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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
LOUISVILLE GAS AND ELECTRIC COMPANY
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
March 26, 1999
Dear Louisville Gas and Electric Company shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Louisville Gas and Electric Company to be held Wednesday, April 21, 1999, at
10:00 a.m., E.D.T. at the Kentucky Center for the Arts, 501 West Main Street,
Louisville, Kentucky.
Business items to be acted upon at the Annual Meeting are the election of
nine directors, the approval of Arthur Andersen LLP as independent auditors of
the Company for 1999 and the transaction of any other business properly brought
before the meeting. Additionally, we will report on the progress of LG&E and
shareholders will have the opportunity to present questions of general interest.
We encourage you to read the proxy statement carefully and complete, sign
and return your proxy in the envelope provided, even if you plan to attend the
meeting. Returning your proxy to us will not prevent you from voting in person
at the meeting, or from revoking your proxy and changing your vote at the
meeting, if you are present and choose to do so.
If you plan to attend the Annual Meeting, please check the box on the proxy
card indicating that you plan to attend the meeting. Please bring the Admission
Ticket, which forms the top portion of the form of proxy, to the meeting with
you. If you wish to attend the meeting, but do not have an Admission Ticket, you
will be admitted to the meeting 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. We hope you can join us at the meeting.
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"), a Kentucky corporation, will be held at the Kentucky Center for the
Arts, 501 West Main Street, Louisville, Kentucky, on Wednesday April 21, 1999,
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 proxy statement:
1. A proposal to elect nine directors, five for three-year terms expiring
in 2002, two for two-year terms expiring in 2001 and two for one-year
terms expiring in 2000;
2. A proposal to approve and ratify the appointment of Arthur Andersen LLP
as independent auditors of LG&E for 1999;
3. Such other business as may properly come before the meeting.
The close of business on February 16, 1999 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.
You are cordially invited to attend the meeting. WHETHER OR NOT YOU PLAN TO
ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE
REPLY ENVELOPE AS SOON AS POSSIBLE. Your cooperation in signing and promptly
returning your proxy is greatly appreciated.
By Order of the Board of Directors,
John R. McCall, Secretary
Louisville Gas and Electric Company
220 West Main Street
Louisville, Kentucky 40202
March 26, 1999
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 21, 1999
----------------------
The Board of Directors of Louisville Gas and Electric Company ("LG&E" or the
"Company") hereby solicits your proxy, and asks that you vote, sign, date and
promptly mail the enclosed proxy card for use at the Annual Meeting of
Shareholders to be held April 21, 1999, and at any adjournment of such meeting.
The meeting will be held at the Kentucky Center for the Arts, 501 West Main
Street, Louisville, Kentucky. This proxy statement and the accompanying proxy
were first mailed to shareholders on or about March 26, 1999.
If you plan to attend the meeting, please check the box on the proxy card
indicating that you plan to attend the meeting. Also, please bring the Admission
Ticket, which forms the top portion of the form of proxy, to the meeting with
you. Shareholders who do not have an Admission Ticket, 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 16, 1999, 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"). Based on information contained in a Schedule 13G filed with the
Securities and Exchange Commission in October 1998, AMVESCAP PLC, a parent
holding company, reported certain holdings in excess of five percent of LG&E's
Preferred Stock. AMVESCAP PLC, with offices at 1315 Peachtree Street, N.W.,
Atlanta, Georgia 30309, and certain of its subsidiaries reported sole voting and
dispositive power as to no shares and shared voting and dispositive power as to
43,000 shares of LG&E Preferred Stock, without par value, $5.875 Series,
representing 17.2% of that class of Preferred Stock. The reporting companies
indicated that they hold the shares on behalf of other persons who have the
right to receive or the power to direct the receipt of dividends or the proceeds
of sales of the shares. No other 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 16, 1999, all directors, nominees for director and executive officers
of LG&E as a group beneficially owned no shares of LG&E Preferred Stock.
Owners of record of LG&E Energy Common Stock at the close of business on
February 16, 1999, 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. In addition, each shareholder has 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. All such votes may be cast
for a single nominee or may be distributed among two or more nominees. The
persons named as proxies reserve the right to cumulate votes represented by
proxies that they receive and to distribute such votes among one or more of the
nominees at their discretion.
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You may revoke your proxy at any time before it is voted by giving written
notice of its revocation to the Secretary of LG&E, by delivery of a later dated
proxy, or by attending the Annual Meeting and voting in person. Signing a proxy
does not preclude you from attending the meeting in person.
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 directors to
be chosen at the meeting. Consequently, any shares not voted (whether by
withholding authority, broker non-vote 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 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 non-votes are treated as shares not voted.
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. Nonetheless, the Board encourages you to vote on each of these matters, and
appreciates your interest.
The Annual Report to Shareholders of LG&E Energy (the "Annual Report"),
including its consolidated financial statements and information regarding LG&E,
is enclosed with this proxy statement. The Annual Report is supplemented by
audited financial statements of LG&E and management's discussion of such
financial statements, which are included as an appendix to this proxy statement
(the "Appendix"), and are incorporated by reference herein. All shareholders are
urged to read the accompanying Annual Report and Appendix.
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PROPOSAL NO. 1
ELECTION OF DIRECTORS
The number of members of the Board of Directors of LG&E is currently fixed
at eighteen pursuant to the Company's bylaws and resolutions adopted by the
Board of Directors. 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. Generally, 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. However, under Kentucky law, directors
appointed to fill vacancies serve terms which expire at the next meeting of
shareholders at which directors are elected. These additional required elections
are also discussed below.
In May 1998, upon the closing of the merger (the "Merger") of KU Energy
Corporation ("KU Energy") into LG&E Energy, the size of the Board of Directors
was established at eighteen. Seven former KU Energy directors, Mira S. Ball,
Carol M. Gatton, Frank V. Ramsey, Jr., William L. Rouse, Jr., Charles L.
Shearer, Ph.D., Lee T. Todd, Jr., Ph.D. and Michael R. Whitley were appointed to
fill the vacancies created by the increase in size of the Board. In December
1998, Mr. Whitley and S. Gordon Dabney retired as directors. Donald C. Swain,
Ph.D., who currently serves with the class of directors whose terms expire at
this Annual Meeting, has indicated his present intention to retire concurrent
with the Annual Meeting and is not standing for re-election as a director. Dr.
Swain has served as a director of LG&E since 1985 and of LG&E Energy since 1990.
Despite the remaining vacancies on the Board of Directors, shareholders may
not vote for a number of directors greater than the number of nominees named in
this proxy 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 Governance Committee."
At this Annual Meeting, the following nine persons are proposed for election
to the Board of Directors:
For three-year terms expiring at the 2002 Annual Meeting: Mira S. Ball,
Roger W. Hale, David B. Lewis, Anne H. McNamara and Frank V. Ramsey, Jr.
For two-year terms expiring at the 2001 Annual Meeting: Carol M. Gatton
and Lee T. Todd, Jr.
For one-year terms expiring at the 2000 Annual Meeting: William L. Rouse,
Jr. and Charles L. Shearer.
All of the nominees are presently directors of LG&E Energy, LG&E and
Kentucky Utilities Company ("KU").
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 proxy cards
returned to LG&E will be voted for such substitute nominee, unless an
instruction to the contrary is indicated on the proxy card.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
ELECTION OF THE NINE NOMINEES FOR DIRECTOR.
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INFORMATION ABOUT DIRECTORS AND NOMINEES
The following contains certain information as of February 16, 1999,
concerning the nominees for director, as well as the directors whose terms of
office continue after the 1999 Annual Meeting.
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2002 ANNUAL MEETING OF
SHAREHOLDERS
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MIRA S. BALL (AGE 64)
Mrs. Ball has been Secretary-Treasurer and Chief Financial Officer of
[PHOTO] Ball Homes, Inc., a residential developer and property management
company in Lexington, Kentucky, since August 1959. Mrs. Ball is a
graduate of the University of Kentucky. Mrs. Ball has been a director
of LG&E Energy and LG&E since May 1998 and of KU since 1992.
ROGER W. HALE (AGE 55)
Mr. Hale has been a Director and Chairman of the Board and Chief
Executive Officer of LG&E Energy since August 1990. Mr. Hale served as
[PHOTO1] President of LG&E Energy from August 1990 to May 1998. Mr. Hale has
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. Mr. Hale has
been a Director and Chairman of the Board and Chief Executive Officer
of KU since May 1998. 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 Global TeleSystems Group, Inc. and H&R Block, Inc.
DAVID B. LEWIS (AGE 54)
Mr. Lewis is a founding partner of the law firm of Lewis & Munday, a
[PHOTO] Professional Corporation, in Detroit, Michigan. Since 1972, Mr. Lewis
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
Energy and LG&E since November 1992 and of KU since May 1998. Mr. Lewis
is also a member of the Board of Directors of TRW, Inc., M.A. Hanna
Company and Comerica Bank, a subsidiary of Comerica Incorporated.
</TABLE>
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ANNE H. MCNAMARA (AGE 51)
Mrs. McNamara has been Senior Vice President and General Counsel of AMR
[PHOTO] Corporation and its subsidiary, American Airlines, Inc., since June
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
Energy and LG&E since November 1991 and of KU since May 1998. Mrs.
McNamara is also a member of the Board of Directors of The SABRE Group
Holdings, Inc.
FRANK V. RAMSEY, JR. (AGE 67)
Mr. Ramsey has been President and a Director of Dixon Bank, Dixon,
[PHOTO] Kentucky, since October 1972. Mr. Ramsey is a graduate of the
University of Kentucky. Mr. Ramsey has been a director of LG&E Energy
and LG&E since May 1998 and of KU since 1986.
</TABLE>
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2001 ANNUAL MEETING OF
SHAREHOLDERS
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CAROL M. GATTON (AGE 66)
Mr. Gatton has been Chairman and Director of Area Bancshares Corpora-
[PHOTO] tion, an Owensboro, Kentucky bank holding company, since April 1976.
Mr. Gatton is also owner of Bill Gatton Chevrolet-Cadillac-Isuzu in
Bristol, Tennessee. Mr. Gatton is a graduate of the University of
Kentucky, and received a master's degree in business administration
from the University of Pennsylvania, Wharton School of Business. Mr.
Gatton has been a director of LG&E Energy and LG&E since May 1998 and
of KU since 1996.
LEE T. TODD, JR., PH.D. (AGE 52)
Dr. Todd has been President and Chief Executive Officer and Director of
[PHOTO] DataBeam Corporation, a Lexington, Kentucky high-technology firm, since
April 1976. Dr. Todd is a graduate of the University of Kentucky. He
also received a master's degree and doctorate in electrical engineering
from the Massachusetts Institute of Technology. Dr. Todd has been a
director of LG&E Energy and LG&E since May 1998 and of KU since 1995.
</TABLE>
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NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2000 ANNUAL MEETING OF
SHAREHOLDERS
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WILLIAM L. ROUSE, JR. (AGE 66)
Mr. Rouse was Chairman of the Board and Chief Executive Officer and
[PHOTO] director of First Security Corporation of Kentucky, an Owensboro,
Kentucky multi-bank holding company, prior to his retirement in 1992.
Mr. Rouse is a graduate of the University of Kentucky. Mr. Rouse has
been a director of LG&E Energy and LG&E since May 1998 and of KU since
1989. Mr. Rouse is also a member of the Board of Directors of Ashland,
Incorporated and Kentucky-American Water Company, a subsidiary of
American Water Works Company, Inc.
CHARLES L. SHEARER, PH.D. (AGE 56)
Dr. Shearer has been President of Transylvania University since July
[PHOTO] 1983. Dr. Shearer is a graduate of the University of Kentucky and
received a master's degree in diplomacy and international commerce from
that institution. He also received a master's degree and a doctorate in
economics from Michigan State University. Dr. Shearer has been a
director of LG&E Energy and LG&E since May 1998 and of KU since 1987.
</TABLE>
DIRECTORS WHOSE TERMS EXPIRE AT 2001 ANNUAL MEETING OF SHAREHOLDERS
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OWSLEY BROWN II (AGE 56)
Mr. Brown has been the Chairman and Chief Executive Officer of Brown-
[PHOTO] Forman Corporation, a consumer products company, since July 1995, and
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 Energy since August 1990, of LG&E since May
1989 and KU since May 1998. Mr. Brown is also a member of the Board of
Directors of Brown-Forman Corporation and North American Coal
Corporation, a subsidiary of NACCO Industries, Inc.
GENE P. GARDNER (AGE 69)
Mr. Gardner has been Chairman of Beaver Dam Coal Company, which is
[PHOTO] engaged in the ownership and development of coal properties, since
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 served as a director of LG&E
Energy from August 1990 until May 1998. He is also a member of the
Board of Directors of Commonwealth Bank and Trust Company, Commonwealth
Financial Corporation and Thomas Industries, Inc.
</TABLE>
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J. DAVID GRISSOM (AGE 60)
Mr. Grissom has been Chairman of Mayfair Capital, Inc., a private
[PHOTO] investment firm, since April 1989. He served as Chairman and Chief
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
Energy since August 1990, of LG&E since January 1982 and of KU since
May 1998. He is also a member of the Board of Directors of Providian
Financial Corporation and Churchill Downs, Inc.
</TABLE>
DIRECTORS WHOSE TERMS EXPIRE AT 2000 ANNUAL MEETING OF SHAREHOLDERS
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WILLIAM C. BALLARD, JR. (AGE 58)
Mr. Ballard has been of counsel to the law firm of Greenebaum Doll &
[PHOTO] McDonald PLLC since May 1992. He served as Executive Vice President and
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 Energy since August 1990, of LG&E
since May 1989 and of KU since May 1998. 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 Jordan Telecommunications Products, Inc.
JEFFERY T. GRADE (AGE 55)
Mr. Grade has been Chairman and Chief Executive Officer and Director of
[PHOTO] Harnischfeger Industries, Inc., which is engaged in the manufacture and
distribution of equipment for the mining and papermaking 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 and of KU since May 1998. He is also a
member of the Board of Directors of Case Corporation.
T. BALLARD MORTON, JR. (AGE 66)
Mr. Morton has been Executive in Residence at the College of Business
[PHOTO] and Public Administration of the University of Louisville since 1983.
Mr. Morton is a graduate of Yale University. Mr. Morton has been a
director of LG&E Energy since August 1990, of LG&E since May 1967 and
of KU since May 1998. 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 and KU, with the exception of Mr. Gardner and Dr. Swain, who serve only
on the LG&E Board. The committees of the Board of Directors of LG&E include an
Audit Committee, a Compensation Committee, a Nominating and Governance Committee
and a Long-Range Planning 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 and KU Board of Directors, with the exception of Mr. Gardner and Dr.
Swain, who currently serve on no committees. As discussed earlier, Dr. Swain is
not standing for re-election and has indicated his present intention to retire
following the Annual Meeting.
During 1998, there were a total of seven 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
Jeffery T. Grade.
COMPENSATION OF DIRECTORS
Directors who are also officers of LG&E receive no compensation in their
capacities as directors. During 1998, non-employee directors received a retainer
of approximately $2,333 per month, or $28,000 annually ($30,000 annually for
committee chairmen), a fee for Board meetings of $1,100 per meeting, a fee for
each committee meeting of $1,000 and, where appropriate, reimbursement for
expenses incurred in traveling to meetings. Non-employee directors residing out
of Kentucky received an additional $1,000 compensation for each Board or
committee meeting they attended. The foregoing amounts represent the aggregate
fees paid to directors in their capacities as directors of LG&E Energy, LG&E and
KU, as applicable, during 1998. Upon their resignation as directors of LG&E
Energy during 1998, Messrs. Dabney and Gardner and Dr. Swain each received
one-time awards of $10,000 in recognition of their years of service on that
Board.
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
received, 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 by 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
16, 1999, eight directors of LG&E were participating in the Deferred Stock Plan.
Non-employee directors 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'
8
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Option Plan"), which was approved by LG&E Energy's shareholders at the 1994
Annual Meeting. Under the terms of the Directors' Option Plan, upon initial
election or appointment to the LG&E Energy Board, each new director, who has not
been an employee or officer of LG&E Energy within the preceding three years,
receives an option grant for 4,000 shares of LG&E Energy Common Stock. Following
the initial grant, eligible directors receive an annual option grant of 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 at the time of grant. 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 251,000 shares are subject to existing
options at a weighted average per share price of $22.83. As of February 16,
1999, each non-employee director held 20,000 exercisable options and 4,000
unexercisable options to purchase LG&E Energy Common Stock, with the exception
of Dr. Swain and Mr. Grade, who held 16,000 and 8,000 exercisable options,
respectively, and 4,000 unexercisable options each, and Messrs. Gatton, Ramsey
and Rouse, Mrs. Ball and Drs. Shearer and Todd, who each held 4,000 exercisable
and 4,000 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, Brown,
Gatton, Grade, Grissom, Lewis and Ramsey, Mrs. Ball and Drs. Shearer and Todd.
During 1998, 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, including KU: 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 financial
affairs that the Committee, the Internal Auditor, or the independent auditors
deemed necessary. The Audit Committee met three times during 1998.
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, LG&E and KU. 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. Gatton, Grade, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara. The
Compensation Committee met five times during 1998.
NOMINATING AND GOVERNANCE COMMITTEE
The Nominating and Governance 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'
9
<PAGE>
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 Governance Committee are Messrs. Ballard, Brown,
Hale (ex officio), Lewis, Ramsey and Rouse, Mrs. Ball and Mrs. McNamara and Dr.
Shearer. The Nominating and Governance Committee met two times during 1998.
LONG-RANGE PLANNING COMMITTEE
The Long-Range Planning Committee is composed of Messrs. Grade, Grissom,
Lewis, Morton, Rouse and Todd, Mrs. Ball and Mrs. McNamara and Dr. Shearer. The
Long-Range Planning Committee considers and makes recommendations to the Board
regarding LG&E's future strategy and direction, long-term goals and other
matters of long-term importance. The Long-Range Planning Committee did not meet
during 1998.
PROPOSAL NO. 2
APPROVAL OF INDEPENDENT AUDITORS FOR 1999
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 Energy and LG&E for
the fiscal year ending December 31, 1999. Arthur Andersen has audited the
accounts of LG&E for many years (as well as those of KU), and of LG&E Energy
since its organization in 1990. The shareholders previously approved the
employment of the firm at the Annual Meeting on April 22, 1998.
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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
APPROVAL OF THE APPOINTMENT OF THE INDEPENDENT AUDITORS.
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 defined
herein.
The Company's 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 a 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 1998 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 LG&E's 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 with 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 proxy statement.
Pursuant to this competitive market positioning philosophy, in establishing
compensation levels for all executive positions for 1998, the Compensation
Committee reviewed competitive compensation information for general industry
companies with revenue between $2 - $3 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 1998 to
approach the 50th percentile of the competitive range from the Survey Group.
Salaries, short-term incentives and long-term incentives for 1998 are described
below.
The 1998 compensation information set forth in other sections of this proxy
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 1998 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 proxy statement for a description of his 1998 compensation). Pursuant to
the terms of existing employment and change in control agreements, severance
amounts were paid to certain departing executives during 1998. See "Employment
Contracts and Termination of Employment Arrangements and Change in Control
Provisions" on page 21 of this proxy statement.
BASE SALARY
The base salaries for LG&E executive officers for 1998 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
In the first quarter of 1998, the Committee established the performance
goals for the Company Performance Awards and Individual Performance Awards.
Payment of Company Performance Awards for executive officers was based 100% on
Net Income Available for Common Stock ("NIAC"), while payment of Individual
Performance Awards was based 100% on Management Effectiveness, which includes a
customer satisfaction element for certain participants. At the beginning of the
third quarter, the Compensation Committee established revised performance goals
to reflect the fundamental business shifts effected by LG&E Energy during 1998,
particularly the decision to discontinue merchant energy marketing and trading
operations and the completion of the KU Merger and the Big Rivers leasing
transactions. For participants with performance goals based upon LG&E Energy
Corp. and LG&E Energy Marketing performance measures, the Compensation Committee
determined that no Company Performance Awards would be payable with respect to
first and second quarter operations and results. Revised Company Performance
Award targets for July through December 1998 were established based upon LG&E
Energy's revised plan of continuing business operations for the third and fourth
quarters of the year.
For 1998, the revised Company Performance Award targets for executive
officers ranged from 21% to 30% of base salary, and the Individual Performance
Award targets ranged from 14% to 20% of base salary. Both awards were
established to be competitive with the 50th percentile of such awards granted to
comparable executives employed by companies in the Survey Group.
The individual officers were eligible to receive from 0% to 175% of their
targeted amounts, dependent upon Company and individual performance during 1998
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. As indicated above, no Company Performance Awards were paid
in respect of first and second quarter operations or results for participants
with performance goals based upon LG&E Energy Corp. and LG&E Energy Marketing
performance measures. Based upon performances against the revised targets for
the second-half of 1998, payouts of Company Performance Awards for 1998 to the
executive officers ranged from 9% to 33%, of base salary. Payouts for the
Individual Performance Awards to the executive officers ranged from 20% to 35%,
of base salary.
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 LG&E 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. In 1998, the Compensation Committee
chose to award stock options 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 1998) 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
1998 at an exercise price equal to the fair market value at the time of grant
and were subject to a one-year vesting requirement. During the year, newly hired
or promoted officers were also eligible to receive pro-rated stock option grants
under the Long-Term Plan. 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 80 utility holding
companies and gas and electric utilities.(1)
Payouts of long-term incentive awards in February 1999 were based on LG&E
Energy's performance during the 1996-1998 period. During such period, LG&E
Energy's performance was at the 63rd percentile of its comparison group with
respect to TSR, resulting in payouts of 125% of the contingent awards. The
performance units are payable 50% in LG&E Energy Common Stock and 50% in cash.
- ------------------------
(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 proxy 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>
Long-term incentive awards were also paid to certain former KU officers in
February 1999 in respect of KU's performance during the 1996-1998 period under
the KU Performance Share Plan (the "KU Plan"). Payouts were made at 100% of
contingent grants, based upon the Compensation Committee's assessment of KU's
performance during 1998 and KU's contribution to strong LG&E Energy performance
following the Merger. These payouts were made in LG&E Energy Common Stock to
four executive officers of the Company who were participants in the KU Plan
prior to the Merger.
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. Following
commencement of his service with LG&E in April 1989, Mr. Hale's employment
agreement has been periodically updated by the Board, to recognize his
fundamental role in establishing LG&E Energy as a national and international
diversified energy services company. Mr. Hale's 1997 employment agreement (the
"1997 Agreement") was effective during the period of 1998 prior to the May 4,
1998 closing of the Merger. A revised employment agreement (the "Revised
Agreement") became effective upon such date and throughout the remainder of
1998. (See "Employment Contracts and Termination of Employment Arrangements and
Change in Control Provisions" on page 21 of this proxy statement.)
The 1997 Agreement and the Revised Agreement established the minimum levels
of Mr. Hale's 1998 and post-merger compensation, although the Compensation
Committee retained discretion to increase such compensation. For 1998, 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, the
Company also considered survey data from various compensation consulting firms.
Mr. Hale also receives LG&E Energy contributions to the savings plan, similar to
those of other officers and employees. Details of Mr. Hale's 1998 compensation
are set forth below.
BASE SALARY. Mr. Hale was paid a total base salary of $700,000 during 1998.
This amount was based upon the minimum salary amount provided in the 1997
Agreement, plus an increase awarded by the Compensation Committee. The
Compensation Committee, in determining Mr. Hale's annual salary, including
increases, focused on his individual performance (including his management
effectiveness, as described below), the growth of LG&E Energy and the
compensation provided to other LG&E Energy, LG&E and KU officers. The 1998
increase was 20.7%
SHORT-TERM INCENTIVES. Mr. Hale's target short-term incentive award was 65%
of his 1998 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 Company performance and individual performance. His
1998 short-term incentive payouts were based 70% on Company Performance Goals
and 30% on Individual Performance Goals.
In 1998, no Company Performance Award was paid to Mr. Hale in respect of
first and second quarter operations or results. His Company Performance Award
payout for performance against the revised targets for the third and fourth
quarters was 23% of his 1998 base salary. Mr. Hale's Individual Performance
Award payout was 34% of his 1998 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, KU and other LG&E Energy subsidiaries, Company growth, customer
satisfaction ratings and other measures, such as LG&E Energy's successful
completion of the leasing transaction with Big Rivers. In May 1998, the
Compensation Committee awarded Mr. Hale a special completion bonus of $250,000
as reward for his leadership role and contribution upon the successful closing
of the KU Merger. (See statement "Short-Term Incentives" on page 12 of this
proxy statement for a discussion of the revised Company Performance Award
targets).
14
<PAGE>
LONG-TERM INCENTIVE GRANT. In 1998, Mr. Hale received 133,588 options and
39,244 performance units for the 1998-2000 performance period. These amounts
were determined in accordance with the terms of his 1997 Agreement and provide
expected value representing approximately 150% 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 1996-1998 period, LG&E Energy's
performance was at the 63rd percentile of its comparison group in TSR. That
resulted in a payout equal to 125% of the approved target. In addition, the
market value per share of LG&E Energy Common Stock increased from $21.22 at
grant to $28.31 during the performance period. This further increased the value
of the payout of the performance units originally awarded to Mr. Hale in 1996.
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. In an effort 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 adoption
of 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. A portion of compensation received by Mr. Hale in 1998 was not
deductible.
CONCLUSION
The Compensation Committee believes that the Company's executive
compensation system served the interests of the Company and its shareholders
effectively during 1998. 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
Carol M. Gatton
Jeffery T. Grade
Anne H. McNamara
T. Ballard Morton, Jr.
Frank V. Ramsey, Jr.
William L. Rouse, 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, 1993, through December 31, 1998, 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>
INDEXED RETURNS
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDING
TOTAL SHAREHOLDER RETURNS
LG&E Energy Corp S&P Utilities S&P 500 Index
Dec-93 100.00 100.00 100.00
Dec-94 96.37 92.06 101.32
Dec-95 116.63 130.74 139.40
Dec-96 142.11 134.83 171.40
Dec-97 151.31 168.07 228.59
Dec-98 180.46 192.89 293.91
12/31/1993 1994 1995 1996 1997 1998
LG&E ENERGY $100 $96 $117 $142 $151 $180
S&P UTILITIES $100 $92 $131 $135 $168 $193
S&P 500 $100 $101 $139 $171 $229 $294
</TABLE>
- ------------------------
(1) Total Shareholder Return assumes $100 invested on December 31, 1993, with
quarterly reinvestment of dividends.
16
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows the cash compensation paid or to be paid by LG&E
or LG&E Energy and any of its subsidiaries including KU, as well as certain
other compensation paid or accrued for those years, to the Chief Executive
Officer and the next four highest compensated executive officers of LG&E who
were serving as such at December 31, 1998, in all capacities in which they
served during 1996, 1997 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ----------
OTHER SECURITIES PAYOUTS
ANNUAL UNDERLYING -------- ALL OTHER
COMPEN- OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#)(3) ($) ($)
- -------------------------------------------------- ---- ------------ -------- --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 1998 $ 700,000 $649,800 $32,301 133,588 $821,581 $ 36,191(1)
Chairman of the Board 1997 580,000 311,808 18,212 67,728 313,037 26,675
and Chief Executive Officer 1996 510,000 416,068 11,010 55,000 641,092 26,909
Victor A. Staffieri 1998 300,000 150,461 10,269 45,802 166,611 15,590(1)
Former Chief Financial Officer 1997 270,000 159,064 8,063 27,946 57,416 10,635
(Currently President and Chief 1996 245,000 175,310 7,431 26,022 124,950 9,336
Operating Officer of LG&E Energy)
Stephen R. Wood 1998 265,000 120,711 7,373 42,799 94,543 13,377(1)
President, Louisville Gas and Electric 1997 245,000 138,039 6,849 15,605 32,306 8,721
Company and President-Distribution 1996 226,000 106,256 7,082 14,772 67,130 7,877
Services Division of LG&E Energy
John R. McCall 1998 260,000 140,399 7,870 34,733 96,635 15,582(1)
Executive Vice President, 1997 245,000 114,764 6,922 15,605 32,306 11,414
General Counsel and Corporate Secretary 1996 231,000 112,303 7,230 15,098 35,868 11,029
Wayne T. Lucas 1998 167,500(2) 138,449 39,773(2) 23,028 0 7,037(1)
Executive Vice President--
Power Generation
</TABLE>
- ------------------------
(1) Includes employer contributions to 401(k) plan, nonqualified thrift plan and
employer paid life insurance premiums in 1998 as follows: Mr. Hale $4,375,
$16,625 and $15,191, respectively; Mr. Staffieri $4,875, $8,897 and $1,818,
respectively; Mr. Wood $4,117, $7,975 and $1,286, respectively; Mr. McCall
$4,318, $6,925 and $4,340, respectively; and Mr. Lucas, $2,337, $0 and
$4,700, respectively.
(2) Reported compensation is only for a portion of the year. Mr. Lucas joined
LG&E on May 4, 1998.
(3) As adjusted for the 2 for 1 stock split effective in April 1996.
17
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN 1998 FISCAL YEAR
The following table contains information at December 31, 1998, with respect
to grants of stock options and stock appreciation rights (SARs) to the named
executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------ REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION
OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME (#) (1) FISCAL YEAR ($/ SHARE) DATE 0%($) 5%($) 10%($)
- ------------------- --------------- ------------------- ----------- ------------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 133,588 16.8% 23.47 02/04/2008 0 1,971,780 4,996,877
Victor A. Staffieri 45,802 5.8% 23.47 02/04/2008 0 676,045 1,713,230
Stephen R. Wood 35,401 4.4% 23.47 02/04/2008 0 522,524 1,324,179
Stephen R. Wood 7,398 0.9% 24.63 02/04/2008 0 114,593 290,400
John R. McCall 34,733 4.4% 23.47 02/04/2008 0 512,665 1,299,193
Wayne T. Lucas 23,028 2.9% 26.50 05/04/2008 0 383,778 860,876
</TABLE>
- ------------------------
(1) Options are awarded at fair market value at time of grant; unless otherwise
indicated, options vest in one year and are exercisable over a ten-year
term.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN 1998 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options and/or SARs during 1998
and the value of unexercised options and SARs held by them as of December 31,
1998:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS OPTIONS/SARS AT
ON VALUE AT FY-END (#) FY-END ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Roger W. Hale 29,900 $183,379 136,042/133,588 784,583/646,900
Victor A. Staffieri 0 N/A 110,536/45,802 837,050/221,796
Stephen R. Wood 0 N/A 53,407/42,799 428,596/198,672
John R. McCall 0 N/A 37,651/34,733 235,255/168,195
Wayne T. Lucas 0 N/A --/23,028 --/41,681
</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 1998 FISCAL YEAR
The following table provides information concerning awards made in 1998 to
the named executive officers under the Long-Term Plan.
<TABLE>
<CAPTION>
NUMBER PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OF 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 39,244 12/31/2000 15,698 39,244 58,866
Victor A. Staffieri 6,728 12/31/2000 2,691 6,728 10,092
Stephen R. Wood 5,200 12/31/2000 2,080 5,200 7,800
John R. McCall 5,102 12/31/2000 2,041 5,102 7,653
Wayne T. Lucas 2,996 12/31/2000 1,198 2,996 4,494
</TABLE>
- ------------------------
(1) The table indicates the number of performance units that 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. The amount of the payout is determined by the then-fair
market value of LG&E Energy Common Stock. For awards made in 1998, the Long-Term
Plan rewards executives on a three-year rolling basis dependent upon the total
shareholder return for 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 1998 are
reported in the summary compensation table for the year of payout.
19
<PAGE>
PENSION PLANS
The following table shows the estimated pension benefits payable to a
covered participant at normal retirement age under LG&E Energy'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:
1998 PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$ 100,000 $ 47,896 $ 47,896 $ 47,896 $ 55,665
$ 200,000 $ 111,896 $ 111,896 $ 111,896 $ 111,896
$ 300,000 $ 175,896 $ 175,896 $ 175,896 $ 175,896
$ 400,000 $ 239,896 $ 239,896 $ 239,896 $ 239,896
$ 500,000 $ 303,896 $ 303,896 $ 303,896 $ 303,896
$ 600,000 $ 367,896 $ 367,896 $ 367,896 $ 367,896
$ 700,000 $ 431,896 $ 431,896 $ 431,896 $ 431,896
$ 800,000 $ 495,896 $ 495,896 $ 495,896 $ 495,896
$ 900,000 $ 559,896 $ 559,896 $ 559,896 $ 559,896
$1,000,000 $ 623,896 $ 623,896 $ 623,896 $ 623,896
$1,100,000 $ 687,896 $ 687,896 $ 687,896 $ 687,896
$1,200,000 $ 751,896 $ 751,896 $ 751,896 $ 751,896
$1,300,000 $ 815,896 $ 815,896 $ 815,896 $ 815,896
$1,400,000 $ 879,896 $ 879,896 $ 879,896 $ 879,896
$1,500,000 $ 943,896 $ 943,896 $ 943,896 $ 943,896
$1,600,000 $ 1,007,896 $ 1,007,896 $ 1,007,896 $1,007,896
$1,700,000 $ 1,071,896 $ 1,071,896 $ 1,071,896 $1,071,896
</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 employed by the Company at December 31, 1998 is as follows: 32 years
for Mr. Hale; 29 years for Mr. Lucas; 4 years for Mr. McCall; 9 years for Mr.
Wood; and 6 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, KU and LG&E Energy with
at least one year of service with either company are eligible to participate in
LG&E Energy'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, KU
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 Energy,
LG&E 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 36 months average compensation, less benefits
payable from the Retirement Income Plan, benefits payable from any other
qualified or nonqualified plan sponsored by LG&E Energy, LG&E 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 $712,328 for Mr.
Hale; $122,371 for Mr. Lucas; $249,108 for Mr. McCall; $292,023 for Mr.
Staffieri; and $241,739 for Mr. Wood.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS
On May 20, 1997, Mr. Hale entered into a new employment agreement with LG&E
Energy for services to be provided to LG&E Energy and its subsidiaries,
including LG&E and KU. This agreement became effective upon the May 4, 1998
consummation of the merger with KU Energy and has an initial term of five years
ending on May 4, 2003. Under the agreement, Mr. Hale is entitled to an annual
base salary of not less than $675,000, subject to annual review by the
Compensation Committee, and to participate in the Short-Term Plan and the
Long-Term Plan. Mr. Hale's agreement 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 agreement provides
that at the Company's expense a life insurance policy in the amount of not less
than $2 million shall be provided to Mr. Hale. 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.
During 1998, officers of LG&E Energy and LG&E entered into revised change in
control agreements, which agreements generally provide for the benefits
described below. In the event of a change in control, all such 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 bonus or
"target" award paid or payable pursuant to the Short-Term Plan. Payments may be
made to executives which would 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 and, in the latter case, LG&E and LG&E Energy will "gross up"
the applicable severance payments to the executive to cover any excise taxes
that may be due. 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.
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 and prorated for the executive's deemed period of service
during the relevant performance period. Additionally, executives shall receive
continuation of certain welfare benefits and payments in respect of accrued but
unused vacation days and for out-placement assistance. During 1998, Michael R.
Whitley, former Vice Chairman and Chief Operating Officer received cash payments
before tax "gross up" of approximately $3.9 million, pursuant to existing
employment and change in control agreements, in addition to the stock-based
awards and other benefits described above, in connection with his departure from
LG&E.
21
<PAGE>
SHAREHOLDER PROPOSALS
FOR 2000 ANNUAL MEETING
Any shareholder may submit a proposal for consideration at the 2000 Annual
Meeting. Any shareholder desiring to submit a proposal for inclusion in the
proxy statement for consideration at the 2000 Annual Meeting should forward the
proposal so that it will be received at LG&E's principal executive offices no
later than November 28, 1999. 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 the 2000 proxy
statement.
Under the Company's bylaws, shareholders intending to submit a proposal in
person at the Annual Meeting must provide advance written notice along with
other prescribed information. In general, such notice must be received by the
Secretary of the Company (a) not less than 90 days prior to the meeting date or
(b) if the meeting date is not publicly announced more than 100 days prior to
the meeting, by the tenth day following such announcement. Proposals not
properly submitted will be considered untimely.
OTHER MATTERS
At the Annual Meeting, it is intended that the first two items set forth in
the accompanying notice and described in this proxy statement will be presented.
Should any other matter be properly presented at the Annual Meeting, the persons
named in the accompanying proxy will vote upon them in accordance with their
best judgment. The Board of Directors knows of no other matters that may be
presented at the meeting.
LG&E will bear the costs of printing and preparing this proxy solicitation.
LG&E will provide copies of this proxy statement, the accompanying proxy and the
Annual Report and Appendix 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
solicitation materials. In addition to using the mails, proxies may be solicited
by directors, officers and regular employees of LG&E, in person or by telephone.
LG&E Energy and LG&E have retained D.F. King & Co., Inc., a firm of professional
proxy solicitors, to assist in the solicitations at an estimated fee of $9,000
plus reimbursement of reasonable expenses.
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
1998, 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.
22
<PAGE>
[LOGO]
PRINTED ON RECYCLED PAPER
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
APPENDIX TO PROXY STATEMENT
March 26, 1999
<PAGE>
FINANCIAL CONTENTS
Statements of Income 1
Statements of Retained Earnings 1
Statements of Cash Flows 2
Balance Sheets 3
Statements of Capitalization 4
Statements of Comprehensive Income 5
Notes to Financial Statements 6
Report of Management 24
Report of Independent Public Accountants 25
Management's Discussion and Analysis of Results of
Operations and Financial Condition 26
SELECTED FINANCIAL DATA
(Thousands of $)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Revenues ....................... $ 854,556 $ 845,543 $ 821,115 $ 751,763 $ 759,075
Provision for Rate Refunds ..... (4,500) -- -- (28,300) --
----------------------------------------------------------------------
Total Operating Revenues ..... 850,056 845,543 821,115 723,463 759,075
----------------------------------------------------------------------
Net Operating Income:
Before Unusual Items ........... 138,207 148,186 147,263 138,203 134,393
Provision for Rate Refunds ..... (2,684) -- -- (16,877) --
Non-Recurring Charges .......... -- -- -- -- (23,353)
----------------------------------------------------------------------
Total Net Operating Income ... 135,523 148,186 147,263 121,326 111,040
----------------------------------------------------------------------
Net Income:
Before Unusual Items ........... 104,381 113,273 107,941 100,061 94,423
Provision for Rate Refunds ..... (2,684) -- -- (16,877) --
Non-Recurring Charges and Merger
Costs to Achieve ............. (23,577) -- -- -- (32,734)
Cumulative Effect of
Accounting Change ............ -- -- -- -- (3,369)
----------------------------------------------------------------------
Total Net Income ............. 78,120 113,273 107,941 83,184 58,320
----------------------------------------------------------------------
Net Income Available for
Common Stock ................... $ 73,552 $ 108,688 $ 103,373 $ 76,873 $ 52,492
----------------------------------------------------------------------
Total Assets ....................... $ 2,104,637 $ 2,055,641 $ 2,006,712 $ 1,979,490 $ 1,966,590
Long-Term Obligations (including
amounts due within one year) ... 626,800 646,800 646,800 662,800 662,800
</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
-----------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Operating Revenues
Electric ................................... $ 663,011 $ 614,532 $ 606,696
Gas ........................................ 191,545 231,011 214,419
-----------------------------------
Total operating revenues ................ 854,556 845,543 821,115
Provision for rate refund (Note 3) ......... (4,500) -- --
-----------------------------------
Net operating revenues (Note 1) ......... 850,056 845,543 821,115
-----------------------------------
Operating Expenses
Fuel for electric generation ............... 154,683 149,463 149,697
Power purchased ............................ 50,176 17,229 16,626
Gas supply expenses ........................ 125,894 158,929 140,482
Other operation expenses ................... 163,584 150,750 143,338
Maintenance ................................ 52,786 47,586 54,790
Depreciation and amortization .............. 93,178 93,020 89,002
Federal and State income taxes (Note 8) 56,307 64,081 63,259
Property and other taxes ................... 17,925 16,299 16,658
-----------------------------------
Total operating expenses ................ 714,533 697,357 673,852
-----------------------------------
Net Operating Income .......................... 135,523 148,186 147,263
Merger Costs to Achieve (Note 2) .............. 32,072 -- --
Other Income and (Deductions) (Note 9) ........ 10,991 4,277 920
Interest Charges .............................. 36,322 39,190 40,242
-----------------------------------
Net Income .................................... 78,120 113,273 107,941
Preferred Stock Dividends ..................... 4,568 4,585 4,568
-----------------------------------
Net Income Available for Common Stock ......... $ 73,552 $ 108,688 $ 103,373
-----------------------------------
-----------------------------------
</TABLE>
STATEMENTS OF RETAINED EARNINGS
(Thousands of $)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Balance January 1 ............................. $258,910 $209,222 $181,049
Add net income ................................ 78,120 113,273 107,941
-----------------------------------
337,030 322,495 288,990
-----------------------------------
Deduct: Cash dividends declared on stock:
5% cumulative preferred ............ 1,075 1,075 1,075
Auction rate cumulative preferred .. 2,024 2,041 2,024
$5.875 cumulative preferred ........ 1,469 1,469 1,469
Common ............................. 85,000 59,000 75,200
-----------------------------------
89,568 63,585 79,768
-----------------------------------
Balance December 31 ........................... $247,462 $258,910 $209,222
-----------------------------------
-----------------------------------
</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
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income ...................................................... $ 78,120 $ 113,273 $ 107,941
Items not requiring cash currently:
Depreciation and amortization ................................ 93,178 93,020 89,002
Deferred income taxes-net .................................... 2,747 (3,495) 26,055
Investment tax credit-net .................................... (4,258) (4,240) (3,997)
Other ........................................................ 5,534 4,640 3,911
Changes in certain net current assets:
Accounts receivable .......................................... (17,708) (9,728) (9,555)
Materials and supplies ....................................... 423 (8,492) (1,418)
Accounts payable ............................................. 34,779 1,416 3,772
Provision for rate refunds ................................... 13 (4,263) (10,789)
Accrued taxes ................................................ 13,206 6,741 4,168
Accrued interest ............................................. 22 (1,978) (1,070)
Prepayments and other ........................................ 976 1,333 685
Other ........................................................... 18,679 (3,188) (23,153)
-------------------------------------
Net cash flows from operating activities ..................... 225,711 185,039 185,552
-------------------------------------
Cash Flows from Investing Activities
Purchases of securities ......................................... (17,397) (18,529) (11,039)
Proceeds from sales of securities ............................... 18,841 2,544 28,605
Construction expenditures ....................................... (138,345) (110,893) (107,879)
-------------------------------------
Net cash flows from investing activities ..................... (136,901) (126,878) (90,313)
-------------------------------------
Cash Flows from Financing Activities
Issuance of first mortgage bonds and pollution control bonds .... -- 69,776 49,745
Retirement of first mortgage bonds and pollution control bonds .. (20,000) (71,693) (67,013)
Payment of dividends ............................................ (87,552) (62,564) (79,310)
-------------------------------------
Net cash flows from financing activities ..................... (107,552) (64,481) (96,578)
-------------------------------------
Change in Cash and Temporary Cash Investments ...................... (18,742) (6,320) (1,339)
Cash and Temporary Cash Investments at Beginning of Year ........... 50,472 56,792 58,131
-------------------------------------
Cash and Temporary Cash Investments at End of Year ................. $ 31,730 $ 50,472 $ 56,792
-------------------------------------
-------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Income taxes ................................................. $ 40,334 $ 63,421 $ 41,508
Interest on borrowed money ................................... 34,245 39,582 40,334
</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
------------------------
1998 1997
----------- ---------
<S> <C> <C>
Utility Plant, at original cost
Electric ............................................................ $2,268,860 $2,242,980
Gas ................................................................. 339,647 337,619
Common .............................................................. 131,271 137,496
------------------------
2,739,778 2,718,095
Less: Reserve for depreciation ..................................... 1,144,123 1,072,842
------------------------
1,595,655 1,645,253
Construction work in progress ....................................... 156,361 61,139
------------------------
1,752,016 1,706,392
------------------------
Other Property and Investments - less reserve .......................... 1,154 1,365
------------------------
Current Assets
Cash and temporary cash investments ................................. 31,730 50,472
Marketable securities (Note 6) ...................................... 17,851 19,311
Accounts receivable-less reserve of $1,399 in 1998 and $1,295 in 1997 142,580 124,872
Materials and supplies-at average cost
Fuel (predominantly coal) ....................................... 23,993 17,651
Gas stored underground .......................................... 33,485 41,487
Other ........................................................... 33,103 31,866
Prepayments ......................................................... 2,285 2,627
------------------------
285,027 288,286
------------------------
Deferred Debits and Other Assets
Unamortized debt expense ............................................ 5,919 6,074
Regulatory assets (Note 3) .......................................... 37,643 24,899
Other ............................................................... 22,878 28,625
------------------------
66,440 59,598
------------------------
$2,104,637 $2,055,641
------------------------
------------------------
Capital and Liabilities
Capitalization (see Statements of Capitalization)
Common equity ....................................................... $ 671,846 $ 683,326
Cumulative preferred stock .......................................... 95,328 95,328
Long-term debt (Note 10) ............................................ 626,800 626,800
------------------------
1,393,974 1,405,454
------------------------
Current Liabilities
Long-term debt due within one year .................................. -- 20,000
Accounts payable .................................................... 133,673 98,894
Provision for rate refunds .......................................... 13,261 13,248
Dividends declared .................................................. 23,168 21,152
Accrued taxes ....................................................... 31,929 18,723
Accrued interest .................................................... 8,038 8,016
Other ............................................................... 15,242 14,608
------------------------
225,311 194,641
------------------------
Deferred Credits and Other Liabilities
Accumulated deferred income taxes (Notes 1 and 8) ................... 254,589 249,851
Investment tax credit, in process of amortization ................... 71,542 75,800
Accumulated provision for pensions and related benefits (Note 7) .... 59,529 33,872
Customers' advances for construction ................................ 10,848 10,385
Regulatory liability (Note 3) ....................................... 63,529 65,502
Other ............................................................... 25,315 20,136
------------------------
485,352 455,546
------------------------
Commitments and Contingencies (Note 12)
$2,104,637 $2,055,641
------------------------
------------------------
</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
----------------------------
1998 1997
----------- ----------
<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 $34 in 1998 and $16 in 1997 (Note 6) ............................ 50 82
Retained earnings ............................................................ 247,462 258,910
----------------------------
671,846 683,326
----------------------------
Cumulative Preferred Stock
Redeemable on 30 days notice by the Company
SHARES CURRENT
OUTSTANDING REDEMPTION PRICE
$25 par value, 1,720,000 shares authorized -
5% series ..................................... 860,287 $ 28.000 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction Rate .................................. 500,000 100.000 50,000 50,000
$5.875 series ................................. 250,000 105.875 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 July 1, 2002, 7 1/2% ........................................... 20,000 20,000
Series due August 15, 2003, 6% ............................................ 42,600 42,600
Pollution control series:
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 ................................................ 506,800 506,800
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 35,000
Trimble County Series due November 1, 2027, variable .................. 35,000 35,000
----------------------------
Total unsecured pollution control bonds ................................... 120,000 120,000
----------------------------
Total long-term bonds ..................................................... 626,800 626,800
----------------------------
Total Capitalization ............................................................. $ 1,393,974 $1,405,454
----------------------------
----------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of $)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income available for common stock .............................. $ 73,552 $ 108,688 $ 103,373
Unrealized holding gains (losses) on available-for-sale securities
arising during the period ...................................... (14) (426) 169
Reclassification adjustment for realized losses on
available-for-sale securities included in net income .......... -- 188 547
-----------------------------------
Other comprehensive income (loss), before tax ...................... (14) (238) 716
Income tax expense (benefit) related to items of other comprehensive
income ........................................................ 18 (119) 289
-----------------------------------
Comprehensive income ............................................... $ 73,520 $ 108,569 $ 103,800
-----------------------------------
-----------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Louisville Gas and Electric Company (LG&E or the Company) is a 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, Kentucky Utilities Company
(KU), and LG&E Capital Corp. (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
for determining retail customer rates. 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 1998 were
3.4% (3.2% electric, 3.4% gas, and 7.4% common); for 1997 were 3.4% (3.2%
electric, 3.3% gas, and 6% common); and for 1996 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.
GAS STORED UNDERGROUND. Gas inventories of $33 million and $41 million at
December 31, 1998 and 1997, respectively, are included in gas stored underground
in the balance sheet. The inventory is accounted for using the average-cost
method.
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
6
<PAGE>
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.
In connection with the Company's marketing of power from owned generation
assets, exchange traded futures are used to hedge market risk associated with
price fluctuations for commitments to sell or purchase electricity. Gains and
losses on these futures contracts are reflected in other income and deductions,
but are immaterial to the Company's results of operations. At December 31, 1998,
the value of these futures contracts was not material to the Company's financial
position.
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) in 1994, the Company implemented a demand side
management program, including a "decoupling mechanism" which allowed the Company
to recover a predetermined level of revenue on electric and gas residential
sales. In 1998, the decoupling mechanism was suspended. See Note 3, Rates and
Regulatory Matters.
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. The Company implemented a Commission-approved
experimental performance-based ratemaking mechanism related to gas procurement
and off-system gas sales activity. See Note 3, Rates and Regulatory Matters.
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.
7
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS. During 1998, the Company adopted the following
accounting pronouncements:
Statements of Financial Accounting Standards No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS (SFAS No. 132), No. 130,
REPORTING COMPREHENSIVE INCOME (SFAS No. 130), and No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No. 131). Pursuant to
SFAS No. 132, the Company has disclosed additional information on changes in
benefit obligations and fair values of plan assets and eliminated certain
disclosures that are no longer relevant. This standard does not change the
measurement or financial statement recognition of the plans. See Note 7,
Pension Plans and Retirement Benefits. Under SFAS No. 131, the Company has
provided information about its various business segments that is intended to
allow readers to view certain financial information as if "through the eyes
of management". See Note 14, Segments of Business and Related Information.
Pursuant to SFAS No. 130, the Company has presented information in the
Statements of Comprehensive Income that measures changes in equity that are
not required to be recorded as a component of net income. These standards had
no impact on the calculation of net income presented in the Statements of
Income.
Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE (SOP 98-1). SOP 98-1, adopted as of
January 1, 1998, clarifies the criteria for capital or expense treatment of
costs incurred by an enterprise to develop or obtain computer software to be
used in its internal operations. The statement does not change treatment of
costs incurred in connection with correcting computer programs to properly
process the millennium change to the Year 2000, which must be expensed as
incurred. Adoption of SOP 98-1 did not have a material effect on the
Company's financial statements.
The following accounting pronouncements have been issued but are not yet
effective:
Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The statement is effective for
fiscal years beginning after June 15, 1999, and establishes accounting and
reporting standards that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that use hedge accounting. The Company is
currently analyzing the provisions of the statement and cannot predict the
impact this statement will have on its results of operations and financial
position, however, the statement could increase volatility in earnings and
other comprehensive income. The effect of this statement will be recorded in
cumulative effect of change in accounting when adopted.
Emerging Issues Task Force Issue No. 98-10, ACCOUNTING FOR ENERGY TRADING AND
RISK MANAGEMENT ACTIVITIES (EITF No. 98-10). This pronouncement is effective
for fiscal years beginning after December 15, 1998. The task force concluded
that energy trading contracts should be recorded at mark to market on the
balance sheet, with the gains and losses shown net in the income statement.
EITF No. 98-10 more broadly defines what represents energy trading to include
economic activities related to physical assets which were not previously
marked to market by established industry practice. The effects of adopting
EITF No. 98-10, if applicable, will be reported as a cumulative effect of a
change in accounting principle
8
<PAGE>
with no prior period restatement. The Company does not expect the adoption of
EITF No. 98-10 to have a material adverse impact on its operations and
financial position.
NOTE 2 - MERGER
LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the
surviving corporation. As a result of the merger, LG&E Energy, which is the
parent of LG&E, became the parent company of Kentucky Utilities Company (KU).
LG&E and KU have continued to maintain their separate corporate identities
and serve customers under their present names. LG&E Energy has estimated
approximately $760 million in gross non-fuel savings over a ten-year period
following the merger. Costs to achieve these savings for the Company of $50.2
million were recorded in the second quarter of 1998, $18.1 million of which
were initially deferred and are being amortized over a five-year period
pursuant to regulatory orders. Primary components of the merger costs were
separation benefits, relocation costs, and transaction fees, the majority of
which were paid by December 31, 1998. The Company expensed the remaining
costs associated with the merger in the second quarter of 1998. In regulatory
filings associated with approval of the merger, the Company committed not to
seek increases in existing base rates and proposed reductions in their retail
customers' bills in amounts based on one-half of the savings, net of the
deferred and amortized amount, over a five-year period. The common stock,
preferred stock and debt securities of the Company were not affected by the
merger.
Regulatory and administrative approvals were obtained from the Federal Energy
Regulatory Commission, (FERC), the Federal Trade Commission, the Securities
and Exchange Commission, the Public Service Commission of Kentucky (Kentucky
Commission or Commission), the Virginia State Corporation Commission and the
stockholders of LG&E Energy and KU Energy prior to the effective date of the
merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt
holding company under the Public Utility Holding Company Act of 1935.
Management has accounted for the merger as a pooling of interests and as a
tax-free reorganization under the Internal Revenue Code.
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 $18.1 million or 50% of the originally estimated costs to achieve such
savings by the Company, be applied to reduce customer rates through a
surcredit on customers' bills and the remaining 50% be retained by the
companies. The Commission approved the surcredit and allocated the customer
savings 53% to KU and 47% to LG&E. The surcredit will be about 2% of customer
bills over the next five years and will amount to approximately $55 million
in net non-fuel savings to the Company's customers. Any fuel cost savings are
passed to customers through the Company's fuel adjustment clause.
NOTE 3 - RATES AND REGULATORY MATTERS
The Company conforms with generally accepted accounting principles as applied
to regulated public utilities and as prescribed by 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
9
<PAGE>
each item. The following regulatory assets and liabilities were included in
the balance sheets as of December 31 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Unamortized loss on bonds ............... $ 17,627 $ 18,698
Merger costs ............................ 16,332 2,938
Manufactured gas sites .................. 3,684 3,263
-----------------------
Total regulatory assets ................. 37,643 24,899
Deferred income taxes - net ............. (63,529) (65,502)
-----------------------
Regulatory assets and (liabilities) - net $(25,886) $(40,603)
-----------------------
-----------------------
</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.
ENVIRONMENTAL COST RECOVERY. Since May 1995, the Company implemented an
environmental cost recovery (ECR) surcharge to recover certain environmental
compliance costs, including costs to comply with the 1990 Clean Air Act, as
amended, as well as other environmental regulations, including those
applicable to coal combustion wastes and related by-products. The ECR
mechanism was authorized by state statute in 1992 and was first approved by
the Kentucky Commission in a KU case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by the Company be subject to
refund pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying
recovery of costs associated with pre-1993 environmental projects through the
ECR. The court remanded the case to the Commission to determine the proper
adjustments to refund amounts collected for such pre-1993 environmental
projects. The parties to the proceeding have notified the Commission that they
have reached agreement as to the terms, refund amounts, refund procedure and
forward application of the ECR. The settlement agreement is subject to
Commission approval. The Company recorded a provision for rate refund of $4.5
million in December 1998.
DEMAND SIDE MANAGEMENT. In January 1994, the Company implemented a
Commission-approved demand side management (DSM) program that the Company,
the Jefferson County Attorney, and representatives of several customer
interest groups had filed with the Commission. The program included 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 program
(decoupling). In June 1998, the Company and customer interest groups
requested an end to the decoupling rate mechanism. On June 1, 1998, the
Company discontinued recording revenues from lost sales due to DSM. Accrued
decoupling revenues
10
<PAGE>
recorded for periods prior to June 1, 1998, will continue to be collected
through the DSM recovery mechanism. On September 23, 1998, the Commission
accepted the Company's modified tariff reflecting this proposal effective as
of June 1, 1998.
PERFORMANCE-BASED RATEMAKING. Since October 1997, the Company has implemented a
Commission-approved, experimental performance-based ratemaking mechanism related
to gas procurement activities and off-system gas sales. During the three-year
test period beginning October 1997, rate adjustments related to this mechanism
will be determined for each 12-month period beginning November 1 and ending
October 31. During the first year of the mechanism ended October 31, 1998, the
Company recorded $3.6 million for its share of reduced gas costs. The $3.6
million will be billed to customers through the gas supply clause beginning
February 1, 1999.
FUEL ADJUSTMENT CLAUSE. The Company has a fuel adjustment clause (FAC)
mechanism, which under Kentucky law allows the Company to recover from
customers, the actual fuel costs associated with retail electric sales. As of
February 12, 1999, the Company received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC from November 1994 through April 1998. The
orders changed the Company's method of assigning fuel costs associated with
electric line losses on off-system sales through the FAC. The orders require
these amounts to be refunded to customers during the first quarter of 1999 and
to include in the FAC calculation the cost of fuel associated with line losses
incurred in making off-system sales.
The Kentucky Commission has not issued the Company an order for the review
period May 1998 through October 1998, however, following the methods set forth
in the previous orders, the Company estimates up to an additional $1.3 million
could be refundable to retail electric customers for open review periods through
December 1998. Management does not believe final resolution of these proceedings
will have a material adverse effect on the Company's financial position or
results of operations.
The Kentucky Commission granted the Company's motion to suspend the refund
obligation until further direction by the Commission. The Commission advised
that the Company may have to pay interest on the refund amounts during the
suspension period. The Company is awaiting a Commission response to a motion to
revoke the orders, or in the alternative, grant a rehearing.
FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate, but
parallel applications with the Commission for approval of a new method of
determining electric rates that provides financial incentives for LG&E and KU to
further reduce customers' rates. The filing was made pursuant to the September
1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to remain
under traditional rate of return regulation or commence non-traditional
regulation. The new ratemaking method, known as performance-based ratemaking
(PBR), would include financial incentives for LG&E and KU to reduce fuel costs
and increase generating efficiency, and to share any resulting savings with
customers. Additionally, the PBR provides financial penalties and rewards to
assure continued high quality service and reliability.
11
<PAGE>
The PBR plan proposed by LG&E and KU consists of five components:
- The utilities' fuel adjustment clause mechanism will be withdrawn
and replaced with a cap that limits recovery of actual changes in
fuel cost to changes in a fuel price index for a five-state
region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the
utilities' fuel costs exceed the index, the difference will be
absorbed by LG&E Energy's shareholders.
- Customers will continue to receive the benefits from the
post-merger joint dispatch of power from LG&E's and KU's
generating plants.
- Power plant performance will be measured against the best
performance achieved between 1991 and 1997. If the performance
exceeds this level, customers will share in up to $10 million
annually of benefits from this performance at each of LG&E and KU.
- The utilities will be encouraged to maintain and improve service
quality, reliability, customer satisfaction and safety, which will
be measured against six objective benchmarks. The plan provides
for annual rewards or penalties to the Company of up to $5 million
per year at each of LG&E and KU.
- The plan provides the utilities with greater flexibility to
customize rates and services to meet customer needs. Services will
continue to be priced above marginal cost and customers will
continue to have the option to elect standard tariff service.
These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision likely will occur in 1999.
Several intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR. The Company is not able to
predict the ultimate outcome of these proceedings, however, should the
Commission mandate significant rate reductions at the Company, through the PBR
proposal or otherwise, such actions could have a material effect on the
Company's financial condition and results of operations.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997,
the Kentucky Commission opened Administrative Case No. 369 to consider
Commission policy regarding cost allocations, affiliate transactions and codes
of conduct governing the relationship between utilities and their non-utility
operations and affiliates. The Commission 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-utility operations; and whether a
code of conduct should be established to assure that non-utility segments of the
holding company are not engaged in practices which result in unfair competition
caused by cost shifting from the non-utility affiliate to the utility. In
September 1998, the Commission issued draft code of conduct and cost allocation
guidelines. In January 1999, the Company, as well as all parties to the
proceeding, filed comments on the Commission draft proposals. Initial hearings
are scheduled for the first quarter of 1999. 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.
12
<PAGE>
NOTE 4 - FINANCIAL INSTRUMENTS
At December 31, 1998, the Company held U.S. Treasury note and bond futures
contracts with notional amounts totaling $2.8 million. These contracts are used
to hedge price risk associated with certain marketable securities and mature in
March 1999.
As of December 31, 1998, the Company had in effect six interest-rate swap
agreements to hedge its exposure to tax exempt rates related to Pollution
Control Bonds, Variable Rate Series. The swaps have notional amounts totaling
$166 million and mature at various times from 1999 to 2005. The Company pays a
weighted-average fixed rate on the swaps of 3.89% and receives a variable rate
based on the JJ Kenny Index (in the case of one of the swaps) or the Bond Market
Association Municipal Swap Index. The indices averaged 3.48% in 1998.
In April 1998, the Company entered into a forward-starting interest-rate swap
with a notional amount of $83.3 million. The swap will hedge anticipated
variable-rate borrowing commitments. It will start in August 2000 and mature in
November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable rate
based on the Bond Market Association Municipal Swap Index. Under certain
conditions, the counterparty to the agreement may terminate the swap at no cost
after August 2010.
The cost and estimated fair values of the Company's non-trading financial
instruments as of December 31, 1998 and 1997 follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
--------------------- ---------------------
FAIR FAIR
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Marketable securities ........................... $ 17,767 $ 17,851 $ 19,213 $ 19,311
Long-term investments -
Not practicable to estimate fair value ....... 748 748 747 747
Preferred stock subject to mandatory redemption . 25,000 26,413 25,000 26,250
Long-term debt .................................. 626,800 648,603 626,800 649,491
U.S. Treasury note and bond futures ............. -- (50) -- (37)
Interest-rate swaps ............................. -- (7,378) -- (248)
</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.
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.
13
<PAGE>
The Company's customer receivables and gas and electric revenues arise from
deliveries of natural gas to approximately 289,000 customers and electricity to
approximately 360,000 customers in Louisville and adjacent areas in Kentucky.
For the year ended December 31, 1998, 77% of total revenue was derived from
electric operations and 23% 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. On December 10, 1998,
the Company and IBEW employees entered into a three-year collective bargaining
agreement following a vote by IBEW members which ratified the contract providing
for certain wage and benefit improvements, and opportunities for early
retirement.
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 1998 were
approximately $18.8 million, which resulted in immaterial realized gains and
losses. Proceeds from sales of available-for-sale securities in 1997 were
approximately $2.5 million, which resulted in immaterial realized gains and
losses, calculated using the specific identification method.
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, 1998 and 1997, follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
FIXED FIXED
EQUITY INCOME TOTAL EQUITY INCOME TOTAL
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Cost ................................. $ 3,798 $ 13,969 $ 17,767 $ 3,763 $ 15,450 $ 19,213
Unrealized gains ..................... 276 31 307 192 13 205
Unrealized losses .................... (95) (128) (223) (40) (67) (107)
---------------------------------------------------------------------
Fair values .......................... $ 3,979 $ 13,872 $ 17,851 $ 3,915 $ 15,396 $ 19,311
---------------------------------------------------------------------
---------------------------------------------------------------------
Fair Values:
No maturity ....................... $ 3,979 $ 178 $ 4,157 $ 3,915 $ 114 $ 4,029
Contractual maturities:
Less than one year .............. -- 8,301 8,301 -- 8,795 8,795
One to five years ............... -- 3,861 3,861 -- 5,442 5,442
Five to ten years ............... -- -- -- -- -- --
Over ten years .................. -- 1,532 1,532 -- 1,045 1,045
Not due at a single maturity date -- -- -- -- -- --
---------------------------------------------------------------------
Total Fair Values .................... $ 3,979 $ 13,872 $ 17,851 $ 3,915 $ 15,396 $ 19,311
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
14
<PAGE>
NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS
The Company sponsors several qualified and non-qualified pension plans and other
postretirement benefit plans for its employees. The following tables provide a
reconciliation of the changes in the plans' benefit obligations and fair value
of assets over the three-year period ending December 31, 1998 and a statement of
the funded status as of December 31 for each of the last three years (in
thousands of $):
<TABLE>
<CAPTION>
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 274,095 $ 229,349 $ 206,866 $ 43,373 $ 39,951 $ 37,815
Service cost ........................... 6,333 5,214 4,989 761 746 773
Interest cost .......................... 19,873 17,629 16,697 2,946 2,942 2,976
Plan amendments ........................ 3,724 3,085 18,694 599 -- 4,066
Curtailment (gain) or loss ............. (2,218) -- -- 344 -- --
Special termination benefits ........... 18,295 -- -- 2,855 -- --
Benefits paid .......................... (10,866) (8,735) (7,745) (2,634) (2,604) (2,678)
Actuarial (gain) or loss ............... 2,699 27,553 (10,152) (3,280) 2,338 (3,001)
---------------------------------------------------------------------------
Benefit obligation at end of year ...... $ 311,935 $ 274,095 $ 229,349 $ 44,964 $ 43,373 $ 39,951
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning
of year ................................ $ 280,238 $ 238,026 $ 207,471 $ 4,384 $ 2,284 $ --
Actual return on plan assets ........... 38,913 46,078 31,921 199 80 --
Employer contributions ................. 375 4,869 6,379 3,207 3,696 2,284
Benefits paid .......................... (10,866) (8,735) (7,745) (1,728) (1,676) --
---------------------------------------------------------------------------
Fair value of plan assets at end of year $ 308,660 $ 280,238 $ 238,026 $ 6,062 $ 4,384 $ 2,284
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Reconciliation of funded status:
Funded status .......................... $ (3,275) $ 6,143 $ 8,677 $ (38,902) $ (38,989) $ (37,667)
Unrecognized actuarial (gain) or loss .. (72,037) (61,720) (65,850) (285) 2,901 493
Unrecognized transition (asset) or
obligation ............................. (8,076) (9,188) (10,300) 18,080 20,053 21,390
Unrecognized prior service costs ....... 41,447 43,518 44,141 3,519 3,410 3,738
---------------------------------------------------------------------------
Net amount recognized at end of year ... $ (41,941) $ (21,247) $ (23,332) $ (17,588) $ (12,625) $ (12,046)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the statement of
financial position and information for plans with benefit obligations in excess
of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Amounts recognized in balance sheet consist of :
Accrued benefit liability ...................... $(41,977) $(21,317) $(23,372) $(17,588) $(12,625) $(12,046)
Intangible asset ............................... 36 70 40 -- -- --
-------------------------------------------------------------------------
Net amount recognized at end of year ........... $(41,941) $(21,247) $(23,332) $(17,588) $(12,625) $(12,046)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Additional year-end information for plans with
benefit obligations in excess of plan assets:
Projected benefit obligation (1) ............ $148,005 $121,902 $101,260 $ 44,964 $ 43,373 $ 39,951
Accumulated benefit obligation (2) .......... 131,430 4,179 3,634 -- -- --
Fair value of plan assets (1) ............... 107,988 99,151 81,848 6,062 4,384 2,284
</TABLE>
(1) All years include the Company's non-union plan and unfunded Supplemental
Executive Retirement Plans (SERPs).
(2) 1998 includes the Company's non-union plan and SERPs. 1997 and 1996
include SERPs only.
The following table provides the components of net periodic benefit cost
for the plans for 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
PENSION PLANS OTHER BENEFITS
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost ................................ $ 6,333 $ 5,214 $ 4,989 $ 761 $ 746 $ 773
Interest cost ............................... 19,873 17,629 16,697 2,946 2,942 2,976
Expected return on plan assets .............. (23,701) (19,849) (17,706) (296) (151) --
Amortization of prior service cost .......... 3,882 3,708 3,491 367 328 328
Amortization of transition (asset) or
obligation .................................. (1,112) (1,112) (1,112) 1,315 1,337 1,337
Recognized actuarial (gain) or loss.......... (2,248) (2,866) (2,047) -- -- --
---------------------------------------------------------------------
Net periodic benefit cost ................... $ 3,027 $ 2,724 $ 4,312 $ 5,093 $ 5,202 $ 5,414
---------------------------------------------------------------------
---------------------------------------------------------------------
FAS 88 special charges
Curtailment (gain)/loss ..................... $ (2,168) $ -- $ -- $ 1,005 $ -- $ --
Prior service cost recognized ............... 1,914 -- -- 124 -- --
Special termination benefits ................ 18,295 -- -- 2,855 -- --
---------------------------------------------------------------------
Total FAS 88 charges ........................ $ 18,041 $ -- $ -- $ 3,984 $ -- $ --
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. During 1998, the Company incurred approximately $18
million in special termination pension benefits as a result of its early
retirement program offered to eligible employees post-merger.
The assumptions used in the measurement of the Company's pension benefit
obligation are shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions as of December 31:
Discount rate................................ 7.00% 7.00% 7.75%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase................ 3.50%-4.00% 2.00-4.00% 2.00-4.25%
</TABLE>
For measurement purposes, a 7% annual increase in the per capita cost of covered
health care benefits was assumed for 1999. The rate was assumed to decrease each
year to 4.25% for 2005 and remain at that level thereafter.
16
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects (in thousands of $):
<TABLE>
<CAPTION>
1% DECREASE 1% INCREASE
<S> <C> <C>
Effect on total of service and interest cost components for 1998 $ 122 $ 146
Effect on year-end 1998 postretirement benefit obligation ...... 1,188 1,971
</TABLE>
THRIFT SAVINGS PLANS
The Company has a thrift savings plan under section 401(k) of the Internal
Revenue Code. 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
the employee contributions. The costs were approximately $2.4 million for 1998
and $1.8 million for each of 1997 and 1996.
NOTE 8 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands of
$):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Included in Operating Expenses:
Current - Federal.............................................. $ 45,716 $ 57,590 $ 33,823
- State................................................ 11,895 14,593 7,685
Deferred - Federal-net.......................................... 2,276 (4,565) 19,161
- State-net............................................ 678 703 6,587
Deferred investment tax credit.................................... 55 102 409
Amortization of investment tax credit............................. (4,313) (4,342) (4,406)
-------------------------------------
Total.......................................................... 56,307 64,081 63,259
-------------------------------------
Included in Other Income and (Deductions):
Current - Federal.............................................. 660 1,484 196
- Federal-merger costs................................. (6,758) - -
- State................................................ 6 161 (96)
- State-merger costs................................... (1,737) - -
Deferred - Federal-net.......................................... (165) 292 246
- State-net............................................ (42) 75 61
-------------------------------------
Total.......................................................... (8,036) 2,012 407
-------------------------------------
Total Income Tax Expense............................................. $ 48,271 $ 66,093 $ 63,666
-------------------------------------
-------------------------------------
</TABLE>
17
<PAGE>
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation and other plant-related items ........ $323,869 $321,442
Other liabilities ................................. 9,644 6,702
-------------------
333,513 328,144
-------------------
Deferred Tax Assets:
Investment tax credit ............................. 28,876 30,595
Income taxes due to customers ..................... 25,447 26,357
Pension overfunding ............................... 2,099 7,265
Accrued expenses not currently deductible and other 22,502 14,076
-------------------
78,924 78,293
-------------------
Net Deferred Income Tax Liability .................... $254,589 $249,851
-------------------
-------------------
</TABLE>
A reconciliation of differences between the statutory U.S. federal income tax
rate and the Company's effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ....... 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.5 5.7 5.4
Amortization of investment tax credit ... (3.4) (2.4) (2.6)
Nondeductible merger expenses ........... 2.4 -- --
Other differences-net ................... (1.3) (1.5) (.7)
-----------------------
Effective Income Tax Rate ............... 38.2% 36.8% 37.1%
-----------------------
-----------------------
</TABLE>
NOTE 9 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income ................ $ 4,245 $ 4,786 $ 4,096
Interest on income tax settlement ........... -- 1,446 --
Gain on sale of stock options ............... -- 1,794 --
Gains (losses) on fixed asset disposal ...... 530 77 (36)
Donations ................................... (168) (147) (150)
Income taxes and other ...................... (2,111) (3,679) (2,990)
Income tax benefit on merger costs to achieve 8,495 -- --
--------------------------------
Total other income and (deductions) ......... $ 10,991 $ 4,277 $ 920
--------------------------------
--------------------------------
</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 1999 sinking
18
<PAGE>
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 occurs. The interest rate reflected in the Statements of
Capitalization applies to the Pollution Control Bonds.
On June 1, 1998, the Company's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by the Company.
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 3.09% and
3.39%, respectively, at December 31, 1998. 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.
The Company's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to
mature in 2002, and the $42.6 million, 6% Series is scheduled for maturity in
2003. There are no scheduled maturities of Pollution Control Bonds for the five
years subsequent to December 31, 1998. The Company has no cash sinking fund
requirements.
NOTE 11 - NOTES PAYABLE
The Company had no notes payable at December 31, 1998, and 1997.
At December 31, 1998, 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.
19
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM. The Company had commitments in connection with its
construction program aggregating approximately $8 million at December 31, 1998.
Construction expenditures for the years 1999 and 2000 are estimated to total
approximately $384 million.
OPERATING LEASE. The Company leases office space and accounts for all of its
office space leases as operating leases. Total lease expense for 1998, 1997, and
1996, less amounts contributed by the parent company, was $1.6 million, $1.8
million, and $1.9 million, respectively. The future minimum annual lease
payments under lease agreements for years subsequent to December 31, 1998, are
as follows (in thousands of $):
<TABLE>
<CAPTION>
<S> <C>
1999 .......... $ 3,055
2000 .......... 3,321
2001 .......... 3,654
2002 .......... 3,594
2003 .......... 3,507
Thereafter 5,260
-------
Total $22,391
-------
-------
</TABLE>
ENVIRONMENTAL. In September 1998, the U.S. Environmental Protection Agency
(USEPA) announced its final regulation requiring significant additional
reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport
to the Northeast. While each state is free to allocate its assigned NOx
reductions among various emissions sectors as it deems appropriate, the
regulation may ultimately require utilities to reduce their NOx emissions to
0.15 lb./mmBtu (million British thermal units ) - an 85% reduction from 1990
levels. Under the regulation, each state must incorporate the additional NOx
reductions in its State Implementation Plan (SIP) by September 1999 and affected
sources must install control measures by May 2003, unless granted extensions.
Several states, various labor and industry groups, and individual companies have
appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit.
Management is currently unable to determine the outcome or exact impact of this
matter until such time as the states identify specific emissions reductions in
their SIPs and the courts rule on the various legal challenges to the final
rule. However, if the 0.15 lb. target is ultimately imposed, the Company will be
required to incur significant capital expenditures and increased operation and
maintenance costs for additional controls.
Subject to further study and analysis, the Company estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. The Company believes its costs in this
regard to be comparable to those of similarly situated utilities with like
generation assets. The Company anticipates that such capital and operating costs
are the type of costs that are eligible for cost recovery from customers under
its environmental surcharge mechanism and believes that a significant portion of
such costs could be so recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.
The Company is also addressing other air quality issues. First, the Company is
monitoring USEPA's implementation of the revised National Ambient Air Quality
Standards (NAAQS) for ozone and
20
<PAGE>
particulate matter. Until USEPA completes additional implementation steps,
including monitoring and nonattainment designations, management is unable to
determine the precise impact of the revised standards. Second, the Company is
conducting modeling activities at its Cane Run Station in response to
notifications from regulatory agencies that the plant may be the source of
potential exceedances of the NAAQS for SO(2). Depending on future regulatory
determinations, the Company may be required to undertake corrective action
that could include significant capital expenditures or emissions limitations.
Third, the Company is working with regulatory authorities to review the
effectiveness of remedial measures aimed at controlling particulate emissions
from its Mill Creek Station. The Company previously settled a number of
property damage claims from adjacent residents and completed significant
plant modifications as part of its ongoing capital construction program. The
Company is currently awaiting a final regulatory determination regarding
remedial measures. In management's opinion, resolution of any remaining
property damage claims from adjacent residents should not have a material
adverse impact on the financial position or results of operations of the
Company.
The Company is addressing potential liabilities for the 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. The Company is negotiating with state agencies
with respect to cleanup of a site owned by the Company. In agreements reached in
1996 and 1998 with the current owners of two sites formerly owned by the
Company, the current owners of those sites have expressly agreed to assume
responsibility for environmental liabilities in return for an aggregate payment
of $400,000. Until conclusion of discussions with state agencies regarding the
site currently owned by the Company, management is unable to precisely determine
remaining liability for cleanup costs at MGP sites. However, management
estimates total cleanup costs to be $3 million. Accordingly, an accrual of $3
million has been recorded in the accompanying financial statements.
The Company, along with other companies, has been identified by USEPA as
potentially responsible parties allegedly liable for cleanup of certain off-site
disposal facilities under the Comprehensive Environmental Response Compensation
and Liability Act. The Company has entered into final settlements for an
aggregate of $150,000 resolving liability in these matters.
NOTE 13 - 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 and Indiana Municipal Power Agency (IMPA) owns a
12.88% undivided interest. Each is responsible for their proportionate ownership
share of fuel cost, operation and maintenance expenses, and incremental assets.
21
<PAGE>
The following data represent shares of the jointly owned property:
<TABLE>
<CAPTION>
TRIMBLE COUNTY
-----------------------------------------
LG&E IMPA IMEA TOTAL
------- ------- ------ ------
<S> <C> <C> <C> <C>
Ownership interest ...................................... 75% 12.88% 12.12% 100%
Mw capacity ............................................. 371.25 63.75 60 495
</TABLE>
NOTE 14 - SEGMENTS OF BUSINESS AND RELATED INFORMATION
Effective December 31, 1998, the Company adopted Statements of Financial
Accounting Standards No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. 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. Financial data for business segments,
follow (in thousands of $):
<TABLE>
<CAPTION>
1998 ELECTRIC GAS TOTAL
------------- ----------- -----------
<S> <C> <C> <C>
Operating revenues........................................ $ 658,511(a) $ 191,545 $ 850,056
Depreciation and amortization............................. 79,866 13,312 93,178
Interest income........................................... 3,566 679 4,245
Interest expense.......................................... 30,389 5,933 36,322
Merger costs to achieve................................... 32,072 - 32,072
Income taxes.............................................. 56,401 (94) 56,307
Net income................................................ 75,368 2,752 78,120
Total assets.............................................. 1,727,463 377,174 2,104,637
Construction expenditures................................. 105,836 32,509 138,345
1997 ELECTRIC GAS TOTAL
-------- --- -----
Operating revenues........................................ $ 614,532 $ 231,011 $ 845,543
Depreciation and amortization............................. 79,958 13,062 93,020
Interest income........................................... 5,279 953 6,232
Interest expense.......................................... 33,349 5,841 39,190
Income taxes.............................................. 59,415 4,666 64,081
Net income................................................ 108,236 5,037 113,273
Total assets.............................................. 1,677,278 378,363 2,055,641
Construction expenditures................................. 81,713 29,180 110,893
1996 ELECTRIC GAS TOTAL
-------- --- -----
Operating revenues........................................ $ 606,696 $ 214,419 $ 821,115
Depreciation and amortization............................. 76,929 12,073 89,002
Interest income........................................... 3,520 576 4,096
Interest expense.......................................... 34,566 5,676 40,242
Income taxes.............................................. 58,448 4,811 63,259
Net income................................................ 100,119 7,822 107,941
Total assets.............................................. 1,673,857 332,855 2,006,712
Construction expenditures................................. 79,541 28,338 107,879
</TABLE>
(a) Net of provision for rate refund, $4.5 million.
<PAGE>
NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1998 and 1997 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
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(Thousands of $)
1998
Operating Revenues.................. $233,344 $201,389 $229,885 $185,438
Net Operating Income................ 32,326 33,629 53,420 16,148
Net Income.......................... 23,399 21 44,861 9,839
Net Income (Loss) Available for
Common Stock.................... 22,276 (1,122) 43,726 8,672
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
</TABLE>
23
<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 provides
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, 1998, 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.
24
<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, 1998
and 1997, and the related statements of income, retained earnings, cash flows
and comprehensive income for each of the three years in the period ended
December 31, 1998. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
------------------------
Louisville, Kentucky Arthur Andersen LLP
January 27, 1999 (Except with respect
to the matter discussed in the eighth
and ninth paragraphs of Note 3, as to
which the date is February 12, 1999)
---------------------------
25
<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 1998, 1997, and 1996 and should be read in connection
with the financial statements and notes thereto.
Some of the following discussion may contain forward-looking statements that are
subject to certain risks, uncertainties and assumptions. Such forward-looking
statements are intended to be identified in this document by the words
"anticipate," "expect," "estimate," "objective," "possible," "potential" and
similar expressions. Actual results may vary materially. Factors that could
cause actual results to differ materially include: general economic conditions;
business and competitive conditions in the energy industry; changes in federal
or state legislation; unusual weather; actions by state or federal regulatory
agencies; and other factors described from time to time in Louisville Gas and
Electric Company's reports to the Securities and Exchange Commission, and
Exhibit No. 99.01 to LG&E Energy Corp's report on Form 8-K filed October 21,
1998.
MERGER
Effective May 4, 1998, following the receipt of all required state and federal
regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation
(KU Energy) merged, with LG&E Energy as the surviving corporation. The
outstanding preferred stock of Louisville Gas and Electric Company (LG&E or the
Company), a subsidiary of LG&E Energy, was not affected by the merger. See Note
2 of Notes to Financial Statements.
RESULTS OF OPERATIONS
Net Income
The Company's net income decreased $35.2 million for 1998, as compared to 1997,
primarily due to non-recurring charges for merger-related expenses and the
Environmental Cost Recovery refund of $23.6 million and $2.7 million, after tax,
respectively. Excluding these non-recurring charges, net income decreased $8.9
million. This decrease is mainly due to higher operating expenses at the
electric generating stations and lower gas sales, partially offset by increased
electric sales.
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.
26
<PAGE>
Revenues
A comparison of operating revenues for the years 1998 and 1997, excluding the
$4.5 million provision recorded for refund of environmental costs previously
recovered from customers (ECR refund), 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 1998 1997 1998 1997
----- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales to Ultimate Consumers:
Fuel and gas supply adjustments, etc $ 3,750 $ (2,155) $ (4,393) $ 27,192
Merger surcredit .................... (3,466) -- -- --
Demand side management/decoupling ... (6,299) 8,041 (369) 4,348
Environmental cost recovery surcharge (260) 448 -- --
Variation in sales volumes .......... 27,051 (4,810) (42,418) (14,891)
--------------------- --------------------
Total retail sales ................ 20,776 1,524 (47,180) 16,649
Wholesale sales ........................ 28,398 3,088 8,720 --
Gas transportation-net ................. -- -- (71) 147
Other .................................. (695) 3,224 (935) (204)
--------------------- --------------------
Total ............................. $ 48,479 $ 7,836 $(39,466) $ 16,592
--------------------- --------------------
--------------------- --------------------
</TABLE>
Electric retail sales increased primarily due to the warmer weather experienced
in 1998 as compared to 1997. Wholesale sales increased due to larger amounts of
power available for off-system sales, an increase in the unit price of the sales
and sales to Kentucky Utilities of $11.6 million due to economic dispatch
following the merger in May 1998 of LG&E Energy Corp. and KU Energy. Gas retail
sales decreased from 1997 due to the warmer weather in 1998. Gas wholesale sales
increased to $8.7 million in 1998 from zero in 1997 due to the implementation of
LG&E's gas performance-based ratemaking mechanism. See Note 3 of Notes to
Financial Statements.
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.
Expenses
Fuel for electric generation and gas supply expenses comprise a large component
of the Company's total operating costs. The Company's electric and gas rates
contain a fuel adjustment clause (FAC) 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).
27
<PAGE>
Fuel for electric generation increased $5.2 million (3.5%) in 1998 because of
higher cost of coal burned ($6.6 million), partially offset by a decrease in
generation ($1.4 million). Fuel expenses incurred in 1997 were approximately the
same as in 1996. The average delivered cost per ton of coal purchased was $22.38
in 1998, $21.66 in 1997, and $21.73 in 1996.
Power purchased expense increased $32.9 million in 1998 to support the increase
in electric sales and increased purchases from Kentucky Utilities of $16 million
as a result of economic dispatch following the merger of the two companies in
May 1998. Power purchased expense increased $.6 million (4%) in 1997 due to an
increase in the amount of purchased power needed to support native load
requirements.
Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a
decrease in the volume of gas delivered to the distribution system. 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). The average unit cost
per thousand cubic feet (Mcf) of purchased gas was $3.05 in 1998 and $3.46 in
each of 1997 and 1996.
Other operation expenses increased $12.8 million (8.5%) over 1997 because of
increased costs to operate the electric generating plants ($6.6 million),
increased administrative costs ($2.2 million), and amortization of deferred
merger costs ($1.8 million). Other operation expenses increased $7.4 million
(5%) in 1997 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.
Maintenance expenses increased $5.2 million (11%) in 1998 as compared to 1997
primarily because of an increase in scheduled outages and general repairs at the
electric generating plants ($2.2 million) and an increase in storm damage
expenses ($1.4 million). Maintenance expenses decreased $7.2 million (13%) in
1997 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).
Depreciation and amortization for 1998 were approximately the same as in 1997.
Depreciation and amortization increased $4 million (4.5%) in 1997 because of
additional utility plant in service. In addition, 1997 reflects the accelerated
write-off of losses on early retirements of facilities.
Variations in income tax expenses are largely attributable to changes in pre-tax
income.
The Company incurred a pre-tax charge in the second quarter of 1998 for costs
associated with the merger of LG&E Energy and KU Energy of $32.1 million. The
corresponding tax benefit of $8.5 million is recorded in other income and
(deductions). The amount charged is in excess of the amount permitted to be
deferred as a regulatory asset by the Kentucky Public Service Commission. See
Note 2 of Notes to Financial Statements.
28
<PAGE>
Other income for 1997 increased by $3.4 million primarily because of the
recording in 1997 of interest income due to a favorable tax settlement and
the sale of stock options which the Company had acquired in a commercial
transaction. See Note 9 of Notes to Financial Statements.
Interest charges for 1998 decreased $2.9 million (7%) due to the retirement of
the Company's 6.75% Series First Mortgage Bonds and lower interest rates.
Interest charges for 1997 decreased $1.1 million (3%) due to favorable
refinancing activities in 1996. The embedded cost of long-term debt was 5.57% at
December 31, 1998, and 5.68% at December 31, 1997. See Note 10 of Notes to
Financial Statements.
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 largely 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 1998 were $138 million compared with $111
million for 1997 and $108 million for 1996.
Past Financing Activities
During 1998, 1997 and 1996, 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 1998,
1997 and 1996.
The Company's combined cash and marketable securities balance decreased by $20
million in 1998 and increased $9 million in 1997. The decrease for 1998 reflects
retirement of a $20 million first mortgage bond. In 1997, the increase reflects
cash flows from operations, partially offset by construction expenditures and
dividends paid.
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 effect on sales of electricity and natural gas.
On June 1, 1998, the Company's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by the Company. The bonds were redeemed with available
funds.
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 3.09%
and 3.39%, respectively, at December 31, 1998. The proceeds
29
<PAGE>
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.
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 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 $384
million for 1999 and 2000. This estimate includes capital expenditures
associated with installation of low nitrogen oxide burner systems as described
in "Environmental Matters."
In July 1998, following LG&E Energy's decision to discontinue its merchant
energy trading and sales business, Standard & Poor's (S&P) downgraded the credit
ratings of LG&E Energy and its subsidiaries while Moody's and Duff & Phelps
(D&P) kept LG&E Energy and its subsidiaries at their prior ratings.
The Company's current debt ratings are:
<TABLE>
<CAPTION>
MOODY'S S&P D&P
--------------------------------------
<S> <C> <C> <C>
First mortgage bonds Aa2 A+ AA
Unsecured debt Aa3 A AA-
Preferred stock aa3 A- AA-
</TABLE>
These ratings reflect the views of Moody's, S&P and D&P. An explanation of the
significance of these ratings may be obtained from them. A security rating is
not a recommendation to buy, sell or hold securities and is subject to revision
or withdrawal at any time by the rating agency.
Future Sources of Financing
Internally generated funds from operations and new debt are expected to fund
substantially all anticipated construction expenditures in 1999 and 2000.
At December 31, 1998, the Company had unused lines of credit of $200 million for
which it pays commitment fees. These credit facilities provide for short-term
borrowing and are scheduled to expire in 2001. Management expects to renegotiate
them when they expire.
To the extent permanent financings are needed in 1999 and 2000, the Company
expects that it will have ready access to the securities markets to raise needed
funds.
Market Risks
The Company is exposed to market risks from changes in interest rates and
commodity prices. To mitigate changes in cash flows attributable to these
exposures, the Company has entered into various derivative financial
instruments. Derivative positions are monitored using techniques that include
market value and sensitivity analysis.
30
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Interest Rate Sensitivity
The Company has certain variable rate Pollution Control Bonds outstanding. At
December 31, 1998, the potential change in interest expense associated with a
1% change in base interest rates of the Company's unswapped debt is estimated
at $.8 million.
Interest rate swaps are used to hedge the Company's underlying variable rate
debt obligations. These swaps hedge specific debt issuance and consistent
with management's designation are accorded hedge accounting treatment.
The Company has entered into swaps to reduce the impact of interest rate
changes on its Pollution Control Bonds. The swap agreements involve the
exchange of floating-rate interest payments for fixed interest payments over
the life of the agreements. As of December 31, 1998, 67% of the outstanding
variable interest rate borrowings were converted to fixed interest rates
through swaps. The potential loss in fair value from these positions
resulting from a hypothetical 1% adverse movement in base interest rates is
estimated at $3.5 million as of December 31, 1998. See Note 4 of Notes to
Financial Statements.
In April 1998, the Company entered into a forward starting swap agreement.
The forward swap involves the exchange of floating-rate interest payments for
fixed interest payments over the life of the agreement. The forward swap was
entered into to hedge the Company's exposure to interest rates for the
anticipated call of its Trimble County, Kentucky, Pollution Control Bonds,
7-5/8% Series, due November 1, 2020. The potential loss in fair value from this
position resulting from a hypothetical 10% change in the yield curve is
estimated at $7.5 million as of December 31, 1998. See Note 4 of Notes to
Financial Statements.
Commodity Price Sensitivity
The Company has limited exposure to market volatility in prices of fuel or
electricity, as long as cost-based regulations exist. To mitigate residual
risks relative to the movements in fuel or in electricity prices, the Company
has entered into primarily fixed-priced contracts for the purchase and sale
of electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31,
1998, exposure from these activities was not material to the financial
statements of the Company.
Year 2000 Computer Software Issue
The Company uses various software, systems and technology that may be affected
by the "Year 2000 Issue." This concerns the ability of electronic processing
equipment (including microprocessors embedded in other equipment) to properly
process the millennium change to the year 2000 and related issues. A failure to
timely correct any such processing problems could result in material operational
and financial risks if significant systems either cease to function or produce
erroneous data. Such risks are more fully described in the sections that follow,
but could include an inability to operate its generating plants, disruptions in
the operation of transmission and distribution systems and an inability to
access interconnections with the systems of neighboring utilities.
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<PAGE>
The Company began its project regarding the Year 2000 issue in 1996. The Board
of Directors has approved the general Year 2000 plan and receives regular
updates. In addition, monthly reporting procedures have been established at
senior management levels. Since 1996, a single-purpose Year 2000 team has been
established in the Information Technology (IT) Department. This team, which is
headed by an officer of the Company, is responsible for planning, implementing,
and documenting the Company's Year 2000 process. The team also provides direct
and detailed assistance to the Company's operational divisions and smaller
units, where identified personnel are responsible for Year 2000 work and
remediation in their specific areas. In many cases, the Company also uses the
services of third parties, including technical consultants, vendor
representatives and auditors.
The Company's Year 2000 effort generally follows a three-phase process:
Phase I - inventory and identify potential Year 2000 issues,
determine solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work plans
regarding Company and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency planning.
The Company has long recognized the complexity of the Year 2000 issue. Work
has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.
State of Readiness
As of January 1999, the Company has substantially completed the internal
inventory, vendor survey and compliance assessment portions (Phases I and II)
of its Year 2000 plan for critical mainframe and PC hardware and software.
Remediation efforts (Phase III) in these areas are approximately 65%
complete. With respect to embedded systems, the Company has also
substantially completed its Phase I and Phase II efforts. Phase III
remediation efforts are also in progress for embedded systems. Testing has
commenced and will continue as remediation efforts are implemented and are
expected to run until July 1999.
As a general matter, corrective action for major IT systems, including
customer information and financial systems, are in process or have been
completed. For smaller or more isolated systems, including embedded and plant
operational systems, the Company has completed much of the evaluative process
and is commencing corrective plans. The Company has communicated with its key
suppliers, customers and business partners regarding their Year 2000
progress, particularly in the IT software and embedded component areas, to
determine the areas in which the Company's operations are vulnerable to those
parties' failure to complete their remediation efforts. The Company is
currently evaluating and, in certain cases, initiating follow-up actions
regarding the responses from these parties. The Company regularly attends and
participates in trade group efforts focusing on Year 2000 issues in the
energy industry.
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Costs of Year 2000 Issues
The Company's system modification costs related to the Year 2000 issue are
being expensed as incurred, while new system installations are generally
being capitalized pursuant to generally accepted accounting principles. See
Note 1 of Notes to Financial Statements. Through December 1998, the Company
has incurred approximately $16 million in capital and operating costs in
connection with the Year 2000 issue. Based upon studies and projections to
date, the Company expects to spend an additional $4.6 million to complete its
Year 2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
Risks of Year 2000 Issues
As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate material
business disruptions from its internal systems due to the Year 2000 issue.
However, the Company may possibly experience limited interruptions to some
aspects of its activities, whether IT, generation, transmission or
distribution, operational, administrative functions or otherwise, and the
Company is considering such potential occurrences in planning for the most
reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties with
key business or operational importance to the Company. Year 2000 problems
affecting key customers, interconnected utilities, fuel suppliers and
transporters, telecommunications providers or financial institutions could
result in lost power or gas sales, reduced power production or transmission
capabilities or internal operational or administrative difficulties on the
part of the Company. The Company is not presently aware of any such
situations; however, severe occurrences of this type could have material
adverse impacts upon the business, operating results or financial condition
of the Company. There can be no assurance that the Company will be able to
identify and correct all aspects of the Year 2000 problem among these third
parties that affect it in sufficient time, that it will develop adequate
contingency plans or that the costs of achieving Year 2000 readiness will not
be material.
Contingency planning is under way for material areas of Year 2000 risk. This
effort will address certain areas, including the most reasonably likely
worst-case scenarios and delays in completion in the Company's remediation
plans, failure or incomplete remediation results and failure of key third
parties to be Year 2000 compliant. Contingency plans will include provisions
for extra staffing, back-up communications, review of unit dispatch and load
shedding procedures, carrying of additional energy reserves and manual energy
accounting procedures. Completion of contingency plan formation is scheduled
for June 1999.
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Forward-Looking Statements
The foregoing discussion regarding the timing, effectiveness, implementation
and cost of the Company's Year 2000 efforts, contains forward-looking
statements, which are based on management's best estimates and assumptions.
These forward-looking statements involve inherent risks and uncertainties,
and actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability of key Year 2000 personnel, the Company's
ability to locate and correct all relevant computer codes, the readiness of
third parties and the Company's ability to respond to unforeseen Year 2000
complications and other factors described from time to time in the Company's
reports to the Securities and Exchange Commission, and Exhibit 99.01 to LG&E
Energy Corp.'s Form 8-K filed October 21, 1998. Such material differences
could result in, among other things, business disruption, operational
problems, financial loss, legal liability and similar risks.
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.
Since May 1995, the Company implemented an environmental cost recovery (ECR)
surcharge to recover certain environmental compliance costs. Such costs
include compliance with the 1990 Clean Air Act, as amended, and other
environmental regulations, including those applicable to coal combustion
wastes and related by-products. The ECR mechanism was authorized by state
statute in 1992 and was first approved by the Kentucky Commission in a
Kentucky Utility case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge were challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by the
Company be subject to refund pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion
upholding the constitutionality of the surcharge statute. The decision,
however, reversed the ruling of the Court of Appeals on the retroactivity
claim, thereby denying recovery of costs associated with pre-1993
environmental projects through the ECR. The court remanded the case to the
Commission to determine the proper adjustments to refund amounts collected
for such pre-1993 environmental projects. The parties to the proceeding have
notified the Commission that they have reached agreement as to the terms,
refund amounts, refund procedures and forward application of the ECR. The
settlement agreement is subject to Commission approval. The Company recorded
a provision for rate refund of $4.5 million in December 1998.
34
<PAGE>
In January 1994, the Company implemented a Commission-approved demand side
management (DSM) program that the Company, the Jefferson County Attorney, and
representatives of several customer interest groups had filed with the
Commission. The program included 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 program (decoupling). In June 1998,
the Company and customer interest groups requested an end to the decoupling
rate mechanism. On June 1, 1998, the Company discontinued recording revenues
from lost sales due to DSM. Accrued decoupling revenues recorded for periods
prior to June 1, 1998, will continue to be collected through the DSM recovery
mechanism. On September 23, 1998, the Commission accepted the Company's
modified tariff reflecting this proposal effective as of June 1, 1998.
In October 1998, LG&E and KU filed separate, but parallel applications with
the Commission for approval of a new method of determining electric rates
that provides financial incentives for LG&E and KU to further reduce
customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to
remain under traditional rate of return regulation or commence
non-traditional regulation. The new ratemaking method, known as
performance-based ratemaking (PBR), would include financial incentives for
LG&E and KU to reduce fuel costs and increase generating efficiency, and to
share any resulting savings with customers. Additionally, the PBR provides
financial penalties and rewards to assure continued high quality service and
reliability.
The PBR plan proposed by LG&E and KU consists of five components:
o The utilities' fuel adjustment clause mechanism will be withdrawn
and replaced with a cap that limits recovery of actual changes in
fuel cost to changes in a fuel price index for a five-state
region. If the utilities outperform the index, benefits will be
shared equally between shareholders and customers. If the
utilities' fuel costs exceed the index, the difference will be
absorbed by LG&E Energy shareholders.
o Customers will continue to receive the benefits from the
post-merger joint dispatch of power from LG&E's and KU's
generating plants.
o Power plant performance will be measured against the best
performance achieved between 1991 and 1997. If the performance
exceeds this level, customers will share in up to $10 million
annually of benefits from this performance at each of LG&E and KU.
o The utilities will be encouraged to maintain and improve service
quality, reliability, customer satisfaction and safety, which will
be measured against six objective benchmarks. The plan provides
for annual rewards or penalties to the Company of up to $5 million
per year at each of LG&E and KU.
o The plan provides the utilities with greater flexibility to
customize rates and services to meet customer needs. Services will
continue to be priced above marginal cost and customers will
continue to have the option to elect standard tariff service.
35
<PAGE>
These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision likely will occur
in 1999. Several intervenors are participating in the case. Some have
requested that the Commission reduce base rates before implementing PBR. The
Company is not able to predict the ultimate outcome of these proceedings,
however, should the Commission mandate significant rate reductions, through
the PBR proposal or otherwise, such actions could have a material effect on
the Company's financial condition and results of operations.
Since October 1997, the Company has implemented a Commission-approved,
experimental performance-based ratemaking mechanism related to gas
procurement activities and off-system gas sales only. During the three-year
test period beginning October 1997, rate adjustments related to this
mechanism will be determined for each 12-month period beginning November 1
and ending October 31. During the first year of the mechanism ended
October 31, 1998, the Company recorded $3.6 million for its share of reduced
gas costs. The $3.6 million will be billed to customers through the gas supply
clause beginning February 1, 1999.
In December 1997, the Kentucky Commission opened Administrative Case No. 369 to
consider Commission policy regarding cost allocations, affiliate transactions
and codes of conduct governing the relationship between utilities and their
non-utility operations and affiliates. The Commission 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-utility operations;
and whether a code of conduct should be established to assure that non-utility
segments of the holding company are not engaged in practices which result in
unfair competition caused by cost shifting from the non-utility affiliate to the
utility. In September 1998, the Commission issued draft code of conduct and cost
allocation guidelines. In January 1999, the Company, as well as all parties to
the proceeding, filed comments on the Commission draft proposals. Initial
hearings are scheduled for the first quarter of 1999. 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.
On February 12, 1999, the Company received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC. The Company estimates up to an additional
$1.3 million could be refundable to retail electric customers through future
Kentucky Commission orders. See Note 3 of Notes to Financial Statements.
The Kentucky Commission granted the Company's motion to suspend the refund
obligation until further direction by the Commission. The Commission advised
that the Company may have to pay interest on the refund amounts during the
suspension period. The Company is awaiting a Commission response to a motion to
revoke the orders, or in the alternative, grant a rehearing.
Environmental Matters
The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur
dioxide (S02) emission limits. The Company is currently in compliance with the
Phase II S02 emission limits required by the year 2000, as it had previously
installed scrubbers on all of its coal-fired generating units. The Company met
the nitrogen oxide (NOx) emission reduction requirements of the Act through
installation of low-NOx burner systems. The Company's compliance plans are
subject to many factors including developments in the emission allowance and
fuel markets, future regulatory and legislative initiatives,
36
<PAGE>
and advances in clean air control technology. The Company will continue to
monitor these developments to ensure that its environmental obligations are
met in the most efficient and cost-effective manner.
In September 1998, the U.S. Environmental Protection Agency announced its final
regulation requiring significant additional reductions in NOx emissions to
mitigate alleged ozone transport to the Northeast. While each state is free to
allocate its assigned NOx reductions among various emissions sectors as it deems
appropriate, the regulation may ultimately require utilities to reduce their NOx
emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction
from 1990 levels. Under the regulation, each state must incorporate the
additional NOx reductions in its State Implementation Plan (SIP) by September
1999 and affected sources must install control measures by May 2003, unless
granted extensions. Several states, various labor and industry groups, and
individual companies have appealed the final regulation to the U.S. Court of
Appeals for the D.C. Circuit. Management is currently unable to determine the
outcome or exact impact of this matter until such time as the states identify
specific emissions reductions in their SIPs and the courts rule on the various
legal challenges to the final rule. However, if the 0.15 lb. target is
ultimately imposed, the Company will be required to incur significant capital
expenditures and increased operation and maintenance costs for additional
controls.
Subject to further study and analysis, the Company estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. The Company believes its costs in this
regard to be comparable to those of similarly situated utilities with like
generation assets. The Company anticipates that such capital and operating costs
are the type of costs that are eligible for cost recovery from customers under
its environmental surcharge mechanism and believes that a significant portion of
such costs could be recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.
See Note 12 of Notes to Financial Statements for a complete discussion of the
Company's environmental issues concerning manufactured gas plant sites and
certain other environmental issues.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E Energy 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-utility energy services businesses, including support for performance-based
ratemaking structures; aggressive cost reduction activities; strategic
acquisitions, dispositions 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 energy industry and the move toward a
competitive, market-based environment. LG&E Energy has urged Congress 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 previously advocated the implementation of this transition by January
1, 2001, and now recommends that adoption of federal legislation specifying a
date certain and appropriate transition regulations implementing deregulation.
37
<PAGE>
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 the issues addressed by these principles are: consumer
protection and benefit, system reliability, universal service, environmental
responsibility, cost allocation, stranded costs and codes of conduct. During
1998, the Kentucky Commission and a task force of the Kentucky General Assembly
have each initiated proceedings, including meetings with representatives of
utilities, consumers, state agencies and other groups in Kentucky, to discuss
the possible structure and effects of energy industry restructuring in Kentucky.
The purpose of the task force is to make recommendations to the Kentucky General
Assembly for possible legislative action during its 2000 session.
However, 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 the ultimate
legislative or regulatory actions regarding industry restructuring and their
impact on the Company, which may be significant, cannot currently be predicted.
38
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<PAGE>
[LGE ENERGY LOGO]
-------------------------
ADMISSION TICKET
LOUISVILLE GAS AND ELECTRIC COMPANY
ANNUAL MEETING OF SHAREHOLDERS
Wednesday, April 21, 1999
10:00 a.m., EDT
Bomhard Theater
Kentucky Center for the Arts
501 West Main Street
Louisville, Kentucky
If you plan to attend the meeting, please check the box on the proxy card
indicating that you plan to attend. Please bring this Admission Ticket to the
meeting with you.
THE BOTTOM PORTION OF THIS FORM IS THE PROXY CARD. Each proposal is fully
explained in the enclosed Notice of Annual Meeting of Shareholders and Proxy
Statement. To vote your proxy, please MARK by placing an "X" in the appropriate
box, SIGN and DATE the proxy. Then please DETACH and RETURN the completed proxy
promptly in the enclosed envelope.
TRIANGLE DETACH HERE TRIANGLE TRIANGLE DETACH HERE TRIANGLE
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH PROPOSAL
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS / / I plan to attend the Annual Meeting,
/ / For / / Withheld and I will bring guest(s).
For, except vote withheld from
the following nominee(s):
------------------------------
Terms expiring in:
2002: MIRA S. BALL ANNE H. MCNAMARA
ROGER W. HALE FRANK V. RAMSEY,
JR.
DAVID B. LEWIS
2001: CAROL M. GATTON
LEE T. TODD, JR.
2000: WILLIAM L. ROUSE, JR.
CHARLES L. SHEARER
2. APPROVAL OF ARTHUR ANDERSEN LLP ------------------------------------------
AS INDEPENDENT AUDITORS
SIGNATURE
/ / For / / Against / / Abstain ------------------------------------------
DATE
<CAPTION>
1. PREFERRED
[LGE ENERGY LOGO]
PROXY
2. ------------------------------------------
SIGNATURE
SIGNATURE(S) SHOULD CORRESPOND TO THE
NAME(S) APPEARING IN THIS PROXY. IF
EXECUTOR, TRUSTEE, GUARDIAN, ETC. PLEASE
INDICATE.
</TABLE>
<PAGE>
Complimentary parking will be available
at the Riverfront PARC garage off Sixth
Street. Please visit the registration
table at the annual meeting for a
[MAP] parking voucher, which you should submit
with your parking ticket to the
attendant upon leaving.
TRIANGLE DETACH HERE TRIANGLE TRIANGLE DETACH HERE TRIANGLE
LOUISVILLE GAS AND ELECTRIC COMPANY
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS -- APRIL 21, 1999
Roger W. Hale, Victor A. Staffieri and John R. McCall are hereby appointed
as proxies, with full power of substitution, to vote the shares of the
shareholder(s) named on the reverse side hereof, at the Annual Meeting of
Shareholders of Louisville Gas and Electric Company to be held on April 21,
1999, and at any adjournment thereof, as directed on the reverse side hereof,
and in their discretion to act upon any other matters that may properly come
before the meeting or any adjournment thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND WILL BE
VOTED AS YOU SPECIFY. IF NOT SPECIFIED, THIS PROXY WILL BE VOTED FOR ALL OF THE
PROPOSALS. A VOTE FOR PROPOSAL 1 INCLUDES DISCRETIONARY AUTHORITY TO CUMULATE
VOTES SELECTIVELY AMONG THE NOMINEES AS TO WHOM AUTHORITY TO VOTE HAS NOT BEEN
WITHHELD.
Please mark, sign and date this proxy on the reverse side and return the
completed proxy promptly in the enclosed envelope.
