10-Q 1 0001.txt 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 September 30, 2000 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 October 31, 2000. Louisville Gas and Electric Company 21,294,223 shares, without par value, as of October 31, 2000, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of October 31, 2000, 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 37 PART II Item 1 Legal Proceedings 38 Item 6 Exhibits and Reports on Form 8-K 39 Signatures 40 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 REVENUES: Electric utility $ 412,200 $ 550,376 $1,154,696 $1,318,307 Gas utility 24,381 17,623 142,676 117,054 International and non-utility 245,315 297,391 616,205 652,951 Net revenues 681,896 865,390 1,913,577 2,088,312 OPERATING EXPENSES: Fuel and power purchased 203,308 413,713 613,013 869,795 Gas supply expenses 117,835 82,248 325,738 234,232 Utility operation and maintenance 95,231 103,789 297,346 322,686 International and non- utility operation and maintenance 49,639 48,905 154,387 141,303 Depreciation and amortization 54,732 54,664 169,907 162,879 Asset impairment charge (Note 4) - - 45,000 - Non-recurring charges (Notes 2 and 3) 3,563 - 38,952 - Total operating expenses 524,308 703,319 1,644,343 1,730,895 Equity in earnings of unconsolidated ventures (Note 6) 15,938 10,092 32,628 43,799 OPERATING INCOME 173,526 172,163 301,862 401,216 Other income 2,432 5,863 13,148 14,862 Interest charges and preferred dividends 38,976 32,414 110,860 95,177 Minority interest 5,363 4,735 11,377 10,148 Income before income taxes 131,619 140,877 192,773 310,753 Income taxes 45,939 53,711 65,862 116,843 Income from continuing operations $ 85,680 $ 87,166 $ 126,911 $ 193,910 - 1 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Income from continuing operations $ 85,680 $ 87,166 $ 126,911 $ 193,910 (Loss) income from disposal of discontinued operations, net of income tax benefit (expense) of $94,476 and ($328) (Note 5) - - (155,000) 788 NET INCOME (LOSS) $ 85,680 $ 87,166 $ (28,089) $ 194,698 Average common shares outstanding 129,677 129,677 129,677 129,677 Earnings (loss) per share - basic and diluted: Continuing operations $ .66 $ .67 $ .98 $ 1.49 (Loss) income from dis- posal of discontinued operations .00 .00 (1.20) .01 Total $ .66 $ .67 $ (.22) $ 1.50 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) Sep. 30, Dec. 31, 2000 1999 CURRENT ASSETS: Cash and temporary cash investments $ 16,974 $ 91,413 Marketable securities 7,104 10,126 Accounts receivable - less reserve 321,486 318,914 Materials and supplies - primarily at average cost: Fuel (predominantly coal) 58,904 91,931 Gas stored underground 66,142 49,038 Other 91,816 90,259 Prepayments and other 25,875 54,038 Total current assets 588,301 705,719 UTILITY PLANT: At original cost 6,071,791 5,916,905 Less: reserve for depreciation 2,653,281 2,503,851 Net utility plant 3,418,510 3,413,054 OTHER PROPERTY AND INVESTMENTS - LESS RESERVES: Investment in unconsolidated ventures (Note 6) 253,184 249,455 Non-utility property and plant, net 431,358 477,442 Other 136,396 25,596 Total other property and investments 820,938 752,493 DEFERRED DEBITS AND OTHER ASSETS 216,758 262,491 Total assets $5,044,507 $5,133,757 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) Sep. 30, Dec. 31, 2000 1999 CURRENT LIABILITIES: Current portion of long-term debt $ 434,372 $ 411,810 Notes payable 550,184 449,578 Accounts payable 195,461 220,460 Net liabilities of discontinued opera- tions (Note 5) 205,506 158,222 Other 167,336 248,841 Total current liabilities 1,552,859 1,488,911 Long-term debt 1,295,574 1,299,415 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 610,834 585,880 Investment tax credit, in process of amortization 79,864 85,828 Regulatory liability 94,637 104,795 Other 168,339 182,357 Total deferred credits and other liabilities 953,674 958,860 Minority interests 111,396 109,952 Cumulative preferred stock 142,640 135,328 COMMON EQUITY: Common stock, without par value - 129,677,030 shares outstanding 777,013 777,013 Other (1,981) (1,956) Retained earnings 213,332 366,234 Total common equity 988,364 1,141,291 Total liabilities and capital $5,044,507 $5,133,757 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 $) Nine Months Ended Sep. 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (28,089) $ 194,698 Items not requiring cash currently: Depreciation and amortization 169,907 162,879 Deferred income taxes - net 13,284 (9,227) Asset impairment charge (Note 4) 45,000 - Non-recurring charges (Notes 2 and 3) 38,952 - Loss (income) from disposal of dis- continued operations (Note 5) 155,000 (788) Other (30,241) (17,480) Change in net current assets (179,935) (78,631) Other 21,393 7,179 Net cash flows from operating activities 205,271 258,630 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (1,433) (917) Proceeds from sales of securities 4,044 10,040 Construction expenditures (303,051) (291,942) Investments in unconsolidated ventures (Note 6) (2,125) (74,498) Investment in subsidiary, net of cash and temporary cash investments acquired - (39,693) Proceeds from sales of investments in affiliates (Note 6) 22,507 53,384 Net cash flows from investing activities (280,058) (343,626) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of debt 162,900 200,000 Retirement of debt (144,962) (35,268) Short-term borrowings 9,790,273 3,927,792 Repayment of short-term borrowings (9,691,847)(3,899,417) Issuance of preferred stock 7,500 - Redemption of preferred stock - (1,202) Payment of common dividends (123,516) (119,628) Net cash flows from financing activities 348 72,277 CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (74,439) (12,719) BEGINNING CASH AND TEMPORARY CASH INVESTMENTS 91,413 105,604 ENDING CASH AND TEMPORARY CASH INVESTMENTS $ 16,974 $ 92,885 - 5 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (cont.) (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 2000 1999 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 34,177 $ 24,871 Interest on borrowed money 110,451 78,483 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Balance at beginning of period $ 170,121 $ 494,059 $ 366,234 $ 466,279 Net income (loss) 85,680 87,166 (28,089) 194,698 Cash dividends declared on common stock ($.3275, $.3175, $.9625 and $.9325 per share) 42,469 41,172 124,813 120,924 Balance at end of period $ 213,332 $ 540,053 $ 213,332 $ 540,053 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Net income (loss) $ 85,680 $ 87,166 $(28,089) $194,698 Unrealized holding gains (losses) on available-for-sale securities arising during the period 44 (287) (473) (250) Reclassification adjustment for realized gains and (losses) on available-for-sale securities included in net income 139 (89) 179 (247) Other comprehensive income (loss), before tax 183 (376) (294) (497) Income tax (expense) benefit related to items of other comprehensive income (40) 142 111 188 Comprehensive income (loss) $ 85,823 $ 86,932 $(28,272) $194,389 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 OPERATING REVENUES: Electric $205,259 $279,907 $544,494 $621,693 Gas 24,381 17,623 142,676 117,054 Provision for rate refunds - (1,135) 1,844 (1,635) Total operating revenues 229,640 296,395 689,014 737,112 OPERATING EXPENSES: Fuel for electric generation 41,854 45,361 120,430 117,199 Power purchased 23,907 85,156 70,006 139,040 Gas supply expenses 16,097 8,763 98,180 72,650 Non-recurring charges (Note 3) - - 8,141 - Other operation expenses 31,620 39,452 99,142 119,101 Maintenance 14,804 12,800 46,127 47,730 Depreciation and amortization 25,119 24,143 73,169 72,428 Federal and state income taxes 23,551 25,683 47,617 47,317 Property and other taxes 4,527 4,001 14,164 12,999 Total operating expenses 181,479 245,359 576,976 628,464 NET OPERATING INCOME 48,161 51,036 112,038 108,648 Other income 1,121 336 4,490 1,648 Interest charges 11,165 9,668 32,981 27,636 NET INCOME 38,117 41,704 83,547 82,660 Preferred stock dividends 1,361 1,090 3,843 3,266 NET INCOME AVAILABLE FOR COMMON STOCK $ 36,756 $ 40,614 $ 79,704 $ 79,394 The accompanying notes are an integral part of these financial statements. - 9 - Louisville Gas and Electric Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Sep. 30, Dec. 31, 2000 1999 UTILITY PLANT: At original cost $3,155,949 $3,065,839 Less: reserve for depreciation 1,292,265 1,215,032 Net utility plant 1,863,684 1,850,807 OTHER PROPERTY AND INVESTMENTS - less reserve 1,088 1,224 CURRENT ASSETS: Cash and temporary cash investments 40,986 54,761 Marketable securities 4,081 6,936 Accounts receivable - less reserve 107,421 113,859 Materials and supplies - at average cost: Fuel (predominantly coal) 11,900 17,350 Gas stored underground 57,868 38,780 Other 33,814 35,010 Prepayments and other 1,453 2,775 Total current assets 257,523 269,471 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,596 5,607 Regulatory assets 31,492 31,443 Other 20,232 12,900 Total deferred debits and other assets 57,320 49,950 Total assets $2,179,615 $2,171,452 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) Sep. 30, Dec. 31, 2000 1999 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Retained earnings 288,935 259,231 Other (1,116) (1,025) Total common equity 712,989 683,376 Cumulative preferred stock 95,140 95,328 Long-term debt 360,600 380,600 Total capitalization 1,168,729 1,159,304 CURRENT LIABILITIES: Current portion of long-term debt 246,200 246,200 Notes payable 131,623 120,097 Accounts payable 103,701 113,008 Provision for rate refunds - 8,962 Dividends declared 18,361 24,236 Accrued taxes 30,648 23,759 Accrued interest 4,147 9,265 Other 16,835 15,725 Total current liabilities 551,515 561,252 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 281,287 255,910 Investment tax credit, in process of amortization 64,045 67,253 Accumulated provision for pensions and related benefits 40,204 38,431 Customer advances for construction 9,632 11,104 Regulatory liability 54,794 58,726 Other 9,409 19,472 Total deferred credits and other liabilities 459,371 450,896 Total capital and liabilities $2,179,615 $2,171,452 The accompanying notes are an integral part of these financial statements. - 11 - Louisville Gas and Electric Company Statements of Cash Flows (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 83,547 $ 82,660 Items not requiring cash currently: Depreciation and amortization 73,169 72,428 Deferred income taxes - net 22,907 (4,981) Investment tax credit - net (3,208) (3,217) Other 5,899 5,255 Changes in current assets and liabilities (20,070) 42,348 Other (9,221) (7,663) Net cash flows from operating activities 153,023 186,830 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (708) (668) Proceeds from sales of securities 3,594 9,955 Construction expenditures (97,670) (141,932) Net cash flows from investing activities (94,784) (132,645) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of pollution control bonds 104,638 - Retirement of pollution control bonds (108,335) - Retirement of first mortgage bonds (20,124) - Short-term borrowings 1,959,012 - Repayment of short-term borrowings (1,947,487) - Payment of dividends (59,718) (69,343) Net cash flows from financing activities (72,014) (69,343) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (13,775) (15,158) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 54,761 31,730 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 40,986 $ 16,572 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 17,641 $ 53,326 Interest on borrowed money 35,903 25,497 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Balance at beginning of period $269,179 $242,242 $259,231 $247,462 Net income 38,117 41,704 83,547 82,660 Subtotal 307,296 283,946 342,778 330,122 Cash dividends declared on stock: 5% cumulative preferred 269 269 807 807 Auction rate cumulative preferred 725 454 1,935 1,358 $5.875 cumulative preferred 367 367 1,101 1,101 Common 17,000 23,000 50,000 67,000 Subtotal 18,361 24,090 53,843 70,266 Balance at end of period $288,935 $259,856 $288,935 $259,856 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Net income available for common stock $36,756 $40,614 $79,704 $79,394 Unrealized holding gains (losses) on available-for-sale securities arising during the period 113 (199) (153) (293) Income tax benefit (expense) related to unrealized holding gains and losses (45) 80 62 118 Comprehensive income $36,824 $40,495 $79,613 $79,219 The accompanying notes are an integral part of these financial statements. - 14 - Kentucky Utilities Company Statements of Income (Unaudited) (Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 OPERATING REVENUES: Electric $215,984 $287,703 $639,087 $730,846 Provision for rate refunds - (6,200) - (6,200) Net operating revenues 215,984 281,503 639,087 724,646 OPERATING EXPENSES: Fuel for electric generation 56,012 60,770 163,093 168,338 Power purchased 39,880 104,213 122,188 195,136 Non-recurring charges (Note 3) - - 11,030 - Other operation expenses 26,092 30,403 79,107 89,359 Maintenance 14,374 13,649 45,602 42,113 Depreciation and amortization 24,532 22,546 73,356 66,694 Federal and state income taxes 14,119 13,910 36,854 47,130 Property and other taxes 3,814 3,483 13,031 11,384 Total operating expenses 178,823 248,974 544,261 620,154 NET OPERATING INCOME 37,161 32,529 94,826 104,492 Other income 1,322 1,604 5,301 5,767 Interest charges 10,000 9,707 29,938 28,448 NET INCOME 28,483 24,426 70,189 81,811 Preferred stock dividends 564 564 1,692 1,692 NET INCOME AVAILABLE FOR COMMON STOCK $ 27,919 $ 23,862 $ 68,497 $ 80,119 The accompanying notes are an integral part of these financial statements. - 15 - Kentucky Utilities Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Sep. 30, Dec. 31, 2000 1999 UTILITY PLANT: At original cost $2,915,842 $2,851,066 Less: reserve for depreciation 1,361,016 1,288,819 Net utility plant 1,554,826 1,562,247 OTHER PROPERTY AND INVESTMENTS - less reserve 14,364 14,349 CURRENT ASSETS: Cash and temporary cash investments 3,113 6,793 Accounts receivable - less reserve 92,166 88,549 Materials and supplies - at average cost: Fuel (predominantly coal) 16,825 30,225 Other 27,434 26,213 Prepayments and other 2,608 3,743 Total current assets 142,146 155,523 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 4,696 4,827 Regulatory assets 19,509 23,033 Other 8,194 25,111 Total deferred debits and other assets 32,399 52,971 Total assets $1,743,735 $1,785,090 The accompanying notes are an integral part of these financial statements. - 16 - Kentucky Utilities Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) Sep. 30, Dec. 31, 2000 1999 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Retained earnings 322,467 329,470 Other (595) (595) Total common equity 630,012 637,015 Cumulative preferred stock 40,000 40,000 Long-term debt 484,830 430,830 Total capitalization 1,154,842 1,107,845 CURRENT LIABILITIES: Current portion of long-term debt - 115,500 Notes payable 29,942 - Accounts payable 108,412 116,546 Provision for rate refunds - 20,567 Dividends declared 25,688 19,150 Accrued taxes 30,006 10,502 Accrued interest 8,499 7,329 Other 18,783 18,617 Total current liabilities 221,330 308,211 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 244,769 243,620 Investment tax credit, in process of amortization 15,819 18,575 Accumulated provision for pensions and related benefits 48,409 48,285 Regulatory liability 39,843 46,069 Other 18,723 12,485 Total deferred credits and other liabilities 367,563 369,034 Total capital and liabilities $1,743,735 $1,785,090 The accompanying notes are an integral part of these financial statements. - 17 - Kentucky Utilities Company Statements of Cash Flows (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 70,189 $ 81,811 Items not requiring cash currently: Depreciation and amortization 73,356 66,694 Deferred income taxes - net (3,829) (9,174) Investment tax credit - net (2,755) (2,783) Changes in current assets and liabilities 8,360 (14,089) Other 27,503 10,200 Net cash flows from operating activities 172,824 132,659 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (74,434) (145,671) Net cash flows from investing activities (74,434) (145,671) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings 159,256 46,667 Repayment of short-term borrowings (129,313) - Issuance of pollution control bonds 12,900 - Retirement of pollution control bonds (74,785) - Payment of dividends (70,128) (55,597) Net cash flows from financing activities (102,070) (8,930) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (3,680) (21,942) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 6,793 58,949 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 3,113 $ 37,007 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 26,544 $ 53,778 Interest on borrowed money 25,417 24,078 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 Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Balance at beginning of period $320,048 $319,424 $329,470 $299,167 Net income 28,483 24,426 70,189 81,811 Subtotal 348,531 343,850 399,659 380,978 Cash dividends declared on stock: 4 75% preferred 237 237 711 711 6.53% preferred 327 327 981 981 Common 25,500 19,000 75,500 55,000 Subtotal 26,064 19,564 77,192 56,692 Balance at end of period $322,467 $324,286 $322,467 $324,286 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. The unaudited consolidated financial statements include the accounts of LG&E Energy Corp. and its wholly-owned subsidiaries. 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 1999 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Company. 2. On February 28, 2000, the Company announced that its Board of Directors accepted an offer to be acquired by Powergen for cash of approximately $3.2 billion or $24.85 per share and the assumption of all of the Company's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of Powergen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction. The acquisition is expected to close 9 to 12 months from the announcement, shortly after all of the conditions to consummation of the acquisition are met. It is possible that the remaining regulatory approvals may be received in time to permit a closing during the fourth quarter of 2000. The Company expensed approximately $3.5 million and $18.9 million related to the Powergen transaction during the three- and nine-month periods ended September 30, 2000, respectively. The foregoing description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. Shareholders of the Company and of Powergen approved the merger transaction in separate meetings held in June 2000. Further, approvals were received from the Kentucky Commission in May 2000, the FERC in June 2000 and the Virginia Commission in July 2000. Required waiting periods with respect to federal antitrust and federal foreign investment laws were each terminated in August 2000. The parties' joint application for approval to the SEC under PUHCA was submitted in April 2000 and is currently under review by the SEC. While the Company and Powergen believe that they will receive the requisite remaining regulatory approvals for the merger in sufficient time to complete the transaction on the schedule mentioned above, there can be no assurance as to the timing of such approvals or the ability to obtain such approvals on satisfactory terms or otherwise. 3. During the first quarter 2000, the Company took a $12.1 million ($.09) after-tax charge for the continued "One Utility" integration of the operations of LG&E and KU including their customer service centers and certain administrative elements of their retail electric and gas distribution operations. The result of this consolidation was the elimination of approximately 400 positions most of which were taken by employees through the Company's voluntary enhanced severance program. - 20 - 4. The Company previously announced its intention to sell its natural gas gathering and processing business in the near term. Information gathered to date indicates that the Company will realize proceeds from the sale of this business below carrying value. As a result, the Company recorded a pretax impairment charge of $45 million in the second quarter of 2000 to reduce the carrying value of this business to more appropriately reflect net realizable value. 5. 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 market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enabled the Company to focus on optimizing the value of physical assets it owns or controls, and reduced the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company will continue to meet its obligations to buy and sell natural gas and electric power under the terms of the contracts until disposition or expiration. 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 WKE. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial 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 resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with OPC. Other components of the write-off included costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs. In the fourth quarter of 1999, the Company received an adverse decision from the arbitration panel considering its contract dispute with OPC, which was commenced by the Company in April 1998. As a result of this adverse decision, higher than anticipated commodity prices, increased load demands, and other factors, the Company increased its after-tax accrued loss on disposal of discontinued operations by $175 million. The additional write-off included costs related to the remaining commitments in its portfolio and exit costs expected to be incurred to serve those commitments. In the second quarter of 2000, the Company increased its after-tax accrued loss on disposal of discontinued operations by an additional $155 million primarily to reflect the most recent OPC load forecast, coupled with the increased demand experienced this summer, and new price forecasts for the OPC and other long-term contracts. 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, there are inherent limitations in models to accurately predict future commodity prices, load demands and other events that could impact the amounts recorded by the Company. - 21 - Operating results for the discontinued merchant energy trading and sales business follow. Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 2000 1999 2000 1999 Revenues $190,555 $386,038 $372,131 $675,820 Loss before taxes (131,221) (166,185) (174,780) (203,729) Income (loss) from discontinued oper- ations, net of in- come taxes (81,528) (100,190) (108,591) (120,670) Net assets of discontinued operations at September 30, 2000, follow. Accounts receivable $ 43,138 Price risk management assets 4,899 Accounts payable (69,138) Other assets and liab- ilities, net 37,004 Net assets before balance of reserve for discontinued operations 15,903 Accrued loss on disposal of discontinued operations, net of income tax benefit of $134,954 (221,409) Net liabilities of discon- tinued operations $(205,506) Total pretax charges against the accrued loss on disposal of discontinued operations through September 30, 2000, include $418.4 million for commitments prior to disposal, $69.6 million for transaction settlements, $11.1 million for goodwill, and $37.9 million for other exit costs. While the Company has been successful in settling portions of its discontinued operations, significant assets, operations and obligations remain. The Company continues to manage the remaining portfolio and believes it has hedged certain of its future obligations through various power purchase commitments and planned construction of physical assets. Management cannot predict the ultimate effectiveness of these hedges. The pretax net fair value of the remaining commitments as of September 30, 2000, are currently estimated to be approximately $13 million in 2000, $50 million to $105 million each year in 2001 through 2004 and $19 million in the aggregate thereafter. As of September 30, 2000, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 24.7 million Mwh's of power and 6.2 million Mmbtu's of natural gas with a volumetric weighted-average period of approximately 30 and 56 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 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, - 22 - but do not reflect actual amounts of cash, financial instruments, or quantities of the underlying commodity which may ultimately be exchanged between the parties. As of October 26, 2000, the Company estimates that a $1 change in electricity prices and a 10-cent 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 $9.8 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 October 26, 2000, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $12.0 million. 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 September 30, 2000, over 97% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of September 30, 2000, six counterparties represented 85% of the Company's price risk management commitments. 6. In March 2000, the Company sold its interest in CEC-APL L.P., a partnership in which the Company owned a 49% interest, for approximately $18 million. This sale resulted in a pretax gain of approximately $2 million. In June 2000, the Company sold its interest in KUCC Cleburne Corporation, through which the Company owned a minority interest in one of the Tenaska limited partnerships, for $4.6 million. This sale resulted in a pretax gain of approximately $1.3 million. 7. In March 2000, the 2000 Kentucky General Assembly passed House Bill 897 that established requirements for cost allocations, affiliate transactions and a code of conduct governing the relationship between utilities and their non-utility operations and affiliates. Management does not expect this matter to have a material adverse effect on the Company's financial position or results of operations. In March 2000, LG&E filed a Notice and Statement with the Kentucky Commission requesting an adjustment in LG&E's gas rates. LG&E asked for a general adjustment in gas rates for a test year for the twelve months ended December 31, 1999. The revenue increase applied for was $26.4 million. The Commission subsequently suspended the effective date of the proposed new tariffs, and held hearings during August 2000. On September 27, 2000, the Commission granted LG&E an annual increase in its base gas revenues of $20.2 million effective September 28, 2000. The Commission authorized a return on equity of 11.25%. The Commission approved the Company's proposal for a weather normalization billing adjustment mechanism that will normalize the effect of weather on revenues from gas sales. On October 19, 2000, the Kentucky Attorney General requested that the Commission grant rehearing on a single revenue requirements issue (normalization of forfeited discounts) on the grounds that the September 27 Order did not rule on or otherwise discuss the issue. On November 2, 2000, the Commission granted the Attorney General's request for rehearing, rejected the Attorney General's proposed adjustment to normalize the level of forfeited discounts, and ordered that its September 27, 2000 Order be modified to reflect its findings on the issue. In May 2000, the Court upheld the Commission's February 1999 order that LG&E make FAC refunds, but reversed the Commission's determination that it was not appropriate to require LG&E to pay interest on the amounts to be refunded. The Court remanded the case to the Commission for a determination of whether interest should be awarded to compensate ratepayers for LG&E's use of the money to be refunded. On June 2, 2000, LG&E filed a Notice of Appeal to the Kentucky Court of Appeals from the Franklin Circuit Court decision. On October 31, 2000, the Franklin Circuit Court issued its rul - 23 - ing in KU's appeal of the Commission's orders in several FAC review cases which required KU to refund $6.7 million it previously collected through its FAC. The Court upheld the Commission's orders in all respects but one, and reversed the Commission's findings that the Commission could not award interest on the refund amounts. The Court remanded the cases to the Commission for further proceedings. On November 2, 2000, KU filed a Notice of Appeal of the Franklin Circuit Court's decision to the Kentucky Court of Appeals. In June 2000, the Commission acknowledged that the PBR Order issued in January 2000 contained errors and issued its Orders on rehearing which revised the rate reductions it had previously ordered. LG&E's rate reduction was lowered to $26.3 million, and KU's reduction was lowered to $30.4 million. No parties filed appeals from the Commission's orders within the time allowed by statute. 8. In May 2000, LG&E and KU issued new variable-rate pollution-control bonds for $25 million and $12.9 million, respectively. At September 30, 2000, the interest rates paid on the bonds equaled 4.35% for LG&E and 4.45% for KU. The new bonds replaced LG&E's 7.45% Series P bonds and KU's 7.375% Series 7 and 7.60% Series 7 bonds. LG&E and KU called the old bonds in June 2000. In June 2000, Capital Corp. issued $150 million of floating-rate medium- term notes due June 2001. The notes had an interest rate of 7.4925% through September 18, 2000, and a rate equal to the three-month LIBOR plus 70 basis points thereafter. At September 30, 2000, the interest rate on the notes equaled 7.36%. In August 2000, LG&E issued $83.3 million of variable-rate pollution- control bonds. At September 30, 2000, the interest rates paid on the bonds equaled 4.40%. The new bonds replaced LG&E's 7.625% Series Q bonds. LG&E fully defeased the Series Q bonds on August 9, 2000. 9. External and intersegment revenues and income from continuing operations by business segment for the three months ended September 30, 2000, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $200,560 $ 4,699 $ 22,758 LG&E gas 24,381 - 13,998 KU electric 211,640 4,344 27,919 Independent Power Operations 4,786 - 1,454 Western Kentucky Energy 82,151 - 16,086 Argentine Gas Distribution 54,797 - 10,764 Other Capital Corp. 103,581 - (1,095) All Other - (9,043) (6,204) Consolidated $681,896 $ - $ 85,680 - 24 - External and intersegment revenues and income from continuing operations by business segment for the nine months ended September 30, 2000, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $ 531,099 $ 15,239 $ 65,835 LG&E gas 142,676 - 13,869 KU electric 623,597 15,490 68,497 Independent Power Operations 15,400 - 16,318 Western Kentucky Energy 209,880 - 18,587 Argentine Gas Distribution 134,556 - 16,756 Other Capital Corp. 256,369 - (48,158) All Other - (30,729) (24,793) Consolidated $1,913,577 $ - $126,911 External and intersegment revenues and income from continuing operations by business segment for the three months ended September 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $273,836 $ 4,936 $ 39,771 LG&E gas 17,623 - 843 KU electric 276,540 4,963 23,862 Independent Power Operations 5,366 - 5,573 Western Kentucky Energy 144,434 - 12,377 Argentine Gas Distribution 48,479 - 6,632 Other Capital Corp. 99,112 - 1,754 All Other - (9,899) (3,646) Consolidated $865,390 $ - $ 87,166 - 25 - External and intersegment revenues and income from continuing operations by business segment for the nine months ended September 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $ 607,681 $ 12,377 $ 78,124 LG&E gas 117,054 - 1,270 KU electric 710,626 14,020 80,119 Independent Power Operations 18,467 - 26,850 Western Kentucky Energy 273,462 - 10,889 Argentine Gas Distribution 123,422 - 11,785 Other Capital Corp. 237,600 - (3,842) All Other - (26,397) (11,285) Consolidated $2,088,312 $ - $193,910 10.Reference is made to Part II, Legal Proceedings, below and Part I, Item 3, Legal Proceedings, of the Company's, LG&E's and KU's (and Notes 18 and 22 of the Company's Notes to Financial Statements) Annual Reports on Form 10-K for the year ended December 31, 1999, and Part II, Item 1, Legal Proceedings, of the Forms 10-Q for the quarters ended March 31, 2000, and June 30, 2000. - 26 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. General The Company's principal subsidiaries are LG&E, an electric and gas utility, KU, an electric utility, LEM and Capital Corp., the holding company for all non-utility investments other than trading operations. 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. On February 28, 2000, the Company announced that its Board of Directors accepted an offer to be acquired by Powergen for cash of approximately $3.2 billion or $24.85 per share and the assumption of all of the Company's debt. For more information, see Note 2 of Notes to Financial Statements under Item 1. 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; 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, 1999. 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 September 30, 2000, Compared to Three Months Ended September 30, 1999 The Company's primary and diluted earnings per share from continuing operations decreased to $.66 in 2000 from $.67 in 1999. The decrease resulted from lower earnings at CRC, Power Operations and LG&E, and from recording expenses related to the Powergen acquisition. Higher earnings at KU, WKE and at the Argentine Gas Distribution companies partially offset these decreases. LG&E Results: LG&E's net income decreased $3.6 million (8.6%) for the quarter ended September 30, 2000, compared to the quarter ended September 30, 1999, primarily due to decreased electric sales resulting from a 25% decrease in cooling degree days and from an electric rate reduction in 2000. Decreased operation expenses partially offset the decrease in electric revenues. - 27 - A comparison of LG&E's revenues for the quarter ended September 30, 2000, with the quarter ended September 30, 1999, excluding the provision for rate refunds of $1.1 million in 1999, reflects increases and decreases which have been segregated by the following principal causes (in thousands of $): Electric Gas Cause Revenues Revenues Retail sales: Fuel and gas supply adjustments $ (3,045) $4,100 Merger surcredit (711) - Performance based rates 2,625 - Environmental cost recovery (482) - Electric rate reduction (8,333) - Variation in sales volume, etc. (10,046) 1,575 Total retail sales (19,992) 5,675 Sales for resale (55,338) 1,319 Gas transportation - net - 17 Other 682 (253) Total $(74,648) $6,758 In January 2000, the Kentucky Commission ordered the termination of LG&E's proposed PBR mechanism. As a result, LG&E refunded certain amounts collected from its customers during the nine months ended March 31, 2000. Electric sales for resale decreased $55.3 million (61.5%) primarily due to decreases in brokered sales activities. 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 Kentucky Commission. Fuel for electric generation decreased $3.5 million (7.7%) for the quarter because of an decrease in generation due to mild weather ($1.4 million), and a decrease in the cost of coal burned ($2.1 million). Gas supply expenses increased $7.3 million primarily due to an increase in the net gas supply cost ($6.6 million) due to higher prices and increased purchases for wholesale sales ($1.1 million). Power purchased decreased $61.2 million primarily due to a decrease in brokered sales activities ($53.1 million) and purchases to support sales for resale ($8.1 million). Other operation expenses decreased $7.8 million (19.9%) primarily due to decreased administrative costs ($4 million) resulting from decreased pension and Year-2000 costs and decreased steam power production costs ($2.5 million). Maintenance expenses increased $2 million (15.7%) in 2000 mainly due to increases in software maintenance agreements, ($1.3 million) and steam production maintenance ($.4 million). Depreciation and amortization increased $1 million in 2000 because of additional utility plant in service. Variations in income tax expense are largely attributable to changes in pre- tax income. - 28 - Interest expenses increased $1.5 million for the quarter ended September 30, 2000 over the quarter ended September 30, 1999 due to increased short term borrowings. KU Results: KU's net income increased $4.1 million (16.6%) for the quarter ended September 30, 2000, as compared to the quarter ended September 30, 1999. The increase was primarily the result of higher off-system sales and lower operation and maintenance expenses, which offset the effects of mild weather and the effect of retail rate reductions. A comparison of KU's revenues for the quarter ended September 30, 2000, with the quarter ended September 30, 1999, excluding the provision for rate refunds of $6.2 million recorded in 1999, reflects increases and decreases which have been segregated by the following principal causes: Sales to ultimate consumers: Fuel supply adjustments $ 5,418 Environmental cost recovery (1,980) Performance based rate reduction 2,528 Merger surcredit (658) Electric rate reduction (8,133) Variation in sales volume, etc. (3,413) Total retail sales (6,238) Wholesale sales (65,437) Other (44) Total $(71,719) The environmental cost recovery surcharges are costs recovered from retail customers for investments KU made in facilities for compliance with clean air regulations. As shown above, KU recovered $2.0 million less as compared with the same quarter 1999. In January 2000, the Kentucky Commission ordered the termination of KU's proposed PBR mechanism. As a result, KU refunded certain amounts collected from its customers during the nine months ended March 31, 2000. The electric rate reduction resulted from the Kentucky Commission's January 2000 PBR order reducing KU's base electric rates. On May 4, 1998, LG&E Energy and KU Energy merged. As a result of merger, the Kentucky Commission approved a surcredit for savings achieved from the merger to be passed to the ultimate consumer over a five-year period. The reduction to retail sales for the merger surcredit is a reflection of that rate reduction. The decrease in wholesale sales is due to fewer brokered sales marketing opportunities and reduced revenue resulting from more moderate summer prices compared to recent summers. Fuel for electric generation comprises a large segment of KU's total operating expenses. KU's electric rates contain an FAC, whereby increases or decreases in the cost of fuel are reflected in retail rates, subject to the approval of the Kentucky Commission, the Virginia Commission, and the FERC. Fuel for electric generation decreased $4.8 million (7.8%) for the quarter because of a decrease in generation ($1.5 million) and the cost of coal burned ($3.3 million). - 29 - Power purchased decreased $64.3 million (61.7%) because there were fewer opportunities in the brokered sales market as mentioned above. Other operating expenses decreased by $4.3 million (14.2%). The decrease was mainly attributable to lower administrative and general expenses ($3.0 million) and customer service and information expenses ($1 million), which were the result of further integration of customer functions. Depreciation and amortization increased due to additional utility plant in service. Variations in income tax expense are largely attributable to changes in pretax income and to recording federal and state tax adjustments. LG&E Capital Corp. and Other Results: Power Operations Power Operations' equity in earnings of unconsolidated ventures increased from $5.4 million in 1999 to $9.3 million in 2000. The increase resulted from reversing maintenance reserves in 2000 and from starting operations at the project in Gregory, Texas, in July 2000. Western Kentucky Energy WKE's revenues decreased from $144.4 million in 1999 to $82.2 million in 2000 due mainly to lower off-system sales. WKE's cost of revenues decreased from $100.8 million in 1999 to $32.4 million in 2000 due mainly to a decrease in the amount of power purchased to sell off-system. Argentine Gas Distribution The Argentine Gas Distribution companies' net income increased from $6.6 million in 1999 to $10.8 million in 2000 due mainly to higher equity in the earnings of Gas BAN and Centro and a decrease in the effective tax rate. Other Other revenues increased from $99.1 million in 1999 to $103.6 million in 2000. The increase resulted from increased sales in the Company's natural gas gathering and processing business and higher energy marketing revenues, partially offset by decreases in revenues at Retail Access Services and CRC- Evans. Other cost of revenues increased from $73.1 million in 1999 to $88.1 million in 2000. The increase resulted from increased sales in the Company's natural gas gathering and processing business and higher energy marketing cost of revenues, partially offset by a decrease at Retail Access Services. The Company recorded non-recurring charges totaling $3.6 million during the third quarter of 2000. See Note 2 of Notes to Financial Statements under Item 1 for more information. Other income for Capital Corp. and Other decreased from $4.6 million in 1999 to $2.8 million in 2000. The decrease resulted from receiving a claim related to an undeveloped independent power project in California in the third quarter of 1999, partially offset by an increase in interest income. Capital Corp. and Other interest expense increased from $12.0 million in 1999 to $17.1 million in 2000. The increase resulted from funding discontinued operations and corporate - 30 - operating expenses. The Company's consolidated effective income tax rate decreased from 38.1% in 1999 to 34.9% in 2000 due mainly to recording foreign and state tax adjustments. Nine Months Ended September 30, 2000, Compared to Nine Months Ended September 30, 1999 The Company's primary and diluted earnings per share from continuing operations decreased to $.98 in 2000 from $1.49 in 1999. The decrease resulted primarily from an asset impairment charge taken on the Company's natural gas gathering and processing business ($.21), recognizing expenses associated with the integration of the Company's two utilities ($.09), and from recording expenses related to the Powergen acquisition ($.12). Excluding these nonrecurring items, earnings per share from continuing operations decreased from $1.49 in 1999 to $1.40 in 2000. This decrease resulted from lower earnings at KU and CRC-Evans, decreases resulting from recognizing one-time items in 1999, and higher interest expense at Capital Corp. Higher earnings at LG&E, WKE and the Argentine Gas Distribution companies partially offset these decreases. The one-time items recognized in 1999 consisted of a gain on the sale of the Company's interest in the Rensselaer project, proceeds from bankruptcy settlements related to the Company's windpower partnerships, and fees related to the development of an independent power project in Gregory, Texas. LG&E Results: LG&E's net income increased $.9 million (1.1%) for the first nine months of 2000, as compared to the first nine months of 1999, primarily because of decreases in operation expenses. This was partially offset by a decrease in operating revenues. The decrease in operating revenues resulted from a decrease in cooling degree days and an electric rate reduction. A comparison of LG&E's revenues for the nine months ended September 30, 2000, with the nine months ended September 30, 1999, excluding the provision for rate refunds, reflects increases and decreases which have been segregated by the following principal causes (in thousands of $): Electric Gas Cause Revenues Revenues Retail sales: Fuel and gas supply adjustments $ (1,270) $14,029 Merger surcredit (1,642) - Performance based rates 350 - Environmental cost recovery (1,206) - Electric rate reductions (15,683) - Variation in sales volume, etc. (11,609) 4,038 Total retail sales (31,060) 18,067 Sales for resale (47,510) 7,772 Gas transportation - net - 180 Other 1,371 (397) Total $(77,199) $25,622 In January 2000, the Kentucky Commission ordered the termination of LG&E's proposed PBR mechanism. As a result, LG&E refunded certain amounts collected from its customers during the nine months ended March 31, 2000. - 31 - Electric sales for resale decreased $47.5 million (28.4%) primarily due to decreases in brokered sales activities. Fuel for electric generation increased $3.2 million (2.8%) year-to-date because of an increase in generation ($9.3 million), partially offset by a decrease in the cost of coal burned ($6.1 million). Gas supply expenses increased $25.5 million (35.1%) primarily due to an increase in the net gas supply cost ($20 million) and increased purchases for wholesale sales ($7.1 million). Power purchased decreased $69 million (49.7%) primarily due to a decrease in brokered sales activities ($66.2 million) and purchases to support sales for resale ($2.8 million). Other operation expenses decreased $20.0 million (16.8%) for the nine months ended September 2000 as compared to same period ended September 1999 primarily due to lower administrative costs ($14.1 million) resulting from lower pension and Year-2000 expenses, and to lower steam and other power production expenses ($4.8 million). Non-recurring charges in 2000 of $8.1 million include the costs associated with the Company's One-Utility Program. Maintenance expenses for the first nine months of 2000 decreased $1.6 million (3.4%) primarily due to decreases in scheduled outages at the Mill Creek and Cane Run generating station ($4.3 million) and electric distribution maintenance ($1 million), partially offset by an increase in software maintenance costs ($3.4 million) Depreciation and amortization increased $.7 million in 2000 because of additional utility plant in service. Other income and deductions increased $2.8 million (172.5%) due to gains on the sale of non-utility property. Variations in income tax expense are largely attributable to changes in pre- tax income. Interest expense increased $5.3 million (19.3%) for the first nine months of 2000 due to increased short term borrowings. KU Results: KU's net income decreased $11.6 million (14.2%) for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. The decrease was partially due to a non-recurring charge of $6.6 million, after tax, made in the first quarter of 2000 for costs associated with further integration of KU and LG&E. Excluding this non-recurring charge, net income decreased $5 million, mainly due to rate reductions ordered by the Kentucky Commission early in 2000, partially offset by decreased operation expenses. - 32 - A comparison of KU's revenues for the nine months ended September 30, 2000, with the nine months ended September 30, 2000, excluding the provision for rate refunds of $6.2 million recorded in the third quarter of 1999, reflects increases and decreases which have been segregated by the following principal causes: Sales to ultimate consumers: Fuel supply adjustments $ 3,618 Environmental cost recovery surcharge (5,062) Performance based rate reduction 795 Merger surcredit (1,389) Electric rate reduction (20,273) Variation in sales volume, etc. 10,134 Total retail sales (12,177) Wholesale sales (82,189) Other 2,607 Total $(91,759) The environmental cost recovery surcharges are costs recovered from retail customers for investments KU made in facilities for compliance with clean air regulations. As shown above, KU recovered $5.1 million less for the nine months ended September 30, 2000 as compared with the nine months ended September 30, 1999. In January 2000, the Kentucky Commission ordered the termination of KU's proposed PBR mechanism. As a result, KU refunded certain amounts collected from its customers during the nine months ended March 31, 2000. The electric rate reduction resulted from the Kentucky Commission's January 2000 PBR order reducing KU's base electric rates. On May 4, 1998, LG&E Energy and KU Energy merged. As a result of merger, the Kentucky Commission approved a surcredit for savings achieved from the merger to be passed to the ultimate consumer over a five-year period. The reduction to retail sales for the merger surcredit is a reflection of that rate reduction. The decrease in wholesale sales is due to fewer brokered sales marketing opportunities and the reduced availability of power because of planned outages at the electric generating plants. Fuel for electric generation decreased $5.2 million (3.1%) because of a decrease in generation ($2.5 million) and a decrease in the cost of coal burned ($2.7 million). Power purchased decreased $72.9 million (37.4%) because there were fewer opportunities in the brokered sales market as mentioned above. Non-recurring charges of $6.6 million, after tax, include the costs associated with the Company's One-Utility Program. Other operating expenses decreased by $10.3 million (11.5%). The decrease was mainly attributable to a decrease in administration and general expenses. Maintenance expenses increased by $3.5 million (8.3%) due primarily to increased maintenance at the steam generating plants. Depreciation and amortization increased due to additional utility plant in service. - 33 - Variations in income tax expense are largely attributable to changes in pretax income and to recording federal and state tax adjustments. LG&E Capital Corp. and Other Results: Power Operations Power Operations' revenues decreased from $18.5 million in 1999 to $15.4 million in 2000. The decrease resulted mainly from recognizing revenues in 1999 related to the Rensselaer project, which the Company sold in March 1999. Power Operations' operation and maintenance expense decreased from $7.5 million in 1999 to $5.3 million in 2000. The decrease resulted primarily from writing off assets related to the Rensselaer project in 1999. Power Operations' equity in earnings of unconsolidated ventures decreased from $35.4 million in 1999 to $21.6 million in 2000, due to recognizing a pretax gain of $15.4 million on the sale of the Rensselaer project in 1999 and to receiving proceeds from bankruptcy settlements related to the Company's windpower partnerships in the second quarter of 1999. Western Kentucky Energy WKE's revenues decreased from $273.5 million in 1999 to $209.9 million in 2000 due mainly to lower off-system sales, partially offset by higher sales to industrial customers. WKE's cost of revenues decreased from $177.9 million in 1999 to $103.4 million in 2000 mainly due to a decrease in purchased power. WKE's operation and maintenance expenses decreased from $72.1 million in 1999 to $70.4 million in 2000 due mainly to a decrease in payroll-related benefits expenses. WKE's depreciation and amortization expense increased from $2.3 million in 1999 to $4.5 million in 2000 due to increased expenditures for information systems conversions. WKE's interest income increased from $.8 million in 1999 to $2.2 million in 2000 due to an increase in the note receivable from Big Rivers. Argentine Gas Distribution The Argentine Gas Distribution companies' net income increased from $11.8 million in 1999 to $16.8 million in 2000 due mainly to an increase in net revenues, increased equity in the earnings of Gas BAN and Centro, and a decrease in the effective tax rate, partially offset by an increase in operation and maintenance expenses. Other Other revenues increased from $237.6 million in 1999 to $256.4 million in 2000. The increase resulted from acquiring CRC-Evans in July 1999, and from higher energy marketing revenues and increased sales in the Company's natural gas gathering and processing business. Fees received in 1999 related to the development of an independent power project in Gregory, Texas, and a decrease in Retail Access Services' revenues partially offset the increases. Other cost of revenues increased from $185.9 million in 1999 to $211.1 million in 2000. The increase resulted from acquiring CRC-Evans in July 1999, and from higher energy marketing revenues and increased sales in the Company's natural gas gathering and processing business. A decrease in Retail Access Services' revenues partially offset the increases. - 34 - The Company recorded asset-impairment and other non-recurring charges totaling $84.0 million during the nine months ended September 30, 2000. See Notes 2, 3 and 4 of Notes to Financial Statements under Item 1 for more information. Other income for Capital Corp. and Other increased from $9.2 million in 1999 to $9.7 million in 2000. The increase resulted from recognizing the gain on the sale of the Company's interest in KUCC Cleburne in the second quarter of 2000 and the gain on the sale of the Company's interest in CEC- APL L.P. in the first quarter of 2000. Higher interest income also contributed to the increase. This increase was partially offset by decreases resulting from payments received in 1999 related to the Rensselaer sale and the initial settlement of a claim on an undeveloped independent power project in California. Capital Corp. and Other interest expense increased from $35.2 million in 1999 to $44.9 million in 2000. The increase resulted from funding discontinued operations, corporate operating expenses, and the Gas BAN and CRC acquisitions. The Company's consolidated effective income tax rate decreased from 37.6% in 1999 to 34.2% in 2000 due to an increase in investment and wind tax credits as a percent of pretax income and to recording foreign and state tax adjustments. 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 nine months ended September 30, 2000, of $303.1 million were financed with internally generated funds and commercial paper. The Company's combined cash and marketable securities balance decreased $77.5 million during the nine months ended September 30, 2000. The decrease reflects construction expenditures and dividends paid, partially offset by cash flows from operations, proceeds received from sales of investments in affiliates, and a net increase in debt. 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 increase in accounts receivable during the nine months ended September 30, 2000, resulted mainly from increases at the Company's natural gas gathering and processing business and at Centro, partially offset by decreases at LG&E and WKE. The decrease in accounts payable also resulted from decreases at LG&E, KU and WKE, partially offset by increases at the Company's natural gas gathering and processing business and at Centro. The decrease in fuel resulted from seasonal decreases at LG&E, KU and WKE, and the increase in gas stored underground resulted from a seasonal increase at LG&E. The decrease in prepayments and other resulted mainly from reclassifying costs related to the purchase of combustion turbines at Capital Corp. from current to noncurrent. The decrease in non-utility property and plant resulted from recording an impairment charge in the second quarter of 2000. See Note 4 of Notes to Financial Statements under Item 1 for more information. The increase in other property and investments resulted from - 35 - expenditures related to the purchase of combustion turbines by Capital Corp. The decrease in deferred debits and other assets resulted mainly from writing off the goodwill associated with the Company's natural gas gathering and processing business and a decrease in the cash surrender value of life insurance at KU. The increase in net liabilities of discontinued operations resulted from an increase in the Company's accrued loss on disposal of discontinued operations, partially offset by payments and operating losses. The decrease in other current liabilities resulted from differences in the timing of estimated tax payments and a decrease in the provision for rate refunds. Long-term debt (including current portion) increased by $18.7 million due to Capital Corp.'s issuing $150 million of medium-term notes in June 2000, partially offset by LG&E's redeeming its first mortgage bonds 7.5% series due July 1, 2002, in January 2000, and by KU's redeeming its Series Q 5.95% bonds due June 15, 2000, in June 2000. Capital Corp.'s redemption of $50 million of medium-term notes due September 7, 2000, in September 2000 also offset the increase. At September 30, 2000, unused capacity under the Company's lines of credit totaled $276.0 million after considering commercial paper support and approximately $55.2 million in letters of credit securing on- and off- balance sheet commitments. Standard and Poor's downgraded LG&E's, KU's and Capital Corp.'s debt ratings on February 28, 2000. The downgrades reflect S&P's opinion of the credit quality of the Companies following the impact of the Kentucky Commission rate reduction and the OPC decision. S&P, Moody's and Fitch continue to have the debt of the Companies on credit watch pending review of the financial condition following consummation of the merger of the Company with Powergen. In July 2000, Fitch (formerly Duff and Phelps) downgraded the long-term debt of Capital Corp. to BBB+ following the announcement of the increase in the discontinued operations reserve. Also during the second quarter of 2000, Capital Corp.'s commercial paper rating changed from D-1- to F-2 as a result of the merger of Fitch and Duff and Phelps. Also in July 2000, the Company announced plans to build up to ten natural gas fired combustion turbines. The Company will build the turbines in Kentucky and Georgia to meet the native load commitments of its two utilities and to mitigate its exposure related to the OPC contract. The Company has not arranged, but has under consideration, several possible methods of financing the construction of the turbines, including the use of new short- or long-term credit facilities or the use of project or lease financing. Before the third quarter of 2000, certain of Capital Corp.'s long-term debt and lease agreements required the Company to maintain a debt-to- capitalization ratio not greater than 65%. Capital Corp. and its financial institutions changed the agreements during the third quarter, and the agreements now require the Company to maintain a debt-to-capitalization ratio not greater than 70%. On March 1, 2001, the debt-to-capitalization ratio required by the agreements will drop back to 65%. The Company's debt- to-capitalization ratio at September 30, 2000, as defined in the agreements, equaled an amount just under 65%. - 36 - The Company's capitalization ratios follow: Sep. 30, Dec. 31, 2000 1999 Long-term debt (including current portion) 50.7% 49.8% Notes payable 16.1 13.1 Preferred stock 4.2 3.9 Common equity 29.0 33.2 Total 100.0% 100.0% LG&E's capitalization ratios follow: Sep. 30, Dec. 31, 2000 1999 Long-term debt (including current portion) 39.2% 41.1% Notes payable 8.5 7.9 Preferred stock 6.2 6.2 Common equity 46.1 44.8 Total 100.0% 100.0% KU's capitalization ratios follow: Sep. 30, Dec. 31, 2000 1999 Long-term debt (including current portion) 40.9% 44.7% Notes payable 2.5 0.0 Preferred stock 3.4 3.3 Common equity 53.2 52.0 Total 100.0% 100.0% For a description of certain contingencies that may affect the Company, LG&E and KU, reference is made to Part II herein - Item 1, Legal Proceedings. 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 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 during the three- and nine-month periods ended September 30, 2000. 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 during the three- and nine-month periods ended September 30, 2000. The Company's exposure to market risks from changes in commodity prices and foreign exchange rates remained immaterial during the three- and nine-month periods ended September 30, 2000. - 37 - 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 (a) the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K for the year ended December 31, 1999: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition; Notes 2, 6, 18 and 22 of the Company's Notes to Financial Statements under Item 8; Notes 3, 12 and 16 of LG&E's Notes to Financial Statements under Item 8 and Notes 3, 11 and 14 of KU's Notes to Financial Statements under Item 8 and (b) the Company's, LG&E's and KU's respective combined Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000, and June 30, 2000: Part II, Item 1, Legal Proceedings. 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. Powergen Merger Regulatory Filings On February 28, 2000, the Company announced the signing of a definitive merger agreement with Powergen of the United Kingdom, wherein, upon closing, the Company will become a wholly-owned subsidiary of Powergen and shareholders of the Company will receive $24.85 per share of Company common stock. The transaction is expected to be completed 9 to 12 months from announcement, subject to receipt of required regulatory approvals and other conditions to consummation. It is possible that the remaining regulatory approvals may be received in time to permit a closing during the fourth quarter of 2000. Shareholders of the Company and of Powergen approved the merger transaction in separate meetings held in June 2000. Further, approvals were received from the Kentucky Commission in May 2000, the FERC in June 2000 and the Virginia Commission in July 2000. Required waiting periods with respect to federal antitrust and federal foreign investment laws were each terminated in August 2000. The parties joint application for approval to the SEC under PUHCA was submitted in April 2000 and is currently under review by the SEC. While the Company and Powergen believe that they will receive the requisite remaining regulatory approvals for the merger in sufficient time to complete the transaction on the schedule mentioned above, there can be no assurance as to the timing of such approvals or the ability to obtain such approvals on satisfactory terms or otherwise. For further discussion of this matter, see Note 2, Notes to Financial Statements, in Part I of this Quarterly Report on Form 10-Q and Item 1, Powergen Merger, and Note 22 to the Company's Notes to Financial Statements under Item 8 of its Annual Report on Form 10-K for the year ended December 31, 1999. Gas Rate Increase Proceeding In August 2000, hearings were held before the Kentucky Commission regarding LG&E's March 2000 application for an general adjustment in gas rates. The requested increase of approximately $26.4 million, the first major non-fuel- related adjustment requested by LG&E to gas rates in 10 years, is designed to reflect higher service and distribution costs to natural gas customers. On September 27, 2000, the Kentucky Commission granted LG&E an annual increase in its base gas rates of $20.2 million, with an authorized return on equity of 11.25%. - 38 - 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 August 14, 2000, the Company filed a report on Form 8-K stating that on July 28, 2000, it announced that it had increased its after-tax loss on disposal of discontinued operations by an additional $155 million. - 39 - 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: November 14, 2000 /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: November 14, 2000 /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: November 14, 2000 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - 40 -