-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jd5VXNxVts5qgfAVwwsdO53z7yP2dLuivaDDH2wROXz6EGIuwMxgfBiKMWosIIpW HGRyFHmLhTMytOOT+HGccQ== 0000835715-97-000003.txt : 19970312 0000835715-97-000003.hdr.sgml : 19970312 ACCESSION NUMBER: 0000835715-97-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 27 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970311 SROS: NYSE SROS: PHLX SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KU ENERGY CORP CENTRAL INDEX KEY: 0000835715 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 611141273 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10944 FILM NUMBER: 97554569 BUSINESS ADDRESS: STREET 1: ONE QUALITY STREET CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FORMER COMPANY: FORMER CONFORMED NAME: HOLDINGS INC DATE OF NAME CHANGE: 19600201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY UTILITIES CO CENTRAL INDEX KEY: 0000055387 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 610247570 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03464 FILM NUMBER: 97554570 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 10-K405 1 1996 FORM 10-K FOR KU ENERGY CORP. AND KENTUCKY UTILTIES CO. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1996 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-10944 KU Energy Corporation 61-1141273 (A Kentucky Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 1-3464 Kentucky Utilities Company 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) Securities registered pursuant to Section 12(b) of the Act: KU Energy Corporation Name of Each Exchange Title of Each Class on Which Registered Common Stock, without par value New York Stock Exchange Pacific Stock Exchange Kentucky Utilities Company Name of Each Exchange Title of Each Class on Which Registered Preferred Stock, 4 3/4% cumulative, Philadelphia Stock Exchange stated value $100 Per Share -1- Securities registered pursuant to Section 12(g) of the Act: KU Energy Corporation None Kentucky Utilities Company Preferred Stock, cumulative, stated value $100 per share (Title of Class) KU Energy Corporation Aggregate market value at March 10, 1997 of the voting stock held by nonaffiliates of KU Energy Corporation (KU Energy): $1,148,718,044. Number of shares of Common Stock outstanding at March 10, 1997: 37,817,878 shares. Kentucky Utilities Company Aggregate market value of the voting stock held by nonaffiliates of Kentucky Utilities Company (KU): None Number of shares of Common Stock outstanding at March 10, 1997: 37,817,878 shares (owned by the parent - KU Energy). Documents Incorporated by Reference: A portion of KU Energy's 1996 Annual Report to Shareholders is incorporated by reference in Parts I and II. A portion of KU Energy's Proxy Statement relating to the 1997 Annual Shareholders Meeting is incorporated by reference in Part III. Exhibit Index appears on page 42. -2- KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY Form 10-K Annual Report to the Securities and Exchange Commission For the Year Ended December 31, 1996* TABLE OF CONTENTS Item Page PART I 1.Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 13 4.Submission of Matters to a Vote of Security Holders . . . . . . 13 Executive Officers of the Registrants . . . . . . . . . . . . . 14 PART II 5.Market for Registrants Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . 17 6.Selected Financial Data . . . . . . . . . . . . . . . . . . . . 18 7.Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 22 8.Financial Statements and Supplementary Data . . . . . . . . . . 22 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . 40 PART III 10.Directors and Executive Officers of the Registrants . . . . . . 40 11.Executive Compensation . . . . . . . . . . . . . . . . . . . . 40 12.Security Ownership of Certain Beneficial Owners and Management . 40 13.Certain Relationships and Related Transactions . . . . . . . . 40 PART IV 14.Exhibits, Financial Statement Schedules, and Reports on Form 8-K 41 Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 42 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 48 *Information included herein which relates solely to KU Energy Corporation is provided solely by KU Energy Corporation and not by Kentucky Utilities Company and shall be deemed not included in the Annual Report on Form 10-K of Kentucky Utilities Company. -3- PART I Item 1. Business KU Energy Corporation KU Energy Corporation (KU Energy or the Company), an exempt utility holding company, was incorporated in the state of Kentucky on June 23, 1988. On December 1, 1991, KU Energy became the holder of all common stock of Kentucky Utilities Company (KU). KU Energy has two wholly owned subsidiaries, KU, an electric utility, and KU Capital Corporation (KU Capital), a nonutility subsidiary. KU is KU Energy's principal subsidiary. The Company is a public utility holding company as defined in the Public Utility Holding Company Act of 1935 (the Holding Company Act). On November 13, 1991, the Company obtained an order from the Securities and Exchange Commission which granted an exemption from all provisions of the Holding Company Act, except Section 9(a)(2) thereof which relates to the acquisition of securities of public utility companies. The ability of the Company to pay dividends on its common stock is dependent upon distributions made to it by KU and KU Capital and on amounts that may be earned by the Company on investments. KU Capital Corporation KU Capital continues to pursue a core energy strategy for its nonutility business activities. Under this strategy, targeted opportunities are energy-related activities that build on the Company's knowledge and expertise and have the appropriate risk/reward profile. Kentucky Utilities Company General KU is a wholly owned subsidiary of KU Energy. KU was incorporated in Kentucky in 1912 and incorporated in Virginia in 1991. KU is a public utility engaged in producing, transmitting and selling electric energy. KU provides electric service to about 432,900 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to about 28,800 customers in 5 counties in southwestern Virginia. In Virginia, KU operates under the name Old Dominion Power Company. KU operates under appropriate franchises in substantially all of the 161 Kentucky incorporated municipalities served. No franchises are required in unincorporated Kentucky communities. Service has been provided in Virginia without franchises for a number of years. The lack of franchises is not expected to have a material adverse effect on KU's operations. KU also sells electric energy at wholesale for resale in 12 municipalities. The territory served by KU has an aggregate population estimated at about 1,000,000. The largest city served is Lexington, Kentucky. The population of the metropolitan Lexington area is estimated at about 225,000. The populations of the next 10 largest cities served at retail range from about 21,000 to 9,000. The territory served includes most of the Bluegrass Region of central Kentucky and parts of the coal mining areas in southeastern and western Kentucky and southwestern Virginia. Lexington is the center of the Bluegrass Region, in which thoroughbred horse, burley tobacco and bourbon whiskey distilling industries are located. Among the principal industries in the territory served are automotive and related -4- industries, coal mining, the manufacture of paper and paper products, electrical and other machinery, and rubber and miscellaneous plastic products. Revenues KU's sources of electric revenues and the respective percentages of total revenues for the three years 1994-1996 were as follows:
Year Ended December 31, 1996 1995 1994 Amount % Amount % Amount % (dollars in thousands) Residential $ 236,229 33 $ 232,760 34 $ 213,574 34 Commercial 150,640 21 151,778 22 142,207 22 Industrial 136,856 19 130,066 19 120,043 19 Mine Power 34,014 5 36,076 5 36,498 6 Public Authorities 56,023 8 54,161 8 49,869 8 Sales for Resale 89,208 13 75,940 11 89,665 14 Miscellaneous Revenues 8,741 1 5,649 1 4,181 - Provision for Refund - Litigation Settlement - - - - (19,385) (3) Total $ 711,711 100 $ 686,430 100 $ 636,652 100
The electric utility business is affected by seasonal weather patterns. As a result, operating revenues (and associated operating expenses) are not generated evenly throughout the year. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Sales and Revenues in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) which is incorporated herein by reference for information related to revenues. Operations KU's net generating capability was 3,639 megawatts at December 31, 1996. The net generating capability available for operation at any time may be lower because of periodic outages of generating units due to inspection, maintenance, fuel restrictions, or modifications required by regulatory agencies. KU obtains power from other utilities under bulk power purchase and interchange contracts. At December 31, 1996, KU's system capability, including purchases from others, was 4,032 megawatts. On February 5, 1996, an all-time system peak demand, on a one-hour integrated basis, was set at 3,391 megawatts. See Item 2, Properties-Construction for a discussion of KU's plans to add additional peaking capacity. The percentage of KU's system output which was internally generated and purchased for the periods indicated was as follows: 1996 1995 1994 Internally Generated 84% 82% 83% Purchased 16% 18% 17% KU is one of 28 members of the East Central Area Reliability Coordination Agreement, the purpose of which is to augment the reliability of the members' bulk power supply through coordination of planning and operation of generation and transmission facilities. The members are engaged in the -5- generation, transmission and sale of electric power and energy in the east central area of the United States, which covers all or portions of Michigan, Indiana, Ohio, Kentucky, Pennsylvania, Virginia, West Virginia and Maryland. KU also has interconnections and contractually established operating arrangements with neighboring utilities and cooperatives. Under a contract with Owensboro Municipal Utilities (OMU), KU has agreed to purchase from OMU the surplus output of the 150-megawatt and 250-megawatt generating units at OMU's Elmer Smith station. Purchases under the contract are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by KU. Such power constituted about 8% of KU's net system output during 1996. See Note 4 of the Notes to Financial Statements, Commitments and Contingencies under Item 8. KU owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns and operates a 1,000-megawatt generating station in southern Illinois. KU's entitlement is 20% of the available capacity of the station. Purchases from EEI are made under a contractual formula which has resulted in costs which were and are expected to be comparable to the cost of other power purchased or generated by KU. Such power constituted about 8% of KU's net system output in 1996. See Note 4 of the Notes to Financial Statements, Commitments and Contingencies, under Item 8. KU had approximately 2,160 employees at December 31, 1996, of which about 300 are covered by union contracts expiring August 1, 1997. Fuel Matters Coal-fired generating units provided more than 99% of KU's net kilowatt- hour generation for 1996. The remainder of KU's net generation for 1996 was provided by hydroelectric plants, oil and/or natural gas burning units. The average delivered cost of coal purchased per million BTU (MBTU) and the percentage of spot coal purchases for the periods indicated were as follows: 1996 1995 1994 Per MBTU - all sources $ 1.14 $ 1.16 $ 1.19 Per MBTU - spot purchases only $ 1.08 $ 1.10 $ 1.16 Spot purchases as % of all sources 33% 30% 46% KU maintains its fuel inventory at levels estimated to be necessary to avoid operational disruptions at its coal-fired generating units. Reliability of coal deliveries can be affected from time to time by a number of factors, including coal mine labor strikes and other supplier or transporter operating difficulties. KU believes there are adequate reserves available to supply its existing base-load generating units with the quantity and quality of coal required for those units throughout their useful lives. KU intends to meet a substantial portion of its coal requirements with 3-year and 5-year contracts. KU anticipates that coal supplied under such contracts will represent about two-thirds of the requirements over the next several years. As part of this strategy, KU will continue to negotiate replacement contracts as contracts expire. KU does not anticipate any problems negotiating new contracts for future coal needs. The balance of coal -6- requirements will be met through spot purchases. See Note 4 of the Notes to Financial Statements, Commitments and Contingencies, under Item 8 for the estimated obligations under existing fuel contracts for each of the years 1997 through 2001. KU has no long-term contracts in place for the purchase of natural gas for its combustion turbine peaking units. KU has met its gas requirements through spot purchases. KU does not anticipate encountering any significant problems acquiring an adequate supply of fuel necessary to operate its peaking units. See Item 2, Properties-Construction for a discussion of KU's plans to add additional peaking capacity. Environmental Matters Federal and state agencies have adopted environmental protection standards which apply to the electric operations of KU. Capital expenditures to comply with environmental requirements amounted to about $187 million during the 1992-1996 time period. KU's generating units are operated in compliance with the Kentucky Natural Resources and Environmental Protection Cabinet's (Cabinet) State Implementation Plan (KYSIP) and New Source Performance Standards developed under the Clean Air Act. The KYSIP is a federally approved plan for the attainment of the national ambient air quality standards. The KYSIP contains standards relating to the emissions of various pollutants (sulfur dioxide, particulates and nitrogen oxides) from KU's fossil-fuel fired steam electric generating units. These emission standards are of varying stringencies and compliance with these standards is attained through a variety of air pollution control technologies (scrubbers, electrostatic precipitators, and low nitrogen oxide burners) and the use of low-sulfur coal. KU's operations are in substantial compliance with current emission standards. The operating permit program under the 1990 Clean Air Act Amendments required KU to make application to the Cabinet for new operating permits for its six generating stations. KU s existing permits to operate air contaminant sources continue in effect until new permits are issued. The acid rain control provisions of the 1990 Clean Air Act Amendments, which are effective in two phases, require KU to further decrease the emissions of sulfur dioxide and nitrogen oxides from its fossil-fuel fired steam electric generating units. Ghent Unit 1, E. W. Brown Units 1, 2 and 3, and Green River Unit 4 were designated as Phase I affected units which were required to comply with sulfur dioxide emission reduction obligations beginning January 1, 1995. In order to comply with these sulfur dioxide emission limitations, KU installed a scrubber and related facilities on Ghent Unit 1 and switched to lower sulfur coal on some other Phase I affected units. In addition, these units were retrofitted with low nitrogen oxide burners in order to comply with applicable nitrogen oxide limitations under United States Environmental Protection Agency (EPA) regulations. The EPA issued final acid rain permits for each of KU's Phase I affected units. The EPA's approval of KU's acid rain compliance plan was accompanied by bonus allowances awarded for the installation of the scrubber on Ghent Unit 1. KU's current emission allowance strategy, in part, includes the accumulation of unused sulfur dioxide emission allowances. These unused allowances result from the bonus allowances received from the EPA and the expected reduced sulfur dioxide emissions from the installation of the Ghent Unit 1 scrubber. The accumulated -7- allowances are expected to allow KU to delay capital expenditures associated with KU's Phase II acid rain compliance obligations, which are effective January 1, 2000. KU's Phase II compliance strategy, in addition to utilizing accumulated allowances, may include additional fuel switching or the installation of additional scrubbers. However, KU will continue to reassess its options for complying with Phase II emission reduction requirements to determine an overall least cost strategy. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Construction Requirements and - Environmental Matters in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference for additional discussion. EPA has proposed revisions to the National Ambient Air Quality Standards for ozone and particulate matter which may result in the EPA seeking additional reductions of sulfur dioxide and nitrogen oxide emissions from coal-fired boilers. Because of the magnitude of these additional reductions (50 percent beyond that already required by the Phase II acid rain control provisions of the 1990 Clean Air Act Amendments which become effective January 1, 2000), substantial costs could be incurred to meet future compliance obligations for KU's coal-fired boilers. The proposed revisions are expected to be finalized in 1997. The revisions would be effective some time after the effective date of the Phase II acid rain control provisions of the 1990 Clean Air Act Amendments. During 1996, each of KU's five fossil-fuel fired steam electric generating stations was re-issued a wastewater discharge permit by the Cabinet under the Clean Water Act's National Pollutant Discharge Elimination System. These 5-year permits place water quality-based effluent limitations (i.e., thermal and chemical limits) on each of the power plant's discharges. KU's operations are in substantial compliance with the conditions in the permits. Pursuant to the Resource Conservation and Recovery Act, utility wastes (fly ash, bottom ash and scrubber sludge) have been categorized as special wastes (i.e., wastes of large volume, but low environmental hazard). The EPA has concluded that the disposal of coal combustion byproducts by practices common to the utility industry is adequate for the protection of human health and the environment. The Cabinet also regulates utility wastes as special wastes under its waste management program. Under the Toxic Substances Control Act, the EPA regulates the use, servicing, repair, storage and disposal of electrical equipment containing polychlorinated biphenyls (PCB). To comply with these regulations, KU implemented procedures to be followed in the handling, storage and disposal of PCBs. In addition, KU completed the mandated phase out of all of its pole-class PCB capacitors and has no vault-type PCB transformers in use in or near commercial buildings. On February 13, 1990, KU received a letter from the EPA identifying KU and others as potentially responsible parties under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA or Superfund) for a disposal site in Daviess County, Kentucky. The letter also asked KU and the other persons or entities named to proceed voluntarily with a remediation program at the site. Under Superfund, a responsible party may be liable for all or a portion of all monies expended by the government to take corrective action at the site. The EPA has turned over responsibility for investigation of the site and development of a remediation plan to a -8- group (not including KU) originally named as potentially responsible parties. KU has entered into an agreement with the group as to the portion of the investigation and development costs to be borne by KU in connection with the site. The agreement does not cover costs which may be incurred in connection with any remediation plan. The remediation plan has been approved by the EPA. The remediation work is scheduled for completion in 1997. KU does not believe that any liability with respect to the site will have a material impact on its financial position or results of operations. Regulation KU is subject to the jurisdiction of the Kentucky Public Service Commission (PSC) and the Virginia State Corporation Commission (SCC) as to retail rates and service, accounts, issuance of securities and in other respects. The Federal Energy Regulatory Commission (FERC) has jurisdiction under the Federal Power Act over certain of the electric utility facilities and operations, wholesale sale of power and related transactions and accounting practices of KU, and in certain other respects as provided in the Act. The FERC has classified KU as a "public utility" as defined in the Act. By reason of owning and operating a small amount of electric utility property in one county in Tennessee (having a gross book value of about $226,000), KU may also be subject to the jurisdiction of the Tennessee Public Service Commission as to retail rates, accounts, issuance of securities and in other respects. Since 1992, utilities in Kentucky have had the option to use either a historical test period or a forward-looking test period in rate filings. KU's fuel adjustment clause for Kentucky customers, which operates to reflect changes in the cost of fuel in billings to customers, is designed to conform to a general regulation providing for a uniform monthly fuel adjustment clause for all electric utilities in Kentucky subject to the jurisdiction of the PSC. The clause is based on a formula approved by the FERC but with certain modifications, including the exclusion of excess fuel expense attributable to certain forced outages, the filing of fuel procurement documentation, a procedure for billing over and under recoveries of fuel cost fluctuations from the base rate level and provision for periodic public hearings to review past adjustments, to make allowance for any past adjustments found not justified, to disallow any improper expenses and to re-index base rates to include current fuel costs. The fuel adjustment clause mechanism for Virginia customers uses an average fuel cost factor based primarily on projected fuel costs. The fuel cost factor is adjusted annually for the over or under collection of fuel costs from the previous year. Rate regulation in Kentucky allows each electric utility, with a PSC- approved environmental compliance plan and environmental surcharge, to recover on a current basis the cost of complying with federal, state or local environmental requirements, including the Federal Clean Air Act as amended, which applies to coal combustion wastes and byproducts from facilities utilized for the production of energy from coal. In 1994, the PSC approved KU's environmental surcharge, which is designed to allow KU to recover compliance related operating expenses and to earn a return on those compliance-related capital expenditures not already included in existing rates through the application of the surcharge each month to customers' bills. Surcharge billings are subject to periodic PSC review of the level of environmental expenditures and reconciliation of previous surcharge billings with actual costs. For additional information regarding the environmental surcharge, including information concerning pending legal proceedings, see Management's Discussion and Analysis of Financial -9- Condition and Results of Operations - Environmental Cost Recovery in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference and Note 9 of the Notes to Financial Statements, "Environmental Cost Recovery," under Item 8. Integrated resource planning regulations in Kentucky require KU and the other major utilities to make triennial filings with the PSC, of various historical and forecasted information relating to forecasted load, capacity margins and demand-side management techniques. Pursuant to Kentucky law, the PSC has established the boundaries of the service territory or area of each retail electric supplier in Kentucky (including KU), other than municipal corporations, within which each such supplier shall have the exclusive right to render retail electric service. The SCC requires each Virginia utility to make annual filings of either a base rate change or an Annual Informational Filing consisting of a set of standard financial schedules. These filings are subject to review by the SCC Staff (Staff). The Staff issues a Staff Report, which includes any findings or recommendations to the SCC relating to the individual utility's financial performance during the historic 12-month period, including previously accepted adjustments. The Staff Report may lead to an adjustment in rates. KU is presently exempt from all the provisions of the Public Utility Holding Company Act of 1935, except Section 9(a)(2) thereof (which relates to the acquisition of securities of public utility companies), by virtue of the exemption granted by an order of the Securities and Exchange Commission dated April 19, 1949 and, absent further action by the Commission, by virtue of annual exemption statements filed by KU with the Commission pursuant to Rule 2 prescribed under the Act. Competition The electric utility industry has been rapidly moving to a less regulated and more competitive environment since the passage of the National Energy Policy Act of 1992 (NEPA). NEPA gave the FERC the authority to order electric utilities to provide wholesale transmission access to independent power producers and other utilities. It also reduced restrictions on the ownership and operation of independent power producers. See Management's Discussion and Analysis of Financial Condition and Results of Operation - Utility Issues - Competition in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference for further discussion of competition. In April 1996, the FERC issued two final rules and a new Notice of Proposed Rulemaking (NOPR) to promote competition and deregulation in the wholesale electric market. FERC Order No. 888 (Order 888) addressed both open access transmission service and stranded cost issues. FERC Order No. 889 (Order 889) required utilities to establish an electronic Open Access Same-Time Information System (OASIS) to share information about available transmission capacity and also required the establishment by each utility of standards of conduct for its transmission system operation. The 1996 NOPR proposes to establish a new system for utilities to use in reserving capacity on their own and other's transmission lines. See Management's Discussion and Analysis of Financial Condition and Results of Operation - Utility Issues - Competition in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference for further discussion of the FERC orders. -10- KU is one of 24 utilities in a ten-state region attempting to form the Midwest Independent System Operator (ISO). The primary objectives of the ISO are to advance wholesale competition by ensuring nondiscriminatory open transmission access to all customers and to enhance transmission reliability. Cautionary Factors See Management's Discussion and Analysis for information concerning forward looking statements. Forward looking statements have been and will be made in written documents and oral presentations of the Company and KU. All statements made herein which are not based on historical facts are forward looking and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. In addition to those forward looking statements and cautionary factors referred to in Management's Discussion and Analysis, forward looking statements in this Form 10-K include those relating to: 1. The need for franchise agreements. 2. The comparability of OMU and EEI power costs to generation and other available power. 3. Maintaining necessary levels of fuel inventory and adequate supplies of coal and gas to avoid operational disruptions. 4. Availability of coal reserves to supply baseload generating units over their useful lives. 5. The amount of coal supplied by contract versus spot purchase. 6. Negotiations of new coal contracts for future coal needs. 7. KU's portion of EPA remediation plan costs at the Daviess County site. 8. The Company's future dividend policy. 9. The percent of total kWh requirements provided by OMU and EEI. 10. Estimates of future construction expenditures discussed under Item 2 - Properties--Construction. All such statements are and will be based on management's belief, judgment and analysis as well as assumptions made by and information available to management at the time the statements are made. When used in the Company's or KU's documents or oral presentations, the words anticipate, estimate, expect, believe and similar expressions are intended to identify forward looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward looking statements, factors that could cause the Company's or KU's actual results to differ materially from those contemplated in any forward looking statements include, among others, those identified in Exhibit 99.06 hereto, which is incorporated herein by reference. -11- Item 2. Properties Currently, KU Energy and KU Capital have no significant physical property. KU owns and operates the following electric generating stations:
Nameplate Effective Rating (KW) Capability (KW) Steam: Ghent Ghent, Ky 2,226,060 2,000,000 Green River South Carrollton, Ky 263,636 242,000 E. W. Brown Burgin, Ky 739,534 661,000 Tyrone Tyrone, Ky 137,500 136,000 Pineville Four Mile, Ky 37,500 33,000 Hydro: Dix Dam & Lock #7 Burgin, Ky 30,297 24,000 Gas/Oil Peaking: Haefling Lexington, Ky 62,100 59,000 E.W. Brown Burgin, Ky 504,000 484,000 4,000,627 3,639,000
Substantially all properties are subject to the lien of KU's Mortgage Indenture. Construction Four 126-MW combustion turbine peaking units have been installed over the past three years. The first peaking unit was placed into commercial operation in late 1994. The second and third units were placed into commercial operation in February 1995 and December 1995, respectively. The fourth unit was placed into commercial operation in May 1996. Total construction expenditures for the years 1997 through 2001 are estimated at $531 million. Such expenditures include an estimated $168 million for generating facilities, $72 million for transmission facilities and $291 million for distribution and general facilities. Included in total construction expenditures for the 1997-2001 period are $95 million for 360 MW of peak generating capacity to be added during 1997-2001. KU has no plans to install baseload generating capacity before 2010. Construction expenditures for the years 1992 through 1996 aggregated about $688 million. See Note 4 of the Notes to Financial Statements, Commitments and Contingencies, under Item 8, for the estimated amounts of construction expenditures for each of the years 1997 through 2001. KU frequently reviews its construction program and construction expenditures, which may be affected by numerous factors, including competition and deregulation, the rate of load growth, changes in construction costs, changes in environmental regulations, least cost planning, the adequacy of rate relief and KU's ability to raise necessary capital. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity & Capital Resources - Capital Requirements in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference. KU's planned additions to its electric generating capacity are based on future load projections using estimated load growth rates. Consideration is also given to projections by neighboring utilities of their future loads and capacity. However, forecasts of future loads are subject to numerous uncertainties, including economic conditions and effectiveness of energy conservation measures. -12- Item 3. Legal Proceedings KU Energy and KU Capital are involved in no material legal proceedings. See Management's Discussion and Analysis - Environmental Matters - Environmental Cost Recovery in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference and Note 9 of the Notes to Financial Statements, "Environmental Cost Recovery," for a discussion of KU's environmental surcharge legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders of either KU Energy or KU during the three months ended December 31, 1996. -13- Executive Officers of KU Energy Current Positions Held During at Least the Name and Age Positions Held Last 5 Years Michael R. Whitley Chairman and Chairman of the Board of KU Energy Age 53 President* since August 1995 and President of KU Energy since November 1994. Director of KU Energy since March 1992. Senior Vice-President from 1988 to November 1994. Secretary of KU Energy from 1988 to November 1992. O. M. Goodlett Senior Vice- Senior Vice-President of KU Energy Age 49 President* since November 1994. James W. Tipton Senior Vice- Senior Vice-President of KU Energy Age 53 President since November 1994. Senior Vice- President of Kentucky Utilities from November 1986 to November 1994. George S. Brooks II General Corporate Secretary of KU Energy Age 46 Counsel and since November 1992, and General Corporate Counsel since 1988. Secretary* William N. English Treasurer* Treasurer of KU Energy since 1988. Age 46 Michael D. Robinson Controller* Controller of KU Energy since June Age 41 1990. Note: Officers are elected annually by the Board of Directors. There is no family relationship between any executive officer and any other executive officer or any director. * Certain executive officers of KU may be considered "executive officers" of KU Energy for certain purposes. Identified persons hold positions with the same titles at KU. Refer to KU's listing of executive officers for information concerning positions held during the last five years and information concerning KU executive officers. -14- Executive Officers of KU Current Positions Held During at Least the Name and Age Positions Held Last 5 Years Michael R. Whitley Chairman and Chairman of the Board of KU since Age 53 President* August 1995 and President from November 1994. Director of KU since March 1992. Senior Vice- President of KU from March 1987 to November 1994. Secretary of KU from July 1978 to November 1992. James M. Allison Senior Vice- Senior Vice-President of KU since Age 43 President** November 1994. Vice-President of KU from February 1993 to November 1994. President and Chief Operating Officer of Wheeling Power Company from October 1989 to January 1993. O. M. Goodlett Senior Vice- Senior Vice-President of KU since Age 49 President* November 1992. Vice-President of KU from April 1982 to November 1992. Wayne T. Lucas Senior Vice- Senior Vice-President of KU since Age 49 President November 1994. Vice President of KU from November 1986 to November 1994. George S. Brooks II General Corporate Secretary of KU since Age 46 Counsel and November 1992, and General Counsel Corporate since January 1988. Secretary* Gary E. Blake Vice-President Vice-President of KU since Age 43 November 1992. Western Division Manager of KU from October 1991 to November 1992. Assistant Western Division Manager of KU from March 1990 to October 1991. William E. Casebier Vice-President Vice-President of KU since May Age 54 1988. -15- Executive Officers of KU (continued) Current Positions Held During at Least the Name and Age Positions Held Last 5 Years Linda M. DiMascio Vice-President Vice-President of KU since Age 42 February 1995. Director of Human Resources of Tucker Housewares from September 1994 to February 1995. Senior Area Coordinator for U.S. Manufacturing Department of Mobil Oil Corporation from April 1992 to September 1994. Assistant Employee Relations Manager, Torrance Refinery of Mobil Oil Corporation from October 1989 to April 1992. Gary L. Hawley Vice-President Vice President of KU since January Age 48 1996. Director of Bulk Power Planning from November 1986 to January 1996. Robert M. Hewett Vice-President Vice-President of KU since January Age 49 1982. William N. English Treasurer* Treasurer of KU since April 1982. Age 46 Michael D. Robinson Controller* Controller of KU since August Age 41 1990. John J. Maloy, Jr. Assistant Assistant Treasurer of KU since Age 42 Treasurer August 1984. (Not an Executive Officer) Note: Officers are elected annually by the Board of Directors. There is no family relationship between any executive officer and any other executive officer or any director. * Certain executive officers of KU may be considered "executive officers" of KU Energy for certain purposes. Identified persons hold positions with the same titles at KU Energy. ** Mr. Allison resigned effective February 21, 1997. His duties were temporarily assigned to Mr. Goodlett, who also continues as the Company's Chief Financial Officer and Senior Vice-President of Finance and Administration. -16- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters KU Energy KU Energy's common stock is listed on the New York and Pacific stock exchanges under the ticker symbol "KU." Quotes in daily newspapers can be found under the listing "KU Engy." The table below sets forth the high and low sales prices and the dividends paid for the Company's common stock for the periods shown.
1996 1995 Dividend Price Dividend Price Quarter Paid High Low Paid High Low First $.43 30 5/8 28 5/8 $.42 28 7/8 26 5/8 Second $.43 30 28 3/8 $.42 28 3/8 26 1/4 Third $.43 30 27 $.42 29 3/8 26 Fourth $.43 30 1/2 28 1/8 $.42 30 5/8 28 3/4
KU Energy's Board has declared a common stock dividend of $.44 per share payable March 14, 1997, to shareholders of record on February 25, 1997. As of December 31, 1996, KU Energy had approximately 29,344 common shareholders of record. KU has paid cash dividends since 1939. KU Energy expects to continue this policy, although future dividends are dependent on future earnings, capital requirements and financial conditions. The dividend payout ratio (cash dividends as a percentage of net income) was 79% for 1996 and 84% for 1995. See Note 5 of the Notes to Consolidated Financial Statements, Common Stock, in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference for information regarding dividend restrictions. KU All of the outstanding common stock of KU is held by KU Energy. The following table sets forth the cash distributions (in thousands of dollars) on common stock paid by KU for the periods indicated: 1996 1995 First Quarter $16,261 $15,789 Second Quarter $16,262 $15,789 Third Quarter $16,262 $15,789 Fourth Quarter $16,262 $15,883 See Note 5 of the Notes to Financial Statements, Common Stock, under Item 8 for information regarding dividend restrictions. -17-
Item 6. Selected Financial Data - KU Energy Year ended December 31, 1996 1995 1994 1993 1992 (dollars in thousands) Operating Revenues: Residential $ 236,229 $ 232,760 $ 213,574 $ 210,759 $ 194,817 Commercial 150,640 151,778 142,207 138,271 133,519 Industrial 136,856 130,066 120,043 111,857 102,808 Mine power 34,014 36,076 36,498 34,977 36,696 Public authorities 56,023 54,161 49,869 48,142 45,570 Total retail revenues 613,762 604,841 562,191 544,006 513,410 Sales for resale 89,208 75,940 89,665 62,463 58,979 Miscellaneous revenues and other 8,716 5,619 4,157 3,448 3,871 Provision for refund - litigation settlement - - (19,385) (3,309) - Total operating revenues 711,686 686,400 636,628 606,608 576,260 Operating Expenses: Fuel used in generation (1) 198,198 189,845 170,654 178,910 168,470 Electric power purchased 62,490 69,579 61,442 34,711 32,753 Other operating expenses 125,351 124,044 114,551 106,124 95,109 Maintenance 64,170 62,599 66,141 59,458 61,270 Depreciation 80,612 75,268 65,441 60,811 58,931 Federal and state income taxes 50,247 43,426 43,904 47,752 40,992 Other taxes 15,049 15,038 14,789 14,357 13,401 Total operating expenses 596,117 579,799 536,922 502,123 470,926 Net Operating Income 115,569 106,601 99,706 104,485 105,334 Other Income and Deductions 8,203 11,655 11,530 10,362 12,162 Income Before Interest and Other Charges and AFUDC 123,772 118,256 111,236 114,847 117,496 Interest and Other Charges: Interest on long-term debt 37,584 36,095 32,147 31,650 39,571 Preferred stock dividend requirements of Subsidiary 2,256 2,256 2,384 2,558 2,518 Other interest 2,120 4,031 2,414 1,249 1,394 Total interest and other charges 41,960 42,382 36,945 35,457 43,483 AFUDC 137 179 1,585 593 169 Net Income $ 81,949 $ 76,053 $ 75,876 $ 79,983 $ 74,182 Earnings per Average Common Share $ 2.17 $ 2.01 $ 2.01 $ 2.11 $ 1.96 Common Stock Data: Shares Outstanding - average and year-end 37,818 37,818 37,818 37,818 37,818 Dividends per Share of Common Stock $ 1.72 $ 1.68 $ 1.64 $ 1.60 $ 1.56 (1) Amounts for 1994 and 1993 reflect reductions of $23 million and $4 million, respectively, associated with refunds to customers related to a litigation settlement with a former coal supplier.
-18- Item 6. Selected Financial Data - KU Energy (continued)
1996 1995 1994 1993 1992 Assets (in thousands) $1,726,948 $1,714,974 $1,669,294 $1,573,194 $1,457,100 Capitalization: (in thousands) Bonds $ 546,330 $ 545,830 $ 495,830 $ 441,830 $ 443,330 Notes 43 64 86 107 128 Unamortized premium on long-term debt - 86 96 108 519 Preferred stock 40,000 40,000 40,000 40,000 40,000 Common stock equity 645,513 628,611 616,092 602,503 583,319 Total capitalization $1,231,886 $1,214,591 $1,152,104 $1,084,548 $1,067,296 % Total Capitalization Represented by: Long-term debt 44.4 44.9 43.0 40.8 41.6 Preferred stock 3.2 3.3 3.5 3.7 3.7 Common stock equity 52.4 51.8 53.5 55.5 54.7 Kilowatt-hours Generated, Purchased and Sold: (in thousands) Power generated 16,510,347 15,223,851 15,524,844 14,934,839 13,700,313 Power purchased 3,165,589 3,254,861 3,066,917 1,926,299 2,032,110 Power interchanged - net 12,450 (6,569) 2,638 1,556 3,393 Total 19,688,386 18,472,143 18,594,399 16,862,694 15,735,816 Less - losses and company use 1,057,808 1,054,589 998,010 1,066,251 876,862 Kilowatt-hours sold 18,630,578 17,417,554 17,596,389 15,796,443 14,858,954 Sales classified: Residential 5,148,364 5,016,012 4,706,058 4,702,697 4,278,098 Commercial 3,410,710 3,403,054 3,272,370 3,217,504 3,080,045 Industrial 4,107,537 3,850,647 3,641,469 3,409,213 3,093,113 Mine power 893,650 926,873 974,233 933,317 977,032 Public authorities 1,349,948 1,297,913 1,225,668 1,199,893 1,123,494 Total retail sales 14,910,209 14,494,499 13,819,798 13,462,624 12,551,782 Sales for resale 3,720,369 2,923,055 3,776,591 2,333,819 2,307,172 Total 18,630,578 17,417,554 17,596,389 15,796,443 14,858,954 Average Number of Customers 456,167 449,144 440,590 432,636 425,403 Residential Sales (per customer): Average kilowatt-hours 13,531 13,377 12,781 12,995 12,007 Average revenue $ 620.87 $ 620.75 $ 580.05 $ 582.41 $ 546.80 System Capability - Megawatts: KU's plants 3,639 3,509 3,265 3,164 3,163 Purchased contracts 393 394 540 365 293 Total system capability 4,032 3,903 3,805 3,529 3,456 Net System Maximum Demand - Megawatts 3,391 3,341 3,127 3,176 2,845 Load Factor (%) 59.3 58.7 59.8 57.7 59.4 Heat Rate (BTU per KWH) (1) 10,351 10,377 10,306 10,367 10,344 Fuel - Average Cost per Ton (1) $ 27.68 $ 28.49 $ 28.84 $ 28.31 $ 27.88 Average Cost per Million BTU (1) $ 1.14 $ 1.18 $ 1.19 $ 1.17 $ 1.18 (1) Based on coal consumed
-19- Item 6. Selected Financial Data - KU
Year ended December 31, 1996 1995 1994 1993 1992 (in thousands) Operating Revenues: Residential $ 236,229 $ 232,760 $ 213,574 $ 210,759 $ 194,817 Commercial 150,640 151,778 142,207 138,271 133,519 Industrial 136,856 130,066 120,043 111,857 102,808 Mine power 34,014 36,076 36,498 34,977 36,696 Public authorities 56,023 54,161 49,869 48,142 45,570 Total retail revenues 613,762 604,841 562,191 544,006 513,410 Sales for resale 89,208 75,940 89,665 62,463 58,979 Miscellaneous revenues and other 8,741 5,649 4,181 3,428 3,432 Provision for refund - litigation settlement - - (19,385) (3,309) - Total operating revenues 711,711 686,430 636,652 606,588 575,821 Operating Expenses: Fuel used in generation (1) 198,198 189,845 170,654 178,910 168,470 Electric power purchased 62,490 69,579 61,442 34,711 32,753 Other operating expenses 122,872 121,426 112,712 104,930 93,915 Maintenance 64,161 62,592 66,134 59,451 61,118 Depreciation 80,424 75,080 65,259 60,800 58,849 Federal and state income taxes 51,452 44,670 44,683 48,178 41,489 Other taxes 14,777 14,694 14,582 14,347 13,359 Total operating expenses 594,374 577,886 535,466 501,327 469,953 Net Operating Income 117,337 108,544 101,186 105,261 105,868 Other Income and Deductions 8,377 8,235 9,299 8,331 11,226 Income Before Interest Charges and AFUDC 125,714 116,779 110,485 113,592 117,094 Interest Charges: Interest on long-term debt 37,584 36,095 32,147 31,650 39,571 Other interest 2,104 4,021 2,411 1,249 1,394 Total interest charges 39,688 40,116 34,558 32,899 40,965 AFUDC 137 179 1,585 593 169 Net Income $ 86,163 $ 76,842 $ 77,512 $ 81,286 $ 76,298 Preferred Stock Dividend Requirements 2,256 2,256 2,384 2,558 2,518 Net Income Applicable to Common Stock $ 83,907 $ 74,586 $ 75,128 $ 78,728 $ 73,780 Common Dividends $ 65,047 $ 63,250 $ 61,644 $ 60,509 $ 108,996 (1) Amounts for 1994 and 1993 reflect reductions of $23 million and $4 million, respectively, associated with refunds to customers related to a litigation settlement with a former coal supplier.
-20- Item 6. Selected Financial Data - KU (continued)
1996 1995 1994 1993 1992 Assets (in thousands) $1,673,055 $1,659,988 $1,618,100 $1,523,274 $1,408,453 Capitalization: (in thousands) Bonds $ 546,330 $ 545,830 $ 495,830 $ 441,830 $ 443,330 Notes 43 64 86 107 128 Unamortized premium on long-term debt - 86 96 108 519 Preferred stock 40,000 40,000 40,000 40,000 40,000 Preferred stock with mandatory redemption - - - - - Common stock equity 595,397 576,537 565,201 552,106 534,073 Total capitalization $1,181,770 $1,162,517 $1,101,213 $1,034,151 $1,018,050 % Total Capitalization Represented by: Long-term debt 46.2 47.0 45.1 42.7 43.6 Preferred stock 3.4 3.4 3.6 3.9 3.9 Common stock equity 50.4 49.6 51.3 53.4 52.5 Kilowatt-hours Generated, Purchased and Sold: (in thousands) Power generated 16,510,347 15,223,851 15,524,844 14,934,839 13,700,313 Power purchased 3,165,589 3,254,861 3,066,917 1,926,299 2,032,110 Power interchanged - net 12,450 (6,569) 2,638 1,556 3,393 Total 19,688,386 18,472,143 18,594,399 16,862,694 15,735,816 Less - losses and company use 1,057,808 1,054,589 998,010 1,066,251 876,862 Kilowatt-hours sold 18,630,578 17,417,554 17,596,389 15,796,443 14,858,954 Sales classified: Residential 5,148,364 5,016,012 4,706,058 4,702,697 4,278,098 Commercial 3,410,710 3,403,054 3,272,370 3,217,504 3,080,045 Industrial 4,107,537 3,850,647 3,641,469 3,409,213 3,093,113 Mine power 893,650 926,873 974,233 933,317 977,032 Public authorities 1,349,948 1,297,913 1,225,668 1,199,893 1,123,494 Total retail sales 14,910,209 14,494,499 13,819,798 13,462,624 12,551,782 Sales for resale 3,720,369 2,923,055 3,776,591 2,333,819 2,307,172 Total 18,630,578 17,417,554 17,596,389 15,796,443 14,858,954 Average Number of Customers 456,167 449,144 440,590 432,636 425,403 Residential Sales (per customer): Average kilowatt-hours 13,531 13,377 12,781 12,995 12,007 Average revenue $ 620.87 $ 620.75 $ 580.05 $ 582.41 $ 546.80 System Capability - Megawatts: KU's plants 3,639 3,509 3,265 3,164 3,163 Purchased contracts 393 394 540 365 293 Total system capability 4,032 3,903 3,805 3,529 3,456 Net System Maximum Demand - Megawatts 3,391 3,341 3,127 3,176 2,845 Load Factor (%) 59.3 58.7 59.8 57.7 59.4 Heat Rate (BTU per KWH) (1) 10,351 10,377 10,306 10,367 10,344 Fuel - Average Cost per Ton(1) $ 27.68 $ 28.49 $ 28.84 $ 28.31 $ 27.88 Average Cost per Million BTU(1) $ 1.14 $ 1.18 $ 1.19 $ 1.17 $ 1.18 (1) Based on coal consumed
-21- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information under the heading Management's Discussion and Analysis of Financial Condition and Results of Operation is combined for KU Energy and KU on pages 14 through 19 of KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data KU ENERGY The financial statements and supplementary data on pages 20 through 33 of KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) are incorporated herein by reference. KU Page(s) Index to Financial Statements and Supplementary Data: Report of Independent Public Accountants 23 Statements of Income and Retained Earnings 24 Statements of Cash Flows 25 Balance Sheets 26 Statements of Capitalization 27 Notes to Financial Statements 28-38 Supplemental Quarterly Financial Information 39 -22- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Kentucky Utilities Company: We have audited the accompanying balance sheets and statements of capitalization of Kentucky Utilities Company (a Kentucky and Virginia corporation) as of December 31, 1996 and 1995, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the management of Kentucky Utilities Company. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kentucky Utilities Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP Arthur Andersen LLP Chicago, Illinois January 28, 1997 -23- Statements of Income and Retained Earnings Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Operating Revenues $ 711,711 $ 686,430 $ 636,652 Operating Expenses: Fuel, principally coal, used in generation 198,198 189,845 170,654 Electric power purchased 62,490 69,579 61,442 Other operating expenses 122,872 121,426 112,712 Maintenance 64,161 62,592 66,134 Depreciation 80,424 75,080 65,259 Federal and state income taxes 51,452 44,670 44,683 Other taxes 14,777 14,694 14,582 Total Operating Expenses 594,374 577,886 535,466 Net Operating Income 117,337 108,544 101,186 Other Income and Deductions: Interest and dividend income 1,733 2,838 4,295 Other income and deductions - net 6,710 5,467 6,098 Total Other Income and Deductions 8,443 8,305 10,393 Income Before Interest Charges 125,780 116,849 111,579 Interest Charges: Interest on long-term debt 37,584 36,095 32,147 Other interest charges 2,033 3,912 1,920 Total Interest Charges 39,617 40,007 34,067 Net Income 86,163 76,842 77,512 Preferred Stock Dividend Requirements 2,256 2,256 2,384 Net Income Applicable to Common Stock $ 83,907 $ 74,586 $ 75,128 Retained Earnings Beginning of Year $ 268,992 $ 257,656 $ 244,429 Add Net Income 86,163 76,842 77,512 355,155 334,498 321,941 Deduct: Dividends on preferred stock 2,256 2,256 2,384 Dividends on common stock 65,047 63,250 61,644 Preferred stock redemption expense - - 257 67,303 65,506 64,285 Retained Earnings End of Year $ 287,852 $ 268,992 $ 257,656 The accompanying Notes to Financial Statements are an integral part of these statements.
-24- Statements of Cash Flows Kentucky Utilities Company
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Cash Flows from Operating Activities: Net income $ 86,163 $ 76,842 $ 77,512 Items not requiring (providing) cash currently: Depreciation 80,424 75,080 65,259 Deferred income taxes 3,750 15,502 (1,559) Investment tax credit deferred (4,013) (4,095) (4,110) Changes in current assets and liabilities: Change in accounts receivable (1,111) (7,759) (255) Change in accounts payable (9,040) (11,517) 5,511 Change in liability to ratepayers (6,599) (310) (29,958) Change in escrow funds 6,599 312 30,841 Change in other current assets and liabilities 6,923 (511) (8,116) Other - net 8,701 5,515 6,839 Net Cash Provided by Operating Activities 171,797 149,059 141,964 Cash Flows from Investing Activities: Construction expenditures - utility (106,503) (124,515) (193,344) Other 178 (119) 371 Net Cash Used by Investing Activities (106,325) (124,634) (192,973) Cash Flows from Financing Activities: Short-term borrowings - net (1,400) (20,700) 76,300 Issuance of long-term debt 35,666 49,288 53,305 Funds deposited with trustee - net 3,779 15,100 95 Retirement of long-term debt, including premiums (36,192) (21) (21) Retirement of preferred stock, including premiums - - (20,302) Payment of dividends (67,303) (65,506) (64,089) Net Cash Provided (Used) by Financing Activities (65,450) (21,839) 45,288 Net Increase (Decrease) in Cash and Cash Equivalents 22 2,586 (5,721) Cash and Cash Equivalents Beginning of Year 5,697 3,111 8,832 Cash and Cash Equivalents End of Year $ 5,719 $ 5,697 $ 3,111 Supplemental Disclosures Cash paid for: Interest $ 36,729 $ 37,961 $ 31,864 Income Taxes $ 47,539 $ 31,974 $ 45,270 The accompanying Notes to Financial Statements are an integral part of these statements.
-25- Balance Sheets Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1996 1995 Assets Utility Plant: Plant in service, at cost $ 2,482,812 $ 2,394,018 Less: Accumulated depreciation 1,067,911 997,366 1,414,901 1,396,652 Construction work in progress 63,435 61,410 Total Utility Plant 1,478,336 1,458,062 Current Assets: Cash and cash equivalents 5,719 5,697 Escrow funds - coal contract litigation - 6,599 Construction funds held by trustee - 3,743 Accounts receivable, net of allowance for doubtful accounts 50,582 49,471 Accrued utility revenues 24,239 27,900 Fuel, principally coal, at average cost 30,895 29,438 Plant materials and operating supplies, at average cost 21,656 23,064 Other 7,486 8,121 Total Current Assets 140,577 154,033 Other Assets: Unamortized loss on reacquired debt 10,838 11,304 Other 43,304 36,589 Total Other Assets 54,142 47,893 Total Assets $ 1,673,055 $ 1,659,988 Capitalization and Liabilities Capitalization: (See Statements of Capitalization) Common stock equity $ 595,397 $ 576,537 Preferred stock 40,000 40,000 Long-term debt 546,373 545,980 Total Capitalization 1,181,770 1,162,517 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 54,200 55,600 Accounts payable 28,960 38,000 Accrued interest 8,048 7,556 Accrued taxes 5,383 5,201 Customer deposits 8,746 6,876 Accrued payroll and vacations 9,862 8,706 Liability to ratepayers - coal contract litigation - 6,599 Other 5,728 6,752 Total Current Liabilities 120,948 135,311 Other Liabilities: Accumulated deferred income taxes 238,542 231,717 Accumulated deferred investment tax credits 30,167 34,180 Regulatory tax liability 54,388 57,726 Other 47,240 38,537 Total Other Liabilities 370,337 362,160 Total Capitalization and Liabilities $ 1,673,055 $ 1,659,988 The accompanying Notes to Financial Statements are an integral part of these statements.
-26- Statements of Capitalization Kentucky Utilities Company
As of December 31, (in thousands of dollars) 1996 1995 Common Stock Equity: Common stock, without par value, outstanding 37,817,878 shares $ 308,140 $ 308,140 Capital stock expense and other (595) (595) Retained earnings 287,852 268,992 Total Common Stock Equity 595,397 576,537 Preferred Stock, cumulative, without par value, $100 stated value 4 3/4%, outstanding 200,000 shares 20,000 20,000 6.53%, outstanding 200,000 shares 20,000 20,000 Total Preferred Stock 40,000 40,000 Long-Term Debt: First Mortgage Bonds: 5.95% Series Q, due June 15, 2000 61,500 61,500 7 3/8% Series K, due December 1, 2002 - 35,500 6.32% Series Q, due June 15, 2003 62,000 62,000 5.99% Series S, due January 15, 2006 36,000 - 7.92% Series P, due May 15, 2007 53,000 53,000 7.55% Series R, due June 1, 2025 50,000 50,000 8.55% Series P, due May 15, 2027 33,000 33,000 295,500 295,000 First Mortgage Bonds, Pollution Control Series: 7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000 7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000 6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930 6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400 6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200 6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400 7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900 5 3/4% Pollution Control Series 9, due December 1, 2023 50,000 50,000 Variable Rate Pollution Control Series 10, due November 1, 2024 54,000 50,800 Variable Rate County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds, due November 1, 2024 - 3,200 250,830 250,830 Total First Mortgage Bonds 546,330 545,830 Unamortized premium - 86 8% secured note, due January 5, 1999 (net of current maturity) 43 64 Total Long-Term Debt 546,373 545,980 Total Capitalization $ 1,181,770 $1,162,517 The accompanying Notes to Financial Statements are an integral part of these statements.
-27- Notes to Financial Statements Kentucky Utilities Company 1. Summary of Significant Accounting Policies General Kentucky Utilities Company (KU) is the principal subsidiary of KU Energy Corporation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts from prior periods have been reclassified to conform with the current year presentation. KU is a public utility engaged in producing, transmitting and selling electric energy. KU provides electric service to about 432,900 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky and to about 28,800 customers in 5 counties in southwestern Virginia. Regulation KU is exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935. KU is subject to regulation by the Kentucky Public Service Commission (PSC), the Virginia State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC). With respect to accounting matters, KU maintains its accounts in accordance with the Uniform System of Accounts as defined by these agencies. KU's accounting policies conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process. Other than the unamortized loss on reacquired debt, KU's regulatory assets are immaterial. Utility Plant Utility plant is stated at the original cost of construction. The cost of repairs of property units and replacements of minor items is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired. Depreciation Provision for depreciation of utility plant is based on straight-line composite rates applied to the cost of depreciable property. The rates approximated 3.5% in 1996 and 1995 and 3.4% in 1994. Cash and Cash Equivalents For purposes of reporting cash flows, KU considers highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. -28- Notes to Financial Statements Kentucky Utilities Company KU utilizes a cash management mechanism that funds certain bank accounts for checks as they are presented to those banks. KU classified checks written but not presented to those banks, which amounted to $6.1 million and $10.5 million at December 31, 1996 and 1995, respectively, in accounts payable. Financial Instruments KU's temporary cash investments are classified as held-to-maturity and are reported under the caption "Cash and cash equivalents" on the Balance Sheet. Stock-Based Compensation KU adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in 1996 by continuing to account for stock compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If KU had recognized compensation expense for awards under its stock-based compensation plan according to the new standard, net income and earnings per share for the year ended 1996, 1995 and 1994 would not have been materially different from amounts recorded. Unamortized Loss on Reacquired Debt KU defers costs (primarily call premiums) arising from the reacquisition or retirement of long-term debt. Costs related to refinanced debt are amortized over the lives of the new debt issues. Costs related to retired debt not refinanced are amortized over the period to the scheduled maturity of the retired debt. Operating Revenues and Fuel Costs Revenues are recorded based on services rendered to customers. KU accrues an estimate of revenues for electric service furnished from the meter reading dates to the end of each accounting period. Cost of fuel used in electric generation is charged to expense as the fuel is consumed. Fuel adjustment clauses adjust operating revenues for changes in the level of fuel costs charged to expense. An environmental surcharge for Kentucky retail customers, implemented in August 1994, permits the utility to recover certain ongoing operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. See Note 9 of the Notes to Financial Statements, "Environmental Cost Recovery," for an update of environmental surcharge legal proceedings. Pursuant to regulatory orders, KU had been refunding fuel cost savings related to the resolution of a coal contract dispute. Refunds were made to Virginia retail customers during the period August 1993 through June 1994. Refunds were made to wholesale customers under the jurisdiction of the FERC in lump sum payments in September 1993. Refunds to Kentucky retail customers commenced in July 1994. Pursuant to -29- Notes to Financial Statements Kentucky Utilities Company legislation adopted in 1996, KU paid the remaining balance of unclaimed Kentucky retail customer refunds to the Kentucky Workers' Compensation Funding Commission to pay certain workers compensation benefits. By virtue of the legislation, KU's payment of the unclaimed refunds to the State released KU from any future liability to customers relating to such refunds. The legislation also preserved the rights of ratepayers entitled to claim a refund who have not yet done so and authorized the Funding Commission to honor future refund claims using any funds available. Operating revenues and fuel expense for 1994 were reduced by $19.4 million and $23.1 million, respectively, resulting from the above- mentioned refunds. The refunds had no impact on operating revenues or fuel expense for 1995 or 1996. The difference between the reduction in operating revenues and the reduction in fuel expense is attributable to incurred litigation costs, fuel cost savings related to opportunity sales and costs incurred to administer the refund plan. These amounts were retained by KU pursuant to regulatory orders. Income Taxes KU establishes deferred tax assets and liabilities, as appropriate, for all temporary differences, and adjusts deferred tax balances to reflect changes in tax rates expected to be in effect during the periods the temporary differences reverse. Investment tax credits resulted from provisions of the tax law which permitted a reduction of KU's tax liability based on certain construction expenditures. Such credits have been deferred in the accounts and are being amortized as reductions in income tax expense over the life of the related property. Because of rate regulation, changes in tax rates are deferred and amortized as the temporary differences reverse. 2. Income Taxes KU is included in the consolidated federal tax return of its parent company, KU Energy. Income taxes are allocated to the individual companies, including KU, based on their respective taxable income or loss. -30- Notes to Financial Statements Kentucky Utilities Company The accumulated deferred income taxes as set forth in the Balance Sheet arise from the following temporary differences:
As of December 31, (in thousands of dollars) 1996 1995 Deferred Tax Assets: Unamortized investment tax credit and other property related differences $ 29,294 $ 31,667 Other 20,583 15,990 Less: Amounts included in current assets 4,723 4,985 45,154 42,672 Deferred Tax Liabilities: Accelerated depreciation and other property related differences 278,036 268,203 Other 5,660 6,186 283,696 274,389 Net accumulated deferred income tax liability $238,542 $231,717
The components of income tax expense are as follows: Year Ended December 31, (in thousands of dollars) 1996 1995 1994
Income taxes charged to Operating Income: Current - federal $ 35,656 $ 23,597 $ 37,058 - state 7,387 5,134 8,812 43,043 28,731 45,870 Deferred - federal 5,510 12,165 (1,114) - state 2,899 3,845 13 8,409 16,010 (1,101) Deferred investment tax credit - (71) (86) 51,452 44,670 44,683 Income taxes charged to Other Income and Deductions: Current - federal 3,565 854 1,537 - state 861 190 344 4,426 1,044 1,881 Deferred - federal (3,665) (406) (365) - state (994) (102) (93) (4,659) (508) (458) Amortization of deferred investment tax credit (4,013) (4,024) (4,024) (4,246) (3,488) (2,601) Total income tax expense $ 47,206 $ 41,182 $ 42,082
-31- Notes to Financial Statements Kentucky Utilities Company KU's effective income tax rate, determined by dividing income taxes by the sum of such taxes and net income, was 35.4% in 1996, 34.9% in 1995 and 35.2% in 1994. The difference between the effective rate and the statutory federal income tax rate is attributable to the following factors: Year Ended December 31, (in thousands of dollars) 1996 1995 1994
Federal income tax computed at 35% $ 46,679 $ 41,308 $ 41,858 Add (Deduct): State income taxes, net of federal income tax benefit 6,599 5,894 5,899 Amortization of deferred investment tax credit (4,013) (4,095) (4,110) Other, net (2,059) (1,925) (1,565) Total income tax expense $ 47,206 $ 41,182 $ 42,082
3. Retirement Benefits Pensions KU has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits under this plan are based on years of service, final average base pay and age at retirement. KU's funding policy is to make such contributions as are necessary to finance the benefits provided under the plan. KU's contributions meet the funding standards set forth in the Employee Retirement Income Security Act of 1974. The plan assets consist primarily of common stocks, corporate bonds and U.S. Government Securities. KU also has a Supplemental Security Plan for certain management personnel. Retirement benefits under this plan are based on years of service, earnings and age at retirement. The plan has no advance funding. Benefit payments are made to retired employees or their beneficiaries from the general assets of KU. The reconciliation of the funded status of the retirement plans and the pension liability recorded by KU is as follows: As of December 31, (in thousands of dollars) 1996 1995
Fair value of plan assets $ 191,778 $ 179,203 Projected benefit obligation (194,874) (183,795) Plan assets less than projected benefit obligation (3,096) (4,592) Unrecognized net (gain)/loss from past experience different than that assumed (12,448) (5,907) Unrecognized prior service cost 3,990 4,344 Unrecognized net asset (1,500) (1,649) Regulatory effect recorded 201 (1,634) Pension liability $ (12,853) $ (9,438) Accumulated benefit obligation (including vested benefits of $147,103 and $139,250, respectively) $ 149,814 $ 141,531
-32- Notes to Financial Statements Kentucky Utilities Company Components of Net Pension Cost: Year Ended December 31, (in thousands of dollars) 1996 1995 1994
Service cost (benefits earned during the period) $ 6,399 $ 6,060 $ 6,017 Interest cost on projected benefit obligation 13,856 13,560 12,366 Actual return on plan assets (20,798) (27,064) (3,723) Net amortization and deferral 6,568 14,608 (8,765) Regulatory effect recorded (1,835) (1,595) (1,916) Net pension cost $ 4,190 $ 5,569 $ 3,979
Assumptions Used in Determining Actuarial Valuations: 1996 1995 1994 Weighted average discount rate used to determine the projected benefit obligation 7.75% 7.75% 8.25% Rate of increase for compensation levels (1) 4.75% 4.75% 5.50% Weighted average expected long-term rate of return on assets 8.25% 8.25% 8.25% (1) 4.75%, 4.75%, and 6.00%, respectively, used for the Supplemental Security Plan valuation.
Other Postretirement Benefits KU provides certain health care and life insurance benefits to eligible retired employees and their dependents. KU accrues, during the years that the employee renders service, the expected cost of providing these benefits for retired employees, their beneficiaries and covered dependents. The postretirement health care plan is contributory for employees who retired after December 31, 1992, with retiree contributions indexed annually based upon the experience of retiree medical expenses for the preceding year. Pre-1993 retirees are not required to contribute to the plan. KU's employees become eligible for retiree medical benefits after 15 years of service and attainment of age 55. The life insurance plan is noncontributory and is based on compensation levels prior to retirement. In 1993, KU began funding, in addition to current requirements for benefit payments, the maximum tax-favored amount allowed through certain tax deductible funding vehicles. KU anticipates making similar funding decisions in future years, but will consider and make such funding decisions on the basis of tax, regulatory and other relevant conditions in effect at such times. The plan assets consist primarily of equity investments. -33- Notes to Financial Statements Kentucky Utilities Company The reconciliation of the funded status of the plans and the postretirement benefit liability recorded by KU is as follows:
As of December 31, (in thousands of dollars) 1996 1995 Accumulated postretirement benefit obligation: Retirees $ (29,313) $ (28,575) Fully eligible active plan participants (8,678) (8,250) Other active plan participants (28,528) (26,831) (66,519) (63,656) Plan assets at fair value 13,322 10,427 Accumulated postretirement benefit obligation in excess of plan assets (53,197) (53,229) Unrecognized net (gain)/loss from past experience different from that assumed (20,029) (18,773) Unrecognized transition obligation 53,460 56,801 Accrued postretirement benefit liability $ (19,766) $ (15,201)
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Service cost (benefits attributed to service during the period) $ 1,859 $ 1,918 $ 2,105 Interest cost on accumulated postretirement benefit obligation 4,751 4,926 4,926 Actual return on plan assets (1,633) (1,722) (80) Net amortization and deferral 103 792 (118) Amortization of transition obligation 3,341 3,341 3,341 Regulatory effect recorded - - 689 Net periodic postretirement benefit cost $ 8,421 $ 9,255 $ 10,863
Assumptions Used in Determining Actuarial Valuations: 1996 1995 1994 Weighted average discount rate used to determine the projected benefit obligation 7.75% 7.75% 8.25% Rate of increase for compensation levels 4.75% 4.75% 5.50% Weighted average expected long-term rate of return on assets 8.00% 8.00% 8.25%
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits is assumed for 1997. The health care cost trend rate is assumed to decrease gradually to 4.75% through 2003 and remain at that level thereafter over the projected payout period of the benefits. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $10.4 million (16%) and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $1.2 million (19%). -34- Notes to Financial Statements Kentucky Utilities Company 4. Commitments and Contingencies The effects of certain commitments made by KU are estimated below:
(in thousands of dollars) 1997 1998 1999 2000 2001 1997-2001 Estimated Construction Expenditures $ 89,700 $ 98,300 $ 114,300 $ 113,700 $115,200 $ 531,200 Estimated Contract Obligations: Fuel 142,200 86,500 48,300 6,600 - 283,600 Purchased power 31,600 30,400 29,000 28,000 30,600 149,600 Operating leases 2,800 2,800 2,700 2,700 2,700 13,700 First Mortgage Bond Maturities: Series Q $ - $ - $ - $ 61,500 $ - $ 61,500
Construction Program KU frequently reviews its construction program and may revise its projections of related expenditures based on revisions to its estimated load growth and projections of its future load. See Management's Discussion and Analysis - Construction Requirements in KU Energy's 1996 Annual Report to Shareholders (Exhibit 13) incorporated herein by reference for a discussion of future construction expenditures including those relating to construction of peaking units. Coal Supply Obligations under KU's coal purchase contracts are stated at prices effective January 1, 1997, and are subject to changes as defined by the terms of the contracts. Purchased Power KU has purchase power arrangements with Owensboro Municipal Utilities (OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU agreement, which expires on January 1, 2020, KU purchases, on an economic basis, all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to KU during 1997-2001, which is expected to be approximately 8% of KU's total kWh requirements, is dependent upon a number of factors including the units' availability, maintenance schedules, fuel costs and OMU requirements. Payments are based on the total costs of the station allocated per terms of the OMU agreement, which generally follows delivered kWh. Included in the total costs is KU's proportionate share of debt service requirements on $192.9 million of OMU bonds outstanding at December 31, 1996. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 48% in 1996. KU has a 20% equity ownership in EEI, which is accounted for on the equity method of accounting. KU's entitlement is 20% of the available -35- Notes to Financial Statements Kentucky Utilities Company capacity of a 1,000-MW station. Payments are based on the total costs of the station allocated per terms of an agreement among the owners, which generally follows delivered kWh. KU has several other contracts for purchased power during 1997-2001 of various MW capacities and for varying periods with a maximum entitlement at any time of 282 MW. Credit Arrangements KU has aggregate bank lines of credit of $60 million, all of which remained unused at December 31, 1996. All of these credit lines expire in December 1999. In support of these lines of credit, KU compensates the banks by paying a commitment fee. 5. Common Stock KU is subject to restrictions applicable to all corporations under Kentucky and Virginia law on the use of retained earnings for cash dividends on common stock, as well as those contained in its Mortgage Indenture and Articles of Incorporation. At December 31, 1996, there were no restricted retained earnings. 6. Preferred and Preference Stock Each series of preferred stock is redeemable at the option of KU upon 30 days' written notice as follows: Redemption Price per Share Series (plus accrued and unpaid dividends, if any) 4 3/4% $101.00 6.53% (Not redeemable prior to December 1, 2003.) $103.265 through November 30, 2004, decreasing approximately $.33 each twelve months thereafter to $100 on or after December 1, 2013. As of December 31, 1996, there were 5.3 million shares of KU preferred stock, having a maximum aggregate stated value of $200 million, authorized for issuance, of which 400,000 shares were outstanding. As of December 31, 1996, there were 2 million shares of KU Preference Stock without par value, authorized for issuance. 7. Short-Term and Long-Term Debt KU's short-term financing requirements are satisfied through the sale of commercial paper. The weighted average interest rate on the year-end balance was 6.17% for 1996 and 5.83% for 1995. -36- Notes to Financial Statements Kentucky Utilities Company In 1994, KU entered into a loan agreement with the County of Carroll, Kentucky to finance the construction of solid waste disposal facilities. The County of Carroll issued $54 million of variable rate revenue bonds, with the proceeds held in a construction fund. In 1994, 1995 and 1996, KU drew down $35.7 million, $15.1 million and $3.2 million, respectively, relating to these bonds. Kentucky Utilities Pollution Control Series 10 Bonds are issued under KU's Mortgage Indenture. Under the provisions for the variable rate revenue bonds, KU can choose between various interest rate options. Currently, the daily interest rate option is being utilized. The average annual interest rate on the bonds during 1996 and 1995 was 3.53% and 3.95%, respectively. The variable rate bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events. If tendered bonds are not remarketed, KU has available lines of credit which may be used to repurchase the bonds. In January 1996, KU issued $36 million of Series S First Mortgage Bonds which bear interest at 5.99% and will mature January 15, 2006. The proceeds were used to redeem $35.5 million of Series K First Mortgage Bonds. Substantially all of KU's utility plant is pledged as security for the first mortgage bonds. 8. Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: The carrying values of cash and cash equivalents, escrow funds, construction funds, short-term borrowings, commercial paper and customer deposits approximate fair value because of the short maturity of these amounts. Long-term debt fair values are based on quoted market prices for KU's first mortgage bonds and on current rates available to KU for debt of the same remaining maturities for KU's pollution control bonds and promissory note. The carrying value of long-term debt on December 31, 1996 and 1995 was $546 million and $546 million, respectively, and the estimated fair value was $587 million and $594 million, respectively. If the difference between fair value and carrying value of KU's long-term debt were settled at amounts approximating those above, the anticipated regulatory treatment (based on the current regulatory environment) would allow recovery of these amounts in rates over a prescribed amortization period. Accordingly, any settlement would not have a material impact on KU's financial position or results of operations. -37- Notes to Financial Statements Kentucky Utilities Company 9. Environmental Cost Recovery Since August 1994, KU has been collecting an environmental surcharge from its Kentucky retail customers under a Kentucky statute which authorizes electric utilities (including KU) to implement, beginning January 1, 1993, an environmental surcharge. The surcharge is designed to recover certain operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. KU's environmental surcharge was approved by the PSC in July 1994 and was implemented in August 1994. The total surcharge collections from August 1, 1994 through December 31, 1996 were approximately $40 million. The constitutionality of the surcharge statute was challenged in the Franklin County (Kentucky) Circuit Court in an action brought against KU and the PSC by the Attorney General of Kentucky and joined by representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the statute, but vacating that part of the PSC's July 1994 order which the judgment describes as allowing KU to recover, under the surcharge, certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The Circuit Court further ordered the case remanded to the PSC for a determination in accordance with the judgment. KU and the PSC assert that none of the costs included in the surcharge were incurred prior to June 1994. The Attorney General and other consumer representatives appealed to the Kentucky Court of Appeals that part of the Circuit Court judgment upholding the constitutionality of the surcharge statute. The PSC and KU appealed that part of the judgment denying recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The PSC has ordered all surcharge revenues collected by KU from February 1, 1995 subject to refund pending final determination of all appeals. The total surcharge collections from February 1, 1995 through December 31, 1996 were approximately $36 million. KU believes the constitutionality of the surcharge statute will be upheld, but it cannot predict the outcome of that part of the Circuit Court judgment disallowing recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. If the Circuit Court judgment is ultimately upheld as entered, KU estimates that the amount it would be required to refund (which is based solely on costs associated with certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993) for surcharge collections through December 31, 1996, from the implementation of the surcharge would be approximately $11 million, and from February 1, 1995 would be approximately $9 million. At this time, KU has not recorded any reserve for refund. -38- Supplementary Quarterly Financial Information (Unaudited) Kentucky Utilities Company Quarterly financial results for 1996 and 1995 are summarized below. Generally, quarterly results may fluctuate due to seasonal variations, changes in fuel costs and other factors.
Quarter 4th 3rd 2nd 1st (in thousands of dollars) 1996 Operating Revenues $ 174,924 $ 178,275 $ 167,516 $ 190,996 Net Operating Income 28,029 30,457 23,863 34,988 Net Income 19,746 22,724 16,190 27,503 Net Income Applicable to Common Stock 19,182 22,160 15,626 26,939 1995 Operating Revenues $ 170,152 $ 194,373 $ 154,757 $ 167,148 Net Operating Income 30,626 33,073 18,283 26,562 Net Income 22,438 24,915 10,561 18,928 Net Income Applicable to Common Stock 21,874 24,351 9,997 18,364
These quarterly amounts reflect, in KU's opinion, all adjustments (including only normal recurring adjustments) necessary for a fair presentation. -39- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None for KU Energy or KU. PART III Item 10. Directors and Executive Officers of the Registrants The information required by Item 10 for the Company and KU relating to each director and each nominee for election as a director at the Company's and KU's 1997 Annual Shareholders Meetings is set forth in the Company's definitive proxy statement (the Proxy Statement) filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 in connection with the Company's 1997 Annual Shareholders Meeting. Such information is incorporated herein by reference to the material appearing in the Proxy Statement under the caption "Election of Directors--General" and is also filed herewith as Exhibit 99.03. Information required by this item relating to executive officers of the Company and KU is set forth under a separate caption in Part I hereof. Item 11. Executive Compensation The information required by Item 11 for the Company and KU is incorporated herein by reference to the material appearing in the Proxy Statement under the caption "Election of Directors -- Directors' Compensation, and -- Executive Compensation" and is also filed herewith as Exhibit 99.03 (but excluding any information contained under the subheadings -- "Report of Compensation Committee on Executive Compensation," -- "Performance Graph"). Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 for the Company and KU is incorporated herein by reference to the material appearing in the Proxy Statement under the caption "Election of Directors--Voting Securities Beneficially Owned by Directors, Nominees and Executive Officers" and is also filed herewith as Exhibit 99.03. Item 13. Certain Relationships and Related Transactions None for KU Energy or KU. -40- PART IV KU ENERGY AND KU Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Page of this Report on Form 10-K KU Energy KU (a) (1) Financial Statements** Report of Independent Public Accountants * 23 Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994 * 24 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 * 25 Balance Sheets as of December 31, 1996 and 1995 * 26 Statements of Capitalization as of December 31, 1996, and 1995 * 27 Notes to Financial Statements * 28 (a) (2) All financial statement schedules for KU Energy and KU are omitted as not applicable or not required under Regulation S-X. * Incorporated by reference from KU Energy's 1996 Annual Report to Shareholders (Exhibit 13). ** The KU Energy consolidated financial statements, including notes, are not included in the KU Annual Report on Form 10-K. -41- (3) Exhibits - KU Energy and KU Applicable to Form 10-K of KU No. Description Energy KU Page(s) 3.01 Amended and Restated Articles of Incorporation of KU Energy Corporation. (Exhibit 3A to Form 10-K Annual Report of KU Energy for the year ended December 31, 1992). Incorporated by reference. x 3.02 Amended and Restated Articles of Incorporation of Kentucky Utilities Company. (Exhibits 4.03 and 4.04 to Form 8-K Current Report of KU, dated December 10, 1993). Incorporated by reference. x 3.03 By-laws of KU Energy Corporation dated July 29, 1996 (Exhibit 4.01 to Form 10-Q Quarterly Report for the quarter ended June 30, 1996 of KU Energy and KU). Incorporated by reference. x 3.04 By-laws of Kentucky Utilities Company dated July 29, 1996. (Exhibit 4.02 to Form 10-Q Quarterly Report for the quarter ended June 30, 1996 of KU Energy and KU). Incorporated by reference. x 4.01 Rights Agreement, dated as of January 27, 1992, by and between KU Energy Corporation and Illinois Stock Transfer Company (Exhibit 4.1 to Form 8-K Current Report of KU Energy dated January 27, 1992). Incorporated by reference. x 4.02 Indenture of Mortgage or Deed of Trust dated May 1, 1947, between Kentucky Utilities Company and First Trust National Association (successor Trustee) and a successor individual co-trustee, as Trustees (the Trustees) (Amended Exhibit 7(a) in File No. 2-7061), and Supplemental Indentures thereto dated, respectively, January 1, 1949 (Second Amended Exhibit 7.02 in File No. 2-7802), July 1, 1950 (Amended Exhibit 7.02 in File No. 2-8499), June 15, 1951 (Exhibit 7.02(a) in File No. 2-8499), June 1, 1952 (Amended Exhibit 4.02 in File No. 2-9658), April 1, 1953 (Amended Exhibit 4.02 in File No. 2-10120), April 1, 1955 (Amended Exhibit 4.02 in File No. 2-11476), April 1, 1956 (Amended Exhibit 2.02 in File -42- Applicable to Form 10-K of KU No. Description Energy KU Page(s) 4.02 No. 2-12322), May 1, 1969 (Amended con. Exhibit 2.02 in File No. 2-32602), April 1, 1970 (Amended Exhibit 2.02 in File No. 2-36410), September 1, 1971 (Amended Exhibit 2.02 in File No. 2-41467), December 1, 1972 (Amended Exhibit 2.02 in File No. 2-46161), April 1, 1974 (Amended Exhibit 2.02 in File No. 2-50344), September 1, 1974 (Exhibit 2.04 in File No. 2-59328), July 1, 1975 (Exhibit 2.05 in File No. 2-59328), May 15, 1976 (Amended Exhibit 2.02 in File No. 2-56126), April 15, 1977 (Exhibit 2.06 in File No. 2-59328), August 1, 1979 (Exhibit 2.04 in File No. 2-64969), May 1, 1980 (Exhibit 2 to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1980), September 15, 1982 (Exhibit 4.04 in File No. 2-79891), August 1, 1984 (Exhibit 4B to Form 10-K Annual Report of KU for the year ended December 31, 1984), June 1, 1985 (Exhibit 4 to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1985), May 1, 1990 (Exhibit 4 to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1990), May 1, 1991 (Exhibit 4 to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1991), May 15, 1992 (Exhibit 4.02 to Form 8-K of KU dated May 14, 1992), August 1, 1992 (Exhibit 4 to Form 10-Q Quarterly Report of KU for the quarter ended September 30, 1992), June 15, 1993 (Exhibit 4.02 to Form 8-K of KU dated June 15, 1993) and December 1, 1993 (Exhibit 4.01 to Form 8-K of KU dated December 10, 1993), November 1, 1994 (Exhibit 4.C to Form 10-K Annual Report of KU for the year ended December 31, 1994), June 1, 1995 (Exhibit 4 to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1995) and January 15, 1996 (Exhibit 4.E to Form 10-K Annual Report of KU for the year ended December 31, 1995). Incorporated by reference. x x -43- Applicable to Form 10-K of KU No. Description Energy KU Page(s) 4.03 Supplemental Indenture dated March 1, 1992 between Kentucky Utilities Company and the Trustees, providing for the conveyance of properties formerly held by Old Dominion Power Company (Exhibit 4B to Form 10-K Annual Report of KU for the year ended December 31, 1992). Incorporated by reference. x x 10.01 KU's Amended and Restated Performance Share Plan (Exhibit 10.A to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1993). Incorporated by reference. x x 10.02 KU's Annual Performance Incentive Plan (Exhibit 10B to Form 10-K Annual Report of KU for the year ended December 31, 1990). Incorporated by reference. x x 10.03 Amendment No. 1 to KU's Annual Performance Share Plan. x x 50-54 10.04 Amendment No. 1 to KU's Annual Performance Incentive Plan (Exhibit 10D to Form 10-K Annual Report of KU for the year ended December 31, 1991). Incorporated by reference. x x 10.05 Amendment No. 2 to KU's Annual Performance Incentive Plan (Exhibit 10.H to Form 10-K Annual Report of KU for the year ended December 31, 1993). Incorporated by reference. x x 10.06 Amendment No. 3 to KU's Annual Performance Incentive Plan (Exhibit 10.I to Form 10-K Annual Report of KU for the year ended December 31, 1993). Incorporated by reference. x x 10.07 Amendment No. 4 to KU's Annual Performance Incentive Plan. x x 55-59 10.08 KU's Executive Optional Deferred Compensation Plan. x x 60-81 10.09 KU's Director Retirement Retainer Program, and Amendment No. 1 (Exhibit 10G to Form 10-K Annual Report of KU for the year ended December 31, 1991). Incorporated by reference. x x 10.10 Amendment No. 2 to KU's Director Retirement Retainer Program. x x 82-84 -44- Applicable to Form 10-K of KU No. Description Energy KU Page(s) 10.11 Amendment No. 3 to KU's Director Retirement Retainer Program. x x 85-87 10.12 KU's Supplemental Security Plan (Exhibit 10I to Form 10-K Annual Report of KU for the year ended December 31, 1991). Incorporated by reference. x x 10.13 Amendment No. 1 to KU's Supplemental Security Plan (Exhibit 10.J to Form 10-K Annual Report of KU for the year ended December 31, 1994). Incorporated by reference. x x 10.14 Amendment No. 2 to KU's Supplemental Security Plan (Exhibit 10.K to Form 10-K Annual Report of KU for the year ended December 31, 1994). Incorporated by reference. x x 10.15 Amendment No. 3 to KU's Supplemental Security Plan. x x 88-94 10.16 KU's Amended and Restated Director Deferred Compensation Plan. x x 95-116 10.17 KU Energy's Performance Share Plan (Exhibit 10A to Form 10-Q Quarterly Report of KU Energy for the quarter ended June 30, 1993). Incorporated by reference. x 10.18 Amendment No. 1 to KU Energy's Performance Share Plan. x 117-121 10.19 KU Energy's Annual Performance Incentive Plan of January 1993 (Exhibit 10.J to Form 10-K Annual Report of KU Energy for the year ended December 31, 1993). Incorporated by reference. x 10.20 Amendment No. 1 to KU Energy's Annual Performance Incentive Plan (Exhibit 10.K to Form 10-K Annual Report of KU Energy for the year ended December 31, 1993). Incorporated by reference. x 10.21 Amendment No. 2 to KU Energy's Annual Performance Incentive Plan of January 1993. x 122-126 10.22 KU Energy's Annual Performance Incentive Plan as amended and restated effective as of January 28, 1997. x 127-148 10.23 KU Energy's Executive Optional Deferred Compensation Plan. x 149-172 -45- Applicable to Form 10-K of KU No. Description Energy KU Page(s) 10.24 KU Energy's Director Retirement Retainer Program (Exhibit 10J to Form 10-K Annual Report of KU Energy for the year ended December 31, 1992). Incorporated by reference. x 10.25 Amendment No. 1 to KU Energy's Director Retirement Retainer Program. x 173-175 10.26 KU Energy's Amended and Restated Director Deferred Compensation Plan. x 176-197 10.27 KU Energy s Long-Term Incentive Plan. x 198-231 12 Computation of Ratio of Earnings to Fixed Charges x 232 13 Portions of 1996 KU Energy Annual Report to Shareholders x x* 233-260 21 List of Subsidiaries x x 261 23 Consent of Independent Public Accountants - KU Energy and KU x x 262 27.01 Financial Data Schedule of KU Energy** x 27.02 Financial Data Schedule of KU** x 99.01 Description of Common Stock - KU Energy x 263-265 99.02 Description of Common Stock - KU x 266-267 99.03 Director and Officer Information x 268-276 99.04 KU Employee Savings Plan as Amended and Restated effective as of January 1, 1997 x x 277-326 99.05 KU Employee Savings Plan Trust effective January 2, 1997 x x 327-341 99.06 Cautionary Statements - KU Energy and KU x x 342-343 Note - Exhibit numbers 10.01 through 10.27 are management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K. * Only the Management's Discussion and Analysis of Financial Condition and Results of Operations is included or incorporated in the Annual Report on Form 10-K of Kentucky Utilities. ** Included in electronic filing only. -46- The following instruments defining the rights of holders of certain long- term debt of KU have not been filed with the Securities and Exchange Commission but will be furnished to the Commission upon request. 1. Loan Agreement dated as of May 1, 1990 between KU and the County of Mercer, Kentucky, in connection with $12,900,000 County of Mercer, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds (KU Project) 1990 Series A, due May 1, 2010 and May 1, 2020. 2. Loan Agreement dated as of May 1, 1991 between KU and the County of Carroll, Kentucky, in connection with $96,000,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series A, due September 15, 2016. 3. Loan Agreement dated as of August 1, 1992 between KU and the County of Carroll, Kentucky, in connection with $2,400,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series C, due February 1, 2018. 4. Loan Agreement dated as of August 1, 1992 between KU and the County of Muhlenberg, Kentucky, in connection with $7,200,000 County of Muhlenberg, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series A, due February 1, 2018. 5. Loan Agreement dated as of August 1, 1992 between KU and the County of Mercer, Kentucky, in connection with $7,400,000 County of Mercer, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series A, due February 1, 2018. 6. Loan Agreement dated as of August 1, 1992 between KU and the County of Carroll, Kentucky, in connection with $20,930,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series B, due February 1, 2018. 7. Loan Agreement dated as of December 1, 1993, between KU and the County of Carroll, Kentucky, in connection with $50,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (KU Project) 1993 Series A due December 1, 2023. 8. Loan Agreement dated as of November 1, 1994, between KU and the County of Carroll, Kentucky, in connection with $54,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (KU Project) 1994 Series A due November 1, 2024. (B) No reports on Form 8-K were filed by KU Energy or KU during the last quarter of 1996. -47- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, KU Energy Corporation and Kentucky Utilities Company have each duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 10, 1997. KU ENERGY CORPORATION AND KENTUCKY UTILITIES COMPANY (Registrants) /s/Michael R. Whitley Michael R. Whitley Chairman and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants in the capacities and on the date indicated. Signature Title /s/Michael R. Whitley Michael R. Whitley Chairman and President (Principal Executive Officer) and Director /s/O.M. Goodlett O. M. Goodlett Senior Vice-President (Principal Financial Officer) /s/Michael D. Robinson Michael D. Robinson Controller (Principal Accounting Officer) /s/Mira S. Ball Mira S. Ball Director /s/Carol M. Gatton Carol M. Gatton Director /s/Harry M. Hoe Harry M. Hoe Director /s/Milton W. Hudson Milton W. Hudson Director /s/John T. Newton John T. Newton Director /s/Frank V. Ramsey, Jr. Frank V. Ramsey, Jr. Director /s/William L. Rouse, Jr. William L. Rouse, Jr. Director -48- Signature Title /s/Charles L. Shearer Charles L. Shearer Director /s/Lee T. Todd, Jr. Lee T. Todd, Jr. Director March 10, 1997 -49- EX-10.03 2 EXHIBIT 10.03 EXHIBIT 10.03 AMENDMENT NO. 1 TO KENTUCKY UTILITIES COMPANY PERFORMANCE SHARE PLAN DOCUMENT (As Amended and Restated Effective as of January 1, 1993) The Kentucky Utilities Company Performance Share Plan Document (As Amended and Restated Effective as of January 1, 1993), (the "Plan"), is hereby amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 9.5 of the Plan. 2. By deleting Section 10.1 of the Plan and inserting in lieu thereof the following: "ARTICLE X - CHANGE IN CONTROL 10.1 A change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after November 1, 1996 any of the following events shall occur: (a) The Company or Parent (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; (b) The Company or Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less 60% of the combined voting power of the then- outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent immediately prior to such sale or transfer; -50- (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Parent or the Voting Stock of the Company; (d) The Company or Parent files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Parent or the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transactions; or (e) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Parent or the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two- thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) or (d) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Parent and the Company, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) an entity in which the Company or the Parent or one or more other -51- Subsidiaries directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (iii) any Parent-sponsored, Company- sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, Parent or Subsidiary, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Parent or the Company, whether in excess of 10% or otherwise, or because the Company, the Parent or a Subsidiary reports that a change in control of the Company or the Parent has or may have occurred or will or may occur in the future by reason of such beneficial ownership. For purposes of this Section 10.1, "Parent" shall mean KU Energy Corporation." 3. By deleting Section 10.2 of the Plan and inserting in lieu thereof the following: "10.2 In the event of a Change in Control under the preceding Section 10.1, a Participant whose employment is terminated, whether voluntarily or involuntarily, after such Change of Control will have a right to an immediate payment in the form of Common Stock of KU Energy Corporation (or any successor thereto) for all Performance Cycles in which he is then currently participating. The number of shares of Common Stock of KU Energy Corporation (or any successor thereto) to be paid shall be determined on the assumption that the target for each outstanding Performance Share Cycle has been met and shall be the number of shares of Common Stock of KU Energy Corporation (or any successor thereto) equal to a fraction of the Participant's total Performance Shares for the applicable Performance Cycle, the numerator of which fraction is the whole and partial months in the applicable Performance Cycle which have passed as of the date of the Change in -52- Control and the denominator of which is the number of months in the applicable Performance Cycle. In addition, the restrictions applicable to any Restricted Stock which the Participant holds as a result of matured Performance Cycles shall lapse as of the date of the Change in Control. Notwithstanding the foregoing, no shares of Restricted Stock received by a Participant pursuant to this Plan may be sold for a period of six months after the receipt of such shares, except in the case of the Disability or death of the Participant." 4. By deleting the text of Article XI of the Plan and inserting in lieu thereof the following: "The Plan became effective for the year commencing January 1, 1990, and may be terminated, amended, modified, or supplemented at any time by the Company with the consent of KU Energy Corporation or any successor thereto. Notwithstanding the preceding sentence, no termination, amendment, modification or supplement may be made on or after the occurrence of a Change in Control (as defined in Section 10.1) that adversely affects the right of any person without his prior written consent." 5. By adding a new Section 12.6 after Section 12.5 of the Plan as follows: "12.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to "Company" for the purposes of this Plan). This Plan shall inure to the benefit of and be enforceable by Participant's personal or legal -53- representatives, executors, administrators, successors, heirs, Beneficiaries, distributees and/or legatees." IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. KENTUCKY UTILITIES COMPANY By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST:/s/George S. Brooks II This Amendment No. 1 is hereby consented to by KU Energy Corporation KU Energy Corporation By /s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer -54- EX-10.07 3 EXHIBIT 10.07 EXHIBIT 10.07 AMENDMENT NO. 4 TO KENTUCKY UTILITIES COMPANY ANNUAL PERFORMANCE INCENTIVE PLAN The Kentucky Utilities Company Annual Performance Incentive Plan, as heretofore amended (the "Plan"), is hereby further amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 7.5 of the Plan and inserting in lieu thereof the following: "7.5 The Committee may adjust the threshold, target, and maximum performance goals for each performance criterion at any time during a Plan Year to reflect any extraordinarily unusual occurrence occurring prior to a Change in Control (as defined in Section 13.1) which is outside the control of management and/or any Participant, which occurrence has a significant impact on the Company." 2. By deleting Section 9.3 of the Plan and inserting in lieu thereof the following: "9.3 If the Participant's employment with the Employer and Affiliates is terminated after the end of the Plan Year, but prior to receipt of the corresponding Incentive Award, the Participant, or the Participant's Beneficiary in the case of the Participant's death, shall be paid the full Incentive Award at the time the other Participants' Incentive Awards are paid, unless termination occurs prior to the occurrence of a Change in Control (as defined in Section 13.1) and is the result of gross negligence or malfeasance as determined by the Committee in which case no award will be paid." 3. By deleting Section 9.4 of the Plan and inserting in lieu thereof the following: "9.4 Notwithstanding any provision of the Plan, the Chief Executive Officer of the Company, in his sole discretion, may limit or eliminate any Participant's participation in the Plan, provided such limitation or elimination occurs both prior to the date the award would otherwise be paid to the -55- Participant and the date on which a Change in Control (as defined in Section 13.1) occurs." 4. By deleting the second sentence of Article X of the Plan and inserting in lieu thereof the following: "Such election, however, shall not apply to all or any part of an Incentive Award (i) payable for a Plan Year in the event of the Participant's death prior to the time other Participants' Incentive Awards for that Plan Year are paid or (ii) payable on or after the occurrence of a Change in Control (as defined in Section 13.1)." 5. By adding a new sentence at the end of Article XI of the Plan as follows: "Notwithstanding the preceding sentence, no termination, amendment, modification or supplement may be made on or after the occurrence of a Change in Control (as defined in Section 13.1) that adversely affects the right of any person without his prior written consent." 6. By adding a new Section 12.6 after Section 12.5 of the Plan as follows: "12.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to "Company" for the purposes of this Plan). This Plan shall inure to the benefit of and be enforceable by Participant's personal or legal representatives, executors, administrators, successors, heirs, Beneficiaries, distributees and/or legatees." -56- 7. By adding a new Article XIII to the Plan after Article XII as follows: "ARTICLE XIII - CHANGE IN CONTROL 13.1 A change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after November 1, 1996 any of the following events shall occur: (a) The Company or Parent (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; (b) The Company or Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less 60% of the combined voting power of the then- outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power -57- of the Voting Stock of the Parent or the Voting Stock of the Company; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Parent or the Company cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two- thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Parent and the Company, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) an entity in which the Company or the Parent or one or more other Subsidiaries directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (iii) any Parent- sponsored, Company-sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, Parent or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Parent or the Company, whether in excess of 10% or otherwise. For purposes of this Section 13.1, "Parent" shall mean KU Energy Corporation. 13.2 In the event a Change in Control under the preceding Section 13.1 occurs during a Plan Year, then, notwithstanding anything to the contrary in Article IX or otherwise in the Plan, no payments of Incentive Awards shall be made under Article IX for such Plan Year, -58- but instead, each Participant employed by the Employer or an Affiliate immediately prior to the date on which the Change in Control occurs and each Participant who had terminated employment with the Employer and Affiliates during the Plan Year by reason of Retirement, Disability or death prior to the occurrence of the Change in Control shall have a right (or, in the case of the Participant's death, his Beneficiary shall have the right) to an immediate cash payment of an Incentive Award based on actual base salary earned during the Plan Year while a Participant prior to the occurrence of the Change in Control or earlier termination and the assumption that established targets were met. Such payments shall be made within 15 days after the date on which the Change in Control occurs." IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. KENTUCKY UTILITIES COMPANY By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST: /s/George S. Brooks II -59- EX-10.08 4 EXHIBIT 10.08 EXHIBIT 10.08 EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KENTUCKY UTILITIES COMPANY (As Amended and Restated Effective As Of January 1, 1997) -60- EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KENTUCKY UTILITIES COMPANY (As Amended And Restated Effective As Of January 1, 1997) ARTICLE I - PLAN This Plan is an unfunded Deferred Compensation arrangement for a select group of management or highly compensated employees who are rendering service to an Employer. ARTICLE II - DEFINITIONS For purposes of the Plan, the following definitions shall control: 2.1 "Annual Performance Incentive Plan" -- The annual incentive plan(s) sponsored by the Company as amended from time to time. 2.2 "Beneficiary" -- Any person or persons designated by the Executive to receive amounts payable in accordance with this Plan in the event of the Executive's death. If no Beneficiary has been designated or if no designated Beneficiary shall survive the Executive, the Executive's Beneficiary shall be deemed to be his or her estate. -61- 2.3 "Committee" -- The Compensation Committee of the Board of Directors of the Company. 2.4 "Company" -- Kentucky Utilities Company, and successors thereto. 2.5 "Death" -- Death from any cause. 2.6 "Deferred Compensation" -- The portion of a Participant's annual incentive award (if any) which may be paid to the Participant under the Company's Annual Performance Incentive Plan(s) that has been deferred to this Plan. 2.7 "Deferred Compensation Account(s) " or "Account(s) " -- The accounts that may be established each year by the Employer as a book reserve for each of its Participants to which shall be credited the sum of the Participant's Deferred Compensation for that year plus any earnings or losses credited thereafter in accordance with Article VI. 2.8 "Deferral Election Form" -- The form made available annually by the Committee to an Executive which, when properly executed by the Executive, effects his or her participation in the Plan for the applicable Performance Cycle. A copy of the Deferral Election Form is attached hereto as Exhibit A and is made a part hereof. -62- 2.9 "Disability" -- A physical or mental condition which prevents a Participant from engaging in any occupation or employment for remuneration or profit, except for the purpose of rehabilitation not incompatible with such findings. The determination shall be made (i) on medical evidence by a licensed physician assigned by the Committee, or (ii) on evidence that the Participant is eligible for disability benefits under the Social Security Act in effect at the date of disability. Disability shall exclude disabilities arising from (a) intentionally self-inflicted injury or self-induced illness; or (b) a proven unlawful act or enterprise on the part of the Participant. 2.10 "Employer" -- The Company and any Subsidiary to which the Plan is extended by the Board of Directors of the Company and which adopts the Plan. 2.11 "Executive" -- Any management or highly compensated employee of an Employer who is deemed by the Committee to be eligible for participation in this Plan. 2.12 "Fair Market Value" -- The closing price of the Parent's Common Stock as reported in the listing of the New York Stock Exchange - Composite Transactions on a specified date. -63- 2.13 "Parent" -- KU Energy Corporation and successors thereto. 2.14 "Participant" -- Any employee designated as an Executive who elects to participate in the Plan according to Article IV or a person who was such at the time of his or her Retirement, Death, Disability or Termination of Service and who retains, or whose Beneficiary retains, a benefit under the Plan which has not been forfeited or distributed. 2.15 "Performance Cycle" -- The period of time during which the value of an award under the Company's Annual Performance Incentive Plan is determined. 2.16 "Plan" -- The Executive Optional Deferred Compensation Plan of Kentucky Utilities Company set forth in this instrument, as it may, from time to time, be amended. 2.17 "Return on Capital" -- The result of dividing the Company's net income before interest charges by the Company's total capitalization as both are reported on the Company's financial statements. 2.18 "Subsidiary" -- Any corporation or other business entity in an unbroken chain beginning with the Parent, if each such corporation or other entity (other than the last in the unbroken chain), or if each group of commonly controlled corporations or other entities, then owns -64- fifty percent (50%) or more of the total combined voting power in one of the other corporations or entities in such chain. 2.19 "Termination of Service" -- The termination for any reason of a Participant's employment as a regular employee of the Employers and the members of any controlled group of corporations (as defined in Section 414(b) of the Internal Revenue Code (the 'Code')) of which an Employer is a member, the members of any group of trades or businesses which are under common control (as defined in Section 414(c) of the Code) of which an Employer is a member, the members of any affiliated service group (as defined in Section 414(m) of the Code) of which an Employer is a member, and all other organizations deemed to be affiliated with an Employer under Section 414(o) of the Code. ARTICLE III - ADMINISTRATION OF THE PLAN The Plan will be administered by the Committee. The Committee shall have the full and exclusive power to construe and interpret the Plan, to correct any defect, supply any omission, make any factual determination or reconcile any inconsistency in such manner and to such extent as the Committee in its sole and absolute discretion may determine. The Committee is authorized to establish and amend rules and regulations necessary for Plan -65- administration. Decisions of the Committee shall be binding on all persons claiming rights under the Plan. The Committee may employ such counsel (who may be counsel for any Employer), consultants and/or agents and may arrange for such services as it may determine to be necessary or appropriate in the administration of the Plan. All expenses incurred by the Committee in administering the Plan shall be paid by the Employers. ARTICLE IV- PARTICIPANTS 4.1 Any Executive may elect for any Performance Cycle beginning prior to January 1, 1998 to have all or any portion of his or her award under the Company's Annual Performance Incentive Plan deferred and credited with earnings or losses in accordance with the terms and conditions of this Plan. 4.2 An Executive desiring to exercise such election under Paragraph 4.1 shall notify the Committee each time he or she wishes to exercise a deferral election. Such notice must be in writing, on a Deferral Election Form provided by the Committee, and delivered to the Committee not later than the December 31st preceding the start of a new Performance Cycle. If an Executive becomes a participant in the Company's Annual Performance Incentive Plan for a Performance Cycle as of a date other than January 1st, -66- that Executive may deliver such notice to the Committee within 30 days of the date as of which that Executive becomes a participant in the Annual Performance Incentive Plan. Once delivered to the Committee, a deferral election as made on a Deferral Election Form shall be irrevocable. 4.3 The amount of a Participant's Deferred Compensation shall be credited to his or her Deferred Compensation Account at the time such amount would have otherwise been paid to the Participant under the Company's Annual Performance Incentive Plan but for his or her deferral election under the Plan. 4.4 No Participant or the Participant's Beneficiary shall acquire any property interest in his or her Deferred Compensation Account or any other assets of the Employer, their rights being limited to receiving from the Employer deferred payments as set forth in this Plan and these rights are conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Employer. -67- ARTICLE V - CONTINUED PARTICIPATION IN THE PLAN A Participant shall not actively participate in the Plan for any Performance Cycle for which a Deferral Election Form has not been timely executed and filed as provided by Paragraph 4.2 herein. In this event, such a Participant's Deferred Compensation Account(s) shall continue to be subject to the provisions of the Plan and all previously submitted Deferral Election Forms. For subsequent Performance Cycles, an Executive may again actively participate hereunder by submitting the appropriate Deferral Election Form in accordance with the provisions of Article IV hereunder. ARTICLE VI - CREDITING OF EARNINGS AND LOSSES As of the last day of each calendar quarter each Participant's Deferred Compensation Account(s) will be credited with earnings or losses in addition to any amounts credited to such Account(s) under Article IV of this Plan. Earnings on each Deferred Compensation Account established for a Participant shall be equal to the interest that would have been earned during such calendar quarter on the average of the balances of the Participant's Account at the end of each calendar month during such calendar quarter at a rate per annum equal to the greater of (1) the Company's Return on Capital for the twelve-month period that ends coincident with that quarter or -68- (2) the 13 week Treasury bill rate as reported in the Wall Street Journal on the first business day coinciding with or next following the end of that calendar quarter. However, effective as of the first day of any calendar quarter beginning on or after April 1, 1997, a Participant may elect, by filing with the Committee written notice (on a form provided by the Committee) at least 15 days prior to the effective date thereof, to have the balance in any Deferred Compensation Accounts established for the Participant for a Performance Cycle beginning on or after January 1, 1993 and prior to January 1, 1998 be transferred or to have any subsequent Deferred Compensation credits for such a Performance Cycle be allocated, as the case may be, in specified multiples of 10%, to a Subaccount II for adjustment in accordance with Paragraph 6.1 below rather than be credited with earnings in accordance with the preceding sentence. Once such an election has been made for a Deferred Compensation Account established for a Performance Cycle, it may not be changed. 6.1 Subaccount II of a Participant's Account shall be adjusted each calendar quarter to equal the Fair Market Value as of the last day of such calendar quarter (or, if it is not a trading date, as of the trading date next preceding such date) of the number of hypothetical shares of Parent Common Stock allocated to Subaccount II of the Participant's Account as of such date. The number of hypothetical shares of Parent Common Stock allocated to Subaccount II of a Participant's Account as of any date shall be equal to the number of shares of Parent Common -69- Stock that would be allocated to the Account as of such date if (i) the Deferred Compensation credited to the Participant's Account to be allocated, or the Account balance to be transferred, to Subaccount II was invested in the Parent's Common Stock at Fair Market Value on the trading day that is coincident with or next preceding the date on which such Deferred Compensation is credited or transferred, as the case may be, to his or her Account, (ii) cash dividends on the shares of Parent Common Stock treated as allocated to Subaccount II of the Participant's Account were automatically reinvested in the Parent's Common Stock at Fair Market Value on the trading day that is coincident with or next following the applicable dividend payment date, and (iii) any distributions from Subaccount II of the Participant's Account were made at Fair Market Value on the trading day that is coincident with or next preceding the effective date of such distribution of the number of hypothetical shares of Parent Common Stock needed to make such distribution, which hypothetical shares shall be subtracted from the number of shares treated as allocated to Subaccount II of the Participant's Account as of the effective date of the distribution. ARTICLE VII - DISTRIBUTION OF AMOUNTS DEFERRED UNDER THE PLAN All payments from the Plan will be made in cash by the Employer. The Participant will receive payments from the Plan in accordance -70- with the Deferral Election Form(s) on file. Notwithstanding the preceding sentence, the remaining balance of a Participant's Deferred Compensation Account(s) will be paid in a lump sum as soon as practical after a Participant's Termination of Service or if a change of control occurs as described in Article XI. ARTICLE VIII - DEATH 8.1 At the time that an Executive becomes a Participant, the Executive shall designate in writing a Beneficiary to receive any payments to which the Executive would have been entitled under the terms of this Plan. The Beneficiary referred to in this paragraph may be designated or changed by the Executive (without the consent of any prior Beneficiary) on a form provided by the Committee and delivered to the Committee before his or her Death. If no such Beneficiary shall have been designated, or if no designated Beneficiary shall survive the Executive, payments shall be payable to the Executive's estate. 8.2 If the Executive's employment is terminated because of Death or if the Executive should die after his or her Termination of Service but before his or her Deferred Compensation Account balance has been paid, then the Employer shall make payments of the Executive's remaining balance in his or her Deferred Compensation Account to -71- his or her Beneficiary in the same manner and to the extent as provided in Article VII. 8.3 If after the Executive's Death, all of the Executive's designated Beneficiary(ies) should die before all payments are made by the Employer, then the value of the remaining payments shall be paid as promptly as possible in one lump sum to the estate of the last to die of such designated Beneficiary(ies). ARTICLE IX - DISABILITY If the Executive's employment is terminated because of Disability, then the Employer shall make payments to the Executive in the same manner and to the same extent as provided in Article VII. ARTICLE X - INCAPACITY If the Committee shall find that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or legal representative) may be paid to the spouse, a child, a parent, a brother or a sister or to any person determined by the Committee -72- in such a manner as the Committee shall determine. For all determinations made by the Committee under this Article, the Committee shall have full acquittance. Any such payment shall be a complete discharge of the liabilities of the Employer under this agreement. ARTICLE XI - CHANGE IN CONTROL A "change in control" for purposes of the Plan shall have occurred if at any time any of the following events shall occur: (a) The Company or Parent is merged or consolidated or reorganized into or with another corporation or other legal person and, as a result of such merger, consolidation, or reorganization, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; (b) The Company or Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity and, as a -73- result of such sale or transfer, less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of the Parent; (d) The Company or Parent files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item -74- therein) that a change in control of the Company or the Parent has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or the Parent cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) or (d) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and Parent, a "change in control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) a Subsidiary, or (iii) any Company-sponsored, Parent-sponsored, or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, Parent or Subsidiary, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, -75- Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or Parent, whether in excess of 10% or otherwise, or because the Company, Parent or a Subsidiary reports that a change in control of the Company or Parent has or may have occurred or will or may occur in the future by reason of such beneficial ownership. Notwithstanding the foregoing provisions of this Article XI, a "change in control" shall not be deemed to have occurred by reason of the Reorganization. For purposes of this Article XI, "Reorganization" shall mean the corporate reorganization whereby the Parent became the holding company of the Company as approved by the Board of Directors of the Company on May 16, 1988 and May 27, 1988. ARTICLE XII - AMENDMENT OF PLAN The Plan may be amended in whole or in part from time to time or terminated at any time by the Board of Directors of the Company, provided, however, that no amendment or termination may be made that adversely affects the rights of any person with respect to amounts previously deferred under the Plan without his or her prior written consent. Notice of every such amendment shall be given in writing to each Participant and Beneficiary of a deceased Participant. -76- ARTICLE XIII - MISCELLANEOUS 13.1 Neither this Agreement, nor any action of the Employer or Committee, nor any election to defer compensation hereunder shall be construed to confer on any person any legal right to be continued as an employee of the Employer. 13.2 Except as required by law, no right of the Executive or Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. 13.3 The Employer shall have the right to deduct from all payments any taxes required by law to be withheld with respect to any payments made under this Plan. 13.4 Masculine pronouns used herein shall refer to men or women or both, and nouns when stated in the singular shall include the plural and when stated in the plural shall include the singular wherever appropriate. 13.5 This Plan shall be construed under the laws of the Commonwealth of Kentucky. -77- 13.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to be the "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Participant. IN WITNESS THEREOF, the Company has caused this Plan to be executed by its duly authorized officers as of the 28th day of January, 1997. KENTUCKY UTILITIES COMPANY By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer Attest:/s/George S. Brooks II Secretary (SEAL) -78- EXHIBIT A EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KENTUCKY UTILITIES COMPANY DEFERRAL ELECTION FORM This election is in accordance with the provisions of the Executive Optional Deferred Compensation Plan (the Plan) of Kentucky Utilities Company (the Company) and is made this ______ day of ________________, _____, by ________________________ (the Executive). By making such election, I understand and agree that I become a party to said Plan, and agree to be bound by its terms and conditions. I further understand that this election is irrevocable. In accordance with and subject to the provisions of the Plan, I hereby elect to defer for the Performance Cycle commencing on January 1, _____ and maturing on December 31, _____ the following amount of compensation that may be payable to me under the Company's Annual Performance Incentive Plan for services rendered during that Performance Cycle: The lesser of _______% of any incentive payment or $________. I understand that this election will remain in effect only for the above indicated Performance Cycle and that a new Deferral -79- Election Form must be completed for each other Performance Cycle that I wish to participate in the Plan. I further elect that the value of my Deferred Compensation Account for the above indicated Performance Cycle be payable to me on the first day of _____________, ____. IN WITNESS WHEREOF, I hereunto set my hand as of the date first above written. (Witness) (Executive) Received and accepted on behalf of the Compensation Committee of the Board of Directors of Kentucky Utilities Company. KENTUCKY UTILITIES COMPANY By Dated -80- EX-10.10 5 EXHIBIT 10.10 AMENDMENT NO. 2 TO KENTUCKY UTILITIES COMPANY DIRECTOR RETIREMENT RETAINER PROGRAM The Kentucky Utilities Company Director Retirement Retainer Program (the Plan ) is hereby amended, effective as of May 1, 1992, in the following respects: 1. By adding a new Section (k) and a new Section (l) to Article II of the Plan after Section (j) as follows: (k) Eligibility Service: An individual's service on either or both of the Board or the Board of Directors of KU Energy Corporation. (l) Mandatory Retirement Date: The date on which the Director would attain age 70; except that, in respect of a Director on January 1, 1992 who was age 65 or older on January 1, 1992, Mandatory Retirement Date shall mean the date on which the Director would attain age 72. 2. By deleting Section 3.1 of the Plan and inserting in lieu thereof the following: 3.1 Eligibility. Each Director who has attained at least age 65 and who thereafter, for reasons other than death, terminates Service while in good standing prior to the date on which a Change in Control occurs shall upon such termination of Service become an Eligible Director and shall be entitled to retirement benefits in accordance with this Article III, provided that such Director at his or her Termination Date shall have completed at least five full, consecutive, continuous years, computed with reference to the date on which the Director's Eligibility Service commenced and anniversaries thereof, of Eligibility Service. -81- 3. By deleting Section 4.2 and inserting in lieu thereof the following: 4.2 Amount of Benefit. The amount of benefit payable to a Director under this Article IV shall be equal to the present value of an assumed series of monthly payments, each installment of which would be equal to one-twelfth of the greater of (a) the annual retainer in effect for Board members on the day immediately preceding the date on which the Change in Control occurs or (b) the annual retainer in effect for Board members on the day immediately preceding the Director s Termination Date, payable commencing on the last day of the month that would begin next following the Director's Mandatory Retirement Date, and on the last day of each month thereafter, over a period of years equal to the lesser of (i) ten or (ii) the number of full years, computed with reference to the date on which the Director's Service commenced and anniversaries thereof, of consecutive, continuous Service the Director would have had if he had continued in Service until his Mandatory Retirement Date. Present value shall be calculated on the basis of a discount rate of 6% per annum, compounded annually. 4. By deleting the first two sentences of Article VI of the Plan and inserting in lieu thereof the following: As long as an Eligible Director is receiving or is entitled to receive retirement benefit payments in accordance with Article III of the Plan, such Eligible Director will not directly or indirectly enter into or in any manner take part in any business or other endeavor, either as an employee, officer, agent, independent contractor, owner or otherwise, which in any manner competes or conflicts with the business of the Company or any of its subsidiaries or affiliated companies or is detrimental to the best interests of the Company or any of its subsidiaries or affiliated companies, unless the Company gives its prior written consent thereto; provided, however, that this Article -82- shall not be construed to prevent the Eligible Director from owning or acquiring publicly traded securities in any entity. The failure of an Eligible Director to comply with the provisions of this Article shall result in the forfeiture of all further payments which otherwise would become due and payable under the Plan to or on behalf of the Eligible Director under Article III of the Plan. 5. By deleting Section 9.1 of the Plan and inserting in lieu thereof the following: 9.1 Other Agreements. The Plan shall not affect in any way the rights or obligations of a Director under any deferred compensation or other agreement between the Director and the Company or any of its subsidiaries or affiliated companies. IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its President and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 19th day of May , 1992. KENTUCKY UTILITIES COMPANY By:/s/John T. Newton President [CORPORATE SEAL] ATTEST: /s/Michael R. Whitley Secretary -83- EX-10.11 6 AMENDMENT NO. 3 TO KU'S DIRECTOR RETIREMENT RETAINER PROGRAM AMENDMENT NO. 3 TO KENTUCKY UTILITIES COMPANY DIRECTOR RETIREMENT RETAINER PROGRAM The Kentucky Utilities Company Director Retirement Retainer Program, as heretofore amended (the "Plan"), is hereby further amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 4.4 of the Plan and inserting in lieu thereof the following: "4.4 Change in Control. For purposes of the Plan, a "Change in Control" shall have occurred if at any time on or after November 1, 1996, any of the following events shall occur: (a) The Company or the Parent (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; (b) The Company or the Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act -84- of 1934, as amended (the "Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of the Parent; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or the Parent cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and the Parent, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) an entity in which the Company or the Parent directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (iii) any Company-sponsored, Parent-sponsored or Subsidiary- sponsored employee stock ownership plan or any other employee benefit plan of the Company, the Parent or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or the Parent, whether in excess of 10% or otherwise. For purposes of this Section 4.4, "Parent" shall mean KU Energy Corporation." IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its -85- Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. KENTUCKY UTILITIES COMPANY By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST: /s/George S. Brooks II -86- EX-10.15 7 EXHIBIT 10.15 EXHIBIT 10.15 Amendment No. 3 To Kentucky Utilities Company Supplemental Security Plan (As Amended and Restated Effective As Of August 1, 1991) The Kentucky Utilities Company Supplemental Security Plan (As Amended and Restated Effective As Of August 1, 1991), as heretofore amended (the "Plan"), is hereby further amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 1.4 of the Plan and inserting in lieu thereof the following: "1.4 "Cause" shall have the meaning as set forth in Section 8.6(iii)." 2. By deleting Section 1.5(a) of the Plan and inserting in lieu thereof the following: "(a) The Company or Parent is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of (i) if the Reorganization has not occurred, the Company, and (ii) otherwise, the Parent, immediately prior to such transaction;". 3. By deleting Section 1.5(b) of the Plan and inserting in lieu thereof the following: "(b) The Company or Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of (i) if the Reorganization has not occurred, the Company, and -87- (ii) otherwise, the Parent, immediately prior to such sale or transfer;". 4. By deleting Section 1.6 of the Plan and inserting in lieu thereof the following: "1.6 Change-In-Control Period" shall mean in respect of each and every occurrence of a Change in Control, the period commencing on the date of the occurrence of such Change in Control and shall continue until the expiration of the second anniversary of such date; provided, however, in the event of a Change in Control resulting from a filing of a report or proxy statement described in subparagraph (d) of the definition of Change in Control, the Change-In-Control Period shall continue until the later of (A) such second anniversary date or (B) the earlier of (i) the date any transaction, occurrence or event described in such report or proxy statement (a "Transaction") is consummated or (ii) the date it is determined that such Transaction will not be consummated. The Board of Directors of the Company may make the determination referred to in clause (ii) by resolution adopted in good faith." 5. By deleting Section 4.2 of the Plan and inserting in lieu thereof the following: "4.2 In the event that there is a Change in Control and thereafter the Member's employment with the Employer and all Affiliates is terminated for reasons other than Cause during the Change-In-Control Period applicable to such Change-In-Control, the Member shall be entitled to and the Company shall pay or cause to be paid to the Member in cash the Change-in-Control Retirement Benefit within thirty (30) days following such Member's termination of employment. In the event a Member's employment is terminated during more than one Change-In-Control Period, however, only one Change- in-Control Retirement Benefit shall be paid to the Member, and the amount of such Change-in-Control Retirement Benefit shall be the greatest amount determined with respect to the Change-in-Control Periods in which the Member's termination occurs." -88- 6. By deleting Section 4.5 of the Plan and inserting in lieu thereof the following: "4.5 In the event there is a Change in Control and the Member's employment with the Employer and all Affiliates is terminated for reasons other than Cause after the end of the Change-in-Control Period applicable to the Change in Control but not during any subsequent Change-in-Control Period and neither the Member nor his Beneficiary is entitled to benefit payments under Article III or Article V, the Company shall pay or cause to be paid in cash to the Member or the Member's Beneficiary in the event of the Member's death an amount equal to his Lump Sum Accrued Benefit within thirty (30) days following the Member's termination of employment." 7. By deleting Section 8.2 of the Plan and inserting in lieu thereof the following: "8.2 If, following the occurrence of a Change in Control, a Member's employment with the Employer and all Affiliates shall be terminated during the Change-in-Control Period applicable to the Change in Control other than pursuant to Section 8.6 hereof, or if the Member shall terminate his employment pursuant to the applicable provisions of Section 8.7 hereof, the Company will continue to provide or cause to be provided the following benefits and will further pay or caused to be paid to the Member or the Member's Beneficiary in the event of the Member's death the following amounts within five (5) business days after the Member's Termination Date: (i) A lump sum cash payment in an amount equal to the Member's Change-in-Control Severance Benefit. (ii) For a period commencing on his Termination Date and ending on the third anniversary thereof, the Company shall arrange to provide the Member with Continued Employee Benefits (and if and to the extent that such benefits shall not or cannot be paid or provided under any policy, plan, program or arrangement of the Company or its Affiliates, then the Company shall itself pay or provide or caused to be paid or provided for the payment to the Member, his dependents and beneficiaries, such Continued Employee Benefits). Without otherwise limiting the purposes or effect of Section 8.8 hereof, Continued Employee Benefits otherwise receivable by the Member pursuant to the first sentence of -89- this Section 8.2(ii) shall be reduced to the extent comparable welfare benefits are actually received by the Member from another employer during such period following the Member's Termination Date, and any such benefits actually received by the Member shall be reported by the Member to the Company. For purposes of determining the period of continuation coverage to which the Member or any of his dependents is entitled pursuant to Section 4980B of the Code (or any successor provision thereto) under any group health plan maintained by the Company or its Affiliates, the Member shall be considered to have remained employed until the third anniversary of his Termination Date. In the event a Member's employment is terminated under the circumstances described above in this Section 8.2 during more than one Change-in-Control Period, only one Change-in-Control Severance Benefit shall be paid to the Member hereunder, and the amount of such Change-in- Control Severance Benefit and Continued Employee Benefits payable hereunder shall be the greatest amounts determined with the respect to the Change-in- Control Periods in which the Member's termination occurs." 8. By deleting the phrase "Change-in-Control Period" where it appears in Section 8.6 of the Plan and inserting in lieu thereof the phrase "Change-in-Control Period applicable to the Change in Control". 9. By deleting Section 8.6(iii) of the Plan, inserting the word "or" after the semi-colon at the end of Section 8.6(ii), and renumbering Section 8.6(iv) of the Plan as Section 8.6(iii). 10. By deleting the phrase "Change-in-Control Period" where it appears in Section 8.7 of the Plan and inserting in lieu thereof the phrase "Change-in-Control Period applicable to the Change in Control". -90- 11. By changing the reference to "Section 8.6(iv)" where it appears in Section 8.7 of the Plan to read "Section 8.6(iii)". 12. By deleting Section 8.7(vii) of the Plan and inserting lieu thereof the following: "(vii) Notwithstanding the provisions of Section 8.7(i) through (vi) above, any Member who immediately prior to the Change in Control (other than a Change in Control within the meaning of Section 1.5(d)) occupied one or more of the following positions with Kentucky Utilities Company: (A) Chairman of the Board, (B) President, (C) Chief Financial Officer, (D) if immediately prior to the Change in Control the positions described in subsections (A), (B) and (C) above are filled in the aggregate by less than three persons, Executive Vice President, (E) Senior Vice President of Kentucky Utilities Company, or (F) Corporate Secretary may terminate his employment with the Employer and its Affiliates for any reason, including without limitation other employment, during the 30-day period commencing on the first anniversary of the date on which the Change in Control (other than a Change in Control within the meaning of Section 1.5(d)) occurs." -91- IN WITNESS WHEREOF, the Company has caused this instrument to be executed by the Chairman of the Board, President and Chief Executive Officer, having been duly authorized by the Board of Directors of the Company on December 16, 1996, effective as of November 1, 1996. KENTUCKY UTILITIES COMPANY By/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer Date of Signature January 6, 1997 -92- EX-10.16 8 EXHIBIT 10.16 EXHIBIT 10.16 KENTUCKY UTILITIES COMPANY DIRECTOR DEFERRED COMPENSATION PLAN (As Amended and Restated Effective As Of January 28, 1997) -93- KENTUCKY UTILITIES COMPANY DIRECTOR DEFERRED COMPENSATION PLAN (As Amended and Restated Effective As Of January 1, 1997) ARTICLE I Purpose The Kentucky Utilities Company Director Deferred Compensation Plan (the "Plan") was established, effective June 1, 1989, to provide eligible directors of Kentucky Utilities Company with the opportunity to defer some or all of the compensation which may be payable to them for services to be performed as members of the Board of Directors of Kentucky Utilities Company. The terms and conditions of the Plan, as amended and restated effective as of January 1, 1997, are set forth below. ARTICLE II Definitions The following words and phrases shall have the meanings set forth below unless a different meaning is clearly required by the context: (a) Act: The Securities Exchange Act of 1934, as amended from time to time. (b) Account: The account maintained for each Participant showing his or her interest under the Plan which shall be divided into Subaccount I and Subaccount II as provided in Section 4.1. (c) Accounting Date: Except as otherwise provided herein, each March 31, June 30, September 30 and December 31 of each calendar year. The first Accounting Date under the Plan was June 30, 1989. (d) Beneficiary: The person or persons (natural or otherwise) designated, in accordance with Section 5.4, to receive the distribution of a Participant's Account balance in the event of the Participant's death. -94- (e) Board: The Board of Directors of the Company. (f) Change in Control: The occurrence of any of the events provided in Section 5.7. (g) Committee: The Compensation Committee of the Board. (h) Company: Kentucky Utilities Company, a corporation organized and existing under the laws of the Commonwealth of Kentucky. (i) Compensation: Any retainer and meeting fees payable to the Director in cash by the Company for services rendered as a member of the Board or any committee thereof. (j) Director: Any member of the Board on or after the Effective Date who is separately compensated for his or her services as a member of the Board. (k) Effective Date: June 1, 1989. (l) Fair Market Value: The closing price of the Company's Common Stock as reported in the listing of the New York Stock Exchange - Composite Transactions on a specified date. (m) Parent: KU Energy Corporation or any successor thereto. (n) Participant: A Director participating in the Plan in accordance with the provisions of Section 3.2, or a former Director whose Account balance under the Plan has not been paid in full. (o) Plan: The Kentucky Utilities Company Director Deferred Compensation Plan set forth in this instrument, as it may be amended from time to time. (p) Service: An individual's service on the Board and on the boards of KU or any other Subsidiary. (q) Subsidiary: An entity in which the Company or the Parent directly or indirectly beneficially owns 50% or more of the voting securities. -95- ARTICLE III Eligibility and Participation 3.1 Eligibility: Each member of the Board who was a Director on the Effective Date was eligible to participate in the Plan as of the Effective Date. Each other Director shall be eligible to participate in the Plan as of the first day of the month next following the date he or she becomes a Director. 3.2 Participation: A Director may elect to participate in the Plan effective as of the date the Director first becomes eligible to participate as provided in Section 3.1, or effective as of the January 1st of any calendar year beginning after such date, by filing written notice of such election with the Company prior to the effective date of such election. Such notice shall be accompanied by (i) an election to defer Compensation as provided in Section 3.4, (ii) an election with respect to Account adjustments as provided in Section 4.3, and (iii) an election as to the method of payment as provided in Section 5.1. Upon filing such election notice, the Director shall become a Participant in the Plan effective as of the date elected as permitted in this Section 3.2. 3.3 Crediting of Compensation: Commencing on the effective date of a Participant's participation in the Plan and continuing during the period that Compensation is to be credited to the Participant's Account under the Plan, the Company shall defer payment of and credit to the Participant's Account all or such portion, as elected by the Participant under Section 3.4, of the Compensation that the Participant would have received for services rendered by the Participant during such period as a -96- member of the Board but for his participation in the Plan, such credits to be made as provided in Section 4.2(b). 3.4 Election to Defer: At the time a Director elects to become a Participant, the Director shall elect to have from 10% to 100%, in specified multiples of 10%, of his or her Compensation for services rendered subsequent to the date the Director becomes a Participant deferred under the Plan and credited to his or her Account as provided in Section 3.3. Such election shall remain in effect until changed or terminated as hereinafter provided. A Participant may change his or her election under this Section 3.4 effective as of the January 1st of any calendar year with respect to Compensation for services to be rendered as a Director on or subsequent to such January 1st, by filing with the Company written notice of such change prior to the effective date of such change. Any change may (i) increase or decrease, within the limits prescribed in the preceding paragraph, the portion of Compensation to be deferred and credited to the Participant's Account as provided in Section 3.3, (ii) terminate an election to defer Compensation under this Section 3.4 or (iii) resume the deferral of Compensation under the Plan within the limits prescribed in the preceding paragraph. A change in the portion of Compensation deferred or the termination of a Participant's election to defer Compensation shall not entitle the Participant to receive payment of his or her Account balance, which shall be payable only as provided in Article V. -97- Any election or change in election under this Section 3.4 shall be made on a form provided or prescribed by the Company. ARTICLE IV Participants' Accounts 4.1 Individual Accounts: A separate Account shall be maintained by the Company on its books for each Participant. Such Account shall be divided into subaccounts to specifically identify the portion of the Account subject to adjustment under Section 4.3(a) ("Subaccount I") and the portion of the Account subject to adjustment under Section 4.3(b) ("Subaccount II"). As of January 1, 1995, each Participant's Account was allocated to Subaccount I unless the Participant had elected otherwise as of such date as then provided in the Plan. Subaccounts I and II may, in turn, be further subdivided into such subaccounts as the Company considers desirable for purposes of the administration of the Plan. 4.2 Accounting Procedures: Each Participant's Account shall be adjusted as of each Accounting Date occurring on or after December 1, 1996 as follows and in the following order: (a) The amount of any transfer to or from Subaccount I or Subaccount II of the Participant's Account, pursuant to a change in election or deemed election under Section 4.3, made as of the first day of the calendar quarter in which such Accounting Date occurs shall be added to or subtracted from, as the case may be, the applicable Subaccounts as of the first day of such calendar quarter. (b) Each Participant's Account shall next be credited with the amount of Compensation to be credited to his or her Account as provided in Section 3.3 during the -98- period ending on such Accounting Date that follows the next preceding Accounting Date. Credits shall be made as of the last business day of the respective calendar months in which such Compensation would have been paid to the Participant by the Company but for his or her participation in the Plan and shall be allocated to Subaccount I or Subaccount II in accordance with the Participant's election or deemed election as in effect as of the respective dates as of which the credits are made. (c) Each Participant's Account shall next be charged as of such Accounting Date with the amount of any distributions under the Plan to the Participant or to his or her Beneficiary effective as of or prior to such Accounting Date. (d) Subaccount I of each Participant's Account shall next be credited with the amount equivalent to interest, as determined under Section 4.3(a), to be added to the Participant's Account as of such Accounting Date. (e) Subaccount II of each Participant's Account shall next be adjusted upwards or downwards, as the case may be, in accordance with Section 4.3(b), to reflect the Fair Market Value of the hypothetical shares of Parent Common Stock allocated to Subaccount II of the Participant's Account as of such Accounting Date. 4.3 Election With Respect to Subaccount Adjustments: Subaccount I and Subaccount II of a Participant's Account are subject to adjustment on and after December 1, 1996, as provided in Section 4.2 as follows: (a) Subaccount I Adjustments. Subaccount I of a Participant's Account shall be adjusted as of an applicable Accounting Date by the addition of an amount equivalent to interest. The interest equivalent to be credited as of an applicable Accounting Date shall be equal to the interest that would be earned on the average of the balances in Subaccount I of the Participant's Account at the end of each calendar month ending during the period following the next preceding -99- Accounting Date and ending on the applicable Accounting Date, at a rate per annum which equals the average prime rate charged by banks as reported in the Federal Reserve Bulletin published on or next prior to the applicable Accounting Date. (b) Subaccount II Adjustments: Subaccount II of a Participant's Account shall be adjusted as of an applicable Accounting Date to equal the Fair Market Value as of such Accounting Date (or, if the Accounting Date is not a trading date, as of the trading date next preceding such Accounting Date) of the number of hypothetical shares of Parent Common Stock allocated to Subaccount II of the Participant's Account as of such Accounting Date. The number of hypothetical shares of Parent Common Stock allocated to Subaccount II of a Participant's Account as of any date shall be equal to the number of shares of Parent Common Stock that would be allocated to the Account as of such date if (i) the Compensation credited to the Participant's Account to be allocated to Subaccount II was invested in the Parent's Common Stock at Fair Market Value on the trading day that is coincident with or next preceding the last day of the calendar month in which such Compensation would have been paid to the Participant but for participation in the Plan, (ii) any balance transferred effective as of January 1, 1995 from Subaccount I due to the one-time election permitted under Section 4.3 of the Plan as then in effect was invested in the Parent's Common Stock at the average Fair Market Value on trading days during the month of December, 1994, (iii) any other balance transferred from Subaccount I due to a change in election under this Section 4.3 was invested in the Parent's Common Stock at Fair Market Value on the trading day that is coincident with or next following the effective date of such change, (iv) cash dividends on the shares of Parent Common Stock treated as allocated to Subaccount II of the Participant's Account were automatically reinvested in the Parent's Common Stock at Fair Market Value on the trading day that is coincident with or next following the applicable dividend payment date, and (v) any transfers to Subaccount I due to a change in election under this Section 4.3 or any distributions from -100- Subaccount II of the Participant's Account were made at Fair Market Value on the trading day that is coincident with or next preceding the effective date of such change of election or distribution of the number of hypothetical shares of Parent Common Stock needed to make such transfer or distribution, which hypothetical shares shall be subtracted from the number of shares treated as allocated to Subaccount II of the Participant's Account as of the effective date of the transfer or distribution. At the time a Director elects to become a Participant or as of January 1, 1995, if later, the Director shall elect to have the Compensation thereafter deferred under Section 3.4 and credited to the Participant's Account allocated, in specified multiples of 10%, to Subaccount I or Subaccount II. If a Director who was a Participant as of December 31, 1994 failed to make an election hereunder as of January 1, 1995, he was deemed to have elected to have Compensation deferred on or after January 1, 1995 allocated to Subaccount I. A Participant's election or deemed election under this Section 4.3 shall remain in effect until changed as provided in this Section 4.3 from time to time. A Participant may change his or her election or deemed election under this Section 4.3 effective, beginning on or after January 1, 1997, as of the first day of any calendar quarter by filing with the Company written notice of such change at least 15 days prior to the effective date of such change. Any change shall direct that either or both of (i) that the balance credited to Subaccount I or Subaccount II of the Participant's Account as of the immediately preceding Accounting Date be transferred, in specified multiples of 10%, to the other Subaccount or (ii) subsequent Compensation credits under Section 3.3 be allocated, -101- in specified multiples of 10%, to Subaccount I or Subaccount II. Such change shall be effective as of the first day of the calendar quarter elected and shall remain in effect until further changed as provided herein. Any election or change in election under this Section 4.3 shall be made on a form provided or prescribed by the Company. Notwithstanding the foregoing provisions of this Section 4.3, if a Participant terminates his or her Service and any portion of the balance credited to his or her Account is to be paid in accordance with Payment Method II or Payment Method III as provided in Section 5.1, any balance in Subaccount II of the Participant's Account shall be transferred by a deemed election to Subaccount I of the Participant's Account as of the day after the Accounting Date that is coincident with or next following the Participant's termination of Service. ARTICLE V Distribution of Benefits 5.1 Termination For Reasons Other Than Death: Within 15 days after the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service for any reason other than death or a termination to which Section 5.6 applies, the Company shall pay, or commence to pay, to the Participant in cash the amount credited to his or her Account. Payment shall be made in accordance with Payment Method I, Payment Method II or Payment Method III, below, as elected by the Director: -102- (a) Payment Method I - By payment in a lump sum of the amount credited to the Participant's Account as of the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service. (b) Payment Method II - By payment in quarterly installments, the number of which shall be the lesser of (i) 40 or (ii) the aggregate number of full calendar quarters during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of the Parent or a Subsidiary (but not counting any such calendar quarter more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. (c) Payment Method III - By payment in annual installments, the number of which shall be the lesser of (i) 10 or (ii) the aggregate number of full calendar years (but not less than one) during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of the Parent or a Subsidiary (but not counting any such calendar year more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. A method of payment shall be elected by the Director at the time the Director elects to become a Participant, which method of payment election shall remain in effect until changed as hereinafter provided. A Participant may change his or her elected method of payment from time to time by filing with the Company written -103- notice of such change, except that no election change shall be effective under the Plan if it is filed with the Company after the date which is one year prior to the date on which the Participant terminates his or her Service. An election or change in election as to the method of payment shall be made on a form provided or prescribed by the Company. Notwithstanding a Participant's election under, or the foregoing provisions of, this Section 5.1, if a Change in Control occurs after a Participant terminates his or her Service but prior to the complete distribution under the Plan of the balance credited to his or her Account, the amount credited to the Participant's Account as of the New York Stock Exchange trading date next preceding the date on which the Change in Control occurs (such amount to be determined as if the trading date next preceding the date on which the Change in Control occurs were an Accounting Date) increased by the amount of any Compensation deferred under the Plan by the Participant not previously credited to his or her Account, shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death after his termination of Service, to his or her Beneficiary) within 15 days after the date on which the Change in Control occurs, such payment to be made effective as of the date on which the Change in Control occurs. 5.2 Death: Upon the death of a Participant, whether before or after termination as a member of the Board, prior to the complete distribution of the balance credited to his or her Account, any undistributed amount credited to the Participant's -104- Account as of the Accounting Date coincident with or next following the Participant's date of death shall be paid in cash in a lump sum to the Participant's Beneficiary within 15 days after such Accounting Date. If, however, a Change in Control shall occur either before or after the Participant's death but prior to the complete distribution of the balance credited to the Participant's Account, distribution shall be made to the Beneficiary as provided in the last paragraph of Section 5.1 or in Section 5.6, whichever is applicable, rather than as provided in this Section 5.2. The foregoing sentence shall not apply if the Participant's termination of Service occurs on or after the third anniversary of the date on which the Change in Control occurs. 5.3 Hardship Distribution: With the prior written consent of the Committee, a Participant may withdraw, as of an Accounting Date prior to termination of Service, from his or her Account a cash amount not in excess of the balance credited to the Participant's Account as of such Accounting Date. The Committee, in its sole discretion, may consent to such withdrawal but only if the withdrawal is necessary, upon demonstration by or on behalf of the Participant, because of a substantial financial hardship of the Participant as a result of accident, illness or disability. The Committee, in its sole discretion, shall determine the amount of such a distribution that is needed to meet the need created by the hardship. Any such distribution shall be charged first to Subaccount I of the Participant's Account and then, to the extent Subaccount I is insufficient, to Subaccount II. -105- 5.4 Beneficiary: As used in the Plan, the term "Beneficiary" means: (a) The last person designated as Beneficiary by the Participant in a written notice on a form prescribed by and filed with the Company; (b) If there is no designated Beneficiary or if the person so designated shall not survive the Participant, such Participant's spouse; or (c) If no such designated Beneficiary and no such spouse is living upon the death of a Participant, or if all such persons die prior to the full distribution of the Participant's Account, then the legal representative of the last survivor of the Participant and such persons, or, if the Company shall not receive notice of the appointment of any such legal representative within one year after such death, the heirs-at-law of such survivor (in the proportions in which they would inherit his intestate personal property) shall be the Beneficiaries to whom the then remaining balance of the Participant's Account shall be distributed. Any Beneficiary designation may be changed from time to time by like notice similarly delivered. No notice given under this Section shall be effective unless and until the Company actually receives such notice and enters it in its records. 5.5 Delay In And Approval Of Distribution: Notwithstanding anything to the contrary herein, the distribution of all or any portion of a Participant's Account will be delayed for a period not to exceed seven months or may be subject to prior approval by the Committee or the Board to the extent that the Committee determines that such delay or approval is necessary or desirable to ensure that any transaction under the Plan will qualify for an exemption from the liability provisions imposed on -106- the Participant under Section 16(b) of the Act or any rules and regulations issued thereunder. In the event of any such delay, the undistributed portion of the Participant's Account shall continue to be subject to adjustment as provided in Section 4.2 until distribution is made. 5.6 Certain Terminations On or After a Change in Control: If a Participant terminates his or her Service on or after the date on which a Change in Control occurs but prior to the third anniversary of the date on which the Change in Control occurs, the amount credited to the Participant's Account as of the date of his or her termination of Service (such amount to be determined as if the date on which the Participant terminates Service were an Accounting Date) increased by the amount of any Compensation deferred under the Plan by the Participant not previously credited to his or her Account shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death, to his or her Beneficiary) within 15 days after the Participant's termination of Service. 5.7 Change in Control: For purposes of the Plan, a "Change in Control" shall have occurred if at any time on or after December 1, 1996, any of the following events shall occur: (a) The Company or the Parent is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Parent immediately prior to such transaction; -107- (b) The Company or the Parent sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Parent, immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of the Parent; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or the Parent cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and the Parent, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Parent, (ii) a Subsidiary or (iii) any Company-sponsored, Parent- sponsored or Subsidiary-sponsored employee stock ownership plan -108- or any other employee benefit plan of the Company, the Parent or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or the Parent, whether in excess of 10% or otherwise. ARTICLE VI Financing of Benefits The Plan shall be a nonqualified and unfunded plan. Benefit payments under the Plan shall represent an unsecured general obligation of the Company and shall be paid by the Company from its general assets. No special fund or trust shall be created or held for the financing of benefits under the Plan. ARTICLE VII Facility of Payment Whenever a person entitled to receive any payment under the Plan is a person under legal disability or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is in the opinion of the Committee unable properly to manage his or her affairs, then such payments shall be paid in such of the following ways as the Committee deems best: (a) to such person directly; (b) to the legally appointed guardian or conservator of such person; (c) to some relative or friend of such person for his or her benefit; (d) for the benefit of such person in such manner as the Committee considers advisable. Any payment made in accordance with the provisions of -109- this Article shall be a complete discharge of any liability for the making of such payment under the Plan, and the distributee's receipt shall be a sufficient discharge to the Company. ARTICLE VIII Administration The Plan shall be administered by the Compensation Committee of the Board. The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, to construe and interpret the Plan, decide all questions of eligibility and determine the amount and time of payment of benefits hereunder. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided under the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. No Participant who is a member of such Committee may vote on any question relating specifically to himself or herself. ARTICLE IX Miscellaneous 9.1 Other Agreements. The Plan shall not affect in any way the rights or obligations of a Director under any deferred compensation or other agreement between the Director and the Company or the Parent, including, but not limited to, the KU Energy Corporation Director Retirement Retainer Program or the Kentucky Utilities Company Director Retirement Retainer Program. 9.2 Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, -110- consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by sale, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Director. 9.3 Interests Not Transferable. No person shall have any right to commute, encumber, pledge or dispose of any right to receive payments hereunder, nor shall such payments be subject to seizure, attachment or garnishment for the payments of any debts, judgments, alimony or separate maintenance obligations or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise, all payments and rights hereunder being expressly declared to be nonassignable and nontransferable. 9.4 Amendment and Termination. The Plan may be amended from time to time or terminated by the Board at any time, but no amendment or termination may adversely affect the rights of any person without his or her prior written consent. 9.5 Applicable Law. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Kentucky. -111- 9.6 Notices. For all purposes of this Plan, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to a Participant at his or her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9.7 Severability: Each section, subsection and lesser section of this Plan constitutes a separate and distinct undertaking, covenant and/or provision hereof. Whenever possible, each provision of this Plan shall be interpreted in such manner as to be effective and valid under applicable law. In the event that any provision of this Plan shall finally be determined to be unlawful, such provision shall be deemed severed from this Plan, but every other provision of this Plan shall remain in full force and effect, and in substitution for any such provision held unlawful, there shall be substituted a provision of similar import reflecting the original intention of the parties hereto to the extent permissible under law. 9.8 Withholding of Taxes: The Company may withhold from any amounts payable under this Plan all federal, state, city and other taxes as shall be legally required. 9.9 Adjustments: In the event of any stock dividend or split, recapitalization, reclassification, increase or -112- decrease in the number of outstanding shares, merger, consolidation or exchanges in shares or other similar changes in the Parent's Common Stock, appropriate adjustments shall be made in the Parent Common Stock referenced in the Plan, including in the calculations under Section 4.3(b), to reflect any such change. -113- IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 28th day of January, 1997. KENTUCKY UTILITIES COMPANY By/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [Corporate Seal] ATTEST:George S. Brooks II Secretary -114- EX-10.18 9 EXHIBIT 10.18 EXHIBIT 10.18 AMENDMENT NO. 1 TO KU ENERGY CORPORATION PERFORMANCE SHARE PLAN DOCUMENT The KU Energy Corporation Performance Share Plan Document (the "Plan") is hereby amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 9.5 of the Plan. 2. By deleting Section 10.1 of the Plan and inserting in lieu thereof the following: "10.1 A change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after November 1, 1996 any of the following events shall occur: (a) The Company or KU (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less 60% of the combined voting power of the then- outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), -115- disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; (d) The Company or KU files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company or KU has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transactions; or (e) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) or (d) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company or KU or one or more other Subsidiaries directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (iii) Company- sponsored, KU-sponsored or Subsidiary- sponsored employee stock ownership plan or any other employee benefit plan of -116- the Company, KU or Subsidiary, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise, or because the Company, KU or a Subsidiary reports that a change in control of the Company or KU has or may have occurred or will or may occur in the future by reason of such beneficial ownership. For purposes of this Section 10.1, "KU" shall mean Kentucky Utilities Company." 3. By deleting Section 10.2 of the Plan and inserting in lieu thereof the following: "10.2 In the event of a Change in Control under the preceding Section 10.1, a Participant whose employment is terminated, whether voluntarily or involuntarily, after such Change of Control will have a right to an immediate payment in the form of Company Common Stock for all Performance Cycles in which he is then currently participating. The number of shares of Company Common Stock to be paid shall be determined on the assumption that the target for each outstanding Performance Share Cycle has been met and shall be the number of shares of Company Common Stock equal to a fraction of the Participant's total Performance Shares for the applicable Performance Cycle, the numerator of which fraction is the whole and partial months in the applicable Performance Cycle which have passed as of the date of the Change in Control and the denominator of which is the number of months in the applicable Performance Cycle. In addition, the restrictions applicable to any Restricted Stock which the Participant holds as a result of matured Performance Cycles shall lapse as of the date of the Change in Control. Notwithstanding the foregoing, no shares of Restricted Stock received by a Participant pursuant to this Plan may be sold for a period of six months after the receipt of such shares, except in the case of the Disability or death of the Participant." -117- 4. By deleting the text of Article XI of the Plan and inserting in lieu thereof the following: "The Plan became effective for the year commencing January 1, 1993, and may be terminated, amended, modified, or supplemented at any time by the Company. Notwithstanding the preceding sentence, no termination, amendment, modification or supplement may be made on or after the occurrence of a Change in Control (as defined in Section 10.1) that adversely affects the right of any person without his prior written consent." 5. By adding a new Section 12.6 after Section 12.5 of the Plan as follows: "12.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to "Company" for the purposes of this Plan). This Plan shall inure to the benefit of and be enforceable by Participant's personal or legal representatives, executors, administrators, successors, heirs, Beneficiaries, distributees and/or legatees." -118- IN WITNESS WHEREOF, KU Energy Corporation has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST:/s/George S. Brooks II -119- EX-10.21 10 EXHIBIT 10.21 EXHIBIT 10.21 AMENDMENT NO. 2 TO KU ENERGY CORPORATION ANNUAL PERFORMANCE INCENTIVE PLAN The KU Energy Corporation Annual Performance Incentive Plan, as heretofore amended (the "Plan"), is hereby further amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 7.5 of the Plan and inserting in lieu thereof the following: "7.5 The Committee may adjust the threshold, target, and maximum performance goals for each performance criterion at any time during a Plan Year to reflect any extraordinarily unusual occurrence occurring prior to a Change in Control (as defined in Section 13.1) which is outside the control of management and/or any Participant, which occurrence has a significant impact on the Company." 2. By deleting Section 9.3 of the Plan and inserting in lieu thereof the following: "9.3 If the Participant's employment with the Employer and Affiliates is terminated after the end of the Plan Year, but prior to receipt of the corresponding Incentive Award, the Participant, or the Participant's Beneficiary in the case of the Participant's death, shall be paid the full Incentive Award at the time the other Participants' Incentive Awards are paid, unless termination occurs prior to the occurrence of a Change in Control (as defined in Section 13.1) and is the result of gross negligence or malfeasance as determined by the Committee in which case no award will be paid." 3. By deleting Section 9.4 of the Plan and inserting in lieu thereof the following: "9.4 Notwithstanding any provision of the Plan, the Chief Executive Officer of the Company, in his sole discretion, may limit or eliminate any Participant's participation in the Plan, provided such limitation or elimination occurs both prior to the date the award would otherwise be paid to the -120- Participant and the date on which a Change in Control (as defined in Section 13.1) occurs." 4. By deleting the second sentence of Article X of the Plan and inserting in lieu thereof the following: "Such election, however, shall not apply to all or any part of an Incentive Award (i) payable for a Plan Year in the event of the Participant's death prior to the time other Participants' Incentive Awards for that Plan Year are paid or (ii) payable on or after the occurrence of a Change in Control (as defined in Section 13.1)." 5. By adding a new sentence at the end of Article XI of the Plan as follows: "Notwithstanding the preceding sentence, no termination, amendment, modification or supplement may be made on or after the occurrence of a Change in Control (as defined in Section 13.1) that adversely affects the right of any person without his prior written consent." 6. By adding a new Section 12.6 after Section 12.5 of the Plan as follows: "12.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to "Company" for the purposes of this Plan). This Plan shall inure to the benefit of and be enforceable by Participant's personal or legal representatives, executors, administrators, successors, heirs, Beneficiaries, distributees and/or legatees." -121- 7. By adding a new Article XIII to the Plan after Article XII as follows: "ARTICLE XIII - CHANGE IN CONTROL 13.1 A change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after November 1, 1996 any of the following events shall occur: (a) The Company or KU (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less 60% of the combined voting power of the then- outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act") disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power -122- of the Voting Stock of the Company or the Voting Stock of KU; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) an entity in which the Company, KU or one or more other Subsidiaries directly or indirectly beneficially owns 50% or more of the voting securities (a "Subsidiary"), or (iii) any Company- sponsored, KU-sponsored or Subsidiary- sponsored employee stock ownership plan or any other employee benefit plan of the Company, KU or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise. For purposes of this Section 13.1, "KU" shall mean Kentucky Utilities Company. 13.2 In the event a Change in Control under the preceding Section 13.1 occurs during a Plan Year, then, notwithstanding anything to the contrary in Article IX or otherwise in the Plan, no payments of Incentive Awards shall be made under Article IX for such Plan Year, but instead, each Participant employed by the -123- Employer or an Affiliate immediately prior to the date on which the Change in Control occurs and each Participant who had terminated employment with the Employer and Affiliates during the Plan Year by reason of Retirement, Disability or death prior to the occurrence of the Change in Control shall have a right (or, in the case of the Participant's death, his Beneficiary shall have the right) to an immediate cash payment of an Incentive Award based on actual base salary earned during the Plan Year while a Participant prior to the occurrence of the Change in Control or earlier termination and the assumption that established targets were met. Such payments shall be made within 15 days after the date on which the Change in Control occurs." IN WITNESS WHEREOF, KU Energy Corporation has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST: /s/George S. Brooks II -124- EX-10.22 11 EXHIBIT 10.22 EXHIBIT 10.22 KU ENERGY CORPORATION ANNUAL PERFORMANCE INCENTIVE PLAN (As Amended And Restated Effective As Of January 28, 1997) -125- KU ENERGY CORPORATION ANNUAL PERFORMANCE INCENTIVE PLAN (As Amended And Restated Effective As Of January 28, 1997) ARTICLE I - PLAN OBJECTIVES The objective of the Plan is to advance the interests of the Company and its shareholders, by providing annual cash incentive compensation opportunities that attract, retain and motivate a select group of management or highly compensated employees: 1.1 By providing compensation opportunities which are competitive with those of other companies of comparable size, and 1.2 By motivating key executives to achieve annual business goals and contribute to team performance by allowing them to share in the risks and rewards of the business. The terms and conditions of the Plan, as amended and restated effective as of January 28, 1997, are set forth below and are applicable to Incentive Awards awarded for Plan Years beginning on or after January 1, 1998. The terms and conditions of the Plan as in effect immediately prior to January 28, 1997 shall continue to apply to Incentive Awards awarded for Plan Years beginning prior to January 1, 1998. -126- ARTICLE II - DEFINITIONS For purposes of the Plan, the following definitions shall control: 2.1 "Base Salary" -- Annualized base salary paid to a Participant as of January 1st of each Plan Year or as of such later date during a Plan Year as of which the Executive becomes a Participant in the Plan, except that if an Executive becomes a Participant as of a date other than January 1st of a Plan Year, such amount shall be prorated in proportion to the portion of the Plan Year in which the Executive will be a Participant. 2.2 "Beneficiary" -- Any person or persons designated by a Participant to receive amounts payable in accordance with this Plan in the event of the Participant's death. If no Beneficiary has been designated or if no designated Beneficiary shall survive the Participant, the Participant's Beneficiary shall be deemed to be his or her estate. 2.3 "Code" -- Internal Revenue Code of 1986, as amended. 2.4 "Committee" -- The Compensation Committee of the Board of Directors of the Company, which is comprised solely of two or more directors that qualify as "outside directors" within the meaning of Section 162(m) of the Code. -127- 2.5 "Company" -- KU Energy Corporation, and successors thereto. 2.6 "Disability" -- A physical or mental condition which prevents a Participant from engaging in any occupation or employment for remuneration or profit, except for the purpose of rehabilitation not incompatible with such findings. The determination shall be made (i) on medical evidence by a licensed physician assigned by the Committee, or (ii) on evidence that the Participant is eligible for disability benefits under the Social Security Act in effect at the date of disability. Disability shall exclude disabilities arising from (a) intentionally self-inflicted injury or self-induced illness; or (b) a proven unlawful act or enterprise on the part of the Participant. 2.7 "Executive" -- Any management or highly compensated employee of the Company or any corporation or other entity which is then a Subsidiary who is deemed by the Committee to be eligible for participation in this Plan. 2.8 "Executive Optional Deferred Compensation Plan of KU Energy Corporation" -- A separate plan, as it may be amended from time to time, designed to allow Participants in this Plan to elect to defer Incentive Award payments to a specified future date. 2.9 "Incentive Award" -- Awards made by the Committee under this Plan. All awards will be paid in cash. -128- 2.10 "Participant" -- An Executive designated by the Committee to participate in this Plan. 2.11 "Participation Form" -- The form that is prepared annually for each Participant, which describes the Participant's performance criteria, goals and award opportunities under this Plan. 2.12 "Plan" -- The KU Energy Corporation Annual Performance Incentive Plan set forth in this instrument, as it may, from time to time, be amended. 2.13 "Plan Year" -- The Company's fiscal year commencing January 1 and ending December 31. 2.14 "Retirement" -- Severance from employment with the Company and Subsidiaries at or after attaining fifty-five (55) years of age and with not less than fifteen (15) complete years of service with the Company and Subsidiaries. 2.15 "Subsidiary" -- Any corporation or other business entity in an unbroken chain beginning with the Company, if each such corporation or other entity (other than the last in the unbroken chain), or if each group of commonly controlled corporations or other entities, then owns fifty percent (50%) or more of the total combined voting power in one of the other corporations or entities in such chain. -129- ARTICLE III - ADMINISTRATION OF THE PLAN The Plan will be administered by the Committee. The Committee shall have the full and exclusive power to construe and interpret the Plan, to correct any defect, supply any omission, make any factual determination or reconcile any inconsistency in such manner and to such extent as the Committee in its sole and absolute discretion may determine. The Committee is authorized to establish and amend rules and regulations necessary for Plan administration. Decisions of the Committee shall be binding on all persons claiming rights under the Plan. Recommendations as to the operation and administration of the Plan, eligible employees to participate in the Plan, the type and amount of Incentive Awards and performance criteria may be made by management to the Committee. The Committee may employ such counsel (who may be counsel for the Company or any Subsidiary), consultants and/or agents and may arrange for such services as it may determine to be necessary or appropriate in the administration of the Plan. All expenses incurred by the Committee in administering the Plan shall be paid by the Company. ARTICLE IV - DESCRIPTION OF THE PLAN The Plan is a target incentive plan which provides for the establishment of target, threshold and maximum levels of Incentive Awards based on performance against specific predetermined performance targets. Management shall submit to the Committee recommendations for each Plan Year which shall -130- include: proposed Participants, target, threshold and maximum award opportunities, performance targets for each performance criterion, and the weighting of the annual Incentive Award among the performance criteria for each Participant. However, the Committee shall determine, in its sole discretion and not later than the 90th day after the beginning of each Plan Year, in writing the Participants, target, threshold and maximum award opportunities, performance criteria, performance target for each performance criterion, and the weighting of the annual Incentive Award among the performance criteria for each Participant. From time to time during a Plan Year, management may also recommend proposed additional Participants for such Plan Year and the award opportunities and performance criteria for such individuals. However, the Committee shall determine, it its sole discretion, in writing any additional Participants for such Plan Year and the award opportunities and performance criteria for such Participants; provided, however, that no additional Participant may be added after the first three months of the Plan Year. As soon as practicable after the end of the Plan Year, each Participant's Incentive Award earned will be determined based on performance against the preestablished performance targets. However, such amounts may not be paid to a Participant until the Committee has certified in writing that the performance targets and any other material terms have been satisfied. -131- ARTICLE V - PARTICIPANTS For each Plan Year, Participants will be selected at the times provided in Article IV by the Committee from among the Executives, subject to the following provisions of this Article V. 5.1 Awards under this Plan may be made only to Executives who are in a position to make significant contributions to the success of the Company. 5.2 Management shall recommend to the Committee those Executives to be considered for Plan participation each Plan Year. However, the Committee, in its sole discretion, shall select the Participants for each Plan Year. ARTICLE VI - AWARD LEVELS 6.1 Management shall recommend to the Committee for each Plan Year the target annual Incentive Award opportunity, expressed as a percentage of the Participant's Base Salary. At the time Executives are selected as Participants in the Plan, however, the Committee shall determine, in its sole discretion, the target annual Incentive Award opportunity for each Participant expressed as a percentage of the Participant's Base Salary. -132- 6.2 The achievement of threshold performance earns no award, maximum performance earns 1.5 times the target award opportunity. Awards for performance between threshold and target performance, and target and maximum performance will be determined by straight-line interpolation. The maximum amount that may be paid to any Participant under the Plan in respect of any Plan Year will not exceed $500,000. ARTICLE VII - PERFORMANCE CRITERIA AND PERFORMANCE GOALS For each Plan Year, management shall recommend to the Committee one or more financial or non-financial or other performance criterion and the threshold, target, and maximum performance goals for each performance criterion for each Participant. However, subject to the provisions of this Article VII, the Committee shall determine, in its sole discretion for each Plan Year at the times provided in Article IV, the performance criteria, the threshold, target and maximum performance goals and the weighting of each performance criterion, for each Participant. 7.1 The performance criteria applicable to any Participant who is, or who is determined by the Committee to be likely to become, a "covered employee" within the meaning of Section 162(m) of the Code (a "Covered Employee"), shall be limited to growth, improvement in or attainment by the Company or its Subsidiaries or one or more business or functional units thereof of certain levels of: -133- (i) return on capital, equity, or operating costs; (ii) economic value added; (iii) margins; (iv) total shareholder return or market value; (v) operating profit or net income; (vi) cash flow, earnings before interest and taxes, earnings before interest, taxes and depreciation, or earnings before interest, taxes, depreciation and amortization; (vii) sales or product volumes; (viii) costs, expenses or inventory; (ix) earnings per share; (x) cost per kilowatt hour; (xi) safety; (xii) environmental standards; (xiii) customer favorability/loyalty; (xiv) service reliability; (xv) productivity; (xvi) market share; or (xvii) completion of specified tasks or goals. Such performance criteria may be expressed either on an absolute basis or relative to other companies or indices selected by the Committee. This Section 7.1 is intended to comply with the exception from Section 162(m) of the Code -134- for qualified performance-based compensation, and shall be construed, applied and administered accordingly. 7.2 The Committee may adjust the threshold, target, and maximum performance goals for each performance criterion at any time during a Plan Year to reflect any extraordinarily unusual occurrence, occurring prior to a Change in Control (as defined in Section 13.1), which is outside the control of management and/or any Participant, which occurrence has a significant impact on the Company; provided, however, that no such modification shall be made in the case of any Incentive Award granted to a Participant who is, or is determined by the Committee to be likely to become, a Covered Employee if the effect would be to cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. In addition, at the time an Incentive Award is granted and performance goals established, the Committee is authorized to determine the manner in which the performance goals will be calculated or measured to take into account certain factors over which Participants have no or limited control including market related changes in inventory value, changes in industry margins, changes to rates or accounting procedures ordered by regulatory bodies, changes in accounting principles, and extraordinary charges to income; provided, however, that no such calculation or measurement shall be made in the case of any Incentive Award granted to the Participant who is, or is determined by the Committee to be likely to become, a -135- Covered Employee in such a manner that would cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. ARTICLE VIII - COMMUNICATION OF THE PLAN After performance targets are established as described above, management shall advise each Participant of the targets and his or her award opportunities under the Plan. This communication will take place each Plan Year via an individual employee Participation Form. ARTICLE IX - PAYMENT OF AWARDS Incentive Awards earned for a Plan Year based on performance against established targets shall be determined and payable in cash by the Company or Subsidiary employing the Participant as soon as feasible after the close of the Plan Year as determined by the Committee, subject to the following provisions of this Article IX. However, such amounts may not be paid to a Participant until the Committee has certified in writing that the performance targets and other material terms have been satisfied. 9.1 In the event of termination of employment with the Company and Subsidiaries during a Plan Year by reason of Retirement, Disability or death of the Participant, the Participant, in the case of Disability or Retirement, or the Participant's Beneficiary, in the case of the Participant's death, shall -136- earn an Incentive Award based on actual base salary earned prior to termination during the Plan Year, and actual performance against established targets. The transfer of employment among the Company and Subsidiaries during a Plan Year shall not be deemed a termination of employment for purposes of the Plan. 9.2 In the event of termination of employment with the Company and Subsidiaries during a Plan Year for any other reason, participation in the Plan will be terminated and no Incentive Award will be payable to the terminated Participant. 9.3 If the Participant's employment with the Company and Subsidiaries is terminated after the end of the Plan Year, but prior to receipt of the corresponding Incentive Award, the Participant, or the Participant's Beneficiary in the case of the Participant's death, shall be paid the full Incentive Award earned, if any, at the time other Participants' Incentive Awards for such Plan Year are paid (unless the termination both occurs prior to the occurrence of a Change in Control (as defined in Section 13.1) occurring after the Incentive Award was awarded and is the result of gross negligence or malfeasance as determined by the Committee, in which case no Incentive Award will be paid). -137- 9.4 Notwithstanding any provision of the Plan, the Committee may limit or eliminate any Participant's participation in the Plan and the Participant's Incentive Award for any Plan Year, provided such limitation or elimination occurs both prior to (i) the date the Incentive Award would otherwise be paid to the Participant and (ii) the occurrence of a Change in Control (as defined in Section 13.1 ) occurring after the Incentive Award was awarded. ARTICLE X - DEFERRAL OF INCENTIVE AWARD PAYMENT Subject to all of the provisions of the Executive Optional Deferred Compensation Plan of KU Energy Corporation, a Participant may elect to defer all or part of any Incentive Award which may be payable to the Participant under this Plan. Such election, however, shall not apply to all or any part of an Incentive Award (i) payable for a Plan Year in the event of the Participant's death prior to the time other Participants' Incentive Awards for that Plan Year are paid or (ii) payable on or after the occurrence of a Change in Control (as defined in Section 13.1) occurring after the Incentive Award was awarded. ARTICLE XI - EFFECTIVE DATE AND AMENDMENTS This amended and restated Plan shall be effective as of January 28, 1997, the date of its adoption by the Board of Directors of the Company, and may be terminated, amended, modified or supplemented at any time by the Board of Directors of the Company. Notwithstanding the preceding sentence, no termination, -138- amendment, modification or supplement (i) may be made that adversely affects the rights of any person, without his or her prior written consent, under any Incentive Award theretofore granted or (ii) shall be effective unless approved by the affirmative vote of the holders of a majority of securities of the Company present, or represented, and entitled to vote at a meeting of shareholders of the Company duly held in accordance with the laws of the Commonwealth of Kentucky within twelve (12) months of the date of adoption of such termination, amendment, modification or supplement, where such termination, amendment, modification or supplement will make a change as may require shareholder approval in order for awards granted under the Plan to qualify for an exception from Section 162(m) of the Code. Notwithstanding anything herein or in any award agreement to the contrary, all Incentive Awards awarded under this amended and restated Plan shall be void unless this amended and restated Plan is approved by the affirmative vote of holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of shareholders duly held in accordance with the laws of the Commonwealth of Kentucky within twelve months after January 28, 1997. ARTICLE XII - MISCELLANEOUS PROVISIONS 12.1 By acceptance of any Incentive Award under the Plan, each Participant agrees that benefit calculations under all other plans of the Company and its Subsidiaries will exclude, -139- unless otherwise expressly provided in any such plan, the Incentive Awards under the Plan. 12.2 The designation as a Participant in the Plan and the receipt of an Incentive Award under the Plan shall not give the Participant any right to continued employment or the right to receive an Incentive Award under the Plan in a subsequent year. 12.3 Except as required by law, no right of the Participant or designated Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. 12.4 Any words herein used in the masculine shall be read and construed in the feminine where appropriate. Words in the singular shall be read and construed as though used in the plural in all cases where the context so requires. 12.5 This Plan shall be construed under the laws of the Commonwealth of Kentucky. 12.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization -140- or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to be the "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Participant. 12.7 The Company shall deduct or cause to be deducted from all payments under the Plan any federal, state, or local taxes required by law to be withheld with respect to such payments. ARTICLE XIII - CHANGE IN CONTROL 13.1 A change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after November 1, 1996 any of the following events shall occur: (a) The Company or KU (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person and, as a result of -141- such merger, consolidation or reorganization, less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity and, as a result of such sale or transfer, less 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under -142- Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two- thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) a Subsidiary, or (iii) any Company-sponsored, KU- sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of -143- the Company, KU or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise. For purposes of this Section 13.1, "KU" shall mean Kentucky Utilities Company. 13.2 In the event a Change in Control under the preceding Section 13.1 occurs during a Plan Year, then, notwithstanding anything to the contrary in Article IX or otherwise in the Plan, no payments of Incentive Awards shall be made under Article IX for such Plan Year, but instead, each Participant employed by the Company or a Subsidiary immediately prior to the date on which the Change in Control occurs and each Participant who had terminated employment with the Company and Subsidiaries during the Plan Year by reason of Retirement, Disability or death prior to the occurrence of the Change in Control shall have a right (or, in the case of the Participant's death, his or her Beneficiary shall have the right) to an immediate cash payment of an Incentive Award based on actual base salary earned during the Plan Year while a Participant prior to the occurrence of the Change in Control or earlier termination and on the assumption that established targets were met. -144- Such payments shall be made within 15 days after the date on which the Change in Control occurs. -145- IN WITNESS THEREOF, the Company has caused this Plan to be executed by its duly authorized officers as of the 28th day of January, 1997. KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer Attest:/s/George S. Brooks II Secretary (SEAL) -146- EX-10.23 12 EXHIBIT 10.23 EXHIBIT 10.23 EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KU ENERGY CORPORATION (As Amended and Restated Effective As Of January 1, 1997) -147- EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KU ENERGY CORPORATION (As Amended And Restated Effective As Of January 1, 1997) ARTICLE I - PLAN This Plan is an unfunded Deferred Compensation arrangement for a select group of management or highly compensated employees who are rendering service to an Employer. ARTICLE II - DEFINITIONS For purposes of the Plan, the following definitions shall control: 2.1 "Annual Performance Incentive Plan" -- The annual incentive plan(s) sponsored by the Company as amended from time to time. 2.2 "Beneficiary" -- Any person or persons designated by the Executive to receive amounts payable in accordance with this Plan in the event of the Executive's death. If no Beneficiary has been designated or if no designated Beneficiary shall survive the Executive, the Executive's Beneficiary shall be deemed to be his or her estate. 2.3 "Committee" -- The Compensation Committee of the Board of Directors of the Company. -148- 2.4 "Company" -- KU Energy Corporation, and successors thereto. 2.5 "Death" -- Death from any cause. 2.6 "Deferred Compensation" -- The portion of a Participant's annual incentive award (if any) which may be paid to the Participant under the Company's Annual Performance Incentive Plan(s) that has been deferred to this Plan. 2.7 "Deferred Compensation Account(s) " or "Account(s) " -- The accounts that may be established each year by the Employer as a book reserve for each of its Participants to which shall be credited the sum of the Participant's Deferred Compensation for that year plus any earnings or losses credited thereafter in accordance with Article VI. 2.8 "Deferral Election Form" -- The form made available annually by the Committee to an Executive which, when properly executed by the Executive, effects his or her participation in the Plan for the applicable Performance Cycle. A copy of the Deferral Election Form is attached hereto as Exhibit A and is made a part hereof. 2.9 "Disability" -- A physical or mental condition which prevents a Participant from engaging in any occupation or employment for remuneration or profit, except for the purpose of rehabilitation not incompatible with such -149- findings. The determination shall be made (i) on medical evidence by a licensed physician assigned by the Committee, or (ii) on evidence that the Participant is eligible for disability benefits under the Social Security Act in effect at the date of disability. Disability shall exclude disabilities arising from (a) intentionally self-inflicted injury or self-induced illness; or (b) a proven unlawful act or enterprise on the part of the Participant. 2.10 "Employer" -- The Company, KU Capital Corporation, commencing with Performance Cycles beginning on or after January 1, 1998, Kentucky Utilities Company, and any other Subsidiary to which the Plan is extended by the Board of Directors of the Company and which adopts the Plan. 2.11 "Executive" -- Any management or highly compensated employee of an Employer who is deemed by the Committee to be eligible for participation in this Plan. 2.12 "Fair Market Value" -- The closing price of the Company's Common Stock as reported in the listing of the New York Stock Exchange - Composite Transactions on a specified date. 2.13 "Participant" -- Any employee designated as an Executive who elects to participate in the Plan according to -150- Article IV or a person who was such at the time of his or her Retirement, Death, Disability or Termination of Service and who retains, or whose Beneficiary retains, a benefit under the Plan which has not been forfeited or distributed. 2.14 "Performance Cycle" -- The period of time during which the value of an award under the Company's Annual Performance Incentive Plan is determined. 2.15 "Plan" -- The Executive Optional Deferred Compensation Plan of KU Energy Corporation set forth in this instrument, as it may, from time to time, be amended. 2.16 "Return on Capital" -- The result of dividing the Company's net income before interest charges by the Company's total capitalization as both are reported on the Company's financial statements. 2.17 "Subsidiary" -- Any corporation or other business entity in an unbroken chain beginning with the Company, if each such corporation or other entity (other than the last in the unbroken chain), or if each group of commonly controlled corporations or other entities, then owns fifty percent (50%) or more of the total combined voting power in one of the other corporations or entities in such chain. -151- 2.18 "Termination of Service" -- The termination for any reason of a Participant's employment as a regular employee of the Employers and the members of any controlled group of corporations (as defined in Section 414(b) of the Internal Revenue Code (the 'Code')) of which an Employer is a member, the members of any group of trades or businesses which are under common control (as defined in Section 414(c) of the Code) of which an Employer is a member, the members of any affiliated service group (as defined in Section 414(m) of the Code) of which an Employer is a member, and all other organizations deemed to be affiliated with an Employer under Section 414(o) of the Code. ARTICLE III - ADMINISTRATION OF THE PLAN The Plan will be administered by the Committee. The Committee shall have the full and exclusive power to construe and interpret the Plan, to correct any defect, supply any omission, make any factual determination or reconcile any inconsistency in such manner and to such extent as the Committee in its sole and absolute discretion may determine. The Committee is authorized to establish and amend rules and regulations necessary for Plan administration. Decisions of the Committee shall be binding on all persons claiming rights under the Plan. The Committee may employ such counsel (who may be counsel for any Employer), consultants and/or agents and may arrange for such services as it -152- may determine to be necessary or appropriate in the administration of the Plan. All expenses incurred by the Committee in administering the Plan shall be paid by the Employers. ARTICLE IV- PARTICIPANTS 4.1 Any Executive may elect to have all or any portion of his or her award under the Company's Annual Performance Incentive Plan deferred and credited with earnings or losses in accordance with the terms and conditions of this Plan. 4.2 An Executive desiring to exercise such election under Paragraph 4.1 shall notify the Committee each time he or she wishes to exercise a deferral election. Such notice must be in writing, on a Deferral Election Form provided by the Committee, and delivered to the Committee not later than the December 31st preceding the start of a new Performance Cycle. If an Executive becomes a participant in the Company's Annual Performance Incentive Plan for a Performance Cycle as of a date other than January 1st, that Executive may deliver such notice to the Committee within 30 days of the date as of which that Executive becomes a participant in the Annual Performance Incentive Plan. Once delivered to the Committee, a deferral -153- election as made on a Deferral Election Form shall be irrevocable. 4.3 The amount of a Participant's Deferred Compensation shall be credited to his or her Deferred Compensation Account at the time such amount would have otherwise been paid to the Participant under the Company's Annual Performance Incentive Plan but for his or her deferral election under the Plan. 4.4 No Participant or the Participant's Beneficiary shall acquire any property interest in his or her Deferred Compensation Account or any other assets of the Employer, their rights being limited to receiving from the Employer deferred payments as set forth in this Plan and these rights are conditioned upon continued compliance with the terms and conditions of this Plan. To the extent that any Participant or Beneficiary acquires a right to receive benefits under this Plan, such right shall be no greater than the right of any unsecured general creditor of the Employer. ARTICLE V - CONTINUED PARTICIPATION IN THE PLAN A Participant shall not actively participate in the Plan for any Performance Cycle for which a Deferral Election Form has not been timely executed and filed as provided by Paragraph 4.2 herein. -154- In this event, such a Participant's Deferred Compensation Account(s) shall continue to be subject to the provisions of the Plan and all previously submitted Deferral Election Forms. For subsequent Performance Cycles, an Executive may again actively participate hereunder by submitting the appropriate Deferral Election Form in accordance with the provisions of Article IV hereunder. ARTICLE VI - CREDITING OF EARNINGS AND LOSSES As of the last day of each calendar quarter each Participant's Deferred Compensation Account(s) will be credited with earnings or losses in addition to any amounts credited to such Account(s) under Article IV of this Plan. Earnings on each Deferred Compensation Account established for a Participant for a Performance Cycle beginning prior to January 1, 1998 shall be equal to the interest that would have been earned during such calendar quarter on the average of the balances of the Participant's Account at the end of each calendar month during such calendar quarter at a rate per annum equal to the greater of (1) the Company's Return on Capital for the twelve-month period that ends coincident with that quarter or (2) the 13 week Treasury bill rate as reported in the Wall Street Journal on the first business day coinciding with or next following the end of that calendar quarter. However, effective as of the first day of any calendar quarter beginning on or after -155- April 1, 1997, a Participant may elect, by filing with the Committee written notice (on a form provided by the Committee) at least 15 days prior to the effective date thereof, to have the balance in any Deferred Compensation Accounts established for the Participant for a Performance Cycle beginning prior to January 1, 1998 be transferred or to have any subsequent Deferred Compensation credits for such a Performance Cycle be allocated, as the case may be, in specified multiples of 10%, to a Subaccount II for adjustment in accordance with Paragraph 6.2 below rather than be credited with earnings in accordance with the preceding sentence. Once such an election has been made for a Deferred Compensation Account established for a Performance Cycle, it may not be changed. Earnings or losses on each Deferred Compensation Account established for a Participant for a Performance Cycle beginning on or after January 1, 1998 shall be determined by adjusting the Account in accordance with Paragraph 6.1 or Paragraph 6.2 below. A Participant shall elect on his or her Deferral Election Form for a Performance Cycle to have the Participant's Deferred Compensation for the Performance Cycle allocated to Subaccount I for adjustment in accordance with Paragraph 6.1 or to Subaccount II for adjustment in accordance with Paragraph 6.2. Such election shall be made in specified multiples of 10% and once made may not be changed with respect to Deferred Compensation for a Performance Cycle. -156- 6.1 Subaccount I of a Participant's Account shall be adjusted each calendar quarter by earnings equal to the interest that would be earned during such calendar quarter on the average of the balances in Subaccount I of the Participant's Account at the end of each calendar month during the calendar quarter, at a rate per annum which equals the average prime rate charged by banks as reported in the Federal Reserve Bulletin published on or next prior to the last day of such calendar quarter. 6.2 Subaccount II of a Participant's Account shall be adjusted each calendar quarter to equal the Fair Market Value as of the last day of such calendar quarter (or, if it is not a trading date, as of the trading date next preceding such date) of the number of hypothetical shares of Company Common Stock allocated to Subaccount II of the Participant's Account as of such date. The number of hypothetical shares of Company Common Stock allocated to Subaccount II of a Participant's Account as of any date shall be equal to the number of shares of Company Common Stock that would be allocated to the Account as of such date if (i) the Deferred Compensation credited to the Participant's Account to be allocated, or the Account balance to be transferred, to Subaccount II was invested in the Company's Common Stock at Fair Market Value on the trading day that is coincident with or next preceding the date on which such Deferred Compensation is credited or transferred, as the case may be, to his or her Account, -157- (ii) cash dividends on the shares of Company Common Stock treated as allocated to Subaccount II of the Participant's Account were automatically reinvested in the Company's Common Stock at Fair Market Value on the trading day that is coincident with or next following the applicable dividend payment date, and (iii) any distributions from Subaccount II of the Participant's Account were made at Fair Market Value on the trading day that is coincident with or next preceding the effective date of such distribution of the number of hypothetical shares of Company Common Stock needed to make such distribution, which hypothetical shares shall be subtracted from the number of shares treated as allocated to Subaccount II of the Participant's Account as of the effective date of the distribution. ARTICLE VII - DISTRIBUTION OF AMOUNTS DEFERRED UNDER THE PLAN All payments from the Plan will be made in cash by the Employer. The Participant will receive payments from the Plan in accordance with the Deferral Election Form(s) on file. Notwithstanding the preceding sentence, the remaining balance of a Participant's Deferred Compensation Account(s) will be paid in a lump sum as soon as practical after a Participant's Termination of Service or if a change of control occurs as described in Article XI. -158- ARTICLE VIII - DEATH 8.1 At the time that an Executive becomes a Participant, the Executive shall designate in writing a Beneficiary to receive any payments to which the Executive would have been entitled under the terms of this Plan. The Beneficiary referred to in this paragraph may be designated or changed by the Executive (without the consent of any prior Beneficiary) on a form provided by the Committee and delivered to the Committee before his or her Death. If no such Beneficiary shall have been designated, or if no designated Beneficiary shall survive the Executive, payments shall be payable to the Executive's estate. 8.2 If the Executive's employment is terminated because of Death or if the Executive should die after his or her Termination of Service but before his or her Deferred Compensation Account balance has been paid, then the Employer shall make payments of the Executive's remaining balance in his or her Deferred Compensation Account to his or her Beneficiary in the same manner and to the extent as provided in Article VII. 8.3 If after the Executive's Death, all of the Executive's designated Beneficiary(ies) should die before all payments are made by the Employer, then the value of the remaining payments shall be paid as promptly as possible -159- in one lump sum to the estate of the last to die of such designated Beneficiary(ies). ARTICLE IX - DISABILITY If the Executive's employment is terminated because of Disability, then the Employer shall make payments to the Executive in the same manner and to the same extent as provided in Article VII. ARTICLE X - INCAPACITY If the Committee shall find that any person to whom any payment is payable under this Plan is unable to care for his or her affairs because of illness or accident, or is a minor, any payment due (unless a prior claim therefore shall have been made by a duly appointed guardian, committee or legal representative) may be paid to the spouse, a child, a parent, a brother or a sister or to any person determined by the Committee in such a manner as the Committee shall determine. For all determinations made by the Committee under this Article, the Committee shall have full acquittance. Any such payment shall be a complete discharge of the liabilities of the Employer under this agreement. -160- ARTICLE XI - CHANGE IN CONTROL A "change in control" for purposes of the Plan shall have occurred if at any time any of the following events shall occur: (a) The Company or KU (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person and, as a result of such merger, consolidation, or reorganization, less than a majority of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then-outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity and, as a result of such sale or transfer, less than a majority of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; -161- (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; (d) The Company or KU files a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Form 8-K or schedule 14A (or any successor schedule, form or report or item therein) that a change in control of the Company or KU has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (e) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the -162- directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) or (d) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "change in control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) a Subsidiary, or (iii) any Company-sponsored, KU-sponsored, or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, KU or Subsidiary, either files or becomes obligated to file a report or a proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or Schedule 14A (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise, or because the Company, KU or a Subsidiary reports that a change in control of the Company or KU has or may have occurred or will or may occur in the future by reason of such beneficial ownership. Notwithstanding the foregoing provisions of this Article XI, a "change in control" -163- shall not be deemed to have occurred by reason of the Reorganization. For purposes of this Article XI: "KU" shall mean Kentucky Utilities Company. "Reorganization" shall mean the corporate reorganization whereby the Company became the holding company of KU as approved by the Board of Directors of KU on May 16, 1988 and May 27, 1988. ARTICLE XII - AMENDMENT OF PLAN The Plan may be amended in whole or in part from time to time or terminated at any time by the Board of Directors of the Company, provided, however, that no amendment or termination may be made that adversely affects the rights of any person with respect to amounts previously deferred under the Plan without his or her prior written consent. Notice of every such amendment shall be given in writing to each Participant and Beneficiary of a deceased Participant. ARTICLE XIII - MISCELLANEOUS 13.1 Neither this Agreement, nor any action of the Employer or Committee, nor any election to defer compensation hereunder shall be construed to confer on any person any -164- legal right to be continued as an employee of the Employer. 13.2 Except as required by law, no right of the Executive or Beneficiary to receive payments under this Plan shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law and any attempt, voluntary or involuntary, to effect any such action shall be null and void and of no effect. 13.3 The Employer shall have the right to deduct from all payments any taxes required by law to be withheld with respect to any payments made under this Plan. 13.4 Masculine pronouns used herein shall refer to men or women or both, and nouns when stated in the singular shall include the plural and when stated in the plural shall include the singular wherever appropriate. 13.5 This Plan shall be construed under the laws of the Commonwealth of Kentucky. 13.6 The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to -165- assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to be the "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Participant. IN WITNESS THEREOF, the Company has caused this Plan to be executed by its duly authorized officers as of the 28th day of January, 1997. KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer Attest:/s/George S. Brooks II Secretary (SEAL) -166- EXHIBIT A EXECUTIVE OPTIONAL DEFERRED COMPENSATION PLAN OF KU ENERGY CORPORATION DEFERRAL ELECTION FORM This election is in accordance with the provisions of the Executive Optional Deferred Compensation Plan (the Plan) of KU Energy Corporation (the Company) and is made this ______ day of ________________, _____, by ________________________ (the Executive). By making such election, I understand and agree that I become a party to said Plan, and agree to be bound by its terms and conditions. I further understand that this election is irrevocable. In accordance with and subject to the provisions of the Plan, I hereby elect to defer for the Performance Cycle commencing on January 1, _____ and maturing on December 31, _____ the following amount of compensation that may be payable to me under the Company's Annual Performance Incentive Plan for services rendered during that Performance Cycle: The lesser of _______% of any incentive payment or $________. In accordance with and subject to the provisions of the Plan, I hereby also elect to have my Deferred Compensation for the above-indicated Performance Cycle allocated to the following -167- subaccounts for adjustment (indicate from 0% to 100% -- in 10% increments -- in front of each item; total must equal 100%): ______ Subaccount I. Adjustment based on prime rate of interest. ______ Subaccount II. Adjustment made by making a hypothetical investment in Company Common Stock with the assumption of automatic dividend reinvestment. I understand that this election will remain in effect only for the above indicated Performance Cycle and that a new Deferral Election Form must be completed for each other Performance Cycle that I wish to participate in the Plan. I further elect that the value of my Deferred Compensation Account for the above indicated Performance Cycle be payable to me on the first day of _____________, ____. -168- IN WITNESS WHEREOF, I hereunto set my hand as of the date first above written. (Witness) (Executive) Received and accepted on behalf of the Compensation Committee of the Board of Directors of KU Energy Corporation. KU ENERGY CORPORATION By Dated -169- EX-10.25 13 EXHIBIT 10.25 EXHIBIT 10.25 AMENDMENT NO. 1 TO KU ENERGY CORPORATION DIRECTOR RETIREMENT RETAINER PROGRAM The KU Energy Corporation Director Retirement Retainer Program (the "Plan") is hereby amended, effective as of November 1, 1996, in the following respects: 1. By deleting Section 4.4 of the Plan and inserting in lieu thereof the following: "4.4 Change in Control. For purposes of the Plan, a "Change in Control" shall have occurred if at any time on or after November 1, 1996, any of the following events shall occur: (a) The Company or KU is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or -170- Section 14(d)(2) of the Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) a Subsidiary or (iii) any Company-sponsored, KU-sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, KU or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise." IN WITNESS WHEREOF, KU Energy Corporation has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 16th day of December, 1996. -171- KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [CORPORATE SEAL] ATTEST:George S. Brooks II -172- EX-10.26 14 EXHIBIT 10.26 EXHIBIT 10.26 KU ENERGY CORPORATION DIRECTOR DEFERRED COMPENSATION PLAN (As Amended and Restated Effective As Of January 1, 1997) -173- KU ENERGY CORPORATION DIRECTOR DEFERRED COMPENSATION PLAN (As Amended and Restated Effective As Of January 1, 1997) ARTICLE I Purpose The KU Energy Corporation Director Deferred Compensation Plan (the "Plan") was established, effective May 1, 1992, to provide eligible directors of KU Energy Corporation with the opportunity to defer some or all of the compensation which may be payable to them for services to be performed as members of the Board of Directors of KU Energy Corporation. The terms and conditions of the Plan, as amended and restated effective as of January 1, 1997, are set forth below. ARTICLE II Definitions The following words and phrases shall have the meanings set forth below unless a different meaning is clearly required by the context: (a) Act: The Securities Exchange Act of 1934, as amended from time to time. (b) Account: The account maintained for each Participant showing his or her interest under the Plan which shall be divided into Subaccount I and Subaccount II as provided in Section 4.1. (c) Accounting Date: Except as otherwise provided herein, each March 31, June 30, September 30 and December 31 of each calendar year. The first Accounting Date under the Plan was June 30, 1992. (d) Beneficiary: The person or persons (natural or otherwise) designated, in -174- accordance with Section 5.4, to receive the distribution of a Participant's Account balance in the event of the Participant's death. (e) Board: The Board of Directors of the Company. (f) Change in Control: The occurrence of any of the events provided in Section 5.7. (g) Committee: The Compensation Committee of the Board. (h) Company: KU Energy Corporation, a corporation organized and existing under the laws of the Commonwealth of Kentucky. (i) Compensation: Any retainer and meeting fees payable to the Director in cash by the Company for services rendered as a member of the Board or any committee thereof. (j) Director: Any member of the Board on or after the Effective Date who is separately compensated for his or her services as a member of the Board. (k) Effective Date: May 1, 1992. (l) Fair Market Value: The closing price of the Company's Common Stock as reported in the listing of the New York Stock Exchange - Composite Transactions on a specified date. (m) KU: Kentucky Utilities Company. (n) Participant: A Director participating in the Plan in accordance with the provisions of Section 3.2, or a former Director whose Account balance under the Plan has not been paid in full. (o) Plan: The KU Energy Corporation Director Deferred Compensation Plan set forth in this instrument, as it may be amended from time to time. (p) Service: An individual's service on the Board and on the boards of KU or any other Subsidiary. -175- (q) Subsidiary: An entity in which the Company, KU or one or more other Subsidiaries directly or indirectly beneficially owns 50% or more of the voting securities. ARTICLE III Eligibility and Participation 3.1 Eligibility: Each member of the Board who was a Director on the Effective Date was eligible to participate in the Plan as of the Effective Date. Each other Director shall be eligible to participate in the Plan as of the first day of the month next following the date he or she becomes a Director. 3.2 Participation: A Director may elect to participate in the Plan effective as of the date the Director first becomes eligible to participate as provided in Section 3.1, or effective as of the January 1st of any calendar year beginning after such date, by filing written notice of such election with the Company prior to the effective date of such election. Such notice shall be accompanied by (i) an election to defer Compensation as provided in Section 3.4, (ii) an election with respect to Account adjustments as provided in Section 4.3, and (iii) an election as to the method of payment as provided in Section 5.1. Upon filing such election notice, the Director shall become a Participant in the Plan effective as of the date elected as permitted in this Section 3.2. 3.3 Crediting of Compensation: Commencing on the effective date of a Participant's participation in the Plan and continuing during the period that Compensation is to be credited to the Participant's Account under the Plan, the Company shall defer payment of and credit to the Participant's Account all or -176- such portion, as elected by the Participant under Section 3.4, of the Compensation that the Participant would have received for services rendered by the Participant during such period as a member of the Board but for his participation in the Plan, such credits to be made as provided in Section 4.2(b). 3.4 Election to Defer: At the time a Director elects to become a Participant, the Director shall elect to have from 10% to 100%, in specified multiples of 10%, of his or her Compensation for services rendered subsequent to the date the Director becomes a Participant deferred under the Plan and credited to his or her Account as provided in Section 3.3. Such election shall remain in effect until changed or terminated as hereinafter provided. A Participant may change his or her election under this Section 3.4 effective as of the January 1st of any calendar year with respect to Compensation for services to be rendered as a Director on or subsequent to such January 1st, by filing with the Company written notice of such change prior to the effective date of such change. Any change may (i) increase or decrease, within the limits prescribed in the preceding paragraph, the portion of Compensation to be deferred and credited to the Participant's Account as provided in Section 3.3, (ii) terminate an election to defer Compensation under this Section 3.4 or (iii) resume the deferral of Compensation under the Plan within the limits prescribed in the preceding paragraph. A change in the portion of Compensation deferred or the termination of a Participant's election to defer Compensation shall not entitle the Participant -177- to receive payment of his or her Account balance, which shall be payable only as provided in Article V. Any election or change in election under this Section 3.4 shall be made on a form provided or prescribed by the Company. ARTICLE IV Participants' Accounts 4.1 Individual Accounts: A separate Account shall be maintained by the Company on its books for each Participant. Such Account shall be divided into subaccounts to specifically identify the portion of the Account subject to adjustment under Section 4.3(a) ("Subaccount I") and the portion of the Account subject to adjustment under Section 4.3(b) ("Subaccount II"). As of January 1, 1995, each Participant's Account was allocated to Subaccount I unless the Participant had elected otherwise as of such date as then provided in the Plan. Subaccounts I and II may, in turn, be further subdivided into such subaccounts as the Company considers desirable for purposes of the administration of the Plan. 4.2 Accounting Procedures: Each Participant's Account shall be adjusted as of each Accounting Date occurring on or after December 1, 1996 as follows and in the following order: (a) The amount of any transfer to or from Subaccount I or Subaccount II of the Participant's Account, pursuant to a change in election or deemed election under Section 4.3, made as of the first day of the calendar quarter in which such Accounting Date occurs shall be added to or subtracted from, as the case may be, the applicable Subaccounts as of the first day of such calendar quarter. -178- (b) Each Participant's Account shall next be credited with the amount of Compensation to be credited to his or her Account as provided in Section 3.3 during the period ending on such Accounting Date that follows the next preceding Accounting Date. Credits shall be made as of the last business day of the respective calendar months in which such Compensation would have been paid to the Participant by the Company but for his or her participation in the Plan and shall be allocated to Subaccount I or Subaccount II in accordance with the Participant's election or deemed election as in effect as of the respective dates as of which the credits are made. (c) Each Participant's Account shall next be charged as of such Accounting Date with the amount of any distributions under the Plan to the Participant or to his or her Beneficiary effective as of or prior to such Accounting Date. (d) Subaccount I of each Participant's Account shall next be credited with the amount equivalent to interest, as determined under Section 4.3(a), to be added to the Participant's Account as of such Accounting Date. (e) Subaccount II of each Participant's Account shall next be adjusted upwards or downwards, as the case may be, in accordance with Section 4.3(b), to reflect the Fair Market Value of the hypothetical shares of Company Common Stock allocated to Subaccount II of the Participant's Account as of such Accounting Date. 4.3 Election With Respect to Subaccount Adjustments: Subaccount I and Subaccount II of a Participant's Account are subject to adjustment on and after December 1, 1996, as provided in Section 4.2 as follows: (a) Subaccount I Adjustments. Subaccount I of a Participant's Account shall be adjusted as of an applicable Accounting Date by the addition of an amount equivalent to interest. The interest equivalent to be credited as of an applicable Accounting Date shall be equal to the interest that would be -179- earned on the average of the balances in Subaccount I of the Participant's Account at the end of each calendar month ending during the period following the next preceding Accounting Date and ending on the applicable Accounting Date, at a rate per annum which equals the average prime rate charged by banks as reported in the Federal Reserve Bulletin published on or next prior to the applicable Accounting Date. (b) Subaccount II Adjustments: Subaccount II of a Participant's Account shall be adjusted as of an applicable Accounting Date to equal the Fair Market Value as of such Accounting Date (or, if the Accounting Date is not a trading date, as of the trading date next preceding such Accounting Date) of the number of hypothetical shares of Company Common Stock allocated to Subaccount II of the Participant's Account as of such Accounting Date. The number of hypothetical shares of Company Common Stock allocated to Subaccount II of a Participant's Account as of any date shall be equal to the number of shares of Company Common Stock that would be allocated to the Account as of such date if (i) the Compensation credited to the Participant's Account to be allocated to Subaccount II was invested in the Company's Common Stock at Fair Market Value on the trading day that is coincident with or next preceding the last day of the calendar month in which such Compensation would have been paid to the Participant but for participation in the Plan, (ii) any balance transferred effective as of January 1, 1995 from Subaccount I due to the one-time election permitted under Section 4.3 of the Plan as then in effect was invested in the Company's Common Stock at the average Fair Market Value on trading days during the month of December, 1994, (iii) any other balance transferred from Subaccount I due to a change in election under this Section 4.3 was invested in the Company's Common Stock at Fair Market Value on the trading day that is coincident with or next following the effective date of such change, (iv) cash dividends on the shares of Company Common Stock treated as allocated to Subaccount II of the Participant's Account were automatically reinvested in the Company's Common Stock at Fair Market Value on the trading day that is coincident with or -180- next following the applicable dividend payment date, and (v) any transfers to Subaccount I due to a change in election under this Section 4.3 or any distributions from Subaccount II of the Participant's Account were made at Fair Market Value on the trading day that is coincident with or next preceding the effective date of such change of election or distribution of the number of hypothetical shares of Company Common Stock needed to make such transfer or distribution, which hypothetical shares shall be subtracted from the number of shares treated as allocated to Subaccount II of the Participant's Account as of the effective date of the transfer or distribution. At the time a Director elects to become a Participant or as of January 1, 1995, if later, the Director shall elect to have the Compensation thereafter deferred under Section 3.4 and credited to the Participant's Account allocated, in specified multiples of 10%, to Subaccount I or Subaccount II. If a Director who was a Participant as of December 31, 1994 failed to make an election hereunder as of January 1, 1995, he was deemed to have elected to have Compensation deferred on or after January 1, 1995 allocated to Subaccount I. A Participant's election or deemed election under this Section 4.3 shall remain in effect until changed as provided in this Section 4.3 from time to time. A Participant may change his or her election or deemed election under this Section 4.3 effective, beginning on or after January 1, 1997, as of the first day of any calendar quarter by filing with the Company written notice of such change at least 15 days prior to the effective date of such change. Any change shall direct that either or both of (i) that the balance credited to Subaccount I or Subaccount II of the Participant's Account as of the immediately preceding Accounting Date be transferred, in -181- specified multiples of 10%, to the other Subaccount or (ii) subsequent Compensation credits under Section 3.3 be allocated, in specified multiples of 10%, to Subaccount I or Subaccount II. Such change shall be effective as of the first day of the calendar quarter elected and shall remain in effect until further changed as provided herein. Any election or change in election under this Section 4.3 shall be made on a form provided or prescribed by the Company. Notwithstanding the foregoing provisions of this Section 4.3, if a Participant terminates his or her Service and any portion of the balance credited to his or her Account is to be paid in accordance with Payment Method II or Payment Method III as provided in Section 5.1, any balance in Subaccount II of the Participant's Account shall be transferred by a deemed election to Subaccount I of the Participant's Account as of the day after the Accounting Date that is coincident with or next following the Participant's termination of Service. ARTICLE V Distribution of Benefits 5.1 Termination For Reasons Other Than Death: Within 15 days after the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service for any reason other than death or a termination to which Section 5.6 applies, the Company shall pay, or commence to pay, to the Participant in cash the amount credited to his or her Account. Payment shall be made in accordance with Payment -182- Method I, Payment Method II or Payment Method III, below, as elected by the Director: (a) Payment Method I - By payment in a lump sum of the amount credited to the Participant's Account as of the Accounting Date coincident with or next following the date on which the Participant terminates his or her Service. (b) Payment Method II - By payment in quarterly installments, the number of which shall be the lesser of (i) 40 or (ii) the aggregate number of full calendar quarters during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of KU or other Subsidiary (but not counting any such calendar quarter more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. (c) Payment Method III - By payment in annual installments, the number of which shall be the lesser of (i) 10 or (ii) the aggregate number of full calendar years (but not less than one) during which compensation was credited to the Participant's Account under the Plan and to his or her account under any similar plan of KU or other Subsidiary (but not counting any such calendar year more than once). The amount of each installment shall be equal to the quotient obtained by dividing the balance credited to Participant's Account as of the Accounting Date coincident with or next preceding the date of such installment payment by the number of installment payments remaining to be made to such Participant at the time of such calculation. A method of payment shall be elected by the Director at the time the Director elects to become a Participant, which method of payment election shall remain in effect until changed as hereinafter provided. -183- A Participant may change his or her elected method of payment from time to time by filing with the Company written notice of such change, except that no election change shall be effective under the Plan if it is filed with the Company after the date which is one year prior to the date on which the Participant terminates his or her Service. An election or change in election as to the method of payment shall be made on a form provided or prescribed by the Company. Notwithstanding a Participant's election under, or the foregoing provisions of, this Section 5.1, if a Change in Control occurs after a Participant terminates his or her Service but prior to the complete distribution under the Plan of the balance credited to his or her Account, the amount credited to the Participant's Account as of the New York Stock Exchange trading date next preceding the date on which the Change in Control occurs (such amount to be determined as if the trading date next preceding the date on which the Change in Control occurs were an Accounting Date) increased by the amount of any Compensation deferred under the Plan by the Participant not previously credited to his or her Account, shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death after his termination of Service, to his or her Beneficiary) within 15 days after the date on which the Change in Control occurs, such payment to be made effective as of the date on which the Change in Control occurs. 5.2 Death: Upon the death of a Participant, whether before or after termination as a member of the Board, prior to -184- the complete distribution of the balance credited to his or her Account, any undistributed amount credited to the Participant's Account as of the Accounting Date coincident with or next following the Participant's date of death shall be paid in cash in a lump sum to the Participant's Beneficiary within 15 days after such Accounting Date. If, however, a Change in Control shall occur either before or after the Participant's death but prior to the complete distribution of the balance credited to the Participant's Account, distribution shall be made to the Beneficiary as provided in the last paragraph of Section 5.1 or in Section 5.6, whichever is applicable, rather than as provided in this Section 5.2. The foregoing sentence shall not apply if the Participant's termination of Service occurs on or after the third anniversary of the date on which the Change in Control occurs. 5.3 Hardship Distribution: With the prior written consent of the Committee, a Participant may withdraw, as of an Accounting Date prior to termination of Service, from his or her Account a cash amount not in excess of the balance credited to the Participant's Account as of such Accounting Date. The Committee, in its sole discretion, may consent to such withdrawal but only if the withdrawal is necessary, upon demonstration by or on behalf of the Participant, because of a substantial financial hardship of the Participant as a result of accident, illness or disability. The Committee, in its sole discretion, shall determine the amount of such a distribution that is needed to meet the need created by the hardship. Any such distribution shall be charged first to Subaccount I of the Participant's -185- Account and then, to the extent Subaccount I is insufficient, to Subaccount II. 5.4 Beneficiary: As used in the Plan, the term "Beneficiary" means: (a) The last person designated as Beneficiary by the Participant in a written notice on a form prescribed by and filed with the Company; (b) If there is no designated Beneficiary or if the person so designated shall not survive the Participant, such Participant's spouse; or (c) If no such designated Beneficiary and no such spouse is living upon the death of a Participant, or if all such persons die prior to the full distribution of the Participant's Account, then the legal representative of the last survivor of the Participant and such persons, or, if the Company shall not receive notice of the appointment of any such legal representative within one year after such death, the heirs-at-law of such survivor (in the proportions in which they would inherit his intestate personal property) shall be the Beneficiaries to whom the then remaining balance of the Participant's Account shall be distributed. Any Beneficiary designation may be changed from time to time by like notice similarly delivered. No notice given under this Section shall be effective unless and until the Company actually receives such notice and enters it in its records. 5.5 Delay In And Approval Of Distribution: Notwithstanding anything to the contrary herein, the distribution of all or any portion of a Participant's Account will be delayed for a period not to exceed seven months or may be subject to prior approval by the Committee or the Board to the extent that the Committee determines that such delay or approval is necessary -186- or desirable to ensure that any transaction under the Plan will qualify for an exemption from the liability provisions imposed on the Participant under Section 16(b) of the Act or any rules and regulations issued thereunder. In the event of any such delay, the undistributed portion of the Participant's Account shall continue to be subject to adjustment as provided in Section 4.2 until distribution is made. 5.6 Certain Terminations On or After a Change in Control: If a Participant terminates his or her Service on or after the date on which a Change in Control occurs but prior to the third anniversary of the date on which the Change in Control occurs, the amount credited to the Participant's Account as of the date of his or her termination of Service (such amount to be determined as if the date on which the Participant terminates Service were an Accounting Date) increased by the amount of any Compensation deferred under the Plan by the Participant not previously credited to his or her Account shall be paid in cash in a lump sum to the Participant (or, in the event of the Participant's death, to his or her Beneficiary) within 15 days after the Participant's termination of Service. 5.7 Change in Control: For purposes of the Plan, a "Change in Control" shall have occurred if at any time on or after December 1, 1996, any of the following events shall occur: (a) The Company or KU is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then-outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- -187- outstanding securities entitled to vote generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less than 60% of the combined voting power of the then-outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company, immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Act, disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Act) of securities representing 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) a -188- Subsidiary or (iii) any Company-sponsored, KU-sponsored or Subsidiary-sponsored employee stock ownership plan or any other employee benefit plan of the Company, KU or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise. ARTICLE VI Financing of Benefits The Plan shall be a nonqualified and unfunded plan. Benefit payments under the Plan shall represent an unsecured general obligation of the Company and shall be paid by the Company from its general assets. No special fund or trust shall be created or held for the financing of benefits under the Plan. ARTICLE VII Facility of Payment Whenever a person entitled to receive any payment under the Plan is a person under legal disability or a person not adjudicated incompetent but who, by reason of illness or mental or physical disability, is in the opinion of the Committee unable properly to manage his or her affairs, then such payments shall be paid in such of the following ways as the Committee deems best: (a) to such person directly; (b) to the legally appointed guardian or conservator of such person; (c) to some relative or friend of such person for his or her benefit; (d) for the benefit of such person in such manner as the Committee considers -189- advisable. Any payment made in accordance with the provisions of this Article shall be a complete discharge of any liability for the making of such payment under the Plan, and the distributee's receipt shall be a sufficient discharge to the Company. ARTICLE VIII Administration The Plan shall be administered by the Compensation Committee of the Board. The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, to construe and interpret the Plan, decide all questions of eligibility and determine the amount and time of payment of benefits hereunder. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided under the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. No Participant who is a member of such Committee may vote on any question relating specifically to himself or herself. ARTICLE IX Miscellaneous 9.1 Other Agreements. The Plan shall not affect in any way the rights or obligations of a Director under any deferred compensation or other agreement between the Director and the Company or KU, including, but not limited to, the KU Energy Corporation Director Retirement Retainer Program or the Kentucky Utilities Company Director Retirement Retainer Program. -190- 9.2 Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by sale, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Director. 9.3 Interests Not Transferable. No person shall have any right to commute, encumber, pledge or dispose of any right to receive payments hereunder, nor shall such payments be subject to seizure, attachment or garnishment for the payments of any debts, judgments, alimony or separate maintenance obligations or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise, all payments and rights hereunder being expressly declared to be nonassignable and nontransferable. 9.4 Amendment and Termination. The Plan may be amended from time to time or terminated by the Board at any time, but no amendment or termination may adversely affect the rights of any person without his or her prior written consent. -191- 9.5 Applicable Law. This Plan shall be construed in accordance with and governed by the laws of the Commonwealth of Kentucky. 9.6 Notices. For all purposes of this Plan, all communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive office and to a Participant at his or her principal residence, or to such other address as any party may have furnished to the other in writing and in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9.7 Severability: Each section, subsection and lesser section of this Plan constitutes a separate and distinct undertaking, covenant and/or provision hereof. Whenever possible, each provision of this Plan shall be interpreted in such manner as to be effective and valid under applicable law. In the event that any provision of this Plan shall finally be determined to be unlawful, such provision shall be deemed severed from this Plan, but every other provision of this Plan shall remain in full force and effect, and in substitution for any such provision held unlawful, there shall be substituted a provision of similar import reflecting the original intention of the parties hereto to the extent permissible under law. -192- 9.8 Withholding of Taxes: The Company may withhold from any amounts payable under this Plan all federal, state, city and other taxes as shall be legally required. 9.9 Adjustments: In the event of any stock dividend or split, recapitalization, reclassification, increase or decrease in the number of outstanding shares, merger, consolidation or exchanges in shares or other similar changes in the Company's Common Stock, appropriate adjustments shall be made in the Company Common Stock referenced in the Plan, including in the calculations under Section 4.3(b), to reflect any such change. -193- IN WITNESS WHEREOF, KU Energy Corporation has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, as of the 28th day of January, 1997. KU ENERGY CORPORATION By/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [Corporate Seal] ATTEST: /s/George S. Brooks II Secretary -194- EX-10.27 15 EXHIBIT 10.27 EXHIBIT 10.27 KU ENERGY CORPORATION LONG TERM INCENTIVE PLAN -195- KU ENERGY CORPORATION LONG TERM INCENTIVE PLAN 1. Purposes; Definitions . . . . . . . . . . . . . . . . . 1 2. Administration. . . . . . . . . . . . . . . . . . . . . 4 2.1 Compensation Committee . . . . . . . . . . . . . . 4 2.2 Duties and Powers of Committee . . . . . . . . . . 4 2.3 Majority Rule . . . . . . . . . . . . . . . . . . 5 2.4 Compensation; Professional Assistance; Good Faith Actions . . . . . . . . . . . . . . . . . . . . . 5 3. Shares Subject to the Plan . . . . . . . . . . . . . . . 6 3.1 Shares Subject to the Plan . . . . . . . . . . . . 6 3.2 Limitations . . . . . . . . . . . . . . . . . . . 6 3.3 Changes in Company's Shares . . . . . . . . . . . 7 4. Eligibility . . . . . . . . . . . . . . . . . . . . . . 8 5. Stock Options . . . . . . . . . . . . . . . . . . . . . 8 5.1 Grant . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Terms . . . . . . . . . . . . . . . . . . . . . . 9 (a) Price . . . . . . . . . . . . . . . . . . . . 9 (b) Term . . . . . . . . . . . . . . . . . . . . . 9 (c) Vesting . . . . . . . . . . . . . . . . . . . 9 5.3 Method of Exercise . . . . . . . . . . . . . . . . 10 5.4 Reload Options . . . . . . . . . . . . . . . . . . 11 6. Stock Appreciation Rights . . . . . . . . . . . . . . . 11 6.1 Grant . . . . . . . . . . . . . . . . . . . . . . 11 6.2 Terms . . . . . . . . . . . . . . . . . . . . . . 12 (a) Price/Amount Paid on Exercise . . . . . . . . 12 (b) Term . . . . . . . . . . . . . . . . . . . . . 13 (c) Vesting . . . . . . . . . . . . . . . . . . . 13 6.3 Method of Exercise . . . . . . . . . . . . . . . . 13 6.4 Effects of Exercise . . . . . . . . . . . . . . . 14 7. Restricted Shares . . . . . . . . . . . . . . . . . . . 14 7.1 Grants . . . . . . . . . . . . . . . . . . . . . . 14 7.2 Terms . . . . . . . . . . . . . . . . . . . . . . 15 (a) Price . . . . . . . . . . . . . . . . . . . . 15 (b) Restrictions and Conditions . . . . . . . . . 15 8. Performance Awards . . . . . . . . . . . . . . . . . . . 17 9. Performance Criteria . . . . . . . . . . . . . . . . . . 17 10. Change in Control . . . . . . . . . . . . . . . . . . . 20 10.1 Definition . . . . . . . . . . . . . . . . . . . . 20 10.2 Share Based Awards . . . . . . . . . . . . . . . . 24 10.3 Performance Awards . . . . . . . . . . . . . . . . 24 -196- 11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . 24 11.1 Effective Date . . . . . . . . . . . . . . . . . . 25 11.2 Amendment, Suspension or Termination of the Plan . 25 11.3 Amendment of Award . . . . . . . . . . . . . . . . 26 11.4 Transferability . . . . . . . . . . . . . . . . . 26 11.5 No Rights as Shareholder . . . . . . . . . . . . . 27 11.6 Effect of Plan Upon Other Compensation and Incentive Plans . . . . . . . . . . . . . . . . . 27 11.7 Regulations and Other Approvals; Governing Law . . 27 11.8 Governing Law . . . . . . . . . . . . . . . . . . 29 11.9 Withholding of Taxes . . . . . . . . . . . . . . . 29 11.10 No Right to Continued Employment . . . . . . . . . 30 11.11 Titles; Construction . . . . . . . . . . . . . . . 30 11.12 Successors . . . . . . . . . . . . . . . . . . . . 30 -197- KU ENERGY CORPORATION LONG TERM INCENTIVE PLAN 1. Purposes; Definitions. The purposes of the Plan are to further the growth, development and financial success of the Company by providing incentives to those officers and other key employees who have the capacity for contributing in substantial measure toward the growth and profitability of the Company and to assist the Company in attracting and retaining employees with the ability to make such contributions. To accomplish such purposes, the Plan provides that the Company may grant Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Shares and Performance Awards. Whenever the following terms are used in the Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. "Board" shall mean the Board of Directors of the Company. "Change in Control" shall have the meaning set forth in Section 10.1. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board, appointed as provided in Section 2.1 "Company" shall mean KU Energy Corporation, a Kentucky corporation, and any successor corporation. -198- "Effective Date" shall have the meaning set forth in Section 11.1. "Employee" shall mean any employee (including any officer whether or not a director) of the Company, or of any corporation or other business entity which is then a Subsidiary. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" of a Share as of a given date shall mean (a) the closing sale price per Share as reported in this listing of the New York Stock Exchange-Composite Transactions on such date, or if there are no sales on such date, on the next preceding trading day during which a sale occurred, or (b) if clause (a) does not apply, the fair market value of the Share as determined by the Committee from time to time in good faith. "Incentive Stock Option" shall mean an Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. "Nonqualified Stock Option" shall mean an Option that is not an Incentive Stock Option. "Option" shall mean an option to purchase Shares (including Restricted Shares, if the Committee so determines) granted pursuant to Section 5.1. "Option Agreement" shall mean the written agreement pursuant to which an Option is awarded. "Optionee" shall mean an Employee to whom an Option has been granted pursuant to the Plan. "Participant" shall mean an Employee to whom an award is granted pursuant to the Plan. -199- "Performance Award" shall mean an award granted pursuant to Section 8. "Performance Criteria" shall have the meaning set forth in Section 9. "Plan" shall mean this KU Energy Corporation Long Term Incentive Plan set forth in this instrument, as it may, from time to time, be amended. "Restricted Shares" shall mean Shares which are awarded to a Participant that are subject to the restrictions described in Section 7. "Rule 16b-3" shall mean Rule 16b-3 adopted by the Securities and Exchange Commission under the Exchange Act. "Securities Act" shall mean the Securities Act of 1933, as amended. "Share" shall mean a share of the Company's Common Stock. "Stock Appreciation Right" shall mean a right granted pursuant to Section 6.1. "Subsidiary" shall mean any corporation or other business entity in an unbroken chain beginning with the Company, if each such corporation or other entity (other than the last in the unbroken chain), or if each group of commonly controlled corporations or other entities, then owns fifty percent (50%) or more of the total combined voting power in one of the other corporations or other entities in such chain. -200- 2. Administration. 2.1 Compensation Committee The Plan shall be administered by the Committee, which shall consist of two or more individuals appointed by the Board and holding office at the pleasure of the Board. All Committee members shall be members of the Board, and must be "non-employee directors," as such term is described in Rule 16b-3, if and as such Rule is in effect, and "outside directors" within the meaning of Section 162(m) of the Code. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. 2.2 Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its terms and provisions. The Committee shall have the full and exclusive power to construe and interpret the Plan, to correct any defect, supply any omission, make any factual determination or reconcile any inconsistency in such manner and to such extent as the Committee in its sole and absolute discretion may determine, and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to construe, interpret, amend or revoke any such rules. All actions taken and all constructions, interpretations and determinations made by the Committee shall be binding upon all affected persons. In addition to the authority otherwise prescribed in the Plan, the Committee shall have the authority in its sole discretion to -201- prescribe such limitations, restrictions, and conditions upon, provisions for vesting and acceleration of, provisions prescribing the nature and amount of legal consideration to be received upon the grant or exercise of, any award made under the Plan and all other terms and conditions of any such award as the Committee deems appropriate, provided that none of the foregoing conflicts with any of the express terms or limitations of the Plan and that the foregoing are set forth in the instrument granting any such award or in the rules referred to elsewhere in this Section 2.2. 2.3 Majority Rule The Committee shall act by a majority of its members in office. The Committee may act either by vote at a telephonic or other meeting or by a memorandum or other written instrument signed by a majority of the Committee. 2.4 Compensation; Professional Assistance; Good Faith Actions Members of the Committee shall receive such compensation for their services as members as may be determined by the Board. All expenses and liabilities incurred by members of the Committee in connection with the administration of the Plan shall be borne by the Company. The Committee may employ attorneys, consultants, accountants, appraisers, or other persons. The Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the -202- awards hereunder, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. 3. Shares Subject to the Plan. 3.1 Shares Subject to the Plan Subject to adjustment pursuant to Section 3.3, the number of Shares that may be the subject of or related to awards under this Plan is 1,000,000. Such shares may be treasury shares, shares of original issue, shares purchased in the open market or a combination of the foregoing. In the event that (a) any Participant delivers Shares (i) to pay the exercise price of an Option or any other award granted hereunder, or (ii) in satisfaction of any tax withholding requirement, or (b) any other payment made or benefit realized under the Plan is satisfied by the transfer or relinquishment of Shares, the number of Shares available for awards under the Plan shall be increased by the number of Shares so surrendered, paid or relinquished. 3.2 Limitations Subject to adjustment pursuant to Section 3.3: (i) The maximum number of Shares that may be the subject of Options and Stock Appreciation Rights under the Plan to any Participant shall not, in the aggregate, exceed 20,000 per year; (ii) The maximum number of Restricted Shares subject to Performance Criteria under Section 9.2 that are granted under the Plan to any Participant shall not exceed 20,000 Shares per year; -203- (iii) No Participant shall be granted Performance Awards under the Plan (a) in the case of Performance Awards designated as performance shares, in the aggregate, in excess of 20,000 performance shares per year, and (b) in the case of Performance Awards designated as performance units, in the aggregate, in excess of $750,000 per year; and (iv) The aggregate number of Shares actually issued or transferred by the Company upon the exercise of Incentive Stock Options shall not exceed the total number of Shares specified in Section 3.1. 3.3 Changes in Company's Shares In the event of any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Shares at a price substantially below fair market value, or other similar corporate event that affects the Shares or other awards granted or made available for issuance under the Plan such that an adjustment is required in order to preserve the benefits or potential benefits intended to be made available under this Plan, then the Committee shall in such manner as the Committee may deem equitable, adjust any or all of (a) the number and kind of shares which thereafter may be awarded or optioned and sold or made the subject of other awards granted under the Plan in the aggregate or to any Participant, (b) the number and kind of shares subject to outstanding Options and other awards, and (c) the grant, exercise or conversion price with respect to any of the foregoing and/or, if deemed appropriate, make provision for a cash payment to a -204- Participant or a person who has an outstanding Option or other award; provided, however, that the number of Shares subject to any Option or other award shall always be a whole number. 4. Eligibility. Any Employee who is an officer or who is designated by the Committee as a key Employee shall be eligible to receive awards under this Plan. In general, an Employee may be designated as a key Employee if such Employee is responsible for or contributes to the management, growth, and/or profitability of the business of the Company and/or a Subsidiary. 5. Stock Options. 5.1 Grant Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine the eligible Employees to whom Options shall be granted, the number of Shares to be covered by each Option, the exercise price therefor and the terms and conditions applicable to the exercise of the Option. The Committee shall have the authority to grant Incentive Stock Options, Nonqualified Stock Options, or both. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with Section 422 of the Code and any rules or regulations promulgated thereunder. 5.2 Terms Options shall be granted only pursuant to a written Option Agreement, which shall be executed by the Optionee and an authorized officer of the Company and which shall contain such -205- terms and conditions as the Committee shall determine, consistent with the Plan, including the following: (a) Price. The exercise price for the Shares subject to an Option, or the manner in which such exercise price is to be determined, shall be determined by the Committee, provided that, the exercise price per Share shall not be less than 100% of the Fair Market Value of a Share as of the date the Option is granted. (b) Term. Options shall be for such term as the Committee shall determine, provided that no Option shall be exercisable after the expiration of ten years from the date it is granted. (c) Vesting. Options shall be exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the Option Agreement. To the extent not exercised, installments shall accumulate and may be exercised, in whole or in part, at any time after becoming exercisable, but not later than the date the Option expires. The Committee may accelerate the exercisability of any Option or portion thereof at any time. Notwithstanding the foregoing, the Committee may, in its sole discretion, provide in the Option Agreement that all or a part of the Shares received by an Optionee upon the exercise of a Nonqualified Stock Option shall be Restricted Shares subject to any or all of the restrictions or conditions prescribed pursuant to Section 7.2(b). 5.3 Method of Exercise The exercise of an Option shall be made only by a written notice delivered in person or by first class mail to the -206- Secretary of the Company at the Company's principal executive office, specifying the number of Shares to be purchased and accompanied by full payment therefor and otherwise in accordance with the Option Agreement pursuant to which the Option was granted. The purchase price for any Shares purchased pursuant to the exercise of an Option shall be paid in full upon such exercise in cash, by check or, at the discretion of the Committee and upon such terms and conditions as the Committee shall approve, by transferring Shares to the Company that have been owned by the Optionee for at least six months prior to such transfer, by having Shares withheld or exercising pursuant to a "cashless exercise" procedure, or any combination thereof. Any Shares transferred to the Company as payment of the purchase price under an Option shall be valued at their Fair Market Value on the date of exercise of such Option. If requested by the Committee, the Optionee shall deliver the Option Agreement evidencing the Option to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such Option Agreement to the Optionee. Not less than one hundred (100) Shares may be purchased at any time upon the exercise of an Option unless the number of Shares so purchased constitutes the total number of Shares then purchasable under the Option or the Committee determines otherwise, in its sole discretion. 5.4 Reload Options The Committee may provide for the grant to any Optionee of additional Options ("Reload Options") upon the exercise of Options, including Reload Options, through the delivery of Shares; provided, however, that (i) Reload Options may be granted -207- only with respect to the same number of Shares as were surrendered to exercise the Options, (ii) the exercise price per Share of the Reload Options shall be not less than 100% of the Fair Market Value of a Share as of the date the Reload Options are granted, and (iii) the Reload Options shall not be exercisable after the expiration of the term of the Options, the exercise of which resulted in the grant of the Reload Options. 6. Stock Appreciation Rights. 6.1 Grant Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine the eligible Employees to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered, and the terms and conditions applicable to the exercise of such rights. Stock Appreciation Rights may be granted in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. In the case of a Nonqualified Stock Option, a tandem Stock Appreciation Right may be granted either at or after the time of the grant of such Option. In the case of an Incentive Stock Option, a tandem Stock Appreciation Right may be granted only at the time of the grant of such Option, may be exercised only if and when the Fair Market Value of the Shares subject to the Incentive Stock Option exceeds the exercise price of such Option, and shall contain such other terms and conditions required to comply with Section 422 of the Code and any rules or regulations promulgated thereunder. -208- 6.2 Terms Stock Appreciation Rights shall be granted only pursuant to a written agreement, which shall be executed by the Participant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan, including the following: (a) Price/Amount Paid on Exercise. The strike price for a Stock Appreciation Right shall be determined by the Committee, in its sole discretion, provided that the strike price per Share shall not be less than one hundred percent (100%) of the Fair Market Value of a Share as of the date the Stock Appreciation Right is granted. Upon the exercise of a Stock Appreciation Right, a Participant shall be entitled to receive an amount in cash and/or Shares equal in value to the excess of the Fair Market Value of one Share on the date of exercise over the strike price per Share for such Stock Appreciation Right, multiplied by the number of Shares in respect of which the Stock Appreciation Right shall have been exercised. The Committee shall determine whether the Stock Appreciation Right shall be settled in cash, Shares or a combination of cash and Shares. (b) Term. Stock Appreciation Rights shall be for such term as the Committee shall determine, and as shall be set forth in each award agreement. (c) Vesting. Stock Appreciation Rights shall be exercisable in such installments (which need not be equal) and at such times as may be designated by the Committee and set forth in the award agreement, provided that no Stock Appreciation Right shall be exercisable after the expiration of ten years from the date it is granted. -209- 6.3 Method of Exercise The exercise of a Stock Appreciation Right shall be made only by a written notice delivered in person or by first class mail to the Secretary of the Company at the Company's principal executive office, specifying the number of Shares with respect to which the Stock Appreciation Right is being exercised and otherwise in accordance with the award agreement pursuant to which the Stock Appreciation Right was granted. A Stock Appreciation Right may not be exercised with respect to less than one hundred (100) Shares, unless the number of Shares with respect to which it is exercised constitutes the total number of Shares then subject to such right or the Committee determines otherwise, in its sole discretion. 6.4 Effects of Exercise Upon the exercise of a Stock Appreciation Right that was granted in tandem with an Option, such Option (a) shall be surrendered and deemed to have been exercised for the purpose of the limitations set forth in Section 3.1 on the number of Shares to be issued under the Plan in the aggregate and to any Participant to the extent of the number of Shares with respect to which the Stock Appreciation Right has been exercised, and (b) shall no longer be exercisable with respect to the number of Shares for which the tandem Stock Appreciation Right has been exercised. If requested by the Committee, the Participant shall deliver the award agreement evidencing the Stock Appreciation Right to the Secretary of the Company who shall endorse thereon a notation of such exercise and return such agreement to the Participant. -210- 7. Restricted Shares. 7.1 Grants Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine the eligible Employees to whom, and the time or times at which, grants of Restricted Shares will be made, the number of Restricted Shares to be awarded, the price (if any) to be paid by the recipient of Restricted Shares, the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. Awards of Restricted Shares may be granted either alone or in addition to other awards granted under the Plan. The Committee may condition the grant or vesting of Restricted Shares upon the attainment of Performance Criteria or such other factors as the Committee may determine, in its sole discretion. The provisions of Restricted Share awards need not be the same with respect to each recipient. 7.2 Terms Restricted Shares awards shall be granted only pursuant to a written agreement, which shall be executed by the Participant and a duly authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan, including the following: (a) Price. The purchase price of Restricted Shares shall be determined by the Committee, in its sole discretion, and may be zero. -211- (b) Restrictions and Conditions. (i) The award may be subject to such restrictions as may be imposed by the Committee in its sole discretion, including, without limitation, Performance Criteria, as a condition for the grant or vesting of the Restricted Shares; provided, however, that the period within which Performance Criteria must be achieved shall not exceed ten years after the date of grant of the Restricted Shares. The Committee may provide for the lapse of restrictions imposed on an award in installments. (ii) Except as provided in clause (i), the Participant shall have, with respect to the Restricted Shares, all of the rights of a shareholder of the Company, including the right to vote the Shares and to receive any cash dividends. (iii) The Committee may, in its sole discretion, retain in the applicable award agreement the authority to waive in whole or in part any or all restrictions with respect to a Participant's Restricted Shares, based on such factors as the Committee may deem appropriate. (iv) The Committee may, in its sole discretion, provide that Restricted Shares be held in escrow or trust pending delivery to the Participant upon the satisfaction of any applicable restrictions or delivery to the Company upon forfeiture. (v) The restrictions imposed on an award of Restricted Shares that is subject to Performance Criteria under Section 9.2 may not lapse until the Committee -212- certifies in writing that the Performance Criteria and any other material terms have been satisfied. 8. Performance Awards. Subject to the provisions of the Plan, the Committee shall have the sole and complete authority to determine eligible Employees to whom Performance Awards shall be granted. Performance Awards may be with respect to or unrelated to Shares subject to Options or Stock Appreciation Rights granted under the Plan. Performance Awards may be designated as performance shares or performance units (which shall be valued at $1.00 per unit) and shall consist of a predetermined amount, payable in cash or in Shares, on such terms and subject to such conditions, including Performance Criteria, as may be determined in writing by the Committee in its discretion. Performance Awards may be payable with respect to a specific period, and may be vested in whole or in part on the date of the award thereof, as determined from time to time by the Committee in its discretion. If the Performance Awards are to be paid in the form of Restricted Shares, the recipient must execute a written agreement as described in Section 7.2 as a condition of the issuance of such shares in his or her name. Performance Awards that are subject to Performance Criteria under Section 9.2 may not be paid until the Committee certifies in writing that the Performance Criteria and any other material terms have been satisfied. 9. Performance Criteria. 9.1 Options, Stock Appreciation Rights, Restricted Shares and Performance Awards, when so determined by the Committee, may be subject to such financial or non-financial performance or other criteria ("Performance Criteria") as may be adopted from time to time by the Committee in its discretion. -213- Performance Criteria shall not include the attaining of a certain length of service with the Company. Performance Criteria may be expressed either on an absolute basis or relative to other companies or indices selected by the Committee. 9.2 The Performance Criteria applicable to any Participant who is, or who is determined by the Committee to be likely to become, a "covered employee" within the meaning of Section 162(m) of the Code (a "Covered Employee"), shall be limited to growth, improvement in or attainment by the Company or its Subsidiaries or one or more business or functional units thereof of certain levels of: (i) return on capital, equity, or operating costs; (ii) economic value added; (iii) margins; (iv) total shareholder return or market value; (v) operating profit or net income; (vi) cash flow, earnings before interest and taxes, earnings before interest, taxes and depreciation, or earnings before interest, taxes, depreciation and amortization; (vii) sales or product volumes; (viii) costs, expenses or inventory; (ix) earnings per share; (x) cost per kilowatt hour; (xi) safety; -214- (xii) environmental standards; (xiii) customer favorability/loyalty; (xiv) service reliability; (xv) productivity; (xvi) market share; or (xvii) completion of specified tasks or goals. This Section 9.2 is intended to comply with the exception from Section 162(m) of the Code for qualified performance-based compensation, and shall be construed, applied and administered accordingly. 9.3 If the Committee determines that a change in the business, operations, corporate structure or capital structure of the Company, or the manner in which it conducts its business, or other events or circumstances render the Performance Criteria to be unsuitable, the Committee may modify such Performance Criteria or the related minimum acceptable level of achievement, in whole or in part, as the Committee deems appropriate and equitable; provided, however, that no such modification shall be made in the case of any award to a Participant who is, or is determined by the Committee to be likely to become, a Covered Employee if the effect would be to cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. In addition, at the time the award subject to Performance Criteria is made and performance goals established, the Committee is authorized to determine the manner in which the Performance Criteria will be calculated or measured to take into account certain factors over which Participants have no or limited control including market related changes in inventory value, -215- changes in industry margins, changes to rates or accounting procedures ordered by regulatory bodies, changes in accounting principles, and extraordinary charges to income; provided, however, that no such calculation or measurement shall be made in the case of any Participant who is, or is determined by the Committee to be likely to become, a Covered Employee in such a manner that would cause the award to fail to qualify for the performance-based compensation exception to Section 162(m) of the Code. 10. Change in Control. 10.1 Definition. Except to the extent a different definition is provided by the Committee in the grant of an award under the Plan, a change in control ("Change in Control") for purposes of the Plan shall have occurred if at any time on or after the Effective Date any of the following events shall occur: (a) The Company or KU (as defined below) is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation or reorganization less than 60% of the combined voting power of the then- outstanding securities of such corporation or person immediately after such transaction is held in the aggregate by the holders of the then- outstanding securities entitled to vote -216- generally in the election of directors (the "Voting Stock") of the Company immediately prior to such transaction; (b) The Company or KU sells or otherwise transfers all or substantially all of its assets to any other corporation or other legal entity, and as a result of such sale or transfer less 60% of the combined voting power of the then- outstanding securities of such other corporation or entity immediately after such sale or transfer is held in the aggregate by the holders of Voting Stock of the Company immediately prior to such sale or transfer; (c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein), each as promulgated pursuant to the Exchange Act disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing -217- 10% or more of the combined voting power of the Voting Stock of the Company or the Voting Stock of KU; or (d) If at any time during any period of two consecutive years, individuals who at the beginning of any such period constitute the directors of the Company or KU cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by such company's stockholders, of each director of such company first elected during such period was approved by a vote of at least two-thirds of the directors of such company then still in office who were directors of such company at the beginning of any such period. Notwithstanding the foregoing provisions of paragraph (c) above, unless otherwise determined in a specific case by majority vote of the Board of Directors of the Company and KU, a "Change in Control" shall not be deemed to have occurred for purposes of the Plan solely because (i) the Company, (ii) a Subsidiary, or (iii) any Company- sponsored, KU-sponsored or Subsidiary- -218- sponsored employee stock ownership plan or any other employee benefit plan of the Company, KU or Subsidiary, either files or becomes obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report or item therein) under the Exchange Act, disclosing beneficial ownership by it of shares of Voting Stock of the Company or KU, whether in excess of 10% or otherwise. For purposes of this Section 10.1, "KU" shall mean Kentucky Utilities Company. 10.2 Share Based Awards. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Share based awards granted under this Plan shall immediately vest or become exercisable, as the case may be, 100% in each Participant, including Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, and Restricted Stock. 10.3 Performance Awards. Notwithstanding any other provisions of the Plan, unless otherwise provided by the Committee in the grant of a Performance Award, in the event of a Change in Control, (i) all performance units granted under this Plan shall be immediately paid out in cash and (ii) all performance shares granted under this Plan shall be paid out immediately in Shares. The amount of -219- the payout in Shares or cash, as the case may be, shall be determined on the assumption that the target for the applicable performance period has been met and shall be the amount equal to a fraction of the Participant's performance shares or performance units, as the case may be, for the applicable performance period, the numerator of which fraction is the whole and partial months in the performance period which have passed as of the date of the Change in Control and the denominator of which is the number of months in the performance period. -220- 11. Miscellaneous. 11.1 Effective Date The Plan shall become effective as of January 28, 1997, the date of Board approval (the "Effective Date"), and shall continue in effect until the tenth anniversary of such date, subject to approval of the Plan by the affirmative vote of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting of shareholders duly held in accordance with the laws of the Commonwealth of Kentucky within twelve months of adoption of the Plan by the Board. Notwithstanding anything herein or in any award agreement to the contrary, all awards awarded under the Plan shall be void unless this Plan is so approved by the Company's shareholders. 11.2 Amendment, Suspension or Termination of the Plan The Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board; provided, however, that, except as provided in Section 3.3, no amendment shall be effective unless approved by the affirmative vote of the holders of a majority of securities of the Company present, or represented, and entitled to vote at a meeting of shareholders of the Company duly held in accordance with the laws of the Commonwealth of Kentucky within twelve (12) months of the date of adoption of such amendment, where such amendment will: (a) increase the total number of Shares reserved for the purposes of the Plan; or (b) make such other change as may require shareholder approval (i) under the rules of any exchange on which Shares are traded, or (ii) in order for awards granted under the -221- Plan to qualify for an exception from Section 162(m) of the Code. Neither the amendment, suspension nor termination of the Plan shall, without the written consent of the Participant, alter or impair any rights or obligations under any award theretofore granted. No awards may be granted during any period of suspension nor after termination of the Plan, and in no event may any awards be granted under the Plan after ten years from the Effective Date. 11.3 Amendment of Award The Committee may amend, modify or terminate any outstanding award with the Participant's written consent at any time prior to payment or exercise in any manner not inconsistent with the terms of the Plan, including without limitation, (a) to change the date or dates as of which an Option or Stock Appreciation Right becomes exercisable or Restricted Shares or Performance Awards become vested, or (b) to cancel and reissue an award under such different terms and conditions as it determines appropriate. 11.4 Transferability Except as otherwise determined by the Committee, no award shall be assignable or transferable except by will or the laws of descent and distribution, and no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant. 11.5 No Rights as Shareholder Subject to the provisions of the applicable award, no Participant shall be deemed for any purpose to be or to have the -222- rights and privileges of the owner of any Shares subject to any Option or otherwise to be distributed under the Plan until such Participant shall have become the holder thereof. Notwithstanding the foregoing, in connection with each grant of Restricted Shares, the applicable award agreement shall specify if and to what extent the Participant shall not be entitled to the rights of a shareholder in respect of such Restricted Shares. 11.6 Effect of Plan Upon Other Compensation and Incentive Plans The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in the Plan shall be construed to limit the right of the Company or any Subsidiary to establish any other forms of incentives or compensation for Employees of the Company or any Subsidiary. 11.7 Regulations and Other Approvals; Governing Law (a) The obligation of the Company to sell or deliver Shares with respect to Options or any other award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee. (b) The Committee may make such changes in Incentive Stock Options awarded under the Plan as may be necessary or appropriate to comply with the rules and regulations of any government authority or to obtain the tax benefits under the -223- applicable provisions of the Code and regulations promulgated thereunder for Employees granted Incentive Stock Options. (c) Each Option and any other award payable in Shares is subject to the requirement that, if at any time the Committee determines, in its sole discretion, that the listing, registration or qualification of Shares issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Option or the issuance of Shares, no Options shall be granted or payment made or Shares issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions as acceptable to the Committee. (d) In the event that the disposition of Shares acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act, and is not otherwise exempt from such registration, such Shares shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require any individual receiving Shares pursuant to the Plan, as a condition precedent to receipt of such Shares, to represent to the Company in writing that the Shares acquired by such individual are acquired for investment only and not with a view to distribution. The certificate for any Shares acquired pursuant to the Plan shall include any legend that the Committee deems appropriate to reflect any restrictions on transfer. -224- 11.8 Governing Law The Plan and the rights of all persons claiming hereunder shall be construed and determined in accordance with the laws of the Commonwealth of Kentucky without giving effect to the choice of law principles thereof. 11.9 Withholding of Taxes No later than the date which any award granted under the Plan to a Participant becomes subject to any withholding tax, the Participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, the federal, state, local or other taxes of any kind required by the law of any applicable jurisdiction or the Company to be withheld. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant. In its discretion, the Committee may permit Participants to satisfy withholding obligations by delivering previously owned Shares or by electing to have Shares withheld. 11.10 No Right to Continued Employment Nothing in the Plan or in any award agreement shall confer upon any Employee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the right of the Company and its Subsidiaries, which are hereby expressly reserved, to remove, terminate or discharge any Employee at any time for any reason whatsoever, with or without cause. -225- 11.11 Titles; Construction Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, when the context so indicates. Any reference to a section (other than to a section of the Plan) shall also include a successor to such section. 11.12 Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and agree to perform this Plan in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Plan shall be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed to "Company" for the purposes of this Plan), and the heirs, executors and administrators of each Participant. IN WITNESS THEREOF, the Company has caused this Plan to be executed by its duly authorized officers as of the 28th day of January, 1997. -226- KU ENERGY CORPORATION By:/s/Michael R. Whitley Chairman of the Board, President and Chief Executive Officer Attest:/s/George S. Brooks II Secretary (SEAL) -227- EX-12 16 EHIBIT 12 EXHIBIT 12 KENTUCKY UTILITIES COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1996 1995 1994 1993 1992 (in thousands except ratios) Earnings Net Income $ 86,163 $ 76,842 $ 77,512 $ 81,286 $ 76,298 Adjustments Fixed charges 39,688 40,116 34,558 32,899 40,965 Income taxes Current Federal 35,656 23,597 37,058 35,893 30,838 Current State 7,387 5,134 8,812 9,484 7,951 Deferred Federal--Net 5,510 12,165 (1,114) 2,837 2,269 Deferred State--Net 2,899 3,845 13 71 561 Deferred investment tax credit--Net - (71) (86) (107) (130) Income taxes included in Other Income and Deductions Current Fed and State 4,426 1,044 1,881 (2,616) (224) Deferred Fed and State (4,659) (508) (458) 2,817 1,144 Amortization of investment credit (4,013) (4,024) (4,024) (4,024) (4,019) Undistributed income of Electric Energy, Inc 24 99 (39) (38) (53) Total Earnings $ 173,081 $ 158,239 $ 154,113 $ 158,502 $ 155,600 Fixed Charges Int on long-term debt $ 37,584 $ 36,095 $ 32,147 $ 31,650 $ 39,571 Other interest charges 2,104 4,021 2,411 1,249 1,394 Total Fixed Charges $ 39,688 $ 40,116 $ 34,558 $ 32,899 $ 40,965 Ratio of Earnings to Fixed Charges 4.36 3.94 4.46 4.82 3.80 ____________ Note--Rentals are not material and have not been included in fixed charges.
-228- EX-13 17 EXHIBIT 13 EXHIBIT 13 Management's Discussion and Analysis of Financial Condition and Results of Operation COMPANY DESCRIPTION KU Energy Corporation (KU Energy or the Company) is an investor-owned utility holding company with two wholly owned subsidiaries. Kentucky Utilities Company (KU or the Utility), the principal subsidiary of KU Energy, is an electric utility, and KU Capital Corporation (KU Capital) is a nonutility subsidiary. Material changes in the consolidated financial condition and results of operations of the Company are primarily attributable to the operations of KU. RESULTS OF OPERATIONS 1996 Compared to 1995 Earnings & Dividends KU Energy's earnings in 1996 were $2.17 per share, up 8% from $2.01 per share in 1995. The increase in 1996 earnings was largely due to kilowatt-hour (kWh) sales growth which was attributable to increased sales to neighboring utilities, continued economic growth in KU's service area and the impact of KU's successful marketing efforts. Common stock dividends were increased 2.4% to $1.72 per share in 1996. In January 1997, KU Energy's Board increased the common dividend again to an indicated annual rate of $1.76 per share. This marked the 16th consecutive year in which dividends have increased. 1996 kWh Sales by Classification Year Ended December 31, 1996 Residential 28% Commercial 18% Industrial 22% Mine Power 5% Public Authorities 7% Sales for Resale 20% Total 100% -229- Sales & Revenues 1996 1995 kWh Revenue kWh Revenue Change Variance Change Variance (%) (000's) (%) (000's) Residential 3 $ 3,469 7 $19,186 Commercial - (1,138) 4 9,571 Industrial 7 6,790 6 10,023 Mine Power (4) (2,062) (5) (422) Public Authorities 4 1,862 6 4,292 Total Retail Sales 3 8,921 5 42,650 Sales for Resale 27 13,268 (23) (13,725) Miscellaneous Revenues and Other - 3,097 - 1,462 Total Before Refund 7 25,286 (1) 30,387 Provisions for Refund - Litigation Settlement - - - 19,385 Total 7 $25,286 (1) $49,772 Sales totaled 18.6 billion kWh in 1996, a 7% increase from 1995. Sales for resale, which include wholesale and opportunity sales, rose 27% in 1996. Industrial sales increased 7% while residential sales increased 3%. These increases are the result of the Company's successful marketing efforts. In addition, the increase in industrial sales reflects continued economic growth in KU's service area. Operating revenues for 1996 were $711.7 million, up $25.3 million (4%) from 1995. The increase in 1996 revenues was largely due to the growth in kWh sales described above. Operating Expenses Fuel expense for 1996 was $198.2 million, an $8.4 million (4%) increase from 1995. This increase was due to increased generation for kWh sales, partially offset by a 3% decrease in the cost per million British thermal units (MBTU) of coal consumed. Purchased power expense decreased $7.1 million (10%) in 1996. The decline was due to a reduction in kWh purchases and to a reduction in demand costs ($4.0 million) under a contract with a neighboring utility. Depreciation expense increased $5.3 million (7%) in 1996. This increase was due to increased plant in service including a combustion turbine peaking unit placed into service in May 1996. Federal and state income taxes increased $6.8 million (16%) in 1996. The increase was primarily due to the increase in pretax income. Other Income and Deductions Other income and deductions of $8.3 million in 1996 were down 29% from 1995. Other income and deductions for 1996 include a $5.5 million pretax write-off associated with nonutility investments. (For additional information refer to Management's Discussion and Analysis - Nonutility Activities.) -230- 1995 Compared To 1994 Earnings & Dividends KU Energy s earnings in 1995 were $2.01 per share and compare to earnings of $2.01 for 1994 (which included a one-time recovery of about $.05 per share associated with the resolution of a coal contract dispute). Refer to Note 1 of the Notes to Consolidated Financial Statements, Operating Revenues and Fuel Costs. In 1995, common stock dividends were increased to $1.68 per share from $1.64 in 1994. Sales & Revenues KWh sales in 1995 were 1% below sales in 1994. The decrease was largely due to a 23% decline in sales for resale which reflected a return to more normal levels from the unusually high levels of those sales in 1994. Sales to residential customers increased by 7% in 1995 as a result of favorable weather in the second half of 1995, continued growth in the number of residential customers and the impact of KU's marketing efforts. Industrial sales rose 6% as a result of continued economic growth in KU's service area. About 29% of the increase in industrial sales for 1995 was due to greater sales to Toyota Motor Manufacturing (TMM), KU's largest customer. A plant expansion at TMM completed in March 1994 was operational the entire year of 1995. Operating revenues for 1995 were $686.4 million, up $30.4 million (5%) from 1994, excluding the impact of the refunds to customers associated with the above mentioned resolution of a coal contract dispute. Operating revenues in 1994 were reduced by about $19.4 million, and fuel expense was reduced by about $23.1 million as a result of the refunds. The increase in 1995 revenues was largely due to the growth in retail sales described above and to amounts recovered under an environmental surcharge (about $17.9 million in 1995 compared to $3.5 million in 1994). Refer to Note 9 of the Notes to Consolidated Financial Statements, Environmental Cost Recovery. Operating Expenses Fuel expense for 1995 was $189.8 million, a $3.9 million (2%) decrease from 1994, excluding the effect of the 1994 refunds to customers. This decrease was due to a 1% decline in coal consumption and a 1% decrease in the cost per MBTU of coal consumed. Purchased power expense increased $8.1 million (13%) in 1995 due to increased demand charges ($2.5 million) and energy costs ($5.6 million). The increase in energy costs reflected a 6% increase in kWh purchases as well as higher prices. The increase in kWh purchases was primarily attributable to the significant demand for electricity in the third quarter of 1995 due to unusually warm weather. Other operating expenses increased $9.5 million (8%) in 1995 due to increased generating plant operations expenses (primarily attributable to costs associated with environmental compliance) and administrative and general expenses. -231- Maintenance expense decreased $3.5 million (5%) in 1995. Maintenance expense for 1994 included additional costs for damage from two severe ice storms in the first quarter of 1994. Depreciation expense for 1995 increased $9.8 million (15%). This increase was related to the Ghent Unit 1 scrubber, which was placed into service late in 1994, and two combustion turbine peaking units placed into service late in 1994 and early in 1995. Interest and Other Charges Interest and other charges rose $5.8 million (16%) in 1995 which reflected the issuance of $54 million of long-term debt in the fourth quarter of 1994, $50 million of long-term debt in the second quarter of 1995 and an increase in the average amount of short-term debt outstanding during the first half of 1995. LIQUIDITY & CAPITAL RESOURCES The Company s financial position remained strong in 1996. At the end of the year, common stock equity represented 52.4% of total capitalization while long-term debt was 44.4%, and preferred stock was 3.2%. This capital structure supports the Company's goal of maintaining double A credit ratings. Current ratings on KU's senior debt securities are as follows: Duff & Phelps AA Moody's Aa2 Standard & Poor's AA- As of December 31, 1996 1995 1994 1993 1992 Capitalization (in millions) $1,232 $1,215 $1,152 $1,085 $1,067 Long-Term Debt 44.4% 44.9% 43.0% 40.8% 41.6% Preferred Stock 3.2% 3.3% 3.5% 3.7% 3.7% Common Stock Equity 52.4% 51.8% 53.5% 55.5% 54.7% Cash from operations accounted for 99% of cash requirements in 1996 as compared to 78% in 1995 and 54% in 1994. For these purposes, cash requirements exclude optional debt refinancings and redemptions and optional preferred stock redemptions. At the end of 1996, KU's short-term borrowings were $54 million compared to $56 million at December 31, 1995. The Company has used short-term borrowings to temporarily finance ongoing construction expenditures and general corporate requirements. Taking advantage of lower interest rates, KU issued $36 million of Series S First Mortgage Bonds at a rate of 5.99% in January 1996 and used the proceeds to redeem $35.5 million of Series K First Mortgage Bonds which carried a rate of 7 3/8%. In June 1995, KU issued $50 million of Series R First Mortgage Bonds which will mature in 2025 and bear interest at 7.55%. The proceeds were used primarily to pay short-term indebtedness incurred to finance ongoing construction expenditures and general corporate requirements. In 1994, $54 million of Variable Rate Collateralized Solid Waste Disposal -232- Facility Revenue Bonds were issued on behalf of KU. Proceeds from the sale of this tax exempt issue were used to fund a portion of the costs of certain environmental compliance facilities at the Utility's Ghent Generating Station. The Company's financial strength is enhanced by its competitive cost of capital. Shown below are the Company's embedded costs of long-term debt and preferred stock at year-end: Embedded Cost 1996 1995 1994 Long-Term Debt 6.98% 7.15% 7.06% Preferred Stock 5.64% 5.64% 5.64% Capital Requirements Construction Expenditures - 1996 Actual, 1997-2001 Estimated Actual Estimated (In millions of dollars) 1996 1997 1998 1999 2000 2001 Construction Expenditures $107 $ 90 $ 98 $114 $114 $115 During 1996, construction expenditures were $106.5 million. Construction expenditures are expected to be approximately $89.7 million in 1997. For the five-year period 1997-2001, construction expenditures are projected to be $531.2 million. This compares to $687.5 million spent in the five-year period ending in 1996. Included in the five-year projection for 1997-2001 is $95.4 million for additional peaking units. In addition to construction expenditures, projected capital requirements for 1997-2001 include $61.5 million for scheduled debt retirements. Capital requirements for the five-year period 1997-2001 are expected to be met primarily through internal sources of funds. External financing to fund scheduled debt retirements will be required. KU forecasts annual growth in sales and peak demand of 2.6% and 3.0%, respectively, over the next 5 years. The Utility plans to provide for the future power needs of its customers primarily through purchased power and the addition of combustion turbine peaking units. There are no plans for additional baseload capacity before 2010. NONUTILITY ACTIVITIES KU Energy continues to pursue a core energy strategy for its nonutility business activities. Under this strategy, targeted opportunities are energy-related activities that build on the Company's knowledge and expertise and have the appropriate risk/reward profile. KU Capital, KU Energy's nonutility subsidiary, has an investment of $25 million in equity interests in eight combustion turbine generating units (all of which are leased to investment grade utility companies). KU Capital has limited partnership interests in the identification, development and ownership of certain independent power projects in North America through agreements with Tenaska Inc. (a developer of gas-fired cogeneration and independent power generation projects) and its affiliates. -233- Under the agreements with Tenaska, KU Capital, through its wholly owned subsidiaries, has invested $5.0 million in limited partnership interests in two operating cogeneration projects. KU Capital has committed $4.8 million to an additional independent power project which began operation in January 1997, and expects to fund this commitment in the first quarter of 1997. KU Capital also has a limited partnership interest in a 248-megawatt gas- fired generation plant in Frederickson, Washington, under the sponsorship of Tenaska. Construction of this independent power project was suspended in 1995 after the Bonneville Power Administration (BPA) notified Tenaska of its intent to cancel a power purchase agreement which BPA had entered into for electricity which would be produced by the Frederickson project. Tenaska has a $650 million claim for damages against BPA in the United States Court of Federal Claims (Court of Claims). The arbitration ordered by the Court of Claims began in February 1997. Although it is not possible at this time to determine the outcome of such arbitration, the Company believes the possibility of any material adverse impact on the results of operations or the financial position of the Company as a result of these matters is remote. KU Capital also has been funding a portion of the costs associated with identifying and pursuing potential independent power projects in North America. During 1996, KU Capital determined that none of the costs funded during 1994-1996 (approximately $5.5 million) would lead to successful projects; therefore, this amount was written-off. KU Capital's remaining funding commitment over the next several years totals $4.5 million. UTILITY ISSUES Competition The electric utility industry has been rapidly moving to a less regulated and more competitive environment since the passage of the National Energy Policy Act of 1992 (NEPA). NEPA gave the Federal Energy Regulatory Commission (FERC) the authority to order electric utilities to provide wholesale transmission access to independent power producers and other utilities. It also reduced restrictions on the ownership and operation of independent power producers. Pursuant to NEPA, in 1995 the FERC issued a Notice of Proposed Rulemaking (NOPR) to promote competition and deregulation in the wholesale electric market by requiring electric utilities to offer nondiscriminatory open access to their transmission systems. In April 1996, the FERC issued two final rules and a new NOPR. FERC Order No. 888 (Order 888) addresses both open access transmission service and stranded cost issues. FERC Order No. 889 (Order 889) requires utilities to establish an electronic Open Access Same-Time Information System (OASIS) to share information about available transmission capacity and also requires the establishment by each utility of standards of conduct for its transmission system operation. The 1996 NOPR proposes to establish a new system for utilities to use in reserving capacity on their own and other s transmission lines. In July 1996, KU filed an open access transmission tariff (TS) with the FERC designed to comply with provisions of Order 888. This tariff has -234- been accepted by the FERC, superseding the TS which had been in effect since December 1994. The provisions of the new TS are similar to the terms and conditions of service contained in KU s previously existing tariff. Although Order 888 does address stranded cost issues, KU is expected to have very little, if any, stranded costs. In conjunction with other utility members of the East Central Area Reliability Coordination Agreement, KU has developed an OASIS and finalized its standards of conduct pursuant to Order 889. KU met the FERC's deadline (January 1997) for implementation of these requirements. KU is also in the process of evaluating the FERC s 1996 NOPR. This NOPR would replace certain aspects of KU s transmission tariff now in effect with a capacity reservation tariff by the end of 1997. The FERC has received comments from interested parties regarding the potential tariff change and is currently evaluating those comments. KU cannot predict when a final rule will be issued. KU is one of 24 utilities in a ten-state region attempting to form the Midwest Independent System Operator (ISO). The primary objectives of the ISO are to advance wholesale competition by ensuring nondiscriminatory open transmission access to all customers and to enhance transmission reliability. Proposals to bring competition to the retail level of the electric utility industry are being considered in several states and at the federal level. These proposals reflect many divergent opinions concerning the complex issues surrounding retail competition. Some states are conducting pilot projects to allow retail customers to choose their electric supplier. Kentucky and Virginia have not initiated projects of this nature. The Company advocates competition in the electric utility industry and believes customer choice should be extended to the retail level. With low-cost generation and rates that are among the lowest in the nation, the Company is well-positioned for the challenges and opportunities of a competitive marketplace. -235- Environmental Matters Clean Air Act KU met Phase I requirements of the Clean Air Act Amendments of 1990 (which were effective January 1, 1995) primarily through the addition of a flue gas desulfurization system (scrubber) on Unit 1 of the Utility's Ghent Generating Station. The scrubber began commercial operation in December 1994. The Company's current strategy for Phase II requirements (which will be effective January 1, 2000) is to use accumulated emission allowances to delay additional capital expenditures. The Company's future compliance plans are contingent upon many factors, including developments in the emission allowance market and the fuel market as well as regulatory and legislative actions and advances in clean air technology. The Company will continue to review and revise its compliance plans accordingly to ensure that its environmental obligations are met in the most efficient and cost-effective manner. Environmental Cost Recovery In August 1994, KU implemented an environmental cost recovery mechanism (surcharge) in Kentucky. Authorized by a 1992 state statute and approved by the Kentucky Public Service Commission (PSC), the surcharge is designed to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act Amendments, through a surcharge on customers bills. The constitutionality of the surcharge was challenged in a Kentucky state court action brought against KU and the PSC by the Attorney General of Kentucky and representatives of consumer groups. In July 1995, the state court upheld the constitutionality of the surcharge statute but vacated that part of the PSC's order which the state court described as allowing KU to recover certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993. All parties (including KU) have appealed to the Kentucky Court of Appeals. KU believes the constitutionality of the surcharge statute will be upheld, but it cannot predict the outcome of that part of the state court judgment disallowing recovery of certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993. If the state court judgment is ultimately upheld as entered, KU estimates that the amount it would be required to refund (which is based solely on costs associated with certain environmental expenditures characterized by the state court as having been incurred before January 1, 1993) for surcharge collections through December 31, 1996, from the implementation of the surcharge would be approximately $11 million, and from February 1, 1995 would be approximately $9 million. At this time, KU has not recorded any reserve for refund. Refer to Note 9 of the Notes to Consolidated Financial Statements, Environmental Cost Recovery. -236- INFLATION KU's rates are designed to recover operating and historical plant investment costs. Financial statements, which are prepared in accordance with generally accepted accounting principles, report operating results in terms of historic costs and do not evaluate the impact of inflation. Inflation affects the Utility's construction costs, operating expenses and interest charges. Inflation can also impact KU's financial performance if rate relief is not granted on a timely basis for increased operating costs. FORWARD LOOKING STATEMENTS This report includes forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made herein which are not based on historical facts are forward looking and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Such forward looking statements include those under Management's Discussion and Analysis relating to (i) amounts of future construction expenditures, sources of funds to meet capital requirements and financing requirements, (ii) forecasts of annual growth in sales and peak demand and anticipated sources of additional power supply to meet customer demand, (iii) the anticipated level of stranded costs resulting from competitive conditions and deregulation, (iv) the anticipated strategy to comply with the Clean Air Act Amendments of 1990, (v) the anticipated results of proceedings related to the environmental surcharge and (vi) the anticipated results of the arbitration relating to the Frederickson project. Such statements are based on management's belief, judgment and analysis as well as assumptions made by and information available to management at the date hereof. In addition to any assumptions and cautionary factors referred to specifically in this report in connection with such forward looking statements, factors that could cause actual results to differ materially from those contemplated by the forward looking statements include (i) the speed and nature of increased competition and deregulation in the electric and gas utility industry, (ii) economic or weather conditions affecting future sales and margins, (iii) changing energy prices, (iv) legislative and regulatory changes including revised environmental requirements, (v) availability and cost of capital, (vi) unanticipated or adverse decisions in regulatory proceedings or litigation and (vii) other matters detailed from time to time in the Company's or KU's reports filed with the Securities and Exchange Commission. -237- Consolidated Statements of Income and Retained Earnings KU Energy Corporation & Subsidiaries
Year Ended December 31, 1996 1995 1994 (in thousands of dollars, except for per share amounts) Operating Revenues $ 711,686 $ 686,400 $ 636,628 Operating Expenses: Fuel, principally coal, used in generation 198,198 189,845 170,654 Electric power purchased 62,490 69,579 61,442 Other operating expenses 125,351 124,044 114,551 Maintenance 64,170 62,599 66,141 Depreciation 80,612 75,268 65,441 Federal and state income taxes 50,247 43,426 43,904 Other taxes 15,049 15,038 14,789 Total Operating Expenses 596,117 579,799 536,922 Net Operating Income 115,569 106,601 99,706 Other Income and Deductions: Interest and dividend income 2,800 4,115 5,914 Other income and deductions - net 5,469 7,610 6,709 Total Other Income and Deductions 8,269 11,725 12,623 Income Before Interest and Other Charges 123,838 118,326 112,329 Interest and Other Charges: Interest on long-term debt 37,584 36,095 32,147 Preferred stock dividend requirements of Subsidiary 2,256 2,256 2,384 Other interest charges 2,049 3,922 1,922 Total Interest and Other Charges 41,889 42,273 36,453 Net Income $ 81,949 $ 76,053 $ 75,876 Earnings per Average Common Share, based on average shares outstanding of 37,817,878 $ 2.17 $ 2.01 $ 2.01 Retained Earnings Beginning of Year $ 321,066 $ 308,547 $ 294,949 Add Net Income 81,949 76,053 75,876 403,015 384,600 370,825 Deduct: Dividends on common stock, $1.72, $1.68 and $1.64 per share during 1996, 1995 and 1994, respectively 65,047 63,534 62,021 Preferred stock redemption expense - - 257 65,047 63,534 62,278 Retained Earnings End of Year $ 337,968 $ 321,066 $ 308,547 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
-238- Consolidated Statements of Cash Flows KU Energy Corporation & Subsidiaries Year Ended December 31, (in thousands of dollars) 1996 1995 1994
Cash Flows from Operating Activities: Net income $ 81,949 $ 76,053 $ 75,876 Items not requiring (providing) cash currently: Depreciation 80,612 75,268 65,441 Deferred income taxes 5,891 16,919 (612) Investment tax credit deferred (4,013) (4,095) (4,110) Changes in current assets and liabilities: Change in accounts receivable (969) (7,945) (190) Change in accounts payable (9,682) (10,774) 4,815 Change in liability to ratepayers (6,599) (310) (29,958) Change in escrow funds 6,599 312 30,841 Change in other current assets and liabilities 5,778 (433) (7,954) Other - net 10,181 1,868 5,250 Net Cash Provided by Operating Activities 169,747 146,863 139,399 Cash Flows from Investing Activities: Construction expenditures - utility (106,503) (124,515)(193,344) Proceeds from sale of long-term investments - - 15,440 Investment in leveraged leases - - (6,609) Investment in independent power projects (1,310) (3,204) (6,742) Other 2,038 1,288 927 Net Cash Used by Investing Activities (105,775) (126,431)(190,328) Cash Flows from Financing Activities: Short-term borrowings - net (1,400) (20,700) 76,300 Issuance of long-term debt 35,666 49,288 53,305 Funds deposited with trustee - net 3,779 15,100 95 Retirement of long-term debt, including premiums (36,192) (21) (21) Retirement of preferred stock, including premiums - - (20,302) Payment of common stock dividends (65,047) (63,534) (62,021) Net Cash Provided (Used) by Financing Activities (63,194) (19,867) 47,356 Net Increase (Decrease) in Cash and Cash Equivalents 778 565 (3,573) Cash and Cash Equivalents Beginning of Year 29,492 28,927 32,500 Cash and Cash Equivalents End of Year $ 30,270 $ 29,492 $ 28,927 Supplemental Disclosures Cash paid for: Interest $ 36,729 $ 37,961 $ 31,864 Income Taxes $ 45,775 $ 31,507 $ 44,343 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
-239- Consolidated Balance Sheets KU Energy Corporation & Subsidiaries
As of December 31, (in thousands of dollars) 1996 1995 Assets Utility Plant: Plant in service, at cost $2,482,812 $2,394,018 Less: Accumulated depreciation 1,067,911 997,366 1,414,901 1,396,652 Construction work in progress 63,435 61,410 Total Utility Plant 1,478,336 1,458,062 Current Assets: Cash and cash equivalents 30,270 29,492 Escrow funds - coal contract litigation - 6,599 Construction funds held by trustee - 3,743 Accounts receivable, net of allowance for doubtful accounts 50,498 49,529 Accrued utility revenues 24,239 27,900 Fuel, principally coal, at average cost 30,895 29,438 Plant materials and operating supplies, at average cost 21,656 23,064 Other 7,486 8,121 Total Current Assets 165,044 177,886 Other Assets: Investment in leveraged leases 24,650 21,509 Unamortized loss on reacquired debt 10,838 11,304 Other 48,080 46,213 Total Other Assets 83,568 79,026 Total Assets $1,726,948 $1,714,974 Capitalization and Liabilities Capitalization: (See Consolidated Statements of Capitalization) Common stock equity $ 645,513 $ 628,611 Preferred stock 40,000 40,000 Long-term debt 546,373 545,980 Total Capitalization 1,231,886 1,214,591 Current Liabilities: Long-term debt due within one year 21 21 Short-term borrowings 54,200 55,600 Accounts payable 28,253 37,935 Accrued interest 8,048 7,556 Accrued taxes 4,005 4,960 Customer deposits 8,746 6,876 Accrued payroll and vacations 9,921 8,759 Liability to ratepayers - coal contract litigation - 6,599 Other 5,954 6,992 Total Current Liabilities 119,148 135,298 Other Liabilities: Accumulated deferred income taxes 242,674 233,707 Accumulated deferred investment tax credits 30,167 34,180 Regulatory tax liability 54,388 57,726 Other 48,685 39,472 Total Other Liabilities 375,914 365,085 Total Capitalization and Liabilities $1,726,948 $1,714,974 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
-240- Consolidated Statements of Capitalization KU Energy Corporation & Subsidiaries
As of December 31, (in thousands of dollars) 1996 1995 Common Stock Equity: Common stock, without par value, authorized 160,000,000 shares, outstanding 37,817,878 shares $ 308,140 $ 308,140 Capital stock expense and other (595) (595) Retained earnings 337,968 321,066 Total Common Stock Equity 645,513 628,611 Preferred Stock: Kentucky Utilities cumulative, without par value, $100 stated value 4 3/4%, outstanding 200,000 shares 20,000 20,000 6.53%, outstanding 200,000 shares 20,000 20,000 Total Preferred Stock 40,000 40,000 Long-Term Debt: First Mortgage Bonds: 5.95% Series Q, due June 15, 2000 61,500 61,500 7 3/8% Series K, due December 1, 2002 - 35,500 6.32% Series Q, due June 15, 2003 62,000 62,000 5.99% Series S, due January 15, 2006 36,000 - 7.92% Series P, due May 15, 2007 53,000 53,000 7.55% Series R, due June 1, 2025 50,000 50,000 8.55% Series P, due May 15, 2027 33,000 33,000 295,500 295,000 First Mortgage Bonds, Pollution Control Series: 7 3/8% Pollution Control Series 7, due May 1, 2010 4,000 4,000 7.45% Pollution Control Series 8, due September 15, 2016 96,000 96,000 6 1/4% Pollution Control Series 1B, due February 1, 2018 20,930 20,930 6 1/4% Pollution Control Series 2B, due February 1, 2018 2,400 2,400 6 1/4% Pollution Control Series 3B, due February 1, 2018 7,200 7,200 6 1/4% Pollution Control Series 4B, due February 1, 2018 7,400 7,400 7.60% Pollution Control Series 7, due May 1, 2020 8,900 8,900 5 3/4% Pollution Control Series 9, due December 1, 2023 50,000 50,000 Variable Rate Pollution Control Series 10, due November 1, 2024 54,000 50,800 Variable Rate County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds, due November 1, 2024 - 3,200 250,830 250,830 Total First Mortgage Bonds 546,330 545,830 Unamortized premium - 86 8% secured note, due January 5, 1999 (net of current maturity) 43 64 Total Long-Term Debt 546,373 545,980 Total Capitalization $1,231,886 $1,214,591 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
-241- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries 1. Summary of Significant Accounting Policies General The consolidated financial statements include the accounts of KU Energy Corporation (KU Energy or the Company), a holding company, and its wholly owned subsidiaries, Kentucky Utilities Company (KU) and KU Capital Corporation (KU Capital). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. All significant intercompany balances and transactions have been eliminated from the consolidated financial statements. Certain amounts from prior periods have been reclassified to conform with the current year presentation. KU is a public utility engaged in producing, transmitting and selling electric energy. KU provides electric service to about 432,900 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky and to about 28,800 customers in 5 counties in southwestern Virginia. KU Capital continues to pursue a core energy strategy for its nonutility business activities. Under this strategy, targeted opportunities are energy-related activities that build on the Company's knowledge and expertise and have the appropriate risk/reward profile. Regulation The Company is exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935. KU is subject to regulation by the Kentucky Public Service Commission (PSC), the Virginia State Corporation Commission (SCC) and the Federal Energy Regulatory Commission (FERC). With respect to accounting matters, KU maintains its accounts in accordance with the Uniform System of Accounts as defined by these agencies. KU's accounting policies conform to generally accepted accounting principles applicable to rate regulated enterprises and reflect the effects of the ratemaking process. Other than the unamortized loss on reacquired debt, KU's regulatory assets are immaterial. Utility Plant Utility plant is stated at the original cost of construction. The cost of repairs of property units and replacements of minor items is charged to maintenance expense as incurred. Property unit replacements are capitalized and the depreciation reserve is charged with the cost, less net salvage, of units retired. -242- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries Depreciation Provision for depreciation of utility plant is based on straight-line composite rates applied to the cost of depreciable property. The rates approximated 3.5% in 1996 and 1995 and 3.4% in 1994. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. The Company utilizes a cash management mechanism that funds certain bank accounts for checks as they are presented to those banks. The Company classified checks written but not presented to those banks, which amounted to $6.1 million and $10.5 million at December 31, 1996 and 1995, respectively, in accounts payable. Financial Instruments The Company's temporary cash investments are classified as held-to- maturity and are reported under the caption "Cash and cash equivalents" on the Consolidated Balance Sheet. Stock-Based Compensation The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," in 1996 by continuing to account for stock compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." If the Company had recognized compensation expense for awards under its stock- based compensation plan according to the new standard, net income and earnings per share for the year-ended 1996, 1995 and 1994 would not have been materially different from amounts recorded. Unamortized Loss on Reacquired Debt KU defers costs (primarily call premiums) arising from the reacquisition or retirement of long-term debt. Costs related to refinanced debt are amortized over the lives of the new debt issues. Costs related to retired debt not refinanced are amortized over the period to the scheduled maturity of the retired debt. Operating Revenues and Fuel Costs Revenues are recorded based on services rendered to customers. KU accrues an estimate of revenues for electric service furnished from the meter reading dates to the end of each accounting period. Cost of fuel used in electric generation is charged to expense as the fuel is consumed. Fuel adjustment clauses adjust operating revenues for changes in the level of fuel costs charged to expense. An environmental surcharge for Kentucky retail customers, implemented in August 1994, permits the utility to recover certain ongoing operating and capital costs of compliance with federal, state or local environmental -243- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. See Note 9 of the Notes to Consolidated Financial Statements, "Environmental Cost Recovery," for an update of environmental surcharge legal proceedings. Pursuant to regulatory orders, KU had been refunding fuel cost savings related to the resolution of a coal contract dispute. Refunds were made to Virginia retail customers during the period August 1993 through June 1994. Refunds were made to wholesale customers under the jurisdiction of the FERC in lump sum payments in September 1993. Refunds to Kentucky retail customers commenced in July 1994. Pursuant to legislation adopted in 1996, KU paid the remaining balance of unclaimed Kentucky retail customer refunds to the Kentucky Workers' Compensation Funding Commission to pay certain workers compensation benefits. By virtue of the legislation, KU's payment of the unclaimed refunds to the State released KU from any future liability to customers relating to such refunds. The legislation also preserved the rights of ratepayers entitled to claim a refund who have not yet done so and authorized the Funding Commission to honor future refund claims using any funds available. Operating revenues and fuel expense for 1994 were reduced by $19.4 million and $23.1 million, respectively, resulting from the above- mentioned refunds. The refunds had no impact on operating revenues or fuel expense for 1995 or 1996. The difference between the reduction in operating revenues and the reduction in fuel expense is attributable to incurred litigation costs, fuel cost savings related to opportunity sales and costs incurred to administer the refund plan. These amounts were retained by KU pursuant to regulatory orders. Income Taxes The Company establishes deferred tax assets and liabilities, as appropriate, for all temporary differences, and adjusts deferred tax balances to reflect changes in tax rates expected to be in effect during the periods the temporary differences reverse. Investment tax credits resulted from provisions of the tax law which permitted a reduction of the Company's tax liability based on certain construction expenditures. Such credits have been deferred in the accounts and are being amortized as reductions in income tax expense over the life of the related property. Because of rate regulation, changes in tax rates are deferred and amortized as the temporary differences reverse. -244- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries 2. Income Taxes The accumulated deferred income taxes as set forth in the Consolidated Balance Sheets arise from the following temporary differences:
As of December 31, (in thousands of dollars) 1996 1995 Deferred Tax Assets: Unamortized investment tax credit and other property related differences $ 29,294 $ 31,667 Other 21,627 16,728 Less: Amounts included in current assets 4,723 4,985 46,198 43,410 Deferred Tax Liabilities: Accelerated depreciation and other property related differences 278,044 268,203 Other 10,828 8,914 288,872 277,117 Net accumulated deferred income tax liability $ 242,674 $ 233,707
The components of income tax expense are as follows:
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Income taxes charged to Operating Income: Current - federal $ 34,255 $ 22,011 $ 36,332 - state 6,585 4,734 8,623 40,840 26,745 44,955 Deferred - federal 5,949 12,809 (997) - state 3,458 3,943 32 9,407 16,752 (965) Deferred investment tax credit - (71) (86) 50,247 43,426 43,904 Income taxes charged to Other Income and Deductions: Current - federal 2,716 1,868 1,507 - state 900 384 266 3,616 2,252 1,773 Deferred - federal (3,138) 176 325 - state (378) (9) 28 (3,516) 167 353 Amortization of deferred investment tax credit (4,013) (4,024) (4,024) (3,913) (1,605) (1,898) Total income tax expense $ 46,334 $ 41,821 $ 42,006
-245- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries The Company's effective income tax rate, determined by dividing income taxes by the sum of such taxes and net income, was 36.1% in 1996, 35.5% in 1995 and 35.6% in 1994. The difference between the effective rate and the statutory federal income tax rate is attributable to the following factors: Year Ended December 31, (in thousands of dollars) 1996 1995 1994
Federal income tax computed at 35% $ 44,899 $ 41,256 $ 41,259 Add (Deduct): State income taxes, net of federal income tax benefit 6,867 5,884 5,817 Amortization of deferred investment tax credit (4,013) (4,095) (4,110) Other, net (1,419) (1,224) (960) Total income tax expense $ 46,334 $ 41,821 $ 42,006
3. Retirement Benefits Pensions The Company has a noncontributory defined benefit pension plan covering substantially all of its employees. Benefits under this plan are based on years of service, final average base pay and age at retirement. The Company's funding policy is to make such contributions as are necessary to finance the benefits provided under the plan. The Company's contributions meet the funding standards set forth in the Employee Retirement Income Security Act of 1974. The plan assets consist primarily of common stocks, corporate bonds and U.S. Government Securities. The Company also has a Supplemental Security Plan for certain management personnel. Retirement benefits under this plan are based on years of service, earnings and age at retirement. The plan has no advance funding. Benefit payments are made to retired employees or their beneficiaries from the general assets of the Company. The reconciliation of the funded status of the retirement plans and the pension liability recorded by the Company is as follows:
As of December 31, (in thousands of dollars) 1996 1995 Fair value of plan assets $ 191,778 $ 179,203 Projected benefit obligation (194,874) (183,795) Plan assets less than projected benefit obligation (3,096) (4,592) Unrecognized net (gain)/loss from past experience different than that assumed (12,448) (5,907) Unrecognized prior service cost 3,990 4,344 Unrecognized net asset (1,500) (1,649) Regulatory effect recorded 201 (1,634) Pension liability $ (12,853) $ (9,438) Accumulated benefit obligation (including vested benefits of $147,103 and $139,250, respectively) $ 149,814 $ 141,531
-246- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries Components of Net Pension Cost:
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Service cost (benefits earned during the period) $ 6,399 $ 6,060 $ 6,017 Interest cost on projected benefit obligation 13,856 13,560 12,366 Actual return on plan assets (20,798) (27,064) (3,723) Net amortization and deferral 6,568 14,608 (8,765) Regulatory effect recorded (1,835) (1,595) (1,916) Net pension cost $ 4,190 $ 5,569 $ 3,979 Assumptions Used in Determining Actuarial Valuations: 1996 1995 1994 Weighted average discount rate used to determine the projected benefit obligation 7.75% 7.75% 8.25% (1) Rate of increase for compensation levels 4.75% 4.75% 5.50% Weighted average expected long-term rate of return on assets 8.25% 8.25% 8.25% (1) 4.75%, 4.75%, and 6.00%, respectively, used for the Supplemental Security Plan valuation.
Other Postretirement Benefits The Company provides certain health care and life insurance benefits to eligible retired employees and their dependents. The Company accrues, during the years that the employee renders service, the expected cost of providing these benefits for retired employees, their beneficiaries and covered dependents. The postretirement health care plan is contributory for employees who retired after December 31, 1992, with retiree contributions indexed annually based upon the experience of retiree medical expenses for the preceding year. Pre-1993 retirees are not required to contribute to the plan. The Company's employees become eligible for retiree medical benefits after 15 years of service and attainment of age 55. The life insurance plan is noncontributory and is based on compensation levels prior to retirement. In 1993, the Company began funding, in addition to current requirements for benefit payments, the maximum tax-favored amount allowed through certain tax deductible funding vehicles. The Company anticipates making similar funding decisions in future years, but will consider and make such funding decisions on the basis of tax, regulatory and other relevant conditions in effect at such times. The plan assets consist primarily of equity investments. -247- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries The reconciliation of the funded status of the plans and the postretirement benefit liability recorded by the Company is as follows:
As of December 31, (in thousands of dollars) 1996 1995 Accumulated postretirement benefit obligation: Retirees $ (29,313) $ (28,575) Fully eligible active plan participants (8,678) (8,250) Other active plan participants (28,528) (26,831) (66,519) (63,656) Plan assets at fair value 13,322 10,427 Accumulated postretirement benefit obligation in excess of plan assets (53,197) (53,229) Unrecognized net (gain)/loss from past experience different from that assumed (20,029) (18,773) Unrecognized transition obligation 53,460 56,801 Accrued postretirement benefit liability $ (19,766) $ (15,201)
Components of the net periodic postretirement benefit cost are as follows:
Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Service cost (benefits attributed to service during the period) $ 1,859 $ 1,918 $ 2,105 Interest cost on accumulated postretirement benefit obligation 4,751 4,926 4,926 Actual return on plan assets (1,633) (1,722) (80) Net amortization and deferral 103 792 (118) Amortization of transition obligation 3,341 3,341 3,341 Regulatory effect recorded - - 689 Net periodic postretirement benefit cost $ 8,421 $ 9,255 $ 10,863
Assumptions Used in Determining Actuarial Valuations: 1996 1995 1994 Weighted average discount rate used to determine the projected benefit obligation 7.75% 7.75% 8.25% Rate of increase for compensation levels 4.75% 4.75% 5.50% Weighted average expected long-term rate of return on assets 8.00% 8.00% 8.25%
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health care benefits is assumed for 1997. The health care cost trend rate is assumed to decrease gradually to 4.75% through 2003 and remain at that level thereafter over the projected -248- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries payout period of the benefits. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $10.4 million (16%) and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the year by $1.2 million (19%). 4. Commitments and Contingencies The effects of certain commitments made by the Company are estimated below:
(in thousands of dollars) 1997 1998 1999 2000 2001 1997-2001 Estimated Construction Expenditures $ 89,700 $ 98,300 $ 114,300 $ 113,700 $ 115,200 $ 531,200 Estimated Contract Obligations: Fuel 142,200 86,500 48,300 6,600 - 283,600 Purchased power 31,600 30,400 29,000 28,000 30,600 149,600 Operating leases 2,800 2,800 2,700 2,700 2,700 13,700 Independent Power Project Commitments 5,700 1,000 1,000 900 700 9,300 First Mortgage Bond Maturities: Series Q $ - $ - $ - $ 61,500 $ - $ 61,500
Construction Program KU frequently reviews its construction program and may revise its projections of related expenditures based on revisions to its estimated load growth and projections of its future load. See Management's Discussion and Analysis - Construction Requirements for a discussion of future construction expenditures including those relating to construction of peaking units. Coal Supply Obligations under KU's coal purchase contracts are stated at prices effective January 1, 1997, and are subject to changes as defined by the terms of the contracts. Purchased Power KU has purchase power arrangements with Owensboro Municipal Utilities (OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU agreement, which expires on January 1, 2020, KU purchases, on an economic basis, all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to KU during 1997-2001, which is expected to be approximately 8% of KU's total kWh requirements, is dependent upon a number of factors including the units' availability, maintenance schedules, fuel costs and OMU requirements. Payments are -249- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries based on the total costs of the station allocated per terms of the OMU agreement, which generally follows delivered kWh. Included in the total costs is KU's proportionate share of debt service requirements on $192.9 million of OMU bonds outstanding at December 31, 1996. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 48% in 1996. KU has a 20% equity ownership in EEI, which is accounted for on the equity method of accounting. KU's entitlement is 20% of the available capacity of a 1,000-MW station. Payments are based on the total costs of the station allocated per terms of an agreement among the owners, which generally follows delivered kWh. KU has several other contracts for purchased power during 1997-2001 of various MW capacities and for varying periods with a maximum entitlement at any time of 282 MW. Independent Power Projects During 1994, the Company entered into agreements with Tenaska, Inc. (a developer of gas-fired cogeneration and independent power generation projects), and its affiliates to purchase limited partnership interests in the identification, development and ownership of certain independent power projects in North America. Under the agreements, the Company (through its wholly owned subsidiaries) is a limited partner in three operating cogeneration projects, one of which became operational in January 1997 and will be funded by the Company ($4.8 million) in the first quarter of 1997 (see Credit Arrangements below). The Company also has agreed to participate in funding the costs associated with identifying and pursuing potential independent power projects in North America. The remaining funding commitment over the next several years totals $4.5 million. Credit Arrangements KU has aggregate bank lines of credit of $60 million, all of which remained unused at December 31, 1996. All of these credit lines expire in December 1999. In support of these lines of credit, KU compensates the banks by paying a commitment fee. KU Capital has a standby letter of credit in the amount of $4.8 million to support its future commitment to an independent power project. This letter of credit is effective for one year. In support of this letter of credit, KU Capital compensates the bank by paying a commitment fee. 5. Common Stock KU Energy is subject to restrictions applicable to all corporations under Kentucky law on the use of retained earnings for cash dividends on common stock. KU is subject to the same restrictions as well as those contained in Virginia law, its Mortgage Indenture and Articles of Incorporation. At December 31, 1996, there were no restricted retained earnings. -250- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries The Company has a shareholder rights plan designed to provide protection to shareholders in the event of an unsolicited attempt to acquire the Company. Under the shareholder rights plan, in certain circumstances, KU Energy shareholders will receive as a dividend one right for each share of KU Energy common stock. Should certain events occur (for instance, an acquirer becomes the beneficial owner of 20 percent or more of the Company's outstanding voting stock without approval by the Company, or certain transactions occur following an acquirer becoming the beneficial owner of 10 percent or more of such voting stock without Company approval), each right would entitle the holder, other than the acquirer, to purchase common shares of KU Energy or shares of any company that acquires KU Energy at a discount from the market value. In certain circumstances, the Company may redeem the rights at a price of $.01 per right. The rights expire in February 2002. 6. Preferred and Preference Stock KU Energy As of December 31, 1996, there were 20 million shares of KU Energy preferred stock, without par value, authorized for issuance. Kentucky Utilities Each series of preferred stock is redeemable at the option of KU upon 30 days' written notice as follows: Redemption Price per Share Series (plus accrued and unpaid dividends, if any) 4 3/4% $101.00 6.53% (Not redeemable prior to December 1, 2003.) $103.265 through November 30, 2004, decreasing approximately $.33 each twelve months thereafter to $100 on or after December 1, 2013. As of December 31, 1996, there were 5.3 million shares of KU preferred stock, having a maximum aggregate stated value of $200 million, authorized for issuance, of which 400,000 shares were outstanding. As of December 31, 1996, there were 2 million shares of KU preference stock, without par value, authorized for issuance. 7. Short-Term and Long-Term Debt KU's short-term financing requirements are satisfied through the sale of commercial paper. The weighted average interest rate on the year-end balance was 6.17% for 1996 and 5.83% for 1995. -251- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries In 1994, KU entered into a loan agreement with the County of Carroll, Kentucky to finance the construction of solid waste disposal facilities. The County of Carroll issued $54 million of variable rate revenue bonds, with the proceeds held in a construction fund. In 1994, 1995 and 1996, KU drew down $35.7 million, $15.1 million and $3.2 million, respectively, relating to these bonds. Kentucky Utilities Pollution Control Series 10 Bonds are issued under KU's Mortgage Indenture. Under the provisions for the variable rate revenue bonds, KU can choose between various interest rate options. Currently, the daily interest rate option is being utilized. The average annual interest rate on the bonds during 1996 and 1995 was 3.53% and 3.95%, respectively. The variable rate bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events. If tendered bonds are not remarketed, the Company has available lines of credit which may be used to repurchase the bonds. In January 1996, KU issued $36 million of Series S First Mortgage Bonds which bear interest at 5.99% and will mature January 15, 2006. The proceeds were used to redeem $35.5 million of Series K First Mortgage Bonds. Substantially all of KU's utility plant is pledged as security for the first mortgage bonds. 8. Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: The carrying values of cash and cash equivalents, escrow funds, construction funds, short-term borrowings, commercial paper and customer deposits approximate fair value because of the short maturity of these amounts. Long-term debt fair values are based on quoted market prices for KU's first mortgage bonds and on current rates available to KU for debt of the same remaining maturities for KU's pollution control bonds and promissory note. The carrying value of long-term debt on December 31, 1996 and 1995 was $546 million and $546 million, respectively, and the estimated fair value was $587 million and $594 million, respectively. If the difference between fair value and carrying value of KU's long-term debt were settled at amounts approximating those above, the anticipated regulatory treatment (based on the current regulatory environment) would allow recovery of these amounts in rates over a prescribed amortization period. Accordingly, any settlement would not have a material impact on the Company's financial position or results of operations. -252- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries 9. Environmental Cost Recovery Since August 1994, KU has been collecting an environmental surcharge from its Kentucky retail customers under a Kentucky statute which authorizes electric utilities (including KU) to implement, beginning January 1, 1993, an environmental surcharge. The surcharge is designed to recover certain operating and capital costs of compliance with federal, state or local environmental requirements associated with the production of energy from coal, including the Federal Clean Air Act as amended. KU's environmental surcharge was approved by the PSC in July 1994 and was implemented in August 1994. The total surcharge collections from August 1, 1994 through December 31, 1996 were approximately $40 million. The constitutionality of the surcharge statute was challenged in the Franklin County (Kentucky) Circuit Court in an action brought against KU and the PSC by the Attorney General of Kentucky and joined by representatives of consumer groups. In July 1995, the Circuit Court entered a judgment upholding the constitutionality of the statute, but vacating that part of the PSC's July 1994 order which the judgment describes as allowing KU to recover, under the surcharge, certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The Circuit Court further ordered the case remanded to the PSC for a determination in accordance with the judgment. KU and the PSC assert that none of the costs included in the surcharge were incurred prior to June 1994. The Attorney General and other consumer representatives appealed to the Kentucky Court of Appeals that part of the Circuit Court judgment upholding the constitutionality of the surcharge statute. The PSC and KU a p pealed that part of the judgment denying recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. The PSC has ordered all surcharge revenues collected by KU from February 1, 1995 subject to refund pending final determination of all appeals. The total surcharge collections from February 1, 1995 through December 31, 1996 were approximately $36 million. KU believes the constitutionality of the surcharge statute will be upheld, but it cannot predict the outcome of that part of the Circuit Court judgment disallowing recovery of certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993. If the Circuit Court judgment is ultimately upheld as entered, KU estimates that the amount it would be required to refund (which is based solely on costs associated with certain environmental expenditures characterized by the Circuit Court as having been incurred before January 1, 1993) for surcharge collections through December 31, 1996, from the implementation of the surcharge would be approximately $11 million, and from February 1, 1995 would be approximately $9 million. At this time, KU has not recorded any reserve for refund. 10. Leveraged Leases KU Capital owns equity interests in several leveraged leases for combustion turbine units leased to utility companies. The leases expire -253- Notes to Consolidated Financial Statements KU Energy Corporation & Subsidiaries in 1999. KU Capital's equity investment represents 75% of the aggregate purchase price of the leases. The remaining 25% represents the nonrecourse debt provided by lenders at the inception of the leases in 1974. The lenders have been granted, as their sole remedy in the event of default by the lessees, an assignment of rentals due under the leases and a security interest in the leased properties. The following is a summary of the components of KU Capital's net investment in leveraged leases:
As of December 31, (in thousands of dollars) 1996 1995 Rentals receivable (net of nonrecourse debt) $ 3,511 $ 3,983 Estimated residual value of leased property 32,707 32,707 Less: Unearned and deferred income 11,568 15,181 Investment in leveraged leases 24,650 21,509 Less: Accumulated deferred income taxes 4,219 2,407 Net investment in leveraged leases $ 20,431 $19,102
The following is a summary of the components of income from leveraged
leases: Year Ended December 31, (in thousands of dollars) 1996 1995 1994 Income before income taxes $ 3,613 $ 3,306 $ 2,140 Income tax expense 1,890 1,286 829 Income from leveraged leases $ 1,723 $ 2,020 $ 1,311
-254- Financial Information (Unaudited) KU Energy Corporation & Subsidiaries Quarterly financial results for 1996 and 1995 are summarized below. Generally, quarterly results may fluctuate due to seasonal variations, changes in fuel costs and other factors. Net Income and Earnings per Average Common Share for the fourth quarter of 1996 were reduced by $2.4 million and $.06, respectively, for the write-off associated with nonutility investments. (For additional information refer to Management's Discussion and Analysis - Nonutility Activities.) Quarter 4th 3rd 2nd 1st
(in thousands of dollars, except for per share amounts) 1996 Operating Revenues $ 174,917 $ 178,269 $ 167,510 $ 190,990 Net Operating Income 27,796 29,820 22,825 35,128 Net Income 17,064 22,493 16,073 26,319 Earnings per Average Common Share .45 .60 .42 .70 1995 Operating Revenues $ 170,144 $ 194,367 $ 154,749 $ 167,140 Net Operating Income 30,161 32,536 17,893 26,011 Net Income 22,245 24,579 10,422 18,807 Earnings per Average Common Share .59 .65 .27 .50 These quarterly amounts reflect, in the Company's opinion, all adjustments (including only normal recurring adjustments) necessary for a fair presentation.
-255- Report of Independent Public Accountants KU Energy Corporation & Subsidiaries To the Shareholders of KU Energy Corporation: We have audited the accompanying consolidated balance sheets and statements of capitalization of KU Energy Corporation (a Kentucky corporation) and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of KU Energy Corporation and Subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/Arthur Andersen LLP Arthur Andersen LLP Chicago, Illinois January 28, 1997 -256- EX-21 18 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF KU ENERGY AND KU State or Jurisdiction Name of Incorporation KU Energy Corporation Kentucky KU Capital Corporation* Kentucky Kentucky Utilities Company* Kentucky and Virginia Electric Energy, Inc.** Illinois * KU Energy Corporation owns 100% of the common stock of KU Capital Corporation and Kentucky Utilities Company. ** Kentucky Utilities Company owns 20% of the Common Stock of Electric Energy, Inc. -257- EX-23 19 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 28, 1997, on the financial statements of KU Energy Corporation incorporated in this Form 10-K and our report dated January 28, 1997, on the financial statements of Kentucky Utilities Company included in this Form 10-K into the previously filed Form S-8 Registration Statement of KU Energy Corporation and Kentucky Utilities Company (File No. 33-57087). /s/Arthur Andersen Arthur Andersen LLP Chicago, Illinois March 10, 1997 -258- EX-27 20 EXHIBIT 27.01
UT THS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K ANNUAL REPORT. KU ENERGY CORPORATION 0000835715 1,000 YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 1,478,336 41,974 165,044 41,594 0 1,726,948 308,140 (595) 337,968 645,513 0 40,000 546,373 54,200 0 0 21 0 0 0 440,841 1,726,948 711,686 50,247 545,870 596,117 115,569 8,269 123,838 41,889 81,949 0 81,949 65,047 37,584 169,747 2.17 2.17
EX-27 21 EXHIBIT 27.02
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE STATEMENTS OF INCOME AND CASH FLOWS FOR THE PERIOD ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K ANNUAL REPORT. KENTUCKY UTILITIES COMPANY 0000055387 1,000 YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 1,478,336 12,548 140,577 41,594 0 1,673,055 308,140 (595) 287,852 595,397 0 40,000 546,373 54,200 0 0 21 0 0 0 437,064 1,673,055 711,711 51,452 542,922 594,374 117,337 8,443 125,780 39,617 86,163 2,256 83,907 65,047 37,584 171,797 0 0 ALL OUTSTANDING COMMON STOCK OF KENTUCKY UTILITIES COMPANY IS HELD BY ITS PARENT COMPANY, KU ENERGY CORPORATION. THEREFORE, EARNINGS PER SHARE IS NOT APPLICABLE.
EX-99.01 22 EXHIBIT 99.01 EXHIBIT 99.01 DESCRIPTION OF COMMON STOCK - KU ENERGY General. The authorized capital stock of KU Energy consists of 20,000,000 shares of preferred stock, without par value, issuable in series of which none is outstanding, and 160,000,000 shares of common stock, without par value, of which 37,817,878 were outstanding at December 31, 1996. Kentucky Utilities, KU Energy's subsidiary, has authorized capital stock of 5,300,000 shares of Cumulative Preferred Stock, without par value, issuable in series, of which 400,000 shares, $100 per share stated value, were outstanding at December 31, 1996; 2,000,000 shares of Preference Stock, without par value, issuable in series, of which no shares are outstanding; and 80,000,000 shares of common stock, of which 37,817,878 shares, all owned by KU Energy, were outstanding at December 31, 1996. Kentucky Utilities has issued and outstanding $546,330,000 in aggregate principal amount of First Mortgage Bonds of various series under its First Mortgage Indenture (Kentucky Utilities' Mortgage Indenture). The following statements, unless the context otherwise indicates, are brief summaries of the substance or general effect of certain provisions of KU Energy's Amended and Restated Articles of Incorporation, as amended, (KU Energy's Articles) or the Amended and Restated Articles of Incorporation, as amended, of Kentucky Utilities' and the resolutions or amendments establishing series of Kentucky Utilities Preferred Stock and Preference Stock (collectively, Kentucky Utilities' Articles), and of Kentucky Utilities' Mortgage Indenture securing its outstanding First Mortgage Bonds. Such statements make use of defined terms and are not complete; they are subject to all the provisions of KU Energy's Articles, Kentucky Utilities' Articles or Kentucky Utilities' Mortgage Indenture, as the case may be. Dividend Rights. Dividends on Common Stock of KU Energy will depend in the foreseeable future primarily upon the earnings, financial condition and capital requirements of Kentucky Utilities. The ability of KU Energy to pay dividends on its Common Stock would be limited to the extent Kentucky Utilities is limited in its right to pay dividends on or acquire Kentucky Utilities Common Stock. Whenever dividends on all outstanding shares of Kentucky Utilities Preferred and Preference Stock of all series for all previous quarter- yearly dividend periods and the current quarter-yearly dividend period shall have been paid or declared and set apart for payment, and whenever all amounts required to be set aside for any sinking fund for the redemption or purchase of shares of the Kentucky Utilities Preferred or Preference Stock for all previous periods or dates shall have been paid or set aside, and subject to the limitations summarized below, the Kentucky Utilities Board of Directors may declare dividends on Kentucky Utilities Common Stock out of any surplus or net profits of Kentucky Utilities legally available for that purpose. Kentucky Utilities' Mortgage Indenture provides, in effect, that, so long as certain currently outstanding series of First Mortgage Bonds are outstanding, Kentucky Utilities will not declare or pay any dividends (other than in stock) on Kentucky Utilities Common Stock, or make any other distribution on or purchase any Kentucky Utilities Common Stock, unless the total amount charged or provided for maintenance, repairs and depreciation of the mortgaged properties subsequent to May 1, 1947, plus the surplus earned during the period and remaining after any such dividend, distribution or purchase, shall equal at least 15% of Kentucky Utilities' total utility operating revenues for the -261- period, after deducting from such revenues the cost of electricity purchased for resale. Kentucky Utilities' Articles provide in effect that, so long as any Kentucky Utilities Preferred Stock is outstanding, the total amount of all dividends or other distributions on Kentucky Utilities Common Stock (other than in stock) that may be paid, and purchases of Kentucky Utilities Common Stock that may be made, during any 12-month period shall not exceed (a) 5% of Kentucky Utilities' net income (as defined) for the 12-month period next preceding each such dividend, distribution or purchase, if the ratio of "common stock equity" to "total capital" (as defined) is 20% to 25%, or (b) 50% of such net income if such ratio is less than 20%. If such ratio is in excess of 25%, no such dividends may be paid or distributions or purchases made that would reduce such ratio to less than 25% except to the extent permitted by clauses (a) and (b). At December 31, 1996, no amount of retained earnings was restricted as to the payment of dividends on Kentucky Utilities Common Stock under the foregoing provisions of Kentucky Utilities' Mortgage Indenture or Kentucky Utilities' Articles. Voting Rights. The shares of KU Energy's Common Stock entitle the holders thereof to one vote for each share upon all matters upon which shareholders have the right to vote, subject to any special voting rights, if any, which may vest in the holders of KU Energy's preferred stock. KU Energy's preferred stock may be issued in series, each of which will be identical except for such relative rights and preferences with respect to the matters listed in the next sentence as may be determined by the Board of Directors of KU Energy. The Board of Directors of KU Energy may determine, for each series of preferred stock, the number of shares and the rate of dividend (or method of determining dividends) to be borne by the shares of each such series, the voting rights, if any, the stated value, if any, and the preferences with respect to distributions including dividends and distributions upon dissolution of shares of such series, the price or prices at which, and other terms and conditions on which, shares of each series may be redeemed, and the sinking fund provisions, if any, for the redemption or purchase of shares of each such series, the conversion privileges, if any, and may change redeemed or re-acquired shares of any such series into shares of another series, subject, however, to such restrictions and limitations as are or may be, from time to time provided by law or contained in KU Energy's Articles. If a quorum consisting of a majority of the shares outstanding and entitled to vote on the matter is present (either in person or by proxy) at a shareholders' meeting, action on a matter (other than the election of directors) by a voting group shall be approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, (i) except as described under "Board of Directors" below, (ii) except that directors are elected by cumulative voting and (iii) unless a greater vote is required by law. Shareholder Rights. KU Energy has a shareholder rights plan designed to provide protection to shareholders in the event of an unsolicited attempt to acquire KU Energy. Under the shareholder rights plan, KU Energy shareholders received as a dividend one right for each share of KU Energy common stock. Should certain events occur - for instance, an acquirer becomes the beneficial owner of 20 percent or more of KU Energy's outstanding voting stock without approval by KU Energy or certain transactions occur following an acquirer becoming the beneficial owner of 10 percent or more of such voting stock without KU Energy approval, each right would entitle the holder, other than the acquirer, to purchase common shares of KU Energy or shares of any company that acquires KU Energy at a discount from the market value. In certain circumstances, KU Energy may redeem the rights at a price of $.01 per right. The rights expire in February 2002. -262- Preemptive Rights. Holders of KU Energy's securities have no preemptive subscription rights. Liquidation Rights. In the event of any liquidation or dissolution of KU Energy, holders of Common Stock are entitled to receive the net assets of KU Energy except to the extent of the preferential rights, if any, of the holders of KU Energy's preferred stock as may be established from time to time in accordance with KU Energy's Articles. Board of Directors. KU Energy's Bylaws provide for a Board of Directors comprised of from nine to eleven members as determined from time to time by the Board. The Board currently has ten members. KU Energy's Articles provide for the classification of the Board of Directors into groups with directors being elected for three-year terms. Under KU Energy's Articles, the article providing for the classification of the Board of Directors may not be altered, amended or repealed and no provision inconsistent with such article may be adopted without the vote of 80 percent of the shares entitled to vote generally, voting as a class. Cumulative Voting. KU Energy's Articles provide for the election of directors by cumulative voting. Amendments to the Registrant's Articles. Except as set forth under "Board of Directors" above, KU Energy's Articles may be amended or repealed, if the number of shares voted in favor of such amendment exceeded the number of shares voted against such amendment by each voting group or, if such amendment would give rise to dissenters' rights, by the affirmative vote of the holders of a majority of the outstanding shares of KU Energy entitled to vote on such amendment (which would include the Common Stock and any series of preferred stock which, by its terms or applicable law, was so entitled to vote), unless any class or series of shares is entitled to vote as a class in respect thereof, in which event the proposed amendment must be approved in addition by the required vote of each class or series of shares entitled to vote as a class in respect thereof. Call of Special Meetings. KU Energy's Articles provide that no meeting of shareholders may be called by shareholders unless called by the holders of at least 51 percent of all the votes entitled to be cast on each issue proposed to be considered at the special meeting. Miscellaneous. The Transfer Agents for the Common Stock are Illinois Stock Transfer Company, Chicago, Illinois, and Harris Trust and Savings Bank, Chicago, Illinois; and the Registrar is Harris Trust and Savings Bank, Chicago, Illinois. The outstanding shares of Common Stock of KU Energy are fully paid and nonassessable. KU Energy reserves the right to increase, decrease or reclassify its authorized capital stock or any class or series thereof, and to amend or repeal any provisions of KU Energy's Articles, in the manner prescribed by law, subject to the limitations described in KU Energy's Articles; and all rights conferred on shareholders in KU Energy's Articles are subject to this reservation. -263- EX-99.02 23 EXHIBIT 99.02 EXHIBIT 99.02 DESCRIPTION OF COMMON STOCK - KU General. The authorized capital stock of KU consists of 5,300,000 shares of Preferred Stock, cumulative, without par value, issuable in series, of which 400,000 shares were outstanding at December 31, 1996, 2,000,000 shares of Preference Stock, cumulative, without par value, issuable in series, and 80,000,000 shares of Common Stock, without par value of which 37,817,878 shares were outstanding (all of which were held by KU Energy) at December 31, 1996. No shares of Preference Stock are issued or outstanding. The following statements, unless the context otherwise indicates, are brief summaries of the substance or general effect of certain provisions of KU's Amended and Restated Articles of Incorporation and resolutions and amendments establishing series of Preferred Stock (collectively, the Articles) and of KU's Mortgage Indenture, as amended, securing its first mortgage bonds (Indenture). The statements make use of defined terms, are not complete and do not give effect to statutory or common law. Dividend Rights. The Board of Directors of KU may declare dividends on the Common Stock out of any surplus or net profits of KU legally available for the purpose, provided full cumulative dividends on the Preferred Stock and the Preference Stock for the current and all past quarterly dividend periods shall have been paid or declared and set apart for payment and KU is not in arrears in its sinking fund obligations in respect of any shares of Preferred Stock or Preference Stock. Limitations on Dividends on Common Stock. The Indenture provides that, so long as certain currently outstanding series of First Mortgage Bonds are outstanding, KU will not declare or pay any dividends on its Common Stock or make any other distribution on or purchase any of its Common Stock unless the amounts expended by KU for maintenance and repairs and provided for depreciation subsequent to April 30, 1947, plus KU's earned surplus (retained earnings) for such period and remaining after any such payment, distribution or purchase, shall aggregate not less than 15% of the gross operating revenues of KU for the period. The Articles provide, in effect, that, so long as any of the Preferred Stock is outstanding, the total amount of all dividends or other distributions on Common Stock and purchases of such stock that may be paid or made during any 12-month period shall not exceed (a) 75% of the "net income available for dividends on common stock" if the ratio of "common stock equity" to "total capital" (each as defined) of KU shall be 20% to 25%, or (b) 50% of such net income if such ratio shall be less than 20%. When such ratio is 25% or more, no such dividends, distributions or purchases may be paid or made which would reduce such ratio to less than 25% except to the extent permitted by clauses (a) and (b) above. As of December 31, 1996, no amount of retained earnings was restricted under the Indenture or Articles. Voting Rights. Each share of Common Stock is entitled to one vote on each matter voted on at stockholders' meetings, except as otherwise provided in the Articles, and to cumulative voting rights in the election of directors. Shares of Preferred Stock and Preference Stock are not entitled to vote for the election of directors or in respect of any other matters, except as expressly provided in the Articles or as may be required by law. The Articles give to holders of Preferred Stock and Preference Stock certain special voting rights designed to protect their interest with respect to specified corporate action. In addition, in certain events relating to -264- dividends in default on Preferred Stock, holders of Preferred Stock as a class are entitled to elect a majority of the full Board of Directors; and in certain events relating to dividends in default on the Preference Stock, holders of Preference Stock as a class are entitled to elect two directors. Liquidation Rights. Upon the liquidation or dissolution of KU, the holders of Preferred Stock and the Preference Stock are entitled to be paid designated amounts out of the net assets of KU in preference to the Common Stock. After such payment to holders of Preferred Stock and Preference Stock, the remaining assets and profits shall be distributed to the holders of Common Stock. Board of Directors. KU's Bylaws provide for a Board of Directors comprised of from nine to eleven members as determined from time to time by the Board. The Board currently has ten members. KU's Articles provide for the classification of the Board of Directors into groups with directors being elected for three-year terms subject to certain rights of holders of Preferred Stock and Preference Stock to elect directors. Preemptive Rights. Holders of KU's Stock have no preemptive right to subscribe for stock or securities of KU. Call of Special Meetings. KU's Articles provide that no meeting of shareholders (except for certain meetings called by holders of Preferred Stock or Preference Stock) may be called by shareholders unless called by the holders of at least 51 percent of all the votes entitled to be cast on each issue proposed to be considered at the special meeting. Miscellaneous. The outstanding shares of Common Stock of KU are fully paid and non-assessable. Under Kentucky and Virginia law, KU may amend the Articles to increase, decrease or adjust its capital stock or any class thereof or otherwise amend any provision of the Articles or any amendment thereto, in the manner permitted by law, subject, however, to the limitations prescribed in the Articles; and all rights conferred on stockholders in the Articles or any amendment thereto are subject to the foregoing. The Transfer Agents of the Common Stock are Illinois Stock Transfer Company, Chicago, Illinois, and Harris Trust and Savings Bank, Chicago, Illinois; and the Registrar is Harris Trust and Savings Bank, Chicago, Illinois. -265- EX-99.03 24 EXHIBIT 99.03 EXHIBIT 99.03 Common Stock present or represented at the meeting, and entitled to vote at the meeting. For purposes of action on the Long Term Incentive Plan Proposal and Annual Performance Incentive Plan Proposal, an abstention is the equivalent of a "no" vote on the proposal. Shareholders may vote either in person or by duly authorized proxy. The giving of a proxy will not prevent a shareholder from voting in person at the meeting. A proxy may be revoked by a shareholder at any time prior to the voting thereof by giving written notice to the Secretary of the Company prior to such voting. All shares entitled to vote and represented by effective proxies on the enclosed form, received by the Company, will be voted at the meeting (or any adjourned session thereof) in accordance with the terms of such proxies. Each Participant in the Company's Automatic Dividend Reinvestment and Stock Purchase Plan (the "Reinvestment Plan"), Kentucky Utilities' Employee Stock Ownership Plan (the "ESOP") or the Kentucky Utilities Employee Savings Plan (the "Savings Plan") will receive a form of proxy by which such Participant may direct the agent or trustee under such Plans as to the manner of voting shares credited to the Participant's accounts under such Plans. Shareholders of record who are participants in the Reinvestment Plan will receive only one form of proxy for their certificated shares and those shares which they may have acquired through reinvested dividends. A Participant of any of such Plans wishing to vote in person at the meeting may obtain a proxy for shares credited to his account under such Plans by making a written request therefor by April 7, 1997, as follows: for the Reinvestment Plan, to George S. Brooks II, Secretary of the Company, at the address stated on page 1; for the ESOP, to Banc One Kentucky, PO Box 32500, Louisville, Kentucky 40232, Attention: Barbara J. Steele, Trust Investment Division; and for the Savings Plan, to CG Trust Company, c/o Cigna Retirement and Investment Services, Routing Code M- 122, 350 Church Street, Hartford, Connecticut 06103, Attention: Bruce Beckmann. Election of Directors GENERAL Three directors are to be elected at the meeting. Barring unforeseen circumstances and in the absence of contrary directions, the proxies solicited herewith will be voted for the election of Milton W. Hudson, John T. Newton and William L. Rouse, Jr. as directors of the Company. The nominees will hold office until the 2000 Annual Meeting of Shareholders of the Company or until their respective successors shall have been duly elected and qualified except that pursuant to the Board of Director's policy on retirement, Mr. Hudson will retire from the Board at the 1998 Annual Meeting. The proxies may also be voted for a substitute nominee or nominees in the event any one or more of said persons shall be unable to serve for any reason or be withdrawn from nomination, an occurrence not now anticipated. Except as otherwise indicated, each nominee has been engaged in his present principal occupation for at least the past five years. All information regarding share ownership is as of January 31, 1997. The following information is given with respect to the nominees for election as directors: MILTON W. HUDSON, 69, has been an economic consultant (Washington, DC) since 1991. He was Managing Director and Senior Economic Advisor of Morgan Guaranty Trust Company of New York from January 1990 until his retirement in June 1991. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1990. Mr. Hudson beneficially owns 1,210 shares of Common Stock of the Company. LOGO -266- JOHN T. NEWTON, 66, retired in 1995 as Chairman of the Board and Chief Executive Officer of the Company and Kentucky Utilities, positions he had held since 1987. He had also been President of these companies from 1987 to November 1, 1994. Mr. Newton has been a director of the Company since 1988 and a director of Kentucky Utilities since 1974. He beneficially owns 32,653 shares of Common Stock of the Company which include 7,668 shares held jointly with his wife and 5,000 shares held solely by his wife. LOGO WILLIAM L. ROUSE, JR., 64, was Chairman of the Board and Chief Executive Officer and a director of First Security Corporation of Kentucky, a multi-bank holding company, prior to his retirement in 1992. Mr. Rouse is a director of Ashland, Incorporated. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1989. Mr. Rouse beneficially owns 1,000 shares of Common Stock of the Company. In addition, Mr. Rouse's account under the Directors Deferred Compensation Plan described below has the equivalent of 3,937 shares of Common Stock. LOGO Information with respect to those directors whose terms are not expiring is as follows: MIRA S. BALL, 62, is Secretary-Treasurer and Chief Financial Officer of Ball Homes, Inc., a single-family residential developer and property management company. She has been a director of the Company and Kentucky Utilities since 1992. Ms. Ball beneficially owns 6,057 shares of Common Stock of the Company. Her term expires in 1999. LOGO CAROL M. GATTON, 64, is Chairman of Area Bancshares, Inc., a bank holding company in Owensboro, Kentucky. He is also involved in real estate ventures and automobile dealerships. Mr. Gatton beneficially owns 1,000 shares of Common Stock of the Company. His term expires in 1998. LOGO HARRY M. HOE, 71, is President and a director of J. R. Hoe & Sons, Inc., Middlesboro, Kentucky, a foundry and casting company. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1979. Mr. Hoe beneficially owns 16,745 shares of Common Stock of the Company which include 5,394 shares held solely by his wife. His term expires in 1998. LOGO -267- FRANK V. RAMSEY, JR., 65, is President and Director of Dixon Bank, Dixon, Kentucky, and a farm owner and operator. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1986. Mr. Ramsey beneficially owns 1,400 shares of Common Stock of the Company. His term expires in 1999. LOGO CHARLES L. SHEARER, PH.D., 54, is President of Transylvania University, Lexington, Kentucky. He has been a director of the Company since 1991 and a director of Kentucky Utilities since 1987. Dr. Shearer beneficially owns 1,460 shares of Common Stock of the Company which include 200 shares held solely by his wife and 14 shares held by his children. His term expires in 1999. LOGO LEE T. TODD, JR., PH.D., 50, is President and Chief Executive Officer of DataBeam Corporation, a Kentucky-based, high- technology firm. He was elected a director of the Company and Kentucky Utilities in 1995. Dr. Todd beneficially owns 500 shares of Common Stock of the Company. His term expires in 1999. LOGO MICHAEL R. WHITLEY, 54, has been Chairman, President and Chief Executive Officer of the Company and Kentucky Utilities since August 1, 1995. He was President and Chief Operating Officer of the Company and Kentucky Utilities from November 1, 1994 to August 1, 1995. He was Executive Vice President of these companies from August 1, 1994 to November 1, 1994. Before this period, he had been a Senior Vice President of the Company since 1988 and of Kentucky Utilities since 1987. Mr. Whitley was Secretary of the Company from 1988 until 1992 and of Kentucky Utilities from 1978 until 1992. He is a director of PNC Bank Kentucky, Inc., a wholly owned subsidiary of PNC Bank Corp., Inc. Mr. Whitley has been a director of the Company and Kentucky Utilities since 1992. He beneficially owns 30,985 shares of Common Stock of the Company which include 6,300 shares held jointly with his wife and 964 shares held solely by his wife. LOGO His term expires in 1998. VOTING SECURITIES BENEFICIALLY OWNED BY DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS The directors, nominees and executive officers of the Company and Kentucky Utilities owned beneficially at January 31, 1997 an aggregate of 189,117 shares of Common Stock of the Company, representing in the aggregate 0.5% of such stock. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS All members of the Company's Board of Directors are currently members of Kentucky Utilities' Board of Directors. The Board of Directors of the Company and the Board of Directors of Kentucky Utilities have each -268- Compensation Committee in the grant or payment of awards to the director or executive under incentive or other plans maintained by the Company. The Board of Directors of the Company may amend or terminate the Equity Ownership Guidelines at any time or from time to time. DIRECTORS' COMPENSATION Each director of the Company is also a director of its principal subsidiary, Kentucky Utilities. Each director who is not an employee of the Company or Kentucky Utilities is paid an annual retainer of $20,000. This retainer is reduced by any retainer paid from a Company subsidiary. Kentucky Utilities pays non-employee directors an annual retainer of $15,000. Thus, the net annual Company retainer paid to such directors is $5,000 but the aggregate paid for serving on both Boards is $20,000. An additional annual retainer of $1,200 is paid to each non-employee director who is a chairperson of a committee of either Board. However, if a non-employee director is a chairperson of the same Board committee of the Company and Kentucky Utilities, only one such additional annual retainer is paid. In addition to an annual retainer, the Company and Kentucky Utilities pay each non-employee director a $1,000 fee for each meeting of a Board or a particular committee attended; provided that if the Boards of the Company and Kentucky Utilities meet on the same day, only one $1,000 fee is paid for both meetings. Similarly, if the same committee of the Boards of the Company and Kentucky Utilities meets on the same day, only one $1,000 fee is paid for both meetings. Out-of-pocket travel expenses are paid to directors for all meetings attended. All eligible directors of the Company and Kentucky Utilities are entitled to participate in the Director Retirement Retainer Programs (the "Director Retirement Plans") of the Company and Kentucky Utilities. Directors who are not, and have not previously been, an officer of Kentucky Utilities, the Company, or their affiliated companies ("outside directors") are eligible to participate. An outside director who is 65 years of age and has completed at least five consecutive years of service on the Company's and/or Kentucky Utilities' Board will receive, upon termination of service from a Board for any reason other than death, an annual retirement benefit equal to the annual retainer paid to such Board's directors in effect as of such termination, payable monthly over a period of years equal to the number of full years such director served on the Board, but not in excess of 10 years. Such payments cease, however, if the director dies before all such payments are made. The annual retainer in effect upon the director's termination from a Board will generally be calculated as described in the first paragraph under this caption (excluding the additional annual retainer for chairpersons). In the event of a change in control of the Company or Kentucky Utilities, any person then receiving a retirement benefit would be paid, within 30 days of the change in control, a lump-sum payment equal to the discounted present value of all then unpaid installments of the director's retirement benefit. In the event of a change in control, each outside director in office immediately prior to such change in control will be eligible to receive an accelerated retirement benefit if the director terminates service from a Board for any reason other than death within three years of the date of the change in control. Such accelerated retirement benefit would be paid in a lump sum within 30 days of such termination and would be equal to the discounted present value of the retirement benefit which such director would have received if the director had retired from the Board at age 70 (or for certain directors, 72) and lived to collect the full benefit otherwise payable under the applicable Director Retirement Plan. Such benefit would be based on the higher of the annual retainer in effect immediately prior to the change in control or immediately prior to such director's termination of service. Change in control is broadly defined under the Director Retirement Plans and includes any merger, consolidation, reorganization or sale of substantially all of the assets of the Company or Kentucky Utilities which results in less than 60% of the voting power of the resulting entity being owned by the holders of the Common Stock of the Company prior to the transaction; a change in the majority of the Board of Directors of the Company or Kentucky Utilities over a two- -269- year period which is not approved by two-thirds of the incumbent directors; and the acquisition by any person or group of persons of beneficial ownership of 10% or more of the Common Stock of the Company or Kentucky Utilities. Directors may elect to have all or a specified portion of their directors' fees deferred under the Director Deferred Compensation Plans (the "Director Deferred Compensation Plans") of the Company and Kentucky Utilities, such elections to be made in accordance with and subject to the terms of the Director Deferred Compensation Plans. Amounts deferred will be maintained in unfunded accounts for each participant, which, based on a choice made by the director, either: (1) bear interest at a floating rate based upon the average prime rate charged by banks as reported in the Federal Reserve Bulletin; or (2) experience appreciation (depreciation) and earnings based on a hypothetical investment in the Company's Common Stock. Amounts deferred under the Director Deferred Compensation Plans will be paid to the participant upon termination as a director for any reason other than death based on a choice made by the Director as permitted by the Director Deferred Compensation Plans in a single payment or, with interest, quarterly over a period of not to exceed 40 calendar quarters, or, with interest, annually over a period of not to exceed 10 years. In the event of a participant's death, payment of any remaining balance of credited amounts will be made in a single payment to a designated beneficiary. In certain cases, directors may receive a distribution of deferred amounts in the event of substantial financial hardship. In the event of a change in control of the Company or Kentucky Utilities, any director who terminated prior to the change in control whose deferred amounts have not been distributed would receive, within 15 days of the change in control, a lump sum payment of the undistributed amounts. In the event of a change in control, each director who terminates thereafter within three years of the date of the change in control would be paid, within 15 days after termination, a lump sum payment of the director's deferred amounts. Change in control has essentially the same meaning as under the Director Retirement Plans described above. Because officers of the Company and Kentucky Utilities receive no compensation for services as directors, any director who is an officer is not eligible to participate in the plans. -270- EXECUTIVE COMPENSATION General. The following table contains information with respect to the compensation paid by (or earned from) the Company and Kentucky Utilities, for all services rendered during 1994 through 1996 in all capacities, to the Chief Executive Officer and the other four most highly compensated executive officers of the Company and Kentucky Utilities: Summary Compensation Table
LONG-TERM COMPENSATION ANNUAL COMPENSATION PAYOUTS --------------------------- ------------ LTIP OTHER ANNUAL ------------ ALL OTHER SALARY BONUS COMPENSATION PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) ($)(4) - --------------------------- ---- ------- ------ ------------ ------- ------------ MICHAEL R. WHITLEY; 1996 387,737 99,741 2,164 79,798 6,242 Chairman of the Board, President 1995 318,467 73,476 116 0 4,686 & Chief Executive Officer & 1994 245,490 67,157 481 50,508 5,560 Director of the Company & Kentucky Utilities JAMES W. TIPTON; 1996 230,750 38,304 2,004 77,882 5,670 Senior Vice President 1995 227,591 39,942 1,445 0 4,667 of the Company 1994 214,043 63,210 1,373 50,508 5,537 O. M. GOODLETT; 1996 231,840 51,994 0 52,560 5,181 Senior Vice President of the 1995 210,195 44,550 0 0 4,500 Company & Kentucky Utilities 1994 200,251 56,889 0 30,246 4,500 WAYNE T. LUCAS; 1996 208,137 49,043 749 33,124 6,361 Senior Vice President 1995 194,553 42,160 711 0 4,692 of Kentucky Utilities 1994 159,699 33,754 523 22,658 5,522 JAMES M. ALLISON; 1996 175,749 43,208 0 N/A 5,056 Senior Vice President 1995 169,405 38,160 0 N/A 4,527 of Kentucky Utilities 1994 133,674 29,131 0 N/A 4,500 (Resigned Feb. 21, 1997)
- -------- (1) Bonuses are paid under the Incentive Plans. Any bonus earned but deferred under the Executive Deferred Compensation Plans is included in the Table. (2) Other annual compensation consists of amounts for group term life insurance and related taxes. (3) Reflects payouts under the Performance Share Plans described under "Report of Compensation Committee on Executive Compensation" above. Performance goals were not met, and thus no payouts were made for the Performance Cycle that relates to 1995 in the table above. Amounts shown for 1994 and 1996 reflect a payout in the form of restricted shares of the Company's Common Stock of 75% and 100%, respectively, of the contingent grant for the applicable Performance Cycle. Such restricted stock will be forfeited if the officer terminates employment prior to January 1, 2001 (for amounts shown for 1994) and January 2, 2003 (for amounts shown for 1996) for any reason other than retirement, disability or death. In the event of a change in control, the restrictions lapse immediately. (4) All other compensation includes: (a) above-market-rate interest earned on deferred compensation; and (b) the employer matching contribution made to the officer's account in the 401(k) Employee Savings Plan. Such amounts for 1996 are shown in the following table.
EXECUTIVE INTEREST ON 401(K) MATCHING OFFICER DEFERRED COMPENSATION CONTRIBUTION --------- --------------------- --------------- Michael R. Whitley................. $1,742 $4,500 James W. Tipton.................... 1,170 4,500 O. M. Goodlett..................... 681 4,500 Wayne T. Lucas..................... 1,861 4,500 James M. Allison................... 556 4,500
-271- Long Term Incentive Awards. Performance Shares contingently awarded under the Performance Share Plans in 1996 are reported in the Long-Term Incentive Plan awards table below. A description of how awards are determined is presented under "Report of Compensation Committee on Executive Compensation." A description of the scale by which performance targets are set follows the table. Long-Term Incentive Plan--Awards In Last Fiscal Year
PERFORMANCE OR OTHER NUMBER OF PERIOD SHARES, UNTIL ESTIMATED FUTURE PAYOUTS UNDER UNITS OR MATURATION NON-STOCK PRICE-BASED PLANS(4) OTHER RIGHTS OR -------------------------------------- NAME (#) PAYOUT(3) THRESHOLD($) TARGET($) MAXIMUM($) - ---- ------------ ----------- ------------ -------------- ---------- Michael R. Whitley...... 5,835 (1) 3 0 87,525-131,288 175,050 James W. Tipton......... 2,280 (1) 3 0 34,200-51,300 68,400 O.M. Goodlett........... 2,180 (1) 3 0 32,700-49,050 65,400 Wayne T. Lucas.......... 1,950 (2) 3 0 29,250-43,875 58,500 James M. Allison........ 1,730 (2) 3 0 25,950-38,925 51,900
- -------- (1) Constitutes Performance Shares contingently granted under the KUE Performance Share Plan in 1996. (2) Constitutes Performance Shares contingently granted under the Kentucky Utilities Performance Share Plan in 1996. (3) Number of years in Performance Cycle. (4) See description below for the scale that determines which amount would be applicable. Amounts are calculated based on the price of the Company's Common Stock on December 31, 1996. For the Performance Cycle commencing in 1996, payouts of contingent grants shown in the table above will be determined by calculating the average return on equity for the Performance Cycle of the Company or Kentucky Utilities, as the case may be, compared to the average return on equity for the Performance Cycle for the comparable companies. The returns will be ranked in descending order. For the 1996-1998 Performance Cycle, the scale that determines if grants are earned is as follows: if the Company's or Kentucky Utilities' rank, as the case may be, is in the top two, the payout will be 100% of the contingent grant (the Maximum shown in the table); if their rank is third or fourth, the payout will be 75%, and if their rank is fifth or sixth, the payout will be 50% (the two figures shown as Target in the table); and if their rank is seventh or below, no shares will be awarded (shown as the Threshold in the table) for that Performance Cycle under the applicable Performance Share Plan. Retirement Plan. Each of the officers of the Company and Kentucky Utilities is entitled to participate in the Kentucky Utilities employee retirement plans described below. Executive officers, like other employees, are eligible to participate in Kentucky Utilities' Retirement Plan, and all eligible persons whose compensation is reported in the Summary Compensation Table participated in the Retirement Plan. Contributions to the Retirement Plan are determined actuarially and cannot be readily calculated as applied to any individual participant or small group of participants. Generally, compensation for Retirement Plan purposes means base compensation while a participant, excluding overtime pay, commissions, performance incentive compensation or other extraordinary compensation. The compensation for Retirement Plan purposes of the individuals named in the foregoing table is substantially equivalent to the base salary reported in the Summary Compensation Table. The credited years of service under the Retirement Plan for such persons were as follows: Mr. Whitley, 32 years; Mr. Tipton, 29 years; Mr. Goodlett, 26 years; Mr. Lucas, 27 years; and Mr. Allison, 2 years. All of the credited years of service were computed as of December 31, 1996. Retirement Plan benefits depend upon length of service, age at retirement and amount of compensation (determined in accordance with the Retirement Plan). -272- Although higher amounts are determined under the Retirement Plan and shown in the table below, in most cases, pension benefits under the Retirement Plan or compensation used to measure such benefits will be reduced to comply with maximum limitations imposed by the Internal Revenue Code. Under such limitations effective in 1996, no base compensation above $150,000 may be used to calculate a benefit, except in the case of certain executive officers to preserve benefits accrued under previously applicable rules. In addition, no annual benefit derived from employer contributions may exceed $120,000. Assuming retirement at age 65, a Retirement Plan participant would be eligible at retirement for a maximum annual pension benefit (without taking into account the Internal Revenue Code limitations referred to above) set forth in the following table. However, assuming retirement at age 65, assuming 1996 base compensation and taking into account the Internal Revenue Code limitations, the annual pension benefit under the Retirement Plan for the executive officers named in the Summary Compensation Table would be as follows: Mr. Whitley, 103,607; Mr. Tipton, 95,146; Mr. Goodlett, 90,672; Mr. Lucas, 92,904; and Mr. Allison, 53,737.
ANNUAL BENEFIT AFTER SPECIFIED YEARS OF SERVICE(2) FINAL AVERAGE -------------------------------------------------------------- BASE PAY(1) 15 20 25 30 35 40 45 ------------- -------- -------- -------- -------- -------- -------- -------- $150,000........ $ 29,999 $ 39,999 $ 49,999 $ 59,999 $ 69,998 $ 79,998 $ 89,998 $200,000........ $ 39,999 $ 53,332 $ 66,665 $ 79,998 $ 93,331 $106,664 $119,997 $250,000........ $ 49,999 $ 66,665 $ 83,331 $ 99,998 $116,664 $133,330 $149,996 $300,000........ $ 59,999 $ 79,998 $ 99,998 $119,997 $139,997 $159,996 $179,996 $350,000........ $ 69,998 $ 93,331 $116,664 $139,997 $163,329 $186,662 $209,995 $400,000........ $ 79,998 $106,664 $133,330 $159,996 $186,662 $213,328 $239,994 $450,000........ $ 89,998 $119,997 $149,996 $179,996 $209,995 $239,994 $269,993 $500,000........ $ 99,998 $133,330 $166,663 $199,995 $233,328 $266,660 $299,993 $550,000........ $109,997 $146,663 $183,329 $219,995 $256,660 $293,326 $329,992 $600,000........ $119,997 $159,996 $199,995 $239,994 $279,993 $319,992 $359,991
- -------- (1) "Final average base pay" generally means the average annual compensation during the 60 consecutive months of highest pay during the period of employment. (2) Annual benefits shown are on a straight life annuity basis. Amounts shown are not subject to any deduction for Social Security benefits or other offset amounts. Benefits may be reduced by Internal Revenue Code limitations described above. Supplemental Security Plan. Executive officers and certain other employees of the Company and Kentucky Utilities are eligible to be members in Kentucky Utilities' Supplemental Security Plan which provides retirement, disability and death benefits as well as a change in control retirement benefit and a change in control severance benefit. As to executive officers, upon retirement at age 65, an eligible member will receive 15 annual payments of an amount equal to 75% of basic compensation, offset by benefits payable from any defined benefit plan of the Company or an affiliate (such as Kentucky Utilities' Retirement Plan) and social security benefits. Basic compensation is the annualized base monthly salary of the member, exclusive of performance incentive compensation or other extraordinary compensation, in effect at termination of employment by retirement, disability or death. Upon termination of employment by death of an eligible executive officer prior to age 65, the member's beneficiary will receive an annual benefit equal to 50% of basic compensation until the later of the date such member would have attained age 65 or completion of 15 annual payments. Upon termination of employment by disability prior to age 65, the member will receive the "retirement benefit" if the member lives to retirement age and remains disabled or the "death benefit" if the member dies prior to retirement age and is disabled at death. Benefits will be paid from the general funds of the employer. The estimated annual benefits from Kentucky Utilities' Supplemental Security Plan that would be payable upon retirement at normal retirement -273- age (age 65) for the individuals named in the Summary Compensation Table (assuming 1996 base salary) are as follows: Mr. Whitley, 188,128; Mr. Tipton, 65,342; Mr. Goodlett, 63,821; Mr. Lucas, 43,389; and Mr. Allison, 64,991. To assist in providing funds to pay such benefits when they become payable, insurance is purchased on the lives of the members of the Supplemental Security Plan. Change In Control Arrangements. Under the Supplemental Security Plan, members are entitled to change in control severance benefits in the following circumstances: (i) involuntary termination of the individual's employment within two years following a change in control (or, if later, prior to the consummation of the change in control transaction or its earlier abandonment) for reasons other than cause, death or permanent disability; (ii) resignation within two years of a change in control (or, if later, prior to the consummation of the change in control transaction or its earlier abandonment) for good reason (as defined in the plan); and (iii) in respect of the Chairman of the Board, the President, the Chief Financial Officer (or, if such positions are filled by less than three persons, the Executive Vice President), the Senior Vice Presidents and the Corporate Secretary, in each case of Kentucky Utilities, termination of employment for any reason during the 30-day period commencing on the first anniversary of the consummation of a change in control. In such circumstances, the employee will be entitled to a change in control severance payment equal to a certain percentage (300% in the case of executive officers of the Company or Kentucky Utilities) of the sum of (i) the employee's basic compensation and (ii) the employee's target annual performance incentive compensation. In addition, the employee will be entitled to continuation of certain employee welfare benefits for up to three years following termination of employment, subject to an offset for comparable benefits. Under the Supplemental Security Plan, the employee is entitled to receive additional payments, if necessary, to reimburse the employee for certain federal excise tax liabilities. The Supplemental Security Plan's change in control retirement benefit provides that, upon termination of employment, other than for cause (as defined in the Supplemental Security Plan) following a change in control, an eligible member will receive a lump- sum amount equal to the present value of the retirement benefit (described in the preceding paragraph and assuming the member is then 65 but prorated if the member then has less than 15 years of service, including an assumed three additional years of service in the case of executive officers); provided that, if the termination is more than two years from the change in control, the calculation of years of service will not include the assumed additional three years and the compensation upon which the benefit is calculated will be the actual compensation in effect at termination (rather than the compensation in effect at the change in control which, if higher, would be used if termination occurred within two years of the change in control). The change in control severance benefits and change in control retirement benefits are effective for a minimum of five years, which is automatically extended from year to year unless Kentucky Utilities gives notice that it does not wish to extend the period of effectiveness. Change in control has essentially the same meaning as under the Director Retirement Plans described under "Directors' Compensation." The Incentive Plans, Performance Share Plans and Executive Deferred Compensation Plans contain provisions relating to a change in control. Under each of these plans a change in control has essentially the same meaning as under the Director Retirement Plans described under "Directors' Compensation." Under the Performance Share Plans, if a participant's employment is terminated voluntarily or involuntarily after a change in control, such participant will have the right to an immediate payment in shares of Company Common Stock for all Performance Cycles in which the participant is currently participating. The amount payable to a participant in the event of termination in connection with a change in control will be determined in accordance with the formula specified in the Performance Share Plans. In addition, after a change in control, whether or not the participant is terminated, under the Executive Deferred Compensation Plans, all amounts held under such plans will be paid to the participant. Under the Incentive Plans, after a change in control, whether or not a participant is terminated, a participant, including a participant who had terminated prior to the change in control by reason of retirement, disability or death, will have a right to an immediate cash payment based on actual base salary earned prior to the change in control and on the assumption that established targets for the year had been met. -274- EX-99.04 25 EXHIBIT 99.04 EXHIBIT 99.04 KENTUCKY UTILITIES COMPANY EMPLOYEE SAVINGS PLAN _____________________________________________ (As Amended and Restated Effective As Of January 1, 1997) -275- TABLE OF CONTENTS ARTICLE TITLE PAGE I General 1 II Definitions and Construction 1 III Eligibility and Participation 6 IV Contributions 7 V Investment Funds 18 VI Allocations to Participant's Accounts 20 VII Vesting of Accounts 24 VIII Distribution of Benefits 24 IX Loans to Participants 33 X Administration 35 XI Miscellaneous 42 XII Amendment, Termination and Action by Employers 46 XIII Successor Employer and Merger or Consolidation of Plans 47 -276- KENTUCKY UTILITIES COMPANY EMPLOYEE SAVINGS PLAN (As Amended and Restated Effective As Of January 1, 1997) ARTICLE I General In order to provide for a systematic savings program for eligible employees and in order to supplement such savings with employer contributions, Kentucky Utilities Company established, effective January 1, 1988, the Kentucky Utilities Company Employee Savings Plan. The terms and conditions of the Plan, as amended and restated as of January 1, 1997, are hereinafter set forth and shall be effective in respect of Plan Years beginning on or after January 1, 1997. However, certain provisions are effective as of other specified dates. Any provisions of the Plan that are effective prior to January 1, 1997 shall be deemed to amend the corresponding provisions of the Plan as in effect before this amendment and restatement. ARTICLE II Definitions and Construction 2.1 Definitions: The following words and phrases shall have the meanings set forth below unless a different meaning is clearly required by the context: (a) Account: Any or all of the accounts maintained for each Participant showing his interest in the Trust Fund as described in (i), (n), (u), (y) and (z) below. (b) Active Participant: An Employee who has in effect while a Participant an authorization for a reduction in Compensation as provided in Section 4.1. (c) Affiliated Employer: Any member of a controlled group of corporations (as defined in Section 414(b) of the Code) of which the Corporation is a member, any member of a group of trades or businesses which are under common control (as defined in Section 414(c) of the Code) of which the Corporation is a member, any member of an affiliated service group (as defined in Section 414(m) of the Code) of which the Corporation is a member, and any other organization deemed to be affiliated with the Corporation under Section 414(o) of the Code. (d) Board of Directors: The Board of Directors of the Corporation. -277- (e) Code: The Internal Revenue Code of 1986, as amended from time to time. (f) Committee: The committee established pursuant to the provisions of Section 10.2. (g) Common Stock: Common Stock of KU Energy Corporation or any successor or successors. (h) Compensation: The base pay, excluding overtime pay, shift differentials, commissions, pay-in-lieu of vacations, bonuses, performance incentive compensation and other special payments, paid to an Employee while an Active Participant by an Employer for services performed, but without reduction by the amount of any contributions made by the Employer on behalf of the Employee to his Compensation Conversion Accounts pursuant to Section 4.1 or pursuant to a salary reduction agreement under any cafeteria plan meeting the requirements of Section 125 of the Code. For any Plan Year, however, Compensation in excess of $150,000 (as adjusted for such Plan Year for the cost of living in accordance with Section 401(a)(17)(B) of the Code) shall be disregarded. (i) Compensation Conversion Accounts: A Participant's Matched Compensation Conversion Account and Supplemental Compensation Conversion Account. (j) Corporation: Kentucky Utilities Company or any successor or successors. (k) Effective Date: January 1, 1988. (l) Employee: Any person, on or after the Effective Date, receiving regular stated salary or wages from and rendering service to an Employer, but excluding, however, (i) any person who is part of a collective bargaining unit unless and until the certified collective bargaining agent and the Employer agree to coverage under the Plan, (ii) any person who is a leased employee or deemed to be an employee of an Employer as provided in Section 414(n) or (o) of the Code, and (iii) any person who is an independent contractor. Any individual who is a "leased employee" as provided by Section 414(n) of the Code shall be treated as a leased employee for purposes of Section 2.1(l)(ii) above and any other applicable provision of the Plan. A "leased employee" as provided by Section 414(n) of the Code means any individual who, pursuant to an agreement between the Employer or Affiliated Employer and any other person ("leasing organization"), has performed services for the Employer or Affiliated Employer on a substantially full time basis for a period of at least one year if such services are performed under primary direction or control by the Employer -278- or Affiliated Employer, as the case may be. An individual will not be considered a "leased employee" as provided in Section 414(n) of the Code, however, if (A) leased employees (determined without regard to this sentence) do not constitute more than 20 percent of the Employer's or Affiliated Employer's nonhighly compensated work force (within the meaning of Section 414(n)(5)(C)(ii) of the Code) and (B) such leased employee is covered by a money purchase pension plan maintained by the leasing organization that provides (i) a nonintegrated employer contribution rate of at least 10 percent of compensation, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the leased employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code, (ii) immediate participation and (iii) full and immediate vesting. (m) Employer: The Corporation and any Affiliated Employer to which the Plan has been extended by the Board of Directors and which adopts the Plan. Effective July 28, 1992 KU Energy Corporation became an Employer under the Plan and effective March 1, 1994 KU Capital Corporation became an Employer under the Plan. (n) Employer Matching Contribution Account: The account maintained for a Participant to record contributions, if any, made by an Employer on his behalf to the Trust Fund pursuant to Section 4.2, and adjustments relating thereto. (o) ERISA: The Employee Retirement Income Security Act of 1974, as amended from time to time. (p) Highly Compensated Employee: With respect to any Plan Year, any employee of the Employer or Affiliated Employer who during the preceding Plan Year: (i) was at any time a 5% owner (as defined in Section 416(i)(1) of the Code) of the Employer or any Affiliated Employer; or (ii) received compensation (as defined in Section 414(q)(7) of the Code) from the Employer and Affiliated Employers in excess of $80,000 (as adjusted under the Code) and, if the Corporation elects application for such preceding Plan Year, was in the top-paid 20% of employees of the Employer and Affiliated Employers ranked on the basis of compensation. With respect to the Plan Year, the term "Highly Compensated Employee" also means any employee of the Employer or Affiliated Employer who meets the requirements of paragraph (i) above during such Plan Year. -279- The identification of Highly Compensated Employees under this Section 2.1(p) shall be made in accordance with the provisions of Section 414(q) of the Code and the regulations thereunder. (q) Hour of Employment: An Hour of Employment shall mean: (i) each hour for which an employee is directly or indirectly paid, or entitled to payment, by an Employer or Affiliated Employer for the performance of duties (such hours to be credited to the employee for the computation period or periods in which the duties are performed); (ii) each hour, calculated in accordance with the provisions of Department of Labor Regulation Section 2530.200b-2(b) which are incorporated herein by reference, for which an employee is directly or indirectly paid, or entitled to payment, by an Employer or Affiliated Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence, provided, however, that no more than 501 Hours of Employment shall be credited under this Section 2.1(q)(ii) for any single continuous period whether or not such period occurs in a single computation period (such hours to be credited to the employee for the computation period or periods in which the period of time during which no duties are performed occurs); and (iii) each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to by an Employer or Affiliated Employer (such hours to be credited to the employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made). For the purposes of this Section 2.1(q), the term "employee" shall include a leased employee or other person deemed to be an employee of an Employer or Affiliated Employer as provided in Section 414(n) or (o) of the Code. (r) Implementation Date: The date, as determined by the Committee, on which the Telephone Response System will become operational under the Plan and Trust, which date will occur after January 1, 1997 and before May 1, 1997. (s) Inactive Participant: A Participant (i) who ceases to be an Employee but remains an employee of an Employer or Affiliated Employer, (ii) who while continuing -280- as an Employee has terminated his authorization for reduction in Compensation as provided in Section 4.1, or (iii) who has made a rollover contribution to his Rollover Contribution Account prior to becoming an Active Participant. (t) Investment Fund(s): Any or all of the funds provided for in Section 5.1. (u) Matched Compensation Conversion Account: The account maintained for a Participant to record contributions, if any, made by an Employer on his behalf to the Trust Fund pursuant to Section 4.1 that are matched by Employer matching contributions made pursuant to Section 4.2, and adjustments relating thereto. (v) Participant: An Employee participating in the Plan in accordance with the provisions of Section 3.1, an Inactive Participant or an Employee whose employment with the Employer and Affiliated Employers has terminated and who is having distribution of his Account deferred to age 65 in accordance with Section 8.5. (w) Plan: The Plan set forth in this instrument, as it may, from time to time, be amended. (x) Plan Year: The 12-month period commencing on January 1 and ending on December 31 of each year. (y) Rollover Contribution Account: The account maintained for a Participant to record rollover contributions, if any, made to the Trust Fund by or on behalf of the Participant pursuant to Section 4.9, and adjustments relating thereto. (z) Supplemental Compensation Conversion Account: The account maintained for a Participant to record contributions, if any, made by an Employer on his behalf to the Trust Fund pursuant to Section 4.1 that are unmatched by Employer matching contributions made pursuant to Section 4.2, and adjustments relating thereto. (aa) Telephone Response System: The telephone response system, if any, maintained by the Trustee, or an affiliate thereof, for purposes of the Plan and Trust and by means of which a Participant may make or provide certain elections, authorizations, directions and instructions under the Plan and Trust. All elections, authorizations, directions and instructions made by a Participant by means of the Telephone Response System shall be processed by the Trustee or its affiliates only after the identity of the Participant is verified by use of a personal identification number furnished by the Trustee or its affiliate and shall be subject to and become effective in accordance with the written rules of the Telephone Response System as prepared -281- by the Trustee or its affiliates and in effect from time to time. (bb) Trust: The Trust to which contributions under the Plan are to be made in order to establish a fund (the "Trust Fund") to be held in trust and administered by the Trustee, which Trust, as from time to time amended, constitutes part of the Plan. (cc) Trustee: The trustee or trustees of the Trust, and their successors and substitutes. (dd) Valuation Date: The last day of each calendar quarter. On and after January 1, 1997, however, Valuation Date shall mean each day the New York Stock Exchange is open. 2.2 Construction: The masculine gender, where appearing in the Plan, shall be deemed to include the feminine gender, and the singular may include the plural, unless the context clearly indicates to the contrary. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan, and not to any particular provision or Section. ARTICLE III Eligibility and Participation 3.1 Eligibility: Each Employee shall be eligible to participate in the Plan as of the first day of the payroll period beginning coincident with or next following the date as of which he has completed a 12-consecutive month period beginning with his employment commencement date, or anniversary thereof, of not less than 1,000 Hours of Employment, provided, however, an Employee shall not be eligible to participate in the Plan prior to the first day of the payroll period beginning coincident with or next following January 1, 1988 or the date he becomes an Employee, if later. For purposes of this Section 3.1, "employment commencement date" means the date on which an Employee first performs an Hour of Employment within the meaning of Section 2.1(q)(i). -282- 3.2 Participation: (a) Prior to the Implementation Date, an Employee who is eligible to participate in the Plan may elect to become a Participant in the Plan as of the date he first becomes eligible to participate as provided in Section 3.1, or as of the first day of any payroll period thereafter, by filing prior written notice of such election with the Employer, accompanied by (i) an authorization for a reduction in Compensation as provided in Section 4.1 and (ii) an election as to Investment Funds as provided in Section 5.2. Upon filing such election notice, he shall become a Participant as of the date elected if such date is at least 30 days after filing the election notice or, if such date is less than 30 days thereafter or a date is not specified, as of the first day of the first payroll period practicable beginning not more than 30 days after filing the election notice. (b) On and After the Implementation Date, an Employee who is eligible to participate in the Plan may elect to become a Participant in the Plan as of the date he first becomes eligible to participate as provided in Section 3.1, or as of the first day of any payroll period thereafter, by providing prior notice of such election by such means (which may include through use of the Telephone Response System) as the Committee shall prescribe from time to time, accompanied by (i) an authorization for a reduction in Compensation as provided in Section 4.1 and (ii) an election as to Investment Funds as provided in Section 5.2. Upon providing such election notice, he shall become a Participant as of the first day of the first payroll period practicable beginning not more than 30 days after the election notice is given. 3.3 Re-Employment: If an employee of an Employer or Affiliated Employer terminates his employment after he has completed a period of employment described in Section 3.1 and thereafter he is hired as an Employee, he shall be eligible to become an Active Participant on the first day of the payroll period beginning coincident with or next following the date of his reemployment, and he may elect to become an Active Participant as of such date, or as of the first day of any payroll period thereafter, as provided in Section 3.2. ARTICLE IV Contributions 4.1 Compensation Conversion Contributions: (a) At the time an Employee elects to become a Participant, he shall authorize the Employer, subject to the provisions of this Section 4.1 and Sections 4.5, 4.7, 4.8 -283- and 6.4, to reduce his Compensation in an amount equal to 1% of his Compensation per payroll period while an Active Participant or such multiple of 1% thereof, but not to exceed 16%, as he may designate, and the Employer shall make contributions to the Trust Fund for allocation (i) to the Matched Compensation Conversion Account of each of its Active Participants who so authorizes in an amount equal to such reduction of his Compensation for a payroll period of up to 6% and (ii) to the Supplemental Compensation Conversion Account of each of its Active Participants who so authorizes in an amount equal to such reduction of his Compensation for a payroll period of over 6% (up to 16%). (b) A Participant may change his authorization for a reduction in Compensation as of the first day of any payroll period (i) prior to the Implementation Date by giving the Committee at least 15 days prior written notice, or (ii) on or after the Implementation Date by such means (which may include through use of the Telephone Response System) as the Committee shall prescribe from time to time. Any change may either (i) increase or decrease within the limits prescribed in Section 4.1(a) the rate of Compensation reduction under this Section 4.1 or (ii) terminate or revoke a prior termination of such Compensation reduction authorization. A change in the rate or termination of a Participant's Compensation reduction authorization shall not entitle him to receive payment of benefits under Article VIII, which shall be payable only as provided therein. Notwithstanding the preceding paragraph or the provisions of Section 4.1(c), in the event a Participant receives a hardship withdrawal under Section 8.6 or from any other cash or deferred arrangement within the meaning of Section 401(k) of the Code which is part of a qualified plan maintained by the Corporation or the Affiliated Employers, then the Participant's authorization for a reduction in Compensation under this Section 4.1 shall terminate automatically on the date as of which such hardship withdrawal is made and such termination shall continue in effect for a period of 12 months thereafter. After the expiration of such 12-month period, the Participant may again elect to actively participate in the Plan in accordance with the provisions of this Section 4.1. (c) Any authorization or change in authorization under this Section 4.1 made by means other than the Telephone Response System shall be effective as soon as practicable after it is made and shall be made (i) on a form provided or prescribed by the Committee and (ii) in accordance with rules of the Committee in effect from time to time. Any authorization or change therein made from time to time by means of the Telephone Response System shall be effective as soon as practicable after it is made, but in no event shall such an authorization or a change in authorization be effective unless and until the Participant has filed with -284- the Employer a signed statement authorizing Compensation reductions and other transactions under the Plan made by means of the Telephone Response System. (d) The maximum amount that may be contributed in the aggregate to the Compensation Conversion Accounts on behalf of a Participant for any Plan Year shall not exceed $9,500, as adjusted for cost of living in accordance with Section 402(g)(5) of the Code. In the event the Participant received a hardship withdrawal in the immediately preceding Plan Year under Section 8.6 or from any other cash or deferred arrangement within the meaning of Section 401(k) of the Code which is part of a qualified plan maintained by the Corporation or the Affiliated Employers, such maximum amount shall be reduced as provided in clause (B)(iv) of the second sentence of Section 8.6(b). Such maximum amount for any Plan Year shall also be reduced by the excess, if any, of (i) the amount of any elective deferrals (within the meaning of Treasury Reg. Section 1.402(g)-1(b)) contributed by the Employer or Affiliated Employers for such Plan Year on behalf of the Participant pursuant to a salary reduction agreement under any other cash or deferred arrangement within the meaning of Section 401(k) of the Code which is part of a qualified plan maintained by the Employer or Affiliated Employer or to any other plan, contract or arrangement of the Employer or Affiliated Employer described in said regulation, over (ii) the amount of any excess contributions paid to the Participant for the Plan Year pursuant to Section 4.5 or similar provision under any other such cash or deferred arrangement. (e) In the event the limitation under Section 4.1(d) is exceeded for a Plan Year, then, notwithstanding any other provision of the Plan or law, such excess, plus any income and minus any loss allocable thereto, shall be distributed to the Participant not later than April 15 next following the end of such Plan Year. Such excess to be distributed, however, shall be reduced by the amount of contributions, if any, previously distributed for such Plan Year from the Participant's Compensation Conversion Accounts pursuant to the requirements of Section 4.5 or 4.8. A Participant, however, may only receive such a distribution during such Plan Year if: (i) the Participant designates in writing that the distribution is a distribution of an amount in excess of the limitation under Section 402(g) of the Code for the Plan Year, (ii) the distribution is made after the date on which the Plan received the excess contribution, and (iii) the Plan designates the distribution as a distribution of amounts in excess of the limitation under Section 402(g) of the Code for the Plan Year. -285- (f) Distribution in accordance with Section 4.1(e) shall be made first from the Participant's Supplemental Compensation Conversion Account and then from his Matched Compensation Conversion Account only to the extent the amount to be distributed exceeds the balance in his Supplemental Compensation Conversion Account. Excess contributions distributed from an Account, plus any income and minus any loss allocable thereto, shall be distributed from the Investment Funds in which such Account is invested at the time of distribution pro rata in accordance with the balance of the Account in each of the Investment Funds as of the Valuation Date next preceding the date of distribution, except that no amount shall be distributed from the Account invested in the Participant Loan Fund until the balance in the other Investment Funds has been distributed. (g) For purposes of Section 4.1(d), the income or loss allocable to the excess contributions to be distributed from a particular Account for a Plan Year shall be determined by multiplying the total income or loss of the Account for such Plan Year by a fraction, the numerator of which is the excess contributions to be distributed from such Account for such Plan Year and the denominator of which is the balance in such Account as of the end of such Plan Year reduced by the income allocable to such Account for the Plan Year or increased by the loss allocable to such Account for the Plan Year. 4.2 Employer Matching Contributions: Subject to the provisions of Sections 4.6, 4.7, 4.8 and 6.4, each Employer shall contribute to the Trust Fund for each payroll period beginning on or after January 1, 1997 matching contributions on behalf of each of its Employees who is an Active Participant during such payroll period in an amount equal to fifty percent (50%) of the amount contributed in accordance with Section 4.1 on behalf of the Participant to his Matched Compensation Conversion Account for such payroll period. Such amount shall be allocated to the Participant's Employer Matching Contribution Account. 4.3 Remittance of Contributions: Contributions under Sections 4.1 and 4.2 shall be paid in cash to the Trustee as soon as practicable after the payroll period for which they are paid, but in no event later than the 15th business day of the month following the month in which amounts contributed under Section 4.1 would otherwise have been payable in cash to Participants as wages. The Trustee shall be accountable for all contributions received from the Employers, but the Trustee shall have no duty to see that the contributions received comply with the provisions of the Plan, nor shall the Trustee be obligated or have any right to enforce or collect any contribution from the Employers or otherwise see that the funds are deposited according to the provisions of the Plan. -286- 4.4 Participant Contributions: Non-deductible contributions shall not be required or permitted under the Plan by any Participant. 4.5 Adjustments to Compensation Conversion Accounts: (a) Notwithstanding the provisions of Section 4.1, if the Actual Deferral Percentage for the Eligible Employees who are Highly Compensated Employees for any Plan Year beginning on or after January 1, 1997 exceeds, or in the judgment of the Committee is likely to exceed, the greater of (i) or (ii) as follows: (i) The Actual Deferral Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, multiplied by 1.25, or (ii) The Actual Deferral Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, multiplied by 2; provided, however, that the Actual Deferral Percentage for the Eligible Employees who are Highly Compensated Employees for the Plan Year may not exceed the Actual Deferral Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees by more than two percentage points; then the amounts contributed, or to be contributed, to the Compensation Conversion Accounts on behalf of Participants who are Highly Compensated Employees for such Plan Year shall be reduced at such time and in such manner as the Committee shall determine under rules and regulations uniformly applied and consistent with the following provisions of this Section 4.5 so that the Actual Deferral Percentage for the Eligible Employees who are Highly Compensated Employees for such Plan Year does not exceed the greater of (i) or (ii) above. For purposes of applying the preceding paragraph for any Plan Year, the Corporation may elect to use the Actual Deferral Percentage for the Plan Year for Eligible Employees who are not Highly Compensated Employees rather than for the next preceding Plan Year, but if such an election is made, it may not be changed except to the extent provided in applicable governmental regulations, rulings or announcements. The provisions of this Section 4.5(a) shall be applied separately in respect of any Participants covered under each separate collective bargaining agreement. (b) If during the Plan Year a Participant who is a Highly Compensated Employee for such Plan Year also participated in any other plan of an Employer or Affiliated Employer which includes a cash or deferred arrangement -287- qualifying under Section 401(k) of the Code, his compensation, and contributions made pursuant to the cash or deferred arrangement, under such other plan shall be taken into account for purposes of applying the tests under Section 4.5(a)(i) and (ii) above. If during the Plan Year one or more other plans which include a cash or deferred arrangement under Section 401(k) of the Code are considered along with this Plan as one plan for purposes of Section 410(b) of the Code (other than the average benefit percentage test thereunder), all such plans shall be treated as one plan in applying the tests under Section 4.5(a)(i) and (ii) above. If during a Plan Year a Participant who is not a Highly Compensated Employee for such Plan Year had contributions made under Section 4.1 on his behalf in excess of the maximum limitation contained in Section 4.1(d) for the Plan Year, such excess contributions shall not be taken into account for purposes of applying the tests of Section 4.5(a)(i) and (ii) above. (c) In order to accomplish the reductions required under Section 4.5(a) or to meet the limitations of Section 4.8, the Committee, in its discretion, may reduce contributions previously made first from a Participant's Supplemental Compensation Conversion Account to the extent thereof and then from his Matched Compensation Conversion Account, or adjust the amount of reductions in Compensation authorized pursuant to the provisions of Section 4.1, for such period as may be required. Any reductions in the amounts contributed to the Compensation Conversion Accounts on behalf of Participants who are Highly Compensated Employees for such Plan Year shall be made on the basis of the amounts of Compensation reductions contributed by such Participants beginning with the greatest amounts. (d) The amount by which contributions previously made to a Participant's Compensation Conversion Accounts for a Plan Year are reduced under this Section 4.5, plus any income and minus any loss allocable thereto, shall be paid, notwithstanding any other provision of the Plan or law, to the Participant not later than two and one-half months after the end of such Plan Year. The amount of such contributions to be distributed, however, shall be reduced by the amount of excess contributions, if any, previously distributed for such Plan Year from the Participant's Compensation Conversion Accounts pursuant to the requirements of Section 4.1(d). Such distributions from an Account shall be made from the Investment Funds in which such Account is invested at the time of distribution pro rata in accordance with the balance of the Account in each of the Investment Funds as of the Valuation Date next preceding the date of distribution, except that no amount shall be distributed from the Account invested in the Participant Loan Fund until the balance in the other Investment Funds has been distributed. For purposes of this Section 4.5(d), the income or loss allocable to contributions to be distributed from a -288- particular Account for a Plan Year shall be determined in the manner provided in Section 4.1(g) for determining income or loss allocable to excess contributions thereunder. (e) For purposes of this Section 4.5 and Section 4.8: (i) "Actual Deferral Percentage" for a specified group of Eligible Employees for a Plan Year shall be the average of 100 times the result (calculated separately for each Eligible Employee in such group and rounded to four decimal places) obtained by dividing the amount actually contributed to the Account of each such Eligible Employee under Section 4.1 for such Plan Year by the Eligible Employee's compensation for the portion of such Plan Year for which contributions to the Compensation Conversion Accounts were made or could have been made for such Eligible Employee; (ii) "Eligible Employee" shall mean an Employee who is eligible to participate in the Plan as provided in Section 3.1 for all or any part of a Plan Year; and (iii) "Compensation" for a Plan Year for purposes of Section 4.5(e)(i) shall have the meaning determined by the Committee in accordance with Section 414(s) of the Code and the regulations thereunder (but not in excess of the limitation described in Section 401(a)(17) of the Code) and shall only include such compensation for the portion of such Plan Year for which contributions to the Eligible Employee's Compensation Conversion Accounts were made or could have been made. 4.6 Adjustments to Employer Matching Contribution Accounts: (a) Notwithstanding the provisions of Section 4.2, if the Average Contribution Percentage for the Eligible Employees who are Highly Compensated Employees for any Plan Year beginning on or after January 1, 1997 exceeds, or in the judgment of the Committee is likely to exceed, the greater of (i) or (ii) as follows: (i) The Average Contribution Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, multiplied by 1.25, or (ii) The Average Contribution Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, multiplied by 2; provided, however, that the Average Contribution Percentage for the Eligible Employees who are Highly Compensated Employees for the Plan Year may not exceed the Average Contribution Percentage for the next -289- preceding Plan Year for Eligible Employees who are not Highly Compensated Employees by more than two percentage points; then the amounts contributed, or to be contributed, to the Employer Matching Contribution Accounts on behalf of Participants who are Highly Compensated Employees for such Plan Year shall be reduced at such time and in such manner as the Committee shall determine under rules and regulations uniformly applied and consistent with the following provisions of this Section 4.6 so that the Average Contribution Percentage for the Eligible Employees who are Highly Compensated Employees for such Plan Year does not exceed the greater of (i) or (ii) above. For purposes of applying the preceding paragraph for any Plan Year, the Corporation may elect to use the Actual Contribution Percentage for the Plan Year for Eligible Employees who are not Highly Compensated Employees rather than for the next preceding Plan Year, but if such an election is made, it may not be changed except to the extent provided in applicable governmental regulations, rulings or announcements. The provisions of this Section 4.6(a) shall not apply in respect of any Participants covered under a collective bargaining agreement. (b) If during the Plan Year a Participant who is a Highly Compensated Employee for such Plan Year also participated in any other plan of an Employer or Affiliated Employer to which employer matching contributions or employee contributions required to be taken into account under this Section 4.6 are made, his compensation, and such contributions made, under such other plan shall be taken into account for purposes of applying the tests under Section 4.6(a)(i) and (ii) above. If during a Plan Year one or more plans to which employer matching contributions or employee contributions required to be taken into account under this Section 4.6 are made are considered along with the Plan as one plan for purposes of Section 410(b) of the Code (other than the average benefit percentage test thereunder), all such plans shall be treated as one plan in determining the Average Contribution Percentage of a group of Participants in the Plan. (c) In order to accomplish the reductions required under Section 4.6(a) or to meet the limitations of Section 4.8, the Committee, in its discretion, may reduce contributions previously made, or adjust the amount of contributions to be made, pursuant to the provisions of Section 4.2, for such period as may be required. Any reductions in the amounts contributed to the Employer Matching Contribution Accounts on behalf of Participants who are Highly Compensated Employees for such Plan Year shall be -290- made on the basis of the amounts of the Employer matching contributions contributed on behalf of such Participants beginning with the greatest amounts. (d) The amount by which contributions previously made to a Participant's Employer Matching Contribution Account for a Plan Year are reduced under this Section 4.6, plus any income and minus any loss allocable thereto, shall be paid, notwithstanding any other provision of the Plan or law, to the Participant not later than two and one-half months after the end of such Plan Year. In addition, if reductions in contributions to a Participant's Matched Compensation Conversion Account are made pursuant to Sections 4.1 or 4.5, the Committee shall reduce Employer matching contributions previously made with respect to such contributions pursuant to the provisions of Section 4.2, and such amount, plus any income and minus any loss allocable thereto, shall be forfeited and applied to reduce the amount of Employer matching contributions made pursuant to Section 4.2. Reductions in contributions from the Participant's Employer Matching Contribution Account, plus any income and minus any loss allocable thereto, shall be made from the Investment Funds in which such Account is invested at the time of reduction pro rata in accordance with the balance of the Account in each of the Investment Funds as of the Valuation Date next preceding the date of reduction, except that no reduction shall be made from the Account invested in the Participant Loan Fund until the balance in the other Investment Funds has been reduced to zero. For purposes of this Section 4.6(d), the income or loss allocable to contributions for a Plan Year shall be determined in the manner provided in Section 4.1(g) for determining income or loss allocable to excess contributions under Section 4.1. (e) For purposes of this Section 4.6 and Section 4.8: (i) "Average Contribution Percentage" for a specified group of Eligible Employees for a Plan Year shall be the average of 100 times the result (calculated separately for each Eligible Employee in such group and rounded to four decimal places) obtained by dividing the amount actually contributed to the Account of each such Eligible Employee under Section 4.2 for such Plan Year by the Eligible Employee's compensation for the portion of such Plan Year for which contributions to the Employer Matching Contribution Account were made or could have been made for such Eligible Employee; (ii) "Eligible Employee" shall mean an Employee who is eligible to participate in the Plan as provided in Section 3.1 for all or any part of a Plan Year, excluding, however, any Employee who is covered under a collective bargaining agreement; and -291- (iii) "Compensation" for a Plan Year for purposes of Section 4.6(e)(i) shall have the meaning determined by the Committee in accordance with Section 414(s) of the Code and the regulations thereunder (but not in excess of the limitation described in Section 401(a)(17) of the Code) and shall only include such compensation for the portion of such Plan Year for which contributions to the Eligible Employee's Employer Matching Contribution Account were made or could have been made. 4.7 Aggregation of Discrimination Tests: The Actual Deferral Percentage Test described in Section 4.5 and the Average Contribution Percentage Test described in Section 4.6 may be aggregated, at the election of the Corporation, and applied as provided in Section 401(k) of the Code and the regulations thereunder. 4.8 Multiple Use of Alternative Limitation: (a) Notwithstanding the foregoing provisions of this Article IV, if, after the application of Sections 4.5 and 4.6, the sum of the Actual Deferral Percentage and the Average Contribution Percentage for the group of Eligible Employees who are Highly Compensated Employees for a Plan Year exceeds the aggregate limit (as defined below) for the Plan Year, then the contributions made for such Plan Year pursuant to Sections 4.1 and 4.2 for Eligible Employees who are Highly Compensated Employees shall be reduced so that the aggregate limit is not exceeded. Such reductions shall be made first in contributions made pursuant to Section 4.1 (but only to the extent such contributions are allocated to Supplemental Compensation Conversion Accounts) and then in contributions made pursuant to Section 4.2. Reductions in contributions shall be made in the manner provided in Section 4.5 or Section 4.6, whichever is applicable. The amount by which a Highly Compensated Employee's contributions is reduced in accordance with the foregoing shall be treated as an excess contribution under Section 4.5 or Section 4.6, whichever the case may be. For the purposes of this Section 4.8, the Actual Deferral Percentage and Average Contribution Percentage of Eligible Employees who are Highly Compensated Employees are determined after any reductions required for such Plan Year under Sections 4.5 and 4.6, respectively. No reduction, however, shall be required by this Section 4.8 for a Plan Year if either (i) the Actual Deferral Percentage of the Eligible Employees who are Highly Compensated Employees does not exceed 1.25 multiplied by the Actual Deferral Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, or (b) the Average Contribution Percentage of Eligible Employees who are Highly Compensated Employees does not exceed 1.25 multiplied by the Average Contribution -292- Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees. (b) For purposes of this Section 4.8, the term "aggregate limit" for a Plan Year means the sum of (i) 125% of the greater of (A) the Actual Deferral Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees or (B) the Average Contribution Percentage for the next preceding Plan Year for Eligible Employees who are not Highly Compensated Employees, and (ii) the lesser of (A) 200% of, or (B) two percentage points plus, the lesser of such Actual Deferral Percentage or Average Contribution Percentage. If it would result in a larger aggregate limit, the word "lesser" is substituted for the word "greater" in subpart (i) of this paragraph, and the word "greater" is substituted for the word "lesser" the second place it is used in subpart (ii) of this paragraph. (c) For purposes of applying the provisions of this Section 4.8, if pursuant to Section 4.5 or 4.6, respectively, the Corporation has elected to use the Actual Deferral Percentage and/or Actual Contribution Percentage for the Plan Year for Eligible Employees who are not Highly Compensated Employees rather than for the next preceding Plan Year, then such election shall also apply for purposes of this Section 4.8. 4.9 Rollover Contributions: An Employee, whether or not he is eligible to participate in the Plan as provided in Section 3.1, may make a "qualifying rollover contribution" to the Plan. A qualifying rollover contribution means the contribution to the Plan by or on behalf of an Employee of: (a) All or a portion of an eligible rollover distribution (as defined in Section 402(c)(4) of the Code); provided, however, that the portion, if any, of an eligible rollover distribution consisting of nondeductible employee contributions may not be contributed to the Plan; or (b) A rollover contribution (as defined in Section 408(d)(3)(A)(ii) of the Code). A qualifying rollover contribution to be made by or on behalf of an Employee must be made in cash to the Trustee by an Employee no later than the 60th day following the day upon which the Employee received the eligible rollover distribution or rollover contribution with respect to which the qualifying rollover contribution is to be made or directly by the trustee of another plan qualified under Section 401(a) of the Code. The Committee shall develop such procedures, and may require such information and verifications from an Employee desiring to make a qualifying rollover contribution, as it deems necessary or desirable to determine that the proposed contribution will meet the requirements of this Section 4.9. A qualifying rollover -293- contribution made under this Section 4.9 shall be allocated to the Employee's Rollover Contribution Account. If the Employee is not eligible to or has not elected to participate in the Plan as an Active Participant, his qualifying rollover contribution shall be accompanied by an election as to Investment Funds as provided in Section 5.2 and he shall become an Inactive Participant as of the date the qualifying rollover contribution is made. ARTICLE V Investment Funds 5.1 Investment Funds: As of January 1, 1997, there shall be the following Investment Funds under the Plan: (a) Protected Income Fund. (b) Common Stock Fund. The Company as of January 1, 1997 and from time to time thereafter may, in its discretion, establish one or more additional Investment Funds or terminate any Investment Fund, including the Protected Income Fund or the Company Stock Fund, as it deems appropriate. Amounts loaned to a Participant as provided in Article IX shall be recorded in and considered an investment by such Participant in a fund designated as the Participant Loan Fund. 5.2 Participant's Election of Investment Funds: (a) Each Employee who becomes a Participant prior to the Implementation Date shall file a written election with the Committee directing that contributions to his Employer Matching Contribution Account, to his Compensation Conversion Accounts and to his Rollover Contribution Account be invested in specified multiples of 10% (1% on or after January 1, 1997) in any of the Investment Funds offered under the Plan (other than the Participant Loan Fund). Each Employee who becomes a Participant on or after the Implementation Date shall make an election with the Trustee by such means (which may include through use of the Telephone Response System) as the Committee shall prescribe from time to time, directing that contributions to his Employer Matching Contribution Account, to his Compensation Conversion Accounts and to his Rollover Contribution Account be invested in specified multiples of 1% in any of the Investment Funds offered under the Plan (other than the Participant Loan Fund). Contributions shall be invested in accordance with an election made under this Section 5.2(a) until an election is changed as hereinafter provided in the Plan from time to time. (b) An election under this Section 5.2 may be changed after January 2, 1997 by a Participant only as of a -294- Valuation Date occurring on or after the Implementation Date and by giving the Trustee notice of such change by such means (which may include through use of the Telephone Response System) as the Committee shall prescribe from time to time. Any change shall direct either or both of: (i) that the balance in such Participant's Employer Matching Contribution Account, Matched Compensation Conversion Account, Supplemental Compensation Conversion Account and Rollover Contribution Account which is not invested in the Participant Loan Fund as of the effective date of such change, be transferred in multiples of 1% to one of the remaining Investment Funds (other than the Participant Loan Fund), or (ii) that subsequent contributions to the Participant's Employer Matching Contribution Account, Matched Compensation Conversion Account, Supplemental Compensation Conversion Account and Rollover Contribution Account be invested in multiples of 1% in any of Investment Funds offered under the Plan (other than the Participant Loan Fund). For purposes of subparagraph (i) above, transfers from the Common Stock Fund to the extent invested in shares of Common Stock shall be made based on 1% multiples of the number of shares held in the Participant's Account as of the effective date of the change. Any change in investment election made in accordance with the preceding paragraph shall be initiated and completed as of the Valuation Date made or as soon as practicable thereafter, subject to the rules and procedures, if any, relating to the Investment Funds involved. To the extent any common, collective, pooled or similar investment fund or guaranteed investment contract in which an Investment Fund is invested restricts transfers into or from such common, collective, pooled or similar investment fund or guaranteed investment contract, such restrictions shall apply to limit a Participant's ability to change investment elections under this Section 5.2(b). (c) Any election or change in election under this Section 5.2 required to be made in writing shall be made (i) on a form provided or prescribed by the Committee and (ii) in accordance with rules of the Committee in effect from time to time. -295- ARTICLE VI Allocations to Participant's Accounts 6.1 Individual Accounts: A separate Account shall be maintained for each Participant to show his interest in the Investment Funds. Each of the Investment Funds may, however, be invested as a single fund, without segregation of Trust Fund investments to the individual Accounts of Participants. Each Account will consist of an "Employer Matching Contribution Account," a "Matched Compensation Conversion Account", a "Supplemental Compensation Conversion Account" and a "Rollover Contribution Account". 6.2 Valuations and Adjustments: Each Participant's Accounts in an Investment Fund as of each Valuation Date with respect to that Investment Fund shall be adjusted as follows: (a) As of each Valuation Date with respect to an Investment Fund, the amount of contributions made by or on behalf of the Participant and paid to the Trust Fund since the next preceding Valuation Date and allocable to such Investment Fund shall be added to the Accounts and the Investment Fund to which allocated. (b) As of each Valuation Date with respect to an Investment Fund, the amount of any interest and loan repayments paid since the next preceding Valuation Date by the Participant to the Trust Fund in respect of loans in accordance with Article IX and allocable to such Investment Fund in accordance with Section 9.4 shall be added to the Accounts and the Investment Fund to which allocated. (c) As of each Valuation Date with respect to an Investment Fund, the amount of any distributions, withdrawals or expenses paid from the Accounts and such Investment Fund since the next preceding Valuation Date shall be subtracted from the Accounts and the Investment Fund from which paid. (d) The Trustee shall, as of the close of business on each Valuation Date with respect to an Investment Fund, determine the fair market value and "Fund Earnings" of such Investment Fund. "Fund Earnings" of an Investment Fund as of any Valuation Date shall mean the net of such Investment Fund's earnings (including accrued interest), expenses (other than expenses charged to a particular Participant's Accounts) and gains, losses and unrealized appreciation and depreciation on the assets of such Investment Fund since the next preceding Valuation Date. However, in respect of amounts invested in common, collective, pooled or similar investment funds, fair market value and "Fund Earnings" shall be as reported by that fund. As of the close of business on each Valuation Date with respect to an Investment Fund, "Fund Earnings" for such Investment Fund -296- shall be allocated among Participants' Accounts in the same ratio as the Participant's "Adjusted Account Balance" with respect to each of his Accounts in the Investment Fund bears to the total of all Participants' "Adjusted Account Balances" in such Investment Fund as of the Valuation Date. However, with respect to the Common Stock Fund and any other Investment Fund that utilizes full and fractional share accounting, any dividends or other rights paid on shares allocated to Participants' Accounts in such Investment Fund as of the shareholder record date in respect of such dividend or right shall be allocated, when paid, to the Accounts of Participants in such Investment Fund to whom the shares in respect of which the dividends or rights were paid were allocated as of the shareholder record date. A Participant's "Adjusted Account Balance" with respect to an Account in an Investment Fund shall mean the Account balance in such Investment Fund as of the next preceding Valuation Date plus or minus, as the case may be, such percentage, if any, of the amount of the adjustments made pursuant to Section 6.2(a), (b), (c) or (e) with respect to such Account as of such Valuation Date as the Committee shall determine in accordance with a uniform and non-discriminatory policy with respect to such Investment Fund. (e) As of each Valuation Date with respect to an Investment Fund, the amount of any transfers in respect of the Accounts made since the next preceding Valuation Date to or from the Investment Fund (including amounts to be paid from the Trust Fund on account of loans in accordance with Article IX) shall be subtracted from or added to, as the case may be, the Investment Fund. 6.3 Adjustments Conclusive: Every adjustment under this Article VI shall be deemed to have been made on the applicable date, regardless of the dates of actual entries. The determination of the net value of the assets of the Trust Fund and of the debits or credits to the Accounts of the respective Participants and their Beneficiaries, as provided, shall be conclusive and binding upon all parties. -297- 6.4 Limitation on Allocations: (a) Notwithstanding anything to the contrary contained in the Plan, in no case shall the amount of the "annual addition," as defined in Section 415(c)(2) of the Code, consisting of Employer contributions under Sections 4.1 and 4.2 which are allocated to a Participant's Account for any Plan Year, combined with the annual additions that are allocated to his accounts for such Plan Year under all other defined contribution plans maintained by any Employer or Affiliated Employer, together with amounts treated as an annual addition for such Plan Year under Sections 415(l)(1) and 419A(d)(2) of the Code, exceed the lesser of (i) $30,000, as adjusted, effective on and after January 1, 1995, by the cost of living pursuant to Section 415(d) of the Code (the "Dollar Limitation") and (ii) 25 percent of the Participant's compensation as reported on his Forms W-2 from the Employers and Affiliated Employers for such Plan Year. (b) Notwithstanding the provisions of Section 6.4(a), the otherwise permissible "annual addition" for any Participant under this Plan may be reduced to the extent necessary, as determined by the Committee, to prevent disqualification of the Plan under Section 415 of the Code, which imposes the following additional limitations on the benefits payable to Participants who also may be participating in another tax-qualified pension, profit sharing, thrift, savings or stock bonus plan or in a welfare plan maintained by an Employer or Affiliated Employer: If the Participant is also covered under a qualified defined benefit plan of an Employer or Affiliated Employer, the sum of a Participant's "defined benefit plan fraction" and his "defined contribution plan fraction" may not exceed 1.0. The "defined benefit plan fraction" shall be a fraction (not in excess of 1) the numerator of which is the projected annual benefit of the Participant under all defined benefit plans required to be taken into account, determined as of the end of the Plan Year, and the denominator of which is the lesser of (A) the product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Plan Year (or, if greater, by the Participant's current accrued benefit under such defined benefit plans as of December 31, 1986) and (B) the product of 1.4 multiplied by the amount that may be taken into account under Section 415(b)(1)(B) of the Code with respect to the Participant for such Plan Year. The "defined contribution plan fraction" shall be a fraction (not in excess of 1) the numerator of which is the sum of the "annual additions" as determined under Sections 415(c)(2), 415(l)(1) and 419A(d)(2) of the Code (except that employee contributions made for any Plan Year prior to 1987 that were not treated as an annual addition for such year shall not be treated as an annual addition hereunder for any year after 1986) to the Participant's account under all plans required -298- to be taken into account, as of the end of the Plan Year, and the denominator of which is the sum of the "applicable maximum amount" of annual additions that could have been made under Section 415(c) of the Code for the Plan Year and for each prior calendar year of such Participant's employment with the Employers and Affiliated Employers. The "applicable maximum amount" of annual addition for any year shall be equal to the lesser of 1.25 multiplied by the Dollar Limitation in effect for such year, and 1.4 multiplied by the amount that may be taken into account under Section 415(c)(1)(B) of the Code with respect to the Participant for such year. The numerator of the "defined contribution plan fraction" shall be adjusted, where applicable, as prescribed by the Internal Revenue Service. In the event the Plan is determined to be a "top-heavy plan" within the meaning of Section 416(g) of the Code with respect to any Plan Year, then, unless the requirements of Section 416(h)(2) of the Code are met with respect to the Plan, the number "1.0" shall be substituted for the number "1.25" wherever it appears in this Section 6.4(b). The provisions of this Section 6.4(b) shall be without effect for any Plan Year beginning after December 31, 1999. (c) Any contribution, plus or minus any earnings, gains, or losses attributable thereto, which may not be allocated by reason of this Section 6.4 shall, subject to the limitations of this Section 6.4, be (i) reallocated to the Accounts of other Participants entitled to share in Employer matching contributions for such Plan Year where Employer matching contributions under Section 4.2 are involved in proportion to the ratio which the Compensation of each of such other Participants for the Plan Year bears to the aggregate Compensation of all of such other Participants for the Plan Year, and (ii) paid to the Participant where any contributions under Section 4.1 are involved. If, however, the reallocation provided for in (i) of the preceding sentence would cause the limitations of this Section 6.4 to be exceeded with respect to each Participant for the Plan Year, then any Employer matching contributions under Section 4.2 that may not be so reallocated may not be distributed to Participants but shall be held unallocated in a suspense account under the Plan. All amounts held in the suspense account during any subsequent Plan Year shall be used to reduce Employer matching contributions for such subsequent Plan Year and succeeding Plan Years as necessary. 6.5 Statement of Account: As soon as practicable after the end of each calendar quarter, a statement will be furnished to each Participant showing the status of his Account at the beginning and end of such calendar quarter, any changes in such Account during such calendar quarter, and such other information as the Committee may determine. -299- ARTICLE VII Vesting of Accounts 7.1 Vesting of Accounts: A Participant's Accounts shall at all times be fully vested in such Participant and a Participant's right to receive distributions from his Accounts shall at all times be nonforfeitable. ARTICLE VIII Distribution of Benefits 8.1 Settlement Date: A Participant shall be entitled to distribution of his Account following his Settlement Date. The Settlement Date of a Participant shall be whichever of the following dates is applicable: (a) Normal Retirement Date: The Participant's sixty- fifth (65th) birthday. (b) Late Retirement Date: The actual retirement date of a Participant who remains in active service of the Employers and Affiliated Employers after his normal retirement date. (c) Early Retirement Date: The date before a Participant's normal retirement date on which he retires from the active service of the Employers and Affiliated Employers under a qualified defined benefit plan of the Employer or Affiliated Employer. (d) Date of Death: The date of a Participant's death prior to his actual retirement date. (e) Date of Disability: The date before a Participant's normal or early retirement date on which the Employer determines that he is totally and permanently disabled. A Participant shall be deemed totally and permanently disabled if he is receiving disability benefits under the long term disability plan of his Employer or would be entitled to receive such benefits if he were a participant in such plan. (f) Date of Termination of Employment: The date on which, before his normal or early retirement date, a Participant terminates his employment with the Employers and Affiliated Employers for any reason other than his death or disability. Leaves of absence and layoffs granted by the Employer or Affiliated Employer in accordance with practices uniformly applied will not be considered as terminations of employment during the term of such leave or layoff. While a Participant is on a leave of absence or layoff, his -300- participation in the Plan shall continue on the same basis as if he were not absent on leave or layoff. In the event an arbitration proceeding is instituted under a collective bargaining agreement in respect of the termination of a Participant's employment, such Participant will not be considered to have terminated his employment for purposes of this Plan unless and until a final decision upholding the termination is rendered in such proceeding or the grievance is dropped on behalf of the Participant. 8.2 Amount to be Distributed: (a) Except a provided in Section 8.5, if the Participant's Settlement Date occurs prior to the Implementation Date, the full amount in his Account as of the Valuation Date next preceding the Implementation Date, and less the unpaid portion of all loans made to the Participant pursuant to Article IX including interest accrued thereon (which shall be considered distributed), shall be distributed to him or, in the event of his death, to his Beneficiary; provided, however, that any such Participant whose Settlement Date occurs prior to February 28, 1997 may elect prior to his Settlement Date to receive as of January 29, 1997 or February 28, 1997, provided the date elected is subsequent to his Settlement Date, an advance payment of the amount due to the Participant hereunder which equals to 80% of his Account balance as of December 31, 1996 exclusive of the unpaid portion of all loans made to the Participant pursuant to Article IX. (b) If a Participant's Settlement Date occurs on or after the Implementation Date, the full amount in the Participant's Account as of the Valuation Date coincident with or next preceding the effective date as of which distribution is made, and less the unpaid portion of all loans made to the Participant pursuant to Article IX including interest accrued thereon (which shall be considered distributed), shall be distributed to the Participant or, in the event of his death, to his Beneficiary. 8.3 Form of Distribution: A distribution under this Article VIII shall be made in cash, except that the Participant or Beneficiary may request that all of the Participant's Account invested in Common Stock in the Common Stock Fund be distributed in whole shares of Common Stock with any fractional share being paid in cash. Requests for distribution in the form of Common Stock shall be made at such time and in such manner as the Committee shall determine under rules and regulations which are uniformly applied. The amount of any cash distribution made shall be based on the net amount received by the Trust Fund on the sale of Common Stock required to be sold in order to make cash distributions. -301- 8.4 Method of Distribution: Except as provided in Section 8.5(e), distribution to a Participant or his Beneficiary shall be made in a lump sum. 8.5 Time of Distribution: (a) Except as hereinafter provided in this Section 8.5, distribution of the Participant's Account to which he is entitled under Section 8.2 shall be made not later than sixty (60) days after the date on which the Participant's Settlement Date occurs (or within 60 days after the Implementation Date if the Participant's Settlement Date occurs on or after December 1, 1996 and before the Implementation Date). (b) If the value of the Participant's Account to be distributed exceeds $3,500 (or at the time of any prior distribution or withdrawal exceeded $3,500) and he has not attained age 65, distribution to the Participant shall be deferred until he attains age 65 and shall be made, as provided in Section 8.4, not later than sixty (60) days following the date on which he attains age 65 (or not later than April 30, 1997 if the Participant attains age 65 on or after December 1, 1996 and before the Implementation Date) unless the Participant consents in writing to, or is deemed to have elected, earlier distribution as hereinafter provided. The amount to be distributed shall be the full amount in the Participant's Account as of the Valuation Date coincident with or next preceding the effective date as of which distribution is made and less the unpaid portion of all loans made to the Participant pursuant to Article IX including interest accrued thereon (which shall be considered distributed). A Participant who does not wish to have distribution deferred may elect to have his Account distributed after his Settlement Date as provided in Section 8.5(a). If a Participant has not repaid all loans made to him under the Plan at the time of his termination, he shall be deemed to have elected to have that portion of his Account equal to the unpaid portion of said loans, including accrued interest, distributed after his Settlement Date as provided in Section 8.5(a) unless he is not in default on such loan at the time of termination. If the Participant is not in default on the loan at the time of his termination or if a Participant receives a loan after his termination of employment, the unpaid portion of such loan, including accrued interest, shall be deducted from the balance of his Account to which he is entitled and considered a distribution from his Account on the first to occur of (i) the Participant's default on repayment on the loan and (ii) the date payment of his Account is made under this Section 8.5. (c) If distribution of a Participant's Account following his Settlement Date is deferred under Section 8.5(b), the Participant may elect at any time to have -302- distribution made prior to his attaining age 65 and, in such case, distribution shall be made not later than sixty (60) days following the date he files his election with the Committee (or not later than April 30, 1997 if the Participant files his election on or after December 1, 1996 and before the Implementation Date). If distribution of a Participant's Account is deferred and the Participant dies prior to distribution, distribution of his Account shall be made to his Beneficiary not later than sixty (60) days following the date of the Participant's death (or not later than April 30, 1997 if the Participant's death occurs on or after December 1, 1996 and before the Implementation Date). In each case, the amount to be distributed shall be the full amount in the Participant's Account as of the Valuation Date coincident with or next preceding the effective date as of which distribution is to be made and less the unpaid portion of all loans made to the Participant pursuant to Article IX including interest accrued thereon (which shall be considered distributed). (d) If consent to distribution is required under Section 8.5(b) or (c) or a withdrawal is to be made under Section 8.6 or Section 8.10, the Committee shall no less than 30 days and no more than 90 days prior to the date distribution or withdrawal is to be made provide the Participant with written notice of his right to defer payment to age 65. Such distribution or withdrawal, however, may be made less than 30 days after the provision of the written notice, if the notice informs the Participant of his right of at least 30 days after receiving the notice to consider the decision of whether or not to elect distribution or withdrawal and the Participant, after receiving the notice, affirmatively elects distribution or withdrawal. (e) If the amount of the payment to be made on or before a particular date cannot be ascertained by such date, a payment retroactive to such date shall be made no later than 60 days after the earliest date on which the amount of such payment can be ascertained. If any amount is allocated to a Participant's Account subsequent to the payment of his Account, a payment of such additional amount shall be made to the Participant within 60 days after the allocation is made. If the proceeds from the liquidation of any portion of a Participant's Account are received by the Trust Fund subsequent to the payment of the remaining portion of his Account, payment of such additional amount shall be made as soon as practicable after the proceeds are received. (f) If a Participant's payment is deferred under Section 8.5 to a date following his Settlement Date, the unpaid amounts not considered an investment from time to time in the Participant Loan Fund shall be invested prior to distribution in accordance with the election of the Participant as provided in Section 5.2 of the Plan. -303- (g) Notwithstanding the foregoing provisions of this Section 8.5 or any other provision of the Plan, if a Participant continues in employment of the Employer or Affiliated Employers after he attains age 70-1/2, distribution of the Participant's Account shall be made to him not later than the April 1 of the calendar year following the later of (i) the calendar year in which he attains age 70-1/2, or (ii) the calendar year in which his Settlement Date occurs. However, if the Participant owns, or is considered to own, in the Plan Year ending in calendar year in which he attains age 70-1/2, more than 5% of the outstanding stock of the Corporation or an Affiliated Employer or stock possessing more than 5% of the total combined voting power of all stock of the Corporation or an Affiliated Employer, then distribution of the Participant's Account shall be made to him not later than the April 1 next following the last day of the calendar year in which the Participant attains age 70-1/2. To the extent that governmental regulations, rulings or announcements require that any Participant with an Account balance at December 31, 1996 be paid at the Participant's election no later than the April 1 of the calendar year following the calendar year in which he attains age 70-1/2 as provided in the Plan as in effect prior to this restatement, such Participant shall be so paid. 8.6 Hardship Withdrawals: A Participant shall have the right to withdraw amounts from his Compensation Conversion Account(s) as of a Valuation Date (but on and after January 1, 1997 not until on or after the Implementation Date) on account of his financial hardship in accordance with the following: (a) The Participant shall file a written request with the Committee at least 30 days prior to the date as of which the withdrawal is to be made setting forth the amount he wishes to withdraw, the Investment Fund(s) from which it is to be withdrawn and data establishing his financial hardship; and (b) A hardship withdrawal under this Section 8.6 shall be permitted only if the withdrawal both (i) is made on account of an immediate and heavy financial need of the Participant and (ii) is necessary to satisfy such financial need. For purposes of this Section 8.6: (A) a withdrawal will be considered to be made on account of an immediate and heavy financial need of the Participant only if it is on account of (i) medical expenses, as described in Section 213(d) of the Code, previously incurred by the Participant, the Participant's spouse or any dependent of the Participant (as defined in Section 152 of the Code) or necessary for these persons to obtain medical care described in Section 213(d) of the Code, (ii) the purchase -304- (excluding mortgage payments) of a principal residence for the Participant, (iii) the need to make payment of tuition and related educational fees for the next 12 months of post-secondary education for the Participant, his spouse, children or dependents, or (iv) the need to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence; and (B) a withdrawal will be considered to be necessary to satisfy an immediate and heavy financial need of the Participant only if (i) the withdrawal is not in excess of the amount of the immediate and heavy financial need of the Participant, including amounts necessary to pay any Federal, state or local income taxes or penalties reasonably anticipated to result from the withdrawal, (ii) the Participant has obtained all distributions, other than hardship distributions, and all nontaxable (at the time of the loan) loans currently available to him under the Plan and all other qualified plans maintained by the Corporation or the Affiliated Employers, (iii) the Participant is precluded from making or having made on his behalf any contributions under Section 4.1 or elective contributions under other qualified or nonqualified plans of deferred compensation maintained by the Corporation or the Affiliated Employers, or any elective after-tax employee contributions under any such plan of the Corporation or the Affiliated Employers, for a period of at least 12 months after receipt of the withdrawal, and (iv) the maximum amount within the meaning of Section 402(g) of the Code that may be contributed as elective contributions to the Participant's Compensation Conversion Accounts and to any other qualified or nonqualified plan of deferred compensation maintained by the Corporation or the Affiliated Employers is reduced for the Plan Year next following the Plan Year in which the hardship withdrawal is received by the amount of such contributions made by or on behalf of the Participant for the Plan Year in which the withdrawal is received. The determination of the existence of financial hardship hereunder and of the amount required to be distributed to meet the need created by the hardship will be made by the Committee and its decisions shall be applied in a nondiscriminatory manner. (c) No withdrawal under this Section 8.6 may exceed an amount equal to the lesser of (i) the balance in the Participant's Compensation Conversion Accounts as of the -305- Valuation Date coincident with or next preceding the effective date of the withdrawal, less all unpaid loans as of the date of withdrawal made to the Participant pursuant to Article IX, including interest accrued thereon, that are made from such Accounts, and (ii) the aggregate amount of contributions made to such Accounts under Section 4.1 and not previously withdrawn less all unpaid loans made to the Participant pursuant to Article IX that are made from such Accounts. (d) Only one withdrawal under this Section 8.6 may be made by a Participant during each Plan Year. The minimum withdrawal that will be allowed is $500. (e) Payment of any withdrawals will be made in cash in a lump sum to the Participant as soon as practicable following the date the request is approved by the Committee but a Participant may elect to have such amount rolled over directly to an "eligible retirement plan" in accordance with Section 8.9. 8.7 Beneficiary: As used in the Plan, the term "Beneficiary" means: (a) The last person or persons designated as beneficiary by the Participant in a written notice on a form prescribed by the Committee, provided, however, that if the Participant is married at the time of his death and the person so designated is not his surviving spouse, such designation will not be effective under the Plan unless the requirements of the last paragraph of this Section 8.7 have been met in respect of such designation; (b) If there is no beneficiary designation in accordance with Section 8.7(a) that is effective under the Plan or if the person designated pursuant to an effective designation shall not survive the Participant, such Participant's spouse; or (c) If no such designated beneficiary and no such spouse is living upon the death of a Participant, or if all such persons die prior to the full distribution of such Participant's Account, then the legal representative of the last survivor of the Participant and such persons, or, if the Committee shall not receive notice of the appointment of any such legal representative within one (1) year after such death, the heirs-at-law of such survivor (in the proportions in which they would inherit his intestate personal property) shall be the beneficiary to whom the then remaining balance of such Account shall be distributed. Any Beneficiary designation may be changed from time to time by like notice similarly delivered. No notice given under this Section shall be effective unless and until the Committee actually receives such notice and enters it in its records. -306- No beneficiary designation under Section 8.7(a) which designates a beneficiary who is not the Participant's surviving spouse shall be effective under the Plan unless the Participant's surviving spouse consents to such designation, such consent acknowledges the effect of such designation and the surviving spouse's signature on such consent is witnessed by a notary public. Notwithstanding the foregoing sentence, such consent of the surviving spouse shall not be required if the Participant establishes to the satisfaction of the Committee that (i) the surviving spouse cannot be located, (ii) the Participant is legally separated or the Participant has been abandoned (and the Participant has a court order to such effect) unless a qualified domestic relations order provides otherwise, or (iii) the spouse is legally incompetent and the spouse's legal guardian gives such consent. 8.8 Facility of Payment: Whenever and as often as any Participant or his Beneficiary entitled to payments hereunder shall be under a legal disability or, in the sole judgment of the Committee, shall otherwise be unable to apply such payments to his own best interest and advantage, the Committee in the exercise of its discretion may direct all or any portion of such payments to be made in any one or more of the following ways: (i) directly to him; (ii) to his legal guardian or conservator; or (iii) to his spouse or to any other person, to be expended for his benefit. The decision of the Committee shall in each case be final and binding upon all persons in interest. 8.9 Direct Rollovers: If a Participant (which for purposes of this Section 8.9 shall include a spouse or former spouse who is an alternate payee under a qualified domestic relations order as defined in Section 414(p) of the Code) or a Beneficiary who is the Participant's surviving spouse is to receive a distribution or a withdrawal under this Article VIII or Section 12.3, he may elect to have all of the amounts, or any portion thereof equal to $500 or more, that would otherwise be paid to him, including the unpaid balance of any loan that would be considered a distribution, paid directly by the Trustee to an "eligible retirement plan" (as defined below) that will accept such rollover. Such election shall apply, however, only to the extent a distribution is not a minimum distribution required under Code Section 401(a)(9). Upon the election of a Participant or Beneficiary under this Section 8.9, the amount of the distribution or withdrawal with respect to which the election was made shall be paid directly, by such means as the Committee shall determine, to the specified eligible retirement plan at the time it would otherwise have been paid to the Participant or Beneficiary. The portion, if any, of the distribution or withdrawal that may not be directly rolled over or which the Participant or Beneficiary has elected not to be rolled over shall be made to the Participant or Beneficiary as otherwise provided in the Plan. -307- Not earlier than 90 days or later than 30 days before a distribution or withdrawal would otherwise be made (or at such other time as is permitted or prescribed by government regulation, ruling or announcement), the Committee will deliver or cause to be delivered to the Participant or Beneficiary notice of his right to make an election under this Section 8.9. Any election must be made within such period and shall be subject to such terms and conditions as the Committee shall prescribe, including any such terms, conditions or limitations required or permitted by government regulations, rulings and announcements. An election shall be accompanied by such documentation, information and verifications as the Committee shall require regarding the eligible retirement plan to which the direct rollover is to be made and to enable the Trustee to properly make the direct rollover. For purposes of this Section 8.9, "eligible retirement plan" shall mean: (i) an individual retirement account described in Code Section 408(a); (ii) an individual retirement annuity described in Code Section 408(b) (other than an endowment contract); (iii) with respect to a Participant, a defined contribution plan qualified under Code Section 401(a); or (iv) with respect to a Participant, an annuity plan described in Code Section 403(a). 8.10 Rollover Contribution Account Withdrawals: A Participant shall have the right to withdraw amounts from his Rollover Contribution Account as of a Valuation Date occurring on or after the Implementation Date in accordance with the following: (a) The Participant shall file a written request with the Committee at least 30 days prior to the date as of which the withdrawal is to be made setting forth the amount he wishes to withdraw and the Investment Fund(s) from which it is to be withdrawn. (b) No withdrawal may exceed an amount equal to the balance in the Participant's Rollover Contribution Account as of the Valuation Date coincident with or next preceding the effective date of the withdrawal, less all unpaid loans as of the date of withdrawal made to the Participant pursuant to Article IX, including accrued interest that are made from such Account. (c) Payment of any withdrawal will be made in cash in a lump sum to the Participant as soon as practicable following the effective date of the withdrawal but a -308- Participant may elect to have such amount rolled over directly to an "eligible retirement plan" in accordance with Section 8.9. ARTICLE IX Loans to Participants 9.1 Application for Loans: Upon the application of a Participant, the Committee, in accordance with a uniform and non- discriminatory policy, may direct the Trustee to make a loan to such Participant upon such terms as the Committee shall specify subject to the provisions of this Article IX. In making loans, the Committee may consider only those factors which would be considered in a normal commercial setting by an entity in the business of making similar types of loans. Any loan approved by the Committee will be disbursed on such date as the Committee shall direct. A loan shall be charged first to the Participant's Rollover Contribution Account, next to his Supplemental Compensation Conversion Account, next to his Matched Compensation Conversion Account and finally to his Employer Matching Contribution Account. All loans will be charged prorata to the Investment Fund(s) (other than the Participant Loan Fund) in which the Participant's Account(s) from which the loan is to be made are invested. Any loan applied for by means of the Telephone Response System shall be deemed made on the effective date of the application under the rules of the Telephone Response System. Until after the Implementation Date, no loan may be made unless the loan application is submitted by the Participant in writing to the Committee on or prior to November 15, 1996. On and after the Implementation Date, an application shall be made by such means (which may include through use of the Telephone Response System) as the Committee shall prescribe from time to time, and the loan application fee, if any, then in effect shall be charged to and paid from the Participant's Account(s) and the Investment Fund(s) in which it is invested as soon as practicable after the loan has been made in the same manner as the loan is charged. The loan application fee, if any, shall be determined -309- by the Committee from time to time on a uniform and non-discriminatory basis without regard to the amount of the loan requested and shall be non-refundable. Any costs incurred at the request of a Participant in respect of the manner in which the loan proceeds are to be disbursed shall be paid by the Participant. In the event a loan is applied for by means of the Telephone Response System but the application is denied by the Committee or the Participant cancels the application for the loan before the loan is disbursed, any funds in the Participant's Accounts that had been obtained by liquidating investments in the Investment Funds in order to make the loan shall be reinvested in the Investment Funds as soon as practicable in accordance with the Participant's most recent investment election with respect to the investment of contributions under Article V. 9.2 Limitations on Loans: No loan to any Participant, when added to the outstanding balance of all other loans from all qualified plans of the Employers and Affiliated Employers made to the Participant, shall exceed the lesser of (a) $50,000, reduced by the excess, if any, of the highest outstanding balance of all loans from such plans to the Participant during the one-year period ending on the day before the date on which the loan is made over the outstanding balance of loans from such plans to the Participant on the date the loan is made or (b) 50% of the sum of the balance in his Account and the vested balances in all other qualified plans of the Employers and Affiliated Employers, as of the most recent Valuation Date for which a valuation is available, as adjusted for any distributions, withdrawals or contributions made after such Valuation Date. In no event, however, shall any loan under the Plan to the Participant exceed 50% of the balance in his Account as of the Valuation Date coinciding with the date the loan is made. The Committee shall not approve a loan of less than $1,000 nor shall the Committee approve more than one loan to any Participant in any Plan Year. No more than one unpaid loan shall be outstanding to any Participant at any time. 9.3 Interest on Loans: The Committee will establish the interest rate to apply for the term of all loans. The interest rate for any loan shall be commensurate with the interest rate charged by persons in the business of lending money for loans which would be made under similar circumstances, as determined by the Committee. 9.4 Repayment of Loans: Any loan to a Participant shall be repaid by the Participant in such manner as the Committee shall determine, subject to the limitations of this Section 9.4. The Committee shall require that the loan and interest thereon be repaid in equal monthly installments, payable on the first day of each month (commencing as soon as practicable following the date the loan is disbursed), over a period which shall not exceed five years from the date of the loan. Each monthly installment, which in no event shall be less than $25, -310- may be paid by payroll deductions by the Employer from the compensation of the Participant or by such other method as the Committee shall prescribe. Payroll deductions for a monthly installment shall be made from the second regular paycheck of the month next preceding the month in which the installment is payable. The Employer shall deposit with the Trustee the sums so deducted or paid with respect to a loan. Any loan under the Plan may be prepaid without penalty on the first day of any month. Partial prepayments shall not be permitted. Amounts received by the Trust Fund as a repayment of a loan to a Participant or as payment of interest on a loan to a Participant shall be added to Investment Funds in accordance with the Participant's most recent election with respect to the investment of contributions under Article V and loan repayments shall be made to the Participant's Accounts in the reverse order from which the loan was charged. 9.5 Security for Loans: Each loan to a Participant shall be evidenced by a note, payable to the order of the Trustee, for the amount of the loan including interest thereon. Each loan shall be secured by a pledge of the borrower's Account considered an investment in the Participant Loan Fund, which pledge shall give the Trustee a security interest in all of the Participant's then existing and thereafter acquired rights in his Account considered an investment in the Participant Loan Fund. By accepting the loan the Participant automatically assigns, as security for the loan, such rights in his Account. In the event the Participant's employment with the Employer and Affiliated Employers is terminated for any reason prior to the repayment of the loan, the unpaid balance plus accrued interest thereon shall be deducted from the amount of his Account balance to which he is entitled as provided in Section 8.2. If, however, a Participant is having distribution of his Account deferred to age 65 and he is not in default on repayment on the loan at the time of his termination of employment or if a Participant receives a loan after his termination of employment, any unpaid balance on such loan plus accrued interest shall be deducted from the balance of his Account to which he is entitled and considered a distribution from his Account on the first to occur of (i) the default on repayment of the loan and (ii) the date payment of his Account is made under Section 8.5. ARTICLE X Administration 10.1 Allocation of Responsibility Among Fiduciaries for Plan and Trust Administration: In general, the Corporation, which shall be the "administrator" and a "named fiduciary" under the Plan for purposes of ERISA, shall have the sole authority to appoint and remove the Trustee, members of the Committee and any investment manager that may be provided for under the Trust and to delegate fiduciary responsibilities in addition to any delegation provided herein, and to amend or terminate, in whole or in part, the Plan or the Trust. The Committee, the members of -311- which shall be "named fiduciaries" under ERISA, shall have the general responsibility for the administration of the Plan and shall have the power to delegate fiduciary responsibilities in addition to any delegation provided herein. 10.2 Appointment of Committee: The Plan shall be administered by a Committee consisting of at least three persons and not more than seven persons who shall be appointed by and serve at the pleasure of the Board of Directors. No member of the Committee who is an employee of an Employer shall receive compensation with respect to his services as a member of the Committee. The Corporation shall notify the Trustee of the members of the Committee and any changes in membership that may take place from time to time. 10.3 Claims Procedure: The Committee shall make all determinations as to the right of any person to a benefit. Any denial by the Committee of a claim for benefits under the Plan by a Participant or Beneficiary shall be stated in writing by the Committee and delivered or mailed to the Participant or Beneficiary. Such notice shall set forth the specific reasons for the denial, written in a manner calculated to be understood by the Participant. In addition, the Committee shall afford a reasonable opportunity to any Participant or Beneficiary whose claim for benefits has been denied for a full and fair review of the decision denying the claim. To the extent that any portion of the benefits of a Participant or Beneficiary under the Plan are not in dispute, payment of the undisputed portion shall be made without regard to any disputed benefits in accordance with the terms of the Plan. The Committee's decision on review shall, to the extent permitted by law, be final and binding on all persons. 10.4 Other Committee Powers and Duties: The Committee shall have such duties and powers as may be necessary to discharge its duties hereunder, including, but not by way of limitation, the following: (a) to have the full and exclusive power to (i) construe and interpret the Plan, construe any ambiguous provision of the Plan, correct any defect, supply any omission or reconcile any inconsistency in such manner and to such extent as the Committee in its sole and absolute discretion may determine, and (ii) decide all questions of eligibility and determine the amount, manner and time of payment of any benefits hereunder; (b) to prescribe procedures to be followed by Participants or Beneficiaries in filing applications for benefits; (c) to prepare and distribute, in such manner as the Committee determines to be appropriate, information explaining the Plan; -312- (d) to receive from the Employers and from Participants such information as shall be necessary for the proper administration of the Plan; (e) to furnish the Employers, upon request, such annual reports with respect to the administration of the Plan as are reasonable and appropriate; (f) to receive, review and keep on file reports from the Trustee of the financial condition, and of the receipts and disbursements, of the Trust Fund; and (g) to appoint or employ individuals to assist in the administration of the Plan. The Committee shall have no power to add to, subtract from or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. 10.5 Rules and Decisions: The Committee may adopt such rules as it deems necessary, desirable or appropriate. All rules and decisions of the Committee shall be uniformly and consistently applied to all Participants in similar circumstances. When making a determination or calculation, the Committee shall be entitled to rely upon information furnished by a Participant or Beneficiary, the Employers, the legal counsel for the Employers or the Trustee. 10.6 Committee Procedures: The Committee may act at a meeting or in writing without a meeting. The Committee shall elect one of its members as chairman, appoint a secretary, who may or may not be a Committee member, and advise the Trustee of such actions in writing. The secretary shall keep a record of all meetings and forward all necessary communications to the Employers or the Trustee. The Committee may adopt such bylaws and regulations as it deems desirable for the conduct of its affairs. All decisions of the Committee shall be made by the vote of the majority including actions in writing taken without a meeting. 10.7 Authorization of Benefit Payments: The Committee shall issue directions to the Trustee concerning all benefits that are to be paid from the Trust Fund pursuant to the provisions of the Plan and shall warrant that all such directions are in accordance with the Plan. 10.8 Applications and Forms: Any action permitted or required to be taken by a Participant or Beneficiary shall be by means of the Telephone Response System or on such form or forms as the Committee may require. The Committee may require a Participant or Beneficiary to complete and file with the Committee all other forms prescribed by the Committee, and to furnish all pertinent information requested by the Committee. -313- The Committee may rely upon all such information so furnished to it. 10.9 Administration Expenses: All expenses, including Trustee's fees, and all other costs and expenses, including those of the Committee, incurred in operating and administering the Plan and Trust may be paid in whole or in part by the Corporation and any expenses not paid by it shall be paid by the Trustee out of principal or income of the Trust Fund. Any expenses, however, of processing loan applications and disbursing loans shall be paid by Participants or charged to their Accounts as and to the extent provided in Article IX. Any expenses, including but not limited to investment advisor fees, related to the investment of assets of any Investment Fund shall be paid by the Trustee from the Investment Fund and where allocable to a particular Participant's Account shall be changed to such Accounts unless paid by the Corporation. 10.10 Provisions Regarding Common Stock: (a) Named Fiduciaries: (i) The Committee will be the "named fiduciary" under ERISA for purposes of directing the Trustee (i) with respect to the voting of all allocated shares of Common Stock held in the Common Stock Fund of the Trust Fund for which voting instructions are not timely furnished by Participants and Beneficiaries pursuant to the provisions of Section 10.10(b) or which have not been allocated to Participant Accounts; (ii) exercising any options, warrants or other rights in connection with shares of Common Stock held in the Common Stock Fund of the Trust Fund; and (iii) exercising any appraisal rights, dissenters' rights or similar rights granted by applicable law to the registered or beneficial holders of Common Stock. The Committee will adopt from time to time whatever procedures it determines to be appropriate in order to exercise its powers and duties under this Section 10.10(a)(i) and may retain advisors and consultants (including, without limitation, legal counsel and financial advisors) who are independent of the Corporation, the Board of Directors and the Trustee to the extent the Committee determines such independent advice to be necessary or appropriate. (ii) The Committee may, in its discretion, delegate any power or duty allocated to it pursuant to Section 10.10(a)(i) above to another person or entity, who will act as an independent fiduciary and will exercise such power or duty to the same extent as it could have been exercised by the Committee. The persons or entities to which such powers and duties may be delegated will include, without limitation, the Board of Directors or any committee of the Board of Directors, the Trustee, any other person or entity that meets the requirements -314- of an investment manager under ERISA Section 3(38), or any other person or entity that the Committee determines in good faith has the requisite knowledge and experience concerning the matter with respect to which the delegation is made. The Committee may also remove any fiduciary to whom it has delegated any power or duty and exercise such power or duty itself or appoint a successor fiduciary. For purposes of Section 10.10(b) and 10.10(c), the term "Committee" will also mean any fiduciary to which the Committee has delegated any power or duty pursuant to this Section 10.10(a)(ii). (iii) Each Participant and Beneficiary who furnishes instructions to the Trustee on any matter relating to Common Stock held in the Common Stock Fund of the Trust Fund in accordance with the provisions of Section 10.10(b) or Section 10.10(c) will be a "named fiduciary" under ERISA with respect to such matter. (b) Voting of Common Stock: (i) With respect to all corporate matters submitted to shareholders of Common Stock at any annual or special meeting thereof or pursuant to any solicitation of written consents in lieu of a meeting (a "consent solicitation"), all shares of Common Stock allocated to the Accounts of Participants in the Common Stock Fund as of the record date established for such meeting or consent solicitation will be voted in accordance with the voting instructions of such Participants as provided to the Trustee, provided that such instructions are received by the fifth day before the meeting or deadline for submitting consents. Upon timely receipt of proper voting instructions, the Trustee will vote the shares as instructed. With respect to shares of Common Stock allocated to the Account of a deceased Participant, such Participant's Beneficiary will be entitled to direct the voting with respect to such allocated shares as if such Beneficiary were the Participant. (ii) The Committee will instruct the Trustee how to vote any allocated shares of Common Stock in the Common Stock Fund for which the Trustee does not receive timely instructions from Participants or Beneficiaries and any shares of Common Stock in the Common Stock Fund that have not been allocated to Participants' Accounts. (iii) As soon as practicable before each annual or special meeting of the holders of Common Stock or deadline for submitting consents, the Trustee will deliver or cause to be delivered to each Participant, or in the event of his death to his Beneficiary, who has shares of Common Stock in the Common Stock Fund -315- allocated to his Account as of the applicable record date, a copy of all reports, financial statements, proxies and proxy solicitation material sent generally to shareholders with respect to such matter, together with forms requesting instructions on how to vote the shares of Common Stock allocated to his Account. The Committee and the Trustee may also provide Participants with such other material concerning the matters to be voted on as or the Committee in its discretion determines to be appropriate, provided, however, that prior to any distribution of materials by the Committee, the Trustee will be furnished with complete copies of all such materials. The instructions received by the Trustee from Participants or Beneficiaries will be held by the Trustee in strict confidence and will not be divulged or released to any person including directors, officers or employees of the Corporation, or of any other company, except as otherwise required by law. (iv) A Participant's or Beneficiary's right to instruct the Trustee with respect to voting shares of Common Stock will not include rights concerning the exercise of any appraisal rights, dissenters' rights or similar rights granted by applicable law to the registered or beneficial holders of Common Stock. These matters will be exercised by the Trustee in accordance with the Committee's instructions. (c) Tender Offer for Common Stock: (i) The Trustee will tender or not tender shares or exchange shares of Common Stock in the Common Stock Fund allocated to the Account of any Participant only as and to the extent instructed by the Participant. With respect to shares of Common Stock in the Common Fund allocated to the Account of a deceased Participant, such Participant's Beneficiary will be entitled to direct the Trustee whether or not to tender or exchange such shares as if such Beneficiary were the Participant. If tender or exchange instructions for shares of Common Stock in the Common Stock Fund allocated to the Account of any Participant are not timely received by the Trustee, the Trustee will treat the non-receipt as an instruction not to tender such shares. (ii) The Committee will instruct the Trustee whether or not to tender any shares of Common Stock in the Common Stock Fund that have not been allocated to Participants' Accounts. (iii) In the event an offer is received by the Trustee to purchase or exchange any shares of Common Stock held in the Common Stock Fund by the Trust (including a -316- tender offer for shares of Common Stock subject to Section 14(d)(1) of the Securities Exchange Act of 1934 or subject to Rule 13e-4 promulgated under that Act, as those provisions may from time to time be amended), the Trustee will advise each Participant who has shares of Common Stock in the Common Stock Fund allocated to such Participant's Account in writing of the terms of the offer as soon as practicable after its commencement and will furnish each Participant with a form by which he may instruct the Trustee confidentially whether or not to tender or exchange shares allocated to such Participant's Account. The Committee and the Trustee may also provide Participants with such other material concerning the tender or exchange offer as the Trustee or the Committee in its discretion determines to be appropriate, provided, however, that prior to any distribution of materials by the Committee, the Trustee will be furnished with complete copies of all such materials. The instructions received by the Trustee from Participants or Beneficiaries will be held by the Trustee in strict confidence and will not be divulged or released to any person, including directors, officers or employees of the Corporation, or of any other company, except as otherwise required by law. (iv) In the event, under the terms of a tender offer or otherwise, any shares of Common Stock held in the Common Stock Fund tendered for sale, exchange or transfer pursuant to such offer may be withdrawn from such offer, the Trustee will follow instructions received from Participants, Beneficiaries or the Committee respecting the withdrawal of such securities from such offer in the same manner as other instructions pursuant to this Section 10.10(c). (v) In the event that an offer for fewer than all of the shares of Common Stock held by the Trustee in the Common Stock Fund is received by the Trustee, Participants, Beneficiaries and the Committee will be entitled to direct the Trustee as to the acceptance or rejection of such offer as provided by Sections 10.10(c)(i)-(iv). The instructions received by the Trustee to tender shares will be applied on a pro rata basis in accordance with the number or amount of such shares subject to the instruction, based on the largest portion of such Common Stock that the Plan may sell, exchange or transfer pursuant to the offer and the instructions received by the Trustee from Participants, Beneficiaries and the Committee. (vi) In the event instructions are solicited from Participants and the Committee with respect to an offer pursuant to Sections 10.10(c)(i)-(iv), and prior to the termination of such offer another offer is received by the Trustee for the securities subject to the first -317- offer, the Trustee will treat the offer as a new offer for purposes of apprising Participants of their rights to provide instructions to the Trustee. The Trustee will use its best efforts in the circumstances to solicit instructions from Participants and the Committee to the Trustee (i) whether to withdraw any tender with respect to securities tendered pursuant to the first offer, if possible, and if withdrawn, whether to tender any securities so withdrawn pursuant to the second offer and (ii) whether or not to tender pursuant to the second offer any securities not tendered pursuant to the first offer. (vii) A Participant's instructions to the Trustee to tender or exchange shares of Common Stock will not be deemed a withdrawal or suspension from the Plan or a forfeiture of any portion of the Participant's interest in the Plan. Funds received in exchange for tendered shares will be credited to the Account of the Participant whose shares were tendered and will be used by the Trustee to purchase Common Stock, as soon as practicable. In the interim, the Trustee will invest such funds in short-term investments permitted under the Trust. (viii) In the event the Corporation or KU Energy Corporation initiates a tender or exchange offer, the Committee may, in its sole discretion, direct the Trustee to enter into an agreement with the Corporation not to tender or exchange any shares of Common Stock held in the Common Stock Fund in such offer, in which event, the foregoing provisions of this Section 10.10(c) will have no effect with respect to such offer and the Trustee will not tender or exchange any shares of Common Stock held in the Common Stock Fund (allocated or unallocated) in such offer. ARTICLE XI Miscellaneous 11.1 No Guarantee of Employment: Nothing contained in the Plan shall be construed as a contract of the employment between an Employer and any Employee, or as a right of any Employee to be continued in the employment of an Employer, or as a limitation of the right of an Employer to discharge any of its Employees, with or without cause. 11.2 Rights to Trust Assets: No Participant shall have at any time any right to, or interest in, any assets of the Trust Fund, except as provided from time to time under the Plan, and then only to the extent of the benefits payable under the Plan to such Participant out of the assets of the Trust Fund. -318- All payments of benefits as provided for in the Plan shall be made solely out of the assets of the Trust Fund. 11.3 Nonalienation of Benefits: Except as provided in Section 9.5 or in respect of the creation, assignment or recognition of a right to any benefit under the Plan pursuant to the provisions of a "qualified domestic relations order" as defined in Section 414(p)(1)(A) of the Code, benefits payable under the Plan shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, including any such liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of the Participant, prior to actually being received by the person entitled to the benefit under the terms of the Plan; and any such attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to benefits payable hereunder, shall be void. Except as provided above, the Trust Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder. 11.4 Notice of Address: Each Participant or Beneficiary shall file with the Committee a written notice giving his post office address and each change of post office address. Any communication, statement, or notice addressed and mailed, postage prepaid, to such person at his latest post office address as so filed shall constitute an effective notice upon such person for all purposes of the Plan, and neither the Trustee, the Employers nor the Committee shall be obliged to search for or ascertain the whereabouts of any such person. If any such person is notified that he is entitled to payment under the Plan, and also is notified of the provisions of this Section, and such person fails to claim his benefits or make his whereabouts known, or cannot be located after reasonably diligent inquiry, within one (1) year thereafter, the remaining interest of such person shall be distributed to any one or more of the spouse or next of kin of the Participant or Beneficiary involved, or shall be otherwise applied at such time and to such extent as shall be permitted under any applicable federal government publication, ruling or regulation. 11.5 Applicable Law: All questions arising in respect of the Plan, including those pertaining to its validity, interpretation and administration, shall be governed, controlled and determined in accordance with the laws of the Commonwealth of Kentucky insofar as such laws are not preempted by the laws of the United States. 11.6 Profit Sharing Plan: It is intended that the Plan be a qualified profit sharing plan under Section 401(a) of the Code. -319- 11.7 Top-Heavy Provisions: The following provisions shall become effective in any Plan Year in which the Plan is determined to be a "top-heavy plan." (a) The Plan will be considered a "top-heavy plan" for a Plan Year if as of the last day of the next preceding Plan Year (i) the aggregate value of the Accounts of Participants, including former Participants, who are "key employees" within the meaning of Section 416(i)(1) of the Code exceeds 60% of the aggregate value of the Accounts of all Participants, including former Participants, or (ii) the Plan is part of a required aggregation group and the required aggregation group is top-heavy. However, and notwithstanding the above, the Plan shall not be considered a "top-heavy plan" for any Plan Year in which the Plan is a part of a required or permissive aggregation group which is not top-heavy. For purposes of this subsection, the value of a Participant's or former Participant's Account shall be adjusted as provided in Sections 416(g)(3) and (4) of the Code. A "required aggregation group" shall mean each qualified plan of an Employer or Affiliated Employer in which a "key employee" participates and any other qualified plan of an Employer or Affiliated Employer which enables any such plan to meet the requirements of Section 401(a)(4) or 410 of the Code. A "permissive aggregation group" shall mean any required aggregation group plus any other qualified plan or plans of an Employer or Affiliated Employer which, when considered with the required aggregation group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. A Participant's or former Participant's compensation as reported on his Forms W-2 from the Employers for a Plan Year shall be used, where applicable, in determining whether he is a "key employee." (b) Notwithstanding the provisions of Article IV to the contrary, if for any Plan Year the Plan is a "top-heavy plan," an Employer shall contribute to the Trust Fund for each of its Employees who is an Eligible Employee (as defined below) on the last day of the Plan Year and who is not a "key employee," an amount equal to the excess, if any, of (i) over (ii), where (i) is the lesser of (A) three percent of such Eligible Employee's compensation (as reported on his Form W-2 from the Employer and Affiliated Employers but not in excess of the compensation limitation described in Section 401(a)(17) of the Code) for the Plan Year and (B) to the extent permitted under Section 416(c)(2)(B) of the Code, the percentage of such Eligible Employee's compensation (as reported on his Form W-2 from the Employer and Affiliated Employers but not in excess of the compensation limitation described in Section 401(a)(17) of the Code) for the Plan Year equal to the percentage of compensation (not in excess of the compensation limitation described in Section 401(a)(17) of the Code) of employer contributions (including contributions made pursuant to a salary reduction agreement) and forfeitures allocated for -320- the Plan Year under the Plan and each other qualified defined contribution plan maintained by the Employers or Affiliated Employers for the "key employee" for whom such percentage is the highest for such Plan Year, and (ii) is the sum of employer contributions (excluding contributions made pursuant to a salary reduction agreement) and forfeitures allocated to such Eligible Employee under the Plan and all other qualified defined contribution plans maintained by an Employer or Affiliated Employers for the Plan Year. However, and notwithstanding the above, the provisions of this subsection (b) shall not apply for any Plan Year with respect to an Eligible Employee who has accrued the defined benefit minimum provided under Section 416 of the Code under a qualified defined benefit plan maintained by the Employers or a Affiliated Employer. Any amount contributed in accordance with this subsection (b) with respect to an Eligible Employee for a Plan Year shall be deemed to be a contribution made under Section 4.2 and shall be allocated to the Eligible Employee's Account. Any Eligible Employee for whom such a contribution is made who is not already a Participant shall, notwithstanding the provisions of Section 3.1, become a Participant in the Plan as of the last day of the Plan Year for which the contribution is made. (c) For purposes of this Section 11.7, "Eligible Employee" shall mean any Employee who is eligible to participate in the Plan as provided in Section 3.1 other than an Employee who is included in a unit of employees covered by a collective bargaining agreement between employee representatives and one or more Employers if there is evidence that retirement benefits have been the subject of good faith bargaining between such employee representatives and such Employer or Employers. 11.8 Return of Contributions: Notwithstanding any provision of the Plan to the contrary, contributions made by an Employer shall be returned to the Employer in the following circumstances: (a) Each contribution of the Employers under the Plan is expressly conditioned upon the current deductibility of the contribution under Section 404 of the Code. If all or part of an Employer's contribution is disallowed as a deduction under Section 404 of the Code, such disallowed amount (reduced by any losses attributable thereto) shall be returned to the Employer with respect to which the deduction was disallowed within one year after disallowance. (b) If a contribution is made by an Employer by reason of a mistake of fact, then so much of the contribution as was made as a result of the mistake (reduced by any losses attributable thereto) shall be returned to the Employer within one year after the mistaken contribution was made. -321- ARTICLE XII Amendment, Termination and Action by Employers 12.1 Amendment and Termination: The Corporation may amend, discontinue contributions under or terminate, and each Employer as to itself may discontinue contributions or terminate, the Plan in whole or in part, at any time or from time to time. Notwithstanding the foregoing, no amendment or termination of the Plan shall cause any part of the Trust Fund to be used for, or diverted to, any purpose other than the exclusive benefit of Participants or their Beneficiaries or shall operate retroactively so as to affect adversely the right of any Participant or Beneficiary of the Plan prior to such action; provided, however, that the Corporation may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA or the Code. 12.2 Action by Employers: Any action by an Employer under the Plan may be by resolution of its Board of Directors, or by any person or persons duly authorized by resolution of said Board to take such action. 12.3 Effect of Termination: Upon the bankruptcy, insolvency, merger, consolidation, or dissolution of an Employer, without provision being made by its successor, if any, for the continuation of the Plan, or upon the termination, partial termination or discontinuance of the Plan or of the payment of contributions thereunder, by an Employer, the Accounts of the Participants who are Employees of such Employer and who are affected by such termination, partial termination or discontinuance shall continue to be fully vested and held in the Trust Fund in accordance with the provisions of the Plan and Trust, except that the Committee may direct that the assets of the Trust Fund allocable to each such Participant and his Beneficiary shall be distributed to such Participant or Beneficiary; in which event the Trust shall thereupon terminate as to such Employer when all Accounts have been distributed; provided, however, that no such distribution shall be made to any Participant until he attains age 59-1/2 except in the case of termination of employment or as otherwise provided in Article VIII or upon termination of the Plan without the establishment or maintenance by the Employer or an Affiliated Employer, within 12 months after distribution, of another qualified defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code). ARTICLE XIII Successor Employer and Merger or Consolidation of Plans 13.1 Successor Employer: In the event of the dissolution, merger, consolidation or reorganization of an Employer, provision may be made by which the Plan and Trust will -322- be continued by the successor; and, in that event, such successor (subject to the consent of the Corporation if the Employer is other than the Corporation) shall be substituted for the Employer under the Plan. The substitution of the successor shall constitute an assumption of Plan liabilities by the successor and the successor shall have all of the powers, duties and responsibilities of an Employer under the Plan. 13.2 Plan Assets: In the event of any merger or consolidation of the Plan with, or transfer in whole or in part of the assets and liabilities of the Trust Fund to another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the Participants of the Plan, the assets of the Trust Fund applicable to such Participants shall be transferred to the other trust fund only if: (a) Each Participant would (if either the Plan or the other plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if this Plan had then terminated); (b) Resolutions of the Board of Directors of the Corporation under this Plan, and of any new successor employer of the affected Participants, shall authorize such transfer of assets; and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities with respect to such Participants' inclusion in the new employer's plan; and (c) Such other plan and trust are qualified under Sections 401(a) and 501(a) of the Code. -323- IN WITNESS WHEREOF, Kentucky Utilities Company has caused this instrument to be executed in its name by its Chairman of the Board, President and Chief Executive Officer and its Corporate Seal to be hereunto affixed, attested by its Secretary, on this 8th day of November, 1996. KENTUCKY UTILITIES COMPANY By /s/ Michael R. Whitley Chairman of the Board, President and Chief Executive Officer [Corporate Seal] ATTEST: /s/ George S. Brooks II Secretary -324- EX-99.05 26 EXHIBIT 99.05 EXHIBIT 99.05 KENTUCKY UTILITIES COMPANY EMPLOYEE SAVINGS PLAN TRUST (Effective January 2, 1997) -325- TABLE OF CONTENTS Page Section 1: Establishment of Trust . . . . . . . . . . . . . . . . . . . 1 Section 2: General Duties of the Company and Plan Committee; Indemnification . . . . . . . . . . . . . . . . . . . . . . . 2 Section 3: General Duties of Trustee . . . . . . . . . . . . . . . . . . 2 Section 4: Power and Duties of Trustee with Respect to Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Section 5: Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . 6 Section 6: Investment Managers . . . . . . . . . . . . . . . . . . . . . 6 Section 7: Disbursement of Trust Funds . . . . . . . . . . . . . . . . . 7 Section 8: Investment Fund Directions . . . . . . . . . . . . . . . . . 8 Section 9: Common Trust Funds . . . . . . . . . . . . . . . . . . . . . 8 Section 10: Expenses of the Plan and Trust . . . . . . . . . . . . . . . 8 Section 11: Accounts of the Trustee . . . . . . . . . . . . . . . . . . . 9 Section 12: Resignation, Removal and Substitution of Trustee . . . . . . 9 Section 13: Amendment and Termination of Trust . . . . . . . . . . . . . 10 Section 14: Action of Company and Plan Committee . . . . . . . . . . . . 11 Section 15: Miscellaneous Provisions . . . . . . . . . . . . . . . . . . 11 -326- KENTUCKY UTILITIES COMPANY EMPLOYEE SAVINGS PLAN TRUST THIS TRUST AGREEMENT, made as of the 2nd day of January, 1997, by and between KENTUCKY UTILITIES COMPANY (hereinafter called the "Company") and CG TRUST COMPANY, a trust company organized under the laws of the State of Illinois with its principal office and place of business in the City of Chicago, Illinois (hereinafter called the "Trustee"). WITNESSETH: WHEREAS, the Company has heretofore adopted for its eligible employees the Kentucky Utilities Company Employee Savings Plan (which, as amended from time to time, is hereinafter called the "Plan"); WHEREAS, the Kentucky Utilities Company Master Retirement and Employee Savings Plan Trust (the "Master Trust") was established to serve as the funding medium for the Plan and certain other plans maintained by the Company; WHEREAS, the Company desires to separate the equitable share of the Master Trust attributable to the Plan and to transfer it, effective January 2, 1997 or as soon thereafter as is practicable, to a separate trust established under the Plan; and WHEREAS, the Company desires the Trustee to serve as the trustee of such separate trust and the Trustee is willing to do so pursuant to the terms of this Trust Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, the parties hereto do hereby mutually declare and agree as follows: Section 1: Establishment of Trust. (a) In order to carry out the purposes of the Plan, the Company hereby creates and establishes a trust to be known as the "Kentucky Utilities Company Employee Savings Plan Trust" (hereinafter called the "Trust"). The Trustee accepts this Trust and agrees to act as Trustee hereunder, but only on the terms and conditions set forth in this Trust Agreement. Subject to the terms and conditions of this Trust Agreement, all right, title and interest in and to the assets held under the Trust shall be vested exclusively in the Trustee. This Trust shall be effective on January 2, 1997. (b) The Trustee shall hold hereunder all contributions and other property acceptable to it and received from or at the direction of the Company. All assets so received, together with the income therefrom and any other increment thereon, shall be held by the Trustee pursuant to the terms of this Trust Agreement without distinction between principal and income. All money and other property held under the Trust Agreement at any time of reference is hereinafter called the "Trust Fund." The Trust Fund shall be invested only through those investment vehicles or options as the Trustee accepts in writing from time to time. The Company acknowledges and agrees that it is responsible for effectuating the transfer to the Trustee of assets held under the Master Trust that are attributable to the Plan. -327- Section 2: General Duties of the Company and Plan Committee; Indemnification. (a) The Company, as Plan administrator and a named fiduciary under the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), shall control and manage the operation of the Plan as provided therein. The committee (hereinafter called the "Committee") appointed pursuant to the provisions of the Plan, the members of which are named fiduciaries for purposes of ERISA, shall be responsible for determining benefit rights under the Plan, instructing the Trustee in the disbursement of benefits, and performing those Plan administration functions specified in the Plan. (b) The Company shall act as custodian with respect to promissory notes, mortgages and related documents given in connection with Plan loans, if any, and the Company shall hold in safekeeping all such promissory notes, mortgages and related documents. (c) The Trustee shall be indemnified and saved harmless by the Company from and against any and all claims, losses, damages, expenses (including reasonable counsel fees) and liability to which the Trustee may be subjected by reason of (i) any act done or omitted to be done in acting in reliance upon the instructions or directions of the Company or the Committee, or any delegate of the Company or the Committee, issued in accordance with the Trust Agreement or on directions properly given by a Plan participant or beneficiary, where the provisions of this Trust Agreement permit such direction or (ii) the Company's or Committee's, or such delegate's or a Plan participant's or beneficiary's, as the case may be, failure to instruct or direct where authorized to do so pursuant to the terms of the Trust Agreement. Any reference herein to directions or instructions from the Company or the Committee shall include directions or instructions from any delegate of the Company or the Committee, as the case may be. (d) In addition to and in no way in limitation of the indemnification of Section 2(c) above, the Company hereby agrees to indemnify and hold harmless the Trustee from and against any claims, losses, damages, expenses (including reasonable counsel fees) and liability to which the Trustee may be subject by reason of any act or omission of any prior or subsequent trustee or any other existing trustee of the Plan. Section 3: General Duties of Trustee. (a) The Trustee shall receive, hold, manage, invest and reinvest the Trust Fund pursuant to the provisions of this Trust Agreement. The Trustee shall have no duty to determine any facts or the propriety of any action taken or omitted by it in good faith pursuant to instructions from persons issued in accordance with this Trust Agreement. (b) The Trustee shall be responsible only for all contributions as are actually received by it as Trustee hereunder. The Trustee shall have no duty or authority to ascertain whether any contributions should be made to it pursuant to the Plan or to bring any action to enforce any obligation to make any such contribution, nor shall it have any responsibility concerning the amount of any contribution or the application of the Plan's contribution formula. -328- (c) The duties and obligations of the Trustee hereunder shall be limited to those expressly imposed upon it by this Trust Agreement notwithstanding (unless otherwise specifically provided herein) any reference herein to the Plan, and no further duties or obligations of the Trustee shall be implied. The Trustee shall not be liable in discharging its duties hereunder if it acts in good faith and in accordance with the terms of this Trust Agreement and in accordance with applicable Federal or state laws, rules and regulations. Section 4: Power and Duties of Trustee with Respect to Trust Fund. The Trustee shall have the following powers and duties regarding the Trust Fund: (a) To hold title to the assets of the Trust Fund, which may include entering into depository or custodial arrangements for the safekeeping of records relevant to the ownership of such assets with any bank or banks as the Trustee may choose. Except as permitted by ERISA, the Trustee shall not maintain the indicia of ownership of any assets of the Trust Fund outside the jurisdiction of the district courts of the United States. (b) Subject to provisions of Section 6, Section 7(c) and Section 8, to invest and reinvest the assets of the Trust Fund in such investments or in such investment vehicles, including annuity or insurance contracts issued by affiliates of the Trustee, in accordance with directions received from the Company and to agree to amendments to such annuity or insurance contracts as directed by the Company. The Trustee shall have no duty or responsibility to determine the appropriateness of any Plan investment, or to cause such investments to be changed. Notwithstanding any other provisions of this Trust Agreement, all notices, proposed contract amendments, rate or fee changes or other communications regarding all group annuity contracts that are assets of the Trust Fund, including any group annuity contract issued by Connecticut General Life Insurance Company or other affiliate of the Trustee, will be sent directly by the issuer of the contract to the Company or forwarded by the Trustee to the Company, and the Trustee shall act on behalf of the Trust with respect to any such notice, proposed amendment, change or other communication only in accordance with the written direction of the Company. Any rights of a contractholder, under any such group annuity contract to discontinue, amend or otherwise modify the contract shall be exercised only upon the specific written direction of the Company to the issuer of the contract or by the Trustee at the Company's specific written direction. (c) To make disbursements from the Trust Fund as directed by the Committee or Company in accordance with this Trust Agreement. The Trustee shall be entitled to rely on any such direction, and shall have no responsibility to ascertain whether the Plan permits such a disbursement. (d) To delegate to third parties, including affiliates of the Trustee, any or all of its duties hereunder, including recordkeeping and reporting, provided that such delegation does not result in a violation of any applicable law (including, but not limited to, the Internal Revenue Code of 1986, as amended (the "Code") or ERISA), rule or regulation. Also, the Trustee may utilize the services of outside custodians to hold on the Trustee's behalf any Plan assets. Without limiting the generality of the foregoing, the Trustee hereby appoints the Company, and the Company hereby accepts appointment, to act as custodian with respect to promissory notes, mortgages and related documents given in connection with Plan loans, if any. -329- (e) To make transfers among investment funds established under the Plan as directed by the Committee or by a Plan participant in accordance with Section 8. The Trustee shall be entitled to rely on any such direction and shall have no responsibility to ascertain whether Plan permits such a transfer. (f) At the direction of the person authorized to direct such action as referred to in Section 4(b) above and subject to the Trustee's acceptance in accordance with Section 1(b) above: (i) to invest and reinvest the Trust Fund, together with the income therefrom, in stocks, including, but not limited to, stock of the Company, KU Energy Corporation or other affiliate of the Company (hereinafter called "Company Stock"), bonds, debentures, convertible debentures and bonds, mortgages, notes, commercial paper and other evidences of indebtedness (including those issued by the Trustee), shares of mutual funds (which funds may be sponsored, managed or offered by an affiliate of the Trustee), guaranteed investment contracts, bank investment contracts, other securities, policies of life insurance or annuity contracts (including those issued by an affiliate of the Trustee), options, options to buy or sell securities, or other assets, and all other property of any type (personal, real or mixed, and tangible or intangible); (ii) to deposit or invest all or any part of the assets of the Trust in savings accounts or certificates of deposit or other deposits in a bank or savings and loan association or other depository institution; (iii) to hold, manage, improve, repair and control all property, real or personal, forming part of the Trust Fund; and to sell, convey, transfer, exchange, partition, lease for any term, even extending beyond the duration of this Trust, and otherwise dispose of the same from time to time; (iv) to have, respecting securities, all the rights, powers and privileges of an owner, including the power to give proxies, pay assessments and other sums necessary for the protection of the Trust Fund; to vote any corporate stock either in person or by proxy, with or without power of substitution, for any purpose; to participate in voting trusts, pooling agreements, foreclosure, reorganizations, consolidations, mergers and liquidations, and in connection therewith to deposit securities with or transfer title to any protective or other committee; to exercise or sell stock subscriptions or conversion rights; and, regardless of any limitation elsewhere in this instrument relative to investments by the Trustee, to accept and retain as an investment any securities or other property received through the exercise of any of the foregoing powers; provided, however, that such voting and other rights in any Company Stock held in the investment fund established under the Plan designed to invest in Company Stock shall be voted -330- or exercised in accordance with Section 10.10 of the Plan. (v) to hold in cash, without liability for interest, such portion of the Trust Fund which it is directed to so hold in accordance with this Trust Agreement pending investment, or payment of expenses, or the distribution of benefits; (vi) to settle, compromise or abandon all claims and demands in favor of or against the Trust Fund; (vii) to invest in any common or collective trust fund of the type referred to in Section 9 hereof maintained by the Trustee or otherwise; (viii) to exercise all of the further rights, powers, options and privileges granted, provided for, or vested in trustees generally under the laws of the state in which the Trustee is incorporated so that the powers conferred upon the Trustee herein shall not be in limitation of any authority conferred by law, but shall be in addition thereto; (ix) to maintain accounts at and execute transactions through any brokerage or other firm, including any firm which is an affiliate of the Trustee; and (x) to lend money to a Plan participant as directed by the Committee. (g) To the extent necessary or which it deems appropriate to implement its powers under this Section 4 or otherwise to fulfill any of its duties and responsibilities as Trustee of the Trust Fund, the Trustee shall have the following additional powers and authority: (i) to register securities, or any other property, in its name or in the name of any nominee, including the name of any affiliate or the nominee name designated by any affiliate, with or without indication of the capacity in which property shall be held, or to hold securities in bearer form and to deposit any securities or other property in a depository or clearing corporation; (ii) to designate and engage the services of, and to delegate powers and responsibilities to, such agents, representatives, advisers, counsel and accountants as the Trustee considers necessary or appropriate, any of whom may be an affiliate of the Trustee or a person who renders services to such an affiliate, and, as a part of its expenses under this Trust Agreement to the extent not prohibited under ERISA, to pay their reasonable expenses and compensation; (iii) to make, execute and deliver, as Trustee, any and all deeds, leases, mortgages, conveyances, waivers, -331- releases or other instruments in writing necessary or appropriate for the accomplishment of any of the powers listed in this Trust Agreement; and (iv) generally to do all other acts which the Trustee deems necessary or appropriate for the protection of the Trust Fund. (h) To establish a procedure for the timely dissemination to each person entitled to direct the Trustee as to a voting or other decision called for thereby or referred to therein of all proxy and other materials bearing on the decision. In the case of Company Stock, at such times as proxy or other materials bearing thereon are disseminated generally to owners of Company Stock in accordance with applicable law, the Company shall cause a copy of such proxy or other materials to be delivered directly to the Trustee and, thereafter, shall promptly deliver to the Trustee or any other entity hired by the Company or Committee to handle shareholder solicitions and tabulations such number of additional copies of the proxy or other materials as the Trustee or such other entity may request for dissemination to Plan participants and beneficiaries. Section 5: Payment of Taxes. The Trustee shall pay out of the Trust Fund income taxes and other taxes of any and all kinds levied or assessed under existing or future laws against the Trust Fund. Section 6: Investment Managers. The Company may direct the Trustee to segregate all or a portion of the Trust Fund in a separate investment account or accounts and may appoint an investment manager, as defined in ERISA, to direct the investment and reinvestment of such investment account or accounts in respect of which an investment manager has been appointed. In such event, the Company shall notify the Trustee of the appointment of such investment manager. Thereafter, the Trustee shall make every sale or investment in respect of such account or accounts only as directed in writing by the investment manager or, with the Trustee's consent, sales or investments may be communicated to and implemented by a broker/dealer designated by the investment manager. Communication of any such direction to such a broker/dealer shall conclusively be deemed an authorization to the broker/dealer to implement the direction even though coming from a person other than the Trustee. The Trustee shall, without question, comply with any directions given to it by the investment manager appointed pursuant to the preceding sentences of this Section 6 and shall not be accountable for any losses sustained by reason of any action taken or omitted pursuant to the provisions of the preceding sentences and no person dealing with the Trustee need inquire whether or not these provisions have been complied with. The Trustee shall be under no duty to question any such direction of the investment manager, to review any securities or other property held in any investment account or accounts in respect of which an investment manager has been appointed or to make any recommendations to the investment manager with respect to such securities or other property. The Trustee shall not be liable or responsible for any loss resulting to the Trust Fund by reason of any sale or investment made pursuant to the direction of an investment manager nor by reason of the failure to take any action with such direction in the absence of further directions of such investment manager. Notwithstanding anything in the Trust Agreement to the contrary, the Trustee shall be indemnified and -332- saved harmless by the Company from and against any and all personal liability to which the Trustee may be subjected by carrying out any directions of an investment manager issued pursuant hereto or for failure to act in the absence of directions of the investment manager, including all expenses reasonably incurred in its defense in the event the Company fails to provide such defense; provided, however, the Trustee shall not be so indemnified if it participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager, having actual knowledge that such act or omission was a breach of fiduciary duty; provided further, however, that the Trustee shall not be deemed to have knowingly participated in or knowingly undertaken to conceal an act or omission of an investment manager with knowledge that such act or omission was a breach of fiduciary duty by merely complying with directions of an investment manager or for failure to act in the absence of directions of an investment manager or by reason of maintaining accounting records. The Trustee shall not be charged with knowledge of the termination of the appointment of any investment manager until it receives written notice thereof from the Company. Section 7: Disbursement of Trust Funds. (a) Upon receipt of written direction of the Committee, the Trustee shall make payments from the Trust Fund to such persons or direct that such payments be made from any annuity contract held in the Trust Fund, in such manner and in such amounts as the Committee shall direct in writing, and amounts paid pursuant to such direction shall no longer constitute a part of the Trust Fund. Notwithstanding the foregoing, in accordance with procedures agreed to by the Company and the Trustee, the Committee may provide direction directly to an insurance carrier regarding payments of Plan benefits or other disbursements to be made from an annuity contract issued by such carrier, which may include Connecticut General Life Insurance Company, that is held in the Trust Fund. (b) Except as provided in Section 15(n) or in the Plan, at no time shall any part of the corpus or income of the Trust Fund be used for, or diverted to, purposes other than for the exclusive purpose of providing benefits to participants in the Plan and their beneficiaries, and defraying reasonable expenses of administering the Plan and Trust, and the assets of the Trust Fund shall never inure to the benefit of the Company or any other employer participating in the Plan (hereinafter called an "Employer"). (c) Loans to participants as provided for in the Plan shall be granted and administered by the Committee and may be initiated in accordance with Section 8. The Trustee shall distribute cash to such participants who are granted loans in such amount and at such times as the Committee shall from time to time direct in writing. Loan payments collected by the Company shall be forwarded to the Trustee identifying the principal and interest portions. Section 8: Investment Fund Directions. Each Plan participant shall provide directions as to which investment funds the amounts allocable to his or her Plan accounts will be invested and may initiate a Plan loan from time to time in accordance with the terms of the Plan. It shall be the responsibility of the Committee to accumulate, aggregate and transmit to the Trustee initial investment directions received in accordance with the Plan from Plan participants. On and after the date as agreed upon by the Trustee -333- or its affiliates and the Committee for the implementation of a telephone response system under the Trust, each Plan participant shall make each and every investment direction change as to which investment funds amounts allocable to his or her Plan account shall be invested and may initiate Plan loan requests by use of, and subject to the written rules of, the telephone response system maintained for such purpose by the Trustee or its affiliate, unless the Trustee has been directed by the Committee in writing not to accept telephone directions from participants, in which event investment directions by the participants shall be transmitted to the Trustee by the Committee. The Trustee shall process directions made via the telephone response system only after the identity of the Plan participant is verified by use of a personal identification number ("PIN") and social security number. Section 9: Common Trust Funds. The Trustee, or any bank or trust company acting as an investment manager pursuant to Section 6, is specifically authorized to invest and reinvest any part or all of the Trust Fund assets in any common, collective or pooled trust fund, including any such fund of which the Trustee or its affiliate or such bank or trust company is trustee, which is now or hereafter maintained as a medium for the collective investment of funds of pension, profit sharing or other employee benefit plans, and which are qualified under Section 401(a) and exempt from taxation under Section 501(a) of the Code. Any assets deposited with the trustee of a collective trust fund shall be held and invested by the trustee thereunder pursuant to all the terms and conditions of the trust agreement or declaration of trust establishing such trust fund, which agreement or declaration is hereby incorporated herein by reference and shall prevail over any contrary provisions of this Trust Agreement. Section 10: Expenses of the Plan and Trust. The Trustee shall be compensated in accordance with the fee schedule provided to and agreed upon by the Company. If the Trustee sends the Company (to the attention of the Company's Vice President of Human Resources) written notice of a proposed amendment to its fee schedule and the Company fails to object thereto within 90 days of the Company's actual receipt of such notice, the amended fee schedule shall be deemed accepted by the Company. In addition, the Trustee shall be paid its reasonable expenses, including reasonable expenses of counsel and other agents employed by the Trustee, incurred in conjunction with the administration of the Trust Fund. The expenses incurred by the Trustee in the administration of the Trust Fund, including fees for legal services rendered to the Trustee, such compensation to the Trustee as may be agreed upon from time to time between the Company and the Trustee, and all other proper charges and expenses incurred by the Company, the Employers and Committee in the administration of the Plan, including, but not limited to, accounting, legal and actuarial expenses, shall be paid from the Trust Fund except to the extent the Company or other Employers elect to pay such items. Section 11: Accounts of the Trustee. The Trustee has accepted this Trust on the condition that the Company has entered or is entering into a service agreement with Connecticut General Life Insurance Company whereby Connecticut General Life Insurance Company will provide recordkeeping services for all Plan assets held pursuant to this Trust Agreement. Accordingly, the Trustee shall maintain or cause to be maintained accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by -334- the Company. As of the close of each calendar year, or as of the close of such other accounting period as the Company may from time to time designate, and as of the date of the removal or resignation of the Trustee as provided in Section 12 hereof, the Trustee shall file or cause to be filed with the Company a written account setting forth all investments, receipts, disbursements and other transactions effected during the period from the date of its last such account and a list of the assets of the Trust Fund at the close of such period. Such account may be in the form of monthly or quarterly statements which taken together reflect the matters set forth in the preceding sentence. It shall be the duty of the Company to review such written account promptly within 90 days from the date of filing any such account and the Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to the propriety of the acts and transactions shown in such account except with respect to any such acts or transactions as to which the Company shall within such 90-day period file written objections with the Trustee. The approval of any accounting, act or procedure by the Company shall be a full acquittance and discharge to the Trustee with respect thereto. Nothing herein contained, however, shall be deemed to preclude the Trustee's right to have its account judicially settled by a court of competent jurisdiction. Section 12: Resignation, Removal and Substitution of Trustee. (a) The Trustee may resign at any time by giving at least 30 days' written notice to the Company (unless the Company deems notice of a shorter duration to be adequate); except that in the event the Company terminates the recordkeeping service agreement with Connecticut General Life Insurance Company referred in Section 11, the Trustee shall be deemed to have resigned as of the effective date of such termination without the necessity of providing prior written notice to the Company. The Company, by action of its Board of Directors, may remove the Trustee at any time by giving at least 30 days' written notice to the Trustee (unless the Trustee deems notice of a shorter duration to be adequate). Upon such removal or resignation of the Trustee, the Company shall appoint a successor trustee who shall have the same powers and duties as those conferred upon the Trustee hereunder. (b) Any successor trustee hereunder may be either a corporation authorized and empowered to exercise trust powers or may be one or more individuals. (c) Upon the acceptance of the appointment of a successor trustee, the resigning or removed Trustee shall execute, acknowledge and deliver all documents and written instruments necessary to transfer and deliver the Trust Fund and all rights and privileged therein to the successor trustee. No successor Trustee shall be personally liable for any act or omission of any predecessor. Upon the transfer and delivery of the Trust Fund to the successor Trustee and the approval or settlement of the accounts of the resigning or removed Trustee as provided in Section 11, the resigning or removed Trustee shall be discharged from further accountability for the Trust Fund with respect to the propriety of the acts and transactions shown in such account and the resigning or removed Trustee shall be under no further duty, obligation or responsibility for the disposition by such successor Trustee of the Trust Fund or any part thereof. -335- (d) In the event that any corporate Trustee hereunder shall be converted into, shall merge or consolidate with, or shall sell or transfer substantially all of its assets and business to, another corporation, state or federal, the corporation resulting from such conversion, merger or consolidation, or the corporation to which such sale or transfer shall be made, shall thereupon become and be the Trustee of the Trust with the same effect as through specifically so named. Section 13: Amendment and Termination of Trust. (a) The Company, by action of its Board of Directors, and the Trustee may mutually agree at any time to amend this Trust Agreement and the Trust created hereby to any extent deemed advisable. No amendment to this Trust Agreement shall be effective unless mutually agreed to in writing by the Company and the Trustee; provided, however, that the Trustee's fee schedule may be amended as provided in Section 10. (b) The Company, by action of its Board of Directors, may at any time revoke this Trust Agreement and terminate the Trust hereby created. Such revocation and termination shall become effective upon receipt by the Trustee or its delegate of a written instrument of such revocation and termination executed by the Company. Upon any such termination being implemented in connection with the termination of the Plan, disposition of the assets of the Trust Fund shall be governed by the terms of the Plan; provided, however, that the Trustee shall not distribute any portion of the Trust Fund after such termination unless the Company first obtains a determination from the Internal Revenue Service that such termination will not affect adversely the qualified status of the Plan. In lieu of an Internal Revenue Service determination, assets of the Trust Fund may be distributed if the Company agrees in writing with the Trustee to indemnify the Trust Fund for any taxes or other penalties which may be assessed against it as a result of such termination or agrees to provide a bond to secure payment of any such taxes or penalties. (c) This Trust Agreement shall terminate in its entirety when there is no asset included in the Trust Fund. Section 14: Action of Company and Plan Committee. (a) Any action by the Company, pursuant to any of the provisions of this Trust Agreement, except as provided in Section 12(a), 13(a) or 13(b) hereof, shall be by written instruction signed by its President or one of its Vice Presidents, or by written instrument executed by any person authorized by any one of the above to take such action; and the Trustee shall be fully protected in acting in accordance with any such written instrument received by it. (b) All notices, orders, requests and instructions of the Committee under the Plan to the Trustee shall be in writing signed by any one of its members or by its Secretary and the Trustee shall act and shall be fully indemnified and saved harmless by the Company pursuant to Section 2(c) of this Trust Agreement in acting in reliance upon and in accordance with such notices, orders, requests and instructions, and shall have no duty to see to the application of any funds paid in accordance therewith. The Company by any one of its officers will certify to the Trustee the appointment and termination of office of members of the Committee and the Committee's -336- Secretary and the Trustee shall not be charged with knowledge thereof until it receives such notice. Section 15: Miscellaneous Provisions. (a) This Trust Agreement and the Trust hereby created shall be governed, construed, administered and regulated in all respects under the laws of the State of Illinois insofar as such laws are not preempted by the laws of the United States. (b) The titles of the Sections in this Trust Agreement are for convenience of reference only and, in case of any conflict, the text of this instrument, rather than such titles, shall control. (c) In case any provisions of this Trust Agreement shall be held illegal or invalid for any reason, their illegality or invalidity shall not affect the remaining parts of this Trust Agreement, and this Trust Agreement shall be construed and enforced as if the illegal and invalid provisions had never been a part of the Trust Agreement. (d) This Trust Agreement may be executed in any number of counterparts, each of which shall be deemed an original. The counterparts shall constitute one and the same instrument and may be sufficiently evidenced by any one counterpart. (e) This Trust Agreement shall be binding upon the respective successors and assigns of the Company and the Trustee. (f) Neither the gender nor the number (singular or plural) of any word shall be construed to exclude another gender or number when a different gender or number would be appropriate. (g) In the event of any conflict between provisions of the Plan and those of this Trust Agreement, this Trust Agreement shall prevail. (h) Communications to the Trustee shall be sent to the Trustee's principal offices or such address as the Trustee may specify in writing. Communications to the Company shall be sent to the Company's principal offices or such address as the Company may specify in writing. No communication shall be binding upon the Trustee or the Company until it is received by the Trustee or the Company, as the case may be, or its delegate. (i) In the event of the merger or consolidation of the Company or any Employer or other circumstances whereby a successor person, firm or company shall continue to carry on all or a substantial part of its business, and such successor shall elect to carry on the provisions of the Plan as therein provided, such successor, subject to the consent of the Company with respect to an Employer other than the Company, shall be substituted for the Company or such Employer, as the case may be, hereunder, upon the filing in writing of its election so to do with the Trustee. The Trustee may, but need not, rely on the certification of an officer of the Company, and a certified copy of a resolution of the Board of Directors of such successor, reciting the facts, circumstances and consummation of such succession and the election of such successor to continue the Plan as conclusive evidence thereof, without requiring any additional evidence. -337- (j) Subject to the provisions if ERISA relating to parties entitled to participate in proceedings relating to the Plan and Trust, necessary parties to any accounting, litigation or other proceedings shall include only the Trustee and the Company and the settlement or judgment in any such case in which the Company is duly served or cited shall be binding upon all Plan participants, and their beneficiaries and estates, and upon all persons claiming by, through or under them. (k) The right to distributions directed to be made hereunder may not, except as provided in the Plan, be voluntarily or involuntarily sold, transferred or assigned by any Plan participant, or by any beneficiary, nor shall distributions be in any way liable to the claim of any creditor of any such person. The foregoing sentence shall not preclude the creation, assignment or recognition of a right to any benefit under the Plan or Trust, pursuant to the provision of a "qualified domestic relations order" as defined in Section 414(p)(1)(A) of the Code. (l) If any payment of a benefit hereunder has been mailed by U.S. Mail to the last address of the payee furnished the Trustee by the Committee is returned and unclaimed, the Trustee shall notify the Committee or the Company and shall discontinue further payments to such payee until it receives the further instructions of the Committee. (m) Notwithstanding any provision in this Trust Agreement to the contrary, contributions made by the Company or any Employer shall be returned to the Company or said Employer if the Company certifies that such return is in compliance with Section 403(c) of ERISA. (n) The Company intends that the Trust herein created shall qualify as an "Exempt Organization" with the meaning of Section 501(a) of the Code or under any comparable section of any future legislation which amends, supplements or supersedes said Section, and until advised to the contrary, the Trustee may assume that the Trust is so qualified and is entitled to tax exemption. IN WITNESS WHEREOF, this Trust Agreement has been executed on the dates indicated below to be effective January 2, 1997. The persons executing this Trust Agreement represent that they are duly authorized to do so. -338- Attest KENTUCKY UTILITIES COMPANY /s/ George S. Brooks II By /s/ Michael R. Whitley Its Chairman, President and CEO Date November 26, 1996 Attest CG TRUST COMPANY /s/ Sharon Grigas By /s/ Jeananne G. Digan Its Trust Officer Date January 6, 1997 -339- EX-99.06 27 EXHIBIT 99.06 EXHIBIT 99.06 CAUTIONARY STATEMENTS - KU ENERGY AND KU The following are cautionary statements, assumptions and other factors that could cause the Company's or KU's actual results to differ materially from those contemplated in any forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 1. Increased competition in the utility industry including effects of: decreasing margins as a result of competitive pressures; industry restructuring initiatives; inability to recover in rates a return on investments made under regulation; legislation or regulatory initiatives (such as retail wheeling or open access) designed to increase competition and the presence of new competitors entering KU's service territory, including other traditional utilities, nonutility generators, power marketers, power brokers and others. These factors could result in lower revenues and earnings. 2. Economic conditions affecting customers businesses producing changes in demand for their products or services or changes in their cost structures causing fluctuations in the amount of energy purchased from KU. These factors could have a significant impact on the economic health of KU's service territory, which (in turn) could have an adverse impact on revenues and earnings. 3. Increased capital and other costs of providing for increased customer demand (through addition of peaking capacity or purchased power). Increased costs not recovered from customers could result in lower earnings. 4. Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Federal Energy Regulatory Commission and applicable state utility regulatory bodies. These could adversely affect reported results. 5. Availability or cost of capital, which may be affected by, or may affect, interest rates, market perceptions of the utility and energy- related industries, the Company or any of its subsidiaries or changes in security ratings of the Company or KU. Increases in capital costs, without corresponding increases in revenues, would adversely affect earnings. 6. Unusual weather conditions; catastrophic weather-related events; unscheduled generation outages; unanticipated changes in the cost or availability of fuel or gas supply due to higher demand, shortages or transportation problems; or electric transmission system or gas pipeline constraints. The foregoing could adversely affect operating results. 7. Economic conditions including significant fluctuations in the rate of inflation. Increased costs caused by inflation, without corresponding increases in revenues would adversely affect earnings. -340- 8. Changes in monetary, fiscal, tax or environmental policies of governments or governmental agencies, which may significantly affect costs of capital, expense levels or costs of compliance with existing or future environmental requirements. Such increases in costs, without corresponding increases in revenues, would adversely affect earnings. 9. Employee workforce factors including changes in collective bargaining agreements with union employees, or work stoppages, which may increase costs or reduce revenues. 10. Significant changes in policies of regulatory agencies with jurisdiction over KU's rates, which may adversely affect revenues and earnings. 11. Costs and other effects of legal and administrative proceedings, settlements, investigations and claims, including but not limited to those described in Notes 4 and 9 of the Notes to Consolidated Financial Statements in the Company's and KU's Annual Report on Form 10-K for the year ended December 31, 1996. Neither the Company nor KU undertakes any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -341- -----END PRIVACY-ENHANCED MESSAGE-----