-----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, PnGHKj05/imyMXnXzZeU992rvPXf1MOKT0AC6n+rQureuanxPNIP6HwbOs/IfRwC Kpw4CK3Y2yMIET8w+FUGZw== 0000861388-98-000013.txt : 19980817 0000861388-98-000013.hdr.sgml : 19980817 ACCESSION NUMBER: 0000861388-98-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: CSX SROS: NYSE 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: 98689777 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: 98689778 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: 98689779 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32010 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 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 June 30, 1998 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. 129,682,889 shares, without par value, as of July 31, 1998. Louisville Gas and Electric Company 21,294,223 shares, without par value, as of July 31, 1998, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of July 31, 1998, 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 26 PART II Item 1 Legal Proceedings 37 Item 4 Submission of Matters to a Vote of Security Holders 39 Item 6 Exhibits and Reports on Form 8-K 41 Signatures 42 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 Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 REVENUES: Electric utility $ 358,471 $309,085 $ 682,266 $616,820 Gas utility 26,540 34,191 119,299 130,929 Argentine gas distribution and other 56,126 45,262 90,296 63,862 Total revenues 441,137 388,538 891,861 811,611 COST OF REVENUES: Fuel and power purchased 126,560 99,619 238,536 196,954 Gas supply expenses 16,282 21,144 80,358 88,969 Argentine gas distribution and other 32,248 26,200 51,675 37,594 Total cost of revenues 175,090 146,963 370,569 323,517 Gross profit 266,047 241,575 521,292 488,094 OPERATING EXPENSES: Operation and maintenance: Utility 110,081 110,752 213,064 210,995 Argentine gas distribution and other 18,881 14,482 32,202 22,903 Depreciation and amortization 48,999 46,523 99,071 91,891 Total operating expenses 177,961 171,757 344,337 325,789 Equity in earnings of joint ventures (Note 9) 50,882 6,127 56,863 9,730 OPERATING INCOME 138,968 75,945 233,818 172,035 Merger costs to achieve (Note 2) 65,318 - 65,318 - Other income and (deductions) (4,971) 4,515 (2,268) 7,886 Interest charges and preferred dividends 25,888 26,696 51,945 51,219 Minority interest 3,302 3,121 4,645 3,689 Income before income taxes 39,489 50,643 109,642 125,013 Income taxes 26,195 17,859 49,674 44,699 Income from continuing operations $ 13,294 $ 32,784 $ 59,968 $ 80,314 - 1 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Income from continuing operations $ 13,294 $ 32,784 $ 59,968 $ 80,314 Income (loss) from discontinued operations, net of income tax expense (benefit) of $(16,922), $657, $(18,907), and $538 (Notes 1 and 3) (20,093) 883 (23,599) (545) Loss on disposal of discon- tinued operations, net of income tax benefit of $125,000 (Notes 1 and 3) (225,000) - (225,000) - NET INCOME (LOSS) $(231,799) $ 33,667 $(188,631) $ 79,769 Average common shares outstanding 129,683 129,647 129,683 129,589 Earnings (loss) per share: Continuing operations $ .10 $ .25 $ .46 $ .62 Discontinued operations (.15) .01 (.17) .00 Loss on disposal of dis- continued operations (1.74) .00 (1.74) .00 Total $ (1.79) $ .26 $ (1.45) $ .62 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) June 30, Dec. 31, 1998 1997 CURRENT ASSETS: Cash and temporary cash investments $ 100,731 $ 111,003 Marketable securities 25,014 22,300 Accounts receivable - less reserve 254,014 242,942 Materials and supplies - primarily at average cost: Fuel (predominantly coal) 51,990 45,450 Gas stored underground 14,220 42,104 Other 55,765 55,514 Net assets of discontinued opera- tions (Notes 1 and 3) - 222,784 Prepayments and other 8,563 9,304 Total current assets 510,297 751,401 UTILITY PLANT: At original cost 5,457,904 5,390,868 Less: reserve for depreciation 2,278,710 2,201,124 Net utility plant 3,179,194 3,189,744 OTHER PROPERTY AND INVESTMENTS - LESS RESERVES: Investment in affiliates (Note 9) 189,226 177,006 Non-utility property and plant, net 253,850 248,119 Other 56,870 53,534 Total other property and investments 499,946 478,659 DEFERRED DEBITS AND OTHER ASSETS 159,600 143,140 Total assets $4,349,037 $4,562,944 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) June 30, Dec. 31, 1998 1997 CURRENT LIABILITIES: Long-term debt due within one year $ 21 $ 20,021 Notes payable 206,079 393,784 Accounts payable 170,069 134,714 Trimble County settlement 10,704 13,248 Net liabilities of discontinued operations (Notes 1 and 3) 6,040 - Other 173,133 122,780 Total current liabilities 566,046 684,547 Long-term debt 1,360,732 1,210,690 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 547,474 548,477 Investment tax credit, in process of amortization 97,853 101,931 Regulatory liability 118,829 117,079 Other 189,035 156,688 Total deferred credits and other liabilities 953,191 924,175 Minority interests 103,581 105,985 Cumulative preferred stock 136,530 138,353 COMMON EQUITY: Common stock, without par value - 129,682,889 shares outstanding 778,273 778,273 Other (2,207) (1,663) Retained earnings 452,891 722,584 Total common equity 1,228,957 1,499,194 Total liabilities and capital $4,349,037 $4,562,944 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 $) Six Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (188,631)$ 79,769 Items not requiring cash currently: Depreciation and amortization 99,071 91,891 Deferred income taxes - net 2,657 8,127 Loss from discontinued operations (Notes 1 and 3) 23,599 545 Loss on disposal of discontinued operations (Notes 1 and 3) 225,000 - Other (24,687) 608 Change in net current assets 78,963 9,241 Other (24,013) (18,217) Net cash flows from operating activities 191,959 171,964 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (4,451) (8,876) Proceeds from sales of securities 1,820 3,317 Construction expenditures (92,206) (86,642) Investment in affiliates (1,294) (5,790) Proceeds from sale of investment in affiliate 16,000 - Acquisition of interests in Argentine natural gas distribution companies, net of cash and temporary cash investments acquired - (125,852) Net cash flows from investing activities (80,131) (223,843) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes 150,000 - Retirement of long-term debt (20,021) (21) Short-term borrowings 2,074,643 1,381,600 Repayment of short-term borrowings (2,262,624)(1,244,000) Redemption of preferred stock (1,823) - Issuance of common stock - 2,900 Payment of common dividends (62,275) (71,464) Net cash flows from financing activities $ (122,100)$ 69,015 - 5 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (cont.) (Unaudited - Thousands of $) Six Months Ended June 30, 1998 1997 CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS $ (10,272)$ 17,136 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 111,003 106,463 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 100,731 $ 123,599 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 35,534 $ 46,150 Interest on borrowed money 45,331 42,949 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 Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Balance at beginning of period $ 728,942 $694,312 $ 722,584 $683,962 Net income (loss) (231,799) 33,667 (188,631) 79,769 Cash dividends declared on common stock ($.34123, $.27581, $.62509 and $.55162 per share) 44,252 35,753 81,062 71,505 Other - 8 - 8 Balance at end of period $ 452,891 $692,218 $ 452,891 $692,218 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 $) (Note 5) Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Net income (loss) $(231,799) $33,667 $(188,631) $79,769 Unrealized holding (gains) losses on available-for-sale securities arising during the period 22 258 8 (72) Reclassification adjustment for realized (gains) and losses on available-for-sale securities included in net income (77) (423) 34 (441) Other comprehensive income (loss), before tax (55) (165) 42 (513) Income tax expense (benefit) related to items of other comprehensive income (22) (164) 15 (258) Comprehensive income (loss) $(231,832) $33,666 $(188,604) $79,514 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 Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 OPERATING REVENUES: Electric $174,849 $146,085 $315,435 $274,746 Gas 26,540 34,191 119,298 130,929 Total operating revenues 201,389 180,276 434,733 405,675 OPERATING EXPENSES: Fuel for electric generation 41,242 35,438 77,283 66,450 Power purchased 15,227 2,969 24,826 6,976 Gas supply expenses 16,282 21,144 80,359 88,969 Other operation expenses 40,506 37,094 80,874 73,962 Maintenance 13,054 14,621 23,319 26,343 Depreciation and amortization 23,294 22,952 46,589 45,904 Federal and state income taxes 13,664 11,386 26,082 24,663 Property and other taxes 4,491 4,250 9,446 9,091 Total operating expenses 167,760 149,854 368,778 342,358 NET OPERATING INCOME 33,629 30,422 65,955 63,317 Merger costs to achieve (Note 2) 34,134 - 34,134 - Other income and (deductions) 9,998 958 10,309 1,844 Interest charges 9,472 9,893 18,710 19,707 NET INCOME 21 21,487 23,420 45,454 Preferred stock dividends 1,143 1,161 2,266 2,288 NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ (1,122) $ 20,326 $ 21,154 $ 43,166 The accompanying notes are an integral part of these financial statements. - 9 - Louisville Gas and Electric Company Balance Sheets (Thousands of $) ASSETS (Unaudited) June 30, Dec. 31, 1998 1997 UTILITY PLANT: At original cost $2,816,476 $2,779,234 Less: reserve for depreciation 1,108,848 1,072,842 Net utility plant 1,707,628 1,706,392 OTHER PROPERTY AND INVESTMENTS - less reserve 1,109 1,365 CURRENT ASSETS: Cash and temporary cash investments 49,422 50,472 Marketable securities 21,934 19,311 Accounts receivable - less reserve 129,576 124,872 Materials and supplies - at average cost: Fuel (predominantly coal) 26,590 17,651 Gas stored underground 13,566 41,487 Other 31,643 31,866 Prepayments 1,522 2,627 Total current assets 274,253 288,286 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 6,075 6,074 Regulatory assets 39,993 24,899 Other 25,224 28,625 Total deferred debits and other assets 71,292 59,598 Total assets $2,054,282 $2,055,641 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) June 30, Dec. 31, 1998 1997 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Retained earnings 239,064 258,910 Other (750) (754) Total common equity 663,484 683,326 Cumulative preferred stock 95,328 95,328 Long-term debt 626,800 626,800 Total capitalization 1,385,612 1,405,454 CURRENT LIABILITIES: Long-term debt due within one year - 20,000 Accounts payable 105,744 98,894 Trimble County settlement 10,704 13,248 Dividends declared 22,343 21,152 Accrued taxes 17,862 18,723 Accrued interest 8,529 8,016 Other 16,749 14,608 Total current liabilities 181,931 194,641 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 247,369 249,851 Investment tax credit, in process of amortization 73,644 75,800 Accumulated provision for pensions and related benefits 62,694 40,608 Regulatory liability 70,444 65,502 Other 32,588 23,785 Total deferred credits and other liabilities 486,739 455,546 Total capitalization and liabilities $2,054,282 $2,055,641 The accompanying notes are an integral part of these financial statements. - 11 - Louisville Gas and Electric Company Statements of Cash Flows (Unaudited - Thousands of $) Six Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,420 $ 45,454 Items not requiring cash currently: Depreciation and amortization 46,589 45,904 Deferred income taxes - net 2,460 (1,319) Investment tax credit - net (2,156) (2,171) Other 2,008 1,940 Changes in current assets and liabilities: Accounts receivable (4,704) 10,462 Materials and supplies 19,205 21,698 Trimble County settlement (2,544) (2,439) Accounts payable 6,850 (33,864) Accrued taxes (861) 4,626 Accrued interest 513 180 Prepayments and other 3,246 2,920 Other - net 17,647 4,475 Net cash flows from operating activities 111,673 97,866 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (3,550) (6,467) Proceeds from sales of securities 933 1,247 Construction expenditures (48,031) (43,298) Net cash flows from investing activities (50,648) (48,518) CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of first mortgage bonds (20,000) - Payment of dividends (42,075) (21,258) Net cash flows from financing activities (62,075) (21,258) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (1,050) 28,090 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 50,472 56,792 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 49,422 $ 84,882 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 23,121 $ 25,936 Interest on borrowed money 17,357 18,710 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 Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Balance at beginning of period $261,386 $232,062 $258,910 $209,222 Net income 21 21,487 23,420 45,454 Subtotal 261,407 253,549 282,330 254,676 Cash dividends declared on stock: 5% cumulative preferred 269 269 538 538 Auction rate cumulative preferred 507 525 994 1,016 $5.875 cumulative preferred 367 367 734 734 Common 21,200 19,000 41,000 19,000 Subtotal 22,343 20,161 43,266 21,288 Balance at end of period $239,064 $233,388 $239,064 $233,388 The accompanying notes are an integral part of these financial statements. - 13 - Louisville Gas and Electric Company Statements of Comprehensive Income (Unaudited - Thousands of $) (Note 5) Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Net income (loss) available for common stock $(1,122) $20,326 $21,154 $43,166 Unrealized holding losses on available-for-sale securities arising during the period 33 419 6 2 Reclassification adjustment for realized gains on available-for- sale securities included in net income (66) (412) - (402) Other comprehensive income (loss), before tax (33) 7 6 (400) Income tax expense (benefit) related to items of other comprehensive income (13) (4) 3 (111) Comprehensive income (loss) $(1,142) $20,337 $21,157 $42,877 The accompanying notes are an integral part of these financial statements. - 14 - Kentucky Utilities Company Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 OPERATING REVENUES $193,079 $162,868 $376,298 $341,782 OPERATING EXPENSES: Fuel for electric generation 54,690 41,613 103,037 86,326 Power purchased 24,602 19,599 42,591 37,202 Other operation expenses 31,458 30,483 61,431 61,271 Maintenance 16,615 20,490 29,948 32,501 Depreciation 21,617 20,911 43,103 41,746 Federal and state income taxes 11,731 6,215 26,699 21,742 Property and other taxes 4,222 3,815 8,310 7,828 Total operating expenses 164,935 143,126 315,119 288,616 NET OPERATING INCOME 28,144 19,742 61,179 53,166 Merger costs to achieve (Note 2) 21,830 - 21,830 - Other income and (deductions) 2,193 2,244 3,907 3,656 Interest charges 9,626 9,898 19,326 19,773 NET INCOME (LOSS) (1,119) 12,088 23,930 37,049 Preferred stock dividends 564 564 1,128 1,128 NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $(1,683) $ 11,524 $ 22,802 $ 35,921 The accompanying notes are an integral part of these financial statements. - 15 - Kentucky Utilities Company Balance Sheets (Thousands of $) ASSETS (Unaudited) June 30, Dec. 31, 1998 1997 UTILITY PLANT: At original cost $2,641,428 $2,611,634 Less: reserve for depreciation 1,169,862 1,128,282 Net utility plant 1,471,566 1,483,352 OTHER PROPERTY AND INVESTMENTS - less reserve 13,123 12,808 CURRENT ASSETS: Cash and temporary cash investments 6,014 5,453 Accounts receivable - less reserve 92,998 74,524 Material and supplies - at average cost: Fuel (predominantly coal) 25,400 27,799 Other 24,022 23,648 Prepayments 5,797 5,769 Total current assets 154,231 137,193 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,428 5,628 Regulatory assets 30,742 14,773 Other 18,864 26,126 Total other assets 55,034 46,527 Total assets $1,693,954 $1,679,880 The accompanying notes are an integral part of these financial statements. - 16 - Kentucky Utilities Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) June 30, Dec. 31, 1998 1997 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Retained earnings 287,462 304,750 Other (595) (595) Total common equity 595,007 612,295 Cumulative preferred stock 40,000 40,000 Long-term debt 546,330 546,351 Total capitalization 1,181,337 1,198,646 CURRENT LIABILITIES: Long-term debt due within one year 21 21 Notes payable - 33,600 Accounts payable 66,661 33,386 Dividends declared 17,588 188 Accrued taxes 18,817 7,473 Accrued interest 8,080 8,283 Other 28,455 26,216 Total current liabilities 139,622 109,167 OTHER LIABILITIES: Accumulated deferred income taxes 247,304 245,150 Investment tax credit, in process of amortization 24,209 26,131 Regulatory liability 48,385 50,904 Other 53,097 49,882 Total other liabilities 372,995 372,067 Total capitalization and liabilities $1,693,954 $1,679,880 The accompanying notes are an integral part of these financial statements. - 17 - Kentucky Utilities Company Statements of Cash Flows (Unaudited - Thousands of $) Six Months Ended June 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 23,930 $ 37,049 Items not requiring cash currently: Depreciation and amortization 43,103 41,746 Deferred income taxes - net (188) 3,832 Investment tax credit - net (1,922) (2,043) Changes in current assets and liabilities: Accounts receivable (18,474) 4,900 Materials and supplies 2,025 (8,008) Accounts payable 33,275 (1,754) Accrued taxes 11,344 13 Accrued interest (203) (157) Prepayments and other 2,032 2,093 Other (4,060) (4,845) Net cash flows from operating activities 90,862 72,826 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from insurance reimbursement 71 4,056 Construction expenditures (32,932) (41,824) Net cash flows from investing activities (32,861) (37,768) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings 381,500 1,180,600 Repayments of short-term borrowings (415,100)(1,183,000) Repayments of debt (21) (21) Payment of dividends (23,819) (34,408) Net cash flows from financing activities (57,440) (36,829) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 561 (1,771) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 5,453 5,719 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 6,014 $ 3,948 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 17,033 $ 21,139 Interest on borrowed money 17,925 18,504 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 Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Balance at beginning of period $312,216 $295,608 $304,750 $287,851 Net income (loss) (1,119) 12,088 23,930 37,049 Subtotal 311,097 307,696 328,680 324,900 Cash dividends declared on stock: 4 3/4% preferred 237 237 475 475 6.53% preferred 327 327 653 653 Common 23,071 16,640 40,090 33,280 Subtotal 23,635 17,204 41,218 34,408 Balance at end of period $287,462 $290,492 $287,462 $290,492 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 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. On July 28, 1998, the Company announced it would discontinue its merchant energy trading and sales business effective June 30, 1998. It also announced the discontinuance and intent to sell its natural gas gathering and processing business. The Company restated its financial statements for prior periods to present the operating results, financial position and cash flows of these businesses as discontinued operations. As a result of this decision, the Company recorded an after-tax loss of $225 million in the second quarter. The write-off calculation used current future price curves which include the effect of recent volatility and price spikes in the power trading market. Higher-than-forecasted prices, increased volatility and other events not modeled could result in additional write-offs. See Note 3 for more information. The consolidated financial statements include the accounts of LG&E Energy Corp., LG&E, LG&E Capital Corp. (Capital Corp.), KU Energy, KU and KU Capital Corporation (KU Capital) and their respective wholly- owned subsidiaries, collectively referred to herein as the "Company." KU and KU Capital were subsidiaries of KU Energy before the merger. On July 24, 1998, KU Capital Corporation was merged into LG&E Capital Corp., with the latter as the surviving corporation. 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 and KU Energy's Annual Reports on Form 10-K for 1997 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Company. See also LG&E's and KU's Annual Reports on Form 10-K for 1997. 2. Through June 30, 1998, the Company's costs associated with the merger amounted to $103.9 million. This amount included $52.3 million for LG&E and $42.3 million for - 20 - KU, and consisted of separation costs, transaction costs and other merger-related expenditures. In accordance with regulatory filings approved by the Kentucky Public Service Commission (the Commission) and the Virginia State Corporation Commission, the Company deferred $38.6 million of the costs associated with the merger and will amortize this amount over five years. LG&E and KU will refund merger-related savings to their customers through surcredits over the next five years, and the amortization will reduce the amount of the surcredits. The amortization and the surcredits began in July 1998. The Company, LG&E and KU expensed the remaining costs associated with the merger in the second quarter of 1998, and included the amounts in merger costs to achieve in the accompanying statements of income. For more information, see Note 2 of the Company's Annual Report on Form 10-K for 1997, the Company's Current Report on Form 8-K dated May 4, 1998, and LG&E's and KU's Annual Reports on Form 10-K for 1997. 3. On July 28, 1998, the Company announced it would discontinue its merchant energy trading and sales business. The Company plans to sell or buy out the long-term contracts that obligate it to buy and sell natural gas and electric power. In addition, the Company plans to sell its natural gas gathering and processing business. The operating results, financial position and cash flows of these businesses are classified as discontinued operations in these financial statements. The Company cannot predict the ultimate cost to buy out these contracts or the ultimate purchase price received upon a sale of these assets, which may be higher or lower than estimated, resulting in additional charges. The Company expects to have completed these transactions within one year. The Company recorded a charge of $350.0 million ($225.0 million after income taxes) related to the discontinuance of the merchant trading business and the gas gathering and processing business. This charge covers the estimated costs of terminating and buying out contracts, reducing workforce, and writing off assets, net of estimated proceeds the Company expects to receive. See also Note 1. Operating results for discontinued operations follow. Three Months Six Months Ended Ended June 30, June 30, 1998 1997 1998 1997 Revenues $715,969 $521,889 $1,656,683 $1,580,967 Income (loss) before taxes (37,015) 1,540 (42,506) (7) Income (loss) from dis- continued operations, net of income taxes (20,093) 883 (23,599) (545) - 21 - Net liabilities of discontinued operations at June 30, 1998, follow. Cash and temporary cash investments $ 3,689 Accounts receivable 378,396 Price risk management assets 786,571 Non-utility property and plant, net 173,576 Accounts payable (401,784) Price risk management liabilities (730,214) Goodwill and other assets and liabilities, net 8,726 Net assets before accrued loss on disposal of dis- continued operations 218,960 Accrued loss on disposal of discontinued operations, net of income tax benefit of $125,000 225,000 Net liabilities of dis- continued operations $ 6,040 4. On April 3, 1998, LG&E entered into a forward-starting interest-rate swap with a notional amount of $83.3 million. The swap will hedge anticipated variable-rate borrowing commitments. It will start in August 2000 and mature in November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable rate based on the Bond Market Association Municipal Swap Index. Under certain conditions, the counterparty to the agreement may terminate the swap at no cost after August 2010. 5. In the first quarter of 1998, the Company, LG&E, and KU adopted Statement of Accounting Standards No. 130, Reporting Comprehensive Income. The Company and LG&E have presented the information required by the Statement in their respective Statements of Comprehensive Income. KU had no items of other comprehensive income for the three- and six-month periods ended June 30, 1998, and June 30, 1997, and it had no accumulated other comprehensive income at June 30, 1998, or December 31, 1997. Accumulated other comprehensive income included in the Company's equity totaled $244,000 and $217,000 at June 30, 1998, and December 31, 1997, respectively. Accumulated other comprehensive income included in LG&E's equity totaled $86,000 and $82,000 at June 30, 1998, and December 31, 1997, respectively. The Company's and LG&E's accumulated other comprehensive income at June 30, 1998, and December 31, 1997, consisted of unrealized holding gains and losses on available-for-sale marketable securities. On April 3, 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-5, Reporting on the Costs of Start-Up Activities, which is effective for fiscal years beginning after December 31, 1998. The statement requires companies to expense the costs of start-up activities as incurred. The statement also requires certain previously capitalized costs to be charged to expense at the time of adoption and reported as the cumulative effect of a change in accounting principle. The Company is currently analyzing the provisions of the statement and anticipates that a range of $10 to $20 million of start-up costs could be affected. On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging - 22 - Activities. The statement is effective for fiscal years beginning after June 15, 1999, and establishes accounting and reporting standards that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company is currently analyzing the provisions of the statement and cannot predict the impact this statement will have on its consolidated operations and financial position. However, the statement could increase volatility in earnings and other comprehensive income. 6. Since August 1994, KU has been collecting an environmental surcharge from its Kentucky retail customers under a Kentucky statute which authorizes electric utilities (including KU) to implement, beginning January 1, 1993, an environmental surcharge. The surcharge is designed to recover certain operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. KU's environmental surcharge was approved by the Kentucky Public Service Commission (PSC) in July 1994 and was implemented in August 1994. The total surcharge collections from August 1, 1994, through June 30, 1998, were approximately $70 million. The PSC's order approving the surcharge and the constitutionality of the surcharge statute were challenged in the Franklin County (Kentucky) Circuit Court (Circuit Court) in an action brought against KU and the PSC by the Attorney General of Kentucky and joined by representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the surcharge statute, but vacating that part of the PSC's July 1994 order which the Circuit Court's judgment described as retroactively applying the surcharge statute. The Circuit Court further ordered the case remanded to the PSC for a determination in accordance with the judgment. KU and the PSC argued that the PSC's July 1994 order did not retroactively apply the statute. The Kentucky Attorney General and other consumer representatives appealed to the Kentucky Court of Appeals (Court of Appeals) that part of the Circuit Court judgment upholding the constitutionality of the surcharge statute. The PSC and KU appealed that part of the judgment concerning the retroactive application of the surcharge statute. The PSC previously ordered KU to collect all surcharge revenues beginning February 1, 1995 subject to refund pending final determination of all appeals. KU expects the PSC to continue to do so until the appeals are concluded. The total surcharge collections from February 1, 1995 through June 30, 1998 were approximately $66 million. In December 1997, the Court of Appeals rendered an opinion upholding the portion of the Circuit Court's judgment regarding the constitutionality of the surcharge statute but reversing that portion of the Circuit Court's judgment concerning the claim of retroactive application of the statute. The Kentucky Attorney General and other consumer representatives filed motions for discretionary review with the Kentucky Supreme Court (Supreme Court). The Supreme Court granted said motion and the issues are presently being briefed by the parties at the Supreme Court. KU continues to believe that the constitutionality of the surcharge statute will be upheld. Although KU cannot predict the outcome of the claim of retroactive application of the statute, it is the position of KU and the PSC that the July 1994 PSC order did not retroactively apply the statute. If the Court of Appeals' opinion re - 23 - versing the Circuit Court's judgment on the claim of retroactively is overturned and the Circuit Court's judgment, as entered, is upheld, KU estimates that the amount it could be required to refund for surcharge collections through June 30, 1998, from the implementation of the surcharge would be approximately $17 million and from February 1, 1995, would be approximately $15 million. At this time, KU has not recorded any reserve for refund. Although not a party to the KU proceeding, LG&E is involved in separate proceedings regarding its surcharge and may also face exposure on these matters in the event of an ultimate adverse ruling on these issues. See Note 4 of LG&E's Notes to Financial Statements in LG&E's Annual Report on Form 10-K for the year ended December 31, 1997, for a further discussion. 7. Note 16 of the Company's Financial Statements for the year ended December 31, 1997 discusses the status of certain proceedings before the FERC regarding the status of the Southampton cogeneration facility ("Southampton") as a qualifying facility ("QF") under the Public Utility Regulatory Policies Act for the year 1992, including a request for clarification as to any FERC-ordered rate refunds payable from Southampton to Virginia Electric and Power Company ("VEPCO") for the 1992 period. See Part II, Item 1, Legal Proceedings, for recent developments in this matter. 8. Effective July 15, 1998, the Company closed its pending transaction to lease the generating assets of Big Rivers Electric Corporation ("Big Rivers"). Future minimum payments under the lease agreement follow (amounts in thousands of dollars). 1998 $ - 1999 - 2000 15,481 2001 30,962 2002 30,962 Thereafter 619,240 Total $696,645 The Company paid the first two years' rent to Big Rivers at closing. The above table does not include this payment, which totaled $55.9 million. See "Recent Developments - Lease of Big Rivers Facilities" in Item 2, Management's Discussion and Analysis of Operations and Financial Condition for information concerning this transaction. See also Part II, Item 1, Legal Proceedings, of the Company's Form 10-Q for the quarter ended March 31, 1998 and Part I, Item 1, Business, of the Company's 1997 Form 10-K. 9. On June 30, 1998, the partnership that owns the Rensselaer cogeneration facility, along with 14 other independent power producers, participated in the consummation of a Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO), the purchasing utility. As part of the MRA, the partnership restructured its power purchase agreement with NIMO and entered into a multi-year agreement with the utility. Substantial amounts of the gross proceeds received by the partnership from NIMO were used to repay outstanding project debt and financial obligations as well as termination payments to the project's steam host, fuel suppliers, fuel transporters and other service providers. As a result of a settlement among the parties, the Company will retain a 50% interest in the partnership that owns the Rensselaer facility. The Company received one-half of the partnership's net receipts related to the MRA, less amounts retained by the partnership for operating needs. The Company recognized an after-tax gain on the MRA - 24 - transaction and the settlement of $21 million. See also Part II, Item 1, Legal Proceedings. 10.Note 16 of the Company's, and Note 12 of LG&E's, Financial Statements for the year ended December 31, 1997, respectively, in the Company's and LG&E's Annual Report on Form 10-K for such year, discuss certain pending settlements for an aggregate of $150,000 relating to LG&E's status as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act for certain disposal facilities. These settlements are now final and have been entered by the court. 11.Reference is made to Part II, Legal Proceedings, in the Company's, KU Energy's, LG&E's and KU's 10-Qs for the quarter ended March 31, 1998, and Part I, Item 3, Legal Proceedings, of the Company's, KU Energy's, LG&E's and KU's (and Note 16 of the Company's Notes to Financial Statements) in their respective Annual Reports on Form 10-K for the year ended December 31, 1997. - 25 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Recent Developments - Merger On May 4, 1998, LG&E Energy and KU Energy merged. KU Energy was the parent company of Kentucky Utilities Company (KU). Further information concerning the merger is included in Notes 1 and 2. Discontinuance of Merchant Energy Trading and Sales Business On July 28, 1998, the Company announced that, primarily due to its current portfolio of energy marketing contracts, and the impact that recent volatility, instability and rising prices on the power market have had on these contracts, it would discontinue its merchant trading and sales business effective June 30, 1998. Exiting the merchant trading and sales business is intended to enable the Company to focus on adding and optimizing physical assets, and to eliminate the earnings impact of extreme market volatility on its current portfolio of energy marketing contracts. The Company intends to sell or buyout the long-term contracts that obligate it to buy and sell natural gas and electric power. It also plans to sell its natural gas gathering and processing business. The Company, however, intends to maintain sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize the value of power sales from assets it owns or controls, including LG&E, KU and Big Rivers. As a result of the Company's decision to discontinue its merchant 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 $225.0 million in the second quarter. The loss on disposal of discontinued operations results primarily from several fixed-price energy marketing contracts entered 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 these operations and exit costs. Although the Company used what it believes to be appropriate estimates for future energy prices to calculate the write-off, there is no guarantee that higher than anticipated future prices or a lower received purchase price than estimated for asset sales could not result in additional write-offs. See Part II, Item I for a discussion of settlement negotiations regarding the OPC contract. The Company restated its financial statements for prior periods to present the operating results, financial position and cash flows of these businesses as discontinued operations. See Notes 1 and 3 for more information. Lease of Big Rivers Facilities As previously announced, effective July 15, 1998, the Company closed its transaction to lease the generating assets of Big Rivers Electric Corporation ("Big Rivers") following receipt of necessary regulatory approvals. This 25-year transaction involves a lease by subsidiaries of the Company of Big Rivers' approximately 1,700 megawatts of generating capacity. Under the transactions, Western Kentucky Energy Corp. ("WKE"), a subsidiary of the Company, leases and operates Big Rivers' three coal-fired facilities as an exempt wholesale generator. In addition, an affiliate of WKE operates and maintains the Station Two generating facility of the City of Henderson, Kentucky, and another affiliate, LG&E Energy Marketing, Inc. ("LEM"), purchases from the City the capacity and energy of Station Two in excess of the City's needs. In related transactions, LEM supplies power to Big Rivers at fixed prices to meet the needs of its four member distribution cooperatives and their retail customers in Western Kentucky, and separately provides power directly to two of those cooperatives to meet the needs of the aluminum smelting facilities of Alcan Alu - 26 - minum Corporation and Southwire Company in that state. Excess generating capacity will remain available for LEM to market throughout the region. In connection with these transactions, the Company, through its affiliates, has undertaken to bear certain of the future capital requirements of those generating assets, certain defined environmental compliance costs, and other obligations. Big Rivers' personnel at the plants became employees of WKE upon the commencement of the transactions. Final Kentucky Public Service Commission approvals in connection with this transaction were received on July 14, 1998, and final Federal Energy Regulatory Commission approvals were received on July 8, 1998. See Part II, Item 1, Legal Proceedings, of the Company's Form 10-Q for the quarter ended March 31, 1998 and Part I, Item 1, Business, of the Company's 1997 Form 10-K. General Two of the Company's principal subsidiaries are LG&E, an electric and gas utility, and KU, an electric utility. 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; 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, 1997. Results of Operations LG&E's, KU's and the Argentine gas distribution companies' results of operations are significantly 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 June 30, 1998, Compared to Three Months Ended June 30, 1997 The Company's income from continuing operations decreased to $.10 per share in 1998 from $.25 per share in 1997. Results for 1998 included $.42 of after-tax charges for merger-related costs ($.19 for LG&E, $.17 for KU, and $.06 for Corporate). Excluding these charges, income from continuing operations totaled $.52 in 1998, an increase of $.27 over earnings for 1997. Approximately $.16 of this increase resulted primarily from closing a Master Restructuring Agreement in June 1998 with the utility that buys the power generated by the Rensselaer facility (see Note 9 of Notes to Financial Statements). The rest of the increase resulted from increased earnings at LG&E and KU. Income from discontinued operations decreased $21.0 million due to increased volatility, instability and rising prices in the wholesale power market during the second quarter of 1998. See Notes 1 and 3 of Notes to Financial Statements for more information. LG&E Results: LG&E's net income decreased $21.4 million for the quarter ended June 30, 1998, as compared to the quarter ended June 30, 1997, due to an after-tax charge for merger-related expenses as discussed in Note 2 of Notes to Financial Statements of $25 million. Excluding this - 27 - charge, LG&E's net income increased $3.6 million over the comparable second quarter of 1997. This is primarily due to an increase in electric sales caused by the warmer weather and decreased maintenance at electric generation stations, partially offset by decreased gas sales and higher operating expenses at electric generating plants and increased maintenance expenses due to several severe storms that occurred in the second quarter of 1998. A comparison of LG&E's revenues for the quarter ended June 30, 1998, with the quarter ended June 30, 1997, 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 $ 2,113 $ (1,984) Demand side management/decoupling revenue (3,283) (459) Variation in sales volume, etc. 14,723 (5,385) Total 13,553 (7,828) Sales for resale 15,583 891 Gas transportation - net - (498) Other (372) (216) Total $28,764 $ (7,651) Retail electric sales increased due to the warmer weather experienced in the quarter compared to the second quarter of 1997; cooling degree days this quarter were 91% higher than last year. Electric sales for resale increased due to larger amounts of power available for off-system sales, an increase in the unit price of sales and sales to Kentucky Utilities of $4.3 million as a result of economic dispatch of generating units between LG&E and KU following the merger of LG&E Energy Corp. and KU Energy. As a consequence of such economic dispatch, LG&E and KY are buying power from each other when it is economically advisable for them to do so. Fuel for electric generation and gas supply expenses comprise a large segment 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 increased $5.8 million (16%) for the quarter because of an increase in generation ($4.3 million) and a higher cost of coal burned ($1.5 million). Gas supply expenses decreased $4.9 million (23%) due to a decrease in the volume of gas delivered to the distribution system ($2.6 million) and a decrease in net gas supply cost ($2.3 million). Power purchased increased $12.3 million because of an increase in the unit price of purchases, increased Kwh purchases to support increased electric sales and increased purchases from Kentucky Utilities of $5.1 million as a result of economic dispatch following the merger of the two companies in May 1998. Other operation expenses increased $3.4 million (9%) over 1997 because of increased costs to operate the electric generating plants. - 28 - Maintenance expenses decreased $1.6 million (11%) mainly because of a decrease in repairs at the electric generating plants ($3.5 million); offset by increased storm damage expenses ($1.9 million). LG&E incurred a pretax charge in the second quarter for costs associated with the merger of LG&E Energy Corp. and KU Energy of $34.1 million. The corresponding tax benefit of $9.1 million is recorded in Other income and (deductions). The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Public Service Commission. See Note 2 for a further explanation of merger costs. Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Interest charges decreased partly because the Company's First Mortgage Bonds, 6.75% Series of $20 million were retired at maturity on June 1, 1998. KU Results: KU's net income for the three months ended June 30, 1998 decreased $13.2 million compared to the same period of 1997. The decrease was due to an after-tax charge in the second quarter of 1998 of $21.7 million for merger related expenses as discussed in Note 2 of Notes to Financial Statements. Excluding this charge, net income for the three months ended June 30, 1998, increased $8.5 million. The increase was primarily due to increases in residential sales, commercial sales and sales for resale caused by the warmer weather and decreased maintenance expenses. A comparison of KU's revenues for the quarter ended June 30,1998, with the quarter ended June 30,1997, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Cause Revenues Sales to ultimate consumers: Fuel clause adjustments $ 2,555 Environmental cost recovery 398 Variation in sales volume, etc. 8,219 Total 11,172 Sales for resale 18,514 Other 525 Total $30,211 Operating revenues increased $30.2 million (19%). The increase reflects a 28% increase in kilowatt-hour sales, which is primarily attributable to increases in residential sales, commercial sales, and sales for resale. The increases in residential and commercial sales were primarily due to warmer weather during the second quarter of 1998 in comparison to 1997. The increase in sales for resale (1,584,357 megawatt-hours versus 714,214 megawatt-hours) was primarily due to increased marketing efforts, an increase in the unit price of sales and sales to LG&E of $5.1 million as a result of economic dispatch following the merger of LG&E Energy Corp. and KU Energy. - 29 - Fuel for electric generation expenses increased by $13.1 million (31%) due to a 29% increase in million British thermal units (MBTU) used. The increased consumption was primarily caused by the previously mentioned increase in kilowatt-hour sales. Power purchased increased $5 million (26%). The increase was primarily due to a 31% increase in megawatt-hour purchases which was attributable to increased purchases from LG&E of $4.3 million as a result of economic dispatch following the merger of the two companies in May 1998. Maintenance expense decreased $3.9 million (19%). The decrease was mainly attributable to differences in the timing of production maintenance expenditures. Merger costs to achieve reflects the pre-tax charge of $21.8 million (the corresponding tax benefit of $.1 million is recorded in other income and (deductions)) for merger related expenses as discussed in Note 2 of Notes to Financial Statements. Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Argentine Gas Distribution and Other Results: LG&E Capital Corp. and KU Capital Corp., wholly-owned subsidiaries of the Company, serve as the holding companies for the Company's non-utility operations. LG&E Capital Corp., through its subsidiaries, is engaged in various independent power projects and in the gas distribution business in Argentina. LG&E Capital also holds the Company's discontinued operations. KU Capital Corp., through its subsidiaries, is engaged in various independent power projects and leveraged leases. LG&E Capital's and KU Capital's continuing operations are included in the accompanying income statements under the headings "Argentina Gas Distribution and Other" and "Equity in Earnings of Joint Ventures." On July 24, 1998, KU Capital Corporation was merged into LG&E Capital Corp., with the latter as the surviving corporation. Argentine gas distribution and other revenues increased $10.9 million due to Retail Access Services' starting operations in the second quarter of 1998 and to an increase in revenues at Distribuidora de Gas del Centro (Centro). Cost of revenues increased $6.0 million due to Retail Access Services starting operations. Retail Access Services is a business of the Company which provides consulting, technical, software and operational support and services to independent retail energy service providers in certain markets. Argentine gas distribution and other operation and maintenance expense increased $4.4 million due mainly to higher corporate expenses. Non- utility depreciation and amortization increased $1.4 million due to write- offs related to the Rensselaer project's closing of the Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). See Note 9 of Notes to Financial Statements under Item 1. Equity in earnings of joint ventures increased $44.8 million in 1998 due primarily to the Rensselaer project's gain in connection with the NIMO MRA. See Note 9 of Notes to Financial Statements under Item 1. Non-utility other income decreased $8.9 million primarily due to the reacquisition of one-half of the Company's interest in the partnership that owns the Rensselaer project, and to recording related expenses. See Note 9 of Notes to Financial Statements in Item 1. The consolidated effective tax rate increased to 66.3% in 1998 from 35.3% in 1997 mainly due to non-deductible merger-related expenses. - 30 - Six Months Ended June 30, 1998, Compared to Six Months Ended June 30, 1997 The Company's income from continuing operations decreased to $.46 per share in 1998 from $.62 per share in 1997. Results for 1998 included $.42 of charges for merger-related costs ($.19 for LG&E, $.17 for KU, and $.06 for Corporate). Excluding these charges, income from continuing operations would have totaled $.88 in 1998, an increase of $.26 over earnings for 1997. Approximately $.16 of this increase resulted from closing the NIMO MRA in June 1998 (see Note 9 of Notes to Financial Statements). The rest of the increase resulted from increased earnings at LG&E and KU. Income from discontinued operations decreased $23.1 million due to increased volatility, instability and rising prices in the wholesale power market during the first six months of 1998. See Notes 1 and 3 of Notes to Financial Statements for more information. LG&E Results: LG&E's net income decreased $22 million for the first six months of 1998, as compared to the first six months of 1997, due to the charge for merger- related expenses as discussed in Note 2 of Notes to Financial Statements. Excluding the costs to achieve the merger, net income increased $3 million. This increase is mainly due to increased electric retail and wholesale sales, partially offset by lower gas sales and higher operating expenses at the electric generating stations. A comparison of LG&E's revenues for the six months ended June 30, 1998, with the six months ended June 30, 1997, 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 $ 650 $ 1,837 Demand side management/decoupling revenue (3,283) 924 Environmental cost recovery surcharge (230) - Variation in sales volume, etc. 15,196 (19,339) Total 12,333 (16,578) Sales for resale 28,974 5,399 Gas transportation - net - (14) Other (618) (438) Total $ 40,689 $(11,631) Electric retail sales increased primarily due to the warmer weather experienced in the second quarter as compared to 1997. Sales for resale increased due to larger amounts of power available for off-system sales, an increase in the unit price of the sales and sales to Kentucky Utilities of $4.3 million due to economic dispatch following the merger in May 1998 of LG&E Energy Corp. and KU Energy. - 31 - Gas retail sales decreased from 1997 due to the warmer weather in the first six months of 1998. Gas wholesale sales increased to $5.4 million in 1998 from zero in 1997 due to the implementation of LG&E's performance-based ratemaking mechanism. Fuel for electric generation increased $10.8 million (16%) for the six months because of an increase in generation ($8.2 million) and a higher cost of coal burned ($2.6 million). Gas supply expenses decreased $8.6 million (10%) due to a decrease in the volume of gas delivered to the distribution system. Power purchased increased $17.9 million because of the availability of economically priced power during the first quarter of 1998, an increase in the unit price of purchases in the second quarter of 1998 and increased purchases from Kentucky Utilities of $5.1 million as a result of economic dispatch following the merger of the two companies in May 1998. Other operation expenses increased $6.9 million (9%) over 1997 because of increased costs to operate the electric generating plants ($4.2 million) and increased administrative costs ($3.3 million). Maintenance expenses decreased $3 million (11%) primarily because of a decrease in repairs at the electric generating plants ($4.5 million) offset by increased storm damage expenses of $1.4 million. LG&E incurred a pre-tax charge in the second quarter for costs associated with the merger of LG&E Energy Corp. and KU Energy of $34.1 million. The corresponding tax benefit of $9.1 million is recorded in other income and (deductions). The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Public Service Commission. See Note 2 for a further explanation of merger costs. Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. KU Results: KU's net income for the six months ended June 30, 1998 decreased $13.1 million compared to the same period of 1997. This decrease was due to an after-tax charge in the second quarter of 1998, of $21.7 million for merger related expenses as discussed in Note 2 of Notes to Financial Statements. Excluding this charge, net income for the six months ended June 30, 1998, increased $8.5 million. The increase was primarily due to increases in residential sales, commercial sales and sales for resale caused by the warmer weather and decreased maintenance expenses. - 32 - A comparison of KU's revenues for the six months ended June 30, 1998, with the six months ended June 30, 1997, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Cause Revenues Sales to ultimate consumers: Fuel clause adjustments $ 6,956 Environmental cost recovery 1,178 Variation in sales volume, etc. 5,686 Total 13,820 Sales for resale 19,761 Other 935 Total $34,516 Operating revenues increased $34.5 million (10%). The increase reflects a 15% increase in kilowatt-hour sales. The increase in kilowatt-hour sales is primarily attributable to increases in residential sales, commercial sales, and sales for resale. The increases in residential and commercial sales are primarily attributable to warmer weather in 1998. The increase in sales for resale (2,522,155 megawatt-hours versus 1,549,106 megawatt- hours) was primarily due to increased marketing efforts, an increase in the unit price of sales and sales to LG&E of $5.1 million as a result of economic dispatch following the merger of LG&E Energy Corp. and KU Energy. Fuel for electric generation expenses increased by $16.7 million (19%) primarily due to a 14% increase in MBTU used. The increased consumption was primarily caused by the previously mentioned increase in kilowatt-hour sales. Power purchased increased $5.4 million (14%). The increase was primarily due to a 17% increase in megawatt-hour purchases which was primarily attributable to increased purchases from LG&E of $4.3 million as a result of economic dispatch following the merger of the two companies in May 1998. Maintenance expense decreased $2.6 million (8%). The decrease was mainly attributable to differences in the timing of production maintenance expenditures. Merger costs to achieve reflects the one-time charge in the second quarter of 1998 of $21.8 million (the corresponding tax benefit of $.1 million is recorded in other income and (deductions)) for merger related expenses as discussed in Note 2 of Notes to Financial Statements. Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Argentine Gas Distribution and Other Results: Argentine gas distribution and other revenues increased $26.4 million due to acquiring a controlling interest in Distribuidora de Gas del Centro (Centro) in February 1997 and to Retail Access Services starting operations in the second quarter of 1998. Cost of revenues increased $14.1 million for the same reasons. - 33 - Argentine gas distribution and other operation and maintenance expense increased $9.3 million due mainly to higher corporate expenses. Non- utility depreciation and amortization increased $5.1 million due to writing off certain capitalized interest and development costs related to the San Miguel facility and to write-offs related to the Rensselaer project's Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). For more information about the San Miguel sale, see Note 7 of Notes to Financial Statements under Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. See Note 9 of Notes to Financial Statements in Item 1 for more information about the MRA with NIMO. Equity in earnings of joint ventures increased $44.8 million in 1998 due to the Rensselaer project's recording a gain related to the MRA with NIMO. Non-utility other income decreased $9.1 million due to the reacquisition of the Company's interest in the partnership that owns the Rensselaer project, and to recording related expenses. See Note 9 of Notes to Financial Statements in Item 1. Non-utility interest charges increased $2.2 million due to an increase in average debt outstanding. The consolidated effective tax rate increased to 45.3% in 1998 from 35.8% in 1997 mainly due to non-deductible merger-related expenses. Liquidity and Capital Resources The Company's need for capital funds is primarily related to the construction of plant and equipment necessary to meet LG&E's and KU's electric and gas customers' needs and protection of the environment. Capital funds are also needed for the Company's capital obligations under the Big Rivers lease arrangements, the discontinuance of the merchant sales and trading business, partnership equity contributions in connection with independent power production projects, information system enhancements, and other business development opportunities. Construction expenditures for the six months ended June 30, 1998, of $92.2 million were financed with internally generated funds. It is currently anticipated that the Company will meet its known capital needs with internally generated funds and short- term borrowings. The Company's combined cash and marketable securities balance decreased $7.6 million during the six months ended June 30, 1998. The decrease reflects construction expenditures, dividends paid and a net decrease in debt, partially offset by cash flows from operations and proceeds received from the sale of the Company's interest in the San Miguel project. 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 significant increases in accounts receivable and accounts payable resulted from seasonal fluctuations in Centro's businesses. Gas stored underground decreased due to seasonal fluctuations in LG&E's business. The decrease in notes payable and the offsetting increase in long-term debt reflect issuing $150 million of medium-term notes in February 1998 and using the proceeds to repay a portion of the outstanding commercial paper balance. The Company also uses commercial paper which had maturity dates ranging between one and 270 days. Because of the rollover of these maturity dates, total short-term borrowings during the first six months of 1998 were $2.1 billion and total repayments of short-term borrowings during the same period were $2.3 billion. See Note 14 of Notes to Financial Statements under Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. - 34 - At June 30, 1998, unused capacity under the Company's lines of credit totaled $672.1 million after considering commercial paper support and approximately $81.8 million in letters of credit securing on- and off- balance sheet commitments. At December 31, 1997, unused capacity under the lines of credit totaled $541.7 million. The increase in unused capacity resulted from repaying a portion of the outstanding commercial paper balance. As explained in more detail under Item 1 of Part II of this report, on July 15, 1998, the Company closed its transaction to lease the generating assets of Big Rivers Electric Corporation. On July 14, 1998, LG&E Capital Corp. issued $95.1 million of commercial paper to meet various working capital requirements related to the closing. In July 1998 following the Company's decision to discontinue its merchant energy trading and sales business, Standard & Poor's (S&P) downgraded the credit ratings of the Company and its subsidiaries. The Company's corporate credit rating was changed from "A+" to "A". Similar action was taken with respect to the credit ratings of LG&E and KU. LG&E's corporate credit rating and first mortgage bonds are now rated "A+", its unsecured debt and preferred stock are now rated "A" and its commercial paper is now rated "A-1". KU's corporate credit rating and preferred stock are now rated "A+", its first mortgage bonds are now rated "AA-" and its commercial paper is now rated "A-1". LG&E Capital's ratings for its corporate credit and unsecured debt are now "A" and its commercial paper rating remained at "A-1". These ratings reflect the views of S&P, and an explanation of the significance of these ratings may be obtained from S&P. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. LG&E retired $20 million of first mortgage bonds on June 1, 1998, with funds generated internally. At June 30, 1998, KU had no short-term borrowings compared to $33.6 million at December 31, 1997. The short-term borrowings have been used primarily to finance ongoing construction expenditures and general corporate requirements. The decrease during the six months ended June 30, 1998, is due primarily to cash provided by operations exceeding cash required for investing and financing activities (exclusive of short-term borrowings) for the six months ended June 30, 1998. The Company's capitalization ratios at June 30, 1998, and December 31, 1997, follow: June 30, Dec. 31, 1998 1997 Long-term debt (including current portion) 46.4% 37.7% Notes payable 7.0 12.1 Preferred stock 4.7 4.2 Common equity 41.9 46.0 Total 100.0% 100.0% LG&E's capitalization ratios at June 30, 1998, and December 31, 1997, follow: June 30, Dec. 31, 1998 1997 Long-term debt (including current portion) 45.2% 45.4% Preferred stock 6.9 6.7 Common equity 47.9 47.9 Total 100.0% 100.0% - 35 - KU's capitalization ratios at June 30, 1998, and December 31, 1997, follow: June 30, Dec. 31, 1998 1997 Long-term debt (including current portion) 46.2% 44.4% Notes payable 0.0 2.7 Preferred stock 3.4 3.2 Common equity 50.4 49.7 Total 100.0% 100.0% 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. - 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 (i) the following items and captions of (a) the Company's and LG&E's and (b) KU Energy's and KU's respective combined Annual Reports on Form 10-K for the year ended December 31, 1997: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition; Notes 4 and 16 of the Company's Notes to Financial Statements under Item 8; Notes 3 and 12 of LG&E's Notes to Financial Statements under Item 8 and Note 9 of KU's Notes to Financial Statements under Item 8; and (ii) the following items and captions of (a) the Company's and LG&E's and (b) KU Energy's and KU's respective combined Quarterly Reports on Form 10-Q for the quarter ended March 31, 1998: Part III, Item 1, Legal Proceedings; and Note 2 to KU Energy's and KU's Notes to Financial Statements. Except as described herein, to date, the proceedings reported in the Company's and LG&E's and KU Energy's and KU's respective Forms 10-K and first-quarter Forms 10-Q have not changed materially. Big Rivers Transaction. Effective July 15, 1998, the Company closed its pending transaction to lease the generating assets of Big Rivers Electric Corporation ("Big Rivers"). See "Recent Developments - Lease of Big Rivers Facilities" in Item 2, Management's Discussion and Analysis of Operations and Financial Condition for information concerning this transaction. See also Part II, Item 1, Legal Proceedings, of the Company's Form 10-Q for the quarter ended March 31, 1998 and Part I, Item 1, Business, of the Company's 1997 Form 10- K. Southampton Note 16 of the Company's Financial Statements for the year ended December 31, 1997 discusses the status of certain proceedings before the FERC regarding the status of the Southampton cogeneration facility ("Southampton") as a qualifying facility ("QF") under the Public Utility Regulatory Policies Act for the year 1992, including a request for clarification as to any FERC-ordered rate refunds payable from Southampton to Virginia Electric and Power Company ("VEPCO") for the 1992 period. On May 18, 1998, the FERC issued an order addressing certain issues in this matter. The order reaffirmed certain exemptions granted Southampton as a QF for the 1992 period. Regarding the rate refund amount, the FERC order requires VEPCO to compensate Southampton for every hour in 1992 that the unit was available for dispatch, whether or not actually dispatched, at VEPCO's hourly economy energy cost, thus reducing Southampton's exposure to refund. FERC also denied Southampton's request for approval of a $500,000 refund and directed the parties to enter into further FERC-supervised settlement negotiations regarding calculation of the refund amount in accordance with the clarifications in the FERC order. Southampton and VEPCO each filed requests for rehearing of the May 18 order which are still pending before the FERC. On May 28, 1998, Southampton filed a petition for review of FERC's orders in this proceeding with the United States Court of Appeals for the District of Columbia Circuit ("Court of Appeals"). Because the Court of Appeals will dismiss a petition for review if petitions for rehearing are simultaneously pending before FERC and several parties, including Southampton, have sought rehearing, Southampton has filed a voluntary motion with the Court of Appeals to dismiss its appeal without prejudice. FERC has also filed a motion to dismiss Southampton's appeal. If Southampton's motion is granted, Southampton could seek judicial review of FERC's decisions in this proceeding after FERC acts on the pending petitions for rehearing. Pending the commencement and outcome of such negotiations, as well as any further potential actions, currently unknown, to be taken by Southampton or VEPCO, including possible appeal of any final FERC order, the Company cannot predict the ultimate amount of the refund. The Company's 50% share of the revenues - 37 - received by Southampton in 1992 was approximately $9.5 million and any refund is subject to interest charges. The Company has also been notified that its partners in the Southampton facility are disputing their responsibility for their share of any refund and are asserting that the Company should bear the full responsibility for any refund. The Company and partners are currently negotiating these matters. Calgary Item 3, Legal Proceedings, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 discusses the status of certain proceedings relating to unauthorized transactions which were discovered in the Company's former LG&E Natural Canada Inc. office. The Company has agreed to dismiss one action which had been filed in this matter against a natural gas sales and marketing company and its director, president and secretary. The Company continues to pursue the remaining action against its former employee as described in Item 3 to the Form 10-K, which action is in the discovery stages. Rensselaer Item 3, Legal Proceedings, to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, discussed the status of a master restructuring agreement between Niagara Mohawk Power Corporation ("NIMO") and LG&E Westmoreland-Rensselaer ("LWR"), the owner of the Rensselaer, New York cogeneration facility in which the Company has an interest. The closing of the master restructuring transactions between NIMO and 14 other independent power producers including LWR occurred June 30, 1998. In connection with this closing and the restructuring of its power purchase agreement with NIMO, the Company recorded an after-tax gain of $21.0 million relating to its interest in LWR. The Company previously reported the sale of one-half of its interest in LWR. As a result of a settlement among the parties, the Company has retained its 50% ownership in the Rensselaer facility. See also "Recent Developments" in Part I, Item 2, Management's Discussion and Analysis of Operations and Financial Condition. Oglethorpe Power Contract In November 1996, the Company, through its LG&E Energy Marketing Inc. subsidiary (LEM), entered into a 15 year agreement with Oglethorpe Power Corporation (OPC) to supply approximately one-half of OPC's systemwide power needs during the term of the agreement and with rights to market OPC's surplus power. The Company has been in settlement negotiations with OPC over load projections provided by OPC as an inducement for LEM to enter into the 1996 agreement. Absent an acceptable settlement with OPC, the Company will pursue legal remedies. See also "Recent Developments" in Part I, Item 2, Management's Discussion and Analysis of Operations and Financial Condition. Springfield Municipal Contract On July 29, 1998, LEM filed suit in the United States District Court for the Western District of Kentucky in Louisville, against the City of Springfield, Illinois, City Water, Light and Power Company ("Springfield CWLP"). The action seeks damages for Springfield CWLP's failure, including in late June 1998, to sell electric energy to LEM pursuant to a February 1997 Interchange Agreement and transaction confirmations thereunder, as well as for other related claims. LEM has estimated that its damages in this matter may be approximately $21.0 million. Proposed NOx Reductions Note 16 to the Company's and Note 12 to LG&E's respective Notes to Financial Statements for the year ended December 31, 1997 and Management's Discussion and Analysis to KU Energy's and KU's respective Forms 10-K for the year ending December 31, 1997 (Part I, Item - 38 - 1, Business) and their Forms 10-Q for the quarter ending March 31, 1998 (Part I, Item 2), discuss the pending United States Environmental Protection Agency's ("USEPA") new nitrogen oxide and particulate matter standards adopted in July 1997 and related proposed regulations issued in October 1997. The Company continues to monitor the USEPA comment and rule- making process in this matter through regional and industry trade groups and organizations. If finally adopted as proposed, the regulations may require LG&E, KU and Big Rivers, as well as the Company's independent power projects, to incur significant capital expenditures and significantly increased operation and maintenance costs. In connection with the closing of the KU Energy merger and Big Rivers lease transactions and potential Company obligations in respect of these additional coal-fired generation assets, the Company now estimates these capital costs as potentially in excess of $300 million in the aggregate. These costs would generally be incurred following the year 2000. The Company believes its exposure in this regard to be comparable to that of similarly-situated utilities with like generation assets. The Company anticipates that a significant portion of any such capital costs could be recoverable through rates. However, Public Service Commission Approval is necessary and there can be no guarantee of such recovery. KU Environmental Surcharge On June 10, 1998, the Kentucky Supreme Court granted motions for discretionary review filed by the Kentucky Attorney General and consumer representatives in court proceedings regarding the constitutionality of the state environmental surcharge statute and related matters. Briefs are due in early August, however no date for oral argument has yet been set. See Note 6 to Notes to Financial Statements (Unaudited) under Item 1 of this Form 10-Q for further details, including a discussion any potential refund amounts. Item 4. Submission of Matters to a Vote of Security Holders. a) LG&E Energy's and LG&E's Annual Meetings of Shareholders were held on April 22, 1998. KU Energy's Annual Meeting of Shareholders was held on April 28, 1998. The sole common shareholder of KU executed a written consent in lieu of an annual meeting on April 28, 1998. b) Not applicable. c) The matters voted upon and the results of the voting at the Special Meeting are set forth below: 1. LG&E Energy: i) The shareholders voted to elect LG&E Energy's nominees for election to the Board of Directors as follows: Owsley Brown II - 54,134,575 common shares cast in favor of election and 303,969 shares withheld. Gene P. Gardner - 54,099,551 common shares cast in favor of election and 307,816 shares withheld. J. David Grissom - 54,045,140 common shares cast in favor of election and 353,789 shares withheld. Jeffery T. Grade - 53,965,876 common shares cast in favor of election and 404,887 shares withheld. Holders of 235,944 common shares abstained from voting on this matter. - 39 - ii)The shareholders voted 54,087,460 common shares in favor of and 197,592 shares against the approval of Arthur Andersen LLP as independent auditors for 1998. Holders of 401,599 common shares abstained from voting on this matter. 2. LG&E: i) The shareholders voted to elect LG&E's nominees for election to the Board of Directors as follows: 21,294,223 common shares cast in favor of election and no shares withheld for each of Owsley Brown II, Gene P. Gardner, J. David Grissom and Jeffery T. Grade, respectively. Holders of no common shares abstained from voting on this matter. ii)The shareholders voted 21,294,223 common shares in favor of and no shares against the approval of Arthur Andersen LLP as independent auditors for 1998. iii)The shareholders voted 21,294,223 common shares in favor of and no shares against the approval of an amendment to LG&E's By-laws to increase the maximum number of directors. 3. KU Energy: The shareholders voted to elect KU Energy's nominees for election to the Board of Directors as follows: Carol M. Gatton - 31,997,263 common shares cast in favor of election and no shares withheld. Harry M. Hoe - 32,117,171 common shares cast in favor of election and no shares withheld. Michael R. Whitley - 32,167,314 common shares cast in favor of election and no shares withheld. Holders of 438,788 common shares abstained from voting on this matter. 4. KU: The shareholders voted to elect KU's nominees for election to the Board of Directors as follows: 37,817,878 common shares cast in favor of election and no shares withheld for each of Carol M. Gatton, Harry M. Hoe and Michael R. Whitley, respectively. Holders of no common shares abstained from voting on this matter. d) Not applicable. - 40 - 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 April 9, 1998, the Company filed a report on Form 8-K announcing that the LG&E Energy Corp. and KU Energy Corporation merger will close effective May 4, 1998, subject to Securities and Exchange Commission final approval and the satisfaction and confirmation of certain closing conditions set forth in their merger agreement. On May 6, 1998, the Company filed a report on Form 8-K stating that: 1) On May 4, 1998, LG&E Energy Corp. and KU Energy Corporation completed their merger with the Company as the surviving corporation. 2) Effective May 1, 1998, the Company elected Frederick J. Newton, III, to the position of Senior Vice President - Human Resources and Administration. On June 30, 1998, the Company filed a report on Form 8-K announcing that effective on or about January 1, 1998, the Louisville Gas and Electric Company Employees' Stock Ownership Plan and Trust (the "ESOP") was merged into the LG&E Energy Corp. Savings Plan and 401(k) Savings Plan for Employees of Louisville Gas and Electric Company who are Represented by Local 2100 of IBEW, and the ESOP ceased to exist. On July 29, 1998, the Company filed a report on Form 8-K announcing that it would discontinue its merchant energy trading and sales business and that it would sell the associated gas gathering and processing business. The Company also announced in the same report on Form 8-K that its energy marketing subsidiary, LG&E Energy Marketing Inc. ("LEM"), intends to file an action against the City of Springfield, Illinois, City Water, Light and Power Company ("Springfield CWLP"). The action will seek damages for Springfield CWLP's failure, including in late June 1998, to sell electric energy to LEM pursuant to a February 1997 Interchange Agreement and transaction confirmations thereunder, as well as for other related claims. - 41 - 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: August 12, 1998 /s/ S. Bradford Rives S. Bradford Rives Vice President - Finance 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: August 12, 1998 /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: August 12, 1998 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - 42 - EX-27 2
UT 0000861388 LG&E ENERGY CORP. 1,000 3-MOS DEC-31-1998 MAR-31-1998 PER-BOOK 3,177,897 469,464 733,896 145,531 0 4,526,788 776,010 277 728,942 1,505,229 0 138,353 1,360,701 205,515 0 0 20,021 0 0 0 1,296,969 4,526,788 450,724 23,479 357,217 380,696 70,028 (803) 69,225 24,370 44,855 1,687 43,168 36,810 18,108 142,355 0.33 0.33 Includes common stock expense of $2,263. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $5,981. The Company restated this schedule to reflect its merger with KU Energy Corporation and to reclassify discontinued operations.
EX-27 3
UT 0000861388 LG&E ENERGY CORP. 1,000 3-MOS DEC-31-1997 MAR-31-1997 PER-BOOK 3,155,821 470,464 671,161 127,148 0 4,424,594 775,209 (100) 694,312 1,469,421 0 135,328 1,230,604 310,500 0 0 21 0 0 0 1,278,720 4,424,594 423,073 26,840 327,551 354,391 68,682 1,943 70,625 22,832 47,793 1,691 46,102 35,752 18,719 116,346 0.36 0.36 Includes common stock expense of $1,861. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $3,603. The Company restated this schedule to reflect its merger with KU Energy Corporation and to reclassify discontinued operations.
EX-27 4
UT 0000861388 LG&E ENERGY CORP. 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 3,161,686 476,617 683,242 134,411 0 4,455,956 775,512 (101) 692,218 1,467,629 0 135,328 1,210,635 349,800 0 0 20,021 0 0 0 1,272,543 4,455,956 811,611 44,699 643,265 687,964 123,647 7,341 130,988 47,803 83,185 3,416 79,769 71,505 37,582 171,964 0.62 0.62 Includes common stock expense of $1,874. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $9,730. The Company restated this schedule to reflect its merger with KU Energy Corporation and to reclassify discontinued operations.
EX-27 5
UT 0000861388 LG&E ENERGY CORP. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 3,189,744 478,659 751,401 143,140 0 4,562,944 776,393 217 722,584 1,499,194 0 138,353 1,210,690 393,784 0 0 20,021 0 0 0 1,300,902 4,562,944 1,713,419 115,472 1,313,227 1,428,699 284,720 2,703 287,423 97,586 189,837 6,841 182,996 144,366 75,010 322,814 1.41 1.41 Includes common stock expense of $1,880. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $22,937. The Company restated this schedule to reflect its merger with KU Energy Corporation and to reclassify discontinued operations.
EX-27 6
UT 0000861388 LG&E ENERGY CORP. 1,000 6-MOS DEC-31-1998 JUN-30-1998 PER-BOOK 3,179,194 499,946 510,297 159,600 0 4,349,037 775,822 244 452,891 1,228,957 0 136,530 1,360,732 206,079 0 0 21 0 0 0 1,416,718 4,349,037 891,861 49,674 662,688 712,362 179,499 (316,185) (136,686) 48,551 (185,237) 3,394 (188,631) 81,062 36,123 191,959 (1.45) (1.45) Includes common stock expense of $2,451. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $56,863. Includes loss from discontinued operations and loss on disposal of discontinued operations, both net of income taxes.
EX-27 7
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 6-MOS DEC-31-1998 JUN-30-1998 PER-BOOK 1,471,566 13,123 154,231 55,034 0 1,693,954 307,545 0 287,462 595,007 0 40,000 546,330 0 0 0 21 0 0 0 512,596 1,693,954 376,298 24,741 288,420 313,161 63,137 (19,881) 43,256 19,326 23,930 1,128 22,802 40,090 18,654 90,862 0 0 Includes common stock expense of $595. Represents unrealized loss on marketable securities, net of taxes.
EX-27 8
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 6-MOS DEC-31-1998 JUN-30-1998 PER-BOOK 1,707,628 1,109 274,253 71,292 0 2,054,282 424,335 85 239,064 663,484 0 95,328 626,800 0 0 0 0 0 0 0 668,670 2,054,282 434,733 26,082 342,696 368,778 65,955 (23,825) 42,130 18,710 23,420 2,266 21,154 41,000 17,469 111,674 0 0 Includes common stock expense of $836. Represents unrealized loss on marketable securities, net of taxes. Includes merger cost to achieve. See Note 2 of Notes to Financial Statements.
-----END PRIVACY-ENHANCED MESSAGE-----