-----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, LwKu4Oeq+ALd8Tk/M5jFwbPiN0jC3eqNExnMJdHBx9Eb6MWuGZSZo4CGLsWDOYmF 4R86XFdBo8uCwPCHLMIO9Q== 0000861388-03-000012.txt : 20030813 0000861388-03-000012.hdr.sgml : 20030813 20030813152809 ACCESSION NUMBER: 0000861388-03-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 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: 1934 Act SEC FILE NUMBER: 001-03464 FILM NUMBER: 03840995 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: 1934 Act SEC FILE NUMBER: 001-02893 FILM NUMBER: 03840994 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-Q 1 q10q0603.txt LG&E AND KU SECOND QUARTER 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 Or [_] TRANSITION REPORT PURSUANT 1TO 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. 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, KY 40507-1428 (859) 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Louisville Gas and Electric Company 21,294,223 shares, without par value, as of July 31, 2003, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of July 31, 2003, all held by LG&E Energy Corp. This combined Form 10-Q is separately filed by 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 related to the other registrants. TABLE OF CONTENTS PART I Item 1 Consolidated Financial Statements Louisville Gas and Electric Company and Subsidiary Statements of Income 1 Balance Sheets 2 Statements of Cash Flow 4 Statements of Retained Earnings 5 Statements of Other Comprehensive Income 6 Kentucky Utilities Company and Subsidiary Statements of Income 7 Balance Sheets 8 Statements of Cash Flow 10 Statements of Retained Earnings 11 Statements of Other Comprehensive Income 12 Notes to Consolidated Financial Statements 13 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3 Quantitative and Qualitative Disclosures About Market Risk 30 Item 4 Controls and Procedures 32 PART II Item 1 Legal Proceedings 33 Item 6 Exhibits and Reports on Form 8-K 33 Signatures 35 Exhibits 36 - - New Page - Part I. Financial Information - Item 1. Financial Statements Louisville Gas and Electric Company and Subsidiary Consolidated Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 OPERATING REVENUES (Note 5 and Note 8): Electric $173,917 $185,225 $360,936 $346,111 Gas 41,456 30,938 181,280 148,056 Total operating revenues 215,373 216,163 542,216 494,167 OPERATING EXPENSES: Fuel for electric generation 46,277 50,550 95,754 94,657 Power purchased (Note 8) 17,313 15,476 41,440 33,697 Gas supply expenses 25,963 18,346 132,070 101,813 Other operation expenses 53,379 54,807 106,907 103,216 Maintenance 17,690 15,572 29,583 27,573 Depreciation and amortization (Note 8) 30,293 25,889 57,437 51,167 Federal and state income taxes 4,714 8,335 21,355 21,572 Property and other taxes 3,454 4,778 8,189 9,314 Total operating expenses 199,083 193,753 492,735 443,009 NET OPERATING INCOME 16,290 22,410 49,481 51,158 Other expense - net (1,394) (67) (330) (66) Interest charges (Note 3) 7,141 7,087 14,131 14,893 NET INCOME $ 7,755 $ 15,256 $ 35,020 $ 36,199 The accompanying notes are an integral part of these consolidated financial statements. - - Page 1 - Louisville Gas and Electric Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) ASSETS June 30, December 31, 2003 2002 UTILITY PLANT: At original cost $3,730,273 $3,622,985 Less: reserve for depreciation 1,507,498 1,463,674 Net utility plant (Note 7) 2,222,775 2,159,311 OTHER PROPERTY AND INVESTMENTS - less reserve of $63 as of June 30, 2003 and December 31, 2002 602 764 CURRENT ASSETS: Cash 3,073 17,015 Accounts receivable - less reserve of $2,125 as of June 30, 2003 and December 31, 2002 (Note 4) 71,045 68,440 Materials and supplies - at average cost: Fuel (predominantly coal) 35,953 36,600 Gas stored underground 21,745 50,266 Other 23,493 25,651 Prepayments and other 6,235 5,298 Total current assets 161,544 203,270 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 6,385 6,532 Regulatory assets (Note 6) 154,520 153,446 Other 33,079 37,755 Total deferred debits and other assets 193,984 197,733 Total assets $2,578,905 $2,561,078 The accompanying notes are an integral part of these consolidated financial statements. - - Page 2 - Louisville Gas and Electric Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) CAPITALIZATION AND LIABILITIES June 30, December 31, 2003 2002 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Common stock expense (836) (836) Additional paid-in capital 40,000 40,000 Retained earnings 442,498 409,319 Accumulated other comprehensive loss (42,063) (40,512) Total common equity 864,769 833,141 Cumulative preferred stock 95,140 95,140 Long-term debt 328,104 328,104 Long-term debt to associated company (Note 9) 100,000 - Total capitalization 1,388,013 1,256,385 CURRENT LIABILITIES: Current portion of long-term debt 288,800 288,800 Notes payable to parent (Note 9) 171,732 193,053 Accounts payable 96,699 122,771 Accrued taxes - 1,450 Other 20,077 19,536 Total current liabilities 577,308 625,610 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes - net 329,833 313,225 Investment tax credit, in process of amortization 52,431 54,536 Accumulated provision for pensions and related benefits 134,096 224,703 Customer advances for construction 9,835 10,260 Asset retirement obligation (Note 8) 9,639 - Regulatory liabilities (Note 6) 44,719 52,424 Long-term derivative liability 19,700 17,115 Other 13,331 6,820 Total deferred credits and other liabilities 613,584 679,083 Total capital and liabilities $2,578,905 $2,561,078 The accompanying notes are an integral part of these consolidated financial statements. - - Page 3 - Louisville Gas and Electric Company and Subsidiary Consolidated Statement of Cash Flows (Unaudited) (Thousands of $) Six Months Ended June 30, 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 35,020 $ 36,199 Items not requiring cash currently: Depreciation and amortization 57,437 51,167 Deferred income taxes - net 12,876 9,507 Investment tax credit - net (2,105) (2,108) Asset retirement obligations (Note 8) 4,108 - Other 22,332 20,917 Changes in current assets and liabilities 14,956 (21,917) Changes in accounts receivable securitization-net (Note 4) (14,000) 16,100 Pension funding (83,100) - Gas supply clause (18,386) 13,793 Other (501) (6,938) Net cash flows from operating activities 28,637 116,720 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities - (101) Proceeds from sales of securities 163 - Construction expenditures (119,412) (69,524) Net cash flows from investing activities (119,249) (69,625) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowing from associated company (Note 9) 100,000 - Short-term borrowings from parent (Note 9) 349,400 278,100 Repayment of short-term borrowings from parent (370,737) (280,744) Issuance of pollution control bonds - 119,067 Retirement of pollution control bonds - (120,000) Payment of dividends (1,993) (25,176) Net cash flows from financing activities 76,670 (28,753) CHANGE IN CASH (13,942) 18,342 CASH AT BEGINNING OF PERIOD 17,015 2,112 CASH AT END OF PERIOD $ 3,073 $ 20,454 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $15,947 $ 16,681 Interest on borrowed money 10,705 13,019 The accompanying notes are an integral part of these consolidated financial statements. - - Page 4 - Louisville Gas and Electric Company and Subsidiary Consolidated Statement of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Balance at beginning of period $435,647 $413,514 $409,319 $393,636 Net income 7,755 15,256 35,020 36,199 Subtotal 443,402 428,770 444,339 429,835 Cash dividends declared on stock: 5% cumulative preferred 269 269 538 538 Auction rate cumulative preferred 268 413 569 842 $5.875 cumulative preferred 367 367 734 734 Common - 23,000 - 23,000 Subtotal 904 24,049 1,841 25,114 Balance at end of period $442,498 $404,721 $442,498 $404,721 The accompanying notes are an integral part of these consolidated financial statements. - - Page 5 - Louisville Gas and Electric Company and Subsidiary Consolidated Statements of Other Comprehensive Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Net income $ 7,755 $15,256 $35,020 $36,199 Losses on derivative instruments and hedging activities (Note 3) (2,552) (3,939) (2,585) (2,430) Income tax benefit related to items of other comprehensive loss 1,021 1,576 1,034 973 Other comprehensive loss, net of tax (1,531) (2,363) (1,551) (1,457) Other comprehensive income $ 6,224 $12,893 $33,469 $34,742 The accompanying notes are an integral part of these consolidated financial statements. - - Page 6 - Kentucky Utilities Company and Subsidiary Consolidated Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 OPERATING REVENUES (Note 5 and Note 8) $197,174 $196,020 $422,157 $405,044 OPERATING EXPENSES: Fuel for electric generation 59,641 57,368 125,964 115,639 Power purchased (Note 8) 33,648 32,376 74,848 67,292 Other operation expenses 38,130 36,201 77,019 70,723 Maintenance 7,403 15,386 36,369 26,945 Depreciation and amortization (Note 8) 27,762 23,515 51,912 46,574 Federal and state income taxes 7,467 7,365 14,067 21,748 Property and other taxes 3,968 3,762 8,163 7,876 Total operating expenses 178,019 175,973 388,342 356,797 NET OPERATING INCOME 19,155 20,047 33,815 48,247 Other income - net 2,694 1,685 4,803 3,324 Interest charges (Note 3) 7,690 8,980 12,598 14,462 NET INCOME $ 14,159 $ 12,752 $ 26,020 $ 37,109 The accompanying notes are an integral part of these consolidated financial statements. - - Page 7 - Kentucky Utilities Company and Subsidiary Consolidated Balance Sheets (Unaudited) (Thousands of $) ASSETS June 30, December 31, 2003 2002 UTILITY PLANT: At original cost $3,450,964 $3,280,762 Less: reserve for depreciation 1,581,895 1,536,658 Net utility plant (Note 7) 1,869,069 1,744,104 OTHER PROPERTY AND INVESTMENTS - less reserve of $130 as of June 30, 2003 and December 31, 2002 16,144 14,358 CURRENT ASSETS: Cash 6,698 5,391 Accounts receivable - less reserve of $939 and $800 as of June 30, 2003 and December 31, 2002, respectively (Note 4) 46,251 49,588 Materials and supplies - at average cost: Fuel (predominantly coal) 41,438 46,090 Other 27,888 26,408 Prepayments and other 6,132 6,584 Total current assets 128,407 134,061 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 4,868 4,991 Regulatory assets (Note 6) 61,398 65,404 Long-term derivative asset 17,108 16,928 Other 16,973 18,537 Total deferred debits and other assets 100,347 105,860 Total assets $2,113,967 $1,998,383 The accompanying notes are an integral part of these consolidated financial statements. - - Page 8 - Kentucky Utilities Company and Subsidiary Consolidated Balance Sheets (cont.) (Unaudited) (Thousands of $) CAPITALIZATION AND LIABILITIES June 30, December 31, 2003 2002 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Common stock expense (322) (322) Additional paid-in capital 15,000 15,000 Retained earnings 526,916 502,024 Accumulated other comprehensive loss (10,462) (10,462) Total common equity 839,272 814,380 Cumulative preferred stock 39,727 39,727 Long-term debt 348,758 346,562 Long-term debt to associated company (Note 9) 100,000 - Total capitalization 1,327,757 1,200,669 CURRENT LIABILITIES: Current portion of long-term debt 91,930 153,930 Notes payable to parent (Note 9) 146,430 119,490 Accounts payable 85,963 95,374 Accrued taxes 8,696 4,955 Other 24,779 21,442 Total current liabilities 357,798 395,191 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes - net 250,948 241,184 Investment tax credit, in process of amortization 7,179 8,500 Accumulated provision for pensions and related benefits 104,376 110,927 Asset retirement obligation (Note 8) 19,087 - Regulatory liabilities (Note 6) 21,623 29,876 Other 25,199 12,036 Total deferred credits and other liabilities 428,412 402,523 Total capital and liabilities $2,113,967 $1,998,383 The accompanying notes are an integral part of these consolidated financial statements. - - Page 9 - Kentucky Utilities Company and Subsidiary Consolidated Statement of Cash Flows (Unaudited) (Thousands of $) Six Months Ended June 30, 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,020 $ 37,109 Items not requiring cash currently: Depreciation and amortization 51,912 46,574 Deferred income taxes - net 1,485 (3,106) Investment tax credit - net (1,321) (1,478) Asset retirement obligations (Note 8) 9,460 - Other 13,257 13,237 Changes in current assets and liabilities 4,628 (24,551) Changes in accounts receivable securitization-net (Note 4) - 2,300 Pension funding (3,515) - Other 12,862 8,208 Net cash flows provided by operating activities 114,788 78,293 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of securities (1,786) - Construction expenditures (175,507) (47,844) Net cash flows from investing activities (177,293) (47,844) CASH FLOWS FROM FINANCING ACTIVITIES: Long-term borrowings from associated company (Note 9) 100,000 - Short-term borrowings from parent (Note 9) 360,640 505,938 Repayment of short-term borrowings from parent (333,700) (534,138) Issuance of pollution control bonds - 37,027 Retirement of pollution control bonds (62,000) (37,930) Payment of dividends (1,128) (1,128) Net cash flows from financing activities 63,812 (30,231) CHANGE IN CASH 1,307 218 CASH AT BEGINNING OF PERIOD 5,391 3,295 CASH AT END OF PERIOD $ 6,698 $ 3,513 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $13,763 $27,905 Interest on borrowed money $11,045 $16,120 The accompanying notes are an integral part of these consolidated financial statements. - - Page 10 - Kentucky Utilities Company and Subsidiary Consolidated Statement of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Balance at beginning of period $513,321 $434,689 $502,024 $410,896 Net income 14,159 12,752 26,020 37,109 Subtotal 527,480 447,441 528,044 448,005 Cash dividends declared on stock: 4.75% cumulative preferred 237 237 475 475 6.53% cumulative preferred 327 327 653 653 Subtotal 564 564 1,128 1,128 Balance at end of period $526,916 $446,877 $526,916 $446,877 The accompanying notes are an integral part of these consolidated financial statements. - - Page 11 - Kentucky Utilities Company and Subsidiary Consolidated Statements of Other Comprehensive Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Net income $14,159 $12,752 $26,020 $37,109 Gains on derivative instruments and hedging activities (Note 3) - 1,828 - 1,828 Income tax expense related to items of other comprehensive income - (731) - (731) Other comprehensive gain, net of tax - 1,097 - 1,097 Other comprehensive income $14,159 $13,849 $26,020 $38,206 The accompanying notes are an integral part of these consolidated financial statements. - - Page 12 - Louisville Gas and Electric Company and Subsidiary Kentucky Utilities Company and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 1. The unaudited consolidated financial statements include the accounts of Louisville Gas and Electric Company and Subsidiary and Kentucky Utilities Company and Subsidiary ("LG&E" and "KU" or the "Companies"). The common stock of each of LG&E and KU is wholly-owned by LG&E Energy Corp. ("LG&E Energy"). In the opinion of management, the unaudited interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of consolidated financial position, results of operations, comprehensive income 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 Securities and Exchange Commission ("SEC") rules and regulations, although the Companies believe that the disclosures are adequate to make the information presented not misleading. See LG&E's and KU's Annual Reports on Form 10-K for the year ended December 31, 2002 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Companies. The accompanying financial statements for the three months and six months ended June 30, 2002, have been revised to conform with certain reclassifications in the current three months and six months ended June 30, 2003. These reclassifications had no effect on net income, total assets, or total capital and liabilities as previously reported. 2. On December 11, 2000, LG&E Energy was acquired by Powergen plc, now known as Powergen Limited, ("Powergen") for cash of approximately $3.2 billion or $24.85 per share and the assumption of all of LG&E Energy's debt. As a result of the acquisition, LG&E Energy became a wholly- owned indirect subsidiary of Powergen and LG&E and KU became indirect subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E Energy continued their separate identities and continue to serve customers in Kentucky, Virginia and Tennessee under their existing names. The preferred stock and debt securities of the utility operations were not affected by this transaction resulting in the utility operations' obligations to continue to file SEC reports. Following the acquisition, Powergen became a registered holding company under the Public Utility Holding Company Act of 1935 ("PUHCA"), and LG&E and KU, as subsidiaries of a registered holding company, became subject to additional regulation under PUHCA. As a result of the Powergen acquisition and in order to comply with PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed as a subsidiary of LG&E Energy and became operational on January 1, 2001. LG&E Services provides certain services to affiliated entities, including LG&E and KU, at cost, as required under PUHCA. On January 1, 2001, approximately 1,000 employees, primarily from LG&E Energy, LG&E and KU, were moved to LG&E Services. On July 1, 2002, a German company, E.ON AG ("E.ON"), completed its acquisition of Powergen. E.ON had announced its pre-conditional cash offer of 5.1 billion pounds sterling ($7.3 billion) for Powergen on April 9, 2001. Following the acquisition, LG&E and KU became indirect subsidiaries of E.ON and E.ON became a registered holding company under PUHCA. As contemplated in their regulatory filings in connection with the E.ON acquisition, E.ON, Powergen and LG&E Energy have completed an administrative reorganization to move the LG&E Energy group from an indirect Powergen subsidiary to an indirect E.ON subsidiary. This reorganization was effective March 2003. - Page 13 - No costs associated with the Powergen acquisition or the E.ON acquisition nor any of the effects of purchase accounting have been reflected in the financial statements of LG&E or KU. 3. The Companies use interest rate swaps to hedge exposure to market fluctuations in certain of their debt instruments. Pursuant to the Companies' policies, use of these financial instruments is intended to mitigate risk and earnings volatility and is not speculative in nature. Management has designated all of the Companies' interest rate swaps as hedge instruments. Financial instruments designated as cash flow hedges have resulting gains and losses recorded within other comprehensive income and stockholders' equity. To the extent a financial instrument or the underlying item being hedged is prematurely terminated or the hedge becomes ineffective, the resulting gains or losses are reclassified from other comprehensive income to net income. Financial instruments designated as fair value hedges are periodically marked to market with the resulting gains and losses recorded directly into net income to correspond with income or expense recognized from changes in market value of the items being hedged. As of June 30, 2003, LG&E had fixed rate swaps covering $100.3 million in notional amounts of variable rate debt and with fixed rates ranging from 4.309% to 5.495%. The average variable rate on the debt during the three months and six months ended June 30, 2003 was 1.13% and 1.16%, respectively. The swaps have been designated as cash flow hedges and expire on various dates from February 2005 through November 2020. The hedges were deemed to be fully effective resulting in a pretax loss for the three months and six months ended June 30, 2003 of $2.6 million and $2.6 million, respectively, recorded in other comprehensive income. Upon expiration of these hedges, the amount recorded in other comprehensive income will be reclassified into earnings. The amount expected to be reclassified from other comprehensive income to earnings in the next twelve months is immaterial due to the long-term nature of the swaps. As of June 30, 2003, KU had variable rate swaps covering $153 million in notional amounts of fixed rate debt. The average variable rate on these swaps during the three months and six months ended June 30, 2003 was 1.93% and 1.94%, respectively. The underlying debt has fixed rates ranging from 5.75% to 7.92%. The swaps have been designated as fair value hedges and expire on various dates from May 2007 through June 2025. During the three months and six months ended June 30, 2003, the effect of marking these financial instruments and the underlying debt to market resulted in a pretax loss of $2.2 million and $2.0 million, respectively, recorded as an increase in interest expense. 4. LG&E and KU participate in accounts receivable securitization programs. The purpose of these programs is to enable the utilities to accelerate the receipt of cash from the collection of retail accounts receivable, thereby reducing dependence upon more costly sources of working capital. The securitization programs allow for a percentage of eligible receivables to be sold. Eligible receivables are generally all receivables associated with retail sales that have standard terms and are not past due. LG&E and KU are able to terminate these programs at any time without penalty. If there is a significant deterioration in the payment record of the receivables by retail customers or if the Companies fail to meet certain covenants of the programs, the programs may terminate at the election of the financial institutions. In this case, payments from retail customers would first be used to repay the financial institutions participating in the programs, and would then be available for use by the Companies. As part of these programs, LG&E and KU sold retail accounts receivables to wholly owned subsidiaries, LG&E Receivables LLC ("LG&E R") and KU Receivables LLC ("KU R"). Simultaneously, LG&E R and KU R entered into two separate three-year accounts receivable securitization facilities with two financial institutions and their affiliates whereby LG&E R and - - Page 14 - KU R can sell, on a revolving basis, an undivided interest in certain of their receivables and receive up to $75 million and $50 million, especttively, from an unrelated third party purchaser. The effective cost of the receivables programs is comparable to the Companies' lowest cost source of capital, and is based on prime rated commercial paper. LG&E and KU retain servicing rights of the sold receivables through separate servicing agreements with the third party purchasers. LG&E and KU have obtained opinions from independent legal counsel indicating these transactions qualify as true sales of receivables. As of June 30, 2003 and December 31, 2002, LG&E's outstanding program balances were $49.2 million and $63.2 million, respectively, and KU's balance for both periods was $49.3 million. The allowance for doubtful accounts associated with the eligible securitized receivables was $2.1 million and $1.8 million for LG&E at June 30, 2003 and December 31, 2002 and $0.7 million and $0.5 million for KU at June 30, 2003 and December 31, 2002. Charge offs were immaterial for LG&E and KU. Management believes that the risk of uncollectibility associated with the sold receivables is minimal. 5. External and intersegment revenues (related party transactions between LG&E and KU) and income by business segment for the three and six months ended June 30, 2003, follow (in thousands of $): Three Months Ended June 30, 2003 External Intersegment Revenues Revenues Net Income (Loss) LG&E electric $163,067 $10,850 $ 9,457 LG&E gas 41,456 - (1,682) Total $204,523 $10,850 $ 7,775 KU electric $187,963 $ 9,211 $14,159 Six Months Ended June 30, 2003 External Intersegment Revenues Revenues Net Income LG&E electric $333,116 $27,820 $27,489 LG&E gas 181,280 - 7,531 Total $514,396 $27,820 $35,020 KU electric $398,482 $23,675 $26,020 External and intersegment revenues (related party transactions between LG&E and KU) and income by business segment for the three and six months ended June 30, 2002, follow (in thousands of $): Three Months Ended June 30, 2002 External Intersegment Revenues Revenues Net Income (Loss) LG&E electric $175,375 $ 9,850 $17,658 LG&E gas 30,938 - (2,402) Total $206,313 $ 9,850 $15,256 KU electric $187,925 $ 8,095 $12,752 - - Page 15 - Six Months Ended June 30, 2002 External Intersegment Revenues Revenues Net Income LG&E electric $323,208 $22,903 $28,750 LG&E gas 148,056 - 7,449 Total $471,264 $22,903 $36,199 KU electric $382,168 $22,876 $37,109 6. The following regulatory assets and liabilities were included in the balance sheet of LG&E and KU as of June 30, 2003 and December 31, 2002 (in thousands of $): Louisville Gas and Electric (Unaudited) June 30, December 31, 2003 2002 REGULATORY ASSETS: VDT costs $ 82,870 $ 98,044 Unamortized loss on bonds 18,267 18,843 Gas supply adjustments due from customers 32,100 13,714 Earnings sharing mechanism provision 10,728 12,500 Asset retirement obligation 5,589 - LG&E/KU merger costs - 1,815 One utility costs 141 954 Manufactured gas sites 1,605 1,757 Other 3,220 5,819 Total $154,520 $153,446 REGULATORY LIABILITIES: Deferred income taxes - net $ 41,804 $ 45,536 Gas supply adjustments due to customers 1,555 3,154 Other 1,360 3,734 Total $ 44,719 $ 52,424 Kentucky Utilities (Unaudited) June 30, December 31, 2003 2002 REGULATORY ASSETS: VDT costs $ 32,322 $38,375 Unamortized loss on bonds 9,018 9,456 Earnings sharing mechanism provision 9,036 13,500 Asset retirement obligation 9,714 - LG&E/KU merger costs - 2,046 One utility costs - 873 Other 1,308 1,154 Total $ 61,398 65,404 REGULATORY LIABILITIES: Deferred income taxes - net $ 20,575 28,854 Other 1,048 1,022 Total $ 21,623 $29,876 - - Page 16 - 7. The following data represent shares of jointly owned additions to the Trimble County plant for four combustion turbines as of June 30, 2003: LG&E KU Total Ownership % 37% 63% 100% Mw capacity 237 403 640 Plant under construction $52 $92 $144 Depreciation - - - Net book value $52 $92 $144 8. Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement Obligations, was issued in 2001. SFAS No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The effective implementation date for SFAS No. 143 was January 1, 2003. Management has calculated the impact of SFAS No. 143 and the recently released FERC final rule, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations. As of June 30, 2003, LG&E recorded asset retirement obligation (ARO) assets in the amount of $4.5 million and liabilities of $9.6 million. LG&E recorded offsetting regulatory assets of $5.6 million, pursuant to regulatory treatment prescribed under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. As of June 30, 2003, KU recorded ARO assets in the amount of $8.6 million and liabilities of $19.1 million. KU recorded offsetting regulatory assets of $9.7 million, pursuant to regulatory treatment prescribed under SFAS No. 71. LG&E and KU AROs are primarily related to final retirement of generating units. Assets with associated AROs will no longer include a cost of removal component within their depreciation rate. Assets without associated AROs will continue to be depreciated including a cost of removal component within the depreciation rate. Had SFAS No. 143 been in effect for the 2002 reporting period, the Companies would have established asset retirement obligations as described in the following table (in thousands of $): LG&E KU Provision at January 1, 2002 $8,752 $17,331 Accretion expense 578 1,146 Provision at December 31, 2002 $9,330 $18,477 For the three months and six months ended June 30, 2003, LG&E recorded ARO accretion expense of $154,000 and $308,000, respectively, ARO depreciation expense of $29,000 and $58,000, respectively, and an offsetting regulatory credit in the income statement of $183,000 and $366,000, respectively. For the three months and six months ended June 30, 2003, KU recorded ARO accretion expense of $306,000 and $612,000, respectively, ARO depreciation expense of $44,000 and $88,000, respectively, and an offsetting regulatory credit in the income statement of $350,000 and $700,000, respectively. The recording of the regulatory credit is pursuant to regulatory treatment prescribed under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. SFAS No. 143 has no impact on the results of the operation of the Companies. The Companies adopted EITF No. 98-10, Accounting for Energy Trading and Risk Management Activities, effective January 1, 1999. This pronouncement required that energy trading contracts be marked to market on the balance sheet, with the gains and losses shown net in the income statement. Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. EITF No. 02-03 established the following: - Rescinded EITF No. 98-10, - Contracts that do not meet the definition of a derivative under SFAS No.133 should not be marked to fair market value, and - - Page 17 - - Revenues should be shown in the income statement net of costs associated with trading activities, whether or not the trades are physically settled. With the rescission of EITF No. 98-10, energy trading contracts that do not also meet the definition of a derivative under SFAS No. 133 must be accounted for as executory contracts. Contracts previously recorded at fair value under EITF No. 98-10 that are not also derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, must be restated to historical cost through a cumulative effect adjustment. The rescission of this standard had no impact on financial position or results of operations of the Companies since all contracts marked to market under EITF No. 98-10 are also within the scope of SFAS No. 133. As a result of EITF No. 02-03, the Companies have netted the power purchased expense for trading activities against electric operating revenue to reflect this accounting change. The Companies applied this guidance to all prior periods, which had no impact on previously reported net income or common equity. Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 LG&E: Gross electric operating revenues $180,637 $191,813 $375,930 $358,059 Less costs reclassified from power purchased 6,720 6,588 14,994 11,948 Net electric operating revenues reported $173,917 $185,225 $360,936 $346,111 KU: Gross electric operating revenues $204,675 $203,555 $438,822 $418,723 Less costs reclassified from power purchased 7,501 7,535 16,665 13,679 Net electric operating revenues reported $197,174 $196,020 $422,157 $405,044 Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 LG&E: Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645 Less costs reclassified to revenues 6,720 6,588 14,994 11,948 Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697 KU: Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971 Less costs reclassified to revenues 7,501 7,535 16,665 13,679 Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292 In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 is effective immediately for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim reporting periods beginning after June 15, 2003. - - Page 18 - LG&E has existing $5.875 series mandatorily redeemable preferred stock with 250,000 shares outstanding having a current redemption price of $100 per share. The preferred stock has a sinking fund requirement sufficient to retire a minimum of 12,500 shares on July 15th of each year commencing with July 15, 2003, and a minimum of 187,500 shares on July 15, 2008 at $100 per share. LG&E redeemed 12,500 shares in accordance with these provisions on July 15, 2003. Beginning with the three months ended September 30, 2003, LG&E will reclassify, at fair value, its $5.875 series preferred stock as long-term debt with the minimum shares mandatorily redeemable within one year classified as current portion of long-term debt. Dividends accrued beginning July 1, 2003 will be charged as interest expense. KU has no financial instruments that fall within the scope of SFAS No. 150. 9. On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON affiliate. The term of each loan is ten years and the interest rate is 4.55%. KU had a first mortgage bond of $62 million that matured in June 2003 and LG&E has a first mortgage bond of $42.6 million maturing in August 2003. The Companies expect to refinance these bonds, along with a portion of the notes payable to parent, with additional long- term intercompany loans. The Companies participate in a money pool whereby LG&E Energy can make funds available up to $400 million at market-based rates for each of LG&E and KU. LG&E Energy maintains facilities of $200 million with a Powergen subsidiary and $150 million with an E.ON affiliate to ensure funding availability for the money pool. There was $82 million outstanding under the Powergen line of credit and the balance under E.ON affiliates' line totaled $74.9 million as of June 30, 2003. LG&E Energy has provided loans to LG&E and KU through the money pool that total $171.7 million and $146.4 million, respectively, as of June 30, 2003. These borrowings carried an interest rate based on an index of highly rated commercial paper issuers as of the prior month end of 1.21% at June 30, 2003. 10.In the normal course of business, lawsuits, claims, environmental actions, and various non-ratemaking governmental proceedings arise against LG&E and KU. To the extent that damages are assessed in any of these lawsuits, LG&E and KU believe that their insurance coverage is adequate. Management, after consultation with legal counsel, and based upon the present status of these items, does not anticipate that liabilities arising out of other currently pending or threatened lawsuits and claims of the type referenced above will have a material adverse effect on LG&E's or KU's consolidated financial position or results of operations. LG&E Employment Discrimination Case As previously reported, in October 2001, approximately 30 employees or former employees filed a complaint against LG&E claiming past and current instances of employment discrimination against LG&E. LG&E has removed the case to the U.S. District Court for the Western District of Kentucky and filed an answer denying all plaintiffs' claims. Discovery has commenced in the matter. The court has ordered mediation and certain plaintiffs have settled for non-material amounts as a result of that process. In addition, certain other plaintiffs have sought administrative review before the U.S. Equal Employment Opportunity Commission which has, to date, declined to proceed to litigation on any claims reviewed. Previously amended pleadings, while reducing the size of the plaintiff and defendant groups and eliminating certain prior demands, contain a claimed damage amount of $100 million as well as requests for injunctive relief. During mediation in the first quarter 2003, additional settlements were reached with a number of plaintiffs, including a settlement with the lead plaintiff, which reduced the number of remaining plaintiffs to approximately nine. LG&E intends to continue to defend itself vigorously in the action and management does not anticipate that the outcome will have a material impact on LG&E's operations or financial condition. - - Page 19 - Combustion Turbine Litigation LG&E and KU have filed a lawsuit in the U.S. District Court for the Eastern District of Kentucky against Alstom Power, Inc. (formerly ABB Power Generation, Inc.) ("Alstom") regarding two combustion turbines supplied by Alstom during 1999. These units are installed at KU's E.W. Brown generating plant and beneficial ownership of the combustion turbines is jointly vested in LG&E and KU. The original purchase price for the turbines was approximately $91.8 million. The suit presents warranty, negligence, misrepresentation, fraud and other claims relating to numerous operational defects or deficiencies of the turbines. LG&E and KU have requested rescission of the contract and recovery of all expenditures relating to the turbines. Recently, the court ruled that LG&E and KU cannot pursue rescission on the breach of contract claim, but has not ruled on whether they can seek rescission on the fraud count. In addition, LG&E and KU seek punitive damages. As an alternative to rescission, LG&E and KU have requested relief for amounts incurred or expended to date in connection with operational repairs, cover damages or liquidated damages and other costs, with possible further damages and interest to be proven at trial. The matter is currently in discovery with a trial re-scheduled for the fourth quarter of 2003. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General The following discussion and analysis by management focuses on those factors that had a material effect on LG&E's and KU's financial results of operations and financial condition during the three and six month periods ended June 30, 2003, and should be read in connection with the financial statements and notes thereto. Some of the following discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible," "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include: general economic conditions; business and competitive conditions in the energy industry; changes in federal or state legislation; unusual weather; actions by state or federal regulatory agencies; and other factors described from time to time in LG&E's and KU's reports to the Securities and Exchange Commission, including the report on Form 10-K for year ended December 31, 2002. Results of Operations The results of operations for LG&E and KU are affected by seasonal fluctuations in temperature and other weather-related factors. Because of these and other factors, the results of one interim period are not necessarily indicative of results or trends to be expected for the full year. Three Months Ended June 30, 2003, Compared to Three Months Ended June 30, 2002 LG&E Results: LG&E's net income decreased $7.5 million (49%) for the three months ended June 30, 2003, as compared to the three months ended June 30, 2002, primarily because of a decrease in sales to electric retail consumers due to milder weather experienced in 2003 and a decrease in the price of retail electric sales and higher depreciation and maintenance expenses. - - Page 20 - A comparison of LG&E's revenues for the three months ended June 30, 2003, with the three months ended June 30, 2002, reflects increases and (decreases) which have been segregated by the following principal causes (in thousands of $): Electric Gas Cause Revenues Revenues Retail sales: Fuel and gas supply adjustments $ (5,438) $ 8,733 Environmental cost recovery surcharge (89) - Demand side management cost recovery 279 (51) LG&E/KU merger surcredit 227 - Value delivery surcredit (731) (186) Weather normalization - 588 Variation in sales volume and other (8,286) 1,944 Total retail sales (14,038) 11,028 Wholesale sales 1,527 (428) Gas transportation - net - (28) Other 1,203 (54) Total $(11,308) $10,518 Electric revenues decreased primarily due to lower fuel costs billed to customers and a decrease in retail volumes sold due to a 42% decrease in cooling degree days. These decreases were partially offset by an increase in wholesale sales volumes. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause and increased volumes sold, partially offset by a decrease in volume of wholesale sales. Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating expenses. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply are reflected in retail rates, subject to the approval of the Kentucky Public Service Commission (Kentucky Commission). Fuel for electric generation decreased $4.3 million (8%) for the three months ended due to a decrease in generation ($2.5 million) and a decrease in the cost of coal burned ($1.8 million). Gas supply expenses increased $7.6 million (42%) due to an increase in net gas supply cost ($9.7 million), partially offset by a decrease in the volume of retail gas delivered to the distribution system ($2.1 million). Power purchased increased $1.8 million (12%) due to an increase in the price of power purchased. Other operations expenses decreased $1.4 million (3%), as compared to 2002, primarily due to lower injury and damage liability claims from third parties, $1.9 million. Maintenance expenses increased $2.1 million (14%) primarily due to increased maintenance of gas distribution mains and maintenance of electric distribution lines, $1.9 million. Depreciation and amortization increased $4.4 million (17%) because of additional utility plant in service. - - Page 21 - Variations in income tax expense are largely attributable to changes in pre- tax income. Three Months Three Months Ended Ended June 30, 2003 June 30, 2002 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 6.5 4.3 Amortization of investment tax credit & R&D (9.5) (4.5) Other differences (2.2) (0.4) Effective income tax rate 29.8% 34.4% The amortization of investment tax credit and other differences were approximately the same in both periods, but lower pretax income for the three months ended June 30, 2003, caused the percentage changes to be greater in the 2003 period. KU Results: KU's net income increased $1.4 million (11%) for the three months ended June 30, 2003, as compared to the three months ended June 30, 2002. The increase was mainly due to decreased maintenance expenses due to insurance recovery for expenses associated with a severe ice storm experienced in February 2003 partially offset by increases in depreciation, other operation expenses, power purchased, and fuel. A comparison of KU's revenues for the three months ended June 30, 2003, with the three months ended June 30, 2002, reflects increases and (decreases) which have been segregated by the following principal causes (in thousands of $): Retail sales: Fuel supply adjustments $ (116) Environmental cost recovery surcharge (826) LG&E/KU merger surcredit 76 Value delivery surcredit (403) Earnings sharing mechanism 1,109 Variation in sales volume and other 282 Total retail sales 122 Wholesale sales 2,962 Other (1,930) Total $ 1,154 Electric revenue increased primarily due to an increase in wholesale sales volume. Fuel for electric generation comprises a large component of KU's total operating expenses. KU's electric rates contain a fuel adjustment clause, whereby increases or decreases in the cost of fuel are reflected in retail rates, subject to the approval of the Kentucky Commission, the Virginia State Corporation Commission, and the Federal Energy Regulatory Commission. Fuel for electric generation increased $2.3 million (4%) for the quarter because of an increase in the cost of coal burned ($4.4 million) partially offset by a decrease in generation ($2.1 million) due to temporary plant outages. Power purchased increased $1.3 million (4%) due to an increase in the price of power purchased ($.3 million) and an increase in the volume purchased ($1.0 million). - - Page 22 - Other operation expenses increased $1.9 million (5%) as compared to 2002, due to increased pension (the market value of plan assets has been affected by declines in the equity market) and post-retirement medical expenses ($1.2 million), and increased property insurance ($.5 million). Maintenance expenses decreased $8.0 million (52%) primarily due to an insurance reimbursement of costs incurred in the first quarter of 2003 for repairs to electric distribution equipment due to an ice storm in February 2003 ($8.9 million). Depreciation and amortization increased $4.3 million (18%) because of additional utility plant in service. Variations in income tax expense are largely attributable to changes in pretax income. Three Months Three Months Ended Ended June 30, 2003 June 30, 2002 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 6.5 6.8 Amortization of investment tax credit & R&D (3.1) (3.9) Other differences (4.6) (4.5) Effective income tax rate 33.8% 33.4% Other income - net increased $1.0 million (60%) in 2003 primarily due to an increase in subsidiary earnings, $.6 million, and a decrease in benefit costs, $0.2 million, partially offset by taxes. Interest charges decreased $1.3 million (14%) for the three months ended June 30, 2003 as compared to the three months ended 2002 due primarily to lower interest rates on variable rate debt. The weighted average interest rate on variable-rate bonds for the three months ended June 30, 2003, was 1.14% and the corresponding rate for the three months ended June 30, 2002, was 1.64%. - - Page 23 - Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002 LG&E Results: LG&E's net income decreased $1.2 million (3%) for the six months ended June 30, 2003, as compared to the six months ended June 30, 2002, primarily because of an increase in operations, maintenance, and depreciation expenses partially offset by an increase in sales to gas retail consumers, due to the colder winter experienced in 2003, and increased electric wholesale sales. A comparison of LG&E's revenues for the six months ended June 30, 2003, with the six months ended June 30, 2002, reflects increases and (decreases) which have been segregated by the following principal causes (in thousands of $): Electric Gas Cause Revenues Revenues Retail sales: Fuel and gas supply adjustments $ 611 $24,834 Environmental cost recovery surcharge 1,278 - Demand side management cost recovery 671 397 LG&E/KU merger surcredit (449) - Value delivery surcredit (1,517) (830) Weather normalization - (2,262) Variation in sales volume and other (825) 17,374 Total retail sales (231) 39,513 Wholesale sales 13,596 (6,141) Gas transportation - net - (12) Other 1,460 (136) Total $14,825 $33,224 Electric revenues increased primarily because of an increase in wholesale sales prices ($14.4 million), partially offset by a decrease in wholesale sales volumes ($.8 million). Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause and increased volumes sold due to an increase in heating degree days (19%), partially offset by a decrease in volume of wholesale sales. Fuel for electric generation increased $1.1 million (1%) for the six months because of an increase in the cost of coal burned ($1.1 million). Gas supply expenses increased $30.3 million (30%) due to an increase in net gas supply cost ($21.5 million) and an increase in the volume of retail gas delivered to the distribution system ($13.6 million), partially offset by decreased wholesale gas expenses ($4.8 million). Power purchased increased $7.7 million (23%) because of an increase in the price of power purchased ($9.0 million) partially offset by a decrease in the volume of the purchases ($1.3 million). Other operations expenses increased $3.7 million (4%) in 2003, as compared to 2002, primarily due to higher costs of customer assistance programs ($1.5 million), and increased pension (the market value of plan assets has been affected by declines in the equity market), post-retirement and medical benefits ($2.2 million). Maintenance expenses increased $2.0 million (7%) primarily due to increased maintenance of gas distribution mains and maintenance of electric distribution lines, $1.7 million. Depreciation and amortization increased $6.3 million (12%) because of additional utility plant in service. - -Page 24 - Variations in income tax expense are largely attributable to changes in pre- tax income. Six Months Ended Six Months Ended June 30, 2003 June 30, 2002 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 5.8 5.0 Amortization of investment tax credit & R&D (3.8) (3.7) Other differences (0.8) (0.2) Effective income tax rate 36.2% 36.1% Interest charges decreased $.8 million (5%) due primarily to lower interest rates on variable rate debt. The weighted average interest rate on variable-rate bonds for the six months ended June 30, 2003 was 1.19%, compared to 1.61% for the comparable period in 2002. KU Results: KU's net income decreased $11.1 million (30%) for the six months ended June 30, 2003, as compared to the six months ended June 30, 2002. The decrease was mainly due to expenses associated with a severe ice storm experienced in February 2003, in excess of insurance reimbursements received in June 2003, timing of the performance of annual steam production maintenance and depreciation expense. A comparison of KU's revenues for the six months ended June 30, 2003, with the six months ended June 30, 2002, reflects increases and (decreases) which have been segregated by the following principal causes (in thousands of $): Retail sales: Fuel supply adjustments $ 7,147 Environmental cost recovery surcharge (889) Demand side management cost recovery 337 LG&E/KU merger surcredit (366) Value delivery surcredit (860) Earnings sharing mechanism (1,900) Variation in sales volume and other 11,677 Total retail sales 15,146 Wholesale sales 510 Other 1,457 Total $17,113 Electric revenues increased primarily due to an increase in retail volumes sold due to a 13% increase in heating degree days and higher fuel costs billed to customers. Fuel for electric generation increased $10.3 million (9%) for the six months due to an increase in the cost of coal burned ($11.5 million), offset by a decrease in generation ($1.2 million). Power purchased increased $7.6 million (11%) due to an increase in price of power purchased ($2.8 million) and an increase in volume purchased ($4.8 million) partially as a result of temporary plant outages. - - Page 25 - Other operation expenses increased $6.3 million (9%), primarily due to costs associated with an ice storm ($2.5 million), increased pension (the market value of plan assets has been affected by declines in the equity market) and post-retirement medical expenses ($2.6 million), increased property insurance ($.9 million), and higher electric transmission costs resulting from increased Midwest Independent System Operator (MISO) costs ($.3 million). Maintenance expenses increased $9.4 million (35%) primarily due to repairs to electric distribution equipment due to an ice storm ($4.1 million, net of $8.9 million in insurance reimbursements), and timing of annual maintenance of steam production equipment ($5.7 million). Depreciation and amortization increased $5.3 million (11%) because of additional utility plant in service. Variations in income tax expense are largely attributable to changes in pretax income. Six Months Ended Six Months Ended June 30, 2003 June 30, 2002 Effective Rate Statutory federal income tax rate 35.0% 35.0% State income taxes net of federal benefit 6.7 6.3 Amortization of investment tax credit & R&D (3.4) (3.5) Other differences (4.4) (3.0) Effective income tax rate 33.9% 34.8% Other income - net increased $1.5 million (45%) primarily due to an increase in subsidiary earnings, $.5 million, decreased benefit costs, $.4 million, and gain on energy trading contracts marked to market $.5 million, partially offset by an increase in taxes. Interest charges decreased $1.9 million (13%) due primarily to lower interest rates on variable rate debt. The weighted average interest rate on variable-rate bonds for the six months ended June 30, 2003, was 1.16% and the corresponding rate for the six months ended June 30, 2002, was 1.57%. Liquidity and Capital Resources LG&E and KU's need for capital funds are largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers. Internal and external lines of credit, the accounts receivable securitization programs, and commercial paper programs are maintained to fund short-term capital requirements. Construction expenditures for the six months ended June 30, 2003 for LG&E and KU amounted to $119.4 million and $175.5 million, respectively. Such expenditures related primarily to construction to meet nitrogen oxide (NOx) emission standards and the acquisition of combustion turbines to meet peak power demands. LG&E and KU combustion turbine expenditures for the six months ended June 30, 2003, were $53.3 million and $90.9 million, respectively. The expenditures were financed with internally generated funds, intercompany loans from affiliates, and accounts receivable securitization program funds. See Note 4 of Notes to Financial Statements concerning accounts receivable securitization. LG&E's cash balance decreased $13.9 million during the six months ended June 30, 2003, primarily due to a pension contribution and the purchase of an interest in four combustion turbines financed with intercompany loans. KU's cash balance increased $1.3 million during the six months ended June 30, 2003. The increase reflects cash flows from operations and intercompany loans, partially offset by construction expenditures, including the purchase of an interest in four combustion turbines. - - Page 26 - Variations in accounts receivable, accounts payable and materials and supplies are generally not significant indicators of LG&E's and KU's liquidity. Such variations are primarily attributable to seasonal fluctuations in weather, which have a direct effect on sales of electricity and natural gas. The increase in accounts receivable at LG&E resulted primarily from timing of payments. The decrease in accounts receivable for KU resulted primarily from timing of payments. The decrease in LG&E's gas stored underground relates to seasonal usage of gas. The decrease in the fuel inventory at LG&E resulted from seasonal fluctuations partially offset by increased pricing. The decrease in fuel inventory at KU resulted from seasonal fluctuations. The Companies participate in a money pool whereby LG&E Energy can make funds available up to $400 million at market-based rates for each of LG&E and KU. LG&E Energy maintains facilities of $200 million with a Powergen subsidiary and $150 million with an E.ON affiliate to ensure funding availability for the money pool. There was $82 million outstanding under the Powergen line of credit and the balance under E.ON affiliates' line totaled $74.9 million as of June 30, 2003. LG&E Energy has provided loans to LG&E and KU through the money pool that total $171.7 million and $146.4 million, respectively, as of June 30, 2003. These borrowings carried an interest rate based on an index of highly rated commercial paper issuers as of the prior month end of 1.21% at June 30, 2003. During July 2003, LG&E entered into five 364 day revolving lines of credit that total $185 million. The facilities mature in June and July 2004. On April 30, 2003, a $250 million line of credit of LG&E Energy with an E.ON affiliate expired and was not renewed. On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON affiliate. The term of each loan is ten years and the interest rate is 4.55%. KU had a first mortgage bond of $62 million that matured in June 2003 and LG&E has a first mortgage bond of $42.6 million maturing in August 2003. The Companies expect to refinance these bonds, along with a portion of the notes payable to parent, with additional long-term intercompany loans. Under the provisions of variable-rate pollution control bonds totaling $246.2 million for LG&E and $91.9 million for KU, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt. Should any of the bonds be put to LG&E or KU, funds from the money pool could be used to reacquire the bonds. LG&E's security ratings as of August 4, 2003, were: Moody's S&P Fitch First mortgage bonds A1 A- A+ Preferred stock Baa1 BBB- A- Commercial paper P-1 A-2 F-1 KU's security ratings as of August 4, 2003, were: Moody's S&P Fitch First mortgage bonds A1 A A+ Preferred stock Baa1 BBB- A- Commercial paper P-1 A-2 F-1 - - Page 27 - These ratings reflect the views of Moody's, S&P and Fitch. 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's capitalization ratios at June 30, 2003, and December 31, 2002, follow: June 30, Dec. 31, 2003 2002 Long-term debt (including current portion) 38.8% 35.5% Notes payable 9.3 11.1 Preferred stock 5.1 5.5 Common equity 46.8 47.9 Total 100.0% 100.0% KU's capitalization ratios at June 30, 2003, and December 31, 2002, follow: June 30, Dec. 31, 2003 2002 Long-term debt (including current portion) 34.5% 34.0% Notes payable 9.4 8.1 Preferred stock 2.5 2.7 Common equity 53.6 55.2 Total 100.0% 100.0% New Accounting Pronouncements SFAS No. 143, Accounting for Asset Retirement Obligations, was issued in 2001. SFAS No. 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The effective implementation date for SFAS No. 143 was January 1, 2003. Management has calculated the impact of SFAS No. 143 and the recently released FERC final rule, Accounting, Financial Reporting, and Rate Filing Requirements for Asset Retirement Obligations. As of June 30, 2003, LG&E recorded asset retirement obligation (ARO) assets in the amount of $4.5 million and liabilities of $9.6 million. LG&E recorded offsetting regulatory assets of $5.6 million, pursuant to regulatory treatment prescribed under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. As of June 30, 2003, KU recorded ARO assets in the amount of $8.6 million and liabilities of $19.1 million. KU recorded offsetting regulatory assets of $9.7 million, pursuant to regulatory treatment prescribed under SFAS No. 71. LG&E and KU AROs are primarily related to final retirement of generating units. Assets with associated AROs will no longer include a cost of removal component within their depreciation rate. Assets without associated AROs will continue to be depreciated including a cost of removal component within the depreciation rate. Had SFAS No. 143 been in effect for the 2002 reporting period, the Companies would have established asset retirement obligations as described in the following table ($000): LG&E KU Provision at January 1, 2002 $8,752 $17,331 Accretion expense 578 1,146 Provision at December 31, 2002 $9,330 $18,477 The Companies adopted EITF No. 98-10, Accounting for Energy Trading and Risk Management Activities, effective January 1, 1999. This pronouncement required that energy trading contracts be marked to market on the balance sheet, with the gains and losses shown net in the income statement. - - Page 28 - Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities. EITF No. 02-03 established the following: - Rescinded EITF No. 98-10, - Contracts that do not meet the definition of a derivative under SFAS No. 133 should not be marked to fair market value, and - Revenues should be shown in the income statement net of costs associated with trading activities, whether or not the trades are physically settled. With the rescission of EITF No. 98-10, energy trading contracts that do not also meet the definition of a derivative under SFAS No. 133 must be accounted for as executory contracts. Contracts previously recorded at fair value under EITF No. 98-10 that are not also derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, must be restated to historical cost through a cumulative effect adjustment. The rescission of this standard had no impact on financial position or results of operations of the Companies since all contracts marked to market under EITF No. 98-10 are also within the scope of SFAS No. 133. As a result of EITF No. 02-03, the Companies have netted the power purchased expense for trading activities against electric operating revenue to reflect this accounting change. The Companies applied this guidance to all prior periods, which had no impact on previously reported net income or shareholders' equity. The following tables present the impact of this reclassification (in thousands of $): Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 LG&E: Gross electric operating revenues$180,637 $191,813 $375,930 $358,059 Less costs reclassified 6,720 6,588 14,994 11,948 Net electric operating revenues reported $173,917 $185,225 $360,936 $346,111 KU: Gross electric operating revenues$204,675 $203,555 $438,822 $418,723 Less costs reclassified 7,501 7,535 16,665 13,679 Net electric operating revenues reported $197,174 $196,020 $422,157 $405,044 Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 LG&E: Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645 Less costs reclassified 6,720 6,588 14,994 11,948 Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697 KU: Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971 Less costs reclassified 7,501 7,535 16,665 13,679 Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292 In May 2003, the Financial Accounting Standards Board issued Statement of SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 is effective immediately for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim reporting periods beginning after June 15, 2003. - - Page 29 - LG&E has existing $5.875 series mandatorily redeemable preferred stock with 250,000 shares outstanding having a current redemption price of $100 per share. The preferred stock has a sinking fund requirement sufficient to retire a minimum of 12,500 shares on July 15th of each year commencing with July 15, 2003, and a minimum of 187,500 shares on July 15, 2008 at $100 per share. Beginning with the three months ended September 30, 2003, LG&E will reclassify, at fair value, its $5.875 series preferred stock as long-term debt with the minimum shares mandatorily redeemable within one year classified as current portion of long-term debt. Dividends accrued beginning July 1, 2003 will be charged as interest expense. KU has no financial instruments that fall within the scope of SFAS No. 150. Contingencies For a description of significant contingencies that may affect LG&E and KU, reference is made to Part I, Item 3, Legal Proceedings, and Note 11 to the financial statements contained in LG&E's and KU's Annual Reports on Form 10- K for the year ended December 31, 2002 and to Part II - Item 1, Legal Proceedings herein. Item 3. Quantitative and Qualitative Disclosures About Market Risk. LG&E and KU are exposed to market risks. Both operations are exposed to market risks from changes in interest rates and commodity prices. To mitigate changes in cash flows attributable to these exposures, the Companies have entered into various derivative instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. The Companies use interest rate swaps to hedge exposure to market fluctuations in certain of their debt instruments. Pursuant to the Companies' policies, use of these financial instruments is intended to mitigate risk and earnings volatility and is not speculative in nature. Management has designated all of the Companies' interest rate swaps as hedge instruments. Financial instruments designated as cash flow hedges have resulting gains and losses recorded within other comprehensive income and stockholders' equity. To the extent a financial instrument or the underlying item being hedged is prematurely terminated or the hedge becomes ineffective, the resulting gains or losses are reclassified from other comprehensive income to net income. Financial instruments designated as fair value hedges are periodically marked to market with the resulting gains and losses recorded directly into net income to correspond with income or expense recognized from changes in market value of the items being hedged. The potential change in interest expense associated with a 1% change in base interest rates of LG&E's and KU's unswapped debt is estimated at $5.3 million and $5.5 million, respectively, at June 30, 2003. LG&E's exposure to floating interest rates decreased $18.3 million and KU's exposure to floating interest rates increased $4.3 million during the first six months of 2003. The potential changes in the fair values of the Companies' interest-rate swaps resulting from changes in interest rates and the yield curve also did not change materially during the first six months of 2003. Pension Risk LG&E's and KU's costs of providing defined-benefit pension retirement plans are dependent upon a number of factors, such as the rates of return on plan assets, discount rate, and contributions made to the plans. The market value of LG&E and KU plan assets has been affected by declines in the equity market. As a result, at December 31, 2002, LG&E and KU were required to recognize an additional minimum liability as prescribed by SFAS No. 87 Employers' Accounting for Pensions. The liability was recorded as a reduction to other comprehensive income, and did not affect net income for 2002. The amount of the liability depended upon the asset returns experienced in 2002 and contributions made by LG&E and KU to the plan during 2002. Also, pension cost and cash contributions to the plans could increase in future years without a substantial recovery in the equity markets. If the fair value of the plans assets exceeds the accumulated benefit obligation, the recorded liability will be reduced and other comprehensive income will be restored in the consolidated balance sheet. - - Page 30 - During 2002, the combination of poor market performance and historically low corporate bond rates created a divergence in the potential value of the pension liability and the actual value of the pension assets. However, year-to-date 2003 market performance has been quite strong. Should poor market conditions return these conditions could result in an increase in LG&E's and KU's funded accumulated benefit obligation and future pension expense. The primary assumptions that drive the value of the unfunded accumulated benefit obligation are the discount rate and expected return on plan assets. In January 2003, LG&E and KU made contributions to the pension plan of $83.1 million and $3.5 million, respectively. Energy Trading & Risk Management Activities LG&E and KU conduct energy trading and risk management activities to maximize the value of power sales from physical assets they own, in addition to the wholesale sale of excess asset capacity. Certain energy trading activities are accounted for on a mark-to-market basis in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. Wholesale sales of excess asset capacity are treated as normal sales under SFAS No. 133 and SFAS No. 138 and are not marked to market. The rescission of EITF No. 98-10 for fiscal periods ending after December 15, 2002, had no impact on LG&E's or KU's energy trading and risk management reporting as all contracts marked to market under EITF No. 98-10 are also within the scope of SFAS No. 133. The table below summarizes each LG&E's and KU's energy trading and risk management activities for the three months and six months ended June 30, 2003, and 2002(in thousands of $). Trading volumes are evenly divided between LG&E and KU. Three Months Six Months Ended Ended June 30, June 30, 2003 2002 2003 2002 Fair value of contracts at beginning of period, net asset/(liability) $ 403 $ 12 $ (156) $(186) Fair value of contracts when entered into during the period - 104 2,620 (57) Contracts realized or otherwise settled during the period (226) (31) (283) 335 Changes in fair value due to changes in assumptions 141 (59) (1,863) (66) Fair value of contracts at end of period, net asset/(liability) $ 318 $ 26 $ 318 $ 26 No changes to valuation techniques for energy trading and risk management activities occurred during 2003 or 2002. Changes in market pricing, interest rate and volatility assumptions were made during all periods. All contracts outstanding at June 30, 2003, have a maturity of less than one year and are valued using prices actively quoted for proposed or executed transactions or quoted by brokers. LG&E and KU maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of June 30, 2003, 100% of the trading and risk management commitments were with counterparties rated BBB-/Baa3 equivalent or better. - - Page 31 - Deregulation The electricity industry in Virginia is currently undergoing deregulation which will enable customers to choose their own energy suppliers after January 2004. On March 19, 2003, the Governor of Virginia signed House Bill 2367, the "Electric Utility Restructuring Suspension," which suspends Kentucky Utilities/Old Dominion Power from Virginia electric utility restructuring until such time as retail choice is offered to other customers in the United States. Item 4. Controls and Procedures. LG&E and KU maintain a system of disclosure controls and procedures designed to ensure that information required to be disclosed by the Companies in reports they file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission rules and forms. LG&E and KU conducted an evaluation of such controls and procedures under the supervision and with the participation of the Companies' management, including the Chairman, President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"). Based upon that evaluation, the CEO and CFO are of the conclusion that the Companies' disclosure controls and procedures are effective as of the end of the period covered by this report. There has been no change in the Companies' internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2003, that has materially affected, or is reasonably likely to materially affect, the Companies' internal control over financial reporting. - - Page 32 - Part II. Other Information Item 1. Legal Proceedings. For a description of the significant legal proceedings involving LG&E and KU, reference is made to the information under the following items and captions of LG&E's and KU's (A) respective combined Annual Report on Form 10-K for the year ended December 31, 2002: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations; Notes 3 and 11 of LG&E's Notes to Financial Statements under Item 8 and Notes 3 and 11 of KU's Notes to Financial Statements under Item 8; and (B) respective combined Quarterly Report on Form 10Q for the quarter ended March 31, 2003: Item 1 of Part II Legal Proceedings. Except as described herein, to date, the proceedings reported in LG&E's and KU's respective combined Annual Report on Form 10-K have not changed materially. LG&E Employment Discrimination Case As previously reported, in October 2001, approximately 30 employees or former employees filed a complaint against LG&E claiming past and current instances of employment discrimination against LG&E. LG&E has removed the case to the U.S. District Court for the Western District of Kentucky and filed an answer denying all plaintiffs' claims. Discovery has commenced in the matter. The court has ordered mediation and certain plaintiffs have settled for non-material amounts as a result of that process. In addition, certain other plaintiffs have sought administrative review before the U.S. Equal Employment Opportunity Commission which has, to date, declined to proceed to litigation on any claims reviewed. Previously amended pleadings, while reducing the size of the plaintiff and defendant groups and eliminating certain prior demands, contain a claimed damage amount of $100 million as well as requests for injunctive relief. During mediation in the first quarter 2003, additional settlements were reached with a number of plaintiffs, including a settlement with the lead plaintiff, which reduced the number of remaining plaintiffs to approximately nine. LG&E intends to continue to defend itself vigorously in the action and management does not anticipate that the outcome will have a material impact on LG&E's operations or financial condition. Combustion Turbine Litigation LG&E and KU have filed a lawsuit in the U.S. District Court for the Eastern District of Kentucky against Alstom Power, Inc. (formerly ABB Power Generation, Inc.) ("Alstom") regarding two combustion turbines supplied by Alstom during 1999. These units are installed at KU's E.W. Brown generating plant and beneficial ownership of the combustion turbines is vested in LG&E and KU. The original purchase price for the turbines was approximately $91.8 million. The suit presents warranty, negligence, misrepresentation, fraud and other claims relating to numerous operational defects or deficiencies of the turbines. LG&E and KU have requested rescission of the contract and recovery of all expenditures relating to the turbines. Recently, the court ruled that LG&E and KU cannot pursue rescission on the breach of contract claim, but has not ruled on whether they can seek rescission on the fraud count. In addition, LG&E and KU seek punitive damages. As an alternative to rescission, LG&E and KU have requested relief for amounts incurred or expended to date in connection with operational repairs, cover damages or liquidated damages and other costs, with possible further damages and interest to be proven at trial. The matter is currently in discovery with a trial re-scheduled for the fourth quarter of 2003. - - Page 33 - Item 6(a). Exhibits. Applicable to Form 10-Q of Exhibit No. LG&E KU Description 31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002 31.1 X Certification of Chairman of the Board, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 X Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.3 X Certification of Chairman of the Board, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.4 X Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Item 6(b). Reports on Form 8-K. On May 14, 2003, LG&E and KU filed a Current Report on Form 8-K, submitting certifications of the Chairman, President and Chief Executive Officer and the Chief Financial Officer of each company, respectively, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 regarding the Companies' Quarterly Reports on Form 10-Q for the period ended March 31, 2003. - - Page 34 - SIGNATURES Pursuant to the requirements of the Securities 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 13, 2003 /s/ S. Bradford Rives S. Bradford Rives Senior Vice President, Finance and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities 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 13, 2003 /s/ S. Bradford Rives S. Bradford Rives Senior Vice President, Finance and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - - Page 35 - Exhibit 31 - CERTIFICATIONS Exhibit 31.1 Louisville Gas and Electric Company I, Victor A. Staffieri, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and Electric Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 ____________________ Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer - - Page 36 - Exhibit 31.2 Louisville Gas and Electric Company I, Richard Aitken-Davies, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas and Electric Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 ___________________ Richard Aitken-Davies Chief Financial Officer - - Page 37 - Exhibit 31.3 Kentucky Utilities Company I, Victor A. Staffieri, Chairman of the Board, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 _____________________ Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer - - Page 38 - Exhibit 31.4 Kentucky Utilities Company I, Richard Aitken-Davies, Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 ____________________ Richard Aitken-Davies Chief Financial Officer - - Page 39 - Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Louisville Gas and Electric Company and Kentucky Utilities Company (the "Companies") on Form 10-Q for the period ended June 30, 2003, as filed with the Securities and Exchange Commission (the "Report"), each of the undersigned does hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge, 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Companies as of the dates and for the period expressed in the Report. August 13, 2003 /s/ Victor A. Staffieri Chairman of the Board, President and Chief Executive Officer Louisville Gas and Electric Company Kentucky Utilities Company /s/ Richard Aitken-Davies Chief Financial Officer Louisville Gas and Electric Company Kentucky Utilities Company The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. - - Page 40 - -----END PRIVACY-ENHANCED MESSAGE-----