-----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, Qn4BzruFOKQHHm3l8HI3Kq9u6FPSk0L2amKnbA9A9CZDUJ7tqW3Y5CrlEr6KncKH 1B9yN5tXCK3LApQW2Fz6fg== 0000861388-99-000011.txt : 19990816 0000861388-99-000011.hdr.sgml : 19990816 ACCESSION NUMBER: 0000861388-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LG&E ENERGY CORP CENTRAL INDEX KEY: 0000861388 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 611174555 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 99688801 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 99688802 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 99688803 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 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, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification No. 1-10568 LG&E Energy Corp. 61-1174555 (A Kentucky Corporation) 220 West Main Street P.O. Box 32030 Louisville, Ky. 40232 (502) 627-2000 2-26720 Louisville Gas and Electric Company 61-0264150 (A Kentucky Corporation) 220 West Main Street P.O. Box 32010 Louisville, Ky. 40232 (502) 627-2000 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: LG&E Energy Corp. 129,677,030 shares, without par value, as of July 30, 1999. Louisville Gas and Electric Company 21,294,223 shares, without par value, as of July 30, 1999, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of July 30, 1999, all held by LG&E Energy Corp. This combined Form 10-Q is separately filed by LG&E Energy Corp., Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein related to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. In particular, information contained herein related to LG&E Energy Corp. or any of its direct or indirect subsidiaries other than Louisville Gas and Electric Company or Kentucky Utilities Company is provided solely by LG&E Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities Company, and shall be deemed not included in the Form 10-Q of Louisville Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company. TABLE OF CONTENTS PART I Item 1 Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income 1 Consolidated Balance Sheets 3 Consolidated Statements of Cash Flows 5 Consolidated Statements of Retained Earnings 7 Consolidated Statements of Comprehensive Income 8 Louisville Gas and Electric Company Statements of Income 9 Balance Sheets 10 Statements of Cash Flows 12 Statements of Retained Earnings 13 Statements of Comprehensive Income 14 Kentucky Utilities Company Statements of Income 15 Balance Sheets 16 Statements of Cash Flows 18 Statements of Retained Earnings 19 Notes to Financial Statements 20 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 30 Item 3 Quantitative and Qualitative Disclosures About Market Risk 44 PART II Item 1 Legal Proceedings 45 Item 4 Submission of Matters to a Vote of Security Holders 45 Item 6 Exhibits and Reports on Form 8-K 47 Signatures 49 Part I. Financial Information - Item 1. Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (Unaudited - Thousands of $ Except Per Share Data) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 REVENUES: Electric utility $ 406,258 $ 358,471 $ 767,931 $ 682,266 Gas utility 23,652 26,540 99,431 119,299 International and non-utility 193,747 87,177 355,560 151,187 Total revenues 623,657 472,188 1,222,922 952,752 OPERATING EXPENSES: Fuel and power purchased 250,994 136,175 456,082 251,940 Gas supply expenses 56,920 63,691 151,984 167,534 Utility operation and maintenance 115,192 110,081 218,897 213,064 International and non- utility operation and maintenance 47,434 22,985 92,398 39,904 Depreciation and amortization 53,479 51,286 108,215 103,652 Merger costs to achieve - 65,318 - 65,318 Total operating expenses 524,019 449,536 1,027,576 841,412 Equity in earnings of unconsolidated ventures (Notes 5 and 6) 12,051 50,882 33,707 56,863 OPERATING INCOME 111,689 73,534 229,053 168,203 Other income and (deductions) 2,611 (4,971) 8,999 (2,268) Interest charges and preferred dividends 32,243 26,061 62,763 52,294 Minority interest 3,842 3,302 5,413 4,645 Income before income taxes 78,215 39,200 169,876 108,996 Income taxes 28,250 26,197 63,132 49,775 Income from continuing operations $ 49,965 $ 13,003 $ 106,744 $ 59,221 - 1 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Income from continuing operations $ 49,965 $ 13,003 $ 106,744 $ 59,221 Loss from discontinued operations, net of income tax expense benefit of $12,924 and $15,008 (Notes 2 and 3) - (19,802) - (22,852) Income (loss) on disposal of dis- continued operations, net of income tax benefit (expense) of $125,000, $(328) and $125,000 (Notes 2 and 3) - (225,000) 788 (225,000) Income (loss) before cum- ulative effect of change in accounting principle 49,965 (231,799) 107,532 (188,631) Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $5,061 - - - (7,162) NET INCOME (LOSS) $ 49,965 $(231,799) $ 107,532 $(195,793) Average common shares outstanding 129,677 129,683 129,677 129,683 Earnings (loss) per share - basic and diluted: Continuing operations $ .39 $ .10 $ .82 $ .46 Discontinued operations .00 (.16) .00 (.18) Income (loss) on dis- posal of discontinued operations .00 (1.73) .01 (1.73) Cumulative effect of accounting change .00 .00 .00 (.06) Total $ .39 $ (1.79) $ .83 $ (1.51) The accompanying notes are an integral part of these financial statements. - 2 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $) ASSETS (Unaudited) June 30, Dec. 31, 1999 1998 CURRENT ASSETS: Cash and temporary cash investments $ 139,417 $ 105,726 Marketable securities 13,620 20,862 Accounts receivable - less reserve 315,366 293,219 Materials and supplies - primarily at average cost: Fuel (predominantly coal) 96,839 78,855 Gas stored underground 19,223 39,249 Other 69,177 72,457 Net assets of discontinued opera- tions (Notes 2 and 3) - 3,219 Prepayments and other 48,885 38,287 Total current assets 702,527 651,874 UTILITY PLANT: At original cost 5,676,590 5,581,667 Less: reserve for depreciation 2,438,160 2,352,306 Net utility plant 3,238,430 3,229,361 OTHER PROPERTY AND INVESTMENTS - LESS RESERVES: Investment in unconsolidated ventures (Notes 5 and 6) 229,173 167,877 Non-utility property and plant, net 466,127 447,372 Other 164,821 117,321 Total other property and investments 860,121 732,570 DEFERRED DEBITS AND OTHER ASSETS 210,827 214,152 Total assets $5,011,905 $4,827,957 The accompanying notes are an integral part of these financial statements. - 3 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (cont.) (Thousands of $) CAPITAL AND LIABILITIES (Unaudited) June 30, Dec. 31, 1999 1998 CURRENT LIABILITIES: Long-term debt due within one year $ 61,500 $ - Notes payable 311,034 365,135 Accounts payable 218,415 243,968 Net liabilities of discontinued oper- ations (Notes 2 and 3) 17,197 - Other 312,039 242,479 Total current liabilities 920,185 851,582 Long-term debt 1,599,348 1,510,775 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 567,691 570,698 Investment tax credit, in process of amortization 89,860 93,844 Regulatory liability 104,875 109,411 Other 210,761 206,064 Total deferred credits and other liabilities 973,187 980,017 Minority interests 111,031 107,815 Cumulative preferred stock 135,328 136,530 COMMON EQUITY: Common stock, without par value - 129,677,030 shares outstanding 778,273 778,273 Other 494 (3,314) Retained earnings 494,059 466,279 Total common equity 1,272,826 1,241,238 Total liabilities and capital $5,011,905 $4,827,957 The accompanying notes are an integral part of these financial statements. - 4 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited - Thousands of $) Six Months Ended June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 107,532 $ (195,793) Items not requiring cash currently: Depreciation and amortization 108,215 103,652 Deferred income taxes - net (4,752) (5,614) Loss from discontinued operations (Notes 2 and 3) - 22,852 Loss (gain) on disposal of discon- tinued operations (Notes 2 and 3) (788) 225,000 Cumulative effect of change in accounting principle - 7,162 Other (24,170) (24,687) Change in net current assets 44,859 85,425 Other 23,977 (28,372) Net cash flows from operating activities 254,873 189,625 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (652) (4,451) Proceeds from sales of securities 7,871 1,820 Construction expenditures (199,770) (93,620) Investments in unconsolidated ventures (Note 5) (74,498) (1,294) Proceeds from sale of investment in affiliate (Note 6) 33,821 16,000 Net cash flows from investing activities (233,228) (81,545) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes 150,000 150,000 Retirement of bonds - (20,021) Short-term borrowings 756,132 2,074,643 Repayment of short-term borrowings (813,132)(2,262,624) Redemption of preferred stock (1,202) (1,823) Payment of common dividends (79,752) (62,275) Net cash flows from financing activities 12,046 (122,100) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 33,691 (14,020) BEGINNING CASH AND TEMPORARY CASH INVESTMENTS 105,726 111,512 ENDING CASH AND TEMPORARY CASH INVESTMENTS $ 139,417 $ 97,492 - 5 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (cont.) (Unaudited - Thousands of $) Six Months Ended June 30, 1999 1998 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 9,375 $ 35,534 Interest on borrowed money 53,857 45,331 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 6 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Retained Earnings (Unaudited - Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Balance at beginning of period $ 483,970 $ 721,780 $ 466,279 $ 722,584 Net income (loss) 49,965 (231,799) 107,532 (195,793) Cash dividends declared on common stock ($.30750, $.34123, $.61500 and $.62509 per share) 39,876 44,252 79,752 81,062 Balance at end of period $ 494,059 $ 445,729 $ 494,059 $ 445,729 The accompanying notes are an integral part of these financial statements. - 7 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Net income (loss) $49,965 $(231,799) $107,532 $(195,793) Unrealized holding gains (losses) on available-for-sale securities arising during the period (155) 22 37 8 Reclassification adjustment for realized gains and losses on available-for-sale securities included in net income (163) (77) (158) 34 Other comprehensive income (loss), before tax (318) (55) (121) 42 Income tax (expense) benefit related to items of other comprehensive income 110 22 46 (15) Comprehensive income (loss) $49,757 $(231,832) $107,457 $(195,766) The accompanying notes are an integral part of these financial statements. - 8 - Louisville Gas and Electric Company Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 OPERATING REVENUES: Electric $190,445 $174,849 $341,286 $315,435 Gas 23,652 26,540 99,431 119,298 Total operating revenues 214,097 201,389 440,717 434,733 OPERATING EXPENSES: Fuel for electric generation 39,380 41,242 71,838 77,283 Power purchased 30,858 15,227 53,884 24,826 Gas supply expenses 13,395 16,282 63,887 80,359 Other operation expenses 39,457 40,506 79,649 80,874 Maintenance 20,227 13,054 34,930 23,319 Depreciation and amortization 24,143 23,294 48,285 46,589 Federal and state income taxes 12,079 13,664 21,634 26,082 Property and other taxes 3,962 4,491 8,998 9,446 Total operating expenses 183,501 167,760 383,105 368,778 NET OPERATING INCOME 30,596 33,629 57,612 65,955 Merger costs to achieve - 34,134 - 34,134 Other income 234 9,998 1,312 10,309 Interest charges 8,790 9,472 17,968 18,710 NET INCOME 22,040 21 40,956 23,420 Preferred stock dividends 1,086 1,143 2,176 2,266 NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ 20,954 $ (1,122) $ 38,780 $ 21,154 The accompanying notes are an integral part of these financial statements. - 9 - Louisville Gas and Electric Company Balance Sheets (Thousands of $) ASSETS (Unaudited) June 30, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $2,952,536 $2,896,139 Less: reserve for depreciation 1,188,585 1,144,123 Net utility plant 1,763,951 1,752,016 OTHER PROPERTY AND INVESTMENTS - less reserve 1,239 1,154 CURRENT ASSETS: Cash and temporary cash investments 36,150 31,730 Marketable securities 10,394 17,851 Accounts receivable - less reserve 158,278 142,580 Materials and supplies - at average cost: Fuel (predominantly coal) 18,513 23,993 Gas stored underground 13,203 33,485 Other 34,018 33,103 Prepayments and other 5,145 2,285 Total current assets 275,701 285,027 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,763 5,919 Regulatory assets 35,292 37,643 Other 17,665 22,878 Total deferred debits and other assets 58,720 66,440 Total assets $2,099,611 $2,104,637 The accompanying notes are an integral part of these financial statements. - 10 - Louisville Gas and Electric Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) June 30, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Retained earnings 242,242 247,462 Other (842) (786) Total common equity 666,570 671,846 Cumulative preferred stock 95,328 95,328 Long-term debt 626,800 626,800 Total capitalization 1,388,698 1,393,974 CURRENT LIABILITIES: Accounts payable 123,201 133,673 Provision for rate refunds 11,169 13,261 Dividends declared 23,086 23,168 Accrued taxes 45,749 31,929 Accrued interest 8,013 8,038 Other 17,772 15,242 Total current liabilities 228,990 225,311 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 252,256 254,589 Investment tax credit, in process of amortization 69,397 71,542 Accumulated provision for pensions and related benefits 60,177 59,529 Regulatory liability 61,684 63,529 Other 38,409 36,163 Total deferred credits and other liabilities 481,923 485,352 Total capital and liabilities $2,099,611 $2,104,637 The accompanying notes are an integral part of these financial statements. - 11 - Louisville Gas and Electric Company Statements of Cash Flows (Unaudited - Thousands of $) Six Months Ended June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 40,956 $ 23,420 Items not requiring cash currently: Depreciation and amortization 48,285 46,589 Deferred income taxes - net (3,982) 2,460 Investment tax credit - net (2,145) (2,156) Other 3,585 2,008 Changes in current assets and liabilities: Accounts receivable (15,698) (4,704) Materials and supplies 24,847 19,205 Provision for rate refunds (2,092) (2,544) Accounts payable (10,472) 6,850 Accrued taxes 13,820 (861) Prepayments and other (355) 3,759 Other 6,319 17,647 Net cash flows from operating activities 103,068 111,673 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (495) (3,550) Proceeds from sales of securities 7,861 933 Construction expenditures (59,757) (48,031) Net cash flows from investing activities (52,391) (50,648) CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of first mortgage bonds - (20,000) Payment of dividends (46,257) (42,075) Net cash flows from financing activities (46,257) (62,075) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 4,420 (1,050) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 31,730 50,472 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 36,150 $ 49,422 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 16,065 $ 23,121 Interest on borrowed money 16,657 17,357 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 12 - Louisville Gas and Electric Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Balance at beginning of period $243,288 $261,386 $247,462 $258,910 Net income 22,040 21 40,956 23,420 Subtotal 265,328 261,407 288,418 282,330 Cash dividends declared on stock: 5% cumulative preferred 269 269 538 538 Auction rate cumulative preferred 450 507 904 994 $5.875 cumulative preferred 367 367 734 734 Common 22,000 21,200 44,000 41,000 Subtotal 23,086 22,343 46,176 43,266 Balance at end of period $242,242 $239,064 $242,242 $239,064 The accompanying notes are an integral part of these financial statements. - 13 - Louisville Gas and Electric Company Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Net income (loss) available for common stock $20,954 $(1,122) $38,780 $21,154 Unrealized holding gains (losses) on available-for-sale securities arising during the period (178) 33 (94) 6 Reclassification adjustment for realized gains and losses on available-for-sale securities included in net income - (66) - - Other comprehensive income (loss), before tax (178) (33) (94) 6 Income tax (expense) benefit related to items of other comprehensive income 72 13 38 (3) Comprehensive income (loss) $20,848 $(1,142) $38,724 $21,157 The accompanying notes are an integral part of these financial statements. - 14 - Kentucky Utilities Company Statements of Income (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 OPERATING REVENUES $225,794 $193,079 $443,143 $376,298 OPERATING EXPENSES: Fuel for electric generation 49,412 54,690 107,567 103,037 Power purchased 51,606 24,602 90,923 42,591 Other operation expenses 31,812 31,458 58,955 61,431 Maintenance 15,944 16,615 28,464 29,948 Depreciation 22,158 21,617 44,149 43,103 Federal and state income taxes 16,077 11,731 33,221 26,699 Property and other taxes 3,788 4,222 7,901 8,310 Total operating expenses 190,797 164,935 371,180 315,119 NET OPERATING INCOME 34,997 28,144 71,963 61,179 Merger costs to achieve - 21,830 - 21,830 Other income and (deductions) 1,993 2,193 4,162 3,907 Interest charges 9,233 9,626 18,740 19,326 NET INCOME (LOSS) 27,757 (1,119) 57,385 23,930 Preferred stock dividends 564 564 1,128 1,128 NET INCOME (LOSS) AVAILABLE FOR COMMON STOCK $ 27,193 $ (1,683) $ 56,257 $ 22,802 The accompanying notes are an integral part of these financial statements. - 15 - Kentucky Utilities Company Balance Sheets (Thousands of $) ASSETS (Unaudited) June 30, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $2,724,054 $2,685,528 Less: reserve for depreciation 1,249,575 1,208,183 Net utility plant 1,474,479 1,477,345 OTHER PROPERTY AND INVESTMENTS - less reserve 14,641 14,238 CURRENT ASSETS: Cash and temporary cash investments 58,980 59,071 Accounts receivable - less reserve 126,797 106,003 Materials and supplies - at average cost: Fuel (predominantly coal) 33,731 23,927 Other 25,576 24,877 Prepayments 5,545 2,427 Total current assets 250,629 216,305 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,027 5,227 Regulatory assets 25,716 28,228 Other 22,887 19,859 Total deferred debits and other assets 53,630 53,314 Total assets $1,793,379 $1,761,202 The accompanying notes are an integral part of these financial statements. - 16 - Kentucky Utilities Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) June 30, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Retained earnings 319,424 299,168 Other (595) (595) Total common equity 626,969 606,713 Cumulative preferred stock 40,000 40,000 Long-term debt 484,830 546,330 Total capitalization 1,151,799 1,193,043 CURRENT LIABILITIES: Long-term debt due within one year 61,500 - Accounts payable 102,127 100,012 Provision for rate refunds 21,500 21,500 Dividends declared 18,188 18,188 Accrued taxes 25,698 16,733 Accrued interest 7,625 8,110 Other 33,394 31,226 Total current liabilities 270,032 195,769 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 244,970 244,493 Investment tax credit, in process of amortization 20,463 22,302 Accumulated provision for pensions and related benefits 54,630 50,044 Regulatory liability 43,191 45,882 Other 8,294 9,669 Total deferred credits and other liabilities 371,548 372,390 Total capital and liabilities $1,793,379 $1,761,202 The accompanying notes are an integral part of these financial statements. - 17 - Kentucky Utilities Company Statements of Cash Flows (Unaudited - Thousands of $) Six Months Ended June 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 57,385 $ 23,930 Items not requiring cash currently: Depreciation and amortization 44,149 43,103 Deferred income taxes - net (2,214) (188) Investment tax credit - net (1,839) (1,922) Changes in current assets and liabilities: Accounts receivable (20,794) (18,474) Materials and supplies (10,503) 2,025 Accounts payable 2,115 33,275 Accrued taxes 8,965 11,344 Prepayments and other (3,603) 1,829 Other 7,658 (4,010) Net cash flows from operating activities 81,319 90,912 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (44,282) (32,932) Net cash flows from investing activities (44,282) (32,932) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings - 381,500 Repayments of short-term borrowings - (415,100) Payment of dividends (37,128) (23,819) Net cash flows from financing activities (37,128) (57,419) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (91) 561 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 59,071 5,453 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 58,980 $ 6,014 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 30,273 $ 17,033 Interest on borrowed money 17,632 17,925 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 18 - Kentucky Utilities Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Balance at beginning of period $310,231 $312,216 $299,167 $304,750 Net income (loss) 27,757 (1,119) 57,385 23,930 Subtotal 337,988 311,097 356,552 328,680 Cash dividends declared on stock: 4 75% preferred 237 237 475 475 6.53% preferred 327 327 653 653 Common 18,000 23,071 36,000 40,090 Subtotal 18,564 23,635 37,128 41,218 Balance at end of period $319,424 $287,462 $319,424 $287,462 The accompanying notes are an integral part of these financial statements. - 19 - LG&E Energy Corp. and Subsidiaries Louisville Gas and Electric Company Kentucky Utilities Company Notes to Financial Statements (Unaudited) 1. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation (the Merger). The accompanying unaudited consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a subsidiary of LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU Energy, were not affected by the Merger. KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the surviving corporation. The consolidated financial statements include the accounts of LG&E Energy, LG&E, Capital Corp., and KU and their respective wholly-owned subsidiaries, collectively referred to herein as the "Company." All significant intercompany items and transactions have been eliminated from the unaudited consolidated financial statements. In the opinion of management, all adjustments, including those of a normal recurring nature, have been made to present fairly the consolidated financial position, results of operations and cash flows for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. See the Company's, LG&E's and KU's Reports on Form 10-K for 1998 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Company. 2. Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize the value of - 20 - power sales from physical assets it owns or controls, including LG&E, KU and Western Kentucky Energy (WKE). At the time the Company decided to discontinue its merchant energy trading and sales business, it also decided to sell its natural gas gathering and processing business. Subsequently, effective June 30, 1999, the Company decided to retain this business. The accompanying financial statements reflect the reclassification of the natural gas gathering and processing business as continuing operations for all periods presented. See Note 3 below. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believes to be appropriate estimates for future energy prices, among other factors, to calculate the net realizable value of discontinued operations, it also recognizes that there are inherent limitations in models to accurately predict future events. As a result, there is no guarantee that higher-than- anticipated future commodity prices or load demands, lower-than- estimated asset sales prices or other factors could not result in additional losses. The Company has been successful in settling portions of its discontinued operations, but significant assets, operations and obligations remain. As of July 28, 1999, the Company estimates that a $1 change in electricity prices and a 10 cent change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $8.8 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of July 28, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $11.7 million. Operating results for discontinued operations follow. All amounts exclude the Company's natural gas gathering and processing business. The Company charged its loss from discontinued operations for the three- and six-month periods ended June 30, 1999, to accrued loss on disposal of discontinued operations. Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Revenues $156,345 $684,918 $289,782 $1,595,792 Loss before taxes (21,786) (32,726) (26,723) (37,860) Loss from discontinued operations, net of income taxes (13,070) (19,802) (15,991) (22,852) - 21 - Net liabilities of discontinued operations at June 30, 1999, follow. All amounts exclude the Company's natural gas gathering and processing business. Cash and temporary cash investments $ 3,301 Accounts receivable 117,709 Price risk management assets 78,237 Accounts payable (132,937) Price risk management liabilities (25,925) Goodwill and other assets and liabilities, net 41,320 Net assets before accrued loss on disposal of dis- continued operations 81,705 Accrued loss on disposal of discontinued operations, net of income tax benefit of $57,233 (98,902) Net liabilities of discon- tinued operations $(17,197) Total charges against the accrued loss on disposal of discontinued operations through June 30, 1999, include $105.7 million for commitments prior to disposal, $51.2 million for transaction settlements, $11.1 million for goodwill, and $23.2 million for other exit costs. The reserve as of June 30, 1999, represents management's best estimate of the loss from remaining discontinued operations until disposal and the costs of disposing of these operations. As of June 30, 1999, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 28.0 million MWh's of power and 24.8 million MMBTU's of natural gas with a volumetric weighted-average period of approximately 38 and 53 months, respectively. These notional amounts are based on estimated loads since various commitments do not include specified firm volumes. The Company is also under contract to buy or sell immaterial amounts of coal and SO2 allowances in support of its power contracts. Notional amounts reflect the nominal volume of transactions included in the Company's price risk management commitments, but do not reflect actual amounts of cash, financial instruments, or quantities of the underlying commodity which may ultimately be exchanged between the parties. - 22 - The fair values of discontinued operations' price risk management assets and liabilities as of June 30, 1999, follow (in thousands of $): Liabil- Commodity Assets ities Electricity $ 76,247 $ 25,522 Natural gas 1,990 - Totals 78,237 25,522 Reserves - 403 Net values $ 78,237 $ 25,925 The average fair values of discontinued operations' price risk management assets and liabilities for the three- and six-month periods ended June 30, 1999, follow (in thousands of $): Three Months Six Months Liabil- Liabil- Commodity Assets ities Assets ities Electricity $ 80,036 $ 26,265 $ 80,601 $ 27,177 Natural gas 2,180 - 6,690 - Totals $ 82,216 $ 26,265 $ 87,291 $ 27,177 The above tables above do not include the fair value of various transactions not previously recorded using mark-to-market accounting since these transactions commit the Company to the sale or purchase of electricity or natural gas without specified firm volumes. The fair values above are based on quotes from exchanges and over-the- counter markets, price volatility factors, the use of established pricing models and the time value of money. They also reflect management estimates of counterparty credit risk, location differentials and the potential impact of liquidating the Company's position in an orderly manner over a reasonable period of time under present market conditions. If the Company is unable to dispose of its remaining commitments, it will continue to meet its obligations through the terms of the contracts. The net fair value of these commitments as of June 30, 1999, are currently estimated to be approximately $56.7 million in 1999, $14.3 million to $38.5 million each year in 2000 through 2004, and $6.3 million for later years. The Company's discontinued operations maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of June 30, 1999, over 88% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of June 30, 1999, seven counterparties represented 79% of the Company's price risk management commitments. 3. Effective June 30, 1999, the Company reclassified its natural gas gathering and processing business to continuing operations from discontinued operations, as required by accounting standards. The Company did not dispose of this business during the one-year period as required by accounting standards because of management's expectation of more favorable future energy prices and the related impact on this business. The Company has reflected the operating results and net assets of the natural gas gather - 23 - ing and processing business as continuing operations in the accompanying financial statements for all periods presented. Operating results for the natural gas gathering and processing business follow. Year Ended December 31, 1998 1997 1996 Revenues $109,833 $107,691 $85,259 Income (loss) before taxes (2,593) 2,829 4,888 Net income (loss) (1,599) 1,323 2,873 Three Months Six Months Ended Ended June 30, June 30, 1999 1998 1999 1998 Revenues $42,135 $31,051 $75,437 $60,891 Income (loss) before taxes 266 (289) (850) (646) Net income (loss) 40 (291) (748) (747) Net assets of the natural gas gathering and processing business follow. June 30, Dec. 31, Dec. 31, 1999 1998 1997 Cash and temporary cash investments $ 141 $ - $ 509 Accounts receivable 16,622 7,425 13,948 Non-utility property and plant, net 158,783 161,473 171,114 Accounts payable (13,211) (6,148) (13,449) Goodwill and other assets and liabilities, net (20,617) (22,318) (20,043) Net assets $141,718 $140,432 $152,079 The Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. No loss on disposal of the net assets of the natural gas gathering and processing business was included because the Company assumed it would sell these assets for an amount equal to or greater than book value. It also included an after-tax reserve of approximately $1.6 million for estimated losses from operations of the natural gas gathering and processing business through the date of disposal. Since this amount equaled the estimated losses from operations included in the original accrued loss on disposal of discontinued operations, no reversal of the accrued loss is included in income for the three- and six-month periods ended June 30, 1999. The Company has recorded no impairment losses related to the net assets of its natural gas gathering and processing business. 4. On July 8, 1999, the Company purchased 100% of the outstanding common stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial consideration of $45.6 million and retirement of approximately $37.9 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. The purchase agreement provides for future annual earn-out payments to the previous owners based on CRC's meeting certain financial targets over the next three years. The agreement capped the total of these payments at $31.0 million. The Company accounted for the - 24 - acquisition using the purchase method and management expects to record goodwill of approximately $47 million from the initial transaction with additional goodwill recorded contingent upon future earn-out payments. Goodwill will be amortized over a period of twenty years. The purchase consideration, including the potential earn-out payments, will be paid 55% in cash and 45% in LG&E Energy common stock. LG&E Energy will repurchase common stock from time to time in the open market or through privately negotiated transactions in amounts equal to the stock portions of the initial and subsequent earn-out payments. During the third quarter 1999, the Company purchased approximately 935,000 shares in this regard and completed the initial purchase installment. 5. On March 30, 1999, the Company acquired an indirect 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $73.5 million, including transaction costs, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company accounted for the acquisition using the purchase method, and it records its share of earnings using the equity method. The purchase price exceeded the underlying equity in BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their estimated fair values. 6. On March 15, 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which the Company owns a 50% interest, sold substantially all the assets and major contracts of its 79 MW gas-fired cogeneration facility in Rensselaer, New York, with net proceeds to the Company of approximately $34 million. The sale resulted in an after- tax gain to the Company of approximately $8.9 million. 7. The Company adopted Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10) in the first quarter of 1999. The task force concluded that energy trading contracts should be recorded using mark-to-market valuation on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines energy trading to include certain financial activities related to physical assets which were not previously marked to market by established industry practice. Initial adoption of EITF No. 98-10 did not have a material impact on the Company's consolidated results of operations or financial position. For the quarter ended June 30, 1999, the Company recorded approximately $6.9 million in consolidated pre-tax income as a result of valuing the Company's electric energy trading contracts using the mark-to-market method. 8. On April 5, 1999, LG&E and KU filed a joint agreement among the companies and the Kentucky Attorney General to amend the companies' previously-filed performance-based ratemaking (PBR) plan. The amendment requested Kentucky Public Service Commission (the Commission) approval of a five-year rate reduction plan, which would reduce electric rates by $20 million in the first year (beginning July 1, 1999), and by $8 million annually for each of the next four years (through June 30, 2004), for a total five-year savings to customers of $52 million. The reductions will be distributed between LG&E and KU customers based on the same methodology the Commission approved in its previous merger order for allocating the merger savings to the utilities' customers (53 percent to KU customers; 47 percent to LG&E customers). The joint agreement includes adoption of the PBR plan as proposed by the companies. The amended filing also includes the establishment of a $6 million program over the five-year period to assist low-income customers in paying their energy bills. In addition to the rate reductions and energy assistance program, the amended filing calls for LG&E and KU to extend for an additional year (through June 30, 2004) both - 25 - the rate cap and the merger-savings surcredit the utilities established as part of their earlier merger plan. Under the rate cap, the companies agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger. They also agreed to a monthly surcredit to customers' bills reflecting the 50 percent share of the non-fuel merger savings allocated to the utilities' customers in the first five years following the merger. As part of the amended PBR filing, LG&E also agreed to refrain from filing for an increase in natural gas rates over the five-year period (through June 30, 2004). On April 13, 1999, the Commission issued initial orders implementing the amended PBR plan, effective July 2, 1999, and subject to modification. The Commission has adopted a procedural schedule, which provides for discovery, hearings and public comment. The Commission has also consolidated into the continuing PBR proceedings an earlier March 8, 1999, rate complaint by a group of industrial intervenors, the Kentucky Industrial Utility Consumers, Inc. (KIUC) in which KIUC has requested significant reductions in the electric rates of LG&E and KU. The Commission has scheduled hearings on the Companies' PBR proposals and the rate complaint to begin on August 31. The Commission is expected to issue a final ruling by the end of 1999. 9. On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into on April 9, 1999, to hedge the entire issuance, the effective rate amounted to 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. On May 24, 1999, KU entered into an interest-rate swap agreement to hedge a portion of its outstanding first mortgage bonds. The swap has a notional amount of $53 million and expires in May 2004. KU pays a variable rate based on the six-month London Interbank Offered Rate plus 1.88% and receives a fixed rate of 7.92%. The agreement provides for a collar on the variable rate paid by KU with a floor of 4.65% and a cap of 6.78%. The agreement suspends the collar during periods when the London Interbank Offered Rate moves outside a specified range. - 26 - 10.External and intersegment revenues and income from continuing operations by business segment for the three months ended June 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $185,519 $ 4,927 $ 20,740 LG&E gas 23,652 - 213 KU electric 220,739 5,055 27,193 Independent Power Operations 6,197 - 7,202 Western Kentucky Energy 69,050 - (464) Argentine Gas Distribution 45,146 - 4,796 Other Capital Corp. 73,354 - (6,589) All Other - (9,982) (3,126) Consolidated $623,657 $ - $ 49,965 External and intersegment revenues and income from continuing operations by business segment for the six months ended June 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $ 333,845 $ 7,441 $ 38,353 LG&E gas 99,431 - 427 KU electric 434,086 9,057 56,257 Independent Power Operations 13,101 - 21,382 Western Kentucky Energy 129,028 - (1,488) Argentine Gas Distribution 74,943 - 5,153 Other Capital Corp. 138,488 - (5,701) All Other - (16,498) (7,639) Consolidated $1,222,922 $ - $106,744 - 27 - External and intersegment revenues and income from continuing operations by business segment for the three months ended June 30, 1998, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $170,523 $ 4,326 $ (922) LG&E gas 26,540 - (199) KU electric 187,963 5,116 (1,683) Independent Power Operations 4,666 - 25,166 Argentine Gas Distribution 43,241 - 2,513 Other Capital Corp. 39,255 - (1,441) All Other - (9,442) (10,431) Consolidated $472,188 $ - $ 13,003 External and intersegment revenues and income from continuing operations by business segment for the six months ended June 30, 1998, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $311,108 $ 4,326 $ 20,499 LG&E gas 119,299 - 656 KU electric 371,158 5,140 22,802 Independent Power Operations 9,893 - 29,150 Argentine Gas Distribution 70,652 - 2,709 Other Capital Corp. 70,642 - (2,612) All Other - (9,466) (13,983) Consolidated $952,752 $ - $ 59,221 The assets of the Company's Argentine Gas Distribution segment increased from $346.3 million at December 31, 1998, to $425.1 million at June 30, 1999, due mainly to acquiring a 19.6% ownership interest in BAN (see Note 5 of Notes to Financial Statements). The assets of the Other Capital Corp. segment increased from $121.0 million at December 31, 1998, to $383.3 million at June 30, 1999, due mainly to reclassifying the assets of the natural gas gathering and processing business from discontinued to continuing operations (see Note 3 of Notes to Financial Statements) and capitalizing construction costs related to gas turbine peaking units (see Management's Discussion and Analysis of Results of Operations and Financial Condition in Item 2). 11.On March 15, 1999, Capital Corp. entered into a letter of intent to lease or acquire three 150-megawatt (Mw) combustion turbines and is currently negotiating the terms of a definitive agreement. This 450 Mw gas fired merchant combustion turbine power generation facility will be located in Monroe, Georgia, and is expected to be completed - 28 - by June 1, 2001. The aggregate price, including construction of related facilities, is estimated to be approximately $185 million. 12.Prior to implementation of the PBR, LG&E and KU employed a fuel adjustment clause (FAC) mechanism, which under Kentucky law allows the companies to recover from customers, the actual fuel costs associated with retail electric sales. In February 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed the Company's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. On February 19, 1999 LG&E requested that the Commission grant rehearing on the February orders, and further requested that the Commission stay the refund requirement until it could rule on the rehearing request. On February 25, 1999 the Commission granted the request for a stay, and on March 11, 1999 granted in part the request for rehearing. The Commission also granted rehearing on the KIUC's request for rehearing on the Commission's determination that it lacks authority to require the Companies to pay interest on the refund amounts. The Commission conducted a hearing on the rehearing issues on June 29, 1999. The Commission is expected to issue a final ruling on rehearing by the end of 1999. LG&E and KIUC have each filed separate appeals from the Commission's February 1999 orders with the Franklin, Ky. Circuit Court. A decision on the appeals by the Court is not expected until the middle of 2000. In July 1999, the Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, on July 23, 1999, the Commission stayed the refund requirement pending the Commission's final determination of any rehearing request that KU may file. On August 9, 1999, KU filed its request for rehearing of the July orders. 13.As of June 30, 1999, Capital Corp. had expended approximately $110.1 million in connection with its October 1998 purchase of two natural gas combustion turbines. The aggregate construction cost is not expected to exceed $125 million. On July 23, 1999, the PSC approved LG&E's and KU's application for the purchase of the turbines from Capital Corp. at a price equal to the lower of their fair market value or cost. Capital Corp. completed the installation of the turbines in July 1999. These units were placed into commercial operation in early August 1999. 14.Reference is made to Part II, Legal Proceedings, below and Part I, Item 3, Legal Proceedings, of the Company's, KU Energy's, LG&E's and KU's (and Note 18 of the Company's Notes to Financial Statements) Annual Reports on Form 10-K for the year ended December 31, 1998, and Part II, Item 1, Legal Proceedings, of the Form 10-Q for the quarter ended March 31, 1999. - 29 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Recent Developments On July 8, 1999, the Company purchased 100% of the outstanding common stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial consideration of $45.6 million and retirement of approximately $37.9 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. For more information, see Note 4 of Notes to Financial Statements under Item 1. As of June 30, 1999, Capital Corp. had expended approximately $110.1 million in connection with its October 1998 purchase of two natural gas combustion turbines. The aggregate construction cost is not expected to exceed $125 million. On July 23, 1999, the PSC approved LG&E's and KU's application for the purchase of the turbines from Capital Corp. at a price equal to the lower of their fair market value or cost. Capital Corp. completed the installation of the turbines in July 1999. These units were placed into commercial operation in early August 1999. On April 13, 1999, the Kentucky Public Service Commission (PSC) issued initial orders in the performance-based ratemaking proceedings for LG&E and KU. The PSC orders implement, effective July 2, 1999, and subject to modification, the companies' pending performance-based ratemaking proposals, including a five-year, $52 million rate reduction plan jointly filed by LG&E, KU and the Kentucky Attorney General's Office with the PSC on April 5, 1999. For more information, see Note 8 to the Notes to Financial Statements of the Company, LG&E and KU under Item 1. On March 30, 1999, the Company acquired an indirect 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. For more information, see Note 5 of Notes to Financial Statements under Item 1 for more information. On March 15, 1999, Capital Corp. entered into a letter of intent to lease or acquire three combustion turbines and is currently negotiating the terms of a definitive agreement. The aggregate price, including construction of related facilities, is estimated to be approximately $185 million. On March 15, 1999, the partnership that owns the Rensselaer cogeneration facility sold substantially all the assets and major contracts of the facility. For more information, see "Results of Operations" below, Note 6 of Notes to Financial Statements under Item 1 and the Company's Annual Report on Form 10-K for the year ended December 31, 1998. General The Company's principal subsidiaries are LG&E, an electric and gas utility, KU, an electric utility, and Capital Corp., the holding company for all non- utility investments. LG&E's and KU's results of operations and liquidity and capital resources are important factors affecting the Company's consolidated results of operations and capital resources and liquidity. Some of the matters discussed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis may contain forward- looking statements that are subject to certain risks, uncertainties and assumptions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions; business and competitive conditions in the energy industry; future prices of power and natural gas; unusual weather; regulatory decisions, in - 30 - cluding decisions relating to the Company's performance-based ratemaking proceedings and decisions resulting from the combination of LG&E Energy and KU Energy; the Company's ability to resolve Year 2000 issues in a timely manner and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998. Results of Operations The results of operations for LG&E, KU and Capital Corp.'s Argentine gas distribution and WKE operations are affected by seasonal fluctuations in temperature and other weather-related factors. Because of these and other factors, the results of one interim period are not necessarily indicative of results or trends to be expected for the full year. Three Months Ended June 30, 1999, Compared to Three Months Ended June 30, 1998 The Company's primary and diluted earnings per share from continuing operations increased to $.39 in 1999 from $.10 in 1998. Continuing operations for 1998 included $.41 of after-tax charges for merger-related costs ($.19 for LG&E, $.17 for KU, and $.05 for Corporate), and an after- tax gain of $.16 resulting from the Rensselaer project's Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). Excluding these items, income from continuing operations increased to $.39 in 1999 from $.35 in 1998. This increase resulted from higher earnings at KU and Capital Corp., partially offset by lower earnings at LG&E. LG&E Results: LG&E's net income increased $22 million for the quarter ended June 30, 1999, compared to the quarter ended June 30, 1998, primarily because of a $25 million one-time, after-tax charge incurred in 1998 for LG&E's costs to merge LG&E Energy Corp. with KU Energy. Excluding this charge, LG&E's net income decreased $2.9 million compared to the second quarter of 1998, primarily due to increased maintenance expenses at electric generating plants, partially offset by increased electric sales. - 31 - A comparison of LG&E's revenues for the quarter ended June 30, 1999, with the quarter ended June 30, 1998, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Gas Cause Revenues Revenues Sales to ultimate consumers: Fuel and gas supply adjustments $(2,193) $(5,592) Merger surcredit (1,466) - Demand side management/revenue decoupling (698) (820) Variation in sales volume, etc. 1,305 2,261 Total retail sales (3,052) (4,151) Sales for resale 18,627 823 Gas transportation - net - 96 Other 21 344 Total $15,596 $(2,888) Electric sales for resale increased $18.6 million due to increases in brokered sales activities. Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating expenses. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply may be reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky. See Notes 8 and 12 for a further discussion. Fuel for electric generation decreased $1.9 million (5%) for the quarter because of a decreased volume of generation. Gas supply expenses decreased $2.9 million (18%) due to a decrease in the volume of gas delivered to the distribution system ($3.3 million). Power purchased increased $16 million primarily due to increased purchases for sales for resale, partially offset by approximately $3.5 million of income recorded as a result of valuing the Company's electric energy trading contracts using the mark-to-market method. See Note 7 of Notes to Financial Statements. Maintenance expenses increased $7.2 million (55%) in 1999 mainly due to increases in scheduled outages at the Mill Creek generating station Unit 3 and the Cane Run generating station Unit 6 ($5.1 million), and maintenance of other steam plant equipment ($2.9 million) partially offset by a decrease in storm damage repairs ($1 million). Depreciation and amortization increased $.8 million in 1999 because of additional utility plant in service. A $34.1 million one-time charge was recorded in the second quarter of 1998 for costs associated with the merger of LG&E Energy Corp. and KU Energy (the corresponding tax benefit of $9.1 million is recorded in other income and (deductions)). Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. - 32 - Interest charges decreased partly because of the retirement of the Company's 6.75% Series First Mortgage Bonds ($20 million) at maturity on June 1, 1998. KU Results: KU's net income increased $28.9 million for the quarter ended June 30, 1999, as compared to the quarter ended June 30, 1998, primarily because of a $21.8 million one-time, after-tax charge incurred in 1998 for KU's costs to merge LG&E Energy Corp. with KU Energy. Excluding this charge, KU's net income increased $7.2 million as compared to the second quarter of 1998 was primarily due to increases in off-system sales and sales for resale. A comparison of KU's revenues for the quarter ended June 30,1999, with the quarter ended June 30,1998, reflects increases and decreases which have been segregated by the following principal causes (in thousands of $): Sales to ultimate consumers: Fuel clause adjustments $ 1,091 Environmental cost recovery (443) Merger surcredit (1,496) Variation in sales volume, etc. 1,213 Total retail sales 365 Sales for resale 32,356 Other (6) Total $32,715 Operating revenues increased $32.7 million (17%). The increase in sales for resale (2,125,467 megawatt-hours versus 1,147,199 megawatt-hours) was primarily due to more aggressive marketing efforts. Fuel for electric generation comprises a large component of KU's total operating expenses. KU's electric rates contain a fuel adjustment clause (FAC), whereby increases or decreases in the cost of fuel are reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky, The Virginia State Corporation Commission, and the Federal Energy Regulatory Commission. See Note 12 for a further discussion. Fuel for electric generation expenses decreased by $5.3 million (11%) for the quarter because of decrease in the cost of coal burned ($3.4 million) and reduced levels of generation ($1.8 million). Power purchased increased $27 million. The increase was primarily due to a 86% increase in megawatt-hour purchases which was used to support the aforementioned sales for resale, partially offset by approximately $3.1 million of income recorded as a result of valuing the Company's electric energy trading contracts using the mark-to-market method. See Note 7 of Notes to Financial Statements. A $21.8 million one-time charge was recorded in the second quarter of 1998 for the merger of LG&E Energy Corp. and KU Energy (the corresponding tax benefit of $.1 million is recorded in other income and (deductions)). Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Capital Corp. Results: Capital Corp., the holding company for all non-utility investments, conducts its operations through three principal segments: Independent Power Operations, WKE and Argentine - 33 - Gas Distribution. Involvement in these and other non-utility businesses represents the Company's commitment to understand, respond to, and capitalize on the opportunities presented by an emerging competitive energy services industry. Independent Power Operations develops, operates, maintains and owns interests in domestic and international power generation facilities that sell electric and steam energy to utility and industrial customers, and owns equity interests in combustion turbines which are leased to others. WKE leases and operates the generating facilities of Big Rivers. Argentine Gas Distribution owns interests in three natural gas distribution companies in Argentina. The Company engages in other energy- related businesses which are not individual distinct segments of the business. These include CRC-Evans, based in Houston, Texas, a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. Capital Corp. is also engaged in commercial and retail initiatives designed to assess the energy and utility needs of large commercial and industrial entities, to provide maintenance and repair services for customers' major household appliances and to provide third party metering and billing services. Independent Power Operations Independent Power Operations' revenues increased from $4.7 million in 1998 to $6.2 million in 1999 due to an increase in fees related to development power projects, partially offset by lower income resulting from selling the Rensselaer joint venture in March 1999. Independent Power Operations' depreciation and amortization decreased from $1.5 million in 1998 to $.3 million in 1999 due to asset write-offs in June 1998 related to the Rensselaer project's Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). Independent Power Operations' equity in earnings of unconsolidated ventures decreased from $50.0 million in 1998 to $8.6 million in 1999. The decrease resulted mainly from recognizing the June 1998 gain related to the Rensselaer project's NIMO MRA. Western Kentucky Energy Western Kentucky Energy (WKE) began operations July 15, 1998, after closing its lease transaction with Big Rivers. During the quarter, WKE's revenues totaled $69.1 million and cost of revenues, primarily composed of fuel and purchased power expenses, amounted to $41.3 million. Operation and maintenance expenses of $27.3 million include $7.0 million of rent expense associated with the lease of Big Rivers' operating facilities. WKE incurred interest expense of approximately $1.5 million associated with borrowings to fund the initial purchase of certain materials and supplies from Big Rivers and to prepay the first two years' lease payments of $55.9 million. Argentine Gas Distribution The Argentine Gas Distribution companies' revenues increased 4% or $1.9 million in 1999 to $45.1 million due to higher consumption per customer and an increase in the customer base. Operation and maintenance expenses increased by 2.7% or $.2 million over the same period due to higher consumption. The Argentine Gas Distribution companies' equity in earnings of unconsolidated ventures increased from $.9 million in 1998 to $3.4 million in 1999 due to acquiring a 19.6% interest in Gas Natural BAN, S.A. (BAN) in March 1999. See Recent Developments and Note 5 of Notes to Financial Statements in Item 1. - 34 - Other As a result of the reclassification of the gas gathering and processing business from discontinued operations to continuing operations effective June 30, 1999, the Company's activities include certain natural gas transportation, storage, gathering and processing operations and facilities, which businesses are conducted through Capital Corp. Additionally, the Company conducts various commercial and retail initiatives, primarily energy-related new businesses and services designed to leverage the its existing assets, operations and market presence, which commercial and retail initiatives have not had a significant impact on the Company's financial position or required significant capital investment. This segment's revenues increased from $39.3 million in 1998 to $73.4 million in 1999, and its cost of revenues increased from $31.2 million in 1998 to $64.8 million in 1999. These increases reflect increases at Retail Access Services and higher natural gas liquids prices. Retail Access Services provides consulting, technical, software and operational support and services to independent retail energy service providers in certain markets. See Note 3 for a discussion of the Company's decision to retain its natural gas gathering and processing business. Interest expense increased by $7.7 million in 1999 mainly due to funding discontinued operations and corporate expenses, including the cost to fund the WKE transaction and the Gas BAN acquisition. The Company's consolidated effective income tax rate decreased from 66.8% in 1998 to 36.1% in 1999 due to non-deductible merger-related expenses recorded in 1998. Six Months Ended June 30, 1999, Compared to Six Months Ended June 30, 1998 The Company's primary and diluted earnings per share from continuing operations increased to $.82 in 1999 from $.46 in 1998. Results for 1998 included $.41 of after-tax charges for merger-related costs ($.19 for LG&E, $.17 for KU, and $.05 for Corporate), and an after-tax gain of $.16 resulting from the Rensselaer project's Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). Excluding these items, income from continuing operations increased to $.82 in 1999 from $.71 in 1998. This increase resulted from higher earnings at KU and Capital Corp. LG&E Results: LG&E's net income increased $17.5 million for the first six months of 1999, as compared to the first six months of 1998, primarily because of the charge incurred in 1998 for LG&E's costs to merge LG&E Energy Corp. with KU Energy of $25 million. Excluding this charge, LG&E's net income decreased $7.4 million for the same period. This is primarily due to increased maintenance expenses at electric generating plants. - 35 - A comparison of LG&E's revenues for the six months ended June 30, 1999, with the six months ended June 30, 1998, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Gas Cause Revenues Revenues Sales to ultimate consumers: Fuel and gas supply adjustments $ 790 $(25,612) Merger surcredit (2,856) - Demand side management/revenue decoupling (3,094) (5,398) Variation in sales volume, etc. 6,400 10,693 Total retail sales 1,240 (20,317) Sales for resale 24,552 412 Other 59 38 Total $25,851 $(19,867) Sales for resale increased due to increased brokered sales. Gas retail sales decreased from 1998 due to a decline in gas prices in the first quarter of 1999. Fuel for electric generation decreased $5.4 million (7%) for the six months because of a decrease in generation ($5.9 million). Gas supply expenses decreased $16.5 million (21%) due to a decrease in net gas supply costs ($22.4 million) partially offset by an increase in the volume of gas delivered to the distribution system ($3.7 million). Power purchased increased $29.1 million (117%) primarily due to increased purchases for sales for resale. Maintenance expenses for the first six months of 1999 increased $11.6 million (50%) primarily due to increases in scheduled outages at the Mill Creek generating station Unit 3 and the Cane Run generating station Unit 6 ($5.4 million), forced outages at Mill Creek Units 1 and 4 ($3.9 million), and general repairs at the electric generating plants ($2.4 million). Depreciation and amortization increased $1.7 million in 1999 because of additional utility plant in service. A $34.1 million one-time charge was recorded in the second quarter of 1998 for costs associated with the merger of LG&E Energy Corp. and KU Energy (the corresponding tax benefit of $9.1 million is recorded in Other income and (deductions)). Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Interest charges decreased partly because $20 million of the Company's First Mortgage Bonds, 6.75% Series were retired at maturity on June 1, 1998. - 36 - KU Results: KU's net income increased $33.5 million for the first six months of 1999, as compared to the first six months of 1998, primarily because of the charge incurred in 1998 for KU's costs to merge LG&E Energy Corp. with KU Energy of $21.7 million. Excluding this charge, KU's net income increased $11.8 million for the same period. The increase was primarily due to increases in residential sales, commercial sales and sales for resale. A comparison of KU's revenues for the six months ended June 30, 1999, with the six months ended June 30,1998, reflects increases and decreases which have been segregated by the following principal causes (in thousands of $): Sales to ultimate consumers: Fuel clause adjustments $ 241 Environmental cost recovery (1,081) Merger surcredit (3,165) Variation in sales volume, etc. 10,490 Total retail sales 6,485 Sales for resale 59,627 Other 733 Total $66,845 Retail sales increased due to a 2% increase in sales volumes year to date. The increase in sales for resale (4,020,756 megawatt-hours versus 1,676,671 megawatt-hours) was primarily due to more aggressive marketing efforts and efficiencies achieved from coordinated dispatch of a larger available pool of generation following completion of the merger in May 1998 of LG&E Energy and KU Energy. Expenses Fuel for electric generation expenses increased by $4.5 million (4%) primarily due to an increase in generation ($8.5 million) offset by a decrease in the lower cost of coal burned ($4.2 million). Power purchased increased $48.3 million. The increase was primarily due to a 90% increase in megawatt-hour purchases which was primarily used to support the aforementioned sales for resale. A $21.8 million one-time charge was recorded in the second quarter of 1998 for the merger of LG&E Energy Corp. and KU Energy (the corresponding tax benefit of $.1 million is recorded in other income and (deductions)). Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Capital Corp. Results: Independent Power Operations Independent Power Operations' revenues increased from $9.9 million in 1998 to $13.1 million in 1999 due to recognizing fees related to an independent power project in Gregory, Texas and recognizing previously deferred income related to the sale of the Rensselaer project in March 1999. See Note 6 of Notes to Financial Statements under Item 1. - 37 - Independent Power Operations' depreciation and amortization decreased from $4.1 million in 1998 to $2.3 million in 1999 due to writing off certain capitalized interest and development costs related to the San Miguel facility in the first quarter of 1998 and to write-offs related to the Rensselaer project's MRA with NIMO in the second quarter of 1998. Independent Power Operations' equity in earnings of unconsolidated ventures decreased from $55.6 million in 1998 to $30.0 million in 1999. The decrease resulted mainly from recognizing a gain in June 1998 related to the Rensselaer project's NIMO MRA partially offset by the Rensselaer project's sale of substantially all of its assets and major contracts in March 1999. Independent Power Operations' other income and expense changed from $8.7 million expense in 1998 to $.9 million income in 1999 due primarily to reacquiring in 1998 half of the Company's interest in the partnership that owned the Rensselaer project, and to recording related expenses. Western Kentucky Energy WKE began operations July 15, 1998, after closing its lease transaction with Big Rivers. During 1999, revenues totaled $129.0 million and cost of revenues, primarily composed of fuel and purchased power expenses, amounted to $77.0 million. Operation and maintenance expenses of $52.1 million include $14.0 million of rent expense associated with the lease of Big Rivers' operating facilities. WKE incurred interest expense of approximately $2.8 million associated with borrowings to fund the initial purchase of certain materials and supplies from Big Rivers and to prepay the first two years' lease payments of $55.9 million. Argentine Gas Distribution The Argentine Gas Distribution companies' revenues increased 6% or $4.3 million in 1999 to $74.9 million due to higher consumption per customer and an increase in the customer base. Operation and maintenance expenses increased by 5.3% or $.8 million over the same period due to higher consumption. The Argentine Gas Distribution companies' equity in earnings of unconsolidated ventures increased from $1.2 million in 1998 to $3.7 million in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Note 5 of Notes to Financial Statements in Item 1. Other This segment's revenues increased from $70.6 million in 1998 to $138.5 million in 1999, and its cost of revenues increased from $55.6 million in 1998 to $113.6 million in 1999. These increases reflect increases at Retail Access Services and higher natural gas liquids prices. Capital Corp.'s other income increased $3.2 million in 1999 due mainly to receiving the initial settlement of a claim related to its independent power project in California. Interest expense increased by $12.3 million in 1999 mainly due to funding discontinued operations and corporate expenses, including the cost to fund the WKE transaction and the Gas BAN acquisition. The Company's consolidated effective income tax rate decreased from 45.7% in 1998 to 37.2% in 1999 mainly due to non-deductible merger-related expenses recorded in 1998. - 38 - Liquidity and Capital Resources The Company's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and equity investments in connection with independent power production projects and other energy-related growth or acquisition opportunities among the non-utility businesses. Capital funds are also needed for the Company's capital obligations under the Big Rivers lease arrangements, losses incurred in connection with the discontinuance of the merchant energy trading and sales business and information system enhancements. Lines of credit and commercial paper programs are maintained to fund these temporary capital requirements. Construction expenditures for the six months ended June 30, 1999, of $199.8 million were financed with internally generated funds and commercial paper. The Company's combined cash and marketable securities balance increased $26.4 million during the six months ended June 30, 1999. The increase reflects cash flows from operations, a net increase in debt, and the Company's portion of the proceeds received by the Rensselaer project from the sale of its assets and major contracts, partially offset by construction expenditures, the investment in BAN, and dividends paid. Variations in accounts receivable, accounts payable and materials and supplies are generally not significant indicators of the Company's liquidity. Such variations are primarily attributable to fluctuations in weather, which have a direct effect on sales of electricity and natural gas. The increase in accounts receivable resulted primarily from seasonal fluctuations in LG&E's and KU's businesses and higher natural gas gathering and processing revenues. The decrease in accounts payable resulted from fluctuations in LG&E's and KU's businesses. The increase in fuel inventories resulted from seasonal fluctuations in KU's and WKE's businesses, and the decrease in gas stored underground resulted from seasonal fluctuations in LG&E's business. The decrease in net assets of discontinued operations resulted from a seasonal increase in accounts payable and a decrease in price risk management assets, partially offset by a seasonal increase in accounts receivable and a reduction in the accrued loss on disposal. The increase in investments in unconsolidated ventures resulted from the investment in BAN and equity in earnings, partially offset by distributions received. The increase in non-utility property and plant resulted mainly from additions at Centro. The increase in other property and investments resulted from expenditures related to the purchase of two natural gas turbines by Capital Corp. The Company issues commercial paper that has maturity dates ranging between one and 270 days. Because of the rollover of these maturity dates, total short-term borrowings during the first six months of 1999 were $756.1 million and total repayments of short-term borrowings were $813.1 million. See Note 16 of the Company's Notes to Financial Statements contained in its Annual Report on Form 10-K for the year ended December 31, 1998. As of June 30, 1999, Capital Corp. had expended approximately $110.1 million in connection with its October 1998 purchase of two natural gas combustion turbines. The aggregate construction cost is not expected to exceed $125 million. On July 23, 1999, the PSC approved LG&E's and KU's application for the purchase of the turbines from Capital Corp. at a price equal to the lower of their fair market value or cost. Capital Corp. completed the installation of the turbines in July 1999. These units were placed into commercial operation in early August 1999. On March 15, 1999, Capital Corp. entered into a letter of intent to lease or acquire three 150-megawatt (Mw) combustion turbines and is currently negotiating the terms of a defini - 39 - tive agreement. This 450 Mw gas fired merchant combustion turbine power generation facility will be located in Monroe, Georgia, and is expected to be completed by June 1, 2000. The aggregate price, including construction of related facilities, is estimated to be approximately $185 million. At June 30, 1999, unused capacity under the Company's lines of credit totaled $592.0 million after considering commercial paper support and approximately $56.7 million in letters of credit securing on- and off- balance sheet commitments. At December 31, 1998, unused capacity under the lines of credit totaled $536.8 million. The increase in unused capacity resulted from paying down commercial paper during the six months ended June 30, 1999. The Company's capitalization ratios at June 30, 1999, and December 31, 1998, follow: June 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 49.1% 46.5% Notes payable 9.2 11.2 Preferred stock 4.0 4.2 Common equity 37.7 38.1 Total 100.0% 100.0% LG&E's capitalization ratios at June 30, 1999, and December 31, 1998, follow: June 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 45.1% 45.0% Preferred stock 6.9 6.8 Common equity 48.0 48.2 Total 100.0% 100.0% KU's capitalization ratios at June 30, 1999, and December 31, 1998, follow: June 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 45.0% 45.7% Preferred stock 3.3 3.4 Common equity 51.7 50.9 Total 100.0% 100.0% On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into on April 9, 1999, to hedge the entire issuance, the effective rate amounted to 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. See Recent Developments for common stock repurchase activities in connection with the CRC acquisition. For a description of significant contingencies that may affect the Company, LG&E and KU, reference is made to Part II herein - Item 1, Legal Proceedings. - 40 - Year 2000 Computer Issue The Company and its subsidiaries, including LG&E and KU, use various software, systems and technology that may be affected by the "Year 2000 Issue." This concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to the year 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are more fully detailed in the sections that follow, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. The Company began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer of the Company, is responsible for planning, implementing and documenting the Company's Year 2000 process. The team also provides direct and detailed assistance to the Company's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, the Company also uses the services of third parties, including technical consultants, vendor representatives and auditors. The Company's Year 2000 effort generally follows a three phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding Company and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. The Company has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, client-server, PCs and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units and (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities. State of Readiness As of June 1999, the Company and its subsidiaries have completed the internal inventory, vendor survey and compliance assessment portions (Phases I and II) of their Year 2000 plan for critical equipment and systems, including IT, non-IT and embedded components. Remediation efforts (Phase III) in these areas are complete with minor exceptions, which exceptions do not effect the reliability of the electric generation, transmission or distribution or gas distribution systems. Testing has been conducted in parallel with remediation and is also largely complete for critical systems. Contingency planning has been initiated for all IT and non-IT critical systems and will continue throughout 1999. The Company has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which the Company's operations are vulnerable to those parties' failure to complete their remediation efforts. The Company is currently evaluating and, in certain cases, initiating follow-up actions regarding the responses from these - 41 - parties. The Company regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry. Costs of Year 2000 Issues The Company's, LG&E's and KU's system modification costs related to the Year 2000 issue are being expensed as incurred. Through June 1999, the Company incurred approximately $24.4 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, the Company expects to spend an additional $7.7 million to complete its Year 2000 efforts. Through June 1999, LG&E incurred approximately $17.8 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, LG&E expects to spend an additional $2.8 million to complete its Year 2000 efforts. Through June 1999, KU incurred approximately $4.1 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, KU expects to spend an additional $2.8 million to complete its Year 2000 efforts. It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally, many costs are not incremental costs but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with the Company's Year 2000 issues will not be higher. Risks of Year 2000 Issues As described above, the Company has made significant progress in the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of its remediation plan, the Company does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, the Company may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and the Company is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to the Company. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, reduced power production or transmission capabilities or internal operational or administrative difficulties on the part of the Company. The Company is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of the Company. There can be no assurance that the Company will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning is under way for material areas of Year 2000 risk. This effort is addressing certain areas, including the most reasonably likely worst-case scenarios and delays in completion in the Company's remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans will include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual en- - 42 - ergy accounting procedures. Contingency plan formulation was substantially completed in June 1999 and implementation and resourcing of such plans is underway. Forward Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation, and cost of the Company's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates derived using assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, the Company's ability to locate and correct all relevant computer codes, the readiness of third parties, and the Company's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. - 43 - Item 3. Quantitative and Qualitative Disclosures About Market Risk. LG&E Energy is exposed to market risks in both its regulated and non- utility operations. Both operations are exposed to market risks from changes in interest rates and commodity prices, while the non-utility operations are also exposed to changes in foreign exchange rates. To mitigate changes in cash flows attributable to these exposures, the Company has entered into various derivative financial instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Risk The potential change in interest expense resulting from changes in base interest rates of the Company's unswapped debt did not change materially during the six months ended June 30, 1999. The potential changes in the fair values of the Company's interest-rate swaps resulting from changes in interest rates and the yield curve also did not change materially during the six months ended June 30, 1999. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. Commodity Price Risk The Company's exposure to market risks from changes in commodity prices did not change materially during the six months ended June 30, 1999. However, as a result of the Commission's approval of the PBR effective July 2, 1999, LG&E's and KU's fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by the Company's shareholders. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. Foreign Exchange Risk The Company has foreign exchange exposure to both the Spanish Peseta and the Argentine Peso. During the second quarter of 1999, the Company's exposure to the Argentine Peso increased due to the acquisition of Gas BAN. However, management believes the Company's foreign exchange exposure to a 10% change in the Spanish Peseta and Argentine Peso would not have a material effect on the financial position or results of operations. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. - 44 - Part II. Other Information Item 1. Legal Proceedings. For a description of the significant legal proceedings involving the Company, LG&E and KU, reference is made to the information under the following items and captions of (a) the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K for the year ended December 31, 1998: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition; Notes 2, 5, 18 and 22 of the Company's Notes to Financial Statements under Item 8; Notes 3, 12, 16 and 18 of LG&E's Notes to Financial Statements under Item 8 and Notes 3, 11 and 13 of KU's Notes to Financial Statements under Item 8 and (b) the Company's, LG&E's and KU's respective combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1999: Part III, Item 1, Legal Proceedings. Except as described herein, to date, the proceedings reported in the Company's, LG&E's and KU's respective combined Form 10-K's and Form 10-Q's have not changed materially. Certain Fuel Adjustment Clause Proceedings In July 1999, the Kentucky Public Service Commission (PSC) issued orders to KU requiring refunds of approximately $4.2 million and $5.8 million, respectively, in costs previously recovered from customers under the fuel adjustment clause mechanism for line losses associated with off-system sales. KU has filed a motion to stay the refund pending a rehearing on certain issues. Subject to those rehearings, the refunds are currently ordered for the third quarter 1999. See Note 12 of Notes to Financial Statements, above, Item 3, Legal Proceedings, and Notes 5 and 22 to the Company's and Note 3 of KU's respective Notes to Financial Statements under Item 8 of the Company's and KU's combined Annual Report on Form 10-K for the year ended December 31, 1998, for further discussion of this matter. Environmental Matters On May 25, 1999, the U.S. Court of Appeals for the D.C. Circuit entered an order in the appeal concerning the Environmental Protection Agency's (EPA) September 1998 rulemaking mandating significant reductions in NOx emissions. The court issued an indefinite stay of the September 1999 deadline for each state to incorporate additional NOx deadlines in their state implementation plans of the NOx reductions pending further appellate proceedings which are scheduled to occur during 1999. In a separate proceeding, the court also remanded certain related ozone standards to the EPA for further rule-making action. See Environmental Matters, under Item 7 of the Company's, LG&E's and KU's Annual Report for the year ended December 31, 1998 for a further discussion of these matters. Oglethorpe Power Contract Discovery proceedings have continued in the arbitration proceeding brought by LG&E Energy Marketing Inc. (LEM) against Oglethorpe Power Corporation (OPC) regarding LEM's November 1996 power sales agreement with OPC. A hearing on the merits is currently scheduled for November 1999 with a final decision anticipated in December 1999. See Item 3, Legal Proceedings, and Item 8, Note 18 to Notes to Financial Statements, in LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 for more information on this matter. Item 4. Submission of Matters to a Vote of Security Holders. a) LG&E Energy's, LG&E's and KU's Annual Meetings of Shareholders were held on April 21, 1999. - 45 - b) Not applicable. c) The matters voted upon and the results of the voting at the Annual Meetings are set forth below: 1. LG&E Energy: i) The shareholders voted to elect LG&E Energy's nominees for election to the Board of Directors as follows: William L. Rouse, Jr. - 101,006,828 common shares cast in favor of election and 1,349,817 shares withheld. Charles L. Shearer - 101,071,033 common shares cast in favor of election and 1,285,612 shares withheld. Carol M. Gatton - 101,004,430 common shares cast in favor of election and 1,352,215 shares withheld. Lee T. Todd, Jr. - 101,086,957 common shares cast in favor of election and 1,269,688 shares withheld. Mira S. Ball - 100,987,324 common shares cast in favor of election and 1,369,445 shares withheld. Roger W. Hale - 100,750,551 common shares cast in favor of election and 1,606,700 shares withheld. David B Lewis - 100,971,581 common shares cast in favor of election and 1,385,192 shares withheld. Anne H. McNamara - 101,026,444 common shares cast in favor of election and 1,330,201 shares withheld. Frank V. Ramsey, Jr. - 100,596,229 common shares cast in favor of election and 1,400,416 shares withheld. Holders of 514,576 common shares abstained from voting on this matter. ii) The shareholders voted 101,269,233 common shares in favor of and 622,022 shares against the approval of Arthur Andersen LLP as independent auditors for 1999. Holders of 996,985 common shares abstained from voting on this matter. iii) The shareholders voted 73,254,869 common shares in favor of and 25,774,121 shares against the approval of an amendment to the Omnibus Long-Term Incentive Plan, including the issuance of additional shares thereunder. Holders of 3,846,557 common shares abstained from voting on this matter. 2. LG&E: i) The shareholders voted to elect LG&E's nominees for election to the Board of Directors as follows: William L. Rouse, Jr. - 21,294,223 common shares and 282,068 preferred shares cast in favor of election and 13,169 preferred shares withheld. - 46 - Charles L. Shearer - 21,294,223 common shares and 282,193 preferred shares cast in favor of election and 13,044 preferred shares withheld. Carol M. Gatton - 21,294,223 common shares and 282,174 preferred shares cast in favor of election and 13,063 preferred shares withheld. Lee T. Todd, Jr. - 21,294,223 common shares and 282,218 preferred shares cast in favor of election and 13,019 preferred shares withheld. Mira S. Ball - 21,294,223 common shares and 282,218 preferred shares cast in favor of election and 13,019 preferred shares withheld. Roger W. Hale - 21,294,223 common shares and 281,877 preferred shares cast in favor of election and 13,360 preferred shares withheld. David B. Lewis - 21,294,223 common shares and 281,458 preferred shares cast in favor of election and 13,779 preferred shares withheld. Anne H. McNamara - 21,294,223 common shares and 282,218 preferred shares cast in favor of election and 13,019 preferred shares withheld. Frank V. Ramsey, Jr. - 21,294,223 common shares and 282,218 preferred shares cast in favor of election and 13,019 preferred shares withheld. Holders of no common or preferred shares abstained from voting on this matter. ii)The shareholders voted 21,294,223 common shares and 285,910 preferred shares in favor of and 667 preferred shares against the approval of Arthur Andersen LLP as independent auditors for 1999. Holders of 8,660 preferred shares abstained from voting on this matter. 3. KU: i) The sole shareholder voted to elect KU's nominees for election to the Board of Directors as follows: 37,817,878 common shares cast in favor of election and no shares withheld for each of William L. Rouse, Jr., Charles L. Shearer, Carol M. Gatton, Lee T. Todd, Jr., Mira S. Ball, Roger W. Hale, David B. Lewis, Anne H. McNamara and Frank V. Ramsey, Jr., respectively. ii)The sole shareholder voted 37,817,878 common shares in favor of and no shares against the approval of Arthur Andersen LLP as independent auditors for 1999. Holders of no common shares abstained from voting on these matters. d) Not applicable. Item 6(a). Exhibits. Exhibit Number Description 27 Financial Data Schedules for LG&E Energy Corp., Louisville Gas and Electric Company, and Kentucky Utilities Company. - 47 - Item 6(b). Reports on Form 8-K. On April 7, 1999, the Company, LG&E and KU filed reports on Form 8-K announcing that on April 5, 1999, LG&E and KU had reached an agreement with the Kentucky Attorney General's Office regarding LG&E's and KU's pending performance-based ratemaking (PBR) proposal. In a filing with the PSC, the parties amended the companies' PBR proposal to request approval of an agreed-upon five-year rate reduction plan. In the same filing, the Company announced that on March 30, 1999, it had acquired an indirect ownership interest of approximately 20 percent in Gas Natural BAN, S.A. On April 20, 1999, the Company, LG&E and KU filed reports on Form 8-K announcing orders of the PSC dated April 13, 1999, regarding LG&E and KU. The PSC orders implement, effective July 2, 1999, the companies' pending performance-based ratemaking proposal, including a five-year rate reduction plan agreed upon earlier by the companies and the Kentucky Attorney General's Office. On July 14, 1999, the Company filed a report on Form 8-K announcing that it had acquired, effective July 8, 1999, CRC Holdings Corp., the parent company of CRC-Evans Pipeline International, Inc. and related companies, a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. - 48 - SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LG&E Energy Corp. Registrant Date: August 13, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Louisville Gas and Electric Company Registrant Date: August 13,1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kentucky Utilities Company Registrant Date: August 13, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - 49 - EX-27 2
UT 0000861388 LG&E ENERGY CORP. 1,000 6-MOS DEC-31-1999 JUN-30-1999 PER-BOOK 3,238,430 860,121 702,527 210,827 0 5,011,905 778,675 92 494,059 1,272,826 0 135,328 1,599,348 311,034 0 0 61,500 0 0 0 1,631,869 5,011,905 1,222,922 63,132 999,282 1,062,414 160,508 9,787 170,295 59,459 110,836 3,304 107,532 79,752 35,151 254,873 0.83 0.83 Includes common stock expense of $(402). Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $33,707.
EX-27 3
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 6-MOS DEC-31-1999 JUN-30-1999 PER-BOOK 1,474,479 14,641 250,629 53,630 0 1,793,379 307,545 0 319,424 626,969 0 40,000 484,830 0 0 0 61,500 0 0 0 580,080 1,793,379 443,143 33,221 337,959 371,180 71,963 4,162 76,125 18,740 57,385 1,128 56,257 37,128 18,519 81,319 0 0 Includes common stock expense of $595. Represents unrealized loss on marketable securities, net of taxes.
EX-27 4
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 6-MOS DEC-31-1999 JUN-30-1999 PER-BOOK 1,763,951 1,239 275,701 58,720 0 2,099,611 424,334 (6) 242,242 666,570 0 95,328 626,800 0 0 0 0 0 0 0 710,913 2,099,611 440,717 21,634 361,471 383,105 57,612 1,312 58,924 17,968 40,956 2,176 38,780 44,000 16,632 103,068 0 0 Includes common stock expense of $836. Represents unrealized gain/loss on marketable securities, net of taxes.
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