UNITED STATES
                    SECURITIES AND EXCHANGE COMMISSION
                         Washington, D. C.  20549

                                FORM 10-Q

(Mark One)
[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                      SECURITIES EXCHANGE ACT OF 1934

               For the quarterly period ended June 30, 2006

                                    OR

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


       Commission  Registrant, State of Incorporation,  IRS Employer
      File Number     Address, and Telephone Number Identification Number

         1-2893    Louisville Gas and Electric Company   61-0264150
                         (A Kentucky Corporation)
                           220 West Main Street
                             P. O. Box 32010
                        Louisville, Kentucky 40232
                              (502) 627-2000

         1-3464         Kentucky Utilities Company       61-0247570
                  (A Kentucky and Virginia Corporation)
                            One Quality Street
                      Lexington, Kentucky 40507-1428
                              (859) 255-2100


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

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer.  See definition of
"accelerated filer and large accelerated filer" in Rule 12-b2 of the
Exchange Act.  (Check one):

Large accelerated filer _____               Accelerated filer_____

                    Non-accelerated filer __X___

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  Yes    No X

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

Louisville Gas and Electric Company - 21,294,223 shares, without par value,
as of July 31, 2006, all held by E.ON U.S. LLC

Kentucky Utilities Company - 37,817,878 shares, without par value, as of
July 31, 2006, all held by E.ON U.S. LLC

This combined Form 10-Q is separately filed by Louisville Gas and Electric
Company and Kentucky Utilities Company. Information contained herein
related to any individual registrant is filed by such registrant on its own
behalf.  Each registrant makes no representation as to information related
to the other registrants.


                          INDEX OF ABBREVIATIONS

AG                    Attorney General of Kentucky
ARO                   Asset Retirement Obligation
CAIR                  Clean Air Interstate Rule
CAMR                  Clean Air Mercury Rule
CCN                   Certificate of Public Convenience and Necessity
Company               LG&E or KU, as applicable
Companies             LG&E and KU
DSM                   Demand Side Management
ECR                   Environmental Cost Recovery
EEI                   Electric Energy, Inc.
E.ON                  E.ON AG
E.ON U.S.             E.ON U.S. LLC (formerly LG&E Energy LLC and LG&E
                        Energy Corp.)
E.ON U.S. Services    E.ON U.S. Services Inc. (formerly LG&E Energy
                        Services Inc.)
EPA                   U.S. Environmental Protection Agency
EPAct 2005            Energy Policy Act of 2005
FAC                   Fuel Adjustment Clause
FASB                  Financial Accounting Standards Board
FERC                  Federal Energy Regulatory Commission
Fidelia               Fidelia Corporation (an E.ON affiliate)
FIN                   FASB Interpretation No.
FGD                   Flue Gas Desulfurization
FTR                   Financial Transmission Rights
IMEA                  Illinois Municipal Electric Agency
IMPA                  Indiana Municipal Power Agency
Kentucky Commission   Kentucky Public Service Commission
KU                    Kentucky Utilities Company
LIBOR                 London Interbank Offer Rate
LG&E                  Louisville Gas and Electric Company
MISO                  Midwest Independent Transmission System
                        Operator,Inc.
Moody's               Moody's Investor Services, Inc.
Mw                    Megawatts
NOx                   Nitrogen Oxide
OMU                   Owensboro Municipal Utilities
PUHCA 1935            Public Utility Holding Company Act of 1935
PUHCA 2005            Public Utility Holding Company Act of 2005
S&P                   Standard & Poor's Rating Services
SEC                   Securities and Exchange Commission
SFAS                  Statement of Financial Accounting Standards
SO2                   Sulfur Dioxide
TEMT                  Transmission and Energy Markets Tariff
VDT                   Value Delivery Team Process
Virginia Commission   Virginia State Corporation Commission

                             TABLE OF CONTENTS

                                  PART I
 Item 1.  Financial Statements (Unaudited)
  	   Louisville Gas and Electric Company
            Statements of Income                                        1
            Statements of Retained Earnings                             1
            Balance Sheets                                              2
            Statements of Cash Flows                                    4
            Statements of Comprehensive Income                          5
     	   Kentucky Utilities Company
            Statements of Income                                        6
            Statements of Retained Earnings                             6
            Balance Sheets                                              7
            Statements of Cash Flows                                    9
            Statements of Comprehensive Income                         10
            Notes to Financial Statements                              11
 Item 2. Management's Discussion and Analysis of Financial
            Condition and Results of Operations                        26
 Item 3. Quantitative and Qualitative Disclosures About Market Risk    36
 Item 4. Controls and Procedures                                       38

                                  PART II

 Item 1. Legal Proceedings                                             39
 Item 1A.Risk Factors                                                  39
 Item 5. Other Information                                             39
 Item 6. Exhibits                                                      39
         Signatures                                                    41
         Exhibits                                                      42

Part I.  Financial Information - Item 1.  Financial Statements (Unaudited)

                   Louisville Gas and Electric Company
                     Statements of Income (Unaudited)
                              (Millions of $)

                                          Three Months        Six Months
                                         Ended June 30,     Ended June 30,
                                         2006     2005       2006    2005
OPERATING REVENUES:
Electric                                 $223     $228       $435    $457
Gas                                        54       53        254     225
    Total operating revenues              277      281        689     682

OPERATING EXPENSES:
Fuel for electric generation               70       68        135     129
Power purchased                            26       28         54      67
Gas supply expenses                        38       36        200     171
Other operation and maintenance expenses   65       65        143     139
Depreciation and amortization              31       31         61      62
    Total operating expenses              230      228        593     568

OPERATING INCOME                           47       53         96     114

Other expense - net                         1        -          1       -
Interest expense (Note 3)                   6        6         13      12
Interest expense to affiliated
  companies (Note 8)                        3        3          7       6

INCOME BEFORE INCOME TAXES                 37       44         75      96

Federal and state income taxes             12	    16         25      34

NET INCOME                                $25      $28        $50     $62


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


                Statements of Retained Earnings (Unaudited)
                              (Millions of $)

                                          Three Months       Six Months
                                         Ended June 30,     Ended June 30,
                                         2006     2005       2006    2005

Balance at beginning of period           $605     $538       $621    $534
Net income                                 25       28         50      62
  Subtotal                                630      566        671     596

Cash dividends declared on stock:
Cumulative preferred                        1        1          2       2
Common                                     20       10         60      39
  Subtotal                                 21       11         62      41

Balance at end of period                 $609     $555       $609    $555

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


                    Louisville Gas and Electric Company
                              Balance Sheets
                                (Unaudited)
                              (Millions of $)


ASSETS                                           June 30,   December 31,
                                                   2006         2005
Current Assets:
Cash and cash equivalents                         $   5        $  7
Accounts receivable - less reserves of $1
  million as of June 30,2006
  and December 31, 2005                             123         231
Accounts receivable from affiliated
  companies (Note 8)                                 19          36
Materials and supplies:
  Fuel (predominantly coal)                          53          39
  Gas stored underground                             30         125
  Other materials and supplies                       29          28
Prepayments and other current assets                  4           6
  Total current assets                              263         472

Other property and investments - less reserves
  of less than $1 million as of June 30, 2006
  and December 31, 2005                               1           1

Utility plant:
At original cost                                  4,077       4,049
Less: reserve for depreciation                    1,523       1,509
  Net utility plant                               2,554       2,540

Deferred debits and other assets:
Restricted cash                                       7          10
Unamortized debt expense                              8           8
Regulatory assets (Note 2)                           78          84
Other assets                                         36          31
  Total deferred debits and other assets            129         133

Total assets                                     $2,947      $3,146

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


                    Louisville Gas and Electric Company
                          Balance Sheets (cont.)
                                (Unaudited)
                              (Millions of $)

LIABILITIES AND EQUITY                           June 30,  December 31,
                                                   2006       2005
Current liabilities:
Current portion of long-term debt                  $248        $248
Notes payable to affiliated companies
  (Note 5 and Note 8)                                 1         141
Accounts payable                                     80         141
Accounts payable to affiliated
  companies (Note 8)                                 47          52
Accrued income taxes                                  9           6
Customer deposits                                    18          17
Other current liabilities                            26          15
  Total current liabilities                         429         620

Long-term debt:
Long-term debt (Note 5)                             328         328
Long-term debt to affiliated company
  (Note 5 and Note 8)                               225         225
Mandatorily redeemable preferred stock               20          20
  Total long-term debt                              573         573

Deferred credits and other liabilities:
Accumulated deferred income taxes - net             312         322
Investment tax credit, in process of
  amortization                                       40          42
Accumulated provision for pensions and
  related benefits                                  129         143
Customer advances for construction                   10          10
Asset retirement obligation                          27          27
Regulatory liabilities (Note 2):
  Accumulated cost of removal of utility
    plant                                           225         219
  Regulatory liability deferred income taxes         44          42
  Other regulatory liabilities                       42          20
Other liabilities                                    23          31
  Total deferred credits and other liabilities      852         856

Cumulative preferred stock                           70          70

Common equity:
Common stock, without par value -
  Authorized 75,000,000 shares,
  outstanding 21,294,223 shares                     424         424
Additional paid-in capital                           40          40
Accumulated comprehensive loss                      (50)        (58)
Retained earnings                                   609         621
  Total common equity                             1,023       1,027

Total liabilities and equity                     $2,947      $3,146

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


                    Louisville Gas and Electric Company
                         Statements of Cash Flows
                                (Unaudited)
                              (Millions of $)
                                                   Six Months Ended
                                                        June 30,
                                                   2006        2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                          $50         $62
Items not requiring cash currently:
  Depreciation and amortization                      61          62
  Deferred income taxes                             (13)        (11)
  VDT amortization                                    7          15
  Other                                              (3)         (3)
Changes in current assets and liabilities:
  Accounts receivable                               108          41
  Accounts receivable from affiliated companies      17         (15)
  Fuel                                              (14)         (6)
  Gas stored underground                             95          58
  Other changes in current assets                     1           -
  Accounts payable                                  (61)        (39)
  Accounts payable to affiliated companies           (5)         29
  Accrued income taxes                                3          (6)
  Other changes in current liabilities               12          (7)
Pension funding (Note 4)                            (18)          -
Gas supply clause receivable, net                    31           2
Other                                                (8)         (3)
  Net cash provided by operating activities         263         179

CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures                           (66)        (51)
Change in restricted cash                             3          (2)
  Net cash used for investing activities            (63)        (53)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term borrowings from
  affiliated company (Note 8)                         -         (50)
Repayment of short-term borrowings from
  affiliated company (Note 5)                      (140)        (37)
Payment of dividends                                (62)        (41)
  Net cash used for financing activities           (202)       (128)

CHANGE IN CASH AND CASH EQUIVALENTS                  (2)         (2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD                                              7           7
CASH AND CASH EQUIVALENTS AT END OF PERIOD           $5          $5

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


                    Louisville Gas and Electric Company
                    Statements of Comprehensive Income
                                (Unaudited)
                              (Millions of $)


                                         Three Months         Six Months
                                        Ended June 30,      Ended June 30,
                                         2006    2005        2006    2005


Net income                               $25      $28         $50     $62

Income Taxes - Minimum Pension Liability   -        -           -      (1)

Gain (loss) on derivative instruments
  and hedging activities - net of tax
  benefit (expense) of $(2) million,
  $5 million, $(5) million and $4
  million, respectively (Note 4)           3       (8)          8      (6)

Comprehensive income (loss), net of tax    3       (8)          8      (7)

Comprehensive income                     $28      $20         $58     $55

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


                        Kentucky Utilities Company
                           Statements of Income
                                (Unaudited)
                              (Millions of $)

                                          Three Months         Six Months
                                         Ended June 30,      Ended June 30,
                                         2006     2005       2006    2005

OPERATING REVENUES                       $276     $265       $569    $552

OPERATING EXPENSES:
Fuel for electric generation              100       84        195     172
Power purchased                            44       50         90      96
Other operation and maintenance expenses   63       68        133     126
Depreciation and amortization              29       29         57      58
  Total operating expenses                236      231        475     452

OPERATING INCOME                           40       34         94     100

Other (income) - net                       (5)      (2)       (13)     (3)
Interest expense (Note 3)                   4        4          7       7
Interest expense to affiliated
  companies (Note 5 and Note 8)             5        4         11       7

INCOME BEFORE INCOME TAXES                 36       28         89      89

Federal and state income taxes             11       10         29      34

NET INCOME                                $25      $18        $60     $55

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


                      Statements of Retained Earnings
                                (Unaudited)
                              (Millions of $)

                                         Three Months        Six Months
                                        Ended June 30,      Ended June 30,
                                         2006     2005      2006    2005

Balance at beginning of period           $753     $666      $718    $660
Net income                                 25       18        60      55
  Subtotal                                778      684       778     715

Cash dividends declared on stock:
Cumulative preferred                        -        -         -       1
Common                                      -       10         -      40
  Subtotal                                  -       10         -      41

Balance at end of period                 $778     $674      $778    $674

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


                        Kentucky Utilities Company
                              Balance Sheets
                                (Unaudited)
                              (Millions of $)

                                                 June 30,    December 31,
ASSETS                                             2006         2005

Current assets:
Cash and cash equivalents                            $5          $7
Restricted cash                                      10          22
Accounts receivable - less reserves of $2
  million as of June 30, 2006 and
  December 31, 2005                                 113         135
Accounts receivable from affiliated
  companies (Note 8)                                 18          32
Materials and supplies:
  Fuel (predominantly coal)                          75          55
  Other materials and supplies                       35          32
Prepayments and other current assets                  9           5
  Total current assets                              265         288

Other property and investments -
  less reserves of less than $1 million as
  of June 30,2006 and December 31, 2005              22          23

Utility plant:
At original cost                                  3,944       3,847
Less: reserve for depreciation                    1,532       1,508
  Net utility plant                               2,412       2,339

Deferred debits and other assets:
Unamortized debt expense                              5           5
Regulatory assets (Note 2)                           70          58
Cash surrender value of key man life insurance       34          32
Other assets                                          9          11
  Total deferred debits and other assets            118         106
Total assets                                     $2,817      $2,756

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


                        Kentucky Utilities Company
                          Balance Sheets (cont.)
                                (Unaudited)
                              (Millions of $)

                                                 June 30,   December 31,
LIABILITIES AND EQUITY                             2006        2005

Current liabilities:
Current portion of long-term debt                  $140        $123
Notes payable to affiliated companies
  (Note 5 and Note 8)                                52          70
Accounts payable                                     81          89
Accounts payable to affiliated companies
  (Note 8)                                           60          53
Accrued income taxes                                  -          13
Customer deposits                                    18          17
Other current liabilities                            24          18
  Total current liabilities                         375         383

Long-term debt:
Long-term debt (Note 5)                             186         240
Long-term debt to affiliated company
  (Note 5 and Note 8)                               433         383
  Total long-term debt                              619         623

Deferred credits and other liabilities:
Accumulated deferred income taxes - net             277         274
Accumulated provision for pensions and
  related benefits                                   97          92
Asset retirement obligation                          28          27
Regulatory liabilities (Note 2):
  Accumulated cost of removal of utility plant      288         281
  Regulatory liability deferred income taxes         22          23
  Other regulatory liabilities                       10          11
Other liabilities                                    19          20
  Total deferred credits and other liabilities      741         728

Common equity:
Common stock, without par value -
  Authorized 80,000,000 shares,
  outstanding 37,817,878                            308         308
Additional paid-in capital                           15          15
Accumulated comprehensive loss                      (19)        (19)

Retained earnings                                   765         704
Undistributed subsidiary earnings                    13          14
Total retained earnings                             778         718
 Total common equity                              1,082       1,022

Total liabilities and equity                     $2,817      $2,756

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


                        Kentucky Utilities Company
                         Statements of Cash Flows
                                (Unaudited)
                              (Millions of $)

                                                    Six Months Ended
                                                         June 30,
                                                    2006         2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                           $60          $55
Items not requiring cash currently:
  Depreciation and amortization                       57           58
  Deferred income taxes                                2           (4)
  VDT amortization                                     3            6
  Other                                                6           (5)
Changes in current assets and liabilities:
  Accounts receivable                                 22           26
  Accounts receivable from affiliated companies       14          (21)
  Fuel                                               (20)          (5)
  Other changes in current assets                     (7)           3
  Accounts payable                                    (8)         (20)
  Accounts payable to affiliated companies             7           35
  Accrued income taxes                               (13)          (2)
  Other changes in current liabilities                 7          (12)
Fuel adjustment clause receivable, net               (15)         (13)
Other                                                 (4)           2
  Net cash provided by operating activities          111          103

CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures                           (121)         (44)
Change in restricted cash                             12            -
  Net cash used for investing activities            (109)         (44)

CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of first mortgage bonds (Note 5)          (36)         (50)
Short-term borrowings from affiliated company
  (Note 5)                                             -           58
Long-term borrowings from affiliated company
  (Note 5)                                            50            -
Repayment of short-term borrowings from
  affiliated company (Note 5)                        (18)           -
Repayment of other borrowings                          -          (27)
Payment of dividends                                   -          (41)
  Net cash used for financing activities              (4)         (60)

CHANGE IN CASH AND CASH EQUIVALENTS                   (2)          (1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
  PERIOD                                               7            5
CASH AND CASH EQUIVALENTS AT END OF PERIOD            $5           $4

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


                        Kentucky Utilities Company
                    Statements of Comprehensive Income
                                (Unaudited)
                              (Millions of $)


                                         Three Months        Six Months
                                        Ended June 30,      Ended June 30,
                                         2006     2005      2006    2005

Net income                                $25      $18       $60     $55

Comprehensive income, net of tax            -        -         -       -

Comprehensive income                      $25      $18       $60     $55

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


                   Louisville Gas and Electric Company
                       Kentucky Utilities Company
                      Notes to Financial Statements
                               (Unaudited)

1. General

   The unaudited financial statements include the accounts of the
   Companies. The common stock of each Company is wholly-owned by E.ON
   U.S. In the opinion of management, the unaudited condensed interim
   financial statements include all adjustments, consisting only of normal
   recurring adjustments, necessary for a fair statement of financial
   position, results of operations, retained earnings, comprehensive
   income and cash flows for the periods indicated. Certain information
   and footnote disclosures normally included in financial statements
   prepared in accordance with generally accepted accounting principles
   have been condensed or omitted pursuant to SEC rules and regulations,
   although the Companies believe that the disclosures are adequate to
   make the information presented not misleading.

   See the Companies' Annual Reports on Form 10-K for the year ended
   December 31, 2005, for information relevant to the accompanying
   financial statements, including information as to the significant
   accounting policies of the Companies.

   New Accounting Pronouncements

   In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in
   Income Taxes, an interpretation of FASB Statement No. 109, Accounting
   for Income Taxes. FIN 48 is effective for fiscal years beginning after
   December 15, 2006. FIN 48 clarifies accounting for income taxes to
   provide improved consistency of criteria used to recognize, derecognize
   and measure benefits related to income taxes. The Companies are now
   analyzing the future impacts of FIN 48 on results of operations and
   financial condition.

2. Rates and Regulatory Matters

   For a description of each line item of regulatory assets and
   liabilities for the Companies, reference is made to Part I, Item 8,
   Financial Statements and Supplementary Data, Note 3 of the Companies'
   Annual Reports on Form 10-K for the year ended December 31, 2005.

   The following regulatory assets and liabilities were included in LG&E's
   Balance Sheets as of June 30, 2006 and December 31, 2005:

                    Louisville Gas and Electric Company
                                (Unaudited)
                                                 June 30,    December 31,
    (in millions)                                  2006         2005

    ARO                                             $21          $20
    Gas supply adjustments                           21           29
    Unamortized loss on bonds                        20           21
    ECR                                               6            2
    FAC                                               5            -
    VDT                                               -            7
    Other                                             5            5
    Total regulatory assets                         $78          $84

    Accumulated cost of removal of utility plant   $225         $219
    Deferred income taxes - net                      44           42
    Gas supply adjustments                           40           17
    Other                                             2            3
    Total regulatory liabilities                   $311         $281

   LG&E currently earns a return on all regulatory assets, excluding the
   ARO regulatory assets, gas supply adjustments and the FAC. The ARO
   regulatory assets earn no current return and will be offset against the
   associated regulatory liability (included in other regulatory
   liabilities), ARO asset and ARO liability at the time the underlying
   asset is retired. The gas supply adjustments and the FAC have separate
   rate mechanisms with recovery within twelve months.

   The increase in FAC for the period is due to the higher cost of fuel
   being passed on to customers. The decrease in VDT for the period is due
   to the completion of the amortization of the VDT in the first quarter
   of 2006.  The increase in the Gas supply adjustments net liability for
   the period reflects over-recovery of gas supply costs, in process of
   being refunded to customers.

   The following regulatory assets and liabilities were included in KU's
   Balance Sheets as of June 30, 2006 and December 31, 2005:

                        Kentucky Utilities Company
                                (Unaudited)

                                                 June 30,    December 31,
    (in millions)                                  2006         2005

    ARO                                             $21          $20
    Unamortized loss on bonds                        10           11
    ECR                                               5            4
    FAC                                              27           12
    VDT                                               -            3
    Other                                             7            8
    Total regulatory assets                         $70          $58

    Accumulated cost of removal of utility plant   $288         $281
    Deferred income taxes - net                      22           23
    Other                                            10           11
    Total regulatory liabilities                   $320         $315

   KU currently earns a return on all regulatory assets, excluding the ARO
   regulatory assets and the FAC. The ARO regulatory assets earn no
   current return and will be offset against the associated regulatory
   liability (included in other regulatory liabilities), ARO asset and ARO
   liability at the time the underlying asset is retired. The FAC has a
   separate recovery mechanism with recovery within twelve months.

   The increase in FAC for the period is due to the higher cost of fuel
   being passed on to customers. The decrease in VDT for the period is due
   to the completion of the amortization of the VDT in the first quarter
   of 2006.

   ELECTRIC AND GAS RATE CASES

   On June 30, 2004, the Kentucky Commission issued an order approving an
   increase in the base electric rates of the Companies and the natural
   gas rates of LG&E.  The rate increases took effect on July 1, 2004.

   During 2004 and 2005, the AG conducted an investigation of the
   Companies, as well as of the Kentucky Commission and its staff,
   requesting information regarding allegedly improper communications
   between the Companies and the Kentucky Commission, particularly during
   the period covered by the rate cases. Concurrently, the AG had filed
   pleadings with the Kentucky Commission requesting rehearing of the rate
   cases on computational components of the increased rates, including
   income taxes, cost of removal and depreciation amounts. In August 2004,
   the Kentucky Commission denied the AG's rehearing request on the cost
   of removal and depreciation issues and granted rehearing on the income
   tax component. The Kentucky Commission agreed to hold in abeyance
   further proceedings in the rate case, until the AG filed its
   investigative report regarding the allegations of improper
   communication.

   In January 2005 and February 2005, the AG filed a motion summarizing
   its investigative report as containing evidence of improper
   communications and record-keeping errors by the Companies in their
   conduct of activities before the Kentucky Commission or other state
   governmental entities and forwarded such report to the Kentucky
   Commission under continued confidential treatment to allow it to
   consider the report, including its impact, if any, on completing its
   investigation and any remaining steps in the rate case.  To date, the
   Companies have neither seen nor requested copies of the report or its
   contents.

   In December 2005, the Kentucky Commission issued an order noting
   completion of its inquiry, including review of the AG's investigative
   report. The order concludes that no improper communications occurred
   during the rate proceeding. The order further established a procedural
   schedule through the first quarter of 2006 for considering the sole
   issue for which rehearing was granted: state income tax rates used in
   calculating the granted rate increase. On March 31, 2006, the Kentucky
   Commission issued an order resolving this issue in the Companies' favor
   consistent with the original rate increase order.

   The Companies believe no improprieties have occurred in their
   communications with the Kentucky Commission and have cooperated in the
   proceedings before the AG and the Kentucky Commission. The Companies
   are currently unable to predict whether there will be any additional
   actions or consequences as a result of the AG's report and
   investigation.

   ECR

   In June 2006, the Companies filed applications to amend their ECR plans
   with the Kentucky Commission seeking approval to recover investments in
   environmental upgrades at the Companies' generating facilities. The
   estimated capital cost of the upgrades for the years 2006 through 2008
   is approximately $391 million ($66 million for LG&E and $325 million
   for KU), of which $229 million is for the Air Quality Control System at
   Trimble County Unit 2 ($44 million for LG&E and $185 million for KU)
   and $95 million is for KU's Ghent Unit 2 Selective Catalytic Reduction.
   A final order is expected to be issued by the end of 2006.

   In April 2006, the Kentucky Commission initiated routine periodic
   reviews of the ECR mechanisms for the Companies.  These proceedings are
   expected to be completed before the end of the third quarter of 2006.

   In December 2004, KU and LG&E filed applications with the Kentucky
   Commission for approval of a CCN to construct new SO2 control
   technology (FGDs) at KU's Ghent and Brown stations, and to amend LG&E's
   compliance plan to allow recovery of new and additional environmental
   compliance facilities.  The estimated capital cost of the additional
   facilities for 2006 through 2008 is approximately $720 million ($40
   million for LG&E and $680 million for KU), of which $560 million is for
   the KU FGDs at Brown and Ghent.  Hearings in these cases occurred
   during May 2005 and final orders were issued in June 2005, granting
   approval of the CCN and amendments to the Companies' compliance plans.

   FAC

   On February 15, 2006, KU filed with the Virginia Commission an
   application seeking approval of an increase in its fuel cost factor to
   reflect higher fuel costs incurred during 2005, and anticipated to be
   incurred in 2006, of approximately $6 million. The Virginia Commission
   approved KU's request on April 5, 2006.

   VDT

   In December 2001, the Companies received an order from the Kentucky
   Commission permitting them to set up regulatory assets for workforce
   reduction costs (VDT costs) and begin amortizing them over a five-year
   period beginning in April 2001. The order also reduced revenues through
   a surcredit on bills to ratepayers over the same five-year period,
   reflecting a sharing (40% to the ratepayers and 60% to the Companies)
   of the stipulated savings, net of amortization costs, of the workforce
   reduction. The five-year VDT amortization period ended March 31, 2006.

   On February 27, 2006, the AG, Kentucky Industrial Utility Consumers,
   Inc. and the Companies reached a settlement agreement on the future
   ratemaking treatment of the VDT surcredits and costs and subsequently
   submitted a joint motion to the Kentucky Commission to approve the
   unanimous settlement agreement.  Under the terms of the settlement
   agreement, the VDT surcredit will continue at the current level until
   such time as LG&E or KU file for a change in electric or natural gas
   base rates.  The Kentucky Commission issued an order on March 24, 2006,
   approving the settlement agreement.

   MISO

   The MISO is a non-profit independent transmission system operator that
   controls more than 100,000 miles of transmission lines over 1.1 million
   square miles in 17 northern Midwest states and one Canadian province.
   The MISO operates the regional power grid and wholesale electricity
   market in an effort to optimize efficiency and safeguard reliability in
   accordance with federal energy policy.

   The Companies are now involved in proceedings with the Kentucky
   Commission and the FERC seeking the authority to exit the MISO. Based
   on various financial analyses performed internally due to the July 2003
   Kentucky Commission investigation into MISO membership, and
   particularly in light of the financial impact of MISO's implementation
   of the new day-ahead and real-time markets, the Companies determined
   that the costs of MISO membership, both now and in the future, outweigh
   the benefits. A timeline of events regarding the MISO and various
   proceedings is as follows:

      - September 1998 - The FERC granted conditional approval for the
        formation of the MISO. The Companies were founding members.

      - October 2001 - The FERC ordered that all bundled retail loads and
        grandfathered wholesale loads of each member transmission owner
        be included in the calculation of the MISO "cost adder," the
        Schedule 10 charges designed to recover the MISO's cost of
        operation, including start-up capital (debt) costs. The Companies
        and several owners opposed the FERC order and filed suit with the
        United States Court of Appeals.

      - February 2002 - The MISO began commercial operations.

      - February 2003 - The FERC reaffirmed its position on the Schedule
        10 charges and the order was subsequently upheld by the U.S. Court
        of Appeals.

      - July 2003 - The Kentucky Commission opened an investigation into
        the Companies' MISO membership. Testimony was filed by the
        Companies that supported an exit from the MISO, under certain
        conditions.

      - August 2004 - The MISO filed its FERC-required TEMT. The Companies
        and other owners filed opposition to certain conditions of the TEMT
        and sought to delay the implementation. Such opposition was denied
        by the FERC.

      - December 2004 - The Companies provided the MISO its required
        one-year notice of intent to exit the grid.

      - April 2005 - The MISO implemented its day-ahead and real-time
        market (MISO Day 2), including a congestion management system.

      - October 2005 - The Companies filed documents with the FERC seeking
        authority to exit the MISO.

      - November 2005 - The Companies requested a Kentucky Commission order
        authorizing the transfer of functional control of their
        transmission facilities from the MISO to the Companies
        respectively, for the purpose of withdrawing from the MISO. The
        request stated that the Tennessee Valley Authority ("TVA") would
        have control to the extent necessary to act as the Companies'
        Reliability Coordinator and for the Southwest Power Pool, Inc.
        ("SPP") to perform its function as the Companies' Independent
        Transmission Organization. The Kentucky Commission issued an order
        authorizing this transfer in July 2006.

      - March 2006 - the FERC issued an order conditionally approving the
        request of the Companies to exit the MISO.  The FERC order
        contained a number of conditions that the Companies needed to
        satisfy to effect their exit from the MISO including:

        - Submission of various compliance filings addressing:

          - the Companies' hold-harmless obligations under the MISO
            Transmission Owners' Agreement, and the amount of the MISO
            exit fee to be paid by the Companies as calculated under the
            approved methodology;
          - the Companies' anticipated arrangements with Southwest Power
            Pool, Inc. and Tennessee Valley Authority, including revisions
            to address certain independence and transmission planning
            considerations, and reciprocity arrangements to ensure certain
            KU requirements customers do not incur pancaked rates for
            transmission and ancillary services;
          - the Companies' proposed Open Access Transmission Tariff as
            revised to address possible capacity hoarding, available
            transmission calculation methodology, curtailment priority and
            pricing, among other matters; and
          - the Companies' finalized arrangements with the Southwest Power
            Pool, Inc. and Tennessee Valley Authority.

        - The Companies must also file an application of the proposed Open
          Access Transmission Tariff under Section 205 of the Federal Power
          Act including a proposed return on equity. During April 2006
          through the present, the Companies have submitted filings to the
          FERC addressing the majority of the conditions contained in the
          March 2006 order, including a proposed return on equity of 10.88%
          as part of its open access transmission tariff effective upon any
          exit from the MISO.

      - May 2006 - the Kentucky Commission issued an order approving the
        request of the Companies to exit the MISO.  The order authorized
        the Companies, upon exit of the MISO, to establish a regulatory
        asset for the exit fee, subject to adjustment for possible future
        MISO credits, and a regulatory liability for certain revenues which
        may be collected via current base rates as a result of the existing
        inclusion of amounts associated with certain MISO Schedule 10
        charges.

      - July 2006 - the Kentucky Commission issued an order approving the
        Companies' contractual arrangements with TVA and SPP to provide
        services to the Companies as reliability coordinator and
        independent transmission organization, respectively, upon a
        withdrawal from the MISO.  This order was subject to certain
        conditions based upon a satisfactory outcome of pending FERC
        proceedings involving the Companies' market-based rate authority.

      - July 2006 - the Kentucky Commission issued further orders denying
        the MISO's request for a rehearing regarding the May 2006 order
        and denying the MISO's request for intervenor status in the
        proceeding concerning the Companies' TVA/SPP arrangements.

      - July 2006 - the FERC issued a further decision accepting, in
        substantial part, certain of the Companies' steps, including
        compliance and other filings, which constituted conditions to the
        FERC's March 2006 order conditionally approving their exit from the
        MISO.  Also in July 2006, the FERC issued an order denying the
        MISO's request for a rehearing regarding the FERC's March 2006
        order.

   The Companies now estimate that they may complete their exit from the
   MISO during late summer 2006.  The Companies have tendered a
   contractual notice to the MISO providing for a withdrawal date of
   September 1, 2006.  There remain certain further conditions that must
   be satisfied under the FERC's exit orders, which conditions the
   Companies currently anticipate they can accomplish.  The Companies are
   in continuing discussions with the MISO concerning operational elements
   of the exit and transition.

   On or about the date of a completed exit from the MISO, and following
   initial calculation and invoicing from the MISO, the Companies would
   pay an exit fee to the MISO in an amount of up to approximately $41
   million (allocated approximately $16 million for LG&E and $25 million
   for KU).  The ultimate amount would be determined based upon the actual
   timing and circumstances of exit and, following payment, is subject to
   confirmation, correction and true-up, as agreed between the Companies
   and the MISO.  The Kentucky Commission's May 2006 order granted certain
   relief regarding the exit fee, including the establishment of a
   regulatory asset relating to such fee and continuing ability to recover
   certain MISO charges in existing rates.

   While the Companies believe they can reasonably achieve the remaining
   conditions imposed by the FERC relating to MISO exit by the late
   summer, including possibly as early as September 1, 2006, the actual
   timing or occurrence of withdrawal cannot be assured.

   Market-Based Rate Authority

   Beginning in April 2004, the FERC initiated proceedings to modify its
   methods used to assess generation market power and has established more
   stringent interim market screen tests.  During 2005, in connection with
   the Companies' tri-annual market-based rate tariff renewals, the FERC
   continued to contend that the Companies failed such market screens in
   certain regions. The Companies disputed this contention and, in January
   2006, in an attempt to resolve the matter, the Companies submitted
   proposed tariff schedules to the FERC containing a mitigation mechanism
   with respect to applicable power sales into the control area of Big
   Rivers Electric Corporation ("BREC") in western Kentucky, where Western
   Kentucky Energy Corp., an affiliate of the Companies, maintains a long-
   term contractual relationship with BREC. Under the proposed tariff
   schedule, prices for such sales would be capped at a relevant MISO
   power pool index price.  Should the Companies exit the MISO, the FERC
   contended that they would have market power in their own joint control
   area, potentially requiring a similar mitigation mechanism for power
   sales into such region. In July 2006, the FERC issued an order in the
   Companies' market-based rate proceeding accepting the Companies'
   further proposal to address certain market power issues the FERC had
   claimed would arise upon an exit from the MISO.  In particular, the
   Companies received permission to sell power at market-based rates at
   the interface of control areas in which they may be deemed to have
   market power, subject to a restriction that such power not be
   collusively re-sold back into such control areas.  Certain general FERC
   proceedings continue with respect to market-based rate matters, and the
   Companies' market-based rate authority is subject to such future
   developments.

   In some cases, recent FERC decisions in other market-based rate
   proceedings have proposed or required cost-based, rather than market
   index, price caps.  The Companies cannot predict the ultimate impact of
   the current or potential mitigation mechanisms on their future
   wholesale power sales.

   EPAct 2005

   The EPAct 2005 was enacted on August 8, 2005. Among other matters, this
   comprehensive legislation contains provisions mandating improved
   electric reliability standards and performance; providing economic and
   other incentives relating to transmission, pollution control and
   renewable generation assets; increasing funding for clean coal
   generation incentives (see Note 6); repealing PUHCA 1935; enacting
   PUHCA 2005 and expanding FERC jurisdiction over public utility holding
   companies and related matters via the Federal Power Act and PUHCA 2005.

   The FERC was directed by the EPAct 2005 to adopt rules to address many
   areas previously regulated by the other agencies under other statutes,
   including PUHCA 1935. The FERC remains in various stages of rulemaking
   on these issues and the Companies are monitoring these rulemaking
   activities and actively participating in these and other rulemaking
   proceedings. The Companies continue to evaluate the potential impacts
   of the EPAct 2005 and the associated rulemakings and cannot predict
   what impact the EPAct 2005, and any uncompleted rulemakings, will have
   on their operations or financial position.

3. Financial Instruments

   The Companies use over-the-counter interest rate swaps to hedge
   exposure to market fluctuations in certain of their debt instruments.
   Pursuant to the Companies' policies, use of these financial instruments
   is intended to mitigate risk, earnings and cash flow volatility and is
   not speculative in nature. Management has designated all of the
   interest rate swaps as hedge instruments.  Financial instruments
   designated as cash flow hedges have resulting gains and losses recorded
   within comprehensive income and stockholders' equity. Financial
   instruments designated as fair value hedges and the underlying hedged
   items are periodically marked to market with the resulting net gains
   and losses recorded directly into net income.  Upon termination of any
   fair value hedge, the resulting gain or loss is recorded into net
   income.

   As of June 30, 2006, LG&E was party to various interest rate swap
   agreements with aggregate notional amounts of $211 million.  Under
   these swap agreements, LG&E paid fixed rates averaging 4.38% and
   received variable rates based on LIBOR or the Bond Market Association's
   municipal swap index averaging 3.67% at June 30, 2006. The swap
   agreements in effect at June 30, 2006, have been designated as cash
   flow hedges and mature on dates ranging from 2020 to 2033.  The hedges
   have been deemed to be fully effective resulting in a pretax gain of
   $13 million for the six months ended June 30, 2006, recorded in
   comprehensive income.  Upon expiration of these hedges, the amount
   recorded in comprehensive income will be reclassified into earnings.
   The amounts expected to be reclassified from comprehensive income to
   earnings in the next twelve months are immaterial. A deposit in the
   amount of $7 million, used as collateral for the $83 million interest
   rate swap, is classified as restricted cash on LG&E's Balance Sheet.
   The amount of the deposit required is tied to the market value of the
   swap.

   As of June 30, 2006, KU was party to an interest rate swap agreement
   with a notional amount of $53 million. Under this swap agreement, KU
   paid variable rates based on LIBOR averaging 7.24%, and received fixed
   rates averaging 7.92% at June 30, 2006. The swap agreement in effect at
   June 30, 2006 has been designated as a fair value hedge and matures in
   2007.  At June 30, 2006, the effect of marking this financial
   instrument and the underlying debt to market resulted in pretax gains
   recorded in interest expense of less than $1 million.

   Interest rate swaps hedge interest rate risk on the underlying debt.
   Under SFAS No. 133, Accounting for Derivative Instruments and Hedging
   Activities, as amended, in addition to swaps being marked to market,
   the item being hedged using a fair value hedge must also be marked to
   market. Consequently at June 30, 2006, KU's debt reflects a mark-to-
   market adjustment of less than $1 million.

   At June 30, 2006, the Companies' percentage of debt having a variable
   rate, including the impact of interest rate swaps, was 44%($364 million)
   for LG&E and 47% ($378 million) for KU.

4. Pension and Other Post-retirement Benefit Plans

   The following table provides the components of net periodic benefit
   cost for pension and other benefit plans for the three and six months
   ended June 30, 2006 and 2005:

                                Three Months Ended     Six Months Ended
                                     June 30,              June 30,
                                2006       2005        2006       2005
   (in millions)              LG&E  KU   LG&E  KU   LG&E  KU   LG&E   KU

   Pension and Other Benefit Plans
   Components of net periodic
    benefit cost
     Service cost              $2   $2   $1    $2     $3  $4    $3    $3
     Interest cost              5    5    6     4     11   8    12     9
     Expected return on
       plan assets             (5)  (4)  (5)   (4)   (10) (7)  (11)   (8)
     Amortization of prior
       service cost             1    -    1     -      2   1     3     1
     Recognized actuarial
       loss                     1    1    1     1      2   2     1     1
     Total net period benefit
       cost                    $4   $4   $4    $3     $8  $8    $8    $6

   LG&E made a discretionary contribution to the pension plan of $18
   million in January 2006. LG&E made no contributions during 2005. KU
   made no contributions to the pension plan in 2006 or 2005.

5. Short-Term and Long-Term Debt

   Under the provisions for LG&E's variable-rate pollution control bonds,
   Series S, T, U, BB, CC, DD and EE, and KU's variable-rate pollution
   control bonds Series 10, 12, 13, 14 and 15, the bonds are subject to
   tender for purchase at the option of the holder and to mandatory tender
   for purchase upon the occurrence of certain events, causing the bonds
   to be classified as current portion of long-term debt in the balance
   sheets. The average annualized interest rate for these bonds during the
   six months ending June 30, 2006 was 3.38% for LG&E and 3.41% for KU.

   During June 2006, LG&E renewed five revolving lines of credit with
   banks totaling $185 million. There was no outstanding balance under any
   of these facilities at June 30, 2006. LG&E expects to renew these
   facilities prior to their expiration in June 2007.

   LG&E, KU and E.ON U.S. participate in an intercompany money pool
   agreement. Details of the balances at June 30, 2006 and December 31,
   2005 were as follows:

                        Total Money    Amount      Balance     Average
                      Pool Available Outstanding  Available  Interest Rate

    ($ in millions)
    June 30, 2006:
    LG&E                   $400         $  1        $399       4.96%
    KU                     $400         $ 52        $348       4.96%

    December 31, 2005:
    LG&E                   $400         $141        $259       4.21%
    KU                     $400         $ 70        $330       4.21%

   E.ON U.S. maintains a revolving credit facility totaling $200 million
   with an affiliated company, E.ON North America, Inc., to ensure funding
   availability for the money pool. The balance outstanding on this
   facility at June 30, 2006, was $64 million.

   Redemptions and maturities of long-term debt year-to-date through June
   30, 2006, are summarized below:

   ($ in millions)
                                        Principal       Secured/
   Year    Company  Description          Amount  Rate   Unsecured  Maturity

   2006    KU       First mortgage bonds  $36    5.99%  Secured    Jan 2006


   Issuances of long-term debt year-to-date through June 30, 2006, are
   summarized below:

   ($ in millions)
                                        Principal       Secured/
   Year    Company  Description          Amount  Rate   Unsecured  Maturity

   2006    KU       Fidelia note          $50    6.33%  Unsecured  Jun 2036


6. Commitments and Contingencies

   Except as may be discussed in this Quarterly Report on Form 10-Q
   (including Note 2), material changes have not occurred in the current
   status of various commitments or contingent liabilities from that
   discussed in the Companies' Annual Report on Form 10-K for the year
   ended December 31, 2005 (including in Notes 3 and 10 to the financial
   statements of the Companies contained therein) and Quarterly Report on
   Form 10-Q for the quarter ended March 31, 2006 (including in Notes 2
   and 6 to the financial statements contained therein). See the above-
   referenced notes in the Companies' Annual Report on Form 10-K and
   Quarterly Report on Form 10-Q for information regarding such
   commitments or contingencies.

   TRIMBLE COUNTY UNIT 2

   In June 2006, the Companies, as 75% owners, entered into and delivered
   notice to proceed under an engineering, procurement and construction
   agreement with Bechtel Power Corporation ("Bechtel"), regarding
   construction of Trimble County Unit 2 valued at approximately $1.1
   billion.  IMEA and IMPA, as 25% owners, are also parties to the
   contract.  The contract is generally in the form of a lump-sum, turnkey
   agreement for the design, engineering, procurement, construction,
   commissioning, testing and delivery of the project, according to
   designated specifications, terms and conditions.  The contract price
   and its components are subject to a number of potential adjustments
   which may serve to increase or decrease the ultimate construction price
   paid or payable to the contractor.  The contract also contains standard
   representations, covenants, indemnities, termination and other
   provisions for arrangements of this type, including termination for
   convenience or for cause rights.  In general, termination by the owners
   for convenience or by the contractor due to owners' default will limit
   payment obligations to payment for work or incentives performed or
   earned to date and termination by owners due to contractor's default
   will similarly limit payment obligations, subject however to owners'
   rights with respect to cover damages and to certain collateral
   provided.  In connection with this matter, the Companies dismissed
   their litigation against Bechtel regarding the contract previously
   commenced in April 2006 in United States District Court for the Western
   District of Kentucky.

   In June 2006, the Companies filed an application with the Department of
   Energy ("DOE") requesting certification to be eligible for investment
   tax credits applicable to the construction of Trimble County Unit 2.
   The EPAct 2005 added a new 48A to the Internal Revenue Code, which
   provides for an investment tax credit to promote the commercialization
   of advanced coal technologies that will generate electricity in an
   environmentally responsible manner.  The application requested up to
   the maximum amount of "advanced coal project" credit allowed per
   taxpayer, or $125 million, based on an estimate of 15% of projected
   qualifying Trimble County Unit 2 expenditures.  The DOE is anticipated
   to select and certify feasible and suitable qualifying projects, in
   their discretion, from among the applicant group during the late fall
   of 2006.  If selected, the Companies would submit an additional
   application to the Internal Revenue Service ("IRS").  IRS action on
   such applications would thereafter be expected to occur during the
   fourth quarter of 2006.  If, and to the extent the Companies'
   applications are ultimately accepted, the Companies could thereafter
   claim allocated federal income tax credits on eligible expenditures, as
   they occur over time, relating to the Trimble County Unit 2 project.

   LOUISVILLE DOWNTOWN ARENA

   LG&E has been asked by the Louisville Arena Authority, Inc., a non-
   profit corporation (the "Authority"), to transfer certain property and
   relocate certain LG&E facilities so that an LG&E-owned site, in part,
   could be used for the development and construction of a new multi-
   purpose arena in Louisville, Kentucky.  The Authority and LG&E are
   negotiating a non-binding letter of intent regarding the arena
   transactions.  LG&E estimates that the cost of relocating the LG&E
   facilities will be approximately $63 million and LG&E expects to
   request that the Authority arrange for the provision of state funds
   necessary for the relocation, as well as up to $10 million in state
   funds for the purchase of the property at fair market value. Current
   estimates are that the arena project could be completed by
   approximately 2010.  The anticipated letter of intent would be subject
   to a number of contingencies, including completion of definitive
   documents and regulatory approvals necessary for the transactions
   contemplated.

   OMU LITIGATION

   In May 2004, the City of Owensboro, Kentucky and Owensboro Municipal
   Utilities (collectively "OMU") commenced a suit now removed to the U.S.
   District Court for the Western District of Kentucky, against KU
   concerning a long-term power supply contract (the "OMU Agreement") with
   KU. The dispute involves interpretational differences regarding issues
   under the OMU Agreement, including various payments or charges between
   KU and OMU and rights concerning excess power, termination and
   emissions allowances. The complaint seeks approximately $6 million in
   damages for periods prior to 2004 and OMU is expected to claim further
   amounts for later-occurring periods. OMU has additionally requested
   injunctive and other relief, including a declaration that KU is in
   material breach of the contract. KU has filed an answer in that court
   denying the OMU claims and presenting counterclaims. During 2005, the
   FERC declined KU's application to exercise exclusive jurisdiction over
   the matter. In July 2005, the district court resolved a summary
   judgment motion made by KU in OMU's favor, ruling that a contractual
   provision grants OMU the ability to terminate the contract without
   cause upon four years' prior notice, for which ruling KU retains
   certain rights to appeal. At this time the district court case is in
   the discovery stage and a trial schedule has not yet been established.
   In May 2006, OMU issued a notification of its intent to terminate the
   contract in May 2010, without cause, absent any earlier termination
   which may be permitted by the proceeding.

   ENVIRONMENTAL MATTERS

   In April 2006, the EPA issued a notice of violation for alleged
   violations of the Clean Air Act involving work performed on Unit 3 of
   KU's E.W. Brown Station in 1997.   The EPA alleges modification of a
   source without a permit, failure to comply with requirements under the
   Prevention of Significant Deterioration ("PSD") program, operation of a
   source in violation of the New Source Performance Standards ("NSPS"),
   and failure to identify the applicability of PSD and NSPS requirements
   in compliance certifications.  Violations, if ultimately found, could
   result in additional expenditures on pollution controls or civil
   penalties. KU has responded to certain data requests of the EPA and
   held initial discussions with the EPA regarding this matter. Due to the
   early stage of this matter, KU is unable to determine its ultimate
   potential impact.

   The Companies are subject to SO2 and NOx emission limits on their
   electric generating units pursuant to the Clean Air Act. The Companies
   placed into operation significant NOx controls for their generating
   units prior to the 2004 summer ozone season. As of June 30, 2006, LG&E
   and KU have incurred total capital costs of approximately $191 million
   and $217 million, respectively, to reduce their NOx emissions to
   required levels. In addition, the Companies incur additional operating
   and maintenance costs in operating the new NOx controls.  On March 10,
   2005, the EPA issued the final CAIR which requires substantial
   additional reductions in SO2 and NOx emissions from electric generating
   units. The CAIR provides for a two-phased reduction program with Phase
   I reductions in NOx and SO2 emissions in 2009 and 2010, respectively,
   and Phase II reductions in 2015. On March 15, 2005, the EPA issued a
   related regulation, the final CAMR, which requires substantial mercury
   reductions from electric generating units. The CAMR also provides for a
   two-phased reduction, with the Phase I target in 2010 achieved as a "co-
   benefit" of the controls installed to meet the CAIR. Additional control
   measures will be required to meet the Phase II target in 2018. Both the
   CAIR and the CAMR establish a cap and trade framework, in which a limit
   is set on total emissions and allowances can be bought or sold on the
   open market to be used for compliance, unless the state chooses another
   approach. LG&E currently has FGDs on all its coal-fired units, but will
   continue to evaluate improvements to further reduce SO2 emissions.

   In order to meet these new regulatory requirements, KU has implemented
   a plan for adding significant additional SO2 controls to its generating
   units. Installation of additional SO2 controls will proceed on a phased
   basis, with construction of controls (i.e., FGDs) having commenced in
   September 2005 and continuing through the final installation and
   operation in 2009. KU estimates that it will incur $659 million in
   capital costs related to the construction of the FGDs to achieve
   compliance with current emission limits on a company-wide basis. Of
   this amount, $77 million has been incurred through June 30, 2006. In
   addition, KU will incur additional operating and maintenance costs in
   operating the new SO2 controls.

   The Companies are also monitoring several other air quality issues
   which may potentially impact coal-fired power plants, including the
   EPA's revised air quality standards for ozone and particulate matter
   and measures to implement the EPA's Clean Air Visibility Rule.

   In the normal course of business, lawsuits, claims, environmental
   actions and various non-ratemaking governmental proceedings arise
   against the Companies. To the extent that damages are assessed in any
   lawsuits relating to the above, the Companies believe that their
   insurance coverage or other appropriate reserves are adequate.
   Management, after consultation with legal counsel, and based upon the
   present status of these items, does not anticipate that liabilities
   arising out of other currently pending or threatened lawsuits and
   claims of the type referenced above will have a material adverse effect
   on the Companies' financial position or results of operations.

 7.Segments of Business

   LG&E's revenues, net income and total assets by business segment for
   the three and six months ended June 30, 2006 and 2005, follow:

                                         Three Months         Six Months
                                        Ended June 30,      Ended June 30,
   (in millions)                         2006    2005       2006    2005
   LG&E Electric
        Revenues                         $223    $228       $435    $457
        Net income                         27      30         42      54
        Total assets                    2,440   2,404      2,440   2,404

   LG&E Gas
        Revenues                           54      53        254     225
        Net income                         (2)     (2)         8       8
        Total assets                      507     454        507     454

   Total
        Revenues                          277      281       689     682
        Net income                         25       28        50      62
        Total assets                    2,947    2,858     2,947   2,858

   KU is an electric utility company. It does not provide natural gas
   service and, therefore, is presented as a single business segment.

8. Related Party Transactions

   LG&E, KU, subsidiaries of E.ON U.S. and other subsidiaries of E.ON
   engage in related-party transactions. These transactions are generally
   performed at cost and in accordance with applicable FERC, Kentucky
   Commission and Virginia Commission regulations. The significant
   related-party transactions are disclosed below.

   Electric Purchases

   The Companies' intercompany electric revenues and purchased power
   expense from affiliated companies for the three and six months ended
   June 30, 2006 and 2005 were as follows:

                                Three Months             Six Months
                               Ended June 30,          Ended June 30,
   (in millions)               2006       2005        2006        2005
                            LG&E  KU   LG&E  KU    LG&E   KU   LG&E   KU

   Electric operating
     revenues from KU        $22  $-    $21   $-    $44   $-   $47    $-
   Electric operating
     revenues from LG&E        -  17      -   19      -   36     -    49
   Purchased power from KU    17   -     19    -     36    -    49     -
   Purchased power from LG&E   -  22      -   21      -   44     -    47

   Interest Charges

   The Companies' intercompany interest income and expense for the three
   and six months ended June 30, 2006 and 2005 were as follows:

                                  Three Months         Six Months
                                 Ended June 30,       Ended June 30,
   (in millions)                2006       2005       2006        2005
                             LG&E  KU   LG&E  KU   LG&E   KU    LG&E  KU
   Interest on money pool
     loans                    $-   $1    $-   $-    $1   $2     $-    $-
   Interest on Fidelia
     loans                     3    4     3    4     6    9      6     7

   Other Intercompany Billings

   Other intercompany billings related to the Companies for the three and
   six months ended June 30, 2006 and 2005 were as follows:

                                          Three Months      Six Months
                                         Ended June 30,    Ended June 30,
   (in millions)                         2006     2005      2006    2005
   E.ON U.S. Services billings to LG&E    $69      $76      $105    $108
   E.ON U.S. Services billings to KU       78       75       120     101
   LG&E billings to E.ON U.S. Services      2        1         3       5
   KU billings to E.ON U.S. Services        2        -         3       4
   LG&E billings to KU                      6        7        10      10
   KU billings to LG&E                      3        9        15      13

9. Subsequent Events

   On July 14, 2006, LG&E redeemed 12,500 shares of its 5.875% mandatorily
   redeemable preferred stock pursuant to sinking fund requirements at
   $100 per share.

   On July 20, 2006, KU completed a new tax-exempt financing totaling
   approximately $17 million. The new bonds, due June 1, 2036, have a
   variable, auction rate of interest.

   Effective August 1, 2006, KU and its employees represented by IBEW
   Local 2100 entered into a new three-year collective bargaining
   agreement. Such agreement provides for routine updates to wages,
   benefits or other provisions and provides for annual wage re-openers
   for the second and third years.


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

                                  General

The following discussion and analysis by management focuses on those
factors that had a material effect on the Companies' financial results of
operations and financial condition during the three and six month periods
ended June 30, 2006, and should be read in connection with the financial
statements and notes thereto.

Some of the following discussion may contain forward-looking statements
that are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document
by the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include:
general economic conditions; business and competitive conditions in the
energy industry; changes in federal or state legislation; unusual weather;
actions by state or federal regulatory agencies; and other factors
described from time to time in the Companies' reports to the SEC, including
the Annual Reports on Form 10-K for the year ended December 31, 2005.

                             Executive Summary

LG&E and KU, subsidiaries of E.ON U.S. (indirect subsidiaries of E.ON), are
regulated public utilities. At June 30, 2006, LG&E supplied electricity to
approximately 398,000 customers and natural gas to approximately 323,000
customers in Louisville and adjacent areas in Kentucky. At June 30, 2006,
KU provided electricity to approximately 497,000 customers in 77 counties
in central, southeastern and western Kentucky, to approximately 30,000
customers in southwestern Virginia and 5 customers in Tennessee.  KU also
sells wholesale electricity to 12 municipalities.

The mission of the Companies is to build on our tradition and achieve
world-class status providing reliable, low-cost energy services and
superior customer satisfaction; and to promote safety, financial success
and quality of life for our employees, communities and other stakeholders.

The Companies' strategy focuses on the following:

  - Achieve scale as an integrated U.S. electric and gas business through
    organic growth;
  - Maintain excellent customer satisfaction;
  - Maintain best-in-class cost position versus U.S. utility companies;
  - Develop and transfer best practices throughout the company;
  - Invest in infrastructure to meet expanding load and comply with
       increasing environmental requirements;
  - Achieve appropriate regulated returns on all investment;
  - Attract, retain and develop the best people; and
  - Act with a commitment to corporate social responsibility that enhances
      the well being of our employees, demonstrates environmental
      stewardship, promotes quality of life in our communities and reflects
      the diversity of the society we serve.

In a June 2004 order, the Kentucky Commission accepted the settlement
agreements reached by the majority of the parties in the rate cases filed
by the Companies in December 2003.  Under the ruling, the LG&E utility base
electric rates have increased $43 million (7.7%) and base natural gas rates
have increased $12 million (3.4%) annually. Base electric rates at KU have
increased $46 million (6.8%) annually.  The rate increases took effect on
July 1, 2004. The 2004 increases were the first increases in electric base
rates for the Companies in 13 and 20 years, respectively; the previous
natural gas rate increase for the LG&E gas utility took effect in September
2000.

The Companies have begun construction of another base-load coal-fired unit
at the Trimble County site. The Companies believe this is the least cost
alternative to meet the future needs of customers. Trimble County Unit 2,
with a 750 Mw capacity rating, is expected to be jointly owned by the
Companies (75% owners of the unit) and IMEA and IMPA (25% owners). Trimble
County Unit 2 is expected to cost $1.1 billion and be completed by 2010.
The Companies' aggregate 75% share of the total Trimble County Unit 2
capital cost is approximately $885 million and is estimated to be
approximately $120 million for LG&E and $510 million for KU through 2008.
Through June 2006, expenditures for Trimble County Unit 2 have been $7
million for LG&E and $25 million for KU. In June 2006, the Companies
entered into a construction contract regarding the Trimble County Unit 2
project. See Note 6 of the Notes to Financial Statements, in Part 1, Item
1, herein.

In November 2005, the Kentucky Commission approved the CCN construction
application of the Companies to expand the Trimble County generating plant.
Kentucky Commission approvals for the related transmission line CCNs were
granted in September 2005 and May 2006. In July 2006, certain property
owners filed a motion for judicial appeal of the latter transmission line
CCN ruling. A schedule for such proceeding has not been established. In
November 2005, the Kentucky Division for Air Quality issued the final air
permit, which was challenged via a request for remand in December 2005 by
three environmental advocacy groups, including the Sierra Club.
Administrative proceedings with respect to the challenge are expected to
continue during 2006 with a hearing scheduled for October 2006. A ruling
thereafter may be anticipated in the first half of 2007.

In July 2006, the FERC issued a final report under a routine audit that its
Office of Enforcement (formerly its Office of Market Oversight and
Investigations) had conducted regarding the compliance of E.ON U.S. and
subsidiaries, including LG&E and KU, under the FERC's standards of conduct
and codes of conduct requirements, as well as other areas. The final report
contained certain findings calling for improvements in E.ON U.S. and
subsidiaries' structures, policies and procedures relating to transmission,
generation dispatch, energy marketing and other practices. E.ON U.S. and
affiliates have agreed to certain corrective actions and plan to submit
procedures related to such corrective actions to the FERC.  The corrective
actions are in the nature of organization and operational improvements as
described above and are not expected to have a material adverse impact on
the Companies' results of operations or financial condition.

                          Results of Operations

The results of operations for the Companies are affected by seasonal
fluctuations in temperature and other weather-related factors.  Because of
these and other factors, the results of one interim period are not
necessarily indicative of results or trends to be expected for the full
year.

              Three Months Ended June 30, 2006, Compared to
                     Three Months Ended June 30, 2005

LG&E Results:

LG&E's net income decreased $3 million (11%) for the three months ended
June 30, 2006, as compared to the three months ended June 30, 2005,
primarily due to lower electricity and natural gas retail and wholesale
sales volumes resulting largely from milder weather than in the prior year.

A comparison of LG&E's revenues for the three months ended June 30, 2006,
with the three months ended June 30, 2005, reflects increases and
(decreases) which have been segregated by the following principal causes:

Cause                                     Electric           Gas
(in millions)                             Revenues         Revenues

Retail sales:
  Fuel and gas supply adjustments           $6                $7
  Environmental cost recovery surcharge     (3)                -
  Variation in sales volume and other       (5)               (2)
    Total retail sales                      (2)                5
Wholesale sales                             (4)               (4)
Other                                        1                 -
Total                                      $(5)               $1

Electric revenues decreased $5 million (2%) primarily due to:
  - Decreased wholesale revenues ($4 million) largely due to 4% lower
     volumes
  - Decreased retail electric volumes delivered ($5 million) resulting from
    a 14% decrease in cooling degree days in the second quarter of 2006
    compared to the same period in 2005 and an 16% decrease from the
    20-year average
  - Decreased environmental cost recovery ($3 million) due to lower ECR
    billing rates
  - Increased fuel costs billed to customers through the fuel adjustment
    clause ($6 million) due to higher  costs of coal and natural gas

Gas revenues increased $1 million (2%) primarily due to:
  - Increased gas supply costs billed to customers through the gas supply
    adjustment ($7 million) due to the higher cost of natural gas
  - Decreased wholesale revenues ($4 million) as a result of 7% lower
    volumes due to lower demand from wholesale customers
  - Decreased retail gas volumes delivered ($2 million) resulting from a
    17% decrease in heating degree days in the second quarter of 2006
    compared to the same period in 2005 and an 20% decrease from the
    20-year average

Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses. Increases or decreases in the
cost of fuel and natural gas supply are reflected in LG&E's electric and
natural gas retail rates, through the fuel adjustment clause and gas supply
clause, subject to the approval of the Kentucky Commission.

  Fuel for electric generation increased $2 million (3%) in 2006 primarily
  due to:
    - Increased unit cost of fuel burned ($4 million) due to higher fuel
      prices
    - Decreased generation ($2 million) due to lower wholesale and retail
      sales volumes

  Power purchased decreased $2 million (7%) in 2006 primarily due to:
    - Decreased volumes purchased ($6 million) due to lower wholesale and
      retail sales
    - Increased unit cost of purchases ($4 million) due to higher market
      prices

  Gas supply expenses increased $2 million (6%) in 2006 primarily due to:
    - Increased unit cost of natural gas purchased ($8 million)
    - Decreased volumes of natural gas delivered into the distribution
      system ($6 million) due to milder weather

A comparison of the LG&E effective income tax rate for the three months
ended June 30, 2006 and 2005 follows:

                                             Three Months    Three Months
                                                Ended           Ended
                                            June 30, 2006   June 30, 2005
 Effective Rate
 Statutory federal income tax rate               35.0%          35.0%
 State income taxes net of federal benefit        3.5            5.2
 Amortization of investment tax credits          (2.7)          (2.3)
 Other differences                               (3.4)          (1.5)
 Effective income tax rate                       32.4%          36.4%

State income taxes in 2006 reflect Kentucky Coal Tax credits earned. The
change in amortization of investment tax credits and other differences is
largely attributable to the change in the levels of pre-tax income.

KU Results:

KU's net income increased $7 million (39%) for the three months ended June
30, 2006, as compared to the three months ended June 30, 2005, primarily
due to lower maintenance costs, a lower effective income tax rate and
higher earnings from EEI.

A comparison of KU's revenues for the three months ended June 30, 2006,
with the three months ended June 30, 2005, reflects increases and
(decreases) which have been segregated by the following principal causes:

Cause
                                                      Electric
(in millions)                                         Revenues
Retail sales:
  Fuel supply adjustments                               $17
  Environmental cost recovery surcharge                   3
  Variation in sales volumes and other                   (7)
    Total retail sales                                   13
Other                                                    (2)
Total                                                   $11

Electric revenues increased $11 million (4%) in 2006 primarily due to:
  - Increased fuel costs billed to customers through the fuel adjustment
    clause ($17 million) due to higher costs of coal and natural gas
  - Increased environmental cost recovery ($3 million) due to higher ECR
    billing rates
  - Decreased retail electric volumes delivered ($7 million) resulting from
    a 17% decrease in cooling degree days in the second quarter of 2006
    compared to the same period in 2005 and an 19% decrease from the
    20-year average

Fuel for electric generation comprises a large component of KU's total
operating expenses. Increases or decreases in the cost of fuel are
reflected in KU's retail electric rates through the fuel adjustment clause,
subject to the approval of the Kentucky Commission, the Virginia State
Corporation Commission and the FERC.

  Fuel for electric generation increased $16 million (19%) in 2006
  primarily due to:
    - Increased unit cost of fuel burned ($9 million) due to higher fuel
      prices
    - Increased generation ($7 million) largely due to higher unit
      availability

  Power purchased decreased $6 million (12%) in 2006 primarily due to:
    - Decreased volumes purchased ($8 million) largely due to higher unit
      availability and decreased retail demand
    - Increased unit cost of purchases ($2 million) due to higher market
      prices

Other operation and maintenance expenses decreased $5 million (7%) in
2006 primarily due to:
  - Decreased maintenance costs ($3 million) largely due to an outage last
    year at Brown Unit 3
  - Decreased other power supply costs ($2 million) related to lower MISO
    Day 2 expenses

Other (income) - net increased $3 million (150%) primarily due to increased
equity in earnings from EEI as a result of EEI selling electricity at
market based rates, effective January 2006.

Interest expense increased $1 million (13%) in 2006 primarily due to
increased borrowing from Fidelia.

A comparison of the KU effective income tax rate for the three months ended
June 30, 2006 and 2005 follows:

                                             Three Months    Three Months
                                                Ended           Ended
                                            June 30, 2006   June 30, 2005
 Effective Rate
 Statutory federal income tax rate                35.0%          35.0%
 State income taxes net of federal benefit         4.4            5.0
 Amortization of investment tax credits           (0.8)          (1.4)
 EEI dividend                                     (6.1)            -
 Other differences                                (1.9)          (2.9)
 Effective income tax rate                        30.6%          35.7%

The EEI dividend in the second quarter of 2006 reflects a tax benefit
associated with the receipt of dividends from KU's investment in EEI. The
change in amortization of investment tax credits and other differences is
largely attributable to the change in the levels of pre-tax income.


                Six Months Ended June 30, 2006, Compared to
                      Six Months Ended June 30, 2005

LG&E Results:

LG&E's net income decreased $12 million (19%) for the six months ended June
30, 2006, as compared to the six months ended June 30, 2005, primarily due
to lower electricity and natural gas retail and wholesale sales volumes,
higher maintenance costs and higher interest expense.

A comparison of LG&E's revenues for the six months ended June 30, 2006,
with the six months ended June 30, 2005, reflects increases and (decreases)
which have been segregated by the following principal causes:

Cause                                        Electric          Gas
(in millions)                                Revenues        Revenues
Retail sales:
  Fuel and gas supply adjustments               $15             $73
  Merger surcredit                                1               -
  Weather normalization                           -               2
  Variation in sales volume and other            (8)            (31)
     Total retail sales                           8              44
Wholesale sales                                 (32)            (16)
Other                                             2               1
Total                                          $(22)            $29

Electric revenues decreased $22 million (5%) in 2006 primarily due to:
  - Decreased wholesale revenues ($32 million) largely due to 10% lower
    volumes
  - Decreased retail electric volumes delivered ($8 million) resulting from
    a 10% decrease in cooling degree days in the first six months of 2006
    compared to the same period in 2005 and an 12% decrease from the
    20-year average
  - Increased fuel costs billed to customers through the fuel adjustment
    clause ($15 million) due to higher  costs of coal and natural gas
  - Increased miscellaneous revenues ($2 million)

Gas revenues increased $29 million (13%) in 2006 primarily due to:
  - Increased gas supply costs billed to customers through the gas supply
    adjustment ($73 million) due to higher natural gas costs
  - Increased weather normalization revenues ($2 million) due to warmer
    weather
  - Decreased retail gas volumes delivered ($31 million) resulting from a
    10% decrease in heating degree days in the first six months of 2006
    compared to the same period in 2005 and an 12% decrease from the
    20-year average
  - Decreased wholesale revenues ($16 million) as a result of 7% lower
    volumes due to lower demand from wholesale customers

Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating expenses.  Increases or decreases in
the cost of fuel and natural gas supply are reflected in LG&E's electric
and natural gas retail rates, through the fuel adjustment clause and gas
supply clause, subject to the approval of the Kentucky Commission.

  Fuel for electric generation increased $6 million (5%) in 2006 primarily
  due to:
   - Increased unit cost of fuel burned ($13 million) due to higher fuel
     prices
   - Decreased generation ($5 million) due to lower wholesale and retail
     sales volumes

  Power purchased decreased $13 million (19%) in 2006 primarily due to:
   - Decreased volumes purchased ($22 million) due to lower wholesale and
     retail sales
   - Increased unit cost of purchases ($9 million) due to higher market
     prices

  Gas supply expenses increased $29 million (17%) in 2006 primarily due to:

   - Increased unit cost of natural gas purchased ($69 million)
   - Decreased volumes of natural gas delivered into the distribution
     system ($40 million) due to milder weather

Other operation and maintenance expenses increased $4 million (3%) in 2006
primarily due to:
  - Increased steam maintenance ($3 million) largely due to the outage at
    Mill Creek Unit 4
  - Increased distribution maintenance ($2 million) due to higher storm
    restoration costs

Interest expense increased $2 million (11%) in 2006 primarily due to:
  - Increased interest rates on variable rate debt ($3 million)
  - Increased interest on tax deficiencies ($1 million)
  - Increased interest rates on money pool borrowing ($1 million)
  - Decreased interest on the swaps ($2 million)
  - Decreased interest due to refinancing fixed rate debt with variable
    rate debt ($1 million)

The weighted average interest rate on variable-rate bonds for the six
months ended June 30, 2006, was 3.33%, compared to 2.27% for the comparable
period in 2005.

A comparison of the LG&E effective income tax rate for the six months ended
June 30, 2006 and 2005 follows:

                                              Six Months      Six Months
                                                Ended           Ended
                                            June 30, 2006   June 30, 2005
 Effective Rate
 Statutory federal income tax rate               35.0%          35.0%
 State income taxes net of federal benefit        3.6            4.8
 Amortization of investment tax credits          (2.7)          (2.2)
 Other differences                               (2.6)          (2.2)
 Effective income tax rate                       33.3%          35.4%

State income taxes in 2006 reflect Kentucky Coal Tax credits earned. The
change in amortization of investment tax credits and other differences is
largely attributable to the change in the levels of pre-tax income.

KU Results:

KU's net income increased $5 million (9%) for the six months ended June 30,
2006, as compared to the six months ended June 30, 2005, primarily due
higher earnings from EEI and a lower effective income tax rate, which is
partially offset by higher transmission costs and higher interest charges.

A comparison of KU's revenues for the six months ended June 30, 2006, with
the six months ended June 30, 2005, reflects increases and (decreases)
which have been segregated by the following principal causes:

Cause                                                    Electric
(in millions)                                            Revenues
Retail sales:
  Fuel supply adjustments                                   $36
  Environmental cost recovery surcharge                       3
  Merger surcredit                                            1
  Rate and rate structure                                     2
  Variation in sales volume and other                        (6)
Total retail sales                                           36
Wholesale sales                                             (18)
Other                                                        (1)
Total                                                       $17

Electric revenues increased $17 million (3%) in 2006 primarily due to:
  - Increased fuel costs billed to customers through the fuel adjustment
    clause ($36 million) due to higher  costs of coal and natural gas
  - Increased environmental cost recovery ($3 million) due to higher ECR
    billing rates
  - Increased Virginia revenues due to a rate change for increased fuel
    recovery ($2 million)
  - Decreased wholesale sales ($18 million) largely due to 5% lower volumes
  - Decreased retail electric volumes delivered ($7 million) resulting from
    a 9% decrease in cooling degree days in the first six months of 2006
    compared to the same period in 2005 and an 11% decrease from the
    20-year average

Fuel for electric generation comprises a large component of KU's total
operating expenses. Increases or decreases in the cost of fuel are
reflected in KU's retail electric rates through the fuel adjustment clause,
subject to the approval of the Kentucky Commission, the Virginia State
Corporation Commission and the FERC.

  Fuel for electric generation increased $23 million (13%) in 2006
  primarily due to:
    - Increased unit cost of fuel burned ($20 million) due to higher fuel
      prices
    - Increased generation ($3 million) largely due to higher unit
      availability

  Power purchased decreased $6 million (6%) in 2006 primarily due to:
    - Decreased volumes purchased ($18 million) largely due to higher unit
      availability and decreased retail demand
    - Increased unit cost of purchases ($12 million) due to higher market
      prices

Other operation and maintenance expenses increased $7 million (6%) in
2006 primarily due to:
  - Increased other power supply ($5 million) largely due to MISO Day 2
  - Increased transmission expense ($3 million) largely due to MISO Day 1

Other (income) - net increased $10 million (333%) primarily due to
increased equity in earnings from EEI as a result of EEI selling
electricity at market based rates, effective January 2006.

Interest expense increased $4 million (29%) in 2006 primarily due to:
  - Increased borrowing from Fidelia ($2 million)
  - Increased borrowing and increased interest rates on money pool debt
    ($2 million)

A comparison of the KU effective income tax rate for the six months ended
June 30, 2006 and 2005 follows:

                                              Six Months      Six Months
                                                Ended           Ended
                                            June 30, 2006   June 30, 2005
 Effective Rate
 Statutory federal income tax rate               35.0%          35.0%
 State income taxes net of federal benefit        4.4            4.7
 Amortization of investment tax credits          (0.6)          (0.9)
 EEI dividend                                    (5.1)            -
 Other differences                               (1.1)          (0.6)
 Effective income tax rate                       32.6%          38.2%

The EEI dividend for the six months ended June 30, 2006, reflects a tax
benefit associated with the receipt of dividends from KU's investment in
EEI.

Liquidity and Capital Resources

The Companies' needs for capital funds are largely related to the
construction of plant and equipment necessary to meet the needs of electric
and gas utility customers, in addition to debt service requirements and
dividend payments. Internal and external lines of credit are maintained to
fund short-term capital requirements. The Companies believe that such
sources of funds will be sufficient to meet the needs of the business in
the foreseeable future.

At June 30, 2006, the Companies were in a negative working capital position
in part because of the classification of certain variable-rate pollution
control bonds that are subject to tender for purchase at the option of the
holder as current portion of long-term debt. The Companies expect to cover
any working capital deficiencies with cash flow from operations, money pool
borrowings and borrowings from Fidelia.

Construction expenditures for the six months ended June 30, 2006 amounted
to $66 million for LG&E and $121 million for KU.  At LG&E, capital
expenditures included infrastructure for new customers, gas main
replacements/extensions and capital repairs to Mill Creek Unit 4. At KU,
capital expenditures included construction of FGD and other environmental
equipment at the Ghent generating station and infrastructure for new
customers.

LG&E's cash balance decreased $2 million during the six months ended June
30, 2006, largely resulting from repayments of debt and the payment of
dividends.  KU's cash balance decreased $2 million during the six months
ended June 30, 2006, primarily due to increased capital expenditures.

Variations in accounts receivable, inventories and accounts payable are
generally not significant indicators of the Companies' liquidity.  Such
variations are primarily attributable to seasonal fluctuations in weather,
which have a direct effect on sales of electricity and natural gas. The
decreases in LG&E's accounts receivable and natural gas stored underground
relate primarily to seasonal uses of natural gas.

For information regarding the Companies' use of interest rate swaps to
hedge underlying variable-rate (LG&E) and fixed-rate (KU) debt obligations,
see Note 3 of the Notes to Financial Statements.

See Note 5 of the Notes to Financial Statements for information regarding
the Companies' long-term and short-term debt including: accounting
treatment of bonds permitting tender for purchase at the option of the
holder, re-negotiation of revolving credit lines, intercompany debt
transactions and the issuance and redemption of financial instruments
during the year.

Security ratings as of June 30, 2006, were:

                                        LG&E                  KU
                                  Moody's   S&P        Moody's   S&P

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

These ratings reflect the views of Moody's and S&P.  A security rating is
not a recommendation to buy, sell or hold securities and is subject to
revision or withdrawal at any time by the rating agency.

LG&E made a discretionary contribution to the pension plan of $18 million
in January 2006. LG&E made no contributions during 2005. KU made no
contributions to the pension plan in 2006 or 2005.

Contingencies

For a description of significant contingencies that may affect the
Companies, reference is made to Part I, Item 3, Legal Proceedings in the
Companies' Annual Reports on Form 10-K for the year ended December 31,
2005; to Part I - Item 1 and Part II - Item 1, Legal Proceedings in the
Companies' Quarterly Report on Form 10-Q for the period ended March 31,
2006;  and to Notes 2 and 6 of the Notes to Financial Statements in Part I
- Item 1, and Part II - Item 1, Legal Proceedings herein.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Risk

The Companies use interest rate swaps to hedge exposure to market
fluctuations in certain of their debt instruments. Pursuant to the
Companies' policies, use of these financial instruments is intended to
mitigate risk and earnings volatility and is not speculative in nature.
Management has designated all of the Companies' interest rate swaps as
hedge instruments. Financial instruments designated as cash flow hedges
have resulting gains and losses recorded within comprehensive income and
stockholders' equity. To the extent a financial instrument or the
underlying item being hedged is prematurely terminated or the hedge becomes
ineffective, the resulting gains or losses are reclassified from
comprehensive income to net income. Financial instruments designated as
fair value hedges are periodically marked to market with the resulting
gains and losses recorded directly into net income to correspond with
income or expense recognized from changes in market value of the items
being hedged.

The potential change in interest expense associated with a 1% change in
base interest rates of the Companies' unswapped variable debt is estimated
at $4 million each at June 30, 2006. The Companies' exposure to floating
interest rates did not materially change during the first six months of
2006.

The potential loss in fair value of LG&E's interest rate swaps resulting
from a hypothetical 1% change in base interest rates is estimated at
approximately $17 million as of June 30, 2006. The potential loss in fair
value of KU's interest rate swaps resulting from a hypothetical 1% change
in base interest rates is estimated at less than $1 million as of June 30,
2006. These estimates are derived from third-party valuations. Changes in
the market values of these swaps, if held to maturity, will have no effect
on LG&E's or KU's net income or cash flow.

Pension Risk

The Companies' costs of providing defined-benefit pension retirement plans
is dependent upon a number of factors, such as the rates of return on plan
assets, discount rate and contributions made to the plan. The Companies
have recognized an additional minimum liability as prescribed by SFAS No.
87, Employers' Accounting for Pensions because the accumulated benefit
obligation exceeds the fair value of their plans' assets. The liabilities
were recorded as a reduction to comprehensive income, and did not affect
net income. The amount of the liability depends upon the discount rate, the
asset returns and contributions made by the Companies to the plans. If the
fair value of the plans' assets exceeds the accumulated benefit obligation,
the recorded liabilities will be reduced and comprehensive income will be
restored in the balance sheet.

A 1% increase or decrease in the assumed discount rate could have an
approximate $49 million positive or negative impact to the accumulated
benefit obligation of LG&E.  A 1% increase or decrease in the assumed
discount rate could have an approximate $33 million positive or negative
impact to the accumulated benefit obligation of KU.

LG&E made a discretionary contribution to the pension plan for $18 million
in January 2006. LG&E made no contributions during 2005. KU made no
contributions to the pension plan in 2006 or 2005.

Energy & Risk Management Activities

The Companies conduct energy trading and risk management activities to
maximize the value of power sales from physical assets they own.  Certain
energy trading activities are accounted for on a mark-to-market basis in
accordance with SFAS No. 133, as amended. Wholesale sales of excess asset
capacity are treated as normal sales under SFAS No. 133, as amended, and
are not marked to market.

Since the inception of the MISO Day 2 market in April 2005, the Companies
have been eligible to receive FTRs from the MISO.  FTRs are assigned by the
MISO to market participants for a twelve-month period of time beginning
June 1, 2006, for off-peak and peak periods based on each market
participant's share of generation. FTRs are utilized to manage price risk
associated with transmission congestion. The value of FTRs is determined by
the transmission congestion charges that arise when the transmission grid
is congested in the day-ahead market.  FTRs are obtained through an
allocation from the MISO at zero cost, however, they can also be bought and
sold.  FTRs are derivatives and their fair value is insignificant due to
the lack of liquidity in the forward market.

The fair values of the Companies' energy trading and risk management
contracts as of June 30, 2006 were each approximately $2 million. The fair
values at June 30, 2005, were less than $1 million each. No changes to
valuation techniques for energy trading and risk management activities
occurred during 2006 or 2005.  Changes in market pricing, interest rate and
volatility assumptions were made during all periods. The outstanding mark-
to-market value is sensitive to changes in prices, price volatilities and
interest rates. The Companies estimate that a movement in prices of $1 and
a change in interest and volatilities of 1% would result in a change in the
mark-to-market value of less than $1 million. All contracts outstanding at
June 30, 2006, have a maturity of less than one year and are valued using
prices actively quoted for proposed or executed transactions or quoted by
brokers.

The Companies maintain policies intended to minimize credit risk and
revalue credit exposures daily to monitor compliance with those policies.
As of June 30, 2006, 100% of the trading and risk management commitments
were with counterparties rated BBB-/Baa3 equivalent or better.


Item 4.  Controls and Procedures

The Companies maintain a system of disclosure controls and procedures
designed to ensure that information required to be disclosed by the
Companies in reports they file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission rules and
forms.  The Companies conducted an evaluation of such controls and
procedures under the supervision and with the participation of the
Companies' management, including the Chairman, President and Chief
Executive Officer ("CEO") and the Chief Financial Officer ("CFO").  Based
upon that evaluation, the CEO and CFO have concluded that the Companies'
disclosure controls and procedures are effective as of the end of the
period covered by this report.

The Companies are not accelerated filers under the Sarbanes-Oxley Act of
2002 and associated rules (the "Act") and consequently anticipate issuing
Management's Report on Internal Control over Financial Reporting pursuant
to Section 404 of the Act in their first periodic report covering the
fiscal year ended December 31, 2007 as permitted by SEC rulemaking.

In preparation for required reporting under Section 404 of the Act, the
Companies are conducting a thorough review of their internal controls over
financial reporting, including disclosure controls and procedures.  Based
on this review, the Companies have made internal controls enhancements and
will continue to make future enhancements to their internal control over
financial reporting.  There has been no change in the Companies' internal
control over financial reporting that occurred during the fiscal quarter
ended June 30, 2006, that has materially affected, or is reasonably likely
to materially affect, the Companies' internal control over financial
reporting.


                        Part II.  Other Information

Item 1.  Legal Proceedings.

For a description of the significant legal proceedings involving the
Companies, reference is made to the information under the following items
and captions of the Companies' respective combined Annual Report on Form 10-
K for the year ended December 31, 2005:  Item 1, Business; Item 3, Legal
Proceedings; Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations; and Item 8, Financial Statements and
Supplementary Data in Notes 3 and 10.  Reference is also made to the
matters described in Notes 2 and 6 of Part 1, Item 1 of the Companies'
Quarterly Report on Form 10-Q for the three months ended March 31, 2006,
and Notes 2 and 6 of the Notes to Financial Statements in Part I, Item 1 of
this 10-Q. Except as described herein, to date, the proceedings reported in
the Companies' respective combined Annual Report on Form 10-K have not
changed materially.

Other

In the normal course of business, other lawsuits, claims, environmental
actions, and other governmental proceedings arise against the Companies.
To the extent that damages are assessed in any of these lawsuits, the
Companies believe that their 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 LG&E's or KU's financial position or
results of operations, respectively.

Item 1A. Risk Factors.

LG&E and KU currently anticipate withdrawal from the MISO effective
September 1, 2006. The resulting changes to transmission and wholesale
power market structures and prices are not completely estimable and may
result in unforeseen effects on costs or revenues. As required by the
FERC, in connection with their exit, the Companies have engaged two
independent third parties to perform certain oversight and functional
control activities relating to transmission and related activities.  The
Companies will save certain MISO membership costs and charges, but will
incur an exit fee and fees related to the new transmission service vendors.
The Companies believe that, over time, the benefits and savings from an
exit of the MISO will outweigh the costs and expenses.  However, until
post-MISO market conditions and operations have matured, the effects on
financial condition, liquidity or results of operations will remain
difficult to fully predict.

See Note 2 of LG&E's and KU's Notes to Financial Statements in Part I, Item
1 of this 10-Q.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

Applicable to Form
         10-Q of

Exhibit
No. LG&E  KU   Description

4.1       X    Loan Agreement dated June 23, 2006 between
               Kentucky Utilities Company and Fidelia Corporation.  [Filed
               as Exhibit 4.1 to KU's Current Report on Form 8-K dated June
               23, 2006 and incorporated by reference herein.]

4.2       X    Copy of Promissory Note from KU to
               Fidelia Corporation, dated as of June 23, 2006.  [Filed as
               Exhibit 4.2 to KU's Current Report on Form 8-K dated June
               23, 2006 and incorporated by reference herein.]

31.1  X        Certification of Chairman of the Board, President and Chief
               Executive Officer, pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002
31.2  X        Certification of Chief Financial Officer, pursuant to
               Section 302 of the Sarbanes-Oxley Act of 2002
31.3      X    Certification of Chairman of the Board, President and Chief
               Executive Officer, pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002
31.4      X    Certification of Chief Financial Officer, pursuant to
               Section 302 of the Sarbanes-Oxley Act of 2002
32    X   X    Certification pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002

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


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Louisville Gas and Electric Company
Registrant


Date:  August 14, 2006          /s/ S. Bradford Rives
                                S. Bradford Rives
                                Chief Financial Officer
                                (On behalf of the registrant in his
                                capacities as Principal Financial Officer
                                and Principal
                                Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


Kentucky Utilities Company
Registrant


Date:  August 14, 2006          /s/ S. Bradford Rives
                                S. Bradford Rives
                                Chief Financial Officer
                                (On behalf of the registrant in his
                                capacities as Principal Financial Officer
                                and Principal
                                Accounting Officer)