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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934 (Amendment No. )
Check the appropriate box:
/X/ Preliminary Information Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
/ / Definitive Information Statement
LOUISVILLE GAS AND ELECTRIC COMPANY
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/X/ No fee required
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[LOGO]
March , 1998
Dear Louisville Gas and Electric Company shareholder:
Please note that the Annual Meeting of Shareholders of Louisville Gas and
Electric Company, will be held Wednesday April 22, 1998, at 10:00 a.m., E.D.T.
at the Hyatt Regency Louisville, 320 W. Jefferson Street, Louisville, Kentucky.
Business matters to be acted upon at the meeting are the election of four
directors, the approval of the independent auditors for 1998, the adoption of
changes to the Company's By-laws to increase the maximum number of directors in
connection with the pending merger transaction between the Company's parent,
LG&E Energy Corp., and KU Energy Corporation, and the transaction of any other
business properly brought before the meeting. We will also report on the
progress of LG&E, and shareholders will have the opportunity to present
questions of general interest.
In order to save the expense and time of soliciting proxies, and because
LG&E Energy is the sole shareholder of approximately 96% of the shares entitled
to vote at this meeting, the Company has decided not to solicit proxies for this
meeting and you are requested not to send us a proxy.
Shareholders are welcome to attend the meeting in person and cast their
votes by ballot on the issues presented at the meeting. If you wish to attend
the meeting, you will be admitted after presenting personal identification and
evidence of ownership.
The directors and officers of LG&E appreciate your continuing interest in
the business of LG&E.
Sincerely,
[SIGNATURE]
Roger W. Hale
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
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[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Louisville Gas and Electric Company
("LG&E" or the "Company"), a Kentucky corporation, will be held at the Hyatt
Regency Louisville, 320 West Jefferson Street, Louisville, Kentucky, on
Wednesday, April 22, 1998, at 10:00 a.m., E.D.T. At the Annual Meeting
shareholders will be asked to consider and vote upon the following matters,
which are more fully described in the accompanying information statement:
1. A proposal to elect four directors, three for three-year terms expiring
in 2001 and one for a two-year term expiring in 2000;
2. A proposal to approve and ratify the appointment of Arthur Andersen LLP
as independent auditors of LG&E for 1998;
3. A proposal to approve the amendment of LG&E's By-laws so as to increase
the maximum number of directors from 15 to 20; and
4. Such other business as may properly come before the meeting.
The close of business on February 17, 1998, has been fixed by the Board of
Directors as the record date for determination of shareholders entitled to
notice of and to vote at the Annual Meeting or any adjournment thereof.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY. However, if you wish to vote your shares, you may do so by attending the
meeting in person and casting your vote by a ballot which will be provided for
that purpose.
By Order of the Board of Directors,
John R. McCall, Secretary
Louisville Gas and Electric Company
220 West Main Street
Louisville, Kentucky 40202
March , 1998
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INFORMATION STATEMENT
--------------------
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 22, 1998
----------------------
The Annual Meeting of Shareholders will be held April 22, 1998 at the Hyatt
Regency Louisville, 320 West Jefferson Street, Louisville, Kentucky. This
information statement was first mailed to shareholders on or about March ,
1998.
Shareholders who wish to attend the meeting, including beneficial owners
whose accounts are held by brokers or other institutions, will be admitted to
the meeting upon presentation of personal identification and, in the case of
beneficial owners, proof of ownership.
The outstanding stock of LG&E is divided into three classes: Common Stock,
Preferred Stock (without par value), and Preferred Stock, par value $25 per
share. At the close of business on February 17, 1998, the record date for the
Annual Meeting, the following shares of each were outstanding:
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Common Stock, without par value............................ 21,294,223 shares
Preferred Stock, par value $25 per share, 5% Series........ 860,287 shares
Preferred Stock, without par value $5.875 Series........... 250,000 shares
Auction Series A (stated value $100 per share)............. 500,000 shares
</TABLE>
All of the outstanding LG&E Common Stock is owned by LG&E Energy Corp.
("LG&E Energy"). No persons or groups are known by management to be beneficial
owners of more than five percent of LG&E's Preferred Stock. As of February 17,
1998, all directors, nominees for director and executive officers of LG&E as a
group beneficially owned 22 shares of LG&E Preferred Stock, which is less than
one-tenth of one percent of the total LG&E Preferred Stock outstanding on that
date.
LG&E Energy owns all of the outstanding LG&E Common Stock, and intends to
vote this stock in favor of the nominees for directors as set forth below,
thereby ensuring their election to the Board. LG&E Energy also intends to vote
all of the outstanding LG&E Common Stock in favor of the appointment of Arthur
Andersen LLP as the independent auditors for LG&E as set forth in Proposal No. 2
herein and in favor of the adoption of the By-law amendment set forth in
Proposal No. 3 herein.
Since LG&E Energy's ownership represents more than 96% of the total votes
that could be cast at the Annual Meeting and the election of the nominees and
the adoption of the remaining proposals is thereby assured, the Company
considered it inappropriate to solicit proxies. Please be advised, therefore,
that this is only an Information Statement. WE ARE NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND US A PROXY. However, if you wish to vote your
shares, you may do so by attending the meeting in person and casting your vote
by a ballot which will be provided for that purpose.
Owners of record at the close of business on February 17, 1998, of the
Common Stock and the 5% Cumulative Preferred Stock, par value $25 per share (the
"5% Preferred Stock") are entitled to one vote per share for each matter
presented at the Annual Meeting or any adjournment thereof, and, in addition,
have cumulative voting rights with respect to the election of directors.
Accordingly, in electing directors, each shareholder is entitled to as many
votes as the number of shares of stock owned multiplied by the number of
directors to be elected, and may cast all such votes for a single nominee or may
distribute them among two or more nominees.
Directors are elected by a plurality of the votes cast by the holders of
LG&E's Common Stock and 5% Preferred Stock at a meeting at which a quorum is
present. "Plurality" means that the individuals who receive the largest number
of votes cast are elected as directors up to the maximum number of
1
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directors to be chosen at the meeting. Consequently, any shares not voted
(whether by withholding authority, broker nonvote or otherwise) have no impact
on the election of directors except to the extent the failure to vote for an
individual results in another individual receiving a larger percentage of votes.
The affirmative vote of 80% of the outstanding LG&E Common Stock and 5%
Preferred Stock is required for approval of the amendment to the By-laws to
increase the maximum number of directors from 15 to 20. Abstentions from voting
and broker nonvotes, if any, on such matter will be treated as votes against.
The affirmative vote of a majority of the shares of LG&E Common Stock and 5%
Preferred Stock represented at the Annual Meeting is required for the approval
of the independent auditors and any other matters that may properly come before
the meeting. Abstentions from voting on any such matter are treated as votes
against, while broker nonvotes are treated as shares not voted.
The Annual Report to Shareholders of LG&E Energy (the "Annual Report"),
including its consolidated financial statements and information regarding LG&E,
was mailed prior to mailing of this information statement. The Annual Report was
supplemented by audited financial statements of LG&E and management's discussion
of such financial statements, which are included as an appendix to this
information statement (the "Appendix"), and are incorporated by reference
herein. All shareholders are urged to read the accompanying Annual Report and
Appendix.
PENDING KU ENERGY MERGER
On May 20, 1997, LG&E Energy and KU Energy Corporation ("KU Energy") entered
into an Agreement and Plan of Merger (The "Merger Agreement") pursuant to which
KU Energy will be merged with and into LG&E Energy, with LG&E Energy as the
surviving corporation (the "Merger"). The Merger was unanimously approved by the
Boards of Directors of both companies and was approved by shareholders of each
company in special shareholder meetings on October 14, 1997. The Merger is
expected to close shortly after all of the conditions to consummation of the
Merger, including receipt of all regulatory approvals, are met or waived. Such
conditions are expected to be met before the end of 1998, but could be met as
early as the second quarter of 1998.
To date, the Merger has been approved substantially as filed by the Public
Service Commission of Kentucky on September 12, 1997 and by the Virginia State
Corporation Commission on January 20, 1998. The Merger remains subject to
certain additional approvals, including approval by the Federal Energy
Regulatory Commission ("FERC"), the Securities and Exchange Commission ("SEC")
and expiration of applicable waiting periods following requisite notifications
to the Federal Trade Commission and the Department of Justice ("FTC-DOJ
Filings"). Filings for approval were made with the FERC on October 9, 1997 and
with the SEC on January 13, 1998. The FTC-DOJ Filings were made on February 25,
1998.
Pursuant to the Merger Agreement, at the effective time of the Merger, the
new Board of Directors of LG&E will consist of those persons serving as
directors of LG&E immediately prior to the Merger, plus those persons designated
by KU Energy to serve on the LG&E Energy board. As a result, the Board of
Directors of LG&E at the effective time of the Merger is expected to consist of
eighteen directors. Because the Company's By-laws currently limit the size of
the Board of Directors to fifteen members, the Board of Directors has proposed
for adoption by the shareholders the By-law amendment discussed in Proposal No.
3. Similarly, following the Merger, the Board of Directors of Kentucky Utilities
Company ("KU") will consist of those persons serving as directors of KU
immediately prior to the Merger plus those persons designated by LG&E Energy to
serve on the LG&E Energy board. See "Election of Directors" on page 3 of this
information statement.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The number of members of the Board of Directors of LG&E has been fixed at
twelve, pursuant to the Company's By-laws and resolutions adopted by the Board
of Directors. However, the Board of Directors of LG&E presently consists of
eleven members. The directors are classified into three classes, as nearly equal
in number as possible, with respect to the time for which they are to hold
office. One class of directors is elected at each year's Annual Meeting to serve
for three-year terms and to continue in office until their successors are
elected and qualified.
In October 1997, the Board of Directors unanimously appointed Jeffery T.
Grade to complete the remainder of the unexpired term of Ronald L. Bittner, who
died unexpectedly in August 1997. Mr. Bittner had been appointed to the Board of
Directors in October 1996 and was subsequently elected at the 1997 Annual
Meeting to a three-year term expiring at the 2000 Annual Meeting. Both Mr.
Grade's and Mr. Bittner's appointments were the result of searches conducted by
the Nominating and Development Committee of the Board of Directors for qualified
candidates to fill the two open positions on the Board of Directors created when
the directors voted unanimously in mid-1996 to increase the size of the Board of
Directors from ten to twelve members, in accordance with the Company's By-laws.
Despite the remaining vacancy on the Board of Directors, shareholders may not
vote for a number of nominees greater than the number of nominees named in this
information statement. Procedures for reviewing and nominating candidates to the
LG&E Board of Directors are discussed in more detail in "Information Concerning
the Board of Directors--Nominating and Development Committee".
At this Annual Meeting, the following three persons are proposed for
election to the Board of Directors for three-year terms expiring at the 2001
Annual Meeting: Owsley Brown II, Gene P. Gardner and J. David Grissom. Also at
this Annual Meeting, Jeffery T. Grade is proposed for election to the Board of
Directors to complete the remainder of a term expiring at the 2000 Annual
Meeting. All of the nominees are presently directors of both LG&E and LG&E
Energy.
The Board of Directors does not know of any nominee who will be unable to
stand for election or otherwise serve as a director. If for any reason any
nominee becomes unavailable for election, the Board of Directors may designate a
substitute nominee, in which event the shares represented on the ballots
returned to LG&E will be voted for such substitute nominee, unless an
instruction to the contrary is indicated on the ballot.
As discussed above, at the effective time of the Merger, the Board of
Directors of LG&E will consist of those persons serving on such board prior to
the Merger plus seven persons designated by KU Energy to serve on the LG&E
Energy Board of Directors. In this regard, KU Energy has designated the
following individuals, all of whom are currently directors of KU Energy and KU:
MICHAEL R. WHITLEY (AGE 55)
Chairman, President and Chief Executive Officer of KU Energy and KU;
MIRA S. BALL (AGE 63)
Secretary-Treasurer and Chief Financial Officer of Ball Homes, Inc., a
single-family residential developer and property management company;
CAROL M. GRATTON (AGE 65)
Chairman of Area Bancshares, Inc., an Owensboro, Kentucky bank holding
company;
FRANK V. RAMSEY, JR. (AGE 66)
President and Director of Dixon Bank, Dixon, Kentucky;
3
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WILLIAM L. ROUSE, JR. (AGE 65)
Formerly Chairman of the Board and Chief Executive Officer of First Security
Corporation of Kentucky, a multi-bank holding company, and currently a
director of Ashland, Incorporated;
CHARLES L. SHEARER, PH.D. (AGE 55)
President of Transylvania University, Lexington, Kentucky; and
LEE T. TODD, JR., PH.D. (AGE 51)
President and Chief Executive Officer of DataBeam Corporation, a
Kentucky-based, high-technology firm.
It is expected that, following approval of the By-law amendment described in
Proposal No. 3 and at the effective time of the Merger, which could be shortly
after the Annual Meeting, the size of the Board of Directors will be increased
to eighteen members and the seven directors designated by KU Energy will be
elected by the LG&E Board of Directors to fill the vacancies created by the
increase in the size of the Board.
As previously stated LG&E Energy intends to vote all the outstanding shares
of common stock of the Company in favor of the nominees set forth herein, and
since LG&E Energy's ownership of such common stock represents over 96% of the
voting power of the Company, the election of such nominees is thereby assured.
4
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INFORMATION ABOUT DIRECTORS AND NOMINEES
The following contains certain information as of February 17, 1998,
concerning the nominees for director, as well as the directors whose terms of
office continue after the 1998 Annual Meeting.
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2001 ANNUAL MEETING OF
SHAREHOLDERS
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OWSLEY BROWN II (AGE 55)
Mr. Brown has been the Chairman and Chief Executive Officer of Brown-
Forman Corporation, a consumer products company, since July 1995, and
[PHOTO1] was President of Brown-Forman Corporation from 1987 to 1995. Mr. Brown
was first named Chief Executive Officer of Brown-Forman Corporation in
July 1994. Mr. Brown is a graduate of Yale University, and received his
master's degree in business administration from Stanford University. He
has been a director of LG&E since May 1989 and of LG&E Energy since
August 1990. Mr. Brown is also a member of the Board of Directors of
Brown-Forman Corporation, Hilliard Lyons Trust Company and NACCO
Industries, Inc.
GENE P. GARDNER (AGE 68)
Mr. Gardner has been Chairman of Beaver Dam Coal Company, which is
engaged in the ownership and development of coal properties, since
[PHOTO1] April 1983. Mr. Gardner is a graduate of the University of Louisville
and of the Advanced Management Program of the University of Virginia,
Colgate-Darden Graduate School of Business. Mr. Gardner has been a
director of LG&E since July 1979 and of LG&E Energy since August 1990.
He is also a member of the Board of Directors of Commonwealth Bank and
Trust Company, Commonwealth Financial Corporation and Thomas
Industries, Inc.
J. DAVID GRISSOM (AGE 59)
Mr. Grissom has been Chairman of Mayfair Capital, Inc., a private
investment firm, since April 1989. He served as Chairman and Chief
[PHOTO1] Executive Officer of Citizens Fidelity Corporation from April 1977
until March 31, 1989. Upon the acquisition of Citizens Fidelity
Corporation by PNC Financial Corp. in February 1987, Mr. Grissom served
as Vice Chairman and as a Director of PNC Financial Corp. until March
1989. Mr. Grissom is a graduate of Centre College and the University of
Louisville School of Law. Mr. Grissom has been a director of LG&E since
January 1982 and of LG&E Energy since August 1990. He is also a member
of the Board of Directors of Providian Financial Corporation, Churchill
Downs, Inc., and Regal Cinemas, Inc.
</TABLE>
5
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NOMINEE FOR DIRECTOR WITH TERM EXPIRING AT 2000 ANNUAL MEETING OF SHAREHOLDERS
<TABLE>
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JEFFERY T. GRADE (AGE 54)
Mr. Grade has been Chairman and Chief Executive Officer of Harnischfe-
ger Industries, Inc., which is engaged in the manufacture and
[PHOTO2] distribution of equipment for the mining, papermaking and material
handling industries, since January 1993. He served as President and
Chief Executive Officer from 1992 to 1993 and President and Chief
Operating Officer from 1986 to 1992. Mr. Grade is a graduate of the
Illinois Institute of Technology and received a master's degree in
business administration from DePaul University. Mr. Grade has been a
director of LG&E Energy and LG&E since October 1997. He is also a
member of the Board of Directors of Case Corporation and Coeur D'Aline
Mines Corporation.
</TABLE>
DIRECTORS WHOSE TERMS EXPIRE AT 1999 ANNUAL MEETING OF SHAREHOLDERS
<TABLE>
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ROGER W. HALE (AGE 54)
Mr. Hale has been a Director and Chairman of the Board, President and
Chief Executive Officer of LG&E Energy since August 1990. Mr. Hale has
[PHOTO1] also been Chief Executive Officer and a Director of LG&E since June
1989, Chairman of the Board of LG&E since February 1, 1990, and served
as President of LG&E from June 1989 until January 1, 1992. Prior to his
coming to LG&E, Mr. Hale served as Executive Vice President of Bell
South Enterprises, Inc. Mr. Hale is a graduate of the University of
Maryland, and received a master's degree in management from the
Massachusetts Institute of Technology, Sloan School of Management. Mr.
Hale is also a member of the Board of Directors of PNC Bank, Kentucky,
Inc., and H&R Block, Inc.
DAVID B. LEWIS (AGE 53)
Mr. Lewis is a founding partner of the law firm of Lewis & Munday, a
Professional Corporation, in Detroit, Michigan. Since 1972, Mr. Lewis
[PHOTO1] has served as Chairman of the Board and a Director of the firm. Mr.
Lewis is a graduate of Oakland University and received his law degree
from the University of Michigan Law School. He also received a master's
degree in business administration from the University of Chicago
Graduate School of Business. Mr. Lewis has been a director of LG&E and
LG&E Energy since November 1992. Mr. Lewis is also a member of the
Board of Directors of Consolidated Rail Corporation, TRW, Inc., and
M.A. Hanna Company, and serves or has served as a board member for
numerous educational, cultural and civic organizations in the Detroit
and Washington, D.C. areas.
ANNE H. MCNAMARA (AGE 50)
Mrs. McNamara has been Senior Vice President and General Counsel of AMR
Corporation and its subsidiary, American Airlines, Inc., since June
[PHOTO1] 1988. Mrs. McNamara is a graduate of Vassar College, and received her
law degree from Cornell University. She has been a director of LG&E and
LG&E Energy since November 1991. Mrs. McNamara is also a member of the
Board of Directors of The SABRE Group Holdings, Inc.
</TABLE>
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DONALD C. SWAIN (AGE 66)
Dr. Swain served as President of the University of Louisville from
April 1981 to June 1995, and has served as President Emeritus since
[PHOTO1] July 1995. Dr. Swain is a graduate of the University of Dubuque. He
received his master's and doctoral degrees in history from the
University of California at Berkeley. He has been a director of LG&E
since May 1985 and of LG&E Energy since August 1990.
</TABLE>
DIRECTORS WHOSE TERMS EXPIRE AT 2000 ANNUAL MEETING OF SHAREHOLDERS
<TABLE>
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WILLIAM C. BALLARD, JR. (AGE 57)
Mr. Ballard has been of counsel to the law firm of Greenebaum Doll &
McDonald PLLC since May 1992. He served as Executive Vice President and
[PHOTO1] Chief Financial Officer from 1978 until May 1992, of Humana, Inc., a
healthcare services company. Mr. Ballard is a graduate of the
University of Notre Dame, and received his law degree, with honors,
from the University of Louisville School of Law. He also received a
Master of Law degree in taxation from Georgetown University. Mr.
Ballard has been a director of LG&E since May 1989 and of LG&E Energy
since August 1990. Mr. Ballard is also a member of the Board of
Directors of United Healthcare Corp., Health Care REIT, Inc.,
Healthcare Recoveries, Inc., MidAmerica Bancorp, American Safety Razor,
Inc. and Atria Communities, Inc.
S. GORDON DABNEY (AGE 69)
Mr. Dabney was President of Standard Foods, Inc., which is engaged in
the food processing business, from 1955 until he retired in 1995. Mr.
[PHOTO3] Dabney is currently a business consultant. He attended the University
of Florida. He has been a director of LG&E since January 1987 and of
LG&E Energy since August 1990.
T. BALLARD MORTON, JR. (AGE 64)
Mr. Morton has been Executive in Residence at the College of Business
and Public Administration of the University of Louisville since 1983.
[PHOTO3] Mr. Morton is a graduate of Yale University. Mr. Morton has been a
director of LG&E since May 1967 and of LG&E Energy since August 1990.
Mr. Morton is also a member of the Board of Directors of the Kroger
Company.
</TABLE>
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INFORMATION CONCERNING THE BOARD OF DIRECTORS
Each member of the Board of Directors of LG&E is also a director of LG&E
Energy. The committees of the Board of Directors of LG&E include an Audit
Committee, a Compensation Committee and a Nominating and Development Committee.
The directors who are members of the various committees of LG&E serve in the
same capacity for purposes of the LG&E Energy Board of Directors. See "Pending
KU Energy Merger" on page 2 of this information statement for information
regarding the Board of Directors following such Merger.
During 1997, there were a total of twelve meetings of the LG&E Board. All
directors attended 75% or more of the total number of meetings of the Board of
Directors and Committees of the Board on which they served, with the exception
of David B. Lewis.
COMPENSATION OF DIRECTORS
Directors who are also officers of LG&E receive no compensation in their
capacities as directors. During 1997, directors received a retainer of
approximately $1,750 per month, or $21,000 annually ($22,100 annually for
committee chairmen), a fee for Board meetings of $1,100 per meeting and a fee
for each committee meeting of $1,000. Non-employee directors residing out of the
Louisville area received reimbursement for expenses incurred in traveling to
meetings, and received an additional $1,000 compensation for each Board meeting
they attended. The foregoing amounts represent the aggregate fees paid to
directors in their capacities as directors of LG&E and LG&E Energy during 1997.
Non-employee directors of LG&E may elect to defer all or a part of their
fees (including retainers, fees for attendance at regular and special meetings,
committee meetings and travel compensation) pursuant to the LG&E Energy Corp.
Deferred Stock Compensation Plan (the "Deferred Stock Plan"). Each deferred
amount is credited by LG&E Energy to a bookkeeping account and then is converted
into a stock equivalent on the date the amount is credited. The number of stock
equivalents credited to the director is based upon the average of the high and
the low sale price of LG&E Energy Common Stock on the New York Stock Exchange
for the five trading days prior to the conversion. Additional stock equivalents
will be added to stock accounts at the time that dividends are declared on LG&E
Energy Common Stock, in an amount equal to the amount of LG&E Energy Common
Stock that could be purchased with dividends that would be paid on the stock
equivalents if converted to LG&E Energy Common Stock. In the event that LG&E
Energy is a party to any consolidation, recapitalization, merger, share exchange
or other business combination in which all or a part of the outstanding LG&E
Energy Common Stock is changed into or exchanged for stock or other securities
of the other entity or LG&E Energy, or for cash or other property, the stock
account of a participating director shall be converted to such new securities or
consideration equal to the amount each share of LG&E Energy Common Stock
receives, multiplied by the number of share equivalents in the stock account.
A director will be eligible to receive a distribution from his or her
account only upon termination of service, death, retirement or otherwise.
Following departure from the Board, the distribution will occur, at the
director's election, either in one lump sum or in no more than five annual
installments. The distribution will be made, at the director's election, either
in LG&E Energy Common Stock or in cash equal to the then-market price of the
LG&E Energy Common Stock allocated to the director's stock account. At February
17, 1998, seven directors were participating in the Deferred Stock Plan.
Non-employee directors of LG&E who are also directors of LG&E Energy also
receive stock options pursuant to the LG&E Energy Corp. Stock Option Plan for
Non-Employee Directors (the "Directors' Option Plan"), which was approved by the
shareholders at the 1994 annual meeting. Under the terms of the Directors'
Option Plan, upon initial election or appointment to the Board, each new
director, who has not been an employee or officer of LG&E Energy or any of its
subsidiaries within the preceding three years, receives an option grant for
4,000 shares of LG&E Energy Common
8
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Stock. Following the initial grant, eligible directors receive an annual option
grant for 4,000 shares on the first Wednesday of each February. Option grants
for 1994-1996 were for 2,000 shares, all of which were adjusted in April 1996 to
reflect a two-for-one stock split. The option exercise price per share for each
share of LG&E Energy Common Stock is the fair market value on the grant date.
Options granted are not exercisable during the first twelve months from the date
of grant and will terminate 10 years from the date of grant. In the event of a
tender offer or an exchange offer for shares of LG&E Energy Common Stock, all
then exercisable, but unexercised options granted under the Directors' Option
Plan will continue to be exercisable for thirty days following the first
purchase of shares pursuant to such tender or exchange offer.
The Directors' Option Plan authorizes the issuance of up to 500,000 shares
of LG&E Energy Common Stock, of which 188,000 are subject to existing options at
a weighted average per share price of $21.63. As of February 17, 1998, each
non-employee director held 16,000 exercisable options and 4,000 unexercisable
options to purchase LG&E Energy Common Stock, with the exception of Mr. Grade
who held 8,000 unexercisable options. The number of shares subject to the
Directors' Option Plan and subject to awards outstanding under the plan will
adjust with any stock dividend or split, recapitalization, reclassification,
merger, consolidation, combination or exchange of shares, or any similar
corporate change.
AUDIT COMMITTEE
The Audit Committee of the Board is composed of Messrs. Ballard, Dabney,
Brown, Gardner, Grade, Grissom and Lewis and Dr. Swain. During 1997, the Audit
Committee maintained direct contact with the independent auditors and LG&E's
Internal Auditor to review the following matters pertaining to LG&E, and to LG&E
Energy and its subsidiaries: the adequacy of accounting and financial reporting
procedures; the adequacy and effectiveness of internal accounting controls; the
scope and results of the annual audit and any other matters relative to the
audit of these companies' accounts and their financial affairs that the
Committee, the Internal Auditor, or the independent auditors deemed necessary.
The Audit Committee met three times during 1997.
COMPENSATION COMMITTEE
The Compensation Committee, composed of non-employee directors, approves the
compensation of the Chief Executive Officer and the executive officers of LG&E
Energy and LG&E. The Committee makes recommendations to the full Board regarding
benefits provided to executive officers and the establishment of various
employee benefit plans. The members of the Compensation Committee are Messrs.
Dabney, Gardner, Grade, Grissom and Morton and Mrs. McNamara. The Compensation
Committee met two times during 1997.
NOMINATING AND DEVELOPMENT COMMITTEE
The Nominating and Development Committee is composed of the Chairman of the
Board and certain other directors. The Committee reviews and recommends to the
Board of Directors nominees to serve on the Board and their compensation. The
Committee considers nominees suggested by other members of the Board, by members
of management and by shareholders. To be considered for inclusion in the slate
of nominees proposed by the Board of Directors at an annual meeting, shareholder
recommendations must be submitted in writing to the Secretary of LG&E not later
than 120 days prior to the Annual Meeting. In addition, the Articles of
Incorporation and Bylaws of LG&E contain procedures governing shareholder
nominations for election of directors at a shareholders' meeting. The Chairman
of the Annual Meeting may refuse to acknowledge the nomination of any person not
made in compliance with these procedures. The members of the Nominating and
Development Committee are Messrs. Ballard, Brown, Lewis, Hale (ex officio),
Morton and Dr. Swain and Mrs. McNamara. The Nominating and Development Committee
met three times during 1997.
9
<PAGE>
PROPOSAL NO. 2
APPROVAL OF INDEPENDENT AUDITORS FOR 1998
Based upon the recommendation of the Audit Committee, the Board of
Directors, subject to ratification by shareholders, has selected Arthur Andersen
LLP as independent auditors to audit the accounts of LG&E and LG&E Energy for
the fiscal year ending December 31, 1998. Arthur Andersen has audited the
accounts of LG&E for many years and LG&E Energy since its organization in 1990.
The shareholders previously approved the employment of the firm at the Annual
Meeting on May 8, 1997.
Representatives of Arthur Andersen LLP will be present at the Annual
Meeting. Such representatives will be given the opportunity to make a statement
if they so desire, and will be available to respond to appropriate questions.
As previously stated, LG&E Energy intends to vote all of the outstanding
shares of common stock of the Company in favor of approval of the appointment of
Arthur Andersen LLP as independent auditors, and since LG&E Energy's ownership
of such common stock represents over 96% of the voting power of the Company, the
approval of such independent auditors is assured.
PROPOSAL NO. 3
APPROVAL OF BY-LAWS TO INCREASE THE MAXIMUM NUMBER
OF DIRECTORS FROM 15 TO 20.
The Board of Directors has unanimously approved, subject to shareholder
approval, the amendment of Section 1(a) of Article II of the Company's By-Laws
(the "By-Laws") to provide that, effective upon the effective time of the
Merger, the size of the Board of Directors shall be no fewer than nine (9) and
no more than twenty (20), with the exact number to be fixed by the Board of
Directors.
The Company's By-Laws currently provide for an authorized number of
directors of no fewer than nine (9) and not more than fifteen (15). As discussed
above, under the terms of the Merger Agreement with KU Energy, following
consummation of the Merger, the Board of Directors of LG&E will consist of those
persons serving as directors of LG&E immediately prior to the Merger plus those
seven (7) persons designated by KU Energy to serve as directors of LG&E Energy
following the Merger. As a result, the size of the Board of Directors is
expected to be increased from its current size of eleven (11) to eighteen (18).
Because the By-Laws currently limit the number of directors to fifteen (15)
persons, this amendment to the By-Laws is necessary to consummate the Merger.
For these reasons, the Board of Directors recommends that, effective upon
the effective time of the Merger, the first sentence of Section 1(a) of Article
II of the By-Laws be amended so as to read as follows:
(a) The number of directors of the Company shall be fixed from time to
time by the Board of Directors, but shall be no fewer than nine (9) and
no more than twenty (20).
Under both the Company's Restated Articles of Incorporation and By-Laws,
this amendment to the By-Laws requires the approval of 80% of LG&E's
shareholders entitled to vote generally, which are the holders of the LG&E
Common Stock and 5% Preferred. As the owner of approximately 96% of the LG&E
shares entitled to vote, LG&E Energy will vote its shares in favor of this
amendment, thereby ensuring adoption of such amendment to the Company's By-Laws.
10
<PAGE>
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is comprised wholly of
non-employee directors and makes all decisions regarding the compensation of
LG&E's executive officers, including the setting of base pay and the
administration of LG&E Energy's Omnibus Long-Term Incentive Plan (the "Long-Term
Plan") and Short-Term Incentive Plan (the "Short-Term Plan"), each as described
herein.
The executive compensation program and the target awards and opportunities
for executives are designed to be competitive with the compensation and pay
programs of comparable companies, including utilities, utility holding companies
and companies in general industry nationwide. The executive compensation program
has been developed and implemented over time through consultation with, and upon
the recommendations of, nationally-recognized executive compensation
consultants. The Compensation Committee and the Board of Directors have
continued access to such consultants as desired, and are provided with
independent compensation data for their review.
LG&E is the principal subsidiary of LG&E Energy. As noted above, the members
of the Compensation Committee and Board of Directors of LG&E also serve in the
same capacity for LG&E Energy. Certain executive officers of LG&E are also
executive officers of LG&E Energy. For those individuals references below to the
Compensation Committee and Board of Directors refer to the Compensation
Committee and Board of Directors of both LG&E and LG&E Energy unless otherwise
indicated, and discussions of their compensation include compensation earned for
services to both LG&E and LG&E Energy. Set forth below is a report submitted by
the members of the Compensation Committee addressing LG&E Energy's compensation
policies during 1997 for officers of LG&E and LG&E Energy, including the
executive officers named in the following tables. The executive officers of LG&E
participate in the Long-Term Plan and Short-Term Plan of LG&E Energy. References
to stock, shareholder performance or shareholder return relate to LG&E Energy
Common Stock.
COMPENSATION PHILOSOPHY
There are three major components of executive compensation program: (1) base
salary; (2) short-term or annual incentives; and (3) long-term incentives. LG&E
developed its executive compensation program to focus on both short-term and
long-term business objectives that are designed to enhance overall shareholder
value. The short-term and long-term incentives are premised on the belief that
the interests of executives should be closely aligned with those of LG&E
Energy's shareholders. Based on this philosophy, these two portions of each
executive's total compensation package are placed at risk and are linked to the
accomplishment of specific results that are designed to benefit LG&E Energy's
shareholders in both the short-term and long-term. Under this
pay-for-performance approach, a highly competitive level of compensation can be
earned in years of strong performance; conversely, in years of below-average
performance, compensation may decline below competitive benchmarks.
The executive compensation program also recognizes that LG&E and LG&E
Energy's compensation practices must be competitive not only with utilities and
utility holding companies, but also companies in general industry to ensure that
a stable and successful management team can be recruited and retained. The
Compensation Committee believes that the Company's most direct competitors for
executive talent are not limited to the companies that would be included in the
utility industry index against which shareholder returns may be compared. For
this reason, the various compensation peer groups, as established below, are not
the same as the utility industry index in the Comparison of Five-Year Total
Return graph included on page 16 of this information statement.
Pursuant to this competitive market positioning philosophy, in establishing
compensation levels for all executive positions for 1997, the Compensation
Committee reviewed competitive compensation information for general industry
companies with revenue between $1.5 - $3.5 billion (the "Survey
11
<PAGE>
Group") and established targeted total direct compensation (base salary plus
short-term incentives and long-term incentives) for each executive for 1997 to
approach the 50th percentile of the competitive range from the Survey Group.
Salaries, short-term incentives and long-term incentives for 1997 are described
below.
The 1997 compensation information set forth in other sections of this
information statement, particularly with respect to the tabular information
presented, reflects the considerations set forth in this report. The Base
Salary, Short-Term Incentives, and Long-Term Incentives sections that follow
address the compensation philosophy for 1997 for all executive officers except
for Mr. Roger W. Hale. Mr. Hale's compensation is determined in accordance with
the terms of his Employment Agreement (See "Chief Executive Officer
Compensation" on page 14 of this information statement for a description of his
1997 compensation).
BASE SALARY
The base salaries for LG&E executive officers for 1997 were designed to be
competitive with the Survey Group at approximately the 50th percentile of the
base salary range for executives in similar positions with companies in the
Survey Group. Actual base salaries were determined based on individual
performance and experience.
SHORT-TERM INCENTIVES
The short-term incentives for 1997 provided direct financial compensation to
executives and rewarded them for meeting performance goals that were established
at the beginning of the 1997 performance year. The Short-Term Plan provides for
Company Performance Awards and Individual Performance Awards, each of which is
expressed as a percentage of base salary and each of which is determined
independent of the other. In 1997, payment of Company Performance Awards for
executive officers was based 100% on Net Income Available for Common Stock
("NIAC"). Payment of Individual Performance Awards was based 100% on Management
Effectiveness, which included a Customer Satisfaction element. The awards varied
within the executive officer group based upon the nature of each individual's
functional responsibilities, with more senior officers having a greater
percentage of their short-term incentives based on Company Performance Awards.
This component of the 1997 executive compensation program focused executives on
the tasks most immediately at hand and were based upon priorities tailored to
the 1997 performance year.
In 1997, the Company Performance Award targets for executive officers ranged
from 18% to 30% of base salary, and the Individual Performance Award targets for
executive officers ranged from 12% to 20% of base salary. Both awards were
established to be competitive with the 50th percentile of the level of such
awards granted to comparable executives employed by companies in the Survey
Group. The individual officers were eligible to receive from 0% to 150% of their
targeted amounts, dependent upon Company and individual performance during 1997
as measured by NIAC with regard to Company Performance Awards, and were eligible
to receive from 0% to 175% of their targeted amounts dependent upon individual
performance as measured by Management Effectiveness with regard to Individual
Performance Awards. Based upon such performances, payouts of Company Performance
Awards for 1997 to the executive officers named in the following tables ranged
from 0% to 21%, and to the other executive officers ranged from 7% to 24%, of
base salary, respectively. Payouts for the Individual Performance Awards to the
named executive officers ranged from 15% to 35%, and to the other executive
officers ranged from 15% to 21%, of base salary, respectively. In addition, the
Compensation Committee awarded special payments to certain officers, including
each of the named executive officers, to adjust for increased expenses in 1997
associated with mark-to-market accounting, the write-off of certain regulatory
assets and uncapitalized transaction costs associated with the leasing
transaction with Big Rivers Electric Corporation. These payments ranged from 7%
to 19% of the named executive officers' respective base salaries.
12
<PAGE>
LONG-TERM INCENTIVES
The Long-Term Plan is administered by a committee of not less than three
non-employee directors of LG&E Energy who are appointed by the Energy Board of
Directors. At this time, the Compensation Committee administers the Long-Term
Plan. The Long-Term Plan provides for the grant of any or all of the following
types of awards: stock options, stock appreciation rights, restricted stock,
performance units and performance shares. To date, the Compensation Committee
has chosen to award stock options, stock appreciation rights and performance
units to executive officers.
The Compensation Committee determined the competitive long-term grants to be
awarded for each executive based on the long-term awards for the 50th percentile
of the Survey Group. The aggregate expected value of the stock options and
performance units (delivered 50% in the form of performance units and 50% in the
form of nonqualified stock options in 1997) was intended to approach the
expected value of long-term incentives payable to executives in similar
positions with companies in the 50th percentile of the Survey Group, depending
upon achievement of targeted Company performance.
Stock options were granted to executive officers during the first quarter of
1997 at an exercise price equal to the fair market value at the date of the
grant and were subject to a one-year vesting requirement. Since options were
granted with an exercise price equal to the market value of the Common Stock at
the time of grant, they provide no value unless LG&E Energy's stock price
increases after the grants are awarded. Once the options vest, they are
exercisable over a nine-year term. These awards are thus tied to stock price
appreciation in excess of the stock's value at time of grant, rewarding
executives as if they shared in the ownership of LG&E Energy. The number of
shares subject to options was determined by taking the expected value to be
provided in options, as determined above, and dividing that amount by the
estimated current value of an option using a variation of the Black-Scholes
Option Pricing methodology provided by the outside compensation consultant.
Prior awards were not considered when making new grants.
The number of performance units granted was determined by taking the amount
of the executive's long-term award to be delivered in performance units
(adjusted on a present value basis), as determined above, and dividing that
amount by the fair market value of LG&E Energy Common Stock on the date of the
grant. The value of the performance units is substantially dependent upon the
changing value of LG&E Energy's Common Stock in the marketplace. Each executive
officer is entitled to receive from 0% to 150% of the performance units
contingently awarded to the executive based on LG&E Energy's total shareholder
return over a three-year period (defined as share price increase plus dividends
paid, divided by share price at beginning of the period) measured against the
total shareholder return for such period ("TSR") by a peer group selected by the
Committee. The peer group for measuring LG&E Energy's TSR performance (the
"Long-Term Plan Peer Group") consists of approximately 90 utility holding
companies and gas and electric utilities(1). Performance units granted prior to
1996 included return on invested capital ("ROIC") over a three-year period
measured against a pre-established, internally set goal as a performance measure
in addition to TSR.
Payouts of long-term incentive awards in February 1998 were based on LG&E
Energy's performance during the 1995-1997 period. During such period, LG&E
Energy's performance was at the 36th percentile of its comparison group with
respect to TSR, and at 64% of targeted ROIC performance (as adjusted for certain
items deemed appropriate by the Compensation Committee), resulting in payouts
- ------------------------
(1) While similar, the utilities and holding companies that are in the
Long-Term Plan Peer Group are not necessarily the same as those in the
Standard & Poor's Utility Index used in the Company Performance Graph on
page 16 of the information statement or the Survey Group. Nevertheless, in
the judgment of the Compensation Committee, the companies in the Long-Term
Plan Peer Group continue to represent the appropriate peer group for
performance unit compensation purposes.
13
<PAGE>
of 57% of the contingent awards. The performance units are payable 50% in LG&E
Energy Common Stock and 50% in cash.
CHIEF EXECUTIVE OFFICER COMPENSATION
The compensation of the Chief Executive Officer of LG&E and LG&E Energy, Mr.
Roger W. Hale, is governed by the terms of an employment agreement. Mr. Hale
originally entered into an employment agreement with LG&E in April 1989. That
agreement was developed to induce him to move to LG&E from another company, and
was updated by Board actions in 1990, 1993 and 1997 to recognize his fundamental
role in establishing LG&E Energy as a national and international diversified
energy services provider. The term of Mr. Hale's 1997 employment agreement (the
"1997 Agreement") expires by its terms on December 31, 2001. (In connection with
the prospective Merger, a supplemental agreement for employment has also been
entered into by Mr. Hale and LG&E Energy. See "Employment Contracts and
Termination of Employment Arrangements and Change in Control Provisions" on page
20 of this information statement.)
The 1997 Agreement dictates the level of Mr. Hale's minimum 1997
compensation, but the Compensation Committee retains discretion to increase such
compensation. For 1997, the Compensation Committee compared Mr. Hale's
compensation to that of chief executive officers of companies contained in the
Survey Group as well as electric and gas utilities and utility holding companies
with comparable revenues, market capitalization and asset size. In setting
long-term awards, LG&E Energy also considered survey data from various
compensation consulting firms. Mr. Hale also receives LG&E Energy contributions
to thrift and savings plans, similar to those of other officers and employees.
Details of Mr. Hale's 1997 compensation are set forth below.
BASE SALARY. Mr. Hale was paid a base salary of $580,000 during 1997. The
1997 Agreement provides that his salary shall not be less than $580,000 and is
to be reviewed as of each January 1 by the Compensation Committee. The
Compensation Committee, in determining the annual salary increase for 1997,
focused on Mr. Hale's individual performance (including his management
effectiveness, as described below), the growth of LG&E Energy and the
compensation provided to other LG&E Energy and LG&E officers. The 1997 increase
was 13.7%.
SHORT-TERM INCENTIVES. Mr. Hale's target short-term incentive award was 60%
of his 1997 base salary. Like all other executive officers receiving short-term
incentive awards, Mr. Hale was eligible to receive more or less than the
targeted amount, based on LG&E Energy's performance and individual performance.
His 1997 short-term incentive payouts were based 70% on Company Performance
Goals and 30% on Individual Performance Goals.
In 1997, no Company Performance Award payout was made to Mr. Hale. Mr.
Hale's Individual Performance Award payout was 32% of his 1997 base salary. The
Compensation Committee considered Mr. Hale's effectiveness in several areas in
determining the final Individual Performance Award. These included the financial
performance of LG&E Energy, LG&E and other LG&E Energy subsidiaries, company
growth, customer satisfaction ratings and other measures, such as LG&E Energy's
announcement and progress, respectively, during 1997, on the major strategic
initiatives of the Merger and the leasing transaction with Big Rivers.
Additionally, the Compensation Committee awarded Mr. Hale a payment of 22% of
his basic salary as a reward for his leadership role and contributions to the
Company's strategic performance during 1997 (adjusted for those factors
previously described in connection with the additional short-term incentives
paid to the Company's executive officers. See "Short-Term Incentives" on page 11
of this information statement).
14
<PAGE>
LONG-TERM INCENTIVE GRANT. In 1997, Mr. Hale received 67,728 options, and
23,145 performance units for the 1997-1999 performance period. These amounts
were determined in accordance with the terms of his 1997 Agreement and provide
expected value representing approximately 110% of his base salary. The terms of
the options and performance units (including the manner in which performance
units are earned) for Mr. Hale are the same as for other executive officers, as
described under the heading "Long-Term Incentives."
LONG-TERM INCENTIVE PAYOUT. In the 1995-1997 period, LG&E Energy's
performance was at the 36th percentile of its comparison group in TSR, and at
64% of targeted ROIC performance (as adjusted for certain items deemed
appropriate by the Compensation Committee). That resulted in a payout equal to
57% of the approved target. In addition, the market value per share of LG&E
Energy Common Stock increased from $19.30 at grant to $24.81 during the
performance period. This further increased the value of the payout of the
performance units originally awarded to Mr. Hale in 1994.
In connection with the Merger and in recognition of Mr. Hale's continued
importance to the future performance of LG&E and LG&E Energy, the Compensation
Committee in mid-1997 negotiated with Mr. Hale to retain his services following
consummation of the Merger. Consequently, Mr. Hale entered into a conditional
employment agreement with LG&E Energy, effective upon consummation of such
Merger. The term of this new agreement (the "Prospective Agreement") will extend
through the fifth anniversary of the closing of the Merger. The Prospective
Agreement had no effect on Mr. Hale's 1997 compensation as discussed in this
report. See "Employment Contract and Termination of Employment Arrangements and
Change in Control Provisions" on page 21 of this information statement.
TAX MATTERS
Section 162(m) of the Code was enacted in 1993 and generally prohibits the
company from deducting executive compensation in excess of $1,000,000.
Qualifying "performance based compensation" is not subject to this deduction
limitation if certain requirements are satisfied. It is the Compensation
Committee's general intent to preserve the deductibility of executive
compensation to the extent reasonably practicable and to the extent consistent
with its other compensation objectives. To ensure that certain compensation
payable under the Long-Term Plan and Short-Term Plan remain deductible, the
Compensation Committee and the Board of Directors recommended, and the
shareholders approved, modification of the Long-Term Plan and adopted a new
Short-Term Plan in 1996. Although not all of the compensation paid to executive
officers under these two plans constitutes "performance based compensation," all
compensation paid to executive officers in 1997 was deductible.
CONCLUSION
The Compensation Committee believes that the company's executive
compensation system served the interests of the company and its shareholders
effectively during 1997. The Compensation Committee takes very seriously its
responsibilities with respect to the company's executive compensation system,
and it will continue to monitor and revise the compensation policies as
necessary to ensure that the company's compensation system continues to meet the
needs of the company and its shareholders.
MEMBERS OF THE COMPENSATION COMMITTEE
J. David Grissom, Chairman
S. Gordon Dabney
Gene P. Gardner
Jeffery T. Grade
Anne H. McNamara
T. Ballard Morton, Jr.
15
<PAGE>
COMPANY PERFORMANCE
All of the outstanding Common Stock of LG&E is owned by LG&E Energy, and
accordingly, there are no trading prices for LG&E's Common Stock. The following
graph reflects a comparison of the cumulative total return (change in stock
price plus reinvested dividends) to shareholders of LG&E Energy Common Stock
from December 31, 1992, through December 31, 1997, with the Standard & Poor's
500 Composite Index and the Standard & Poor's Utility Index. The comparisons in
this table are required by the Securities and Exchange Commission and,
therefore, are not intended to forecast or be indicative of possible future
performance of LG&E Energy Common Stock.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
COMPARISON OF FIVE YEAR CUMULATIVE
<S> <C> <C> <C>
TOTAL SHAREHOLDER RETURN (1)
LG&E Energy S&P Utilities S&P 500
12/31/92 $100 $100 $100
1993 122 114 110
1994 117 105 112
1995 142 150 153
1996 173 154 189
1997 184 192 252
</TABLE>
- ------------------------
(1) Total Shareholder Return assumes $100 invested on December 31, 1992, with
quarterly reinvestment of dividends.
16
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows the cash compensation paid or to be paid by LG&E,
LG&E Energy or any of its subsidiaries, as well as certain other compensation
paid or accrued for those years, to the Chief Executive Officer and the next
four highest compensated executive officers who were serving as such at December
31, 1997, of LG&E in all capacities in which they served (including service for
LG&E Energy) during 1995, 1996 and 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ----------
OTHER SECURITIES PAYOUTS
ANNUAL UNDERLYING -------- ALL OTHER
COMPEN- OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#)(2) ($) ($)
- -------------------------------------------------- ---- ------------ -------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 1997 $ 580,000 $311,808 $18,212 67,728 $313,037 $ 26,675(1)
Chairman of the Board 1996 510,000 416,068 11,010 55,000 641,092 26,909
and CEO 1995 436,500 303,859 14,716 13,292 559,686 13,901
Victor A. Staffieri 1997 270,000 159,064 8,063 27,946 57,416 10,635(1)
Chief Financial Officer 1996 245,000 175,310 7,431 26,022 124,950 9,336
Former Position: (President -- Louisville 1995 230,764 134,695 6,215 6,394 49,137 7,149
Gas and Electric Company)
Stephen R. Wood 1997 245,000 138,039 6,849 15,605 32,306 8,721(1)
President -- Louisville Gas and 1996 226,000 106,256 7,082 14,772 67,130 7,877
Electric Company (Former position: 1995 212,000 106,884 9,084 2,284 49,137 7,484
Executive Vice President and
Chief Administrative Officer
of LG&E Energy)
John R. McCall 1997 245,000 114,764 6,922 15,605 32,306 11,414(1)
Executive Vice President, 1996 231,000 112,303 7,230 15,098 35,868 11,029
General Counsel and 1995 220,000 106,848 5,791 4,568 0 8,696
Corporate Secretary
Charles A. Markel, III 1997 185,000 45,399 759 8,838 23,051 6,713(1)
Treasurer 1996 178,500 54,375 713 8,750 47,800 5,645
1995 178,500 59,850 3,361 3,624 42,926 5,511
</TABLE>
- ------------------------
(1) Includes employer contributions to 401(k) plan, nonqualified thrift plan and
employer paid life insurance premiums in 1997 as follows: Mr. Hale $3,135,
$8,349 and $15,191, respectively; Mr. Staffieri $3,135, $5,682 and $1,818,
respectively; Mr. Wood $2,989, $4,446 and $1,286 respectively; Mr. McCall
$3,135, $3,939 and $4,340, respectively; and Mr. Markel $2,957, $2,830 and
$926 respectively.
(2) As adjusted for the 2 for 1 stock split effective in April 1996.
17
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN 1997 FISCAL YEAR
The following table contains information at December 31, 1997, with respect
to grants of stock options and stock appreciation rights (SARs) to the named
executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
--------------------------- REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL EXERCISE RATES OF STOCK
UNDERLYING OPTIONS/SARS OR BASE PRICE APPRECIATION
OPTIONS/SARS GRANTED TO PRICE FOR OPTION TERM
GRANTED EMPLOYEES IN ($/ EXPIRATION ------------------------------
NAME (#) (1) FISCAL YEAR SHARE) DATE 0%($) 5%($) 10%($)
- ---------------------------------------- ------------ ------------ -------- ---------- ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 67,728 19.5% $ 24.18 02/6/2007 0 $1,029,917 $2,610,013
Victor A. Staffieri 27,946 8.1 24.18 02/6/2007 0 424,966 1,076,946
Stephen R. Wood 15,605 4.5 24.18 02/6/2007 0 237,300 601,365
John R. McCall 15,605 4.5 24.18 02/6/2007 0 237,300 601,365
Charles A. Markel, III 8,838 2.5 24.18 02/6/2007 0 134,397 340,587
</TABLE>
- ------------------------
(1) Options are awarded at fair market value at time of grant; unless otherwise
indicated, options vest in one year and are exercisable over a ten-year
term.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN 1997 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options and/or SARs during 1997
and the value of unexercised options and SARs held by them as of December 31,
1997:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS OPTIONS/SARS AT
ON VALUE AT FY-END (#) FY-END ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Roger W. Hale 0 N/A 98,214/67,728 $485,927/$42,838
Victor A. Staffieri 0 N/A 62,590/47,946 310,048/140,126
Stephen R. Wood 0 N/A 37,802/15,605 231,801/9,870
John R. McCall 0 N/A 22,046/15,605 93,606/9,870
Charles A. Markel, III 0 N/A 28,954/8,838 194,884/5,590
</TABLE>
- ------------------------
(1) Dollar amounts reflect market value of LG&E Energy Common Stock at year-end,
minus the exercise price.
18
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS TABLE
LONG-TERM INCENTIVE PLAN AWARDS IN 1997 FISCAL YEAR
The following table provides information concerning awards made in 1997 to
the named executive officers under the Long-Term Plan.
<TABLE>
<CAPTION>
NUMBER PERFORMANCE
OF OR ESTIMATED FUTURE PAYOUTS UNDER
SHARES, OTHER PERIOD NON-STOCK PRICE BASED PLANS
UNITS OR UNTIL (NUMBER OF SHARES) (1)
OTHER MATURATION -------------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
- ------------------------------------------------------------ --------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Roger W. Hale 23,145 12/31/99 9,258 23,145 34,718
Victor A. Staffieri 4,775 12/31/99 1,910 4,775 7,163
Stephen R. Wood 2,666 12/31/99 1,066 2,666 3,999
John R. McCall 2,666 12/31/99 1,066 2,666 3,999
Charles A. Markel, III 1,510 12/31/99 604 1,510 2,265
</TABLE>
- ------------------------
(1) The table indicates the number of performance units which are paid 50% in
stock and 50% in cash at maturation.
Each performance unit awarded represents the right to receive an amount
payable 50% in LG&E Energy Common Stock and 50% in cash on the date of payout,
the latter portion being payable in cash in order to facilitate the payment of
taxes by the recipient. For awards made in 1997, the amount of the payout is
determined by the then-fair market value of LG&E Energy Common Stock. The
Long-Term Plan rewards executives on a three-year rolling basis dependent upon
the total shareholder return for LG&E Energy shareholders. The target for award
eligibility requires that LG&E Energy shareholders earn a total return at a
preset level in comparison to that of the utility holding companies and gas and
electric utilities in the Long-Term Plan Peer Group. The Committee sets a
contingent award for each management level selected to participate in the Plan
and such amount is the basis upon which incentive compensation is determined.
Depending on the level of achievement, the participant can receive from zero to
150% of the contingent award amount. Payments made under the Long-Term Plan in
1997 are reported in the summary compensation table for the year of payout.
PENSION PLANS
The following table shows the estimated pension benefits payable to a
covered participant at normal retirement age under LG&E's qualified defined
benefit pension plans, as well as non-qualified supplemental pension plans that
provide benefits that would otherwise be denied participants by reason of
certain Internal Revenue Code limitations for qualified plan benefits, based on
the remuneration that is covered under the plan and years of service with LG&E,
LG&E Energy and its subsidiaries:
19
<PAGE>
1997 PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$100,000 $ 48,088 $ 48,088 $ 48,088 $ 55,884
$150,000 $ 80,088 $ 80,088 $ 80,088 $ 85,584
$200,000 $ 112,088 $ 112,088 $ 112,088 $ 112,088
$250,000 $ 144,088 $ 144,088 $ 144,088 $ 144,088
$300,000 $ 176,088 $ 176,088 $ 176,088 $ 176,088
$350,000 $ 208,088 $ 208,088 $ 208,088 $ 208,088
$400,000 $ 240,088 $ 240,088 $ 240,088 $ 240,088
$450,000 $ 272,088 $ 272,088 $ 272,088 $ 272,088
$500,000 $ 304,088 $ 304,088 $ 304,088 $ 304,088
$550,000 $ 336,088 $ 336,088 $ 336,088 $ 336,088
$600,000 $ 368,088 $ 368,088 $ 368,088 $ 368,088
$650,000 $ 400,088 $ 400,088 $ 400,088 $ 400,088
$700,000 $ 432,088 $ 432,088 $ 432,088 $ 432,088
$750,000 $ 464,088 $ 464,088 $ 464,088 $ 464,088
$800,000 $ 496,088 $ 496,088 $ 496,088 $ 496,088
$850,000 $ 528,088 $ 528,088 $ 528,088 $ 528,088
$900,000 $ 560,088 $ 560,088 $ 560,088 $ 560,088
$950,000 $ 592,088 $ 592,088 $ 592,088 $ 592,088
$1,000,000 $ 624,088 $ 624,088 $ 624,088 $ 624,088
$1,050,000 $ 656,088 $ 656,088 $ 656,088 $ 656,088
</TABLE>
A participant's remuneration covered by the Retirement Income Plan (the
"Retirement Income Plan") is his or her average base salary and short-term
incentive payment (as reported in the Summary Compensation Table) for the five
calendar plan years during the last ten years of the participant's career for
which such average is the highest. The estimated years of service for each named
executive is as follows: 31 years for Mr. Hale; 8 years for Mr. Wood; 3 years
for Mr. McCall; 13 years for Mr. Markel; and 5 years for Mr. Staffieri. Benefits
shown are computed as a straight life single annuity beginning at age 65.
Current Federal law prohibits paying benefits under the Retirement Income
Plan in excess of $120,000 per year. Officers of LG&E and LG&E Energy with at
least one year of service with either company are eligible to participate in
LG&E's Supplemental Executive Retirement Plan (the "Supplemental Executive
Retirement Plan"), which is an unfunded supplemental plan that is not subject to
the $120,000 limit. Presently, participants in the Supplemental Executive
Retirement Plan consist of all of the eligible officers of LG&E and LG&E Energy.
This plan provides generally for retirement benefits equal to 64% of average
current earnings during the final 36 months prior to retirement, reduced by
Social Security benefits, by amounts received under the Retirement Income Plan
and by benefits from other employers. As part of its employment agreement with
Mr. Hale, LG&E established a separate Supplemental Executive Retirement Plan.
The special plan generally provides for a retirement benefit for Mr. Hale of 2%
for each of his first 20 years of service with LG&E, LG&E Energy or with certain
prior employers, 1.5% for each of the next 10 years of service and 1% for each
remaining year of service completed prior to age 65, all multiplied by Mr.
Hale's final 60 months average compensation, less benefits payable from the
Retirement Income Plan, benefits payable from any other qualified or
non-qualified plan sponsored by LG&E, LG&E Energy or certain prior employers,
and primary Social Security benefits. Under Mr. Hale's employment agreement (see
below), he may elect to commence payment of his retirement benefits at age 50.
If he retires prior to age 65, Mr. Hale's benefits will be reduced by factors
set forth in the employment agreement.
20
<PAGE>
The estimated annual benefits to be received under the Retirement Income
Plan and the Supplemental Executive Retirement Plans upon normal retirement at
age 65 and after deduction of Social Security benefits will be $586,896 for Mr.
Hale; $240,996 for Mr. Wood; $210,804 for Mr. McCall; $136,464 for Mr. Markel;
and $276,144; for Mr. Staffieri.
EMPLOYMENT CONTRACT AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS
Effective January 1, 1997, Mr. Hale entered into a new employment agreement
with LG&E Energy for services to be provided to LG&E and LG&E Energy. The new
agreement extends through December 31, 2001. Under the new agreement, Mr. Hale
is entitled to an annual base salary of not less than $580,000, subject to
annual review by the Compensation Committee, and to participate in the
Short-Term Plan and the Long-Term Plan. Mr. Hale's arrangement with LG&E Energy
provides for a short-term incentive target award of not less than 60% of base
salary and long-term incentive grants with a present value of not less than 110%
of base salary to be delivered two-thirds in the form of performance
units/shares and one-third in the form of non-qualified stock options. In
addition, the 1997 Agreement provides that an insurance policy in the amount of
not less than $2 million shall be provided to Mr. Hale at the Company's expense.
LG&E Energy's Board of Directors may terminate the agreement at any time and, if
it does so for reasons other than cause, LG&E Energy must pay Mr. Hale's base
salary plus his target short-term incentive award for the remaining term of his
employment contract, but not less than two years.
In connection with the Merger, on May 20, 1997, Mr. Hale entered into an
employment agreement to become effective upon the consummation of the Merger.
Under this Prospective Agreement, which will have an initial term of five years
commencing on the effective date of the Merger, Mr. Hale is entitled to an
annual base salary of not less than $675,000, subject to annual review by the
Compensation Committee. The Prospective Agreement also contains short-term and
long-term incentive, life insurance and termination provisions similar to the
1997 Agreement.
In the event of a change in control, all officers of LG&E and LG&E Energy
shall be entitled to the following payments if, within twenty-four months after
such change in control, they are terminated for reasons other than cause or
disability, or their employment responsibilities are altered: (i) all accrued
compensation; (ii) a severance amount equal to 2.99 times the sum of (a) his or
her annual base salary and (b) his or her "target" award pursuant to the
Short-Term Plan. However, except for Mr. Hale, in no event is the payment to the
executive to equal or exceed an amount which would constitute a nondeductible
payment pursuant to Section 280G of the Internal Revenue Code of 1986, as
amended (the "Code"), or be subject to an excise tax imposed by Section 4999 of
the Code. The executive is entitled to receive such amounts in a lump-sum
payment within thirty days of termination. A change in control encompasses
certain mergers and acquisitions, changes in Board membership and acquisitions
of voting securities of LG&E Energy and will include the Merger.
Also upon a change in control of LG&E Energy, all stock-based awards shall
vest 100%, and all performance-based awards, such as performance units and
performance shares, shall immediately be paid out in cash, based upon the extent
to which the performance goals have been met through the effective date of the
change in control or based upon the assumed achievement of such goals, whichever
amount is higher.
21
<PAGE>
SHAREHOLDER PROPOSALS
FOR 1999 ANNUAL MEETING
Any shareholder may submit a proposal for consideration at the 1999 Annual
Meeting. Any shareholder desiring to submit a proposal for inclusion in a proxy
statement for consideration at the 1999 Annual Meeting should forward the
proposal so that it will be received at LG&E's principal executive offices no
later than November , 1998. Proposals received by that date that are proper
for consideration at the Annual Meeting and otherwise conforming to the rules of
the Securities and Exchange Commission will be included in a 1999 proxy
statement.
OTHER MATTERS
At the Annual Meeting, it is intended that the first three items set forth
in the accompanying notice and described in this information statement will be
presented. The Board of Directors knows of no other matters which may be
presented at the meeting.
LG&E will bear the costs of printing and preparing this information
statement. LG&E will provide copies of this information statement and the Annual
Report to brokers, dealers, banks and voting trustees, and their nominees, for
mailing to beneficial owners, and upon request therefor, will reimburse such
record holders for their reasonable expenses in forwarding such materials.
ANY SHAREHOLDER MAY OBTAIN WITHOUT CHARGE A COPY OF LG&E'S ANNUAL REPORT ON
FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR
1997, BY SUBMITTING A REQUEST IN WRITING TO: JOHN R. MCCALL, SECRETARY,
LOUISVILLE GAS AND ELECTRIC COMPANY, P.O. BOX 32010, 220 WEST MAIN STREET,
LOUISVILLE, KENTUCKY 40232.
[LOGO]
PRINTED ON RECYCLED PAPER
22
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
APPENDIX TO THE INFORMATION STATEMENT
March __, 1998
<PAGE>
FINANCIAL CONTENTS
<TABLE>
<S> <C>
Statements of Income 1
Statements of Retained Earnings 1
Statements of Cash Flows 2
Balance Sheets 3
Statements of Capitalization 4
Notes to Financial Statements 5
Report of Management 23
Report of Independent Public Accountants 24
Management's Discussion and Analysis of Results of
Operations and Financial Condition 25
</TABLE>
SELECTED FINANCIAL DATA
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Revenues . . . . . . . . . . . $ 845,543 $ 821,115 $ 723,463 $ 759,075 $ 775,125
----------------------------------------------------------------------
Net Operating Income:
Before Unusual Items. . . . . . . . . . 148,186 147,263 138,203 134,393 136,118
Trimble County Settlement . . . . . . . - - (16,877) - -
Non-Recurring Charges . . . . . . . . . - - - (23,353) -
----------------------------------------------------------------------
Total Net Operating Income . . . . . 148,186 147,263 121,326 111,040 136,118
----------------------------------------------------------------------
Net Income:
Before Unusual Items. . . . . . . . . . 113,273 107,941 100,061 94,423 90,535
Trimble County Settlement . . . . . . . - - (16,877) - -
Non-Recurring Charges . . . . . . . . . - - - (32,734) -
Cumulative Effect of
Accounting Change. . . . . . . . . . - - - (3,369) -
----------------------------------------------------------------------
Total Net Income . . . . . . . . . . 113,273 107,941 83,184 58,320 90,535
----------------------------------------------------------------------
Net Income Available for
Common Stock. . . . . . . . . . . . . . 108,688 103,373 76,873 52,492 84,554
----------------------------------------------------------------------
Total Assets . . . . . . . . . . . . . . 2,055,641 2,006,712 1,979,490 1,966,590 1,974,584
Long-Term Obligations (including
amounts due within one year). . . . . . 646,800 646,800 662,800 662,800 662,800
</TABLE>
Management's Discussion and Analysis of Results of Operations and Financial
Condition and the Notes to Financial Statements should be read in conjunction
with the above information.
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF INCOME
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating Revenues
Electric. . . . . . . . . . . . . . . . . . . . . . . . $ 614,532 $ 606,696 $ 570,637
Gas . . . . . . . . . . . . . . . . . . . . . . . . . . 231,011 214,419 181,126
Refund - Trimble County settlement (Note 13). . . . . . - - (28,300)
----------------------------------------
Total operating revenues (Note 1). . . . . . . . . . 845,543 821,115 723,463
----------------------------------------
Operating Expenses
Fuel for electric generation. . . . . . . . . . . . . . 149,463 149,697 138,002
Power purchased . . . . . . . . . . . . . . . . . . . . 17,229 16,626 16,830
Gas supply expenses . . . . . . . . . . . . . . . . . . 158,929 140,482 110,738
Other operation expenses. . . . . . . . . . . . . . . . 150,750 143,338 134,655
Maintenance . . . . . . . . . . . . . . . . . . . . . . 47,586 54,790 52,101
Depreciation and amortization . . . . . . . . . . . . . 93,020 89,002 85,759
Federal and State income taxes (Note 8) . . . . . . . . 64,081 63,259 47,524
Property and other taxes. . . . . . . . . . . . . . . . 16,299 16,658 16,528
----------------------------------------
Total operating expenses . . . . . . . . . . . . . . 697,357 673,852 602,137
----------------------------------------
Net Operating Income . . . . . . . . . . . . . . . . . . 148,186 147,263 121,326
Other Income and (Deductions) (Note 9) . . . . . . . . . 4,277 920 3,776
Interest Charges . . . . . . . . . . . . . . . . . . . . 39,190 40,242 41,918
----------------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . 113,273 107,941 83,184
Preferred Stock Dividends. . . . . . . . . . . . . . . . 4,585 4,568 6,311
----------------------------------------
Net Income Available for Common Stock. . . . . . . . . . $ 108,688 $ 103,373 $ 76,873
----------------------------------------
----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF RETAINED EARNINGS
(Thousands of $)
Years Ended December 31
----------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Balance January 1. . . . . . . . . . . . . . . . . . . . $ 209,222 $ 181,049 $ 193,895
Add net income . . . . . . . . . . . . . . . . . . . . . 113,273 107,941 83,184
----------------------------------------
322,495 288,990 277,079
----------------------------------------
Deduct: Cash dividends declared on stock:
5% cumulative preferred. . . . . . . . . . . . 1,075 1,075 1,075
7.45% cumulative preferred . . . . . . . . . . - - 1,527
Auction rate cumulative preferred. . . . . . . 2,041 2,024 2,240
$5.875 cumulative preferred. . . . . . . . . . 1,469 1,469 1,469
Common . . . . . . . . . . . . . . . . . . . . 59,000 75,200 89,000
Preferred stock redemption expense . . . . . . . - - 719
----------------------------------------
. . . . . . . . . . . . . . . . . . . . . . . . 63,585 79,768 96,030
----------------------------------------
Balance December 31. . . . . . . . . . . . . . . . . . . $ 258,910 $ 209,222 $ 181,049
----------------------------------------
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF CASH FLOWS
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 113,273 $ 107,941 $ 83,184
Items not requiring cash currently:
Depreciation and amortization. . . . . . . . . . . . 93,020 89,002 85,759
Deferred income taxes-net. . . . . . . . . . . . . . (3,495) 26,055 7,049
Investment tax credit-net. . . . . . . . . . . . . . (4,240) (3,997) (4,742)
Other. . . . . . . . . . . . . . . . . . . . . . . . 4,640 3,911 3,958
Changes in certain net current assets:
Accounts receivable. . . . . . . . . . . . . . . . . (9,728) (9,555) (19,531)
Materials and supplies . . . . . . . . . . . . . . . (8,492) (1,418) 1,428
Trimble County settlement. . . . . . . . . . . . . . (4,263) (10,789) 28,300
Accounts payable . . . . . . . . . . . . . . . . . . 1,416 3,772 22,936
Accrued taxes. . . . . . . . . . . . . . . . . . . . 6,741 4,168 (433)
Accrued interest . . . . . . . . . . . . . . . . . . (1,978) (1,070) (2,330)
Prepayments and other. . . . . . . . . . . . . . . . 1,333 685 (61)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (3,188) (23,153) (6,917)
----------------------------------------
Net cash flows from operating activities . . . . . . 185,039 185,552 198,600
----------------------------------------
Cash Flows from Investing Activities
Purchases of securities . . . . . . . . . . . . . . . . (18,529) (11,039) (119,151)
Proceeds from sales of securities . . . . . . . . . . . 2,544 28,605 151,422
Construction expenditures . . . . . . . . . . . . . . . (110,893) (107,879) (93,423)
----------------------------------------
Net cash flows from investing activities . . . . . . (126,878) (90,313) (61,152)
----------------------------------------
Cash Flows from Financing Activities
Issuance of first mortgage bonds and pollution
control bonds . . . . . . . . . . . . . . . . . . . . 69,776 49,745 39,914
Redemption of preferred stock . . . . . . . . . . . . . - - (22,108)
Retirement of first mortgage bonds and pollution
control bonds . . . . . . . . . . . . . . . . . . . . (71,693) (67,013) (41,055)
Payment of dividends. . . . . . . . . . . . . . . . . . (62,564) (79,310) (95,206)
----------------------------------------
Net cash flows from financing activities . . . . . . (64,481) (96,578) (118,455)
----------------------------------------
Change in Cash and Temporary Cash Investments. . . . . . (6,320) (1,339) 18,993
Cash and Temporary Cash Investments at Beginning
of Year . . . . . . . . . . . . . . . . . . . . . . . 56,792 58,131 39,138
----------------------------------------
Cash and Temporary Cash Investments at End of Year . . . $ 50,472 $ 56,792 $ 58,131
----------------------------------------
----------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes . . . . . . . . . . . . . . . . . . . . $ 63,421 $ 41,508 $ 40,049
Interest on borrowed money . . . . . . . . . . . . . 39,582 40,334 42,589
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
BALANCE SHEETS
(Thousands of $)
<TABLE>
<CAPTION>
Assets December 31
---------------------------
1997 1996
------ ------
<S> <C> <C>
Utility Plant, at original cost
Electric. . . . . . . . . . . . . . . . . . . . . . . . $ 2,242,980 $ 2,192,557
Gas . . . . . . . . . . . . . . . . . . . . . . . . . . 337,619 320,791
Common. . . . . . . . . . . . . . . . . . . . . . . . . 137,496 130,678
---------------------------
2,718,095 2,644,026
Less: Reserve for depreciation . . . . . . . . . . . . 1,072,842 999,987
---------------------------
1,645,253 1,644,039
Construction work in progress . . . . . . . . . . . . . 61,139 41,183
---------------------------
1,706,392 1,685,222
---------------------------
Other Property and Investments - less reserve. . . . . . 1,365 1,028
---------------------------
Current Assets
Cash and temporary cash investments . . . . . . . . . . 50,472 56,792
Marketable securities (Note 6). . . . . . . . . . . . . 19,311 3,595
Accounts receivable-less reserve of $1,295 in 1997
and $1,470 in 1996 . . . . . . . . . . . . . . . . . . 124,872 115,144
Materials and supplies-at average cost
Fuel (predominantly coal). . . . . . . . . . . . . . 17,651 14,576
Gas stored underground . . . . . . . . . . . . . . . 41,487 35,510
Other. . . . . . . . . . . . . . . . . . . . . . . . 31,866 32,426
Prepayments . . . . . . . . . . . . . . . . . . . . . . 2,627 2,480
---------------------------
288,286 260,523
---------------------------
Deferred Debits and Other Assets
Unamortized debt expense. . . . . . . . . . . . . . . . 6,074 6,933
Regulatory assets (Note 3). . . . . . . . . . . . . . . 24,899 27,729
Other . . . . . . . . . . . . . . . . . . . . . . . . . 28,625 25,277
---------------------------
59,598 59,939
---------------------------
$ 2,055,641 $ 2,006,712
---------------------------
---------------------------
Capital and Liabilities
Capitalization (see Statements of Capitalization)
Common equity . . . . . . . . . . . . . . . . . . . . . $ 683,326 $ 633,757
Cumulative preferred stock. . . . . . . . . . . . . . . 95,328 95,328
Long-term debt. . . . . . . . . . . . . . . . . . . . . 626,800 646,835
---------------------------
1,405,454 1,375,920
---------------------------
Current Liabilities
Long-term debt due within one year. . . . . . . . . . . 20,000 -
Accounts payable. . . . . . . . . . . . . . . . . . . . 98,894 97,478
Trimble County settlement (Note 13) . . . . . . . . . . 13,248 17,511
Dividends declared. . . . . . . . . . . . . . . . . . . 21,152 20,131
Accrued taxes . . . . . . . . . . . . . . . . . . . . . 18,723 11,982
Accrued interest. . . . . . . . . . . . . . . . . . . . 8,016 9,994
Other . . . . . . . . . . . . . . . . . . . . . . . . . 14,608 13,128
---------------------------
194,641 170,224
---------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Notes 1 and 8) . . . 249,851 241,681
Investment tax credit, in process of amortization . . . 75,800 80,040
Accumulated provision for pensions and related benefits 40,608 42,554
Customers' advances for construction. . . . . . . . . . 10,385 10,033
Regulatory liability (Note 3) . . . . . . . . . . . . . 65,502 77,287
Other . . . . . . . . . . . . . . . . . . . . . . . . . 13,400 8,973
---------------------------
455,546 460,568
---------------------------
Commitments and Contingencies (Note 12)
$ 2,055,641 $ 2,006,712
---------------------------
---------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF CAPITALIZATION
(Thousands of $)
<TABLE>
<CAPTION>
December 31
-------------------------------------
1997 1996
---- ----
<S> <C> <C>
Common Equity
Common stock, without par value -
Authorized 75,000,000 shares, outstanding 21,294,223 shares. . . . . $ 425,170 $ 425,170
Common stock expense . . . . . . . . . . . . . . . . . . . . . . . . . . (836) (836)
Unrealized gain on marketable securities, net of income
taxes of $16 in 1997 and $136 in 1996 (Note 6) . . . . . . . . . . . 82 201
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 258,910 209,222
-----------------------------------
683,326 633,757
-----------------------------------
</TABLE>
Cumulative Preferred Stock
Redeemable on 30 days notice by the Company except $5.875 series
<TABLE>
<CAPTION>
Shares Current
Outstanding Redemption Price
----------- ----------------
<S> <C> <C> <C> <C>
$25 par value, 1,720,000 shares authorized -
5% series. . . . . . . . . . . . . . . . . 860,287 $ 28.00 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction Rate . . . . . . . . . . . . . . . 500,000 100.00 50,000 50,000
$5.875 series. . . . . . . . . . . . . . . 250,000 Not redeemable 25,000 25,000
Preferred stock expense. . . . . . . . . . . . . . . . . . . . . . . . (1,179) (1,179)
-----------------------------------
95,328 95,328
-----------------------------------
Long-Term Debt (Note 10)
First mortgage bonds -
Series due June 1, 1998, 6 3/4%. . . . . . . . . . . . . . . . . . - 20,000
Series due July 1, 2002, 7 1/2%. . . . . . . . . . . . . . . . . . 20,000 20,000
Series due August 15, 2003, 6% . . . . . . . . . . . . . . . . . . 42,600 42,600
Pollution control series:
N due February 1, 2019, 7 3/4% . . . . . . . . . . . . . . . . - 35,000
O due February 1, 2019, 7 3/4% . . . . . . . . . . . . . . . . - 35,000
P due June 15, 2015, 7.45% . . . . . . . . . . . . . . . . . . 25,000 25,000
Q due November 1, 2020, 7 5/8% . . . . . . . . . . . . . . . . 83,335 83,335
R due November 1, 2020, 6.55%. . . . . . . . . . . . . . . . . 41,665 41,665
S due September 1, 2017, variable. . . . . . . . . . . . . . . 31,000 31,000
T due September 1, 2017, variable. . . . . . . . . . . . . . . 60,000 60,000
U due August 15, 2013, variable. . . . . . . . . . . . . . . . 35,200 35,200
V due August 15, 2019, 5 5/8%. . . . . . . . . . . . . . . . . 102,000 102,000
W due October 15, 2020, 5.45%. . . . . . . . . . . . . . . . . 26,000 26,000
X due April 15, 2023, 5.90%. . . . . . . . . . . . . . . . . . 40,000 40,000
-----------------------------------
Total first mortgage bonds . . . . . . . . . . . . . . . . . . . . 506,800 596,800
Pollution control bonds (unsecured) -
Jefferson County Series due September 1, 2026, variable. . . . 22,500 22,500
Trimble County Series due September 1, 2026, variable. . . . . 27,500 27,500
Jefferson County Series due November 1, 2027, variable . . . . 35,000 -
Trimble County Series due November 1, 2027, variable . . . . . 35,000 -
-----------------------------------
Total unsecured pollution control bonds. . . . . . . . . . . . . . 120,000 50,000
-----------------------------------
Total long-term bonds. . . . . . . . . . . . . . . . . . . . . . . 626,800 646,800
Unamortized premium on bonds . . . . . . . . . . . . . . . . . . . . . - 35
-----------------------------------
626,800 646,835
-----------------------------------
Total Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,405,454 $ 1,375,920
-----------------------------------
-----------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Louisville Gas and Electric Company (the Company) is the primary subsidiary of
LG&E Energy Corp. The Company is a regulated public utility that is engaged in
the generation, transmission, distribution, and sale of electric energy and the
storage, distribution, and sale of natural gas in Louisville and adjacent areas
in Kentucky. LG&E Energy Corp. is an exempt energy services holding company
with wholly-owned subsidiaries consisting of the Company and LG&E Capital Corp.
All of the Company's Common Stock is held by LG&E Energy Corp.
UTILITY PLANT. The Company's plant is stated at original cost, which includes
payroll-related costs such as taxes, fringe benefits, and administrative and
general costs. Construction work in progress has been included in the rate
base, and, accordingly, the Company has not recorded any allowance for funds
used during construction.
The cost of plant retired or disposed of in the normal course of business is
deducted from plant accounts and such cost plus removal expense less salvage
value is charged to the reserve for depreciation. When complete operating units
are disposed of, appropriate adjustments are made to the reserve for
depreciation and gains and losses, if any, are recognized.
DEPRECIATION. Depreciation is provided on the straight-line method over the
estimated service lives of depreciable plant. The amounts provided for 1997
were 3.4% (3.2% electric, 3.3% gas, and 6% common); and for 1996 and 1995 were
3.3% (3.2% electric, 3.3% gas, and 6% common) of average depreciable plant.
CASH AND TEMPORARY CASH INVESTMENTS. The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which approximates
fair value.
FINANCIAL INSTRUMENTS. The Company uses over-the-counter interest-rate swap
agreements to hedge its exposure to fluctuations in the interest rates it pays
on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond
futures to hedge its exposure to fluctuations in the value of its investments in
the preferred stocks of other companies. Gains and losses on interest-rate
swaps used to hedge interest rate risk are reflected in interest charges
monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge
investments in preferred stocks are initially deferred and classified as
unrealized gains or losses on marketable securities in common equity and then
charged or credited to other income and deductions when the securities are sold.
See Note 4, Financial Instruments.
5
<PAGE>
DEBT EXPENSE. Debt expense is amortized over the lives of the related bond
issues, consistent with regulatory practices.
DEFERRED INCOME TAXES. Deferred income taxes have been provided for all
material book-tax temporary differences.
INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the
tax law that permitted a reduction of the Company's tax liability based on
credits for certain construction expenditures. Deferred investment tax credits
are being amortized to income over the estimated lives of the related property
that gave rise to the credits.
REVENUE RECOGNITION. Revenues are recorded based on service rendered to
customers through month-end. The Company accrues an estimate for unbilled
revenues from each meter reading date to the end of the accounting period.
Under an agreement approved by the Public Service Commission of
Kentucky (Kentucky Commission or Commission), the Company has implemented a
demand side management program and a "decoupling mechanism," which allows the
Company to recover a predetermined level of revenue on electric and gas
residential sales. See Management's Discussion and Analysis, Rates and
Regulation, for further discussion.
FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to
expense as used, and the cost of gas supply is charged to expense as delivered
to the distribution system.
MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent items at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. See Note 12, Commitments and
Contingencies, for a further discussion.
NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1997, the Company adopted
Statement of Financial Accounting Standards No. 125, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES (SFAS No.
125). This new standard is effective for all transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996. Adopting SFAS No. 125 had no impact on the Company's financial position
or results of operations.
The Company adopted the provisions of Statement of Position 96-1, ENVIRONMENTAL
REMEDIATION LIABILITIES, effective January 1, 1997. This statement provides
authoritative guidance for recognition, measurement, and disclosure of
environmental remediation liabilities in financial statements. Due to the
Company's previous recognition of this type of liability, adoption did not have
a material impact on the Company's financial position or results of operation.
See Note 12, Commitments and Contingencies, for a further discussion of the
Company's environmental commitments and contingencies.
6
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128), and
No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE (SFAS No. 129),
effective for periods ending after December 15, 1997. SFAS No. 128 will not
have an effect on the Company because the common stock is held by the parent,
LG&E Energy Corp. The Company does not expect any change in reporting by the
Company as a result of adopting SFAS No. 129.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, and No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,
effective for periods beginning after December 15, 1997. The Company does not
expect its comprehensive income to differ materially from its net income or its
segment disclosures to change significantly as a result of adopting the
provisions of these statements.
NOTE 2 - LG&E - KENTUCKY UTILITIES MERGER
On May 20, 1997, LG&E Energy Corp. (LG&E Energy), the parent company of LG&E,
entered into an Agreement and Plan of Merger with KU Energy Corporation (KU).
As a result of the merger, LG&E Energy will become the parent company of KU's
principal operating subsidiary, Kentucky Utilities Company (Kentucky Utilities).
The operating utility subsidiaries (LG&E and Kentucky Utilities) will maintain
their separate corporate identities and will continue to serve customers in
Kentucky and Virginia under their present names although certain functions
performed by each of the utilities will be combined. LG&E Energy and KU expect
more than $760 million in gross non-fuel savings over a ten-year period
following the merger. Costs to achieve these synergies are estimated to be $77
million. The preferred stock and debt securities of the operating utility
subsidiaries will not be affected by the merger.
On September 12, 1997, the Kentucky Commission approved the merger application
substantially as filed. In the application filed with the Commission, the
utilities proposed that 50% of the net non-fuel cost savings estimated to be
achieved from the merger, less 50% of the costs to achieve such savings (but not
in excess of the currently estimated costs to achieve), be applied to reduce
customer rates, and the remaining 50% be retained by the companies. The
Commission approved and allocated the customer savings 53% to Kentucky Utilities
and 47% to LG&E. The order provides for a surcredit on customers' bills for 50%
of the projected net non-fuel savings in each of the five years following
consummation of the merger. The credit, which will be about 2% of customer
bills in the five-year period, will amount to approximately $55 million in net
non-fuel savings to LG&E customers. Any fuel cost savings will be passed to
Kentucky customers through the companies' fuel adjustment clauses. One-half of
the costs to achieve the savings will be charged to expenses as incurred, once
the merger is consummated, and the remaining portion (not to exceed one-half of
$77 million for Kentucky Utilities and LG&E combined) will be deferred as a
regulatory asset and amortized as an offset to customer savings equally over
five years. It will be up to Kentucky Utilities and LG&E to actually realize
the estimated level of net non-fuel savings.
7
<PAGE>
On October 9, 1997, LG&E Energy and KU filed for approval of the merger with the
Federal Energy Regulatory Commission. On October 14, 1997, in separate
meetings, stockholders from each of the companies met and the holders of over
75% of the outstanding shares of common stock of LG&E Energy and KU approved the
merger. On January 20, 1998, the Virginia State Corporation Commission approved
the merger substantially as filed.
The merger remains subject to approval of the Federal Energy Regulatory
Commission under the Federal Power Act, the approval of the Securities and
Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935,
and the filing of requisite notifications with the Federal Trade Commission and
the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, and the expiration of all applicable waiting periods
thereunder. It is anticipated that LG&E Energy, as parent of LG&E and Kentucky
Utilities, will continue to be an exempt holding company under the Public
Utility Holding Company Act of 1935.
NOTE 3 - RATES AND REGULATORY MATTERS
The Company conforms with generally accepted accounting principles as applied to
regulated public utilities and as prescribed by the Federal Energy Regulatory
Commission (FERC) and the Kentucky Commission. The Company is subject to
Statement of Financial Accounting Standards No. 71, ACCOUNTING FOR THE EFFECTS
OF CERTAIN TYPES OF REGULATION (SFAS No. 71). Under SFAS No. 71, certain costs
that would otherwise be charged to expense are deferred as regulatory assets
based on expected recovery from customers in future rates. Likewise, certain
credits that would otherwise be reflected as income are deferred as regulatory
liabilities based on expected flowback to customers in future rates. The
Company's current or expected recovery of deferred costs and expected flowback
of deferred credits is generally based on specific ratemaking decisions or
precedent for each item. The following regulatory assets and liabilities were
included in the balance sheets as of December 31 (in thousands of $):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Unamortized loss on bonds. . . . . . . . . . . . . . . . . . $ 18,698 $ 17,162
Merger costs . . . . . . . . . . . . . . . . . . . . . . . . 2,938 -
Manufactured gas sites . . . . . . . . . . . . . . . . . . . 3,263 3,244
Unamortized extraordinary retirements. . . . . . . . . . . . - 4,087
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3,236
-----------------------------
Total regulatory assets. . . . . . . . . . . . . . . . . . . 24,899 27,729
Deferred income taxes - net. . . . . . . . . . . . . . . . . (65,502) (77,287)
-----------------------------
Regulatory assets and (liabilities) - net. . . . . . . . . . $ (40,603) $ (49,558)
-----------------------------
-----------------------------
</TABLE>
During 1997, the Company wrote off certain previously deferred assets that
amounted to approximately $4.2 million. Items written off include expenses
associated with the Company's hydro-electric plant, a management audit fee, and
the accelerated write-off of losses on early retirement of facilities.
8
<PAGE>
ENVIRONMENTAL COST RECOVERY. In April 1995, in response to an application filed
by the Company, the Commission approved, with modifications, an environmental
cost recovery surcharge that increased electric revenues by $3.2 million in
1995, an additional $2.4 million in 1996, and an additional $.4 million in 1997.
An appeal of the Commission's April 1995 order by various intervenors in the
proceeding (including the Kentucky Attorney General) is currently pending in the
Franklin Circuit Court of Kentucky. The Company is contesting the legal
challenges to the surcharge, but cannot predict the outcome of the appeal. In a
similar proceeding involving appeals from the Commission's order authorizing an
environmental cost recovery surcharge for Kentucky Utilities Company by the same
intervenors, the Kentucky Court of Appeals, in a decision issued on December 5,
1997, upheld the constitutionality of the surcharge statute. The intervenors
have petitioned the Kentucky Supreme Court to review the decision of the
Kentucky Court of Appeals. Any refunds that may be ordered as a result of these
proceedings are not expected to have a material adverse effect on the Company's
financial position or results of operations. See Rates and Regulation under
Management's Discussion and Analysis for a further discussion.
PERFORMANCE-BASED RATEMAKING. On September 30, 1997, the Commission issued an
order approving the Company's request to implement an experimental
performance-based ratemaking mechanism. This mechanism, which only applies to
gas procurement activities and gas off-system sales, was approved for a
three-year test period effective October 1, 1997. During the experimental
period, rate adjustments related to this mechanism will be determined for each
12-month period beginning November 1 and ending October 31. This mechanism is
not expected to have a material effect on the Company's financial position or
results of operations.
FUTURE RATE REGULATION. In its September 12, 1997 order approving the merger of
LG&E Energy and KU, the Kentucky Commission ordered the Company to file by the
later of the consummation of the merger or September 14, 1998, detailed plans to
address the future rate regulation of the Company. The Commission directed the
Company to indicate in its filing whether it desired to remain under traditional
rate of return regulation or commence non-traditional regulation. The Company
was further ordered to explain the reasons for its election, and in the case of
traditional regulation, include an analysis and proposals relative to its
earnings at that time. If non-traditional regulation is elected, the Company
must explain the reasons for its choice and how its plan will achieve the
Commission's goals of providing incentives to utilities and a sharing of the
resulting benefits with customers. The Commission stated that it will fully
investigate the filing and determine whether changes should be made to the
existing regulation of the Company. The Company cannot presently predict the
outcome of this matter.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. The Kentucky
Commission has opened Administrative Case No. 369 to lay ground work for
Commission policy addressing cost allocations, affiliate transactions, and codes
of conduct governing the relationship between utilities and their non-regulated
operations and affiliates. The Commission stated in its December 19, 1997 order
it intends to address two major areas in the proceedings: the tools and
conditions needed to prevent cost shifting and cross-subsidization between
regulated and non-
9
<PAGE>
regulated operations; and whether a code of conduct should be established to
assure that non-regulated segments of the holding company are not engaged in
practices which result in unfair competition caused by cost shifting from the
non-regulated affiliate to the utility. Management does not expect the ultimate
resolution of this matter to have a material adverse effect on the Company's
financial position or results of operations.
NOTE 4 - FINANCIAL INSTRUMENTS
The Company uses over-the-counter interest-rate swap agreements to hedge its
exposure to fluctuations in the interest rates it pays on variable-rate debt,
and it uses exchange-traded U.S. Treasury note and bond futures to hedge its
exposure to fluctuations in the value of its investments in the preferred stocks
of other companies.
At December 31, 1997, the Company held U.S. Treasury notes and bond futures
contracts with notional amounts totaling $2.4 million. These contracts are used
to hedge price risk associated with certain marketable securities and mature in
March 1998.
As of December 31, 1997, the Company had in effect one interest rate swap
agreement to hedge its exposure to tax exempt rates related to Pollution Control
Bonds, Variable Rate Series. The swap has a notional amount of $15 million and
it matures in September 1999. The Company paid a fixed rate on the swap of
4.74% in 1997, 1996, and 1995 and received a variable rate based on the JJ Kenny
Index of 3.66% in 1997, 3.46% in 1996, and 3.87% in 1995. In addition, the
Company had entered into three other tax exempt interest rate swaps that became
effective in February 1998. The notional amount of each of these is $17
million, and they mature in February 2001, 2003, and 2005. The swap agreements
call for the Company to pay fixed rates averaging 4.184%, and to receive a
variable rate based on the PSA Municipal Bond Index.
The cost and estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 follow (in thousands of $):
<TABLE>
<CAPTION>
1997 1996
------------------------- --------------------------
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Marketable securities. . . . . . . . . . . . . . . . . $ 19,213 $ 19,311 $ 3,258 $ 3,595
Long-term investments -
Not practicable to estimate fair value . . . . . . . 747 747 744 744
Preferred stock subject to mandatory redemption. . . . 25,000 26,250 25,000 24,938
Long-term debt . . . . . . . . . . . . . . . . . . . . 626,800 649,491 646,800 662,721
U.S. Treasury note and bond futures. . . . . . . . . . - (37) - 6
Interest-rate swaps. . . . . . . . . . . . . . . . . . - (248) - (319)
</TABLE>
All of the above valuations reflect prices quoted by exchanges except for the
swaps and the long-term investments. The fair values of the swaps reflect price
quotes from dealers or amounts calculated using accepted pricing models. The
fair values of the long-term investments reflect cost, since the Company cannot
reasonably estimate fair value.
10
<PAGE>
NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on- or off-balance sheet) relate to
groups of customers or counterparties that have similar economic or industry
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.
The Company's customer receivables and gas and electric revenues arise from
deliveries of natural gas to approximately 284,000 customers and electricity to
approximately 356,000 customers in Louisville and adjacent areas in Kentucky.
For the year ended December 31, 1997, 73% of total revenue was derived from
electric operations and 27% from gas operations.
The Company's operation and maintenance employees are members of the
International Brotherhood of Electrical Workers (IBEW) Local 2100 which
represents approximately 60% of the Company's workforce. The Company's
collective bargaining agreement with IBEW employees expires in November 1998.
NOTE 6 - MARKETABLE SECURITIES
The Company's marketable securities have been determined to be
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Proceeds from sales of available-for-sale securities in 1997 were
approximately $2.5 million, which resulted in immaterial realized gains and
losses. Proceeds from sales of available-for-sale securities in 1996 were
approximately $28.6 million, which resulted in realized gains of approximately
$.3 million and losses of approximately $.8 million, calculated using the
specific identification method.
11
<PAGE>
Approximate cost, fair value, and other required information pertaining to the
Company's available-for-sale securities by major security type as of
December 31, 1997 and 1996, follow (in thousands of $):
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Fixed Fixed
Equity Income Total Equity Income Total
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Cost . . . . . . . . . . . . . . . . . . $ 3,763 $ 15,450 $ 19,213 $ 3,258 $ - $ 3,258
Unrealized gains . . . . . . . . . . . . 192 13 205 572 - 572
Unrealized losses. . . . . . . . . . . . (40) (67) (107) (235) - (235)
-----------------------------------------------------------------------------------
Fair values. . . . . . . . . . . . . . . $ 3,915 $ 15,396 $ 19,311 $ 3,595 $ - $ 3,595
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Fair Values:
No maturity. . . . . . . . . . . . . . $ 3,915 $ 114 $ 4,029 $ 2,126 $ - $ 2,126
Contractual Maturities:
Less than one year . . . . . . . . . - 8,795 8,795 1,469 - 1,469
One to five years. . . . . . . . . . - 5,442 5,442 - - -
Five to ten years. . . . . . . . . . - - - - - -
Over ten years . . . . . . . . . . . - 1,045 1,045 - - -
Not due at a single maturity date. . - - - - - -
-----------------------------------------------------------------------------------
Total Fair Values. . . . . . . . . . . . $ 3,915 $ 15,396 $ 19,311 $ 3,595 $ - $ 3,595
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS
PENSION PLANS. The Company has two non-contributory, defined-benefit pension
plans that cover all eligible employees. Retirement benefits are based on the
employee's age at retirement, years of service, and compensation. The Company's
policy is to fund annual actuarial costs, up to the maximum amount deductible
for income tax purposes, as determined under the frozen entry age actuarial cost
method. The assets of the plans consist primarily of common stocks, corporate
bonds, investments in international mutual funds, and United States government
securities.
The Company also has a supplemental executive retirement plan that covers
officers of the Company. The plan provides retirement benefits based on average
earnings during the final three years prior to retirement, reduced by social
security benefits, any pension benefits received from plans of prior employers,
and by amounts received under the pension plans referred to in the preceding
paragraph.
12
<PAGE>
Pension costs were $2.7 million for 1997, $4.3 million for 1996, and $5 million
for 1995, of which approximately $491,000, $751,000, and $761,000, respectively,
were charged to construction. The components of periodic pension expense are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the period . . . . . . . $ 5,213 $ 4,989 $ 4,361
Interest cost on projected benefit obligation. . . . . . . . 17,630 16,697 14,328
Actual return on plan assets . . . . . . . . . . . . . . . . (46,039) (31,931) (45,608)
Amortization of transition asset . . . . . . . . . . . . . . (1,112) (1,112) (1,112)
Net amortization and deferral. . . . . . . . . . . . . . . . 27,032 15,669 33,008
--------------------------------------
Net pension cost . . . . . . . . . . . . . . . . . . . . . . $ 2,724 $ 4,312 $ 4,977
--------------------------------------
--------------------------------------
</TABLE>
The funded status of the pension plans at December 31 is shown below (in
thousands of $):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . $ 209,240 $ 178,534
Non-Vested . . . . . . . . . . . . . . . . . . . . . . . . 25,455 19,913
------------------------
Accumulated benefit obligation . . . . . . . . . . . . . . 234,695 198,447
Effect of projected future compensation. . . . . . . . . . 39,400 30,902
------------------------
Projected benefit obligation . . . . . . . . . . . . . . . 274,095 229,349
Plan assets at fair value. . . . . . . . . . . . . . . . . 280,238 238,026
------------------------
Plan assets in excess of projected benefit obligation. . . 6,143 8,677
Unrecognized net transition asset. . . . . . . . . . . . . (9,188) (10,300)
Unrecognized prior service cost. . . . . . . . . . . . . . 43,518 44,142
Unrecognized net gain. . . . . . . . . . . . . . . . . . . (61,790) (65,891)
------------------------
Accrued pension liability. . . . . . . . . . . . . . . . . . $ (21,317) $ (23,372)
------------------------
------------------------
</TABLE>
The assumptions used in determining the actuarial valuations are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Assumed discount rate to determine
projected benefit obligation . . . . . . . . . . . . . . . 7% 7.75%
Assumed long-term rate of return
on plan assets . . . . . . . . . . . . . . . . . . . . . . 8.5% 8.5%
Assumed annual rate of increase in
future compensation levels . . . . . . . . . . . . . . . . 2% - 4% 2% - 4.25%
</TABLE>
POST-RETIREMENT BENEFITS. The Company provides certain health care and life
insurance benefits for eligible retired employees. Post-retirement health care
benefits are subject to a maximum amount payable by the Company. The Company
accrues for the expected cost of post-retirement benefits other than pensions
during the employee's years of service with the Company. The discounted present
value of the post-retirement benefit obligation is being amortized over 20
years.
13
<PAGE>
Post-retirement benefit costs are shown below (in thousands of $):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . . . . . . . . . . $ 746 $ 773 $ 595
Interest cost. . . . . . . . . . . . . . . . . . . . . . . . 2,943 2,976 2,706
Actual return on assets. . . . . . . . . . . . . . . . . . . (80) - -
Amortization of transition obligation. . . . . . . . . . . . 1,337 1,337 1,337
Net amortization and deferral. . . . . . . . . . . . . . . . 256 328 -
--------------------------------------
Post-retirement benefit cost . . . . . . . . . . . . . . . . $ 5,202 $ 5,414 $ 4,638
--------------------------------------
--------------------------------------
</TABLE>
The accumulated post-retirement benefit obligation at December 31, is shown
below (in thousands of $):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,735) $ (18,568)
Fully eligible active employees. . . . . . . . . . . . . . . (3,783) (4,808)
Other active employees . . . . . . . . . . . . . . . . . . . (17,855) (16,575)
------------------------
Accumulated post-retirement benefit obligation . . . . . . . (43,373) (39,951)
Plan assets at fair value. . . . . . . . . . . . . . . . . . 4,384 2,284
Unrecognized prior service cost. . . . . . . . . . . . . . . 3,410 3,738
Unrecognized transition obligation . . . . . . . . . . . . . 20,053 21,390
Unrecognized net loss. . . . . . . . . . . . . . . . . . . . 2,901 493
------------------------
Accrued post-retirement benefit liability. . . . . . . . . . $ (12,625) $ (12,046)
------------------------
------------------------
</TABLE>
The accumulated post-retirement benefit obligation was determined using an
assumed discount rate of 7% for 1997 and 7.75% for 1996. Assumed compensation
increases for projected life insurance benefits for affected groups was 4% for
1997 and 4.25% for 1996. An assumed health care cost trend rate of 9% was
assumed for 1997, gradually decreasing to 4.25% in nine years and thereafter.
A 1% increase in the assumed health care cost trend rate would increase the
accumulated post-retirement benefit obligation by approximately $1.7 million and
the annual service and interest cost by approximately $200,000. In 1996, the
Company began funding certain liabilities for post-retirement benefits through a
tax-deductible funding vehicle. The plan assets are being held in two voluntary
employee benefit association (VEBA) trusts and are invested primarily in
short-term United States government securities.
THRIFT SAVINGS PLAN. The Company has a Thrift Savings Plan under Section 401(k)
of the Internal Revenue Code. The plan covers all regular full-time employees
with one year or more of service at the Company. Under the plan, eligible
employees may defer and contribute to the plan a portion of current compensation
in order to provide future retirement benefits. The Company makes contributions
to the plan by matching a portion of employee contributions. These costs were
approximately $1.8 million for each of the years 1997, 1996, and 1995.
14
<PAGE>
NOTE 8 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands
of $):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Included in Operating Expenses:
Current - Federal. . . . . . . . . . . . . . . $ 57,590 $ 33,823 $ 36,379
- State-net. . . . . . . . . . . . . . 14,593 7,685 9,138
Deferred - Federal-net. . . . . . . . . . . . . (4,565) 19,161 4,021
- State-net. . . . . . . . . . . . . . 703 6,587 2,728
Deferred investment tax credit . . . . . . . . . 102 409 -
Amortization of investment tax credit. . . . . . (4,342) (4,406) (4,742)
---------------------------------------
Total . . . . . . . . . . . . . . . . . . . . $ 64,081 $ 63,259 $ 47,524
---------------------------------------
Included in Other Income and (Deductions):
Current - Federal. . . . . . . . . . . . . . . $ 1,484 $ 196 $ (555)
- State. . . . . . . . . . . . . . . . 161 (96) (343)
Deferred - Federal-net. . . . . . . . . . . . . 292 246 240
- State-net. . . . . . . . . . . . . . 75 61 60
---------------------------------------
Total . . . . . . . . . . . . . . . . . . . . 2,012 407 (598)
---------------------------------------
Total Income Tax Expense . . . . . . . . . . . . . $ 66,093 $ 63,666 $ 46,926
---------------------------------------
---------------------------------------
</TABLE>
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation and other plant-related items . . . . . . . . $ 321,442 $ 314,692
Other liabilities. . . . . . . . . . . . . . . . . . . . . 6,702 14,864
------------------------
328,144 329,556
------------------------
Deferred Tax Assets:
Investment tax credit. . . . . . . . . . . . . . . . . . . 30,595 32,305
Income taxes due to customers. . . . . . . . . . . . . . . 26,357 31,195
Pension overfunding. . . . . . . . . . . . . . . . . . . . 7,265 7,860
Accrued expenses not currently deductible and other. . . . 14,076 16,515
------------------------
78,293 87,875
------------------------
Net Deferred Income Tax Liability . . . . . . . . . . . $ 249,851 $ 241,681
------------------------
------------------------
</TABLE>
15
<PAGE>
A reconciliation of differences between the statutory U.S. federal income tax
rate and the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate. . . . . . . . . . . . . . 35.0% 35.0% 35.0%
State income taxes net of federal benefit. . . . . . . . . . 5.7 5.4 5.8
Amortization of investment tax credit. . . . . . . . . . . . (2.4) (2.6) (3.6)
Other differences-net. . . . . . . . . . . . . . . . . . . . (1.5) (.7) (1.1)
-----------------------------------
Effective Income Tax Rate. . . . . . . . . . . . . . . . . . 36.8% 37.1% 36.1%
-----------------------------------
-----------------------------------
</TABLE>
NOTE 9 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gain on sale of stock options. . . . . . . . . . . . . . . . $ 1,794 $ - $ -
Interest on income tax settlement. . . . . . . . . . . . . . 1,446 - -
Interest and dividend income . . . . . . . . . . . . . . . . 4,786 4,096 5,732
Gains (losses) on fixed asset disposal . . . . . . . . . . . 77 (36) 1,090
Donations. . . . . . . . . . . . . . . . . . . . . . . . . . (147) (150) (144)
Income taxes and other . . . . . . . . . . . . . . . . . . . (3,679) (2,990) (2,902)
--------------------------------------
Total other income and deductions. . . . . . . . . . . . . . $ 4,277 $ 920 $ 3,776
--------------------------------------
--------------------------------------
</TABLE>
NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS
Annual requirements for the sinking funds of the Company's First Mortgage Bonds
(other than the First Mortgage Bonds issued in connection with certain Pollution
Control Bonds) are the amounts necessary to redeem 1% of the highest principal
amount of each series of bonds at any time outstanding. Property additions
(166 2/3% of principal amounts of bonds otherwise required to be so redeemed)
have been applied in lieu of cash. It is the intent of the Company to apply
property additions to meet 1998 sinking fund requirements of the First Mortgage
Bonds.
The trust indenture securing the First Mortgage Bonds constitutes a direct first
mortgage lien upon a substantial portion of all property owned by the Company.
The indenture, as supplemented, provides in substance that, under certain
specified conditions, portions of retained earnings will not be available for
the payment of dividends on common stock. No portion of retained earnings is
presently restricted by this provision.
Pollution Control Bonds (Louisville Gas and Electric Company Projects) issued by
Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan
payments by the Company to the Counties pursuant to loan agreements, and certain
series are further secured by the delivery from time to time of an equal amount
of the Company's First Mortgage Bonds, Pollution Control Series. First Mortgage
Bonds so delivered are summarized in the Statements of Capitalization. No
principal or interest on these First Mortgage Bonds is payable unless default on
the loan agreements
16
<PAGE>
occurs. The interest rate reflected in the Statements of Capitalization applies
to the Pollution Control Bonds.
In November 1997, the Company issued $35 million of Jefferson County, Kentucky
and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. Interest rates for these bonds were 3.90%
and 3.85%, respectively, at December 31, 1997. The proceeds from these bonds
were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky
and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019.
In October 1996, the Company issued $22.5 million of Jefferson County, Kentucky,
and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79%
and 3.82%, respectively, as of December 31, 1997. In December 1996, the
proceeds from the bonds were used to redeem the outstanding 7.25% Series of
Jefferson County and Trimble County Pollution Control Bonds due December 1,
2016.
On June 1, 1996, the Company's First Mortgage Bonds, 5.625% Series of $16
million matured and were retired by the Company.
The Company's First Mortgage Bonds, 6.75% Series of $20 million is scheduled to
mature in June 1998, and the $20 million, 7.5% Series is scheduled for maturity
in 2002. There are no scheduled maturities of Pollution Control Bonds for the
five years subsequent to December 31, 1997. The Company has no cash sinking
fund requirements.
NOTE 11 - NOTES PAYABLE
The Company had no notes payable at December 31, 1997, and 1996.
At December 31, 1997, the Company had unused lines of credit of $200 million,
for which it pays commitment fees. The credit facility provides for short-term
borrowings and support of variable rate Pollution Control Bonds. The credit
lines are scheduled to expire in 2001. Management expects to renegotiate these
lines when they expire.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM. The Company had commitments in connection with its
construction program aggregating approximately $7 million at December 31, 1997.
Construction expenditures for the years 1998 and 1999 are estimated to total
approximately $260 million.
17
<PAGE>
OPERATING LEASE. The Company leases office space and accounts for all of its
office space leases as operating leases. Total lease expense for 1997, 1996,
and 1995, less amounts contributed by the parent company, was $1.8 million, $1.9
million, and $2 million, respectively. The future minimum annual lease payments
under lease agreements for years subsequent to December 31, 1997, are as follows
(in thousands of $):
<TABLE>
<S> <C>
1998 . . . . . . . . . . . . . . . . . . . . . . . $ 3,071
1999 . . . . . . . . . . . . . . . . . . . . . . . 3,055
2000 . . . . . . . . . . . . . . . . . . . . . . . 3,321
2001 . . . . . . . . . . . . . . . . . . . . . . . 3,654
2002 . . . . . . . . . . . . . . . . . . . . . . . 3,594
Thereafter . . . . . . . . . . . . . . . . . . . . 8,767
----------
Total . . . . . . . . . . . . . . . . . . . . $ 25,462
-----------
-----------
</TABLE>
ENVIRONMENTAL. With the passage of the Clean Air Act Amendments of 1990 (the
Act), the Company already complied with the stringent sulfur dioxide emission
limits required by the year 2000 as it had previously installed scrubbers on all
of its coal-fired generating units. Since then, as part of its ongoing
construction program, the Company has spent $31 million for measures to meet
applicable nitrogen oxide limits. While the overall financial impact of the Act
on the Company has been minimal, the Company is closely monitoring several
significant regulatory developments which may potentially impact the Company
including efforts by local officials to address the "ozone nonattainment" status
of Jefferson County, Kentucky and implementation of new ozone and particulate
matter standards adopted by the United States Environmental Protection Agency
(USEPA) in June 1997. Finally, the Company is monitoring regulations proposed
by USEPA in October 1997, that could require numerous utilities including the
Company to reduce nitrogen oxide emissions by approximately 85% from 1990
levels. The Company has already reduced its nitrogen oxide emissions by
approximately 40%. However, if finally adopted, the proposed regulations may
require the Company to incur significant capital expenditures, currently
estimated as potentially in excess of $100 million, and significantly increased
operation and maintenance costs. The Company currently anticipates that a
significant portion of any such capital costs could be recoverable through
rates, although there can be no guarantee of such recovery.
The Company is currently addressing other emissions issues at two of its power
plants. First, the Company is conducting modeling activities in response to a
notification from the Air Pollution Control District of Jefferson County (APCD)
indicating that the Cane Run plant may be the source of a potential exceedance
of the air quality standards for sulfur dioxide. Depending on the outcome of
the modeling, the Company may be required to undertake corrective action that
could include significant capital improvements. Secondly, the Company is
working with the APCD to review the effectiveness of remedial measures aimed at
controlling particulate emissions from the Mill Creek plant which allegedly
damaged metal surfaces on adjacent properties. The Company had previously
established a claims resolution process which resulted in property damage
settlements with adjacent residents at an aggregate cost of approximately $15
million. In related litigation, in October, 1997, the Jefferson Circuit Court
dismissed all but one of the claims pursued by persons who had not previously
settled with the Company. In management's opinion, resolution
18
<PAGE>
of any remaining claims should not have a material adverse impact on the
financial position or results of operations of the Company.
The Company is also addressing potential liabilities for cleanup of properties
where hazardous substances may have been released. The Company has identified
contamination at certain manufactured gas plant (MGP) sites currently or
formerly owned by the Company. One of the sites was conveyed to a new owner
which assumed responsibility for environmental liabilities and the Company is
negotiating with potentially responsible parties and state agencies with respect
to two other sites. Until conclusion of such discussions, the Company is unable
to precisely determine its remaining liability for cleanup costs at MGP sites.
However, based on site studies, management currently estimates total cleanup
costs within the range of $3 million to $8 million and has recorded an accrual
of approximately $3 million in the accompanying financial statements.
The Company, along with other companies, has also been identified by USEPA as a
potentially responsible party allegedly liable for cleanup costs under the
Comprehensive Environmental Response Compensation and Liability Act (CERCLA) for
certain off-site disposal facilities. The Company has entered a final
settlement for $7,500 for one site and has entered tentative settlements for an
aggregate of $150,000 for the remaining sites. Tentative settlements are
subject to approval by the government and entry by the court.
NOTE 13 - TRIMBLE COUNTY GENERATING PLANT
Trimble County Unit 1 (Trimble County), a 495-megawatt coal-fired electric
generating unit placed into service in December 1990, has been the subject of
numerous legal and regulatory proceedings to determine the appropriate
ratemaking treatment to implement the Kentucky Public Service Commission's 1988
decision that the Company should not be allowed to recover 25% of the cost of
Trimble County from ratepayers.
In December 1995, the Commission approved a unanimous settlement agreement that
was filed by the Company and other parties. Under the agreement, which resolved
all outstanding issues, the Company agreed to refund approximately $22 million
to current electric customers, most of which is being refunded by credits to
customers' bills over the five years 1996 through 2000. In addition, the
Company agreed to pay $900,000 per year for five years beginning in 1996 to the
Metro Human Needs Alliance, Inc., a not-for-profit Louisville-based corporation,
for the sole purpose of funding low-income energy assistance programs in the
service territory. The Company also agreed to revise the residential decoupling
methodology approved by the Commission in 1994 in a manner that reduced revenues
collected from residential customers by approximately $1.8 million. Finally,
the parties agreed to dismiss all appeals currently pending in state courts
regarding the Commission's orders in the Company's last general rate case.
19
<PAGE>
NOTE 14 - JOINTLY OWNED ELECTRIC UTILITY PLANT
The Company owns a 75% undivided interest in Trimble County Unit 1. Accounting
for the 75% portion of the Unit, which the Commission has allowed to be
reflected in customer rates, is similar to the Company's accounting for other
wholly owned utility plants.
Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns
a 12.12% undivided interest in the Unit, and Indiana Municipal Power Agency
(IMPA) owns a 12.88% undivided interest. Each is responsible for their
proportionate ownership share of operation and maintenance expenses and
incremental assets, and for fuel used.
The following data represent shares of the jointly owned property:
<TABLE>
<CAPTION>
Trimble County
--------------------------------------
<S> <C> <C> <C> <C>
LG&E IMPA IMEA Total
---- ---- ---- -----
Ownership interest . . . . . . . . . . . . . 75% 12.88% 12.12% 100%
Mw capacity. . . . . . . . . . . . . . . . . 371.25 63.75 60 495
</TABLE>
20
<PAGE>
NOTE 15 - SEGMENTS OF BUSINESS
The Company is a regulated public utility engaged in the generation,
transmission, distribution, and sale of electricity and the storage,
distribution, and sale of natural gas.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(Thousands of $)
<S> <C> <C> <C>
Operating Information
Operating Revenues
Electric . . . . . . . . . . . . . . . $ 614,532 $ 606,696 $ 542,337 (a)
Gas . . . . . . . . . . . . . . . . . . 231,011 214,419 181,126
----------------------------------------
Total . . . . . . . . . . . . . . . . $ 845,543 $ 821,115 $ 723,463
----------------------------------------
----------------------------------------
Pre-tax Operating Income
Electric. . . . . . . . . . . . . . . . $ 197,233 $ 192,129 $ 152,199
Gas . . . . . . . . . . . . . . . . . . 15,034 18,393 16,651
----------------------------------------
Total . . . . . . . . . . . . . . . . $ 212,267 $ 210,522 $ 168,850
----------------------------------------
----------------------------------------
Other Information
Depreciation and Amortization
Electric. . . . . . . . . . . . . . . . $ 79,958 $ 76,929 $ 74,437
Gas . . . . . . . . . . . . . . . . . . 13,062 12,073 11,322
----------------------------------------
Total . . . . . . . . . . . . . . . . $ 93,020 $ 89,002 $ 85,759
----------------------------------------
----------------------------------------
Construction Expenditures (b)
Electric. . . . . . . . . . . . . . . . $ 81,713 $ 79,541 $ 66,661
Gas . . . . . . . . . . . . . . . . . . 29,180 28,338 26,762
----------------------------------------
Total . . . . . . . . . . . . . . . . $ 110,893 $ 107,879 $ 93,423
----------------------------------------
----------------------------------------
Investment Information-December 31
Identifiable Assets
Electric. . . . . . . . . . . . . . . . $1,517,512 $1,505,508 $1,501,568
Gas . . . . . . . . . . . . . . . . . . 317,337 300,550 268,840
----------------------------------------
Total . . . . . . . . . . . . . . . . 1,834,849 1,806,058 1,770,408
Other Assets (c) . . . . . . . . . . . . . 220,792 200,654 209,082
----------------------------------------
Total Assets. . . . . . . . . . . . . $2,055,641 $2,006,712 $1,979,490
----------------------------------------
----------------------------------------
</TABLE>
(a) Net of Refund - Trimble County settlement of $28.3 million.
(b) Excluding cost of removal and salvage.
(c) Includes cash and temporary cash investments, marketable securities,
accounts receivable, unamortized debt expense, and other property and
investments.
21
<PAGE>
NOTE 16 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1997 and 1996 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------
March June September December
----- ---- --------- --------
(Thousands of $)
<S> <C> <C> <C> <C>
1997
Operating Revenues . . . . . . $ 225,399 $ 180,276 $ 208,435 $ 231,433
Net Operating Income . . . . . 32,895 30,422 46,562 38,307
Net Income . . . . . . . . . . 23,967 21,487 37,223 30,596
Net Income Available for
Common Stock . . . . . . . . 22,840 20,326 36,077 29,445
1996
Operating Revenues . . . . . . $ 226,744 $ 181,107 $ 203,818 $ 209,446
Net Operating Income . . . . . 33,950 32,736 51,681 28,896
Net Income . . . . . . . . . . 23,552 22,908 42,466 19,015
Net Income Available for
Common Stock . . . . . . . . 22,396 21,772 41,320 17,885
</TABLE>
22
<PAGE>
REPORT OF MANAGEMENT
The management of Louisville Gas and Electric Company is responsible for the
preparation and integrity of the financial statements and related information
included in this Annual Report. These statements have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis and, necessarily, include amounts that reflect the best estimates and
judgment of management.
The Company's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur
Andersen LLP all the Company's financial records and related data as well as the
minutes of shareholders' and directors' meetings.
Management has established and maintains a system of internal controls that
provide reasonable assurance that transactions are completed in accordance with
management's authorization, that assets are safeguarded and that financial
statements are prepared in conformity with generally accepted accounting
principles. Management believes that an adequate system of internal controls is
maintained through the selection and training of personnel, appropriate division
of responsibility, establishment and communication of policies and procedures
and by regular reviews of internal accounting controls by the Company's internal
auditors. Management reviews and modifies its system of internal controls in
light of changes in conditions and operations, as well as in response to
recommendations from the internal auditors. These recommendations for the year
ended December 31, 1997, did not identify any material weaknesses in the design
and operation of the Company's internal control structure.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of the Company, the Audit Committee meets regularly with the
Company's independent public accountants, internal auditors and management. The
Audit Committee reviews the results of the independent accountants' audit of the
financial statements and their audit procedures, and discusses the adequacy of
internal accounting controls. The Audit Committee also approves the annual
internal auditing program, and reviews the activities and results of the
internal auditing function. Both the independent public accountants and the
internal auditors have access to the Audit Committee at any time.
Louisville Gas and Electric Company maintains and internally communicates a
written code of business conduct that addresses, among other items, potential
conflicts of interest, compliance with laws, including those relating to
financial disclosure, and the confidentiality of proprietary information.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Louisville Gas and Electric Company:
We have audited the accompanying balance sheets and statements of capitalization
of Louisville Gas and Electric Company (a Kentucky corporation and a
wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 1997 and 1996,
and the related statements of income, retained earnings and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Louisville Gas and Electric
Company as of December 31, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Louisville, Kentucky Arthur Andersen LLP
January 28, 1998
______________________________
24
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis by management focuses on those factors
that had a material effect on the Company's financial results of operations and
financial condition during 1997, 1996, and 1995 and should be read in connection
with the financial statements and notes thereto.
In May 1997, LG&E Energy Corp. (LG&E Energy) entered into a Merger Agreement
with KU Energy Corporation (KU), which provides for the combination of KU into
LG&E Energy. Completion of the merger remains subject to various regulatory
approvals and other conditions. The following discussion and analysis and
related financial statements do not reflect the impact of the Company's proposed
merger with Kentucky Utilities Company (Kentucky Utilities). See Note 2 of
Notes to Financial Statements.
Some of the following discussion may contain forward-looking statements that are
subject to certain risks, uncertainties and assumptions. Such forward looking
statements are intended to be identified in this document by the words
"anticipate," "expect," "estimate," "objective," "possible," "potential" and
similar expressions. Actual results may vary materially. Factors that could
cause actual results to differ materially include: general economic conditions;
business and competitive conditions in the energy industry; changes in federal
or state legislation; unusual weather; actions by state or federal regulatory
agencies, including decisions regarding the proposed combination of the Company
and Kentucky Utilities; and other factors described from time to time in
Louisville Gas and Electric Company's reports to the Securities and Exchange
Commission, including Exhibit No. 99.01 to LG&E's 1996 report on Form 10-K.
RESULTS OF OPERATIONS
Net Income
The Company's net income increased $5.3 million for 1997 over 1996. This
improvement was mainly due to increased sales of electricity to wholesale
customers, a lower level of maintenance expenses and increased investment and
interest income. These items were partially offset by reduced gas sales volumes
due to warmer winter weather and a write-off of certain expenses deferred in
prior periods.
Net income for 1996 increased $7.9 million over 1995 excluding a $16.9 million
charge against net income in 1995 to recognize the effects of a settlement of
the long-standing issues surrounding the Company's Trimble County electric
generating plant. Without excluding the Trimble County
25
<PAGE>
charge-off, net income increased $24.8 million over 1995. The $7.9 million
increase in net income was primarily the result of a significantly higher level
of wholesale electric sales and increased retail sales of electricity and
natural gas, partially offset by increased operation and maintenance expenses.
Revenues
A comparison of operating revenues for the years 1997 and 1996, with the
immediately preceding year reflects both increases and decreases, which have
been segregated by the following principal causes (in thousands of $):
<TABLE>
<CAPTION>
Increase (Decrease) From Prior Period
------------------------------------------------------
Electric Revenues Gas Revenues
------------------------- ------------------------
Cause 1997 1996 1997 1996
----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales to Ultimate Consumers:
Fuel and gas supply adjustments, etc.. . . . . . . . $ (2,155) $ (4,652) $ 27,192 $ 21,176
Demand side management/decoupling. . . . . . . . . . 8,041 5,429 4,348 (1,989)
Environmental cost recovery surcharge. . . . . . . . 448 2,410 - -
Variation in sales volumes . . . . . . . . . . . . . (4,810) 801 (14,891) 14,483
------------------------ ------------------------
Total . . . . . . . . . . . . . . . . . . . . . . 1,524 3,988 16,649 33,670
Wholesale sales. . . . . . . . . . . . . . . . . . . . 3,088 30,383 - -
Gas transportation-net . . . . . . . . . . . . . . . . - - 147 (971)
Other. . . . . . . . . . . . . . . . . . . . . . . . . 3,224 1,688 (204) 594
------------------------ ------------------------
Total . . . . . . . . . . . . . . . . . . . . . . $ 7,836 $ 36,059 $ 16,592 $ 33,293
------------------------ ------------------------
------------------------ ------------------------
</TABLE>
Electric revenues increased in 1997 due to a slightly higher level of wholesale
sales and other revenues. Gas revenues increased primarily as a result of
higher gas supply costs billed to customers through the gas supply clause,
partially offset by decreased gas sales due mainly to warmer weather.
Electric revenues increased in 1996 compared with 1995 primarily because of an
increase in wholesale sales of electricity which resulted from aggressive
marketing efforts. Gas revenues increased as a result of the higher cost of
natural gas in 1996 and because of increased sales to ultimate consumers (6%)
caused mainly by colder weather experienced in the first quarter of the year.
Expenses
Fuel for electric generation and gas supply expenses comprise a large segment of
the Company's total operating costs. The Company's electric and gas rates
contain a fuel adjustment clause and a gas supply clause, respectively, whereby
increases or decreases in the cost of fuel and gas supply are reflected in the
Company's rates, subject to approval by the Public Service Commission of
Kentucky (Kentucky Commission or Commission).
26
<PAGE>
Fuel expenses incurred in 1997 were approximately the same as in 1996. Fuel
expenses increased $11.7 million (8%) in 1996 primarily because of a 12%
increase in generation ($16 million), partially offset by a decrease in the cost
of coal burned ($4.3 million). The average delivered cost per ton of coal
purchased was $21.66 in 1997, $21.73 in 1996, and $23.68 in 1995.
Power purchased expense increased $.6 million (4%) in 1997 over 1996 due to an
increase in the amount of purchased power needed to support native load
requirements. Power purchased expense in 1996 of $16.6 million was
approximately the same as in 1995. Power was purchased in 1996 primarily to
supplement generation requirements related to wholesale electric power sales.
Gas supply expenses for 1997 increased $18.4 million (13%) because of the higher
cost of net gas supply ($29.3 million), partially offset by a decrease in the
volume of gas delivered to the distribution system ($10.9 million). Gas supply
expenses increased $29.7 million (27%) in 1996 mainly because of the higher cost
of net gas supply ($21.8 million) and an increase in the volume of gas delivered
to the distribution system ($7.9 million). The average unit cost per Mcf of
purchased gas was $3.46 in 1997 and 1996, and $2.62 in 1995.
Other operation expenses increased $7.4 million (5%) over 1996 primarily because
of increased costs to operate the electric generating plants ($5.1 million) and
a write-off of certain previously deferred items ($3.2 million). Items written
off include expenses associated with the hydro-electric plant and a management
audit fee. Even though the Company believes it could have reasonably expected
to recover these costs in future rate proceedings, it decided not to seek
recovery and expensed these costs because of increasing competitive pressures in
the industry.
Other operation expenses in 1996 increased $8.7 million (6%) over 1995 primarily
because of increased costs to operate the Company's electric power plants ($2.9
million), the electric and gas transmission and distribution systems ($1.9
million), and the recognition of proceeds in 1995 for the settlement of a
commercial dispute. Pursuant to a study to determine when the settlement should
be recorded, the Company recognized $6 million as a reduction of 1995 operation
expense and $2 million as a reduction of 1996 operation expense.
Maintenance expenses decreased $7.2 million (13%) from 1996 due to decreased
repairs at the electric generating plants resulting from fewer scheduled outages
($5 million) and a lower level of storm damage repairs ($1.8 million).
Maintenance expenses in 1996 increased $2.7 million (5%) over 1995 primarily due
to increased storm damage repairs ($1.8 million) and an increase in electric
power plant expenses ($.9 million).
Depreciation and amortization increased $4 million (4.5%) over 1996 because of
additional utility plant in service. In addition, 1997 reflects the accelerated
write-off of losses on early retirements of facilities. Depreciation and
amortization increased in 1996 primarily because of additional depreciable plant
in service.
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Variations in income tax expenses are largely attributable to changes in pre-tax
income.
Other income for 1997 increased by $3.4 million primarily because of interest
income recorded as a result of a favorable tax settlement and the sale of stock
options which the Company had acquired in a commercial transaction. Other
income for 1996 decreased about $2.9 million because of a decrease in income
earned from investments and lower gains realized from the sale of property as
compared to 1995. See Note 9 of Notes to Financial Statements.
Interest charges for 1997 decreased $1.1 million (3%) due to favorable
refinancing activities in 1996. Interest charges for 1996 decreased $1.7
million (4%) primarily because of the retirement of outstanding debt. The
embedded cost of long-term debt at December 31, 1997, was 5.68% and at
December 31, 1996, 6.05%. See Note 10 of Notes to Financial Statements for
further discussion.
Preferred dividends decreased $1.7 million (28%) for 1996 as compared to 1995
due primarily to the redemption of the 7.45% Series Cumulative Preferred Stock
in December 1995.
The rate of inflation may have a significant impact on the Company's operations,
its ability to control costs and the need to seek timely and adequate rate
adjustments. However, relatively low rates of inflation in the past few years
have moderated the impact on current operating results.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for capital funds is primarily related to the construction of
plant and equipment necessary to meet the needs of electric and gas utility
customers and protection of the environment.
Construction Expenditures
New construction expenditures for 1997 were $111 million compared with $108
million for 1996 and $93 million for 1995.
Past Financing Activities
During 1997, 1996, and 1995, the Company's primary source of capital was
internally generated funds from operating cash flows. Internally generated
funds provided financing for 100% of the Company's construction expenditures for
1997, 1996, and 1995.
Variations in accounts receivable and accounts payable are not generally
significant indicators of the Company's liquidity, as such variations are
primarily attributable to fluctuations in weather in the Company's service
territory, which has a direct affect on sales of electricity and natural gas.
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In November 1997, the Company issued $35 million of Jefferson County, Kentucky
and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. The interest rates for these bonds were
3.90% and 3.85%, respectively, at December 31, 1997. The proceeds from these
bonds were used to redeem the outstanding 7.75% Series of Jefferson County,
Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1,
2019.
In October 1996, the Company issued $22.5 million of Jefferson County, Kentucky
and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79%
and 3.82%, respectively, at December 31, 1997. The proceeds from these bonds
were applied in December 1996 to redeem the outstanding 7.25% Series of
Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds
due December 1, 2016.
On June 1, 1996, the Company's First Mortgage Bonds, 5.625% Series of $16
million matured and were retired by the Company. The bonds were redeemed with
available funds.
In April 1995, the Company issued $40 million of Jefferson County, Kentucky,
Pollution Control Bonds, 5.90% Series, due April 15, 2023. The proceeds from
these bonds were used to redeem the outstanding 9.25% Series of Pollution
Control Bonds due July 1, 2015.
In December 1995, the Company redeemed the outstanding shares of its 7.45%
Cumulative Preferred Stock with a par value of $25 per share at a redemption
price of $25.75 per share. The Company funded the $22 million redemption with
cash generated internally.
Future Capital Requirements
Future financing requirements may be affected in varying degrees by factors such
as load growth, changes in construction expenditure levels, rate actions allowed
by regulatory agencies, new legislation, market entry of competing electric
power generators, changes in environmental regulations and other regulatory
requirements. The Company estimates construction expenditures will total $260
million for 1998 and 1999. In addition, capital requirements for 1998 include
$20 million to retire long-term debt that is scheduled to mature on June 1,
1998.
Future Sources of Financing
Internally generated funds from operations are expected to fund substantially
all anticipated construction expenditures in 1998 and 1999.
At December 31, 1997, the Company had unused lines of credit of $200 million for
which it pays commitment fees. These credit facilities are scheduled to expire
in 2001. Management expects to renegotiate them when they expire.
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To the extent permanent financings are needed in 1998 and 1999, the Company
expects that it will have ready access to the securities markets to raise needed
funds.
Year 2000 Computer Software Issue
The Company began its project regarding the year 2000 issue in 1996. The board
of directors approved the general year 2000 plan and receives, along with
management, regular updates. Project teams are continuing to evaluate risks and
to plan and implement appropriate sources of corrective action. Corrective
action, including replacement or modification of certain software systems, for
major applications such as customer information and financial systems are in
process, and in certain cases completed. Regarding the smaller, more isolated
systems, the Company anticipates moving from the evaluative stage to the
corrective stage during 1998. The Company has also communicated with its
suppliers, customers and key business partners regarding year 2000 compliance
and intends to continue monitoring their progress on this issue.
The amount that has been expensed through December 31, 1997, is approximately $2
million. Based on studies and progress made to-date, the Company expects to
spend approximately $10 million in 1998 and 1999 for significant modification of
its computer information systems to enable proper processing of transactions
relating to the year 2000 and beyond. Accordingly, the Company does not expect
the amounts required to be expensed over the next two years to have a material
effect on its financial position or results of operations.
LG&E Energy Corp. - KU Energy Corporation Merger
On May 20, 1997, LG&E Energy and KU entered into an agreement and Plan of Merger
providing for a merger of LG&E Energy and KU. Pursuant to the Merger Agreement,
KU will be merged with and into LG&E Energy, with LG&E Energy as the surviving
corporation effective with the receipt of all required approvals. The merger
has been approved by the Kentucky Commission and the Virginia State Corporation
Commission. See Note 2 of Notes to Financial Statements.
Rates and Regulation
The Company is subject to the jurisdiction of the Kentucky Commission in
virtually all matters related to electric and gas utility regulation, and as
such, its accounting is subject to Statement of Financial Accounting Standards
No. 71, ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION (SFAS No. 71).
Given the Company's competitive position in the market and the status of
regulation in the state of Kentucky, the Company has no plans or intentions to
discontinue its application of SFAS No. 71. See Note 3 of Notes to Financial
Statements.
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On December 8, 1995, the Commission approved a settlement agreement filed by the
Company and all intervenors in the Trimble County proceedings, including various
consumer interest groups and government agencies, that, in effect, resolved all
of the regulatory and legal issues related to the appropriate ratemaking
treatment to exclude 25% of the Trimble County plant costs from customer rates.
Under the settlement, ratepayers are receiving $22 million in refunds, most of
which is being refunded over the five-year period, 1996 through 2000, based on a
per kilowatt-hour credit. In addition, the Company also is providing $900,000
annually for five years, beginning in 1996, to fund low-income energy assistance
programs. The Company also revised the decoupling methodology in a manner that
reduced revenues collected from residential customers during 1996 and 1997 by a
total of approximately $1.8 million.
The overall effect of the settlement, which the Company recognized in its
entirety in the fourth quarter of 1995, was to reduce electric revenues by $28.3
million and net income by $16.9 million. See Note 13 of Notes to Financial
Statements.
In May 1995, the Company implemented a Commission approved environmental cost
recovery (ECR) surcharge to recover certain costs required to comply with the
Federal Clean Air Act, as amended, and those federal, state, and local
environmental requirements which apply to coal combustion wastes and by-products
from facilities utilized for production of energy from coal. As a result of
this surcharge, the Company's electric revenues increased $3.2 million in 1995,
an additional $2.4 million in 1996 and an additional $.4 million in 1997. The
Kentucky Attorney General (KAG), and the Kentucky Industrial Utility Customers
filed an appeal in Franklin Circuit Court on various issues related to the
Commission's order in this proceeding, including the constitutionality of the
Kentucky statute that authorizes the surcharge. In an order dated April 10,
1996, associated with the first six-month review of the operation of the
surcharge, the Commission stated that all environmental surcharge revenues
collected from the date of the April 10 order will be subject to refund, pending
the outcome of the legal proceedings. The Company is contesting the legal
challenges but cannot predict the outcome of this litigation. In a similar
proceeding involving appeals from the Commission's order authorizing an
environmental cost recovery surcharge for Kentucky Utilities Company by the same
intervenors, the Kentucky Court of Appeals, in a decision issued on December 5,
1997, upheld the constitutionality of the surcharge statute. The intervenors
have petitioned the Kentucky Supreme Court to review the decision of the
Kentucky Court of Appeals. Any refunds that may ultimately be ordered, are not
expected to have a material adverse effect on the Company's financial position
or results of operation.
In January 1994, the Company implemented a Commission approved demand side
management (DSM) program that the Company, KAG, the Jefferson County Attorney,
and representatives of several customer-interest groups had filed with the
Commission. The approved program included a formal collaborative process to
develop future DSM programs and also contained a rate mechanism that (1)
provided the Company concurrent recovery of DSM costs, (2) provided an incentive
for implementing DSM programs, and (3) allowed the Company to recover revenues
from lost sales associated with the DSM.
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Subsequent to the original filing, the Company requested three significant
revisions to the DSM program. In 1996, the Commission approved the addition of
five new programs that increased the Company's commitment to DSM by
approximately $4 million over the next two years. In 1997, the Company
requested a change in the methodology used in determining revenues from lost
sales associated with DSM programs. This change would replace the decoupling
mechanism approved in the original program with a methodology based on
engineering estimates. Also in 1997, the Company requested approval to
implement a 1998 program budget in the amount of $2.5 million. The revisions
requested in 1997 are currently pending before the Commission.
On September 30, 1997, the Commission issued an order approving the Company's
request to implement an experimental performance-based ratemaking mechanism.
This mechanism is related to gas procurement activities and gas off-system sales
only and is approved for a three-year test period effective October 1, 1997.
During the three year experimental period, rate adjustments related to this
mechanism will be determined for each 12 month period beginning November 1 and
ending October 31. This mechanism is not expected to have a material effect on
the Company's financial position or results of operations.
In its September 12, 1997 order approving the merger of LG&E Energy and KU, the
Kentucky Commission ordered the Company to file by the later of the consummation
of the merger or September 14, 1998, detailed plans to address the future rate
regulation of the Company. The Commission directed the Company to indicate in
its filing whether it desired to remain under traditional rate of return
regulation or commence non-traditional regulation. The Company was further
ordered to explain the reasons for its election, and in the case of traditional
regulation, include an analysis and proposals relative to its earnings at that
time. If non-traditional regulation is elected, the Company must explain the
reasons for its choice and how its plan will achieve the Commission's goals of
providing incentives to utilities and a sharing of the resulting benefits with
customers. The Commission stated that it will fully investigate the filing and
determine whether changes should be made to the existing regulation of the
Company. The Company cannot presently predict the outcome of this matter.
The Company last filed for a rate increase with the Commission in June 1990
based on the test year ended April 30, 1990. The Commission issued a final
order in September 1991 that effectively granted the Company an annual increase
in rates of $6.8 million ($6.1 million electric and $.7 million gas).
Environmental Matters
With the passage of the Clean Air Act Amendments of 1990 (the Act), the Company
already complied with the stringent sulfur dioxide emission limits required by
the year 2000, as it had previously installed scrubbers on all of its coal-fired
generating units. Since 1990, as part of its ongoing construction program, the
Company has spent $31 million for measures to meet applicable nitrogen oxide
limits. While the overall financial impact of the Act on the Company has been
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minimal, the Company is closely monitoring several significant regulatory
developments which may potentially impact the Company including regulations
proposed by the United States Environmental Protection Agency (USEPA) in October
1997. These regulations address long-range ozone transport from Midwest
emissions sources that allegedly contribute to ozone problems in the Northeast.
If finally adopted, the proposed regulations may require numerous utilities
including the Company to incur significant capital expenditures, currently
estimated as potentially in excess of $100 million, and significantly increased
operation and maintenance costs required to achieve additional reductions in
emissions of nitrogen oxides.
See Note 12 of Notes to Financial Statements for a complete discussion of the
Company's environmental issues concerning the proposed USEPA ozone transport
regulations, its Mill Creek and Cane Run electric generating plants,
manufactured gas plant sites, and certain other environmental issues.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E Energy Corp. has moved aggressively over the past decade to be positioned
for, and to help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, LG&E Energy has taken
many steps to prepare for the expected increase in competition in its regulated
and non-regulated energy services businesses, including aggressive cost
reduction activities; strategic acquisitions and growth initiatives; write-offs
of previously deferred expenses; an increase in focus on commercial and
industrial customers; an increase in employee training; and necessary corporate
and business unit realignments. LG&E Energy continues to be active in the
national debate surrounding the restructuring of the electric industry and the
move toward a competitive, market-based environment. LG&E Energy has urged
Congress and federal regulatory agencies to set a specific date for a complete
transition to a competitive market, one that will quickly and efficiently bring
the benefits associated with customer choice. LG&E Energy has repeatedly
advocated the implementation of this transition by January 1, 2001.
The Kentucky Commission has held a series of meetings with representatives of
utilities, consumers, state agencies, state legislators and other groups in
Kentucky to discuss the possible effects of electric industry restructuring in
Kentucky. In December 1997, the Kentucky Commission issued a set of principles
which are intended to serve as its guide in consideration of issues relating to
industry restructuring. Among these principles were: consumer protection and
benefit, system reliability, universal service, environmental responsibility,
cost allocation, stranded costs and codes of conduct.
At the time of this report, neither the Kentucky General Assembly nor the
Kentucky Commission has adopted or approved a plan or timetable for retail
electric industry competition in Kentucky. The nature or timing of future
legislative or regulatory actions regarding industry restructuring and their
impact on the Company, which may be significant, cannot be predicted currently.
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[LGE LOGO]
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ADMISSION TICKET
LOUISVILLE GAS AND ELECTRIC COMPANY
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, April 22, 1998
10:00 a.m., EDT
Hyatt Regency Louisville
320 West Jefferson Street
Louisville, Kentucky
If you plan to attend the meeting, please bring this Admission Ticket to the
meeting with you.
<PAGE>
Complimentary parking will be available
at the Hyatt Regency and the Cowger
Parking Garage. Please visit the
[MAP] registration table to receive your
parking voucher, which you will give to
the parking attendant upon leaving.
LOUISVILLE GAS AND ELECTRIC COMPANY
ANNUAL MEETING OF SHAREHOLDERS -- APRIL 22, 1998
