EXHIBIT 13


     Management's  Discussion  and Analysis of Financial Condition and Results
     of Operation

     COMPANY DESCRIPTION

     KU  Energy  Corporation  (KU  Energy or the Company) is an investor-owned
     utility  holding  company  with  two wholly owned subsidiaries.  Kentucky
     Utilities  Company  (KU  or  the Utility), the principal subsidiary of KU
     Energy,  is  an electric utility, and KU Capital Corporation (KU Capital)
     is a nonutility subsidiary.

     Material  changes  in the consolidated financial condition and results of
     operations of the Company are primarily attributable to the operations of
     KU.


     RESULTS OF OPERATIONS

     1996 Compared to 1995

     Earnings & Dividends

     KU  Energy's  earnings in 1996 were $2.17 per share, up 8% from $2.01 per
     share  in  1995.    The  increase  in  1996  earnings  was largely due to
     kilowatt-hour  (kWh)  sales  growth  which  was attributable to increased
     sales to neighboring utilities, continued economic growth in KU's service
     area and the impact of KU's successful marketing efforts.

     Common  stock  dividends  were increased 2.4% to $1.72 per share in 1996.
     In January 1997, KU Energy's Board increased the common dividend again to
     an  indicated  annual  rate  of  $1.76  per  share.  This marked the 16th
     consecutive year in which dividends have increased.

     1996 kWh Sales by Classification

     Year Ended December 31,                                             1996
     Residential                                                           28%
     Commercial                                                            18%
     Industrial                                                            22%
     Mine Power                                                             5%
     Public Authorities                                                     7%
     Sales for Resale                                                      20%
         Total                                                            100%




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<PAGE>

     Sales & Revenues

                                                1996             1995
                                             kWh    Revenue     kWh   Revenue
                                           Change   Variance  Change Variance
                                             (%)    (000's)     (%)   (000's)

     Residential                              3     $ 3,469       7   $19,186
     Commercial                               -      (1,138)      4     9,571
     Industrial                               7       6,790       6    10,023
     Mine Power                              (4)     (2,062)     (5)     (422)
     Public Authorities                       4       1,862       6     4,292
          Total Retail Sales                  3       8,921       5    42,650
     Sales for Resale                        27      13,268     (23)  (13,725)
     Miscellaneous Revenues and Other         -       3,097       -     1,462
          Total Before Refund                 7      25,286      (1)   30,387
     Provisions for Refund -
       Litigation Settlement                  -           -       -    19,385
          Total                               7     $25,286      (1)  $49,772


     Sales  totaled  18.6 billion kWh in 1996, a 7% increase from 1995.  Sales
     for  resale,  which  include wholesale and opportunity sales, rose 27% in
     1996.    Industrial  sales increased 7% while residential sales increased
     3%.  These increases are the result of the Company's successful marketing
     efforts.    In  addition,  the  increase  in  industrial  sales  reflects
     continued economic growth in KU's service area.

     Operating  revenues  for  1996 were $711.7 million, up $25.3 million (4%)
     from  1995.   The increase in 1996 revenues was largely due to the growth
     in kWh sales described above.


     Operating Expenses

     Fuel  expense  for 1996 was $198.2 million, an $8.4 million (4%) increase
     from  1995.  This increase was due to increased generation for kWh sales,
     partially offset by a 3% decrease in the cost per million British thermal
     units (MBTU) of coal consumed.

     Purchased  power  expense  decreased  $7.1  million  (10%)  in 1996.  The
     decline  was  due  to  a reduction in kWh purchases and to a reduction in
     demand costs ($4.0 million) under a contract with a neighboring utility.

     Depreciation  expense increased $5.3 million (7%) in 1996.  This increase
     was  due  to  increased  plant  in service including a combustion turbine
     peaking unit placed into service in May 1996.

     Federal and state income taxes increased $6.8 million (16%) in 1996.  The
     increase was primarily due to the increase in pretax income.

     Other Income and Deductions

     Other  income  and  deductions of $8.3 million in 1996 were down 29% from
     1995.  Other income and deductions for 1996 include a $5.5 million pretax
     write-off  associated  with  nonutility  investments.    (For  additional
     information  refer  to  Management's Discussion and Analysis - Nonutility
     Activities.)

                                        -230-
<PAGE>
     1995 Compared To 1994

     Earnings & Dividends

     KU Energy s earnings in 1995 were $2.01 per share and compare to earnings
     of $2.01  for 1994  (which included a one-time recovery of about $.05 per
     share  associated with the resolution of a coal contract dispute).  Refer
     to  Note  1 of the Notes to Consolidated Financial Statements,  Operating
     Revenues and Fuel Costs.

     In  1995,  common  stock dividends were increased to $1.68 per share from
     $1.64 in 1994.

     Sales & Revenues

     KWh  sales in 1995 were 1% below sales in 1994.  The decrease was largely
     due to a 23% decline in sales for resale which reflected a return to more
     normal levels from the unusually high levels of those sales in 1994.

     Sales  to  residential  customers  increased by 7% in 1995 as a result of
     favorable  weather  in  the  second half of 1995, continued growth in the
     number of residential customers and the impact of KU's marketing efforts.
     Industrial sales rose 6% as a result of continued economic growth in KU's
     service area.  About 29% of the increase in industrial sales for 1995 was
     due  to  greater  sales to Toyota Motor Manufacturing (TMM), KU's largest
     customer.    A  plant  expansion  at  TMM  completed  in  March  1994 was
     operational the entire year of 1995.

     Operating  revenues  for  1995 were $686.4 million, up $30.4 million (5%)
     from  1994,   excluding the impact of the refunds to customers associated
     with   the  above  mentioned  resolution  of  a  coal  contract  dispute.
     Operating  revenues in 1994 were reduced by about $19.4 million, and fuel
     expense was reduced by about $23.1 million as a result of the refunds.

     The  increase  in  1995  revenues was largely due to the growth in retail
     sales  described  above  and  to amounts recovered under an environmental
     surcharge  (about    $17.9  million  in  1995 compared to $3.5 million in
     1994).    Refer  to  Note  9  of  the  Notes  to  Consolidated  Financial
     Statements,  Environmental Cost Recovery.

     Operating Expenses

     Fuel  expense  for  1995 was $189.8 million, a $3.9 million (2%) decrease
     from  1994,  excluding the effect of the 1994 refunds to customers.  This
     decrease was due to a 1% decline in coal consumption and a 1% decrease in
     the cost per MBTU of coal consumed.

     Purchased  power  expense  increased  $8.1  million  (13%) in 1995 due to
     increased  demand charges ($2.5 million) and energy costs ($5.6 million).
     The  increase in energy costs reflected a 6% increase in kWh purchases as
     well  as  higher  prices.    The  increase in kWh purchases was primarily
     attributable  to  the  significant  demand  for  electricity in the third
     quarter of 1995 due to unusually warm weather.

     Other  operating  expenses  increased  $9.5  million  (8%) in 1995 due to
     increased  generating  plant operations expenses  (primarily attributable
     to costs associated with environmental compliance) and administrative and
     general expenses.

                                        -231-
<PAGE>

     Maintenance  expense  decreased  $3.5 million (5%) in 1995.   Maintenance
     expense for 1994 included additional costs for damage from two severe ice
     storms in the first quarter of 1994.

     Depreciation  expense  for  1995  increased  $9.8  million  (15%).   This
     increase  was related to the Ghent Unit 1 scrubber, which was placed into
     service  late  in  1994,  and two combustion turbine peaking units placed
     into service late in 1994 and early in 1995.

     Interest and Other Charges

     Interest  and  other  charges  rose  $5.8  million  (16%)  in  1995 which
     reflected  the  issuance  of  $54 million of long-term debt in the fourth
     quarter  of  1994, $50 million of long-term debt in the second quarter of
     1995 and an increase in the average amount of short-term debt outstanding
     during the first half of 1995.


     LIQUIDITY & CAPITAL RESOURCES

     The  Company s financial position remained strong in 1996.  At the end of
     the  year,  common stock equity represented 52.4% of total capitalization
     while  long-term  debt  was  44.4%,  and  preferred stock was 3.2%.  This
     capital  structure  supports  the  Company's goal of maintaining double A
     credit  ratings.    Current ratings on KU's senior debt securities are as
     follows:

     Duff & Phelps                          AA
     Moody's                                Aa2
     Standard & Poor's                      AA-

     As of December 31,               1996     1995    1994     1993     1992
     Capitalization (in millions)   $1,232   $1,215  $1,152   $1,085   $1,067

     Long-Term Debt                   44.4%    44.9%   43.0%    40.8%   41.6%
     Preferred Stock                   3.2%     3.3%    3.5%     3.7%    3.7%
     Common Stock Equity              52.4%    51.8%   53.5%    55.5%   54.7%

     Cash  from  operations  accounted for 99% of cash requirements in 1996 as
     compared  to  78%  in  1995  and  54%  in 1994.  For these purposes, cash
     requirements  exclude  optional  debt  refinancings  and  redemptions and
     optional preferred stock redemptions.

     At  the end of 1996, KU's short-term borrowings were $54 million compared
     to  $56  million  at  December 31, 1995.  The Company has used short-term
     borrowings  to  temporarily finance ongoing construction expenditures and
     general corporate requirements.

     Taking  advantage  of  lower  interest  rates,  KU  issued $36 million of
     Series S First Mortgage Bonds at a rate of 5.99% in January 1996 and used
     the  proceeds  to  redeem  $35.5 million of Series K First Mortgage Bonds
     which carried a rate of 7 3/8%.

     In  June  1995,  KU  issued  $50 million of Series R First Mortgage Bonds
     which  will mature in 2025 and bear interest at 7.55%.  The proceeds were
     used primarily to pay short-term indebtedness incurred to finance ongoing
     construction expenditures and general corporate requirements.

     In 1994, $54 million of Variable Rate Collateralized Solid Waste Disposal

                                        -232-
<PAGE>

     Facility  Revenue  Bonds  were issued on behalf of KU.  Proceeds from the
     sale of this tax exempt issue were used to fund a portion of the costs of
     certain  environmental  compliance  facilities  at  the  Utility's  Ghent
     Generating Station.

     The  Company's financial strength is enhanced by its competitive cost of
     capital.   Shown below are the Company's embedded costs of long-term debt
     and preferred stock at year-end:

     Embedded Cost                           1996         1995          1994
     Long-Term Debt                           6.98%        7.15%         7.06%
     Preferred Stock                          5.64%        5.64%         5.64%


     Capital Requirements

     Construction Expenditures - 1996 Actual, 1997-2001 Estimated

                                   Actual                Estimated
     (In millions of dollars)        1996    1997    1998    1999    2000  2001

     Construction Expenditures       $107    $ 90    $ 98    $114    $114  $115

     During  1996, construction expenditures were $106.5 million. Construction
     expenditures are expected to be approximately $89.7 million in 1997.  For
     the  five-year  period 1997-2001, construction expenditures are projected
     to  be  $531.2  million.    This  compares to $687.5 million spent in the
     five-year  period  ending  in 1996.  Included in the five-year projection
     for 1997-2001 is $95.4 million for additional peaking units.

     In  addition to construction expenditures, projected capital requirements
     for  1997-2001  include  $61.5  million  for  scheduled debt retirements.
     Capital  requirements  for the five-year period 1997-2001 are expected to
     be met primarily through internal sources of funds. External financing to
     fund scheduled debt retirements will be required.

     KU  forecasts  annual  growth  in sales and peak demand of 2.6% and 3.0%,
     respectively,  over  the  next 5 years.  The Utility plans to provide for
     the  future  power  needs of its customers  primarily  through  purchased
     power  and the addition of combustion turbine peaking units. There are no
     plans for additional baseload capacity before 2010.


     NONUTILITY ACTIVITIES

     KU  Energy  continues to pursue a core energy strategy for its nonutility
     business  activities.    Under  this strategy, targeted opportunities are
     energy-related  activities  that  build  on  the  Company's knowledge and
     expertise and have the appropriate risk/reward profile.

     KU  Capital,  KU  Energy's  nonutility  subsidiary, has an investment of
     $25  million  in  equity interests in eight combustion turbine generating
     units (all of which are leased to investment grade utility companies).

     KU  Capital  has  limited  partnership  interests  in the identification,
     development  and ownership of certain independent power projects in North
     America  through   agreements with Tenaska Inc. (a developer of gas-fired
     cogeneration  and  independent  power  generation  projects)  and  its
     affiliates.

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<PAGE>
     Under  the  agreements with Tenaska, KU Capital, through its wholly owned
     subsidiaries,  has invested $5.0 million in limited partnership interests
     in  two  operating  cogeneration  projects.    KU  Capital  has committed
     $4.8  million  to  an  additional  independent  power project which began
     operation  in  January  1997, and  expects to fund this commitment in the
     first quarter of 1997.

     KU Capital also has a limited partnership interest in a 248-megawatt gas-
     fired generation plant in Frederickson, Washington, under the sponsorship
     of Tenaska.  Construction of this independent power project was suspended
     in  1995 after the Bonneville Power Administration (BPA) notified Tenaska
     of  its intent to cancel a power purchase agreement which BPA had entered
     into for electricity which would be produced by the Frederickson project.
     Tenaska  has  a  $650 million claim for damages against BPA in the United
     States  Court  of  Federal  Claims  (Court  of  Claims).  The arbitration
     ordered  by  the  Court of Claims began in February 1997.  Although it is
     not  possible  at this time to determine the outcome of such arbitration,
     the  Company  believes  the possibility of any material adverse impact on
     the  results  of operations or the financial position of the Company as a
     result of these matters is remote.

     KU  Capital  also has been funding a portion of the costs associated with
     identifying  and  pursuing  potential independent power projects in North
     America.    During  1996,  KU  Capital  determined that none of the costs
     funded    during  1994-1996  (approximately  $5.5  million) would lead to
     successful   projects;  therefore,  this  amount  was  written-off.    KU
     Capital's remaining funding commitment over the next several years totals
     $4.5 million.


     UTILITY ISSUES

     Competition

     The electric utility industry has been rapidly moving to a less regulated
     and more competitive environment since the passage of the National Energy
     Policy  Act  of  1992  (NEPA).  NEPA  gave  the Federal Energy Regulatory
     Commission  (FERC)  the  authority to order electric utilities to provide
     wholesale  transmission  access  to independent power producers and other
     utilities. It also reduced restrictions on the ownership and operation of
     independent power producers.

     Pursuant to NEPA, in 1995 the FERC issued a Notice of Proposed Rulemaking
     (NOPR)  to promote competition and deregulation in the wholesale electric
     market  by  requiring  electric utilities to offer nondiscriminatory open
     access to their transmission systems.

     In  April  1996,  the  FERC  issued two final rules and a new NOPR.  FERC
     Order No. 888 (Order 888) addresses both open access transmission service
     and  stranded  cost  issues.    FERC  Order  No. 889 (Order 889) requires
     utilities  to  establish  an electronic Open Access Same-Time Information
     System (OASIS) to share information about available transmission capacity
     and  also  requires  the  establishment  by  each utility of standards of
     conduct for its transmission system operation.  The 1996 NOPR proposes to
     establish  a  new  system  for  utilities to use in reserving capacity on
     their own and other s transmission lines.

     In  July  1996, KU filed an open access transmission tariff (TS) with the
     FERC  designed  to  comply with provisions of Order 888.  This tariff has

                                        -234-
<PAGE>
     been  accepted  by  the FERC, superseding the TS which had been in effect
     since  December  1994.    The provisions of the new TS are similar to the
     terms  and  conditions  of  service contained in KU s previously existing
     tariff.

     Although  Order  888 does address stranded cost issues, KU is expected to
     have very little, if any, stranded costs.

     In  conjunction  with  other  utility  members  of  the East Central Area
     Reliability  Coordination  Agreement,  KU  has  developed  an  OASIS  and
     finalized  its  standards  of  conduct pursuant to Order 889.  KU met the
     FERC's deadline (January 1997) for implementation of these requirements.

     KU  is also in the process of evaluating the FERC s 1996 NOPR.  This NOPR
     would  replace  certain aspects of KU s transmission tariff now in effect
     with  a  capacity  reservation  tariff  by the end of 1997.  The FERC has
     received  comments from interested parties regarding the potential tariff
     change  and  is  currently  evaluating those comments.  KU cannot predict
     when a final rule will be issued.

     KU  is  one  of 24 utilities in a ten-state region attempting to form the
     Midwest Independent System Operator (ISO).  The primary objectives of the
     ISO  are  to  advance wholesale competition by ensuring nondiscriminatory
     open  transmission  access  to  all customers and to enhance transmission
     reliability.

     Proposals  to  bring  competition  to  the  retail  level of the electric
     utility  industry  are  being  considered  in  several  states and at the
     federal  level.    These  proposals  reflect  many  divergent  opinions
     concerning  the  complex  issues  surrounding  retail  competition.  Some
     states  are conducting pilot projects to allow retail customers to choose
     their  electric  supplier.    Kentucky  and  Virginia  have not initiated
     projects of this nature.

     The  Company  advocates  competition in the electric utility industry and
     believes  customer  choice  should be extended to the retail level.  With
     low-cost  generation  and  rates that are among the lowest in the nation,
     the  Company is well-positioned for the challenges and opportunities of a
     competitive marketplace.








                                        -235-
<PAGE>
     Environmental Matters

     Clean Air Act

     KU  met  Phase  I  requirements  of  the Clean Air Act Amendments of 1990
     (which were effective January 1, 1995)  primarily through the addition of
     a  flue  gas desulfurization system (scrubber) on Unit 1 of the Utility's
     Ghent  Generating  Station.    The scrubber began commercial operation in
     December 1994.

     The  Company's current strategy for Phase II requirements (which will be
     effective  January  1, 2000) is to use accumulated emission allowances to
     delay additional capital expenditures.

     The  Company's future compliance plans are contingent upon many factors,
     including  developments  in  the  emission  allowance market and the fuel
     market  as  well  as  regulatory  and legislative actions and advances in
     clean air technology.  The Company will continue to review and revise its
     compliance plans accordingly to ensure that its environmental obligations
     are met in the most efficient and cost-effective manner.

     Environmental Cost Recovery

     In  August  1994, KU implemented an environmental cost recovery mechanism
     (surcharge)  in  Kentucky.    Authorized  by  a  1992   state statute and
     approved  by  the Kentucky Public Service Commission (PSC), the surcharge
     is  designed to recover certain environmental compliance costs, including
     costs  to  comply  with  the  1990  Clean  Air  Act Amendments, through a
     surcharge on  customers  bills.

     The constitutionality of the surcharge was challenged in a Kentucky state
     court  action  brought  against KU and the PSC by the Attorney General of
     Kentucky and representatives of consumer groups.  In July 1995, the state
     court  upheld  the constitutionality of the surcharge statute but vacated
     that  part of the PSC's order which the state court described as allowing
     KU  to  recover  certain  environmental expenditures characterized by the
     state  court as having been incurred before January 1, 1993.  All parties
     (including KU) have appealed to the Kentucky Court of Appeals.

     KU  believes  the  constitutionality  of  the  surcharge  statute will be
     upheld, but it cannot predict the outcome of that part of the state court
     judgment  disallowing  recovery  of  certain  environmental  expenditures
     characterized   by  the  state  court  as  having  been  incurred  before
     January  1,  1993.    If the state court judgment is ultimately upheld as
     entered,  KU  estimates  that  the  amount it would be required to refund
     (which  is  based  solely  on costs associated with certain environmental
     expenditures  characterized  by  the  state court as having been incurred
     before  January  1,  1993) for surcharge collections through December 31,
     1996,  from  the  implementation  of the surcharge would be approximately
     $11 million, and from February 1, 1995 would be approximately $9 million.
     At  this  time,  KU  has  not  recorded any reserve for refund.  Refer to
     Note  9 of the Notes to Consolidated Financial Statements,  Environmental
     Cost Recovery.





                                        -236-
<PAGE>
     INFLATION

     KU's  rates  are  designed  to  recover  operating  and  historical plant
     investment costs.  Financial statements, which are prepared in accordance
     with  generally  accepted accounting principles, report operating results
     in  terms  of historic costs and do not evaluate the impact of inflation.
     Inflation  affects  the  Utility's construction costs, operating expenses
     and   interest  charges.    Inflation  can  also  impact  KU's  financial
     performance if rate relief is not granted on a timely basis for increased
     operating costs.


     FORWARD LOOKING STATEMENTS

     This report includes forward looking statements within the meaning of the
     Private  Securities  Litigation  Reform Act of 1995.  All statements made
     herein  which  are not based on historical facts are forward looking and,
     accordingly,  involve  risks  and  uncertainties  that could cause actual
     results  to differ materially from those discussed.  Such forward looking
     statements  include  those  under  Management's  Discussion and Analysis
     relating  to  (i) amounts of future construction expenditures, sources of
     funds  to  meet  capital  requirements  and  financing  requirements,
     (ii)  forecasts of annual growth in sales and peak demand and anticipated
     sources  of  additional  power  supply to meet customer demand, (iii) the
     anticipated level of stranded costs resulting from competitive conditions
     and  deregulation, (iv) the anticipated strategy to comply with the Clean
     Air  Act  Amendments  of 1990, (v) the anticipated results of proceedings
     related  to  the environmental surcharge and (vi) the anticipated results
     of the arbitration relating to the Frederickson project.  Such statements
     are  based  on  management's  belief,  judgment  and analysis as well as
     assumptions  made  by and information available to management at the date
     hereof.    In addition to any assumptions and cautionary factors referred
     to  specifically  in  this report in connection with such forward looking
     statements,  factors that could cause actual results to differ materially
     from those contemplated by the forward looking statements include (i) the
     speed  and  nature  of  increased  competition  and  deregulation  in the
     electric  and  gas  utility industry, (ii) economic or weather conditions
     affecting  future  sales  and  margins,  (iii)  changing  energy  prices,
     (iv)  legislative  and regulatory changes including revised environmental
     requirements, (v) availability and cost of capital, (vi) unanticipated or
     adverse decisions in regulatory proceedings or litigation and (vii) other
     matters detailed from time to time in the Company's or KU's reports filed
     with the Securities and Exchange Commission.





                                        -237-
<PAGE>
<TABLE>
     Consolidated Statements
      of Income and
      Retained Earnings

                                         KU Energy Corporation
                                            & Subsidiaries

<CAPTION>

      Year Ended December 31,                                        1996       1995      1994
      (in thousands of dollars, except for per share amounts)
<S>                                                             <C>        <C>       <C>
      Operating Revenues                                        $  711,686 $ 686,400 $  636,628
      Operating Expenses:
          Fuel, principally coal, used in generation               198,198   189,845    170,654
          Electric power purchased                                  62,490    69,579     61,442
          Other operating expenses                                 125,351   124,044    114,551
          Maintenance                                               64,170    62,599     66,141
          Depreciation                                              80,612    75,268     65,441
          Federal and state income taxes                            50,247    43,426     43,904
          Other taxes                                               15,049    15,038     14,789
            Total Operating Expenses                               596,117   579,799    536,922
      Net Operating Income                                         115,569   106,601     99,706
      Other Income and Deductions:
          Interest and dividend income                               2,800     4,115      5,914
          Other income and deductions - net                          5,469     7,610      6,709
            Total Other Income and Deductions                        8,269    11,725     12,623
      Income Before Interest and Other Charges                     123,838   118,326    112,329

      Interest and Other Charges:
          Interest on long-term debt                                37,584    36,095     32,147
          Preferred stock dividend requirements of Subsidiary        2,256     2,256      2,384
          Other interest charges                                     2,049     3,922      1,922
            Total Interest and Other Charges                        41,889    42,273     36,453

      Net Income                                                $   81,949 $  76,053 $   75,876
      Earnings per Average Common Share, based on average
            shares outstanding of 37,817,878                    $     2.17 $    2.01 $     2.01


      Retained Earnings Beginning of Year                       $  321,066 $ 308,547 $  294,949
      Add Net Income                                                81,949    76,053     75,876
                                                                   403,015   384,600    370,825

      Deduct:
          Dividends on common stock, $1.72, $1.68 and $1.64 per
            share during 1996, 1995 and 1994, respectively          65,047    63,534     62,021
          Preferred stock redemption expense                             -         -        257
                                                                    65,047    63,534     62,278

      Retained Earnings End of Year                             $  337,968 $ 321,066 $  308,547

     The accompanying Notes to Consolidated Financial Statements are an integral
     part of these statements.

</TABLE>

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<PAGE>
<TABLE>

     Consolidated Statements
      of Cash Flows

                                         KU Energy Corporation
                                            & Subsidiaries

      Year Ended December 31, (in thousands of dollars)               1996      1995       1994
<CAPTION>

      Cash Flows from Operating Activities:

<S>                                                               <C>       <C>        <C>
          Net income                                              $  81,949 $  76,053  $ 75,876
          Items not requiring (providing) cash currently:
            Depreciation                                             80,612    75,268   65,441
            Deferred income taxes                                     5,891    16,919     (612)
            Investment tax credit deferred                           (4,013)   (4,095)  (4,110)
            Changes in current assets and liabilities:
             Change in accounts receivable                             (969)   (7,945)    (190)
             Change in accounts payable                              (9,682)  (10,774)   4,815
             Change in liability to ratepayers                       (6,599)     (310) (29,958)
             Change in escrow funds                                   6,599       312   30,841
             Change in other current assets and liabilities           5,778      (433)  (7,954)
            Other - net                                              10,181     1,868    5,250

      Net Cash Provided by Operating Activities                     169,747   146,863  139,399

      Cash Flows from Investing Activities:

          Construction expenditures - utility                      (106,503) (124,515)(193,344)
          Proceeds from sale of long-term investments                     -         -   15,440
          Investment in leveraged leases                                  -         -   (6,609)
          Investment in independent power projects                   (1,310)   (3,204)  (6,742)
          Other                                                       2,038     1,288      927

      Net Cash Used by Investing Activities                        (105,775) (126,431)(190,328)

      Cash Flows from Financing Activities:

          Short-term borrowings - net                                (1,400)  (20,700)  76,300
          Issuance of long-term debt                                 35,666    49,288   53,305
          Funds deposited with trustee - net                          3,779    15,100       95
          Retirement of long-term debt, including premiums          (36,192)      (21)     (21)
          Retirement of preferred stock, including premiums               -         -  (20,302)
          Payment of common stock dividends                         (65,047)  (63,534) (62,021)

      Net Cash Provided (Used) by Financing Activities              (63,194)  (19,867)  47,356

      Net Increase (Decrease) in Cash and Cash Equivalents              778       565   (3,573)

      Cash and Cash Equivalents Beginning of Year                    29,492    28,927   32,500

      Cash and Cash Equivalents End of Year                       $  30,270 $  29,492 $ 28,927

      Supplemental Disclosures

      Cash paid for:
          Interest                                                $  36,729 $  37,961 $ 31,864
          Income Taxes                                            $  45,775 $  31,507 $ 44,343

     The accompanying Notes to Consolidated Financial Statements are an integral
     part of these statements.
</TABLE>

                                                 -239-
<PAGE>
<TABLE>
     Consolidated
     Balance Sheets

                                         KU Energy Corporation
                                            & Subsidiaries
<CAPTION>

      As of December 31, (in thousands of dollars)                             1996       1995
      Assets
      Utility Plant:
<S>                                                                      <C>        <C>
        Plant in service, at cost                                        $2,482,812 $2,394,018
        Less:  Accumulated depreciation                                   1,067,911    997,366
                                                                          1,414,901  1,396,652

        Construction work in progress                                        63,435     61,410
           Total Utility Plant                                            1,478,336  1,458,062

      Current Assets:
        Cash and cash equivalents                                            30,270     29,492
        Escrow funds - coal contract litigation                                   -      6,599
        Construction funds held by trustee                                        -      3,743
        Accounts receivable, net of allowance for doubtful accounts          50,498     49,529
        Accrued utility revenues                                             24,239     27,900
        Fuel, principally coal, at average cost                              30,895     29,438
        Plant materials and operating supplies, at average cost              21,656     23,064
        Other                                                                 7,486      8,121
           Total Current Assets                                             165,044    177,886

      Other Assets:
        Investment in leveraged leases                                       24,650     21,509
        Unamortized loss on reacquired debt                                  10,838     11,304
        Other                                                                48,080     46,213
           Total Other Assets                                                83,568     79,026
           Total Assets                                                  $1,726,948 $1,714,974

      Capitalization and Liabilities
      Capitalization: (See Consolidated Statements of Capitalization)
        Common stock equity                                              $  645,513 $  628,611
        Preferred stock                                                      40,000     40,000
        Long-term debt                                                      546,373    545,980
           Total Capitalization                                           1,231,886  1,214,591

      Current Liabilities:
        Long-term debt due within one year                                       21         21
        Short-term borrowings                                                54,200     55,600
        Accounts payable                                                     28,253     37,935
        Accrued interest                                                      8,048      7,556
        Accrued taxes                                                         4,005      4,960
        Customer deposits                                                     8,746      6,876
        Accrued payroll and vacations                                         9,921      8,759
        Liability to ratepayers - coal contract litigation                        -      6,599
        Other                                                                 5,954      6,992
           Total Current Liabilities                                        119,148    135,298

      Other Liabilities:
        Accumulated deferred income taxes                                   242,674    233,707
        Accumulated deferred investment tax credits                          30,167     34,180
        Regulatory tax liability                                             54,388     57,726
        Other                                                                48,685     39,472
           Total Other Liabilities                                          375,914    365,085
           Total Capitalization and Liabilities                          $1,726,948 $1,714,974

      The accompanying Notes to Consolidated Financial Statements are an integral
     part of these statements.

</TABLE>
                                                 -240-
<PAGE>
<TABLE>
     Consolidated
      Statements of
      Capitalization                     KU Energy Corporation
                                            & Subsidiaries
<CAPTION>

      As of December 31, (in thousands of dollars)                             1996       1995
      Common Stock Equity:
        Common stock, without par value, authorized 160,000,000
<S>                                                                      <C>        <C>
          shares, outstanding 37,817,878 shares                          $  308,140 $  308,140
        Capital stock expense and other                                        (595)      (595)
        Retained earnings                                                   337,968    321,066
          Total Common Stock Equity                                         645,513    628,611
      Preferred Stock:
        Kentucky Utilities cumulative, without par value,
          $100 stated value
        4 3/4%, outstanding 200,000 shares                                   20,000     20,000
        6.53%,  outstanding 200,000 shares                                   20,000     20,000
          Total Preferred Stock                                              40,000     40,000

      Long-Term Debt:
        First Mortgage Bonds:
          5.95%  Series Q, due June 15, 2000                                 61,500     61,500
          7 3/8% Series K, due December 1, 2002                                   -     35,500
          6.32%  Series Q, due June 15, 2003                                 62,000     62,000
          5.99%  Series S, due January 15, 2006                              36,000          -
          7.92%  Series P, due May 15, 2007                                  53,000     53,000
          7.55%  Series R, due June 1, 2025                                  50,000     50,000
          8.55%  Series P, due May 15, 2027                                  33,000     33,000
                                                                            295,500    295,000
        First Mortgage Bonds, Pollution Control Series:
          7 3/8% Pollution Control Series 7, due May 1, 2010                  4,000      4,000
          7.45%  Pollution Control Series 8, due September 15, 2016          96,000     96,000
          6 1/4% Pollution Control Series 1B, due February 1, 2018           20,930     20,930
          6 1/4% Pollution Control Series 2B, due February 1, 2018            2,400      2,400
          6 1/4% Pollution Control Series 3B, due February 1, 2018            7,200      7,200
          6 1/4% Pollution Control Series 4B, due February 1, 2018            7,400      7,400
          7.60%  Pollution Control Series 7, due May 1, 2020                  8,900      8,900
          5 3/4% Pollution Control Series 9, due December 1, 2023            50,000     50,000
          Variable Rate Pollution Control Series 10, due November 1, 2024    54,000     50,800
          Variable Rate County of Carroll, Kentucky, Collateralized Solid
            Waste Disposal Facility Revenue Bonds, due November 1, 2024           -      3,200
                                                                            250,830    250,830
            Total First Mortgage Bonds                                      546,330    545,830
        Unamortized premium                                                       -         86
        8% secured note, due January 5, 1999 (net of current maturity)           43         64
          Total Long-Term Debt                                              546,373    545,980
          Total Capitalization                                           $1,231,886 $1,214,591

     The accompanying Notes to Consolidated Financial Statements are an integral
     part of these statements.
</TABLE>
                                                 -241-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     1. Summary of Significant Accounting Policies

     General

     The  consolidated  financial statements include the accounts of KU Energy
     Corporation (KU Energy or the Company), a holding company, and its wholly
     owned  subsidiaries,  Kentucky  Utilities  Company  (KU)  and  KU Capital
     Corporation  (KU  Capital).    The preparation of financial statements in
     conformity  with  generally  accepted  accounting  principles  requires
     management  to  make  estimates  and assumptions that affect the reported
     amounts of assets and liabilities and disclosure of contingent assets and
     liabilities  at  the  date  of  the financial statements and the reported
     amounts  of  revenues  and  expenses during the reporting period.  Actual
     results  could differ from those estimates.  All significant intercompany
     balances  and  transactions  have  been  eliminated from the consolidated
     financial  statements.    Certain  amounts  from  prior periods have been
     reclassified to conform with the current year presentation.

     KU  is  a  public  utility engaged in producing, transmitting and selling
     electric energy.  KU provides electric service to about 432,900 customers
     in  over  600  communities  and  adjacent  suburban and rural areas in 77
     counties  in  central,  southeastern  and  western  Kentucky and to about
     28,800 customers in 5 counties in southwestern Virginia.

     KU  Capital continues to pursue a core energy strategy for its nonutility
     business  activities.    Under  this strategy, targeted opportunities are
     energy-related  activities  that  build  on  the  Company's knowledge and
     expertise and have the appropriate risk/reward profile.

     Regulation

     The  Company  is  exempt  from regulation as a registered holding company
     under  the  Public Utility Holding Company Act of 1935.  KU is subject to
     regulation  by the Kentucky Public Service Commission (PSC), the Virginia
     State  Corporation  Commission  (SCC)  and  the Federal Energy Regulatory
     Commission  (FERC).  With respect to accounting matters, KU maintains its
     accounts  in accordance with the Uniform System of Accounts as defined by
     these  agencies.   KU's accounting policies conform to generally accepted
     accounting  principles  applicable  to  rate  regulated  enterprises  and
     reflect   the  effects  of  the  ratemaking  process.    Other  than  the
     unamortized  loss  on  reacquired  debt,  KU's  regulatory  assets  are
     immaterial.

     Utility Plant

     Utility  plant  is stated at the original cost of construction.  The cost
     of  repairs  of property units and replacements of minor items is charged
     to  maintenance  expense  as  incurred.    Property unit replacements are
     capitalized  and  the depreciation reserve is charged with the cost, less
     net salvage, of units retired.






                                        -242-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     Depreciation

     Provision  for  depreciation  of  utility plant is based on straight-line
     composite  rates  applied to the cost of depreciable property.  The rates
     approximated 3.5% in 1996 and 1995 and 3.4% in 1994.

     Cash and Cash Equivalents

     For purposes of reporting cash flows, the Company considers highly liquid
     investments  with  a  maturity  of  three months or less from the date of
     purchase to be cash equivalents.

     The  Company utilizes a cash management mechanism that funds certain bank
     accounts  for  checks  as they are presented to those banks.  The Company
     classified  checks  written  but  not  presented  to  those  banks, which
     amounted to $6.1 million and $10.5 million at December 31, 1996 and 1995,
     respectively, in accounts payable.

     Financial Instruments

     The  Company's  temporary  cash  investments  are  classified as held-to-
     maturity  and  are reported under the caption "Cash and cash equivalents"
     on the Consolidated Balance Sheet.

     Stock-Based Compensation

     The  Company adopted Statement of Financial Accounting Standards No. 123,
     "Accounting  for  Stock-Based  Compensation,"  in  1996  by continuing to
     account  for  stock compensation in accordance with Accounting Principles
     Board Opinion No. 25, "Accounting for Stock Issued to Employees."  If the
     Company  had  recognized compensation expense for awards under its stock-
     based  compensation  plan  according  to the new standard, net income and
     earnings  per share for the year-ended 1996, 1995 and 1994 would not have
     been materially different from amounts recorded.

     Unamortized Loss on Reacquired Debt

     KU  defers costs (primarily call premiums) arising from the reacquisition
     or  retirement  of  long-term debt.  Costs related to refinanced debt are
     amortized  over  the  lives  of  the  new  debt issues.  Costs related to
     retired  debt  not  refinanced  are  amortized  over  the  period  to the
     scheduled maturity of the retired debt.

     Operating Revenues and Fuel Costs

     Revenues  are  recorded  based  on  services  rendered  to customers.  KU
     accrues  an  estimate of revenues for electric service furnished from the
     meter  reading  dates  to the end of each accounting period. Cost of fuel
     used  in  electric  generation  is  charged  to  expense  as  the fuel is
     consumed.   Fuel adjustment clauses adjust operating revenues for changes
     in  the  level  of  fuel  costs  charged  to  expense.   An environmental
     surcharge  for  Kentucky  retail  customers,  implemented in August 1994,
     permits  the  utility  to  recover  certain ongoing operating and capital
     costs  of  compliance   with  federal,  state  or  local  environmental


                                        -243-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     requirements   associated  with  the  production  of  energy  from  coal,
     including  the Federal Clean Air Act as amended.  See Note 9 of the Notes
     to  Consolidated Financial Statements, "Environmental Cost Recovery," for
     an update of environmental surcharge legal proceedings.

     Pursuant  to  regulatory  orders, KU had been refunding fuel cost savings
     related  to the resolution of a coal contract dispute.  Refunds were made
     to  Virginia  retail customers during the period August 1993 through June
     1994.  Refunds were made to wholesale customers under the jurisdiction of
     the  FERC  in  lump  sum payments in September 1993.  Refunds to Kentucky
     retail customers commenced in July 1994.  Pursuant to legislation adopted
     in  1996,  KU  paid  the  remaining  balance of unclaimed Kentucky retail
     customer refunds to the Kentucky Workers' Compensation Funding Commission
     to pay certain workers  compensation benefits.

     By  virtue  of  the legislation, KU's payment of the unclaimed refunds to
     the  State released KU from any future liability to customers relating to
     such  refunds.    The legislation also preserved the rights of ratepayers
     entitled  to  claim  a refund who have not yet done so and authorized the
     Funding  Commission  to  honor  future  refund  claims  using  any  funds
     available.

     Operating  revenues  and  fuel  expense  for  1994  were  reduced  by
     $19.4  million and $23.1 million, respectively, resulting from the above-
     mentioned  refunds.    The refunds had no impact on operating revenues or
     fuel  expense  for 1995 or 1996.  The difference between the reduction in
     operating  revenues  and the reduction in fuel expense is attributable to
     incurred litigation costs, fuel cost savings related to opportunity sales
     and  costs  incurred  to  administer the refund plan.  These amounts were
     retained by KU pursuant to regulatory orders.

     Income Taxes

     The Company  establishes  deferred  tax  assets  and  liabilities,  as
     appropriate,  for  all  temporary  differences,  and adjusts deferred tax
     balances  to reflect changes in tax rates expected to be in effect during
     the  periods  the  temporary differences reverse.  Investment tax credits
     resulted  from  provisions  of the tax law which permitted a reduction of
     the  Company's  tax liability based on certain construction expenditures.
     Such  credits  have been deferred in the accounts and are being amortized
     as  reductions  in  income  tax  expense  over  the  life  of the related
     property.  Because  of rate regulation, changes in tax rates are deferred
     and amortized as the temporary differences reverse.










                                        -244-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries


      2.  Income Taxes

     The  accumulated  deferred  income taxes as set forth in the Consolidated
     Balance Sheets arise from the following temporary differences:
<TABLE>
<CAPTION>

     As of December 31, (in thousands of dollars)                        1996           1995

      Deferred Tax Assets:
        Unamortized investment tax credit and other property
<S>                                                                  <C>            <C>
          related differences                                        $  29,294      $  31,667

        Other                                                           21,627         16,728
        Less: Amounts included in current assets                         4,723          4,985
                                                                        46,198         43,410

      Deferred Tax Liabilities:
        Accelerated depreciation and other property
          related differences                                          278,044        268,203
        Other                                                           10,828          8,914
                                                                       288,872        277,117

      Net accumulated deferred income tax liability                  $ 242,674      $ 233,707
</TABLE>
<TABLE>
     The components of income tax expense are as follows:
<CAPTION>

     Year Ended December 31, (in thousands of dollars)              1996      1995       1994
      Income taxes charged to Operating Income:
<S>                                                            <C>        <C>        <C>
      Current    - federal                                     $   34,255 $  22,011  $  36,332
                 - state                                            6,585     4,734      8,623
                                                                   40,840    26,745     44,955
      Deferred   - federal                                          5,949    12,809       (997)
                 - state                                            3,458     3,943         32
                                                                    9,407    16,752       (965)
      Deferred investment tax credit                                    -       (71)       (86)
                                                                   50,247    43,426     43,904
      Income taxes charged to Other Income
      and Deductions:
      Current    - federal                                          2,716     1,868      1,507
                 - state                                              900       384        266
                                                                    3,616     2,252      1,773
      Deferred   - federal                                         (3,138)      176        325
                 - state                                             (378)       (9)        28
                                                                   (3,516)      167        353
      Amortization of deferred investment tax credit               (4,013)   (4,024)    (4,024)
                                                                   (3,913)   (1,605)    (1,898)

      Total income tax expense                                 $   46,334 $   41,821 $  42,006
</TABLE>


                                                 -245-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     The  Company's  effective  income  tax  rate, determined by dividing income
     taxes  by the sum of such taxes and net income, was 36.1% in 1996, 35.5% in
     1995  and 35.6% in 1994.  The difference between the effective rate and the
     statutory federal income tax rate is attributable to the following factors:
<TABLE>

     Year Ended December 31,  (in thousands of dollars)             1996      1995       1994
<CAPTION>

<S>                                                            <C>        <C>        <C>
      Federal income tax computed at 35%                       $   44,899 $  41,256  $  41,259
      Add (Deduct):
      State income taxes, net of federal income tax benefit         6,867     5,884      5,817
      Amortization of deferred investment tax credit               (4,013)   (4,095)    (4,110)
      Other, net                                                   (1,419)   (1,224)      (960)
      Total income tax expense                                 $   46,334 $  41,821  $  42,006
</TABLE>

       3.  Retirement Benefits

     Pensions

     The  Company  has a noncontributory defined benefit pension plan covering
     substantially  all  of its employees.  Benefits under this plan are based
     on  years  of service, final average base pay and age at retirement.  The
     Company's  funding  policy is to make such contributions as are necessary
     to  finance  the  benefits  provided  under  the  plan.    The  Company's
     contributions  meet  the  funding  standards  set  forth  in the Employee
     Retirement  Income  Security  Act  of  1974.    The  plan  assets consist
     primarily  of  common  stocks,  corporate  bonds  and  U.S.  Government
     Securities.

     The  Company also has a Supplemental Security Plan for certain management
     personnel.    Retirement  benefits under this  plan are based on years of
     service,  earnings  and  age  at  retirement.    The  plan has no advance
     funding.    Benefit  payments  are  made  to  retired  employees or their
     beneficiaries from the general assets of the Company.

     The  reconciliation  of the funded status of the retirement plans and the
     pension liability recorded by the Company is as follows:
<TABLE>
<CAPTION>

     As of December 31, (in thousands of dollars)                           1996         1995

<S>                                                                      <C>         <C>
      Fair value of plan assets                                          $ 191,778   $ 179,203
      Projected benefit obligation                                        (194,874)   (183,795)
      Plan assets less than projected benefit obligation                    (3,096)     (4,592)
      Unrecognized net (gain)/loss from past
       experience different than that assumed                              (12,448)     (5,907)
      Unrecognized prior service cost                                        3,990       4,344
      Unrecognized net asset                                                (1,500)     (1,649)
      Regulatory effect recorded                                               201      (1,634)
      Pension liability                                                  $ (12,853)  $  (9,438)

      Accumulated benefit obligation (including vested benefits
          of $147,103 and $139,250, respectively)                        $ 149,814   $ 141,531
</TABLE>

                                                 -246-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

<TABLE>

     Components of Net Pension Cost:
<CAPTION>
      Year Ended December 31, (in thousands of dollars)           1996       1995         1994

<S>                                                          <C>         <C>         <C>
      Service cost (benefits earned during the period)       $  6,399    $   6,060   $   6,017
      Interest cost on projected benefit obligation            13,856       13,560      12,366
      Actual return on plan assets                            (20,798)     (27,064)     (3,723)
      Net amortization and deferral                             6,568       14,608      (8,765)
      Regulatory effect recorded                               (1,835)      (1,595)     (1,916)
      Net pension cost                                       $  4,190    $   5,569   $   3,979

      Assumptions Used in Determining Actuarial Valuations:
                                                                 1996         1995        1994
      Weighted average discount rate used to
       determine the projected benefit obligation               7.75%        7.75%       8.25%
                                               (1)
      Rate of increase for compensation levels                  4.75%        4.75%       5.50%

      Weighted average expected long-term rate
       of return on assets                                      8.25%        8.25%       8.25%

      (1)
         4.75%,  4.75%,  and  6.00%,  respectively, used for the Supplemental Security Plan
         valuation.
</TABLE>
     Other Postretirement Benefits

     The  Company  provides certain health care and life insurance benefits to
     eligible  retired  employees  and their dependents.  The Company accrues,
     during  the years that the employee renders service, the expected cost of
     providing  these  benefits for retired employees, their beneficiaries and
     covered  dependents.  The postretirement health care plan is contributory
     for   employees  who  retired  after  December  31,  1992,  with  retiree
     contributions  indexed  annually  based  upon  the  experience of retiree
     medical  expenses  for  the  preceding  year.   Pre-1993 retirees are not
     required  to  contribute  to  the  plan.   The Company's employees become
     eligible  for  retiree  medical  benefits  after  15 years of service and
     attainment  of age 55.  The life insurance plan is noncontributory and is
     based on compensation levels prior to retirement.

     In  1993,  the Company began funding, in addition to current requirements
     for  benefit  payments,  the  maximum  tax-favored amount allowed through
     certain  tax deductible funding vehicles.  The Company anticipates making
     similar  funding  decisions  in  future years, but will consider and make
     such funding decisions on the basis of tax, regulatory and other relevant
     conditions in effect at such times.  The plan assets consist primarily of
     equity investments.


                                        -247-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries


     The   reconciliation  of  the  funded  status  of  the  plans  and  the
     postretirement benefit liability recorded by the Company is as follows:
<TABLE>

<CAPTION>
     As of December 31, (in thousands of dollars)                   1996         1995

      Accumulated postretirement benefit obligation:
<S>                                                             <C>          <C>
        Retirees                                                $ (29,313)   $ (28,575)
        Fully eligible active plan participants                    (8,678)      (8,250)
        Other active plan participants                            (28,528)     (26,831)
                                                                  (66,519)     (63,656)
      Plan assets at fair value                                    13,322       10,427
      Accumulated postretirement benefit obligation
        in excess of plan assets                                  (53,197)     (53,229)
      Unrecognized net (gain)/loss from past
        experience different from that assumed                    (20,029)     (18,773)
      Unrecognized transition obligation                           53,460       56,801
      Accrued postretirement benefit liability                  $ (19,766)   $ (15,201)
</TABLE>
<TABLE>
      Components of the net periodic postretirement benefit cost are as follows:
<CAPTION>

     Year Ended December 31, (in thousands of dollars)              1996       1995       1994
      Service cost (benefits attributed to
<S>                                                              <C>        <C>        <C>
        service during the period)                               $  1,859   $  1,918   $  2,105
      Interest cost on accumulated postretirement
        benefit obligation                                          4,751      4,926      4,926
      Actual return on plan assets                                 (1,633)    (1,722)       (80)
      Net amortization and deferral                                   103        792       (118)
      Amortization of transition obligation                         3,341      3,341      3,341
      Regulatory effect recorded                                        -          -        689
      Net periodic postretirement benefit cost                   $  8,421   $  9,255   $ 10,863
</TABLE>

<TABLE>

      Assumptions Used in Determining Actuarial Valuations:          1996       1995       1994
      <S>                                                           <C>        <C>        <C>
      Weighted average discount rate used to
        determine the projected benefit obligation                  7.75%      7.75%      8.25%

      Rate of increase for compensation levels                      4.75%      4.75%      5.50%

      Weighted average expected long-term rate of
        return on assets                                            8.00%      8.00%      8.25%
</TABLE>

     For  measurement  purposes,  a  7.5%  annual  rate of increase in the per
     capita  cost  of  covered  health care benefits is assumed for 1997.  The
     health  care  cost  trend  rate is assumed to decrease gradually to 4.75%
     through  2003  and  remain  at  that  level thereafter over the projected

                                        -248-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     payout  period  of the benefits.  Increasing the assumed health care cost
     trend  rates  by  one  percentage  point  in each year would increase the
     accumulated postretirement benefit obligation as of December 31, 1996, by
     $10.4  million  (16%)  and the aggregate of the service and interest cost
     components  of  the net periodic postretirement benefit cost for the year
     by $1.2 million (19%).


      4.  Commitments and Contingencies
<TABLE>

     The  effects  of  certain  commitments  made by the Company are estimated
     below:
<CAPTION>

     (in thousands of dollars)       1997      1998      1999       2000      2001  1997-2001
      Estimated Construction
<S>                              <C>       <C>       <C>        <C>       <C>       <C>
        Expenditures             $  89,700 $  98,300 $ 114,300  $ 113,700 $ 115,200 $ 531,200
      Estimated Contract
        Obligations:
           Fuel                    142,200    86,500    48,300      6,600         -   283,600
           Purchased power          31,600    30,400    29,000     28,000    30,600   149,600
           Operating leases          2,800     2,800     2,700      2,700     2,700    13,700
      Independent Power Project
        Commitments                  5,700     1,000     1,000        900       700     9,300
      First Mortgage Bond
        Maturities:
           Series Q              $      -  $      -  $      -   $  61,500 $       - $  61,500
</TABLE>

      Construction Program

     KU  frequently  reviews  its  construction  program  and  may  revise its
     projections  of  related expenditures based on revisions to its estimated
     load growth and projections of its future load.

     See  Management's Discussion and Analysis - Construction Requirements for
     a discussion of future construction expenditures including those relating
     to construction of peaking units.

     Coal Supply

     Obligations  under  KU's  coal  purchase  contracts  are stated at prices
     effective  January  1, 1997, and are subject to changes as defined by the
     terms of the contracts.

     Purchased Power

     KU  has  purchase  power  arrangements with Owensboro Municipal Utilities
     (OMU),  Electric  Energy,  Inc.  (EEI), and other parties.  Under the OMU
     agreement, which expires on January 1, 2020, KU purchases, on an economic
     basis,  all  of the output of a 400-MW generating station not required by
     OMU.    The  amount  of purchased power available to KU during 1997-2001,
     which  is expected to be approximately 8% of KU's total kWh requirements,
     is  dependent upon a number of factors including the units' availability,
     maintenance  schedules,  fuel  costs  and OMU requirements.  Payments are

                                        -249-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     based  on  the  total costs of the station allocated per terms of the OMU
     agreement,  which generally follows delivered kWh.  Included in the total
     costs  is  KU's  proportionate  share  of  debt  service  requirements on
     $192.9  million  of OMU bonds outstanding at December 31, 1996.  The debt
     service  is  allocated  to  KU  based  on  its  annual allocated share of
     capacity, which averaged approximately 48% in 1996.

     KU  has  a  20%  equity  ownership  in EEI, which is accounted for on the
     equity  method  of  accounting.  KU's entitlement is 20% of the available
     capacity of a 1,000-MW station.  Payments are based on the total costs of
     the  station  allocated per terms of an agreement among the owners, which
     generally follows delivered kWh.

     KU  has  several  other contracts for purchased power during 1997-2001 of
     various  MW capacities and for varying periods with a maximum entitlement
     at any time of 282 MW.

     Independent Power Projects

     During  1994,  the  Company entered into agreements with Tenaska, Inc. (a
     developer  of  gas-fired  cogeneration  and  independent power generation
     projects),  and  its affiliates to purchase limited partnership interests
     in  the  identification, development and ownership of certain independent
     power  projects  in  North  America.    Under the agreements, the Company
     (through  its  wholly  owned  subsidiaries) is a limited partner in three
     operating  cogeneration  projects,  one  of  which  became operational in
     January  1997  and  will  be  funded by the Company ($4.8 million) in the
     first quarter of 1997  (see Credit Arrangements below).  The Company also
     has  agreed  to  participate  in  funding  the  costs  associated  with
     identifying  and  pursuing  potential independent power projects in North
     America.    The  remaining funding commitment over the next several years
     totals $4.5 million.

     Credit Arrangements

     KU  has  aggregate  bank  lines  of  credit  of $60 million, all of which
     remained  unused  at December 31, 1996.  All of these credit lines expire
     in  December  1999.   In support of these lines of credit, KU compensates
     the banks by paying a commitment fee.

     KU  Capital  has a standby letter of credit in the amount of $4.8 million
     to  support  its future commitment to an independent power project.  This
     letter of credit is effective for one year.  In support of this letter of
     credit, KU Capital compensates the bank by paying a commitment fee.

      5.  Common Stock

     KU Energy is subject to restrictions applicable to all corporations under
     Kentucky law on the use of retained earnings for cash dividends on common
     stock.  KU is subject to the same restrictions as well as those contained
     in  Virginia  law,  its Mortgage Indenture and Articles of Incorporation.
     At December 31, 1996, there were no restricted retained earnings.


                                        -250-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries


     The  Company has a shareholder rights plan designed to provide protection
     to  shareholders  in  the  event of an unsolicited attempt to acquire the
     Company.    Under  the shareholder rights plan, in certain circumstances,
     KU  Energy  shareholders  will  receive  as a dividend one right for each
     share  of  KU  Energy  common  stock.    Should certain events occur (for
     instance,  an acquirer becomes the beneficial owner of 20 percent or more
     of  the  Company's  outstanding  voting  stock  without  approval  by the
     Company, or certain transactions occur following an acquirer becoming the
     beneficial  owner  of  10  percent  or  more of such voting stock without
     Company  approval),  each  right would entitle the holder, other than the
     acquirer, to purchase common shares of KU Energy or shares of any company
     that  acquires KU Energy at a discount from the market value.  In certain
     circumstances,  the  Company may redeem the rights at a price of $.01 per
     right.  The rights expire in February 2002.

      6.  Preferred and Preference Stock

     KU Energy

     As  of  December  31,  1996,  there  were  20 million shares of KU Energy
     preferred stock, without par value, authorized for issuance.

     Kentucky Utilities

     Each  series of preferred stock is redeemable at the option of KU upon 30
     days' written notice as follows:


                      Redemption Price per Share
      Series          (plus accrued and unpaid dividends, if any)
      4 3/4%              $101.00

      6.53%               (Not redeemable prior to December 1, 2003.)
                          $103.265  through  November  30,  2004,  decreasing
                          approximately   $.33  each  twelve  months  thereafter
                          to $100 on or after December 1, 2013.


     As  of  December  31, 1996, there were 5.3 million shares of KU preferred
     stock,   having  a  maximum  aggregate  stated  value  of  $200  million,
     authorized for issuance, of which 400,000 shares were outstanding.

     As  of  December  31,  1996, there were 2 million shares of KU preference
     stock, without par value, authorized for issuance.


      7.  Short-Term and Long-Term Debt

     KU's  short-term financing requirements are satisfied through the sale of
     commercial  paper.    The  weighted average interest rate on the year-end
     balance was 6.17% for 1996 and 5.83% for 1995.


                                        -251-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     In  1994,  KU  entered  into a loan agreement with the County of Carroll,
     Kentucky  to finance the construction of solid waste disposal facilities.
     The  County of Carroll issued $54 million of variable rate revenue bonds,
     with  the  proceeds held in a construction fund.  In 1994, 1995 and 1996,
     KU drew down $35.7 million, $15.1 million and $3.2 million, respectively,
     relating  to these bonds.  Kentucky Utilities Pollution Control Series 10
     Bonds are issued under KU's Mortgage Indenture.

     Under  the  provisions for the variable rate revenue bonds, KU can choose
     between  various  interest  rate  options.  Currently, the daily interest
     rate  option  is being utilized.  The average annual interest rate on the
     bonds  during  1996  and  1995  was  3.53%  and 3.95%, respectively.  The
     variable  rate  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.    If tendered bonds are not remarketed, the Company has
     available lines of credit which may be used to repurchase the bonds.

     In  January  1996, KU issued $36 million of Series S First Mortgage Bonds
     which  bear  interest  at  5.99%  and  will mature January 15, 2006.  The
     proceeds  were  used  to  redeem $35.5 million of Series K First Mortgage
     Bonds.

     Substantially  all  of  KU's utility plant is pledged as security for the
     first mortgage bonds.


      8.  Financial Instruments

     The  following  methods  and  assumptions  were used to estimate the fair
     value  of each class of financial instruments for which it is practicable
     to estimate that value:

     The   carrying  values  of  cash  and  cash  equivalents,  escrow  funds,
     construction  funds, short-term borrowings, commercial paper and customer
     deposits  approximate  fair  value because of the short maturity of these
     amounts.

     Long-term  debt  fair  values  are based on quoted market prices for KU's
     first mortgage bonds and on current rates available to KU for debt of the
     same remaining maturities for KU's pollution control bonds and promissory
     note.  The carrying value of long-term debt on December 31, 1996 and 1995
     was  $546  million and $546 million, respectively, and the estimated fair
     value was $587 million and $594 million, respectively.

     If the difference between fair value and carrying value of KU's long-term
     debt  were  settled at amounts approximating those above, the anticipated
     regulatory  treatment (based on the current regulatory environment) would
     allow  recovery  of these amounts in rates over a prescribed amortization
     period.   Accordingly, any settlement would not have a material impact on
     the Company's financial position or results of operations.



                                        -252-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     9. Environmental Cost Recovery

     Since August 1994, KU has been collecting an environmental surcharge from
     its  Kentucky  retail customers under a Kentucky statute which authorizes
     electric  utilities  (including  KU)  to  implement, beginning January 1,
     1993,  an  environmental surcharge.  The surcharge is designed to recover
     certain  operating and capital costs of compliance with federal, state or
     local environmental requirements associated with the production of energy
     from  coal,  including  the  Federal  Clean  Air  Act  as  amended.  KU's
     environmental  surcharge  was  approved  by  the PSC in July 1994 and was
     implemented  in  August  1994.    The  total  surcharge  collections from
     August 1, 1994 through December 31, 1996 were approximately $40 million.

     The  constitutionality  of  the  surcharge  statute was challenged in the
     Franklin  County (Kentucky) Circuit Court in an action brought against KU
     and   the  PSC  by  the  Attorney  General  of  Kentucky  and  joined  by
     representatives  of  consumer  groups.    In July 1995, the Circuit Court
     entered  a  judgment  upholding the constitutionality of the statute, but
     vacating  that  part  of  the  PSC's  July  1994 order which the judgment
     describes  as  allowing  KU  to  recover,  under  the  surcharge, certain
     environmental  expenditures  characterized by the Circuit Court as having
     been  incurred before January 1, 1993.  The Circuit Court further ordered
     the  case  remanded to the PSC for a determination in accordance with the
     judgment.    KU and the PSC assert that none of the costs included in the
     surcharge were incurred prior to June 1994.

     The  Attorney  General and other consumer representatives appealed to the
     Kentucky  Court  of  Appeals  that  part  of  the  Circuit Court judgment
     upholding the constitutionality of the surcharge statute.  The PSC and KU
     a p pealed  that  part  of  the  judgment  denying  recovery  of  certain
     environmental  expenditures  characterized by the Circuit Court as having
     been  incurred before January 1, 1993.  The PSC has ordered all surcharge
     revenues  collected by KU from February 1, 1995 subject to refund pending
     final determination of all appeals.  The total surcharge collections from
     February  1,  1995  through  December  31,  1996  were  approximately
     $36 million.

     KU  believes  the  constitutionality  of  the  surcharge  statute will be
     upheld,  but  it  cannot  predict the outcome of that part of the Circuit
     Court judgment disallowing recovery of certain environmental expenditures
     characterized  by  the  Circuit  Court  as  having  been  incurred before
     January  1,  1993.  If the Circuit Court judgment is ultimately upheld as
     entered,  KU  estimates  that  the  amount it would be required to refund
     (which  is  based  solely  on costs associated with certain environmental
     expenditures  characterized  by the Circuit Court as having been incurred
     before  January  1,  1993) for surcharge collections through December 31,
     1996,  from  the  implementation  of the surcharge would be approximately
     $11 million, and from February 1, 1995 would be approximately $9 million.
     At this time, KU has not recorded any reserve for refund.


     10. Leveraged Leases

     KU  Capital  owns  equity  interests  in  several  leveraged  leases  for
     combustion  turbine units leased to utility companies.  The leases expire

                                        -253-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     in  1999.  KU Capital's equity investment represents 75% of the aggregate
     purchase  price  of  the  leases.    The  remaining  25%  represents  the
     nonrecourse  debt  provided  by lenders at the inception of the leases in
     1974.    The lenders have been granted, as their sole remedy in the event
     of  default by the lessees, an assignment of rentals due under the leases
     and a security interest in the leased properties.

     The  following  is  a  summary  of  the  components  of  KU Capital's net
     investment in leveraged leases:
<TABLE>
<CAPTION>

     As of December 31, (in thousands of dollars)                            1996         1995
<S>                                                                      <C>          <C>
      Rentals receivable (net of nonrecourse debt)                       $   3,511    $   3,983
      Estimated residual value of leased property                           32,707       32,707
      Less:  Unearned and deferred income                                   11,568       15,181
      Investment in leveraged leases                                        24,650       21,509
      Less:  Accumulated deferred income taxes                               4,219        2,407
      Net investment in leveraged leases                                 $  20,431      $19,102
</TABLE>
<TABLE>

      The  following  is  a  summary  of  the components of income from leveraged
<CAPTION>
     leases:
     Year Ended December 31, (in thousands of dollars)              1996      1995       1994
<S>                                                            <C>        <C>        <C>
      Income before income taxes                               $    3,613 $   3,306  $   2,140
      Income tax expense                                            1,890     1,286        829
      Income from leveraged leases                             $    1,723 $   2,020  $   1,311
</TABLE>






                                                 -254-
<PAGE>
      Financial
      Information
      (Unaudited)

                                         KU Energy Corporation
                                            & Subsidiaries

      Quarterly  financial results for 1996 and 1995  are summarized  below.
      Generally, quarterly results may fluctuate due to seasonal variations,
      changes in fuel costs and other factors.

      Net  Income  and  Earnings  per  Average  Common Share for  the  fourth
      quarter of 1996 were reduced  by  $2.4  million  and  $.06, respectively,
      for  the  write-off  associated  with nonutility  investments.  (For
      additional information refer to Management's Discussion and Analysis -
      Nonutility Activities.)
<TABLE>

      Quarter                                   4th            3rd           2nd           1st
<CAPTION>

                                       (in thousands of dollars, except for per share amounts)
      1996
<S>                                      <C>            <C>           <C>           <C>
      Operating Revenues                 $  174,917     $  178,269    $  167,510    $  190,990
      Net Operating Income                   27,796         29,820        22,825        35,128
      Net Income                             17,064         22,493        16,073        26,319
      Earnings per Average
             Common Share                       .45            .60           .42           .70

      1995
      Operating Revenues                 $  170,144     $  194,367    $  154,749    $  167,140
      Net Operating Income                   30,161         32,536        17,893        26,011
      Net Income                             22,245         24,579        10,422        18,807
      Earnings per Average
             Common Share                       .59            .65           .27           .50


      These quarterly amounts reflect, in the Company's opinion, all adjustments (including only
      normal recurring adjustments) necessary for a fair presentation.

</TABLE>













                                                 -255-
<PAGE>
     Report of
     Independent
     Public
     Accountants

                               KU Energy Corporation
                                   & Subsidiaries

     To the Shareholders of
     KU Energy Corporation:

     We   have  audited  the  accompanying  consolidated  balance  sheets  and
     statements  of  capitalization  of  KU  Energy  Corporation  (a  Kentucky
     corporation)  and  Subsidiaries as of December 31, 1996 and 1995, and the
     related consolidated statements of income and retained earnings, and cash
     flows  for each of the three years in the period ended December 31, 1996.
     These  consolidated  financial  statements  are the responsibility of the
     Company's  management.    Our  responsibility is to express an opinion on
     these financial statements based on our audits.

     We  conducted  our  audits in accordance with generally accepted auditing
     standards.  Those standards require that we plan and perform the audit to
     obtain  reasonable  assurance  about whether the financial statements are
     free  of  material  misstatement.  An audit includes examining, on a test
     basis,  evidence  supporting the amounts and disclosures in the financial
     statements.    An audit also includes assessing the accounting principles
     used  and significant estimates made by management, as well as evaluating
     the overall financial statement presentation.  We believe that our audits
     provide a reasonable basis for our opinion.

     In  our  opinion,  the  financial  statements  referred  to above present
     fairly,  in  all  material  respects, the financial position of KU Energy
     Corporation  and  Subsidiaries  as of December 31, 1996 and 1995, and the
     results  of  their  operations and their cash flows for each of the three
     years in the period ended December 31, 1996, in conformity with generally
     accepted accounting principles.


                                         /s/Arthur Andersen LLP
                                         Arthur Andersen LLP



     Chicago, Illinois
     January 28, 1997











                                        -256-