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UNITED STATES
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 June 30, 2003
Or
[_] TRANSITION REPORT PURSUANT 1TO 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 July 31, 2003,
all held by LG&E Energy Corp.
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 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.
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 20
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 30
Item 4 Controls and Procedures 32
PART II
Item 1 Legal Proceedings 33
Item 6 Exhibits and Reports on Form 8-K 33
Signatures 35
Exhibits 36
- - New 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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
OPERATING REVENUES (Note 5 and Note 8):
Electric $173,917 $185,225 $360,936 $346,111
Gas 41,456 30,938 181,280 148,056
Total operating revenues 215,373 216,163 542,216 494,167
OPERATING EXPENSES:
Fuel for electric generation 46,277 50,550 95,754 94,657
Power purchased (Note 8) 17,313 15,476 41,440 33,697
Gas supply expenses 25,963 18,346 132,070 101,813
Other operation expenses 53,379 54,807 106,907 103,216
Maintenance 17,690 15,572 29,583 27,573
Depreciation and amortization
(Note 8) 30,293 25,889 57,437 51,167
Federal and state income taxes 4,714 8,335 21,355
21,572
Property and other taxes 3,454 4,778 8,189 9,314
Total operating expenses 199,083 193,753 492,735 443,009
NET OPERATING INCOME 16,290 22,410 49,481 51,158
Other expense - net (1,394) (67) (330) (66)
Interest charges (Note 3) 7,141 7,087 14,131 14,893
NET INCOME $ 7,755 $ 15,256 $ 35,020 $ 36,199
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
June 30, December 31,
2003 2002
UTILITY PLANT:
At original cost $3,730,273 $3,622,985
Less: reserve for depreciation 1,507,498 1,463,674
Net utility plant (Note 7) 2,222,775 2,159,311
OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of June 30, 2003
and December 31, 2002 602 764
CURRENT ASSETS:
Cash 3,073 17,015
Accounts receivable - less reserve of $2,125 as of
June 30, 2003 and December 31, 2002 (Note 4) 71,045
68,440
Materials and supplies - at average cost:
Fuel (predominantly coal) 35,953 36,600
Gas stored underground 21,745 50,266
Other 23,493 25,651
Prepayments and other 6,235 5,298
Total current assets 161,544 203,270
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 6,385 6,532
Regulatory assets (Note 6) 154,520 153,446
Other 33,079 37,755
Total deferred debits and other assets 193,984 197,733
Total assets $2,578,905 $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
June 30, December 31,
2003 2002
CAPITALIZATION:
Common stock, without par value -
Outstanding 21,294,223 shares $ 425,170 $ 425,170
Common stock expense (836) (836)
Additional paid-in capital 40,000 40,000
Retained earnings 442,498 409,319
Accumulated other comprehensive loss (42,063) (40,512)
Total common equity 864,769 833,141
Cumulative preferred stock 95,140 95,140
Long-term debt 328,104 328,104
Long-term debt to associated company (Note 9) 100,000 -
Total capitalization 1,388,013 1,256,385
CURRENT LIABILITIES:
Current portion of long-term debt 288,800 288,800
Notes payable to parent (Note 9) 171,732 193,053
Accounts payable 96,699 122,771
Accrued taxes - 1,450
Other 20,077 19,536
Total current liabilities 577,308 625,610
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 329,833 313,225
Investment tax credit, in process of amortization 52,431 54,536
Accumulated provision for pensions
and related benefits 134,096 224,703
Customer advances for construction 9,835 10,260
Asset retirement obligation (Note 8) 9,639 -
Regulatory liabilities (Note 6) 44,719 52,424
Long-term derivative liability 19,700 17,115
Other 13,331 6,820
Total deferred credits and other liabilities 613,584 679,083
Total capital and liabilities $2,578,905 $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 $)
Six Months
Ended
June 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 35,020 $ 36,199
Items not requiring cash currently:
Depreciation and amortization 57,437 51,167
Deferred income taxes - net 12,876 9,507
Investment tax credit - net (2,105) (2,108)
Asset retirement obligations (Note 8) 4,108 -
Other 22,332 20,917
Changes in current assets and liabilities 14,956 (21,917)
Changes in accounts receivable
securitization-net (Note 4) (14,000) 16,100
Pension funding (83,100) -
Gas supply clause (18,386) 13,793
Other (501) (6,938)
Net cash flows from operating activities 28,637 116,720
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities - (101)
Proceeds from sales of securities 163 -
Construction expenditures (119,412) (69,524)
Net cash flows from investing activities (119,249) (69,625)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowing from
associated company (Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 349,400 278,100
Repayment of short-term borrowings from parent (370,737) (280,744)
Issuance of pollution control bonds - 119,067
Retirement of pollution control bonds - (120,000)
Payment of dividends (1,993) (25,176)
Net cash flows from financing activities 76,670 (28,753)
CHANGE IN CASH (13,942) 18,342
CASH AT BEGINNING OF PERIOD 17,015 2,112
CASH AT END OF PERIOD $ 3,073 $ 20,454
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $15,947 $ 16,681
Interest on borrowed money 10,705 13,019
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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Balance at beginning of period $435,647 $413,514 $409,319 $393,636
Net income 7,755 15,256 35,020 36,199
Subtotal 443,402 428,770 444,339 429,835
Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative preferred 268 413 569 842
$5.875 cumulative preferred 367 367 734 734
Common - 23,000 - 23,000
Subtotal 904 24,049 1,841 25,114
Balance at end of period $442,498 $404,721 $442,498 $404,721
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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Net income $ 7,755 $15,256 $35,020 $36,199
Losses on derivative instruments
and hedging activities (Note 3) (2,552) (3,939) (2,585) (2,430)
Income tax benefit related to items
of other comprehensive loss 1,021 1,576 1,034 973
Other comprehensive loss,
net of tax (1,531) (2,363) (1,551) (1,457)
Other comprehensive income $ 6,224 $12,893 $33,469 $34,742
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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
OPERATING REVENUES
(Note 5 and Note 8) $197,174 $196,020 $422,157 $405,044
OPERATING EXPENSES:
Fuel for electric generation 59,641 57,368 125,964 115,639
Power purchased (Note 8) 33,648 32,376 74,848 67,292
Other operation expenses 38,130 36,201 77,019 70,723
Maintenance 7,403 15,386 36,369 26,945
Depreciation and amortization
(Note 8) 27,762 23,515 51,912 46,574
Federal and state income taxes 7,467 7,365 14,067 21,748
Property and other taxes 3,968 3,762 8,163 7,876
Total operating expenses 178,019 175,973 388,342 356,797
NET OPERATING INCOME 19,155 20,047 33,815 48,247
Other income - net 2,694 1,685 4,803 3,324
Interest charges (Note 3) 7,690 8,980 12,598 14,462
NET INCOME $ 14,159 $ 12,752 $ 26,020 $ 37,109
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
June 30, December 31,
2003 2002
UTILITY PLANT:
At original cost $3,450,964 $3,280,762
Less: reserve for depreciation 1,581,895 1,536,658
Net utility plant (Note 7) 1,869,069 1,744,104
OTHER PROPERTY AND INVESTMENTS -
less reserve of $130 as of June 30, 2003 and
December 31, 2002 16,144 14,358
CURRENT ASSETS:
Cash 6,698 5,391
Accounts receivable - less reserve of $939 and $800
as of June 30, 2003 and December 31, 2002,
respectively (Note 4) 46,251 49,588
Materials and supplies - at average cost:
Fuel (predominantly coal) 41,438 46,090
Other 27,888 26,408
Prepayments and other 6,132 6,584
Total current assets 128,407 134,061
DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,868 4,991
Regulatory assets (Note 6) 61,398 65,404
Long-term derivative asset 17,108 16,928
Other 16,973 18,537
Total deferred debits and other assets 100,347 105,860
Total assets $2,113,967 $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
June 30, December 31,
2003 2002
CAPITALIZATION:
Common stock, without par value -
Outstanding 37,817,878 shares $ 308,140 $ 308,140
Common stock expense (322) (322)
Additional paid-in capital 15,000 15,000
Retained earnings 526,916 502,024
Accumulated other comprehensive loss (10,462) (10,462)
Total common equity 839,272 814,380
Cumulative preferred stock 39,727 39,727
Long-term debt 348,758 346,562
Long-term debt to associated company (Note 9) 100,000 -
Total capitalization 1,327,757 1,200,669
CURRENT LIABILITIES:
Current portion of long-term debt 91,930 153,930
Notes payable to parent (Note 9) 146,430 119,490
Accounts payable 85,963 95,374
Accrued taxes 8,696 4,955
Other 24,779 21,442
Total current liabilities 357,798 395,191
DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 250,948 241,184
Investment tax credit, in process of amortization 7,179 8,500
Accumulated provision for pensions and
related benefits 104,376 110,927
Asset retirement obligation (Note 8) 19,087 -
Regulatory liabilities (Note 6) 21,623 29,876
Other 25,199 12,036
Total deferred credits and other liabilities 428,412 402,523
Total capital and liabilities $2,113,967 $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 $)
Six Months
Ended
June 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,020 $ 37,109
Items not requiring cash currently:
Depreciation and amortization 51,912 46,574
Deferred income taxes - net 1,485 (3,106)
Investment tax credit - net (1,321) (1,478)
Asset retirement obligations (Note 8) 9,460 -
Other 13,257 13,237
Changes in current assets and liabilities 4,628 (24,551)
Changes in accounts receivable securitization-net
(Note 4) - 2,300
Pension funding (3,515) -
Other 12,862 8,208
Net cash flows provided by operating activities 114,788 78,293
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (1,786) -
Construction expenditures (175,507) (47,844)
Net cash flows from investing activities (177,293) (47,844)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from associated company
(Note 9) 100,000 -
Short-term borrowings from parent (Note 9) 360,640 505,938
Repayment of short-term borrowings from parent (333,700) (534,138)
Issuance of pollution control bonds - 37,027
Retirement of pollution control bonds (62,000) (37,930)
Payment of dividends (1,128) (1,128)
Net cash flows from financing activities 63,812 (30,231)
CHANGE IN CASH 1,307 218
CASH AT BEGINNING OF PERIOD 5,391 3,295
CASH AT END OF PERIOD $ 6,698 $ 3,513
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $13,763 $27,905
Interest on borrowed money $11,045 $16,120
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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Balance at beginning of period $513,321 $434,689 $502,024 $410,896
Net income 14,159 12,752 26,020 37,109
Subtotal 527,480 447,441 528,044 448,005
Cash dividends declared on stock:
4.75% cumulative preferred 237 237 475 475
6.53% cumulative preferred 327 327 653 653
Subtotal 564 564 1,128 1,128
Balance at end of period $526,916 $446,877 $526,916 $446,877
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 Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Net income $14,159 $12,752 $26,020 $37,109
Gains on derivative instruments and
hedging activities (Note 3) - 1,828 - 1,828
Income tax expense related to items of
other comprehensive income - (731) - (731)
Other comprehensive gain,
net of tax - 1,097 - 1,097
Other comprehensive income $14,159 $13,849 $26,020 $38,206
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.
The accompanying financial statements for the three months and six
months ended June 30, 2002, have been revised to conform with certain
reclassifications in the current three months and six months ended June
30, 2003. These reclassifications had no effect on net income, total
assets, or total capital and liabilities as previously reported.
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.
- Page 13 -
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 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 June 30, 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 three months and six months ended June 30, 2003 was 1.13% and
1.16%, respectively. 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 three months and six months ended June 30, 2003 of $2.6 million
and $2.6 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 June 30, 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 three months and six months ended June
30, 2003 was 1.93% and 1.94%, respectively. 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 three months and six months ended
June 30, 2003, the effect of marking these financial instruments and
the underlying debt to market resulted in a pretax loss of $2.2 million
and $2.0 million, respectively, recorded as an increase 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
- - Page 14 -
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,
especttively, 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 June
30, 2003 and December 31, 2002, LG&E's outstanding program balances
were $49.2 million and $63.2 million, respectively, and KU's balance
for both periods was $49.3 million.
The allowance for doubtful accounts associated with the eligible
securitized receivables was $2.1 million and $1.8 million for LG&E at
June 30, 2003 and December 31, 2002 and $0.7 million and $0.5 million
for KU at June 30, 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 and six months
ended June 30, 2003, follow (in thousands of $):
Three Months Ended June 30, 2003
External Intersegment
Revenues Revenues Net Income (Loss)
LG&E electric $163,067 $10,850 $ 9,457
LG&E gas 41,456 - (1,682)
Total $204,523 $10,850 $ 7,775
KU electric $187,963 $ 9,211 $14,159
Six Months Ended June 30, 2003
External Intersegment
Revenues Revenues Net Income
LG&E electric $333,116 $27,820 $27,489
LG&E gas 181,280 - 7,531
Total $514,396 $27,820 $35,020
KU electric $398,482 $23,675 $26,020
External and intersegment revenues (related party transactions between
LG&E and KU) and income by business segment for the three and six
months ended June 30, 2002, follow (in thousands of $):
Three Months Ended June 30, 2002
External Intersegment
Revenues Revenues Net Income (Loss)
LG&E electric $175,375 $ 9,850 $17,658
LG&E gas 30,938 - (2,402)
Total $206,313 $ 9,850 $15,256
KU electric $187,925 $ 8,095 $12,752
- - Page 15 -
Six Months Ended June 30, 2002
External Intersegment
Revenues Revenues Net Income
LG&E electric $323,208 $22,903 $28,750
LG&E gas 148,056 - 7,449
Total $471,264 $22,903 $36,199
KU electric $382,168 $22,876 $37,109
6. The following regulatory assets and liabilities were included in the
balance sheet of LG&E and KU as of June 30, 2003 and December 31, 2002 (in
thousands of $):
Louisville Gas and Electric
(Unaudited)
June 30, December 31,
2003 2002
REGULATORY ASSETS:
VDT costs $ 82,870 $ 98,044
Unamortized loss on bonds 18,267 18,843
Gas supply adjustments due from customers 32,100 13,714
Earnings sharing mechanism provision 10,728 12,500
Asset retirement obligation 5,589 -
LG&E/KU merger costs - 1,815
One utility costs 141 954
Manufactured gas sites 1,605 1,757
Other 3,220 5,819
Total $154,520 $153,446
REGULATORY LIABILITIES:
Deferred income taxes - net $ 41,804 $ 45,536
Gas supply adjustments due to customers 1,555 3,154
Other 1,360 3,734
Total $ 44,719 $ 52,424
Kentucky Utilities
(Unaudited)
June 30, December 31,
2003 2002
REGULATORY ASSETS:
VDT costs $ 32,322 $38,375
Unamortized loss on bonds 9,018 9,456
Earnings sharing mechanism provision 9,036 13,500
Asset retirement obligation 9,714 -
LG&E/KU merger costs - 2,046
One utility costs - 873
Other 1,308 1,154
Total $ 61,398 65,404
REGULATORY LIABILITIES:
Deferred income taxes - net $ 20,575 28,854
Other 1,048 1,022
Total $ 21,623 $29,876
- - Page 16 -
7. The following data represent shares of jointly owned additions to the
Trimble County plant for four combustion turbines as of June 30, 2003:
LG&E KU Total
Ownership % 37% 63% 100%
Mw capacity 237 403 640
Plant under construction $52 $92 $144
Depreciation - - -
Net book value $52 $92 $144
8. Statement of Financial Accounting Standard (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 June 30,
2003, LG&E recorded asset retirement obligation (ARO) assets in the
amount of $4.5 million and liabilities of $9.6 million. LG&E recorded
offsetting regulatory assets of $5.6 million, pursuant to regulatory
treatment prescribed under SFAS No. 71, Accounting for the Effects of
Certain Types of Regulation. As of June 30, 2003, KU recorded ARO
assets in the amount of $8.6 million and liabilities of $19.1 million.
KU recorded offsetting regulatory assets of $9.7 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
For the three months and six months ended June 30, 2003, LG&E recorded
ARO accretion expense of $154,000 and $308,000, respectively, ARO
depreciation expense of $29,000 and $58,000, respectively, and an
offsetting regulatory credit in the income statement of $183,000 and
$366,000, respectively. For the three months and six months ended June
30, 2003, KU recorded ARO accretion expense of $306,000 and $612,000,
respectively, ARO depreciation expense of $44,000 and $88,000,
respectively, and an offsetting regulatory credit in the income
statement of $350,000 and $700,000, respectively. The recording of the
regulatory credit is pursuant to regulatory treatment prescribed under
SFAS No. 71, Accounting for the Effects of Certain Types of Regulation.
SFAS No. 143 has no impact on the results of the operation of the
Companies.
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.
Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues
Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities. EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of a derivative under
SFAS No.133 should not be marked to fair market value, and
- - Page 17 -
- Revenues should be shown in the income statement net of costs
associated with trading activities, whether or not the trades
are physically settled.
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, 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 since all
contracts marked to market under EITF No. 98-10 are also within the
scope of SFAS No. 133.
As a result of EITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating
revenue to reflect this accounting change. The Companies applied this
guidance to all prior periods, which had no impact on previously
reported net income or common equity.
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues $180,637 $191,813 $375,930 $358,059
Less costs reclassified
from power purchased 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues $204,675 $203,555 $438,822 $418,723
Less costs reclassified
from power purchased 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified to revenues 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified to revenues 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. SFAS No. 150 is effective immediately
for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective for interim reporting periods beginning
after June 15, 2003.
- - Page 18 -
LG&E has existing $5.875 series mandatorily redeemable preferred stock
with 250,000 shares outstanding having a current redemption price of
$100 per share. The preferred stock has a sinking fund requirement
sufficient to retire a minimum of 12,500 shares on July 15th of each
year commencing with July 15, 2003, and a minimum of 187,500 shares on
July 15, 2008 at $100 per share. LG&E redeemed 12,500 shares in
accordance with these provisions on July 15, 2003. Beginning with the
three months ended September 30, 2003, LG&E will reclassify, at fair
value, its $5.875 series preferred stock as long-term debt with the
minimum shares mandatorily redeemable within one year classified as
current portion of long-term debt. Dividends accrued beginning July 1,
2003 will be charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No.
150.
9. On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and the interest rate is
4.55%. KU had a first mortgage bond of $62 million that matured in
June 2003 and LG&E has a first mortgage bond of $42.6 million maturing
in August 2003. The Companies expect to refinance these bonds, along
with a portion of the notes payable to parent, with additional long-
term intercompany loans.
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 $150 million with an E.ON affiliate to ensure
funding availability for the money pool. There was $82 million
outstanding under the Powergen line of credit and the balance under
E.ON affiliates' line totaled $74.9 million as of June 30, 2003. LG&E
Energy has provided loans to LG&E and KU through the money pool that
total $171.7 million and $146.4 million, respectively, as of June 30,
2003. These borrowings carried an interest rate based on an index of
highly rated commercial paper issuers as of the prior month end of
1.21% at June 30, 2003.
10.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 plaintiffs' 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 other 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 settlement with the lead plaintiff, which reduced the
number of remaining plaintiffs to approximately nine. 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.
- - Page 19 -
Combustion Turbine Litigation
LG&E and KU have filed a lawsuit 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 beneficial ownership of the combustion
turbines is jointly vested in 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. Recently, the
court ruled that LG&E and KU cannot pursue rescission on the breach of
contract claim, but has not ruled on whether they can seek rescission
on the fraud count. In addition, LG&E and KU seek punitive damages.
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 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 six month periods
ended June 30, 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 June 30, 2003, Compared to
Three Months Ended June 30, 2002
LG&E Results:
LG&E's net income decreased $7.5 million (49%) for the three months ended
June 30, 2003, as compared to the three months ended June 30, 2002,
primarily because of a decrease in sales to electric retail consumers due
to milder weather experienced in 2003 and a decrease in the price of retail
electric sales and higher depreciation and maintenance expenses.
- - Page 20 -
A comparison of LG&E's revenues for the three months ended June 30, 2003,
with the three months ended June 30, 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 $ (5,438) $ 8,733
Environmental cost recovery surcharge (89) -
Demand side management cost recovery 279 (51)
LG&E/KU merger surcredit 227 -
Value delivery surcredit (731) (186)
Weather normalization - 588
Variation in sales volume and other (8,286) 1,944
Total retail sales (14,038) 11,028
Wholesale sales 1,527 (428)
Gas transportation - net - (28)
Other 1,203 (54)
Total $(11,308) $10,518
Electric revenues decreased primarily due to lower fuel costs billed to
customers and a decrease in retail volumes sold due to a 42% decrease in
cooling degree days. These decreases were partially offset by an increase
in wholesale sales volumes. Gas revenues increased primarily as a result of
higher gas supply costs billed to customers through the gas supply clause
and increased volumes sold, 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 decreased $4.3 million (8%) for the three months ended
due to a decrease in generation ($2.5 million) and a decrease in the cost
of coal burned ($1.8 million). Gas supply expenses increased $7.6 million
(42%) due to an increase in net gas supply cost ($9.7 million), partially
offset by a decrease in the volume of retail gas delivered to the
distribution system ($2.1 million).
Power purchased increased $1.8 million (12%) due to an increase in the
price of power purchased.
Other operations expenses decreased $1.4 million (3%), as compared to 2002,
primarily due to lower injury and damage liability claims from third
parties, $1.9 million.
Maintenance expenses increased $2.1 million (14%) primarily due to
increased maintenance of gas distribution mains and maintenance of electric
distribution lines, $1.9 million.
Depreciation and amortization increased $4.4 million (17%) because of
additional utility plant in service.
- - Page 21 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Three Months Three Months
Ended Ended
June 30, 2003 June 30, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.5 4.3
Amortization of investment tax credit & R&D (9.5) (4.5)
Other differences (2.2) (0.4)
Effective income tax rate 29.8% 34.4%
The amortization of investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the
three months ended June 30, 2003, caused the percentage changes to be
greater in the 2003 period.
KU Results:
KU's net income increased $1.4 million (11%) for the three months ended
June 30, 2003, as compared to the three months ended June 30, 2002. The
increase was mainly due to decreased maintenance expenses due to insurance
recovery for expenses associated with a severe ice storm experienced in
February 2003 partially offset by increases in depreciation, other
operation expenses, power purchased, and fuel.
A comparison of KU's revenues for the three months ended June 30, 2003,
with the three months ended June 30, 2002, reflects increases and
(decreases) which have been segregated by the following principal causes
(in thousands of $):
Retail sales:
Fuel supply adjustments $ (116)
Environmental cost recovery surcharge (826)
LG&E/KU merger surcredit 76
Value delivery surcredit (403)
Earnings sharing mechanism 1,109
Variation in sales volume and other 282
Total retail sales 122
Wholesale sales 2,962
Other (1,930)
Total $ 1,154
Electric revenue increased primarily due to an increase in wholesale sales
volume.
Fuel for electric generation comprises 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 $2.3 million (4%) for the quarter
because of an increase in the cost of coal burned ($4.4 million) partially
offset by a decrease in generation ($2.1 million) due to temporary plant
outages.
Power purchased increased $1.3 million (4%) due to an increase in the price
of power purchased ($.3 million) and an increase in the volume purchased
($1.0 million).
- - Page 22 -
Other operation expenses increased $1.9 million (5%) as compared to 2002,
due to increased pension (the market value of plan assets has been affected
by declines in the equity market) and post-retirement medical expenses
($1.2 million), and increased property insurance ($.5 million).
Maintenance expenses decreased $8.0 million (52%) primarily due to an
insurance reimbursement of costs incurred in the first quarter of 2003 for
repairs to electric distribution equipment due to an ice storm in February
2003 ($8.9 million).
Depreciation and amortization increased $4.3 million (18%) because of
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in
pretax income.
Three Months Three Months
Ended Ended
June 30, 2003 June 30, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.5 6.8
Amortization of investment tax credit & R&D (3.1) (3.9)
Other differences (4.6) (4.5)
Effective income tax rate 33.8% 33.4%
Other income - net increased $1.0 million (60%) in 2003 primarily due to an
increase in subsidiary earnings, $.6 million, and a decrease in benefit
costs, $0.2 million, partially offset by taxes.
Interest charges decreased $1.3 million (14%) for the three months ended
June 30, 2003 as compared to the three months ended 2002 due primarily to
lower interest rates on variable rate debt. The weighted average interest
rate on variable-rate bonds for the three months ended June 30, 2003, was
1.14% and the corresponding rate for the three months ended June 30, 2002,
was 1.64%.
- - Page 23 -
Six Months Ended June 30, 2003, Compared to
Six Months Ended June 30, 2002
LG&E Results:
LG&E's net income decreased $1.2 million (3%) for the six months ended June
30, 2003, as compared to the six months ended June 30, 2002, primarily
because of an increase in operations, maintenance, and depreciation
expenses partially offset by an increase in sales to gas retail consumers,
due to the colder winter experienced in 2003, and increased electric
wholesale sales.
A comparison of LG&E's revenues for the six months ended June 30, 2003,
with the six months ended June 30, 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 $ 611 $24,834
Environmental cost recovery surcharge 1,278 -
Demand side management cost recovery 671 397
LG&E/KU merger surcredit (449) -
Value delivery surcredit (1,517) (830)
Weather normalization - (2,262)
Variation in sales volume and other (825) 17,374
Total retail sales (231) 39,513
Wholesale sales 13,596 (6,141)
Gas transportation - net - (12)
Other 1,460 (136)
Total $14,825 $33,224
Electric revenues increased primarily because of an increase in wholesale
sales prices ($14.4 million), partially offset by a decrease in wholesale
sales volumes ($.8 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 an increase in heating degree days
(19%), partially offset by a decrease in volume of wholesale sales.
Fuel for electric generation increased $1.1 million (1%) for the six months
because of an increase in the cost of coal burned ($1.1 million). Gas
supply expenses increased $30.3 million (30%) due to an increase in net gas
supply cost ($21.5 million) and an increase in the volume of retail gas
delivered to the distribution system ($13.6 million), partially offset by
decreased wholesale gas expenses ($4.8 million).
Power purchased increased $7.7 million (23%) because of an increase in the
price of power purchased ($9.0 million) partially offset by a decrease in
the volume of the purchases ($1.3 million).
Other operations expenses increased $3.7 million (4%) in 2003, as compared
to 2002, primarily due to higher costs of customer assistance programs
($1.5 million), and increased pension (the market value of plan assets has
been affected by declines in the equity market), post-retirement and
medical benefits ($2.2 million).
Maintenance expenses increased $2.0 million (7%) primarily due to increased
maintenance of gas distribution mains and maintenance of electric
distribution lines, $1.7 million.
Depreciation and amortization increased $6.3 million (12%) because of
additional utility plant in service.
- -Page 24 -
Variations in income tax expense are largely attributable to changes in pre-
tax income.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.8 5.0
Amortization of investment tax credit & R&D (3.8) (3.7)
Other differences (0.8) (0.2)
Effective income tax rate 36.2% 36.1%
Interest charges decreased $.8 million (5%) due primarily to lower interest
rates on variable rate debt. The weighted average interest rate on
variable-rate bonds for the six months ended June 30, 2003 was 1.19%,
compared to 1.61% for the comparable period in 2002.
KU Results:
KU's net income decreased $11.1 million (30%) for the six months ended June
30, 2003, as compared to the six months ended June 30, 2002. The decrease
was mainly due to expenses associated with a severe ice storm experienced
in February 2003, in excess of insurance reimbursements received in June
2003, timing of the performance of annual steam production maintenance and
depreciation expense.
A comparison of KU's revenues for the six months ended June 30, 2003, with
the six months ended June 30, 2002, reflects increases and (decreases)
which have been segregated by the following principal causes (in thousands
of $):
Retail sales:
Fuel supply adjustments $ 7,147
Environmental cost recovery surcharge (889)
Demand side management cost recovery 337
LG&E/KU merger surcredit (366)
Value delivery surcredit (860)
Earnings sharing mechanism (1,900)
Variation in sales volume and other 11,677
Total retail sales 15,146
Wholesale sales 510
Other 1,457
Total $17,113
Electric revenues increased primarily due to an increase in retail volumes
sold due to a 13% increase in heating degree days and higher fuel costs
billed to customers.
Fuel for electric generation increased $10.3 million (9%) for the six
months due to an increase in the cost of coal burned ($11.5 million),
offset by a decrease in generation ($1.2 million).
Power purchased increased $7.6 million (11%) due to an increase in price of
power purchased ($2.8 million) and an increase in volume purchased ($4.8
million) partially as a result of temporary plant outages.
- - Page 25 -
Other operation expenses increased $6.3 million (9%), primarily due to
costs associated with an ice storm ($2.5 million), increased pension (the
market value of plan assets has been affected by declines in the equity
market) and post-retirement medical expenses ($2.6 million), increased
property insurance ($.9 million), and higher electric transmission costs
resulting from increased Midwest Independent System Operator (MISO) costs
($.3 million).
Maintenance expenses increased $9.4 million (35%) primarily due to repairs
to electric distribution equipment due to an ice storm ($4.1 million, net
of $8.9 million in insurance reimbursements), and timing of annual
maintenance of steam production equipment ($5.7 million).
Depreciation and amortization increased $5.3 million (11%) because of
additional utility plant in service.
Variations in income tax expense are largely attributable to changes in
pretax income.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.7 6.3
Amortization of investment tax credit & R&D (3.4) (3.5)
Other differences (4.4) (3.0)
Effective income tax rate 33.9% 34.8%
Other income - net increased $1.5 million (45%) primarily due to an
increase in subsidiary earnings, $.5 million, decreased benefit costs, $.4
million, and gain on energy trading contracts marked to market $.5 million,
partially offset by an increase in taxes.
Interest charges decreased $1.9 million (13%) due primarily to lower
interest rates on variable rate debt. The weighted average interest rate
on variable-rate bonds for the six months ended June 30, 2003, was 1.16%
and the corresponding rate for the six months ended June 30, 2002, was
1.57%.
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 six months ended June 30, 2003 for LG&E
and KU amounted to $119.4 million and $175.5 million, respectively. Such
expenditures related primarily to construction to meet nitrogen oxide (NOx)
emission standards and the acquisition of combustion turbines to meet peak
power demands. LG&E and KU combustion turbine expenditures for the six
months ended June 30, 2003, were $53.3 million and $90.9 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 $13.9 million during the six months ended
June 30, 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 $1.3 million during the six months ended June
30, 2003. The increase reflects cash flows from operations and
intercompany loans, partially offset by construction expenditures,
including the purchase of an interest in four combustion turbines.
- - Page 26 -
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 timing of payments. The decrease in accounts receivable for
KU resulted primarily from timing of payments. The decrease in LG&E's gas
stored underground relates to seasonal usage of gas. The decrease in the
fuel inventory at LG&E resulted from seasonal fluctuations partially offset
by increased pricing. The decrease in fuel inventory at KU resulted from
seasonal fluctuations.
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 $150 million with an E.ON affiliate to ensure funding
availability for the money pool. There was $82 million outstanding under
the Powergen line of credit and the balance under E.ON affiliates' line
totaled $74.9 million as of June 30, 2003. LG&E Energy has provided loans
to LG&E and KU through the money pool that total $171.7 million and $146.4
million, respectively, as of June 30, 2003. These borrowings carried an
interest rate based on an index of highly rated commercial paper issuers as
of the prior month end of 1.21% at June 30, 2003.
During July 2003, LG&E entered into five 364 day revolving lines of credit
that total $185 million. The facilities mature in June and July 2004.
On April 30, 2003, a $250 million line of credit of LG&E Energy with an
E.ON affiliate expired and was not renewed.
On April 30, 2003, LG&E and KU each borrowed $100 million from an E.ON
affiliate. The term of each loan is ten years and the interest rate is
4.55%. KU had a first mortgage bond of $62 million that matured in June
2003 and LG&E has a first mortgage bond of $42.6 million maturing in August
2003. The Companies expect to refinance these bonds, 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.
LG&E's security ratings as of August 4, 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 August 4, 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
- - Page 27 -
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 June 30, 2003, and December 31, 2002,
follow:
June 30, Dec. 31,
2003 2002
Long-term debt (including current portion) 38.8% 35.5%
Notes payable 9.3 11.1
Preferred stock 5.1 5.5
Common equity 46.8 47.9
Total 100.0% 100.0%
KU's capitalization ratios at June 30, 2003, and December 31, 2002, follow:
June 30, Dec. 31,
2003 2002
Long-term debt (including current portion) 34.5% 34.0%
Notes payable 9.4 8.1
Preferred stock 2.5 2.7
Common equity 53.6 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 June 30, 2003, LG&E
recorded asset retirement obligation (ARO) assets in the amount of $4.5
million and liabilities of $9.6 million. LG&E recorded offsetting
regulatory assets of $5.6 million, pursuant to regulatory treatment
prescribed under SFAS No. 71, Accounting for the Effects of Certain Types
of Regulation. As of June 30, 2003, KU recorded ARO assets in the amount
of $8.6 million and liabilities of $19.1 million. KU recorded offsetting
regulatory assets of $9.7 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.
- - Page 28 -
Effective January 1, 2003, the Companies adopted EITF No. 02-03, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes
and Contracts Involved in Energy Trading and Risk Management Activities.
EITF No. 02-03 established the following:
- Rescinded EITF No. 98-10,
- Contracts that do not meet the definition of a derivative under
SFAS No. 133 should not be marked to fair market value, and
- Revenues should be shown in the income statement net of costs
associated with trading activities, whether or not the trades
are physically settled.
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, 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 since all contracts marked to market under
EITF No. 98-10 are also within the scope of SFAS No. 133.
As a result of EITF No. 02-03, the Companies have netted the power
purchased expense for trading activities against electric operating revenue
to reflect this accounting change. The Companies applied this guidance to
all prior periods, which had no impact on previously reported net income or
shareholders' equity. The following tables present the impact of this
reclassification (in thousands of $):
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross electric operating revenues$180,637 $191,813 $375,930 $358,059
Less costs reclassified 6,720 6,588 14,994 11,948
Net electric operating
revenues reported $173,917 $185,225 $360,936 $346,111
KU:
Gross electric operating revenues$204,675 $203,555 $438,822 $418,723
Less costs reclassified 7,501 7,535 16,665 13,679
Net electric operating
revenues reported $197,174 $196,020 $422,157 $405,044
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
LG&E:
Gross power purchased $ 24,033 $ 22,064 $ 56,434 $ 45,645
Less costs reclassified 6,720 6,588 14,994 11,948
Net power purchased reported $ 17,313 $ 15,476 $ 41,440 $ 33,697
KU:
Gross power purchased $ 41,149 $ 39,911 $ 91,513 $ 80,971
Less costs reclassified 7,501 7,535 16,665 13,679
Net power purchased reported $ 33,648 $ 32,376 $ 74,848 $ 67,292
In May 2003, the Financial Accounting Standards Board issued Statement of
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 is effective
immediately for financial instruments entered into or modified after May
31, 2003, and otherwise is effective for interim reporting periods
beginning after June 15, 2003.
- - Page 29 -
LG&E has existing $5.875 series mandatorily redeemable preferred stock with
250,000 shares outstanding having a current redemption price of $100 per
share. The preferred stock has a sinking fund requirement sufficient to
retire a minimum of 12,500 shares on July 15th of each year commencing with
July 15, 2003, and a minimum of 187,500 shares on July 15, 2008 at $100 per
share. Beginning with the three months ended September 30, 2003, LG&E will
reclassify, at fair value, its $5.875 series preferred stock as long-term
debt with the minimum shares mandatorily redeemable within one year
classified as current portion of long-term debt. Dividends accrued
beginning July 1, 2003 will be charged as interest expense.
KU has no financial instruments that fall within the scope of SFAS No. 150.
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 $5.3
million and $5.5 million, respectively, at June 30, 2003. LG&E's exposure
to floating interest rates decreased $18.3 million and KU's exposure to
floating interest rates increased $4.3 million during the first six 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 six 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.
- - Page 30 -
During 2002, the combination of poor market performance and historically
low corporate bond rates created a divergence in the potential value of the
pension liability and the actual value of the pension assets. However,
year-to-date 2003 market performance has been quite strong. Should poor
market conditions return 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 No. 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 No. 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 three months and six months ended June 30,
2003, and 2002(in thousands of $). Trading volumes are evenly divided
between LG&E and KU.
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
Fair value of contracts at beginning of
period, net asset/(liability) $ 403 $ 12 $ (156) $(186)
Fair value of contracts when entered
into during the period - 104 2,620 (57)
Contracts realized or otherwise
settled during the period (226) (31) (283) 335
Changes in fair value due to changes
in assumptions 141 (59) (1,863) (66)
Fair value of contracts at end of period,
net asset/(liability) $ 318 $ 26 $ 318 $ 26
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 all periods. All
contracts outstanding at June 30, 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
June 30, 2003, 100% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.
- - Page 31 -
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 until such time as retail choice is offered to other
customers in the United States.
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. 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 as of the end of the
period covered by this report. There has been no change in the Companies'
internal control over financial reporting that occurred during the fiscal
quarter ended June 30, 2003, that has materially affected, or is reasonably
likely to materially affect, the Companies' internal control over financial
reporting.
- - Page 32 -
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, 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; and (B) respective combined Quarterly
Report on Form 10Q for the quarter ended March 31, 2003: Item 1 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 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 plaintiffs' 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 other 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 settlement with the lead plaintiff, which
reduced the number of remaining plaintiffs to approximately nine. 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
LG&E and KU have filed a lawsuit 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 beneficial ownership of the combustion turbines is vested in 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.
Recently, the court ruled that LG&E and KU cannot pursue rescission on the
breach of contract claim, but has not ruled on whether they can seek
rescission on the fraud count. In addition, LG&E and KU seek punitive
damages. 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 33 -
Item 6(a). Exhibits.
Applicable to Form
10-Q of
Exhibit
No. LG&E KU Description
31 X X Certification - Section 302 of Sarbanes-Oxley Act of 2002
31.1 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.3 X Certification of Chairman of the Board, President and
Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.4 X Certification of Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 X X Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Item 6(b). Reports on Form 8-K.
On May 14, 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'
Quarterly Reports on Form 10-Q for the period ended March 31, 2003.
- - Page 34 -
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: August 13, 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: August 13, 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 35 -
Exhibit 31 - CERTIFICATIONS
Exhibit 31.1
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
- - Page 36 -
Exhibit 31.2
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
___________________
Richard Aitken-Davies
Chief Financial Officer
- - Page 37 -
Exhibit 31.3
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
_____________________
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer
- - Page 38 -
Exhibit 31.4
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 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 report;
3. Based on my knowledge, the financial statements, and other
financial information included in this 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
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
____________________
Richard Aitken-Davies
Chief Financial Officer
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Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Louisville Gas and
Electric Company and Kentucky Utilities Company (the "Companies") on Form
10-Q for the period ended June 30, 2003, as filed with the Securities and
Exchange Commission (the "Report"), each of the undersigned does hereby
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge,
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Companies as of the dates and for the period expressed in the Report.
August 13, 2003
/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
/s/ Richard Aitken-Davies
Chief Financial Officer
Louisville Gas and Electric Company
Kentucky Utilities Company
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
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