SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification No.
1-10568 LG&E Energy Corp. 61-1174555
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32030
Louisville, Ky. 40232
(502) 627-2000
2-26720 Louisville Gas and Electric Company 61-0264150
(A Kentucky Corporation)
220 West Main Street
P.O. Box 32010
Louisville, Ky. 40232
(502) 627-2000
1-3464 Kentucky Utilities Company 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
LG&E Energy Corp.
129,677,030 shares, without par value, as of July 30, 1999.
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of July 30, 1999,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 30, 1999,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by LG&E Energy Corp.,
Louisville Gas and Electric Company and Kentucky Utilities Company.
Information contained herein related to any individual registrant is filed
by such registrant on its own behalf. Each registrant makes no
representation as to information relating to the other registrants. In
particular, information contained herein related to LG&E Energy Corp. or
any of its direct or indirect subsidiaries other than Louisville Gas and
Electric Company or Kentucky Utilities Company is provided solely by LG&E
Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities
Company, and shall be deemed not included in the Form 10-Q of Louisville
Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1 Financial Statements
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income 1
Consolidated Balance Sheets 3
Consolidated Statements of Cash Flows 5
Consolidated Statements of Retained Earnings 7
Consolidated Statements of Comprehensive Income 8
Louisville Gas and Electric Company
Statements of Income 9
Balance Sheets 10
Statements of Cash Flows 12
Statements of Retained Earnings 13
Statements of Comprehensive Income 14
Kentucky Utilities Company
Statements of Income 15
Balance Sheets 16
Statements of Cash Flows 18
Statements of Retained Earnings 19
Notes to Financial Statements 20
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 30
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 44
PART II
Item 1 Legal Proceedings 45
Item 4 Submission of Matters to a Vote of Security Holders 45
Item 6 Exhibits and Reports on Form 8-K 47
Signatures 49
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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 Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
REVENUES:
Electric utility $ 406,258 $ 358,471 $ 767,931 $ 682,266
Gas utility 23,652 26,540 99,431 119,299
International and
non-utility 193,747 87,177 355,560 151,187
Total revenues 623,657 472,188 1,222,922 952,752
OPERATING EXPENSES:
Fuel and power purchased 250,994 136,175 456,082 251,940
Gas supply expenses 56,920 63,691 151,984 167,534
Utility operation and
maintenance 115,192 110,081 218,897 213,064
International and non-
utility operation
and maintenance 47,434 22,985 92,398 39,904
Depreciation and
amortization 53,479 51,286 108,215 103,652
Merger costs to
achieve - 65,318 - 65,318
Total operating expenses 524,019 449,536 1,027,576 841,412
Equity in earnings
of unconsolidated
ventures (Notes 5 and 6) 12,051 50,882 33,707 56,863
OPERATING INCOME 111,689 73,534 229,053 168,203
Other income and (deductions) 2,611 (4,971) 8,999 (2,268)
Interest charges and
preferred dividends 32,243 26,061 62,763 52,294
Minority interest 3,842 3,302 5,413 4,645
Income before income taxes 78,215 39,200 169,876 108,996
Income taxes 28,250 26,197 63,132 49,775
Income from continuing
operations $ 49,965 $ 13,003 $ 106,744 $ 59,221
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Unaudited - Thousands of $ Except Per Share Data)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Income from continuing
operations $ 49,965 $ 13,003 $ 106,744 $ 59,221
Loss from discontinued
operations, net of income tax
expense benefit of $12,924
and $15,008 (Notes 2 and 3) - (19,802) - (22,852)
Income (loss) on disposal of dis-
continued operations, net of
income tax benefit (expense)
of $125,000, $(328) and
$125,000 (Notes 2 and 3) - (225,000) 788 (225,000)
Income (loss) before cum-
ulative effect of change
in accounting principle 49,965 (231,799) 107,532 (188,631)
Cumulative effect of change
in accounting for start-up
costs, net of income tax
benefit of $5,061 - - - (7,162)
NET INCOME (LOSS) $ 49,965 $(231,799) $ 107,532 $(195,793)
Average common shares
outstanding 129,677 129,683 129,677 129,683
Earnings (loss) per share -
basic and diluted:
Continuing operations $ .39 $ .10 $ .82 $ .46
Discontinued operations .00 (.16) .00 (.18)
Income (loss) on dis-
posal of discontinued
operations .00 (1.73) .01 (1.73)
Cumulative effect of
accounting change .00 .00 .00 (.06)
Total $ .39 $ (1.79) $ .83 $ (1.51)
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
1999 1998
CURRENT ASSETS:
Cash and temporary cash investments $ 139,417 $ 105,726
Marketable securities 13,620 20,862
Accounts receivable - less reserve 315,366 293,219
Materials and supplies - primarily at average cost:
Fuel (predominantly coal) 96,839 78,855
Gas stored underground 19,223 39,249
Other 69,177 72,457
Net assets of discontinued opera-
tions (Notes 2 and 3) - 3,219
Prepayments and other 48,885 38,287
Total current assets 702,527 651,874
UTILITY PLANT:
At original cost 5,676,590 5,581,667
Less: reserve for depreciation 2,438,160 2,352,306
Net utility plant 3,238,430 3,229,361
OTHER PROPERTY AND INVESTMENTS - LESS RESERVES:
Investment in unconsolidated
ventures (Notes 5 and 6) 229,173 167,877
Non-utility property and plant, net 466,127 447,372
Other 164,821 117,321
Total other property and investments 860,121 732,570
DEFERRED DEBITS AND OTHER ASSETS 210,827 214,152
Total assets $5,011,905 $4,827,957
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets (cont.)
(Thousands of $)
CAPITAL AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
1999 1998
CURRENT LIABILITIES:
Long-term debt due within one year $ 61,500 $ -
Notes payable 311,034 365,135
Accounts payable 218,415 243,968
Net liabilities of discontinued oper-
ations (Notes 2 and 3) 17,197 -
Other 312,039 242,479
Total current liabilities 920,185 851,582
Long-term debt 1,599,348 1,510,775
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 567,691 570,698
Investment tax credit, in
process of amortization 89,860 93,844
Regulatory liability 104,875 109,411
Other 210,761 206,064
Total deferred credits and other liabilities 973,187 980,017
Minority interests 111,031 107,815
Cumulative preferred stock 135,328 136,530
COMMON EQUITY:
Common stock, without par value -
129,677,030 shares outstanding 778,273 778,273
Other 494 (3,314)
Retained earnings 494,059 466,279
Total common equity 1,272,826 1,241,238
Total liabilities and capital $5,011,905 $4,827,957
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 107,532 $ (195,793)
Items not requiring cash currently:
Depreciation and amortization 108,215 103,652
Deferred income taxes - net (4,752) (5,614)
Loss from discontinued operations
(Notes 2 and 3) - 22,852
Loss (gain) on disposal of discon-
tinued operations (Notes 2 and 3) (788) 225,000
Cumulative effect of change
in accounting principle - 7,162
Other (24,170) (24,687)
Change in net current assets 44,859 85,425
Other 23,977 (28,372)
Net cash flows from operating activities 254,873 189,625
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (652) (4,451)
Proceeds from sales of securities 7,871 1,820
Construction expenditures (199,770) (93,620)
Investments in unconsolidated
ventures (Note 5) (74,498) (1,294)
Proceeds from sale of investment
in affiliate (Note 6) 33,821 16,000
Net cash flows from investing activities (233,228) (81,545)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes 150,000 150,000
Retirement of bonds - (20,021)
Short-term borrowings 756,132 2,074,643
Repayment of short-term borrowings (813,132)(2,262,624)
Redemption of preferred stock (1,202) (1,823)
Payment of common dividends (79,752) (62,275)
Net cash flows from financing activities 12,046 (122,100)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 33,691 (14,020)
BEGINNING CASH AND TEMPORARY
CASH INVESTMENTS 105,726 111,512
ENDING CASH AND TEMPORARY
CASH INVESTMENTS $ 139,417 $ 97,492
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
1999 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes $ 9,375 $ 35,534
Interest on borrowed money 53,857 45,331
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Retained Earnings
(Unaudited - Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Balance at beginning
of period $ 483,970 $ 721,780 $ 466,279 $ 722,584
Net income (loss) 49,965 (231,799) 107,532 (195,793)
Cash dividends declared on
common stock ($.30750, $.34123,
$.61500 and $.62509 per share) 39,876 44,252 79,752 81,062
Balance at end of period $ 494,059 $ 445,729 $ 494,059 $ 445,729
The accompanying notes are an integral part of these financial statements.
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LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Net income (loss) $49,965 $(231,799) $107,532 $(195,793)
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (155) 22 37 8
Reclassification adjustment for
realized gains and losses on
available-for-sale securities
included in net income (163) (77) (158) 34
Other comprehensive income
(loss), before tax (318) (55) (121) 42
Income tax (expense) benefit related
to items of other comprehensive
income 110 22 46 (15)
Comprehensive income (loss) $49,757 $(231,832) $107,457 $(195,766)
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
OPERATING REVENUES:
Electric $190,445 $174,849 $341,286 $315,435
Gas 23,652 26,540 99,431 119,298
Total operating revenues 214,097 201,389 440,717 434,733
OPERATING EXPENSES:
Fuel for electric generation 39,380 41,242 71,838 77,283
Power purchased 30,858 15,227 53,884 24,826
Gas supply expenses 13,395 16,282 63,887 80,359
Other operation expenses 39,457 40,506 79,649 80,874
Maintenance 20,227 13,054 34,930 23,319
Depreciation and amortization 24,143 23,294 48,285 46,589
Federal and state
income taxes 12,079 13,664 21,634 26,082
Property and other taxes 3,962 4,491 8,998 9,446
Total operating expenses 183,501 167,760 383,105 368,778
NET OPERATING INCOME 30,596 33,629 57,612 65,955
Merger costs to
achieve - 34,134 - 34,134
Other income 234 9,998 1,312 10,309
Interest charges 8,790 9,472 17,968 18,710
NET INCOME 22,040 21 40,956 23,420
Preferred stock dividends 1,086 1,143 2,176 2,266
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 20,954 $ (1,122) $ 38,780 $ 21,154
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
1999 1998
UTILITY PLANT:
At original cost $2,952,536 $2,896,139
Less: reserve for depreciation 1,188,585 1,144,123
Net utility plant 1,763,951 1,752,016
OTHER PROPERTY AND INVESTMENTS -
less reserve 1,239 1,154
CURRENT ASSETS:
Cash and temporary cash investments 36,150 31,730
Marketable securities 10,394 17,851
Accounts receivable - less reserve 158,278 142,580
Materials and supplies - at average cost:
Fuel (predominantly coal) 18,513 23,993
Gas stored underground 13,203 33,485
Other 34,018 33,103
Prepayments and other 5,145 2,285
Total current assets 275,701 285,027
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,763 5,919
Regulatory assets 35,292 37,643
Other 17,665 22,878
Total deferred debits and other assets 58,720 66,440
Total assets $2,099,611 $2,104,637
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Retained earnings 242,242 247,462
Other (842) (786)
Total common equity 666,570 671,846
Cumulative preferred stock 95,328 95,328
Long-term debt 626,800 626,800
Total capitalization 1,388,698 1,393,974
CURRENT LIABILITIES:
Accounts payable 123,201 133,673
Provision for rate refunds 11,169 13,261
Dividends declared 23,086 23,168
Accrued taxes 45,749 31,929
Accrued interest 8,013 8,038
Other 17,772 15,242
Total current liabilities 228,990 225,311
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 252,256 254,589
Investment tax credit, in
process of amortization 69,397 71,542
Accumulated provision for pensions
and related benefits 60,177 59,529
Regulatory liability 61,684 63,529
Other 38,409 36,163
Total deferred credits and other liabilities 481,923 485,352
Total capital and liabilities $2,099,611 $2,104,637
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 40,956 $ 23,420
Items not requiring cash currently:
Depreciation and amortization 48,285 46,589
Deferred income taxes - net (3,982) 2,460
Investment tax credit - net (2,145) (2,156)
Other 3,585 2,008
Changes in current assets and liabilities:
Accounts receivable (15,698) (4,704)
Materials and supplies 24,847 19,205
Provision for rate refunds (2,092) (2,544)
Accounts payable (10,472) 6,850
Accrued taxes 13,820 (861)
Prepayments and other (355) 3,759
Other 6,319 17,647
Net cash flows from operating activities 103,068 111,673
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (495) (3,550)
Proceeds from sales of securities 7,861 933
Construction expenditures (59,757) (48,031)
Net cash flows from investing activities (52,391) (50,648)
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of first mortgage bonds - (20,000)
Payment of dividends (46,257) (42,075)
Net cash flows from financing activities (46,257) (62,075)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 4,420 (1,050)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 31,730 50,472
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 36,150 $ 49,422
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 16,065 $ 23,121
Interest on borrowed money 16,657 17,357
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Balance at beginning
of period $243,288 $261,386 $247,462 $258,910
Net income 22,040 21 40,956 23,420
Subtotal 265,328 261,407 288,418 282,330
Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative
preferred 450 507 904 994
$5.875 cumulative preferred 367 367 734 734
Common 22,000 21,200 44,000 41,000
Subtotal 23,086 22,343 46,176 43,266
Balance at end of period $242,242 $239,064 $242,242 $239,064
The accompanying notes are an integral part of these financial statements.
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Louisville Gas and Electric Company
Statements of Comprehensive Income
(Unaudited - Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Net income (loss) available
for common stock $20,954 $(1,122) $38,780 $21,154
Unrealized holding gains (losses)
on available-for-sale securities
arising during the period (178) 33 (94) 6
Reclassification adjustment for
realized gains and losses on
available-for-sale securities
included in net income - (66) - -
Other comprehensive income
(loss), before tax (178) (33) (94) 6
Income tax (expense) benefit related
to items of other comprehensive
income 72 13 38 (3)
Comprehensive income (loss) $20,848 $(1,142) $38,724 $21,157
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Income
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
OPERATING REVENUES $225,794 $193,079 $443,143 $376,298
OPERATING EXPENSES:
Fuel for electric generation 49,412 54,690 107,567 103,037
Power purchased 51,606 24,602 90,923 42,591
Other operation expenses 31,812 31,458 58,955 61,431
Maintenance 15,944 16,615 28,464 29,948
Depreciation 22,158 21,617 44,149 43,103
Federal and state
income taxes 16,077 11,731 33,221 26,699
Property and other taxes 3,788 4,222 7,901 8,310
Total operating expenses 190,797 164,935 371,180 315,119
NET OPERATING INCOME 34,997 28,144 71,963 61,179
Merger costs to
achieve - 21,830 - 21,830
Other income and (deductions) 1,993 2,193 4,162 3,907
Interest charges 9,233 9,626 18,740 19,326
NET INCOME (LOSS) 27,757 (1,119) 57,385 23,930
Preferred stock dividends 564 564 1,128 1,128
NET INCOME (LOSS) AVAILABLE
FOR COMMON STOCK $ 27,193 $ (1,683) $ 56,257 $ 22,802
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets
(Thousands of $)
ASSETS
(Unaudited)
June 30, Dec. 31,
1999 1998
UTILITY PLANT:
At original cost $2,724,054 $2,685,528
Less: reserve for depreciation 1,249,575 1,208,183
Net utility plant 1,474,479 1,477,345
OTHER PROPERTY AND INVESTMENTS -
less reserve 14,641 14,238
CURRENT ASSETS:
Cash and temporary cash investments 58,980 59,071
Accounts receivable - less reserve 126,797 106,003
Materials and supplies - at average cost:
Fuel (predominantly coal) 33,731 23,927
Other 25,576 24,877
Prepayments 5,545 2,427
Total current assets 250,629 216,305
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 5,027 5,227
Regulatory assets 25,716 28,228
Other 22,887 19,859
Total deferred debits and other assets 53,630 53,314
Total assets $1,793,379 $1,761,202
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Balance Sheets (cont.)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, Dec. 31,
1999 1998
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Retained earnings 319,424 299,168
Other (595) (595)
Total common equity 626,969 606,713
Cumulative preferred stock 40,000 40,000
Long-term debt 484,830 546,330
Total capitalization 1,151,799 1,193,043
CURRENT LIABILITIES:
Long-term debt due within one year 61,500 -
Accounts payable 102,127 100,012
Provision for rate refunds 21,500 21,500
Dividends declared 18,188 18,188
Accrued taxes 25,698 16,733
Accrued interest 7,625 8,110
Other 33,394 31,226
Total current liabilities 270,032 195,769
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 244,970 244,493
Investment tax credit, in
process of amortization 20,463 22,302
Accumulated provision for pensions
and related benefits 54,630 50,044
Regulatory liability 43,191 45,882
Other 8,294 9,669
Total deferred credits and other liabilities 371,548 372,390
Total capital and liabilities $1,793,379 $1,761,202
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Cash Flows
(Unaudited - Thousands of $)
Six Months
Ended
June 30,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,385 $ 23,930
Items not requiring cash currently:
Depreciation and amortization 44,149 43,103
Deferred income taxes - net (2,214) (188)
Investment tax credit - net (1,839) (1,922)
Changes in current assets and liabilities:
Accounts receivable (20,794) (18,474)
Materials and supplies (10,503) 2,025
Accounts payable 2,115 33,275
Accrued taxes 8,965 11,344
Prepayments and other (3,603) 1,829
Other 7,658 (4,010)
Net cash flows from operating activities 81,319 90,912
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (44,282) (32,932)
Net cash flows from investing activities (44,282) (32,932)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings - 381,500
Repayments of short-term borrowings - (415,100)
Payment of dividends (37,128) (23,819)
Net cash flows from financing activities (37,128) (57,419)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS (91) 561
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 59,071 5,453
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 58,980 $ 6,014
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 30,273 $ 17,033
Interest on borrowed money 17,632 17,925
For the purposes of these statements, all temporary cash investments
purchased with a maturity of three months or less are considered cash
equivalents.
The accompanying notes are an integral part of these financial statements.
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Kentucky Utilities Company
Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Balance at beginning
of period $310,231 $312,216 $299,167 $304,750
Net income (loss) 27,757 (1,119) 57,385 23,930
Subtotal 337,988 311,097 356,552 328,680
Cash dividends declared on stock:
4 75% preferred 237 237 475 475
6.53% preferred 327 327 653 653
Common 18,000 23,071 36,000 40,090
Subtotal 18,564 23,635 37,128 41,218
Balance at end of period $319,424 $287,462 $319,424 $287,462
The accompanying notes are an integral part of these financial statements.
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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
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<PAGE>
power sales from physical assets it owns or controls, including LG&E,
KU and Western Kentucky Energy (WKE).
At the time the Company decided to discontinue its merchant energy
trading and sales business, it also decided to sell its natural gas
gathering and processing business. Subsequently, effective June 30,
1999, the Company decided to retain this business. The accompanying
financial statements reflect the reclassification of the natural gas
gathering and processing business as continuing operations for all
periods presented. See Note 3 below.
As a result of the Company's decision to discontinue its merchant
energy trading and sales activity, and the initial decision to sell the
associated gas gathering and processing business, the Company recorded
an after-tax loss on disposal of discontinued operations of $225
million in the second quarter of 1998. The loss on disposal of
discontinued operations resulted primarily from several fixed-price
energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power
Corporation (OPC). Other components of the write-off include costs
relating to certain peaking options, goodwill associated with the
Company's 1995 purchase of merchant energy trading and sales operations
and exit costs, including labor and related benefits, severance and
retention payments, and other general and administrative expenses.
Although the Company used what it believes to be appropriate estimates
for future energy prices, among other factors, to calculate the net
realizable value of discontinued operations, it also recognizes that
there are inherent limitations in models to accurately predict future
events. As a result, there is no guarantee that higher-than-
anticipated future commodity prices or load demands, lower-than-
estimated asset sales prices or other factors could not result in
additional losses. The Company has been successful in settling
portions of its discontinued operations, but significant assets,
operations and obligations remain. As of July 28, 1999, the Company
estimates that a $1 change in electricity prices and a 10 cent change
in natural gas prices across all geographic areas and time periods
could change the value of the Company's remaining energy portfolio by
approximately $8.8 million. In addition to price risk, the value of
the Company's remaining energy portfolio is subject to operational and
event risks including, among others, increases in load demand,
regulatory changes, and forced outages at units providing supply for
the Company. As of July 28, 1999, the Company estimates that a 1%
change in the forecasted load demand could change the value of the
Company's remaining energy portfolio by $11.7 million.
Operating results for discontinued operations follow. All amounts
exclude the Company's natural gas gathering and processing business.
The Company charged its loss from discontinued operations for the three-
and six-month periods ended June 30, 1999, to accrued loss on disposal
of discontinued operations.
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Revenues $156,345 $684,918 $289,782 $1,595,792
Loss before taxes (21,786) (32,726) (26,723) (37,860)
Loss from discontinued
operations, net of
income taxes (13,070) (19,802) (15,991) (22,852)
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<PAGE>
Net liabilities of discontinued operations at June 30, 1999, follow.
All amounts exclude the Company's natural gas gathering and processing
business.
Cash and temporary cash
investments $ 3,301
Accounts receivable 117,709
Price risk management assets 78,237
Accounts payable (132,937)
Price risk management
liabilities (25,925)
Goodwill and other assets
and liabilities, net 41,320
Net assets before accrued
loss on disposal of dis-
continued operations 81,705
Accrued loss on disposal
of discontinued operations,
net of income tax benefit
of $57,233 (98,902)
Net liabilities of discon-
tinued operations $(17,197)
Total charges against the accrued loss on disposal of discontinued
operations through June 30, 1999, include $105.7 million for
commitments prior to disposal, $51.2 million for transaction
settlements, $11.1 million for goodwill, and $23.2 million for other
exit costs. The reserve as of June 30, 1999, represents management's
best estimate of the loss from remaining discontinued operations until
disposal and the costs of disposing of these operations.
As of June 30, 1999, the Company's discontinued operations were under
various contracts to buy and sell power and gas with net notional
amounts of 28.0 million MWh's of power and 24.8 million MMBTU's of
natural gas with a volumetric weighted-average period of approximately
38 and 53 months, respectively. These notional amounts are based on
estimated loads since various commitments do not include specified firm
volumes. The Company is also under contract to buy or sell immaterial
amounts of coal and SO2 allowances in support of its power contracts.
Notional amounts reflect the nominal volume of transactions included in
the Company's price risk management commitments, but do not reflect
actual amounts of cash, financial instruments, or quantities of the
underlying commodity which may ultimately be exchanged between the
parties.
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<PAGE>
The fair values of discontinued operations' price risk management
assets and liabilities as of June 30, 1999, follow (in thousands of $):
Liabil-
Commodity Assets ities
Electricity $ 76,247 $ 25,522
Natural gas 1,990 -
Totals 78,237 25,522
Reserves - 403
Net values $ 78,237 $ 25,925
The average fair values of discontinued operations' price risk
management assets and liabilities for the three- and six-month periods
ended June 30, 1999, follow (in thousands of $):
Three Months Six Months
Liabil- Liabil-
Commodity Assets ities Assets ities
Electricity $ 80,036 $ 26,265 $ 80,601 $ 27,177
Natural gas 2,180 - 6,690 -
Totals $ 82,216 $ 26,265 $ 87,291 $ 27,177
The above tables above do not include the fair value of various
transactions not previously recorded using mark-to-market accounting
since these transactions commit the Company to the sale or purchase of
electricity or natural gas without specified firm volumes.
The fair values above are based on quotes from exchanges and over-the-
counter markets, price volatility factors, the use of established
pricing models and the time value of money. They also reflect
management estimates of counterparty credit risk, location
differentials and the potential impact of liquidating the Company's
position in an orderly manner over a reasonable period of time under
present market conditions.
If the Company is unable to dispose of its remaining commitments, it
will continue to meet its obligations through the terms of the
contracts. The net fair value of these commitments as of June 30,
1999, are currently estimated to be approximately $56.7 million in
1999, $14.3 million to $38.5 million each year in 2000 through 2004,
and $6.3 million for later years.
The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor
compliance with those policies. As of June 30, 1999, over 88% of the
Company's price risk management commitments were with counterparties
rated BBB equivalent or better. As of June 30, 1999, seven
counterparties represented 79% of the Company's price risk management
commitments.
3. Effective June 30, 1999, the Company reclassified its natural gas
gathering and processing business to continuing operations from
discontinued operations, as required by accounting standards. The
Company did not dispose of this business during the one-year period as
required by accounting standards because of management's expectation of
more favorable future energy prices and the related impact on this
business. The Company has reflected the operating results and net
assets of the natural gas gather
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<PAGE>
ing and processing business as continuing operations in the
accompanying financial statements for all periods presented.
Operating results for the natural gas gathering and processing business
follow.
Year Ended December 31,
1998 1997 1996
Revenues $109,833 $107,691 $85,259
Income (loss) before taxes (2,593) 2,829 4,888
Net income (loss) (1,599) 1,323 2,873
Three Months Six Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
Revenues $42,135 $31,051 $75,437 $60,891
Income (loss) before taxes 266 (289) (850) (646)
Net income (loss) 40 (291) (748) (747)
Net assets of the natural gas gathering and processing business follow.
June 30, Dec. 31, Dec. 31,
1999 1998 1997
Cash and temporary cash
investments $ 141 $ - $ 509
Accounts receivable 16,622 7,425 13,948
Non-utility property and
plant, net 158,783 161,473 171,114
Accounts payable (13,211) (6,148) (13,449)
Goodwill and other assets
and liabilities, net (20,617) (22,318) (20,043)
Net assets $141,718 $140,432 $152,079
The Company recorded an after-tax loss on disposal of discontinued
operations of $225 million in the second quarter of 1998. No loss on
disposal of the net assets of the natural gas gathering and processing
business was included because the Company assumed it would sell these
assets for an amount equal to or greater than book value. It also
included an after-tax reserve of approximately $1.6 million for
estimated losses from operations of the natural gas gathering and
processing business through the date of disposal. Since this amount
equaled the estimated losses from operations included in the original
accrued loss on disposal of discontinued operations, no reversal of the
accrued loss is included in income for the three- and six-month periods
ended June 30, 1999. The Company has recorded no impairment losses
related to the net assets of its natural gas gathering and processing
business.
4. On July 8, 1999, the Company purchased 100% of the outstanding common
stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC)
for initial consideration of $45.6 million and retirement of
approximately $37.9 million in CRC debt. CRC, based in Houston, Texas,
is a provider of specialized equipment and services used in the
construction and rehabilitation of gas and oil transmission pipelines.
The purchase agreement provides for future annual earn-out payments to
the previous owners based on CRC's meeting certain financial targets
over the next three years. The agreement capped the total of these
payments at $31.0 million. The Company accounted for the
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<PAGE>
acquisition using the purchase method and management expects to record
goodwill of approximately $47 million from the initial transaction with
additional goodwill recorded contingent upon future earn-out payments.
Goodwill will be amortized over a period of twenty years.
The purchase consideration, including the potential earn-out payments,
will be paid 55% in cash and 45% in LG&E Energy common stock. LG&E
Energy will repurchase common stock from time to time in the open
market or through privately negotiated transactions in amounts equal to
the stock portions of the initial and subsequent earn-out payments.
During the third quarter 1999, the Company purchased approximately
935,000 shares in this regard and completed the initial purchase
installment.
5. On March 30, 1999, the Company acquired an indirect 19.6% ownership
interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution
company that serves 1.1 million customers in the northern portion of
the province of Buenos Aires, Argentina. The purchase price totaled
$73.5 million, including transaction costs, which has been reflected in
investments in unconsolidated ventures in the accompanying balance
sheet. The Company accounted for the acquisition using the purchase
method, and it records its share of earnings using the equity method.
The purchase price exceeded the underlying equity in BAN by $13.0
million. The Company allocated this difference to the assets and
liabilities acquired based on their estimated fair values.
6. On March 15, 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which the Company owns a 50% interest, sold
substantially all the assets and major contracts of its 79 MW gas-fired
cogeneration facility in Rensselaer, New York, with net proceeds to the
Company of approximately $34 million. The sale resulted in an after-
tax gain to the Company of approximately $8.9 million.
7. The Company adopted Emerging Issues Task Force Issue No. 98-10,
Accounting for Energy Trading and Risk Management Activities (EITF No.
98-10) in the first quarter of 1999. The task force concluded that
energy trading contracts should be recorded using mark-to-market
valuation on the balance sheet, with the gains and losses shown net in
the income statement. EITF No. 98-10 more broadly defines energy
trading to include certain financial activities related to physical
assets which were not previously marked to market by established
industry practice. Initial adoption of EITF No. 98-10 did not have a
material impact on the Company's consolidated results of operations or
financial position. For the quarter ended June 30, 1999, the Company
recorded approximately $6.9 million in consolidated pre-tax income as a
result of valuing the Company's electric energy trading contracts using
the mark-to-market method.
8. On April 5, 1999, LG&E and KU filed a joint agreement among the
companies and the Kentucky Attorney General to amend the companies'
previously-filed performance-based ratemaking (PBR) plan. The
amendment requested Kentucky Public Service Commission (the Commission)
approval of a five-year rate reduction plan, which would reduce
electric rates by $20 million in the first year (beginning July 1,
1999), and by $8 million annually for each of the next four years
(through June 30, 2004), for a total five-year savings to customers of
$52 million. The reductions will be distributed between LG&E and KU
customers based on the same methodology the Commission approved in its
previous merger order for allocating the merger savings to the
utilities' customers (53 percent to KU customers; 47 percent to LG&E
customers). The joint agreement includes adoption of the PBR plan as
proposed by the companies.
The amended filing also includes the establishment of a $6 million
program over the five-year period to assist low-income customers in
paying their energy bills.
In addition to the rate reductions and energy assistance program, the
amended filing calls for LG&E and KU to extend for an additional year
(through June 30, 2004) both
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<PAGE>
the rate cap and the merger-savings surcredit the utilities established
as part of their earlier merger plan. Under the rate cap, the
companies agreed, in the absence of extraordinary circumstances, not to
increase base electric rates for five years following the merger. They
also agreed to a monthly surcredit to customers' bills reflecting the
50 percent share of the non-fuel merger savings allocated to the
utilities' customers in the first five years following the merger.
As part of the amended PBR filing, LG&E also agreed to refrain from
filing for an increase in natural gas rates over the five-year period
(through June 30, 2004).
On April 13, 1999, the Commission issued initial orders implementing
the amended PBR plan, effective July 2, 1999, and subject to
modification. The Commission has adopted a procedural schedule, which
provides for discovery, hearings and public comment. The Commission
has also consolidated into the continuing PBR proceedings an earlier
March 8, 1999, rate complaint by a group of industrial intervenors, the
Kentucky Industrial Utility Consumers, Inc. (KIUC) in which KIUC has
requested significant reductions in the electric rates of LG&E and KU.
The Commission has scheduled hearings on the Companies' PBR proposals
and the rate complaint to begin on August 31. The Commission is
expected to issue a final ruling by the end of 1999.
9. On May 7, 1999, Capital Corp. issued $150.0 million of medium-term
notes due May 2004, with a stated interest rate on the notes of 6.205%.
After taking into account the forward-starting interest-rate swap
entered into on April 9, 1999, to hedge the entire issuance, the
effective rate amounted to 6.13%. The proceeds were used to repay a
portion of Capital Corp.'s outstanding commercial paper, which had been
used to fund the BAN acquisition and other working capital needs.
On May 24, 1999, KU entered into an interest-rate swap agreement to
hedge a portion of its outstanding first mortgage bonds. The swap has
a notional amount of $53 million and expires in May 2004. KU pays a
variable rate based on the six-month London Interbank Offered Rate plus
1.88% and receives a fixed rate of 7.92%. The agreement provides for a
collar on the variable rate paid by KU with a floor of 4.65% and a cap
of 6.78%. The agreement suspends the collar during periods when the
London Interbank Offered Rate moves outside a specified range.
- 26 -
<PAGE>
10.External and intersegment revenues and income from continuing
operations by business segment for the three months ended June 30,
1999, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $185,519 $ 4,927 $ 20,740
LG&E gas 23,652 - 213
KU electric 220,739 5,055 27,193
Independent Power
Operations 6,197 - 7,202
Western Kentucky
Energy 69,050 - (464)
Argentine Gas
Distribution 45,146 - 4,796
Other Capital Corp. 73,354 - (6,589)
All Other - (9,982) (3,126)
Consolidated $623,657 $ - $ 49,965
External and intersegment revenues and income from continuing
operations by business segment for the six months ended June 30, 1999,
follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $ 333,845 $ 7,441 $ 38,353
LG&E gas 99,431 - 427
KU electric 434,086 9,057 56,257
Independent Power
Operations 13,101 - 21,382
Western Kentucky
Energy 129,028 - (1,488)
Argentine Gas
Distribution 74,943 - 5,153
Other Capital Corp. 138,488 - (5,701)
All Other - (16,498) (7,639)
Consolidated $1,222,922 $ - $106,744
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<PAGE>
External and intersegment revenues and income from continuing
operations by business segment for the three months ended June 30,
1998, follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $170,523 $ 4,326 $ (922)
LG&E gas 26,540 - (199)
KU electric 187,963 5,116 (1,683)
Independent Power
Operations 4,666 - 25,166
Argentine Gas
Distribution 43,241 - 2,513
Other Capital Corp. 39,255 - (1,441)
All Other - (9,442) (10,431)
Consolidated $472,188 $ - $ 13,003
External and intersegment revenues and income from continuing
operations by business segment for the six months ended June 30, 1998,
follow:
Income
(Loss)
Inter- from
External segment Cont.
Revenues Revenues Oper.
LG&E electric $311,108 $ 4,326 $ 20,499
LG&E gas 119,299 - 656
KU electric 371,158 5,140 22,802
Independent Power
Operations 9,893 - 29,150
Argentine Gas
Distribution 70,652 - 2,709
Other Capital Corp. 70,642 - (2,612)
All Other - (9,466) (13,983)
Consolidated $952,752 $ - $ 59,221
The assets of the Company's Argentine Gas Distribution segment
increased from $346.3 million at December 31, 1998, to $425.1 million
at June 30, 1999, due mainly to acquiring a 19.6% ownership interest in
BAN (see Note 5 of Notes to Financial Statements). The assets of the
Other Capital Corp. segment increased from $121.0 million at December
31, 1998, to $383.3 million at June 30, 1999, due mainly to
reclassifying the assets of the natural gas gathering and processing
business from discontinued to continuing operations (see Note 3 of
Notes to Financial Statements) and capitalizing construction costs
related to gas turbine peaking units (see Management's Discussion and
Analysis of Results of Operations and Financial Condition in Item 2).
11.On March 15, 1999, Capital Corp. entered into a letter of intent to
lease or acquire three 150-megawatt (Mw) combustion turbines and is
currently negotiating the terms of a definitive agreement. This 450 Mw
gas fired merchant combustion turbine power generation facility will be
located in Monroe, Georgia, and is expected to be completed
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<PAGE>
by June 1, 2001. The aggregate price, including construction of
related facilities, is estimated to be approximately $185 million.
12.Prior to implementation of the PBR, LG&E and KU employed a fuel
adjustment clause (FAC) mechanism, which under Kentucky law allows the
companies to recover from customers, the actual fuel costs associated
with retail electric sales. In February 1999, LG&E received orders
from the Kentucky Commission requiring a refund to retail electric
customers of approximately $3.9 million resulting from reviews of the
FAC from November 1994 through April 1998, of which $1.9 million was
refunded in April 1999 for the period beginning November 1994 and
ending October 1996. The orders changed the Company's method of
computing fuel costs associated with electric line losses on off-system
sales appropriate for recovery through the FAC. On February 19, 1999
LG&E requested that the Commission grant rehearing on the February
orders, and further requested that the Commission stay the refund
requirement until it could rule on the rehearing request. On February
25, 1999 the Commission granted the request for a stay, and on March
11, 1999 granted in part the request for rehearing. The Commission
also granted rehearing on the KIUC's request for rehearing on the
Commission's determination that it lacks authority to require the
Companies to pay interest on the refund amounts. The Commission
conducted a hearing on the rehearing issues on June 29, 1999. The
Commission is expected to issue a final ruling on rehearing by the end
of 1999. LG&E and KIUC have each filed separate appeals from the
Commission's February 1999 orders with the Franklin, Ky. Circuit Court.
A decision on the appeals by the Court is not expected until the middle
of 2000.
In July 1999, the Commission issued a series of orders requiring KU to
refund approximately $10.1 million resulting from reviews of the FAC
from November 1994 to October 1998. The orders changed KU's method of
computing fuel costs associated with electric line losses on off-system
sales appropriate for recovery through the FAC, and KU's method for
computing system line losses for the purpose of calculating the system
sales component of the FAC charge. At KU's request, on July 23, 1999,
the Commission stayed the refund requirement pending the Commission's
final determination of any rehearing request that KU may file. On
August 9, 1999, KU filed its request for rehearing of the July orders.
13.As of June 30, 1999, Capital Corp. had expended approximately $110.1
million in connection with its October 1998 purchase of two natural gas
combustion turbines. The aggregate construction cost is not expected
to exceed $125 million. On July 23, 1999, the PSC approved LG&E's and
KU's application for the purchase of the turbines from Capital Corp. at
a price equal to the lower of their fair market value or cost. Capital
Corp. completed the installation of the turbines in July 1999. These
units were placed into commercial operation in early August 1999.
14.Reference is made to Part II, Legal Proceedings, below and Part I, Item
3, Legal Proceedings, of the Company's, KU Energy's, LG&E's and KU's
(and Note 18 of the Company's Notes to Financial Statements) Annual
Reports on Form 10-K for the year ended December 31, 1998, and Part II,
Item 1, Legal Proceedings, of the Form 10-Q for the quarter ended March
31, 1999.
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<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
Recent Developments
On July 8, 1999, the Company purchased 100% of the outstanding common stock
of CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial
consideration of $45.6 million and retirement of approximately $37.9
million in CRC debt. CRC, based in Houston, Texas, is a provider of
specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines. For more
information, see Note 4 of Notes to Financial Statements under Item 1.
As of June 30, 1999, Capital Corp. had expended approximately $110.1
million in connection with its October 1998 purchase of two natural gas
combustion turbines. The aggregate construction cost is not expected to
exceed $125 million. On July 23, 1999, the PSC approved LG&E's and KU's
application for the purchase of the turbines from Capital Corp. at a price
equal to the lower of their fair market value or cost. Capital Corp.
completed the installation of the turbines in July 1999. These units were
placed into commercial operation in early August 1999.
On April 13, 1999, the Kentucky Public Service Commission (PSC) issued
initial orders in the performance-based ratemaking proceedings for LG&E and
KU. The PSC orders implement, effective July 2, 1999, and subject to
modification, the companies' pending performance-based ratemaking
proposals, including a five-year, $52 million rate reduction plan jointly
filed by LG&E, KU and the Kentucky Attorney General's Office with the PSC
on April 5, 1999. For more information, see Note 8 to the Notes to
Financial Statements of the Company, LG&E and KU under Item 1.
On March 30, 1999, the Company acquired an indirect 19.6% ownership
interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company
that serves 1.1 million customers in the northern portion of the province
of Buenos Aires, Argentina. For more information, see Note 5 of Notes to
Financial Statements under Item 1 for more information.
On March 15, 1999, Capital Corp. entered into a letter of intent to lease
or acquire three combustion turbines and is currently negotiating the terms
of a definitive agreement. The aggregate price, including construction of
related facilities, is estimated to be approximately $185 million.
On March 15, 1999, the partnership that owns the Rensselaer cogeneration
facility sold substantially all the assets and major contracts of the
facility. For more information, see "Results of Operations" below, Note 6
of Notes to Financial Statements under Item 1 and the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
General
The Company's principal subsidiaries are LG&E, an electric and gas utility,
KU, an electric utility, and Capital Corp., the holding company for all non-
utility investments. LG&E's and KU's results of operations and liquidity
and capital resources are important factors affecting the Company's
consolidated results of operations and capital resources and liquidity.
Some of the matters discussed in the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis may contain forward-
looking statements that are subject to certain risks, uncertainties and
assumptions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to:
general economic conditions; business and competitive conditions in the
energy industry; future prices of power and natural gas; unusual weather;
regulatory decisions, in
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<PAGE>
cluding decisions relating to the Company's performance-based ratemaking
proceedings and decisions resulting from the combination of LG&E Energy and
KU Energy; the Company's ability to resolve Year 2000 issues in a timely
manner and other factors described from time to time in the Company's
reports to the Securities and Exchange Commission, including Exhibit 99.01
to the Form 10-K for the year ended December 31, 1998.
Results of Operations
The results of operations for LG&E, KU and Capital Corp.'s Argentine gas
distribution and WKE operations are affected by seasonal fluctuations in
temperature and other weather-related factors. Because of these and other
factors, the results of one interim period are not necessarily indicative
of results or trends to be expected for the full year.
Three Months Ended June 30, 1999, Compared to
Three Months Ended June 30, 1998
The Company's primary and diluted earnings per share from continuing
operations increased to $.39 in 1999 from $.10 in 1998. Continuing
operations for 1998 included $.41 of after-tax charges for merger-related
costs ($.19 for LG&E, $.17 for KU, and $.05 for Corporate), and an after-
tax gain of $.16 resulting from the Rensselaer project's Master
Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO).
Excluding these items, income from continuing operations increased to $.39
in 1999 from $.35 in 1998. This increase resulted from higher earnings at
KU and Capital Corp., partially offset by lower earnings at LG&E.
LG&E Results:
LG&E's net income increased $22 million for the quarter ended June 30,
1999, compared to the quarter ended June 30, 1998, primarily because of a
$25 million one-time, after-tax charge incurred in 1998 for LG&E's costs to
merge LG&E Energy Corp. with KU Energy. Excluding this charge, LG&E's net
income decreased $2.9 million compared to the second quarter of 1998,
primarily due to increased maintenance expenses at electric generating
plants, partially offset by increased electric sales.
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<PAGE>
A comparison of LG&E's revenues for the quarter ended June 30, 1999, with
the quarter ended June 30, 1998, reflects increases and decreases which
have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $(2,193) $(5,592)
Merger surcredit (1,466) -
Demand side management/revenue
decoupling (698) (820)
Variation in sales volume, etc. 1,305 2,261
Total retail sales (3,052) (4,151)
Sales for resale 18,627 823
Gas transportation - net - 96
Other 21 344
Total $15,596 $(2,888)
Electric sales for resale increased $18.6 million due to increases in
brokered sales activities.
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply may be reflected in retail rates, subject to the approval of the
Public Service Commission of Kentucky. See Notes 8 and 12 for a further
discussion. Fuel for electric generation decreased $1.9 million (5%) for
the quarter because of a decreased volume of generation. Gas supply
expenses decreased $2.9 million (18%) due to a decrease in the volume of
gas delivered to the distribution system ($3.3 million).
Power purchased increased $16 million primarily due to increased purchases
for sales for resale, partially offset by approximately $3.5 million of
income recorded as a result of valuing the Company's electric energy
trading contracts using the mark-to-market method. See Note 7 of Notes to
Financial Statements.
Maintenance expenses increased $7.2 million (55%) in 1999 mainly due to
increases in scheduled outages at the Mill Creek generating station Unit 3
and the Cane Run generating station Unit 6 ($5.1 million), and maintenance
of other steam plant equipment ($2.9 million) partially offset by a
decrease in storm damage repairs ($1 million).
Depreciation and amortization increased $.8 million in 1999 because of
additional utility plant in service.
A $34.1 million one-time charge was recorded in the second quarter of 1998
for costs associated with the merger of LG&E Energy Corp. and KU Energy
(the corresponding tax benefit of $9.1 million is recorded in other income
and (deductions)).
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
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<PAGE>
Interest charges decreased partly because of the retirement of the
Company's 6.75% Series First Mortgage Bonds ($20 million) at maturity on
June 1, 1998.
KU Results:
KU's net income increased $28.9 million for the quarter ended June 30,
1999, as compared to the quarter ended June 30, 1998, primarily because of
a $21.8 million one-time, after-tax charge incurred in 1998 for KU's costs
to merge LG&E Energy Corp. with KU Energy. Excluding this charge, KU's net
income increased $7.2 million as compared to the second quarter of 1998 was
primarily due to increases in off-system sales and sales for resale.
A comparison of KU's revenues for the quarter ended June 30,1999, with the
quarter ended June 30,1998, reflects increases and decreases which have
been segregated by the following principal causes (in thousands of $):
Sales to ultimate consumers:
Fuel clause adjustments $ 1,091
Environmental cost recovery (443)
Merger surcredit (1,496)
Variation in sales volume, etc. 1,213
Total retail sales 365
Sales for resale 32,356
Other (6)
Total $32,715
Operating revenues increased $32.7 million (17%). The increase in sales
for resale (2,125,467 megawatt-hours versus 1,147,199 megawatt-hours) was
primarily due to more aggressive marketing efforts.
Fuel for electric generation comprises a large component of KU's total
operating expenses. KU's electric rates contain a fuel adjustment clause
(FAC), whereby increases or decreases in the cost of fuel are reflected in
retail rates, subject to the approval of the Public Service Commission of
Kentucky, The Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission. See Note 12 for a further discussion. Fuel for
electric generation expenses decreased by $5.3 million (11%) for the
quarter because of decrease in the cost of coal burned ($3.4 million) and
reduced levels of generation ($1.8 million).
Power purchased increased $27 million. The increase was primarily due to a
86% increase in megawatt-hour purchases which was used to support the
aforementioned sales for resale, partially offset by approximately $3.1
million of income recorded as a result of valuing the Company's electric
energy trading contracts using the mark-to-market method. See Note 7 of
Notes to Financial Statements.
A $21.8 million one-time charge was recorded in the second quarter of 1998
for the merger of LG&E Energy Corp. and KU Energy (the corresponding tax
benefit of $.1 million is recorded in other income and (deductions)).
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
Capital Corp. Results:
Capital Corp., the holding company for all non-utility investments,
conducts its operations through three principal segments: Independent
Power Operations, WKE and Argentine
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<PAGE>
Gas Distribution. Involvement in these and other non-utility businesses
represents the Company's commitment to understand, respond to, and
capitalize on the opportunities presented by an emerging competitive energy
services industry. Independent Power Operations develops, operates,
maintains and owns interests in domestic and international power generation
facilities that sell electric and steam energy to utility and industrial
customers, and owns equity interests in combustion turbines which are
leased to others. WKE leases and operates the generating facilities of Big
Rivers. Argentine Gas Distribution owns interests in three natural gas
distribution companies in Argentina. The Company engages in other energy-
related businesses which are not individual distinct segments of the
business. These include CRC-Evans, based in Houston, Texas, a provider of
specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines. Capital Corp. is
also engaged in commercial and retail initiatives designed to assess the
energy and utility needs of large commercial and industrial entities, to
provide maintenance and repair services for customers' major household
appliances and to provide third party metering and billing services.
Independent Power Operations
Independent Power Operations' revenues increased from $4.7 million in 1998
to $6.2 million in 1999 due to an increase in fees related to development
power projects, partially offset by lower income resulting from selling the
Rensselaer joint venture in March 1999.
Independent Power Operations' depreciation and amortization decreased from
$1.5 million in 1998 to $.3 million in 1999 due to asset write-offs in June
1998 related to the Rensselaer project's Master Restructuring Agreement
(MRA) with Niagara Mohawk Power Corporation (NIMO).
Independent Power Operations' equity in earnings of unconsolidated ventures
decreased from $50.0 million in 1998 to $8.6 million in 1999. The decrease
resulted mainly from recognizing the June 1998 gain related to the
Rensselaer project's NIMO MRA.
Western Kentucky Energy
Western Kentucky Energy (WKE) began operations July 15, 1998, after closing
its lease transaction with Big Rivers. During the quarter, WKE's revenues
totaled $69.1 million and cost of revenues, primarily composed of fuel and
purchased power expenses, amounted to $41.3 million. Operation and
maintenance expenses of $27.3 million include $7.0 million of rent expense
associated with the lease of Big Rivers' operating facilities. WKE
incurred interest expense of approximately $1.5 million associated with
borrowings to fund the initial purchase of certain materials and supplies
from Big Rivers and to prepay the first two years' lease payments of $55.9
million.
Argentine Gas Distribution
The Argentine Gas Distribution companies' revenues increased 4% or $1.9
million in 1999 to $45.1 million due to higher consumption per customer and
an increase in the customer base. Operation and maintenance expenses
increased by 2.7% or $.2 million over the same period due to higher
consumption.
The Argentine Gas Distribution companies' equity in earnings of
unconsolidated ventures increased from $.9 million in 1998 to $3.4 million
in 1999 due to acquiring a 19.6% interest in Gas Natural BAN, S.A. (BAN) in
March 1999. See Recent Developments and Note 5 of Notes to Financial
Statements in Item 1.
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<PAGE>
Other
As a result of the reclassification of the gas gathering and processing
business from discontinued operations to continuing operations effective
June 30, 1999, the Company's activities include certain natural gas
transportation, storage, gathering and processing operations and
facilities, which businesses are conducted through Capital Corp.
Additionally, the Company conducts various commercial and retail
initiatives, primarily energy-related new businesses and services designed
to leverage the its existing assets, operations and market presence, which
commercial and retail initiatives have not had a significant impact on the
Company's financial position or required significant capital investment.
This segment's revenues increased from $39.3 million in 1998 to $73.4
million in 1999, and its cost of revenues increased from $31.2 million in
1998 to $64.8 million in 1999. These increases reflect increases at Retail
Access Services and higher natural gas liquids prices. Retail Access
Services provides consulting, technical, software and operational support
and services to independent retail energy service providers in certain
markets. See Note 3 for a discussion of the Company's decision to retain
its natural gas gathering and processing business.
Interest expense increased by $7.7 million in 1999 mainly due to funding
discontinued operations and corporate expenses, including the cost to fund
the WKE transaction and the Gas BAN acquisition. The Company's
consolidated effective income tax rate decreased from 66.8% in 1998 to
36.1% in 1999 due to non-deductible merger-related expenses recorded in
1998.
Six Months Ended June 30, 1999, Compared to
Six Months Ended June 30, 1998
The Company's primary and diluted earnings per share from continuing
operations increased to $.82 in 1999 from $.46 in 1998. Results for 1998
included $.41 of after-tax charges for merger-related costs ($.19 for LG&E,
$.17 for KU, and $.05 for Corporate), and an after-tax gain of $.16
resulting from the Rensselaer project's Master Restructuring Agreement
(MRA) with Niagara Mohawk Power Corporation (NIMO). Excluding these items,
income from continuing operations increased to $.82 in 1999 from $.71 in
1998. This increase resulted from higher earnings at KU and Capital Corp.
LG&E Results:
LG&E's net income increased $17.5 million for the first six months of 1999,
as compared to the first six months of 1998, primarily because of the
charge incurred in 1998 for LG&E's costs to merge LG&E Energy Corp. with KU
Energy of $25 million. Excluding this charge, LG&E's net income decreased
$7.4 million for the same period. This is primarily due to increased
maintenance expenses at electric generating plants.
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<PAGE>
A comparison of LG&E's revenues for the six months ended June 30, 1999,
with the six months ended June 30, 1998, reflects increases and decreases
which have been segregated by the following principal causes:
Increase or
(Decrease)
(Thousands of $)
Electric Gas
Cause Revenues Revenues
Sales to ultimate consumers:
Fuel and gas supply adjustments $ 790 $(25,612)
Merger surcredit (2,856) -
Demand side management/revenue
decoupling (3,094) (5,398)
Variation in sales volume, etc. 6,400 10,693
Total retail sales 1,240 (20,317)
Sales for resale 24,552 412
Other 59 38
Total $25,851 $(19,867)
Sales for resale increased due to increased brokered sales.
Gas retail sales decreased from 1998 due to a decline in gas prices in the
first quarter of 1999.
Fuel for electric generation decreased $5.4 million (7%) for the six months
because of a decrease in generation ($5.9 million).
Gas supply expenses decreased $16.5 million (21%) due to a decrease in net
gas supply costs ($22.4 million) partially offset by an increase in the
volume of gas delivered to the distribution system ($3.7 million).
Power purchased increased $29.1 million (117%) primarily due to increased
purchases for sales for resale.
Maintenance expenses for the first six months of 1999 increased $11.6
million (50%) primarily due to increases in scheduled outages at the Mill
Creek generating station Unit 3 and the Cane Run generating station Unit 6
($5.4 million), forced outages at Mill Creek Units 1 and 4 ($3.9 million),
and general repairs at the electric generating plants ($2.4 million).
Depreciation and amortization increased $1.7 million in 1999 because of
additional utility plant in service.
A $34.1 million one-time charge was recorded in the second quarter of 1998
for costs associated with the merger of LG&E Energy Corp. and KU Energy
(the corresponding tax benefit of $9.1 million is recorded in Other income
and (deductions)).
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
Interest charges decreased partly because $20 million of the Company's
First Mortgage Bonds, 6.75% Series were retired at maturity on June 1,
1998.
- 36 -
<PAGE>
KU Results:
KU's net income increased $33.5 million for the first six months of 1999,
as compared to the first six months of 1998, primarily because of the
charge incurred in 1998 for KU's costs to merge LG&E Energy Corp. with KU
Energy of $21.7 million. Excluding this charge, KU's net income increased
$11.8 million for the same period. The increase was primarily due to
increases in residential sales, commercial sales and sales for resale.
A comparison of KU's revenues for the six months ended June 30, 1999, with
the six months ended June 30,1998, reflects increases and decreases which
have been segregated by the following principal causes (in thousands of $):
Sales to ultimate consumers:
Fuel clause adjustments $ 241
Environmental cost recovery (1,081)
Merger surcredit (3,165)
Variation in sales volume, etc. 10,490
Total retail sales 6,485
Sales for resale 59,627
Other 733
Total $66,845
Retail sales increased due to a 2% increase in sales volumes year to date.
The increase in sales for resale (4,020,756 megawatt-hours versus 1,676,671
megawatt-hours) was primarily due to more aggressive marketing efforts and
efficiencies achieved from coordinated dispatch of a larger available pool
of generation following completion of the merger in May 1998 of LG&E Energy
and KU Energy.
Expenses
Fuel for electric generation expenses increased by $4.5 million (4%)
primarily due to an increase in generation ($8.5 million) offset by a
decrease in the lower cost of coal burned ($4.2 million).
Power purchased increased $48.3 million. The increase was primarily due to
a 90% increase in megawatt-hour purchases which was primarily used to
support the aforementioned sales for resale.
A $21.8 million one-time charge was recorded in the second quarter of 1998
for the merger of LG&E Energy Corp. and KU Energy (the corresponding tax
benefit of $.1 million is recorded in other income and (deductions)).
Variations in income tax expense are largely attributable to changes in pre-
tax income as well as non-deductible merger expenses.
Capital Corp. Results:
Independent Power Operations
Independent Power Operations' revenues increased from $9.9 million in 1998
to $13.1 million in 1999 due to recognizing fees related to an independent
power project in Gregory, Texas and recognizing previously deferred income
related to the sale of the Rensselaer project in March 1999. See Note 6 of
Notes to Financial Statements under Item 1.
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<PAGE>
Independent Power Operations' depreciation and amortization decreased from
$4.1 million in 1998 to $2.3 million in 1999 due to writing off certain
capitalized interest and development costs related to the San Miguel
facility in the first quarter of 1998 and to write-offs related to the
Rensselaer project's MRA with NIMO in the second quarter of 1998.
Independent Power Operations' equity in earnings of unconsolidated ventures
decreased from $55.6 million in 1998 to $30.0 million in 1999. The
decrease resulted mainly from recognizing a gain in June 1998 related to
the Rensselaer project's NIMO MRA partially offset by the Rensselaer
project's sale of substantially all of its assets and major contracts in
March 1999.
Independent Power Operations' other income and expense changed from $8.7
million expense in 1998 to $.9 million income in 1999 due primarily to
reacquiring in 1998 half of the Company's interest in the partnership that
owned the Rensselaer project, and to recording related expenses.
Western Kentucky Energy
WKE began operations July 15, 1998, after closing its lease transaction
with Big Rivers. During 1999, revenues totaled $129.0 million and cost of
revenues, primarily composed of fuel and purchased power expenses, amounted
to $77.0 million. Operation and maintenance expenses of $52.1 million
include $14.0 million of rent expense associated with the lease of Big
Rivers' operating facilities. WKE incurred interest expense of
approximately $2.8 million associated with borrowings to fund the initial
purchase of certain materials and supplies from Big Rivers and to prepay
the first two years' lease payments of $55.9 million.
Argentine Gas Distribution
The Argentine Gas Distribution companies' revenues increased 6% or $4.3
million in 1999 to $74.9 million due to higher consumption per customer and
an increase in the customer base. Operation and maintenance expenses
increased by 5.3% or $.8 million over the same period due to higher
consumption.
The Argentine Gas Distribution companies' equity in earnings of
unconsolidated ventures increased from $1.2 million in 1998 to $3.7 million
in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Note 5
of Notes to Financial Statements in Item 1.
Other
This segment's revenues increased from $70.6 million in 1998 to $138.5
million in 1999, and its cost of revenues increased from $55.6 million in
1998 to $113.6 million in 1999. These increases reflect increases at
Retail Access Services and higher natural gas liquids prices.
Capital Corp.'s other income increased $3.2 million in 1999 due mainly to
receiving the initial settlement of a claim related to its independent
power project in California.
Interest expense increased by $12.3 million in 1999 mainly due to funding
discontinued operations and corporate expenses, including the cost to fund
the WKE transaction and the Gas BAN acquisition. The Company's
consolidated effective income tax rate decreased from 45.7% in 1998 to
37.2% in 1999 mainly due to non-deductible merger-related expenses recorded
in 1998.
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<PAGE>
Liquidity and Capital Resources
The Company's need for capital funds is largely related to the construction
of plant and equipment necessary to meet the needs of electric and gas
utility customers and equity investments in connection with independent
power production projects and other energy-related growth or acquisition
opportunities among the non-utility businesses. Capital funds are also
needed for the Company's capital obligations under the Big Rivers lease
arrangements, losses incurred in connection with the discontinuance of the
merchant energy trading and sales business and information system
enhancements. Lines of credit and commercial paper programs are maintained
to fund these temporary capital requirements.
Construction expenditures for the six months ended June 30, 1999, of $199.8
million were financed with internally generated funds and commercial paper.
The Company's combined cash and marketable securities balance increased
$26.4 million during the six months ended June 30, 1999. The increase
reflects cash flows from operations, a net increase in debt, and the
Company's portion of the proceeds received by the Rensselaer project from
the sale of its assets and major contracts, partially offset by
construction expenditures, the investment in BAN, and dividends paid.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of the Company's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The increase in accounts receivable resulted primarily from seasonal
fluctuations in LG&E's and KU's businesses and higher natural gas gathering
and processing revenues. The decrease in accounts payable resulted from
fluctuations in LG&E's and KU's businesses. The increase in fuel
inventories resulted from seasonal fluctuations in KU's and WKE's
businesses, and the decrease in gas stored underground resulted from
seasonal fluctuations in LG&E's business.
The decrease in net assets of discontinued operations resulted from a
seasonal increase in accounts payable and a decrease in price risk
management assets, partially offset by a seasonal increase in accounts
receivable and a reduction in the accrued loss on disposal.
The increase in investments in unconsolidated ventures resulted from the
investment in BAN and equity in earnings, partially offset by distributions
received.
The increase in non-utility property and plant resulted mainly from
additions at Centro. The increase in other property and investments
resulted from expenditures related to the purchase of two natural gas
turbines by Capital Corp.
The Company issues commercial paper that has maturity dates ranging between
one and 270 days. Because of the rollover of these maturity dates, total
short-term borrowings during the first six months of 1999 were $756.1
million and total repayments of short-term borrowings were $813.1 million.
See Note 16 of the Company's Notes to Financial Statements contained in its
Annual Report on Form 10-K for the year ended December 31, 1998.
As of June 30, 1999, Capital Corp. had expended approximately $110.1
million in connection with its October 1998 purchase of two natural gas
combustion turbines. The aggregate construction cost is not expected to
exceed $125 million. On July 23, 1999, the PSC approved LG&E's and KU's
application for the purchase of the turbines from Capital Corp. at a price
equal to the lower of their fair market value or cost. Capital Corp.
completed the installation of the turbines in July 1999. These units were
placed into commercial operation in early August 1999.
On March 15, 1999, Capital Corp. entered into a letter of intent to lease
or acquire three 150-megawatt (Mw) combustion turbines and is currently
negotiating the terms of a defini
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<PAGE>
tive agreement. This 450 Mw gas fired merchant combustion turbine power
generation facility will be located in Monroe, Georgia, and is expected to
be completed by June 1, 2000. The aggregate price, including construction
of related facilities, is estimated to be approximately $185 million.
At June 30, 1999, unused capacity under the Company's lines of credit
totaled $592.0 million after considering commercial paper support and
approximately $56.7 million in letters of credit securing on- and off-
balance sheet commitments. At December 31, 1998, unused capacity under the
lines of credit totaled $536.8 million. The increase in unused capacity
resulted from paying down commercial paper during the six months ended June
30, 1999.
The Company's capitalization ratios at June 30, 1999, and December 31,
1998, follow:
June 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 49.1% 46.5%
Notes payable 9.2 11.2
Preferred stock 4.0 4.2
Common equity 37.7 38.1
Total 100.0% 100.0%
LG&E's capitalization ratios at June 30, 1999, and December 31, 1998,
follow:
June 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 45.1% 45.0%
Preferred stock 6.9 6.8
Common equity 48.0 48.2
Total 100.0% 100.0%
KU's capitalization ratios at June 30, 1999, and December 31, 1998, follow:
June 30, Dec. 31,
1999 1998
Long-term debt (including current portion) 45.0% 45.7%
Preferred stock 3.3 3.4
Common equity 51.7 50.9
Total 100.0% 100.0%
On May 7, 1999, Capital Corp. issued $150.0 million of medium-term notes
due May 2004, with a stated interest rate on the notes of 6.205%. After
taking into account the forward-starting interest-rate swap entered into on
April 9, 1999, to hedge the entire issuance, the effective rate amounted to
6.13%. The proceeds were used to repay a portion of Capital Corp.'s
outstanding commercial paper, which had been used to fund the BAN
acquisition and other working capital needs.
See Recent Developments for common stock repurchase activities in
connection with the CRC acquisition.
For a description of significant contingencies that may affect the Company,
LG&E and KU, reference is made to Part II herein - Item 1, Legal
Proceedings.
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<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 June 1999, the Company and its subsidiaries have completed the
internal inventory, vendor survey and compliance assessment portions
(Phases I and II) of their Year 2000 plan for critical equipment and
systems, including IT, non-IT and embedded components. Remediation
efforts (Phase III) in these areas are complete with minor exceptions,
which exceptions do not effect the reliability of the electric generation,
transmission or distribution or gas distribution systems. Testing has been
conducted in parallel with remediation and is also largely complete for
critical systems. Contingency planning has been initiated for all IT and
non-IT critical systems and will continue throughout 1999.
The Company has communicated with its key suppliers, customers and business
partners regarding their Year 2000 progress, particularly in the IT
software and embedded component areas, to determine the areas in which the
Company's operations are vulnerable to those parties' failure to complete
their remediation efforts. The Company is currently evaluating and, in
certain cases, initiating follow-up actions regarding the responses from
these
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<PAGE>
parties. The Company regularly attends and participates in trade group
efforts focusing on Year 2000 issues in the energy industry.
Costs of Year 2000 Issues
The Company's, LG&E's and KU's system modification costs related to the
Year 2000 issue are being expensed as incurred. Through June 1999, the
Company incurred approximately $24.4 million in capital and operating costs
in connection with the Year 2000 issue. Based upon studies and projections
to date, the Company expects to spend an additional $7.7 million to
complete its Year 2000 efforts.
Through June 1999, LG&E incurred approximately $17.8 million in capital and
operating costs in connection with the Year 2000 issue. Based upon studies
and projections to date, LG&E expects to spend an additional $2.8 million
to complete its Year 2000 efforts.
Through June 1999, KU incurred approximately $4.1 million in capital and
operating costs in connection with the Year 2000 issue. Based upon studies
and projections to date, KU expects to spend an additional $2.8 million to
complete its Year 2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
Risks of Year 2000 Issues
As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate
material business disruptions from its internal systems due to the Year
2000 issue. However, the Company may possibly experience limited
interruptions to some aspects of its activities, whether IT, generation,
transmission or distribution, operational, administrative functions or
otherwise, and the Company is considering such potential occurrences in
planning for the most reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties
with key business or operational importance to the Company. Year 2000
problems affecting key customers, interconnected utilities, fuel suppliers
and transporters, telecommunications providers or financial institutions
could result in lost power or gas sales, reduced power production or
transmission capabilities or internal operational or administrative
difficulties on the part of the Company. The Company is not presently
aware of any such situations; however, severe occurrences of this type
could have material adverse impacts upon the business, operating results or
financial condition of the Company. There can be no assurance that the
Company will be able to identify and correct all aspects of the Year 2000
problem among these third parties that affect it in sufficient time, that
it will develop adequate contingency plans or that the costs of achieving
Year 2000 readiness will not be material.
Contingency planning is under way for material areas of Year 2000 risk.
This effort is addressing certain areas, including the most reasonably
likely worst-case scenarios and delays in completion in the Company's
remediation plans, failure or incomplete remediation results and failure of
key third parties to be Year 2000 compliant. Contingency plans will
include provisions for extra staffing, back-up communications, review of
unit dispatch and load shedding procedures, carrying of additional energy
reserves and manual en-
- 42 -
<PAGE>
ergy accounting procedures. Contingency plan formulation was substantially
completed in June 1999 and implementation and resourcing of such plans is
underway.
Forward Looking Statements
The foregoing discussion regarding the timing, effectiveness,
implementation, and cost of the Company's Year 2000 efforts, contains
forward-looking statements, which are based on management's best estimates
derived using assumptions. These forward-looking statements involve
inherent risks and uncertainties, and actual results could differ
materially from those contemplated by such statements. Factors that might
cause material differences include, but are not limited to, the
availability of key Year 2000 personnel, the Company's ability to locate
and correct all relevant computer codes, the readiness of third parties,
and the Company's ability to respond to unforeseen Year 2000 complications
and other factors described from time to time in the Company's reports to
the Securities and Exchange Commission, including Exhibit 99.01 to the Form
10-K for the year ended December 31, 1998. Such material differences could
result in, among other things, business disruption, operational problems,
financial loss, legal liability and similar risks.
- 43 -
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E Energy is exposed to market risks in both its regulated and non-
utility operations. Both operations are exposed to market risks from
changes in interest rates and commodity prices, while the non-utility
operations are also exposed to changes in foreign exchange rates. To
mitigate changes in cash flows attributable to these exposures, the Company
has entered into various derivative financial instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
Interest Rate Risk
The potential change in interest expense resulting from changes in base
interest rates of the Company's unswapped debt did not change materially
during the six months ended June 30, 1999. The potential changes in the
fair values of the Company's interest-rate swaps resulting from changes in
interest rates and the yield curve also did not change materially during
the six months ended June 30, 1999. See Item 7 of the Company's report on
Form 10-K for the year ended December 31, 1998.
Commodity Price Risk
The Company's exposure to market risks from changes in commodity prices did
not change materially during the six months ended June 30, 1999. However,
as a result of the Commission's approval of the PBR effective July 2, 1999,
LG&E's and KU's fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the
difference will be absorbed by the Company's shareholders. See Item 7 of
the Company's report on Form 10-K for the year ended December 31, 1998.
Foreign Exchange Risk
The Company has foreign exchange exposure to both the Spanish Peseta and
the Argentine Peso. During the second quarter of 1999, the Company's
exposure to the Argentine Peso increased due to the acquisition of Gas BAN.
However, management believes the Company's foreign exchange exposure to a
10% change in the Spanish Peseta and Argentine Peso would not have a
material effect on the financial position or results of operations. See
Item 7 of the Company's report on Form 10-K for the year ended December 31,
1998.
- 44 -
<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 Report on Form 10-Q for the quarter ended
March 31, 1999: Part III, Item 1, Legal Proceedings. Except as described
herein, to date, the proceedings reported in the Company's, LG&E's and KU's
respective combined Form 10-K's and Form 10-Q's have not changed
materially.
Certain Fuel Adjustment Clause Proceedings
In July 1999, the Kentucky Public Service Commission (PSC) issued orders to
KU requiring refunds of approximately $4.2 million and $5.8 million,
respectively, in costs previously recovered from customers under the fuel
adjustment clause mechanism for line losses associated with off-system
sales. KU has filed a motion to stay the refund pending a rehearing on
certain issues. Subject to those rehearings, the refunds are currently
ordered for the third quarter 1999. See Note 12 of Notes to Financial
Statements, above, Item 3, Legal Proceedings, and Notes 5 and 22 to the
Company's and Note 3 of KU's respective Notes to Financial Statements under
Item 8 of the Company's and KU's combined Annual Report on Form 10-K for
the year ended December 31, 1998, for further discussion of this matter.
Environmental Matters
On May 25, 1999, the U.S. Court of Appeals for the D.C. Circuit entered an
order in the appeal concerning the Environmental Protection Agency's (EPA)
September 1998 rulemaking mandating significant reductions in NOx
emissions. The court issued an indefinite stay of the September 1999
deadline for each state to incorporate additional NOx deadlines in their
state implementation plans of the NOx reductions pending further appellate
proceedings which are scheduled to occur during 1999. In a separate
proceeding, the court also remanded certain related ozone standards to the
EPA for further rule-making action. See Environmental Matters, under Item
7 of the Company's, LG&E's and KU's Annual Report for the year ended
December 31, 1998 for a further discussion of these matters.
Oglethorpe Power Contract
Discovery proceedings have continued in the arbitration proceeding brought
by LG&E Energy Marketing Inc. (LEM) against Oglethorpe Power Corporation
(OPC) regarding LEM's November 1996 power sales agreement with OPC. A
hearing on the merits is currently scheduled for November 1999 with a final
decision anticipated in December 1999. See Item 3, Legal Proceedings, and
Item 8, Note 18 to Notes to Financial Statements, in LG&E Energy's Annual
Report on Form 10-K for the year ended December 31, 1998 for more
information on this matter.
Item 4. Submission of Matters to a Vote of Security Holders.
a) LG&E Energy's, LG&E's and KU's Annual Meetings of Shareholders were
held on April 21, 1999.
- 45 -
<PAGE>
b) Not applicable.
c) The matters voted upon and the results of the voting at the Annual
Meetings are set forth below:
1. LG&E Energy:
i) The shareholders voted to elect LG&E Energy's nominees for election to
the Board of Directors as follows:
William L. Rouse, Jr. - 101,006,828 common shares cast in favor of
election and 1,349,817 shares withheld.
Charles L. Shearer - 101,071,033 common shares cast in favor of
election and 1,285,612 shares withheld.
Carol M. Gatton - 101,004,430 common shares cast in favor of election
and 1,352,215 shares withheld.
Lee T. Todd, Jr. - 101,086,957 common shares cast in favor of election
and 1,269,688 shares withheld.
Mira S. Ball - 100,987,324 common shares cast in favor of election and
1,369,445 shares withheld.
Roger W. Hale - 100,750,551 common shares cast in favor of election and
1,606,700 shares withheld.
David B Lewis - 100,971,581 common shares cast in favor of election and
1,385,192 shares withheld.
Anne H. McNamara - 101,026,444 common shares cast in favor of election
and 1,330,201 shares withheld.
Frank V. Ramsey, Jr. - 100,596,229 common shares cast in favor of
election and 1,400,416 shares withheld.
Holders of 514,576 common shares abstained from voting on this matter.
ii) The shareholders voted 101,269,233 common shares in favor of and
622,022 shares against the approval of Arthur Andersen LLP as
independent auditors for 1999. Holders of 996,985 common shares
abstained from voting on this matter.
iii) The shareholders voted 73,254,869 common shares in favor of and
25,774,121 shares against the approval of an amendment to the Omnibus
Long-Term Incentive Plan, including the issuance of additional shares
thereunder. Holders of 3,846,557 common shares abstained from voting
on this matter.
2. LG&E:
i) The shareholders voted to elect LG&E's nominees for election to the
Board of Directors as follows:
William L. Rouse, Jr. - 21,294,223 common shares and 282,068
preferred shares cast in favor of election and 13,169 preferred shares
withheld.
- 46 -
<PAGE>
Charles L. Shearer - 21,294,223 common shares and 282,193 preferred
shares cast in favor of election and 13,044 preferred shares withheld.
Carol M. Gatton - 21,294,223 common shares and 282,174 preferred shares
cast in favor of election and 13,063 preferred shares withheld.
Lee T. Todd, Jr. - 21,294,223 common shares and 282,218 preferred
shares cast in favor of election and 13,019 preferred shares withheld.
Mira S. Ball - 21,294,223 common shares and 282,218 preferred shares
cast in favor of election and 13,019 preferred shares withheld.
Roger W. Hale - 21,294,223 common shares and 281,877 preferred shares
cast in favor of election and 13,360 preferred shares withheld.
David B. Lewis - 21,294,223 common shares and 281,458 preferred shares
cast in favor of election and 13,779 preferred shares withheld.
Anne H. McNamara - 21,294,223 common shares and 282,218 preferred
shares cast in favor of election and 13,019 preferred shares withheld.
Frank V. Ramsey, Jr. - 21,294,223 common shares and 282,218 preferred
shares cast in favor of election and 13,019 preferred shares withheld.
Holders of no common or preferred shares abstained from voting on this
matter.
ii)The shareholders voted 21,294,223 common shares and 285,910 preferred
shares in favor of and 667 preferred shares against the approval of
Arthur Andersen LLP as independent auditors for 1999. Holders of 8,660
preferred shares abstained from voting on this matter.
3. KU:
i) The sole shareholder voted to elect KU's nominees for election to the
Board of Directors as follows:
37,817,878 common shares cast in favor of election and no shares
withheld for each of William L. Rouse, Jr., Charles L. Shearer, Carol
M. Gatton, Lee T. Todd, Jr., Mira S. Ball, Roger W. Hale, David B.
Lewis, Anne H. McNamara and Frank V. Ramsey, Jr., respectively.
ii)The sole shareholder voted 37,817,878 common shares in favor of and no
shares against the approval of Arthur Andersen LLP as independent
auditors for 1999.
Holders of no common shares abstained from voting on these matters.
d) Not applicable.
Item 6(a). Exhibits.
Exhibit
Number Description
27 Financial Data Schedules for LG&E Energy Corp.,
Louisville Gas and Electric Company, and Kentucky
Utilities Company.
- 47 -
<PAGE>
Item 6(b). Reports on Form 8-K.
On April 7, 1999, the Company, LG&E and KU filed reports on Form 8-K
announcing that on April 5, 1999, LG&E and KU had reached an agreement with
the Kentucky Attorney General's Office regarding LG&E's and KU's pending
performance-based ratemaking (PBR) proposal. In a filing with the PSC, the
parties amended the companies' PBR proposal to request approval of an
agreed-upon five-year rate reduction plan. In the same filing, the Company
announced that on March 30, 1999, it had acquired an indirect ownership
interest of approximately 20 percent in Gas Natural BAN, S.A.
On April 20, 1999, the Company, LG&E and KU filed reports on Form 8-K
announcing orders of the PSC dated April 13, 1999, regarding LG&E and KU.
The PSC orders implement, effective July 2, 1999, the companies' pending
performance-based ratemaking proposal, including a five-year rate reduction
plan agreed upon earlier by the companies and the Kentucky Attorney
General's Office.
On July 14, 1999, the Company filed a report on Form 8-K announcing that it
had acquired, effective July 8, 1999, CRC Holdings Corp., the parent
company of CRC-Evans Pipeline International, Inc. and related companies, a
provider of specialized equipment and services used in the construction and
rehabilitation of gas and oil transmission pipelines.
- 48 -
<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: August 13, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Louisville Gas and Electric Company
Registrant
Date: August 13,1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Kentucky Utilities Company
Registrant
Date: August 13, 1999 /s/ Michael D. Robinson
Michael D. Robinson
Vice President and Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
- 49 -
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