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 September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
1-10568 LG&E Energy Corp. 61-1174555
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32030
Louisville, Ky. 40232
(502) 627-2000
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
LG&E Energy Corp.
129,677,030 shares, without par value, as of October 29, 1999.
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of October 29, 1999,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of October 29, 1999,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by LG&E Energy Corp.,
Louisville Gas and Electric Company and Kentucky Utilities Company.
Information contained herein related to any individual registrant is filed
by such registrant on its own behalf. Each registrant makes no
representation as to information relating to the other registrants. In
particular, information contained herein related to LG&E Energy Corp. or
any of its direct or indirect subsidiaries other than Louisville Gas and
Electric Company or Kentucky Utilities Company is provided solely by LG&E
Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities
Company, and shall be deemed not included in the Form 10-Q of Louisville
Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company.
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TABLE OF CONTENTS
PART I
Item 1 Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income 1
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 6
Consolidated Statements of Retained Earnings 8
Consolidated Statements of Comprehensive Income 9
Louisville Gas and Electric Company
Statements of Income 10
Balance Sheets 11
Statements of Cash Flows 13
Statements of Retained Earnings 14
Statements of Comprehensive Income 15
Kentucky Utilities Company
Statements of Income 16
Balance Sheets 17
Statements of Cash Flows 19
Statements of Retained Earnings 20
Notes to Financial Statements 21
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 32
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 46
PART II
Item 1 Legal Proceedings 48
Item 6 Exhibits and Reports on Form 8-K 49
Signatures 50
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Part I. Financial Information - Item 1. Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
REVENUES:
Electric utility $ 557,711 $ 447,796 $1,325,642 $1,130,062
Gas utility 17,623 16,978 117,054 136,277
International and
non-utility 297,391 164,402 652,951 315,589
Total revenues 872,725 629,176 2,095,647 1,581,928
Provision for rate
refunds (Note 12) (7,335) - (7,335) -
Net revenues 865,390 629,176 2,088,312 1,581,928
OPERATING EXPENSES:
Fuel and power purchased 413,713 206,044 869,795 457,984
Gas supply expenses 82,248 53,137 234,232 220,671
Utility operation and
maintenance 103,789 106,997 322,686 320,061
International and non-
utility operation
and maintenance 48,905 57,003 141,303 96,907
Depreciation and
amortization 54,664 51,378 162,879 155,030
Merger costs to
achieve - - - 65,318
Total operating expenses 703,319 474,559 1,730,895 1,315,971
Equity in earnings
of unconsolidated
ventures (Notes 5 and 6) 10,092 2,744 43,799 59,607
OPERATING INCOME 172,163 157,361 401,216 325,564
Other income 5,863 2,840 14,862 572
Interest charges and
preferred dividends 32,414 26,833 95,177 79,127
Minority interest 4,735 4,459 10,148 9,104
Income before income taxes 140,877 128,909 310,753 237,905
Income taxes 53,711 50,055 116,843 99,830
Income from continuing
operations $ 87,166 $ 78,854 $ 193,910 $ 138,075
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Income from continuing
operations $ 87,166 $ 78,854 $ 193,910 $ 138,075
Loss from discontinued
operations, net of income tax
expense benefit of $15,008
(Notes 2 and 3) - - - (22,852)
Income (loss) on disposal of dis-
continued operations, net of
income tax (expense) benefit
of $(243), $(328) and
$124,757 (Notes 2 and 3) - 658 788 (224,342)
Income (loss) before cum-
ulative effect of change
in accounting principle 87,166 79,512 194,698 (109,119)
Cumulative effect of change
in accounting for start-up
costs, net of income tax
benefit of $5,061 - - - (7,162)
NET INCOME (LOSS) $ 87,166 $ 79,512 $ 194,698 $ (116,281)
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Average common shares
outstanding 129,677 129,683 129,677 129,683
Earnings (loss) per share -
basic:
Continuing operations $ .67 $ .61 $ 1.49 $ 1.06
Discontinued operations .00 .00 .00 (.17)
Income (loss) on dis-
posal of discontinued
operations .00 .00 .01 (1.73)
Cumulative effect of
accounting change .00 .00 .00 (.06)
Total $ .67 $ .61 $ 1.50 $ (.90)
Earnings (loss) per share -
diluted:
Continuing operations $ .67 $ .61 $ 1.49 $ 1.06
Discontinued operations .00 .00 .00 (.16)
Income (loss) on dis-
posal of discontinued
operations .00 .00 .01 (1.73)
Cumulative effect of
accounting change .00 .00 .00 (.06)
Total $ .67 $ .61 $ 1.50 $ (.89)
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CURRENT ASSETS:
Cash and temporary cash investments $ 93,007 $ 105,726
Marketable securities 11,458 20,862
Accounts receivable - less reserve 377,693 293,219
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 82,614 78,855
Gas stored underground 49,143 39,249
Other 93,797 72,457
Net assets of discontinued opera-
tions (Notes 2 and 3) 36,380 3,219
Prepayments and other 41,810 38,287
Total current assets 785,902 651,874
UTILITY PLANT:
At original cost 5,851,448 5,581,667
Less: reserve for depreciation 2,478,866 2,352,306
Net utility plant 3,372,582 3,229,361
OTHER PROPERTY AND INVESTMENTS - LESS RESERVES:
Investment in unconsolidated
ventures (Notes 5 and 6) 231,690 167,877
Non-utility property and plant, net 493,623 447,372
Other 36,393 117,321
Total other property and investments 761,706 732,570
DEFERRED DEBITS AND OTHER ASSETS 267,894 214,152
Total assets $5,188,084 $4,827,957
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITAL AND LIABILITIES
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CURRENT LIABILITIES:
Long-term debt due within one year $ 111,590 $ -
Notes payable 393,202 365,135
Accounts payable 218,882 243,968
Other 351,523 242,479
Total current liabilities 1,075,197 851,582
Long-term debt 1,599,603 1,510,775
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 558,609 570,698
Investment tax credit, in
process of amortization 87,844 93,844
Regulatory liability 102,844 109,411
Other 201,013 206,064
Total deferred credits and other liabilities 950,310 980,017
Minority interests 109,075 107,815
Cumulative preferred stock 135,328 136,530
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 778,273 778,273
Other 245 (3,314)
Retained earnings 540,053 466,279
Total common equity 1,318,571 1,241,238
Total liabilities and capital $5,188,084 $4,827,957
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - Thousands of $)
Nine Months
Ended
Sep. 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 194,698 $ (116,281)
Items not requiring cash currently:
Depreciation and amortization 162,879 155,030
Deferred income taxes - net (11,822) (11,471)
Loss from discontinued operations
(Notes 2 and 3) - 22,852
(Gain) loss on disposal of discon-
tinued operations (Notes 2 and 3) (788) 224,342
Cumulative effect of change
in accounting principle - 7,162
Other (17,480) (9,276)
Change in net current assets (73,790) (118,416)
Other 4,933 (45,059)
Net cash flows from operating activities 258,630 108,883
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (917) (18,783)
Proceeds from sales of securities 10,040 16,777
Construction expenditures (291,942) (151,158)
Investments in unconsolidated
ventures (Note 5) (74,498) (1,010)
Investment in subsidiary, net of cash
and temporary cash investments
acquired (Note 4) (39,693) -
Proceeds from sale of investment
in affiliate and sale of
leveraged leases (Note 6) 53,384 16,000
Net cash flows from investing activities (343,626) (138,174)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes 200,000 150,000
Retirement of bonds (35,268) (20,021)
Short-term borrowings 3,927,792 4,753,762
Repayment of short-term borrowings (3,899,417)(4,743,743)
Redemption of preferred stock (1,202) (1,823)
Payment of common dividends (119,628) (100,855)
Net cash flows from financing activities 72,277 37,320
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (12,719) 8,029
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 105,726 111,512
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 93,007 $ 119,541
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Nine Months
Ended
Sep. 30,
1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 24,871 $ 38,137
Interest on borrowed money 78,483 70,414
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Retained Earnings
(Unaudited - Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Balance at beginning
of period $ 494,059 $ 445,729 $ 466,279 $ 722,584
Net income (loss) 87,166 79,512 194,698 (116,281)
Cash dividends declared on
common stock ($.3175, $.3075,
$.9325 and $.93259 per share) 41,172 39,877 120,924 120,939
Balance at end of period $ 540,053 $ 485,364 $ 540,053 $ 485,364
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Net income (loss) $ 87,166 $79,512 $194,698 $(116,281)
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (287) (50) (250) (42)
Reclassification adjustment for
realized gains and (losses) on
available-for-sale securities
included in net income (89) 90 (247) 124
Other comprehensive income
(loss), before tax (376) 40 (497) 82
Income tax benefit (expense) related
to items of other comprehensive
income 142 (29) 188 (44)
Comprehensive income (loss) $ 86,932 $79,523 $194,389 $(116,243)
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
OPERATING REVENUES:
Electric $279,907 $212,907 $621,693 $528,341
Gas 17,623 16,978 117,054 136,277
Provision for rate
refunds (Note 12) (1,135) - (1,635) -
Total operating revenues 296,395 229,885 737,112 664,618
OPERATING EXPENSES:
Fuel for electric generation 45,361 41,205 117,199 118,488
Power purchased 85,156 18,057 139,040 42,883
Gas supply expenses 8,763 8,950 72,650 89,308
Other operation expenses 39,452 41,976 119,101 122,850
Maintenance 12,800 10,666 47,730 33,985
Depreciation and amortization 24,143 23,294 72,428 69,883
Federal and state
income taxes 25,683 27,403 47,317 53,485
Property and other taxes 4,001 4,914 12,999 14,361
Total operating expenses 245,359 176,465 628,464 545,243
NET OPERATING INCOME 51,036 53,420 108,648 119,375
Merger costs to
achieve - - - 34,134
Other income 336 359 1,648 10,668
Interest charges 9,668 8,918 27,636 27,629
NET INCOME 41,704 44,861 82,660 68,280
Preferred stock dividends 1,090 1,135 3,266 3,400
NET INCOME AVAILABLE
FOR COMMON STOCK $ 40,614 $ 43,726 $ 79,394 $ 64,880
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
UTILITY PLANT:
At original cost $3,034,699 $2,896,139
Less: reserve for depreciation 1,211,971 1,144,123
Net utility plant 1,822,728 1,752,016
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,348 1,154
CURRENT ASSETS:
Cash and temporary cash investments 16,572 31,730
Marketable securities 8,274 17,851
Accounts receivable - less reserve 191,017 142,580
Materials and supplies - at average cost:
Fuel (predominantly coal) 12,142 23,993
Gas stored underground 41,778 33,485
Other 34,586 33,103
Prepayments and other 1,748 2,285
Total current assets 306,117 285,027
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,685 5,919
Regulatory assets 34,117 37,643
Other 15,217 22,878
Total deferred debits and other assets 55,019 66,440
Total assets $2,185,212 $2,104,637
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 259,856 247,462
Other (960) (786)
Total common equity 684,066 671,846
Cumulative preferred stock 95,328 95,328
Long-term debt 626,800 626,800
Total capitalization 1,406,194 1,393,974
CURRENT LIABILITIES:
Accounts payable 218,056 133,673
Provision for rate refunds 11,126 13,261
Dividends declared 24,090 23,168
Accrued taxes 37,370 31,929
Accrued interest 7,786 8,038
Other 15,978 15,242
Total current liabilities 314,406 225,311
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 252,021 254,589
Investment tax credit, in
process of amortization 68,325 71,542
Accumulated provision for pensions
and related benefits 45,860 59,529
Regulatory liability 60,998 63,529
Other 37,408 36,163
Total deferred credits and other liabilities 464,612 485,352
Total capital and liabilities $2,185,212 $2,104,637
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Nine Months
Ended
Sep. 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82,660 $ 68,280
Items not requiring cash currently:
Depreciation and amortization 72,428 69,883
Deferred income taxes - net (4,981) 373
Investment tax credit - net (3,217) (3,180)
Other 5,255 2,862
Changes in current assets and liabilities 42,348 (22,279)
Other (7,663) 24,132
Net cash flows from operating activities 186,830 140,071
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (668) (17,784)
Proceeds from sales of securities 9,955 15,623
Construction expenditures (141,932) (72,950)
Net cash flows from investing activities (132,645) (75,111)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of first mortgage bonds - (20,000)
Payment of dividends (69,343) (64,417)
Net cash flows from financing activities (69,343) (84,417)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (15,158) (19,457)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 31,730 50,472
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 16,572 $ 31,015
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 53,326 $ 37,396
Interest on borrowed money 25,497 26,195
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Balance at beginning
of period $242,242 $239,064 $247,462 $258,910
Net income 41,704 44,861 82,660 68,280
Subtotal 283,946 283,925 330,122 327,190
Cash dividends declared on stock:
Preferred 1,090 1,135 3,266 3,400
Common 23,000 22,000 67,000 63,000
Subtotal 24,090 23,135 70,266 66,400
Balance at end of period $259,856 $260,790 $259,856 $260,790
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Net income available
for common stock $40,614 $43,726 $79,394 $64,880
Unrealized holding (losses) gains
on available-for-sale securities
arising during the period (199) 32 (293) 39
Income tax benefit (expense)
related to unrealized holding
gains and losses 80 (14) 118 (16)
Comprehensive income $40,495 $43,744 $79,219 $64,903
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
OPERATING REVENUES:
Electric $287,703 $246,117 $730,846 $622,415
Provision for rate refunds
(Note 12) (6,200) - (6,200) -
Net operating revenues 281,503 246,117 724,646 622,415
OPERATING EXPENSES:
Fuel for electric generation 60,770 65,586 168,338 168,623
Power purchased 104,213 40,134 195,136 82,725
Other operation expenses 30,403 31,100 89,359 92,531
Maintenance 13,649 15,630 42,113 45,578
Depreciation and amortization 22,546 21,749 66,694 64,852
Federal and state
income taxes 13,910 23,325 47,130 50,024
Property and other taxes 3,483 3,916 11,384 12,225
Total operating expenses 248,974 201,440 620,154 516,558
NET OPERATING INCOME 32,529 44,677 104,492 105,857
Merger costs to
achieve - - - 21,830
Other income 1,604 1,899 5,767 5,806
Interest charges 9,707 9,596 28,448 28,923
NET INCOME 24,426 36,980 81,811 60,910
Preferred stock dividends 564 564 1,692 1,692
NET INCOME AVAILABLE
FOR COMMON STOCK $ 23,862 $ 36,416 $ 80,119 $ 59,218
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
UTILITY PLANT:
At original cost $2,816,749 $2,685,528
Less: reserve for depreciation 1,266,895 1,208,183
Net utility plant 1,549,854 1,477,345
OTHER PROPERTY AND INVESTMENTS -
less reserve 14,165 14,238
CURRENT ASSETS:
Cash and temporary cash investments 37,129 59,071
Accounts receivable - less reserve 135,287 106,003
Materials and supplies - at average cost:
Fuel (predominantly coal) 29,246 23,927
Other 25,461 24,877
Prepayments 2,595 2,427
Total current assets 229,718 216,305
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,927 5,227
Regulatory assets 24,393 28,228
Other 22,871 19,859
Total deferred debits and other assets 52,191 53,314
Total assets $1,845,928 $1,761,202
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
Sep. 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 324,286 299,168
Other (595) (595)
Total common equity 631,831 606,713
Cumulative preferred stock 40,000 40,000
Long-term debt 484,830 546,330
Total capitalization 1,156,661 1,193,043
CURRENT LIABILITIES:
Long-term debt due within one year 61,500 -
Accounts payable 148,093 100,012
Provision for rate refunds 27,700 21,500
Dividends declared 19,282 18,188
Accrued taxes 25,107 16,733
Accrued interest 9,714 8,110
Other 33,945 31,226
Total current liabilities 325,341 195,769
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 239,351 244,493
Investment tax credit, in
process of amortization 19,519 22,302
Accumulated provision for pensions
and related benefits 55,165 50,044
Regulatory liability 41,846 45,882
Other 8,045 9,669
Total deferred credits and other liabilities 363,926 372,390
Total capital and liabilities $1,845,928 $1,761,202
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Nine Months
Ended
Sep. 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 81,811 $ 60,910
Items not requiring cash currently:
Depreciation and amortization 66,694 64,852
Deferred income taxes - net (9,178) (331)
Investment tax credit - net (2,783) (2,875)
Changes in current assets and liabilities 31,623 49,426
Other 11,116 3,149
Net cash flows from operating activities 179,283 175,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (145,628) (53,498)
Net cash flows from investing activities (145,628) (53,498)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings - 381,500
Repayments of short-term borrowings - (415,100)
Payment of dividends (55,597) (41,783)
Net cash flows from financing activities (55,597) (75,383)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (21,942) 46,250
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 59,071 5,453
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 37,129 $ 51,703
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 53,778 $ 43,556
Interest on borrowed money 24,078 24,244
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Balance at beginning
of period $319,424 $287,461 $299,167 $304,750
Net income 24,426 36,980 81,811 60,910
Subtotal 343,850 324,441 380,978 365,660
Cash dividends declared on stock:
Preferred 564 564 1,692 1,692
Common 19,000 18,000 55,000 58,091
Subtotal 19,564 18,564 56,692 59,783
Balance at end of period $324,286 $305,877 $324,286 $305,877
The accompanying notes are an integral part of these financial statements.
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<PAGE>
LG&E Energy Corp. and Subsidiaries
Louisville Gas and Electric Company
Kentucky Utilities Company
Notes to Financial Statements
(Unaudited)
1. Effective May 4, 1998, following the receipt of all required state and
federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the
Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy
as the surviving corporation (the Merger). The accompanying unaudited
consolidated financial statements reflect the accounting for the merger
as a pooling of interests and are presented as if the companies were
combined as of the earliest period presented. However, the financial
information is not necessarily indicative of the results of operations,
financial position or cash flows that would have occurred had the
merger been consummated for the periods for which it is given effect,
nor is it necessarily indicative of future results of operations,
financial position, or cash flows. The financial statements reflect
the conversion of each outstanding share of KU Energy common stock into
1.67 shares of LG&E Energy common stock. The outstanding preferred
stock of Louisville Gas and Electric Company (LG&E), a subsidiary of
LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU
Energy, were not affected by the Merger.
KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E
Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the
surviving corporation. The consolidated financial statements include
the accounts of LG&E Energy, LG&E, Capital Corp., and KU and their
respective wholly-owned subsidiaries, collectively referred to herein
as the "Company." All significant intercompany items and transactions
have been eliminated from the unaudited consolidated financial
statements.
In the opinion of management, all adjustments, including those of a
normal recurring nature, have been made to present fairly the
consolidated financial position, results of operations and cash flows
for the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations, although
the Company believes that the disclosures included herein are adequate
to make the information presented not misleading.
See the Company's, LG&E's and KU's Reports on Form 10-K for 1998 for
information relevant to the accompanying financial statements,
including information as to the significant accounting policies of the
Company.
2. Effective June 30, 1998, the Company discontinued its merchant energy
trading and sales business. This business consisted primarily of a
portfolio of energy marketing contracts entered into in 1996 and early
1997, nationwide deal origination and some level of speculative trading
activities, which were not directly supported by the Company's physical
assets. The Company's decision to discontinue these operations was
primarily based on the impact that volatility and rising prices in the
power market had on its portfolio of energy marketing contracts.
Exiting the merchant energy trading and sales business enables the
Company to focus on optimizing the value of physical assets it owns or
controls, and to reduce the earnings impact on continuing operations of
extreme market volatility in its portfolio of energy marketing
contracts. The Company is in the process of settling commitments that
obligate it to buy and sell natural gas and electric power. If the
Company is unable to dispose of these commitments or assets it will
continue to meet its obligations under the contracts. The Company,
however, has maintained sufficient market knowledge, risk management
skills, technical systems and experienced personnel to maximize the
value of
- 21 -
<PAGE>
power sales from physical assets it owns or controls, including LG&E,
KU and Western Kentucky Energy Corp. (WKE).
At the time the Company decided to discontinue its merchant energy
trading and sales business, it also decided to sell its natural gas
gathering and processing business. Subsequently, effective June 30,
1999, the Company decided to retain this business. The accompanying
financial statements reflect the reclassification of the natural gas
gathering and processing business as continuing operations for all
periods presented. See Note 3 below.
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the initial decision to sell the
associated gas gathering and processing business, the Company recorded
an after-tax loss on disposal of discontinued operations of $225
million in the second quarter of 1998. The loss on disposal of
discontinued operations resulted primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power
Corporation (OPC). Other components of the write-off include costs
relating to certain peaking options, goodwill associated with the
Company's 1995 purchase of merchant energy trading and sales operations
and exit costs, including labor and related benefits, severance and
retention payments, and other general and administrative expenses.
Although the Company used what it believed to be appropriate estimates
for future energy prices, among other factors, to calculate the net
realizable value of discontinued operations, there are inherent
limitations in models to accurately predict future commodity prices,
load demands and other events.
Operating results for discontinued operations follow. All amounts
exclude the Company's natural gas gathering and processing business.
The Company charged its loss from discontinued operations for the three-
and nine-month periods ended September 30, 1999, to accrued loss on
disposal of discontinued operations.
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Revenues $ 386,038 $1,870,301 $ 675,820 $3,466,093
Loss before taxes (148,464) (76,367) (175,187) (114,227)
Loss from discontinued
operations, net of
income taxes (88,514) (38,911) (104,505) (61,763)
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<PAGE>
Net assets of discontinued operations at September 30, 1999, follow.
All amounts exclude the Company's natural gas gathering and processing
business.
Accounts receivable $ 69,290
Price risk management assets 33,384
Accounts payable (83,390)
Price risk management
liabilities (10,499)
Other assets and liab-
ilities, net 26,306
Net assets before balance
of reserve for discontinued
operations 35,091
Reserve for discontinued
operations (4,950)
Income tax benefit 6,239
Net assets of discon-
tinued operations $ 36,380
Total charges against the accrued loss on disposal of discontinued
operations through September 30, 1999, include $250.8 million for
commitments prior to disposal, $69.6 million for transaction
settlements, $11.1 million for goodwill, and $25.9 million for other
exit costs. While the Company has been successful in settling portions
of its discontinued operations, significant assets, operations and
obligations remain. The Company continues to manage the remaining
portfolio, has successfully hedged certain of its future exposures, and
has initiated arbitration proceedings with OPC over the terms of its
contract.
As discussed in Part II, Item 1, Legal Proceedings below, LG&E Energy
Marketing Inc. initiated arbitration proceedings against OPC related to
LEM's long-term contract to supply approximately one-half of OPC's
systemwide power needs. While the Company expects a favorable outcome
in the OPC arbitration proceeding, no assurances can be given as to
such an event. Should OPC prevail, the Company may be required to
increase its after-tax accrued loss on disposal of discontinued
operations by approximately $150 million as a result of higher than
anticipated future commodity prices, increased load demands, and other
factors. Any such increase in the loss reserve will be recorded in
discontinued operations. This amount is subject to continuing analysis
and estimation. Management does not expect this to have a material
effect on income from continuing operations. See Part II, Item 1,
Legal Proceedings below.
If the Company is unable to dispose of its remaining commitments, it
will continue to meet its obligations through the terms of the
contracts. The net fair value of these commitments as of September 30,
1999, are currently estimated to be approximately $7 million favorable
for the remainder of 1999, offset by negative $5 million to $27 million
each year in 2000 through 2004 and $9 million in the aggregate
thereafter.
As of September 30, 1999, the Company's discontinued operations were
under various contracts to buy and sell power and gas with net notional
amounts of 23.8 million MWh's of power and 38.5 million MMBTU's of
natural gas with a volumetric weighted-average period of approximately
39 and 50 months, respectively. These notional amounts are based on
estimated loads since various commitments do not include specified firm
volumes. The Company is also under contract to buy or sell immaterial
amounts of coal and SO2 allowances in support of its power contracts.
Notional amounts reflect the nominal volume of transactions included in
the Company's price
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<PAGE>
risk management commitments, but do not reflect actual amounts of cash,
financial instruments, or quantities of the underlying commodity which
may ultimately be exchanged between the parties.
As of October 19, 1999, the Company estimates that a $1 change in
electricity prices and a 10 cent change in natural gas prices across
all geographic areas and time periods could change the value of the
Company's remaining energy portfolio by approximately $7.5 million. In
addition to price risk, the value of the Company's remaining energy
portfolio is subject to operational and event risks including, among
others, increases in load demand, regulatory changes, and forced
outages at units providing supply for the Company. As of October 19,
1999, the Company estimates that a 1% change in the forecasted load
demand could change the value of the Company's remaining energy
portfolio by $9.6 million.
The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor
compliance with those policies. As of September 30, 1999, over 95% of
the Company's price risk management commitments were with
counterparties rated BBB equivalent or better. As of September 30,
1999, seven counterparties represented 80% of the Company's price risk
management commitments.
3. Effective June 30, 1999, the Company reclassified its natural gas
gathering and processing business to continuing operations from
discontinued operations. The Company chose to retain rather than
dispose of this business at the end of the one-year period established
by accounting standards because of management's expectation of more
favorable future energy prices and the related impact on this business.
The Company has reflected the operating results and net assets of the
natural gas gathering and processing business as continuing operations
in the accompanying financial statements for all periods presented.
Operating results for the natural gas gathering and processing business
follow.
Year Ended December 31,
1998 1997 1996
Revenues $109,833 $107,691 $85,259
(Loss) income before taxes (2,593) 2,829 4,888
Net (loss) income (1,599) 1,323 2,873
Three Months Nine Months
Ended Ended
Sep. 30, Sep. 30,
1999 1998 1999 1998
Revenues $40,229 $25,321 $115,666 $86,212
(Loss) income before taxes (321) (901) (1,171) (1,547)
Net (loss) income (312) (658) (1,060) (1,405)
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<PAGE>
Net assets of the natural gas gathering and processing business follow.
Sep. 30, Dec. 31, Dec. 31,
1999 1998 1997
Cash and temporary cash
investments $ 6,440 $ - $ 509
Accounts receivable 20,303 7,425 13,948
Non-utility property and
plant, net 157,539 161,473 171,114
Accounts payable (20,819) (6,148) (13,449)
Goodwill and other assets
and liabilities, net (6,553) (22,318) (20,043)
Net assets $156,910 $140,432 $152,079
The Company recorded an after-tax loss on disposal of discontinued
operations of $225 million in the second quarter of 1998. No loss on
disposal of the net assets of the natural gas gathering and processing
business was included because the Company assumed it would sell these
assets for an amount equal to or greater than book value. It also
included an after-tax reserve of approximately $1.6 million for
estimated losses from operations of the natural gas gathering and
processing business through the date of disposal. Since this amount
equaled the estimated losses from operations included in the original
accrued loss on disposal of discontinued operations, no reversal of the
accrued loss was included in income for the three- and nine-month
periods ended September 30, 1999. The Company has recorded no
impairment losses related to the net assets of its natural gas
gathering and processing business.
4. In July 1999, the Company purchased 100% of the outstanding common
stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC)
for initial consideration of $45.6 million and retirement of
approximately $37.9 million in CRC debt. CRC, based in Houston, Texas,
is a provider of specialized equipment and services used in the
construction and rehabilitation of gas and oil transmission pipelines.
The purchase agreement provides for future annual earn-out payments to
the previous owners based on CRC's meeting certain financial targets
over the next three years. The agreement caps the total of these
payments at $31.0 million.
The purchase consideration, including the potential earn-out payments,
was paid 55% in cash and 45% in LG&E Energy common stock. LG&E Energy
will repurchase common stock from time to time in the open market or
through privately negotiated transactions in amounts equal to the stock
portions of the initial and subsequent earn-out payments. During the
third quarter 1999, the Company purchased approximately 935,000 shares
in this regard and completed the initial purchase installment.
The Company accounted for the acquisition using the purchase method.
Management recorded goodwill of approximately $51.1 million from the
initial transaction and may record additional goodwill contingent upon
future earn-out payments. Goodwill is being amortized over a period of
twenty years.
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<PAGE>
The fair values of the net assets acquired follow:
Assets $132,501
Liabilities 87,956
Cash paid, excluding transaction costs 44,545
Cash and cash equivalents acquired 5,943
Net cash paid, excluding transaction costs 38,602
Transaction costs 1,091
Net cash paid $ 39,693
5. On March 30, 1999, the Company acquired an indirect 19.6% ownership
interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution
company that serves 1.1 million customers in the northern portion of
the province of Buenos Aires, Argentina. The purchase price totaled
$73.5 million, which has been reflected in investments in
unconsolidated ventures in the accompanying balance sheet. The Company
accounted for the acquisition using the purchase method, and it records
its share of earnings using the equity method. The purchase price
exceeded the underlying equity in BAN by $13.0 million. The Company
allocated this difference to the assets and liabilities acquired based
on their estimated fair values.
6. In March 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which the Company owns a 50% interest, sold
substantially all the assets and major contracts of its 79 MW gas-fired
cogeneration facility in Rensselaer, New York, with net proceeds to the
Company of approximately $34 million. The sale resulted in an after-
tax gain to the Company of approximately $8.9 million.
7. The Company adopted Emerging Issues Task Force Issue No. 98-10,
Accounting for Energy Trading and Risk Management Activities (EITF No.
98-10) in the first quarter of 1999. The task force concluded that
energy trading contracts should be recorded using mark-to-market
valuation on the balance sheet, with the gains and losses shown net in
the income statement. EITF No. 98-10 more broadly defines energy
trading to include certain financial activities related to physical
assets which were not previously marked to market by established
industry practice. Initial adoption of EITF No. 98-10 did not have a
material impact on the Company's consolidated results of operations or
financial position. For the three- and nine- month periods ended
September 30, 1999, the Company recorded approximately $6.2 million of
expense and $.8 million of income, respectively, in consolidated pre-
tax income as a result of valuing the Company's electric energy trading
contracts using the mark-to-market method.
8. In April 1999, LG&E and KU filed a joint agreement among the companies
and the Kentucky Attorney General to amend the companies' previously-
filed performance-based ratemaking (PBR) plan. The amendment requested
Kentucky Public Service Commission (the Commission) approval of a five-
year rate reduction plan, which would reduce electric rates by $20
million in the first year (beginning July 1999), and by $8 million
annually for each of the next four years (through June 2004), for a
total five-year savings to customers of $52 million. The reductions
will be distributed between LG&E and KU customers based on the same
methodology the Commission approved in its previous merger order for
allocating the merger savings to the utilities' customers (53 percent
to KU customers; 47 percent to LG&E customers). The joint agreement
includes adoption of the PBR plan as proposed by the companies.
The amended filing also includes the establishment of a $6 million
program over the five-year period to assist low-income customers in
paying their energy bills.
In addition to the rate reductions and energy assistance program, the
amended filing calls for LG&E and KU to extend for an additional year
(through June 2004) both the rate cap and the merger-savings surcredit
the utilities established as part of their
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<PAGE>
earlier merger plan. Under the rate cap, the companies agreed, in the
absence of extraordinary circumstances, not to increase base electric
rates for five years following the merger. They also agreed to a
monthly surcredit to customers' bills reflecting the 50 percent share
of the non-fuel merger savings allocated to the utilities' customers in
the first five years following the merger.
As part of the amended PBR filing, LG&E also agreed to refrain from
filing for an increase in natural gas rates over the five-year period
(through June 2004).
In April 1999, the Commission issued initial orders implementing the
amended PBR plan, effective July 1999, and subject to modification.
The Commission also consolidated into the continuing PBR proceedings an
earlier March 1999, rate complaint by a group of industrial
intervenors, the Kentucky Industrial Utility Consumers, Inc. (KIUC) in
which KIUC requested significant reductions in electric rates.
Hearings were conducted before the Commission on LG&E's and KU's
amended PBR plans and the KIUC rate reduction petitions in August and
September 1999. Legal briefs of the parties were filed with the
Commission in October 1999. KIUC's current position calls for annual
revenue reductions for LG&E and KU of $69.6 million and $61.5 million,
respectively. A decision from the Commission is expected by the end of
the fourth quarter of 1999 or in early 2000.
9. In September 1999, Capital Corp. issued $50 million of floating rate
notes under its medium-term note program. The notes mature in
September 2000 and pay interest at a rate equal to the one-month LIBOR
plus 0.10%.
In May 1999, Capital Corp. issued $150.0 million of medium-term notes
due May 2004, with a stated interest rate on the notes of 6.205%.
After taking into account the forward-starting interest-rate swap
entered into in April 1999, to hedge the entire issuance, the effective
rate amounted to 6.13%. The proceeds were used to repay a portion of
Capital Corp.'s outstanding commercial paper, which had been used to
fund the BAN acquisition and other working capital needs.
In May 1999, KU entered into an interest-rate swap agreement to hedge a
portion of its outstanding first mortgage bonds. The swap has a
notional amount of $53 million and expires in May 2004. KU pays a
variable rate based on the six-month London Interbank Offered Rate
(LIBOR) plus 1.88% and receives a fixed rate of 7.92%. The agreement
provides for a collar on the variable rate paid by KU with a floor of
4.65% and a cap of 6.78%. The agreement suspends the collar during
periods when the London Interbank Offered Rate moves outside a
specified range. As of September 30, 1999, the rate payable by KU
equaled 5.18%.
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<PAGE>
10.External and intersegment revenues and income from continuing
operations by business segment for the three months ended September 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $273,836 $ 4,936 $ 39,771
LG&E gas 17,623 - 843
KU electric 276,540 4,963 23,862
Independent Power
Operations 5,366 - 5,573
Western Kentucky
Energy 144,434 - 12,377
Argentine Gas
Distribution 48,479 - 6,632
Other Capital Corp. 99,112 - 1,754
All Other - (9,899) (3,646)
Consolidated $865,390 $ - $ 87,166
External and intersegment revenues and income from continuing
operations by business segment for the nine months ended September 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 607,681 $ 12,377 $ 78,124
LG&E gas 117,054 - 1,270
KU electric 710,626 14,020 80,119
Independent Power
Operations 18,467 - 26,850
Western Kentucky
Energy 273,462 - 10,889
Argentine Gas
Distribution 123,422 - 11,785
Other Capital Corp. 237,600 - (3,842)
All Other - (26,397) (11,285)
Consolidated $2,088,312 $ - $193,910
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<PAGE>
External and intersegment revenues and income from continuing
operations by business segment for the three months ended September 30,
1998, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $209,431 $ 3,475 $ 41,935
LG&E gas 16,978 - 1,790
KU electric 238,365 7,752 36,416
Independent Power
Operations 5,108 - 1,812
Western Kentucky
Energy 66,246 - 5,451
Argentine Gas
Distribution 47,399 - 3,406
Other Capital Corp. 45,649 - (2,645)
All Other - (11,227) (9,311)
Consolidated $629,176 $ - $ 78,854
External and intersegment revenues and income from continuing
operations by business segment for the nine months ended September 30,
1998, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 520,539 $ 7,801 $ 62,434
LG&E gas 136,277 - 2,446
KU electric 609,523 12,892 59,218
Independent Power
Operations 15,001 - 30,962
Western Kentucky
Energy 66,246 - 5,451
Argentine Gas
Distribution 118,051 - 6,115
Other Capital Corp. 116,291 - (5,257)
All Other - (20,693) (23,294)
Consolidated $1,581,928 $ - $138,075
The assets of the Company's Argentine Gas Distribution segment
increased from $346.3 million at December 31, 1998, to $441.9 million
at September 30, 1999, due mainly to acquiring a 19.6% ownership
interest in BAN (see Note 5 of Notes to Financial Statements) and to
construction expenditures at Distribuidora de Gas del Centro. The
assets of the Other Capital Corp. segment increased from $121.0 million
at December 31, 1998, to $439.8 million at June 30, 1999. This
increase resulted from reclassifying the assets of the natural gas
gathering and processing business from discontinued to continuing
operations (see Note 3 of Notes to Financial Statements) and acquiring
CRC-Evans in July 1999 (see Note 4 of Notes to Financial Statements).
A decrease resulting from transferring costs related to gas turbine
peaking units to LG&E and KU
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<PAGE>
partially offset these increases (see Management's Discussion and
Analysis of Results of Operations and Financial Condition in Item 2).
11.In August 1999, a Capital Corp. subsidiary entered into an operating
lease for three combustion turbines. The lease has a five year term,
but no rent is payable until the turbines have been completed and
installed. Certain related facilities are expected to be added to the
same lease in the fourth quarter of 1999. The turbines are expected to
be used in a 450 Mw gas fired merchant combustion turbine power
generation facility, located in Monroe, Georgia, which is expected to
be completed in June 2001. At the end of the lease term, the Company
may purchase the leased assets or assist the lessor in selling them.
If the assets are sold, the Company is obligated to make up any
deficiency between the lease balance and the proceeds subject to a cap.
The total value of the assets under the existing lease is expected to
be approximately $125 million and is expected to increase to
approximately $175 million in the fourth quarter of 1999.
12.Prior to implementation of the PBR, LG&E and KU employed a fuel
adjustment clause (FAC) mechanism, which under Kentucky law allowed the
companies to recover from customers, the actual fuel costs associated
with retail electric sales. In February 1999, LG&E received orders
from the Kentucky Commission requiring a refund to retail electric
customers of approximately $3.9 million resulting from reviews of the
FAC from November 1994 through April 1998, of which $1.9 million was
refunded in April 1999 for the period beginning November 1994 and
ending October 1996. The orders changed the Company's method of
computing fuel costs associated with electric line losses on off-system
sales appropriate for recovery through the FAC. LG&E requested that
the Commission grant rehearing on the February orders, and further
requested that the Commission stay the refund requirement until it
could rule on the rehearing request. The Commission granted the
request for a stay, and in March 1999 granted part of the request for
rehearing. The Commission also granted rehearing on the KIUC's request
for rehearing on the Commission's determination that it lacked
authority to require the Companies to pay interest on the refund
amounts. The Commission conducted a hearing on the rehearing issues in
June 1999 and is expected to issue a final ruling on rehearing by the
end of 1999. LG&E and KIUC have each filed separate appeals from the
Commission's February 1999 orders with the Franklin Circuit Court. A
decision on the appeals by the Court is not expected until next year.
In July 1999, the Commission issued a series of orders requiring KU to
refund approximately $10.1 million resulting from reviews of the FAC
from November 1994 to October 1998. The orders changed KU's method of
computing fuel costs associated with electric line losses on off-system
sales appropriate for recovery through the FAC, and KU's method for
computing system line losses for the purpose of calculating the system
sales component of the FAC charge. At KU's request, on July 23, 1999,
the Commission stayed the refund requirement pending the Commission's
final determination of any rehearing request that KU may file. In
August 1999, KU filed its request for rehearing of the July orders.
In August 1999, the Commission issued a Final Order in the KU
proceedings, agreeing, in part, with the Company's arguments outlined
in its Petition for Rehearing. While the Commission confirmed that the
Company should change its method of computing the fuel costs associated
with electric line losses, it agreed with KU that the line loss
percentage should be based on the Company's actual line losses incurred
in making off-system sales rather than the percentage used in its Open
Access Transmission Tariff. The Commission also upheld its previous
ruling concerning the computation of system line losses in the
calculation of the FAC. The net effect of the Commission's Final Order
was to reduce the refund obligation to $5.8 million from the original
Order amount of $10.1 million. In August 1999, LG&E and KU each
recorded its estimated share of anticipated FAC refunds of $8.7
million. KU began implementing the refund
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<PAGE>
in October and will continue the refund through September 2000. Both
KU and the KIUC have appealed the Order to the Franklin Circuit Court.
A decision is not expected on the appeal until next year.
13.In August 1999, the Company received a Final Order from the PSC
relating to its Environmental Cost Recovery mechanism which resulted in
the reversal of approximately $1.4 million of the provision for refunds
by KU and LG&E in December 1998.
14.In October 1998, Capital Corp. purchased two natural gas combustion
turbines and began to install them. In July 1999, Capital Corp.
completed installation of the turbines and sold them at cost to LG&E
and KU for $45.7 million and $76.7 million, respectively, following
approval from the Commission. The turbines began commercial operation
in early August 1999.
15.Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the Company's, LG&E's and KU's (and Note 18 of
the Company's Notes to Financial Statements) Annual Reports on Form 10-
K for the year ended December 31, 1998, and Part II, Item 1, Legal
Proceedings, of the Form 10-Q for the quarters ended March 31, 1999,
and June 30, 1999.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments
In April 1999, the Kentucky Public Service Commission (the Commission)
issued initial orders in the performance-based ratemaking proceedings for
LG&E and KU. The Commission orders implement, effective July 1999, and
subject to modification, the companies' pending performance-based
ratemaking proposals, including a five-year, $52 million rate reduction
plan jointly filed by LG&E, KU and the Kentucky Attorney General's Office
with the Commission in April 1999. For more information, see Note 8 to the
Notes to Financial Statements under Item 1 and Commodity Price Risk under
Item 3.
In October 1999, a Capital Corp. subsidiary entered into an initial
agreement to purchase six natural gas combustion turbines and is
negotiating terms of a definitive agreement. In connection therewith,
Capital Corp. is pursuing initial development of a possible 1,600 Mw
generation facility in Anderson County, Texas. Should the plant be
developed as presently planned, the aggregate cost is estimated to be
approximately $760 million, portions of which may be independently financed
or shared with eventual outside partners.
In October 1999, a partnership in which Capital Corp. owns an interest sold
to an Ameren Energy Corporation affiliate the natural gas combustion
turbine previously leased by such partnership in Ferndale, Washington. The
Company's indirect proceeds from such sale were approximately $4.5 million.
In August 1999, a Capital Corp. subsidiary entered into an operating lease
for three combustion turbines. The lease has a five year term, but no rent
is payable until the turbines have been completed and installed. Certain
related facilities are expected to be added to the same lease in the fourth
quarter of 1999. The turbines are expected to be used in a 450 Mw gas
fired merchant combustion turbine power generation facility, located in
Monroe, Georgia, which is expected to be completed in June 2001. At the
end of the lease term, the Company may purchase the leased assets or assist
the lessor in selling them. If the assets are sold, the Company is
obligated to make up any deficiency between the lease balance and the
proceeds subject to a cap. The total value of the assets under the
existing lease is expected to be approximately $125 million and is expected
to increase to approximately $175 million in the fourth quarter of 1999.
For more information, see Note 11 to the Notes to Financial Statements
under Item 1.
In July 1999, the Company purchased 100% of the outstanding common stock of
CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial
consideration of $45.6 million and retirement of approximately $37.9
million in CRC debt. CRC, based in Houston, Texas, is a provider of
specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines. For more
information, see Note 4 of Notes to Financial Statements under Item 1.
In July 1999, Capital Corp. completed installation of two natural gas
turbines (purchased in October 1998) and sold them at cost to LG&E and KU
for $45.7 million and $76.7 million, respectively, following approval from
the Commission. The turbines began commercial operation in early August
1999.
Effective June 30, 1999, the Company reclassified its natural gas gathering
and processing business to continuing operations from discontinued
operations. For more information, see Note 3 to the Notes to Financial
Statements under Item 1.
In March 1999, the Company acquired an indirect 19.6% ownership interest in
Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves
1.1 million customers in
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the northern portion of the province of Buenos Aires, Argentina. For more
information, see Note 5 of Notes to Financial Statements under Item 1 for
more information.
In March 1999, the partnership that owns the Rensselaer cogeneration
facility sold substantially all the assets and major contracts of the
facility. For more information, see "Results of Operations" below, Note 6
of Notes to Financial Statements under Item 1 and the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
General
The Company's principal subsidiaries are LG&E, an electric and gas utility,
KU, an electric utility, and Capital Corp., the holding company for all non-
utility investments. LG&E's and KU's results of operations and liquidity
and capital resources are important factors affecting the Company's
consolidated results of operations and capital resources and liquidity.
Some of the matters discussed in the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis may contain forward-
looking statements that are subject to certain risks, uncertainties and
assumptions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to:
general economic conditions; business and competitive conditions in the
energy industry; future prices or usage loads of power and natural gas;
unusual weather; regulatory decisions, including decisions relating to the
Company's performance-based ratemaking proceedings, legal proceedings,
including the arbitration matter relating to the OPC power contract, and
decisions resulting from the combination of LG&E Energy and KU Energy; the
Company's ability to resolve Year 2000 issues in a timely manner and other
factors described from time to time in the Company's reports to the
Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-
K for the year ended December 31, 1998.
Results of Operations
The results of operations for LG&E, KU and Capital Corp.'s Argentine gas
distribution, CRC and WKE operations are affected by seasonal fluctuations
in temperature and other weather-related factors. Because of these and
other factors, the results of one interim period are not necessarily
indicative of results or trends to be expected for the full year.
Three Months Ended September 30, 1999, Compared to
Three Months Ended September 30, 1998
The Company's primary and diluted earnings per share from continuing
operations increased to $.67 in 1999 from $.61 in 1998. Results for 1999
included $.04 of after-tax charges for fuel adjustment refunds. Excluding
this item, income from continuing operations increased to $.71 in 1999 from
$.61 in 1998. This increase resulted from strong off-system sales at WKE,
increases resulting from acquiring CRC and BAN in 1999, and lower corporate
expenses. Lower earnings at LG&E and KU partially offset these increases.
LG&E Results:
LG&E's net income decreased $3.2 million for the quarter ended September
30, 1999, compared to the quarter ended September 30, 1998, primarily due
to implementation of the Company's performance based ratemaking proposal
which resulted in a reduction of electric revenues of $ 3.2 million.
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A comparison of LG&E's revenues for the quarter ended September 30, 1999,
with the quarter ended September 30, 1998, excluding the provision for rate
refunds of $1.1 million, reflects increases and decreases which have been
segregated by the following principal causes:
Increase or
(Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $(2,190) $(1,100)
Merger surcredit (900) -
Performance based rate bill reduction (3,159) -
Demand side management/revenue
decoupling 20 -
Environmental cost recovery (137) -
Variation in sales volume, etc. 10,116 1,395
Total retail sales 3,750 295
Sales for resale 63,789 8
Gas transportation - net - (144)
Other (539) 486
Total $67,000 $ 645
Electric sales for resale increased $59.1 million due to brokered sales
activities.
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E had an electric fuel
adjustment clause (FAC) whereby increases or decreases would be reflected
in retail rates, subject to the approval of the Public Service Commission
of Kentucky (PSC). Effective July 2, 1999 the FAC was discontinued and
replaced with an amended electric performance based rate mechanism (PBR).
The PBR is subject to PSC modification. See Note 8 for a further
discussion of the PBR mechanism and Note 12 for a further discussion of the
FAC. LG&E gas rates contain a gas supply clause whereby increases and
decreases in the cost of gas supply may be reflected in retail rates,
subject to PSC approval. Fuel for electric generation increased $4.2
million (10%) for the quarter because of an increase in generation due to
warmer weather ($5.2 million), partially offset by a decrease in the cost
of coal burned ($1 million). Gas supply expenses decreased $.2 million.
Power purchased increased $67 million primarily due to increased purchases
for sales for resale, including approximately $2 million of expenses
recorded as a result of valuing the Company's electric energy trading
contracts using the mark-to-market method. See Note 7 of Notes to
Financial Statements.
Other operation expenses decreased $2.5 million (6%) primarily due to
decreased operation of steam power production ($2.1 million).
Maintenance expenses increased $2.1 million (20%) in 1999 mainly due to
increases in scheduled outages at the Mill Creek generating station units 3
and 4 ($1.4 million), and the Cane Run generating station units 4 and 6
($.7 million).
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Depreciation and amortization increased $.8 million in 1999 because of
additional utility plant in service.
Property and other taxes decreased $.9 million due to a sales tax accrual
recorded as a result of a sales tax audit in the third quarter of last
year.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
KU Results:
KU's net income decreased $12.6 million for the quarter ended September 30,
1999, as compared to the quarter ended September 30, 1998. This decrease
is partially due to recording a net provision for the refund of certain
revenues under the fuel adjustment clause and environmental cost recovery
mechanism, as well as the implementation of the Commission ordered
performance-based ratemaking proposal. The after-tax impact of these
regulatory actions is $6.4 million. See Notes 8 and 12 of Notes to
Financial Statements.
A comparison of KU's revenues for the quarter ended September 30, 1999,
with the quarter ended September 30, 1998, excluding the provision for rate
refunds of $6.2 million, reflects increases and decreases which have been
segregated by the following principal causes:
Sales to ultimate consumers:
Fuel clause adjustments $ (2,921)
Environmental cost recovery 396
Merger surcredit (603)
Performance based rate bill reduction (2,914)
Variation in sales volume, etc. 2,066
Total retail sales (3,976)
Sales for resale 44,438
Other 1,124
Total $41,586
The increase in sales for resale was primarily due to more aggressive
marketing efforts.
Fuel for electric generation comprises a large component of KU's total
operating expenses. KU's Kentucky jurisdictional electric rates were
subject to an electric fuel adjustment clause (FAC) whereby increases or
decreases would be reflected in retail rates, subject to the approval of
the Public Service Commission of Kentucky (PSC). Effective July 2, 1999
the FAC was discontinued and replaced with an amended electric performance
based rate mechanism (PBR). The PBR is subject to PSC modification. See
Note 8 for a further discussion of the PBR mechanism and Note 12 for a
further discussion of the FAC. KU's wholesale and Virginia jurisdictional
electric rates contain a fuel adjustment clause whereby increases or
decreases in the cost of fuel are reflected in rates, subject to the
approval of the Virginia State Corporation Commission and the Federal
Energy Regulatory Commission. Fuel for electric generation expenses
decreased by $4.8 million (7%) for the quarter primarily because of a
decrease in generation.
Power purchased increased $64 million. The increase was primarily due to a
160% increase in megawatt-hour purchases which was used to support the
aforementioned sales for resale as well as an increase in reserve margin
purchases.
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Maintenance expense decreased $2 million (13%) due to a decrease in
maintenance activities at the steam generating plants.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Capital Corp. Results:
Capital Corp., the holding company for all non-utility investments,
conducts its operations through three principal segments: Independent
Power Operations, WKE and Argentine Gas Distribution. Involvement in these
and other non-utility businesses represents the Company's commitment to
understand, respond to, and capitalize on the opportunities presented by an
emerging competitive energy services industry. Independent Power
Operations develops, operates, maintains and owns interests in domestic and
international power generation facilities that sell electric and steam
energy to utility and industrial customers, and owns equity interests in
combustion turbines which are leased to others. WKE leases and operates
the generating facilities of Big Rivers. Argentine Gas Distribution owns
interests in three natural gas distribution companies in Argentina.
Capital Corp. also engages in other energy-related businesses (Other Energy-
Related Businesses) which are not individual distinct segments of the
business. These include CRC, a provider of specialized equipment and
services used in the construction and rehabilitation of gas and oil
transmission pipelines, Enertech, a commercial and retail initiative
designed to assess the energy and utility needs of large commercial and
industrial entities, and LG&E Home Services, a maintenance and repair
service for customers' major household appliances, and third party metering
and billing services. These also include the gas gathering and processing
business, which consists of certain natural gas transportation, storage,
gathering and processing operations and facilities.
Independent Power Operations
Independent Power Operations' equity in earnings of unconsolidated ventures
increased from $1.8 million in 1998 to $5.4 million in 1999. The increase
resulted mainly from writing off the $3.8 million investment in Windpower
Partners 1994 in the third quarter of 1998, offset by lower equity in
earnings at the Rensselaer project in 1999 resulting from the sale of this
project in the first quarter, and lower ROVA I capacity payments from
Virginia Electric and Power during the third quarter of 1999.
Western Kentucky Energy
Western Kentucky Energy (WKE) began operations in July 1998, upon
commencement of its lease transaction with Big Rivers.
WKE's revenues and cost of revenues increased from $66.2 million and $29.3
million, respectively, in 1998 to $144.4 million and $100.8 million,
respectively, in 1999. These increases resulted mainly from higher off-
system sales in 1999.
WKE's operation and maintenance expenses decreased from $25.8 million in
1998 to $21.5 million in 1999 due to reclassifying reagent and disposal
expenses from operation and maintenance expenses in 1998 to cost of
revenues in 1999. One-time expenses paid in 1998 to Big Rivers Electric
Corporation for storage and unloading of fuel acquired at closing also
contributed to the decrease.
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Argentine Gas Distribution
The Argentine Gas Distribution companies' revenues increased 2% or $1.1
million in 1999 to $48.5 million due to higher consumption per customer and
an increase in the customer base. Operation and maintenance expenses
decreased by 21.4% or $1.4 million over the same period.
The Argentine Gas Distribution companies' equity in earnings of
unconsolidated ventures increased from $1.0 million in 1998 to $4.7 million
in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Recent
Developments and Note 5 of Notes to Financial Statements in Item 1.
Other
As a result of the reclassification of the gas gathering and processing
business from discontinued operations to continuing operations effective
June 30, 1999, the Company's activities include certain natural gas
transportation, storage, gathering and processing operations and
facilities, which businesses are conducted through Capital Corp. Its
activities also include those of CRC, a provider of specialized equipment
and services used in the construction and rehabilitation of gas and oil
transmission pipelines, which the Company acquired in July 1999.
Additionally, the Company conducts various commercial and retail
initiatives, primarily energy-related new businesses and services designed
to leverage its existing assets, operations and market presence, which
commercial and retail initiatives have not had a significant impact on the
Company's financial position or required significant capital investment.
Other Energy-Related Businesses' revenues increased from $45.6 million in
1998 to $99.1 million in 1999, and its cost of revenues increased from
$38.4 million in 1998 to $73.1 million in 1999. These increases reflect
the CRC acquisition in July 1999 and higher natural gas sales. See Note 4
for a discussion of the CRC acquisition and see Note 3 for a discussion of
the Company's decision to retain its natural gas gathering and processing
business.
Other Energy-Related Businesses' operation and maintenance expense
increased from $9.0 million in 1998 to $14.9 million in 1999 due mainly to
acquiring CRC.
Capital Corp.'s interest expense increased from $6.6 million in 1998 to
$12.0 million in 1999 mainly due to funding the BAN and CRC acquisitions,
the WKE transaction, discontinued operations and corporate expenses.
Nine Months Ended September 30, 1999, Compared to
Nine Months Ended September 30, 1998
The Company's primary and diluted earnings per share from continuing
operations increased to $1.49 in 1999 from $1.06 in 1998. Results for 1998
included $.41 of after-tax charges for merger-related costs ($.19 for LG&E,
$.17 for KU, and $.05 for Corporate), and an after-tax gain of $.16
resulting from the Rensselaer project's Master Restructuring Agreement
(MRA) with Niagara Mohawk Power Corporation (NIMO). Results for 1999
included $.05 of after-tax charges for fuel adjustment refunds ($.04 for KU
and $.01 for LG&E). Excluding these items, income from continuing
operations increased to $1.54 in 1999 from $1.31 in 1998. This increase
resulted from higher earnings at Capital Corp, partially offset by lower
earnings at LG&E (excluding merger-related costs).
LG&E Results:
LG&E's net income increased $14.4 million for the first nine months of
1999, as compared to the first nine months of 1998, primarily because of
the charge incurred in 1998 for
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LG&E's cost to merge LG&E Energy Corp. with KU Energy of $25 million.
Excluding this charge, LG&E's net income decreased $10.6 million for the
same period. This is primarily due to increased maintenance expenses at
electric generating plants.
A comparison of LG&E's revenues for the nine months ended September 30,
1999, with the nine months ended September 30, 1998, excluding the
provision for rate refunds of $1.6 million, reflects increases and
decreases which have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $(2,102) $(26,851)
Merger surcredit (3,756) -
Performance based rate bill reduction (3,159) -
Demand side management/revenue
decoupling (3,075) (6,220)
Environmental cost recovery (169) -
Variation in sales volume, etc. 17,750 13,049
Total retail sales 5,489 (20,022)
Sales for resale 88,341 420
Gas transportation - net - (412)
Other (478) 791
Total $93,352 $(19,223)
Sales for resale increased due to increased brokered sales.
Gas retail sales decreased from 1998 due to a decline in gas prices in the
first quarter of 1999.
Gas supply expenses decreased $16.7 million (19%) due to a decrease in net
gas supply costs ($20.7 million) partially offset by an increase in the
volume of gas delivered to the distribution system ($4.0 million).
Power purchased increased $96.2 million (224%) primarily due to increased
purchases for sales for resale.
Other operation expenses decreased $3.7 million (3%) for the nine months
ended September 1999 as compared to same period ended September 1998
primarily due to lower steam power production expenses.
Maintenance expenses for the first nine months of 1999 increased $13.7
million (40%) primarily due to increases in scheduled outages at the Mill
Creek generating station units 3 and 4, and the Cane Run generating station
units 4 and 6 ($7.5 million), increased forced outages at Mill Creek units
1 and 4 and Cane Run unit 5 ($3.9 million), and general repairs at the
electric generating plants ($2.4 million).
Depreciation and amortization increased $2.5 million in 1999 because of
additional utility plant in service.
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<PAGE>
A $34.1 million one-time charge was recorded in the second quarter of 1998
for costs associated with the merger of LG&E Energy Corp. and KU Energy
(the corresponding tax benefit of $9.1 million is recorded in Other
income).
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
KU Results:
KU's net income increased $20.9 million for the nine months ended September
30, 1999, as compared to the nine months ended September 30, 1998,
primarily because of a $21.7 million one-time, after tax charge incurred in
1998 for KU's costs to merge LG&E Energy Corp. with KU Energy.
A comparison of KU's revenues for the nine months ended September 30, 1999,
with the nine months ended September 30, 1998, excluding the provision for
rate refunds of $6.2 million, reflects increases and decreases which have
been segregated by the following principal causes:
Sales to ultimate consumers:
Fuel clause adjustments $ (2,626)
Environmental cost recovery (684)
Merger surcredit (3,767)
Performance based rate bill reduction (2,914)
Variation in sales volume, etc. 12,499
Total retail sales 2,508
Sales for resale 104,065
Other 1,858
Total $108,431
The increase in sales for resale was primarily due to more aggressive
marketing efforts and efficiencies achieved from coordinated dispatch of a
larger available pool of generation following completion of the merger in
May 1998 of LG&E Energy and KU Energy.
Power purchased increased $112 million. The increase was primarily due to
a 53% increase in megawatt-hour purchases which was primarily used to
support the aforementioned sales for resale as well as an increase in
reserve margin purchases.
Maintenance expense decreased $3.5 million (8%) due to decreases in
maintenance at the steam generating plants and the transmission and
distribution systems.
A $21.8 million one-time charge was recorded in the second quarter of 1998
for the merger of LG&E Energy Corp. and KU Energy.
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
Capital Corp. Results:
Independent Power Operations
Independent Power Operations' revenues increased from $15.0 million in 1998
to $18.5 million in 1999 due to recognizing previously deferred income
related to the sale of the
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Rensselaer project in March 1999. See Note 6 of Notes to Financial
Statements under Item 1.
Independent Power Operations' depreciation and amortization decreased from
$4.3 million in 1998 to $2.6 million in 1999 due to writing off certain
capitalized interest and development costs related to the San Miguel
facility in the first quarter of 1998 and to write-offs related to the
Rensselaer project's MRA with NIMO in the second quarter of 1998.
Independent Power Operations' equity in earnings of unconsolidated ventures
decreased from $57.4 million in 1998 to $35.4 million in 1999. The
decrease resulted mainly from recognizing a gain in June 1998 related to
the Rensselaer project's NIMO MRA, partially offset by the Rensselaer
project's sale of substantially all of its assets and major contracts in
March 1999. An increase resulting from writing off the investment in
Windpower Partners 1994 in the third quarter of 1998 also offset the
overall decrease.
Independent Power Operations' other income and expense changed from $8.9
million expense in 1998 to $1.7 million income in 1999 due primarily to
reacquiring in 1998 half of the Company's interest in the partnership that
owned the Rensselaer project, and to recording related expenses.
Western Kentucky Energy
WKE began operations in July 1998, after closing its lease transaction with
Big Rivers. WKE's revenues and cost of revenues increased from $66.2
million and $29.3 million, respectively, in 1998 to $273.5 million and
$177.9 million, respectively, in 1999. These increases resulted from WKE's
operating for nine months in 1999, compared to only two and one-half months
in 1998. Increases in off-system sales in the third quarter of 1999 also
contributed to the increase.
WKE's operation and maintenance increased from $25.8 million in 1998 to
$72.1 million in 1999. This increase resulted from WKE's operating for
nine months in 1999, compared to only two and one-half months in 1998.
Argentine Gas Distribution
The Argentine Gas Distribution companies' revenues increased 4.5% or $5.4
million in 1999 to $123.4 million due to higher consumption per customer
and an increase in the customer base. Operation and maintenance expenses
decreased by 6.7% or $1.2 million over the same period.
The Argentine Gas Distribution companies' equity in earnings of
unconsolidated ventures increased from $2.2 million in 1998 to $8.4 million
in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Note 5
of Notes to Financial Statements in Item 1.
Other
Other Energy-Related Businesses' revenues increased from $116.3 million in
1998 to $237.6 million in 1999, and its cost of revenues increased from
$94.0 million in 1998 to $185.9 million in 1999. These increases reflect
increases at Retail Access Services, higher natural gas sales, and the CRC
acquisition.
Other Energy-Related Businesses' operation and maintenance expense
increased from $21.6 million in 1998 to $31.6 million in 1999 due mainly to
acquiring CRC.
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Other Energy-Related Businesses' other income increased from $3.0 million
in 1998 to $7.6 million in 1999 due mainly to receiving a claim related to
an undeveloped independent power project in California.
Capital Corp.'s interest expense increased from $17.5 million in 1998 to
$35.1 million in 1999 due mainly to funding the BAN and CRC acquisitions,
the WKE transaction, discontinued operations and corporate expenses.
Liquidity and Capital Resources
The Company's need for capital funds is largely related to the construction
of plant and equipment necessary to meet the needs of electric and gas
utility customers and equity investments in connection with independent
power production projects and other energy-related growth or acquisition
opportunities among the non-utility businesses. Capital funds are also
needed for the Company's capital obligations under the Big Rivers lease
arrangements, losses incurred in connection with the discontinuance of the
merchant energy trading and sales business and information system
enhancements. Lines of credit and commercial paper programs are maintained
to fund these temporary capital requirements.
Construction expenditures for the nine months ended September 30, 1999, of
$291.9 million were financed with internally generated funds and commercial
paper.
The Company's combined cash and marketable securities balance decreased
$22.1 million during the nine months ended September 30, 1999. The
decrease reflects construction expenditures, the investment in BAN, the
acquisition of CRC and dividends paid, partially offset by cash flows from
operations, a net increase in debt, the Company's portion of the proceeds
received by the Rensselaer project from the sale of its assets and major
contracts, and proceeds received from the sale of four combustion turbines
held under a leveraged lease.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of the Company's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The increase in accounts receivable resulted primarily from seasonal
fluctuations in LG&E's, KU's, and WKE's businesses, the CRC acquisition,
and higher natural gas gathering and processing revenues. The decrease in
accounts payable resulted from fluctuations in LG&E's and KU's businesses,
partially offset by seasonal fluctuations in Distribuidora de Gas del
Centro's (Centro's) business and an increase resulting from acquiring CRC.
The increase in other materials and supplies resulted from acquiring CRC.
The increase in net assets of discontinued operations resulted from a
decrease in the reserve, partially offset by a decrease in net price risk
management assets, a seasonal increase in accounts payable and a decrease
in cash. The decrease in cash resulted from seasonal fluctuations and from
a large transaction settlement near the end of the period.
The increase in investments in unconsolidated ventures resulted from the
investment in BAN and equity in earnings, partially offset by selling the
investment in the Rensselaer venture and distributions received.
The increase in non-utility property and plant resulted mainly from
acquiring CRC and from additions at Centro and WKE. The decrease in other
property and investments resulted from reclassifying the two combustion
turbines purchased by Capital Corp. to LG&E's and KU's utility property
accounts. In July 1999, Capital Corp. completed installation of the
turbines and sold them at cost to LG&E and KU for $45.7 million and $76.7
million, respectively. The turbines began commercial operation in early
August 1999.
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The increase in deferred debits and other assets resulted from recording
goodwill related to the CRC acquisition, and to capitalizing costs related
to the combustion turbine power generation facility in Monroe, Georgia.
Long-term debt due within one year increased due to issuing new debt and
reclassifying amounts from noncurrent to current.
The Company issues commercial paper that has maturity dates ranging between
one and 270 days. The Company had outstanding commercial paper of $393.2
million at September 30, 1999, at a weighted-average interest rate of
5.65%. Because of the rollover of these maturity dates, total short-term
borrowings and repayments during the first nine months of 1999 totaled $3.9
billion. See Note 16 of the Company's Notes to Financial Statements
contained in its Annual Report on Form 10-K for the year ended December 31,
1998.
The increase in other current liabilities resulted from acquiring CRC and
from differences in the timing of estimated income tax payments. The
increase in long-term debt resulted from additional borrowings, partially
offset by reclassifications to current.
In October 1999, a Capital Corp. subsidiary entered into an initial
agreement to purchase six natural gas combustion turbines and is
negotiating terms of a definitive agreement. In connection therewith,
Capital Corp. is pursuing initial development of a possible 1,600 Mw
generation facility in Anderson County, Texas. Should the plant be
developed as presently planned, the aggregate cost is estimated to be
approximately $760 million, portions of which may be independently financed
or shared with eventual outside partners.
In August 1999, a Capital Corp. subsidiary entered into an operating lease
for three combustion turbines. The lease has a five year term, but no rent
is payable until the turbines have been completed and installed. Certain
related facilities are expected to be added to the same lease in the fourth
quarter of 1999. The turbines are expected to be used in a 450 Mw gas
fired merchant combustion turbine power generation facility, located in
Monroe, Georgia, which is expected to be completed in June 2001. At the
end of the lease term, the Company may purchase the leased assets or assist
the lessor in selling them. If the assets are sold, the Company is
obligated to make up any deficiency between the lease balance and the
proceeds subject to a cap. The total value of the assets under the
existing lease is expected to be approximately $125 million and is expected
to increase to approximately $175 million in the fourth quarter of 1999.
At September 30, 1999, unused capacity under the Company's lines of credit
totaled $504.8 million after considering commercial paper support and
approximately $62.0 million in letters of credit securing on- and off-
balance sheet commitments. At December 31, 1998, unused capacity under the
lines of credit totaled $536.8 million. The decrease in unused capacity
resulted from additional borrowing during the nine months ended September
30, 1999.
Capital Corp. has provided letters of credit issued to third parties to
secure certain off-balance sheet obligations (including contingent
obligations) of its subsidiaries. The letters of credit securing such
obligations totaled approximately $23.0 million at September 30, 1999. For
more information, see Notes 17 and 18 of the Company's Notes to Financial
Statements in its Annual Report on Form 10-K for the year ended December
31, 1998.
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The Company's capitalization ratios at September 30, 1999, and December 31,
1998, follow:
Sep. 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 48.0% 46.5%
Notes payable 11.1 11.2
Preferred stock 3.8 4.2
Common equity 37.1 38.1
Total 100.0% 100.0%
LG&E's capitalization ratios at September 30, 1999, and December 31, 1998,
follow:
Sep. 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 44.6% 45.0%
Preferred stock 6.8 6.8
Common equity 48.6 48.2
Total 100.0% 100.0%
KU's capitalization ratios at September 30, 1999, and December 31, 1998,
follow:
Sep. 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 44.8% 45.7%
Preferred stock 3.3 3.4
Common equity 51.9 50.9
Total 100.0% 100.0%
In May 1999, Capital Corp. issued $150.0 million of medium-term notes due
May 2004, with a stated interest rate on the notes of 6.205%. After taking
into account the forward-starting interest-rate swap entered into in April
1999, to hedge the entire issuance, the effective rate amounted to 6.13%.
The proceeds were used to repay a portion of Capital Corp.'s outstanding
commercial paper, which had been used to fund the BAN acquisition and other
working capital needs.
In September 1999, Capital Corp. issued $50 million of floating rate notes
under its medium-term note program. The notes mature in September 2000 and
pay interest at a rate equal to the one-month LIBOR plus 0.10%.
LG&E implemented a new $200 million commercial paper program in November
1999. An initial issuance of notes totaling $120.1 million took place on
November 8. A majority of the proceeds were used in connection with
capital requirements relating to the joint acquisition by LG&E and KU of
combustion turbines from LG&E Capital Corp., which occurred in July 1999.
See Recent Developments for common stock repurchase activities in
connection with the CRC acquisition.
For a description of significant contingencies that may affect the Company,
LG&E and KU, reference is made to Part II herein - Item 1, Legal
Proceedings.
- 43 -
<PAGE>
Year 2000 Computer Issue
The Company and its subsidiaries, including LG&E and KU, use various
software, systems and technology that may be affected by the "Year 2000
Issue." This concerns the ability of electronic processing equipment
(including microprocessors embedded in other equipment) to properly process
the millennium change to the year 2000 and related issues. A failure to
timely correct any such processing problems could result in material
operational and financial risks if significant systems either cease to
function or produce erroneous data. Such risks are more fully detailed in
the sections that follow, but could include an inability to operate its
generating plants, disruptions in the operation of transmission and
distribution systems and an inability to access interconnections with the
systems of neighboring utilities.
The Company began its project regarding the Year 2000 issue in 1996. The
Board of Directors has approved the general Year 2000 plan and receives
regular updates. In addition, monthly reporting procedures have been
established at senior management levels. Since 1996, a single-purpose Year
2000 team has been established in the Information Technology (IT)
Department. This team, which is headed by an officer of the Company, is
responsible for planning, implementing and documenting the Company's Year
2000 process. The team also provides direct and detailed assistance to the
Company's operational divisions and smaller units, where identified
personnel are responsible for Year 2000 work and remediation in their
specific areas. In many cases, the Company also uses the services of third
parties, including technical consultants, vendor representatives and
auditors.
The Company's Year 2000 effort generally follows a three phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work
plans regarding Company and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency
planning.
The Company has long recognized the complexity of the Year 2000 issue.
Work has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.
State of Readiness
As of October 1999, the Company and its subsidiaries have completed the
internal inventory, vendor survey, compliance assessment, remediation and
testing and contingency planning portions (Phases I, II and III) of their
Year 2000 plan for critical equipment and systems, including IT, non-IT and
embedded components. A substantially similar readiness state exists for
all non-critical systems. Training and drill scenarios on contingency plan
actions have been initiated for appropriate critical systems and will
continue throughout 1999.
The Company has communicated with its key suppliers, customers and business
partners regarding their Year 2000 progress, particularly in the IT
software and embedded component areas, to determine the areas in which the
Company's operations are vulnerable to those parties' failure to complete
their remediation efforts. The Company has evaluated and, in certain
cases, initiated follow-up actions regarding the responses from these
parties.
- 44 -
<PAGE>
The Company regularly attends and participates in trade group efforts
focusing on Year 2000 issues in the energy industry.
Costs of Year 2000 Issues
The Company's, LG&E's and KU's system modification costs related to the
Year 2000 issue are being expensed as incurred. Through September 1999,
the Company incurred approximately $26.1 million in capital and operating
costs in connection with the Year 2000 issue. Based upon studies and
projections to date, the Company expects to spend an additional $6.0
million to complete its Year 2000 efforts.
Through September 1999, LG&E incurred approximately $18.4 million in
capital and operating costs in connection with the Year 2000 issue. Based
upon studies and projections to date, LG&E expects to spend an additional
$2.2 million to complete its Year 2000 efforts.
Through September 1999, KU incurred approximately $4.8 million in capital
and operating costs in connection with the Year 2000 issue. Based upon
studies and projections to date, KU expects to spend an additional $2.1
million to complete its Year 2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
Risks of Year 2000 Issues
As described above, the Company has significantly completed the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of remaining remediation and contingency plan actions, the
Company does not anticipate material business disruptions from its internal
systems due to the Year 2000 issue. However, the Company may possibly
experience limited interruptions to some aspects of its activities, whether
IT, generation, transmission or distribution, operational, administrative
functions or otherwise, and the Company is considering such potential
occurrences in planning for the most reasonably likely worst-case
scenarios.
Additionally, risk exists regarding the non-compliance of third parties
with key business or operational importance to the Company. Year 2000
problems affecting key customers, interconnected utilities, fuel suppliers
and transporters, telecommunications providers or financial institutions
could result in lost power or gas sales, reduced power production or
transmission capabilities or internal operational or administrative
difficulties on the part of the Company. The Company is not presently
aware of any such situations; however, severe occurrences of this type
could have material adverse impacts upon the business, operating results or
financial condition of the Company. There can be no assurance that the
Company will be able to identify and correct all aspects of the Year 2000
problem among these third parties that affect it in sufficient time, that
it will develop adequate contingency plans or that the costs of achieving
Year 2000 readiness will not be material.
Contingency planning has been completed for material areas of Year 2000
risk. This effort has addressed certain areas, including the most
reasonably likely worst-case scenarios, delays in completion of any
remaining remediation plans, failure or incomplete remediation results and
failure of key third parties to be Year 2000 compliant. Contingency plans
include provisions for extra staffing, back-up communications, review of
unit dispatch and load shedding procedures, carrying of additional energy
reserves and manual energy ac
- 45 -
<PAGE>
counting procedures. Contingency plan formulation has been completed and
final implementation, resourcing and drilling of such plans is underway.
Forward Looking Statements
The foregoing discussion regarding the timing, effectiveness,
implementation, and cost of the Company's Year 2000 efforts, contains
forward-looking statements, which are based on management's best estimates
derived using assumptions. These forward-looking statements involve
inherent risks and uncertainties, and actual results could differ
materially from those contemplated by such statements. Factors that might
cause material differences include, but are not limited to, the
availability of key Year 2000 personnel, the Company's ability to locate
and correct all relevant computer codes, the readiness of third parties,
and the Company's ability to respond to unforeseen Year 2000 complications
and other factors described from time to time in the Company's reports to
the Securities and Exchange Commission, including Exhibit 99.01 to the Form
10-K for the year ended December 31, 1998. Such material differences could
result in, among other things, business disruption, operational problems,
financial loss, legal liability and similar risks.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E Energy is exposed to market risks in both its regulated and non-
utility operations. Both operations are exposed to market risks from
changes in interest rates and commodity prices, while the non-utility
operations are also exposed to changes in foreign exchange rates. To
mitigate changes in cash flows attributable to these exposures, the Company
has entered into various derivative financial instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
Interest Rate Risk
The potential change in interest expense resulting from changes in base
interest rates of the Company's unswapped debt did not change materially
during the nine months ended September 30, 1999. The potential changes in
the fair values of the Company's interest-rate swaps resulting from changes
in interest rates and the yield curve also did not change materially during
the nine months ended September 30, 1999. See Item 7 of the Company's
report on Form 10-K for the year ended December 31, 1998.
Commodity Price Risk
The Company's exposure to market risks from changes in commodity prices did
not change materially during the nine months ended September 30, 1999.
However, as a result of the Commission's approval of the PBR effective July
1999, (subject to future change) LG&E's and KU's fuel adjustment clause
mechanism was withdrawn and replaced with a cap that limits recovery of
actual changes in fuel cost to changes in a fuel price index for a five-
state region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the utilities' fuel
costs exceed the index, the difference will be absorbed by the Company's
shareholders.
Capital Corp. through its subsidiaries operates and controls the generating
capacity of Big Rivers and the City of Henderson. Some of the excess
capacity generated by Big Rivers and the City is currently being marketed
by WKE. To mitigate residual risks relative to the movements in
electricity prices, WKE has entered into primarily fixed-priced contracts
for the sale of electricity through the wholesale electricity market. At
September 30, 1999, exposure from these activities was not material to the
consolidated financial statements of the Company.
See Item 7 of the Company's report on Form 10-K for the year ended December
31, 1998.
- 46 -
<PAGE>
Foreign Exchange Risk
The Company has foreign exchange exposure to both the Spanish Peseta and
the Argentine Peso. During the second quarter of 1999, the Company's
exposure to the Argentine Peso increased due to the acquisition of BAN.
However, management believes the Company's foreign exchange exposure to a
10% change in the Spanish Peseta and Argentine Peso would not have a
material effect on the financial position or results of operations.
As a result of acquiring CRC, the Company also has foreign exchange
exposure to the Canadian dollar and the British pound. Management believes
the Company's foreign exchange exposure to a 10% change in the either of
these currencies would not have a material effect on the financial position
or results of operations.
See Item 7 of the Company's report on Form 10-K for the year ended December
31, 1998.
- 47 -
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving the
Company, LG&E and KU, reference is made to the information under the
following items and captions of (a) the Company's, LG&E's and KU's
respective combined Annual Report on Form 10-K for the year ended December
31, 1998: Item 1, Business; Item 3, Legal Proceedings; Item 7,
Management's Discussion and Analysis of Results of Operations and Financial
Condition; Notes 2, 5, 18 and 22 of the Company's Notes to Financial
Statements under Item 8; Notes 3, 12, 16 and 18 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3, 11 and 13 of KU's Notes to
Financial Statements under Item 8 and (b) the Company's, LG&E's and KU's
respective combined Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1999 and June 30, 1999: Part III, Item 1, Legal Proceedings.
Except as described herein, to date, the proceedings reported in the
Company's, LG&E's and KU's respective combined Form 10-K's and Form 10-Q's
have not changed materially.
Certain Fuel Adjustment Clause Proceedings
On August 30, 1999, the Kentucky Public Service Commission (PSC) issued a
final order in these proceedings, agreeing with in part, and denying in
part, the arguments outlined by KU in its rehearing petition. A net effect
of the PSC's final order is to reduce the refund obligation from $10.1
million, the original order amount, to $5.8 million. The refund will be
implemented by KU from October 1999 to September 2000. Both KU and an
intervenor in the case have appealed the PSC final order to the Franklin
Circuit Court where a decision is anticipated in mid to late 2000. See
Note 12 of Notes to Financial Statements, in Item 3 above; Legal
Proceedings, and Notes 5 and 22 to the Company's and Note 3 of KU's
respective Notes to Financial Statements under Item 8 of the Company's and
KU's combined Annual Report on Form 10-K for the year ended December 31,
1998, for further discussion of this matter.
Performance-Based Ratemaking
During August and September 1999, hearings were conducted before the PSC on
LG&E's and KU's amended PBR plans. Initial briefs of the parties were
filed with the PSC on October 7, 1999 and reply briefs were filed October
21, 1999. A decision from the PSC is expected by the end of the fourth
quarter of 1999 or in early 2000. See Note 8 of Notes to Financial
Statements of the Company, LG&E and KU contained in Item 1 of this Form 10-
Q and Item 3, Legal Proceedings, to the Company's, LG&E's and KU's combined
Annual Report on Form 10-K for further discussion of this matter.
Oglethorpe Power Contract
Written submissions were filed by both parties during the third quarter in
the arbitration proceeding brought by LG&E Energy Marketing Inc. (LEM)
against Oglethorpe Power Corporation (OPC) regarding LEM's November 1996
power sales agreement with OPC and disputed load forecasts provided in
connection therewith. A hearing on the merits began on November 2, 1999,
and will end on November 19, 1999, with a final decision anticipated in mid
to late December 1999. While the Company anticipates a favorable outcome
in the proceeding, no assurances can be given as to such event. Should OPC
prevail, and as a result of higher than anticipated future commodity
prices, increased load demands, particularly at OPC, and other factors, the
Company may be required to increase its after-tax loss reserve by
approximately $150 million. Any such increase in the loss reserve will be
recorded in discontinued operations. This amount is subject to continuing
analysis and estimation. Management does not expect this to have a
material effect on income from continuing operations. See Note 2 in Notes
to Financial Statements under Item 1 above for a discussion of the
Company's discontinued operations and the reserve associated therewith.
- 48 -
<PAGE>
Springfield Municipal Contract
Trial is currently scheduled for January 2000 in the action filed by LEM
against the City of Springfield, Illinois City Water, Light and Power
Company concerning the parties' 1997 Interchange Agreement. LEM has
estimated damages in this matter of approximately $21 million. See Item 3,
Legal Proceedings and Note 18 to the Company's Notes to Financial
Statements under Item 8, respectively, of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 for further discussion of
this matter.
Environmental Matters
On October 2, 1999, approximately 38,000 gallons of diesel fuel leaked from
an underground pipeline at the E.W. Brown Station. Under the oversight of
EPA and state officials, KU commenced immediate spill containment and
recovery measures which prevented the spill from reaching the Kentucky
River. KU ultimately recovered approximately 34,000 gallons of diesel
fuel. On November 4, 1999, the Kentucky Division of Water issued a notice
of violation for the incident. KU has committed to undertake additional
mitigation measures and is currently negotiating a resolution of the state
regulatory aspects of this matter. To date, KU has incurred an estimated
$800,000 in remediation costs. KU is also investigating its possible
remedies against the manufacturer of a cracked valve at issue in the spill.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedules for LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky
Utilities Company.
Item 6(b). Reports on Form 8-K.
On July 14, 1999, the Company filed a report on Form 8-K announcing that it
had acquired, effective July 8, 1999, CRC Holdings Corp., the parent
company of CRC-Evans Pipeline International, Inc. and related companies, a
provider of specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines.
- 49 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LG&E Energy Corp.
Registrant
Date: November 15, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: November 15, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: November 15, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
- 50 -
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