45
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004March 31, 2005
Or
[_] TRANSITION REPORT PURSUANT 1TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation IRS Employer
File Number Address, and Telephone Number Identification No.
1-2893 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, KY 40507-1428
(859) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X. No _.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of July 31, 2004,April 30, 2005,
all held by LG&E Energy LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 2004,April 30, 2005,
all held by LG&E Energy LLC
This combined Form 10-Q is separately filed by Louisville Gas and Electric
Company and Kentucky Utilities Company. Information contained herein
related to any individual registrant is filed by such registrant on its own
behalf. Each registrant makes no representation as to information related
to the other registrants.
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INDEX OF ABBREVIATIONS
AEP American Electric Power Company, Inc.
AG Attorney General of Kentucky
ARB Accounting Research Bulletin
ARO Asset Retirement Obligation
CCN Certificate of Public Convenience and Necessity
DSM Demand Side Management
ECR Environmental Cost Recovery
EEI Electric Energy, Inc.
E.ON E.ON AG
ESM Earnings Sharing Mechanism
FAC Fuel Adjustment Clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fidelia Fidelia Corporation (an E.ON affiliate)
FIN FASB Interpretation No.
FGD Flue Gas Desulfurization
FSP FASB Staff Position
IMEA Illinois Municipal Electric Agency
IMPA Indiana Municipal Power Agency
IRS Internal Revenue Service
Kentucky Commission Kentucky Public Service Commission
KU Kentucky Utilities Company
LIBOR London Interbank Offer Rate
LEM LG&E Energy Marketing Inc.
LG&E Louisville Gas and Electric Company
LG&E Energy LG&E Energy LLC (as successor to LG&E Energy Corp.)
LG&E Services LG&E Energy Services Inc.
LMP Locational Marginal Pricing
MGP Manufactured Gas Plant
MISO Midwest Independent Transmission System Operator Inc.
Moody's Moody's Investor Services, Inc.
Mw Megawatts
Mwh Megawatt hours
NOPR Notice of Proposed Rulemaking
OMU Owensboro Municipal Utilities
OVEC Ohio Valley Electric Corporation
PJM PJM Interconnection, LLC
Powergen Powergen Limited (formerly Powergen plc)
PUHCA Public Utility Holding Company Act of 1935
RTO Regional Transmission Operator
S&P Standard & Poor's Rating Services
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SMD Standard Market Design
SO2 Sulfur Dioxide
VDT Value Delivery Team Process
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TABLE OF CONTENTS
PART I
ItemITEM 1 Consolidated Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of IncomeFINANCIAL STATEMENTS (UNAUDITED)
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME 1
Statements of Retained EarningsSTATEMENTS OF RETAINED EARNINGS 1
Balance SheetsBALANCE SHEETS 2
Statements of Cash FlowSTATEMENTS OF CASH FLOWS 4
Statements of Other Comprehensive IncomeSTATEMENTS OF OTHER COMPREHENSIVE INCOME 5
Kentucky Utilities Company and Subsidiary
Statements of IncomeKENTUCKY UTILITIES COMPANY
STATEMENTS OF INCOME 6
Statements of Retained EarningsSTATEMENTS OF RETAINED EARNINGS 6
Balance SheetsBALANCE SHEETS 7
Statements of Cash FlowSTATEMENTS OF CASH FLOWS 9
Statements of Other Comprehensive IncomeSTATEMENTS OF OTHER COMPREHENSIVE INCOME 10
Notes to Consolidated Financial StatementsNOTES TO FINANCIAL STATEMENTS 11
ItemITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
ItemMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. 25
ITEM 3 Quantitative and Qualitative Disclosures About
Market Risk 36
ItemQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 32
ITEM 4 Controls and Procedures 37CONTROLS AND PROCEDURES. 34
PART II
ItemITEM 1 Legal Proceedings 38
ItemLEGAL PROCEEDINGS 35
ITEM 6 Exhibits and Reports on Form 8-K 39
Signatures 40
Exhibits 41EXHIBITS 35
SIGNATURES 36
EXHIBITS 37
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Part I. Financial Information - Item 1. Financial Statements (Unaudited)
Louisville Gas and Electric Company
and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands(Millions of $)
Three Months Six Months
Ended
Ended
June 30, June 30,March 31,
2005 2004 2003 2004 2003
OPERATING REVENUES (Note 5)4):
Electric $192,566 $173,917 $390,815 $360,936$229.8 $198.3
Gas 43,646 41,456 207,360 181,280172.6 163.7
Total operating revenues 236,212 215,373 598,175 542,216402.4 362.0
OPERATING EXPENSES:
Fuel for electric generation 47,615 46,277 100,139 95,75460.3 52.9
Power purchased 17,345 17,313 46,233 41,44039.0 28.9
Gas supply expenses 30,991 25,963 161,747 132,070135.6 130.8
Other operation and maintenance expenses 57,110 53,379 115,171 106,907
Maintenance 15,266 17,690 26,807 29,58375.2 74.3
Depreciation and amortization 28,223 30,293 55,722 57,437
Federal and state income taxes 9,374 4,714 24,399 21,355
Property and other taxes 5,069 3,454 10,140 8,18930.7 27.5
Total operating expenses 210,993 199,083 540,358 492,735340.8 314.4
NET OPERATING INCOME 25,219 16,290 57,817 49,48161.6 47.6
Other income (expense) - net 133 (1,395) (328) (335)
Other income from affiliated company
(Note 10) - 1 - 50.2 (0.8)
Interest expense (Note 3) 5,236 5,849 10,013 12,1045.8 4.8
Interest expense to affiliated companies (Note 10) 2,976 1,292 6,117 2,0279) 3.1 3.1
INCOME BEFORE INCOME TAXES 52.9 38.9
Federal and state income taxes (Note 6) 19.0 14.7
NET INCOME $ 17,14033.9 $ 7,755 $ 41,359 $ 35,020
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Balance at beginning of period $521,204 $435,647 $497,441 $409,319
Net income 17,140 7,755 41,359 35,020
Subtotal 538,344 443,402 538,800 444,339
Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative preferred 219 268 406 569
$5.875 cumulative preferred (Note 8) - 367 - 734
Common 21,000 - 21,000 -
Subtotal 21,488 904 21,944 1,841
Balance at end of period $516,856 $442,498 $516,856 $442,49824.2
The accompanying notes are an integral part of these consolidatedfinancial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Balance at beginning of period $534.0 $497.5
Net income 33.9 24.2
Subtotal 567.9 521.7
Cash dividends declared on stock:
5% cumulative preferred 0.3 0.3
Auction rate cumulative preferred 0.4 0.2
Common 29.0 -
Subtotal 29.7 0.5
Balance at end of period $538.2 $521.2
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands(Millions of $)
ASSETS
June 30,March 31, December 31,
2005 2004 2003
UTILITY PLANT:
At original cost $3,857,231 $3,804,183
Less: reserve for depreciation 1,366,281 1,326,442
Net utility plant (Note 7) 2,490,950 2,477,741
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of June 30, 2004
and December 31, 2003 507 611
CURRENT ASSETS:
Cash and cash equivalents 13,984 1,706$ 6.7 $ 6.8
Accounts receivable -
less reserve of $3,515$1.2 million and $0.8 million as of
June 30, 2004March 31, 2005 and December 31, 2003 (Note 4) 114,072 84,5852004,
respectively 161.4 167.0
Materials and supplies - at average cost:
Fuel (predominantly coal) 32,843 25,26021.9 21.8
Gas stored underground 21,795 69,88424.8 77.5
Other 26,085 24,97126.2 26.1
Prepayments and other 2,981 5,2814.9 3.9
Total current assets 211,760 211,687245.9 303.1
OTHER PROPERTY AND INVESTMENTS -
less reserve of less than $0.1 million as of
March 31, 2005 and December 31, 2004 0.6 0.5
UTILITY PLANT:
At original cost 3,934.3 3,915.8
Less: reserve for depreciation 1,432.4 1,396.3
Net utility plant 2,501.9 2,519.5
DEFERRED DEBITS AND OTHER ASSETS:
Restricted cash 10.8 10.9
Unamortized debt expense 8,653 8,7538.4 8.4
Regulatory assets (Note 6) 113,553 143,626
Long-term derivative asset (Note 3) 2,368 -5) 76.4 91.9
Other 33,038 40,12132.8 32.2
Total deferred debits and other assets 157,612 192,500128.4 143.4
Total assets $2,860,829 $2,882,539$2,876.8 $2,966.5
The accompanying notes are an integral part of these consolidated financial statements.
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Louisville Gas and Electric Company
and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands(Millions of $)
CAPITALIZATION AND LIABILITIES
June 30,March 31, December 31,
2005 2004 2003
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
Accumulated other comprehensive loss (34,444) (38,111)
Retained earnings 516,856 497,441
Total common equity 946,746 923,664
Cumulative preferred stock 70,425 70,425
Mandatorily redeemable preferred stock (Note 8) 22,500 22,500
Long-term debt (Note 9) 328,104 328,104
Long-term debt to affiliated company (Note 9) 225,000 200,000
575,604 550,604
Total capitalization 1,592,775 1,544,693
CURRENT LIABILITIES:
Current portion of mandatorily
redeemable preferred stock (Note 8) 1,250 1,250$ 1.3 $ 1.3
Current portion of long-term debt 246,200 246,200246.2 246.2
Current portion of long-term debt to
affiliated company (Note 9) 50,0008) - 50.0
Notes payable to affiliated companies (Note 9) 25,950 80,3328) 35.0 58.2
Accounts payable 76,261 93,11888.2 106.1
Accounts payable to affiliated companies (Note 10) 27,606 38,3439) 26.3 31.7
Accrued income taxes 2,605 11,47231.4 6.2
Customer deposits 11,015 10,493
Accrued interest 2,146 1,999
Accrued interest to affiliated company (Note 10) 3,648 2,75015.0 14.0
Other 14,893 11,7844.8 18.5
Total current liabilities 461,574 497,741448.2 532.2
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 344,337 337,704326.3 347.2
Investment tax credit, in process of amortization 47,535 50,32945.2 46.2
Accumulated provision for pensions
and related benefits 106,695 140,598122.1 120.6
Customer advances for construction 10,344 9,8909.6 10.6
Asset retirement obligation 10,064 9,74710.4 10.3
Regulatory liabilities (Note 6)5):
Accumulated cost of removal of utility plant 218,022 216,948214.1 220.2
Other 49,511 51,822
Long-term derivative liability (Note 3) 12,198 15,96672.5 52.2
Other 7,774 7,10126.1 29.4
Total deferred credits and other liabilities 806,480 840,105826.3 836.7
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares 425.2 425.2
Common stock expense (0.8) (0.8)
Additional paid-in capital 40.0 40.0
Accumulated other comprehensive loss (45.1) (45.6)
Retained earnings 538.2 534.0
Total common equity 957.5 952.8
Cumulative preferred stock 70.4 70.4
Mandatorily redeemable preferred stock 21.3 21.3
Long-term debt (Note 8) 328.1 328.1
Long-term debt to affiliated company (Note 8) 225.0 225.0
Total capitalization 1,602.3 1,597.6
Total capital and liabilities $2,860,829 $2,882,539$2,876.8 $2,966.5
The accompanying notes are an integral part of these consolidated financial statements.
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Louisville Gas and Electric Company
and Subsidiary
Consolidated StatementStatements of Cash Flows
(Unaudited)
(Thousands(Millions of $)
SixThree Months Ended
June 30,March 31,
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,35933.9 $ 35,02024.2
Items not requiring cash currently:
Depreciation and amortization 55,722 57,437
Deferred income taxes - net 4,909 12,876
Investment tax credit - net (2,794) (2,105)
Value Delivery Team (VDT)30.7 27.5
VDT amortization (Note 6) 15,067 15,332
Mark-to-market financial7.6 7.5
Change in fair value of derivative instruments (6,136) 1,551(1.3) 6.1
Other 4,957 9,557(0.1) (3.8)
Changes in current assets and liabilities (19,580) 14,956
Changes in accounts receivable
securitization-net (Note 4) - (14,000)liabilities-net 46.3 (29.2)
Pension funding (Note 9 and 12) (34,492) (83,125)
Provision for post-retirement benefits (8,047) (4,201)11) - (34.5)
Gas supply clause 8,340 (19,834)receivable, net 1.9 7.8
Earnings sharing mechanism 2,357 1,772
Combustion turbine litigation settlement 7,107 -receivable 3.5 3.0
Other 9,769 3,401(1.2) 7.7
Net cash flows fromprovided by operating activities 78,538 28,637121.3 16.3
CASH FLOWS FROMUSED IN INVESTING ACTIVITIES:
Proceeds from sales(Purchase) sale of securities 103 163long-term investments (0.1) 0.1
Construction expenditures (64,958) (119,412)(18.5) (27.0)
Net cash flows fromused for investing activities (64,855) (119,249)(18.6) (26.9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated company (Note 9) 125,000 100,000
Short-term borrowings from affiliated
company (Note 9) 260,550 349,4008) - 125.0
Repayment of long-term borrowings
from affiliated company (50,000)(Note 8) (50.0) -
Short-term borrowings from affiliated company (Note 8) - 131.2
Repayment of short-term borrowings
from affiliated company (314,932) (370,737)
Issuance costs of pollution control bonds (133) -(23.2) (218.2)
Payment of common dividends (21,000) -
Payment of preferred dividends (890) (1,993)(29.7) (0.4)
Other 0.1 (0.1)
Net cash flows from(used for) provided by financing
activities (1,405) 76,670(102.8) 37.5
CHANGE IN CASH AND CASH EQUIVALENTS 12,278 (13,942)(0.1) 26.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,706 17,0156.8 1.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,9846.7 $ 3,07328.6
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 33,062(0.7) $ 15,947(5.2)
Interest on borrowed money 8,539 10,705$ 3.9 $ 3.9
Interest to affiliated companies on borrowed money 5,282 1,315$ 4.0 $ 2.8
The accompanying notes are an integral part of these consolidated financial statements.
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Louisville Gas and Electric Company
and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands(Millions of $)
Three Months Six Months
Ended
Ended
June 30, June 30,March 31,
2005 2004 2003 2004 2003
Net income $17,140 $7,775 $41,359 $35,020
Gains/(losses)$33.9 $24.2
Income Taxes - Minimum Pension Liability (Note 6) (1.1) -
Gain (loss) on derivative instruments and hedging
activities - net of tax benefit/(expense) of
$(4,866), $1,021,
$(2,449)$(1.0) and $1,034,$2.4 for 2005 and 2004,
respectively (Note 3) 7,299 (1,531) 3,667 (1,551)1.6 (3.6)
Other comprehensive income (loss), net of tax 7,299 (1,531) 3,667 (1,551)0.5 (3.6)
Comprehensive income $24,439 $6,224 $45,026 $33,469$34.4 $20.6
The accompanying notes are an integral part of these consolidated financial statements.
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Kentucky Utilities Company
and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands(Millions of $)
Three Months Six Months
Ended
Ended
June 30, June 30,March 31,
2005 2004 2003 2004 2003
OPERATING REVENUES $232,369 $197,174 $479,755 $422,157$287.5 $247.4
OPERATING EXPENSES:
Fuel for electric generation 67,631 59,641 137,515 125,96487.4 70.0
Power purchased 30,662 33,648 71,969 74,84846.3 41.3
Other operation and maintenance expenses 36,536 38,130 74,990 77,019
Maintenance 17,024 7,403 28,908 36,36959.6 54.5
Depreciation and amortization 25,950 27,762 51,199 51,912
Federal and state income taxes 17,461 7,467 38,562 14,067
Property and other taxes 4,284 3,968 8,537 8,16328.6 25.2
Total operating expenses 199,548 178,019 411,680 388,342221.9 191.0
NET OPERATING INCOME 32,821 19,155 68,075 33,81565.6 56.4
Other income - net 1,958 2,697 3,420 4,803
Other income (expense) from
affiliated company (Note 10) 4 (3) 14 -1.0 0.4
Interest expense (Note 3) 3,682 6,582 4,417 11,1132.9 0.7
Interest expense to affiliated companies (Note 10) 3,536 1,108 7,083 1,4859) 3.6 3.6
NET INCOME BEFORE INCOME TAXES 60.1 52.5
Federal and state income taxes (Note 6) 22.6 20.1
NET INCOME $ 27,56537.5 $ 14,159 $ 60,009 $ 26,020
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Balance at beginning of period $623,050 $513,321 $591,170 $502,024
Net income 27,565 14,159 60,009 26,020
Subtotal 650,615 527,480 651,179 528,044
Cash dividends declared on stock:
4.75% cumulative preferred 237 237 475 475
6.53% cumulative preferred 327 327 653 653
Common 21,000 - 21,000 -
Subtotal 21,564 564 22,128 1,128
Balance at end of period $629,051 $526,916 $629,051 $526,91632.4
The accompanying notes are an integral part of these consolidatedfinancial statements.
Statements of Retained Earnings
(Unaudited)
(Millions of $)
Three Months Ended
March 31,
2005 2004
Balance at beginning of period $659.4 $591.2
Net income 37.5 32.4
Subtotal 696.9 623.6
Cash dividends declared on stock:
4.75% cumulative preferred 0.2 0.2
6.53% cumulative preferred 0.3 0.3
Common 30.0 -
Subtotal 30.5 0.5
Balance at end of period $666.4 $623.1
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands(Millions of $)
ASSETS
June 30,March 31, December 31,
2005 2004 2003
UTILITY PLANT:
At original cost $3,645,814 $3,596,657
Less: reserve for depreciation 1,377,302 1,355,055
Net utility plant (Note 7) 2,268,512 2,241,602
OTHER PROPERTY AND INVESTMENTS -
less reserve of $131 as of June 30, 2004 and
December 31, 2003 19,196 17,862
CURRENT ASSETS:
Cash and cash equivalents 9,792 4,869$ 3.9 $ 4.6
Accounts receivable - less reserve of $673$0.7 million
and $672$0.6 million as of June 30, 2004March 31, 2005 and
December 31, 2003,
2004,respectively (Note 4) 94,804 49,289103.6 112.6
Materials and supplies - at average cost:
Fuel (predominantly coal) 35,552 45,53849.9 52.2
Other 27,367 27,09428.4 28.0
Prepayments and other 9,866 13,1009.4 9.9
Total current assets 177,381 139,890195.2 207.3
OTHER PROPERTY AND INVESTMENTS -
less reserve of $0.1 million as of March 31,
2005 and December 31, 2004, respectively 21.1 20.5
UTILITY PLANT:
At original cost 3,730.6 3,712.1
Less: reserve for depreciation 1,438.1 1,415.0
Net utility plant 2,292.5 2,297.1
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,349 4,4814.7 4.7
Regulatory assets (Note 6) 64,974 72,3185) 58.9 61.4
Long-term derivative asset (Note 3) 7,584 12,2235.5 6.1
Other 11,102 21,91614.6 13.3
Total deferred debits and other assets 88,009 110,93883.7 85.5
Total assets $2,553,098 $2,510,292$2,592.5 $2,610.4
The accompanying notes are an integral part of these consolidated financial statements.
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Kentucky Utilities Company
and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands(Millions of $)
CAPITALIZATION AND LIABILITIES
June 30,March 31, December
31,
2005 2004 2003
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
Accumulated other comprehensive loss (6,045) (6,031)
Retained earnings 629,051 591,170
Total common equity 945,824 907,957
Cumulative preferred stock 39,727 39,727
Long-term debt (Note 9) 307,940 312,646
Long-term debt to affiliated company (Note 9) 333,000 283,000
640,940 595,646
Total capitalization 1,626,491 1,543,330
CURRENT LIABILITIES:
Current portion of long-term debt 87,130 91,930$ 123.1 $ 87.1
Current portion of long-term notes to
affiliated company 75.0 75.0
Notes payable to affiliated company (Note 9) 53,181 43,2318) 26.0 34.8
Accounts payable 48,356 69,94750.3 77.9
Accounts payable to affiliated companies (Note 10) 15,727 26,4269) 21.0 32.8
Accrued income taxes 10,454 7,10433.4 5.9
Customer deposits 13,867 13,453
Accrued interest 1,972 2,024
Accrued interest to affiliated company (Note 10) 3,493 2,45415.7 15.0
Other 17,019 9,7674.6 15.4
Total current liabilities 251,199 266,336349.1 343.9
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 275,860 261,258267.7 282.6
Investment tax credit, in process of amortization 4,832 5,8593.4 3.8
Accumulated provision for pensions and
related benefits 63,140 103,101
Customer advances for construction 1,624 1,56480.0 77.9
Asset retirement obligation 20,339 19,69821.2 21.0
Regulatory liabilities (Note 6)5):
Accumulated cost of removal of utility plant 266,218 261,942271.6 266.8
Other 30,908 38,02741.4 24.7
Other 12,487 9,17715.9 17.0
Total deferred credits and other liabilities 675,408 700,626701.2 693.8
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares 308.1 308.1
Common stock expense (0.3) (0.3)
Additional paid-in capital 15.0 15.0
Accumulated other comprehensive loss (13.6) (13.3)
Retained earnings 653.8 647.3
Undistributed subsidiary earnings 12.6 12.1
Total common equity 975.6 968.9
Cumulative preferred stock 39.7 39.7
Long-term debt (Note 8) 268.9 306.1
Long-term debt to affiliated company (Note 8) 258.0 258.0
Total capitalization 1,542.2 1,572.7
Total capital and liabilities $2,553,098 $2,510,292$2,592.5 $2,610.4
The accompanying notes are an integral part of these consolidated financial statements.
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Kentucky Utilities Company
and Subsidiary
Consolidated StatementStatements of Cash Flows
(Unaudited)
(Thousands(Millions of $)
SixThree Months Ended
June 30,March 31,
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,00937.5 $ 26,02032.4
Items not requiring cash currently:
Depreciation and amortization 51,199 51,912
Deferred income taxes - net 13,346 1,485
Investment tax credit - net (1,027) (1,321)
Value Delivery Team (VDT)28.6 25.2
VDT amortization (Note 6) 5,877 6,153
Mark-to-market financial2.9 2.9
Change in fair value of derivative instruments (67) 2,016(1.2) (0.5)
Other 1,632 14,548(1.1) 6.4
Changes in current assets and liabilities (52,855) 4,628(10.6) (41.7)
Earnings sharing mechanism receivable 5.1 3.3
Pension funding (Note 9 and 12) (43,409) (3,515)
Provision for post-retirement benefits (3,372) (3,036)
Earnings sharing mechanism 344 4,464
Combustion turbine litigation settlement 11,59511) - (43.4)
Other 6,296 11,434(3.8) 10.9
Net cash flows fromprovided by operating activities 49,568 114,78857.4 (4.5)
CASH FLOWS FROMUSED IN INVESTING ACTIVITIES:
Purchase of securities (1,334) (1,786)long-term investments (0.1) (0.7)
Construction expenditures (76,338) (175,507)(18.5) (38.6)
Net cash flows fromused in investing activities (77,672) (177,293)(18.6) (39.3)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated company (Note 9) 50,000 100,0008) - 50.0
Short-term borrowings from affiliated company (Note 9) 255,000 360,6408) - 128.0
Repayment of short-term borrowings
from affiliated company (245,050) (333,700)
Retirement of pollution control bonds (4,800) (62,000)
Refund of issuance costs of pollution
control bonds 5 -(8.9) (130.5)
Payment of common dividends (21,000) -
Payment of preferred dividends (1,128) (1,128)(30.6) (0.5)
Net cash flows from financing activities 33,027 63,812(39.5) 47.0
CHANGE IN CASH AND CASH EQUIVALENTS 4,923 1,307(0.7) 3.2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,869 5,3914.6 4.9
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,7923.9 $ 6,6988.1
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 21,264(2.3) $ 13,7631.0
Interest on borrowed money 7,562 11,045$ 2.2 $ 1.6
Interest to affiliated companies on borrowed money 6,070 724$ 3.2 $ 2.2
The accompanying notes are an integral part of these consolidated financial statements.
- - New Page9 -
Kentucky Utilities Company and Subsidiary
Consolidated
Statements of Other Comprehensive Income
(Unaudited)
(Thousands(Millions of $)
Three Months Six Months
Ended
Ended
June 30, June 30,March 31,
2005 2004 2003 2004 2003
Net income $27,565 $14,159 $60,009 $26,020
Losses on derivative instruments
and hedging activities$37.5 $32.4
Income Taxes - net of tax
benefit/(expense) of $18 and $5
respectivelyMinimum Pension Liability (Note 3) (27) - (14)6) (0.3) -
Other comprehensive loss, net of tax (27) - (14)(0.3) -
Comprehensive income $27,538 $14,159 $59,995 $26,020$37.2 $32.4
The accompanying notes are an integral part of these consolidated financial statements.
- - New Page10 -
Louisville Gas and Electric Company
and Subsidiary
Kentucky Utilities Company
and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The unaudited consolidated financial statements include the accounts of Louisville GasLG&E and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary (each "LG&E" and "KU", or the
"Companies").KU.
The common stock of each of LG&E and KU is wholly-owned by LG&E Energy LLC ("LG&E Energy").Energy.
In the opinion of management, the unaudited interim financial
statements include 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")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, 2003,2004, 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, 2003,March
31, 2004, have been revised to conform to certain reclassifications in
the current three months and six months ended June
30, 2004.March 31, 2005. These reclassifications
had no impact on the balance sheet net assets or net income, as previously reported. LG&E
and KU net operating income previously reported for the three months
ended March 31, 2004 increased by $15.0 million and $21.1 million,
respectively, because the income statement presentation was changed in
2005 to report income tax expense in the category Federal and State
income taxes, which appears just before net income. LG&E and KU other
income (expense) - net previously reported for the three months ended
March 31, 2004 decreased $0.3 million and $1.0 million, respectively,
also due to the income tax reclassification.
2. Mergers and Acquisitions
LG&E and KU are each subsidiaries of LG&E Energy. InOn July 1, 2002, E.ON
AG ("E.ON"), a German company, completed its acquisition of Powergen, Limited ("Powergen"), the former parent company ofincluding
LG&E Energy. As a
result, LG&E and KU became indirect subsidiaries of E.ON. E.ON had
announced its pre-conditional cash offer ofEnergy, for approximately 5.1 billion pounds sterling ($7.3 billion) for Powergen in April 2001..
As a result of the acquisition, LG&E Energy became a wholly-owned
subsidiary of E.ON and, as a result, LG&E and KU also became indirect
subsidiaries of E.ON. LG&E and KU have continued their separate
identities and serve customers under their existing names. The preferred
stock and debt securities of LG&E and KU were not affected by this
transaction and the utilities continue to file SEC reports. Following the
purchase of Powergen by E.ON,acquisition, E.ON became a registered holding company under the Public Utility Holding Company Act of 1935
("PUHCA"). As a result, E.ON, its utility subsidiaries, includingPUHCA. LG&E
and KU, and certainas subsidiaries of its non-utility subsidiariesa registered holding company, are subject to
extensive regulation by the SECadditional regulations under PUHCA with respect to issuances
and sales of securities, acquisitions and sales of certain utility
properties, and intra-system sales of certain goods and services.PUHCA. In addition, PUHCA generally limits the ability of registered holding
companies to acquire additional public utility systems and to acquire
and retain businesses unrelated to the utility operations of the
holding company. LG&E and KU believe that they have adequate authority
(including financing authority) under existing SEC orders and
regulations to conduct their business. LG&E and KU will seek
additional authorization when necessary.
As contemplated in their regulatory filings in connection with the E.ON
acquisition,March 2003, E.ON, Powergen and
LG&E Energy completed an administrative reorganization to move the LG&E
Energy group from an indirect Powergen subsidiary to an indirect E.ON
subsidiary. This reorganization was
effective in March 2003. In early 2004, LG&E Energy begancommenced direct reporting
arrangements to E.ON.
- 11 - New Page -
The utility operations (LG&E and KU) of LG&E Energy have continued
their separate identities and continue to serve customers in Kentucky,
Virginia and Tennessee under their existing names. The preferred stock
and debt securities of LG&E and KU were not affected by these
transactions and LG&E and KU continue to file SEC reports.
Effective December 30, 2003, LG&E Energy LLC became the successor, by
assignment and subsequent merger, to all the assets and liabilities of
LG&E Energy Corp. Following the conversion, LG&E Energy became a
registered holding company under PUHCA.
3. Financial Instruments
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk, earnings and cash flow 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 designated as a cash flow hedge 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 and the underlying hedged items are periodically marked to market with the
resulting net gains and losses recorded directly into net income. Upon terminationincome to
correspond with income or expense recognized from changes in market
value of any fair value hedges,
the resulting gain or loss is recorded into net income.items being hedged.
As of June 30, 2004,March 31, 2005, LG&E was party to various interest rate swap
agreements with aggregate notional amounts of $228.3$211.3 million. Under
these swap agreements, LG&E paid fixed rates averaging 4.38% and
received variable rates based on LIBOR or the Bond Market Association's
municipal swap index averaging 1.01%1.86% at June 30, 2004.March 31, 2005. The swap
agreements in effect at June 30, 2004March 31, 2005 have been designated as cash
flow hedges and mature on dates ranging from 20052020 to 2033. The hedges
have been deemed to be fully effective resulting in a pretax gain of
$12.2
million and $6.1$2.6 million for the three months and six months ended June
30, 2004, respectively,March 31, 2005, recorded in
other comprehensive income. Upon expiration of these hedges, the
amount recorded in other comprehensive income will be reclassified into
earnings. The amounts expected to be reclassified from other
comprehensive income to earnings in the next twelve months areis
immaterial. A deposit in the amount of $10.8 million, used as
collateral for the $83.3 million interest rate swap, is classified as
restricted cash on LG&E's balance sheet. The amount of the deposit
required is tied to the market value of the swap.
In February 2005, an LG&E interest rate swap with a notional amount of
$17 million matured. The swap was fully effective upon expiration,
therefore, the impact on earnings and other comprehensive income from
the swap maturity was less than $0.1 million.
As of June 30, 2004,March 31, 2005, KU was party to various interest rate swap
agreements with aggregate notional amounts of $103.0 million. Under
these swap agreements, KU paid variable rates based on either LIBOR or
the Bond Market Association's municipal swap index averaging 2.23%3.80%, and
received fixed rates averaging 7.74% at June 30, 2004.March 31, 2005. The swap
agreements in effect at June 30, 2004March 31, 2005 have been designated as fair
value hedges and mature on dates ranging from 2007 to 2025. During the
three months and six months ended June 30, 2004,For 2005,
the effect of marking these financial instruments and the underlying
debt to market resulted in a net pretax gain/(loss) of $(0.5) million and $0.7 million
(representing the hedges' ineffectiveness), respectively,gains recorded as a
decrease/(increase) in interest expense.expense of
$0.7 million.
- 12 -
Interest rate swaps hedge interest rate risk on the underlying debt.
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in addition to swaps being marked to market, the item being
hedged using a fair value hedge must also be marked to market.
Consequently at June 30, 2004,March 31, 2005, KU's debt reflects an increase by a $10.0$7.0 million mark-to-marketmark-
to-market adjustment.
- - New Page -
In February 2004, KU terminated the swap it had in place related to
its Series 9 pollution control bonds. The notional amount of the
terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination, resulting in a gain of $0.8
million.
4. Accounts Receivable Securitization Programs
In February 2001, LG&E and KU implemented accounts receivable
securitization programs. The purpose of these programs was to enable
LG&E and KU to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital.
In January 2004, LG&E and KU terminated their accounts receivable
securitization programs and replaced them with intercompany loans from
an E.ON affiliate. In May 2004, LG&E and KU dissolved their inactive
accounts receivable securitization-related subsidiaries, LG&E
Receivables LLC and KU Receivables LLC. The accounts receivable
securitization-related subsidiaries were the only subsidiaries of LG&E
and KU.
5. SegmentSegments of Business
LG&E's revenues and net income by business segment for the three and
six months
ended June 30,March 31, 2005 and 2004, and 2003, follow:
Three Months Ended
Six Months Ended
June 30, June 30,March 31,
(in thousands)millions) 2005 2004 2003 2004 2003
LG&E Electric
Revenues 192,566 173,917 390,815 360,936$ 229.8 $ 198.3
Net income 20,441 9,457 36,384 27,48923.9 15.9
Total assets 2,394.1 2,427.4
LG&E Gas
Revenues 43,646 41,456 207,360 181,280172.6 163.7
Net income (3,301) (1,682) 4,975 7,53110.0 8.3
Total assets 482.7 469.6
Total
Revenues 236,212 215,373 598,175 542,216402.4 362.0
Net income 17,140 7,775 41,359 35,020
6.33.9 24.2
Total assets 2,876.8 2,897.0
KU is an electric utility company. It does not provide gas service and
therefore, is presented as a single business segment.
5. Rates and Regulatory AssetsMatters
For a description of each line item of regulatory assets and
Liabilitiesliabilities for LG&E and KU, reference is made to Part I, Item 8,
Financial Statements and Supplementary Data, Note 3 of LG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2004.
The following regulatory assets and liabilities were included in LG&E's
balance sheets as of June 30, 2004March 31, 2005 and December 31, 2003:2004:
- 13 -
Louisville Gas and Electric Company
(Unaudited)
June 30,March 31, December 31,
(in thousands)millions) 2005 2004
2003
VDT costsCosts $ 52,74330.1 $ 67,81037.7
Unamortized loss on bonds 20.0 20.3
ARO 7.1 6.9
Merger surcredit 4.5 4.8
ESM - 2.1
Rate case expenses 1.0 1.1
FAC - 0.8
Gas supply adjustments due from customers 11,930 22,077
Unamortized loss on bonds 20,802 21,333
Earnings sharing mechanism (ESM) provision 10,002 12,359
Merger surcredit 5,529 6,220
Asset retirement obligation (ARO) 6,480 6,01510.2 13.3
Gas performance-basedperformance base ratemaking (PBR) 3,378 5,480
Other (including fuel adjustment clause (FAC),
demand side management (DSM), etc.) 2,689 2,3322.4 3.7
Manufactured gas sites 1.1 1.2
Total regulatory assets $ 113,55376.4 $ 143,62691.9
Accumulated cost of removal of utility plant $(218,022) $(216,948)$214.1 $220.2
Deferred income taxes - net (39,457) (41,180)(Note 6) 55.8 37.2
ARO 0.1 0.1
ECR 4.0 4.0
FAC 0.8 -
ESM 1.4 -
DSM 3.3 2.5
Gas supply adjustments due to customers (4,999) (6,805)
DSM (2,904) (1,706)
Other (including environmental cost recovery
(ECR), ARO, FAC and ESM) (2,151) (2,131)7.1 8.4
Total regulatory liabilities $(267,533) $(268,770)
- New Page -$286.6 $272.4
LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, FAC, and gas performance-basedperformance based ratemaking, and FAC, all
of which are separate rate mechanisms with recovery within twelve
months. Additionally, no current return is earned on the ARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset and ARO liability at the
time the underlying asset is retired.removed.
The following regulatory assets and liabilities were included in KU's
balance sheets as of June 30, 2004March 31, 2005 and December 31, 2003:2004:
- Page 14 -
Kentucky Utilities Company
(Unaudited)
June 30,March 31, December 31,
(in thousands)millions) 2005 2004 2003
VDT costs $ 20,57411.8 $ 26,45114.7
Unamortized loss on bonds 10,127 10,511
ESM provision 12,038 12,38211.2 11.4
ARO 13.3 12.8
Merger surcredit 4,280 4,815
ARO 12,095 11,3223.5 3.7
ESM - 3.1
Rate case expenses 1.0 1.1
FAC 2,865 4,298
Other 2,995 2,53913.1 9.4
Deferred storm costs 3.4 3.6
Post retirement and pension 1.2 1.2
Management audit expenses 0.4 0.4
Total regulatory assets $ 64,97458.9 $ 72,31861.4
Accumulated cost of removal of utility plant $(266,218) $(261,942)$271.6 $266.8
Deferred income taxes - net (22,802) (24,058)(Note 6) 32.4 19.3
ARO (1,288) (1,162)1.5 1.4
ECR 2.5 1.2
FAC - 0.1
ESM 2.0 -
DSM 1.9 1.6
Spare parts (1,071) (1,055)
ECR (3,671) (9,189)
Other (including FAC and DSM) (2,076) (2,563)1.1 1.1
Total regulatory liabilities $(297,126) $(299,969)$313.0 $291.5
KU currently earns a return on all regulatory assets except for ESM and
FAC, both of which are separate recovery mechanisms with recovery
within twelve months. Additionally, no current return is earned on the
ARO regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset and ARO liability at the
time the underlying asset is retired.
7. Utility Plantremoved.
Based on an order from the Kentucky Commission in September 2004, KU
retired two steam generating units, Green River Units 1 and 2,reclassified from maintenance expense to a regulatory asset, $4.0
million related to costs not reimbursed from the 2003 ice storm. These
costs will be amortized through June 2009. These amortized costs,
which are included in KU's jurisdictional operating expenses, are
recovered in base rates.
Due to a number of changes in Kentucky's tax system, including the
reduction of the Corporate income tax, timing differences included in
the amountreserve for deferred state income taxes at December 31, 2004 will
reverse at lower rates than previously provided. See Note 6.
- 15 -
ELECTRIC AND GAS RATE CASES
On June 30, 2004, the Kentucky Commission issued an order approving an
increase in the base electric rates of $17.2 million, fromLG&E and KU and the gas rates of
LG&E. The rate increases took effect on July 1, 2004.
During July 2004, the AG served subpoenas on LG&E and KU, as well as on
the Kentucky Commission and its booksstaff, requesting information regarding
alleged improper communications between LG&E and KU and the Kentucky
Commission. The Kentucky Commission procedurally reopened the rate case
for the limited purpose of taking evidence, if any, as to the
communication issues. In September and October 2004, various
proceedings were held in circuit courts in Franklin and Jefferson
Counties, Kentucky regarding the scope and timing of document
production or other information required or agreed to be produced under
the AG's subpoenas and matters were consolidated into the Franklin
County court.
In January 2005, the AG conducted interviews of certain employees of
LG&E and KU and submitted its report to the Franklin County, Kentucky
Circuit Court in confidence. Concurrently, the AG filed a motion
summarizing the report as containing evidence of improper
communications and record-keeping errors by LG&E and KU in their
conduct of activities before the Kentucky Commission or other state
governmental entities and requesting release of the report to such
agencies. During February 2005, the court ruled that the report be
forwarded to the Kentucky Commission under continued confidential
treatment to allow it to consider the report, including its impact, if
any, on completing its investigation and any remaining steps in the
rate case, including ending the current abeyance. To date, LG&E and KU
have neither seen nor requested copies of the report or its contents.
LG&E and KU believe no improprieties have occurred in their
communications with the Kentucky Commission and are cooperating with
the proceedings before the AG and the Kentucky Commission.
LG&E and KU are currently unable to determine any possible future
actions of the AG or the Kentucky Commission or the ultimate impact, if
any, of the AG's report and investigation, including whether there will
be further actions to appeal, review or otherwise challenge the granted
increases in base rates.
- 16 -
VDT
The current five-year VDT amortization period is scheduled to expire in
March 31, 2004.
Approximately $4 million2006. As part of the settlement agreements in common assets, which are shared by Green
River Units 3the electric and
4,gas rate cases, LG&E and KU shall file with the Kentucky Commission a
plan for the future ratemaking treatment of the VDT surcredits and
costs six months prior to the March 2006 expiration. The surcredit
shall remain on KU's books. The common assets will
remain on KU's booksin effect following the expiration of the fifth year until
the Commission enters an order on the future disposition of VDT-related
issues.
ECR
In December 2004, KU and LG&E filed applications with the Kentucky
Commission for approval of a CCN to construct new SO2 control
technology (FGDs) at KU's Ghent and Brown stations, and to amend LG&E's
compliance plan to allow recovery of new and additional environmental
compliance facilities. The estimated capital cost of the additional
facilities is $742.7 million ($40.2 million for LG&E and $702.5 million
for KU), of which $658.9 million is for the FGDs. Hearings in these
cases occurred during May 2005 and final retirement of Green River Units 3orders are expected in June
2005.
MISO
The MISO implemented a day-ahead and 4. The gross book value of Green River Units 1 and 2 was chargedreal-time market, including a
congestion management system in April 2005. This system is similar to
the accumulated reserve for depreciationLMP system currently used by the PJM RTO and contemplated in accordanceFERC's
SMD NOPR, currently being discussed. The MISO filed with FERC regulationsa
mechanism for recovery of costs for the congestion management system.
The MISO proposed the addition of two new Schedules, 16 and no gain or loss17.
Schedule 16 is the MISO's cost recovery mechanism for the Financial
Transmission Rights Administrative Service it provides. Schedule 17 is
the MISO's mechanism for recovering costs it incurs for providing
Energy Marketing Support Administrative Service. The MISO transmission
owners, including LG&E and KU, objected to the allocation of costs
among market participants and retail native load. FERC ruled in 2004 in
favor of the MISO.
The Kentucky Commission opened an investigation into LG&E and KU's
memberships in the MISO in July 2003. The Kentucky Commission directed
LG&E and KU to file testimony addressing the costs and benefits of the
MISO membership both currently and over the next five years and other
legal issues surrounding continued membership. LG&E and KU engaged an
independent third-party to conduct a cost-benefit analysis on this
issue. The information was recorded.filed with the Kentucky Commission in
September 2003. The analysis and testimony supported the exit from the
MISO, under certain conditions. The MISO filed its own testimony and
cost benefit analysis in December 2003. A partial redemption of
pollution control Series 14 bonds totaling $4.8 millionfinal Kentucky Commission
order was requiredexpected in the second quarter asof 2004. The ruling has since
been delayed due to the Kentucky Commission's request for additional
testimony on the MISO's Market Tariff filing at FERC; a resultruling is
expected by summer 2005.
- 17 -
Should LG&E and KU be ordered to exit the MISO, current MISO rules may
also impose an exit fee. While LG&E and KU believe legal and
regulatory precedent should permit most or many of the retirement (see Note 9)MISO-related
costs to be recovered in their rates charged to customers, they can
give no assurance that state or federal regulators will ultimately
agree with such position with respect to all costs, components or
timing of recovery. In April 2005, the Kentucky Commission issued an
order declining an LG&E and KU request for an automatic monthly tracker
of certain MISO-related costs, to be recovered through a new rate
mechanism.
At this time, LG&E and KU cannot predict the outcome or effects of the
various FERC and Kentucky Commission proceedings described above,
including whether such proceedings will have a material impact on the
financial condition or results of operations of the Companies.
Financial consequences (changes in transmission revenues and costs)
associated with the transmission market tariff charges are subject to
varying assumptions and calculations and are therefore difficult to
estimate. Changes in revenues and costs related to broader shifts in
energy market practices and economics are not currently estimable.
KENTUCKY COMMISSION STRATEGIC BLUEPRINT
In February 2005, Kentucky's Governor signed an executive order
directing the Kentucky Commission, in conjunction with the Commerce
Cabinet and the Environmental and Public Protection Cabinet, to
develop a Strategic Blueprint for the continued use and development of
electric energy'. - - New Page -This Strategic Blueprint will be designed to promote
future investment in electric infrastructure for the Commonwealth of
Kentucky, to protect Kentucky's low-cost electric advantage, to
maintain affordable rates for all Kentuckians, and to preserve
Kentucky's commitment to environmental protection. In March 2005, the
Kentucky Commission established Administrative Case No. 2005-00090 to
collect information from all jurisdictional utilities in Kentucky,
including LG&E and KU, pertaining to Kentucky electric generation,
transmission and distribution systems. The following data represent shares of jointly-owned additionsKentucky Commission must
provide its Strategic Blueprint to the Trimble County plant for four combustion turbines ("CT's") asGovernor in early August 2005.
LG&E and KU responded to the Kentucky Commission's first set of June
30, 2004. Trimble County CT Units 7 and 8 began commercial operation
on June 1, 2004. The addition to LG&E plant in service was $37.0
million and for KU the addition was $63.2 million. Trimble County CT
Units 9 and 10 began commercial operation on July 1, 2004.
($ in millions) LG&E KU Total
Trimble CT 7
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value $18.7 $32.1 $50.8
Trimble CT 8
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value $18.6 $31.9 $50.5
Trimble CT 9
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value
(in construction work in progress) $18.7 $32.0 $50.7
Trimble CT 10
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value
(in construction work in progress) $18.6 $32.0 $50.6
8. New Accounting Pronouncements
FIN 46
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 ("FIN 46"). FIN 46 required certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was
effective immediately for all new variable interest entities created or
acquired after January 31, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential
variable interest entities other than special purpose entities, the
revised FIN 46 ("FIN 46R") is now required to be applied no later than
the end of the first fiscal year or interim reporting period ending
after March 15, 2004. For all special purpose entities created prior
to February 1, 2003, FIN 46R is now required to be applieddata
requests at the end of March 2005.
6. Income Taxes
Kentucky House Bill 272, also known as Kentucky's Tax Modernization
Plan, was signed into law on March 18, 2005. This bill contains a
number of changes in Kentucky's tax system, including the first interim or annual reporting period ending after December
15, 2003. FIN 46R may be applied prospectively with a cumulative-
effect adjustment asreduction of
the date it is first applied, or by restating
previously issued financial statements withCorporate income tax rate from 8.25% to 7% effective January 1,
2005, and a cumulative-effect
adjustment asfurther reduction to 6% effective January 1, 2007. Because
of the beginningtax rate reduction, timing differences included in the reserve
for deferred state income taxes at December 31, 2004, will reverse at
lower rates than previously provided. Without some form of adjustment,
- 18 -
the first year restated. FIN 46R
also requires certain disclosuresdeferred tax reserve amount will exceed the actual deferred tax
liability attributable to existing timing differences. This excess
amount is referred to as excess deferred income taxes. The Company has
filed an application with the Kentucky Commission requesting approval
of an entity's relationship with
variable interest entities.its accounting treatment to establish and amortize a regulatory
liability for its net excess deferred tax balance. Both LG&E and KU
hold investment interests in Ohio Valley Electric
Corporation ("OVEC"), and KU holds an investment interest in Electric
Energy, Inc. ("EEI"). Neither LG&E nor KU are the primary beneficiary
of OVEC or EEI, and thus neither are consolidated into the financial
statements of LG&E or KU.
- New Page -
LG&E, KU and ten other electric utilities are participating owners of
OVEC, located in Piketon, Ohio. OVEC owns and operates two power
plants that burn coal to generate electricity, Kyger Creek Station in
Ohio and Clifty Creek Station in Indiana. LG&E's share is 7%,
representing approximately 155 Mw of generation capacity and KU's share
is 2.5%, approximately 55 Mw of generation capacity.
LG&E's and KU's original investments in OVEC were made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock.
LG&E's and KU's investments in OVEC are accounted foramortizing their depreciation-related excess deferred tax balances
under the costaverage rate assumption method. The average rate assumption
method of accounting. As of June 30, 2004, LG&E's and KU's investments
in OVEC totaled $0.5 million and $0.3 million, respectively. LG&E's
and KU's maximum exposure to loss as a result of their involvement with
OVEC is limited tomatches the value of their investments. In the eventamortization of the inabilityexcess deferred taxes with the
life of OVECthe timing differences to fulfill its powerwhich it relates.
Significant judgment is required in determining the provision requirements,for
income taxes, and there are many transactions for which the ultimate
tax outcome is uncertain. To provide for these uncertainties
or exposures, LG&E and KU would substitute such power supply with either owned generation or
market purchasesmaintain an allowance for tax contingencies,
the balance of which management believes is adequate. Tax
contingencies are analyzed periodically and would generally recover associated incremental
costs through regulatory rate mechanisms. See Note 11 and Part II,
Item 1, for further discussion of developments regarding LG&E's and
KU's ownership interests and power purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-
Mw generating station in southern Illinois. KU is entitled to take 20%
of the available capacity of the station. Purchases from EEIadjustments are made when
events occur to warrant a change. LG&E and KU are currently in the
examination phase of IRS audits for the years 1999 to 2003 and
expect some or all of these audits to be completed within the
next twelve months. LG&E is also under a contractual formula which has resulted in costs which wereKentucky sales and areuse tax
audit for the periods October 1, 1997 through December 31, 2001, and an
initial assessment is expected to be comparable to the cost of other power purchased or
generated by KU. Such power equated to approximately 9% of KU's net
generation system output in 2003.
KU's original investment in EEI was made in 1953. KU's investment in
EEI is accounted for under the equity method of accounting and, as of
June 30, 2004, totaled $11.9 million. KU's maximum exposure to loss as
a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with
either owned generation or market purchases and would generally recover
associated incremental costs through regulatory rate mechanisms.
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 was effective immediately for financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective for interim reporting periods beginning after June 15,
2003.
As of June 30, 2004, LG&E had 237,500 shares of $5.875 series
mandatorily redeemable preferred stock 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 15 of each year commencing with July 15, 2003, and the remaining
187,500 shares on July 15, 2008 at $100 per share. Beginning with the
three months ended September 30, 2003, LG&E reclassified its $5.875
series preferred stock as long-term debt with the minimum shares
mandatorily redeemable within one year classified as current.
Dividends accrued beginning July 1, 2003 are charged as interest
expense. On July 15, 2004, LG&E redeemed 12,500 shares as required at
a price of $100 per share.
KU has no financial instruments that fall within the scopenext three months. The
results of SFAS No.
150.audit assessments by taxing authorities could have a
material effect on quarterly or annual cash flows as well as results of
operations over the next three to twelve months as these audits are
completed. However, LG&E and KU do not believe that any of these
matters will have a material adverse effect on results of operations.
7. New Accounting Pronouncements
FSP 106-2
In May 2004, the FASB finalized FASB Staff Position ("FSP")FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare
- - New Page - Prescription Drug, Improvement and
Modernization Act of 2003 ("Medicare Act") with guidance on accounting
for subsidies provided under the Medicare Act which became law in
December 2003. FSP 106-2 iswas effective for the first interim or annual
period beginning after June 15, 2004. KU will adopt FSP 106-2 in the third quarter of 2004. LG&E's medical
plan does not providehave a
benefit that is actuarially equivalent to
Medicare Part D; therefore, FSP 106-2 is not expected to have anmaterial impact on LG&E.
On&E or KU.
FSP 109-1
In December 2004, the basisFASB finalized FSP 109-1, Accounting for Income
Taxes, Application of actuarial estimates,FAS 109 to the MedicareTax Deduction on Qualified
Production Activities Provided by the American Jobs Creation Act will resultof
2004, which requires the tax deduction on qualified production
activities to be treated as a special deduction in accordance with FAS
109. FSP 109-1 became effective December 21, 2004. For the three
months ended March 31, 2005, LG&E and KU recognized $0.4 million and
$0.2 million, respectively, in tax benefits related to this deduction.
- 19 -
FIN 47
In March 2005, the FASB issued Financial Accounting Standards Board
Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an overall reductioninterpretation of FASB Statement No. 143 ("FIN 47").
FIN 47 clarifies that the term "conditional asset retirement
obligation" as used in SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of settlement
are conditional on a future event that may or may not be within the
control of the accumulated postretirement benefitentity. The obligation ("APBO") for postretirement healthto perform the asset retirement
activity is unconditional even though uncertainty exists about the
timing and life insurance benefits for KU
amounting(or) method of settlement. An entity is required to
approximately $5.0 million as of January 1, 2004.
Accordingly, KU's net periodic postretirement benefit cost for 2004
will be reduced by approximately $0.7 million. The APBO and the net
periodic postretirement benefit cost as of andrecognize a liability for the periodsfair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated. The fair value of a liability for the
conditional asset retirement obligation should be recognized when
incurred; generally, upon acquisition, construction, or development and
through the normal operation of the asset. FIN 47 is effective no
later than the end of fiscal years ending June 30, 2004after December 15, 2005. LG&E
and 2003 do not reflect amounts associated withKU are currently evaluating the subsidies provided by the Medicare Act.
9.impact of this pronouncement.
8. Short-Term and Long-Term Debt
Under the provisions for LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution
control bonds Series 10, 12, 13, 14, and 15, the bonds are subject to
tender for purchase at the option of the holder and to mandatory tender
for purchase upon the occurrence of certain events, causing the bonds
to be classified as current portion of long-term debt in the Consolidated Balance
Sheets. The average annualized interest rate for these bonds during
the three months ending June 30, 2004March 31, 2005 was 1.11%1.96% for theboth LG&E bonds and 1.18% for the KU bonds.
In JanuaryKU.
During June 2004, LG&E entered into two long-term notes from Fidelia
Corporation ("Fidelia"), an E.ON financing subsidiary, one totaling $25
million with an interest rate of 4.33% that matures in January 2012,
and a one-year note totaling $100 million with an interest rate of
1.53%. The loans are secured by a lien subordinated to the first
mortgage bond lien. The proceeds were used to fund a pension
contribution and to repay other debt obligations. In April 2004, LG&E
prepaid $50 million of the $100 million 1.53% note payable to Fidelia.
The prepayment was paid out of cash balances and there was no
prepayment fee.
In January 2004, KU entered into an unsecured long-term loan from
Fidelia totaling $50 million with an interest rate of 4.39% that
matures in January 2012. The proceeds were used to fund a pension
contribution and to repay other debt obligations.
In May 2004, KU redeemed $4.8 million of its Series 14 pollution
control bonds which were initially issued in the amount of $7.2
million.
LG&E maintainsrenewed five bilateralrevolving lines of credit with
banks totaling $185 million
that mature in 2005.million. There was no outstanding balance under
any of these facilities at June 30, 2004. ManagementMarch 31, 2005. The Company expects to
renew these facilities as they expire.prior to their expiration in June 2005.
LG&E, KU and KULG&E Energy participate in an intercompany money pool
agreement whereinagreement. Details of the balances at March 31, 2005 and March 31, 2004
were as follows:
Total Money Amount Balance Average
(millions of $) Pool Available Outstanding Available Interest Rate
March 31, 2005:
LG&E Energy and$400.0 $35.0 $365.0 2.65%
KU make funds available to400.0 26.0 374.0 2.65
March 31, 2004:
LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the
prior month end) up to $400 million. Likewise, LG&E Energy and LG&E
make funds available to$400.0 $ - $400.0 -%
KU at market-based rates up to $400 million.400.0 40.7 359.3 0.98
- 20 - New Page -
LG&E had $26.0 million in money pool loans from LG&E Energy (included
in "Notes payable to affiliated companies") at an average rate of 1.04%
at June 30, 2004, and $171.7 million at an average rate of 1.21% at
June 30, 2003. The balance of the money pool loans from LG&E Energy to
KU (included in "Notes payable to affiliated companies") was $53.2
million at an average rate of 1.04% and $146.4 million at an average
rate of 1.21% at June 30, 2004 and 2003, respectively. The amount
available to LG&E under the money pool agreement at June 30, 2004 was
$374.0 million. The amount available to KU under the money pool
agreement at June 30, 2004 was $346.8 million.
LG&E Energy maintains a revolving credit facility totaling $150$200 million
with an E.ON affiliateNorth America, Inc. to ensure funding availability for the
money pool. There was no balance outstanding on this facility at March
31, 2005.
In January 2005, LG&E Energy had an outstanding balance of $69.7paid at maturity a $50 million at an averageloan from Fidelia
using proceeds from short-term loans from the money pool.
In April 2005, LG&E refinanced $40 million in existing pollution
control indebtedness. The original indebtedness, 5.90% Pollution
Control Bonds, Series X, due April 15, 2023, was discharged on May 13,
2005, using the proceeds from the replacement indebtedness, LG&E
Pollution Control Bonds, Series HH, due February 1, 2035, which carry
a variable, auction rate of 1.79% under this facility as of June 30, 2004 and availability of
$80.3 million remained.
10.Relatedinterest.
9. Related Party Transactions
LG&E, KU, certain subsidiaries of LG&E Energy and other subsidiaries of E.ON
engage in related-party transactions. Transactions among LG&E, KU and
LG&E Energy subsidiaries are eliminated upon consolidation of LG&E
Energy subsidiaries.Energy. Transactions between LG&E or KU and E.ON subsidiaries are
eliminated upon consolidation of E.ON subsidiaries.E.ON. These transactions are generally
performed at cost and are in accordance with the SEC regulations under
the PUHCA and the applicable Kentucky Public Service Commission ("Kentucky Commission") regulations. Accounts
payable to and receivable from related parties are netted and presented
as accounts payable to affiliated companies on the balance sheets of
LG&E and KU, as allowed due to the right of offset. Obligations related
to intercompany debt arrangements with LG&E Energy and Fidelia are
presented as separate line items on the balance sheet, as appropriate.
The significant related-party transactions are disclosed below.
Electric Purchases
LG&E and KU intercompany electric revenues and purchased power expense
(including LG&E Energy Marketing Inc. ("LEM"))from affiliated companies for the three months ended March 31, 2005 and
six months ended June 30, 2004 and 2003 were as follows:
Three months ended Six months ended
June 30, June 30,____LG&E____ ______KU______
(in thousands)millions) 2005 2004 20032005 2004 2003
LG&E
Electric operating revenues from KU $8,426 $10,850 $30,504 $27,820$25.8 $22.1 - -
Electric operating revenues from LG&E - - $30.1 $21.6
Electric operating revenues from LEM 622 1,077 1,350 8,2260.3 0.7 - -
Purchased power from KU 9,114 9,211 30,699 23,675
KU
Electric operating revenues
from LG&E $9,114 $9,211 $30,699 $23,675
Electric operating revenues
from LEM 390 318 550 2,10030.1 21.6 - -
Purchased power from LG&E 8,426 10,850 30,504 27,820- - 25.8 22.1
- 21 -
Interest Charges
LG&E intercompany interest income and expense for the three months and
six months ended June 30, 2004 and 2003 were as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
Interest to affiliate
(money pool) $ (13) $ 536 $ 35 $1,269
Interest to affilitate
(Fidelia loans) 2,986 758 6,069 758
Interest to affiliate (KU) 4 (3) 14 -
Interest from affiliate (KU) - 1 - 5
- New Page - KU intercompany interest income and expense for the three
months ended March 31, 2005 and six months ended June 30, 2004 and 2003 were as follows:
Three months ended Six months ended
June 30, June 30,____LG&E____ ______KU______
(in thousands)millions) 2005 2004 20032005 2004
2003
Interest to affiliate
(money pool)on money pool loans $0.4 $ 75 $349 $ 219 $722- $0.1 $0.2
Interest to affiliate
(Fidelia loans) 3,461 758 6,864 758
Interest to affiliate (LG&E) - 1 - 5
Interest from affiliate (LG&E) 4 (3) 14 -on Fidelia loans 2.7 3.1 3.5 3.4
Other Intercompany Billings
Other intercompany billings (including LG&E Energy Services Inc. ("LG&E
Services")) related to LG&E and KU for the three months
ended March 31, 2005 and six months
ended June 30, 2004 and 2003 were as follows:
Three months ended Six months ended
June 30, June 30,
(in thousands)millions) 2005 2004 2003 2004 2003
LG&E Services billings to LG&E $60,390 $61,404 $98,552 $88,034$32.3 $38.2
LG&E Services billingsbilling to KU 44,613 64,915 75,188 86,40925.8 30.6
LG&E billings to LG&E Services 1,490 1,281 4,525 6,143
LG&E billings to KU 33,796 39,111 94,509 91,760
KU billings to LG&E 31,683 22,203 83,516 55,7954.7 3.0
KU billings to LG&E Services 1,097 770 3,915 7,864
11.Commitments3.2 2.8
LG&E billings to KU 14.1 16.6
KU billings to LG&E 4.0 1.5
10. Commitments and Contingencies
Except as may be discussed in this Quarterly Report on Form 10-Q
(including Note 5), material changes have not occurred in the current
status of various commitments or contingent liabilities from that
discussed in the Companies' Annual Report on Form 10-K for the year
ended December 31, 20032004 (including in Notes 3 and 11 to the financial
statements of LG&E and KU contained thereintherein.) See Notes 3 and incorporated herein by reference) or Quarterly11 to
the Companies' Annual Report on Form 10-Q10-K for the quarter ended March 31, 2004.
Electric and Gas Rates Cases
In December 2003, LG&E and KU filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates.information regarding
such commitments or contingencies.
LITIGATION
The Companies requested general adjustments in
electric rates and LG&E requested general adjustments in gas rates
based on the twelve-month test year ended September 30, 2003. The
revenue increases requested by LG&E were $63.8 million for electric and
$19.1 million for gas. The revenue increase requested by KU was $58.3
million.
On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates of LG&E and the base
electric rates of KU. The Kentucky Commission's order largely accepted
proposed settlement agreements filed in May 2004 litigation commenced by LG&E, KU and a
majority of the parties to the rate case proceedings. The rate
increases took effect on July 1, 2004.
In the Kentucky Commission's order, (a) LG&E was granted increases in
annual base electric rates of approximately $43.4 million (7.7%) and in
annual base gas rates of approximately $11.9 million (3.4%) and (b) KU
was granted an increase in annual base electric rates of approximately
$46.1 million (6.8%). Other provisions of the order include decisions
on certain depreciation, gas supply clause, ECR and VDT amounts or
mechanisms and a termination of the ESM with respect to all periods
after 2003. The order also provided for a recovery before March 31,
2005 by the Companies of previously requested amounts relating to the
ESM during 2003.
- New Page -
During July 2004, the Attorney General of Kentucky ("AG") served
subpoenas on LG&E and KU, as well as on the Kentucky Commission and its
staff, requesting information regarding allegedly improper
communications between the Companies and the Kentucky Commission,
particularly during the period covered by the rate cases. The Kentucky
Commission has procedurally reopened the rate cases for the limited
purpose of taking evidence, if any, as to the communication issues.
Subsequently, the AG filed pleadings with the Kentucky Commission
requesting rehearing of the rate cases on certain computational
components of the increased rates, including income tax, cost of
removal and depreciation amounts. In August 2004, the Kentucky
Commission denied the AG's rehearing request on the cost of removal
and depreciation issues, with the effect that the rate increase order
is final as to these matters, subject to the parties' rights to
judicial appeals. The Kentucky Commission further agreed to hold
in abeyance until mid-October 2004 its further proceedings regarding
the AG's concerns about alleged improper communications until the
AG could file with the Kentucky Commission an investigative report
regarding the latter issue. In addition, the Kentucky Commission
granted a rehearing on the income tax component once the abeyance
discussed above is lifted.
LG&E and KU believe no improprieties have occurred in their
communications with the Kentucky Commission and are cooperating with
the proceedings before the AG and the Kentucky Commission. The
Companies are currently unable to determine the ultimate impact, if
any, of the AG's investigation on the recently concluded rate case
or their operations generally.
Earnings Sharing Mechanism
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $13.0 million
related to LG&E and $16.2 million related to KU. Based upon estimates,
the Companies previously accrued $8.9 million at LG&E and $9.3 million
at KU for the 2003 ESM as of December 31, 2003.
On June 30, 2004, the Kentucky Commission issued an order largely
accepting proposed settlement agreements by the Companies and all
intervenors regarding the ESM mechanisms of LG&E and KU. Under the ESM
settlements, LG&E and KU will continue to collect approximately $13.0
million and $16.2 million, respectively, of previously requested 2003
ESM revenue amounts through March 2005. As part of the settlement, the
parties agreed to a termination of the ESM mechanism relating to all
periods after 2003.
As a result of the settlement, the Company accrued an additional $4.1
million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM
revenue.
OVEC Power Agreement and Share Purchase
On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to
be effective beginning March 2006, upon the expiration of the current
power contract among the parties. Under the new contract, which has a
20-year term from its effective date, LG&E and KU have purchase rights
for 5.63% and 2.5%, respectively, of OVEC power at marginal cost-based
rates. LG&E and KU are entitled to 7% and 2.5% of OVEC power,
respectively, under the current contract.
- New Page -
LG&E's estimated future minimum annual demand payments under the
Amended and Restated Inter-Company Power Agreement are as follows:
(in thousands)
2006 $ 10,098
2007 9,726
2008 9,932
2009 10,144
2010 10,361
Thereafter 170,646
Total $220,907
In addition, LG&E will purchase from American Electric Power Company
Inc. ("AEP") an additional 0.73% interest in OVEC for a purchase price
of approximately $104,000, resulting in an increase in LG&E ownership
in OVEC from 4.9% to 5.63%. The share purchase transaction is
anticipated to be completed during the fourth quarter of 2004, subject
to receipt of certain regulatory approvals.
Owensboro Contract Litigation
In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District CourtOMU against KU concerning a long-termlong-
term power supply contract (the "OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under thecontinues. To date, OMU Agreement, including
various payments or charges between KU and OMU and rights concerning
excess power, termination and emissions allowances, respectively. The
complaint seekshas claimed
approximately $6 million in damages for historical periods, as well as
injunctive and other relief, including a declaration that KU is in
material breach. KU currently has removed this
litigation to the U.S. District Court for the Western District of
Kentucky and filed an answer in that court denying the OMU claims and
presenting certain counterclaims. KU has also initiated a proceeding
atjurisdictional or summary judgment
motions, respectively, pending before the FERC and district court
regarding aspects of this matter.
ENVIRONMENTAL MATTERS
LG&E and KU are subject to obtain the FERC's rulingSO2 and NOx emission limits on certain of the issues in
dispute.
Environmental Matters
In September 1998, the EPA announced its final "NOx SIP Call" rule
requiring states to impose significant additional reductions in NOx
emissions by May 2003, in order to mitigate alleged ozone transport
impacts on the Northeast region. The Commonwealth of Kentucky SIP,
which was approved by EPA June 24, 2003, required reductions in NOx
emissions from coal-firedtheir
electric generating units to the 0.15 lb./Mmbtu level
on a system-wide basis. In related proceedings in response to
petitions filed by various Northeast states, in December 1999, EPA
issued a final rule pursuant to Section 126 of the Clean Air Act
directing similar NOx reductions from a number of specifically targeted
generating units including allAct. LG&E and KU
units. As a result of
appeals to both rules, the compliance date was extended to May 2004.
LG&E and KU have complied with these NOx emissions reduction rules by
addingplaced into operation significant additional NOx controls to their generating
units.
Installation of additional NOx controls have been performed on a phased
basis, commencing in late 2000 and continuing throughunits prior to the final
compliance date.2004 Summer Ozone Season. As of June 30,December 31, 2004,
LG&E hasand KU incurred total capital costs of approximately $182$186 million
and $219 million, respectively, to reduce itstheir NOx emissions to the 0.15
lb./Mmbtu level on a company-wide basis. As of June 30, 2004, KU has
incurred total capital costs of approximately $193 million to reduce
its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis.below
required levels. In addition, LG&E and KU have begun incurringincur additional operationoperating
and maintenance costs in operating new NOx controls.
LG&E- 22 -
KU has implemented a plan for adding significant additional SO2
controls to its generating units. Installation of additional SO2
controls will proceed on a phased basis, with construction of controls
(i.e. FGDs) commencing in mid-2005 and continuing through the final
installation and operation in 2009. KU believe
theirestimates that it will incur
$658.9 million in capital costs related to the construction of the FGDs
to achieve compliance with current emission limits on a company-wide
basis. In addition, KU will incur additional operating and maintenance
costs in this regard to be comparable to those of similarly
situated utilities with like generation assets. In April 2001, the
Kentucky Commission granted recovery of these costs under the
environmental surcharge mechanism for LG&E and KU.operating new SO2 controls.
LG&E and KU are also monitoring several other air quality issues which
may potentially impact coal-fired power plants, including EPA's revised
air quality standards for ozone and particulate matter, measures to
- - New Page -
implement EPA's regional haze rule, EPA's December 2003 proposals to
regulateClean Air Mercury Rule which
regulates mercury emissions from steam electric generating units and
to
further reducereductions in emissions of sulfur dioxideSO2 and nitrogen oxidesNOx required under the Clean Air
Interstate Rule.
In addition, LG&E is currently working with local regulatory
authorities to review the effectiveness of remedial measures aimed at
controlling particulate matter emissions from its Mill Creek Station.
From time to time, LG&E previously settledand KU conduct negotiations with the applicable
regulatory authorities to finalize cleanup plans or determine financial
responsibility concerning other environmental matters, including
remediation steps regarding former LG&E and KU MGP sites, a number of
property damage claims from adjacent residents and completed
significant remedial measures as part of its ongoing capital
construction program. LG&E has converted the Mill Creek Stationsettlement
agreement relating to a wet stack operationfuel oil discharge at KU's E.W. Brown plant and
matters relating to a KU transformer scrap yard.
In January 2005, approximately 1,000 gallons of fuel oil leaked
from a cracked weld in an efforta storage tank at KU's Green River
Generating Station. KU commenced immediate spill containment,
recovery and remediation actions and has received satisfactory
inspections from state regulators to resolve all outstanding issuesdate. The cost related to
particulate matter emissions.
12.the cleanup of the oil spill was less than $0.2 million.
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 or
other appropriate reserves are 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
financial position or results of operations.
EEI CONTRACT
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-
Mw generating station in southern Illinois. KU is entitled to take 20%
of the available capacity of the station. Purchases from EEI are made
under a contractual formula which has resulted in costs which were and
- 23 -
are expected to be comparable to the cost of other power generated by
KU. This contract governing the purchases from EEI will terminate on
December 31, 2005. Such power equated to approximately 10% of KU's net
generation system output in 2004 and for the first quarter of 2005.
Discussions are on-going related to the extension of the contract.
11. Pension and Other Post-retirement Benefit Plans
The following table provides the components of net periodic benefit
cost for pension and other benefit plans:
Three Months Ended Year to Date
June 30, 2004 June 30, 2004plans for the three months ended
March 31, 2005:
(in thousands)millions) LG&E KU
LG&E KUPension and Other Benefit Plans:
Components of net periodicperiod benefit cost:cost
Service cost $ 9341.7 $ 1,103 $ 3,022 $ 3,4901.8
Interest cost 4,709 3,538 15,233 11,1876.5 4.3
Expected return on plan assets (4,289) (3,195) (13,874) (10,104)(6.0) (4.0)
Amortization of prior service cost (2) 148 (7) 4671.3 0.3
Amortization of transition obligation 897 269 2,900 853- 0.2
Recognized actuarial loss 494 388 1,599 1,2270.7 0.6
$ 2,7434.2 $ 2,251 $ 8,873 $ 7,1203.2
In January 2004, LG&E and KU made discretionary contributions to theirthe
pension plans in the amountsplan of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are required for 2004planned for either
LG&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
12. Subsequent Events
On April 13, 2005, LG&E refinanced $40 million in existing pollution
control indebtedness. The original indebtedness, 5.90% Pollution
Control Bonds, Series X, due April 15, 2023, was discharged on May 13,
2005, using the proceeds from the replacement indebtedness, LG&E
Pollution Control Bonds, Series HH, due February 1, 2035, which carry a
variable, auction rate of interest.
On May 12, 2005, KU issued a redemption notice to bondholders for its
7.55% First Mortgage Bonds, Series R, totaling $50 million. It is
currently anticipated the bond will be redeemed on June 13, 2005, and
no further discretionary contributions are planned.
13.Subsequent Events
July Storms
In July 2004 violent thunderstorms swept through Kentucky, causing
significant damagethe Company will pay a call premium of 3.775%. KU has also received
notice from the counterparty to the interest rate swap related to this
bond that it will terminate the swap and widespread power outages. Atpay to KU the heightsame 3.775% call
premium pursuant to the terms of the storms, 115,000 LG&E customers and 22,700 KU customers were without
power. The cost to repair the damage incurred in the LG&E service
territory as a result of these storms is estimated to be $8.4 million
in operations and maintenance expense and $2.1 million in capital
expenditures. The cost to repair the damage incurred in the KU service
territory as a result of these storms is estimated to be $0.5 million
in operations and maintenance expense and $0.1 million in capital
expenditures.
Rate Cases Update
During July 2004, the AG requested a rehearing of the LG&E and KU rate
cases. For a description of developments in these cases, see Note 11
of the Notes to Consolidated Financial Statements in Part 1, Item 1, of
this Quarterly Report on Form 10-Q.
Trimble County Combustion Turbines Units 9 & 10
Trimble County Combustion Turbines Units 9 and 10 began commercial
operation on July 1, 2004. See Note 7 of the Notes to Consolidated
Financial Statements on Part 1, Item 1 of this Quarterly Report on Form
10-Q.swap.
- - New Page24 -
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
General
The following discussion and analysis by management focuses on those
factors that had a material effect on LG&E's and KU's financial results of
operations and financial condition during the three and six month periodsperiod ended
June 30, 2004,March 31, 2005, and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the SEC,
including the Annual Reports on Form 10-K for the year ended December 31,
2003.2004.
Executive Summary
LG&E's net income&E and KU, subsidiaries of LG&E Energy LLC (an indirect subsidiary of
E.ON), are regulated public utilities. LG&E supplies electricity to
approximately 391,000 customers and natural gas to approximately 320,000
customers in Louisville and adjacent areas in Kentucky. KU provides
electric service to approximately 490,000 customers in over 77 counties in
central, southeastern and western Kentucky, to approximately 30,000
customers in southwestern Virginia and to less than 10 customers in
Tennessee. KU also sells wholesale electric energy to 12 municipalities.
The mission of LG&E and KU is to build on our tradition and achieve world-
class status providing reliable, low-cost energy services and superior
customer satisfaction; and to promote safety, financial success and quality
of life for the three months ended June 30, 2004 was $17.1
million ($9.4 million higher than the three months ended June 30, 2003).
The increase was primarily related to higher electric revenues. Retail
sales volumes increased due to warmer weather, while gas volumes decreased.
KU's net income for the three months ended June 30, 2004, was $27.6 million
($13.4 million higher than the three months ended June 30, 2003). The
increase was primarily due to higher electric revenues due to higher retail
sales volumes resulting from warmer weather, partially offset by higher
maintenance expense.
LG&E's net income for the six months ended June 30, 2004 was $41.4 million
($6.4 million higher than the six months ended June 30, 2003). The
increase was primarily related to higher electric revenues due to warmer
weather. KU's net income for the six months ended June 30, 2004, was $60.0
million ($34.0 million higher than the six months ended June 30, 2003).
The increase was primarily due to higher electric revenuesour employees, communities and lower
maintenance expense.
As regulated utilities,other stakeholders.
LG&E and KU's financial performance is greatly
impacted by regulatory proceedings. Onstrategy focuses on the following:
- Execute all our business processes to secure a world-class
competitive advantage
- Develop and transfer best practices in generation, customer service,
distribution and supply
- Operate our commercial hub to enhance margins and manage risks across
the company
- Pursue flexible asset portfolio management
- Attract, retain and develop the best people.
- 25 -
In a June 30, 2004 order, the Kentucky Commission issued an order approving increasesaccepted the settlement
agreements reached by the majority of the parties in the base rates ofrate cases filed
by LG&E and KU.KU in December 2003. Under the ruling, the LG&E utility base
electric rates have increased $43.4 million (7.7%) and base gas rates have
increased $11.9 million (3.4%), on an annual basis. The rate increaseincreases
took effect on July 1, 2004. In JulyBase electric rates at KU have increased
$46.1 million (6.8%) annually. The 2004 increases were the AG commenced an investigation examining communications betweenfirst increases
in electric base rates for LG&E and KU in 13 and 20 years, respectively;
the last gas rate increase for the LG&E gas utility took effect in
September 2000.
With the recent installation of four combustion turbines at Trimble County,
near-term regulated load growth in Kentucky is expected to be satisfied.
However, the Integrated Resource Plan submitted by LG&E and KU to the
Kentucky Commission in April 2005 indicated the requirement for additional
base-load capacity in the longer-term. Consequently, LG&E and KU have
begun development efforts for a new base-load coal-fired unit. Trimble
County Unit 2, with a 732 Mw capacity rating, is expected to be jointly
owned by LG&E and KU (75% aggregate ownership) and IMEA and IMPA (25%
aggregate ownership). Of their 75% (549 Mw) ownership, LG&E will own 19%
(104 Mw) and KU will own 81% (445 Mw). An application for a construction
CCN was filed with the Kentucky Commission and an air permit application
was filed with the CompaniesKentucky Department of Air Quality in December 2004.
LG&E's and separately, filedKU's share of the total capital cost of $885 million for Trimble
County Unit 2 is estimated to be $168 million and $717 million,
respectively, through 2010. An application for a rehearing oftransmission CCN is
anticipated to be filed with the
rate cases on such issue and certain calculation components of the
increased rates. The Kentucky Commission orderedduring 2005.
In addition to the Trimble County Unit 2 project, another focus of major
utility investment is environmental expenditures. In order to mitigate the
declining SO2 allowance bank at KU over the next several years, KU filed
with the Kentucky Commission in December 2004 an application for a reopeningCCN to
construct four FGDs at an estimated cost of the rate
cases to take evidence in the communications issue. For$658.9 million; a description of
developments in these cases, see Note 11 of the Notes to Consolidated
Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-
Q.decision is
expected by late June 2005.
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 another period.the full
year.
- - New Page26 -
Three Months Ended June 30, 2004,March 31, 2005, Compared to
Three Months Ended June 30, 2003March 31, 2004
LG&E Results:
LG&E's net income increased $9.4$9.7 million (121%(40%) for the three months ended
June 30, 2004,March 31, 2005, as compared to the three months ended June 30, 2003,March 31, 2004,
primarily due to the increase in electric and gas base rates effective July
1, 2004 and higher retail electric revenues, partially offset by
higher other operation expenses.and gas wholesale sales.
A comparison of LG&E's revenues for the three months ended June 30, 2004,March 31, 2005,
with the three months ended June 30, 2003,March 31, 2004, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric Gas
(in thousands)millions) Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 1,1593.6 $ 7,7511.3
Environmental cost recovery surcharge 5,513(0.8) -
Earnings sharing mechanism 518(3.6) -
Demand side management cost recovery 0.1 -
LG&E/KU merger surcredit (947)(1.1) -
Value delivery surcredit (0.3) (0.2)
Weather normalization - (0.7)
Rates and rate structure 15.3 4.3
Variation in sales volume and other 17,303 (5,777)2.0 (1.9)
Total retail sales 23,546 1,97415.2 2.8
Wholesale sales (4,026) 27914.4 5.9
Gas transportation - net - (0.3)
Provision for rate collections 1,0172.3 -
Other (1,888) (63)(0.4) 0.5
Total $31.5 $ 18,649 $ 2,1908.9
Electric revenues increased $18.6$31.5 million (16%) in 2005 primarily as the result of andue to:
- - An increase in sales volumes to ultimate consumers of 9.2%rates and a change in rate structure ($15.3 million).
The retail sales
volume increase was- - Higher wholesale revenues ($14.4 million), primarily due to warmer weather than the prior year as cooling
degree days increased 89%. However, overall volumes decreased due to lower
wholesale sales.21% higher
prices.
Gas revenues increased $2.2$8.9 million (5%) in 2005 primarily as a result
ofdue to:
- - Higher wholesale revenues ($5.9 million) due to 42% higher natural gas prices billed to customers through the gas supply
clause partially offset by lower sales
volumes to ultimate consumers due to
warmer weather.
The provision forand 11% higher prices.
- - An increase in rates and a change in rate collections increased $1.0 million, including a $3.4
million higher provision for the earnings sharing mechanism, offset by a
$2.4 million lower provision for the environmental cost recovery surcharge.structure ($4.3 million).
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply are reflected in retail rates, subject to the approval of the
Kentucky Commission.
- 27 -
Fuel for electric generation increased $1.3$7.4 million (3%(14%) in 2005
primarily due to:
- Increased cost per BTU (15% higher), resulting in $7.8 million higher
fuel costs.
- Decreased generation (1% lower), resulting in $0.4 million lower fuel
costs.
Gas supply expenses increased $4.8 million (4%) in 2005 primarily due to:
- Increased cost of purchases for wholesale sales ($5.5 million).
- Increased recovery of performance-based rates ($0.2 million).
- Decreased volume of gas delivered to the distribution system ($1.1
million).
Power purchased increased $10.1 million (35%) in 2005 primarily due to:
- Increased cost per Mwh (35% higher), primarily related to increased
intercompany purchase costs due to SO2 allowance costs.
Other operations and maintenance expenses increased $0.9 million (1%) in
2005.
Other operation expenses decreased $2.7 million (5%) in 2005 primarily
due to:
- Decreased MISO-related transmission expense ($3.0 million).
- Decreased information technology systems operations expense
($1.3 million) (charged to maintenance expenses in 2005).
- Decreased property insurance expense ($0.2 million).
- Increased steam generation operations expense ($0.6 million).
- Increased customer billing expense ($0.5 million).
- Increased gas underground storage costs ($0.5 million).
Maintenance expenses increased $3.5 million (30%) in 2005 primarily
due to:
- Increased Cane Run maintenance due to outage repairs ($1.4 million).
- Increased distribution system maintenance (including tree trimming and
underground conductor repairs) ($0.7 million).
- Increased information technology systems maintenance ($1.3 million)
(charged to operation expenses in 2004).
Property and other taxes increased $0.1 million (2%) in 2005 primarily
due to:
- Increased property tax ($0.1 million).
In total, other income (expense) - net increased $1.0 million (125%) in
2005 primarily due to:
- - Increased mark-to-market income ($0.2 million) related to energy
trading contracts.
- - Decreased miscellaneous deductions ($0.7 million).
In total, interest expense increased $1.0 million (13%) in 2005 primarily
due to:
- - Increased interest on variable-rate debt ($1.1 million).
- - Increased interest on customer deposits ($0.5 million).
- - Decreased interest costs on interest rate swaps ($0.6 million).
- 28 -
The weighted average interest rate on variable-rate bonds for the three
months ended due to an increase in the cost of coal
burned ($2.0 million)March 31, 2005, was 1.91%, partially offset by a decrease in generation ($0.7
million). Gas supply expenses increased $5.0 million (19%) due to an
increase in net gas supply cost ($6.7 million), offset by a decrease in the
volume of retail gas sold ($1.7 million).
Other operation expenses increased $3.7 million (7%), as compared to 2003.
An estimated $7.4 million was recorded in1.03% for the
second quarter of 2004 for
costs incurred related to May 2004 storms. Results for 2003 included $1.1
million in cost to achieve amortization related to the KU/LG&E merger and
the One Utility initiative, which ended June 30, 2003, and September 30,
2003, respectively. In addition, pension expense was $1.3 million lower
and bad debt expense was $0.5 million lowercomparable period in 2004.
Maintenance expenses decreased $2.4 million (14%). A write-off of obsolete
inventory of $1.1 million was included in 2003 and steam power generation
was $0.7 million lower in 2004.
Depreciation and amortization decreased $2.1 million (7%) due to a
depreciation adjustment in the second quarter of 2003 related to assets
capitalized in that period.
- - New Page -
Property and other taxes increased $1.6 million (47%). In June 2003,
property taxes reflected a $1.2 million coal incentive tax credit.
VariationsVariances in income tax expense are largely attributable to changes in pre-
tax income.income and a reduction in the statutory Kentucky rate.
Three Months Three Months
Ended Ended
June 30,March 31, 2005 March 31, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.8 6.54.3 5.6
Amortization of investment and other tax credit & R&D (6.6) (9.5)credits (1.9) (2.7)
Other differences 0.6 (2.2)(1.5) (0.1)
Effective income tax rate 34.8% 29.8%35.9% 37.8%
The increased tax benefit in other differences is largely attributable to
the new Internal Revenue Code Section 199 Qualified Production Activities
deduction and the amortization of investmentexcess deferred income taxes, which
reflect the benefits of deferred tax credit and other differencesreversing at lower tax rates than what
were approximately the same in both periods, but lower pretaxprovided.
Kentucky House Bill 272, also known as Kentucky's Tax Modernization Plan,
was signed into law on March 18, 2005. See Note 6 for additional
discussion of income for the
three months ended June 30, 2003, caused the percentage changes to be
greater in the 2003 period.
Interest charges decreased $0.6 million (10%) primarily due to the $ 1.0
million savings on interest expense realized from the refinancing of fixed-
rate Series V and Series W pollution control bonds to the variable-rate
Series GG pollution control bonds in November 2003.
Interest expense to affiliated companies increased $1.7 million (130%)
primarily due to a $2.2 million increase in interest expense to Fidelia
related to new notes issued in August 2003 and January 2004. Offsetting
this increase is a $0.5 million decrease in interest expense on borrowings
from the money pool due to lower borrowing levels.
The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2004, was 1.07% and the corresponding rate for the
three months ended June 30, 2003, was 1.15%.taxes.
KU Results:
KU's net income increased $13.4$5.1 million (95%(16%) for the three months ended
June 30, 2004,March 31, 2005, as compared to the three months ended June 30, 2003.March 31, 2004. The
increase was primarily due to increase in base rates effective July 1, 2004
and higher revenues related to higher sales
volumes, partially offset by higher maintenance expense.wholesale sales.
A comparison of KU's revenues for the three months ended June 30, 2004,March 31, 2005,
with the three months ended June 30, 2003,March 31, 2004, reflects increases and
(decreases) which have been segregated by the following principal causes:
Cause Electric
(in thousands)millions) Revenues
Retail sales:
Fuel supply adjustments $(2,503)$13.1
Environmental cost recovery surcharge 1,6154.6
Earnings sharing mechanism 1,395(4.5)
Demand side management cost recovery 0.2
LG&E/KU merger surcredit (1,071)(0.8)
Value delivery surcredit (0.2)
Rates and rate structure 13.9
Variation in sales volume and other 16,967(1.8)
Total retail sales 16,40324.5
Wholesale sales 5,36215.6
Provision for rate collections 11,6940.8
Other 1,736(0.8)
Total $35,195$40.1
- - New Page29 -
Electric revenues increased $35.2$40.1 million (16%) in 2005 primarily as the result of andue to:
- - Higher wholesale revenues ($15.6 million), primarily due to 44% higher
prices and 8% higher sales volumes.
- - An increase in sales volumes to ultimate consumers of 11.3%rates and a change in rate structure ($13.9 million).
The sales volume
increase was- - Higher fuel supply adjustments ($13.1 million) due to warmer weather than last year as cooling degree days
increased 73%. Also contributing to higher revenuescost of
fuel used for the quarter were
increases in the provision for rate collectionsgeneration and wholesale sales. The
provision for rate collections included a $3.8 million higher provision for
the earnings sharing mechanism, a $5.4 million higher provision related to
the environmental cost recovery surcharge, and a $2.4 million higher
provision related to the fuel adjustment clause.purchased power.
Fuel for electric generation comprises a large component of KU's total
operating expenses. KU's electric rates contain a fuel adjustment clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Commission, the Virginia
State Corporation Commission, and the Federal Energy Regulatory Commission.FERC.
Fuel for electric generation increased $8.0$17.4 million (13%(25%) for the quarter
because of an increase in 2005
primarily due to:
- Increased cost per BTU (23% higher), resulting in $16.3 million higher
fuel costs.
- Increased generation ($8.1 million)(2% higher), partially offset by a
slight decreaseresulting in the cost of coal burned ($0.1 million).$1.1 million higher fuel
costs.
Power purchased decreased $3.0increased $5.0 million (8%(12%) in 2005 primarily due to a decreaseto:
- Increased cost per MWh (10% higher), resulting in the price$4.1 million higher
costs.
- Increased volumes of powerMWh purchased ($1.7 million)(2% higher), resulting in $0.9
million higher costs.
Other operations and a decreasemaintenance expenses increased $5.1 million (9%) in
the volume purchased
($1.3 million).2005.
Other operation expenses decreased $1.6$0.1 million (4%(less than 1%) as comparedin 2005
primarily due to:
- Decreased information technology systems operation expenses ($1.1
million) (charged to 2003.
Cost to achieve amortization for the KU/LG&E merger, which endedmaintenance expenses in June
2003, was $1.0 million in 2003.2005).
- Decreased property insurance expense ($0.2 million).
- Increased customer billing expense ($0.6 million).
- Increased MISO-related transmission expense ($0.5 million).
Maintenance expenses increased $9.6$5.2 million (130%(44%) in 2005 primarily due
to:
- Increased E.W. Brown plant maintenance expense ($0.7 million).
Maintenance- Increased Ghent plant maintenance expense ($1.7 million).
- Increased distribution system maintenance ($1.5 million) due to storm
restoration expenses.
- Increased information technology systems maintenance ($1.1 million)
(charged to operation expenses in 2003 were reduced by an $8.92004).
- 30 -
In total, other income (expense) - net increased $0.6 million insurance reimbursement received(150%) in
2005 primarily due to:
- - Decreased allowance for funds used during construction ($0.5 million).
In total, interest expense increased $2.2 million (51%) in 2005 primarily
due to:
- - Increased interest costs associated with the secondmark-to-market of the
interest rate swaps ($1.9 million). In the first quarter of 2003 for costs incurred2004, a swap
was terminated, resulting in a February 2003 ice storm.
Depreciation and amortization decreased $1.8$0.8 million (7%) because of a
depreciation adjustmentgain.
The weighted average interest rate on variable-rate bonds for the three
months ended March 31, 2005, was 1.90%, compared to 1.03% for the
comparable period in the second quarter of 2003 related to assets
capitalized that quarter.2004.
Variations in income tax expense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
June 30,March 31, 2005 March 31, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.0 6.54.6 5.8
Amortization of investment and other tax credit & R&D (1.2) (3.1)credits (0.7) (1.0)
Other differences (1.8) (4.6)(1.3) (1.5)
Effective income tax rate 38.0% 33.8%
The amortization37.6% 38.3%
Kentucky House Bill 272, also known as Kentucky's Tax Modernization Plan,
was signed into law on March 18, 2005. See Note 6 for additional
discussion of the investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the
three months ended June 30, 2003, caused the percentage change to be
greater in the 2003 period.
Interest expense decreased $2.9 million (44%) primarily due to $1.6 million
in interest expense savings from the redemption of pollution control bonds
Series Q at 6.32% and Series P at 8.55% redeemed in June and November of
2003, respectively. Additionally, interest rate swaps yielded a $1.2
million decrease in related interest expenses resulting primarily from the
termination of a swap in February 2004 and better performance of the
remaining swaps.
Interest expense to affiliated companies increased $2.4 million (219%)
primarily due to a $2.7 million increase in interest expense to Fidelia
related to new notes issued in August 2003 through January 2004.
Offsetting this increase is a $0.3 decrease in interest expense on
borrowings from the money pool due to lower borrowing levels.
The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2004, was 1.11% and the corresponding rate for the
three months ended June 30, 2003, was 1.14%.
- - New Page -
Six Months Ended June 30, 2004, Compared to
Six Months Ended June 30, 2003
LG&E Results:
LG&E's net income increased $6.4 million (18%) for the six months ended
June 30, 2004, as compared to the six months ended June 30, 2003, primarily
due to higher electric and gas revenues, partially offset by higher other
operations expenses and higher interest expense.
A comparison of LG&E's revenues for the six months ended June 30, 2004,
with the six months ended June 30, 2003, reflects increases and (decreases)
which have been segregated by the following principal causes:
Cause Electric Gas
(in thousands) Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $(1,646) 45,381
Environmental cost recovery surcharge 7,911 -
Earnings sharing mechanism 3,774 -
LG&E/KU merger surcredit (1,418) -
Weather normalization - 2,419
Variation in sales volume and other 15,998 (22,275)
Total retail sales 24,619 25,525
Wholesale sales 8,091 1,034
Provision for rate refunds (2,982) -
Other 151 (479)
Total $29,879 $ 26,080
Electric revenues increased $29.9 million primarily because of increased
sales volumes to ultimate consumers of 4.4% due to warmer weather than
prior year as cooling degrees days increased 94%. Increased wholesale
revenues and environmental cost recovery also contributed to the increase
in revenues. Gas revenues increased $26.1 million primarily as a result of
higher natural gas prices billed to customers, partially offset by lower
sales volumes to ultimate consumers due to warmer weather.
The provision for rate refunds decreased $3.0 million, primarily due to a
$3.9 million lower provision related to the environmental cost recovery
surcharge.
Fuel for electric generation increased $4.4 million (5%) for the six months
due to an increase in the cost of coal burned ($4.4 million) while
generation volume was flat. Gas supply expenses increased $29.7 million
(22%) due to an increase in net gas supply cost ($40.8 million), offset by
a decrease in the volume of retail gas delivered to the distribution system
($11.1 million).
Power purchased increased $4.8 million (12%) due to an increase in the
price of power purchased ($1.0 million) and an increase in the volume of
the purchases ($3.8 million).
Other operations expenses increased $8.3 million (8%) in 2004, as compared
to 2003, due to higher transmission expense of $3.5 million, primarily due
to higher MISO-related expense, and $7.5 million higher electric
distribution expense, due to the May 2004 storms. These higher expenses
were partially offset by $2.9 million lower cost to achieve amortization
related to the KU/LG&E merger and One Utility initiative, and $1.5 million
lower benefits expense.
Maintenance expenses decreased $2.8 million (9%). In 2003, $2.1 million in
obsolete inventory was written off.
- - New Page -
Depreciation and amortization decreased $1.7 million (3%) because of a
depreciation adjustment in the second quarter of 2003, related to assets
capitalized in that period.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.7 5.8
Amortization of investment tax credit & R&D (4.3) (3.8)
Other differences 0.2 (0.8)
Effective income tax rate 36.6% 36.2%
Property and other taxes increased $2.0 million (24%). Property taxes in
2003 reflected a $1.2 million coal incentive tax credit.
Interest charges decreased $2.1 million (17%) primarily due to the $2.9
million savings of interest expense realized from the refinancing of fixed-
rate Series V and Series W pollution control bonds into the variable-rate
Series GG. Also, the redemption of the first mortgage bond in August 2003
contributed to the decrease in interest expense by $1.3 million.
Offsetting these decreases is an increase of $1.9 million from interest
rate swaps.
Interest expense to affiliated companies increased $4.1 million (202%)
primarily due to a $5.3 million increase in interest expense to Fidelia
related to new notes issued in August 2003 and January 2004. Offsetting
this increase is a $1.2 million decrease in interest expense on borrowings
from the money pool due to lower borrowing levels.
The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2004 was 1.06%, compared to 1.19% for the comparable
period in 2003.
KU Results:
KU's net income increased $34.0 million (131%) for the six months ended
June 30, 2004, as compared to the six months ended June 30, 2003. The
increase was primarily due to higher electric revenues and lower
maintenance expense.
A comparison of KU's revenues for the six months ended June 30, 2004, with
the six months ended June 30, 2003, reflects increases and (decreases)
which have been segregated by the following principal causes:
Cause
(in thousands)
Retail sales:
Environmental cost recovery surcharge $ 2,067
Earnings sharing mechanism 5,304
LG&E/KU merger surcredit (1,829)
Variation in sales volume and other 19,541
Total retail sales 25,083
Wholesale sales 11,918
Provision for rate collections 15,863
Other 4,734
Total $57,598
- - New Page -
Electric revenues increased $57.6 million primarily due to increased sales
volumes to ultimate consumers of 6.1% due to warmer weather than last year
as cooling degree days increased 75%. Also contributing to the overall
revenue increase were increases in the provision for rate collections,
wholesale revenues, and earnings sharing mechanism recoveries. The
provision for rate collections included higher provisions for the
environmental cost recovery ($10.4 million), the earngins sharing mechanism
($3.5 million) and the fuel adjustment clause ($2.0 million).
Fuel for electric generation increased $11.6 million (9%) for the six
months due to an increase in the cost of coal burned ($3.5 million) and an
increase in generation ($8.1 million).
Power purchased decreased $2.9 million (4%) due to a decrease in the price
of power purchased ($5.4 million), partially offset by an increase in
volumes purchased ($2.5 million).
Other operation expenses decreased $2.0 million (3%). Cost to achieve
amortization of $3.2 million related to the KU/LG&E merger and One Utility
initiative was recorded in 2003 and was fully amortized as of June 2003.
In 2004, benefits expense decreased $1.5 million and distribution expense
decreased $0.7 million due to the February 2003 ice storm. These decreases
were offset by higher emission allowance expense of $2.3 million and higher
transmission expense of $1.1 million.
Maintenance expenses decreased $7.5 million (21%). Steam power maintenance
expense decreased $5.5 million; Ghent Unit 3, Green River Unit 4 and Tyrone
Unit 3 all had major overhauls in 2003. Distribution maintenance decreased
$1.3 million and transmission overhead line maintenance decreased $0.6
million in 2004 due to the February 2003 ice storm.
Variations in income tax expense are largely attributable to changes in
pretax income.
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.9 6.7
Amortization of investment tax credit & R&D (1.1) (3.4)
Other differences (1.7) (4.4)
Effective income tax rate 38.1% 33.9%
The amortization of the investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the six
months ended June 30, 2003, caused the percentage changes to be greater in
the 2003 period.
Interest expense decreased $6.7 million (60%) due primarily to the
redemption of pollution control bonds Series P at 8.55% and Series Q at
6.32% redeemed in November and June of 2003, respectively. Additionally,
interest rate swaps yielded a $2.8 million decrease in related interest
expenses resulting primarily from the February termination of a swap
related to the Series 9 pollution control bonds and better performance of
remaining swaps.
- - New Page -
Interest expense to affiliated companies increased $5.6 million (377%)
primarily due to a $6.1 million increase in interest expense to Fidelia
related to new notes issued in August 2003 through January 2004.
Offsetting this increase is a $0.5 million decrease in interest expense on
borrowings from the money pool due to lower borrowing levels.
The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2004, was 1.08% and the corresponding rate for the
six months ended June 30, 2003, was 1.16%.taxes.
Liquidity and Capital Resources
LG&E and KU's needs 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 are
maintained to fund short-term capital requirements. LG&E and KU believe
that such sources of funds will be sufficient to meet the needs of the
business in the foreseeable future.
As of June 30, 2004,At March 31, 2005, LG&E and KU are in a negative working capital position. The Companiesposition
in part because of the classification of certain variable-rate pollution
control bonds that are subject to tender for purchase at the option of the
holder as current portion of long-term debt. LG&E and KU expect to cover
any working capital deficiencies with cash flow from operations, money pool
borrowings and borrowings from Fidelia, an
E.ON financing subsidiary.Fidelia.
Construction expenditures for the sixthree months ended June 30, 2004 for LG&E
and KUMarch 31, 2005
amounted to $64.9 million and $76.3 million, respectively. Such
expenditures include construction to meet nitrogen oxide (NOx) emission
standards and the acquisition of combustion turbines to meet peak power
demands. Expenditures for the six months ended June 30, 2004, by LG&E and
KU for NOx construction were $5.6 million and $21.9 million, respectively.
Expenditures for the six months ended June 30, 2004, for Trimble County
combustion turbines, Units 7 through 10, by LG&E and KU were $5.5 million
and $9.5 million, respectively. In addition, LG&E construction
expenditures include $8.4$18.5 million for distribution overheadeach Company. At LG&E, expenditures included
gas main replacements ($1.9 million), the construction of a 138Kv
transmission line construction, $5.8 million for($1.1 million), and Mill Creek Unit 3 ductwork installation
related to the flue4 boiler tubing ($1.1
million), along with expenditures for electric and gas desulfurization ("FGD") project, and $5.3 million
for gas main replacements.distribution system
construction. At KU, construction expenditures include $6.4
million for E.W.included Brown Unit 3 cooling tower and precipitator rebuild and
$6.0 million forcontrols upgrade
($1.2 million), distribution construction in the Lexington area.line transformers ($1.0 million), along with
electric distribution system construction. The expenditures were financed
with internally generated fundsfunds.
- 31 -
LG&E's and intercompany
loans from affiliates.
LG&E'sKU's cash balance increased $12.3balances decreased $0.1 million and $0.7 million,
respectively, during the sixthree months ended June 30, 2004,March 31, 2005, primarily due
to higher net income and increased net
borrowingsthe payment of dividends, lower levels of borrowing from affiliated
companies partiallyand construction expenditures, offset by pension funding,
construction expenditures, and payment of common dividends to its parent
company. KU'shigher cash balance increased $4.9 million during the six months
ended June 30, 2004. The increase reflects higher net income and increased
net borrowings from affiliated companies, partially offsetprovided by
pension
funding, construction expenditures and the payment of common dividends to
its parent company.operating activities.
Variations in accounts receivable, accounts payable and materials and
suppliesinventories are
generally not significant indicators of LG&E's and KU's liquidity. In general, suchSuch
variations are usuallyprimarily attributable to seasonal fluctuations in weather,
which have a direct effect on sales of electricity and natural gas. However, the increaseThe
decrease in accounts receivable at LG&E and KU as of June 30, 2004, was primarily due to lower
revenues at the terminationend of the accounts receivable securitization programs in January 2004.
Discontinuing the accounts receivable securitizations programs resulted in
an increase in accounts receivable of $58.0 million at LG&E and by $50.0
million at KU. (LG&E and KU maintained a fully funded reserve for
uncollectible accounts related to receivables sold during the
securitization program.) The increase in accounts receivable at LG&E as of
June 30, 2004 was somewhat offset by the impact of decreased gas sales in
June 2004 compared to December 2003.heating season. The decrease in LG&E's gas
stored underground relates to seasonal uses of gas.
Interest rate swaps are used to hedge LG&E's and KU's underlying variable-
rate debt obligations. These swaps hedge specific debt issuances and,
consistent with management's designation, are accorded hedge accounting
treatment. As of June 30, 2004,March 31, 2005, LG&E had swaps with a combined notional
value of $228.3$211.3 million and KU had swaps with a combined notional value of
$103.0 million. LG&E's swaps exchange floating-rate interest payments for
fixed-rate interest payments to reduce the impact of interest rate changes
on LG&E's pollution control bonds. KU's swaps effectively convert fixed-
rate obligations on KU's first mortgage bonds Series P and R to variable-
rate obligations.
In February 2004, KU terminated the2005, an LG&E interest rate swap it had in place at December 31,
2003 related to its Series 9 pollution control bonds. Thewith a notional amount of the terminated$17
million matured. The swap was $50 millionfully effective upon expiration, therefore,
the impact on earnings and KU receivedother comprehensive income from the swap
maturity was less than $0.1 million.
At March 31, 2005, LG&E's and KU's percentage of debt having a payment of $2.0
million as part of the termination, resulting in a gain of $0.8 million.
- - New Page -
At June 30, 2004, variable
rate, debt, including the impact of interest rate swaps, was 36.9% of LG&E's total debt at $331.9 million41.8% ($358.0
million) and 45.7% of KU's
total debt at $352.2 million. At December 31, 2003, variable rate debt,
including the impact of interest rate swaps, was 44.0% of LG&E's total debt
at $386.3 million and 55.5% of KU's total debt at $397.1 million.50.4% ($375.0 million), respectively.
Under the provisions offor LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution control
bonds Series 10, 12, 13, 14, and 15, the bonds are subject to tender for
purchase at the option of the holder and to mandatory tender for purchase
upon the occurrence of certain events, causing the bonds to be classified
as current portion of long-term debt in the Consolidated Balance Sheets. The average
annualized interest rate for these bonds during the sixthree months ending
June 30, 2004,March 31, 2005 was 1.10%1.96% for both the LG&E bonds and 1.13% for the KU bonds.
In JanuaryDuring June 2004, LG&E entered into two long-term notes with Fidelia, one
totaling $25 million with an interest rate of 4.33% that matures in January
2012, and a one-year note totaling $100 million with an interest rate of
1.53%. The loans are secured by a lien subordinated to the first mortgage
bond lien. The proceeds were used to fund a pension contribution and to
repay other debt obligations. In April 2004, LG&E prepaid $50 million of
the $100 million 1.53% note payable to Fidelia. The prepayment was paid
out of cash balances and there was no prepayment fee.
In January 2004, KU entered into an unsecured long-term loan from Fidelia
totaling $50 million with an interest rate of 4.39% that matures in January
2012. The proceeds were used to fund a pension contribution and to repay
other debt obligations.
LG&E maintainsrenewed five bilateralrevolving lines of credit with banks
totaling $185 million that mature in 2005.million. There was no outstanding balance under any of these
facilities at June 30, 2004. ManagementMarch 31, 2005. The Company expects to renew these facilities
as they expire.prior to their expiration in June 2005.
- 32 -
LG&E, KU and KULG&E Energy participate in an intercompany money pool
agreement whereinagreement. Details of the balances at March 31, 2005 and March 31, 2004
were as follows:
Total Money Amount Balance Average
(millions of $) Pool Available Outstanding Available Interest Rate
March 31, 2005:
LG&E Energy and$400.0 $35.0 $365.0 2.65%
KU make funds available to400.0 26.0 374.0 2.65
March 31, 2004:
LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the prior
month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds
available to$400.0 $ - $400.0 -%
KU at market-based rates up to $400 million. LG&E had $26.0
million in money pool loans from LG&E Energy (included in "Notes payable to
affiliated companies") at an average rate of 1.04% at June 30, 2004, and
$171.7 million at an average rate of 1.21% at June 30, 2003. The balance
of the money pool loans from LG&E Energy to KU (included in "Notes payable
to affiliated companies") was $53.2 million at an average rate of 1.04% and
$146.4 million at an average rate of 1.21% at June 30, 2004 and 2003,
respectively. The amount available to LG&E under the money pool agreement
at June 30, 2004 was $374.0 million. The amount available to KU under the
money pool agreement at June 30, 2004 was $346.8 million.400.0 40.7 359.3 0.98
LG&E Energy maintains a revolving credit facility totaling $150$200 million
with an
affiliateE.ON North America, Inc. to ensure funding availability for the money
pool. There was no balance outstanding on this facility at March 31, 2005.
In April 2005, LG&E Energy
had an outstanding balance of $69.7refinanced $40 million at an averagein existing pollution control
indebtedness. The original indebtedness, 5.90% Pollution Control Bonds,
Series X, due April 15, 2023, was discharged on May 13, 2005, using the
proceeds from the replacement indebtedness, LG&E Pollution Control Bonds,
Series HH, due February 1, 2035, which carry a variable, auction rate of
1.79%
under this facility as of June 30, 2004 and availability of $80.3interest.
In January 2005, LG&E paid at maturity the $50 million remained.loan from Fidelia
using proceeds from short-term loans from the money pool.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
contributions are required for 2004 and no further discretionary contributions to the pension plans are planned.planned for either
LG&E's security&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
Security ratings as of June 30, 2004,March 31, 2005, were:
LG&E KU
Moody's S&P Moody's S&P
First mortgage bonds A1 A- A1 A
Preferred stock Baa1 BBB- Baa1 BBB-
Commercial paper P-1 A-2
- - New Page -
KU's security ratings as of June 30, 2004, were:
Moody's S&P
First mortgage bonds A1 A
Preferred stock Baa1 BBB-
Commercial paper P-1 A-2
These ratings reflect the views of Moody's and S&P. A security rating is
not a recommendation to buy, sell or hold securities and is subject to
revision or withdrawal at any time by the rating agency.
LG&E's capitalization- 33 -
Capitalization ratios at June 30, 2004,March 31, 2005, and December 31, 2003,2004, follow:
June 30,LG&E KU
March 31, December 31, March 31,December 31,
2005 2004 20032005 2004
Long-term debt
(including current portion) 31.2% 31.9%31.7% 30.5% 22.2% 22.2%
Long-term debt to affiliated
company (including current
portion) 14.3 10.711.9 14.1 18.9 18.8
Notes payable to affiliated
companies 1.4 4.31.9 3.0 1.5 2.0
Preferred stock 3.7 3.83.6 2.2 2.2
Common equity 49.4 49.350.8 48.8 55.2 54.8
Total 100.0% 100.0%
KU's capitalization ratios at June 30, 2004, and December 31, 2003, follow:
June 30, December 31,
2004 2003
Long-term debt (including current portion) 22.4% 24.1%
Long-term debt to affiliated company
(including current portion) 18.8 16.8
Notes payable to affiliated companies 3.0 2.6
Preferred stock 2.3 2.4
Common equity 53.5 54.1
Total 100.0% 100.0%
New Accounting Pronouncements
FIN 46
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation No. 46, ConsolidationFor a discussion of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46").
FIN 46 required certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 was effective immediately for all new variable interest entities created
or acquired after January 31, 2003.
In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003,accounting pronouncements and making other
amendments to clarify application of the guidance. For potential variable
interest entities other than special purpose entities, the revised FIN 46
("FIN 46R") is now required to be applied no later than the end of the
first fiscal year or interim reporting period ending after March 15, 2004.
For all special purpose entities created prior to February 1, 2003, FIN 46R
is now required to be applied at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is
first applied, or by restating previously issued financial statements with
a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46R also requires certain disclosures of an entity's
relationship with variable interest entities.
- - New Page -
Boththeir impacts on LG&E
and KU, hold investment interests in OVEC and KU holds an
investment interest in EEI. Neither LG&E nor KU are the primary
beneficiary of OVEC or EEI, and thus neither are consolidated into the
financial statements of LG&E or KU.
LG&E, KU and ten other electric utilities are participating owners of OVEC,
located in Piketon, Ohio. OVEC owns and operates two power plants that
burn coal to generate electricity, Kyger Creek Station in Ohio and Clifty
Creek Station in Indiana. LG&E's share is 7%, representing approximately
155 Mw of generation capacity and KU's share is 2.5%, approximately 55 Mw
of generation capacity.
LG&E's and KU's original investments in OVEC were made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's
and KU's investments in OVEC are accounted for on the cost method of
accounting. As of June 30, 2004, LG&E's and KU's investments in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability of
OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would generally recover associated incremental costs through
regulatory rate mechanisms. Seesee Part II,I - Item 1, for further discussion of
developments regarding LG&E's and KU's ownership interests and power
purchase rights.
KU owns 20% of the common stock of EEI, which owns and operates a 1,000-Mw
generating station in southern Illinois. KU is entitledNotes to take 20% of the
available capacity of the station. Purchases from EEI are made under a
contractual formula which has resulted in costs which were and are expected
to be comparable to the cost of other power purchased or generated by KU.
Such power equated to approximately 9% of KU's net generation system output
in 2003.
KU's original investment in EEI was made in 1953. KU's investment in EEI
is accounted for on the equity method of accounting. As of June 30, 2004,
KU's investment in EEI totaled $11.9 million. KU's maximum exposure to
loss as a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with either
owned generation or market purchases and would generally recover associated
incremental costs through regulatory rate mechanisms.
SFAS No. 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 was effective immediately for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective for interim
reporting periods beginning after June 15, 2003.
As of June 30, 2004, LG&E had 237,500 shares of $5.875 series mandatorily
redeemable preferred stock 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 15 of each year
commencing with July 15, 2003, and the remaining 187,500 shares on July 15,
2008 at $100 per share. Beginning with the three months ended September
30, 2003, LG&E reclassified its $5.875 series preferred stock as long-term
debt with the minimum shares mandatorily redeemable within one year
classified as current. Dividends accrued beginning July 1, 2003 are
charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No. 150.
- - New Page -
FSP 106-2
In May 2004, the FASB finalized FASB Staff Position ("FSP") 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("Medicare Act") with
guidance on accounting for subsidies provided under the Medicare Act which
became law in December 2003. FSP 106-2 is effective for the first interim
or annual period beginning after June 15, 2004. KU will adopt FSP 106-2 in
the third quarter of 2004. LG&E's medical plan does not provide a benefit
that is actuarially equivalent to Medicare Part D; therefore, FSP 106-2 is
not expected to have an impact on LG&E.
On the basis of actuarial estimates, the Medicare Act will result in an
overall reduction of the accumulated postretirement benefit obligation
("APBO") for postretirement health and life insurance benefits for KU
amounting to approximately $5.0 million as of January 1, 2004.
Accordingly, KU's net periodic postretirement benefit cost for 2004 will be
reduced by approximately $0.7 million. The APBO and the net periodic
postretirement benefit cost as of and for the periods ending June 30, 2004
and 2003 do not reflect amounts associated with the subsidies provided by
the Medicare Act.Statements, Note 7.
Contingencies
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings in LG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2003; Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004; and to
Part I - Item 1, Notes to Financial Statments, Notes 5 and 10, and Part II
- - Item 1, Legal Proceedings herein.
Electric and Gas Rates Cases
On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates of LG&E and the base electric
rates of KU. In July 2004, the AG commenced an investigation examining
communications between the Kentucky Commission and the Companies and
separately filed for a rehearing of the rate cases on such issue and
certain calculation components of the increased rates. The Kentucky
Commission ordered a procedural reopening of the rate cases for the limited
purpose of taking evidence, if any, as to the communication issue. For a
description of developments in these cases, see Note 11 of the Notes to
Consolidated Financial Statements in Part 1, Item 1 of this Quarterly
Report on Form 10-Q.
Earnings Sharing Mechanism
The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $13.0 million
related to LG&E and $16.2 million related to KU. Based upon estimates, the
Companies previously accrued $8.9 million at LG&E and $9.3 million at KU
for the 2003 ESM as of December 31, 2003.
On June 30, 2004, the Kentucky Commission issued an order largely accepting
proposed settlement agreements by the Companies and all intervenors
regarding the ESM mechanisms of LG&E and KU. Under the ESM settlements,
LG&E and KU will continue to collect approximately $13.0 million and $16.2
million, respectively, of previously requested 2003 ESM revenue amounts
through March 2005. As part of the settlement, the parties agreed to a
termination of the ESM mechanism relating to all periods after 2003.
As a result of the settlement, the Company accrued an additional $4.1
million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM
revenue.
- - New Page -
OVEC Power Agreement and Share Purchase
On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expiration of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.
LG&E's estimated future minimum annual demand payments under the Amended
and Restated Inter-Company Agreement are as follows:
(in thousands)
2006 $ 10,098
2007 9,726
2008 9,932
2009 10,144
2010 10,361
Thereafter 170,646
Total $220,907
In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during the fourth quarter of 2004, subject to receipt of certain
regulatory approvals.
Owensboro Contract Litigation
In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District Court against KU concerning a long-term power supply contract (the
"OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under the OMU Agreement, including
various payments or charges between KU and OMU and rights concerning excess
power, termination and emissions allowances, respectively. The complaint
seeks approximately $6 million in damages for historical periods, as well
as injunctive and other relief, including a declaration that KU is in
material breach. KU has removed this litigation to the U.S. District Court
for the Western District of Kentucky and filed an answer in that court
denying the OMU claims and presenting certain counterclaims. KU has also
initiated a proceeding at the FERC to obtain the FERC's ruling on certain
of the issues in dispute.
Environmental Matters
In September 1998, the EPA announced its final "NOx SIP Call" rule
requiring states to impose significant additional reductions in NOx
emissions by May 2003, in order to mitigate alleged ozone transport impacts
on the Northeast region. The Commonwealth of Kentucky SIP, which was
approved by EPA June 24, 2003, required reductions in NOx emissions from
coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide
basis. In related proceedings in response to petitions filed by various
Northeast states, in December 1999, EPA issued a final rule pursuant to
Section 126 of the Clean Air Act directing similar NOx reductions from a
number of specifically targeted generating units including all LG&E and KU
units. As a result of appeals to both rules, the compliance date was
extended to May 2004. LG&E and KU have complied with these NOx emissions
reduction rules.
LG&E and KU have added significant additional NOx controls to their
generating units. Installation of additional NOx controls have been
performed on a phased basis, with installation of controls which commenced
in late 2000 and continued through the final compliance date. As of June
30, 2004, LG&E has incurred total capital costs of approximately $191
million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a
company-wide basis. As of June 30, 2004, KU has incurred total capital
costs of approximately $252 million to reduce its NOx emissions to the 0.15
lb./Mmbtu level on a company-wide basis. In addition, LG&E and KU have
begun incurring additional operation and maintenance costs in operating new
NOx controls. LG&E and KU believe their costs in this regard to be
comparable to those of similarly situated utilities with like generation
assets. In April 2001, the Kentucky Commission granted recovery of these
costs under the environmental surcharge mechanism for LG&E and KU.
- - New Page -
LG&E and KU are also monitoring several other air quality issues which may
potentially impact coal-fired power plants, including EPA's revised air
quality standards for ozone and particulate matter, measures to implement
EPA's regional haze rule, EPA's December 2003 proposals to regulate mercury
emissions from steam electric generating units and to further reduce
emissions of sulfur dioxide and nitrogen oxides under the Clean Air
Interstate Rule. In addition, LG&E is currently working with local
regulatory authorities to review the effectiveness of remedial measures
aimed at controlling particulate matter emissions from its Mill Creek
Station. LG&E previously settled a number of property damage claims from
adjacent residents and completed significant remedial measures as part of
its ongoing capital construction program. LG&E has converted the Mill
Creek Station to a wet stack operation in an effort to resolve all
outstanding issues related to particulate matter emissions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E&E's and KU, and their respective ratepayers,KU's operations are exposed to market risks.
Market risk exposures includerisks from changes in
interest rates and commodity prices. To mitigate changes in cash flows
attributable to these exposures, the Companies have entered into various
derivative instruments. Derivative positions are monitored using
techniques that include market value and sensitivity analysis.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
Management has designated all of the Companies' interest rate swaps as
hedge instruments. Financial instruments designated as cash flow hedges
have resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge becomes
ineffective, the resulting gains or losses are reclassified from other
comprehensive income to net income. Financial instruments designated as
fair value hedges are periodically marked to market with the resulting
gains and losses recorded directly into net income to correspond with
income or expense recognized from changes in market value of the items
being hedged.
- 34 -
The potential change in interest expense associated with a 1% change in
base interest rates of LG&E's and KU's unswapped variable debt is estimated
at $3.3$3.58 million and $3.5$3.75 million, respectively, at June 30, 2004.March 31, 2005. LG&E's exposure
to floating interest rates decreased $1.1 million
and KU's exposure to floating interest rates decreased $1.0 milliondid not materially change
during the first sixthree months of 2004.2005.
The potential loss in fair value of LG&E's interest rate swaps resulting
from a hypothetical 1% change in base interest rates is estimated at
approximately $23.6$22.0 million as of June 30, 2004.March 31, 2005. The potential loss in
fair value of KU's interest rate swaps resulting from a hypothetical 1%
change in base interest rates is estimated at approximately $4.3$1.0 million as
of June 30, 2004.March 31, 2005. These estimates are derived from third-party
valuations. Changes in the market values of these swaps, if held to
maturity, will have no effect on LG&E's or KU's net income or cash flow.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
is dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plan. At June 30,
2004, LG&E and KU
have arecognized an additional minimum pension liability as prescribed by SFAS No.
87, Employers' Accounting for Pensions inbecause the pre-tax amountsaccumulated benefit
obligation exceeds the fair value of $47.6
- - New Page -
and $9.9 million, respectively.their plans' assets. The liabilities
arewere recorded as a reduction to other comprehensive income, and dodid not
affect net income. The amount of the liabilitiesliability depends upon the discount
rate, the asset returns experienced in
2003 and contributions made by LG&E and KUthe Companies to the
plan during 2003.plans. If the fair value of the planplans' assets exceeds the accumulated
benefit obligation, the recorded liabilityliabilities will be reduced and other
comprehensive income will be restored in the Consolidated Balance Sheets.balance sheet.
A 1% increase or decrease in the assumed discount rate could have an
approximate $41$39.9 million positive or negative impact to the accumulated
benefit obligation of LG&E. A 1% increase or decrease in the assumed
discount rate could have an approximate $27$26.8 million positive or negative
impact to the accumulated benefit obligation of KU.
In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
discretionary contributions to the pension plans are planned for either
LG&E or KU for 2005, but one or both Companies may make a discretionary
contribution to the other post-retirement benefit plans.
Energy Trading & Risk Management Activities
The table below summarizes LG&E's and KU's energy trading and risk
management activities for the three months ended March 31, 2005, and six months ended June 30,
2004, and 2003(in thousands of $).2004.
Trading volumes are allocated evenly divided between LG&E and KU.
Three Months Six Months
Ended
Ended
June 30, June 30,March 31,
2005 2004
2003 2004 2003(in millions)
Fair value of contracts at beginning of
period, net asset/(liability) $ 603(0.2) $ 403 $ 572 $(156)0.6
Fair value of contracts when entered
into during the period (5) - (5) 2,620-
Contracts realized or otherwise
settled during the period (82) (226) (232) (283)0.2 (0.2)
Changes in fair value due to changes in assumptions 25 141 206 (1,863)- 0.2
Fair value of contracts at end of period,
net asset $ 541- $ 318 $ 541 $ 3180.6
- 35 -
No changes to valuation techniques for energy trading and risk management
activities occurred during 20042005 or 2003.2004. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. The
outstanding mark-to-market value is sensitive to changes in prices, price
volatilities, and interest rates. The Companies estimate that a movement
in prices of $1 and a change in interest and volatilities of 1% would not
result in a change of a material amount. All contracts outstanding at
June 30, 2004,March 31, 2005, have a maturity of less than one year and are valued using
prices actively quoted for proposed or executed transactions or quoted by
brokers.
LG&E and KU maintain policies intended to minimize credit risk and revalue
credit exposures daily to monitor compliance with those policies. As of
June 30, 2004, 98.9%March 31, 2005, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
Item 4. Controls and Procedures.
LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
Companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. LG&E and KU conducted an evaluation of such controls and procedures
under the supervision and with the participation of the Companies'
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management, including the Chairman, President and Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"). Based upon that
evaluation, the CEO and CFO have concluded that the Companies' disclosure
controls and procedures are effective as of the end of the period covered
by this report.
LG&E and KU are not accelerated filers under the Sarbanes-Oxley Act of 2002
and associated rules (the "Act") and consequently anticipate issuing
Management's Report on Internal Control over Financial Reporting pursuant
to Section 404 of the Act in their first periodic report covering the
fiscal year ended December 31, 2006 as permitted by SEC rulemaking.
In preparation for required reporting under Section 404 of the Sarbanes-
Oxley Act of 2002, the Companies are conducting a thorough review of their
internal controls over financial reporting, including disclosure controls
and procedures. Based on this review, the Companies have made internal
controls enhancements and will continue to make future enhancements to
their internal control over financial reporting. There has been no change
in the Companies' internal control over financial reporting that occurred
during the fiscal quarter ended June 30, 2004,March 31, 2005, that has materially
affected, or is reasonably likely to materially affect, the Companies'
internal control over financial reporting.
- 36 -
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 (a) LG&E's and KU's respective combined Annual Report on Form 10-K
for the year ended December 31, 2003:2004: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8, Financial Statements and
Supplementary Data in Note 11. Reference is also made to the matters
described in Notes 5 and (b) LG&E's and KU's Quarterly Report on Form 10-Q
for the period ended March 31, 2004:10 of Part I, Item I, Legal Proceedings.1 of this 10-Q. Except as
described herein, to date, the proceedings reported in LG&E's and KU's
respective combined Annual Report on Form 10-K or Quarterly Reports on Form
10-Q have not changed materially.
ElectricOther
In the normal course of business, other lawsuits, claims, environmental
actions, and Gas Rates Cases
On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates ofother governmental proceedings arise against LG&E and KU. To
the base electric
ratesextent that damages are assessed in any of KU. In July 2004, the AG commenced an investigation examining
communications between the Kentucky Commission and the Companies and
separately filed for a rehearing of the rate cases on such issue and
certain calculation components of the increased rates. The Kentucky
Commission ordered a procedural reopening of the rate cases for the limited
purpose of taking evidence, if any, as to the communication issue. For a
description of developments in these cases, see Note 11 of the Notes to
Consolidated Financial Statements in Part 1, Item 1 of this Quarterly
Report on Form 10-Q.
MISO
During March and April 2004, the Kentucky Commission held hearings in the
proceedings examining the cost and benefits of MISO membership. In July
2004, the Kentucky Commission reopened the matter for further testimony and
hearings on recently-filed MISO energy market tariffs and analysis of
potential membership in other Regional Transmission Organizations.
Proceedings in this matter are anticipated to continue into 2005.
OVEC Power Agreement and Share Purchase
On April 30, 2004, OVEC and its shareholders, includinglawsuits, LG&E and KU
entered into an Amendedbelieve that their insurance coverage is adequate. Management, after
consultation with legal counsel, does not anticipate that liabilities
arising out of other currently pending or threatened lawsuits and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expirationclaims
will have a material adverse effect on LG&E's or KU's financial position or
results of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.
In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during the fourth quarter of 2004, subject to receipt of certain
regulatory approvals.
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Owensboro Contract Litigation
In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District Court against KU concerning a long-term power supply contract (the
"OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under the OMU Agreement, including
various payments or charges between KU and OMU and rights concerning excess
power, termination and emissions allowances,operations, respectively. The complaint
seeks approximately $6 million in damages for historical periods, as well
as injunctive and other relief, including a declaration that KU is in
material breach. KU has removed this litigation to the U.S. District Court
for the Western District of Kentucky and filed an answer in that court
denying the OMU claims and presenting certain counterclaims. KU has also
initiated a proceeding at the FERC to obtain the FERC's ruling on certain
of the issues in dispute.
Item 6. Exhibits and Reports on Form 8-K.
6(a)Exhibits.
Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
10.01 X X Copy of Amended and restated inter-company power
agreement dated as of March 13, 2006, among Ohio Valley
Electric Corporation and sponsoring companies, including
LG&E and KU.
10.02 X X Copy of Fourth Amendment dated as of February 1,
2004 to Employment and Severance Agreement dated as of
February 25, 2000 by and among E.ON AG, LG&E Energy,
Powergen and Victor A. Staffieri.
10.03 X X Copy of Modification No. 15, dated as of April 30,
2004, to Inter-Company Power Agreement dated July 10, 1953
among Ohio Valley Electric Corporation and Sponsoring
Companies.
31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002
31.1 X31.1X Certification of Chairman of the Board, President and Chief
Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 X31.2X 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
Certain instruments defining the rights of holders of certain long-term
debt of LG&E andor KU have not been filed with the SEC but will be furnished
to the SEC upon request.
6(b). Reports on Form 8-K.
On July 1, 2004, LG&E and KU filed a Current Report on Form 8-K describing
the June 30, 2004, order of the Kentucky Commission regarding increases in
their base rates.
- - New Page37 -
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: AugustMay 13, 20042005 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and 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: AugustMay 13, 20042005 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and Principal Accounting Officer)
- 38 - New Page -
Exhibit 31 - CERTIFICATIONS
Exhibit 31.1
Louisville Gas and Electric Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2004
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
- - New Page -
Exhibit 31.2
Louisville Gas and Electric Company
I, S. Bradford Rives, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville
Gas and Electric Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2004
/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
- - New Page -
Exhibit 31.3
Kentucky Utilities Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2004
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
- - New Page -
Exhibit 31.4
Kentucky Utilities Company
I, S. Bradford Rives, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2004
/s/ S. Bradford Rives
S. Bradford Rives,
Chief Financial Officer
- - New Page -
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, 2004, 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, 2004
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ S. Bradford Rives
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.