UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.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 SeptemberJune 30, 2002
or
[ ]2003
Or
[_] TRANSITION REPORT PURSUANT TO1TO SECTION 13 OR 15(d)15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation IRS Employer
File Number Address, and Telephone Number Identification No.
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky.KY 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, KentuckyKY 40507-1428
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No __._.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of OctoberJuly 31, 2002,2003,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of OctoberJuly 31, 2002,2003,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by Louisville Gas and Electric
Company and Kentucky Utilities Company. Information contained herein
related to any individual registrant is filed by such registrant on its own
behalf. Each registrant makes no representation as to information relatingrelated
to the other registrants.
TABLE OF CONTENTS
PART I
Item 1 Consolidated Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income 1
Balance Sheets 2
Statements of Cash FlowsFlow 4
Statements of Retained Earnings 5
Statements of Other Comprehensive Income 6
Kentucky Utilities Company and Subsidiary
Statements of Income 7
Balance Sheets 8
Statements of Cash FlowsFlow 10
Statements of Retained Earnings 11
Statements of Other Comprehensive Income 12
Notes to Consolidated Financial Statements 13
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 2120
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 2930
Item 4 Controls and Procedures 3132
PART II
Item 1 Legal Proceedings 33
Item 6 Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35
Exhibits 36
- - New Page -
Part I. Financial Information - Item 1. Financial Statements
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
SeptemberJune 30, SeptemberJune 30,
2003 2002 20012003 2002 2001
OPERATING REVENUES (Note 7)5 and Note 8):
Electric $223,017 $206,228 $581,076 $557,891$173,917 $185,225 $360,936 $346,111
Gas 22,800 25,657 170,856 216,10641,456 30,938 181,280 148,056
Total operating revenue 245,817 231,885 751,932 773,997revenues 215,373 216,163 542,216 494,167
OPERATING EXPENSES:
Fuel for electric generation 52,827 44,338 147,484 124,57146,277 50,550 95,754 94,657
Power purchased 15,322 15,566 60,967 59,651(Note 8) 17,313 15,476 41,440 33,697
Gas supply expenses 11,098 13,533 112,911 157,591
Non-recurring charges (Note 4) - - - 144,38525,963 18,346 132,070 101,813
Other operation expenses 51,269 39,441 154,486 111,12253,379 54,807 106,907 103,216
Maintenance 18,869 13,680 46,441 37,91817,690 15,572 29,583 27,573
Depreciation and amortization
(Note 4) 28,196 26,344 79,363 77,1838) 30,293 25,889 57,437 51,167
Federal and state income taxes 22,083 25,821 43,655 5,6394,714 8,335 21,355
21,572
Property and other taxes 4,501 4,070 13,815 12,9533,454 4,778 8,189 9,314
Total operating expenses 204,165 182,793 659,122 731,013199,083 193,753 492,735 443,009
NET OPERATING INCOME 41,652 49,092 92,810 42,98416,290 22,410 49,481 51,158
Other incomeexpense - net 156 360 90 1,718(1,394) (67) (330) (66)
Interest charges (Note 5) 7,604 9,182 22,497 30,0803) 7,141 7,087 14,131 14,893
NET INCOME 34,204 40,270 70,403 14,622
Preferred stock dividends 1,075 1,110 3,189 3,628
NET INCOME AVAILABLE
FOR COMMON STOCK $ 33,1297,755 $ 39,16015,256 $ 67,21435,020 $ 10,99436,199
The accompanying notes are an integral part of these consolidated financial
statements.
-1-- - Page 1 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept.June 30, Dec.December 31,
2003 2002 2001
UTILITY PLANT:
At original cost $3,554,543 $3,423,037$3,730,273 $3,622,985
Less: reserve for depreciation 1,449,059 1,381,8741,507,498 1,463,674
Net utility plant 2,105,484 2,041,163(Note 7) 2,222,775 2,159,311
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of Sept.June 30, 2003
and December 31, 2002 and Dec. 31, 2001 1,415 1,176602 764
CURRENT ASSETS:
Cash 15,148 2,1123,073 17,015
Accounts receivable - less reserve of $1,575$2,125 as of
Sept.June 30, 2003 and December 31, 2002 and Dec. 31, 2001 (Note 6) 42,375 85,6674) 71,045
68,440
Materials and supplies - at average cost:
Fuel (predominantly coal) 35,057 22,02435,953 36,600
Gas stored underground 49,516 46,39521,745 50,266
Other 27,586 29,05023,493 25,651
Prepayments and other 2,504 4,6886,235 5,298
Total current assets 172,186 189,936161,544 203,270
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,146 5,9216,385 6,532
Regulatory assets (Note 8) 150,915 197,1426) 154,520 153,446
Other 12,380 13,01633,079 37,755
Total deferred debits and other assets 169,441 216,079193,984 197,733
Total assets $2,448,526 $2,448,354$2,578,905 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
-2-- - Page 2 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
Sept.June 30, Dec.December 31,
2003 2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Common stock expense (836) (836)
Additional paid-in capital 40,000 40,000
Retained earnings 414,850 393,636442,498 409,319
Accumulated other comprehensive income (25,972) (19,900)
Other (836) (836)loss (42,063) (40,512)
Total common equity 853,212 838,070864,769 833,141
Cumulative preferred stock 95,140 95,140
Long-term debt (Notes 10 and 11) 328,104 370,704328,104
Long-term debt to associated company (Note 9) 100,000 -
Total capitalization 1,276,456 1,303,9141,388,013 1,256,385
CURRENT LIABILITIES:
Current portion of long-term debt 288,800 246,200288,800
Notes payable to parent 129,153 94,197(Note 9) 171,732 193,053
Accounts payable 86,425 149,07096,699 122,771
Accrued taxes 21,118 20,257
Accrued interest 4,045 5,818- 1,450
Other 14,463 12,84020,077 19,536
Total current liabilities 544,004 528,382577,308 625,610
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 307,489 298,143- net 329,833 313,225
Investment tax credit, in process of amortization 55,589 58,68952,431 54,536
Accumulated provision for pensions
and related benefits 165,365 167,526134,096 224,703
Customer advances for construction 10,350 9,7459,835 10,260
Asset retirement obligation (Note 8) 9,639 -
Regulatory liabilities (Note 8) 54,906 65,3496) 44,719 52,424
Long-term derivative liability 19,700 17,115
Other 34,367 16,60613,331 6,820
Total deferred credits and other liabilities 628,066 616,058613,584 679,083
Total capital and liabilities $2,448,526 $2,448,354$2,578,905 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
-3-- - Page 3 -
Louisville Gas and Electric Company and Subsidiary
Consolidated StatementsStatement of Cash Flows
(Unaudited)
(Thousands of $)
NineSix Months
Ended
SeptemberJune 30,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 70,40335,020 $ 14,62236,199
Items not requiring cash currently:
Depreciation and amortization 79,363 77,18357,437 51,167
Deferred income taxes - net 7,748 (45,886)12,876 9,507
Investment tax credit - net (3,100) (3,186)
Non-recurring charges(2,105) (2,108)
Asset retirement obligations (Note 4)8) 4,108 -
107,919
Other 33,595 11,97722,332 20,917
Changes in current assets and liabilities (63,348) 4,75414,956 (21,917)
Changes in accounts receivable
securitization-net (Note 6) 32,200 37,9004) (14,000) 16,100
Pension funding (83,100) -
Gas supply clause (18,386) 13,793
Other 13,662 (14,122)(501) (6,938)
Net cash flows from operating activities 170,523 191,16128,637 116,720
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (239) - (101)
Proceeds from sales of securities 163 - 4,231
Construction expenditures (141,855) (143,844)(119,412) (69,524)
Net cash flows from investing activities (142,094) (139,613)(119,249) (69,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowing from
associated company (Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 349,400 278,100
Repayment of short-term borrowings from parent (370,737) (280,744)
Issuance of pollution control bonds (Note 10) 118,876 10,104- 119,067
Retirement of pollution control bonds (Note 10)- (120,000) -
Short-term borrowings 896,456 61,564
Repayment of short-term borrowings (861,500) (121,000)
Payment of dividends (49,225) (3,885)(1,993) (25,176)
Net cash flows from financing activities (15,393) (53,217)76,670 (28,753)
CHANGE IN CASH AND TEMPORARY(13,942) 18,342
CASH INVESTMENTS 13,036 (1,669)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 17,015 2,112
2,495
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 15,1483,073 $ 82620,454
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $15,947 $ 46,925 $ 16,51716,681
Interest on borrowed money $ 22,523 $ 25,554
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.10,705 13,019
The accompanying notes are an integral part of these consolidated financial
statements.
-4-- - Page 4 -
Louisville Gas and Electric Company and Subsidiary
Consolidated StatementsStatement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended SeptemberEnded
June 30, Ended SeptemberJune 30,
2003 2002 20012003 2002 2001
Balance at beginning of period $404,721 $286,428$435,647 $413,514 $409,319 $393,636 $314,594
Net income 34,204 40,270 70,403 14,6227,755 15,256 35,020 36,199
Subtotal 438,925 326,698 464,039 329,216443,402 428,770 444,339 429,835
Cash dividends declared on stock:
5% cumulative preferred 269 269 807 807538 538
Auction rate cumulative preferred 439 474 1,281 1,720268 413 569 842
$5.875 cumulative preferred 367 367 1,101 1,101734 734
Common - 23,000 - 46,000 -23,000
Subtotal 24,075 1,110 49,189 3,628904 24,049 1,841 25,114
Balance at end of period $414,850 $325,588 $414,850 $325,588$442,498 $404,721 $442,498 $404,721
The accompanying notes are an integral part of these consolidated financial
statements.
-5-- - Page 5 -
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
SeptemberJune 30, SeptemberJune 30,
2003 2002 20012003 2002 2001
Net income $34,204 $40,270 $70,403 $14,622
Cumulative effect of change in
accounting principle - accounting
for derivative instruments and
hedging activities (Note 5) - - - (5,998)$ 7,755 $15,256 $35,020 $36,199
Losses on derivative instruments
and hedging activities (Note 5) (7,691) (4,663) (10,121) (5,721)
Other comprehensive income (loss)
before tax (7,691) (4,663) (10,121) (11,719)3) (2,552) (3,939) (2,585) (2,430)
Income tax benefit related to items
of other comprehensive income (loss) 3,076 1,865 4,049 4,688loss 1,021 1,576 1,034 973
Other comprehensive loss,
net of tax (1,531) (2,363) (1,551) (1,457)
Other comprehensive income $29,589 $37,472 $64,331 $ 7,5916,224 $12,893 $33,469 $34,742
The accompanying notes are an integral part of these consolidated financial
statements.
-6-- - Page 6 -
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
SeptemberJune 30, SeptemberJune 30,
2003 2002 20012003 2002 2001
OPERATING REVENUES
(Note 7) $239,020 $216,370 $657,744 $647,5225 and Note 8) $197,174 $196,020 $422,157 $405,044
OPERATING EXPENSES:
Fuel for electric generation 80,380 65,646 196,018 177,09659,641 57,368 125,964 115,639
Power purchased 31,873 31,139 112,844 116,046
Non-recurring charges (Note 4) - - - 63,7888) 33,648 32,376 74,848 67,292
Other operation expenses 38,151 30,937 108,874 84,89838,130 36,201 77,019 70,723
Maintenance 12,439 14,143 39,385 41,6637,403 15,386 36,369 26,945
Depreciation and amortization
(Note 4) 24,449 24,158 71,023 71,8058) 27,762 23,515 51,912 46,574
Federal and state income taxes 17,011 16,236 38,759 21,6067,467 7,365 14,067 21,748
Property and other taxes 3,689 3,857 11,565 12,2893,968 3,762 8,163 7,876
Total operating expenses 207,992 186,116 578,468 589,191178,019 175,973 388,342 356,797
NET OPERATING INCOME 31,028 30,254 79,276 58,33119,155 20,047 33,815 48,247
Other income - net 5,466 1,284 8,789 5,6982,694 1,685 4,803 3,324
Interest charges (Note 5) 5,409 5,198 19,871 23,7403) 7,690 8,980 12,598 14,462
NET INCOME before cumulative
effect of accounting change 31,085 26,340 68,194 40,289
Cumulative effect of change in
accounting for derivative
instruments and hedging
activities, net of tax - - - 136
NET INCOME 31,085 26,340 68,194 40,425
Preferred stock dividends 564 564 1,692 1,692
NET INCOME AVAILABLE
FOR COMMON STOCK $ 30,52114,159 $ 25,77612,752 $ 66,50226,020 $ 38,73337,109
The accompanying notes are an integral part of these consolidated financial
statements.
-7-- - Page 7 -
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept.June 30, Dec.December 31,
2003 2002 2001
UTILITY PLANT:
At original cost $3,224,034 $3,064,220$3,450,964 $3,280,762
Less: reserve for depreciation 1,528,492 1,457,7541,581,895 1,536,658
Net utility plant 1,695,542 1,606,466(Note 7) 1,869,069 1,744,104
OTHER PROPERTY AND INVESTMENTS -
less reserve of $129$130 as of Sept.June 30, 2003 and
December 31, 2002 and Dec. 31, 2001 13,766 9,62916,144 14,358
CURRENT ASSETS:
Cash and temporary cash investments 6,790 3,2956,698 5,391
Accounts receivable - less reserve of $520$939 and $800
as of Sept.June 30, 2003 and December 31, 2002,
and Dec. 31, 2001respectively (Note 6) 54,605 45,2914) 46,251 49,588
Materials and supplies - at average cost:
Fuel (predominantly coal) 33,981 43,38241,438 46,090
Other 26,796 26,18827,888 26,408
Prepayments and other 4,505 4,9426,132 6,584
Total current assets 126,677 123,098128,407 134,061
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 3,977 4,3164,868 4,991
Regulatory assets (Note 8) 52,821 66,4676) 61,398 65,404
Long-term derivative asset 17,108 16,928
Other 26,686 16,92616,973 18,537
Total deferred debits and other assets 83,484 87,709100,347 105,860
Total assets $1,919,469 $1,826,902$2,113,967 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
-8-- - Page 8 -
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
Sept.June 30, Dec.December 31,
2003 2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Common stock expense (322) (322)
Additional paid-in capital 15,000 15,000
Retained earnings 477,398 410,896526,916 502,024
Accumulated other comprehensive income - 1,588
Other (595) (595)loss (10,462) (10,462)
Total common equity 799,943 735,029839,272 814,380
Cumulative preferred stock 40,000 40,00039,727 39,727
Long-term debt 348,758 346,562
Long-term debt to associated company (Note 10) 347,839 434,5069) 100,000 -
Total capitalization 1,187,782 1,209,5351,327,757 1,200,669
CURRENT LIABILITIES:
Current portion of long-term debt 91,930 153,930 54,000
Notes payable to parent 87,690 47,790(Note 9) 146,430 119,490
Accounts payable 73,328 85,149
Dividends declared 188 -85,963 95,374
Accrued taxes 12,655 20,520
Accrued interest 4,767 5,6688,696 4,955
Other 18,234 16,48224,779 21,442
Total current liabilities 350,792 229,609357,798 395,191
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 240,001 239,204- net 250,948 241,184
Investment tax credit, in process of amortization 9,239 11,4557,179 8,500
Accumulated provision for pensions and
related benefits 77,445 91,235
Customer advances for construction 1,492 1,526104,376 110,927
Asset retirement obligation (Note 8) 19,087 -
Regulatory liabilities (Note 8) 32,242 33,8896) 21,623 29,876
Other 20,476 10,44925,199 12,036
Total deferred credits and other liabilities 380,895 387,758428,412 402,523
Total capital and liabilities $1,919,469 $1,826,902$2,113,967 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
-9-- - Page 9 -
Kentucky Utilities Company and Subsidiary
Consolidated StatementsStatement of Cash Flows
(Unaudited)
(Thousands of $)
NineSix Months
Ended
SeptemberJune 30,
2003 2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,19426,020 $ 40,42537,109
Items not requiring cash currently:
Depreciation and amortization 71,023 71,80551,912 46,574
Deferred income taxes - net (2,180) (31,980)1,485 (3,106)
Investment tax credit - net (2,216) (2,585)
Non-recurring charges(1,321) (1,478)
Asset retirement obligations (Note 4)8) 9,460 -
48,504
Other 18,358 5,48913,257 13,237
Changes in current assets and liabilities (23,631) (20,671)4,628 (24,551)
Changes in accounts receivable securitization-net
(Note 6) 4,900 30,0004) - 2,300
Pension funding (3,515) -
Other (3,278) (147)12,862 8,208
Net cash flows fromprovided by operating activities 131,170 140,840114,788 78,293
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (1,786) -
Construction expenditures (164,766) (102,329)(175,507) (47,844)
Net cash flows from investing activities (164,766) (102,329)(177,293) (47,844)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from associated company
(Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 360,640 505,938
Repayment of short-term borrowings from parent (333,700) (534,138)
Issuance of pollution control bonds (Note 10) 36,813 - 37,027
Retirement of pollution control bonds (Note 10)(62,000) (37,930) -
Short-term borrowings 390,200 348,963
Repayment of short-term borrowings (350,300) (385,912)
Payment of dividends (1,692) (1,692)(1,128) (1,128)
Net cash flows from financing activities 37,091 (38,641)63,812 (30,231)
CHANGE IN CASH AND TEMPORARY1,307 218
CASH INVESTMENTS 3,495 (130)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 5,391 3,295
314
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 6,7906,698 $ 1843,513
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 59,070 $ 52,280$13,763 $27,905
Interest on borrowed money $ 22,419 $ 23,017
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.$11,045 $16,120
The accompanying notes are an integral part of these consolidated financial
statements.
-10-- - Page 10 -
Kentucky Utilities Company and Subsidiary
Consolidated StatementsStatement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended SeptemberEnded
June 30, Ended SeptemberJune 30,
2003 2002 20012003 2002 2001
Balance at beginning of period $446,877 $360,195$513,321 $434,689 $502,024 $410,896 $347,238
Net income 31,085 26,340 68,194 40,42514,159 12,752 26,020 37,109
Subtotal 477,962 386,535 479,090 387,663527,480 447,441 528,044 448,005
Cash dividends declared on stock:
4.75% cumulative preferred 237 237 711 711475 475
6.53% cumulative preferred 327 327 981 981653 653
Subtotal 564 564 1,692 1,6921,128 1,128
Balance at end of period $477,398 $385,971 $477,398 $385,971$526,916 $446,877 $526,916 $446,877
The accompanying notes are an integral part of these consolidated financial
statements.
-11-- - Page 11 -
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months NineSix Months
Ended Ended
SeptemberJune 30, SeptemberJune 30,
2003 2002 20012003 2002 2001
Net income $31,085 $26,340 $68,194 $40,425
Cumulative effect of change in
accounting principle-accounting
for derivative instruments and
hedging activities (Note 5) - - - 2,647
Losses$14,159 $12,752 $26,020 $37,109
Gains on derivative instruments and
hedging activities (Note 5) (4,475)3) - (2,647)1,828 - Other comprehensive income (loss)
before tax (4,475) - (2,647) 2,6471,828
Income tax benefit (expense)expense related to items of
other comprehensive income (loss) 1,790 - 1,059 (1,059)(731) - (731)
Other comprehensive gain,
net of tax - 1,097 - 1,097
Other comprehensive income $28,400 $26,340 $66,606 $42,013$14,159 $13,849 $26,020 $38,206
The accompanying notes are an integral part of these consolidated financial
statements.
-12-- - Page 12 -
Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary ("LG&E" and "KU" or the "Companies").
The common stock of each of LG&E and KU is wholly-owned by LG&E Energy
Corp. ("LG&E Energy"). In the opinion of management, the unaudited
interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of consolidated
financial position, results of operations, comprehensive income and
cash flows for the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to Securities and Exchange Commission
("SEC") rules and regulations, although the Companies believe that the
disclosures are adequate to make the information presented not
misleading.
See LG&E's and KU's Annual Reports on Form 10-K for the year ended
December 31, 20012002 for information relevant to the accompanying
financial statements, including information as to the significant
accounting policies of the Companies.
The accompanying financial statements for the three months and six
months ended June 30, 2002, have been revised to conform with certain
reclassifications in the current three months and six months ended June
30, 2003. These reclassifications had no effect on net income, total
assets, or total capital and liabilities as previously reported.
2. On December 11, 2000, LG&E Energy was acquired by Powergen plc, now
known as Powergen Limited, ("Powergen") for cash of approximately $3.2
billion or $24.85 per share and the assumption of all of LG&E Energy's
debt. As a result of the acquisition, among other things, LG&E Energy became a wholly-ownedwholly-
owned indirect subsidiary of Powergen and as a result, LG&E and KU became indirect
subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E
Energy continued their separate identities and continue to serve
customers in Kentucky, Virginia and VirginiaTennessee under their existing
names. The preferred stock and debt securities of the utility
operations were not affected by this transaction resulting in the
utility operations' obligations to continue to file SEC reports.
Following the acquisition, Powergen became a registered holding company
under the Public Utility Holding Company Act of 1935 ("PUHCA"), and
LG&E and KU, as subsidiaries of a registered holding company, became
subject to additional regulation under PUHCA.
No costs
associated with the Powergen acquisition nor any of the effects of purchase
accounting have been reflected in the financial statements of LG&E or KU.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed as a
subsidiary of LG&E Energy and became operational on January 1, 2001.
LG&E Services provides certain services to affiliated entities,
including LG&E and KU, at cost, as required under PUHCA. On January 1,
2001, approximately 1,000 employees, primarily from LG&E Energy, LG&E
and KU, were moved to LG&E Services.
3. On April 9, 2001,July 1, 2002, a German company, E.ON AG ("E.ON"), completed its
acquisition of Powergen. E.ON had announced a pre-
conditionalits pre-conditional cash
offer of 5.1 billion pounds sterling ($7.3 billion) to
acquire Powergen. The final regulatory approval needed was receivedfor Powergen on
June
14, 2002 fromApril 9, 2001. Following the SEC. Effective July 1, 2002, the acquisition of Powergen
was completed by E.ON. Following this acquisition, LG&E and KU became indirect
subsidiaries of E.ON and E.ON became a registered holding company under
PUHCA,PUHCA. As contemplated in their regulatory filings in connection with
the E.ON acquisition, E.ON, Powergen and subjectLG&E Energy have completed an
administrative reorganization to regulation thereunder.move the LG&E Energy group from an
indirect Powergen subsidiary to an indirect E.ON subsidiary. This
reorganization was effective March 2003.
- Page 13 -
No costs associated with the Powergen acquisition or the E.ON
acquisition nor any of the effects of purchase accounting have been
reflected in the financial statements of LG&E or KU.
4. During the first quarter 2001, LG&E recorded a $144 million charge and
KU recorded a $64 million charge for a workforce reduction program.
Primary components of the charge were separation benefits, enhanced
early retirement benefits, and health care benefits. The result of
this workforce reduction was the net elimination of approximately 950
positions, accomplished primarily through a voluntary enhanced
severance program.
On June 1, 2001, LG&E and KU filed an application ("VDT case") with the
Kentucky Public Service Commission (the "Kentucky Commission") to
create a regulatory asset relating to these first quarter 2001 charges.
The application requested permission to amortize these costs over a
four-year period. The Kentucky Commission also opened a case to review
a depreciation study and resulting depreciation rates implemented in
2001.
-13-
LG&E and KU reached a settlement in the VDT case as well as the other
cases involving depreciation rates and the Earnings Sharing Mechanism
with all intervening parties. The settlement agreement was approved by
the Kentucky Commission on December 3, 2001.
The Kentucky Commission's December 3, 2001 order allowed LG&E to set up
a regulatory asset of $141 million for the workforce reduction costs
and begin amortizing these costs over a five year period starting in
April 2001. The first quarter charge of $144 million represented all
employees who had accepted the voluntary enhanced severance program.
Between the time of the original filing and the December 3, 2001 order,
some employees rescinded their participation in the voluntary enhanced
severance program, thereby decreasing the original charge from $144
million to $141 million. The settlement will also reduce revenues by
approximately $26 million through a surcredit on bills to customers
over the same five year period. The surcredit represents stipulated
net savings LG&E anticipates realizing from implementation of best
practices through the value delivery process. The agreement also
established LG&E's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $5.6 million in 2001.
The Kentucky Commission's December 3, 2001 order allowed KU to set
up a regulatory asset of $54 million for the workforce reduction costs
and begin amortizing these costs over a five year period starting in
April 2001. The first quarter charge of $64 million represented all
employees who had accepted the voluntary enhanced severance program.
Some employees rescinded their participation in the voluntary enhanced
severance program and, along with the non-recurring charge of $6.9
million for FERC and Virginia jurisdictions, decreased the original
charge from $64 million to $54 million. The settlement will also reduce
revenues by approximately $11 million through a surcredit on bills to
customers over the same five year period. The surcredit represents
stipulated net savings KU anticipates realizing from implementation of
best practices through the value delivery process. The agreement also
established KU's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $6.0 million in 2001.
5. Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that LG&E
and KU must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 could increase the
volatility in earnings and other comprehensive income. LG&E and KU adopted
SFAS No. 133 on January 1, 2001. The effect of adopting this statement in
2001 resulted in a $3.6 million (net of tax of $2.4 million) decrease in
other comprehensive income from a cumulative effect of change in accounting
principle for LG&E and a $1.6 million (net of tax of $1.1 million) increase
in other comprehensive income from a cumulative effect of change in
accounting principle for KU.3. The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy,the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
Management has designated all of the Companies' interest rate swaps as
hedge instruments. Financial instruments designated as cash flow hedges
have resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge becomes
ineffective, the resulting gains or losses are reclassified from other
comprehensive income to net income. Financial instruments designated as
fair value hedges are periodically marked to market with the resulting
gains and losses recorded directly into net income to correspond with
income or expense recognized from changes in market value of the items
being hedged.
-14-
As of SeptemberJune 30, 2002,2003, LG&E had fixed rate swaps covering $117,335,000$100.3 million
in notional amounts of variable rate debt and with fixed rates ranging
from 4.184%4.309% to 5.495%. The average variable rate on the debt during
the quarterthree months and ninesix months ended SeptemberJune 30, 20022003 was 1.38%1.13% and
1.44%.1.16%, respectively. The swaps have been designated as cash flow hedges
and expire on various dates from February 20032005 through November 2020.
The hedges were deemed to be fully effective resulting in a pretax loss
for the quarterthree months and ninesix months ended SeptemberJune 30, 20022003 of $7.7$2.6 million
and $10.1$2.6 million, respectively, recorded in Other Comprehensive
Income.other comprehensive income.
Upon expiration of these hedges, the amount recorded in Other
Comprehensive Incomeother
comprehensive income will be reclassified into earnings. The amount
expected to be reclassified from Other Comprehensive Incomeother comprehensive income to earnings
in the next twelve months is immaterial due to the long-term nature of
the swaps.
As of SeptemberJune 30, 2002,2003, KU had variable rate swaps covering $153,000,000$153
million in notional amounts of fixed rate debt. The average variable
rate on these swaps during the quarterthree months and ninesix months ended SeptemberJune
30, 20022003 was 2.37%1.93% and 2.40%.1.94%, respectively. The underlying debt has
fixed rates ranging from 5.75% to 7.92%. The swaps have been
designated as fair value hedges and expire on various dates from May
2007 through June 2025. During the quarterthree months and ninesix months ended
SeptemberJune 30, 2002,2003, the effect of marking these financial instruments and
the underlying debt to market resulted in a pretax gainsloss of $1.6$2.2 million
and $1.2$2.0 million, respectively, recorded as a reductionan increase in interest
expense.
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementation of
SFAS No. 133. DIG Issue C15, Normal Purchases and Normal Sales
Exception for Option Type Contracts and Forward Contracts in
Electricity was adopted in 2001 and had no impact on results of
operations and financial position of the Companies. DIG Issue C16,
Applying the Normal Purchase and Normal Sales Exception to Contracts
that Combine a Forward Contract and a Purchased Option Contract, was
cleared in the third quarter 2001 and stated that option contracts do
not meet the normal purchases and normal sales exception and should
follow SFAS No. 133. DIG Issue C16 was effective in the second quarter
of 2002. The adoption of DIG Issue C16 did not have a material impact
on the financial position or results of operations of the Companies
pursuant to regulatory treatment prescribed by SFAS No. 71, Accounting
for the Effects of Certain Types of Regulation. LG&E recorded a mark
to market liability and a corresponding regulatory asset of $0.2
million at September 30, 2002. KU recorded a mark to market asset and
corresponding regulatory liability of $1.3 million at September 30,
2002. The notional amounts of these options as of September 30, 2002,
is $5.0 million for LG&E and $9.8 million for KU.
6. SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, and provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Companies
adopted SFAS No. 140 in the first quarter of 2001, when4. LG&E and KU entered intoparticipate in accounts receivable securitization programs.
On February 6, 2001, LG&E and KU implemented an accounts receivable
securitization program. The purpose of this programthese programs is to enable the utilities to accelerate the
receipt of cash from the collection of retail accounts receivable, thereby
reducing dependence upon more costly sources of working capital. The
securitization program allowsprograms allow for a percentage of eligible receivables to
be sold. Eligible receivables are generally all receivables associated
with retail sales that have standard terms and are not past due. LG&E and
KU are able to terminate these programs at any time without penalty. If
there is a significant deterioration in the payment record of the
receivables by retail customers or if the Companies fail to meet certain
covenants of the program,programs, the programprograms may terminate at the election of
the financial institutions. In this case, payments from retail customers
would first be used to repay the financial institutions participating in
the program,programs, and would then be available for use by the Companies.
-15-
As part of the program,these programs, LG&E and KU sold retail accounts receivables
to wholly owned subsidiaries, LG&E Receivables LLC ("LG&E R") and KU
Receivables LLC ("KU R"). Simultaneously, LG&E R and KU R entered into
two separate three-year accounts receivable securitization facilities
with two financial institutions and their affiliates whereby LG&E R and
- - Page 14 -
KU R can sell, on a revolving basis, an undivided interest in certain
of their receivables and receive up to $75 million and $50 million,
respectively,especttively, from an unrelated third party purchaser. The effective
cost of the receivables programs is comparable to the Companies' lowest
cost source of capital, and is based on prime rated commercial paper.
LG&E and KU retain servicing rights of the sold receivables through
separate servicing agreements with the third party purchasers. LG&E
and KU have obtained opinions from independent legal counsel indicating
these transactions qualify as true sales of receivables. As of SeptemberJune
30, 20022003 and December 31, 2001,2002, LG&E's outstanding program balances
were $74.2$49.2 million and $42.0$63.2 million, respectively, and KU's balances were $50.0 million and $45.1 million, respectively.balance
for both periods was $49.3 million.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1.5$2.1 million and $1.8 million for LG&E at
June 30, 2003 and December 31, 2002 and $0.7 million and $0.5 million
for KU for both Septemberat June 30, 20022003 and December 31, 2001.2002. Charge offs were
immaterial for LG&E and KU. Management believes that the risk of
uncollectibility associated with the sold receivables is minimal.
7.5. External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and ninesix months
ended SeptemberJune 30, 2002,2003, follow (in thousands of $):
Three Months Ended SeptemberJune 30, 2002
Net
Income/
(Loss)
Inter- Avail.2003
External segment ForIntersegment
Revenues Revenues Common StockNet Income (Loss)
LG&E electric $218,201$163,067 $10,850 $ 4,816 $ 37,5019,457
LG&E gas 22,80041,456 - (4,372)(1,682)
Total $241,001$204,523 $10,850 $ 4,816 $ 33,1297,775
KU electric $232,738$187,963 $ 6,283 $ 30,521
Nine9,211 $14,159
Six Months Ended SeptemberJune 30, 2002
Net
Income/
(Loss)
Inter- Avail.2003
External segment ForIntersegment
Revenues Revenues Common StockNet Income
LG&E electric $553,357 $ 27,719 $ 64,572$333,116 $27,820 $27,489
LG&E gas 170,856181,280 - 2,6427,531
Total $724,213 $ 27,719 $ 67,214$514,396 $27,820 $35,020
KU electric $628,585 $ 29,159 $ 66,502
-16-$398,482 $23,675 $26,020
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and ninesix
months ended SeptemberJune 30, 2001,2002, follow (in thousands of $):
Three Months Ended SeptemberJune 30, 2001
Net
Income/
(Loss)
Inter- Avail.2002
External segment ForIntersegment
Revenues Revenues Common StockNet Income (Loss)
LG&E electric $175,375 $ 199,740 $ 6,488 $ 41,1399,850 $17,658
LG&E gas 25,65730,938 - (1,979)(2,402)
Total $206,313 $ 225,397 $ 6,488 $ 39,1609,850 $15,256
KU electric $187,925 $ 208,263 $ 8,107 $ 25,776
Nine8,095 $12,752
- - Page 15 -
Six Months Ended SeptemberJune 30, 2001
Net
Income/
(Loss)
Inter- Avail.2002
External segment ForIntersegment
Revenues Revenues Common StockNet Income
LG&E electric $ 535,574 $ 22,317 $ 24,564$323,208 $22,903 $28,750
LG&E gas 216,106148,056 - (13,570)7,449
Total $ 751,680 $ 22,317 $ 10,994$471,264 $22,903 $36,199
KU electric $ 623,873 $ 23,649 $ 38,733
-17-
8.$382,168 $22,876 $37,109
6. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of SeptemberJune 30, 20022003 and December 31, 20012002 (in
thousands of $):
Louisville Gas and Electric
(Unaudited)
Sept.June 30, Dec.December 31,
2003 2002 2001
REGULATORY ASSETS:
VDT costs $105,029 $127,529$ 82,870 $ 98,044
Unamortized loss on bonds 17,695 17,90218,267 18,843
Gas supply adjustments due from customers 15,167 30,135
Gas performance based ratemaking 4,957 7,70832,100 13,714
Earnings sharing mechanism provision 10,728 12,500
Asset retirement obligation 5,589 -
LG&E/KU merger costs 2,722 5,444- 1,815
One utility costs 1,626 3,643
Demand-side management 1,885 2,719141 954
Manufactured gas sites 1,834 2,0621,605 1,757
Other 3,220 5,819
Total 150,915 197,142$154,520 $153,446
REGULATORY LIABILITIES:
Deferred income taxes - net 47,105 48,703$ 41,804 $ 45,536
Gas supply adjustments due to customers 6,392 15,7021,555 3,154
Other 1,409 9441,360 3,734
Total $ 54,90644,719 $ 65,34952,424
Kentucky Utilities
(Unaudited)
Sept.June 30, Dec.December 31,
2003 2002 2001
REGULATORY ASSETS:
VDT costs $40,186 $48,811$ 32,322 $38,375
Unamortized loss on bonds 6,693 6,1429,018 9,456
Earnings sharing mechanism provision 9,036 13,500
Asset retirement obligation 9,714 -
LG&E/KU merger costs 3,070 6,139- 2,046
One utility costs 1,746 4,365- 873
Other 1,126 1,0101,308 1,154
Total 52,821 66,467$ 61,398 65,404
REGULATORY LIABILITIES:
Deferred income taxes - net 29,896 32,872
Mark$ 20,575 28,854
Other 1,048 1,022
Total $ 21,623 $29,876
- - Page 16 -
7. The following data represent shares of jointly owned additions to market coal supply option contracts 1,314the
Trimble County plant for four combustion turbines as of June 30, 2003:
LG&E KU Total
Ownership % 37% 63% 100%
Mw capacity 237 403 640
Plant under construction $52 $92 $144
Depreciation - Other 1,032 1,017
Total $32,242 $33,889
9. SFAS- -
Net book value $52 $92 $144
8. Statement of Financial Accounting Standard (SFAS) No. 143, Accounting
for Asset Retirement Obligations, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
werewas issued duringin 2001. SFAS No. 143
establishes accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of SFAS No. 121 to allocate
goodwill to long-lived assets to be tested for impairment. The effective implementation date for SFAS No. 144143 was January 1, 2002 and
SFAS No. 143 is January 1, 2003.
SFAS No. 144 had noManagement has calculated the impact on the
financial position or results of operations of LG&E or KU. Management
is currently conducting an analysis and review of SFAS No. 143 and the recently
released FERC Notice of Proposed Rulemaking No. RM02-7,final rule, Accounting, Financial Reporting, and Rate
Filing Requirements for Asset Retirement Obligations (NOPR RM02-7). Although a final determination
has not been made, management believes there will be no material impact
onObligations. As of June 30,
2003, LG&E recorded asset retirement obligation (ARO) assets in the
financial position or resultsamount of operations$4.5 million and liabilities of $9.6 million. LG&E recorded
offsetting regulatory assets of $5.6 million, pursuant to regulatory
treatment prescribed under SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. -18-As of June 30, 2003, KU recorded ARO
assets in the amount of $8.6 million and liabilities of $19.1 million.
KU recorded offsetting regulatory assets of $9.7 million, pursuant to
regulatory treatment prescribed under SFAS No. 145, Rescission71. LG&E and KU AROs
are primarily related to final retirement of SFAS Nos. 4, 44 and 64, Amendmentgenerating units. Assets
with associated AROs will no longer include a cost of removal component
within their depreciation rate. Assets without associated AROs will
continue to be depreciated including a cost of removal component
within the depreciation rate.
Had SFAS No. 13, and Technical Corrections was issued143 been in effect for the 2002 reporting period, the
Companies would have established asset retirement obligations as
described in the second quarter
2002.following table (in thousands of $):
LG&E KU
Provision at January 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at December 31, 2002 $9,330 $18,477
For the three months and six months ended June 30, 2003, LG&E recorded
ARO accretion expense of $154,000 and $308,000, respectively, ARO
depreciation expense of $29,000 and $58,000, respectively, and an
offsetting regulatory credit in the income statement of $183,000 and
$366,000, respectively. For the three months and six months ended June
30, 2003, KU recorded ARO accretion expense of $306,000 and $612,000,
respectively, ARO depreciation expense of $44,000 and $88,000,
respectively, and an offsetting regulatory credit in the income
statement of $350,000 and $700,000, respectively. The rescinded pronouncements were as follows:recording of the
regulatory credit is pursuant to regulatory treatment prescribed under
SFAS No. 4,
Reporting Gains and Losses from Extinguishment71, Accounting for the Effects of Debt;Certain Types of Regulation.
SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers; SFAS No. 64,
Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements; and,
SFAS No. 13, Accounting for Leases. The provisions related to SFAS No.
13 were effective for fiscal years beginning after May 15, 2002. All
other provisions of SFAS No. 145 shall be effective for financial
statements issued on or after May 15, 2002. The adoption of this
standard will not have a material143 has no impact on financial position orthe results of operations of the Companies.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The
Companies do not expect the adoption of this standard to have an impact
on financial position or results of operationsoperation of the
Companies.
The CompanyCompanies adopted EITF No. 98-10, Accounting for Energy Trading and
Risk Management Activities, effective January 1, 1999. This
pronouncement required that energy trading contracts be marked to
market on the balance sheet, with the gains and losses shown net in the
income statement.
In October 2002,Effective January 1, 2003, the EmergingCompanies adopted EITF No. 02-03, Issues
Task Force
reachedInvolved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities. EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of a consensusderivative under
SFAS No.133 should not be marked to rescind EITF 98-10. The effective date forfair market value, and
- - Page 17 -
- Revenues should be shown in the full rescission will be for fiscal periods beginning after December 15,
2002.income statement net of costs
associated with trading activities, whether or not the trades
are physically settled.
With the rescission of EITF No. 98-10, energy trading contracts that do
not also meet the definition of a derivative under SFAS No. 133 must be
accounted for as executory contracts. Contracts previously recorded at
fair value under EITF No. 98-10 that are not also derivatives under
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, must be restated to historical cost through a cumulative
effect adjustment. The Companies do not expect
the rescission of this standard to have a materialhad no impact on
financial position or results of operations of the Companies.Companies since all
contracts marked to market under EITF No. 98-10 are also within the
scope of SFAS No. 147, Acquisitions133.
As a result of Certain Financial Institutions was issued
in November 2002. This standard providesEITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating
revenue to reflect this accounting change. The Companies applied this
guidance on the accounting
for the acquisition of a financial institution. SFAS No. 147to all prior periods, which had no impact on previously
reported net income or common equity.
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues $180,637 $191,813 $375,930 $358,059
Less costs reclassified
from power purchased 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues $204,675 $203,555 $438,822 $418,723
Less costs reclassified
from power purchased 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified to revenues 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified to revenues 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. SFAS No. 150 is effective immediately
for financial positioninstruments entered into or resultsmodified after May 31, 2003,
and otherwise is effective for interim reporting periods beginning
after June 15, 2003.
- - Page 18 -
LG&E has existing $5.875 series mandatorily redeemable preferred stock
with 250,000 shares outstanding having a current redemption price of
operations$100 per share. The preferred stock has a sinking fund requirement
sufficient to retire a minimum of 12,500 shares on July 15th of each
year commencing with July 15, 2003, and a minimum of 187,500 shares on
July 15, 2008 at $100 per share. LG&E redeemed 12,500 shares in
accordance with these provisions on July 15, 2003. Beginning with the
three months ended September 30, 2003, LG&E will reclassify, at fair
value, its $5.875 series preferred stock as long-term debt with the
minimum shares mandatorily redeemable within one year classified as
current portion of long-term debt. Dividends accrued beginning July 1,
2003 will be charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No.
150.
9. On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and the interest rate is
4.55%. KU had a first mortgage bond of $62 million that matured in
June 2003 and LG&E has a first mortgage bond of $42.6 million maturing
in August 2003. The Companies expect to refinance these bonds, along
with a portion of the notes payable to parent, with additional long-
term intercompany loans.
The Companies participate in a money pool whereby LG&E Energy can make
funds available up to $400 million at market-based rates for each of
LG&E orand KU. 10.On October 23, 2002, LG&E refinanced its pollution control series R
bondEnergy maintains facilities of $200 million with a
variable rate bondPowergen subsidiary and $150 million with an E.ON affiliate to ensure
funding availability for the money pool. There was $82 million
outstanding under the Powergen line of credit and the same $41.665balance under
E.ON affiliates' line totaled $74.9 million principal
amount. The interest rate on the new bond will be reset every 35 days via
an auction process. The new bonds are secured by first mortgage bonds and
by bond insurance. The new bonds will mature on October 1, 2032.
On October 3, 2002, KU refinanced its pollution control series 8 bond
with a variable rate bond of the same $96 million principal amount.
The interest rate will be reset every 35 days via an auction process.
The bonds are secured by first mortgage bonds and by bond insurance.
The new bonds will mature on October 1, 2032.
On May 23, 2002 KU refinanced its pollution control series 1B, 2B, 3B,
and 4B bonds, totaling $37.9 million. The new bonds, series 12, 13, 14
and 15 are due in February 2032 and bear interest at a variable rate.
The new bonds are secured by first mortgage bonds and have the same
principal amount as the prior bonds. The variable rate will be
established by the remarketing agent based on conditions in the tax-
exempt debt market.
On March 22, 2002, LG&E refinanced two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate
bonds are secured by first mortgage bonds and will mature November 1,
2027. The variable rate will be established by the remarketing agent
taking into account market conditions in the commercial paper market.
-19-
On March 6, 2002, LG&E refinanced $22.5 million and $27.5 million in
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and
are secured by first mortgage bonds. The variable rate will be
established by the remarketing agent taking into account market
conditions in the commercial paper market.
11.As of June 30, 2002,2003. LG&E
Energy owned $104.6has provided loans to LG&E and KU through the money pool that
total $171.7 million in varying
portionsand $146.4 million, respectively, as of LG&E's outstanding variableJune 30,
2003. These borrowings carried an interest rate pollution control bonds.
The bonds were acquired during May 2002 by LG&E Energybased on an index of
highly rated commercial paper issuers as an investment
and were sold in their entirety duringof the first halfprior month end of
July 2002 to
unaffiliated third parties.
12.In1.21% at June 30, 2003.
10.In the normal course of business, lawsuits, claims, environmental
actions, and various non-ratemaking governmental proceedings arise
against LG&E and KU. To the extent that damages are assessed in any of
these lawsuits, LG&E and KU believe that their insurance coverage is
adequate. Management, after consultation with legal counsel, and based
upon the present status of these items, does not anticipate that
liabilities arising out of other currently pending or threatened
lawsuits and claims of the type referenced above will have a material
adverse effect on LG&E's or KU's consolidated financial position or
results of operations.
LG&E Employment Discrimination Case
As previously reported, in October 2001, approximately 30 employees or
former employees filed a complaint against LG&E claiming past and
current instances of employment discrimination against LG&E. LG&E has
removed the case to the U.S. District Court for the Western District of
Kentucky and filed an answer denying all plaintiffs' claims. Discovery
has commenced in the matter. The court has ordered mediation and
certain plaintiffs have settled for non-material amounts as a result of
that process. In addition, certain other plaintiffs have sought
administrative review before the U.S. Equal Employment Opportunity
Commission which has, to date, declined to proceed to litigation on any
claims reviewed. Previously amended pleadings, while reducing the size
of the plaintiff and defendant groups and eliminating certain prior
demands, contain a claimed damage amount of $100 million as well as
requests for injunctive relief. During mediation in the first quarter
2003, additional settlements were reached with a number of plaintiffs,
including a settlement with the lead plaintiff, which reduced the
number of remaining plaintiffs to approximately nine. LG&E intends to
continue to defend itself vigorously in the action and management does
not anticipate that the outcome will have a material impact on LG&E's
operations respectively.
-20-or financial condition.
- - Page 19 -
Combustion Turbine Litigation
LG&E and KU have filed a lawsuit in the U.S. District Court for the
Eastern District of Kentucky against Alstom Power, Inc. (formerly ABB
Power Generation, Inc.) ("Alstom") regarding two combustion turbines
supplied by Alstom during 1999. These units are installed at KU's E.W.
Brown generating plant and beneficial ownership of the combustion
turbines is jointly vested in LG&E and KU. The original purchase price
for the turbines was approximately $91.8 million. The suit presents
warranty, negligence, misrepresentation, fraud and other claims
relating to numerous operational defects or deficiencies of the
turbines. LG&E and KU have requested rescission of the contract and
recovery of all expenditures relating to the turbines. Recently, the
court ruled that LG&E and KU cannot pursue rescission on the breach of
contract claim, but has not ruled on whether they can seek rescission
on the fraud count. In addition, LG&E and KU seek punitive damages.
As an alternative to rescission, LG&E and KU have requested relief for
amounts incurred or expended to date in connection with operational
repairs, cover damages or liquidated damages and other costs, with
possible further damages and interest to be proven at trial. The
matter is currently in discovery with a trial re-scheduled for the
fourth quarter of 2003.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The following discussion and analysis by management focuses on those
factors that had a material effect on LG&E's and KU's financial results of
operations and financial condition during the three and ninesix month periods
ended SeptemberJune 30, 20022003, and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy and fuel industry or markets;industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the Securities
and Exchange Commission, including Exhibit No.
99.01 to their Annual Reportthe report on Form 10-K for year ended
December 31, 2001.2002.
Results of Operations
The results of operations for LG&E and KU are affected by seasonal
fluctuations in temperature and other weather-related factors. Because of
these and other factors, the results of one interim period are not
necessarily indicative of results or trends to be expected for the full
year.
Three Months Ended SeptemberJune 30, 2002,2003, Compared to
Three Months Ended SeptemberJune 30, 20012002
LG&E Results:
LG&E's net income decreased $6.1$7.5 million (49%) for the quarterthree months ended
SeptemberJune 30, 2002,2003, as compared to the quarterthree months ended SeptemberJune 30, 2001. Higher2002,
primarily because of a decrease in sales to electric retail consumers due
to milder weather experienced in 2003 and a decrease in the price of retail
electric sales were offset by amortization expenses associated with
LG&E's workforce reduction program (See Note 4) and increased repairs to
steam productionhigher depreciation and gas distribution systems.maintenance expenses.
- - Page 20 -
A comparison of LG&E's revenues for the quarterthree months ended SeptemberJune 30, 2002,2003,
with the quarterthree months ended SeptemberJune 30, 2001,2002, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 9,235 $(4,542)(5,438) $ 8,733
Environmental cost recovery surcharge 4,233(89) -
Demand side management cost recovery 723 39279 (51)
LG&E/KU merger surcredit (1,093)227 -
Value delivery surcredit (411) (26)(731) (186)
Weather normalization - 588
Variation in sales volume etc. 10,905 (167)and other (8,286) 1,944
Total retail sales 23,592 (2,696)(14,038) 11,028
Wholesale sales (7,970) -1,527 (428)
Gas transportation - net - 19(28)
Other 1,167 (180)1,203 (54)
Total $16,789 $(2,857)
-21-$(11,308) $10,518
Electric revenues increaseddecreased primarily because of an increase in retail
sales partially offset bydue to lower fuel costs billed to
customers and a decrease in wholesale sales. Theretail volumes sold due to a 42% decrease in
wholesale sales is attributable to lower sales volumes ($12.2 million),cooling degree days. These decreases were partially offset by an increase
in wholesale sales prices ($4.2 million).
The retail sales increase was duevolumes. Gas revenues increased primarily as a result of
higher gas supply costs billed to customers through the gas supply clause
and increased volumes sold, partially offset by a decrease in part to warmer weather experienced
this period. Cooling degree days increased 26% for the three months ended
September 2002 as compared to three months ended September 2001.volume of
wholesale sales.
Fuel for electric generation and gas supply expenses comprise a large
portioncomponent of LG&E's total operating expenses. LG&E's electric and gas
rates contain a Fuel Adjustment Clausefuel adjustment clause and a Gas Supply Clause,gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply may beare reflected in retail rates, subject to the approval of the
Kentucky Commission.Public Service Commission (Kentucky Commission). Fuel for
electric generation increased $8.5decreased $4.3 million (19%(8%) for the quarter because of an increasethree months ended
due to a decrease in generation ($2.5 million) and a decrease in the cost
of coal burned ($10.9
million), offset by a decrease in quantity of coal burned ($2.41.8 million). Gas supply expenses decreased $2.4increased $7.6 million
(18%(42%) due to a decreasean increase in net gas supply cost ($2.89.7 million), partially
offset by an increasea decrease in the volume of retail gas delivered to the
distribution system ($.42.1 million).
Power purchased increased $1.8 million (12%) due to an increase in the
price of power purchased.
Other operationoperations expenses increased $11.8decreased $1.4 million (30%(3%) in 2002,, as compared to 2001, primarily due to amortization expenses associated with LG&E's
workforce reduction program ($7.5 million), increased costs for pension
expenses ($1.3 million) and increased electric transmission expenses ($2.0
million). Transmission expenses increased during 2002, primarily as a
result of the Company joining the Midwest Independent System Operators
(MISO) to meet regulatory requirements for regional transmission.
Maintenance expenses increased $5.2 million (38%) in 2002,
primarily due to lower injury and damage liability claims from third
parties, $1.9 million.
Maintenance expenses increased outages at the steam production plants ($3.1 million)$2.1 million (14%) primarily due to
increased maintenance of gas distribution mains and gas
main repairs ($2.1 million).
A reconciliationmaintenance of differences between the U.S. statutory federalelectric
distribution lines, $1.9 million.
Depreciation and amortization increased $4.4 million (17%) because of
additional utility plant in service.
- - Page 21 -
Variations in income tax rate and effective incomeexpense are largely attributable to changes in pre-
tax rate for the three months ended September
follows:income.
Three Months Three Months
Ended Ended
June 30, 2003 June 30, 2002
Effective rate Sept. 2002 Sept. 2001Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.5% 5.4%6.5 4.3
Amortization of investment tax credit & R&D (1.8)% (1.6)%(9.5) (4.5)
Other differences (0.1)% (0.3)%(2.2) (0.4)
Effective income tax rate 38.6% 38.5%
Interest charges decreased $1.6 million (17%) due to29.8% 34.4%
The amortization of investment tax credit and other differences were
approximately the same in both periods, but lower interest rates
on variable rate long-term debt ($1.4 million) and a decrease in interest
associated with the accounts receivable securitization program ($.2
million). (See Note 10.) The weighted average interest rate on variable-
rate tax-exempt debtpretax income for the
three months ended SeptemberJune 30, 2002 was
1.42%, compared2003, caused the percentage changes to 3.02% forbe
greater in the comparable period in 2001.2003 period.
KU Results:
KU's net income increased $4.7$1.4 million (11%) for the quarterthree months ended
SeptemberJune 30, 2002,2003, as compared to the quarterthree months ended SeptemberJune 30, 2001.2002. The
increase was primarilymainly due to increased retail electric revenues and increased equity
earnings fromdecreased maintenance expenses due to insurance
recovery for expenses associated with a minority interestsevere ice storm experienced in
February 2003 partially offset by increasedincreases in depreciation, other
operation expense.expenses, power purchased, and fuel.
A comparison of KU's revenues for the quarterthree months ended SeptemberJune 30, 2002,2003,
with the quarterthree months ended SeptemberJune 30, 2001,2002, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $ 8,864(116)
Environmental cost recovery surcharge 1,238
Demand side management cost recovery 274(826)
LG&E/KU merger surcredit (480)76
Value delivery surcredit (189)(403)
Earnings sharing mechanism 1,109
Variation in sales volume etc. 16,291and other 282
Total retail sales 25,998122
Wholesale sales (4,863)2,962
Other 1,515(1,930)
Total $22,650
-22-$ 1,154
Electric revenuesrevenue increased primarily due to an increase in retail sales.
Cooling degree days increased 36% for the quarter ended September 30, 2002
compared to the same period in 2001.wholesale sales
volume.
Fuel for electric generation comprises a large portioncomponent of KU's total
operating expenses. KU's electric rates contain a Fuel Adjustment Clause,fuel adjustment clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Public Service Commission, the Virginia
State Corporation Commission, and the Federal Energy Regulatory Commission.
Fuel for electric generation increased $14.7$2.3 million (22%(4%) for the quarter
due tobecause of an increase in the cost of coal burned ($13.44.4 million) partially
offset by a decrease in generation ($2.1 million) due to temporary plant
outages.
Power purchased increased $1.3 million (4%) due to an increase in the price
of power purchased ($.3 million) and an increase in the volume burnedpurchased
($1.31.0 million).
- - Page 22 -
Other operation expenses increased $7.2$1.9 million (23%(5%) as compared to 2001,
primarily2002,
due to amortizationincreased pension (the market value of plan assets has been affected
by declines in the equity market) and post-retirement medical expenses
associated with KU's workforce
reduction program ($2.81.2 million), increased operation of the electric
transmission system primarily resulting from increased MISO costs ($2.6
million),and increased property insurance ($0.8 million), and claims ($0.7.5 million).
Maintenance expenses decreased $1.7$8.0 million (12%(52%) primarily due to decreased maintenancean
insurance reimbursement of steam productioncosts incurred in the first quarter of 2003 for
repairs to electric distribution equipment due to an ice storm in February
2003 ($8.9 million).
Depreciation and amortization increased $4.3 million (18%) because of
additional utility plant ($1.3 million).
A reconciliation of differences between the U.S. statutory federalin service.
Variations in income tax rate and effective income tax rate for the three months ended September
follows:expense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
June 30, 2003 June 30, 2002
Effective rate Sept. 2002 Sept. 2001Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.9% 5.6%6.5 6.8
Amortization of investment tax credit & R&D (1.6)% (2.1)%(3.1) (3.9)
Other differences (4.3)% (1.2)%(4.6) (4.5)
Effective income tax rate 34.0% 37.3%
The change33.8% 33.4%
Other income - net increased $1.0 million (60%) in other differences is2003 primarily due to higher dividends received
deduction related to the increasedan
increase in subsidiary earnings, from KU's equity earnings from$.6 million, and a minority interest.
Other income-net increased $4.2decrease in benefit
costs, $0.2 million, as a result of increased earnings
from KU's equity earnings from a minority interest. The increased earnings
are due to the gain on the sale of emissions allowances.partially offset by taxes.
Interest charges increased $.2decreased $1.3 million (4%(14%) for the third quarter 2002three months ended
June 30, 2003 as compared to the third quarter 2001three months ended 2002 due primarily to
higher intercompany balances,
partially offset by lower interest rates on variable rate debt. (See Note 10.) The weighted average interest
rate on variable-rate tax-exempt debtbonds for the three months ended SeptemberJune 30, 2003, was
1.14% and the corresponding rate for the three months ended June 30, 2002,
was 1.57%, compared to 2.62% for the
comparable period in 2001.
-23-
Nine1.64%.
- - Page 23 -
Six Months Ended SeptemberJune 30, 2002,2003, Compared to
NineSix Months Ended SeptemberJune 30, 20012002
LG&E Results:
LG&E's net income increased $55.8decreased $1.2 million (3%) for the ninesix months ended SeptemberJune
30, 2002,2003, as compared to the ninesix months ended SeptemberJune 30, 2001,2002, primarily
because of a non-recurring charge of $86.1 million, net of
tax, for LG&E's workforce reduction program incurredan increase in 2001. Excluding
this one-time charge, LG&E's net income would have decreased $30.3 million
primarily due to amortization expenses associated with LG&E's workforce
reduction program (See Note 4)operations, maintenance, and higher transmission and pensiondepreciation
expenses partially offset by lower interest expense.an increase in sales to gas retail consumers,
due to the colder winter experienced in 2003, and increased electric
wholesale sales.
A comparison of LG&E's revenues for the ninesix months ended SeptemberJune 30, 2002,2003,
with the ninesix months ended SeptemberJune 30, 2001,2002, reflects increases and (decreases)
which have been segregated by the following principal causes (in thousands
of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $12,939 $(60,700)$ 611 $24,834
Environmental cost recovery surcharge 7,9181,278 -
Demand side management cost recovery 926 721671 397
LG&E/KU merger surcredit (2,127)(449) -
Value delivery surcredit (922) (196)(1,517) (830)
Weather normalization - (2,262)
Variation in sales volume etc. 20,681 5,173and other (825) 17,374
Total retail sales 39,415 (55,002)(231) 39,513
Wholesale sales (18,794) 9,97813,596 (6,141)
Gas transportation - net - 94(12)
Other 2,564 (320)1,460 (136)
Total $23,185 $(45,250)$14,825 $33,224
Electric revenues increased primarily because of an increase in wholesale
sales to
retail customers,prices ($14.4 million), partially offset by decreaseda decrease in wholesale
sales. The
increase in retail sales was due in part to warmer weather experienced in
the period. Cooling degree days increased 20% for the nine months ended
September 2002 as compared to the nine months ended September 2001.
Wholesale sales decreased due to lower market pricesvolumes ($21.9 million)
partially offset by increased volume sold ($3.1.8 million). Gas revenues decreasedincreased primarily as a result
of lowerhigher gas supply costs billed to customers through the gas supply
clause.clause and increased volumes sold due to an increase in heating degree days
(19%), partially offset by a decrease in volume of wholesale sales.
Fuel for electric generation increased $22.9$1.1 million (18%(1%) for the ninesix months
because of an increase in the cost of coal burned ($23.8 million)
partially offset by a decrease in quantity of coal burned ($.91.1 million). Gas
supply expenses decreased $44.7increased $30.3 million (28%(30%) due to a decreasean increase in net gas
supply cost ($47.421.5 million), and a decreasean increase in the volume of retail gas
delivered to the distribution system ($5.213.6 million), partially offset by
increaseddecreased wholesale gas expenses ($7.94.8 million).
ThePower purchased increased $7.7 million (23%) because of an increase in the
price of power purchased ($9.0 million) partially offset by a decrease in
non-recurring chargesthe volume of $144.4 millionthe purchases ($86.1 million
after tax) is due to the costs associated with LG&E's workforce reduction
initiative which were recorded in the first quarter of 2001 (See Note 4)1.3 million).
Other operationoperations expenses increased $43.4$3.7 million (39%(4%) in 2002,2003, as compared
to
2001, primarily due to amortization expenses associated with LG&E's
workforce reduction program ($22.5 million), increased costs for electric
transmission primarily resulting from increased MISO costs ($7.8 million),
pension expenses ($5.8 million), and property insurance ($1.7 million).
-24-
Maintenance expenses increased $8.5 million (22%) in 2002, primarily due to higher costs of customer assistance programs
($1.5 million), and increased repairs to steam productionpension (the market value of plan assets has
been affected by declines in the equity market), post-retirement and
medical benefits ($4.7 million) and maintenance to the
gas distribution system ($2.72.2 million).
Other income-net decreased $1.6Maintenance expenses increased $2.0 million in 2002(7%) primarily due to an
increaseincreased
maintenance of gas distribution mains and maintenance of electric
distribution lines, $1.7 million.
Depreciation and amortization increased $6.3 million (12%) because of
additional utility plant in non-utility expenses ($0.8 million) and an increaseservice.
- -Page 24 -
Variations in the tax
provision related to other income ($0.8 million).
A reconciliation of differences between the U.S. statutory federal income tax rate and effective incomeexpense are largely attributable to changes in pre-
tax rate for the nine months ended Septemberincome.
Six Months Ended Six Months Ended
June 30, follows:2003 June 30, 2002
Effective rate Sept. 2002 Sept. 2001Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.3% 5.0%5.8 5.0
Amortization of investment tax credit & R&D (2.8)% (17.9)%(3.8) (3.7)
Other differences (0.1)% (4.1)%(0.8) (0.2)
Effective income tax rate 37.4% 18.0%
The amortization of investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the
nine months ended September 30, 2001 (resulting from the workforce
reduction charge) caused the percentage changes to be greater.36.2% 36.1%
Interest charges decreased $7.6$.8 million (25%(5%) due primarily to lower interest
rates on variable rate long term debt ($5.1 million), a decrease in interest on
debt to parent company ($1.0 million), and a decrease in interest
associated with the accounts receivable securitization program ($1.8
million). (See Note 10.)debt. The weighted average interest rate on
variable-
rate tax-exempt debtvariable-rate bonds for the ninesix months ended SeptemberJune 30, 20022003 was 1.58%1.19%,
compared to 3.82%1.61% for the comparable period in 2001.2002.
KU Results:
KU's net income increased $27.8decreased $11.1 million (30%) for the ninesix months ended SeptemberJune
30, 2002,2003, as compared to the ninesix months ended SeptemberJune 30, 2001.2002. The increasedecrease
was primarilymainly due a non-recurring charge of $38.0 million, net of
tax, made in the first quarter of 2001 for coststo expenses associated with KU's
workforce reduction program. Excluding this one-time charge, net income
decreased $10.2 million, due largely to increased operation expenses,
partially offset by increased equity earnings from a minority interestsevere ice storm experienced
in February 2003, in excess of insurance reimbursements received in June
2003, timing of the performance of annual steam production maintenance and
lower interestdepreciation expense.
A comparison of KU's revenues for the ninesix months ended SeptemberJune 30, 2002,2003, with
the ninesix months ended SeptemberJune 30, 2001,2002, reflects increases and (decreases)
which have been segregated by the following principal causes (in thousands
of $):
Retail sales:
Fuel supply adjustments $18,223$ 7,147
Environmental cost recovery surcharge 3,781(889)
Demand side management cost recovery 1,570337
LG&E/KU merger surcredit (2,641)(366)
Value delivery surcredit (527)(860)
Earnings sharing mechanism (1,900)
Variation in sales volume etc. 21,073and other 11,677
Total retail sales 41,47915,146
Wholesale sales (35,913)510
Other 4,6561,457
Total $10,222$17,113
Electric revenues increased primarily due to an increase in sales to retail customers, partially offset by decreased wholesale sales. The decrease in
wholesale sales is primarilyvolumes
sold due to lower prices ($14.7 million) and a decrease in volume sold ($21.2 million). The13% increase in retail sales is
due to an increase in coolingheating degree days of 25%.
-25-and higher fuel costs
billed to customers.
Fuel for electric generation increased $18.9$10.3 million (11%(9%) for the ninesix
months due to an increase in the cost of coal burned ($26.211.5 million)
partially,
offset by a decrease of volume burnedin generation ($7.31.2 million)
Non-recurring charges decreased $63.8.
Power purchased increased $7.6 million ($38.0 million after tax).
These costs were(11%) due to KU's workforce reduction program which were
recordedan increase in the first quarterprice of
2001 (See Note 4).power purchased ($2.8 million) and an increase in volume purchased ($4.8
million) partially as a result of temporary plant outages.
- - Page 25 -
Other operation expenses increased $24.0$6.3 million (28%(9%) compared to 2001,, primarily due to
amortization expensescosts associated with KU's workforce
reduction programan ice storm ($10.72.5 million), higherincreased pension (the
market value of plan assets has been affected by declines in the equity
market) and post-retirement medical expenses ($2.02.6 million), increased
property insurance ($2.0 million) and outside services ($2.4.9 million), and higher costs for electric transmission primarilycosts
resulting from increased MISOMidwest Independent System Operator (MISO) costs
($6.0.3 million).
Other income-netMaintenance expenses increased $3.1$9.4 million (54%(35%) in 2002 primarily due to increased earnings from KU's equity earnings from a minority interest ($4.6
million), partially offset by a gain on disposition of property in 2001 of
$1.3 million. The increased equity earnings in 2002 arerepairs
to electric distribution equipment due to the gain on
the salean ice storm ($4.1 million, net
of emissions allowances.
A reconciliation$8.9 million in insurance reimbursements), and timing of differences between the U.S. statutory federalannual
maintenance of steam production equipment ($5.7 million).
Depreciation and amortization increased $5.3 million (11%) because of
additional utility plant in service.
Variations in income tax rate and effective income tax rate for the nine months ended September
follows:expense are largely attributable to changes in
pretax income.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Effective rate Sept. 2002 Sept. 2001Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.7% 6.2%6.7 6.3
Amortization of investment tax credit & R&D (2.6)% (4.4)%(3.4) (3.5)
Other differences (3.6)% (4.2)%(4.4) (3.0)
Effective income tax rate 34.5% 32.6%33.9% 34.8%
Other income - net increased $1.5 million (45%) primarily due to an
increase in subsidiary earnings, $.5 million, decreased benefit costs, $.4
million, and gain on energy trading contracts marked to market $.5 million,
partially offset by an increase in taxes.
Interest charges decreased $3.9$1.9 million (16%(13%) for the first nine months of
2002 as compared to the nine months of 2001due primarily due to lower
interest rates on variable rate debt ($2.9 million) (see Note 10) and a decrease in interest
associated with the accounts receivable securitization program ($1.0
million).debt. The weighted average interest rate
on variable-rate tax-exempt
debtbonds for the ninesix months ended SeptemberJune 30, 2003, was 1.16%
and the corresponding rate for the six months ended June 30, 2002, was
1.66%, compared to
3.37% for the comparable period in 2001.1.57%.
Liquidity and Capital Resources
LG&E's&E and KU's need for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Internal and external lines of credit, the
accounts receivable securitization programs, and commercial paper programs
are maintained to fund short-term capital requirements.
Construction expenditures for the ninesix months ended SeptemberJune 30, 20022003 for LG&E
and KU amounted to $141.8$119.4 million and $164.8$175.5 million, respectively. Such
expenditures related primarily to construction to meet nitrogen oxide (NOx)
emission standards and the acquisition of new combustion turbines to meet peak
power demands. LG&E and KU combustion turbine expenditures for the six
months ended June 30, 2003, were $53.3 million and $90.9 million,
respectively. The expenditures were financed with internally generated
funds, intercompany loans from affiliates, and accounts receivable
securitization program funds. Also, common stock dividends of
$46 million were paid by LG&E. See Note 64 of Notes to Financial Statements
concerning accounts receivable securitization.
LG&E's cash balance decreased $13.9 million during the six months ended
June 30, 2003, primarily due to a pension contribution and the purchase of
an interest in four combustion turbines financed with intercompany loans.
KU's cash and temporary cash investment balance increased $13.0$1.3 million and $3.5 million, respectively during the ninesix months ended SeptemberJune
30, 2002.2003. The increases reflectincrease reflects cash flows from operations and
short-term borrowings,intercompany loans, partially offset by construction expenditures,
and
LG&E's common dividend payments.including the purchase of an interest in four combustion turbines.
- - Page 26 -
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to seasonal
fluctuations in weather, which have a direct effect on sales of electricity
and natural gas. The decreaseincrease in accounts receivable at LG&E resulted
primarily from the increased saletiming of accounts receivable through the accounts receivable
securitization program.payments. The increasedecrease in accounts receivable for
KU resulted primarily from timing of payments. The decrease in LG&E's gas
stored underground relates to seasonal fluctuations, increased intercompany
receivables partially offset by the increased saleusage of accounts receivable
through the accounts receivable securitization program. (See Note 6 of
Notes to Financial Statements). The increase in fuel inventory at LG&E
resulted from reduced fuel consumption due to outages and increased
pricing.gas. The decrease in the
fuel inventory at KULG&E resulted from seasonal fluctuations partially offset
by increased pricing. -26-
LG&E andThe decrease in fuel inventory at KU resulted from
seasonal fluctuations.
The Companies participate in a money pool whereby LG&E Energy can make
funds available to LG&E and KU at market-based rates up to $400 million at market-based rates for each of LG&E
and $250 million for KU. LG&E Energy maintains a facilityfacilities of $200 million with a Powergen
subsidiary and $150 million with an E.ON affiliate to ensure funding
availability for the money pool. There was no balance$82 million outstanding under
the Powergen line of credit and the balance under E.ON affiliates' line
totaled $74.9 million as of SeptemberJune 30, 2002 and no outstanding commercial paper program
balance.2003. LG&E Energy has provided loans
to LG&E and KU through the money pool that total $129.2$171.7 million and $87.7$146.4
million, respectively, as of SeptemberJune 30, 2002.2003. These borrowings carried an
interest rate based on an index of highly rated commercial paper issuers as
of the prior month end of 1.71%1.21% at SeptemberJune 30, 2002.2003.
During July 2003, LG&E entered into five 364 day revolving lines of credit
that total $185 million. The facilities mature in June and July 2004.
On March 6, 2002,April 30, 2003, a $250 million line of credit of LG&E refinanced $22.5Energy with an
E.ON affiliate expired and was not renewed.
On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and $27.5the interest rate is
4.55%. KU had a first mortgage bond of $62 million unsecuredthat matured in June
2003 and LG&E has a first mortgage bond of $42.6 million maturing in August
2003. The Companies expect to refinance these bonds, along with a portion
of the notes payable to parent, with additional long-term intercompany
loans.
Under the provisions of variable-rate pollution control bonds both due September 1, 2026. The replacement
bonds, due September 1, 2026, are variable rate bondstotaling
$246.2 million for LG&E and are secured by
first mortgage bonds.
On March 22, 2002, LG&E refinanced two $35$91.9 million unsecured pollution
control bonds due November 1, 2027. The replacement variable ratefor KU, the bonds are secured by first mortgage bonds and will mature November 1, 2027.
On May 23, 2002 KU refinanced pollution control series 1B, 2B, 3B, and 4B
bonds, totaling $37.9 million. The new bonds, series 12, 13, 14 and 15 are
due in February 2032 and bear interestsubject to
tender for purchase at a variable rate. The new bonds
are secured by first mortgage bonds and have the same principal amount as
the prior bonds.
On October 3, 2002, KU refinanced its pollution control series 8 bond with
a variable rate bondoption of the same $96 million principal amount. Theholder and to mandatory tender for
purchase upon the occurrence of certain events, causing the bonds are secured by first mortgage bonds and by bond insurance. The new bonds
will mature on October 1, 2032.
On October 23, 2002, LG&E refinanced it pollution control series R bond
with a variable rate bondto be
classified as current portion of long-term debt. Should any of the same $41.667 million principal amount.
The new bonds
are secured by first mortgage bonds and by bond insurance.
The new bonds will mature on October 1, 2032.
As of June 30, 2002,be put to LG&E Energy owned $104.6 million in varying portions
of LG&E's outstanding variable rate pollution controlor KU, funds from the money pool could be used to reacquire
the bonds. The bonds
were acquired during May 2002 by LG&E Energy as an investment and were sold
in their entirety during the first half of July 2002 to unaffiliated third
parties.
LG&E's security ratings as of October 8, 2002,August 4, 2003, were:
Moody's S&P Fitch
First mortgage bonds A1 A- A+
Preferred stock Baa1 BBB- A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of August 4, 2003, were:
Moody's S&P Fitch
First mortgage bonds A1 A A+
Preferred stock Baa1 BBBBBB- A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of October 8, 2002, were:
Moody's S&P Fitch
First mortgage bonds A1 A A+
Preferred stock Baa1 BBB A-
Commercial paper P-1 A-2 F-1
-27-
During the third quarter S&P raised the ratings of LG&E and KU by one notch
and assigned a stable outlook to all of the ratings. Moody's and Fitch
confirmed the ratings of LG&E and KU during the quarter and assigned a
stable outlook to the ratings.- - Page 27 -
These ratings reflect the views of Moody's, S&P and Fitch. A security
rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time by the rating agency.
LG&E's capitalization ratios at SeptemberJune 30, 2002,2003, and December 31, 2001,2002,
follow:
Sept.June 30, Dec. 31,
2003 2002 2001
Long-term debt (including current portion) 36.4% 37.5%38.8% 35.5%
Notes payable 7.6 5.79.3 11.1
Preferred stock 5.6 5.85.1 5.5
Common equity 50.4 51.046.8 47.9
Total 100.0% 100.0%
KU's capitalization ratios at SeptemberJune 30, 2002,2003, and December 31, 2001,2002, follow:
Sept.June 30, Dec. 31,
2003 2002 2001
Long-term debt (including current portion) 35.1% 37.2%34.5% 34.0%
Notes payable 6.1 3.69.4 8.1
Preferred stock 2.8 3.12.5 2.7
Common equity 56.0 56.153.6 55.2
Total 100.0% 100.0%
New Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, werewas issued duringin
2001. SFAS No. 143 establishes accounting and reporting standards for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs.
SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144, among other provisions, eliminates the requirement of SFAS
No. 121 to allocate goodwill to long-lived assets to be tested for
impairment. The effective implementation date for SFAS No. 144143 was January 1, 2002 and SFAS No. 143 is January 1, 2003.
SFAS No. 144 had noManagement has calculated the impact on
the financial position or results of operations of LG&E or KU. Management
is currently conducting an analysis and review of SFAS No. 143 and the recently
released FERC Notice of Proposed Rulemaking No. RM02-7,final rule, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations (NOPR RM02-7). Although a final determination has
not been made, management believes there will be no material impact onObligations. As of June 30, 2003, LG&E
recorded asset retirement obligation (ARO) assets in the financial position or resultsamount of operations$4.5
million and liabilities of $9.6 million. LG&E recorded offsetting
regulatory assets of $5.6 million, pursuant to regulatory treatment
prescribed under SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation. -28-
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementationAs of SFAS
No. 133. DIG Issue C15, Normal Purchases and Normal Sales Exception for
Option Type Contracts and Forward Contracts in Electricity was adopted in
2001 and had no impact on results of operations and financial position of
the Companies. DIG Issue C16, Applying the Normal Purchase and Normal
Sales Exception to Contracts that Combine a Forward Contract and a
Purchased Option Contract, was clearedJune 30, 2003, KU recorded ARO assets in the third quarter 2001amount
of $8.6 million and stated
that option contracts do not meet the normal purchases and normal sales
exception and should follow SFAS No. 133. DIG Issue C16 was effective in
the second quarterliabilities of 2002. The adoption$19.1 million. KU recorded offsetting
regulatory assets of DIG Issue C16 did not have a
material impact on the financial position or results of operations of the
Companies$9.7 million, pursuant to regulatory treatment
prescribed byunder SFAS No. 71,
Accounting71. LG&E and KU AROs are primarily related to
final retirement of generating units. Assets with associated AROs will no
longer include a cost of removal component within their depreciation rate.
Assets without associated AROs will continue to be depreciated including a
cost of removal component within the depreciation rate.
Had SFAS No. 143 been in effect for the Effects of Certain Types of Regulation.2002 reporting period, the
Companies would have established asset retirement obligations as described
in the following table ($000):
LG&E recorded a
mark to market liability and a corresponding regulatory asset of $0.2
millionKU
Provision at September 30, 2002. KU recorded a mark to market asset and
corresponding regulatory liability of $1.3 millionJanuary 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at September 30, 2002.
The notional amounts of these options, as of September 30, 2002, is $5.0
million for LG&E and $9.8 million for KU.
SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No.
13, and Technical Corrections was issued in the second quarter 2002. The
rescinded pronouncements were as follows: SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt; SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers; SFAS No. 64, Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements; and, SFAS No. 13, Accounting for Leases.
The provisions related to SFAS No. 13 were effective for fiscal years
beginning after May 15, 2002. All other provisions of SFAS No. 145 shall
be effective for financial statements issued on or after May 15, 2002. The
adoption of this standard will not have a material impact on financial
position or results of operations of the Companies.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002.2002 $9,330 $18,477
The Companies do
not expect the adoption of this standard to have an impact on financial
position or results of operations of the Companies.
The Company adopted EITF No. 98-10, Accounting for Energy Trading and
Risk Management Activities, effective January 1, 1999. This pronouncement
required that energy trading contracts be marked to market on the balance
sheet, with the gains and losses shown net in the income statement.
In
October 2002,- - Page 28 -
Effective January 1, 2003, the EmergingCompanies adopted EITF No. 02-03, Issues
Task Force reachedInvolved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities.
EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of a consensusderivative under
SFAS No. 133 should not be marked to rescind
EITF 98-10. The effective date forfair market value, and
- Revenues should be shown in the full rescission will be for fiscal
periods beginning after December 15, 2002.income statement net of costs
associated with trading activities, whether or not the trades
are physically settled.
With the rescission of EITF No. 98-10, energy trading contracts that do not
also meet the definition of a derivative under SFAS No. 133 must be
accounted for as executory contracts. Contracts previously recorded at
fair value under EITF No. 98-10 that are not also derivatives under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, must
be restated to historical cost through a cumulative effect adjustment. The
Companies do not expect the
rescission of this standard to have a materialhad no impact on financial position or results
of operations of the Companies.Companies since all contracts marked to market under
EITF No. 98-10 are also within the scope of SFAS No. 147, Acquisitions133.
As a result of Certain Financial Institutions was issued in
November 2002. This standard providesEITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating revenue
to reflect this accounting change. The Companies applied this guidance on the accounting for the
acquisition of a financial institution. SFAS No. 147to
all prior periods, which had no impact on previously reported net income or
shareholders' equity. The following tables present the impact of this
reclassification (in thousands of $):
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues$180,637 $191,813 $375,930 $358,059
Less costs reclassified 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues$204,675 $203,555 $438,822 $418,723
Less costs reclassified 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued Statement of
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 is effective
immediately for financial positioninstruments entered into or results of operations ofmodified after May
31, 2003, and otherwise is effective for interim reporting periods
beginning after June 15, 2003.
- - Page 29 -
LG&E or KU.has existing $5.875 series mandatorily redeemable preferred stock with
250,000 shares outstanding having a current redemption price of $100 per
share. The preferred stock has a sinking fund requirement sufficient to
retire a minimum of 12,500 shares on July 15th of each year commencing with
July 15, 2003, and a minimum of 187,500 shares on July 15, 2008 at $100 per
share. Beginning with the three months ended September 30, 2003, LG&E will
reclassify, at fair value, its $5.875 series preferred stock as long-term
debt with the minimum shares mandatorily redeemable within one year
classified as current portion of long-term debt. Dividends accrued
beginning July 1, 2003 will be charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No. 150.
Contingencies
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings, and Notes 12 (LG&E)
andNote 11 (KU) to the
financial statements contained in LG&E's and KU's Annual Reports on Form 10-K10-
K for the year ended December 31, 20012002 and to Part II - Item 1, Legal
Proceedings herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E and KU are exposed to market risks. Both operations are exposed to
market risks from changes in interest rates and commodity prices. To
mitigate changes in cash flows attributable to these exposures, the
Companies have entered into various derivative instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
-29-
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy,the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
Management has designated all of the Companies' interest rate swaps as
hedge instruments. Financial instruments designated as cash flow hedges
have resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge becomes
ineffective, the resulting gains or losses are reclassified from other
comprehensive income to net income. Financial instruments designated as
fair value hedges are periodically marked to market with the resulting
gains and losses recorded directly into net income to correspond with
income or expense recognized from changes in market value of the items
being hedged.
The potential change in interest expense resulting from changesassociated with a 1% change in
base interest rates of the Companies'LG&E's and KU's unswapped debt did not change materiallyis estimated at $5.3
million and $5.5 million, respectively, at June 30, 2003. LG&E's exposure
to floating interest rates decreased $18.3 million and KU's exposure to
floating interest rates increased $4.3 million during the first ninesix months
of 2002. However, during October 2002, KU
refinanced a $96 million bond at a floating rate and LG&E refinanced a
$41.665 million bond at a floating rate. The interest rates on the new
bonds will be reset every 35 days via an auction process. Prior to the
refinancing, the LG&E bond had been at a 6.55% fixed rate and the KU bond
had been at a 7.45% fixed rate.2003. The potential changes in the fair values of the Company'sCompanies'
interest-rate swaps resulting from changes in interest rates and the yield
curve also did not change materially during the first ninesix months of 2002.
The Companies have entered into fuel purchase contracts that contain
options which allow the Companies to purchase additional tons of coal, as
needed, or purchase less coal than contractually required, as needed. The
potential changes resulting from variations in coal commodity prices of the
Companies' coal supply contracts containing option features were not
material during the first nine months of 2002. The Companies' exposure to
market risks from changes in commodity prices were immaterial during the
first nine months of 2002.2003.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
are dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plan.plans. The market
value of LG&E and KU plan assets has been affected by declines in the
equity market since the beginning of this fiscal year.market. As a result, at December 31, 2002, LG&E and KU could bewere
required to recognize an additional minimum liability as prescribed by SFAS
No. 87 Employers' Accounting for Pensions. The liability would bewas recorded as a
reduction to other comprehensive income, and woulddid not affect net income for
2002. The amount of the liability if any, will dependdepended upon the asset returns
experienced in 2002 and contributions made by LG&E and KU to the plan
during 2002. Also, pension cost and cash contributions to the plans could
increase in future years without a substantial recovery in the equity
markets. If the fair value of the planplans assets exceeds the accumulated
benefit obligation, the recorded liability will be reduced and other
comprehensive income will be restored in the consolidated balance sheet.
The- - Page 30 -
During 2002, the combination of poor market performance and historically
low corporate bond rates has created a divergence in the potential value of the
pension liability and the actual value of the pension assets. TheseHowever,
year-to-date 2003 market performance has been quite strong. Should poor
market conditions return these conditions could result in an increase in
LG&E's and KU's funded accumulated benefit obligation and future pension
expense. The primary assumptions that drive the value of the unfunded
accumulated benefit obligation are the discount rate and expected return on
plan assets.
The value of the pension assets as of December 31, 2001, was $234 million
and $217 million, forIn January 2003, LG&E and KU respectively. The valuemade contributions to the pension plan of
the
accumulated benefit obligation as of December 31, 2001, was $352$83.1 million and $224$3.5 million, for LG&E and KU, respectively. As of September 30, 2002,
the asset values were approximately $191 million and $176 million for LG&E
and KU, respectively. This decline is a result of the conditions mentioned
above. A one-percentage point increase or decrease in the assumed discount
rate could have approximately a negative or positive $36 million and $26
million impact to the accumulated benefit obligation of LG&E and KU,
respectively. LG&E and KU are currently unable to determine the impact of
these changes until an updated actuarial valuation of the pension liability
is performed, and asset value is determined, as of December 31, 2002. If
LG&E and KU elect not to make a contribution to plan assets equal to the
unfunded accumulated benefit obligation, there could be an adjustment to
other comprehensive income.
-30-
Energy Trading & Risk Management Activities
LG&E and KU conduct energy trading and risk management activities to
maximize the value of power sales from physical assets it owns,they own, in
addition to the wholesale sale of excess asset capacity. Certain energy
trading activities are currently accounted for on a mark-to-market basis in
accordance with EITF 98-10 Accounting for Contracts Involved in Energy
Trading and Risk Management Activities, SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Wholesale sales of excess
asset capacity and wholesale purchases are treated as normal sales and purchases under SFAS No. 133 and SFAS No.
138 and are not marked to market.
The rescission of EITF No. 98-10 for fiscal periods ending after December
15, 2002, had no impact on LG&E's or KU's energy trading and risk
management reporting as all contracts marked to market under EITF No. 98-10
are also within the scope of SFAS No. 133.
The table below summarizes botheach LG&E&E's and KU's energy trading and risk
management activities during quarterfor the three months and ninesix months ended SeptemberJune 30,
2002 (in2003, and 2002(in thousands of $), as trading. Trading volumes are evenly divided
between the
two regulated utilities.
Quarter Nine
endedLG&E and KU.
Three Months ended
Sept.Six Months
Ended Ended
June 30, June 30,
2003 2002 Sept. 30,2003 2002
Fair value of contracts at beginning of
period, net asset/(liability) $ 26403 $ 12 $ (156) $(186)
Fair value of contracts when entered
into during the period (5) (62)- 104 2,620 (57)
Contracts realized or otherwise
settled during the period 6 341(226) (31) (283) 335
Changes in fair value due to changes
in assumptions (193) (259)141 (59) (1,863) (66)
Fair value of contracts at end of period,
net asset/(liability) $(166) $(166)$ 318 $ 26 $ 318 $ 26
No changes to valuation techniques for energy trading and risk management
activities occurred during 2003 or 2002. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. All
contracts outstanding at SeptemberJune 30, 20022003, have a maturity of less than one
year and are valued using prices actively quoted for proposed or executed
transactions or quoted by brokers.
The Companies do not expect the rescission of EITF 98-10 will have a
material impact on valuation techniques for energy trading and risk
management activities.
LG&E and KU maintain policies intended to minimize credit risk and revaluesrevalue
credit exposures daily to monitor compliance with those policies. As of
SeptemberJune 30, 2002, 88%2003, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
- - Page 31 -
Deregulation
The electricity industry in Virginia is currently undergoing deregulation
which will enable customers to choose their own energy suppliers after
January 2004. On March 19, 2003, the Governor of Virginia signed House
Bill 2367, the "Electric Utility Restructuring Suspension," which suspends
Kentucky Utilities/Old Dominion Power from Virginia electric utility
restructuring until such time as retail choice is offered to other
customers in the United States.
Item 4. Controls and Procedures.
LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
companiesCompanies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. During the 90 day period preceding the filing of this report, LG&E and KU conducted an evaluation of such controls and procedures
under the supervision and with the participation of the companies'Companies'
management, including the Chairman, President and Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"). Based upon that
evaluation, the CEO and CFO are of the conclusion that the companies'Companies'
disclosure controls and procedures are effective.
With respect to LG&E's and KU's internal controls, there haveeffective as of the end of the
period covered by this report. There has been no significant changeschange in the Companies'
internal controlscontrol over financial reporting that occurred during the fiscal
quarter ended June 30, 2003, that has materially affected, or in other factors that could
significantlyis reasonably
likely to materially affect, these controls subsequent to the date of their most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-31-Companies' internal control over financial
reporting.
- - Page 32 -
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving LG&E and
KU, reference is made to the information under the following items and
captions of LG&E's and KU's (A) respective combined Annual Report on Form
10-K for the year ended December 31, 2001:2002: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; Notes 3 12 and 1611 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3 11 and 1411 of KU's Notes to
Financial Statements under Item 88; and (B) respective combined Quarterly
ReportsReport on Form 10-Q10Q for the quartersquarter ended March 31, 2002 and June 30,
2002:2003: Item I1 of Part II
Legal Proceedings. Except as described herein, to date, the proceedings
reported in LG&E's and KU's respective combined Annual Report on Form 10-K
have not changed materially.
LG&E Employment Discrimination Case
As previously disclosed, complaints were filed against LG&E and certain
related and unrelated parties wherebyreported, in October 2001, approximately 30 employees or
former employees claimedfiled a complaint against LG&E claiming past and current
instances of employment discrimination.discrimination against LG&E. LG&E has removed the
case to the U.S. District Court for the Western District of Kentucky and
filed an answer denying all plaintiffs' claims. In October 2002, following discussions among plaintiffs' representatives
and LG&E as defendant, further amended complaints were filed in this case
involving claims by certain current or former employees of instances of
employment discrimination. The amended complaints establish the population
of named plaintiffs, delete the prior request for class certification,
delete the prior naming of LG&E's president as a defendant and reduce the
named damage amount to $100 million. Discovery has commenced in
the matter,matter. The court has ordered mediation and certain plaintiffs have
settled for non-material amounts as well as required mediation ora result of that process. In addition,
certain other plaintiffs have sought administrative review including before the U.S.
Equal Employment Opportunity Commission which has, to date, declined to
proceed to litigation on any claims reviewed. Previously amended
pleadings, while reducing the size of the plaintiff and defendant groups
and eliminating certain prior demands, contain a claimed damage amount of
$100 million as well as requests for injunctive relief. During mediation
in the first quarter 2003, additional settlements were reached with a
number of plaintiffs, including a settlement with the lead plaintiff, which
reduced the number of remaining plaintiffs to approximately nine. LG&E
intends to continue to defend itself vigorously in the action and
management does not anticipate that the outcome will have a material impact
on LG&E's operations or financial condition.
Combustion Turbine Litigation
In September 2002, LG&E and KU or their affiliates,have filed a further
amended complaint in litigationlawsuit in the U.S. District Court for the Eastern
District of Kentucky against Alstom Power, Inc. (formerly ABB Power
Generation, Inc.) ("Alstom") regarding two combustion turbines supplied by
Alstom during 1999,1999. These units are installed at KU's E.W. Brown generating
plant and now
jointly owned bybeneficial ownership of the combustion turbines is vested in LG&E
and KU. The original purchase price for the turbines was approximately
$91.8 million. The suit presents warranty, negligence, misrepresentation,
and fraud and other claims relating to numerous operational defects or
deficiencies of the turbines and various damages
incurred by LG&E and KU in connection therewith.turbines. LG&E and KU have requested rescission of the
contract and recovery of all expenditures relating to the turbines.
Recently, the court ruled that LG&E and KU cannot pursue rescission on the
breach of contract claim, but has not ruled on whether they can seek
rescission on the fraud count. In theaddition, LG&E and KU seek punitive
damages. As an alternative to rescission, LG&E and KU have requested
relief for amounts incurred or expended to date in connection with
operational repairs, cover damages or liquidated damages and other costs,
with possible further damages and interest to be proven at trial. The
matter is currently in discovery with a trial presently
scheduledre-scheduled for the thirdfourth
quarter of 2003.
-32-- - Page 33 -
Item 6(a). Exhibits.
None.Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002
31.1 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.4 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Item 6(b). Reports on Form 8-K.
On AugustMay 14, 20022003, LG&E and KU filed a Current Report on Form 8-K, submitting
certifications of the Chairman, President and Chief Executive Officer and
the Chief Financial Officer of each company, respectively, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 regarding the companies'Companies'
Quarterly Reports on Form 10-Q for the period ended June 30,
2002.
-33-March 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: November 14, 2002August 13, 2003 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President, - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: November 14, 2002August 13, 2003 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President, - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
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Exhibit 31 - CERTIFICATIONS
Exhibit 31.1
Louisville Gas and Electric Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a) designed(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, based on our
evaluation as
of the Evaluation Date;end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a) all(a) All significant deficiencies and material weaknesses in the design
or operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial datainformation; and
have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.control over financial reporting.
Date: November 14, 2002
/s/ Victor A. StaffieriAugust 13, 2003
____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
-35-- - Page 36 -
Exhibit 31.2
Louisville Gas and Electric Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a) designed(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, based on our
evaluation as of the Evaluation Date;end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a) all(a) All significant deficiencies and material weaknesses in the design
or operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial datainformation; and
have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.control over financial reporting.
Date: November 14, 2002
/s/ Richard Aitken-DaviesAugust 13, 2003
___________________
Richard Aitken-Davies
Chief Financial Officer
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Exhibit 31.3
Kentucky Utilities Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a)designed(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly
report is being prepared;
b)evaluated(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, based on our
evaluation as of the Evaluation Date;end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a) all(a) All significant deficiencies and material weaknesses in the design
or operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial datainformation; and
have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6.The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.control over financial reporting.
Date: November 14, 2002
/s/ Victor A. StaffieriAugust 13, 2003
_____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
-37-- - Page 38 -
Exhibit 31.4
Kentucky Utilities Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officersofficer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) for the registrant
and we have:
a) designed(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly
report is being prepared;
b) evaluated(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, based on our
evaluation as of the Evaluation Date;end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officersofficer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
function)functions):
a) all(a) All significant deficiencies and material weaknesses in the design
or operation of internal controlscontrol over financial reporting which couldare
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial datainformation; and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.control over financial reporting.
Date: November 14, 2002
/s/ Richard Aitken-DaviesAugust 13, 2003
____________________
Richard Aitken-Davies
Chief Financial Officer
-38-- - Page 39 -
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Louisville Gas and
Electric Company and Kentucky Utilities Company (the "Companies") on Form
10-Q for the period ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Report"), each of the undersigned does hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge,
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Companies as of the dates and for the period expressed in the Report.
August 13, 2003
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ Richard Aitken-Davies
Chief Financial Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
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