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 March 31,2003
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, KY 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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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 April 30, 2003,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of April 30, 2003,
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 related
to the other registrants.
[page]
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 Flow 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 Flow 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 18
Item 3 Quantitative and Qualitative Disclosures About 23
Market Risk
Item 4 Controls and Procedures 25
PART II
Item 1 Legal Proceedings 26
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28
[page]
Part I. Financial Information - Item 1. Financial Statements
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
OPERATING REVENUES (Note 5):
Electric $195,293 $166,246
Gas 139,824 117,119
Total operating revenue 335,117 283,365
OPERATING EXPENSES:
Fuel for electric generation 49,477 44,107
Power purchased 32,401 23,581
Gas supply expenses 106,107 83,467
Other operation expenses 53,528 48,410
Maintenance 11,893 12,001
Depreciation and amortization 27,145 25,278
Federal and state income taxes 16,641 13,237
Property and other taxes 4,735 4,536
Total operating expenses 301,927 254,617
NET OPERATING INCOME 33,190 28,748
Other income - net 1,064 1
Interest charges (Note 3) 6,990 7,806
NET INCOME 27,264 20,943
Preferred stock dividends 936 1,065
NET INCOME AVAILABLE FOR COMMON STOCK $ 26,328 $ 19,878
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -1-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
March 31, December 31,
2003 2002
UTILITY PLANT:
At original cost $3,688,926 $3,622,985
Less: reserve for depreciation 1,485,616 1,463,674
Net utility plant 2,203,310 2,159,311
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of March 31, 2003
and December 31, 2002 602 764
CURRENT ASSETS:
Cash 5,778 17,015
Accounts receivable - less reserve of $2,125
as of March 31, 2003 and
December 31, 2002 (Note 4) 71,391 68,440
Materials and supplies - at average cost:
Fuel (predominantly coal) 33,468 36,600
Gas stored underground 19,404 50,266
Other 25,994 25,651
Prepayments and other 5,765 5,298
Total current assets 161,800 203,270
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,466 6,532
Regulatory assets (Note 6) 163,578 153,446
Other 33,214 37,755
Total deferred debits and other assets 203,258 197,733
Total assets $2,568,970 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -2-
Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
2003 2002
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 435,647 409,319
Accumulated other comprehensive loss (40,532) (40,512)
Other (836) (836)
Total common equity 859,449 833,141
Cumulative preferred stock 95,140 95,140
Long-term debt 328,104 328,104
Total capitalization 1,282,693 1,256,385
CURRENT LIABILITIES:
Current portion of long-term debt 288,800 288,800
Notes payable to parent 248,512 193,053
Accounts payable 109,872 122,771
Accrued taxes 18,490 1,450
Other 19,255 19,536
Total current liabilities 684,929 625,610
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes 323,338 313,225
Investment tax credit, in process of
amortization 53,484 54,536
Accumulated provision for pensions
and related benefits 136,872 224,703
Customer advances for construction 9,780 10,260
Asset retirement obligation (Note 7) 9,484 -
Regulatory liabilities (Note 6) 44,425 52,424
Other 23,965 23,935
Total deferred credits and other liabilities 601,348 679,083
Total capital and liabilities $2,568,970 $2,561,078
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -3-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,264 $ 20,943
Items not requiring cash currently:
Depreciation and amortization 27,145 25,278
Deferred income taxes - net 5,510 290
Investment tax credit - net (1,052) (1,054)
Other 13,302 10,893
Changes in current assets and liabilities 22,413 (32,199)
Changes in accounts receivable securitization-net
(Note 4) 11,800 (22,000)
Pension funding (83,100) -
Other (17,828) 9,775
Net cash flows from operating activities 5,454 11,926
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities - (180)
Proceeds from sales of securities 162 -
Construction expenditures (71,255) (24,947)
Net cash flows from investing activities (71,093) (25,127)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of pollution control bonds - 119,926
Retirement of pollution control bonds - (120,000)
Short-term borrowings from parent 229,200 58,300
Repayment of short-term borrowings from parent (173,741) (29,944)
Payment of dividends (1,057) (1,111)
Net cash flows from financing activities 54,402 27,171
CHANGE IN CASH (11,237) 13,970
CASH AT BEGINNING OF PERIOD 17,015 2,112
CASH AT END OF PERIOD $ 5,778 $ 16,082
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on borrowed money $ 6,700 $ 8,356
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -4-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
Balance at beginning of period $409,319 $393,636
Net income 27,264 20,943
Subtotal 436,583 414,579
Cash dividends declared on stock:
5% cumulative preferred 269 269
Auction rate cumulative preferred 300 429
$5.875 cumulative preferred 367 367
Subtotal 936 1,065
Balance at end of period $435,647 $413,514
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -5-
Louisville Gas and Electric Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
Net income $27,264 $20,943
Gains (Losses) on derivative instruments
and hedging activities (Note 3) (33) 1,509
Income tax (expense) benefit related to items of
other comprehensive income (loss) 13 (603)
Other comprehensive gain (loss), net of tax (20) 906
Other comprehensive income $27,244 $21,849
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -6-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
OPERATING REVENUES (Note 5) $234,147 $215,168
OPERATING EXPENSES:
Fuel for electric generation 66,323 58,271
Power purchased 50,363 41,060
Other operation expenses 38,889 34,522
Maintenance 28,966 11,559
Depreciation and amortization 24,150 23,059
Federal and state income taxes 6,601 14,383
Property and other taxes 4,195 4,114
Total operating expenses 219,487 186,968
NET OPERATING INCOME 14,660 28,200
Other income - net 2,109 1,639
Interest charges (Note 3) 4,908 5,482
NET INCOME 11,861 24,357
Preferred stock dividends 564 564
NET INCOME AVAILABLE FOR COMMON STOCK $ 11,297 $ 23,793
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -7-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)
ASSETS
March 31, December 31,
2003 2002
UTILITY PLANT:
At original cost $3,380,258 $3,280,762
Less: reserve for depreciation 1,556,389 1,536,658
Net utility plant 1,823,869 1,744,104
OTHER PROPERTY AND INVESTMENTS -
less reserve of $130 as of March 31, 2003 and
December 31, 2002 14,842 14,358
CURRENT ASSETS:
Cash 7,177 5,391
Accounts receivable - less reserve of $800 as of
March 31, 2003 and December 31, 2002 (Note 4) 60,700 49,588
Materials and supplies - at average cost:
Fuel (predominantly coal) 43,229 46,090
Other 26,641 26,408
Prepayments and other 8,019 6,584
Total current assets 145,766 134,061
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,944 4,991
Regulatory assets (Note 6) 66,704 65,404
Other 35,240 35,465
Total deferred debits and other assets 106,888 105,860
Total assets $2,091,365 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -8-
Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)
CAPITALIZATION AND LIABILITIES
March 31, December 31,
2003 2002
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 513,321 502,024
Accumulated other comprehensive loss (10,462) (10,462)
Other (595) (595)
Total common equity 825,404 814,107
Cumulative preferred stock 40,000 40,000
Long-term debt 347,874 346,562
Total capitalization 1,213,278 1,200,669
CURRENT LIABILITIES:
Current portion of long-term debt 153,930 153,930
Notes payable to parent 174,531 119,490
Accounts payable 84,347 95,374
Accrued taxes 17,889 4,955
Other 23,083 21,442
Total current liabilities 453,780 395,191
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 249,751 241,184
Investment tax credit, in process of amortization 7,840 8,500
Accumulated provision for pensions and
related benefits 106,101 110,927
Asset retirement obligation (Note 7) 18,782 -
Regulatory liabilities (Note 6) 22,224 29,876
Other 19,609 12,036
Total deferred credits and other liabilities 424,307 402,523
Total capital and liabilities $2,091,365 $1,998,383
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -9-
Kentucky Utilities Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,861 $ 24,357
Items not requiring cash currently:
Depreciation and amortization 24,150 23,059
Deferred income taxes - net 913 (2,406)
Investment tax credit - net (660) (739)
Other 18,156 1,233
Changes in current assets and liabilities (6,371) (19,020)
Changes in accounts receivable securitization
- net (Note 4) - (25,100)
Other 3,062 8,388
Net cash flows provided by operating activities 51,111 9,772
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (103,802) (23,611)
Net cash flows from investing activities (103,802) (23,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings from parent 444,011 174,869
Repayment of short-term borrowings from parent (388,970) (158,469)
Payment of dividends (564) (564)
Net cash flows from financing activities 54,477 15,836
CHANGE IN CASH 1,786 1,997
CASH AT BEGINNING OF PERIOD 5,391 3,295
CASH AT END OF PERIOD $ 7,177 $ 5,292
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest on borrowed money $ 1,764 $ 6,101
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -10-
Kentucky Utilities Company and Subsidiary
Consolidated Statement of Retained Earnings
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
Balance at beginning of period $502,024 $410,896
Net income 11,861 24,357
Subtotal 513,885 435,253
Cash dividends declared on stock:
4.75% preferred 237 237
6.53% preferred 327 327
Subtotal 564 564
Balance at end of period $513,321 $434,689
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -11-
Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)
Three Months
Ended
March 31,
2003 2002
Net income $11,861 $24,357
Income tax benefit related to items of other
comprehensive income (loss) - -
Other comprehensive income $11,861 $24,357
The accompanying notes are an integral part of these consolidated financial
statements.
[page] -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, 2002 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, now
known as Powergen Limited, ("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, LG&E Energy became a wholly-
owned indirect subsidiary of Powergen and 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, Virginia and Tennessee 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.
As a result of the Powergen acquisition and in order to comply with
PUHCA, LG&E Energy Services Inc. ("LG&E Services") was formed as a
subsidiary of LG&E Energy 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.
On July 1, 2002, a German company, E.ON AG ("E.ON"), completed its
acquisition of Powergen. E.ON had announced its pre-conditional cash
offer of 5.1 billion pounds sterling ($7.3 billion) for Powergen on
April 9, 2001. Following the acquisition, LG&E and KU became indirect
subsidiaries of E.ON and E.ON became a registered holding company under
PUHCA. As contemplated in their regulatory filings in connection with
the E.ON acquisition, E.ON, Powergen and LG&E Energy have completed an
administrative reorganization to move the LG&E Energy group from an
indirect Powergen subsidiary to an indirect E.ON subsidiary. This
reorganization was effective March 2003.
No costs associated with the Powergen acquisition or the E.ON
acquisition nor any of the effects of purchase accounting have been
reflected in the financial statements of LG&E or KU.
3. The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, 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
[page] -13-
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.
As of March 31, 2003, LG&E had fixed rate swaps covering $100.3 million
in notional amounts of variable rate debt and with fixed rates ranging
from 4.309% to 5.495%. The average variable rate on the debt during
the quarter ended March 31, 2003 was 1.20%. The swaps have been
designated as cash flow hedges and expire on various dates from
February 2005 through November 2020. The hedges were deemed to be fully
effective resulting in a pretax loss for the quarter ended March 31,
2003 of $33,000 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 March 31, 2003, KU had variable rate swaps covering $153
million in notional amounts of fixed rate debt. The average variable
rate on these swaps during the quarter ended March 31, 2003 was 1.95%.
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 ended March
31, 2003, the effect of marking these financial instruments and the
underlying debt to market resulted in pretax gains of $190,000 recorded
as a reduction in interest expense.
4. LG&E and KU participate in accounts receivable securitization programs.
The purpose of these programs 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 programs allow 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 programs, the programs
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 programs, and would then be
available for use by the Companies.
As part of these programs, 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 March
31, 2003 and December 31, 2002, LG&E's outstanding program balances
were $75.0 million and $63.2 million, respectively, and KU's balance
for both periods was $49.3 million.
[page] -14-
The allowance for doubtful accounts associated with the eligible
securitized receivables was $2.1 million and $1.8 million for LG&E at
March 31, 2003 and December 31, 2002 and $0.5 million for KU for both
March 31, 2003 and December 31, 2002. Charge offs were immaterial for
LG&E and KU. Management believes that the risk of uncollectibility
associated with the sold receivables is minimal.
5. External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three months ended
March 31, 2003, follow (in thousands of $):
Three Months Ended March 31, 2003
Net Income
External Intersegment Available For
Revenues Revenues Common Stock
LG&E electric $171,175 $24,118 $17,266
LG&E gas 139,824 - 9,062
Total $310,999 $24,118 $26,328
KU electric $217,901 $16,246 $11,297
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three months ended
March 31, 2002, follow (in thousands of $):
Three Months Ended March 31, 2002
Net Income
External Intersegment Available For
Revenues Revenues Common Stock
LG&E electric $153,193 $13,053 $10,178
LG&E gas 117,119 - 9,700
Total $270,312 $13,053 $19,878
KU electric $200,387 $14,781 $23,793
6. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of March 31, 2003 and December 31,
2002 (in thousands of $):
Louisville Gas and Electric
(Unaudited)
March 31, December 31,
2003 2002
REGULATORY ASSETS:
VDT costs $ 90,493 $ 98,044
Unamortized loss on bonds 18,555 18,843
Gas supply adjustments due from customers 30,022 13,714
Earnings Sharing Mechanism provision 13,647 12,500
Asset retirement obligation 5,405 -
LG&E/KU merger costs 907 1,815
One utility costs 282 954
Manufactured gas sites 1,681 1,757
Other 2,586 5,819
Total $163,578 $153,446
REGULATORY LIABILITIES:
Deferred income taxes - net $ 40,933 $ 45,536
Gas supply adjustments due to customers 270 3,154
Other 3,222 3,734
Total $ 44,425 $ 52,424
[page] -15-
Kentucky Utilities
(Unaudited)
March 31, December 31,
2003 2002
REGULATORY ASSETS:
VDT costs $35,363 $38,375
Unamortized loss on bonds 9,234 9,456
Earnings Sharing Mechanism provision 10,490 13,500
Asset retirement obligation 9,365 -
LG&E/KU merger costs 1,023 2,046
One utility costs - 873
Other 1,229 1,154
Total 66,704 65,404
REGULATORY LIABILITIES:
Deferred income taxes - net 21,200 28,854
Other 1,024 1,022
Total $22,224 $29,876
7. SFAS No. 143, Accounting for Asset Retirement Obligations, was issued
in 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.
The effective implementation date for SFAS No. 143 was January 1, 2003.
Management has calculated the impact of SFAS No. 143 and the recently
released FERC final rule, Accounting, Financial Reporting, and Rate
Filing Requirements for Asset Retirement Obligations. As of March 31,
2003, LG&E recorded asset retirement obligation (ARO) assets in the
amount of $5.3 million and liabilities of $9.5 million. LG&E recorded
offsetting regulatory assets of $5.4 million, pursuant to regulatory
treatment prescribed under SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. As of March 31, 2003, KU recorded ARO
assets in the amount of $9.9 million and liabilities of $18.8 million.
KU recorded offsetting regulatory assets of $9.4 million, pursuant to
regulatory treatment prescribed under SFAS No. 71. LG&E and KU AROs
are primarily related to final retirement of generating units. Assets
with associated AROs will no longer include a cost of removal component
within their depreciation rate. Assets without associated AROs will
continue to be depreciated including a cost of removal component within
the depreciation rate.
Had SFAS No. 143 been in effect for the 2002 reporting period, the
Companies would have established asset retirement obligations as
described in the following table (in thousands of $):
LG&E KU
Provision at January 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at December 31, 2002 $9,330 $18,477
The Companies 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
(EITF) reached a consensus to rescind EITF 98-10. The effective date
for the full rescission was 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
[page] -16-
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, Accounting for Derivative
Instruments and Hedging Activities, must be restated to historical cost
through a cumulative effect adjustment. The rescission of this
standard had no impact on financial position or results of operations
of the Companies.
8. On April 30, LG&E and KU each borrowed $100 million from an E.ON
affiliate and used the proceeds to repay notes payable to the parent.
The term of each loan is ten years and the interest rate is 4.55%.
LG&E has a first mortgage bond of $42.6 million maturing in August and
KU has a first mortgage bond of $62 million maturing in June. The
Companies expect to refinance these bonds at maturity, along with a
portion of the notes payable to parent, with additional long-term
intercompany loans.
9. 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.
LG&E Employment Discrimination Case
As previously reported, in October 2001, approximately 30 employees or
former employees filed a complaint against LG&E claiming past and
current instances of employment discrimination against LG&E. LG&E has
removed the case to the U.S. District Court for the Western District of
Kentucky and filed an answer denying all plaintiff's claims. Discovery
has commenced in the matter. The court has ordered mediation and
certain plaintiffs have settled for non-material amounts as a result of
that process. In addition, certain plaintiffs have sought
administrative review before the U.S. Equal Employment Opportunity
Commission which has, to date, declined to proceed to litigation on any
claims reviewed. Previously amended pleadings, while reducing the size
of the plaintiff and defendant groups and eliminating certain prior
demands, contain a claimed damage amount of $100 million as well as
requests for injunctive relief. During mediation in the first quarter
2003, additional settlements were reached with a number of plaintiffs,
including a proposed settlement with the lead plaintiff, which will
reduce the number of remaining plaintiffs to approximately one dozen.
LG&E intends to continue 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, and 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. These units are installed at KU's E.W.
Brown generating plant and 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, fraud and other
claims relating to numerous operational defects or deficiencies of the
turbines. LG&E and KU have requested rescission of the contract and
recovery of all expenditures relating to the turbines. As an
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 re-scheduled for the
fourth quarter of 2003.
[page] -18-
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
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 month period ended
March 31, 2003, and should be read in connection with the financial
statements and notes thereto.
Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in LG&E's and KU's reports to the Securities
and Exchange Commission, including the report on Form 10-K for year ended
December 31, 2002.
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 March 31, 2003, Compared to
Three Months Ended March 31, 2002
LG&E Results:
LG&E's net income increased $6.3 million (30%) for the quarter ended March
31, 2003, as compared to the quarter ended March 31, 2002, primarily
because of an increase in sales to electric retail and wholesale consumers
due to the colder winter experienced in 2003 and an increase in price of
wholesale sales.
A comparison of LG&E's revenues for the quarter ended March 31, 2003, with
the quarter ended March 31, 2002, 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 $ 6,017 $ 16,102
Environmental cost recovery surcharge 849 -
Demand side management cost recovery 391 448
LG&E/KU merger surcredit (676) -
Value delivery surcredit (788) (643)
Weather normalization - (3,097)
Variation in sales volume and other 8,014 15,675
Total retail sales 13,807 28,485
Wholesale sales 14,983 (5,714)
Gas transportation - net - 16
Other 257 (82)
Total $ 29,047 $ 22,705
[page] -18-
Electric revenues increased primarily because of an increase in wholesale
sales prices ($16.9 million) and increased retail volumes sold due to a
24% increase in heating degree days and higher fuel costs billed to
customers. These increases were partially offset by a decrease in wholesale
sales volumes ($1.9 million). Gas revenues increased primarily as a result
of higher gas supply costs billed to customers through the gas supply
clause and increased volumes sold due to the colder weather, partially
offset by a decrease in volume of wholesale sales.
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. LG&E's electric and gas
rates contain a fuel adjustment clause and a gas supply clause,
respectively, whereby increases or decreases in the cost of fuel and gas
supply are reflected in retail rates, subject to the approval of the
Kentucky Public Service Commission (Kentucky Commission). Fuel for
electric generation increased $5.4 million (12%) for the quarter because of
an increase in generation ($2.2 million) and an increase in the cost of
coal burned ($3.2 million). Gas supply expenses increased $22.6 million
(27%) due to an increase in net gas supply cost ($12.1 million) and an
increase in the volume of retail gas delivered to the distribution system
($14.8 million), partially offset by decreased wholesale gas expenses ($4.3
million).
Power purchased increased $8.8 million (37%) because of an increase in
price of power purchased ($10.8 million) partially offset by a decrease in
volume of purchases ($2 million).
Other operations expenses increased $5.1 million (11%) in 2003, as compared
to 2002, primarily due to higher electric transmission costs resulting from
increased MISO costs ($1.9 million), increased costs of customer assistance
programs ($1.2 million), and increased pension and post-retirement medical
benefits ($1.5 million).
Depreciation and amortization increased $1.9 million (8%) because of
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Quarter Ended Quarter Ended
March 31, 2003 March 31, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.6 5.4
Amortization of investment tax credit & R&D (2.4) (3.2)
Other differences (0.4) -
Effective income tax rate 37.8% 37.2%
Other income - net increased $1.1 million in 2003 primarily due to
decreased merchandising costs ($.5 million), decreased benefit costs ($.5
million), and a gain on energy trading contracts marked to market ($.6
million), partially offset by an increase in taxes ($.7 million).
Interest charges decreased $.8 million (10%) due primarily to lower
interest rates on variable rate debt. The average variable interest rate
for the three months ended March 31, 2003 and 2002 was 1.20% and 2.08%,
respectively.
KU Results:
KU's net income decreased $12.5 million (51%) for the quarter ended March
31, 2003, as compared to the quarter ended March 31, 2002. The decrease was
mainly due to expenses associated with a severe ice storm experienced in
February 2003.
A comparison of KU's revenues for the quarter ended March 31, 2003, with
the quarter ended March 31, 2002, reflects increases and (decreases) which
have been segregated by the following principal causes (in thousands of $):
[page] -19-
Retail sales:
Fuel supply adjustments $ 7,385
Environmental cost recovery surcharge 1,915
Demand side management cost recovery 336
LG&E/KU merger surcredit (442)
Value delivery surcredit (457)
Variation in sales volume and other 6,287
Total retail sales 15,024
Wholesale sales 568
Other 3,387
Total $ 18,979
Electric revenues increased primarily because of higher fuel and
environmental costs billed to customers and an increase in retail volumes
sold due to a 19% increase in heating degree days.
Fuel for electric generation comprise a large component 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 Commission, the Virginia
State Corporation Commission, and the Federal Energy Regulatory Commission.
Fuel for electric generation increased $8.1 million (14%) for the quarter
because of an increase in the cost of coal burned ($7.3 million) and an
increase in generation ($.8 million).
Power purchased increased $9.3 million (23%) due to an increase in price of
power purchased ($6.2 million) and an increase in volume purchased ($3.1
million).
Other operation expenses increased $4.4 million (13%) as compared to 2002,
primarily due to costs associated with an ice storm ($1.9 million),
increased pension and post-retirement medical expenses ($1.2 million),
increased property insurance ($.4 million), and higher electric
transmission costs resulting from increased MISO costs ($.3 million).
Maintenance expenses for 2003 increased $17.4 million (150%) primarily due
to repairs to electric distribution equipment due to an ice storm ($15.9
million), and timing of annual maintenance of steam production equipment
($2.3 million).
Depreciation and amortization increased $1.1 million (5%) because of
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in
pretax income.
Quarter Ended Quarter Ended
March 31, 2003 March 31, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.9 6.1%
Amortization of investment tax credit & R&D (3.7) (3.3)
Other differences (4.1) (2.3)
Effective income tax rate 34.1% 35.5%
Other income - net increased $.5 million (29%) in 2003 primarily due to
decreased benefit costs ($.4 million), and gain on energy trading contracts
marked to market ($.6 million), partially offset by an increase in taxes
($.5 million).
Interest charges decreased $.6 million (11%) for the first quarter 2003 as
compared to the first quarter 2002 due primarily to lower interest rates on
variable rate debt. The average variable interest rate for the three
months ended March 31, 2003, was 1.16% and the corresponding debt for the
three months ended March 31, 2002, was 5.23%.
[page] -20-
Liquidity and Capital Resources
LG&E 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 three months ended March 31, 2003 for
LG&E and KU amounted to $71.3 million and $103.8 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. LG&E and KU combustion turbine expenditures for
the three months ended March 31, 2003, was $40.1 million and $68.2 million,
respectively. The expenditures were financed with internally generated
funds, intercompany loans from affiliates, and accounts receivable
securitization program funds. See Note 4 of Notes to Financial Statements
concerning accounts receivable securitization.
LG&E's cash balance decreased $11.2 million during the three months ended
March 31, 2003, primarily due to a pension contribution and the purchase of
an interest in four combustion turbines financed with intercompany loans.
KU's cash balance increased $1.8 million during the three months ended
March 31, 2003. The increase reflects cash flows from operations and
increased short-term borrowings, partially offset by construction
expenditures, including the purchase of four combustion turbines.
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 seasonal
fluctuations in weather, which have a direct effect on sales of electricity
and natural gas. The increase in accounts receivable at LG&E resulted
primarily from the increased electric and gas sales. The increase in
accounts receivable for KU resulted primarily from increased electric
sales. The decrease in LG&E's gas stored underground relates to seasonal
uses of gas. The decrease in the fuel inventory at LG&E and KU resulted
from seasonal fluctuations partially offset by increased pricing.
The Companies participate in a money pool whereby LG&E Energy can make
funds available up to $400 million at market-based rates for each of LG&E
and KU. LG&E Energy maintains facilities of $200 million with a Powergen
subsidiary and $400 million with an E.ON affiliate to ensure funding
availability for the money pool. There was no balance outstanding under the
Powergen line of credit and the balance under E.ON affiliates' line totaled
$185 million as of March 31, 2003. LG&E Energy has provided loans to LG&E
and KU through the money pool that total $248.5 million and $174.5 million,
respectively, as of March 31, 2003. These borrowings carried an interest
rate based on an index of highly rated commercial paper issuers as of the
prior month end of 1.25% at March 31, 2003.
On April 30, 2003, a $250 million line of credit with an E.ON affiliate
expired and was not renewed.
On April 30, LG&E and KU each borrowed $100 million from an E.ON affiliate
and used the proceeds to repay notes payable to the parent. The term of
each loan is ten years and the interest rate is 4.55%. LG&E has a first
mortgage bond of $42.6 million maturing in August and KU has a first
mortgage bond of $62 million maturing in June. The Companies expect to
refinance these bonds at maturity, along with a portion of the notes
payable to parent, with additional long-term intercompany loans.
Under the provisions of variable-rate pollution control bonds totaling
$246.2 million for LG&E and $91.9 million for KU, the bonds are subject to
tender for purchase at the option of the holder and to mandatory tender for
purchase upon the occurrence of certain events, causing the bonds to be
classified as current portion of long-term debt. Should any of the bonds
be put to LG&E or KU, funds from the money pool could be used to reacquire
the bonds.
[page] -21-
LG&E's security ratings as of March 31, 2003, 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 March 31, 2003, 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
During the third quarter 2002 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 March 31, 2003, and December 31, 2002,
follow:
March 31, Dec. 31,
2003 2002
Long-term debt (including current portion) 33.9% 35.5%
Notes payable 13.7 11.1
Preferred stock 5.2 5.5
Common equity 47.2 47.9
Total 100.0% 100.0%
KU's capitalization ratios at March 31, 2003, and December 31, 2002,
follow:
March 31, Dec. 31,
2003 2002
Long-term debt (including current portion) 32.6% 34.0%
Notes payable 11.3 8.1
Preferred stock 2.6 2.7
Common equity 53.5 55.2
Total 100.0% 100.0%
New Accounting Pronouncements
SFAS No. 143, Accounting for Asset Retirement Obligations, was issued in
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.
The effective implementation date for SFAS No. 143 was January 1, 2003.
Management has calculated the impact of SFAS No. 143 and the recently
released FERC final rule, Accounting, Financial Reporting, and Rate Filing
Requirements for Asset Retirement Obligations. As of March 31, 2003, LG&E
[page] -22-
recorded asset retirement obligation (ARO) assets in the amount of $5.3
million and liabilities of $9.5 million. LG&E recorded offsetting
regulatory assets of $5.4 million, pursuant to regulatory treatment
prescribed under SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation. As of March 31, 2003, KU recorded ARO assets in the amount
of $9.9 million and liabilities of $18.8 million. KU recorded offsetting
regulatory assets of $9.4 million, pursuant to regulatory treatment
prescribed under SFAS No. 71. LG&E and KU AROs are primarily related to
final retirement of generating units. Assets with associated AROs will no
longer include a cost of removal component within their depreciation rate.
Assets without associated AROs will continue to be depreciated including a
cost of removal component within the depreciation rate.
Had SFAS No. 143 been in effect for the 2002 reporting period, the
Companies would have established asset retirement obligations as described
in the following table ($000):
LG&E KU
Provision at January 1, 2002 $8,752 $17,331
Accretion expense 578 1,146
Provision at December 31, 2002 $9,330 $18,477
The Companies 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 EITF reached a consensus to rescind EITF 98-10. The
effective date for the full rescission was 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 rescission of this standard had no
impact on financial position or results of operations of the Companies.
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 Note 11 to the
financial statements contained in LG&E's and KU's Annual Reports on Form 10-
K for the year ended December 31, 2002 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.
The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, 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 associated with a 1% change in
base interest rates of LG&E's and KU's unswapped debt is estimated at $6.3
million and $5.8 million, respectively, at March 31, 2003. LG&E's and KU's
exposure to floating interest rates increased $84.3 million and $55.0
[page] -23-
million, respectively, during the first three months of 2003. The
potential changes in the fair values of the Companies' interest-rate swaps
resulting from changes in interest rates and the yield curve also did not
change materially during the first three months of 2003.
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 plans. The market
value of LG&E and KU plan assets has been affected by declines in the
equity market. As a result, at December 31, 2002, LG&E and KU were
required to recognize an additional minimum liability as prescribed by SFAS
No. 87 Employers' Accounting for Pensions. The liability was recorded as a
reduction to other comprehensive income, and did not affect net income for
2002. The amount of the liability depended 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 plans 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.
In January 2003, LG&E and KU made contributions to the pension plan of
$83.1 million and $3.5 million, respectively.
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 they own, in
addition to the wholesale sale of excess asset capacity. Certain energy
trading activities are accounted for on a mark-to-market basis in
accordance with 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 are treated as normal sales under SFAS No. 133 and SFAS No.
138 and are not marked to market.
The rescission of EITF 98-10 for fiscal periods ending after December 15,
2002, had no impact on LG&E's or KU's energy trading and risk management
reporting as all contracts marked to market under EITF 98-10 are also
within the scope of SFAS No. 133.
The table below summarizes each LG&E's and KU's energy trading and risk
management activities for the first quarter of 2003 and 2002(in thousands
of $). Trading volumes are evenly divided between LG&E and KU.
Three Months Three Months
Ended Ended
March 31, 2003 March 31, 2002
Fair value of contracts at beginning of period,
net asset/(liability) $ (156) $ (186)
Fair value of contracts when entered into
during the period 2,620 (26)
Contracts realized or otherwise settled
during the period (57) 231
Changes in fair value due to changes
in assumptions (2,004) (7)
Fair value of contracts at end of period,
net asset/(liability) $ 403 $ 12
[page] -24-
No changes to valuation techniques for energy trading and risk management
activities occurred during 2003 or 2002. Changes in market pricing,
interest rate and volatility assumptions were made during both quarters.
All contracts outstanding at March 31, 2003, have a maturity of less than
one year and are valued using prices actively quoted for proposed or
executed transactions or quoted by brokers.
LG&E and KU maintain policies intended to minimize credit risk and revalue
credit exposures daily to monitor compliance with those policies. As of
March 31, 2003, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
Deregulation
The electricity industry in Virginia is currently undergoing deregulation
which will enable customers to choose their own energy suppliers after
January 2004. On March 19, 2003, the Governor of Virginia signed House
Bill 2367, the "Electric Utility Restructuring Suspension," which suspends
Kentucky Utilities/Old Dominion Power from Virginia Electric Utility
Restructuring.
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 with 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.
[page] -25-
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 respective combined Annual Report on Form 10-K
for the year ended December 31, 2002: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; Notes 3 and 11 of LG&E's Notes to
Financial Statements under Item 8 and Notes 3 and 11 of KU's Notes to
Financial Statements under Item 8. 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 reported, in October 2001, approximately 30 employees or
former employees filed a complaint against LG&E claiming past and current
instances of employment discrimination against LG&E. LG&E has removed the
case to the U.S. District Court for the Western District of Kentucky and
filed an answer denying all plaintiff's claims. Discovery has commenced in
the matter. The court has ordered mediation and certain plaintiffs have
settled for non-material amounts as a result of that process. In addition,
certain plaintiffs have sought administrative review before the U.S. Equal
Employment Opportunity Commission which has, to date, declined to proceed
to litigation on any claims reviewed. Previously amended pleadings, while
reducing the size of the plaintiff and defendant groups and eliminating
certain prior demands, contain a claimed damage amount of $100 million as
well as requests for injunctive relief. During mediation in the first
quarter 2003, additional settlements were reached with a number of
plaintiffs, including a proposed settlement with the lead plaintiff, which
will reduce the number of remaining plaintiffs to approximately one dozen.
LG&E intends to continue 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, and 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. These units are installed at KU's E.W. Brown generating
plant and 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, fraud and other claims relating to numerous
operational defects or deficiencies of the turbines. LG&E and KU have
requested rescission of the contract and recovery of all expenditures
relating to the turbines. As an 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 re-scheduled for
the fourth quarter of 2003.
Item 6(a). Exhibits.
None.
Item 6(b). Reports on Form 8-K.
On March 25, 2003 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' Annual Reports on Form 10-K for the period ended December 31,
2002.
[page] -26-
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: May 14, 2003 /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: May 14, 2003 /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)
[page] -27-
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: May 14, 2003
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
Louisville Gas and Electric Company
[page] -28-
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: May 14, 2003
/s/ Richard Aitken-Davies
Richard Aitken-Davies
Chief Financial Officer
[page] -29-
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 am 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: May 14, 2003
/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
[page] -30-
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: May 14, 2003
/s/ Richard Aitken-Davies
Richard Aitken-Davies
Chief Financial Officer
[page] -31-