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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, 2002
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.
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
(859) 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:
Louisville Gas and Electric Company
21,294,223 shares, without par value, as of October 31, 2002,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of October 31, 2002,
all held by LG&E Energy Corp.
This combined Form 10-Q is separately filed by 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.
TABLE OF CONTENTS
PART I
Item 1 Consolidated Financial Statements
Louisville Gas and Electric Company and Subsidiary
Statements of Income 1
Balance Sheets 2
Statements of Cash Flows 4
Statements of Retained Earnings 5
Statements of Other Comprehensive Income 6
Kentucky Utilities Company and Subsidiary
Statements of Income 7
Balance Sheets 8
Statements of Cash Flows 10
Statements of Retained Earnings 11
Statements of Other Comprehensive Income 12
Notes to Consolidated Financial Statements 13
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 29
Item 4 Controls and Procedures 31
PART II
Item 1 Legal Proceedings 33
Item 6 Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35
Part I. Financial Information - Item 1. Financial Statements
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
OPERATING REVENUES (Note 7):
Electric $223,017 $206,228 $581,076 $557,891
Gas 22,800 25,657 170,856 216,106
Total operating revenue 245,817 231,885 751,932 773,997
OPERATING EXPENSES:
Fuel for electric generation 52,827 44,338 147,484 124,571
Power purchased 15,322 15,566 60,967 59,651
Gas supply expenses 11,098 13,533 112,911 157,591
Non-recurring charges (Note 4) - - - 144,385
Other operation expenses 51,269 39,441 154,486 111,122
Maintenance 18,869 13,680 46,441 37,918
Depreciation and amortization
(Note 4) 28,196 26,344 79,363 77,183
Federal and state income taxes 22,083 25,821 43,655 5,639
Property and other taxes 4,501 4,070 13,815 12,953
Total operating expenses 204,165 182,793 659,122 731,013
NET OPERATING INCOME 41,652 49,092 92,810 42,984
Other income - net 156 360 90 1,718
Interest charges (Note 5) 7,604 9,182 22,497 30,080
NET INCOME 34,204 40,270 70,403 14,622
Preferred stock dividends 1,075 1,110 3,189 3,628
NET INCOME AVAILABLE
FOR COMMON STOCK $ 33,129 $ 39,160 $ 67,214 $ 10,994
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept. 30, Dec. 31,
2002 2001
UTILITY PLANT:
At original cost $3,554,543 $3,423,037
Less: reserve for depreciation 1,449,059 1,381,874
Net utility plant 2,105,484 2,041,163
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of Sept. 30, 2002
and Dec. 31, 2001 1,415 1,176
CURRENT ASSETS:
Cash 15,148 2,112
Accounts receivable -
less reserve of $1,575 as of Sept. 30, 2002
and Dec. 31, 2001 (Note 6) 42,375 85,667
Materials and supplies - at average cost:
Fuel (predominantly coal) 35,057 22,024
Gas stored underground 49,516 46,395
Other 27,586 29,050
Prepayments and other 2,504 4,688
Total current assets 172,186 189,936
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,146 5,921
Regulatory assets (Note 8) 150,915 197,142
Other 12,380 13,016
Total deferred debits and other assets 169,441 216,079
Total assets $2,448,526 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
-2-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
Sept. 30, Dec. 31,
2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Additional paid-in capital 40,000 40,000
Retained earnings 414,850 393,636
Accumulated other comprehensive income (25,972) (19,900)
Other (836) (836)
Total common equity 853,212 838,070
Cumulative preferred stock 95,140 95,140
Long-term debt (Notes 10 and 11) 328,104 370,704
Total capitalization 1,276,456 1,303,914
CURRENT LIABILITIES:
Current portion of long-term debt 288,800 246,200
Notes payable to parent 129,153 94,197
Accounts payable 86,425 149,070
Accrued taxes 21,118 20,257
Accrued interest 4,045 5,818
Other 14,463 12,840
Total current liabilities 544,004 528,382
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 307,489 298,143
Investment tax credit, in
process of amortization 55,589 58,689
Accumulated provision for pensions
and related benefits 165,365 167,526
Customer advances for construction 10,350 9,745
Regulatory liabilities (Note 8) 54,906 65,349
Other 34,367 16,606
Total deferred credits and other liabilities 628,066 616,058
Total capital and liabilities $2,448,526 $2,448,354
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Nine Months
Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 70,403 $ 14,622
Items not requiring cash currently:
Depreciation and amortization 79,363 77,183
Deferred income taxes - net 7,748 (45,886)
Investment tax credit - net (3,100) (3,186)
Non-recurring charges (Note 4) - 107,919
Other 33,595 11,977
Changes in current assets and liabilities (63,348) 4,754
Changes in accounts receivable
securitization-net (Note 6) 32,200 37,900
Other 13,662 (14,122)
Net cash flows from operating activities 170,523 191,161
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities (239) -
Proceeds from sales of securities - 4,231
Construction expenditures (141,855) (143,844)
Net cash flows from investing activities (142,094) (139,613)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds (Note 10) 118,876 10,104
Retirement of pollution control bonds (Note 10) (120,000) -
Short-term borrowings 896,456 61,564
Repayment of short-term borrowings (861,500) (121,000)
Payment of dividends (49,225) (3,885)
Net cash flows from financing activities (15,393) (53,217)
CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 13,036 (1,669)
CASH AND TEMPORARY CASH INVESTMENTS
AT BEGINNING OF PERIOD 2,112 2,495
CASH AND TEMPORARY CASH INVESTMENTS
AT END OF PERIOD $ 15,148 $ 826
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 46,925 $ 16,517
Interest on borrowed money $ 22,523 $ 25,554
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 consolidated financial
statements.
-4-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Balance at beginning
of period $404,721 $286,428 $393,636 $314,594
Net income 34,204 40,270 70,403 14,622
Subtotal 438,925 326,698 464,039 329,216
Cash dividends declared on stock:
5% cumulative preferred 269 269 807 807
Auction rate cumulative
preferred 439 474 1,281 1,720
$5.875 cumulative preferred 367 367 1,101 1,101
Common 23,000 - 46,000 -
Subtotal 24,075 1,110 49,189 3,628
Balance at end of period $414,850 $325,588 $414,850 $325,588
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
Net income $34,204 $40,270 $70,403 $14,622
Cumulative effect of change in
accounting principle - accounting
for derivative instruments and
hedging activities (Note 5) - - - (5,998)
Losses on derivative instruments
and hedging activities (Note 5) (7,691) (4,663) (10,121) (5,721)
Other comprehensive income (loss)
before tax (7,691) (4,663) (10,121) (11,719)
Income tax benefit related to items
of other comprehensive
income (loss) 3,076 1,865 4,049 4,688
Other comprehensive income $29,589 $37,472 $64,331 $ 7,591
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
OPERATING REVENUES (Note 7) $239,020 $216,370 $657,744 $647,522
OPERATING EXPENSES:
Fuel for electric generation 80,380 65,646 196,018 177,096
Power purchased 31,873 31,139 112,844 116,046
Non-recurring charges (Note 4) - - - 63,788
Other operation expenses 38,151 30,937 108,874 84,898
Maintenance 12,439 14,143 39,385 41,663
Depreciation and amortization
(Note 4) 24,449 24,158 71,023 71,805
Federal and state
income taxes 17,011 16,236 38,759 21,606
Property and other taxes 3,689 3,857 11,565 12,289
Total operating expenses 207,992 186,116 578,468 589,191
NET OPERATING INCOME 31,028 30,254 79,276 58,331
Other income - net 5,466 1,284 8,789 5,698
Interest charges (Note 5) 5,409 5,198 19,871 23,740
NET INCOME before cumulative
effect of accounting change 31,085 26,340 68,194 40,289
Cumulative effect of change in
accounting for derivative
instruments and hedging
activities, net of tax - - - 136
NET INCOME 31,085 26,340 68,194 40,425
Preferred stock dividends 564 564 1,692 1,692
NET INCOME AVAILABLE
FOR COMMON STOCK $ 30,521 $ 25,776 $ 66,502 $ 38,733
The accompanying notes are an integral part of these consolidated financial
statements.
-7-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
Sept. 30, Dec. 31,
2002 2001
UTILITY PLANT:
At original cost $3,224,034 $3,064,220
Less: reserve for depreciation 1,528,492 1,457,754
Net utility plant 1,695,542 1,606,466
OTHER PROPERTY AND INVESTMENTS -
less reserve of $129 as of Sept. 30, 2002
and Dec. 31, 2001 13,766 9,629
CURRENT ASSETS:
Cash and temporary cash investments 6,790 3,295
Accounts receivable - less reserve of $520
as of Sept. 30, 2002, and Dec. 31, 2001 (Note 6) 54,605 45,291
Materials and supplies - at average cost:
Fuel (predominantly coal) 33,981 43,382
Other 26,796 26,188
Prepayments and other 4,505 4,942
Total current assets 126,677 123,098
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 3,977 4,316
Regulatory assets (Note 8) 52,821 66,467
Other 26,686 16,926
Total deferred debits and other assets 83,484 87,709
Total assets $1,919,469 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
-8-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
Sept. 30, Dec. 31,
2002 2001
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Additional paid-in capital 15,000 15,000
Retained earnings 477,398 410,896
Accumulated other comprehensive income - 1,588
Other (595) (595)
Total common equity 799,943 735,029
Cumulative preferred stock 40,000 40,000
Long-term debt (Note 10) 347,839 434,506
Total capitalization 1,187,782 1,209,535
CURRENT LIABILITIES:
Current portion of long-term debt 153,930 54,000
Notes payable to parent 87,690 47,790
Accounts payable 73,328 85,149
Dividends declared 188 -
Accrued taxes 12,655 20,520
Accrued interest 4,767 5,668
Other 18,234 16,482
Total current liabilities 350,792 229,609
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income
taxes 240,001 239,204
Investment tax credit, in
process of amortization 9,239 11,455
Accumulated provision for pensions
and related benefits 77,445 91,235
Customer advances for construction 1,492 1,526
Regulatory liabilities (Note 8) 32,242 33,889
Other 20,476 10,449
Total deferred credits and other liabilities 380,895 387,758
Total capital and liabilities $1,919,469 $1,826,902
The accompanying notes are an integral part of these consolidated financial
statements.
-9-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Thousands of $)
Nine Months
Ended
September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,194 $ 40,425
Items not requiring cash currently:
Depreciation and amortization 71,023 71,805
Deferred income taxes - net (2,180) (31,980)
Investment tax credit - net (2,216) (2,585)
Non-recurring charges (Note 4) - 48,504
Other 18,358 5,489
Changes in current assets and liabilities (23,631) (20,671)
Changes in accounts receivable
securitization-net (Note 6) 4,900 30,000
Other (3,278) (147)
Net cash flows from operating activities 131,170 140,840
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (164,766) (102,329)
Net cash flows from investing activities (164,766) (102,329)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds (Note 10) 36,813 -
Retirement of pollution control bonds (Note 10) (37,930) -
Short-term borrowings 390,200 348,963
Repayment of short-term borrowings (350,300) (385,912)
Payment of dividends (1,692) (1,692)
Net cash flows from financing activities 37,091 (38,641)
CHANGE IN CASH AND TEMPORARY
CASH INVESTMENTS 3,495 (130)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 3,295 314
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 6,790 $ 184
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 59,070 $ 52,280
Interest on borrowed money $ 22,419 $ 23,017
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 consolidated financial
statements.
-10-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
Balance at beginning
of period $446,877 $360,195 $410,896 $347,238
Net income 31,085 26,340 68,194 40,425
Subtotal 477,962 386,535 479,090 387,663
Cash dividends declared on stock:
4.75% preferred 237 237 711 711
6.53% preferred 327 327 981 981
Subtotal 564 564 1,692 1,692
Balance at end of period $477,398 $385,971 $477,398 $385,971
The accompanying notes are an integral part of these consolidated financial
statements.
-11-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months Nine Months
Ended Ended
September 30, September 30,
2002 2001 2002 2001
Net income $31,085 $26,340 $68,194 $40,425
Cumulative effect of change in
accounting principle-accounting
for derivative instruments and
hedging activities (Note 5) - - - 2,647
Losses on derivative instruments
and hedging activities (Note 5) (4,475) - (2,647) -
Other comprehensive income (loss)
before tax (4,475) - (2,647) 2,647
Income tax benefit (expense)
related to items of other
comprehensive income (loss) 1,790 - 1,059 (1,059)
Other comprehensive income $28,400 $26,340 $66,606 $42,013
The accompanying notes are an integral part of these consolidated financial
statements.
-12-
Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary ("LG&E" and "KU" or the "Companies").
The common stock of each of LG&E and KU is wholly-owned by LG&E Energy
Corp. ("LG&E Energy"). In the opinion of management, the unaudited
interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of consolidated
financial position, results of operations, comprehensive income 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 Securities and Exchange Commission
("SEC") rules and regulations, although the Companies believe that the
disclosures are adequate to make the information presented not
misleading.
See LG&E's and KU's Annual Reports on Form 10-K for the year ended
December 31, 2001 for information relevant to the accompanying
financial statements, including information as to the significant
accounting policies of the Companies.
2. On December 11, 2000, LG&E Energy was acquired by Powergen plc
("Powergen") for cash of approximately $3.2 billion or $24.85 per share and
the assumption of all of LG&E Energy's debt. As a result of the
acquisition, among other things, LG&E Energy became a wholly-owned indirect
subsidiary of Powergen and, as a result, LG&E and KU became indirect
subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E
Energy continued their separate identities and continue to serve customers
in Kentucky and Virginia under their existing names. The preferred stock
and debt securities of the utility operations were not affected by this
transaction resulting in the utility operations' obligations to continue to
file SEC reports. Following the acquisition, Powergen became a registered
holding company under the Public Utility Holding Company Act of 1935
("PUHCA"), and LG&E and KU, as subsidiaries of a registered holding
company, became subject to additional regulation under PUHCA. No costs
associated with the Powergen acquisition nor any of the effects of purchase
accounting have been reflected in the financial statements of LG&E or KU.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed and
became operational on January 1, 2001. LG&E Services provides certain
services to affiliated entities, including LG&E and KU, at cost, as
required under PUHCA. On January 1, 2001, approximately 1,000
employees, primarily from LG&E Energy, LG&E and KU, were moved to LG&E
Services.
3. On April 9, 2001, a German company, E.ON AG ("E.ON"), announced a pre-
conditional cash offer of 5.1 billion pounds sterling ($7.3 billion) to
acquire Powergen. The final regulatory approval needed was received on June
14, 2002 from the SEC. Effective July 1, 2002, the acquisition of Powergen
was completed by E.ON. Following this acquisition, LG&E and KU became
indirect subsidiaries of E.ON and E.ON became a registered holding company
under PUHCA, and subject to regulation thereunder. No costs associated with
the E.ON acquisition nor any of the effects of purchase accounting have
been reflected in the financial statements of LG&E or KU.
4. During the first quarter 2001, LG&E recorded a $144 million charge and
KU recorded a $64 million charge for a workforce reduction program.
Primary components of the charge were separation benefits, enhanced
early retirement benefits, and health care benefits. The result of
this workforce reduction was the net elimination of approximately 950
positions, accomplished primarily through a voluntary enhanced
severance program.
On June 1, 2001, LG&E and KU filed an application ("VDT case") with the
Kentucky Public Service Commission (the "Kentucky Commission") to
create a regulatory asset relating to these first quarter 2001 charges.
The application requested permission to amortize these costs over a
four-year period. The Kentucky Commission also opened a case to review
a depreciation study and resulting depreciation rates implemented in
2001.
-13-
LG&E and KU reached a settlement in the VDT case as well as the other
cases involving depreciation rates and the Earnings Sharing Mechanism
with all intervening parties. The settlement agreement was approved by
the Kentucky Commission on December 3, 2001.
The Kentucky Commission's December 3, 2001 order allowed LG&E to set up
a regulatory asset of $141 million for the workforce reduction costs
and begin amortizing these costs over a five year period starting in
April 2001. The first quarter charge of $144 million represented all
employees who had accepted the voluntary enhanced severance program.
Between the time of the original filing and the December 3, 2001 order,
some employees rescinded their participation in the voluntary enhanced
severance program, thereby decreasing the original charge from $144
million to $141 million. The settlement will also reduce revenues by
approximately $26 million through a surcredit on bills to customers
over the same five year period. The surcredit represents stipulated
net savings LG&E anticipates realizing from implementation of best
practices through the value delivery process. The agreement also
established LG&E's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $5.6 million in 2001.
The Kentucky Commission's December 3, 2001 order allowed KU to set
up a regulatory asset of $54 million for the workforce reduction costs
and begin amortizing these costs over a five year period starting in
April 2001. The first quarter charge of $64 million represented all
employees who had accepted the voluntary enhanced severance program.
Some employees rescinded their participation in the voluntary enhanced
severance program and, along with the non-recurring charge of $6.9
million for FERC and Virginia jurisdictions, decreased the original
charge from $64 million to $54 million. The settlement will also reduce
revenues by approximately $11 million through a surcredit on bills to
customers over the same five year period. The surcredit represents
stipulated net savings KU anticipates realizing from implementation of
best practices through the value delivery process. The agreement also
established KU's new depreciation rates in effect retroactive to
January 1, 2001. The new depreciation rates decreased depreciation
expense by $6.0 million in 2001.
5. Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities, establishes
accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that LG&E
and KU must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 could increase the
volatility in earnings and other comprehensive income. LG&E and KU adopted
SFAS No. 133 on January 1, 2001. The effect of adopting this statement in
2001 resulted in a $3.6 million (net of tax of $2.4 million) decrease in
other comprehensive income from a cumulative effect of change in accounting
principle for LG&E and a $1.6 million (net of tax of $1.1 million) increase
in other comprehensive income from a cumulative effect of change in
accounting principle for KU.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk
and earnings volatility and is not speculative in nature. Management
has designated all of the Companies' interest rate swaps as hedge
instruments. Financial instruments designated as cash flow hedges have
resulting gains and losses recorded within other comprehensive income
and stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge
becomes ineffective, the resulting gains or losses are reclassified
from other comprehensive income to net income. Financial instruments
designated as fair value hedges are periodically marked to market with
the resulting gains and losses recorded directly into net income to
correspond with income or expense recognized from changes in market
value of the items being hedged.
-14-
As of September 30, 2002, LG&E had fixed rate swaps covering
$117,335,000 in notional amounts of variable rate debt and with fixed
rates ranging from 4.184% to 5.495%. The average variable rate on the
debt during the quarter and nine months ended September 30, 2002 was
1.38% and 1.44%. The swaps have been designated as cash flow hedges and
expire on various dates from February 2003 through November 2020. The
hedges were deemed to be fully effective resulting in a pretax loss for
the quarter and nine months ended September 30, 2002 of $7.7 million
and $10.1 million, respectively, recorded in Other Comprehensive
Income. Upon expiration of these hedges, the amount recorded in Other
Comprehensive Income will be reclassified into earnings. The amount
expected to be reclassified from Other Comprehensive Income to earnings
in the next twelve months is immaterial due to the long-term nature of
the swaps.
As of September 30, 2002, KU had variable rate swaps covering
$153,000,000 in notional amounts of fixed rate debt. The average
variable rate on these swaps during the quarter and nine months ended
September 30, 2002 was 2.37% and 2.40%. The underlying debt has fixed
rates ranging from 5.75% to 7.92%. The swaps have been designated as
fair value hedges and expire on various dates from May 2007 through
June 2025. During the quarter and nine months ended September 30,
2002, the effect of marking these financial instruments and the
underlying debt to market resulted in pretax gains of $1.6 million and
$1.2 million, respectively, recorded as a reduction in interest
expense.
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementation of
SFAS No. 133. DIG Issue C15, Normal Purchases and Normal Sales
Exception for Option Type Contracts and Forward Contracts in
Electricity was adopted in 2001 and had no impact on results of
operations and financial position of the Companies. DIG Issue C16,
Applying the Normal Purchase and Normal Sales Exception to Contracts
that Combine a Forward Contract and a Purchased Option Contract, was
cleared in the third quarter 2001 and stated that option contracts do
not meet the normal purchases and normal sales exception and should
follow SFAS No. 133. DIG Issue C16 was effective in the second quarter
of 2002. The adoption of DIG Issue C16 did not have a material impact
on the financial position or results of operations of the Companies
pursuant to regulatory treatment prescribed by SFAS No. 71, Accounting
for the Effects of Certain Types of Regulation. LG&E recorded a mark
to market liability and a corresponding regulatory asset of $0.2
million at September 30, 2002. KU recorded a mark to market asset and
corresponding regulatory liability of $1.3 million at September 30,
2002. The notional amounts of these options as of September 30, 2002,
is $5.0 million for LG&E and $9.8 million for KU.
6. SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, revises the standards for
accounting for securitizations and other transfers of financial assets
and collateral and requires certain disclosures, and provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Companies
adopted SFAS No. 140 in the first quarter of 2001, when LG&E and KU
entered into accounts receivable securitization programs.
On February 6, 2001, LG&E and KU implemented an accounts receivable
securitization program. The purpose of this program is to enable the
utilities to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital. The securitization program allows
for a percentage of eligible receivables to be sold. Eligible
receivables are generally all receivables associated with retail sales
that have standard terms and are not past due. LG&E and KU are able to
terminate these programs at any time without penalty. If there is a
significant deterioration in the payment record of the receivables by
retail customers or if the Companies fail to meet certain covenants of
the program, the program may terminate at the election of the financial
institutions. In this case, payments from retail customers would first
be used to repay the financial institutions participating in the
program, and would then be available for use by the Companies.
-15-
As part of the program, LG&E and KU sold retail accounts receivables to
wholly owned subsidiaries, LG&E Receivables LLC ("LG&E R") and KU
Receivables LLC ("KU R"). Simultaneously, LG&E R and KU R entered into
two separate three-year accounts receivable securitization facilities
with two financial institutions and their affiliates whereby LG&E R and
KU R can sell, on a revolving basis, an undivided interest in certain
of their receivables and receive up to $75 million and $50 million,
respectively, from an unrelated third party purchaser. The effective
cost of the receivables programs is comparable to the Companies' lowest
cost source of capital, and is based on prime rated commercial paper.
LG&E and KU retain servicing rights of the sold receivables through
separate servicing agreements with the third party purchasers. LG&E
and KU have obtained opinions from independent legal counsel indicating
these transactions qualify as true sales of receivables. As of
September 30, 2002 and December 31, 2001, LG&E's outstanding program
balances were $74.2 million and $42.0 million, respectively, and KU's
balances were $50.0 million and $45.1 million, respectively.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $1.5 million for LG&E and $0.5 million for
KU for both September 30, 2002 and December 31, 2001. Charge offs were
immaterial for LG&E and KU. Management believes that the risk of
uncollectibility associated with the sold receivables is minimal.
7. External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and nine
months ended September 30, 2002, follow (in thousands of $):
Three Months Ended September 30, 2002
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common Stock
LG&E electric $218,201 $ 4,816 $ 37,501
LG&E gas 22,800 - (4,372)
Total $241,001 $ 4,816 $ 33,129
KU electric $232,738 $ 6,283 $ 30,521
Nine Months Ended September 30, 2002
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common Stock
LG&E electric $553,357 $ 27,719 $ 64,572
LG&E gas 170,856 - 2,642
Total $724,213 $ 27,719 $ 67,214
KU electric $628,585 $ 29,159 $ 66,502
-16-
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and nine
months ended September 30, 2001, follow (in thousands of $):
Three Months Ended September 30, 2001
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common Stock
LG&E electric $ 199,740 $ 6,488 $ 41,139
LG&E gas 25,657 - (1,979)
Total $ 225,397 $ 6,488 $ 39,160
KU electric $ 208,263 $ 8,107 $ 25,776
Nine Months Ended September 30, 2001
Net
Income/
(Loss)
Inter- Avail.
External segment For
Revenues Revenues Common Stock
LG&E electric $ 535,574 $ 22,317 $ 24,564
LG&E gas 216,106 - (13,570)
Total $ 751,680 $ 22,317 $ 10,994
KU electric $ 623,873 $ 23,649 $ 38,733
-17-
8. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of September 30, 2002 and December 31,
2001 (in thousands of $):
Louisville Gas and Electric
(Unaudited)
Sept. 30, Dec. 31,
2002 2001
REGULATORY ASSETS:
VDT costs $105,029 $127,529
Unamortized loss on bonds 17,695 17,902
Gas supply adjustments due from customers 15,167 30,135
Gas performance based ratemaking 4,957 7,708
LG&E/KU merger costs 2,722 5,444
One utility costs 1,626 3,643
Demand-side management 1,885 2,719
Manufactured gas sites 1,834 2,062
Total 150,915 197,142
REGULATORY LIABILITIES:
Deferred income taxes - net 47,105 48,703
Gas supply adjustments due to customers 6,392 15,702
Other 1,409 944
Total $ 54,906 $ 65,349
Kentucky Utilities
(Unaudited)
Sept. 30, Dec. 31,
2002 2001
REGULATORY ASSETS:
VDT costs $40,186 $48,811
Unamortized loss on bonds 6,693 6,142
LG&E/KU merger costs 3,070 6,139
One utility costs 1,746 4,365
Other 1,126 1,010
Total 52,821 66,467
REGULATORY LIABILITIES:
Deferred income taxes - net 29,896 32,872
Mark to market coal supply option contracts 1,314 -
Other 1,032 1,017
Total $32,242 $33,889
9. SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets,
were issued during 2001. SFAS No. 143 establishes accounting and
reporting standards for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 144, among other
provisions, eliminates the requirement of SFAS No. 121 to allocate
goodwill to long-lived assets to be tested for impairment. The
effective implementation date for SFAS No. 144 was January 1, 2002 and
SFAS No. 143 is January 1, 2003. SFAS No. 144 had no impact on the
financial position or results of operations of LG&E or KU. Management
is currently conducting an analysis and review of SFAS No. 143 and the
recently released FERC Notice of Proposed Rulemaking No. RM02-7,
Accounting, Financial Reporting, and Rate Filing Requirements for Asset
Retirement Obligations (NOPR RM02-7). Although a final determination
has not been made, management believes there will be no material impact
on the financial position or results of operations pursuant to
regulatory treatment prescribed under SFAS No. 71, Accounting for the
Effects of Certain Types of Regulation.
-18-
SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS
No. 13, and Technical Corrections was issued in the second quarter
2002. The rescinded pronouncements were as follows: SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt; SFAS No. 44,
Accounting for Intangible Assets of Motor Carriers; SFAS No. 64,
Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements; and,
SFAS No. 13, Accounting for Leases. The provisions related to SFAS No.
13 were effective for fiscal years beginning after May 15, 2002. All
other provisions of SFAS No. 145 shall be effective for financial
statements issued on or after May 15, 2002. The adoption of this
standard will not have a material impact on financial position or
results of operations of the Companies.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. The provisions of this Statement are effective for exit
or disposal activities that are initiated after December 31, 2002. The
Companies do not expect the adoption of this standard to have an impact
on financial position or results of operations of the Companies.
The Company adopted EITF No. 98-10, Accounting for Energy Trading and
Risk Management Activities, effective January 1, 1999. This
pronouncement required that energy trading contracts be marked to
market on the balance sheet, with the gains and losses shown net in the
income statement. In October 2002, the Emerging Issues Task Force
reached a consensus to rescind EITF 98-10. The effective date for the
full rescission will be for fiscal periods beginning after December 15,
2002. With the rescission of EITF No. 98-10, energy trading contracts
that do not also meet the definition of a derivative under SFAS No. 133
must be accounted for as executory contracts. Contracts previously
recorded at fair value under EITF No. 98-10 that are not also
derivatives under SFAS No. 133 must be restated to historical cost
through a cumulative effect adjustment. The Companies do not expect
the rescission of this standard to have a material impact on financial
position or results of operations of the Companies.
SFAS No. 147, Acquisitions of Certain Financial Institutions was issued
in November 2002. This standard provides guidance on the accounting
for the acquisition of a financial institution. SFAS No. 147 had no
impact on the financial position or results of operations of LG&E or
KU.
10.On October 23, 2002, LG&E refinanced its pollution control series R
bond with a variable rate bond of the same $41.665 million principal
amount. The interest rate on the new bond will be reset every 35 days via
an auction process. The new bonds are secured by first mortgage bonds and
by bond insurance. The new bonds will mature on October 1, 2032.
On October 3, 2002, KU refinanced its pollution control series 8 bond
with a variable rate bond of the same $96 million principal amount.
The interest rate will be reset every 35 days via an auction process.
The bonds are secured by first mortgage bonds and by bond insurance.
The new bonds will mature on October 1, 2032.
On May 23, 2002 KU refinanced its pollution control series 1B, 2B, 3B,
and 4B bonds, totaling $37.9 million. The new bonds, series 12, 13, 14
and 15 are due in February 2032 and bear interest at a variable rate.
The new bonds are secured by first mortgage bonds and have the same
principal amount as the prior bonds. The variable rate will be
established by the remarketing agent based on conditions in the tax-
exempt debt market.
On March 22, 2002, LG&E refinanced two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate
bonds are secured by first mortgage bonds and will mature November 1,
2027. The variable rate will be established by the remarketing agent
taking into account market conditions in the commercial paper market.
-19-
On March 6, 2002, LG&E refinanced $22.5 million and $27.5 million in
unsecured pollution control bonds, both due September 1, 2026. The
replacement bonds, due September 1, 2026, are variable rate bonds and
are secured by first mortgage bonds. The variable rate will be
established by the remarketing agent taking into account market
conditions in the commercial paper market.
11.As of June 30, 2002, LG&E Energy owned $104.6 million in varying
portions of LG&E's outstanding variable rate pollution control bonds.
The bonds were acquired during May 2002 by LG&E Energy as an investment
and were sold in their entirety during the first half of July 2002 to
unaffiliated third parties.
12.In the normal course of business, lawsuits, claims, environmental
actions, and various non-ratemaking governmental proceedings arise
against LG&E and KU. To the extent that damages are assessed in any of
these lawsuits, LG&E and KU believe that their insurance coverage is
adequate. Management, after consultation with legal counsel, and based
upon the present status of these items, does not anticipate that
liabilities arising out of other currently pending or threatened
lawsuits and claims of the type referenced above will have a material
adverse effect on LG&E's or KU's consolidated financial position or
results of operations, respectively.
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The following discussion and analysis by management focuses on those
factors that had a material effect on LG&E's and KU's financial results of
operations and financial condition during the three and nine month periods
ended September 30, 2002 and should be read in connection with the
financial statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy and fuel industry or markets; changes in federal or state
legislation; unusual weather; actions by state or federal regulatory
agencies; and other factors described from time to time in LG&E's and KU's
reports to the Securities and Exchange Commission, including Exhibit No.
99.01 to their Annual Report on Form 10-K for year ended December 31, 2001.
Results of Operations
The results of operations for LG&E and KU 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, 2002, Compared to
Three Months Ended September 30, 2001
LG&E Results:
LG&E's net income decreased $6.1 million for the quarter ended September
30, 2002, as compared to the quarter ended September 30, 2001. Higher
electric retail sales were offset by amortization expenses associated with
LG&E's workforce reduction program (See Note 4) and increased repairs to
steam production and gas distribution systems.
A comparison of LG&E's revenues for the quarter ended September 30, 2002,
with the quarter ended September 30, 2001, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $ 9,235 $(4,542)
Environmental cost recovery surcharge 4,233 -
Demand side management cost recovery 723 39
LG&E/KU merger surcredit (1,093) -
Value delivery surcredit (411) (26)
Variation in sales volume, etc. 10,905 (167)
Total retail sales 23,592 (2,696)
Wholesale sales (7,970) -
Gas transportation - net - 19
Other 1,167 (180)
Total $16,789 $(2,857)
-21-
Electric revenues increased primarily because of an increase in retail
sales partially offset by a decrease in wholesale sales. The decrease in
wholesale sales is attributable to lower sales volumes ($12.2 million),
partially offset by an increase in wholesale sales prices ($4.2 million).
The retail sales increase was due in part to warmer weather experienced
this period. Cooling degree days increased 26% for the three months ended
September 2002 as compared to three months ended September 2001.
Fuel for electric generation and gas supply expenses comprise a large
portion of LG&E's total operating expenses. LG&E's electric and gas rates
contain a Fuel Adjustment Clause and a Gas Supply Clause, respectively,
whereby increases or decreases in the cost of fuel and gas supply may be
reflected in retail rates, subject to the approval of the Kentucky
Commission. Fuel for electric generation increased $8.5 million (19%) for
the quarter because of an increase in the cost of coal burned ($10.9
million), offset by a decrease in quantity of coal burned ($2.4 million).
Gas supply expenses decreased $2.4 million (18%) due to a decrease in net
gas supply cost ($2.8 million), partially offset by an increase in the
volume of retail gas delivered to the distribution system ($.4 million).
Other operation expenses increased $11.8 million (30%) in 2002, as compared
to 2001, primarily due to amortization expenses associated with LG&E's
workforce reduction program ($7.5 million), increased costs for pension
expenses ($1.3 million) and increased electric transmission expenses ($2.0
million). Transmission expenses increased during 2002, primarily as a
result of the Company joining the Midwest Independent System Operators
(MISO) to meet regulatory requirements for regional transmission.
Maintenance expenses increased $5.2 million (38%) in 2002 primarily due to
increased outages at the steam production plants ($3.1 million) and gas
main repairs ($2.1 million).
A reconciliation of differences between the U.S. statutory federal income
tax rate and effective income tax rate for the three months ended September
follows:
Effective rate Sept. 2002 Sept. 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.5% 5.4%
Amortization of investment tax credit & R&D (1.8)% (1.6)%
Other differences (0.1)% (0.3)%
Effective income tax rate 38.6% 38.5%
Interest charges decreased $1.6 million (17%) due to lower interest rates
on variable rate long-term debt ($1.4 million) and a decrease in interest
associated with the accounts receivable securitization program ($.2
million). (See Note 10.) The weighted average interest rate on variable-
rate tax-exempt debt for the three months ended September 30, 2002 was
1.42%, compared to 3.02% for the comparable period in 2001.
KU Results:
KU's net income increased $4.7 million for the quarter ended September 30,
2002, as compared to the quarter ended September 30, 2001. The increase was
primarily due to increased retail electric revenues and increased equity
earnings from a minority interest partially offset by increased operation
expense.
A comparison of KU's revenues for the quarter ended September 30, 2002,
with the quarter ended September 30, 2001, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $ 8,864
Environmental cost recovery surcharge 1,238
Demand side management cost recovery 274
LG&E/KU merger surcredit (480)
Value delivery surcredit (189)
Variation in sales volume, etc. 16,291
Total retail sales 25,998
Wholesale sales (4,863)
Other 1,515
Total $22,650
-22-
Electric revenues increased primarily due to an increase in retail sales.
Cooling degree days increased 36% for the quarter ended September 30, 2002
compared to the same period in 2001.
Fuel for electric generation comprises a large portion of KU's total
operating expenses. KU's electric rates contain a Fuel Adjustment Clause,
whereby increases or decreases in the cost of fuel are reflected in retail
rates, subject to the approval of the Kentucky Public Service Commission,
the Virginia State Corporation Commission, and the Federal Energy
Regulatory Commission. Fuel for electric generation increased $14.7 million
(22%) for the quarter due to an increase in the cost of coal burned ($13.4
million) and an increase in volume burned ($1.3 million).
Other operation expenses increased $7.2 million (23%) compared to 2001,
primarily due to amortization expenses associated with KU's workforce
reduction program ($2.8 million), increased operation of the electric
transmission system primarily resulting from increased MISO costs ($2.6
million), increased property insurance ($0.8 million), and claims ($0.7
million).
Maintenance expenses decreased $1.7 million (12%) primarily due to
decreased maintenance of steam production plant ($1.3 million).
A reconciliation of differences between the U.S. statutory federal income
tax rate and effective income tax rate for the three months ended September
follows:
Effective rate Sept. 2002 Sept. 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 4.9% 5.6%
Amortization of investment tax credit & R&D (1.6)% (2.1)%
Other differences (4.3)% (1.2)%
Effective income tax rate 34.0% 37.3%
The change in other differences is due to higher dividends received
deduction related to the increased earnings from KU's equity earnings from
a minority interest.
Other income-net increased $4.2 million as a result of increased earnings
from KU's equity earnings from a minority interest. The increased earnings
are due to the gain on the sale of emissions allowances.
Interest charges increased $.2 million (4%) for the third quarter 2002
compared to the third quarter 2001 due to higher intercompany balances,
partially offset by lower rates on variable rate debt. (See Note 10.) The
weighted average interest rate on variable-rate tax-exempt debt for the
three months ended September 30, 2002 was 1.57%, compared to 2.62% for the
comparable period in 2001.
-23-
Nine Months Ended September 30, 2002, Compared to
Nine Months Ended September 30, 2001
LG&E Results:
LG&E's net income increased $55.8 million for the nine months ended
September 30, 2002, as compared to the nine months ended September 30,
2001, primarily because of a non-recurring charge of $86.1 million, net of
tax, for LG&E's workforce reduction program incurred in 2001. Excluding
this one-time charge, LG&E's net income would have decreased $30.3 million
primarily due to amortization expenses associated with LG&E's workforce
reduction program (See Note 4) and higher transmission and pension
expenses, partially offset by lower interest expense.
A comparison of LG&E's revenues for the nine months ended September 30,
2002, with the nine months ended September 30, 2001, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Electric Gas
Cause Revenues Revenues
Retail sales:
Fuel and gas supply adjustments $12,939 $(60,700)
Environmental cost recovery surcharge 7,918 -
Demand side management cost recovery 926 721
LG&E/KU merger surcredit (2,127) -
Value delivery surcredit (922) (196)
Variation in sales volume, etc. 20,681 5,173
Total retail sales 39,415 (55,002)
Wholesale sales (18,794) 9,978
Gas transportation - net - 94
Other 2,564 (320)
Total $23,185 $(45,250)
Electric revenues increased primarily because of an increase in sales to
retail customers, partially offset by decreased wholesale sales. The
increase in retail sales was due in part to warmer weather experienced in
the period. Cooling degree days increased 20% for the nine months ended
September 2002 as compared to the nine months ended September 2001.
Wholesale sales decreased due to lower market prices ($21.9 million)
partially offset by increased volume sold ($3.1 million). Gas revenues
decreased primarily as a result of lower gas supply costs billed to
customers through the gas supply clause.
Fuel for electric generation increased $22.9 million (18%) for the nine
months because of an increase in the cost of coal burned ($23.8 million)
partially offset by a decrease in quantity of coal burned ($.9 million).
Gas supply expenses decreased $44.7 million (28%) due to a decrease in net
gas supply cost ($47.4 million), and a decrease in the volume of retail gas
delivered to the distribution system ($5.2 million), partially offset by
increased wholesale gas expenses ($7.9 million).
The decrease in non-recurring charges of $144.4 million ($86.1 million
after tax) is due to the costs associated with LG&E's workforce reduction
initiative which were recorded in the first quarter of 2001 (See Note 4).
Other operation expenses increased $43.4 million (39%) in 2002, compared to
2001, primarily due to amortization expenses associated with LG&E's
workforce reduction program ($22.5 million), increased costs for electric
transmission primarily resulting from increased MISO costs ($7.8 million),
pension expenses ($5.8 million), and property insurance ($1.7 million).
-24-
Maintenance expenses increased $8.5 million (22%) in 2002 primarily due to
increased repairs to steam production ($4.7 million) and maintenance to the
gas distribution system ($2.7 million).
Other income-net decreased $1.6 million in 2002 primarily due to an
increase in non-utility expenses ($0.8 million) and an increase in the tax
provision related to other income ($0.8 million).
A reconciliation of differences between the U.S. statutory federal income
tax rate and effective income tax rate for the nine months ended September
30 follows:
Effective rate Sept. 2002 Sept. 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.3% 5.0%
Amortization of investment tax credit & R&D (2.8)% (17.9)%
Other differences (0.1)% (4.1)%
Effective income tax rate 37.4% 18.0%
The amortization of investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the
nine months ended September 30, 2001 (resulting from the workforce
reduction charge) caused the percentage changes to be greater.
Interest charges decreased $7.6 million (25%) due to lower interest rates
on variable rate long term debt ($5.1 million), a decrease in interest on
debt to parent company ($1.0 million), and a decrease in interest
associated with the accounts receivable securitization program ($1.8
million). (See Note 10.) The weighted average interest rate on variable-
rate tax-exempt debt for the nine months ended September 30, 2002 was
1.58%, compared to 3.82% for the comparable period in 2001.
KU Results:
KU's net income increased $27.8 million for the nine months ended September
30, 2002, as compared to the nine months ended September 30, 2001. The
increase was primarily due a non-recurring charge of $38.0 million, net of
tax, made in the first quarter of 2001 for costs associated with KU's
workforce reduction program. Excluding this one-time charge, net income
decreased $10.2 million, due largely to increased operation expenses,
partially offset by increased equity earnings from a minority interest and
lower interest expense.
A comparison of KU's revenues for the nine months ended September 30, 2002,
with the nine months ended September 30, 2001, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $18,223
Environmental cost recovery surcharge 3,781
Demand side management cost recovery 1,570
LG&E/KU merger surcredit (2,641)
Value delivery surcredit (527)
Variation in sales volume, etc. 21,073
Total retail sales 41,479
Wholesale sales (35,913)
Other 4,656
Total $10,222
Electric revenues increased primarily due to an increase in sales to retail
customers, partially offset by decreased wholesale sales. The decrease in
wholesale sales is primarily due to lower prices ($14.7 million) and a
decrease in volume sold ($21.2 million). The increase in retail sales is
due to an increase in cooling degree days of 25%.
-25-
Fuel for electric generation increased $18.9 million (11%) for the nine
months due to an increase in the cost of coal burned ($26.2 million)
partially offset by a decrease of volume burned ($7.3 million)
Non-recurring charges decreased $63.8 million ($38.0 million after tax).
These costs were due to KU's workforce reduction program which were
recorded in the first quarter of 2001 (See Note 4).
Other operation expenses increased $24.0 million (28%) compared to 2001,
primarily due to amortization expenses associated with KU's workforce
reduction program ($10.7 million), higher pension expenses ($2.0 million),
property insurance ($2.0 million) and outside services ($2.4 million), and
higher costs for electric transmission primarily resulting from increased
MISO costs ($6.0 million).
Other income-net increased $3.1 million (54%) in 2002 primarily due to
increased earnings from KU's equity earnings from a minority interest ($4.6
million), partially offset by a gain on disposition of property in 2001 of
$1.3 million. The increased equity earnings in 2002 are due to the gain on
the sale of emissions allowances.
A reconciliation of differences between the U.S. statutory federal income
tax rate and effective income tax rate for the nine months ended September
follows:
Effective rate Sept. 2002 Sept. 2001
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.7% 6.2%
Amortization of investment tax credit & R&D (2.6)% (4.4)%
Other differences (3.6)% (4.2)%
Effective income tax rate 34.5% 32.6%
Interest charges decreased $3.9 million (16%) for the first nine months of
2002 as compared to the nine months of 2001 primarily due to lower rates on
variable rate debt ($2.9 million) (see Note 10) and a decrease in interest
associated with the accounts receivable securitization program ($1.0
million). The weighted average interest rate on variable-rate tax-exempt
debt for the nine months ended September 30, 2002 was 1.66%, compared to
3.37% for the comparable period in 2001.
Liquidity and Capital Resources
LG&E's and KU's need for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers. Internal and external lines of credit, the
accounts receivable securitization programs, and commercial paper programs
are maintained to fund short-term capital requirements.
Construction expenditures for the nine months ended September 30, 2002 for
LG&E and KU amounted to $141.8 million and $164.8 million, respectively.
Such expenditures related primarily to construction to meet nitrogen oxide
(NOx) emission standards and the acquisition of new combustion turbines to
meet peak power demands. The expenditures were financed with internally
generated funds, intercompany loans from affiliates, and accounts
receivable securitization program funds. Also, common stock dividends of
$46 million were paid by LG&E. See Note 6 of Notes to Financial Statements
concerning accounts receivable securitization.
LG&E's and KU's cash and temporary cash investment balance increased $13.0
million and $3.5 million, respectively during the nine months ended
September 30, 2002. The increases reflect cash flows from operations and
short-term borrowings, partially offset by construction expenditures and
LG&E's common dividend payments.
Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. Such variations are primarily attributable to fluctuations in
weather, which have a direct effect on sales of electricity and natural
gas. The decrease in accounts receivable at LG&E resulted primarily from
the increased sale of accounts receivable through the accounts receivable
securitization program. The increase in accounts receivable for KU
resulted primarily from seasonal fluctuations, increased intercompany
receivables partially offset by the increased sale of accounts receivable
through the accounts receivable securitization program. (See Note 6 of
Notes to Financial Statements). The increase in fuel inventory at LG&E
resulted from reduced fuel consumption due to outages and increased
pricing. The decrease in the fuel inventory at KU resulted from seasonal
fluctuations partially offset by increased pricing.
-26-
LG&E and KU participate in a money pool whereby LG&E Energy can make funds
available to LG&E and KU at market-based rates up to $400 million for LG&E
and $250 million for KU. LG&E Energy maintains a facility of $200 million
with a Powergen subsidiary to ensure funding availability for the money
pool. There was no balance outstanding under the Powergen line of credit
as of September 30, 2002 and no outstanding commercial paper program
balance. LG&E Energy has provided loans to LG&E and KU through the money
pool that total $129.2 million and $87.7 million, respectively, as of
September 30, 2002. These borrowings carried an interest rate based on an
index of highly rated commercial paper issuers as of the prior month end of
1.71% at September 30, 2002.
On March 6, 2002, LG&E refinanced $22.5 million and $27.5 million unsecured
pollution control bonds, both due September 1, 2026. The replacement
bonds, due September 1, 2026, are variable rate bonds and are secured by
first mortgage bonds.
On March 22, 2002, LG&E refinanced two $35 million unsecured pollution
control bonds due November 1, 2027. The replacement variable rate bonds
are secured by first mortgage bonds and will mature November 1, 2027.
On May 23, 2002 KU refinanced pollution control series 1B, 2B, 3B, and 4B
bonds, totaling $37.9 million. The new bonds, series 12, 13, 14 and 15 are
due in February 2032 and bear interest at a variable rate. The new bonds
are secured by first mortgage bonds and have the same principal amount as
the prior bonds.
On October 3, 2002, KU refinanced its pollution control series 8 bond with
a variable rate bond of the same $96 million principal amount. The bonds
are secured by first mortgage bonds and by bond insurance. The new bonds
will mature on October 1, 2032.
On October 23, 2002, LG&E refinanced it pollution control series R bond
with a variable rate bond of the same $41.667 million principal amount.
The new bonds are secured by first mortgage bonds and by bond insurance.
The new bonds will mature on October 1, 2032.
As of June 30, 2002, LG&E Energy owned $104.6 million in varying portions
of LG&E's outstanding variable rate pollution control bonds. The bonds
were acquired during May 2002 by LG&E Energy as an investment and were sold
in their entirety during the first half of July 2002 to unaffiliated third
parties.
LG&E's security ratings as of October 8, 2002, were:
Moody's S&P Fitch
First mortgage bonds A1 A A+
Preferred stock Baa1 BBB A-
Commercial paper P-1 A-2 F-1
KU's security ratings as of October 8, 2002, were:
Moody's S&P Fitch
First mortgage bonds A1 A A+
Preferred stock Baa1 BBB A-
Commercial paper P-1 A-2 F-1
-27-
During the third quarter S&P raised the ratings of LG&E and KU by one notch
and assigned a stable outlook to all of the ratings. Moody's and Fitch
confirmed the ratings of LG&E and KU during the quarter and assigned a
stable outlook to the ratings.
These ratings reflect the views of Moody's, S&P and Fitch. A security
rating is not a recommendation to buy, sell or hold securities and is
subject to revision or withdrawal at any time by the rating agency.
LG&E's capitalization ratios at September 30, 2002, and December 31, 2001,
follow:
Sept. 30, Dec. 31,
2002 2001
Long-term debt (including current portion) 36.4% 37.5%
Notes payable 7.6 5.7
Preferred stock 5.6 5.8
Common equity 50.4 51.0
Total 100.0% 100.0%
KU's capitalization ratios at September 30, 2002, and December 31, 2001,
follow:
Sept. 30, Dec. 31,
2002 2001
Long-term debt (including current portion) 35.1% 37.2%
Notes payable 6.1 3.6
Preferred stock 2.8 3.1
Common equity 56.0 56.1
Total 100.0% 100.0%
New Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, were issued
during 2001. SFAS No. 143 establishes accounting and reporting standards
for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of and the accounting and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
SFAS No. 144, among other provisions, eliminates the requirement of SFAS
No. 121 to allocate goodwill to long-lived assets to be tested for
impairment. The effective implementation date for SFAS No. 144 was January
1, 2002 and SFAS No. 143 is January 1, 2003. SFAS No. 144 had no impact on
the financial position or results of operations of LG&E or KU. Management
is currently conducting an analysis and review of SFAS No. 143 and the
recently released FERC Notice of Proposed Rulemaking No. RM02-7,
Accounting, Financial Reporting, and Rate Filing Requirements for Asset
Retirement Obligations (NOPR RM02-7). Although a final determination has
not been made, management believes there will be no material impact on the
financial position or results of operations pursuant to regulatory
treatment prescribed under SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation.
-28-
The Financial Accounting Standards Board created the Derivatives
Implementation Group ("DIG") to provide guidance for implementation of SFAS
No. 133. DIG Issue C15, Normal Purchases and Normal Sales Exception for
Option Type Contracts and Forward Contracts in Electricity was adopted in
2001 and had no impact on results of operations and financial position of
the Companies. DIG Issue C16, Applying the Normal Purchase and Normal
Sales Exception to Contracts that Combine a Forward Contract and a
Purchased Option Contract, was cleared in the third quarter 2001 and stated
that option contracts do not meet the normal purchases and normal sales
exception and should follow SFAS No. 133. DIG Issue C16 was effective in
the second quarter of 2002. The adoption of DIG Issue C16 did not have a
material impact on the financial position or results of operations of the
Companies pursuant to regulatory treatment prescribed by SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation. LG&E recorded a
mark to market liability and a corresponding regulatory asset of $0.2
million at September 30, 2002. KU recorded a mark to market asset and
corresponding regulatory liability of $1.3 million at September 30, 2002.
The notional amounts of these options, as of September 30, 2002, is $5.0
million for LG&E and $9.8 million for KU.
SFAS No. 145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS No.
13, and Technical Corrections was issued in the second quarter 2002. The
rescinded pronouncements were as follows: SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt; SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers; SFAS No. 64, Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements; and, SFAS No. 13, Accounting for Leases.
The provisions related to SFAS No. 13 were effective for fiscal years
beginning after May 15, 2002. All other provisions of SFAS No. 145 shall
be effective for financial statements issued on or after May 15, 2002. The
adoption of this standard will not have a material impact on financial
position or results of operations of the Companies.
SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities, was issued in July 2002. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002. The Companies do
not expect the adoption of this standard to have an impact on financial
position or results of operations of the Companies.
The Company adopted EITF No. 98-10, Accounting for Energy Trading and Risk
Management Activities, effective January 1, 1999. This pronouncement
required that energy trading contracts be marked to market on the balance
sheet, with the gains and losses shown net in the income statement. In
October 2002, the Emerging Issues Task Force reached a consensus to rescind
EITF 98-10. The effective date for the full rescission will be for fiscal
periods beginning after December 15, 2002. With the rescission of EITF No.
98-10, energy trading contracts that do not also meet the definition of a
derivative under SFAS No. 133 must be accounted for as executory contracts.
Contracts previously recorded at fair value under EITF No. 98-10 that are
not also derivatives under SFAS No. 133 must be restated to historical cost
through a cumulative effect adjustment. The Companies do not expect the
rescission of this standard to have a material impact on financial position
or results of operations of the Companies.
SFAS No. 147, Acquisitions of Certain Financial Institutions was issued in
November 2002. This standard provides guidance on the accounting for the
acquisition of a financial institution. SFAS No. 147 had no impact on the
financial position or results of operations of LG&E or KU.
Contingencies
For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings, and Notes 12 (LG&E)
and 11 (KU) to the financial statements contained in LG&E's and KU's Annual
Reports on Form 10-K for the year ended December 31, 2001 and to Part II -
Item 1, Legal Proceedings herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
LG&E and KU are exposed to market risks. Both operations are exposed to
market risks from changes in interest rates and commodity prices. To
mitigate changes in cash flows attributable to these exposures, the
Companies have entered into various derivative instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
-29-
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to Company
policy, use of these financial instruments is intended to mitigate risk and
earnings volatility and is not speculative in nature. Management has
designated all of the Companies' interest rate swaps as hedge instruments.
Financial instruments designated as cash flow hedges have resulting gains
and losses recorded within other comprehensive income and stockholders'
equity. To the extent a financial instrument or the underlying item being
hedged is prematurely terminated or the hedge becomes ineffective, the
resulting gains or losses are reclassified from other comprehensive income
to net income. Financial instruments designated as fair value hedges are
periodically marked to market with the resulting gains and losses recorded
directly into net income to correspond with income or expense recognized
from changes in market value of the items being hedged.
The potential change in interest expense resulting from changes in base
interest rates of the Companies' unswapped debt did not change materially
during the first nine months of 2002. However, during October 2002, KU
refinanced a $96 million bond at a floating rate and LG&E refinanced a
$41.665 million bond at a floating rate. The interest rates on the new
bonds will be reset every 35 days via an auction process. Prior to the
refinancing, the LG&E bond had been at a 6.55% fixed rate and the KU bond
had been at a 7.45% fixed rate. 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 first
nine months of 2002.
The Companies have entered into fuel purchase contracts that contain
options which allow the Companies to purchase additional tons of coal, as
needed, or purchase less coal than contractually required, as needed. The
potential changes resulting from variations in coal commodity prices of the
Companies' coal supply contracts containing option features were not
material during the first nine months of 2002. The Companies' exposure to
market risks from changes in commodity prices were immaterial during the
first nine months of 2002.
Pension Risk
LG&E's and KU's costs of providing defined-benefit pension retirement plans
are dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plan. The market
value of LG&E and KU plan assets has been affected by declines in the
equity market since the beginning of this fiscal year. As a result, at
December 31, 2002, LG&E and KU could be required to recognize an additional
minimum liability as prescribed by SFAS No. 87 Employers' Accounting for
Pensions. The liability would be recorded as a reduction to other
comprehensive income, and would not affect net income for 2002. The amount
of the liability, if any, will depend upon the asset returns experienced in
2002 and contributions made by LG&E and KU to the plan during 2002. Also,
pension cost and cash contributions to the plans could increase in future
years without a substantial recovery in the equity markets. If the fair
value of the plan assets exceeds the accumulated benefit obligation, the
recorded liability will be reduced and other comprehensive income will be
restored in the consolidated balance sheet.
The combination of poor market performance and historically low corporate
bond rates has created a divergence in the potential value of the pension
liability and the actual value of the pension assets. These conditions
could result in an increase in LG&E's and KU's funded accumulated benefit
obligation and future pension expense. The primary assumptions that drive
the value of the unfunded accumulated benefit obligation are the discount
rate and expected return on plan assets.
The value of the pension assets as of December 31, 2001, was $234 million
and $217 million, for LG&E and KU, respectively. The value of the
accumulated benefit obligation as of December 31, 2001, was $352 million
and $224 million, for LG&E and KU, respectively. As of September 30, 2002,
the asset values were approximately $191 million and $176 million for LG&E
and KU, respectively. This decline is a result of the conditions mentioned
above. A one-percentage point increase or decrease in the assumed discount
rate could have approximately a negative or positive $36 million and $26
million impact to the accumulated benefit obligation of LG&E and KU,
respectively. LG&E and KU are currently unable to determine the impact of
these changes until an updated actuarial valuation of the pension liability
is performed, and asset value is determined, as of December 31, 2002. If
LG&E and KU elect not to make a contribution to plan assets equal to the
unfunded accumulated benefit obligation, there could be an adjustment to
other comprehensive income.
-30-
Energy Trading & Risk Management Activities
LG&E and KU conduct energy trading and risk management activities to
maximize the value of power sales from physical assets it owns, in addition
to the wholesale sale of excess asset capacity. Certain energy trading
activities are currently accounted for on a mark-to-market basis in
accordance with EITF 98-10 Accounting for Contracts Involved in Energy
Trading and Risk Management Activities, SFAS No. 133 Accounting for
Derivative Instruments and Hedging Activities, and SFAS No. 138 Accounting
for Certain Derivative Instruments and Certain Hedging Activities.
Wholesale sales of excess asset capacity and wholesale purchases are
treated as normal sales and purchases under SFAS No. 133 and SFAS No. 138
and are not marked to market.
The table below summarizes both LG&E and KU's energy trading and risk
management activities during quarter and nine months ended September 30,
2002 (in thousands of $), as trading volumes are evenly divided between the
two regulated utilities.
Quarter Nine
ended Months ended
Sept. 30, 2002 Sept. 30, 2002
Fair value of contracts at beginning of period,
net asset/(liability) $ 26 $(186)
Fair value of contracts when entered into
during the period (5) (62)
Contracts realized or otherwise settled
during the period 6 341
Changes in fair value due to changes
in assumptions (193) (259)
Fair value of contracts at end of period,
net asset/(liability) $(166) $(166)
No changes to valuation techniques for energy trading and risk management
activities occurred during 2002. All contracts outstanding at September
30, 2002 have a maturity of less than one year and are valued using prices
actively quoted for proposed or executed transactions or quoted by brokers.
The Companies do not expect the rescission of EITF 98-10 will have a
material impact on valuation techniques for energy trading and risk
management activities.
LG&E and KU maintain policies intended to minimize credit risk and revalues
credit exposures daily to monitor compliance with those policies. As of
September 30, 2002, 88% of the trading and risk management commitments were
with counterparties rated BBB- equivalent or better.
Item 4. Controls and Procedures.
LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. During the 90 day period preceding the filing of this report, LG&E
and KU conducted an evaluation of such controls and procedures under the
supervision and the participation of the companies' management, including
the Chairman, President and Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO"). Based upon that evaluation, the CEO and CFO are
of the conclusion that the companies' disclosure controls and procedures
are effective.
With respect to LG&E's and KU's internal controls, there have been no
significant changes in internal controls or in other factors that could
significantly affect these controls subsequent to the date of their most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
-31-
Part II. Other Information
Item 1. Legal Proceedings.
For a description of the significant legal proceedings involving LG&E and
KU, reference is made to the information under the following items and
captions of LG&E's and KU's (A) respective combined Annual Report on Form
10-K for the year ended December 31, 2001: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; Notes 3, 12 and 16 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3, 11 and 14 of KU's Notes to
Financial Statements under Item 8 and (B) respective combined Quarterly
Reports on Form 10-Q for the quarters ended March 31, 2002 and June 30,
2002: Item I of Part II, Legal Proceedings. Except as described herein,
to date, the proceedings reported in LG&E's and KU's respective combined
Annual Report on Form 10-K have not changed materially.
LG&E Employment Discrimination Case
As previously disclosed, complaints were filed against LG&E and certain
related and unrelated parties whereby approximately 30 employees or former
employees claimed past and current instances of employment discrimination.
LG&E has removed the case to the U.S. District Court for the Western
District of Kentucky and filed an answer denying all plaintiffs' claims.
In October 2002, following discussions among plaintiffs' representatives
and LG&E as defendant, further amended complaints were filed in this case
involving claims by certain current or former employees of instances of
employment discrimination. The amended complaints establish the population
of named plaintiffs, delete the prior request for class certification,
delete the prior naming of LG&E's president as a defendant and reduce the
named damage amount to $100 million. Discovery has commenced in the
matter, as well as required mediation or administrative review, including
before the U.S. Equal Employment Opportunity Commission which has, to date,
declined to proceed on any claims reviewed. LG&E intends to defend itself
vigorously in the action and management does not anticipate that the
outcome will have a material impact on LG&E's operations or financial
condition.
Combustion Turbine Litigation
In September 2002, LG&E and KU, or their affiliates, filed a further
amended complaint in litigation in the U.S. District Court for the Eastern
District of Kentucky against Alstom Power, Inc. (formerly ABB Power
Generation, Inc.) ("Alstom") regarding two combustion turbines supplied by
Alstom during 1999, installed at KU's E.W. Brown generating plant and now
jointly owned by LG&E and KU. The original purchase price for the turbines
was approximately $91.8 million. The suit presents warranty, negligence,
misrepresentation and fraud and other claims relating to numerous
operational defects or deficiencies of the turbines and various damages
incurred by LG&E and KU in connection therewith. LG&E and KU have
requested rescission of the contract and recovery of all expenditures
relating to the turbines. In the alternative to rescission, LG&E and KU
have requested relief for amounts incurred or expended to date in
connection with operational repairs, cover damages or liquidated damages
and other costs, with possible further damages and interest to be proven at
trial. The matter is currently in discovery with a trial presently
scheduled for the third quarter of 2003.
-32-
Item 6(a). Exhibits.
None.
Item 6(b). Reports on Form 8-K.
On August 14, 2002 LG&E and KU filed a Current Report on Form 8-K,
submitting certifications of the Chairman, President and Chief Executive
Officer and the Chief Financial Officer of each company, respectively,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 regarding the
companies' Quarterly Reports on Form 10-Q for the period ended June 30,
2002.
-33-
SIGNATURES
Pursuant to the requirements of the Securities 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 14, 2002 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
Pursuant to the requirements of the Securities 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 14, 2002 /s/ S. Bradford Rives
S. Bradford Rives
Senior Vice President - Finance and
Controller
(On behalf of the registrant in his
capacity as Principal Accounting Officer)
-34-
CERTIFICATIONS
Louisville Gas and Electric Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas
and Electric Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
-35-
Louisville Gas and Electric Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Louisville Gas
and Electric Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Richard Aitken-Davies
Richard Aitken-Davies
Chief Financial Officer
-36-
Kentucky Utilities Company
I, Victor A. Staffieri, Chairman of the Board, President and Chief
Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky Utilities
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a)designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6.The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
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Kentucky Utilities Company
I, Richard Aitken-Davies, Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kentucky
Utilities Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Richard Aitken-Davies
Richard Aitken-Davies
Chief Financial Officer
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