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45

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, 2004

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.

1-2893 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, 2004,
all held by LG&E Energy LLC
Kentucky Utilities Company
37,817,878 shares, without par value, as of July 31, 2004,
all held by LG&E Energy LLC

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.

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TABLE OF CONTENTS

PART I


Item 1 Consolidated Financial Statements

Louisville Gas and Electric Company and Subsidiary
Statements of Income 1
Statements of Retained Earnings 1
Balance Sheets 2
Statements of Cash Flow 4
Statements of Other Comprehensive Income 5


Kentucky Utilities Company and Subsidiary
Statements of Income 6
Statements of Retained Earnings 6
Balance Sheets 7
Statements of Cash Flow 9
Statements of Other Comprehensive Income 10

Notes to Consolidated Financial Statements 11

Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22

Item 3 Quantitative and Qualitative Disclosures About
Market Risk 36

Item 4 Controls and Procedures 37


PART II

Item 1 Legal Proceedings 38

Item 6 Exhibits and Reports on Form 8-K 39

Signatures 40

Exhibits 41

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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,
2004 2003 2004 2003
OPERATING REVENUES (Note 5):
Electric $192,566 $173,917 $390,815 $360,936
Gas 43,646 41,456 207,360 181,280
Total operating revenues 236,212 215,373 598,175 542,216

OPERATING EXPENSES:
Fuel for electric generation 47,615 46,277 100,139 95,754
Power purchased 17,345 17,313 46,233 41,440
Gas supply expenses 30,991 25,963 161,747 132,070
Other operation expenses 57,110 53,379 115,171 106,907
Maintenance 15,266 17,690 26,807 29,583
Depreciation and amortization 28,223 30,293 55,722 57,437
Federal and state income taxes 9,374 4,714 24,399 21,355
Property and other taxes 5,069 3,454 10,140 8,189
Total operating expenses 210,993 199,083 540,358 492,735

NET OPERATING INCOME 25,219 16,290 57,817 49,481

Other income (expense) - net 133 (1,395) (328) (335)
Other income from affiliated company
(Note 10) - 1 - 5
Interest expense (Note 3) 5,236 5,849 10,013 12,104
Interest expense to affiliated
companies (Note 10) 2,976 1,292 6,117 2,027

NET INCOME $ 17,140 $ 7,755 $ 41,359 $ 35,020



Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)


Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003


Balance at beginning of period $521,204 $435,647 $497,441 $409,319
Net income 17,140 7,755 41,359 35,020
Subtotal 538,344 443,402 538,800 444,339

Cash dividends declared on stock:
5% cumulative preferred 269 269 538 538
Auction rate cumulative preferred 219 268 406 569
$5.875 cumulative preferred (Note 8) - 367 - 734
Common 21,000 - 21,000 -
Subtotal 21,488 904 21,944 1,841

Balance at end of period $516,856 $442,498 $516,856 $442,498


The accompanying notes are an integral part of these consolidated financial
statements.

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Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)

ASSETS


June 30, December 31,
2004 2003

UTILITY PLANT:
At original cost $3,857,231 $3,804,183
Less: reserve for depreciation 1,366,281 1,326,442
Net utility plant (Note 7) 2,490,950 2,477,741

OTHER PROPERTY AND INVESTMENTS -
less reserve of $63 as of June 30, 2004
and December 31, 2003 507 611

CURRENT ASSETS:
Cash and cash equivalents 13,984 1,706
Accounts receivable - less reserve of $3,515 as of
June 30, 2004 and December 31, 2003 (Note 4) 114,072 84,585
Materials and supplies - at average cost:
Fuel (predominantly coal) 32,843 25,260
Gas stored underground 21,795 69,884
Other 26,085 24,971
Prepayments and other 2,981 5,281
Total current assets 211,760 211,687

DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 8,653 8,753
Regulatory assets (Note 6) 113,553 143,626
Long-term derivative asset (Note 3) 2,368 -
Other 33,038 40,121
Total deferred debits and other assets 157,612 192,500

Total assets $2,860,829 $2,882,539


The accompanying notes are an integral part of these consolidated financial
statements.

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Louisville Gas and Electric Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)

CAPITALIZATION AND LIABILITIES


June 30, December 31,
2004 2003
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
Accumulated other comprehensive loss (34,444) (38,111)
Retained earnings 516,856 497,441
Total common equity 946,746 923,664

Cumulative preferred stock 70,425 70,425

Mandatorily redeemable preferred stock (Note 8) 22,500 22,500
Long-term debt (Note 9) 328,104 328,104
Long-term debt to affiliated company (Note 9) 225,000 200,000
575,604 550,604

Total capitalization 1,592,775 1,544,693

CURRENT LIABILITIES:
Current portion of mandatorily
redeemable preferred stock (Note 8) 1,250 1,250
Current portion of long-term debt 246,200 246,200
Current portion of long-term debt to
affiliated company (Note 9) 50,000 -
Notes payable to affiliated companies (Note 9) 25,950 80,332
Accounts payable 76,261 93,118
Accounts payable to affiliated companies (Note 10) 27,606 38,343
Accrued income taxes 2,605 11,472
Customer deposits 11,015 10,493
Accrued interest 2,146 1,999
Accrued interest to affiliated company (Note 10) 3,648 2,750
Other 14,893 11,784
Total current liabilities 461,574 497,741

DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 344,337 337,704
Investment tax credit, in process of amortization 47,535 50,329
Accumulated provision for pensions
and related benefits 106,695 140,598
Customer advances for construction 10,344 9,890
Asset retirement obligation 10,064 9,747
Regulatory liabilities (Note 6):
Accumulated cost of removal of utility plant 218,022 216,948
Other 49,511 51,822
Long-term derivative liability (Note 3) 12,198 15,966
Other 7,774 7,101
Total deferred credits and other liabilities 806,480 840,105

Total capital and liabilities $2,860,829 $2,882,539


The accompanying notes are an integral part of these consolidated financial
statements.

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Louisville Gas and Electric Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)


Six Months
Ended
June 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,359 $ 35,020
Items not requiring cash currently:
Depreciation and amortization 55,722 57,437
Deferred income taxes - net 4,909 12,876
Investment tax credit - net (2,794) (2,105)
Value Delivery Team (VDT) amortization (Note 6) 15,067 15,332
Mark-to-market financial instruments (6,136) 1,551
Other 4,957 9,557
Changes in current assets and liabilities (19,580) 14,956
Changes in accounts receivable
securitization-net (Note 4) - (14,000)
Pension funding (Note 9 and 12) (34,492) (83,125)
Provision for post-retirement benefits (8,047) (4,201)
Gas supply clause 8,340 (19,834)
Earnings sharing mechanism 2,357 1,772
Combustion turbine litigation settlement 7,107 -
Other 9,769 3,401
Net cash flows from operating activities 78,538 28,637

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities 103 163
Construction expenditures (64,958) (119,412)
Net cash flows from investing activities (64,855) (119,249)

CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated
company (Note 9) 125,000 100,000
Short-term borrowings from affiliated
company (Note 9) 260,550 349,400
Repayment of long-term borrowings from
affiliated company (50,000) -
Repayment of short-term borrowings from
affiliated company (314,932) (370,737)
Issuance costs of pollution control bonds (133) -
Payment of common dividends (21,000) -
Payment of preferred dividends (890) (1,993)
Net cash flows from financing activities (1,405) 76,670

CHANGE IN CASH AND CASH EQUIVALENTS 12,278 (13,942)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,706 17,015

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,984 $ 3,073

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 33,062 $ 15,947
Interest on borrowed money 8,539 10,705
Interest to affiliated companies on
borrowed money 5,282 1,315

The accompanying notes are an integral part of these consolidated financial
statements.

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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,
2004 2003 2004 2003

Net income $17,140 $7,775 $41,359 $35,020

Gains/(losses) on derivative instruments
and hedging activities - net of tax
benefit/(expense) of $(4,866), $1,021,
$(2,449) and $1,034, respectively
(Note 3) 7,299 (1,531) 3,667 (1,551)


Other comprehensive income (loss),
net of tax 7,299 (1,531) 3,667 (1,551)

Comprehensive income $24,439 $6,224 $45,026 $33,469


The accompanying notes are an integral part of these consolidated financial
statements.

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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Thousands of $)


Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003

OPERATING REVENUES $232,369 $197,174 $479,755 $422,157

OPERATING EXPENSES:
Fuel for electric generation 67,631 59,641 137,515 125,964
Power purchased 30,662 33,648 71,969 74,848
Other operation expenses 36,536 38,130 74,990 77,019
Maintenance 17,024 7,403 28,908 36,369
Depreciation and amortization 25,950 27,762 51,199 51,912
Federal and state income taxes 17,461 7,467 38,562 14,067
Property and other taxes 4,284 3,968 8,537 8,163
Total operating expenses 199,548 178,019 411,680 388,342

NET OPERATING INCOME 32,821 19,155 68,075 33,815

Other income - net 1,958 2,697 3,420 4,803
Other income (expense) from
affiliated company (Note 10) 4 (3) 14 -
Interest expense (Note 3) 3,682 6,582 4,417 11,113
Interest expense to affiliated
companies (Note 10) 3,536 1,108 7,083 1,485

NET INCOME $ 27,565 $ 14,159 $ 60,009 $ 26,020




Consolidated Statements of Retained Earnings
(Unaudited)
(Thousands of $)


Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003


Balance at beginning of period $623,050 $513,321 $591,170 $502,024
Net income 27,565 14,159 60,009 26,020
Subtotal 650,615 527,480 651,179 528,044

Cash dividends declared on stock:
4.75% cumulative preferred 237 237 475 475
6.53% cumulative preferred 327 327 653 653
Common 21,000 - 21,000 -
Subtotal 21,564 564 22,128 1,128

Balance at end of period $629,051 $526,916 $629,051 $526,916


The accompanying notes are an integral part of these consolidated financial
statements.

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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets
(Unaudited)
(Thousands of $)


ASSETS

June 30, December 31,
2004 2003

UTILITY PLANT:
At original cost $3,645,814 $3,596,657
Less: reserve for depreciation 1,377,302 1,355,055
Net utility plant (Note 7) 2,268,512 2,241,602

OTHER PROPERTY AND INVESTMENTS -
less reserve of $131 as of June 30, 2004 and
December 31, 2003 19,196 17,862

CURRENT ASSETS:
Cash and cash equivalents 9,792 4,869
Accounts receivable - less reserve of $673 and $672
as of June 30, 2004 and December 31, 2003,
respectively (Note 4) 94,804 49,289
Materials and supplies - at average cost:
Fuel (predominantly coal) 35,552 45,538
Other 27,367 27,094
Prepayments and other 9,866 13,100
Total current assets 177,381 139,890

DEFERRED DEBITS AND OTHER ASSETS:
Unamortized debt expense 4,349 4,481
Regulatory assets (Note 6) 64,974 72,318
Long-term derivative asset (Note 3) 7,584 12,223
Other 11,102 21,916
Total deferred debits and other assets 88,009 110,938

Total assets $2,553,098 $2,510,292


The accompanying notes are an integral part of these consolidated financial
statements.

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Kentucky Utilities Company and Subsidiary
Consolidated Balance Sheets (cont.)
(Unaudited)
(Thousands of $)

CAPITALIZATION AND LIABILITIES

June 30, December 31,
2004 2003

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
Accumulated other comprehensive loss (6,045) (6,031)
Retained earnings 629,051 591,170
Total common equity 945,824 907,957

Cumulative preferred stock 39,727 39,727

Long-term debt (Note 9) 307,940 312,646
Long-term debt to affiliated company (Note 9) 333,000 283,000
640,940 595,646

Total capitalization 1,626,491 1,543,330

CURRENT LIABILITIES:
Current portion of long-term debt 87,130 91,930
Notes payable to affiliated company (Note 9) 53,181 43,231
Accounts payable 48,356 69,947
Accounts payable to affiliated companies (Note 10) 15,727 26,426
Accrued income taxes 10,454 7,104
Customer deposits 13,867 13,453
Accrued interest 1,972 2,024
Accrued interest to affiliated company (Note 10) 3,493 2,454
Other 17,019 9,767
Total current liabilities 251,199 266,336

DEFERRED CREDITS AND OTHER LIABILITIES:
Accumulated deferred income taxes - net 275,860 261,258
Investment tax credit, in process of amortization 4,832 5,859
Accumulated provision for pensions and
related benefits 63,140 103,101
Customer advances for construction 1,624 1,564
Asset retirement obligation 20,339 19,698
Regulatory liabilities (Note 6):
Accumulated cost of removal of utility plant 266,218 261,942
Other 30,908 38,027
Other 12,487 9,177
Total deferred credits and other liabilities 675,408 700,626

Total capital and liabilities $2,553,098 $2,510,292


The accompanying notes are an integral part of these consolidated financial
statements.

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Kentucky Utilities Company and Subsidiary
Consolidated Statement of Cash Flows
(Unaudited)
(Thousands of $)


Six Months
Ended
June 30,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 60,009 $ 26,020
Items not requiring cash currently:
Depreciation and amortization 51,199 51,912
Deferred income taxes - net 13,346 1,485
Investment tax credit - net (1,027) (1,321)
Value Delivery Team (VDT) amortization (Note 6) 5,877 6,153
Mark-to-market financial instruments (67) 2,016
Other 1,632 14,548
Changes in current assets and liabilities (52,855) 4,628
Pension funding (Note 9 and 12) (43,409) (3,515)
Provision for post-retirement benefits (3,372) (3,036)
Earnings sharing mechanism 344 4,464
Combustion turbine litigation settlement 11,595 -
Other 6,296 11,434
Net cash flows from operating activities 49,568 114,788

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities (1,334) (1,786)
Construction expenditures (76,338) (175,507)
Net cash flows from investing activities (77,672) (177,293)

CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings from affiliated
company (Note 9) 50,000 100,000
Short-term borrowings from affiliated
company (Note 9) 255,000 360,640
Repayment of short-term borrowings from
affiliated company (245,050) (333,700)
Retirement of pollution control bonds (4,800) (62,000)
Refund of issuance costs of pollution
control bonds 5 -
Payment of common dividends (21,000) -
Payment of preferred dividends (1,128) (1,128)
Net cash flows from financing activities 33,027 63,812

CHANGE IN CASH AND CASH EQUIVALENTS 4,923 1,307

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,869 5,391

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,792 $ 6,698

SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Income taxes $ 21,264 $ 13,763
Interest on borrowed money 7,562 11,045
Interest to affiliated companies on
borrowed money 6,070 724



The accompanying notes are an integral part of these consolidated financial
statements.

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Kentucky Utilities Company and Subsidiary
Consolidated Statements of Other Comprehensive Income
(Unaudited)
(Thousands of $)


Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003

Net income $27,565 $14,159 $60,009 $26,020

Losses on derivative instruments
and hedging activities - net of tax
benefit/(expense) of $18 and $5
respectively (Note 3) (27) - (14) -

Other comprehensive loss, net of tax (27) - (14) -

Comprehensive income $27,538 $14,159 $59,995 $26,020


The accompanying notes are an integral part of these consolidated financial
statements.

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Louisville Gas and Electric Company and Subsidiary
Kentucky Utilities Company and Subsidiary

Notes to Consolidated Financial Statements
(Unaudited)

1. General

The unaudited consolidated financial statements include the accounts of
Louisville Gas and Electric Company and Subsidiary and Kentucky
Utilities Company and Subsidiary (each "LG&E" and "KU", or the
"Companies"). The common stock of each of LG&E and KU is wholly-owned
by LG&E Energy LLC ("LG&E Energy"). In the opinion of management, the
unaudited interim financial statements include 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, 2003, 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, 2003, have been revised to conform to certain
reclassifications in the current three months and six months ended June
30, 2004. These reclassifications had no impact on the balance sheet
net assets or net income, as previously reported.


2. Mergers and Acquisitions

LG&E and KU are each subsidiaries of LG&E Energy. In July 2002, E.ON
AG ("E.ON"), a German company, completed its acquisition of Powergen
Limited ("Powergen"), the former parent company of LG&E Energy. As a
result, LG&E and KU became indirect subsidiaries of E.ON. E.ON had
announced its pre-conditional cash offer of 5.1 billion pounds sterling
($7.3 billion) for Powergen in April 2001.

Following the purchase of Powergen by E.ON, E.ON became a registered
holding company under the Public Utility Holding Company Act of 1935
("PUHCA"). As a result, E.ON, its utility subsidiaries, including LG&E
and KU, and certain of its non-utility subsidiaries are subject to
extensive regulation by the SEC under PUHCA with respect to issuances
and sales of securities, acquisitions and sales of certain utility
properties, and intra-system sales of certain goods and services. In
addition, PUHCA generally limits the ability of registered holding
companies to acquire additional public utility systems and to acquire
and retain businesses unrelated to the utility operations of the
holding company. LG&E and KU believe that they have adequate authority
(including financing authority) under existing SEC orders and
regulations to conduct their business. LG&E and KU will seek
additional authorization when necessary.

As contemplated in their regulatory filings in connection with the E.ON
acquisition, E.ON, Powergen and LG&E Energy 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 in March 2003. In early 2004, LG&E Energy began direct
reporting arrangements to E.ON.

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The utility operations (LG&E and KU) of LG&E Energy have 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 LG&E and KU were not affected by these
transactions and LG&E and KU continue to file SEC reports.

Effective December 30, 2003, LG&E Energy LLC became the successor, by
assignment and subsequent merger, to all the assets and liabilities of
LG&E Energy Corp. Following the conversion, LG&E Energy became a
registered holding company under PUHCA.


3. Financial Instruments

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, earnings and cash flow 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 designated as a cash flow hedge 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 and the underlying hedged items are periodically
marked to market with the resulting net gains and losses recorded
directly into net income. Upon termination of any fair value hedges,
the resulting gain or loss is recorded into net income.

As of June 30, 2004, LG&E was party to various interest rate swap
agreements with aggregate notional amounts of $228.3 million. Under
these swap agreements, LG&E paid fixed rates averaging 4.38% and
received variable rates based on LIBOR or the Bond Market Association's
municipal swap index averaging 1.01% at June 30, 2004. The swap
agreements in effect at June 30, 2004 have been designated as cash flow
hedges and mature on dates ranging from 2005 to 2033. The hedges have
been deemed to be fully effective resulting in a pretax gain of $12.2
million and $6.1 million for the three months and six months ended June
30, 2004, respectively, recorded in other comprehensive income. Upon
expiration of these hedges, the amount recorded in other comprehensive
income will be reclassified into earnings. The amounts expected to be
reclassified from other comprehensive income to earnings in the next
twelve months are immaterial.

As of June 30, 2004, KU was party to various interest rate swap
agreements with aggregate notional amounts of $103.0 million. Under
these swap agreements, KU paid variable rates based on either LIBOR or
the Bond Market Association's municipal swap index averaging 2.23%, and
received fixed rates averaging 7.74% at June 30, 2004. The swap
agreements in effect at June 30, 2004 have been designated as fair
value hedges and mature on dates ranging from 2007 to 2025. During the
three months and six months ended June 30, 2004, the effect of marking
these financial instruments and the underlying debt to market resulted
in a net pretax gain/(loss) of $(0.5) million and $0.7 million
(representing the hedges' ineffectiveness), respectively, recorded as a
decrease/(increase) in interest expense.

Interest rate swaps hedge interest rate risk on the underlying debt.
Under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, in addition to swaps being marked to market, the item being
hedged using a fair value hedge must also be marked to market.
Consequently at June 30, 2004, KU's debt reflects an increase by a
$10.0 million mark-to-market adjustment.

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In February 2004, KU terminated the swap it had in place related to
its Series 9 pollution control bonds. The notional amount of the
terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination, resulting in a gain of $0.8
million.


4. Accounts Receivable Securitization Programs

In February 2001, LG&E and KU implemented accounts receivable
securitization programs. The purpose of these programs was to enable
LG&E and KU to accelerate the receipt of cash from the collection of
retail accounts receivable, thereby reducing dependence upon more
costly sources of working capital.

In January 2004, LG&E and KU terminated their accounts receivable
securitization programs and replaced them with intercompany loans from
an E.ON affiliate. In May 2004, LG&E and KU dissolved their inactive
accounts receivable securitization-related subsidiaries, LG&E
Receivables LLC and KU Receivables LLC. The accounts receivable
securitization-related subsidiaries were the only subsidiaries of LG&E
and KU.


5. Segment of Business

LG&E's revenues and net income by business segment for the three and
six months ended June 30, 2004 and 2003, follow:

Three Months Ended Six Months Ended
June 30, June 30,

(in thousands) 2004 2003 2004 2003

LG&E Electric
Revenues 192,566 173,917 390,815 360,936
Net income 20,441 9,457 36,384 27,489

LG&E Gas
Revenues 43,646 41,456 207,360 181,280
Net income (3,301) (1,682) 4,975 7,531

Total
Revenues 236,212 215,373 598,175 542,216
Net income 17,140 7,775 41,359 35,020


6. Regulatory Assets and Liabilities

The following regulatory assets and liabilities were included in
LG&E's balance sheets as of June 30, 2004 and December 31, 2003:

Louisville Gas and Electric
(Unaudited)
June 30, December 31,
(in thousands) 2004 2003

VDT costs $ 52,743 $ 67,810
Gas supply adjustments due from customers 11,930 22,077
Unamortized loss on bonds 20,802 21,333
Earnings sharing mechanism (ESM) provision 10,002 12,359
Merger surcredit 5,529 6,220
Asset retirement obligation (ARO) 6,480 6,015
Gas performance-based ratemaking (PBR) 3,378 5,480
Other (including fuel adjustment clause (FAC),
demand side management (DSM), etc.) 2,689 2,332
Total regulatory assets $ 113,553 $ 143,626

Accumulated cost of removal of
utility plant $(218,022) $(216,948)
Deferred income taxes - net (39,457) (41,180)
Gas supply adjustments due to customers (4,999) (6,805)
DSM (2,904) (1,706)
Other (including environmental cost recovery
(ECR), ARO, FAC and ESM) (2,151) (2,131)
Total regulatory liabilities $(267,533) $(268,770)

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LG&E currently earns a return on all regulatory assets except for gas
supply adjustments, ESM, gas performance-based ratemaking and FAC, all
of which are separate rate mechanisms with recovery within twelve
months. Additionally, no current return is earned on the ARO
regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.

The following regulatory assets and liabilities were included in KU's
balance sheets as of June 30, 2004 and December 31, 2003:

Kentucky Utilities
(Unaudited)

June 30, December 31,
(in thousands) 2004 2003

VDT costs $ 20,574 $ 26,451
Unamortized loss on bonds 10,127 10,511
ESM provision 12,038 12,382
Merger surcredit 4,280 4,815
ARO 12,095 11,322
FAC 2,865 4,298
Other 2,995 2,539
Total regulatory assets $ 64,974 $ 72,318

Accumulated cost of removal of
utility plant $(266,218) $(261,942)
Deferred income taxes - net (22,802) (24,058)
ARO (1,288) (1,162)
Spare parts (1,071) (1,055)
ECR (3,671) (9,189)
Other (including FAC and DSM) (2,076) (2,563)
Total regulatory liabilities $(297,126) $(299,969)

KU currently earns a return on all regulatory assets except for ESM and
FAC, both of which are separate recovery mechanisms with recovery
within twelve months. Additionally, no current return is earned on the
ARO regulatory asset. This regulatory asset will be offset against the
associated regulatory liability, ARO asset, and ARO liability at the
time the underlying asset is retired.

7. Utility Plant

KU retired two steam generating units, Green River Units 1 and 2, in
the amount of $17.2 million, from its books as of March 31, 2004.
Approximately $4 million in common assets, which are shared by Green
River Units 3 and 4, remain on KU's books. The common assets will
remain on KU's books until the final retirement of Green River Units 3
and 4. The gross book value of Green River Units 1 and 2 was charged
to the accumulated reserve for depreciation in accordance with FERC
regulations and no gain or loss was recorded. A partial redemption of
pollution control Series 14 bonds totaling $4.8 million was required in
the second quarter as a result of the retirement (see Note 9).

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The following data represent shares of jointly-owned additions to the
Trimble County plant for four combustion turbines ("CT's") as of June
30, 2004. Trimble County CT Units 7 and 8 began commercial operation
on June 1, 2004. The addition to LG&E plant in service was $37.0
million and for KU the addition was $63.2 million. Trimble County CT
Units 9 and 10 began commercial operation on July 1, 2004.

($ in millions) LG&E KU Total

Trimble CT 7
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value $18.7 $32.1 $50.8

Trimble CT 8
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value $18.6 $31.9 $50.5

Trimble CT 9
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value
(in construction work in progress) $18.7 $32.0 $50.7

Trimble CT 10
Ownership % 37% 63% 100%
Mw capacity 59 101 160
Net book value
(in construction work in progress) $18.6 $32.0 $50.6

8. New Accounting Pronouncements

FIN 46

In January 2003, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 ("FIN 46"). FIN 46 required certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the
equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 was
effective immediately for all new variable interest entities created or
acquired after January 31, 2003.

In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential
variable interest entities other than special purpose entities, the
revised FIN 46 ("FIN 46R") is now required to be applied no later than
the end of the first fiscal year or interim reporting period ending
after March 15, 2004. For all special purpose entities created prior
to February 1, 2003, FIN 46R is now required to be applied at the end
of the first interim or annual reporting period ending after December
15, 2003. FIN 46R may be applied prospectively with a cumulative-
effect adjustment as of the date it is first applied, or by restating
previously issued financial statements with a cumulative-effect
adjustment as of the beginning of the first year restated. FIN 46R
also requires certain disclosures of an entity's relationship with
variable interest entities.

Both LG&E and KU hold investment interests in Ohio Valley Electric
Corporation ("OVEC"), and KU holds an investment interest in Electric
Energy, Inc. ("EEI"). Neither LG&E nor KU are the primary beneficiary
of OVEC or EEI, and thus neither are consolidated into the financial
statements of LG&E or KU.

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LG&E, KU and ten other electric utilities are participating owners of
OVEC, located in Piketon, Ohio. OVEC owns and operates two power
plants that burn coal to generate electricity, Kyger Creek Station in
Ohio and Clifty Creek Station in Indiana. LG&E's share is 7%,
representing approximately 155 Mw of generation capacity and KU's share
is 2.5%, approximately 55 Mw of generation capacity.

LG&E's and KU's original investments in OVEC were made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock.
LG&E's and KU's investments in OVEC are accounted for under the cost
method of accounting. As of June 30, 2004, LG&E's and KU's investments
in OVEC totaled $0.5 million and $0.3 million, respectively. LG&E's
and KU's maximum exposure to loss as a result of their involvement with
OVEC is limited to the value of their investments. In the event of the
inability of OVEC to fulfill its power provision requirements, LG&E and
KU would substitute such power supply with either owned generation or
market purchases and would generally recover associated incremental
costs through regulatory rate mechanisms. See Note 11 and Part II,
Item 1, for further discussion of developments regarding LG&E's and
KU's ownership interests and power purchase rights.

KU owns 20% of the common stock of EEI, which owns and operates a 1,000-
Mw generating station in southern Illinois. KU is entitled to take 20%
of the available capacity of the station. Purchases from EEI are made
under a contractual formula which has resulted in costs which were and
are expected to be comparable to the cost of other power purchased or
generated by KU. Such power equated to approximately 9% of KU's net
generation system output in 2003.

KU's original investment in EEI was made in 1953. KU's investment in
EEI is accounted for under the equity method of accounting and, as of
June 30, 2004, totaled $11.9 million. KU's maximum exposure to loss as
a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with
either owned generation or market purchases and would generally recover
associated incremental costs through regulatory rate mechanisms.

SFAS No. 150

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 was effective immediately for financial
instruments entered into or modified after May 31, 2003, and otherwise
was effective for interim reporting periods beginning after June 15,
2003.

As of June 30, 2004, LG&E had 237,500 shares of $5.875 series
mandatorily redeemable preferred stock 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 15 of each year commencing with July 15, 2003, and the remaining
187,500 shares on July 15, 2008 at $100 per share. Beginning with the
three months ended September 30, 2003, LG&E reclassified its $5.875
series preferred stock as long-term debt with the minimum shares
mandatorily redeemable within one year classified as current.
Dividends accrued beginning July 1, 2003 are charged as interest
expense. On July 15, 2004, LG&E redeemed 12,500 shares as required at
a price of $100 per share.

KU has no financial instruments that fall within the scope of SFAS No.
150.

FSP 106-2

In May 2004, the FASB finalized FASB Staff Position ("FSP") 106-2,
Accounting and Disclosure Requirements Related to the Medicare
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Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare
Act") with guidance on accounting for subsidies provided under the
Medicare Act which became law in December 2003. FSP 106-2 is effective
for the first interim or annual period beginning after June 15, 2004.
KU will adopt FSP 106-2 in the third quarter of 2004. LG&E's medical
plan does not provide a benefit that is actuarially equivalent to
Medicare Part D; therefore, FSP 106-2 is not expected to have an impact
on LG&E.

On the basis of actuarial estimates, the Medicare Act will result in an
overall reduction of the accumulated postretirement benefit obligation
("APBO") for postretirement health and life insurance benefits for KU
amounting to approximately $5.0 million as of January 1, 2004.
Accordingly, KU's net periodic postretirement benefit cost for 2004
will be reduced by approximately $0.7 million. The APBO and the net
periodic postretirement benefit cost as of and for the periods ending
June 30, 2004 and 2003 do not reflect amounts associated with the
subsidies provided by the Medicare Act.


9. Short-Term and Long-Term Debt

Under the provisions for LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution
control bonds Series 10, 12, 13, 14 and 15, 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 in the
Consolidated Balance Sheets. The average annualized interest rate for
these bonds during the three months ending June 30, 2004 was 1.11% for
the LG&E bonds and 1.18% for the KU bonds.

In January 2004, LG&E entered into two long-term notes from Fidelia
Corporation ("Fidelia"), an E.ON financing subsidiary, one totaling $25
million with an interest rate of 4.33% that matures in January 2012,
and a one-year note totaling $100 million with an interest rate of
1.53%. The loans are secured by a lien subordinated to the first
mortgage bond lien. The proceeds were used to fund a pension
contribution and to repay other debt obligations. In April 2004, LG&E
prepaid $50 million of the $100 million 1.53% note payable to Fidelia.
The prepayment was paid out of cash balances and there was no
prepayment fee.

In January 2004, KU entered into an unsecured long-term loan from
Fidelia totaling $50 million with an interest rate of 4.39% that
matures in January 2012. The proceeds were used to fund a pension
contribution and to repay other debt obligations.

In May 2004, KU redeemed $4.8 million of its Series 14 pollution
control bonds which were initially issued in the amount of $7.2
million.

LG&E maintains five bilateral lines of credit totaling $185 million
that mature in 2005. There was no outstanding balance under these
facilities at June 30, 2004. Management expects to renew these
facilities as they expire.

LG&E and KU participate in an intercompany money pool agreement wherein
LG&E Energy and KU make funds available to LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the
prior month end) up to $400 million. Likewise, LG&E Energy and LG&E
make funds available to KU at market-based rates up to $400 million.
- - New Page -

LG&E had $26.0 million in money pool loans from LG&E Energy (included
in "Notes payable to affiliated companies") at an average rate of 1.04%
at June 30, 2004, and $171.7 million at an average rate of 1.21% at
June 30, 2003. The balance of the money pool loans from LG&E Energy to
KU (included in "Notes payable to affiliated companies") was $53.2
million at an average rate of 1.04% and $146.4 million at an average
rate of 1.21% at June 30, 2004 and 2003, respectively. The amount
available to LG&E under the money pool agreement at June 30, 2004 was
$374.0 million. The amount available to KU under the money pool
agreement at June 30, 2004 was $346.8 million. LG&E Energy maintains
a revolving credit facility totaling $150 million with an E.ON
affiliate to ensure funding availability for the money pool. LG&E
Energy had an outstanding balance of $69.7 million at an average rate
of 1.79% under this facility as of June 30, 2004 and availability of
$80.3 million remained.

10.Related Party Transactions

LG&E, KU, certain subsidiaries of LG&E Energy and other subsidiaries of
E.ON engage in related-party transactions. Transactions among LG&E, KU
and LG&E Energy subsidiaries are eliminated upon consolidation of LG&E
Energy subsidiaries. Transactions between LG&E or KU and E.ON
subsidiaries are eliminated upon consolidation of E.ON subsidiaries.
These transactions are generally performed at cost and are in
accordance with the SEC regulations under the PUHCA and the applicable
Kentucky Public Service Commission ("Kentucky Commission") regulations.
Accounts payable to and receivable from related parties are netted and
presented as accounts payable to affiliated companies on the balance
sheets of LG&E and KU, as allowed due to the right of offset.
Obligations related to intercompany debt arrangements with LG&E Energy
and Fidelia are presented as separate line items on the balance sheet,
as appropriate. The significant related-party transactions are
disclosed below.

Electric Purchases

LG&E and KU intercompany electric revenues and purchased power expense
(including LG&E Energy Marketing Inc. ("LEM")) for the three months and
six months ended June 30, 2004 and 2003 were as follows:

Three months ended Six months ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
LG&E
Electric operating revenues
from KU $8,426 $10,850 $30,504 $27,820
Electric operating revenues
from LEM 622 1,077 1,350 8,226
Purchased power from KU 9,114 9,211 30,699 23,675

KU
Electric operating revenues
from LG&E $9,114 $9,211 $30,699 $23,675
Electric operating revenues
from LEM 390 318 550 2,100
Purchased power from LG&E 8,426 10,850 30,504 27,820

Interest Charges

LG&E intercompany interest income and expense for the three months and
six months ended June 30, 2004 and 2003 were as follows:


Three months ended Six months ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003

Interest to affiliate
(money pool) $ (13) $ 536 $ 35 $1,269
Interest to affilitate
(Fidelia loans) 2,986 758 6,069 758
Interest to affiliate (KU) 4 (3) 14 -
Interest from affiliate (KU) - 1 - 5


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KU intercompany interest income and expense for the three months and
six months ended June 30, 2004 and 2003 were as follows:

Three months ended Six months ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003

Interest to affiliate
(money pool) $ 75 $349 $ 219 $722
Interest to affiliate
(Fidelia loans) 3,461 758 6,864 758
Interest to affiliate (LG&E) - 1 - 5
Interest from affiliate (LG&E) 4 (3) 14 -

Other Intercompany Billings

Other intercompany billings (including LG&E Energy Services Inc. ("LG&E
Services")) related to LG&E and KU for the three months and six months
ended June 30, 2004 and 2003 were as follows:

Three months ended Six months ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003

LG&E Services billings to LG&E $60,390 $61,404 $98,552 $88,034
LG&E Services billings to KU 44,613 64,915 75,188 86,409
LG&E billings to LG&E Services 1,490 1,281 4,525 6,143
LG&E billings to KU 33,796 39,111 94,509 91,760
KU billings to LG&E 31,683 22,203 83,516 55,795
KU billings to LG&E Services 1,097 770 3,915 7,864


11.Commitments and Contingencies

Except as discussed in this Quarterly Report on Form 10-Q, material
changes have not occurred in the current status of various commitments
or contingent liabilities from that discussed in the Companies' Annual
Report on Form 10-K for the year ended December 31, 2003 (including in
Notes 3 and 11 to the financial statements of LG&E and KU contained
therein and incorporated herein by reference) or Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004.

Electric and Gas Rates Cases

In December 2003, LG&E and KU filed applications with the Kentucky
Commission requesting increases in LG&E's and KU's electric rates and
LG&E's gas rates. The Companies requested general adjustments in
electric rates and LG&E requested general adjustments in gas rates
based on the twelve-month test year ended September 30, 2003. The
revenue increases requested by LG&E were $63.8 million for electric and
$19.1 million for gas. The revenue increase requested by KU was $58.3
million.

On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates of LG&E and the base
electric rates of KU. The Kentucky Commission's order largely accepted
proposed settlement agreements filed in May 2004 by LG&E, KU and a
majority of the parties to the rate case proceedings. The rate
increases took effect on July 1, 2004.

In the Kentucky Commission's order, (a) LG&E was granted increases in
annual base electric rates of approximately $43.4 million (7.7%) and in
annual base gas rates of approximately $11.9 million (3.4%) and (b) KU
was granted an increase in annual base electric rates of approximately
$46.1 million (6.8%). Other provisions of the order include decisions
on certain depreciation, gas supply clause, ECR and VDT amounts or
mechanisms and a termination of the ESM with respect to all periods
after 2003. The order also provided for a recovery before March 31,
2005 by the Companies of previously requested amounts relating to the
ESM during 2003.

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During July 2004, the Attorney General of Kentucky ("AG") served
subpoenas on LG&E and KU, as well as on the Kentucky Commission and its
staff, requesting information regarding allegedly improper
communications between the Companies and the Kentucky Commission,
particularly during the period covered by the rate cases. The Kentucky
Commission has procedurally reopened the rate cases for the limited
purpose of taking evidence, if any, as to the communication issues.
Subsequently, the AG filed pleadings with the Kentucky Commission
requesting rehearing of the rate cases on certain computational
components of the increased rates, including income tax, cost of
removal and depreciation amounts. In August 2004, the Kentucky
Commission denied the AG's rehearing request on the cost of removal
and depreciation issues, with the effect that the rate increase order
is final as to these matters, subject to the parties' rights to
judicial appeals. The Kentucky Commission further agreed to hold
in abeyance until mid-October 2004 its further proceedings regarding
the AG's concerns about alleged improper communications until the
AG could file with the Kentucky Commission an investigative report
regarding the latter issue. In addition, the Kentucky Commission
granted a rehearing on the income tax component once the abeyance
discussed above is lifted.

LG&E and KU believe no improprieties have occurred in their
communications with the Kentucky Commission and are cooperating with
the proceedings before the AG and the Kentucky Commission. The
Companies are currently unable to determine the ultimate impact, if
any, of the AG's investigation on the recently concluded rate case
or their operations generally.

Earnings Sharing Mechanism

The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $13.0 million
related to LG&E and $16.2 million related to KU. Based upon estimates,
the Companies previously accrued $8.9 million at LG&E and $9.3 million
at KU for the 2003 ESM as of December 31, 2003.

On June 30, 2004, the Kentucky Commission issued an order largely
accepting proposed settlement agreements by the Companies and all
intervenors regarding the ESM mechanisms of LG&E and KU. Under the ESM
settlements, LG&E and KU will continue to collect approximately $13.0
million and $16.2 million, respectively, of previously requested 2003
ESM revenue amounts through March 2005. As part of the settlement, the
parties agreed to a termination of the ESM mechanism relating to all
periods after 2003.

As a result of the settlement, the Company accrued an additional $4.1
million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM
revenue.

OVEC Power Agreement and Share Purchase

On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to
be effective beginning March 2006, upon the expiration of the current
power contract among the parties. Under the new contract, which has a
20-year term from its effective date, LG&E and KU have purchase rights
for 5.63% and 2.5%, respectively, of OVEC power at marginal cost-based
rates. LG&E and KU are entitled to 7% and 2.5% of OVEC power,
respectively, under the current contract.

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LG&E's estimated future minimum annual demand payments under the
Amended and Restated Inter-Company Power Agreement are as follows:

(in thousands)
2006 $ 10,098
2007 9,726
2008 9,932
2009 10,144
2010 10,361
Thereafter 170,646
Total $220,907

In addition, LG&E will purchase from American Electric Power Company
Inc. ("AEP") an additional 0.73% interest in OVEC for a purchase price
of approximately $104,000, resulting in an increase in LG&E ownership
in OVEC from 4.9% to 5.63%. The share purchase transaction is
anticipated to be completed during the fourth quarter of 2004, subject
to receipt of certain regulatory approvals.

Owensboro Contract Litigation

In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District Court against KU concerning a long-term power supply contract
(the "OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under the OMU Agreement, including
various payments or charges between KU and OMU and rights concerning
excess power, termination and emissions allowances, respectively. The
complaint seeks approximately $6 million in damages for historical
periods, as well as injunctive and other relief, including a
declaration that KU is in material breach. KU has removed this
litigation to the U.S. District Court for the Western District of
Kentucky and filed an answer in that court denying the OMU claims and
presenting certain counterclaims. KU has also initiated a proceeding
at the FERC to obtain the FERC's ruling on certain of the issues in
dispute.

Environmental Matters

In September 1998, the EPA announced its final "NOx SIP Call" rule
requiring states to impose significant additional reductions in NOx
emissions by May 2003, in order to mitigate alleged ozone transport
impacts on the Northeast region. The Commonwealth of Kentucky SIP,
which was approved by EPA June 24, 2003, required reductions in NOx
emissions from coal-fired generating units to the 0.15 lb./Mmbtu level
on a system-wide basis. In related proceedings in response to
petitions filed by various Northeast states, in December 1999, EPA
issued a final rule pursuant to Section 126 of the Clean Air Act
directing similar NOx reductions from a number of specifically targeted
generating units including all LG&E and KU units. As a result of
appeals to both rules, the compliance date was extended to May 2004.
LG&E and KU have complied with these NOx emissions reduction rules by
adding significant additional NOx controls to their generating units.
Installation of additional NOx controls have been performed on a phased
basis, commencing in late 2000 and continuing through the final
compliance date.

As of June 30, 2004, LG&E has incurred total capital costs of
approximately $182 million to reduce its NOx emissions to the 0.15
lb./Mmbtu level on a company-wide basis. As of June 30, 2004, KU has
incurred total capital costs of approximately $193 million to reduce
its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis.
In addition, LG&E and KU have begun incurring additional operation and
maintenance costs in operating new NOx controls. LG&E and KU believe
their costs in this regard to be comparable to those of similarly
situated utilities with like generation assets. In April 2001, the
Kentucky Commission granted recovery of these costs under the
environmental surcharge mechanism for LG&E and KU.

LG&E and KU are also monitoring several other air quality issues which
may potentially impact coal-fired power plants, including EPA's revised
air quality standards for ozone and particulate matter, measures to

- - New Page -

implement EPA's regional haze rule, EPA's December 2003 proposals to
regulate mercury emissions from steam electric generating units and to
further reduce emissions of sulfur dioxide and nitrogen oxides under
the Clean Air Interstate Rule. In addition, LG&E is currently working
with local regulatory authorities to review the effectiveness of
remedial measures aimed at controlling particulate matter emissions
from its Mill Creek Station. LG&E previously settled a number of
property damage claims from adjacent residents and completed
significant remedial measures as part of its ongoing capital
construction program. LG&E has converted the Mill Creek Station to a
wet stack operation in an effort to resolve all outstanding issues
related to particulate matter emissions.


12. Pension and Other Post-retirement Benefit Plans

The following table provides the components of net periodic benefit
cost for pension and other benefit plans:

Three Months Ended Year to Date
June 30, 2004 June 30, 2004
(in thousands) LG&E KU LG&E KU
Components of net periodic benefit cost:
Service cost $ 934 $ 1,103 $ 3,022 $ 3,490
Interest cost 4,709 3,538 15,233 11,187
Expected return on plan assets (4,289) (3,195) (13,874) (10,104)
Amortization of prior service cost (2) 148 (7) 467
Amortization of transition
obligation 897 269 2,900 853
Recognized actuarial loss 494 388 1,599 1,227
$ 2,743 $ 2,251 $ 8,873 $ 7,120

In January 2004, LG&E and KU made discretionary contributions to their
pension plans in the amounts of $34.5 million and $43.4 million,
respectively. No contributions are required for 2004 for either LG&E
or KU and no further discretionary contributions are planned.

13.Subsequent Events

July Storms

In July 2004 violent thunderstorms swept through Kentucky, causing
significant damage and widespread power outages. At the height of the
storms, 115,000 LG&E customers and 22,700 KU customers were without
power. The cost to repair the damage incurred in the LG&E service
territory as a result of these storms is estimated to be $8.4 million
in operations and maintenance expense and $2.1 million in capital
expenditures. The cost to repair the damage incurred in the KU service
territory as a result of these storms is estimated to be $0.5 million
in operations and maintenance expense and $0.1 million in capital
expenditures.

Rate Cases Update

During July 2004, the AG requested a rehearing of the LG&E and KU rate
cases. For a description of developments in these cases, see Note 11
of the Notes to Consolidated Financial Statements in Part 1, Item 1, of
this Quarterly Report on Form 10-Q.

Trimble County Combustion Turbines Units 9 & 10

Trimble County Combustion Turbines Units 9 and 10 began commercial
operation on July 1, 2004. See Note 7 of the Notes to Consolidated
Financial Statements on Part 1, Item 1 of this Quarterly Report on Form
10-Q.

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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, 2004, 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 SEC,
including the Annual Reports on Form 10-K for the year ended December 31,
2003.

Executive Summary

LG&E's net income for the three months ended June 30, 2004 was $17.1
million ($9.4 million higher than the three months ended June 30, 2003).
The increase was primarily related to higher electric revenues. Retail
sales volumes increased due to warmer weather, while gas volumes decreased.
KU's net income for the three months ended June 30, 2004, was $27.6 million
($13.4 million higher than the three months ended June 30, 2003). The
increase was primarily due to higher electric revenues due to higher retail
sales volumes resulting from warmer weather, partially offset by higher
maintenance expense.

LG&E's net income for the six months ended June 30, 2004 was $41.4 million
($6.4 million higher than the six months ended June 30, 2003). The
increase was primarily related to higher electric revenues due to warmer
weather. KU's net income for the six months ended June 30, 2004, was $60.0
million ($34.0 million higher than the six months ended June 30, 2003).
The increase was primarily due to higher electric revenues and lower
maintenance expense.

As regulated utilities, LG&E and KU's financial performance is greatly
impacted by regulatory proceedings. On June 30, 2004, the Kentucky
Commission issued an order approving increases in the base rates of LG&E
and KU. The rate increase took effect on July 1, 2004. In July 2004, the
AG commenced an investigation examining communications between the Kentucky
Commission and the Companies and separately, filed for a rehearing of the
rate cases on such issue and certain calculation components of the
increased rates. The Kentucky Commission ordered a reopening of the rate
cases to take evidence in the communications issue. For a description of
developments in these cases, see Note 11 of the Notes to Consolidated
Financial Statements in Part 1, Item 1 of this Quarterly Report on Form 10-
Q.

Results of Operations

The results of operations for LG&E and KU are affected by fluctuations in
temperature and other weather-related factors. Because of these and other
factors, the results of one period are not necessarily indicative of
results or trends to be expected for another period.

- - New Page -

Three Months Ended June 30, 2004, Compared to
Three Months Ended June 30, 2003

LG&E Results:

LG&E's net income increased $9.4 million (121%) for the three months ended
June 30, 2004, as compared to the three months ended June 30, 2003,
primarily due to higher retail electric revenues, partially offset by
higher other operation expenses.

A comparison of LG&E's revenues for the three months ended June 30, 2004,
with the three months ended June 30, 2003, reflects increases and
(decreases) which have been segregated by the following principal causes:

Cause Electric Gas
(in thousands) Revenues Revenues

Retail sales:
Fuel and gas supply adjustments $ 1,159 $ 7,751
Environmental cost recovery surcharge 5,513 -
Earnings sharing mechanism 518 -
LG&E/KU merger surcredit (947) -
Variation in sales volume and other 17,303 (5,777)
Total retail sales 23,546 1,974

Wholesale sales (4,026) 279
Provision for rate collections 1,017 -
Other (1,888) (63)
Total $ 18,649 $ 2,190

Electric revenues increased $18.6 million primarily as the result of an
increase in sales volumes to ultimate consumers of 9.2%. The retail sales
volume increase was due to warmer weather than the prior year as cooling
degree days increased 89%. However, overall volumes decreased due to lower
wholesale sales. Gas revenues increased $2.2 million primarily as a result
of higher natural gas prices billed to customers through the gas supply
clause partially offset by lower sales volumes to ultimate consumers due to
warmer weather.

The provision for rate collections increased $1.0 million, including a $3.4
million higher provision for the earnings sharing mechanism, offset by a
$2.4 million lower provision for the environmental cost recovery surcharge.

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 Commission. Fuel for electric generation increased $1.3 million
(3%) for the three months ended due to an increase in the cost of coal
burned ($2.0 million), partially offset by a decrease in generation ($0.7
million). Gas supply expenses increased $5.0 million (19%) due to an
increase in net gas supply cost ($6.7 million), offset by a decrease in the
volume of retail gas sold ($1.7 million).

Other operation expenses increased $3.7 million (7%), as compared to 2003.
An estimated $7.4 million was recorded in the second quarter of 2004 for
costs incurred related to May 2004 storms. Results for 2003 included $1.1
million in cost to achieve amortization related to the KU/LG&E merger and
the One Utility initiative, which ended June 30, 2003, and September 30,
2003, respectively. In addition, pension expense was $1.3 million lower
and bad debt expense was $0.5 million lower in 2004.

Maintenance expenses decreased $2.4 million (14%). A write-off of obsolete
inventory of $1.1 million was included in 2003 and steam power generation
was $0.7 million lower in 2004.

Depreciation and amortization decreased $2.1 million (7%) due to a
depreciation adjustment in the second quarter of 2003 related to assets
capitalized in that period.
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Property and other taxes increased $1.6 million (47%). In June 2003,
property taxes reflected a $1.2 million coal incentive tax credit.

Variations in income tax expense are largely attributable to changes in pre-
tax income.

Three Months Three Months
Ended Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.8 6.5
Amortization of investment tax credit & R&D (6.6) (9.5)
Other differences 0.6 (2.2)
Effective income tax rate 34.8% 29.8%

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.

Interest charges decreased $0.6 million (10%) primarily due to the $ 1.0
million savings on interest expense realized from the refinancing of fixed-
rate Series V and Series W pollution control bonds to the variable-rate
Series GG pollution control bonds in November 2003.

Interest expense to affiliated companies increased $1.7 million (130%)
primarily due to a $2.2 million increase in interest expense to Fidelia
related to new notes issued in August 2003 and January 2004. Offsetting
this increase is a $0.5 million decrease in interest expense on borrowings
from the money pool due to lower borrowing levels.

The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2004, was 1.07% and the corresponding rate for the
three months ended June 30, 2003, was 1.15%.

KU Results:

KU's net income increased $13.4 million (95%) for the three months ended
June 30, 2004, as compared to the three months ended June 30, 2003. The
increase was primarily due to higher revenues related to higher sales
volumes, partially offset by higher maintenance expense.

A comparison of KU's revenues for the three months ended June 30, 2004,
with the three months ended June 30, 2003, reflects increases and
(decreases) which have been segregated by the following principal causes:

Cause
(in thousands)

Retail sales:
Fuel supply adjustments $(2,503)
Environmental cost recovery surcharge 1,615
Earnings sharing mechanism 1,395
LG&E/KU merger surcredit (1,071)
Variation in sales volume and other 16,967
Total retail sales 16,403

Wholesale sales 5,362
Provision for rate collections 11,694
Other 1,736
Total $35,195

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Electric revenues increased $35.2 million primarily as the result of an
increase in sales volumes to ultimate consumers of 11.3%. The sales volume
increase was due to warmer weather than last year as cooling degree days
increased 73%. Also contributing to higher revenues for the quarter were
increases in the provision for rate collections and wholesale sales. The
provision for rate collections included a $3.8 million higher provision for
the earnings sharing mechanism, a $5.4 million higher provision related to
the environmental cost recovery surcharge, and a $2.4 million higher
provision related to the fuel adjustment clause.

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 $8.0 million (13%) for the quarter
because of an increase in generation ($8.1 million), partially offset by a
slight decrease in the cost of coal burned ($0.1 million).

Power purchased decreased $3.0 million (8%) due to a decrease in the price
of power purchased ($1.7 million) and a decrease in the volume purchased
($1.3 million).

Other operation expenses decreased $1.6 million (4%) as compared to 2003.
Cost to achieve amortization for the KU/LG&E merger, which ended in June
2003, was $1.0 million in 2003.

Maintenance expenses increased $9.6 million (130%). Maintenance expenses
in 2003 were reduced by an $8.9 million insurance reimbursement received in
the second quarter of 2003 for costs incurred in a February 2003 ice storm.

Depreciation and amortization decreased $1.8 million (7%) because of a
depreciation adjustment in the second quarter of 2003 related to assets
capitalized that quarter.

Variations in income tax expense are largely attributable to changes in
pretax income.

Three Months Three Months
Ended Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 6.0 6.5
Amortization of investment tax credit & R&D (1.2) (3.1)
Other differences (1.8) (4.6)
Effective income tax rate 38.0% 33.8%

The amortization of the 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 change to be
greater in the 2003 period.

Interest expense decreased $2.9 million (44%) primarily due to $1.6 million
in interest expense savings from the redemption of pollution control bonds
Series Q at 6.32% and Series P at 8.55% redeemed in June and November of
2003, respectively. Additionally, interest rate swaps yielded a $1.2
million decrease in related interest expenses resulting primarily from the
termination of a swap in February 2004 and better performance of the
remaining swaps.

Interest expense to affiliated companies increased $2.4 million (219%)
primarily due to a $2.7 million increase in interest expense to Fidelia
related to new notes issued in August 2003 through January 2004.
Offsetting this increase is a $0.3 decrease in interest expense on
borrowings from the money pool due to lower borrowing levels.

The weighted average interest rate on variable-rate bonds for the three
months ended June 30, 2004, was 1.11% and the corresponding rate for the
three months ended June 30, 2003, was 1.14%.

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Six Months Ended June 30, 2004, Compared to
Six Months Ended June 30, 2003

LG&E Results:

LG&E's net income increased $6.4 million (18%) for the six months ended
June 30, 2004, as compared to the six months ended June 30, 2003, primarily
due to higher electric and gas revenues, partially offset by higher other
operations expenses and higher interest expense.

A comparison of LG&E's revenues for the six months ended June 30, 2004,
with the six months ended June 30, 2003, reflects increases and (decreases)
which have been segregated by the following principal causes:

Cause Electric Gas
(in thousands) Revenues Revenues

Retail sales:
Fuel and gas supply adjustments $(1,646) 45,381
Environmental cost recovery surcharge 7,911 -
Earnings sharing mechanism 3,774 -
LG&E/KU merger surcredit (1,418) -
Weather normalization - 2,419
Variation in sales volume and other 15,998 (22,275)
Total retail sales 24,619 25,525

Wholesale sales 8,091 1,034
Provision for rate refunds (2,982) -
Other 151 (479)
Total $29,879 $ 26,080

Electric revenues increased $29.9 million primarily because of increased
sales volumes to ultimate consumers of 4.4% due to warmer weather than
prior year as cooling degrees days increased 94%. Increased wholesale
revenues and environmental cost recovery also contributed to the increase
in revenues. Gas revenues increased $26.1 million primarily as a result of
higher natural gas prices billed to customers, partially offset by lower
sales volumes to ultimate consumers due to warmer weather.

The provision for rate refunds decreased $3.0 million, primarily due to a
$3.9 million lower provision related to the environmental cost recovery
surcharge.

Fuel for electric generation increased $4.4 million (5%) for the six months
due to an increase in the cost of coal burned ($4.4 million) while
generation volume was flat. Gas supply expenses increased $29.7 million
(22%) due to an increase in net gas supply cost ($40.8 million), offset by
a decrease in the volume of retail gas delivered to the distribution system
($11.1 million).

Power purchased increased $4.8 million (12%) due to an increase in the
price of power purchased ($1.0 million) and an increase in the volume of
the purchases ($3.8 million).

Other operations expenses increased $8.3 million (8%) in 2004, as compared
to 2003, due to higher transmission expense of $3.5 million, primarily due
to higher MISO-related expense, and $7.5 million higher electric
distribution expense, due to the May 2004 storms. These higher expenses
were partially offset by $2.9 million lower cost to achieve amortization
related to the KU/LG&E merger and One Utility initiative, and $1.5 million
lower benefits expense.

Maintenance expenses decreased $2.8 million (9%). In 2003, $2.1 million in
obsolete inventory was written off.

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Depreciation and amortization decreased $1.7 million (3%) because of a
depreciation adjustment in the second quarter of 2003, related to assets
capitalized in that period.

Variations in income tax expense are largely attributable to changes in pre-
tax income.

Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.7 5.8
Amortization of investment tax credit & R&D (4.3) (3.8)
Other differences 0.2 (0.8)
Effective income tax rate 36.6% 36.2%

Property and other taxes increased $2.0 million (24%). Property taxes in
2003 reflected a $1.2 million coal incentive tax credit.

Interest charges decreased $2.1 million (17%) primarily due to the $2.9
million savings of interest expense realized from the refinancing of fixed-
rate Series V and Series W pollution control bonds into the variable-rate
Series GG. Also, the redemption of the first mortgage bond in August 2003
contributed to the decrease in interest expense by $1.3 million.
Offsetting these decreases is an increase of $1.9 million from interest
rate swaps.

Interest expense to affiliated companies increased $4.1 million (202%)
primarily due to a $5.3 million increase in interest expense to Fidelia
related to new notes issued in August 2003 and January 2004. Offsetting
this increase is a $1.2 million decrease in interest expense on borrowings
from the money pool due to lower borrowing levels.

The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2004 was 1.06%, compared to 1.19% for the comparable
period in 2003.

KU Results:

KU's net income increased $34.0 million (131%) for the six months ended
June 30, 2004, as compared to the six months ended June 30, 2003. The
increase was primarily due to higher electric revenues and lower
maintenance expense.

A comparison of KU's revenues for the six months ended June 30, 2004, with
the six months ended June 30, 2003, reflects increases and (decreases)
which have been segregated by the following principal causes:

Cause
(in thousands)

Retail sales:
Environmental cost recovery surcharge $ 2,067
Earnings sharing mechanism 5,304
LG&E/KU merger surcredit (1,829)
Variation in sales volume and other 19,541
Total retail sales 25,083

Wholesale sales 11,918
Provision for rate collections 15,863
Other 4,734
Total $57,598

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Electric revenues increased $57.6 million primarily due to increased sales
volumes to ultimate consumers of 6.1% due to warmer weather than last year
as cooling degree days increased 75%. Also contributing to the overall
revenue increase were increases in the provision for rate collections,
wholesale revenues, and earnings sharing mechanism recoveries. The
provision for rate collections included higher provisions for the
environmental cost recovery ($10.4 million), the earngins sharing mechanism
($3.5 million) and the fuel adjustment clause ($2.0 million).

Fuel for electric generation increased $11.6 million (9%) for the six
months due to an increase in the cost of coal burned ($3.5 million) and an
increase in generation ($8.1 million).

Power purchased decreased $2.9 million (4%) due to a decrease in the price
of power purchased ($5.4 million), partially offset by an increase in
volumes purchased ($2.5 million).

Other operation expenses decreased $2.0 million (3%). Cost to achieve
amortization of $3.2 million related to the KU/LG&E merger and One Utility
initiative was recorded in 2003 and was fully amortized as of June 2003.
In 2004, benefits expense decreased $1.5 million and distribution expense
decreased $0.7 million due to the February 2003 ice storm. These decreases
were offset by higher emission allowance expense of $2.3 million and higher
transmission expense of $1.1 million.

Maintenance expenses decreased $7.5 million (21%). Steam power maintenance
expense decreased $5.5 million; Ghent Unit 3, Green River Unit 4 and Tyrone
Unit 3 all had major overhauls in 2003. Distribution maintenance decreased
$1.3 million and transmission overhead line maintenance decreased $0.6
million in 2004 due to the February 2003 ice storm.

Variations in income tax expense are largely attributable to changes in
pretax income.

Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
Effective Rate
Statutory federal income tax rate 35.0% 35.0%
State income taxes net of federal benefit 5.9 6.7
Amortization of investment tax credit & R&D (1.1) (3.4)
Other differences (1.7) (4.4)
Effective income tax rate 38.1% 33.9%

The amortization of the investment tax credit and other differences were
approximately the same in both periods, but lower pretax income for the six
months ended June 30, 2003, caused the percentage changes to be greater in
the 2003 period.

Interest expense decreased $6.7 million (60%) due primarily to the
redemption of pollution control bonds Series P at 8.55% and Series Q at
6.32% redeemed in November and June of 2003, respectively. Additionally,
interest rate swaps yielded a $2.8 million decrease in related interest
expenses resulting primarily from the February termination of a swap
related to the Series 9 pollution control bonds and better performance of
remaining swaps.

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Interest expense to affiliated companies increased $5.6 million (377%)
primarily due to a $6.1 million increase in interest expense to Fidelia
related to new notes issued in August 2003 through January 2004.
Offsetting this increase is a $0.5 million decrease in interest expense on
borrowings from the money pool due to lower borrowing levels.

The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2004, was 1.08% and the corresponding rate for the
six months ended June 30, 2003, was 1.16%.

Liquidity and Capital Resources

LG&E and KU's needs 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 are
maintained to fund short-term capital requirements. LG&E and KU believe
that such sources of funds will be sufficient to meet the needs of the
business in the foreseeable future.

As of June 30, 2004, LG&E and KU are in a negative working capital
position. The Companies expect to cover any deficiencies with cash flow
from operations, money pool borrowings, and borrowings from Fidelia, an
E.ON financing subsidiary.

Construction expenditures for the six months ended June 30, 2004 for LG&E
and KU amounted to $64.9 million and $76.3 million, respectively. Such
expenditures include construction to meet nitrogen oxide (NOx) emission
standards and the acquisition of combustion turbines to meet peak power
demands. Expenditures for the six months ended June 30, 2004, by LG&E and
KU for NOx construction were $5.6 million and $21.9 million, respectively.
Expenditures for the six months ended June 30, 2004, for Trimble County
combustion turbines, Units 7 through 10, by LG&E and KU were $5.5 million
and $9.5 million, respectively. In addition, LG&E construction
expenditures include $8.4 million for distribution overhead line
construction, $5.8 million for Mill Creek Unit 3 ductwork installation
related to the flue gas desulfurization ("FGD") project, and $5.3 million
for gas main replacements. At KU, construction expenditures include $6.4
million for E.W. Brown Unit 3 cooling tower and precipitator rebuild and
$6.0 million for distribution construction in the Lexington area. The
expenditures were financed with internally generated funds and intercompany
loans from affiliates.

LG&E's cash balance increased $12.3 million during the six months ended
June 30, 2004, primarily due to higher net income and increased net
borrowings from affiliated companies, partially offset by pension funding,
construction expenditures, and payment of common dividends to its parent
company. KU's cash balance increased $4.9 million during the six months
ended June 30, 2004. The increase reflects higher net income and increased
net borrowings from affiliated companies, partially offset by pension
funding, construction expenditures and the payment of common dividends to
its parent company.

Variations in accounts receivable, accounts payable and materials and
supplies are generally not significant indicators of LG&E's and KU's
liquidity. In general, such variations are usually attributable to
seasonal fluctuations in weather, which have a direct effect on sales of
electricity and natural gas. However, the increase in accounts receivable
at LG&E and KU, as of June 30, 2004, was primarily due to the termination
of the accounts receivable securitization programs in January 2004.
Discontinuing the accounts receivable securitizations programs resulted in
an increase in accounts receivable of $58.0 million at LG&E and by $50.0
million at KU. (LG&E and KU maintained a fully funded reserve for
uncollectible accounts related to receivables sold during the
securitization program.) The increase in accounts receivable at LG&E as of
June 30, 2004 was somewhat offset by the impact of decreased gas sales in
June 2004 compared to December 2003. The decrease in LG&E's gas stored
underground relates to seasonal uses of gas.

Interest rate swaps are used to hedge LG&E's and KU's underlying variable-
rate debt obligations. These swaps hedge specific debt issuances and,
consistent with management's designation, are accorded hedge accounting
treatment. As of June 30, 2004, LG&E had swaps with a combined notional
value of $228.3 million and KU had swaps with a combined notional value of
$103.0 million. LG&E's swaps exchange floating-rate interest payments for
fixed-rate interest payments to reduce the impact of interest rate changes
on LG&E's pollution control bonds. KU's swaps effectively convert fixed-
rate obligations on KU's first mortgage bonds Series P and R to variable-
rate obligations.

In February 2004, KU terminated the swap it had in place at December 31,
2003 related to its Series 9 pollution control bonds. The notional amount
of the terminated swap was $50 million and KU received a payment of $2.0
million as part of the termination, resulting in a gain of $0.8 million.

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At June 30, 2004, variable rate debt, including the impact of interest rate
swaps, was 36.9% of LG&E's total debt at $331.9 million and 45.7% of KU's
total debt at $352.2 million. At December 31, 2003, variable rate debt,
including the impact of interest rate swaps, was 44.0% of LG&E's total debt
at $386.3 million and 55.5% of KU's total debt at $397.1 million.

Under the provisions of LG&E's variable-rate pollution control bonds,
Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution control
bonds Series 10, 12, 13, 14 and 15, 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 in the Consolidated Balance Sheets.
The average annualized interest rate for these bonds during the six months
ending June 30, 2004, was 1.10% for the LG&E bonds and 1.13% for the KU
bonds.

In January 2004, LG&E entered into two long-term notes with Fidelia, one
totaling $25 million with an interest rate of 4.33% that matures in January
2012, and a one-year note totaling $100 million with an interest rate of
1.53%. The loans are secured by a lien subordinated to the first mortgage
bond lien. The proceeds were used to fund a pension contribution and to
repay other debt obligations. In April 2004, LG&E prepaid $50 million of
the $100 million 1.53% note payable to Fidelia. The prepayment was paid
out of cash balances and there was no prepayment fee.

In January 2004, KU entered into an unsecured long-term loan from Fidelia
totaling $50 million with an interest rate of 4.39% that matures in January
2012. The proceeds were used to fund a pension contribution and to repay
other debt obligations.

LG&E maintains five bilateral lines of credit with banks totaling $185
million that mature in 2005. There was no outstanding balance under these
facilities at June 30, 2004. Management expects to renew these facilities
as they expire.

LG&E and KU participate in an intercompany money pool agreement wherein
LG&E Energy and KU make funds available to LG&E at market-based rates
(based on an index of highly rated commercial paper issues as of the prior
month end) up to $400 million. Likewise, LG&E Energy and LG&E make funds
available to KU at market-based rates up to $400 million. LG&E had $26.0
million in money pool loans from LG&E Energy (included in "Notes payable to
affiliated companies") at an average rate of 1.04% at June 30, 2004, and
$171.7 million at an average rate of 1.21% at June 30, 2003. The balance
of the money pool loans from LG&E Energy to KU (included in "Notes payable
to affiliated companies") was $53.2 million at an average rate of 1.04% and
$146.4 million at an average rate of 1.21% at June 30, 2004 and 2003,
respectively. The amount available to LG&E under the money pool agreement
at June 30, 2004 was $374.0 million. The amount available to KU under the
money pool agreement at June 30, 2004 was $346.8 million. LG&E Energy
maintains a revolving credit facility totaling $150 million with an
affiliate to ensure funding availability for the money pool. LG&E Energy
had an outstanding balance of $69.7 million at an average rate of 1.79%
under this facility as of June 30, 2004 and availability of $80.3 million
remained.

In January 2004, LG&E and KU made discretionary contributions to their
pension plans of $34.5 million and $43.4 million, respectively. No
contributions are required for 2004 and no further discretionary
contributions are planned.

LG&E's security ratings as of June 30, 2004, were:

Moody's S&P

First mortgage bonds A1 A-
Preferred stock Baa1 BBB-
Commercial paper P-1 A-2

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KU's security ratings as of June 30, 2004, were:

Moody's S&P

First mortgage bonds A1 A
Preferred stock Baa1 BBB-
Commercial paper P-1 A-2

These ratings reflect the views of Moody's and S&P. 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, 2004, and December 31, 2003,
follow:

June 30, December 31,
2004 2003

Long-term debt (including current portion) 31.2% 31.9%
Long-term debt to affiliated company
(including current portion) 14.3 10.7
Notes payable to affiliated companies 1.4 4.3
Preferred stock 3.7 3.8
Common equity 49.4 49.3
Total 100.0% 100.0%

KU's capitalization ratios at June 30, 2004, and December 31, 2003, follow:

June 30, December 31,
2004 2003

Long-term debt (including current portion) 22.4% 24.1%
Long-term debt to affiliated company
(including current portion) 18.8 16.8
Notes payable to affiliated companies 3.0 2.6
Preferred stock 2.3 2.4
Common equity 53.5 54.1
Total 100.0% 100.0%

New Accounting Pronouncements

FIN 46

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46").
FIN 46 required certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 was effective immediately for all new variable interest entities created
or acquired after January 31, 2003.

In December 2003, FIN 46 was revised, delaying the effective dates for
certain entities created before February 1, 2003, and making other
amendments to clarify application of the guidance. For potential variable
interest entities other than special purpose entities, the revised FIN 46
("FIN 46R") is now required to be applied no later than the end of the
first fiscal year or interim reporting period ending after March 15, 2004.
For all special purpose entities created prior to February 1, 2003, FIN 46R
is now required to be applied at the end of the first interim or annual
reporting period ending after December 15, 2003. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date it is
first applied, or by restating previously issued financial statements with
a cumulative-effect adjustment as of the beginning of the first year
restated. FIN 46R also requires certain disclosures of an entity's
relationship with variable interest entities.

- - New Page -

Both LG&E and KU hold investment interests in OVEC and KU holds an
investment interest in EEI. Neither LG&E nor KU are the primary
beneficiary of OVEC or EEI, and thus neither are consolidated into the
financial statements of LG&E or KU.

LG&E, KU and ten other electric utilities are participating owners of OVEC,
located in Piketon, Ohio. OVEC owns and operates two power plants that
burn coal to generate electricity, Kyger Creek Station in Ohio and Clifty
Creek Station in Indiana. LG&E's share is 7%, representing approximately
155 Mw of generation capacity and KU's share is 2.5%, approximately 55 Mw
of generation capacity.

LG&E's and KU's original investments in OVEC were made in 1952. LG&E's
investment in OVEC is the equivalent of 4.9% of OVEC's common stock and
KU's investment is the equivalent of 2.5% of OVEC's common stock. LG&E's
and KU's investments in OVEC are accounted for on the cost method of
accounting. As of June 30, 2004, LG&E's and KU's investments in OVEC
totaled $0.5 million and $0.3 million, respectively. LG&E's and KU's
maximum exposure to loss as a result of their involvement with OVEC is
limited to the value of their investment. In the event of the inability of
OVEC to fulfill its power provision requirements, LG&E and KU would
substitute such power supply with either owned generation or market
purchases and would generally recover associated incremental costs through
regulatory rate mechanisms. See Part II, Item 1, for further discussion of
developments regarding LG&E's and KU's ownership interests and power
purchase rights.

KU owns 20% of the common stock of EEI, which owns and operates a 1,000-Mw
generating station in southern Illinois. KU is entitled to take 20% of the
available capacity of the station. Purchases from EEI are made under a
contractual formula which has resulted in costs which were and are expected
to be comparable to the cost of other power purchased or generated by KU.
Such power equated to approximately 9% of KU's net generation system output
in 2003.

KU's original investment in EEI was made in 1953. KU's investment in EEI
is accounted for on the equity method of accounting. As of June 30, 2004,
KU's investment in EEI totaled $11.9 million. KU's maximum exposure to
loss as a result of its involvement with EEI is limited to the value of its
investment. In the event of the inability of EEI to fulfill its power
provision requirements, KU would substitute such power supply with either
owned generation or market purchases and would generally recover associated
incremental costs through regulatory rate mechanisms.

SFAS No. 150

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No.
150 was effective immediately for financial instruments entered into or
modified after May 31, 2003, and otherwise was effective for interim
reporting periods beginning after June 15, 2003.

As of June 30, 2004, LG&E had 237,500 shares of $5.875 series mandatorily
redeemable preferred stock 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 15 of each year
commencing with July 15, 2003, and the remaining 187,500 shares on July 15,
2008 at $100 per share. Beginning with the three months ended September
30, 2003, LG&E reclassified its $5.875 series preferred stock as long-term
debt with the minimum shares mandatorily redeemable within one year
classified as current. Dividends accrued beginning July 1, 2003 are
charged as interest expense.

KU has no financial instruments that fall within the scope of SFAS No. 150.

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FSP 106-2

In May 2004, the FASB finalized FASB Staff Position ("FSP") 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("Medicare Act") with
guidance on accounting for subsidies provided under the Medicare Act which
became law in December 2003. FSP 106-2 is effective for the first interim
or annual period beginning after June 15, 2004. KU will adopt FSP 106-2 in
the third quarter of 2004. LG&E's medical plan does not provide a benefit
that is actuarially equivalent to Medicare Part D; therefore, FSP 106-2 is
not expected to have an impact on LG&E.

On the basis of actuarial estimates, the Medicare Act will result in an
overall reduction of the accumulated postretirement benefit obligation
("APBO") for postretirement health and life insurance benefits for KU
amounting to approximately $5.0 million as of January 1, 2004.
Accordingly, KU's net periodic postretirement benefit cost for 2004 will be
reduced by approximately $0.7 million. The APBO and the net periodic
postretirement benefit cost as of and for the periods ending June 30, 2004
and 2003 do not reflect amounts associated with the subsidies provided by
the Medicare Act.

Contingencies

For a description of significant contingencies that may affect LG&E and KU,
reference is made to Part I, Item 3, Legal Proceedings in LG&E's and KU's
Annual Reports on Form 10-K for the year ended December 31, 2003; Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004; and to Part II -
Item 1, Legal Proceedings herein.

Electric and Gas Rates Cases

On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates of LG&E and the base electric
rates of KU. In July 2004, the AG commenced an investigation examining
communications between the Kentucky Commission and the Companies and
separately filed for a rehearing of the rate cases on such issue and
certain calculation components of the increased rates. The Kentucky
Commission ordered a procedural reopening of the rate cases for the limited
purpose of taking evidence, if any, as to the communication issue. For a
description of developments in these cases, see Note 11 of the Notes to
Consolidated Financial Statements in Part 1, Item 1 of this Quarterly
Report on Form 10-Q.

Earnings Sharing Mechanism

The Companies filed their final 2003 ESM calculations with the Kentucky
Commission on March 1, 2004, and applied for recovery of $13.0 million
related to LG&E and $16.2 million related to KU. Based upon estimates, the
Companies previously accrued $8.9 million at LG&E and $9.3 million at KU
for the 2003 ESM as of December 31, 2003.

On June 30, 2004, the Kentucky Commission issued an order largely accepting
proposed settlement agreements by the Companies and all intervenors
regarding the ESM mechanisms of LG&E and KU. Under the ESM settlements,
LG&E and KU will continue to collect approximately $13.0 million and $16.2
million, respectively, of previously requested 2003 ESM revenue amounts
through March 2005. As part of the settlement, the parties agreed to a
termination of the ESM mechanism relating to all periods after 2003.

As a result of the settlement, the Company accrued an additional $4.1
million at LG&E and $6.9 million at KU in June 2004 related to 2003 ESM
revenue.

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OVEC Power Agreement and Share Purchase

On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expiration of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.

LG&E's estimated future minimum annual demand payments under the Amended
and Restated Inter-Company Agreement are as follows:

(in thousands)
2006 $ 10,098
2007 9,726
2008 9,932
2009 10,144
2010 10,361
Thereafter 170,646
Total $220,907

In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during the fourth quarter of 2004, subject to receipt of certain
regulatory approvals.

Owensboro Contract Litigation

In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District Court against KU concerning a long-term power supply contract (the
"OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under the OMU Agreement, including
various payments or charges between KU and OMU and rights concerning excess
power, termination and emissions allowances, respectively. The complaint
seeks approximately $6 million in damages for historical periods, as well
as injunctive and other relief, including a declaration that KU is in
material breach. KU has removed this litigation to the U.S. District Court
for the Western District of Kentucky and filed an answer in that court
denying the OMU claims and presenting certain counterclaims. KU has also
initiated a proceeding at the FERC to obtain the FERC's ruling on certain
of the issues in dispute.

Environmental Matters

In September 1998, the EPA announced its final "NOx SIP Call" rule
requiring states to impose significant additional reductions in NOx
emissions by May 2003, in order to mitigate alleged ozone transport impacts
on the Northeast region. The Commonwealth of Kentucky SIP, which was
approved by EPA June 24, 2003, required reductions in NOx emissions from
coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide
basis. In related proceedings in response to petitions filed by various
Northeast states, in December 1999, EPA issued a final rule pursuant to
Section 126 of the Clean Air Act directing similar NOx reductions from a
number of specifically targeted generating units including all LG&E and KU
units. As a result of appeals to both rules, the compliance date was
extended to May 2004. LG&E and KU have complied with these NOx emissions
reduction rules.

LG&E and KU have added significant additional NOx controls to their
generating units. Installation of additional NOx controls have been
performed on a phased basis, with installation of controls which commenced
in late 2000 and continued through the final compliance date. As of June
30, 2004, LG&E has incurred total capital costs of approximately $191
million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a
company-wide basis. As of June 30, 2004, KU has incurred total capital
costs of approximately $252 million to reduce its NOx emissions to the 0.15
lb./Mmbtu level on a company-wide basis. In addition, LG&E and KU have
begun incurring additional operation and maintenance costs in operating new
NOx controls. LG&E and KU believe their costs in this regard to be
comparable to those of similarly situated utilities with like generation
assets. In April 2001, the Kentucky Commission granted recovery of these
costs under the environmental surcharge mechanism for LG&E and KU.

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LG&E and KU are also monitoring several other air quality issues which may
potentially impact coal-fired power plants, including EPA's revised air
quality standards for ozone and particulate matter, measures to implement
EPA's regional haze rule, EPA's December 2003 proposals to regulate mercury
emissions from steam electric generating units and to further reduce
emissions of sulfur dioxide and nitrogen oxides under the Clean Air
Interstate Rule. In addition, LG&E is currently working with local
regulatory authorities to review the effectiveness of remedial measures
aimed at controlling particulate matter emissions from its Mill Creek
Station. LG&E previously settled a number of property damage claims from
adjacent residents and completed significant remedial measures as part of
its ongoing capital construction program. LG&E has converted the Mill
Creek Station to a wet stack operation in an effort to resolve all
outstanding issues related to particulate matter emissions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

LG&E and KU, and their respective ratepayers, are exposed to market risks.
Market risk exposures include 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 $3.3
million and $3.5 million, respectively, at June 30, 2004. LG&E's exposure
to floating interest rates decreased $1.1 million and KU's exposure to
floating interest rates decreased $1.0 million during the first six months
of 2004.

The potential loss in fair value of LG&E's interest rate swaps resulting
from a hypothetical 1% change in base interest rates is estimated at
approximately $23.6 million as of June 30, 2004. The potential loss in
fair value of KU's interest rate swaps resulting from a hypothetical 1%
change in base interest rates is estimated at approximately $4.3 million as
of June 30, 2004. These estimates are derived from third-party valuations.
Changes in the market values of these swaps, if held to maturity, will have
no effect on LG&E's or KU's net income or cash flow.

Pension Risk

LG&E's and KU's costs of providing defined-benefit pension retirement plans
is dependent upon a number of factors, such as the rates of return on plan
assets, discount rate, and contributions made to the plan. At June 30,
2004, LG&E and KU have a minimum pension liability as prescribed by SFAS
No. 87, Employers' Accounting for Pensions, in the pre-tax amounts of $47.6
- - New Page -

and $9.9 million, respectively. The liabilities are recorded as a
reduction to other comprehensive income, and do not affect net income. The
amount of the liabilities depends upon the asset returns experienced in
2003 and contributions made by LG&E and KU to the plan during 2003. If the
fair value of the plan assets exceeds the accumulated benefit obligation,
the recorded liability will be reduced and other comprehensive income will
be restored in the Consolidated Balance Sheets.

A 1% increase or decrease in the assumed discount rate could have an
approximate $41 million positive or negative impact to the accumulated
benefit obligation of LG&E. A 1% increase or decrease in the assumed
discount rate could have an approximate $27 million positive or negative
impact to the accumulated benefit obligation of KU.

In January 2004, LG&E and KU made contributions to their pension plans of
$34.5 million and $43.4 million, respectively.

Energy Trading & Risk Management Activities

The table below summarizes LG&E's and KU's energy trading and risk
management activities for the three months and six months ended June 30,
2004, and 2003(in thousands of $). Trading volumes are evenly divided
between LG&E and KU.

Three Months Six Months
Ended Ended
June 30, June 30,
2004 2003 2004 2003
Fair value of contracts at beginning of
period, net asset/(liability) $ 603 $ 403 $ 572 $(156)
Fair value of contracts when entered
into during the period (5) - (5) 2,620
Contracts realized or otherwise
settled during the period (82) (226) (232) (283)
Changes in fair value due to changes
in assumptions 25 141 206 (1,863)
Fair value of contracts at end of period,
net asset $ 541 $ 318 $ 541 $ 318

No changes to valuation techniques for energy trading and risk management
activities occurred during 2004 or 2003. Changes in market pricing,
interest rate and volatility assumptions were made during all periods. All
contracts outstanding at June 30, 2004, 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, 2004, 98.9% of the trading and risk management commitments were
with counterparties rated BBB-/Baa3 equivalent or better.

Item 4. Controls and Procedures.

LG&E and KU maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
Companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms. LG&E and KU conducted an evaluation of such controls and procedures
under the supervision and with the participation of the Companies'

- - New Page -

management, including the Chairman, President and Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"). Based upon that
evaluation, the CEO and CFO have concluded 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, 2004, that has materially affected, or is reasonably likely
to materially affect, the Companies' internal control over financial
reporting.

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 (a) LG&E's and KU's respective combined Annual Report on Form
10-K for the year ended December 31, 2003: Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, and Item 8, Financial Statements and
Supplementary Data and (b) LG&E's and KU's Quarterly Report on Form 10-Q
for the period ended March 31, 2004: Item I, 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 or Quarterly Reports on Form
10-Q have not changed materially.

Electric and Gas Rates Cases

On June 30, 2004, the Kentucky Commission issued an order approving
increases in the base electric and gas rates of LG&E and the base electric
rates of KU. In July 2004, the AG commenced an investigation examining
communications between the Kentucky Commission and the Companies and
separately filed for a rehearing of the rate cases on such issue and
certain calculation components of the increased rates. The Kentucky
Commission ordered a procedural reopening of the rate cases for the limited
purpose of taking evidence, if any, as to the communication issue. For a
description of developments in these cases, see Note 11 of the Notes to
Consolidated Financial Statements in Part 1, Item 1 of this Quarterly
Report on Form 10-Q.

MISO

During March and April 2004, the Kentucky Commission held hearings in the
proceedings examining the cost and benefits of MISO membership. In July
2004, the Kentucky Commission reopened the matter for further testimony and
hearings on recently-filed MISO energy market tariffs and analysis of
potential membership in other Regional Transmission Organizations.
Proceedings in this matter are anticipated to continue into 2005.

OVEC Power Agreement and Share Purchase

On April 30, 2004, OVEC and its shareholders, including LG&E and KU,
entered into an Amended and Restated Inter-Company Power Agreement, to be
effective beginning March 2006, upon the expiration of the current power
contract among the parties. Under the new contract, which has a 20-year
term from its effective date, LG&E and KU have purchase rights for 5.63%
and 2.5%, respectively, of OVEC power at marginal cost-based rates. LG&E
and KU are entitled to 7% and 2.5% of OVEC power, respectively, under the
current contract.

In addition, LG&E will purchase from American Electric Power Company Inc.
("AEP") an additional 0.73% interest in OVEC for a purchase price of
approximately $104,000, resulting in an increase in LG&E ownership in OVEC
from 4.9% to 5.63%. The share purchase transaction is anticipated to be
completed during the fourth quarter of 2004, subject to receipt of certain
regulatory approvals.

- - New Page -


Owensboro Contract Litigation

In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
Utilities (collectively "OMU"), filed suit in Davies County, Kentucky
District Court against KU concerning a long-term power supply contract (the
"OMU Agreement") with KU. The dispute involves interpretational
differences regarding certain issues under the OMU Agreement, including
various payments or charges between KU and OMU and rights concerning excess
power, termination and emissions allowances, respectively. The complaint
seeks approximately $6 million in damages for historical periods, as well
as injunctive and other relief, including a declaration that KU is in
material breach. KU has removed this litigation to the U.S. District Court
for the Western District of Kentucky and filed an answer in that court
denying the OMU claims and presenting certain counterclaims. KU has also
initiated a proceeding at the FERC to obtain the FERC's ruling on certain
of the issues in dispute.

Item 6. Exhibits and Reports on Form 8-K.

6(a) Applicable to Form
10-Q of

Exhibit
No. LG&E KU Description

10.01 X X Copy of Amended and restated inter-company power
agreement dated as of March 13, 2006, among Ohio Valley
Electric Corporation and sponsoring companies, including
LG&E and KU.
10.02 X X Copy of Fourth Amendment dated as of February 1,
2004 to Employment and Severance Agreement dated as of
February 25, 2000 by and among E.ON AG, LG&E Energy,
Powergen and Victor A. Staffieri.
10.03 X X Copy of Modification No. 15, dated as of April 30,
2004, to Inter-Company Power Agreement dated July 10, 1953
among Ohio Valley Electric Corporation and Sponsoring
Companies.
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

Certain instruments defining the rights of holders of certain long-term
debt of LG&E and KU have not been filed with the SEC but will be furnished
to the SEC upon request.

6(b). Reports on Form 8-K.

On July 1, 2004, LG&E and KU filed a Current Report on Form 8-K describing
the June 30, 2004, order of the Kentucky Commission regarding increases in
their base rates.

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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, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and 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, 2004 /s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer
(On behalf of the registrant in his
capacities as Principal Financial Officer
and Principal
Accounting Officer)

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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, 2004


/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer

- - New Page -

Exhibit 31.2
Louisville Gas and Electric Company

I, S. Bradford Rives, 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, 2004


/s/ S. Bradford Rives
S. Bradford Rives
Chief Financial Officer

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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, 2004


/s/ Victor A. Staffieri
Victor A. Staffieri
Chairman of the Board, President and Chief Executive Officer

- - New Page -

Exhibit 31.4
Kentucky Utilities Company

I, S. Bradford Rives, 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, 2004



/s/ S. Bradford Rives
S. Bradford Rives,
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, 2004, 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, 2004

/s/ Victor A. Staffieri
Chairman of the Board, President
and Chief Executive Officer
Louisville Gas and Electric Company
Kentucky Utilities Company


/s/ S. Bradford Rives
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.