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),  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.

     THE MERGER

     On May 20, 1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered into
     an  Agreement  and  Plan of Merger (Merger) providing for a tax-free, stock
     for  stock merger of KU Energy and LG&E Energy.  As a result of the Merger,
     LG&E  Energy,  the surviving corporation, will become the parent company of
     KU and will continue as parent of Louisville Gas & Electric Company (LG&E).
     When  the  Merger is completed, shareholders of KU Energy common stock will
     receive 1.67 shares of LG&E Energy common stock for each share of KU Energy
     common stock held.

     Shareholders  of  both  companies approved the Merger on October 14, 1997.
     The  Merger  also  has  been  approved  by  the  Virginia State Corporation
     Commission (SCC) and the Kentucky Public Service Commission (PSC).

     The  PSC  order approves a surcredit mechanism which passes one-half of the
     potential  non-fuel  merger  savings (net of costs to achieve) to customers
     over  the  first  five years following the consummation of the Merger.  The
     credit  will  be  nearly 2% of customers  bills in the five-year period and
     will  amount  to  approximately  $63  million in net non-fuel savings to KU
     customers.    Similar  methods for passing net non-fuel merger savings have
     been  approved  for  Virginia  customers  by  the SCC and agreed to by KU's
     municipal wholesale customers.

     The PSC order also approves recovery from ratepayers of one-half of merger-
     related  expenses (not to exceed $77 million) over a five-year period.  The
     remaining  merger-related  expenses  will be expensed as incurred after the
     effective  date  of  the  Merger.    The  Company's share of merger-related
     expenses is expected to be approximately $38 million.  Through December 31,
     1997,  the  Company  has  deferred  approximately  $7.9  million  pending
     consummation  of  the  Merger.  Of that amount, $4.1 million is included in
     regulatory assets to be recovered following  the consummation of the Merger
     as described above.  Refer to Note 1 of the Notes to Consolidated Financial
     Statements,  Summary of Significant Accounting Policies.

     As part of their application, KU and LG&E have proposed a base rate cap for
     five  years  after  consummation  of  the  Merger,  except  in the event of
     extraordinary  circumstances  such as a significant increase in the federal
     corporate  tax  rate.    The PSC order notes that the PSC has the statutory
     jurisdiction  to  regulate  utility  rates  including  the  authority  to
     investigate and review KU's and LG&E's earnings at any time.

     The  PSC  order also requires KU and LG&E to file by September 14, 1998, or

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<PAGE>

     the  consummation  of  the  Merger,  whichever  is later, detailed plans to
     address  any  future rate regulation that may be adopted in the state.  The
     PSC  order further provides that the PSC will at that time determine on the
     basis of the described filings and other information whether changes should
     be made to the existing regulation of KU and LG&E.

     The  Merger  must  still  be  approved  by  the  Federal  Energy Regulatory
     Commission  and  the Securities and Exchange Commission and reviewed by the
     Federal  Trade  Commission.   Following receipt of the remaining regulatory
     approvals,  the  Merger  is  expected to be effective as early as the first
     half of 1998.

     RESULTS OF OPERATIONS

     Earnings and Dividends

     The  Company's  1997  earnings  were $2.25 per share compared to $2.17 per
     share earned in 1996, an increase of  4%.  Earnings in 1997 were positively
     impacted by increased kilowatt-hour (kWh) sales to industrial customers and
     higher  market prices on sales for resale offset somewhat by overall milder
     weather in 1997.

     Earnings  per  share  for 1996 of $2.17 were 8% above earnings of $2.01 per
     share  for 1995. The increase in 1996 earnings was largely due to 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 2.3% to $1.76 per share in 1997.  In
     January  1998,  KU Energy's Board increased the common dividend again to an
     indicated annual rate of $1.80 per share.  This marked the 17th consecutive
     year in which dividends have increased.

     1997 kWh Sales by Classification

     Year Ended December 31,                                              1997
     Residential                                                           27%
     Commercial                                                            19%
     Industrial                                                            24%
     Mine Power                                                             5%
     Public Authorities                                                     7%
     Sales for Resale                                                      18%
          Total                                                           100%

     Sales and Revenues
                                                 1997              1996
                                             kWh    Revenue     kWh   Revenue
                                           Change  Variance    Change Variance
                                           (%)       (000's)    (%)    (000's)

     Residential                             (2)    $(4,405)     3    $ 3,469
     Commercial                               -         154      -     (1,138)
     Industrial                               9       9,945      7      6,790
     Mine Power                               4         527     (4)    (2,062)
     Public Authorities                       -         220      4      1,862
          Total Retail Sales                  2       6,441      3      8,921
     Sales for Resale                        (9)     (1,878)    27     13,268
     Miscellaneous Revenues and Other         -         161      -      3,097
          Total                               -     $ 4,724      7    $25,286

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<PAGE>

     Total  sales  for  1997  were  flat  as compared to 1996. Residential sales
     decreased  2%  for the year due to milder weather in 1997 compared to 1996.
     Industrial  sales  increased  9%  reflecting  continued  growth  in  the
     manufacturing  sector of the service area economy.  Sales for resale, which
     include  wholesale  and  opportunity  sales,  declined 9% in 1997; however,
     revenues did not decline by a comparable amount due to higher market prices
     per megawatt-hour on opportunity sales.

     Operating  revenues of $716.4 million for 1997 were fairly flat, increasing
     $4.7  million  (1%)  from  1996 due primarily to kWh sales remaining almost
     unchanged as discussed above.

     Sales  for  1996  were  7%  above  1995. Sales for resale rose 27% in 1996.
     Industrial  sales increased 7% while residential sales increased 3%.  These
     increases were the result of the Company's successful marketing efforts and
     continued economic growth in KU s service area.

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

     Operating Expenses

     Fuel  expense  totaled $188.4 million in 1997, a $9.8 million (5%) decrease
     from 1996.  The decline was primarily due to a 4% decrease in MBTU (million
     British  thermal  units)  consumed  which  resulted from an increase in kWh
     purchases.

     Purchased  power expense increased $10.1 million (16%) in 1997 due to a 19%
     increase  in  kWh  purchases  associated  with  increased  availability  of
     surplus  power  on  favorable  pricing terms and to a one-time reduction in
     demand  costs  in  1996  of  about  $4  million  under  a  contract  with a
     neighboring utility.

     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 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 one-time reduction in
     demand costs as discussed above.

     Depreciation  expense  increased $3.7 million (5%) and $5.3 million (7%) in
     1997 and 1996, respectively.  The increases were primarily due to increased
     utility plant in service including a combustion turbine peaking unit placed
     into service in May 1996.

     Federal and state income taxes increased $.3 million (1%) in 1997 primarily
     due to the increase in pre-tax income.

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

     Other Income and Deductions

     Other  income  and deductions of $10.5 million in 1997 were up $2.2 million

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     (27%)  compared  to  1996.   Other income and deductions for 1996 include a
     $5.5  million  pre-tax  write-off  associated  with nonutility investments.
     Other income and deductions of $8.3 million in 1996 were down 29% from 1995
     primarily  due to the $5.5 million pre-tax write-off mentioned above.  (For
     additional information, refer to page 21  Nonutility Activities. )

     COMPETITION

     Wholesale

     The  electric  utility  industry's move to competition formally began with
     passage  of  The  National Energy Policy Act of 1992 (NEPA).  NEPA gave the
     Federal  Energy  Regulatory  Commission  (FERC) authority to order electric
     utilities  to  provide wholesale transmission services to independent power
     producers  and  other  utilities.  NEPA  also  increased competition in the
     wholesale  generation  market by reducing restrictions on the ownership and
     operation of independent power producers.

     In  1996,  under  authority  granted  by  NEPA, the FERC issued rules (FERC
     Order  888  and  Order  889)  requiring  electric  utilities  to open their
     transmission  systems  to other wholesale buyers and sellers.  In addition,
     the  rules  require  electric  utilities  to  separate  their  merchant and
     transmission  functions.    These  rules  create greater competition in the
     industry by increasing the availability of transmission services.

     In  March  1997,  FERC  issued  its  Final  Rule  (Order  888-A)  affirming
     Orders  888  and  889.      In July 1997, KU filed a conforming open access
     transmission tariff (TS) with the FERC.  The Company's TS has been accepted
     by the FERC.

     Retail

     Proposals  to bring competition to the retail level of the electric utility
     industry  are being considered in numerous states and at the federal level.
     In  Kentucky,  the PSC has held a series of informal meetings with electric
     utilities  and  other interested parties to discuss the potential impact of
     industry  restructuring.    Based  upon  these  meetings, the PSC issued in
     December  1997  a  set of principles and guidelines on the restructuring of
     the  electric utility industry.  The principles and guidelines focus on the
     fundamental  issues  relating  to  consumer protection and benefits, system
     reliability, environmental responsibility and other related matters.

     The  Company  continues  to advocate nationwide 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.    The Company believes its
     merger  with  LG&E  Energy  will  strengthen its competitive position.  The
     larger  size of the combined company will provide greater opportunities for
     growth  while expected cost savings will help ensure that KU's rates remain
     among the lowest in the nation.

     Stranded Costs

     KU  believes  that  it  will  have very little, if any, stranded costs as a
     result of wholesale or retail competition.




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<PAGE>

     Midwest Independent System Operator

     In  1998,  KU  announced  that  it will join the Midwest Independent System
     Operator  (MISO).    KU is among nine transmission system owners, including
     LG&E, which filed a proposal with the FERC in January 1998 seeking approval
     to  form  the  MISO.    The MISO is a regional entity that would manage and
     operate  the  transmission  owners    collective transmission systems in an
     eight-state  region.    The  primary  objectives of the MISO are to advance
     wholesale  competition  by  ensuring  nondiscriminatory  open  transmission
     access to all wholesale customers and to enhance transmission reliability.

     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  KU'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 and may also include fuel switching
     or the installation of additional scrubbers.

     The  Company's  future  compliance plans are contingent upon many factors,
     including developments in the emission allowance market and fuel markets 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  PSC  in  July  1994,  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  PSC's  order approving the surcharge and the constitutionality of the
     surcharge  were  challenged  in  a Franklin County (Kentucky) Circuit Court
     (Circuit  Court)  action  brought  against  KU  and the PSC by the Attorney
     General  of Kentucky and representatives of consumer groups.  In July 1995,
     the Circuit Court entered a judgment upholding the constitutionality of the
     surcharge  statute  but  vacating  that  part  of the PSC's order which the
     Circuit  Court's judgment described as retroactively applying the surcharge
     statute.    All  parties  (including  KU  and the PSC) appealed the Circuit
     Court's judgment to the Kentucky Court of Appeals (Court of Appeals).  The
     PSC  has  ordered  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, 1997 were
     approximately $56 million.

     In  December  1997,  the Court of Appeals rendered an opinion upholding the
     portion  of the Circuit Court's judgment regarding the constitutionality of
     the  surcharge  statute  but  reversing that portion of the Circuit Court's
     judgment  concerning  the  claim of retroactive application of the statute.
     The Kentucky Attorney General and other consumer representatives have filed
     motions  for  discretionary review with the Kentucky Supreme Court (Supreme

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<PAGE>

     Court).  The Supreme Court has the discretion to grant or deny the motions.
     KU and the PSC have asked the Supreme Court to deny the motions.  KU cannot
     predict  whether the Supreme Court will grant review of the case or when it
     will act on the matter.

     KU continues to believe that the constitutionality of the surcharge statute
     will  be  upheld.    Although KU cannot predict the outcome of the claim of
     retroactive  application  of  the statute, it is the position of KU and the
     PSC  that  the July 1994 PSC order did not retroactively apply the statute.
     If  the Court of Appeals  opinion reversing the Circuit Court's judgment on
     the  claim of retroactivity is overturned and the Circuit Court's judgment,
     as entered, is upheld, KU estimates that the amount it could be required to
     refund  for  surcharge  collections  through  December  31,  1997, from the
     implementation  of  the  surcharge  would be approximately $15 million, and
     from  February  1, 1995, would be approximately $13 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.

     Nitrogen Oxide Emissions Reductions

     The  Environmental  Protection Agency (EPA) issued final rules revising the
     National  Ambient Air Quality Standards for ozone and particulate matter in
     July  1997.   The revised standards would require significant reductions in
     sulfur  dioxide  and  nitrogen  oxide  emissions  from  coal-fired  boilers
     (including  those  at KU's generating stations) beginning in 2004.  Certain
     implementation  proposals, which are not yet final, would target coal-fired
     utilities  in  the  Midwest  and  South,  including  Kentucky,  for  more
     substantial  reductions  than  other  areas and other sources of emissions.
     Final  implementation  methods  will  be  set  by  the EPA as well as state
     regulatory  authorities.  KU believes that the costs relating to compliance
     with  the  new  standards,  including  capital  costs as well as associated
     increases  in  operating  costs,  are  likely  to  be  substantial  and are
     dependent  upon  the  ultimate  control  program  agreed to by the targeted
     states  and  EPA.   Such costs are expected to be incurred in the 2004-2007
     time period.  KU further believes that such capital and operating costs are
     the  type  of costs that are eligible for recovery from customers under its
     environmental  surcharge  mechanism.    However,  approval  from the PSC is
     required.    Refer  to  Note  9  of  the  Notes  to  Consolidated Financial
     Statements,   Environmental Cost Recovery.   The exact nature of the impact
     of  the  new standards on KU's operations will not likely be known for some
     time.

     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 KU'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.
     (Refer to page 16,  The Merger,  regarding a proposed rate cap.)



     LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  financial position remained strong in 1997.  At the end of
     the year, common stock equity represented 53% of total capitalization while

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<PAGE>

     long-term  debt  was  44%,  and preferred stock was 3%.  Current ratings on
     KU's  senior debt securities are as follows: Duff & Phelps AA, Moody's Aa2
     and Standard & Poor's AA.
<TABLE>
<CAPTION>

     As of December 31,                       1997       1996        1995       1994       1993
<S>                                          <C>        <C>         <C>        <C>        <C>
      Capitalization (in millions)           $1,250     $1,232      $1,215     $1,152     $1,085

      Long-Term Debt                          43.7%      44.4%       44.9%      43.0%      40.8%
      Preferred Stock                          3.2%       3.2%        3.3%       3.5%       3.7%
      Common Stock Equity                     53.1%      52.4%       51.8%      53.5%      55.5%
</TABLE>

     Cash  from  operations  accounted  for 106% of cash requirements in 1997 as
     compared  to  99%  in 1996 and 78% in 1995.  For calculation purposes, cash
     requirements   exclude  optional  debt  refinancings  and  redemptions  and
     optional preferred stock redemptions.

     At the end of 1997, KU's short-term borrowings were $34 million compared to
     $54  million  at  December  31,  1996.    The  Company  has used short-term
     borrowings  to  temporarily  finance  ongoing construction expenditures and
     general  corporate  requirements.    The  decrease is due primarily to cash
     provided  by operations exceeding cash required for investing and financing
     activities (exclusive of short-term borrowings).

     Taking advantage of lower interest rates, KU issued $36 million of Series S
     First Mortgage Bonds, maturing 2006, 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.

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

     Embedded Costs                                  1997       1996       1995
     Long-Term Debt                                  6.98%      6.98%      7.15%
     Preferred Stock                                 5.64%      5.64%      5.64%


     Capital Requirements

     Construction Expenditures - 1997 Actual, 1998-2002 Estimated

                                   Actual                Estimated
     (In millions of dollars)       1997    1998    1999    2000    2001    2002

     Construction Expenditures       $94    $ 97   $ 103    $120    $116    $113

     During  1997,  construction  expenditures  were  $94  million. Construction
     expenditures are expected to be approximately $97 million in 1998.  For the
     five-year  period  1998-2002, construction expenditures are projected to be
     $549  million.    Included in the projection is $105 million for additional
     peaking  units.   Construction expenditures for the five-year period ending

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<PAGE>



     in 1997 were $695 million.

     In  addition  to  construction expenditures, projected capital requirements
     for  1998-2002  include  $61.5  million  for  scheduled  debt  retirements.
     Capital  requirements for the five-year period 1998-2002 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 2.5% and 2.7%,
     respectively,  over  the next 5 years.  KU  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.

     YEAR 2000 SOFTWARE MODIFICATIONS

     The  Company,  like most owners of computer software, is required to modify
     significant  portions  of its software so that it will function properly in
     the  year  2000. The Company has developed a plan to be year 2000 compliant
     no  later  than  the  second  quarter of 1999.  Maintenance or modification
     costs  will  be expensed as incurred.  The Company does not expect that the
     amounts  required  to  be  expensed  over  the  next  two years will have a
     material  effect  on  its financial position or results of operations.  The
     amount expensed  through 1997 was immaterial.

     If  the  Company's  year  2000  plans  are  not successful, there could be
     significant  disruption  of the Company's ability to bill customers and pay
     suppliers,  as  well  as  a possible slowdown of certain computer-dependent
     processes.


     NONUTILITY ACTIVITIES

     KU  Capital,  KU Energy's nonutility subsidiary, has an investment of about
     $28  million  in  equity  interests  in eight combustion turbine generating
     units  (all of which are leased to investment grade utility companies).  In
     addition,  KU  Capital  has  an  investment  of  $8.7  million  in  limited
     partnership interests in three operating independent power projects through
     agreements  with Tenaska, Inc. (Tenaska), a developer of domestic gas-fired
     cogeneration and independent power generation projects, and its affiliates.

     KU  Capital  also  has  a  limited  partnership  interest  in  a  gas-fired
     generation project which is the subject of a breach of contract claim filed
     by Tenaska against the Bonneville Power Administration (BPA).  Construction
     of  the  project  was  suspended  in 1995 after BPA notified Tenaska of its
     intent  to  cancel  a power purchase agreement under which BPA committed to
     buy  electricity to be produced by the project.  Tenaska has a $650 million
     claim  for damages against BPA in the United States Court of Federal Claims
     (Court  of  Claims).    Arbitration ordered by the Court of Claims began in
     February 1997.  An initial decision is expected in the second half of 1998.
     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 this matter is remote.

     Under  its  agreements with Tenaska,  KU Capital has been funding a portion
     of the costs associated with identifying and pursuing potential independent
     power  projects  in  North  America.    Such funding, which was expensed as
     incurred,  totaled about $1 million in 1997.  In 1996, KU Capital wrote-off

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     $5.5  million  of  costs  funded  during 1994-1996 that was associated with
     unsuccessful  projects.  KU Capital's remaining funding commitment over the
     next several years totals $3.6 million.

     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,  (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, (vi) the
     anticipated  results  of  the  arbitration  relating  to  the Tenaska claim
     against  BPA, (vii) the impact of the revisions to the National Ambient Air
     Quality Standards and recovery of related costs, (viii) with respect to the
     Merger, the expected timing of consummation, the Company's share of merger-
     related  expenses,  the  anticipated  amount  of  customer  savings and the
     anticipated  strengthened  competitive position and (ix) the expected costs
     associated  with  year  2000  software  modifications.  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.

















                                         -69-
<PAGE>
      Consolidated Statements
      of Income and
      Retained Earnings

<TABLE>
<CAPTION>

                                         KU Energy Corporation
                                            & Subsidiaries


      Year Ended December 31,                                       1997        1996      1995

      (in thousands, except for per share amounts)
<S>                                                            <C>         <C>        <C>
      OPERATING REVENUES                                       $ 716,410   $ 711,686  $686,400
      OPERATING EXPENSES:
          Fuel, principally coal, used in generation             188,439     198,198   189,845
          Electric power purchased                                72,542      62,490    69,579
          Other operating expenses                               123,537     125,351   124,044
          Maintenance                                             65,004      64,170    62,599
          Depreciation                                            84,297      80,612    75,268
          Federal and state income taxes                          50,501      50,247    43,426
          Other taxes                                             15,459      15,049    15,038
            Total Operating Expenses                             599,779     596,117   579,799
      NET OPERATING INCOME                                       116,631     115,569   106,601
      OTHER INCOME AND DEDUCTIONS:
          Interest and dividend income                             2,507       2,800     4,115
          Other income and deductions - net                        8,000       5,469     7,610
            Total Other Income and Deductions                     10,507       8,269    11,725
      INCOME BEFORE INTEREST AND OTHER CHARGES                   127,138     123,838   118,326

      INTEREST AND OTHER CHARGES:
          Interest on long-term debt                              37,405      37,584    36,095
          Preferred stock dividend requirements of Subsidiary      2,256       2,256     2,256
          Other interest charges                                   2,298       2,049     3,922
            Total Interest and Other Charges                      41,959      41,889    42,273

      NET INCOME                                               $  85,179   $  81,949  $ 76,053


      BASIC EARNINGS PER AVERAGE COMMON SHARE,
       based on average shares outstanding of 37,818           $    2.25   $    2.17  $   2.01


      RETAINED EARNINGS BEGINNING OF YEAR                      $ 337,968   $ 321,066  $308,547


      ADD NET INCOME                                              85,179      81,949    76,053
                                                                 423,147     403,015   384,600
      DEDUCT:
          Dividends on common stock, $1.76, $1.72 and $1.68
            per share during 1997, 1996 and 1995, respectively    66,559      65,047    63,534

          Other                                                        8           -         -

      RETAINED EARNINGS END OF YEAR                            $ 356,580    $337,968  $321,066

     The accompanying Notes to Consolidated Financial Statements are an integral
     part of these statements.
</TABLE>
                                         -70-
<PAGE>

     Consolidated Statements
      of Cash Flows

                                         KU Energy Corporation
                                            & Subsidiaries

<TABLE>
<CAPTION>

      Year Ended December 31, (in thousands of dollars)            1997        1996        1995

      CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                           <C>         <C>         <C>
          Net income                                          $  85,179   $  81,949   $  76,053
          Items not requiring (providing) cash currently:
            Depreciation                                         84,297      80,612      75,268
            Deferred income taxes                                 7,815       5,891      16,919
            Investment tax credit deferred                       (4,036)     (4,013)     (4,095)
            Deferred merger-related costs                        (7,851)          -           -
            Changes in current assets and liabilities:
              Change in accounts receivable                       5,229        (969)     (7,945)
              Change in accounts payable                          1,308      (9,682)    (10,774)
              Change in other current assets and liabilities      3,451       5,778        (431)
            Other - net                                          (5,254)     10,181       1,868

      Net Cash Provided by Operating Activities                 170,138     169,747     146,863

      CASH FLOWS FROM INVESTING ACTIVITIES:

          Construction expenditures - utility                   (94,006)   (106,503)   (124,515)
          Investment in independent power projects               (4,805)     (1,310)     (3,204)
          Proceeds from insurance reimbursements                  4,270         257         152
          Proceeds from independent power projects                2,567       1,388         943
          Other                                                     472         393         193

      Net Cash Used by Investing Activities                     (91,502)   (105,775)   (126,431)

      CASH FLOWS FROM FINANCING ACTIVITIES:

          Short-term borrowings - net                           (20,600)     (1,400)    (20,700)
          Issuance of long-term debt                                  -      35,666      49,288
          Funds deposited with trustee - net                          -       3,779      15,100
          Retirement of long-term debt, including premiums          (21)    (36,192)        (21)
          Payment of common stock dividends                     (66,559)    (65,047)    (63,534)

      Net Cash Used by Financing Activities                     (87,180)    (63,194)    (19,867)

      NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS       (8,544)        778         565

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

      Cash and Cash Equivalents End of Year                   $  21,726   $  30,270   $  29,492

      SUPPLEMENTAL DISCLOSURES

      Cash paid for:
          Interest                                            $  37,053   $  36,729   $  37,961
          Income Taxes                                        $  41,398   $  45,775   $  31,507

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

</TABLE>


                                         -71-
<PAGE>
      Consolidated
      Balance Sheets

                                         KU Energy Corporation
                                            & Subsidiaries
<TABLE>
<CAPTION>

      As of December 31, (in thousands of dollars)                             1997       1996
      ASSETS
      UTILITY PLANT:
<S>                                                                      <C>        <C>
        Plant in service, at cost                                        $2,552,695 $2,482,812
        Less:  Accumulated depreciation                                   1,128,282  1,067,911
                                                                          1,424,413  1,414,901
        Construction work in progress                                        58,939     63,435
           Total Utility Plant                                            1,483,352  1,478,336

      CURRENT ASSETS:
        Cash and cash equivalents                                            21,726     30,270
        Accounts receivable, net of allowance for doubtful accounts          45,269     50,498
        Accrued utility revenues                                             29,668     24,239
        Fuel, principally coal, at average cost                              27,799     30,895
        Plant materials and operating supplies, at average cost              23,648     21,656
        Other                                                                 5,769      7,486
           Total Current Assets                                             153,879    165,044

      OTHER ASSETS:
        Investment in leveraged leases                                       28,152     24,650
        Investment in independent power projects                              8,730      4,745
        Regulatory assets                                                    14,773     11,531
        Other                                                                48,376     42,642
           Total Other Assets                                               100,031     83,568
           Total Assets                                                  $1,737,262 $1,726,948

      CAPITALIZATION AND LIABILITIES
      CAPITALIZATION: (SEE CONSOLIDATED STATEMENTS OF CAPITALIZATION)
        Common stock equity                                              $  664,122 $  645,513
        Preferred stock                                                      40,000     40,000
        Long-term debt                                                      546,351    546,373
           Total Capitalization                                           1,250,473  1,231,886

      CURRENT LIABILITIES:
        Long-term debt due within one year                                       21         21
        Short-term borrowings                                                33,600     54,200
        Accounts payable                                                     29,561     28,253
        Accrued interest                                                      8,283      8,048
        Accrued taxes                                                         7,710      4,005
        Customer deposits                                                     9,841      8,746
        Accrued payroll and vacations                                        10,407      9,921
        Other                                                                 6,492      5,954
           Total Current Liabilities                                        105,915    119,148

      OTHER LIABILITIES:
        Accumulated deferred income taxes                                   252,492    242,674
        Accumulated deferred investment tax credits                          26,131     30,167
        Regulatory tax liability - net                                       50,904     54,388
        Other                                                                51,347     48,685
           Total Other Liabilities                                          380,874    375,914
           Total Capitalization and Liabilities                          $1,737,262 $1,726,948

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

                                         -72-
<PAGE>
      Consolidated
      Statements of
      Capitalization                     KU Energy Corporation
                                             & Subsidiaries
<TABLE>
<CAPTION>


      As of December 31, (in thousands of dollars)                             1997       1996
      COMMON STOCK EQUITY:
        Common stock, without par value, authorized 160,000,000
          shares, outstanding 37,817,517 shares in 1997 and

<S>                                                                      <C>        <C>
          37,817,878 shares in 1996                                      $  308,137 $  308,140
        Capital stock expense and other                                        (595)      (595)
        Retained earnings                                                   356,580    337,968
          Total Common Stock Equity                                         664,122    645,513

      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
          6.32%  Series Q, due June 15, 2003                                 62,000     62,000
          5.99%  Series S, due January 15, 2006                              36,000     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    295,500

        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     54,000
                                                                            250,830    250,830
            Total First Mortgage Bonds                                      546,330    546,330

        8% secured note, due January 5, 1999 (net of current maturity)           21         43

          Total Long-Term Debt                                              546,351    546,373
          Total Capitalization                                           $1,250,473 $1,231,886

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

</TABLE>

                                         -73-
<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 441,200 customers
     in  over  600  communities  and  adjacent  suburban and rural areas in 77
     counties  in  central,  southeastern  and  western  Kentucky and to about
     29,000 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.



     The following is a summary of the components of regulatory assets:

     As of December 31, (in thousands of dollars)          1997          1996

     Unamortized loss on reacquired debt               $  9,756      $ 10,838
     Merger costs                                         4,062             -
     Other                                                  955           693
     Regulatory Assets                                 $ 14,773      $ 11,531

     KU is currently not earning a return on these regulatory assets.


                                        -74-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries


     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.

     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 1997, 1996 and 1995.

     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.

     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
     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
     information about environmental surcharge legal proceedings.


     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.


                                        -75-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     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.

     New Accounting Pronouncements

     In  February 1997, the Financial Accounting Standards Board (FASB) issued
     Statement of Financial Accounting Standards No. 128, "Earnings per Share"
     (SFAS  128),  and  Statement  of  Financial Accounting Standards No. 129,
     Disclosure of Information about Capital Structure  (SFAS 129).  SFAS 128
     specifies  the computation, presentation, and disclosure requirements for
     earnings  per  share  for entities with publicly held common stock.  SFAS
     129  was issued in conjunction with the FASB's earnings per share project
     and incorporated related disclosure requirements from APB Opinion No. 10,
     Disclosure  of  Long-Term  Obligations,    and  Statement  of Financial
     Accounting  Standards No. 47,  Disclosure of Long-Term Obligations.   The
     Company  adopted  the  statements  for  year-end 1997 and adoption of the
     statements did not have any dilutive impact on the basic current earnings
     per share calculation or disclosures.

     In  June  1997,  FASB issued Statements of Financial Accounting Standards
     No.  130,    Reporting  Comprehensive  Income,  and No. 131,  Disclosures
     about  Segments  of an Enterprise and Related Information,  effective for
     periods  beginning  after  December  15,  1997.   These statements do not
     affect  the  accounting  recognition  or measurement of transactions, but
     rather  require  expanded  disclosures  regarding financial results.  The
     Company will adopt these standards in 1998 as required by the FASB.

     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
     basic  earnings  per  share for the years ended 1997, 1996 and 1995 would
     not have been materially different from amounts recorded.






                                        -76-
<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)                        1997           1996

      DEFERRED TAX ASSETS:
        Unamortized investment tax credit and other property
<S>                                                                  <C>            <C>
          related differences                                        $  48,364      $  50,629

        Other                                                           21,691         21,627
        Less: Amounts included in current assets                         3,242          4,723
                                                                        66,813         67,533

      DEFERRED TAX LIABILITIES:
        Accelerated depreciation and other property
          related differences                                          305,468        299,379
        Other                                                           13,837         10,828
                                                                       319,305        310,207

      NET ACCUMULATED DEFERRED INCOME TAX LIABILITY                  $ 252,492      $ 242,674

      The components of income tax expense are as follows:

     Year Ended December 31, (in thousands of dollars)              1997      1996       1995
      INCOME TAXES CHARGED TO OPERATING INCOME:
      Current    - federal                                     $   38,472 $  34,255  $  22,011
                 - state                                            8,757     6,585      4,734
                                                                   47,229    40,840     26,745
      Deferred   - federal                                          1,917     5,949     12,809
                 - state                                            1,355     3,458      3,943
                                                                    3,272     9,407     16,752
      Deferred investment tax credit                                    -         -        (71)
                                                                   50,501    50,247     43,426
      INCOME TAXES CHARGED TO OTHER INCOME
      AND DEDUCTIONS:
      Current    - federal                                         (1,609)     2,716     1,868
                 - state                                             (454)       900       384
                                                                   (2,063)     3,616     2,252
      Deferred   - federal                                          3,426     (3,138)      176
                 - state                                            1,117       (378)       (9)
                                                                    4,543     (3,516)      167
      Amortization of deferred investment tax credit               (4,036)    (4,013)   (4,024)
                                                                   (1,556)    (3,913)   (1,605)

      TOTAL INCOME TAX EXPENSE                                 $   48,945  $  46,334  $ 41,821

</TABLE>


                                                 -77-
<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 36.5% in 1997, 36.1% in
     1996  and 35.5% in 1995.  The difference between the effective rate and the
     statutory federal income tax rate is attributable to the following factors:
<TABLE>
<CAPTION>

     Year Ended December 31,  (in thousands of dollars)             1997      1996       1995

<S>                                                            <C>        <C>        <C>
      FEDERAL INCOME TAX COMPUTED AT 35%                       $   46,943 $  44,899  $  41,256
      Add (Deduct):
      State income taxes, net of federal income tax benefit         7,004     6,867      5,884
      Amortization of deferred investment tax credit               (4,036)   (4,013)    (4,095)
      Other, net                                                     (966)   (1,419)    (1,224)
      TOTAL INCOME TAX EXPENSE                                 $   48,945 $  46,334  $  41,821
</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.

     On  May  20,  1997, KU Energy and LG&E Energy Corp. (LG&E Energy) entered
     into  a  Merger  Agreement. For information concerning the agreement, see
     Management's Discussion and Analysis - The Merger.  Under the provisions
     of  the  Supplemental  Security  Plan, the Merger Agreement constituted a
     change-in-control which required that a lump sum present value payment be
     made  to retired employees entitled to retirement benefits on the date of
     the  Merger  Agreement.    On  May  30, 1997, lump sum payments totalling
     $4.7 million were made to retired employees.




                                        -78-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     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)                           1997         1996

<S>                                                                      <C>         <C>
      Fair value of plan assets                                          $ 217,424   $ 191,778
      Projected benefit obligation                                        (214,657)   (194,874)
      Plan assets more (less) than projected benefit obligation              2,767      (3,096)
      Unrecognized net (gain)/loss from past
       experience different than that assumed                              (19,775)    (12,448)
      Unrecognized prior service cost                                        3,635       3,990
      Unrecognized net asset                                                (1,350)     (1,500)
      Regulatory effect recorded                                               462         201
      Pension liability                                                  $ (14,261)  $ (12,853)

      Accumulated benefit obligation (including vested benefits
          of $164,498 and $147,103, respectively)                        $ 168,810   $ 149,814


      Components of Net Pension Cost:
      Year Ended December 31, (in thousands of dollars)           1997       1996         1995

      Service cost (benefits earned during the period)       $  6,728    $   6,399   $   6,060
      Interest cost on projected benefit obligation            14,680       13,856      13,560
      Actual return on plan assets                            (34,211)     (20,798)    (27,064)
      Net amortization and deferral                            19,320        6,568      14,608
      Regulatory effect recorded                                 (261)      (1,835)     (1,595)
      Net pension cost                                       $  6,256    $   4,190   $   5,569

      Assumptions Used in Determining Actuarial Valuations:
                                                                 1997         1996        1995
      Weighted average discount rate used to
       determine the projected benefit obligation               7.00%        7.75%       7.75%

      Rate of increase for compensation levels                  4.00%        4.75%       4.75%

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

</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  employees  render service, the expected cost of
     providing  these  benefits  upon  retirement  to  such  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

                                        -79-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     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.

     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)                   1997              1996

      Accumulated postretirement benefit obligation:
<S>                                                             <C>                <C>
        Retirees                                                $ (30,777)         $(29,313)
        Fully eligible active plan participants                    (9,777)           (8,678)
        Other active plan participants                            (31,585)          (28,528)
                                                                  (72,139)          (66,519)
      Plan assets at fair value                                    17,763            13,322
      Accumulated postretirement benefit obligation
        in excess of plan assets                                  (54,376)          (53,197)
      Unrecognized net (gain)/loss from past
        experience different from that assumed                    (19,697)          (20,029)
      Unrecognized transition obligation                           50,118            53,460
      Accrued postretirement benefit liability                  $ (23,955)         $(19,766)

      Components of the net periodic postretirement benefit cost are as follows:

     Year Ended December 31, (in thousands of dollars)              1997       1996       1995
      Service cost (benefits attributed to
        service during the period)                               $  1,853   $  1,859   $  1,918
      Interest cost on accumulated postretirement
        benefit obligation                                          4,895      4,751      4,926
      Actual return on plan assets                                 (3,569)    (1,633)    (1,722)
      Net amortization and deferral                                 1,706        103        792
      Amortization of transition obligation                         3,341      3,341      3,341
      Net periodic postretirement benefit cost                   $  8,226   $  8,421   $  9,255

</TABLE>


                                                 -80-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries
<TABLE>
<CAPTION>

     Assumptions Used in Determining Actuarial Valuations:          1997       1996       1995

<S>                                                                  <C>         <C>        <C>
     Weighted average discount rate used to
        determine the projected benefit obligation                  7.00%      7.75%      7.75%

      Rate of increase for compensation levels                      4.00%      4.75%      4.75%

      Weighted average expected long-term rate of
        return on assets                                            7.90%      8.00%      8.00%
</TABLE>

      For  measurement  purposes,  a  7.0%  annual  rate of increase in the per
     capita  cost  of  covered  health care benefits is assumed for 1998.  The
     health  care  cost  trend  rate is assumed to decrease gradually to 4.25%
     through  2004  and  remain  at  that  level thereafter over the projected
     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, 1997, by
     $11.5  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 (18%).


      4.  COMMITMENTS AND CONTINGENCIES

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

     (in thousands of dollars)       1998      1999      2000       2001      2002 1998-2002
      ESTIMATED CONSTRUCTION
<S>                              <C>       <C>       <C>        <C>       <C>       <C>
        EXPENDITURES             $  97,200 $ 103,200 $ 120,000  $ 115,600 $ 112,700 $ 548,700
      ESTIMATED CONTRACT
       OBLIGATIONS:
           Fuel                    157,800    50,400     9,000          -         -   217,200
           Purchased power          31,300    30,200    29,500     32,300    32,300   155,600
           Operating leases          2,900     2,800     2,800      2,800     2,700    14,000
      INDEPENDENT POWER PROJECT
        COMMITMENTS                  1,000     1,000     1,000        600         -     3,600
      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 - Capital 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

                                        -81-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     effective  January  1, 1998, 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 all of the
     output of a 400-MW generating station not required by OMU.  The amount of
     purchased power available to KU during 1998-2002, 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 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 $186.6 million
     of  OMU  bonds  outstanding  at  December  31, 1997.  The debt service is
     allocated  to  KU  based on its annual allocated share of capacity, which
     averaged approximately 50% in 1997.

     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 1998-2002 of
     various  MW capacities and for varying periods with a maximum entitlement
     at any time of 282 MW.

     Independent Power Projects

     The  Company  has 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.    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 $3.6 million.

     Credit Arrangements

     KU  has  aggregate  bank  lines  of  credit  of $60 million, all of which
     remained  unused  at December 31, 1997.  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.

     5.  COMMON STOCK

     KU Energy is subject to restrictions applicable to all corporations under

                                        -82-
<PAGE>



     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     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, 1997, there were no restricted retained earnings.

     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.  The rights have been amended
     to  provide  that  the  Merger  will  not  result  in the rights becoming
     exercisable.


     6.  PREFERRED AND PREFERENCE STOCK

     KU Energy

     As  of  December  31,  1997,  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, 1997, 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,  1997, there were 2 million shares of KU preference
     stock, without par value, authorized for issuance.



                                        -83-
<PAGE>
     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     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 6.79% for 1997 and 6.17% for 1996.

     Under  the  provisions  for the variable rate Pollution Control Series 10
     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 1997 and 1996 was 3.77% and 3.53%,
     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 which carried a rate of 7 3/8%.

     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, short-
     term  borrowings, commercial paper and customer deposits approximate fair
     value  because  of  the  short  maturity of these amounts.  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.

     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, 1997 and 1996
     was  $546  million,  and  the  estimated  fair value was $579 million and
     $587 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.



                                        -84-
<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  Kentucky Public Service
     Commission  (PSC)  in  July 1994 and was implemented in August 1994.  The
     total surcharge collections from August 1, 1994 through December 31, 1997
     were approximately $60 million.

     The  PSC's order approving the surcharge and the constitutionality of the
     surcharge  statute  were  challenged  in  the  Franklin County (Kentucky)
     Circuit Court (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 surcharge statute, but vacating
     that part of the PSC's July 1994 order which the Circuit Court's judgment
     described  as  retroactively applying the surcharge statute.  The Circuit
     Court further ordered the case remanded to the PSC for a determination in
     accordance  with the judgment.  KU and the PSC argued that the PSC's July
     1994 order did not retroactively apply the statute.

     The Kentucky Attorney General and other consumer representatives appealed
     to  the  Kentucky  Court  of  Appeals (Court of Appeals) that part of the
     Circuit  Court  judgment upholding the constitutionality of the surcharge
     statute.    The  PSC and KU appealed that part of the judgment concerning
     the  retroactive  application  of  the  surcharge  statute.   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, 1997
     were approximately $56 million.

     In  December 1997, the Court of Appeals rendered an opinion upholding the
     portion  of  the Circuit Court's judgment regarding the constitutionality
     of  the  surcharge  statute  but  reversing  that  portion of the Circuit
     Court's  judgment concerning the claim of retroactive application of the
     statute.

     The  Kentucky  Attorney  General  and other consumer representatives have
     filed  motions  for  discretionary review with the Kentucky Supreme Court
     (Supreme  Court).   The Supreme Court has the discretion to grant or deny
     the  motions.    KU  and the PSC have asked the Supreme Court to deny the
     motions.    KU cannot predict whether the Supreme Court will grant review
     of the case or when it will act on the matter.

     KU  continues  to  believe  that  the  constitutionality of the surcharge
     statute  will  be  upheld.  Although KU cannot predict the outcome of the
     claim of retroactive application of the statute, it is the position of KU
     and  the PSC that the July 1994 PSC order did not retroactively apply the
     statute.   If the Court of Appeals  opinion reversing the Circuit Court's

                                        -85-
<PAGE>

     Notes to Consolidated
     Financial Statements

                               KU Energy Corporation
                                   & Subsidiaries

     judgment  on  the  claim  of  retroactivity is overturned and the Circuit
     Court's judgment, as entered, is upheld, KU estimates that the amount it
     could  be  required  to  refund  for  surcharge  collections  through
     December  31,  1997,  from  the  implementation of the surcharge would be
     approximately  $15  million,  and  from  February  1,  1995,  would  be
     approximately $13 million.  At this time, KU has not recorded any reserve
     for refund.

     10. MERGER AGREEMENT WITH LG&E ENERGY

     KU  Energy  and LG&E Energy entered into a Merger Agreement dated May 20,
     1997.    For  information  concerning  the  agreement,  see  Management's
     Discussion and Analysis - The Merger.

     11. LEVERAGED LEASES

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

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


     As of December 31, (in thousands of dollars)                            1997         1996
<S>                                                                      <C>          <C>
      Rentals receivable (net of nonrecourse debt)                       $   3,039    $   3,511
      Estimated residual value of leased property                           32,707       32,707
      Less:  Unearned and deferred income                                    7,594       11,568
      Investment in leveraged leases                                        28,152       24,650
      Less:  Accumulated deferred income taxes                               5,750        4,219
      Net investment in leveraged leases                                 $  22,402    $  20,431


     The  following  is  a  summary  of  the components of income from leveraged
     leases:
     Year Ended December 31, (in thousands of dollars)              1997      1996       1995
      Income before income taxes                               $    3,974 $   3,613  $   3,306
      Income tax expense                                            1,751     1,890      1,286
      Income from leveraged leases                             $    2,223 $   1,723  $   2,020


</TABLE>



                                                 -86-
<PAGE>

      Financial
      Information
      (Unaudited)

                                         KU Energy Corporation
                                            & Subsidiaries

      Quarterly  financial results for 1997 and 1996 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>
<CAPTION>

      Quarter                                   4th            3rd           2nd           1st

                                       (in thousands of dollars, except for per share amounts)
      1997
<S>                                      <C>            <C>           <C>           <C>
      Operating Revenues                 $  182,546     $  192,095    $  162,861    $  178,908
      Net Operating Income                   29,543         34,630        19,322        33,136
      Net Income                             21,713         26,553        12,050        24,863
      Earnings per Average
             Common Share                       .57            .70           .32           .66

      1996
      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
</TABLE>

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










                                                 -87-
<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, 1997 and 1996, 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, 1997.
     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, 1997 and 1996, and the
     results  of  their  operations and their cash flows for each of the three
     years in the period ended December 31, 1997, in conformity with generally
     accepted accounting principles.


                                         /s/Arthur Andersen LLP
                                         Arthur Andersen LLP



     Chicago, Illinois
     January 26, 1998





                                        -88-