-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IhmKr6M2VQZpf0cRElsaZwj1XS9DkKLqjuEFpQXtYcYKg3UQMYZxdRX9Cu84VHB5 87CXPIFM+nnR6b6fLidfOQ== 0000861388-99-000007.txt : 19990518 0000861388-99-000007.hdr.sgml : 19990518 ACCESSION NUMBER: 0000861388-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LG&E ENERGY CORP CENTRAL INDEX KEY: 0000861388 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 611174555 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 99627411 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 99627412 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 99627413 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification No. 1-10568 LG&E Energy Corp. 61-1174555 (A Kentucky Corporation) 220 West Main Street P.O. Box 32030 Louisville, Ky. 40232 (502) 627-2000 2-26720 Louisville Gas and Electric Company 61-0264150 (A Kentucky Corporation) 220 West Main Street P.O. Box 32010 Louisville, Ky. 40232 (502) 627-2000 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: LG&E Energy Corp. 129,677,030 shares, without par value, as of April 30, 1999. Louisville Gas and Electric Company 21,294,223 shares, without par value, as of April 30, 1999, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of April 30, 1999, all held by LG&E Energy Corp. This combined Form 10-Q is separately filed by LG&E Energy Corp., Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein related to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. In particular, information contained herein related to LG&E Energy Corp. or any of its direct or indirect subsidiaries other than Louisville Gas and Electric Company or Kentucky Utilities Company is provided solely by LG&E Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities Company, and shall be deemed not included in the Form 10-Q of Louisville Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company. TABLE OF CONTENTS PART I Item 1 Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income 1 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 5 Consolidated Statements of Retained Earnings 7 Consolidated Statements of Comprehensive Income 8 Louisville Gas and Electric Company Statements of Income 9 Balance Sheets 10 Statements of Cash Flows 12 Statements of Retained Earnings 13 Statements of Comprehensive Income 14 Kentucky Utilities Company Statements of Income 15 Balance Sheets 16 Statements of Cash Flows 18 Statements of Retained Earnings 19 Notes to Financial Statements 20 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 27 Item 3 Quantitative and Qualitative Disclosures About Market Risk 36 PART II Item 1 Legal Proceedings 37 Item 6 Exhibits and Reports on Form 8-K 38 Signatures 39 Part I. Financial Information - Item 1. Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (Unaudited - Thousands of $ Except Per Share Data) Three Months Ended Mar. 31, 1999 1998 REVENUES: Electric utility $361,673 $323,795 Gas utility 75,779 92,759 International and non-utility 128,511 34,170 Total revenues 565,963 450,724 OPERATING EXPENSES: Operation and maintenance: Fuel and power purchased 205,088 115,765 Gas supply expenses 66,619 79,714 Utility operation and maintenance 103,705 102,983 International and non-utility operation and maintenance 41,254 13,321 Depreciation and amortization 52,538 50,072 Total operating expenses 469,204 361,855 Equity in earnings of uncon- solidated ventures (Note 4) 21,656 5,981 OPERATING INCOME 118,415 94,850 Other income and (deductions) 6,453 2,703 Interest charges and preferred dividends 30,520 26,057 Minority interest 1,571 1,343 Income before income taxes 92,777 70,153 Income taxes 35,210 23,479 Income from continuing operations 57,567 46,674 Loss from discontinued operations, net of income tax benefit of $1,985 (Note 3) - (3,506) Income before cumulative effect of change in accounting principle $ 57,567 $ 43,168 - 1 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Ended Mar. 31, 1999 1998 Income before cumulative effect of change in accounting principle $ 57,567 $ 43,168 Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $5,061 - (7,162) NET INCOME $ 57,567 $ 36,006 Average common shares outstanding 129,677 129,683 Earnings (loss) per share - basic and diluted: Continuing operations $ .44 $ .36 Discontinued operations .00 (.02) Cumulative effect of accounting change .00 (.06) Total $ .44 $ .28 The accompanying notes are an integral part of these financial statements. - 2 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $) ASSETS (Unaudited) Mar. 31, Dec. 31, 1999 1998 CURRENT ASSETS: Cash and temporary cash investments $ 128,548 $ 108,723 Marketable securities 18,253 20,862 Accounts receivable - less reserve 270,105 285,794 Materials and supplies - primarily at average cost: Fuel (predominantly coal) 85,072 78,855 Gas stored underground 11,895 34,144 Other 74,553 72,457 Net assets of discontinued opera- tions (Note 3) 146,613 143,651 Prepayments and other 35,390 37,784 Total current assets 770,429 782,270 UTILITY PLANT: At original cost 5,615,225 5,581,667 Less: reserve for depreciation 2,396,575 2,352,306 Net utility plant 3,218,650 3,229,361 OTHER PROPERTY AND INVESTMENTS - LESS RESERVES: Investment in unconsolidated ventures (Notes 2 and 4) 225,695 167,877 Non-utility property and plant, net 298,768 285,899 Other 139,260 117,321 Total other property and investments 663,723 571,097 DEFERRED DEBITS AND OTHER ASSETS 196,487 190,540 Total assets $4,849,289 $4,773,268 The accompanying notes are an integral part of these financial statements. - 3 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (cont.) (Thousands of $) CAPITAL AND LIABILITIES (Unaudited) Mar. 31, Dec. 31, 1999 1998 CURRENT LIABILITIES: Notes payable $ 434,746 $ 365,135 Accounts payable 183,304 237,820 Other 291,055 243,699 Total current liabilities 909,105 846,654 Long-term debt 1,510,816 1,510,775 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 522,535 520,721 Investment tax credit, in process of amortization 91,877 93,844 Regulatory liability 107,223 109,411 Other 206,963 206,280 Total deferred credits and other liabilities 928,598 930,256 Minority interests 106,236 107,815 Cumulative preferred stock 135,328 136,530 COMMON EQUITY: Common stock, without par value - 129,677,030 shares outstanding 778,273 778,273 Other (3,037) (3,314) Retained earnings 483,970 466,279 Total common equity 1,259,206 1,241,238 Total liabilities and capital $4,849,289 $4,773,268 The accompanying notes are an integral part of these financial statements. - 4 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 57,567 $ 36,006 Items not requiring cash currently: Depreciation and amortization 52,538 50,072 Deferred income taxes - net 2,185 2,942 Loss from discontinued operations - net of tax (Note 3) - 3,506 Cumulative effect of change in accounting principle - net of tax - 7,162 Other (15,372) (3,885) Change in net current assets 21,736 65,708 Other (11,172) (19,156) Net cash flows from operating activities 107,482 142,355 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (223) (3,584) Proceeds from sales of securities 3,075 961 Construction expenditures (79,002) (36,615) Investments in unconsolidated ventures (Note 2) (74,250) (886) Proceeds from sale of investment in affiliate (Note 4) 33,821 16,000 Net cash flows from investing activities (116,579) (24,124) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes - 150,000 Retirement of bonds - (21) Short-term borrowings 416,174 1,222,843 Repayment of short-term borrowings (346,174)(1,410,824) Redemption of preferred stock (1,202) - Payment of common dividends (39,876) (36,810) Net cash flows from financing activities 28,922 (74,812) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 19,825 43,419 BEGINNING CASH AND TEMPORARY CASH INVESTMENTS 108,723 111,003 ENDING CASH AND TEMPORARY CASH INVESTMENTS $ 128,548 $ 154,422 - 5 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (cont.) (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 2,969 $ 2,660 Interest on borrowed money 23,533 22,549 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 6 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Retained Earnings (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 Balance at beginning of period $466,279 $722,584 Net income 57,567 36,006 Cash dividends declared on common stock ($.30750 and $.28386 per share) 39,876 36,810 Balance at end of period $483,970 $721,780 The accompanying notes are an integral part of these financial statements. - 7 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 Net income $57,567 $36,006 Unrealized holding gains (losses) on available-for-sale securities arising during the period 192 (14) Reclassification adjustment for realized gains and losses on available-for-sale securities included in net income 5 111 Other comprehensive income, before tax 197 97 Income tax expense related to items of other comprehensive income (64) (37) Comprehensive income $57,700 $36,066 The accompanying notes are an integral part of these financial statements. - 8 - Louisville Gas and Electric Company Statements of Income (Unaudited) (Thousands of $) Three Months Ended Mar. 31, 1999 1998 REVENUES: Electric $152,721 $140,585 Gas 75,779 92,759 Rate refund (Note 10) (1,881) - Total operating revenues 226,619 233,344 OPERATING EXPENSES: Fuel for electric generation 32,457 36,041 Power purchased 23,026 9,600 Gas supply expenses 50,492 64,076 Other operation expenses 40,192 40,368 Maintenance 14,702 10,266 Depreciation and amortization 24,144 23,294 Federal and state income taxes 9,556 12,417 Property and other taxes 5,036 4,956 Total operating expenses 199,605 201,018 NET OPERATING INCOME 27,014 32,326 Other income and (deductions) 1,080 311 Interest charges 9,178 9,238 NET INCOME 18,916 23,399 Preferred stock dividends 1,089 1,123 NET INCOME AVAILABLE FOR COMMON STOCK $ 17,827 $ 22,276 The accompanying notes are an integral part of these financial statements. - 9 - Louisville Gas and Electric Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Mar. 31, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $2,913,378 $2,896,139 Less: reserve for depreciation 1,168,270 1,144,123 Net utility plant 1,745,108 1,752,016 OTHER PROPERTY AND INVESTMENTS - less reserve 1,347 1,154 CURRENT ASSETS: Cash and temporary cash investments 38,859 31,730 Marketable securities 15,093 17,851 Accounts receivable - less reserve 151,972 142,580 Materials and supplies - at average cost: Fuel (predominantly coal) 21,596 23,993 Gas stored underground 11,215 33,485 Other 34,097 33,103 Prepayments 2,438 2,285 Total current assets 275,270 285,027 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,841 5,919 Regulatory assets 36,467 37,643 Other 17,988 22,878 Total deferred debits and other assets 60,296 66,440 Total assets $2,082,021 $2,104,637 The accompanying notes are an integral part of these financial statements. - 10 - Louisville Gas and Electric Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) Mar. 31, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Retained earnings 243,289 247,462 Other (736) (786) Total common equity 667,723 671,846 Cumulative preferred stock 95,328 95,328 Long-term debt 626,800 626,800 Total capitalization 1,389,851 1,393,974 CURRENT LIABILITIES: Accounts payable 114,208 133,673 Provision for rate refunds 13,401 13,261 Dividends declared 23,090 23,168 Accrued taxes 27,020 31,929 Accrued interest 7,615 8,038 Other 18,436 15,242 Total current liabilities 203,770 225,311 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 259,117 254,589 Investment tax credit, in process of amortization 70,470 71,542 Accumulated provision for pensions and related benefits 60,177 59,529 Regulatory liability 62,685 63,529 Other 35,951 36,163 Total deferred credits and other liabilities 488,400 485,352 Total capital and liabilities $2,082,021 $2,104,637 The accompanying notes are an integral part of these financial statements. - 11 - Louisville Gas and Electric Company Statements of Cash Flows (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 18,916 $ 23,399 Items not requiring cash currently: Depreciation and amortization 24,143 23,294 Deferred income taxes - net 3,650 2,547 Investment tax credit - net (1,072) (1,078) Other 1,772 1,000 Changes in net current assets: Accounts receivable (9,392) 22,202 Materials and supplies 23,673 22,185 Provision for rate refunds 140 (1,706) Accounts payable (19,465) (26,547) Accrued taxes (4,909) 9,180 Accrued interest (423) 114 Prepayments and other 3,041 2,111 Other 4,704 4,710 Net cash flows from operating activities 44,778 81,411 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (223) (3,096) Proceeds from sales of securities 3,065 444 Construction expenditures (17,323) (19,064) Net cash flows from investing activities (14,481) (21,716) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of dividends (23,168) (21,152) Net cash flows from financing activities (23,168) (21,152) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 7,129 38,543 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 31,730 50,472 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 38,859 $ 89,015 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 11,288 $ 4,276 Interest on borrowed money 8,811 8,705 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 12 - Louisville Gas and Electric Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Ended Mar. 31, 1999 1998 Balance at beginning of period $247,462 $258,910 Net income 18,916 23,399 Subtotal 266,378 282,309 Cash dividends declared on stock: 5% cumulative preferred 269 269 Auction rate cumulative preferred 453 487 $5.875 cumulative preferred 367 367 Common 22,000 19,800 Subtotal 23,089 20,923 Balance at end of period $243,289 $261,386 The accompanying notes are an integral part of these financial statements. - 13 - Louisville Gas and Electric Company Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 Net income available for common stock $17,827 $22,276 Unrealized holding gains (losses) on available-for-sale securities arising during the period 84 (27) Reclassification adjustment for realized gains on available-for-sale securities included in net income - 66 Other comprehensive income, before tax 84 39 Income tax expense related to items of other comprehensive income (34) (16) Comprehensive income $17,877 $22,299 The accompanying notes are an integral part of these financial statements. - 14 - Kentucky Utilities Company Statements of Income (Unaudited) (Thousands of $) Three Months Ended Mar. 31, 1999 1998 OPERATING REVENUES $217,349 $183,219 OPERATING EXPENSES: Fuel for electric generation 58,155 48,347 Power purchased 39,317 17,989 Other operation expenses 27,142 29,973 Maintenance 12,520 13,333 Depreciation and amortization 21,991 21,486 Federal and state income taxes 17,144 14,968 Property and other taxes 4,113 4,088 Total operating expenses 180,382 150,184 NET OPERATING INCOME 36,967 33,035 Other income and (deductions) 2,168 1,714 Interest charges 9,507 9,700 NET INCOME 29,628 25,049 Preferred stock dividends 564 564 NET INCOME AVAILABLE FOR COMMON STOCK $ 29,064 $ 24,485 The accompanying notes are an integral part of these financial statements. - 15 - Kentucky Utilities Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Mar. 31, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $2,701,846 $2,685,528 Less: reserve for depreciation 1,228,305 1,208,183 Net utility plant 1,473,541 1,477,345 OTHER PROPERTY AND INVESTMENTS - less reserve 14,408 14,238 CURRENT ASSETS: Cash and temporary cash investments 56,838 59,071 Accounts receivable - less reserve 104,163 106,003 Materials and supplies - at average cost: Fuel (predominantly coal) 21,993 23,927 Other 26,050 24,877 Prepayments 3,783 2,427 Total current assets 212,827 216,305 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,127 5,227 Regulatory assets 26,972 28,228 Other 25,356 19,859 Total deferred debits and other assets 57,455 53,314 Total assets $1,758,231 $1,761,202 The accompanying notes are an integral part of these financial statements. - 16 - Kentucky Utilities Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) Mar. 31, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Retained earnings 310,231 299,168 Other (595) (595) Total common equity 617,776 606,713 Cumulative preferred stock 40,000 40,000 Long-term debt 546,330 546,330 Total capitalization 1,204,106 1,193,043 CURRENT LIABILITIES: Accounts payable 56,497 100,012 Provision for rate refunds 21,500 21,500 Dividends declared 18,188 18,188 Accrued taxes 39,523 16,733 Accrued interest 10,559 8,110 Other 35,319 31,226 Total current liabilities 181,586 195,769 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 243,443 244,493 Investment tax credit, in process of amortization 21,407 22,302 Accumulated provision for pensions and related benefits 52,736 50,044 Regulatory liability 44,537 45,882 Other 10,416 9,669 Total deferred credits and other liabilities 372,539 372,390 Total capital and liabilities $1,758,231 $1,761,202 The accompanying notes are an integral part of these financial statements. - 17 - Kentucky Utilities Company Statements of Cash Flows (Unaudited - Thousands of $) Three Months Ended Mar. 31, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29,628 $ 25,049 Items not requiring cash currently: Depreciation and amortization 21,991 21,486 Deferred income taxes - net (2,396) 847 Investment tax credit - net (895) (968) Changes in net current assets: Accounts receivable 1,840 4,600 Materials and supplies 1,934 4,907 Provision for rate refunds (1,173) (456) Accounts payable (43,515) (5,269) Accrued taxes 22,790 18,475 Accrued interest 2,449 (87) Prepayments and other (1,356) 1,803 Other 3,215 2,169 Net cash flows from operating activities 34,512 72,556 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from insurance reimbursement 59 8 Construction expenditures (18,240) (15,299) Net cash flows from investing activities (18,181) (15,291) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings - 381,500 Repayments of short-term borrowings - (415,100) Retirement of debt - (21) Payment of dividends (18,564) (17,582) Net cash flows from financing activities (18,564) (51,203) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (2,233) 6,062 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 59,071 5,453 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 56,838 $ 11,515 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ - $ 138 Interest on borrowed money 6,079 6,476 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 18 - Kentucky Utilities Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Ended Mar. 31, 1999 1998 Balance at beginning of period $299,167 $304,750 Net income 29,628 25,049 Subtotal 328,795 329,799 Cash dividends declared on stock: 4.75% preferred 237 237 6.53% preferred 327 327 Common 18,000 17,018 Subtotal 18,564 17,582 Balance at end of period $310,231 $312,217 The accompanying notes are an integral part of these financial statements. - 19 - LG&E Energy Corp. and Subsidiaries Louisville Gas and Electric Company Kentucky Utilities Company Notes to Financial Statements (Unaudited) 1. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation (the Merger). The accompanying unaudited consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a subsidiary of LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU Energy, were not affected by the Merger. KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the surviving corporation. The consolidated financial statements include the accounts of LG&E Energy, LG&E, Capital Corp., and KU and their respective wholly-owned subsidiaries, collectively referred to herein as the "Company." All significant intercompany items and transactions have been eliminated from the unaudited consolidated financial statements. In the opinion of management, all adjustments, including those of a normal recurring nature, have been made to present fairly the consolidated financial position, results of operations and cash flows for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. See the Company's, LG&E's and KU's Reports on Form 10-K for 1998 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Company. 2. On March 30, 1999, the Company acquired an indirect 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $74.3 million, including transaction costs, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company accounted for the acquisition using the purchase method, and will record its share of earnings using the equity method. The purchase price exceeded the underlying equity in BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their estimated fair values. 3. Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power mar - 20 - ket had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. It also plans to sell its natural gas gathering and processing business. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize the value of power sales from physical assets it owns or controls, including LG&E, KU and those of the Big Rivers Electric Corporation (Big Rivers). As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations results primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believes to be appropriate estimates for future energy prices, among other factors, to calculate the net realizable value of discontinued operations, it also recognizes that there are inherent limitations in models to accurately predict future events. As a result, there is no guarantee that higher-than- anticipated future commodity prices or load demands, lower-than- estimated asset sales prices or other factors could not result in additional losses. The Company has been successful in settling portions of its discontinued operations, but significant assets, operations and obligations remain. As of March 31, 1999, the Company estimates that a $1 change in electricity prices and a 10 cents change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $7.5 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of March 31, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $8.3 million. - 21 - Operating results for discontinued operations follow. The Company charged its loss from discontinued operations for the three months ended March 31, 1999, to accrued loss on disposal of discontinued operations. Three Months Ended Mar. 31, 1999 1998 Revenues $166,739 $940,699 Income (loss) before taxes (6,054) (5,491) Income (loss) from dis- continued operations, net of income taxes (3,709) (3,506) Net assets of discontinued operations at March 31, 1999, follow. Cash and temporary cash investments $ 4,317 Accounts receivable 56,637 Price risk management assets 86,611 Non-utility property and plant, net 161,839 Accounts payable (58,032) Price risk management liabilities (27,733) Goodwill and other assets and liabilities, net 38,567 Net assets before accrued loss on disposal of dis- continued operations 262,206 Accrued loss on disposal of discontinued operations, net of income tax benefit of $66,009 (115,593) Net assets of discon- tinued operations $146,613 Total charges against the accrued loss on disposal of discontinued operations through March 31, 1999, include $85.3 million for commitments prior to disposal, $51.2 million for transaction settlements, $11.1 million for goodwill, and $20.8 million for other exit costs. The reserve as of March 31, 1999, represents management's best estimate of the loss from remaining discontinued operations until disposal and the costs of disposing of these operations. As of March 31, 1999, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 28.1 million MWh's of power and 22.0 million MMBTU's of natural gas with a volumetric weighted-average period of approximately 42 and 60 months, respectively. These notional amounts are based on estimated loads since various commitments do not include specified firm volumes. The Company is also under contract to buy or sell immaterial amounts of coal and SO2 allowances in support of its power contracts. Notional amounts reflect the nominal volume of transactions included in the Company's price risk management commitments, but do not reflect actual amounts of cash, financial instruments, or quan - 22 - tities of the underlying commodity which may ultimately be exchanged between the parties. The fair values of discontinued operations' price risk management assets and liabilities as of March 31, 1999, and the averages for the three months then ended follow (in thousands of $): Average Fair Value Fair Value Liabil- Liabil- Commodity Assets ities Assets ities Electricity $ 86,611 $ 27,256 $ 92,367 $ 28,367 Natural gas - - 3,389 - Totals 86,611 27,256 $ 95,756 $ 28,367 Reserves - 477 Net values $ 86,611 $ 27,733 The table above does not include the fair value of various transactions not previously recorded using mark to market accounting since these transactions commit the Company to the sale or purchase of electricity or natural gas without specified firm volumes. The fair values above are based on quotes from exchanges and over-the- counter markets, price volatility factors, the use of established pricing models and the time value of money. They also reflect management estimates of counterparty credit risk, location differentials and the potential impact of liquidating the Company's position in an orderly manner over a reasonable period of time under present market conditions. The change in values from December 31, 1998, to March 31, 1999, resulted from volatility and risk management actions taken in connection with discontinuing the merchant energy trading and sales business. If the Company is unable to dispose of its remaining commitments, it will continue to meet its obligations through the terms of the contracts. The net fair value of these commitments as of March 31, 1999, are currently estimated to be approximately $63.3 million in 1999, $28.8 million to $37.4 million each year in 2000 through 2004, and $4.7 million for later years. The Company's discontinued operations maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of March 31, 1999, over 78% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of March 31, 1999, seven counterparties represented 91% of the Company's price risk management commitments. 4. On March 15, 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which the Company owns a 50% interest, sold substantially all the assets and major contracts of its 79 MW gas-fired cogeneration facility in Rensselaer, New York, with net proceeds to the Company of approximately $34 million. The sale resulted in an after- tax gain to the Company of approximately $8.9 million. 5. The Company adopted Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10) in the first quarter of 1999. The task force concluded that energy trading contracts should be recorded using mark to market valuation on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines energy trading to include cer - 23 - tain financial activities related to physical assets which were not previously marked to market by established industry practice. The effects of adopting EITF No. 98-10 did not have a material impact on the Company's consolidated results of operations or financial position. 6. On April 5, 1999, LG&E and KU filed a joint agreement among the companies and the Kentucky Attorney General to amend the companies' previously-filed performance-based ratemaking (PBR) plan. The amendment requested Kentucky Public Service Commission (the Commission) approval of a five-year rate reduction plan, which would reduce electric rates by $20 million in the first year (beginning July 1, 1999), and by $8 million annually for each of the next four years (through June 30, 2004), for a total five-year savings to customers of $52 million. The reductions will be distributed between LG&E and KU customers based on the same methodology the Commission approved in its previous merger order for allocating the merger savings to the utilities' customers (53 percent to KU customers; 47 percent to LG&E customers). The joint agreement includes adoption of the PBR plan as proposed by the companies. The amended filing also includes the establishment of a $6 million program over the five-year period to assist low-income customers in paying their energy bills. In addition to the rate reductions and energy assistance program, the amended filing calls for LG&E and KU to extend for an additional year (through June 30, 2004) both the rate cap and the merger-savings surcredit the utilities established as part of their earlier merger plan. Under the rate cap, the companies agreed, in the absence of extraordinary circumstances, not to adjust base electric rates for five years following the merger. They also agreed to a monthly surcredit to customers' bills reflecting the 50 percent share of the non-fuel merger savings allocated to the utilities' customers in the first five years following the merger. As part of the amended PBR filing, LG&E also agreed to refrain from filing for an increase in natural gas rates over the five-year period (through June 30, 2004). On April 13, 1999, the Commission issued initial orders implementing the amended PBR plan, effective July 2, 1999, and subject to modification. The Commission has adopted a procedural schedule, which provides for discovery, hearings and public comment. The Commission has also consolidated into the continuing PBR proceedings an earlier March 8, 1999, rate complaint by a group of industrial intervenors, in which the intervenors have requested significant reductions in the electric rates of LG&E and KU. The Commission is expected to issue a final ruling during 1999. 7. On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into on April 9, 1999, to hedge the entire issuance, the effective rate will be 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. - 24 - 8. External and intersegment revenues and income from continuing operations by business segment for the three months ended March 31, 1999, follow: Income Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $148,326 $ 2,514 $ 17,613 LG&E gas 75,779 - 214 KU electric 213,347 4,002 29,064 Independent Power Operations 6,904 - 14,180 Western Kentucky Energy 59,978 - (1,024) Argentine Gas Distribution 29,797 - 357 Other Capital Corp. 31,832 - 1,676 All Other - (6,516) (4,513) Consolidated $565,963 $ - $ 57,567 External and intersegment revenues and income from continuing operations by business segment for the three months ended March 31, 1998, follow: Income Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $140,585 $ - $ 21,421 LG&E gas 92,759 - 855 KU electric 183,210 24 24,485 Independent Power Operations 5,227 - 3,984 Argentine Gas Distribution 27,411 - 196 Other Capital Corp. 1,532 - (715) All Other - (24) (3,552) Consolidated $450,724 $ - $ 46,674 The assets of the Company's Argentine Gas Distribution segment increased from $346.3 million at December 31, 1998, to $418.4 million at March 31, 1999, due mainly to acquiring a 19.6% ownership interest in BAN. See Note 2 of Notes to Financial Statements. 9. On March 15, 1999, Capital Corp. entered into a letter of intent to lease or acquire three combustion turbines and is currently negotiating the terms of a definitive agreement. The aggregate price, including construction of related facilities, is estimated to be approximately $175 million. Capital Corp. is considering various financing alternatives. 10.LG&E and KU employ a fuel adjustment clause (FAC) mechanism, which under Kentucky law allows the companies to recover from customers, the actual fuel costs associated with retail electric sales. In February 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million - 25 - resulting from reviews of the FAC from November 1994 through April 1998. The orders changed the Company's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. The Kentucky Commission has not issued LG&E an order for the review period May 1998 through October 1998, nor have they issued orders pertaining to KU's FAC for review periods after November 1994. However, following the methods set forth in the LG&E orders the Company estimates up to an additional $4.8 million could be refundable to LG&E and KU retail electric customers for open review periods through December 1998. On March 11, 1999, the Commission denied LG&E's Petition for Rehearing for the period November 1994 through October 1996 and directed LG&E to reduce future fuel expense by $1.9 million in the first billing month after the Order. LG&E recorded a provision for the rate refund of $1,881,000 in March and refunded the amount through the fuel adjustment clause in April 1999. In a separate series of Orders on March 11, 1999, the PSC granted LG&E's Petition for Rehearing for the period November 1996 through April 1998 and established a procedural schedule for LG&E and other parties to submit evidence and for a hearing before the Commission. In the same Orders the PSC granted the Petition for Rehearing of the KIUC to determine if interest should be paid on any fuel refunds for this latter period. 11.Reference is made to Part II, Legal Proceedings, below and Part I, Item 3, Legal Proceedings, of the Company's, KU Energy's, LG&E's and KU's (and Note 18 of the Company's Notes to Financial Statements) Annual Reports on Form 10-K for the year ended December 31, 1998. - 26 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Recent Developments On April 13, 1999, the Kentucky Public Service Commission (PSC) issued initial orders in the performance-based ratemaking proceedings for LG&E and KU. The PSC orders implement, effective July 2, 1999, the companies' pending performance-based ratemaking proposals, including a five-year, $52 million rate reduction plan jointly filed by LG&E, KU and the Kentucky Attorney General's Office with the PSC on April 5, 1999. See Note 6 to the Notes to Financial Statements of the Company, LG&E and KU contained in Item 1 of this Form 10-Q for further discussion of this matter. On March 30, 1999, the Company acquired a 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. See Note 2 of Notes to Financial Statements under Item 1 for more information. On March 15, 1999, Capital Corp. entered into a letter of intent to lease or acquire three combustion turbines and is currently negotiating the terms of a definitive agreement. The aggregate price, including construction of related facilities, is estimated to be approximately $175 million. Capital Corp. is considering various financing alternatives. As of March 31, 1999, Capital Corp. had expended approximately $82.5 million in connection with its October 1998 purchase of two natural gas combustion turbines. The aggregate purchase price, including costs of installation, is approximately $125 million, which is expected to be largely funded through additional borrowing by Capital Corp. Capital Corp. expects to complete the purchase by August 1999. In addition, LG&E and KU have filed an application with the PSC requesting approval for the purchase of these turbines from Capital Corp. at cost. Assuming approval is granted, the transfer of the turbines is expected to occur in August 1999. If approval is not granted by the PSC, Capital Corp. will operate and market the power of these gas turbines. On March 15, 1999, the partnership that owns the Rensselaer cogeneration facility sold substantially all the assets and major contracts of the facility. For more information, see "Results of Operations" below, Note 4 of Notes to Financial Statements under Item 1 and the Company's Annual Report on Form 10-K for the year ended December 31, 1998. General The Company's principal subsidiaries are LG&E, an electric and gas utility, KU, an electric utility, and Capital Corp., the holding company for all non- utility investments. LG&E's and KU's results of operations and liquidity and capital resources are important factors affecting the Company's consolidated results of operations and capital resources and liquidity. Some of the matters discussed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis may contain forward- looking statements that are subject to certain risks, uncertainties and assumptions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions; business and competitive conditions in the energy industry; future prices of power and natural gas; unusual weather; regulatory decisions, including decisions resulting from the combination of LG&E Energy and KU Energy; the Company's ability to resolve Year 2000 issues in a timely manner and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998. - 27 - Results of Operations The results of operations for LG&E, KU and Capital Corp.'s Argentine gas distribution and WKE operations are affected by seasonal fluctuations in temperature and other weather-related factors. Because of these and other factors, the results of one interim period are not necessarily indicative of results or trends to be expected for the full year. Three Months Ended March 31, 1999, Compared to Three Months Ended March 31, 1998 The Company's diluted earnings per share from continuing operations increased to $.44 in 1999 from $.36 in 1998. The increase resulted from higher earnings at KU, an after-tax gain of $8.9 million ($.07) on the sale of the Company's interest in the Rensselaer, New York, project and after- tax income of $5.3 million ($.04) for fees related to the development of an independent power project in Gregory, Texas. Lower earnings at LG&E, an increase in interest expense at Capital Corp. and higher corporate expenses partially offset these increases. LG&E Results: LG&E's net income decreased $4.5 million (19%) for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998, primarily because of increased maintenance expenses and lower gas revenues resulting from a decline in gas prices. These expenses were partially offset by increased retail and wholesale sales of electricity. Heating degree days were 17% above 1998. A comparison of LG&E's revenues for the quarter ended March 31, 1999, with the quarter ended March 31, 1998, excluding the FAC refund (which reduced electric revenues by $1.9 million), reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Gas Cause Revenues Revenues Sales to ultimate consumers: Fuel and gas supply adjustments $ 2,983 $(20,019) Merger surcredit (1,390) - Demand side management/revenue decoupling (2,396) (5,395) Variation in sales volume, etc. 6,976 9,248 Total retail sales 6,173 (16,166) Sales for resale 5,925 (411) Gas transportation - net - (364) Other 38 (39) Total $12,136 $(16,980) Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating expenses. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply may be reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky. Fuel for electric generation decreased $3.6 million (10%) - 28 - for the quarter because of a decrease in generation ($3.6 million). Gas supply expenses decreased $13.6 million (21%) due to decreases in net gas supply cost. Power purchased increased $13.4 million (140%) due to purchases for sales for resale. Maintenance expenses increased $4.4 million (43%) in 1999 primarily due to forced outages at the Mill Creek generating station Units 1, 3, and 4 ($3.5 million) and increased storm related electric distribution expenses ($.4 million) and maintenance of general plant ($.4 million). Depreciation and amortization increased $.8 million in 1999 because of additional utility plant in service. Variations in income tax expense are largely attributable to changes in pre- tax income. KU Results: KU's net income increased $4.6 million (18%) for the quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998. The increase was mainly due to increases in retail electric sales caused by an increase in heating degree days. A comparison of KU's revenues for the quarter ended March 31, 1999, with the quarter ended March 31, 1998, reflects increases and decreases which have been segregated by the following principal causes: Sales to ultimate consumers: Fuel clause adjustments $ (790) Environmental cost recovery (638) Merger surcredit (1,867) Variation in sales volume, etc. 9,415 Total retail sales 6,120 Sales for resale 27,270 Other 740 Total $34,130 Retail sales increased due to a 5% increase in sales volumes in the quarter, which is primarily the result of a 16% increase in heating degree days. The increase in sales for resale (1,895,289 megawatt-hours versus 529,472 megawatt-hours) was primarily due to more aggressive marketing efforts, efficiencies achieved from coordinated dispatch of a larger available pool of generation following completion of the merger in May 1998 of LG&E Energy and KU Energy, and sales to LG&E of $4 million due to economic dispatch following the merger. Fuel for electric generation comprises a large segment of KU's total operating expenses. KU's electric rates contain a fuel adjustment clause (FAC), whereby increases or decreases in the cost of fuel are reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky, The Virginia State Corporation Commission, and the Federal Energy Regulatory Commission. Fuel for electric generation increased $9.8 million (20%) for the quarter because of an increase in generation ($10.2 million) which was partially offset by the lower cost of coal burned ($.4 million). - 29 - Power purchased expense increased $21 million in 1999 because of a 94% increase in megawatt-hour purchases which was primarily attributable to increased sales for resale and economic dispatch purchases from LG&E of $2.5 million. Other operating expense decreased by $2.8 million (9%). The decrease was mainly attributable to a decrease in administrative and general expenses. Variations in income tax expense are largely attributable to changes in pretax income. Capital Corp. Results: Capital Corp., the holding company for all non-utility investments, conducts its operations through three principal segments: Independent Power Operations, WKE and Argentine Gas Distribution. Involvement in these and other non-utility businesses represents the Company's commitment to understand, respond to, and capitalize on the opportunities presented by an emerging competitive energy services industry. Independent Power Operations develops, operates, maintains and owns interests in domestic and international power generation facilities that sell electric and steam energy to utility and industrial customers, and owns equity interests in combustion turbines which are leased to others. WKE leases and operates the generating facilities of Big Rivers. Argentine Gas Distribution owns interests in three natural gas distribution companies in Argentina. Capital Corp. is also engaged in commercial and retail initiatives designed to assess the energy and utility needs of large commercial and industrial entities, provide maintenance and repair services for customers' major household appliances and provide third party metering and billing services. Independent Power Operations Independent Power Operations' revenues increased from $5.2 million in 1998 to $6.9 million in 1999 as a result of recognizing income previously deferred related to the recently sold Rensselaer project. The project sold substantially all of its assets and major contracts in March 1999. See Note 4 of Notes to Financial Statements under Item 1. Independent Power Operations' equity in earnings of unconsolidated ventures increased from $5.6 million in 1998 to $21.4 million in 1999. The increase reflected a pre-tax gain of $14.5 million that resulted from the Rensselaer project's sale of substantially all of its assets and major contracts in March 1999. Independent Power Operations' other income increased by approximately $1.0 million in 1999 due primarily to the recognition of contract breakage income associated with the Rensselaer sale in March 1999. Western Kentucky Energy WKE began operations July 15, 1998, after closing its lease transaction with Big Rivers. WKE's revenues totaled $60.0 million in 1999. WKE's cost of revenues, primarily composed of fuel and purchased power expenses, amounted to $35.7 million. Operation and maintenance expenses of $24.7 million include $7.0 million of rent expense associated with the lease of Big Rivers' operating facilities. WKE incurred interest expense of approximately $1.4 million associated with borrowings to fund the initial purchase of certain materials and supplies from Big Rivers and to prepay the first two years' lease payments of $55.9 million. Argentine Gas Distribution The Argentine Distribution companies' revenues increased 9% or $2.4 million in 1999 to $29.5 million due to higher consumption per customer and an increase in the customer base. - 30 - Operation and maintenance expenses increased by 4.5% or $1.0 million over the same period due to higher consumption. Other The Company has entered into various commercial and retail initiatives to position itself for growth in the energy industry. The commercial initiatives represent new businesses and products designed to leverage the Company's existing assets and experience, and to gain access to new markets. Our retail initiatives enhance value for LG&E's and KU's customers and are designed to help ensure that LG&E and KU remain the utility of choice within their respective service areas when a fully competitive industry framework takes shape. These commercial and retail initiatives have not had a significant impact on the Company's financial position or required significant capital investment. We remain optimistic that these non-traditional developing ventures will add to our knowledge base as well as our financial results in the future. Capital Corp.'s other revenues increased from $1.5 million in 1998 to $31.8 million in 1999 due to Retail Access Services' starting operations in the second quarter of 1998 and to Capital Corp.'s selling 50% of its interest in an independent power project it is developing in Texas. Capital Corp.'s other income increased $2.6 million in 1999 due mainly to receiving the initial settlement of a claim related to an undeveloped independent power project in California. Interest expense increased by $4.7 million (87%) in 1999 mainly due to funding discontinued operations and corporate expenses. The Company's consolidated effective income tax rate increased from 33.5% in 1998 to 38.0% in 1999 due to favorably resolving tax audits in 1998 and to changes in the provision for state income taxes. A decrease in investment and other tax credits as a percent of pretax income also contributed to the increase. Liquidity and Capital Resources The Company's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and equity investments in connection with independent power production projects and other energy-related growth or acquisition opportunities among the non-utility businesses. Capital funds are also needed for the Company's capital obligations under the Big Rivers lease arrangements, losses incurred in connection with the discontinuance of the merchant energy trading and sales business, information system enhancements, and other business development opportunities. Fluctuations in the Company's discontinued energy marketing and trading activities also affected liquidity throughout the quarter. Lines of credit and commercial paper programs are maintained to fund these temporary capital requirements. Construction expenditures for the three months ended March 31, 1999, of $79.0 million were financed with internally generated funds. The Company's combined cash and marketable securities balance increased $17.2 million during the three months ended March 31, 1999. The increase reflects cash flows from operations, a net increase in debt, and the Company's portion of the proceeds received by the Rensselaer project from the sale of its assets and major contracts, partially offset by construction expenditures, the investment in BAN, and dividends paid. Variations in accounts receivable, accounts payable and materials and supplies are generally not significant indicators of the Company's liquidity. Such variations are primarily attributable to fluctuations in weather, which have a direct effect on sales of electricity and natural gas. The decrease in accounts receivable resulted from seasonal fluctua - 31 - tions in KU's and Centro's businesses, partially offset by an increase resulting from higher revenues at Retail Access Services. The decrease in accounts payable resulted from fluctuations in LG&E's and KU's businesses, and the decrease in gas stored underground resulted from seasonal fluctuations in LG&E's business. The increase in other current liabilities resulted from differences in the timing of income tax payments. The increase in investments in unconsolidated ventures resulted from the investment in BAN and equity in earnings, partially offset by distributions received. The increase in non-utility property and plant resulted mainly from additions at Centro. The increase in other property and investments resulted from expenditures related to the purchase of two natural gas turbines by Capital Corp. The Company issues commercial paper that has maturity dates ranging between one and 270 days. Because of the rollover of these maturity dates, total short-term borrowings during the first three months of 1999 were $416.2 million and total repayments of short-term borrowings were $346.2 million. See Note 16 of the Company's Notes to Financial Statements contained in its Annual Report on Form 10-K for the year ended December 31, 1998. In October 1998, Capital Corp. entered into a contract to purchase two natural gas turbines. Capital Corp. anticipates that the turbines or their electrical output, if operated, would be marketed or sold to one or more affiliated or unaffiliated third parties. The aggregate purchase price, including costs of installation, for the turbines is approximately $125 million, which is expected to be largely funded through additional borrowing by Capital Corp. As of March 31, 1999, Capital Corp. had expended approximately $82.5 million for the turbines and expects to complete the purchase by August 1999. On March 15, 1999, Capital Corp. entered into a letter of intent to acquire three combustion turbines and is currently negotiating the terms of a definitive agreement. The aggregate price, including construction of related facilities, is estimated to be approximately $175 million. Capital Corp. is considering various financing alternatives. At March 31, 1999, unused capacity under the Company's lines of credit totaled $466.6 million after considering commercial paper support and approximately $58.7 million in letters of credit securing on- and off- balance sheet commitments. At December 31, 1998, unused capacity under the lines of credit totaled $536.8 million. The decrease in unused capacity resulted from borrowing funds to meet working capital needs. The Company's capitalization ratios at March 31, 1999, and December 31, 1998, follow: Mar. 31, Dec. 31, 1999 1998 Long-term debt (including current portion) 45.2% 46.4% Notes payable 13.0 11.2 Preferred stock 4.1 4.2 Common equity 37.7 38.2 Total 100.0% 100.0% - 32 - LG&E's capitalization ratios at March 31, 1999, and December 31, 1998, follow: Mar. 31, Dec. 31, 1999 1998 Long-term debt (including current portion) 45.1% 45.0% Preferred stock 6.9 6.8 Common equity 48.0 48.2 Total 100.0% 100.0% KU's capitalization ratios at March 31, 1999, and December 31, 1998, follow: Mar. 31, Dec. 31, 1999 1998 Long-term debt (including current portion) 45.4% 45.7% Preferred stock 3.3 3.4 Common equity 51.3 50.9 Total 100.0% 100.0% On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into on April 9, 1999, to hedge the entire issuance, the effective rate will be 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. For a description of significant contingencies that may affect the Company, LG&E and KU, reference is made to Part II herein - Item 1, Legal Proceedings. Year 2000 Computer Issue The Company and its subsidiaries, including LG&E and KU, use various software, systems and technology that may be affected by the "Year 2000 Issue." This concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to the year 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are more fully detailed in the sections that follow, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. The Company began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer of the Company, is responsible for planning, implementing and documenting the Company's Year 2000 process. The team also provides direct and detailed assistance to the Company's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, the Company also uses the services of third parties, including technical consultants, vendor representatives and auditors. - 33 - The Company's Year 2000 effort generally follows a three phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding Company and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. The Company has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, client-server, PCs and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units and (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities. State of Readiness As of March 1999, the Company and its subsidiaries have substantially completed the internal inventory, vendor survey and compliance assessment portions (Phases I and II) of their Year 2000 plan for mission critical mainframe and PC hardware and software. Remediation efforts (Phase III) in these areas are approximately 75% complete. With respect to non-IT embedded systems, the Company, LG&E and KU also have substantially completed their Phase I and Phase II efforts and Phase III remediation efforts are in progress. Testing has commenced and will continue as remediation efforts are implemented and are expected to run until July 1999. Contingency planning has been initiated for all IT and non-IT mission critical systems and will continue throughout 1999. As a general matter, corrective action for major IT systems, including customer information, financial and trading systems, are in process or have been completed. For smaller or more isolated systems, including embedded and plant operational systems, the Company has completed much of the evaluative process and is commencing corrective plans. The Company has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which the Company's operations are vulnerable to those parties' failure to complete their remediation efforts. The Company is currently evaluating and, in certain cases, initiating follow-up actions regarding the responses from these parties. The Company regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry. Costs of Year 2000 Issues The Company's, LG&E's and KU's system modification costs related to the Year 2000 issue are being expensed as incurred. Through March 1999, the Company has incurred approximately $22.1 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, the Company expects to spend an additional $10.0 million to complete its Year 2000 efforts. Through March 1999, LG&E has incurred approximately $17.0 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, LG&E expects to spend an additional $3.6 million to complete its Year 2000 efforts. Through March 1999, KU has incurred approximately $3.3 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, KU expects to spend an additional $3.6 million to complete its Year 2000 efforts. - 34 - It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally, many costs are not incremental costs but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with the Company's Year 2000 issues will not be higher. Risks of Year 2000 Issues As described above, the Company has made significant progress in the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of its remediation plan, the Company does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, the Company may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and the Company is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to the Company. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, reduced power production or transmission capabilities or internal operational or administrative difficulties on the part of the Company. The Company is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of the Company. There can be no assurance that the Company will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning is under way for material areas of Year 2000 risk. This effort will address certain areas, including the most reasonably likely worst-case scenarios and delays in completion in the Company's remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans will include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual energy accounting procedures. Completion of contingency plan formulation is scheduled for June 1999. Forward Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation, and cost of the Company's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates derived using assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, the Company's ability to locate and correct all relevant computer codes, the readiness of third parties, and the Company's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. - 35 - Item 3. Quantitative and Qualitative Disclosures About Market Risk. LG&E Energy is exposed to market risks in both its regulated and non- utility operations. Both operations are exposed to market risks from changes in interest rates and commodity prices, while the non-utility operations are also exposed to changes in foreign exchange rates. To mitigate changes in cash flows attributable to these exposures, the Company has entered into various derivative financial instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. The potential change in interest expense resulting from changes in base interest rates of the Company's unswapped debt did not change materially in the first quarter of 1999. The potential changes in the fair values of the Company's interest-rate swaps resulting from changes in interest rates and the yield curve also did not change materially in the first quarter of 1999. The Company's exposure to market risks from changes in commodity prices and foreign exchange rates remained immaterial in the first quarter of 1999. - 36 - Part II. Other Information Item 1. Legal Proceedings. For a description of the significant legal proceedings involving the Company, LG&E and KU, reference is made to the information under the following items and captions of the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K for the year ended December 31, 1998: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition; Notes 2, 5, 18 and 22 of the Company's Notes to Financial Statements under Item 8; Notes 3, 12, 16 and 18 of LG&E's Notes to Financial Statements under Item 8 and Notes 3, 11 and 13 of KU's Notes to Financial Statements under Item 8. Except as described herein, to date, the proceedings reported in the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K have not changed materially. Certain Fuel Adjustment Clause Proceedings On April 1, 1999, LG&E filed a notice of appeal in the Circuit Court of Franklin County, Kentucky appealing certain rulings of the Kentucky Public Service Commission (PSC) requiring refunds of approximately $3.9 million (as of February 1999) in costs previously recovered from customers under the fuel adjustment clause mechanism. See Item 3, Legal Proceedings, and Notes 5 and 22 to the Company's and Notes 3 and 16 of LG&E's respective Notes to Financial Statements under Item 8 of the Company's and LG&E's combined Annual Report on Form 10-K for the year ended December 31, 1998, for further discussion of this matter. Kenetech Bankruptcy In April 1999, the Windpower Partners 1993, Windpower Partners 1994 and KW Tarifa, S.A. projects in which the Company owns certain interests received initial distributions aggregating approximately $12.7 million, as well as certain other assets, in connection with these projects' claims in the bankruptcy proceeding of Kenetech Windpower, Inc. The funds are currently held in trust and will be used to pay legal fees and unpaid interest on debt of the projects, as appropriate. The Company expects to record a pre- tax gain of approximately $2.5 million during the second quarter of 1999 in connection with these initial distributions. See Item 3, Legal Proceedings, and Note 18 of the Company's Notes to Financial Statements under Item 8 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998, for further discussion of this matter. Performance-Based Ratemaking On April 13, 1999, the PSC issued initial orders in the performance-based ratemaking proceedings (PBR) for LG&E and KU. The PSC orders implement, effective July 2, 1999, and subject to modification, the companies' pending PBR proposals, including a five-year, $52 million rate reduction plan agreed upon by LG&E, KU and the Kentucky Attorney General's Office and previously filed with the PSC on April 5, 1999. Further proceedings in the PBR case, including consideration of rate reductions requested by certain intervenors, are scheduled for the second and third quarters of 1999. See Note 6 to the Notes to Financial Statements of the Company, LG&E and KU contained in Item 1 of this Form 10-Q and Item 3, Legal Proceedings, to the Company's, LG&E's and KU's combined Annual Report on Form 10-K for further discussion of this matter. - 37 - Item 6(a). Exhibits. Exhibit Number Description 27 Financial Data Schedules for LG&E Energy Corp., Louisville Gas and Electric Company, and Kentucky Utilities Company. Item 6(b). Reports on Form 8-K. On February 11, 1999, the Company filed a report on Form 8-K announcing that it had realigned its management structure to support its strategy of aggressively growing the company as the energy services industry moves toward deregulation. On March 23, 1999, the Company filed a report on Form 8-K announcing that on March 15, 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which LG&E Energy owns a 50% interest, completed the sale of substantially all the assets and major contracts of its 79 MW gas-fired cogeneration facility in Rensselaer, New York to Fulton Cogeneration Associates, L.P., an affiliate of The Coastal Corporation. On April 7, 1999, the Company, LG&E and KU filed reports on Form 8-K announcing that on April 5, 1999, LG&E and KU had reached an agreement with the Kentucky Attorney General's Office regarding LG&E's and KU's pending performance-based ratemaking (PBR) proposal. In a filing with the PSC, the parties amended the companies' PBR proposal to request approval of an agreed-upon five-year rate reduction plan. In the same filing, the Company announced that on March 30, 1999, it had acquired an indirect ownership interest of approximately 20 percent in Gas Natural BAN, S.A. On April 20, 1999, the Company, LG&E and KU filed reports on Form 8-K announcing orders of the PSC dated April 13, 1999, regarding LG&E and KU. The PSC orders implement, effective July 2, 1999, the companies' pending performance-based ratemaking proposal, including a five-year rate reduction plan agreed upon earlier by the companies and the Kentucky Attorney General's Office. - 38 - SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LG&E Energy Corp. Registrant Date: May 14, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Louisville Gas and Electric Company Registrant Date: May 14, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kentucky Utilities Company Registrant Date: May 14, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - 39 - EX-27 2
UT 0000861388 LG&E ENERGY CORP. 1,000 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK 3,218,650 663,723 770,429 196,487 0 4,849,289 774,936 300 483,970 1,259,206 0 135,328 1,510,816 434,746 0 0 0 0 0 0 1,509,193 4,849,289 565,963 35,210 449,119 484,329 81,634 6,453 88,087 28,867 59,220 1,653 57,567 39,876 17,636 107,482 0.44 0.44 Includes common stock expense of $3,337. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $21,656.
EX-27 3
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK 1,473,541 14,408 212,827 57,455 0 1,758,231 307,545 0 310,231 617,776 0 40,000 546,330 0 0 0 0 0 0 0 554,125 1,758,231 217,349 17,144 163,238 180,382 36,967 2,168 39,135 9,507 29,628 564 29,064 18,564 9,248 34,512 0 0 Includes common stock expense of $595.
EX-27 4
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 3-MOS DEC-31-1999 MAR-31-1999 PER-BOOK 1,745,108 1,347 275,270 60,296 0 2,082,021 424,335 100 243,288 667,723 0 95,328 626,800 0 0 0 0 0 0 0 692,170 2,082,021 226,619 9,556 190,049 199,605 27,014 1,080 28,094 9,178 18,916 1,089 17,827 22,000 8,388 44,778 0 0 Includes common stock expense of $836. Represents unrealized gain/loss on marketable securities, net of taxes.
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