-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UPIp/H2R1N5atGF9KS63ijFXuEpy95DpKOu+JAeo+wJ5HkjNRkvKaTxeAsmNRvKM 635o1wHEIDhYnJ9jcJR8qg== 0000861388-99-000014.txt : 19991117 0000861388-99-000014.hdr.sgml : 19991117 ACCESSION NUMBER: 0000861388-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LG&E ENERGY CORP CENTRAL INDEX KEY: 0000861388 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 611174555 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 99755826 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 99755827 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 99755828 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification No. 1-10568 LG&E Energy Corp. 61-1174555 (A Kentucky Corporation) 220 West Main Street P.O. Box 32030 Louisville, Ky. 40232 (502) 627-2000 2-26720 Louisville Gas and Electric Company 61-0264150 (A Kentucky Corporation) 220 West Main Street P.O. Box 32010 Louisville, Ky. 40232 (502) 627-2000 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: LG&E Energy Corp. 129,677,030 shares, without par value, as of October 29, 1999. Louisville Gas and Electric Company 21,294,223 shares, without par value, as of October 29, 1999, all held by LG&E Energy Corp. Kentucky Utilities Company 37,817,878 shares, without par value, as of October 29, 1999, all held by LG&E Energy Corp. This combined Form 10-Q is separately filed by LG&E Energy Corp., Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein related to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. In particular, information contained herein related to LG&E Energy Corp. or any of its direct or indirect subsidiaries other than Louisville Gas and Electric Company or Kentucky Utilities Company is provided solely by LG&E Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities Company, and shall be deemed not included in the Form 10-Q of Louisville Gas and Electric Company or the Form 10-Q of Kentucky Utilities Company. TABLE OF CONTENTS PART I Item 1 Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income 1 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 6 Consolidated Statements of Retained Earnings 8 Consolidated Statements of Comprehensive Income 9 Louisville Gas and Electric Company Statements of Income 10 Balance Sheets 11 Statements of Cash Flows 13 Statements of Retained Earnings 14 Statements of Comprehensive Income 15 Kentucky Utilities Company Statements of Income 16 Balance Sheets 17 Statements of Cash Flows 19 Statements of Retained Earnings 20 Notes to Financial Statements 21 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 32 Item 3 Quantitative and Qualitative Disclosures About Market Risk 46 PART II Item 1 Legal Proceedings 48 Item 6 Exhibits and Reports on Form 8-K 49 Signatures 50 Part I. Financial Information - Item 1. Financial Statements LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (Unaudited - Thousands of $ Except Per Share Data) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 REVENUES: Electric utility $ 557,711 $ 447,796 $1,325,642 $1,130,062 Gas utility 17,623 16,978 117,054 136,277 International and non-utility 297,391 164,402 652,951 315,589 Total revenues 872,725 629,176 2,095,647 1,581,928 Provision for rate refunds (Note 12) (7,335) - (7,335) - Net revenues 865,390 629,176 2,088,312 1,581,928 OPERATING EXPENSES: Fuel and power purchased 413,713 206,044 869,795 457,984 Gas supply expenses 82,248 53,137 234,232 220,671 Utility operation and maintenance 103,789 106,997 322,686 320,061 International and non- utility operation and maintenance 48,905 57,003 141,303 96,907 Depreciation and amortization 54,664 51,378 162,879 155,030 Merger costs to achieve - - - 65,318 Total operating expenses 703,319 474,559 1,730,895 1,315,971 Equity in earnings of unconsolidated ventures (Notes 5 and 6) 10,092 2,744 43,799 59,607 OPERATING INCOME 172,163 157,361 401,216 325,564 Other income 5,863 2,840 14,862 572 Interest charges and preferred dividends 32,414 26,833 95,177 79,127 Minority interest 4,735 4,459 10,148 9,104 Income before income taxes 140,877 128,909 310,753 237,905 Income taxes 53,711 50,055 116,843 99,830 Income from continuing operations $ 87,166 $ 78,854 $ 193,910 $ 138,075 - 1 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Income from continuing operations $ 87,166 $ 78,854 $ 193,910 $ 138,075 Loss from discontinued operations, net of income tax expense benefit of $15,008 (Notes 2 and 3) - - - (22,852) Income (loss) on disposal of dis- continued operations, net of income tax (expense) benefit of $(243), $(328) and $124,757 (Notes 2 and 3) - 658 788 (224,342) Income (loss) before cum- ulative effect of change in accounting principle 87,166 79,512 194,698 (109,119) Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $5,061 - - - (7,162) NET INCOME (LOSS) $ 87,166 $ 79,512 $ 194,698 $ (116,281) - 2 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Unaudited - Thousands of $ Except Per Share Data) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Average common shares outstanding 129,677 129,683 129,677 129,683 Earnings (loss) per share - basic: Continuing operations $ .67 $ .61 $ 1.49 $ 1.06 Discontinued operations .00 .00 .00 (.17) Income (loss) on dis- posal of discontinued operations .00 .00 .01 (1.73) Cumulative effect of accounting change .00 .00 .00 (.06) Total $ .67 $ .61 $ 1.50 $ (.90) Earnings (loss) per share - diluted: Continuing operations $ .67 $ .61 $ 1.49 $ 1.06 Discontinued operations .00 .00 .00 (.16) Income (loss) on dis- posal of discontinued operations .00 .00 .01 (1.73) Cumulative effect of accounting change .00 .00 .00 (.06) Total $ .67 $ .61 $ 1.50 $ (.89) The accompanying notes are an integral part of these financial statements. - 3 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $) ASSETS (Unaudited) Sep. 30, Dec. 31, 1999 1998 CURRENT ASSETS: Cash and temporary cash investments $ 93,007 $ 105,726 Marketable securities 11,458 20,862 Accounts receivable - less reserve 377,693 293,219 Materials and supplies - primarily at average cost: Fuel (predominantly coal) 82,614 78,855 Gas stored underground 49,143 39,249 Other 93,797 72,457 Net assets of discontinued opera- tions (Notes 2 and 3) 36,380 3,219 Prepayments and other 41,810 38,287 Total current assets 785,902 651,874 UTILITY PLANT: At original cost 5,851,448 5,581,667 Less: reserve for depreciation 2,478,866 2,352,306 Net utility plant 3,372,582 3,229,361 OTHER PROPERTY AND INVESTMENTS - LESS RESERVES: Investment in unconsolidated ventures (Notes 5 and 6) 231,690 167,877 Non-utility property and plant, net 493,623 447,372 Other 36,393 117,321 Total other property and investments 761,706 732,570 DEFERRED DEBITS AND OTHER ASSETS 267,894 214,152 Total assets $5,188,084 $4,827,957 The accompanying notes are an integral part of these financial statements. - 4 - LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (cont.) (Thousands of $) CAPITAL AND LIABILITIES (Unaudited) Sep. 30, Dec. 31, 1999 1998 CURRENT LIABILITIES: Long-term debt due within one year $ 111,590 $ - Notes payable 393,202 365,135 Accounts payable 218,882 243,968 Other 351,523 242,479 Total current liabilities 1,075,197 851,582 Long-term debt 1,599,603 1,510,775 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 558,609 570,698 Investment tax credit, in process of amortization 87,844 93,844 Regulatory liability 102,844 109,411 Other 201,013 206,064 Total deferred credits and other liabilities 950,310 980,017 Minority interests 109,075 107,815 Cumulative preferred stock 135,328 136,530 COMMON EQUITY: Common stock, without par value - 129,677,030 shares outstanding 778,273 778,273 Other 245 (3,314) Retained earnings 540,053 466,279 Total common equity 1,318,571 1,241,238 Total liabilities and capital $5,188,084 $4,827,957 The accompanying notes are an integral part of these financial statements. - 5 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 194,698 $ (116,281) Items not requiring cash currently: Depreciation and amortization 162,879 155,030 Deferred income taxes - net (11,822) (11,471) Loss from discontinued operations (Notes 2 and 3) - 22,852 (Gain) loss on disposal of discon- tinued operations (Notes 2 and 3) (788) 224,342 Cumulative effect of change in accounting principle - 7,162 Other (17,480) (9,276) Change in net current assets (73,790) (118,416) Other 4,933 (45,059) Net cash flows from operating activities 258,630 108,883 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (917) (18,783) Proceeds from sales of securities 10,040 16,777 Construction expenditures (291,942) (151,158) Investments in unconsolidated ventures (Note 5) (74,498) (1,010) Investment in subsidiary, net of cash and temporary cash investments acquired (Note 4) (39,693) - Proceeds from sale of investment in affiliate and sale of leveraged leases (Note 6) 53,384 16,000 Net cash flows from investing activities (343,626) (138,174) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes 200,000 150,000 Retirement of bonds (35,268) (20,021) Short-term borrowings 3,927,792 4,753,762 Repayment of short-term borrowings (3,899,417)(4,743,743) Redemption of preferred stock (1,202) (1,823) Payment of common dividends (119,628) (100,855) Net cash flows from financing activities 72,277 37,320 CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (12,719) 8,029 BEGINNING CASH AND TEMPORARY CASH INVESTMENTS 105,726 111,512 ENDING CASH AND TEMPORARY CASH INVESTMENTS $ 93,007 $ 119,541 - 6 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (cont.) (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 1999 1998 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Income taxes $ 24,871 $ 38,137 Interest on borrowed money 78,483 70,414 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 7 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Retained Earnings (Unaudited - Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Balance at beginning of period $ 494,059 $ 445,729 $ 466,279 $ 722,584 Net income (loss) 87,166 79,512 194,698 (116,281) Cash dividends declared on common stock ($.3175, $.3075, $.9325 and $.93259 per share) 41,172 39,877 120,924 120,939 Balance at end of period $ 540,053 $ 485,364 $ 540,053 $ 485,364 The accompanying notes are an integral part of these financial statements. - 8 - LG&E Energy Corp. and Subsidiaries Consolidated Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Net income (loss) $ 87,166 $79,512 $194,698 $(116,281) Unrealized holding gains (losses) on available-for-sale securities arising during the period (287) (50) (250) (42) Reclassification adjustment for realized gains and (losses) on available-for-sale securities included in net income (89) 90 (247) 124 Other comprehensive income (loss), before tax (376) 40 (497) 82 Income tax benefit (expense) related to items of other comprehensive income 142 (29) 188 (44) Comprehensive income (loss) $ 86,932 $79,523 $194,389 $(116,243) The accompanying notes are an integral part of these financial statements. - 9 - Louisville Gas and Electric Company Statements of Income (Unaudited) (Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 OPERATING REVENUES: Electric $279,907 $212,907 $621,693 $528,341 Gas 17,623 16,978 117,054 136,277 Provision for rate refunds (Note 12) (1,135) - (1,635) - Total operating revenues 296,395 229,885 737,112 664,618 OPERATING EXPENSES: Fuel for electric generation 45,361 41,205 117,199 118,488 Power purchased 85,156 18,057 139,040 42,883 Gas supply expenses 8,763 8,950 72,650 89,308 Other operation expenses 39,452 41,976 119,101 122,850 Maintenance 12,800 10,666 47,730 33,985 Depreciation and amortization 24,143 23,294 72,428 69,883 Federal and state income taxes 25,683 27,403 47,317 53,485 Property and other taxes 4,001 4,914 12,999 14,361 Total operating expenses 245,359 176,465 628,464 545,243 NET OPERATING INCOME 51,036 53,420 108,648 119,375 Merger costs to achieve - - - 34,134 Other income 336 359 1,648 10,668 Interest charges 9,668 8,918 27,636 27,629 NET INCOME 41,704 44,861 82,660 68,280 Preferred stock dividends 1,090 1,135 3,266 3,400 NET INCOME AVAILABLE FOR COMMON STOCK $ 40,614 $ 43,726 $ 79,394 $ 64,880 The accompanying notes are an integral part of these financial statements. - 10 - Louisville Gas and Electric Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Sep. 30, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $3,034,699 $2,896,139 Less: reserve for depreciation 1,211,971 1,144,123 Net utility plant 1,822,728 1,752,016 OTHER PROPERTY AND INVESTMENTS - less reserve 1,348 1,154 CURRENT ASSETS: Cash and temporary cash investments 16,572 31,730 Marketable securities 8,274 17,851 Accounts receivable - less reserve 191,017 142,580 Materials and supplies - at average cost: Fuel (predominantly coal) 12,142 23,993 Gas stored underground 41,778 33,485 Other 34,586 33,103 Prepayments and other 1,748 2,285 Total current assets 306,117 285,027 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 5,685 5,919 Regulatory assets 34,117 37,643 Other 15,217 22,878 Total deferred debits and other assets 55,019 66,440 Total assets $2,185,212 $2,104,637 The accompanying notes are an integral part of these financial statements. - 11 - Louisville Gas and Electric Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) Sep. 30, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 21,294,223 shares $ 425,170 $ 425,170 Retained earnings 259,856 247,462 Other (960) (786) Total common equity 684,066 671,846 Cumulative preferred stock 95,328 95,328 Long-term debt 626,800 626,800 Total capitalization 1,406,194 1,393,974 CURRENT LIABILITIES: Accounts payable 218,056 133,673 Provision for rate refunds 11,126 13,261 Dividends declared 24,090 23,168 Accrued taxes 37,370 31,929 Accrued interest 7,786 8,038 Other 15,978 15,242 Total current liabilities 314,406 225,311 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 252,021 254,589 Investment tax credit, in process of amortization 68,325 71,542 Accumulated provision for pensions and related benefits 45,860 59,529 Regulatory liability 60,998 63,529 Other 37,408 36,163 Total deferred credits and other liabilities 464,612 485,352 Total capital and liabilities $2,185,212 $2,104,637 The accompanying notes are an integral part of these financial statements. - 12 - Louisville Gas and Electric Company Statements of Cash Flows (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 82,660 $ 68,280 Items not requiring cash currently: Depreciation and amortization 72,428 69,883 Deferred income taxes - net (4,981) 373 Investment tax credit - net (3,217) (3,180) Other 5,255 2,862 Changes in current assets and liabilities 42,348 (22,279) Other (7,663) 24,132 Net cash flows from operating activities 186,830 140,071 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities (668) (17,784) Proceeds from sales of securities 9,955 15,623 Construction expenditures (141,932) (72,950) Net cash flows from investing activities (132,645) (75,111) CASH FLOWS FROM FINANCING ACTIVITIES: Retirement of first mortgage bonds - (20,000) Payment of dividends (69,343) (64,417) Net cash flows from financing activities (69,343) (84,417) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (15,158) (19,457) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 31,730 50,472 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 16,572 $ 31,015 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 53,326 $ 37,396 Interest on borrowed money 25,497 26,195 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 13 - Louisville Gas and Electric Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Balance at beginning of period $242,242 $239,064 $247,462 $258,910 Net income 41,704 44,861 82,660 68,280 Subtotal 283,946 283,925 330,122 327,190 Cash dividends declared on stock: Preferred 1,090 1,135 3,266 3,400 Common 23,000 22,000 67,000 63,000 Subtotal 24,090 23,135 70,266 66,400 Balance at end of period $259,856 $260,790 $259,856 $260,790 The accompanying notes are an integral part of these financial statements. - 14 - Louisville Gas and Electric Company Statements of Comprehensive Income (Unaudited - Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Net income available for common stock $40,614 $43,726 $79,394 $64,880 Unrealized holding (losses) gains on available-for-sale securities arising during the period (199) 32 (293) 39 Income tax benefit (expense) related to unrealized holding gains and losses 80 (14) 118 (16) Comprehensive income $40,495 $43,744 $79,219 $64,903 The accompanying notes are an integral part of these financial statements. - 15 - Kentucky Utilities Company Statements of Income (Unaudited) (Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 OPERATING REVENUES: Electric $287,703 $246,117 $730,846 $622,415 Provision for rate refunds (Note 12) (6,200) - (6,200) - Net operating revenues 281,503 246,117 724,646 622,415 OPERATING EXPENSES: Fuel for electric generation 60,770 65,586 168,338 168,623 Power purchased 104,213 40,134 195,136 82,725 Other operation expenses 30,403 31,100 89,359 92,531 Maintenance 13,649 15,630 42,113 45,578 Depreciation and amortization 22,546 21,749 66,694 64,852 Federal and state income taxes 13,910 23,325 47,130 50,024 Property and other taxes 3,483 3,916 11,384 12,225 Total operating expenses 248,974 201,440 620,154 516,558 NET OPERATING INCOME 32,529 44,677 104,492 105,857 Merger costs to achieve - - - 21,830 Other income 1,604 1,899 5,767 5,806 Interest charges 9,707 9,596 28,448 28,923 NET INCOME 24,426 36,980 81,811 60,910 Preferred stock dividends 564 564 1,692 1,692 NET INCOME AVAILABLE FOR COMMON STOCK $ 23,862 $ 36,416 $ 80,119 $ 59,218 The accompanying notes are an integral part of these financial statements. - 16 - Kentucky Utilities Company Balance Sheets (Thousands of $) ASSETS (Unaudited) Sep. 30, Dec. 31, 1999 1998 UTILITY PLANT: At original cost $2,816,749 $2,685,528 Less: reserve for depreciation 1,266,895 1,208,183 Net utility plant 1,549,854 1,477,345 OTHER PROPERTY AND INVESTMENTS - less reserve 14,165 14,238 CURRENT ASSETS: Cash and temporary cash investments 37,129 59,071 Accounts receivable - less reserve 135,287 106,003 Materials and supplies - at average cost: Fuel (predominantly coal) 29,246 23,927 Other 25,461 24,877 Prepayments 2,595 2,427 Total current assets 229,718 216,305 DEFERRED DEBITS AND OTHER ASSETS: Unamortized debt expense 4,927 5,227 Regulatory assets 24,393 28,228 Other 22,871 19,859 Total deferred debits and other assets 52,191 53,314 Total assets $1,845,928 $1,761,202 The accompanying notes are an integral part of these financial statements. - 17 - Kentucky Utilities Company Balance Sheets (cont.) (Thousands of $) CAPITALIZATION AND LIABILITIES (Unaudited) Sep. 30, Dec. 31, 1999 1998 CAPITALIZATION: Common stock, without par value - Outstanding 37,817,878 shares $ 308,140 $ 308,140 Retained earnings 324,286 299,168 Other (595) (595) Total common equity 631,831 606,713 Cumulative preferred stock 40,000 40,000 Long-term debt 484,830 546,330 Total capitalization 1,156,661 1,193,043 CURRENT LIABILITIES: Long-term debt due within one year 61,500 - Accounts payable 148,093 100,012 Provision for rate refunds 27,700 21,500 Dividends declared 19,282 18,188 Accrued taxes 25,107 16,733 Accrued interest 9,714 8,110 Other 33,945 31,226 Total current liabilities 325,341 195,769 DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 239,351 244,493 Investment tax credit, in process of amortization 19,519 22,302 Accumulated provision for pensions and related benefits 55,165 50,044 Regulatory liability 41,846 45,882 Other 8,045 9,669 Total deferred credits and other liabilities 363,926 372,390 Total capital and liabilities $1,845,928 $1,761,202 The accompanying notes are an integral part of these financial statements. - 18 - Kentucky Utilities Company Statements of Cash Flows (Unaudited - Thousands of $) Nine Months Ended Sep. 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 81,811 $ 60,910 Items not requiring cash currently: Depreciation and amortization 66,694 64,852 Deferred income taxes - net (9,178) (331) Investment tax credit - net (2,783) (2,875) Changes in current assets and liabilities 31,623 49,426 Other 11,116 3,149 Net cash flows from operating activities 179,283 175,131 CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (145,628) (53,498) Net cash flows from investing activities (145,628) (53,498) CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings - 381,500 Repayments of short-term borrowings - (415,100) Payment of dividends (55,597) (41,783) Net cash flows from financing activities (55,597) (75,383) CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (21,942) 46,250 CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 59,071 5,453 CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 37,129 $ 51,703 SUPPLEMENTAL DISCLOSURES: Cash paid during the period for: Income taxes $ 53,778 $ 43,556 Interest on borrowed money 24,078 24,244 For the purposes of these statements, all temporary cash investments purchased with a maturity of three months or less are considered cash equivalents. The accompanying notes are an integral part of these financial statements. - 19 - Kentucky Utilities Company Statements of Retained Earnings (Unaudited) (Thousands of $) Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Balance at beginning of period $319,424 $287,461 $299,167 $304,750 Net income 24,426 36,980 81,811 60,910 Subtotal 343,850 324,441 380,978 365,660 Cash dividends declared on stock: Preferred 564 564 1,692 1,692 Common 19,000 18,000 55,000 58,091 Subtotal 19,564 18,564 56,692 59,783 Balance at end of period $324,286 $305,877 $324,286 $305,877 The accompanying notes are an integral part of these financial statements. - 20 - LG&E Energy Corp. and Subsidiaries Louisville Gas and Electric Company Kentucky Utilities Company Notes to Financial Statements (Unaudited) 1. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation (the Merger). The accompanying unaudited consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a subsidiary of LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU Energy, were not affected by the Merger. KU Capital Corporation, a subsidiary of KU Energy, was merged into LG&E Capital Corp. (Capital Corp.) on July 24, 1998, with the latter as the surviving corporation. The consolidated financial statements include the accounts of LG&E Energy, LG&E, Capital Corp., and KU and their respective wholly-owned subsidiaries, collectively referred to herein as the "Company." All significant intercompany items and transactions have been eliminated from the unaudited consolidated financial statements. In the opinion of management, all adjustments, including those of a normal recurring nature, have been made to present fairly the consolidated financial position, results of operations and cash flows for the periods indicated. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. See the Company's, LG&E's and KU's Reports on Form 10-K for 1998 for information relevant to the accompanying financial statements, including information as to the significant accounting policies of the Company. 2. Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize the value of - 21 - power sales from physical assets it owns or controls, including LG&E, KU and Western Kentucky Energy Corp. (WKE). At the time the Company decided to discontinue its merchant energy trading and sales business, it also decided to sell its natural gas gathering and processing business. Subsequently, effective June 30, 1999, the Company decided to retain this business. The accompanying financial statements reflect the reclassification of the natural gas gathering and processing business as continuing operations for all periods presented. See Note 3 below. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believed to be appropriate estimates for future energy prices, among other factors, to calculate the net realizable value of discontinued operations, there are inherent limitations in models to accurately predict future commodity prices, load demands and other events. Operating results for discontinued operations follow. All amounts exclude the Company's natural gas gathering and processing business. The Company charged its loss from discontinued operations for the three- and nine-month periods ended September 30, 1999, to accrued loss on disposal of discontinued operations. Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Revenues $ 386,038 $1,870,301 $ 675,820 $3,466,093 Loss before taxes (148,464) (76,367) (175,187) (114,227) Loss from discontinued operations, net of income taxes (88,514) (38,911) (104,505) (61,763) - 22 - Net assets of discontinued operations at September 30, 1999, follow. All amounts exclude the Company's natural gas gathering and processing business. Accounts receivable $ 69,290 Price risk management assets 33,384 Accounts payable (83,390) Price risk management liabilities (10,499) Other assets and liab- ilities, net 26,306 Net assets before balance of reserve for discontinued operations 35,091 Reserve for discontinued operations (4,950) Income tax benefit 6,239 Net assets of discon- tinued operations $ 36,380 Total charges against the accrued loss on disposal of discontinued operations through September 30, 1999, include $250.8 million for commitments prior to disposal, $69.6 million for transaction settlements, $11.1 million for goodwill, and $25.9 million for other exit costs. While the Company has been successful in settling portions of its discontinued operations, significant assets, operations and obligations remain. The Company continues to manage the remaining portfolio, has successfully hedged certain of its future exposures, and has initiated arbitration proceedings with OPC over the terms of its contract. As discussed in Part II, Item 1, Legal Proceedings below, LG&E Energy Marketing Inc. initiated arbitration proceedings against OPC related to LEM's long-term contract to supply approximately one-half of OPC's systemwide power needs. While the Company expects a favorable outcome in the OPC arbitration proceeding, no assurances can be given as to such an event. Should OPC prevail, the Company may be required to increase its after-tax accrued loss on disposal of discontinued operations by approximately $150 million as a result of higher than anticipated future commodity prices, increased load demands, and other factors. Any such increase in the loss reserve will be recorded in discontinued operations. This amount is subject to continuing analysis and estimation. Management does not expect this to have a material effect on income from continuing operations. See Part II, Item 1, Legal Proceedings below. If the Company is unable to dispose of its remaining commitments, it will continue to meet its obligations through the terms of the contracts. The net fair value of these commitments as of September 30, 1999, are currently estimated to be approximately $7 million favorable for the remainder of 1999, offset by negative $5 million to $27 million each year in 2000 through 2004 and $9 million in the aggregate thereafter. As of September 30, 1999, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 23.8 million MWh's of power and 38.5 million MMBTU's of natural gas with a volumetric weighted-average period of approximately 39 and 50 months, respectively. These notional amounts are based on estimated loads since various commitments do not include specified firm volumes. The Company is also under contract to buy or sell immaterial amounts of coal and SO2 allowances in support of its power contracts. Notional amounts reflect the nominal volume of transactions included in the Company's price - 23 - risk management commitments, but do not reflect actual amounts of cash, financial instruments, or quantities of the underlying commodity which may ultimately be exchanged between the parties. As of October 19, 1999, the Company estimates that a $1 change in electricity prices and a 10 cent change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $7.5 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of October 19, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $9.6 million. The Company's discontinued operations maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of September 30, 1999, over 95% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of September 30, 1999, seven counterparties represented 80% of the Company's price risk management commitments. 3. Effective June 30, 1999, the Company reclassified its natural gas gathering and processing business to continuing operations from discontinued operations. The Company chose to retain rather than dispose of this business at the end of the one-year period established by accounting standards because of management's expectation of more favorable future energy prices and the related impact on this business. The Company has reflected the operating results and net assets of the natural gas gathering and processing business as continuing operations in the accompanying financial statements for all periods presented. Operating results for the natural gas gathering and processing business follow. Year Ended December 31, 1998 1997 1996 Revenues $109,833 $107,691 $85,259 (Loss) income before taxes (2,593) 2,829 4,888 Net (loss) income (1,599) 1,323 2,873 Three Months Nine Months Ended Ended Sep. 30, Sep. 30, 1999 1998 1999 1998 Revenues $40,229 $25,321 $115,666 $86,212 (Loss) income before taxes (321) (901) (1,171) (1,547) Net (loss) income (312) (658) (1,060) (1,405) - 24 - Net assets of the natural gas gathering and processing business follow. Sep. 30, Dec. 31, Dec. 31, 1999 1998 1997 Cash and temporary cash investments $ 6,440 $ - $ 509 Accounts receivable 20,303 7,425 13,948 Non-utility property and plant, net 157,539 161,473 171,114 Accounts payable (20,819) (6,148) (13,449) Goodwill and other assets and liabilities, net (6,553) (22,318) (20,043) Net assets $156,910 $140,432 $152,079 The Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. No loss on disposal of the net assets of the natural gas gathering and processing business was included because the Company assumed it would sell these assets for an amount equal to or greater than book value. It also included an after-tax reserve of approximately $1.6 million for estimated losses from operations of the natural gas gathering and processing business through the date of disposal. Since this amount equaled the estimated losses from operations included in the original accrued loss on disposal of discontinued operations, no reversal of the accrued loss was included in income for the three- and nine-month periods ended September 30, 1999. The Company has recorded no impairment losses related to the net assets of its natural gas gathering and processing business. 4. In July 1999, the Company purchased 100% of the outstanding common stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial consideration of $45.6 million and retirement of approximately $37.9 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. The purchase agreement provides for future annual earn-out payments to the previous owners based on CRC's meeting certain financial targets over the next three years. The agreement caps the total of these payments at $31.0 million. The purchase consideration, including the potential earn-out payments, was paid 55% in cash and 45% in LG&E Energy common stock. LG&E Energy will repurchase common stock from time to time in the open market or through privately negotiated transactions in amounts equal to the stock portions of the initial and subsequent earn-out payments. During the third quarter 1999, the Company purchased approximately 935,000 shares in this regard and completed the initial purchase installment. The Company accounted for the acquisition using the purchase method. Management recorded goodwill of approximately $51.1 million from the initial transaction and may record additional goodwill contingent upon future earn-out payments. Goodwill is being amortized over a period of twenty years. - 25 - The fair values of the net assets acquired follow: Assets $132,501 Liabilities 87,956 Cash paid, excluding transaction costs 44,545 Cash and cash equivalents acquired 5,943 Net cash paid, excluding transaction costs 38,602 Transaction costs 1,091 Net cash paid $ 39,693 5. On March 30, 1999, the Company acquired an indirect 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $73.5 million, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company accounted for the acquisition using the purchase method, and it records its share of earnings using the equity method. The purchase price exceeded the underlying equity in BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their estimated fair values. 6. In March 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which the Company owns a 50% interest, sold substantially all the assets and major contracts of its 79 MW gas-fired cogeneration facility in Rensselaer, New York, with net proceeds to the Company of approximately $34 million. The sale resulted in an after- tax gain to the Company of approximately $8.9 million. 7. The Company adopted Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10) in the first quarter of 1999. The task force concluded that energy trading contracts should be recorded using mark-to-market valuation on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines energy trading to include certain financial activities related to physical assets which were not previously marked to market by established industry practice. Initial adoption of EITF No. 98-10 did not have a material impact on the Company's consolidated results of operations or financial position. For the three- and nine- month periods ended September 30, 1999, the Company recorded approximately $6.2 million of expense and $.8 million of income, respectively, in consolidated pre- tax income as a result of valuing the Company's electric energy trading contracts using the mark-to-market method. 8. In April 1999, LG&E and KU filed a joint agreement among the companies and the Kentucky Attorney General to amend the companies' previously- filed performance-based ratemaking (PBR) plan. The amendment requested Kentucky Public Service Commission (the Commission) approval of a five- year rate reduction plan, which would reduce electric rates by $20 million in the first year (beginning July 1999), and by $8 million annually for each of the next four years (through June 2004), for a total five-year savings to customers of $52 million. The reductions will be distributed between LG&E and KU customers based on the same methodology the Commission approved in its previous merger order for allocating the merger savings to the utilities' customers (53 percent to KU customers; 47 percent to LG&E customers). The joint agreement includes adoption of the PBR plan as proposed by the companies. The amended filing also includes the establishment of a $6 million program over the five-year period to assist low-income customers in paying their energy bills. In addition to the rate reductions and energy assistance program, the amended filing calls for LG&E and KU to extend for an additional year (through June 2004) both the rate cap and the merger-savings surcredit the utilities established as part of their - 26 - earlier merger plan. Under the rate cap, the companies agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger. They also agreed to a monthly surcredit to customers' bills reflecting the 50 percent share of the non-fuel merger savings allocated to the utilities' customers in the first five years following the merger. As part of the amended PBR filing, LG&E also agreed to refrain from filing for an increase in natural gas rates over the five-year period (through June 2004). In April 1999, the Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, the Kentucky Industrial Utility Consumers, Inc. (KIUC) in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Commission on LG&E's and KU's amended PBR plans and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Commission in October 1999. KIUC's current position calls for annual revenue reductions for LG&E and KU of $69.6 million and $61.5 million, respectively. A decision from the Commission is expected by the end of the fourth quarter of 1999 or in early 2000. 9. In September 1999, Capital Corp. issued $50 million of floating rate notes under its medium-term note program. The notes mature in September 2000 and pay interest at a rate equal to the one-month LIBOR plus 0.10%. In May 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into in April 1999, to hedge the entire issuance, the effective rate amounted to 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. In May 1999, KU entered into an interest-rate swap agreement to hedge a portion of its outstanding first mortgage bonds. The swap has a notional amount of $53 million and expires in May 2004. KU pays a variable rate based on the six-month London Interbank Offered Rate (LIBOR) plus 1.88% and receives a fixed rate of 7.92%. The agreement provides for a collar on the variable rate paid by KU with a floor of 4.65% and a cap of 6.78%. The agreement suspends the collar during periods when the London Interbank Offered Rate moves outside a specified range. As of September 30, 1999, the rate payable by KU equaled 5.18%. - 27 - 10.External and intersegment revenues and income from continuing operations by business segment for the three months ended September 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $273,836 $ 4,936 $ 39,771 LG&E gas 17,623 - 843 KU electric 276,540 4,963 23,862 Independent Power Operations 5,366 - 5,573 Western Kentucky Energy 144,434 - 12,377 Argentine Gas Distribution 48,479 - 6,632 Other Capital Corp. 99,112 - 1,754 All Other - (9,899) (3,646) Consolidated $865,390 $ - $ 87,166 External and intersegment revenues and income from continuing operations by business segment for the nine months ended September 30, 1999, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $ 607,681 $ 12,377 $ 78,124 LG&E gas 117,054 - 1,270 KU electric 710,626 14,020 80,119 Independent Power Operations 18,467 - 26,850 Western Kentucky Energy 273,462 - 10,889 Argentine Gas Distribution 123,422 - 11,785 Other Capital Corp. 237,600 - (3,842) All Other - (26,397) (11,285) Consolidated $2,088,312 $ - $193,910 - 28 - External and intersegment revenues and income from continuing operations by business segment for the three months ended September 30, 1998, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $209,431 $ 3,475 $ 41,935 LG&E gas 16,978 - 1,790 KU electric 238,365 7,752 36,416 Independent Power Operations 5,108 - 1,812 Western Kentucky Energy 66,246 - 5,451 Argentine Gas Distribution 47,399 - 3,406 Other Capital Corp. 45,649 - (2,645) All Other - (11,227) (9,311) Consolidated $629,176 $ - $ 78,854 External and intersegment revenues and income from continuing operations by business segment for the nine months ended September 30, 1998, follow: Income (Loss) Inter- from External segment Cont. Revenues Revenues Oper. LG&E electric $ 520,539 $ 7,801 $ 62,434 LG&E gas 136,277 - 2,446 KU electric 609,523 12,892 59,218 Independent Power Operations 15,001 - 30,962 Western Kentucky Energy 66,246 - 5,451 Argentine Gas Distribution 118,051 - 6,115 Other Capital Corp. 116,291 - (5,257) All Other - (20,693) (23,294) Consolidated $1,581,928 $ - $138,075 The assets of the Company's Argentine Gas Distribution segment increased from $346.3 million at December 31, 1998, to $441.9 million at September 30, 1999, due mainly to acquiring a 19.6% ownership interest in BAN (see Note 5 of Notes to Financial Statements) and to construction expenditures at Distribuidora de Gas del Centro. The assets of the Other Capital Corp. segment increased from $121.0 million at December 31, 1998, to $439.8 million at June 30, 1999. This increase resulted from reclassifying the assets of the natural gas gathering and processing business from discontinued to continuing operations (see Note 3 of Notes to Financial Statements) and acquiring CRC-Evans in July 1999 (see Note 4 of Notes to Financial Statements). A decrease resulting from transferring costs related to gas turbine peaking units to LG&E and KU - 29 - partially offset these increases (see Management's Discussion and Analysis of Results of Operations and Financial Condition in Item 2). 11.In August 1999, a Capital Corp. subsidiary entered into an operating lease for three combustion turbines. The lease has a five year term, but no rent is payable until the turbines have been completed and installed. Certain related facilities are expected to be added to the same lease in the fourth quarter of 1999. The turbines are expected to be used in a 450 Mw gas fired merchant combustion turbine power generation facility, located in Monroe, Georgia, which is expected to be completed in June 2001. At the end of the lease term, the Company may purchase the leased assets or assist the lessor in selling them. If the assets are sold, the Company is obligated to make up any deficiency between the lease balance and the proceeds subject to a cap. The total value of the assets under the existing lease is expected to be approximately $125 million and is expected to increase to approximately $175 million in the fourth quarter of 1999. 12.Prior to implementation of the PBR, LG&E and KU employed a fuel adjustment clause (FAC) mechanism, which under Kentucky law allowed the companies to recover from customers, the actual fuel costs associated with retail electric sales. In February 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed the Company's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. LG&E requested that the Commission grant rehearing on the February orders, and further requested that the Commission stay the refund requirement until it could rule on the rehearing request. The Commission granted the request for a stay, and in March 1999 granted part of the request for rehearing. The Commission also granted rehearing on the KIUC's request for rehearing on the Commission's determination that it lacked authority to require the Companies to pay interest on the refund amounts. The Commission conducted a hearing on the rehearing issues in June 1999 and is expected to issue a final ruling on rehearing by the end of 1999. LG&E and KIUC have each filed separate appeals from the Commission's February 1999 orders with the Franklin Circuit Court. A decision on the appeals by the Court is not expected until next year. In July 1999, the Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, on July 23, 1999, the Commission stayed the refund requirement pending the Commission's final determination of any rehearing request that KU may file. In August 1999, KU filed its request for rehearing of the July orders. In August 1999, the Commission issued a Final Order in the KU proceedings, agreeing, in part, with the Company's arguments outlined in its Petition for Rehearing. While the Commission confirmed that the Company should change its method of computing the fuel costs associated with electric line losses, it agreed with KU that the line loss percentage should be based on the Company's actual line losses incurred in making off-system sales rather than the percentage used in its Open Access Transmission Tariff. The Commission also upheld its previous ruling concerning the computation of system line losses in the calculation of the FAC. The net effect of the Commission's Final Order was to reduce the refund obligation to $5.8 million from the original Order amount of $10.1 million. In August 1999, LG&E and KU each recorded its estimated share of anticipated FAC refunds of $8.7 million. KU began implementing the refund - 30 - in October and will continue the refund through September 2000. Both KU and the KIUC have appealed the Order to the Franklin Circuit Court. A decision is not expected on the appeal until next year. 13.In August 1999, the Company received a Final Order from the PSC relating to its Environmental Cost Recovery mechanism which resulted in the reversal of approximately $1.4 million of the provision for refunds by KU and LG&E in December 1998. 14.In October 1998, Capital Corp. purchased two natural gas combustion turbines and began to install them. In July 1999, Capital Corp. completed installation of the turbines and sold them at cost to LG&E and KU for $45.7 million and $76.7 million, respectively, following approval from the Commission. The turbines began commercial operation in early August 1999. 15.Reference is made to Part II, Legal Proceedings, below and Part I, Item 3, Legal Proceedings, of the Company's, LG&E's and KU's (and Note 18 of the Company's Notes to Financial Statements) Annual Reports on Form 10- K for the year ended December 31, 1998, and Part II, Item 1, Legal Proceedings, of the Form 10-Q for the quarters ended March 31, 1999, and June 30, 1999. - 31 - Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. Recent Developments In April 1999, the Kentucky Public Service Commission (the Commission) issued initial orders in the performance-based ratemaking proceedings for LG&E and KU. The Commission orders implement, effective July 1999, and subject to modification, the companies' pending performance-based ratemaking proposals, including a five-year, $52 million rate reduction plan jointly filed by LG&E, KU and the Kentucky Attorney General's Office with the Commission in April 1999. For more information, see Note 8 to the Notes to Financial Statements under Item 1 and Commodity Price Risk under Item 3. In October 1999, a Capital Corp. subsidiary entered into an initial agreement to purchase six natural gas combustion turbines and is negotiating terms of a definitive agreement. In connection therewith, Capital Corp. is pursuing initial development of a possible 1,600 Mw generation facility in Anderson County, Texas. Should the plant be developed as presently planned, the aggregate cost is estimated to be approximately $760 million, portions of which may be independently financed or shared with eventual outside partners. In October 1999, a partnership in which Capital Corp. owns an interest sold to an Ameren Energy Corporation affiliate the natural gas combustion turbine previously leased by such partnership in Ferndale, Washington. The Company's indirect proceeds from such sale were approximately $4.5 million. In August 1999, a Capital Corp. subsidiary entered into an operating lease for three combustion turbines. The lease has a five year term, but no rent is payable until the turbines have been completed and installed. Certain related facilities are expected to be added to the same lease in the fourth quarter of 1999. The turbines are expected to be used in a 450 Mw gas fired merchant combustion turbine power generation facility, located in Monroe, Georgia, which is expected to be completed in June 2001. At the end of the lease term, the Company may purchase the leased assets or assist the lessor in selling them. If the assets are sold, the Company is obligated to make up any deficiency between the lease balance and the proceeds subject to a cap. The total value of the assets under the existing lease is expected to be approximately $125 million and is expected to increase to approximately $175 million in the fourth quarter of 1999. For more information, see Note 11 to the Notes to Financial Statements under Item 1. In July 1999, the Company purchased 100% of the outstanding common stock of CRC-Evans Pipeline International, Inc. and affiliates (CRC) for initial consideration of $45.6 million and retirement of approximately $37.9 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. For more information, see Note 4 of Notes to Financial Statements under Item 1. In July 1999, Capital Corp. completed installation of two natural gas turbines (purchased in October 1998) and sold them at cost to LG&E and KU for $45.7 million and $76.7 million, respectively, following approval from the Commission. The turbines began commercial operation in early August 1999. Effective June 30, 1999, the Company reclassified its natural gas gathering and processing business to continuing operations from discontinued operations. For more information, see Note 3 to the Notes to Financial Statements under Item 1. In March 1999, the Company acquired an indirect 19.6% ownership interest in Gas Natural BAN, S.A. (BAN), a natural gas distribution company that serves 1.1 million customers in - 32 - the northern portion of the province of Buenos Aires, Argentina. For more information, see Note 5 of Notes to Financial Statements under Item 1 for more information. In March 1999, the partnership that owns the Rensselaer cogeneration facility sold substantially all the assets and major contracts of the facility. For more information, see "Results of Operations" below, Note 6 of Notes to Financial Statements under Item 1 and the Company's Annual Report on Form 10-K for the year ended December 31, 1998. General The Company's principal subsidiaries are LG&E, an electric and gas utility, KU, an electric utility, and Capital Corp., the holding company for all non- utility investments. LG&E's and KU's results of operations and liquidity and capital resources are important factors affecting the Company's consolidated results of operations and capital resources and liquidity. Some of the matters discussed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis may contain forward- looking statements that are subject to certain risks, uncertainties and assumptions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions; business and competitive conditions in the energy industry; future prices or usage loads of power and natural gas; unusual weather; regulatory decisions, including decisions relating to the Company's performance-based ratemaking proceedings, legal proceedings, including the arbitration matter relating to the OPC power contract, and decisions resulting from the combination of LG&E Energy and KU Energy; the Company's ability to resolve Year 2000 issues in a timely manner and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10- K for the year ended December 31, 1998. Results of Operations The results of operations for LG&E, KU and Capital Corp.'s Argentine gas distribution, CRC and WKE operations are affected by seasonal fluctuations in temperature and other weather-related factors. Because of these and other factors, the results of one interim period are not necessarily indicative of results or trends to be expected for the full year. Three Months Ended September 30, 1999, Compared to Three Months Ended September 30, 1998 The Company's primary and diluted earnings per share from continuing operations increased to $.67 in 1999 from $.61 in 1998. Results for 1999 included $.04 of after-tax charges for fuel adjustment refunds. Excluding this item, income from continuing operations increased to $.71 in 1999 from $.61 in 1998. This increase resulted from strong off-system sales at WKE, increases resulting from acquiring CRC and BAN in 1999, and lower corporate expenses. Lower earnings at LG&E and KU partially offset these increases. LG&E Results: LG&E's net income decreased $3.2 million for the quarter ended September 30, 1999, compared to the quarter ended September 30, 1998, primarily due to implementation of the Company's performance based ratemaking proposal which resulted in a reduction of electric revenues of $ 3.2 million. - 33 - A comparison of LG&E's revenues for the quarter ended September 30, 1999, with the quarter ended September 30, 1998, excluding the provision for rate refunds of $1.1 million, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Gas Cause Revenues Revenues Sales to ultimate consumers: Fuel and gas supply adjustments $(2,190) $(1,100) Merger surcredit (900) - Performance based rate bill reduction (3,159) - Demand side management/revenue decoupling 20 - Environmental cost recovery (137) - Variation in sales volume, etc. 10,116 1,395 Total retail sales 3,750 295 Sales for resale 63,789 8 Gas transportation - net - (144) Other (539) 486 Total $67,000 $ 645 Electric sales for resale increased $59.1 million due to brokered sales activities. Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating expenses. LG&E had an electric fuel adjustment clause (FAC) whereby increases or decreases would be reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky (PSC). Effective July 2, 1999 the FAC was discontinued and replaced with an amended electric performance based rate mechanism (PBR). The PBR is subject to PSC modification. See Note 8 for a further discussion of the PBR mechanism and Note 12 for a further discussion of the FAC. LG&E gas rates contain a gas supply clause whereby increases and decreases in the cost of gas supply may be reflected in retail rates, subject to PSC approval. Fuel for electric generation increased $4.2 million (10%) for the quarter because of an increase in generation due to warmer weather ($5.2 million), partially offset by a decrease in the cost of coal burned ($1 million). Gas supply expenses decreased $.2 million. Power purchased increased $67 million primarily due to increased purchases for sales for resale, including approximately $2 million of expenses recorded as a result of valuing the Company's electric energy trading contracts using the mark-to-market method. See Note 7 of Notes to Financial Statements. Other operation expenses decreased $2.5 million (6%) primarily due to decreased operation of steam power production ($2.1 million). Maintenance expenses increased $2.1 million (20%) in 1999 mainly due to increases in scheduled outages at the Mill Creek generating station units 3 and 4 ($1.4 million), and the Cane Run generating station units 4 and 6 ($.7 million). - 34 - Depreciation and amortization increased $.8 million in 1999 because of additional utility plant in service. Property and other taxes decreased $.9 million due to a sales tax accrual recorded as a result of a sales tax audit in the third quarter of last year. Variations in income tax expense are largely attributable to changes in pre- tax income. KU Results: KU's net income decreased $12.6 million for the quarter ended September 30, 1999, as compared to the quarter ended September 30, 1998. This decrease is partially due to recording a net provision for the refund of certain revenues under the fuel adjustment clause and environmental cost recovery mechanism, as well as the implementation of the Commission ordered performance-based ratemaking proposal. The after-tax impact of these regulatory actions is $6.4 million. See Notes 8 and 12 of Notes to Financial Statements. A comparison of KU's revenues for the quarter ended September 30, 1999, with the quarter ended September 30, 1998, excluding the provision for rate refunds of $6.2 million, reflects increases and decreases which have been segregated by the following principal causes: Sales to ultimate consumers: Fuel clause adjustments $ (2,921) Environmental cost recovery 396 Merger surcredit (603) Performance based rate bill reduction (2,914) Variation in sales volume, etc. 2,066 Total retail sales (3,976) Sales for resale 44,438 Other 1,124 Total $41,586 The increase in sales for resale was primarily due to more aggressive marketing efforts. Fuel for electric generation comprises a large component of KU's total operating expenses. KU's Kentucky jurisdictional electric rates were subject to an electric fuel adjustment clause (FAC) whereby increases or decreases would be reflected in retail rates, subject to the approval of the Public Service Commission of Kentucky (PSC). Effective July 2, 1999 the FAC was discontinued and replaced with an amended electric performance based rate mechanism (PBR). The PBR is subject to PSC modification. See Note 8 for a further discussion of the PBR mechanism and Note 12 for a further discussion of the FAC. KU's wholesale and Virginia jurisdictional electric rates contain a fuel adjustment clause whereby increases or decreases in the cost of fuel are reflected in rates, subject to the approval of the Virginia State Corporation Commission and the Federal Energy Regulatory Commission. Fuel for electric generation expenses decreased by $4.8 million (7%) for the quarter primarily because of a decrease in generation. Power purchased increased $64 million. The increase was primarily due to a 160% increase in megawatt-hour purchases which was used to support the aforementioned sales for resale as well as an increase in reserve margin purchases. - 35 - Maintenance expense decreased $2 million (13%) due to a decrease in maintenance activities at the steam generating plants. Variations in income tax expense are largely attributable to changes in pre- tax income. Capital Corp. Results: Capital Corp., the holding company for all non-utility investments, conducts its operations through three principal segments: Independent Power Operations, WKE and Argentine Gas Distribution. Involvement in these and other non-utility businesses represents the Company's commitment to understand, respond to, and capitalize on the opportunities presented by an emerging competitive energy services industry. Independent Power Operations develops, operates, maintains and owns interests in domestic and international power generation facilities that sell electric and steam energy to utility and industrial customers, and owns equity interests in combustion turbines which are leased to others. WKE leases and operates the generating facilities of Big Rivers. Argentine Gas Distribution owns interests in three natural gas distribution companies in Argentina. Capital Corp. also engages in other energy-related businesses (Other Energy- Related Businesses) which are not individual distinct segments of the business. These include CRC, a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines, Enertech, a commercial and retail initiative designed to assess the energy and utility needs of large commercial and industrial entities, and LG&E Home Services, a maintenance and repair service for customers' major household appliances, and third party metering and billing services. These also include the gas gathering and processing business, which consists of certain natural gas transportation, storage, gathering and processing operations and facilities. Independent Power Operations Independent Power Operations' equity in earnings of unconsolidated ventures increased from $1.8 million in 1998 to $5.4 million in 1999. The increase resulted mainly from writing off the $3.8 million investment in Windpower Partners 1994 in the third quarter of 1998, offset by lower equity in earnings at the Rensselaer project in 1999 resulting from the sale of this project in the first quarter, and lower ROVA I capacity payments from Virginia Electric and Power during the third quarter of 1999. Western Kentucky Energy Western Kentucky Energy (WKE) began operations in July 1998, upon commencement of its lease transaction with Big Rivers. WKE's revenues and cost of revenues increased from $66.2 million and $29.3 million, respectively, in 1998 to $144.4 million and $100.8 million, respectively, in 1999. These increases resulted mainly from higher off- system sales in 1999. WKE's operation and maintenance expenses decreased from $25.8 million in 1998 to $21.5 million in 1999 due to reclassifying reagent and disposal expenses from operation and maintenance expenses in 1998 to cost of revenues in 1999. One-time expenses paid in 1998 to Big Rivers Electric Corporation for storage and unloading of fuel acquired at closing also contributed to the decrease. - 36 - Argentine Gas Distribution The Argentine Gas Distribution companies' revenues increased 2% or $1.1 million in 1999 to $48.5 million due to higher consumption per customer and an increase in the customer base. Operation and maintenance expenses decreased by 21.4% or $1.4 million over the same period. The Argentine Gas Distribution companies' equity in earnings of unconsolidated ventures increased from $1.0 million in 1998 to $4.7 million in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Recent Developments and Note 5 of Notes to Financial Statements in Item 1. Other As a result of the reclassification of the gas gathering and processing business from discontinued operations to continuing operations effective June 30, 1999, the Company's activities include certain natural gas transportation, storage, gathering and processing operations and facilities, which businesses are conducted through Capital Corp. Its activities also include those of CRC, a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines, which the Company acquired in July 1999. Additionally, the Company conducts various commercial and retail initiatives, primarily energy-related new businesses and services designed to leverage its existing assets, operations and market presence, which commercial and retail initiatives have not had a significant impact on the Company's financial position or required significant capital investment. Other Energy-Related Businesses' revenues increased from $45.6 million in 1998 to $99.1 million in 1999, and its cost of revenues increased from $38.4 million in 1998 to $73.1 million in 1999. These increases reflect the CRC acquisition in July 1999 and higher natural gas sales. See Note 4 for a discussion of the CRC acquisition and see Note 3 for a discussion of the Company's decision to retain its natural gas gathering and processing business. Other Energy-Related Businesses' operation and maintenance expense increased from $9.0 million in 1998 to $14.9 million in 1999 due mainly to acquiring CRC. Capital Corp.'s interest expense increased from $6.6 million in 1998 to $12.0 million in 1999 mainly due to funding the BAN and CRC acquisitions, the WKE transaction, discontinued operations and corporate expenses. Nine Months Ended September 30, 1999, Compared to Nine Months Ended September 30, 1998 The Company's primary and diluted earnings per share from continuing operations increased to $1.49 in 1999 from $1.06 in 1998. Results for 1998 included $.41 of after-tax charges for merger-related costs ($.19 for LG&E, $.17 for KU, and $.05 for Corporate), and an after-tax gain of $.16 resulting from the Rensselaer project's Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). Results for 1999 included $.05 of after-tax charges for fuel adjustment refunds ($.04 for KU and $.01 for LG&E). Excluding these items, income from continuing operations increased to $1.54 in 1999 from $1.31 in 1998. This increase resulted from higher earnings at Capital Corp, partially offset by lower earnings at LG&E (excluding merger-related costs). LG&E Results: LG&E's net income increased $14.4 million for the first nine months of 1999, as compared to the first nine months of 1998, primarily because of the charge incurred in 1998 for - 37 - LG&E's cost to merge LG&E Energy Corp. with KU Energy of $25 million. Excluding this charge, LG&E's net income decreased $10.6 million for the same period. This is primarily due to increased maintenance expenses at electric generating plants. A comparison of LG&E's revenues for the nine months ended September 30, 1999, with the nine months ended September 30, 1998, excluding the provision for rate refunds of $1.6 million, reflects increases and decreases which have been segregated by the following principal causes: Increase or (Decrease) (Thousands of $) Electric Gas Cause Revenues Revenues Sales to ultimate consumers: Fuel and gas supply adjustments $(2,102) $(26,851) Merger surcredit (3,756) - Performance based rate bill reduction (3,159) - Demand side management/revenue decoupling (3,075) (6,220) Environmental cost recovery (169) - Variation in sales volume, etc. 17,750 13,049 Total retail sales 5,489 (20,022) Sales for resale 88,341 420 Gas transportation - net - (412) Other (478) 791 Total $93,352 $(19,223) Sales for resale increased due to increased brokered sales. Gas retail sales decreased from 1998 due to a decline in gas prices in the first quarter of 1999. Gas supply expenses decreased $16.7 million (19%) due to a decrease in net gas supply costs ($20.7 million) partially offset by an increase in the volume of gas delivered to the distribution system ($4.0 million). Power purchased increased $96.2 million (224%) primarily due to increased purchases for sales for resale. Other operation expenses decreased $3.7 million (3%) for the nine months ended September 1999 as compared to same period ended September 1998 primarily due to lower steam power production expenses. Maintenance expenses for the first nine months of 1999 increased $13.7 million (40%) primarily due to increases in scheduled outages at the Mill Creek generating station units 3 and 4, and the Cane Run generating station units 4 and 6 ($7.5 million), increased forced outages at Mill Creek units 1 and 4 and Cane Run unit 5 ($3.9 million), and general repairs at the electric generating plants ($2.4 million). Depreciation and amortization increased $2.5 million in 1999 because of additional utility plant in service. - 38 - A $34.1 million one-time charge was recorded in the second quarter of 1998 for costs associated with the merger of LG&E Energy Corp. and KU Energy (the corresponding tax benefit of $9.1 million is recorded in Other income). Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. KU Results: KU's net income increased $20.9 million for the nine months ended September 30, 1999, as compared to the nine months ended September 30, 1998, primarily because of a $21.7 million one-time, after tax charge incurred in 1998 for KU's costs to merge LG&E Energy Corp. with KU Energy. A comparison of KU's revenues for the nine months ended September 30, 1999, with the nine months ended September 30, 1998, excluding the provision for rate refunds of $6.2 million, reflects increases and decreases which have been segregated by the following principal causes: Sales to ultimate consumers: Fuel clause adjustments $ (2,626) Environmental cost recovery (684) Merger surcredit (3,767) Performance based rate bill reduction (2,914) Variation in sales volume, etc. 12,499 Total retail sales 2,508 Sales for resale 104,065 Other 1,858 Total $108,431 The increase in sales for resale was primarily due to more aggressive marketing efforts and efficiencies achieved from coordinated dispatch of a larger available pool of generation following completion of the merger in May 1998 of LG&E Energy and KU Energy. Power purchased increased $112 million. The increase was primarily due to a 53% increase in megawatt-hour purchases which was primarily used to support the aforementioned sales for resale as well as an increase in reserve margin purchases. Maintenance expense decreased $3.5 million (8%) due to decreases in maintenance at the steam generating plants and the transmission and distribution systems. A $21.8 million one-time charge was recorded in the second quarter of 1998 for the merger of LG&E Energy Corp. and KU Energy. Variations in income tax expense are largely attributable to changes in pre- tax income as well as non-deductible merger expenses. Capital Corp. Results: Independent Power Operations Independent Power Operations' revenues increased from $15.0 million in 1998 to $18.5 million in 1999 due to recognizing previously deferred income related to the sale of the - 39 - Rensselaer project in March 1999. See Note 6 of Notes to Financial Statements under Item 1. Independent Power Operations' depreciation and amortization decreased from $4.3 million in 1998 to $2.6 million in 1999 due to writing off certain capitalized interest and development costs related to the San Miguel facility in the first quarter of 1998 and to write-offs related to the Rensselaer project's MRA with NIMO in the second quarter of 1998. Independent Power Operations' equity in earnings of unconsolidated ventures decreased from $57.4 million in 1998 to $35.4 million in 1999. The decrease resulted mainly from recognizing a gain in June 1998 related to the Rensselaer project's NIMO MRA, partially offset by the Rensselaer project's sale of substantially all of its assets and major contracts in March 1999. An increase resulting from writing off the investment in Windpower Partners 1994 in the third quarter of 1998 also offset the overall decrease. Independent Power Operations' other income and expense changed from $8.9 million expense in 1998 to $1.7 million income in 1999 due primarily to reacquiring in 1998 half of the Company's interest in the partnership that owned the Rensselaer project, and to recording related expenses. Western Kentucky Energy WKE began operations in July 1998, after closing its lease transaction with Big Rivers. WKE's revenues and cost of revenues increased from $66.2 million and $29.3 million, respectively, in 1998 to $273.5 million and $177.9 million, respectively, in 1999. These increases resulted from WKE's operating for nine months in 1999, compared to only two and one-half months in 1998. Increases in off-system sales in the third quarter of 1999 also contributed to the increase. WKE's operation and maintenance increased from $25.8 million in 1998 to $72.1 million in 1999. This increase resulted from WKE's operating for nine months in 1999, compared to only two and one-half months in 1998. Argentine Gas Distribution The Argentine Gas Distribution companies' revenues increased 4.5% or $5.4 million in 1999 to $123.4 million due to higher consumption per customer and an increase in the customer base. Operation and maintenance expenses decreased by 6.7% or $1.2 million over the same period. The Argentine Gas Distribution companies' equity in earnings of unconsolidated ventures increased from $2.2 million in 1998 to $8.4 million in 1999 due to acquiring a 19.6% interest in BAN in March 1999. See Note 5 of Notes to Financial Statements in Item 1. Other Other Energy-Related Businesses' revenues increased from $116.3 million in 1998 to $237.6 million in 1999, and its cost of revenues increased from $94.0 million in 1998 to $185.9 million in 1999. These increases reflect increases at Retail Access Services, higher natural gas sales, and the CRC acquisition. Other Energy-Related Businesses' operation and maintenance expense increased from $21.6 million in 1998 to $31.6 million in 1999 due mainly to acquiring CRC. - 40 - Other Energy-Related Businesses' other income increased from $3.0 million in 1998 to $7.6 million in 1999 due mainly to receiving a claim related to an undeveloped independent power project in California. Capital Corp.'s interest expense increased from $17.5 million in 1998 to $35.1 million in 1999 due mainly to funding the BAN and CRC acquisitions, the WKE transaction, discontinued operations and corporate expenses. Liquidity and Capital Resources The Company's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and equity investments in connection with independent power production projects and other energy-related growth or acquisition opportunities among the non-utility businesses. Capital funds are also needed for the Company's capital obligations under the Big Rivers lease arrangements, losses incurred in connection with the discontinuance of the merchant energy trading and sales business and information system enhancements. Lines of credit and commercial paper programs are maintained to fund these temporary capital requirements. Construction expenditures for the nine months ended September 30, 1999, of $291.9 million were financed with internally generated funds and commercial paper. The Company's combined cash and marketable securities balance decreased $22.1 million during the nine months ended September 30, 1999. The decrease reflects construction expenditures, the investment in BAN, the acquisition of CRC and dividends paid, partially offset by cash flows from operations, a net increase in debt, the Company's portion of the proceeds received by the Rensselaer project from the sale of its assets and major contracts, and proceeds received from the sale of four combustion turbines held under a leveraged lease. Variations in accounts receivable, accounts payable and materials and supplies are generally not significant indicators of the Company's liquidity. Such variations are primarily attributable to fluctuations in weather, which have a direct effect on sales of electricity and natural gas. The increase in accounts receivable resulted primarily from seasonal fluctuations in LG&E's, KU's, and WKE's businesses, the CRC acquisition, and higher natural gas gathering and processing revenues. The decrease in accounts payable resulted from fluctuations in LG&E's and KU's businesses, partially offset by seasonal fluctuations in Distribuidora de Gas del Centro's (Centro's) business and an increase resulting from acquiring CRC. The increase in other materials and supplies resulted from acquiring CRC. The increase in net assets of discontinued operations resulted from a decrease in the reserve, partially offset by a decrease in net price risk management assets, a seasonal increase in accounts payable and a decrease in cash. The decrease in cash resulted from seasonal fluctuations and from a large transaction settlement near the end of the period. The increase in investments in unconsolidated ventures resulted from the investment in BAN and equity in earnings, partially offset by selling the investment in the Rensselaer venture and distributions received. The increase in non-utility property and plant resulted mainly from acquiring CRC and from additions at Centro and WKE. The decrease in other property and investments resulted from reclassifying the two combustion turbines purchased by Capital Corp. to LG&E's and KU's utility property accounts. In July 1999, Capital Corp. completed installation of the turbines and sold them at cost to LG&E and KU for $45.7 million and $76.7 million, respectively. The turbines began commercial operation in early August 1999. - 41 - The increase in deferred debits and other assets resulted from recording goodwill related to the CRC acquisition, and to capitalizing costs related to the combustion turbine power generation facility in Monroe, Georgia. Long-term debt due within one year increased due to issuing new debt and reclassifying amounts from noncurrent to current. The Company issues commercial paper that has maturity dates ranging between one and 270 days. The Company had outstanding commercial paper of $393.2 million at September 30, 1999, at a weighted-average interest rate of 5.65%. Because of the rollover of these maturity dates, total short-term borrowings and repayments during the first nine months of 1999 totaled $3.9 billion. See Note 16 of the Company's Notes to Financial Statements contained in its Annual Report on Form 10-K for the year ended December 31, 1998. The increase in other current liabilities resulted from acquiring CRC and from differences in the timing of estimated income tax payments. The increase in long-term debt resulted from additional borrowings, partially offset by reclassifications to current. In October 1999, a Capital Corp. subsidiary entered into an initial agreement to purchase six natural gas combustion turbines and is negotiating terms of a definitive agreement. In connection therewith, Capital Corp. is pursuing initial development of a possible 1,600 Mw generation facility in Anderson County, Texas. Should the plant be developed as presently planned, the aggregate cost is estimated to be approximately $760 million, portions of which may be independently financed or shared with eventual outside partners. In August 1999, a Capital Corp. subsidiary entered into an operating lease for three combustion turbines. The lease has a five year term, but no rent is payable until the turbines have been completed and installed. Certain related facilities are expected to be added to the same lease in the fourth quarter of 1999. The turbines are expected to be used in a 450 Mw gas fired merchant combustion turbine power generation facility, located in Monroe, Georgia, which is expected to be completed in June 2001. At the end of the lease term, the Company may purchase the leased assets or assist the lessor in selling them. If the assets are sold, the Company is obligated to make up any deficiency between the lease balance and the proceeds subject to a cap. The total value of the assets under the existing lease is expected to be approximately $125 million and is expected to increase to approximately $175 million in the fourth quarter of 1999. At September 30, 1999, unused capacity under the Company's lines of credit totaled $504.8 million after considering commercial paper support and approximately $62.0 million in letters of credit securing on- and off- balance sheet commitments. At December 31, 1998, unused capacity under the lines of credit totaled $536.8 million. The decrease in unused capacity resulted from additional borrowing during the nine months ended September 30, 1999. Capital Corp. has provided letters of credit issued to third parties to secure certain off-balance sheet obligations (including contingent obligations) of its subsidiaries. The letters of credit securing such obligations totaled approximately $23.0 million at September 30, 1999. For more information, see Notes 17 and 18 of the Company's Notes to Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 1998. - 42 - The Company's capitalization ratios at September 30, 1999, and December 31, 1998, follow: Sep. 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 48.0% 46.5% Notes payable 11.1 11.2 Preferred stock 3.8 4.2 Common equity 37.1 38.1 Total 100.0% 100.0% LG&E's capitalization ratios at September 30, 1999, and December 31, 1998, follow: Sep. 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 44.6% 45.0% Preferred stock 6.8 6.8 Common equity 48.6 48.2 Total 100.0% 100.0% KU's capitalization ratios at September 30, 1999, and December 31, 1998, follow: Sep. 30, Dec. 31, 1999 1998 Long-term debt (including current portion) 44.8% 45.7% Preferred stock 3.3 3.4 Common equity 51.9 50.9 Total 100.0% 100.0% In May 1999, Capital Corp. issued $150.0 million of medium-term notes due May 2004, with a stated interest rate on the notes of 6.205%. After taking into account the forward-starting interest-rate swap entered into in April 1999, to hedge the entire issuance, the effective rate amounted to 6.13%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper, which had been used to fund the BAN acquisition and other working capital needs. In September 1999, Capital Corp. issued $50 million of floating rate notes under its medium-term note program. The notes mature in September 2000 and pay interest at a rate equal to the one-month LIBOR plus 0.10%. LG&E implemented a new $200 million commercial paper program in November 1999. An initial issuance of notes totaling $120.1 million took place on November 8. A majority of the proceeds were used in connection with capital requirements relating to the joint acquisition by LG&E and KU of combustion turbines from LG&E Capital Corp., which occurred in July 1999. See Recent Developments for common stock repurchase activities in connection with the CRC acquisition. For a description of significant contingencies that may affect the Company, LG&E and KU, reference is made to Part II herein - Item 1, Legal Proceedings. - 43 - Year 2000 Computer Issue The Company and its subsidiaries, including LG&E and KU, use various software, systems and technology that may be affected by the "Year 2000 Issue." This concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to the year 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are more fully detailed in the sections that follow, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. The Company began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer of the Company, is responsible for planning, implementing and documenting the Company's Year 2000 process. The team also provides direct and detailed assistance to the Company's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, the Company also uses the services of third parties, including technical consultants, vendor representatives and auditors. The Company's Year 2000 effort generally follows a three phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding Company and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. The Company has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, client-server, PCs and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units and (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities. State of Readiness As of October 1999, the Company and its subsidiaries have completed the internal inventory, vendor survey, compliance assessment, remediation and testing and contingency planning portions (Phases I, II and III) of their Year 2000 plan for critical equipment and systems, including IT, non-IT and embedded components. A substantially similar readiness state exists for all non-critical systems. Training and drill scenarios on contingency plan actions have been initiated for appropriate critical systems and will continue throughout 1999. The Company has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which the Company's operations are vulnerable to those parties' failure to complete their remediation efforts. The Company has evaluated and, in certain cases, initiated follow-up actions regarding the responses from these parties. - 44 - The Company regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry. Costs of Year 2000 Issues The Company's, LG&E's and KU's system modification costs related to the Year 2000 issue are being expensed as incurred. Through September 1999, the Company incurred approximately $26.1 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, the Company expects to spend an additional $6.0 million to complete its Year 2000 efforts. Through September 1999, LG&E incurred approximately $18.4 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, LG&E expects to spend an additional $2.2 million to complete its Year 2000 efforts. Through September 1999, KU incurred approximately $4.8 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, KU expects to spend an additional $2.1 million to complete its Year 2000 efforts. It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally, many costs are not incremental costs but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with the Company's Year 2000 issues will not be higher. Risks of Year 2000 Issues As described above, the Company has significantly completed the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of remaining remediation and contingency plan actions, the Company does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, the Company may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and the Company is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to the Company. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, reduced power production or transmission capabilities or internal operational or administrative difficulties on the part of the Company. The Company is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of the Company. There can be no assurance that the Company will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning has been completed for material areas of Year 2000 risk. This effort has addressed certain areas, including the most reasonably likely worst-case scenarios, delays in completion of any remaining remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual energy ac - 45 - counting procedures. Contingency plan formulation has been completed and final implementation, resourcing and drilling of such plans is underway. Forward Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation, and cost of the Company's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates derived using assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, the Company's ability to locate and correct all relevant computer codes, the readiness of third parties, and the Company's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 10-K for the year ended December 31, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. Item 3. Quantitative and Qualitative Disclosures About Market Risk. LG&E Energy is exposed to market risks in both its regulated and non- utility operations. Both operations are exposed to market risks from changes in interest rates and commodity prices, while the non-utility operations are also exposed to changes in foreign exchange rates. To mitigate changes in cash flows attributable to these exposures, the Company has entered into various derivative financial instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Risk The potential change in interest expense resulting from changes in base interest rates of the Company's unswapped debt did not change materially during the nine months ended September 30, 1999. The potential changes in the fair values of the Company's interest-rate swaps resulting from changes in interest rates and the yield curve also did not change materially during the nine months ended September 30, 1999. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. Commodity Price Risk The Company's exposure to market risks from changes in commodity prices did not change materially during the nine months ended September 30, 1999. However, as a result of the Commission's approval of the PBR effective July 1999, (subject to future change) LG&E's and KU's fuel adjustment clause mechanism was withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five- state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by the Company's shareholders. Capital Corp. through its subsidiaries operates and controls the generating capacity of Big Rivers and the City of Henderson. Some of the excess capacity generated by Big Rivers and the City is currently being marketed by WKE. To mitigate residual risks relative to the movements in electricity prices, WKE has entered into primarily fixed-priced contracts for the sale of electricity through the wholesale electricity market. At September 30, 1999, exposure from these activities was not material to the consolidated financial statements of the Company. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. - 46 - Foreign Exchange Risk The Company has foreign exchange exposure to both the Spanish Peseta and the Argentine Peso. During the second quarter of 1999, the Company's exposure to the Argentine Peso increased due to the acquisition of BAN. However, management believes the Company's foreign exchange exposure to a 10% change in the Spanish Peseta and Argentine Peso would not have a material effect on the financial position or results of operations. As a result of acquiring CRC, the Company also has foreign exchange exposure to the Canadian dollar and the British pound. Management believes the Company's foreign exchange exposure to a 10% change in the either of these currencies would not have a material effect on the financial position or results of operations. See Item 7 of the Company's report on Form 10-K for the year ended December 31, 1998. - 47 - Part II. Other Information Item 1. Legal Proceedings. For a description of the significant legal proceedings involving the Company, LG&E and KU, reference is made to the information under the following items and captions of (a) the Company's, LG&E's and KU's respective combined Annual Report on Form 10-K for the year ended December 31, 1998: Item 1, Business; Item 3, Legal Proceedings; Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition; Notes 2, 5, 18 and 22 of the Company's Notes to Financial Statements under Item 8; Notes 3, 12, 16 and 18 of LG&E's Notes to Financial Statements under Item 8 and Notes 3, 11 and 13 of KU's Notes to Financial Statements under Item 8 and (b) the Company's, LG&E's and KU's respective combined Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30, 1999: Part III, Item 1, Legal Proceedings. Except as described herein, to date, the proceedings reported in the Company's, LG&E's and KU's respective combined Form 10-K's and Form 10-Q's have not changed materially. Certain Fuel Adjustment Clause Proceedings On August 30, 1999, the Kentucky Public Service Commission (PSC) issued a final order in these proceedings, agreeing with in part, and denying in part, the arguments outlined by KU in its rehearing petition. A net effect of the PSC's final order is to reduce the refund obligation from $10.1 million, the original order amount, to $5.8 million. The refund will be implemented by KU from October 1999 to September 2000. Both KU and an intervenor in the case have appealed the PSC final order to the Franklin Circuit Court where a decision is anticipated in mid to late 2000. See Note 12 of Notes to Financial Statements, in Item 3 above; Legal Proceedings, and Notes 5 and 22 to the Company's and Note 3 of KU's respective Notes to Financial Statements under Item 8 of the Company's and KU's combined Annual Report on Form 10-K for the year ended December 31, 1998, for further discussion of this matter. Performance-Based Ratemaking During August and September 1999, hearings were conducted before the PSC on LG&E's and KU's amended PBR plans. Initial briefs of the parties were filed with the PSC on October 7, 1999 and reply briefs were filed October 21, 1999. A decision from the PSC is expected by the end of the fourth quarter of 1999 or in early 2000. See Note 8 of Notes to Financial Statements of the Company, LG&E and KU contained in Item 1 of this Form 10- Q and Item 3, Legal Proceedings, to the Company's, LG&E's and KU's combined Annual Report on Form 10-K for further discussion of this matter. Oglethorpe Power Contract Written submissions were filed by both parties during the third quarter in the arbitration proceeding brought by LG&E Energy Marketing Inc. (LEM) against Oglethorpe Power Corporation (OPC) regarding LEM's November 1996 power sales agreement with OPC and disputed load forecasts provided in connection therewith. A hearing on the merits began on November 2, 1999, and will end on November 19, 1999, with a final decision anticipated in mid to late December 1999. While the Company anticipates a favorable outcome in the proceeding, no assurances can be given as to such event. Should OPC prevail, and as a result of higher than anticipated future commodity prices, increased load demands, particularly at OPC, and other factors, the Company may be required to increase its after-tax loss reserve by approximately $150 million. Any such increase in the loss reserve will be recorded in discontinued operations. This amount is subject to continuing analysis and estimation. Management does not expect this to have a material effect on income from continuing operations. See Note 2 in Notes to Financial Statements under Item 1 above for a discussion of the Company's discontinued operations and the reserve associated therewith. - 48 - Springfield Municipal Contract Trial is currently scheduled for January 2000 in the action filed by LEM against the City of Springfield, Illinois City Water, Light and Power Company concerning the parties' 1997 Interchange Agreement. LEM has estimated damages in this matter of approximately $21 million. See Item 3, Legal Proceedings and Note 18 to the Company's Notes to Financial Statements under Item 8, respectively, of the Company's Annual Report on Form 10-K for the year ended December 31, 1998 for further discussion of this matter. Environmental Matters On October 2, 1999, approximately 38,000 gallons of diesel fuel leaked from an underground pipeline at the E.W. Brown Station. Under the oversight of EPA and state officials, KU commenced immediate spill containment and recovery measures which prevented the spill from reaching the Kentucky River. KU ultimately recovered approximately 34,000 gallons of diesel fuel. On November 4, 1999, the Kentucky Division of Water issued a notice of violation for the incident. KU has committed to undertake additional mitigation measures and is currently negotiating a resolution of the state regulatory aspects of this matter. To date, KU has incurred an estimated $800,000 in remediation costs. KU is also investigating its possible remedies against the manufacturer of a cracked valve at issue in the spill. Item 6(a). Exhibits. Exhibit Number Description 27 Financial Data Schedules for LG&E Energy Corp., Louisville Gas and Electric Company, and Kentucky Utilities Company. Item 6(b). Reports on Form 8-K. On July 14, 1999, the Company filed a report on Form 8-K announcing that it had acquired, effective July 8, 1999, CRC Holdings Corp., the parent company of CRC-Evans Pipeline International, Inc. and related companies, a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. - 49 - SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LG&E Energy Corp. Registrant Date: November 15, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Louisville Gas and Electric Company Registrant Date: November 15, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kentucky Utilities Company Registrant Date: November 15, 1999 /s/ Michael D. Robinson Michael D. Robinson Vice President and Controller (On behalf of the registrant in his capacity as Principal Accounting Officer) - 50 - EX-27 2
UT 0000861388 LG&E ENERGY CORP. 1,000 9-MOS DEC-31-1999 SEP-30-1999 PER-BOOK 3,372,582 761,706 785,902 267,894 0 5,188,084 778,660 (142) 540,053 1,318,571 0 135,328 1,599,603 393,202 0 0 111,590 0 0 0 1,629,790 5,188,084 2,088,312 116,843 1,697,244 1,814,087 274,225 15,650 289,875 90,220 199,655 4,957 194,698 120,924 52,961 258,630 1.50 1.50 Includes common stock expense of $(387). Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $43,799.
EX-27 3
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 9-MOS DEC-31-1999 SEP-30-1999 PER-BOOK 1,549,854 14,165 229,718 52,191 0 1,845,928 307,545 0 324,286 631,831 0 40,000 484,830 0 0 0 61,500 0 0 0 627,767 1,845,928 724,646 47,130 573,024 620,154 104,492 5,767 110,259 28,448 81,811 1,692 80,119 56,692 27,716 179,150 0 0 Includes common stock expense of $595. Represents unrealized loss on marketable securities, net of taxes.
EX-27 4
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 9-MOS DEC-31-1999 SEP-30-1999 PER-BOOK 1,822,728 1,348 306,117 55,019 0 2,185,212 424,334 (124) 259,856 684,066 0 95,328 626,800 0 0 0 0 0 0 0 779,018 2,185,212 737,112 47,317 581,147 628,464 108,648 1,648 110,296 27,636 82,660 3,266 79,394 67,000 25,245 186,830 0 0 Includes common stock expense of $836. Represents unrealized gain/loss on marketable securities, net of taxes.
-----END PRIVACY-ENHANCED MESSAGE-----