<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K

(Mark One)

[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                                       OR

[_]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                   For the fiscal year ended December 31, 1996

                        Commission file number 1 - 10568

                                LG&E ENERGY CORP.
                                -----------------
             (Exact name of registrant as specified in its charter)

           Kentucky                                          61 - 1174555
           --------                                          ------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)

          220 West Main Street                                    40232
             P.O. Box 32030                                       -----
             Louisville, KY                                    (Zip Code)
             --------------
(Address of principal executive offices)

                                 (502) 627-2000
                                 --------------
                         (Registrant's telephone number)

           Securities registered pursuant to section 12(b) of the Act:

                                                        Name of each exchange on
         Title of each class                                which registered
         -------------------                                ----------------
   Common Stock, without par value                       New York Stock Exchange
                                                                   and
Rights to Purchase Series A Preferred                    Chicago Stock Exchange
      Stock, without par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of February 28, 1997, the aggregate market value of the registrant's voting
stock held by non-affiliates was $1,855,880,404 and the number of outstanding
shares of the registrant's common stock, without par value, was 66,377,022.

                       DOCUMENTS INCORPORATED BY REFERENCE
                       -----------------------------------

The Company's proxy statement filed with the Commission on March 26, 1997, is
incorporated by reference into Part III of this Form 10-K.

<PAGE>

                                TABLE OF CONTENTS

                                     PART I

Item 1.    Business.........................................................   1
           Overview of Operations...........................................   1
           Louisville Gas and Electric Company
                General.....................................................   3
                Electric Operations.........................................   5
                Gas Operations..............................................   6
                Regulation and Rates........................................   7
                Construction Program and Financing..........................   9
                Coal Supply.................................................   9
                Gas Supply..................................................  10
                Environmental Matters.......................................  11
           LG&E Energy Systems Inc..........................................  11
           LG&E Gas Systems Inc.............................................  13
           Employees and Labor Relations....................................  16
Item 2.    Properties.......................................................  17
Item 3.    Legal Proceedings................................................  19
Item 4.    Submission of Matters to a Vote of Security Holders..............  21
Executive Officers of the Company...........................................  21

                                     PART II

Item 5.    Market for the Registrant's Common Equity and Related
                Stockholder Matters.........................................  22
Item 6.    Selected Financial Data..........................................  23
Item 7.    Management's Discussion and Analysis of Results of
                Operations and Financial Condition..........................  24
Item 8.    Financial Statements and Supplementary Data......................  35
Item 9.    Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure....................................  66

                                    PART III

Item 10.   Directors and Executive Officers of the Registrant (a)...........  66
Item 11.   Executive Compensation (a).......................................  66
Item 12.   Security Ownership of Certain Beneficial Owners
                and Management (a)..........................................  66
Item 13.   Certain Relationships and Related Transactions (a)...............  66

                                     PART IV

Item 14.   Exhibits, Financial Statement Schedules,
                and Reports on Form 8-K.....................................  66
Signatures      ............................................................  80

(a) Incorporated by reference.

<PAGE>

                                     Part I.

Item 1. Business.

                             OVERVIEW OF OPERATIONS

LG&E Energy Corp. (the Company), incorporated November 14, 1989, is a
diversified energy-services holding company with three direct subsidiaries:
Louisville Gas and Electric Company (LG&E), LG&E Energy Systems Inc. (Energy
Systems) and LG&E Gas Systems Inc. (Gas Systems).

LG&E is a regulated public utility that supplies natural gas to approximately
277,000 customers and electricity to approximately 351,000 customers in
Louisville and adjacent areas in Kentucky. LG&E's service area covers
approximately 700 square miles in 17 counties and has an estimated population of
800,000. Included in this area is the Fort Knox Military Reservation, to which
LG&E transports gas and provides electric service, but which maintains its own
distribution systems. LG&E also provides gas service in limited additional
areas. LG&E's coal-fired electric generating plants, which are all equipped with
systems to reduce sulfur dioxide emissions, produce most of LG&E's electricity;
the remainder is generated by a hydroelectric power plant and combustion
turbines. Underground natural gas storage fields help LG&E provide economical
and reliable gas service to customers. During 1996, the Company's financial
condition and results of operation depended to a large degree on the financial
condition and results of operations of LG&E.

In 1991, the Company began to explore business opportunities consistent with its
strategy to expand its energy services platform, including cogeneration and
independent power production and fuel-related businesses such as gathering,
storing, transporting and marketing natural gas. LG&E Energy Systems Inc. was
formed in 1991 as the first of two subsidiaries intended to hold the Company's
investments in non-utility businesses and to separate these investments from the
regulated utility. The second, LG&E Gas Systems Inc., was formed in 1995.

Consistent with the Company's expansion strategy, Energy Systems purchased
Hadson Power Systems, Incorporated, of Irvine, California, from Hadson
Corporation in December 1991. Following the acquisition, Hadson Power Systems
was renamed LG&E Power Systems Inc. and has been subsequently renamed LG&E Power
Inc. (LPI). LPI develops, designs, owns, operates, and maintains power
generation facilities that sell energy to local industries and utilities.

In 1992, Energy Systems acquired a 36.5% interest in Natural Gas Clearinghouse
(NGC), and in January 1994, it sold that interest. See Note 6 of Notes to
Financial Statements under Item 8 for a further discussion of the sale of NGC.

In 1994, LG&E Power Marketing Inc. (LPM), an indirect wholly-owned subsidiary of
LPI, was formed to market power throughout the United States. LPM was among the
first utility-affiliated marketers in the country to secure FERC approval to
sell power at market-based rates and engage in wholesale power marketing
activities.

In November 1994, the Company announced that one of its subsidiaries, LG&E
International Inc. (LII), a wholly-owned subsidiary of Energy Systems, had
formed a joint venture to build and operate a natural gas-fired power plant in
north central Argentina. The plant was completed in 1995 and began commercial
operation in early 1996.

In May 1995, Gas Systems acquired all of the outstanding common stock of Hadson
Corporation, now known as LG&E Natural Inc. (LG&E Natural), a company engaged in
the marketing, gathering, processing, storage 


                                       1
<PAGE>

and transportation of natural gas.

On February 13, 1997, the Company acquired interests in two Argentine natural
gas distribution companies through its global venture unit, LG&E International
Inc. (LII). LII purchased a controlling interest in Distribuidora de Gas del
Centro (Centro) and acquired a minority interest in Distribuidora de Gas del
Cuyana (Cuyana). Centro serves approximately 372,000 customers in Cordoba
Province, Argentina; Cuyana serves approximately 305,000 customers in Mendoza
Province, Argentina. The investment in these companies totaled approximately
$140 million. The Company intends to continue to pursue international
development opportunities that have an acceptable level of risk and a reasonable
rate of return.

On March 19, 1997, the U.S. Bankruptcy Court selected the Company's proposal 
to lease all of the generating assets of Big Rivers Electric Corporation 
("Big Rivers") in a court-ordered auction. Big Rivers, a Henderson, Kentucky, 
based power generation cooperative with 1,459 Mw of owned net generating 
capacity, currently is in bankruptcy proceedings. Under the terms of the 
Company's proposal, the Company will lease the generating assets of Big 
Rivers for 25 years and provide power to Big Rivers to serve its member 
cooperatives and their customers at reduced rates. Prior to the court-ordered 
auction, Pacificorp had signed a 25-year lease arrangement with Big Rivers 
that called for Pacificorp to pay approximately $30.1 million annually. 
Although the Company has not yet finalized with Big Rivers all aspects of the 
proposed transaction, the Company expects to provide $50 million of 
additional value over the Pacificorp arrangement. Pacificorp has challenged 
the Bankruptcy Court's decision to hold an auction. Consummation of the 
transaction is subject to a number of conditions, including submission of a 
detailed reorganization plan and approval of such a plan by the Bankruptcy 
Court, completion of successful negotiations with the creditors and customers 
of Big Rivers and receipt of certain regulatory approvals.

With respect to the regulated utility operations of LG&E, The Kentucky Public
Service Commission (Kentucky Commission) has held a series of meetings with
electric utilities operating in Kentucky to discuss the potential impact of the
major restructuring of the industry that is being driven by competition and
market forces. Specifically, the Kentucky Commission has indicated it wants to
ensure that ratepayers in Kentucky will continue to receive the current low
electric rates and high reliability and quality of service during and after the
restructuring of the industry. Topics discussed have included the regulatory
treatment of potential stranded costs or benefits, the utility's historical
obligation to serve, the functional separation of utilities, regulatory and
legal changes that may be needed in a restructured electric industry and many
other issues. These wide-ranging discussions, which are expected to continue in
the future, centered around the theme of how the Kentucky Commission and
utilities can best work together to benefit energy consumers in Kentucky.

LG&E is exploring steps that it can take to maintain or even improve its
position as a low-cost producer of electricity and evaluating other actions,
including an analysis associated with the future recovery of certain regulatory
assets, that will enable the Company to continue to offer favorable electric
rates to its customers.

The Company operates three divisions that are designed to facilitate decision 
making, improve response to customers and align operating units with 
the changing competitive marketplace. The operating divisions are:

      Distribution Services Division - which includes the distribution resources
      of Louisville Gas and Electric Company (LG&E), is responsible for
      expanding and developing the distribution businesses and investing in
      enhanced service offerings behind the customer's meter.

      Energy Marketing Division - consists of the operations of LG&E
      Natural, which markets gas throughout the United States and Canada and 
      the operations of LG&E Power Marketing Inc. (LPM), which is responsible
      for project development and the marketing and sale of wholesale power
      throughout the United States.


                                       2
<PAGE>

      Power Generation Division - which includes the generation resources of
      LG&E, LG&E Power Inc. (LPI), and LG&E International Inc. (LII), has
      responsibility for all utility and non-utility power plant operations,
      asset management and development functions both domestically and
      internationally.

The realignment does not affect the Company's legal structure, regulation of
LG&E by the Public Service Commission of Kentucky (Kentucky Commission or
Commission) or the Company's status as an exempt holding company.

The Company and its subsidiaries currently are exempt from all provisions,
except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (the
"Holding Company Act") on the basis that the Company and LG&E are incorporated
in the same state and their business is predominately intrastate in character
and carried on substantially in the state of incorporation. It is necessary for
the Company to file an annual exemption statement with the Securities and
Exchange Commission (SEC).

The Company is not a public utility under the laws of the Commonwealth of
Kentucky and is not subject to regulation as such by the Kentucky Commission.
See Louisville Gas and Electric Company - Regulation and Rates below for a
description of the regulation of LG&E by the Kentucky Commission, which includes
the ability to regulate certain intercompany transactions between LG&E and the
Company, including the Company's non-utility subsidiaries.

                       LOUISVILLE GAS AND ELECTRIC COMPANY

General

LG&E's Trimble County Unit 1 (Trimble County), a 495-megawatt, coal-fired
electric generating unit, which LG&E began constructing in 1979, was placed in
commercial operation on December 23, 1990. Trimble County had been subject to
numerous reviews by the Public Service Commission of Kentucky (Kentucky
Commission or Commission). On December 8, 1995, the Commission approved a
settlement agreement filed by LG&E and all intervenors in the Trimble County
proceedings, including various consumer interest groups and government agencies,
that in effect, resolved all of the regulatory and legal issues related to the
appropriate ratemaking treatment to exclude 25% of the Trimble County costs from
customer rates. LG&E owns a 75% undivided interest in Trimble County. For a more
detailed discussion of the proceedings relating to Trimble County, see Electric
Operations and Notes 17 and 18 of Notes to Financial Statements under Item 8.

With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already
complied with the stringent sulfur dioxide emission limits required by the year
2000 as it had previously installed scrubbers on all of its coal-fired
generating units. Since then, as part of its ongoing construction program, LG&E
has spent $29 million through 1996 for remedial measures necessary to meet the
Act's requirements for nitrogen oxides. The overall financial impact of the Act
on LG&E has been minimal. However, LG&E is closely monitoring a number of
significant regulatory developments. In November 1996, the United States
Environmental Protection Agency (USEPA) announced its proposal to revise the
National Ambient Air Quality Standards for ozone and particulate matter. In
November 1996, USEPA also announced its intent to direct certain states to
address long range ozone transport from Midwest emission sources which allegedly
contribute to ozone problems in the Northeast. While management is unable to
predict the outcome or exact impact of these ongoing regulatory proceedings,
LG&E continues to be well-positioned in the market to be a "clean" power
provider without the large capital expenditures that are expected to be incurred
by many other utilities. For a more detailed discussion of the Clean Air Act and


                                       3
<PAGE>

other environmental issues, see Environmental Matters under this Item, Item 3,
Item 7, and Note 16 of the Notes to Financial Statements under Item 8.

LG&E has taken many steps to prepare for the expected increase in competition in
its industry, including a reduction in the number of employees; aggressive cost
cutting; a write-off of previously deferred expenses; an increase in focus on
not only commercial and industrial customers, but residential customers as well;
an increase in employee involvement and training; a major realignment and
formation of new business units, and continuous modifications of its
organizational structure.

In 1996, the Power Generation Division of the Company introduced initiatives
designed to maintain LG&E's low-cost advantage in this increasingly competitive
segment of the energy-services industry. To optimize the daily operation of the
plants, LG&E established new work processes that encourage decision making at
the optimal level.

LG&E is continually developing ways to enhance the service it provides to
customers, including the formation of strategic partnerships with other service
providers. These partnerships increase the product offerings available to
customers, allow LG&E to leverage existing systems and position it in new
markets for the future. Partnerships also allow LG&E to be more innovative by
creating cutting-edge offerings that might not be possible otherwise. LG&E is
now using its customer service centers as a central portal for other utility
services. Through a joint effort with the Louisville Water Company, customers
can now arrange for new services or make payment to both utilities through LG&E.
Customers can also apply for low-interest loans to purchase a variety of
energy-efficient household appliances and equipment, such as natural gas
furnaces, through the Company's Home Energy Loan Program. These are conveniences
that enhance customers' lives and help secure our relationships for the future.

By using gas storage fields strategically, LG&E can buy gas when prices are low,
store it, and retrieve the gas when demand is high. Accessing least cost gas was
made easier in November 1993 when the Federal Energy Regulatory Commission Order
No. 636 went into effect. Previously, LG&E and other utilities purchased most of
their gas services from pipeline companies. The order "unbundled" gas services,
allowing utilities to purchase gas, transportation, and storage services
separately from many different sources. Currently, LG&E buys competitively
priced gas from several large producers under contracts of varying duration. By
purchasing from multiple suppliers and storing any excess gas, LG&E is able to
secure favorably priced gas for its customers. Without storage capacity, LG&E
would be forced to buy additional gas when customer demand increases, which is
usually when the price is highest.

During 1995, LG&E negotiated a five year transportation agreement with Tennessee
Gas Pipeline Company (Tennessee) to become LG&E's second natural gas pipeline
transporter. The agreement with Tennessee became effective November 1, 1996. For
many years, Texas Gas Transmission Corporation (Texas Gas) has been the sole


                                       4
<PAGE>

provider of gas transport services to LG&E. For further discussion, see Gas
Supply.

For the year ended December 31, 1996, 74% of total operating revenues was
derived from electric operations and 26% from gas operations. Electric and gas
operating revenues and the percentages by classes of service on a combined basis
for this period were as follows:

                                            (Thousands of $)
                                    Electric      Gas       Combined  % Combined
                                    --------      ---       --------  ----------

      Residential                   $202,318    $125,327    $327,645      44%
      Commercial                     163,027      47,415     210,442      29
      Industrial                     110,914      21,229     132,143      18
      Public authorities              54,318      11,731      66,049       9
                                    --------    --------    --------     ---
      Total - ultimate consumers     530,577     205,702     736,279     100%
                                                                         ===
      Sales for resale                67,854        --        67,854   
      Gas transported - net             --         6,850       6,850   
      Miscellaneous                    8,729       1,867      10,596   
                                    --------    --------    --------
        Total                       $607,160    $214,419    $821,579   
                                    ========    ========    ========     

See Note 19 of Notes to Financial Statements under Item 8 for financial
information concerning segments of business for the three years ended December
31, 1996.

Electric Operations

The sources of LG&E's electric operating revenues and the volumes of sales for
the three years ended December 31, 1996, were as follows:

<TABLE>
<CAPTION>
                                                           1996            1995            1994
                                                           ----            ----            ----
<S>                                                    <C>            <C>              <C>        
      ELECTRIC OPERATING REVENUES (Thousands of $):
      Residential                                      $   202,318    $    201,357     $   194,145
      Small commercial and industrial                       74,034          73,074          70,916
      Large commercial                                      88,993          87,497          84,931
      Large industrial                                     110,914         110,800         108,004
      Public authorities                                    54,318          53,861          53,191
      Refund - Trimble County settlement                      --           (28,300)           --
                                                       -----------    ------------     -----------
        Total - ultimate consumers                         530,577         498,289         511,187
      Sales for resale                                      67,854          37,471          42,720
      Miscellaneous                                          8,729           7,026           5,420
                                                       -----------    ------------     -----------
        Total                                          $   607,160    $    542,786     $   559,327
                                                       ===========    ============     ===========
      ELECTRIC SALES (Thousands of kwh):
      Residential                                        3,382,124       3,415,225       3,204,330
      Small commercial and industrial                    1,130,558       1,112,130       1,073,152
      Large commercial                                   1,850,294       1,802,035       1,729,668
      Large industrial                                   3,058,723       3,023,543       2,874,411
      Public authorities                                 1,122,147       1,113,063       1,085,741
                                                       -----------    ------------     -----------
        Total-ultimate consumers                        10,543,846      10,465,996       9,967,302
      Sales for resale                                   3,589,090       2,000,607       2,315,311
                                                       -----------    ------------     -----------
        Total                                           14,132,936      12,466,603      12,282,613
                                                       ===========    ============     ===========
</TABLE>

At December 31, 1996, LG&E had 351,295 electric customers.


                                       5
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LG&E uses efficient coal-fired boilers that are fully equipped with sulfur
dioxide removal systems to generate electricity. LG&E's system wide emission
rate for sulfur dioxide in 1996 was approximately .96 lbs./MMBtu of heat input,
which is significantly below the Phase II limit of 1.2 lbs./MMBtu established by
the Clean Air Act Amendments for the year 2000.

The 1996 maximum local peak load of 2,282 Mw occurred on Wednesday, August 7
when the temperature at the time of peak was 93(degree)F (average for the day
was 84(degree)F). On Thursday, August 17, 1995, LG&E set its all-time record
local peak load of 2,357 Mw, when the temperature at the time of peak reached
94(degree)F (average for the day was 86(degree)F). The record system peak of
3,223 Mw (which included purchases from and short-term sales to other electric
utilities) occurred on Thursday, May 30, 1991.

LG&E's current reserve margin is 16%. At February 28, 1997, LG&E owned steam and
combustion turbine generating facilities with a capacity of 2,512 Mw and an 80
Mw hydroelectric facility on the Ohio River. See Item 2, Properties.

LG&E is a participating owner with 14 other electric utilities of Ohio Valley
Electric Corporation whose primary customer is the Portsmouth Area
uranium-enrichment complex of the U.S. Department of Energy at Piketon, Ohio.
LG&E has direct interconnections with 11 utility companies in the area and has
agreements with each interconnected utility for the purchase and sale of
capacity and energy. LG&E also has agreements with an increasing number of
entities throughout the United States for the purchase and/or sale of capacity
and energy and for the utilization of their bulk transmission system.

The Illinois Municipal Electric Agency (IMEA), based in Springfield, Illinois,
which is an agency of 30 municipalities that own and operate their own electric
systems, has a 12.12% ownership interest in LG&E's Trimble County Unit 1. The
Indiana Municipal Power Agency (IMPA), based in Carmel, Indiana, has a 12.88%
interest in the Trimble County Unit. IMPA is composed of 31 municipalities that
have joined together to meet their long-term electric power needs. Both IMEA and
IMPA pay their proportionate share for operation and maintenance expenses of
Trimble County and for fuel and reactant used. They are also responsible for
their proportionate share of incremental capital assets acquired. See Note 18 of
Notes to Financial Statements under Item 8 for further discussion.

Gas Operations

The sources of LG&E's gas operating revenues and the volumes of sales for the
three years ended December 31, 1996, were as follows:


                                       6
<PAGE>

                                                  1996        1995        1994
                                                  ----        ----        ----
      GAS OPERATING REVENUES (Thousands of $):
      Residential                               $125,327    $107,762    $110,553
      Commercial                                  47,415      38,161      40,474
      Industrial                                  21,229      17,430      27,956
      Public authorities                          11,731       8,679      12,930
                                                --------    --------    --------
        Total - ultimate consumers               205,702     172,032     191,913
      Gas transported - net                        6,850       7,821       6,759
      Miscellaneous                                1,867       1,273       1,457
                                                --------    --------    --------
        Total                                   $214,419    $181,126    $200,129
                                                ========    ========    ========

      GAS SALES (Millions of cu. ft.):
      Residential                                 25,531      24,242      22,935
      Commercial                                  10,656       9,885       9,450
      Industrial                                   5,190       5,188       7,505
      Public authorities                           2,790       2,423       3,268
                                                --------    --------    --------
        Total - ultimate consumers                44,167      41,738      43,158
      Gas transported                             12,540      12,241       6,854
                                                --------    --------    --------
        Total                                     56,707      53,979      50,012
                                                ========    ========    ========

At December 31, 1996, LG&E had 277,493 gas customers.

LG&E has underground natural gas storage fields that help provide economical and
reliable gas service to ultimate consumers.

Reflecting the changing nature of the gas business, a number of industrial
customers purchase their natural gas requirements directly from alternate
suppliers for delivery through LG&E's distribution system. Generally,
transportation of natural gas for LG&E's customers does not have an adverse
effect on earnings because of the offsetting decrease in gas supply expenses.
Transportation rates are designed to make LG&E economically indifferent as to
whether gas is sold or merely transported.

The all-time maximum day gas sendout of 545,000 Mcf occurred on Sunday, January
20, 1985, when the average temperature for the day was -11(degree)F. During
1996, the maximum day gas sendout was 521,000 Mcf, occurring on February 2, when
the average temperature for the day was 6(degree)F. Supply on that day consisted
of 202,000 Mcf from purchases, 275,000 Mcf delivered from underground storage,
and 44,000 Mcf transported for industrial customers. For further discussion, see
Gas Supply.

Under FERC Order No. 636, pipelines may recover costs associated with the
transition to and implementation of this order from pipeline customers,
including LG&E. LG&E is recovering these costs from its customers through its
gas supply clause.

Regulation and Rates

The Kentucky Commission has regulatory jurisdiction over the rates and service
of LG&E and over the issuance of certain of its securities. The Kentucky
Commission has the ability to examine the rates LG&E charges its retail
customers at any time. LG&E is a "public utility" as defined in the Federal
Power Act, and is subject to the jurisdiction of the Department of Energy and
the FERC with respect to the matters covered in such Act, including the sale of
electric energy at wholesale in interstate commerce. In addition, the FERC has
sole jurisdiction over the issuance by LG&E of short-term securities.

For a discussion of current regulatory matters, see Rates and Regulation under
Item 7 and Note 3 of Notes to 


                                       7
<PAGE>

Financial Statements under Item 8.

Increases and decreases in the cost of fuel for electric generation are
reflected in the rates charged to all of LG&E's electric customers by means of
LG&E's fuel adjustment clause. The Kentucky Commission requires public hearings
at six-month intervals to examine past fuel adjustments, and at two-year
intervals for the purpose of additional examination and transfer of the then
current fuel adjustment charge or credit to the base charges. The Commission
also requires that electric utilities, including LG&E, file certain documents
relating to fuel procurement and the purchase of power and energy from other
utilities.

LG&E's gas rates contain a gas supply clause (GSC), whereby increases or
decreases in the cost of gas supply are reflected in LG&E's rates, subject to
approval of the Kentucky Commission. The GSC procedure prescribed by order of
the Commission provides for quarterly rate adjustments to reflect the expected
cost of gas supply in that quarter. In addition, the GSC contains a mechanism
whereby any over- or under-recoveries of gas supply cost from prior quarters
will be refunded to or recovered from customers through the adjustment factor
determined for subsequent quarters.

On December 8, 1995, the Commission approved a settlement agreement that, in
effect, resolved all the regulatory and legal issues related to the appropriate
ratemaking treatment to exclude 25% of the Trimble County plant costs from
customer rates. See Note 17 of Notes to Financial Statements under Item 8 for
further discussion of this matter.

On April 6, 1995, in response to an application filed by LG&E, the Commission
approved, with modifications, an environmental cost recovery surcharge that
increased electric revenues by $3.2 million in 1995 and $2.4 million in 1996.
The surcharge became effective May 1, 1995. An appeal of the Commission's April
6 order by various intervenors in the proceeding (including the Kentucky
Attorney General) is currently pending in the Franklin Circuit Court of
Kentucky. LG&E is contesting the legal challenges to the surcharge, but cannot
predict the outcome of the appeal. The amount of refunds that may be ordered, if
any, are not expected to have a material adverse effect on the Company's
financial position or results of operations. See Rates and Regulation under Item
7 for a further discussion.

In January 1994, LG&E implemented a Commission approved demand side management
(DSM) program. The program contains a rate mechanism that provides for the
recovery of DSM program costs, allows LG&E to recover revenues due to lost sales
associated with the DSM programs and provides LG&E an incentive for implementing
DSM programs. See Rates and Regulation under Item 7 for a further discussion of
DSM.

On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Orders
888 and 889. Order 888 requires all public utilities to file Open Access
Transmission Tariffs. These tariffs will allow third parties to utilize a
utility's transmission assets under comparable terms and conditions as the
utility. LG&E filed its Open Access Transmission Tariff on July 9, 1996, to
comply with FERC's Order 888. See Rates and Regulation under Item 7 for a
further discussion of this matter.

As part of the corporate reorganization whereby LG&E became the subsidiary of
LG&E Energy Corp., LG&E obtained the approval of the Kentucky Commission. The
order of the Kentucky Commission authorizing LG&E to reorganize into a holding
company structure contains certain provisions, which, among other things, ensure
the Kentucky Commission access to books and records of Energy Corp. and its
affiliates which relate to transactions with LG&E; requires Energy Corp. and its
subsidiaries to employ accounting and other procedures and controls to protect
against subsidization of non-utility activities by LG&E's customers; and
precludes LG&E from guaranteeing any obligations of Energy Corp. without prior
written consent from the Kentucky Commission. In addition, the order provides
that LG&E's Board of Directors has the responsibility to use its dividend policy
consistent with preserving the financial strength of LG&E and that the Kentucky
Commission, through its authority over LG&E's 


                                       8
<PAGE>

capital structure, can protect LG&E's ratepayers from the financial effects
resulting from non-utility activities.

Construction Program and Financing

LG&E's construction program is designed to ensure that there will be adequate
capacity and reliability to meet the electric and gas needs of its service area.
These needs are continually being reassessed and appropriate revisions are made,
when necessary, in construction schedules. LG&E's estimates of its construction
expenditures can vary substantially due to numerous items beyond LG&E's control,
such as changes in rates, economic conditions, construction costs, and new
environmental or other governmental laws and regulations.

During the five years ended December 31, 1996, gross property additions amounted
to $496 million. Internally generated funds for the five year period were
sufficient to provide for all of these gross additions. The gross additions
during this period amounted to approximately 18% of total utility plant at
December 31, 1996, and consisted of $368 million for electric properties and
$128 million for gas properties. Gross retirements during the same period were
$94 million, consisting of $76 million for electric properties and $18 million
for gas properties.

Coal Supply

Over 90% of LG&E's present electric generating capacity is coal-fired, the
remainder being made up of a hydroelectric plant and combustion turbine peaking
units fueled by natural gas and oil. Coal will be the predominant fuel used by
LG&E in the foreseeable future, with natural gas and oil being used for peaking
capacity and flame stabilization in coal-fired boilers or in emergencies. LG&E
has no nuclear generating units and has no plans to build any in the foreseeable
future.

In January 1996, LG&E bought out the last year of its three year contract with
Andalex Resources, Inc. at a cost of $3.5 million. The Kentucky Commission
allowed the recovery of the buyout expense through LG&E's fuel adjustment
clause. As a result of the buyout of the coal contract, LG&E's customers
realized a net savings in excess of $1 million.

LG&E has entered into coal supply agreements with various suppliers for coal
deliveries for 1997 and beyond. LG&E normally augments its coal supply
agreements with spot market purchases which, during 1996, were about 10% of
total purchases. LG&E has a coal inventory policy, which is in compliance with
the Kentucky Commission's directives and which LG&E believes provides adequate
protection under most contingencies. LG&E had on hand at December 31, 1996, a
coal inventory of approximately 650,000 tons, or a 36 day supply.

LG&E expects, for the foreseeable future, to continue purchasing most of its
coal from western Kentucky and southwest Indiana, which has a sulfur content in
the 2%-4.5% range. The abundant supply of this relatively low priced coal,
combined with present and future desulfurization technologies, is expected to
enable LG&E to continue to provide adequate electric service in a manner
acceptable under existing environmental laws and regulations.

Coal for LG&E's Mill Creek plant is delivered by rail and barge. Deliveries to
the Cane Run and Trimble County plants are by rail and barge, respectively.

The average delivered cost of coal purchased by LG&E, per ton and per million
Btu, for the periods shown were as follows:


                                       9
<PAGE>

                                             1996         1995         1994
                                             ----         ----         ----

      Per ton                             $   21.73    $   23.68    $   25.27
      Per million Btu                           .97         1.04         1.10

This downward trend in the delivered cost of coal is expected to continue
through 1997.

Gas Supply

Prior to the implementation of FERC Order No. 636, LG&E had purchased natural
gas and pipeline transportation services from Texas Gas Transmission Corporation
(Texas Gas). LG&E now purchases only transportation services from Texas Gas and,
beginning in 1996, Tennessee Gas Pipeline Company (Tennessee). In addition, LG&E
purchases natural gas from many other sources under contracts for varying
periods of time.

Under Order No. 636, pipelines may recover costs associated with the transition
to and implementation of this order from pipeline customers, including LG&E. The
Commission issued an order, based on proceedings that were held to investigate
the impact of Order No. 636 on utilities and ratepayers in Kentucky, providing
that transition costs assessed on utilities by the pipelines, which are clearly
identifiable as being related to the cost of the commodity itself, are
appropriate to be recovered from customers through the gas supply clause.
Transition costs are billed pursuant to orders issued by FERC in transition cost
regulatory proceedings.

LG&E transports on the Texas Gas system under No-Notice Service (NNS) and Firm
Transportation (FT) rates. During the winter months, LG&E has 184,900 MMBtu
(180,390 Mcf) per day in NNS. LG&E does not transport on the Texas Gas system
under FT rates during the winter months. During the summer months, LG&E's NNS
level is 111,000 MMBtu (108,293 Mcf) per day, and its FT service level is 24,000
MMBtu (23,415 Mcf) per day. Each of these NNS and FT agreements with Texas Gas
expire in equal portions in 1998, 2000, and 2001. Each agreement includes a
unilateral five year roll-over provision exercisable at LG&E's option. Effective
November 1, 1996, LG&E also terminated a transportation agreement with Texas Gas
which provided for 30,000 MMBtu (29,268 Mcf) per day in FT service throughout
the year. On November 1, 1996, LG&E initiated service under a five year
transportation agreement with Tennessee for 30,000 MMBtu (28,986 Mcf) per day in
firm transportation service under Tennessee's Rate FT-A. For the previous thirty
years, Texas Gas had been the sole provider of gas transportation services to
LG&E.

During 1996, LG&E participated in several regulatory proceedings at FERC. During
1997, Texas Gas is expected to file for a change in its rates as required under
the settlement in its last rate case in Docket RP94-423. LG&E plans to
participate in that and other proceedings, as appropriate.

LG&E also has a portfolio of supply arrangements with various suppliers in order
to meet its firm sales obligations. These gas supply arrangements include
pricing provisions which are market-responsive. These firm supplies, in tandem
with pipeline transportation services, provide the reliability and flexibility
necessary to serve LG&E's customers.

LG&E operates five underground gas storage fields with a current working gas
capacity of 14.6 million Mcf. Gas is purchased and injected into storage during
the summer season and is then withdrawn to supplement pipeline supplies to meet
the gas-system load requirements during the winter heating season.

The estimated maximum deliverability from storage during the early part of the
1995-1996 heating season was approximately 373,000 Mcf per day. Deliverability
decreases during the latter portion of the heating season as the storage
inventory is reduced by seasonal withdrawals.


                                       10
<PAGE>

The average cost per Mcf of natural gas purchased by LG&E was $3.46 in 1996,
$2.62 in 1995, and $2.78 in 1994.

Environmental Matters

Protection of the environment is a major priority for LG&E. LG&E engages in a
variety of activities within the jurisdiction of federal, state, and local
regulatory agencies. Those agencies have issued LG&E permits for various
activities subject to air quality, water quality, and waste management laws and
regulations. For the five year period ending with 1996, expenditures for
pollution control facilities represented $101 million or 20% of total
construction expenditures. The cost of operating and maintaining
scrubber-related facilities amounted to $22 million in 1996 and $21 million in
1995. See Note 16 of Notes to Financial Statements under Item 8 for a discussion
of specific environmental proceedings affecting the Company.

                            LG&E ENERGY SYSTEMS INC.

LG&E Energy Systems Inc. (Energy Systems) was formed in 1991 as the first of two
subsidiaries intended to hold the Company's investments in non-utility
businesses. In December 1991, Energy Systems purchased Hadson Power Systems,
Incorporated, which was renamed at the time of purchase to LG&E Power Systems
Inc, and subsequently renamed LG&E Power Inc. (together with its subsidiaries,
"LPI"). In 1992, Energy Systems acquired a 36.5% interest in Natural Gas
Clearinghouse (NGC). In January 1994, the Company completed the sale of its
equity interest in NGC to NOVA Corporation of Alberta, Canada. See Note 6 of
Notes to Financial Statements under Item 8.

LPI develops, owns, operates, and maintains power generation facilities that
sell electric and steam energy to utility and industrial customers. LPI, through
its predecessor, has been in the independent power business since 1982 and has
approximately 310 employees. It currently has ownership interests in projects
capable of generating over 700 megawatts of electric power capacity in North
Carolina, Virginia, New York, California, Minnesota, and Texas. In November
1994, the Company announced that LG&E International Inc. (LII), a wholly-owned
subsidiary of Energy Systems, had formed a joint venture to build and operate a
natural-gas-fired power plant in north central Argentina. The plant was
completed in 1995 and began commercial operation in early 1996. The other
partners in the project are Sideco Americana, S.A., an Argentine engineering and
construction company, and Charter Oak Energy, Inc., a non-utility subsidiary of
Northeast Utilities. In 1995, LII also invested $4.5 million into a partnership
that acquired a 44% interest in a 30 Mw wind facility in Tarifa, Spain. The
partners in the project include Kenetech International, Ltd. and other local
Spanish companies.

On February 13, 1997, the Company acquired interests in two Argentine natural
gas distribution companies through its global venture unit, LG&E International
Inc. (LII). LII purchased a controlling interest in Distribuidora de Gas del
Centro (Centro) and acquired a minority interest in Distribuidora de Gas del
Cuyana (Cuyana). Centro serves approximately 372,000 customers in Cordoba
Province, Argentina; Cuyana serves approximately 305,000 customers in Mendoza
Province, Argentina. The investment in these companies totaled approximately
$140 million.

Except for its investments in wind power and its Roanoke Valley I facility (ROVA
I) (see Item 2, Properties), each of the projects LPI has in operation within
the United States is a qualifying cogeneration facility (QF) under the Public
Utility Regulatory Policy Act of 1978 (PURPA). See Item 3 and Note 16 of Notes
to Financial Statements under Item 8 for a discussion of certain issues
regarding past operations at certain of these facilities. Certain partnerships,
in which LPI has an ownership interest, are operating wind power facilities
which are qualifying small power production facilities under PURPA. In addition,
LPI has obtained exempt wholesale generator (EWG) status for the entities which
own the ROVA I and Roanoke Valley II (ROVA II) projects in North Carolina, the
Rensselaer facility in Rensselaer, New York, and the Southampton, Altavista and
Hopewell projects in Virginia. Except for ROVA I, these projects continue to
maintain QF status under PURPA.


                                       11
<PAGE>

Generally, QF status exempts projects from the application of the Holding
Company Act, many provisions of the Federal Power Act, and state laws and
regulations respecting rates and financial or organization regulation of
electric utilities. EWGs also are exempt from application of the Holding Company
Act and many provisions of the Federal Power Act, but once such an entity files
its electric generation rates with FERC, it becomes a jurisdictional public
utility under the Federal Power Act. As such a "public utility," an EWG's rates
and some of its corporate activities are subject to FERC regulation. EWGs also
are subject to non-rate regulation under state laws governing electric
utilities. While QF or EWG status entitles LPI's projects to certain regulatory
exceptions and benefits under PURPA and the Holding Company Act, each project
must still comply with other federal, state and local laws, including those
regarding siting, construction, operation, licensing and pollution abatement.

LII has ownership interests in a wind facility in Tarifa, Spain, a natural gas
combustion turbine and associated electrical and natural gas equipment in
Tucuman Province, Argentina, and two natural gas distribution companies in
Argentina. Each of these entities has obtained foreign utility company (FUCO)
status under the Holding Company Act. Generally, FUCO status exempts these
facilities from application of the Holding Company Act.

LPM, a wholly-owned subsidiary of LPI, markets and brokers wholesale power. LPM
was among the first utility-affiliated marketers in the country to secure FERC
approval to sell power at market-based rates and engage in wholesale power
marketing activities. During 1996, LPM sold or brokered 17.4 million
megawatt-hours of power in 35 states. This volume of activity placed LPM among
the three largest marketers of wholesale energy in 1996 and the largest seller
affiliated with a regulated electric utility. Although a portion of LPM's 1996
sales came from the Tennessee Valley Authority (TVA) and, as described below,
such sales to TVA have been discontinued, LPM is predicting that the market for
electric energy will expand and its revenues will increase in future years.

In November 1996, LPM and the Company entered into a purchase and sale 
agreement with Oglethorpe Power Corporation ("OPC") pursuant to which LPM 
will have access to approximately half of OPC's 5,000 Mw of generation 
resources. LPM also will be required to cover approximately half of the 
energy needs of OPC's other member cooperatives. OPC will pay a fixed price 
for the energy over the term of the agreement. The term of the agreement is 
fifteen years. After a specified period, each party has the ability to 
terminate the agreement upon advance written notice. In January 1997, LPM, 
LPI and OPC entered into a similar agreement with two member cooperatives who 
did not opt to participate in the November agreement. Both agreements were 
approved by the Rural Utilities Services in February 1997. Over the course of 
the fifteen-year agreement, LPM is expected to provide more than 200 million 
megawatt-hours of electricity to OPC.

LPM uses financial instruments in its power marketing activities. These
financial instruments are used to hedge price and geographic basis risk for its
purchase and sales commitments and to enhance its overall portfolio of electric
power trading activities. See Note 4 and Note 16 of Notes to Financial
Instruments under Item 8 for an overall discussion of these activities.

LPM competes with other power marketers, including utility affiliated power 
marketers and gas marketers that have expanded into the electric power 
market. The power marketing industry is very competitive, particularly with 
respect to price and service.

Energy Systems has provided letters of credit and various other guarantees to
third parties which totaled approximately $31.4 million and $33.7 million as of
December 31, 1996 and 1995, respectively.


                                       12
<PAGE>

The letters of credit are subject to Support Agreements as more fully described
in Note 16 of Notes to Financial Statements under Item 8.

For a discussion of the request for rehearing filed with FERC by
LG&E-Westmoreland Southampton, the partnership that owns the Southampton
facility, regarding the partnership's request for an order from FERC stating
that the Southampton facility remains a qualifying facility for 1992, see Note
16 of Notes to Financial Statements under Item 8.

On December 23, 1996, Westmoreland Coal Company and its four first tier
subsidiaries filed for reorganization under Section 11 of the U.S. Bankruptcy
Code. One of these subsidiaries, Westmoreland Energy, Inc., is the direct parent
of the various entities that are partners in partnerships with LG&E Energy
subsidiaries which own six independent generating facilities. See Note 16 of
Notes to Financial Statements under Item 8.

Westmoreland-LG&E Partners, the partnership that owns the Roanoke Valley I and
II facilities, is seeking the recovery of capacity payments withheld by Virginia
Electric and Power Company. In early March 1996, Virginia Power filed a motion
for summary judgment, and on March 22, 1996, the court granted Virginia Power's
motion as to all counts. The Company has appealed the court's ruling and the
Virginia Supreme Court has granted review. See Note 16 of Notes to Financial
Statements under Item 8.

Niagara Mohawk Corporation (NIMO) has proposed to buy out the Power Purchase
Agreements NIMO has with a group of independent power projects. The Rensselaer
cogeneration facility, in which the Company has a 50% interest through an
indirect subsidiary, is one of the projects affected by this initiative. While
discussions among the projects and NIMO are continuing, the Company is not able
to predict the outcome of this event. Based upon the status of current
negotiations, the Company does not expect the ultimate resolution of this matter
to have a material adverse effect on its results of operations or financial
condition. See Note 16 of Notes to Financial Statements under Item 8.

In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States
Bankruptcy Court in the Northern District of California for protection under
Chapter 11 of the United States Bankruptcy Code seeking, among other things, to
restructure certain contractual commitments between Kenetech and its
subsidiaries, on the one hand, and various windpower projects located in the
U.S. and abroad, on the other hand. Included in these projects are the Windpower
Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A.
(Tarifa) wind projects in which the Company has invested, collectively,
approximately $31 million. See Note 16 of Notes to Financial Statements under
Item 8.

The Alabama Power Company, Georgia Power Company and Mississippi Power Company
(the Plaintiffs) filed a Complaint for Declaratory Judgment and Injunctive
Relief against the Tennessee Valley Authority (TVA) and LPM in the United States
District court for the Northern District of Alabama. The court ruled that TVA
violated the Tennessee Valley Authority Act (TVA Act) by entering into an
interchange agreement with LPM (Interchange Agreement) and that TVA is
prohibited from selling or delivering any power to LPM.
See Note 16 of Notes to Financial Statements under Item 8.

                              LG&E GAS SYSTEMS INC.

LG&E Gas Systems Inc. (Gas Systems) was formed in 1995 as the second of two
subsidiaries intended to hold the Company's investments in non-utility
businesses. In May 1995, Gas Systems acquired all of the outstanding common
stock of Hadson Corporation, now known as LG&E Natural Inc. (LG&E Natural), a
company primarily involved in the marketing, gathering, processing, storage and
transportation of natural gas.

LG&E Natural's business is seasonal and affected by weather patterns in the
market areas it serves. West Coast, 


                                       13
<PAGE>

Southwest and Southeast markets typically have higher demand for LG&E Natural's
products in the summer months, while the Northeast and Midwest market demand is
generally greater in the winter.

As part of the natural gas marketing services it offers customers, LG&E Natural
aggregates supplies of natural gas from gas producers and processors, contracts
for transportation services on both interstate and intrastate pipelines, and
provides a variety of re-bundled services to end users and local distribution
companies. The Company believes that the growth of LG&E Natural's gas marketing
business depends primarily upon its ability to provide quality services in
response to evolving customer needs and market conditions.

The volume of gas transported and marketed by LG&E Natural has increased from an
average of approximately 600 million cubic feet per day in May 1995, when LG&E
Natural was acquired, to approximately 3.6 billion cubic feet per day by the end
of 1996. As of December 31, 1996, LG&E Natural had approximately 721 direct gas
sales contracts with industrial firms, local gas distribution companies,
electric utilities, large commercial entities and institutions such as
hospitals, military bases and universities. LG&E Natural maintains a diverse
customer base in order to limit its reliance on any one industry or region.
During 1996, no customer accounted for more than 10% of LG&E Natural's total gas
sales. LG&E Natural competes with other gas marketers and producers primarily on
the basis of market-responsive pricing and flexibility of deal structure,
including the use of financial instruments, reliability of performance and
customer service.

The majority of natural gas purchased and sold by LG&E Natural is generally
under spot contracts of thirty days or less. LG&E Natural also has long-term
sales and purchase arrangements with a variety of customers, with terms of 60
days to nine years.

LG&E Natural (through a wholly-owned subsidiary) and Santa Fe Energy Resources
Inc. (Santa Fe) are parties to a Master Gas Purchase Contract (Gas Contract),
which was entered into in December 1993 and which expires in December 2001. The
Gas Contract provides for the dedication by Santa Fe to LG&E Natural of all of
its domestic natural gas production from specified existing wells, which consist
of essentially of all such entity's domestic natural gas production (except to
the extent such production is dedicated under pre-existing contracts) and
certain domestic development and exploration wells. LG&E Natural currently
receives about 80,000 MMBtu per day under the contract. Production of gas wells
acquired by Santa Fe may, by mutual agreement, be dedicated under the Gas
Contract. LG&E Natural is obligated to analyze and provide its recommendation
regarding the method of gathering and transporting production from exploration
wells, whether by Santa Fe, LG&E Natural or third parties.

LG&E Natural is required to release gas production dedicated under the Gas
Contract under certain circumstances, including, if LG&E Natural's financial
condition changes materially and adversely and LG&E Natural does not provide
financial assurances (such as letters of credit) for the value of such gas
acceptable to Santa Fe. To date, Santa Fe has not elected to request any such
financial assurances. Pursuant to the Gas Contract, LG&E Natural is required to
pay Santa Fe, for all production delivered, the fair market price for such gas.
LG&E Natural is obligated to use its best efforts to receive gas from Santa Fe
at delivery points so as to maximize the set price received by Santa Fe for such
production.

The term of the Gas Contract runs until March 31, 2001. However, either LG&E
Natural or Santa Fe has the right to terminate the contract upon a material
breach of the contract or the occurrence of certain events. In addition, Santa
Fe has the right to terminate the contract or suspend performance if (i)
payments are overdue by more than three working days, or (ii) LG&E Natural fails
to purchase specified percentages of available production from Santa Fe.

LG&E Natural's natural gas gathering and processing operations are concentrated
in southeastern New Mexico, the Louisiana Gulf Coast and the Permian Basin of
West Texas. Assets employed to conduct these operations 


                                       14
<PAGE>

include a 90-mile intrastate pipeline in southeastern New Mexico (the Llano
pipeline), eleven separate gathering systems consisting of 1,253 miles of
pipeline, five gas processing facilities (two of which are inactive), an
underground gas storage facility with a current working capacity of
approximately six billion cubic feet (BCF) of gas, and two gas transmission
systems located in Texas which total 76 miles. LG&E Natural owns 100% of six of
the gathering systems, and it has ownership interests in the other five ranging
from 11% to 50%.

The Llano pipeline, which has a design capacity of approximately 180,000 MCF of
gas per day, is capable of delivering gas to four different interstate pipelines
and directly to three end users, as well as receiving gas from three interstate
pipelines. LG&E Natural, through its various subsidiaries, purchases gas from
over 100 producers connected to the Llano pipeline and sells the gas directly to
end-user customers or delivers the gas into one of the interstate pipelines for
sale. LG&E Natural, through its various subsidiaries, also transports natural
gas through the Llano pipeline for third parties and is paid a transportation
fee for such services. An average of approximately 60,000 MCF of natural gas per
day moved through the Llano pipeline in 1996.

The eleven gathering systems gathered approximately 104,000 MCF (net to LG&E
Natural ownership interests) of natural gas per day during 1996. Connected to
the Llano pipeline are two operating natural gas processing facilities capable
of processing approximately 85,000 MMBtu of natural gas per day. These
facilities extract natural gas liquids, including propane, ethane, butanes and
natural gasoline, from the natural gas stream, at which point the mixed stream
of liquids is sold. Approximately 189,000 gallons per day of natural gas liquids
were extracted and sold from these facilities in 1996.

Also connected to the Llano pipeline is a natural gas storage facility. This
facility has current working capacity of approximately six BCF. LG&E Natural,
through a subsidiary, offers this storage capacity to third parties on a fee
basis. As of December 31, 1996, storage capacity of approximately 2.5 BCF was
leased to other parties.

Through infusions of working capital and other financial support, the Company
has enhanced LG&E Natural's ability to secure trade credit for natural gas
purchases. This has enabled LG&E Natural to significantly increase levels of
natural gas marketing and management expects this trend to continue in the
foreseeable future.

Gas Systems has provided letters of credit issued to third parties to secure
certain off-balance sheet obligations (including contingent obligations) of LG&E
Natural and its subsidiaries. The letters of credit securing such obligations
totaled approximately $6.6 million and $11 million at December 31, 1996 and
1995. The lenders under the credit facilities for Gas Systems are entitled to
the benefits of Support Agreements with LG&E Energy Corp. The Support Agreements
state, in substance, that LG&E Energy Corp. will provide Gas Systems with the
necessary funds and financial support to meet its obligations under the credit
facilities.

LG&E Natural uses financial instruments in its natural gas marketing activities.
These financial instruments are used to hedge price and geographic basis risk
for its purchase and sales commitments and to enhance its overall portfolio of
natural gas trading activities. See Note 4 of Notes to Financial Instruments
under Item 8 for an overall discussion of these activities.

The production, transportation and certain sales of natural gas are subject to
federal, state or local regulations which have a significant impact upon LG&E
Natural's energy products and services business. Regulation at the federal level
of domestically produced or transported natural gas is administered primarily by
the FERC pursuant to the Natural Gas Act (NGA) and the Natural Gas Policy Act of
1978 (NGPA). Maximum selling prices of certain categories of gas, whether sold
in interstate or intrastate commerce, previously were regulated pursuant to
NGPA. The NGPA established various categories of gas and provided for graduated
deregulation of price controls of several categories of gas and the deregulation
of sales of certain categories of gas. All price deregulation contemplated under
the NGPA has already taken place. Subsequently, the Natural Gas Wellhead
Decontrol Act of 1989 terminated all NGA and NGPA regulation of "first sales" of
domestic natural gas on 


                                       15
<PAGE>

January 1, 1993. The sale for resale of certain natural gas in interstate
commerce is regulated, in part, pursuant to the NGA, which requires certificate
and abandonment authority to initiate and terminate such sales. In addition,
natural gas marketed by LG&E Natural is usually transported by interstate
pipeline companies that are subject to the jurisdiction of the FERC. Similarly,
some of the transportation and storage services provided by Llano are subject to
FERC regulation under section 311 of the NGPA. These services are frequently
sold to gas distribution companies that contract with interstate pipeline
companies for transportation from the Llano facility to their respective service
areas. Section 311 permits intrastate pipelines under certain circumstances to
sell gas to, transport gas for, or have gas transported by, interstate pipeline
companies, and assign contract rights to purchase surplus gas from producers to
interstate pipeline companies without being regulated as interstate pipelines
under the NGA.

For a discussion of lawsuits filed as a result of LG&E Natural's discovery in
the fourth quarter of 1996 that unauthorized transactions had occurred,
resulting in losses of $17.1 million after tax, see Note 16 of Notes to
Financial Statements under Item 8.

                          EMPLOYEES AND LABOR RELATIONS

The Company and its subsidiaries had 3,069 full-time employees at December 31,
1996. LG&E's approximately 1,500 operating, maintenance, and construction
employees are members of the International Brotherhood of Electrical Workers
(IBEW) Local 2100. The current three year contract will expire in November 1998.


                                       16
<PAGE>

ITEM 2. Properties.

LG&E's power generating system consists of the coal-fired units operated at its
three steam generating stations. Combustion turbines supplement the system
during peak or emergency periods. At February 28, 1997, LG&E owned the following
electric generating stations:

<TABLE>
<CAPTION>
                                                                  Year in   Capability
                                                                  Service  Rating (Kw)
                                                                  -------  -----------
<S>                                                                <C>       <C>    
            Steam Stations:
            Mill Creek-Kosmosdale, Ky 
                Unit 1                                             1972      303,000
                Unit 2                                             1974      301,000
                Unit 3                                             1978      386,000
                Unit 4                                             1982      480,000
                                                                           ---------
                     Total Mill Creek                                      1,470,000

            Cane Run-near Louisville, Ky 
                Unit 4                                             1962      155,000
                Unit 5                                             1966      168,000
                Unit 6                                             1969      240,000
                                                                           ---------
                     Total Cane Run                                          563,000

            Trimble County-Bedford, Ky. (a)
                Unit 1                                             1990      371,000

            Combustion Turbine Generators (Peaking capability):
            Zorn                                                   1969       16,000
            Paddy's Run                                            1968       43,000
            Cane Run                                               1968       16,000
            Waterside                                              1964       33,000
                                                                           ---------
                Total combustion turbine generators                          108,000
                                                                           ---------
            Total capability rating                                        2,512,000
                                                                           =========
</TABLE>

            (a)   Amount shown represents LG&E's 75% interest in Trimble County.
                  LG&E is responsible for operation of Unit 1 and is reimbursed
                  by IMEA and IMPA for expenditures related to Trimble County
                  based on their proportionate share of ownership interest. See
                  Note 18 of Notes to Financial Statements, Jointly Owned
                  Electric Utility Plant, under Item 8 for further discussion on
                  ownership.

LG&E also owns an 80 Mw hydroelectric generating station located in Louisville,
operated under license issued by the FERC.

At December 31, 1996, LG&E's electric transmission system included 21
substations with a total capacity of approximately 11,026,897 Kva and
approximately 652 structure miles of lines. The electric distribution system
included 83 substations with a total capacity of approximately 3,383,530 Kva,
3,537 structure miles of overhead lines, 274 miles of underground conduit, and
5,420 miles of underground conductors.

LG&E's gas transmission system includes 178 miles of transmission mains, and the
gas distribution system includes 3,528 miles of distribution mains.

LG&E operates underground gas storage facilities with a current working gas
capacity of approximately 14.6 


                                       17
<PAGE>

million Mcf. See Gas Supply under Item 1.

In 1990, LG&E entered into an operating lease for its corporate office building
located in downtown Louisville, Kentucky. The lease is for a period of 15 years
and is scheduled to expire June 2005. LG&E Energy Corp. has an operating lease
for its corporate office space with an expiration date of 1997. LPI has
operating lease commitments related to three office facilities that expire in
1997, 1999 and 2001. LG&E Natural has six office leases that expire between 1997
and 2004.

Other properties owned by LG&E include office buildings, service centers,
warehouses, garages, and other structures and equipment, the use of which is
common to both the electric and gas departments.

The trust indenture securing LG&E's First Mortgage Bonds constitutes a direct
first mortgage lien upon much of the property owned by LG&E.

At December 31, 1996, LPI owned the percentage indicated of the following joint
ventures:

<TABLE>
<CAPTION>
                                                                                 Net
                                              Ownership                   Capability        Year in
      Name                                   Interest %          Fuel     Rating (Mw)       Service
      ----                                   ----------          ----     -----------       -------

<S>                                                  <C>         <C>               <C>         <C> 
      LG&E Westmoreland-Southampton                  50          Coal              63          1992
      Franklin, Virginia

      LG&E Westmoreland-Altavista                    50          Coal              63          1992
      Altavista, Virginia

      LG&E Westmoreland-Hopewell                     50          Coal              63          1992
      Hopewell, Virginia

      Westmoreland-LG&E Partners                     50          Coal             165          1994
      (Roanoke Valley I)
      Weldon, North Carolina

      LG&E Westmoreland-Rensselaer                   50          Natural           79          1994
      Rensselaer, New York                                           Gas

      Windpower Partners 1993-Palm Springs           50          Wind              43          1994
      Palm Springs, California

      Windpower Partners 1993-Buffalo Ridge          50          Wind              25          1994
      Buffalo Ridge, Minnesota

      Windpower Partners 1994                        25          Wind             25-35        1995
      Culberson County, Texas

      Westmoreland-LG&E Partners                     50          Coal              44          1995
      (Roanoke Valley II)
      Weldon, North Carolina

      K.W. Tarifa, S.A                               44          Wind              30          1995
      Tarifa, Spain

      Central Termica San Miguel de Tucuman          33          Natural          114          1996
      Tucuman Province, Argentina                                    Gas
</TABLE>


                                       18
<PAGE>

LPI's ownership interests in these projects and the revenues from the sale of
electricity and steam from the projects are pledged as security to the lenders
who provided the financing for the project. See Note 16 of Notes to Financial
Statements under Item 8 for a discussion of the bankruptcy filing of an
affiliate of LPI's partner in the Southampton, Altavista, Hopewell, Rensselaer
and Roanoke Valley joint ventures.

LG&E Natural, through certain subsidiaries, owns or has an interest in eleven
gas gathering systems. LG&E Natural owns a 100% interest in six of these
systems, a 50% interest in one of the systems and interests ranging from 11% to
24% in the four remaining systems. These systems are located in Texas, New
Mexico, Louisiana, Montana and Oklahoma.

LG&E Natural, through a subsidiary, owns the LG&E Natural pipeline, a 90-mile
intrastate pipeline system in southeastern New Mexico with a throughput capacity
of 180,000 MCF of gas per day. LG&E Natural, through subsidiaries, owns the
Power-Tex system, a 74-mile gas transmission system located in Texas. This
system has a design capacity of 90,000 MCF of gas per day. LG&E Natural, through
certain subsidiaries, also owns, or has interests in, and operates five natural
gas processing plants located in southeastern New Mexico and western Texas with
a total design capacity of 125,000 MCF of gas per day. LG&E Natural owns 100%
interests in three of these plants, and a majority of the two remaining plants.
Through a subsidiary, it owns and operates an underground natural gas storage
facility adjacent to the Llano pipeline in southeastern New Mexico with a
current working capacity of approximately six BCF of natural gas.

ITEM 3. Legal Proceedings.

Rates, Regulatory Matters, and Trimble County Generating Plant

For a discussion of current regulatory matters and a detailed discussion of the
Trimble County Unit 1 settlement agreement, see Rates and Regulation under Item
7 and Notes 3 and 17 of Notes to Financial Statements under Item 8.

Statewide Power Planning

In March 1995, the Commission staff issued its report on its review of LG&E's
1993 biennial Integrated Resource Plan. The Staff Report specifically found that
LG&E's plan contained some of the better analyses among those filed by the
electric utilities under the Commission's jurisdiction, and presented several
suggestions for LG&E's consideration when it develops its next plan. In an order
issued March 17, 1995, the Commission formally closed its proceeding for the
review of LG&E's plan. On May 5, 1995, the Commission granted LG&E's request to
waive the requirement that LG&E file an Integrated Resource Plan during 1995. On
July 21, 1995, the Kentucky Commission amended its Integrated Resource Planning
regulations to replace the biennial filing requirement with a triennial
requirement. The amended regulations also specified that LG&E's next Integrated
Resource Plan is to be filed 39 months from the effective date of the amended
regulation, or October 21, 1998.

Environmental

For a complete discussion of LG&E's environmental issues concerning its Mill
Creek and Cane Run generating plants, manufactured gas plant sites, and other
environmental issues affecting LG&E, LPI, and LG&E Natural, see Note 16 of Notes
to Financial Statements under Item 8.


                                       19
<PAGE>

Southampton

For a discussion of the request for rehearing filed with FERC by
LG&E-Westmoreland Southampton, the partnership that owns the Southampton
facility, regarding the partnership's request for an order from FERC stating
that the Southampton facility remains a qualifying facility for 1992, see Item 1
and Note 16 of Notes to Financial Statements under Item 8.

Roanoke Valley I

Westmoreland-LG&E Partners (WLP), the partnership that owns the Roanoke Valley I
and II facilities, is seeking the recovery of capacity payments withheld by
Virginia Electric and Power Company. In December 1996, the Virginia Supreme
Court agreed to hear the Company's appeal of an adverse lower court ruling. See
Item 1 and Note 16 of Notes to Financial Statements under Item 8.

Rensselaer

Niagara Mohawk Corporation (NIMO) has proposed to buy out the Power Purchase
Agreements NIMO has with a group of independent power projects. The Rensselaer
cogeneration facility, in which the Company has a 50% interest through an
indirect subsidiary, is one of the projects affected by this initiative. While
discussions among the projects and NIMO are continuing, the Company is not able
to predict the outcome of this event. Based upon the status of current
negotiations, the Company does not expect the ultimate resolution of this matter
to have a material adverse effect on its results of operations or financial
condition. See Note 16 of Notes to Financial Statements under Item 8.

TVA/LPM Interchange Agreement

On January 12, 1996, the Alabama Power Company, Georgia Power Company and
Mississippi Power Company (the Plaintiffs) filed a Complaint for Declaratory
Judgment and Injunctive Relief against the Tennessee Valley Authority (TVA) and
LG&E Power Marketing Inc. (LPM), a wholly-owned subsidiary of the Company, in
the United States District Court for the Northern District of Alabama. The
Plaintiffs claimed that TVA violated the Tennessee Valley Authority Act (TVA
Act) by entering into an interchange agreement with LPM (Interchange Agreement)
and that TVA was prohibited from selling or delivering any power to LPM, to any
other broker or marketer of power, or to any other unauthorized recipient, or
from otherwise engaging in unlawful power supply arrangements. In September
1996, the Court granted the Plaintiffs Motion for Summary Judgment, finding that
LPM is not a power generating organization with which TVA had an exchange power
arrangement on July 1, 1957, and that the contract is null and void. This
decision became final on November 23, 1996. This decision is not expected to
have a material effect on the Company's financial position or results of
operations.

Calgary

On November 22, 1996 LG&E Natural Canada Inc., a subsidiary of LG&E Natural, 
initiated action in the Court of the Queens Bench of Alberta, Calgary against 
a former employee. That action and an additional action, filed on the same 
date in the General Division of the Calgary Court, also named a natural gas 
sales and marketing company and the director, president and secretary of that 
company. An amended statement of claim was filed in the Calgary action on 
December 23, 1996, naming additional parties. These lawsuits were filed as a 
result of LG&E Natural's discovery in the fourth quarter of 1996 that the 
former employee had engaged in unauthorized transactions. Counterclaims have 
been filed seeking damages of approximately forty million dollars for, among 
other things, defamation and breach of contract. See Note 8, Non-Recurring 
Charges, and Note 16, Commitments and Contingencies, under Item 8. The 
Company does not expect the ultimate resolution of this matter to have a 
material adverse effect on its results of operations or financial condition.

                                       20
<PAGE>

Other

In the normal course of business, other lawsuits, claims, environmental actions,
and other governmental proceedings arise against the Company. To the extent that
damages are assessed in any of these lawsuits, the Company believes that its
insurance coverage is adequate. Management, after consultation with legal
counsel, does not anticipate that liabilities arising out of other currently
pending or threatened lawsuits and claims will have a material adverse effect on
the Company's consolidated financial position or results of operations.

ITEM 4. Submission of Matters to a Vote of Security Holders.

None.

Executive Officers of the Company.

                                                             Effective Date of
                                                             Election to Present
      Name                 Age    Position                   Position
      ----                 ---    --------                   --------

      Roger W. Hale         53    Chairman of the Board,     August 17, 1990
                                  President and Chief
                                  Executive Officer

      Victor A. Staffieri   41    President - Distribution   December 15, 1995
                                  Services Division
                                  President - Louisville Gas
                                  and Electric Company

      Walter Z. Berger      41    Group President -          January 3, 1997
                                  Energy Marketing

      John R. McCall        53    Executive Vice President,  July 1, 1994
                                  General Counsel and
                                  Corporate Secretary

      Stephen R. Wood       54    Executive Vice             January 1, 1994
                                  President and Chief
                                  Administrative Officer

      George W. Basinger    51    Senior Vice President -    August 1, 1996
                                  Power Operations

      Charles A. Markel III 49    Vice President -           January 1, 1993
                                  Finance and Treasurer

      S. Bradford Rives     38    Vice President -           March 15, 1996
                                  Finance and Controller

The present term of office of each of the above executive officers extends to
the meeting of the Board of Directors following the Annual Meeting of
Shareholders, scheduled to be held May 8, 1997.


                                       21
<PAGE>

There are no family relationships between executive officers of the Company or
executive officers of its subsidiaries.

Messrs. Hale, Staffieri, McCall, and Markel are also executive officers of the
Company's principal subsidiary, LG&E. Mr. Hale is Chairman of the Board and
Chief Executive Officer of LG&E; Mr. Staffieri is President of LG&E; Mr. McCall
is Executive Vice President, General Counsel and Corporate Secretary of LG&E;
and Mr. Markel is Treasurer of LG&E.

Before he was elected to his current position, Mr. Staffieri was General Counsel
and Secretary of Long Island Lighting Company from April 1989 to March 1992;
Senior Vice President, General Counsel and Corporate Secretary of the Company
from March 1992 to November 1992; Senior Vice President, Public Policy and
General Counsel of the Company and LG&E from November 1992 to January 1994; and
President of LG&E from January 1994 to the present.

Before he was elected to his current position, Mr. Berger was Vice President 
and Chief Financial Officer of Tri-State Oil, a subsidiary of Baker Hughes, 
Inc., from January 1988 to February 1992; Controller of Enron America, Inc. 
from February 1992 to July 1992; General Manager of Enron America, Inc. from 
August 1992 to November 1992; Vice President, Finance and Business 
Development of Enron Oil Trading and Transportation from November 1992 to 
February 1996; and Executive Vice President and Chief Financial Officer of 
LG&E Energy Corp. and of LG&E from February 1996 to January 1997.

Before he was elected to his current position, Mr. McCall was Partner and
Litigation Chairman of Brown, Todd & Heyburn, a law firm.

Before he was elected to his current position, Mr. Wood was Senior Vice
President and Chief Administrative Officer of LG&E and the Company prior to
December 1992; and Senior Vice President and Chief Administrative Officer of
LG&E from December 1992 to January 1994.

Before he was elected to his current position, Mr. Basinger was Partner of
National Power Company prior to November 1993; Vice President of Venture
Management for LG&E Power Inc. from December 1993 to November 1994; and Senior
Vice President of Operations for LG&E Power Inc. from November 1994 to August
1996.

Before he was elected to his current position, Mr. Markel was Vice President -
Finance and Treasurer prior to January 1992; and Senior Vice President and Chief
Financial Officer from January 1992 to January 1993.

Before he was elected to his current position, Mr. Rives was Director -
Corporate Finance prior to February 1992; Assistant Treasurer from February 1992
to December 1992; Director - Business Development from January 1993 to December
1993; Associate General Counsel from January 1994 to June 1994; Vice President
and Treasurer of LG&E Power from June 1994 to March 1995; Vice President,
Controller and Treasurer of LG&E Power from March 1995 to December 1995; and
Vice President - Finance, Non-Utility Business from January 1996 to March 1996.

                                    PART II.

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
        Matters.

The Company's Common Stock is listed on the New York and Chicago Stock
Exchanges. The ticker symbol is "LGE." The newspaper stock exchange listings are
"LGE Energy" or "LGE EN." The following table gives information with respect to
price ranges, as reported in The Wall Street Journal as New York Stock Exchange
Composite Transactions, and dividends paid for the periods shown.


                                       22
<PAGE>

<TABLE>
<CAPTION>
                                    1996                                   1995
                                    ----                                   ----

                      Dividend       High        Low       Dividend        High         Low
                          Paid      Price      Price           Paid       Price       Price
                          ----      -----      -----           ----       -----       -----
<S>                     <C>       <C>        <C>            <C>        <C>         <C>     
      First quarter     $.2775    $22.000    $20.750        $.26875    $20.0000    $18.4375
      Second quarter     .2775     22.875     20.875         .26875     20.1875     18.6875
      Third quarter      .2775     23.625     21.625         .26875     20.0625     19.0000
      Fourth quarter     .2875     24.625     22.375         .27750     21.5625     20.0000
</TABLE>

The number of record holders of Common Stock at December 31, 1996, was 30,927.
The book value of the Company's Common Stock at December 31, 1996, was $12.23
per share.

ITEM 6. Selected Financial Data.

                             Years Ended December 31
                     (Thousands of $ Except per Share Data)
                     --------------------------------------
<TABLE>
<CAPTION>
                                           1996                1995                1994            1993           1992
                                           ----                ----                ----            ----           ----
<S>                                   <C>                 <C>                 <C>              <C>            <C>        
      Revenues:
      Revenues                        $  3,589,465 (a)    $  1,402,980 (a)    $    829,663     $   900,027    $   834,739
      Refund - Trimble County
        settlement                            --               (28,300)               --              --             --
                                      ------------        ------------        ------------     -----------    -----------
           Revenues                      3,589,465           1,374,680             829,663         900,027        834,739
                                      ============        ============        ============     ===========    ===========
      Operating income:
      Before non-recurring items           237,771             205,357             189,087         189,122        174,504
      Trimble County settlement               --               (29,800)               --              --             --
      Non-recurring charges                (26,330)               --               (48,743)           --             --
                                      ------------        ------------        ------------     -----------    -----------
        Operating income                   211,441             175,557             140,344         189,122        174,504
                                      ============        ============        ============     ===========    ===========
      Net income:
      Continuing operations:
        Before non-recurring items         121,117             100,682              95,525          80,825         71,437
        Trimble County settlement             --               (17,852)               --              --             --
        Non-recurring charges              (17,114)               --               (38,696)           --             --
                                      ------------        ------------        ------------     -----------    -----------
              Total                        104,003              82,830              56,829          80,825         71,437
      Discontinued operations                 --                  --                  --             7,435          4,177
      Gain on sale of
        discontinued operations               --                  --                51,805            --             --
      Cumulative effect of
        accounting change                     --                  --                (3,369)           --             --
                                      ------------        ------------        ------------     -----------    -----------
           Net income                 $    104,003        $     82,830        $    105,265     $    88,260    $    75,614
                                      ============        ============        ============     ===========    ===========

      Average number of com-
        mon shares outstanding          66,293,670          66,105,175          65,981,870      65,377,181     64,614,969
</TABLE>


                                       23
<PAGE>

                             Years Ended December 31
                     (Thousands of $ Except per Share Data)
                     --------------------------------------
<TABLE>
<CAPTION>
                                               1996             1995               1994               1993          1992
                                               ----             ----               ----               ----          ----
<S>                                      <C>              <C>                <C>                <C>           <C>       
      Earnings per share of
        common stock:
        Continuing operations:
           Before non-recurring items         $1.83            $1.52              $1.45              $1.24         $1.11
           Trimble County settlement           --               (.27)              --                 --            --
           Non-recurring charges               (.26)            --                 (.59)              --            --
                                              -----            -----              -----              -----          ----
                   Total                       1.57             1.25                .86               1.24          1.11
        Discontinued operations                --               --                 --                  .11           .06
        Gain on sale of
           discontinued operations             --               --                  .79               --            --
        Cumulative effect of
           accounting change                   --               --                 (.05)              --            --
                                              -----            -----              -----              -----          ----
              Earnings per share              $1.57            $1.25              $1.60              $1.35         $1.17
                                              =====            =====              =====              =====         =====

      Cash dividends declared per
        share of common stock                 $1.13          $1.0925            $1.0575             $1.023         $.991
      Payout ratio                             72.1%(b)         87.2%(b)           66.3%(b)           75.9%         84.7%

      Total assets                       $3,011,892       $2,628,920         $2,217,464         $2,186,468    $2,148,398

      Long-term obligations
        (including amounts
        due within one year)                646,800          662,800            662,800            662,800       686,262
</TABLE>

      (a)   The significant increases in revenues in 1996 and 1995 resulted
            primarily from acquiring LG&E Natural in May 1995. See Note 2 of
            Notes to Financial Statements under Item 8 and Management's
            Discussion and Analysis under Item 7.

      (b)   Excluding mark-to-market, the Trimble County settlement,
            non-recurring charges, gain on sale of discontinued operations, and
            cumulative effect of accounting change, the payout ratios would have
            been 70.8%, 71.8% and 73.1% in 1996, 1995 and 1994, respectively.

      Management's Discussion and Analysis of Results of Operations and
      Financial Condition and the Notes to Financial Statements should be read
      in conjunction with the above information.

ITEM 7. Management's Discussion and Analysis of Results of Operations and
        Financial Condition.

The following discussion and analysis by management focuses on those factors
that had a material effect on the Company's financial results of operations and
financial condition during 1996, 1995, and 1994 and should be read in connection
with the consolidated financial statements and notes thereto. The Company's
financial results and conditions have been largely dependent on the financial
results and conditions of its principal subsidiary, Louisville Gas and Electric
Company (LG&E), a regulated electric and gas utility. Future financial results
from the Company's operations will become increasingly reflective of the returns
earned from its portfolio of non-utility investments in energy marketing and
related services, energy generation, and gas distribution in addition to the
financial results provided by LG&E.

Some of the following discussion may contain forward looking statements that are
subject to certain risks, uncertainties and assumptions. Such forward looking
statements are intended to be identified in this document by the words
"anticipate," "estimate," "objective," "possible," "potential" and similar
expressions. Actual 


                                       24
<PAGE>

results may vary materially. Factors that could cause actual results to differ
materially include: general economic conditions; business and competitive
conditions in the energy industry; change in federal or state legislation;
unusual weather; actions by state or federal regulatory agencies affecting
rates; and other factors described from time to time in LG&E Energy Corp.'s
reports to the Securities and Exchange Commission.

RESULTS OF OPERATIONS

Earnings per Share

Earnings per share data contained herein for periods prior to 1996 have been
restated to reflect a two-for-one stock split that occurred in 1996.

Earnings per share of common stock for 1996 of $1.57 increased 32 cents over the
$1.25 per share reported for 1995. Excluding the one-time non-recurring charges
as discussed in the following paragraph, earnings per share were $1.83 in 1996,
or 31 cents more than comparable 1995 earnings of $1.52. The 31-cent increase
resulted from higher earnings at LG&E of 14 cents and higher energy marketing
and other earnings of 27 cents, partially offset by an increase in corporate and
other expenses of (10 cents). The LG&E increase of 14 cents is primarily the
result of a significantly higher level of wholesale electric sales and increased
retail sales of electricity and natural gas, partially offset by increased
operation and maintenance expenses. The increase in non-utility earnings
reflects growth in the Company's energy marketing and trading business and a
strong performance by the independent power ventures. Also, earnings
attributable to energy marketing and trading for 1996 include an increase for
contracts accounted for under the mark-to-market method of accounting of 23
cents per share.

The reported earnings per share in 1996 of $1.57 include a one-time charge of 26
cents, which resulted from unauthorized transactions in LG&E Natural Inc.'s
(LG&E Natural) Calgary, Alberta, Canada, office. See Note 8 of the Notes to
Financial Statements under Item 8. Earnings per share for 1995 include a
one-time charge of 27 cents to recognize the settlement of the long-standing
issues surrounding LG&E's Trimble County electric generating plant.

Earnings per share of common stock for 1995 were $1.25, a decrease of 35 cents
from the $1.60 earned in 1994. The decrease primarily reflects a 27-cent charge
taken to recognize the Trimble County settlement mentioned in the preceding
paragraph. In addition, earnings in 1994 included a gain on the sale of the
Company's interest in Natural Gas Clearinghouse (NGC) of 79 cents, partially
offset by non-recurring charges (46 cents), the expense of establishing a
charitable foundation (13 cents) and the adoption of a new accounting standard
for post-employment benefits (5 cents). When considered together, these 1994
items produced a 15-cent net increase in earnings of a non-recurring nature.
Comparison of earnings for the two years without the significant non-recurring
items discussed above indicates an improvement in earnings of 7 cents during
1995 ($1.52 in 1995 as compared to $1.45 in 1994). This increase resulted
primarily from an increase in earnings from investments in joint ventures and
higher earnings at LG&E, partially offset by a decrease in gross profits at LG&E
Power Inc. (LPI), lower fee income, and an increase in interest expense
resulting from the Company's borrowings to finance the acquisition of LG&E
Natural. LG&E's earnings increase was primarily due to higher retail electric
sales, positive cost containment efforts and a reduction in expenses due to the
settlement of a commercial dispute. These factors were partially offset by
increased purchased power expenses at LG&E primarily as a result of unplanned
power plant outages.

Utility Results

Revenues

A comparison of LG&E's revenues for the years 1996 and 1995, excluding the
Trimble County settlement 


                                       25
<PAGE>

(which reduced electric revenues by $28.3 million in 1995), with the immediately
preceding year reflects both increases and decreases, which have been segregated
by the following principal causes (in thousands of $):

<TABLE>
<CAPTION>
                                                      Increase (Decrease) From Prior Period
                                                   Electric Revenues           Gas Revenues
                                                   1996         1995         1996         1995
                                                   ----         ----         ----         ----
<S>                                              <C>          <C>          <C>          <C>      
      Sales to ultimate consumers:
        Fuel and gas supply adjustments, etc     $ (4,652)    $(10,566)    $ 21,176     $(16,940)
        Demand side management/decoupling           5,429       (4,619)      (1,989)         479
        Environmental cost recovery surcharge       2,410        3,205         --           --
        Variation in sales volumes                    801       27,382       14,483       (3,420)
                                                 --------     --------     --------     --------
           Total                                    3,988       15,402       33,670      (19,881)
      Sales for resale                             30,383       (5,249)        --           --
      Gas transportation-net                         --           --           (971)       1,062
      Other                                         1,703        1,606          594         (184)
                                                 --------     --------     --------     --------
        Total                                    $ 36,074     $ 11,759     $ 33,293     $(19,003)
                                                 ========     ========     ========     ========
</TABLE>

Electric revenues increased in 1996 compared with 1995 primarily because of an
increase in sales of electricity for resale which resulted from aggressive
marketing efforts. Gas revenues increased as a result of the higher cost of
natural gas in 1996 and because of increased sales to ultimate consumers (6%)
caused mainly by colder weather experienced in the first quarter of the year.

Electric revenues increased in 1995 mainly because of an increase in sales to
ultimate consumers as a result of the warmer summer weather and improved
economic conditions in LG&E's service territory. Gas revenues decreased as a
result of lower gas supply adjustment revenues, which reflected the lower cost
of natural gas in 1995.

Expenses

Fuel for electric generation and gas supply expenses comprise a large segment of
the Company's total operating costs. LG&E's electric and gas rates contain a
fuel adjustment clause and a gas supply clause, respectively, whereby increases
or decreases in the cost of fuel and gas supply are reflected in LG&E's rates,
subject to approval by the Public Service Commission of Kentucky (Kentucky
Commission or Commission).

Fuel expenses increased $11.7 million (8%) in 1996 primarily because of a 12%
increase in generation ($16 million), partially offset by a decrease in the cost
of coal burned ($4.3 million). Fuel expenses decreased $5.6 million (4%) in 1995
as compared to 1994 due to a decrease in the cost of coal burned ($7.5 million)
partially offset by increased generation of 2%. The average delivered cost per
ton of coal purchased was $21.73 in 1996, $23.68 in 1995, and $25.27 in 1994.
This downward trend in the delivered cost of coal is expected to continue
through 1997.

Power purchased expense in 1996 of $16.6 million was approximately the same as
in 1995. Power was purchased in 1996 primarily to supplement generation
requirements related to wholesale electric power sales. Power purchased in 1995
increased $7.1 million over 1994 primarily because of increased purchases
resulting from unplanned outages at the electric generating plants during the
extremely hot summer weather.

Gas supply expenses increased $29.7 million (27%) mainly because of the higher
unit cost of net gas supply ($21.8 million) and an increase in the volume of gas
delivered to the distribution system ($7.9 million). Gas supply expenses
decreased $20.8 million (16%) in 1995 because of the lower cost of net gas
supply ($18.7 million) and a decrease in the volume of gas delivered to the
distribution system ($2.1 million). The average 


                                       26
<PAGE>

unit cost per Mcf of purchased gas was $3.46 in 1996, $2.62 in 1995, and $2.78
in 1994.

Operation and maintenance expense increased $11.5 million (6%) over 1995
primarily because of increased costs to operate the Company's electric power
plants ($2.9 million), the electric and gas transmission and distribution
systems ($1.9 million), increased storm damage expenses ($2.2 million) and
because of the recognition of credits to expense in 1995 for settlement proceeds
received related to a commercial dispute. In 1995 LG&E received cash proceeds of
$8 million in connection with the settlement of a commercial dispute. Pursuant
to a study to determine the proper amount of income to be recognized, LG&E
recognized $6 million as a reduction of 1995 operation expense. After further
study and the resolution of the remaining legal issues, the $2 million balance
was applied as a reduction of operation expense in 1996.

Operation and maintenance expenses increased $1.2 million (less than 1%) in
1995, as compared to 1994, primarily as a result of an increase in repairs at
the electric power plants ($4.2 million), an increase in labor related expenses
($3.8 million) and an increase in various administrative expenses ($1.8
million). These increases were partially offset by a decrease in storm damage
expenses ($1 million), property damage claims ($1.2 million), and because of a
credit to expense representing a portion of the proceeds received in a
commercial dispute as discussed above.

Depreciation and amortization increased in both 1996 and 1995 primarily because
of additional utility plant in service.

Non-recurring charges in 1994 of $38.6 million include LG&E's write-off of costs
in connection with early retirements and workforce reductions that occurred in
1992 and 1993, costs in connection with property damage claims pertaining to
particulate emissions from the Mill Creek electric generating plant, and certain
costs previously deferred resulting from adoption of Statement of Financial
Accounting Standards No. 106, Employers' Accounting for Post-Retirement Benefits
Other Than Pensions. See Note 8 of Notes to Financial Statements under Item 8.

Other income decreased about $3 million in 1996 because of a decrease in income
earned from investments and lower gains realized from the sale of property as
compared to 1995. See Note 12 of Notes to Financial Statements under Item 8.

Contribution to the Company's charitable foundation reflects the expense
associated with establishing a tax-exempt foundation during 1994. Contributions
made from this foundation are not charged against income, and therefore, do not
affect the Company's net income. See Note 8 of Notes to Financial Statements
under Item 8.

Interest charges for 1996 decreased $1.7 million (4%) primarily because of the
retirement of outstanding debt. The Company's First Mortgage Bonds, 5.625%
Series of $16 million were retired at maturity on June 1, 1996 and $50 million
in other debt was refinanced at more favorable rates. Interest charges for 1995
decreased $.9 million primarily due to a reversal of an interest expense reserve
resulting from a favorable ruling on certain income tax matters. The embedded
cost of long-term debt at December 31, 1996, was 6.05%; at December 31, 1995,
6.32%. See Note 14, First Mortgage Bonds and Pollution Control Bonds, for
further discussion.

Preferred dividends decreased $1.7 million (28%) due primarily to the redemption
of the 7.45% Series Cumulative Preferred Stock in December 1995. Preferred
dividends increased $.5 million in 1995 because of a higher rate associated with
the Auction Rate Series.

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

The rate of inflation may have a significant impact on LG&E's operations, its
ability to control costs, and the 


                                       27
<PAGE>

need to seek timely and adequate rate adjustments. However, relatively low rates
of inflation in the past few years have moderated the impact on current
operating results.

Energy Marketing, Trading and Other Results

Revenues and cost of revenues increased substantially in 1996 compared to 1995
primarily due to increased volumes and higher prices associated with the
Company's energy marketing and trading operations. Energy marketing and trading
includes the operations of LG&E Natural which was acquired in May 1995 and LG&E
Power Marketing Inc. (LPM), both of which substantially increased their levels
of activity during 1996. Revenues also increased approximately $26.2 million due
to adoption of the mark-to-market method of accounting for the Company's energy
trading and price risk management activities. See Notes 1 and 20 of Notes to
Financial Statements under Item 8. Additionally, LPI recorded approximately $7.6
million in revenues from development activities associated with an independent
power project in the Northeast, which is included in other revenues.

Revenues and cost of revenues for energy marketing and trading increased in 1995
compared to 1994 mainly due to acquiring LG&E Natural in May 1995. Higher power
marketing volumes in 1995 also contributed to the increases. Decreases in other
revenues were primarily due to the completion of construction activities at
LPI's ROVA I and Rensselaer projects in the second quarter of 1994 and the ROVA
II project in May 1995. The decrease in construction activity reflects a trend
in the domestic independent power production industry.

Operation and maintenance expenses increased $28 million in 1996 compared to
1995 primarily due to the LG&E Natural acquisition. Approximately $7 million of
the increase resulted from reclassification of expenses included in cost of
revenues in 1995 to operation and maintenance in 1996. Higher levels of energy
marketing and trading activities also contributed to the increase.

Operation and maintenance expenses increased $15.2 million in 1995 compared to
1994 mainly due to the May 1995 LG&E Natural acquisition. Also, LPI incurred
costs in 1995 to exit the engineering and construction business which
contributed to the increase, as did costs resulting from LPI's acquiring
operation and maintenance contracts from UCOS in 1995. See Note 7 of Notes to
Financial Statements under Item 8.

Depreciation and amortization increased $5.9 million in 1996 and $7 million in
1995 primarily due to the LG&E Natural acquisition.

Non-recurring charges in 1996 resulted from losses recognized when an internal
investigation uncovered unauthorized transactions by a marketer in LG&E
Natural's Calgary, Alberta, Canada, office. Non-recurring charges in 1994
included costs related to LPI's vacating leased office space. See Notes 8 and 16
of Notes to Financial Statements under Item 8.

The decrease in equity in earnings of joint ventures in 1996 compared to 1995
mainly resulted from the sale of power purchase contracts by two partnerships in
June 1995. The sales resulted in gains totaling $9.7 million in 1995. Also,
earnings from the three windpower joint ventures formerly managed by Kenetech
Windpower, Inc. (Kenetech) decreased $1.1 million. This was primarily due to an
increased level of expense incurred because of a change in operations management
at the ventures during 1996 after Kenetech filed for Chapter 11 bankruptcy
protection. The Company now manages operations at two of the projects, and
another venture partner manages the third. See Notes 7 and 16 of Notes to
Financial Statements under Item 8.

The increase in equity in earnings of joint ventures in 1995 compared to 1994
mainly resulted from the $9.7 million gain mentioned above and the startup of
operations at newly-completed power plants. Operations began at LPI's ROVA I and
Rensselaer plants in the second quarter of 1994, and at the ROVA II project in
May 1995.


                                       28
<PAGE>

Other income and deductions decreased in 1996 by approximately $1.6 million
primarily due to reduced interest and dividend income earned on investments in
marketable securities due primarily to lower levels of investments. Other income
and deductions decreased $8.8 million in 1995 compared to 1994. The 1994 amount
included a fee received from Westmoreland Energy, Inc. for a guarantee by the
Company of certain cogeneration project funding commitments. Lower investment
income resulting from a lower level of investments in marketable securities also
contributed to the decrease. See Note 12 of Notes to Financial Statements under
Item 8.

Interest charges increased $3.5 million in 1996 and $5.4 million in 1995 due to
increases in notes payable. Notes payable increased significantly in May 1995,
when the Company acquired LG&E Natural.

Gain on sale of discontinued operations reflects the sale of the Company's
investment in NGC in January 1994. See Note 6 of Notes to Financial Statements
under Item 8.

LIQUIDITY AND CAPITAL RESOURCES

The Company's need for capital funds is primarily related to the construction of
plant and equipment necessary to meet the needs of electric and gas utility
customers and equity investments in connection with independent power production
projects and other energy-related growth or acquisition opportunities among the
non-utility businesses. Fluctuations in the Company's energy marketing and
trading activities also affect liquidity throughout the year. Lines of credit
are maintained to fund these temporary capital requirements.

Capital Requirements

Utility construction expenditures for 1996 were $108 million compared with $93
million for 1995 and $95 million for 1994. Non-utility construction expenditures
(other than generating plant expenditures incurred by joint ventures) were
approximately $8 million in 1996, $11 million in 1995, and were not material in
1994. Non-utility construction expenditures are not expected to vary
significantly in 1997 from the 1996 level. In 1995, LPI invested equity of $16.3
million in its ROVA I and ROVA II power plants, a wind power project in Texas
and the redemption of its interest in the partnership that operated many of its
power generation plants. In addition, LG&E International Inc. (LII) invested
$4.5 million in a wind project in Tarifa, Spain and $13.3 million in a natural
gas-fired generation facility in Tucuman, Argentina. In 1994, LPI invested $20.4
million in a partnership with Kenetech Windpower Inc. for the purpose of owning
and operating power plants producing electricity from wind turbines and $18.9
million in its ROVA I and Rensselaer power plants.

Past Financing Activities

During 1996, 1995, and 1994, the Company's primary source of capital was
internally generated funds from operating cash flows. Internally generated funds
provided financing for 100% of the Company's utility construction expenditures
for 1996, 1995, and 1994. The Company acquired LG&E Natural on May 15, 1995 for
$143 million, plus acquisition-related fees and expenses. The acquisition was
financed with cash and lines of credit. The Company also provided LG&E Natural
with additional cash through December 1996 to meet general working capital
needs, including margin calls. Margin calls are generally required on certain of
the Company's hedge and trading financial instruments to address changes in
market prices. The Company had approximately $9.7 million of net margin deposits
as of December 31, 1996.

The Company's combined cash and marketable securities balance increased $11.3
million in 1996. The increase reflects cash flows from operations, partly offset
by capital expenditures, dividends paid, and a net decrease in borrowings. In
1995, combined cash and marketable securities decreased $79.6 million compared
to 1994 which primarily resulted from the acquisition of LG&E Natural and
related working capital needs, additional 


                                       29
<PAGE>

investments in affiliates, and dividends paid; offset by cash flows from
operations, an increase in borrowings and changes in classification of
investments from non-current to current assets. The Company's liquidity was
positively affected in 1994 by the sale of its investment in Natural Gas
Clearinghouse. This sale enabled the Company to invest $123 million in
marketable securities.

The increases in accounts receivable and accounts payable during 1996 resulted
from increased energy marketing volumes. The increases in price risk management
assets and liabilities resulted from adopting the mark-to-market method of
accounting for the Company's energy marketing and trading activities in 1996.
Variations in accounts receivable and accounts payable are not generally
significant indicators of the Company's liquidity, as such variations are
primarily attributable to fluctuations in weather in LG&E's service territory,
and as it relates to LG&E Natural and LPM, throughout the United States, which
has a direct effect on sales of electricity and natural gas.

On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million
matured and were retired by LG&E. The bonds were redeemed with available funds.

In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky and
$27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due September 1, 2026. Interest rates for these bonds were 3.60%
and 3.57%, respectively, at December 31, 1996. The proceeds from these bonds
were applied in December 1996 to redeem the outstanding 7.25% Series of
Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds
due December 1, 2016.

In April 1995, LG&E issued $40 million of Jefferson County, Kentucky, Pollution
Control Bonds, 5.90% Series, due April 15, 2023. The proceeds from these bonds
were used to redeem the outstanding 9.25% Series of Pollution Control Bonds due
July 1, 2015.

In December 1995, LG&E redeemed the outstanding shares of its 7.45% Cumulative
Preferred Stock with a par value of $25 per share at a redemption price of
$25.75 per share. LG&E funded the $22 million redemption with cash generated
internally.

The Company's equity investments in non-utility projects and non-utility
construction expenditures (other than generating plant expenditures during 1994)
were financed through internally generated funds and short-term borrowings.
Construction expenditures for new generating projects were funded through
project debt.

The Company had non-utility short-term borrowings outstanding of $158 million as
of December 31, 1996. Short-term borrowings were $173 million as of December 31,
1995, and $32 million as of December 31, 1994. The increase in 1995 primarily
relates to the acquisition of LG&E Natural.

The Company issued $2 million of new common stock in 1996 and $3 million in
1995, under various employee plans. See Note 13 of Notes to Financial Statements
under Item 8.

Future Capital Requirements

Future utility financing requirements may be affected in varying degrees by
factors such as load growth, changes in construction expenditure levels, rate
actions allowed by regulatory agencies, new legislation, market entry of
competing electric power generators, changes in environmental regulations and
other regulatory requirements. The Company estimates that LG&E's construction
expenditures will total $250 million for 1997 and 1998. In addition, LG&E's
capital requirements for 1998 include $20 million to retire long-term debt that
is scheduled to mature. Capital expenditures for the non-utility businesses are
anticipated to total $54 million for 1997 and 1998. Ascertainable non-utility
equity funding commitments were immaterial at December 31, 1996. 


                                       30
<PAGE>

As discussed below and in Note 2 of Notes to Financial Statements under Item 8,
the Company acquired interests in two Argentine natural gas distribution
companies in February 1997. The Company borrowed approximately $100 million to
finance these purchases. Other future capital funding requirements are dependent
upon the identification of suitable investment opportunities to enhance
shareholder returns and achieve long-term financial objectives through business
acquisitions.

Future Sources of Financing

Internally generated funds from operations are expected to fund substantially
all of LG&E's anticipated construction expenditures in 1997 and 1998. Similarly,
the Company anticipates having sufficient internal cash generation, borrowing
capacity and access to securities markets to meet anticipated equity investments
and non-utility capital expenditures in 1997 and 1998.

At December 31, 1996, loan agreements and lines of credit were in place totaling
$590 million ($25 million for LG&E Energy Corp., $200 million for LG&E, $215
million for LG&E Gas Systems Inc. and $150 million for LG&E Energy Systems Inc.)
for which the companies pay commitment or facility fees. These credit facilities
are scheduled to expire at various points in time from 1997 through 2001.
Management expects to renegotiate them when they expire. Also, a new $100
million borrowing facility was opened in February 1997 to fund a portion of the
Argentine natural gas distribution company investments discussed above.

The lenders under the credit facilities for LG&E Energy Systems Inc. and LG&E
Gas Systems Inc. are entitled to the benefits of Support Agreements with LG&E
Energy Corp. See Note 15 of Notes to Financial Statements under Item 8.

Year 2000 Computer Software Modification Costs

Based on a preliminary study, the Company expects to spend approximately $12
million to $15 million from 1997 through 1999 to modify its computer information
systems enabling proper processing of transactions relating to the year 2000 and
beyond. The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Company does not expect the
amounts required to be expensed over the next three years to have a material
effect on its financial position or results of operations. The amount expensed
in 1996 was immaterial.

Rates and Regulation

LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all
matters related to electric and gas utility regulation, and as such, its
accounting is subject to Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Given
LG&E's competitive position in the market and the status of regulation in the
state of Kentucky, LG&E has no plans or intentions to discontinue its
application of SFAS No. 71. See Note 3 of Notes to Financial Statements under
Item 8.

On December 8, 1995, the Commission approved a settlement agreement filed by
LG&E and all intervenors in the Trimble County proceedings, including various
consumer interest groups and government agencies, that, in effect, resolved all
of the regulatory and legal issues related to the appropriate ratemaking
treatment to exclude 25% of the Trimble County plant costs from customer rates.
Under the settlement, ratepayers are to receive $22 million in refunds, most of
which is being refunded over the five-year period, 1996 through 2000, based on a
per kilowatt-hour credit. In addition, LG&E also agreed to provide $900,000
annually for five years, beginning in 1996, to fund low-income energy assistance
programs and agreed to revise the decoupling methodology in a manner that was to
reduce revenues collected from residential customers during 1996 and 1997 by a
total of 


                                       31
<PAGE>

approximately $1.8 million.

The overall effect of the settlement, which the Company recognized in its
entirety in the fourth quarter of 1995, was to reduce electric revenues by $28.3
million and increase operating expenses by $1.5 million. Thus the settlement
reduced net income by $17.9 million, and earnings per share by 27(cent). See
Note 17 of Notes to Financial Statements under Item 8 for further discussion.

In May 1995, LG&E implemented a Commission approved environmental cost recovery
(ECR) surcharge to recover certain costs required to comply with the Federal
Clean Air Act, as amended, and those federal, state, and local environmental
requirements which apply to coal combustion wastes and by-products from
facilities utilized for production of energy from coal. As a result of this
surcharge, LG&E's electric revenues increased $3.2 million in 1995, an
additional $2.4 million in 1996 and a further increase in revenues of
approximately $1 million is projected for 1997. The Kentucky Attorney General
(KAG), and the Kentucky Industrial Utility Customers (KIUC) have filed an appeal
in Franklin Circuit Court on various issues related to the Commission's order in
this proceeding, including the constitutionality of the Kentucky statute that
authorizes the surcharge. In an order dated April 10, 1996, associated with the
first six-month review of the operation of the surcharge, the Commission stated
that all environmental surcharge revenues collected from the date of the April
10 order will be subject to refund, pending the final determination of the April
6, 1995, order. LG&E is contesting the legal challenges but cannot predict the
outcome of this litigation. However, the amount of refunds, if any, that may
ultimately be ordered, are not expected to have a material adverse effect on
LG&E's financial position or results of operation.

In January 1994, LG&E implemented a Commission approved demand side management
(DSM) program that LG&E, KAG, the Jefferson County Attorney, and representatives
of several customer-interest groups had filed with the Commission. LG&E
committed up to $3.3 million over three years (from 1994 through 1996) for
initial programs that include a residential energy conservation and education
program and a commercial conservation audit program. The approved program
includes a formal collaborative process to develop future DSM programs and also
contains a rate mechanism that (1) provides LG&E concurrent recovery of DSM
costs, (2) provides an incentive for implementing DSM programs, and (3) allows
LG&E to recover revenues from lost sales associated with the DSM programs
through a decoupling mechanism.

In 1996, the Commission approved the addition of six new programs that increased
LG&E's commitment to DSM by approximately $4 million over the next two years.

On April 24, 1996 the Federal Energy Regulatory Commission (FERC) issued Orders
888 and 889. Order 888 requires all public utilities to file Open Access
Transmission Tariffs. These tariffs will allow third parties to utilize a
utility's transmission assets under comparable terms and conditions as the
utility. LG&E filed its Open Access Transmission Tariff on July 9, 1996, to
comply with FERC's Order 888.

Order 889 requires public utilities to implement standards of conduct and an
Open Access Same-time Information System (OASIS). The standards of conduct
require that public utilities functionally separate their transmission and
wholesale power merchant functions. OASIS will allow other parties to obtain
information about a utility's transmission system in the same manner that the
utility's wholesale power merchant function does. OASIS ensures that relevant
information is passed from the utility's transmission function to the purchaser
of transmission service in a non-discriminatory manner. LG&E has made a
functional separation of its transmission and wholesale power merchant function.
A filing of LG&E's standards of conduct was made with the FERC on December 31,
1996. In January 1997, LG&E began operation of its OASIS system in accordance
with the FERC Order.

LG&E last filed for a rate increase with the Commission in June 1990 based on
the test-year ended April 30, 


                                       32
<PAGE>

1990. The Commission issued a final order in September 1991 that effectively
granted LG&E an annual increase in rates of $6.8 million ($6.1 million electric
and $.7 million gas).

Environmental Matters

With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already
complied with the stringent sulfur dioxide emission limits required by the year
2000 as it had previously installed scrubbers on all of its coal-fired
generating units. Since then, as part of its ongoing construction program, LG&E
has spent $29 million through 1996 for remedial measures necessary to meet the
Act's requirements for nitrogen oxides. These expenditures are being recovered
under the environmental cost recovery mechanism as more fully discussed in Note
3 of the Notes to Financial Statements under Item 8. LPI's coal-fired power
plants are also equipped with scrubbers or related equipment and they meet the
sulfur dioxide and nitrogen oxide limits imposed by the Act. The overall
financial impact of the Act on LG&E has been minimal. However, LG&E is closely
monitoring a number of significant regulatory developments. In November 1996,
the United States Environmental Protection Agency (USEPA) announced its proposal
to revise the National Ambient Air Quality Standards for ozone and particulate
matter. In November 1996, USEPA also announced its intent to direct certain
states to address long range ozone transport from Midwest emission sources which
allegedly contribute to ozone problems in the Northeast. While management is
unable to predict the outcome or exact impact of these ongoing regulatory
proceedings, LG&E continues to be well-positioned in the market to be a "clean"
power provider without the large capital expenditures that are expected to be
incurred by many other utilities.

Reference is made to Environmental under Note 16 of Notes to Financial
Statements under Item 8 for a complete discussion of LG&E's environmental issues
concerning its Mill Creek and Cane Run electric generating plants, manufactured
gas plant sites, and certain other environmental issues.

Public Utility Regulatory Policies Act

Proposals also have been introduced in Congress to repeal all or portions of the
Public Utility Regulatory Policies Act (PURPA). PURPA and its implementing
regulations require, among other things, that electric utilities purchase
electricity generated by qualifying cogeneration facilities at a price based on
the purchasing utility's avoided costs. LPI is the partial owner of several
qualifying cogeneration facilities. While the Company supports the repeal of
PURPA, the Company intends to oppose any efforts to nullify existing contracts
between electric utilities and qualifying cogeneration facilities. The Company
is involved in proceedings before FERC regarding its Southampton cogeneration
facility and in litigation with the purchasing utility of the energy from its
ROVA I project. Niagara Mohawk Corporation (NIMO) has proposed to buy out the
Power Purchase Agreements NIMO has with a group of independent power projects.
The Rensselaer cogeneration facility, in which the Company has a 50% interest
through an indirect subsidiary, is one of the projects affected by this
initiative. While discussions among the projects and NIMO are continuing, the
Company is not able to predict the outcome of this event. See Note 16 of the
Notes to Financial Statements under Item 8.

FUTURE OUTLOOK

Big Rivers Electric Corporation

On March 19, 1997, the U.S. Bankruptcy Court selected the Company's proposal 
to lease all of the generating assets of Big Rivers Electric Corporation 
("Big Rivers") in a court-ordered auction. Big Rivers, a Henderson, Kentucky, 
based power generation cooperative with 1,459 Mw of owned net generating 
capacity, currently is in bankruptcy proceedings. Under the terms of the 
Company's proposal, the Company will lease the generating assets of Big 
Rivers for 25 years and provide power to Big Rivers to serve its member 
cooperatives and their customers at reduced rates. Prior to the court-ordered 
auction, Pacificorp had signed a 25-year lease arrangement with Big Rivers 
that called for Pacificorp to pay approximately $30.1 million annually. 
Although the Company has not yet finalized with Big Rivers all aspects of the 
proposed transaction, the Company expects to provide $50 million of 
additional value over the Pacificorp arrangement. Pacificorp has challenged 
the Bankruptcy Court's decision to hold an auction. Consummation of the 
transaction is subject to a number of conditions, including submission of a 
detailed reorganization plan and approval of such a plan by the Bankruptcy 
Court, completion of successful negotiations with the creditors and customers 
of Big Rivers and receipt of certain regulatory approvals.


                                       33
<PAGE>

Argentine Natural Gas Distribution Companies Acquisitions

On February 13, 1997, the Company acquired interests in two Argentine natural
gas distribution companies through its global venture unit, LG&E International
Inc. (LII). LII purchased a controlling interest in Distribuidora de Gas del
Centro (Centro) and acquired a minority interest in Distribuidora de Gas del
Cuyana (Cuyana). Centro serves approximately 372,000 customers in Cordoba
Province, Argentina; Cuyana serves approximately 305,000 customers in Mendoza
Province, Argentina. The investment in these companies totaled approximately
$140 million.

Electric Industry Restructuring

The Kentucky Public Service Commission (Kentucky Commission) has held a series
of meetings with electric utilities operating in Kentucky to discuss the
potential impact of the major restructuring of the industry that is being driven
by competition and market forces. Specifically, the Kentucky Commission has
indicated it wants to ensure that ratepayers in Kentucky will continue to
receive the current low electric rates and high reliability and quality of
service during and after the restructuring of the industry.

Topics discussed have included the regulatory treatment of potential stranded
costs or benefits, the utility's historical obligation to serve, the functional
separation of utilities, regulatory and legal changes that may be needed in a
restructured electric industry and many other issues. These wide-ranging
discussions, which are expected to continue in the future, centered around the
theme of how the Kentucky Commission and utilities can best work together to
benefit energy consumers in Kentucky.

LG&E is exploring steps that it can take to maintain or even improve its
position as a low-cost producer of electricity and evaluating other actions,
including an analysis associated with the future recovery of certain regulatory
assets, that will enable the Company to continue to offer favorable electric
rates to its customers.


                                       34
<PAGE>

ITEM 8. Financial Statements and Supplementary Data.

                       LG&E Energy Corp. and Subsidiaries
                        Consolidated Statements of Income
                     (Thousands of $ Except Per Share Data)
<TABLE>
<CAPTION>
                                                                      Years Ended December 31
                                                                 1996           1995          1994
                                                                 ----           ----          ----
<S>                                                           <C>           <C>             <C>      
REVENUES:
    Energy marketing and trading .........................  $ 2,736,940  $   630,249   $     1,289
    Electric utility .....................................      607,160      571,086       559,327
    Refund - Trimble County Settlement (Note 17) .........         --        (28,300)         --
    Gas utility ..........................................      214,419      181,126       200,129
    Other ................................................       30,946       20,519        68,918
                                                            -----------  -----------   -----------
       Total revenues (Note 1) ...........................    3,589,465    1,374,680       829,663
                                                            -----------  -----------   -----------
COST OF REVENUES:
    Energy marketing and trading .........................    2,663,902      604,302         1,222
    Fuel and power purchased .............................      166,323      154,832       153,356
    Gas supply expenses ..................................      140,482      110,738       131,561
    Other ................................................       13,556       19,858        56,395
                                                            -----------  -----------   -----------
       Total cost of revenues (Note 1) ...................    2,984,263      889,730       342,534
                                                            -----------  -----------   -----------
Gross profit .............................................      605,202      484,950       487,129

OPERATING EXPENSES:
    Operation and maintenance:
       Utility ...........................................      214,786      203,284       202,123
       Energy marketing and trading and other ............       67,907       39,874        24,629
    Depreciation and amortization ........................      103,556       94,393        84,173
    Non-recurring charges (Note 8) .......................       26,330         --          48,743
                                                            -----------  -----------   -----------
       Total operating expenses ..........................      412,579      337,551       359,668
                                                            -----------  -----------   -----------
Equity in earnings of joint ventures (Note 7) ............       18,818       28,158        12,883
                                                            -----------  -----------   -----------

OPERATING INCOME .........................................      211,441      175,557       140,344

Other income and (deductions) (Note 12) ..................        3,808        5,389        13,718
Contribution to charitable foundation (Note 8) ...........         --           --          15,000
Interest charges and preferred dividends .................       53,887       53,822        48,839
                                                            -----------  -----------   -----------
Income from continuing operations before income taxes ....      161,362      127,124        90,223

Income taxes (Note 11) ...................................       57,359       44,294        33,394
                                                            -----------  -----------   -----------

INCOME FROM CONTINUING OPERATIONS ........................      104,003       82,830        56,829

Gain on sale of discontinued operations, net of income
    taxes of $35,048 (Note 6) ............................         --           --          51,805
                                                            -----------  -----------   -----------
Income before cumulative effect of change in
    accounting principle .................................      104,003       82,830       108,634

Cumulative effect of change in accounting for post-
    employment benefits, net of income taxes of $2,280 ...         --           --          (3,369)
                                                            -----------  -----------   -----------
NET INCOME ...............................................  $   104,003  $    82,830   $   105,265
                                                            ===========  ===========   ===========

Average common shares outstanding (Note 1) ...............       66,294       66,105        65,982

Earnings per share of common stock (Note 1):
    From continuing operations ...........................  $      1.57  $      1.25   $       .86
    Gain on sale of discontinued operations ..............         --           --             .79
    Cumulative effect of accounting change ...............         --           --            (.05)
                                                            -----------  -----------   -----------
       Total .............................................  $      1.57  $      1.25   $      1.60
                                                            ===========  ===========   ===========
</TABLE>

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


                                       35
<PAGE>

                       LG&E Energy Corp. and Subsidiaries
                           Consolidated Balance Sheets
                                (Thousands of $)
<TABLE>
<CAPTION>
                                                                     December 31
                                                                  1996          1995
                                                                  ----          ----
<S>                                                            <C>           <C>       
ASSETS:
Current assets:
    Cash and temporary cash investments ...................    $  114,669    $   80,144
    Marketable securities (Note 9) ........................         5,815        29,060
    Accounts receivable - less reserve of $6,601 in
       1996 and $6,269 in 1995 ............................       545,729       314,153
    Materials and supplies - primarily at average cost:
       Fuel (predominantly coal) ..........................        14,576        14,996
       Gas stored underground .............................        43,258        47,530
       Other ..............................................        32,426        34,384
    Price risk management assets (Note 4) .................        86,844          --
    Prepayments and other .................................        14,255        27,245
                                                               ----------    ----------
       Total current assets ...............................       857,572       547,512
                                                               ----------    ----------

Other property and investments - less reserve:
    Investments in affiliates (Note 7) ....................       126,099       123,338
    Non-utility property and plant, net (Notes 1 and 2) ...       171,338       173,410
    Price risk management assets (Note 4) .................        36,623          --
    Other .................................................        21,465        23,720
                                                               ----------    ----------
       Total other property and investments ...............       355,525       320,468
                                                               ----------    ----------

Utility plant, at original cost:
    Electric ..............................................     2,218,577     2,160,062
    Gas ...................................................       327,116       305,609
    Common ................................................       139,516       133,189
                                                               ----------    ----------
       Gross utility plant (Note 1) .......................     2,685,209     2,598,860
    Less:  reserve for depreciation .......................       999,987       934,942
                                                               ----------    ----------
       Net utility plant ..................................     1,685,222     1,663,918
                                                               ----------    ----------
Deferred debits and other assets:
    Regulatory assets (Note 3) ............................        27,729        29,926
    Goodwill, net (Notes 1 and 2) .........................        47,318        46,501
    Other .................................................        38,526        20,595
                                                               ----------    ----------
       Total deferred debits and other assets .............       113,573        97,022
                                                               ----------    ----------
           Total assets ...................................    $3,011,892    $2,628,920
                                                               ==========    ==========
CAPITAL AND LIABILITIES:
Current liabilities:
    Long-term debt due within one year ....................    $     --      $   16,000
    Notes payable (Note 15) ...............................       158,000       173,000
    Accounts payable ......................................       528,556       287,457
    Trimble County settlement (Note 17) ...................        17,511        29,800
    Common dividends declared .............................        19,073        18,369
    Accrued taxes .........................................          --           9,812
    Accrued interest ......................................        10,338        11,372
    Price risk management liabilities (Note 4) ............       108,402          --
    Other .................................................        33,955        42,635
                                                               ----------    ----------
       Total current liabilities ..........................       875,835       588,445
                                                               ----------    ----------

Long-term debt ............................................       646,835       646,845

Deferred credits and other liabilities:
    Accumulated deferred income taxes (Notes 1 and 11) ....       288,107       233,481
    Investment tax credit, in process of amortization .....        80,040        84,037
    Accumulated provision for pensions and related benefits        44,773        48,427
    Customers' advances for construction ..................        10,033         9,251
    Regulatory liability (Note 3) .........................        77,287        88,242
    Price risk management liabilities (Note 4) ............        27,482          --
    Other .................................................        54,954        55,730
                                                               ----------    ----------
       Total deferred credits and other liabilities .......       582,676       519,168
                                                               ----------    ----------

Cumulative preferred stock ................................        95,328        95,328

Commitments and contingencies (Note 16)

Common equity .............................................       811,218       779,134
                                                               ----------    ----------

    Total capital and liabilities .........................    $3,011,892    $2,628,920
                                                               ==========    ==========
</TABLE>

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


                                       36
<PAGE>

                       LG&E Energy Corp. and Subsidiaries
                      Consolidated Statements of Cash Flows
                                (Thousands of $)
<TABLE>
<CAPTION>
                                                                    Years Ended December 31
                                                                1996          1995          1994
                                                                ----          ----          ----
<S>                                                           <C>           <C>           <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income ...........................................    $ 104,003     $  82,830     $ 105,265
    Items not requiring cash currently:
       Depreciation and amortization .....................      103,556        94,393        84,173
       Deferred income taxes - net .......................       49,894        13,113        (4,502)
       Investment tax credit - net .......................       (3,997)       (4,742)       (4,619)
       Change in net price risk management assets ........      (13,913)         --            --
       Undistributed earnings of joint ventures ..........       (2,581)       16,269        (7,887)
       Cumulative effect of change in accounting principle         --            --           3,369
       Non-recurring charges .............................       26,330          --          48,743
       Gain on sale of discontinued operations ...........         --            --         (90,878)
       Other .............................................        8,267         5,351        10,698
    Change in certain net current assets:
       Accounts receivable ...............................     (231,576)     (161,649)       26,577
       Materials and supplies ............................        6,650        (8,756)        3,280
       Trimble County settlement .........................      (12,289)       29,800          --
       Accounts payable ..................................      241,099       139,991       (32,938)
       Accrued taxes .....................................       (9,812)       (5,935)        4,480
       Accrued interest ..................................       (1,034)       (2,056)          564
       Prepayments and other .............................        4,310       (22,421)       (6,596)
    Other ................................................      (38,526)       (7,106)       (4,170)
                                                              ---------     ---------     ---------
       Net cash flows from operating activities ..........      230,381       169,082       135,559
                                                              ---------     ---------     ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of securities ..............................      (20,625)     (204,391)     (318,450)
    Proceeds from sales of securities ....................       44,609       319,731       190,636
    Construction expenditures ............................     (115,450)     (104,527)      (96,258)
    Acquisition of LG&E Natural Inc., net of cash
       and temporary cash investments acquired (Note 2) ..         --        (146,104)         --
    Investment in affiliates (Note 7) ....................         (180)      (34,045)      (44,292)
    Proceeds from sale of discontinued operations ........         --            --         170,000
                                                              ---------     ---------     ---------
       Net cash flows from investing activities ..........      (91,646)     (169,336)      (98,364)
                                                              ---------     ---------     ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Issuance of common stock .............................        2,293         2,711         2,025
    Issuance of bonds ....................................       49,745        39,914          --
    Redemption of preferred stock ........................         --         (22,108)         --
    Retirement of bonds ..................................      (67,013)      (43,579)         --
    Repayment of short-term borrowings ...................     (229,500)     (119,632)      (20,000)
    Short-term borrowings ................................      214,500       245,315        32,000
    Payment of common dividends ..........................      (74,235)      (71,630)      (69,190)
                                                              ---------     ---------     ---------
       Net cash flows from financing activities ..........     (104,210)       30,991       (55,165)
                                                              ---------     ---------     ---------

Change in cash and temporary cash investments ............       34,525        30,737       (17,970)

Beginning cash and temporary cash investments ............       80,144        49,407        67,377
                                                              ---------     ---------     ---------

Ending cash and temporary cash investments ...............    $ 114,669     $  80,144     $  49,407
                                                              =========     =========     =========
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
       Income taxes ......................................    $  22,005     $  37,771     $  81,468
       Interest on borrowed money ........................       49,316        48,916        41,042
</TABLE>

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


                                       37
<PAGE>

                       LG&E Energy Corp. and Subsidiaries
                    Consolidated Statements of Capitalization
                                (Thousands of $)
<TABLE>
<CAPTION>
                                                                                                December 31
                                                                                             1996          1995
                                                                                             ----          ----
<S>                                                                                      <C>           <C>      
COMMON EQUITY:
    Common stock, without par value -
       Authorized 125,000,000 shares, outstanding 66,341,444
       shares in 1996 and 66,194,766 shares in 1995 (Note 13) ..................          $ 466,329     $ 463,705
    Common stock expense .......................................................             (1,259)         (928)
    Unrealized gain (loss) on marketable securities, net of income   
       taxes $122 in 1996 and $328 in 1995 (Note 9) ............................                154          (573)
    Retained earnings ..........................................................            345,994       316,930
                                                                                            -------       -------
           Total common equity .................................................            811,218       779,134
                                                                                            -------       -------
</TABLE>

CUMULATIVE PREFERRED STOCK (Note 13):
    Redeemable on 30 days notice by Louisville Gas and Electric
       Company, except $5.875 series

<TABLE>
<CAPTION>
                                                      Shares            Current
                                                   Outstanding      Redemption Price
                                                   -----------      ----------------
<S>                                                  <C>             <C>                     <C>           <C>   
$25 par value, 1,720,000 shares authorized -
   5% series ...................................     860,287         $    28.00              21,507        21,507
Without par value, 6,750,000 shares authorized -                                                        
   Auction rate ................................     500,000             100.00              50,000        50,000
   $5.875 series ...............................     250,000         Not redeemable          25,000        25,000
Preferred stock expense ........................................................             (1,179)       (1,179)
                                                                                             ------       -------
       Total cumulative preferred stock ........................................             95,328        95,328
                                                                                             ------       -------
LONG-TERM DEBT (Note 14):
    First mortgage bonds -
       Series due June 1, 1998, 6 3/4% .........................................             20,000        20,000
       Series due July 1, 2002, 7 1/2% .........................................             20,000        20,000
       Series due August 15, 2003, 6% ..........................................             42,600        42,600
       Pollution control series:                                                         
           K due December 1, 2016, 7 1/4% ......................................               --          27,500
           L due December 1, 2016, 7 1/4% ......................................               --          22,500
           N due February 1, 2019, 7 3/4% ......................................             35,000        35,000
           O due February 1, 2019, 7 3/4% ......................................             35,000        35,000
           P due June 15, 2015, 7.45% ..........................................             25,000        25,000
           Q due November 1, 2020, 7 5/8% ......................................             83,335        83,335
           R due November 1, 2020, 6.55% .......................................             41,665        41,665
           S due September 1, 2017, variable ...................................             31,000        31,000
           T due September 1, 2017, variable ...................................             60,000        60,000
           U due August 15, 2013, variable .....................................             35,200        35,200
           V due August 15, 2019, 5 5/8% .......................................            102,000       102,000
           W due October 15, 2020, 5.45% .......................................             26,000        26,000
           X due April 15, 2023, 5.90% .........................................             40,000        40,000
                                                                                         ----------    ----------
              Total first mortgage bonds .......................................            596,800       646,800
    Pollution control bonds (unsecured) -                                                
       Jefferson County due September 1, 2026, variable                                      22,500          --
       Trimble County due September 1, 2026, variable                                        27,500          --
                                                                                         ----------    ----------
           Total unsecured long-term debt ......................................             50,000          --
                                                                                         ----------    ----------
              Total long-term bonds ............................................            646,800       646,800
    Unamortized premium on bonds ...............................................                 35            45
                                                                                         ----------    ----------
       Total long-term debt ....................................................            646,835       646,845
                                                                                         ----------    ----------
           Total capitalization ................................................         $1,553,381    $1,521,307
                                                                                         ==========    ==========
</TABLE>

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


                                       38
<PAGE>

                       LG&E Energy Corp. and Subsidiaries
                  Consolidated Statements of Retained Earnings
                                (Thousands of $)
<TABLE>
<CAPTION>
                                                                 Years Ended December 31
                                                               1996        1995        1994
                                                               ----        ----        ----
<S>                                                          <C>         <C>         <C>     
Balance January 1 .......................................    $316,930    $307,072    $271,606
Add net income ..........................................     104,003      82,830     105,265
Deduct: Cash dividends declared on common stock
           ($1.13 per share in 1996, $1.0925 in 1995, and
           $1.0575 in 1994) .............................      74,939      72,253      69,799
           Preferred stock redemption expense ...........        --           719        --
                                                             --------    --------    --------

Balance December 31 .....................................    $345,994    $316,930    $307,072
                                                             ========    ========    ========
</TABLE>

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

                          NOTES TO FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation. The consolidated financial statements include the
accounts of LG&E Energy Corp., Louisville Gas and Electric Company (LG&E), LG&E
Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems) and
their respective wholly-owned subsidiaries, collectively referred to herein as
the "Company." All significant intercompany items and transactions have been
eliminated from the consolidated financial statements. Certain reclassification
entries have been made to the 1995 and 1994 financial statements to conform to
the 1996 presentation with no impact on previously reported earnings. The
Company is exempt from regulation as a registered holding company under the
Public Utility Holding Company Act of 1935 (PUHCA).

Cash and Temporary Cash Investments. The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which approximates
fair value.

Gas Stored Underground. The costs of natural gas inventories are included in gas
stored underground in the balance sheets as of December 31, 1996, and 1995.
Utility and non-utility gas inventories were $36 million and $7 million,
respectively, at December 31, 1996, and $32 million and $16 million,
respectively, at December 31, 1995. LG&E accounts for gas inventories using the
average-cost method. Non-utility gas inventories are stated at the lower of
average cost or market.

Utility Plant. LG&E's utility plant is stated at original cost, which includes
payroll-related costs such as taxes, fringe benefits, and administrative and
general costs. Construction work in progress has been included in the rate base,
and, accordingly, LG&E has not recorded any allowance for funds used during
construction.

The cost of utility plant retired or disposed of in the normal course of
business is deducted from utility plant accounts and such cost plus removal
expense less salvage value is charged to the reserve for depreciation. When
complete operating units are disposed of, appropriate adjustments are made to
the reserve for depreciation and gains and losses, if any, are recognized.

Depreciation and Amortization. Utility depreciation is provided on the
straight-line method over the estimated service lives of depreciable plant. The
amounts provided for LG&E in 1996 and 1995 were 3.3% 


                                       39
<PAGE>

(3.2% electric, 3.3% gas, and 6% common); and for 1994, 3.3% (3.2% electric,
3.3% gas, and 5% common). Depreciation of non-utility plant and equipment is
based on the straight-line method over periods ranging from 3 to 25 years.
Intangible assets have been allocated to the subsidiaries' lines of business and
are being amortized over periods ranging from 7 to 40 years.

Financial Instruments. The Company uses financial instruments associated with
its energy trading and price risk management activities which are accounted for
using the mark-to-market method.

The Company also uses over-the-counter interest-rate swap agreements to hedge
its exposure to fluctuations in the interest rates it pays on variable-rate
debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge
its exposure to fluctuations in the value of its investments in the preferred
stocks of other companies. Gains and losses on interest-rate swaps used to hedge
interest rate risk are reflected in interest charges monthly. Gains and losses
on U.S. Treasury note and bond futures used to hedge investments in preferred
stocks are initially deferred and classified as unrealized losses on marketable
securities in common equity and then charged or credited to other income and
deductions when the securities are sold. See Note 4, Price Risk Management and
Financial Instruments.

Debt Premium and Expense. Utility debt premium and expense are amortized over
the lives of the related debt issues, consistent with regulatory practices.

Deferred Income Taxes. Deferred income taxes have been provided for all material
book-tax temporary differences.

Investment Tax Credits. Investment tax credits resulted from provisions of the
tax law that permitted a reduction of the Company's tax liability based on
credits for certain construction expenditures. Deferred investment tax credits
are being amortized to income over the estimated lives of the related property
that gave rise to the credits.

Common Stock. Effective April 15, 1996, the outstanding shares of the Company's
common stock were split on a two-for-one basis. The new shares were issued to
shareholders of record on April 1, 1996. Prior period shares, dividends, and
earnings per share of common stock have been restated to reflect the stock
split.

Revenue Recognition. Effective January 1, 1996, the Company adopted the
mark-to-market method of accounting for its energy trading and price risk
management activities conducted by LG&E Natural Inc. (LG&E Natural) and LG&E
Power Inc. (LPI). Under mark-to-market accounting, the Company's electric power
and natural gas trading contracts, including both physical transactions and
financial instruments, are recorded at market value, net of future servicing
costs and reserves. The market prices used to value these transactions reflect
management's best estimates considering various factors including closing
exchange and over-the-counter quotations, time value and volatility factors of
the underlying commitments. The values are adjusted to reflect the potential
impact of liquidating a position in an orderly manner over a reasonable period
of time under present market conditions.

Changes in the market value of the contract portfolio resulting from newly
originated transactions and price movements are recognized as energy marketing
and trading revenues in the period of the change. The resultant unrealized gains
and losses and related reserves are recorded as price risk management assets and
liabilities.

The Company's prior method of accounting recognized gains and losses when the
underlying physical commodity was delivered. This change in accounting was made
to more fairly present the current results of the Company's operations and to
recognize value creation as contracts are finalized. The effect of this change
was immaterial for prior periods and increased 1996 Energy Marketing and Trading
revenues and income from 


                                       40
<PAGE>

operations by $26.2 million ($15.3 million after tax).

Utility revenues are recorded based on service rendered to customers through
month end. LG&E accrues an estimate for unbilled revenues from each meter
reading date to the end of the accounting period. Under an agreement approved by
the Public Service Commission of Kentucky (Kentucky Commission or Commission),
LG&E has implemented a demand side management program and a "decoupling
mechanism," which allows LG&E to recover a predetermined level of revenue on
electric and gas residential sales. See Management's Discussion and Analysis,
Rates and Regulation, for further discussion. The Company recognized revenues
from non-utility construction activities using the percentage of completion
method of accounting.

Fuel and Gas Costs. The cost of fuel for electric generation is charged to
expense as used, and the cost of gas supply is charged to expense as delivered
to the distribution system.

Management's Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent items 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. See Note 16, Commitments and
Contingencies, for a further discussion.

New Accounting Pronouncements.

Stock-Based Compensation. The Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation in the first quarter
of 1996. It elected to continue to account for its stock-based compensation
plans using the intrinsic-value method. If the Company had used the fair-value
method to account for its plans, net income and earnings per share for all years
presented would not have differed materially from reported amounts.

Long-Lived Assets. The Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121) in the first quarter of 1996.
This new standard requires that long-lived assets and certain intangibles be
reviewed for impairment and possible write-down to fair value whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has performed these impairment reviews on certain
long-lived assets and has determined their carrying amounts to be recoverable.
Management continues to monitor current and anticipated future operating
conditions, legal requirements and regulatory environment for circumstances that
may trigger potential asset impairments.

Transfers and Extinguishments. In June 1996, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 125), effective for all transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996. The
Company plans to adopt the provisions of SFAS No. 125 in the first quarter of
1997. The Company does not expect the adoption of SFAS No. 125 to have a
material adverse impact on its financial position or results of operation.

Environmental Remediation. Effective January 1, 1997, the Company will adopt the
provisions of Statement of Position (SOP) 96-1, Environmental Remediation
Liabilities. This statement provides authoritative guidance for recognition,
measurement, and disclosure of environmental remediation liabilities in
financial statements. Due to the Company's previous recognition of this type of
liability, adoption is not expected to have a material impact on its financial
position or results of operation. See Note 16, Commitments and Contingencies,
for a further discussion on the Company's environmental commitments and
contingencies.


                                       41
<PAGE>

Note 2 - Acquisitions

Argentine Natural Gas Distribution Companies. On February 13, 1997, the Company
acquired interests in two Argentine natural gas distribution companies through
its global venture unit, LG&E International Inc. (LII). LII purchased a
controlling interest in Distribuidora de Gas del Centro and acquired a minority
interest in Distribuidora de Gas del Cuyana. The investment in these companies
totaled approximately $140 million.

LG&E Natural Inc. On May 15, 1995, Gas Systems acquired all of the outstanding
common stock of Hadson Corporation, now known as LG&E Natural Inc., a company
engaged in natural gas marketing, gathering and processing, for $143 million,
plus transaction-related costs and expenses. The Company accounted for the
acquisition as a purchase, and the purchase price was allocated to the assets
and liabilities acquired based on their estimated fair values. Approximately
$33.4 million of goodwill was recorded at the time of purchase. In 1996, after
final determination of liabilities assumed and asset fair values, the Company
increased this amount to $37 million.

A summary of the fair values of the net assets acquired follows (in thousands of
$):

      Fair value of assets acquired                               $277,059
      Liabilities assumed                                          133,948
                                                                  --------
      Cash paid, excluding transaction costs                       143,111
      Cash and cash equivalents acquired                             4,924
                                                                  --------
      Net cash paid, excluding transaction costs                   138,187
      Transaction costs                                              7,917
                                                                  --------
      Net cash paid                                               $146,104
                                                                  ========

LG&E Natural's revenues, cost of revenues, and operating expenses since the date
of acquisition are classified as Energy Marketing and Trading in the 1996 and
1995 Statements of Income. LG&E Natural's operations did not have a material
impact on consolidated gross profit or operating income in 1995.

LG&E Natural's property and equipment is included in the balance sheet under
Non-utility property and plant.

Note 3 - Utility Rates and Regulatory Matters

Accounting for the regulated utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as prescribed
by the Federal Energy Regulatory Commission (FERC) and the Kentucky Commission.
LG&E is subject to Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under
SFAS No. 71, certain costs that would otherwise be charged to expense are
deferred as regulatory assets based on expected recovery from customers in
future rates. Likewise, certain credits that would otherwise be reflected as
income are deferred as regulatory liabilities based on expected flowback to
customers in future rates. Management's expected recovery of deferred costs and
expected flowback of deferred credits is generally based on specific ratemaking
decisions or precedent for each item. The following regulatory assets and
liabilities were included in the consolidated balance sheets as of December 31
(in thousands of $):


                                       42
<PAGE>

                                                      1996         1995
                                                      ----         ----

      Unamortized loss on bonds                     $ 17,162     $ 16,443
      Unamortized extraordinary retirements            4,087        6,935
      Manufactured gas sites                           3,244        3,220
      Other                                            3,236        3,328
                                                    --------     --------
      Total regulatory assets                         27,729       29,926
      Deferred income taxes - net                    (77,287)     (88,242)
                                                    --------     --------
      Regulatory assets and liabilities - net       $(49,558)    $(58,316)
                                                    ========     ========

Substantially all of LG&E's regulatory assets are being recovered through rates
charged to customers. LG&E expects to seek regulatory approval to recover any
remaining regulatory assets in its next general rate case.

Environmental Cost Recovery. On April 6, 1995, in response to an application
filed by LG&E, the Commission approved, with modifications, an environmental
cost recovery surcharge that increased electric revenues by $3.2 million in 1995
and $2.4 million in 1996. The surcharge became effective May 1, 1995.

An appeal of the Commission's April 6 order by various intervenors in the
proceeding (including the Kentucky Attorney General) is currently pending in the
Franklin Circuit Court of Kentucky. LG&E is contesting the legal challenges to
the surcharge, but cannot predict the outcome of the appeal. The amount of
refunds that may be ordered, if any, are not expected to have a material adverse
effect on the Company's financial position or results of operations. See Rates
and Regulation under Management's Discussion and Analysis for a further
discussion.

Note 4 - Price Risk Management and Financial Instruments

Price Risk Management. The Company engages in price risk management activities
related to electricity and natural gas. In addition to the purchase and sale of
these physical commodities, the following instruments are utilized by the
Company: forward contracts which commit the Company to purchase or sell energy
in the future; swap agreements, which require payments to (or receipt of
payments from) counterparties based on the differential between a fixed price
and index-based price for the underlying commodity; written and purchased
options settled in delivery of the underlying commodity; exchange traded and
over-the-counter futures and options contracts; as well as tolling and other
contractual arrangements.

The availability and use of these types of contracts allow the Company to manage
and hedge its contractual commitments, reduce its exposure relative to the
volatility of cash market prices, and take advantage of selected arbitrage
opportunities via open positions. The Company is also able to secure additional
sources of physical supply or create additional markets for existing supply
through the use of exchange for physical (EFP) transactions allowed by the New
York Mercantile Exchange.

The notional amounts and terms of such contracts held by the Company at December
31, 1996, in which the Company receives or pays a fixed price for the underlying
commodity are as follows:

                                                  Fixed         Fixed    Maximum
                                   Unit of        Price         Price    Term in
      Product                      Measure        Payor      Receiver      Years
      -------                      -------        -----      --------      -----

      Electricity         Thousands of Mwh       63,481        60,696         10
      Natural gas         Millions of MBtu    1,147,990     1,117,732          3

The weighted average term of the Company's natural gas price risk management
contracts as of December 31, 1996 was approximately eight months. The weighted
average term of the Company's electric power price risk 


                                       43
<PAGE>

management contracts at that date was approximately one year.

The Company will at times create a net open position or allow a net open
position to continue when it believes that future changes in prices will make
the positions profitable. These net open positions could result in losses for
the Company if prices do not move in the manner or direction expected. The
Company has established trading policies designed to limit the Company's
exposure to price risk, and it continually monitors and reviews these policies
to ensure they are responsive to changing business conditions. Based on the
Company's net positions at December 31, 1996, a 3% movement in electric and
natural gas market prices would have affected net income by approximately $4.6
million.

The fair value of the price risk management assets and liabilities as of
December 31, 1996 and the average fair value of those instruments held during
the year are set forth below (in thousands of $):

<TABLE>
<CAPTION>
                                                                                 Average Fair
                                                   Fair Value                    Value for the
                                                      as of                       Year Ended
                                                    12/31/96                       12/31/96

                                             Assets     Liabilities        Assets       Liabilities
                                             ------     -----------        ------       -----------
<S>                                        <C>             <C>            <C>               <C>    
      By Counterparty:
      Marketers                            $ 56,148        $ 77,931       $45,897           $47,719
      Energy producers                       40,729           9,322        20,373             5,856
      Financial institutions                 10,505          21,366        10,292            13,394
      Industrial and commercial users         3,390           2,308         1,589             1,045
      Gas transmission companies                 70           2,204            68             1,382
      Other                                  12,625          15,512        11,721             8,696
                                           --------       ---------        ------             -----

      Total                                 123,467         128,643       $89,940           $78,092
                                                                          =======           =======
      Reserves                                 --            7,241
                                           --------       ---------

      Net values                           $123,467        $135,884
                                           ========        ========
</TABLE>

The values assigned to the Company's price risk management assets and
liabilities reflect quotes from exchanges and over-the-counter markets, use of
established pricing models, the time value of money, and price volatility
factors. They also reflect counterparty credit risk, location differentials, and
the potential impact of liquidating the Company's position in an orderly manner
over a reasonable period of time under present market conditions.

The Company maintains policies intended to minimize counterparty credit risk.
With respect to the Company's price risk management assets, commitments with 35
customers represent approximately 70% of these assets at December 31, 1996.

Other Financial Instruments. At December 31, 1996, the Company had a short
position in U.S. Treasury note and bond futures contracts with notional amounts
totaling $3 million. These contracts are used to hedge price risk associated
with certain marketable securities and mature in March 1997.

At December 31, 1996, the Company was a party to six interest-rate swap
agreements. Two of the swaps have notional amounts of $15 million each, and the
Company uses them to hedge its exposure to changes in the interest rates paid on
$30 million of LG&E's Pollution Control Bonds, Variable Rate Series, due
September 1, 2017. One of these swaps will mature in September 1997, and the
other in September 1999. The Company paid interest at average fixed rates on the
swaps of 4.55% in 1996, 1995, and 1994, and received interest at 


                                       44
<PAGE>

average variable rates based on the JJ Kenny Index of 3.46% in 1996, 3.87% in
1995, and 2.84% in 1994.

The Company entered into the other four swaps in the first quarter of 1996 to
hedge some of its notes payable. The notional amounts on these swaps total $75
million, and they mature at various times from February 1997 through April 1997.
In 1996, the Company paid an average fixed rate on the swaps of 4.94% and
received an average variable rate based on the three-month London Interbank
offered rate of 5.46%.

The Company entered into two additional interest-rate swaps in January 1997 to
hedge some of its notes payable. The notional amounts on these swaps total $50
million, and they mature in November 1997 and January 1998. The Company will pay
an average fixed rate on the swaps of 5.82%. The average variable receive rate
is based on the three-month London Interbank offered rate and currently equals
5.59%.

The cost and estimated fair values of the Company's financial instruments
(excluding the fair values of the Company's price risk management assets and
liabilities) used for non-trading as of December 31, 1996 and 1995 follow (in
thousands of $):

<TABLE>
<CAPTION>
                                                1996                      1995
                                                ----                      ----
                                                        Fair                      Fair
                                           Cost        Value         Cost        Value
<S>                                    <C>         <C>           <C>         <C>      
      Marketable securities            $  5,539    $   5,815     $ 29,961    $  29,060
      Long-term investments:
        Not practicable to estimate
           fair value                     4,156        4,156        4,083        4,083
      Preferred stock subject
        to mandatory redemption          25,000       24,938       25,000       25,000
      Long-term debt                    646,800      662,721      662,800      688,977
      U.S. Treasury note and
        bond futures                       --             10         --           (187)
      Interest rate swaps                  --           (192)        --           (522)
</TABLE>

All of the above valuations reflect prices quoted by exchanges except for the
swaps and the long-term investments. The fair values of the swaps reflect price
quotes from dealers or amounts calculated using accepted pricing models. The
fair values of the long-term investments reflect cost, since the Company cannot
reasonably estimate fair value.

Note 5 - Concentrations of Credit and Other Risk

Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on- or off-balance sheet) relate to
groups of customers or counterparties that have similar economic or industry
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.

LG&E's customer receivables and gas and electric revenues arise from deliveries
of natural gas to approximately 277,000 customers and electricity to
approximately 351,000 customers in Louisville and adjacent areas in Kentucky.
For the year ended December 31, 1996, 74% of total utility revenue was derived
from electric operations and 26% from gas operations.

The financial position and results of operations of the domestic joint ventures
described in Note 7, Investments in Joint Ventures, and Note 16, Commitments and
Contingencies, are dependent upon the continuation of long-term power sales
contracts with neighboring utilities.


                                       45
<PAGE>

Refer to Note 4, Price Risk Management and Financial Instruments, for a
discussion of concentrations relating to price risk management activities.

LG&E's operation and maintenance employees are members of the International
Brotherhood of Electrical Workers (IBEW) Local 2100 which represents
approximately one-half of the Company's workforce. LG&E's collective bargaining
agreement with IBEW employees expires in November 1998.

Note 6 - Discontinued Operations

In January 1994, the Company sold its 36.5% partnership interest in Natural Gas
Clearinghouse (NGC) for $170 million. The transaction resulted in an after-tax
gain of approximately $52 million. The Company's interest in NGC was acquired in
1992 at a cost of approximately $70 million and was accounted for as a purchase.

Note 7 - Investments in Joint Ventures

The Company's investments in joint ventures reflect interests in general
partnerships and foreign entities held by LPI and LII in electric power and
steam producing plants. These investments are accounted for using the equity
method.

The fuel type, ownership percentages and carrying amounts of the joint ventures
as of December 31, 1996 are summarized below (in thousands of $):

<TABLE>
<CAPTION>
                                                                              Carrying
                                                       Fuel Type   % Owned      Amount
                                                       ---------   -------      ------
<S>                                                  <C>                <C>   <C>     
      LG&E Westmoreland - Southampton                       Coal        50    $ 14,758
      LG&E Westmoreland - Altavista                         Coal        50      11,704
      LG&E Westmoreland - Hopewell                          Coal        50      10,591
      LG&E Westmoreland - Rensselaer                 Natural Gas        50      10,052
      Westmoreland - LG&E Partners                          Coal        50      28,581
      Windpower Partners 1993                               Wind        50      22,766
      Windpower Partners 1994                               Wind        25       4,996
      Central Termica San Miguel de Tucuman, S.A     Natural Gas        33      18,198
      KW Tarifa, S.A                                        Wind        46       4,453
                                                                              --------
                                                                    
      Total                                                                   $126,099
</TABLE>

With respect to the first seven projects listed above, certain of the Company's
partners (or affiliates of such partners) are in bankruptcy proceedings. See
Note 16, Commitments and Contingencies.

The Company's carrying amount exceeded the underlying equity in joint ventures
by $25.3 million and $26.4 million at December 31, 1996, and 1995, respectively.
This difference, which is being amortized, represents adjustments to reflect the
fair value of the underlying net assets acquired in 1991, in conjunction with
the purchase of LPI, and related goodwill.

In August 1995, LPI redeemed its 50% ownership interest in UC Operating Services
(UCOS), a partnership with Constellation Energy, Inc. formed to provide
operation and maintenance services to independent power production facilities.
LPI purchased for $3.2 million the existing operation and maintenance contracts
and certain net assets relating to the facilities in which they also have an
ownership interest. The operation and maintenance contracts have remaining terms
ranging from 20 to 23 years. LPI is amortizing consideration paid for the
contracts over a similar period.


                                       46
<PAGE>

In June 1995, Babcock-Ultrapower West Enfield and Babcock-Ultrapower Jonesboro,
two partnerships which were 17%-owned by LPI, sold power purchase contracts to
Bangor Hydro-Electric Company. Subsequent to the sale, the partnerships reduced
the carrying amounts of their remaining assets to estimated net realizable
value. Equity in Earnings of Joint Ventures in the Company's Statement of Income
for 1995 includes $9.7 million representing LPI's interest in the gains on the
sales. In October 1996, the plants were sold to a third party and the Company's
interests in the partnerships were liquidated.

Note 8 - Non-Recurring Charges

In the fourth quarter of 1996, LG&E Natural discovered that a marketer in its
Calgary, Alberta, office had engaged in unauthorized transactions, resulting in
significant losses in the Company's Canadian natural gas marketing business. The
Company recorded an expense of $17.1 million (U.S.) after income taxes to
reflect the losses. The activities of the marketer, which occurred primarily
within the last weeks prior to discovery, included creating unsupported purchase
and sales agreements. Management believes it has taken appropriate steps
necessary to mitigate the likelihood of these events recurring. The Company is
pursuing criminal and civil actions associated with this event. See Note 16,
Commitments and Contingencies. Also, LG&E Natural's insurance carrier has been
notified of the Company's intent to pursue claims under the Company's blanket
crime policy, which covers certain losses up to $10 million per event.

As part of a study of its business strategy and realignment during 1994, LG&E
re-evaluated its regulatory strategy which previously had been to seek full
recovery of certain costs deferred in accordance with prior precedents
established by the Commission. As a result of this re-evaluation, LG&E wrote off
certain expenses that had previously been deferred amounting to approximately
$38.6 million before taxes. While LG&E continues to believe that it could have
reasonably expected to recover these costs in future rate proceedings before the
Commission, LG&E decided to deduct these expenses currently and not seek
recovery for such expenses in future rates due to increasing competitive
pressures and the existing and anticipated future economic conditions. LPI
recorded a reserve for $10.1 million, before taxes, for the costs related to
vacating leased office space.

In the first quarter of 1994, the Board of Directors of the Company approved the
formation of a tax-exempt charitable foundation (Foundation) that makes
charitable contributions to qualified persons and entities. In 1994, the Company
recorded a pre-tax charge against income and made an irrevocable payment of $15
million to fund the Foundation. The Foundation is exempt from Federal income tax
under the Internal Revenue Code.

Note 9 - Marketable Securities

The Company's marketable securities have been determined to be
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Proceeds from sales of available-for-sale securities in 1996 were
approximately $44.6 million, which resulted in realized gains of approximately
$.5 million and losses of approximately $1.4 million, calculated using the
specific identification method. Proceeds from sales of available-for-sale
securities in 1995 were approximately $319.7 million, which resulted in realized
gains of approximately $3.4 million and losses of approximately $6.9 million.

Approximate cost, fair value, and other required information about the Company's
available-for-sale securities by major security type as of December 31, 1996 and
1995, follow (in thousands of $):


                                       47
<PAGE>

<TABLE>
<CAPTION>
                                                              Fixed
                                                Equity       Income        Total
                                                ------       ------        -----
<S>                                            <C>         <C>          <C>     
      1996:
      Cost                                     $ 4,833     $    706     $  5,539
      Unrealized gains                           2,109         --          2,109
      Unrealized losses                         (1,789)         (44)      (1,833)
                                               -------     --------     --------
      Fair values                              $ 5,153     $    662     $  5,815
                                               =======     ========     ========
      Fair values:
        No maturity                            $ 4,255     $   --       $  4,255
        Contractual maturities:
           Less than one year                      898         --            898
           One to five years                      --           --           --
           Five to ten years                      --           --           --
           Over ten years                         --            662          662
           Not due at a single maturity date      --           --           --
                                               -------     --------     --------
      Total fair values                        $ 5,153     $    662     $  5,815
                                               =======     ========     ========
      1995:
      Cost                                     $ 9,187     $ 20,774     $ 29,961
      Unrealized gains                              58            4           62
      Unrealized losses                           (312)        (651)        (963)
                                               -------     --------     --------
      Fair values                              $ 8,933     $ 20,127     $ 29,060
                                               =======     ========     ========
      Fair values:
        No maturity                            $ 8,222     $   --       $  8,222
        Contractual maturities:
           Less than one year                      711        6,424        7,135
           One to five years                      --          9,283        9,283
           Five to ten years                      --            831          831
           Over ten years                         --          2,912        2,912
           Not due at a single maturity date      --            677          677
                                               -------     --------     --------
      Total fair values                        $ 8,933     $ 20,127     $ 29,060
                                               =======     ========     ========
</TABLE>

Note 10 - Pension Plans and Retirement Benefits

Pension Plans. The Company has two non-contributory, defined-benefit pension
plans, that cover eligible employees of the LG&E Energy Corp. corporate staff
and LG&E. Retirement benefits are based on the employee's years of service, age
at retirement and compensation. The Company's policy is to fund annual actuarial
costs, up to the maximum amount deductible for income tax purposes, as
determined under the frozen entry age actuarial cost method. The assets of the
plans consist primarily of common stocks, corporate bonds and United States
government securities.

The Company also has supplemental executive retirement plans that cover eligible
officers of the Company. The plans provide retirement benefits based on average
earnings during the final three or five years prior to retirement, reduced by
social security benefits, any pension benefits received from plans of prior
employers, and by amounts received under the pension plans mentioned in the
preceding paragraph. For LPI officers, retirement benefits are reduced by an
equivalent pension amount derived from contributions to their 401(k) savings
plan.

Pension costs were $5,403,000 for 1996, $5,768,000 for 1995, and $4,996,000 for
1994, of which approximately $751,000, $761,000, and $693,000, respectively, was
charged to construction.


                                       48
<PAGE>

The components of periodic pension expense are shown below (in thousands of $):

<TABLE>
<CAPTION>
                                                            1996         1995         1994
                                                            ----         ----         ----
<S>                                                       <C>          <C>          <C>     
      Service cost - benefits earned during the period    $  5,566     $  4,805     $  5,134
      Interest cost on projected benefit obligation         17,276       14,761       13,377
      Actual return on plan assets                         (32,250)     (46,107)        (494)
      Amortization of transition asset                      (1,079)      (1,079)      (1,079)
      Net amortization and deferral                         15,890       33,388      (11,942)
                                                          --------     --------     --------
        Net pension cost                                  $  5,403     $  5,768     $  4,996
                                                          ========     ========     ========
</TABLE>

The funded status of the pension plans at December 31 is shown below (in
thousands of $):

<TABLE>
<CAPTION>
                                                                  1996          1995
                                                                  ----          ----
<S>                                                            <C>           <C>      
      Actuarial present value of accumulated plan benefits:
           Vested                                              $ 182,490     $ 169,812
           Non-vested                                             21,770         9,807
                                                               ---------     ---------
           Accumulated benefit obligation                        204,260       179,619
           Effect of projected future compensation                33,417        33,741
                                                               ---------     ---------
           Projected benefit obligation                          237,677       213,360
           Plan assets at fair value                             240,733       209,931
                                                               ---------     ---------
           Plan assets in excess of (less than)
              projected benefit obligation                         3,056        (3,429)
           Unrecognized net transition asset                     (10,088)      (11,166)
           Unrecognized prior service cost                        45,064        29,434
           Unrecognized net gain                                 (65,009)      (42,937)
                                                               ---------     ---------

      Accrued pension liability                                $ (26,977)    $ (28,098)
                                                               =========     =========
</TABLE>

The assumptions used in determining the actuarial valuations are as follows:

                                                           1996             1995
                                                           ----             ----

      Assumed discount rate to determine
        projected benefit obligation                      7.75%            7.50%
      Assumed long-term rate of return                               
        on plan assets                                    8.50%            8.50%
      Assumed annual rate of increase in
        future compensation levels                2.00% - 4.25%    3.50% - 4.00%

Post-Retirement Benefits. The Company provides certain health care and life
insurance benefits for eligible retired employees. Post-retirement health care
benefits are subject to a maximum amount payable by the Company. The Company
accrues for the expected cost of post-retirement benefits other than pensions
during the employee's years of service with the Company. The discounted present
value of the post-retirement benefit obligation at the date of adoption is being
amortized over 20 years.


                                       49
<PAGE>

Post-retirement benefit costs are shown below (in thousands of $):

                                                  1996      1995      1994
                                                  ----      ----      ----

      Service cost                              $  803    $  614    $  647
      Interest cost                              2,994     2,717     2,400
      Amortization of transition obligation      1,341     1,341     1,341
      Amortization of prior service cost           332      --        --
                                                ------    ------    ------

      Post-retirement benefit cost              $5,470    $4,672    $4,388
                                                ======    ======    ======

The accumulated post-retirement benefit obligation at December 31 is shown below
(in thousands of $):

                                                            1996          1995
                                                            ----          ----

      Retirees                                          $(18,568)    $(19,965)
      Fully eligible active employees                     (4,837)      (2,780)
      Other active employees                             (16,819)     (15,267)
                                                        --------     --------
      Accumulated post-retirement benefit obligation     (40,224)     (38,012)
      Plan assets at fair value                            2,297         --
      Unrecognized prior service cost                      3,788         --
      Unrecognized transition obligation                  21,452       22,793
      Unrecognized net loss                                  500        3,513
                                                        --------     --------
      Accrued post-retirement benefit liability         $(12,187)    $(11,706)
                                                        ========     ========

The accumulated post-retirement benefit obligation was determined using an
assumed discount rate of 7.75% for 1996 and 7.5% for 1995. Assumed compensation
increases for projected life insurance benefits for affected groups was 4% for
1996 and 1995. An assumed health care cost trend rate of 10% was assumed for
1996, gradually decreasing to 5% in eight years and thereafter.

A 1% increase in the assumed health care cost trend rate would increase the
accumulated post-retirement benefit obligation by approximately $2 million and
the annual service and interest cost by approximately $200,000. In 1996, the
Company began funding certain liabilities for post-retirement benefits through a
tax-deductible funding vehicle. The plan assets are being held in two voluntary
employee benefit association (VEBA) trusts and are invested primarily in
short-term United States government securities.

Thrift Savings Plans. The Company has Thrift Savings Plans under Section 401(k)
of the Internal Revenue Code. Under these plans, eligible employees may defer
and contribute to the plan a portion of current compensation in order to provide
future retirement benefits. The Company makes contributions to the plans by
matching a portion of employee's contributions. These costs were approximately
$2.9 million for 1996, $3.1 million for 1995, and $3.3 million for 1994.


                                       50
<PAGE>

Note 11 - Federal and State Income Taxes

Components of income tax expense from continuing operations are shown in the
table below (in thousands of $):

                                                 1996         1995         1994
                                                 ----         ----         ----

      Included in Income Taxes:
        Current - federal                    $ 18,193     $ 32,526     $ 33,483
                - state                        (6,731)       3,397        9,032
        Deferred- federal - net                34,246        8,943       (4,560)
                - state - net                  15,648        4,170           58
      Deferred investment tax credit              409         --           --
      Amortization of investment tax credit    (4,406)      (4,742)      (4,619)
                                             --------     --------     --------

      Total                                  $ 57,359     $ 44,294     $ 33,394
                                             ========     ========     ========

Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):

                                                        1996          1995
                                                        ----          ----

      Deferred tax liabilities:
        Depreciation and other
           plant-related items                      $403,934      $375,963
        Other liabilities                             29,568        11,990
                                                    --------      --------
                                                     433,502       387,953
                                                    --------      --------
      Deferred tax assets:
        Investment tax credit                         32,306        33,919
        Income taxes due to customers                 31,195        32,363
        Net operating loss carryforward               22,857        20,956
        Deferred income                               13,430        13,179
        Accrued liabilities not currently
           deductible and other                       45,607        54,055
                                                    --------      --------
                                                     145,395       154,472
                                                    --------      --------

      Net deferred income tax liability             $288,107      $233,481
                                                    ========      ========

Net operating loss carryforwards related to the LG&E Natural acquisition total
$121 million at December 31, 1996. These carryforwards, which expire in 1997
through 2009, are subject to an annual limitation of approximately $5.5 million
under Sections 382 and 383 of the Internal Revenue Code, and realization is
dependent upon generating sufficient taxable income prior to their expiration.
At December 31, 1996 and 1995, the Company recorded valuation allowances of
$25.6 million and $29.5 million, respectively, related to these deferred tax
assets. Unamortized goodwill will be reduced if unrecorded net operating loss
carryforwards are realized.

A reconciliation of differences between the statutory U.S. federal income tax
rate and the Company's effective income tax rate for continuing operations
follows:


                                       51
<PAGE>

                                                       1996      1995      1994
                                                       ----      ----      ----

      Statutory federal income tax rate               35.0%     35.0%     35.0%
      State income taxes net of federal benefit        6.2       5.0       6.2
      Investment and other tax credits                (3.9)     (4.7)     (5.6)
      Reduction of taxes provided in prior years      (3.0)     (1.3)       --
      Other differences - net                           .3       (.8)      (.8)
                                                      ----      ----      ----

      Effective income tax rate                       34.6%     33.2%     34.8%
                                                      ====      ====      ====

Note 12 - Other Income and Deductions

Other income and deductions consisted of the following at December 31 (in
thousands of $):

                                                  1996         1995        1994
                                                  ----         ----        ----

      Fee income (expense)                    $  --       $   --       $  6,092
      Losses on securities - net                 (953)      (3,465)      (2,138)
      Interest and dividend income              5,965       10,195       11,690
      Gains on fixed asset disposals - net        (36)       1,089        1,772
      Donations                                  (361)        (356)      (1,285)
      Other                                      (807)      (2,074)      (2,413)
                                              -------     --------     --------

      Total other income and (deductions)     $ 3,808     $  5,389     $ 13,718
                                              =======     ========     ========

Note 13 - Capital Stock

Effective April 15, 1996, the outstanding shares of the Company's common stock
were split on a two-for-one basis. In addition, the Company's shareholders
approved an increase in the Company's authorized shares from 75,000,000 to
125,000,000 on April 23, 1996. Prior period shares of common stock have been
restated in the financial statements and in this note to reflect the stock
split.

Changes in shares of common stock outstanding are shown in the table below (in
thousands):

                                                1996       1995       1994
                                                ----       ----       ----

      Outstanding January 1                   66,195     66,032     65,912
      Issues under the Employee
        Common Stock Purchase
        Plan (1996, $1,457;
        1995, $1,354; 1994, $1,377)               77         80         82
      Issues under the Omnibus
        Long-Term Incentive Plan
        (1996, $1,167; 1995, $1,371;
        1994, $663)                               69         83         38
                                              ------     ------     ------

      Outstanding December 31                 66,341     66,195     66,032
                                              ======     ======     ======

The Company has a Long-Term Incentive Plan, under which nonqualified stock
options, performance units and stock appreciation rights have been granted to
key personnel. A total of 2,699,250 shares of common stock have been reserved
for issuance under the plan. Directors of the Company receive stock options
pursuant to the Stock Option Plan for Non-Employee Directors. A total of 500,000
shares of common stock have been reserved for issuance under this plan. Each
option entitles the holder to acquire one share of the Company's stock no


                                       52
<PAGE>

earlier than one year from the date granted. The options are granted at market
value and generally expire 10 years from the date granted. Performance units are
paid out on a three year rolling basis in 50% stock and 50% cash based on
Company performance.

A summary of the status of the Company's nonqualified stock options follows:

                                     Out-        Exer-        Option Price
                                 standing      cisable           per Share
                                 --------      -------           ---------

      As of December 31, 1993     307,766      153,756     $12.93 - $19.60
        Options granted and
           exercisable            240,630      154,010     $15.28 - $19.60
        Options exercised         (32,094)     (32,094)    $12.93 - $18.02
        Options cancelled         (31,774)     (19,090)    $15.28 - $19.60
                                 --------     --------     ---------------

      As of December 31, 1994     484,528      256,582     $12.93 - $19.60
        Options granted and
           exercisable            150,690      137,946     $18.08 - $19.71
        Options exercised         (60,522)     (60,522)    $12.93 - $19.30
        Options cancelled         (61,146)      (1,620)    $18.69 - $19.71
                                 --------     --------     ---------------

      As of December 31, 1995     513,550      332,386     $12.93 - $19.71
        Options granted and
           exercisable            415,348      158,914     $18.69 - $21.22
        Options exercised         (48,226)     (48,226)    $12.93 - $19.71
        Options cancelled         (16,328)        --       $19.71 - $21.22
                                 --------     --------     ---------------

      As of December 31, 1996     864,344      443,074     $12.93 - $21.22
                                 ========     ========     ===============

Common stock equivalents resulting from the options granted under both the
Long-Term Plan and the Directors' Plan would not have a material dilutive effect
on reported earnings per share.

The Company has a Shareholders Rights Plan designed to protect shareholders'
interests in the event the Company is ever confronted with an unfair or
inadequate acquisition proposal. Pursuant to the plan, each share of common
stock has one-third of a "right" entitling the holder to purchase from the
Company one one-hundredth of a share of new preferred stock of the Company under
certain circumstances. The holders of the rights will, under certain conditions,
also be entitled to purchase either shares of common stock of LG&E Energy Corp.
or common stock of the acquirer at a reduced percentage of market value. The
rights will expire in the year 2000.

In December 1995, LG&E redeemed the 858,128 outstanding shares of its 7.45%
Cumulative Preferred Stock with a par value of $25 per share at a redemption
price of $25.75 per share.

Note 14 - First Mortgage Bonds and Pollution Control Bonds

Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other
than the First Mortgage Bonds issued in connection with the Pollution Control
Bonds) are the amounts necessary to redeem 1% of the highest principal amount of
each series of bonds at any time outstanding. Property additions (166 2/3% of
principal amounts of bonds otherwise required to be so redeemed) have been
applied in lieu of cash. It is the intent of LG&E to apply property additions to
meet 1997 sinking fund requirements of the First Mortgage Bonds.


                                       53
<PAGE>

The trust indenture securing the First Mortgage Bonds constitutes a direct first
mortgage lien upon substantially all property owned by LG&E. The indenture, as
supplemented, provides in substance that, under certain specified conditions,
portions of retained earnings will not be available for the payment of dividends
on common stock. No portion of retained earnings is presently restricted by this
provision.

Pollution Control Bonds (LG&E Projects) issued by Jefferson and Trimble
Counties, Kentucky, are secured by the assignment of loan payments by LG&E to
the Counties pursuant to loan agreements, and further secured by the delivery
from time to time of an equal amount of LG&E's First Mortgage Bonds, Pollution
Control Series. First Mortgage Bonds so delivered are summarized in the
Statements of Capitalization. No principal or interest on these First Mortgage
Bonds is payable unless default on the loan agreements occurs. The interest rate
reflected in the Statements of Capitalization applies to the Pollution Control
Bonds.

In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky, and
$27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due September 1, 2026. Interest rates for these bonds were 3.60%
and 3.57%, respectively, as of December 31, 1996. In December 1996, the proceeds
from the bonds were used to redeem the outstanding 7.25% Series of Jefferson
County and Trimble County Pollution Control Bonds due December 1, 2016.

On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million
matured and were retired by the Company.

In April 1995, LG&E issued $40 million of Jefferson County, Kentucky, Pollution
Control Bonds, 5.90% Series, due April 15, 2023. The proceeds of the bonds were
used to redeem the outstanding 9.25% Series of Pollution Control Bonds due July
1, 2015.

LG&E's First Mortgage Bonds, 6.75% Series of $20 million is scheduled to mature
in 1998. There are no scheduled maturities of Pollution Control Bonds for the
five years subsequent to December 31, 1996. The Company has no cash sinking fund
requirements.

Note 15 - Notes Payable

Energy Systems had notes payable of $47 million at December 31, 1996, and 1995,
at weighted average interest rates of 5.83% and 6.13%, respectively. Gas Systems
had notes payable of $111 million and $126 million at a weighted average
interest rate of 5.83% and 5.98%, respectively, at December 31, 1996 and 1995.
LG&E Energy Corp. and LG&E had no notes payable at December 31, 1996, and 1995.

At December 31, 1996, lines of credit were in place totaling $590 million ($200
million for LG&E, $150 million for Energy Systems, $215 million for Gas Systems,
and $25 million for LG&E Energy Corp.), for which the companies pay commitment
or facility fees. Unused capacity under these lines totaled $375.5 million after
consideration of the above borrowings and approximately $56.5 million in letters
of credit securing on and off balance sheet commitments. The credit lines are
scheduled to expire at various points in time from 1997 through 2001. Management
expects to renegotiate these lines when they expire.

The lenders under the credit facilities for Energy Systems and Gas Systems are
entitled to the benefits of Support Agreements with LG&E Energy Corp. The
Support Agreements state, in substance, that LG&E Energy Corp. will provide
Energy Systems and Gas Systems with the necessary funds and financial support to
meet their obligations under the credit facilities.


                                       54
<PAGE>

Note 16 - Commitments and Contingencies

Construction Program. The Company had commitments, primarily in connection with
the construction program of LG&E, aggregating approximately $7 million at
December 31, 1996. LG&E's construction expenditures for the years 1997 and 1998
are estimated to total approximately $250 million. Non-utility construction
expenditures for the same two year period are estimated to be $44 million.

Letters of Credit. Energy Systems has provided letters of credit and various
other guarantees to third parties which totaled approximately $31.4 million and
$33.7 million as of December 31, 1996 and 1995, respectively.

Gas Systems has provided letters of credit issued to third parties to secure
certain off-balance sheet obligations (including contingent obligations) of LG&E
Natural and its subsidiaries. The letters of credit securing such obligations
totaled approximately $6.6 million and $11 million at December 31, 1996 and
1995.

These letters of credit are subject to Support Agreements as more fully
described in Note 15, Notes Payable.

Project Contingencies.

Southampton. The Southampton plant, a 63 megawatt coal-fired cogeneration
facility in Franklin, Virginia, supplies process steam to a nearby chemical
manufacturer and bulk electric power under contract to Virginia Electric and
Power Company (Virginia Power) as a qualifying facility (QF) under the Public
Utility Regulatory Policies Act (PURPA). The plant began commercial operation in
1992. In July 1994, FERC denied the request of LG&E-Westmoreland Southampton
(the Partnership) for a waiver of certain QF requirements. The Partnership
subsequently filed a request seeking a reversal of FERC's order, or, in the
alternative, a clarification of FERC's order stating that, with the exception of
rates, the Partnership remains a QF for 1992 exempt from regulation as a public
utility under PUHCA, utility laws in Virginia and various portions of the
Federal Power Act.

In July 1996, the FERC entered an order in the Southampton case which included a
policy statement regarding all QF facilities which fail temporarily to meet QF
standards. The order affirmed the continued availability to Southampton of
exemptions from PUHCA and state law for the year 1992, supporting the
Partnership's request that the ruling on non-compliance should have no effect on
the exemptions from regulations that would have classified the plant as a public
utility. The FERC's decision to uphold these exemptions eliminates potential
issues involving provisions of PUHCA, Virginia utility law and the non-rate
provisions of the Federal Power Act.

The FERC also concluded that the Partnership should refund a portion of the
rates it received from Virginia Power during 1992. The Company had anticipated
that the Partnership could be required to make a refund to Virginia Power in the
event the QF standards for 1992 were not waived. The order calls for a refund
with interest from the Partnership of the difference between the amount paid by
Virginia Power during the period and the amount Virginia Power would have paid
for energy if it had purchased energy at its incremental energy rate. The
Company's share of the revenues received by the Partnership in 1992 is
approximately $9.5 million. The amount of the refund is currently unknown,
pending further FERC review. In August 1996 the Partnership filed a Request for
Clarification to better understand what the Commission intended and filed a
Request for Rehearing on the grounds that the order violated the statutory
standard for just and reasonable rates. In September 1996, the Partnership filed
a motion for review at the U.S. Court of Appeals for the District of Columbia
Circuit. In November 1996, the Partnership requested FERC approval for the
contract rates it charged during the period of non-compliance minus a $500,000
refund offered by the Partnership. The Company continues to study the order and,
at this time, 

                                       55
<PAGE>

cannot predict what, if any, further action it may take, cannot predict the
determinations of FERC on the pending motions, and cannot predict what action
Virginia Power may take.

Westmoreland Bankruptcy. On December 23, 1996, Westmoreland Coal Company and its
four first tier subsidiaries filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. One of these subsidiaries, Westmoreland Energy, Inc. (WEI)
is the direct parent of the various entities that are partners in partnerships
with LG&E Energy subsidiaries (including the Partnership and WLP (as defined
herein)) which own six independent generating facilities. None of those
partnerships and no partner of those partnerships is under bankruptcy court
protection. It is unclear at this time what effect these filings will have on
the value of the partnerships. Although there is no current default occasioned
by the filings, defaults could occur under project loan agreements if not
remedied within the specified time period. If a default occurred which was not
cured within the allowed time, the lenders would have the right, among other
things, to accelerate the outstanding loans. These loans, which are non-recourse
to the Company above the partnership level, totaled $622.4 million at December
31, 1996.

Roanoke Valley I. The Company owns a 50% interest in Westmoreland-LG&E Partners
(WLP), the sole owner of Roanoke Valley I, a cogeneration facility selling
electric power to Virginia Power and steam energy to Patch Rubber Company. Under
the Power Purchase Agreement (PPA) between WLP and Virginia Power, WLP is
entitled to receive capacity payments based on availability. From May 1994
through December 1996, Virginia Power withheld approximately $12.5 million of
these capacity payments during periods of forced outages. To date, the Company
has not realized any income on its 50% portion of the capacity payments being
withheld by Virginia Power.

In October 1994, WLP filed a complaint against Virginia Power in the Circuit
Court of the City of Richmond, Virginia seeking damages of at least $5.7
million, contending that Virginia Power breached the PPA in withholding such
payments. In June 1995, the court denied Virginia Power's motion to dismiss
WLP's complaint. In March 1996, Virginia Power filed a motion for summary
judgment which was subsequently granted by the court as to all counts. WLP filed
a petition for appeal with the Virginia Supreme Court in July 1996, asserting
three separate errors committed by the trial court. The Virginia Supreme Court
granted review in December 1996. WLP's brief on the merits was filed January 29,
1997. If WLP is successful in its appeal before the Virginia Supreme Court, the
case will be remanded to the trial court, and WLP will be entitled to submit its
case to a jury.

In the Company's opinion, WLP is entitled to recover the capacity payments
withheld by Virginia Power and should prevail in this matter ensuring receipt of
future capacity payments during forced outages billable to Virginia Power during
the remaining 22 years of the PPA. However, the Company is unable to predict the
outcome of this proceeding, or the amount of capacity payments, if any, which
Virginia Power may be ordered to pay to WLP. However, the Company does not
expect the ultimate resolution of this matter to have a material adverse effect
on its results of operations or financial condition.

Rensselaer. Niagara Mohawk Corporation (NIMO) has proposed to buy out the Power
Purchase Agreements NIMO has with a group of 19 independent power producers
(IPPs). The Rensselaer cogeneration facility, in which the Company has a 50%
interest through an indirect subsidiary, is one of the projects affected by this
initiative. The Company and the other IPPs, as a group, have negotiated with
NIMO an agreement in principle to restructure all the power purchase agreements.
Substantial further negotiation with NIMO, suppliers and lenders to the
Rensselaer Project are required to finalize the terms delineated in the
agreement in principle. The Company is under no obligation to amend or terminate
the Rensselaer Project power purchase agreement if a satisfactory restructuring
cannot ultimately be achieved. The Company is not able to predict the outcome of
the project restructuring effort or the potential actions by NIMO if the
proposed IPP group restructuring is not accomplished. Based upon the status of
current negotiations, the Company does not 


                                       56
<PAGE>

expect the ultimate resolution of this matter to have a material adverse effect
on its results of operations or financial condition.

Kenetech Bankruptcy. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in
the United States Bankruptcy Court in the Northern District of California for
protection under Chapter 11 of the United States Bankruptcy Code seeking, among
other things, to restructure certain contractual commitments between Kenetech
and its subsidiaries, on the one hand, and various windpower projects located in
the U.S. and abroad, on the other hand. Included in these projects are the
Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW
Tarifa, S.A. (Tarifa) wind projects in which the Company has invested,
collectively, approximately $31 million. As a part of the bankruptcy proceeding,
Kenetech is also seeking to void certain warranty commitments made to the owners
of those projects with respect to the operation and output of the facilities,
and the repair and replacement of the windpower generation equipment located
there. LPI has been named to the creditors' committee in the Kenetech bankruptcy
on behalf of the three projects, and has been working with representatives of
Kenetech and other secured and unsecured creditors to ensure that the project
owners' interests are equitably treated in the bankruptcy. On January 31, 1997,
the projects filed their respective breach of contract and other claims against
Kenetech in the bankruptcy proceeding. In September 1996, LG&E Power Operating
Services Inc., an affiliate of the Company (LPOS), assumed operating control
over the WPP 93 and WPP 94 facilities, pursuant to Facility Operating Agreements
with the owners of those facilities. Those agreements replaced the interim
operations and maintenance agreements between the owners and Kenetech that were
implemented at the time of the Kenetech bankruptcy filing. The owners of the
Tarifa windpower project assumed operating control over that facility shortly
after the bankruptcy filing, and are considering the merits of retaining a
third-party contractor to operate and maintain these facilities.

In November, 1996, KW Tarifa, S.A., certain of its shareholders and an affiliate
of the Company, LG&E Power Finance Inc. (LPF) completed separate Settlement
Transactions with affiliates of Kenetech, whereby the equity interests of
Kenetech's affiliate in KW Tarifa S.A. were purchased by the other shareholders,
and certain subordinated indebtedness of KW Tarifa S.A. to another Kenetech
affiliate was purchased by LPF and subsequently retired by KW Tarifa S.A.

The Company is unable to predict the outcome of the bankruptcy proceeding or the
settlement negotiations. However, the Company does not expect the ultimate
resolution of the bankruptcy to have a material adverse effect on its results of
operations or financial condition.

TVA/LPM Interchange Agreement. The Alabama Power Company, Georgia Power Company
and Mississippi Power Company (the Plaintiffs) filed a Complaint for Declaratory
Judgment and Injunctive Relief against the Tennessee Valley Authority (TVA) and
LG&E Power Marketing Inc. (LPM), a wholly-owned subsidiary of the Company, in
the United States District Court for the Northern District of Alabama. The
Plaintiffs claimed that TVA violated the Tennessee Valley Authority Act by
entering into an interchange agreement with LPM and that TVA was prohibited from
selling or delivering any power to LPM, to any other broker or marketer of
power, or to any other unauthorized recipient, or from otherwise engaging in
unlawful power supply arrangements. In September 1996, the Court granted the
Plaintiffs Motion for Summary Judgment, finding that LPM is not a power
generating organization with which TVA had an exchange power arrangement on July
1, 1957, and that the contract is null and void. This decision became final on
November 23, 1996. This decision is not expected to have a material effect on
the Company's financial position or results of operations.

Calgary. On November 22, 1996, LG&E Natural Canada Inc., a subsidiary of LG&E
Natural, filed a claim in Alberta, Calgary against a former employee; a natural
gas sales and marketing company incorporated in Ontario; and the director,
president and secretary of that sales and marketing company. An amended
statement of claim was filed in that same action on December 23, 1996, against
additional parties. These lawsuits were 


                                       57
<PAGE>

filed as a result of LG&E Natural's discovery in the fourth quarter of 1996 that
unauthorized transactions had occurred. See Note 8, Non-Recurring Charges. A
criminal investigation has been opened by the Commercial Crime Unit of the
Calgary Police Service and is under way. The Company intends to aggressively
pursue all civil, criminal, and other available remedies.

The former employee and other defendants have filed counterclaims seeking
aggregate damages of approximately $40 million for defamation and breach of
contract. The Company does not expect the ultimate resolution of these
counterclaims to have a material adverse effect on its results of operations or
financial condition.

Operating Leases. LG&E Energy Corp. has an operating lease for its corporate
office space with an expiration date of 1997. LG&E has an operating lease for
its corporate office building that is scheduled to expire in June 2005. LPI has
operating lease commitments related to two office facilities that expire in 1999
and 2001. LG&E Natural has six office leases that expire in 1997 through 2004.
Total lease expense for 1996, 1995, and 1994, was $4.1 million, $5.5 million,
and $4.9 million, respectively. The future minimum annual lease payments under
these lease agreements for years subsequent to December 31, 1996, are as follows
(in thousands of $):

      1997                                            $ 6,079
      1998                                              5,080
      1999                                              4,501
      2000                                              4,855
      2001                                              4,774
      Thereafter                                       13,991
                                                      -------
      Total                                           $39,280
                                                      =======

Operating lease commitments have been reduced for annual rental payments to be
received from noncancelable subleases of $1.5 million in 1997, approximately
$1.8 million per year from 1998 through 2000, and $1.3 million in 2001. Future
lease payments associated with facilities vacated in mid-1994 were included in
the non-recurring charges recorded during 1994 and therefore, do not represent
future operating expenses. See Note 8, Non-Recurring Charges.

Contracted Data Processing Services. LG&E Natural has an agreement to receive
contracted data processing services through March 2003. The agreement calls for
LG&E Natural to make payments of $1,065,000 in 1997, $1,000,000 per year for
1998 through 2001, and $1,250,000 thereafter.

Environmental. With the passage of the Clean Air Act Amendments of 1990 (the
Act), LG&E already complied with the stringent sulfur dioxide emission limits
required by the year 2000 as it had previously installed scrubbers on all of its
coal-fired generating units. Since then, as part of its ongoing construction
program, LG&E has spent $29 million through 1996 for remedial measures necessary
to meet the Act's requirements for nitrogen oxides. The overall financial impact
of the Act on LG&E has been minimal. However, LG&E is closely monitoring a
number of significant regulatory developments. In November 1996, the United
States Environmental Protection Agency (USEPA) announced its proposal to revise
the National Ambient Air Quality Standards for ozone and particulate matter. In
November 1996, USEPA also announced its intent to direct certain states to
address long range ozone transport from Midwest emission sources which allegedly
contribute to ozone problems in the Northeast. While management is unable to
predict the outcome or exact impact of these ongoing regulatory proceedings,
LG&E continues to be well-positioned in the market to be a "clean" power
provider without the large capital expenditures that are expected to be incurred
by many other utilities.

In recent years, LG&E has undertaken extensive modifications at its Mill Creek
plant aimed at controlling 


                                       58
<PAGE>

certain particulate emissions which allegedly damaged metal surfaces on adjacent
properties. The Air Pollution Control District of Jefferson County (APCD) and
LG&E are reviewing the results of a field sampling program to demonstrate the
effectiveness of the plant modifications. In an effort to resolve the associated
property damage claims, LG&E also established a claims resolution process which
resulted in property damage settlements with adjacent residents at an aggregate
cost of approximately $15 million.

In August 1993, 34 persons filed a complaint in Jefferson Circuit Court against
LG&E seeking certification of a class consisting of certain persons in the
vicinity of the Mill Creek plant who have allegedly suffered personal injury or
property damage as a result of emissions from the plant. The court denied the
Plaintiffs' initial motion for class certification, but allowed the Plaintiffs
to bring a total of 537 individual claimants into the litigation. As part of its
ongoing claims resolution process, as described above, LG&E subsequently settled
the claims of approximately half of the individual claimants. In December 1996,
the court granted Plaintiff counsel's motion to withdraw from representation of
all remaining claimants who have not settled with LG&E. If those parties fail to
obtain alternate counsel or otherwise pursue the litigation, their claims will
be subject to dismissal. LG&E intends to vigorously defend itself against any
claims which remain. In management's opinion, resolution of any remaining claims
should not have a material adverse impact on the financial position or results
of operations of LG&E.

In response to a notification from the APCD that LG&E's Cane Run plant may be
the source of a potential exceedance of the National Ambient Air Quality
Standards for sulfur dioxide, LG&E submitted a draft action plan and modeling
schedule to the APCD and USEPA. The APCD and USEPA have approved the submittals,
and an LG&E contractor is currently conducting additional modeling activities.
Although it is expected that corrective action will be accomplished through
capital improvements, until the modeling activities are complete, LG&E cannot
determine the precise impact of this matter.

The APCD is reviewing potential reductions in emissions of ozone precursors
necessary to bring Jefferson County, Kentucky into compliance with the National
Ambient Air Quality Standards for ozone. As described above, LG&E has installed
controls which result in substantial reductions in nitrogen oxide (NOX)
emissions from its plants. In March 1994, the APCD adopted a regulation
requiring a 15% reduction in volatile organic compound (VOC) emissions from
industrial sources, including LG&E's Cane Run and Mill Creek plants. Because
there are currently no demonstrated technologies for control of VOC emissions
from coal-fired boilers, the regulation raised the prospect of potential limits
on generation at those two plants. After extensive negotiation with affected
parties, in December 1996, the APCD amended its regulation to delete the
requirement for VOC reductions from LG&E's plants. The APCD also determined that
no additional reductions in either industrial VOC or NOX emissions are warranted
at this time, but reserved the right to impose additional reductions if
necessary in the future.

LG&E owns or formerly owned three primary sites where manufactured gas plant
operations were conducted. Remedial investigations performed at these sites have
identified coal tar and other contaminants typical of manufactured gas plant
operations. In December 1996 LG&E conveyed one of the sites to a new owner, for
a nominal sum in return for the new owner assuming certain environmental
liabilities and cleanup obligations. LG&E does not expect to incur any further
remedial investigation or cleanup costs at this site. LG&E is awaiting
regulatory determinations from the Kentucky Natural Resources and Environmental
Protection Cabinet on the level of remediation required at both other sites.
Until such regulatory determinations are made, LG&E is unable to precisely
determine the liability for cleanup costs. However, based on the results of
studies at the sites, management currently estimates total cleanup costs will
fall within a range of $3 million to $8 million and has recorded an accrual of
approximately $3 million in the accompanying financial statements.

LG&E, along with a number of other companies, has been identified as a
potentially responsible party (PRP) allegedly liable for cleanup under the
Comprehensive Environmental Response Compensation and Liability 


                                       59
<PAGE>

Act, as amended, at four off-site waste treatment or disposal sites. Under the
law, each PRP potentially could be held jointly and severally liable for the
cost of cleanup, but would have the right to seek contribution from other PRPs.
The sites targeted for cleanup in which LG&E has been identified as a PRP
include the Smith's Farm site located in Bullitt County, Kentucky, the Sonora
and Carlie Middleton Burn sites located in Hardin County, Kentucky, and the M.T.
Richards site located in Crossville, Illinois. With respect to the Smith's Farm
site, USEPA has identified LG&E as a de minimis PRP and is currently pursuing
other parties for the vast majority of the $44 million in cleanup costs as
estimated by USEPA. LG&E is participating in settlement discussions in an effort
to resolve any alleged liability which it may have. With respect to the Sonora
site and Carlie Middleton Burn sites, LG&E is involved in litigation with USEPA
and approximately 50 companies in an effort to resolve liability for
approximately $2.5 million in cleanup costs incurred by USEPA. With respect to
the M.T. Richards site, LG&E has been identified as a de minimis party and has
reached a tentative settlement for $7,500, subject to approval by the government
and entry by the court. While it is not possible at this time to predict the
exact outcome or precise impact of these matters, management believes that these
matters should not have a material adverse impact on the financial position or
results of operations of LG&E.

Like LG&E, LPI, LG&E Natural and their subsidiaries are subject to extensive
federal, state and local environmental laws and regulations governing the
operation of the various facilities in which they participate as an owner or
managing operator. Among other things, these laws and regulations govern the
discharge of materials into waterways, the air and the ground and, if violated,
may require the owner or operator to take remedial action to maintain the
affected facility's operating status. To the extent any such remedial
environmental actions have been required of LPI, LG&E Natural or their
subsidiaries in the past, related expenditures have not been material.

Note 17 - Trimble County Generating Plant.

Trimble County Unit 1 (Trimble County), a 495-megawatt coal-fired electric
generating unit placed into service in December 1990, has been the subject of
numerous legal and regulatory proceedings to determine the appropriate
ratemaking treatment to implement the Kentucky Public Service Commission's 1988
decision that LG&E should not be allowed to recover 25% of the cost of Trimble
County from ratepayers.

On December 1, 1995, LG&E and other parties filed with the Commission a
unanimous settlement agreement that was approved by the Commission on December
8, 1995. Under the agreement, which resolves all outstanding issues, LG&E agreed
to refund approximately $22 million to current electric customers, most of which
is being refunded by credits to customers' bills over the five years 1996
through 2000. In addition, LG&E agreed to pay $900,000 per year for five years
beginning in 1996 to the Metro Human Needs Alliance, Inc., a not-for-profit
Louisville-based corporation, for the sole purpose of funding low-income energy
assistance programs in the service territory. LG&E also agreed to revise the
residential decoupling methodology approved by the Commission in 1994 in a
manner that will reduce revenues collected from residential customers during
1996 and 1997 by a total of approximately $1.8 million. Finally, the parties
agreed to dismiss all appeals currently pending in state courts regarding the
Commission's orders in LG&E's last general rate case.

Note 18 - Jointly Owned Electric Utility Plant

LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the
75% portion of the Unit, which the Commission has allowed to be reflected in
customer rates, is similar to LG&E's accounting for other wholly-owned utility
plants.

Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns
a 12.12% undivided interest in the Unit, and Indiana Municipal Power Agency
(IMPA) owns a 12.88% undivided interest. Each is responsible for their
proportionate ownership share of operation and maintenance expenses and
incremental 


                                       60
<PAGE>

assets, and for fuel used.

The following data represent shares of the jointly owned property:

                                                  Trimble County
                                        LG&E       IMPA       IMEA   Total
                                        ----       ----       ----   -----
      Ownership interest                 75%     12.88%     12.12%    100%
      Mw capacity                    371.25      63.75         60     495

Note 19 - Segments of Business

LG&E Energy Corp. has business operations in both the regulated and
non-regulated energy markets. The regulated business is conducted through
Louisville Gas and Electric Company (LG&E), an electric and gas public utility
engaged in the generation, transmission, distribution, and sale of electric
energy and the storage, distribution and sale of natural gas in Louisville and
adjacent areas of Kentucky.

The non-utility businesses include LG&E Power Inc. (LPI), LG&E International
Inc. (LII), LG&E Natural Inc. (LG&E Natural) and LG&E Power Marketing Inc.
(LPM). LPI and its subsidiaries develop, design, own, operate, and maintain
power generation facilities that sell energy to local industries and utilities
throughout the United States. LII develops and owns international
power-generation assets located in Spain and Argentina and acquired interests in
two natural gas distribution companies located in Argentina in February 1997.
LG&E Natural and LPM primarily engage in retail and wholesale marketing of
natural gas and electric power, respectively, throughout the United States; LG&E
Natural also operates in Canada. LG&E Natural and LPM make up the energy
marketing and trading segment of the business. Other primarily relates to
non-utility power generation activities.

<TABLE>
<CAPTION>
      (Thousands of $)                            1995            1994             1993
                                                  ----            ----             ----
<S>                                        <C>             <C>                <C>      
      Operating Information:
        Revenues:
           Electric                        $   607,160     $   542,786(a)     $ 559,327
           Gas                                 214,419         181,126          200,129
                                           -----------     -----------        ---------
              Total utility                    821,579         723,912          759,456
           Energy marketing and trading      2,736,940         630,249            1,289
           Other                                30,946          20,519           68,918
                                           -----------     -----------        ---------
              Total                        $ 3,589,465     $ 1,374,680        $ 829,663
                                           ===========     ===========        =========

        Operating Income:
           Electric                        $   192,593     $   152,648        $ 139,916
           Gas                                  18,393          16,651           11,368
                                           -----------     -----------        ---------
              Total utility                    210,986         169,299          151,284
           Energy marketing and trading          2,916            (959)            (410)
           Other                                13,491          18,187            4,573
           Corporate                           (15,952)        (10,970)         (15,103)
                                           -----------     -----------        ---------
              Total                        $   211,441     $   175,557        $ 140,344
                                           ===========     ===========        =========
</TABLE>


                                       61
<PAGE>

<TABLE>
<CAPTION>
      (Thousands of $)                              1995          1994          1993
                                                    ----          ----          ----
<S>                                           <C>           <C>           <C>       
      Other Information:
        Depreciation and Amortization:
           Electric                           $   76,929    $   74,437    $   71,882
           Gas                                    12,073        11,322        10,637
                                              ----------    ----------    ----------
              Total utility                       89,002        85,759        82,519
           Energy marketing and trading           12,482         6,961          --
           Other                                   1,661         1,189         1,072
           Corporate                                 411           484           582
                                              ----------    ----------    ----------
              Total                           $  103,556    $   94,393    $   84,173
                                              ==========    ==========    ==========
        Construction Expenditures:
           Electric                           $   79,541    $   66,661    $   71,592
           Gas                                    28,338        26,762        23,806
                                              ----------    ----------    ----------
              Total utility (b)                  107,879        93,423        95,398
           Energy marketing and trading            6,081         9,020          --
           Other                                   1,154         1,916           663
           Corporate                                 336           168           197
                                              ----------    ----------    ----------
              Total                           $  115,450    $  104,527    $   96,258
                                              ==========    ==========    ==========
        Identifiable Assets - December 31:
           Electric                           $1,505,508    $1,501,568    $1,514,287
           Gas                                   300,550       268,840       252,946
           Other                                 186,346       208,517       199,078
                                              ----------    ----------    ----------
              Total utility                    1,992,404     1,978,925     1,966,311
           Energy marketing and trading          827,913       470,440         3,573
           Other                                 181,946       171,261       246,408
           Corporate                               9,629         8,294         1,172
                                              ----------    ----------    ----------
              Total                           $3,011,892    $2,628,920    $2,217,464
                                              ==========    ==========    ==========
</TABLE>

      (a)   Net of Refund - Trimble County Settlement of $28.3 million.
      (b)   Excluding cost of removal and salvage.

Note 20 - Selected Quarterly Data (Unaudited)

Selected financial data for the four quarters of 1996 and 1995 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year. The Company restated its results for
the first three quarters of 1996 to reflect adoption of the mark-to-market
method of accounting for its energy trading and price risk management
activities. See Note 1, Summary of Significant Accounting Policies and Note 4,
Price Risk Management and Financial Instruments.

<TABLE>
<CAPTION>
                                                               Quarters Ended
      (Thousands of $ except per share data)     March        June   September      December
                                                 -----        ----   ---------      --------
<S>                                           <C>         <C>         <C>         <C>       
      1996
      Revenues                                $875,429    $760,913    $853,928    $1,099,195
      Operating income                          59,060      48,692      70,307        33,382
      Net income:
        Originally reported                     21,535      23,796      41,104        11,350
        Effect of change to mark-to-market       5,560          26         632          --
                                              --------    --------    --------    ----------
        Restated                                27,095      23,822      41,736        11,350
</TABLE>


                                       62
<PAGE>

<TABLE>
<CAPTION>
                                                               Quarters Ended
      (Thousands of $ except per share data)     March        June   September    December
                                                 -----        ----   ---------    --------
<S>                                               <C>         <C>         <C>         <C> 
      1996 (cont.)
      Earnings per share:
        Originally reported                       $.33        $.36        $.62        $.17
        Effect of change to mark-to-market         .08        --           .01        --
                                              --------    --------    --------    --------
        Restated                                   .41         .36         .63         .17

      1995
      Revenues                                $208,101    $249,057    $410,161    $507,361(a)
      Operating income                          44,444      52,468      73,957       4,688
      Net income (loss)                         19,692      24,650      39,091        (603)
      Earnings per share of common stock           .30         .37         .59        (.01)
</TABLE>

      (a)   Net of Refund - Trimble County Settlement of $28.3 million.


                                       63
<PAGE>

                              REPORT OF MANAGEMENT

The management of LG&E Energy Corp. and subsidiaries is responsible for the
preparation and integrity of the consolidated financial statements and related
information included in this Annual Report. These statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis and, necessarily, include amounts that reflect the best
estimates and judgment of management.

The Company's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur Andersen
LLP all the Company's financial records and related data as well as the minutes
of shareholders' and directors' meetings.

Management has established and maintains a system of internal controls that
provides reasonable assurance that transactions are completed in accordance with
management's authorization, that assets are safeguarded and that financial
statements are prepared in conformity with generally accepted accounting
principles. Management believes that an adequate system of internal controls is
maintained through the selection and training of personnel, appropriate division
of responsibility, establishment and communication of policies and procedures
and by regular reviews of internal accounting controls by the Company's internal
auditors. Management reviews and modifies its system of internal controls in
light of changes in conditions and operations, as well as in response to
recommendations from the internal auditors. These recommendations for the year
ended December 31, 1996, did not identify any material weaknesses in the design
and operation of the Company's internal control structure.

The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of the Company, the Audit Committee meets regularly with the
Company's independent public accountants, internal auditors and management. The
Audit Committee reviews the results of the independent accountants' audit of the
consolidated financial statements and their audit procedures, and discusses the
adequacy of internal accounting controls. The Audit Committee also approves the
annual internal auditing program, and reviews the activities and results of the
internal auditing function. Both the independent public accountants and the
internal auditors have access to the Audit Committee at any time.

LG&E Energy Corp. and subsidiaries maintain and internally communicate a written
code of business conduct that addresses, among other items, potential conflicts
of interest, compliance with laws, including those relating to financial
disclosure, and the confidentiality of proprietary information.


                                       64
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of LG&E Energy Corp.:

We have audited the consolidated balance sheets and statements of capitalization
of LG&E Energy Corp. (a Kentucky corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, retained
earnings and cash flows for each of the three years in the period ended December
31, 1996. These 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LG&E Energy Corp.
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.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1996, the Company changed its method of accounting for price risk
management activities.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.


Louisville, Kentucky                                         Arthur Andersen LLP
January 29, 1997  (Except with
respect to the matters discussed
in the first paragraph of Note 2
and the twelfth paragraph of
Note 16, as to which the date
is March 12, 1997.)


                                       65
<PAGE>

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

None.

                                    PART III

ITEMS 10, 11, 12 and 13 are omitted pursuant to General Instruction G, inasmuch
as the Company filed copies of a definitive proxy statement with the Commission
on March 26, 1997, pursuant to Regulation 14A under the Securities Exchange Act
of 1934. Such proxy statement is incorporated herein by this reference. In
accordance with General Instruction G of Form 10-K, the information required by
Item 10 relating to executive officers has been included in Part I of this Form
10-K.

                                     PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)   1. Financial Statements (included in Item 8):

            Consolidated Statements of Income for the three years ended December
            31, 1996 (page 35).
            Consolidated Balance Sheets - December 31, 1996, and 1995 (page 36).
            Consolidated Statements of Cash Flows for the three years ended
            December 31, 1996 (page 37).
            Consolidated Statements of Capitalization - December 31, 1996, and
            1996 (page 38).
            Consolidated Statements of Retained Earnings for the three years
            ended December 31, 1996 (page 39).
            Notes to Consolidated Financial Statements (pages 39-63).
            Report of Management (page 64).
            Report of Independent Public Accountants (page 65).

      2.    Financial Statement Schedules (included in Part IV):

            Schedule II - Valuation and Qualifying Accounts for the three years
                          ended December 31, 1996 (page 79).

All other schedules have been omitted as not applicable or not required or
because the information required to be shown is included in the Financial
Statements or the accompanying Notes to Financial Statements.

3. Exhibits:

Exhibit
No.                                     Description
---                                     -----------

3.01  Copy of Restated Articles of Incorporation, dated November 6, 1996. [Filed
      as Exhibit 3.06 to the Company's Quarterly Report on Form 10-Q for the
      quarter ended September 30, 1996, and incorporated by reference herein]

3.02  Copy of Bylaws, as amended through December 4, 1991. [Filed as Exhibit
      3.03 to the Company's Annual Report on Form 10-K for the year ended
      December 31, 1991, and incorporated by reference herein]

4.01  Copy of Trust Indenture dated November 1, 1949, from LG&E to Harris Trust
      and Savings Bank, 


                                       66
<PAGE>

      Trustee. [Filed as Exhibit 7.01 to LG&E's Registration Statement 2-8283
      and incorporated by reference herein]

4.02  Copy of Supplemental Indenture dated February 1, 1952, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.05 to
      LG&E's Registration Statement 2-9371 and incorporated by reference herein]

4.03  Copy of Supplemental Indenture dated February 1, 1954, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.03 to
      LG&E's Registration Statement 2-11923 and incorporated by reference
      herein]

4.04  Copy of Supplemental Indenture dated September 1, 1957, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.04 to
      LG&E's Registration Statement 2-17047 and incorporated by reference
      herein]

4.05  Copy of Supplemental Indenture dated October 1, 1960, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.05 to
      LG&E's Registration Statement 2-24920 and incorporated by reference
      herein]

4.06  Copy of Supplemental Indenture dated June 1, 1966, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.06 to LG&E's
      Registration Statement 2-28865 and incorporated by reference herein]

4.07  Copy of Supplemental Indenture dated June 1, 1968, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.07 to LG&E's
      Registration Statement 2-37368 and incorporated by reference herein]

4.08  Copy of Supplemental Indenture dated June 1, 1970, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.08 to LG&E's
      Registration Statement 2-37368 and incorporated by reference herein]

4.09  Copy of Supplemental Indenture dated August 1, 1971, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.09 to
      LG&E's Registration Statement 2-44295 and incorporated by reference
      herein]

4.10  Copy of Supplemental Indenture dated June 1, 1972, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.10 to LG&E's
      Registration Statement 2-52643 and incorporated by reference herein]

4.11  Copy of Supplemental Indenture dated February 1, 1975, which is a
      supplemental instrument to exhibit 4.01 hereto. [Filed as Exhibit 2.11 to
      LG&E's Registration Statement 2-57252 and incorporated by reference
      herein]

4.12  Copy of Supplemental Indenture dated September 1, 1975, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.12 to
      LG&E's Registration Statement 2-57252 and incorporated by reference
      herein]

4.13  Copy of Supplemental Indenture dated September 1, 1976, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.13 to
      LG&E's Registration Statement 2-57252 and incorporated by reference
      herein] 

4.14  Copy of Supplemental Indenture dated October 1, 1976, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.14 to
      LG&E's Registration Statement 2-65271 and incorporated by reference
      herein]


                                       67
<PAGE>

4.15  Copy of Supplemental Indenture dated June 1, 1978, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.15 to LG&E's
      Registration Statement 2-65271 and incorporated by reference herein]

4.16  Copy of Supplemental Indenture dated February 15, 1979, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.16 to
      LG&E's Registration Statement 2-65271 and incorporated by reference
      herein]

4.17  Copy of Supplemental Indenture dated September 1, 1979, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.17 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1980,
      and incorporated by reference herein]

4.18  Copy of Supplemental Indenture dated September 15, 1979, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.18 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1980,
      and incorporated by reference herein]

4.19  Copy of Supplemental Indenture dated September 15, 1981, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.19 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1981,
      and incorporated by reference herein]

4.20  Copy of Supplemental Indenture dated March 1, 1982, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.20 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1982,
      and incorporated by reference herein]

4.21  Copy of Supplemental Indenture dated March 15, 1982, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.21 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1982,
      and incorporated by reference herein]

4.22  Copy of Supplemental Indenture dated September 15, 1982, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.22 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1982,
      and incorporated by reference herein]

4.23  Copy of Supplemental Indenture dated February 15, 1984, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.23 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1984,
      and incorporated by reference herein]

4.24  Copy of Supplemental Indenture dated July 1, 1985, which is a supplemental
      instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.24 to LG&E's Annual
      Report on Form 10-K for the year ended December 31, 1985, and incorporated
      by reference herein]

4.25  Copy of Supplemental Indenture dated November 15, 1986, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.25 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1986,
      and incorporated by reference herein]

4.26  Copy of Supplemental Indenture dated November 16, 1986, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.26 to
      LG&E's Annual Report on Form 10-K for the year 


                                       68
<PAGE>

      ended December 31, 1986, and incorporated by reference herein]

4.27  Copy of Supplemental Indenture dated August 1, 1987, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.27 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1987,
      and incorporated by reference herein]

4.28  Copy of Supplemental Indenture dated February 1, 1989, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.28 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1988,
      and incorporated by reference herein]

4.29  Copy of Supplemental Indenture dated February 2, 1989, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.29 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1988,
      and incorporated by reference herein]

4.30  Copy of Supplemental Indenture dated June 15, 1990, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.30 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1990,
      and incorporated by reference herein]

4.31  Copy of Supplemental Indenture dated November 1, 1990, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.31 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1990,
      and incorporated by reference herein]

4.32  Copy of Supplemental Indenture dated September 1, 1992, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.32 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1992,
      and incorporated by reference herein]

4.33  Copy of Supplemental Indenture dated September 2, 1992, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.33 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1992,
      and incorporated by reference herein]

4.34  Copy of Supplemental Indenture dated August 15, 1993, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.34 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1993,
      and incorporated by reference herein]

4.35  Copy of Supplemental Indenture dated August 16, 1993, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.35 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1993,
      and incorporated by reference herein]

4.36  Copy of Supplemental Indenture dated October 15, 1993, which is a
      supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.36 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1993,
      and incorporated by reference herein]

10.01 Copies of Agreement between Sponsoring Companies re: Project D of Atomic
      Energy Commission, dated May 12, 1952, Memorandums of Understanding
      between Sponsoring Companies re: Project D of Atomic Energy Commission,
      dated September 19, 1952 and October 28, 1952, and Power Agreement between
      Ohio Valley Electric Corporation and Atomic Energy Commission, dated
      October 15, 1952. [Filed as Exhibit 13(y) to LG&E's Registration Statement
      2-9975 and incorporated by reference herein]

10.02 Copy of Modification No. 1 dated July 23, 1953, to the Power Agreement
      between Ohio Valley 


                                       69
<PAGE>

      Electric Corporation and Atomic Energy Commission. [Filed as Exhibit
      4.03(b) to LG&E's Registration Statement 2-24920 and incorporated by
      reference herein]

10.03 Copy of Modification No. 2 dated March 15, 1964, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 5.02c to LG&E's Registration Statement 2-61607 and
      incorporated by reference herein]

10.04 Copy of Modification No. 3 and No. 4 dated May 12, 1966 and January 7,
      1967, respectively, to the Power Agreement between Ohio Valley Electric
      Corporation and Atomic Energy Commission. [Filed as Exhibits 4(a)(13) and
      4(a)(14) to LG&E's Registration Statement 2-26063 and incorporated by
      reference herein]

10.05 Copy of Modification No. 5 dated August 15, 1967, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 13(c) to LG&E's Registration Statement 2-27316 and
      incorporated by reference herein]

10.06 Copies of (i) Inter-Company Power Agreement, dated July 10, 1953, between
      Ohio Valley Electric Corporation and Sponsoring Companies (which Agreement
      includes as Exhibit A the Power Agreement, dated July 10, 1953, between
      Ohio Valley Electric Corporation and Indiana-Kentucky Electric
      Corporation); (ii) First Supplementary Transmission Agreement, dated July
      10, 1953, between Ohio Valley Electric Corporation and Sponsoring
      Companies; (iii) Inter-Company Bond Agreement, dated July 10, 1953,
      between Ohio Valley Electric Corporation and Sponsoring Companies; (iv)
      Inter-Company Bank Credit Agreement, dated July 10, 1953, between Ohio
      Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit
      5.02f to LG&E's Registration Statement 2-61607 and incorporated by
      reference herein]

10.07 Copy of Modification No. 1 and No. 2 dated June 3, 1966 and January 7,
      1967, respectively, to Inter-Company Power Agreement dated July 10, 1953.
      [Filed as Exhibits 4(a)(8) and 4(a)(10) to LG&E's Registration Statement
      2-26063 and incorporated by reference herein]

10.08 Copies of Amendments to Agreements (iii) and (iv) referred to under 10.06
      above as follows: (i) Amendment to Inter-Company Bond Agreement and (ii)
      Amendment to Inter-Company Bank Credit Agreement. [Filed as Exhibit 5.02h
      to LG&E's Registration Statement 2-61607 and incorporated by reference
      herein]

10.09 Copy of Modification No. 1, dated August 20, 1958, to First Supplementary
      Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric
      Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02i to
      LG&E's Registration Statement 2-61607 and incorporated by reference
      herein]

10.10 Copy of Modification No. 2, dated April 1, 1965, to the First
      Supplementary Transmission Agreement, dated July 10, 1953, among Ohio
      Valley Electric Corporation and the Sponsoring Companies. [Filed as
      Exhibit 5.02j to LG&E's Registration Statement 2-61607 and incorporated by
      reference herein]

10.11 Copy of Modification No. 3, dated January 20, 1967, to First Supplementary
      Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric
      Corporation and the Sponsoring Companies. [Filed as Exhibit 4(a)(7) to
      LG&E's Registration Statement 2-26063 and incorporated by reference
      herein]


                                       70
<PAGE>

10.12 Copy of Modification No. 6 dated November 15, 1967, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 4(g) to LG&E's Registration Statement 2-28524 and
      incorporated by reference herein]

10.13 Copy of Modification No. 3 dated November 15, 1967, to the Inter-Company
      Power Agreement dated July 10, 1953. [Filed as Exhibit 4.02m to LG&E's
      Registration Statement 2-37368 and incorporated by reference herein]

10.14 Copy of Modification No. 7 dated November 5, 1975, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 5.02n to LG&E's Registration Statement 2-56357 and
      incorporated by reference herein]

10.15 Copy of Modification No. 4 dated November 5, 1975, to the Inter-Company
      Power Agreement dated July 10, 1953. [Filed as Exhibit 5.02o to LG&E's
      Registration Statement 2-56357 and incorporated by reference herein]

10.16 Copy of Modification No. 4 dated April 30, 1976, to First Supplementary
      Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric
      Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02p to
      LG&E's Registration Statement 2-61607 and incorporated by reference
      herein]

10.17 Copy of Modification No. 8 dated June 23, 1977, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 5.02q to LG&E's Registration Statement 2-61607 and
      incorporated by reference herein]

10.18 Copy of Modification No. 9 dated July 1, 1978, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 5.02r to LG&E's Registration Statement 2-63149 and
      incorporated by reference herein]

10.19 Copy of Modification No. 10 dated August 1, 1979, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 2 to LG&E's Annual Report on Form 10-K for the year
      ended December 31, 1979, and incorporated by reference herein]

10.20 Copy of Modification No. 11 dated September 1, 1979, to the Power
      Agreement between Ohio Valley Electric Corporation and Atomic Energy
      Commission. [Filed as Exhibit 3 to LG&E's Annual Report on Form 10-K for
      the year ended December 31, 1979, and incorporated by reference herein]

10.21 Copy of Modification No. 5 dated September 1, 1979, to Inter-Company Power
      Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and
      Sponsoring Companies. [Filed as Exhibit 4 to LG&E's Annual Report on Form
      10-K for the year ended December 31, 1979, and incorporated by reference
      herein]

10.22 Copy of Modification No. 12 dated August 1, 1981, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 10.25 to LG&E's Annual Report on Form 10-K for the year
      ended December 31, 1981, and incorporated by reference herein]

10.23 Copy of Modification No. 6 dated August 1, 1981, to Inter-Company Power
      Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and
      Sponsoring Companies. [Filed as Exhibit 10.26 to LG&E's Annual Report on
      Form 10-K for the year ended December 31, 1981, and incorpo-


                                       71
<PAGE>

      rated by reference herein]

10.24 Copy of Diversity Power Agreement dated September 9, 1987, between East
      Kentucky Power Cooperative and LG&E covering the purchase and sale of
      power between the two companies from 1988 through 1995. [Filed as Exhibit
      10.28 to LG&E's Annual Report on Form 10-K for the year ended December 31,
      1987, and incorporated by reference herein]

10.25 Copy of Supplemental Executive Retirement Plan as amended through January
      3, 1990, covering all officers of LG&E. [Filed as Exhibit 10.29 to LG&E's
      Annual Report on Form 10-K for the year ended December 31, 1989, and
      incorporated by reference herein]

10.26 Copy of LG&E Energy Corp. Deferred Stock Compensation Plan effective
      January 1, 1992, covering non-employee directors of the Company and its
      subsidiaries. [Filed as Exhibit 10.34 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1991, and incorporated by
      reference herein]

10.27 Copy of form of change in control agreement for officers of LG&E Energy
      Corp. [Filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1992, and incorporated by reference
      herein]

10.28 Copy of Supplemental Executive Retirement Plan for R. W. Hale, effective
      June 1, 1989. [Filed as Exhibit 10.42 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1992, and incorporated by
      reference herein]

10.29 Copy of Nonqualified Savings Plan covering officers of the Company,
      effective January 1, 1992. [Filed as Exhibit 10.43 to the Company's Annual
      Report on Form 10-K for the year ended December 31, 1992, and incorporated
      by reference herein]

10.30 Copy of Modification No. 13 dated September 1, 1989, to the Power
      Agreement between Ohio Valley Electric Corporation and Atomic Energy
      Commission. [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K
      for the year ended December 31, 1993, and incorporated by reference
      herein]

10.31 Copy of Modification No. 14 dated January 15, 1992, to the Power Agreement
      between Ohio Valley Electric Corporation and Atomic Energy Commission.
      [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year
      ended December 31, 1993, and incorporated by reference herein]

10.32 Copy of Modification No. 7 dated January 15, 1992, to Inter-Company Power
      Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and
      Sponsoring Companies. [Filed as Exhibit 10.44 to LG&E's Annual Report on
      Form 10-K for the year ended December 31, 1993, and incorporated by
      reference herein]

10.33 Copy of Modification No. 15 dated February 15, 1993, to the Power
      Agreement between Ohio Valley Electric Corporation and Atomic Energy
      Commission. [Filed as Exhibit 10.45 to LG&E's Annual Report on Form 10-K
      for the year ended December 31, 1993, and incorporated by reference
      herein]

10.34 Copy of Firm No Notice Transportation Agreement effective November 1,
      1993, between Texas Gas Transmission Corporation and LG&E (expires October
      31, 2001) covering the transmission of natural gas. 

                                       72
<PAGE>

      Copy of Firm No Notice Transportation Agreement effective November 1,
      1993, between Texas Gas Transmission Corporation and LG&E (expires October
      31, 2000) covering the transmission of natural gas.

      Copy of Firm No Notice Transportation Agreement effective November 1,
      1993, between Texas Gas Transmission Corporation and LG&E (expires October
      31, 1998) covering the transmission of natural gas.

      [Filed as Exhibit 10.47 to LG&E's Annual Report on Form 10-K for the year
      ended December 31, 1993, and incorporated by reference herein]

10.35 Copy of LG&E Energy Corp. Stock Option Plan for Non-Employee Directors.
      [Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1993, and incorporated by reference herein]

10.36 Copy of Modification No. 8 dated January 19, 1994, to Intercompany Power
      Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and
      the Sponsoring Companies. [Filed as Exhibit 10.43 to LG&E's Annual Report
      on Form 10-K for the year ended December 31, 1995, and incorporated by
      reference herein]

10.37 Copy of Amendment dated March 1 1995, to Firm No-Notice Transportation
      Agreements dated November 1, 1993 (2-Year, 5-Year and 8-Year), between
      Texas Gas Transmission Corporation and LG&E covering the transmission of
      natural gas. [Filed as Exhibit 10.44 of LG&E's Annual Report on Form 10-K
      for the year ended December 31, 1995, and incorporated by reference
      herein]

10.38 Copy of Modification No. 9, dated August 17, 1995, to the Inter-Company
      Power Agreement dated July 10, 1953, among Ohio Valley Electric
      Corporation and the Sponsoring Companies. [Filed as Exhibit 10.39 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1996,
      and incorporated by reference herein]

10.39 Copy of Agreement and Plan of Merger, dated February 10, 1995, between
      LG&E Natural Inc., formerly known as Hadson Corporation, Carousel
      Acquisition Corporation and the Company. [Filed as Exhibit 2 of Schedule
      13D by the Company on February 21, 1995, and incorporated by reference
      herein]

10.40 Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas
      Gas Transmission Corporation and the Company (expires October 31, 1998)
      covering the transportation of natural gas.

      Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas
      Gas Transmission Corporation and the Company (expires October 31, 2001)
      covering the transportation of natural gas. [Filed as Exhibit 10.45 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1995,
      and incorporated by reference herein]

10.41 Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas
      Gas Transmission Corporation and the Company (expires October 31, 2000)
      covering the transportation of natural gas [Filed as Exhibit 10.41 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1996,
      and incorporated by reference herein]

10.42 Copy of Coal Supply Agreement, dated January 1, 1996, between Lafayette
      Coal Company, Black Beauty Coal Company and the Company covering the
      purchase of coal. [Filed as Exhibit 10.46 to 


                                       73
<PAGE>

      LG&E's Annual Report on Form 10-K for the year ended December 31, 1995,
      and incorporated by reference herein]

10.43 Copy of Coal Supply Agreement, dated December 15, 1995, between W.B. Coal
      Company, Inc., Windsor Coal Company and the Company covering the purchase
      of coal. [Filed as Exhibit 10.48 to LG&E's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

10.44 Copy of Coal Supply Agreement, dated June 1, 1996, between Peabody
      Coalsales Company and LG&E covering the purchase of coal. [Filed as
      Exhibit 10.49 to LG&E's Annual Report on Form 10-K for the year ended
      December 31, 1996, and incorporated by reference herein]

10.45 Copy of Coal Supply Agreement, dated June 1, 1996, between Kindill Mining,
      Inc. and LG&E covering the purchase of coal. [Filed as Exhibit 10.46 to
      LG&E's Annual Report on Form 10-K for the year ended December 31, 1996,
      and incorporated by reference herein]

10.46 Copy of Letter Amendment, dated October 31, 1996, to the Coal Supply
      Agreement dated June 1, 1996, between Kindill Mining, Inc. and LG&E
      covering the purchase of coal. [Filed as Exhibit 10.47 to LG&E's Annual
      Report on Form 10-K for the year ended December 31, 1996, and incorporated
      by reference herein]

10.47 Copy of Amended and Restated Omnibus Long-Term Incentive Plan effective
      January 1, 1996, covering officers and key employees of the Company.
      [Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

10.48 Copy of Short-Term Incentive Plan effective January 1, 1996, covering
      officers and key employees of the Company. [Filed as Exhibit 10.53 to the
      Company's Annual Report on Form 10-K for the year ended December 31, 1995,
      and incorporated by reference herein]

10.49 Copy of form of first amendment to change in control agreement for
      officers of the Company and key employees date as of January 1, 1996.
      [Filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

10.50 Copy of Amendment to the Non-Qualified Savings Plan, effective January 1,
      1992. [Filed as Exhibit 10.55 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1995, and incorporated by reference
      herein]

10.51 Copy of Amendment to the Non-Qualified Savings Plan, effective January 1,
      1995. [Filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1995, and incorporated by reference
      herein]

10.52 Copy of Amendment to the Non-Qualified Savings Plan, effective January 1,
      1995. [Filed as Exhibit 10.57 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1995, and incorporated by reference
      herein]

10.53 Copy of Amendment to the Supplemental Executive Retirement Plan, effective
      January 1, 1992. [Filed as Exhibit 10.58 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995, and incorporated by
      reference herein]


                                       74
<PAGE>

10.54 Copy of Amendment to the Supplemental Executive Retirement Plan, effective
      January 1, 1993. [Filed as Exhibit 10.59 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995, and incorporated by
      reference herein]

10.55 Copy of Amendment to the Supplemental Executive Retirement Plan, effective
      January 1, 1995. [Filed as Exhibit 10.60 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995, and incorporated by
      reference herein]

10.56 Copy of Amendment to the Supplemental Executive Retirement Plan, effective
      May 1, 1995. [Filed as Exhibit 10.61 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1995, and incorporated by
      reference herein]

10.57 Copy of Form of Master Gas Purchase Agreement, dated December 14, 1993,
      among Santa Fe, SFEOP and AGPC. [Filed as Exhibit 10.23 to LG&E Natural
      Inc.'s Registration Statement on Form S-4, File No. 33-68224, and
      incorporated by reference herein]

10.58 Copy of Credit Agreement, dated as of January 29, 1996, among LG&E Energy
      Systems Inc., as Borrower, the Banks named therein, Citibank, N.A. as
      Agent and Bank of Montreal as Co-Agent. [Filed as Exhibit 10.01 to the
      Company's Quarterly Report on Form 10-Q/A for the quarter ended March 31,
      1996, and incorporated by reference herein]

10.59 Copy of Support Agreement, dated as of December 6, 1995, between the
      Company and LG&E Energy Systems Inc. [Filed as Exhibit 10.02 to the
      Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1996, and incorporated by reference herein]

10.60 Copy of Credit Agreement, dated as of May 12, 1995, among LG&E Gas Systems
      Inc., as Borrower, the Banks named therein and Bank of Montreal as Agent.
      [Filed as Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q/A
      for the quarter ended March 31, 1996, and incorporated by reference
      herein]

10.61 Copy of Support Agreement, dated as of December 6, 1995, between the
      Company and LG&E Energy Systems Inc. [Filed as Exhibit 10.04 to the
      Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
      1996, and incorporated by reference herein]

10.62 Copy of Credit Agreement, dated as of December 18, 1995, among LG&E, as
      Borrower, the Banks named therein, PNC Bank, Kentucky, Inc. as Agent and
      Bank of Montreal as Co-Agent. [Filed as Exhibit 10.01 to the LG&E's
      Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996, and
      incorporated by reference herein]

10.64 Copy of Firm Transportation Agreement, dated November 1, 1996, between
      LG&E and Tennessee Gas Pipeline Company for 30,000 MMBtu per day in Firm
      Transportation Service under Tennessee's Rate FT-A (expires October 31,
      2001). [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for
      the year ended December 31, 1996, and incorporated by reference herein]

10.65 Amendment No. 1, dated as of November 5, 1996, to Credit Agreement dated
      as of December 18, 1995, by and among Louisville Gas and Electric Company,
      the Banks party thereto, and PNC Bank, Kentucky, Inc. as Agent and Bank of
      Montreal as Co-Agent. [Filed as Exhibit 10.59 to LG&E's Annual Report on
      Form 10-K for the year ended December 31, 1996, and incorporated by
      reference herein]


                                       75
<PAGE>

10.66 Copy of Power Purchase and Sale Agreement, dated as of November 19, 1996,
      among the Company, LG&E Power Marketing Inc., and Oglethorpe Power
      Corporation. [Certain portions of this exhibit have been omitted pursuant
      to a confidential treatment request filed with the Securities and Exchange
      Commission]

10.67 Copy of Power Purchase and Sale Agreement, dated as of January 1, 1997,
      among LG&E Power Marketing Inc., LG&E Power Inc., and Oglethorpe Power
      Corporation. [Certain portions of this exhibit have been omitted pursuant
      to a confidential treatment request filed with the Securities and Exchange
      Commission]

10.68 Copy of Amendment No. 1, dated November 27, 1996, to the Credit Agreement
      dated as of May 12, 1995, among LG&E Gas Systems Inc., as Borrower, the
      Banks named therein and Bank of Montreal as Agent.

10.69 LG&E Energy Corp. and Louisville Gas and Electric Company Non-Officer
      Senior Management Pension Restoration Plan, effective May 1, 1996.

10.70 Copy of Employment Contract between the Company and Roger W. Hale
      effective January 1, 1997.

18    Letter Regarding Change in Accounting Method.

21    Subsidiaries of the Registrant.

23    Consent of Independent Public Accountants.

24    Power of Attorney.

27    Financial Data Schedule.

99.01 Cautionary Statement for purposes of the "Safe Harbor" provisions of the
      Private Securities Litigation Reform Act of 1995.

99.02 Description of Common Stock.

(b)   Executive Compensation Plans and Arrangements:

      Supplemental Executive Retirement Plan as amended through January 3, 1990,
      covering all officers of LG&E. [Filed as Exhibit 10.29 to LG&E's Annual
      Report on Form 10-K for the year ended December 31, 1989, and incorporated
      by reference herein]

      LG&E Energy Corp. Deferred Stock Compensation Plan effective January 1,
      1992, covering non-employee directors of the Company and its subsidiaries.
      [Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1991, and incorporated by reference herein]

      Form of change in control agreement for officers of LG&E Energy Corp.
      [Filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1992, and incorporated by reference herein]

      Supplemental Executive Retirement Plan for R. W. Hale, effective June 1,
      1989. [Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1992, and incorporated 


                                       76
<PAGE>

      by reference herein]

      Nonqualified Savings Plan covering officers of the Company effective
      January 1, 1992. [Filed as Exhibit 10.43 to the Company's Annual Report on
      Form 10-K for the year ended December 31, 1992, and incorporated by
      reference herein]

      LG&E Energy Corp. Stock Option Plan for Non-Employee Directors. [Filed as
      Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year
      ended December 31, 1993, and incorporated by reference herein]

      Amended and Restated Omnibus Long-Term Incentive Plan effective January 1,
      1996, covering officers and key employees of the Company. [Filed as
      Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year
      ended December 31, 1995, and incorporated by reference herein]

      Short-Term Incentive Plan effective January 1, 1996, covering officers and
      key employees of the Company. [Filed as Exhibit 10.53 to the Company's
      Annual Report on Form 10-K for the year ended December 31, 1995, and
      incorporated by reference herein]

      Form of first amendment to change in control agreement for officers of the
      Company and key employees dated as of January 1, 1996. [Filed as Exhibit
      10.54 to the Company's Annual Report on Form 10-K for the year ended
      December 31, 1995, and incorporated by reference herein]

      Amendment to the Non-Qualified Savings Plan, effective January 1, 1992.
      [Filed as Exhibit 10.55 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

      Amendment to the Non-Qualified Savings Plan, effective January 1, 1995.
      [Filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

      Amendment to the Non-Qualified Savings Plan, effective January 1, 1995.
      [Filed as Exhibit 10.57 to the Company's Annual Report on Form 10-K for
      the year ended December 31, 1995, and incorporated by reference herein]

      Amendment to the Supplemental Executive Retirement Plan, effective January
      1, 1992. [Filed as Exhibit 10.58 to the Company's Annual Report on Form
      10-K for the year ended December 31, 1995, and incorporated by reference
      herein]

      Amendment to the Supplemental Executive Retirement Plan, effective January
      1, 1993. [Filed as Exhibit 10.59 to the Company's Annual Report on Form
      10-K for the year ended December 31, 1995, and incorporated by reference
      herein]

      Amendment to the Supplemental Executive Retirement Plan, effective January
      1, 1995. [Filed as Exhibit 10.60 to the Company's Annual Report on Form
      10-K for the year ended December 31, 1995, and incorporated by reference
      herein]

      Amendment to the Supplemental Executive Retirement Plan, effective May 1,
      1995. [Filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K
      for the year ended December 31, 1995, and incorporated by reference
      herein]


                                       77
<PAGE>

      Copy of Employment Contract between the Company and Roger W. Hale
      effective January 1, 1997.

      LG&E Energy Corp. and Louisville Gas and Electric Company Non-Officer
      Senior Management Pension Restoration Plan, effective May 1, 1996.

(c)   Reports on Form 8-K:

      On November 22, 1996, the Company filed a report on Form 8-K stating that
      LG&E Natural announced the discovery of certain unauthorized transactions
      by an individual in its Calgary, Alberta, office. LG&E Natural is a
      wholly-owned subsidiary of LG&E Energy Corp.

      On December 20, 1996, the Company filed a report on Form 8-K announcing
      that it had agreed to acquire interests in two Argentine natural gas
      distribution companies.

      On January 6, 1997, the Company filed a report on Form 8-K announcing that
      it had named its Chief Financial Officer, Walter Z. Berger, to a new
      position of Group President - Energy Marketing.

      On February 10, 1997, the Company filed a report on Form 8-K announcing
      that it had submitted a proposal to the Board of Directors of Big Rivers
      Electric Corporation to lease or acquire the assets of the Henderson,
      KY-based cooperative, which is currently in bankruptcy proceedings.

      On February 14, 1997, the Company filed a report on Form 8-K announcing
      that it had completed its previously announced $140-million acquisition of
      interests in two Argentine natural gas distribution companies.

      On February 25, 1997, the Company filed a report on Form 8-K announcing
      that its board of directors gave approval for the Company to replace
      Pacificorp in the existing reorganization plan of Big Rivers Electric
      Corporation.

      On March 20, 1997, the Company filed a report on Form 8-K announcing 
      that a federal bankruptcy court selected the Company's proposal to 
      lease the generating assets of Big Rivers Electric Corporation in a
      court ordered auction.


                                       78
<PAGE>

                 LG&E Energy Corp. and Subsidiaries Schedule II
                 Schedule II - Valuation and Qualifying Accounts
                   For the Three Years Ended December 31, 1996
                                (Thousands of $)

<TABLE>
<CAPTION>
                                                                                                          (a)
                                                                                                  Accumulated
                                                 Other          Accounts             Price           Deferred
                                              Property        Receivable              Risk       Income Taxes
                                                   and    (Uncollectible        Management        (NOL Carry-
                                           Investments         Accounts)          Reserves          forwards)
<S>                                            <C>                <C>               <C>               <C>  
Balance December 31, 1993                      $    63            $1,769            $ --              $  --

Additions:
    Charged to costs and expenses                  968             3,166              --                 --
    Other additions                              1,648              --                --                 --
Deductions:
    Net charges of nature for which
       reserves were created                      --               3,396              --                 --
    Other deductions                               134              --                --                 --
                                               -------            ------            ------            -------

Balance December 31, 1994                        2,545             1,539              --                 --

Additions:
    Charged to costs and expenses                6,523             4,039              --                 --
    Other additions                                 41             4,614              --               29,501
Deductions:
    Net charges of nature for which
       reserves were created                      --               3,923              --                 --
    Other deductions                               502              --                --                 --
                                               -------            ------            ------            -------

Balance December 31, 1995                        8,607             6,269              --               29,501

Additions:
    Charged to costs and expenses               10,934             2,940             7,241               --
    Other additions                                641               616              --                 --
Deductions:
    Net charges of nature for which
       reserves were created                      --               3,224              --                 --
    Other deductions                             1,479              --                --                3,900
                                               -------            ------            ------            -------

Balance December 31, 1996                      $18,703            $6,601            $7,241            $25,601
                                               =======            ======            ======            =======
</TABLE>

(a) Partially offsets a deferred tax debit included in accumulated deferred
    income taxes. The debit represents LG&E Natural's net operating loss
    carryforwards available when acquired by the Company.


                                       79
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                        LG&E ENERGY CORP.
                                        Registrant

March 26, 1997                          /s/ Charles A. Markel III
(Date)                                  _____________________________________
                                        Charles A. Markel III
                                        Vice President - Finance and Treasurer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.

Signature                Title                                    Date
---------                -----                                    ----

Roger W. Hale            Chairman of the Board,
                         President and Chief Executive
                         Officer
                         (Principal Executive Officer);

Charles A. Markel III    Vice President - Finance and 
                         Treasurer (Principal Financial 
                         and Accounting Officer);

William C. Ballard, Jr.  Director;

Ronald L. Bittner        Director

Owsley Brown, II         Director;

S. Gordon Dabney         Director;

Gene P. Gardner          Director;

J. David Grissom         Director;

David B. Lewis           Director;

Anne H. McNamara         Director;

T. Ballard Morton, Jr.   Director; and

Dr. Donald C. Swain      Director.

By  /s/ Charles A. Markel III
    ________________________________                              March 26, 1997
       Charles A. Markel III
       (Attorney-In-Fact)


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