-----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, L7pD67Kn6WlZM+xP8NAdvX6uMVoscaGIh0oWpnBBa88b6WdUZd3q2y3PpLqIY6pD tkYmrcuLk/y96TwlQgmzFA== 0001047469-99-012453.txt : 19990331 0001047469-99-012453.hdr.sgml : 19990331 ACCESSION NUMBER: 0001047469-99-012453 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 35 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LG&E ENERGY CORP CENTRAL INDEX KEY: 0000861388 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 611174555 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 99578876 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 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: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 99578877 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 99578878 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32010 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended DECEMBER 31, 1998 Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification Number - ----------- ----------------------------- ---------------------- 1-10568 LG&E ENERGY CORP. 61-1174555 (A Kentucky Corporation) 220 West Main Street P. O. Box 32030 Louisville, Kentucky 40232 (502) 627-2000 2-26720 LOUISVILLE GAS AND ELECTRIC COMPANY 61-0264150 (A Kentucky Corporation) 220 West Main Street P. O. Box 32010 Louisville, Kentucky 40232 (502) 627-2000 1-3464 KENTUCKY UTILITIES COMPANY 61-0247570 (A Kentucky and Virginia Corporation) One Quality Street Lexington, Kentucky 40507-1428 (606) 255-2100 Securities registered pursuant to section 12(b) of the Act: LG&E ENERGY CORP. ----------------- Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock, without par value New York Stock Exchange and Rights to Purchase Series A Preferred Chicago Stock Exchange Stock, without par value LOUISVILLE GAS AND ELECTRIC COMPANY ----------------------------------- Name of each exchange on Title of each class which registered ------------------- ---------------- First Mortgage Bonds, Series due July 1, 2002, 7 1/2% New York Stock Exchange KENTUCKY UTILITIES COMPANY -------------------------- Name of each exchange on Title of each class which registered ------------------- ---------------- Preferred Stock, 4 3/4% cumulative, Philadelphia Stock Exchange tated value $100 per share Securities registered pursuant to section 12(g) of the Act: LOUISVILLE GAS AND ELECTRIC COMPANY ----------------------------------- 5% Cumulative Preferred Stock, $25 Par Value $5.875 Cumulative Preferred Stock, Without Par Value Auction Rate Series A Preferred Stock, Without Par Value (Title of class) KENTUCKY UTILITIES COMPANY -------------------------- Preferred Stock, cumulative, stated value $100 per share (Title of class) 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 26, 1999, the aggregate market value of LG&E Energy Corp.'s voting common stock held by non-affiliates totaled $2,915,904,217, and it had 129,677,030 shares of common stock outstanding. As of February 26, 1999, the aggregate market value of Louisville Gas and Electric Company's voting preferred stock held by non-affiliates totaled $18,066,027, and it had 21,294,223 shares of common stock outstanding, all held by LG&E Energy Corp, and 860,287 shares of voting preferred stock outstanding. As of February 26, 1999, the aggregate market value of Kentucky Utility Company's voting stock held by non-affiliates totaled zero, and it had 37,817,878 shares of common stock outstanding, all held by LG&E Energy Corp. This combined Form 10-K is separately filed by LG&E Energy Corp., Louisville Gas and Electric Company and Kentucky Utilities Company. Information contained herein related to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants. In particular, information contained herein related to LG&E Energy Corp. or any of its direct or indirect subsidiaries other than Louisville Gas and Electric Company or Kentucky Utilities Company is provided solely by LG&E Energy Corp., not Louisville Gas and Electric Company or Kentucky Utilities Company, and shall be deemed not included in the Form 10-K of Louisville Gas and Electric Company or the Form 10-K of Kentucky Utilities Company. DOCUMENTS INCORPORATED BY REFERENCE LG&E Energy Corp.'s proxy statement, filed with the Commission on March 26, 1999, and Louisville Gas and Electric Company's proxy statement, filed with the Commission on March 26, 1999, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS PART I Item 1. Business........................................................ 1 Overview of Operations.......................................... 1 Merger with KU Energy Corporation............................... 1 Discontinuance of Merchant Energy Trading and Sales Business.... 1 Louisville Gas and Electric Company General..................................................... 3 Electric Operations......................................... 4 Gas Operations.............................................. 6 Rates and Regulation........................................ 7 Construction Program and Financing..........................10 Coal Supply.................................................10 Gas Supply..................................................11 Environmental Matters.......................................11 Competition.................................................11 Kentucky Utilities Company General.....................................................12 Electric Operations.........................................13 Rates and Regulation........................................14 Construction Program and Financing..........................16 Coal Supply.................................................17 Environmental Matters.......................................17 LG&E Capital Corp...............................................18 Independent Power Operations....................................18 Western Kentucky Energy.........................................20 Argentine Gas Distribution Division.............................22 Discontinued Operations.........................................23 Employees and Labor Relations...................................24 Item 2. Properties......................................................25 Item 3. Legal Proceedings...............................................29 Item 4. Submission of Matters to a Vote of Security Holders.............31 Executive Officers of the Company..........................................32 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters......................................39 Item 6. Selected Financial Data.........................................40 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition: LG&E Energy Corp.........................................44 Louisville Gas and Electric Company......................62 Kentucky Utilities Company...............................73 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................................83 Item 8. Financial Statements and Supplementary Data: LG&E Energy Corp.........................................84 Louisville Gas and Electric Company.....................127 Kentucky Utilities Company..............................152 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.....................172 TABLE OF CONTENTS (CONT.) PART III Item 10. Directors and Executive Officers of the Registrant (a)........172 Item 11. Executive Compensation (a)....................................172 Item 12. Security Ownership of Certain Beneficial Owners and Management (a).......................................172 Item 13. Certain Relationships and Related Transactions (a)............172 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................172 Signatures .........................................................198 (a) Incorporated by reference. PART I. Item 1. Business. OVERVIEW OF OPERATIONS LG&E Energy Corp. (the Company or LG&E Energy), incorporated November 14, 1989, is a diversified energy-services holding company with three direct subsidiaries: Louisville Gas and Electric Company (LG&E), Kentucky Utilities Company (KU) and LG&E Capital Corp. (Capital Corp.). The Company's domestic regulated operations are conducted by LG&E and KU. The Company and its subsidiaries currently are exempt from all provisions, except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (the "Holding Company Act") on the basis that the Company, LG&E and KU are incorporated in the same state and their business is predominately intrastate in character and carried on substantially in the state of incorporation. The Company is not a public utility under the laws of the Commonwealth of Kentucky and is not subject to regulation as such by the Kentucky Public Service Commission (Kentucky Commission) or the Virginia State Corporation Commission (Virginia Commission). See LG&E - Rates and Regulation and - Rates and Regulation for descriptions of the regulation of LG&E and KU by the Kentucky Commission, and of KU by the Virginia Commission, which includes the ability to regulate certain intercompany transactions between LG&E, KU and the Company, including the Company's non-utility subsidiaries. MERGER WITH KU ENERGY CORPORATION Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. The accompanying consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of LG&E and KU were not affected by the Merger. See Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. DISCONTINUANCE OF MERCHANT ENERGY TRADING AND SALES BUSINESS Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. It also plans to sell its natural gas gathering and processing business. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize 1 the value of power sales from physical assets it owns or controls, including LG&E, KU and the Big Rivers Electric Corporation (Big Rivers). As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations results primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believes to be appropriate estimates for future energy prices among other factors to calculate the net realizable value of discontinued operations, it also recognizes that there are inherent limitations in models to accurately predict future events. As a result, there is no guarantee that higher-than-anticipated future commodity prices or load demands, lower- than-estimated asset sales prices or other factors could not result in additional losses. The Company has been successful in settling portions of its discontinued operations, but significant assets, operations and obligations remain. As of January 27, 1999, the Company estimates that a $1 change in electricity prices and a 10 cent change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $8.8 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of January 27, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $9.3 million. See Notes 3 and 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. The Company reclassified its financial statements for prior periods to present the operating results, financial position and cash flows of these businesses as discontinued operations. See Notes 1 and 3 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for more information. LEASE OF BIG RIVERS FACILITIES On July 15, 1998, the Company closed the transaction to lease the generating assets of Big Rivers following receipt of necessary regulatory approvals. Under the 25-year operating lease, Western Kentucky Energy Corp. and its affiliates (WKE) are leasing and operating Big Rivers' three coal-fired facilities. In addition, WKE operates and maintains the Station Two generating facility of the City of Henderson (Henderson). The combined generating capacity of these facilities amounts to approximately 1,700 megawatts (Mw), net of the Henderson's capacity and energy needs from Station Two. In related transactions, power is supplied to Big Rivers at contractual prices over the term of the lease to meet the needs of four member distribution cooperatives and their retail customers, including major western Kentucky aluminum smelters. Excess generating capacity is available to WKE to market throughout the region. In connection with these transactions, WKE has undertaken to bear certain of the future capital requirements of those generating assets, certain defined environmental compliance costs and other obligations. Big Rivers' personnel at the plants became employees of WKE upon the completion of the transactions. See Note 4 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 2 LOUISVILLE GAS AND ELECTRIC COMPANY General Incorporated on July 2, 1913, LG&E is a regulated public utility that supplies natural gas to approximately 289,000 customers and electricity to approximately 360,000 customers in Louisville and adjacent areas in Kentucky. LG&E's service area covers approximately 700 square miles in 17 counties and has an estimated population of one million. Included in this area is the Fort Knox Military Reservation, to which LG&E transports gas and provides electric service, but which maintains its own distribution systems. LG&E also provides gas service in limited additional areas. LG&E's coal-fired electric generating plants, which are all equipped with systems to reduce sulfur dioxide emissions, produce most of LG&E's electricity. The remainder is generated by a hydroelectric power plant and combustion turbines. Underground natural gas storage fields help LG&E provide economical and reliable gas service to customers. LG&E's Trimble County Unit 1 (Trimble County), a 495-Mw, coal-fired electric generating unit was placed in commercial operation in December 1990. In December 1995, the Commission approved a settlement agreement that excluded 25% of the Trimble County costs from customer rates. LG&E owns a 75% undivided interest in Trimble County. See Electric Operations under Item 1, Note 13 of LG&E's Notes to Financial Statements and Note 19 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In September 1998, the U.S. Environmental Protection Agency announced its final regulation requiring significant additional reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIPs and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, LG&E will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, LG&E estimates that it may incur capital costs in the range of $100 million to $200 million. These costs would generally be incurred beginning in 2000. LG&E believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. LG&E anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. 3 For the year ended December 31, 1998, 77% of total operating revenues was derived from electric operations and 23% from gas operations. Electric and gas operating revenues and the percentages by classes of service on a combined basis for this period were as follows:
(Thousands of $) Electric Gas Combined %Combined -------- --- -------- --------- Residential $213,476 $113,430 $326,906 45% Commercial 170,954 40,888 211,842 29 Industrial 113,372 11,969 125,341 17 Public authorities 55,075 8,884 63,959 9 -------- -------- -------- --- Total retail 552,877 175,171 728,048 100% --- --- Wholesale sales 99,340 8,720 108,060 Gas transported - net - 6,926 6,926 Provision for rate refund - ECR (4,500) - (4,500) Miscellaneous 10,794 728 11,522 -------- -------- -------- Total $658,511 $191,545 $850,056 -------- -------- -------- -------- -------- --------
See Note 14 of LG&E's Notes to Financial Statements and Note 20 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for financial information concerning segments of business for the three years ended December 31, 1998. Electric Operations The sources of LG&E's electric operating revenues and the volumes of sales for the three years ended December 31, 1998, were as follows:
1998 1997 1996 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $213,476 $205,137 $202,318 Small commercial and industrial 76,304 72,769 74,034 Large commercial 94,650 90,131 88,993 Large industrial 113,372 110,652 110,914 Public authorities 55,075 53,412 54,318 -------- -------- -------- Total retail 552,877 532,101 530,577 Wholesale sales 99,340 70,942 67,854 Provision for rate refund - ECR (4,500) - - Miscellaneous 10,794 11,489 8,265 -------- -------- -------- Total $658,511 $614,532 $606,696 -------- -------- -------- -------- -------- -------- ELECTRIC SALES (Thousands of mwh): Residential 3,534 3,302 3,382 Small commercial and industrial 1,156 1,108 1,131 Large commercial 1,977 1,880 1,850 Large industrial 3,097 3,054 3,059 Public authorities 1,140 1,105 1,122 ------ ------ ------ Total retail 10,904 10,449 10,544 Wholesale sales 4,970 3,800 3,589 ------ ------ ------ Total 15,874 14,249 14,133 ------ ------ ------ ------ ------ ------
At December 31, 1998, LG&E had 360,024 electric customers. 4 LG&E uses efficient coal-fired boilers that are fully equipped with sulfur dioxide removal systems to generate electricity. LG&E's system wide emission weighted-average rate for sulfur dioxide in 1998 was approximately .97 lbs./MMBtu of heat input, which is significantly below the Phase II limit of 1.2 lbs./MMBtu established by the Clean Air Act Amendments of 1990 for the year 2000. The 1998 maximum local peak load of 2,427 Mw occurred on Tuesday, August 25, 1998, when the temperature at the time was 94(degree)F. Prior to 1998, the record local peak load was 2,414 Mw (set on July 21, 1997). 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 LG&E's Results of Operations under Item 7. LG&E's current reserve margin is 14%. At December 31, 1998, LG&E owned steam and combustion turbine generating facilities with a capacity of 2,512 Mw and an 80 Mw hydroelectric facility on the Ohio River. See Item 2, Properties. LG&E is a participating owner with 14 other electric utilities of Ohio Valley Electric Corporation whose primary customer is the Portsmouth Area uranium-enrichment complex of the U.S. Department of Energy at Piketon, Ohio. LG&E has direct interconnections with 11 utility companies in the area and has agreements with each interconnected utility for the purchase and sale of capacity and energy. LG&E also has agreements with an increasing number of entities throughout the United States for the purchase and/or sale of capacity and energy and for the utilization of their bulk transmission system. The Illinois Municipal Electric Agency (IMEA), based in Springfield, Illinois, which is an agency of 35 municipalities that own and operate their own electric systems, has a 12.12% ownership interest in LG&E's Trimble County Unit 1. The Indiana Municipal Power Agency (IMPA), based in Carmel, Indiana, has a 12.88% interest in the Trimble County Unit. IMPA is composed of 31 municipalities that have joined together to meet their long-term electric power needs. Both IMEA and IMPA pay their proportionate share for operation and maintenance expenses of Trimble County and for fuel and reactant used. They are also responsible for their proportionate share of incremental capital assets acquired. See Note 13 of LG&E's Notes to Financial Statements and Note 19 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. 5 Gas Operations The sources of LG&E's gas operating revenues and the volumes of sales for the three years ended December 31, 1998, were as follows:
1998 1997 1996 ---- ---- ---- GAS OPERATING REVENUES (Thousands of $): Residential $113,430 $139,967 $125,327 Commercial 40,888 52,440 47,415 Industrial 11,969 17,892 21,229 Public authorities 8,884 12,052 11,731 -------- -------- -------- Total retail 175,171 222,351 205,702 Wholesale sales 8,720 - - Gas transported - net 6,926 6,997 6,850 Miscellaneous 728 1,663 1,867 -------- -------- -------- Total $191,545 $231,011 $214,419 -------- -------- -------- -------- -------- -------- GAS SALES (Millions of cu. ft.): Residential 20,040 24,038 25,531 Commercial 8,448 10,212 10,656 Industrial 2,860 3,948 5,190 Public authorities 1,967 2,467 2,790 -------- -------- -------- Total retail 33,315 40,665 44,167 Wholesale sales 3,880 - - Gas transported 13,027 13,452 12,540 -------- -------- -------- Total 50,222 54,117 56,707 -------- -------- -------- -------- -------- --------
At December 31, 1998, LG&E had 288,777 gas customers. The gas 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 LG&E's Results of Operations under Item 7. LG&E has underground natural gas storage fields that help provide economical and reliable gas service to ultimate consumers. By using gas storage fields strategically, LG&E can buy gas when prices are low, store it, and retrieve the gas when demand is high. Accessing least cost gas was made easier in November 1993 when the Federal Energy Regulatory Commission Order No. 636 went into effect. Previously, LG&E and other utilities purchased most of their gas services from pipeline companies. The order "unbundled" gas services, allowing utilities to purchase gas, transportation, and storage services separately from many different sources. Currently, LG&E buys competitively priced gas from several large producers under contracts of varying duration. By purchasing from multiple suppliers and storing any excess gas, LG&E is able to secure favorably priced gas for its customers. Without storage capacity, LG&E would be forced to buy additional gas when customer demand increases, which is usually when the price is highest. A number of industrial customers purchase their natural gas requirements directly from alternate suppliers for delivery through LG&E's distribution system. Generally, transportation of natural gas for LG&E's customers does not have an adverse effect on earnings because of the offsetting decrease in gas supply expenses. Transportation rates are designed to make LG&E economically indifferent as to whether gas is sold or merely transported. 6 The all-time maximum day gas sendout of 545,000 Mcf occurred on Sunday, January 20, 1985, when the average temperature for the day was -11(degree)F. During 1998, the maximum day gas sendout was 425,000 Mcf, occurring on March 11, when the average temperature for the day was 20(degree)F. Supply on that day consisted of 105,000 Mcf from purchases, 263,000 Mcf delivered from underground storage, and 57,000 Mcf transported for industrial customers. For a further discussion, see Gas Supply under Item 1. Rates and Regulation The Kentucky Commission has regulatory jurisdiction over the rates and service of LG&E and over the issuance of certain of its securities. The Kentucky Commission has the ability to examine the rates LG&E charges its retail customers at any time. LG&E is a "public utility" as defined in the Federal Power Act, and is subject to the jurisdiction of the Department of Energy and the FERC with respect to the matters covered in such Act, including the sale of electric energy at wholesale in interstate commerce. In addition, the FERC has sole jurisdiction over the issuance by LG&E of short-term securities. For a discussion of current regulatory matters, see Rates and Regulation for LG&E and LG&E Energy Corp. under Item 7 and Note 3 of LG&E's Notes to Financial Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Increases and decreases in the cost of fuel for electric generation are reflected in the rates charged to all of LG&E's electric customers by means of LG&E's fuel adjustment clause (FAC). The Kentucky Commission requires public hearings at six-month intervals to examine past fuel adjustments, and at two-year intervals to review past operations of the fuel clause and transfer of the then current fuel adjustment charge or credit to the base charges. The Commission also requires that electric utilities, including LG&E, file certain documents relating to fuel procurement and the purchase of power and energy from other utilities. As of February 12, 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC for the period from November 1994 through April 1998. LG&E estimates up to an additional $1.3 million could be refundable to retail electric customers for the period from May 1998 through December 1998. See Note 3 of LG&E's Notes to Financial Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. LG&E filed a Petition of Rehearing of all of the orders and a motion to suspend the refund obligation. On February 25, 1999, the Commission suspended the obligation to refund pending further direction by the Commission. It also advised that LG&E may have to pay interest on the refund amounts for the suspension period. On March 11, 1999 the Commission denied LG&E's Petition for Rehearing for the period November 1994 through October 1996 and directed LG&E to reduce future fuel expense by $1.9 million in the first billing month after the Order. The Company is considering the filing of an Appeal with the Franklin Circuit Court. In a separate series of Orders on March 11, 1999, the PSC granted LG&E's Petition for Rehearing for the period November 1996 through April 1998 and established a procedural schedule for LG&E and other parties to submit evidence and for a hearing before the Commission. In the same Orders the PSC granted the Petition for Rehearing of the Kentucky Industrial Utility Customers to determine if interest should be paid on any fuel refunds for this latter period. LG&E's gas rates contain a gas supply clause (GSC), whereby increases or decreases in the cost of gas supply are reflected in LG&E's rates, subject to approval of the Kentucky Commission. The GSC procedure prescribed by order of the Commission provides for quarterly rate adjustments to reflect the expected cost of gas supply in that quarter. In addition, the GSC contains a mechanism whereby any over- or under-recoveries of gas supply cost from prior quarters will be refunded to or recovered from customers through the adjustment factor determined for subsequent quarters. 7 In May 1995, LG&E implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act, as amended, and other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by LG&E be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery through the ECR of costs associated with pre-1993 environmental projects. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, proper adjustments and forward application of the ECR. The settlement agreement is subject to Commission approval. LG&E recorded a provision for rate refund of $4.5 million in December 1998. See Rates and Regulation for LG&E and LG&E Energy Corp. under Item 7 for a further discussion. Integrated resource planning regulations in Kentucky require LG&E and the other major utilities to make triennial filings with the Kentucky Commission of various historical and forecasted information relating to forecasted load, capacity margins and demand-side management techniques. Pursuant to Kentucky law, the Kentucky Commission has established the boundaries of the service territory or area of each retail electric supplier in Kentucky (including LG&E), other than municipal corporations, within which each such supplier has the exclusive right to render retail electric service. In January 1994, LG&E implemented a Commission-approved demand side management (DSM) program that LG&E, the Jefferson County Attorney, and representatives of several customer interest groups had filed with the Commission. The program included a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs and (3) allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording revenues from lost sales due to DSM. Accrued decoupling revenues recorded for periods prior to June 1, 1998, will continue to be collected through the DSM recovery mechanism. In September 1998, the Commission accepted LG&E's modified tariff reflecting this proposal effective as of June 1, 1998. See Rates and Regulation for LG&E and LG&E Energy Corp. under Item 7 for a discussion of Commission approved changes to the original program and requested revisions pending before the Commission. In October 1997, LG&E implemented a Commission-approved, experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. During the first year of operation of the mechanism LG&E recorded $3.6 million for its share of reduced gas costs. The $3.6 million will be billed to customers through the gas supply clause beginning February 1, 1999. 8 In October 1998, LG&E and KU filed separate, but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by LG&E Energy's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint with the Kentucky Commission alleging that LG&E's electric rates are excessive and should be reduced by an amount between $43 and $90 million and that the Kentucky Commission establish a proceeding to reduce LG&E's electric rates. LG&E has asked the Kentucky Commission to dismiss the Complaint. LG&E is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E, through the PBR proposal or otherwise, such actions could have a material effect on LG&E's financial condition and results of operations. As part of the corporate reorganization whereby LG&E became the subsidiary of LG&E Energy, LG&E obtained the approval of the Kentucky Commission. The order of the Kentucky Commission authorizing LG&E to reorganize into a holding company structure contains certain provisions, which, among other things, ensure the Kentucky Commission access to books and records of LG&E Energy and its affiliates which relate to transactions with LG&E; requires LG&E Energy and its subsidiaries to employ accounting and other procedures and controls to 9 protect against subsidization of non-utility activities by LG&E's customers; and precludes LG&E from guaranteeing any obligations of LG&E Energy without prior written consent from the Kentucky Commission. In addition, the order provides that LG&E's Board of Directors has the responsibility to use its dividend policy consistent with preserving the financial strength of LG&E and that the Kentucky Commission, through its authority over LG&E's capital structure, can protect LG&E's ratepayers from the financial effects resulting from non-utility activities. Construction Program and Financing LG&E's construction program is designed to ensure that there will be adequate capacity and reliability to meet the electric and gas needs of its service area. These needs are continually being reassessed and appropriate revisions are made, when necessary, in construction schedules. LG&E's estimates of its construction expenditures can vary substantially due to numerous items beyond LG&E's control, such as changes in rates, economic conditions, construction costs, and new environmental or other governmental laws and regulations. During the five years ended December 31, 1998, gross property additions amounted to $546 million. Internally generated funds for the five-year period were sufficient to provide for all of these gross additions. The gross additions during this period amounted to approximately 20% of total utility plant at December 31, 1998, and consisted of $405 million for electric properties and $141 million for gas properties. Gross retirements during the same period were $112 million, consisting of $91 million for electric properties and $21 million for gas properties. Coal Supply Over 90% of LG&E's present electric generating capacity is coal-fired, the remainder being made up of a hydroelectric plant and combustion turbine peaking units fueled by natural gas and oil. Coal will be the predominant fuel used by LG&E in the foreseeable future, with natural gas and oil being used for peaking capacity and flame stabilization in coal-fired boilers or in emergencies. LG&E has no nuclear generating units and has no plans to build any in the foreseeable future. LG&E has entered into coal supply agreements with various suppliers for coal deliveries for 1999 and beyond. LG&E normally augments its coal supply agreements with spot market purchases which, during 1998, were about 21% of total purchases. LG&E has a coal inventory policy which it believes provides adequate protection under most contingencies. LG&E had on hand at December 31, 1998, a coal inventory of approximately 1,015,000 tons, or a 56 day supply. LG&E expects, for the foreseeable future, to continue purchasing most of its coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky, southwest Indiana, West Virginia and Ohio. The abundant supply of this relatively low priced coal, combined with present and future desulfurization technologies, is expected to enable LG&E to continue to provide adequate electric service in a manner acceptable under existing environmental laws and regulations. Coal is delivered for LG&E's Mill Creek plant by rail and barge; Trimble County plant by barge and Cane Run plant by rail. Starting the second half of 2000, Cane Run is also expected to have the capability for barge delivery of coal. The average delivered cost of coal purchased by LG&E, per ton and per million Btu, for the periods shown were as follows:
1998 1997 1996 ---- ---- ---- Per ton $22.38 $21.66 $21.73 Per million Btu .98 .94 .97
10 The delivered cost of coal is expected to decrease during 1999. Gas Supply LG&E purchases transportation services from Texas Gas Transmission Corporation (Texas Gas) and Tennessee Gas Pipeline Company (Tennessee). LG&E purchases natural gas supplies from multiple sources under contracts for varying periods of time. During 1997, Texas Gas filed with FERC for a change in its rates as required under the settlement in its last rate case. LG&E participated in that and other proceedings, as appropriate. Resolution of that rate case took place in 1998 when the settlement was approved effective December 1. LG&E received a refund of $1.5 million from Texas Gas in January 1999 which will be refunded to customers in 1999. LG&E transports on the Texas Gas system under No-Notice Service (NNS) and Firm Transportation (FT) rates. During the winter months, LG&E has 184,900 MMBtu per day in NNS. LG&E's summer NNS levels are 60,000 MMBtu per day and its summer FT levels are 54,000 MMBtu per day. Each of these NNS and FT agreements with Texas Gas expire in equal portions in 2000, 2001, and 2003. LG&E also transports on the Tennessee system under Tennessee's Rate FT-A. LG&E's contract levels with Tennessee are 51,000 MMBtu per day annually. The FT-A agreement with Tennessee expires 2002. LG&E also has a portfolio of supply arrangements with various suppliers in order to meet its firm sales obligations. These gas supply arrangements include pricing provisions which are market-responsive. These firm supplies, in tandem with pipeline transportation services, provide the reliability and flexibility necessary to serve LG&E's customers. LG&E operates five underground gas storage fields with a current working gas capacity of 14.6 million Mcf. Gas is purchased and injected into storage during the summer season and is then withdrawn to supplement pipeline supplies to meet the gas-system load requirements during the winter heating season. The estimated maximum deliverability from storage during the early part of the 1998-1999 heating season was approximately 373,000 Mcf per day. Deliverability decreases during the latter portion of the heating season as the storage inventory is reduced by seasonal withdrawals. The average cost per Mcf of natural gas purchased by LG&E was $3.05 in 1998 and $3.46 in each of 1997 and 1996. Environmental Matters Protection of the environment is a major priority for LG&E. LG&E engages in a variety of activities within the jurisdiction of federal, state, and local regulatory agencies. Those agencies have issued LG&E permits for various activities subject to air quality, water quality, and waste management laws and regulations. For the five year period ending with 1998, expenditures for pollution control facilities represented $106 million or 19% of total construction expenditures. See Note 12 of LG&E's Notes to Financial Statements and Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of specific environmental proceedings affecting LG&E. Competition In the last several years, LG&E has taken many steps to prepare for the expected increase in competition in its industry, including a reduction in the number of employees; aggressive cost cutting; write-offs of previously deferred expenses; an increase in focus on not only commercial and industrial customers, but residential customers 11 as well; an increase in employee involvement and training; a major realignment and formation of new business units, and continuous modifications of its organizational structure. LG&E could take additional steps like these to better position itself for competition in the future. KENTUCKY UTILITIES COMPANY General 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 449,000 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to about 29,000 customers in 5 counties in southwestern Virginia. In Virginia, KU operates under the name Old Dominion Power Company. KU operates under appropriate franchises in substantially all of the 160 Kentucky incorporated municipalities served. No franchises are required in unincorporated Kentucky or Virginia communities. The lack of franchises is not expected to have a material adverse effect on KU's operations. KU also sells wholesale electric energy to 12 municipalities. In September, 1998, the U.S. Environmental Protection Agency (USEPA) announced its final regulation requiring significant additional reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./MMBTU - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, KU will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, KU estimates that it may incur capital costs of approximately $100 to $200 million. These costs would generally be incurred beginning in 2000. KU believes its costs for these matters to be comparable to those of similarly situated utilities with like generation assets. KU anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanisms and believes that a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. 12 Electric Operations The sources of KU's electric operating revenues and the volumes of sales for the three years ended December 31, 1998, were as follows:
1998 1997 1996 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $238,898 $231,824 $236,229 Commercial 158,549 150,794 150,640 Industrial 154,662 146,801 136,856 Mine Power 31,697 34,541 34,014 Public authorities 58,814 56,243 56,023 -------- -------- -------- Total - ultimate consumers 642,620 620,203 613,762 Wholesale sales 179,118 87,330 89,208 Provision for rate refund - ECR (21,500) - - Miscellaneous 9,876 8,904 8,741 -------- -------- -------- Total $810,114 $716,437 $711,711 -------- -------- -------- -------- -------- -------- ELECTRIC SALES (Thousands of mwh): Residential 5,247 5,061 5,148 Commercial 3,644 3,422 3,411 Industrial 4,747 4,464 4,107 Mine Power 838 926 894 Public authorities 1,424 1,355 1,350 ------ ------ ------ Total - ultimate consumers 15,900 15,228 14,910 Wholesale sales 7,224 3,397 3,721 ------ ------ ------ Total 23,124 18,625 18,631 ------ ------ ------ ------ ------ ------
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 KU's Results of Operations under Item 7. At December 31, 1998, KU owned steam and combustion turbine generating facilities with a capacity of 3,694 Mw and a 24 Mw hydroelectric facility. See Item 2, Properties. KU obtains power from other utilities under bulk power purchase and interchange contracts. At December 31, 1998, KU's system capability, including purchases from others, was 4,235 Mw. On August 25, 1998, a record local peak load, on a one-hour integrated basis, was set at 3,559 Mw. Under a contract expiring 2020 with Owensboro Municipal Utilities (OMU), KU has agreed to purchase from OMU the surplus output of the 150-Mw and 250-Mw 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 9% of KU's net system output during 1998. See Note 11 of KU's Notes to Financial Statements and Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. KU owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns and operates a 1,000-Mw 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 13 about 8% of KU's net system output in 1998. See Note 11 of KU's Notes to Financial Statements and Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. See also Item 3, Legal Proceedings. Rates and Regulation The Kentucky Commission and the Virginia Commission have regulatory jurisdiction over KU's retail rates and service, and over the issuance of certain of its securities. FERC has jurisdiction under the Federal Power Act (FPA) 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 FPA. FERC has classified KU as a "public utility" as defined in the FPA. 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 $225,000) from which KU serves five customers, KU is subject to the jurisdiction of the Tennessee Regulatory Authority (TRA). In addition, the FERC has sole jurisdiction over the issuance by KU of short-term securities. For a discussion of current regulatory matters, see Rates and Regulation for KU and LG&E Energy Corp. under Item 7 and under Note 3 of KU's Notes to the Financial Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. KU's fuel adjustment clause (FAC) for Kentucky customers operates to reflect changes in the cost of fuel in billings to customers, and is designed to conform with the Kentucky Commission's regulation providing for a uniform monthly fuel adjustment clause for all electric utilities in Kentucky subject to the jurisdiction of the Kentucky Commission. The Kentucky Commission's regulation is based on a formula approved by 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 may be adjusted annually for over- or under collections of fuel costs from the previous year. As of February 12, 1999, the Kentucky Commission ordered KU's affiliate utility, LG&E, to refund FAC charges to retail electric customers after a review of LG&E's FAC from November 1994 through April 1998. The Kentucky Commission subsequently on March 11, 1999, denied LG&E's Petition for Rehearing for the period November 1994 through October 1996, but granted rehearing for the period November 1996 through April 1998 on the same issue. KU has not received an order from the Kentucky Commission but estimates that it may be required to refund to its retail electric customers up to $3.5 million in FAC charges for the period November 1994 through October 1998. Rate regulation in Kentucky allows each electric utility, with the Kentucky Commission's 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, applicable to coal combustion wastes and byproducts from facilities utilized for the production of energy from coal. In 1994, the Kentucky Commission 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 Kentucky Commission 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 Note 3 of KU's Notes to Financial Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 14 The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by KU be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, proper adjustments and forward application of the ECR. The settlement agreement is subject to Commission approval. KU recorded a provision for rate refund of $21.5 million in December 1998. See Rates and Regulation for KU and LG&E Energy Corp. under Item 7 for a further discussion. Integrated resource planning regulations in Kentucky require KU and the other major utilities to make triennial filings with the Kentucky Commission of various historical and forecasted information relating to forecasted load, capacity margins and demand-side management techniques. Pursuant to Kentucky law, the Kentucky Commission 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 has the exclusive right to render retail electric service. The Virginia Commission 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 Virginia Commission Staff (Staff). The Staff issues a Staff Report, which includes any findings or recommendations to the Virginia Commission relating to the individual utility's financial performance during the historic 12-month period, including previously accepted adjustments. The Staff Report can lead to an adjustment in rates. As a result of its ownership in EEI, KU is considered a holding company under the Holding Company Act. KU however is presently exempt from all the provisions of the Holding Company Act, 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. For information regarding regulatory matters related to the merger of LG&E Energy and KU Energy, see Note 2 of KU's Notes to Financial Statements and Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In October 1998, LG&E and KU filed separate but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. 15 The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by LG&E Energy's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision may occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint with the Kentucky Commission alleging that KU's electric rates are excessive and should be reduced by an amount between $42 and $56 million, and that the Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked the Kentucky Commission to dismiss the Complaint. KU is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at KU, through the PBR proposal or otherwise, such actions could have a material effect on KU's financial condition and results of operations. Construction Program and Financing KU's construction program is designed to ensure that there will be adequate capacity and reliability to meet the electric and gas needs of its service area. These needs are continually being reassessed and appropriate revisions are made, when necessary, in construction schedules. KU's estimates of its construction expenditures can vary substantially due to numerous items beyond KU's control, such as changes in rates, economic conditions, construction costs, and new environmental or other governmental laws and regulations. During the last five years ended December 31, 1998, construction expenditures aggregated about $609 million, which included four 126-Mw combustion turbine peaking units. 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. 16 Coal Supply Coal-fired generating units provided more than 98% of KU's net kilowatt- hour generation for 1998. The remainder of KU's net generation for 1998 was provided by oil and/or natural gas burning units and hydroelectric plants. 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:
1998 1997 1996 ---- ---- ---- Per ton $26.97 $27.97 $27.54 Per MBTU - all sources $1.12 $1.15 $1.14 Per MBTU - spot purchases only $1.10 $1.12 $1.08 Spot purchases as % of all sources 42% 34% 33%
The price of coal, due to using low sulfur content coal and transportation costs are expected to increase slightly during 1998. 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 fluctuations in demand, coal mine labor issues 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 three-year or shorter contracts. 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 requirements will be met through spot purchases. KU had on hand at December 31, 1998, a coal inventory of approximately 866,000 tons, or a 42 day supply. KU expects, for the foreseeable future, to continue purchasing most of its coal, which has a sulfur content in the .7% - 3.5% range, from western and eastern Kentucky, West Virginia, southwest Indiana and Pennsylvania. Coal for Ghent is delivered by barge. Deliveries to the Tyrone, Green River and Pineville locations are by truck. Delivery to E.W. Brown is by rail. 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 and does not anticipate encountering any significant problems acquiring an adequate supply of fuel necessary to operate its peaking units. Environmental Matters Protection of the environment is a major priority for KU. KU engages in a variety of activities within the jurisdiction of federal, state, and local regulatory agencies. Those agencies have issued KU permits for various activities subject to air quality, water quality, and waste management laws and regulations. For the five year period ending with 1998, expenditures for pollution control facilities represented $174 million or 29% of total construction expenditures. See Note 11 of KU's Notes to Financial Statements and Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. 17 Competition KU has taken many steps to prepare for the expected increase in competition in its industry, including a reduction in the number of employees; aggressive cost cutting; an increase in focus on not only commercial and industrial customers, but residential customers as well; an increase in employee involvement and training; and continuous modifications of its organizational structure. KU could take additional steps like these to better position itself for competition in the future. LG&E CAPITAL CORP. LG&E Capital Corp. (Capital Corp.), the holding company for all non-utility investments, was formed on September 5, 1997, when the Company merged two of its former direct subsidiaries, LG&E Energy Systems Inc. and LG&E Gas Systems Inc., and renamed the company LG&E Capital Corp. On July 24, 1998, KU Capital Corporation (KU Capital), a former subsidiary of KU Energy, was merged into Capital Corp., with the latter as the survivor corporation. As previously discussed in item 1 under Discontinuance of Merchant Energy Trading and Sales Business, effective June 30, 1998, the Company discontinued this business operation. For a more detailed discussion of the discontinuance of the Company's merchant energy trading and sales business, see Discontinued Operations under this Item, and Notes 3 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. Capital Corp. conducts its operations through three principal business segments: Independent Power Operations, Western Kentucky Energy and Argentine Gas Distribution. See Note 20 of LG&E Energy's Notes to Financial Statements under Item 8. INDEPENDENT POWER OPERATIONS General Capital Corp.'s Independent Power Operations (Power Operations) develop, operate, maintain and own domestic and international power generation facilities that sell electric and steam energy to utility and industrial customers. Power Operations currently has domestic ownership interests in projects capable of generating nearly 600 Mw of electric power in North Carolina, Virginia, California, Minnesota, Texas and Washington, and international ownership interest in a windpower generating facility in Tarifa, Spain. Additionally, Power Operations owns and / or has ownership interests in eight combustion turbines. Ownership interests in each of these projects and the revenues from the sale of electricity and steam are pledged as security to the lenders which provided the financing. See Item 2, Properties, for a listing of the Power Operations' projects. On March 15, 1999, LG&E Westmoreland - Rensselaer, in which Power Operations has a 50% interest, sold the assets of the Rensselaer cogeneration facility. This transaction will result in a pre-tax gain for Power Operations of approximately $14.5 million. In June 1998, Power Operations entered into a partnership with Columbia Electric Corporation for the development of a natural gas-fired cogeneration project in Gregory, Texas, providing electricity and steam equivalent of 550 Mw. Construction commenced in August 1998 and non-recourse financing for a majority of the construction and other costs was obtained in November 1998. The project will sell steam and a portion of its electric output to Reynolds Metals Company. A medium-term fixed-price contract has also been entered into with a third party for a portion of the remaining electric output. The project is expected to begin commercial operation in the summer of 2000. The Company's equity contribution is expected to be approximately $30 to $35 million in connection with its 50% interest in the project. 18 In February 1998, Power Operations sold its interest in a 114-Mw natural gas-fired power plant in North Central Argentina. Fuel Supply Power Operations operates five coal fired and three wind plants. See Item 2, Properties. Coal supply needed by Power Operations is under long-term contracts expiring at various times from 2008 through 2014. Each contract has two five-year renewal options. All coal is delivered by rail. Customer Base Each project has long-term power purchase agreements with a single power purchaser, except one of the Tenaska Limited Partnerships which has two. The power purchasers are Virginia Electric and Power (VEPCO) for Southampton, Altavista, and Hopewell in Virginia and Roanoke Valley I (ROVA I) and Roanoke Valley II (ROVA II) in North Carolina; Southern California Edison Co. for Windpower Partners 1993 (WPP 93) in California; Northern States Power Company for WPP 93 in Minnesota; Lower Colorado River Authority for Windpower Partners 1994 (WPP 94), Brazos Electric Power Cooperative for Tenaska Limited Partnerships (TLP), Texas Utilities Electric Company for TLP and Campbell Soup for TLP in Texas; Puget Sound Power & Light for TLP in Washington; and Compania Sevillana de Electricidad for K.W. Tarifa in Spain. WPP 94 also sells excess power to Texas Utilities. See Item 2, Properties, for a listing of Power Operations projects. Each of Power Operations combustion turbines are leased to utility companies. The lessees are Portland General Electric Company (Portland General) in Oregon, Arkansas Power and Light Company in Arkansas and Puget Sound Power & Light Company in Washington. The leases expire in 1999. Upon expiration each of the leases, each of the lessees has the option to extend the lease, purchase the unit or allow the lease to terminate. Portland General has notified the Company that it will exercise its rights to purchase the units covered by its leases when they expire. Regulatory Environment Except for its investments in wind power and ROVA I, each of Power Operations' projects in the United States is a qualifying cogeneration facility (QF) under the Public Utility Regulatory Policy Act of 1978 (PURPA). See Item 3 and Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of certain issues regarding past operations at certain of these facilities. Certain partnerships, in which companies in the Power Operations business segment have ownership interests, are operating wind power facilities which are qualifying small power production facilities under PURPA. In addition, Power Operations has obtained exempt wholesale generator (EWG) status for the entities which own the ROVA I and ROVA II projects in North Carolina and the Southampton, Altavista and Hopewell projects in Virginia. Generally, QF status exempts projects from the application of the Holding Company Act, many provisions of the Federal Power Act, and state laws and regulations respecting rates and financial or organization regulation of electric utilities. EWGs also are exempt from application of the Holding Company Act and many provisions of the Federal Power Act, but once such an entity files its electric generation rates with FERC, it becomes a jurisdictional public utility under the Federal Power Act. As a "public utility," an EWG's rates and some of its corporate activities are subject to FERC regulation. EWGs also are subject to non-rate regulation under state laws governing electric utilities. While QF or EWG status entitles Power Operations' projects to certain regulatory exceptions and benefits under PURPA and the Holding Company Act, each project must still comply with other federal, state and local laws, including those regarding siting, construction, operation, licensing and pollution abatement. 19 The foreign power generation facility in which Power Operations has an ownership interest has obtained foreign utility company (FUCO) status under the Holding Company Act. Generally, FUCO status exempts this facility from application of the Holding Company Act. Commitments & Contingencies In January 1999, a final order was entered in the bankruptcy proceedings involving Westmoreland Coal Company and certain of its subsidiaries, including Westmoreland Energy, Inc., the parent of various entities that are partners in four of Power Operations' independent generating facilities. However, none of the partnerships and no partner of the current partnerships has been under bankruptcy court protection, nor were these partnerships in a default occasioned under the project loan documents. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Westmoreland-LG&E Partners (WLP), the partnership that owns the ROVA I and II facilities, is seeking the recovery of capacity payments withheld by VEPCO. In November 1998, the Circuit Court for the City of Richmond, Virginia, issued a decision awarding WLP approximately $19 million, plus interest until paid, and ruled WLP was entitled to receive future capacity payments for eligible forced outages during the remainder of the PPA term. In January 1999, VEPCO filed a notice of appeal regarding the Circuit Court decision. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States Bankruptcy Court in the Northern District of California for protection under Chapter 11 of the United States Bankruptcy Code seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries and various windpower projects located in the U.S. and abroad. Included in these projects are the WPP 93, WPP 94 and KW Tarifa, S.A. (Tarifa) wind projects in which Power Operations has invested, collectively, approximately $31 million. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. WPP 94, in which the Company has a 25% interest through indirect subsidiaries, did not make its semiannual payments, due September 1997, March 1998, September 1998 and March 1999, to John Hancock Mutual Life Insurance Company (Hancock) under certain notes issued by WPP94 to Hancock. WPP 94 and Hancock are presently engaged in discussions concerning a possible restructuring of WPP 94's debt obligations. Because of the continuing nature of the negotiations, the Company is not able to predict the outcome of this event. The Company does not expect the ultimate resolution of this matter to have a material effect on its results of operations or financial condition. During the third quarter of 1998, the Company wrote off its aggregate remaining investment in WPP94. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. WESTERN KENTUCKY ENERGY General In July 1998, following receipt of necessary regulatory approvals, the Company closed the transaction to lease the generating assets of Big Rivers. Under the 25-year operating lease, Western Kentucky Energy Corp. and its affiliates (WKE) lease and operate the operating assets of Big Rivers (three coal-fired plants and one combustion turbine). In addition, WKE operates and maintains the Station Two generating facility of the City of Henderson (Henderson). The combined generating capacity of these facilities amounts to approximately 1,700 Mw, net of Henderson's capacity and energy needs from Station Two. Under the terms of the lease agreement, WKE paid Big Rivers a total of $55.9 million for the first two years and will pay $31.0 million for each of the remaining 23 years. In addition, WKE purchased Big Rivers' inventory, personal property and emission allowances, and made a one-time payment to Big Rivers of $12.1 million. 20 In related transactions, power is supplied to Big Rivers at contractual prices over the term of the lease to meet the needs of four member distribution cooperatives serving approximately 91,000 customers in 22 western Kentucky counties and two aluminum smelters. The excess generating capacity is available to WKE to market throughout the region. Also, as part of the transaction, WKE agreed to provide Big Rivers a $50.0 million note to help it emerge from bankruptcy. The terms of the note are that WKE will provide $1.7 million per month for the first 12 months beginning August 1998 and $2.5 million per month over the subsequent 12 months. The note will be repaid over a three-year period, beginning August 2000, with interest at 7.165%. WKE's business is affected by seasonal weather patterns. As a result, operating revenues (and associated expenses) are not generated evenly throughout the year. Construction Program and Financing In connection with these transactions, WKE has undertaken to bear certain of the future capital requirements of these generating assets. WKE's estimates of its construction expenditures can vary substantially due to numerous items beyond WKE's control, such as economic conditions, construction costs, and new environmental or other governmental laws and regulations. During 1998 gross property additions amounted to $11.8 million excluding personal property acquired from Big Rivers. Internally generated funds and intercompany financing from Capital Corp. provided 100% of the construction expenditures. Coal Supply Coal-fired generating units provided 90% of the electric generating capacity controlled by WKE, the remainder being made up of a combustion turbine peaking unit fueled by fuel oil. Coal will be the predominant fuel used by WKE, with fuel oil being used for peaking capacity. WKE has entered into coal supply agreements with various suppliers for coal deliveries for 1999 and beyond. WKE normally augments its coal supply agreements with spot market purchases. At December 31, 1998, WKE had on hand coal inventory of approximately 1.1 million tons, or a 75 day supply. WKE expects, for the foreseeable future, to continue purchasing most of its coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky and southwest Indiana. The abundant supply of this relatively low priced coal, combined with present and future desulfurization technologies, is expected to enable WKE to continue to provide adequate electric service in a manner acceptable under existing environmental laws and regulations. Coal for WKE's operations are delivered by barge and truck. The average delivered cost per ton of coal purchased by WKE for 1998 was $20.85. Environmental Matters In September 1998, the U.S. Environmental Protection Agency announced its final regulation requiring significant additional reductions in NOx emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various 21 labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, WKE will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, WKE estimates that it may incur capital costs of approximately $100 million. These costs would generally be incurred beginning in 2000. WKE engages in a variety of activities within the jurisdiction of federal, state and local regulatory agencies. Those agencies have issued WKE permits for various activities subject to air quality, water quality and waste management laws and regulations. During 1998, expenditures for pollution controlled facilities represented $.5 million of WKE's construction expenditures. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for a discussion of specific environmental proceedings. ARGENTINE GAS DISTRIBUTION General In February 1997, the Company acquired interests in two Argentine natural gas distribution companies. Capital Corp., through a subsidiary, purchased a controlling interest in Distribuidora de Gas del Centro (Centro) and a minority interest in Distribuidora de Gas Cuyana (Cuyana). Centro and Cuyana together serve approximately 706,000 customers in six provinces in Argentina. The investment in these companies totaled approximately $140 million. Each of these companies has obtained foreign utility company (FUCO) status under the Holding Company Act. Generally, FUCO status exempts these facilities from application of the Holding Company Act. Gas Operations Centro's and Cuyana's primary source of gas supply is YPF, S.A., and its primary source of gas transmission is TGN, S.A. Centro and Cuyana have no underground storage facilities. The Argentine federal regulator of gas transmission and distribution, Energas, has granted Centro a concession that gives Centro the exclusive right to distribute natural gas in its service territories. The concession ends in 2028. Centro and Cuyana have been granted exclusive 35-year concessions to provide gas distribution services to their respective service territories. These concessions, which originally expire in 2028, also contain the possibility of a single 10-year extension. Centro derives approximately 12% of its revenues from electric power plants located in its service territory. Some of these power plants are state-owned. Centro sells gas to these plants under contracts ranging from two to 15 years. Construction Program and Financing Centro's capital expenditures for 1998 totaled $15 million and were financed internally. Centro will spend approximately $30 million in 1999 to expand and maintain its gas distribution network, and it will finance the expenditures through borrowings and internal sources. 22 DISCONTINUED OPERATIONS General Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business and announced a plan to sell its natural gas gathering and processing business (Gas Operations). For a more detailed discussion of the costs incurred see Discontinuance of Merchant Energy Trading and Sales Business previously discussed in this Item and Notes 3 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. Product and Services The merchant energy trading and sales business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. Capital Corp.'s Gas Operations, conducted through various subsidiaries, include: a transportation operation consisting of a 90-mile intrastate pipeline located in southeast New Mexico (Llano pipeline); gathering and processing operations consisting of 1,200 miles of pipeline concentrated in southeastern New Mexico and the Permian Basin of west Texas; and a 6.0 Bcf gas storage facility connected to the Llano pipeline. For a more detailed explanation of these assets see Item 2, Properties. The Llano pipeline has a design capacity of approximately 180,000 Mcf of gas per day and is capable of delivering gas to three different interstate pipelines. Capital Corp., through its various subsidiaries, purchases gas from over 50 producers connected to the Llano pipeline and sells the gas directly to end-user customers or delivers the gas into one of the interstate pipelines for sale. Also, through its various subsidiaries, Capital Corp. transports natural gas through the Llano pipeline for third parties and is paid a transportation fee for such services. An average of approximately 100,000 Mcf of natural gas per day moved through the Llano pipeline in 1998. The 11 gathering systems owned (seven 100%, one leased and ownership interests ranging from 11% to 50% in three others) and operated during 1998 gathered approximately 205,000 Mcf of natural gas per day during 1998. During 1998, Capital Corp. divested itself of its three partially owned gathering systems. Connected to the Llano pipeline are two operating natural gas processing facilities capable of processing approximately 85,000 MMBtu of natural gas per day. These facilities extract natural gas liquids, including propane, ethane, butanes and natural gasoline, from the natural gas stream, at which point the mixed stream of liquids is sold. Approximately 215,000 gallons per day of natural gas liquids were extracted and sold from these facilities in 1998. Also connected to the Llano pipeline is a natural gas storage facility. As noted above, this facility has current working capacity of approximately 6.0 Bcf. Capital Corp., through a subsidiary, offers this storage capacity to third parties on a fee basis. As of December 31, 1998, storage capacity of approximately 3.0 Bcf was leased to other parties. Governmental Regulations The production, transportation and certain sales of natural gas are subject to federal, state or local regulations which have a significant impact upon Capital Corp.'s energy products and services businesses. Regulation at the federal level of domestically produced or transported natural gas is administered primarily by the FERC 23 pursuant to the Natural Gas Act (NGA) and the Natural Gas Policy Act of 1978 (NGPA). Maximum selling prices of certain categories of gas, whether sold in interstate or intrastate commerce, previously were regulated pursuant to NGPA. The NGPA established various categories of gas and provided for graduated deregulation of price controls of several categories of gas and the deregulation of sales of certain categories of gas. All price deregulation contemplated under the NGPA has already taken place. Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 terminated all NGA and NGPA regulation of "first sales" of domestic natural gas on January 1, 1993. The sale for resale of certain natural gas in interstate commerce is regulated, in part, pursuant to the NGA, which requires certificate and abandonment authority to initiate and terminate such sales. In addition, natural gas marketed by a Capital Corp. subsidiary is usually transported by interstate pipeline companies that are subject to the jurisdiction of the FERC. Similarly, some of the transportation and storage services provided by Llano are subject to FERC regulation under section 311 of the NGPA. These services are frequently sold to gas distribution companies that contract with interstate pipeline companies for transportation from the Llano facility to their respective service areas. Section 311 permits intrastate pipelines under certain circumstances to sell gas to, transport gas for, or have gas transported by, interstate pipeline companies, and assign contract rights to purchase surplus gas from producers to interstate pipeline companies without being regulated as interstate pipelines under the NGA. Capital Corp., through a subsidiary, submitted a rate case for transportation and storage rates to the FERC in 1998 which was approved without intervention. Commitments and Contingencies For discussions of lawsuits filed as a result of the Company's discovery in the fourth quarter of 1996 that unauthorized transactions had occurred in its gas trading business, a lawsuit related to the failure to sell electricity to the Company pursuant to an interchange agreement, and an arbitration proceeding related to load projections provided as inducement to enter into a power supply agreement see Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. EMPLOYEES AND LABOR RELATIONS LG&E Energy and its subsidiaries had 5,403 full-time employees at December 31, 1998, including 2,315 full-time employees of LG&E and 1,779 full-time employees of KU. At December 31, 1998, LG&E had 1,385 operating, maintenance, and construction employees that were members of the International Brotherhood of Electrical Workers (IBEW) Local 2100. The current three year contract with the IBEW will expire in November 2001. At December 31, 1998, KU had 233 operating, maintenance and construction employees who were members of IBEW Local 101 and United Steelworkers of America (USWA) Local 8686. The current contract will expire August 1, 1999. At December 31, 1998, WKE had 352 operating, maintenance and construction employees that were members of the IBEW Local 1701. The current contract will expire September 14, 2001. 24 ITEM 2. Properties. LG&E's power generating system consists of the coal-fired units operated at its three steam generating stations. Combustion turbines supplement the system during peak or emergency periods. LG&E owns and operates the following electric generating stations:
Capability Rating (Kw) ----------- Steam Stations: Mill Creek - Kosmosdale, KY. Unit 1 303,000 Unit 2 301,000 Unit 3 386,000 Unit 4 480,000 ---------- Total Mill Creek 1,470,000 Cane Run - near Louisville, KY. Unit 4 155,000 Unit 5 168,000 Unit 6 240,000 ---------- Total Cane Run 563,000 Trimble County - Bedford, KY. (a) Unit 1 371,000 Combustion Turbine Generators (Peaking capability): Zorn 16,000 Paddy's Run 43,000 Cane Run 16,000 Waterside 33,000 ----------- Total combustion turbine generators 108,000 ----------- Total capability rating 2,512,000 ----------- -----------
(a) Amount shown represents LG&E's 75% interest in Trimble County. LG&E is responsible for operation of Unit 1 and is reimbursed by IMEA and IMPA for expenditures related to Trimble County based on their proportionate share of ownership interest. See Note 19 of LG&E Energy Corp.'s Notes to Financial Statements, Jointly Owned Electric Utility Plant, under Item 8 for further discussion on ownership. LG&E also owns an 80 Mw hydroelectric generating station located in Louisville, operated under license issued by the FERC. At December 31, 1998, LG&E's electric transmission system included 21 substations with a total capacity of approximately 11,071,700 Kva and approximately 652 structure miles of lines. The electric distribution system included 82 substations with a total capacity of approximately 3,313,730 Kva, 3,659 structure miles of overhead lines, 341 miles of underground conduit, and 5,451 miles of underground conductors. LG&E's gas transmission system includes 209 miles of transmission mains, and the gas distribution system includes 3,720 miles of distribution mains. 25 LG&E operates underground gas storage facilities with a current working gas capacity of approximately 14.6 million Mcf. See Gas Supply under Item 1. In 1990, LG&E entered into an operating lease for its corporate office building located in downtown Louisville, Kentucky. The lease is for a period of 15 years and is scheduled to expire June 2005. LG&E Energy has operating leases for its corporate office space that expire between 1999 and 2012. Other properties owned by LG&E include office buildings, service centers, warehouses, garages, and other structures and equipment, the use of which is common to both the electric and gas departments. The trust indenture securing LG&E's First Mortgage Bonds constitutes a direct first mortgage lien upon much of the property owned by LG&E. KU's power generating system consists of the coal-fired units operated at its five steam generating stations. KU owns and operates the following electric generating stations:
Capability Rating (kw) ----------- Steam Stations: Tyrone - Tyrone, KY. Unit 1 30,000 Unit 2 33,000 Unit 3 73,000 ----------- Total Tyrone 136,000 Green River - South Carrollton, KY. Unit 1 29,000 Unit 2 30,000 Unit 3 73,000 Unit 4 107,000 ---------- Total Green River 239,000 E.W. Brown - Burgin, KY. Unit 1 106,000 Unit 2 170,000 Unit 3 441,000 ---------- Total E.W. Brown 717,000 Pineville - Four Mile, KY. Unit 3 34,000 Ghent - Ghent, KY. Unit 1 487,000 Unit 2 497,000 Unit 3 513,000 Unit 4 500,000 ---------- Total Ghent 1,997,000
26
Capability Rating (kw) ----------- Combustion Turbine Generators (Peaking capability): E.W. Brown - Burgin, KY. Unit 8 135,000 Unit 9 120,000 Unit 10 135,000 Unit 11 122,000 ---------- Total E.W. Brown 512,000 Haefling - Lexington, KY. Unit 1 59,000 ----------- Total capability rating 3,694,000 ---------- ----------
Substantially all properties are subject to the lien of KU's Mortgage Indenture. KU also owns a 24 Mw hydroelectric generating station located in Burgin, Kentucky, operated under license issued by the FERC. At December 31, 1998, KU's electric transmission system included 107 substations with a total capacity of approximately 14,538,240 Kva and approximately 4,272,330 structure miles of lines. The electric distribution system included 437 substations with a total capacity of approximately 4,302,120 Kva, 4,272 structure miles of overhead lines. At December 31, 1998, Power Operations owned the percentage indicated of the following joint ventures:
Net Ownership Capability Name Interest % Fuel Rating (Mw) ------- ---------- ---- ----------- LG&E Westmoreland-Southampton 50 Coal 63 Franklin, Virginia LG&E Westmoreland-Altavista 50 Coal 63 Altavista, Virginia LG&E Westmoreland-Hopewell 50 Coal 63 Hopewell, Virginia Westmoreland-LG&E Partners 50 Coal 165 (Roanoke Valley I) Weldon, North Carolina LG&E Westmoreland-Rensselaer 50 Natural 79 Rensselaer, New York (sold March 15, Gas 1999 - see below) Windpower Partners 1993 L.P. 50 Wind 43 Palm Springs, California Windpower Partners 1993 L.P. 50 Wind 25 Buffalo Ridge, Minnesota
27
Net Ownership Capability Name Interest % Fuel Rating (Mw) ------ ---------- ---- ----------- Windpower Partners 1994 L.P. 25 Wind 25-35 Culberson County, Texas Westmoreland-LG&E Partners 50 Coal 44 (Roanoke Valley II) Weldon, North Carolina K.W. Tarifa, S.A. 46 Wind 30 Tarifa, Spain Tenaska Limited Partnerships 5-10 Gas 223-258
Power Operations' ownership interests in these projects (except Rensselaer) and the revenues from the sale of electricity and steam from the projects are pledged as security to the lenders who provided the financing for the project. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of the bankruptcy filing of an affiliate of Power Operations' partner in the Southampton, Altavista, Hopewell, Rensselaer and Roanoke Valley joint ventures. Also, see the same note for a discussion of the bankruptcy filing of an affiliate of Power Operations' partner in the Windpower Partners 1993 and Windpower Partners 1994 joint ventures. See Note 8 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. On March 15, 1999, LG&E Westmoreland - Rensselaer, in which Power Operations has a 50% interest, sold the assets of the Rensselaer cogeneration facility. This transaction will result in a pre-tax gain for Power Operations of approximately $14.5 million. At December 31, 1998, Power Operations owned equity interests in the following combustion turbine units which are leased to utility companies. The leases expire in 1999. Upon expiration of each of the leases, each of the lessees has the option to extend the lease, purchase the unit or allow the lease to terminate.
Capacity Ownership (Mw) Unit Quantity Fuel Interest % Per Unit ----- -------- ---- ---------- -------- Beaver, OR 2 Gas/Oil 100 59.3 Blytheville, AR 3 Gas 49 64.6 Beaver, OR 2 Gas/Oil 49 59.3 Ferndale, WA 1 Gas 49 56.9
Portland General Electric Company (Portland General) is the lessee of the units in Beaver, Arkansas Power & Light Company (AP&L) is the lessee of the units in Blytheville, and Puget Sound Power & Light Company (PSP&L) is the lessee of the unit in Ferndale. Portland General has agreed to purchase the four units in Beaver for approximately $20 million. This transaction is expected to close in the second half of 1999. AP&L has decided to allow its lease to terminate and not to buy the turbines in Blytheville. PSP&L has not decided if it will exercise its option to extend its lease, purchase the unit in Ferndale, or allow its lease to terminate. 28 Capital Corp., through certain subsidiaries, owns or has an interest in eight gas gathering systems consisting of 1,200 miles of pipeline (of which it owns 100% of four, leases one, and has ownership interests ranging from 11% to 50% in the other three). These systems are located in Texas, New Mexico, Louisiana, Montana and Oklahoma. These gas gathering systems make up part of the Company's Merchant Energy Trading and Sales Business, which the Company discontinued effective June 30, 1998. See Discontinued Operations under this Item. The major gas gathering system is the Llano pipeline, a 90-mile intrastate pipeline system in southeastern New Mexico with a throughput capacity of 180,000 MCF of gas per day. Capital Corp., through subsidiaries, owns two gas transmission systems located in Texas which total 76 miles. This system has a design capacity of 90,000 MCF of gas per day. It also owns, or has interests in, and operates five natural gas processing plants located in southeastern New Mexico and western Texas with a total design capacity of 125,000 MCF of gas per day (owns 100% interests in three of these plants, and a majority of the two remaining plants). Only three of the five plants are active currently. In addition, Capital Corp. owns and operates a sour gas treating facility in Texas and an underground natural gas storage facility adjacent to the Llano pipeline in southeastern New Mexico with a current working capacity of approximately six BCF of natural gas. The Llano pipeline makes up part of the Company's Merchant Energy Trading and Sales Business, which the Company discontinued effective June 30, 1998. WKE is leasing and operating for 25 years all of the generating assets owned by Big Rivers, a Henderson, Kentucky-based power generation cooperative with 1,459 Mw of owned net generating capacity. Big Rivers owns three coal-fired plants and one combustion turbine. In addition, WKE operates a 312 Mw coal-fired facility owned by the City of Henderson, Kentucky, with contractual rights to any surplus power generated by such facility, which historically has been about 80% of the unit's capacity. Centro's gas transmission and distribution system includes 5,963 miles of transmission mains and distribution mains located in Cordoba, Argentina, and neighboring provinces. Cuyana's gas transmission and distribution system includes approximately 4,800 miles of transmission mains and distribution mains located in Mendoza Province, Argentina, and neighboring provinces. ITEM 3. Legal Proceedings. Rates and Regulatory Matters For a discussion of current regulatory matters, including a discussion of (a) rate matters addressed in the Kentucky Commission's order approving the KU Merger, (b) proceedings before the Kentucky Supreme Court and the Kentucky Commission regarding environmental cost recovery surcharge refunds, and (c) fuel adjustment clause proceedings before the Kentucky Commission regarding electric line loss refunds, see Rates and Regulation under Item 7 and Notes 2, 5 and 18 of LG&E Energy Corp.'s Notes to Financial Statements, Note 3 LG&E's Notes to Financial Statements and Notes 3 of KU's Notes to Financial Statements under Item 8. Performance-Based Ratemaking In October, 1998, LG&E and KU filed applications with the Kentucky Commission for appeal of a performance-based method for determining electric rates. The companies' proposals include financial incentives to reduce fuel costs and increase generating efficiency, as well as financial penalties and rewards in other performance areas. The proposals are subject to approval by the Kentucky Commission, with a decision likely to occur during 1999. Certain intervenors have requested that the Kentucky Commission significantly reduce base rates before implementing PBR. See Rates and Regulations under Item 7 and Notes 5 and 22 to LG&E Energy's Notes to Financial Statements, Notes 3 and 16 to LG&E's Notes to Financial Statements and Notes 3 29 and 13 to KU's Notes to Financial Statements. Fuel Adjustment Clause Proceedings Pursuant to Kentucky statute, aspects of the Company's utilities rates are reviewed through semi-annual fuel adjustment clause (FAC) proceedings at the Kentucky Commission. Although the proceedings are routine, some items are noted herein. Certain intervenors have challenged KU's recovery of certain energy charges for power purchased from Owensboro Municipal Utilities and requested rate refunds for such amounts. Although the outcome of this proceeding cannot be predicted, the Company believes that, based upon its review of the legal and regulatory precedence, its position should prevail and that the PSC should not disallow any of the energy charges in this category for any part of the four year period. KU estimates the amount of disputed costs to be approximately $12.8 million through October 31, 1998. See also Note 18 to LG&E Energy's Notes to Financial Statements and Note 11 to KU's Notes to Financial Statements. See Rates and Regulatory Matters above regarding electric line loss matters arising during LG&E's and KU's FAC proceedings. Environmental For a discussion of environmental matters concerning (a) currently proposed NOx and SO2 emission limit decreases, (b) issues at LG&E's Mill Creek and Cane Run generating plants and LG&E's and KU's manufactured gas plant sites, and (c) other environmental items affecting LG&E Energy and its subsidiaries, see Environmental Matters under Item 7 and Note 18 of LG&E Energy's Notes to Financial Statements, Note 12 of LG&E's Notes to Financial Statements and Note 11 of KU's Notes to Financial Statements under Item 8, respectively. Southampton For a discussion of the settlement of certain FERC proceedings involving LG&E-Westmoreland Southampton, the partnership that owns the Southampton facility, regarding the Southampton facility status as a qualifying facility for 1992, see Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Roanoke Valley I Westmoreland-LG&E Partners (WLP), the partnership that owns the Roanoke Valley I and II facilities, is seeking the recovery of capacity payments withheld by Virginia Electric and Power Company (VEPCO). In November 1998, the Circuit Court for the City of Richmond, Virginia issued an opinion awarding WLP approximately $19 million plus interest until paid, and addressed certain other issues. In January 1999, VEPCO appealed the decision. See Item 1 and Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Kenetech Bankruptcy In May 1996, Kenetech Windpower, Inc. (Kenetech) filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the Northern District of California seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries, on one hand, and various windpower projects located in the U.S. and abroad, on the other hand. Included in these projects are the Windpower Partners 1993, Windpower Partners 1994 and KW Tarifa, S.A. wind projects. In January 1999, the Bankruptcy Court approved an initial plan of reorganization. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. 30 Windpower Partners 1994 Windpower Partners 1994 (WPP 94), in which the Company has a 25% interest through indirect subsidiaries, did not make semiannual payments, due September 1997, March 1998, September 1998 and March 1999 to John Hancock Mutual Life Insurance Company (Hancock) under certain Notes issued by WPP 94 to Hancock. The Company has offered WPP 94 financial support with respect to the appropriate proportion of its debt obligations, but certain of the three other investor groups are unable to offer funds to WPP 94 in support of the partnership. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. Calgary On November 22, 1996 LG&E Natural Canada Inc., an indirect subsidiary of LG&E Energy, initiated action in the Court of the Queens Bench of Alberta, Calgary against a former employee as a result of the discovery that the former employee had engaged in unauthorized transactions. See Note 18 to LG&E Energy's Notes to Financial Statements, under Item 8 for a further discussion. Springfield Municipal Contract LG&E Energy Marketing Inc. (LEM), an indirect subsidiary of LG&E Energy, filed suit against the City of Springfield, Illinois, City Water, Light and Power Company in the United States District Court for the Western District of Kentucky. See Note 18 to LG&E Energy's Notes to Financial Statements under Item 8 for a further discussion. Oglethorpe Power Contract In October 1998, LEM initiated an arbitration proceeding against Oglethorpe Power Corporation (OPC) in connection with matters involving LEM's November 1996 power sales agreement with OPC. Selection of arbitrators was completed in February 1999 and discovery proceedings have commenced in this matter. See Note 18 to LG&E Energy's Notes to Financial Statements under Item 8 for a further discussion. Other In the normal course of business, other lawsuits, claims, environmental actions, and other governmental proceedings arise against LG&E Energy and its subsidiaries, including LG&E and KU. To the extent that damages are assessed in any of these lawsuits, LG&E Energy, LG&E and KU believe that their insurance coverage is adequate. Management, after consultation with legal counsel, does not anticipate that liabilities arising out of other currently pending or threatened lawsuits and claims will have a material adverse effect on LG&E's Energy's, LG&E's or KU's consolidated financial position or results of operations, respectively. ITEM 4. Submission of Matters to a Vote of Security Holders. None. 31 Executive Officers of LG&E Energy Corp.:
Effective Date of Election to Present Name Age Position Position ------ --- -------- -------------------- Roger W. Hale 55 Chairman of the Board August 17, 1990 and Chief Executive Officer Victor A. Staffieri 43 President and Chief February 16, 1999 Operating Officer R. Foster Duncan 45 Executive Vice President February 16, 1999 and Chief Financial Officer Stephen R. Wood 56 President - Distribution May 15, 1997 Services Division President - Louisville Gas and Electric Company Robert M. Hewett 52 President - Kentucky May 4, 1998 Utilities Company John R. McCall 55 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary Wayne T. Lucas 51 Executive Vice President - May 4, 1998 Power Generation George W. Basinger 53 Senior Vice President - May 4, 1998 Independent Power Operations Donald F. Santa, Jr. 40 Senior Vice President and October 1, 1998 Deputy General Counsel Frederick J. Newton III 43 Senior Vice President and January 2, 1999 Chief Administrative Officer S. Bradford Rives 40 Senior Vice President - February 16, 1999 Finance and Business Development Wendy C. Heck 45 Vice President - Infor- February 3, 1998 mation Technology Charles A. Markel 51 Vice President - January 1, 1993 Finance and Treasurer Michael D. Robinson 43 Vice President and February 16, 1999 Controller
32 The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Shareholders, scheduled to be held April 21, 1999. There are no family relationships between executive officers of the Company or executive officers of its subsidiaries. Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also executive officers of LG&E and KU. Mr. Hale is Chairman of the Board and Chief Executive Officer of LG&E and KU; Mr. Lucas is Executive Vice President - Power Generation of LG&E and KU; Mr. Duncan is Chief Financial Officer of LG&E and KU; Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary of LG&E and KU; Mr. Newton is Senior Vice President and Chief Administrative Officer of LG&E and KU; Mr. Markel is Treasurer of LG&E and KU; and Mr. Robinson is Vice President and Controller of LG&E and KU. Mr. Wood and Ms. Heck are also officers of LG&E. Mr. Wood is President of LG&E; and Ms. Heck is Vice President - - Information Technology of LG&E. Mr. Hale was President of LG&E Energy from December 1992 to May 1998. Before he was elected to his current position, Mr. Staffieri was Senior Vice President, Public Policy and General Counsel of LG&E Energy Corp. and LG&E from November 1992 to January 1994; President of LG&E from January 1994 to May 1997; President - Distribution Services of LG&E Energy Corp. from December 1995 to May 1997; Chief Financial Officer of LG&E Energy Corp. and LG&E from May 1997 to February 1999; and Chief Financial Officer of KU from May 1998 to February 1999. Before he was elected to his current position, Mr. Duncan was Senior Vice President, Corporate Finance and Business Development of Freeport-McMoRan Resource Partners from March 1993 to May 1994; Vice President and Corporate Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and their affiliates from May 1994 to January 1998; and Executive Vice President - Planning and Development of LG&E Energy Corp. from January 1998 to February 1999. Before he was elected to his current position, Mr. Wood was Senior Vice President and Chief Administrative Officer of LG&E from August 1990 to January 1994, and Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997. Before he was elected to his current position, Mr. Hewett was Vice President - Regulation and Economic Planning of KU from January 1982 to April 1997; and Senior Vice President - Customer Service and Marketing of KU from April 1997 to May 1998. Before he was elected to his current position, Mr. McCall was Partner and Litigation Chairman of Brown, Todd & Heyburn, a law firm. Before he was elected to his current position, Mr. Lucas was Vice President, Energy Supply of KU from November 1986 to November 1994; and Senior Vice President, Energy Supply of KU from November 1994 to June 1998. Before he was elected to his current position, Mr. Basinger was Partner of National Power Company prior to November 1993; Vice President of Venture Management of LG&E Power Inc. from December 1993 to November 1994; Senior Vice President of Operations of LG&E Power Inc. from November 1994 to August 1996; and Senior Vice President - Power Operations of LG&E Energy Corp. from August 1996 to May 1998. Before he was elected to his current position, Mr. Santa was a member of the Federal Energy Regulatory 33 Commission from May 1993 to August 1997; and Vice President and Deputy General Counsel of LG&E Energy Corp. from September 1997 to October 1998. Before he was elected to his current position, Mr. Newton was Director of Human Resources, Manufacturing and Engineering at Unilever from October 1993 to July 1995; Senior Director, Human Resources, Supply Chain, at Unilever from August 1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation from August 1996 to July 1997; Senior Vice President, Human Resources, at Woolworth Corporation's Champs Sports Division from August 1997 to April 1998; and Senior Vice President - Human Resources and Administration of LG&E Energy Corp., LG&E and KU from May 1998 to January 1999. Before he was elected to his current position, Mr. Rives was Associate General Counsel of LG&E Energy Corp. from January 1994 to June 1994; Vice President and Treasurer of LG&E Power Inc. from June 1994 to March 1995; Vice President, Controller and Treasurer of LG&E Power Inc. from March 1995 to December 1995; Vice President - Finance, Non-Utility Business of LG&E Energy Corp. from January 1996 to March 1996; and Vice President - Finance and Controller of LG&E Energy Corp. from March 1996 to February 1999. Before she was elected to her current position, Ms. Heck was Vice President - Information Services of LG&E from January 1994 to May 1997; and Vice President, Administration of LG&E Energy Corp. from May 1997 to February 1998. Before he was elected to his current position, Mr. Robinson was Controller of KU Energy Corporation from June 1990 to May 1998; Controller of KU from August 1990 to May 1998, and Vice President and Controller of LG&E and KU from May 1998 to the present. Executive Officers of LG&E:
Effective Date of Election to Present Name Age Position Position ------ --- -------- ------------------- Roger W. Hale 55 Chairman of the Board, January 1, 1992 and Chief Executive Officer Stephen R. Wood 56 President May 15, 1997 R. Foster Duncan 45 Executive Vice President February 16, 1999 and Chief Financial Officer John R. McCall 55 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary Wayne T. Lucas 51 Executive Vice President - May 4, 1998 Power Generation Frederick J. Newton III 43 Senior Vice President and January 2, 1999 Chief Administrative Officer Rebecca L. Farrar 39 Vice President, Gas February 15, 1995 Service Business
34
Effective Date of Election to Present Name Age Position Position ---- --- -------- ------------------- Wendy C. Heck 45 Vice President - Infor- February 3, 1998 mation Technology Chris Hermann 51 Vice President, Power May 4, 1998 Generation and Engineering Services Paul W. Thompson 42 Vice President, Retail September 15, 1996 Electric Business Ronald L. Willhite 52 Vice President - May 4, 1998 Regulatory Affairs Michael D. Robinson 43 Vice President and May 4, 1998 Controller Charles A. Markel 51 Treasurer January 1, 1993
The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Shareholders, scheduled to be held April 21, 1999. There are no family relationships between executive officers of LG&E. Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also executive officers of LG&E Energy Corp. and KU. Mr. Hale is Chairman of the Board and Chief Executive Officer of LG&E Energy Corp. and KU; Mr. Lucas is Executive Vice President - Power Generation of LG&E Energy Corp. and KU; Mr. Duncan is Chief Financial Officer of LG&E Energy Corp. and KU; Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy Corp. and KU; Mr. Newton is Senior Vice President and Chief Administrative Officer of LG&E Energy Corp. and KU; Mr. Markel is Vice President - Finance and Treasurer of LG&E Energy Corp. and Treasurer of KU; and Mr. Robinson is Vice President and Controller of LG&E Energy Corp. and KU. Mr. Wood and Ms. Heck are also officers of LG&E Energy Corp. Mr. Wood is President - Distribution Services of LG&E Energy Corp.; and Ms. Heck is Vice President - Information Technology of LG&E Energy Corp. Mr. Willhite is also Vice President - Regulatory Affairs of KU. Before he was elected to his current position, Mr. Wood was Senior Vice President and Chief Administrative Officer of LG&E from August 1990 to January 1994, and Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997. Before he was elected to his current position, Mr. Duncan was Senior Vice President, Corporate Finance and Business Development of Freeport-McMoRan Resource Partners from March 1993 to May 1994; Vice President and Corporate Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and their affiliates from May 1994 to January 1998; and Executive Vice President - Planning and Development of LG&E Energy Corp. from January 1998 to February 1999. Before he was elected to his current position, Mr. McCall was Partner and Litigation Chairman of Brown, Todd & Heyburn, a law firm. 35 Before he was elected to his current position, Mr. Lucas was Vice President, Energy Supply of KU from November 1986 to November 1994; and Senior Vice President, Energy Supply of KU from November 1994 to June 1998. Before he was elected to his current position, Mr. Newton was Director of Human Resources, Manufacturing and Engineering at Unilever from October 1993 to July 1995; Senior Director, Human Resources, Supply Chain, at Unilever from August 1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation from August 1996 to July 1997; Senior Vice President, Human Resources, at Woolworth Corporation's Champs Sports Division from August 1997 to April 1998; and Senior Vice President - Human Resources and Administration of LG&E Energy Corp., LG&E and KU from May 1998 to January 1999. Before she was elected to her current position, Ms. Farrar was Division Manager, Central Division-Gas Operations of South Carolina Electric and Gas Company from February 1992 to July 1994; and General Manager, Gas Operations of South Carolina Electric and Gas Company from July 1994 to February 1995. Before she was elected to her current position, Ms. Heck was Vice President - Information Services of LG&E from January 1994 to May 1997; and Vice President, Administration of LG&E Energy Corp. from May 1997 to February 1998. Before he was elected to his current position, Mr. Hermann was Vice President and General Manager, Wholesale Electric Business of LG&E from January 1993 to June 1997; and Vice President, Business Integration of LG&E from June 1997 to May 1998. Before he was elected to his current position, Mr. Thompson was Director-Business Development for LG&E Energy Corp. prior to December 1993; General Manager-Gas Operations for LG&E from December 1993 to July 1994; and Vice President-Business Development for LG&E Energy Corp. from July 1994 to September 1996. Before he was elected to his current position, Mr. Willhite was Director of Regulation for Kentucky Utilities prior to April 1997; and Vice President of Regulation and Economic Planning for Kentucky Utilities from April 1997 to May 1998. Before he was elected to his current position, Mr. Robinson was Controller of KU Energy Corporation from June 1990 to May 1998; and Controller of KU from August 1990 to May 1998. Executive Officers of KU:
Effective Date of Election to Present Name Age Position Position ---- --- -------- ------------------- Roger W. Hale 55 Chairman of the Board, May 4, 1998 and Chief Executive Officer Robert M. Hewett 52 President May 4, 1998 Wayne T. Lucas 51 Executive Vice President - May 4, 1998 Power Generation
36
Effective Date of Election to Present Name Age Position Position ---- --- -------- ------------------- R. Foster Duncan 45 Executive Vice President February 16, 1999 and Chief Financial Officer John R. McCall 55 Executive Vice President, May 4, 1998 General Counsel and Corporate Secretary Frederick J. Newton III 43 Senior Vice President and January 2, 1999 Chief Administrative Officer Gary E. Blake 45 Vice President - Sales May 4, 1998 and Service James J. Ellington 53 Vice President - Power May 4, 1998 Generation Ronald L. Willhite 52 Vice President - May 4 1998 Regulatory Affairs Michael D. Robinson 43 Vice President and August 1, 1990 Controller Charles A. Markel 51 Treasurer May 4, 1998
The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Shareholders, scheduled to be held April 21, 1999. There are no family relationships between executive officers of KU. Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also executive officers of LG&E Energy Corp. and LG&E. Mr. Hale is Chairman of the Board and Chief Executive Officer of LG&E Energy Corp. and LG&E; Mr. Lucas is Executive Vice President - Power Generation of LG&E Energy Corp. and LG&E; Mr. Duncan is Chief Financial Officer of LG&E Energy Corp. and LG&E; Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy Corp. and LG&E; Mr. Newton is Senior Vice President and Chief Administrative Officer of LG&E Energy Corp. and LG&E; Mr. Markel is Vice President - Finance and Treasurer of LG&E Energy Corp. and Treasurer of LG&E; and Mr. Robinson is Vice President and Controller of LG&E Energy Corp. and LG&E. Mr. Willhite is also Vice President - Regulatory Affairs of LG&E. Before he was elected to his current position, Mr. Hale was Chairman of the Board and Chief Executive Officer of LG&E Energy Corp. from August 1990 to the present and Chairman of the Board and Chief Executive Officer of LG&E from January 1992 to the present. Before he was elected to his current position, Mr. Hewett was Vice President - Regulation and Economic Planning of KU from January 1982 to April 1997; and Senior Vice President - Customer Service and Marketing of KU from April 1997 to May 1998. Before he was elected to his current position, Mr. Lucas was Vice President, Energy Supply of KU from 37 November 1986 to November 1994; and Senior Vice President, Energy Supply of KU from November 1994 to June 1998. Before he was elected to his current position, Mr. Duncan was Senior Vice President, Corporate Finance and Business Development of Freeport-McMoRan Resource Partners from March 1993 to May 1994; Vice President and Corporate Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and their affiliates from May 1994 to January 1998; and Executive Vice President - Planning and Development of LG&E Energy Corp. from January 1998 to February 1999. Before he was elected to his current position, Mr. McCall was Partner and Litigation Chairman of Brown, Todd & Heyburn, a law firm, through June 1994; and Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy Corp. and LG&E from July 1994 to the present. Before he was elected to his current position, Mr. Newton was Director of Human Resources, Manufacturing and Engineering at Unilever from October 1993 to July 1995; Senior Director, Human Resources, Supply Chain, at Unilever from August 1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation from August 1996 to July 1997; Senior Vice President, Human Resources, at Woolworth Corporation's Champs Sports Division from August 1997 to April 1998; and Senior Vice President - Human Resources and Administration of LG&E Energy Corp., LG&E and KU from May 1998 to January 1999. Before he was elected to his current position, Mr. Blake was Vice President - Retail Marketing of KU from November 1992 to May 1998. Before he was elected to his current position, Mr. Ellington was Superintendent of KU's Ghent plant from May 1986 to May 1998. Before he was elected to his current position, Mr. Willhite was Director of Regulation for Kentucky Utilities prior to April 1997; and Vice President of Regulation and Economic Planning for Kentucky Utilities from April 1997 to May 1998. Before he was elected to his current position, Mr. Robinson was Controller of KU Energy Corporation from June 1990 to May 1998 and Controller of KU from August 1990 to May 1998. Before he was elected to his current position, Mr. Markel was Vice President - Finance and Treasurer of LG&E Energy Corp. and Treasurer of LG&E from January 1993 to the present. 38 PART II. ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters. LG&E ENERGY: LG&E Energy 's Common Stock is listed on the New York and Chicago Stock Exchanges. The ticker symbol is "LGE." The newspaper stock exchange listings are "LGE Energy" or "LGE EN." The following table gives information with respect to price ranges, as reported in THE WALL STREET JOURNAL as New York Stock Exchange Composite Transactions, and dividends paid for the periods shown (dividends paid have not been restated to reflect the KU merger).
1998 1997 ---- ---- Dividend High Low Dividend High Low Paid Price Price Paid Price Price --------- ----- ----- -------- ----- ----- First quarter $.2975 $26.4375 $23.0000 $.2875 $25.8750 $23.5000 Second quarter .2975 27.7500 24.6875 .2875 25.0000 21.8125 Third quarter .2975 27.8750 22.5000 .2875 23.4375 21.2500 Fourth quarter .3075 29.3125 26.0625 .2975 25.0625 21.2500
The number of record holders of Common Stock at December 31, 1998, totaled 50,199. The book value of the Company's Common Stock at December 31, 1998, was $9.57 per share. LG&E: All LG&E common stock, 21,294,223 shares, is held by LG&E Energy. Therefore, there is no public market for LG&E's common stock. The following table sets forth LG&E's cash distributions on common stock paid to LG&E Energy (in thousands of $):
1998 1997 ---- ---- First quarter $20,000 $19,000 Second quarter 19,800 - Third quarter 21,200 19,000 Fourth quarter 22,000 20,000
39 KU: All KU common stock, 37,817,878 shares, is held by LG&E Energy. Therefore, there is no public market for KU's common stock. The following table sets forth KU's cash distributions on common stock paid to LG&E Energy (in thousands of $):
1998 1997 ---- ---- First quarter $17,018 $16,639 Second quarter 23,071 16,640 Third quarter 18,000 16,640 Fourth quarter 18,000 16,640
ITEM 6. Selected Financial Data.
Years Ended December 31 (Thousands of $ Except Per Share Data) -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- LG&E ENERGY: Revenues: Revenues $2,002,413 $1,725,055 $1,560,460 $1,460,980 $1,467,258 Provision for rate refunds (26,000) -- -- (28,300) -- ----------- ----------- ----------- ----------- ----------- Net revenues 1,976,413 1,725,055 1,560,460 1,432,680 1,467,258 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Operating income: Before non-recurring items 475,285 418,855 380,038 350,898 335,691 Provision for rate refunds (26,000) -- -- (29,800) -- Merger costs to achieve and non-recurring charges (65,318) -- (5,493) -- (48,743) ----------- ----------- ----------- ----------- ----------- Operating income 383,967 418,855 374,545 321,098 286,948 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss): Before non-recurring items 232,216 207,040 192,786 177,467 171,622 Provision for rate refunds (15,556) -- -- (17,852) -- Merger costs to achieve and non-recurring charges (56,389) -- (2,400) -- (38,696) ----------- ----------- ----------- ----------- ----------- Total continuing operations 160,271 207,040 190,386 159,615 132,926 Discontinued operations (23,599) (24,044) (4,434) (732) (241) Gain (loss) on sale of discontinued operations (225,000) -- -- -- 51,805 Cumulative effect of accounting change (7,162) -- -- -- (3,369) ----------- ----------- ----------- ----------- ----------- Net income (loss) $ (95,490) $ 182,996 $ 185,952 $ 158,883 $ 181,121 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Average number of com- mon shares outstanding 129,679,020 129,626,875 129,449,526 129,261,031 129,137,726
40
Years Ended December 31 (Thousands of $ Except Per Share Data) -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- LG&E ENERGY (CONT.): Earnings (loss) per share of common stock (basic): Before non-recurring items $1.79 $1.60 $1.49 $1.37 $1.33 Provision for rate refunds (.12) -- -- (.14) -- Merger costs to achieve and non-recurring charges (.43) -- (.02) -- (.30) ----------- ----------- ----------- ----------- ----------- Total continuing operations 1.24 1.60 1.47 1.23 1.03 Discontinued operations (.18) (.19) (.03) -- -- Gain (loss) on sale of discontinued operations (1.74) -- -- -- .40 Cumulative effect of accounting change (.06) -- -- -- (.03) ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share $(.74) $1.41 $1.44 $1.23 $1.40 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share of common stock (diluted): Before non-recurring items $1.79 $1.60 $1.49 $1.37 $1.33 Provision for rate refunds (.12) -- -- (.14) -- Merger costs to achieve and non-recurring charges (.44) -- (.02) -- (.30) ----------- ----------- ----------- ----------- ----------- Total continuing operations 1.23 1.60 1.47 1.23 1.03 Discontinued operations (.17) (.19) (.03) -- -- Gain (loss) on sale of discontinued operations (1.73) -- -- -- .40 Cumulative effect of accounting change (.06) -- -- -- (.03) ----------- ----------- ----------- ----------- ----------- Earnings (loss) per share $(.73) $1.41 $1.44 $1.23 $1.40 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cash dividends declared per share of common stock $1.240 $1.113 $1.081 $1.050 $1.021 Payout ratio (from continuing operations before non- recurring items) 69.3% 69.7% 72.6% 76.5% 76.8% Total assets $4,773,268 $4,562,944 $4,132,599 $4,101,526 $3,887,122 Long-term obligations (including amounts due within one year) 1,510,775 1,230,711 1,193,229 1,208,846 1,158,895
LG&E Energy Corp.'s Management's Discussion and Analysis of Results of Operations and Financial Condition and the Notes to Financial Statements should be read in conjunction with the above information. 41
Years Ended December 31 (Thousands of $) -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- LG&E: Operating revenues: Revenues $854,556 $845,543 $821,115 $751,763 $759,075 Provision for rate refunds (4,500) -- -- (28,300) -- ---------- ---------- ---------- ---------- ---------- Total operating revenues 850,056 845,543 821,115 723,463 759,075 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net operating income: Before unusual items 138,207 148,186 147,263 138,203 134,393 Provision for rate refunds (2,684) -- -- (16,877) -- Non-recurring charges -- -- -- -- (23,353) ---------- ---------- ---------- ---------- ---------- Operating income 135,523 148,186 147,263 121,326 111,040 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income: Before unusual items 104,381 113,273 107,941 100,061 94,423 Provision for rate refunds (2,684) -- -- (16,877) -- Merger costs to achieve and non-recurring charges (23,577) -- -- -- (32,734) Cumulative effect of accounting change -- -- -- -- (3,369) ---------- ---------- ---------- ---------- ---------- Net income 78,120 113,273 107,941 83,184 58,320 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income available for common stock 73,552 108,688 103,373 76,873 52,492 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total assets 2,104,637 2,055,641 2,006,712 1,979,490 1,966,590 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Long-term obligations (including amounts due within one year) $626,800 $646,800 $646,800 $662,800 $662,800 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
LG&E's Management's Discussion and Analysis of Results of Operations and Financial Condition and LG&E's Notes to Financial Statements should be read in conjunction with the above information.
Years Ended December 31 (Thousands of $) -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- KU: Operating revenues: Revenues $831,614 $716,437 $711,711 $686,430 $656,013 Provision for rate refund (21,500) -- -- -- (19,385) ---------- ---------- ---------- ---------- ---------- Operating revenues 810,114 716,437 711,711 686,430 636,628 ---------- ---------- ---------- ---------- ---------- Net operating income: Before unusual items 138,263 118,408 117,337 108,544 120,571 Provision for rate refund (12,875) -- -- -- (19,385) ---------- ---------- ---------- ---------- ---------- Operating income 125,388 118,408 117,337 108,544 101,186 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
42
Years Ended December 31 (Thousands of $) -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- KU (CONT.): Net income: Before unusual items 107,303 85,713 86,163 76,842 96,897 Provision for rate refund (12,875) -- -- -- (19,385) Merger cost to achieve (21,664) -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income 72,764 85,713 86,163 76,842 77,512 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income available for common stock 70,508 83,457 83,907 74,586 75,128 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total assets 1,763,797 1,679,880 1,673,055 1,659,988 1,618,100 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Long-term obligations (including amounts due within one year) $546,330 $546,351 $546,373 $545,894 $495,916 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
KU's Management's Discussion and Analysis of Results of Operations and Financial Condition and KU's Notes to Financial Statements should be read in conjunction with the above information. 43 ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. LG&E ENERGY: GENERAL The following discussion and analysis by management focuses on those factors that had a material effect on the Company's financial results of operations and financial condition during 1998, 1997 and 1996 and should be read in connection with the consolidated financial statements and notes thereto. As set forth in the discussion concerning Discontinued Operations below, future financial results from the Company's operations will continue to reflect the results from its portfolio of investments in electric generation and gas distribution in addition to the financial results provided by the Company's regulated utilities, Louisville Gas and Electric Company (LG&E) and Kentucky Utilities Company (KU). Some of the following discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible," "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include: general economic conditions; business and competitive conditions in the energy industry; changes in federal or state legislation; unusual weather; actions by state or federal regulatory agencies; and other factors described from time to time in LG&E Energy Corp.'s reports to the Securities and Exchange Commission, including Exhibit 99.01 to LG&E Energy Corp.'s report on Form 8-K filed October 21, 1998. MERGER Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. The accompanying consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of LG&E and KU was not affected by the merger. See Note 2 of LG&E Energy's Notes to Financial Statements under Item 8. DISCONTINUANCE OF MERCHANT ENERGY TRADING AND SALES BUSINESS Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. It also plans to sell its natural gas gathering and processing business. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize 44 LG&E Energy (cont.): the value of power sales from physical assets it owns or controls, including LG&E, KU and the Big Rivers Electric Corporation (Big Rivers). As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations results primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believes to be appropriate estimates for future energy prices among other factors to calculate the net realizable value of discontinued operations, it also recognizes that there are inherent limitations in models to accurately predict future events. As a result, there is no guarantee that higher-than-anticipated future commodity prices or load demands, lower- than-estimated asset sales prices or other factors could not result in additional losses. The Company has been successful in settling portions of its discontinued operations, but significant assets, operations and obligations remain. As of January 27, 1999, the Company estimates that a $1 change in electricity prices and a 10(cent) change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $8.8 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of January 27, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $9.3 million. See Notes 3 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. The Company reclassified its financial statements for prior periods to present the operating results, financial position and cash flows of these businesses as discontinued operations. See Notes 1 and 3 of LG&E Energy's Notes to Financial Statements under Item 8 for more information. MASTER RESTRUCTURING AGREEMENT On June 30, 1998, the partnership that owns the Rensselaer cogeneration facility, along with 14 other independent power producers, participated in the consummation of a Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO), the utility purchasing energy from the Rensselaer facility. The Company recognized a net after-tax gain on the MRA transaction and settlement of $21 million. See Note 8 of LG&E Energy's Notes to Financial Statements under Item 8. LEASE OF BIG RIVERS FACILITIES On July 15, 1998, the Company closed the transaction to lease the generating assets of Big Rivers following receipt of necessary regulatory approvals. Under the 25-year operating lease, Western Kentucky Energy Corp. and its affiliates (WKE) are leasing and operating Big Rivers' three coal-fired facilities. In addition, WKE operates and maintains the Station Two generating facility of the City of Henderson (Henderson). The combined generating capacity of these facilities amounts to approximately 1,700 megawatts, net of the Henderson's capacity and energy needs from Station Two. In related transactions, power is supplied to Big Rivers at contractual prices over the term of the lease to meet the needs of four member distribution cooperatives and their retail customers, including major western Kentucky aluminum smelters. Excess generating capacity is available to WKE to market throughout the region. In connection with these transactions, WKE has 45 LG&E Energy (cont.): undertaken to bear certain of the future capital requirements of those generating assets, certain defined environmental compliance costs and other obligations. Big Rivers' personnel at the plants became employees of WKE upon the completion of the transactions. RESULTS OF OPERATIONS Earnings per Share Continuing operations for 1998 produced basic earnings per share of $1.24, before a decrease of 6 cents due to cumulative effect of an accounting change, a decrease of 36 cents per share from $1.60 earned from continuing operations in 1997. Earnings for 1998 include non-recurring charges for merger-related costs and environmental cost recovery refunds of 43 cents and 12 cents, respectively. Excluding these non-recurring charges, earnings per share from continuing operations for 1998 were $1.79, an increase of 19 cents over 1997. The 19 cent per share increase resulted from a 10 cent increase in core domestic utility business and a 16 cent increase in non-utility business, partially offset by an increase in corporate and other expenses of 7 cents. The 1998 non-utility results included 16 cents relating to the consummation of the MRA with NIMO, 3 cents for first-year earnings related to the Big Rivers transactions, 1 cent due to a full year of operations and an increase in core business of our Argentine operations, partially offset by an increase in non-utility expenses of 4 cents, primarily related to the loss on disposition of our gas-fired power plant in San Miguel, Argentina and, the write-off of our Windpower Partners 1994 investment. Earnings per share from continuing operations for 1997 were $1.60, an increase of 13 cents per share from the $1.47 earned from continuing operations in 1996. Earnings for 1996 included a charge of 2 cents resulting from a write-off associated with non-utility investments. Excluding this charge, earnings per share from continuing operations for 1996 were $1.49; thus, 1997 earnings from continuing operations increased 11 cents. The 11 cent per share increase resulted from an increase in core utility business earnings of 3 cents, first-year earnings related to the acquisition of interests in two Argentine gas distribution units of 4 cents, and an increase in the non-utility power generation business of 8 cents, partially offset by an increase in corporate and other expenses, including interest expense on debt incurred to acquire non-utility businesses of 4 cents. The 3 cent increase in utility earnings was primarily due to higher contributions from wholesale electric sales and lower maintenance expenses. Loss from discontinued operations decreased from 19 cents in 1997 to 18 cents in 1998, due primarily to the Company's decision to exit the merchant energy trading and sales business effective June 30, 1998. See Note 3 of LG&E Energy's Notes to Financial Statements under Item 8. Loss from discontinued operations increased from 3 cents in 1996 to 19 cents in 1997, due primarily to abnormal weather, price volatility in the energy market and narrowing margins in the natural gas business. 46 LG&E Energy (cont.): Electric and Gas Utility Results Revenues A comparison of utility revenues for the years 1998 and 1997, excluding the $26 million provision recorded for refund of environmental costs previously recovered from customers (ECR refund), with the immediately preceding year reflects both increases and decreases, which have been segregated by the following principal causes (in thousands of $):
Increase (Decrease) From Prior Period Electric Revenues Gas Revenues 1998 1997 1998 1997 ---- ---- ---- ---- Sales to ultimate consumers: Fuel and gas supply adjustments, etc. $ 4,908 $ (7,569) $ (4,393) $ 27,192 Merger surcredit (7,501) -- -- -- Demand side management/decoupling (6,299) 8,041 (369) 4,348 Environmental cost recovery surcharge (807) 1,002 -- -- Variation in sales volumes 52,892 6,491 (42,418) (14,891) ----------- --------- --------- -------- Total retail sales 43,193 7,965 (47,180) 16,649 Wholesale sales 90,386 1,210 8,720 -- Gas transportation-net -- -- (71) 147 Other (324) 3,548 (935) (204) ----------- --------- --------- -------- Total $ 133,255 $ 12,723 $ (39,466) $ 16,592 ----------- --------- --------- -------- ----------- --------- --------- --------
Electric retail sales increased primarily due to the warmer weather experienced in 1998 as compared to 1997. Wholesale sales increased due to larger amounts of power available for off-system sales, and an increase in the unit price of the sales. Gas retail sales decreased from 1997 due to the warmer weather in 1998. Gas wholesale sales increased to $8.7 million in 1998 from zero in 1997 due to the implementation of LG&E's performance-based ratemaking mechanism. See Note 5 of LG&E Energy's Notes to Financial Statements under Item 8. Electric revenues increased in 1997 due to a higher level of industrial sales and other revenues. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause, partially offset by decreased gas sales due mainly to warmer weather. Expenses Fuel for electric generation and gas supply expenses comprise a large component of the Company's total operating costs. LG&E's and KU's electric rates contain a fuel adjustment clause (FAC) and LG&E's gas rates contain a gas supply clause, whereby increases or decreases in the cost of fuel and gas supply are reflected in LG&E's and KU's rates, subject to approval by the Kentucky Public Service Commission (Kentucky Commission or Commission), the Virginia State Corporation Commission (Virginia Commission) and the Federal Energy Regulatory Commission (FERC). Fuel for electric generation increased $34.1 million in 1998 primarily due to an increase in generation to support increased electrical sales at KU ($27.3 million) and a higher cost of coal burned at LG&E ($6.6 million). Fuel expenses incurred in 1997 decreased $10 million primarily due to a decrease in generation at KU which resulted from an increase in economic power purchased. LG&E's average delivered cost per ton of coal purchased was $22.38 in 1998, $21.66 in 1997, and $21.73 in 1996. KU's average delivered cost per ton of coal purchased was 47 LG&E Energy (cont.): $26.97 in 1998, $27.97 in 1997, and $27.54 in 1996. Power purchased increased $59.5 million in 1998 to support the increase in wholesale sales and due to increases in the unit price of purchases. Purchased power expense increased $10.7 million (13%) in 1997, due to an increase at KU in kilowatt hour (kWh) purchases associated with increased availability of surplus power on favorable pricing terms and to a one-time reduction at KU in demand costs in 1996 of about $4 million under a contract with a neighboring utility. Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a decrease in the volume of gas delivered to the distribution system. Gas supply expenses for 1997 increased $18.4 million (13%) because of the higher cost of net gas supply ($29.3 million), partially offset by a decrease in the volume of gas delivered to the distribution system ($10.9 million). The average unit cost per thousand cubic feet (Mcf) of purchased gas was $3.05 in 1998 and $3.46 in 1997 and 1996. Operation and maintenance expenses increased $14.6 million (3.8%) over 1997 because of increased costs to operate and maintain LG&E's electric generating plants ($8.8 million), amortization of deferred merger costs ($3.8 million), and an increase in storm damage expenses ($1.4 million). Operation and maintenance expenses for 1997 were approximately the same as 1996. Maintenance decreased in 1997 due mainly to decreased repairs at LG&E's electric generating plants caused by fewer outages and a lower level of storm damage repairs. These decreases were offset by an increase in costs to operate LG&E's power plants and a write-off of certain previously deferred items at LG&E that amounted to approximately $3 million. Items written off include expenses associated with the hydroelectric plant and a management audit fee. Even though LG&E believes it could have reasonably expected to recover these costs in future rate proceedings, it decided not to seek recovery and expensed these costs because of increasing competitive pressures in the industry. Depreciation and amortization increased $2.7 million (1.5%) in 1998 because of additional utility plant in service. Depreciation and amortization increased in 1997 primarily because of additional plant in service at both KU and LG&E. In addition, 1997 reflects the accelerated write-off of losses on early retirements of facilities at LG&E. The companies incurred a pre-tax charge in the second quarter of 1998 for costs associated with the merger of LG&E Energy and KU Energy of $53.9 million (of this amount, $32.1 million was for LG&E, and $21.8 million was for KU). The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Public Service Commission. See Note 2 of LG&E Energy's Notes to Financial Statements under Item 8. Interest charges for 1998 decreased $3.9 million (7%) due to the retirement of LG&E's 6.75% Series First Mortgage Bonds and lower interest rates. LG&E's embedded cost of long-term debt was 5.57% at December 31, 1998 and 5.68% at December 31, 1997. KU's embedded cost of long-term debt was 6.99% at December 31, 1998 and 6.98% at December 31, 1997. See Note 16 of LG&E Energy's Notes to Financial Statements under Item 8. Variations in income tax expenses are largely attributable to changes in pre-tax income as well as non-deductible merger expenses. The rate of inflation may have a significant impact on the Company's utility operations, its ability to control 48 LG&E Energy (cont.): costs and the need to seek timely and adequate rate adjustments. However, relatively low rates of inflation in the past few years have moderated the impact on current operating results. LG&E Capital Corp. Results LG&E Capital Corp. (Capital Corp.), the holding company for all non-utility investments, conducts its operations through three principal segments: Independent Power Operations, WKE and Argentine Gas Distribution. Involvement in these and other non-utility businesses represents the Company's commitment to understand, respond to, and capitalize on the opportunities presented by an emerging competitive energy services industry. The Independent Power Operations develop, operate, maintain and own interests in domestic and international power generation facilities that sell electric and steam energy to utility and industrial customers, and own equity interests in combustion turbines which are leased to others. WKE leases and operates the generating facilities of Big Rivers. Argentine Gas Distribution owns interests in two natural gas distribution companies in Argentina. Capital Corp. is also engaged in commercial and retail initiatives designed to assess the energy and utility needs of large commercial and industrial entities, provide maintenance and repair services for customers' major household appliances and provide third party metering and billing services. See Notes 2, 4, 8, 9, 18 and 20 of LG&E Energy's Notes to Financial Statements under Item 8. Independent Power Operations Revenues Revenues from Independent Power Operations, comprised mainly of contractual revenues from various power plant operations, were approximately the same in 1998 and 1997. Revenues increased 9% to $19.6 million in 1997 due to the addition of plant operating contracts at the Windpower Partners 1993 (WPP 93) California and Minnesota facilities, as well as the Windpower Partners 1994 (WPP 94) Texas facility. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. Equity in Earnings of unconsolidated ventures includes the Company's share of earnings from the ventures in which it maintains an equity interest, but does not consolidate the results of operations. The 247% increase in equity in earnings in 1998 to $71.3 million was primarily attributable to the closure of the MRA transaction with NIMO and an arbitration award received by the Frederickson, Washington, venture, partially offset by a write-off of the Company's investment in the WPP 94 venture. Equity in Earnings were approximately the same in 1997 and 1996. See Notes 8 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. Expenses Direct costs of revenues are primarily comprised of labor and related expenses associated with the Company 's operation of various power plants. These costs were approximately the same in 1998 and 1997. Expenses increased 9% to $12.2 million in 1997 due to the addition of the operating contracts at the WPP 93 and WPP 94 facilities. Operation and maintenance expenses were approximately the same for all periods presented. Depreciation and amortization increased $3.3 million in 1998 due to the write-off of certain intangible assets and capitalized interest associated with the sale of the Company's interest in a 114 MW gas-fired power plant in San Miguel, Argentina and the closure of the MRA transaction with NIMO. Depreciation and amortization expenses were approximately the same in 1997 and 1996. See Note 8 of LG&E Energy's Notes to Financial Statements under Item 8. 49 LG&E Energy (cont.): Western Kentucky Energy WKE commenced operations effective July 15, 1998, after closing its lease transaction with Big Rivers and reported solid performance during its first partial year of operations with revenues of $128.5 million. WKE's cost of revenues, primarily composed of fuel and purchased power expenses, amounted to $73.1 million for the year. Operation and maintenance expenses of $45.4 million include $12.8 million of rent expense associated with the lease of Big Rivers' operating facilities. WKE incurred interest expense of approximately $2.6 million associated with borrowings to fund the initial purchase of certain materials and supplies from Big Rivers and to prepay the first two years' lease payments of $55.9 million. See Note 4 of LG&E Energy's Notes to Financial Statements under Item 8. Argentine Gas Distribution In February 1997, the Company acquired interests in two Argentine natural gas distribution companies: Distribuidora de Gas del Centro (Centro) and Distribuidora de Gas Cuyana (Cuyana). Centro is consolidated within the Company's results while Cuyana's results are recorded using the equity method of accounting. Our investments in Argentina continue to contribute to our non-utility operations, with Centro's revenues increasing by 16% or $21 million due to a full year of operations in 1998 versus 10 1/2 months in 1997, higher per customer consumption and an increase in the customer base. Centro's operating expenses increased by 8% or $2.4 million due to a full year of operations in 1998. Equity in earnings of Cuyana were approximately the same in 1997 and 1998. See Notes 2 and 8 of LG&E Energy's Notes to Financial Statements under Item 8. Other The Company has entered into various commercial and retail initiatives to position itself for growth in the energy industry. The commercial initiatives represent new businesses and products designed to leverage the Company's existing assets and experience, and to gain access to new markets. Our retail initiatives enhance value for LG&E's and KU's customers and are designed to help ensure that LG&E and KU remain the utility of choice within their respective service areas when a fully competitive industry framework takes shape. These commercial and retail initiatives have not had a significant impact on the Company's financial position or required significant capital investment over the last three years. We remain optimistic that these non-traditional developing ventures will add to our knowledge base as well as our financial results in the future. Interest costs increased by $10.4 million, or 62%, from 1997 to 1998 primarily due to the funding of discontinued operations and LG&E Energy's operating expenses. The increase of $7.5 million, or 80%, from 1996 to 1997 was primarily due to the Argentine gas distribution acquisition. See Notes 2, 3, 6 and 16 of LG&E Energy's Notes to Financial Statements under Item 8. LIQUIDITY AND CAPITAL RESOURCES The Company's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and equity investments in connection with independent power production projects and other energy-related growth or acquisition opportunities among the non-utility businesses. Capital funds are also needed for the Company's capital obligations under the Big Rivers lease arrangements, losses incurred in connection with the discontinuance of the merchant energy trading and sales business, information system enhancements, and other business development opportunities. Fluctuations in the Company's discontinued energy marketing and trading activities also affected liquidity throughout the year. Lines of credit and commercial paper programs are maintained to fund these temporary capital requirements. 50 LG&E Energy (cont.): Construction Expenditures and Equity Investments Utility construction expenditures for 1998 were $230 million compared with $205 million for 1997 and $215 million for 1996. Non-utility construction expenditures (other than unconsolidated ventures) were approximately $112 million in 1998, $5 million in 1997, and $1 million in 1996. The 1998 increase for non-utility is mainly due to the purchase of two gas turbine peaking units by Capital Corp., system expansion and refurbishment at Centro, and generating asset upgrades at WKE. Past Financing Activities During 1998, 1997 and 1996, the Company's primary sources of capital were internally generated funds from operating cash flows and debt financing. Internally generated funds provided financing for 100% of the Company's utility construction expenditures for 1998, 1997 and 1996. In 1998, the Company financed $92 million in closing costs related to the WKE lease with commercial paper. The Company provided its merchant energy trading and sales business with additional cash to meet obligations and general working capital needs from funds obtained via Capital Corp.'s borrowings. The results of the merchant energy trading and sales business are included in discontinued operations. The Company acquired interests in two Argentine natural gas distribution companies in 1997 for $140 million, plus transaction related fees and expenses. This acquisition was financed with cash and lines of credit. The Company's combined cash and marketable securities balance decreased by $3.7million in 1998 and increased by $21 million in 1997. The decrease in 1998 reflects expenses incurred to discontinue our merchant energy trading and sales business, merger costs and an increase in capital expenditures, partially offset by increased borrowings and cash flow from continuing operations. The increase for 1997 reflects cash flows from operations and an increase in borrowings, partially offset by capital expenditures and dividends paid. In 1996, combined cash and marketable securities decreased $15.7 million. This decrease reflects capital expenditures, dividends paid and a net decrease in borrowings, partially offset by cash flows from operations. The increases in accounts receivable and accounts payable during 1998 resulted primarily from the Big Rivers transaction. Variations in accounts receivable and accounts payable are not generally significant indicators of the Company's liquidity, as such variations are primarily attributable to fluctuations in weather in LG&E's and KU's service territories. In November 1998, Capital Corp. issued $150 million of Reset Put Securities due 2011. The interest rate is set at 5.75% through November 1, 2001. The securities will be subject to automatic purchase by a remarketing agent, at which time the interest rate will be reset, or to automatic repurchase by Capital Corp. on November 1, 2001. After taking into account the net effect of the derivative instruments entered into in September 1998 to hedge the interest rate on the notes and other issuance costs, the effective rate through October 31, 2001 is approximately 5.4%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper. See Note 16 of LG&E Energy's Notes to Financial Statements under Item 8. On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million matured and were retired by LG&E. The bonds were redeemed with available funds. In February 1998, Capital Corp. issued $150 million of medium-term notes due January 2008, with a stated interest rate on the notes of 6.46%. After taking into account the effects of an interest rate swap entered into in 1997 to hedge the interest rate on $100 million of such medium-term notes and other issuance costs, the effective rate will be 6.82%. The proceeds were used to repay outstanding commercial paper. See Note 16 of 51 LG&E Energy (cont.): LG&E Energy's Notes to Financial Statements under Item 8. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. The interest rates for these bonds were 3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. In September 1997, LG&E Energy Systems Inc. and LG&E Gas Systems Inc. merged to form Capital Corp. At the same time, Capital Corp. implemented a $600 million commercial paper facility backed by new lines of credit totaling $700 million. The Company terminated the previous lines of credit which totaled $460 million. The Company's equity investments in non-utility projects and non-utility construction expenditures were financed through internally generated funds and short-term borrowings. Construction expenditures for new generating projects were generally funded through project debt. The Company had non-utility short-term borrowings outstanding of $365.1 million as of December 31, 1998. These borrowings consisted of commercial paper, which had maturity dates ranging between 1 and 270 days. Because of the rollover of these maturity dates, total short-term borrowings and repayments during the year were approximately $6.8 billion. Short-term borrowings were $360.2 million as of December 31, 1997, and $158 million as of December 31, 1996. The increase in 1997 was primarily due to the acquisition of the interests in the Argentine natural gas distribution companies and the funding of working capital requirements. KU had no short-term borrowings at December 31, 1998. At the end of 1997, KU's short-term borrowings were $34 million compared to $54 million at December 31, 1996. KU has used short-term borrowings to temporarily finance ongoing construction expenditures and general corporate requirements. The decrease in 1998 from 1997 and 1997 from 1996 was due primarily to KU's cash provided by operations exceeding cash required for investing and financing activities (exclusive of short-term borrowings). LG&E had no short-term borrowings at December 31, 1998 or 1997. In May 1998, upon closing of the merger with KU Energy, the Company issued 63,149,394 shares of common stock to former KU Energy shareholders. The Company issued 186,192 shares of new common stock in 1997 and 146,678 shares in 1996, under various employee plans. The Company announced a program on October 14, 1997, authorizing the repurchase of up to 1,000,000 shares of its common stock to be used for, among other things, benefit and compensation plans. See Note 15 of LG&E Energy's Notes to Financial Statements under Item 8. Future Capital Requirements Future utility financing requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other regulatory requirements. The Company estimates that LG&E's construction expenditures will total $384 million for 1999 and 2000, and that KU's construction expenditures for the same period will total approximately $341 million. Both utilities construction estimates include capital expenditures associated with installation of low nitrogen oxide burner systems as described in the section titled "Environmental Matters." In addition, KU's capital requirements for 2000 include $61.5 million for scheduled debt retirements. Capital expenditures for the non-utility businesses are anticipated to total $68 million for 1999 and 2000. Other future capital funding requirements are dependent 52 LG&E Energy (cont.): upon the identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions. In October 1998, the Company negotiated for the purchase of two gas turbine peaking units at a total cost of approximately $125 million, of which $62 million was expended in 1998. In July 1998, as part of the deal structure with Big Rivers, WKE agreed to provide Big Rivers a $50 million note to help it emerge from bankruptcy. WKE will provide $1.7 million per month for the first 12 months of the note, beginning August 1998, and $2.5 million per month over the subsequent 12 months. The note will be repaid over a three-year period, beginning August 2000, with interest at 7.165%. In July 1998, following the Company's decision to discontinue its merchant energy trading and sales business, Standard & Poor's (S&P) downgraded the credit ratings of the Company and its subsidiaries while Moody's and Duff & Phelps (D&P) kept the Company and its subsidiaries at their prior ratings. The Company's current debt ratings are:
Moody's S&P D&P ------- ------ ------ LG&E First mortgage bonds Aa2 A+ AA Unsecured debt Aa3 A AA- Preferred stock aa3 A- AA- KU First mortgage bonds Aa2 AA- AA Preferred stock aa3 A- AA- Commercial paper P-1 A-1 D-1+ CAPITAL CORP. Medium-term notes A1 A A+ Commercial paper P-1 A-1 D-1+
These ratings reflect the views of Moody's, S&P and D&P. An explanation of the significance of these ratings may be obtained from them. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. Future Sources of Financing Internally generated funds from operations and new debt are expected to fund LG&E's and KU's anticipated construction expenditures in 1999 and 2000. Similarly, the Company anticipates having sufficient internal cash generation, borrowing capacity and access to securities markets to meet anticipated equity investments and non-utility capital expenditures in 1999 and 2000. At December 31, 1998, loan agreements and lines of credit were in place totaling $960 million ($200 million for LG&E, $60 million for KU, and $700 million for Capital Corp.) for which the companies pay commitment or facility fees. The LG&E credit facility provides for short-term borrowing. KU's credit facilities provide for short-term borrowing and support of commercial paper borrowings. The Capital Corp. facilities provide for short-term borrowing, letter of credit issuance, and support of commercial paper borrowings. Unused capacity 53 LG&E Energy (cont.): under these lines totaled $536.8 million after considering the commercial paper support and approximately $58.1 million in letters of credit securing on- and off-balance sheet commitments. The credit lines will expire at various times from 1999 through 2002. Management expects to renegotiate the lines when they expire. The lenders under the credit facilities, commercial paper facility and the medium-term notes for Capital Corp. are entitled to the benefits of a Support Agreement with LG&E Energy Corp. See Note 17 of LG&E Energy's Notes to Financial Statements under Item 8. Market Risks LG&E Energy is exposed to market risks in both its regulated and non-utility operations. Both operations are exposed to market risks from changes in interest rates and commodity prices, while the non-utility operations are also exposed to changes in foreign exchange rates. To mitigate changes in cash flows attributable to these exposures, the Company has entered into various derivative financial instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Sensitivity The Company has short-term and long-term variable rate debt obligations outstanding. At December 31, 1998, the potential change in interest expense associated with a 1% change in base interest rates of the Company's unswapped debt is estimated at $4 million. Interest rate swaps are used to hedge the Company's underlying variable rate debt obligations. These swaps hedge specific debt issuance and consistent with management's designation are accorded hedge accounting treatment. LG&E and Capital Corp. have entered into swaps to reduce the impact of interest rate changes on their Pollution Control Bonds and commercial paper program. The swap agreements involve the exchange of floating-rate interest payments for fixed interest payments over the life of the agreements. As of December 31, 1998, 40% of the outstanding variable interest rate borrowings were converted to fixed interest rates through swaps. The potential loss in fair value from these positions resulting from a hypothetical 1% adverse movement in base interest rates is estimated at $5.6 million as of December 31, 1998. Changes in the market value of these swaps if held to maturity, as the Company intends to do, will have no effect on the Company's net income or cash flow. See Note 6 of LG&E Energy's Notes to Financial Statements under Item 8. In April 1998, LG&E entered into a forward starting swap agreement. The forward swap involves the exchange of floating-rate interest payments for fixed interest payments over the life of the agreement. The forward swap was entered into to hedge LG&E's exposure to interest rates for the anticipated call of its Trimble County, Kentucky, Pollution Control Bonds, 7 5/8% Series, due November 1, 2020. The potential loss in fair value from this position resulting from a hypothetical 10% change in the yield curve is estimated at $7.5 million as of December 31, 1998. See Note 6 of LG&E Energy's Notes to Financial Statements under Item 8. Commodity Price Sensitivity LG&E and KU have limited exposure to market volatility in prices of fuel or electricity, as long as cost-based regulations exist. To mitigate residual risks relative to the movements in fuel or electricity prices, LG&E and KU have entered into primarily fixed-priced contracts for the purchase and sale of electricity through the wholesale electricity market. WKE is exposed to changes in fuel prices. To mitigate this risk, WKE has 54 LG&E Energy (cont.): entered into various fuel supply contracts which expire at various times through 2001. Realized gains and losses are recognized in the income statement as incurred. At December 31, 1998, exposure from these activities was not material to the consolidated financial statements of the Company. Capital Corp. through its subsidiaries operates and controls the generating capacity of Big Rivers and the City of Henderson. Some of the excess capacity generated by Big Rivers and the City is currently being marketed by WKE. To mitigate residual risks relative to the movements in electricity prices, WKE has entered into primarily fixed-priced contracts for the purchase and sale of electricity through the wholesale electricity market. Realized gains and losses are recognized in the income statement as incurred. At December 31, 1998, exposure from these activities was not material to the consolidated financial statements of the Company. The Company's discontinued merchant energy trading and sales business has exposure to market volatility in prices of electricity. See Discontinuance of Merchant Energy Trading and Sales Business under Management's Discussion and Analysis and Note 3 of Notes to Financial Statements. Exchange Rate Sensitivity The Company has investments in Argentina and Spain which are not hedged. The Company relies on the Argentine peso's currency peg to the U.S. dollar to mitigate currency risk attributable to its Argentine investments and views its Spanish investment as too small to hedge cost-effectively. A 10% decline in the December 31, 1998 exchange rate for the Argentine peso and the Spanish peseta (versus the U.S. dollar) would not have a material effect on income from continuing operations. YEAR 2000 COMPUTER SOFTWARE ISSUE The Company and its subsidiaries use various software, systems and technology that may be affected by the "Year 2000 Issue." This concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to the year 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are more fully detailed in the sections that follow, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. The Company began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer of the Company, is responsible for planning, implementing and documenting the Company's Year 2000 process. The team also provides direct and detailed assistance to the Company's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, the Company also uses the services of third parties, including technical consultants, vendor representatives and auditors. The Company's Year 2000 effort generally follows a three-phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; 55 LG&E Energy (cont.): Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding Company and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. The Company has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, client-server, PCs and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units and (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities. State of Readiness As of January 1999, the Company and its subsidiaries have substantially completed the internal inventory, vendor survey and compliance assessment portions (Phases I and II) of their Year 2000 plan for critical mainframe and PC hardware and software. Remediation efforts (Phase III) in these areas are approximately 60% complete. With respect to embedded systems, the Company, LG&E and KU have substantially completed their Phase I and Phase II efforts. For each entity, Phase III remediation efforts are also in progress for embedded systems. Testing has commenced and will continue as remediation efforts are implemented and are expected to run until July 1999. As a general matter, corrective action for major IT systems, including customer information, financial and trading systems, are in process or have been completed. For smaller or more isolated systems, including embedded and plant operational systems, the Company has completed much of the evaluative process and is commencing corrective plans. The Company has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which the Company's operations are vulnerable to those parties' failure to complete their remediation efforts. The Company is currently evaluating and, in certain cases, initiating follow-up actions regarding the responses from these parties. The Company regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry. Cost of Year 2000 Issues The Company's system modification costs related to the Year 2000 issue are being expensed as incurred, while new system installations are generally being capitalized pursuant to generally accepted accounting principles. See Note 1 of LG&E Energy' Notes to Financial Statements under Item 8. Through December 1998, the Company has incurred approximately $20.2 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, the Company expects to spend an additional $11.9 million to complete its Year 2000 efforts. It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally, many costs are not incremental costs but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with the Company's Year 2000 issues will not be higher. 56 LG&E Energy (cont.): Risks of Year 2000 Issues As described above, the Company has made significant progress in the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of its remediation plan, the Company does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, the Company may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and the Company is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to the Company. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, reduced power production or transmission capabilities or internal operational or administrative difficulties on the part of the Company. The Company is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of the Company. There can be no assurance that the Company will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning is under way for material areas of Year 2000 risk. This effort will address certain areas, including the most reasonably likely worst-case scenarios and delays in completion in the Company's remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans will include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual energy accounting procedures. Completion of contingency plan formulation is scheduled for June 1999. Forward-Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation and cost of the Company's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates and assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, the Company's ability to locate and correct all relevant computer codes, the readiness of third parties and the Company's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in the Company's reports to the Securities and Exchange Commission, including Exhibit 99.01 to the Form 8-K filed October 21, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. RATES AND REGULATION LG&E and KU are subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric and gas utility regulation, and as such, their accounting is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). KU is also subject to the jurisdiction of the Virginia Commission and FERC. Given LG&E's and KU's competitive position in the market and the status of regulation in the states of Kentucky and Virginia, neither LG&E nor KU has plans or intentions to discontinue its application of SFAS No. 71. See Note 5 of LG&E Energy's Notes to 57 LG&E Energy (cont.): Financial Statements under Item 8. Since May 1995 and August 1994, respectively, LG&E and KU have implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs. Such costs include compliance with the 1990 Clean Air Act, as amended, and other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge were challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by LG&E and KU be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, proper adjustments and forward application of the ECR. The settlement agreement is subject to Commission approval. The Company recorded a provision for rate refund of $26 million in December 1998. In January 1994, LG&E implemented a Commission-approved demand side management (DSM) program that LG&E, the Jefferson County, Kentucky, Attorney and representatives of several customer interest groups had filed with the Commission. The program included a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs and (3) allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording revenues from lost sales due to DSM. Accrued decoupling revenues recorded for periods prior to June 1, 1998, will continue to be collected through the DSM recovery mechanism. On September 23, 1998, the Commission accepted LG&E's modified tariff reflecting this proposal effective as of June 1, 1998. In October 1998, LG&E and KU filed separate but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits 58 LG&E Energy (cont.): recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by the Company's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to the Company of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost, and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint with the Kentucky Commission alleging that LG&E's and KU's electric rates are excessive and should be reduced by an amount between $85 and $146 million and that the Kentucky Commission establish a proceeding to reduce LG&E's and KU's electric rates. LG&E and KU have asked the Kentucky Commission to dismiss the Complaint. The Company is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E and/or KU, through the PBR proposal or otherwise, such actions could have a material effect on the Company's financial condition and results of operations. Since October 1997, LG&E has implemented a Commission-approved, experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales only. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. During the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6 million for its share of reduced gas costs. The $3.6 million will be billed to customers through the gas supply clause beginning February 1, 1999. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, the Company, as well as all parties to the proceeding, filed comments on the Commission draft proposals. Initial hearings are scheduled for the first 59 LG&E Energy (cont.): quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on the Company's financial position or results of operations. As of February 12, 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998. The Company estimates up to an additional $4.8 million could be refundable to LG&E and KU retail electric customers through future Kentucky Commission orders. See Note 5 of LG&E Energy's Notes to Financial Statements under Item 8. Environmental Matters The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur dioxide (SO2) emission limits. LG&E is currently in compliance with the Phase II SO2 emission limits required by the year 2000, as it had previously installed scrubbers on all of its coal-fired generating units. KU met the Phase I requirements of the Act primarily through the installation of a scrubber on Unit 1 of the Ghent Generating Station, while WKE utilized fuel switching and emission allowance strategies. The Company's combined strategy for Phase II is to use accumulated emissions allowances to delay additional capital expenditures and may also include fuel switching or the installation of additional scrubbers. LG&E, KU, and WKE met the nitrogen oxide (NOx) emission reduction requirements of the Act through installation of low-NOx burner systems. The Company's compliance plans are subject to many factors including developments in the emission allowance and fuel markets, future regulatory and legislative initiatives, and advances in clean air control technology. The Company will continue to monitor these developments to ensure that its environmental obligations are met in the most efficient and cost-effective manner. In September 1998, the U.S. Environmental Protection Agency announced its final regulation requiring significant additional reductions in NOx emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units)-an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIPs and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, WKE and the independent power projects in which the Company has an interest will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, the Company estimates that it may incur capital costs in the range of $300 million to $500 million in the aggregate for LG&E, KU and WKE. These costs would generally be incurred beginning in 2000. The Company believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. LG&E and KU anticipate that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under their environmental surcharge mechanisms and believe that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of recovery. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for a complete discussion of the Company's environmental issues concerning manufactured gas plant sites and certain other environmental 60 LG&E Energy (cont.): issues. Public Utilities Regulatory Policies Act Proposals also have been introduced in Congress to repeal all or portions of the Public Utility Regulatory Policies Act (PURPA). PURPA and its implementing regulations require, among other things, that electric utilities purchase electricity generated by qualifying cogeneration facilities at a price based on the purchasing utility's avoided costs. The Company is the partial owner and contractual operator of several qualifying cogeneration facilities. While the Company supports the repeal of PURPA, the Company intends to oppose any efforts to nullify existing contracts between electric utilities and qualifying cogeneration facilities. The Company has been involved in proceedings before FERC regarding its Southampton cogeneration facility and in litigation with the purchasing utility of the energy from its Roanoke Valley I cogeneration facility. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. IMPACT OF NON-UTILITY BUSINESSES The Company expects to continue investing in non-utility projects, including domestic and international power production and gas distribution projects, as described under Future Capital Requirements. The non-utility projects in which the Company has invested carry a higher level of risk than LG&E's or KU's traditional utility businesses. Current investments in non-utility projects are subject to competition, operating risks, dependence on certain suppliers and customers, environmental and energy regulations, as well as political and currency risks. In addition, significant expenses may be incurred for projects pursued by the Company that do not materialize. The aggregate effect of these factors creates the potential for more volatility in the non-utility component of the Company's earnings. Accordingly, the historical operating results of the Company's non-utility businesses may not necessarily be indicative of future operating results. FUTURE OUTLOOK Competition and Customer Choice LG&E Energy has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, the Company has taken many steps to prepare for the expected increase in competition in its regulated and non-utility energy services businesses, including support for performance-based ratemaking structures, aggressive cost reduction activities; strategic acquisitions, dispositions and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. The Company continues to be active in the national debate surrounding the restructuring of the energy industry and the move toward a competitive, market-based environment. LG&E Energy has urged Congress to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E Energy has previously advocated the implementation of this transition by January 1, 2001, and now recommends adoption of federal legislation specifying a date certain and appropriate transition regulations implementing deregulation. In December 1997, the Kentucky Commission issued a set of principles which are intended to serve as its guide in consideration of issues relating to industry restructuring. Among the issues addressed by these principles are: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. During 1998, the Kentucky Commission and a task force of the 61 LG&E Energy (cont.): Kentucky General Assembly have each initiated proceedings, including meetings with representatives of utilities, consumers, state agencies and other groups in Kentucky, to discuss the possible structure and effects of energy industry restructuring in Kentucky. The purpose of the task force is to make recommendations to the Kentucky General Assembly for possible legislative action during its 2000 session. However, at the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of the ultimate legislative or regulatory actions regarding industry restructuring and their impact on the Company, which may be significant, cannot currently be predicted. LG&E: The following discussion and analysis by management focuses on those factors that had a material effect on LG&E's financial results of operations and financial condition during 1998, 1997, and 1996 and should be read in connection with the financial statements and notes thereto. Some of the following discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible," "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include: general economic conditions; business and competitive conditions in the energy industry; changes in federal or state legislation; unusual weather; actions by state or federal regulatory agencies; and other factors described from time to time in Louisville Gas and Electric Company's reports to the Securities and Exchange Commission, and Exhibit No. 99.01 to LG&E Energy Corp's report on Form 8-K filed October 21, 1998. MERGER Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a subsidiary of LG&E Energy, was not affected by the merger. See Note 2 of LG&E's Notes to Financial Statements under Item 8. RESULTS OF OPERATIONS Net Income LG&E's net income decreased $35.2 million for 1998, as compared to 1997, primarily due to non-recurring charges for merger-related expenses and the Environmental Cost Recovery refund of $23.6 million and $2.7 million, after tax, respectively. Excluding these non-recurring charges, net income decreased $8.9 million. This decrease is mainly due to higher operating expenses at the electric generating stations and lower gas sales, partially offset by increased electric sales. Net income increased $5.3 million for 1997 over 1996. This improvement was mainly due to increased sales of electricity to wholesale customers, a lower level of maintenance expenses and increased investment and interest income. These items were partially offset by reduced gas sales volumes due to warmer winter weather and a write-off of certain expenses deferred in prior periods. 62 LG&E (cont.): Revenues A comparison of operating revenues for the years 1998 and 1997, excluding the $4.5 million provision recorded for refund of environmental costs previously recovered from customers (ECR refund), with the immediately preceding year reflects both increases and decreases, which have been segregated by the following principal causes (in thousands of $):
Increase (Decrease) From Prior Period Electric Revenues Gas Revenues CAUSE 1998 1997 1998 1997 ----- ---- ---- ---- ---- Sales to ultimate consumers: Fuel and gas supply adjustments, etc. $ 3,750 $ (2,155) $ (4,393) $ 27,192 Merger surcredit (3,466) -- -- -- Demand side management/decoupling (6,299) 8,041 (369) 4,348 Environmental cost recovery surcharge (260) 448 -- -- Variation in sales volumes 27,051 (4,810) (42,418) (14,891) --------- --------- --------- -------- Total retail sales 20,776 1,524 (47,180) 16,649 Wholesale sales 28,398 3,088 8,720 -- Gas transportation-net -- -- (71) 147 Other (695) 3,224 (935) (204) --------- --------- --------- -------- Total $ 48,479 $ 7,836 $ (39,466) $ 16,592 --------- --------- --------- -------- --------- --------- --------- --------
Electric retail sales increased primarily due to the warmer weather experienced in 1998 as compared to 1997. Wholesale sales increased due to larger amounts of power available for off-system sales, an increase in the unit price of the sales and sales to Kentucky Utilities (KU) of $11.6 million due to economic dispatch following the merger in May 1998 of LG&E Energy and KU Energy. Gas retail sales decreased from 1997 due to the warmer weather in 1998. Gas wholesale sales increased to $8.7 million in 1998 from zero in 1997 due to the implementation of LG&E's gas performance-based ratemaking mechanism. See Note 3 of LG&E's Notes to Financial Statements under Item 8. Electric revenues increased in 1997 due to a slightly higher level of wholesale sales and other revenues. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause, partially offset by decreased gas sales due mainly to warmer weather. Expenses Fuel for electric generation and gas supply expenses comprise a large component of LG&E's total operating costs. LG&E's electric and gas rates contain a fuel adjustment clause (FAC) and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply are reflected in LG&E's rates, subject to approval by the Public Service Commission of Kentucky (Kentucky Commission or Commission). Fuel for electric generation increased $5.2 million (3.5%) in 1998 because of higher cost of coal burned ($6.6 million), partially offset by a decrease in generation ($1.4 million). Fuel expenses incurred in 1997 were approximately the same as in 1996. The average delivered cost per ton of coal purchased was $22.38 in 1998, $21.66 in 1997, and $21.73 in 1996. Power purchased expense increased $32.9 million in 1998 to support the increase in electric sales and increased purchases from KU of $16 million as a result of economic dispatch following the merger of the two companies 63 LG&E (cont.): in May 1998. Power purchased expense increased $.6 million (4%) in 1997 due to an increase in the amount of purchased power needed to support native load requirements. Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a decrease in the volume of gas delivered to the distribution system. Gas supply expenses for 1997 increased $18.4 million (13%) because of the higher cost of net gas supply ($29.3 million), partially offset by a decrease in the volume of gas delivered to the distribution system ($10.9 million). The average unit cost per thousand cubic feet (Mcf) of purchased gas was $3.05 in 1998 and $3.46 in each of 1997 and 1996. Other operation expenses increased $12.8 million (8.5%) over 1997 because of increased costs to operate the electric generating plants ($6.6 million), increased administrative costs ($2.2 million), and amortization of deferred merger costs ($1.8 million). Other operation expenses increased $7.4 million (5%) in 1997 primarily because of increased costs to operate the electric generating plants ($5.1 million) and a write-off of certain previously deferred items ($3.2 million). Items written off include expenses associated with the hydro-electric plant and a management audit fee. Even though LG&E believes it could have reasonably expected to recover these costs in future rate proceedings, it decided not to seek recovery and expensed these costs because of increasing competitive pressures in the industry. Maintenance expenses increased $5.2 million (11%) in 1998 as compared to 1997 primarily because of an increase in scheduled outages and general repairs at the electric generating plants ($2.2 million) and an increase in storm damage expenses ($1.4 million). Maintenance expenses decreased $7.2 million (13%) in 1997 from 1996 due to decreased repairs at the electric generating plants resulting from fewer scheduled outages ($5 million) and a lower level of storm damage repairs ($1.8 million). Depreciation and amortization for 1998 were approximately the same as in 1997. Depreciation and amortization increased $4 million (4.5%) in 1997 because of additional utility plant in service. In addition, 1997 reflects the accelerated write-off of losses on early retirements of facilities. Variations in income tax expenses are largely attributable to changes in pre-tax income. LG&E incurred a pre-tax charge in the second quarter of 1998 for costs associated with the merger of LG&E Energy and KU Energy of $32.1 million. The corresponding tax benefit of $8.5 million is recorded in other income and (deductions). The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Commission. See Note 2 of LG&E's Notes to Financial Statements under Item 8. Other income for 1997 increased by $3.4 million primarily because of the recording in 1997 of interest income due to a favorable tax settlement and the sale of stock options which LG&E had acquired in a commercial transaction. See Note 9 of LG&E's Notes to Financial Statements under Item 8. Interest charges for 1998 decreased $2.9 million (7%) due to the retirement of LG&E's 6.75% Series First Mortgage Bonds and lower interest rates. Interest charges for 1997 decreased $1.1 million (3%) due to favorable refinancing activities in 1996. The embedded cost of long-term debt was 5.57% at December 31, 1998, and 5.68% at December 31, 1997. See Note 10 of LG&E's Notes to Financial Statements under Item 8. The rate of inflation may have a significant impact on LG&E's operations, its ability to control costs and the need to seek timely and adequate rate adjustments. However, relatively low rates of inflation in the past few years have moderated the impact on current operating results. 64 LG&E (cont.): LIQUIDITY AND CAPITAL RESOURCES LG&E's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and protection of the environment. Construction Expenditures New construction expenditures for 1998 were $138 million compared with $111 million for 1997 and $108 million for 1996. Past Financing Activities During 1998, 1997 and 1996, LG&E's primary source of capital was internally generated funds from operating cash flows. Internally generated funds provided financing for 100% of LG&E's construction expenditures for 1998, 1997, and 1996. LG&E's combined cash and marketable securities balance decreased by $20 million in 1998 and increased $9 million in 1997. The decrease for 1998 reflects retirement of a $20 million first mortgage bond. In 1997, the increase reflects cash flows from operations, partially offset by construction expenditures and dividends paid. Variations in accounts receivable and accounts payable are not generally significant indicators of LG&E's liquidity, as such variations are primarily attributable to fluctuations in weather in LG&E's service territory, which has a direct affect on sales of electricity and natural gas. On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million matured and were retired by LG&E. The bonds were redeemed with available funds. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. The interest rates for these bonds were 3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. Future Capital Requirements Future financing requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other regulatory requirements. LG&E estimates construction expenditures will total $384 million for 1999 and 2000. This estimate includes capital expenditures associated with installation of low nitrogen oxide burner systems as described in "Environmental Matters." In July 1998, following LG&E Energy's decision to discontinue its merchant energy trading and sales business, Standard & Poor's (S&P) downgraded the credit ratings of LG&E Energy and its subsidiaries while Moody's and Duff & Phelps (D&P) kept LG&E Energy and its subsidiaries at their prior ratings. 65 LG&E (cont.): LG&E's current debt ratings are:
Moody's S&P D&P ------- --- --- First mortgage bonds Aa2 A+ AA Unsecured debt Aa3 A AA- Preferred stock aa3 A- AA-
These ratings reflect the views of Moody's, S&P and D&P. An explanation of the significance of these ratings may be obtained from them. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. Future Sources of Financing Internally generated funds from operations and new debt are expected to fund substantially all anticipated construction expenditures in 1999 and 2000. At December 31, 1998, LG&E had unused lines of credit of $200 million for which it pays commitment fees. These credit facilities provide for short-term borrowing and are scheduled to expire in 2001. Management expects to renegotiate them when they expire. To the extent permanent financings are needed in 1999 and 2000, LG&E expects that it will have ready access to the securities markets to raise needed funds. Market Risks LG&E is exposed to market risks from changes in interest rates and commodity prices. To mitigate changes in cash flows attributable to these exposures, LG&E has entered into various derivative financial instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Sensitivity LG&E has certain variable rate Pollution Control Bonds outstanding. At December 31, 1998, the potential change in interest expense associated with a 1% change in base interest rates of LG&E's unswapped debt is estimated at $.8 million. Interest rate swaps are used to hedge LG&E's underlying variable rate debt obligations. These swaps hedge specific debt issuance and consistent with management's designation are accorded hedge accounting treatment. LG&E has entered into swaps to reduce the impact of interest rate changes on its Pollution Control Bonds. The swap agreements involve the exchange of floating-rate interest payments for fixed interest payments over the life of the agreements. As of December 31, 1998, 67% of the outstanding variable interest rate borrowings were converted to fixed interest rates through swaps. The potential loss in fair value from these positions resulting from a hypothetical 1% adverse movement in base interest rates is estimated at $3.5 million as of December 31, 1998. Changes in the market value of these swaps if held to maturity, as LG&E intends to do, will have no effect on LG&E's net income or cash flow. See Note 4 LG&E's of Notes to Financial Statements under Item 8. In April 1998, LG&E entered into a forward starting swap agreement. The forward swap involves the exchange 66 LG&E (cont.): of floating-rate interest payments for fixed interest payments over the life of the agreement. The forward swap was entered into to hedge LG&E's exposure to interest rates for the anticipated call of its Trimble County, Kentucky, Pollution Control Bonds, 7 5/8% Series, due November 1, 2020. The potential loss in fair value from this position resulting from a hypothetical 10% change in the yield curve is estimated at $7.5 million as of December 31, 1998. See Note 4 of LG&E's Notes to Financial Statements under Item 8. Commodity Price Sensitivity LG&E has limited exposure to market volatility in prices of fuel or electricity, as long as cost-based regulations exist. To mitigate residual risks relative to the movements in fuel or in electricity prices, LG&E has entered into primarily fixed-priced contracts for the purchase and sale of electricity through the wholesale electricity market. Realized gains and losses are recognized in the income statement as incurred. At December 31, 1998, exposure from these activities was not material to the financial statements of LG&E. Year 2000 Issue LG&E uses various software, systems and technology that may be affected by the "Year 2000 Issue." This concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to the year 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are more fully described in the sections that follow, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. LG&E began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer of LG&E, is responsible for planning, implementing, and documenting LG&E's Year 2000 process. The team also provides direct and detailed assistance to LG&E's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, LG&E also uses the services of third parties, including technical consultants, vendor representatives and auditors. LG&E's Year 2000 effort generally follows a three-phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding LG&E and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. LG&E has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, client-server, PCs and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units, (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities, and (d) contingency planning. 67 LG&E (cont.): State of Readiness As of January 1999, LG&E has substantially completed the internal inventory, vendor survey and compliance assessment portions (Phases I and II) of its Year 2000 plan for critical mainframe and PC hardware and software, as well as embedded systems. Remediation efforts (Phase III) in these areas are approximately 65% complete. Phase III remediation efforts are also in progress for embedded systems. Testing and contingency planning has commenced and will continue as remediation efforts are implemented and are expected to run until July 1999. As a general matter, corrective action for major IT systems, including customer information and financial systems, and smaller or more isolated systems, including embedded and plant operational systems, are in process or have been completed. LG&E has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which LG&E's operations are vulnerable to those parties' failure to complete their remediation efforts. LG&E is currently evaluating and, in certain cases, initiating follow-up actions regarding the responses from these parties. LG&E regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry. Costs of Year 2000 Issues LG&E's system modification costs related to the Year 2000 issue are being expensed as incurred, while new system installations are generally being capitalized pursuant to generally accepted accounting principles. See Note 1 of LG&E's Notes to Financial Statements under Item 8. Through December 1998, LG&E has incurred approximately $16 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, LG&E expects to spend an additional $4.6 million to complete its Year 2000 efforts. It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally, many costs are not incremental costs, but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with LG&E's Year 2000 issues will not be higher. Risks of Year 2000 Issues As described above, LG&E has made significant progress in the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of its remediation plan, LG&E does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, LG&E may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and LG&E is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to LG&E. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, reduced power production or transmission capabilities or internal operational or administrative difficulties on 68 LG&E (cont.): the part of LG&E. LG&E is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of LG&E. There can be no assurance that LG&E will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning is under way for material areas of Year 2000 risk. This effort will address certain areas, including the most reasonably likely worst-case scenarios and delays in completion in LG&E's remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans will include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual energy accounting procedures. Completion of contingency plan formation is scheduled for June 1999. Forward-Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation and cost of LG&E's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates and assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, LG&E's ability to locate and correct all relevant computer codes, the readiness of third parties and LG&E's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in LG&E's reports to the Securities and Exchange Commission, and Exhibit 99.01 to LG&E Energy Corp.'s Form 8-K filed October 21, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. Rates and Regulation LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric and gas utility regulation, and as such, its accounting is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Given LG&E's competitive position in the market and the status of regulation in the state of Kentucky, LG&E has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of LG&E's Notes to Financial Statements under Item 8. Since May 1995, LG&E implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs. Such costs include compliance with the 1990 Clean Air Act, as amended, and other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge were challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by LG&E be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the 69 LG&E (cont.): surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, proper adjustments and forward application of the ECR. The settlement agreement is subject to Commission approval. LG&E recorded a provision for rate refund of $4.5 million in December 1998. In January 1994, LG&E implemented a Commission-approved demand side management (DSM) program that LG&E, the Jefferson County Attorney, and representatives of several customer interest groups had filed with the Commission. The program included a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs and (3) allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording revenues from lost sales due to DSM. Accrued decoupling revenues recorded for periods prior to June 1, 1998, will continue to be collected through the DSM recovery mechanism. On September 23, 1998, the Commission accepted LG&E's modified tariff reflecting this proposal effective as of June 1, 1998. In October 1998, LG&E and KU filed separate, but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by LG&E Energy's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the 70 LG&E (cont.): option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint with the Kentucky Commission alleging that LG&E's electric rates are excessive and should be reduced by an amount between $43 and $90 million and that the Kentucky Commission establish a proceeding to reduce LG&E's electric rates. LG&E has asked the Kentucky Commission to dismiss the Complaint. LG&E is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E, through the PBR proposal or otherwise, such actions could have a material effect on LG&E's financial condition and results of operations. Since October 1997, LG&E has implemented a Commission-approved, experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales only. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. During the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6 million for its share of reduced gas costs. The $3.6 million will be billed to customers through the gas supply clause beginning February 1, 1999. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, LG&E, as well as all parties to the proceeding, filed comments on the Commission draft proposals. Initial hearings are scheduled for the first quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on LG&E's financial position or results of operations. As of February 12, 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998. LG&E estimates up to an additional $1.3 million could be refundable to retail electric customers for the period from May 1998 through December 1998. See Note 3 of LG&E's Notes to Financial Statements under Item 8. LG&E filed a Petition for Rehearing of all of the orders and a motion to suspend the refund obligation. On February 25, 1999, the Commission suspended the obligation to refund pending further direction by the Commission. It also advised that LG&E may have to pay interest on the refund amounts for the suspension period. On March 11, 1999 the Commission denied LG&E's Petition for Rehearing for the period November 1994 through October 1996 and directed LG&E to reduce future fuel expense by $1.9 million in the first billing month after the Order. The Company is considering the filing of an Appeal with the Franklin Circuit Court. In a separate series of Orders on March 11, 1999, the PSC granted LG&E's Petition for Rehearing for the period November 1996 through April 1998 and established a procedural schedule for LG&E and other parties to 71 LG&E (cont.): submit evidence and for a hearing before the Commission. In the same Orders the PSC granted the Petition for Rehearing of the Kentucky Industrial Utility Customers to determine if interest should be paid on any fuel refunds for this latter period. Environmental Matters The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur dioxide (SO2) emission limits. LG&E is currently in compliance with the Phase II SO2 emission limits required by the year 2000, as it had previously installed scrubbers on all of its coal-fired generating units. LG&E met the nitrogen oxide (NOx) emission reduction requirements of the Act through installation of low-NOx burner systems. LG&E's compliance plans are subject to many factors including developments in the emission allowance and fuel markets, future regulatory and legislative initiatives, and advances in clean air control technology. LG&E will continue to monitor these developments to ensure that its environmental obligations are met in the most efficient and cost-effective manner. In September 1998, the U.S. Environmental Protection Agency announced its final regulation requiring significant additional reductions in NOx emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) - - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, LG&E will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, LG&E estimates that it may incur capital costs in the range of $100 million to $200 million. These costs would generally be incurred beginning in 2000. LG&E believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. LG&E anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. See Note 12 of LG&E's Notes to Financial Statements under Item 8 for a complete discussion of LG&E's environmental issues concerning manufactured gas plant sites and certain other environmental issues. FUTURE OUTLOOK Competition and Customer Choice LG&E Energy has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, LG&E Energy has taken many steps to prepare for the expected increase in competition in its regulated and non-utility energy services businesses, including support for performance-based ratemaking structures; aggressive cost reduction activities; 72 LG&E (cont.): strategic acquisitions, dispositions and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. LG&E Energy continues to be active in the national debate surrounding the restructuring of the energy industry and the move toward a competitive, market-based environment. LG&E Energy has urged Congress to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E Energy has previously advocated the implementation of this transition by January 1, 2001, and now recommends that adoption of federal legislation specifying a date certain and appropriate transition regulations implementing deregulation. In December 1997, the Kentucky Commission issued a set of principles which are intended to serve as its guide in consideration of issues relating to industry restructuring. Among the issues addressed by these principles are: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. During 1998, the Kentucky Commission and a task force of the Kentucky General Assembly have each initiated proceedings, including meetings with representatives of utilities, consumers, state agencies and other groups in Kentucky, to discuss the possible structure and effects of energy industry restructuring in Kentucky. The purpose of the task force is to make recommendations to the Kentucky General Assembly for possible legislative action during its 2000 session. However, at the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of the ultimate legislative or regulatory actions regarding industry restructuring and their impact on LG&E, which may be significant, cannot be currently predicted. KU General The following discussion and analysis by management focuses on those factors that had a material effect on KU's financial results of operations and financial condition during 1998, 1997, and 1996 and should be read in connection with KU's financial statements and notes thereto. Some of the following discussion may contain forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate," "expect," "estimate," "objective," "possible," "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include: general economic conditions; business and competitive conditions in the energy industry; changes in federal or state legislation; unusual weather; actions by state or federal regulatory agencies, and other factors described from time to time in Kentucky Utilities Company's reports to the Securities and Exchange Commission, including Exhibit No. 99.01 to LG&E Energy Corp.'s report on Form 8-K filed October 21, 1998. Merger Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. The outstanding preferred stock of Kentucky Utilities Company (KU), which was a subsidiary of KU Energy before the merger, was not affected by the merger. See Note 2 of KU's Notes to Financial Statements under Item 8. 73 KU (cont.): RESULTS OF OPERATIONS Net Income KU's net income decreased $12.9 million for 1998 as compared to 1997, primarily due to non-recurring charges for merger-related expenses and Environmental Cost Recovery refund of $21.5 million and $12.9 million, after tax, respectively. Excluding these non-recurring charges, net income increased $21.5 million. The increase is mainly due to higher residential sales, commercial sales, industrial sales and sales for resale caused by the warmer weather and increased marketing efforts. Net income for 1997 as compared to 1996 was flat. Revenues A comparison of KU's revenues for the years 1998 and 1997, excluding the provision recorded for refund of environmental costs previously recovered (ECR refund) from customers (which reduced electric revenues by $21.5 million), with the immediately preceding year reflects both increases and decreases, which have been segregated by the following principal causes (in thousands of $):
Increase (Decrease) From Prior Period CAUSE 1998 1997 ----- ---- ---- Sales to ultimate consumers: Fuel clause adjustments, etc. $ 1,158 $ (5,414) Merger surcredit (4,035) - Environmental cost recovery surcharge (547) 554 Variation in sales volumes 25,841 11,301 -------- -------- Total retail sales 22,417 6,441 Sales for resale 91,788 (1,878) Other 972 163 -------- -------- Total $115,177 $ 4,726 -------- -------- -------- --------
Retail sales increased due to increases in residential and commercial sales primarily attributable to warmer weather experienced in the second and third quarters of 1998 as compared to 1997. The increase in sales for resale (7,224,156 megawatt-hours versus 3,397,423 megawatt-hours) was primarily due to a more aggressive marketing efforts, increase in the unit price of the sales, efficiencies achieved from coordinated dispatch of a larger available pool of generation following completion of the merger, and sales to LG&E of $16 million due to economic dispatch following the merger in May 1998 of LG&E Energy and KU Energy. Total sales for 1997 were flat as compared to 1996. Residential sales decreased 2% for the year due to milder weather in 1997 compared to 1996. Industrial sales increased 9% reflecting continued growth in the manufacturing sector of the service area economy. Sales for resale, which include wholesale and opportunity sales, declined 9% in 1997; however, revenues did not decline by a comparable amount due to higher market prices per megawatt-hour on opportunity sales. Provision for rate refund reflects a charge in revenues during 1998 of $21.5 million for the refund of environmental costs previously recovered from customers. See Note 3 of KU's Notes to Financial Statements under Item 8. 74 KU (cont.): Expenses Fuel for electric generation comprises a large component of KU's total operating costs. KU's electric rates contain a fuel adjustment clause (FAC), whereby increases or decreases in the cost of fuel are reflected in KU's rates, subject to approval by the Public Service Commission of Kentucky (Kentucky Commission or Commission), Virginia State Corporation Commission (Virginia Commission), and the Federal Energy Regulatory Commission (FERC). Fuel for electric generation increased $27.4 million (15%) in 1998 primarily due to a 12% increase in MBTU (Million British Thermal Units) used. Fuel expenses increased by $30.3 million (22%) in 1997 primarily due to a 18% increase in MBTU (Million British Thermal Units) used. The increased consumption was primarily caused by the previously mentioned increase in kilowatt-hour sales. KU's average delivered cost per ton of coal purchased was $26.97 in 1998 , $27.97 in 1997, and $27.54 in 1996. Power purchased expense increased $54 million (75%) in 1998 because of a 67% increase in megawatt-hour purchases which was primarily attributable to increased marketing efforts and purchases from LG&E of $11.6 million as a result of economic dispatch following the merger of the two companies in May 1998. Power purchased expense increased $10.1 million (16%) in 1997 due to a 19% increase in kWH purchases associated with increased availability of surplus power on favorable pricing terms and to a one-time reduction in demand costs in 1996 of about $4 million under a contract with a neighboring utility. Depreciation and amortization increased $2.5 million (1.5%) in 1998 because of additional utility plant in service. Depreciation and amortization increased in 1997 primarily because of additional plant in service at KU. KU's embedded cost of long-term debt was 6.99% at December 31, 1998, and 6.98% at December 31, 1997. See Note 10 of KU's Notes to Financial Statements under Item 8. Merger costs to achieve reflects the one-time charge during 1998 of $21.7 million (the corresponding tax benefit of $.2 million is recorded in other income and (deductions) for merger related expenses as discussed in Note 2 of KU's Notes to Financial Statements under Item 8). Variations in income tax expense are largely attributable to changes in pre-tax income. The rate of inflation may have a significant impact on KU's utility operations, its ability to control costs and the need to seek timely and adequate rate adjustments. However, relatively low rates of inflation in the past few years have moderated the impact on current operating results. LIQUIDITY AND CAPITAL RESOURCES KU's need for capital funds is largely related to the construction of plant and equipment necessary to meet the needs of electric utility customers and protection of the environment. Construction Expenditures New construction expenditures for 1998 were $92 million compared with $94 million for 1997 and $106.5 million for 1996. 75 KU (cont.): Past Financing Activities During 1998, 1997, and 1996, KU's primary source of capital was internally generated funds from operating cash flows and debt financing. Internally generated funds provided financing for 100% of KU's construction expenditures for 1998, 1997, and 1996. Variations in accounts receivable and accounts payable are not generally significant indicators of KU's liquidity, as such variations are primarily attributable to fluctuations in weather in KU's service territory, which has a direct affect on sales of electricity. KU has no short-term borrowings outstanding at December 31, 1998. At the end of 1997, KU's short-term borrowings were $34 million compared to $54 million at December 31, 1996. KU has used short-term borrowings to temporarily finance ongoing construction expenditures and general corporate requirements. The decrease in 1997 from 1996 was due primarily to KU's cash provided by operations exceeding cash required for investing and financing activities (exclusive of short-term borrowings). Future Capital Requirements Future financing requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions allowed by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other regulatory requirements. KU estimates construction expenditures will total $341 million for 1999 and 2000. In addition, KU's capital requirements for 2000 include $61.5 million for scheduled debt retirements. In July 1998, following LG&E Energy's decision to discontinue its merchant energy trading and sales business, Standard & Poor's (S&P) downgraded the credit ratings of LG&E Energy and its subsidiaries while Moody's and Duff & Phelps (D&P) kept LG&E Energy and its subsidiaries at their prior ratings. KU's current debt ratings are:
Moody's S&P D&P ------- --- --- First mortgage bonds Aa2 A+ AA Preferred stock Aa3 A- AA- Commercial paper P-1 A-1 D-1+
These ratings reflect the views of Moody's, S&P and D&P. An explanation of the significance of these ratings may be obtained from them. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. Future Sources of Financing Internally generated funds from operations and new debt are expected to fund substantially all anticipated construction expenditures in 1999 and 2000. At December 31, 1998, KU had unused lines of credit of $60 million for which it pays commitment fees. The KU credit facilities provide for short-term borrowing and support of commercial-paper borrowings. These credit facilities are scheduled to expire in 1999. Management expects to renegotiate them when they expire. 76 KU (cont.): To the extent permanent financings are needed in 1999 and 2000, KU expects that it will have ready access to the securities markets to raise needed funds. Interest Rate Sensitivity KU has variable rate debt obligations outstanding. At December 31, 1998, the potential change in interest expense associated with a 1% change in base interest rates is immaterial. Commodity Price Sensitivity KU has limited exposure to market volatility in prices of fuel or electricity, as long as cost-based regulations exist. To mitigate residual risks relative to the movements in fuel or electricity prices, KU entered into primarily fixed priced contracts for the purchase and sale of electricity through the wholesale electricity market. Realized gains and losses are recognized in the income statement as incurred. At December 31, 1998, exposure from these activities was not material to the financial statements. Year 2000 Issue KU uses various software, systems and technology that are affected by the "Year 2000 Issue." This issue concerns the ability of electronic processing equipment (including microprocessors embedded in other equipment) to properly process the millennium change to 2000 and related issues. A failure to timely correct any such processing problems could result in material operational and financial risks if significant systems either cease to function or produce erroneous data. Such risks are described in more detail following, but could include an inability to operate its generating plants, disruptions in the operation of transmission and distribution systems, and an inability to access interconnections with the systems of neighboring utilities. KU began its project regarding the Year 2000 issue in 1996. The Board of Directors has approved the general Year 2000 plan and receives regular updates. In addition, monthly reporting procedures have been established at senior management levels. Since 1996, a single-purpose Year 2000 team has been established in the Information Technology (IT) Department. This team, which is headed by an officer, is responsible for planning, implementing, and documenting KU's Year 2000 process. The team also provides direct and detailed assistance to KU's operational divisions and smaller units, where identified personnel are responsible for Year 2000 work and remediation in their specific areas. In many cases, KU also uses the services of third parties, including technical consultants, vendor representatives and auditors. KU's Year 2000 effort generally follows a three phase process: Phase I - inventory and identify potential Year 2000 issues, determine solutions; Phase II - survey vendors regarding their Year 2000 readiness, determine solutions to deal with possible vendor non-compliance, develop work plans regarding KU and vendors non-compliance issues; and Phase III - implementation, testing, certification, contingency planning. KU has long recognized the complexity of the Year 2000 issue. Work has progressed concurrently on (a) replacing or modifying IT systems, including mainframes, PC's and software applications, (b) replacing or modifying non-IT systems, including embedded systems such as mechanical control units, (c) evaluating the readiness of key third parties, including customers, suppliers, business partners and neighboring utilities, and (d) 77 KU (cont.): contingency planning. State of Readiness As of January 1999, KU has substantially completed the internal inventory, vendor survey, and compliance assessment portions (Phases I and II) of their Year 2000 plan for critical mainframe and PC hardware and software, as well as embedded systems. Remediation efforts (Phase III) in these areas are approximately 55% complete. Testing and contingency planning has commenced and will continue as remediation efforts are implemented and are expected to run until July 1999. As a general matter, corrective action for major IT systems, including customer information, financial and trading systems, and smaller or more isolated systems, including embedded and plant operational systems, are in process or have been completed. KU has communicated with its key suppliers, customers and business partners regarding their Year 2000 progress, particularly in the IT software and embedded component areas, to determine the areas in which KU's operations are vulnerable to those parties failure to complete their remediation efforts. KU is currently evaluating and, in certain cases, initiating follow-up actions regarding the responses from these parties. KU regularly attends and participates in trade group efforts focusing on Year 2000 issues in the energy industry context. Costs of Year 2000 Issues KU's system modification costs related to the Year 2000 issue are being expensed as incurred, while new system installations are generally being capitalized pursuant to generally accepted accounting principles. (See Note 1 of KU's Notes to Financial Statements under Item 8). Through December 1998, KU has incurred approximately $2.4 million in capital and operating costs in connection with the Year 2000 issue. Based upon studies and projections to date, KU expects to spend an additional $4.5 million to complete its Year 2000 efforts. It should be noted that these figures include total hardware, software, embedded systems and consulting costs. In many cases, these costs include system replacements which were already contemplated or which provided additional benefits or efficiencies beyond the Year 2000 aspect. Additionally many costs are not incremental costs, but constitute redeployment of existing IT and other resources. These costs represent management's current estimates; however, there can be no assurance that actual costs associated with KU's Year 2000 issues will not be higher. Risks of Year 2000 Issues As described above, KU has made significant progress in the implementation of its Year 2000 plan. Based upon the information currently known regarding its internal operations and assuming successful and timely completion of its remediation plan, KU does not anticipate material business disruptions from its internal systems due to the Year 2000 issue. However, KU may possibly experience limited interruptions to some aspects of its activities, whether IT, generation, transmission or distribution, operational, administrative functions or otherwise, and KU is considering such potential occurrences in planning for the most reasonably likely worst-case scenarios. Additionally, risk exists regarding the non-compliance of third parties with key business or operational importance to KU. Year 2000 problems affecting key customers, interconnected utilities, fuel suppliers and transporters, telecommunications providers or financial institutions could result in lost power or gas sales, 78 KU (cont.): reduced power production or transmission capabilities or internal operational or administrative difficulties on the part of the KU. KU is not presently aware of any such situations; however, severe occurrences of this type could have material adverse impacts upon the business, operating results or financial condition of KU. There can be no assurance that KU will be able to identify and correct all aspects of the Year 2000 problem among these third parties that affect it in sufficient time, that it will develop adequate contingency plans or that the costs of achieving Year 2000 readiness will not be material. Contingency planning is under way for material areas of Year 2000 risk. This effort will address certain areas, including the most reasonably likely worst-case scenarios and delays in completion in KU's remediation plans, failure or incomplete remediation results and failure of key third parties to be Year 2000 compliant. Contingency plans will include provisions for extra staffing, back-up communications, review of unit dispatch and load shedding procedures, carrying of additional energy reserves and manual energy accounting procedures. Completion of contingency plan formation is scheduled for June 1999. Forward Looking Statements The foregoing discussion regarding the timing, effectiveness, implementation, and cost of KU's Year 2000 efforts, contains forward-looking statements, which are based on management's best estimates and assumptions. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, the availability of key Year 2000 personnel, KU's ability to locate and correct all relevant computer codes, the readiness of third parties, and KU's ability to respond to unforeseen Year 2000 complications and other factors described from time to time in KU's reports to the Securities and Exchange Commission, including Exhibit 99.01 to LG&E Energy Corp.'s report on Form 8-K filed October 21, 1998. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. Rates and Regulation KU is subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric utility regulation, and as such, their accounting is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). KU is also subject to the jurisdiction of the Virginia Commission and FERC. Given KU's competitive position in the market and the status of regulation in the states of Kentucky and Virginia, KU has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of KU's Notes to Financial Statements under Item 8. In August 1994, KU implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs. Such costs include compliance with the 1990 Clean Air Act, as amended, as well as other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by KU be subject to refund pending final determination of all appeals. 79 KU (cont.): On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, proper adjustments and forward application of the ECR. The settlement agreement is subject to Commission approval. KU recorded a provision for rate refund of $21.5 million in December 1998. See Rates and Regulation in KU's Management's Discussion and Analysis of Results of Operations and Financial Condition under Item 7 for a further discussion. In October 1998, LG&E and KU filed separate but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by the LG&E Energy's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision may occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between 80 KU (cont.): utilities and their non-utility operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, KU, as well as all parties to the proceeding, filed comments on the Commission draft proposals. Initial hearings are scheduled for the first quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on KU's financial position or results of operations. As of February 12, 1999, the Kentucky Commission ordered KU's affiliate utility, LG&E, to refund FAC charges to retail electric customers after a review of LG&E's FAC from November 1994 through April 1998. The Kentucky Commission subsequently on March 11, 1999, denied LG&E's Petition for Rehearing for the period November 1994 through October 1996, but granted rehearing for the period November 1996 through April 1998 on the same issue. KU has not received an order from the Kentucky Commission but estimates that it may be required to refund to its retail electric customers approximately $3.5 million in FAC charges for the period November 1994 through October 1998. On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint with the Kentucky Commission alleging that KU's electric rates are excessive and should be reduced by an amount between $42 and $56 million, and that the Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked the Kentucky Commission to dismiss the Complaint. KU is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at KU, through the PBR proposal or otherwise, such actions could have a material effect on KU's financial condition and results of operations. Environmental Matters The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur dioxide (SO2) emission limits. KU met the Phase I requirements of the Act primarily through the installation of a scrubber on Unit 1 of the Ghent Generating Station. KU's current strategy for Phase II is to use accumulated emissions allowances to delay additional capital expenditures and may also include fuel switching or the installation of additional scrubbers. KU met the nitrogen oxide (NOx) emission reduction requirements of the Act through installation of low-NOx burner systems. KU's compliance plans are subject to many factors including developments in the emission allowance and fuel markets, future regulatory and legislative initiatives, and advances in clean air control technology. KU will continue to monitor these developments to ensure that its environmental obligations are met in the most efficient and cost-effective manner. In September 1998, the U.S. Environmental Protection Agency (USEPA) announced its final regulation requiring significant additional reductions in NOx emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) -an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this 81 KU (cont.): matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed KU will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, KU estimates that it may incur capital costs in the range of $100 million to $200 million. These costs would generally be incurred beginning in the year 2000. KU believes its costs for these matters to be comparable to those of similarly situated utilities with like generation assets. KU anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. See Note 11 of KU's Notes to Financial Statements under Item 8 for a complete discussion of KU's environmental issues. In July, 1997, USEPA issued revised National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter. KU is monitoring USEPA's implementation of the revised standards. Until USEPA completes additional implementation steps, including monitoring and nonattainment demonstrations, management is unable to determine the precise impact of the revised standards. FUTURE OUTLOOK Competition and Customer Choice LG&E Energy has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, LG&E Energy has taken many steps to prepare for the expected increase in competition in its regulated and non-utility energy services businesses, including support for performance-based ratemaking structures, aggressive cost reduction activities; strategic acquisitions, dispositions, and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. LG&E Energy continues to be active in the national debate surrounding the restructuring of the energy industry and the move toward a competitive, market-based environment. LG&E Energy has urged Congress and federal regulatory agencies to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E Energy has previously advocated the implementation of this transition by January 1, 2001, and now recommends that federal legislation be adopted specifying a date certain and appropriate transition regulations implementing deregulation. In December 1997, the Kentucky Commission issued a set of principles which are intended to serve as its guide in consideration of issues relating to industry restructuring. Among these principles were: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. During 1998, the Kentucky Commission and a task force of the Kentucky General Assembly have each initiated proceedings, including meetings with representatives of utilities, consumers, state agencies, and other groups in Kentucky, to discuss the possible structure and effects of energy industry restructuring in Kentucky. The purpose of the task force is to make recommendations to the Kentucky General Assembly for possible legislative action during its 2000 session. However, at the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of future legislative or regulatory actions regarding industry restructuring and their impact on KU, which may be significant, cannot be predicted currently. 82 KU (cont.): ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk. See Management's Discussion and Analysis of Results of Operations and Financial Condition, Market Risks, under Item 7. 83 ITEM 8. Financial Statements and Supplementary Data. LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (Thousands of $ Except Per Share Data)
Years Ended December 31 1998 1997 1996 ---- ---- ---- REVENUES: Electric utility........................... $1,464,824 $1,331,569 $1,318,846 Gas utility................................ 191,545 231,011 214,419 International and non-utility.............. 346,044 162,475 27,195 ---------- ---------- ----------- Total revenues.......................... 2,002,413 1,725,055 1,560,460 Provision for rate refund (Note 5)......... (26,000) - - ---------- ---------- ----------- Net revenues (Note 1)................... 1,976,413 1,725,055 1,560,460 ---------- ---------- ----------- OPERATING EXPENSES: Operation and maintenance: Fuel and power purchased................... 640,438 442,949 440,570 Gas supply expenses........................ 207,041 229,033 140,482 Utility operation and maintenance.......... 432,763 415,882 416,597 International and non-utility operation and maintenance.......................... 123,267 54,724 31,101 Depreciation and amortization.................. 197,417 186,549 171,399 Merger costs to achieve and non-recurring charges (Notes 2 and 10)..... 65,318 - 5,493 ---------- ---------- ----------- Total operating expenses................ 1,666,244 1,329,137 1,205,642 ---------- ---------- ---------- Equity in earnings of unconsolidated ventures (Note 8)............................ 73,798 22,937 19,727 ---------- ---------- ----------- OPERATING INCOME............................... 383,967 418,855 374,545 Other income and (deductions) (Note 14)........ 7,451 20,970 11,575 Interest charges and preferred dividends....... 108,871 104,427 94,412 Minority interest.............................. 10,453 9,035 - ---------- ---------- ----------- Income from continuing operations, before income taxes................................. 272,094 326,363 291,708 Income taxes (Note 13)......................... 111,823 119,323 101,322 ---------- ---------- ----------- Income from continuing operations.............. 160,271 207,040 190,386 Loss from discontinued operations, net of income tax (benefit) expense of $(14,907), $(15,116) and $2,371 (Notes 1 and 3).............................. (23,599) (24,044) (4,434) Loss on disposal of discontinued operations, net of income tax benefit of $125,000 (Note 3) .................................... (225,000) - - ---------- ---------- ----------- Income (loss) before cumulative effect of change in accounting principle............... (88,328) 182,996 185,952 Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $5,061 (Note 1)................... (7,162) - - ---------- ---------- ----------- NET INCOME (LOSS).............................. $ (95,490) $ 182,996 $ 185,952 ---------- ---------- ----------- ---------- ---------- -----------
The accompanying notes are an integral part of these financial statements. 84 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Thousands of $ Except Per Share Data)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Average common shares outstanding........................... 129,679 129,627 129,450 Earnings (loss) per share of common stock - basic: Continuing operations....................................... $1.24 $1.60 $1.47 Loss from discontinued operations........................... (.18) (.19) (.03) Loss on disposal of discontinued operations................. (1.74) - - Cumulative effect of accounting change...................... (.06) - - ------- -------- -------- Total ..................................................... $ (.74) $1.41 $1.44 ------- -------- -------- ------- -------- -------- Earnings (loss) per share of common stock - diluted: Continuing operations....................................... $1.23 $1.60 $1.47 Loss from discontinued operations........................... (.17) (.19) (.03) Loss on disposal of discontinued operations................. (1.73) - - Cumulative effect of accounting change...................... (.06) - - ------- -------- --------- Total ..................................................... $ (.73) $1.41 $1.44 ------- -------- --------- ------- -------- ---------
Consolidated Statements of Comprehensive Income (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Net income (loss)............................................ $(95,490) $182,996 $185,952 Unrealized holding gains (losses) on available-for-sale securities arising during the period....................... (168) (567) 196 Reclassification adjustment for realized and losses on available-for-sale securities included in net income..... 123 337 981 ------- -------- --------- Other comprehensive income (loss) before tax................. (45) (230) 1,177 Income tax expense (benefit) related to items of other comprehensive income..................................... 5 (293) 450 ------- -------- --------- Comprehensive income (loss).................................. $(95,540) $183,059 $186,679 ------- -------- --------- ------- -------- ---------
Consolidated Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Balance January 1........................................... $722,584 $683,962 $637,996 Add net income (loss)....................................... (95,490) 182,996 185,952 Deduct: Cash dividends declared on common stock ($1.240 per share in 1998, $1.113 per share in 1997, and $1.081 per share in 1996)............. (160,815) (144,366) (139,986) Preferred stock redemption expense and other....... - (8) - --------- --------- --------- Balance December 31......................................... $466,279 $722,584 $683,962 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. 85 LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $)
December 31 1998 1997 ---- ---- ASSETS: Current assets: Cash and temporary cash investments............................... $ 108,723 $ 111,003 Marketable securities (Note 11)................................... 20,862 22,300 Accounts receivable - less reserve of $10,532 in 1998 and $10,187 in 1997.......................................... 285,794 242,942 Materials and supplies - primarily at average cost: Fuel (predominantly coal)...................................... 78,855 45,450 Gas stored underground......................................... 34,144 42,104 Other.......................................................... 72,457 55,514 Net assets of discontinued operations (Notes 1 and 3)............. 143,651 222,784 Prepayments and other............................................. 37,784 9,304 ------------ ------------ Total current assets........................................... 782,270 751,401 ------------ ------------ Utility plant: At original cost (Note 1)......................................... 5,581,667 5,390,868 Less: reserve for depreciation................................... 2,352,306 2,201,124 ------------ ------------ Net utility plant.............................................. 3,229,361 3,189,744 ------------ ------------ Other property and investments - less reserve: Investments in unconsolidated ventures (Note 8)................... 167,877 177,006 Non-utility property and plant, net (Notes 1 and 2)............... 285,899 248,119 Other ........................................................... 117,321 53,534 ------------ ------------ Total other property and investments........................... 571,097 478,659 ------------ ------------ Deferred debits and other assets: Regulatory assets (Note 5)........................................ 65,871 39,672 Goodwill, net..................................................... 13,273 13,675 Other ........................................................... 111,396 89,793 ----------- ------------- Total deferred debits and other assets......................... 190,540 143,140 ------------ ------------ Total assets............................................... $4,773,268 $4,562,944 ------------ ------------ ------------ ------------ CAPITAL AND LIABILITIES: Current liabilities: Long-term debt due within one year................................ $ - $ 20,021 Notes payable (Note 17)........................................... 365,135 393,784 Accounts payable.................................................. 237,820 134,714 Taxes and interest accrued........................................ 104,656 45,011 Common dividends declared......................................... 39,876 19,792 Provision for rate refunds........................................ 34,761 13,248 Customer deposits................................................. 17,404 15,795 Other ........................................................... 47,002 42,182 ------------ ------------ Total current liabilities...................................... 846,654 684,547 ------------ ------------ Long-term debt (Note 16).............................................. 1,510,775 1,210,690 Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 13)................ 520,721 548,477 Investment tax credit, in process of amortization................. 93,844 101,931 Accumulated provision for pensions and related benefits........... 120,233 80,217 Regulatory liability (Note 5)..................................... 109,411 117,079 Other ........................................................... 86,047 76,471 ------------- ------------ Total deferred credits and other liabilities................... 930,256 924,175 ------------- ------------ Minority interest (Note 2)............................................ 107,815 105,985 Cumulative preferred stock............................................ 136,530 138,353 Commitments and contingencies (Note 18) Common equity........................................................ 1,241,238 1,499,194 ------------- ------------ Total capital and liabilities..................................... $4,773,268 $4,562,944 ------------- ------------ ------------- ------------
The accompanying notes are an integral part of these financial statements. 86 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................................. $ (95,490) $ 182,996 $ 185,952 Items not requiring cash currently: Depreciation and amortization.................................. 197,417 186,549 171,399 Deferred income taxes - net.................................... (30,860) 10,316 55,589 Investment tax credit - net.................................... (8,087) (8,276) (8,010) Undistributed earnings of unconsolidated ventures.............. (18,833) (2,326) (2,102) Loss from discontinued operations (Notes 1 and 3).............. 23,599 24,044 4,434 Loss on disposal of discontinued operations (Note 3)........................................ 225,000 - - Cumulative effect of change in accounting principle (Note 1)......................................... 7,162 - - Other.......................................................... 21,838 14,213 10,147 Change in certain net current assets: Accounts receivable............................................ (42,852) (22,771) (3,976) Materials and supplies......................................... (42,388) (7,514) (1,468) Net assets of discontinued operations (Notes 1 and 3).......... (145,867) (10,946) 13,539 Provision for rate refunds..................................... 21,513 (4,263) (12,289) Accounts payable............................................... 103,106 1,826 (11,396) Accrued taxes and interest..................................... 59,645 5,859 (5,009) Customer deposits.............................................. 1,609 2,392 2,867 Prepayments and other.......................................... (23,660) (411) 4,022 Other............................................................. (41,130) (52,942) (35,313) --------- ----------- ----------- Net cash flows from operating activities....................... 211,722 318,746 368,386 --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities........................................... (18,421) (21,526) (20,625) Proceeds from sales of securities................................. 19,995 5,030 44,609 Construction expenditures......................................... (342,214) (210,131) (215,954) Investment in subsidiaries net of cash and temporary cash investments acquired (Note 2)................... - (124,593) - Investments in unconsolidated ventures (Note 8)................... (1,010) (5,791) (1,490) Proceeds from sale of investment in affiliate..................... 16,000 - - --------- ---------- ---------- Net cash flows from investing activities....................... (325,650) (357,011) (193,460) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes..................................... 300,000 - - Issuance of bonds................................................. - 69,776 89,190 Retirement of bonds............................................... (20,042) (71,714) (103,205) Short-term borrowings............................................. 6,751,089 3,871,905 2,784,700 Repayment of short-term borrowings................................ (6,776,845) (3,690,321) (2,801,100) Issuance of preferred stock....................................... - 3,025 - Redemption of preferred stock..................................... (1,823) - - Issuance of common stock.......................................... - 3,781 2,293 Payment of common dividends....................................... (140,731) (143,647) (139,282) --------- ----------- ---------- Net cash flows from financing activities....................... 111,648 42,805 (167,404) --------- ----------- ---------- Change in cash and temporary cash investments....................... (2,280) 4,540 7,522 Beginning cash and temporary cash investments....................... 111,003 106,463 98,941 ---------- ---------- ---------- Ending cash and temporary cash investments.......................... $ 108,723 $ 111,003 $ 106,463 --------- ---------- ---------- --------- ---------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................................. $ 55,513 $ 82,662 $ 67,780 Interest on borrowed money................................... 96,356 93,451 86,045
The accompanying notes are an integral part of these financial statements. 87 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Capitalization (Thousands of $)
December 31 1998 1997 ---- ---- COMMON EQUITY: Common stock, without par value - Authorized 300,000,000 shares, outstanding 129,677,030 shares in 1998 and 129,682,889 shares in 1997 (Note 15)...................... $ 778,273 $ 778,273 Common stock expense............................................................ (3,481) (1,880) Unrealized gain on marketable securities, net of income taxes of $94 in 1998 and $89 in 1997 (Note 11)............................... 167 217 Retained earnings............................................................... 466,279 722,584 ------------ ------------ Total common equity.......................................................... 1,241,238 1,499,194 ------------ ------------ PREFERRED STOCK (Note 15): Shares Current Outstanding Redemption Price ----------- ---------------- Cumulative and redeemable on 30 days notice by Louisville Gas and Electric Company: $25 par value, 1,720,000 shares authorized - 5% series .................................... 860,287 $28.00 21,507 21,507 Without par value, 6,750,000 shares authorized - Auction rate.................................. 500,000 100.00 50,000 50,000 $5.875 series................................. 250,000 105.875 25,000 25,000 Preferred stock expense......................................................... (1,179) (1,179) ------------ ----------- Total LG&E preferred stock................................................... 95,328 95,328 ------------ ----------- Cumulative and redeemable on 30 days notice by Kentucky Utilities Company: $100 stated value, 200,000 shares authorized - 4 3/4% series................................. 200,000 $101.00 20,000 20,000 $100 stated value, 200,000 shares authorized - 6.53% series.................................. 200,000 Not redeemable 20,000 20,000 ------------ ----------- Total KU preferred stock..................................................... 40,000 40,000 ------------ ----------- $10 nominal value, 102,089 and 302,364 shares authorized and outstanding, (net of shares owned by affiliates) for 1998 and 1997, respectively, variable rate and redeemable by Inversora de Gas del Centro.................. 1,202 3,025 ------------- ------------ Total preferred stock........................................................... 136,530 138,353 ------------- ------------ LONG-TERM DEBT (Note 16): Louisville Gas and Electric Company: First mortgage bonds - Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000 Series due August 15, 2003, 6%............................................... 42,600 42,600 Pollution control series: P due June 15, 2015, 7.45%............................................... 25,000 25,000 Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335 R due November 1, 2020, 6.55%............................................ 41,665 41,665 S due September 1, 2017, variable........................................ 31,000 31,000 T due September 1, 2017, variable........................................ 60,000 60,000 U due August 15, 2013, variable.......................................... 35,200 35,200 V due August 15, 2019, 5 5/8%............................................ 102,000 102,000 W due October 15, 2020, 5.45%............................................ 26,000 26,000 X due April 15, 2023, 5.90%.............................................. 40,000 40,000 ------------- ------------- Total first mortgage bonds............................................ 506,800 506,800 ------------- -------------
The accompanying notes are an integral part of these financial statements. 88 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Capitalization (cont.) (Thousands of $)
December 31 1998 1997 ---- ---- Pollution control bonds (unsecured) - Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500 Trimble County Series due September 1, 2026, variable........................ 27,500 27,500 Jefferson County Series due November 1, 2027, variable....................... 35,000 35,000 Trimble County Series due November 1, 2027, variable......................... 35,000 35,000 ------------- ------------ Total unsecured pollution control bonds.................................. 120,000 120,000 ------------- ------------ Total LG&E long-term debt............................................. 626,800 626,800 ------------ ------------ Kentucky Utilities Company: First mortgage bonds: Series Q, due June 15, 2000, 5.95%........................................... 61,500 61,500 Series Q, due June 15, 2003, 6.32%........................................... 62,000 62,000 Series S, due January 15, 2006, 5.99%........................................ 36,000 36,000 Series P, due May 15, 2007, 7.92%............................................ 53,000 53,000 Series R, due June 1, 2025, 7.55%............................................ 50,000 50,000 Series P, due May 15, 2027, 8.55%............................................ 33,000 33,000 Pollution Control Series: Series 7, due May 1, 2010, 7 3/8%........................................ 4,000 4,000 Series 8, due September 15, 2016, 7.45%.................................. 96,000 96,000 Series 1B, due February 1, 2018, 6 1/4%.................................. 20,930 20,930 Series 2B, due February 1, 2018, 6 1/4%.................................. 2,400 2,400 Series 3B, due February 1, 2018, 6 1/4%.................................. 7,200 7,200 Series 4B, due February 1, 2018, 6 1/4%.................................. 7,400 7,400 Series 7, due May 1, 2020, 7.60%......................................... 8,900 8,900 Series 9, due December 1, 2023, 5 3/4%................................... 50,000 50,000 Series 10, due November 1, 2024, variable................................ 54,000 54,000 ------------ ----------- Total first mortgage bonds............................................ 546,330 546,330 Other ................................................................... - 21 ------------ ----------- Total KU long-term debt...................................................... 546,330 546,351 ------------ ----------- LG&E Capital Corp.: Argentine negotiable obligations, due August 2001, 10 1/2%...................... 37,645 37,539 Medium term notes, due January 15, 2008, 6.46% (Note 16)........................ 150,000 - Medium term notes, due November 1, 2011, 5.75% (Note 16)........................ 150,000 - ------------ ----------- Total Capital Corp. long-term debt........................................... 337,645 37,539 ------------ ----------- Total long-term debt............................................................ 1,510,775 1,210,690 ------------ ----------- Total capitalization............................................................ $ 2,888,543 $ 2,848,237 ------------ ----------- ------------ -----------
The accompanying notes are an integral part of these financial statements. 89 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy or the Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. The accompanying consolidated financial statements reflect the accounting for the merger as a pooling of interests and are presented as if the companies were combined as of the earliest period presented. However, the financial information is not necessarily indicative of the results of operations, financial position or cash flows that would have occurred had the merger been consummated for the periods for which it is given effect, nor is it necessarily indicative of future results of operations, financial position, or cash flows. The financial statements reflect the conversion of each outstanding share of KU Energy common stock into 1.67 shares of LG&E Energy common stock. The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a subsidiary of LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of KU Energy, were not affected by the Merger. Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business and announced its plans to sell its natural gas gathering and processing business. As a result of this decision, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. See Note 3, Discontinued Operations. The consolidated financial statements include the accounts of LG&E Energy, LG&E, LG&E Capital Corp. (Capital Corp.), KU and their respective wholly owned subsidiaries, collectively referred to herein as the Company. KU and KU Capital Corporation (KU Capital) were subsidiaries of KU Energy before the merger. On September 5, 1997, LG&E Energy merged two of its direct subsidiaries, LG&E Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems), and renamed the surviving company LG&E Capital Corp. In July 1998, KU Capital was merged into Capital Corp. with the latter as the surviving corporation. LG&E Energy's regulated operations are conducted by LG&E and KU. Its non-utility operations are conducted by Capital Corp., which has various subsidiaries referred to in these financial statements, including LG&E Power Inc. (LPI), LG&E Energy Marketing (LEM), LG&E International Inc. (LII) and Western Kentucky Energy Corp. (with its affiliates, WKE). All significant intercompany items and transactions have been eliminated from the consolidated financial statements. The Company is exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). CASH AND TEMPORARY CASH INVESTMENTS. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value. GAS STORED UNDERGROUND. The costs of utility natural gas inventories are included in gas stored underground in the balance sheets as of December 31, 1998 and 1997. Utility gas inventories were $33 million and $41 million at December 31, 1998 and 1997, respectively. LG&E accounts for gas inventories using the average-cost method. Non-utility gas inventories are included in net assets or liabilities of discontinued operations. UTILITY PLANT. LG&E's and KU's utility plant is stated at original cost, which includes payroll-related costs such as taxes, fringe benefits, and administrative and general costs. Construction work in progress has been included in the rate base for determining retail customer rates. Neither LG&E nor KU has recorded any significant 90 allowance for funds used during construction. The cost of utility plant retired or disposed of in the normal course of business is deducted from utility plant accounts and such cost, plus removal expense less salvage value, is charged to the reserve for depreciation. When complete operating units are disposed of, appropriate adjustments are made to the reserve for depreciation, and gains and losses, if any, are recognized. DEPRECIATION AND AMORTIZATION. Utility depreciation is provided on the straight-line method over the estimated service lives of depreciable plant. The amounts provided for LG&E in 1998 and 1997 were 3.4% and for 1996 were 3.3%. The amounts provided for KU were 3.5% in 1998, 1997 and 1996. Depreciation of non-utility plant and equipment is based on the straight-line method over periods ranging from 3 to 33 years for domestic operations. Intangible assets and goodwill have been allocated to the subsidiaries' lines of business and are being amortized over periods ranging up to 40 years. FINANCIAL INSTRUMENTS. The Company uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized losses on marketable securities in common equity and then charged or credited to other income and deductions when the securities are sold. See Note 6, Financial Instruments. In connection with the Company's marketing of power from owned or controlled generation assets, exchange traded futures are used to hedge its exposure to price risk. The Company also uses financial instruments associated with its discontinued merchant energy trading and sales business, the financial impact of which is included in discontinued operations. See Note 3, Discontinued Operations. DEBT EXPENSE. Utility debt expense is amortized over the lives of the related bond issues, consistent with regulatory practices. DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material book-tax temporary differences. INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the tax law that permitted a reduction of the Company's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. COMMON STOCK. Effective April 15, 1996, the outstanding shares of the Company's common stock were split on a two-for-one basis. The new shares were issued to shareholders of record on April 1, 1996. On May 4, 1998, 63,149,394 shares were issued to shareholders of KU Energy to effect the merger, and the KU Energy shares were retired. Prior period shares, dividends and earnings per share of common stock have been restated to reflect the stock split and to reflect the exchange of KU Energy's shares for shares of LG&E Energy. REVENUE RECOGNITION. Utility revenues are recorded based on service rendered to customers through month-end. LG&E and KU accrue estimates for unbilled revenues from each meter reading date to the end of the accounting period. Under an agreement approved by the Public Service Commission of Kentucky (Kentucky Commission or Commission) in 1995, LG&E implemented a demand-side management program, including a 91 "decoupling mechanism" which allowed LG&E to recover a predetermined level of revenue on electric and gas residential sales. In 1998, the decoupling mechanism was suspended. See Note 5, Utility Rates and Regulatory Matters. FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to expense as used, and the cost of gas supply is charged to expense as delivered to the distribution system. LG&E implemented a Commission approved experimental performance-based ratemaking mechanism related to gas procurement and off-system gas sales activity. See Note 5, Utility Rates and Regulatory Matters. MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent items at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 18, Commitments and Contingencies, for a further discussion. NEW ACCOUNTING PRONOUNCEMENTS. During 1998, the Company adopted the following accounting pronouncements: Statements of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132), No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131) and No. 130, Reporting Comprehensive Income (SFAS No. 130). Pursuant to SFAS No. 132, the Company has disclosed additional information on changes in benefit obligations and fair values of plan assets and eliminated certain disclosures that are no longer relevant. This standard does not change the measurement or financial statement recognition of the plans (see Note 12, Pension Plans and Retirement Benefits). Under SFAS No. 131, the Company has provided information about its various business segments that is intended to allow readers to view certain financial information as if "through the eyes of management" (see Note 20, Segments of Business and Related Information Disclosures). Pursuant to SFAS No. 130, the Company has presented information in the Consolidated Statements of Comprehensive Income that measures changes in equity that are not required to be recorded as a component of net income. These standards had no impact on the calculation of net income or earnings per share presented in the Consolidated Statements of Income. Statement of Position Nos. 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5) and 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-5, adopted as of January 1, 1998, requires companies to expense the costs of start-up activities as incurred. The statement also requires certain previously capitalized costs to be charged to expense at the time of adoption as a cumulative effect of a change in accounting principle. The Company had previously capitalized start-up costs related to its investments in various unconsolidated ventures and other non-utility businesses. The cumulative effect of adoption resulted in a $7.2 million after-tax charge. The effect of this change on 1998 income before cumulative effect of changes in accounting principles was not significant. SOP 98-1, adopted as of January 1, 1998, clarifies the criteria for capital or expense treatment of costs incurred by an enterprise to develop or obtain computer software to be used in its internal operations. The statement does not change treatment of costs incurred in connection with correcting computer programs to properly process the millennium change to the Year 2000, which must be expensed as incurred. Adoption of SOP 98-1 did not have a material effect on the Company's financial statements. The following accounting pronouncements have been issued but are not yet effective: Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for fiscal years beginning after June 15, 1999, and establishes accounting and reporting standards that every derivative instrument be recorded in the balance sheet as either an asset or 92 liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that use hedge accounting. The Company is currently analyzing the provisions of the statement and cannot predict the impact this statement will have on its consolidated operations and financial position; however, the statement could increase volatility in earnings and other comprehensive income. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10). This pronouncement is effective for fiscal years beginning after December 15, 1998. The task force concluded that energy trading contracts should be recorded at mark to market on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines what represents energy trading to include economic activities related to physical assets which were not previously marked to market by established industry practice. The effects of adopting EITF No. 98-10, if applicable, will be reported as a cumulative effect of a change in accounting principle with no prior period restatement. The Company does not expect the adoption of EITF No. 98-10 to have a material adverse impact on its consolidated operations and financial position. NOTE 2 - MERGERS AND ACQUISITIONS KU ENERGY CORPORATION. LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the surviving corporation. As a result of the merger, the Company, which is the parent of LG&E, became the parent company of KU. The operating utility subsidiaries (LG&E and KU) have continued to maintain their separate corporate identities and serve customers in Kentucky and Virginia under their present names. LG&E Energy has estimated approximately $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these savings of $103.9 million were recorded in the second quarter of 1998, $38.6 million of which were initially deferred and are being amortized over a five-year period pursuant to regulatory orders. Primary components of the merger costs were separation benefits, relocation costs, and transaction fees, the majority of which were paid by December 31, 1998. The Company, LG&E and KU expensed the remaining costs associated with the merger in the second quarter of 1998. In regulatory filings associated with approval of the merger, LG&E and KU committed not to seek increases in existing base rates and proposed reductions in their retail customers' bills in amounts based on one-half of the savings, net of the deferred and amortized amount, over a five-year period. The preferred stock and debt securities of the operating utility subsidiaries were not affected by the merger. The non-utility subsidiaries of KU Energy have become subsidiaries of Capital Corp. Under the terms of the Agreement and Plan of Merger dated May 20, 1997 (the Merger Agreement), each outstanding share of the common stock, without par value, of KU Energy (KU Energy Common Stock) together with the associated KU Energy stock purchase rights, was converted into 1.67 shares of common stock of LG&E Energy (LG&E Energy Common Stock), together with the associated LG&E Energy stock purchase rights. Immediately preceding the merger, there were 66,527,636 shares of LG&E Energy common stock outstanding, and 37,817,517 shares of KU Energy common stock outstanding. Based on such capitalization, immediately following the merger, 51.3% of the outstanding LG&E Energy common stock was owned by the shareholders of LG&E Energy prior to the merger and 48.7% was owned by former KU Energy shareholders. Regulatory and administrative approvals were obtained from the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission, the Securities and Exchange Commission, the Virginia State Corporation Commission and the stockholders of LG&E Energy and KU Energy prior to the effective date of the merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under 93 the Public Utility Holding Company Act of 1935. Management has accounted for the merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code. In the application filed with the Commission, the utilities proposed that 50% of the net non-fuel cost savings estimated to be achieved from the merger, less $38.6 million or 50% of the originally estimated costs to achieve such savings, be applied to reduce customer rates through a surcredit on customers' bills and the remaining 50% be retained by the companies. The Commission approved the surcredit and allocated the customer savings 53% to KU and 47% to LG&E. The surcredit will be about 2% of customer bills over the next five years and will amount to approximately $55 million in net non-fuel savings to LG&E customers and approximately $63 million in net non-fuel savings to KU customers. Any fuel cost savings are passed to Kentucky customers through the companies' fuel adjustment clauses. ARGENTINE GAS DISTRIBUTION COMPANIES. On February 13, 1997, the Company acquired interests in two Argentine natural gas distribution companies for $140 million, plus transaction-related costs and expenses. The Company acquired a controlling interest in Distribuidora de Gas del Centro (Centro) and a combined 14.4% interest in Distribuidora de Gas Cuyana (Cuyana). The Company accounted for both acquisitions using the purchase method. The Company allocated substantially all of the excess of the purchase price over the underlying equity of Centro and Cuyana to property and equipment. The Company recognized no goodwill on the acquisition. The fair values of the net assets acquired follow (in thousands of $): Assets $330,215 Liabilities 86,455 Minority interests 103,916 -------- Cash paid, excluding transaction costs 139,844 Cash and cash equivalents acquired 16,453 -------- Net cash paid, excluding transaction costs 123,391 Transaction costs 1,202 -------- Net cash paid $124,593 -------- --------
Centro's revenues, cost of revenues and operating expenses since the date of acquisition are classified as components of international and non-utility in these Statements of Income. The earnings of Cuyana are included in Equity in Earnings of Unconsolidated Ventures. The Company includes Centro's property and equipment in Non-utility property and plant, net, in its balance sheet, and it includes its investment in Cuyana in Investments in Unconsolidated Ventures. Portions of Centro not owned directly or indirectly by the Company are reported as minority interests in the financial statements. Liabilities assumed in the purchase included negotiable obligations issued by Centro with a face amount of $38 million. The obligations mature in August 2001, pay interest at 10.5% of face value and are classified as long-term debt. NOTE 3 - DISCONTINUED OPERATIONS Effective June 30, 1998, the Company discontinued its merchant energy trading and sales business. This business consisted primarily of a portfolio of energy marketing contracts entered into in 1996 and early 1997, nationwide deal origination and some level of speculative trading activities, which were not directly supported by the Company's physical assets. The Company's decision to discontinue these operations was primarily based on the impact that volatility and rising prices in the power market had on its portfolio of energy marketing contracts. Exiting the merchant energy trading and sales business enables the Company to focus on optimizing the value of physical assets it owns or controls, and to reduce the earnings impact on continuing operations of 94 extreme market volatility in its portfolio of energy marketing contracts. The Company is in the process of settling commitments that obligate it to buy and sell natural gas and electric power. It also plans to sell its natural gas gathering and processing business. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the contracts. The Company, however, has maintained sufficient market knowledge, risk management skills, technical systems and experienced personnel to maximize the value of power sales from physical assets it owns or controls, including LG&E, KU and the Big Rivers Electric Corporation (Big Rivers). As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the decision to sell the associated gas gathering and processing business, the Company recorded an after-tax loss on disposal of discontinued operations of $225 million in the second quarter of 1998. The loss on disposal of discontinued operations results primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with Oglethorpe Power Corporation (OPC). Other components of the write-off include costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs, including labor and related benefits, severance and retention payments, and other general and administrative expenses. Although the Company used what it believes to be appropriate estimates for future energy prices among other factors to calculate the net realizable value of discontinued operations, it also recognizes that there are inherent limitations in models to accurately predict future events. As a result, there is no guarantee that higher-than-anticipated future commodity prices or load demands, lower-than-estimated asset sales prices or other factors could not result in additional losses. The Company has been successful in settling portions of its discontinued operations, but significant assets, operations and obligations remain. As of January 27, 1999, the Company estimates that a $1 change in electricity prices and a 10 cents change in natural gas prices across all geographic areas and time periods could change the value of the Company's remaining energy portfolio by approximately $8.8 million. In addition to price risk, the value of the Company's remaining energy portfolio is subject to operational and event risks including, among others, increases in load demand, regulatory changes, and forced outages at units providing supply for the Company. As of January 27, 1999, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $9.3 million. See Note 18, Commitments and Contingencies, for a discussion of the OPC contract. See also Note 1, Summary of Significant Accounting Policies. Operating results for discontinued operations follow (in thousands of $):
1998 1997 1996 ---- ---- ---- Revenues $ 3,865,020 $ 3,255,175 $ 2,740,691 Loss before taxes (173,423) (39,160) (2,063) Loss from discontinued operations, net of income taxes $ (113,273) $ (24,044) $ (4,434)
95 Net assets of discontinued operations at December 31 follow (in thousands of $):
1998 1997 ---- ---- Cash and temporary cash investments $ 1,674 $ 15,089 Accounts receivable 78,200 353,162 Price risk management assets, net 98,885 164,581 Non-utility property and plant, net 163,510 176,032 Accounts payable and accruals (71,265) (344,265) Price risk management liabilities, net (32,693) (154,910) Goodwill and other assets and liabilities, net 24,721 13,095 --------- ---------- Net assets before accrued loss on disposal of dis- continued operations 263,032 222,784 Accrued loss on disposal of discontinued operations, net of income tax benefit of $74,297 119,381 - --------- ---------- Net assets of discontinued operations $ 143,651 $ 222,784 --------- ---------- --------- ----------
ACCOUNTING TREATMENT. Effective January 1, 1996, the Company adopted the mark to market method of accounting for most of its merchant energy trading and sales activities. The Company has included these activities in Discontinued Operations in the accompanying financial statements. Under mark to market accounting, all electric power and natural gas contracts which qualify for such accounting treatment, including both physical transactions and financial instruments, were recorded at market value, net of future servicing costs and reserves, and were recognized as price risk management assets and liabilities in the balance sheet. To qualify for mark to market accounting treatment, merchant energy trading and sales contracts generally must include, among other factors, a firm term, volume and price and allow for settlement in cash or with another financial instrument. Changes in the value of these price risk management assets and liabilities resulting from the execution of new contracts and changes in market factors were recognized as merchant energy trading and sales revenues in the period of the change. Revenues and cost of revenues associated with merchant energy trading and sales activities that did not qualify for mark to market accounting treatment were recognized using the accrual method of accounting at the time of delivery of the underlying commodity. Prior to January 1, 1996, all of the Company's merchant energy trading and sales activities were accounted for under the accrual method. The effect of this change in accounting was immaterial to prior periods at the time of adoption. In addition, the Company entered into transactions to hedge the impact of market fluctuations in its energy-related assets, liabilities and other contractual commitments. Changes in the market value of these hedge transactions were afforded hedge accounting treatment whereby gains and losses were deferred until the gains or losses on the hedged items were recognized or the instrument was terminated. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, all transactions are recorded using discontinued operations accounting. Most transactions previously recorded using the mark to market method of accounting have now been settled. The effects of the previously adopted mark to market method of accounting for the remaining unsettled transactions are applied against the reserve for discontinued operations. Total charges against the reserve through December 31, 1998 include $77.3 million for commitments prior to disposal, $51.2 million for transaction settlements, $11.1 million for goodwill, and $16.7 million for other exit 96 costs. The reserve as of December 31, 1998, represents management's best estimate of the loss from remaining discontinued operations until disposal and the costs of disposing of these operations. MARKET RISK. The primary market risk inherent in the Company's discontinued operations relates to commodity price risk principally associated with fluctuations in the supply and demand of electricity and natural gas. The Company's price risk management strategy involved using various derivative instruments to hedge the impact of market fluctuations in its energy-related assets, liabilities and other contractual commitments. Derivative instruments utilized as hedges include futures contracts; swap agreements, where settlement is based on the difference between a fixed and index-based price; exchange-traded options; over-the-counter options, which are settled in cash or the physical delivery of the commodity; exchange-for-physical transactions, in which payment for delivery of the underlying commodity is in the form of futures contracts; and tolling arrangements. The changes in the market value of these instruments correspond to the price changes in the underlying commodities. The Company has reduced its price risk by settling contracts or entering into back-to-back agreements with third parties to act on its behalf as the purchaser or seller for specified transactions. For all other transactions, the Company is actively attempting to mitigate its risk and no new overall positions are being taken. The remaining net open positions on these transactions could result in additional losses to the Company if prices do not move in the manner or direction anticipated. The Company has established trading policies and limits designed to minimize its exposure to price risk and regularly revalues exposures against the stipulated limits. The Company also continually reviews these policies to ensure they are responsive to changing business conditions. The Company's discontinued operations utilize various methodologies which simulate forward price curves in the energy markets to estimate the size and probability of changes in market value resulting from price movements. The use of these methodologies requires a number of key assumptions including selection of confidence levels, the holding period of the positions, and the depth and applicability to future periods of historical price information. In addition to price risk, the value of the Company's entire energy portfolio is subject to operational and event risks including, among others, regulatory changes, increases in load demand, and forced outages at units providing supply for the Company. NOTIONAL AMOUNTS. As of December 31, 1998, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 30.6 million MWh's of power and 22.7 million MMBTU's of natural gas with a volumetric weighted-average period of approximately 45 and 16 months, respectively. These notional amounts are based on estimated loads since various commitments do not include specified firm volumes. The Company is also under contract to buy or sell immaterial amounts of coal and SO2 allowances in support of its power contracts. Notional amounts reflect the nominal volume of transactions included in the Company's price risk management commitments, but do not reflect actual amounts of cash, financial instruments, or quantities of the underlying commodity which may ultimately be exchanged between the parties. 97 FAIR VALUES. The fair values of discontinued operations' price risk management assets and liabilities recorded on a mark to market basis as of December 31, 1998 and 1997, and the average fair values during the year by commodity are set forth below (in thousands of $):
Fair Value Average Fair Value --------------------------- ---------------------------- Assets Liabilities Assets Liabilities --------- ----------- --------- ----------- 1998: By Commodity: ------------- Electricity $ 98,823 $ 31,950 $ 230,816 $ 194,233 Natural gas 62 - 69,972 61,701 Other - - 265 - --------- --------- --------- --------- Total 98,885 31,950 $ 301,053 $ 255,934 Reserves - 743 --------- --------- --------- --------- --------- --------- Net values $ 98,885 $ 32,693 --------- --------- --------- --------- 1997: ----- By Commodity: ------------- Electricity $ 69,704 $ 56,308 $ 81,765 $ 31,093 Natural gas 94,252 92,245 55,676 65,414 Other 625 1,119 505 848 --------- --------- --------- --------- Total 164,581 149,672 $ 137,946 $ 97,355 Reserves - 5,238 --------- --------- --------- --------- --------- --------- Net values $164,581 $154,910 --------- --------- --------- ---------
The table above does not include the fair value of various transactions not previously recorded using mark to market accounting since these transactions commit the Company to the sale or purchase of electricity or natural gas without specified firm volumes. The fair values above are based on quotes from exchanges and over-the-counter markets, price volatility factors, the use of established pricing models and the time value of money. They also reflect management estimates of counterparty credit risk, location differentials and the potential impact of liquidating the Company's position in an orderly manner over a reasonable period of time under present market conditions. The increase in values from 1997 to 1998 results from volatility and risk management actions taken in connection with discontinuing the merchant energy trading and sales business. If the Company is unable to dispose of its remaining commitments, it will continue to meet its obligations through the terms of the contracts. The net fair value of these commitments as of December 31, 1998 are currently estimated to be approximately $24.6 million in 1999, $19.6 million to $36.6 million each year in 2000 through 2004, and $5.4 million for later years. CREDIT RISK. The Company's discontinued operations maintain policies intended to minimize credit risk and revalue credit exposures daily to monitor compliance with those policies. As of December 31, 1998, over 90% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of December 31, 1998, seven counterparties represented 86% of the Company's price risk management commitments. 98 NOTE 4 - BIG RIVERS ELECTRIC CORPORATION LEASE On July 15, 1998, the Company closed the transaction to lease the generating assets of Big Rivers Electric Corporation (Big Rivers). Under the 25-year operating lease, WKE is leasing and operating Big Rivers' three coal-fired facilities. In addition, WKE operates and maintains the Station Two generating facility of the City of Henderson (Henderson). The combined generating capacity of these facilities amounts to approximately 1,700 megawatts, net of the Henderson's capacity and energy needs from Station Two. WKE prepaid $55.9 million for its first two years of lease payments. Lease expense for 1998 was $12.8 million. See Note 18, Commitments and Contingencies, for a further discussion. In related transactions, power is supplied to Big Rivers at contractual prices over the term of the lease to meet the needs of four-member distribution cooperatives and their retail customers, including major western Kentucky aluminum smelters. Excess generating capacity is available to WKE to market throughout the region. In connection with these transactions, WKE has undertaken to bear certain of the future capital requirements of those generating assets, certain defined environmental compliance costs and other obligations. In July 1998, as part of the deal structure with Big Rivers, WKE agreed to provide Big Rivers a $50 million note to help it emerge from bankruptcy. WKE will provide $1.7 million per month for the first 12 months of the note, beginning August 1998, and $2.5 million per month over the subsequent 12 months. The note will be repaid over a three-year period, beginning August 2000, with interest at 7.165%. NOTE 5 - UTILITY RATES AND REGULATORY MATTERS Accounting for the regulated utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by FERC, the Kentucky Commission and the Virginia Commission. LG&E and KU are subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71, certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowback to customers in future rates. LG&E's and KU's current or expected recovery of deferred costs and expected flowback of deferred credits is generally based on specific ratemaking decisions or precedent for each item. The following regulatory assets and liabilities were included in the consolidated balance sheets as of December 31 (in thousands of $):
1998 1997 ---- ---- Unamortized loss on bonds $ 26,302 $ 28,454 Merger costs 34,749 7,000 Manufactured gas sites 3,684 3,263 Other 1,136 955 ---------- ---------- Total regulatory assets 65,871 39,672 Deferred income taxes - net (109,411) (117,079) ---------- ---------- Regulatory assets and liabilities - net $ (43,540) $ (77,407) ---------- ---------- ---------- ----------
During 1997, LG&E wrote off certain previously deferred assets that amounted to approximately $4.2 million. Items written off include expenses associated with LG&E's hydro-electric plant, a management audit fee, and the accelerated write-off of losses on early retirement of facilities. ENVIRONMENTAL COST RECOVERY. Since May 1995 and August 1994, respectively, LG&E and KU have implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act, as amended, as well as other environmental 99 regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in KU's Case No. 93-465 in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by LG&E and KU be subject to refund pending final determination of all appeals. On December 19, 1998 the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, refund amounts, refund procedure and forward application of the ECR. The settlement agreement is subject to Commission approval. The Company recorded a provision for rate refund of $26 million in December 1998. OTHER RATE MATTERS. In January 1994, LG&E implemented a Commission-approved demand side management (DSM) program that LG&E, the Jefferson County, Kentucky, Attorney and representatives of several customer interest groups had filed with the Commission. The program included a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs and (3) allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording revenues from lost sales due to DSM. Accrued decoupling revenues recorded for periods prior to June 1, 1998, will continue to be collected through the DSM recovery mechanism. On September 23, 1998, the Commission accepted LG&E's modified tariff reflecting this proposal effective as of June 1, 1998. Since October 1997, LG&E has implemented a Commission-approved, experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales only. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. During the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6 million for its share of reduced gas costs. The $3.6 million will be billed to customers through the gas supply clause beginning February 1, 1999. LG&E and KU employ a fuel adjustment clause (FAC) mechanism, which under Kentucky law allows the companies to recover from customers, the actual fuel costs associated with retail electric sales. As of February 12, 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998. The orders changed the Company's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. The orders require these amounts to be refunded to customers during first quarter 1999. The Kentucky Commission has not issued LG&E an order for the review period May 1998 through October 1998, nor have they issued orders pertaining to KU's FAC for review periods after November 1994. However, following the methods set forth in the LG&E orders, the Company estimates up to an additional $4.8 million could be refundable to LG&E and KU retail electric customers for open review periods through December 100 1998. Management intends to file a request for rehearing on the Kentucky Commission's rulings. Management does not believe final resolution of these proceedings will have a material adverse effect on the Company's financial position or results of operations. FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utility outperform the index, benefits will be shared equally between shareholders and customers. If the utility's fuel costs exceed the index, the difference will be absorbed by the Company's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to the Company of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. The Company is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E or KU, through the PBR proposal or otherwise, such actions could have a material effect on the Company's financial condition and results of operations. KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; 101 and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, the Company, as well as all parties to the proceeding, filed comments on the Commission draft proposals. Initial hearings are scheduled for the first quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on the Company's financial position or results of operations. NOTE 6 - FINANCIAL INSTRUMENTS At December 31, 1998, the Company held U.S. Treasury note and bond futures contracts with notional amounts totaling $4.9 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 1999. As of December 31, 1998, LG&E had in effect six interest-rate swap agreements to hedge its exposure to tax exempt rates related to Pollution Control Bonds, Variable Rate Series. The swaps have notional amounts totaling $166 million and mature at various times from 1999 to 2005. LG&E pays a weighted-average fixed rate on the swaps of 3.89% and receives a variable rate based on the JJ Kenny Index (in the case of one of the swaps) or the Bond Market Association Municipal Swap Index. The indices averaged 3.48% in 1998. In April 1998, LG&E entered into a forward-starting interest-rate swap with a notional amount of $83.3 million. The swap will hedge anticipated variable-rate borrowing commitments. It will start in August 2000 and mature in November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable rate based on the Bond Market Association Municipal Swap Index. Under certain conditions, the counterparty to the agreement may terminate the swap at no cost after August 2010. Capital Corp. had two interest rate swaps outstanding at December 31, 1998, which hedge a portion of its notes payable. One swap has a notional amount of $50 million and matures in June 2002. Capital Corp. receives a variable rate based on the three-month London Interbank Offered Rate which equaled 5.24% at year end and pays a fixed rate of 6.49%. The second swap has a notional amount of $50 million and matures in January 2000. The Company receives a variable rate based on a one-month commercial paper rate index and pays a fixed rate of 4.78%. The index for December 1998 was 5.23%. The cost and estimated fair values of the Company's non-trading financial instruments (excluding the fair values of the Company's price risk management assets and liabilities) as of December 31, 1998 and 1997 follow (in thousands of $):
1998 1997 ---- ---- Fair Fair Cost Value Cost Value ----------- ----------- ----------- ----------- Marketable securities $ 20,592 $ 20,862 $ 21,994 $ 22,300 Long-term investments - Not practicable to estimate fair value 1,721 1,721 3,983 3,983 Preferred stock subject to mandatory redemption 25,000 26,413 25,000 26,250 Long-term debt 1,510,795 1,576,502 1,210,690 1,266,030 U.S. Treasury note and bond futures - (87) - (81) Interest rate swaps - (9,527) - (4,328)
102 All of the above valuations reflect prices quoted by exchanges except for the swaps and the long-term investments. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. The fair values of the long-term investments reflect cost, since the Company cannot reasonably estimate fair value. NOTE 7 - CONCENTRATIONS OF CREDIT AND OTHER RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. LG&E's customer receivables and gas and electric revenues arise from deliveries of natural gas to approximately 289,000 customers and electricity to approximately 360,000 customers in Louisville and adjacent areas in Kentucky. KU's customer receivables and revenues arise from deliveries of electricity to about 449,000 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky and to about 29,000 customers in five counties in southwestern Virginia. For the year ended December 31, 1998, 90% of total utility revenue was derived from electric operations and 10% from gas operations. The financial position and results of operations of the domestic unconsolidated ventures are substantially dependent upon the continuation of long-term power sales contracts with purchasing utilities. The Argentine natural gas distribution companies serve approximately 706,000 customers in six provinces in Argentina. WKE's customer receivables and revenues arise from the deliveries of electricity and generating capacity to Big Rivers for distribution to its four members distribution cooperatives, as well as to other major wholesale customers. LG&E's operation and maintenance employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 2100 which represents approximately 60% of LG&E's workforce. On December 10, 1998, LG&E and IBEW employees entered into a three-year collective bargaining agreement following a vote by IBEW members which ratified the contract providing for certain wage and benefit improvements, and opportunities for early retirement. KU's operation and maintenance employees are members of the IBEW Local 101 and United Steelworkers of America (USWA) Local 8686. KU has approximately 15% of its workforce covered by union contracts expiring August 1, 1999. In September 1998, WKE and approximately 350 WKE employees entered into a three-year collective bargaining agreement providing for, among other things, annual wage increases and fixed pension benefits. NOTE 8 - INVESTMENTS IN UNCONSOLIDATED VENTURES The Company's investments in unconsolidated ventures reflect interests in domestic and foreign electric power and steam producing plants and one of the Argentine gas distribution companies. These investments are accounted for using the equity method. 103 The fuel type, ownership percentages and carrying amounts of the unconsolidated ventures as of December 31, 1998 are summarized as follows (in thousands of $):
Carrying Fuel Type % Owned Amount --------- ------- -------- LG&E Westmoreland - Southampton Coal 50 $ 13,784 LG&E Westmoreland - Altavista Coal 50 12,669 LG&E Westmoreland - Hopewell Coal 50 11,330 LG&E Westmoreland - Rensselaer Natural Gas 50 23,023 Westmoreland - LG&E Partners Coal 50 25,141 Windpower Partners 1993 Wind 50 21,345 Windpower Partners 1994 Wind 25 - KW Tarifa, S.A. Wind 46 5,999 Distribuidora de Gas Cuyana - 14 44,531 Tenaska Limited Partnerships Gas 5-10 7,899 Electric Energy, Inc. (Note 18) Coal 20 2,156 -------- Total $167,877 -------- --------
The Company's carrying amount exceeded the underlying equity in unconsolidated ventures by $33.3 million and $32.9 million at December 31, 1998 and 1997, respectively. This difference, which is being amortized, represents adjustments to reflect the fair value of the underlying net assets acquired and related goodwill. In January 1999, a final order was entered in the bankruptcy proceedings involving Westmoreland Coal Company and certain of its subsidiaries, including Westmoreland Energy, Inc., the parent of various entities that are partners with company subsidiaries in five of the independent generating facilities. However, none of the partnerships and no partner of the current partnerships has been under bankruptcy court protection, nor were these partnerships in a default occasioned under the project loan documents. With respect to the Windpower Partners 1993 and Windpower Partners 1994 (WPP94) projects listed above, certain of the Company's partners (or affiliates of such partners) are in bankruptcy proceedings. During the third quarter of 1998, the Company wrote off its aggregate remaining investment in WPP94 of $3.8 million. See Note 18, Commitments and Contingencies. In November 1998, the Company received approximately $8.5 million in connection with an arbitration proceeding concerning a former Power Purchase Agreement between Tenaska Washington Partners II, L.P. and the Bonneville Power Administration (BPA). The Company has a 10% interest in this partnership, which owned a partially constructed facility in Frederickson, Washington. This facility was transferred to the BPA following payment of the award. In June 1998, the partnership that owns the Rensselaer facility, along with 14 other independent power producers, participated in the consummation of a Master Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). As part of the MRA, the partnership restructured its power purchase agreement with NIMO and entered into a new multi-year agreement with the utility. Concurrent with the MRA, the Company reached a settlement with other parties to retain a 50% ownership in the Rensselaer facility. As a result of these transactions, the Company recorded a $21 million, net after-tax gain in 1998. See Note 18, Commitments and Contingencies. In February 1998, the Company sold its indirect, one-third interest in the company which owned and operated the San Miguel, Argentina generating facility for a price of $16 million. The sale resulted in a $2.8 million pre- 104 tax charge to 1998 earnings. NOTE 9 - LEVERAGED LEASES Capital Corp. owns equity interests in several leveraged leases for combustion turbine units leased to utility companies. The leases expire in 1999 at which time the Company will release, sell or reacquire these assets. Capital Corp.'s equity investment represents 75% of the aggregate purchase price of the leases. The remaining 25% represents the non-recourse 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 Capital Corp.'s net investment in leveraged leases at December 31 (in thousands of $):
1998 1997 ---- ---- Rents receivable (net of nonrecourse debt) $ 1,556 $ 3,039 Estimated residual value of leased property 32,707 32,707 Less: unearned and deferred income 3,319 7,594 -------- -------- Investment in leveraged leases 30,944 28,152 Less: accumulated deferred income taxes 7,301 5,750 -------- -------- Net investment in leveraged leases $23,643 $22,402 -------- -------- -------- --------
See Note 14, Other Income and Deductions for income from leveraged leases. NOTE 10 - NON-RECURRING CHARGES Under certain agreements with Tenaska, Inc., a developer of domestic gas-fired cogeneration and independent power generation projects, the Company has been funding a portion of the costs associated with identifying and pursuing potential independent power projects in North America. Such funding, which was expensed as incurred, totaled about $1 million in 1997. In 1996, the Company wrote off $5.5 million of costs funded during 1994-1996 that was associated with unsuccessful projects. As of December 31, 1998, the Company has no remaining funding commitment. 105 NOTE 11 - MARKETABLE SECURITIES The Company's marketable securities have been determined to be "available-for-sale" under the provisions of Statement of Financial Accounting Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1998 were approximately $20 million, which resulted in realized gains of approximately $.2 million and losses of approximately $.7 million, calculated using the specific identification method. Proceeds from sales of available-for-sale securities in 1997 were approximately $5 million, which resulted in immaterial realized gains and losses. Approximate cost, fair value and other required information pertaining to the Company's available-for-sale securities by major security type, as of December 31, 1998 and 1997, follow (in thousands of $):
Fixed Equity Income Total ------ ------ ----- 1998: ----- Cost $6,467 $14,134 $20,601 Unrealized gains 545 40 585 Unrealized losses (196) (128) (324) ------ ------- ------- Fair values $6,816 $14,046 $20,862 ------ ------- ------- ------ ------- ------- Fair values: No maturity $6,816 $ 178 $ 6,994 Contractual maturities: Less than one year - 8,301 8,301 One to five years - 3,861 3,861 Five to ten years - - - Over ten years - 1,706 1,706 Not due at a single maturity date - - - ------ ------- ------- Total fair values $6,816 $14,046 $20,862 ------ ------- ------- ------ ------- ------- 1997: ----- Cost $6,379 $15,615 $21,994 Unrealized gains 445 18 463 Unrealized losses (90) (67) (157) ------ ------- ------- Fair values $6,734 $15,566 $22,300 ------ ------- ------- ------ ------- ------- Fair values: No maturity $6,734 $ 114 $ 6,848 Contractual maturities: Less than one year - 8,795 8,795 One to five years - 5,442 5,442 Five to ten years - - - Over ten years - 1,215 1,215 Not due at a single maturity date - - - ------ ------- ------- Total fair values $6,734 $15,566 $22,300 ------ ------- ------- ------ ------- -------
NOTE 12 - PENSION PLANS AND RETIREMENT BENEFITS PENSION PLANS AND RETIREMENT BENEFITS. LG&E Energy Corp. sponsors several qualified and non-qualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three-year period 106 ending December 31, 1998 and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Change in benefit obligation Benefit obligation at beginning of year $499,143 $432,551 $397,155 Service cost 14,242 12,675 11,965 Interest cost 35,715 32,927 31,132 Plan amendments 6,377 3,143 19,186 Acquisitions/divestitures (2,243) - - Curtailment (gain) or loss (364) - - Special termination benefits 23,965 - - Benefits paid (23,823) (22,114) (16,811) Actuarial (gain) or loss 5,629 39,961 (10,076) -------- -------- -------- Benefit obligation at end of year $558,641 $499,143 $432,551 -------- -------- -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year $501,361 $432,612 $389,303 Actual return on plan assets 70,631 81,645 53,713 Employer contributions 2,638 10,101 7,139 Benefits paid (23,823) (22,114) (16,811) Administrative expenses (96) (883) (732) -------- -------- -------- Fair value of plan assets at end of year $550,711 $501,361 $432,612 -------- -------- -------- -------- -------- -------- Reconciliation of funded status Funded status $ (7,930) $ 2,218 $ 61 Unrecognized actuarial (gain) or loss (96,368) (79,891) (77,495) Unrecognized transition (asset) or obligation (9,059) (10,358) (11,587) Unrecognized prior service cost 47,286 48,064 49,054 -------- -------- -------- Net amount recognized at year-end $(66,071) $(39,967) $ (39,967) -------- -------- -------- -------- -------- -------- Other Benefits: --------------- Change in benefit obligation Benefit obligation at beginning of year $115,894 $106,743 $101,667 Service cost 2,870 2,633 2,661 Interest cost 8,255 7,860 7,746 Plan amendments 613 - 4,120 Acquisitions/divestitures 2,283 - - Curtailment (gain) or loss 3,584 - - Special termination benefits 2,855 - - Benefits paid (5,260) (6,648) (6,535) Actuarial (gain) or loss (3,501) 5,306 (2,917) -------- -------- -------- Benefit obligation at end of year $127,593 $115,894 $106,742 -------- -------- -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year $ 22,192 $ 15,568 $ 10,427 Actual return on plan assets 5,313 3,649 1,582 Employer contributions 7,056 7,577 6,037 Benefits paid (4,077) (4,602) (2,478) Administrative expenses - - - -------- -------- -------- Fair value of plan assets at end of year $ 30,484 $ 22,192 $ 15,568 -------- -------- -------- -------- -------- --------
107
1998 1997 1996 ---- ---- ---- Reconciliation of funded status Funded status $(97,109) $(93,702) $(91,175) Unrecognized actuarial (gain) or loss (20,115) (16,730) (19,477) Unrecognized transition (asset) or obligation 63,834 70,230 74,912 Unrecognized prior service cost 3,572 3,456 3,787 -------- -------- -------- Net amount recognized at year-end $(49,818) $(36,746) $(31,953) -------- -------- -------- -------- -------- --------
There are no plan assets in the nonqualified plan due to the nature of the plan. The following tables provide the amounts recognized in the statement of financial position and information for plans with benefit obligations in excess of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(67,126) $(40,296) $(40,032) Intangible asset 426 281 65 Other 706 710 - -------- -------- -------- Net amount recognized at year-end $(65,994) $(39,305) $(39,967) -------- -------- -------- -------- -------- -------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation (1) $163,722 $138,492 $120,254 Accumulated benefit obligation (2) 142,941 11,879 14,656 Fair value of plan assets (1) 111,914 102,775 84,555 (1) All years include LG&E's non-union plan, Energy Corp.'s plan and all of the Company's unfunded Supplemental Executive Retirement Plans (SERPs). (2) 1998 includes LG&E's non-union plan, Energy Corp.'s plan and all SERPs. 1997 and 1996 include SERPs only. Other Benefits: --------------- Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(49,818) $(36,746) $(31,953) Intangible asset - - - Other (4,421) (4,166) - -------- -------- -------- Net amount recognized at year-end $(54,239) $(40,912) $(31,953) -------- -------- -------- -------- -------- -------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $127,593 $115,894 $106,743 Fair value of plan assets 30,484 22,192 15,568
108 The following table provides the components of net periodic benefit cost for the plans for 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Components of net periodic benefit cost Service cost $ 14,242 $ 12,675 $ 11,965 Interest cost 35,715 32,927 31,132 Expected return on plan assets (42,278) (35,511) (32,320) Amortization of prior service cost 4,421 4,133 3,911 Amortization of transition (asset) or obligation (1,224) (1,229) (1,229) Recognized actuarial (gain) or loss (2,248) (2,854) (2,031) ---------- --------- --------- Net periodic benefit cost $ 8,628 $ 10,141 $ 11,428 ---------- --------- --------- ---------- --------- --------- FAS88 special charges Curtailment (gain)/loss $ (2,204) $ - $ - Prior service cost recognized 2,015 - - Special termination benefits 23,965 - - ---------- --------- --------- Total FAS88 charges $ 23,776 $ - $ - ---------- --------- --------- ---------- --------- --------- Other Benefits: --------------- Components of net periodic benefit cost Service cost $ 2,870 $ 2,633 $ 2,662 Interest cost 8,255 7,860 7,746 Expected return on plan assets (1,722) (1,204) (827) Amortization of prior service cost 373 332 332 Amortization of transition (asset) or obligation 4,621 4,682 4,682 Recognized actuarial (gain) or loss (467) (810) (704) ---------- --------- --------- Net periodic benefit cost $ 13,930 $ 13,493 $ 13,891 ---------- --------- --------- ---------- --------- --------- FAS88 special charges Curtailment (gain)/loss $ 2,243 $ - $ - Special termination benefits 2,855 - - ---------- --------- --------- Total FAS88 charges $ 5,098 $ - $ - ---------- --------- --------- ---------- --------- ---------
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. At the time of the merger KU Energy had both qualified and nonqualified pension plans. During 1998, the Company invested approximately $24.0 million in special termination benefits as a result of its early retirement program offered to eligible employees post-merger. On May 30, 1997, $4.7 million in lump sum payments were made to retired employees of KU Energy due to a change-in-control provision in the provisions of the Supplemental Security Plan of the Merger Agreement. 109 The assumptions used in the measurement of the Company's pension benefit obligation are shown in the following table:
1998 1997 1996 ---- ---- ---- Weighted-average assumptions as of December 31 Discount rate 7.00% 7.00% 7.75% Expected long-term rate of return on plan assets (1) 8.25%-8.50% 8.25%-8.50% 8.25%-8.50% Rate of compensation increase (2) 3.50%-4.00% 2.00%-4.00% 2.00%-4.75%
(1) All plans used 8.50% except KU's. (2) All plans used 4.00% except LG&E's union plan which used 3.50% for 1998 and 2.00% for 1997. Rate of compensation increase for 1996 was 2.00% for LG&E's union plan, 4.25% for LG&E and 4.75% for KU. For measurement purposes, a 7% annual increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.25% for 2005 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
1% Change Effect on total of service and interest cost components for 1998 $ (1,214) Effect on year-end 1998 postretirement benefit obligations (11,752) Effect on total of service and interest cost components for 1998 1,544 Effect on year-end 1998 postretirement benefit obligations 15,197
THRIFT SAVINGS PLANS. The Company has thrift savings plans under section 401(k) of the Internal Revenue Code. Under these plans, eligible employees may defer and contribute to the plans a portion of current compensation in order to provide future retirement benefits. The Company makes contributions to the plans by matching a portion of the employee's contributions. The costs were approximately $6.0 million, $4.7 million and $4.2 million for 1998, 1997 and 1996, respectively. NOTE 13 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
1998 1997 1996 ---- ---- ---- Included in Income Taxes: Current - federal $114,741 $ 88,654 $ 52,018 - foreign 12,208 9,055 - - state 23,821 19,574 1,725 Deferred - federal - net (25,605) 9,024 36,848 - state - net (5,255) 1,292 18,741 Deferred investment tax credit - 102 409 Amortization of investment tax credit (8,087) (8,378) (8,419) -------- -------- -------- Total $111,823 $119,323 $101,322 -------- -------- -------- -------- -------- --------
110 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1998 1997 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $632,593 $670,540 Other liabilities 39,966 43,199 -------- -------- 672,559 713,739 -------- -------- Deferred tax assets: Investment tax credit 37,878 41,142 Income taxes due to customers 43,021 45,574 Deferred income 11,626 11,878 Accrued expenses not currently deductible and other 59,313 66,668 -------- -------- 151,838 165,262 -------- -------- Net deferred income tax liability $520,721 $548,477 -------- -------- -------- --------
At December 31, 1998, there were $116 million of net operating loss carryforwards related to discontinued operations. These carryforwards, which expire in years 2000 through 2009, are subject to an annual limitation of approximately $6 million under provisions of the Internal Revenue Code, and realization is dependent upon generating sufficient taxable income prior to their expiration. At both December 31, 1998 and 1997, the Company recorded valuation allowances of $25.6 million, related to these deferred tax assets. Unamortized goodwill will be reduced if unrecorded net operating loss carryforwards are realized. A reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective income tax rate as a percentage of income from continuing operations before income taxes and preferred dividends follows:
1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 4.4 3.9 4.7 Effect of foreign operations including foreign tax credit 1.8 1.1 - Investment and other tax credits (3.6) (3.1) (3.6) Nondeductible merger expenses 4.7 - - Other differences - net (2.2) (1.1) (2.2) ---- ---- ----- Effective income tax rate 40.1% 35.8% 33.9% ---- ---- ----- ---- ---- -----
111 NOTE 14 - OTHER INCOME AND DEDUCTIONS Other income and deductions consisted of the following at December 31 (in thousands of $):
1998 1997 1996 ---- ---- ---- Income from leveraged leases $ 4,273 $ 3,974 $ 3,613 Interest and dividend income 10,552 11,605 8,765 Gains (losses) on disposals - net (4,942) 7,083 51 Other (2,432) (1,692) (854) -------- -------- -------- Total other income and (deductions) $ 7,451 $ 20,970 $ 11,575 -------- -------- -------- -------- -------- --------
NOTE 15 - CAPITAL STOCK Changes in shares of common stock outstanding are shown in the table below (in thousands). The amounts in the table reflect the merger-related exchange of 1.67 shares of LG&E Energy common stock for each share of KU Energy common stock.
1998 1997 1996 ---- ---- ---- Outstanding January 1 129,683 129,497 129,350 Issues under the Employee Common Stock Purchase Plan (1997, $1,613; 1996, $1,457) - 77 78 Issues under the Omnibus Long-Term Incentive Plan (1997, $2,195; 1996, $1,167) - 109 69 Merger-related buy-back of fractional shares (6) - - ------- ------- ------- Outstanding December 31 129,677 129,683 129,497 ------- ------- ------- ------- ------- -------
The Company's shareholders approved an increase in the Company's authorized shares of common stock from 125,000,000 to 300,000,000 on October 14, 1997 in conjunction with the proposed merger with KU Energy. This increase was effective at the consummation of the merger on May 4, 1998. The Company has an Omnibus Long-Term Incentive Plan, under which nonqualified stock options, performance units and stock appreciation rights have been granted to key personnel. A total of 3,000,000 shares of common stock have been reserved for issuance under the plan. Performance units are paid out on a three-year rolling basis in 50% stock and 50% cash based on Company performance. Directors of the Company receive stock options pursuant to the Stock Option Plan for Non-Employee Directors. A total of 500,000 shares of common stock have been reserved for issuance under this plan. Each option entitles the holder to acquire one share of the Company's stock no earlier than one year from the date granted. The options are granted at market value and generally expire 10 years from the date granted. Although shares are reserved as described above, the Company announced a repurchase program on October 14, 1997, authorizing the repurchase of up to 1,000,000 shares of its common stock to be used for, among other things, benefit and compensation plans, including the Omnibus Long-Term Incentive Plan. 112 A summary of the status of the Company's nonqualified stock options follows:
Outstanding Exercisable ----------- ----------- Weighted- Weighted- Average Average Options Price Options Price ------- --------- ------- --------- As of December 31, 1995 513,550 18.04 332,386 17.26 Options granted and exercisable 415,348 21.24 158,914 19.57 Options exercised (48,226) 17.26 (48,226) 17.26 Options cancelled (16,328) 21.01 - - --------- ------ ------- ------ As of December 31, 1996 864,344 19.57 443,074 18.09 Options granted and exercisable 394,945 24.15 352,966 21.22 Options exercised (87,568) 18.97 (87,568) 18.97 Options cancelled (77,100) 23.04 - - --------- ------ ------- ------ As of December 31, 1997 1,094,621 21.01 708,472 19.54 Options granted and exercisable 901,588 24.19 437,373 24.19 Options exercised (153,456) 20.42 (153,456) 20.42 Options cancelled (100,284) 23.05 - - --------- ------ ------- ------ As of December 31, 1998 1,742,469 $22.60 992,389 $21.46 --------- ------ ------- ------ --------- ------ ------- ------
Common stock equivalents resulting from the options granted under both the Long-Term Plan and the Directors' Plan would not have a material dilutive effect on reported earnings per share. The Company has a Shareholders' Rights Plan designed to protect shareholders' interests in the event the Company is ever confronted with an unfair or inadequate acquisition proposal. Pursuant to the plan, each share of common stock has one-third of a "right" entitling the holder to purchase from the Company one one-hundredth of a share of new preferred stock of the Company under certain circumstances. The holders of the rights will, under certain conditions, also be entitled to purchase either shares of common stock of LG&E Energy or common stock of the acquirer at a reduced percentage of market value. The rights will expire in the year 2000. In December 1997, Inversora de Gas del Centro (Inversora), a subsidiary of the Company that holds part of the Company's interest in Centro, issued 302,364 shares of preferred stock to unaffiliated parties. The stock has a nominal value of $10 per share and a variable dividend consisting of 5% of Inversora's annual net income. Inversora can redeem the shares at the nominal value upon shareholder approval. During 1998 Inversora redeemed 200,275 shares of preferred stock. NOTE 16 - LONG-TERM DEBT Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other than the First Mortgage Bonds issued in connection with certain Pollution Control Bonds) are the amounts necessary to redeem 1% of the highest principal amount of each series of bonds at any time outstanding. Property additions (166 2/3% of principal amounts of bonds otherwise required to be so redeemed) have been applied in lieu of cash. It is the intent of LG&E to apply property additions to meet 1999 sinking fund requirements of the First Mortgage Bonds. 113 The trust indenture securing the First Mortgage Bonds constitutes a direct first mortgage lien upon a substantial portion of all property owned by LG&E. The indenture, as supplemented, provides in substance that, under certain specified conditions, portions of retained earnings will not be available for the payment of dividends on common stock. No portion of retained earnings is presently restricted by this provision. Pollution Control Bonds (LG&E Projects) issued by Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan payments by LG&E to the Counties pursuant to loan agreements, and certain series are further secured by the delivery from time to time of an equal amount of LG&E's First Mortgage Bonds, Pollution Control Series. First Mortgage Bonds so delivered are summarized in the Statements of Capitalization. No principal or interest on these First Mortgage Bonds is payable unless default on the loan agreements occurs. The interest rate reflected in the Statements of Capitalization applies to the Pollution Control Bonds. On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million matured and were retired by the Company. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. Interest rates for these bonds were 3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. LG&E's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to mature in 2002, and the $42.6 million, 6% Series is scheduled for maturity in 2003. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 1998. The Company has no cash sinking fund requirements. Under the provisions for the KU's variable rate Pollution Control Bonds Series 10, KU can choose between various interest rate options. The daily interest rate option was utilized at December 31, 1998. The average annual interest rate on the bonds during 1998 and 1997 was 3.54% and 3.77%, 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. Substantially all of KU's utility plant is pledged as security for its first mortgage bonds. Capital Corp. has established a $500 million medium-term note program. On November 3, 1998, Capital Corp. issued $150 million of Reset Put Securities due 2011. The interest rate is set at 5.75% through November 1, 2001. The securities will be subject to automatic purchase by a remarketing agent, at which time the interest rate will be reset, or to automatic repurchase by Capital Corp., on November 1, 2001. After taking into account the net effect of the derivative instruments entered into in September 1998 to hedge the interest rate on the notes and other issuance costs, the effective rate through October 31, 2001, is approximately 5.4%. The proceeds were used to repay a portion of Capital Corp.'s outstanding commercial paper. In February 1998, Capital Corp. issued $150 million of medium-term notes due in January 2008, with a stated interest rate on the notes of 6.46%. After taking into account the effects of an interest-rate swap entered into in 1997 to hedge the interest rate on $100 million (See Note 6, Financial Instruments) and other issuance costs, the effective rate will be 6.82%. The proceeds were used to repay outstanding commercial paper. 114 Centro maintains a $100 million global note program. As of December 31, 1998 and 1997, Centro had outstanding $37.6 million in negotiable obligations, net of issuance costs as part of this program. The maturity date of the debt is August 21, 2001. Interest is paid semi-annually based upon a fixed rate of 10.5%. NOTE 17 - NOTES PAYABLE Capital Corp. had outstanding commercial paper of $365.1 million at December 31, 1998, at a weighted-average interest rate of 5.19%. The Company had no other notes payable at December 31, 1998. Capital Corp. had notes payable of $360.2 million at December 31, 1997, at a weighted-average interest rate of 5.79%. KU's short-term financing requirements are satisfied through the sale of commercial paper. KU had no short-term borrowings at December 31, 1998. KU had outstanding commercial paper of $33.6 million at December 31, 1997, at a weighted-average interest rate of 6.79%. At December 31, 1998, the Company had lines of credit in place totaling $960 million ($200 million for LG&E, $60 million for KU, and $700 million for Capital Corp.) for which the Companies pays commitment or facility fees. The LG&E credit facility provides for short-term borrowing. KU credit facilities provide for short-term borrowing and support of commercial paper borrowing. The Capital Corp. facility provides for short-term borrowing, letter of credit issuance, and support of commercial-paper borrowings. Unused capacity under these lines totaled $536.8 million after considering the commercial paper support and approximately $58.1 million in letters of credit securing on- and off-balance sheet commitments. The credit lines will expire at various times from 1999 through 2002. Management expects to renegotiate the lines when they expire. The lenders under the credit facilities, commercial paper program, and medium-term notes for Capital Corp. are entitled to the benefits of a Support Agreement with LG&E Energy. The Support Agreement states, in substance, that LG&E Energy will provide Capital Corp. with the necessary funds and financial support to meet their obligations under the credit facilities, commercial paper program, and medium-term notes. On September 5, 1997, Energy Systems and Gas Systems merged to form Capital Corp. At the same time, Capital Corp. implemented a $600 million commercial paper facility backed by new lines of credit totaling $700 million. The Company terminated the previous lines of credit which totaled $460 million. NOTE 18 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM The Company had commitments, primarily in connection with the construction program of LG&E and KU, aggregating approximately $15 million at December 31, 1998. LG&E's construction expenditures for the years 1999 and 2000 are estimated to total approximately $384 million. KU's construction expenditures for the same period are estimated to total approximately $341 million. Non-utility construction expenditures for the same two-year period are estimated to be $68 million. LETTERS OF CREDIT Capital Corp. has provided letters of credit issued to third parties to secure certain off-balance sheet obligations (including contingent obligations) of its subsidiaries. The letters of credit securing such obligations totaled approximately $30.7 million and $38.3 million at December 31, 1998 and 1997, respectively. These letters of credit are subject to Support Agreements as more fully described in Note 17, Notes Payable. Capital Corp. has provided a guarantee of a lease obligation to a third party. The obligation totaled $7.6 million 115 and $10.2 million at December 31, 1998 and 1997, respectively. PROJECT CONTINGENCIES SOUTHAMPTON. In October 1998, LG&E-Westmoreland Southampton and Virginia Electric and Power Company (VEPCO) entered into a settlement agreement which resolved issues pending before the FERC regarding the status of the Southampton cogeneration facility (Southampton) as a qualifying facility (QF) under the Public Utility Regulatory Policies Act for the year 1992, including the possible payment of FERC-ordered refunds by Southampton of capacity payments previously received from VEPCO for such year. The settlement, which has been approved by the FERC, provides for, among other items, payments by Southampton to VEPCO of $1 million annually for the years 1999-2001, followed by a reduction in capacity payments from VEPCO to Southampton by $500,000 annually for the years 2002-2008. Following 2008, VEPCO may elect to terminate its power purchases from Southampton or continue to receive the annual reduction in capacity payments for the remainder of the power purchase agreement. The Company has also been notified that its partners in the Southampton partnership are disputing their responsibilities for their share of the refunds and are asserting that the Company should bear full responsibility for such amounts. The Company and its partners are currently negotiating these matters. The Company does not believe that the disputes with its partners will have a material adverse effect on its results of operations or financial condition. ROANOKE VALLEY I. The Company owns a 50% interest in Westmoreland-LG&E Partners (WLP), the owner of the Roanoke Valley I facility which sells electric power to VEPCO pursuant to a long-term power purchase agreement (PPA). From May 1994 through December 1998, VEPCO withheld approximately $14.8 million of capacity payments during periods of forced outages. In October 1994, WLP filed a complaint against VEPCO seeking damages related to the withholding of such payments. In June 1997, the Virginia Supreme Court reversed a lower court ruling granting summary judgment in favor of VEPCO and remanded the case for a trial which occurred in October 1998. In November 1998, the Circuit Court for the City of Richmond, Virginia issued a decision awarding WLP approximately $19 million, plus interest until paid, and ruled WLP was entitled to receive future capacity payments for eligible forced outages during the remainder of the PPA term. In January 1999, VEPCO filed a notice of appeal regarding the Circuit Court decision. Pending resolution of all appeals by VEPCO, the Company has not recognized any income on its 50% portion of the capacity payments being withheld by VEPCO. In the Company's opinion, WLP is entitled to recover the withheld capacity payments, as well as the future capacity payments during forced outages. The Company does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. RENSSELAER. In November 1998, LG&E Westmoreland-Rensselaer (LWR), in which the Company has a 50% interest, entered into a non-binding letter of intent for the sale of the assets of the Rensselaer cogeneration facility. The proposed sale is subject to a number of contingencies, including satisfactory completion of certain due diligence, corporate approvals by buyer and seller parties, receipt of all necessary regulatory and third party approvals and consents and other matters. Should all conditions precedent be satisfied or waived, a sale is scheduled for early 1999. KENETECH BANKRUPTCY. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States Bankruptcy Court in the Northern District of California for protection under Chapter 11 of the United States Bankruptcy Code seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries, and various windpower projects located in the U.S. and abroad. Included in these projects are the Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A. (Tarifa) wind projects in which the Company has invested, collectively, approximately $31 million. As part of the bankruptcy proceeding, Kenetech is also seeking to void certain warranty commitments made to the owners 116 of those projects with respect to the operation and output of the facilities, and the repair and replacement of the windpower generation equipment located there. In January 1997, the projects filed their respective breach of contract and other claims against Kenetech in the bankruptcy proceeding. In January 1999, the Bankruptcy Court approved an initial plan of reorganization. The Plan is subject to a number of filed objections, the resolution of which and satisfaction of other conditions precedent are required prior to initial distributions currently planned for the first quarter 1999. The projects are discussing with their creditors the allocation of any such distributions. The Company is unable to predict the outcome of these proceedings. However, the Company does not expect the ultimate resolution of the bankruptcy to have a material adverse effect on its results of operations or financial condition. WINDPOWER PARTNERS 1994. WPP 94 is a windpower generation facility in Texas, in which the Company has a 25% interest. WPP 94 did not make its semiannual payments, due September 1997, March 1998 and September 1998 to John Hancock Mutual Life Insurance Company (Hancock) under certain Notes issued by WPP 94 to Hancock. WPP 94 and Hancock are presently engaged in discussions concerning a possible restructuring of WPP 94's debt obligations. Because of the continuing nature of the negotiations, the Company is not able to predict the outcome of this event. The Company does not expect the ultimate resolution of this matter to have a material effect on its results of operations or financial condition. GREGORY. In June 1998, LPI entered into a partnership with Columbia Electric Corporation for the development of a natural gas-fired cogeneration project in Gregory, Texas, providing electricity and steam equivalent of 550 MW. Initial construction commenced in August 1998 and non-recourse financing for a majority of the construction and other costs was obtained in November 1998. The project will sell steam and a portion of its electric output to Reynolds Metals Company. A medium-term fixed-price contract has also been entered into with a third party for a portion of the remaining electric output. The project is expected to begin commercial operation in the summer of 2000 at an anticipated total project cost of approximately $240 million. The Company's equity contribution is expected to be approximately $30 to $35 million in connection with its 50% interest in the project. CALGARY. In November 1996, LG&E Natural Canada Inc., a subsidiary of LEM, initiated action in the Court of the Queens Bench of Alberta, Calgary against a former employee. An amended statement of claim was filed in the Calgary action in December 1996, naming additional parties. These lawsuits were filed as a result of LEM's discovery in the fourth quarter of 1996 that the former employee had engaged in unauthorized transactions. Counterclaims have been filed seeking damages of approximately $40 million for, among other things, defamation and breach of contract. In the second quarter of 1997, the Company received an insurance settlement of $7.6 million (net of expenses) related to the losses. Discovery proceedings in this action have occurred in 1998. The Company does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. SPRINGFIELD MUNICIPAL CONTRACT. In July 1998, LEM filed suit in the United States District Court for the Western District of Kentucky in Louisville, against the City of Springfield, Illinois, City Water, Light and Power Company (Springfield CWLP). The action seeks damages for Springfield CWLP's failure, including in late June 1998, to sell electric energy to LEM pursuant to a February 1997 Interchange Agreement and transaction confirmations thereunder, as well as for other related claims. LEM has estimated that its damages in this matter may be approximately $21 million. The parties have commenced discovery which is scheduled to continue into late 1999. OGLETHORPE POWER CONTRACT. In November 1996, the Company, through LEM, entered into a 15-year agreement with OPC to supply approximately one-half of OPC's systemwide power needs during the term of the agreement and with rights to market OPC's surplus power. The Company has been in settlement negotia- 117 tions with OPC over load projections provided by OPC as an inducement for LEM to enter into the 1996 agreement. In October 1998, LEM initiated an arbitration proceeding against OPC related to these load projections. Final selection of the arbitration panel is expected to occur in the first quarter of 1999. See also Discontinuance of Merchant Energy Trading and Sales Business in Management's Discussion and Analysis of Operations and Financial Condition. OPERATING LEASES The Company leases office space, office equipment and vehicles. See also Note 4 for discussion of the Big Rivers Electric Corporation operating lease. The Company accounts for these leases as operating leases. Total lease expense for 1998, 1997 and 1996, was $21.7 million, $6.7 million and $7.8 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1998 are as follows (in thousands of $): 1999 $ 5,650 2000 19,926 2001 36,669 2002 37,072 2003 36,574 Thereafter 627,073 -------- Total $762,964 -------- --------
Future minimum annual lease payments have been reduced by rental payments to be received from noncancelable subleases of approximately $1.8 million per year through 1999 and 2000, and $1.3 million in 2001. ENVIRONMENTAL In September 1998, the U.S. Environmental Protection Agency (USEPA) announced its final regulation requiring significant additional reductions in NOx emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu-an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIPs and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, WKE and the independent power projects in which the Company has an interest will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, the Company estimates that it may incur capital costs in the range of $300 million to $500 million in the aggregate for LG&E, KU, and WKE. These costs would generally be incurred beginning in 2000. The Company believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. The Company anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanisms and believes that, in the cases of LG&E and KU, a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. The Company is also addressing other air quality issues. First, the Company is monitoring USEPA's 118 implementation of the revised National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter. Until USEPA completes additional implementation steps, including monitoring and nonattainment designations, management is unable to determine the precise impact of the revised standards. Second, the Company is conducting modeling activities at LG&E's Cane Run Station and WKE's Coleman Station in response to notifications from regulatory agencies that those plants may be the source of potential exceedances of the NAAQS for SO2. Depending on future regulatory determinations, the Company may be required to undertake corrective action that could include significant capital expenditures or emissions limitations. Third, the Company is working with regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate emissions from LG&E's Mill Creek Station. The Company previously settled a number of property damage claims from adjacent residents and completed significant plant modifications as part of its ongoing capital construction program. The Company is currently awaiting a final regulatory determination regarding remedial measures. In management's opinion, resolution of any remaining property damage claims from adjacent residents should not have a material adverse impact on the financial position or results of operations of the Company. The Company is addressing potential liabilities for the cleanup of properties where hazardous substances may have been released. The Company has identified contamination at certain manufactured gas plant (MGP) sites currently or formerly owned by the Company. A cleanup has been completed at a site owned by KU and the Company is negotiating with state agencies with respect to cleanup of a site owned by LG&E. In addition, several other former MGP sites have been conveyed to other parties over a substantial period of time. In agreements reached in 1996 and 1998 with the current owners of two sites formerly owned by LG&E, the current owners of those sites have expressly agreed to assume responsibility for environmental liabilities in return for an aggregate payment of $400,000. Until conclusion of discussions with state agencies regarding the site currently owned by LG&E and the receipt of additional information on sites no longer owned by the Company, management is unable to precisely determine remaining liability for cleanup costs at MGP sites. However, management estimates total cleanup costs to be approximately $3 million. Accordingly, an accrual of $3 million has been recorded in the accompanying financial statements. LG&E and KU along with other companies have been identified by USEPA as potentially responsible parties allegedly liable for cleanup of certain off-site disposal facilities under the Comprehensive Environmental Response Compensation and Liability Act. LG&E has entered into final settlements for an aggregate of $150,000 resolving liability in two cases, while KU is currently participating as a de minimis party in an additional case. WKE and LPI and subsidiaries are also subject to extensive federal, state and local environmental laws and regulations governing the operation of various facilities in which they participate as an owner or managing operator. To the extent that there have been any developments pursuant to environmental laws and regulations, such developments have not been material, except as otherwise disclosed herein. PURCHASED POWER KU has purchase power arrangements with Owensboro Municipal Utilities (OMU), Electric Energy, Inc. (EEI) and other parties. Under the OMU agreement, which expires on January 1, 2020, KU purchases all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to KU during 1999-2003, which is expected to be approximately 9% 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 $180 million of OMU bonds outstanding at December 31, 1998. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 49% in 1998. 119 KU has a 20% equity ownership in EEI, which is accounted for on the equity method of accounting. See Note 8. 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 1999-2003 of various MW capacities and for varying periods with a maximum entitlement at any time of 282 MW. The estimated future minimum annual payments under purchased power agreements for the five years ended December 31, 2003, are as follows (in thousands of $): 1999 $ 34,291 2000 26,712 2001 29,621 2002 29,561 2003 29,670 -------- Total $149,855 -------- --------
NOTE 19 - JOINTLY OWNED ELECTRIC UTILITY PLANT LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the 75% portion of the Unit, which the Commission has allowed to be reflected in customer rates, is similar to LG&E's accounting for other wholly owned utility plants. Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns a 12.12% undivided interest, and Indiana Municipal Power Agency (IMPA) owns a 12.88% undivided interest. Each is responsible for its proportionate ownership share of fuel cost, operation and maintenance expenses, and incremental assets. The following data represents shares of the jointly owned property:
Trimble County LG&E IMPA IMEA TOTAL ---- ---- ---- ----- Ownership interest 75% 12.88% 12.12% 100% Mw capacity 371.25 63.75 60 495
NOTE 20 - SEGMENTS OF BUSINESS AND RELATED INFORMATION Effective December 31, 1998, the Company adopted Statements of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information. The Company's principal business segments consist of LG&E's regulated electric and gas utility operations, KU's regulated electric utility operations and Capital Corp.'s non-utility operations. Capital Corp.'s principal business segments include its independent power operations, WKE and Argentine gas distribution subsidiaries. 120 The All Other category consists of elimination entries, adjustments and other corporate. The Company does not allocate all expenses from corporate to reportable segments. International long-lived assets consist of the long-lived assets of the Argentine gas distribution companies, the Company's investment in the San Miguel project in Argentina, and its investment in the Tarifa project in Spain. The Company acquired its interests in the Argentine gas distribution companies in February 1997, and it sold its interest in the San Miguel project in February 1998. Financial data for business segments, revenues by product, and long-lived assets by geographic area follow (in thousands of $):
LG&E CAPITAL CORP. ------------------------------------------- Inde- Argentine pendent Western Gas Other LG&E LG&E KU Power Kentucky Distri- Capital All Consol- Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated - ---- -------- --- -------- ---------- ------ ------ ----- --------- ------ 1998 - ---- Revenues $ 658,510 $191,545 $ 810,114 $ 19,884 $128,519 $148,162 $49,479 $(29,800) $1,976,413 Depreciation and amortization 79,867 13,312 86,657 4,633 1,345 8,973 1,759 871 197,417 Interest income 3,672 679 1,811 5,025 18 2,313 14,734 (17,700) 10,552 Interest expense 34,221 6,668 40,896 6 2,631 12,581 27,176 (15,308) 108,871 Equity in unconsolidated ventures - - - 71,297 - 2,501 - - 73,798 Merger costs to achieve 32,073 - 21,830 - - - - 11,415 65,318 Income taxes 48,415 (152) 49,444 24,432 2,442 10,030 (5,321) (17,467) 111,823 Income from continuing operations 71,536 2,016 70,508 41,608 3,592 5,752 (8,203) (26,538) 160,271 Total assets 1,734,221 332,789 1,751,048 163,663 176,166 346,305 120,972 148,104 4,773,268 Construction expenditures 105,837 32,509 91,992 4,242 17,549 14,977 69,478 5,630 342,214
(1) This column includes eliminations, adjustments and corporate.
LG&E CAPITAL CORP. ------------------------------------------- Inde- Argentine pendent Western Gas Other LG&E LG&E KU Power Kentucky Distri- Capital All Consol- Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated - ---- -------- --- -------- ---------- ------ ------ ----- --------- ------ 1997 - ---- Revenues $ 615,159 $231,011 $ 716,410 $ 19,622 $ - $127,182$ 15,671 $ - $1,725,055 Depreciation and amortization 79,958 13,062 84,111 1,287 - 7,569 84 478 186,549 Interest income 5,400 953 1,673 2,321 - 1,697 7,836 (9,721) 10,159 Interest expense 37,236 6,539 41,955 - - 10,472 16,819 (8,594) 104,427 Equity in unconsolidated ventures - - - 20,526 - 2,411 - - 22,937 Income taxes 61,426 4,667 47,789 10,154 - 7,264 (893) (11,084) 119,323 Income from continuing operations 104,349 4,339 83,457 17,795 - 4,860 (1,461) (6,299) 207,040 Total assets 1,728,761 325,864 1,679,676 214,952 - 340,144 15,801 257,746 4,562,944 Construction expenditures 81,713 29,180 94,006 45 - 4,369 147 671 210,131
(1) This column includes eliminations, adjustments and corporate. 121
LG&E CAPITAL CORP. ------------------------------------------- Inde- Argentine pendent Western Gas Other LG&E LG&E KU Power Kentucky Distri- Capital All Consol- Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated - ---- -------- --- -------- ---------- ------ ------ ----- --------- ------ 1996 - ---- Revenues $ 607,160 $214,419 $ 711,711 $ 17,956 $ - $ - $ 9,239 $ (25) $1,560,460 Depreciation and amortization 76,929 12,073 80,424 1,308 - - 250 415 171,399 Interest income 3,521 576 2,800 127 - - 1,134 607 8,765 Interest expense 38,488 6,322 41,873 (1,281) - - 9,337 (327) 94,412 Equity in unconsolidated ventures - - - 19,727 - - - - 19,727 Non-recurring charges - - - 5,493 - - - - 5,493 Income taxes 58,854 4,812 47,206 4,522 - - (6,146) (7,926) 101,322 Income from continuing operations 96,197 7,176 83,907 10,337 - - (963) (6,268) 190,386 Total assets 1,709,942 294,444 1,672,954 214,421 - - 21,122 219,716 4,132,599 Construction expenditures 79,541 28,338 106,582 1,080 - - 74 339 215,954
(1) This column includes eliminations, adjustments and corporate. Revenue By Product:
Asset-Based Retail Retail Energy Year Electric Gas Marketing Other Totals 1998 $1,189,185 $339,707 $390,567 $56,954 $1,976,413 1997 1,173,275 358,193 158,294 35,293 1,725,055 1996 1,153,039 214,419 165,832 27,170 1,560,460
Long-Lived Assets By Geographic Area:
Inter- Year Domestic national Totals 1998 $3,691,554 $299,444 $3,990,998 1997 3,451,437 360,106 3,811,543 1996 3,441,488 25,089 3,466,577
122 NOTE 21 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 1998 and 1997 are shown below. Because of seasonal fluctuations in temperature and other factors, results for quarters may fluctuate throughout the year.
(Thousands of $ except per share data) Quarters Ended March June September December ----- ---- --------- -------- 1998 - ---- Revenues $ 450,724 $ 441,137 $ 603,855 $ 480,697 Operating income 94,850 73,650 158,583 56,884 Net income (loss): Continuing operations 46,674 13,294 (a) 79,512 20,791(b) Discontinued operations (3,506) (20,093) - - Loss on disposal of discon- tinued operations - (225,000) - - Cumulative effect of account- ing change (7,162) - - - -------- --------- --------- --------- Total 36,006 (231,799) 79,512 20,791 Earnings per share of common stock (basic and diluted): Continuing operations .36 .10 .61 .16 Discontinued operations (.02) (.15) - - Loss on disposal of discon- tinued operations - (1.74) - - Cumulative effect of account- ing change (.06) - - - -------- --------- --------- --------- Total .28 (1.79) .61 .16 1997 - ---- Revenues $ 423,073 $ 388,538 $ 461,512 $ 451,932 Operating income 96,090 75,945 143,124 103,696 Net income (loss): Continuing operations 47,530 32,784 70,869 55,857 Discontinued operations (1,428) 883 (15,123) (8,376) -------- --------- --------- --------- Total 46,102 33,667 55,746 47,481 Earnings per share of common stock (basic and diluted): Continuing operations .37 .25 .55 .43 Discontinued operations (.01) .01 (.12) (.06) ----- --- ----- ----- Total .36 .26 .43 .37
(a) The decrease of $20.4 million compared to June 1997 was due to an after-tax charge of $56.4 million from merger-related expenses, offset by an increase in our core utility business of approximately $13.0 million and the consummation of the MRA with NIMO resulting in a $21.0 million gain. (b) The decrease of $26.7 million compared to December 1997 was due to an after-tax charge of $15.6 million related to refunds of certain amounts collected under the environmental cost recovery surcharge, warmer weather and higher utility operating expenses. 123 NOTE 22 - SUBSEQUENT EVENT On March 8, 1999, the Kentucky Industrial Utility Customers (KIUC) filed a separate complaints with the Kentucky Commission alleging that LG&E's and KU's electric rates are excessive and should be reduced by an amount between $85 and $146 million and that the Kentucky Commission establish a proceeding to reduce LG&E's and KU's electric rates. LG&E and KU have asked the Kentucky Commission to dismiss the complaint. The Company is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E and KU, through the PBR proposal or otherwise, such actions could have a material effect on LG&E's and KU's financial condition and results of operations. On March 11, 1999, the Commission denied LG&E's Petition for Rehearing for the period November 1994 through October 1996 and directed LG&E to reduce future fuel expense by $1.9 million in the first billing month after the Order. The Company is considering the filing of an Appeal with the Franklin Circuit Court. In a separate series of Orders on March 11,1999, the PSC granted LG&E's Petition for Rehearing for the period November 1996 through April 1998 and established a procedural schedule for LG&E and other parties to submit evidence and for a hearing before the Commission. In the same Orders the PSC granted the Petition for Rehearing of the KIUC to determine if interest should be paid on any fuel refunds for this latter period. On March 15, 1999, LG&E Westmoreland - Rensselaer, in which the Company has a 50% interest, sold the assets of the Rensselaer cogeneration facility. This transaction will result in a pre-tax gain for the Company of approximately $14.5 million. 124 LG&E Energy Corp. REPORT OF MANAGEMENT The management of LG&E Energy Corp. and subsidiaries is responsible for the preparation and integrity of the consolidated financial statements and related information included in this Annual Report. These statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and, necessarily, include amounts that reflect the best estimates and judgment of management. The Company's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all the Company's financial records and related data as well as the minutes of shareholders' and directors' meetings. Management has established and maintains a system of internal controls that provides reasonable assurance that transactions are completed in accordance with management's authorization, that assets are safeguarded and that financial statements are prepared in conformity with generally accepted accounting principles. Management believes that an adequate system of internal controls is maintained through the selection and training of personnel, appropriate division of responsibility, establishment and communication of policies and procedures and by regular reviews of internal accounting controls by the Company's internal auditors. Management reviews and modifies its system of internal controls in light of changes in conditions and operations, as well as in response to recommendations from the internal auditors. These recommendations for the year ended December 31, 1998, did not identify any material weaknesses in the design and operation of the Company's internal control structure. The Audit Committee of the Board of Directors is composed entirely of outside directors. In carrying out its oversight role for the financial reporting and internal controls of the Company, the Audit Committee meets regularly with the Company's independent public accountants, internal auditors and management. The Audit Committee reviews the results of the independent accountants' audit of the consolidated financial statements and their audit procedures, and discusses the adequacy of internal accounting controls. The Audit Committee also approves the annual internal auditing program and reviews the activities and results of the internal auditing function. Both the independent public accountants and the internal auditors have access to the Audit Committee at any time. LG&E Energy Corp. and subsidiaries maintain and internally communicate a written code of business conduct that addresses, among other items, potential conflicts of interest, compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information. 125 LG&E Energy Corp. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of LG&E Energy Corp.: We have audited the accompanying consolidated balance sheets and statements of capitalization of LG&E Energy Corp. (a Kentucky corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, retained earnings, cash flows and comprehensive income for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LG&E Energy Corp. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As explained in Notes 1 and 3 to the consolidated financial statements, effective January 1, 1998, the Company changed its method of accounting for start-up costs and effective January 1, 1996, the Company changed its method of accounting for price risk management activities. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Louisville, Kentucky Arthur Andersen LLP January 27, 1999 (Except with respect to the matters discussed in the eighth and ninth paragraphs of Note 5, as to which the date is February 12, 1999, and Note 22, as to which the date is March 15, 1999.) 126 Louisville Gas and Electric Company Statements of Income (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- OPERATING REVENUES: Electric.......................................................... $ 663,011 $ 614,532 $ 606,696 Gas............................................................... 191,545 231,011 214,419 --------- --------- --------- Total operating revenues....................................... 854,556 845,543 821,115 Provision for rate refund (Note 3)................................ (4,500) - - --------- --------- --------- Net operating revenues (Note 1)................................ 850,056 845,543 821,115 --------- --------- --------- OPERATING EXPENSES: Fuel for electric generation...................................... 154,683 149,463 149,697 Power purchased................................................... 50,176 17,229 16,626 Gas supply expenses............................................... 125,894 158,929 140,482 Other operation expenses.......................................... 163,584 150,750 143,338 Maintenance....................................................... 52,786 47,586 54,790 Depreciation and amortization..................................... 93,178 93,020 89,002 Federal and state income taxes (Note 8)........................... 56,307 64,081 63,259 Property and other taxes.......................................... 17,925 16,299 16,658 --------- --------- --------- Total operating expenses....................................... 714,533 697,357 673,852 --------- --------- --------- Net operating income.................................................. 135,523 148,186 147,263 Merger costs to achieve (Note 2)...................................... 32,072 - - Other income and (deductions) (Note 9)................................ 10,991 4,277 920 Interest charges...................................................... 36,322 39,190 40,242 --------- --------- --------- Net income............................................................ 78,120 113,273 107,941 Preferred stock dividends............................................. 4,568 4,585 4,568 --------- --------- --------- Net income available for common stock................................. $ 73,552 $ 108,688 $ 103,373 --------- --------- --------- --------- --------- ---------
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Balance January 1..................................................... $258,910 $209,222 $181,049 Add net income........................................................ 78,120 113,273 107,941 -------- -------- -------- 337,030 322,495 288,990 Deduct: Cash dividends declared on stock: 5% cumulative preferred.................................. 1,075 1,075 1,075 Auction rate cumulative preferred........................ 2,024 2,041 2,024 $5.875 cumulative preferred.............................. 1,469 1,469 1,469 Common................................................... 85,000 59,000 75,200 -------- -------- -------- 89,568 63,585 79,768 -------- -------- -------- Balance December 31................................................... $247,462 $258,910 $209,222 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 127 Louisville Gas and Electric Company Statements of Comprehensive Income (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Net income available for common stock................................. $ 73,552 $108,688 $103,373 Unrealized holding gains (losses) on available-for-sale securities arising during the period......................................... (14) (426) 169 Reclassification adjustment for realized and losses on available-for-sale securities included in net income.............. - 188 547 -------- -------- -------- Other comprehensive income (loss) before tax.......................... (14) (238) 716 Income tax expense (benefit) related to items of other comprehensive income.............................................. 18 (119) 289 -------- -------- -------- Comprehensive income.................................................. $ 73,520 $108,569 $103,800 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 128 Louisville Gas and Electric Company Balance Sheets (Thousands of $)
December 31 1998 1997 ---- ---- ASSETS: Utility plant, at original cost: Electric.................................................................... $2,268,860 $2,242,980 Gas ..................................................................... 339,647 337,619 Common ..................................................................... 131,271 137,496 ---------- ---------- 2,739,778 2,718,095 Less: reserve for depreciation............................................. 1,144,123 1,072,842 ---------- ---------- 1,595,655 1,645,253 Construction work in progress............................................... 156,361 61,139 ---------- ---------- 1,752,016 1,706,392 ---------- ---------- Other property and investments - less reserve................................... 1,154 1,365 Current assets: Cash and temporary cash investments......................................... 31,730 50,472 Marketable securities (Note 6).............................................. 17,851 19,311 Accounts receivable - less reserve of $1,399 in 1998 and $1,295 in 1997..... 142,580 124,872 Materials and supplies - at average cost: Fuel (predominantly coal)................................................ 23,993 17,651 Gas stored underground................................................... 33,485 41,487 Other.................................................................... 33,103 31,866 Prepayments................................................................. 2,285 2,627 ---------- ---------- 285,027 288,286 ---------- ---------- Deferred debits and other assets: Unamortized debt expense.................................................... 5,919 6,074 Regulatory assets (Note 3).................................................. 37,643 24,899 Other ..................................................................... 22,878 28,625 ---------- ---------- 66,440 59,598 ---------- ---------- $2,104,637 $2,055,641 ---------- ---------- ---------- ---------- CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity............................................................... $ 671,846 $ 683,326 Cumulative preferred stock.................................................. 95,328 95,328 Long-term debt (Note 10).................................................... 626,800 626,800 ---------- ---------- 1,393,974 1,405,454 ---------- ---------- Current liabilities: Long-term debt due within one year.......................................... - 20,000 Accounts payable............................................................ 133,673 98,894 Provision for rate refunds.................................................. 13,261 13,248 Dividends declared.......................................................... 23,168 21,152 Accrued taxes............................................................... 31,929 18,723 Accrued interest............................................................ 8,038 8,016 Other ..................................................................... 15,242 14,608 ---------- ---------- 225,311 194,641 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 8)........................... 254,589 249,851 Investment tax credit, in process of amortization........................... 71,542 75,800 Accumulated provision for pensions and related benefits (Note 7)............ 59,529 33,872 Customers' advances for construction........................................ 10,848 10,385 Regulatory liability (Note 3)............................................... 63,529 65,502 Other ..................................................................... 25,315 20,136 ---------- ---------- 485,352 455,546 ---------- ---------- Commitments and contingencies (Note 12) $2,104,637 $2,055,641 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 129 Louisville Gas and Electric Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 78,120 $ 113,273 $ 107,941 Items not requiring cash currently: Depreciation and amortization.................................. 93,178 93,020 89,002 Deferred income taxes - net.................................... 2,747 (3,495) 26,055 Investment tax credit - net.................................... (4,258) (4,240) (3,997) Other.......................................................... 5,534 4,640 3,911 Change in certain net current assets: Accounts receivable............................................ (17,708) (9,728) (9,555) Materials and supplies......................................... 423 (8,492) (1,418) Accounts payable............................................... 34,779 1,416 3,772 Provision for rate refunds..................................... 13 (4,263) (10,789) Accrued taxes.................................................. 13,206 6,741 4,168 Accrued interest............................................... 22 (1,978) (1,070) Prepayments and other.......................................... 976 1,333 685 Other............................................................. 18,679 (3,188) (23,153) --------- ---------- ---------- Net cash flows from operating activities....................... 225,711 185,039 185,552 --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities........................................... (17,397) (18,529) (11,039) Proceeds from sales of securities................................. 18,841 2,544 28,605 Construction expenditures......................................... (138,345) (110,893) (107,879) --------- ---------- ---------- Net cash flows from investing activities....................... (136,901) (126,878) (90,313) --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of first mortgage bonds and pollution control bonds...... - 69,776 49,745 Retirement of first mortgage bonds and pollution control bonds.... (20,000) (71,693) (67,013) Payment of dividends.............................................. (87,552) (62,564) (79,310) --------- ---------- ---------- Net cash flows from financing activities....................... (107,552) (64,481) (96,578) --------- ---------- ---------- Change in cash and temporary cash investments......................... (18,742) (6,320) (1,339) Cash and temporary cash investments at beginning of year.............. 50,472 56,792 58,131 --------- ---------- ---------- Cash and temporary cash investments at end of year.................... $ 31,730 $ 50,472 $ 56,792 --------- ---------- ---------- --------- ---------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................................... $ 40,334 $ 63,421 $ 41,508 Interest on borrowed money..................................... 34,245 39,582 40,334
The accompanying notes are an integral part of these financial statements. 130 Louisville Gas and Electric Company Statements of Capitalization (Thousands of $)
December 31 1998 1997 ---- ---- COMMON EQUITY: Common stock, without par value - Authorized 75,000,000 shares, outstanding 21,294,223 shares.................. $ 425,170 $ 425,170 Common stock expense............................................................ (836) (836) Unrealized gain on marketable securities, net of income taxes $34 in 1998 and $16 in 1997 (Note 6)................................... 50 82 Retained earnings............................................................... 247,462 258,910 ---------- ---------- 671,846 683,326 ---------- ---------- CUMULATIVE PREFERRED STOCK: Redeemable on 30 days notice by LG&E Shares Current Outstanding Redemption Price ----------- ---------------- $25 par value, 1,720,000 shares authorized - 5% series .................................... 860,287 $28.00 21,507 21,507 Without par value, 6,750,000 shares authorized - Auction rate.................................. 500,000 100.00 50,000 50,000 $5.875 series................................. 250,000 105.875 25,000 25,000 Preferred stock expense......................................................... (1,179) (1,179) ---------- ---------- 95,328 95,328 ---------- ---------- LONG-TERM DEBT (Note 10): First mortgage bonds - Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000 Series due August 15, 2003, 6%............................................... 42,600 42,600 Pollution control series: P due June 15, 2015, 7.45%............................................... 25,000 25,000 Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335 R due November 1, 2020, 6.55%............................................ 41,665 41,665 S due September 1, 2017, variable........................................ 31,000 31,000 T due September 1, 2017, variable........................................ 60,000 60,000 U due August 15, 2013, variable.......................................... 35,200 35,200 V due August 15, 2019, 5 5/8%............................................ 102,000 102,000 W due October 15, 2020, 5.45%............................................ 26,000 26,000 X due April 15, 2023, 5.90%.............................................. 40,000 40,000 ---------- ---------- Total first mortgage bonds............................................ 506,800 506,800 Pollution control bonds (unsecured) - Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500 Trimble County Series due September 1, 2026, variable........................ 27,500 27,500 Jefferson County Series due November 1, 2027, variable....................... 35,000 35,000 Trimble County Series due November 1, 2027, variable......................... 35,000 35,000 ---------- ---------- Total unsecured pollution control bonds.................................. 120,000 120,000 ---------- ---------- Total long-term bonds................................................. 626,800 626,800 ---------- ---------- Total capitalization......................................................... $1,393,974 $1,405,454 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 131 Louisville Gas and Electric Company Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Louisville Gas and Electric Company (LG&E) is a subsidiary of LG&E Energy Corp. (LG&E Energy). LG&E is a regulated public utility that is engaged in the generation, transmission, distribution, and sale of electric energy and the storage, distribution, and sale of natural gas in Louisville and adjacent areas in Kentucky. LG&E Energy is an exempt energy services holding company with wholly-owned subsidiaries consisting of LG&E, Kentucky Utilities Company (KU), and LG&E Capital Corp. (Capital Corp.). All of the LG&E's Common Stock is held by LG&E Energy. UTILITY PLANT. LG&E's plant is stated at original cost, which includes payroll-related costs such as taxes, fringe benefits, and administrative and general costs. Construction work in progress has been included in the rate base for determining retail customer rates. LG&E has not recorded any allowance for funds used during construction. The cost of plant retired or disposed of in the normal course of business is deducted from plant accounts and such cost, plus removal expense less salvage value, is charged to the reserve for depreciation. When complete operating units are disposed of, appropriate adjustments are made to the reserve for depreciation and gains and losses, if any, are recognized. DEPRECIATION. Depreciation is provided on the straight-line method over the estimated service lives of depreciable plant. The amounts provided for 1998 were 3.4% (3.2% electric, 3.4% gas, and 7.4% common); for 1997 were 3.4% (3.2% electric, 3.3% gas, and 6% common); and for 1996 were 3.3% (3.2% electric, 3.3% gas, and 6% common) of average depreciable plant. CASH AND TEMPORARY CASH INVESTMENTS. LG&E considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value. GAS STORED UNDERGROUND. Gas inventories of $33 million and $41 million at December 31, 1998 and 1997, respectively, are included in gas stored underground in the balance sheet. The inventory is accounted for using the average-cost method. FINANCIAL INSTRUMENTS. LG&E uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized gains or losses on marketable securities in common equity and then charged or credited to other income and deductions when the securities are sold. See Note 4, Financial Instruments. In connection with the LG&E's marketing of power from owned generation assets, exchange traded futures are used to hedge market risk associated with price fluctuations for commitments to sell or purchase electricity. Gains and losses on these futures contracts are reflected in other income and deductions, but are immaterial to the LG&E's results of operations. At December 31, 1998, the value of these futures contracts was not material to the LG&E's financial position. DEBT EXPENSE. Debt expense is amortized over the lives of the related bond issues, consistent with regulatory 132 practices. DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material book-tax temporary differences. INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the tax law that permitted a reduction of LG&E's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. REVENUE RECOGNITION. Revenues are recorded based on service rendered to customers through month-end. LG&E accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. Under an agreement approved by the Public Service Commission of Kentucky (Kentucky Commission or Commission) in 1994, LG&E implemented a demand side management program, including a "decoupling mechanism" which allowed LG&E to recover a predetermined level of revenue on electric and gas residential sales. In 1998, the decoupling mechanism was suspended. See Note 3, Rates and Regulatory Matters. FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to expense as used, and the cost of gas supply is charged to expense as delivered to the distribution system. LG&E implemented a Commission-approved experimental performance-based ratemaking mechanism related to gas procurement and off-system gas sales activity. See Note 3, Rates and Regulatory Matters. MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent items at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 12, Commitments and Contingencies, for a further discussion. NEW ACCOUNTING PRONOUNCEMENTS. During 1998, LG&E adopted the following accounting pronouncements: Statements of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS No. 132), No. 130, Reporting Comprehensive Income (SFAS No. 130), and No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). Pursuant to SFAS No. 132, LG&E has disclosed additional information on changes in benefit obligations and fair values of plan assets and eliminated certain disclosures that are no longer relevant. This standard does not change the measurement or financial statement recognition of the plans. See Note 7, Pension Plans and Retirement Benefits. Under SFAS No. 131, LG&E has provided information about its various business segments that is intended to allow readers to view certain financial information as if "through the eyes of management". See Note 14, Segments of Business and Related Information. Pursuant to SFAS No. 130, LG&E has presented information in the Statements of Comprehensive Income that measures changes in equity that are not required to be recorded as a component of net income. These standards had no impact on the calculation of net income presented in the Statements of Income. Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1, adopted as of January 1, 1998, clarifies the criteria for capital or expense treatment of costs incurred by an enterprise to develop or obtain computer software to be used in its internal operations. The statement does not change treatment of costs incurred in connection with correcting computer programs to properly process the millennium change to the Year 2000, which must be expensed as incurred. Adoption of SOP 98-1 did not have a material effect on LG&E's financial statements. 133 The following accounting pronouncements have been issued but are not yet effective: Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for fiscal years beginning after June 15, 1999, and establishes accounting and reporting standards that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that use hedge accounting. LG&E is currently analyzing the provisions of the statement and cannot predict the impact this statement will have on its results of operations and financial position, however, the statement could increase volatility in earnings and other comprehensive income. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10). This pronouncement is effective for fiscal years beginning after December 15, 1998. The task force concluded that energy trading contracts should be recorded at mark to market on the balance sheet, with the gains and losses shown net in the income statement. EITF No. 98-10 more broadly defines what represents energy trading to include economic activities related to physical assets which were not previously marked to market by established industry practice. The effects of adopting EITF No. 98-10, if applicable, will be reported as a cumulative effect of a change in accounting principle with no prior period restatement. LG&E does not expect the adoption of EITF No. 98-10 to have a material adverse impact on its operations and financial position. NOTE 2 - MERGER LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the surviving corporation. As a result of the merger, LG&E Energy, which is the parent of LG&E, became the parent company of Kentucky Utilities Company (KU). LG&E and KU have continued to maintain their separate corporate identities and serve customers under their present names. LG&E Energy has estimated approximately $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these savings for LG&E of $50.2 million were recorded in the second quarter of 1998, $18.1 million of which were initially deferred and are being amortized over a five-year period pursuant to regulatory orders. Primary components of the merger costs were separation benefits, relocation costs, and transaction fees, the majority of which were paid by December 31, 1998. LG&E expensed the remaining costs associated with the merger in the second quarter of 1998. In regulatory filings associated with approval of the merger, LG&E committed not to seek increases in existing base rates and proposed reductions in their retail customers' bills in amounts based on one-half of the savings, net of the deferred and amortized amount, over a five-year period. The common stock, preferred stock and debt securities of LG&E were not affected by the merger. Regulatory and administrative approvals were obtained from the Federal Energy Regulatory Commission, (FERC), the Federal Trade Commission, the Securities and Exchange Commission, the Public Service Commission of Kentucky (Kentucky Commission or Commission), the Virginia State Corporation Commission and the stockholders of LG&E Energy and KU Energy prior to the effective date of the merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under the Public Utility Holding Company Act of 1935. Management has accounted for the merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code. In the application filed with the Commission, the utilities proposed that 50% of the net non-fuel cost savings estimated to be achieved from the merger, less $18.1 million or 50% of the originally estimated costs to achieve 134 such savings by LG&E, be applied to reduce customer rates through a surcredit on customers' bills and the remaining 50% be retained by the companies. The Commission approved the surcredit and allocated the customer savings 53% to KU and 47% to LG&E. The surcredit will be about 2% of customer bills over the next five years and will amount to approximately $55 million in net non-fuel savings to LG&E's customers. Any fuel cost savings are passed to customers through LG&E's fuel adjustment clause. NOTE 3 - RATES AND REGULATORY MATTERS LG&E conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by FERC and the Kentucky Commission. LG&E is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71, certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowback to customers in future rates. LG&E's current or expected recovery of deferred costs and expected flowback of deferred credits is generally based on specific ratemaking decisions or precedent for each item. The following regulatory assets and liabilities were included in the balance sheets as of December 31 (in thousands of $):
1998 1997 ---- ---- Unamortized loss on bonds $ 17,627 $ 18,698 Merger costs 16,332 2,938 Manufactured gas sites 3,684 3,263 -------- -------- Total regulatory assets 37,643 24,899 Deferred income taxes - net (63,529) (65,502) -------- -------- Regulatory assets and (liabilities) - net $(25,886) $(40,603) -------- -------- -------- --------
During 1997, LG&E wrote off certain previously deferred assets that amounted to approximately $4.2 million. Items written off include expenses associated with LG&E's hydro-electric plant, a management audit fee, and the accelerated write-off of losses on early retirement of facilities. ENVIRONMENTAL COST RECOVERY. Since May 1995, LG&E implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act, as amended, as well as other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in a KU case in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by LG&E be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, refund amounts, refund procedure and forward application of the ECR. The 135 settlement agreement is subject to Commission approval. LG&E recorded a provision for rate refund of $4.5 million in December 1998. DEMAND SIDE MANAGEMENT. In January 1994, LG&E implemented a Commission-approved demand side management (DSM) program that LG&E, the Jefferson County Attorney, and representatives of several customer interest groups had filed with the Commission. The program included a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs and (3) allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling). In June 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording revenues from lost sales due to DSM. Accrued decoupling revenues recorded for periods prior to June 1, 1998, will continue to be collected through the DSM recovery mechanism. On September 23, 1998, the Commission accepted LG&E's modified tariff reflecting this proposal effective as of June 1, 1998. PERFORMANCE-BASED RATEMAKING. Since October 1997, LG&E has implemented a Commission-approved, experimental performance-based ratemaking mechanism related to gas procurement activities and off-system gas sales. During the three-year test period beginning October 1997, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. During the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6 million for its share of reduced gas costs. The $3.6 million will be billed to customers through the gas supply clause beginning February 1, 1999. FUEL ADJUSTMENT CLAUSE. LG&E has a fuel adjustment clause (FAC) mechanism, which under Kentucky law allows LG&E to recover from customers, the actual fuel costs associated with retail electric sales. As of February 12, 1999, LG&E received orders from the Kentucky Commission requiring a refund to retail electric customers of approximately $3.9 million resulting from reviews of the FAC from November 1994 through April 1998. The orders changed LG&E's method of assigning fuel costs associated with electric line losses on off-system sales through the FAC. The orders require these amounts to be refunded to customers during 1999 and to include in the FAC calculation the cost of fuel associated with line losses incurred in making off-system sales. The Kentucky Commission has not issued LG&E an order for the review period May 1998 through October 1998, however, following the methods set forth in the previous orders, LG&E estimates up to an additional $1.3 million could be refundable to retail electric customers for open review periods through December 1998. LG&E filed a request for rehearing on the Kentucky Commission's rulings. LG&E does not believe final resolution of these proceedings will have a material adverse effect on LG&E's financial position or results of operations. The Kentucky Commission granted LG&E's motion to suspend the refund obligation until further direction by the Commission. The Commission advised that LG&E may have to pay interest on the refund amounts for the suspension period. LG&E is awaiting a Commission response to a motion to revoke the orders, or in the alternative, grant a rehearing. FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate, but parallel applications with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial 136 penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by LG&E Energy's shareholders. Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. The plan provides the utilities with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested that the Commission reduce base rates before implementing PBR. LG&E is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E, through the PBR proposal or otherwise, such actions could have a material effect on LG&E's financial condition and results of operations. KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, LG&E, as well as all parties to the proceeding, filed comments on the Commission draft proposals. Initial hearings are scheduled for the first quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on LG&E's financial position or results of operations. NOTE 4 - FINANCIAL INSTRUMENTS At December 31, 1998, LG&E held U.S. Treasury note and bond futures contracts with notional amounts totaling $2.8 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 1999. 137 As of December 31, 1998, LG&E had in effect six interest-rate swap agreements to hedge its exposure to tax exempt rates related to Pollution Control Bonds, Variable Rate Series. The swaps have notional amounts totaling $166 million and mature at various times from 1999 to 2005. LG&E pays a weighted-average fixed rate on the swaps of 3.89% and receives a variable rate based on the JJ Kenny Index (in the case of one of the swaps) or the Bond Market Association Municipal Swap Index. The indices averaged 3.48% in 1998. In April 1998, LG&E entered into a forward-starting interest-rate swap with a notional amount of $83.3 million. The swap will hedge anticipated variable-rate borrowing commitments. It will start in August 2000 and mature in November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable rate based on the Bond Market Association Municipal Swap Index. Under certain conditions, the counterparty to the agreement may terminate the swap at no cost after August 2010. The cost and estimated fair values of LG&E's non-trading financial instruments as of December 31, 1998 and 1997 follow (in thousands of $):
1998 1997 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Marketable securities $ 17,767 $ 17,851 $ 19,213 $ 19,311 Long-term investments - Not practicable to estimate fair value 748 748 747 747 Preferred stock subject to mandatory redemption 25,000 26,413 25,000 26,250 Long-term debt 626,800 648,603 626,800 649,491 U.S. Treasury note and bond futures - (50) - (37) Interest-rate swaps - (7,378) - (248)
All of the above valuations reflect prices quoted by exchanges except for the swaps and the long-term investments. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. The fair values of the long-term investments reflect cost, since LG&E cannot reasonably estimate fair value. NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. LG&E's customer receivables and gas and electric revenues arise from deliveries of natural gas to approximately 289,000 customers and electricity to approximately 360,000 customers in Louisville and adjacent areas in Kentucky. For the year ended December 31, 1998, 77% of total revenue was derived from electric operations and 23% from gas operations. LG&E's operation and maintenance employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 2100 which represents approximately 60% of LG&E's workforce. On December 10, 1998, LG&E and IBEW employees entered into a three-year collective bargaining agreement following a vote by IBEW members which ratified the contract providing for certain wage and benefit improvements, and opportunities for early retirement. 138 NOTE 6 - MARKETABLE SECURITIES LG&E's marketable securities have been determined to be "available-for-sale" under the provisions of Statement of Financial Accounting Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1998 were approximately $18.8 million, which resulted in immaterial realized gains and losses. Proceeds from sales of available-for-sale securities in 1997 were approximately $2.5 million, which resulted in immaterial realized gains and losses, calculated using the specific identification method. Approximate cost, fair value, and other required information pertaining to LG&E's available-for-sale securities by major security type, as of December 31, 1998 and 1997, follow (in thousands of $):
Fixed Equity Income Total ------ ------ ----- 1998: Cost $3,798 $13,969 $17,767 Unrealized gains 276 31 307 Unrealized losses (95) (128) (223) -------- ---------- ---------- Fair values $3,979 $13,872 $17,851 -------- ---------- ---------- -------- ---------- ---------- Fair values: No maturity $3,979 $ 178 $ 4,157 Contractual maturities: Less than one year - 8,301 8,301 One to five years - 3,861 3,861 Five to ten years - - - Over ten years - 1,532 1,532 Not due at a single maturity date - - - -------- ---------- ---------- Total fair values $3,979 $13,872 $17,851 -------- ---------- ---------- -------- ---------- ---------- 1997: Cost $3,763 $15,450 $19,213 Unrealized gains 192 13 205 Unrealized losses (40) (67) (107) -------- ----------- ---------- Fair values $3,915 $15,396 $19,311 -------- ---------- ---------- -------- ---------- ---------- Fair values: No maturity $3,915 $ 114 $ 4,029 Contractual maturities: Less than one year - 8,795 8,795 One to five years - 5,442 5,442 Five to ten years - - - Over ten years - 1,045 1,045 Not due at a single maturity date - - - ---------- ------------- ------------- Total fair values $3,915 $15,396 $19,311 -------- ---------- ---------- -------- ---------- ----------
139 NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS PENSION PLANS. LG&E sponsors several qualified and non-qualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three-year period ending December 31, 1998 and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Change in benefit obligation Benefit obligation at beginning of year $274,095 $229,349 $206,866 Service cost 6,333 5,214 4,989 Interest cost 19,873 17,629 16,697 Plan amendments 3,724 3,085 18,694 Curtailment (gain) or loss (2,218) - - Special termination benefits 18,295 - - Benefits paid (10,866) (8,735) (7,745) Actuarial (gain) or loss 2,699 27,553 (10,152) --------- --------- ---------- Benefit obligation at end of year $311,935 $274,095 $229,349 --------- --------- ---------- --------- --------- ---------- Change in plan assets Fair value of plan assets at beginning of year $280,238 $238,026 $207,471 Actual return on plan assets 38,913 46,078 31,921 Employer contributions 375 4,869 6,379 Benefits paid (10,866) (8,735) (7,745) --------- --------- ---------- Fair value of plan assets at end of year $308,660 $280,238 $238,026 --------- --------- ---------- --------- --------- ---------- Reconciliation of funded status Funded status $ (3,275) $ 6,143 $ 8,677 Unrecognized actuarial (gain) or loss (72,037) (61,720) (65,850) Unrecognized transition (asset) or obligation (8,076) (9,188) (10,300) Unrecognized prior service cost 41,447 43,518 44,141 --------- --------- ---------- Net amount recognized at end of year $ (41,941) $ (21,247) $ (23,332) --------- --------- ---------- --------- --------- ---------- Other Benefits: -------------- Change in benefit obligation Benefit obligation at beginning of year $43,373 $39,951 $37,815 Service cost 761 746 773 Interest cost 2,946 2,942 2,976 Plan amendments 599 - 4,066 Curtailment (gain) or loss 344 - - Special termination benefits 2,855 - - Benefits paid (2,634) (2,604) (2,678) Actuarial (gain) or loss (3,280) 2,338 (3,001) --------- --------- ---------- Benefit obligation at end of year $44,964 $43,373 $39,951 --------- --------- ---------- --------- --------- ---------- Change in plan assets Fair value of plan assets at beginning of year $ 4,384 $ 2,284 $ - Actual return on plan assets 199 80 - Employer contributions 3,207 3,696 2,284 Benefits paid (1,728) (1,676) - --------- --------- ---------- Fair value of plan assets at end of year $ 6,062 $ 4,384 $ 2,284 --------- --------- ---------- --------- --------- ----------
140
1998 1997 1996 ---- ---- ---- Reconciliation of funded status Funded status $ (38,902) $ (38,989) $ (37,667) Unrecognized actuarial (gain) or loss (285) 2,901 493 Unrecognized transition (asset) or obligation 18,080 20,053 21,390 Unrecognized prior service cost 3,519 3,410 3,738 ----------- ----------- ----------- Net amount recognized at end of year $ (17,588) $ (12,625) $ (12,046) ----------- ----------- ----------- ----------- ----------- -----------
There are no plan assets in the nonqualified plan due to the nature of the plan. The following tables provide the amounts recognized in the statement of financial position and information for plans with benefit obligations in excess of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Amounts recognized in the balance sheet consisted of: Accrued benefit liability $ (41,977) $ (21,317) $ (23,372) Intangible asset 36 70 40 ----------- ----------- ----------- Net amount recognized at year-end $ (41,941) $ (21,247) $ (23,332) ----------- ----------- ----------- ----------- ----------- ----------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation (1) $148,005 $121,902 $101,260 Accumulated benefit obligation (2) 131,430 4,179 3,634 Fair value of plan assets (1) 107,988 99,151 81,848 (1) All years include LG&E's non-union plan and unfunded Supplemental Executive Retirement Plans (SERPs). (2) 1998 includes LG&E's non-union plan and SERPs. 1997 and 1996 include SERPs only. Other Benefits: --------------- Amounts recognized in the balance sheet consisted of: Accrued benefit liability $ (17,588) $ (12,625) $ (12,046) ----------- ----------- ----------- ----------- ----------- ----------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $44,964 $43,373 $39,951 Fair value of plan assets 6,062 4,384 2,284
141 The following table provides the components of net periodic benefit cost for the plans for 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- Pension Plans: -------------- Components of net periodic benefit cost Service cost $ 6,333 $ 5,214 $ 4,989 Interest cost 19,873 17,629 16,697 Expected return on plan assets (23,701) (19,849) (17,706) Amortization of prior service cost 3,882 3,708 3,491 Amortization of transition (asset) or obligation (1,112) (1,112) (1,112) Recognized actuarial (gain) or loss (2,248) (2,866) (2,047) --------- --------- --------- Net periodic benefit cost $ 3,027 $ 2,724 $ 4,312 --------- --------- --------- --------- --------- --------- FAS88 special charges Curtailment (gain)/loss $ (2,168) $ - $ - Prior service cost recognized 1,914 - - Special termination benefits 18,295 - - --------- --------- --------- Total FAS88 charges $ 18,041 $ - $ - --------- --------- --------- --------- --------- --------- Other Benefits: --------------- Components of net periodic benefit cost Service cost $ 761 $ 746 $ 773 Interest cost 2,946 2,942 2,976 Expected return on plan assets (296) (151) - Amortization of prior service cost 367 328 328 Amortization of transition (asset) or obligation 1,315 1,337 1,337 --------- --------- --------- Net periodic benefit cost $ 5,093 $ 5,202 $ 5,414 --------- --------- --------- --------- --------- --------- FAS88 special charges Curtailment (gain)/loss $ 1,005 $ - $ - Prior service cost recognized 124 - - Special termination benefits 2,855 - - --------- --------- --------- Total FAS88 charges $ 3,984 $ - $ - --------- --------- --------- --------- --------- ---------
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. During 1998, LG&E incurred approximately $18 million in special termination pension benefits as a result of its early retirement program offered to eligible employees post-merger. The assumptions used in the measurement of LG&E's pension benefit obligation are shown in the following table:
1998 1997 1996 ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate 7.00% 7.00% 7.75% Expected long-term rate of return on plan assets 8.50% 8.50% 8.50% Rate of compensation increase 3.50%-4.00% 2.00%-4.00% 2.00%-4.25%
For measurement purposes, a 7% annual increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease each year to 4.25% for 2005 and remain at that level thereafter. 142 Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects (in thousands of $):
1% Decrease 1% Increase ----------- ----------- Effect on total of service and interest cost components for 1998 $ 122 $ 146 Effect on year-end 1998 postretirement benefit obligations 1,188 1,971
THRIFT SAVINGS PLANS. LG&E has a thrift savings plan under section 401(k) of the Internal Revenue Code. Under the plan, eligible employees may defer and contribute to the plan a portion of current compensation in order to provide future retirement benefits. LG&E makes contributions to the plan by matching a portion of the employee contributions. The costs were approximately $2.4 million for 1998 and $1.8 million for each of 1997 and 1996. NOTE 8 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
1998 1997 1996 ---- ---- ---- Included in operating expenses: Current - federal $45,716 $57,590 $33,823 - state 11,895 14,593 7,685 Deferred - federal - net 2,276 (4,565) 19,161 - state - net 678 703 6,587 Deferred investment tax credit 55 102 409 Amortization of investment tax credit (4,313) (4,342) (4,406) -------- -------- -------- Total 56,307 64,081 63,259 Included in other income and (deductions): Current - federal 660 1,484 196 - federal - merger costs (6,758) - - - state 6 161 (96) - state - merger costs (1,737) - - Deferred - federal - net (165) 292 246 - state - net (42) 75 61 -------- -------- -------- Total (8,036) 2,012 407 -------- -------- -------- Total income tax expense $48,271 $66,093 $63,666 -------- -------- -------- -------- -------- --------
143 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1998 1997 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $323,869 $321,442 Other liabilities 9,644 6,702 --------- --------- 333,513 328,144 --------- --------- Deferred tax assets: Investment tax credit 28,876 30,595 Income taxes due to customers 25,447 26,357 Pension overfunding 2,099 7,265 Accrued liabilities not currently deductible and other 22,502 14,076 --------- --------- 78,924 78,293 --------- --------- Net deferred income tax liability $254,589 $249,851 --------- --------- --------- ---------
A reconciliation of differences between the statutory U.S. federal income tax rate and LG&E's effective income tax rate follows:
1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 5.5 5.7 5.4 Amortization of investment tax credit (3.4) (2.4) (2.6) Nondeductible merger expenses 2.4 - - Other differences - net (1.3) (1.5) (.7) ----- ----- ----- Effective income tax rate 38.2% 36.8% 37.1% ----- ----- ----- ----- ----- -----
NOTE 9 - OTHER INCOME AND DEDUCTIONS Other income and deductions consisted of the following at December 31 (in thousands of $):
1998 1997 1996 ---- ---- ---- Interest and dividend income $ 4,245 $ 4,786 $ 4,096 Interest on income tax settlement - 1,446 - Gain on sale of stock options - 1,794 - Gains (losses) on fixed asset disposal 530 77 (36) Donations (168) (147) (150) Income taxes and other (2,111) (3,679) (2,990) Income tax benefit on merger costs to achieve 8,495 - - --------- --------- --------- Total other income and deductions $ 10,991 $ 4,277 $ 920 --------- --------- --------- --------- --------- ---------
NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other than the First Mortgage Bonds issued in connection with certain Pollution Control Bonds) are the amounts necessary to redeem 1% of the highest principal amount of each series of bonds at any time outstanding. Property additions (166 2/3% of principal 144 amounts of bonds otherwise required to be so redeemed) have been applied in lieu of cash. It is the intent of LG&E to apply property additions to meet 1999 sinking fund requirements of the First Mortgage Bonds. The trust indenture securing the First Mortgage Bonds constitutes a direct first mortgage lien upon a substantial portion of all property owned by LG&E. The indenture, as supplemented, provides in substance that, under certain specified conditions, portions of retained earnings will not be available for the payment of dividends on common stock. No portion of retained earnings is presently restricted by this provision. Pollution Control Bonds (Louisville Gas and Electric Company Projects) issued by Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan payments by LG&E to the Counties pursuant to loan agreements, and certain series are further secured by the delivery from time to time of an equal amount of LG&E's First Mortgage Bonds, Pollution Control Series. First Mortgage Bonds so delivered are summarized in the Statements of Capitalization. No principal or interest on these First Mortgage Bonds is payable unless default on the loan agreements occurs. The interest rate reflected in the Statements of Capitalization applies to the Pollution Control Bonds. On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million matured and were retired by LG&E. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. Interest rates for these bonds were 3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. LG&E's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to mature in 2002, and the $42.6 million, 6% Series is scheduled for maturity in 2003. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 1998. LG&E has no cash sinking fund requirements. NOTE 11 - NOTES PAYABLE LG&E had no notes payable at December 31, 1998, and 1997. At December 31, 1998, LG&E had unused lines of credit of $200 million, for which it pays commitment fees. The credit facility provides for short-term borrowings and support of variable rate Pollution Control Bonds. The credit lines are scheduled to expire in 2001. Management expects to renegotiate these lines when they expire. NOTE 12 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM. LG&E had commitments in connection with its construction program aggregating approximately $8 million at December 31, 1998. Construction expenditures for the years 1999 and 2000 are estimated to total approximately $384 million. 145 OPERATING LEASE. LG&E leases office space and accounts for all of its office space leases as operating leases. Total lease expense for 1998, 1997, and 1996, less amounts contributed by the parent company, was $1.6 million, $1.8 million, and $1.9 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1998, are as follows (in thousands of $): 1999 $ 3,055 2000 3,321 2001 3,654 2002 3,594 2003 3,507 Thereafter 5,260 --------- Total $22,391 --------- ---------
ENVIRONMENTAL. In September 1998, the U.S. Environmental Protection Agency (USEPA) announced its final regulation requiring significant additional reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units ) - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, LG&E will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, LG&E estimates that it may incur capital costs in the range of $100 million to $200 million. These costs would generally be incurred beginning in 2000. LG&E believes its costs in this regard to be comparable to those of similarly situated utilities with like generation assets. LG&E anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanism and believes that a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. LG&E is also addressing other air quality issues. First, LG&E is monitoring USEPA's implementation of the revised National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter. Until USEPA completes additional implementation steps, including monitoring and nonattainment designations, management is unable to determine the precise impact of the revised standards. Second, LG&E is conducting modeling activities at its Cane Run Station in response to notifications from regulatory agencies that the plant may be the source of potential exceedances of the NAAQS for sulfur dioxide (SO2). Depending on future regulatory determinations, LG&E may be required to undertake corrective action that could include significant capital expenditures or emissions limitations. Third, LG&E is working with regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant plant modifications as part of its ongoing capital construction program. LG&E is currently awaiting a final regulatory determination regarding remedial measures. In management's opinion, resolution of any remaining property damage claims from adjacent residents should not have a material adverse impact on the financial position or results of operations of LG&E. 147 LG&E is addressing potential liabilities for the cleanup of properties where hazardous substances may have been released. LG&E has identified contamination at certain manufactured gas plant (MGP) sites currently or formerly owned by LG&E. LG&E is negotiating with state agencies with respect to cleanup of a site owned by LG&E. In agreements reached in 1996 and 1998 with the current owners of two sites formerly owned by LG&E, the current owners of those sites have expressly agreed to assume responsibility for environmental liabilities in return for an aggregate payment of $400,000. Until conclusion of discussions with state agencies regarding the site currently owned by LG&E, management is unable to precisely determine remaining liability for cleanup costs at MGP sites. However, management estimates total cleanup costs to be $3 million. Accordingly, an accrual of $3 million has been recorded in the accompanying financial statements. LG&E, along with other companies, has been identified by USEPA as potentially responsible parties allegedly liable for cleanup of certain off-site disposal facilities under the Comprehensive Environmental Response Compensation and Liability Act. LG&E has entered into final settlements for an aggregate of $150,000 resolving liability in these matters. NOTE 13 - JOINTLY OWNED ELECTRIC UTILITY PLANT LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the 75% portion of the Unit, which the Commission has allowed to be reflected in customer rates, is similar to LG&E's accounting for other wholly owned utility plants. Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns a 12.12% undivided interest and Indiana Municipal Power Agency (IMPA) owns a 12.88% undivided interest. Each is responsible for their proportionate ownership share of fuel cost, operation and maintenance expenses, and incremental assets. The following data represent shares of the jointly owned property:
Trimble County LG&E IMPA IMEA TOTAL ---- ---- ---- ----- Ownership interest 75% 12.88% 12.12% 100% Mw capacity 371.25 63.75 60 495
147 NOTE 14 - SEGMENTS OF BUSINESS AND RELATED INFORMATION Effective December 31, 1998, LG&E adopted Statements of Financial Accounting Standards No. 131, Disclosure About Segments of an Enterprise and Related Information. LG&E is a regulated public utility engaged in the generation, transmission, distribution, and sale of electricity and the storage, distribution, and sale of natural gas. Financial data for business segments, follow (in thousands of $):
Electric Gas Total 1998 Operating revenues $ 658,511(a) $191,545 $ 850,056 Depreciation and amortization 79,866 13,312 93,178 Interest income 3,566 679 4,245 Interest expense 30,389 5,933 36,322 Merger costs to achieve 32,072 - 32,072 Income taxes 56,401 (94) 56,307 Net income 75,368 2,752 78,120 Total assets 1,727,463 377,174 2,104,637 Construction expenditures 105,836 32,509 138,345 1997 Operating revenues $ 614,532 $231,011 $ 845,543 Depreciation and amortization 79,958 13,062 93,020 Interest income 5,279 953 6,232 Interest expense 33,349 5,841 39,190 Income taxes 59,415 4,666 64,081 Net income 108,236 5,037 113,273 Total assets 1,677,278 378,363 2,055,641 Construction expenditures 81,713 29,180 110,893 1996 Operating revenues $ 606,696 $214,419 $ 821,115 Depreciation and amortization 76,929 12,073 89,002 Interest income 3,520 576 4,096 Interest expense 34,566 5,676 40,242 Income taxes 58,448 4,811 63,259 Net income 100,119 7,822 107,941 Total assets 1,673,857 332,855 2,006,712 Construction expenditures 79,541 28,338 107,879
(a) Net of provision for rate refund of $4.5 million. 148 NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 1998 and 1997 are shown below. Because of seasonal fluctuations in temperature and other factors, results for quarters may fluctuate throughout the year.
Quarters Ended March June September December ----- ---- --------- -------- (Thousands of $) 1998 Operating revenues $233,344 $201,389 $229,885 $185,438 Net operating income 32,326 33,629 53,420 16,148 Net income 23,399 21 44,861 9,839 Net income (loss) available for common stock 22,276 (1,122) (a) 43,726 8,672(b) 1997 Operating revenues $225,399 $180,276 $208,435 $231,433 Net operating income 32,895 30,422 46,562 38,307 Net income 23,967 21,487 37,223 30,596 Net income (loss) available for common stock 22,840 20,326 36,077 29,445
(a) The decrease of $21.5 million compared to June 1997 was due to a non-recurring after-tax charge of $23.6 million from merger-related expenses offset by increased electric sales caused by warmer weather. (b) The decrease of $20.8 million compared to December 1997 was due to a non-recurring charge to refund certain amounts collected under the Environmental Cost Recovery surcharge, decreased gas sales due to warmer weather and higher operating expenses at the electric generating stations. NOTE 16 - SUBSEQUENT EVENT On March 8,1999, the Kentucky Industrial Utility Customers (KIUC) filed a complaint with the Kentucky Commission alleging that LG&E's electric rates are excessive and should be reduced by an amount between $43 and $90 million and that the Kentucky Commission establish a proceeding to reduce LG&E's electric rates. LG&E has asked the Kentucky Commission to dismiss the complaint. LG&E is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at LG&E, through the PBR proposal or otherwise, such actions could have a material effect on LG&E's financial condition and results of operations. On March 11, 1999, the Commission denied LG&E's Petition for Rehearing for the period November 1994 through October 1996 and directed LG&E to reduce future fuel expense by $1.9 million in the first billing month after the Order. The Company is considering the filing of an Appeal with the Franklin Circuit Court. In a separate series of Orders on March 11,1999, the PSC granted LG&E's Petition for Rehearing for the period November 1996 through April 1998 and established a procedural schedule for LG&E and other parties to submit evidence and for a hearing before the Commission. In the same Orders the PSC granted the Petition for Rehearing of the KIUC to determine if interest should be paid on any fuel refunds for this latter period. 149 Louisville Gas and Electric Company REPORT OF MANAGEMENT The management of Louisville Gas and Electric Company is responsible for the preparation and integrity of the financial statements and related information included in this Annual Report. These statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and, necessarily, include amounts that reflect the best estimates and judgment of management. LG&E's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all LG&E's financial records and related data as well as the minutes of shareholders' and directors' meetings. Management has established and maintains a system of internal controls that provides reasonable assurance that transactions are completed in accordance with management's authorization, that assets are safeguarded and that financial statements are prepared in conformity with generally accepted accounting principles. Management believes that an adequate system of internal controls is maintained through the selection and training of personnel, appropriate division of responsibility, establishment and communication of policies and procedures and by regular reviews of internal accounting controls by LG&E's internal auditors. Management reviews and modifies its system of internal controls in light of changes in conditions and operations, as well as in response to recommendations from the internal auditors. These recommendations for the year ended December 31, 1998, did not identify any material weaknesses in the design and operation of LG&E's internal control structure. The Audit Committee of the Board of Directors is composed entirely of outside directors. In carrying out its oversight role for the financial reporting and internal controls of LG&E, the Audit Committee meets regularly with LG&E's independent public accountants, internal auditors and management. The Audit Committee reviews the results of the independent accountants' audit of the financial statements and their audit procedures, and discusses the adequacy of internal accounting controls. The Audit Committee also approves the annual internal auditing program and reviews the activities and results of the internal auditing function. Both the independent public accountants and the internal auditors have access to the Audit Committee at any time. Louisville Gas and Electric Company maintains and internally communicates a written code of business conduct that addresses, among other items, potential conflicts of interest, compliance with laws, including those relating to financial disclosure and the confidentiality of proprietary information. 150 Louisville Gas and Electric Company REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Louisville Gas and Electric Company: We have audited the accompanying balance sheets and statements of capitalization of Louisville Gas and Electric Company (a Kentucky corporation and a wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 1998 and 1997, and the related statements of income, retained earnings, cash flows and comprehensive income for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of LG&E'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 Louisville Gas and Electric Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Louisville, Kentucky Arthur Andersen LLP January 27, 1999 (Except with respect to the matters discussed in the eighth and ninth paragraphs of Note 3, as to which the date is February 12, 1999, and Note 16, as to which the date is March 11, 1999.) 151 Kentucky Utilities Company Statements of Income (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- OPERATING REVENUES: Electric.......................................................... $ 831,614 $ 716,437 $ 711,711 Provision for rate refund (Note 3)................................ (21,500) - - --------- --------- --------- Total operating revenues (Note 1).............................. 810,114 716,437 711,711 --------- --------- --------- OPERATING EXPENSES: Fuel, principally coal, used in generation........................ 217,401 188,439 198,198 Power purchased................................................... 126,584 72,542 62,490 Other operation expenses.......................................... 121,275 120,951 122,872 Maintenance....................................................... 63,608 64,990 64,161 Depreciation and amortization..................................... 86,657 84,111 80,424 Federal and state income taxes (Note 7)........................... 53,256 51,690 51,452 Property and other taxes.......................................... 15,945 15,306 14,777 --------- --------- --------- Total operating expenses....................................... 684,726 598,029 594,374 --------- --------- --------- Net operating income.................................................. 125,388 118,408 117,337 Merger costs to achieve (Note 2)...................................... 21,830 - - Interest and dividend income.......................................... 1,811 1,673 1,733 Other income and (deductions) (Note 8)................................ 6,035 5,330 6,710 Interest charges...................................................... 38,640 39,698 39,617 --------- --------- --------- Net income............................................................ 72,764 85,713 86,163 Preferred stock dividends............................................. 2,256 2,256 2,256 --------- --------- --------- Net income available for common stock................................. $ 70,508 $ 83,457 $ 83,907 --------- --------- --------- --------- --------- ---------
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- Balance January 1..................................................... $304,750 $287,852 $268,992 Add net income........................................................ 72,764 85,713 86,163 -------- -------- -------- 377,514 373,565 355,155 Deduct: Cash dividends declared on stock: 4.75% cumulative preferred............................... 950 950 950 6.53% cumulative preferred............................... 1,306 1,306 1,306 Common................................................... 76,091 66,559 65,047 -------- -------- -------- 78,347 68,815 67,303 -------- -------- -------- Balance December 31................................................... $299,167 $304,750 $287,852 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. 152 Kentucky Utilities Company Balance Sheets (Thousands of $)
December 31 1998 1997 ---- ---- ASSETS: Utility plant, at original cost................................................. $2,602,167 $2,552,695 Less: reserve for depreciation................................................. 1,208,183 1,128,282 ---------- ---------- 1,393,984 1,424,413 Construction work in progress................................................... 83,361 58,939 ---------- ---------- 1,477,345 1,483,352 ---------- ---------- Other property and investments - less reserve................................... 14,238 12,808 Current assets: Cash and temporary cash investments......................................... 59,071 5,453 Accounts receivable - less reserve of $520 in 1998 and 1997................. 106,003 74,524 Materials and supplies - at average cost: Fuel (predominantly coal)................................................ 23,927 27,799 Other.................................................................... 24,877 24,466 Prepayments and other....................................................... 5,022 4,951 ---------- ---------- 218,900 137,193 ---------- ---------- Deferred debits and other assets: Unamortized debt expense.................................................... 5,227 5,628 Regulatory assets (Note 3).................................................. 28,228 14,771 Other ..................................................................... 19,859 26,128 ---------- ---------- 53,314 46,527 ---------- ---------- $1,763,797 $1,679,880 ---------- ---------- ---------- ---------- CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity............................................................... $ 606,713 $ 612,295 Cumulative preferred stock.................................................. 40,000 40,000 Long-term debt.............................................................. 546,330 546,351 ---------- ---------- 1,193,043 1,198,646 ---------- ---------- Current liabilities: Long-term debt due within one year.......................................... - 21 Notes payable............................................................... - 33,600 Accounts payable............................................................ 100,012 33,386 Provision for rate refund................................................... 21,500 - Dividends declared.......................................................... 18,188 188 Accrued taxes............................................................... 16,733 7,473 Accrued interest............................................................ 8,110 8,283 Other ..................................................................... 31,226 26,216 ---------- ---------- 195,769 109,167 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Note 7).................................. 247,088 245,150 Investment tax credit, in process of amortization........................... 22,302 26,131 Accumulated provision for pensions and related benefits..................... 50,044 41,334 Customers' advances for construction........................................ 1,265 1,464 Regulatory liability (Note 3)............................................... 45,882 51,576 Other ..................................................................... 8,404 6,412 ---------- ---------- 374,985 372,067 ---------- ---------- Commitments and contingencies (Note 11) $1,763,797 $1,679,880 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 153 Kentucky Utilities Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 1998 1997 1996 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 72,764 $ 85,713 $ 86,163 Items not requiring cash currently: Depreciation and amortization.................................. 86,657 84,111 80,424 Deferred income taxes - net.................................... (2,437) 4,606 3,750 Investment tax credit - net.................................... (3,829) (4,036) (4,013) Deferred merger-related costs.................................. (14,322) (4,062) - Change in certain net current assets and liabilities: Accounts receivable............................................ (31,479) 297 2,551 Fuel inventory................................................. 3,872 3,095 (1,456) Materials and supplies......................................... (411) (1,755) 1,764 Accounts payable............................................... 66,626 4,426 (9,040) Provision for rate refund...................................... 21,500 - - Accrued taxes.................................................. 9,260 2,090 182 Accrued interest............................................... (173) 235 492 Prepayments and other.......................................... 71 (1,481) 278 Other............................................................. 49,321 5,667 10,702 ---------- ---------- ---------- Net cash flows from operating activities....................... 257,420 178,906 171,797 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds form insurance reimbursement............................. 179 4,270 257 Construction expenditures......................................... (91,992) (94,006) (106,503) Other............................................................. - - (79) ---------- ---------- ---------- Net cash flows from investing activities....................... (91,813) (89,736) (106,325) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings............................................. 381,500 2,645,500 2,570,200 Repayments of short-term borrowings............................... (415,100) (2,666,100) (2,571,600) Issuance of first mortgage bonds.................................. - - 39,445 Repayment of first mortgage bonds................................. (42) (21) (36,192) Payment of dividends.............................................. (78,347) (68,815) (67,303) ---------- ---------- ---------- Net cash flows from financing activities....................... (111,989) (89,436) (65,450) ---------- ---------- ---------- Change in cash and temporary cash investments......................... 53,618 (266) 22 Cash and temporary cash investments at beginning of year.............. 5,453 5,719 5,697 ---------- ---------- ---------- Cash and temporary cash investments at end of year.................... $ 59,071 $ 5,453 $ 5,719 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................................... $ 46,490 $ 44,857 $ 47,539 Interest on borrowed money..................................... 36,008 37,053 36,729
The accompanying notes are an integral part of these financial statements. 154 Kentucky Utilities Company Statements of Capitalization (Thousands of $)
December 31 1998 1997 ---- ---- COMMON EQUITY: Common stock, without par value - outstanding 37,817,878 shares, respectively.................................. $ 308,140 $ 308,140 Retained earnings............................................................... 299,168 304,750 Other........................................................................... (595) (595) ---------- ---------- 606,713 612,295 ---------- ----------
CUMULATIVE PREFERRED STOCK: Redeemable on 30 days notice by KU, except 6.53% series
Shares Current Outstanding Redemption Price ----------- ---------------- Without par value, 5,300,000 shares authorized - 4.75% series.................................. 200,000 100.00 20,000 20,000 6.53% series.................................. 200,000 Not redeemable 20,000 20,000 ---------- ---------- 40,000 40,000 ---------- ----------
LONG-TERM DEBT (Note 10): First mortgage bonds - Q due June 15, 2000, 5.95%................................................... 61,500 61,500 Q due June 15, 2003, 6.32%................................................... 62,000 62,000 S due January 15, 2006, 5.99%................................................ 36,000 36,000 P due May 15, 2007, 7.92%.................................................... 53,000 53,000 R due June 1, 2025, 7.55%.................................................... 50,000 50,000 P due May 15, 2027, 8.55%.................................................... 33,000 33,000 Pollution control series: 1B due February 1, 2018, 6.25%........................................... 20,930 20,930 2B due February 1, 2018, 6.25%........................................... 2,400 2,400 3B due February 1, 2018, 6.25%........................................... 7,200 7,200 4B due February 1, 2018, 6.25%........................................... 7,400 7,400 7, due May 1, 2010, 7.38%................................................ 4,000 4,000 7, due May 1, 2020, 7.60%................................................ 8,900 8,900 8, due September 15, 2016, 7.45%......................................... 96,000 96,000 9, due December 1, 2023, 5.75%........................................... 50,000 50,000 10, due November 1, 2024, variable....................................... 54,000 54,000 ---------- ---------- Total first mortgage bonds............................................ 546,330 546,330 8% secured note, due January 5, 1999 (net of current maturity).................. - 21 ---------- ---------- Total long-term bonds........................................................ 546,330 546,351 ---------- ---------- Total capitalization......................................................... $1,193,043 $1,198,646 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 155 Kentucky Utilities Company Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Kentucky Utilities Company (KU) is a subsidiary of LG&E Energy Corp. KU is a regulated public utility that is engaged in the generation, transmission, distribution, and sale of electric energy. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy Corporation (KU Energy) merged, with LG&E Energy as the surviving corporation. LG&E Energy is an exempt energy services holding company with wholly-owned subsidiaries consisting of KU, Louisville Gas and Electric Company (LG&E) and LG&E Capital Corp (Capital Corp.) All of KU's Common Stock is held by LG&E Energy. Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation with no impact on previously reported income. UTILITY PLANT. KU's utility plant is stated at original cost, which includes payroll-related costs such as taxes, fringe benefits, and administrative and general costs. Construction work in progress has been included in the rate base for determining retail customer rates. KU has not recorded any significant allowance for funds used during construction. The cost of utility plant retired or disposed of in the normal course of business is deducted from utility plant accounts and such cost, plus removal expense less salvage value, is charged to the reserve for depreciation. When complete operating units are disposed of, appropriate adjustments are made to the reserve for depreciation and gains and losses, if any, are recognized. DEPRECIATION. Depreciation is provided on the straight-line method over the estimated service lives of depreciable plant. The amounts provided for KU approximated 3.5% in 1998, 1997 and 1996. CASH AND TEMPORARY CASH INVESTMENTS. KU considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value. DEBT EXPENSE. Debt expense is amortized over the lives of the related bond issues, consistent with regulatory practices. DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material book-tax temporary differences. INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the tax law that permitted a reduction of KU's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. REVENUE RECOGNITION. Revenues are recorded based on service rendered to customers through month-end. KU accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. FUEL COSTS. The cost of fuel for electric generation is charged to expense as used. MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and 156 liabilities and disclosure of contingent items at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. See Note 11, Commitments and Contingencies, for a further discussion. NEW ACCOUNTING PRONOUNCEMENTS. During 1998, KU adopted the following accounting pronouncements: Statements of Financial Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Post retirement Benefits (SFAS No. 132), effective for periods beginning after December 15, 1997. Pursuant to SFAS No. 132, KU has disclosed additional information on changes in benefit obligations and fair values of plan assets and eliminated certain disclosures that are no longer relevant. This standard does not change the measurement or financial statement recognition of the plans (See Note 6, Pension Plans and Retirement Benefits). Statement of Position No 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), adopted January 1, 1998. SOP 98-1 clarifies the criteria for capital or expense treatment of costs incurred by an enterprise to develop or obtain computer software to be used in its internal operations. The statement does not change treatment of costs incurred in connection with correcting computer programs to properly process the millennium change to the Year 2000, which must be expensed as incurred. Adoption of SOP 98-1 did not have a material effect on KU's financial statements. The following accounting pronouncements have been issued but are not yet effective: Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement is effective for fiscal years beginning after June 15, 1999, and establishes accounting and reporting standards that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that use hedge accounting. KU is currently analyzing the provisions of the statement and cannot predict the impact this statement will have on its operations and financial position; however, the statement could increase volatility in earnings. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. The Emerging Issues Task Force issue No. 98-10, Accounting for Energy Trading and Risk Management Activities (EITF No. 98-10), which is effective for fiscal years beginning after December 15, 1998. The task force concluded that energy trading contracts should be recorded at mark to market on the balance sheet, with the gains and losses shown net in the income statement. EITF 98-10 more broadly defines what represents energy trading to include economic activities related to physical assets which were not previously recorded at mark to market by established industry practice. The effects of adopting EITF No. 98-10, if applicable, will be reported as a cumulative effect of a change in accounting principle with no prior period restatement. KU does not expect the adoption of EITF No. 98-10 to have a material adverse impact on its operations and financial position. NOTE 2 - LG&E - KENTUCKY UTILITIES MERGER LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the surviving corporation. As a result of the merger, LG&E Energy, which is the parent of LG&E, became the parent company of KU. The operating utility subsidiaries (LG&E and KU) have continued to maintain their separate corporate identities and serve customers in Kentucky and Virginia under their present names. LG&E Energy has estimated approxi- 157 mately $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these savings of $42.3 million were recorded in the second quarter of 1998, $20.5 million of which were initially deferred and are being amortized over a five-year period pursuant to regulatory orders. Primary components of the merger costs were separation benefits, relocation costs, and transaction fees, the majority of which were paid by December 31, 1998. KU expensed the remaining costs associated with the merger in the second quarter of 1998. In regulatory filings associated with approval of the merger, KU committed not to seek increases in existing base rates and proposed reductions in their retail customers' bills in amounts based on one-half of the net savings, net of the deferred and amortized amount, over a five-year period. The preferred stock and debt securities of the operating utility subsidiaries were not affected by the merger. The non-utility subsidiaries of KU Energy have become subsidiaries of Capital Corp. Under the terms of the Agreement and Plan of Merger dated May 20, 1997 (the Merger Agreement) each outstanding share of the common stock, without par value, of KU Energy (KU Common Stock) together with the associated KU Energy stock purchase rights, was converted into 1.67 shares of common stock of LG&E Energy (LG&E Energy Common Stock), together with the associated LG&E Energy stock purchase rights. Immediately preceding the merger, there were 66,527,636 shares of LG&E Energy common stock outstanding, and 37,817,517 shares of KU Energy common stock outstanding. Based on such capitalization, immediately following the merger, 51.3% of the outstanding LG&E Energy common stock was owned by the shareholders of LG&E Energy prior to the merger and 48.7% was owned by former KU Energy shareholders. Regulatory and administrative approvals were obtained from the Federal Energy Regulatory Commission (FERC), the Federal Trade Commission, the Securities and Exchange Commission, the Virginia State Corporation Commission and the stockholders of LG&E Energy and KU Energy prior to the effective date of the merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under the Public Utility Holding Company Act of 1935. Management has accounted for the merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code. In the application filed with the Commission, the utilities proposed that 50% of the net non-fuel cost savings estimated to be achieved from the merger, less $38.6 million or 50% of the originally estimated costs to achieve such savings, be applied to reduce customer rates through a surcredit on customers' bills and the remaining 50% be retained by the companies. The Commission approved the surcredit and allocated the customer savings 53% to KU and 47% to LG&E. The surcredit will be about 2% of customer bills over the next five years and will amount to approximately $63 million in net non-fuel savings to KU customers. Any fuel cost savings are passed to Kentucky customers through KU's fuel adjustment clause. 158 NOTE 3 - UTILITY RATES AND REGULATORY MATTERS Accounting for the regulated utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by the FERC, the Kentucky Commission and the Virginia Commission. KU is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71, certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowback to customers in future rates. KU's current or expected recovery of deferred costs and expected flowback of deferred credits is generally based on specific ratemaking decisions or precedent for each item. The following regulatory assets and liabilities were included on the balance sheet as of December 31 (in thousands of $):
1998 1997 ---- ---- Unamortized loss on bonds $ 8,675 $ 9,756 Merger costs 18,417 4,062 Other 1,136 953 --------- --------- Total regulatory assets 28,228 14,771 Deferred income taxes - net (45,882) (51,576) Other regulatory liability (670) (673) --------- --------- Regulatory assets and (liabilities) - net $(18,324) $(37,478) --------- --------- --------- ---------
ENVIRONMENTAL COST RECOVERY. In August 1994, KU implemented an environmental cost recovery (ECR) surcharge to recover certain environmental compliance costs, including costs to comply with the 1990 Clean Air Act, as amended, as well as, other environmental regulations, including those applicable to coal combustion wastes and related by-products. The ECR mechanism was authorized by state statute in 1992 and was first approved by the Kentucky Commission in July 1994. The Commission's order approving the surcharge in the KU case and the constitutionality of the surcharge was challenged by certain intervenors, including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, have upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. The Commission ordered that certain surcharge revenues collected by KU be subject to refund pending final determination of all appeals. On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute. The decision, however, reversed the ruling of the Court of Appeals on the retroactivity claim, thereby denying recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Commission to determine the proper adjustments to refund amounts collected for such pre-1993 environmental projects. The parties to the proceeding have notified the Commission that they have reached agreement as to the terms, refund amounts, refund procedure and forward application of the ECR. The settlement agreement is subject to Commission approval. KU recorded a provision for rate refund of $21.5 million in December 1998. FUEL ADJUSTMENT CLAUSE. KU employs a fuel adjustment clause (FAC) mechanism, which under Kentucky law allows the company to recover from customers, the actual fuel costs associated with retail electric sales. As of February 12, 1999, LG&E, a subsidiary of LG&E Energy Corp., received orders from the Kentucky Commission requiring a refund to retail electric customers which resulted from reviews of the FAC from November 1994 through April 1998. The orders changed the method of assigning fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. The orders require these 159 amounts to be refunded to customers during first quarter 1999 and to include in the FAC calculation the cost of fuel associated with line losses incurred in making off-system sales. KU has not received an order from the Kentucky Commission but anticipates that it will be required to refund to retail electric customers of approximately $3.5 million for the review period November 1994 through December 1998. Management does not believe final resolution of these proceedings will have a material adverse effect on KU's financial position or results of operations. FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate but parallel with the Commission for approval of a new method of determining electric rates that provides financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein the Commission directed LG&E and KU to indicate whether it desired to remain under traditional rate of return regulation or commence non-traditional regulation. The new ratemaking method, known as performance-based ratemaking (PBR), would include financial incentives for LG&E and KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR provides financial penalties and rewards to assure continued high quality service and reliability. The PBR plan proposed by LG&E and KU consists of five components: 1) The utilities' fuel adjustment clause mechanism will be withdrawn and replaced with a cap that limits recovery of actual changes in fuel cost to changes in a fuel price index for a five-state region. If the utilities outperform the index, benefits will be shared equally between shareholders and customers. If the utilities' fuel costs exceed the index, the difference will be absorbed by LG&E Energy's shareholders. 2) Customers will continue to receive the benefits from the post-merger joint dispatch of power from LG&E's and KU's generating plants. 3) Power plant performance will be measured against the best performance achieved between 1991 and 1997. If the performance exceeds this level, customers will share equally with LG&E Energy's shareholders in up to $10 million annually of benefits from this performance at each of LG&E and KU. 4) The utilities will be encouraged to maintain and improve service quality, reliability, customer satisfaction and safety, which will be measured against six objective benchmarks. The plan provides for annual rewards or penalties to LG&E Energy of up to $5 million per year at each of LG&E and KU. 5) The plan provides KU with greater flexibility to customize rates and services to meet customer needs. Services will continue to be priced above marginal cost and customers will continue to have the option to elect standard tariff service. These proposals are subject to approval by the Commission. Approval proceedings commenced in October 1998 and a final decision likely will occur in 1999. Several intervenors are participating in the case. Some have requested the Commission to reduce base rates before implementing PBR. KU is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at KU, through the PBR proposal or otherwise, such actions could have a material effect on KU's financial condition and result of operations. KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility 160 operations and affiliates. The Commission intends to address two major areas in the proceedings: the tools and conditions needed to prevent cost shifting and cross-subsidization between regulated and non-utility operations; and whether a code of conduct should be established to assure that non-utility segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Commission issued draft code of conduct and cost allocation guidelines. In January 1999, KU, as well as all parties to the proceeding, issued comments on the Commission draft proposals. Initial hearings are scheduled for the first quarter of 1999. Management does not expect the ultimate resolution of this matter to have a material adverse effect on KU's financial position or results of operations. NOTE 4 - FINANCIAL INSTRUMENTS The cost and estimated fair values of the KU's non-trading financial instruments as of December 31, 1998 and 1997 follow (in thousands of $):
1998 1997 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Long-term debt $546,330 $587,245 $546,351 $578,835 -------- -------- -------- -------- -------- -------- -------- --------
The above valuations reflect prices quoted by exchanges. NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. KU's customer receivables and electric revenues arise from deliveries of electricity to about 449,000 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky and to about 29,000 customers in five counties in southwestern Virginia. For the year ended December 31, 1998, 100% of total utility revenue was derived from electric operations. KU's operation and maintenance employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 101 and United Steelworkers of America (USWA) Local 8686. KU has approximately 15% of its workforce covered by union contracts expiring August 1, 1999. 161 NOTE 6 - PENSION PLANS AND RETIREMENT BENEFITS PENSION PLANS. KU sponsors a qualified and non-qualified pension plans and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three-year period ending December 31, 1998 and a statement of the funded status as of December 31 of the three years (in thousands of $):
1998 1997 1996 ---- ---- ---- PENSION PLANS: Change in benefit obligation Benefit obligation at beginning of year $214,657 $194,874 $183,795 Service cost 6,702 6,728 6,399 Interest cost 14,939 14,680 13,856 Acquisitions/divestitures (2,243) -- -- Curtailment (gain) or loss 1,901 -- -- Special termination benefits 5,427 -- -- Benefits paid (12,762) (13,313) (9,001) Actuarial (gain) or loss 2,367 11,688 (175) -------- -------- -------- Benefit obligation at end of year $230,988 $214,657 $194,874 -------- -------- -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year $217,500 $191,879 $179,371 Actual return on plan assets 31,209 35,066 21,463 Employer contributions 2,273 4,750 777 Benefits paid (12,762) (13,314) (9,001) Administrative expenses (96) (882) (731) -------- -------- -------- Fair value of plan assets at end of year $238,124 $217,499 $191,879 -------- -------- -------- -------- -------- -------- Reconciliation of funded status Funded status $ 7,135 $ 2,843 $ (2,995) Unrecognized actuarial (gain) or loss (26,487) (19,552) (12,549) Unrecognized transition (asset) or obligation (1,128) (1,350) (1,500) Unrecognized prior service cost 2,831 3,635 3,990 -------- -------- -------- Net amount recognized at year-end $(17,649) $(14,424) $(13,054) -------- -------- -------- -------- -------- -------- OTHER BENEFITS: Change in benefit obligation Benefit obligation at beginning of year $ 72,139 $66,519 $63,656 Service cost 2,012 1,853 1,859 Interest cost 5,207 4,895 4,751 Curtailment (gain) or loss 3,240 -- -- Special termination benefits - (4,038) (3,857) Benefits paid (2,617) -- -- Actuarial (gain) or loss (331) 2,910 110 -------- -------- -------- Benefit obligation at end of year $ 79,650 $ 72,139 $66,519 -------- -------- -------- -------- -------- -------- Change in plan assets Fair value of plan assets at beginning of year $ 17,763 $ 13,270 $ 10,427 Actual return on plan assets 5,117 3,569 1,581 Employer contributions 3,805 3,848 3,740 Benefits paid (2,348) (2,924) (2,478) -------- -------- -------- Fair value of plan assets at end of year $ 24,337 $ 17,763 $ 13,270 -------- -------- -------- -------- -------- --------
162
1998 1997 1996 ---- ---- ---- Reconciliation of funded status Funded status $(55,313) $(54,376) $ (53,249) Unrecognized actuarial (gain) or loss (19,944) (19,697) (19,977) Unrecognized transition (asset) or obligation 45,701 50,118 53,460 -------- -------- -------- Net amount recognized at year-end $(29,556) $(23,955) $ (19,766) -------- -------- -------- -------- -------- --------
There are no plan assets in the nonqualified plan due to the nature of the plan. The following tables provide the amounts recognized in the statement of financial position and information for plans with benefit obligations in excess of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- PENSION PLANS: Amounts recognized in the statement financial position consisted of: Accrued benefit liability $(17,649) $ (14,424) $ (13,054) Other (22) -- -- -------- -------- -------- Accrued benefit liability $(17,671) $ (14,424) $ (13,054) -------- -------- -------- -------- -------- -------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 2,300 $ 6,199 $ 10,667 Accumulated benefit obligation 99 3,975 8,235 OTHER BENEFITS: Amounts recognized in the statement financial position consisted of: Accrued benefit liability $ (29,556) $ (23,955) $ (19,766) Other (2,817) (2,955) -- -------- -------- -------- Net amount recognized at year-end $ (32,373) $ (26,910) $ (19,766) -------- -------- -------- -------- -------- -------- Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 79,650 $ 72,139 $ 66,519 Fair value of plan assets 24,337 17,763 13,270
163 The following table provides the components of net periodic benefit cost for the plans for fiscal years 1998, 1997 and 1996 (in thousands of $):
1998 1997 1996 ---- ---- ---- PENSION PLANS: Components of net periodic benefit cost Service cost $ 6,703 $ 6,728 $ 6,399 Interest cost 14,939 14,680 13,856 Expected return on plan assets (18,264) (15,427) (14,410) Amortization of transition (asset) or obligation 321 354 354 Amortization of prior service cost (146) (150) (150) Amortization of net (gain) loss (151) (26) (24) ---------- ---------- ---------- Net periodic benefit cost $ 3,402 $ 6,159 $ 6,025 ---------- ---------- ---------- ---------- ---------- ---------- FAS88 special charges Prior service cost recognized $ 67 $ -- $ -- Special termination benefits 5,427 -- -- ---------- ---------- ---------- Total FAS88 charges $ 5,494 $ -- $ -- ---------- ---------- ---------- ---------- ---------- ---------- OTHER BENEFITS: Components of net periodic benefit cost Service cost $ 2,012 $ 1,853 $ 1,859 Interest cost 5,207 4,895 4,751 Expected return on plan assets (1,424) (1,051) (827) Amortization of transition (asset) or obligation 3,303 3,341 3,341 Amortization of net (gain) loss (536) (812) (703) ---------- ---------- ---------- Net periodic benefit cost $ 8,562 $ 8,226 $ 8,421 ---------- ---------- ---------- ---------- ---------- ---------- FAS88 special charges Curtailment (gain)/loss $ 1,114 $ -- $ -- ---------- ---------- ---------- ---------- ---------- ----------
On May 4, 1998 LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. At the time of the merger KU had both qualified and nonqualified pension plans. Under the provisions of the Supplemental Security Plan (SERP), the Merger Agreement constituted a change-in-control which required that a lump sum present value payment be made out of KU's SERP to retired employees entitled to retirement benefits on the date of the Merger Agreement. On May 30, 1997, $4.7 million in lump sum payments were made to these retired employees. Effective May 4, 1998, due to the change in control, the present value balance of KU's SERP of $4.9 million was transferred and allocated between LG&E Energy Corp's Nonqualified Savings Plan and KU's Nonqualified Savings plan of $2.2 million and $2.7 million, respectively. The plan is an unfunded, pretax deferred compensation program which provides officers and senior managers of KU the opportunity to defer earnings above the qualified savings plan limits. As an "Unfunded" plan the money is not specifically invested or secured and future distributions will be made from the general assets of KU. Currently interest is credited at a rate equal to the average yield on five-year Treasury notes. During 1998, KU invested approximately $6.6 million in special termination benefits as a result of its early retirement program offered to eligible employees post-merger. KU provides nonpension post retirement benefits for eligible retired employees. 164 The assumptions used in the measurement of the KU's benefit obligation are shown in the following table:
1998 1997 1996 ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate 7.00% 7.75% 7.75% Expected long-term rate of return on plan assets 8.25% 8.25% 8.25% Rate of compensation increase 4.00% 4.75% 4.75%
For measurement purposes, a 7.00% annual increase in the per capita cost of covered health care benefits was assumed for 1999. The rate was assumed to decrease gradually to 4.25% for 2005 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects:
1% INCREASE ----------- Effect on total of service and interest cost components for 1998 $ (1,071) Effect on year-end 1998 postretirement benefit obligation (10,219) Effect on total of service and interest cost components for 1998 1,373 Effect on year-end 1998 postretirement benefit obligation 12,815
THRIFT SAVINGS PLANS. KU has a thrift savings plan under section 401(k) of the Internal Revenue Code. Under the plan, eligible employees may defer and contribute to the plan a portion of current compensation in order to provide future retirement benefits. KU makes contributions to the plan by matching a portion of the employee contributions. The costs were approximately $2.2 million for each of 1998 and 1997, and $2.1 million for 1996. NOTE 7 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
1998 1997 1996 ---- ---- ---- Included in operating expenses: Current - federal $46,321 $39,353 $35,656 - state - net 10,245 8,964 7,387 Deferred - federal - net (3,186) 1,996 5,510 - state - net (124) 1,377 2,899 --------- --------- -------- Total 53,256 51,690 51,452 Included in other income and (deductions): Current - federal (617) (853) 3,565 - state (237) (246) 861 Deferred - federal - net 694 975 (3,665) - state - net 178 258 (994) Amortization of investment tax credit (3,829) (4,036) (4,013) --------- ---------- ---------- Total (3,811) (3,902) (4,246) --------- ---------- ---------- Total income tax expense $49,445 $47,788 $47,206 --------- ---------- ---------- --------- ---------- ----------
165 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1998 1997 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $289,147 $285,034 Other liabilities 5,598 5,389 --------- --------- 294,745 290,423 --------- --------- Deferred tax assets: Investment tax credit 9,001 10,547 Income taxes due to customers 17,574 19,217 Accrued liabilities not currently deductible and other 23,677 18,750 Less: amounts included in current assets 2,595 3,241 --------- --------- 47,657 45,273 --------- --------- Net deferred income tax liability $247,088 $245,150 --------- --------- --------- ---------
A reconciliation of differences between the statutory U.S. federal income tax rate and KU's effective income tax rate follows:
1998 1997 1996 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 5.4 5.0 4.9 Amortization of investment tax credit (3.1) (3.0) (3.0) Nondeductible merger expenses 6.4 -- -- Other differences - net (2.2) (1.2) (1.5) ----- ----- ----- Effective income tax rate 41.5% 35.8% 35.4% ----- ----- ----- ----- ----- -----
NOTE 8 - OTHER INCOME AND DEDUCTIONS Other income and deductions consisted of the following at December 31 (in thousands of $):
1998 1997 1996 ---- ---- ---- Equity in earnings - subsidiary company $ 2,167 $ 2,480 $ 2,436 Interest and dividend income 1,811 1,673 1,733 Gains (losses) on fixed asset disposal 272 412 87 Donations (453) (388) (379) Income taxes and other 4,049 2,826 4,566 -------- -------- -------- Total other income and deductions $ 7,846 $ 7,003 $ 8,443 -------- -------- -------- -------- -------- --------
NOTE 9 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS Under the provisions for the KU's variable rate Pollution Control Bonds Series 10, KU can choose between various interest rate options. The daily interest rate option was utilized at December 31, 1998. The average annual interest rate on the bonds during 1998 and 1997 was 3.54% and 3.77%, respectively. The variable rate 166 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. Substantially all of KU's utility plant is pledged as security for its first mortgage bonds. NOTE 10 - NOTES PAYABLE KU's short-term financing requirements are satisfied through the sale of commercial paper, KU had no short-term borrowings at December 31, 1998. KU had outstanding commercial paper of $33.6 million at December 31, 1997, at a weighted average interest rate of 6.79%. At December 31, 1998, KU had lines of credit in place totaling $60 million, all of which remained unused at December 31, 1998. In support of these lines of credit, KU pays commitment or facility fees. The KU credit facilities provide for short-term borrowing and support of commercial paper borrowings. The credit lines will expire in December 1999. Management expects to renegotiate these lines when they expire. NOTE 11 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM. KU had $6.5 million of commitments in connection with its construction program at December 31, 1998. Construction expenditures for the years 1999 and 2000 are estimated to total approximately $341 million. OPERATING LEASES. KU leases office space, office equipment, and vehicles. KU accounts for these leases as operating leases. Total lease expense for 1998, 1997, and 1996, was $1.9 million, $1.8 million, and $1.7 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1998, are as follows (in thousands of $): 1999 $ 1,059 2000 983 2001 927 2002 862 2003 811 -------- Total $ 4,642 -------- --------
ENVIRONMENTAL. In September, 1998, the U.S. Environmental Protection Agency (USEPA) announced its final regulation requiring significant additional reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport to the Northeast. While each state is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction from 1990 levels. Under the regulation, each state must incorporate the additional NOx reductions in its State Implementation Plan (SIP) by September 1999 and affected sources must install control measures by May 2003, unless granted extensions. Several states, various labor and industry groups, and individual companies have appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the states identify specific emissions reductions in their SIP and the courts rule on the various legal challenges to the final rule. However, if the 0.15 lb. target is ultimately imposed, KU will be required to incur significant capital expenditures and increased operation and maintenance costs for additional controls. Subject to further study and analysis, KU estimates that it may incur capital costs of approximately $100 to $200 million for KU. These costs would generally be incurred beginning in 2000. 167 KU believes its costs for these matters to be comparable to those of similarly situated utilities with like generation assets. KU anticipates that such capital and operating costs are the type of costs that are eligible for cost recovery from customers under its environmental surcharge mechanisms and believes that, in the case of KU, a significant portion of such costs could be so recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of such recovery. In July, 1997, USEPA issued revised National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter. KU is monitoring USEPA's implementation of the revised standards. Until USEPA completes additional implementation steps, including monitoring and nonattainment demonstrations, management is unable to determine the precise impact of the revised standards. KU is addressing potential liabilities for the cleanup of properties where hazardous substances may have been released. KU along with other companies has been identified by USEPA as a potentially responsible party allegedly liable for cleanup of off-site disposal facilities under the Comprehensive Environmental Response Compensation and Liability Act. KU is currently participating as a de minimis party in one such matter. In addition, KU has conducted various voluntary cleanups of KU owned properties, including cleanup of a former manufactured gas plant site. PURCHASED POWER. KU has purchase power arrangements with Owensboro Municipal Utilities (OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU agreement, which expires on January 1, 2020, KU purchases all of the output of a 400-MW generating station not required by OMU. The amount of purchased power available to KU during 1999-2003, which is expected to be approximately 9% 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 $180 million of OMU bonds outstanding at December 31, 1998. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 49% in 1998. 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 1999-2003 of various MW capacities and for varying periods with a maximum entitlement at any time of 282 MW. The estimated future minimum annual payments under purchased power agreements for the five years ended December 31, 2003 follow (in thousands of $): 1999 $ 34,291 2000 26,712 2001 29,621 2002 29,561 2003 29,670 ---------- Total $ 149,855 ---------- ----------
168 NOTE 12 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 1998 and 1997 are shown below. Because of seasonal fluctuations in temperature and other factors, results for quarters may fluctuate throughout the year.
Quarters Ended March June September December ------------ ----------- ------------- ------------ (Thousands of $) 1998 Revenues $183,219 $193,079 $246,117 $187,699 Operating income 33,035 28,144 44,677 19,531 Net income (loss) 25,049 (1,119) 36,980 11,854 Net income (loss) available for common stock 24,485 (1,683) (a) 36,416 (b) 11,290(c) 1997 Revenues $178,914 $162,868 $192,102 $182,553 Operating income 33,424 19,742 35,343 29,889 Net income 24,961 12,088 26,924 21,740 Net income available for common stock 24,397 11,524 26,360 21,176
(a) The decrease of $13.2 million compared to June 1997 was due to a non-recurring after-tax charge of $21.5 million from merger-related expenses, offset by an increase of $8.3 million due to increased sales caused by warmer weather and lower maintenance expenses. (b) The increase of $10.1 million compared to September 1997 was due to increased sales caused by warmer weather and an increase in wholesale sales. (c) The decrease of $9.9 million compared to December 1997 was due to an after-tax charge of $12.9 million related to refunds of certain amounts collected under the Environmental Cost Recovery surcharge, partially offset by higher wholesale sales. NOTE 13 - SUBSEQUENT EVENT On March 8, 1999, the Kentucky Industrial Utility Customers filed a complaint with the Kentucky Commission alleging that KU's electric rates are excessive and should be reduced by an amount between $42 and $56 million, and that the Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked the Kentucky Commission to dismiss the complaint. KU is not able to predict the ultimate outcome of these proceedings, however, should the Commission mandate significant rate reductions at KU, through the PBR proposal or otherwise, such actions could have a material effect on KU's financial condition and results of operations. 169 Kentucky Utilities Company REPORT OF MANAGEMENT The management of Kentucky Utilities Company is responsible for the preparation and integrity of the financial statements and related information included in this Annual Report. These statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and, necessarily, include amounts that reflect the best estimates and judgment of management. KU's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all KU's financial records and related data as well as the minutes of shareholders' and directors' meetings. Management has established and maintains a system of internal controls that provide reasonable assurance that transactions are completed in accordance with management's authorization, that assets are safeguarded and that financial statements are prepared in conformity with generally accepted accounting principles. Management believes that an adequate system of internal controls is maintained through the selection and training of personnel, appropriate division of responsibility, establishment and communication of policies and procedures and by regular reviews of internal accounting controls by KU's internal auditors. Management reviews and modifies its system of internal controls in light of changes in conditions and operations, as well as in response to recommendations from the internal auditors. These recommendations for the year ended December 31, 1998, did not identify any material weaknesses in the design and operation of KU's internal control structure. The Audit Committee of the Board of Directors is composed entirely of outside directors. In carrying out its oversight role for the financial reporting and internal controls of KU, the Audit Committee meets regularly with KU's independent public accountants, internal auditors and management. The Audit Committee reviews the results of the independent accountants' audit of the financial statements and their audit procedures, and discusses the adequacy of internal accounting controls. The Audit Committee also approves the annual internal auditing program, and reviews the activities and results of the internal auditing function. Both the independent public accountants and the internal auditors have access to the Audit Committee at any time. Kentucky Utilities Company maintains and internally communicates a written code of business conduct that addresses, among other items, potential conflicts of interest, compliance with laws, including those relating to financial disclosure, and the confidentiality of proprietary information. 170 Kentucky Utilities Company REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Kentucky Utilities Company: We have audited the accompanying balance sheets and statements of capitalization of Kentucky Utilities Company (a Kentucky and Virginia corporation and a wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 1998 and 1997, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of KU'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 Kentucky Utilities Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Louisville, Kentucky Arthur Andersen LLP January 27, 1999 (Except with respect to the matters discussed in the fifth paragraph of Note 3, as to which the date is February 12, 1999, and Note 13, as to which the date is March 8, 1999.) 171 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III ITEMS 10, 11, 12 and 13 are omitted pursuant to General Instruction G, inasmuch as LG&E Energy and LG&E filed copies of their definitive proxy statements with the Commission on March 26, 1999, respectively, pursuant to Regulation 14A under the Securities Exchange Act of 1934. Such proxy and information statements are incorporated herein by this reference. In accordance with General Instruction G of Form 10-K, the information required by Item 10 relating to executive officers has been included in Part I of this Form 10-K. The information required by ITEMS 10, 11, 12 and 13 for KU is incorporated herein by reference to the material appearing in Exhibit 99.03, which is filed herewith. In accordance with General Instruction G of Form 10-K, the information required by Item 10 relating to executive officers of KU has been included in Part I of this Form 10-K. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements (included in Item 8): LG&E ENERGY: Consolidated statements of income for the three years ended December 31, 1998 (page 84). Consolidated statements of retained earnings for the three years ended December 31, 1998 (page 85). Consolidated statements of comprehensive income for the three years ended December 31, 1998 (page 85) Consolidated balance sheets - December 31, 1998, and 1997 (page 86). Consolidated statements of cash flows for the three years ended December 31, 1998 (page 87). Consolidated statements of capitalization - December 31, 1998, and 1997 (page 88). Notes to consolidated financial statements (pages 90-123). Report of management (page 125). Report of independent public accountants (page 126). LG&E: Statements of income for the three years ended December 31, 1998 (page 127). Statements of retained earnings for the three years ended December 31, 1998 (page 127). Statements of comprehensive income for the three years ended December 31, 1998 (page 128). Balance sheets - December 31, 1998, and 1997 (page 129). Statements of cash flows for the three years ended December 31, 1998 (page 130). Statements of capitalization - December 31, 1998, and 1997 (page 131). Notes to financial statements (pages 132-149). Report of management (page 150). Report of independent public accountants (page 151). 172 (a) 1. Financial Statements (included in Item 8) (continued): KU: Statements of income for the three years ended December 31, 1998 (page 152). Statements of retained earnings for the three years ended December 31, 1998 (page 152). Balance sheets - December 31, 1998, and 1997 (page 153). Statements of cash flows for the three years ended December 31, 1998 (page 154). Statements of capitalization - December 31, 1998, and 1997 (page 155). Notes to financial statements (pages 156-169). Report of management (page 170). Report of independent public accountants (page 170). 2. Financial Statement Schedules (included in Part IV): Schedule II Valuation and Qualifying Accounts for the three years ended December 31, 1998, for LG&E Energy (page 195), LG&E (page 196), and KU (page 197). All other schedules have been omitted as not applicable or not required or because the information required to be shown is included in the Financial Statements or the accompanying Notes to Financial Statements. 3. Exhibits:
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 2.01 x x x Copy of Agreement and Plan of Merger, dated as of May 20, 1997, by and between LG&E Energy and KU Energy, including certain exhibits thereto. [Filed as Exhibit 2 to LG&E Energy's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 3.01 x Copy of LG&E Energy's Amended and Restated Articles of Incorporation dated May 4, 1998. [Filed as Exhibit 4.1 to LG&E Energy's Current Report on Form 8-K dated May 4, 1998, and incorporated by reference herein] 3.02 x Copy of Restated Articles of Incorporation of LG&E, dated November 6, 1996. [Filed as Exhibit 3.06 to LG&E's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated by reference herein] 3.03 x Copy of Bylaws of LG&E Energy, as amended through May 4, 1998. [Filed as Exhibit 4.2 to LG&E Energy's Current Report on Form 8-K dated May 4, 1998, and incorporated by reference herein]
173
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 3.04 x Copy of By-Laws of LG&E, as amended through May 4, 1998. 3.05 x Amended and Restated Articles of Incorporation of Kentucky Utilities Company [Filed as Exhibits 4.03 and 4.04 to Form 8-K Current Report of KU, dated December 10, 1993, and incorporated by reference herein] 3.06 x By-laws of Kentucky Utilities Company dated April 28, 1998. 4.01 x x Copy of Trust Indenture dated November 1, 1949, from LG&E to Harris Trust and Savings Bank, Trustee. [Filed as Exhibit 7.01 to LG&E's Registration Statement 2-8283 and incorporated by reference herein] 4.02 x x Copy of Supplemental Indenture dated February 1, 1952, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.05 to LG&E's Registration Statement 2-9371 and incorporated by reference herein] 4.03 x x Copy of Supplemental Indenture dated February 1, 1954, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.03 to LG&E's Registration Statement 2-11923 and incorporated by reference herein] 4.04 x x Copy of Supplemental Indenture dated September 1, 1957, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.04 to LG&E's Registration Statement 2-17047 and incorporated by reference herein] 4.05 x x Copy of Supplemental Indenture dated October 1, 1960, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.05 to LG&E's Registration Statement 2-24920 and incorporated by reference herein] 4.06 x x Copy of Supplemental Indenture dated June 1, 1966, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.06 to LG&E's Registration Statement 2-28865 and incorporated by reference herein] 4.07 x x Copy of Supplemental Indenture dated June 1, 1968, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.07 to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 4.08 x x Copy of Supplemental Indenture dated June 1, 1970, which is a
174
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.08 to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 4.09 x x Copy of Supplemental Indenture dated August 1, 1971, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.09 to LG&E's Registration Statement 2-44295 and incorporated by reference herein] 4.10 x x Copy of Supplemental Indenture dated June 1, 1972, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.10 to LG&E's Registration Statement 2-52643 and incorporated by reference herein] 4.11 x x Copy of Supplemental Indenture dated February 1, 1975, which is a supplemental instrument to exhibit 4.01 hereto. [Filed as Exhibit 2.11 to LG&E's Registration Statement 2-57252 and incorporated by reference herein] 4.12 x x Copy of Supplemental Indenture dated September 1, 1975, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.12 to LG&E's Registration Statement 2-57252 and incorporated by reference herein] 4.13 x x Copy of Supplemental Indenture dated September 1, 1976, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.13 to LG&E's Registration Statement 2-57252 and incorporated by reference herein] 4.14 x x Copy of Supplemental Indenture dated October 1, 1976, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.14 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.15 x x Copy of Supplemental Indenture dated June 1, 1978, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.15 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.16 x x Copy of Supplemental Indenture dated February 15, 1979, which
175
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.16 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.17 x x Copy of Supplemental Indenture dated September 1, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.17 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1980, and incorporated by reference herein] 4.18 x x Copy of Supplemental Indenture dated September 15, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.18 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1980, and incorporated by reference herein] 4.19 x x Copy of Supplemental Indenture dated September 15, 1981, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.19 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 4.20 x x Copy of Supplemental Indenture dated March 1, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.20 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.21 x x Copy of Supplemental Indenture dated March 15, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.21 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.22 x x Copy of Supplemental Indenture dated September 15, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.22 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.23 x x Copy of Supplemental Indenture dated February 15, 1984, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.23 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1984, and incorporated by reference herein] 4.24 x x Copy of Supplemental Indenture dated July 1, 1985, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.24 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1985, and incorporated by reference herein] 4.25 x x Copy of Supplemental Indenture dated November 15, 1986,
176
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1986, and incorporated by reference herein] 4.26 x x Copy of Supplemental Indenture dated November 16, 1986, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.26 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1986, and incorporated by reference herein] 4.27 x x Copy of Supplemental Indenture dated August 1, 1987, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.27 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated by reference herein] 4.28 x x Copy of Supplemental Indenture dated February 1, 1989, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.28 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated by reference herein] 4.29 x x Copy of Supplemental Indenture dated February 2, 1989, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.29 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated by reference herein] 4.30 x x Copy of Supplemental Indenture dated June 15, 1990, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.30 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated by reference herein] 4.31 x x Copy of Supplemental Indenture dated November 1, 1990, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.31 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated by reference herein] 4.32 x x Copy of Supplemental Indenture dated September 1, 1992, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.32 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein]
177
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 4.33 x x Copy of Supplemental Indenture dated September 2, 1992, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.33 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 4.34 x x Copy of Supplemental Indenture dated August 15, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.34 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 4.35 x x Copy of Supplemental Indenture dated August 16, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.35 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 4.36 x x Copy of Supplemental Indenture dated October 15, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.36 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 4.37 x x 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 No. 2-12322), May 1, 1969 (Amended 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
178
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- (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. 4.38 x x 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 [Filed as Exhibit 4B to Form 10-K Annual Report of KU for the year ended December 31, 1992, and incorporated by reference herein] 10.01 x x Copies of Agreement between Sponsoring Companies re: Project D of Atomic Energy Commission, dated May 12, 1952, Memorandums of Understanding between Sponsoring Companies re: Project D of Atomic Energy Commission, dated September 19, 1952 and October 28, 1952, and Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission, dated October 15, 1952. [Filed as Exhibit 13(y) to LG&E's Registration Statement 2-9975 and incorporated by reference herein] 10.02 x x Copy of Modification No. 1 dated July 23, 1953, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 4.03(b) to LG&E's Registration Statement 2-24920 and incorporated by reference herein] 10.03 x x Copy of Modification No. 2 dated March 15, 1964, to the Power
179
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02c to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.04 x x Copy of Modification No. 3 and No. 4 dated May 12, 1966 and January 7, 1967, respectively, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibits 4(a)(13) and 4(a)(14) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.05 x x Copy of Modification No. 5 dated August 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 13(c) to LG&E's Registration Statement 2-27316 and incorporated by reference herein] 10.06 x x Copies of (i) Inter-Company Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies (which Agreement includes as Exhibit A the Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Indiana-Kentucky Electric Corporation); (ii) First Supplementary Transmission Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iii) Inter-Company Bond Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iv) Inter-Company Bank Credit Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 5.02f to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.07 x x Copy of Modification No. 1 and No. 2 dated June 3, 1966 and January 7, 1967, respectively, to Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibits 4(a)(8) and 4(a)(10) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.08 x x Copies of Amendments to Agreements (iii) and (iv) referred to under 10.06 above as follows: (i) Amendment to Inter-Company Bond Agreement and (ii) Amendment to Inter-Company Bank Credit Agreement. [Filed as Exhibit 5.02h to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.09 x x Copy of Modification No. 1, dated August 20, 1958, to First
180
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02i to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.10 x x Copy of Modification No. 2, dated April 1, 1965, to the First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02j to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.11 x x Copy of Modification No. 3, dated January 20, 1967, to First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 4(a)(7) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.12 x x Copy of Modification No. 6 dated November 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 4(g) to LG&E's Registration Statement 2-28524 and incorporated by reference herein] 10.13 x x Copy of Modification No. 3 dated November 15, 1967, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 4.02m to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 10.14 x x Copy of Modification No. 7 dated November 5, 1975, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02n to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.15 x x Copy of Modification No. 4 dated November 5, 1975, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 5.02o to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.16 x x Copy of Modification No. 4 dated April 30, 1976, to First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02p to LG&E's Registration Statement 2-61607 and incorporated by reference herein]
181
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 10.17 x x Copy of Modification No. 8 dated June 23, 1977, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02q to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.18 x x Copy of Modification No. 9 dated July 1, 1978, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02r to LG&E's Registration Statement 2-63149 and incorporated by reference herein] 10.19 x x Copy of Modification No. 10 dated August 1, 1979, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 2 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.20 x x Copy of Modification No. 11 dated September 1, 1979, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 3 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.21 x x Copy of Modification No. 5 dated September 1, 1979, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 4 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.22 x x Copy of Modification No. 12 dated August 1, 1981, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.23 x x Copy of Modification No. 6 dated August 1, 1981, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.26 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.24 x x * Copy of LG&E Energy Corp. Deferred Stock Compensation
182
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- Plan effective January 1, 1992, covering non-employee directors of the Company and its subsidiaries. [Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated by reference herein] 10.25 x x * Copy of Supplemental Executive Retirement Plan for R. W. Hale, effective June 1, 1989. [Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 10.26 x x * Copy of Nonqualified Savings Plan covering officers of the Company, effective January 1, 1992. [Filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 10.27 x x Copy of Modification No. 13 dated September 1, 1989, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.28 x x Copy of Modification No. 14 dated January 15, 1992, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.29 x x Copy of Modification No. 7 dated January 15, 1992, to Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.44 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.30 x x Copy of Modification No. 15 dated February 15, 1993, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.45 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.31 x x Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2001) covering the transmission of natural gas.
183
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2000) covering the transmission of natural gas. Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2003) covering the transmission of natural gas. [Filed as Exhibit 10.47 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.32 x x x * Copy of LG&E Energy Corp. Stock Option Plan for Non-Employee Directors. [Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.33 x x Copy of Modification No. 8 dated January 19, 1994, to Intercompany Power Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.34 x x Copy of Amendment dated March 1 1995, to Firm No-Notice Transportation Agreements dated November 1, 1993 (2-Year, 5-Year and 8-Year), between Texas Gas Transmission Corporation and LG&E covering the transmission of natural gas. [Filed as Exhibit 10.44 of LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.35 x x Copy of Modification No. 9, dated August 17, 1995, to the Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 10.39 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.36 x x Copy of Agreement and Plan of Merger, dated February 10, 1995, between LG&E Natural Inc., formerly known as Hadson Corporation, Carousel Acquisition Corporation and the Company. [Filed as Exhibit 2 of Schedule 13D by the Company on
184
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- February 21, 1995, and incorporated by reference herein] 10.37 x x Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2003) covering the transportation of natural gas. Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2001) covering the transportation of natural gas. [Filed as Exhibit 10.45 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.38 x x Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2000) covering the transportation of natural gas [Filed as Exhibit 10.41 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.39 x x x * Copy of Amended and Restated Omnibus Long-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.40 x x x * Copy of Short-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.53 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.41 x x * Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1992. [Filed as Exhibit 10.55 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.42 x x * Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1995. [Filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.43 x x * Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1995. [Filed as Exhibit 10.57 to the Company's
185
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.44 x x Copy of Form of Master Gas Purchase Agreement, dated December 14, 1993, among Santa Fe, SFEOP and AGPC. [Filed as Exhibit 10.23 to LG&E Natural Inc.'s, formerly known as Hadson Corporation, Registration Statement on Form S-4, File No. 33-68224, and incorporated by reference herein] 10.45 x x Copy of Credit Agreement, dated as of December 18, 1995, among LG&E, as Borrower, the Banks named therein, PNC Bank, Kentucky, Inc. as Agent and Bank of Montreal as Co-Agent. [Filed as Exhibit 10.01 to the LG&E's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996, and incorporated by reference herein] 10.46 x x Copy of Firm Transportation Agreement, dated November 1, 1996, between LG&E and Tennessee Gas Pipeline Company for 30,000 MMBtu per day in Firm Transportation Service under Tennessee's Rate FT-A (expires October 31, 2001). [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.47 x x Copy of Amendment No. 1, dated as of November 5, 1996, to Credit Agreement dated as of December 18, 1995, by and among Louisville Gas and Electric Company, the Banks party thereto, and PNC Bank, Kentucky, Inc. as Agent and Bank of Montreal as Co-Agent. [Filed as Exhibit 10.59 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.48 x x Copy of Power Purchase and Sale Agreement, dated as of November 19, 1996, among the Company, LG&E Power Marketing Inc., and Oglethorpe Power Corporation. [Filed as Exhibit 10.66 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 10.49 x x Copy of Power Purchase and Sale Agreement, dated as of January 1, 1997, among LG&E Power Marketing Inc., LG&E Power Inc., and Oglethorpe Power Corporation. [Filed as Exhibit 10.67 to LG&E Energy's Annual Report on Form 10-K for
186
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- the year ended December 31, 1996, and incorporated by reference herein] [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 10.50 x Copy of U.S. $500,000,000 Credit Agreement, dated as of September 5, 1997, among LG&E Capital Corp., as Borrower, and the Banks named therein, as Lenders, and Chase Securities Inc., as Syndication Agent, Bank of Montreal, as Administrative Agent, and Morgan Guaranty Trust Company of New York, PNC Bank, Kentucky, Inc., The Bank of New York, The First National Bank of Chicago and Wachovia Bank, N.A., as Co-Agents. [Filed as Exhibit 10.01 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.51 x Copy of U.S. $ 200,000,000 Credit Agreement, dated as of September 5, 1997, among LG&E Capital Corp., as Borrower, and the Banks named therein, as Lenders, and Chase Securities Inc., as Syndication Agent, Bank of Montreal, as Administrative Agent, and Morgan Guaranty Trust Company of New York, PNC Bank, Kentucky, Inc., The Bank of New York, The First National Bank of Chicago and Wachovia Bank, N.A., as Co-Agents. [Filed as Exhibit 10.02 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.52 x Copy of Support Agreement, dated as of September 5, 1997, between LG&E Energy Corp. and LG&E Capital Corp. [Filed as Exhibit 10.03 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.53 x KU Energy Stock Option Agreement, dated as of May 20, 1997, by and between KU Energy and LG&E Energy. [Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 10.54 x Copy of LG&E Energy Stock Option Agreement, dated as of May 20, 1997, by and between KU Energy and LG&E Energy. [Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 10.55 x x x * Copy of Employment Agreement between LG&E Energy and Roger W. Hale dated May 20, 1997, effective May 4, 1998.
187
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- [Filed as Annex D to Exhibit 2.01 of LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.56 x x * Copy of LG&E Energy Corp. and Louisville Gas and Electric Company Non-Officer Senior Management Pension Restoration Plan, effective May 1, 1996. [Filed as Exhibit 10.69 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.57 x Copy of Indenture between LG&E Capital Corp. and the Bank of New York as Trustee dated as of January 15, 1998. [Filed as Exhibit 10.72 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.58 x Copy of First Supplemental Indenture between LG&E Capital Corp. and The Bank of New York as Trustee dated as of January 15, 1998. [Filed as Exhibit 10.73 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.59 x x x * Copy of Supplemental Executive Retirement Plan as amended through January 1, 1998, covering officers of LG&E Energy. [Filed as Exhibit 10.74 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.60 x x x * Copy of form of Change in Control Agreement for officers of LG&E Energy Corp. [Filed as Exhibit 10.75 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.61 x x Copy of Coal Supply Agreement between LG&E and Kindill Mining, Inc., dated July 1, 1997. [Filed as Exhibit 10.76 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.62 x x Copy of Coal Supply Agreement between LG&E and Warrior Coal Corp. dated January 1, 1997, and Amendments #1 and #2 dated May 1, 1997, and December 1, 1997, thereto. [Filed as Exhibit 10.79 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein]
188
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 10.63 x x Copies of Amendments dated September 23, 1997, to Firm No-Notice Transportation Agreements dated November 1, 1993, between Texas Gas Transmission Corporation and LG&E, as amended. [Filed as Exhibit 10.81 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.64 x x Copies of Amendments dated September 23, 1997, to Firm Transportation Agreements dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E, as amended. [Filed as Exhibit 10.82 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.65 x x Copy of Gas Transportation Agreement dated November 1, 1996, between Tennessee Gas Pipeline Company and LG&E and amendments dated February 4, 1997, thereto. [Filed as Exhibit 10.83 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 10.66 x x * KU's Amended and Restated Performance Share Plan [Filed as Exhibit 10.A to Form 10-Q Quarterly Report of KU for the quarter ended June 30, 1993, and incorporated by reference herein] 10.67 x x * KU's Annual Performance Incentive Plan [Filed as Exhibit 10B to Form 10-K Annual Report of KU for the year ended December 31, 1990, and incorporated by reference herein] 10.68 x x * Amendment No. 1 to KU's Performance Share Plan [Filed as Exhibit 10.03 to Form 10-K Annual Report for KU for the year ended December 31, 1996, and incorporated by reference herein] 10.69 x x * Amendment No. 1 to KU's Annual Performance Incentive Plan [Filed as Exhibit 10D to Form 10-K Annual Report of KU for the year ended December 31, 1991, and incorporated by reference herein] 10.70 x x * Amendment No. 2 to KU's Annual Performance Incentive Plan [Filed as Exhibit 10.H to Form 10-K Annual Report of KU for the year ended December 31, 1993, and incorporated by reference herein]
189
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 10.71 x x * Amendment No. 3 to KU's Annual Performance Incentive Plan [Filed as Exhibit 10.I to Form 10-K Annual Report of KU for the year ended December 31, 1993, and incorporated by reference herein] 10.72 x x * Amendment No. 4 to KU's Annual Performance Incentive Plan [Filed as Exhibit 10.07 to Form 10-K Annual Report for KU for the year ended December 31, 1996, and incorporated by reference herein] 10.73 x x * KU's Executive Optional Deferred Compensation Plan [Filed as Exhibit 10.08 to Form 10-K Annual Report for KU for the year ended December 31, 1996, and incorporated by reference herein] 10.74 x x * KU Energy's Long-Term Incentive Plan [Filed as Exhibit 10.27 to Form 10-K Annual Report of KU Energy for the year ended December 31, 1996, and incorporated by reference herein] 10.75 x * Employment Agreement by and between KU Energy Corporation and Michael R. Whitley [Filed as Exhibit (2)-5 to S-4 Registration Statement File No. 333-34219; Annex E to Form DEFM14A Joint Proxy Statement of LG&E Energy Corp. and KU Energy Corporation dated August 22, 1997, and incorporated by reference herein] 10.76 x x Copy of Amended and Restated Coal Supply Agreement dated April 1, 1998 between LG&E and Hopkins County Coal LLC. 10.77 x x Copy of Coal Supply Agreement dated January 1, 1999 between LG&E and Peabody COALSALES Company. 10.78 x x Copy of Coal Supply Agreement dated December 31, 1997 between KU and Leslie Resources, Inc. 10.79 x x Copy of Amendment No. One to Contract dated November 16, 1998 between KU, Leslie Resources, Inc., AEI Coal Sales Company, Inc. and AEI Holding Company, Inc. regarding Coal Supply Agreement dated December 31, 1997. 10.80 x x Copy of Assignment and Assumption Agreement dated November 16, 1998 between KU, Leslie Resources, Inc. and AEI Coal Sales Company, Inc. regarding Coal Supply Agreement dated December 31, 1997.
190
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 10.81 x x Copy of Coal Supply Agreement dated April 1, 1995 between KU and Consolidation Coal Company, Quarto Mining Company, McElroy Coal Company, Consol Pennsylvania Coal Company, Greenon Coal Company and Nineveh Coal Company. 10.82 x x Copy of Amendment to Coal Supply Agreement dated October 1, 1996 between KU and Consolidation Coal Company, Quarto Mining Company, McElroy Coal Company, Consol Pennsylvania Coal Company, Greenon Coal Company and Nineveh Coal Company regarding Coal Supply Agreement dated April 1, 1995. 10.83 x Copy of New Participation Agreement dated April 6, 1998 among Big Rivers Electric Corporation. LG&E Energy Marketing Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky Energy Corp. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.84 x Copy of Letter Agreement from WKE Station Two Inc. to Big Rivers Electric Corporation dated April 6, 1998 amending New Participation Agreement dated April 6, 1998 among Big Rivers Electric Corporation. LG&E Energy Marketing Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky Energy Corp. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.85 x Copy of Second Amendment dated June 15, 1998 to New Participation Agreement dated April 6, 1998 among Big Rivers Electric Corporation. LG&E Energy Marketing Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky Energy Corp. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.86 x Copy of Third Amendment dated July 15, 1998 to New Participation Agreement dated April 6, 1998 among Big Rivers Electric Corporation. LG&E Energy Marketing Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky Energy Corp. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.87 x Copy of Form of Lease and Operating Agreement Between Western Kentucky Energy Corp. and Big Rivers Electric Corporation
191
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- dated July 15, 1998. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.88 x Copy of Power Purchase Agreement Between Big Rivers Electric Corporation and LG&E Energy Marketing Inc. dated July 15, 1998. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission.] 10.89 x Copy of Agreement and Amendments to Agreements By and Among City of Henderson, Kentucky, City of Henderson Utility Commission, Big Rivers Electric Corporation, WKE Station Two Inc., LG&E Energy Marketing Inc., and Western Kentucky Energy Corp. dated July 15, 1998. 10.90 x x x * Copy of Amendment to LG&E Energy's Supplemental Executive Retirement Plan, effective September 2, 1998. 10.91 x x x * Copy of Amendment effective September 2, 1998 to Supplemental Executive Retirement Plan for R. W. Hale effective June 1, 1989. 10.92 x Copy of Terms Agreement among LG&E Capital Corp., LG&E Energy Corp., Morgan Stanley & Co. Incorporated, Chase Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. dated October 29, 1998. 12 x x Computation of Ratio of Earnings to Fixed Charges for LG&E and KU. 21 x x x Subsidiaries of the Registrant. 23.01 x Consent of Independent Public Accountants for LG&E Energy Corp. 23.02 x Consent of Independent Public Accountants for LG&E. 23.03 x Consent of Independent Public Accountants for KU. 24 x x x Power of Attorney. 27 x x x Financial Data Schedules for LG&E Energy Corp., LG&E and KU.
192
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - ------- ---------- ---------- ---------- ------------- 99.01 x x x Cautionary Statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. 99.02 x Description of Common Stock. 99.03 x Director and Officer Information.
(b) Executive Compensation Plans and Arrangements: Exhibits preceded by an asterisk ("*") above are management contracts, compensation plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (c) Reports on Form 8-K: On October 2, 1998, the Company filed a report on Form 8-K announcing that Michael R. Whitley, Vice Chairman of the Board of Directors, President and Chief Operating Officer of LG&E Energy Corp. announced his retirement, effective November 1, 1998. Mr. Whitley also retired from the positions of Vice Chairman of the Board of Directors and Chief Operating Officer of Louisville Gas and Electric Company and Kentucky Utilities Company, two public utility subsidiaries of the Company. On October 21, 1998, the Company filed a report on Form 8-K containing management's discussion and analysis and consolidated financial statements of the Company as of December 31, 1997. The Company filed this report in connection with the May 4, 1998, merger of KU Energy Corporation and LG&E Energy Corp. On December 21, 1998, the Company filed a report on Form 8-K announcing that LG&E Energy Corp. noted the recent decision of the Kentucky Supreme Court regarding the environmental cost recovery mechanism allowing its subsidiaries, Kentucky Utilities Company and Louisville Gas and Electric Company, to recover certain costs associated with environmental compliance and requiring certain refunds. On February 11, 1999, the Company filed a report on Form 8-K announcing that it had realigned its management structure to support its strategy of aggressively growing the company as the energy services industry moves toward deregulation. On March 23, 1999, the Company filed a report on Form 8-K announcing that on March 15, 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which LG&E Energy owns a 50% interest, completed the sale of substantially all the assets and major contracts of its 79 MW gas-fired cogeneration facility in Rensselaer, New York to Fulton Cogeneration Associates, L.P., an affiliate of The Coastal Corporation. (d) 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. 193 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. 194 Schedule II LG&E Energy Corp. and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1998 (Thousands of $)
(b) (a) Accumulated Other Accounts Discon- Deferred Property Receivable tinued Income Taxes and (Uncollectible Operations (NOL Carry- Investments Accounts) Reserve Forwards) ----------- -------------- ---------- ------------ Balance December 31, 1995 $ 8,785 $ 6,724 $ - $29,501 Additions: Charged to costs and expenses 11,019 4,840 - - Other additions 641 616 - - Deductions: Net charges of nature for which reserves were created - 5,059 - - Other deductions 1,479 - - 3,900 --------- --------- ---------- -------- Balance December 31, 1996 18,966 7,121 - 25,601 Additions: Charged to costs and expenses 11,875 5,356 - - Other additions 7,570 1,997 - - Deductions: Net charges of nature for which reserves were created 354 4,212 - - Other deductions - 75 - - --------- --------- ---------- -------- Balance December 31, 1997 38,057 10,187 - 25,601 Additions: Charged to costs and expenses 23,791 4,770 225,000 - Other additions 1,750 248 - - Deductions: Net charges of nature for which reserves were created 11,399 4,648 105,619 - Other deductions 108 25 - --------- --------- ---------- -------- Balance December 31, 1998 $52,091 $10,532 $119,381 $25,601 --------- --------- ---------- -------- --------- --------- ---------- --------
(a) Amounts presented are after tax. (b) Partially offsets a deferred tax debit included in net assets of discontinued operations. The debit represents net operating loss carryforwards available from a previous acquisition. 195 Schedule II Louisville Gas and Electric Company Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1998 (Thousands of $)
Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- -------------- Balance December 31, 1995 $ 63 $ 1,360 Additions: Charged to costs and expenses - 2,600 Deductions: Net charges of nature for which reserves were created - 2,490 -------- -------- Balance December 31, 1996 63 1,470 Additions: Charged to costs and expenses - 2,300 Deductions: Net charges of nature for which reserves were created - 2,475 -------- -------- Balance December 31, 1997 63 1,295 Additions: Charged to costs and expenses - 2,300 Deductions: Net charges of nature for which reserves were created - 2,196 -------- -------- Balance December 31, 1998 $ 63 $ 1,399 -------- -------- -------- --------
196 Schedule II Kentucky Utilities Company Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1998 (Thousands of $)
Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- -------------- Balance December 31, 1995 $ 178 $ 455 Additions: Charged to costs and expenses 85 1,900 Deductions: Net charges of nature for which reserves were created - 1,835 ------- ------- Balance December 31, 1996 263 520 Additions: Charged to costs and expenses 82 1,374 Deductions: Net charges of nature for which reserves were created - 1,374 ------- ------- Balance December 31, 1997 345 520 Additions: Charged to costs and expenses 231 1,308 Deductions: Net charges of nature for which reserves were created - 1,308 ------- ------- Balance December 31, 1998 $ 576 $ 520 ------- ------- ------- -------
197 SIGNATURES - LG&E ENERGY CORP. (First of Two Pages) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LG&E ENERGY CORP. Registrant March 31, 1999 /s/ R. Foster Duncan - -------------- ------------------------------ (Date) R. Foster Duncan Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Roger W. Hale Chairman of the Board, and Chief Executive Officer (Principal Executive Officer); R. Foster Duncan Executive Vice President and Chief Financial Officer (Principal Financial Officer); Michael D. Robinson Vice President and Controller (Principal Accounting Officer); Mira S. Ball Director; William C. Ballard, Jr. Director; Owsley Brown, II Director; Carol M. Gatton Director; Jeffery T. Grade Director; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
198 SIGNATURES - LG&E ENERGY CORP. (Second of Two Pages) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- T. Ballard Morton, Jr. Director; Frank V. Ramsey, Jr. Director; William L. Rouse, Jr. Director; Charles L. Shearer, Ph.D. Director; and Lee T. Todd, Jr., Ph.D. Director. By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
199 SIGNATURES - LOUISVILLE GAS AND ELECTRIC COMPANY (First of Two Pages) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LOUISVILLE GAS AND ELECTRIC COMPANY Registrant March 31, 1999 /s/ R. Foster Duncan - -------------- -------------------- (Date) R. Foster Duncan Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Roger W. Hale Chairman of the Board and Chief Executive Officer (Principal Executive Officer); R. Foster Duncan Executive Vice President and Chief Financial Officer (Principal Financial Officer); Michael D. Robinson Vice President and Controller (Principal Accounting Officer); Mira S. Ball Director; William C. Ballard, Jr. Director; Owsley Brown, II Director; Gene P. Gardner Director; Carol M. Gatton Director; Jeffery T. Grade Director; J. David Grissom Director; David B. Lewis Director; By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
200 SIGNATURES - LOUISVILLE GAS AND ELECTRIC COMPANY (Second of Two Pages) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Anne H. McNamara Director; T. Ballard Morton, Jr. Director; Frank V. Ramsey, Jr. Director; William L. Rouse, Jr. Director; Charles L. Shearer, Ph.D. Director; Dr. Donald C. Swain Director; and Lee T. Todd, Jr., Ph.D. Director. By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
201 SIGNATURES - KENTUCKY UTILITIES COMPANY (First of Two Pages) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KENTUCKY UTILITIES COMPANY Registrant March 31, 1999 /s/ R. Foster Duncan - -------------- -------------------- (Date) R. Foster Duncan Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Roger W. Hale Chairman of the Board and Chief Executive Officer (Principal Executive Officer); R. Foster Duncan Executive Vice President and Chief Financial Officer (Principal Financial Officer); Michael D. Robinson Vice President and Controller (Principal Accounting Officer); Mira S. Ball Director; William C. Ballard, Jr. Director; Owsley Brown, II Director; Carol M. Gatton Director; Jeffery T. Grade Director; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
202 SIGNATURES - KENTUCKY UTILITIES COMPANY (Second of Two Pages) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- T. Ballard Morton, Jr. Director; Frank V. Ramsey, Jr. Director; William L. Rouse, Jr. Director; Charles L. Shearer, Ph.D. Director; and Lee T. Todd, Jr., Ph.D. Director. By /s/ R. Foster Duncan March 31, 1999 -------------------- R. Foster Duncan (Attorney-In-Fact)
203 EX-3.04 2 EXHIBIT 3.04 LOUISVILLE GAS AND ELECTRIC COMPANY By-Laws Adopted November 7, 1956 As Amended Through May 4, 1998 Article I. Meetings of Stockholders Section 1. The Annual Meeting of the stockholders of the Company shall be held at a location in or out of Kentucky at a time and date to be fixed by the Board of Directors each year. Notice of the annual meeting shall be mailed to each stockholder entitled to notice at least ten (10) days before the Annual Meeting. Section 2. Except as otherwise mandated by Kentucky law and except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, special meetings of stockholders may be called only by the President of the Company or by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. For purposes of these By-Laws, the phrase "Company's Amended Articles of Incorporation" shall mean the Amended Articles of Incorporation of Louisville Gas and Electric Company as in effect on February 1, 1987, and as thereafter amended from time to time. Section 3. A stockholder may vote in person or by proxy, filed with the Secretary of the Company before or immediately upon the convening of the meeting. Section 4. Any action required or permitted to be taken by the stockholders of the Company at a meeting of such holders may be taken without such a meeting only if a consent in writing setting forth the action so taken shall be signed by all of the stockholders entitled to vote with respect to the subject matter thereof. Section 5. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly be requested to be brought before the meeting by a stockholder. For business to be properly requested to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Company, not less than 90 days prior to the meeting; provided, however, that in the event that the date of the meeting is not publicly announced by the Company by mail, press release or otherwise more than 100 days prior to the meeting, notice by the stockholder to be timely must be delivered to the Secretary of the Company not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was communicated to stockholders. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Company's books, of the stockholder proposing such business, (c) the class and number of shares of the Company which are beneficially owned by the stockholder, and (d) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 5. The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 5, and if he should so determine, he shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. Article II. Board of Directors Section 1. (a) The number of directors of the Company shall be fixed from time to time by the Board of Directors, but shall be no fewer than nine (9) and no more than twenty (20). The Board of Directors may elect one of its members as Chairman of the Board. Regular meetings of the Board of Directors shall be held at such time and place as may be fixed by the Board of Directors. Except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, the directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, as determined by the Board of Directors, one class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1988, another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1989, and another class to be originally elected for a term expiring at the annual meeting of stockholders to be held in 1990, with each member of each class to hold office until his successor is elected and qualified. At each annual meeting of the stockholders of the Company and except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. 2 (b) Advance notice of stockholder nominations for the election of directors shall be given in the manner provided in Section 2 of Article IV of these By-Laws. (c) Except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances: (i) newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors; (ii) any director elected in accordance with the preceding clause (i) shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified; and (iii) no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (d) Except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, any director may be removed from office, with or without cause, only by the affirmative vote of the holders of at least 80% of the combined voting power of the then outstanding shares of the Company's stock entitled to vote generally (as defined in Article Eighth of the Company's Amended Articles of Incorporation), voting together as a single class. Notwithstanding the foregoing provisions of this Paragraph (d), if at any time any stockholders of the Company have cumulative voting rights with respect to the election of directors and less than the entire Board of Directors is to be removed, no director may be removed from office if the votes cast against his removal would be sufficient to elect him as a director if then cumulatively voted at an election of the class of directors of which he is a part. Section 2. Regular Meetings shall be held at such time and place as may be fixed by the Board of Directors. Section 3. Special Meetings of the Board of Directors shall be held at the call of the Chairman or of the President, or, in their absence, of a Vice President, or at the request in writing of not less than three (3) members of the Board. Section 4. Regular and Special Meetings may be held outside of the State of Kentucky. Section 5. Notices of Regular and Special Meetings shall be sent to each director at least one (1) day prior to the meeting. Section 6. The business and affairs of the Company shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or by the Company's Amended Articles of Incorporation. Unless otherwise provided by law, at each meeting of the Board of Directors, the presence of a majority of the total number of directors 3 shall constitute a quorum for the transaction of business. Except as provided in Section l(c) of this Article II, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In case at any meeting of the Board of Directors a quorum shall not be present, the members of the Board of Directors present may by majority vote adjourn the meeting from time to time until a quorum shall attend. Section 7. Directors may receive such fees or compensation for their services as may be authorized by resolution of the Board of Directors. In addition, expenses of attendance, if any, may be allowed for attendance at each regular or special meeting. Section 8. The Board of Directors, by resolution adopted by a majority of the full Board of Directors, may designate from among its members an executive committee and one or more other committees each of which, to the extent provided in such resolution, shall have and exercise all the authority of the Board of Directors, but no such committee shall have the authority to take action that under Kentucky law can only be taken by a board of directors. Article III. Officers Section 1. The officers of the Company shall be a Chief Executive Officer, President, Chief Financial Officer, one or more Vice Presidents, Secretary, Treasurer, Controller and such other officers (including, if so directed by a resolution of the Board of Directors, Chairman of the Board) as the Board may from time to time elect or appoint. Any two of the offices may be combined in one person, but no officer shall execute, acknowledge, or verify any instrument in more than one capacity. Officers are to be elected by the Board of Directors of the Company at the first meeting of the Board following the annual meeting of stockholders and, unless otherwise specified by the Board of Directors, shall be elected to hold office for one year or until their successors are elected and qualified. Any vacancy shall be filled by the Board of Directors, provided that the Chief Executive Officer may fill such a vacancy until the Board of Directors shall elect a successor. Except as provided below, officers shall perform those duties usually incident to the office or as otherwise required by the Board of Directors, the Chief Executive Officer, or the officer to whom they report. An officer may be removed with or without cause and at any time by the Board of Directors or by the Chief Executive Officer. Chief Executive Officer Section 2. The Chief Executive Officer of the Company shall have full charge of all of the affairs of the Company, shall preside at all meetings of the stockholders and, in the absence of the Chairman of the Board, at meetings of the Board of Directors. President Section 3. The President shall exercise the functions of the Chief Executive Officer during the absence or disability of the Chief Executive Officer. 4 Chief Financial Officer Section 4. The Chief Financial Officer of the Company shall have full charge of all of the financial affairs of the Company, including maintaining accurate books and records, meeting all reporting requirements and controlling Company funds. Vice Presidents Section 5. The Vice President or Vice Presidents may be designated as Vice President, Senior Vice President or Executive Vice President, as the Board of Directors or Chief Executive Officer may determine. Secretary Section 6. The Secretary shall be present at and record the proceedings of all meetings of the Board of Directors and of the stockholders, give notices of meetings of Directors and stockholders, have custody of the seal of the Company and affix it to any instrument requiring the same, and shall have the power to sign certificates for shares of stock of the Company. Treasurer Section 7. The Treasurer shall have charge of all receipts and disbursements of the Company and be custodian of the Company's funds. Controller Section 8. The Controller shall have charge of the accounting records of the Company. Chairman of the Board Section 9. In the event the Board of Directors elects a Chairman of the Board and designates by resolution that the Chairman of the Board shall be an officer of the corporation, the Chairman of the Board shall preside at all meetings of the Board of Directors and serve the corporation in an advisory capacity. Article IV. Capital Stock Certificates and Director Nominations Section 1. The Board of Directors shall approve all stock certificates as to form. The certificates for the various classes of stock, issued by the Company, shall be printed or engraved with the facsimile signatures of the President and Secretary and a facsimile seal of the Company. The Board of Directors shall appoint transfer agents to issue and transfer certificates of stock, and registrars to register said certificates. 5 Section 2. Except as otherwise provided in or fixed by or pursuant to the provisions of Article Fourth of the Company's Amended Articles of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Company's Common Stock as to dividends or upon liquidation to elect directors under specified circumstances, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as director or directors at a stockholders' meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company not later than 90 days in advance of such meeting; provided, however, that in the event the date of the meeting is not publicly announced by the Company by mail, press release or otherwise more than 100 days prior to the meeting, notice by the stockholder to be timely must be delivered not later than the close of business on the tenth day following the date on which notice of such meeting was first communicated to stockholders. Each such notice shall set forth (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (e) the consent of each nominee to serve as a director of the Company if so elected. The Chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. Article V. Lost Stock Certificates The Board of Directors may, in its discretion, direct that a new certificate or certificates of stock be issued in place of any certificate or certificates of stock theretofore issued by the Company, alleged to have been stolen, lost or destroyed, and the Board of Directors when authorizing the issuance of such new certificate or certificates may, in its discretion, and as a condition precedent thereto, require the owner of such stolen, lost or destroyed certificate or certificates or the legal representatives of such owner, to give to the Company, its transfer agent or agents, its registrar or registrars, as may be authorized or required to sign and countersign such new certificate or certificates, a corporate surety bond in such sum as it may direct as indemnity against any claim or claims that may be made against the Company, its transfer agent or agents, its registrar or registrars, for or in respect to the shares of stock represented by the certificate or certificates alleged to have been stolen, lost or destroyed. 6 Article VI. Dividends on Preferred Stock Dividends upon the 5% Cumulative Preferred Stock, $25 Par value, if declared, shall be payable on January 15, April 15, July 15 and October 15 of each year. If the date herein designated for the payment of any dividend shall, in any year, fall upon a legal holiday, then the dividend payable on such date shall be paid on the next day not a legal holiday. Dividends in respect of each share of $8.90 Cumulative Preferred Stock (without par value) of the Company shall be payable on October 16, 1978, when and as declared by the Board of Directors of the Company, to holders of record on September 29, 1978, and shall accrue from the date of original issuance of said series. Thereafter, such dividends shall be payable on January 15, April 15, July 15, and October 15 in each year (or the next business day thereafter in each case), when and as declared by the Board of Directors of the Company, for the quarter-yearly period ending on the last business day of the preceding month. Dividends in respect of each share of Preferred Stock, Auction Series A (without par value), of the Company shall be payable when and as declared by the Board of Directors of the Company, on the dates and in the manner set forth in the Amendment to the Articles of Incorporation of the Company setting forth the terms of such series. Dividends in respect of each share of $5.875 Cumulative Preferred Stock, of the Company shall be payable when and as declared by the Board of Directors of the Company, on the dates and in the manner set forth in the Amendment to the Articles of Incorporation of the Company setting forth the terms of such series. Article VII. Finance Section 1. The Board of Directors shall designate the bank or banks to be used as depositories of the funds of the Company and shall designate the officers and employees of the Company who may sign and countersign checks drawn against the various accounts of the Company. The Board of Directors may authorize the use of facsimile signatures on checks drawn against certain bank accounts of the Company. Section 2. Notes shall be signed by the President and either a Vice President or the Treasurer. In the absence of the President, notes shall be signed by two Vice Presidents, or a Vice President and the Treasurer. 7 Article VIII. Seal The seal of this Company shall be in the form of a circular disk, bearing the following information: ( Louisville Gas and Electric Company ) ( Incorporated Under the Laws of ) ( Kentucky ) ( Seal ) ( 1913 ) Article IX. Amendments Subject to the provisions of the Company's Amended Articles of Incorporation, these By-Laws may be amended or repealed at any regular meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by the holders of at least a majority of the voting power of the shares represented and entitled to vote thereon at such meeting at which a quorum is present; provided that in the notice of such special meeting notice of such purpose shall be given. Subject to the laws of the State of Kentucky, the Company's Amended Articles of Incorporation and these By-Laws, the Board of Directors may by majority vote of those present at any meeting at which a quorum is present amend these By-Laws, or adopt such other By-Laws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Company. Article X. Indemnification Section 1. Right to Indemnification. Each person who was or is a director of the Company and who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Company or is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnified Director"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Company to the fullest extent permitted by the Kentucky Business Corporation Act, as the same exists or may hereafter be amended, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably 8 incurred or suffered by such Indemnified Director in connection therewith and such indemnification shall continue as to an Indemnified Director who has ceased to be a director or officer and shall inure to the benefit of the Indemnified Director's heirs, executors and administrators. Each person who was or is an officer of the Company and not a director of the Company and who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any proceeding, by reason of the fact that he or she is or was an officer of the Company or is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnified Officer"), whether the basis of such proceeding is alleged action in an official capacity as an officer or in any other capacity while serving as an officer, shall be indemnified and held harmless by the Company against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such Indemnified Officer to the same extent and under the same conditions that the Company must indemnify an Indemnified Director pursuant to the immediately preceding sentence and to such further extent as is not contrary to public policy and such indemnification shall continue as to an Indemnified Officer who has ceased to be an officer and shall inure to the benefit of the Indemnified Officer's heirs, executors and administrators. Notwithstanding the foregoing and except as provided in Section 2 of this Article X with respect to proceedings to enforce rights to indemnification, the Company shall indemnify any Indemnified Director or Indemnified Officer in connection with a proceeding (or part thereof) initiated by such Indemnified Director or Indemnified Officer only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. As hereinafter used in this Article X, the term "indemnitee" means any Indemnified Director or Indemnified Officer. Any person who is or was a director or officer of a subsidiary of the Company shall be deemed to be serving in such capacity at the request of the Company for purposes of this Article X. The right to indemnification conferred in this Article shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Kentucky Business Corporation Act requires, an advancement of expenses incurred by an indemnitee who at the time of receiving such advance is a director of the Company shall be made only upon: (i) delivery to the Company of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter, a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Article or otherwise; (ii) delivery to the Company of a written affirmation of the indemnitee's good faith belief that he has met the standard of conduct that makes indemnification by the Company permissible under the Kentucky Business Corporation Act; and (iii) a determination that the facts then known to those making the determination would not preclude indemnification under the Kentucky Business Corporation Act. The right to indemnification and advancement of expenses incurred in this Section 1 shall be a contract right. Section 2. Right of Indemnitee to Bring Suit. If a claim under Section 1 of this Article X is not paid in full by the Company within sixty days after a written claim has been received by the Company (except in the case of a claim for an advancement of expenses, in which case the 9 applicable period shall be twenty days), the indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part to any such suit or in a suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee also shall be entitled to be paid the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (other than a suit to enforce a right to an advancement of expenses brought by an indemnitee who will not be a director of the Company at the time such advance is made) it shall be a defense that, and in (ii) any suit by the Company to recover an advancement of expenses pursuant to the terms of an undertaking the Company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the standard of conduct that makes it permissible hereunder or under the Kentucky Business Corporation Act (the "applicable standard of conduct") for the Company to indemnify the indemnitee for the amount claimed. Neither the failure of the Company (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that the indemnitee has not met the applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified or to such advancement of expenses under this Article X or otherwise shall be on the Company. Section 3. Non-Exclusivity of Rights. The rights to indemnification and to the advancement of expenses conferred in this Article X shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Company's Articles of Incorporation, these By-Laws, any agreement, any vote of stockholders or disinterested directors or otherwise. Section 4. Insurance. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Kentucky Business Corporation Act. Section 5. Indemnification of Employees and Agents. The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Company and to any person serving at the request of the Company as an agent or employee of another corporation or of a partnership, joint venture, trust or other enterprise to the fullest extent of the provisions of this Article X with respect to the indemnification and advancement of expenses of directors and officers of the Company. 10 Section 6. Repeal or Modification. Any repeal or modification of any provision of this Article X shall not adversely affect any rights to indemnification and to advancement of expenses that any person may have at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification. Section 7. Severability. In case any one or more of the provisions of this Article X, or any application thereof, shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Article X, and any other application thereof, shall not in any way be affected or impaired thereby. 11 EX-3.06 3 EXHIBIT 3.06 BY-LAWS OF KENTUCKY UTILITIES COMPANY Dated April 28, 1998 BY-LAWS OF KENTUCKY UTILITIES COMPANY ARTICLE I STOCK TRANSFERS Section 1. Each holder of fully paid stock shall be entitled to a certificate or certificates of stock stating the number and the class of shares owned by such holder, provided that, the Board of Directors may, by resolution, authorize the issue of some or all of the shares of any or all classes or series of stock without certificates. All certificates of stock shall, at the time of their issuance, be signed by the Chairman of the Board, the President or a Vice-President and by the Secretary or Assistant Secretary, and may be authenticated and registered by a duly appointed registrar. If the stock certificate is authenticated by a registrar, the signatures of the corporate officers may be facsimiles. In case any officer designated for the purpose who has signed or whose facsimile signature has been used on any stock certificate shall, from any cause, cease to be such officer before the certificate has been delivered by the Company, the certificate may nevertheless be adopted by the Company and be issued and delivered as though the person had not ceased to be such officer. Section 2. Shares of stock shall be transferable only on the books of the Company and upon proper endorsement and surrender of the outstanding certificates representing the same. If any outstanding certificate of stock shall be lost, destroyed or stolen, the officers of the Company shall have authority to cause a new certificate to be issued to replace such certificate upon the receipt by the Company of satisfactory evidence that such certificate has been lost, destroyed or stolen and of a bond of indemnity deemed sufficient by the officers to protect the Company and any registrar and any transfer agent of the Company against loss which may be sustained by reason of issuing such new certificate to replace the certificate reported lost, destroyed or stolen; and any transfer agent of the Company shall be authorized to issue and deliver such new certificate and any registrar of the Company is authorized to register such new certificate, upon written directions signed by the Chairman of the Board, the President or a Vice-President and by the Treasurer or the Secretary of the Company. Section 3. All certificates representing each class of stock shall be numbered and a record of each certificate shall be kept showing the name of the person to whom the certificate was issued with the number and the class of shares and the date thereof. All certificates exchanged or returned to the Company shall be cancelled and an appropriate record made. Section 4. The Board of Directors may fix a date not exceeding seventy days preceding the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date of allotment of rights, or, subject to contract rights with respect thereto, the date when any change or conversion or exchange of shares shall be made or go into effect, as a record date for the determination of the shareholders entitled to notice of and to vote at any such meeting, or entitled to receive payment of any such dividend, or allotment of rights, or to exercise the rights with respect to any such change, conversion or exchange of shares, and in such case only shareholders of record on the date so fixed shall be entitled to notice of and to vote at such meeting, or to receive payment of such dividend or allotment of rights or to exercise such rights, as the case may be, notwithstanding any transfer of shares on the books of the Company after the record date fixed as aforesaid. The Board of Directors may close the books of the Company against transfer of shares during the whole or any part of such period. When a determination of shareholders entitled to notice of and to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof except as otherwise provided by statute. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. An Annual Meeting of Stockholders of the Company shall be held at such date and time as shall be designated from time to time by the Board of Directors. Each such Annual Meeting shall be held at the principal office of the Company in Kentucky or at such other place as the Board of Directors may designate from time to time. Section 2. Special meetings of the stockholders may be called by the Board of Directors or by the holders of not less than 51% of all the votes entitled to be cast on each issue proposed to be considered at the special meeting, or in such other manner as may be provided by statute. Business transacted at special meetings shall be confined to the purposes stated in the notice of meeting. Section 3. Notice of the time and place of each annual or special meeting of stockholders shall be sent by mail to the recorded address of each stockholder entitled to vote not less than ten or more than sixty days before the date of the meeting, except in cases where other special method of notice may be required by statute, in which case the statutory -3- method shall be followed. The notice of special meeting shall state the object of the meeting. Notice of any meeting of the stockholders may be waived by any stockholder. Section 4. At an Annual Meeting of the Stockholders, only such business shall be conducted as shall have been properly brought before the meeting in accordance with the procedures set forth in these By-laws. To be properly brought before the Annual Meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise be a proper matter for consideration and otherwise be properly requested to be brought before the meeting by a stockholder as hereinafter provided. For business to be properly requested to be brought before an Annual Meeting by a stockholder, a stockholder of a class of shares of the Company entitled to vote upon the matter requested to be brought before the meeting (or his designated proxy as provided below) must have given timely and proper notice thereof to the Secretary. To be timely, a stockholder's notice must be given by personal delivery or mailed by United States mail, postage prepaid, and received by the Secretary not fewer than sixty calendar days prior to the meeting; provided, however, that in the event that the date of the meeting is not publicly announced by mail, press release or otherwise or disclosed in a public report, information statement, or other filing made with the Securities and Exchange Commission, in either case, at least seventy calendar days prior to the meeting, notice by the stockholder to be timely must be received by the Secretary, as provided above, not later than the close of business on the tenth day following the day on which such notice of the date of the meeting or such public disclosure or filing was made. To be proper, a stockholder's notice to the Secretary must be in writing and must set forth as to each matter the stockholder proposes to bring before the Annual Meeting (a) a description in reasonable detail of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (b) the name and address, as they appear on the Company books, of the stockholder proposing such business or granting a proxy to the proponent or an intermediary, (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (d) the name and address of the proponent, if the holder of a proxy from a qualified stockholder of record, and the names and addresses of any intermediate proxies, (e) the class and number of shares of the Company which are beneficially owned by the stockholder, and (f) any material interest of the stockholder or the proponent in such business. The chairman of an Annual Meeting shall determine whether business was properly brought before the meeting, which determination absent manifest error will be conclusive for all purposes. Section 5. The Chairman of the Board, if present, and in his absence the President, and the Secretary of the Company, shall act as Chairman and Secretary, respectively, at each stockholders meeting, unless otherwise provided by the Board of Directors prior to the meeting. Unless otherwise determined by the Board of Directors prior to the meeting, the Chairman of the stockholders' meeting shall determine the order of -4- business and shall have the authority in his discretion to regulate the conduct of any such meeting, including, without limitation, by imposing restrictions on the persons (other than stockholders of the Company or their duly appointed proxies) who may attend any such stockholders' meeting, by determining whether any stockholder or his proxy may be excluded from any stockholders' meeting based upon any determination by the Chairman, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereat, and by regulating the circumstances in which any person may make a statement or ask questions at any stockholders' meeting. Section 6. The Company shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, except as expressly provided by law. Section 7. The Board of Directors may postpone and reschedule any previously scheduled annual or special meeting of stockholders and may adjourn any convened meeting of stockholders to another date and time as specified by the chairman of the meeting. ARTICLE III BOARD OF DIRECTORS Section 1. The Board of Directors shall consist of no more than fifteen and no less than nine members as determined from time to time by resolution of the Board of Directors. Subject to the special rights of the holders of shares of the Preferred Stock and the holders of shares of the Preference Stock to elect Directors as specified in the Articles of Incorporation, the Directors shall be divided into three groups, with each group containing one-third of the total, as near as may be, to be elected and to serve staggered terms as provided in the Articles of Incorporation of the Company. Except as otherwise expressly provided by the Articles of Incorporation, the Board of Directors may accept resignations of individual Directors and may fill, until the first annual election thereafter and until the necessary election shall have taken place, vacancies occurring at any time in the membership of the Board by death, resignation or otherwise. Written notice of such resignation shall be made as provided by law. Section 2. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if the stockholder has given timely and proper notice thereof to -5- the Secretary. To be timely, a stockholder's notice must be given by personal delivery or mailed by United States mail, postage prepaid, and received by the Secretary not fewer than sixty calendar days or more than ninety calendar days prior to the meeting; provided, however, that in the event that the date of the meeting is not publicly announced by mail, press release or otherwise or disclosed in a public report, information statement or other filing made with the Securities and Exchange Commission, in either case, at least seventy calendar days prior to the meeting, notice by the stockholder to be timely must be so received by the Secretary, as provided above, not later than the close of business on the tenth day following the day on which such notice of the date of the meeting or such public disclosure or filing was made. To be proper, a stockholder's notice of nomination to the Secretary must be in writing and must set forth as to each nominee: (a) the name and address, as they appear on the Company books, of the stockholder who intends to make the nomination or granting a proxy to the proponent or an intermediary; (b) the name and address of the person or persons to be nominated; (c) a representation that the stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (d) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (e) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the Board of Directors, provided that (i) such information does not in any way violate any applicable Securities and Exchange Commission regulation, including regulations concerning public availability of information, and (ii) any information withheld on such basis shall be provided by separate notice at such time as would not be in violation of any applicable Securities and Exchange Commission regulation, such notice to be a supplement to the notice otherwise required herein; (f) the class and number of shares of the Company which are beneficially owned by the stockholder; and (g) the signed consent of each nominee to serve as a director of the Company if so elected. Section 3. If the Chairman of the meeting for the election of Directors determines that a nomination of any candidate for election as a director at such meeting was not made in accordance with the applicable provisions of these By-laws, such nomination shall be void. Section 4. The Board of Directors may adopt such special rules and regulations for the conduct of their meetings and the management of the affairs of the Company as they may determine to be appropriate, not inconsistent with law or these By-laws. Section 5. A regular meeting of the Board of Directors shall be held as soon as practicable after the annual meeting of stockholders in each year. In addition, regular -6- quarterly meetings of the Board may be held at the general offices of the Company in Kentucky, or at such other place as shall be specified in the notice of such meeting on the last Monday of January, July and October in each year. Written notice of every regular meeting of the Board, stating the time of day at which such meeting will be held, shall be given to each Director not less than two days prior to the date of the meeting. Such notice may be given personally in writing, or by telegraph or other written means of electronic communication, or by depositing the same, properly addressed, in the mail. Section 6. Special meetings of the Board may be called at any time by the Chairman of the Board, or the President, or by a Vice-President when acting as President, or by any two Directors. Notice of such meeting, stating the place, day and hour of the meeting shall be given to each Director not less than one day prior to the date of the meeting. Such notice may be given personally in writing, or by telegraph or other written means of electronic communication, or by depositing the same, properly addressed, in the mail. Section 7. Notice of any meeting of the Board may be waived by any Director. Section 8. A majority of the Board of Directors shall constitute a quorum for the transaction of business at any meeting of the board, but a less number may adjourn the meeting to some other day or sine die. The Board of Directors shall keep minutes of their proceedings at their meetings. The members of the Board may be paid such fees or compensations for their services as Directors as the Board, from time to time, by resolution, may determine. ARTICLE IV COMMITTEES Section 1. The Board of Directors may, by resolution passed by a majority of the whole Board, appoint an Executive Committee of not less than three members of the Board, including the Chairman of the Board, if there be one, and the President of the Company. The Executive Committee may make its own rules of procedure and elect its Chairman, and shall meet where and as provided by such rules, or by resolution of the Board of Directors. A majority of the members of the Committee shall constitute a quorum for the transaction of business. During the intervals between the meetings of the Board of Directors, the Executive Committee shall have all the powers of the Board in the management of the business and affairs of the Company except as limited by statute, including power to authorize the seal of the Company to be affixed to all papers which require it, and, by majority vote of all its members, may exercise any and all such powers in such manner as such Committee shall deem best for the interests of the Company, in all cases in which specific directions shall not have been given by the Board of Directors. The Executive -7- Committee shall keep regular minutes of its proceedings and report the same to the Board at meetings thereof. Section 2. The Board of Directors may appoint other committees, standing or special, from time to time from among their own number, or otherwise, and confer powers on such committees, and revoke such powers and terminate the existence of such committees at its pleasure. Section 3. Meetings of any committee may be called in such manner and may be held at such times and places as such committee may by resolution determine, provided that a meeting of any committee may be called at any time by the Chairman of the Board or by the President. Notice of such meeting, stating the place, day and hour of the meeting shall be given to each Director not less than one day prior to the meeting. Such notice may be given personally in writing, or by telegraph or other written means of electronic communication, or by depositing the same, properly addressed, in the mail. Members of all committees may be paid such fees for attendance at meetings as the Board of Directors may determine. ARTICLE V OFFICERS Section 1. There shall be elected by the Board of Directors in each year, and if practicable at its first meeting after the annual election of Directors, the following principal officers, namely: a President, one or more Vice-Presidents (any one or more of whom may be designated Executive Vice-President or Senior Vice-President), a Secretary, a Treasurer, and a Controller; and the Board may provide for and elect a Chairman of the Board and such other officers and prescribe such duties for them as in its judgment may, from time to time, be required to conduct the business of the Company. If the Board shall elect a Chairman of the Board, the Board may, but need not, designate the Chairman of the Board as the chief executive officer of the Company. In absence of the election of a Chairman of the Board or any such designation, the President shall be the chief executive officer of the Company. All references in the By-laws of the Company to a Vice-President or Vice-Presidents shall include any Executive Vice-President and any Senior Vice-President. All officers, unless sooner removed, shall hold their respective offices until the first meeting of the Board of Directors after the next succeeding annual election of Directors, and until their successors, willing to serve, shall have been elected, but any officer may be removed from office at the pleasure of the Board. Section 2. The chief executive officer of the Company (whether the Chairman of the Board or the President) shall have responsibility for the general management and direction, subject to the approval of the Board of Directors and of the Executive Committee, -8- of the business of the Company, including the power to appoint and to remove and discharge any and all agents and employees of the Company not elected or appointed directly by the Board of Directors. He shall have such other power and duties as usually devolve upon the chief executive officer of the corporation and such further powers and duties as may from time to time be prescribed by the Board of Directors. Section 3. The Chairman of the Board, if there be one elected and when present, shall preside at all meetings of the Board of Directors, and at all meetings of the stockholders of the Company at which the stockholders shall not choose some other person to preside. He shall be a member of the Executive Committee, if there be one, and may attend any meeting of any committee of the Board whether or not he is a member of such committee. The Chairman of the Board, when requested so to do, shall give the President and the Board of Directors of the Company the benefit of his advice and experience with respect to the Company's affairs and, when not designated as the chief executive officer, shall perform such other duties as may be delegated to him by the Board of Directors. Section 4. The President, when not designated as the chief executive officer or when not acting as the chief executive officer, shall have such other powers and duties as usually devolve upon the President of a corporation and such further powers and duties as may from time to time be prescribed by the Board of Directors or as may be delegated to him by the Chairman of the Board. The President shall be a member of the Executive Committee, if there be one, and may attend any meeting of any committee of the Board whether or not he is a member of such committee. In the absence or inability of the Chairman of the Board to act, if there be one elected, the powers and duties of the Chairman of the Board (including those as chief executive officer if he shall have been designated as such) shall temporarily devolve upon the President. The President shall, unless a Chairman of the Board shall have been elected and present, preside at all meetings of the Board of Directors and at all meetings of the stockholders at which the stockholders shall not choose some other person to preside. He may, with the approval of the Board of Directors, appoint, to aid him in his duties, an assistant to be known as Assistant to the President, and may assign to said Assistant such duties as he shall think advisable and as shall not be inconsistent with the By-laws of the Company. Section 5. Each of the Vice-Presidents shall have such powers and duties as may be prescribed for him by the Board of Directors, or be delegated to him by the Chairman of the Board or the President. In the absence or inability of the President, or in case of his death, resignation or removal from office, the powers and duties of the President shall temporarily devolve upon such of the Vice-Presidents as the Board shall have designated or shall designate for the purpose, and the officer so designated shall have and exercise all powers and duties of the President during such absence or disability, or until the vacancy in the office of President shall be filled. -9- Section 6. The Secretary shall attend all meetings of the Board of Directors and of the Executive Committee, shall keep a true and faithful record thereof in proper books to be provided for that purpose, and shall have the custody and care of the corporate seal, records, minutes and stock books of the Company. He shall also act as Secretary of all stockholders' meetings, and keep a record thereof, except as some other person may be selected as Secretary or as may be prescribed for him by the Board or the Executive Committee. Section 7. The Treasurer shall have charge of, and be responsible for, the collection, receipt, custody and disbursement of the funds of the Company, and shall deposit its funds in the name of the Company in such banks, trust companies, or safety vaults as he shall select, subject to the approval of the chief executive officer. He shall have the custody of such books, receipted vouchers and other books and papers as in the practical business operations of the Company shall naturally belong in the office or custody of the Treasurer, or shall be placed in his custody by the Board of Directors, by the Executive Committee, by the Chairman of the Board, by the President, or by any one of the Vice-Presidents when acting as or on behalf of the President. He shall sign checks, drafts and other papers providing for the payment of money by the Company for approved purposes in the usual course of business, and shall have such other powers and duties as are commonly incidental to the office of Treasurer, or as may be prescribed for him by the Board or the Executive Committee. He may be required to give bond to the Company for the faithful discharge of his duties in such form and to such amount and with such sureties as shall be determined by the Board of Directors. Section 8. The Controller shall have general supervision over all books and accounts of the Company relating to receipts and disbursements, and shall arrange the form of all vouchers, accounts, reports and returns required by the various departments. He shall examine the accounts of all officers and employees from time to time, and as often as practicable, and shall see that proper returns are made of all receipts from all sources, and that correct vouchers are turned over to him for all disbursements for any purpose. All bills for the previous month, properly made in detail and certified, shall be submitted to him, and he shall audit and approve the same if found satisfactory and correct, but he shall not approve or audit any voucher unless the charges covered by the voucher have been previously approved through working order, requisition or otherwise by the head of the department in which it originated or unless he shall be otherwise satisfied of its propriety and correctness. He shall have full access to all contracts, correspondence and other papers and records of the Company relating to its business matters, and shall have the custody of its account books, original contracts, and other papers relating to the accounts of the Company, except such as in the practical business operations of the Company shall naturally belong in the custody of the Treasurer, or shall be placed in his custody by the Board of Directors, by the Executive Committee, by the Chairman of the Board, by the President, or by one of the Vice-Presidents when acting as or on behalf of the President. The Controller shall have such other powers -10- and duties as are commonly incidental to the office of Controller or as may be prescribed for him. He may be required to give bond to the Company for the faithful discharge of his duties in such form and to such amount and with such sureties as shall be determined by the Board of Directors. Section 9. Assistant Secretaries, Assistant Treasurers and Assistant Controllers, when elected, shall, respectively, assist the Secretary, Treasurer and Controller of the Company in the performance of their respective duties assigned to such principal officers, and in assisting his principal officer, each assistant officer shall, for such purpose, have the same powers as his principal officer. The powers and duties of any such principal officer, shall, except as otherwise ordered by the Board of Directors, temporarily devolve upon his assistant in case of the absence, disability, death, resignation or removal from office of such principal officer. ARTICLE VI MISCELLANEOUS Section 1. The funds of the Company shall be deposited to its credit in such banks or trust companies as are selected by the Treasurer, subject to the approval of the chief executive officer. Such funds shall be withdrawn only on checks or drafts of the Company for the purpose of the Company, except that such funds may be withdrawn without the issuance of a check or draft (a) to effect a transfer of funds between accounts maintained by the Company at one or more depositaries; (b) to effect the withdrawal of funds, pursuant to resolution of the Board of Directors, for the payment of either commercial paper promissory notes of other entities or government securities purchased by the Company; (c) to effect a withdrawal of funds by the Company pursuant to the terms of any agreement or other document, approved by the Board of Directors, which requires or contemplates payment or payments by the Company by means other than a check or draft; or (d) to effect a withdrawal of funds for such other purpose as the Board of Directors by resolution shall provide. All checks and drafts of the Company shall be signed in such manner and by such officer or officers or such individuals as the Board of Directors, from time to time by resolution, shall determine. Only checks and drafts so signed shall be valid checks or drafts of the Company. Section 2. No debt shall be contracted except for current expenses unless authorized by the Board of Directors or the Executive Committee, and no bills shall be paid by the Treasurer unless audited and approved by the Controller or some other person or committee expressly authorized by the Board of Directors or the Executive Committee, to audit and approve bills for payment. All notes of the Company shall be executed by two different officers of the Company. Either or both of such executions may be by facsimile. -11- Section 3. The fiscal year of the Company shall close at the end of December annually. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS Section 1. Unless prohibited by law, the Company shall indemnify each of its Directors, officers, employees and agents against expenses (including attorneys' fees), judgments, taxes, fines and amounts paid in settlement, incurred by such person in connection with, and shall advance expenses (including attorneys' fees) incurred by such person in defending any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) to which such person was, is, or is threatened to be made a party by reason of the fact that such person is or was a Director, officer, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. Advancement of expenses shall be made upon receipt of a written statement of his good faith belief that he has met the standard of conduct as required by statute and a written undertaking, with such security, if any, as the Board may reasonably require, by or on behalf of the person seeking indemnification, to repay amounts advanced if it shall ultimately be determined that such person is not entitled to be indemnified by the Company. Section 2. In addition (and not by way of limitation of) the foregoing provisions of Section 1 of this Article VII and the provisions of the Kentucky Business Corporation Act, each person (including the heirs, executors, administrators and estate of such person) who is or was or had agreed to become a Director, officer, employee or agent of the Company and each person (including the heirs, executors, administrators and estate of such person) who is or was serving or who had agreed to serve at the request of the Directors or any officer of the Company as a Director, officer, employee, trustee, partner or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be indemnified by the Company to the fullest extent permitted by the Kentucky Business Corporation Act or any other applicable laws as presently or hereafter in effect. Without limiting the generality or the effect of the foregoing, the Company is authorized to enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Article VII. Any repeal or modification of this Article by the stockholders of the Company shall not adversely affect any indemnification of any person hereunder in respect of any act or omission occurring prior to the time of such repeal or modification. Section 3. The Company may purchase and maintain insurance on behalf of any -12- person who is or was entitled to indemnification as described above, whether or not the Company would have the power or duty to indemnify such person against such liability under this Article VII or applicable law. Section 4. To the extent required by applicable law, any indemnification of, or advance of expenses to, any person who is or was entitled to indemnification as described above, if arising out of a proceeding by or in the right of the Company, shall be reported in writing to the stockholders with or before the notice of the next stockholders' meeting. -13- Section 5. The indemnification provided by this Article VII: (a) shall not be deemed exclusive of any other rights to which the Company's Directors, officers, employees or agents may be entitled pursuant to the Articles of Incorporation, any agreement of indemnity, as a matter of law or otherwise; and (b) shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators. ARTICLE VIII AMENDMENT OR REPEAL OF BY-LAWS These By-laws may be added to, amended or repealed at any meeting of the Board of Directors, and may also be added to, amended or repealed by the stockholders. -14- EX-10.76 4 EXHIBIT 10.76 Contract #96-412-026 AMENDED AND RESTATED COAL SUPPLY AGREEMENT This is an amended and restated coal supply agreement (the "Agreement") dated as of April 1, 1998 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and HOPKINS COUNTY COAL LLC ("Seller"), a Delaware limited liability company, having an address of 1717 South Boulder Avenue, Tulsa Oklahoma 74119-4886 ("Seller"), and WEBSTER COUNTY COAL CORPORATION ("Guarantor"), a Kentucky corporation, having an address of 1717 South Boulder Avenue, Tulsa Oklahoma 74119-4886. W I T N E S S E T H: A. Seller's predecessor in interest, Andalex Resources, Inc. ("Andalex"), and Buyer entered into a coal supply agreement dated April 1, 1997, as amended by Amendment to Coal Supply Agreement ("Amendment No. 1") dated effective August 1, 1997, whereby Andalex agreed to sell and supply and Buyer agreed to purchase steam coal under the terms and conditions set forth therein. B. Andalex and Seller entered into an Agreement for Purchase and Sale of Assets whereby Seller agreed to acquire certain assets of Andalex, including mines in Andalex's Cimarron Division. C. Pursuant to Amendment No. 2 to Coal Supply Agreement ("Amendment No. 2"), Buyer consented to Seller's assumption of all Andalex's obligations and liabilities under the Agreement arising on and after the date of the consent, on the condition that Seller's sole member's subsidiary guaranty the performance of Seller's obligations and liabilities under the Contract #96-412-026 Agreement. Hereinafter, the Agreement, as modified by Amendment No. 1 and Amendment No. 2 shall be referred to as the "Agreement." D. Buyer and Seller wish to amend and restate the Agreement in its entirety pursuant to the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1. GENERAL Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM The term of this Agreement shall commence on April 1, 1997 (the "Commencement Date") and shall continue through December 31, 2001, subject to the price, terms and conditions review set forth in ss.8.3 (the "Term"). The period of April 1, 1997, through March 31, 1998, shall hereinafter be referred to as the "Initial Term"; the period of April 1, 1998, through December 31, 1999 (as it may be extended through December 31, 2001, pursuant to the price, terms and conditions review set forth in ss. 8.3), shall be referred to as the "Secondary Term." SECTION 3. QUANTITY During the period of the Commencement Date through March 31, 1998 (the "Initial Term"), Seller shall sell and deliver and Buyer shall purchase and accept delivery of 62,500 tons of coal per month. Such coal shall be delivered ratably in accordance with reasonable delivery schedules to be mutually agreed upon by Buyer and Seller. 2 Contract #96-412-026 Subject to ss. 8.3, during the following portions of the Secondary Term, Seller shall deliver and Buyer shall purchase and accept delivery of the following quantities of coal: YEAR BASE QUANTITY (TONS) ---- -------------------- April 1, 1998, through December 31, 1998 897,000 - 927,000 January 1, 1999, through December 31, 1999 1,500,000 January 1, 2000, through December 31, 2000 1,500,000 January 1, 2001 through December 31, 2001 1,500,000 Such coal shall be delivered ratably in accordance with reasonable delivery schedules to be mutually agreed upon by Buyer and Seller. SECTION 4. SOURCE ss. 4.1 Source. The coal sold hereunder shall be supplied from any one of the geological seams Western Kentucky #11, #12, and #9 (surface and underground), of any one of the mines in Seller's Cimarron Division as of the effective date of this Agreement (the "Coal Property"). Seller shall have the right to add to the Coal Property mines in Seller's Cimarron Division developed after the effective date of this Agreement with Buyer's prior written consent, which will not be unreasonably withheld. ss. 4.2 Assurance of Operation and Reserves. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. 3 Contract #96-412-026 Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby dedicates to this Agreement sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. ss. 4.3 Non-Diversion of Coal. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. "ss. 4.4 Substitute Coal. In the event Seller is unable to produce or obtain coal from the Coal Property in the quantity and of the quality required by this Agreement, and such inability is not caused by a force majeure event as defined in ss. 10 of this Agreement, then Buyer will have the option of requiring that Guarantor supply coal (the "Substitute Coal") from the Dotiki facilities and mines owned by Guarantor. If Seller's inability to supply coal from the Coal Property is caused by a force majeure event as accepted by Buyer, then Buyer shall have the option of requesting that Guarantor supply Substitute Coal and Guarantor shall have the option of supplying Substitute Coal, but Guarantor shall have no obligation to perform unless Guarantor has elected to exercise its option. Buyer's option to request performance by Guarantor must be exercised in writing within ten (10) days of Buyer's receipt of Seller's declaration of force majeure. Guarantor's option to accept Buyer's offer must be exercised in writing within ten (10) days of Guarantor's receipt of Buyer's notice of election. 4 Contract #96-412-026 All Substitute Coal supplied hereunder shall be supplied pursuant to all the terms and conditions of this Agreement, including, but not limited to, the price provisions of ss. 8, the quality specifications of ss. 6.1, and the provisions of ss. 5 concerning reimbursement to Buyer for increased transportation costs. The determination of whether the Substitute Coal materially meets or exceeds these parameters shall be made by Buyer in Buyer's sole opinion. Seller's or Guarantor's delivery of coal not produced from the Coal Property without having received the express written consent of Buyer shall constitute a material breach of this Agreement. If Guarantor supplies Substitute Coal with the express consent of Buyer, such coal shall be considered delivered from the Coal Property for all purposes of this Agreement except with regard to any increased transportation costs." SECTION 5. DELIVERY ss. 5.1 Buyer's Option. During the Initial Term, the Delivery Point shall be designated as set forth in Amendment No. 1. During the Secondary term, the Delivery Point shall be designated as follows: the coal shall be delivered F.O.B. railcar at the Cimarron rail loading facility near Madisonville, Kentucky on the Paducah and Louisville Railway (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be shared by Buyer and Seller. Buyer may request to change the Delivery Point to either F.O.B. truck or F.O.B. barge. Upon Buyer's notification to Seller of its desire to change the Delivery Point, Buyer and Seller shall mutually agree in writing upon the change(s) and the time frame wherein such change will take place. 5 Contract #96-412-026 ss. 5.2 Rail or Truck Delivery. If the coal is delivered F.O.B. railcar or F.O.B. truck, then title to and risk of loss respecting the coal will pass to Buyer and the coal will be considered to be delivered when it is loaded into the railcars or trucks at the rail or truck loading facility. Buyer or its contractor shall furnish suitable railcars or trucks in accordance with a delivery schedule provided by Buyer to Seller. Seller shall be responsible for and pay the cost of repairs for any damages caused by Seller to railcars or trucks owned or leased by Buyer while such railcars or trucks are in Seller's control or custody. Seller shall comply with the applicable provisions of Buyer's rail or truck contractor's tariff. At Buyer's request, Seller shall treat (or have treated) any shipment of coal hereunder with a freeze conditioning agent approved by Buyer in order to maintain coal handling characteristics during shipment. If requested by Buyer, Seller shall also treat (or have treated) any railcars specified by Buyer with a side release agent approved by Buyer. The price for each such requested chemical treatment shall be an amount equal to Seller's cost of materials applied on a per gallon basis for each applicable of freeze conditioning agent or side release agent, as the case may be. Seller shall invoice Buyer for all such treatment which occurred in a calendar month by the fifteenth of the following month; and payment shall be mailed by the 25th of such following month or within ten days after receipt of Seller's invoice, whichever is later. ss. 5.3. Delivery to Sebree Dock. During the Initial Term, delivery obligations to Sebree Dock shall be governed by Amendment No. 1. SECTION 6. QUALITY ss. 6.1 Specifications. During the Initial Term, the coal delivered hereunder shall conform to the following specifications on an "as received" basis: 6 Contract #96-412-026 Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) - -------------------------------------------------------------------------------- BTU/LB. min. 11,500 LESS THAN 11,200 LBS/MMBTU: MOISTURE max. 10.5 GREATER THAN 12 ASH max. 10.5 GREATER THAN 13 SULFUR max. 3.0 GREATER THAN 3.3 SULFUR min. 1.8 LESS THAN 1.8 CHLORINE max. .04 GREATER THAN .05 FLUORINE max. .006 GREATER THAN .006 NITROGEN max. 1.1 GREATER THAN 1.5 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1 Size (3" x 0"): Top size (inches)* max. 3x0 GREATER THAN 3x0 Fines (% by wgt) Passing 1/4" screen max. 45% GREATER THAN 50% % BY WEIGHT: VOLATILE max. 40 GREATER THAN 41 VOLATILE min. 35 LESS THAN 33 FIXED CARBON max. 48 GREATER THAN 49 FIXED CARBON min. 44 LESS THAN 40 GRINDABILITY (HGI) min. 55 LESS THAN 52 BASE ACID RATIO (B/A) .39 .43 SLAGGING FACTOR** max. 1.6 GREATER THAN 1.9 FOULING FACTOR*** max. .2 GREATER THAN .3 ASH FUSION TEMPERATURE ((degree)F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1940 min. 1900 Softening (H=W) min. 2035 min. 1975 Softening (H=1/2W) min. 2085 min. 2000 Fluid min. 2190 min. 2100 OXIDIZING ATMOSPHERE Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2320 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375 7 Contract #96-412-026 * All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than thirty-five percent (35%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by Weight(Dry)) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by Weight(Dry)) The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0) ---------------------------------------- (Si0(2) + Al(2)0(3) + Ti0(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. During the Secondary Term, the coal delivered hereunder shall conform to the above specifications on an "as received" basis, with the exception of the following different specifications: Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) - -------------------------------------------------------------------------------- BTU/LB. min. 11,400 LESS THAN 11,100 LBS/MMBTU: MOISTURE max. 11.5 GREATER THAN 13.5 ASH max. 11.75 GREATER THAN 13.0 SULFUR max. 3.125 GREATER THAN 3.4 Size (3" x 0"): Top size (inches)* max. 3x0 GREATER THAN 3x0 * All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than fifty percent (50%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. 8 Contract #96-412-026 ss. 6.2 Definition of "Shipment". As used herein, a "shipment" shall mean one (1) unit trainload or a day's loading of trucks or individual barge or barge lot, in accordance with Buyer's actual sampling and analyzing practices. ss. 6.3 Rejection. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in ss. 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in ss. 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in ss. 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement (as adjusted under ss. 8.2 for coal of the quality actually supplied by the other source) plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in ss.6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by 9 Contract #96-412-026 Buyer; however, the price shall be adjusted in accordance with ss.8.2 and the quantity Buyer is obligated to purchase from Seller, at Buyer's sole option, shall be reduced by the amount of each such non-conforming shipment. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. ss. 6.4 Suspension and Termination. If the coal sold hereunder fails to meet one or more of the Guaranteed Monthly Weighted Averages set forth in ss.6.1 for any one month during the term of this Agreement, or if two (2) truck shipments or three (3) barge shipments in a seven-day period are rejectable by Buyer, or if Buyer receives at its generating station two (2) rail shipments which are rejectable in any ten-day period, Buyer may, upon notice confirmed in writing and sent to Seller by certified mail, terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS ss. 7.1 Weights. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any reasonable time or frequency. If the scales are found to be inaccurate, over or under the tolerance range allowable for the scale, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. Buyer shall send to seller, by telecopier or electronic data transmittal, a listing of the 10 Contract #96-412-026 daily shipment weights within three (3) business days after Buyer's determination of such weights. ss. 7.2 Sampling and Analysis. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. Buyer shall send to Seller by telecopier or electronic data transmittal a copy of the analysis within (10) business days after sampling the applicable shipment. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with reliable and industry accepted standards. Samples for analyses shall be taken by any reliable and industry accepted standard acceptable to both parties, may be composited, and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be in accordance with reliable and industry accepted standards. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal 11 Contract #96-412-026 Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE 12 Contract #96-412-026 ss. 8.1 Base Price. The base price (the "Base Price") of the coal to be sold hereunder will be firm and will be determined by the year in which the coal is delivered as defined in ss. 5 in accordance with the following schedule: YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ (the Initial Term) ------------------ 1997 $0.7800 1998 $0.7900 (the Secondary Term) 1998 $0.8285 1999 $0.8285 2000 $0.8485 2001 $0.8585 ss. 8.2 Quality Price Adjustments. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in ss.6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in ss.6.1, as determined pursuant to ss.7.2, subject to the provisions set forth below. The discount values used are as follows: DISCOUNT VALUES --------------- $/MMBTU ------- BTU/LB 0.2604 $/LB./MMBTU ----------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016 (b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall be calculated on the basis of the difference between the 13 Contract #96-412-026 actual Monthly Weighted Average and the Guaranteed Monthly Weighted Average pursuant to the methodology shown in Exhibit A attached hereto. During the Initial Term, the Guaranteed Monthly Weighted Average and Discount Points shall be calculated as follows: Guaranteed Monthly Weighted Average Discount Point ---------------- -------------- BTU/LB min. 11,500 11,350 LB/MMBTU - -------- SULFUR max. 3.0 3.2 ASH max. 10.5 12.0 MOISTURE max. 10.5 11.0 For example, if the actual Monthly Weighted Average of ash equals 12.5 lb/MMBTU, then the applicable discount would be (12.5 lb. - 10.5 lb.) x $0.0083/lb./MMBTU = $.0166/MMBTU. During the Secondary Term, the Guaranteed Monthly Weighted Average and Discount Points shall be calculated as follows: Guaranteed Monthly Weighted Average Discount Point ---------------- -------------- BTU/LB min. 11,400 11,250 LB/MMBTU - -------- SULFUR max. 3.125 3.325 ASH max. 11.75 12.50 MOISTURE max. 11.5 13.0 For example, if the actual Monthly Weighted Average of ash equals 13.5 lb/MMBTU, then the applicable discount would be (13.5 lb. - 11.75 lb.) x $0.0083/lb./MMBTU = $.01453/MMBTU. 14 Contract #96-412-026 ss. 8.3 Price, Terms and Conditions Review. The Base Price and all other terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1, 2000. The party requesting such a review shall give written notice of its request to the other party on or before October 1, 1999. The parties then shall negotiate an agreement on new prices and/or other terms and conditions between October 1, 1999 and December 1, 1999. If the parties do not reach an agreement by December 1, 1999, then this Agreement will terminate as of December 31, 1999 without liability due to such termination for either party, and the parties shall have no further obligations hereunder except those incurred prior to the date of termination. ss. 8.4 Payment Calculation. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 9. INVOICES, BILLING AND PAYMENT. ss. 9.1 Invoicing Address. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Management With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable 15 Contract #96-412-026 ss. 9.2 Invoice Procedures for Coal Shipments. Seller shall invoice Buyer at the Base Price, minus any quality price discounts, for all coal unloaded in a calendar month by the twentieth (20th) day of the following month. ss. 9.3 Payment Procedures for Coal Shipments. For all coal delivered pursuant to Article 5 hereof, and unloaded at the Delivery Point between the first (1st) and fifteenth (15th) days of any calendar month. Buyer shall make preliminary payment for seventy-five percent (75%) of the amount owed for the coal (based on the assumption that the coal will meet all guaranteed monthly quality parameters) by the twenty-fifth (25th) day of such month of delivery, except that, if the 25th is not a regular work day, payment shall be made on the next regular work day. For all coal delivered, as defined in Article 5 hereof, and unloaded at the Delivery Point between the sixteenth (16th) and the last day of any calendar month. Buyer shall make preliminary payment for seventy-five percent (75%) of the delivered coal by the tenth (10th) day of the month following the month of delivery, except that, if the 10th is not a regular work day, payment shall be made on the next regular work day. Preliminary payment shall be in the amount of seventy-five percent (75%) of the then current price on a dollar per ton basis as calculated by the guaranteed monthly weighted average BTU/lb. and the then current Base Price in cents per MMBTU. A reconciliation of amounts paid and amounts owed shall occur on the twenty-fifth (25th) day of the month following the month of delivery. (For example, Buyer will make one initial payment on September 25 for seventy-five percent of coal delivered September 1 through 15, and another initial payment on October 10 for seventy-five percent of coal delivered September 16 through 30. A reconciliation will occur on October 25 for all deliveries made in September.) The reconciliation shall be made as follows: Seller shall invoice Buyer on or before the 20th day 16 Contract #96-412-026 of the month following the month of delivery. The amount due for all coal (based on the Base Price minus any Quality Price Discounts) delivered and unloaded and accepted by Buyer during any calendar month shall be calculated and compared to the sum of the preliminary payments made for coal delivered and unloaded and accepted during such month. The difference shall be paid by or paid to Seller, as applicable, by the twenty-fifth (25th) day of the month following the month of delivery, except, that, if the 25th is not a regular work day, payment shall be made in the next regular work day. In the event Seller notifies Buyer that a pattern has developed whereby payments are not being paid when due, as set forth herein, Buyer shall review its internal approval and payment procedures and remedy such payment practices, if any develop. ss. 9.4 Withholding. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to (i) acts of God, (ii) war, (iii) riots, (iv) civil insurrection, (v) acts of the public enemy, (vi) strikes, (vii) lockouts, (viii) fires, (ix) floods, 17 Contract #96-412-026 (x) earthquakes, (xi) explosions, (xii) mine accidents that are solely responsible for delaying or preventing performance of Seller for 10 consecutive days, (xiii) breakdown of or damage to equipment, plant, transmission systems, or transportation providers that is solely responsible for delaying or preventing the performance of Seller for 10 consecutive days, (xiv) unforeseen adverse geologic conditions which were not detected despite prudent mine planning and mining processes and which are solely responsible for delaying or preventing the performance of Seller for 10 consecutive days, or (xv) the inability to obtain necessary mining permit(s) after applying for such with prudent and reasonable diligence, and such event is beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro-rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. 18 Contract #96-412-026 Tonnage deficiencies resulting from Seller's declared force majeure event shall be made up at Buyer's sole option on a mutually agreed-upon schedule. Tonnage deficiencies resulting from Buyer's declared force majeure event shall be made up at Seller's sole option on a mutually agreed-upon schedule. SECTION 11. NOTICES ss. 11.1 Form and Place of Notice. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, Kentucky 40232 Attn: Director, Fuels Management If to Seller: Hopkins County Coal LLC 1717 S. Boulder Avenue; Sixth Floor P.O. Box 22027 Tulsa, Oklahoma 74121-2027 Attn: Mr. Gary J. Rathburn Senior Vice President, Marketing With a copy to: Mapco Coal, Inc. 771 Corporate Drive, Suite 900 Lexington, Kentucky 40503 Att: James E. Plaisted, Sales Manager, Central Region ss. 11.2 Change of Person or Address. Either party may change the person or address specified above upon giving written notice to the other party of such change. 19 Contract #96-412-026 SECTION 12. RIGHT TO RESELL Buyer shall have the unqualified right to re-sell all or any of the coal purchased under this Agreement. SECTION 13. INDEMNITY AND INSURANCE ss. 13.1 Indemnity. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable attorney's fees) (i) relating to the barges or railcars provided by Buyer or Buyer's contractor while such barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. ss. 13.2 Insurance. Seller agrees to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (2) Automobile General Liability, $1,000,000 single limit liability. (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of 20 Contract #96-412-026 Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 14. TERMINATION FOR DEFAULT. If either party hereto commits a material breach of any of its obligations under this Agreement at any time (with the exception of defaults occurring under ss.6.4), then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than thirty (30) days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 15. TAXES, DUTIES AND FEES Seller shall pay when due, and the price set forth in ss. 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. 21 Contract #96-412-026 SECTION 16. DOCUMENTATION AND RIGHT OF AUDIT Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses and source of all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 17. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CRF ss. 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CRF ss. 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CRF ss. 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC ss. 637(d)(3); and subcontracting plan requirements set forth in 15 USC ss. 637(d). SECTION 18. COAL PROPERTY INSPECTIONS Buyer and its representatives, and others as may be required by applicable laws, ordinances and regulations shall have the right at all reasonable times and at their own expense to 22 Contract #96-412-026 inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 19. MISCELLANEOUS ss. 19.1 Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. ss. 19.2 Headings. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning of interpretation of this Agreement. ss. 19.3 Waiver. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. ss. 19.4 Remedies Cumulative. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. ss. 19.5 Severability. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable 23 Contract #96-412-026 in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. ss. 19.6 Binding Effect. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. ss. 19.7 Assignment. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied; provided, however, that Buyer shall have the right, without consent of Seller, to assign all or any part of this Agreement to any company, controlling, controlled by, or under common control with Buyer. ss. 19.8 Entire Agreement. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. ss. 19.9 Amendments. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. SECTION 20. GUARANTY OF PERFORMANCE AND GUARANTOR'S INDEMNIFICATION. ss. 20.1 Guaranty of Performance. As a material inducement for Buyer's giving its consent to the Assignment and Assumption, and in consideration thereof, Guarantor hereby guarantees the full, prompt and complete performance by Seller of all the terms and conditions of the Agreement to be performed by Seller thereunder (the "Guaranty"). Guarantor hereby indemnifies and holds Buyer and Buyer's successors and assigns harmless from and against all liability 24 Contract #96-412-026 and expense, including reasonable attorney's fees, sustained by Buyer by reason of the failure of Guarantor fully to perform and comply with the terms and obligations of the Agreement, or by reason of any misrepresentation of Guarantor hereunder. It is understood this is a continuing, absolute and unconditional Guaranty, co-extensive and co-terminous with the Agreement between the Seller and Buyer, as it may be extended and amended by Buyer and Seller. Guarantor hereby expressly waives notice of acceptance of this Guaranty, notice of the defaults by Seller or of nonpayment or nonfulfillment of any or all of Seller's liabilities and obligations. The delay or failure of Buyer to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right or of the Guaranty. ss.20.2 Guarantor's Consent for Amendments and Extensions. The Guarantor hereby expressly gives the Buyer and Seller from time to time, without notice to Guarantor, authority and consent to give and make such extensions, renewals, settlements, and compromises at it may deem proper with respect to any of the duties or liabilities of the Seller under this Agreement. ss. 20.3 Buyer's Consent to Assignment and Assumption. In reliance on the Guaranty and on the representations and warranties of Seller/Assignor, Seller and Guarantor set forth herein, Buyer hereby consents to the Assignment and Assumption. Buyer's consent thereto shall not be construed as a consent to any future assignments, or as a waiver of ss. 19.7 of the Agreement, which provision is hereby ratified and confirmed. ss. 20.4 Guarantor's Additional Representations, Warranties and Covenants. Guarantor hereby represents and warrants it has the power and authority, and promptly will, take all necessary actions to enable Guarantor to supply Substitute Coal. 25 Contract #96-412-026 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. HOPKINS COUNTY COAL LLC LOUISVILLE GAS AND ELECTRIC COMPANY By: /s/ signed By: /s/ Wayne T. Lucas --------------------------- ------------------------------- Wayne T. Lucas Title: Senior Vice President - Marketing EVP - Power Generation --------------------------------- Date: December 4, 1998 Date: December 9, 1998 ----------------------------------- ------------------------------ WEBSTER COUNTY COAL CORPORATION By: /s/ signed -------------------------- Title: Senior Vice President - Marketing ---------------------------------- Date: December 4, 1998 ----------------------------------- 26 Contract #96-412-026 Exhibit A Page 1 of 4 EXHIBIT A - INITIAL TERM SAMPLE COAL PAYMENT CALCULATIONS Total Evaluated Coal Costs for Contract No. 96-412-26 - -------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
Section I Base Data -------------------------------------- -------------- 1) Base F.O.B. price per ton: $ 17.94 /ton ------------- 1a) Tons of coal delivered: tons ------------- 2) Guaranteed average heat content: 11,500 BTU/LB. ------------- 2r) As received monthly avg. heat content: BTU/LB. ------------- 2a) Energy delivered in MMBTU: MMBTU ------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $ 0.78000 MMBTU ------------- [(Line 1)/(Line 2)] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU [( /ton)/( BTU/LB)] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.00 LBS./MMBTU ----------- 3r) As received monthly avg. sulfur LBS./MMBTU ----------- 4) Guaranteed monthly avg. ash 10.50 LBS./MMBTU ----------- 4r) As received monthly avg. ash LBS./MMBTU ----------- 5) Guaranteed monthly avg. max. moisture 10.50 LBS./MMBTU ----------- 5r) As received monthly avg. moisture LBS./MMBTU ----------- Section II Discounts -------------------------------------- ------------ Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r LESS THAN 11,350 BTU/lb. then: {1 - (line 2r) / (line 2)} * $0.2604/MMBTU {1 - ( ) / (11,500)} * $0.2604 = $ /MMBTU ----------- 7d) SULFUR: If line 3r is greater than 3.20 lbs./MMBTU [ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur [ ( ) - (3.00) ] * 0.1232 = $ /MMBTU ----------- 8d) ASH: If line 4r is greater than 12.00 lbs./MMBTU [ (line 4r) - (line 4) ] * 0.0083/MMBTU [ ( ) - (10.50) ] * 0.0083 = $ /MMBTU ----------- 9d) MOISTURE: If line 5r is greater than 11.00 lbs./MMBTU [ (line 5r) - (line 5) ] * 0.0016/MMBTU [ ( ) - (10.50) ] * 0.0016 = $ /MMBTU -----------
27 Contract #96-412-026 Exhibit A Page 2 of 4
Total Price Section III Adjustments -------------------------------------- ----------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $ /MMBTU ------------ Line 7d $ /MMBTU ------------ Line 8d $ /MMBTU ------------ Line 9d $ /MMBTU ------------ 10) Total Discounts (-): Algebraic sum of above: $ /MMBTU ------------ 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $ /MMBTU + $ /MMBTU = $ ----- ------------ ---------- 13) Total base cost of coal (line 2a) * (line 2b) $ /MMBTU + $ /MMBTU = $ ----- ------------ ---------- 14) Total coal payment for month (line 12) + (line 13) $ /MMBTU + $ = $ ----- ------------ ----------
28 Contract #96-412-026 Exibit A Page 3 of 4 EXHIBIT A - SECONDARY TERM SAMPLE COAL PAYMENT CALCULATIONS Total Evaluated Coal Costs for Contract No. 96-412-26 - -------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
Section I Base Data -------------------------------------- --------------- 1) Base F.O.B. price per ton: $ 18.89 /ton ------------ 1a) Tons of coal delivered: tons ------------ 2) Guaranteed average heat content: 11,400 BTU/LB. ------------ 2r) As received monthly avg. heat content: BTU/LB. ------------ 2a) Energy delivered in MMBTU: MMBTU ------------ [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $ 0.8285 MMBTU ------------ [ (Line 1) / (Line 2) ] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU [ ( /ton) / ( BTU/LB) ] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.125 LBS./MMBTU ------------ 3r) As received monthly avg. sulfur LBS./MMBTU ------------ 4) Guaranteed monthly avg. ash 11.75 LBS./MMBTU ------------ 4r) As received monthly avg. ash LBS./MMBTU ------------ 5) Guaranteed monthly avg. max. moisture 11.50 LBS./MMBTU ------------ 5r) As received monthly avg. moisture LBS./MMBTU ------------ Section II Discounts -------------------------------------- -------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r LESS THAN 11,250 BTU/lb. then: {1 - (line 2r) / (line 2)} * $0.2604/MMBTU {1 - ( ) / (11,400)} * $0.2604 = $ /MMBTU ------------ 7d) SULFUR: If line 3r is greater than 3.325 lbs./MMBTU [ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur [ ( ) - (3.125) ] * 0.1232 = $ /MMBTU ------------ 8d) ASH: If line 4r is greater than 12.50 lbs./MMBTU [ (line 4r) - (line 4) ] * 0.0083/MMBTU [ ( ) - (11.75) ] * 0.0083 = $ /MMBTU ------------ 9d) MOISTURE: If line 5r is greater than 13.00 lbs./MMBTU [ (line 5r) - (line 5) ] * 0.0016/MMBTU [ ( ) - (11.50) ] * 0.0016 = $ /MMBTU ------------
29 Contract #96-412-026 Exhibit A Page 4 of 4
Total Price Section III Adjustments -------------------------------------- ------------ Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $ /MMBTU ------------ Line 7d $ /MMBTU ------------ Line 8d $ /MMBTU ------------ Line 9d $ /MMBTU ------------ 10) Total Discounts (-): Algebraic sum of above: $ /MMBTU ------------ 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $ /MMBTU + $ /MMBTU = $ ----- ------------ -------- 13) Total base cost of coal (line 2a) * (line 2b) $ /MMBTU + $ /MMBTU = $ ----- ----------- -------- 14) Total coal payment for month (line 12) + (line 13) $ /MMBTU + $ = $ ----- ----------- --------
30 EX-10.77 5 EXHIBIT 10.77 Contract #LGE 99-002 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated January 1, 1999 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and PEABODY COALSALES COMPANY, a Delaware corporation, 701 Market Street, Suite 830, St. Louis, Missouri 63101-1826 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL. Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM. The term of this Agreement shall commence on January 1, 1999 and shall continue through December 31, 2000, subject to the price renegotiation set forth in ss. 8.1. SECTION 3. QUANTITY. ss. 3.1 Base Quantity. Subject to the price renegotiation set forth in ss. 8.1, Seller shall sell and deliver and Buyer shall purchase and accept delivery of the following annual base quantity of coal ("Base Quantity"): YEAR BASE QUANTITY (TONS) ---- -------------------- 1999 1,860,000 2000 1,860,000 ss. 3.2 Delivery Schedule. Buyer shall specify in writing to Seller the monthly quantities to be delivered in 1999 within ten (10) business days after this agreement is fully executed. Time is of the essence with respect to the schedule so established; and failure by Seller to deliver in a timely fashion shall constitute a material breach within the meaning of ss. 16 of this Agreement. Contract #LGE 99-002 SECTION 4. SOURCE. ss. 4.1 Source. The coal sold hereunder, including coal purchased by Seller from third parties, shall be supplied from geological seam Kentucky #9, from Seller's Patriot Complex, Henderson County, Kentucky (the "Coal Property"). ss. 4.2 Assurance of Operation and Reserves. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby allocates to this Agreement sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. ss. 4.3 Non-Diversion of Coal. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. 2 Contract #LGE 99-002 ss. 4.4 Seller's Preparation of Mining Plan. Seller shall have prepared a complete mining plan for the Coal Property with adequate supporting data to demonstrate Seller's capability to have coal produced from the Coal Property which meets the quantity and quality specifications of this Agreement. Seller shall, upon Buyer's request during Coal Property Inspections, if any (made pursuant to ss. 20), provide information to Buyer of such mining plan which shall contain maps and a narrative depicting areas and seams of coal to be mined and shall include (but not be limited to) the following information: (i) reserves from which the coal will be produced during the term hereof and the mining sequence, by year (or such other time intervals as mutually agreed) during the term of this Agreement, from which coal will be mined; (ii) methods of mining such coal; (iii) methods of transporting and, in the event a preparation plant is utilized by Seller, the methods of washing coal to insure compliance with the quantity and quality requirements of this Agreement including a description and flow sheet of the preparation plant; (iv) quality data plotted on the maps depicting data points and isolines by ash, sulfur, and Btu; (v) quality control plans including sampling and analysis procedures to insure individual shipments meet quality specifications; and (vi) Seller's aggregate commitments to others to sell coal from the Coal Property during the term of this Agreement. Buyer's receipt of information or data furnished by Seller (the "Mining Information") shall not in any many relieve Seller of any of Seller's obligations or responsibilities under this Agreement; nor shall such review be construed as constituting an approval of Seller's proposed mining plan as prudent mining practices, such review by Buyer being limited solely to a determination, for Buyer's purposes only, of Seller's capability to supply coal to fulfill Buyer's requirements of a dependable coal supply. 3 Contract #LGE 99-002 ss. 4.5 Substitute Coal. Notwithstanding the above representations and warranties, in the event that Seller is unable to produce or obtain coal from the Coal Property in the quantity and of the quality required by this Agreement, and such inability is not caused by a force majeure event as defined in ss. 10, then Buyer will have the option of requiring that Seller supply substitute coal from other facilities and mines. Seller shall also have the right to supply substitute coal after having received Buyer's prior written consent (which shall not be unreasonably withheld). Such substitute coal shall be provided under all the terms and conditions of this Agreement including, but not limited to, the price provisions of ss.8, the quality specifications of ss. 6.1, and the provisions of ss. 5 concerning reimbursement to Buyer for increased transportation costs. Seller's delivery of coal not produced from the Coal Property without having received the express written consent of Buyer shall constitute a material breach of this Agreement. SECTION 5. DELIVERY. ss. 5.1 Barge Delivery. The coal shall be delivered to Buyer F.O.B. barge at the Demao Dock at mile point 31.5 on the Green River (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Title to and risk of loss of coal sold will pass to Buyer and the coal will be considered to be delivered when barges containing the coal are disengaged by Buyer's barging contractor from the loading dock. Buyer or its contractor shall furnish suitable barges in accordance with a 4 Contract #LGE 99-002 delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for all costs of transporting the coal from the mines to the loading docks and loading and trimming the coal into barges to the proper draft and the proper distribution within the barges. Buyer shall arrange for transporting the coal by barge from the loading dock to its generating station(s) and shall pay for the cost of such transportation. For delays caused by Seller in handling the scheduling of shipments with Buyer's barging contractor, Seller shall be responsible for any demurrage or other penalties assessed by said barging contractor (or assessed by Buyer) which accrue at the Delivery Point, including the demurrage, penalties for loading less than the specified minimum tonnage per barge, or other penalties assessed for barges not loaded in conformity with applicable requirements. Buyer shall be responsible to deliver barges in as clean and dry condition as practicable. Seller shall require of the loading dock operator that the barges and towboats provided by Buyer or Buyer's barging contractor be provided convenient and safe berth free of wharfage, dockage and port charges; that while the barges are in the care and custody of the loading dock, all U.S. Coast Guard regulations and other applicable laws, ordinances, rulings, and regulations shall be complied with, including adequate mooring and display of warning lights; that any water in the cargo boxes of the barges be pumped out by the loading dock operator prior to loading; that the loading operations be performed in a workmanlike manner and in accordance with the reasonable loading requirements of Buyer and Buyer's barging contractor; and that the loading dock operator carry landing owners or wharfinger's insurance with basic coverage of not less than $300,000.00 and total of basic coverage and excess liability coverage of not less than $1,000,000.00, and provide evidence thereof to Buyer in the form of a certificate of insurance from the insurance carrier or an acceptable certificate of self-insurance with 5 Contract #LGE 99-002 requirement for 30 days advance notification of Buyer in the event of termination of or material reduction in coverage under the insurance. SECTION 6. QUALITY. ss. 6.1 Specifications. The coal delivered hereunder shall conform to the following specifications on an "as received" basis: Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) - -------------------------------------------------------------------------------- BTU/LB. min. 10,550 LESS THAN 10,300 ------ ------ LBS/MMBTU: MOISTURE max. 11.94 GREATER THAN 14.70 ------ ------ ASH max. 12.89 GREATER THAN 14.60 ------ ------ SULFUR max. 3.22 GREATER THAN 3.80 ------ ------ SULFUR min. 2.75 LESS THAN 2.55 ------ ------ CHLORINE max. 0.05 GREATER THAN 0.06 ------ ------ FLUORINE max. 0.010 GREATER THAN 0.015 ------ ------ NITROGEN max. 1.35 GREATER THAN 1.45 ------ ------ ASH/SULFUR RATIO min. 2.75:1 LESS THAN 2.5:1 ------ ------ SIZE (3" x 0"): Top size (inches)* max. 3x0 GREATER THAN 3x0 ------ ------ Fines (% by wgt) Passing 1/4" screen max. 50 GREATER THAN 55 ------ ------ % BY WEIGHT: VOLATILE min. 31 LESS THAN 29 ------ ------ FIXED CARBON min. 38 LESS THAN 30 ------ ------ GRINDABILITY (HGI) min. 55 LESS THAN 50 ------ ------ BASE ACID RATIO (B/A) 0.60 .90 ------ ------ SLAGGING FACTOR** max. 2.0 GREATER THAN 2.0 ------ ------ FOULING FACTOR*** max. 0.5 GREATER THAN 0.7 ------ ------ 6 Contract #LGE 99-002 ASH FUSION TEMPERATURE ((degree)F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1940 min. 1900 ---- ---- Softening (H=W) min. 2035 min. 1975 ---- ---- Softening (H=1/2W) min. 2085 min. 2000 ---- ---- Fluid min. 2190 min. 2100 ---- ---- OXIDIZING ATMOSPHERE Initial Deformation min. 2300 min. 2200 ---- ---- Softening (H=W) min. 2330 min. 2280 ---- ---- Softening (H=1/2W) min. 2425 min. 2300 ---- ---- Fluid min. 2490 min. 2375 ---- ---- * All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than fifty per cent (50%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by Weight(Dry)) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)O by Weight(Dry)) The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)O(3) + CaO + MgO + Na(2)O + K(2)O) ---------------------------------------- (SiO(2) + Al(2)O(3) + TiO(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. ss. 6.2 Definition of "Shipment". As used herein, a "shipment" shall mean one barge load, a barge lot load, in accordance with Buyer's sampling and analyzing practices. ss. 6.3 Rejection. 7 Contract #LGE 99-002 Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in ss. 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in ss. 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, title to and risk of loss of the coal shall be considered to have never passed to Buyer and Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost and risk. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in ss. 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in ss.6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by Buyer; however, the quantity Seller is obligated to sell to Buyer under the Agreement may or may not be reduced by the amount of each such non-conforming shipment at Buyer's sole option and the shipment shall nevertheless be considered "rejectable" under ss. 6.4. Further, for 8 Contract #LGE 99-002 shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. ss. 6.4 Suspension and Termination. If the coal sold hereunder fails to meet one or more of the Guaranteed Monthly Weighted Averages set forth in ss.6.1 for any two (2) months in a six (6) month period, or if nine (9) barge shipments in a 30 day period are rejectable by Buyer, or if Buyer receives at generating station(s) two (2) rail shipments which are rejectable in any 30 day period, Buyer may upon notice confirmed in writing and sent to Seller by certified mail, suspend future shipments except shipments already loaded into barges and/or railcars. Seller shall, within 10 days, provide Buyer with reasonable assurances that subsequent monthly deliveries of coal shall meet or exceed the Guaranteed Monthly Weighted Averages set forth in ss.6.1 and that the source will exceed the rejection limits set forth in ss.6.1. If Seller fails to provide such assurances within said 10 day period, Buyer may terminate this Agreement by giving written notice of such termination at the end of the 10 day period. A waiver of this right for any one period by Buyer shall not constitute a waiver for subsequent periods. If Seller provides such assurances to Buyer's reasonable satisfaction, shipments hereunder shall resume and any tonnage deficiencies resulting from suspension may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its acceptance of Seller's assurances, or delay the resumption of shipment. If Seller, after such assurances, fails to meet any of the Guaranteed Monthly Weighted Averages for any one (1) month within the next six (6) months or if three (3) barge shipments or 1 rail shipment are rejectable within any one (1) month during such six (6) month period, then Buyer may terminate 9 Contract #LGE 99-002 this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS. ss. 7.1 Weights. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any reasonable time or frequency. If the scales are found to be over or under the tolerance range allowable for the scale based on industry accepted standards, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. ss. 7.2 Sampling and Analysis. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with industry-accepted standards. Samples for analyses shall be taken by any industry-accepted standard, mutually acceptable to both parties, may be composited and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry 10 Contract #LGE 99-002 accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th business day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture 11 Contract #LGE 99-002 (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE. ss. 8.1 Base Price. The base price ("Base Price") of the coal to be sold hereunder will be firm and will be determined by the year in which the coal is delivered as defined in ss.5 in accordance with the following schedule: YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1999 0.8303 F.O.B. barge 2000 * * Buyer and Seller will begin price negotiations on or before October 1, 1999, for prices to be effective during the year 2000. The parties then shall attempt to negotiate an agreement on new prices and/or other terms and conditions between October 1, 1999 and December 1, 1999. If the parties do not reach an agreement by December 1, 1999, then this Agreement will terminate as of December 31, 1999 without liability due to such termination for either party, and the parties shall have no further obligations hereunder except those incurred prior to the date of termination. 12 Contract #LGE 99-002 ss.8.2 Quality Price Discounts. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in ss.6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in ss.6.1, as determined pursuant to ss.7.2, subject to the provisions set forth below. The discount values used are as follows: DISCOUNT VALUES --------------- $/MMBTU ------- BTU/LB. 0.2604 $/LB./MMBTU ----------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016 (b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall apply and shall be calculated on the basis of the difference between the actual Monthly Weighted Average and the Guaranteed Monthly Weighted Average pursuant to the methodology shown in Exhibit A attached hereto. Guaranteed Monthly Weighted Average Discount Point ---------------- -------------- BTU/LB min. 10,550 10,350 LB/MMBTU: SULFUR max. 3.22 3.50 ASH max. 12.89 14.25 13 Contract #LGE 99-002 MOISTURE max. 11.94 13.50 For example, if the actual Monthly Weighted Average of sulfur equals 3.62 lb/MMBTU, then the applicable discount would be ( 3.62 lb. - 3.22 lb.) X $.1232/lb/MMBTU = $.04928/MMBTU. ss. 8.3 Payment Calculation. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 9. INVOICES, BILLING AND PAYMENT. ss. 9.1 Invoicing Address. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Management With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable 14 Contract #LGE 99-002 ss. 9.2 Invoice Procedures for Coal Shipments. Seller shall invoice Buyer at the Base Price, minus any quality price discounts, for all coal unloaded in a calendar month by the fifteenth (15th) of the following month. ss. 9.3 Payment Procedures for Coal Shipments. For all coal delivered pursuant to Article 5 hereof, and unloaded at the Delivery Point between the first (1st) and fifteenth (15th) days of any calendar month. Buyer shall make preliminary payment for seventy-five percent (75%) of the amount owed for the coal (based on the assumption that the coal will meet all guaranteed monthly quality parameters) by the twenty-fifth (25th) day of such month of delivery, except that, if the 25th is not a regular work day, payment shall be made on the next regular work day. For all coal delivered, as defined in Article 5 hereof, and unloaded at the Delivery Point between the sixteenth (16th) and the last day of any calendar month. Buyer shall make preliminary payment for seventy-five percent (75%) of the delivered coal by the tenth (10th) day of the month following the month of delivery, except that, if the 10th is not a regular work day, payment shall be made on the next regular work day. Preliminary payment shall be in the amount of seventy-five percent (75%) of the then current price on a dollar per ton basis as calculated by the guaranteed monthly weighted average BTU/lb. and the then current Base Price in cents per MMBTU. A reconciliation of amounts paid and amounts owed shall occur by the twenty-fifth (25th) day of the month following the month of delivery. (For example, Buyer will make one initial payment by September 25 for seventy-five percent of coal delivered September 1 through 15, and another initial payment by October 10 for seventy-five percent of coal delivered September 16 through 30. A reconciliation will occur by October 25 for all deliveries made in September.) 15 Contract #LGE 99-002 The reconciliation shall be made as follows: Seller shall invoice Buyer on or before the 15th day of the month following the month of delivery. The amount due for all coal (based on the Base Price minus any Quality Price Discounts) delivered and unloaded and accepted by Buyer during any calendar month shall be calculated and compared to the sum of the preliminary payments made for coal delivered and unloaded and accepted during such month. The difference shall be paid by or paid to Seller, as applicable, by the twenty-fifth (25th) day of the month following the month of delivery, except, that, if the 25th is not a regular work day, payment shall be made in the next regular work day. Buyer shall mail all payments to Seller's account at Peabody COALSALES Company, P.O. Box 503099, St. Louis, MO 63150-3099 or electronically transfer funds as requested by Seller. ss. 9.4 Withholding. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE. 16 Contract #LGE 99-002 ss. 10.1 General Force Majeure. If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, fires, floods or earthquakes, which are beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. Tonnage deficiencies resulting from a force majeure event shall be made up at Buyer's sole option on a mutually agreeable schedule. ss. 10.2 Environmental Law Force Majeure. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt 17 Contract #LGE 99-002 environmental laws, regulations, policies and/or restrictions which will make it impossible or commercially impracticable for Buyer to utilize this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies, or restrictions, or change in the interpretation or enforcement thereof, Buyer decides that it will be impossible or commercially impracticable (uneconomical) for Buyer to utilize such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at Seller's mine and/or in the handling and utilization of the coal at Buyer's generating station; and if in Buyer's sole judgment such actions will not, without unreasonable expense to Buyer, make it possible and commercially practicable for Buyer to so utilize coal which thereafter would be delivered hereunder without violating any applicable law, regulation, policy or order, Buyer shall have the right, upon the later of 60 days notice to Seller or the effective date of such restriction, to terminate this Agreement without further obligation hereunder on the part of either party. SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any time by written notice pursuant to ss. 12 of this Agreement, make changes within the general scope of this Agreement in any one or more of the following: quality of coal or coal specifications, quantity of coal, method or time of shipments, place of delivery (including transfer of title and risk of loss), method(s) of weighing, sampling or analysis and such other provision as may affect the suitability and amount of coal for Buyer's generating stations. If any such changes makes necessary or appropriate an increase or decrease in the then current price per ton of coal, or in any other provision of this 18 Contract #LGE 99-002 Agreement, an equitable adjustment shall be made in: price, whether current or future or both, and/or in such other provisions of this Agreement as are affected directly or indirectly by such change, and the Agreement shall thereupon be modified in writing accordingly. Any claim by the Seller for adjustment under this ss. 11 shall be asserted within thirty (30) days after the date of Seller's receipt of the written notice of change, it being understood, however that Seller shall not be obligated to proceed under this Agreement as changed until an equitable adjustment has been agreed upon. The parties agree to negotiate promptly and in good faith to agree upon the nature and extent of any equitable adjustment. SECTION 12. NOTICES. ss. 12.1 Form and Place of Notice. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company P.O. Box 32010 Louisville, Kentucky 40232 Attn.: Director, Fuels Management If to Seller: Peabody COALSALES Company 701 Market Street, Suite 930 St. Louis, Missouri 63101 Attn: Vice-President, Sales 19 Contract #LGE 99-002 ss. 12.2 Change of Person or Address. Either party may change the person or address specified above upon giving written notice to the other party of such change. ss. 12.3 Electronic Data Transmittal. Seller hereby agrees, at Seller's cost, to electronically transmit shipping notices and/or other data to Buyer in a format acceptable to and established by Buyer upon Buyer's request. Buyer shall provide Seller with the appropriate format and will inform Seller as to the electronic data requirements at the appropriate time. SECTION 13. (Intentionally Omitted) SECTION 14. RIGHT TO RESELL. Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. SECTION 15. INDEMNITY AND INSURANCE. ss. 15.1 Indemnity. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable inside and outside attorney's fees) (i) relating to the trucks, barges or railcars provided by Buyer or Buyer's contractor while such trucks, barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. ss. 15.2 Insurance. Seller agrees to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. 20 Contract #LGE 99-002 (2) Automobile General Liability, $1,000,000 single limit liability. (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 16. TERMINATION FOR DEFAULT. Subject to ss. 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, including, but not limited to, a breach of a representation and warranty set forth herein, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than 30 days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to 21 Contract #LGE 99-002 cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 17. TAXES, DUTIES AND FEES. Seller shall pay when due, and the price set forth in ss. 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. SECTION 18. DOCUMENTATION AND RIGHT OF AUDIT. Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses, and source for all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 19. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CFR ss. 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CFR ss. 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CFR ss. 60-741.4 22 Contract #LGE 99-002 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC ss. 637(d)(3); and subcontracting plan requirements set forth in 15 USC ss. 637(d). SECTION 20. COAL PROPERTY INSPECTIONS. Buyer and its representatives, and others as may be required by applicable laws, ordinances and regulations shall have the right at all reasonable times and at their own expense to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall make every reasonable effort to comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 21. MISCELLANEOUS. ss. 21.1 Applicable Law. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. 23 Contract #LGE 99-002 ss. 21.2 Headings. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. ss. 21.3 Waiver. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. ss. 21.4 Remedies Cumulative. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. ss. 21.5 Severability. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. ss. 21.6 Binding Effect. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. ss. 21.7 Assignment. A. Seller shall not, without Buyer's prior written consent, make any assignment or transfer of this Agreement, by operation of law or otherwise, including without limitation any assignment or transfer as security for any obligation, and shall not assign or transfer the performance of or right or duty to perform any obligation of Seller hereunder; provided, however, that Seller may assign the right to receive payments for coal directly from Buyer to a 24 Contract #LGE 99-002 lender as part of any accounts receivable financing or other revolving credit arrangement which Seller may have now or at any time during the term of this Agreement. B. Buyer shall not, without Seller's prior written consent, assign this Agreement or any right for the performance of or right or duty to perform any obligation of Buyer hereunder; except that, without such consent, Buyer may assign this Agreement in connection with a transfer by Buyer of all or a part interest in the generating station comprising the Delivery Point, or as part of a merger or consolidation involving Buyer. C. In the event of an assignment or transfer contrary to the provisions of this section, the non-assigning party may terminate this Agreement immediately. ss. 21.8 Entire Agreement. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. ss. 21.9 Amendments. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LOUISVILLE GAS AND ELECTRIC PEABODY COALSALES COMPANY COMPANY By: /s/ Wayne T. Lucas By: /s/ Richard A. Navarre ------------------------------ ---------------------------- Wayne T. Lucas Richard A. Navarre EVP - Power Generation President Date: January 7, 1999 Date: January 3, 1999 ---------------------------- -------------------------- 25 Contract #LGE 99-002 Exhibit A Page 1 of 2 EXHIBIT A SAMPLE COAL PAYMENT CALCULATIONS Total Evaluated Coal Costs for Contract No. - -------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
Section I Base Data -------------------------------------------- --------------- 1) Base F.O.B. price per ton: $ 17.52 /ton ----------- 1a) Tons of coal delivered: tons ----------- 2) Guaranteed average heat content: 10,550 BTU/LB. ----------- 2r) As received monthly avg. heat content: BTU/LB. ----------- 2a) Energy delivered in MMBTU: MMBTU ----------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $ 0.8303 MMBTU ----------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.22 LBS./MMBTU ----------- 3r) As received monthly avg. sulfur LBS./MMBTU ----------- 4) Guaranteed monthly avg. ash 12.89 LBS./MMBTU ----------- 4r) As received monthly avg. ash LBS./MMBTU ----------- 5) Guaranteed monthly avg. max. moisture 11.94 LBS./MMBTU ----------- 5r) As received monthly avg. moisture LBS./MMBTU ----------- Section II Discounts -------------------------------------------- --------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r LESS THAN 10,350 BTU/lb. then: {1 - (line 2r) / (line 2)} * $0.2604/MMBTU {1 - ( ) / ( )} * $0.2604 = $ /MMBTU ---------- 7d) SULFUR: If line 3r is greater than 3.50 lbs./MMBTU [ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur [ ( ) - ( ) ] * 0.1232 = $ /MMBTU ---------- 8d) ASH: If line 4r is greater than 14.25 lbs./MMBTU [ (line 4r) - (line 4) ] * 0.0083/MMBTU [ ( ) - ( ) ] * 0.0083 = $ /MMBTU ---------- 9d) MOISTURE: If line 5r is greater than 1350 lbs./MMBTU [ (line 5r) - (line 5) ] * 0.0016/MMBTU [ ( ) - ( ) ] * 0.0016 = $ /MMBTU ----------
26 Contract #LGE 99-002 Exhibit A Page 2 of 2
Total Price Section III Adjustments -------------------------------------------- --------------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $ /MMBTU ---------- Line 7d $ /MMBTU ---------- Line 8d $ /MMBTU ---------- Line 9d $ /MMBTU ---------- 10) Total Discounts (-): Algebraic sum of above: $ /MMBTU ---------- 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $ /MMBTU + $ /MMBTU = $ ----- ---------- ----- 13) Total base cost of coal (line 2a) * (line 2b) $ /MMBTU + $ /MMBTU = $ ----- ---------- ----- 14) Total coal payment for month (line 12) + (line 13) $ /MMBTU + $ = $ ----- ---------- -----
27 EX-10.78 6 EXHIBIT 10.78 EXHIBIT 10.78 F-98627 COAL SUPPLY AGREEMENT THIS AGREEMENT, made and entered into effective the 31st day of December, 1997, by and between, LESLIE RESOURCES, INC.(hereafter called Seller), being a Kentucky corporation having its principal offices at Hazard, Kentucky, and KENTUCKY UTILITIES COMPANY, (hereafter called KU), a Kentucky corporation, having its principal office at Lexington, Kentucky; WITNESSETH: That, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: SECTION I. TERM AND TERMINATION. Subject to the provisions of Section V and XII, and unless sooner terminated as elsewhere herein provided, this Agreement shall commence January 1, 1998 and end December 31, 2000. SECTION II. QUANTITIES OF COAL TO BE SOLD, PURCHASED AND DELIVERED; MANNER OF DELIVERIES. 1. As used in this Agreement, "ton" shall mean a short ton of 2,000 pounds avoirdupois weight. "Month" shall mean a calendar month; and "Contract Year" shall mean a period of twelve successive months commencing on any January 1 within the term hereof. "As-received" shall mean at unloading at E.W. Brown. 2. In accordance with and subject to all terms, provisions and conditions herein, during the term hereof, Seller shall sell and ship to KU, and KU shall purchase, receive and pay Seller for, a Base Quantity of 1,200,000 tons of coal. This Base Quantity shall be sold, purchased and delivered in the quantities set forth below in subparagraph (a), as ratable on a monthly basis as possible. (a) During the term, the quantities of coal to be sold, purchased and delivered hereunder shall be as follows:
PERIOD BASE QUANTITY ------ ------------- January 1, 1998 through 400,000 tons December 31, 1998 January 1, 1999 through 400,000 tons December 31, 1999 January 1, 2000 through 400,000 tons December 31, 2000
(b) Deliveries shall be by unit trains of 60 to 80 cars, with deliveries spaced evenly throughout the period. (c) At KU's option, delivery may be in rail cars provided by KU. (d) KU will coordinate with Seller in mutually scheduling all trains delivering coal under this Agreement. SECTION III. SOURCE AND SHIPMENT OF, AND TITLE TO, COAL. 1. The primary source of coal to supply the requirements of this Agreement shall be Seller's mines in Perry, Knott, Letcher, Breathitt, and Leslie Counties, Kentucky, consisting of its mine Permits listed in Exhibit (A) and including any areas or seams adjacent or nearby which may hereinafter be added through additional Permits or by renewal or modification of existing Permits. Seller may substitute - - 2 - comparable quality coal from other operations that Seller controls now or in the future, so long as such coal (A) is delivered to KU at no greater delivered cost per million BTU including taxes, (B) is of a quality and in conformity with the Specifications set forth in Section IV and (C) prior written approval for such substitution has been obtained from KU, which shall not be unreasonably withheld. It is understood that Seller may from time to time purchase small quantities of coal from independent third parties in the ordinary course of Seller's business, and that such coal may also be commingled with Seller's production and shipped to KU provided each of the conditions of subpart (a) and (b) above are fully satisfied. 2. Seller represents and warrants that the coal reserves now controlled by Seller and the production capacity are sufficient to satisfy all the requirements of this Agreement. It is understood that some of the production may be sold to purchasers other than KU; provided, however, that Seller shall, at all times while this Agreement remains in effect, maintain sufficient coal reserves and production capacity for Seller's full performance of its obligations hereunder. 3. Seller shall prepare and load the coal into railroad cars, including as above specified, at KU's election, cars provided by KU. Seller shall load the coal at Seller's loading point at Typo, Kentucky. Notwithstanding any of the foregoing provisions of this Section III, coal shall be loaded by - - 3 - Seller at a fast loading tipple which shall have the capacity of loading a unit train within four (4) hours, and shall otherwise conform to the definition of a fast loading tipple as contained in the tariffs of the carrying railroad. Seller shall deliver the coal to KU f.o.b. the railroad cars at the loading facility at Typo. 4. KU and Seller hereby agree among themselves to be responsible for any rail deficit charges because of movement of less than required minimum in the same proportion that each party has caused the incurrence of such deficit, except in the case of Force Majeure. 5. Coal mined, processed, and transported under this Agreement shall comply in all material respects, with all applicable federal, state, and local laws and regulations. SECTION IV. QUALITY AND SPECIFICATIONS OF COAL. 1. GENERAL. Coal delivered hereunder shall be: (a) coal meeting the Specifications set out in Paragraph 2(a) below, (b) coal shall be freeze-proofed by Seller upon reasonable notice by KU to Seller. Costs of freeze-proofing shall be borne by KU upon a calculation to be mutually agreed upon. 2. SPECIFICATIONS. (a) All coal received hereunder shall, on an as-received basis, meet the following specifications: Calorific Value 12,000 BTU/lb. Ash 12.00% Maximum
- - 4 - Moisture 10.00% Maximum Grindability (hardgrove Index) 45 Minimum Ash Softening (H=1/2W) (Temperature in reducing atmosphere) 2300 DEG. F Minimum Volatile Matter 32% Minimum Fixed Carbon 42% S02** 2.75 lbs/MMBTU Maximum Percent Sulfur 0.80% Minimum * Sizing 2" x 0 Fines (less than 1/4") 35% Maximum
*The stated Percent Sulfur of 0.80% Minimum shall be effective for only such time as KU does not experience operating difficulties. If, in KU's sole judgment, operating difficulties are encountered, KU shall notify Seller in writing of such difficulties. KU and Seller shall then attempt to reach a mutually agreeable solution to increase the sulfur content of coal shipments hereunder in order to alleviate the operating difficulties (including potential purchase by Seller of third party coal for a portion of the coal required hereunder). If no mutually agreeable solution can be reached within 30 days of KU's notification to Seller of operating difficulties, either party may terminate this agreement without incurring further obligation or liability hereunder. (b) All coal to be delivered hereunder, on an as-received basis, shall be classified as rejectable at the qualities specified below: Calorific Value 11,500 BTU/lb. Minimum Ash 14.50% Maximum Moisture 12.00% Maximum Grindability (Hardgrove Index) 42 Minimum Ash Softening (H=1/2W) (Temperature 2300 DEG. F Minimum in reducing atmosphere) Volatile Matter 32% Minimum S02** 2.75 lbs/MMBTU Maximum Percent Sulfur 0.80% Minimum Fines (less than 1/4") 45% Maximum
20,000 **SO2 = ---------------- x % Sulfur BTU/lb (c) KU shall have the right to classify as rejectable any trainload of coal which, when sampled and analyzed in - - 5 - accordance with the provisions of Section VIII, fails to meet the Specifications set out in Paragraph 2(b) of this Section IV. If KU does reject coal failing to meet such Specifications, and the coal has not been unloaded from the railroad cars, Seller shall forthwith remove the coal from the property where the coal is to be unloaded from railcars. Should KU reject any railcar load(s) of coal in any shipment, Seller shall arrange for the removal at Seller's cost of such rejected car(s). Seller's removal cost shall include, but not be limited to, all costs assessed by the railroad, reconsignment charges, transportation charges, and demurrage charges. In addition, if the rejected car(s) of coal are KU-provided car(s), then Seller shall also pay the per diem and mileage charges as defined in the Car Hire Tables of the Official Railway Equipment Register, ICC-RED-6411 Series, as amended. Such per diem charges shall be effective as of the first 7:00 AM following KU's rejection until the railcar(s) are unloaded at a destination specified by Seller and then returned to a destination specified by KU (or by the railroad, if applicable) for further utilization. Such mileage charges shall be based on the loaded and empty miles traveled by the rejected car(s) from the point of rejection to such specified return - - 6 - destination. If one or more trains received hereunder by KU during any calendar month are classified by KU as rejectable coal, or if KU has other reasonable grounds to anticipate that further shipments will be rejectable coal, KU shall have the option of stopping further shipments of coal by Seller until such time as Seller furnishes to KU reasonable assurance that the quality of coal to be shipped hereunder will meet the Specifications in Paragraph 2(a). In lieu of rejecting the coal, KU may at its option purchase the rejected coal on a basis mutually agreed upon. SECTION V. PRICES OF COAL Prices hereafter specified are to be paid by KU to Seller for coal delivered and accepted hereunder. Such prices shall not be increased by increases in Seller's cost of Production, except such prices shall be subject only to the Adjustments herein specified in Section V.1 and V.2. 1. BEGINNING JANUARY 1, 1998. The Price to be paid by KU to Seller for coal delivered and accepted hereunder, shipped by Seller from Typo Kentucky shall be as follows:
PERIOD COAL RECEIVED PRICE PER TON F.O.B. RAILCAR -------------------- ---------------------------- January 1, 1998 through December 31, 1998 $20.55
Such price shall remain fixed during the contract year. 2. BEGINNING JANUARY 1, 1999 AND JANUARY 1, 2000. Buyer and Seller will begin price negotiation for each year, 1999 & 2000, by September 1 of the preceding year, with the intent to - - 7 - reach a mutually agreed price which would begin on January 1, 1999 or January 1, 2000, as appropriate. Such prices shall remain fixed during each contract year. If mutual agreement cannot be reached by November 1, of either year, this coal supply agreement will terminate on December 31, 1998 or December 31, 1999, as appropriate, without either party incurring further obligation or liability. 3. The above price shall be subject to adjustment only in the event that new applicable federal or state statutes, regulations, or other governmental impositions, including but not limited to tax increases or decreases that occur after January 1, 1998, which cause Seller's cost for providing coal to KU under this Agreement to increase or decrease. Seller shall promptly notify KU of any such changes and supply sufficient documentation for KU to verify any such changes. Such adjustments shall be made effective on the first day of the calendar month following the effective date of any change, (except when such change is effective on the first day of the month in which case the adjustment shall be made as of such date). SECTION VI. CALORIFIC, ASH AND S02 ADJUSTMENTS. 1. As soon as practicable after the end of each month, KU shall determine and report to Seller the weighted average calorific value, in BTU per pound, the weighted average ash content, in percent, and the weighted average S02 value, in pounds per MMBTU, from the weights of such coal determined as provided in Section VII and from analyses thereof made as - - 8 - provided in Section VIII. The debits or credits resulting from the calorific, ash and SO2 adjustments described in the following paragraphs (2), (3), (4), and (5) will be made by the end of the following month. 2. CALORIFIC ADJUSTMENT. Such weighted average calorific value shall be used in adjusting the price of coal in the following manner. The F.O.B. Railcar Price then in effect, specified and determined as provided in Section V, but before any Ash or S02 Adjustment provided for hereafter in this Section VI, shall be adjusted to reflect variation from 12,000 BTU per pound in such weighted average calorific value of the coal received, in arriving at the price (exclusive of any Ash or SO2 Adjustment) to be paid by KU to Seller for such coal, in accordance with the following formula (assuming, for purposes of illustration, an adjusted price, prior to the Calorific Adjustment, of $20.55): ACTUAL BTU/LB. - 12,000 x $20.55 = Premium/Penalty Per Ton ----------------------- 12,000 3. ASH ADJUSTMENT. (a) If no more than two individual shipment received in a month exceeds 13.50% ash, KU shall determine the weighted average ash percentage of coal received during such month, and: (i) If the monthly weighted average percent of ash is in excess of 13.00% and is less than or equal to 14.00%, the downward price adjustment shall be $0.20/ton per percent with a base of 13.00%, I.E., - - 9 - $0.20/ ton x (monthly weighted ash %-13.00%) = downward price adjustment). Example: Monthly weighted average ash analysis 13.50%, $0.20/ton x (13.50%-13.00%) = $0.10/ton is the downward price adjustment. (ii) If the monthly weighted average percent of ash is greater than 14.00%, and is less than or equal to 15.00%, the downward price adjustment shall be $0.40/ton per percent with a base of 13.00% I.E., $0.40/ton x (monthly weighted ash % - 13.00%) = downward price adjustment. Example: Monthly weighted average ash analysis 14.50%, $0.40/ton x (14.50% - 13.00%) = $0.60/ton is the downward price adjustment. (iii) If the monthly weighted average percent of ash is greater than 15.00%, the downward price adjustment shall be $0.70/ton per percent with a base of $13.00%, I.E., $0.70/ton x (monthly weighted ash % - 13.00%) = downward price adjustment. Example: Monthly weighted average ash analysis 15.50%, $0.70/ton x (15.50% - 13.00%) = $1.75/ton is the downward price adjustment. (b) If the percent of ash of three or more shipments received in a month is greater than 13.50%, then the ash penalty for the entire month shall be computed on a - - 10 - shipment by shipment basis. (i) If the shipment percent of ash is in excess of 13.00% and is less than or equal to 14.00%, the downward price adjustment shall be $0.20/ton per percent with the base of 13.00%, I.E., $0.20/ton x (shipment ash % - 13.00%) = downward price adjustment. Example: Shipment ash analysis is 13.50%, $0.20/ton x (13.50% - 13.00%) = $0.10/ton is the downward price adjustment. (ii) If the shipment percent of ash is greater than 14.00% and is less than or equal to 15.00%, the downward price adjustment shall be $0.40/ton per percent with a base of 13.00%, I.E., $0.40/ton x (shipment ash % - 13.00%) - downward price adjustment. Example: Shipment ash analysis is 14.50%, $0.40/ton x (14.50% - 13.00%) = $0.60/ton is the downward price adjustment. (iii) If the shipment percent of ash is greater than 15.00%, the downward price adjustment shall be $0.70/ton per percent with a base of 13.00%, I.E., $0.70/ton x (shipment ash % - 13.00%) = downward price adjustment. Example: Shipment ash analysis 15.50%, $0.70/ton - - 11 - x (15.50% - 13.00%) - $1.75/ton is the downward price adjustment. 4. SO2 ADJUSTMENT. (a) Such weighted average S02, value shall be used in adjusting the price of coal in the following manner. The price of coal accepted containing a monthly weighted average S02 in excess of the 2.75 lbs./mmbtu guarantee will be adjusted downward according to the following formula: (ACTUAL S02 - 2.75) (ACTUAL BTU/LB.) ------------------------------------ 9434 = $ per ton downward adjustment Example: Monthly weighted average SO2 = 3.00; monthly weighted average BTU per lb. = 12,000: SO2 Guarantee = 2.75. (3.00 - 2.75) (12.000) ---------------------- 9434 = $0.32 per ton downward adjustment (b) If any individual shipment received in a month exceeds E.W. Brown's State Implementation Plan limit of 5.15 Lbs. S02/mmbtu, KU shall reduce said shipment by $2.00 per ton. This reduction is in addition to any S02 adjustment as stated in Section VI, paragraph 4(a). 5. COMBINATION OF ADJUSTMENTS. The 11,500 BTU per pound Minimum Calorific Value, 14.50% Maximum Ash, and 2.75 Lbs./mmbtu maximum SO2, Specifications in Paragraph 2(b) of Section IV shall apply in the determination of coal rejectability; but if KU receives and burns coal not meeting - - 12 - Specifications in Paragraph 2(a) of Section IV, the actual BTU per pound, actual Ash content and actual SO2/mmbtu of the coal shall be used in computation of the Adjustments provided for in this Section VI. When the Calorific Adjustment, Ash Adjustment, and SO2 Adjustment have been independently made as above provided, the results shall be combined, and the final adjustment to the price payable for such coal is so determined. SECTION VII. WEIGHT DETERMINATIONS. The determinations of the weight of the coal, for purposes of payment, shall be made by the rail carrier on its scales or other scales approved by rail carrier. SECTION VIII. SAMPLING AND ANALYSIS. 1. The Seller has sole responsibility for quality control of the coal and shall forward its loading quality to KU as soon after train loading as practicable. KU will, for purposes of payment, take a representative sample at E.W. Brown of each shipment. Samples taken by KU, for purposes of payment, shall be taken in accordance with KU's approved procedures of sampling. The analyses shall be performed in KU's laboratory in accordance with KU's approved methods. Each sample shall be analyzed for the as-received average moisture, ash, BTU and sulfur content. 2. KU shall compute the as-received weighted average moisture, ash, BTU and sulfur content for all coal received during each calendar month. Such calculations and payment of any - - 13 - premium/penalty adjustments will be delivered to Seller before the end of the following month. The values so determined shall be binding upon the parties unless and until it is established, by one or more independent laboratories using the referee sample as designated in Section VIII.3., that such analyses or calculations have been erroneous. 3. Prior to testing, each gross sample shall be divided into four equal portions and used as follows: one shall be analyzed to determine the quality of the coal; one shall be available for Seller (Seller sample); one shall be retained by KU, as the referee sample for a period of 30 days. If requested by either party, such retained referee sample will be sent to the location mutually agreed to for testing. All testing of any such sample by third parties shall be at requester's expense unless the results differ by more than the applicable ASTM reproducibility standards, in such case, KU will pay for testing. If the independent laboratory results differ by more than the applicable ASTM reproducibility, independent laboratory results will govern. 4. KU shall provide to Seller by mail or more expedient methods as required, the as-received weighted average moisture, ash, BTU and sulfur content of each sample. 5. Seller shall have the right to inspect, observe the operation of any sampling device or appurtenance thereto, sample crusher, reducer, sample container, laboratory equipment - - 14 - or procedure of KU. A proven deficiency in KU's sampling or testing procedures or facilities discovered by Seller shall be brought to KU's attention, and KU shall take any needed corrective action. SECTION IX. BILLING AND PAYMENT. Seller shall invoice KU for coal in each shipment. Such invoices shall be itemized to the extent required by KU, and shall be paid within 15 days after receipt of coal and receipt of invoice by KU. SECTION X. RECORDS AND AUDITS. Seller shall maintain accurate and complete books of account and records regarding coal delivered hereunder. KU, or independent consultants or firms designated by KU, shall have the right at all times to observe and inspect Seller's operations, and at any reasonable time or times to examine and audit all pertinent books of account and records of Seller for the purpose of verifying transactions and matters hereunder. If any such examination or audit discloses that an error has occurred and resulted in an overpayment or underpayment hereunder, the amount thereof shall be established and promptly paid, by the owing party, to the party owed. This provision shall survive the termination or expiration of this Agreement. SECTION XI. COMPLIANCE WITH LAWS, REGULATIONS, POLICIES AND RESTRICTIONS. 1. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt laws, regulations, policies and/or restrictions which - - 15 - will make it impossible or commercially impractical for Seller to continue delivery hereunder. If as a result of the adoption of such laws, regulations, policies or restrictions, or change in interpretation or enforcement thereof Seller decides that it will be impossible, or economically or otherwise impracticable for Seller to continue delivery hereunder, Seller shall so notify KU, and thereupon Seller and KU shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at the mine and/or in the handling and utilization of the coal at KU's E.W. Brown Station; and if in Seller's judgment such actions will not, without unreasonable expense to Seller, make it possible and practical for Seller to continue to deliver coal hereunder and without violating any applicable law, regulation, policy or restriction, Seller shall have the right, upon notice to KU, to terminate this Agreement without further obligation hereunder on the part of either party; provided, however, that if the impracticality pursuant to this Section XI of Seller's continuing to deliver coal hereunder is only on economical grounds, KU may, at its option, prevent such termination by agreeing to reimburse Seller for such expense to the extent that Seller deems such expense to be unreasonable. 2. The parties also recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt laws, regulations, policies and/or restrictions or change in interpretation or enforcement thereof which will make it impossible or commercially impracticable for - - 16 - KU to utilize at E.W. Brown, this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies or restrictions, KU decides that it will be impossible or economically or otherwise impracticable for KU to utilize at KU's E.W. Brown Station coal which would be delivered hereunder, KU shall so notify Seller, and thereupon KU and Seller shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at the mine and/or in the handling and utilization of the coal at KU's said Station; and if in KU's judgment such actions will not, without unreasonable expense to KU, make it possible and practical for KU to so utilize coal which thereafter would be delivered hereunder and without violating any applicable law, regulation, policy or order, KU shall have the right, upon notice to Seller, to terminate this Agreement without further obligation hereunder on the part of either party; provided, however, that, if the impracticality pursuant to this Section XI of KU's utilizing the coal is only on economical grounds, Seller may, at its option, prevent such termination by agreeing to reimburse KU for such expense to the extent that KU deems such expense to be unreasonable. SECTION XII. FORCE MAJEURES. 1. DEFINITION. The term "force majeure" as used herein shall mean any and all causes reasonably beyond the control of the party failing to perform, such as but not limited to acts of God, acts of the public enemy, insurrections, riots, - - 18 - labor disputes, government closures, boycotts, labor and material shortages, fires, explosions, floods, breakdowns or outages (including scheduled outages for maintenance or repairs) of or damage to plants, equipment or facilities, interruptions to power supplies or transportation, embargoes, and acts of military or civil authorities, which wholly or partly prevent the mining, processing, loading and/or delivering of the coal by Seller, or the receiving, accepting and/or utilizing of the coal by KU. As used in the preceding sentence, the phrase "prevent the receiving or accepting" (of the coal by KU) shall include, but not be limited to, breakdowns or outages of the material handling systems at the E.W. Brown Station. The parties recognize that coal purchased by KU hereunder is intended by it for use in its E.W. Brown Station. As used in this Paragraph, "scheduled outages for maintenance or repairs" includes, but is not limited to, outages determined by KU to be necessary for warranty inspections, periodic major overhauls, identification and/or correction of causes of unsatisfactory performance including but not limited to failure to meet environmental requirements, and/or performance of maintenance or repairs reasonably believed to be necessary to the avoidance of involuntary or forced outages. The outages do not include outages for normal maintenance performed on an annual basis. Each party shall promptly notify the other party following commencement of a force majeure. 2. EFFECT HEREUNDER--GENERAL. If because of a force majeure either party is unable to carry out any of its - - 18 - obligations under this Agreement (other than the obligation to pay money in connection with performance of the Agreement), and if such party shall promptly give to the other party written notice of such force majeure, then the obligations of the party giving such notice and the corresponding obligations of the other party shall be suspended to the extent made necessary by such force majeure and during its continuance; provided, however, that the party giving such notice shall act promptly in reasonable manner to eliminate such force majeure. Either party shall have the right to elect to suspend the production, delivery, receipt, acceptance and/or sale or purchase of coal, as the case may be, for the period of time during which such force majeure exists; and, in the event of a force majeure declared by Seller, KU, if it so elects, shall have the right during such period to purchase coal from other sources, and, in the event of a force majeure declared by KU, Seller, if it so elects, shall have the right during such period to sell coal to others. Any deficiencies in deliveries of coal hereunder caused by force majeures shall not be made up except by mutual consent; but if Seller for any reason other than a KU force majeure fails to deliver coal to KU pursuant to normal established shipment schedules but does not notify KU of the occurrence of a force majeure, KU shall have the right to require, but shall not be obligated to accept, make-up tonnages or deliveries of tonnages so lost, at the price in effect when lost. - -19 - 3. TERMINATION FOR PROTRACTED FORCE MAJEURE(S). If (A) a force majeure occurs, (B) the obligations of the parties are suspended pursuant to provisions of this Section XII, (C) such condition (alone or extended by other force majeures) continues so that the obligations of the parties remain suspended for a period of six months, and (D) at the end of such six months or at any time thereafter during the continuance of the force majeure(s) the party other than the party suffering the force majeure(s), in the exercise of reasonable judgment, concludes that there is no likelihood of discontinuance in the immediate future of the force majeure(s) or the resulting suspension of the obligations of the parties, then such party may terminate this Agreement without liability to the party suffering the force majeure(s) by giving to such party sixty days written notice of intention to terminate, unless the force majeure(s) are discontinued and the obligations are restored within such sixty days. SECTION XIII. WAIVERS AND REMEDIES. 1. The failure of either party to insist in any one or more instances upon strict performance of any provision of this Agreement by the other party, or to take advantage of any of its rights hereunder, shall not be construed as a waiver by it of any such rights with respect to any subsequent non-performance of such provision or other matter hereunder; but the provision shall retain its effectiveness and enforceability, and the rights of - - 20 - the parties shall continue and remain in full force and effect. 2. If, at the time a party takes action hereunder requested or demanded by the other party, the party taking the action gives written notice that it is doing so under protest and without agreement as to the appropriateness of the action, then the taking of the action, even if thereafter repeated without further notice, shall not give rise to application of the principles of contemporaneous construction by the parties. 3. Each remedy specifically provided for under this Agreement shall be taken and construed as cumulative and in addition to every other remedy provided for herein or by law. 4. Except with respect to a termination by either party pursuant to the provisions of Section XV, no default by either party in the performance of any of its covenants or obligations hereunder, which except for this provision would be the legal basis for the right of rescission or termination of this Agreement by the other party, shall give or result in such a right unless and until the defaulting party shall fail to correct or take all such actions as are necessary to correct such default within thirty days after written notice of claim of such default is given to the defaulting party by the other party. SECTION XIV. NOTICES. 1. Any notice, request, consent, demand, report or statement which is given to, or served upon, any party under any provision of or in relation to this Agreement, shall be in - - 21 - writing unless otherwise specifically provided herein, and shall be treated as duly delivered when the same either is personally delivered to the President or Vice President of KU in case of a notice to KU, or personally delivered to the President or a Vice President of Seller in the case of a notice to Seller, or is deposited in the United States mail, postage prepaid, and properly addressed as follows: If the notice is to KU, Mr. Wayne T. Lucas Senior Vice President Kentucky Utilities Company One Quality Street Lexington, Kentucky 40507 Copy to: President Kentucky Utilities Company One Quality Street Lexington, Kentucky 40507 (or to such other person or such other address as KU shall have designated by due notice to Seller), and If the notice is to Seller, Leslie Resources, Inc. 1921 Tori Drive Hazard, Kentucky 41701 Attn: Mr. Greg Wells, President (or to such other person or such other address as Seller shall have designated by due notice to KU). 2. Notwithstanding the provisions in Paragraph 1, any notice, request or demand pertaining to routine matters of an operating nature may be delivered by mail, messenger, telephone, telegraph, telecopy or orally to the party being notified as may be appropriate, and, if given by telephone, telegraph, telecopy - - 22 - or orally, shall be confirmed in writing as soon as practicable thereafter, if the party to which the notice is given so requests in any particular instance. SECTION XV. ASSIGNMENT. 1. Seller shall not, without KU's prior written consent, make any assignment or transfer of this Agreement, by operation of law or otherwise, including any assignment or transfer as security for any obligation, and shall not assign or transfer the performance of or right or duty to perform any obligation of Seller hereunder; provided, however, that Seller may assign the right to receive payments for coal directly from KU, as part of any accounts receivable financing or other revolving credit arrangement which Seller may have now or at any time during the term of this Agreement. 2. KU shall not, without Seller's prior written consent, assign this Agreement or any right or the performance of or right or duty to perform any obligation of KU hereunder; except that, without such consent, KU may assign this Agreement in connection with and as part of a sale and transfer by KU of all or a part interest in KU's E.W. Brown Generating Station, or as part of a merger or consolidation involving KU. 3. In the event of any assignment or transfer contrary to the provisions of this Section XV, the party not making such assignment or transfer may terminate this Agreement immediately. SECTION XVI. HEADINGS NOT TO AFFECT CONSTRUCTION. The - - 23 - headings of the Sections, Paragraphs and Subparagraphs of this Agreement are for convenient reference, and do not constitute any part of the provisions hereof; nor shall the heading control or affect the meaning, construction or effect of such provisions. SECTION XVII. WRITTEN INSTRUMENT CONTAINS ENTIRE AGREEMENT. This written instrument contains the entire agreement between the parties in respect of the subject matter; and there are no other understandings or agreements between the parties in respect thereof. SECTION XVIII. CONSTRUCTION OF AGREEMENT. This Agreement shall be governed by and construed according to the laws of the State of Kentucky. IN TESTIMONY WHEREOF, witness the signatures of the parties, as of the day and year written first above. LESLIE RESOURCES, INC. By: /S/ GREG WELLS - PRES. ----------------------------- Greg Wells, President KENTUCKY UTILITIES COMPANY By: /S/ MICHAEL R. WHITLEY /S/WTL ----------------------------- Michael R. Whitley, President - - 24 - Exhibit (A)
STATE FEDERAL PERMITTEE OPERATOR MINES COUNTY STATE PERMIT # MSHA # Leslie Resources, Inc. Leslie Resources, Inc. Job #2-Walkers Branch Knott KY 860-0315 15-17013 Knott KY 860-0356 15-17013 Leslie Resources, Inc Leslie Resources, Inc. Job #5-Chavies Perry KY 897-0323 15-16606 987-0345 Leslie Resources, Inc Leslie Resources, Inc. Job #6-Wooten Leslie KY 866-0196 15-17281 Leslie Resources, Inc Leslie Resources, Inc. Job #8-Big Creek Perry KY 866-0219 15-17534 (A) Kem Coal, Inc. Leslie Resources, Inc. Job #8-Big Creek Perry KY 886-0225 Leslie Resources, Inc Leslie Resources, Inc. Job #8-Big Creek Perry KY 866-0226 (A) Mountain Clay, Inc. Leslie Resources, Inc. Job #24-Camp Creek Leslie KY 866-0229 15-17746 (A) Kem Coal, Inc. Meade & Sheperd Coal Job #25-Pads Branch Perry KY 497-0122 15-17747 (A) Kem Coal, Inc. Leslie Resources, Inc. Job #28-Ball Creek Perry KY 860-0351 15-17838 (A) Mountain Clay, Inc. Meade & Sheperd Coal Job #27-Perkins Perry KY 897-0384 15-17747 (A) Kem Coal, Inc. Leslie Resources, Inc. Job #31-Little Willard Perry KY 897-0358 15-10180 (A) Kem Coal, Inc. Leslie Resources, Inc. Job #30-Briar Fork Perry KY 897-0369 Pending LOADOUT (A) Acecc, Inc. Leslie Resources, Inc. Typo Tipple-Station No. 42621 Perry KY 897-6002 15-13495
(A) All these companies are subsidiaries of Leslie Resources Management, Inc., which is a holding company formed by Mr. Greg Wells who owns a 100% of Leslie Resources Management, Inc. and Leslie Resources, Inc. - - 25 - EX-10.79 7 EXHIBIT 10.79 Contract # F-98627 Amendment #1 AMENDMENT NO. ONE TO CONTRACT THIS AMENDMENT NO. ONE IS entered into effective as of November 16, 1998, by and between KENTUCKY UTILITIES COMPANY (hereinafter referred to as "KU"), whose address is: 220 West Main Street, Louisville, Kentucky 40202, LESLIE RESOURCES, INC. a Kentucky corporation and a subsidiary of AEI Holding Company, Inc., with a principal address of 1500 North Big Run Road, Ashland, Kentucky 41102 ("Assignor") AEI COAL SALES COMPANY, INC., a Kentucky corporation ("Seller"), and AEI HOLDING COMPANY, INC., a Delaware corporation ("Guarantor"). In consideration of the agreements herein contained, the parties hereto agree as follows: 1.0 MODIFICATIONS TO AGREEMENT The Agreement heretofore entered into by KU and Assignor, dated effective December 31, 1997, and identified by the Contract Number set forth above (hereinafter referred to as "Agreement"), is hereby amended as follows: 1.1 KU hereby consents to Assignor's assignment and Seller's assumption of all Assignor's right, title and interest in and to the Agreement, pursuant to that certain Assignment and Assumption Agreement dated November 16, 1998, between Assignor and Seller. KU's consent is expressly conditioned on: (a) Seller's assumption of all Assignor's obligations under the Agreement; and (b) Guarantor's guaranty of Seller's obligations as set forth in that certain Guaranty Agreement given by Guarantor to KU in connection with Seller's assumption of Assignor's obligations. Hereinafter, references to "Seller" in the Agreement, as amended hereby, shall be deemed to be references to AEI Coal Sales Company, Inc. 1.2 Section II.2, Quantities, is hereby revised to provide that the Base Quantity shall be defined as 1,600,000 tons of coal. 1.3 Section II.2(a) is hereby revised to provide that the quantities of coal to be sold, purchased and delivered during the period of December 15, 1998 through December 31, 1999 shall be 800,000 tons. 1.4 In Section IV.2 (a), Specifications, the as-received quality specifications for Calorific value, Ash and SO2 are hereby revised to provide that the following specifications shall be applicable beginning on December 15, 1998, and continuing through the end of the term: Calorific Value 11,800 BTU/lb. Ash 13.00% Maximum SO2 3.00 Lbs. SO2/MMBtu Maximum Contract # F-98627 Amendment #1 1.5 In Section IV.2.(b), the as-received quality specification for SO2 classified as rejectable are hereby revised to provide that the following specification shall be applicable beginning on December 15, 1998, and continuing through the end of the term: SO2 3.75 Lbs. SO2/MMBtu Maximum 1.6 In Section V.1, Prices of Coal, the price per ton F.O.B. rail car beginning on December 15, 1998, will be as follows: December 15, 1998 through December 31, 1999 $21.73 per ton 1.7 Section VI. (2) Calorific Adjustment and Section VI. 4 (a) SO2 Adjustment, are hereby revised to provide that beginning on December 15, 1998, and continuing through the end of the term, the following specifications shall be applicable: Section VI.(2). Calorific Adjustment. Such weighted average calorific value shall be used in adjusting the price of coal in the following manner. The F.O.B. Railcar Price then in effect, specified and determined as provided in Section V, but before any Ash or SO2 Adjustment provided for hereafter in this Section VI, shall be adjusted to reflect variation from 11,800 BTU per pound in such weighted average calorific value of the coal received, in arriving at the price (exclusive of any Ash or SO2 Adjustment) to be paid by KU to Seller for such coal, in accordance with the following formula (assuming, for purposes of illustration, an adjusted price, prior to the Calorific Adjustment, of $21.73): Actual BTU/lb. - 11,800 x $21.73 = Premium/Penalty Per Ton. ----------------------- 11,800 Section VI.(4). SO2 Adjustment. (a) Such weighted average SO2 value shall be used in adjusting the price of coal in the following manner. The price of coal accepted containing a monthly weighted average SO2 in excess of the 3.00 Lbs./MMBtu guarantee will be adjusted downward according to the following formula: (Actual SO2 - 3.00)(Actual Btu/lb.) = $ per ton downward adjustment ------------------------------------ 9434 Example: Monthly weighted average SO2 = 3.50; monthly weighted BTU per lb. = 12,000: SO2 Guarantee = 3.00. Contract # F-98627 Amendment #1 (3.50 - 3.00) (12,000.) = $0.64 per ton downward adjustment ----------------------- 9434 1.8 Section VI.5, Combination of Adjustments, is hereby revised to add the following sentence: "Beginning on December 15, 1998, and continuing through the remainder of the term of the Contract, the reference to SO2 set forth in this shall be revised to indicate an SO2 of 3.00 lbs./MM BTU Maximum." 2.0 STATUS OF AGREEMENT As amended herein, the Agreement is hereby ratified and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 on the day and year written, but effective as of the day and year first set forth above. KENTUCKY UTILITIES COMPANY LESLIE RESOURCES, INC. By: /s/ Wayne T. Lucas By: /s/ Larry Addington -------------------------------- --------------------------- Wayne T. Lucas Larry Addington EVP - Power Generation Chairman Date: 01/08/99 Date: 01/06/99 ---------------------------- ------------------------- AEI COAL SALES COMPANY, INC. By: /s/ Marc Merritt ----------------------------- Marc R. Merritt Its: President Date: 01/06/99 --------------------------- EX-10.80 8 EXHIBIT 10.80 ASSIGNMENT AND ASSUMPTION AGREEMENT THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("this Agreement") is made and entered into this 16th day of November, 1998, by and between LESLIE RESOURCES, INC., a Kentucky corporation, and a subsidiary of AEI RESOURCES, INC., a Delaware corporation ("Assignor"), and AEI COAL SALES COMPANY, INC., a Kentucky corporation ("Assignee"). WHEREAS Assignor entered into a Coal Supply Agreement dated December 31, 1997, with Kentucky Utilities Company (the "Agreement") for the sale of coal from various mines in Kentucky. WHEREAS Assignor wishes to assign and Assignee wishes to accept all of Assignor's rights and obligations under the Agreement. NOW THEREFORE, for and in consideration of the mutual promises and terms and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree to the following: 1. Transfer and Assignment. Assignor hereby transfers, conveys, assigns, sets over and delivers to Assignee, and Assignee hereby accepts the transfer, conveyance, assignment, set over and delivery of all of Assignor's present and future right title and interest in and to the Agreement. 2. Assumption. Assignee hereby assumes and agrees to be bound by all of the terms of and shall undertake all of Assignor's liabilities and obligations of any kind related to the Agreement from and after the date of this Agreement and all references to Assignor in the Agreement shall be deemed to be references to the Assignee. 3. Notice to Third Parties; Consent of Third Parties. Assignor and Assignee shall give notice to any necessary third party of the assignment and transfer of the Agreement. The parties hereto agree to cooperate with one another and execute such further documents and instruments, if any, and take such other actions as may be necessary to give effect to this Agreement. To the extent that the transfer to or assumption by Assignee of the Agreement is deemed to require the consent of a third party, this Agreement shall not constitute a transfer or assumption of same if such transfer or assumption would constitute a breach, violation or termination thereof or affect adversely Assignor's ability to convey such interest to Assignee without impairment until such time as an appropriate consent of such third party is obtained. 4. No Third Party Beneficiaries. Nothing in this Agreement shall confer any rights upon any person or entity other than the parties hereto and each such party's respective successors and assigns. 5. Successors and Assigns. The terms of this Agreement shall be binding upon, and shall inure to the benefit of the parties hereto and their respective successors and assigns. 6. Amendments and Waivers. No amendment, modification or discharge of this Agreement and no waiver hereunder shall be valid or binding unless it is set forth in writing and duly executed by the party against whom enforcement of the amendment modification, waiver or discharge is sought. Any such waiver shall constitute a waiver only with respect to the specific matter described in such writing and shall in no way impair the rights of the party granting such waiver in any other respect to at any other time. 7. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Kentucky. 8. Entire Agreement. This Agreement constitutes the entire agreement of the parties and supersedes all prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof. 9. Headings. The headings contained in this Agreement are for purposes of convenience only and shall not affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their authorized representatives as of the date first written above. LESLIE RESOURCES, INC. AEI COAL SALES COMPANY, INC. /s/ John Lynch /s/ Marc Merritt - ------------------------------------ -------------------------------------- By: John Lynch By: Marc Merritt Its: Sec. Its: President Consent acknowledged: KENTUCKY UTILITIES COMPANY /s/ Wayne T. Lucas - ------------------------------------ By: Wayne T. Lucas Its: Executive Vice President, Power Production EX-10.81 9 EXHIBIT 10.81 EXHIBIT 10.81 F-95513 COAL SUPPLY AGREEMENT THIS AGREEMENT, made and entered into effective the 1st day of April, 1995, by and between CONSOLIDATION COAL COMPANY, QUARTO MINING COMPANY, McELROY COAL COMPANY, CONSOL PENNSYLVANIA COAL COMPANY, GREENON COAL COMPANY and NINEVEH COAL COMPANY, (hereafter collectively called Seller), being Delaware corporations, with their principal offices in, Pittsburgh, Pennsylvania, and KENTUCKY UTILITIES COMPANY, (hereafter called KU), a Kentucky corporation, having its principal office at Lexington, Kentucky; WITNESSETH: That, in consideration of the mutual covenants and agreements herein contained, the parties agree as follows: SECTION I. TERM AND TERMINATION. Subject to the provisions of Section XII, and unless sooner terminated as elsewhere herein provided, this Agreement shall commence April 1, 1995 and end March 31, 2000. SECTION II. QUANTITIES OF COAL TO BE SOLD, PURCHASED AND DELIVERED; MANNER OF DELIVERIES. 1. As used in this Agreement, "ton" shall mean a short ton of 2,000 pounds avoirdupois weight. "Month" shall mean a calendar month; and "Contract Year" shall mean a period of twelve successive months commencing on any April 1 within the term -1- hereof. "As-received" shall mean at unloading at Ghent. 2. In accordance with and subject to all terms, provisions and conditions herein, during the term hereof, Seller shall sell and ship to KU, and KU shall purchase, receive and pay Seller for, a Base Quantity of 2,100,000 tons of coal. This Base Quantity shall be sold, purchased and delivered in the quantities set forth below in subparagraph (a), as ratable on a monthly basis as possible. (a) During the term, the quantities of coal to be sold, purchased and delivered hereunder shall be as follows:
PERIOD BASE QUANTITY ------ -------------- April 1, 1995 through 420,000 tons + 10% quarterly March 31, 1996 - April 1, 1996 through 420,000 tons + 10% quarterly March 31, 1997 - April 1, 1997 through 420,000 tons + 10% quarterly March 31, 1998 - April 1, 1998 through 420,000 tons + 10% quarterly March 31, 1999 - April 1, 1999 through 420,000 tons + 10% quarterly March 31, 2000 -
(b) On or before March 1, June 1, September 1, and December 1 of each contract year, KU may give Seller notice in writing that KU elects to increase or decrease the tons of coal to be sold, purchased and delivered hereunder during the next Contract Quarter (April 1, July 1, October 1 and January 1), by an amount, up to 10,500 tons for the Quarter. (c) Seller shall cooperate with KU in the scheduling of the loading of barges so that the delivery of coal from Seller -2- may be coordinated with other barge deliveries to the Ghent Generating Station. SECTION III. SOURCE AND SHIPMENT OF, AND TITLE TO, COAL. 1. The primary source of coal to supply the requirements of this Agreement shall be the Shoemaker Mine and the McElroy Mine in Marshall County, West Virginia. As necessary to comply with the quality requirements of this Agreement, Seller may blend with coal from such primary sources, coal from Seller's Dilworth, Mahoning Valley, Bailey and/or Enlow Fork Mines. Seller may substitute comparable quality coal from other reserves that Seller controls now or in the future, so long as such coal (A) is delivered to KU at no greater delivered cost per million BTU including taxes, (B) is of a quality and in conformity with the Specifications set forth in Section IV and (C) prior written approval for such substitution has been obtained from KU. 2. Seller represents and warrants that the coal reserves now controlled by Seller and Seller's production capacity are sufficient to satisfy all the requirements of this Agreement. It is understood that some of the production may be sold to purchasers other than KU; provided, however, that Seller shall, at all times while this Agreement remains in effect, maintain sufficient coal reserves and production capacity for Seller's full performance of its obligations hereunder. 3. Seller shall prepare and load the coal into barges provided by KU's barge carrier. Seller shall deliver the coal to -3- KU f.o.b. barge at the loading facilities between M.P. 93.7 and 115.6 on the Ohio River. 4. Coal mined, processed, and transported under this Agreement shall comply with all applicable federal, state, and local laws and regulations. SECTION IV. QUALITY AND SPECIFICATIONS OF COAL. 1. GENERAL. Coal delivered hereunder shall be: (a) Predominantly washed coal meeting the Specifications set out in Paragraph 2(a) below, (b) free of extraneous material, crushed to the size of 2" x 0 with no more than 55% classified as (less than 1/4") fines, with no stoker or other selected size or sizes or types of coal removed from the coal delivered hereunder unless, and only to the extent, necessary to bring the coal into compliance with Specifications herein. 2. SPECIFICATIONS. (a) All coal received hereunder shall, on an as-received basis, meet the following specifications:
Calorific Value 12,000 BTU/lb. Ash 11.00% Maximum Moisture 10.00% Maximum Grindability (Hardgrove Index) 50 Minimum Ash Softening (H=1/2W) (Temperature in reducing atmosphere) 2100DEG. F Minimum Volatile Matter 32% Minimum Fixed Carbon 43% Minimum Sulfur 1.5% Minimum SO2 Emission Limit * 6.25 lbs/MMBTU Maximum Sizing 2" x 0 Fines (less than 1/4") 55% Maximum Chlorine (Dry) 0.12% Maximum
-4- (b) All coal to be delivered hereunder, on an as-received basis, shall be classified as rejectable at the qualities specified below:
Calorific Value 11,700 BTU/lb. Minimum Ash 13.00% Maximum Moisture 10.00% Maximum Grindability (Hardgrove Index) 45.00 Minimum Ash Softening (H=1/2W) (Temperature in reducing atmosphere) 21000 F Minimum Volatile Matter 32% Minimum Sulfur 1.5% Minimum S02 Emission Limit * 6.25 lbs/MMBTU Maximum Fines (less than 1/4") 55% Maximum Chlorine (Dry) 0.16% Maximum
*SO2 = 20,000 X % Sulfur ------------- BTU (c) KU shall have the right to classify as rejectable any barge of coal which, when sampled and analyzed in accordance with the provisions of Section VIII, fails to meet the Specifications set out in Paragraph 2(b) of this Section IV. If KU does reject coal failing to meet such Specifications, Seller shall forthwith arrange for coal to be removed from the barge or shipped to another purchaser at Seller's expense, including but not limited to sampling and barge demurrage. If all coal received hereunder by KU for three consecutive barges is classified by KU as rejectable coal, or if KU has other reasonable grounds to anticipate that -5- further shipments will be of rejectable coal, KU shall have the option of stopping further shipments of coal by Seller until such time as Seller furnishes to KU reasonable assurance that the quality of coal to be shipped hereunder will meet the Specifications in Paragraph 2(a). In lieu of rejecting the coal, KU may at its option purchase the rejected coal on a "distress" basis mutually agreed upon. (d) If 20-percent or more of monthly ratable shipments do not meet the Specifications in Paragraph 2(a), KU shall also have the option of stopping shipments until Seller furnishes reasonable assurance that the quality of coal shipped hereunder meets the Specifications in Paragraph 2(a). (e) SELLER HEREBY DISCLAIMS, AND BUYER HEREBY WAIVES, ANY AND ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. SECTION V. PRICES OF COAL. Prices hereafter specified are to be paid by KU to Seller for coal delivered and accepted hereunder and include any barge fleeting or switching charges. Such prices shall not be increased before April 1, 1995, by increases in Seller's cost of Reclamation, Royalty expenses, Severance Taxes, any other applicable Taxes, or any other costs included in the Price f.o.b. Barge. After April 1, 1995, such prices shall be subject only to the Adjustments herein specified. -6- 1. BEGINNING APRIL 1, 1995. The Price f.o.b. Barge to be paid by KU to Seller for coal delivered and accepted hereunder, shipped by Seller from M.P. 93.7 to M.P. 115.6 on the Ohio River shall be as follows:
PERIOD COAL RECEIVED PRICE PER TON F.O.B. BARGE ---------------------- --------------------------- April 1, 1995 through $18.00 March 31, 1996 April 1, 1996 through $18.40 March 31, 1997 April 1, 1997 through $18.75 March 31, 1998 April 1, 1998 through $19.15 March 31, 1999 April 1, 1999 through $19.50 March 31, 2000
Such prices shall remain fixed during each contract year. 2. The above price shall be subject to adjustment only in the event of the enactment or change of any applicable federal or state statutes, regulations, or other governmental impositions occurring after April 1, 1995, which cause Seller's cost for providing coal to KU under this Agreement to increase or decrease. Seller shall promptly notify KU of any such changes and supply sufficient documentation for KU to verify any such changes. Such adjustments shall be made effective on the first day of the calendar month following the effective date of any change, (except when such change is effective on the first day of the month in which case the adjustment shall be made as of such date). -7- SECTION VI. CALORIFIC, ASH AND MOISTURE ADJUSTMENTS. 1. As soon as practicable after the end of each month, KU shall determine and report to Seller the weighted average calorific value, in BTU per pound, the weighted average ash content, in percent, and weighted average moisture content, in percent, from the weights of such coal determined as provided in Section VII and from analyses thereof made as provided in Section VIII. The debits or credits resulting from the calorific, ash and moisture adjustments described in the following paragraphs (2), (3), (4), and (5) will be made by the end of the following month. 2. CALORIFIC ADJUSTMENT. Such weighted average calorific value shall be used in adjusting the price of coal in the following manner. The f.o.b. Barge Price then in effect, specified and determined as provided in Section V, but before any Ash or Moisture Adjustment provided for hereafter in this Section VI, shall be adjusted to reflect variation from 12,000 BTU per pound in such weighted average calorific value of the coal received, in arriving at the price (exclusive of any Ash or Moisture Adjustment) to be paid by KU to Seller for such coal, in accordance with the following formula (assuming, for purposes of illustration, an f.o.b. Barge Price, prior to the Calorific Adjustment, of $18.00): ACTUAL BTU/LB. - 12,000 x $18.00 = Premium/Penalty Per Ton ----------------------------- 12,000 3. ASH ADJUSTMENT. (a) If the monthly weighted average percent of ash for all -8- receipt(s) received is less than 8.00%, the upward price adjustment shall be $0.20/ton per percent with a base of 8.00%, I.E., ($0.20/ton x (8.00% - monthly weighted ash %) = upward price adjustment). Example: Monthly weighted average ash analysis is 5.80%, $0.20/ton x (8.00% - 5.80%) = $0.44/ton is the upward price adjustment. (b) If the monthly weighted average percent of ash is in excess of 11.00% and is less than or equal to 12.00%, the downward price adjustment shall be $0.20/ton per percent with a base of 11.00%, I.E., ($0.20/ton x (monthly weighted ash % - 11.00%) = downward price adjustment). Example: Monthly weighted average ash analysis is 11.50%, $0.20/ton x (11.50% - 11.00%) = $0.10/ton is the downward price adjustment. (c) If the monthly weighted average percent of ash is greater than 12.00% and is less than or equal to 13.00%, the downward price adjustment shall be $0.40/ton per percent with a base of 11.00% I.E., ($0.40/ton x (monthly weighted ash % - 11.00%) = downward price adjustment). Example: Monthly weighted average ash analysis is 12.50%, $0.40/ton x (12.50% - 11.00%) = $0.60/ton is the downward price adjustment. (d) If the monthly weighted average percent of ash is greater than 13.00%, the downward price adjustment shall be $0.70/ton per -9- percent with a basis of 11.00%, I.E., ($0.70/ton x (monthly weighted ash % - 11.00%) = downward price adjustment). Example: Monthly weighted average ash analysis is 13.50%, $0.70/ton x (13.50% - 11.00%) = $1.75/ton is the downward price adjustment. 4. MOISTURE ADJUSTMENT. (a) If the monthly weighted average percent of moisture is in excess of 10.00% and is less than or equal to 11.00%, the downward price adjustment shall be $0.04/ton per percent with a base of 10.00%, I.E., ($0.04/ton x (monthly weighted moisture % - 10.00%) = downward price adjustment). Example: Monthly weighted average moisture analysis is 10.50%, $0.04/ton x (10.50% - 10.00%) = $0.02/ton is the downward price adjustment. (b) If the monthly weighted average percent of moisture is greater than 11.00% and is less than or equal to 12.00%, the downward price adjustment shall be $0.08/ton per percent with a base of 10.00%, I.E., ($0.08/ton x (monthly weighted moisture % - 10.00%) = downward price adjustment). Example: Monthly weighted average moisture analysis is 11.50%, $0.08/ton x (11.50% - 10.00%) = $0.12/ton is the downward price adjustment. (c) If the monthly weighted average percent of moisture is greater than 12.00%, the downward price adjustment shall be $0.12/ton per percent with a base of 10.00%, I.E., ($0.12/ton x -10- (monthly weighted moisture % - 10.00%) = downward price adjustment). Example: Monthly weighted average moisture analysis is 12.50%, $0.12/ton x (12.50% - 10.00%) = $0.30/ton is the downward price adjustment. 5. COMBINATION OF ADJUSTMENTS. The 11,700 BTU per pound Minimum Calorific Value, 13.00% Maximum Ash, and 10.00% Maximum Moisture. Specifications in Paragraph 2(b) of Section IV shall apply in the determination of coal rejectability; but if KU receives and burns coal not meeting Specifications in Paragraph 2(a) of Section IV, the actual BTU per pound, actual Ash content and actual Moisture content of the coal shall be used in computation of the Adjustments provided for in this Section VI. When the Calorific Adjustment, Ash Adjustment, and Moisture Adjustment have been independently made as above provided, the results shall be combined, and the final adjustment to the price payable for such coal is so determined. SECTION VII. WEIGHT DETERMINATIONS. The determinations of the weight of the coal, for purposes of payment, shall be made with KU's belt scales at Ghent. KU will provide to Seller by fax or other expeditious means, the barge weights, as they become available. Said scales shall be inspected and certified in accordance with the appropriate provisions of the laws of Kentucky. Seller shall have the right to inspect at reasonable times and witness the certification of said scales. If a -11- discrepancy is found as a result of said inspection or certification, same shall be resolved by mutual consent. SECTION VIII. SAMPLING AND ANALYSIS. 1. The Seller has sole responsibility for quality control of the coal and shall forward its loading quality to KU as soon after barge loading as practicable. KU will, for purposes of payment, take a representative sample at Ghent. Samples taken by KU, for purposes of payment, shall be taken in accordance with KU's approved procedures of sampling. Each barge shall be sampled and analyzed by KU. The analyses shall be performed in KU's laboratory in accordance with KU's approved methods. Each barge sample shall be analyzed for the as-received average moisture, ash, BTU and sulfur content. KU will furnish Seller revisions of KU's approved sampling procedures. 2. KU shall compute the as-received weighted average moisture, ash, BTU and sulfur content for all coal received during each calendar month. Such calculations and payment of any premium/penalty adjustments will be delivered to Seller before the end of the following month. The values so determined shall be binding upon the parties unless and until it is established, by one or more independent laboratories using the referee sample as designated in Section VIII.3., that such analyses or calculations have been erroneous. 3. Prior to testing, each gross sample shall be divided into four equal portions and used as follows: one shall be -12- analyzed to determine the quality of the coal; one shall be available for Seller (Seller sample); one shall be retained by KU, as the referee sample for a period of 30 days. If requested by either party, such retained referee sample will be sent to the location mutually agreed to for testing. All testing of any such sample by third parties shall be at requester's expense unless the results differ by more than the applicable ASTM reproducibility standards, in such case, KU will pay for testing. If the independent laboratory results differ by more than the applicable ASTM reproducibility, independent laboratory results will govern. 4. KU shall provide to Seller, by mail or more expedient methods as required, the as-received weighted average moisture, ash, BTU and sulfur content of each barge received. 5. Seller shall have the right to inspect, observe the operation of any sampling device or appurtenance thereto, sample crusher, reducer, sample container, laboratory equipment or procedure of KU. A proven deficiency in KU's sampling or testing procedures or facilities discovered by Seller shall be brought to KU's attention, and KU shall take any needed corrective action. SECTION IX. BILLING AND PAYMENT. Seller shall invoice KU for coal in each shipment. Such invoices shall be itemized to the extent required by KU, and shall be paid within 15 days after receipt of coal and receipt of invoice by KU. -13- SECTION X. RECORDS AND AUDITS. Seller shall maintain accurate and complete books of account and records regarding coal delivered hereunder. KU, or independent consultants or firms designated by KU, shall have the right at all times to observe and inspect Seller's operations, and at any reasonable time or times to examine and audit all pertinent books of account and records of Seller for the purpose of verifying transactions and matters hereunder. If any such examination or audit discloses that an error has occurred and resulted in an overpayment or underpayment hereunder, the amount thereof shall be established and promptly paid, by the owing party, to the party owed. This provision shall survive the termination or expiration of this Agreement. SECTION XI. COMPLIANCE WITH LAWS, REGULATIONS, POLICIES AND RESTRICTIONS. 1. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt laws, regulations, policies and/or restrictions which will make it impossible or commercially impractical for Seller to continue delivery hereunder. If as a result of the adoption of such laws, regulations, policies or restrictions, or change in interpretation or enforcement thereof Seller decides that it will be impossible, or economically or otherwise impracticable for Seller to continue delivery hereunder, Seller shall so notify KU, and thereupon Seller and KU shall promptly consider whether corrective actions can be taken in the mining and preparation of -14- the coal at Seller's mine and/or in the handling and utilization of the coal at KU's Ghent Unit 1; and if in Seller's judgment such actions will not, without unreasonable expense to Seller, make it possible and practical for Seller to continue to deliver coal hereunder and without violating any applicable law, regulation, policy or restriction, Seller shall have the right, upon notice to KU, to terminate this Agreement without further obligation hereunder on the part of either party; provided, however, that if the impracticality of Seller's continuing to deliver coal hereunder is only on economical grounds, KU may, at its option, prevent such termination by agreeing to reimburse Seller for such expense to the extent that Seller deems such expense to be unreasonable. 2. The parties also recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt laws, regulations, policies and/or restrictions or change in interpretation or enforcement thereof which will make it impossible or commercially impracticable for KU to utilize in Ghent 1 Unit this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies or restrictions, KU decides that it will be impossible or economically or otherwise impracticable for KU to utilize in KU's Ghent Unit 1 coal which would be delivered hereunder, KU shall so notify Seller, and thereupon KU and Seller shall promptly consider whether corrective actions can -15- be taken in the mining and preparation of the coal at the mine and/or in the handling and utilization of the coal at KU's said Station; and if in KU's judgment such actions will not, without unreasonable expense to KU, make it possible and practical for KU to so utilize coal which thereafter would be delivered hereunder and without violating any applicable law, regulation, policy or order, KU shall have the right, upon notice to Seller, to terminate this Agreement without further obligation hereunder on the part of either party; provided, however, that, if the impracticality of KU's utilizing the coal is only on economical grounds, Seller may, at its option, prevent such termination by agreeing to reimburse KU for such expense to the extent that KU deems such expense to be unreasonable. SECTION XII. FORCE MAJEURES. 1. DEFINITION. The term "force majeure" as used herein shall mean any and all causes reasonably beyond the control of the party failing to perform, such as but not limited to acts of God, acts of the public enemy, insurrections, riots, labor disputes, government closures, boycotts, labor and material shortages, fires, explosions, floods, breakdowns or outages (including scheduled outages for maintenance or repairs) of or damage to plants, equipment or facilities, interruptions to power supplies or transportation, embargoes, and acts of military or civil authorities, which wholly or partly prevent the mining, processing, loading and/or delivering of the coal by Seller, or -16- the receiving, accepting and/or utilizing of the coal by KU. As used in the preceding sentence, the phrase "prevent the receiving or accepting" (of the coal by KU) shall include, but not be limited to, breakdowns or outages of the material handling systems at the Ghent Station. The parties recognize that coal purchased by KU hereunder is intended by it for use in its Ghent Unit 1. No breakdown or outage of any KU generating unit other than Ghent Unit 1 shall constitute a force majeure hereunder; nor shall any asserted ability of KU to use coal in any generating unit other than Ghent Unit 1 be deemed to negate or eliminate a force majeure hereunder. As used in this Paragraph, "scheduled outages for maintenance or repairs" includes, but is not limited to, outages determined by KU to be necessary for warranty inspections, periodic major overhauls, identification and/or correction of causes of unsatisfactory performance including but not limited to failure to meet environmental requirements, and/or performance of maintenance or repairs reasonably believed to be necessary to the avoidance of involuntary or forced outages. The outages do not include outages for normal maintenance performed on an annual basis. For purposes of this Section XII, any force majeure events which wholly or partly prevent the mining, processing, loading and/or delivering of the coal by Seller from the Shoemaker and/or McElroy mine(s) shall be deemed to equally prevent the mining, processing, loading and/or delivering of the coal by Seller from all other sources listed in Section III.1. -17- Each party shall promptly notify the other party following commencement of a force majeure. 2. EFFECT HEREUNDER--GENERAL. If because of a force majeure either party is unable to carry out any of its obligations under this Agreement (other than the obligation to pay money in connection with performance of the Agreement), and if such party shall promptly give to the other party written notice of such force majeure, then the obligations of the party giving such notice and the corresponding obligations of the other party shall be suspended to the extent made necessary by such force majeure and during its continuance; provided, however, that the party giving such notice shall act promptly in reasonable manner to eliminate such force majeure. Either party shall have the right to elect to suspend the production, delivery, receipt, acceptance and/or sale or purchase of coal, as the case may be, for the period of time during which such force majeure exists; and, in the event of a force majeure declared by Seller, KU, if it so elects, shall have the right during such period to purchase coal from other sources, and, in the event of a force majeure declared by KU, Seller, if it so elects, shall have the right during such period to sell coal to others. Any deficiencies in deliveries of coal hereunder caused by force majeures shall not be made up except by mutual consent; but if Seller for any reason other than a KU force majeure fails to deliver coal to KU pursuant to normal established shipment schedules but does not -18- notify KU of the occurrence of a force majeure, KU shall have the right to require, but shall not be obligated to accept, make-up tonnages or deliveries of tonnages so lost, at the price in effect when lost. 3. TERMINATION FOR PROTRACTED FORCE MAJEURE(S). If (A) a force majeure occurs, (B) the obligations of the parties are suspended pursuant to provisions of this Section XII, (C) such condition (alone or extended by other force majeures) continues so that the obligations of the parties remain suspended for a period of six months, and (D) at the end of such six months or at any time thereafter during the continuance of the force majeure(s) the party other than the party suffering the force majeure(s), in the exercise of reasonable judgment, concludes that there is no likelihood of discontinuance in the immediate future of the force majeure(s) or the resulting suspension of the obligations of the parties, then such party may terminate this Agreement without liability to the party suffering the force majeure(s) by giving to such party sixty days written notice of intention to terminate, unless the force majeure(s) are discontinued and the obligations are restored within such sixty days. SECTION XIII. WAIVERS AND REMEDIES. 1. The failure of either party to insist in any one or more instances upon strict performance of any provision of this Agreement by the other party, or to take advantage of any of its -19- rights hereunder, shall not be construed as a waiver by it of any such rights with respect to any subsequent non-performance of such provision or other matter hereunder; but the provision shall retain its effectiveness and enforceability, and the rights of the parties shall continue and remain in full force and effect. 2. If, at the time a party takes action hereunder requested or demanded by the other party, the party taking the action gives written notice that it is doing so under protest and without agreement as to the appropriateness of the action, then the taking of the action, even if thereafter repeated without further notice, shall not give rise to application of the principles of contemporaneous construction by the parties. 3. Each remedy specifically provided for under this Agreement shall be taken and construed as cumulative and in addition to every other remedy provided for herein or by law. 4. Except with respect to a termination by either party pursuant to the provisions of Section XV, no default by either party in the performance of any of its covenants or obligations hereunder, which except for this provision would be the legal basis for the right of rescission or termination of this Agreement by the other party, shall give or result in such a right unless and until the defaulting party shall fail to correct or take all such actions as are necessary to correct such default within thirty days after written notice of claim of such default is given to the defaulting party by the other party. -20- 5. In no event shall either party be liable to the other for any consequential damages as the result of any breach of warranty or default in performance hereunder. SECTION XIV. NOTICES. 1. Any notice, request, consent, demand, report or statement which is given to, or served upon, any party under any provision of or in relation to this Agreement, shall be in writing unless otherwise specifically provided herein, and shall be treated as duly delivered when the same either is personally delivered to the President or Vice President of KU in case of a notice to KU, or personally delivered to the President or a Vice President of Seller in the case of a notice to Seller, or is deposited in the United States mail, postage prepaid, and properly addressed as follows: If the notice is to KU, Mr. Wayne T. Lucas Senior Vice President Kentucky Utilities Company One Quality Street Lexington, Kentucky 40507 Copy to: President Kentucky Utilities Company One Quality Street Lexington, Kentucky 40507 (or to such other person or such other address as KU shall have designated by due notice to Seller), and If the notice is to Seller, CONSOL, Inc. Attn: Executive Vice President - Sales 1800 Washington Road Pittsburgh, PA 15241 -21- (or to such other person or such other address as Seller shall have designated by due notice to KU). 2. Notwithstanding the provisions in Paragraph 1, any notice, request or demand pertaining to routine matters of an operating nature may be delivered by mail, messenger, telephone, telegraph, telecopy or orally to the party being notified as may be appropriate, and, if given by telephone, telegraph, telecopy or orally, shall be confirmed in writing as soon as practicable thereafter, if the party to which the notice is given so requests in any particular instance. 3. CONSOL, Inc. ("CONSOL") shall administer this AGREEMENT exclusively on behalf of Seller, to include as follows: (a) the administration, of this Agreement; (b) all payments by Buyer to Seller hereunder shall be made to CONSOL; (c) all notices to be given or received by Seller shall be given or received by CONSOL; and (d) any amendment, supplement or modification to this Agreement shall be negotiated by CONSOL, on behalf of Seller. SECTION XV. ASSIGNMENT. 1. Except as part of any merger or consolidation involving any of the companies comprising Seller, Seller shall not, without KU's prior written consent, make any assignment or transfer of this Agreement, by operation of law or otherwise, including any -22- assignment or transfer as security for any obligation, and shall not assign or transfer the performance of or right or duty to perform any obligation of Seller hereunder; provided, however, that Seller may assign the right to receive payments for coal directly from KU, as part of any accounts receivable financing or other revolving credit arrangement which Seller may have now or at any time during the term of this Agreement. 2. KU shall not, without Seller's prior written consent, assign this Agreement or any right or the performance of or right or duty to perform any obligation of KU hereunder; except that, without such consent, KU may assign this Agreement in connection with and as part of a sale and transfer by KU of all or a part interest in KU's Ghent Generating Station, or as part of a merger or consolidation involving KU. 3. In the event of any assignment or transfer contrary to the provisions of this Section XV, the party not making such assignment or transfer may terminate this Agreement immediately. SECTION XVI. HEADINGS NOT TO AFFECT CONSTRUCTION. The headings of the Sections, Paragraphs and Subparagraphs of this Agreement are for convenient reference, and do not constitute any part of the provisions hereof; nor shall the heading control or affect the meaning, construction or effect of such provisions. SECTION XVII. WRITTEN INSTRUMENT CONTAINS ENTIRE AGREEMENT. This written instrument contains the entire agreement between the parties in respect of the subject matter; and there are no other -23- understandings or agreements between the parties in respect thereof. Any amendments to this agreement must be in writing and executed by both parties to be effective. SECTION XVIII. CONSTRUCTION OF AGREEMENT. This Agreement shall be governed by and construed according to the laws of the State of Kentucky. IN TESTIMONY WHEREOF, witness the signatures of the parties, as of the day and year written first above. CONSOLIDATION COAL COMPANY QUARTO MINING COMPANY McELROY COAL COMPANY CONSOL PENNSYLVANIA COAL COMPANY GREENON COAL COMPANY NINEVEH COAL COMPANY By: /S/ SIGNED ---------------------------- Vice President, Consol, Inc. Attorney in Fact KENTUCKY UTILITIES COMPANY By: /S/ MICHAEL R. WHITLEY ---------------------------- President -24- EX-10.82 10 EXHIBIT 10.82 AMENDMENT TO COAL SUPPLY AGREEMENT The undersigned, being the parties to the Coal Supply Agreement dated April 1, 1995 (the "Agreement"), hereby agree to amend the Agreement, effective October 1, 1996, as follows: 1. Island Creek Coal Company, a Delaware corporation, and Laurel Run Mining Company, a Virginia corporation, are added to the Agreement as additional parties within the group of parties collectively called "Seller" therein. Island Creek Coal Company and Laurel Run Mining Company have executed this Amendment to indicate their agreement to such addition. 2. Section II.2 of the Agreement is amended to read as follows: "2. In accordance with and subject to all terms, provisions and conditions herein, during the term hereof, Seller shall sell and ship to KU, and KU shall purchase, receive and pay for, a Base Quantity of 3,360,000 tons of coal. This Base Quantity shall be sold, purchased and delivered in the quantities set forth below in subparagraph (a), as ratable on a monthly basis as possible. (a) During the term, the quantities of coal to be sold, purchased and delivered hereunder shall be as follows: _________Period_________ _________Base Quantity_________ April 1, 1995 through 420,000 tons (35,000 tons per month) March 31, 1996 April 1, 1996 through 210,000 tons (35,000 tons per month) September 30, 1996 October 1, 1996 through 390,000 tons (65,000 tons per month) March 31, 1997 April 1, 1997 through 780,000 tons (65,000 tons per month) March 31, 1998 April 1, 1998 through 780,000 tons (65,000 tons per month) March 31, 1999 April 1, 1999 through 780,000 tons (65,000 tons per month) March 31, 2000 (b) On or before March 1, June 1, September 1 and December 1 of each contract year, KU may give Seller notice in writing that KU elects to increase or decrease the tons of coal to be sold, purchased and delivered hereunder during the next Contract Quarter (April 1, July 1, October 1, and January 1), by an amount, up to 19,500 tons. (c) Seller shall cooperate with KU in the scheduling of the loading of barges so that the delivery of coal from Seller may be coordinated with other barge deliveries to the Ghent Generating Station." 3. Section III.1 of the Agreement is amended to read as follows: ". 1. The primary source of coal to supply the requirements of this Agreement shall be the Shoemaker Mine and McElroy Mine in Marshall County, West Virginia. As necessary to comply with the quality requirements of this Agreement, Seller may blend with coal from such primary sources, coal from Seller's Dilworth, Mahoning Valley, Bailey, Enlow Fork, VP#3, VP#8, Buchanan and/or Twin Branch Mines. Seller may substitute comparable quality coal from other reserves that Seller controls now or in the future so long as such coal (a) is delivered to KU at no greater delivered cost per million BTU including taxes, (b) is of a quality and in conformity with the Specifications set forth in Section IV, and (c) prior written approval for such substitution has been obtained from KU." 4. Except as specifically amended herein, all terms and conditions of the Agreement remain in full force and effect. 2 WITNESS the signatures of the parties, as of October 14, 1997. CONSOLIDATION COAL COMPANY QUARTO MINING COMPANY McELROY COAL COMPANY CONSOL PENNSYLVANIA COAL COMPANY GREENON COAL COMPANY NINEVEH COAL COMPANY ISLAND CREEK COAL COMPANY LAUREL RUN MINING COMPANY By: /s/ signed ------------------------------------- Vice President, CONSOL Inc. Attorney in Fact KENTUCKY UTILITIES COMPANY By: /s/ Michael R. Whitley /s/ WTL ------------------------------------- Its: President & CEO EX-10.83 11 EXHIBIT 10.83 EXECUTION COPY NEW PARTICIPATION AGREEMENT AMONG BIG RIVERS ELECTRIC CORPORATION, LG&E ENERGY MARKETING INC., WESTERN KENTUCKY LEASING CORP., WKE STATION TWO INC. AND WESTERN KENTUCKY ENERGY CORP. APRIL 6, 1998 [* REDACTED = Omitted pursuant to confidentiality request. Material filed separately with SEC.] TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS...........................4 ARTICLE 2 PARTICIPATION EFFECTIVE DATE........................................4 ARTICLE 3 PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE..................5 ARTICLE 4 CLOSING.............................................................5 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BIG RIVERS........................8 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF LG&E PARTIES.....................15 ARTICLE 7 COVENANTS OF BIG RIVERS............................................16 ARTICLE 8 COVENANTS OF CERTAIN LG&E PARTIES..................................19 ARTICLE 9 TRANSFERS AND ASSIGNMENTS TO OCCUR ON THE EFFECTIVE DATE...........20 ARTICLE 10 TRANSFERRED EMPLOYEE MATTERS......................................25 ARTICLE 11 TAXES.............................................................28 ARTICLE 12 ACCOUNTING........................................................31 ARTICLE 13 INSURANCE COVERAGE................................................32 ARTICLE 14 ENVIRONMENTAL LIABILITIES AND INDEMNITIES.........................34 ARTICLE 15 DISPUTE RESOLUTION AND ARBITRATION................................38 ARTICLE 16 TRANSFERS AND ASSIGNMENTS.........................................41 ARTICLE 17 TERMINATION.......................................................43 ARTICLE 18 WAIVER; LG&E INDEMNITIES..........................................48 ARTICLE 19 SEVERAL OBLIGATIONS...............................................49 ARTICLE 20 MUTUAL COVENANTS..................................................50 i Page ---- ARTICLE 21 GENERAL PROVISIONS................................................52 ARTICLE 22...................................................................58 ARTICLE 23 MISCELLANEOUS.....................................................60 ARTICLE 24 GENERAL PROVISIONS................................................61 ii Participation Agreement [*All Exhibits REDACTED.] Exhibit A Cost Sharing Agreement Exhibit B Facilities Operating Agreement Exhibit C Lease and Operating Agreement Exhibit D Power Purchase Agreement Exhibit E Transmission Services and Interconnection Agreement Exhibit F Tax Indemnification Agreement Exhibit G Mortgage and Security Agreement Exhibit H Non-Disturbance Agreement Exhibit I [RESERVED] Exhibit J [RESERVED] Exhibit K Settlement Promissory Note Exhibit L Form of Smelter Undertaking Exhibit M Station Two Agreement Exhibit N Settlement Mortgage Exhibit O Promissory Note (LEM Advances) Exhibit P Capitalization Guidelines Exhibit X Definitions Schedules [*All Schedules REDACTED.] 2.1 CCAP Calculation 3.1 Conditions Precedent to Phase I 3.2 Conditions Precedent to Phase II 3.3 Conditions Precedent to Phase II (Phase I pre Phase II) 5.1.3 Consents 5.1.5 Output 5.1.6 Real Property 5.1.7 Rights-of-Way 5.1.8 Station Two Contracts 5.1.9 Real Property Leases 5.1.10 Water Supply 5.1.11 Personal Property 5.1.12 Equipment Leases 5.1.13 Contracts 5.1.14 Permits 5.1.15 Condition of Tangible Assets 5.1.16 SO(2) Allowances 5.1.17 Litigation and Insurance Claims 5.1.18 Compliance with Laws 5.1.19 Environmental Matters 5.1.20 Benefit Plans 5.1.21 Labor 5.1.22 Transferred Employees 5.1.23 No Condemnation iii 5.1.26 Intellectual Property 6.1.3 No Violation 9.1 Inventory Procedures 9.2 Assignment and Assumption Agreement 9.2.1 Big Rivers' Fuel Supply Agreements 9.3 Excluded Assets iv NEW PARTICIPATION AGREEMENT THIS NEW PARTICIPATION AGREEMENT ("Agreement") is dated this 6th day of April, 1998 (the "Execution Date") among BIG RIVERS ELECTRIC CORPORATION, a Kentucky rural electric cooperative ("Big Rivers"), LG&E ENERGY MARKETING INC., an Oklahoma corporation ("LEM"), WESTERN KENTUCKY LEASING CORP., a Kentucky corporation and agent of the LG&E Parties (as hereinafter defined) for purposes of this Agreement ("Leaseco"), WKE STATION TWO INC., a Kentucky corporation formerly known as LG&E Station Two Inc. ("Station Two Subsidiary") and WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC") (hereinafter, LEM, Leaseco, Station Two Subsidiary and WKEC are collectively referred to as the "LG&E Parties" and together with Big Rivers, the "Parties"). RECITALS A. Big Rivers owns or operates certain Generating Plants which generate electric capacity and energy and it sells power to its Members and to other third parties. On September 25, 1996, Big Rivers filed for relief under Chapter 11 of the Bankruptcy Code. B. Big Rivers and the LG&E Parties desire to enter into a transaction (the "Phase II Transaction") pursuant to which, inter alia, one of the LG&E Parties, or an affiliate thereof, will lease from Big Rivers its Facilities and certain other Assets and will operate the Facilities and obtain title to the electric energy and capacity produced by such Generating Plants, supply power to Big Rivers and certain Members and market excess power, in exchange for such consideration as agreed upon by Big Rivers and the LG&E Parties. C. Big Rivers and the LG&E Parties also desire to enter into such agreements and instruments of assignment that would permit one or more of the LG&E Parties, or an affiliate thereof, either directly or as agent for Big Rivers, to operate and sell power from Station Two. D. Big Rivers and the LG&E Parties recognize that certain regulatory approvals and other preconditions must be met before the contemplated Phase II Transactions can be consummated. E. The Parties therefore desire to enter into the Phase I Agreements, whereby Big Rivers and the LG&E Parties would begin to receive the economic benefits of the contemplated transactions at an earlier date than otherwise would be feasible. F. The Parties desire that such Phase I Agreements continue until the earlier of approximately twenty-five years after the Effective Date or such time as Big Rivers and the LG&E Parties are able to implement the Phase II Transaction, at which time the Phase I Agreements will terminate and the Phase II Agreements will become effective and will remain in effect until such time as the duration of Phase I and Phase II equals approximately twenty-five years, as defined more specifically in the Operative Documents. 2 G. On June 9, 1997, the Parties entered into the Original Participation Agreement which set forth the circumstances and conditions under which the agreements relating to the above-referenced transactions would be executed and become effective, various other matters of interest and agreements of Big Rivers and the LG&E Parties and common provisions relating to certain of the Operative Documents. H. On the same date, LEC executed and delivered the Original Guaranty to Big Rivers. I. On June 9, 1997, Big Rivers filed its First Amended Plan of Reorganization Proposed by Debtor Big Rivers Electric Corporation under Chapter 11 of the Bankruptcy Code as Modified and Restated June 9, 1997 which contemplated the Original Participation Agreement, certain of the Operative Documents and the transactions contemplated thereby. J. A confirmation hearing concerning the above-referenced plan was held and said plan was confirmed. The Bankruptcy Court order confirming said plan approved the transactions contemplated by the form of Operative Documents as filed therewith. K. Subsequently, Big Rivers and certain of the LG&E Parties applied to the Kentucky Public Service Commission ("KPSC") for approval of certain aspects of the plan, including approval of the rates to be charged by Big Rivers to its Members for electric power service for resale to their customers. L. The KPSC set the matter for hearing and at the conclusion of the hearing directed the Parties to try to reach a resolution on the treatment of unforeseen costs affecting the operation of the Generating Plants with the intention that unforeseen costs would be allocated among the classes of Members' customers in a manner other than as contemplated in the plan. M. In response to the KPSC directive, Big Rivers and the LG&E Parties have agreed to modify the transactions as contemplated in the Original Participation Agreement and the form of the Operative Documents attached thereto. N. On March 18, 1998, Big Rivers and the LG&E Parties executed an Amended and Restated Participation Agreement, the effectiveness of which was conditioned on certain events which failed to occur, thus rendering such document of no effect. O. In order to effectuate the contemplated modifications, to assure compatibility among all of the forms of Operative Documents, including the Station Two Agreement, to make certain technical corrections to the form of the existing Operative Documents prior to their execution, and to create certain additional Operative Documents that will be required to effectuate a transaction on modified terms from those contemplated in the Original Participation Agreement, the Parties have agreed to enter into this Agreement, and to suspend their obligations under the Original Participation Agreement until such time as it is determined if the transactions contemplated in this Agreement can be effectuated in accordance with the terms set forth herein. NOW, THEREFORE, in consideration of the mutual covenants set forth below, the Parties agree as follows: 3 ARTICLE 1 DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS 1.1 Terms Defined in this Agreement. All capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in Exhibit X hereto. 1.2 Whole Agreement. The schedules and exhibits to this Agreement constitute an integral part of this Agreement, and all references to this Agreement shall include all such schedules, attachments and exhibits. 1.3 Method of Payment. All payments required to be made by a Party to the other Party under the terms of this Agreement or any other Operative Document, unless otherwise provided herein or in such other Operative Document, shall be made in immediately available United States funds no later than 2:00 p.m. eastern time on the due date therefor. A Party desiring to receive any such payment by wire transfer shall provide written notice to the other Party not less than five (5) business days prior to the due date indicating the wire instructions and applicable account information. A written notice shall be applicable to all future payments unless revoked or modified by that notice or any subsequent written notice. 1.4 Late and Partial Payments. All amounts payable under this Agreement or any other Operative Document by a Party, if not paid when due, will bear interest from the due date until paid at the Default Rate. No receipt by the Party to whom a payment is due of an amount less than the full amount due will be deemed to be other than payment on account, nor will any endorsement or statement on any check or any accompanying letter effect or evidence an accord or satisfaction. The receiving Party may accept such check or payment without prejudice to its right to recover the balance or pursue any right hereunder. ARTICLE 2 PARTICIPATION EFFECTIVE DATE 2.1 This Agreement will be effective on the date on which all of the following have occurred (the "Participation Effective Date"): (a) this Agreement is executed and delivered by the Parties hereto; (b) the Bankruptcy Court has entered an order, which order approves (i) this Agreement and the other Operative Documents in substantially the form attached hereto, and (ii) modifications to the Plan, as contemplated herein, in accordance with Section 1127 of the Bankruptcy Code; and (c) the RUS has accepted such modifications to the Plan and this Agreement (including the Exhibits hereto), which acceptance shall be evidenced by the RUS failing to notify Big Rivers that it has changed its acceptance of the Plan by the date established by the Bankruptcy Court for such notifications, under Bankruptcy Code Section 1127(d). 4 ARTICLE 3 PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE 3.1 The Phase I Agreements will become effective on the Phase I Effective Date; provided, however, that LEC has not determined, in its discretion, based upon advice of its tax advisors, that it would incur unacceptable liabilities by reason of the Tax Indemnification Agreement, in which case the Parties agree that Phase I shall not commence and the Parties shall proceed with Phase II in accordance with Section 3.2 hereof. 3.2 In the event that (a) the regulatory conditions set forth in Schedule 3.2 are satisfied (or waived by the applicable Parties) prior to the commencement of Phase I or (b) the determination set forth in the proviso described in Section 3.1 has been made by LEC, the Parties agree that the Phase I Agreements shall never become effective and that the Closing referred to below shall consummate the transactions contemplated by the Phase II Agreements rather than the transactions contemplated by the Phase I Agreements. 3.3 At any time subsequent to the occurrence of the Phase I Effective Date, upon the satisfaction (or waiver by the applicable Parties) of all conditions set forth in Schedule 3.3, (i) the Phase II Agreements will become effective and (ii) the Phase I Agreements (other than those which are also Phase II Agreements) will terminate (subject to survival of specific provisions as provided therein). Such date shall hereinafter be referred to as the "Phase II Effective Date." At such time as either Big Rivers or Leaseco (as agent for the LG&E Parties) in good faith believes that each of the conditions precedent set forth in Schedule 3.3 have been satisfied or waived by the relevant Party, the Party having that belief may, in its discretion, notify the other Party of its belief. For purposes of this Section 3.3 only "Party" shall refer to (i) Big Rivers or (ii) Leaseco, acting as agent for all the LG&E Parties. The Party receiving such notice agrees to notify the first Party of whether it agrees with or disputes the first Party's belief within ten (10) Business Days after delivery of the initial notice. In the event a Party fails to respond within that ten-day period, it shall be deemed to have agreed with the initial Party's belief. The Phase II Effective Date shall, for purposes of this Agreement, be deemed to have commenced two (2) Business Days following the expiration of the ten-day notice period described above or, if the initial Party's belief shall have been disputed by the other Party as contemplated above, two (2) Business Days after a determination that such conditions precedent have been so satisfied or waived is made (i) by the mutual agreement of the disputing Parties, or (ii) pursuant to a final, non-appealable decision rendered pursuant to Article 15. ARTICLE 4 CLOSING 4.1 The Closing. The consummation of the transactions contemplated in this Agreement and the Phase I Agreements or the Phase II Agreements, as the case may be (the "Closing"), other than the transactions which are required by this Agreement to be consummated prior to the Closing, shall take place at the offices of Sullivan, Mountjoy, Stainback & Miller, P. S. C., Owensboro, Kentucky (or at such other location as the parties may agree) at 10:00 a.m., 5 local time, on the date (the "Effective Date") that is 10 business days following the earlier to occur of (i) the date on which all conditions set forth in Schedule 3.1 of this Agreement have been fulfilled or waived in writing or (ii) the date on which all conditions set forth in Schedule 3.2 of this Agreement have been fulfilled or waived in writing. 4.2 Actions Simultaneous. Notwithstanding the order of the deliveries by the Parties set forth below, all deliveries shall occur simultaneously and shall not be deemed to have been completed until each of the steps set forth in this Article 4 has been completed or has been waived by the Party who is required to waive the same. 4.3 Big Rivers Deliveries. Subject to fulfillment or waiver of the conditions set forth in Schedule 3.1 or Schedule 3.2, as the case may be, at the Closing, Big Rivers shall deliver to the LG&E Parties all of the following (duly executed where appropriate): 4.3.1 Copies of Big Rivers' Articles of Incorporation certified as of a date no more than thirty (30) calendar days prior to the Effective Date by the Secretary of the Commonwealth of Kentucky. 4.3.2 Certificate of Existence of Big Rivers issued as of a recent date by the Secretary of the Commonwealth of Kentucky. 4.3.3 Certificate of the Secretary or an Assistant Secretary of Big Rivers, dated the Effective Date, in form and substance reasonably satisfactory to the LG&E Parties, as to (i) no amendments to the Articles of Incorporation of Big Rivers since the certification date referred to in Section 4.3.1, (ii) the By-laws of Big Rivers, and (iii) the resolutions of the Board of Directors of Big Rivers authorizing the execution and performance of the Operative Documents, the Debt Restructuring Documents, Big Rivers' obligations with respect to the letters of credit described therein, the Baseline Study Agreement between Big Rivers and WKEC, the Member Contracts and the Station Two Agreement and the transactions contemplated thereby. 4.3.4 The Operative Documents (including, without limitation, the Settlement Note) duly executed by an authorized officer of Big Rivers, and copies of the executed Debt Restructuring Documents. 4.3.5 The opinions of each of Sullivan, Mountjoy, Stainback & Miller, P. S. C. and Long Aldridge Norman LLP referenced in Item I (17) of Schedule 3.1. 4.3.6 A certificate of an authorized officer of Big Rivers, stating that (i) the representations and warranties set forth in Article 5 hereof are true and correct in all material respects on the Effective Date, except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date and (ii) the conditions precedent to Big Rivers' obligations set forth in Schedule 3.1 or Schedule 3.2, as the case may be, have been satisfied or waived by Big Rivers, provided that the foregoing shall 6 not relieve any other party to any Operative Document for any misrepresentation by such party in such Operative Document. 4.3.7 Such bills of sale and other appropriate documents of transfer, conveyance and assignment (in form reasonably satisfactory to Big Rivers and the LG&E Parties) as shall be necessary or appropriate in order for the assignment by Big Rivers to Leaseco of the Inventory, the Personal Property, the Intangible Assets and the SO(2) Allowances as contemplated in Sections 9.1, 9.2, 9.3 and 9.4, including, without limitation, the Assignment and Assumption Agreement. 4.3.8 All amounts required to be paid by Big Rivers to any LG&E Party pursuant to the Operative Documents on such date. 4.3.9 The "Marketing Payment" payable by Big Rivers to LEM as contemplated in the Interim Wholesale Marketing Assistance Agreement, dated June 18, 1997, as amended. 4.4 LG&E Parties' Deliveries. Subject to fulfillment or waiver of the conditions set forth in Schedule 3.1 or Schedule 3.2, as the case may be, at the Closing, the LG&E Parties shall deliver to Big Rivers all of the following (duly executed where appropriate): 4.4.1 Copies of the Articles of Incorporation of each LG&E Party, each certified as of a date no more than thirty (30) calendar days prior to the Effective Date by the Secretary of State of the state of their respective incorporation. 4.4.2 Certificate of Existence or Certificate of Good Standing, as appropriate, each issued as of a recent date by the Secretary of State of the state of their incorporation and an Authorization to Transact Business in the Commonwealth of Kentucky, to the extent an LG&E Party is not a Kentucky Corporation, of each LG&E Party. 4.4.3 Certificate of the Secretary or an Assistant Secretary of each LG&E Party, each dated the Effective Date, in form and substance reasonably satisfactory to Big Rivers, as to (i) no amendments to the Articles of Incorporation of any LG&E Party since the certification date referred to in Section 4.4.1, (ii) their By-laws and (iii) their resolutions of the Board of Directors authorizing the execution and performance of the Operative Documents to which each is a party, if any, the transactions contemplated thereby, and all other documents executed in connection therewith. 4.4.4 The Operative Documents, duly executed by an authorized officer of the relevant LG&E Party. 4.4.5 The Initial Fixed Payment, as defined in Section 3.3 of the Power Purchase Agreement, or the Initial Rental Payment under Section 2.3.1 of the Lease, as the case may be. 7 4.4.6 A payment in consideration of transfer of Inventory and Personal Property as contemplated by Sections 9.1 and 9.3, respectively. 4.4.7 A payment in the amount of $[REDACTED], representing the Closing Date enhancement payment. 4.4.8 All other amounts required to be paid by any LG&E Party to Big Rivers pursuant to the Operative Documents on such date. 4.4.9 The opinions of each of Dewey Ballantine LLP and Greenebaum Doll & McDonald PLLC referenced in Item II (14) of Schedule 3.1. 4.4.10 Commitments or other evidence of insurance referenced in, and in accordance with, Article 13. 4.4.11 A certificate of an authorized officer of each LG&E Party stating that (i) the representations and warranties set forth in Article 6 hereof are true and correct in all material respects on the Effective Date, except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date and (ii) the conditions precedent to the LG&E Parties' obligations set forth in Schedule 3.1 or Schedule 3.2, as the case may be, have been satisfied or waived by the LG&E Parties, provided that the foregoing shall not relieve any other party to any Operative Document for any misrepresentation by such party in such Operative Document. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BIG RIVERS 5.1 Representations and Warranties of Big Rivers. Big Rivers hereby represents and warrants to the LG&E Parties as follows: 5.1.1 Organization and Powers of Big Rivers. Big Rivers is a rural electric cooperative, duly organized and existing under the laws of the Commonwealth of Kentucky. Big Rivers has all requisite cooperative power and authority to own the Facilities and all other assets and properties held by it, and to carry on its business as now being conducted. 5.1.2 Authority Relative to Agreement. No further cooperative or member authorization is necessary for the execution, delivery and performance of this Agreement. 5.1.3 No Violation. Except as set forth in Schedule 5.1.3, the execution and delivery of the Operative Documents and the consummation by Big Rivers of the transactions contemplated thereby, including performance in all material respects of all of its obligations thereunder (a) will not violate any statute or law or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will not 8 require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental agency, instrumentality, commission, authority, board or body, except to the extent such authorization, consent, approval, exemption, notice or other action is required solely as a result of actions taken by any LG&E Party after the Effective Date and (c) subject to obtaining the consents referred to in Schedule 5.1.3, will not violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Lien upon any of the Assets (other than a Permitted Lien), under any term or provisions of the Articles of Incorporation or By-laws of Big Rivers or of any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Big Rivers is a party or by which Big Rivers or any of the Assets may be bound or affected. 5.1.4 Effect of Agreement. This Agreement has been, and each of the other Operative Documents will be, duly and validly authorized, executed and delivered by Big Rivers, subject to Bankruptcy Court approval, and constitutes, or will constitute when executed, a valid and legally binding agreement enforceable against Big Rivers in accordance with its terms, except as the foregoing may be limited by (a) general principles of equity or (b) bankruptcy, insolvency, reorganization, arrangement, moratorium, or other laws or equitable principles relating to or affecting creditors' rights generally. 5.1.5 Output. Except as disclosed on Schedule 5.1.5, there are no contracts or other arrangements in place by which any of the electrical output of the Facilities or Station Two has been sold, dedicated or committed. Except as set forth on Schedule 5.1.5 and for Permitted Liens, the output of the Facilities and Station Two is free and clear of any claims and Liens. 5.1.6 Real Property. Schedule 5.1.6 contains a complete description of all Real Property. The Real Property includes all real property (and improvements and fixtures thereon) owned by Big Rivers and used or currently held exclusively for use by Big Rivers in connection with the operation of the Facilities or Station Two. Except as disclosed on Schedule 5.1.6 and for Permitted Liens, Big Rivers owns the Real Property free and clear of any claims and Liens. 5.1.7 Rights-of-Way. Schedule 5.1.7 contains a complete description of all material Rights-of-Way. The Rights-of-Way include all rights-of-way, easements, licenses and other rights owned by Big Rivers and used or currently held exclusively for use by Big Rivers in connection with the operation of the Facilities or Station Two. Except as disclosed on Schedule 5.1.7 and for Permitted Liens, Big Rivers owns all Rights-of-Way free and clear of any claims and Liens. 5.1.8 Station Two Contracts. Schedule 5.1.8 contains a list of all agreements relating to, or affecting, Station Two to which Big Rivers is a party. Big Rivers has not received notice from any third party to the effect that any such agreement 9 is not in full force and effect. Neither Big Rivers nor, to the best of Big Rivers' knowledge, Henderson, is in material default thereunder and Big Rivers holds its interest in each such agreement free and clear of any Liens (other than Permitted Liens). 5.1.9 Real Property Leases. Schedule 5.1.9 lists all Real Property Leases. Except as disclosed on Schedule 5.1.9, (i) each Real Property Lease is in full force and effect, (ii) Big Rivers is not in material default under any Real Property Lease, and (iii) Big Rivers holds the lessee's interest in each Real Property Lease free and clear of any Liens (other than Permitted Liens). 5.1.10 Water Supply. Except as disclosed on Schedule 5.1.10, Big Rivers currently has rights in or to a water supply and Permits for waste water disposal sufficient for the operation of the Facilities at a Capacity of 1459 net MW and for the operation of Station Two at a capacity of 312 net MW, and, as of the date hereof, no permit, license or other governmental or private action or permission is required to utilize such water supply (provided WKEC, Station Two Subsidiary or Leaseco, as the case may be, pays the ordinary charges for consumption or disposition). Big Rivers has no knowledge of any pending or threatened impediment to the continuation of such water supply and waste water disposal as set forth above for the duration of the Term. 5.1.11 Personal Property. Schedule 5.1.11 lists each item of Personal Property with a book value in excess of $100,000. Except as disclosed on Schedule 5.1.11, Big Rivers owns such Personal Property free and clear of any Liens (other than Permitted Liens). 5.1.12 Equipment Leases. Schedule 5.1.12 lists each of the Equipment Leases requiring Big Rivers to make lease payments in excess of $20,000 annually under such lease. Except as disclosed on Schedule 5.1.12, (i) each Equipment Lease is in full force and effect, (ii) Big Rivers is not in material default under any Equipment Lease, and (iii) Big Rivers holds the lessee's interest in each Equipment Lease free and clear of any Liens (other than Permitted Liens). 5.1.13 Contracts. Schedule 5.1.13 contains a listing of all Contracts that involve obligations of Big Rivers in excess of $100,000 or extend beyond six months after the Effective Date and any amendments or modifications to any such Contract. Except as disclosed on Schedule 5.1.13 attached hereto (i) each such Contract, the Hoosier Contracts, the Oglethorpe Contract, the HMP&L Contract, the Member Contracts and each fuel supply agreement listed on Schedule 9.2.1 (collectively the "Representation Contracts") is in full force and effect, (ii) Big Rivers is not in material default under any Representation Contract and (iii) Big Rivers holds its interests in each Representation Contract free and clear of any Liens (other than Permitted Liens). 5.1.14 Permits. Schedule 5.1.14 contains a listing of all material Permits currently required to operate the Facilities at a Capacity of 1459 net MW and Station Two at a capacity of 312 net MW (in accordance with the Station Two Contracts) and specifically identifies those material Permits that expire prior to the end of the Term. 10 Except as disclosed on Schedule 5.1.14, (i) each such Permit is in full force and effect, (ii) Big Rivers is in material compliance with the terms of each such Permit, (iii) Big Rivers holds its interest in each such Permit free and clear of any Liens (other than Permitted Liens) and (iv) each such Permit is assignable to WKEC, Station Two Subsidiary or Leaseco without the consent or approval of, or payment to, any person, governmental authority or regulatory body, which has not yet been obtained or made. 5.1.15 Condition of Tangible Assets. Except as disclosed on Schedule 5.1.15, each of the Tangible Assets and the tangible assets comprising Station Two is in all material respects in good condition and state of repair consistent with Prudent Utility Practice, subject only to ordinary wear and tear. 5.1.16 SO(2) Allowances. Schedule 5.1.16 discloses all SO(2) Allowances allocated by the Environmental Protection Agency by year through December 31, 2023 or otherwise attributable to the Facilities and Station Two and such allowances (or Big Rivers' interest in such allowances, with respect to Station Two) are free of all Liens, including but not limited to claims of brokers (other than Permitted Liens). 5.1.17 Litigation and Insurance Claims. Schedule 5.1.17 contains a description of (i) all pending or, to the best of Big Rivers' knowledge, threatened suits, actions, arbitrations, claims, administrative proceedings or other proceedings or, to the best of Big Rivers' knowledge, governmental investigations related in any way to the ownership or operation of the Facilities or Station Two, and (ii) any claim, demand or notice tendered to an insurer by Big Rivers with respect to any matter related in any way to the ownership or operation of the Facilities or Station Two. 5.1.18 Compliance with Laws. Except as disclosed on Schedule 5.1.18, to Big Rivers' knowledge, Big Rivers' operation of the Facilities and Station Two and use of the Assets and the Station Two Assets are in material compliance with all applicable laws, rules, orders, regulations, or restrictions, except (a) any noncompliance that has been cured and (b) noncompliance that does not and will not materially interfere with the operation of the Facilities or Station Two nor result in the imposition of any material civil or criminal fines or penalties on Big Rivers or any LG&E Party. Except as disclosed on Schedule 5.1.18, Big Rivers has received no notice of material violation or notice of material noncompliance which has not been cured. 5.1.19 Environmental Matters. To the knowledge of Big Rivers, except as disclosed in Schedule 5.1.19 or in the Baseline Environmental Audit Report, there is no pending administrative or judicial investigation, proceeding or action or any outstanding claim, demand, order, administrative or legal proceeding or settlement or consent decree or order under or relating to any Environmental Law and relating to or involving the Facilities or Station Two, nor is there now, nor has there been, any pattern of violations that would lead to any of the foregoing. To the knowledge of Big Rivers, except as disclosed on Schedule 5.1.19 or identified in the Baseline Environmental Audit Report, (i) no Hazardous Substance or other waste (including without limitation garbage and refuse) have been disposed of, spilled, leaked or otherwise released at, on, under or 11 from the Facilities, Station Two, the Real Property, or the land subject to the Rights-of-Way, the Real Property Leases, or any other properties and (ii) there are no underground storage tanks at the Facilities or at Station Two or on the Real Property or the land subject to the Rights-of-Way or the Real Property Leases. 5.1.20 Benefit Plans. 5.1.20.1 Schedule 5.1.20 lists all plans, policies, agreements and other arrangements concerning remuneration, including, but not limited to, employee compensation, pension or welfare benefits of Big Rivers. As applicable, such plans have been maintained in compliance in all material respects with ERISA and the applicable provisions of the Code, except (a) any noncompliance that has been cured and (b) noncompliance that does not materially interfere with the rights of any Transferred Employee. Except as disclosed on Schedule 5.1.20, Big Rivers has received no notice of material violation or notice of material noncompliance which has not been cured. 5.1.20.2 Big Rivers Electric Corporation Bargaining Employees' Thrift and 401(k) Savings Plan, Big Rivers Electric Corporation Salaried Employees' Thrift and 401(k) Savings Plan, Big Rivers Electric Corporation Bargaining Employees' Retirement Plan, and Big Rivers Electric Corporation Salaried Employees' Retirement Plan (collectively, the "Big Rivers Qualified Plans") have been determined by the Internal Revenue Service to be qualified under the Code 401(a), and nothing has occurred which has resulted or is likely to result in the revocation of such qualification. Big Rivers has heretofore delivered to the LG&E Parties a copy of the most recent determination letter for each of the Big Rivers Qualified Plans, and each of the Big Rivers Qualified Plans has been administered in all material respects in accordance with ERISA and applicable provisions of the Code. 5.1.20.3 Full payment will be made as of the Effective Date of all amounts which Big Rivers is required, under applicable law and/or the Big Rivers Qualified Plans, to have paid as a contribution to each of the Big Rivers Qualified Plans as of the last day of the most recent fiscal year of such plan, and no accumulated funding deficiency (as defined in ERISA ss. 312 or Code ss. 412), whether or not waived, exists with respect to the Big Rivers Qualified Plans. All contributions to the Big Rivers Qualified Plans that are defined contribution plans owed by Big Rivers with respect to compensation for periods up to the Effective Date will have been paid to such Big Rivers Qualified Plans as of the Effective Date. 5.1.20.4 No reportable event (as such term is defined in ERISA ss. 4043, but not including an event described in ERISA ss. 4043(c)(9) or any event for which the requirement of notice within 30 days to the Pension Benefit Guaranty Corporation has been waived) has occurred with respect to any of the Big Rivers Qualified Plans within the preceding 36 months. Neither Big Rivers nor any other Person has engaged in any transaction with respect to any of the Big Rivers Qualified Plans which would subject Big Rivers or such Person to a Tax, penalty or liability for 12 prohibited transactions under ERISA or the Code within the preceding 36 months. To the best of Big Rivers' knowledge, no director, officer or employee of Big Rivers, to the extent he/she is a fiduciary with respect to any of the Big Rivers Qualified Plans, has breached any of his/her responsibilities or obligations imposed upon fiduciaries under Title I of ERISA or which would result in any claim being made under, by or on behalf of any of the Big Rivers Qualified Plans, or a participant or beneficiary under any of the Big Rivers Qualified Plans. 5.1.21 Labor. Except as disclosed on Schedule 5.1.21, no employee of Big Rivers is represented for purposes of collective bargaining by any labor organization of any type and within the last five years Big Rivers has not experienced any material labor disputes or any work stoppages due to labor agreements. Except as disclosed on Schedule 5.1.21, Big Rivers is not obligated under the terms of any labor agreement to negotiate with, or seek approval from, any labor organization regarding any term or condition of this Agreement. Except as disclosed on Schedule 5.1.21, there are no pending claims, and to Big Rivers' knowledge no threatened claims, related to the Transferred Employees under any federal, state or local labor or employment laws or regulations, including but not limited to, the Fair Labor Standards Act, National Labor Relations Act, Labor Management Relations Act, Civil Rights Act of 1964, Walsh-Healy Act, Davis Bacon Act, Civil Rights Act of 1866, Age Discrimination in Employment Act, Older Workers Benefit Protection Act, Equal Pay Act of 1963, Executive Order No. 11246, Federal Unemployment Tax Act, Vietnam Era Veterans Readjustment Act, Occupational Safety and Health Act, Civil Rights Act of 1991, American With Disabilities Act, Rehabilitation Act of 1973, Family and Medical leave Act, Worker Adjustment and Retraining Notification Act ("WARN"), ERISA, applicable workers' and unemployment compensation laws, all as amended, or any applicable contract, tort or other common law theories; and no claim under any such laws or regulations is pending or, to the best of Big Rivers' knowledge, threatened against Big Rivers. 5.1.22 Employment Compensation and Credit Service. Schedule 5.1.22 contains a true and correct list of all Transferred Employees. Big Rivers shall provide on or before the Effective Date, a schedule of all sick leave, vacation pay or retiree medical obligations with respect to each Transferred Employee, and except as provided on such schedule there are no other obligations for these benefits. Big Rivers shall, on or as soon as administratively practicable after the Effective Date, provide a listing of all such employees which identifies the "Compensation Rate" of each such employee as of the date immediately preceding the Effective Date as calculated pursuant to Section 1.11 of Big Rivers Severance Plan and which identifies the service credited as of the date immediately preceding the Effective Date under the applicable Big Rivers pension plans for all such employees. 5.1.23 No Condemnation, Expropriation or Restrictions. Neither the whole nor any portion of the Facilities or Station Two is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor to Big Rivers' knowledge, has any such condemnation, expropriation, taking or material new 13 assessment been proposed. Except as set forth in Schedule 5.1.23, Big Rivers has received no notice of any zoning, land use or other governmental proceeding specific to a Facility or Station Two pending, nor to the best of Big Rivers' knowledge proposed, which would materially adversely affect the Facilities or Station Two including without limitation any of the Facilities or Station Two for their present uses. 5.1.24 Taxes. Big Rivers has timely filed all Tax Returns required to be filed by Big Rivers on or before the date upon which this representation is being made, taking into account extensions of time for filing. All Taxes that are or were due and payable by Big Rivers on or before the date upon which this representation is being made, with or without a Return, have been timely paid. Big Rivers has complied with all material requirements of the Code relating to the payment and withholding of Taxes, and Big Rivers has, within the time and in the manner prescribed by applicable law, paid over to the proper Taxing authorities all amounts required to be so withheld and paid over. Big Rivers has received no written notification of any Tax deficiency, proposal for the assessment of a Tax, or the intention of any Taxing authority to audit any Big Rivers' Tax Return. None of the Assets is subject to a Lien for Taxes, except Permitted Liens. 5.1.25 No Brokers. Big Rivers has not employed any broker or finder in connection with the transactions contemplated by the Operative Documents, and it has taken no action that would give rise to a valid claim against any party for a brokerage commission, finder's fee, or other like payment. 5.1.26 Intellectual Property. Schedule 5.1.26 lists each item of Intellectual Property. Except as disclosed on Schedule 5.1.26, Big Rivers owns or has valid rights to use such Intellectual Property free and clear of any Liens (other than Permitted Liens). 5.1.27 Disclaimer of Other Representations and Warranties. THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 5 ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF BIG RIVERS WHETHER WRITTEN, ORAL OR IMPLIED, WITH RESPECT TO THIS AGREEMENT, ANY OTHER OPERATIVE DOCUMENT OR THE ASSETS, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 5 OR IN THE STATION TWO AGREEMENT. THE LG&E PARTIES HEREBY ACKNOWLEDGE AND AGREE THAT BIG RIVERS SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE ASSETS OR ANY PART THEREOF, THE MERCHANTABILITY THEREOF OR THE FITNESS THEREOF FOR ANY PARTICULAR PURPOSE. THE PROVISIONS OF THIS ARTICLE 5 HAVE BEEN NEGOTIATED, AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED IN THIS ARTICLE 5 OR IN THE STATION TWO AGREEMENT, THE FOREGOING PROVISIONS ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR 14 WARRANTIES BY BIG RIVERS, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS, OR OTHERWISE. ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF LG&E PARTIES 6.1 Representations and Warranties of Each LG&E Party. Each LG&E Party represents and warrants to Big Rivers as follows: 6.1.1 Organization and Powers of LG&E Parties. Each LG&E Party is duly organized, existing and in good standing under the laws of its jurisdiction of organization and, in the case of LEM, is duly qualified to do business as a foreign corporation in the Commonwealth of Kentucky. Each LG&E Party has all requisite corporate power and authority and holds all material approvals, permits, authorizations, consents, licenses, orders and restrictions required to own, operate, and lease its properties, and to carry on its business as now being conducted and, subject to satisfaction of all conditions set forth in Schedules 3.1, 3.2 and 3.3 hereof (as applicable), as proposed to be conducted pursuant to the terms of this Agreement and the other Operative Documents. 6.1.2 Authority Relative to Operative Documents. The execution, delivery, and performance of each Operative Document by the relevant LG&E Party has been duly authorized by all necessary corporate and shareholder action. 6.1.3 No Violation. Except as set forth in Schedule 6.1.3, the execution and delivery of the Operative Documents by the relevant LG&E Parties, and the consummation by the LG&E Parties of the transactions contemplated thereby, including performance in all material respects of all of their obligations thereunder (a) will not violate any statute or law or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will not require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental agency, instrumentality, commission, authority, board or body, and (c) will not violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Lien upon any of the assets of the relevant LG&E Party, under any term or provisions of the Articles of Incorporation, By-Laws or other constituent documents of such LG&E Party or of any contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which such LG&E Party is a party or by which such LG&E Party or any of its assets or properties may be bound or affected. 6.1.4 Effect of Agreement. This Agreement has been, and each of the other Operative Documents will be, duly and validly authorized, executed and delivered by the relevant LG&E Party and constitutes, or will constitute when executed, a valid and legally binding agreement of such LG&E Party enforceable against such LG&E Party in 15 accordance with its terms, except as the foregoing may be limited by (a) general principles of equity or (b) bankruptcy, insolvency, reorganization, arrangement, moratorium or other laws or equitable principles relating to or affecting creditors' rights generally. 6.1.5 No Brokers. No LG&E Party, nor any Affiliate thereof, has employed any broker or finder in connection with the transactions contemplated by the Operative Documents, and it has taken no action that would give rise to a valid claim against any party for a brokerage commission, finder's fee, or other like payment. 6.1.6 Staffing. WKEC or Leaseco, as the case may be, will maintain, or acquire, adequate personnel to operate the Assets and perform their respective obligations pursuant to the terms and conditions of the Facilities Operating Agreement and the Lease, as the case may be. 6.1.7 Disclaimer of Other Representations and Warranties. THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 6 ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF THE LG&E PARTIES WHETHER WRITTEN, ORAL OR IMPLIED, WITH RESPECT TO THIS AGREEMENT, ANY OTHER OPERATIVE DOCUMENT OR THE ASSETS, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 6 OR IN THE STATION TWO AGREEMENT. THE PROVISIONS OF THIS ARTICLE 6 HAVE BEEN NEGOTIATED, AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED IN THIS ARTICLE 6 OR IN THE STATION TWO AGREEMENT, THE FOREGOING PROVISIONS ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES BY THE LG&E PARTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS, OR OTHERWISE. ARTICLE 7 COVENANTS OF BIG RIVERS 7.1 Access to Properties, Books and Records. Prior to the Effective Date (and with respect to Section 7.1.2 on and after the Effective Date), Big Rivers shall, at the request of any LG&E Party to Big Rivers' President and Chief Executive Officer: 7.1.1 Afford or cause to be afforded to the agents, attorneys, accountants and other authorized representatives of such LG&E Party reasonable access during normal business hours to all employees, properties, books, records, data, contracts and documents relating to the Assets and Transferred Employees and shall permit such persons, at such LG&E Party's expense, to make copies of such books, records, data, contracts and documents. In particular, Big Rivers shall afford such LG&E Party and its authorized representatives reasonable access to the Real Property and Station Two for the purpose of conducting investigations and examinations thereof and for preparation of surveys, making appraisals and ascertaining the condition thereof. 16 7.1.2 For the purpose of protecting the common interest of Big Rivers and the LG&E Parties in identifying and avoiding tax liability that would be subject to indemnification pursuant to the Tax Indemnification Agreement, permit access by any LG&E Party and its advisors to Big Rivers' employees, agents, independent accountants and accounting firms (including, but not limited to, Mr. James Howard Smith of Arthur Andersen LLP), and other advisors (other than legal counsel associated with law firms) and require such persons (whether an individual or entity) (i) to provide to such LG&E Party, in a timely manner, access to all Big Rivers' Tax Returns, and all workpapers, schedules, memoranda, financial projections, and other written materials that relate to Big Rivers' income Tax liabilities (or potential liabilities) for any past, present, or future taxable year and (ii) to disclose their work product (whether or not such work product is in written form and whether or not subject to privilege) concerning Big Rivers' expected or potential income Tax consequences of the transactions contemplated by the Phase I Agreements and the Phase II Agreements including, but not limited to, their work product relating to any actual or potential Phase I Tax Detriment Item (as such term is defined in the Tax Indemnification Agreement). All costs, fees, and expenses incurred by Big Rivers (either directly or indirectly through its independent attorneys, accountants, or other advisors) in connection with Big Rivers' compliance with this Section 7.1.2 for periods ending on or before the Effective Date shall be borne by Big Rivers, and all such costs, fees, and expenses for periods beginning after the Effective Date shall be borne by the LG&E Parties. 7.1.3 Each LG&E Party shall treat, and shall cause all of its agents, attorneys, accountants, and other authorized representatives to treat, all information obtained pursuant to this Section 7.1 as confidential. 7.1.4 No investigation by any LG&E Party or any of its authorized representatives pursuant to this Section 7.1 shall affect any representation, warranty, or closing condition of any party hereto. 7.2 Negative Covenants. Except as otherwise permitted by this Agreement or the other Operative Documents or with the prior written consent of Leaseco, as agent for the LG&E Parties (not to be unreasonably withheld), prior to the Closing, Big Rivers shall not: 7.2.1 No Liens. Directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Assets, except for Permitted Liens. 7.2.2 No Disposal. Dispose of, or agree to dispose of, any of the Assets or any Station Two Contract (or any portion thereof) or Station Two Asset outside the ordinary course of business. 7.2.3 No New Contracts. Enter into any power sale, maintenance, fuel supply or transportation contracts or make any commitment to do the same in each case, involving the payment of an amount in excess of $500,000 annually or having a termination date after May 31, 1998. Notwithstanding the foregoing, Big Rivers shall be entitled to enter into Pre-Closing Development Agreements with Henderson as 17 contemplated in the "1998 Amendments" (as defined in the Station Two Agreement) for Economic Development Opportunities, provided, that such agreements do not specifically commit Power from any of the Generating Plants from and after the Closing. 7.2.4 No Increase. Implement any general wage increases, but may continue normal salary administration practices, with such changes subject to the review by WKEC prior to Closing. 7.2.5 WARN. Temporarily or permanently close or shut down any "single site of employment" or any "facility" or any "operating unit," department or service within a single site of employment, as such terms are used in WARN within the ninety (90) day period ending on the day before the Effective Date. 7.2.6 No Implementation. Implement or agree to any implementation of or amendment or supplement to any employee profit sharing, stock option, stock purchase, pension, bonus, commission, incentive, retirement medical reimbursement, life insurance, deferred compensation or any other employee compensation or benefit plan or arrangement applicable to any Transferred Employee except for (i) non-material modifications or amendments, (ii) modifications or amendments which are required to be made by applicable law or pursuant to a determination letter request, (iii) modifications or amendments required by written employment agreements, employment policies or applicable collective bargaining agreements existing on March 19, 1997, and (iv) any amendments or modifications which (1) are reasonable given the circumstances, (2) do not result in a substantial increase in benefits, and (3) are approved in writing in advance by the LG&E Parties (such approval not to be unreasonably withheld). The exercise of discretion by Big Rivers under an existing employment agreement, policy or other arrangement that does not increase or alter the liability of the LG&E Parties shall not be considered a violation of Section 7.2.6. 7.2.7 Contracts. Terminate, which termination shall have a material adverse effect on the LG&E Parties' collective rights under the Operative Documents, taken as a whole, or materially modify or amend, or suffer such termination, modification or amendment of any of the Contracts, the Member Contracts, the Hoosier Contract, the Oglethorpe Contract, the HMP&L Contract or the Station Two Contracts (other than pursuant to the 1998 Amendments contemplated in the Station Two Agreement), or any tariffs relating to any of the foregoing; provided, however, that Big Rivers shall be permitted to amend its Member Contracts as necessary to satisfy the conditions to closing set forth in Schedule 3.1, Items (I)(10) and (II)(15). 7.2.8 No Commitment. Agree or commit to do any of the foregoing. 7.3 Affirmative Covenants. Except as otherwise permitted by this Agreement or the other Operative Documents or with the prior written consent of Leaseco, as agent for the LG&E Parties (not to be unreasonably withheld), prior to Closing, Big Rivers shall: 18 7.3.1 Ordinary Course. Operate its business as presently operated and only in the ordinary course and consistent with past practices and with the 1998 Amendments. 7.3.2 Adverse Changes. Advise Leaseco, as agent for the LG&E Parties, in writing of any litigation or administrative proceeding (other than in the Bankruptcy Court) that challenges or otherwise materially affects the transactions contemplated by this Agreement or the remaining Operative Documents and of any material adverse change in the Assets or the Station Two Assets. 7.3.3 Maintain Assets. Use its reasonable best efforts to maintain all of the Tangible Assets in good operating condition, reasonable wear and tear excepted, consistent with Prudent Utility Practice and past practices. 7.3.4 Cancellation. Maintain at all times prior to the Closing policies of insurance relating to the Assets providing substantially the same coverage as is in effect on the Participation Effective Date. 7.3.5 Comply with Laws. Operate and maintain the Assets in substantial compliance with all applicable Laws. 7.3.6 Additional Employee Matters. Fully vest accrued benefits related to all of the "benefit liabilities" (as defined in ERISA ss. 4001(a)(16)) ("Benefit Liabilities") as of the Effective Date under each Big Rivers Qualified Plan with respect to all Transferred Employees who have been hired by WKEC or its Affiliates as of the Effective Date, cause the Big Rivers Qualified Plans to be funded so that the assets of such plans are sufficient to provide all Benefit Liabilities under such plans with respect to each participant and each beneficiary of a deceased participant under such plans. 7.4 Station Two Contracts. Perform all of its duties and obligations under all Station Two Contracts (as amended by the 1998 Amendments, where applicable) in all material respects thereunder, consistent with the terms and provisions thereof. ARTICLE 8 COVENANTS OF CERTAIN LG&E PARTIES 8.1 Use by Other LG&E Parties. Leaseco hereby agrees to make available to all other LG&E Parties during Phase I, for such other LG&E Party's use in the operation, maintenance, management and upkeep of the Facilities and Station Two, the following:(i) the Inventories; (ii) the Personal Property; (iii) the Intangible Assets and the (iv) SO(2) Allowances, in each case at and after such time as such assets and properties have been assigned or otherwise made available to Leaseco in accordance with Article 9, below. Each such LG&E Party hereby agrees to reimburse Leaseco for its proportionate share of all out-of-pocket costs incurred by 19 Leaseco in connection with any of the foregoing assets or the replacement thereof. Leaseco hereby covenants and agrees that it will not transfer, assign, sell or otherwise dispose of any of the Intangible Assets (other than the SO(2) Allowances, the disposition of which is addressed in Section 9.4), to the extent that such Intangible Asset is necessary to the operation and maintenance of the Facilities or Station Two. 8.2 LG&E Party Cross Defaults. Notwithstanding anything to the contrary contained in this Agreement or any other Operative Document, (i) Big Rivers shall not be deemed to have breached or be in default under this Agreement or any other Operative Document as the result of any act or omission of any LG&E Party or any of its Affiliates (which act or omission is itself not the direct result of an act or omission by Big Rivers), provided such act or omission by any LG&E Party or any of its Affiliates (A) is in breach of or default under any Operative Document or (B) constitutes negligence or willful misconduct on the part of such LG&E Party or any of its Affiliates, (ii) any waiver or consent granted or action taken by any LG&E Party with respect to this Agreement or any other Operative Document shall be binding on all LG&E Parties with respect to all Operative Documents, and (iii) a failure on the part of any LG&E Party to perform its obligations under any Operative Document shall not be excused (unless otherwise expressly provided for in such Operative Document) to the extent performance is prevented or frustrated by any action or inaction of any other LG&E Party, which action or inaction on the part of such other LG&E Party is in breach of the provisions of such other Operative Document(s) to which such other LG&E Party is a party. 8.3 Big Rivers Defaults. Notwithstanding anything to the contrary contained in this Agreement or any other Operative Document, no LG&E Party shall be deemed to have breached or be in default under this Agreement or any other Operative Document as the result of any act or omission of Big Rivers (which act or omission is itself not the direct result of an act or omission by any LG&E Party or any of its Affiliates), provided such act or omission by Big Rivers (A) is in breach of or default under any Operative Document or (B) constitutes negligence or willful misconduct on the part of Big Rivers. ARTICLE 9 TRANSFERS AND ASSIGNMENTS TO OCCUR ON THE EFFECTIVE DATE 9.1 Inventories. On the Effective Date, Big Rivers shall sell and assign to Leaseco, free and clear of all Liens, all of Big Rivers' rights, title and interest under, in and to the Inventory in Big Rivers' possession or control. Pursuant to the procedures set forth on Schedule 9.1 hereto, the Parties shall jointly conduct an inventory survey and agree upon the fair market value of the Inventory sold to Leaseco pursuant to this Section 9.1 prior to the Effective Date. Leaseco shall pay Big Rivers for the fair market value as so determined on the Effective Date or, if the parties are unable to agree on such fair market value and either party submits the issue of fair market value to the arbitration procedure described in Section 15, then within five days after final determination pursuant to that procedure. On the Termination Date, Leaseco shall immediately sell and assign to Big Rivers, free and clear of all Liens all of Leaseco's rights, title 20 and interest under, in and to the fuel and scrubber reagent inventory, spare parts and materials and supplies held exclusively for use by any of the LG&E Parties at that time in connection with its operation of the Assets, and in the LG&E Parties' possession or control. Within 30 days after such assignment, the parties shall utilize the procedures set forth above and on Schedule 9.1 and Big Rivers shall pay Leaseco the fair market value of such inventories, parts, materials and supplies. If as of the Termination Date, any portion of such inventories, parts, materials and supplies has been paid for by Big Rivers as Incremental Environmental O&M (determined on a first in, first out basis) either pursuant to the Cost Sharing Agreement or the Lease, Big Rivers shall receive a credit against the fair market value of such inventories, parts, materials and supplies in an amount equal to that portion of such Incremental Environmental O&M that was paid by Big Rivers (determined by reference to the Lease or the Cost Sharing Agreement, as applicable). If the Parties are unable to agree upon the fair market value of inventories, parts, materials and supplies, the issue shall be submitted to the arbitration procedure described in Section 15. 9.2 Assignment of Certain Intangible Assets. On the Effective Date, and pursuant to an Assignment and Assumption Agreement in the form attached hereto as Schedule 9.2 (the "Assignment and Assumption Agreement"), Big Rivers shall assign or transfer to Leaseco all of Big Rivers' right, title and interest in and to all of its obligations under, the Intangible Assets (except the SO(2) Allowances, which are subject to Section 9.4 of this Agreement and except to the extent such Intangible Assets are Excluded Assets), free and clear of all Liens, and Leaseco shall assume and agree to perform and discharge Big Rivers' performance obligations under those Intangible Assets which first arise or accrue on or after the Effective Date. Leaseco shall maintain and replace the Intangible Assets as necessary, in its reasonable discretion, in order to operate the Assets in a manner consistent with Prudent Utility Practice. Leaseco shall inform the Oversight Committee or the Operating Committee, as applicable, of any material change in the status of any Intangible Assets, of any pending applications for new Permits, and of the receipt of new material Intangible Assets. On the Termination Date, Leaseco shall (subject to the receipt of all third-party consents and approvals required therefor, if any) assign or transfer to Big Rivers, free and clear of all Liens, Leaseco's rights, title and interest under, in and to the remaining Intangible Assets (exclusive of SO(2) Allowances, which are addressed in Section 9.4) and any additions, modifications or replacements of the Intangible Assets (exclusive of SO(2) Allowances) previously approved by Big Rivers in writing, and Big Rivers shall assume all of Leaseco's obligations thereunder arising after the Termination Date. Leaseco shall utilize its best efforts to obtain the third-party consents and approvals referred to in the parenthetical in the prior sentence and agrees, to the extent such consents or approvals are not obtained, to utilize its best efforts to provide Big Rivers with its benefits and rights in, to and under such Intangible Assets at no expense to Big Rivers. To the extent that any Permit constituting an Intangible Asset is not assignable by Big Rivers, Big Rivers agrees to make such Permit otherwise available at no additional cost, to the greatest extent possible, to Leaseco and WKEC in connection with the performance of their respective obligations under the Operative Documents. Leaseco agrees (i) to the extent permitted by Law, to take any and all actions necessary to maintain or renew such non-transferable Permits and (ii) to reimburse Big Rivers for any out-of-pocket expenses incurred in connection with the renewal or maintenance of such non-transferable Permits to the extent action by Big Rivers is required by applicable Law. 21 Notwithstanding the above assignment provision, the Parties agree that during Phase I, no fuel supply agreements will be assigned by Big Rivers to Leaseco and any additional fuel supply agreements required during Phase I shall be entered into by Big Rivers in its own name. WKEC, as operator, will pursuant to the Facilities Operating Agreement arrange for the acquisition and delivery of all fuel to the Generating Plants and will, as agent to Big Rivers, make all payments required under all fuel supply agreements, subject to reimbursement for such expenditure as provided in Sections 5.7 and 9.1 of the Facilities Operating Agreement. On the Phase II Effective Date, the Parties agree to execute an Assignment and Assumption Agreement with respect to the fuel supply agreements, provided that Leaseco shall not be obligated to assume any fuel supply agreements entered into by Big Rivers during Phase I to the extent Big Rivers did not receive Leaseco's written approval prior to executing such fuel supply agreement. On the Termination Date, Big Rivers shall not be obligated to assume any fuel supply agreements entered into by Leaseco during Phase II to the extent Leaseco did not receive Big Rivers' written approval prior to executing such fuel supply agreement. Subject to Section 18.3, Section 5.7 of the Facilities Operating Agreement, and any comparable provisions of the Station Two Agreement, Big Rivers shall, during Phase I, make available to WKEC for use at the Facilities, and to Station Two Subsidiary for use at Station Two, all fuel which is available under each of Big Rivers' fuel supply agreements as identified on Schedule 9.2.1. 9.3 Personal Property. On the Effective Date, Big Rivers shall sell to Leaseco, free and clear of all Liens, and Leaseco shall purchase from Big Rivers, all of Big Rivers' rights, title and interest under, in and to the Personal Property in Big Rivers' possession, including, without limitation, the Personal Property listed in Schedule 5.1.11 hereto, but excluding the property identified as Excluded Assets on Schedule 9.3 hereto. Leaseco shall pay Big Rivers an amount equal to [REDACTED] of the Personal Property as so determined on the Effective Date (the "PP Price"). Upon such payment, (a) in the event that the Effective Date is the Phase I Effective Date, the Initial Fixed Payment referenced in Section 3.3(a) of the Power Purchase Agreement shall be reduced by an amount equal to [REDACTED] percent ([REDACTED]%) of the PP Price and the remaining monthly fixed installments payable pursuant to such Section 3.3 shall each be reduced by an amount equal to [REDACTED]% of the PP Price, (b) in the event that the Effective Date is the Phase II Effective Date, the Initial Rental Payment referenced in Section 2.3.1 of the Lease shall be reduced by an amount equal to [REDACTED] percent ([REDACTED]%) of the PP Price and the remaining monthly rental installments payable pursuant to Section 2.3.2 of the Lease shall each be reduced by an amount equal to [REDACTED]% of the PP Price and (c) in the event that Phase II follows Phase I, all remaining monthly rental installments payable on and after the Phase II Effective Date pursuant to Section 2.3.2 of the Lease shall each be reduced by an amount equal to [REDACTED]% of the PP Price. On the Termination Date, Leaseco shall immediately sell to Big Rivers, free and clear of all Liens, all of Leaseco's rights, title and interest under, in and to all tangible personal property (other than fuel and scrubber reagent, inventory, spare parts and materials, and supplies) then in any LG&E Party's possession and used or held at that time exclusively for use in connection with Leaseco's and/or WKEC's use and operation of the Assets, and Big Rivers shall pay Leaseco [REDACTED] of such personal property as so determined on the Termination Date. If as of the Termination Date, any portion of such personal property has been paid for by Big Rivers as Incremental Environmental O&M (determined on a first in, first out basis) either pursuant to the Cost Sharing Agreement or the Lease, Big Rivers shall receive a credit against the [REDACTED] 22 [REDACTED] of such personal property in an amount equal to that portion of such Incremental Environmental O&M that was paid by Big Rivers (determined by reference to the Lease or the Cost Sharing Agreement, as applicable). 9.4 SO(2) Allowances 9.4.1 Except as provided in Section 9.4.2, and except those allowances used by Big Rivers to comply with emissions standards applicable to the Facilities for the period beginning on January 1 immediately preceding the Effective Date and ending on the Effective Date, Leaseco shall, without further compensation to Big Rivers, be entitled to the full and exclusive use, enjoyment and benefit (free of all Liens arising prior to such use, enjoyment or benefit) including the right to sell, exchange or otherwise dispose of, for Leaseco's account, all of the SO(2) Allowances identified on Schedule 5.1.16 hereof (other than those specifically excluded as contemplated by Section 9.1 and the allowances allocated to Station Two, the use of which SO(2) Allowances by the LG&E Parties shall be governed by the Station Two Agreement), and all other SO(2) Allowances that are allocated by the Environmental Protection Agency to the Facilities for any calendar year falling within Phase I and Phase II. Subject to Section 9.4.2, on the Termination Date, Leaseco shall immediately return (free of all Liens) to Big Rivers all of the SO(2) Allowances allocated by the Environmental Protection Agency to the Facilities for all years beginning on or after the Termination Date and a pro rata portion of the SO(2) Allowances allocated by the Environmental Protection Agency to the Facilities for the remainder of the year in which the Termination Date occurs. To the extent Leaseco previously disposed of any such SO(2) Allowances which must otherwise be returned to Big Rivers on the Termination Date, Leaseco shall have the obligation on the Termination Date to replace, at its sole expense, such SO(2) Allowances and to transfer such replacement SO(2) Allowances to Big Rivers (free of all Liens). Bonus, extension or transfer SO(2) Allowances not allocated by the Environmental Protection Agency to the Facilities for a particular year shall be deemed allocated ratably to the period commencing on the Effective Date and ending December 31, 1999. Leaseco shall have sole discretion during Phase I and Phase II of this transaction over the sale, exchange or other disposition of bonus, extension and transfer SO(2) Allowances but shall be obligated to return immediately (free of all Liens) to Big Rivers a pro rata portion of such bonus, extension or transfer S02 Allowances (or replacements thereof) if the Termination Date occurs prior to December 31, 1999. Big Rivers shall designate (and shall cause the City of Henderson to designate) a Leaseco nominee as its designated representative for all matters related to SO(2) Allowances and shall execute all documents needed to implement the foregoing entitlement. 9.4.2 If the Termination Date occurs prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date, this Section 9.4.2 shall apply and the year of termination shall be called the "Final Year of Agreement." In the event SO(2) emissions from the Facilities during the portion of the Final Year of Agreement prior to the Termination Date exceed the pro rata amount of the SO(2) Allowances allocated by the Environmental Protection Agency to the Facilities for the entire Final Year of Agreement, Leaseco shall transfer to Big Rivers SO(2) Allowances equal to the amount by 23 which SO(2) emissions from the Facilities exceed the pro rata amount of the SO(2) Allowances for the Final Year of Agreement. In the event SO(2) emissions from the Facilities during the portion of the Final Year of Agreement prior to the Termination Date are less than the pro rata amount of the SO(2) Allowances allocated by the Environmental Protection Agency to the Facilities for the entire Final Year of Agreement, Big Rivers shall transfer to Leaseco SO(2) Allowances equal to the amount by which SO(2) emissions from the Facilities are less than the pro rata amount of the SO(2) Allowances for the Final Year of Agreement. The pro rata allocation contemplated by this paragraph 9.4.2 shall be calculated based upon the ratio of the number of days prior to termination to the total number of days in the Final Year of Agreement. 9.5 [RESERVED] 9.6 Transmission Use Payment Compensation Adjustment. LEM and certain of its Affiliates have contracted with Big Rivers pursuant to the Transmission Services and Interconnection Agreement for certain services as specified therein for which they will pay Big Rivers according to the rates set forth in Rate Schedules FTS, STNF, and HNF of Big Rivers' Open Access Tariff. In the event the annual total charge for transmission services rendered by Big Rivers to LEM or its Affiliates does not equal or exceed $[REDACTED], LEM shall credit Big Rivers, pursuant to Section 6.6(c) of the Power Purchase Agreement, the difference between $[REDACTED] and the total charge for transmission services billed LEM and its Affiliates by Big Rivers during such Year ("Transmission Use Credit"). In making the determination required by the immediately preceding sentence and in each subsequent calculation pursuant to this Section 9.6, payments made by LEM or its Affiliates to Big Rivers, if any, for the transmission of power to [REDACTED] shall be excluded if such power is for resale to [REDACTED] and (a) is transmitted during or prior to [REDACTED] or [REDACTED], respectively, and constitutes Tier 1 Energy or Tier 2 Energy (as defined in the Smelter Power Purchase Agreements) or (b) is transmitted during or prior to [REDACTED] and constitutes Tier 3 Energy ("Member Transmission Exclusion"). Subject to the Member Transmission Exclusion, in the event that the annual total charge for transmission services rendered to LEM and its Affiliates by Big Rivers pursuant to the Transmission Services and Interconnection Agreement is in excess of $[REDACTED] and the average rate per megawatt hour for non-firm transmission service under the Transmission Services and Interconnection Agreement during such Year exceeded $[REDACTED] per megawatt-hour, escalated at the rate of [REDACTED]% per annum from January 1, [REDACTED], Big Rivers shall credit LEM and its Affiliates pursuant to Section 10 of the Transmission Services and Interconnection Agreement an amount equal to the number of megawatt hours of non-firm transmission service provided during the Year to LEM multiplied by the amount by which the average rate for such service exceeded $[REDACTED] per megawatt-hour escalated at [REDACTED]% per annum from January 1, [REDACTED]("Non-Firm Transmission Use Credit"); provided, in no event shall such credit exceed the difference between (1) the annual total charge for transmission services rendered by Big Rivers pursuant to the Transmission Services and Interconnection Agreement to LEM and its Affiliates with respect to Power purchased or sold by LEM and its Affiliates (subject to the Member Transmission Exclusion) (i) to fulfill LEM's or such Affiliate's 24 obligations under the Operative Documents or (ii) which is produced by the Generating Plants and (2) $[REDACTED]. For purposes of this Section 9.6, the annual total charge for service shall be calculated on January 15 of the subsequent Year and shall be calculated based upon total transmission charges billed to LEM and its Affiliates by Big Rivers for services provided from January 1 through December 31 of the preceding Year pursuant to the Transmission Services and Interconnection Agreement. Any credit owing pursuant to this Section 9.6 shall be made on February 1 of the year following the Year in which it accrues. Any such credit due on the February 1 subsequent to any Partial Year during the Term of this Agreement shall be calculated on a pro-rated basis. Subject to the Member Transmission Exclusion, purchases of transmission service from Big Rivers made by LEM or any of its Affiliates will be credited toward the $[REDACTED] annual minimum payment, such that if the cumulative purchases of LEM and its Affiliates of transmission service from Big Rivers exceeds $[REDACTED]annually, LEM will not owe Big Rivers any further payment under this paragraph, provided that (1) for the purposes of this paragraph, the term "Affiliates" does not include Kentucky Utilities Company and (2) no Non-Firm Transmission Credit shall be due with respect to any Power transmitted under the Transmission Services and Interconnection Agreement for LEM or its Affiliates other than with respect to Power purchased or sold by LEM or its Affiliates (i) to fulfill LEM's or such Affiliate's obligations under the Operative Documents or (ii) which is produced by the Generating Plants. The Parties intend that the credit obligations set forth in this Section 9.6 remain unchanged over the Term of this Agreement. In addition to the agreement of the Parties set forth in Section 8 of the Power Purchase Agreement, the Parties agree that the rates set forth in this Section 9.6 shall not increase or decrease over the Term of the Transmission Services and Interconnection Agreement by reason of regulatory action including but not limited to any filing by Big Rivers with FERC pursuant to Order No. 888. Big Rivers agrees that it will take such measures as necessary to assure that the rights, obligations and economic benefits of LEM and its affiliates under this paragraph remain unchanged. LEM agrees that it waives any rights it may have to seek rates lower than those required by this Section 9.6. ARTICLE 10 TRANSFERRED EMPLOYEE MATTERS 10.1 Treatment of Employees. In order to permit the LG&E Parties to perform their respective obligations set forth in the Operative Documents, Big Rivers shall permit WKEC or any of its Affiliates to employ such of Big Rivers' Transferred Employees, as WKEC, in its sole discretion, deems necessary in this connection. WKEC or its Affiliates shall promptly notify Big Rivers of any Transferred Employee who, as of 12:01 a.m. on the day immediately following the Effective Date, is not offered employment by WKEC or its Affiliates in a position substantially similar to that held with Big Rivers, with compensation not less than substantially equivalent to that provided by Big Rivers to such Transferred Employees and with benefits not less than substantially equivalent to those provided by WKEC to its other employees generally. 10.2 Service Credit to Transferred Employees. The Transferred Employees whom WKEC or any of its Affiliates retains and who agree to become employees of WKEC or 25 such Affiliate shall be offered participation in the employee benefit plans and programs available to similarly situated employees of WKEC or such Affiliate, as applicable, upon terms and conditions which are generally no less favorable in the aggregate than those afforded other similarly situated employees of WKEC or such Affiliate, as applicable. Transferred Employees shall receive credit for their service with Big Rivers for purposes of (i) determining their participation and vesting (but not benefit accrual except to the extent expressly provided in this Section 10) under, and (ii) determining eligibility for early retirement or any subsidized benefit provided under, the tax-qualified retirement plans available to employees of WKEC, Leaseco or their Affiliates. For purposes of computing deductible amounts (or like adjustments or limitations on coverage) under any employee benefit plan or program of WKEC or such Affiliate, as applicable, expenses and claims previously recognized for similar purposes under the applicable similar plan or program of Big Rivers shall be credited or recognized under the comparable plan or program maintained after the Effective Date by WKEC or such Affiliate, as applicable, and any preexisting condition requirements under any such plan or program that may otherwise be applicable to such Transferred Employees shall be waived (to the extent such condition would be covered under Big Rivers' plan or program). Transferred Employees shall also receive credit for their service with Big Rivers for purposes of determining future accruals of sick leave, vacation and any other service-based employee welfare benefit plans or programs of WKEC or such Affiliate, as applicable. 10.3 Collective Bargaining Agreement. WKEC shall not adopt, assume or undertake any responsibility for the currently existing collective bargaining agreement of Big Rivers with the International Brotherhood of Electrical Workers, Local 1701, which had an original term extending through October 14, 1997, and which was extended by Big Rivers and the Union through October 14, 1998. 10.4 Benefit Claims. Big Rivers shall retain responsibility for all workers' compensation, health, life insurance, dependent care, and disability benefit claims of Transferred Employees pending as of the Effective Date, or made after the Effective Date, but relating to events occurring on or prior to the Effective Date. Following the Effective Date, WKEC or its Affiliate (as applicable) shall have responsibility for all workers' compensation, health, life insurance, dependent care, and disability benefit claims of Transferred Employees made after the Effective Date or its Affiliate (as applicable) which relate to events occurring after the Effective Date. 10.5 Severance for Certain Employees of Big Rivers. As contemplated by Section 1.9 of Big Rivers Severance Plan as in effect on August 31, 1996, and as subsequently amended and restated on May 27, 1997 as modified by resolution dated July 11, 1997 and as further amended on March 13, 1998 (the "Big Rivers Severance Plan"), following the Effective Date, Big Rivers shall remain liable for any benefits which become payable under such plan, but WKEC shall reimburse Big Rivers for severance benefits paid by Big Rivers pursuant to Sections 3.4 and 3.5 of Big Rivers Severance Plan, but only to any Transferred Employee not hired by WKEC or such Affiliate or, if hired by WKEC or such Affiliate, subsequently terminated under conditions that require Big Rivers to provide severance benefits pursuant to Big Rivers 26 Severance Plan. Within 60 days following the Effective Date, WKEC shall also reimburse Big Rivers for (i) the severance benefits paid by Big Rivers pursuant to Big Rivers Severance Plan to Transferred Employees whose employment with Big Rivers was terminated as part of a workforce reduction between September 1, 1996 and the Effective Date, (ii) one-half of the cost of outplacement assistance provided by Big Rivers to any employees whose employment was terminated by Big Rivers as part of a workforce reduction between September 1, 1996 and the Effective Date, (iii) one-half of the costs of the outplacement assistance provided by Big Rivers to any employees who are terminated during the period from September 1, 1996 through the one-year anniversary of the Effective Date, and (iv) the full cost of the $150 retiree medical subsidy paid by Big Rivers under the terms of the Big Rivers Severance Plan, under conditions that require Big Rivers to provide severance benefits pursuant to the Big Rivers Severance Plan. This Agreement is not intended to, and shall not be construed to, make any employee of Big Rivers a third-party beneficiary of this Subsection or of any other provision of this Agreement. Big Rivers shall not be responsible for compliance with the Older Workers' Benefit Protection Act in conjunction with the offer and payment of severance benefits to applicable Transferred Employees. The release of claims provided for under the Big Rivers Severance Plan to applicable Transferred Employees terminated on or after the Execution Date shall specifically include WKEC and its Affiliates within the scope of the release of claims, and WKEC shall indemnify and hold harmless Big Rivers and all other fiduciaries of the Big Rivers Severance Plan on and against all liability arising from the inclusion of WKEC or its Affiliates within the scope of the release of claims, if any. 10.6 WARN Act. As of the Effective Date, Big Rivers shall terminate the employment of Transferred Employees (certain of whom in turn may be hired by WKEC or its Affiliates). WKEC agrees to indemnify and hold harmless Big Rivers from and against all liability arising under WARN with respect to the Transferred Employees, whose termination of employment occurs on the Effective Date. This indemnification shall survive the Effective Date and shall remain effective concurrent with the legal limitations period applicable to such WARN liability. In the event it becomes necessary, Big Rivers agrees to reasonably cooperate with WKEC and its relevant Affiliates (if any) in their efforts to comply with WARN in connection with the transactions contemplated by the Operative Documents including, without limitation, the actions to be taken on or after the Effective Date. 10.7 Certain Benefit Obligations. As of the Effective Date, WKEC shall assume the obligation of Big Rivers to provide to each Transferred Employee employed by WKEC or its Affiliates immediately following the Effective Date the amount of unused sick leave and vacation time credited to such employee by Big Rivers as of the Effective Date. Such unused sick leave and vacation shall be provided in accordance with WKEC or its Affiliate's sick leave and vacation policies as in effect from time to time, except that WKEC shall allow non-bargaining Transferred Employees who are age 50 or over on the Effective Date the right to take a cash-out of such unused sick leave credited as of the Effective Date, in accordance with Big Rivers' policy on cash-outs of unused sick leave as set forth in Big Rivers Severance Plan. WKEC shall provide medical benefits to the Transferred Employees upon their retirement in accordance with the retiree medical plan or program of WKEC or its Affiliate, as the case may be, as in effect at the time of such retirement and such retiree medical benefits provided by WKEC or its Affiliate, as the case may be, shall have an aggregate present value as of the Effective Date determined in accordance with Financial Accounting Standard ("FAS") 106 that is no less than the present value as of such date of Big Rivers' obligation to provide retiree 27 medical benefits to the Transferred Employees as determined in accordance with FAS 106. The items described in 10.8.1, 10.8.2 and 10.8.3 below shall be paid by Big Rivers to WKEC in cash on the Effective Date, and if not so paid shall, in the case of any such payment owed to WKEC, be applied as an offset to the Initial Fixed Payment or the Initial Rental Payment (as defined in the Lease), as applicable. 10.7.1 Sick Leave. The following cost of the obligation to provide sick leave to the Transferred Employees shall be paid by Big Rivers. Such cost shall be the sum of (i) and (ii) below based on the product resulting from multiplying the number of sick leave hours for each Transferred Employee as of the Effective Date, times the employee's hourly pay rate with Big Rivers on that date:(i) the entire resulting product times [REDACTED] percent; plus (ii) the portion of the resulting product attributable to accumulations of over [REDACTED] hours of sick leave for non-bargaining Transferred Employees over the age of 50 on the Effective Date, times [REDACTED] percent. 10.7.2 Vacation. The following cost of the obligation to provide vacation to the Transferred Employees shall be paid by Big Rivers. Such cost shall be determined by multiplying the number of vacation hours for each Transferred Employee as of the Effective Date, times the employee's hourly pay rate with Big Rivers on that date. 10.7.3 Retiree Medical Benefits. The following cost of the obligation to provide retiree medical benefits to the Transferred Employees shall be paid by Big Rivers. Such cost shall be the present value as of the Effective Date, of Big Rivers' obligation to provide retiree medical benefits to the Transferred Employees under Financial Accounting Standard 106, minus $[REDACTED]. ARTICLE 11 TAXES 11.1 Sales and Use Taxes. Notwithstanding anything in the Operative Documents to the contrary, (i) Big Rivers shall pay any and all sales and use Taxes imposed on (A) its transfer of Inventory and Personal Property to Leaseco pursuant to Sections 9.1 and 9.3 hereof, (B) its lease of the Facilities pursuant to the Lease and Operating Agreement, and (C), if the Phase I Agreements become effective, its sale of power to LEM pursuant to the Power Purchase Agreement to the extent of the lesser of (1) the sales Tax imposed on Big Rivers with respect to the consideration described in Section 3.3(a) thereof and (2) the sales Tax that would have been imposed on Big Rivers if the Phase II Agreements (rather than the Phase I Agreements) were effective as of the Effective Date, and (ii) an LG&E Party shall pay any and all sales and use Taxes imposed on (A) Leaseco's transfer of fuel and scrubber reagent inventory, spare parts, materials, supplies and other tangible personal property (as required by Sections 9.1 and 9.3 of this Agreement) to Big Rivers on the Termination Date and (B), if the Phase I Agreements become effective, Big Rivers' sale of power to LEM pursuant to the Power Purchase Agreement to the extent that the amount of such sales Tax exceeds the amount of the Tax described in clause (i)(C) of this sentence. The allocation of sales and use Tax pursuant to this Section 11.1 also shall apply to any Tax enacted after the date hereof in replacement of any such sales or use Tax. 28 11.2 Property Taxes. Big Rivers shall pay when due all property Taxes assessed, levied, or exacted on the Assets, but Leaseco shall, following the Effective Date, reimburse Big Rivers for [REDACTED] percent of such Taxes that are allocable to the period beginning on the Effective Date and ending on the Termination Date, provided, however, that the [REDACTED] percent sharing ratio shall be changed to [REDACTED]% for the year [REDACTED] and to [REDACTED]% as of January 1, [REDACTED] and remain at [REDACTED]% throughout the remainder of the Term. In the event that Big Rivers elects to reduce the Contract Limits pursuant to Section 4.3(e) of the Power Purchase Agreement, the property Tax sharing ratio shall be adjusted by multiplying Big Rivers' then-applicable percentage share of property Taxes by the sum of one (1) plus the CCAP in effect on the date of assessment of such Taxes. Any adjustments to the property Tax sharing ratio made pursuant to the preceding sentence shall be effective for taxable periods (or portions thereof) beginning on the effective date for the Reduction in Contract Limits set forth in Section 4.3(e) of the Power Purchase Agreement. For purposes of this Section 11.2, property Taxes imposed on the Assets for a taxable period shall be allocated to each day in such period on a pro rata basis. Leaseco shall reimburse Big Rivers for Leaseco's portion of such Taxes within thirty (30) days of receiving notice from Big Rivers showing the nature and amount of such Taxes, proof of Big Rivers' payment of such Taxes, and the computation of Leaseco's share of such Taxes. The allocation of property Tax pursuant to this Section 11.2 also shall apply to any Tax enacted after the date hereof in replacement of such Tax. 11.3 Unidentified Asset-Related Taxes. Following the Effective Date, the LG&E Parties shall pay when due all Taxes that are imposed upon Big Rivers in connection with the lease, operation, or maintenance of the Assets and not described in Section 11.1 or 11.2 of this Agreement, provided, however, that this Section 11.3 shall not apply to (i) any income or franchise Tax (except to the extent that LEC assumes an income or franchise Tax pursuant to the Tax Indemnification Agreement) or (ii) any utility gross receipts license Tax. 11.4 Change of Law. Except as provided in Sections 11.1 and 11.2 concerning replacement Taxes, Big Rivers shall pay any Tax imposed on Big Rivers that is attributable to a change in law or regulation (or any interpretation thereof) after the Effective Date to the extent that the amount of such Tax does not exceed the amount of the Tax that would have been imposed on Big Rivers if the Phase II Agreements (rather than the Phase I Agreements) had been in effect as of the Effective Date, and the LG&E Parties shall pay any Tax imposed on Big Rivers following the Effective Date that is attributable to a change in law or regulation (or any interpretation thereof) after the Effective Date to the extent that such Tax exceeds the amount of the Tax that would have been imposed on Big Rivers if the Phase II Agreements (rather than the Phase I Agreements) had been in effect as of the Effective Date. Nothing in this Section 11.4 shall relieve Big Rivers of its obligations under Section 8 of the Power Purchase Agreement or Big Rivers or any LG&E Party of their respective obligations under Article 8 of the Lease or Article 7 of the Cost Sharing Agreement. 11.5 Other Taxes. Any Tax imposed on a Party during the term of this Agreement and that is not specifically allocated between the Parties (either by direct payment or reimbursement) pursuant to Sections 11.1, 11.2, 11.3, or 11.4 of this Agreement, Section 8 of the Power Purchase Agreement, or the Tax Indemnification Agreement shall be borne by the Party that is primarily obligated to pay such Tax. 29 11.6 IRS Ruling Request. The LG&E Parties shall have the right, but not the obligation, to require Big Rivers to join LEC in jointly submitting to the IRS a request for a private letter ruling to the effect that the transactions contemplated by the Phase I Agreements, for Federal income tax purposes, should be treated as a lease (or, if reasonably acceptable to Big Rivers, as an arrangement the income taxation of which is substantially identical to that of a lease) of the Assets by Big Rivers to the LG&E Parties (such request, together with any exhibits, attachments, and supplements thereto, the "Ruling Request"). The Parties shall request that the IRS issue the ruling to both Big Rivers and the LG&E Parties but, if the IRS will not agree to such joint ruling, then the Parties shall request that the IRS issue the ruling solely to Big Rivers. The Ruling Request may solicit additional rulings that relate to ancillary issues concerning the Federal income tax consequences of the transactions arising from the Phase I Agreements subject to the express written consent of Big Rivers, which consent shall not be unreasonably withheld. The LG&E Parties shall draft the Ruling Request and submit such draft to Big Rivers for its review and comment, and the Parties shall work expeditiously to file the Ruling Request with the IRS as promptly as possible. The LG&E Parties and Big Rivers shall cooperate in taking all reasonable actions necessary to secure the requested rulings, including the execution of powers of attorney and declarations of the accuracy of the statements made in the Ruling Request. The LG&E Parties shall have the ultimate decision-making authority with respect to the preparation, submission, filing, and negotiations for the requested rulings, but the LG&E Parties shall consult in good faith with Big Rivers to reasonably resolve any disagreement concerning any matter relating to the Ruling Request. Each Party shall have the right to participate in all negotiations and communications with the IRS concerning any matter relating to the Ruling Request. The LG&E Parties shall pay the costs and expenses that the LG&E Parties incur in connection with the Ruling Request and, if Big Rivers retains Arthur Andersen LLP to represent Big Rivers in connection with the Ruling Request, then the LG&E Parties shall pay the fees and expenses charged Big Rivers by Arthur Andersen LLP for such representation to the extent that such fees and expenses exceed those that Arthur Andersen LLP charges Big Rivers in connection with Big Rivers obligations pursuant to Section 7.1.2 hereof. The Parties further agree that a Ruling Request may be submitted to the IRS under the provisions of this section a second time if the LG&E Parties determine, in their sole discretion, and notify Big Rivers of such determination by April 15, 1998, that modifications to the transaction could be deemed to raise the question of whether a material change in facts has occurred such that an IRS response to a prior Ruling Request could no longer be relied upon. 11.7 Kentucky Tax Rulings. At the request of Big Rivers or the LG&E Parties, the Parties shall request, in writing, that the KRC determine, or issue a certificate or other statement to each Party to the effect, that (i) no Party is liable for any sales or use Tax pursuant to the transactions contemplated by the Operative Documents, (ii) no Party is required to withhold any portion of the payments made thereunder on account of any sales or use Tax, and/or (iii) an exemption and/or a reduced rate of property Tax are allowable with respect to all or any portion of the Assets for any taxable period; provided, however, that, if the KRC determines that any party hereto has any obligation to pay or withhold any sales or use Tax, or that an exemption or reduced rate of Tax is not allowable for a taxable period with respect to all or any portion of the Assets, then the parties also shall request that the KRC determine the amount of such liability, obligation, exemption, or rate and advise each party of the nature and 30 computation of the amount of Tax in controversy. Each party shall have the right to participate in the preparation and filing of any and all written and oral submissions to the KRC for purposes of obtaining the determination, certificate, and/or statement described in this Section 11.7, and each party shall have the right to join in all negotiations and communications with the KRC for such purpose. Each party shall execute all necessary waivers of confidentiality of Tax and other information that is or may be reasonably related to the subject matter of the determinations, statements, and certificates described in this Section 11.7. 11.8 Appeal of Tax Assessment. Except as otherwise provided in the Tax Indemnification Agreement, each Party shall have the right to appeal and contest the assessment of any Tax that is imposed upon such Party by operation of law or that is allocated to such Party (either by direct payment or reimbursement) pursuant to this Article 11 or pursuant to Section 8 of the Power Purchase Agreement. ARTICLE 12 ACCOUNTING 12.1 Maintenance of Books and Records. Leaseco shall keep up-to-date books and records of financial transactions and other arrangements that carry out the terms of the Operative Documents, which books and records shall be sufficiently detailed to allow the Parties to fulfill their respective obligations under applicable law. Leaseco shall retain these books and records until the Termination Date (unless otherwise approved by the Operating Committee or unless Leaseco delivers the records it desires to destroy to Big Rivers) and shall make these books and records available for inspection and audit by Big Rivers at any reasonable time pursuant to Section 12.3 of this Agreement. 12.2 Accounting Practices. Leaseco shall keep all accounts consistent with the Accounting Practices. 12.3 Audit. At the request of Big Rivers, Leaseco shall cause the books and records pertaining to operations under the Annual Capital Budget and the Annual O&M Budget for any year to be audited by independent Certified Public Accountants of national reputation acceptable to both Parties. Copies of such audits shall be supplied to each Party. The cost of such audits shall be shared equally by the Parties. 12.4 Statements and Reports. Leaseco shall furnish to the Parties monthly statements of costs incurred and expenditures made pursuant to the Annual Capital Budget and the Annual O&M Budget and copies of all material reports, notice or filings made to any governmental or other regulatory authority. Leaseco shall also furnish to the Parties such other reports as may from time to time reasonably be requested. 12.5 Access to Records. Each of Leaseco and Big Rivers reserves the right to inspect, copy or perform audits of financial records and operations of the Assets. Leaseco shall allow reasonable access to records, reports and supporting documentation regarding the operation of the Assets. From time to time, requirements of Federal or state tax and regulatory 31 agencies of a Party may necessitate access to records held by the other Party and such access shall not be denied unreasonably. 12.6 Confidentiality of Books and Records. Each Party shall treat as confidential books, records and other information developed or acquired by that Party in connection with the Assets and no Party shall reveal or otherwise disclose such confidential information to third parties without the prior written consent of the other Party. These restrictions shall not apply to the disclosure of confidential information (i) to any Affiliate of the disclosing Party; (ii) to each Party and its employees, attorneys, agents and auditors; (iii) to any public or private financing agency or institution which has either lent money, committed to lend money to any Party hereto or is considering such action; (iv) to any third party to which a Party contemplates a permitted transfer under Section 16 provided, however, that in any such case only such confidential information as such third party shall have a legitimate business need to know shall be disclosed; provided, in the case of any disclosure pursuant to (i), (ii), (iii) and (iv), that the Party receiving the disclosure first agrees to keep the information confidential; (v) that otherwise comes into the public domain unless as a result of a breach by such Party of its obligations under this Section 12.6; or (vi) that is required, in the opinion of either Party's counsel, to be disclosed to the RUS or any other federal, state or local government or appropriate regulatory agencies and departments of such agencies or that is required, in the opinion of either Party's counsel, to be publicly announced, to the extent required by law. Each Party shall be responsible to the other Party to this Agreement for any disclosures of confidential information by its employees, attorneys, agents and auditors in violation of this Section 12.6. ARTICLE 13 INSURANCE COVERAGE 13.1 Leaseco to Obtain and Maintain Assets Insurance. Leaseco, at its own expense, shall have in place on the Effective Date, and thereafter maintain in effect at all times during the Term, in accordance with standards prevailing in the electric power industry (including the independent power industry) for assets of similar size and nature, insurance coverage for the Assets with responsible insurers, for the benefit of the parties as their interests may appear, to protect and insure against third party liability for bodily injury and property damage, all risks of physical damage to property or equipment, including transportation and installation perils, catastrophic losses due to either third party liability or damage to first party property and such other insurance as Leaseco deems necessary, with reasonable limits and subject to appropriate exclusions, and deductibles/retentions. In addition to, and not in any way limiting the foregoing, Leaseco shall have in place on the Effective Date and maintain in effect at all times during the Term, insurance coverage of the type and in the minimum amounts set forth on Schedule 13.1 or as required in any Debt Restructuring Documents, whichever is greater. 13.2 Notice of Claims. Leaseco shall notify the other parties of the assertion of any claim in excess of $[REDACTED] relating to the Assets immediately upon assertion of the same, or of the occurrence of an event likely to result in the assertion of such a claim. Leaseco shall report annually to the Operating Committee all claims asserted in the amount of $[REDACTED] or 32 more, and shall provide such Operating Committee with all notices provided to insurers with respect to any claim. 13.3 General Provisions Affecting Assets Insurance. The following provisions shall apply to the Assets Insurance obtained by Leaseco in compliance with this Article 13.3: 13.3.1 Named Insureds. Leaseco shall be named as the first named insured and each of Big Rivers and WKEC shall also be named as named insureds on all policies of Assets Insurance (except for the crime policy and the workers' compensation and employers' liability policy) and such policies that do not carry a "separation of insureds" provision shall carry cross-liability endorsements. 13.3.2 Primary Insurance. Assets Insurance policies shall be primary insurance for all purposes and shall be so endorsed. Any other insurance carried by the parties individually shall not participate with insurance for the Assets as to any loss or claim for which valid and collectible Assets Insurance shall apply. Such other insurance shall apply solely as to the individual interest of the parties; provided, however, the parties shall accept any reasonably restrictive endorsement to their separate insurance policies as may be required by an insurer as a condition precedent to the issuance of a policy of Assets Insurance. 13.3.3 Certificates of Insurance. Leaseco shall furnish the parties with Certificates of Insurance evidencing the existence of the Assets Insurance required by this Article 13. Upon request of Big Rivers, Leaseco shall make available for inspection and copying a certified copy of each of the policy forms of Assets Insurance, together with a line sheet therefor (and any subsequent amendments) naming the insurers and underwriters and the extent of their participation. 13.3.4 Notice of Cancellation or Material Change. Each of the Assets Insurance policies shall be endorsed so as to provide that the parties shall be given the same advance notice of cancellation or material change as that required to be given to Leaseco. 13.3.5 Insurers. Leaseco shall obtain Assets Insurance from such responsible insurers or underwriters, including stock companies, mutuals and pools or groups of insurers or underwriters, as it in its sole discretion may select, provided that the insurance carriers have a policyholder's rating of "A-" or better and a financial size of "Class VII" or better, as published in the latest edition of Best's Insurance Reports. 13.3.6 Refunds. Any refunds of premiums or dividends received by Leaseco on any Assets Insurance shall be retained by Leaseco. 13.3.7 Combined Coverage. Nothing in any Operative Document shall prohibit Leaseco from combining the coverage required by this Agreement with coverage outside the scope of that required by this Agreement as long as such combining of coverage in no way adversely affects the coverage required hereunder. 33 13.4 Relations with Insurers. Leaseco shall assist any insurer in the investigation, adjustment and settlement of any loss or claim covered by Assets Insurance. Leaseco shall present and prosecute claims against insurers and indemnitors providing Assets Insurance or indemnities in respect of any loss of or damage to the Assets or liability of either Party to third parties covered by any indemnity agreement, and to the extent that any such loss, damage or liability is not covered by Assets Insurance or by any indemnity agreement, present and prosecute claims therefor against any parties who may be liable therefor. 13.5 Station Two Insurance Proceeds. Notwithstanding anything contained in this Agreement or any other Operative Document to the contrary, but subject to the provisions of the Station Two Agreement, in the event any Station Two Improvement is damaged or destroyed following the Effective Date and any insurance proceeds are paid or payable to Big Rivers and/or any LG&E Party as a result thereof, and in the event such Station Two Improvement is not repaired or replaced in compliance with the Station Two Agreement and the Station Two Contracts, and Big Rivers and/or Station Two Subsidiary are entitled to retain those proceeds for their account in accordance with those agreements (or such Station Two Improvement is so repaired or replaced using only a portion of the insurance proceeds, and the remaining portion of those proceeds may be so retained by Big Rivers and/or Station Two Subsidiary), then all such insurance proceeds that are not so used for the repair or replacement of such Station Two Improvement shall be divided between Big Rivers and Station Two Subsidiary (with appropriate payments between those Parties) within 30 days after the later of (a) the decision is made not to repair or replace the Station Two Improvement or (b) insurance proceeds have been received (in the case of (a) and (b), together with any interest that may have accrued on those proceeds since their receipt), based on the respective Station Two Improvement Sharing Ratios of Big Rivers and Station Two Subsidiary that applied to the Station Two Improvement at the time of its original construction, purchase or installation. ARTICLE 14 ENVIRONMENTAL LIABILITIES AND INDEMNITIES 14.1 Big Rivers' Environmental Liabilities and Indemnities. Except as set forth in Section 14.2 and Sections 14.7, Big Rivers shall bear, at its sole cost, and, following the Effective Date shall indemnify and hold harmless Leaseco, the other LG&E Parties and their respective Affiliates from and against (i) all costs of responding to a release or threat of release of a Hazardous Substance or other waste (including, without limitation, garbage and refuse) whether (y) on, under or from the Facilities or the Real Property on which the Facilities are located or (z) on, under or from any off-site disposal locations utilized by Big Rivers, but in the case of subclause (y) alone, only to the extent disclosed on Schedule 5.1.19, stipulated by the Parties in writing or identified in the Baseline Environmental Audit Report (or to the extent not first identified in the End Of Term Baseline Audit (as defined in Section 14.5)) and, in the case of subclause (y) and (z), only to the extent that the response is required by Environmental Law, and (ii) any claims, demands, losses, damages, liabilities, costs, expenses, obligations and deficiencies (including, without limitation, costs of corrective or remedial actions, fines, civil or criminal penalties, settlements and attorney's fees) asserted or imposed against, or incurred by, 34 Leaseco, its directors, members of governing bodies, agents, officers, Affiliates, partners and employees, directly or indirectly, in connection with the presence of Hazardous Substances or other waste (including, without limitation, garbage and refuse) whether (X) on, under or from the Facilities or the Real Property on which the Facilities are located or (Y) on, under or from any off-site disposal location utilized by Big Rivers, but in the case of subparagraph (X) alone, only to the extent disclosed on Schedule 5.1.19, stipulated by the Parties in writing or identified in the Baseline Environmental Audit Report (or to the extent not identified in the End Of Term Baseline Audit). Except as provided above, the indemnities contained in this Article 14 shall not apply to incidental, consequential and other special damages that may be incurred by Leaseco or its Affiliates, including lost profits. Without limiting the generality of the foregoing, Big Rivers hereby waives all claims and causes of action against Leaseco whether arising under statute, common law, or otherwise at law or in equity with respect to items (i) and (ii) of this Section, except to the extent covered by Leaseco's indemnity set forth in Section 14.2 below. In the event that a condition covered by this Article 14 is identified in the Baseline Environmental Audit Report or elsewhere as described above, but is contributed to or exacerbated by the action or inaction of Leaseco during Phase II or WKEC during Phase I, Leaseco and Big Rivers shall share equitably in any losses, liabilities, costs or expenses associated with that condition. Notwithstanding anything contained in this Section 14.1 to the contrary, the obligation of Big Rivers to indemnify and hold harmless Leaseco and its Affiliates shall not apply to costs and expenses which constitute Incremental Environmental O&M or costs and expenses for Capital Assets that are necessary to comply with any requirement of any Environmental Law or any environmental regulatory authority. 14.2 Leaseco's and WKEC's Environmental Liabilities and Indemnities. Except as set forth in Section 14.1, Leaseco and WKEC shall, following the Effective Date, bear, at their sole cost, and indemnify and hold harmless Big Rivers from and against (i) all costs of responding to a release or threat of release of a Hazardous Substance or other waste (including, without limitation, garbage and refuse) whether (y) on, under or from the Facilities or the Real Property on which the Facilities are located, or (z) on, under or from any off-site locations utilized by Leaseco or WKEC, but in the case of subclause (y) alone, only to the extent not disclosed on Schedule 5.1.19, not stipulated by the Parties in writing or not identified in the Baseline Environmental Audit Report (including any Hazardous Substance or other waste to the extent first identified in the End Of Term Baseline Audit) and in the case of subclause (y) and (z) to the extent that the response is required by Environmental Law, and (ii) any claims, demands, losses, damages, liabilities, costs, expenses, obligations and deficiencies (including, without limitation, costs of corrective or remedial actions, fines, civil or criminal penalties, settlements and attorney's fees) asserted or imposed against, or incurred by, Big Rivers, its directors, members, agents, officers, partners and employees, directly or indirectly, in connection with the presence of Hazardous Substances or other waste (including, without limitation, garbage and refuse) whether (x) on, under or from the Facilities or the Real Property on which the Facilities are located, (y) on, under, or from any off-site disposal location used by Leaseco or WKEC, but in the case of subparagraph (x) alone, to the extent not disclosed on Schedule 5.1.19 or not stipulated by the Parties in writing or identified in the Baseline Environmental Audit Report (including any Hazardous Substance to the extent first identified in the End Of Term Baseline Audit). Nothing contained in this Section 14.2 shall limit Big Rivers' rights (if any) to indemnity 35 from Leaseco or any of its Affiliates under any Operative Documents by reason of any of their failure to exercise Prudent Utility Practices. Without limiting the generality of the foregoing, Leaseco and WKEC hereby waive all claims and causes of action against Big Rivers whether arising under statute, common law, or otherwise at law or in equity with respect to items (i) and (ii) of this Section except to the extent covered by Big Rivers' indemnity set forth in Section 14.1. In the event that a condition covered by this Section 14.2 is identified in the End Of Term Baseline Audit or elsewhere as described above, but is contributed to or exacerbated by the action or inaction of Big Rivers after the Effective Date, Big Rivers, Leaseco, and WKEC shall share equitably in any losses, liabilities, costs or expenses associated with that condition. Except as provided elsewhere in this Agreement, the indemnities contained in this Article 14 shall not apply to incidental, consequential and other special damages that may be incurred by Big Rivers, including lost profits. Notwithstanding anything contained in this Section 14.2 to the contrary, the obligation of Leaseco and its Affiliates to indemnify and hold harmless Big Rivers shall not apply to costs and expenses which constitute Incremental Environmental O&M or costs and expenses for Capital Assets that are necessary to comply with any requirement of any Environmental Law or any environmental regulatory authority. 14.3 Minimizing Costs, Expenses and Liabilities. Leaseco and WKEC shall during Phases I and II and Big Rivers shall after the Termination Date, use reasonable efforts to minimize costs, expenses and liabilities of the type described in Sections 14.1, 14.2 and 14.7, below. 14.4 No Effect on Insurance. The provisions of this Article 14 shall not be construed to relieve any insurer of its obligation to pay any insurance proceeds in accordance with the terms and conditions of valid and collectible Assets Insurance policies. 14.5 End Of Term Baseline Environmental Audit. As soon as possible following the Termination Date, the parties shall promptly conduct an environmental survey of the Assets utilizing the same guidelines established in the Baseline Environmental Audit performed in advance of the Closing and on the three additional quarterly dates post-closing on which certain supplemental groundwater testing was performed, to the study reported in the Baseline Environmental Audit Report, pursuant to the same terms as the Baseline Study Agreement between Big Rivers and Leaseco or such other terms as the parties may mutually agree upon. The results of that end of term study shall be referred to as the "End Of Term Baseline Audit." Leaseco's share of the expense of the End Of Term Baseline Audit shall not exceed $[REDACTED], adjusted to reflect the change in the preliminary index value of the Implicit Price Deflators for Gross Domestic Product as published in Economic Indicators prepared for the Joint Economic Committee by the Council of Economic Advisers (or any successor index mutually agreed upon by the parties) for the calendar quarter most recently then ended (at the time the contract for such study is executed) from its preliminary value for the third quarter of 1996. 14.6 Areas Expressly Excluded from Scope of Baseline Environmental Audit Report. Notwithstanding anything to the contrary, Big Rivers and Leaseco agree that the provisions of Section 14.1 and Section 14.2 shall not apply to any release or threat of release of Hazardous Substances in or beneath the Green River or the Ohio River (as measured by the 36 ordinary high water mark), whether occurring before or after the Effective Date. With regard to any such releases or threats of releases of Hazardous Substances in or beneath the Green River or the Ohio River, Big Rivers and Leaseco hereby reserve all rights, whether at law or in equity, each may have against the other or against any third party. 14.7 Opacity Indemnity. Notwithstanding anything contained elsewhere in this Article 14 to the contrary, and in lieu of any indemnification and hold harmless covenants set forth in Section 14.1 and 14.2, above: (a) Big Rivers agrees that it shall bear at its sole cost and, following the Effective Date, shall indemnify and hold harmless Leaseco, the other LG&E Parties and their respective Affiliates from and against, any claims, demands, losses, damages, liabilities, costs, expenses, obligations and deficiencies (including without limitation, costs of corrective or remedial actions, fines, civil or criminal penalties, settlements and attorneys fees) (collectively "Opacity Damages"), asserted or imposed against, or incurred by, Leaseco, the other LG&E Parties, their Affiliates, or their respective directors, agents, officers and employees, directly or indirectly, in connection with: (i) any failure of any one or more of the Generating Plants to comply with applicable opacity limitations prior to the Effective Date; (ii) any failure of the Green and Wilson facilities of Big Rivers to comply with applicable opacity limitations at any time from the Effective Date through and including the date on which Big Rivers has received its final Title V Air Quality Permits for the Green and Wilson facilities from the KNREPC (exclusive of violations resulting from the operation of the Green and Wilson facilities by the relevant LG&E Parties during that period in a manner that is materially different than the operation of those facilities by Big Rivers immediately prior to the Effective Date); and (iii) following the receipt by Big Rivers of its Title V Air Quality Permits for the Green and Wilson facilities, (A) any failure by those permits to comply with applicable Environmental Laws at the time of their issuance, (B) any failure by Big Rivers to have obtained those permits in compliance with applicable Environmental Laws at the time of their issuance (including without limitation, any defect in those permits attributable to the compliance certifications included by Big Rivers in its applications for those permits), (C) any challenge to the Title V Air Quality Permits for the Green and Wilson facilities by any Person or governmental or regulatory authority based on the compliance certifications described in (B) above, (D) any operation by any of the LG&E Parties of the Green or Wilson facilities in reliance upon (and in compliance with) those permits where it is determined that any of the circumstances described in (A) or (B), above, existed or (E) any failure of the Title V Air Quality Permits for the Green and Wilson facilities to shield or protect the LG&E Parties, their Affiliates or such other Persons, from and against all such Opacity Damages that may arise following the issuance of those permits by reason of or resulting from the operation of the Green or Wilson facility by the relevant LG&E Parties in compliance with those permits and in a manner that is materially consistent with the operation of those facilities by Big Rivers prior to the Effective Date, and such failure to shield or protect is based upon the circumstances described in (A) or (B) above; including in the case of (i), (ii) and (iii), above, without limitation, any Opacity Damages incurred by any of the LG&E Parties or other Persons identified above following the Effective Date, or following the issuance of the Title V Air Quality Permits for the Green and Wilson facilities, arising out of acts or omissions on the part of Big Rivers, its employees, agents or representatives, occurring prior to the Effective Date or the issuance of those permits (as applicable). 37 (b) Leaseco and WKEC shall, following the Effective Date, bear, at their sole cost, and indemnify and hold harmless Big Rivers from and against any Opacity Damages asserted or imposed against, or incurred by, Big Rivers or its directors, members of governing bodies, agents, officers and employees, directly or indirectly, in connection with any failure of the Generating Plants to comply with applicable opacity limitations subsequent to the Effective Date, other than the Opacity Damages resulting from or under the circumstances described in Section 14.7(a)(ii) or Section 14.7(a)(iii), above. (c) Without limiting the generality of the foregoing, Big Rivers hereby waives all claims and causes of action against the LG&E Parties, whether arising under statute, common law or otherwise at law or in equity, with respect to the Opacity Damages for which Big Rivers is responsible as described in (a), above, and the LG&E Parties hereby waive all claims and causes of action against Big Rivers, whether arising under statute, common law or otherwise at law or in equity, with respect to the Opacity Damages for which Leaseco and WKEC are responsible as described in (b), above. The indemnities contained in this Section 14.7 shall not apply to (y) incidental, consequential and other special damages that may be incurred by the LG&E Parties, Big Rivers or the other Persons identified in (a) or (b) above, including lost profits, or (z) costs and expenses which constitute Incremental Environmental O&M or costs and expenses for Capital Assets that are necessary to comply with any requirement of any Environmental Law or any environmental regulatory authority (including without limitation, any change in position of the KNREPC regarding compliance with applicable opacity limitations based on concurrent measurement of particulate matter emissions affecting the Green and Wilson facilities). ARTICLE 15 DISPUTE RESOLUTION AND ARBITRATION 15.1 Dispute Resolution. If during the term of this Agreement, any issue, dispute or controversy ("Dispute") should arise hereunder or under any of the Operative Documents, then representatives of the affected parties shall promptly confer and exert their best efforts in good faith to reach a reasonable and equitable resolution of such Dispute. If such representatives are unable to resolve such Dispute within five (5) business days, the Dispute shall be referred within two (2) business days of the lapse of the aforementioned five (5) business day period to the responsible senior management of the affected parties for resolution. No party shall seek any other means of resolving any Dispute arising in connection with any Operative Document until all parties' responsible senior managements have had at least five (5) business days to resolve the Dispute following referral of the Dispute to such responsible senior management. Each party shall have the right to join in any such proceeding any other party or entity having an interest therein. If the parties are unable to resolve the Dispute in accordance with the foregoing procedure, either party may then, at any time, initiate mediation of the Dispute, as described in Section 15.2 below. 15.2 Mediation. 38 15.2.1 If either Party initiates mediation, such mediation shall proceed in accordance with the Commercial Mediation Rules of the American Arbitration Association then in effect on the date of this Agreement by a mediator who (x) has the qualifications and experience set forth in Section 15.2.2 below, and (y) is selected as provided in 15.2.3. 15.2.2 Unless the parties agree otherwise, the mediator shall be a lawyer with excellent academic and professional credentials who (w) is familiar with contracts governing the operation of electric generating plants and is otherwise qualified in the subject area of the issue in dispute, (x) is or has been a partner in or counsel to a highly respected law firm for at least 10 years as a practicing attorney specializing in either general commercial litigation or general corporate and commercial matters, (y) has had both training and experience as a mediator in the federal or state courts or with a reputable commercial ADR firm or non-profit ADR organization, and (z) is impartial. 15.2.3 Either Party may initiate mediation of the Dispute by giving the other party a written notice setting forth the list of the names and resumes of three persons who that party ("Initiating Party") believes would be qualified as a mediator. Within 15 days after delivery of this notice, the Recipient Party shall give a counter-notice to the Initiating Party in which the Recipient Party may designate a person to serve as the mediator from among the three persons listed by the Initiating Party, or if no such selection is made, the Recipient Party may set forth a list of names and resumes of three persons who the Recipient Party believes to be qualified as a mediator. Within 10 days after delivery of the counter-notice the Initiating Party may designate a person to serve as mediator from among the three persons listed by the Recipient Party. If the parties cannot agree on a mediator from the three nominees submitted by each party, the mediator shall be selected by the American Arbitration Association. 15.2.4 Within thirty (30) days after the mediator has been selected, both parties and their respective attorneys shall meet with the mediator for one mediation session of at least four hours. Each party's representative attending the mediation session shall have authority to settle the Dispute. If the Dispute cannot be settled at such mediation session or at any mutually agreed upon continuation thereof, either party may give the other and the mediator written notice declaring the mediation process to be at an end, in which case the Dispute shall be resolved by arbitration as provided in Section 15.3 below. 15.2.5 All conferences and discussions which occur in connection with the mediation conducted pursuant to this Agreement shall be deemed settlement discussions and nothing said or disclosed nor any document produced which is not otherwise independently discoverable shall be offered or received as evidence or used for impeachment or for any other purpose in any current or future arbitration or litigation. 15.2.6 The cost of the mediation shall be shared equally by the Parties. 39 15.3 Arbitration. 15.3.1 If the Parties are unable to resolve the Dispute in accordance with the mediation procedure set forth in Section 15.2 within 60 days of the initiation of such procedure, or if either Party refuses to participate in the mediation procedure, either Party may then, at any time, deliver notice to the other party of its intent to submit the Dispute to arbitration, which notice shall include the specific issues concerning the Dispute which must be resolved (the "Arbitration Notice"). At any time following the 10th day after delivery of an Arbitration Notice, either party (for purposes of this Section 15.3, the "First Party") may give notice to the other party (for purposes of this Section 15.3, the "Second Party") that it has designated an arbitrator. Within 15 days of the delivery of the aforesaid notice of designation the Second Party shall be required to designate a second arbitrator and to notify the First Party of such designation. Within 15 days of the designation of the second arbitrator, the two designated arbitrators shall meet and shall jointly designate a third arbitrator, who shall be neutral and impartial. Arbitrators shall be qualified by education and experience in the subject matter of the Dispute and issues to be arbitrated. The arbitrator designated by the party-appointed arbitrators shall be the Chairman of the arbitration panel. A determination by a majority of the panel shall be binding upon and enforceable against each party. 15.3.2 If for any reason (i) the Second Party shall fail timely to designate an arbitrator after notice of designation is delivered by the First Party or (ii) the two party-appointed arbitrators fail timely to designate a third arbitrator, or the third arbitrator shall fail for any reason to serve, said arbitrator(s) shall be designated by the American Arbitration Association upon the demand of either Party. 15.3.3 All proceedings before the arbitrators shall be held at such place as the affected Parties may agree. Failing such agreement, such proceedings shall be held in Louisville, Kentucky in a location other than an office of a Party or counsel to a Party. 15.3.4 The parties agree that any Dispute being resolved by arbitration hereunder shall be determined pursuant to the provisions set forth herein and pursuant to the applicable Commercial Arbitration Rules of the American Arbitration Association then in effect insofar as such rules are not inconsistent with the provisions set forth herein. 15.3.5 The authority of the arbitrators shall be limited to the specific Dispute and related issue(s) in controversy as designated by the parties. 15.3.6 Notwithstanding any provision to the contrary contained in this Section 15.3, the Parties agree that if an Arbitration Notice identifies as the sole issue a determination as to a particular dollar amount owing under this Agreement and does not involve a request for any form of equitable relief, then (a) at the commencement of the arbitration hearing, each Party shall submit a proposed arbitration award and the arbitrators shall be required to adopt in full the proposed arbitration award of one of the 40 Parties and (b) the Party whose proposed arbitration award is not selected shall pay all the costs of the arbitration, including the reasonable attorney's fees of the prevailing Party. 15.3.7 If the Arbitration Notice identifies one or more issues that do not fit the criteria described in Section 15.3.6, then the arbitration panel shall award such relief as they determine appropriate and otherwise in accordance with the terms of this Agreement. If Section 15.3.6 is not applicable, then (i) if a single Party prevails in the arbitration, then the Party that does not prevail in the arbitration shall pay all the costs of the arbitration, including the costs and reasonable attorneys' fees of the prevailing Party and (ii) in the event that no single Party prevails in all respects, the arbitration panel shall determine the appropriate allocation of costs (other than attorneys' fees, in which case each Party will pay their own counsel) in accordance to the extent reasonably possible with the intentions of the Parties, as expressed in 15.3.7(i), that the non-prevailing Party with respect to each issue should bear a proportionate share of the costs imposed on the Parties by arbitration of that issue. 15.3.8 Any decision or award of the arbitrators shall be final and binding upon the Parties. Judgment upon the award rendered may be entered in any court having jurisdiction, or application may be made to such court for a judicial acceptance of the award or any order of enforcement, as the case may be. 15.4 Exclusiveness of Procedures. Subject to the retained jurisdiction of the Bankruptcy Court to resolve disputes between the Parties, the procedures specified in this Section 15, shall be the sole and exclusive procedures for the resolution of disputes between the Parties arising out of or relating to this Agreement and each of the other Operative Documents; provided, that a Party may seek a preliminary injunction or other preliminary judicial relief if in its judgment such action is necessary to avoid irreparable damage. Despite such action the Parties will continue to participate in good faith in the procedures specified in this Section 15. All applicable statutes of limitation shall be tolled while the procedures specified in this Section 15 are pending. The Parties will take such action, if any, required to effectuate such tolling. ARTICLE 16 TRANSFERS AND ASSIGNMENTS 16.1 Permitted Assignments. No party shall assign any of its rights or obligations under any Operative Document without the prior written consent of the other Parties, however that no prior consent shall be required with respect to an assignment: (1) to any Person into which or with which the Party making the assignment is merged or consolidated or to which the Party transfers substantially all of its assets. (2) with respect to each LG&E Party, to any Affiliate. (3) with respect to each LG&E Party, to any third party which is authorized by all appropriate regulatory authorities to fulfill such LG&E Party's obligations under 41 the Operative Documents to which such LG&E Party is a Party and which provides assurances of payment and performance of equal or greater value to that provided in such Operative Documents, as reasonably determined by Big Rivers; provided, however, and notwithstanding Section 16.2, that following such assignment, the Guaranty provided by LEC shall remain in full force and effect, unless and until a replacement guaranty, acceptable to Big Rivers and the RUS, is provided to Big Rivers. (4) in the case of either Big Rivers or any LG&E Party, to any (a) creditor holding a Permitted Lien as security for the underlying obligation, (b) other mortgagee or other secured party as security for indebtedness incurred for borrowed money by such party to fund its acquisition of a Capital Asset pursuant to Article 7 of the Cost Sharing Agreement or Article 8 of the Lease, as applicable, or (c) other entity as security for indebtedness for borrowed money loaned to Big Rivers or any LG&E Party, provided that each such secured party of Big Rivers or any LG&E Party referenced herein executes a Non-Disturbance Agreement in substantially the form attached hereto as Exhibit H (or, in the case of an assignment by an LG&E Party, in a form reasonably acceptable to Big Rivers), and such secured party may transfer or assign the interest given as security pursuant to, or in lieu of, a foreclosure of the Lien (or the exercise of power of sale) held by such secured party, provided that the transferee or assignee assumes all of the duties and obligations of the pledging Party under the Operative Documents, including without limitation the obligation to enter into a Non-Disturbance Agreement, and all other agreements that relate to the interest being transferred or assigned. The rights of Big Rivers and the LG&E Parties (exclusive of WKEC) to assign any of their rights or obligations under the Station Two Agreement are further subject to the limitations on assignment set forth therein. Subject to the foregoing restrictions in this Section, the Operative Documents shall be binding upon, inure to benefit of and be enforceable by the Parties that are signatories thereto and their respective successors and assigns. 16.2 Assignment and Assumption of Related Agreements. No transfer or assignment of any interest in the Assets or in the Operative Documents, or any part thereof pursuant to subsections 16.1(1), 16.1(2) or 16.1(3) may be made unless, simultaneously, the transferring party's rights under all Operative Documents and all other agreements that relate to such interest are similarly transferred or assigned to the same Person or Persons, and such Person or Persons assumes in writing all the duties and obligations of the Party making such transfer or assignment under such agreements that relate to the interest being transferred or assigned. Unless the provisions of subsections 16.1(1), 16.1(2) or 16.1(3) and the immediately preceding sentence are satisfied, no such assignment or transfer shall release the transferring or assigning Party from any of its obligations pursuant to any Operative Document or such other agreements. 16.3 Noncomplying Assignment. Any attempted or purported assignment or transfer made other than in accordance with this Article 16 either voluntarily or by operation of law (including, without limitation, by merger or consolidation) shall be void and of no effect. 16.4 Regulatory Approvals. Assignments or transfers under any Operative Document may be subject to the jurisdiction of state or federal regulatory agencies. Such 42 transfers shall not be effective until all required approvals and all other required action by such agencies having jurisdiction shall have been obtained. 16.5 Liens. No Party shall directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Assets, except Permitted Liens. Leaseco agrees to pay before delinquency all costs for work, services or materials furnished for use in connection with the Assets, the non-payment of which could result in any Lien against the Assets. Leaseco will keep title to the Assets free and clear of any and all Liens other than Permitted Liens. Leaseco will immediately notify Big Rivers of the filing of any such Lien or any pending claims or proceedings related to any such Lien as and when it comes to the attention of Leaseco, and will indemnify and hold Big Rivers harmless from and against all loss, damages and expenses (including reasonable attorneys' fees) suffered or incurred by Big Rivers as a result of such Lien (regardless of whether or not Leaseco knew of the existence of such Lien). In case any such Lien attaches, Leaseco agrees to cause it to be immediately released and removed of record (failing which Big Rivers may do so at Leaseco's sole expense). Notwithstanding anything herein to the contrary, Leaseco shall have the right to contest in good faith any such Lien even if such contest prolongs or permits the existence of such Lien, and (i) Big Rivers shall not be responsible or liable for the removal or release of any Lien on or with respect to the Assets which is created or imposed by the actions of any of the LG&E Parties, or in connection with any services performed for or materials furnished to any of the LG&E Parties, or for the costs or expenses of such removal or release, or for any losses, damages or expenses incurred by any of the LG&E Parties in connection therewith and (ii) the LG&E Parties shall not be responsible or liable for the removal or release of any Lien on or with respect to the Assets which is created or imposed by the actions of Big Rivers, or in connection with any services performed for or materials furnished to Big Rivers, or for the costs or expenses of such removal or release, or for any losses, damages, or expenses incurred by Big Rivers in connection therewith. ARTICLE 17 TERMINATION 17.1 Right of Parties to Terminate. 17.1.1 Termination Prior to the Effective Date. This Agreement may be terminated prior to the Effective Date: (a) Subject to Section 20.5, by Leaseco, on behalf of all LG&E Parties, if any of the authorizations, consents, approvals, filings or registrations required as a condition to both Phase I and Phase II in Schedule 3.1 and Schedule 3.2 hereof shall have been denied, not permitted to go into effect or obtained on terms not reasonably satisfactory to the LG&E Parties and all reasonable final appeals shall have been exhausted; (b) Subject to Section 20.5, by Big Rivers, if any of the authorizations, consents, approvals, filings or registrations required as a condition to both Phase I and Phase II in Schedule 3.1 and Schedule 3.2 hereof shall have been denied, not permitted to go into effect or obtained on 43 terms not reasonably satisfactory to Big Rivers and all reasonable final appeals shall have been exhausted; (c) By Leaseco, on behalf of all LG&E Parties, if Big Rivers shall have breached or defaulted under any of its obligations hereunder in any material respect and such breach or default, if curable, is not cured by the defaulting Party within the period prescribed in Section 17.2; (d) By Big Rivers, if any of the LG&E Parties shall have breached or defaulted under any of its obligations hereunder in any material respect, and such breach or default, if curable, is not cured by the defaulting Party within the period prescribed in Section 17.2; (e) By either Big Rivers or Leaseco, on behalf of all LG&E Parties, by written notice to the other Party, if the Closing shall not have occurred on or prior to December 31, 1998; (f) [RESERVED] (g) By Big Rivers, if, after notice to Leaseco, as agent for the LG&E Parties, and a hearing, the Bankruptcy Court determines, after taking into consideration the Parties obligations under Section 20.5, that it is reasonably certain that any of the conditions precedent to Big Rivers' obligations to close the Phase I transaction or, if it is to precede the Phase I transaction, the Phase II transaction, will not occur or be satisfied prior to December 31, 1998; or (h) By Leaseco, as agent for the LG&E Parties, if, after notice to Big Rivers, and a hearing, the Bankruptcy Court determines, after taking into consideration the Parties obligations under Section 20.5, that it is reasonably certain that any of the conditions precedent to Big Rivers' obligations to close the Phase I transaction or, if it is to precede the Phase I transaction, the Phase II transaction, will not occur or be satisfied prior to December 31, 1998. 17.1.2 Termination After the Effective Date. After the Effective Date, the occurrence of any of the following events shall constitute a default under this Agreement: (1) Failure by a Party to pay when due any and all amounts payable to other Party in accordance with the terms of this Agreement; (2) Any attempt by a Party to transfer an interest in this Agreement in breach of Article 16; (3) Failure of a Party to perform any material obligation set forth herein; (4) Except with respect to the Chapter 11 Case, any filing by a Party of a petition in bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency laws, or voluntarily taking advantage of any such laws by answer or otherwise or the commencement of involuntary proceedings under any such laws if such proceedings are not withdrawn or dismissed within 60 days after such institution; 44 (5) Assignment by a Party for the benefit of creditors; (6) Allowance by a Party of the appointment of a receiver or trustee of all or a material part of its property if such receiver or trustee is not discharged within 60 days after appointment; (7) Any breach of a representation or warranty made by a Party in this Agreement, provided that such breach would have a material adverse effect on the Non-Defaulting Party or its rights under this Agreement or any other Operative Document taken as a whole; provided, however, the Parties acknowledge and agree that any breach occurring on or after the Effective Date of any representation or warranty made by a Party as of the Effective Date in this Agreement shall give rise to the right of the other Party to damages or availability of other remedies provided for hereunder arising from such breach only if the claim for damages or other relief is made within one (1) year following the Effective Date; (8) Failure, inability or refusal of a Party to cure a default or breach under (a) during Phase I, the Power Purchase Agreement, the Cost Sharing Agreement, the Transmission Service and Interconnection Agreement or the Facilities Operating Agreement which gives rise to a termination of such other Phase I Agreement and (b) during Phase II, the Lease, the Transmission Service and Interconnection Agreement or the Power Purchase Agreement which gives rise to a termination of such Phase II Agreement, or any termination by that Party of any of the foregoing agreements in breach or in default thereof; or (9) Failure by Big Rivers to pay to LEM, when due, an amount owed pursuant to the Settlement Promissory Note. (10) The Party in default under any provision of this Section 17.1.2 shall be referred to as the "Defaulting Party" and the other Party shall be referred to as the "Non-Defaulting Party." 17.2 Pre-Effective Date Remedies. If either the LG&E Parties or Big Rivers decides to terminate this Agreement pursuant to Section 17.1.1, such Party shall promptly give written notice to the other Party to this Agreement of such decision. In the event such notice relates to termination due to a breach of a covenant of the other Party contained in this Agreement or any other Operative Document, such notice shall state a date by which such breach must be cured, which shall be at least 30 days after receipt of the notice. If within the 30-day period, the breaching Party cures the breach or if the breach is one that cannot in good faith be corrected within such period and the breaching Party begins to correct the breach within the 30-day period and (a) continues corrective efforts with diligence until a cure is effected and (b) produces reasonably satisfactory evidence that such breach can be cured by December 31, 1998, the notice of termination shall be inoperative and the breaching Party shall lose no rights under this Agreement, provided, that the breaching Party shall remain liable to the other Parties for any damages incurred by them resulting from that breach or default. In the event of a termination pursuant to Section 17.1.1, the Parties shall be released from all liabilities and obligations arising under this Agreement, other than for damages arising from a breach of this Agreement, provided, however, that the Parties acknowledge and agree that notwithstanding any provision to the 45 contrary in this Agreement any breach or default occurring prior to the Effective Date of any representation or warranty made by a Party as of the date hereof in this Agreement or any other Operative Document (other than, in the case of Big Rivers, those representations made in Sections 5.1.1, 5.1.2, 5.1.3 and 5.1.4 of this Agreement and, in the case of the LG&E Parties, in Sections 6.1.1, 6.1.2, 6.1.3 and 6.1.4 of this Agreement) shall not give rise to the right of the other Party to damages, and the non-breaching Party's sole remedy in the event of such a breach or default shall be the right to refuse to consummate the transactions contemplated by this Agreement. 17.3 Post-Effective Date Defaults; Remedies. 17.3.1 Notice of Default. The Non-Defaulting Party shall have the right to give the Defaulting Party a written notice of default ("Notice of Default"), which shall describe the default in reasonable detail and state the date by which the default must be cured, which shall be at least 30 days after receipt of the notice, except as to a breach or default under Subsection (1) of Section 17.1.2 which shall be three days after receipt of notice, and under Subsections (2), (4), (5), (6), (7), (8) or (9) of Section 17.1.2, as to which there will be no cure right. 17.3.2 Opportunity to Cure. If within the three day period with respect to a breach or default under Subsection (1) of Section 17.1.2 the Defaulting Party cures the breach or default, or if within the 30 day period with respect to breaches or defaults under Subsection (3) of Section 17.1.2 (which are not also defaults under Subsections (2), (4), (5), (6), (7), (8) or (9) of Section 17.1.2) the Defaulting Party cures the breach or default or if the failure is one that cannot in good faith be corrected within such period and the Defaulting Party certifies to the Non-Defaulting Party that it agrees to cure such breach or default and begins to correct the breach or default within the 30 day period and continues corrective efforts with diligence until a cure is effected, the notice of default shall be inoperative and the rights of the Non-Defaulting Party under Section 17.3.4 shall not be triggered. Subject to the Defaulting Party's right to contest under Section 17.3.3, if the Defaulting Party does not cure or begin (and diligently continue) to cure the breach or default as provided above, the Non-Defaulting Party shall have the rights specified in Section 17.3.4. A Non-Defaulting Party's right to damages or other relief resulting from a breach by a Defaulting Party hereunder shall begin to accrue as of the first day of the breach without regard to the availability of any cure rights hereunder, and without regard to whether the breach or default is cured. 17.3.3 Contest. If the Defaulting Party disputes the existence or nature of a default asserted in a Notice of Default, then the Defaulting Party shall pay the disputed payment or perform the disputed obligation, but may do so under protest. The protest shall be in writing, shall accompany the disputed payment or precede the performance of the disputed obligation, and shall specify the reasons upon which the protest is based. The Defaulting Party shall deliver copies of the protest to the Non-Defaulting Party. If it is later determined pursuant to the dispute resolution, mediation or arbitration under Section 15 that a protesting party is entitled to a refund of all or any portion of a disputed payment or payments or is entitled to the reasonable equivalent in money of nonmonetary performance of a disputed obligation theretofore made, then, upon such determination, the nonprotesting Party shall pay such amount to the 46 protesting Party, together with interest thereon at a rate equal to the Prime Rate from the date of payment or from the date of completion of performance of a disputed obligation to the date of reimbursement. 17.3.4 Remedies. If the Defaulting Party's breach or default is one for which there is no cure right, or if the Defaulting Party fails or refuses to cure the breach or default under Section 17.3 for which a cure right is available within the time described hereunder, the Non-Defaulting Party shall have, in addition to any other rights and remedies that a Party may have at law, in equity (including, without limitation, to pursue recovery of damages from the Defaulting Party, subject to any limitations on remedies set forth in this Agreement) or otherwise, the following remedies: 17.3.4.1 If Big Rivers, on the one hand, or any of the LG&E Parties, on the other hand, ("X") shall fail to make any payment or shall fail to perform any obligation under this Agreement or the Settlement Promissory Note, then the other Party ("Y") or any of its Affiliates will have the right (but not the obligation) without prior notice to X to perform such obligation and set-off the costs of such performance or the amount of any such past due payment owing to Y against any obligation of Y or any of its Affiliates owing to X or any of its Affiliates hereunder or, in the event the breach or default shall occur during Phase II, under any other Operative Document (whether or not matured). 17.3.4.2 The Non-Defaulting Party may terminate this Agreement upon 30 days' notice to the Defaulting Party of its intent to do so. 17.3.4.3 Notwithstanding anything contained herein or in any Operative Document to the contrary, Big Rivers may also terminate this Agreement at any time that the Guaranty provides Big Rivers with the right to terminate this Agreement. 17.3.4.4 The termination rights provided for in this Section 17.3 are in addition to, and not in lieu of, any rights to terminate this Agreement as are set forth in the Station Two Agreement or the Guaranty, which termination rights shall be cumulative. 17.4 Automatic Termination. This Agreement shall terminate automatically on December 31, 1998 and the Parties hereto shall subsequently have no duties or obligations under this Agreement or the other Operative Documents (except for any breach or default hereunder by the Parties occurring prior to the termination, and except for indemnity claims that have accrued hereunder prior to the termination) unless, prior to December 31, 1998, all conditions to the effectiveness of a confirmed plan of reorganization filed by Big Rivers, which plan incorporates the LG&E Transaction (as defined in the Plan) and which plan is consented to by (i) that number of the Members whose action is required under Section 279.140 of the Kentucky Revised Statutes in order to constitute an action by the membership of Big Rivers, (ii) each of the Banks, (iii) the RUS, (iv) each of the Smelters and (v) Big Rivers, shall have been satisfied or duly waived in accordance with the provisions of such plan. 47 17.5 Condemnation Termination. Upon the occurrence of a total condemnation with respect to all or substantially all of the Tangible Assets, which condemnation causes, during Phase I, the termination of the Cost Sharing Agreement or, during Phase II, the termination of the Lease, all provisions of this Agreement except Section 9.6 hereof shall automatically terminate at such time, and the Settlement Promissory Note shall become immediately payable in full. Section 9.6 shall be treated from that time forward as a part of the Transmission Services and Interconnection Agreement and shall be governed by the provisions thereof. 17.6 Monthly Margin Payments. No provision of this Agreement or any other Operative Document purporting to limit special, incidental and consequential damages that may be recoverable by Big Rivers shall bar or constitute any waiver of any claim by Big Rivers for any Monthly Margin Payments as its damages arising by reason of a default by Leaseco under the Lease or by LEM under the Power Purchase Agreement (including without limitation under Section 2.2(a)(ix) of the Power Purchase Agreement and Section 11.1(8) of the Lease); provided, that nothing contained herein shall be deemed to be an admission by Leaseco that the loss of such payments by Big Rivers is or shall be an actual or direct damage incurred by Big Rivers arising out of such a default by Leaseco or LEM. ARTICLE 18 WAIVER; LG&E INDEMNITIES 18.1 Waiver. Except to the extent caused by the willful or grossly negligent act or omission by Big Rivers, its Affiliates, successors and assigns, or their respective officers, employees, consultants or agents (the "Protected Parties") or by the breach of this Agreement or any other Operative Document by Big Rivers (which act or omission is itself not the direct result of an act or omission of any LG&E Party or any of its Affiliates, successors or assigns or their respective officers, employees, consultants or agents), and except for losses, injuries and damages specifically assumed by Big Rivers or covered by any indemnification or hold harmless covenant of Big Rivers in this Agreement or any of the other Operative Documents, Big Rivers and the Protected Parties will not be liable or in any way responsible for, and following the Effective Date, Leaseco and WKEC waive all claims against Big Rivers and the Protected Parties for, any liability, loss, damage, claim or cost (including attorneys' fees) suffered by Leaseco or WKEC or any of their Affiliates, successors, or assigns, or their respective officers, employees, consultants or agents in connection with the use and/or operation of the Assets by Leaseco or WKEC or any of their Affiliates, successors, or assigns, or their respective officers, employees, consultants or agents. 18.2 General Indemnity. Except to the extent limited pursuant to Section 10.2.1 of the Lease or Section 9.2 of the Cost Sharing Agreement, as applicable, in the event that insurance proceeds are insufficient to restore the Facilities, and notwithstanding the limitations set forth with respect to WKEC in Sections 13.2 and 13.3 of the Facilities Operating Agreement, following the Effective Date, Leaseco shall indemnify and reimburse Big Rivers and the Protected Parties for any and all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) (collectively, "Damages") suffered or incurred by Big Rivers or the Protected Parties as a result of, or with respect to, 48 Leaseco's and/or WKEC's or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents, operation and/or use of the Assets, except to the extent that any of the foregoing Damages arise as a result of (a) the gross negligence or willful misconduct of, or breach of any Operative Document by, Big Rivers or the Protected Parties seeking indemnification (which act or omission is itself not the direct result of an act or omission of any LG&E Party or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents) or (b) any action, event or circumstance for which Big Rivers has an indemnification and hold harmless obligation pursuant to Article 14 (environmental indemnity) or pursuant to any other Operative Document, or for which Big Rivers has expressly assumed responsibility in any Operative Document. Nothing in this Section 18.2 shall be construed to impose an additional or different indemnification obligation upon any of the Parties resulting from, or respecting, any environmental matters than such Party's obligations under Article 14 hereof. 18.3 Fuel Indemnity. During Phase I, Leaseco shall indemnify, defend and hold harmless Big Rivers, and its directors, officers, employees, consultants and agents for any liability, loss, damage, claim, and cost (including attorneys' fees) arising in connection with each and every fuel supply contract held by Big Rivers as of the Effective Date for use in the Generating Plants, and all other fuel supply contracts entered into by Big Rivers after the Effective Date with Leaseco's prior written consent, in each case including liabilities, losses, damages, claims, and costs (including attorneys' fees) arising from any act or omission of Big Rivers, provided that, if such liability, loss, damage, claim or cost (including attorneys' fees) arises from an action of Big Rivers that constitutes breach, default, gross negligence or willful misconduct by Big Rivers under any such fuel supply contract (which breach, default, gross negligence or willful misconduct by Big Rivers under any such fuel supply contract is not related to or caused by any act or omission of any LG&E Party or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents), then Leaseco shall have no obligation under this provision unless an LG&E Party requested or concurred in such action by Big Rivers (in which case Leaseco's obligations under this paragraph shall not be excused). ARTICLE 19 SEVERAL OBLIGATIONS Nothing contained in this Agreement or the remaining Operative Documents shall ever be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to the Parties. Except as otherwise provided herein or in the other Operative Documents with respect to the LG&E Parties, each Party shall be individually responsible for its own covenants, obligations and liabilities as herein or therein provided. 49 ARTICLE 20 MUTUAL COVENANTS Big Rivers and the LG&E Parties covenant and agree that they will act in accordance with the following, and shall bear their own costs and expenses in doing so: 20.1 Governmental Consents. Promptly following the execution of this Agreement, the Parties will proceed to prepare and file with the appropriate governmental authorities any requests for approval or waiver that are required (or that the Parties otherwise agree to seek) from governmental authorities in connection with the transactions contemplated hereby or in the other Operative Documents (including the Phase II Agreements), and the Parties shall diligently and expeditiously prosecute and cooperate fully in the prosecution of such requests for approval or waiver and all proceedings necessary to secure such approvals and waivers. 20.2 Third Party Consents. Promptly following the execution of this Agreement, the Parties will use reasonable best efforts to procure all consents that are required from third parties, including the Members, in connection with the transactions contemplated hereby or in the other Operative Documents, and the Parties shall diligently and expeditiously seek such consents and cooperate fully in the procurement of such consents. 20.3 Reasonable Efforts. Each party will use its reasonable best efforts to effect the transactions contemplated by this Agreement and the remaining Operative Documents and to fulfill the conditions to the obligations of the parties set forth in Schedules 3.1, 3.2 and 3.3 to this Agreement. 20.4 Wholesale Power Contracts. From and after the Execution Date, Big Rivers shall use its commercially reasonable efforts to maintain the Member Contracts (as amended in accordance with this Agreement), the Hoosier Contracts, the Oglethorpe Contract and the HMP&L Contract in full force and effect, to exercise Big Rivers' rights and entitlements thereunder to the fullest extent permissible under those agreements and applicable laws, and to fully and timely perform and discharge its duties and obligations thereunder, in each case throughout the remaining terms of those agreements. In addition, Big Rivers shall not attempt to assign or convey to any other Person (other than an LG&E Party or its Affiliate) any rights or interests that it may have under or pursuant to the Member Contracts, the Hoosier Contracts, the Oglethorpe Contract or the HMP&L Contract throughout the remaining terms of those agreements. 20.5 Further Assurances. Prior to December 31, 1998, the LG&E Parties and Big Rivers will execute such further documents and instruments and take such further actions as may be reasonably requested by Big Rivers or the LG&E Parties, respectively, in order to cause the Closing to occur in accordance with the terms hereof. The LG&E Parties and Big Rivers expressly acknowledge and agree that, although it is their intention to effect a transaction among themselves in the form contemplated by this Agreement and by the Operative Documents in the form attached hereto on the date hereof, it may be preferable to effectuate such a transaction by 50 means of an alternative structure in light of the conditions set forth in Schedule 3.1, 3.2 and 3.3. Accordingly, if (x) a condition to the Effective Date which is not yet satisfied or waived is the receipt of any one or more of the governmental approvals referred to in those provisions of Schedule 3.1, 3.2 or 3.3 entitled "Commission Approval," "Hart Scott Rodino," "Consents," "Governmental Approvals," "FERC Approval" and "Securities and Exchange Approvals", (y) Big Rivers or the LG&E Parties believe that such condition(s) will not be satisfied through the continued use of the transaction structure contemplated by the Operative Documents in the form attached hereto, and (z) Big Rivers or the LG&E Parties believe that the adoption of an alternative structure (that otherwise substantially preserves for each of the LG&E Parties, on the one hand, and Big Rivers, on the other hand, the relative risks and economic benefits contemplated by the Operative Documents in the form attached hereto on the date hereof) would result in such conditions being satisfied or waived, then the LG&E Parties and Big Rivers shall use their respective reasonable best efforts to effect a transaction among themselves by means of a mutually agreed upon structure other than the structure contained in the Operative Documents in the form attached hereto on the date hereof or with mutually agreed upon revisions to the currently contemplated structure, that in either case so preserves such benefits; provided that, prior to the Closing of any such restructured or revised transaction, (A) all Affected Parties (as defined below) shall have consented to such restructured or revised transaction and all governmental authority declarations, filings, registrations, notices, authorizations, consents or approvals necessary for the effectuation of such alternative structure or revisions to the currently contemplated structure shall have been obtained and (B) all other conditions to the Effective Date, as applied to such alternative structure or revisions, shall have been satisfied or waived. For purposes of this Section 20.5, the term "Affected Party" shall mean (i) that number of the Members whose action is required under Section 279.140 of the Kentucky Revised Statutes in order to constitute an action by the membership of Big Rivers, (ii) each of the Smelters, (iii) each of the Banks and (iv) the RUS, but, in each case, only if the restructured or revised transaction contemplated by this Section 20.5 materially adversely affects (X) such party's rights under, or relating to, the Plan or (Y) such party's rights, if any, under, or relating to, the Operative Documents in the form attached hereto. In the event that Big Rivers and the LG&E Parties disagree as to whether or not a party identified in clauses (i) through (iv) above is an "Affected Party," the Parties agree to present such issue to the Bankruptcy Court for determination. 20.6 Operating Committee; Budget Preparation. The Parties agree, notwithstanding the date upon which the Closing occurs, that they will continue to work together to (i) develop an Annual O&M Budget and an Annual Capital Budget with respect to the "Initial Budget Period" (as defined in the Facilities Operating Agreement or the Lease (as applicable), and (ii) consider matters of concern relating to the operation of the Assets and Station Two following the Closing with respect to which the Operating Committee is given a role pursuant to the terms of the Lease or the Facilities Operating Agreement. The applicable provisions contained in the Phase I or Phase II Agreements, as applicable, shall replace this provision on and after the Effective Date. Notwithstanding the preceding sentence, the Parties hereby agree that the Annual Capital Budgets for the Initial Budget Period to be agreed to by the Parties as contemplated in Schedule 3.1 attached to this Agreement shall include as the aggregate budgeted amount for the relevant Year (or portion thereof) the following amounts which amounts shall not be increased or decreased without the written approval of the Parties (but subject to Section 6.5 51 of the Facilities Operating Agreement and Section 7.5 of the Lease dealing with budget deviations): (i) First Partial Year following the Effective Date (assuming there are five full months then remaining in that Year) -- $[REDACTED]; (ii) First full Year following the Effective Date -- $[REDACTED] ; and (iii) Second full Year following the Effective Date -- $[REDACTED]. Notwithstanding the foregoing, in the event an item or expense included in any Annual Capital Budget that is a part of the Initial Period Budgets is determined to be an Enhancement or Major Capital Improvement, or is determined not to be a Capital Asset or Station Two Improvement that Big Rivers would otherwise have an obligation to fund a portion thereof, then Big Rivers will not be responsible for a share of such expenditure, notwithstanding the provisions of Articles 7 or 8 of the Lease, Article 7 of the Cost Sharing Agreement or Article 6 of the Facilities Operating Agreement to the contrary or the inclusion of such item in the Initial Period Budgets. ARTICLE 21 GENERAL PROVISIONS 21.1 Notices. All notices, payments and other communications to each Party under this Agreement or any other Operative Document must be in writing, and shall be addressed respectively as follows: Addressed to: Big Rivers Electric Corporation 201 Third Street Post Office Box 24 Henderson, Kentucky 42419 Phone No. (502) 827-2561 Telecopy No. (502) 827-2558 Attn: Michael Core David Spainhoward With a copy to: James M. Miller, Esq. Sullivan, Mountjoy, Stainback & Miller, P. S. C. 100 St. Ann Building Post Office Box 727 Owensboro, Kentucky 42302-0727 Phone No. (502) 926-4000 Telecopy No. (502) 683-6694 Addressed to: Western Kentucky Energy Corp. c/o LG&E Energy Corp. 220 West Main Street 52 Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-4622 Attn: President Addressed to: LG&E Energy Marketing Inc. c/o LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-4622 Attn: President Addressed to: Western Kentucky Leasing Corp. c/o LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-4622 Attn: President Addressed to: LG&E Station Two, Inc. c/o LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-4622 Attn: President In the case of all LG&E Parties, with a copy to: Richard S. Miller, Esq. Dewey Ballantine 1301 Avenue of the Americas New York, New York 10019 Phone: (212) 259-7070 Facsimile: (212) 259-6333 53 John R. McCall Executive Vice President, General Counsel and Secretary LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-2585 Daniel E. Fisher, Esq. Greenebaum Doll & McDonald PLLC 3300 National City Tower Louisville, Kentucky 40202-3197 Phone No. (502) 587-3620 Telecopy No. (503) 587-3695 Each Party may change such address by notice given to the other Parties in the manner set forth above. All notices shall be effective (i) if sent by messenger or courier service, when delivered, (ii) if sent by mail, three days after posting, and (iii) if sent by telecopy, when sent (provided that, if sent by telecopy, a duplicate copy thereof is promptly sent by mail); provided that if a provision hereof specifies that a period shall be measured by a fixed number of days after receipt of a notice, notice shall be effective when received, irrespective of the means of delivery. 21.2 Waiver. The failure of a Party to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach of any provision of this Agreement shall not constitute a waiver of any provision of this Agreement or limit the Party's right thereafter to enforce any provision or exercise any right. 21.3 Amendment and Modification. No amendment or modification of this Agreement shall be valid unless made in writing and duly executed by the Parties; provided, however, subject to the LG&E Parties' rights pursuant to Schedule 3.1(I)(8), Big Rivers shall be permitted, at any time prior to the Effective Date, without the consent of the LG&E Parties, to update or amend any disclosure schedule referred to in Article 5, which disclosure schedule is attached hereto on the date hereof, solely to the extent necessary to make its representations and warranties on the Effective Date true and correct in all material respects. Notwithstanding the foregoing proviso, updates or amendments made by Big Rivers to Schedule 5.1.19 shall not in any way diminish or otherwise reduce Big Rivers' indemnification obligations pursuant to Section 14.1, as established by reference to Schedule 5.1.19 as provided on the Execution Date. Updates and amendments to such Schedule 5.1.19 made by Big Rivers pursuant to the foregoing proviso following the Execution Date, shall, however, to the extent identifying new or increased liabilities, serve to increase Big Rivers' indemnification obligations under Section 14.1. 21.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the Commonwealth of Kentucky. 54 21.5 Additional Actions. Each Party shall take, from time to time, for no additional consideration, such actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purpose of this Agreement and the remaining Operative Documents. 21.6 Survival of Terms and Conditions; Phase I Adjustments. The provisions of this Agreement, other than those which specifically address the period of time prior to the Closing, shall survive the Closing. The Parties hereby agree that notwithstanding the termination of the Phase I Agreements, any of the following adjustments to the extent made during Phase I and existing as of the Phase II Termination shall survive and be carried forward to Phase II (the "Phase I Adjustments"): 21.6.1 Any adjustments previously made to the payments made by LEM to Big Rivers pursuant to Section 3.3 of the Power Purchase Agreement resulting from a change in Contract Limits, application of a portion of the PP Price reduction or reductions relating to condemnation or destruction of the Assets. 21.6.2 A reconciliation of Actual Environmental O&M with the Environmental Rent Reduction under the Lease. 21.6.3 A continuation, without adjustment, of balances and other accounting with respect to the Capital Account and a continuation of allocation of Capital Assets funded in accordance with the Cost Sharing Agreement. 21.6.4 Any adjustments in the rental payments, Annual Fixed Payments, Tax sharing ratios or Monthly Margin Payments as contemplated in Section 11.2 of this Agreement and Sections 2.3 and 3.3(a) of the Lease and the Power Purchase Agreement, respectively. 21.6.5 A continuation of the effectiveness of any Annual Capital Budget or Annual O&M Budget in effect during any such transitional year, without change. 21.6.6 A continuation of the relative percentages of Shared Costs. 21.7 Termination Date True Up. On the Termination Date, the Parties agree that all amounts due and owing (other than any amounts owed pursuant to Section 21.8), or any outstanding credits, in each case, pursuant to the Operative Documents by Big Rivers to any LG&E Party or LEC and/or any LG&E Party or LEC to Big Rivers shall be so paid on the Termination Date after netting all such amounts and credits owed by the respective Parties. The Parties agree that all credits shall be converted to a cash amount for purposes of this provision. 21.8 Refund Obligation. Without in any way limiting a Non-Defaulting Party's or Performing Party's rights and remedies hereunder or under applicable law, in the event that this Agreement and the other Operative Documents terminate prior to the second anniversary of the Effective Date, which termination does not result from an exercise by Big Rivers of its rights 55 pursuant to this Agreement or such other Operative Document by reason of a breach or default by any LG&E Party thereunder, Big Rivers agrees to refund to Leaseco, as agent for the LG&E Parties, an amount equal to (i) the amount of Initial Fixed Payment or the Initial Rental Payment, as the case may be, paid to Big Rivers on the Effective Date multiplied by (ii) the ratio of (A) the number of days between such Termination Date and the second anniversary of the Effective Date over (B) 730. Such refund amount shall be payable by Big Rivers, free of interest, in twenty-four equal monthly installments commencing on the one-month anniversary of the Termination Date. 21.9 Successors and Assigns. This Agreement shall bind and inure to the benefit of the Parties and their respective successors and permitted assigns. 21.10 Counterparts. This Agreement may be executed in counterparts, both of which taken together shall constitute a single Agreement. 21.11 Entire Agreement. This Agreement, including all attached Exhibits and Schedules, together with the Operative Documents (when executed) and all other agreements referred to in this Agreement or in the other Operative Documents, contains the entire and final understanding of the Parties and supersedes all prior agreements and understandings between the Parties related to the subject matter of those agreements. 21.12 Construction. This Agreement was the product of negotiations between the Parties and, therefore, the rule of contract construction that an agreement shall be construed against the drafter shall not be applied to this Agreement. 21.13 Rights and Obligations Under the Original Participation Agreement. (a) Upon the Participation Effective Date, and for so long thereafter as this Agreement shall remain in effect, the provisions of the Original Participation Agreement, and the rights and obligations of Big Rivers and each of the LG&E Parties pursuant to the Original Participation Agreement, shall be immediately suspended and held in abeyance, and neither Big Rivers nor any of the LG&E Parties shall have any duty to perform its obligations nor any right to receive its benefits or exercise its rights thereunder until the earlier of (i) the termination of this Agreement or (ii) the occurrence of the Phase I Effective Date or the Phase II Effective Date pursuant to Article 3 of this Agreement. Upon the first to occur of the Phase I Effective Date or the Phase II Effective Date pursuant to Article 3 of this Agreement, if such date occurs prior to termination of this Agreement, the Original Participation Agreement shall terminate. In the event that this Agreement terminates pursuant to Section 17.1.1 or 17.4 then the suspension of the Original Participation Agreement and the Parties' rights and obligations thereunder caused by the first sentence of this paragraph will be reversed, and the Original Participation Agreement, as amended, including the rights and obligations of each of the LG&E Parties and Big Rivers thereunder will be restored and thereafter will continue in full force and effect in accordance with the terms of that Original Participation Agreement. (b) Any and all rights and obligations of the Parties pursuant to the Original Participation Agreement, including pursuant to each amendment to such agreement, which had accrued or been received prior to or as of the Participation Effective Date of this Agreement, 56 shall be carried forward and continued under this Agreement such that the rights and obligations of the Parties which were received or performed under the Original Participation Agreement will be deemed to have been received or performed under this Agreement as if this Agreement had been executed as of June 9, 1997. No Party shall be held to have breached this Agreement or be in default of this Agreement for failure to perform prior to the execution date of this Agreement an obligation under this Agreement which was not also an obligation under the Original Participation Agreement, as amended. Nothing contained in this Agreement shall be deemed to release any Party from any breach or default by that Party under the Original Participation Agreement occurring prior to the date of this Agreement. (c) In the event that pursuant to Section 21.13(a) of this Agreement, the Original Participation Agreement is suspended and then restored to full force and effect, all rights and obligations of the Parties pursuant to this Agreement, including pursuant to each amendment to the Agreement (if any), which had accrued or been received prior to or as of the date on which the Original Participation Agreement is restored to its full force and effect, shall be carried forward and continued under the Original Participation Agreement such that the rights and obligations of the Parties which were received or performed under this Agreement will be deemed to have been received or performed under the Original Participation Agreement as if the Parties' rights and obligations thereunder had not been suspended. No Party shall be held to have breached the Original Participation Agreement or be in default of the Original Participation Agreement for failure to perform during the period of suspension an obligation under that agreement which was not also an obligation under this Agreement. Nothing in this Section 21.13 shall be deemed to release any Party from any breach or default by that Party under this Agreement occurring prior to its termination. 21.14 Survival of Certain Obligations (a) Notwithstanding anything contained in this Agreement or in any other Operative Document to the contrary: (i) Big Rivers shall not at any time be entitled to terminate, cancel or otherwise nullify the Settlement Promissory Note, the Settlement Mortgage, the Mortgage and Security Agreement, or the Non-Disturbance Agreement or its payment or performance obligations under those agreements or instruments, by reason of any breach or default by any of the LG&E Parties under the other of those Operative Documents, or under any other Operative Documents not identified above, or by reason of the expiration or termination of any of such other Operative Documents for any reason, to the extent that Big Rivers has any continuing obligations or liabilities under those Operative Documents, including without limitation, where this Agreement, the Guaranty or any such other Operative Document otherwise expressly provides Big Rivers with the right to terminate all or any portion of the Operative Documents under the circumstances described therein; and (ii) in the event any of the LG&E Parties shall, under the terms of any Operative Document, be required to terminate all of the Operative Documents as a condition to their exercising any termination rights with respect to that or any other Operative Document, Big Rivers agrees that the LG&E Parties shall not be required to terminate, cancel or surrender the Settlement Promissory Note, the Settlement Mortgage, the Mortgage and Security Agreement or the Non-Disturbance Agreement as a condition to its right to so terminate all or any of the other Operative Documents. 57 (b) Notwithstanding anything contained in this Agreement or in any other Operative Document to the contrary: (i) neither LEC nor any of the LG&E Parties shall at any time be entitled to terminate, cancel or otherwise nullify the Guaranty or the payment or performance obligations of LEC thereunder, by reason of any breach or default by Big Rivers under any of the other Operative Documents, or by reason of the expiration or termination of any of such other Operative Documents for any reason, to the extent that any of the LG&E Parties have any continuing obligations or liabilities under those Operative Documents, including without limitation, where this Agreement or any such other Operative Document otherwise expressly provides LEC or any of the LG&E Parties with the right to terminate all or any portion of the Operative Documents under the circumstances described therein; and (ii) in the event Big Rivers shall, under the terms of any Operative Document, be required to terminate all of the Operative Documents as a condition to its exercising any termination rights with respect to that or any other Operative Document, the LG&E Parties agree that Big Rivers shall not be required to terminate, cancel or surrender the Guaranty as a condition to its right to so terminate all or any of the other Operative Documents. (c) The provisions of this Section 21.14 shall survive any expiration or termination of this Agreement for any reason, and shall continue to be binding on the Parties. The Parties agree and acknowledge that adequate separate consideration is being provided which would support the Parties' continuing obligations under Section 21.14 despite an earlier termination of the Operative Documents. 21.15 SO(2) Issue The Parties each agree that, from and after the Participation Effective Date they shall reasonably cooperate with each other in good faith, and shall use their commercially reasonable efforts, to obtain at the earliest possible time a Title V Air Quality Permit for the Coleman facility that contains a maximum permit limit of 5.2 lbs/mmbtu Sulfur Dioxide (SO(2)), and, upon the election of the LG&E Parties, a separate affirmative ruling or decision from the KNREPC that the current permit limit of 5.2 lbs/mmbtu SO(2) for the Coleman facility will be maintained following the Effective Date and for the foreseeable future. Consistent with the foregoing, Big Rivers and the LG&E Parties agree that none of them shall conduct any oral or written communications with the KNREPC regarding the maximum permit limit for SO(2) for the Coleman facility without first offering in writing to the other Party(s) a reasonable opportunity to participate in those written or oral communications. ARTICLE 22 22.1 LEM Advances. During the first twelve months following the Effective Date, LEM shall advance to Big Rivers the sum of $[REDACTED] in 11 monthly installments of $[REDACTED] each and a final installment in the sum of $[REDACTED]. During the second twelve months following the Effective Date, LEM shall advance to Big Rivers the sum of $[REDACTED] in 12 equal monthly installments of $[REDACTED] each. The first of such installments shall be delivered to Big Rivers on the first day of the first month following the Effective Date 58 and the successive installments shall be delivered on the first day of the next 23 succeeding months. Big Rivers' obligation to repay such advances shall be evidenced by the Promissory Note from Big Rivers payable to LEM in the form of Exhibit O attached to this Agreement (the "Promissory Note (LEM Advances)"), which shall be executed and delivered by Big Rivers at the Closing; provided, that, LEM and the LG&E Parties acknowledge and agree that LEM's sole recourse for the collection of amounts owing by Big Rivers thereon shall (during Phase I) be a set-off by LEM against the Monthly Margin Payments that are or may be owing by LEM to Big Rivers pursuant to Section 3.3 of the Power Purchase Agreement, and shall (during Phase II) be a set-off-by Leaseco, on behalf of LEM, against the Monthly Margin Payments that are or may be owing by LEM to Big Rivers pursuant to Section 2.3.2 of the Lease, which set-off, Big Rivers acknowledges and agrees, shall be an unqualified right of LEM or Leaseco (as applicable) under the provisions of those Operative Documents. 22.2 Big Rivers' Reimbursement Obligations. LEM covenants and agrees, and Big Rivers acknowledges and agrees, that on the Closing Date and in the event the Marketing Payment contemplated in Section 4.3.9 exceeds $[REDACTED], LEM will execute and deliver to the RUS a Demand Promissory note in a principal amount equal to the amount by which such Marketing Payment so exceeds $[REDACTED], which Demand Promissory Note will be payable on demand ("the Demand Note"). The Demand Note, if one is so delivered, will provide that following a default by Big Rivers under either of the two Promissory Notes to be issued by Big Rivers to the RUS pursuant to the New RUS Agreement (as defined in the Non-Disturbance Agreement) (together, the "RUS Notes"), RUS may demand payment by LEM in an amount equal to the amount then due and owing by Big Rivers under the RUS Notes, provided such amounts, in the aggregate, do not exceed the principal amount of such Demand Note. Big Rivers acknowledges and agrees that in the event that LEM is required to make one or more payments to the RUS pursuant to the Demand Note, Big Rivers will reimburse LEM the amounts so paid by LEM (each a "Big Rivers' Reimbursement Obligation") on the dates so paid by LEM to RUS (the "Demand Dates"). In the event that Big Rivers' Reimbursement Obligation(s) is not paid on the applicable Demand Dates, interest at the Default Rate will begin to accrue as of such Demand Date on Big Rivers' Reimbursement Obligation(s). Notwithstanding the foregoing, so long as any amount remains outstanding under either of the RUS Notes or the "1983 Reimbursement Agreement" or the "1985 Reimbursement Agreement" or the "AMBAC Notes" (each with AMBAC as referred to in Recital A of the Non-Disturbance Agreement), or Big Rivers' pollution control bonds as outstanding on the Effective Date, Big Rivers shall have no obligation to pay any amount with respect to Big Rivers' Reimbursement Obligation(s), provided however, that interest at the Default Rate will continue to accrue during all such periods during which Big Rivers has no payment obligation. Within 30 days, following such suspension period, Big Rivers must satisfy its Big Rivers' Reimbursement Obligations (and accrued and unpaid interest thereon). 22.3 Upon receipt by Big Rivers of notice of any event of default with respect to the RUS Notes, Big Rivers must, as soon as practical, but in any event within two days of receipt, provide written notice to LEM of the same and, if notice from the RUS was provided in written form, Big Rivers must enclose in its written notice to LEM a copy of the same. 59 ARTICLE 23 MISCELLANEOUS 23.1 Sale/Leaseback Transactions. Notwithstanding anything to the contrary contained in this Agreement or any of the other Operative Documents (including, without limitation the restrictions on transfers and assignments set forth in Article 16 hereof and the right of first refusal set forth in Article 24 hereof), Big Rivers shall have the right to enter into a sale, lease, or other similar transaction with respect to any of the Assets and any improvements, modifications or additions thereto (including any such improvements, modifications, or additions paid for, in whole or in part, by any of the LG&E Parties) if, substantially contemporaneous therewith, Big Rivers enters into a leaseback of the Assets subject to such transaction from the transferee, and maintains the absolute right and obligation following the expiration or termination of that sale/leaseback transaction (and agrees with the LG&E Parties that it will exercise that right if it accrues during the Term), to repurchase all such Assets; provided, however, that no such transaction(s) shall be consummated by Big Rivers without providing the LG&E Parties at least 30 days prior written notice thereof (together with a description in reasonable detail of the nature of the transaction), nor shall they be consummated if such consummation would: (a) have a material adverse effect on any of the LG&E Parties or their respective rights and interests under this Agreement or any of the other Operative Documents; (b) impose duties or obligations on any of the LG&E Parties which are materially more burdensome than the duties and obligations set forth in the Operative Documents; (c) impair in any material respect the rights and remedies of the LG&E Parties under or pursuant to the Settlement Note, the Settlement Mortgage, the Mortgage and Security Agreement or the Non-Disturbance Agreement, or their security interests and mortgage interests created thereby; (d) or, in the opinion of counsel to the LG&E Parties, place in jeopardy the Exempt Wholesale Generator status of WKEC or the public utility status of Station Two Subsidiary, or the status of LEC as a holding company exempt from registration under the Public Utility Holding Company Act (or any successor Laws that may require such status). In addition to the foregoing, no such transactions may be consummated by Big Rivers unless the assignee or transferee of the Assets executes and delivers to the LG&E Parties a Non-Disturbance and Attornment Agreement in a form reasonably satisfactory to the LG&E Parties. Any such transaction, provided it meets the conditions and limitations described above, shall not constitute a transfer or assignment of this Agreement or any of the other Operative Documents, and Big Rivers shall remain liable for all obligations of Big Rivers to the LG&E Parties under this Agreement and the other Operative Documents. The LG&E Parties shall cooperate with Big Rivers, at Big Rivers' expense, to accomplish any such transaction, including, without limitation, by entering into such modifications and amendments to this Agreement and the other Operative Documents as Big Rivers may reasonably request in order to accomplish such transaction, consistent with the conditions and limitations described above. 60 ARTICLE 24 GENERAL PROVISIONS 24.1 Residual Value Payment (a) General. Following the Effective Date, and upon the occurrence of: (i) (A) the expiration or termination for any reason (other than as expressly provided below) of this Agreement (during Phase I only), the Power Purchase Agreement (during Phase I only), the Facility Operating Agreement (other than a termination coincident with the Phase II Effective Date), the Lease or the Station Two Agreement, or (B) the expiration or termination for any reason (other than as expressly provided below) of the Transmission Services and Interconnection Agreement (unless Big Rivers shall at that time have in place an effective Open Access Transmission Tariff ("OATT"), then upon any later expiration, termination or withdrawal of the OATT, whether or not voluntary); provided, that the expirations and terminations identified in (A) and (B), above shall specifically exclude (1) any wrongful termination by an LG&E Party of those agreements or instruments, (2) any rejection by an LG&E Party of those agreements or instruments in any bankruptcy proceeding involving that LG&E Party, and (3) any termination by an LG&E Party of this Agreement, the Power Purchase Agreement, the Facility Operating Agreement, the Lease or the Transmission Services and Interconnection Agreement in accordance with its terms which is not followed by a termination of the other of those Operative Documents that remain in effect by one or more LG&E Parties in accordance with their respective terms or by Big Rivers in breach or default thereof (each such expiration, termination or withdrawal identified in (A) and (B), above, individually and collectively, being hereinafter referred to as a "Transaction Termination"); or (ii) any "Transfers" from time-to-time by Big Rivers of the "Subject Assets" (each as defined in Section 24.2 below) or of any of them, whether alone or together with any other assets or properties of Big Rivers, including without limitation, any Transfers to WKEC or Station Two Subsidiary pursuant to Section 24.2, or any involuntary sales, assignments or transfers of any of the Subject Assets such as a foreclosure sale, a deed or sale in lieu of foreclosure or a condemnation action, whether or not such Transfers or involuntary sales, assignments or transfers are permissible under the terms of the Operative Documents, but specifically excluding (A) a Transfer of any Station Two Contracts other than the "Station Two Operating Agreement", the "Station Two Power Sales Agreement" and the "Joint Facilities Agreement" (each as defined in the Station Two Agreement), and (B) any foreclosure under the Restated Mortgage (as defined in the Non-Disturbance Agreement) in circumstances in which this Agreement and the other Operative Documents remain in effect (each such Transfer or involuntary sale, assignment or transfer being hereinafter referred to as a "Triggering Transfer"); then an LG&E Parties' Residual Value Payment, calculated in the manner set forth in Subsection (e), below (if any shall result from that calculation) shall be due and owing by Big Rivers to Station Two Subsidiary; provided, that in the case of an involuntary sale, assignment or transfer of the Subject Assets as described in (ii), above, the Triggering Transfer that results from the 61 same shall be deemed to have occurred on the date immediately prior to the date of the involuntary sale, assignment or transfer, so that the LG&E Parties' Residual Value Payment associated with those Subject Assets shall accrue and become owing by Big Rivers prior to that involuntary sale, assignment or transfer. Big Rivers, Leaseco and, in the case of the tangible Station Two Assets or the Station Two Agreement, Station Two Subsidiary, shall, as soon as is reasonably practicable after the Transaction Termination or Triggering Transfer, jointly commission the completion of a fair market valuation (on a going-concern basis where possible) of all Capital Assets (including without limitation, Enhancements and Major Capital Improvements, if any) and all Station Two Improvements, that are at the time of such valuation included in, incorporated in or constituting a part of (x) all of the Tangible Assets (in the case of a Transaction Termination regarding this Agreement, the Power Purchase Agreement, the Facilities Operating Agreement, the Lease, the Transmission Services and Interconnection Agreement and/or the OATT), (y) the Station Two Assets (as defined in the Station Two Agreement) (in the case of a Transaction Termination regarding the Station Two Agreement or any Triggering Transfer of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement (collectively, the "Key Station Two Contracts") (or any material portion thereof)), or (z) the relevant Subject Assets (in the case of a Triggering Transfer of any Subject Assets other than the Key Station Two Contracts) (collectively, the "Relevant Assets"). (b) Valuation. The fair market valuation of such Relevant Assets shall be determined pursuant to the process described in this Subsection (b) and, as applicable, Subsection (c) below. The valuation shall be conducted by a reputable, independent and impartial appraisal or valuation firm having substantial experience in the field of power facility appraisal or valuation ("Appraiser"), and the results of the valuation by the Appraiser shall be set forth in a written valuation report (the "Valuation Report") made available to all Parties. In the case of any Subject Assets (other than the Key Station Two Contracts) that have been transferred by Big Rivers, Big Rivers shall ensure that the transferee(s) affords the representatives of the Appraiser reasonable access to those Subject Assets and all other assets to which they are affixed or with which they are operated in order to complete the valuation of those Subject Assets; provided, that in the event an LG&E Party or any of its Affiliates is that transferee, then that LG&E Party (or Affiliate) shall itself afford such access to the Subject Assets to the representatives of the Appraiser. The Parties agree to use commercially reasonable efforts to expedite the completion of the relevant valuation, and the Valuation Report of the Appraiser selected shall be made available to all the Parties. The fair market valuation shall consider the age, condition and remaining useful life of the Relevant Assets, the usefulness and importance of the Relevant Assets in the operation or maintenance of the other assets and facilities to which they relate or are affixed, the "going concern" value (if any) of the Relevant Assets, and such other factors or criteria as are customary in the industry for such valuations. Notwithstanding the immediately preceding sentence, in the case of a Triggering Transfer of any of the Relevant Assets, the purchase price paid or payable to Big Rivers (or its successors or permitted assigns) for those Relevant Assets shall be deemed for the purposes of this Section 24.1 to be determinative of their fair market value, unless: (i) such Triggering Transfer shall have been made by Big Rivers in breach or default under Section 24.2 of this Agreement; or (ii) WKEC and/or Station Two Subsidiary (as applicable) shall have been prevented by legal process 62 (including without limitation, any injunction, restraining order or stay imposed in connection with a bankruptcy proceeding involving Big Rivers), by a wrongful termination of this Agreement by Big Rivers, or by a rejection of this Agreement in any bankruptcy proceeding involving Big Rivers, from exercising their respective rights to purchase the Relevant Assets pursuant to Section 24.2 of this Agreement; or (iii) such Triggering Transfer shall have taken the form of an involuntary sale, assignment or transfer of the Relevant Assets of the type contemplated in Subsection (a)(ii), above (including without limitation, a foreclosure of the type described in Subclause (a)(ii)(B) above); in which event the purchase price so paid or payable shall, at the election of Leaseco and/or Station Two Subsidiary (as applicable), not be determinative of the fair market value of the Relevant Assets but shall instead be only one of the factors considered by the Appraiser in its valuation of those assets. In the event such purchase price is deemed to be determinative of the fair market value of the Relevant Assets, then there shall be no valuation of those assets by the Appraiser as contemplated above. Notwithstanding the foregoing, in the event a Triggering Transfer of any Relevant Assets is effected together with a sale, transfer, conveyance or assignment of any other Subject Assets, directly or indirectly, in one transaction or a series of related transactions, to the same Person(s), and (A) in the event any of the LG&E Parties reasonably believe that the portion of the aggregate purchase price payable for the Subject Assets in the transaction(s) that is proposed by Big Rivers to be allocated to or paid for the Relevant Assets does not reflect the actual fair value of those Relevant Assets, or (B) in the event the parties to the transaction(s) fail to designate the portion of that aggregate purchase price that is allocated to or paid for the Relevant Assets, then, upon the written election of that LG&E Party delivered not later than ten (10) days after its receipt of notice of the relevant Triggering Transfer from Big Rivers (including reasonable details of the allocation (if any) of the aggregate purchase price among the Subject Assets), the fair market value of the Relevant Assets shall be determined for purposes of this Section 24.1 pursuant to the dispute resolution and arbitration procedures described in Subsection (c), below (determined as if the purchase price allocation proposed by Big Rivers were the Valuation Report) or, if no such purchase price allocation shall have been made, pursuant to the fair market valuation processes described in this Subsection (b) and Subsection (c), below (but without regard to the sixth and seventh sentences of this Subsection (b)). Subject to the foregoing, the Appraiser shall be selected by the mutual agreement of Big Rivers, on the one hand, and Leaseco and/or Station Two Subsidiary (as applicable), on the other hand, as soon after the relevant Transaction Termination or Triggering Transfer as is reasonably possible, and the Parties each agree to promptly inform the other Parties in the event they shall be informed of or shall cause such a Transaction Termination or Triggering Transfer; provided, that in the event the Parties described above have not mutually selected the Appraiser within 30 days after first commencing their discussion regarding the selection, either Big Rivers, Leaseco or Station Two Subsidiary shall be entitled to refer the matter for resolution pursuant to the dispute resolution provisions of Article 15 of this Agreement. Big Rivers and Station Two Subsidiary (for itself and on behalf of Leaseco) shall share equally in the costs, expenses and fees associated with the Appraiser and its valuation, and shall jointly retain (or be deemed to have jointly retained) the Appraiser. (c) Dispute Over Valuations. In the event, following the completion of the valuation and the issuance of the Appraiser's Valuation Report, either Big Rivers, on the one hand, or Station Two Subsidiary (on behalf of the LG&E Parties), on the other hand, in good 63 faith believes that the Valuation Report regarding the Relevant Assets does not adequately reflect the true fair market value of those assets at that time, or that the Valuation Report is otherwise defective or deficient, that Party shall notify the other Party of its belief within ten (10) days following its receipt of the Valuation Report. Failure to so notify the other Party of that belief shall be deemed to be the acceptance by that Party (and, in the case of Station Two Subsidiary, by all of the LG&E Parties) of the results of the Valuation Report for purposes of this Section 24.1. If such a notice is so delivered to the other Party, then representatives of those Parties shall promptly meet to review the Valuation Report and attempt to confirm the accuracy and completeness of the Valuation Report or, if the Parties shall agree that the Valuation Report is inaccurate, defective or deficient, attempt to rectify the defect or deficiency or to assign a more accurate value to the Relevant Assets. If the Parties are unable to resolve their differences and settle upon a valuation of the Relevant Assets within 30 days after the issuance of the Valuation Report, then either Party shall be entitled to refer the matter directly to arbitration pursuant to the relevant provisions pertaining to the arbitration of disputes in Article 15 of this Agreement (exclusive of Section 15.3.6), for the purpose of determining whether the Valuation Report represented a valuation of the Relevant Assets that was within five percent (5%), above or below, of the actual fair market value of those assets. If, pursuant to that dispute resolution process, the Valuation Report is determined to fall within that range of values, then the Valuation Report shall be deemed to be determinative of the fair market value of the Relevant Assets for purposes of this Section 24.1. If the Valuation Report is determined to fall outside that range of values, then the actual fair market value shall be determined pursuant to arbitration under Article 15 (but without regard to the provisions of Section 15.3.6 of this Agreement). (d) Accounting. Throughout the Term, Big Rivers, on the one hand, and the relevant LG&E Parties, on the other hand, shall separately account for all Capital Assets (including without limitation, Enhancements and Major Capital Improvements) and Station Two Improvements that may be funded by them and/or by Henderson during the Term, including, in the case of the tangible Station Two Assets, without limitation, any Station Two Improvements that may be directly funded by Henderson, Big Rivers or Station Two Subsidiary, that may be indirectly funded by any of them or LEM through reimbursement payments made between those parties, that may be funded through the capacity charge payments made by them, directly or indirectly, pursuant to the Station Two Agreement or the Key Station Two Contracts, and that may be funded by them indirectly through withdrawals from any reserve accounts established pursuant to the Station Two Agreement or the Key Station Two Contracts. Such accounting by the Parties shall include, without limitation, the maintenance of records regarding the original cost and estimated useful lives of the Capital Assets and Station Two Improvements, and their respective contributions to those costs. For purposes of this Section 24.1 only and the calculations to be made hereunder, and to facilitate those calculations, the Capital Assets and Station Two Improvements that may be funded by any of the LG&E Parties, Big Rivers and/or Henderson, directly or indirectly, shall be deemed to be depreciated by each of those Parties and Henderson on a straight-line basis over the entire estimated useful lives of those assets, and otherwise on a consistent basis (regardless of any other methodology for the depreciation or amortization of those assets that may be utilized by the LG&E Parties, Big Rivers or Henderson for internal, tax 64 or accounting purposes, and regardless of whether those assets are assets that may be capitalized, or are characterized as leasehold improvements or otherwise for internal, tax or accounting purposes). In the event the Parties cannot agree on the estimated useful life of one or more Capital Assets or Station Two Improvements, that determination shall be made pursuant to the dispute resolution procedures set forth in Article 15 of this Agreement. At least annually, representatives of Big Rivers, Leaseco and Station Two Subsidiary shall meet to compare their respective records regarding the Capital Assets and Station Two Improvements previously funded, in whole or in part, by Big Rivers, any of the LG&E Parties or, in the case of the tangible Station Two Assets, Henderson, and they shall attempt to resolve any discrepancies that may exist between their respective records. Those Parties shall also consult with Henderson on a periodic basis for the same purpose. In the event of a dispute between the Parties over which party funded which portion of any Capital Assets or Station Two Improvements, over the costs to purchase or install the same, over the estimated useful lives of those assets, or over whether an expenditure was properly characterized as a Capital Asset or Station Two Improvement, that dispute shall be resolved pursuant to the dispute resolution procedures set forth in Article 15 of this Agreement. (e) Payments. At such time following any Transaction Termination or Triggering Transfer as the valuation of the Relevant Assets has been completed and the Valuation Report has been issued by the Appraiser (or at such other time as the fair market value of the Relevant Assets shall be determined or deemed to be determined as contemplated above), Big Rivers shall pay to Station Two Subsidiary, on behalf of all the LG&E Parties, the amounts determined as set forth in (i), (ii) or (iii), as applicable, below (each an "LG&E Parties' Residual Value Payment"). All such amounts, if they shall not have been determined and paid in full by Big Rivers to Station Two Subsidiary within 180 days after the relevant Transaction Termination or Triggering Transfer, shall bear interest payable by Big Rivers at a rate per annum equal to 135 percent of the then current market yield on U.S. Treasury obligations having a remaining maturity of one year, from the 90th day after the Transaction Termination or Triggering Transfer through and including the date on which payment is eventually made. Such interest amounts shall be paid in arrears at the time of and together with the relevant LG&E Parties' Residual Value Payment. Notwithstanding the foregoing, in the event the relevant Triggering Transfer takes the form of a foreclosure, a deed in lieu of foreclosure or any other involuntary Transfer, Station Two Subsidiary shall be entitled to participate in that Triggering Transfer, and to make a claim for any of the proceeds thereof, to secure and recover its LG&E Parties' Residual Value Payment (if any) resulting from that Triggering Transfer or from any other Transaction Termination or Triggering Transfer, without regard to any other provision that may allow payment of that amount by Big Rivers at a later date. (i) In the case of (x) a Transaction Termination regarding this Agreement, the Power Purchase Agreement, the Facilities Operating Agreement, the Lease and the Transmission Services and Interconnection Agreement (or the OATT, as applicable), or regarding any of those agreements, instruments or tariff, or (y) a Triggering Transfer of any of the Subject Assets other than the Key Station Two Contracts, in either case, that occurs on or after the December 31st that is closest to the twenty-fifth anniversary of the Effective Date, then the LG&E Parties' Residual Value Payment with respect to that Transaction Termination or Triggering Transfer shall be an amount equal to the greater of (A) the amount determined by reference to the following formula, or (B) the LG&E Parties' Residual Plant Value (as defined below) for the Relevant Assets: 65 [REDACTED] Where: M = The aggregate fair market value of the Relevant Assets set forth in the Valuation Report (or otherwise determined as provided above); L = The LG&E Parties' Residual Plant Value (as defined below) for the Relevant Assets; B = Big Rivers' Depreciated Book Value (as defined below) for the Relevant Assets; and E = The Depreciated Book Value of all Enhancements and Major Capital Improvements (as defined below) included in the Relevant Assets. For the avoidance of doubt, the Parties agree that no LG&E Parties' Residual Value Payments shall become owing under this Subsection 24.1(e)(i) in respect of any Enhancements, Major Capital Improvements or Station Two Improvements. (ii) In the case of (x) a Transaction Termination regarding the agreements, instruments or tariff described in (i), above, or any of them, or (y) a Triggering Transfer of any of the Subject Assets other than the Key Station Two Contracts, in either case that occurs prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date, then the LG&E Parties' Residual Value Payment with respect to that Transaction Termination or Triggering Transfer shall be an amount equal to the greater of (A) the amount determined by reference to the following formula, or (B) the sum of the LG&E Parties' Residual Plant Value (as defined below) for the Relevant Assets, plus the Depreciated Book Value of all Enhancements and Major Capital Improvements (as defined below) for the Relevant Assets: [REDACTED] Where: M, L, B and E have the meanings set forth in (i) above; and "ET" means the Depreciated Book Value of all Enhancements and Major Capital Improvements calculated as though the Term had continued through the December 31st that is closest to the twenty-fifth anniversary of the Effective Date. (iii) In the case of: (x) a Transaction Termination regarding the Station Two Agreement; or (y) any Triggering Transfer of the Key Station Two Contracts (or any material portion thereof) (A) without the prior consent of the LG&E Parties and Henderson as required by the Station Two Agreement or the Key Station Two Contracts, or (B) to any Person that does not simultaneously assume and agree to perform Big Rivers' obligations under all such Key Station Two Contracts and the Station Two Agreement with those agreements remaining in full force and effect following the Triggering Transfer in accordance with their respective terms; then the LG&E Parties' Residual Value Payment regarding that Transaction Termination or Triggering Transfer, as applicable, shall be an amount equal to the greater of (1) the amount 66 determined by reference to the following formula, or (2) the LG&E Parties' Residual Plant Value (as defined below) for the Relevant Assets (it being understood that so long as the consents described in (A), above, have been obtained and the Person(s) described in (B), above, have so assumed and are performing Big Rivers' obligations described therein, no LG&E Parties' Residual Value Payment with respect to that Triggering Transfer as contemplated in this Subsection (iii) shall become due and owing): [REDACTED] Where LT, BT and HT have the meanings set forth in subsection (f), below, and: M = The aggregate fair market value of the Relevant Assets set forth in the Valuation Report (or otherwise determined as provided above); L = The LG&E Parties' Residual Plant Value for the Relevant Assets; and B = Big Rivers' Depreciated Book Value for the Relevant Assets. Notwithstanding anything contained in this Subsection 24.1(e)(iii) to the contrary, no LG&E Parties' Residual Value Payment shall become owing hereunder by reason of a Transaction Termination regarding the Station Two Agreement if, within 60 days after that Transaction Termination, Big Rivers shall have taken such actions, in compliance with Section 13.8 of the Station Two Agreement, as shall be necessary to prevent the LG&E Parties (or any of them) from having the right, pursuant to Section 13.8 of that agreement, to an abatement against the Annual Fixed Payments or the Rental Payments (as applicable) due by them to Big Rivers, to a reimbursement of the Initial Fixed Payment or Initial Rental Payment, to a reduction in the Contract Limits, or to terminate any of the Operative Documents other than the Station Two Agreement, each as contemplated in Section 13.8 of that agreement; provided, that in the event those LG&E Parties shall at any time thereafter have the immediate right to take any of the foregoing actions or exercise any of the foregoing rights or remedies in accordance with Section 13.8, then the LG&E Parties' Residual Value Payment with respect to that Transaction Termination shall become payable by Big Rivers to Station Two Subsidiary under this Subsection 24.1(e)(iii). (f) Definitions. As used in this Section 24.1: (i) The "LG&E Parties' Residual Plant Value" shall mean the aggregate amount derived from combining for all Capital Assets (excluding any Enhancements or Major Capital Improvements) and Station Two Improvements of the type described below the amounts determined as set forth below: (x) the sum of the original Installed Costs, purchase price amounts and other costs incurred by Big Rivers, each of the LG&E Parties and (in the case of Station Two Improvements) Henderson, collectively, whether directly or indirectly, for each Capital Asset or Station Two Improvement (as applicable), or portion thereof, that has been incorporated into or made a part of the Relevant Assets during the Term and through the Transaction Termination or Triggering Transfer (as applicable), or that has been funded by Big 67 Rivers, any of the LG&E Parties and/or Henderson during the Term, directly or indirectly, but has not been fully incorporated into or made a part of the Relevant Assets as of the Termination Transaction or Triggering Transfer; minus (y) the portion of those Installed Costs, purchase price amounts and other costs that would have been depreciated or amortized by those parties through the Transaction Termination or the Triggering Transfer assuming a straight line depreciation or amortization of that Capital Asset or Station Two Improvement over its estimated useful life; then multiplied by (z)(A) Leaseco's Capital Asset Sharing Ratio that applied to that Capital Asset during the Term (determined by reference to Section 7.4 of the Cost Sharing Agreement or Section 8.4, as of the Lease, as applicable), or (B) in the case of the Station Two Improvements, Station Two Subsidiary's Station Two Improvement Sharing Ratio that applied to that Station Two Improvement (determined by reference to Section 8.17(e) or Section 9.10(c) of the Station Two Agreement, as applicable); (ii) "Big Rivers' Depreciated Book Value" shall mean (A) the aggregate amount determined by reference to Section 24.1(f)(i), above, but after substituting prior to the calculation the relevant Capital Asset Sharing Ratio of Big Rivers (determined by reference to Section 7.4 of the Cost Sharing Agreement or Section 8.4 of the Lease, as applicable) and Big Rivers' Station Two Improvement Sharing Ratio (determined by reference to Section 8.17(e) or Section 9.10(c) of the Station Two Agreement, as applicable) for Leaseco's Capital Asset Sharing Ratio and Station Two Subsidiary's Station Two Improvement Sharing Ratio, respectively, in Subclause (z) of that Section. (iii) "Depreciated Book Value of all Enhancements and Major Capital Improvements" shall mean the aggregate amount derived from combining for all Enhancements and Major Capital Improvements (if any) that have been incorporated into or made a part of the Relevant Assets during the Term and through the Transaction Termination or Triggering Transfer (as applicable), or that have been funded by any of the LG&E Parties during the Term but have not been fully incorporated or made a part of the Relevant Assets as of the Transaction Termination or Triggering Transfer, the amounts determined as set forth below: (x) the sum of the original Installed Costs, purchase price amounts and other costs incurred by any of the LG&E Parties for each such Enhancement or Major Capital Improvement, minus (y) the portion of those Installed Costs, purchase price amounts and other costs that would have been depreciated or amortized by those LG&E Parties through the Transaction Termination or Triggering Transfer assuming a straight line depreciation or amortization of those assets over their estimated useful lives. (iv) "LT" shall mean the aggregate amount of the original Installed Costs, purchase price amounts and other costs incurred by any of the LG&E Parties, whether directly or indirectly, for the construction, purchase or installation of the Relevant Assets, including without limitation, any Relevant Assets that have been funded by any of the LG&E Parties during the Term, directly or indirectly, but that have not been installed or delivered as of the Termination Transaction or Triggering Transfer, whether funded directly by the LG&E Parties, funded indirectly by them through reimbursement payments made between them and Big Rivers or Henderson, funded through capacity charge payments made by them, directly or indirectly, pursuant to the Station Two Agreement or the Key Station Two Contracts, or funded 68 by them indirectly through withdrawals from any reserve accounts established pursuant to those agreements. (v) "BT" shall mean the aggregate amount of the original Installed Costs, purchase price amounts and other costs incurred by Big Rivers, whether directly or indirectly, for the construction, purchase or installation of the Relevant Assets, including without limitation, any Relevant Assets that have been funded by Big Rivers during the Term, directly or indirectly, but that have not been installed or delivered as of the Termination Transaction or Triggering Transfer, whether funded directly by Big Rivers, funded indirectly by it through reimbursement payments made between it and the LG&E Parties or Henderson, funded through capacity charge payments made by it, directly or indirectly, pursuant to the Station Two Agreement or the Key Station Two Contracts, or funded by it indirectly through withdrawals from any reserve accounts established pursuant to those agreements. (vi) "HT" shall mean the aggregate amount of the original Installed Costs, purchase price amounts and other costs incurred by Henderson, whether directly or indirectly, for the construction, purchase or installation of the Relevant Assets, including without limitation, any Relevant Assets that have been funded by Henderson during the Term, directly or indirectly, but that have not been installed or delivered as of the Termination Transaction or Triggering Transfer, whether funded directly by Henderson, funded indirectly by it through reimbursement payments made between it and Big Rivers or the LG&E Parties, funded through capacity charge payments made by it, directly or indirectly, pursuant to the Station Two Agreement or the Key Station Two Contracts, or funded by it indirectly through withdrawals from any reserve accounts established pursuant to those agreements. (g) Security Interests. All LG&E Parties' Residual Value Payments that may become due to any LG&E Party(s) under this Section 24.1 shall be secured by the Settlement Mortgage, and shall be further subject to the Non-Disturbance Agreement to be entered into by Big Rivers, RUS, the LC Issuer and the LG&E Parties. (h) Credit for Other Recoveries. Notwithstanding anything contained in this Section 24.1 to the contrary, in the event the LG&E Parties receive from Big Rivers an LG&E Parties' Residual Value Payment upon the condemnation of any of the Tangible Assets as contemplated in Section 9.1 of the Cost Sharing Agreement or Section 10.1 of the Lease, that payment by Big Rivers shall be deemed to discharge its obligation under this Section 24.1 to make that payment to the relevant LG&E Party. In addition, (i) in the event following the destruction of any Enhancements or Major Capital Improvements the LG&E Parties shall elect not to replace or rebuild the same, the LG&E Parties shall not thereafter be entitled to any LG&E Parties' Residual Value Payments with respect to those assets, and (ii) in the event any other Capital Asset or any Station Two Improvement is destroyed but not replaced or rebuilt as contemplated in Section 9.2.3 of the Cost Sharing Agreement, Section 10.2.3 of the Lease or Section 13.5 of this Agreement (as applicable), and Leaseco or Station Two Subsidiary (as applicable) receives its share of insurance proceeds relative to those Capital Assets or Station Two Improvements as contemplated in those Sections, then the LG&E Parties shall not thereafter be entitled to any LG&E Parties' Residual Value Payments with respect to those assets. 69 24.2 Right of First Refusal. (a) Restriction on Transfer of Assets or Station Two Contracts. Except in the limited circumstances described in this Section 24.2, and then only in accordance with the terms, conditions and provisions of this Section 24.2, Big Rivers agrees that it shall not, at any time during the Term or for a period of one year following the expiration or termination thereof (collectively, the "Option Period"), voluntarily sell, assign, pledge, give, encumber, dispose of, or otherwise voluntarily transfer by operation of law (including without limitation, by merger or consolidation) (each a "Transfer"), any of Big Rivers' rights, title or interests under, in or to (i) the Tangible Assets, any of the Tangible Assets, any other tangible assets or properties relating to or comprising one or more Facilities (including without limitation, any Capital Assets, Enhancements or Major Capital Improvements) or any Real Property on which the Facilities are situated (or any portions(s) of the Facilities or such Real Property), (ii) any tangible assets or properties relating to or comprising the Station Two Assets or the real property on which the Station Two Assets are situated and in which Big Rivers may own or acquire an interest during the Term (including without limitation, any Station Two Improvements), or (iii) the Station Two Contracts (or any material portion thereof), other than a Transfer of the Assigned Station Two Contracts to Station Two Subsidiary pursuant to Station Two Agreement (collectively, the "Subject Assets"). Notwithstanding the foregoing, in the case of the Tangible Assets and the tangible Station Two Assets, Big Rivers shall be entitled to so Transfer the same free of the restrictions of this Section 24.2 if done so by Big Rivers in the ordinary course of the business consistent with past practices (but subject in all cases to any other restrictions on such Transfers set forth in this Agreement or any other Operative Document). (b) Sales or Other Voluntary Transfers. In the event Big Rivers desires to Transfer in any manner all or any portion of the Subject Assets during the Option Period, and has received a bona fide binding written offer to purchase those assets from one or more other Persons (a "Bona Fide Offer") during the Option Period, Big Rivers shall, by written notice to WKEC (in the case of the Tangible Assets) or Station Two Subsidiary (in the case of the Station Two Assets and the Station Two Contracts), including therewith a copy of the Bona Fide Offer, and before any acceptance of that Bona Fide Offer or any agreement to sell those Subject Assets to such other Person(s), first offer the Subject Assets to WKEC or Station Two Subsidiary (as applicable) for purchase by them at the price and upon and subject to the other terms and conditions set forth in the Bona Fide Offer (but without any additional or different terms or conditions), except as provided in (c) below. If it desires to so exercise the same, WKEC or Station Two Subsidiary must, not later than midnight of the 60th day following the date of its receipt of such notice, exercise its right to so purchase all (but not less than all) of the relevant Subject Assets upon the terms and subject to the conditions set forth in the Bona Fide Offer, by giving written notice to Big Rivers of such exercise. In the event WKEC or Station Two Subsidiary does not so exercise its right to purchase all of the Subject Assets within the time period described above, Big Rivers shall thereafter be entitled to Transfer all (but not less than all) of those Subject Assets to the Person(s) who made the Bona Fide Offer, solely on the terms of that Bona Fide Offer, without material modification, at any time during the period commencing on the expiration of the foregoing 60-day period and expiring 210 days thereafter; provided, that in the event such Transfer to that Person shall not have been completed within that 70 210-day period, Big Rivers agrees that it shall not thereafter attempt to Transfer all or any portion of those Subject Assets to that or any other Person (other than WKEC or Station Two Subsidiary) without once again offering to transfer the same to WKEC or Station Two Subsidiary (as applicable) pursuant to this Section 24.2(b). In the event WKEC or Station Two Subsidiary shall so exercise their right pursuant hereto, the closing of the resulting sale of the Subject Assets by Big Rivers to that LG&E Party shall occur at the offices of Leaseco (or Station Two Subsidiary) in Louisville, Kentucky, not later than ninety (90) days following the delivery of the relevant exercise notice, or at such other time and places as those Parties shall mutually agree to. (c) Use of Residual Value Payments. In exercising its right to purchase any Subject Assets pursuant to this Section 24.2, the relevant LG&E Party shall be entitled, in its discretion, to elect to reduce the purchase price payable by that Party for the Subject Assets by the amount of any unpaid LG&E Parties' Residual Value Payment(s) that may then be owing by Big Rivers to any LG&E Party pursuant to Section 24.1, whether or not in connection with the Subject Assets that are being purchased by the relevant LG&E Party; provided, that for purposes of calculating the LG&E Party's Residual Value Payment that shall be available for reduction of that purchase price, the aggregate fair market value of the Subject Assets for purposes of Section 24.1(d) shall be deemed to be the purchase price set forth in the Bona Fide Offer. Any such reduction shall, upon the consummation of that purchase transaction, and to the extent of the reduction, be deemed to correspondingly reduce the obligation of Big Rivers to make that LG&E Parties' Residual Value Payment. 24.3 Continuation of Agreement. Big Rivers recognizes and acknowledges that the RUS, the Members and the LG&E Parties have or will in good faith enter into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the Members and the LG&E Parties that Big Rivers has in good faith entered into this Agreement and will enter into the other Operative Documents in reliance upon and with the specific intent of continuing these transactions through the stated Term (i.e., approximately 25 years). In order to enable Big Rivers to comply with certain requirements of the KPSC related to approval of its proposed rates, and to provide additional assurances of its good faith and commitment and without in any way intending to reduce or otherwise avoid abiding by the Operative Documents throughout their stated Term (i.e., approximately 25 years) and without any implication by any of the Parties that Big Rivers is or would be entitled to attempt to reduce or otherwise avoid the terms of the Operative Documents, Big Rivers additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by Big Rivers of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against Big Rivers under any such Law, neither Big Rivers nor its successor or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify any of the Operative Documents under (other than in 71 accordance with their respective terms) Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency laws (the "Insolvency Assurance"). Thereafter, Big Rivers shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and the LG&E Parties shall be entitled to rely upon the specific provisions of each of the Operative Documents, including but not limited to their stated term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that Big Rivers ever attempts to cause the rejection or termination of any of the Operative Documents (other than in accordance with their respective terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 24.4 LG&E Parties Commitment. The LG&E Parties recognize and acknowledge that the RUS, the Members and Big Rivers have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for their stated term (i.e., approximately 25 years). The LG&E Parties have informed the RUS, the Members and Big Rivers that the LG&E Parties have in good faith entered into this Agreement in reliance upon and with specific intent of continuing this transaction through the stated term (i.e., approximately 25 years). In order to facilitate approval of the proposed rates of Big Rivers and to provide additional assurances of their good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement and the other Operative Documents throughout their stated term (i.e., approximately 25 years), and without any implication by any of the Parties that the LG&E Parties are or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement or any other Operative Document, the LG&E Parties additionally commit and undertake that for the period prior to January 1, 2012, in the event of any filing by any of the LG&E Parties of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against any of the LG&E Parties under any such Law, none of the LG&E Parties nor their respective successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement or any other Operative Document (other than in accordance with their respective terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss.101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency Laws (the "Insolvency Assurance"). Thereafter, the LG&E Parties shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and Big Rivers shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the 72 event that any of the LG&E Parties ever attempt to cause the rejection or termination of this Agreement or any other Operative Document (other than in accordance with their respective terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 24.5 No Limitation on Rights Under New RUS Loan Documents. Nothing in this Article 24 shall modify, reduce or diminish: (i) the rights of the RUS under the New RUS Loan Documents (as defined in that certain New RUS Loan Agreement between Big Rivers and the RUS to be executed and delivered on the Effective Date); or (ii) the rights of the Mortgagees under the New RUS Mortgage (as defined in said New RUS Loan Agreement), including without limitation, any right to withhold consent with respect to any sale or disposition of Big Rivers' property except on terms acceptable to the RUS and/or such mortgagees; but subject, in the case of (i) and (ii), above, to the Non-Disturbance Agreement of even date herewith among Big Rivers, RUS, AMBAC and the LG&E Parties. 24.6 Survival; No Limitation on Remedies. The provisions of this Article 24 shall survive the expiration or termination of this Agreement following the Effective Date for any reason, and shall continue to be binding on the Parties. The payments and other rights provided for in this Article 24 shall be in addition to, and not in lieu of, all other rights and remedies of the LG&E Parties provided for in this Agreement and the other Operative Documents (including without limitation, any rights and remedies in respect of any breach or default by Big Rivers hereunder or thereunder), and all such rights and remedies shall be deemed to be cumulative unless expressly provided otherwise in this Agreement or any other Operative Document. 73 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of the day and year first written above. BIG RIVERS ELECTRIC CORPORATION By: /s/ Michael H. Core ---------------------------- Printed Name: Michael H. Core Title: President/CEO WESTERN KENTUCKY ENERGY CORP. By: /s/ John R. McCall ---------------------------- Printed Name: John R. McCall Title: Vice President LG&E ENERGY MARKETING INC. By: /s/ John R. McCall ---------------------------- Printed Name: John R. McCall Title: Vice President WESTERN KENTUCKY LEASING CORP. By: /s/ John R. McCall ---------------------------- Printed Name: John R. McCall Title: Vice President WKE STATION TWO INC. By: /s/ John R. McCall ---------------------------- Printed Name: John R. McCall Title: Vice President [* All schedules and Exhibits REDACTED] 74 EX-10.84 12 EXHIBIT 10.84 WKE STATION TWO INC. 220 West Main Street Louisville, Kentucky 40232-2030 April 6, 1998 Mr. Michael H. Core [* REDACTED = Omitted pursuant to a President confidential treatment request. Big Rivers Electric Corporation Material filed separately with SEC.] 201 Third Street P.O. Box 24 Henderson, KY 42420-0024 Re: Station Two Agreement - Debt Service Payments on Station Two Bonds Dear Mr. Core: Attached as Exhibit M to the New Participation Agreement of even date herewith by and among Big Rivers Electric Corporation, LG&E Energy Marketing Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky Energy Corp., is the Station Two Agreement (as defined in the New Participation Agreement). Sections 8.18, 9.7(b)(i) and 9.11 of the Station Two Agreement set forth the terms for funding and payment of Debt Service on the Station Two Bonds. This letter amends the New Participation Agreement by setting forth new understandings and agreements with respect to the terms for funding and payment of such Debt Service on the Station Two Bonds. Capitalized Terms that are not defined herein shall have the meaning ascribed to such terms in the Station Two Agreement. Each of the parties set forth below hereby agrees that, in lieu of the payments provided for in Section 8.18 and Sections 9.7(b)(i) and 9.11 of the Station Two Agreement, Station Two Subsidiary and Big Rivers shall each have responsibility (until the earlier of (x) termination of the Station Two Agreement or (y) the Station Two Bonds shall be retired or redeemed) for payment, monthly, of an amount equal to [REDACTED] of the portion of the Debt Service due and owing in the current month by Big Rivers to the Trustee pursuant to Section 6.3(a) of the Station Two Power Sales Agreement. During the Phase I Subcontract Term, Big Rivers shall remain primarily liable to Henderson for timely and full payment of the portion of the Debt Service due and owing by Big Rivers to the Trustee under the Station Two Power Sales Agreement. Big Rivers shall be deemed by each monthly payment of Debt Service it makes to the Trustee during the Phase I Subcontract Term, to the extent such payment is made in accordance with the terms of the Station Two Power Sales Agreement, to have fulfilled its obligation to the LG&E Companies hereunder for payment of its portion of the Debt Service for that month. On the first day of each month during the Phase I Subcontract Term, Station Two Subsidiary shall pay to Big Rivers an amount equal to [REDACTED] of the portion of Debt Service due by Big Rivers to the Trustee during the current month under Section 6.3(a) of the Station Two Power Sales Agreement. Mr. Michael H. Core April 6, 1998 Page 2 During the Phase II Assignment Term, Station Two Subsidiary shall be primarily liable to Henderson for timely and full payment of the portion of the Debt Service due and owing by Station Two Subsidiary (as Big Rivers' assignee) to the Trustee under Section 6.3(a) of the Station Two Power Sales Agreement. Station Two Subsidiary shall be deemed by each monthly payment of Debt Service it makes to the Trustee during the Phase II Assignment Term, to the extent such payment is made in accordance with the terms of the Station Two Power Sales Agreement, to have fulfilled its obligation to Big Rivers hereunder for payment of its portion of the Debt Service for that month. On or prior to each Monthly Payment Date during the Phase II Assignment Term, Big Rivers shall pay to Station Two Subsidiary an amount equal to [REDACTED] of the portion of Debt Service due by Station Two Subsidiary (as Big Rivers' assignee) to the Trustee during the current month under Section 6.3(a) of the Station Two Power Sales Agreement. The foregoing terms and provisions for payment of such Debt Service shall take effect, if ever, from and after the first to occur of the Phase I Effective Date or the Phase II Effective Date under the Station Two Agreement. On or prior to the Effective Date (as defined in the New Participation Agreement), the parties will in good faith work together to make appropriate amendments to the Station Two Agreement to reflect the agreements and understandings set forth in this letter. Please acknowledge your agreement to the terms of this letter by signing in the space provided below. Sincerely, WKE STATION TWO INC. By: /s/ John R. McCall ------------------------------------- John R. McCall, Vice President WESTERN KENTUCKY ENERGY CORP. By: /s/ John R. McCall ------------------------------------- John R. McCall, Vice President Mr. Michael H. Core April 6, 1998 Page 3 LG&E ENERGY MARKETING INC. By: /s/ John R. McCall ------------------------------------- John R. McCall, Vice President WESTERN KENTUCKY LEASING CORP. By: /s/ John R. McCall ------------------------------------- John R. McCall, Vice President AGREED: BIG RIVERS ELECTRIC CORPORATION By: /s/ Michael H. Core ------------------------------------- Title: President and CEO EX-10.85 13 EXHIBIT 10.85 [*REDACTED = Omitted pursuant to confidential treatment request. Material filed separately with SEC.] EXHIBIT 10.85 Privileged and Confidential EXECUTION ORIGINAL SECOND AMENDMENT TO THE NEW PARTICIPATION AGREEMENT This SECOND AMENDMENT TO THE NEW PARTICIPATION AGREEMENT ("AMENDMENT") dated this ___ day of June, 1998, is among BIG RIVERS ELECTRIC CORPORATION, a Kentucky rural electric cooperative ("BIG RIVERS"), LG&E ENERGY MARKETING INC., an Oklahoma corporation ("LEM"), WESTERN KENTUCKY LEASING CORP., a Kentucky corporation ("LEASECO"), WKE Station Two Inc., a Kentucky corporation ("STATION TWO SUBSIDIARY") and WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC") (hereinafter, LEM, Leaseco, Station Two Subsidiary and WKEC are collectively referred to as the "LG&E PARTIES" and together with Big Rivers, the "PARTIES"). RECITALS WHEREAS, the Parties are signatories to the New Participation Agreement dated April 6, 1998, as amended by that certain Letter Agreement dated April 6, 1998 (collectively, the "New Participation Agreement"). WHEREAS, the Parties wish to amend the New Participation Agreement in certain respects as described herein. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Amendment, the Parties agree as follows: Each direction to capitalize or make lower case a word or phrase means to make the initial letter of each referenced word a capital letter or a lower case letter, as directed. 1. NEW PARTICIPATION AGREEMENT. The Parties hereby agree to amend the New Participation Agreement as follows: - - Section 4.3.6 (p. 6). The phrase "and in Sections 23.3 and 23.5" is hereby added immediately following the words "Article 5". - - Section 5.1.24 (p.14). In the references to "Taxing authority," "Taxing" is hereby made lower case. - - Section 7.1.2 (p.17). In the reference to "tax liability", "tax" is hereby capitalized. - - Section 7.3.6 (p. 19). In the phrase "Effective Date, cause the Big Rivers Qualified Plans" the word "and" is hereby inserted between the word "date" and the word "cause." - - Section 8.1 (p.19). The reference to "LG&E Parties" is hereby changed to "LG&E Parties and their Affiliates." The reference to "such other LG&E Party's use" is hereby changed to "use by the LG&E Parties or their Affiliates," and the reference to "such LG&E Party agrees" is hereby changed to "such LG&E Party agrees, and agrees to cause its Affiliates." Privileged and Confidential EXECUTION ORIGINAL - - Section 9.3 (p. 22). In the parenthetical phrase "fuel and scrubber reagent, inventory, spare parts and materials, and supplies" the commas immediately following the words "reagent" and "materials" are hereby deleted. - - Section 9.6 (p.24-25). Each reference to "Transmission Services and Interconnection Agreement" is hereby changed to "Transmission Service and Interconnection Agreement." - - Section 9.7 (p. 25 ): A new Section 9.7 is hereby added as follows: 9.7 INCREMENTAL REVENUE ALLOCATION (a) On the 25th day of each month, commencing on the second occurrence of a 25th day of the month after the Effective Date and continuing until and including January 25, [REDACTED], Big Rivers will pay to LEM [REDACTED]% of the total revenue received by Big Rivers from [REDACTED] for transmission of Tier 3 Energy to [REDACTED] (if any) during the preceding month. (b) On the 25th day of each month, commencing on February 25, [REDACTED] and continuing until and including January 25, [REDACTED], provided that [REDACTED] has entered into a contract with Big Rivers for the transmission of Tier 3 Energy to [REDACTED], which contract provides for service to commence January 1, [REDACTED], is of a duration of no less than [REDACTED] years, assures Big Rivers of receipt of no less than $[REDACTED] annually in transmission revenues, and such minimum revenues are received by Big Rivers, Big Rivers will pay to LEM an amount equal to $[REDACTED]. In addition, on each February 25, commencing on February 25, [REDACTED] and continuing until and including February 25, [REDACTED], Big Rivers will pay LEM an amount equal to the lesser of (i) $[REDACTED] or (ii) the difference between (a) the total amount of revenue received by Big Rivers from [REDACTED] for transmission of Tier 3 Energy to Southwire in the preceding 12 calendar months and (b) $[REDACTED] less the sum of amounts received by LEM from Big Rivers pursuant to this Section 9.7(b) in the preceding 12 calendar months; provided that if Big Rivers' OATT rate for firm point-to-point service declines to less than $[REDACTED] per KW per month, then the amount "$[REDACTED]" set forth in the preceding clause will be reduced proportionally. - - Section 10.3 (p.26). The reference to "WKEC shall not" is hereby changed to "Neither WKEC nor its Affiliates shall." - - Section 10.4 (p.26). The last reference to "or its Affiliates (as applicable)" is hereby deleted. -2- Privileged and Confidential EXECUTION ORIGINAL - - Section 10.5 (p. 26). The word "the" is hereby inserted before each of the first, third, fourth and fifth references to "Big Rivers Severance Plan." - - Section 10.7 (p.28). The reference to "10.8.1, 10.8.2 and 10.8.3" is hereby changed to "10.7.1, 10.7.2 and 10.7.3." - - Section 11.6 (p.30). In each reference to "Federal income tax," "tax" is hereby capitalized. - - Section 12.1 (p.31). References to "Leaseco shall keep" and "Leaseco shall retain" are hereby changed to "Leaseco shall keep, or cause to be kept," and "Leaseco shall retain, or cause to be retained,". - - Section 12.4 (p. 31). The word "notice" is hereby made plural. - - Section 14.5 (p.36). Each reference to "parties" is hereby capitalized. - - Section 15.1 (p.38). The first and second references to "parties" are hereby capitalized and the first, second and third references to "party" is hereby capitalized. - - Section 15.2.1 (p.39). The reference to "Party" is hereby made lower case. - - Section 15.2.3 (p.39). The first reference to "Party" is hereby made lower case. - - Section 15.2.6 (p.39). The reference to "Parties" is hereby made lower case. - - Section 15.3.1 (p.40). The first and second references to "Party" are hereby made lower case and the first reference to "Parties" is hereby made lower case. - - Section 15.3.2 (p.40). The last reference to "Party" is hereby made lower case. - - Section 15.3.4 (p.40). The first reference to "parties" is hereby capitalized. - - Section 15.3.6 (pp.40-41). Each reference to "Parties" or "Party" is hereby made lower case. - - Section 15.3.7 (p.41). Each reference to "Parties" or "Party" is hereby made lower case. - - Section 15.3.8 (p.41). The reference to "Parties" is hereby made lower case. - - Section 16.1 (p.41). The first reference to "party" is hereby capitalized and the word "provided" is hereby inserted before the first use of "however." - - Section 16.2 (p.42). The first reference to "party" is hereby capitalized. - - Section 20.3 (p.50). The reference to "party" is hereby capitalized. - - Section 20.6 (p. 51). Section 20.6 is hereby amended to be and read in its entirety as follows: 20.6 DEVELOPMENT OF BUDGETS; CAPITAL BUDGET LIMITS. 20.6.1 The Parties agree, notwithstanding the date upon which the Closing occurs, that they will continue to work together to (i) develop an Annual O&M Budget and an Annual Capital Budget with respect to the "Initial Budget Period" (as defined in the Facilities Operating Agreement or the Lease, as applicable), and (ii) consider matters of concern relating to the operation of the Assets and Station Two following the Closing with respect to which the Operating Committee is given a role pursuant to the terms of the Lease or the Facilities Operating Agreement. The applicable provisions contained in the Phase I or Phase II Agreements, as applicable, shall replace this provision on and after the Effective Date. -3- Privileged and Confidential EXECUTION ORIGINAL 20.6.2. Notwithstanding Section 20.6.1, above, the Parties hereby agree that the Annual Capital Budgets for the Initial Budget Period to be agreed to by the Parties as contemplated in Schedule 3.1 attached to this Agreement, and the Annual Capital Budgets for each Year thereafter during the Term, shall include as the aggregate budgeted amount for the relevant Year (or portion thereof), in respect of all Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs (as defined in the Station Two Agreement) that are not for Major Capital Repairs or Henderson Major Capital Repairs, respectively, the following amounts (the "Capital Budget Limits"), which Capital Budget Limits shall not be increased or decreased without the written approval of the Parties, but shall be subject to adjustment pursuant to the procedures to be developed by Big Rivers and Leaseco as contemplated in Section 20.6.4 below, and shall be subject to the other provisions of this Section 20.6:
- - First Partial Year following Effective Date (assuming there are five full months then remaining in that Year): $ - - First full Year following Effective Date: $ - - Second full Year following Effective Date: $ - - Third full Year following Effective Date: $ - - Fourth full Year following Effective Date: $ - - Fifth full Year following Effective Date: $ - - Sixth full Year following Effective Date: $ - - Seventh full Year following Effective Date: $ - - Eighth full Year following Effective Date: $ - - Ninth full Year following Effective Date: $ - - Tenth full Year following Effective Date: $ - - Eleventh full Year following Effective Date: $[REDACTED] - - Twelfth full Year following Effective Date: $ - - Thirteenth full Year following Effective Date: $ - - Fourteenth full Year following Effective Date: $ - - Fifteenth full Year following Effective Date: $ - - Sixteenth full Year following Effective Date: $ - - Seventeenth full Year following Effective Date: $ - - Eighteenth full Year following Effective Date: $ - - Nineteenth full Year following Effective Date: $ - - Twentieth full Year following Effective Date: $ - - Twenty-First full Year following Effective Date: $ - - Twenty-Second full Year following Effective Date: $ - - Twenty-Third full Year following Effective Date: $ - - Twenty-Fourth full Year following Effective Date: $ - - Twenty-Fifth full Year following Effective Date: $
-4- Privileged and Confidential EXECUTION ORIGINAL Except as otherwise provided below, Big Rivers, Leaseco and/or Station Two Subsidiary each agree to contribute their respective share of the Capital Budget Limit for each Year (or portion thereof) during the Term, based upon their respective Capital Asset Sharing Ratios or Station Two Improvement Sharing Ratios (as defined in the Station Two Agreement), as applicable; provided, that so long as the aggregate budgeted amount for Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs that are included in the approved Annual Capital Budget and Operating Budget (in the case of Station Two) for a particular Year, but which are not for Major Capital Repairs or Henderson Major Capital Repairs, respectively (the "Approved Capital Amount"), is equal to or greater than the Big Rivers Contribution for that Year, then Big Rivers will contribute the entire Big Rivers Contribution (as defined in Section 20.6.3 below) for that Year and Leaseco and/or Station Two Subsidiary will contribute the remainder of the Approved Capital Amount; and provided further, that in the event the Approved Capital Amount for a particular Year is less than the Big Rivers Contribution for that Year, then Big Rivers alone shall contribute the entire Approved Capital Amount. Notwithstanding anything contained in this Section 20.6 to the contrary Leaseco and/or Station Two Subsidiary shall be entitled to propose an aggregate annual budget for Non-Incremental Capital Costs (exclusive of costs for Major Capital Repairs) and Henderson Non-Incremental Capital Costs (exclusive of Costs for Henderson Major Capital Repairs) that is less than the Capital Budget Limits for that Year, provided such budget is consistent with Prudent Utility Practice, and such budget as proposed by Leaseco and/or Station Two Subsidiary shall be approved if it meets the criteria for such approval in Article 6 of the Cost Sharing Agreement, Article 7 of the Lease and Section 8.15 or 9.8 of the Station Two Agreement (as applicable) notwithstanding that it may be less than the Capital Budget Limit. In addition to the foregoing, in the event the Approved Capital Amount for a particular Year is less in the aggregate than the Big Rivers Contribution for that Year, Big Rivers agrees to contribute the amount by which the Big Rivers Contribution exceeds the Approved Capital Amount, to fund any Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs (in each case exclusive of costs for Major Capital Repairs and Henderson Major Capital Repairs) that were not included in the relevant approved budget, but which (i) are required during that Year, consistent with Prudent Utility Practice, to be expended in order to address unanticipated operating problems at one or -5- Privileged and Confidential EXECUTION ORIGINAL more of the Generating Plants, and (ii) meet the criteria and conditions set forth in Article 7 of the Cost Sharing Agreement, Article 8 of the Lease or Section 8.17 or 9.10 of the Station Two Agreement (as applicable) for Big Rivers' obligation to fund the same. Such contributions by Big Rivers will serve as an approved deviation from the Annual Capital Budget for that Year as contemplated in Section 6.5 of the Facilities Operating Agreement, Section 7.5 of the Lease or Section 8.17(f) or 9.10(d) of the Station Two Agreement, as applicable. 20.6.3 Except as otherwise provided in this Section 20.6, Big Rivers agrees that its respective share of the Capital Budget Limit for each Year shall be the amounts set forth below (collectively, the "Big Rivers Contributions"), which amounts shall be paid by Big Rivers at the time(s) provided in Article 7 of the Cost Sharing Agreement, Article 8 of the Lease and Section 8.17 or 9.10 of the Station Two Agreement, as applicable:
- - First Partial Year: $ - - First full Year: $ - - Second full Year: $ - - Third full Year: $ - - Fourth full Year: $ - - Fifth full Year: $ - - Sixth full Year: $ - - Seventh full Year: $ - - Eighth full Year: $ - - Ninth full Year: $ - - Tenth full Year: $ - - Eleventh full Year: $[REDACTED] - - Twelfth full Year: $ - - Thirteenth full Year: $ - - Fourteenth full Year: $ - - Fifteenth full Year: $ - - Sixteenth full Year: $ - - Seventeenth full Year: $ - - Eighteenth full Year: $ - - Nineteenth full Year: $ - - Twentieth full Year: $ - - Twenty-First full Year: $ - - Twenty-Second full Year: $ - - Twenty-Third full Year: $ - - Twenty-Fourth full Year: $ - - Twenty-Fifth full Year: $
-6- Privileged and Confidential EXECUTION ORIGINAL Big Rivers agrees that the amount of the Big Rivers Contribution for a particular Year shall not be reduced in the event the Approved Capital Amount is less than the Capital Budget Limit for the year, so long as the Approved Capital Amount is equal to or greater than the Big Rivers Contribution. 20.6.4 The Parties agree that, as an additional condition to the Closing and the Parties' obligation to consummate the transactions contemplated at the Closing, Big Rivers and Leaseco must agree upon a mutually satisfactory procedure by which the Capital Budget Limits and the Big Rivers Contributions will be adjusted during the Term to reflect inflationary increases in the cost of Non-Incremental Capital Costs over that period. The Parties agree to negotiate in good faith to develop and agree upon that procedure at the earliest practicable time following the Execution Date, and shall document their agreement (if any) in writing at or prior to the Closing. 20.6.5 Notwithstanding anything contained in any Operative Document to the contrary, but subject to the limitations and conditions set forth in this Section 20.6, at such time as Big Rivers shall have paid the entire Big Rivers Contribution for a particular Year (or the required portion thereof, as contemplated in Section 20.6.2 above) toward the funding of one or more Non-Incremental Capital Costs (other than for Major Capital Repairs) and/or Henderson Non-Incremental Capital Costs (other than for Henderson Major Capital Repairs), in either case in accordance with Article 7 of the Cost Sharing Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the Station Two Agreement (as applicable), then (a) Big Rivers shall be deemed to have paid its entire share of all Non-Incremental Capital Costs (other than for Major Capital Repairs) and Henderson -7- Non-Incremental Capital Costs (other than for Henderson Major Capital Repairs) for that Year (or portion thereof), regardless of whether additional expenditures for those or other Non-Incremental Capital Costs (other than for Major Capital Repairs) or Henderson Non-Incremental Capital Costs (other than for Henderson Major Capital Repairs) have been budgeted for, or are thereafter required during that Year for the maintenance and upkeep of the Generating Plants in accordance with the Operative Documents, and (b) Leaseco or Station Two Subsidiary, as applicable, agree that they shall be responsible for the payment of all other Non-Incremental Capital Costs (exclusive of costs for Major Capital Repairs) and Henderson Non-Incremental Capital Costs (exclusive of costs for Henderson Major Capital Repairs) during that Year to maintain and operate the Facilities and Station Two in accordance with the Operative Documents notwithstanding the Capital Budget Limit for that Year (or portion thereof). Notwithstanding the immediately preceding sentence or any other provision in any Operative Document to the contrary, Big Rivers' payment of the Big Rivers Contribution for a particular Year as contemplated above shall not, and shall not be deemed to, affect, limit or eliminate Big Rivers' continuing obligation under Article 7 of the Cost Sharing Agreement, Article 8 of the Lease or Section 8.17 or 9.10 (as applicable) of the Station Two Agreement for the payment of Big Rivers' relevant Capital Asset Sharing Ratio or Station Two Improvement Sharing Ratio with respect to (a) any Incremental Capital Costs or Henderson Incremental Capital Costs, and (b) any Non-Incremental Capital Costs for Major Capital Repairs or Henderson Non-Incremental Capital Costs for Henderson Major Capital Repairs, in each case that are required to be funded by Big Rivers, directly or indirectly, in accordance with those Articles or Sections, it being expressly understood that all such obligations of Big Rivers shall continue in accordance with those provisions irrespective of the provisions of this Section 20.6, and, where reasonably possible, shall be separately budgeted for by the Parties in the Annual Capital Budgets or Operating Budgets (in the case of Station Two) in accordance with the Cost Sharing Agreement, the Facilities Operating Agreement, the Lease or the Station Two Agreement, as applicable. In addition to the foregoing, and except as otherwise provided in this Section 20.6, nothing in this Section 20.6 shall be deemed to affect, limit or eliminate Big Rivers' or the LG&E Parties' respective obligations or liabilities under or pursuant to this or any other Operative Document by reason of any misrepresentation, breach of warranty or non-fulfillment of any covenant or agreement of Big Rivers or such LG&E Parties, including without limitation, any indemnification and hold harmless covenant of Big Rivers or such LG&E Parties set forth herein or therein. 20.6.6 To the extent any portion of a Big Rivers Contribution that is included in an approved Annual Capital Budget or Operating Budget (in the case of Station Two) is not thereafter used by Leaseco or Station Two Subsidiary in the Year for which payable because the project for which such funds were allocated was deferred or was not completed during that Year, after complying with the provisions of the Operative Documents, then such portion of the Big Rivers Contribution necessary to complete such project will be carried forward and included as an approved addition to the Annual Capital Budget or Operating Budget (as applicable) for the following Year (for use solely in -8- connection with the completion of such project), but shall not serve as a credit against, or reduce, the Big Rivers Contribution for that following Year; provided, that the obligation of Big Rivers to so contribute any such portion of the Big Rivers Contribution in that following Year shall be further conditioned on either (i) Leaseco or Station Two Subsidiary having actually contributed, during the Year for which budgeted, its commitment for Non-Incremental Capital Costs or Henderson Non-Incremental Capital Costs that corresponds with such portion of the Big Rivers Contribution (based upon Leaseco's Capital Asset Sharing Ratio or Station Two Subsidiary's Station Two Improvement Sharing Ratio, as applicable), or (ii) Leaseco's or Station Two Subsidiary's agreement with Big Rivers to make those corresponding contributions at the same time in the following Year as such contributions are required by Big Rivers. References in this Section 20.6 to the Operating Budgets required for Station Two shall be deemed to relate solely to the items and amounts set forth in those budgets for which Big Rivers and/or Station Two Subsidiary are responsible under the Station Two Agreement and the Station Two Contracts referenced therein. 20.6.7 Notwithstanding anything contained in this Agreement or in any other Operative Document to the contrary, the Parties agree that they shall not, at any time after the sixtieth (60th) day following the close of any Year, attempt to claim or assert any claim (A) that an expenditure incurred in that Year and included in the approved Annual O&M Budget, the approved Annual Capital Budget or the approved Operating Budget (in the case of Station Two) for that Year (including without limitation, items that were included in those budgets by agreement of the Parties, by decision of the Operating Committee or Oversight Committee (as applicable), or at the direction of an arbitration panel pursuant to the procedures set forth in Article 15) should in fact have been included in the other budget for that Year, (B) that an expenditure incurred in that Year and included as an expenditure for a Capital Asset or Station Two Improvement in any of those approved budgets is in fact an operation or maintenance expense or an Enhancement or Major Capital Improvement, or is a Capital Asset or Station Two Improvement that Big Rivers is not otherwise obligated to fund in part, (C) that an expenditure incurred in that Year and included as an operation or maintenance expense in any of those approved budgets is in fact an expenditure for a Capital Asset or Station Two Improvement that Big Rivers is obligated to fund in part, (D) that an expenditure incurred in that Year and included in those approved budgets is or is not for a Major Capital Repair or a Henderson Major Capital Repair, (E) that an expenditure incurred in that Year and -9- included as Incremental Environmental O&M in any of those approved budgets is not in fact Incremental Environmental O&M, or (F) that an expenditure incurred in that Year and included as an operation and maintenance expense that is not Incremental Environmental O&M is in fact Incremental Environmental O&M; provided, however that nothing contained in this Section 20.6.7 shall be deemed to affect, limit or eliminate any such claims that are specifically asserted with respect to one or more items included in those approved budgets at any time prior to the expiration of the foregoing sixty-day period following the close of any Year, any such claims that are asserted prior to the approval of such budgets (or deemed approval pursuant to an arbitration award as contemplated above), or any claims regarding expenditures the approval or characterization of which was obtained by a Party through any misrepresentation or fraudulent or other willful misconduct, all of which claims shall be deemed to survive that sixty-day period for all purposes. - - Section 21.4 (p.54). The phrase "but without giving effect to the conflict of law rules of such jurisdiction" is hereby added to the end of the sentence. - - Section 22.2 (p.59). The first and second sentences of Section 22.2 are hereby deleted and are replaced with the following new sentence: "LEM covenants and agrees, and Big Rivers acknowledges and agrees, that on the Closing Date and in the event the Marketing Payment contemplated in Section 4.3.9 exceeds $[REDACTED], LEM will execute and deliver to the RUS a Demand Promissory Note in a principal amount equal to the amount by which such Marketing Payment so exceeds $[REDACTED], and in the form attached to this Agreement as Exhibit Q (the "Demand Note")." Exhibit Q attached to this Amendment shall constitute Exhibit Q of the New Participation Agreement as contemplated above. The fifth sentence of Section 22.2 is hereby amended to be and read in its entirety as follows: "Notwithstanding the foregoing, so long as any amount remains outstanding under either of the two Promissory Notes to be issued by Big Rivers to the RUS pursuant to the New RUS Agreement (as defined in the Non-Disturbance Agreement) or under the "1983 Reimbursement Agreement", the "1985 Reimbursement Agreement" or the "AMBAC Notes" (each with AMBAC as referred to in Recital A of the Non-Disturbance Agreement), or under Big Rivers' pollution control bonds as outstanding on the Effective Date, Big Rivers agrees that it shall not, and LEM agrees that Big Rivers shall have no obligation to, pay any amount with respect to Big Rivers' Reimbursement Obligation(s), provided however, that interest at the Default Rate will continue to accrue during all such periods during which Big Rivers has no payment obligation." A new sentence is hereby added to the end of Section 22.2 of the New Participation Agreement as follows: "Big Rivers' Reimbursement Obligation(s), together with its obligation to pay interest accruing on such reimbursement amounts, shall survive any expiration or termination of this Agreement and shall continue to be binding on Big Rivers." - - New Sections (p.60). New Sections 23.2 through 23.9, inclusive, are hereby added to Article -10- Privileged and Confidential EXECUTION ORIGINAL 23 of the New Participation Agreement as follows: 23.2 COLEMAN UNIT NO. 2 ISSUES. Big Rivers agrees that it will fully repair and rectify, at its expense and consistent with Prudent Utility Practice, all equipment and operating problems at the Coleman Unit No. 2 facility identified in the letter dated May 14, 1998 from Michael Core to George Basinger, as well as all other problems (whether or not related) that may exist and that may prevent bringing that unit back on line for regular operation to its full rated capacity. Big Rivers will use its commercially reasonable efforts to address those problems at the earliest practicable time, in an effort to return the Coleman Unit No. 2 facility on-line prior to July 14, 1998 (or as soon thereafter as is reasonably possible). The foregoing obligations of Big Rivers will survive the Closing and shall continue to be binding on Big Rivers. Notwithstanding the foregoing, Big Rivers acknowledges and agrees that the LG&E Parties shall be under no obligation to effect the Closing or to consummate the transactions contemplated at the Closing until such time as the Coleman Unit 2 facility is repaired in accordance with the preceding provisions. 23.3 GREEN AND WILSON LANDFILL ISSUES. Big Rivers hereby represents and warrants to the LG&E Parties that the landfill located at the Green Station has a remaining useful life and capacity, based upon coal qualities that are consistent with Big Rivers' prior practices, of at least nine (9) years, without modification of any of the existing Permits relative to that landfill, without the need for capital improvements or the disruption or removal of materials located in that landfill, and based upon both vertical and horizontal measurement limitations, but assuming the continuation of Big Rivers' past operation and disposal practices by WKEC or Leaseco, as applicable, following the Effective Date. Big Rivers agrees that prior to the Closing (or as soon thereafter as is reasonably possible, using its commercially reasonable efforts) Big Rivers will, at its expense and consistent with Prudent Utility Practice, construct a new retainment road/wall at the Green Station landfill as contemplated by the pending Permit modification filed with the KNREPC and in compliance with all applicable Laws and Permits. Big Rivers further agrees, at its expense and at the earliest practicable time, to obtain all changes in existing Permits required for the full and lawful use and operation of the Green landfill (as expanded) and the Wilson landfill by the LG&E Parties following the Closing. In the event changes in existing Permits that would allow Big Rivers to forego such removal action in compliance with applicable Laws cannot be obtained despite Big Rivers' commercially reasonable efforts to do so, Big Rivers -11- Privileged and Confidential EXECUTION ORIGINAL agrees, at its expense and consistent with Prudent Utility Practice, to ensure that any landfill materials that have been placed or disposed of outside the permitted boundaries of the Green landfill and the Wilson landfill are removed along with any affected soil or debris, and disposed of in compliance with applicable Laws at the earliest possible time. Big Rivers also agrees to be solely responsible for, and to indemnify and hold harmless the LG&E Parties from and against, all claims, demands, losses, damages, liabilities, costs, expenses, obligations and deficiencies (including without limitation, costs of corrective or remedial actions, fines, civil or criminal penalties, settlements and attorney's fees) that have been or may be suffered or incurred resulting from or arising out of any failure of the Green landfill and/or the Wilson landfill to comply with applicable Permits and/or conditions thereof at any time prior to the Closing or completion of the construction work described above, or the approval by the KNREPC of changes to the existing Permits as described above, whichever is later, unless such failure is caused by any action by any of the LG&E Parties or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents. 23.4 COLEMAN ASH POND ISSUES. The LG&E Parties agree that, except as otherwise required by applicable Laws, the LG&E Parties shall not attempt to unilaterally close the "Southern Ash Pond" or the "Former Ash Pond" at the Coleman facility without the prior written consent of Big Rivers. Big Rivers agrees that it shall be solely responsible, at its expense and as and when required by applicable Laws, for promptly taking all actions, and duly filing all instruments and documents with federal, state and local governmental agencies, as shall be required to officially close the "Southern Ash Pond" and the "Former Ash Pond" at the Coleman facility (as identified on the Coleman facility site map prepared in connection with the Baseline Environmental Audit Report) in accordance with all applicable Laws, Permits and Prudent Utility Practice. Notwithstanding the foregoing, in the event the LG&E Parties elect, in their discretion, to dispose of materials in the Southern Ash Pond or the Former Ash Pond, WKEC or Leaseco, as applicable, shall be responsible for a pro rata portion of those closure costs based on the total amount (in tons) of ash disposed of in those ash ponds by the LG&E Parties as compared with the total amount of ash in the ponds at their closure. In addition to the foregoing, Big Rivers agrees, at its expense, to promptly commence and continue to dredge and excavate the remaining active ash pond (the "Active Ash Pond") at the Coleman facility in such a manner as shall be sufficient to cause the remaining useful life and capacity of that ash pond (based on horizontal and vertical measurements) as of one (1) month following the Closing to be at least -12- Privileged and Confidential EXECUTION ORIGINAL thirteen (13) months under its existing Permits, assuming a continuation of the current capacity factor of the Coleman facility, and assuming no additional dredging or excavation of that ash pond during that 13-month period. All materials so dredged from the Coleman ash pond shall be disposed of by Big Rivers, at its expense, at a permitted landfill or other permitted site located outside the boundaries of any of the Generating Plants or related facilities other than the Coleman Station, and otherwise in compliance with all applicable Laws. Big Rivers also agrees to be solely responsible for, and to indemnify and hold harmless the LG&E Parties from and against, all claims, demands, losses, damages, liabilities, costs, expenses, obligations, and deficiencies (including without limitation, costs of corrective or remedial actions, fines, civil or criminal penalties, settlements and attorney's fees) that have been or may be suffered or incurred resulting from or arising out of (a) any failure of the Active Ash Pond to comply with all applicable Permits at any time prior to the Closing or the completion of the dredging and excavation work described above, whichever is later, (b) any use or disturbance of the "Southern Ash Pond" or the "Former Ash Pond" by Big Rivers at any time prior to the Closing, or any failure of those ash ponds to comply with all applicable Permits at any time prior to the closure of the same as contemplated above (except to the extent that such non-compliance is caused by the use of or the failure to permit (assuming they are otherwise permittable) those ash ponds by the LG&E Parties following the Closing), and (c) any delay in the closure of the "Southern Ash Pond" or the "Former Ash Pond" at the Coleman facility (except to the extent that such delay is caused by the LG&E Parties or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents). 23.5 COLEMAN OPACITY ISSUE. Big Rivers hereby represents and warrants to the LG&E Parties that Big Rivers has taken all such actions, and has made all such repairs (at its expense and consistent with Prudent Utility Practice), in respect of the Coleman facility as were necessary to eliminate the opacity issues or problems identified in the letter from Big Rivers to the KNREPC dated February 11, 1998, relating to opacity exceedances at that facility. 23.6 YEAR 2000 COMPLIANCE ISSUE. Big Rivers hereby agrees to take all such actions, at its expense and consistent with Prudent Utility Practice, as shall be necessary in order to avoid any loss of transmission or other services in violation of its obligations under the Transmission Agreement or Big Rivers' Open Access Transmission Tariff by any of the LG&E Parties, the Members, the Smelters or Big Rivers over or in respect of -13- Privileged and Confidential EXECUTION ORIGINAL Big Rivers' transmission system and related facilities by reason of the passage of time from the year 1999 to the year 2000 (otherwise known as the "millennium problem" or the "Year 2000 problem"). 23.7 M&S INVENTORY. Consistent with Section 9.1 of the New Participation Agreement, Big Rivers and Leaseco agree that, assuming the Parties agree upon the procedures to be set forth on Schedule 9.1 to this Agreement as of the Closing (which agreement is a condition to the Closing), the fair market value to be paid by Leaseco at the Closing for all materials and supplies Inventory of Big Rivers shall be $[REDACTED]. 23.8 MAJOR CAPITAL REPAIRS. As an additional condition to the Parties' obligations to consummate the transactions contemplated at the Closing, the Parties shall have agreed upon a definition of "Major Capital Repairs" which generally shall include expenditures for Capital Assets which (i) are necessary to repair any turbine, scrubber or boiler at any of the Generating Plants, (ii) are not covered by insurance or any warranty, (iii) are not the result of the negligence or willful misconduct of any of the LG&E Parties or any of their Affiliates, successors or assigns or their respective officers, employees, consultants or agents or any breach or default by any of the LG&E Parties or their Affiliates under any of the Operative Documents and (iv) exceed a threshold amount to be agreed upon by the Parties. 23.9 MISCELLANEOUS. Notwithstanding the provisions of Section 5.1.27 of this Agreement, the Parties acknowledge that the representations and warranties of Big Rivers set forth in Sections 23.2 through 23.9, inclusive, shall supplement the representations and warranties set forth in Article 5, and shall be in addition to and not in lieu of those representations and warranties. - - Section 24.3 (p.71). In the phrase "Big Rivers nor its successor or assigns," the word successor is hereby made plural. - - Section 24.5 (p.72). The reference to "Mortgagees" is hereby changed to lower case. 2. COST SHARING AGREEMENT. The Parties hereby agree to amend Exhibit A to the New Participation Agreement (Cost Sharing Agreement) as follows: - - Article 1 (p.1). The phrase "on Exhibit X" is hereby changed to "in Exhibit X." - - Section 6.7 (p.4). The phrase "ACTION. Without Meeting" is hereby changed to "ACTION WITHOUT MEETING." - - Section 6.10 (p.4). The reference to "parties" is hereby capitalized. -14- Privileged and Confidential EXECUTION ORIGINAL - - Section 7.1 (p.5). The reference to "Section 5.1" is hereby changed to "Article 5." - - Section 7.3 (p.5). The phrase "On the first day of each month during the Term Leaseco and Big Rivers shall each deposit sufficient funds into the Capital Account based on their Capital Asset Sharing Ratios (defined in Section 7.4 below) (i)" is hereby changed to "On the first day of each month during the Term, Leaseco and Big Rivers shall each deposit sufficient funds into the Capital Account based on their Capital Asset Sharing Ratios (defined in Section 7.4 below), but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Non-Incremental Capital Costs that are not for Major Capital Repairs (i)". - - Section 7.4(1) (p.6). The reference to "Incremental Capital Asset" is hereby changed to "Capital Asset" and the phrase "Leaseco's share of each Incremental Capital Cost, determined as of the date payment for such Capital Asset is required," is hereby changed to "Leaseco's share of each Incremental Capital Cost, determined as of the date payment for such Capital Asset is required to be made to the Capital Account pursuant to the forecast prepared by Leaseco pursuant to Section 7.2,". - - Section 7.4(2) (p.7). The reference to "Non-Incremental Capital Asset" is hereby changed to "Capital Asset" and the phrase "Leaseco's share of each Non-Incremental Capital Cost" is hereby changed to "Leaseco's share of each Non-Incremental Capital Cost, determined as of the date payment for such Capital Asset is required to be made to the Capital Account pursuant to the forecast prepared by Leaseco pursuant to Section 7.2,". - - Section 14.1 (p.13). The reference to "Notices" is hereby changed to "notices (Section 21.1)." - - Section 14.4 (p.13). The phrase "but without giving effect to the conflict of law rules of such jurisdiction" is hereby added to the end of the sentence. - - Section 14.14.2 (p.15). In the phrase "Leaseco nor its successor or assigns," the word successor is hereby made plural. - - Section 14.14.3 (p.16). The reference to "Mortgagees" is hereby made lower case. 3. FACILITIES OPERATING AGREEMENT. The Parties hereby agree to amend Exhibit B to the New Participation Agreement (Facilities Operating Agreement) as follows: - - Section 5.4(a) (p.3). The reference to "Big Rivers' transmission system" is hereby changed to "Big Rivers' Transmission System." - - Section 5.6 (p.4). The phrase "the books and records that WKEC is required to keep pursuant to this Agreement" is hereby changed to "the books and records that WKEC is required to keep, or cause to be kept, pursuant to this Agreement." - - Section 5.7 (p.4). The phrase "shall administer all Big Rivers' fuel supply agreements, procure and pay for all fuel" is hereby changed to "shall administer, or cause to be administered, all Big Rivers' fuel supply agreements, procure, or cause to be procured, and pay for all fuel." - - Section 5.11 (p.5). The phrase "WKEC shall keep up-to-date books and records" is hereby changed to "WKEC shall keep, or cause to be kept, up-to-date books and records." - - Section 6.5. Section 6.5 is hereby deleted and replaced in its entirety as follows: -15- Privileged and Confidential EXECUTION ORIGINAL 6.5 BUDGET DEVIATIONS. WKEC shall immediately notify the Operating Committee of any anticipated departure of [REDACTED]% or more from an approved Annual Capital Budget or Annual O&M Budget. WKEC shall use reasonable efforts to (a) operate within [REDACTED] percent to 110 percent of the total approved Annual Capital Budget and (b) spend at least [REDACTED] percent of the total approved Annual O&M Budget (not including the fuel or reagent budget). Subject to the provisions set forth below, any increase of [REDACTED]% or more proposed by WKEC to either budget shall be subject to review and approval by the Operating Committee (or in the case of the Annual Capital Budget, the Oversight Committee); provided, that such review and approval shall not apply to the Annual O&M Budgets that are included in the Initial Period Budgets, it being understood that increases of [REDACTED]% or more proposed by WKEC to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs will be borne by WKEC unless they constitute Incremental Environmental O&M required to be borne solely by Leaseco and Big Rivers in the manner provided for in Section 5 of the Cost Sharing Agreement. If WKEC exceeds the total budget for Non-Incremental Capital Costs (exclusive of such costs as are for Major Capital Repairs) that are included in an approved Annual Capital Budget, the additional cost of those Non-Incremental Capital Costs shall be borne by Leaseco unless the Parties otherwise agree, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Annual Capital Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if WKEC exceeds [REDACTED] percent of the total budget for Incremental Capital Costs, or for Non- Incremental Capital Costs for Major Capital Repairs, in either case that are included in an approved Annual Capital Budget, the additional costs of those Capital Assets shall be borne by Leaseco unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that at the time WKEC proposed the applicable portions of the Annual Capital Budget (or modification thereof) relating to those expenditures WKEC acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Leaseco and Big Rivers in accordance with Sections 7.3 and 7.4 of the Cost Sharing Agreement. Notwithstanding the provisions of the immediately preceding sentence, if WKEC exceeds [REDACTED] percent of the total of any budget for Incremental Capital Costs, or for Non-Incremental Capital Costs for Major Capital Repairs, that are included in -16- Privileged and Confidential EXECUTION ORIGINAL an approved Annual Capital Budget that is a part of the Initial Period Budgets, the additional cost of those Capital Assets shall be borne by Leaseco unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that the purchase and installation of those Capital Assets, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or WKEC's or Leaseco's (as applicable) actions in connection with the same, were consistent with Prudent Utility Practice at the time that budget was prepared, in which case the additional costs shall be borne by Leaseco and Big Rivers in accordance with Sections 7.3 and 7.4 of the Cost Sharing Agreement. If WKEC fails or refuses to use reasonable efforts to spend at least [REDACTED] percent of the total approved Annual Capital Budget or the total approved Annual O&M Budget (excluding that portion relating to Incremental Environmental O&M) and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal is inconsistent with Prudent Utility Practice, WKEC shall make the omitted expenditure as required pursuant to the applicable dispute resolution procedure. - - Section 6.6 (p.8). The last sentence of Section 6.6 is hereby deleted and replaced with the following sentence: Additional capital expenditures incurred by WKEC in response to an Operating Emergency which are not already included in an approved Annual Capital Budget shall be paid for by Leaseco unless (a) the same represents an Incremental Capital Cost or expenditures for a Major Capital Repair, in which case such expenditures shall be paid by Leaseco and Big Rivers in accordance with Article 7 of the Cost Sharing Agreement, or (b) Big Rivers shall not have paid the entire Big Rivers Contribution for that Year toward funding of one or more Non-Incremental Capital Costs (other than costs for Major Capital Repairs) and/or Henderson Non-Incremental Capital Costs (other than costs for Henderson Major Capital Costs) in accordance with Article 7 of the Cost Sharing Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the Station Two Agreement (as applicable), then that remaining amount will be allocated to any Non-Incremental Capital Costs in that Year resulting from that Operating Emergency as contemplated in Section 20.6.2 of the Participation Agreement. - - Section 15.2 (pp.15-16). The phrase "WKEC shall deliver to Big Rivers" is hereby changed to "WKEC shall deliver, or cause to be delivered, to Big Rivers" and the phrase "developed by WKEC" is hereby changed to "developed, or caused to be developed, by WKEC." -17- - - Section 17.9 (p.16). The first reference to "parties"" is hereby changed to "Parties'", and the second reference to "parties" is hereby capitalized. - - Section 17.13(a) (p.17). In the phrase "Big Rivers nor its successor or assigns," the word successor is hereby made plural. - - Section 17.13(b) (p.18). In the phrase "WKEC nor its successor or assigns," the word successor is hereby made plural. - - Section 17.13(c) (p.19). The reference to "Mortgagees" is hereby made lower case. 4. LEASE AND OPERATING AGREEMENT. The Parties hereby agree to amend Exhibit C to the New Participation Agreement (Lease and Operating Agreement) as follows: - - Article 1 (p.1). The phrase "on Exhibit X" is hereby changed to "in Exhibit X." - - Section 2.3.2(c). The reference to "LEM" is hereby changed to "Leaseco." - - Section 2.3.2(f)(iii) (p.5). The reference to "Federal Energy Regulatory Commission" is hereby changed to "FERC." - - Section 5.4.1 (p.8). The reference to "Big Rivers' transmission system" is hereby changed to "Big Rivers' Transmission System." - - Section 5.4.3 (p.9). The phrase "the books and records Leaseco is required to keep pursuant to this Agreement" is hereby changed to "the books and records Leaseco is required to keep, or cause to be kept, pursuant to this Agreement." - - Sections 7.5 and 7.6. Sections 7.5 and 7.6 are hereby amended to be and read in their entirety as follows: 7.5 BUDGET DEVIATIONS. Leaseco shall immediately notify the Operating Committee of any anticipated departure of [REDACTED]% or more from an approved Annual Capital Budget or Annual O&M Budget. Leaseco shall use reasonable efforts to (a) operate within [REDACTED] percent to [REDACTED] percent of the total approved Annual Capital Budget and (b) spend at least [REDACTED] percent of the total approved Annual O&M Budget (not including the fuel and reagent budget). Subject to the provisions set forth below, any increase of [REDACTED]% or more proposed by Leaseco to either budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the Annual O&M Budgets that are included in the Initial Period Budgets, it being understood that increases of [REDACTED]% or more proposed by Leaseco to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs will be borne by Leaseco unless they constitute Incremental Environmental O&M required to be borne solely by Leaseco and Big Rivers in the manner provided for in Section 2.3.3. If Leaseco exceeds the total budget for Non-Incremental Capital Costs (exclusive of such costs as are for Major Capital Repairs) that are -18- included in an approved Annual Capital Budget, the additional cost of those Non-Incremental Capital Costs shall be borne by Leaseco unless the Parties otherwise agree, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Annual Capital Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if Leaseco exceeds [REDACTED] percent of the total budget for Incremental Capital Costs, or for Non-Incremental Capital Costs for Major Capital Repairs, in either case that are included in an approved Annual Capital Budget, the additional costs of those Capital Assets shall be borne by Leaseco unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that at the time Leaseco proposed the applicable portions of the Annual Capital Budget (or modification thereof) relating to those expenditures Leaseco acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Leaseco and Big Rivers in accordance with Sections 8.3 and 8.4. Notwithstanding the provisions of the immediately preceding sentence, if Leaseco exceeds [REDACTED] percent of the total of any budget for Incremental Capital Costs, or for Non-Incremental Capital Costs for Major Capital Repairs, that are included in an approved Annual Capital Budget that is a part of the Initial Period Budgets, the additional cost of those Capital Assets shall be borne by Leaseco unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that the purchase and installation of those Capital Assets, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or Leaseco's actions in connection with the same, were consistent with Prudent Utility Practice at the time that budget was prepared, in which case the additional costs shall be borne by Leaseco and Big Rivers in accordance with Sections 8.3 and 8.4. If Leaseco fails or refuses to use reasonable efforts to spend at least [REDACTED] percent of the total approved Annual Capital Budget or the total approved Annual O&M Budget (excluding that portion relating to Incremental Environmental O&M) and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal is inconsistent with Prudent Utility Practice, Leaseco shall make the omitted expenditure as required pursuant to the applicable dispute resolution procedure. 7.6 OPERATING EMERGENCY. Notwithstanding any other provision of this Agreement, in the event of an Operating Emergency, Leaseco -19- Privileged and Confidential EXECUTION ORIGINAL may take such action as in its sole discretion it may deem prudent or necessary to terminate the Operating Emergency, to preserve and maintain the safety, integrity and operability of the Tangible Assets and to maintain Capacity and the availability of the Tangible Assets to the maximum extent. Additional capital expenditures incurred by Leaseco in response to an Operating Emergency which are not already included in an approved Annual Capital Budget shall be paid for by Leaseco unless (a) the same represents an Incremental Capital Cost or expenditures for a Major Capital Repair, in which case such expenditures shall be paid by Leaseco and Big Rivers in accordance with Article 8 of this Agreement, or (b) Big Rivers shall not have paid the entire Big Rivers Contribution for that year toward funding of one or more Non-Incremental Capital Costs (other than costs for Major Capital Repairs) and/or Henderson Non-Incremental Capital Costs (other than costs for Henderson Major Capital Costs) in accordance with Article 7 of the Cost Sharing Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the Station Two Agreement (as applicable), then that remaining amount will be allocated to any Non-Incremental Capital Costs resulting from that Operating Emergency as contemplated in Section 20.6.2 of the Participation Agreement. - - Section 8.3 (p.15). The phrase "On the first day of each month during the Term Leaseco and Big Rivers shall each deposit sufficient funds into the Capital Account based on their Capital Asset Sharing Ratios (defined in Section 8.4 below) (i)" is hereby changed to "On the first day of each month during the Term, Leaseco and Big Rivers shall each deposit sufficient funds into the Capital Account based on their Capital Asset Sharing Ratios (defined in Section 8.4 below), but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Non-Incremental Capital Costs that are not for Major Capital Repairs (i)". - - Section 10.2.2 (p.19). The phrase "the fixed rental payments payable by Leaseco under Section 2.3.2 and the Monthly Margin Payments payable by Leaseco pursuant to Article 2 of this Agreement" is hereby changed to the "fixed rental payments and the Monthly Margin Payments payable by Leaseco pursuant to Section 2.3.2 of this Agreement." - - Section 11.6 (p.22). The reference to the "Transmission Agreement" is hereby changed to the "Transmission Service and Interconnection Agreement." - - Section 13.4 (p.22). The phrase "but without giving effect to the conflict of law rules of such jurisdiction" is hereby added to the end of the sentence. - - Section 13.14.2 (p.24). In the phrase "Leaseco nor its successor or assigns," the word successor is hereby made plural. - - Section 13.14.3 (p.25). The reference to "Mortgagees" is hereby made lower case. - - Schedule 2.3 (in the form attached hereto) is hereby added to the Lease and Operating Agreement. -20- Privileged and Confidential EXECUTION ORIGINAL 5. POWER PURCHASE AGREEMENT. The Parties hereby agree to amend Exhibit D to the New Participation Agreement (Power Purchase Agreement) as follows: - - Section 2.2(d) (p.5). The reference to "tangible assets" is hereby capitalized. - - Section 3.3(a)(iii) (p.8). The phrase "The first Monthly Margin Payment shall be due on the second occurrence" is hereby changed to "The first Monthly Margin Payment shall be due from LEM to Big Rivers on the second occurrence." - - Section 3.3(a)(viii)(3) (p.11). The phrase "Federal Energy Regulatory Commission" is hereby changed to "FERC." - - Section 4.2 (p.14). The phrase "(i) the Members may acquire Power from a Person other than Big Rivers after the first January 1 that is three full Years after the Effective Date to the extent necessary for the Members to fulfill their obligations to provide market-priced Power to certain of their non-Smelter industrial customers as contemplated in the Plan, and (ii)" is hereby deleted. - - Section 4.3(b)(iv). (p.15). The phrase "(determined by reference to (iii), above)" is hereby deleted. - - Section 4.3(d)(iv) (p.16). The phrase "(determined by reference to (iii), above)" is hereby deleted. - - Section 4.3(e)(p.16). The reference to "December 31, 1997" is hereby changed to "December 31, 1998." - - Section 4.4(a)(iii) (p.18). The phrases "market-priced" and "as contemplated in the Plan or Big Rivers' Transaction Tariff" are hereby deleted. - - Section 5.4 (p.21). The references to "transmission system" are hereby capitalized. - - Sections 5.5(b)(iii), 5.6, 5.6 and 5.8 (pp.22-24). The references to "Control Area" are hereby made lower case. - - Section 5.7 (p.23). Section 5.7 is hereby modified by deleting the last sentence of the Section and inserting at the end of the second to last (now last) sentence the following: ;provided, that in the event that two or more Generating Plant units are off-line and Big Rivers is experiencing low voltage problems, the Operator of the Generating Plants will, without adjustment in the Power Value Amount, operate the Generating Plant units down to the design lagging power factor without a loss of megawatt output, but only to the extent necessary to produce an amount of megavars equal to [REDACTED] multiplied by the net output of the Generating Plants that would exist if the units that are off-line at the time the calculation was made are operating. At any time, any additional megavars requested by Big Rivers in excess of [REDACTED] multiplied by the net output of the Generating Plants, assuming no units are off-line, if available from the Generating Plants without loss of megawatt output capabilities, shall be provided to Big Rivers from LEM at LEM's rates for sale of reactive power set forth in its tariff for the sale of ancillary services (as filed with FERC and revised from time-to-time). LEM may also elect (but is not obligated) to -21- Privileged and Confidential EXECUTION ORIGINAL provide, in any hour at Big Rivers' request, megavars in such quantities that their production adversely impacts the Generating Plants' capability to produce megawatts at the rated lagging power factor, but shall do so only at the rate set forth in LEM's tariff for the sale of ancillary services (as filed with FERC and revised from time-to-time) or such other rates as FERC may accept for filing. - - Section 6.2(g) (p.25). The reference to "transmission system" is hereby capitalized. - - Section 6.4(a) (p.28). In the reference to "Base Power Rates," "Rates" is hereby made lower case. - - Section 6.6(b) (p.30). The references to "Excess Credit" are hereby made lower case. - - Section 9.1(a) (p.32). A close parenthesis is hereby added after "Section 15.2." - - Section 13 (p.36) is hereby deleted and left as a "Reserved" section. - - Section 17.3 (p.40). The reference to "Mortgagees" is hereby made lower case. - - Section 18.1 (p.40). The reference to "Notices" is hereby changed to "notices (Section 21.1)." - - Section 18.4 (p.41). The phrase "but without giving effect to the conflict of law rules of such jurisdiction" is hereby added to the end of the sentence. - - Signature Block (p.42). The reference to "LG&E Power Marketing Inc." is hereby changed to "LG&E Energy Marketing Inc." - - Schedule 3.3(a) (in the form attached hereto) is hereby added to the Power Purchase Agreement. - - Exhibit C. The reference to "26 rural delivery points" under Green River Electric is hereby changed to "27 rural delivery points." - - Exhibit C. An additional delivery point for Green River Electric is hereby added as follows: "ACMI 13,800 volts." - - Exhibit C. The reference to "Costain East Portal" under Henderson Union Electric is hereby changed to "Lodestar Energy." - - Exhibit C. The reference to "Green Coal" under Henderson Union Electric is hereby changed to "C.R. Mining." - - Exhibit C. The reference to "Peabody Breck" under Henderson Union Electric is hereby changed to "Peabody Breckenridge." - - Exhibit C. The reference to "Providence Mine" under Henderson Union Electric is hereby changed to "Victory Processing." - - Exhibit C. The reference to "Sextet Dorea Mine 69,000 volts" under Henderson Union Electric is hereby deleted. - - Exhibit C. An additional delivery point for Henderson Union Electric is hereby added as follows: "Dotiki #3 12,470 volts." 6. TRANSMISSION SERVICE AND INTERCONNECTION AGREEMENT. The Parties hereby agree to amend Exhibit E to the New Participation Agreement (Transmission Service and Interconnection Agreement) as follows: -22- Privileged and Confidential EXECUTION ORIGINAL - - Recital B (p.2). The reference to "ancillary services" is hereby capitalized. - - Before Section 2.5 (ECAR) (p.4), a new Section is hereby added which states "`Default Rate' shall have the meaning set forth in Exhibit X to the Participation Agreement." - - Section 2.8 (p.4). The reference to "`Guaranty Agreement'" is hereby changed to "`Guaranty.'" - - Section 3.2(a)(iv) (p.9). The phrase "Chapter 11 Case" is hereby changed to "Big Rivers' Chapter 11 case pending before the U.S. Bankruptcy Court for the Western District of Kentucky, Case No. 96-41168." - - Section 5.1 (p.15). A comma is hereby inserted after the phrase "Big Rivers shall operate and maintain, or cause to be operated and maintained." - - Section 5.2 (p.16). The reference to "Firm Transmission Services Agreement" is hereby changed to "Service Agreement." - - Section 6.2 (p.17). The references to "Short-Term Firm Transmission Service" are hereby changed to "Short-Term Firm Point-to-Point Transmission Service" and the references to "Non-Firm Transmission Service" are hereby changed to "Non-Firm Point-to-Point Transmission Service." - - Section 6.3 (p.18). The reference to "Firm Transmission Service" is hereby changed to "Firm Point-to-Point Transmission Service," the references to "Long-Term Firm Transmission Service" are hereby changed to "Long-Term Firm Point-to-Point Transmission Service" and the reference to "completed Transmission Services Agreement" is hereby changed to "a completed Service Agreement." - - Section 6.5.1 (p.20). The reference to "RUS" is hereby changed to "Administrator of the Rural Utilities Service, U.S. Department of Agriculture or any successor agency or administration." - - Section 6.5.2 (pp.21-25). The reference to "Open Access Transmission Tariff" is hereby changed to "Tariff," the references to "Lease" are hereby changed to "Lease and Operating Agreement" and the reference to "Transmission Service Agreement" is hereby changed to "Service Agreement." - - Section 6.5.3 (p.25). The reference to "FPA" is hereby changed to "Federal Power Act." - - Section 7.1 (p.26). The reference to "Transmission Provider" is hereby changed to "Transmission Provider (as defined in FERC's Order No. 888)" and the reference "WKEC and Station Two Subsidiary" is hereby changed to "LEM." - - Section 8.1.1.1 (p.27). The reference to "Transmission system" is hereby changed to "Transmission System." - - Section 8.1.1.9 (p.28). The reference to "Transmission Facilities" is hereby made lower case. - - Section 8.1.2.8 (p.30). The reference to "control area" is hereby capitalized. - - Section 9.1 (p.33). The reference to "Firm Transmission Service" is hereby changed to "Firm Point-to-Point Transmission Service." - - Section 9.3 (pp.34-35). The references to "Lease Agreement" and "Lease" are hereby changed to "Lease and Operating Agreement," the reference to "Green River Electric Corporation" is hereby changed to "Green River Electric," and the reference to -23- Privileged and Confidential EXECUTION ORIGINAL "Henderson Union Electric Cooperative Corporation" is hereby changed to "Henderson Union." - - Section 9.4 (p.35). The reference to "Kentucky Utilities" is hereby changed to "Kentucky Utilities Company" and the reference to "tariff" is hereby capitalized. - - Section 9.6 (p.36). The reference to "Transmission Providers" is hereby changed to "Transmission Providers (as defined in FERC's Order No. 888)." - - Section 10 (p.37). The references to "Non-Firm Transmission Credit" are hereby changed to "Non-Firm Transmission Use Credit." - - Section 11.1 (p.39). The reference to "Power Contract" is hereby changed to "Power Purchase Agreement" and, in the reference to "Control Area Operator," "Operator" is hereby made lower case. - - Section 16.3 (pp.49-51). The references to "power" and "energy" are hereby capitalized, the references to "Lease" are hereby changed to "Lease and Operating Agreement," and the references to "transmission service" and "transmission system" are hereby capitalized. - - Section 18.4 (p.54). The reference to "Firm Transmission Services Agreements" is hereby changed to "Service Agreements for Firm Point-to-Point Transmission Service." - - Exhibit 5. The reference to "26 rural delivery points" under Green River Electric is hereby changed to "27 rural electric points." - - Exhibit 5. The reference to "Southwire #1 13,800 volts" under Green River Electric is hereby deleted. - - Exhibit 5. The reference to "Southwire #2 13,800 volts" under Green River Electric is hereby deleted. - - Exhibit 5. An additional delivery point for Green River Electric is hereby added as follows: "ACMI 13,800 volts." - - Exhibit 5. The reference to "Costain East Portal" under Henderson Union Electric is hereby changed to "Lodestar Energy." - - Exhibit 5. The reference to "Green Coal" under Henderson Union Electric is hereby changed to "C.R. Mining." - - Exhibit 5. The reference to "Peabody Breck" under Henderson Union Electric is hereby changed to "Peabody Breckenridge." - - Exhibit 5. The reference to "Providence Mine" under Henderson Union Electric is hereby changed to "Victory Processing." - - Exhibit 5. The reference to "Sextet Dorea Mine 69,000 volts" under Henderson Union Electric is hereby deleted. - - Exhibit 5. An additional delivery point for Henderson Union Electric is hereby added as follows: "Dotiki #3 12,470 volts." 7. TAX INDEMNIFICATION AGREEMENT. The Parties hereby agree to amend Exhibit F to the New Participation Agreement (Tax Indemnification Agreement) as follows: - - Recital A (p.1). The reference to "Participation Agreement" is hereby changed to "New Participation Agreement." -24- Privileged and Confidential EXECUTION ORIGINAL - - Recitals B and C (p.1). The references to "LPM" are hereby changed to "LEM." - - Section 2 (p.4). The reference to "December 31, 1997" is hereby changed to "December 31, 1998," and the reference to "member" is hereby capitalized. - - Section 6(c) (p.6). The reference to "Section 7" is hereby changed to "Article 7." - - Section 8(a) (p.7). The reference to "Section 7" is hereby changed to "Article 7." - - Section 9(b) (p.8). The reference to "Operative Agreements" is hereby changed to "Operative Documents." - - Section 11(b) (p.10). After the reference to "(July 7, 1985)," the phrase "("ABA Opinion 352")" is hereby added. - - Section 11(f) (p.11). The phrase "but without giving effect to the conflict of law rules of such jurisdiction" is hereby added to the end of the sentence. 8. MORTGAGE AND SECURITY AGREEMENT. The Parties hereby agree to amend Exhibit G to the New Participation Agreement (Mortgage and Security Agreement) as follows: - - The reference to "Participation Agreement" on the fourth line of page 2 is hereby changed to "New Participation Agreement." - - Section 6 (p.3). The following clause is added within the parenthetical at the end of subpart (a) of Section 6, following the text contained in that parenthetical: "and which are stipulated to be Permitted Liens"; and the following parenthetical is hereby added at the end of subpart (b) of Section 6: "(which is also stipulated to be a Permitted Lien)." 9. STATION TWO AGREEMENT. The Parties hereby agree to amend Exhibit M to the New Participation Agreement (Station Two Agreement) as follows: - - Section 3.5(d) (p.10). Section 3.5(d) is hereby deleted and replaced with the following new section: "(d) A Certificate of an authorized officer of Station Two Subsidiary certifying that, as of the effective date of the Station Two Agreement, Station Two Subsidiary is an "affiliate" of a utility subject to regulation by the KPSC in compliance with KRS Section 96.520." - - Section 8.7 (p.32). The phrase "keep up-to-date books and records" is hereby changed to "keep, or cause to be kept, up-to-date books and records." The phrase "retain those books and records" is hereby changed to "retain, or cause to be retained, those books and records." - - Section 8.14(c) (p.50). The phrase "administer, all of Big Rivers' fuel and reagent supply agreements" is hereby changed to "administer, or cause to be administered, all of Big Rivers' fuel and reagent supply agreements." The phrase "procure and initially pay for all fuel and reagents" is hereby changed to "procure, or cause to be procured, and initially pay for all fuel and reagents." - - Section 8.17(a) (p.56). The first sentence of Section 8.17(a) is hereby amended to be and read in its entirety as follows: -25- Privileged and Confidential EXECUTION ORIGINAL For purposes of this Agreement (including without limitation, Section 9 of this Agreement, entitled "Phase II Assignments") as between Big Rivers and Station Two Subsidiary, "Station Two Improvements" shall mean any betterments, renewals, replacements or additions to the Station Two Assets used in the operation of Station Two and/or the Reid Station (but only if not otherwise accounted for under the Cost Sharing Agreement or the Lease, as applicable), (i) that are made pursuant to the Operating Budget, or an approved modification thereof, or a deviation therefrom as permitted by Section 8.17(f) or Section 9.10(d), as applicable, or that result from an Operating Emergency as contemplated in those Sections, or that are required to be made under the Station Two Contracts in the absence of an approved Operating Budget, and (ii) that should ordinarily be capitalized in accordance with the RUS Uniform System of Accounts Bulletin 1767 B, as such bulletin may be amended, modified, or replaced from time to time (but subject to the Capitalization Guidelines). - - The reference on the last line of Section 8.17(a) to "Article 17" is hereby changed to "Article 7." - - Section 8.17(d) (p.59). The phrase "On the first day of each month during the Phase I Subcontract Term Station Two Subsidiary and Big Rivers shall each deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e) below) (i)" is hereby changed to "On the first day of each month during the Phase I Subcontract Term Station Two Subsidiary and Big Rivers shall each deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e) below) but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Henderson Non-Incremental Capital Costs that are not for Henderson Major Capital Repairs (as defined in the Participation Agreement) (i)". - - Section 8.17(f). Section 8.17(f) is hereby amended to be and read in its entirety as follows: (f) Station Two Subsidiary and Big Rivers agree with each other as follows: Station Two Subsidiary shall immediately notify the Operating Committee of any anticipated departure of [REDACTED]% or more from the budget for Station Two Improvements or for operating and maintenance expenses included in any approved Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a) operate within [REDACTED] percent to [REDACTED] percent of the total approved budget for Station Two Improvements included in an Operating Budget, and (b) to spend at least [REDACTED] percent of the total approved budget for operating and maintenance expenses included in an Operating Budget (not including the fuel or 26 Privileged and Confidential EXECUTION ORIGINAL reagent budget). Subject to the provisions set forth below, any increase of [REDACTED] percent or more proposed by Station Two Subsidiary to either the Station Two Improvements budget or the operating and maintenance expense budget set forth in an approved Operating Budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the operating and maintenance expense budgets that are included in an Operating Budget that is a part of the Initial Period Budgets, it being understood that increases of [REDACTED] percent or more proposed by Station Two Subsidiary to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless they constitute Henderson Incremental Environmental O&M required to be borne by both Station Two Subsidiary and Big Rivers in the manner provided for in Section 8.16. If Station Two Subsidiary exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive of such costs as are for Henderson Major Capital Repairs) that are included in an approved budget for Station Two Improvements in an Operating Budget, the additional cost of those Henderson Non- Incremental Capital Costs that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the parties agree otherwise, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Operating Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if Station Two Subsidiary exceeds [REDACTED] percent of the total approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Major Capital Repairs, in either case that are included in an approved Operating Budget, the additional costs of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement (and contemplated in Section 13.5(e) of this Agreement) determines that at the time Station Two Subsidiary proposed the applicable portions of the Operating Budget (or modification thereof) relating to those expenditures Station Two Subsidiary acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e) of this Agreement. Notwithstanding the provisions -27- Privileged and Confidential EXECUTION ORIGINAL of the immediately preceding sentence, if Station Two Subsidiary exceeds [REDACTED] percent of the total of any approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Major Capital Repairs, that are included in an Operating Budget that is a part of the Initial Period Budgets, the additional cost of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure set forth in Article 15 of the Participation Agreement determines that the purchase and installation of those Station Two Improvements, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or Station Two Subsidiary's actions in connection with the same, were consistent with Prudent Utility Practice at the time that the budget was prepared, in which case the additional costs that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e) of this Agreement. If Station Two Subsidiary fails or refuses to use reasonable efforts to spend at least [REDACTED] percent of the total budget for Station Two Improvements or for operating and maintenance expenses included in an approved Operating Budget (excluding that portion relating to Henderson Incremental Environment O&M), and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal was inconsistent with Prudent Utility Practice, Station Two Subsidiary shall make the omitted expenditures as required pursuant to the applicable dispute resolution procedure. Notwithstanding anything contained in this Section 8.17(f) to the contrary, Station Two Subsidiary shall in no event be required to expend the monies included in an approved Operating Budget where to do so would cause Station Two Subsidiary to be in breach or default under any Station Two Contract. Additional capital expenditures incurred by Station Two Subsidiary in response to an Operating Emergency (as defined in the Participation Agreement) which are not already included in an approved Operating Budget, and which are allocated to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be paid for by Station Two Subsidiary unless (a) the same represents a Henderson Incremental Capital Cost or expenditures for a Henderson Major Capital Repair (as defined in the Participation Agreement), in which case such expenditures shall be paid by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e), or (b) there are remaining amounts in the Big Rivers Contribution for that Year that were not included in the budget for -28- Privileged and Confidential EXECUTION ORIGINAL Henderson Non-Incremental Capital Costs in the approved Operating Budget, as contemplated in Section 20.6.2 of the Participation Agreement, in which case that remaining amount will be allocated to any Henderson Non-Incremental Capital Costs in that Year resulting from that Operating Emergency as contemplated in Section 20.6.2. - - Section 8.18 (p.62). The reference to "Section 6.3(a) of the Station Two Operating Agreement is hereby changed to "Section 6.3(a) of the Station Two Power Sales Agreement." - - Section 9.3 (p.65). The reference to "LG&E" is hereby changed to "Station Two Subsidiary." - - Section 9.10(c) (p.86). In the third sentence, the phrase "On the first day of each month during the Phase II Assignment Term Station Two Subsidiary and Big Rivers shall each directly deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e)), as then applicable, (i)" is hereby changed to "On the first day of each month during the Phase II Assignment Term Station Two Subsidiary and Big Rivers shall each deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e)), as then applicable, but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Henderson Non-Incremental Capital Costs that are not for Henderson Major Capital Repairs (as defined in the Participation Agreement) (i)". - - Section 9.10(d). Section 9.10(d) is hereby amended to be and read in its entirety as follows: (d) Station Two Subsidiary and Big Rivers agree with each other as follows: Station Two Subsidiary shall immediately notify the Operating Committee of any anticipated departure of [REDACTED]% or more from the budget for Station Two Improvements or for operating and maintenance expenses included in any approved Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a) operate within [REDACTED] percent to [REDACTED] percent of the total approved budget for Station Two Improvements included in an Operating Budget, and (b) to spend at least [REDACTED] percent of the total approved budget for operating and maintenance expenses included in an Operating Budget (not including the fuel or reagent budget). Subject to the provisions set forth below, any increase of [REDACTED] percent or more proposed by Station Two Subsidiary to either the Station Two Improvements budget or the operating and maintenance expense budget set forth in an approved Operating Budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the operating and maintenance expense budgets that are included in an Operating Budget that is a part of the Initial Period Budgets, it being understood that -29- Privileged and Confidential EXECUTION ORIGINAL increases of [REDACTED] percent or more proposed by Station Two Subsidiary to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless they constitute Henderson Incremental Environmental O&M required to be borne by both Station Two Subsidiary and Big Rivers in the manner provided for in Section 9.9. If Station Two Subsidiary exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive of such costs as are for Henderson Major Capital Repairs (as defined in the Participation Agreement) that are included in an approved budget for Station Two Improvements in an Operating Budget, the additional cost of those Henderson Non-Incremental Capital Costs that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the parties agree otherwise, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Operating Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if Station Two Subsidiary exceeds [REDACTED] percent of the total approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Henderson Major Capital Repairs, in either case that are included in an approved Operating Budget, the additional costs of those Station Two Improvements that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement (and contemplated in Section 13.5(e) of this Agreement) determines that at the time Station Two Subsidiary proposed the applicable portions of the Operating Budget (or modification thereof) relating to those expenditures Station Two Subsidiary acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of this Agreement. Notwithstanding the provisions of the immediately preceding sentence, if Station Two Subsidiary exceeds 110 percent of the total of any approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Henderson Major Capital Repairs, that are included in an Operating Budget that is a part of the Initial Period Budgets, the additional cost of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station -30- Privileged and Confidential EXECUTION ORIGINAL Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure set forth in Article 15 of the Participation Agreement determines that the purchase and installation of those Station Two Improvements, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or Station Two Subsidiary's actions in connection with the same, were consistent with Prudent Utility Practice at the time that the budget was prepared, in which case the additional costs that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of this Agreement. If Station Two Subsidiary fails or refuses to use reasonable efforts to spend at least [REDACTED] percent of the total budget for Station Two Improvements or for operating and maintenance expenses included in an approved Operating Budget (excluding that portion relating to Henderson Incremental Environmental O&M), and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal was inconsistent with Prudent Utility Practice, Station Two Subsidiary shall make the omitted expenditures as required pursuant to the applicable dispute resolution procedure. Notwithstanding anything contained in this Section 9.10(d) to the contrary, Station Two Subsidiary shall in no event be required to expend the monies included in an approved Operating Budget where to do so would cause Station Two Subsidiary to be in breach or default under any Station Two Contract. Additional capital expenditures incurred by Station Two Subsidiary in response to an Operating Emergency (as defined in the Participation Agreement) which are not already included in an approved Operating Budget, and which are allocated to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be paid for by Station Two Subsidiary unless (a) the same represents a Henderson Incremental Capital Cost or expenditures for a Henderson Major Capital Repair, in which case such expenditures shall be paid by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c), or (b) there are remaining amounts in the Big Rivers Contribution for that Year that were not included in the budget for Henderson Non-Incremental Capital Costs in the approved Operating Budget, as contemplated in Section 20.6.2 of the Participation Agreement, in which case that remaining amount will be allocated to any Henderson Non-Incremental Capital Costs in that Year resulting from that Operating Emergency as contemplated in Section 20.6.2. - - Section 10.9 (p.120). The first reference to "Station Two Subsidiary" is hereby changed to "Station Two Subsidiary or its Affiliates." -31- Privileged and Confidential EXECUTION ORIGINAL - - Section 10.19(c)(3) (p.141). The first reference to "Station Two Subsidiary" is hereby changed to "Station Two Subsidiary and its agents, authorized representatives or employees." - - Section 11.1(a) (p.157). In the phrase "Pre-closing Development Agreements," "closing" is hereby capitalized. - - Section 16.2 (p.229). The reference to "uncontrollable force" is hereby capitalized. - - Section 17 (p.229). The reference to "section 17" is hereby capitalized. 10. ADDITIONAL DEFINITIONS TO STATION TWO AGREEMENT. The Parties agree to amend Exhibit B to the Station Two Agreement (Additional Definitions to Station Two Agreement) as follows: - - Section 7 (Bankruptcy Code) is hereby moved to precede Section 6 (Bankruptcy Court) and those sections are hereby renumbered accordingly. - - Section 6 (p.2). The reference to "Western District of Kentucky" is hereby changed to "Western District of Kentucky, Owensboro Division." - - Section 27 (Facilities) is hereby moved to precede Section 26 (Facilities Operating Agreement) and those sections are hereby renumbered accordingly. - - Section 32 (p.5). The reference to "Amended and Restated Guarantee Agreement" is hereby changed to "New Guarantee Agreement." - - Section 33 (p.5). Section 33 is hereby amended to be and read in its entirety as follows: "'GUARANTY' shall mean the Guarantee Agreement (Station Two Obligations) executed by LEC on the Execution Date for the benefit of Henderson, pursuant to which LEC guarantees the obligations of the LG&E Companies pursuant to the Station Two Agreement, as well as their obligations pursuant to the Systems Reserves Agreement and the G&A Allocation Agreement to be entered into in connection therewith." - - Section 53 (p.7). The phrase "of this Agreement" is hereby deleted. - - Section 54 (p.7). The phrase "of this Agreement" is hereby deleted. - - Section 56 (p.7). The reference to "Kentucky Public Service Commission" is hereby changed to "KPSC." - - Section 59 (p.8). The phrase "of this Agreement" is hereby deleted. - - Section 60 (p.8). The phrase "of this Agreement" is hereby deleted. - - Section 63 (p.8). The reference therein to "subordination, Non-Disturbance, Attornment and Inter-Creditor Agreement" is hereby changed to "Subordination, Non-Disturbance, Attornment and Inter-Creditor Agreements." - - Section 65 (p.8). The reference to "Section 8.16" is hereby changed to "Section 8.15." - - Section 74 (p.9). The phrase "PERMITTED LIEN" shall mean the liens granted by Big Rivers in favor of the RUS and the LC Issuer securing all indebtedness outstanding on the Effective Date to the RUS and the LC Issuer, provided that RUS has executed a Non-Disturbance Agreement with the LG&E Parties and WKEC, and including any lien of the RUS shared by an LC Issuer, provided the LC Issuer has also executed a Non-Disturbance Agreement with the LG&E Parties and KEC, and any of the following additional liens:" is hereby changed to "PERMITTED LIEN" shall mean the liens granted by Big Rivers in favor of the -32- Privileged and Confidential EXECUTION ORIGINAL RUS, the LC Issuer and the [Bank] provided that the RUS, the LC Issuer and/or the [Bank], in each case, has executed a Non-Disturbance Agreement with the LG&E Parties, and any of the following additional liens:" - - Section 94 (Tax or Taxes) is hereby moved to precede Section 93 (Tax Indemnification Agreement) and those sections are hereby renumbered accordingly. - - Section 96 (p.13) Each reference to "Transmission Services and Interconnection Agreement" is hereby changed to "Transmission Service and Interconnection Agreement." - - Section 100 (p.13). The phrase "of this Agreement" is hereby deleted. 11. G&A ALLOCATION AGREEMENT. The Parties hereby agree to amend Exhibit C to the Station Two Agreement (G&A Allocation Agreement) as follows: - - Section 4.3(d) (p.6). The reference to "each administrative building occupied by personnel of Station Two Subsidiary (or its successor in interest) in a Station Two Subsidiary Support Position" is hereby changed to "each administrative building located in Henderson County, Kentucky occupied by personnel of Station Two Subsidiary or its Affiliates (or their successors in interest) in a Station Two Subsidiary Support Position." - - Section 5.2(a) (p.7). The reference to "Section 4.2" is hereby changed to "Section 4.1." 12. OPERATING RESERVES AGREEMENT. The Parties hereby agree to amend the "A greement with Respect to Operating Reserves and Amendment No. 1 to Systems Re serves Agreement" as follows: - - Section J(a) (p.3). The amount "$[REDACTED] per KW" is hereby changed to "$[REDACTED] per KW." - - Section J(b) (p.4). The amount "$[REDACTED] per KW" is hereby changed to "$[REDACTED] per KW." 13. SETTLEMENT MORTGAGE. The Parties hereby agree to amend Exhibit N to the New Participation Agreement (Settlement Mortgage) as follows: - - The reference to "Participation Agreement" in the second sentence of the second full paragraph on page 1 is hereby changed to "New Participation Agreement." 14. EXHIBIT X. The Parties hereby agree to amend Exhibit X to the New Participation Agreement (Definitions) as follows: - - New Section (p. 1). A new section is hereby added between Section 4 (Alcan) and Section 5 (Ancillary Services) which reads: "AMENDED AND RESTATED GUARANTEE AGREEMENT. `AMENDED AND RESTATED GUARANTEE AGREEMENT' shall mean the Guaranty dated March 18, 1998, and made by LEC in favor of Big Rivers." - - Section 5 (p.1). The reference to "Open Access Transmission Service Tariff" is hereby changed to "Open Access Transmission Tariff." - - New Section (p.7). A new Section is hereby added between Section 59 (Hazardous Substances) and Section 60 (Henderson Union) which reads: "HENDERSON MAJOR CAPITAL -33- Privileged and Confidential EXECUTION ORIGINAL REPAIRS. `HENDERSON MAJOR CAPITAL REPAIRS' shall mean Major Capital Repairs conducted at or with respect to Station Two." - - New Section (p.10). A new Section is hereby added between Section 93 (Major Capital Improvement) and Section 94 (Management Fee) which reads: "MAJOR CAPITAL REPAIRS. `MAJOR CAPITAL REPAIRS' shall be as defined by the Parties and set forth in a written document prior to the Closing. - - Section 11 (Assets) is hereby moved to precede Section 10 (Assets Insurance) and those sections are hereby renumbered accordingly. - - Section 14 (Bankruptcy Code) is hereby moved to precede Section 13 (Bankruptcy Court) and those sections are hereby renumbered accordingly. - - Section 13 (p.2). The reference to "Western District of Kentucky" is hereby changed to "Western District of Kentucky, Owensboro Division." - - Section 23 (p.3) The phrase "prior to April 7, 1998" is hereby changed to "on or prior to May 29, 1998." - - Section 26 (p.3). Section 26 is amended to include after the reference to "Annual Capital Budget" therein the following: ", an approved modification thereof, or a deviation therefrom as permitted by Section 6.5 of the Facilities Operating Agreement, Section 7.5 of the Lease, or Section 8.17(f) or 9.10(d) of the Station Two Agreement (as applicable), or that result from an Operating Emergency as contemplated in Section 6.6 of the Facilities Operating Agreement and Section 7.6 of the Lease." - - Section 27 (p.3). In the reference to "Capitalization guidelines," "capitalization" is hereby made lower case. - - Section 58 (p.6). The phrase "Amended and Restated Guarantee Agreement" is hereby changed to "New Guarantee Agreement." - - Section 86 (p.9). The phrase "prior to April 7, 1998" is hereby changed to "on or prior to May 29, 1998." - - Section 87 (p.9). The phrase "prior to April 7, 1998" is hereby changed to "on or prior to May 29, 1998." - - Section 95 (p.10). The phrase "of this Agreement" is hereby deleted. - - Section 96 (p.10). The phrase "of this Agreement" is hereby deleted. - - Section 98 (p.10). The reference to "Kentucky Public Service Commission" is hereby changed to "KPSC." - - Section 102 (p.11). The reference to "Kentucky Public Service Commission" is hereby changed to "KPSC." - - Section 103 (p.11). The phrase "of this Agreement" is hereby deleted. - - Section 104 (p.11). The phrase "of this Agreement" is hereby deleted. - - Section 106 (Minimum Requirement) is hereby moved to precede Section 105 (Minimum Requirement Revision Event) and those sections are renumbered accordingly. - - Section 123 (p.13). The reference to "the Guaranty dated" is hereby changed to "the Guarantee Agreement dated" and the following phrase is added to the end of the sentence: ",which was superseded and replaced by the Amended and Restated Guarantee Agreement dated March 18, 1998." -34- Privileged and Confidential EXECUTION ORIGINAL - - Section 128 (Participation Agreement) is hereby amended by adding ", as amended" at the end of the Section. - - Section 128 (Participation Agreement) is hereby moved to precede Section 127 (Participation Effective Date) and those sections are renumbered accordingly. - - Section 130 (p.14). The phrase "`PERMITTED LIEN' shall mean the liens granted by Big Rivers in favor of the RUS and the LC Issuer securing all indebtedness outstanding on the Effective Date to the RUS and the LC Issuer, provided that RUS has executed a Non-Disturbance Agreement with the LG&E Parties, and including any lien of the RUS shared by an LC Issuer, provided the LC Issuer has also executed a Non-Disturbance Agreement with the LG&E Parties, and any of the following additional liens:" is hereby changed to "`PERMITTED LIEN' shall mean the liens granted by Big Rivers in favor of the RUS, the LC Issuer and the [Bank], in each case, provided that the RUS, the LC Issuer and/or the [Bank] has executed a Non-Disturbance Agreement with the LG&E Parties, and any of the following additional liens:" - - Section 158 (SO2 Allowances) is hereby moved to precede Section 166 (Southwire) and Sections 159 through 165 are hereby renumbered accordingly. - - Section 164 (p.18). The phrase "on or prior to April 7, 1998" is hereby changed to "on or prior to May 29, 1998." - - Section 167 (p.19). The reference to "the City of Henderson's" is hereby changed to "HMP&L's." - - Section 175 (Tax or Taxes) is hereby moved to precede Section 173 (Tax Return or Return) and Section 174 (Tax Indemnification Agreement) and those sections are hereby renumbered accordingly. - - Section 180 (p.20) Each reference to "Transmission Services and Interconnection Agreement" is hereby changed to "Transmission Service and Interconnection Agreement." - - Section 186 (p.21). The reference to "Henderson" is hereby changed to "HMP&L." - - Section 189 (p.21). The phrase "of this Agreement" is hereby deleted. 15. NON-DISTURBANCE AGREEMENT. The parties hereby agree to amend the Non-Disturbance Agreement as follows: - - Section 1.5(c)(i) (p. 5). The phrase "excluding any sums owed in respect of Enhancements or Major Capital Improvements if any amounts are paid to the LG&E Parties under Section 1.5(b)" is hereby added at the end of the Section, immediately following the term "New Participation Agreement." 16. NEW GUARANTEE AGREEMENT. The parties agree to amend the New Guarantee Agreement as follows: - - Second paragraph of the preamble, third sentence (p. 1). The phrase "as amended" is hereby added after "LG&E Affiliates." - - Second paragraph of the preamble, last sentence (p.1). The phrase "as amended," preceded -35- Privileged and Confidential EXECUTION ORIGINAL by a comma, is hereby added after "June 9, 1997" and before the period. 17. CAPITALIZATION GUIDELINES. The parties agree to amend the Capitalization Guidelines attached to the New Participation Agreement as Exhibit P as follows: - - To delete therefrom in its entirety Section 1.a., which reads "a. The Big Rivers 20,000- item Continuing Property Record (CPR) file." - - To renumber the remaining subsections of Section 1 as a., b. and c. - - To change the reference in Section 1.d. from "a, b or c, above" to "a or b, above." -36- Except as expressly provided herein, the provisions of the New Participation Agreement shall remain in full force and effect from and after the execution hereof to the same extent as prior to such execution. IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed as of the day and year first written above. BIG RIVERS ELECTRIC CORPORATION By: /S/ MICHAEL H. CORE --------------------------- Printed Name: Michael H. Core Title: President/CEO WESTERN KENTUCKY ENERGY CORP. By: /S/ GEORGE BASINGER --------------------------- Printed Name: George W. Basinger Title: President LG&E ENERGY MARKETING INC. By: /S/ JOHN R. McCALL --------------------------- Printed Name: John R. McCall Title: Secretary WESTERN KENTUCKY LEASING CORP. By: /S/ GEORGE BASINGER --------------------------- Printed Name: George W. Basinger Title: President WKE STATION TWO INC. By: /S/ GEORGE BASINGER --------------------------- Printed Name: George W. Basinger Title: President - -------------- [* All Exhibits and Schedules REDACTED.] EX-10.86 14 EXHIBIT 10.86 [* REDACTED=Omitted pursuant to confidential treatment request. Material filed separately with SEC.] EXHIBIT 10.86 THIRD AMENDMENT TO NEW PARTICIPATION AGREEMENT THIS THIRD AMENDMENT TO THE NEW PARTICIPATION AGREEMENT ("Amendment") dated this 15th day of July, 1998, is among BIG RIVERS ELECTRIC CORPORATION, a Kentucky rural electric cooperative ("Big Rivers"), LG&E ENERGY MARKETING INC., an Oklahoma corporation ("LEM"), WKE STATION TWO INC., a Kentucky corporation ("Station Two Subsidiary"), and WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC"), for itself and as successor by merger to Western Kentucky Leasing Corp., a Kentucky corporation ("Leaseco") (hereinafter, LEM, Station Two Subsidiary and WKEC are collectively referred to as the "LG&E Parties" and together with Big Rivers, the "Parties"). LG&E ENERGY CORP., a Kentucky corporation ("LEC"), is made a party to this Amendment for the sole limited purpose of making the acknowledgment and agreement provided for in Section 21. RECITALS WHEREAS, the Parties, together with Leaseco, are signatories to the New Participation Agreement dated April 6, 1998, as amended by that certain Letter Agreement dated April 6, 1998 and by the Second Amendment to New Participation Agreement dated June 15, 1998 (collectively, the "New Participation Agreement"). WHEREAS, prior to the execution and delivery of this Amendment Leaseco was merged with and into WKEC, the parent company of Leaseco, in accordance with the General Corporation Laws of the Commonwealth of Kentucky, and WKEC was the surviving corporation in that merger and succeeded to all of the rights and obligations of Leaseco, including without limitation, those under the New Participation Agreement. WHEREAS, the Parties wish to further amend the New Participation Agreement in certain respects, as well as to set forth their agreements in respect of certain matters related to or contemplated in the New Participation Agreement, upon and subject to the terms and conditions set forth in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants set forth in this Amendment, the Parties agree as follows: 1. DEFINITIONS. Capitalized terms used but not defined in this Amendment shall have their same respective meanings as in the New Participation Agreement (including without limitation, Exhibit X attached thereto). 2. PHASE II CLOSING. The LG&E Parties have informed Big Rivers that they believe that, prior to the date hereof, the LG&E Parties received all applicable approvals from the FERC that were required from that commission for the Phase II Effective Date and the consummation by the LG&E Parties of the transactions contemplated in the Phase II Agreements. At the Closing, as a condition precedent thereto, the LG&E Parties will certify to Big Rivers as to their receipt of those FERC approvals pursuant to the Certificate to be delivered in accordance with Section 4.4.11 of the New Participation Agreement. In light of the LG&E Parties' belief, and assuming delivery of the foregoing Certificate, the Parties agree to proceed to consummate the transactions contemplated in the Phase II Agreements as of the Effective Date (upon the satisfaction of the other conditions precedent to the Phase II Effective Date), rather than the transactions contemplated in the Phase I Agreements. 3. MARKETING PAYMENT. Assuming the Closing occurs on July 15, 1998 as proposed, the Parties agree that the Marketing Payment to be paid by Big Rivers to LEM as contemplated in Section 4.3.9 of the New Participation Agreement shall equal $[REDACTED]. In the event the Closing does not occur on July 15, 1998, the Marketing Payment will be recalculated as contemplated in the Interim Wholesale Marketing Assistance Agreement dated June 18, 1997, as amended. 4. RENTAL PAYMENTS. The Parties agree that, by reason of the adjustment contemplated in Section 9.3 of the New Participation Agreement: (a) the Initial Rental Payment to be paid to Big Rivers on the Effective Date as contemplated in Section 4.4.5 of the New Participation Agreement shall be reduced to $[REDACTED]; (b) the annual rental payments to be paid to Big Rivers pursuant to Section 2.3.2 of the Lease (subject to further adjustment as contemplated in that Section) shall be reduced to $[REDACTED]; and (c) the equal monthly installments to be paid to Big Rivers pursuant to Section 2.3.2 of the Lease (subject to further adjustment as contemplated in that Section) shall be reduced to $[REDACTED]. 5. INVENTORY QUANTIFICATION AND VALUATION. The Parties agree that attached hereto as EXHIBIT A is Schedule 9.1 to the New Participation Agreement. The Parties further agree that, based upon the quantification and valuation procedures set forth in Schedule 9.1, the aggregate purchase price to be paid by WKEC (or its successors or permitted assigns) and Station Two Subsidiary, collectively, to Big Rivers on the Effective Date for the Inventory and the Station Two Inventory, pursuant to Section 9.1 of the New Participation Agreement and Section 10.33 of the Station Two Agreement, shall be as follows:
a. Coal Inventory: $[REDACTED] b. Fuel Oil Inventory: $[REDACTED] c. DBA (Reagent) Inventory: $[REDACTED] d. Reagent (Lime/Limestone) Inventory: $[REDACTED] e. Propane Inventory: $[REDACTED] f. SO2 Allowances Inventory: $[REDACTED] g. Spare Parts, Materials and Supplies Inventory: $[REDACTED] Total Purchase Price $[REDACTED]
2 6. PERSONAL PROPERTY. Notwithstanding the provisions of Section 9.3 of the New Participation Agreement or Section 10.35 of the Station Two Agreement that may require Leaseco and Station Two Subsidiary to pay Big Rivers on the Effective Date a "PP Price" or "Station Two PP Price" equal to the "net book value" of the Personal Property and Station Two Personal Property, the Parties agree that all such Personal Property and Station Two Personal Property shall be sold by Big Rivers and purchased by WKEC and Station Two Subsidiary, collectively, on the Effective Date for an aggregate purchase price payable to Big Rivers of $[REDACTED]. As used in the Operative Documents, the "PP Price" and the "Station Two PP Price" shall be deemed to mean the respective portions of the aggregate purchase price amount described above, which portions shall collectively equal that aggregate purchase price. The Parties further agree that the Personal Property and Station Two Personal Property to be sold by Big Rivers to WKEC and Station Two Subsidiary on the Effective Date shall include, without limitation, the items of Personal Property identified on EXHIBIT B attached hereto. The LG&E Parties acknowledge that EXHIBIT B includes more than one list of Personal Property, and that individual items of personal property may have been inadvertently included on each such list. In light of this, the LG&E Parties agree that in the event any item of Personal Property is specifically listed on more than one list (as opposed to being multiple items of the same type or version of Personal Property), the LG&E Parties will only be entitled to receive that single item of Personal Property. In addition, the LG&E Parties shall not be entitled to receive any item of Personal Property that has been previously retired or replaced by Big Rivers. 7. EMPLOYEE MATTERS. (a) Section 10.1 of the New Participation Agreement is hereby deleted in its entirety and the following language is substituted in lieu thereof: 10.1 TREATMENT OF EMPLOYEES. In order to permit the LG&E Parties to perform their respective obligations set forth in the Operative Documents, Big Rivers shall permit WKEC or any of its Affiliates to employ such of Big Rivers' Transferred Employees, as WKEC, in its sole discretion, deems necessary in this connection. WKEC or its Affiliates shall promptly notify Big Rivers of any Transferred Employee who, as of 12:01 a.m. on the day immediately following the Effective Date is not offered employment by WKEC or its Affiliates in a position substantially similar to that held with Big Rivers, with compensation not less than substantially equivalent to that provided by Big Rivers to such Transferred Employee and with benefits not less than substantially equivalent to those provided by WKEC to its other employees generally. For purposes of this Section 10, Time of Closing shall have the same meaning as provided in the Closing of Transactions Letter Agreement dated July 17, 1998 between Big Rivers Electric Corporation, Western Kentucky Energy Corp., WKE Station Two Inc. and LG&E Energy Marketing Inc. (b) Section 10.4 of the New Participation Agreement is hereby deleted in its entirety and the following language is substituted in lieu thereof: 3 10.4 BENEFIT CLAIMS. Big Rivers shall retain responsibility for all workers' compensation, health, life insurance, dependent care, and disability benefit claims of Transferred Employees pending as of the Time of Closing, or made after the Time of Closing, but relating to events occurring on or prior to the Time of Closing. Following the Time of Closing, WKEC or its Affiliate (as applicable) shall have responsibility to reimburse Big Rivers for the health claims made pursuant to the Big Rivers medical plan(s) providing coverage to the Transferred Employees within thirty (30) days after receipt by WKEC from Big Rivers of notice of said claims for the sixty-eight (68) individuals identified on the Transferred Employee listing (Schedule 5.1.22) plus the Retained Employees under the Generation Dispatching Services Agreement as currently covered employees or former employees which claims relate to events occurring after the Time of Closing. (c) Section 10.5 of the New Participation Agreement is hereby deleted in its entirety and the following language is substituted in lieu thereof: 10.5 SEVERANCE FOR CERTAIN EMPLOYEES OF BIG RIVERS. As contemplated by Section 1.9 of the Big Rivers Severance Plan as in effect on August 31, 1996, and as subsequently amended and restated on May 27, 1997, as modified by resolution dated July 11, 1997, and further amended on March 13, 1998 (the "Big Rivers Severance Plan"), Big Rivers shall remain liable for any benefits which become payable under such plan, but WKEC shall reimburse Big Rivers for severance benefits paid by Big Rivers pursuant to Section 3.4 and 3.5 of the Big Rivers Severance Plan in accordance with the following: (a) For benefits payable by Big Rivers to Transferred Employees who terminate employment on the Time of Closing, WKEC or its Affiliate (as applicable) shall reimburse Big Rivers within seven (7) business days after the Time of Closing, for such severance benefits payable pursuant to Sections 3.4 and 3.5(a) and (b) of the Big Rivers Severance Plan. (b) Within sixty (60) days following the Time of Closing, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for the severance benefits payable pursuant to Sections 3.4 and 3.5 (a) and (b) of the Big Rivers Severance Plan by Big Rivers to Transferred Employees whose employment with Big Rivers terminated as part of a workforce reduction between September 1, 1996 and the Time of Closing. (c) Within thirty (30) days after receipt by WKEC from Big Rivers of notice, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for the severance benefits payable pursuant to Sections 3.4 and 3.5 (a) and (b) of the Big Rivers Severance Plan by Big Rivers to Transferred Employees whose employment with WKEC or its Affiliate (as applicable) terminated after the Time of Closing under conditions that require Big Rivers to provide such severance benefits. 4 (d) Within sixty (60) days following the Time of Closing, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for one-half of the cost of outplacement assistance provided by Big Rivers to any employee whose employment terminated with Big Rivers as part of a workforce reduction from September 1, 1996, through the Time of Closing. (e) Within thirty (30) days after receipt by WKEC from Big Rivers of notice, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for one-half of the cost of outplacement assistance provided by Big Rivers to any employee whose employment terminated after the Time of Closing and on or before the one year anniversary of the Time of Closing. (f) Within sixty (60) days following the Time of Closing, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for the full cost of the $150 retiree medical subsidy paid by Big Rivers to any employee whose employment with Big Rivers terminated on or prior to the Time of Closing. (g) Within thirty (30) days after receipt by WKEC from Big Rivers of notice, WKEC or its Affiliate (as applicable) shall also reimburse Big Rivers for the full cost of the $150 retiree medical subsidy paid by Big Rivers to any employee whose employment terminated after the Time of Closing. The parties acknowledge that all of the information necessary to determine the entire payment obligation contemplated in this Section may not be reasonably available as of the times contemplated therein. In light of this, if within sixty (60) days following the payment it is determined that the actual payment amount due therein is different than such previously paid amounts, then an adjustment payment or reimbursement shall be made by the appropriate party to the other party within ninety (90) days of the payment. (d) Section 10.6 of the New Participation Agreement is hereby amended by striking the phrase "Effective Date" each place it appears therein and inserting in lieu thereof the phrase "Time of Closing". (e) Section 10.7 of the New Participation Agreement is hereby deleted in its entirety and the following language is substituted in lieu thereof: 10.7 CERTAIN BENEFIT OBLIGATIONS. As of the Time of Closing, WKEC shall assume the obligation of Big Rivers to provide to each Transferred Employee employed by WKEC or its Affiliates immediately following the Time of Closing the amount of unused sick leave and vacation time credited to such employee by Big Rivers as of the Time of Closing. Such unused sick leave and vacation shall be provided in accordance with WKEC or its Affiliate's sick leave and vacation policies as in effect from time to time, except that WKEC shall allow nonbargaining Transferred Employees the right to take a cash-out of 5 such unused sick leave in excess of [REDACTED] hours at a rate of [REDACTED] credited as of the Time of Closing. WKEC shall provide medical benefits to the Transferred Employees employed by them or their Affiliates upon their retirement in accordance with the retiree medical plan or program of WKEC or its Affiliates, as the case may be, as in effect at the time of such retirement and such retiree medical benefits provided by WKEC or its Affiliates, as the case may be, shall have an aggregate present value as of the Time of Closing determined in accordance with Financial Accounting Standard ("FAS") 106 that is no less than the present value as of such date of Big Rivers' obligation to provide retiree medical benefits to such Transferred Employees as determined in accordance with FAS 106. The items described in 10.7.1, 10.7.2, 10.7.3 and 10.7.4 below shall be paid by Big Rivers to WKEC in cash as of the Time of Closing. If within sixty (60) days following the Time of Closing it is determined that the actual payment amount due therein is different than such paid amount, then an adjustment payment or reimbursement shall be made by the appropriate party to the other party within ninety (90) days of the Time of Closing. 10.7.1 SICK LEAVE. The following cost of the obligation to provide sick leave to the Transferred Employees employed by WKEC or its Affiliates shall be paid by Big Rivers. Such cost shall be the sum of (i) and (ii) below based on the product resulting from multiplying the number of sick leave hours for each such Transferred Employee as of 12:01 a.m. CST on July 16, 1998, times the employee's hourly pay rate with Big Rivers on that date: (i) the entire resulting product times [REDACTED]%; plus (ii) the portion of the resulting product attributable to accumulations of over [REDACTED] hours of sick leave for such non-bargaining Transferred Employees over the age of 50 on the Closing, times [REDACTED]%. 10.7.2 VACATION. The following cost of the obligation to provide vacation to the Transferred Employees employed by WKEC or its Affiliates shall be paid by Big Rivers. Such cost shall be determined by multiplying the number of vacation hours for each such Transferred Employee as of 12:01 a.m. CST on July 16, 1998, times the employee's hourly pay rate with Big Rivers on that date. 10.7.3 CERTAIN RETIREE MEDICAL BENEFITS. The following cost of the obligation to provide retiree medical benefits to the Transferred Employees employed by WKEC or its Affiliates shall be paid by Big Rivers. Such cost shall be the present value as of 12:01 a.m. CST on July 16, 1998, of Big Rivers' obligation to provide retiree medical benefits to such Transferred Employees under Financial Accounting Standard 106, minus $[REDACTED]. 10.7.4 CERTAIN ADDITIONAL MEDICAL BENEFITS. Additionally, Big Rivers shall pay WKEC the sum of $[REDACTED] in consideration for the benefit reimbursement obligations assumed by WKEC pursuant to Section 10.4 with respect to the Transferred Employees not hired by them or their Affiliates. 6 (f) A new Section 10.8 is added to the New Participation Agreement after Section 10.7 to read as follows: Section 10.8 SCHEDULE 5.1.22. The parties also acknowledge that some of the information contained on Schedule 5.1.22 to the New Participation Agreement may not be reasonably available as of the Closing. In light of this, the parties agree that the information contained on Schedule 5.1.22 shall constitute Big Rivers' good faith effort, based on available information, to provide as of the Closing the information required pursuant to Section 5.1.22. The parties acknowledge that the information required on Schedule 5.1.22 with respect to service credited under the Big Rivers pension plans will not be provided at Closing, but shall be provided within seven (7) working days thereof. If within thirty (30) days following the Closing, it is determined that the information contained on Schedule 5.1.22 or provided thereafter is different from the actual information required to be disclosed thereon, then the information contained on Schedule 5.1.22 shall be revised so that the information contained thereon is the actual information as of the Closing. (g) A new Section 10.9 is added to the New Participation Agreement after new Section 10.8 to read as follows: Section 10.9 REIMBURSEMENT FOR CERTAIN EMPLOYEE CLAIMS AND OR LIABILITIES. WKEC and or its Affiliates shall be responsible for the first $[REDACTED], and [REDACTED] of any amounts in excess of $[REDACTED], of any liability or claim resulting from any events occurring during the period beginning as of 1:00 p.m. CST on July 15, 1998 and ending on the Time of Closing which relate to Employee claims and or liabilities. Within 30 days after receipt by WKEC from Big Rivers of notice, WKEC shall reimburse Big Rivers for amounts payable pursuant to this Section 10.9. 8. INFLATION ESCALATOR. The procedure set forth on EXHIBIT C attached hereto shall constitute the mutually satisfactory procedure by which the Capital Budget Limits and the Big Rivers Contributions will be adjusted during the Term to reflect inflationary increases, as contemplated in Section 20.6.4 of the New Participation Agreement. 9. AMENDMENTS TO SECTION 24.1(f) OF THE NEW PARTICIPATION AGREEMENT. Consistent with Section 20.6 of the New Participation Agreement, and notwithstanding the provisions of Section 24.1(f)(i) or 24.1(f)(ii) of that agreement to the contrary, the Parties agree that in the event WKEC (or its successors or permitted assigns), on the one hand, or Big Rivers, on the other hand, shall fund a portion of a Non-Incremental Capital Cost that is greater than WKEC's or Big Rivers' (as applicable) Capital Asset Sharing Ratio in respect of that cost under Section 8.4 of the Lease, or in the event Station Two Subsidiary (or its successors or permitted assigns), on the one hand, or Big Rivers, on the other hand, shall fund a portion of a Henderson Non-Incremental Capital Cost that is greater than Station Two Subsidiary's or Big Rivers' (as applicable) Station Two Improvements Sharing Ratio in respect of that cost under Section 9.10(c) of the Station Two Agreement, then the portion of the LG&E Parties' Residual Plant Value relating to the Capital Assets and/or Station Two Improvements to which that cost relates, and the portion of the Big 7 Rivers' Depreciated Book Value relating to the Capital Assets and/or Station Two Improvements to which that cost relates, shall each be determined based upon the ratio by which the amount of the costs actually funded by WKEC, Station Two Subsidiary (or their successors or permitted assigns) or Big Rivers (as applicable) for those Capital Assets and/or Station Two Improvements, bears to the total costs incurred for those Capital Assets and/or Station Two Improvements, rather than based upon their respective Capital Asset Sharing Ratio or Station Two Improvement Sharing Ratio (as applicable). 10. INITIAL PERIOD BUDGETS; RETIREMENT UNIT LIST; OTHER BUDGET ISSUES. (a) The Parties agree that the budgets attached hereto as EXHIBITS D-1, D-2 AND D-3 are the approved Annual O&M Budgets for the Initial Budget Period, and that the budgets attached hereto as EXHIBITS E-1, E-2 AND E-3 are the approved Annual Capital Budgets for the Initial Budget Period, each as contemplated in Section I, Item 24 and Section II, Item 21 of Schedule 3.1 attached to the New Participation Agreement. Such Initial Period Budgets shall be attached to the Lease as of the Effective Date as contemplated in Section 7.1 thereof. The Parties further agree that, notwithstanding anything to the contrary contained in the New Participation Agreement, the Lease or any other Operative Document, and except as otherwise provided in this Section 10, no Party shall be entitled to claim or assert, whether during the Initial Budget Period or at any time thereafter, that any of the items or expenditures reflected in the Annual Capital Budgets (including those relating to Capital Assets or Station Two Improvements) or Annual O&M Budgets that are included in the Initial Period Budgets are to be expended, or were expended (a) for operations or maintenance expenses rather than expenditures for Capital Assets or Station Two Improvements as noted in the relevant budget, (b) for Capital Assets or Station Two Improvements rather than for operations or maintenance expenses as noted in the relevant budget, (c) in the case of Big Rivers, for Enhancements or Major Capital Improvements, (d) in the case of Big Rivers, for Capital Assets or Station Two Improvements which Big Rivers otherwise has no obligation to fund or contribute under the Operative Documents, or (e) in the case of the LG&E Parties, for Incremental Environmental O&M rather than other operations or maintenance expenses or Capital Assets or Station Two Improvements, as noted in the relevant budget, it being understood by the Parties that Big Rivers, on the one hand, and WKEC and Station Two Subsidiary (and/or any Affiliate of those LG&E Parties to which their funding obligations may be assigned in compliance with Section 16 of the New Participation Agreement and Section 15 of the Station Two Agreement) on the other hand, shall each fund their respective share of the Annual Capital Budgets (including those relating to Capital Assets or Station Two Improvements) included in the Initial Period Budgets (limited in the case of Big Rivers to the Big Rivers Contribution for the relevant Year or portion thereof in respect of Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs which are not for Major Capital Repairs or Henderson Major Capital Repairs, respectively) without objection, absent their mutual agreement to the contrary. The relevant LG&E Parties agree that any expenditure by them during the Initial Budget Period for an item included in the Initial Period Budgets, in excess of the Big Rivers Contribution and up to the Capital Budget Limit for that Year (or portion thereof), shall be expended by that LG&E Party solely for a Capital Asset or Station Two Improvement. In the event any such item that is included in the Initial Period Budgets, and that is so funded by 8 an LG&E Party in excess of the relevant Big Rivers Contribution, is not for a Capital Asset or Station Two Improvement, then the asset for which expended shall be deemed to be excluded from the Relevant Assets, and such costs shall be excluded from the calculation of the "LG&E Parties' Residual Plant Value", "Big Rivers' Depreciated Book Value", the "Depreciated Book Value of all Enhancements and Major Capital Improvements" and "LT", in each case solely for the purposes of determining the Residual Value Payment (if any) that shall be owing by Big Rivers to the relevant LG&E Party pursuant to Section 24.1 of the New Participation Agreement. The Parties further agree that, in the event the LG&E Parties, individually or collectively, shall fund in any Year (or partial Year) included in the Initial Budget Period any Non-Incremental Capital Costs (which are not for Major Capital Repairs) and/or Henderson Non-Incremental Capital Costs (which are not for Henderson Major Capital Repairs) which, when combined with the total of such costs that have been funded by Big Rivers during that Year (or partial year), would exceed the Capital Budget Limit for that Year (or partial Year) set forth in Section 20.6.2 of the New Participation Agreement (as fixed on the date hereof and subject only to adjustment pursuant to Section 20.6.4 of the New Participation Agreement), then the Capital Assets or Station Two Improvements associated with that portion of the Non-Incremental Capital Costs and/or Henderson Non-Incremental Capital Costs that so exceed the Capital Budget Limit for that Year (or partial Year) shall be deemed to be excluded from the Relevant Assets, and such costs that exceed that Capital Budget Limit for that Year (or partial Year) shall be excluded from the calculation of the "LG&E Parties' Residual Plant Value", "Big Rivers' Depreciated Book Value", the "Depreciated Book Value of all Enhancements and Major Capital Improvements" and "LT", in each case solely for the purpose of determining the Residual Value Payment (if any) that shall be owing by Big Rivers to the relevant LG&E Party. The limitations set forth in the immediately preceding sentence shall not apply to such costs as are incurred by any of the LG&E Parties following the Initial Budget Period. Notwithstanding anything in the New Participation Agreement or any other Operative Document to the contrary (including without limitation, the provisions of this Section 10), the Parties agree that (a) the Initial Period Budgets shall have no precedential effect on any of the rights or obligations of the Parties with respect to any Annual O&M Budget or Annual Capital Budget (including any budgets for Capital Assets or Station Two Improvements) for any period subsequent to the Initial Budget Period or any process for establishing those subsequent budgets, and (b) in all events, the Big Rivers Contribution shall be used solely for expenditures characterized in the Initial Period Budgets as "Capital" in the column entitled "Comments from BREC letter of 6/25", or which otherwise are properly characterized as Capital Assets or Station Two Improvements. (b) The Parties shall each use their commercially reasonable efforts to develop, prior to November 30, 1998, a mutually satisfactory "Retirement Unit Property List" based upon the Capitalization Guidelines that will serve, together with the Capitalization Guidelines, to reflect their agreement with respect to whether a particular item to be funded by the Parties (or any of them) is a Capital Asset or Station Two Improvement, on the one hand, or an operations and maintenance expense, on the other hand. In the event the Parties are unable to agree on such a Retirement Unit Property List within that time period, then the Parties agree to promptly refer the matter to a mutually acceptable, disinterested, national certified public accounting firm, which shall be charged with the task of developing a Retirement Unit Property List that is consistent 9 with the Capitalization Guidelines. The Parties shall each be entitled to submit their own proposed version of the Retirement Unit Property List with that accounting firm, and to thereafter confer with that accounting firm regarding their respective viewpoints regarding the nature and contents of that list; provided, that no Party shall confer or communicate with that accounting firm regarding its engagement or the Retirement Unit Property List to be developed by it unless accompanied by a representative of all other Parties. The costs and expenses associated with the engagement of that accounting firm shall be shared equally by Big Rivers and LEM, and the Retirement Unit Property List that is developed by it shall be final and binding on the Parties throughout the Term; provided, that in the event there shall thereafter be amendments, modifications or supplements made to the RUS Uniform System of Accounts Bulletins or the FERC guidelines described in the Capitalization Guidelines that, in the view of either Party, requires a revision to or replacement of the Retirement Unit Property List in order for it to continue to be substantially consistent with those bulletins and guidelines, such Party shall, upon 30 days prior written notice to the other Parties, be entitled to refer the list once again to that accounting firm (or another firm agreed to by the Parties) for a determination of whether such a revision or replacement list is appropriate under the circumstances. Any such revision or replacement list deemed appropriate by that accounting firm shall thereafter be final and binding on the Parties. Solely for purposes of calculating any Residual Value Payment that may be owing to the LG&E Parties, at such time as a Retirement Unit Property List has been initially developed as contemplated above, any expenditures that have been made by the Parties prior to that time shall be determined to be either a Capital Asset or Station Two Improvement, on the one hand, or an operations and maintenance expense, on the other hand, based on the Capitalization Guidelines as supplemented by that Retirement Unit Property List, notwithstanding any different characterization that may have been previously made by any of the Parties. (c) The LG&E Parties will not seek to recover amounts from Big Rivers on the basis that they are for Major Capital Repairs or Henderson Major Capital Repairs until such time as all LG&E Parties (or such of them as shall be responsible for the same) have collectively expended amounts for Major Capital Repairs and/or Henderson Major Capital Repairs equal to the difference between the Capital Budget Limit for that Year (or portion thereof) (as fixed on the date hereof, and subject only to adjustment pursuant to Section 20.6.4 of the New Participation Agreement) and the amount of the actual Annual Capital Budget (including permitted deviations therefrom) for Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs for that Year. In the event the LG&E Parties collectively incur costs in any Year (or portion thereof) for Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs ("Actual Non-Incremental Expenditures") that are less than the aggregate amounts budgeted for such costs in the Annual Capital Budget (including the budget for Station Two Improvements) for that Year (or portion thereof) ("Budgeted Non-Incremental Expenditures"), then within 90 days after the close of that Year WKEC (or its successor or permitted assign) or Station Two Subsidiary (or its successor or permitted assign) shall pay Big Rivers an amount equal to THE LESSER OF (i) the amount of the Major Capital Repairs that were funded by Big Rivers during that Year (or portion thereof) OR (ii) the amount by which the Actual Non-Incremental Expenditures were less than the Budgeted Non-Incremental Expenditures. 10 11. EXHIBIT X: MAJOR CAPITAL REPAIRS DEFINED. Pursuant to Section 96 (Major Capital Repairs) of Exhibit X attached to the New Participation Agreement, and consistent with the provisions of Section 20.6 of the New Participation Agreement, Article 8 of the Lease and Section 9.10 of the Station Two Agreement, the Parties hereby agree that the defined term "Major Capital Repairs" as used in the New Participation Agreement and those other Operative Documents shall have the meaning set forth on EXHIBIT F attached hereto. 12. DISCLOSURE SCHEDULES. Attached hereto as EXHIBIT G are amendments, modifications and supplements to the Disclosure Schedules of Big Rivers attached to and contemplated in the New Participation Agreement. Except as set forth in EXHIBIT G, those Disclosure Schedules have not been amended, modified or supplemented since their delivery to the LG&E Parties on April 6, 1998 in connection with the execution and delivery of the New Participation Agreement. The Parties acknowledge and agree that the Disclosure Schedules attached to the New Participation Agreement were dated April 7, 1998 in error, and that the same should have been dated April 6, 1998 (the date on which the New Participation Agreement was executed and delivered). The Disclosure Schedules are hereby amended accordingly. Big Rivers agrees that upon the delivery to the LG&E Parties of the certificate of its authorized officer as contemplated in Section 4.3.6 of the New Participation Agreement, that certificate shall represent, among other things, the acknowledgment and agreement of Big Rivers that each of the authorizations, consents and approvals set forth on Schedule 5.1.3 of the New Participation Agreement and required to proceed with the Phase II Closing have been obtained by Big Rivers or are no longer required as of the Closing. The LG&E Parties agree that upon the delivery to Big Rivers of the certificate of their authorized officers as contemplated in Section 4.4.11 of the New Participation Agreement, that certificate shall represent, among other things, the acknowledgment and agreement of the LG&E Parties that each of the authorizations, consents and approvals set forth on Schedule 6.1.3 of the New Participation Agreement and required to proceed with the Phase II Closing, and each of the notices, acceptances, disclaimers, declarations, orders and waiting periods described on that schedule and required to proceed with the Phase II Closing, have been obtained by the LG&E Parties or are no longer required as of the Closing. 13. OPERATING COMMITTEE REPRESENTATIVES. As contemplated in Section 6.1 of the Lease and Section 8.15(c) of the Station Two Agreement, WKEC, Station Two Subsidiary and Big Rivers hereby designate the following initial representatives and alternates for service on the Operating Committees for the Facilities and Station Two, respectively: (a) THE FACILITIES. REPRESENTATIVES ALTERNATES WKEC: George W. Basinger Robert E. Henriques Bruce D. Hamilton Big Rivers: Mark Hite Travis Housley David Spainhoward 11 (b) STATION TWO. REPRESENTATIVES ALTERNATES Station Two Subsidiary: George W. Basinger Robert E. Henriques Bruce D. Hamilton Big Rivers: Mark Hite Travis Housley David Spainhoward 14. EXHIBITS TO MORTGAGES. Attached hereto as EXHIBITS H-1, H-2 AND H-3 are the following: (a) Exhibits C (Description of Real Property), D (Real Property Leases) and E (Permitted Liens and other Permitted Title Exceptions), respectively, to the form of Mortgage and Security Agreement attached to the New Participation Agreement as Exhibit G; and (b) Exhibits C (Description of Real Property), D (Real Property Leases) and E (Permitted Liens and other Permitted Title Exceptions), respectively, to the form of Settlement Mortgage attached to the New Participation Agreement as Exhibit N. Each of those Exhibits will be attached to the mortgages described above upon their execution and delivery on the Effective Date. 15. AMENDMENTS TO STATION TWO AGREEMENT. The Parties agree that the form of Station Two Agreement attached to the New Participation Agreement as Exhibit M is hereby amended in the manner set forth on the revised pages of that agreement attached hereto as EXHIBIT I, and the Station Two Agreement shall be revised accordingly prior to its execution and delivery on the Effective Date. 16. CLOSING; ACTIONS FOLLOWING THE CLOSING. Notwithstanding anything contained in the New Participation Agreement or the Station Two Agreement to the contrary, the Parties agree that the Closing (and the "Closing" under the Station Two Agreement) shall take place at the offices of Greenebaum Doll & McDonald PLLC, Louisville, Kentucky, at the time and upon the satisfaction of the conditions precedent to the Closing set forth in those agreements. Each Party hereby waives the 10-day waiting period set forth in Section 4.1 of the New Participation Agreement and Section 3.1 of the Station Two Agreement, and each Party agrees that the Closing will occur at one (1) minute past the hour during which the last of the deliveries contemplated in Sections 4.3 and 4.4 of the New Participation Agreement and Sections 3.3, 3.4 and 3.5 of the Station Two Agreement has occurred, on the date on which all conditions set forth in Schedule 3.2 of the New Participation Agreement and Schedule 2.2 of the Station Two Agreement have been satisfied or waived. Notwithstanding anything contained in the New Participation Agreement or in any other Operative Document to the contrary, the Parties agree that the Transferred Employees that will be offered employment by WKEC (or its successors or permitted 12 assigns) as contemplated in Section 10.1 of the New Participation Agreement will, if they elect to accept the same, commence such employment immediately following the Closing, rather than at 12:01 a.m. on the day immediately following the Effective Date. The Parties agree to reasonably cooperate with each other to determine their respective responsibilities for employee salaries, benefit costs and the like based upon the period of the Effective Date before and after the Closing, and each Party agrees to promptly reimburse the other Party(s) to the extent such other Party(s) shall incur any expense associated with those salaries and benefit costs that are not properly allocable to them. The Parties further agree that WKEC's possession, use and occupancy of the Facilities and other Tangible Assets, and Station Two Subsidiary's possession, use and occupancy of Station Two, shall commence immediately following the Closing. 17. TRANSFERRED EMPLOYEES NOT TO BE OFFERED EMPLOYMENT. Pursuant to Section 10.1 of the New Participation Agreement, WKEC hereby notifies Big Rivers that the Transferred Employees identified on EXHIBIT J attached hereto will not be offered employment with WKEC or any of its Affiliates as of the Closing on the terms contemplated in that Section. 18. ELIMINATION OF AGREEMENTS. In light of the fact that the Parties will proceed with the consummation of the Phase II transactions rather than the Phase I transactions, they each agree that the execution and delivery by Big Rivers and the relevant LG&E Party or LEC (as applicable) of a Cost Sharing Agreement, a Facilities Operating Agreement and a Tax Indemnification Agreement in the form attached to the New Participation Agreement as Exhibits A, B and F, respectively, will not be required, and the Parties hereby waive any requirement that such agreements be executed and delivered as a condition precedent to the Closing. 19. TRANSMISSION PAYMENT. Big Rivers and the LG&E Parties previously agreed pursuant to Section 9.6 of the Participation Agreement that certain payments that may be made by the LG&E Parties (or any of them), or their successors or permitted assigns, to Big Rivers under Big Rivers' Open Access Transmission Tariff for the transmission of Tier 3 power during the period from the Effective Date through December 31, [REDACTED] to [REDACTED] for resale to [REDACTED], and to [REDACTED] for resale to [REDACTED], shall be considered incremental transmission revenues that shall not be counted toward the minimum annual transmission use payment set forth in Section 9.6 of the New Participation Agreement. Pursuant to Section 9.7 of the Participation Agreement, Big Rivers and the LG&E Parties also made certain agreements with respect to incremental transmission revenues that might be received by Big Rivers for transmission of Tier 3 Energy to [REDACTED] and from [REDACTED] for transmission of Tier 3 Energy to [REDACTED]pursuant to a long-term transmission contract. To clarify their agreements with respect to the foregoing, Big Rivers and the LG&E Parties hereby further agree as follows. (a) (i) Section 9.7(a) of the Participation Agreement is amended by deleting the words "from [REDACTED]."; and (ii) Section 9.7(b) of the Participation Agreement is amended by deleting the phrase "from [REDACTED]", adding after the second occurrence of "Tier 3 Energy" a comma followed by the phrase "directly or indirectly," and inserting after the phrase "the preceding 12 13 calendar months" the phrase "whether paid by [REDACTED] or any other Person." (b) Big Rivers and the LG&E Parties will not count toward the Section 9.6 minimum transmission use payment the revenue received by Big Rivers for transmission service purchased by any Person (whether or not an LG&E Party) (i) for transmission of the Tier 3 Energy sold to Henderson Union for resale to [REDACTED] from the Effective Date through December 31, [REDACTED] and (ii) for service from January 1, [REDACTED] through December 31, [REDACTED], up to a maximum exclusion from the Section 9.6 minimum transmission use payment calculation in any year of $[REDACTED] (inclusive of purchases of transmission service for Tier 3 Energy made by Persons other than LEM or other of the LG&E Parties). The exclusions in the preceding sentence shall apply at any time in which the transmission used to transmit the Tier 3 Energy described above is purchased, whether or not an LG&E Party is the supplier of that wholesale power. Big Rivers and the LG&E Parties agree that they will count toward the $[REDACTED] minimum annual transmission use payment described in Section 9.6 of the Participation Agreement all amounts paid by an LG&E Party to Big Rivers for transmission related to the provision of Tier 3 power directly or indirectly (i) to [REDACTED] on or after January 1, [REDACTED] or (ii) to [REDACTED] on or after January 1, [REDACTED] provided that Big Rivers has received during the year for which such determination is made, at least $[REDACTED] in revenue (whether from one or more of the LG&E Parties or another Person or Persons) for the transmission of Tier 3 energy, directly or indirectly, to [REDACTED]. Furthermore, Big Rivers and the LG&E Parties agree that amounts paid by an LG&E Party to Big Rivers for transmission related to Tier 3 power shall be applied toward the $[REDACTED] minimum annual transmission use payment only when such transmission payments relate to Tier 3 power supplied by an LG&E Party. 20. ASSIGNMENT OF INTERESTS. (a) RIGHTS OF ASSIGNMENT. Subject to Subsections (b), (c) and (d), below, Big Rivers acknowledges and agrees that, at any time following the Closing, the consent of Big Rivers is not required: (i) For WKEC to assign and transfer to WKE Corp., a Kentucky corporation and the parent company of WKEC ("WKE Corp.") or to another Affiliate of WKEC, all or any portion of the rights, interests and obligations of WKEC arising under or pursuant to the Lease and/or any other Operative Document and relating to the Tangible Assets, the Inventory, the Personal Property, the Intangible Assets or any assets or properties of HMP&L that are dedicated to or used exclusively in connection with Station Two or dedicated, pursuant to the Joint Facilities Agreement (as defined in the Station Two Agreement), the Station Two Agreement and/or any other Operative Document, for the joint or common use by, or the support of, the Green Station or Reid Station of Big Rivers, on the one hand, and Station Two, on the other hand, or that are otherwise used (exclusively or non-exclusively) at or for the support of Station Two (collectively the "Common Properties"), including without limitation, the following: (A) the rights and interests of WKEC granted in any of the Common Properties pursuant to the Lease (including without limitation, the real property on which any of 14 the Common Properties are located), and any other rights related or appurtenant to those leasehold interests provided for in the Lease or any other Operative Document; (B) any rights of enforcement and collection of WKEC against Big Rivers and/or HMP&L in respect of the Common Properties arising under or pursuant to the Lease or any other Operative Document; and (C) any obligations and liabilities of WKEC arising under the Lease or any other Operative Document in respect of the Common Properties, whether arising before or after the effectiveness of that assignment and transfer, including without limitation, the obligation of WKEC under the Lease for the payment to Big Rivers or HMP&L of that portion of the rental payments relating to the Common Properties (which portion shall be determined by WKEC in its discretion, but shall in no event exceed [REDACTED] of the total rental payments owing to Big Rivers for the Tangible Assets under the Lease). (ii) For any of the LG&E Parties to assign and transfer to WKE Corp. or to another Affiliate of such LG&E Party, all or any portion of the rights, interests and obligations of that LG&E Party, arising under or pursuant to the Operative Documents (in addition to the rights, interests and obligations of WKEC that may be assigned and transferred as contemplated in (i), above), including without limitation, the following: (A) the obligations of any one or more of the LG&E Parties to pay Big Rivers or HMP&L all or any portion of the rental amounts, the Monthly Margin Payments and/or any other amounts arising under the Lease or the other Operative Documents; (B) the right to receive and collect any payments or other amounts owing by Big Rivers or HMP&L to any LG&E Party(s) under the Power Purchase Agreement, any other Operative Document or the Promissory Note (LEM Advances); (C) the right to exercise any abatement rights, set-off rights and other similar rights of all or any of the LG&E Parties in respect of any of the payment obligations of Big Rivers or HMP&L to any of the LG&E Parties under any of the Operative Documents and/or the Promissory Note (LEM Advances); and (D) any rights of enforcement and collection against Big Rivers and/or HMP&L arising under or pursuant to any of the Operative Documents. (iii) Subject to the receipt of any consents and waivers from HMP&L required for the same (the receipt of which shall be the sole responsibility of Station Two Subsidiary), for Station Two Subsidiary to assign and transfer to LEM or another Affiliate of Station Two Subsidiary all or any portion of its rights, interests and obligations under or pursuant to the Station Two Power Sales Agreement (as defined in the Station Two Agreement) and under the Station Two Agreement and relating to the Station Two Power Sales Agreement, including without limitation, the following: 15 (A) the right of Station Two Subsidiary to purchase Station Two Surplus Capacity, Excess Henderson Capacity and Excess Henderson Energy under the Station Two Power Sales Agreement, and the obligation of Station Two Subsidiary to pay Capacity charges and other amounts to HMP&L thereunder; and (B) the right of Station Two Subsidiary to receive and collect any payments or other amounts owing by, and receive notices due from, HMP&L under the Station Two Power Purchase Agreement, or by or from Big Rivers or HMP&L under the Station Two Agreement and relating to the Station Two Power Sales Agreement. (b) FURTHER COMMITMENTS. Consistent with Section 16.2 of the New Participation Agreement and Section 15.2 of the Station Two Agreement, any LG&E Party electing to make an assignment and transfer to WKE Corp. or another Affiliate as contemplated in Subsection (a), above, agrees to simultaneously assign and transfer to WKE Corp. or such Affiliate (as applicable) all rights of the assigning and transferring Party under all Operative Documents and all other agreements that relate to the interests being assigned and transferred, and agrees to cause WKE Corp. or such Affiliate (as applicable) to assume in writing all duties and obligations of the assigning and transferring LG&E Party under such agreements that relate to the interests being assigned and transferred. Nothing contained in this Section 20 shall amend or otherwise modify the rights and obligations of the Parties under Article 16 of the New Participation Agreement or Article 15 of the Station Two Agreement. (c) WKE CORP. AS AN AFFILIATE. Each LG&E Party hereby represents and warrants to Big Rivers that WKE Corp. is an Affiliate of such LG&E Parties organized and existing under the laws of the Commonwealth of Kentucky, and hereby covenants and agrees that WKE Corp. shall be such an Affiliate at such time (if any) as an assignment and transfer by any LG&E Party to WKE Corp. shall occur as contemplated in Subsections (a) and (b), above. (d) REGULATORY APPROVALS. The LG&E Parties acknowledge that, consistent with Section 16.4 of the New Participation Agreement, in the event any assignment or transfer of the type contemplated in Subsection (a) or (b), above, is subject to the jurisdiction of any state or federal regulatory agency, the LG&E Parties shall bear sole responsibility for obtaining any required approvals from and other action by that agency, and shall indemnify and hold harmless Big Rivers (and its respective successors and permitted assigns) from and against all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) suffered or incurred by Big Rivers as a result of, or with respect to, the LG&E Parties' failure to obtain the same; provided, that such a failure to obtain a required consent shall not affect the validity of the transfer unless the transfer is made void or voidable by applicable laws. (e) RECOGNITION OF ASSIGNEE. Upon any assignment and transfer of rights, interests and/or obligations by any of the LG&E Parties to LEM, WKE Corp. or another Affiliate as contemplated in Subsections (a) and (b), above, WKE Corp. or such other Affiliate (as 16 applicable) shall be deemed to be an "LG&E Party" for all purposes under the Operative Documents, and, subject to compliance with this Section 20, Big Rivers agrees to accept and honor all of the rights, interests and obligations of WKE Corp. or such Affiliate (if any) so assigned and transferred to it the same as if it were an original signatory to the relevant Operative Document(s), agrees to remit and pay to LEM, WKE Corp. or such Affiliate (as applicable) all amounts (if any) to which it may be entitled under the Operative Documents as directed by LEM, WKE Corp. or such Affiliate, consistent with the provisions of those agreements, and agrees to look solely to LEM, WKE Corp. or such Affiliate (as applicable) for the performance of such obligations (subject in all cases to the obligations of LEC under the Guarantee described in Section 21, below, and any other rights and remedies of Big Rivers under the Operative Documents). (f) NOTICES. Upon any assignment or transfer of any rights, interests or obligations of any of the LG&E Parties to WKE Corp. or any other Affiliate of the LG&E Parties as contemplated in this Section 20 of which Big Rivers has been notified, any notices, requests, demands or other communications that may be required or permitted to be made to WKE Corp. or such other Affiliate under any of the Operative Documents shall be addressed as follows: c/o LG&E Energy Corp., 220 West Main Street, Louisville, Kentucky 40202, Attn: President, Phone: (502) 627-3665, Facsimile: (502) 627-4622, with a copy to the same additional Persons as may be set forth in the relevant Operative Document with respect to the LG&E Parties. 21. LEC ACKNOWLEDGMENT AND AGREEMENT. Consistent with Section 17 of the New Guarantee Agreement dated April 6, 1998 between LEC and Big Rivers (the "Guarantee"), upon any assignment and transfer by an LG&E Party to WKE Corp. and/or another Affiliate of the LG&E Parties as contemplated in Section 20 above, LEC acknowledges and agrees that (i) WKE Corp. and/or such Affiliate shall be deemed to be an "LG&E Affiliate" for all purposes under the Guarantee, (ii) any Operative Documents or any other agreements entered into by WKE Corp. and/or such Affiliate with Big Rivers (or any obligations assumed by WKE Corp. thereunder) on or prior to the Effective Date, or thereafter by reason of any assignments or transfers in accordance with Section 16 of the New Participation Agreement or Section 15 of the Station Two Agreement, shall be deemed "Agreements" for all purposes under the Guarantee, and (iii) the Guarantee shall continue in full force and effect in accordance with its terms and apply to any and all liabilities and obligations of WKE Corp. and/or such Affiliate to Big Rivers under the "Agreements". 22. ADDITIONAL INTELLECTUAL PROPERTY INDEMNITY AND COVENANTS. In addition to any other rights that the LG&E Parties may have under the New Participation Agreement or any other Operative Document, Big Rivers agrees that, following the Closing, Big Rivers shall indemnify and hold harmless the LG&E Parties (and their respective successors and permitted assigns) from and against all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) suffered or incurred by any LG&E Party as a result of, or with respect to, Big Rivers' failure to obtain any third-party consent or approval (a) to the transfer or assignment to any of the LG&E Parties (or such successors or permitted assigns) of any of the Intellectual Property (or any rights to utilize the same) pursuant to the 17 terms of the New Participation Agreement or an Assignment and Assumption Agreement entered into by Big Rivers with any of the LG&E Parties at the Closing, or (b) to the leasehold interests, use rights and other rights and interests granted or purported to be granted pursuant to the Lease and relating to any patents, patent applications, trade secrets, license rights, license agreements and franchises (including without limitation, computer programs and source programs) that are not Intellectual Property (collectively, "Other Intellectual Property"), which consent or approval Big Rivers was required to obtain prior to that assignment, transfer, grant or purported grant pursuant to the terms of any agreement to which Big Rivers is a party or by which the Intellectual Property or the Other Intellectual Property is bound. In addition to the foregoing, Big Rivers agrees, upon the request of any LG&E Party and at Big Rivers' expense, to use its commercially reasonable efforts following the Closing to obtain any consent or approval of the type described above which was not obtained by Big Rivers prior to the Closing. The LG&E Parties agree to reasonably cooperate with Big Rivers in its attempts to obtain such consents or approvals. The LG&E Parties and Big Rivers agree that no LG&E Party shall (A) be permitted to use any of the Intellectual Property or Other Intellectual Property for any purpose other than the operation and maintenance of the Generating Plants, (B) assign, sell, license or otherwise divest itself or any interest in such Intellectual Property other than as contemplated in Section 16 of the New Participation Agreement, Section 15 of the Station Two Agreement or the Software License Agreement, or (C) be obligated to provide Big Rivers any additional consideration for the purchase or use of such Intellectual Property and other patents, patent applications, trade secrets, license agreements or franchises other than as expressly contemplated in the Operative Documents or the Software License Agreement. The foregoing covenants set forth in this Section 22 shall survive any expiration or termination of the New Participation Agreement for any reason and shall continue to be binding on the Parties, and, in the case of Big Rivers' covenants, such covenants shall not be affected, limited or eliminated by reason of any knowledge by the LG&E Parties that any such consent or approval is required but has not been obtained by Big Rivers prior to the Closing. 23. ADDITIONAL AMENDMENTS TO NEW PARTICIPATION AGREEMENT. The Parties agree to make the following additional amendments to the New Participation Agreement: (a) The reference in Section 4.1 to "business days" is hereby capitalized. (b) The reference in Section 4.3.4 to "Settlement Note" is hereby changed to "Settlement Promissory Note." (c) The reference in Section 4.4.7 to "Closing Date" is hereby changed to "Closing date." (d) The reference in Section 5.1.8 to "Henderson" is hereby changed to "HMP&L." (e) The reference in Section 6.1.6 to "WKEC or Leaseco" is hereby amended to refer to "WKEC or its permitted assignee under the Lease", and the reference in that Section to 18 "the Facilities Operating Agreement and" is hereby deleted. (f) The reference in Section 7.2.3 to "Henderson" is hereby changed to "HMP&L." (g) The reference in Section 7.2.7 to "closing" is hereby capitalized. (h) The reference in Section 9.4.1 to "City of Henderson" is hereby changed to "HMP&L." (i) The reference in Section 11.1 to "Lease and Operating Agreement is hereby changed to "Lease." (j) Section 13.1 shall be amended by adding the following language to the end of that Section: "The Parties hereby acknowledge that the LG&E Parties have elected, with respect to the property insurance, general liability insurance, and boiler and machinery insurance required to be maintained by WKEC pursuant to Sections 2, 3, and 4, respectively, of Schedule 13.1 to the Participation Agreement, to enter into a "deductible buy back" arrangement with Allendale Mutual Insurance Company which effectively creates a layer of "LG&E Self-Insurance" above the required deductible levels set forth in Sections 2, 3, and 4 of Schedule 13.1 to the New Participation Agreement. Any amounts that would be covered by proceeds of the insurance coverage otherwise required to be maintained by WKEC pursuant to Sections 2, 3, and 4 of Schedule 13.1 absent the election referred to in the preceding sentence shall be referred to as "LG&E Self-Insurance Proceeds." (k) The reference in Section 14.5 to "post-closing" is hereby changed to "post-Closing." (l) The reference in the first sentence of the last paragraph of Section 16.1 to "(exclusive of WKEC)" is hereby deleted. (m) The reference in Section 17.1.1(g) to "Parties obligations" is hereby changed to "Parties' obligations." (n) The reference in Section 17.4 to "each of the Banks" is hereby changed to "each of the banks which are parties to the Chapter 11 Case." (o) The reference in Section 22.2 to "Closing Date" is hereby changed to "Closing date" and the reference to "Demand Promissory note" is hereby changed to "Demand Promissory Note." 19 (p) The reference in the first sentence of Section 23.3 to "WKEC or Leaseco" is hereby amended to refer to "the LG&E Parties". (q) The references in Section 24.1(d) to "Henderson" are hereby changed to "HMP&L." (r) The reference in Section 24.1(e)(iii) to "Henderson" is hereby changed to "HMP&L." (s) The references in Section 24.1(f) to "Henderson" are hereby changed to "HMP&L." (t) The reference in Schedule 3.1, Item I.3 to "Kentucky Public Service Commission" is hereby changed to "KPSC." (u) The reference in Schedule 3.1, Sections I.10 and II.15 to "April 7" is hereby deleted and replaced with "June 15", and the references therein to "and after the first January 1 that is three full Years after the Effective Date, their obligation to provide market-priced power to certain of their industrial customers in accordance with the Plan" is hereby deleted. (v) The reference in Schedule 3.1, Item I.20 to "each of the Banks" is hereby changed to "each of the banks which are parties to the Chapter 11 Case." (w) The reference in Schedule 3.1, Item I.22 to "LEM/Member Agreements for Electric Service" is hereby changed to "LEM/Green River Electric Agreement and LEM/Henderson Union Agreement." (x) The reference in Schedule 3.1, Item I.26 to "Henderson" is hereby changed to "HMP&L." (y) The reference in Schedule 3.1, Item II.4 to "Kentucky Public Service Commission" is hereby changed to "KPSC." (z) The reference in Schedule 3.1, Item II.19 to "each of the Banks" is hereby changed to "each of the banks which are parties to the Chapter 11 Case." (aa) The reference in Schedule 3.1, Item II.20 to "Phase I Transactions' is hereby changed to "Phase I transactions." (bb) The reference in Schedule 3.2, Item I.2 to "it is it necessary" is hereby changed to "it is necessary." (cc) The reference in Schedule 3.2, Item I.3 to "Kentucky Public Service 20 Commission" is hereby changed to "KPSC." (dd) The reference in Schedule 3.2, Item II (Preamble) to "The obligations of Big Rivers each of the Phase II Agreements" is hereby changed to "The obligations of Big Rivers under each of the Phase II Agreements." (ee) The reference in Schedule 3.2, Item II.2 to "Kentucky Public Service Commission" is hereby changed to "KPSC." (ff) The reference in Schedule 3.3, Item I.2 to "Kentucky Public Service Commission" is hereby changed to "KPSC." (gg) The reference in Schedule 3.3, Item II.1 to "Kentucky Public Service Commission" is hereby changed to "KPSC." 24. SETTLEMENT PROMISSORY NOTE. The Parties agree that, assuming the Closing occurs on July 15, 1998, the principal balance of the Settlement Promissory Note shall be $[REDACTED], rather than $[REDACTED], reflecting an agreed upon reduction of $[REDACTED] for each month (pro-rated for the month of July) from March 1, 1998 through and including the Effective Date. The Parties further agree that the monthly installments of principal and interest under the Settlement Promissory Note attached to the New Participation Agreement as Exhibit K shall be due on the twenty-fifth (25th) day of the applicable month. 25. PROMISSORY NOTE (LEM ADVANCES). The form of Promissory Note (LEM Advances) attached to the New Participation Agreement as Exhibit O shall be revised as follows: (a) in Section 1(a) the period following the word "months" is deleted and replaced with a comma, and (b) in Sections 1(a), 1(b) and 1(c) the word "first" is deleted wherever it appears and replaced with the word "twenty-fifth". 26. REPRESENTATIONS AND WARRANTIES. The Parties acknowledge and agree that their respective representations and warranties set forth in the New Participation Agreement shall, when once again made by the Parties at the Closing pursuant to the Certificates of their authorized officers contemplated in Sections 4.3.6 and 4.4.11 of the New Participation Agreement, apply to the New Participation Agreement as amended by this Amendment and the Letter Agreement and Second Amendment to New Participation Agreement identified in the first recital of this Amendment. As used in those representations and warranties, the terms "this Agreement" and the "Operative Documents" shall be deemed to include, without limitation, the New Participation Agreement as so amended. 27. ELIMINATION OF DOCUMENTS. The Parties acknowledge and agree that the Oil Testing Agreement referenced in Schedule 3.1 of the New Participation Agreement shall not be entered into by them, and shall no longer be a condition precedent to the Closing. The Parties further acknowledge and agree that the Step-Up Transformer and Meter O&M Agreement referenced in that Schedule will be divided into two separate agreements that will be entered into at the 21 Closing, entitled Transformer Operation and Maintenance Agreement, and Meter and Telemetry Equipment Operation and Maintenance Agreement. 28. METER INSTALLATION AND METERING ISSUES. The LG&E Parties agree to install revenue quality meters and current transformers, as specified in EXHIBIT K-1 attached hereto, at each unit of the Generating Plants on or before the following dates:
Wilson - November 1, 1998 Green - November 1, 1998 Station Two - October 1, 1998 Reid and Reid GT - October 1, 1998 Coleman - September 15, 1998
The LG&E Parties agree to use any unexpected outage opportunity between the Closing and the dates set forth above to install the meters and current transformers, rather than waiting until the dates set forth above. The loss calculation methodology attached hereto as EXHIBIT K-2 will be used to calculate the losses which are added to the KWh derived from meter readings to determine the Energy transmitted through the respective Transformer from the Closing through the time at which the revenue quality meters and current transformers have been installed. WKEC and, in the case of Station Two, Station Two Subsidiary agree to pay Big Rivers a penalty of $[REDACTED] for each day that the installation of the foregoing revenue quality meters and transformers is delayed beyond the dates set forth above. Notwithstanding the foregoing, the LG&E Parties will be excused from their performance and payment obligations set forth in this Section 28 to the extent that any "as received" meter or transformer equipment is defective when delivered. The LG&E Parties agree that Big Rivers shall have no obligation to install the above described meters and current transformers pursuant to either the Transformer Operation & Maintenance Agreement or the Meter and Telemetry Operation & Maintenance Agreement, it being expressly understood that the LG&E Parties shall install or cause to be installed such equipment. 29. MISCELLANEOUS. The Parties acknowledge and agree that the Operative Documents that will be executed by the Parties at the Closing have been altered by agreement of the Parties in certain respects from the form of documents attached to the New Participation Agreement. Except as amended, modified or supplemented by this Amendment, the provisions of the New Participation Agreement shall remain in full force and effect from and after the execution hereof to the same extent as prior to such execution. 30. KEY OIL PAYMENT. At the Closing, the purchase price payable by the LG&E Parties to Big Rivers for Inventory includes an amount to compensate Big Rivers for certain quantities of oil which may be in transit from Key Oil Company to Big Rivers as of the Closing (see Big Rivers Purchase Requisition P660 5). Big Rivers agrees that it will be solely responsible to Key Oil for the payment for such oil following its delivery, whether before or after the Closing. 22 31. MEMBER TRANSMISSION. (a) Big Rivers and the LG&E Parties agree that, to the extent consistent with the directives of the KPSC's July 14, 1998 order in Case No. 98-267 ("KPSC July 1998 Order"), the provisions of Section 6.5 of the Transmission Service and Interconnection Agreement shall continue to govern their respective obligations with respect to Member Transmission. The LG&E Parties and Big Rivers agree that in order to reconcile the KPSC's approval of Big Rivers' OATT rates with its directive that "unforeseen changes in transmission costs due to the Smelters' load" be shared, it is appropriate to interpret the KPSC's order as permitting the Monthly Margin Payments to be deemed to be full payment at Big Rivers' OATT rates as approved in the KPSC July 1998 Order. Therefore, and notwithstanding provisions of Section 6.5 of the Transmission Service and Interconnection Agreement to the contrary, Big Rivers and the LG&E Parties agree that (i) the Monthly Margin Payments shall be as set forth in the Operative Documents, (ii) that in the event that Big Rivers' transmission revenue requirement is not changed or is reduced by order of the KPSC, Big Rivers will continue to provide as Member Transmission [REDACTED] MW of network service and up to [REDACTED] MW of non-firm point-to-point transmission service (so long as no more than [REDACTED] MW is used simultaneously) as part of the Monthly Margin Payment for so long as the Monthly Margin Payments are not reduced, (iii) in the event that Big Rivers' transmission revenue requirement is increased by order of the KPSC (whether or not after a filing by Big Rivers), that Big Rivers will provide [REDACTED] MW of network service and up to [REDACTED] MW of non-firm point-to-point transmission service (so long as no more than [REDACTED] MW is used simultaneously) for the Monthly Margin Payment PLUS an additional monthly payment from LEM equal to (x) the product of [REDACTED] multiplied by [REDACTED] the KPSC approved increase in the annual transmission revenue requirement multiplied by the load ratio share applicable to the network transmission service taken as Member Transmission, and (y) in the event that some portion of the [REDACTED] MW of network transmission service has been converted to point-to-point transmission service for a period equal to or longer than a full billing month, [REDACTED] the difference between the applicable OATT rate for point-to-point transmission (for the portion of the [REDACTED] MW converted) and the modeled rate of $[REDACTED]/kW/mo. multiplied by the converted point-to-point transmission service taken in such month as Member Transmission, and (iv) for the purpose of Section 6.5.2 of the Transmission Service and Interconnection Agreement, the references to"$[REDACTED]" and "$[REDACTED]" will be deemed to refer to the OATT rate approved in the KPSC July 14 Order applicable to the type of service for which the charge is being determined. In addition, the LG&E Parties agree that in light of the KPSC July 1998 Order, nothing in Section 6.5.3 of the Transmission Services and Interconnection Agreement shall be read or enforced so as to prevent Big Rivers from filing for an increase in its transmission revenue requirement at the KPSC or any other regulatory commission asserting jurisdiction over the rates for such service . To the extent the KPSC should ever direct Big Rivers to determine the payment for Member Transmission other than as set forth herein, Big Rivers and the LG&E Parties agree to use their reasonable best efforts to cooperate to amend Section 6.5 of the Transmission Service and Interconnection Agreement so as to preserve their respective economic benefits in a manner consistent with the applicable transmission cost allocations included in any final order of the KPSC. (b) Big Rivers and the LG&E Parties agree that the provisions in Section 6.5 of the Transmission Services and Interconnection Agreement with respect to Member Transmission are 23 based on Monthly Margin Payments calculated based on the sale of [REDACTED] MW to [REDACTED] and [REDACTED] MW to [REDACTED], for a total Member Transmission obligation of [REDACTED] MW of Network Transmission Service. In recognition of the termination of Monthly Margin Payments with respect to the [REDACTED] MW of [REDACTED] as of December 31, [REDACTED], Big Rivers and the LG&E Parties agree that, as of January 1, [REDACTED], all megawatt amounts included in Member Transmission shall be proportionately reduced. Thus, during the period from January 1, 2011 to December 31, [REDACTED], Member Transmission shall consist of [REDACTED] MW of network transmission service and [REDACTED] MW of non-firm point-to-point transmission, and all references to [REDACTED] MW of network transmission service in Section 6.5 during this period shall instead refer to [REDACTED] MW, and all references to [REDACTED] MW of non-firm point-to-point transmission in Section 6.5 during this period shall refer to [REDACTED] MW. 24 IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed as of the day and year first written above. BIG RIVERS ELECTRIC CORPORATION By: /S/ MICHAEL H. CORE ---------------------------- Name: MICHAEL H. CORE Title: PRESIDENT AND CEO LG&E ENERGY MARKETING INC. By: /S/ JOHN R. McCALL ---------------------------- Name: JOHN R. McCALL Title: EXECUTIVE VICE PRESIDENT AND SECRETARY WKE STATION TWO INC. By: /S/ GEORGE BASINGER ---------------------------- Name: GEORGE BASINGER Title: PRESIDENT WESTERN KENTUCKY ENERGY CORP. By: /S/ GEORGE BASINGER ---------------------------- Name: GEORGE BASINGER Title: PRESIDENT LG&E ENERGY CORP. By: /S/ GEORGE BASINGER ---------------------------- Name: GEORGE BASINGER Title: PRESIDENT 25 EXHIBITS TO THE THIRD AMENDMENT TO NEW PARTICIPATION AGREEMENT [* ALL EXHIBITS REDACTED.] A -- Schedule 9.1 - Inventory Quantification and Valuation Procedures B -- Personal Property Lists C -- Inflation Escalator D-1, D-2 & D-3 -- Initial Period O&M Budgets E-1, E-2 & E-3 -- Initial Period Capital Budgets F -- Major Capital Repairs Definition G -- Disclosure Schedule Supplements H-1, H-2 & H-3 -- Exhibits to Mortgages I -- Amendments to Station Two Agreement J -- List of Transferred Employees Not to be Employed 26 EX-10.87 15 EXHIBIT 10.87 CONFIDENTIAL - SUBJECT TO COURT ORDER - -------------------------------------------------------------------------------- FORM OF LEASE AND OPERATING AGREEMENT BETWEEN WESTERN KENTUCKY ENERGY CORP. AND BIG RIVERS ELECTRIC CORPORATION July 15, 1998 [* REDACTED=Omitted pursuant to confidential treatment request. Material filed separately with PSC.] CONFIDENTIAL - SUBJECT TO COURT ORDER LEASE AND OPERATING AGREEMENT PARTIES THIS LEASE AND OPERATING AGREEMENT ("Agreement") is dated this 15th day of July, 1998 (the "Lease Execution Date") between WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC") and BIG RIVERS ELECTRIC CORPORATION, a Kentucky rural electric cooperative ("Big Rivers" and together with WKEC, the "Parties"). RECITALS A. Pursuant to the New Participation Agreement dated as of April 6, 1998, among Big Rivers, WKEC and certain of WKEC's Affiliates (the "Participation Agreement"), the parties thereto have entered into various arrangements for the operation and maintenance of the Assets and the sale of electricity produced therefrom. This Agreement is one of the Phase II Agreements described in the Participation Agreement. B. This Agreement is intended to be an operating lease, and is intended to establish during the term hereof the respective obligations of WKEC and Big Rivers with respect to the ownership, lease and operation of the Assets and all existing and future additions to those Assets, and to govern the day-to-day operation of the Assets by WKEC. NOW, THEREFORE, in consideration of the mutual covenants set forth below, the Parties agree as follows: ARTICLE 1 DEFINITIONS For purposes of this Agreement, capitalized terms not otherwise defined herein shall have the meaning set forth in Exhibit X to the Participation Agreement. ARTICLE 2 LEASE 2.1. Lease Grant. Subject to the terms and conditions of this Agreement, on the Phase II Effective Date, Big Rivers shall, on an exclusive basis, lease to WKEC, and WKEC shall lease from Big Rivers (and, with respect to the property subject to the Real Property Leases, shall sublease), the Tangible Assets during Phase II, except to the extent such assets are Excluded Assets, Personal Property or Inventory. CONFIDENTIAL - SUBJECT TO COURT ORDER 2.2. Term. The term of the lease contemplated by Section 2.1 ("Term") shall commence on the Phase II Effective Date and end on the earliest of (i) the December 31st that is closest to the twenty-fifth anniversary of the Effective Date and (ii) the date of any termination of this Agreement pursuant to Article 11 hereof or pursuant to the relevant provisions of the Guaranty or the Station Two Agreement. 2.3. Rental and Margin Payments 2.3.1. Initial Rental Payment. In the event that the Phase II Effective Date occurs prior to the Phase I Effective Date, WKEC shall pay to Big Rivers on the Phase II Effective Date, as an initial rental payment (the "Initial Rental Payment"), an amount equal to $[REDACTED], subject to adjustment as set forth in Section 9.3 of the Participation Agreement (PP Price adjustment). In the event that the Phase II Effective Date occurs following the Phase I Effective Date but prior to the second anniversary of the Phase I Effective Date, an amount equal to the amount actually refunded by Big Rivers to LEM pursuant to Section 3.3(a) of the Power Purchase Agreement shall be due and payable hereunder by WKEC to Big Rivers on the Phase II Effective Date. For the avoidance of doubt, the parties acknowledge that, except as set forth in this Section 2.3.1 and Section 10.7(d) of the Station Two Agreement, no rental shall be due for the period from the Effective Date until the second anniversary of such date. 2.3.2. Annual Rental; Monthly Installment Payments; Monthly Margin Payments. (a) On the later to occur of (x) the Phase II Effective Date and (y) the second anniversary of the Effective Date, and for each subsequent year during Phase II, after taking into account all applicable Phase I Adjustments, if any, and any reduction effected pursuant to Section 10.1.2, 10.2.2 or 11.6 hereof, WKEC shall pay Big Rivers an annual rental payment of $[REDACTED], subject to adjustment pursuant to Section 9.3 of the Participation Agreement (PP Price adjustment), as follows: WKEC shall pay the annual rental in equal monthly installments of $[REDACTED] (subject to adjustment as set forth in this Article 2), with the first monthly installment to be paid on the later of (x) the Phase II Effective Date and (y) the second anniversary of the Effective Date, and each remaining monthly installment to be paid on the first day of each calendar month through the December 1st that is closest to the twenty-fifth anniversary of the Effective Date; provided, that if the Phase II Effective Date occurs after the second anniversary of the Effective Date, WKEC shall not be obligated hereunder to pay rent with respect to any month, or portion thereof, prior to the Phase II Effective Date, and all rental payments on an annual basis as well as a monthly basis shall be pro rated to reflect this understanding; and provided, further, that if the first monthly installment of the rental payment under this Section 2.3.2 is due on a day other than the first day of the month, WKEC shall pro rate that installment by the ratio that the remaining number of days in the month bears to the total number of days in that month. After taking into account all applicable Phase I Adjustments, if any, if Big Rivers elects to reduce the Contract Limits pursuant to Subsection 4.3(e) of the Power Purchase Agreement, the total annual rental payment provided for in this Subsection 2.3.2 shall be increased effective on January 1 of the Year in which the reduction becomes effective to an amount equal to the product of $[REDACTED] (subject to adjustment pursuant to Section 9.3 of the Participation Agreement) multiplied by the sum of one (1) plus the CCAP. The monthly installment due on such 2 CONFIDENTIAL - SUBJECT TO COURT ORDER January 1 and on the first day of each month during the remainder of Phase II shall be adjusted accordingly. The Parties acknowledge that Big Rivers may elect to reduce the Contract Limits under Subsection 4.3(e) of the Power Purchase Agreement on more than one occasion, and that the annual rental payment and associated monthly installments shall be adjusted as provided in this Subsection 2.3.2 on each such occasion. (b) WKEC shall also pay to Big Rivers a Monthly Margin Payment as follows: In the event the Phase II Effective Date occurs prior to the Phase I Effective Date, the first Monthly Margin Payment under this Agreement shall be due on the second occurrence of a 25th day of the month after the Effective Date, and a Monthly Margin Payment will be due from WKEC to Big Rivers on each 25th day of the month thereafter until and including January 25, [REDACTED], at which time no additional Monthly Margin Payments will accrue. In the event the Phase I Effective Date occurs prior to the Phase II Effective Date, the first Monthly Margin Payment under this Agreement shall be due on the first 25th day of the month immediately following the Phase II Effective Date (or on the Phase II Effective Date, if the Phase II Effective Date occurs on the 25th day of the Month), and a Monthly Margin Payment will be due from WKEC to Big Rivers on each 25th day of the month thereafter until and including January 25, [REDACTED]. Each Monthly Margin Payment is due in the amount set forth in the Schedule of Monthly Margin Payments attached to this Agreement as Schedule 2.3; provided that if the Phase II Effective Date occurs prior to the Phase I Effective Date and on other than the first day of a month, then the first Monthly Margin Payment (due at the relevant time described above) will be the amount designated on Schedule 2.3 for the month in which the Effective Date occurred, multiplied by the ratio of (i) the number of days between the Effective Date and the last day of the month and (ii) the total number of days in that month. In the event the Term shall end prior to January 25, [REDACTED], but on a date other than the last day of a month, then WKEC shall pay to Big Rivers a prorated share of the Monthly Margin Payment for the month in which the Term ended based on the ratio by which the number of days in that month through and including the date on which the Term ended bears to the total number of days in that month. (c) Notwithstanding any provisions of this Section 2.3 to the contrary: (i) in the event this Agreement shall be terminated but the Station Two Agreement shall thereafter continue in effect, then so long as the Station Two Agreement shall continue in effect (and through January 25, [REDACTED] in accordance with Schedule 2.3), WKEC shall continue to pay to Big Rivers a portion of the Monthly Margin Payments equal to (x) the relevant Monthly Margin Payment, multiplied by (y) a fraction, the numerator of which is the amount determined by subtracting from [REDACTED] the total number of megawatts of capacity from Station Two that are reserved for use by HMP&L during that month, and the denominator of which is the amount determined by subtracting from [REDACTED] the total number of megawatts of capacity from Station Two that are reserved for use by HMP&L during that month, and (ii) in the event the Station Two Agreement shall be terminated but this Agreement shall thereafter continue in effect, then the Monthly Margin Payments that shall thereafter be owing by WKEC to Big Rivers shall be reduced by the amount established by multiplying (x) by (y) as described in Subclause (c)(i), above. No cessation or modification of the Monthly Margin Payments pursuant to this Subsection (c) shall constitute or be construed as a waiver or bar to any right of Big Rivers to seek to 3 CONFIDENTIAL - SUBJECT TO COURT ORDER recover any damages resulting from any breach or default by WKEC hereunder, or by any other LG&E Party under any of the other Operative Documents, to which Big Rivers otherwise would be entitled. (d) Notwithstanding anything contained in Section 2.3.2(c)(ii) of this Agreement to the contrary, upon any termination of the Station Two Agreement that would otherwise result in a reduction in the Monthly Margin Payments pursuant thereto such reduction shall nonetheless be suspended, and the relevant Monthly Margin Payments shall once again become payable by WKEC hereunder, if, within 60 days after the termination of the Station Two Agreement, Big Rivers shall have taken such actions, in compliance with Section 13.8 of the Station Two Agreement, as shall be necessary to prevent the LG&E Parties (or any of them) from having the right, pursuant to Section 13.8 of that agreement, to an abatement against the Annual Fixed Payments or the rental payments (as applicable, due by them to Big Rivers, to a reimbursement of the Initial Fixed Payment or Initial Rental Payment, to a reduction in the Contract Limits, or to terminate any of the Operative Documents other than the Station Two Agreement, each as contemplated in Section 13.8 of that agreement; provided, that in the event those LG&E Parties shall at any time thereafter have the immediate right to take any of the foregoing actions or exercise any of the foregoing rights or remedies in accordance with Section 13.8, then the provisions of this Subsection 2.3.2(d) shall no longer suspend operation of Subsection 2.3.2(c)(ii). (e) Big Rivers agrees with WKEC that WKEC shall have the right, on behalf of its Affiliate, LEM, to set-off against the Monthly Margin Payments that may become due and owing to Big Rivers hereunder, at any time following the second anniversary of the Effective Date, the monthly installments of principal and interest that may be due and owing by Big Rivers to LEM under the Promissory Note (LEM Advances) in accordance with the terms and conditions of such note, and any such set-off by WKEC shall be deemed to satisfy its obligations to Big Rivers hereunder with respect to the Monthly Margin Payments (or any portions thereof) so set-off. (f) (i) If the Monthly Margin Payment has been adjusted pursuant to Section 2.3.2.(c)(ii) of this Agreement and Big Rivers is permitted pursuant to the Station Two Power Sales Agreement (as defined in the Station Two Agreement) to purchase energy or capacity from Station Two, then: (A) Big Rivers will sell to LEM and LEM will buy Bundled Ancillary Services (as defined in section (f)(iii) below) for resale to [REDACTED] for the benefit of [REDACTED] and (B) the Monthly Margin Payment will be reduced by an amount equal to the amount due to Big Rivers from LEM for such services during that month; provided, however, that WKEC will continue to make payments to Big Rivers in the same amount as the regularly scheduled Monthly Margin Payment that is otherwise due pursuant to the Operative Documents (taking into consideration, inter alia, any adjustment required by Section 2.3.2.(c)) and Big Rivers will accept such payment as payment, in full, of the amount owed to Big Rivers by WKEC for the Monthly Margin Payment then due and by LEM for the services described above for such month. Pursuant to this paragraph, Big Rivers must provide such services to LEM in the same quantities as LEM is required to provide such services to [REDACTED] to meet the requirements of [REDACTED]. 4 CONFIDENTIAL - SUBJECT TO COURT ORDER (ii) If the Monthly Margin Payment has been adjusted pursuant to Section 2.3.2.(c)(i) of this Agreement, then (A) Big Rivers will sell to LEM and LEM will buy Bundled Ancillary Services (as defined below) for resale to [REDACTED] for the benefit of [REDACTED] and (B) the Monthly Margin Payment will be reduced by an amount equal to the amount due to Big Rivers from LEM for such services during that month; provided, however, that WKEC will continue to make payments to Big Rivers in the same amount as the regularly scheduled Monthly Margin Payment that is otherwise due pursuant to the Operative Documents (taking into consideration, inter alia, any adjustment required by Section 2.3.2.(c)) and Big Rivers will accept such payment as payment, in full, of the amount owed to Big Rivers by WKEC for the Monthly Margin Payment then due and by LEM for the services described above for such month. Pursuant to this paragraph, Big Rivers must provide such services to LEM in the same quantities as LEM must provide such services to [REDACTED] to meet the power requirements of [REDACTED]. (iii) The Bundled Ancillary Services are (A) those services described by Big Rivers in Schedules 3, 4, 5, and 6 of the Open Access Transmission Service Tariff attached as Exhibit 1 to the Transmission Services and Interconnection Agreement, or (B) such services that the FERC determines transmission providers must provide in lieu of or as extensions of the services described in subpart (A) of this sentence. 2.3.3. Adjustment for Incremental Environmental O&M. WKEC shall include Incremental Environmental O&M within the Annual O&M Budget(s). After taking into account all applicable Phase I Adjustments, if any, pursuant to the payment terms described in this Section 2.3.3, Big Rivers shall directly pay a share of all Incremental Environmental O&M incurred by WKEC each year during Phase II, as and when incurred by WKEC, as follows (in each case "Big Rivers' Incremental Environmental O&M Share"): (i) Big Rivers' share of Incremental Environmental O&M incurred during the period from the Effective Date until December 31, [REDACTED], inclusive, is [REDACTED]; (ii) Big Rivers' share of Incremental Environmental O&M incurred during the period from January 1, [REDACTED] to December 31, [REDACTED], inclusive, is [REDACTED]%; and (iii) Big Rivers' share of Incremental Environmental O&M incurred during the period from January 1, [REDACTED] until the Termination Date, inclusive, is [REDACTED]%. Big Rivers' payments shall be made by reducing each monthly installment of rent by an amount equal to Big Rivers' Incremental Environmental O&M Share based on the Incremental Environmental O&M estimated by WKEC to be incurred in such month by WKEC consistent with the Annual O&M Budget (including all modifications thereto approved by the Parties in accordance with this Agreement). Within 120 days after the end of each year, WKEC shall compute the actual Incremental Environmental O&M for the year ("Actual Environmental O&M") and shall compare the Actual Environmental O&M with the aggregate payments made by Big Rivers (through reductions in the rent) pursuant to the immediately preceding sentence of this Section 2.3.3 during such year ("Environmental Rent Reduction"). If Big Rivers' Incremental Environmental O&M Share of the Actual Environmental O&M is more than the Environmental Rent Reduction, Big Rivers shall promptly pay such difference to WKEC. If Big Rivers' Incremental Environmental O&M 5 CONFIDENTIAL - SUBJECT TO COURT ORDER Share of the Actual Environmental O&M is less than the Environmental Rent Reduction, WKEC shall promptly pay such difference to Big Rivers. Except as expressly provided in this Section 2.3.3, elsewhere in this Agreement or in any other Operative Document to the contrary, Big Rivers shall have no obligation or liability to the LG&E Parties for any operating or maintenance costs relating to the Assets. 2.3.4. [RESERVED.] 2.4. Covenant of Quiet Enjoyment. Subject to the terms, covenants, conditions and provisions of this Agreement and the other Phase II Agreements, WKEC shall have the exclusive use and enjoyment of the Tangible Assets and the Energy output of the Tangible Assets during the Term, without interference from Big Rivers. 2.5. No Other Interest. Except as expressly provided in Section 9 of the Participation Agreement, this Agreement is intended as and shall constitute an agreement of lease and nothing herein or elsewhere contained shall be construed as conveying to WKEC any right, title or interest in or to the Tangible Assets, except as lessee only. 2.6. Return of the Tangible Assets. Upon the expiration or other termination of the Term, WKEC will immediately return the Tangible Assets to Big Rivers by surrendering the same into the possession of Big Rivers, in good condition and state of repair consistent with Prudent Utility Practice subject only to ordinary wear and tear, including any replacements, improvements or additions to the Tangible Assets. WKEC acknowledges and agrees that it does not have the right to hold over at any time and Big Rivers may exercise any and all remedies at law or in equity to recover possession of the Tangible Assets, as well as any damages incurred by Big Rivers, due to WKEC's failure to return and surrender possession of the Tangible Assets as required by this Agreement. If WKEC holds over after the expiration or earlier termination of the Term without Big Rivers' prior written consent, WKEC will be deemed a tenant at sufferance, at a daily rental rate equal to the sum of (i) [REDACTED]% of the daily rent payable pursuant to Section 2.3.2 during the last year of the Term, and (ii) the quotient of (x) the relevant Monthly Margin Payment divided by (y) the number of days in that month, and WKEC will be bound by all of the other terms, covenants and agreements of this Agreement as the same may apply to a tenancy at sufferance. ARTICLE 3 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE 5 OF THE PARTICIPATION AGREEMENT AND IN SECTION 6 OF THE STATION TWO AGREEMENT ARE IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF BIG RIVERS, WHETHER WRITTEN, ORAL, OR IMPLIED, WITH RESPECT TO THIS AGREEMENT AND ANY OTHER OPERATIVE DOCUMENT, OR THE ASSETS. WKEC HEREBY ACKNOWLEDGES AND AGREES THAT, SUBJECT TO THE PROVISIONS OF 6 CONFIDENTIAL - SUBJECT TO COURT ORDER ARTICLE 5 OF THE PARTICIPATION AGREEMENT, BIG RIVERS LEASES AND WKEC TAKES THE ASSETS AS IS AND WHERE IS AND BIG RIVERS SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE ASSETS OR ANY PART THEREOF, THE MERCHANTABILITY THEREOF OR THE FITNESS THEREOF FOR ANY PARTICULAR PURPOSE. THE PROVISIONS OF THIS ARTICLE 3 HAVE BEEN NEGOTIATED AND, EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE 5 OF THE PARTICIPATION AGREEMENT AND IN SECTION 6 OF THE STATION TWO AGREEMENT, ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES BY BIG RIVERS, EXPRESS OR IMPLIED, WITH RESPECT TO THE TANGIBLE ASSETS. ARTICLE 4 ADDITIONAL OBLIGATIONS OF BIG RIVERS In addition to all other obligations of Big Rivers set forth herein, Big Rivers shall, during Phase II, upon WKEC's reasonable request, make available to WKEC, to the extent not previously provided to WKEC, the original or a copy of any and all information in Big Rivers' possession related to the operation and maintenance of the Tangible Assets, including but not limited to reports, drawings, instructions or manuals, warranties, recall notices, protocols, testing results, etc. provided to Big Rivers by equipment manufacturers or other sources. ARTICLE 5 WKEC AND OPERATIONS 5.1. Designation. WKEC shall be the operator of the Tangible Assets during Phase II. 5.2. Powers and Duties of WKEC 5.2.1. Use. WKEC agrees to use the Assets only for the generation of electric Energy and uses incidental thereto, so long as such incidental use does not decrease the Capacity or increase the cost of electric Energy generated from the Assets. 5.2.2. Maintenance and Operation. Subject to Section 10.2 with respect to WKEC's right to determine whether or not to restore an Enhancement or a Major Capital Improvement, WKEC, solely at its own expense, except as otherwise expressly contemplated by this Agreement, shall at all times, maintain, operate, service and repair the Tangible Assets, Enhancements and Major Capital Improvements and any additions, alterations or improvements thereto in accordance with Prudent Utility Practice. In addition to, and not in any way limiting the foregoing, WKEC shall, subject to Section 10.2 with respect to its right to determine whether or not to restore an Enhancement or a 7 CONFIDENTIAL - SUBJECT TO COURT ORDER Major Capital Improvement, operate and maintain the Tangible Assets, Enhancements and Major Capital Improvements and any additions, alterations or improvements thereto: (a) In substantial compliance with any and all Laws or as otherwise provided in Item 137 of Schedule 5.1.19 of the Participation Agreement; and (b) In substantial compliance with any standards imposed by any insurance policies required to be maintained by WKEC hereunder, under the Participation Agreement, or under any other Operative Document. WKEC shall be responsible for overseeing the design, construction and placing in service of each Capital Asset authorized in any Annual Capital Budget or any modification to such budget approved by the Operating Committee pursuant to Article 7. 5.3. Marketing of Energy. Subject to the terms and conditions of this Agreement and the other Phase II Agreements, WKEC shall control the output of the Facilities in its sole discretion and shall have the right to market and dispatch Energy generated by the Facilities in its sole discretion and for its own account. 5.4. Cooperation Between Big Rivers and WKEC 5.4.1. System Dispatch. WKEC shall not be responsible for dispatching Big Rivers' Transmission System, it being agreed that Big Rivers shall be responsible for such dispatch consistent with the Transmission Service and Interconnection Agreement. WKEC shall cooperate with Big Rivers' requests in this connection if such cooperation is required in order for Big Rivers to perform its obligations under the Transmission Service and Interconnection Agreement. 5.4.2. Permits; Reports. Big Rivers shall cooperate with WKEC in timely preparing, submitting and executing such information, records, statements or other materials required to obtain and continue in effect any Permits required in connection with the Tangible Assets and any changes to those Permits deemed necessary or desirable, in the reasonable discretion of WKEC consistent with Prudent Utility Practice, to operate the Tangible Assets during Phase II in accordance with Prudent Utility Practice; provided, however, that Big Rivers shall not be required to incur any out-of-pocket expenses to fulfill its obligations under this Section 5.4.2 unless WKEC agrees to reimburse Big Rivers for such out-of-pocket expenses. In addition, Big Rivers agrees to provide WKEC, upon its request, with any and all information to be included in any report, notice or filing which WKEC is obligated to make with respect to the operation of the Facilities with governmental or other regulatory authorities, which information Big Rivers possesses and which is not otherwise available to WKEC. 5.4.3. Access to Facilities; Inspection. Big Rivers shall have access to, and ingress and egress from, the Facilities and the Real Property at all times for the purposes of (a) expanding, maintaining, operating, repairing, renewing, replacing and upgrading Excluded Assets (including, without limitation, constructing new transmission facilities) and (b) upon prior written notice to WKEC, examining and observing the operation of the Tangible Assets, provided such activity does not unreasonably interfere 8 CONFIDENTIAL - SUBJECT TO COURT ORDER with WKEC's operation of the Facilities or its ability to otherwise fulfill its responsibilities under this Agreement. In addition, upon prior written notice to WKEC, Big Rivers and its authorized representatives may visit and inspect the Tangible Assets and obtain copies (at Big Rivers' expense) of any documents or instruments evidencing any Intangible Assets, and the books and records WKEC is required to keep, or cause to be kept, pursuant to this Agreement, and make copies and extracts therefrom, and may discuss any matters relating to this Agreement or any other Phase II Agreement with the officers and employees of WKEC and, in the presence of any officer of WKEC with WKEC's independent accountants. Each such inspection and review shall be conducted at the expense and risk of Big Rivers during normal business hours upon reasonable prior notice to WKEC. Big Rivers shall have no duty to make any such inspection or inquiry and shall not waive any rights hereunder or incur any liability or obligation by reason of not making such inspection or inquiry. ARTICLE 6 OPERATING COMMITTEE 6.1. Establishment and Purpose. Each of Big Rivers and WKEC hereby establish an Operating Committee consisting of not more than two representatives appointed by each such Party. Each such Party shall promptly designate its representatives on the Operating Committee by notice given to the other such Party. Each such Party may appoint one or more alternates to act in the absence of a regular member or members. The chair of the Operating Committee shall be a representative of WKEC. The chair shall be responsible for calling meetings and establishing agendas in consultation with the other such Party. The purpose of the Operating Committee shall be to serve as a means of securing effective cooperation and interchange of information and of providing consultation on a prompt and orderly basis among all parties to the various Operative Documents in connection with various administrative and technical matters which may arise from time to time in connection with the obligations of the parties thereunder. The Operating Committee shall have the following responsibilities: (a) Provide liaison among the parties with respect to their obligations under the Operative Documents. (b) Establish such other ad hoc committees which may be necessary from time to time pursuant to this Section 6.1 and exercise general supervision over such ad hoc committees. (c) Attempt to resolve disputes among the parties arising under the Operative Documents. (d) Review and approve the Annual O&M Budget and the Annual Capital Budget (including deviations therefrom) as provided in Article 7 hereof. 9 CONFIDENTIAL - SUBJECT TO COURT ORDER (e) Review and confirm the Environmental Rent Reduction and the Actual Environmental O&M. (f) Review and confirm WKEC's analysis of the total expenditures caused by any Operating Emergency. (g) Perform any other responsibility established for it under any Operative Document. 6.2. Decisions. WKEC shall make recommendations to Big Rivers with respect to all matters taken under consideration by the Operating Committee. With respect to all matters other than budget approval (which are addressed in Section 7 hereof) considered by the Operating Committee, each of Big Rivers and WKEC shall have one vote on the Operating Committee. Each Party's vote may be exercised by the representatives appointed by the Party or, in the absence of one or both, by an alternate(s). The members or alternates voting on behalf of a Party shall cast that Party's vote as a single unit and shall not have the right to vote separately. Decisions made by the Operating Committee shall be by unanimous vote of the Parties. If the Operating Committee is unable to reach a decision in accordance with the terms of this Section 6, the matter shall be resolved in accordance with Article 15 of the Participation Agreement. 6.3. Meetings. The Operating Committee shall meet at least twice annually including in November or December (for review and approval of the Annual O&M Budget and the Annual Capital Budget) or more often by mutual agreement. Meetings shall be held at Henderson, Kentucky or any other mutually agreed place. 6.4. Notice. WKEC shall give not less than ten days' notice to Big Rivers of regular meetings. Each meeting notice shall include an agenda prepared by WKEC. Notice may be waived by written consent of both Big Rivers and WKEC. 6.5. Quorum. A quorum for any meeting shall exist if each of Big Rivers and WKEC is represented by at least one of its two members. 6.6. Minutes. WKEC shall maintain minutes of Operating Committee meetings and telephone conference calls. WKEC's representative shall prepare and distribute the minutes to Big Rivers' representatives within 45 days after each meeting or telephone conference call of the Operating Committee. The minutes, when signed by Big Rivers and WKEC, shall be the official record of the decisions made by the Operating Committee and shall bind WKEC and Big Rivers. 6.7. Action Without Meeting. In lieu of meetings, the Operating Committee may hold telephone conference calls with WKEC and Big Rivers simultaneously and in which each such Party shall be represented by at least one of its two representatives. The Operating Committee, in lieu of deciding any matter at a meeting or by telephone conference, may act by instrument in writing signed by each such Party's representatives on the Operating Committee. 10 CONFIDENTIAL - SUBJECT TO COURT ORDER 6.8. Costs. Each of WKEC and Big Rivers shall bear for its own account all expenses incurred by such Party's representatives on the Operating Committee in connection with their duties on the Operating Committee. The Operating Committee may condition its approval of any Annual O&M Budget or Annual Capital Budget hereunder (or modification of either) upon receipt of such studies and other information as they may deem appropriate. 6.9. No Modification of Agreement. The Operating Committee may not modify any of the terms, covenants or conditions of any Operative Document. 6.10. Cooperation of the Parties. The Parties agree to cooperate and to provide the Operating Committee with such information as is reasonably necessary for the Operating Committee to perform its responsibilities. ARTICLE 7 ANNUAL BUDGETS 7.1. Operations Pursuant to Budgets. During the partial Year following the Effective Date, if any, and during the two full Years immediately following that partial Year or the Effective Date, as applicable, (collectively, the "Initial Budget Period"), the Annual O&M Budgets and the Annual Capital Budgets attached hereto as Schedule 7.1 shall govern (the "Initial Period Budgets"). The Parties may review and modify such Initial Period Budgets by mutual agreement. WKEC shall, for each Year following the Initial Budget Period during the remainder of Phase II, prepare an Annual O&M Budget and an Annual Capital Budget pursuant to this Article 7. Operations shall be conducted and expenses shall be incurred pursuant to the Annual O&M Budget and the Annual Capital Budget approved by the Operating Committee. WKEC shall also provide the Operating Committee with 5-year plan projections of the Annual O&M Budget and the Annual Capital Budget for information purposes only. 7.2. Content of Annual Capital Budget and Annual O&M Budget. The Annual O&M Budget for each Year shall include details of all anticipated costs and expenses relating to the operation and maintenance of the Tangible Assets for the Year and shall separately identify all Incremental Environmental O&M for the period. The Annual Capital Budget shall describe each Capital Asset in detail (including, but not limited to, equipment or construction specifications), shall specify whether expenses related to that Capital Asset are Incremental Capital Costs or Non-Incremental Capital Costs and shall include cash flow forecasts, cost estimates, and proposed dates for installation and/or replacement in reasonable detail. 7.3. Review and Approval of Annual Capital Budget and Annual O&M Budget. On or before September 1 of the last year of the Initial Budget Period and each subsequent Year, WKEC shall submit in writing to each member of the Operating Committee a proposed Annual O&M Budget and a proposed Annual Capital Budget in each case for the next calendar year. Within 60 days after receipt of WKEC's proposed Annual O&M Budget and proposed Annual Capital Budget, Big Rivers may propose 11 CONFIDENTIAL - SUBJECT TO COURT ORDER modifications thereto. The Operating Committee shall meet to consider any proposed modifications and to approve the Annual O&M Budget and the Annual Capital Budget. The Operating Committee shall approve each calendar year's Annual O&M Budget and the Annual Capital Budget so long as such budgets are consistent with Prudent Utility Practice and this Agreement, subject to the limitations set forth in Section 8.1. Unless the Operating Committee unanimously approves a proposed modification, subject to the requirements of this paragraph, the Operating Committee must approve the Annual O&M Budget and the Annual Capital Budget without such modification if such unmodified budgets are consistent with Prudent Utility Practice and this Agreement, subject to the limitations set forth in Section 8.1. 7.4. Deadlock. In the absence of an approved Annual O&M Budget, WKEC shall operate and maintain the Assets in accordance with Prudent Utility Practice. In the absence of an approved Annual Capital Budget or an approved acquisition of a Capital Asset, WKEC may (but shall not be obligated to, as a condition of mediation or arbitration of the disputed budget or Capital Asset) install or cause a disputed Capital Asset to be installed; provided, however, that WKEC shall bear the full cost of such Capital Asset for its own account unless the Parties otherwise agree or mediation or arbitration under Article 15 of the Participation Agreement finds that WKEC is entitled to reimbursement from Big Rivers because Big Rivers was obligated to pay for the Capital Asset pursuant to Article 8. If the Operating Committee fails to approve an Annual O&M Budget or an Annual Capital Budget for the following calendar year on or before December 15th the Parties will proceed with the dispute resolution procedures set forth in Article 15 of the Participation Agreement. 7.5. Budget Deviations. WKEC shall immediately notify the Operating Committee of any anticipated departure of [REDACTED] or more from an approved Annual Capital Budget or Annual O&M Budget. WKEC shall use reasonable efforts to (a) operate within [REDACTED] percent to [REDACTED] percent of the total approved Annual Capital Budget and (b) spend at least [REDACTED] percent of the total approved Annual O&M Budget (not including the fuel and reagent budget). Subject to the provisions set forth below, any increase of [REDACTED] % or more proposed by WKEC to either budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the Annual O&M Budgets that are included in the Initial Period Budgets, it being understood that increases of [REDACTED]% or more proposed by WKEC to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs will be borne by WKEC unless they constitute Incremental Environmental O&M required to be borne solely by WKEC and Big Rivers in the manner provided for in Section 2.3.3. If WKEC exceeds the total budget for Non- Incremental Capital Costs (exclusive of such costs as are for Major Capital Repairs) that are included in an approved Annual Capital Budget, the additional cost of those Non-Incremental Capital Costs shall be borne by WKEC unless the Parties otherwise agree, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Annual Capital Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if WKEC exceeds [REDACTED] percent of the total budget for Incremental Capital Costs, 12 CONFIDENTIAL - SUBJECT TO COURT ORDER or for Non-Incremental Capital Costs for Major Capital Repairs, in either case that are included in an approved Annual Capital Budget, the additional costs of those Capital Assets shall be borne by WKEC unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that at the time WKEC proposed the applicable portions of the Annual Capital Budget (or modification thereof) relating to those expenditures WKEC acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by WKEC and Big Rivers in accordance with Sections 8.3 and 8.4. Notwithstanding the provisions of the immediately preceding sentence, if WKEC exceeds [REDACTED] percent of the total of any budget for Incremental Capital Costs, or for Non-Incremental Capital Costs for Major Capital Repairs, that are included in an approved Annual Capital Budget that is a part of the Initial Period Budgets, the additional cost of those Capital Assets shall be borne by WKEC unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement determines that the purchase and installation of those Capital Assets, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or WKEC's actions in connection with the same, were consistent with Prudent Utility Practice at the time that budget was prepared, in which case the additional costs shall be borne by WKEC and Big Rivers in accordance with Sections 8.3 and 8.4. If WKEC fails or refuses to use reasonable efforts to spend at least [REDACTED] percent of the total approved Annual Capital Budget or the total approved Annual O&M Budget (excluding that portion relating to Incremental Environmental O&M) and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal is inconsistent with Prudent Utility Practice, WKEC shall make the omitted expenditure as required pursuant to the applicable dispute resolution procedure. 7.6. Operating Emergency. Notwithstanding any other provision of this Agreement, in the event of an Operating Emergency, WKEC may take such action as in its sole discretion it may deem prudent or necessary to terminate the Operating Emergency, to preserve and maintain the safety, integrity and operability of the Tangible Assets and to maintain Capacity and the availability of the Tangible Assets to the maximum extent. Additional capital expenditures incurred by WKEC in response to an Operating Emergency which are not already included in an approved Annual Capital Budget shall be paid for by WKEC unless (a) the same represents an Incremental Capital Cost or expenditures for a Major Capital Repair, in which case such expenditures shall be paid by WKEC and Big Rivers in accordance with Article 8 of this Agreement, or (b) Big Rivers shall not have paid the entire Big Rivers Contribution for that year toward funding of one or more Non- Incremental Capital Costs (other than costs for Major Capital Repairs) and/or Henderson Non-Incremental Capital Costs (other than costs for Henderson Major Capital Repairs) in accordance with Article 7 of the Cost Sharing Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the Station Two Agreement (as applicable), then that remaining amount will be allocated to any Non-Incremental Capital Costs resulting from that Operating Emergency as contemplated in Section 20.6.2 of the Participation Agreement. 13 CONFIDENTIAL - SUBJECT TO COURT ORDER ARTICLE 8 PAYMENT OF CAPITAL ASSETS 8.1. Annual Capital Budget. Capital Assets included in an Annual Capital Budget or any modification of that budget approved by the Operating Committee shall be paid for or reimbursed in accordance with this Article 8. Notwithstanding anything to the contrary in this Agreement or in any other Operative Document, Big Rivers shall have no obligation to (a) authorize the acquisition or construction of or pay for any Capital Assets unless such Capital Assets are necessary, consistent with Prudent Utility Practice, to maintain the Capacity of the Facilities that is physically available and can be legally utilized at [REDACTED] net MW or to comply with any requirement of applicable Laws or administrative or judicial interpretation of an applicable Law (including without limitation, Environmental Laws) or any regulatory authority (including for the avoidance of doubt, and without regard for the actual time for the enactment or implementation of the same, without limitation, the Proposed SIP Call and any Laws that may be enacted or implemented pursuant thereto or in connection therewith), in which case Big Rivers shall be obligated to so authorize the acquisition or construction of and pay for such Capital Assets in accordance with the terms of this Article 8, (b) make any expenditure for Capital Assets which would not be capitalized pursuant to the Accounting Practices (as interpreted, modified or supplemented by the Capitalization Guidelines), or (c) make any expenditure in connection with any personal property or other asset which does not constitute a Capital Asset (other than such expenditures as may be required by Big Rivers as a result of any breach or default by Big Rivers under any of the Operative Documents, or pursuant to any indemnification or hold harmless covenant of Big Rivers under any of the Operative Documents) (unless such expenditure for such personal property or other asset is part of Incremental Environmental O&M, in which case the provisions of Section 2.3.3 shall govern, or unless such expenditure involves Big Rivers' repurchase of personal property on the Termination Date pursuant to Section 9.3 of the Participation Agreement). Big Rivers shall not be required to make any expenditure for Capital Assets which does not meet the foregoing criteria, including, without limitation, any expenditures for Capital Assets, the principal purpose of which is to increase Capacity above [REDACTED] net MW or to improve the efficiency of any Facility. WKEC shall provide written notice to Big Rivers of its intention to make any capital expenditure (an "Enhancement") the principal purpose of which is to increase Capacity above [REDACTED] net MW or to improve the efficiency of any Facility. Big Rivers shall have no approval rights with respect to such Enhancement, provided that such Enhancement (i) is consistent with Prudent Utility Practice, (ii) causes no physical damage to the Facilities, (iii) does not constitute a Major Capital Improvement (as hereinafter defined) and (iv) does not adversely affect the fair market value of the Facilities (using as a basis of comparison the fair market value of the Facilities on the Effective Date). The capital costs incurred prior to the Termination Date which are associated with any Enhancement or Major Capital Improvement shall at all times remain exclusively with WKEC, including, without limitation, following the termination of this Agreement and the other Operative Documents. All Enhancements and Major Capital Improvements shall (i) become part of the Facilities and owned by Big Rivers (subject to the provisions of Article 24 of the Participation Agreement), (ii) be maintained by WKEC in accordance 14 CONFIDENTIAL - SUBJECT TO COURT ORDER with Prudent Utility Practice as provided herein and (iii) subject to Section 10.2 with respect to WKEC's right to determine whether or not to restore an Enhancement or a Major Capital Improvement, be turned over to Big Rivers with the Tangible Assets on the Termination Date. WKEC shall not undertake any significant structural expansion of the Facilities or to construct any new generating plants on the Real Property (in each case, a "Major Capital Improvement"), without Big Rivers' and the RUS' prior written consent thereto. To the extent that there has been any Enhancement or Major Capital Improvement to the Facilities during either Phase I or Phase II, Big Rivers' funding obligations hereunder with respect to both Capital Assets and Incremental Environmental O&M shall not be increased as a result thereof; Big Rivers' obligations shall remain subject to the standard described in Section 8.1(a) above. 8.2. Forecasts. WKEC shall submit to Big Rivers a forecast of cash requirements for each Capital Asset subject to the dollar limitations with respect to such Capital Asset set forth in an Annual Capital Budget or any modification of that budget approved by the Operating Committee. This forecast shall set forth cash requirements with respect to such Capital Asset (i) for each quarterly period commencing on the first day of January, April, July and October in which costs for such Capital Asset shall become due and (ii) for each month of the first two quarterly periods immediately following the issuance of the forecast. WKEC shall revise the forecast and furnish it to Big Rivers no less often than every three months thereafter until completion of the Capital Asset. 8.3. Payment for Capital Assets. WKEC shall maintain an interest-bearing account (the "Capital Account") into which Big Rivers and WKEC shall pay amounts as provided in this Section 8.3 and from which WKEC shall be permitted to withdraw funds to pay when due the cost of Capital Assets. On the first day of each month during the Term, WKEC and Big Rivers shall each deposit sufficient funds into the Capital Account based on their Capital Asset Sharing Ratios (defined in Section 8.4 below), but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Non- Incremental Capital Costs that are not for Major Capital Repairs (i) to cover all cash requirements forecast under Section 8.2 for that month for all Capital Assets (less any excess between funds deposited and interest accrued thereon and funds actually required for Capital Asset expenditures during the previous month) and (ii) to cover any shortfall between funds deposited and actual expenditures required for Capital Assets during the previous month. With respect to funds deposited in the prior month, which are remaining in the present month, and shortfalls in funds deposited in the prior month relative to that month's expenditures, each Party's obligation in the present month shall be adjusted proportionally based on that Party's deposit during the prior month and the Party's relative share of responsibility in that prior month for the Capital Assets for which funds were withdrawn or not used. An illustration of the operation of this Section is set forth in Schedule 8.3. On the Termination Date, all funds remaining in the Capital Account shall be immediately distributed to Big Rivers and WKEC in accordance with the same methodology as used in the prior sentence. 15 CONFIDENTIAL - SUBJECT TO COURT ORDER 8.4. Capital Asset Sharing Ratios. Subject to the provisions of Section 8.1, WKEC and Big Rivers shall directly contribute to the payment of each Capital Asset in accordance with its respective Capital Asset Sharing Ratio, which will be as follows: (a) Each capital expenditure made for a Capital Asset in accordance with Section 8.1 and to comply with a new Law or any revision or change to an existing Law, including but not limited to a new or revised Environmental Law (including for the avoidance of doubt, and without regard for the actual time for the enactment or implementation of the same, without limitation, the Proposed SIP Call and any Laws that may be enacted or implemented pursuant thereto or in connection therewith), or to comply with any change in applicable judicial or administrative interpretation of a Law, occurring after the Effective Date shall be deemed an Incremental Capital Cost. Big Rivers' share of each Incremental Capital Cost, determined as of the date payment for such Incremental Capital Asset is required to be made to the Capital Account pursuant to the forecast prepared by WKEC pursuant to Section 8.2, shall be as follows: (i) from the Effective Date until December 31,[REDACTED], inclusive, [REDACTED]%; (ii) from January 1, [REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]%; (iii) from January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED]%. WKEC's share of each Incremental Capital Cost, determined as of the date payment for such Capital Asset is required, shall be as follows: (i) from the Effective Date until December 31, [REDACTED], inclusive, [REDACTED]%; (ii) from January 1, [REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]%; and (iii) from January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED]. (b) Each capital expenditure made for a Capital Asset in accordance with Section 8.1, but which does not constitute an Incremental Capital Cost as determined in accordance with Section 8.4(a), shall be deemed a Non- Incremental Capital Cost. Big Rivers' share of each Non- Incremental Capital Cost, determined as of the date payment for such Non-Incremental Capital Asset is required to be made to the Capital Account pursuant to the forecast prepared by WKEC pursuant to Section 8.2, shall be as follows: (i) from the Effective Date until December 31, [REDACTED], inclusive, [REDACTED]%; (ii) from January 1, [REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]%; and (iii) from January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED]%. WKEC's share of each Non-Incremental Capital Cost shall be as follows: (i) from the Effective Date until December 31, [REDACTED], inclusive, [REDACTED]%; (ii) from January 1, [REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]% and (iii) from January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED]%. (c) Nothing in this Section 8.4 shall require Big Rivers to pay any portion of an Enhancement or Major Capital Improvement. Further nothing in this Section 8.4 shall require WKEC, or any of its Affiliates, to assume any responsibility related to opacity compliance at the Green or Wilson facilities other than as contemplated in Section 8.1. 8.5. [RESERVED] 8.6. Facilities Retired From Service. Facilities retired from service, whether considered original construction or Capital Assets, shall be disposed of by WKEC in 16 CONFIDENTIAL - SUBJECT TO COURT ORDER accordance with Prudent Utility Practice as soon as practicable. The net proceeds, if any, shall be first applied to the costs of any replacement Capital Assets and the remainder, if any, paid to Big Rivers. 8.7. Title to Assets. Title to each new Capital Asset and any additions, alterations or improvements to the Tangible Assets (including without limitation, Enhancements and Major Capital Improvements) shall, without any action on the part of either Party, automatically vest in Big Rivers. ARTICLE 9 [RESERVED] ARTICLE 10 CONDEMNATION: DAMAGE OR DESTRUCTION OF TANGIBLE ASSETS 10.1. Condemnation. 10.1.1. Taking of All or Substantially All of the Tangible Assets. If all or substantially all of the Tangible Assets are condemned, this Agreement shall terminate when possession of the Tangible Assets is taken by the condemning authority. Upon such termination, WKEC shall have no further liability or obligation under this Agreement (other than liabilities accrued under this Agreement before the date of such condemnation). Payment from the condemnation proceeds shall be as follows: (i) first, in the event that any Enhancements or Major Capital Improvements were included in the Tangible Assets condemned, to WKEC, an amount equal to the LG&E Parties' Residual Value Payment regarding those Enhancements or Major Capital Improvements, determined by reference to Section 24.1(e)(ii) of the Participation Agreement (which shall be deemed to be owing under that Section as if the condemnation were a "Triggering Transfer"), but after defining "M" in that calculation as the total amount of the condemnation proceeds received with respect to all Tangible Assets that were condemned; (ii) second, in full payment of all priority claims of holders of Permitted Liens, in the priority order in which their respective claims appear (including the priority claims held by the LG&E Parties (x) under the Settlement Mortgage and (y) under the Mortgage and Security Agreement, but only to the extent that the LG&E Parties' claims thereunder relate to matters other than any Residual Value Payment for Enhancements or Major Capital Improvements due as result of such condemnation, WKEC's loss of the use and enjoyment of the Tangible Assets (including Enhancements and Major Capital Improvements) associated with the period of time remaining prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date or, with respect to Enhancements and Major Capital Improvements, the lesser of the remaining weighted average useful life of the Enhancements and Major Capital Improvements, or the time remaining prior to the December 31st that is closest to the twenty-fifth anniversary of the 17 CONFIDENTIAL - SUBJECT TO COURT ORDER Effective Date, as applicable, by reason of the condemnation, for which WKEC's compensation is as described in clause (i) and in clause (iii) of this Section 10.1.1); and (iii) third, WKEC shall then be entitled to share in the condemnation award (net of the payments described in clauses (i) and (ii) of this Section 10.1.1) in the proportion that the net present value of the use and enjoyment of the Assets (other than Enhancements and Major Capital Improvements) by WKEC over the period of time remaining prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date bears to the fair market value of the Tangible Assets on the date of the taking, determined on the basis that such taking had not occurred. 10.1.2. Partial Condemnation. If less than substantially all of the Tangible Assets are condemned, then this Agreement shall not terminate but the rent payable by WKEC under Section 2.3.2 shall be reduced proportionately after possession is taken by the condemning authority based upon the ratio of the fair market value of the specific Tangible Assets taken to the fair market value of all Generating Plants at the time of the taking (exclusive of HMP&L's interests in and rights to the value of Station Two not allocated to Big Rivers or Station Two subsidiary pursuant to the Station Two Contracts at the time of the taking), determined on the basis that said taking had not occurred. 10.2. Damage or Destruction; Abatement. 10.2.1. Damage or Destruction. If at any time during Phase II the Tangible Assets are damaged or destroyed and such damage or destruction was caused by a casualty covered by an insurance policy required by Article 13 of the Participation Agreement, WKEC shall, to the extent insurance proceeds are made available to WKEC and to the extent consistent with the Prudent Utility Practice, use such proceeds to restore the Tangible Assets as soon as reasonably possible to substantially the same general condition, character or use as existed before the damage and this Agreement shall remain in effect; provided, however, that to the extent that any Enhancement or Major Capital Improvement has been damaged or destroyed as a result of a casualty covered by an insurance policy, (i) all insurance proceeds associated with such damage or destruction shall belong to WKEC to be applied by WKEC as it may determine in its sole discretion and (ii) WKEC shall be under no obligation to restore such Enhancement or Major Capital Improvement. In the event that WKEC determines that it will not restore such Enhancement or Major Capital Improvement, WKEC agrees that (i) it shall, prior to the Termination Date, continue to maintain the Tangible Assets (including the remains of such Enhancement or Major Capital Improvement) in accordance with Prudent Utility Practice, all Laws and requirements of all insurance policies in effect pursuant to Article 13 of the Participation Agreement and (ii) remove from the Real Property, at its sole expense, the remains of such Enhancement or Major Capital Improvement, no later than the Termination Date (or within a reasonable period thereafter in the event such termination occurs prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date). To the extent the capital cost of such restoration of Tangible Assets, other than Enhancements and Capital Improvements (determined in accordance with Accounting Practices) (i) is not covered by the proceeds of insurance and (ii) is not covered by LG&E Self-Insurance proceeds, then such capital cost shall, to the extent consistent with Section 8.1, be deemed payments for Capital Assets pursuant to 18 an approved modification of the Annual Capital Budget and shall be paid for in accordance with the provisions of Sections 8.3 and 8.4, provided that the Capital Asset Sharing Ratios applied to such restoration shall be those appropriate based on whether it is a Non-Incremental Capital Cost or Incremental Capital Cost, and further provided that these costs will be paid for by WKEC and Big Rivers unless such damage or destruction resulted from (a) the gross negligence or willful misconduct of WKEC or its Affiliates, in which case WKEC shall bear such additional costs alone or (b) from the gross negligence or willful misconduct of Big Rivers, in which case Big Rivers shall bear such additional cost alone. WKEC agrees that it shall, upon Big Rivers' request on the Termination Date (or reasonable period thereafter in the event such termination occurs prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date), remove any Enhancement or Major Capital Improvement from the Real Property, which removal shall be effected in a manner such that it will not adversely affect the value or utility of the remaining Assets. 10.2.2. Abatement. If the Tangible Assets are destroyed or damaged, other than as set forth in the following sentence, the fixed rental payments and the Monthly Margin Payments payable by WKEC pursuant to Section 2.3.2 of this Agreement (but subject to the limitations set forth therein), for the period during which said damage, repair or restoration continues shall not be abated, nor shall they be abated if the Tangible Assets are not restored because such restoration is determined to be inconsistent with Prudent Utility Practice. In the event that any of the Tangible Assets are destroyed or damaged by reason of the gross negligence or willful misconduct of Big Rivers, the fixed rental payments and the Monthly Margin Payments payable by WKEC under Section 2.3.2 will be abated only for the period during which said damage, repair or restoration continues and only in the event the amount of electrical capacity available to LEM from the Generating Plants (exclusive of the capacity reserved by HMP&L from Station Two from time-to-time) is thereby reduced, and then only in proportion with the reduction in such electric capacity below [REDACTED] MW (exclusive of the capacity reserved by HMP&L from Station Two from time to time). 10.2.3. Insurance Proceeds. Notwithstanding anything contained in this Agreement or any other Operative Document to the contrary, but subject to the provisions of Section 10.2.1, above, in the event any Capital Asset (exclusive of Enhancements and Major Capital Improvements) is damaged or destroyed and any insurance proceeds are paid or payable to Big Rivers and/or any LG&E Party as a result thereof, and in the event such Capital Asset is not repaired or replaced in compliance with the Operative Documents (or is so repaired or replaced using only a portion of such insurance proceeds), then all such insurance proceeds that are not so used for the repair or replacement of such Capital Asset or so budgeted for that use shall be divided between Big Rivers and WKEC (with appropriate payments between those Parties) within 30 days after the later of (a) the decision is made not to repair or replace the Capital Assets or (b) insurance proceeds have been received (in the case of (a) and (b), together with any interest that may have accrued on those proceeds since their receipt), based on the respective Capital Asset Sharing Ratio of Big Rivers and WKEC that applied to the relevant Capital Asset at the time of its original construction, purchase or installation. 19 CONFIDENTIAL - SUBJECT TO COURT ORDER ARTICLE 11 DEFAULT AND TERMINATION 11.1. Events of Default. Subject to the terms and conditions of this Section 11, the occurrence of any of the following events shall constitute a default under this Agreement: (1) Failure by either Party to pay when due any and all amounts payable to the other Party in accordance with the terms of this Agreement; (2) Any attempt by a Party to transfer an interest in this Agreement or in the Assets in breach of Section 16 of the Participation Agreement; (3) [RESERVED]; (4) Failure of a Party to perform any material obligation set forth in this Agreement; (5) Except with respect to the Chapter 11 Case, any filing of a petition in bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency laws, or voluntarily taking advantage of any such laws by answer or otherwise or the commencement of involuntary proceedings under any such laws if such proceedings are not withdrawn or dismissed within 60 days after such institution; (6) Assignment by a Party for the benefit of creditors; (7) Allowance by a Party of the appointment of a receiver or trustee of all or a material part of its property if such receiver or trustee is not discharged within 60 days after appointment; or (8) Failure, inability or refusal of a Party or a Party's Affiliate to cure a default or breach by such Party or such Party's Affiliate under the Power Purchase Agreement, the Participation Agreement or the Transmission Service and Interconnection Agreement which gives rise to a termination of such other Phase II Agreement or any termination by that Party of any of the foregoing agreements in breach or in default thereof. The Party in default under any provision of this Agreement shall be referred to as the "Defaulting Party" and the other Party shall be referred to as the "Non- Defaulting Party" 11.2. Notice of Default. The Non-Defaulting Party shall have the right to give the Defaulting Party a written notice of default ("Notice of Default"), which shall describe the default in reasonable detail and state the date by which the default must be cured, which shall be at least 30 days after receipt of the notice, except as to a default under Subsection (1) of Section 11.1 which shall be three days after receipt of notice, and 20 CONFIDENTIAL - SUBJECT TO COURT ORDER under Subsections (2), (5), (6), (7) or (8) of Section 11.1, as to which there will be no cure right. 11.3. Opportunity to Cure. If within the three day period with respect to a default under Subsection (1) of Section 11.1 the Defaulting Party cures the default, or if within the 30 day period with respect to defaults under Subsection (4) (which is not also a default under Subsection (2), (5), (6), (7) or (8) of Section 11.1), the Defaulting Party cures the default or if the failure is one that cannot in good faith be corrected within such period and the Defaulting Party certifies to the Non-Defaulting Party that it agrees to cure such default, certifies a reasonable date by which the cure will be effected, and begins to correct the default within the 30 day period and continues corrective efforts with diligence until a cure is effected, the notice of default shall be inoperative and the rights of the Non- Defaulting Party under Section 11.5 shall not be triggered. Subject to the Defaulting Party's right to contest under Section 11.4, if the Defaulting Party does not cure or begin (and diligently continue) to cure the default as provided above, the Non-Defaulting Party shall have the rights specified in Section 11.5. A Non-Defaulting Party's right to damages or other relief resulting from a breach by a Defaulting Party hereunder shall begin to accrue as of the first day of the breach without regard to the availability of any cure periods hereunder, and without regard to whether the breach or default is cured. 11.4. Contest. If the Defaulting Party disputes the existence or nature of a default asserted in a Notice of Default, then the Defaulting Party shall pay the disputed payment or perform the disputed obligation, but may do so under protest. The protest shall be in writing, shall accompany the disputed payment or precede the performance of the disputed obligation, and shall specify the reasons upon which the protest is based. The Defaulting Party shall deliver copies of the protest to the Non-Defaulting Party. If it is later determined pursuant to the dispute resolution, mediation or arbitration procedure under Article 15 of the Participation Agreement that a protesting party is entitled to a refund of all or any portion of a disputed payment or payments or is entitled to the reasonable equivalent in money of non-monetary performance of a disputed obligation theretofore made, then, upon such determination, the nonprotesting Party shall pay such amount to the protesting Party, together with interest thereon at a rate equal to the Prime Rate from the date of payment or from the date of completion of performance of a disputed obligation to the date of reimbursement. 11.5. Remedies. If the Defaulting Party's default is one for which there is no cure right, or if the Defaulting Party fails or refuses to cure the default under Section 11.3 for which a cure right is available within the time described hereunder, the Non-Defaulting Party shall have, in addition to any rights a Party may have by law or otherwise, the following remedies: (i) If Big Rivers, on the one hand, or WKEC, on the other hand, ("X") shall fail to make any payment or shall fail to perform any obligation under this Agreement, then the other Party ("Y") or any of its Affiliates will have the right (but not the obligation) without prior notice to X to perform such obligations and set-off the costs of such performance or the amount of any such past due payment owing to Y against any 21 CONFIDENTIAL - SUBJECT TO COURT ORDER obligation of Y or any of its Affiliates owing to X or any of its Affiliates hereunder or under any other Phase II Agreement (whether or not matured). (ii) The Non-Defaulting Party may terminate this Agreement upon 30 days' notice to the Defaulting Party of its intent to do so. The termination rights provided for in this Section 11.5 are in addition to, and not in lieu of, any rights to terminate this Agreement as are set forth in the Guaranty and the Station Two Agreement, which termination rights shall be cumulative. (iii) Notwithstanding anything contained herein or in any Operative Document to the contrary, Big Rivers may also terminate this Agreement at any time that the Guaranty provides Big Rivers with the right to terminate this Agreement. No provision of this Agreement or any other Operative Document purporting to limit special, incidental and consequential damages that may be recoverable by Big Rivers shall bar or constitute any waiver of any claim by Big Rivers for any Monthly Margin Payments as its damages arising by reason of a default by WKEC under this Agreement; provided, that nothing contained herein shall be deemed to be an admission by WKEC that the loss of such payments by Big Rivers is or shall be an actual or direct damage incurred by Big Rivers arising out of such a default by WKEC. 11.6. Special Abatement. The annual rental payments payable by WKEC pursuant to Section 2.3.2 hereunder shall be reduced in accordance with the provisions of Section 16.3 of the Transmission Service and Interconnection Agreement, and in accordance with the provisions of the Station Two Agreement. ARTICLE 12 SEVERAL OBLIGATIONS Nothing contained in this Agreement shall ever be construed to create an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to either of the Parties. Each Party shall be individually responsible for its own covenants, obligations and liabilities as herein provided. ARTICLE 13 GENERAL PROVISIONS 13.1. Notices. All provisions set forth in the Participation Agreement with respect to Notices shall apply hereto. 13.2. Waiver. The failure of a Party to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach of any provision of this Agreement shall not constitute a waiver of any provision of this Agreement or limit the Party's right thereafter to enforce any provision or exercise any right. 22 CONFIDENTIAL - SUBJECT TO COURT ORDER 13.3. Amendment and Modification. No amendment or modification of this Agreement shall be valid unless made in writing and duly executed by the Parties. 13.4. Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the Commonwealth of Kentucky but without giving effect to the conflict of law rules of such jurisdiction. 13.5. Further Assurances. Each Party shall take from time to time, for no additional consideration, such actions and execute such additional instruments as may be reasonably (a) necessary to implement and carry out the intent and purpose of this Agreement or (b) desirable but not necessary to implement and carry out the intent and purpose of this Agreement without incurring material cost. 13.6. Survival of Terms and Conditions. The provisions of this Agreement related to the recovery of damages sustained hereunder and the exercise of remedies generally shall survive its termination to the full extent necessary for their enforcement and the protection of the Party in whose favor they run. 13.7. Successors and Assigns. This Agreement shall bind and inure to the benefit of the Parties and their respective successors and permitted assigns. 13.8. Recordation. WKEC shall prepare a short form of this Agreement in form and substance satisfactory to Big Rivers, which shall be executed and acknowledged by the Parties and recorded by WKEC. WKEC may, in its sole discretion, elect to record this entire Agreement. 13.9. Time of the Essence. A material consideration of the Parties entering into this Agreement is that the Parties will make all required payments as and when due and will perform all other obligations under this Agreement in a timely manner. Except as otherwise specifically provided in this Agreement, time is of the essence of each and every provision of this Agreement. 13.10. Counterparts. This Agreement may be executed in counterparts, both of which taken together shall constitute a single agreement. 13.11. Entire Agreement. This Agreement, including all attached Schedules, together with the other Operative Documents, contain the entire and final understanding of the Parties, are intended fully to integrate the Parties' agreement, and supersede all prior agreements and understandings between the Parties related to the subject matter of those agreements. 13.12. Schedules. Any matter disclosed by a Party on any schedule hereto shall be deemed to be disclosed by such Party on all other applicable schedules, provided that such Party has attempted in good faith to disclose such matter on all schedules wherein such disclosure is appropriate to make such schedules true and correct. 23 CONFIDENTIAL - SUBJECT TO COURT ORDER 13.13. Construction. This Agreement was the product of negotiations between the Parties, and therefore the rule of contract construction that an agreement shall be construed against the drafter shall not be applied to this Agreement. 13.14. Continuation of Agreement. 13.14.1. Big Rivers recognizes and acknowledges that the RUS, the Members and the LG&E Parties have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the Members and the LG&E Parties that Big Rivers has in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated Term (i.e., approximately 25 years). In order to enable Big Rivers to comply with certain requirements of the KPSC related to approval of its proposed rates, and to provide additional assurances of its good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 years), and without any implication by any of the Parties that Big Rivers is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, Big Rivers additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by Big Rivers of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against Big Rivers under any such Law, neither Big Rivers nor its successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency Laws (the "Insolvency Assurance"). Thereafter, Big Rivers shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and the LG&E Parties shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that Big Rivers ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its specific terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 13.14.2. WKEC recognizes and acknowledges that the RUS, the Members and Big Rivers have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for their stated Term (i.e., approximately 25 years). WKEC has informed the RUS, the Members and Big Rivers that WKEC has in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated Term (i.e., approximately 25 years). In order to facilitate approval of the proposed rates of Big Rivers and provide additional assurances of its good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 24 CONFIDENTIAL - SUBJECT TO COURT ORDER years), and without any implication by any of the Parties that WKEC is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, WKEC additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by WKEC of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against WKEC under any such Law, neither WKEC nor its successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency Laws (the "Insolvency Assurance"). Thereafter, WKEC shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and Big Rivers shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that WKEC ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its specific terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 13.14.3. Nothing in this Section 13.14 shall modify, reduce or diminish: (i) the rights of the RUS under the New RUS Loan Documents (as defined in that certain New RUS Loan Agreement between Big Rivers and the RUS to be executed and delivered on the Effective Date); or (ii) the rights of the mortgagees under the New RUS Mortgage (as defined in said New RUS Loan Agreement); including without limitation, any right to withhold consent with respect to any sale or disposition of Big Rivers' property except on terms acceptable to the RUS and/or such mortgagees; but subject, in the case of (i) and (ii) above, in all cases to the Non-Disturbance Agreement of even date herewith among Big Rivers, RUS, AMBAC Assurance Corporation and the LG&E Parties. 13.14.4. The provisions of this Section 13.14 shall survive the expiration or termination of this Agreement for any reason, and shall continue to be binding on the Parties. 25 CONFIDENTIAL - SUBJECT TO COURT ORDER IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed as of this 15th day of July, 1998. BIG RIVERS ELECTRIC CORPORATION By /s/ Michael H. Core -------------------------------------- Printed Name: Michael H. Core --------------------------- Title: President and CEO ---------------------------------- WESTERN KENTUCKY ENERGY CORP. By /s/ George Basinger -------------------------------------- Printed Name: George W. Basinger --------------------------- Title: President ---------------------------------- [*All Schedules and Exhibits REDACTED] 26 TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS.........................................................1 ARTICLE 2 LEASE...............................................................1 2.1. Lease Grant...........................................................1 2.2. Term..................................................................2 2.3. Rental and Margin Payments............................................2 2.3.1. Initial Rental Payment............................................2 2.3.2. Annual Rental; Monthly Installment Payments; Monthly Margin Payments................................................2 2.3.3. Adjustment for Incremental Environmental O&M......................5 2.3.4. [RESERVED]........................................................6 2.4. Covenant of Quiet Enjoyment...........................................6 2.5. No Other Interest.....................................................6 2.6. Return of the Tangible Assets.........................................6 ARTICLE 3 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES........................6 ARTICLE 4 ADDITIONAL OBLIGATIONS OF BIG RIVERS................................7 ARTICLE 5 WKEC AND OPERATIONS.................................................7 5.1. Designation...........................................................7 5.2. Powers and Duties of WKEC.............................................7 5.2.1. Use...............................................................7 5.2.2. Maintenance and Operation.........................................7 5.3. Marketing of Energy...................................................8 5.4. Cooperation Between Big Rivers and WKEC...............................8 5.4.1. System Dispatch...................................................8 5.4.2. Permits; Reports..................................................8 5.4.3. Access to Facilities; Inspection..................................8 ARTICLE 6 OPERATING COMMITTEE.................................................9 6.1. Establishment and Purpose.............................................9 6.2. Decisions............................................................10 6.3. Meetings.............................................................10 6.4. Notice...............................................................10 6.5. Quorum...............................................................10 6.6. Minutes..............................................................10 6.7. Action Without Meeting...............................................10 6.8. Costs................................................................11 6.9. No Modification of Agreement.........................................11 6.10. Cooperation of the Parties..........................................11 ARTICLE 7 ANNUAL BUDGETS.....................................................11 7.1. Operations Pursuant to Budgets.......................................11 7.2. Content of Annual Capital Budget and Annual O&M Budget...............11 7.3. Review and Approval of Annual Capital Budget and Annual O&M Budget..................................................11 7.4. Deadlock.............................................................12 7.5. Budget Deviations....................................................12 7.6. Operating Emergency..................................................13 ARTICLE 8 PAYMENT OF CAPITAL ASSETS..........................................14 8.1. Annual Capital Budget................................................14 i CONFIDENTIAL - SUBJECT TO COURT ORDER Page ---- 8.2. Forecasts............................................................15 8.3. Payment for Capital Assets...........................................15 8.4. Capital Asset Sharing Ratios.........................................16 8.5. [RESERVED]...........................................................16 8.6. Facilities Retired From Service......................................16 8.7. Title to Assets......................................................17 ARTICLE 9 [RESERVED].........................................................17 ARTICLE 10 CONDEMNATION: DAMAGE OR DESTRUCTION OF TANGIBLE ASSETS.........................................................17 10.1. Condemnation.........................................................17 10.1.1. Taking of All or Substantially All of the Tangible Assets...............................................17 10.1.2. Partial Condemnation............................................18 10.2. Damage or Destruction; Abatement.....................................18 10.2.1. Damage or Destruction...........................................18 10.2.2. Abatement.......................................................19 10.2.3. Insurance Proceeds..............................................19 ARTICLE 11 DEFAULT AND TERMINATION...........................................20 11.1. Events of Default...................................................20 11.2. Notice of Default...................................................20 11.3. Opportunity to Cure.................................................21 11.4. Contest.............................................................21 11.5. Remedies............................................................21 11.6. Special Abatement...................................................22 ARTICLE 12 SEVERAL OBLIGATIONS...............................................22 ARTICLE 13 GENERAL PROVISIONS................................................22 13.1. Notices.............................................................22 13.2. Waiver..............................................................22 13.3. Amendment and Modification..........................................23 13.4. Governing Law.......................................................23 13.5. Further Assurances..................................................23 13.6. Survival of Terms and Conditions....................................23 13.7. Successors and Assigns..............................................23 13.8. Recordation.........................................................23 13.9. Time of the Essence.................................................23 13.10. Counterparts........................................................23 13.11. Entire Agreement....................................................23 13.12. Schedules...........................................................23 13.13. Construction........................................................24 13.14. Continuation of Agreement...........................................24 SCHEDULES [*All Schedules REDACTED] Description Schedules Monthly Margin Payment 2.3 Initial Period Budgets 7.1 Illustration of Operation of Section 8.3 8.3 ii EX-10.88 16 EXHIBIT 10.88 SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION - SUBJECT TO PROTECTIVE ORDER POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Exhibit 10.88 POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION, AND LG&E ENERGY MARKETING INC. July 15 , 1998 POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. TABLE OF CONTENTS Page Section 1: Definitions......................................................1 Section 2: Effective Date and Termination...................................2 Section 3: Unit Power Sales Agreement.......................................5 Section 4: Big Rivers' Purchases from LEM..................................11 Section 5: Scheduling and Ancillary Services...............................19 Section 6: Metering, Pricing and Billing...................................24 Section 7: Audit Rights....................................................30 Section 8: Cost Determination Changes......................................31 Section 9: Remedies........................................................31 Section 10: Governing Law..................................................33 [Section 11: Reserved].....................................................33 Section 12: Uncontrollable Forces..........................................33 [Section 13: Reserved].....................................................34 [Section 14: Reserved].....................................................35 Section 15: Liability and Indemnity........................................35 Section 16: Entire Agreement...............................................36 Section 17: Continuation of Agreement......................................36 Section 18: General Provisions.............................................38 Exhibit A Points of Delivery For Unit Power Exhibit B Points of Delivery For Purchases By Big Rivers Exhibit C Points of Metering Schedule 3.3(a) Monthly Margin Payment - i - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. This POWER PURCHASE AGREEMENT ("Agreement") dated this 15th day of July , 1998, is between Big Rivers Electric Corporation, a Kentucky rural electric cooperative ("Big Rivers"), and LG&E Energy Marketing Inc., an Oklahoma corporation ("LEM"). LEM and Big Rivers are sometimes referred to herein collectively as "Parties" and individually as "Party." RECITALS WHEREAS, Big Rivers and LEM are parties to certain other agreements as are set forth in the New Participation Agreement dated April 6, 1998 among Big Rivers, LEM, WKEC, Leaseco, and Station Two Subsidiary ("Participation Agreement"), which contemplates the execution and delivery of this Agreement; WHEREAS, Big Rivers and LEM wish to enter into a unit power sales agreement for the duration of Phase I pursuant to which Big Rivers will sell and LEM will purchase the net output of each of the Generating Plants (exclusive of the portion of the net output of Station Two reserved for HMP&L); WHEREAS, during Phase II, Big Rivers will lease the Tangible Assets to Leaseco and assign its right to operate Station Two and purchase Station Two Power to Station Two Subsidiary, and LEM may purchase from Leaseco and Station Two Subsidiary the net output of each of the Generating Plants (exclusive of the portion of the net output of Station Two reserved for HMP&L); and WHEREAS, throughout the Term of this Agreement, Big Rivers wishes to purchase and LEM wishes to sell firm power in the quantities and in accordance with the terms specified herein; NOW, THEREFORE, in consideration of the mutual covenants set forth in this Agreement, the Parties agree as follows: Section 1: Definitions As used herein, the terms set forth in Exhibit X attached to the Participation Agreement have the meanings set forth therein when used with initial capitalization, whether singular or plural, - 1 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. unless that term is also expressly defined in this Agreement, in which event the definition in this Agreement shall control. Section 2: Effective Date and Termination 2.1 Term of this Agreement. This Agreement will be effective on the Effective Date and shall terminate on the earlier of (a) the December 31 of that Year which is closest to the twenty-fifth (25th) anniversary of the Effective Date; or (b) the date of a termination of this Agreement pursuant to Section 2.2 or pursuant the relevant provisions of the Guaranty or the Station Two Agreement. 2.2 Default and Termination. (a) Subject to the terms and conditions of this Section 2.2 and of Section 12, the occurrence of any of the following events, unless otherwise excused pursuant to the terms of this Agreement, shall constitute a default under this Agreement: (i) Failure by a Party to make any payments as and when due hereunder; (ii) Failure of a Party to perform any material duty imposed on it by this Agreement; (iii) Any attempt by a Party to transfer an interest in this Agreement in breach of Article 16 of the Participation Agreement; (iv) Failure of Big Rivers during Phase I to deliver all Unit Output to LEM in accordance with this Agreement including without limitation Section 3.2, for more than 30 days, whether or not consecutive, in any 365 day period; (v) Failure of LEM to deliver to Big Rivers all amounts of Power which Big Rivers is entitled to receive from LEM in accordance with this Agreement for more than 30 days, whether or not consecutive, in any 365 day period; (vi) Except with respect to the Chapter 11 Case, any filing of a petition in bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency laws, or voluntarily taking advantage of any such laws by answer or otherwise or the commencement of involuntary proceedings under any such laws by a Party if such proceedings - 2 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. are not withdrawn or dismissed within 60 days after such institution (in which case default occurs on the 61st day after filing); (vii) Assignment by a Party for the benefit of creditors; (viii) Allowance by a Party of the appointment of a receiver or trustee of all or a material part of its property if such receiver or trustee is not discharged within 60 days after appointment (in which case default occurs on the 61st day after appointment); or (ix) Failure, inability or refusal of a Party to cure a default or breach under (a) during Phase I, the Cost Sharing Agreement, the Facilities Operating Agreement, the Transmission Service and Interconnection Agreement or the Participation Agreement which gives rise to a termination of such other Phase I Agreement or (b) during Phase II, the Lease, the Transmission Service and Interconnection Agreement or the Participation Agreement which gives rise to a termination of such Phase II Agreement; or during either Phase I or Phase II, any termination by a Party of any of the Agreements described above in breach or default thereof. Any Party in default under any provision of this Agreement shall be referred to as the "Defaulting Party" and the other Party shall be referred to as the "Non-Defaulting Party." (b) The Non-Defaulting Party shall have the right to give the Defaulting Party a written notice of default ("Notice of Default"), which shall describe the default in reasonable detail and state the date by which the default must be cured, which shall be at least 30 days after receipt of the Notice of Default, except as to a default under Section 2.2(a)(i) which shall be 3 days after receipt of notice, and under Section 2.2(a)(iii) through (ix), inclusive, as to which there will be no cure right. If within the 3 day period with respect to a default under Section 2.2(a)(i) the Defaulting Party cures the default, or if within the 30 day period with respect to defaults under Section 2.2(a)(ii) (that are not also defaults under Sections 2.2(a)(iii) through (viii), inclusive) the Defaulting Party cures the default, or if the default under Section 2.2(a)(ii) is one that cannot in good faith be corrected within such 30 day period and the Defaulting Party certifies to the Non-Defaulting Party that it - 3 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. agrees to cure such default, certifies a reasonable date by which the cure will be effected, begins to correct the default within the 30 day period and continues corrective efforts with diligence until a cure is effected, the Notice of Default shall be inoperative and the rights of the Non-Defaulting Party under Section 2.2(c) shall not be triggered with respect to such default under Section 2.2(a)(i) or Section 2.2(a)(ii), provided that the cure is effected within the period allotted or such extension as to which the Parties in good faith consent. (c) If the Defaulting Party's default is one for which there is no cure right, or if the Defaulting Party fails or refuses to cure a default for which a cure right is available hereunder within the period described hereunder, the Non-Defaulting Party shall have, in addition to any rights such Party may have by law or otherwise, the right to terminate this Agreement upon 30 days' notice to the Defaulting Party of its intent to do so. The termination rights provided for in this Section 2.2 are in addition to, and not in lieu of, any rights to terminate this Agreement as are set forth in the Guaranty or the Station Two Agreement, which termination rights shall be cumulative. (d) Notwithstanding anything contained elsewhere in this Agreement to the contrary and without extending any period otherwise specified in this Agreement for cure or remedy, in the event (1) a breach or default by the Defaulting Party under this Agreement is curable as contemplated in Section 2.2(b) of this Agreement and (2) such breach or default is of such a nature that it cannot be remedied or cured by repair to or replacement of or construction of Tangible Assets or properties the use or enjoyment of which are required in order for the Non-Defaulting Party to enjoy all of its material rights or interests as contemplated in this Agreement, then such breach or default must be cured within 180 days after notice thereof is delivered by the Non-Defaulting Party(s) or the Non-Defaulting Party(s) shall have the right to terminate this Agreement upon two (2) Business Days prior written notice delivered to the Defaulting Party. Any re-occurrence of a breach or default of the type described in the preceding sentence that arises from a common cause or a continuation of the same event or legal proceeding as the first occurrence following its remedy or cure by the Defaulting Party shall also be grounds for termination of this Agreement if not once again cured or remedied within thirty (30) Business Days after notice thereof delivered by the Non-Defaulting Party. In the event the breach or default of the type described in the first sentence of this Section 2.2(d) reoccurs more than twice in any consecutive 365-day period, it shall be deemed to be no longer curable and the Non-Defaulting Party shall be entitled to exercise its termination rights provided for in (c) above, in addition to all of its other rights and remedies hereunder. - 4 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (e) Except as expressly set forth elsewhere in this Section 2.2, in Section 9 of this Agreement, in Sections 8.2 and 8.3 of the Participation Agreement, or in any other Operative Document (including without limitation, any provision of such Operative Document that may permit a Party or any of its Affiliates to set-off amounts that it may be owed under that document against amounts that it may owe to the other Party or any of its Affiliates under this Agreement), the obligations and rights of the Parties under this Agreement shall be independent and not be affected by either Party's performance or failure to perform under the Facilities Operating Agreement, the Transmission Services and Interconnection Agreement, the Cost Sharing Agreement, the Lease, the Participation Agreement and any other Operative Document or other contract or agreement contemplated therein. Notwithstanding anything in this Agreement to the contrary, Big Rivers' failure to purchase required minimum quantities of Power hereunder shall not constitute a default but shall simply give rise to the rights of LEM under Section 6.4(b). (f) Notwithstanding anything contained herein to the contrary, during Phase I, upon the occurrence of a total condemnation with respect to all or substantially all of the Assets, which condemnation causes the termination of the Cost Sharing Agreement, Section 3 of this Agreement (Unit Power Sales) and all related provisions of this Agreement implementing the Parties' rights and obligations with respect to the Unit Power Sales Agreement set forth in Section 3 shall be null and void and all remaining provisions of this Agreement shall remain in full force and effect. Section 3: Unit Power Sales Agreement 3.1 Phase I Only. The provisions of this Section 3, Unit Power Sales Agreement, will terminate as of the termination of Phase I. In the event that the Effective Date of this Agreement is the Phase II Effective Date, the Unit Power Sales contemplated herein will never occur and this Section 3 will never become effective. 3.2 Purchase of Unit Output. During Phase I, Big Rivers will sell to LEM and LEM will purchase from Big Rivers the Unit Output under the terms and conditions set forth in this Agreement from the generating units that constitute the Generating Plants. Big Rivers is obligated to sell the Unit Output only when the dedicated generating units are operational. LEM is entitled to all Unit Output including, but not limited to, the Generating Plants' capability to provide generation-based Ancillary Services. Big Rivers agrees to direct the Operator of the Generating Plants (during Phase I) to use its commercially reasonable efforts, consistent with Prudent Utility Practice to maximize the amount of Unit Output available for sale to LEM, and consistent with Big Rivers' obligations and rights under the Facilities Operating Agreement and the Station Two Agreement, Big Rivers agrees it will not interfere with the Operator's attempts, consistent with Prudent Utility Practice and Big Rivers' rights and obligations under the - 5 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Facilities Operating Agreement and the Station Two Agreement, to maximize the efficiency and output of the Generating Plants. Big Rivers, through its Operator, will deliver Unit Output to LEM at the Points of Delivery specified in Exhibit A with the output of each Generating Plant to be delivered to its respective Point of Delivery. 3.3 Payments Due. LEM's sole payment obligations with respect to the Unit Output to be purchased by it pursuant to this Unit Power Sales Agreement, and Big Rivers' sole entitlement to payment for such Unit Output, is as set forth in this Section 3.3 as adjusted pursuant to Section 6.6, if applicable. (a) Initial Fixed Payment; Annual Fixed Payments; Monthly Margin Payments. (i) LEM shall pay to Big Rivers on the Phase I Effective Date an Initial Fixed Payment of $57.0 million as adjusted pursuant to Section 9.3 of the Participation Agreement (PP Price adjustment). (ii) Beginning on the second anniversary of the Phase I Effective Date and each subsequent Year during Phase I, LEM shall pay Big Rivers an Annual Fixed Payment of $31.5 million as adjusted pursuant to Section 9.3 of the Participation Agreement (PP Price adjustment), as follows: LEM shall pay the Annual Fixed Payments in equal monthly installments of $2,625,000 as adjusted pursuant to Section 9.3 of the Participation Agreement, with the first monthly installment to be paid on the second anniversary of the Phase I Effective Date and each remaining monthly installment to be paid on the first day of each calendar month up to and including the first day of the calendar month in which Phase I terminates; provided that, if the first installment is due on a day other than the first day of the month, LEM shall prorate that installment by the ratio that the remaining number of days in the month bears to the total number of days in that month. If Phase II commences prior to the second anniversary of the Phase I Effective Date, LEM shall be entitled to a refund of the Initial Fixed Payment prorated by the ratio that the remaining number of days until the second anniversary of the Phase I Effective Date bears to the total number of days between the Phase I Effective Date and the second anniversary of the Phase I Effective Date. If Phase II commences after the second anniversary of the Phase I Effective Date and Phase I terminates on a day other than the last day of a month, LEM shall be entitled to a refund of the installment of the Annual Fixed Payment paid for such month prorated by the ratio that the remaining number of days - 6 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. in the month bears to the total number of days in that month. If Big Rivers elects to reduce the Contract Limits pursuant to Section 4.3(e) of this Agreement, the Annual Fixed Payment provided for in this Section 3.3(a) as adjusted pursuant to Section 9.3 of the Participation Agreement shall be increased effective on January 1 of the Year in which the reduction becomes effective to an amount equal to the product of the Annual Fixed Payment as adjusted pursuant to Section 9.3 of the Participation Agreement multiplied by the sum of one (1) plus the CCAP. The monthly installment of the Annual Fixed Payment due on such January 1 and on the first day of each month during the remainder of Phase I shall be adjusted accordingly. The Parties acknowledge that Big Rivers may elect to reduce the Contract Limits under Section 4.3(e) of this Agreement on more than one occasion, and that the Annual Fixed Payment and associated monthly installments shall be adjusted as provided in this Section 3.3(a) on each such occasion. Subject to the right of set-off provided for in Section 9.3 of this Agreement or in any other Operative Document (which shall not be an abatement), except as expressly provided in Section 3.3(a)(iv) or Section 12.2 of this Agreement, Section 16.3 of the Transmission Service and Interconnection Agreement and Section 9.1.2 and 9.2.2 of the Cost-Sharing Agreement, and except as provided in the Station Two Agreement, there is to be no abatement in the obligation of LEM to make the payments specified in this Section 3.3(a) and in Section 3.3(b), regardless of the actual Unit Output of the Generating Plants or whether there has been any damage or destruction of any portion or all of the Tangible Assets. - 7 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (iii) LEM shall also pay to Big Rivers a Monthly Margin Payment during Phase I as follows: The first Monthly Margin Payment shall be due from LEM to Big Rivers on the second occurrence of a 25th day of a month after the Effective Date, and a Monthly Margin Payment will be due from LEM to Big Rivers on each 25th day of the month thereafter until and including the earlier of January 25, 2012 (at which time no further Monthly Margin Payments will accrue), or the 25th day of the month immediately preceding the Phase II Effective Date. Each Monthly Margin Payment is due in the amount set forth in the Schedule of Monthly Margin Payments attached to this Agreement as Schedule 3.3(a); provided, that if the Effective Date occurs on other than the first day of a month, then the Monthly Margin Payment applicable to the month in which the Effective Date occurs will be the amount designated on Schedule 3.3(a) for the month in which the Effective Date occurred, multiplied by the ratio of (A) the number of days between the Effective Date and the last day of the month to (B) the total number of days in that month. In the event the Term shall end prior to January 25, 2012, but on a date other than the last day of a month, then LEM shall pay to Big Rivers a prorated share of the Monthly Margin Payment for the month in which the Term ended based on the ratio by which the number of days in that month through and including the date on which the Term ended bears to the total number of days in that month. (iv) Notwithstanding any provisions of Section 3.3(a)(iii) to the contrary, in the event during Phase I: (A) this Agreement shall be terminated but the Station Two Agreement shall thereafter continue in effect, then so long as the Station Two Agreement shall continue in effect (through January 25, 2012 in accordance with Schedule 3.3(a)), LEM shall continue to pay to Big Rivers a portion of the Monthly Margin Payments equal to (x) the relevant Monthly Margin Payment, multiplied by (y) a fraction, the numerator of which is the amount determined by subtracting from 312 the total number of megawatts of capacity from Station Two that are reserved for use by Henderson during that month, and the denominator of which is the amount determined by - 8 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. subtracting from 1771 the total number of megawatts of capacity from Station Two that are reserved for use by Henderson during that month, and (B) the Station Two Agreement shall be terminated but this Agreement shall thereafter continue in effect, then the Monthly Margin Payments that shall thereafter be owing by LEM to Big Rivers shall be reduced by the amount established by multiplying (x) by (y), as described in Subclause (A), above. No cessation or modification of the Monthly Margin Payments pursuant to this Subsection 3.3(a)(iv) shall constitute or be construed as a waiver or bar to any right of Big Rivers to seek to recover any damages resulting from any breach or default by LEM hereunder, or by any other LG&E Party under any of the other Operative Documents, to which Big Rivers otherwise would be entitled. (v) Notwithstanding anything contained in Section 3.3.(a)(iv) of this Agreement to the contrary, upon any termination of the Station Two Agreement that would otherwise result in a reduction in the Monthly Margin Payments pursuant to that Section 3.3(a)(iv), such reduction shall be suspended, and the relevant Monthly Margin Payments shall once again become payable by LEM hereunder, if, within 60 days after the termination of the Station Two Agreement, Big Rivers shall have taken such actions, in compliance with Section 13.8 of the Station Two Agreement, as shall be necessary to prevent the LG&E Parties (or any of them) from having the right, pursuant to Section 13.8 of that agreement, to an abatement against the Annual Fixed Payments or the Rental Payments (as applicable) due by them to Big Rivers, to a reimbursement of the Initial Fixed Payment or Initial Rental Payment, to a reduction in the Contract Limits, or to terminate any of the Operative Documents other than the Station Two Agreement, each as contemplated in Section 13.8 of that agreement; provided, that in the event those LG&E Parties shall at any time thereafter have the immediate right to take any of the foregoing actions or exercise any of the foregoing rights or remedies in accordance with Section 13.8, then the provisions of this Subsection 3.3(a)(v) shall no longer suspend operation of Subsection 3.3(a)(iv)(B). - 9 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (vi) Big Rivers agrees with LEM that LEM shall have the right to set-off against the Monthly Margin Payments that may become due and owing to Big Rivers hereunder, at any time following the second anniversary of the Effective Date, the monthly installments of principal and interest that may be due and owing by Big Rivers to LEM under the Promissory Note (LEM Advances) in accordance with the terms and conditions of such note, and any such set-off by LEM shall be deemed to satisfy its obligations to Big Rivers hereunder with respect to the Monthly Margin Payments (or any portions thereof) so set-off. (vii) (1) If the Monthly Margin Payment has been adjusted pursuant to Section 3.3(a)(iv)(B) of this Agreement and Big Rivers is permitted pursuant to the Station Two Power Sales Agreement (as defined in the Station Two Agreement) to purchase energy or capacity from Station Two, then: (A) Big Rivers will sell to LEM and LEM will buy Bundled Ancillary Services (as defined in Section 3.3(a)(vii)(3) below) for resale to Henderson Union for the benefit of Alcan and (B) the Monthly Margin Payment will be reduced by an amount equal to the amount due to Big Rivers from LEM for such services during that month; provided, however, that LEM will continue to make payments to Big Rivers in the same amount as the regularly scheduled Monthly Margin Payment that is otherwise due pursuant to the Operative Documents (taking into consideration, inter alia, any adjustment required by Section 3.3(a)(iv)) and Big Rivers will accept such payment as payment, in full, of the amount owed to Big Rivers by Leaseco for the Monthly Margin Payment then due and by LEM for the services described above for such month. Pursuant to this paragraph, Big Rivers must provide such services to LEM in the same quantities as LEM is required to provide such services to Henderson Union to meet the requirements of Alcan. (2) If the Monthly Margin Payment has been adjusted pursuant to Section 3.3(a)(iv)(A) of this Agreement, then (A) Big Rivers will sell to LEM and LEM will buy Bundled Ancillary Services (as defined in Section 3.3(a)(vii)(3) below) for resale to Green River Electric for the benefit of - 10 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Southwire and (B) the Monthly Margin Payment will be reduced by an amount equal to the amount due to Big Rivers from LEM for such services during that month; provided, however, that Leaseco will continue to make payments to Big Rivers in the same amount as the regularly scheduled Monthly Margin Payment that is otherwise due pursuant to the Operative Documents (taking into consideration, inter alia, any adjustment required by Section 3.3(a)(iv)) and Big Rivers will accept such payment as payment, in full, of the amount owed to Big Rivers by Leaseco for the Monthly Margin Payment then due and by LEM for such month (regardless of whether LEM's actual amount due that month for Bundled Ancillary Services exceeds the amount paid by Leaseco during that month pursuant to this Section 3.3(a) during that month). Pursuant to this paragraph, Big Rivers must provide such services to LEM in the same quantities as LEM must provide such services to Green River Electric to meet the power requirements of Southwire. (3) The Bundled Ancillary Services are (A) those services described by Big Rivers in Schedules 3, 4, 5, and 6 of the Open Access Transmission Service Tariff attached as Exhibit 1 to the Transmission Services and Interconnection Agreement, or (B) such services that the FERC determines transmission providers must provide in lieu of or as extensions of the services described in subpart (A) of this sentence. (b) Operating Pass-Through Costs. In addition to amounts due under Section 3.3(a), throughout Phase I, LEM shall pay to Big Rivers an amount each month equal to the Operating Pass-Through Costs. Billing and payment of the Operating Pass-Through Costs is to be made in accordance with Section 6.5. Section 4: Big Rivers' Purchases from LEM 4.1 Power Sales to Big Rivers. During the Term of this Agreement, Big Rivers will purchase from LEM, and LEM will sell to Big Rivers, Power in amounts as follows (where each of the following are independent and cumulative): (a) Base Power. During the Term of this Agreement, LEM shall be obligated to supply to Big Rivers and Big Rivers shall be - 11 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. obligated to purchase at a cost equal to the amounts set forth in Section 6.2(d) from LEM Base Power as follows: (i) in each hour, (A) no less than the Minimum Requirement; (B) no more than the Maximum Hourly Power Purchase Amount; and (ii) in each Year or Partial Year, (A) no less than the Minimum Annual Power Purchase Amount; and (B) no more than the Maximum Annual Power Purchase Amount. All deliveries of Base Power shall be made at the Points of Delivery as set forth in Exhibit B. (b) Oglethorpe, Hoosier & HMP&L Power. During the Term of this Agreement, LEM shall provide and Big Rivers shall purchase from LEM all its requirements for Oglethorpe Power, HMP&L Power and Hoosier Power at a cost equal to the amounts set forth in Sections 6.2(a) through (c). As used in this Agreement, Big Rivers' requirements for Oglethorpe Power, HMP&L Power and Hoosier Power shall constitute the amount of Power which Big Rivers, at a given moment, sells to Oglethorpe, HMP&L or Hoosier (as applicable) pursuant to the Oglethorpe Contract, the HMP&L Contract and the Hoosier Contracts, respectively. Unless LEM has provided written consent, Big Rivers will not amend, extend or renew any of the contracts pursuant to which it provides Oglethorpe Power, HMP&L Power or Hoosier Power or assign, waive or limit any of its rights or interests pursuant to such contracts throughout the remainder of their terms (and any extensions thereto). To the extent that Big Rivers, under the terms of such contracts, has any existing rights to extend or renew such contracts, Big Rivers shall not extend or renew such contracts without LEM's prior consent, and Big Rivers agrees to so extend or renew those contracts upon the request of LEM and in accordance with the terms of these contracts; provided, however, that Big Rivers shall have no obligation to extend such contracts for any period beyond the end of the Term. Big Rivers agrees to perform each and every obligation for which it is responsible under the Hoosier Contracts, HMP&L Contract and the Oglethorpe Contract and to fully enforce all of its rights under those agreements. Without limiting the foregoing sentences, Big Rivers agrees to use commercially reasonable efforts (which shall not include a requirement to engage the services of any collection agency or institute litigation) to collect all amounts due to Big Rivers for Oglethorpe Power, Hoosier Power and HMP&L Power, and to assign to LEM without cost collection rights and all such receivables not collected within 120 days, so that LEM shall be entitled to attempt to collect the same for its own account. LEM will deliver, or arrange for - 12 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. delivery of, all Oglethorpe Power at either (a) the interconnection between the TVA and Big Rivers systems or (b) the point or points connecting the Georgia Integrated Transmission System and the TVA transmission system or other transmission system or systems from or through which the capacity and energy subject to the Oglethorpe Contract is delivered; all HMP&L Power at Henderson's 161 kV interconnection and the 69kV interconnections with Big Rivers; and all Hoosier Power at the 161 kV interconnection between Hoosier and Big Rivers. All of the foregoing deliveries shall be according to the rates, terms and conditions of Big Rivers' Open Access Transmission Tariff to the extent delivery of such power utilizes Big Rivers' Transmission System; provided, that such Open Access Transmission Tariff exists and continues to exist during all applicable periods, or that transmission access is provided on a non-discriminatory basis under another cost-based transmission tariff on terms comparable to those under which Big Rivers provides transmission service to itself. LEM shall indemnify and hold Big Rivers harmless from and against any and all liabilities, losses, claims, damages, costs and expenses (including reasonable attorneys' fees) suffered or incurred by Big Rivers as a result of (i) any breach by Big Rivers of any of its obligations under the Hoosier Contracts, the Oglethorpe Contract, or the HMP&L Contract which result from any failure by LEM to perform its obligations hereunder, (ii) any and all reasonable costs incurred by Big Rivers in enforcing its rights under the Hoosier Contracts, the Oglethorpe Contract, or the HMP&L Contract, (iii) any and all reasonable costs incurred by Big Rivers in collecting (or attempting to collect) amounts due to Big Rivers for Hoosier Power, Oglethorpe Power, or HMP&L Power and (iv) any and all reasonable costs incurred by Big Rivers in exercising its rights, upon the prior request of LEM, to extend or renew the Hoosier Contracts, the Oglethorpe Contract or the HMP&L Contract. (c) Generation-Based Ancillary Services. During the Term of this Agreement, Big Rivers shall be entitled to receive from LEM those generation-based Ancillary Services which constitute Transmission Support Services, dispatch, Load Following, reactive power support and operating reserve services as specified in Section 5 of this Agreement; and such generation-based services as Big Rivers is required to provide to meet ECAR automatic reserve requirements. As specified in this Agreement, certain generation-based Ancillary Services and certain Load Following services will be provided by LEM to Big Rivers without adjustment to the Power Value Amount; and additional generation-based Ancillary Services and Load Following services will be available at a cost equal to the amounts set forth in Section 6.2(f). Notwithstanding any other provision of this Agreement, LEM shall be required to provide the services identified in this Section 4.1(c) only to the extent that such services can be provided from the Generating Plants, consistent with Prudent Utility Practice and any applicable limitations on the use of Station Two - 13 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. power, and shall be excused in the event that an Uncontrollable Force prevents LEM from providing such services from the Generating Plants to the extent such Uncontrollable Force affects such Generating Plants. Notwithstanding the preceding sentence, to the extent feasible, LEM may elect, at its sole discretion, to meet its obligations under this Section 4.1(c) using whatever resources it chooses. 4.2 Additional Provisions Regarding Member Power. During the Term of this Agreement, Big Rivers shall supply all of the Members' Requirements for Member Power and shall not amend any Member Contract to permit any Member to acquire its requirements for Power to serve its non-Smelter customers from any Person other than Big Rivers except as specifically provided in this Section 4.2.; provided that Henderson Union and Green River Electric, (x) subject to Section 4.4, may enter into agreements with LEM to purchase Power needed to serve any or all Smelter Requirements, and with any supplier to purchase Energy after December 31, 2000 necessary to meet the Smelters' Tier 3 Energy requirements, and (y) are permitted to resell power in accordance with the LEM/Henderson Union Agreement and the LEM/Green River Agreement, respectively and in accordance with the Agreements for Electric Service between those Members and the Smelters. In the event that Big Rivers defaults under a Member Contract and such default could be cause for termination of such Member Contract, then, notwithstanding any other provision of this Agreement, Big Rivers agrees to permit (but not require) LEM, in LEM's sole discretion, to attempt to cure such default. If a Member terminates a Member Contract as a result of a default by Big Rivers (regardless of whether LEM attempts to cure that default), but which default is not the direct result of an act or omission by any LG&E Party, then a "Minimum Requirement Revision Event" will be deemed to have occurred and thereafter, the Minimum Requirement shall be the Minimum Hourly Power Purchase Amount. Big Rivers acknowledges and agrees that any failure or refusal of any Member to purchase Power from Big Rivers by reason of Big Rivers' breach or default under any Member Contract is not an excusable cause for failure of Big Rivers to meet the Minimum Requirement or Minimum Annual Power Purchase Amount and therefore at any time at which Big Rivers fails to meet its Minimum Requirement or Minimum Annual Power Purchase Amount LEM will be entitled to the minimum payments contemplated in Section 6.4(b). Big Rivers may enter into a contract for the sale or resale of Power purchased from LEM to any non-Member or for the purchase or sale of Power from or to Parties other than LEM without limitation provided that nothing in this sentence shall be construed to alter in any manner LEM's obligations to supply or Big Rivers' obligation to purchase Power as otherwise set forth herein. 4.3 Base Power Contract Limits. Throughout the Term of this Agreement, Base Power is subject to the following Contract Limits: - 14 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (a) Minimum Hourly Power Purchase Amount. During any hour through December 31, 2000, the Minimum Hourly Power Purchase Amount is 272 megawatt-hours of Base Power and during any hour of any Year between January 1, 2001 and December 31, 2010 (inclusive), the Minimum Hourly Power Purchase Amount is 297 megawatt-hours of Base Power. During any hour during the Year 2011, the Minimum Hourly Power Purchase Amount is 517 megawatt hours of Base Power, and during any hour of any Year following December 31, 2011, the Minimum Hourly Power Purchase Amount is 600 megawatt-hours of Base Power. (b) Minimum Annual Power Purchase Amount is as follows: (i) During each full Year during the period beginning on the Effective Date through December 31, 2000, the Minimum Annual Power Purchase Amount is 2,687,750 megawatt-hours of Base Power. (ii) During each full Year during the period beginning on January 1, 2001 through December 31, 2010(inclusive), the Minimum Annual Power Purchase Amount is 2,902,285 megawatt-hours of Base Power. (iii) During the Year 2011, the Minimum Annual Power Purchase Amount is 3,699,741 megawatt-hours of Base Power and during each Year following December 31, 2011, the Minimum Annual Power Purchase Amount is 4,300,000 megawatt-hours. (iv) During any Partial Year, the Minimum Annual Power Purchase Amount is the Minimum Annual Power Purchase Amount for that Year, multiplied by a fraction whose numerator is the number of days in such Partial Year and whose denominator is 365. (c) Maximum Hourly Power Purchase Amount. During any hour through December 31, 2000, the Maximum Hourly Power Purchase Amount is not more than 572 megawatt-hours of Base Power and during any hour of any Year between January 1, 2001 and December 31, 2010 (inclusive), the Maximum Hourly Power Purchase Amount is not more than 597 megawatt-hours of Base Power. During any hour during the Year 2011, the Maximum Hourly Power Purchase Amount is not more than 717 megawatt-hours of Base Power, and during any hour of any Year following December 31, 2011, the Maximum Hourly Power Purchase Amount is not more than 800 megawatt-hours of Base Power. - 15 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (d) Maximum Annual Power Purchase Amount is as follows: (i) During each full Year during the period beginning on the Effective Date through December 31, 2000, the Maximum Annual Power Purchase Amount is 5,112,750 megawatt-hours of Base Power. (ii) During each full Year during the period beginning on January 1, 2001 through December 31, 2010(inclusive), the Maximum Annual Power Purchase Amount is 5,327,285 megawatt-hours of Base Power. (iii) During the Year 2011, the Maximum Annual Power Purchase Amount is 6,321,741 megawatt-hours of Base Power and during each Year following December 31, 2011, the Maximum Annual Power Purchase Amount is 7,008,000 megawatt-hours of Base Power. (iv) During any Partial Year, the Maximum Annual Power Purchase Amount is the Maximum Annual Power Purchase Amount for that Year, multiplied by a fraction whose numerator is the number of days in such Partial Year and whose denominator is 365. (e) Reduction in Contract Limits. At any time during the Term of this Agreement, subsequent to the later to occur of the Effective Date or December 31, 1998, Big Rivers may decrease the Contract Limits by giving written notice to LEM of its election to decrease the Contract Limits, subject to the following: (i) Any such reduction (pursuant to this Section 4.3(e)) shall be made as a uniform decrease, measured in megawatt-hours, to all the Contract Limits in all Years, such that upon a change in the Contract Limits that is required by Section 4.3(a) through (d), the changed Contract Limits will be adjusted downward prior to becoming effective by the cumulative number of megawatt-hour reductions elected pursuant to this Section 4.3(e) (assuming such election is effective, consistent with the other requirements of this Section 4.3(e), as of the date the new Contract Limits designated in Section 4.3(a), (b), (c) and (d) become effective). - 16 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (ii) Any such reduction (pursuant to this Section 4.3(e)) shall remain effective for the balance of the Term of this Agreement; (iii) Any notice of a reduction (pursuant to this Section 4.3(e)) shall not become effective until the expiration of two consecutive Years after it is given (for example a notice given in 2001 shall result in Contract Limit reductions starting January 1, 2004); (iv) The cumulative amount of Contract Limit reductions (pursuant to this Section 4.3(e)) during the Term of the Agreement shall not exceed 72 megawatts; (v) No annual reduction (pursuant to this Section 4.3(e)) shall exceed 12 megawatts; and (vi) Any reduction (pursuant to this Section 4.3(e)) of the Minimum Annual Power Purchase Amount shall not result in a Minimum Annual Power Purchase Amount which is less than 102% of actual requirements for Base Power for the Year prior to the effective date of the reduction (notwithstanding any adjustments for Partial Years); provided, that in the event that any notice of a reduction specifies a reduction in the Minimum Annual Power Purchase Amount greater than is permitted pursuant to this Section 4.3(e)(vi), the Minimum Annual Power Purchase Amount shall be reduced each year by the maximum amount permissible until such time as the Minimum Annual Power Purchase Amount has been reduced to the full extent specified in such notice of reduction. (f) The Contract Limits shall be subject to further adjustments as provided in the Station Two Agreement. (g) Notwithstanding anything in this Agreement to the contrary, Base Power shall not include Hoosier Power, Oglethorpe Power or HMP&L Power. 4.4 Exclusivity. (a) In consideration of Big Rivers' agreements as set forth herein, LEM agrees that during the Term of this Agreement, Big Rivers shall be the exclusive distributor (through the Members) of - 17 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Power furnished directly or indirectly to end-users located, or for use within the boundaries of the Members' Franchised Service Territories; provided that Big Rivers shall not be the exclusive distributor with respect to Power to be supplied, directly or indirectly, to meet the Smelter Requirements. LEM and its Affiliates will not, directly or indirectly, sell or furnish, or offer or agree to sell or furnish, Power to or for the benefit or account of any such end user, other than Power to be supplied by LEM to certain Members to meet the Smelter Requirements, except through Big Rivers' exclusive distributorship in accordance with this Agreement, as otherwise expressly permitted by this Agreement, or as expressly permitted in the Station Two Agreement. Notwithstanding the foregoing: (i) LEM or its Affiliates shall be permitted to sell, directly or indirectly, to the Members any Power required to serve the Smelter Requirements during the Term of this Agreement; (ii) LEM or its Affiliates shall be permitted to sell Power, directly or indirectly, to the Smelters to the extent that the Smelters are free to purchase such Power from entities other than the Members under applicable Law and any agreement existing between any Smelter and any Member; and (iii) LEM or its Affiliates shall be permitted (but not required) to sell to Big Rivers for resale to the Members, or to the Members (to the extent the Members are permitted by law and contract to purchase from a Person other than Big Rivers), Power required by the Members to enable the Members to supply Power to certain of their non-Smelter industrial customers. (b) Big Rivers agrees that until December 31, 2011, it will not, directly or indirectly, sell or furnish, or offer or agree to sell or furnish, Power to Henderson Union for sale to Alcan, or to Alcan, other than with respect to the portions of Tier 3 Energy which Henderson Union is explicitly permitted to purchase from a supplier other than LEM, unless the obligation of LEM (during Phase I) or Leaseco (during Phase II) to pay Monthly Margin Payments to Big Rivers under this Agreement or the Lease has terminated, or unless and for the period that LEM or Leaseco (as applicable) has failed to pay such Monthly Margin Payments in breach of this Agreement or the Lease. The provisions of this Section 4.4(b) shall survive any termination of this Agreement for any reason and shall continue to be binding on Big Rivers for so long as the Lease or the Station Two Agreement shall continue in force and effect, and then only in the event Big Rivers - 18 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. continues to receive the Monthly Margin Payments (or portions thereof) in accordance with the Lease. (c) Big Rivers agrees that until December 31, 2010, it will not, directly or indirectly, sell or furnish, or offer or agree to sell or furnish, Power to Green River for sale to Southwire, or to Southwire, other than with respect to the portions of Tier 3 Energy which Green River is explicitly permitted to purchase from a supplier other than LEM, unless the obligation of LEM (during Phase I) or Leaseco (during Phase II) to pay Monthly Margin Payments to Big Rivers under this Agreement or the Lease has terminated or unless and for the period that LEM or Leaseco (as applicable) has failed to pay such Monthly Margin Payments in breach of this Agreement or the Lease. The provisions of this Section 4.4.(c), shall survive any termination of this Agreement for any reason and shall continue to be binding on Big Rivers for so long thereafter as the Lease or the Station Two Agreement shall continue in force and effect, and then only in the event Big Rivers continues to receive the Monthly Margin Payments (or portions thereof) in accordance with the Lease. Section 5: Scheduling and Ancillary Services 5.1 Projected Monthly Schedules. At least 30 days prior to the expected Effective Date and each October 1 thereafter during the Term of this Agreement, Big Rivers shall submit to LEM in writing the projected monthly amounts of Base Power, Oglethorpe Power, HMP&L Power, Hoosier Power, Transmission Support Services and other generation-based Ancillary Services it expects to require during the following Partial Year or Year. Such projections shall represent a good faith estimate by Big Rivers of its anticipated requirements hereunder; provided, that such estimates shall not be binding and shall be used by LEM for planning and information purposes only. The estimates by Big Rivers shall be for all Power and generation-based Ancillary Services to be purchased by Big Rivers pursuant to this Agreement, with a gross up for average annual transmission losses associated with Base Power. Big Rivers shall have full freedom of schedule, subject to the provisions of Section 5.1 and 5.3 and the Contract Limits. 5.2 SEPA Contract. At least 30 days prior to the expected Effective Date and each October 1 thereafter during the Term of this Agreement, Big Rivers shall submit to LEM a schedule showing the amount of Power Big Rivers wishes to have delivered to it under the SEPA Contract during each month ("SEPA Schedule") of the following Partial Year or Year. LEM shall act as Big Rivers' agent for the scheduling of Power under the SEPA Contract and shall have the right to determine (consistent with the provisions of the SEPA Contract) the timing of deliveries of such Power during each month; provided, however, for purposes of the administration of this contract, such - 19 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. deliveries shall be deemed, after-the-fact, to have occurred consistent with the SEPA Schedule and, to the maximum extent allowable under the SEPA Contract, during hours of the Members' demand on Big Rivers' system. 5.3 Daily Preschedules. Big Rivers shall preschedule all deliveries of Power no later than 9:00 a.m., Central Time, on the Business Day immediately preceding the day or days of delivery, or as otherwise mutually agreed by the Parties' dispatchers and schedulers. Big Rivers' preschedule shall specify for each hour of each day scheduled its best estimate of its requirements for Base Power, Oglethorpe Power, HMP&L Power, Hoosier Power, Transmission Support Services and other generation-based Ancillary Services as Big Rivers is entitled to receive pursuant to this Agreement. Big Rivers shall provide its preschedule to LEM and the operator responsible for the dispatch and real-time control of the Generating Plants. Following receipt of Big Rivers' preschedule, LEM shall provide its own preschedule to the operator responsible for the dispatch and real-time control of the Generating Plants specifying for each hour of each day scheduled its best estimate of its requirement for Unit Output. Within three hours of receipt of Big Rivers' preschedule, LEM will provide Big Rivers with a schedule showing the Point(s) of Delivery at which Big Rivers' Base Power, Oglethorpe Power, HMP&L Power, Hoosier Power and other scheduled services will be delivered. The Parties shall make reasonable efforts to minimize changes in Big Rivers' and LEM's preschedules and delivery schedules, but such changes shall be accommodated by the Parties up to 30 minutes prior to the hour of delivery. 5.4 Redispatch. If delivery of Big Rivers' Power requirements, amounts of Power scheduled to be provided by LEM to Green River Electric and Henderson Union to meet the Smelter Requirements and LEM's off-system sales at LEM's specified Points of Delivery is not consistent with operation of Big Rivers' Transmission System in accordance with Prudent Utility Practice, or is not consistent with allowing all requested, otherwise feasible wheeling transactions to occur in Big Rivers' system, then, to the extent consistent with Prudent Utility Practice, LEM will permit Big Rivers to direct redispatch of the Generating Plants as needed (i) to maintain Firm Point-to-Point Transmission Service and Network Integration Transmission Service, including the transmission of Member Power to the Members' Franchised Service Territories, under emergency conditions, and (ii) to permit additional Firm Point-to-Point Transmission Service and Network Integration Transmission Service to be scheduled over congested transmission paths. LEM shall modify the specified Points of Delivery to allow Big Rivers' Transmission System to operate in accordance with Prudent Utility Practice, provided that such redispatch permits LEM to continue to meet its energy delivery commitments. Big Rivers shall pay LEM the incremental cost, if any, - 20 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. of such redispatch, with such cost to be as quoted by Big Rivers or its Operator (during Phase I) or Leaseco (during Phase II) at the time the redispatch service is requested. Big Rivers' obligation pursuant to the preceding sentence is not to be subsumed by or diminished by LEM's separate obligation during Phase I to pay the Operating Pass-Through Costs, but rather requires that throughout the Term, Big Rivers, not LEM or any of its Affiliates, bear the cost of redispatch; provided, that LEM or any of its Affiliates shall be required to pay any increased transmission charge assessed by Big Rivers reflecting the incremental cost of such redispatch where that entity's use of the Transmission System necessitates such redispatch to create the additional transmission capacity used by it. The quoted charge for such redispatch shall be calculated by Big Rivers or its Operator (during Phase I), and by Leaseco (during Phase II), in a manner consistent with the FERC's policies for the calculation of redispatch costs. 5.5 Load Following. (a) Metering. In order to facilitate the provision of Load Following services, LEM, at its sole expense, shall install, or cause to have installed, and cause to be monitored, metering and telemetry equipment, which may include the use of loss compensators, and which in combination with existing metering equipment, if any, is of metering grade accuracy, for measuring power flows at each of the Points of Delivery identified in Exhibit A. (b) Load Following. (i) LEM will provide all of Big Rivers' Load Following requirements with respect to Member Power, without adjustment to the Power Value Amount for the applicable period, subject to the following conditions: (A) LEM shall not be obligated to provide Load Following services for Big Rivers, that, when combined with the provision of Base Power requirements (after adjustment for the SEPA Contract pursuant to Section 5.2), would exceed the Maximum Hourly Power Purchase Amount at any time; and (B) LEM shall not be obligated to provide Load Following services for loss of generation under the control of Big Rivers, or any third-party resource serving Big Rivers, other than from the Generating Plants; and - 21 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (C) LEM shall not be obligated to provide Load Following services for any of Big Rivers' loads that are added to the Big Rivers' system after 1996, and that require Load Following services that are materially different than the aggregate of all loads that were served by Big Rivers as of December 31, 1996 exclusive of the Smelter Requirements. (ii) During the Term of this Agreement, LEM will provide all of Big Rivers' Load Following requirements, if any, with respect to Oglethorpe Power, Hoosier Power and HMP&L Power without adjustment to the Power Value Amount for the applicable period. (iii) Any additional amounts of Load Following required by Big Rivers for the load of its Members that it serves or any transmission customer serving load within Big Rivers' control area shall be supplied to Big Rivers by LEM with a corresponding adjustment to the Power Value Amount equivalent to the LEM rates for such Load Following Service, in accordance with in Section 6.2(f). 5.6 Operating Reserves. LEM will maintain sufficient spinning and non-spinning reserves consistent with reliability guides, principles, and responsibilities set forth in ECAR documents and guides and NERC criteria to support that portion of the Base Power that is consumed in Big Rivers' control area, and such other spinning and non-spinning reserves as may be required pursuant to the Oglethorpe Contract, HMP&L Contract and Hoosier Contracts, each on terms in accordance with this Agreement. With respect to use of the Generating Plants by Big Rivers pursuant to this Section 5.6, there will be no adjustment to the Power Value Amount for the applicable period. 5.7 Reactive Power. LEM shall provide in any hour from its entitlement to the Unit Output of the Generating Plants, at Big Rivers' request and without adjustment to the Power Value Amount, an amount of megavars for Control Area operations up to the electrical net output of such Generating Plants in such hour, multiplied by 0.329 but in no event an amount of megavars equal to less than 608 megawatts multiplied by 0.329. For example, if the electrical output of such Generating Plants in an hour is 1000 MW, up to 329 megavars will be so provided. Subject to the above aggregate limit, Big Rivers shall be entitled to request and receive an amount of megavars up to the maximum net dependable capacity of the Generating Plant unit expressed - 22 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. in megawatts multiplied by 0.329 from any specific unit of any Generating Plant specified by Big Rivers and in operation during the hour; provided that Big Rivers will identify the specific Generating Plant unit required to produce megavars only if such specification is necessitated by localized voltage problems. The current maximum net dependable capacity of each Generation Plant unit, expressed in megawatts, is set forth in Exhibit 6 of the Transmission Service and Interconnection Agreement. However, the Parties shall at all times use the then applicable maximum net dependable capacity of the Generation Plant units, which amount may change from time to time over the course of this Agreement; provided, that in the event that two or more Generating Plant units are off-line and Big Rivers is experiencing low voltage problems, the Operator of the Generating Plants will, without adjustment in the Power Value Amount, operate the Generating Plant units down to the design lagging power factor without a loss of megawatt output, but only to the extent necessary to produce an amount of megavars equal to .329 multiplied by the net output of the Generating Plants that would exist if the units that are off-line at the time the calculation was made are operating. At any time, any additional megavars requested by Big Rivers in excess of .329 multiplied by the net output of the Generating Plants, assuming no units are off-line, if available from the Generating Plants without loss of megawatt output capabilities, shall be provided to Big Rivers from LEM at LEM's rates for sale of reactive power set forth in its tariff for the sale of ancillary services (as filed with FERC and revised from time-to-time). LEM may also elect (but is not obligated) to provide, in any hour at Big Rivers' request, megavars in such quantities that their production adversely impacts the Generating Plants' capability to produce megawatts at the rated lagging power factor, but shall do so only at the rate set forth in LEM's tariff for the sale of ancillary services (as filed with FERC and revised from time-to-time) or such other rates as FERC may accept for filing. 5.8 Transmission Support Services. Upon Big Rivers' request, LEM shall obtain and provide from the Generating Plants, to the extent available from the Generating Plants, to all users of Big Rivers' Transmission System and to Big Rivers, in its capacity as both a Transmission System user when requiring Ancillary Services in excess of the level of such services otherwise provided in this Agreement, and to meet Big Rivers' own Ancillary Services requirements to third-parties as a transmission services provider, any generation-based Ancillary Services that the FERC requires from time to time to be provided by a transmission provider similarly situated to Big Rivers and owning and operating the Generating Plants ("Transmission Support Services"). A request by Big Rivers for Transmission Support Services of the type that cannot be physically provided by a generator located outside of Big Rivers' Control area shall be given first priority by LEM relative to other uses of the Generating Plants. Such generation-based Ancillary Services shall be provided at such rates as LEM - 23 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. establishes, subject to any applicable regulatory policies, for such generation-based Ancillary Services, and LEM will charge such amounts to Big Rivers by adjustment to the Power Value Amount. Neither Big Rivers nor any third-party user of Big Rivers' Transmission System shall be required to purchase such Ancillary Services from LEM to the extent they are able to provide those services themselves or acquire them from an alternative supplier. 5.9 System Logs. All deliveries shall be made in accordance with the Parties' schedules which are in effect 30 minutes prior to each hour of delivery, except deliveries associated with Load Following service which shall reflect the integrated amount accumulated over the hour and shall be deemed to be made during the hours and in the amounts as accounted for in LEM's and Big Rivers' system logs. If scheduled deliveries are interrupted due to an Uncontrollable Force as defined in Section 12, such schedules shall be adjusted to reflect actual deliveries. Section 6: Metering, Pricing and Billing 6.1 Metering. The amounts of Unit Output, Oglethorpe Power, HMP&L Power, Hoosier Power and Base Power delivered during the prior month and the Transmission Support Services and other services provided pursuant to Section 4.1(c) that are provided during the prior month shall be metered at the Points of Delivery and at the Points of Metering and, on a monthly basis, reported by Big Rivers to LEM in accordance with Section 12 of the Transmission Service and Interconnection Agreement. Such information will be used as a basis for determining the Power Value Amount, as defined in Section 6.2. Pursuant to Section 6.5, Big Rivers will issue a statement to LEM once per month, and LEM will issue a statement to Big Rivers once per month, each based on such metered information. LEM shall be entitled to have a representative present when meters are read or to institute other reasonable measures to verify meter readings. Disputes concerning the accuracy of meter reading will be subject to the dispute resolution, mediation and arbitration provisions applicable to this Agreement as set forth in the Participation Agreement. 6.2 In addition to such amounts which Big Rivers may be obligated to pay to LEM pursuant to Sections 8 and 9.2, Big Rivers will pay to LEM each month the "Power Value Amount," which equals the sum of the following: (a) An amount equal to Big Rivers' total revenues actually collected for Oglethorpe Power sold to Oglethorpe by Big Rivers during the prior month (exclusive of any revenue received by Big Rivers from Oglethorpe pursuant to Section 5.3 of the Oglethorpe Contract). - 24 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (b) An amount equal to Big Rivers' total revenues actually collected for Hoosier Power sold to Hoosier by Big Rivers during the prior month. (c) An amount equal to Big Rivers' total revenues actually collected for HMP&L Power sold to HMP&L by Big Rivers during the prior month. (d) An amount equal to the Base Power Price for such month as determined pursuant to Section 6.4. (e) An amount equal to the redispatch costs incurred by Big Rivers pursuant to Section 5.4 during the prior month. (f) An amount based upon the quantity of generation-based Ancillary Services, ECAR reserves or Transmission Support Services provided by LEM to Big Rivers during the prior month in excess of the type and quantity of such services which are explicitly to be provided pursuant to this Agreement without adjustment to the Power Value Amount, priced in accordance with LEM's rates for such services. (g) To the extent that Big Rivers purchases from a third-party ECAR automatic reserves or generation-based emergency services necessary to support operation of its Transmission System, the Power Value Amount shall be reduced by an amount equal to Big Rivers' actual cost of such purchases during the prior month; provided that ECAR automatic reserves or generation-based emergency services shall not be purchased in amounts greater than the minimum amount required under ECAR regulations. 6.3 Base Power Rates. (a) Base Power. During the first Partial Year through December 31, 2001, the rate per megawatt-hour of Base Power is $18.917. For the balance of the Term of this Agreement, the following rates per megawatt-hour for Base Power apply: 2002 $19.117 2003 $19.217 2004 $19.317 2005 $19.417 2006 $19.517 2007 $19.717 2008 $20.017 2009 $20.327 2010 $20.627 2011 $20.947 2012 $20.267 2013 $20.587 - 25 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. 2014 $20.917 2015 $21.247 2016 $21.587 2017 $21.927 2018 $22.277 2019 $22.627 2020 $22.987 2021 $23.357 2022 $23.717 2023 $24.082 2024 $24.452 (b) Base Power Rate Adjustments. Prior to February 1 of the Years 2004, 2011 and 2018, the Parties shall perform the following calculations: Let Pn represent the rate for Base Power for year n as defined in Section 6.3(a). Define Qn = 9.52x + 7.25y + 3.23 where, for each year n of 2004, 2011, and 2018: x = The ratio of the value of the Coal Index (DRI Price of Coal to Electric Utilities - National) at January 1 of year n to the value at January 1 of the seventh preceding year; and y = The ratio of the value of the Labor Index (DRI Unit Labor Cost - National) at January 1 of year n to the value at January 1 of the seventh preceding year. (i) 2004 Adjustment (A) If Q2004 is less than 16.69, then set F2004 = Q2004 / 16.69 (B) If Q2004 is greater than 35.32, then set F2004 = Q2004 / 35.32 (C) If neither determination (1) or (2) is made, then set F2004 = 1.0. (D) The adjusted rate for Base Power, P'n for each year n from 2004 through 2010 shall be determined as P'n = Pn o F2004 - 26 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (ii) 2011 Adjustment (A) If Q2011 is less than 20.66 o F2004, then set F2011 = Q2011 / 20.66 (B) If Q2011 is greater than 43.73 o F2004, then set F2011 = Q2011 / 43.73 (C) If neither determination (1) or (2) is made, then set F2011 = F2004 (D) The adjusted rate for Base Power, P'n for each year n from 2011 through 2017 shall be determined as P'n = Pn o F2011 (iii) 2018 Adjustment (A) If Q2018 is less than 25.59 o F2004 o F2011, then set F2018 = Q2018 / 25.59 (B) If Q2018 is greater than 54.15 o F2004 o F2011, then set F2018 = Q2018 / 54.15 (C) If neither determination (1) or (2) is made, then set F2018 = F2004 o F2011 (D) The adjusted rate for Base Power, P'n, for each year n from 2018 through the Term of this Agreement shall be determined as P'n = Pn o F2018 (iv) Base Power rate adjustments will be effective on January 1 of the Year the calculation is performed. (c) In the event that the Effective Date does not occur on or before December 31, 1998 then Section 6.3(a) will be modified, effective January 1, 1999, and on each January 1 thereafter until the Effective Date occurs (after which time the Section will remain fixed in the form then current), subject to an earlier termination of the Participation Agreement, as follows: each Year stated will be increased by one, such that the rate in the first Partial Year that the Agreement is in effect and through the three calendar years immediately following the first Partial Year will be $18.917 and the remainder of the rates will become effective in the corresponding Year indicated after such modification is made. - 27 - SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION - SUBJECT TO PROTECTIVE ORDER POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. 6.4 Calculation of the Base Power Price (a) Base Power Price. For the purposes of Section 6.2(d), the Base Power Price is equal to the sum of (i) the Base Power rates established in Sections 6.3 multiplied by the number of megawatt-hours of Base Power delivered to Big Rivers during the prior month and (ii) such other amount as determined pursuant to Section 6.4(b). Base Power delivered to Big Rivers during the prior month shall be determined as the total metered load delivered by Big Rivers to Members during the prior month at the Points of Metering as set forth in Exhibit C, plus the total megawatt-hours of Base Power Big Rivers scheduled from LEM during the previous month for resale to third parties other than Members metered at the applicable Point(s) of Delivery as set forth in Exhibit B, plus average annual transmission losses imputed to Power delivered by Big Rivers to the Members and Power delivered for resale to third parties (with such losses to be equal to the effective annual loss rate applied to transmission service during the same period, as calculated pursuant to the Transmission Service and Interconnection Agreement), minus any purchases from SEPA or other third-parties delivered through the Points of Metering. In no event shall the amount of Power priced in accordance with this Section 6.4 exceed the amount of Base Power available pursuant to Section 4.1(a). (b) Minimum Power Purchase Obligation. [*REDACTED. Omitted pursuant to confidential treatment request. Material filed separately with SEC.] - 28 - SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION - SUBJECT TO PROTECTIVE ORDER POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. [* REDACTED. Omitted pursuant to confidentiality request. Material filed separately with SEC.] 6.5 Billing and Payment. Big Rivers and LEM shall reconcile all monthly amounts due and owing other than the Initial Fixed Payment or Annual Fixed Payment as soon after the month's end as detailed information is available. Each month, Big Rivers shall bill LEM for the Operating Pass-Through Costs due pursuant to Section 3.3(b) within two days of receipt of an invoice for such Operating Pass-Through Costs from its Operator, if any, and, separately, for any other amounts due hereunder, if any, and LEM shall bill Big Rivers for the Power Value Amount and any other amounts due hereunder, if any, after adjusting for the credits set forth in Section 6.6 which may apply for that month. Each Party shall bill the other by facsimile (with the original of such bill transmitted to LEM or to Big Rivers, as applicable, by certified mail) for amounts owing pursuant to this Section 6 or as otherwise specified in this Agreement. Payment shall be made for the amount of such bill, including any disputed amounts, by electronic wire transfer by the later of 15 days after facsimile receipt of such bill or the last Business Day of the month except with respect to the Operating Pass-Through Costs which LEM shall pay no later than the Monthly Payment Date; provided, however, Big Rivers shall not be required to pay any amounts under this Section 6.5 to LEM unless all Operating Pass-Through Costs due and owing by LEM to Big Rivers, and for which LEM has been properly billed, shall have first been paid in full. Payments rendered to Big Rivers with respect to the Operating Pass-Through Costs shall be made to (not applicable) or such other financial institution or account number as Big Rivers and its Operator may specify from time to time in writing. Payments rendered to Big Rivers with respect to other than the Operating Pass-Through Costs shall be made to Farmers Bank of Henderson, Kentucky, ABA No. 083900538 for the credit of Big Rivers General Fund, Account No. 1085559, or such other financial institution or account number as Big Rivers may specify from time to time in writing. Payments rendered to LEM shall be made to PNC Bank, Kentucky, ABA No. 083000108, for the credit of LG&E Marketing, Inc., Account No. 3100532665, or such other financial institution or account number as LEM may specify from time to time in writing. Simple interest shall accrue on any unpaid amounts or any credits at a rate equal to the - 29 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Default Rate during the period, if any, of delinquency or outstanding credit. 6.6 Credits. (a) At the end of Year 2011, LEM shall credit Big Rivers' account $2,610,557 and at the end of each Year following December 31, 2011, LEM shall credit Big Rivers' account $4,110,750. (b) In the event that any credit due to Big Rivers for any Year pursuant to subparagraph (a) above (a "Load Reduction Credit") exceeds the Power Value Amount during the final month of such Year (as determined pursuant to Section 6.6(a)), then, LEM shall, at Big Rivers' option either (i) pay to Big Rivers, within thirty (30) days after receiving a request from Big Rivers, an amount equal to the difference between the Load Reduction Credit for such Year and the Power Value Amount due for the final month of such Year or (ii) apply the excess credit against the Power Value Amount due during subsequent months until the excess credit has been reduced to zero. (c) With respect to any year for which LEM owes to Big Rivers pursuant to Section 9.6 of the Participation Agreement a Transmission Use Credit, LEM shall, on February 1 of the following year, credit to Big Rivers' account the full amount of such Transmission Use Credit, which credit will satisfy LEM's obligations under Section 9.6 of the Participation Agreement. (d) [Reserved] (e) On the first day of each month beginning with the first month following the Effective Date and continuing for fifty-five (55) months, LEM shall credit Big Rivers' account $89,000. Section 7: Audit Rights During the Term of this Agreement, each Party may review accounting records and supporting documents of the other Party relevant to the determination of any rate charged pursuant to this Agreement which is not fixed, of amounts of Power, Load Following service or generation-based Ancillary Services provided or received together with the loads and resources involved in such service, and of average loss rates applied hereunder during the prior thirty-six months, provided that each Party may conduct no more than one such audit during any consecutive six month period. If a Party believes there are any errors in the determination of a bill including prices, it shall pay the full amount of such bill and the Parties shall meet to review the accounting records and supporting documents and agree on any adjustments that may be appropriate. If the Parties agree that the billing is incorrect, a corrected bill shall be prepared and the - 30 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. difference between the incorrect bill and corrected bill, including simple interest at a rate equal to the Default Rate for the period of under or overpayment. Each Party shall take all steps reasonably available to secure the confidentiality of the other Party's accounting records and supporting documents and shall use them only for the purpose of confirming the accuracy of billings under this Agreement. Disclosure of accounting records and supporting documents to the other Party is not intended to, and shall not be interpreted to, waive a Party's right to maintain that such records and supporting documents are privileged, confidential, proprietary, or otherwise protected from disclosure to the public. In the event such information is required in a legal or regulatory proceeding, the Party affected shall advise the other Party of the requirement to disclose such information prior to disclosing it and at the Party's request shall ask that the confidentiality of any such information be maintained. Section 8: Cost Determination Changes The cost methodologies utilized for pricing purposes in this Agreement and the rates and rate formulae specified herein shall remain in effect through the Term of this Agreement and neither Party shall petition the FERC or any other governmental agency pursuant to the provisions of Section 205 or 206 of the Federal Power Act or any other provision of law to amend such methodologies or formulae absent the agreement in writing of the other Party or support such a petition filed by any third party. Notwithstanding the foregoing, if a tax on plant emissions should be enacted, LEM may increase the Power Value Amount to reasonably reflect the increased cost associated with the Power sold to Big Rivers hereunder due to the imposition of such tax. Section 9: Remedies 9.1 Rights and Remedies Cumulative. A Party's right to damages or other relief resulting from a breach on the part of any other Party under this Agreement accrues as of the first day of the breach without regard to whether such breach leads to a default under Section 2.2(a). Upon the breach by either Party of its obligations under this Agreement, whether or not such breach is or becomes a default for purposes of Section 2.2(a), the other Party shall have all of the rights and remedies available hereunder, under any other agreement between the Parties as otherwise applicable, and under all applicable laws, all of which rights and remedies shall be cumulative and nonexclusive to the extent permitted by law; provided, however, that: (a) neither Party shall be entitled to recover any loss of earnings, revenues (except as provided in Sections 2.2 or 9.2 of this Agreement), indirect, consequential, incidental or special damages (except as provided in Section 15.2); - 31 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. (b) LEM's exclusive right and remedy for Big Rivers' failure to utilize the Minimum Requirements or the Minimum Annual Power Purchase Amount of Base Power hereunder shall be the remedy set forth in Section 6.4(b); (c) except as provided in Sections 2.2 and 15.2 of this Agreement, a Party's sole right to damages for a failure by the other Party to deliver Power as required by this Agreement shall be the remedies and rights set forth in Section 9.2; and (d) the provisions of Subsection 9.1(a), above, shall not bar or constitute any waiver of any claim by Big Rivers for any Monthly Margin Payments as its damages arising by reason of a default by LEM under this Agreement; provided, that nothing contained herein shall be deemed to be an admission by LEM that the loss of such payments by Big Rivers is or shall be an actual or direct damage incurred by Big Rivers arising out of such a default by LEM. 9.2 Failure to Deliver Power. From time to time, but not more frequently than once each month, LEM may invoice Big Rivers for its damages arising from any failure of Big Rivers to deliver to LEM that Unit Output which through the willful or negligent action of Big Rivers, or through any voluntary or involuntary bankruptcy proceeding involving Big Rivers, was withheld from LEM or delivered other than as directed by LEM in breach of this Agreement, except as such failure may be excused by an Uncontrollable Force or made impossible due to LEM's own negligence or willful act or omission. From time to time, but not more frequently than once each month, Big Rivers may invoice LEM for its damages arising from any failure of LEM to deliver in accordance with this Agreement Base Power, Oglethorpe Power, HMP&L Power, Hoosier Power or any of the services to which Big Rivers is entitled pursuant to Section 4.1(c) except as such failure may be excused by an Uncontrollable Force or made impossible due to Big Rivers' own negligence or willful act or omission. In each of the preceding circumstances in which damages are due, such damages shall equal the damaged Party's reasonably incurred replacement Power costs (including costs of any related Ancillary Services). An invoice rendered in accordance with this Section 9.2 shall be paid, in full, by the receiving party within 30 days of its receipt. 9.3 Offsets. In addition to the rights and remedies described above and elsewhere in this Agreement, but subject to the limitations set forth in Sections 9.1(a), (b) and (c), above, Big Rivers and LEM each agree that if Big Rivers, on the one hand, or LEM, on the other hand, ("X") shall fail to make any payment or shall fail to perform any obligation under this Agreement, then the other Party ("Y") or any of its Affiliates will have the right (but not the obligation) without prior notice to X to perform such obligations and set-off the costs of - 32 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. such performance or the amount of any such past due payment owing to Y against any obligation of Y or any of its Affiliates owing to X or any of its Affiliates hereunder or, during Phase II, under any of the other Operative Documents. Section 10: Governing Law This Agreement shall be subject to and be construed under the laws of the Commonwealth of Kentucky, exclusive of choice of law provisions. [Section 11: Reserved] Section 12: Uncontrollable Forces 12.1 Neither Party to this Agreement shall be considered to be in default in performance of any obligation hereunder if failure of performance shall be due to an Uncontrollable Force. The term "Uncontrollable Force" means any cause beyond the control of the Party affected, including, but not limited to, flood, earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance, labor disturbance, sabotage, and restraint by court order or public authority (other than any filing of a petition in bankruptcy or reorganization or arrangement under any bankruptcy or insolvency laws), which by exercise of due foresight such Party could not reasonably have been expected to avoid, and to the extent that by exercise of due diligence it shall be unable to overcome. A Party shall not, however, be relieved of liability for failure of performance if such failure is due to causes arising out of removable or remediable causes which it fails to remove or remedy with reasonable dispatch. Furthermore, no Party claiming an Uncontrollable Force shall be relieved or excused by reason of such Uncontrollable Force from any payment obligation it may have. Any Party rendered unable to fulfill any obligation by reason of an Uncontrollable Force shall exercise due diligence to remove such inability with all reasonable dispatch. Nothing contained herein, however, shall be construed to require a Party to prevent or settle a strike against its will. Notwithstanding anything in this Section 12 to the contrary, (a) any obligation of Big Rivers to purchase Power under this Agreement (or to make any payment based on a deemed delivery of Power pursuant to Section 6.4(b)) shall be excused to the extent, and only to the extent, that LEM's failure to provide such Power is excused pursuant to this Section 12 and (b) subject to Section 4.1(c), LEM's failure to supply Power to Big Rivers pursuant to this Agreement shall not be excused under this Section 12 unless such Uncontrollable Force prevents LEM from supplying such Power not only from the Generating Plants but also from any other resource or supply. - 33 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. 12.2 Notwithstanding anything contained elsewhere in this Agreement to the contrary and without extending any period otherwise specified in this Agreement for remedy, in the event (1) Big Rivers fails to deliver or is prevented from delivering to LEM the Unit Output as is required pursuant to Section 3 of this Agreement or is restrained from permitting one or more of the Generating Plants to be operated, (2) such failure or restraint is caused by an Uncontrollable Force which is of such a nature that it cannot be remedied or cured by repair to or replacement of or construction of tangible assets or properties the use or enjoyment of which are required in order for LEM to receive those amounts of Unit Output to which it is entitled under this Agreement, then such failure of performance or restraint must be remedied within 180 days after notice thereof is delivered by LEM or LEM shall have the right to reduce its Annual Fixed Payment obligations under Section 3.3(a) as follows. For each month following the 180th day after the commencement of such Uncontrollable Force and continuing until such time as the failure of performance or restraint is remedied (prorated for each partial month), LEM's Annual Fixed Payment obligation for such month under Section 3.3(a) shall be equal to the Annual Fixed Payment amount due under Section 3.3(a) during such month multiplied by the ratio of AR to UOP (provided that if AR divided by UOP is equal to or greater than 1 it shall be deemed to equal 1), where each of AR and UOP are measured in megawatt-hours and AR is set equal to the amount of Unit Output actually received by LEM from Big Rivers at the Points of Delivery, as specified in Exhibit A, during such month and UOP is the average monthly Unit Output as determined over the shorter of (i) the 12 full months immediately preceding the commencement of such Uncontrollable Force or (ii) all of the months between the Effective Date and up to and including the last full month immediately preceding the commencement of such Uncontrollable Force. Following the occurrence and remedy of a failure of performance or restraint of the type described in the first sentence of this Section 12.2, any re-occurrence of the failure of performance or restraint that arises from a common cause or a continuation of the same event or legal proceeding as the first occurrence shall also be grounds for LEM to reduce the payment due in Section 3.3(a) in the same manner as described in the preceding sentence, but which right of reduction shall be effective thirty (30) Business Days after notice of the failure of performance or restraint delivered by LEM to BREC and only if such failure of performance or restraint is not cured within such 30 day period. 12.3 Nothing in this Section 12 relieves LEC of its obligations to indemnify Big Rivers pursuant to Section 9 of the Guaranty Agreement. [Section 13: Reserved] - 34 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. [Section 14: Reserved] Section 15: Liability and Indemnity 15.1 General Indemnity. Each Party shall indemnify and save the other Party and the directors, officers, and employees of such other Party harmless from liability, loss, damage, claim, costs, and expenses (including attorneys' fees) on account of injury to persons (including death) or damage or destruction of property, occasioned by the negligence, whether active or passive, or willful misconduct of such indemnifying Party and its officers, directors, employees, or contractors in the performance of this Agreement; provided, however, that: (a) Each Party shall be solely responsible to its own employees for all claims or benefits due for injuries occurring in the course of their employment or arising out of any workers compensation law. Neither Party shall seek reimbursement or subrogation from the other Party for any benefits paid to the employees of either Party pursuant to any workers compensation law except as necessary to prevent double recovery by the employee. (b) Neither Party and its directors, officers, and employees shall be liable for any loss of earnings, revenues (except as provided in Sections 2.2 or 9.2 of this Agreement), indirect, consequential, incidental or special damages (except as provided in Section 15.2), or injury which may occur to the other Party as a result of outages in delivery of services hereunder by reason of any cause whatsoever, including negligence. 15.2 Indemnity With Respect to Customer Claims. Each Party shall indemnify and save the other Party, and its directors, officers, and employees harmless for any liability, loss, claim, cost (including attorneys' fees) for any claims made by the indemnified Party's electric service customers as a result of any failure of the indemnifying Party to provide electric Power contemplated by this Agreement for any reason or any cause whatsoever including the willful or negligent act of the indemnifying Party or its breach of this Agreement, or any of the Operative Documents, except to the extent that the indemnifying Party's failure to provide Power is excused pursuant to Section 12 or is the result of the negligent or willful actions or omissions of the indemnified Party or its agents or employees. Further, neither Party shall have any indemnification obligation with respect to claims made by the other Party's electric service customers pursuant to any agreement or amendment entered into by such other party after the Effective Date, unless the Party from whom indemnification is sought has agreed to such new contract or - 35 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. amendment, in writing, which consent shall not be unreasonably withheld. Section 16: Entire Agreement 16.1 The Parties' obligations pursuant to this Agreement will be further governed by the Participation Agreement and the other Operative Documents to the extent indicated therein. The requirements of the Participation Agreement and the other Operative Documents and this Agreement are to be interpreted to be in accord wherever possible, but in the event of a direct conflict between the requirements of the Participation Agreement and the other Operative Documents and this Agreement, the provisions of this Agreement govern. 16.2 This Agreement and such applicable portions of the Participation Agreement and the other Operative Documents constitutes the entire agreement of the Parties hereto with respect to the transaction addressed herein and supersedes all prior agreements, whether oral or written. This Agreement may be amended only by a written document signed by both Parties hereto. Section 17: Continuation of Agreement 17.1 Big Rivers recognizes and acknowledges that the RUS, the Members and the LG&E Parties have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate and have agreed to consummate those transactions in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the Members and the LG&E Parties that Big Rivers has in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated Term (i.e., approximately 25 years). In order to enable Big Rivers to comply with certain requirements of the KPSC related to approval of its proposed rates, and to provide additional assurances of its good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 years), and without any implication by any of the Parties that Big Rivers is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, Big Rivers additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by Big Rivers of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against Big Rivers under any such Law, neither Big Rivers nor its successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a - 36 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency Laws (the "Insolvency Assurance"). Thereafter, Big Rivers shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and the LG&E Parties shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that Big Rivers ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 17.2 LEM recognizes and acknowledges that the RUS, the Members and Big Rivers have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions in specific reliance upon the fact that the transaction contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). LEM has informed the RUS, the Members and Big Rivers that LEM has in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated Term (i.e., approximately 25 years). In order to facilitate the approval of the proposed rates of Big Rivers and to provide additional assurances of its good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 years), and without any implication by any of the Parties that LEM is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, LEM additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by LEM of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against LEM under any such Law, neither LEM nor its successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency Laws (the "Insolvency Assurance"). - 37 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Thereafter, LEM shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and Big Rivers shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that LEM ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. 17.3 Nothing in this Section 17 shall modify, reduce or diminish: (i) the rights of the RUS under the New RUS Loan Documents (as defined in that certain New RUS Loan Agreement between Big Rivers and the RUS to be executed and delivered on the Effective Date); or (ii) the rights of the mortgagees under the New RUS Mortgage (as defined in said New RUS Loan Agreement); including without limitation, any right to withhold consent with respect to any sale or disposition of Big Rivers' property except on terms acceptable to the RUS and/or such mortgages; but subject, the case of (i) and (ii) above, in all cases to the Non-Disturbance Agreement of even date herewith among Big Rivers, RUS, AMBAC and the LG&E Parties. 17.4 The provisions of this Section 17 shall survive any expiration or termination of this Agreement for any reason and shall continue to be binding on the Parties. Section 18: General Provisions 18.1 Notices. All provisions set forth in the Participation Agreement with respect to notices (Section 21.1) shall apply hereto. 18.2 Waiver. The failure of a Party to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach of any provision of this Agreement shall not constitute a waiver of any provision of this Agreement or limit the Party's right thereafter to enforce any provision or exercise any right. 18.3 Amendment and Modification. No amendment or modification of this Agreement shall be valid unless made in writing and duly executed by the Parties. 18.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the Commonwealth of Kentucky but without giving effect to the conflict of law rules of such jurisdiction. - 38 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. 18.5 Further Assurances. Each Party shall take from time to time, for no additional consideration, such actions and execute such additional instruments as may be reasonably (a) necessary to implement and carry out the intent and purpose of this Agreement or (b) desirable but not necessary to implement and carry out the intent and purpose of this Agreement without incurring material cost. 18.6 Survival of Terms and Conditions. The provisions of this Agreement related to the recovery of damages sustained hereunder and the exercise of remedies generally shall survive its termination to the full extent necessary for their enforcement and the protection of the Party in whose favor they run. 18.7 Successors and Assigns. This Agreement shall bind and inure to the benefit of the Parties and their respective successors and permitted assigns. 18.8 Time of the Essence. A material consideration of the Parties entering into this Agreement is that the Parties will make all required payments as and when due and will perform all other obligations under this Agreement in a timely manner. Except as otherwise specifically provided in this Agreement, time is of the essence of each and every provision of this Agreement. 18.9 Counterparts. This Agreement may be executed in counterparts, both of which taken together shall constitute a single agreement. 18.10 Dispute Resolution. The Parties agree that any disputes arising with respect to this Agreement shall be resolved in accordance with Section 15 of the Participation Agreement. 18.11 Construction. This Agreement was the product of negotiations between the Parties, and therefore the rule of contract construction that an agreement shall be construed against the drafter shall not be applied to this Agreement. - 39 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed in their respective names by their respective officers thereunder duly authorized. LG&E Energy Marketing Inc. By /s/ John R. McCall ----------------------------------- Title: Vice President and Secretary Big Rivers Electric Corporation By /s/ Michael H. Core ----------------------------------- Title: President and CEO - 40 - POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. EXHIBIT A POINTS OF DELIVERY FOR UNIT POWER The Points of Delivery at which Big Rivers may deliver and LEM shall accept all Unit Output from the Generating Plants hereunder shall be at the following generating plant disconnect switches for the high voltage side of the unit step up transformer in amounts up to the net plant capacity at any time. PLANTS Robert D. Reid Reid Gas Turbine D.B. Wilson Kenneth C. Coleman Robert D. Green Henderson Municipal Power and Light - Station Two POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. EXHIBIT B POINTS OF DELIVERY FOR PURCHASES BY BIG RIVERS The Points of Delivery at which LEM may deliver and Big Rivers shall accept all Base Power hereunder shall be as follows: A. At the following generating plant disconnect switches for high voltage side of the unit step up transformer in amounts up to the net plant capacity at any time: PLANTS Robert D. Reid Reid Gas Turbine D.B. Wilson Kenneth C. Coleman Robert D. Green Henderson Municipal Power and Light - Station Two B. At the points of interchange between the Big Rivers Electric Corporation system and the following entities in amounts not to exceed 80% of the then-effective transfer capability of each individual point of delivery: Tennessee Valley Authority Shawnee Plant Marshall (2) Barkley (3) (SEPA) Paradise Southern Illinois Power Cooperative Morganfield Livingston County Louisville Gas and Electric Company Cloverport Kentucky Utilities Company Hardinsburg D.B. Wilson POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. Southern Indiana Gas and Electric Company Henderson County Substation Hoosier Energy Rural Electric Cooperative Kenneth C. Coleman C. At any new point of interchange that may be established during the Term of this Agreement in amounts equal to 50% of the then-effective transfer capability. POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. EXHIBIT C POINTS OF METERING The Points of Metering, which are those points at which Big Rivers delivers Power to the Members, shall be as set forth below. GREEN RIVER ELECTRIC All 27 rural delivery points are metered at 12,470 volts Industrials' delivery point metering voltage - ACMI 13,800 volts - Commonwealth Aluminum #1 13,800 volts - Commonwealth Aluminum #2 13,800 volts - Commonwealth Aluminum #3 13,800 volts - Alcoa-Hawesville Works 13,800 volts - Kimberly-Clark #1 161,000 volts - Kimberly-Clark #2 161,000 volts - Willamette #1 12,470 volts - Willamette #2 12,470 volts - Willamette #3 12,470 volts - Worldsource #1 13,800 volts - Worldsource #2 13,800 volts HENDERSON UNION ELECTRIC 14 rural delivery points are measured at 12,470 volts 1 rural delivery point is measured at 25,000 volts Industrials' delivery point metering voltage - Accuride 12,470 volts - Black Diamond Mine 7,200 volts - C.R. Mining 69,000 volts - Cardinal River Resources 7,200 volts - Dotiki #3 12,470 volts - Hudson Foods #1 25,000 volts - Hudson Foods #2 25,000 volts - KBA #1 4,160 volts - KBA #2 4,160 volts - Lodestar Energy 69,000 volts - Peabody Breckenridge 69,000 volts - P&M Mine 69,000 volts - Patriot Mine 69,000 volts - Smith Coal 69,000 volts - Valley Grain 12,470 volts - Victory Processing 7,200 volts POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. JACKSON PURCHASE ELECTRIC All 23 rural delivery points are metered at 12,470 volts Industrials' delivery point metering voltage: - Shell Oil 4,160 volts MEADE COUNTY ELECTRIC All 14 rural delivery points are metered at 12,470 volts No industrial delivery points POWER PURCHASE AGREEMENT BETWEEN BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC. POWER PURCHASE AGREEMENT (Schedule 3.3(a)) MONTHLY MARGIN PAYMENTS Monthly Margin Payment ($1,000's) - -------------------------------------------------------------------------------- 1998 $2,276 - -------------------------------------------------------------------------------- 1999 $2,276 - -------------------------------------------------------------------------------- 2000 $2,276 - -------------------------------------------------------------------------------- 2001 $2,219 - -------------------------------------------------------------------------------- 2002 $2,202 - -------------------------------------------------------------------------------- 2003 $1,448 - -------------------------------------------------------------------------------- 2004 $1,423 - -------------------------------------------------------------------------------- 2005 $1,419 - -------------------------------------------------------------------------------- 2006 $1,410 - -------------------------------------------------------------------------------- 2007 $1,418 - -------------------------------------------------------------------------------- 2008 $1,397 - -------------------------------------------------------------------------------- 2009 $1,384 - -------------------------------------------------------------------------------- 2010 $1,363 - -------------------------------------------------------------------------------- 2011 $643 - -------------------------------------------------------------------------------- EX-10.89 17 EXHIBIT 10.89 - -------------------------------------------------------------------------------- AGREEMENT AND AMENDMENTS TO AGREEMENTS BY AND AMONG CITY OF HENDERSON, KENTUCKY, CITY OF HENDERSON UTILITY COMMISSION, BIG RIVERS ELECTRIC CORPORATION, WKE STATION TWO INC., LG&E ENERGY MARKETING INC., AND WESTERN KENTUCKY ENERGY CORP. - -------------------------------------------------------------------------------- July 15, 1998 TABLE OF CONTENTS Section Page @@1. Definitions, Whole Agreement and Payments...............................3 1.1 Definitions..........................................................3 1.2 Schedules and Exhibits...............................................3 1.3 Method of Payment....................................................3 1.4 Late and Partial Payments............................................4 2. Phase I Effective Date and Phase II Effective Date........................4 2.1 Phase I Effective Date...............................................4 2.2 Phase II Assignment Preceding Phase I Subcontract....................4 2.3 Successive Phase I and Phase II Effective Dates......................4 2.4 Effective Date; Term.................................................5 3. Closing; Deliveries at Closing............................................5 3.1 The Closing and the Phase I and Phase II Effective Dates.............5 3.2 Actions Simultaneous.................................................6 3.3 Big Rivers' Deliveries...............................................6 3.4 Henderson's Deliveries..............................................8 3.5 LG&E Companies' Deliveries..........................................10 4. Covenants of the Parties Pending Effective Date..........................11 4.1 Access Pending Effective Date.......................................11 4.2 Negative Covenants..................................................12 4.3 Affirmative Covenants...............................................14 4.4 Purchase Option on Default..........................................16 5. Representations and Warranties of Henderson..............................17 5.1 Organization and Powers of Henderson................................17 5.2 No Violation........................................................17 5.3 Effect of Agreement; Consents.......................................18 5.4 Output..............................................................18 5.5 Station Two Contracts...............................................19 5.6 Bond Ordinance......................................................19 5.7 Condition of Station Two Assets.....................................19 5.8 Water Supply........................................................19 5.9 Permits.............................................................20 5.10 Litigation and Insurance Claims....................................20 5.11 Compliance with Laws...............................................20 5.12 Environmental Matters..............................................21 5.13 No Condemnation, Expropriation or Restrictions.....................22 -i- TABLE OF CONTENTS Section Page 5.14 Miscellaneous Payments.............................................22 5.15 Completeness of Statements.........................................22 6. Representations and Warranties of Big Rivers.............................23 6.1 Organization and Powers of Big Rivers...............................23 6.2 No Violation........................................................23 6.3 Effect of Agreement; Consents.......................................24 6.4 Completeness of Statements..........................................24 7. Representations and Warranties of the LG&E Companies.....................24 7.1 Organization and Powers.............................................24 7.2 No Violation........................................................24 7.3 Effect of Agreement.................................................25 7.4 Completeness of Statements..........................................25 8. Phase I Subcontract......................................................26 8.1 Term of Engagement..................................................26 8.2 Duties of Station Two Subsidiary....................................26 8.3 Standards of Performance............................................29 8.4 Station Two Subsidiary Negative Covenants...........................30 8.5 Reporting Obligations...............................................31 8.6 Communication of Certain Events.....................................32 8.7 Maintenance of Books and Records....................................32 8.8 Statements and Reports..............................................33 8.9 Confidentiality of Books and Records................................34 8.10 Fees and Expenses; Assignment of Rights............................34 8.11 Invoicing Procedure; Reid Station Operating Account(s).............39 8.12 Station Two Surplus Capacity.......................................40 8.13 Phase I Off-Sets...................................................48 8.14 Additional Covenants of Big Rivers.................................50 8.15 Budget Process; Operating Committee................................51 8.16 Adjustment for Henderson Incremental Environmental O&M. ...........54 8.17 Station Two Improvements -- Forecasts, Budgeting and Payments......56 8.18 Reimbursement for Debt Service.....................................64 8.19 Big Rivers' Performance Responsibility.............................65 9. Phase II Assignments.....................................................65 9.1 Assignment..........................................................65 9.2 Assumption of Assumed Station Two Liabilities.......................66 9.3 Term of Assignment..................................................67 9.4 Excluded Station Two Contracts or Liabilities.......................67 -ii- TABLE OF CONTENTS Section Page 9.5 Terms of General Applicability......................................71 9.6 Consents to Assignment..............................................74 9.7 Sale of Station Two Surplus Capacity................................75 9.8 Budget Process for Phase II Assignment..............................82 9.9 Adjustment for Henderson Incremental Environmental O&M..............85 9.10 Station Two Improvements -- Forecasts, Budgeting and Payments......86 9.11 [Intentionally Omitted].............................................93 9.12 Phase I Adjustments................................................94 9.13 Survival of Phase I Subcontract Provisions and Claims..............96 9.14 No Release; Big River's Responsibility.............................97 9.15 Standards of Performance...........................................97 9.16 Communication of Certain Events....................................98 9.17 Additional Payments to Big Rivers..................................98 10. Additional Agreements of the Parties....................................99 10.1 Interim Period Reconciliations.....................................99 10.2 Transfer of Title to Station Two Surplus Capacity.................103 10.3 Sharing of Station Two O&M or R&R Account Balances................104 10.4 [Intentionally Omitted]...........................................115 10.5 Two County Restriction............................................115 10.6 Two Counties' Demand..............................................115 10.7 Suspension of Performance.........................................117 10.8 Insurance.........................................................122 10.9 Cooperation in Fuel Procurement...................................125 10.10 Maintenance Power................................................125 10.11 Access to Premises; Rights-of-Way................................126 10.12 Covenants to Exercise Rights and Remedies........................127 10.13 Notice of Delivery Obligations...................................128 10.14 Access to Records................................................129 10.15 Indemnification; Waivers and Limitations of Liability............129 10.16 Reversion to Big Rivers..........................................139 10.17 Rights of First Offer; Waivers...................................140 10.18 Compliance with Bond Ordinance...................................143 10.19 Additional Covenants of Henderson................................143 10.20 Acknowledgments and Affirmations by Big Rivers...................146 10.21 SEPA Power.......................................................147 10.22 Green Station FGD System Facility................................148 10.23 Transmission and Transformation Facilities.......................149 10.24 Governmental Consents............................................149 10.25 Third Party Consents.............................................150 10.26 Reasonable Best Efforts..........................................150 -iii- TABLE OF CONTENTS Section Page 10.27 Further Assurances...............................................150 10.28 Access to Spare Transformer......................................151 10.29 General and Administrative Expenses..............................152 10.30 Systems and Operating Reserves...................................153 10.31 Rights and Remedies Not Waived...................................153 10.32 Survival Of Representations and Warranties.......................154 10.33 Station Two Inventories..........................................154 10.34 Assignment of Certain Station Two Intangible Assets..............155 10.35 Station Two Personal Property....................................158 10.36 LG&E Parties' Residual Value Payment.............................160 10.37 Survival of Monthly Margin Payments..............................160 11. Additional Agreements Respecting Station Two Power. ...................160 11.1 Pre-Closing Economic Development Opportunities. ..................160 11.2 Economic Development Opportunities During The Term................165 11.3 Treatment of Economic Development Agreements Following the Term...176 11.4 Section 3.4 of Power Sales Contract...............................180 11.5 Use of Excess Energy and Capacity.................................180 12. Condemnation; Damage or Destruction of Station Two Assets..............183 12.1 Condemnation......................................................183 12.2 Damage or Destruction.............................................183 13. Termination; Default; Remedies.........................................185 13.1 Termination Prior to Effective Date...............................185 13.2 Pre-Effective Date Remedies; Conditions Precedent.................185 13.3 Default During the Phase I Subcontract Term.......................186 13.4 Default During the Phase II Assignment Term.......................188 13.5 Notice of Defaults; Cure Rights...................................191 13.6 Remedies During Phase I Subcontract Term..........................196 13.7 Remedies During Phase II Assignment Term..........................201 13.8 Additional Covenants Concerning the Parties' Rights and Remedies..207 13.9 Termination Date True Up..........................................222 13.10 Survival of Terms and Conditions.................................223 14. Abatement and Other Rights.............................................224 14.1 Abatement and Other Rights For Condemnation.......................224 14.2 Abatement and Other Rights for Damage or Destruction..............226 14.3 Abatement and Other Rights Upon Termination.......................228 14.4 Abatement Rights Cumulative.......................................230 -iv- TABLE OF CONTENTS Section Page 15. Transfers and Assignments..............................................230 15.1 Permitted Assignments.............................................230 15.2 Assignment and Assumption of Related Agreements...................232 15.3 Noncomplying Assignment...........................................233 15.4 Regulatory Approvals..............................................233 15.5 Liens.............................................................233 16. Uncontrollable Forces..................................................234 16.1 Suspension of Performance for Uncontrollable Forces...............234 16.2 Uncontrollable Forces.............................................234 17. Taxes..................................................................234 17.1 Sales and Use Taxes...............................................235 17.2 Property Taxes....................................................235 17.3 Unidentified Asset-Related Taxes..................................236 17.4 Change of Tax Law.................................................237 17.5 Other Taxes.......................................................237 17.6 Kentucky Tax Rulings..............................................237 17.7 Appeal of Tax Assessment..........................................238 18. Miscellaneous.........................................................238 18.1 Miscellaneous Disclaimers.........................................238 18.2 No General Obligations of the City................................239 18.3 Notices...........................................................239 18.4 Waiver............................................................241 18.5 Amendment and Modification........................................241 18.6 Governing Law.....................................................241 18.7 Successors and Assigns............................................241 18.8 Counterparts......................................................242 18.9 Severability......................................................242 18.10 Headings.........................................................242 18.11 Entire Agreement.................................................242 18.12 Construction.....................................................242 18.13 Production of Operative Documents................................243 18.14 Zero Capacity Allocations........................................243 18.15 Continuation of Agreement........................................243 -v- TABLE OF CONTENTS Section Page -vi- TABLE OF CONTENTS Section Page -vii- TABLE OF CONTENTS Section Page -viii- EXHIBITS Description Exhibit Station Two Contracts........................................................A Definitions .................................................................B G & A Allocation Agreement...................................................C Amended Systems Reserve Agreement............................................D SCHEDULES Description Schedule Conditions Precedent to Phase I Effective Date ............................2.1 Conditions Precedent to Phase II Effective Date in the Event Phase II Precedes Commencement of Phase I........................................2.2 Conditions Precedent to Phase II Effective Date in the Event Phase II follows Phase I.........................................................2.3 Henderson's No Violation...................................................5.2 Condition of Station Two Assets............................................5.7 Permits....................................................................5.9 Litigation and Insurance Claims...........................................5.10 Big Rivers' No Violation...................................................6.2 Effect of Agreement; Consents..............................................6.3 LG&E Companies' No Violation...............................................7.2 Payments for Station Two Improvements..................................8.17(d) GLOSSARY OF DEFINED TERMS Defined Term Section Actual Henderson Environmental O&M.....................................8.17(c) Additional Payment.....................................................8.10(b) Agreement.........................................................Introduction Assigned Station Two Contracts..........................................9.1(d) Assumed Station Two Liabilities............................................9.2 Big Rivers........................................................Introduction Big Rivers' Henderson Incremental Environmental O&M Share..............8.16(a) Big Rivers' Replacement O&M Fund.......................................10.3(f) Big Rivers' Replacement R&R Fund.......................................10.3(g) Bond Ordinance.......................................................Recital A City..............................................................Introduction Closing....................................................................3.1 Damage Multipliers.....................................................14.2(b) Debt Service and R&R Capacity Payment...................................9.7(b) -ix- Defaulting Party.......................................................13.5(a) Economic Development Agreement.........................................11.2(g) Economic Development Opportunity.......................................11.2(a) Effective Date.............................................................2.4 Environmental Condition...................................................5.12 Environmental Violations..................................................5.12 Excess Henderson Capacity..............................................11.5(b) Excess Henderson Energy................................................11.5(a) Existing SEPA Contract...................................................10.21 Fair Market Value Ratio...................................................14.1 Final Year of Agreement................................................8.10(c) 14 1/2 Cent Payments...................................................8.10(b) Fuel and Reid Station Operating Accounts...............................8.11(b) Fuel and Reid Station Operating Expenses...............................8.10(a) Fundamental Rights.....................................................10.7(c) G & A Allocation Agreement...............................................10.29 Green River............................................................8.12(e) Henderson.........................................................Introduction Henderson Environmental-Related Capital Cost...........................8.17(e) Henderson Non-Incremental Capital Cost.................................8.17(e) Henderson Replacement O&M Fund.........................................10.3(f) Henderson Union........................................................8.12(e) LEM/Henderson Union Agreement..........................................8.12(e) HMPL..............................................................Introduction HUC...............................................................Introduction Joint Facilities Agreement...........................................Recital B Knowledge.................................................................5.12 Letter Ruling..........................................................8.12(e) LG&E Companies....................................................Introduction LG&E Company......................................................Introduction LG&E Rights............................................................13.8(a) LEM...............................................................Introduction LEM Capacity Charge Share .............................................8.12(b) LEM Margin..........................................................13.8(a)(1) Matching Offer.........................................................11.2(f) Maximum Funding Limit...............................................10.3(g)(2) Mean Proposal..........................................................11.2(d) 1993 Amendment.......................................................9.4(b)(4) 1998 Amendments......................................................Recital B New Reserves Agreement...................................................10.30 Non-Defaulting Party...................................................13.5(a) Notice.................................................................11.2(b) Notice of Default......................................................13.5(b) O&M Closing Balance....................................................10.3(a) -x- Offer..................................................................11.2(a) Offer Price............................................................11.2(a) Operating Pass Through Costs...........................................8.10(a) Participation Agreement..............................................Recital D Parties...........................................................Introduction Party.............................................................Introduction Phase I Adjustments.......................................................9.12 Phase I Effective Date.....................................................3.1 Phase I Subcontract..........................................................8 Phase I Subcontract Term...................................................8.1 Phase II Assignment..........................................................9 Phase II Assignment Term...................................................9.3 Phase II Effective Date....................................................2.3 Plan.................................................................Recital D Pre-Closing Development Agreement......................................11.1(a) Qualified Power Marketer...............................................11.2(c) R&R Closing Balance....................................................10.3(a) Refinancing Costs.........................................................10.6 Reid Station............................................................8.2(b) Releasing Party ......................................................10.15(g) Released Party........................................................10.15(g) Replacement O&M Fund...................................................10.3(f) RFP Process............................................................11.2(b) Right of First Offer.......................................................9.6 Section 28................................................................11.2 SEPA.....................................................................10.21 SEPA Power...............................................................10.21 SEPA Schedule............................................................10.21 Station Two..........................................................Recital A Station Two Allowances.................................................8.10(c) Station Two Assets......................................................4.1(a) Station Two Assets Insurance...........................................10.8(b) Station Two Bonds....................................................Recital A Station Two Contracts................................................Recital B Station Two Improvements...............................................8.17(a) Station Two Improvements Account.......................................8.17(d) Station Two Improvement Sharing Ratio..................................8.17(e) Station Two O&M Account.................................................3.3(d) Station Two Operating Agreement......................................Recital B Station Two Power Sales Agreement....................................Recital B Station Two PP Price Reduction...........................................10.35 Station Two R&R Account.................................................3.3(d) Station Two Rated Capacity.............................................8.17(b) Station Two Subsidiary............................................Introduction -xi- Station Two Subsidiary's Performance Obligations......................10.15(a) Station Two Surplus Capacity.........................................Recital B Station Two Unit Output................................................8.12(b) Surplus Power..........................................................11.2(a) Surplus Power Notice...................................................11.2(b) Systems Improvement Project.............................................4.2(d) Term.......................................................................2.4 Termination Multipliers................................................14.3(b) Terms of General Applicability.............................................9.5 Transitional Year......................................................9.12(d) Uncontrollable Force......................................................16.2 WKEC..............................................................Introduction -xii- AGREEMENT AND AMENDMENTS TO AGREEMENTS THIS AGREEMENT AND AMENDMENTS TO AGREEMENTS ("Agreement") is entered into and effective as of July 15, 1998, by and among (i) THE CITY OF HENDERSON, KENTUCKY (the "City"), a municipal corporation and city of the third class organized under the laws of Kentucky, THE CITY OF HENDERSON UTILITY Commission ("HUC"), a public body politic and corporation organized under Kentucky Revised Statutes ss. 96.530 and related statutes, doing business as HENDERSON MUNICIPAL POWER & LIGHT ("HMPL") (the City and HUC being sometimes hereinafter collectively referred to as "Henderson"), (ii) BIG RIVERS ELECTRIC CORPORATION ("Big Rivers"), a Kentucky rural electric cooperative corporation, and (iii) WKE STATION TWO INC., formerly known as LG&E Station Two Inc. ("Station Two Subsidiary"), a Kentucky corporation, LG&E ENERGY MARKETING INC., ("LEM"), an Oklahoma corporation, and WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC") and the successor by merger to Western Kentucky Leasing Corp. (hereinafter, Station Two Subsidiary, LEM and WKEC are referred to collectively as the "LG&E Companies" and individually as an "LG&E Company," and together with Henderson and Big Rivers are referred to collectively as the "Parties" or individually as a "Party"). RECITALS: A. The City owns an electric generating station, consisting of two 175-megawatt coal-fired, steam-electric generators with related facilities located on a site near the Green River in Henderson County, Kentucky ("Station Two"), having as of the date of this Agreement a net rated Capacity of 312 MW. The City financed the costs of acquisition, construction and start-up of Station Two through the issuance of the Electric Light & Power Revenue Bonds, Station Two Series, due March 1, 2003, in an initial aggregate principal amount of $82,500,000 and with an aggregate outstanding principal balance as of March 2, 1998 of $25,035,000 (such bonds, together with any bonds issued to refund such bonds, are hereinafter referred to as the "Station Two Bonds"), which were authorized, sold and issued by the City pursuant to the Electric Light & Power Revenue Bond Ordinance adopted by the City on August 27, 1970, together with supplemental ordinances and amendments thereto as of the date hereof (such ordinance, together with any ordinance (in form and substance reasonably satisfactory to each of the Parties) authorizing any refunding bonds, are hereinafter referred to as the "Bond Ordinance"). B. Big Rivers currently operates Station Two, purchases all Capacity and associated Energy of Station Two surplus to the immediate needs of the City and its inhabitants, determined in accordance with the Station Two Power Sales Agreement described below ("Station Two Surplus Capacity"), and otherwise has arranged with Henderson for the joint utilization by Big Rivers and Henderson of certain auxiliary facilities and operating personnel. The respective rights and obligations of Big Rivers and Henderson with respect to Station Two are set forth in that certain Power Plant Construction and Operation Agreement dated August 1, 1970, as amended (the "Station Two Operating Agreement"), that certain Power Sales Contract dated August 1, 1970, as amended (the "Station Two Power Sales Agreement"), that certain Joint Facilities Agreement dated August 1, 1970, as amended (the "Joint Facilities Agreement"), and other agreements, all of which (together with all amendments thereto, including, without limitation, the Amendments to Contracts dated May 1, 1993 (the "1993 Amendments") and the Amendments to Contracts dated July 15, 1998 (the "1998 Amendments"), are identified on Exhibit A attached hereto (all such agreements, as amended, being referred to hereinafter collectively as the "Station Two Contracts"). C. On September 25, 1996, Big Rivers filed for relief under Chapter 11 of the Bankruptcy Code. D. The LG&E Companies and Big Rivers entered into a New Participation Agreement dated April 6, 1998 (the "Participation Agreement") which contemplates (among other transactions) the lease, use and operation of all Facilities and related assets owned by Big Rivers, the purchase, sale and transmission of the Energy and capacity produced by such Facilities, and the transactions contemplated in this Agreement. The proposed transactions -2- among Big Rivers and the LG&E Companies are substantially described in Big Rivers' Plan of Reorganization. E. As contemplated in the Plan of Reorganization and the Participation Agreement, Big Rivers and the LG&E Companies desire to enter into this Agreement which provides, among other terms, for the performance by Station Two Subsidiary of certain obligations of Big Rivers under certain of the Station Two Contracts and for the purchase and sale by Station Two Subsidiary or LEM of the Station Two Surplus Capacity. AGREEMENT: NOW, THEREFORE, the Parties hereby agree as follows: 1. DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS. 1.1 Definitions. All capitalized terms used in this Agreement but not otherwise defined in this Agreement shall have the meanings set forth in Exhibit B attached hereto or, if not defined therein, shall have the meanings set forth in the Station Two Operating Agreement or the Station Two Power Sales Agreement. A Glossary of terms defined in this Agreement is included with this Agreement for ease of reference only. 1.2 Schedules and Exhibits. The schedules and exhibits to this Agreement constitute an integral part of this Agreement, and all references to this Agreement shall include all such schedules and exhibits. 1.3 Method of Payment. All payments required to be made by a Party to any other Party under the terms of, or as contemplated in, this Agreement, unless otherwise provided in this Agreement or the Station Two Contracts, shall be made in immediately available United States funds no later than 2:00 p.m. eastern time on the due date therefor. A Party desiring to receive any such payment by wire transfer shall provide written notice to the paying Party not -3- less than five (5) Business Days prior to the due date indicating the wire instructions and applicable account information. A written notice shall be applicable to all future payments unless revoked or modified by that notice or any subsequent written notice. 1.4 Late and Partial Payments. All amounts payable between any LG&E Company and Big Rivers under this Agreement, if not paid when due, shall bear interest from the due date until paid at the Default Rate. No receipt by any such Party to whom a payment is due of an amount less than the full amount due will be deemed to be other than payment on account, nor will any endorsement or statement on any check or any accompanying letter effect or evidence an accord or satisfaction. The receiving Party may accept such check or payment without prejudice to its right to recover the balance or pursue any right hereunder. 2. PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE. 2.1 Phase I Effective Date. The "Phase I Subcontract" (defined in Section 8 of this Agreement, entitled "Phase I Subcontract") shall commence and become effective on the "Phase I Effective Date" (as defined in Section 3.1 of this Agreement). 2.2 Phase II Assignment Preceding Phase I Subcontract. In the event that the conditions set forth in Schedule 2.2 for each Party have been fulfilled or waived by each such Party on a date prior to the Phase I Effective Date, the Phase I Subcontract shall never become effective and the Closing referred to in Section 3.1 of this Agreement shall consummate the "Phase II Assignment" (as defined in Section 9 of this Agreement, entitled "Phase II Assignments") rather than the Phase I Subcontract. 2.3 Successive Phase I and Phase II Effective Dates. At any time subsequent to the occurrence of the Phase I Effective Date, upon the satisfaction or waiver by each Party of all conditions set forth in Schedule 2.3 for such Party, (a) the Phase II Assignment shall thereafter commence and become effective as set forth below, and (b) the Phase I Subcontract and the provisions of this Agreement relating thereto, shall, upon the commencement of the Phase II Assignment, immediately terminate and be of no further force or effect (subject to survival of -4- specific provisions set forth in Section 8 of this Agreement, entitled "Phase I Subcontract," or elsewhere in this Agreement which by their terms shall survive the termination of the Phase I Subcontract). The date on which the Phase II Assignment takes effect, whether pursuant to Section 2.2 of this Agreement or Section 2.3 of this Agreement, shall hereinafter be referred to as the "Phase II Effective Date." At such time as any Party shall in good faith believe that each of the conditions precedent set forth in Schedule 2.3 for all Parties have been satisfied or waived by the relevant Party(s), the Party having that belief may, in its discretion, notify all (but not less than all) of the other Parties of its belief, and each such other Party agrees to notify the first Party of whether it agrees with or in good faith disputes the first Party's belief within ten (10) Business Days after delivery of the initial notice. In the event a Party fails to respond within that ten-day period, it shall be deemed to have agreed with the initial Party's belief. The Phase II Effective Date shall commence two (2) Business Days following the expiration of the ten-day notice period described above or, if the initial Party's belief shall have been disputed by one or more other Parties as contemplated above, two (2) Business Days after a determination that such conditions precedent have been so satisfied or waived is made (i) by the mutual agreement of the disputing Parties, or (ii) pursuant to a final, non-appealable decision rendered by a court of competent jurisdiction or other tribunal acceptable to the Parties. The successful Party(s) in any legal proceeding commenced to obtain a decision of the type described in (ii), above, shall be entitled to recover from the unsuccessful Party(s) its reasonable attorneys fees and court costs incurred in connection with that legal proceeding. 2.4 Effective Date; Term. For purposes of this Agreement, the "Effective Date" shall mean the earlier of the Phase I Effective Date or the Phase II Effective Date. The term of this Agreement ("Term") shall commence on the Execution Date and shall, unless sooner terminated as contemplated in Section 13 of this Agreement, continue until the later of expiration of (a) the Phase I Subcontract Term (as defined in Section 8.1 of this Agreement), other than such an expiration occurring upon the Phase II Effective Date, or (b) the Phase II Assignment Term (as defined in Section 9.3 of this Agreement). 3. CLOSING; DELIVERIES AT CLOSING. -5- 3.1 The Closing and the Phase I and Phase II Effective Dates. The consummation of the transactions contemplated in this Agreement and commencement of the Phase I Subcontract Term or the Phase II Assignment Term, (whichever is earlier) (the "Closing"), shall take place at the offices of Sullivan, Mountjoy, Stainback & Miller, P.S.C., Owensboro, Kentucky (or at such other location as the Parties may agree) at 10:00 a.m., local time, on the date that is 10 Business Days following the earlier to occur of (i) the date on which all conditions set forth in Schedule 2.1 of this Agreement for each Party have been fulfilled or waived in writing by such Party in its sole discretion (other than the conditions set forth in items 1.1, 1.9, 2.1, and 2.7 of Schedule 2.1, which the Parties intend shall be fulfilled immediately prior to or contemporaneously with the Closing, unless so waived), (the "Phase I Effective Date"), or (ii) the date on which all conditions set forth in Schedule 2.2 of this Agreement for each Party have been fulfilled or waived in writing by such Party in its sole discretion (other than the conditions set forth in items 1.1, 1.9, 2.1, and 2.7 of Schedule 2.1, which are incorporated by reference in items 1.1 and 2.1 of Schedule 2.2, which the Parties intend shall be fulfilled immediately prior to or contemporaneously with the Closing, unless so waived). Notwithstanding anything contained in this Section 3.1 to the contrary, in no event shall the Effective Date under this Agreement commence prior to the "Effective Date" under the Participation Agreement. 3.2 Actions Simultaneous. Notwithstanding the order of the deliveries by the Parties set forth below, all deliveries shall be deemed to have occurred simultaneously and shall not be deemed to have been completed until each of the steps or conditions set forth or identified in this Section 3, entitled "Closing; Deliveries at Closing," has been completed or has been waived by the Party who is required or permitted to waive the same. 3.3 Big Rivers' Deliveries. At the Closing Big Rivers shall deliver to the LG&E Companies and/or Henderson, as appropriate, all of the following (duly executed where appropriate): -6- (a) A Certificate of the Secretary or an Assistant Secretary of Big Rivers, dated the Effective Date, in form and substance reasonably satisfactory to the LG&E Companies and Henderson, certifying as to the due adoption of the resolutions of the Board of Directors of Big Rivers authorizing the execution, delivery and performance by Big Rivers of this Agreement and the transactions contemplated in this Agreement. (b) The opinions of each of Sullivan, Mountjoy, Stainback & Miller, P.S.C. and Long Aldridge & Norman LLP referenced in items 1.11 and 3.7 of Schedule 2.1. (c) A Certificate of an authorized officer of Big Rivers certifying that (i) the representations and warranties set forth in Section 6 of this Agreement, entitled "Representations and Warranties of Big Rivers," are true and correct in all material respects on the Effective Date as though made on the Effective Date, and (ii) the conditions precedent to Big Rivers' obligations set forth in Section 2 of Schedule 2.1 or Schedule 2.2, as the case may be, have been satisfied or waived by Big Rivers, provided that the foregoing shall not relieve any other Party from its responsibility or liability for any misrepresentation or breach of warranty by such other Party made in this Agreement. (d) A Certificate of the chief financial officer of Big Rivers certifying as to those items affecting or relating to the Station Two Account in the Operation and Maintenance Fund (the "Station Two O&M Account") and the Station Two Account in the Renewals and Replacements Fund (the "Station Two R&R Account") and as to Big Rivers' rights in respect of such accounts in accordance with Section 10.3(a) of this Agreement. (e) Such short-form instruments or other instruments, in recordable form reasonably acceptable to the LG&E Companies and Big Rivers, solely evidencing the rights and interests of the LG&E Companies in and to Big Rivers' properties, rights-of-way and easements granted in Section 10.11 of this Agreement. (f) The New Reserves Agreement contemplated in Section 10.30 of this Agreement. -7- (g) The G & A Allocation Agreement contemplated in Section 10.29 of this Agreement. (h) Such consents of third parties, instruments of assignment and assumption or other agreements, instruments and documents as may be necessary to effect the provisions of Section 11.1 of this Agreement with respect to the Pre-Closing Development Agreements. (i) Such bills of sale and other appropriate documents of transfer, conveyance and assignment (in form reasonably satisfactory to Big Rivers and the LG&E Companies) as shall be necessary or appropriate for the assignment by Big Rivers to Station Two Subsidiary of the Station Two Inventory, the Station Two Personal Property and the Station Two Allowances as contemplated in Sections 10.33, 10.35 and 8.10(c) of this Agreement. (j) An assignment and assumption agreement, in substantially the same form as the Agreement attached as Schedule 9.2 of the Participation Agreement, providing for the assignment from Big Rivers to Station Two Subsidiary of certain of Big Rivers' rights, title and interest under, in and to the Station Two Intangible Assets (other than the Station Two Allowances), as contemplated in Section 10.34 of this Agreement. (k) Such other agreements, instruments and documents as shall be reasonably necessary for the consummation of the transactions contemplated in this Agreement, consistent with Section 10.27 of this Agreement. 3.4 Henderson's Deliveries. At the Closing, Henderson shall deliver to Big Rivers and the LG&E Companies, as appropriate, all of the following (duly executed where appropriate): (a) A Certificate of the City Clerk of the City, dated the Effective Date, in form and substance reasonably satisfactory to Big Rivers and the LG&E Companies, certifying as to due adoption of the resolution or ordinance of the City Commission authorizing and approving the -8- execution, delivery and performance by Henderson of this Agreement and the transactions contemplated in this Agreement. (b) A Certificate of the Secretary of HUC, dated the Effective Date, in form and substance reasonably satisfactory to Big Rivers and the LG&E Companies, certifying as to the due adoption of the resolutions of HUC authorizing the execution, delivery and performance by HUC of this Agreement and the transactions contemplated in this Agreement. (c) A Certificate of the General Manager of HMPL stating that (i) the representations and warranties set forth in Section 5 of this Agreement, entitled "Representations and Warranties of Henderson," are true and correct in all material respects on the Effective Date, as though made on the Effective Date, and (ii) the conditions precedent to Henderson's obligations set forth in Section 3 of Schedule 2.1 or Schedule 2.2, as the case may be, have been satisfied or waived by Henderson, provided, that the foregoing shall not relieve any other Party from its responsibility or liability for any misrepresentation or breach of warranty by such other Party made in this Agreement. (d) A Certificate of the General Manager of HMPL certifying as to those items affecting or relating to the Station Two O&M Account and the Station Two R&R Account and as to Henderson's rights in respect of such accounts in accordance with Section 10.3(a) of this Agreement. (e) The opinions of O'Melveny & Meyers LLP and The Law Firm of Sheffer Hoffman referenced in items 1.11 and 2.9 of Schedule 2.1. (f) Such short-form instruments or other instruments, in recordable form reasonably acceptable to the LG&E Companies, solely evidencing the rights and interests of the LG&E Companies in and to Henderson's properties, rights-of-way and easements as contemplated in Section 10.11 of this Agreement. -9- (g) The New Reserves Agreement contemplated in Section 10.30 of this Agreement. (h) The G & A Allocation Agreement contemplated in Section 10.29 of this Agreement. (i) Such other agreements, instruments and documents as shall be reasonably necessary for the consummation of the transactions contemplated in this Agreement, consistent with Section 10.27 of this Agreement. 3.5 LG&E Companies' Deliveries. At the Closing, each of the LG&E Companies shall deliver to Big Rivers and Henderson, as appropriate, all of the following (duly executed where appropriate): (a) A Certificate of the Secretary or an Assistant Secretary of each LG&E Company, each dated the Effective Date, in form and substance reasonably satisfactory to Big Rivers and Henderson, certifying as to the due adoption of the resolutions of each such LG&E Company's Board of Directors authorizing the execution, delivery and performance by such LG&E Company of this Agreement and the transactions contemplated in this Agreement. (b) A Certificate of an authorized officer of each LG&E Company certifying that (i) the representations and warranties of that LG&E Company set forth in Section 7 of this Agreement, entitled "Representations and Warranties of the LG&E Companies," are true and correct in all material respects on the Effective Date, as though made on the Effective Date, and (ii) the conditions precedent to that LG&E Company's obligations set forth in Section 1 of Schedule 2.1 or Schedule 2.2, as the case may be, have been satisfied or waived by that LG&E Company, provided that the foregoing shall not relieve any other Party from its responsibility or liability for any misrepresentation or breach of warranty by such other Party made in this Agreement. (c) The opinions of Greenebaum Doll & McDonald PLLC and Dewey Ballantine LLP referenced in items 2.9 and 3.7 of Schedule 2.1. -10- (d) A Certificate of an authorized officer of Station Two Subsidiary certifying that, as of the effective date of the Station Two Agreement, Station Two Subsidiary is an "affiliate" of a utility subject to regulation by the KPSC in compliance with KRS ss. 96.520, but only if such compliance is required as of the Effective Date. (e) The New Reserves Agreement contemplated in Section 10.30 of this Agreement. (f) The G & A Allocation Agreement contemplated in Section 10.29 of this Agreement. (g) Such instruments of assignment and assumption or other agreements, instruments and documents as may be necessary for LEM to execute and deliver to effect the provisions of Section 11.1 of this Agreement with respect to the Pre-Closing Development Agreements. (h) Certificates of Insurance, and copies of the policies of Insurance, required by Section 10.8(e) of this Agreement. (i) An assignment and assumption agreement, in substantially the same form as the Agreement attached as Schedule 9.2 of the Participation Agreement, providing for the assumption by Station Two Subsidiary of certain of Big Rivers' performance obligations under the Station Two Intangible Assets (other than the Station Two Allowances), as contemplated in Section 10.34 of this Agreement. (j) Such other agreements, instruments and documents as shall be reasonably necessary for the consummation of the transactions contemplated in this Agreement, consistent with Section 10.27 of this Agreement. 4. COVENANTS OF THE PARTIES PENDING EFFECTIVE DATE. 4.1 Access Pending Effective Date. -11- (a) Prior to the Effective Date, Big Rivers and Henderson shall, at the request of any of the LG&E Companies, afford or cause to be afforded to the employees, agents, attorneys, accountants and other authorized representatives of the LG&E Companies reasonable access during normal business hours to all assets, facilities and properties, tangible and intangible, real and personal, fixed and contingent, comprising Station Two and the Joint Use Facilities, and to all employees, agents, representatives, books, records, data, contracts and documents relating to those assets, facilities and properties (hereinafter, collectively, the "Station Two Assets"), including, without limitation, affording or causing such access for the purpose of conducting investigations and examinations, preparing surveys, making appraisals and ascertaining the condition thereof, and shall permit such persons, at the LG&E Companies' expense, to make copies of such books, records, data, contracts and documents. (b) The LG&E Companies shall treat, and shall cause all of their respective employees, agents, attorneys, accountants and other authorized representatives to treat, all information obtained pursuant to this Section 4.1 that otherwise is not in the public domain as confidential. (c) No investigation by any of the LG&E Companies or any of their respective employees, agents, attorneys, accountants or other authorized representatives pursuant to this Section 4.1 shall affect any representation, warranty, or closing condition of any Party hereto. 4.2 Negative Covenants. Except as otherwise permitted by this Agreement or with the prior written consent of Station Two Subsidiary, for itself and as agent for the other LG&E Companies (which consent shall not be unreasonably withheld), each of Big Rivers and Henderson agree with the LG&E Companies, but not with each other, as follows for all periods prior to the Closing: -12- (a) No Liens. Neither Big Rivers nor Henderson shall, directly or indirectly, create, incur, assume or suffer to exist any Lien on or with respect to any of the Station Two Assets, except for Permitted Liens and Liens created by the Bond Ordinance. (b) No Disposal. Except as may otherwise be required to comply with the Bond Ordinance, neither Big Rivers nor Henderson shall dispose of, or agree to dispose of, any of the Station Two Assets or any rights under the Station Two Contracts outside the ordinary course of business, nor shall either of them assign, or agree to assign, any rights that it may have under any of the Station Two Contracts (or any portion of any of those contracts). (c) No New Contracts. (1) Big Rivers shall not enter into any Power sales contract that commits Energy or Capacity from Station Two, or any maintenance, fuel supply or transportation contracts relating to the operation or maintenance of Station Two or the other Station Two Assets or in furtherance of its obligations under the Station Two Contracts, in any such case, involving the payment or receipt by Big Rivers of an amount in excess of $500,000 annually or having an expiration or termination date after May 31, 1998. Notwithstanding the foregoing or Section 7.2.3 of the Participation Agreement, Big Rivers shall be entitled to enter into Pre-Closing Development Agreements with Henderson as contemplated in the 1998 Amendments for Economic Development Opportunities provided that such agreements do not specifically commit Power from and after the Closing from any of the Generating Plants. (2) Henderson shall not permit Big Rivers to enter into any of the commitments described in (1) above on behalf of Henderson, but only to the extent that Henderson has the right to do so, and Henderson shall not itself, without the written consent of Station Two Subsidiary (unless Henderson reasonably determines that the failure to enter into such a contract would impair Henderson's duties and obligations to the Trustee or the holders of the Station Two Bonds), enter into (A) any contracts relating to the operations or maintenance of Station Two or the other Station Two Assets, or (B) any Power sales -13- contract that commits Capacity (excluding, however, any Station Two Economic Development Power committed to Henderson in accordance with Section 28 of the 1998 Amendments and as contemplated in Section 11.1 of this Agreement), other than such contracts as are permitted under the terms of the Station Two Contracts following a breach or default thereunder by Big Rivers as contemplated in Section 15.2 of the Station Two Power Sales Agreement, and then only to the extent that such breach or default has not been cured by Big Rivers or an LG&E Company in accordance with the terms of the Station Two Contracts and this Agreement, subject, however, to LEM's option to purchase Energy and Capacity as contemplated in Section 4.4 of this Agreement. (d) Station Two Contracts; Station Two Bonds. Henderson shall not breach or default under, nor shall Henderson suffer to exist any breach or default under, the Bond Ordinance or any of the Station Two Bonds or the Station Two Contracts. Big Rivers shall not terminate or materially modify or amend, or suffer to exist any termination or material modification or amendment of, any of the Station Two Contracts or the Station Two Bonds to the extent the same is within its reasonable control. Big Rivers, without the written approval of the LG&E Companies, shall not authorize Henderson to issue, and Henderson agrees that without the written consent of Big Rivers and Station Two Subsidiary it shall not issue, additional bonds or other indebtedness under the Bond Ordinance, whether or not to finance any major renewals or replacements of Station Two, any major additions or improvements thereto, or any expansion thereof (each a "Systems Improvement Project"), unless (x) such Systems Improvement Project is such that no duty, obligation or liability shall be imposed thereby, or in connection therewith, upon Big Rivers or any of the LG&E Companies under this Agreement or any of the Station Two Contracts (including without limitation, in the form of increased Capacity charges under the Station Two Power Sales Agreement), and (y) such Systems Improvement Project would not otherwise adversely affect the rights of any of the LG&E Companies under the Phase I Subcontract or the Phase II Assignment, or under any other transactions contemplated by this Agreement or the Station Two Contracts. -14- (e) No Commitment. Neither Big Rivers nor Henderson shall agree or commit to do any of the foregoing matters which they are otherwise prohibited from doing under the terms of this Section 4.2. (f) Monthly Operations and Demand. Big Rivers agrees with the LG&E Companies that it has not operated, and shall not at any time during each of the 12 calendar months immediately preceding the Effective Date operate, Station Two in such a manner that, when measured on a monthly basis, would violate the Letter Ruling. 4.3 Affirmative Covenants. Except as otherwise permitted by this Agreement or with the prior written consent of Station Two Subsidiary, for itself and as agent for the other LG&E Companies (which consent shall not be unreasonably withheld), each of Big Rivers and Henderson agrees with the LG&E Companies, but not with each other, that it shall at all times prior to the Closing: (a) Ordinary Course. Unless different standards or specifications are otherwise required by any regulatory authority having jurisdiction thereof and such standards or specifications make it impracticable or illegal to comply with the following, operate Station Two as presently operated and only in the ordinary course and consistent with the Station Two Operating Agreement and Prudent Utility Practices unless such performance by those Parties in accordance with Prudent Utility Practice would result in a breach or default by those Parties under the Station Two Contracts or the Bond Ordinance, in which event the covenant regarding Prudent Utility Practices shall not apply. (b) Adverse Changes. Advise Station Two Subsidiary in writing (except to the extent disclosed in this Agreement or in any disclosure schedule hereto) of any litigation or administrative proceeding (other than in the Bankruptcy Court) that challenges or otherwise materially affects, or that, to the best of its knowledge in the case of Henderson, reasonably could be expected to materially affect the transactions contemplated in this Agreement or the respective rights and entitlements of the Parties under the Station Two Contracts as -15- contemplated in this Agreement from and after the Closing, and of any material adverse change in the Station Two Assets, their respective interests therein or the condition thereof. (c) Maintain Assets. Unless different standards or specifications are otherwise required by any regulatory authority having jurisdiction thereof, and such standards or specifications make it impracticable or illegal to comply with the following, use its reasonable best efforts to maintain all tangible assets included in the Station Two Assets in good operating condition, reasonable wear and tear excepted, consistent with the Station Two Contracts and Prudent Utility Practice unless such performance by those Parties in accordance with Prudent Utility Practice would result in a breach or default by those Parties under the Station Two Contracts or the Bond Ordinance, in which event the covenant regarding Prudent Utility Practices shall not apply. (d) Insurance. Maintain at all times prior to the Closing policies of insurance relating to the Station Two Assets and operation of Station Two as required by, and in material compliance with, the Station Two Contracts and the Bond Ordinance and which in any event provide no less coverage than is in effect on the date hereof. (e) Comply with Laws. Operate and maintain Station Two and the other Station Two Assets in substantial compliance with all applicable Laws. (f) Station Two Contracts. Unless different standards or specifications are otherwise required by any regulatory authority having jurisdiction thereof, and such standards or specifications make it impracticable or illegal to comply with the following, perform all of their respective duties and obligations under all Station Two Contracts in all material respects, consistent with the terms and provisions thereof, and not waive or release the other Party thereto (or any other parties thereto) from any material obligation that they may have to perform under any Station Two Contracts in all material respects consistent with the terms and provisions thereof. -16- 4.4 Purchase Option on Default. If at any time prior to the Effective Date Henderson shall have the right under Section 15.2 of the Station Two Power Sales Agreement to sell Station Two Surplus Capacity otherwise allocated to Big Rivers thereunder on account of a breach or default under such agreement by Big Rivers that is not timely cured by Big Rivers or by any LG&E Company (to the extent it elects to do so in accordance with the terms of this Agreement), and Henderson determines to exercise such right, Henderson shall first offer (in a binding written offer delivered to LEM) to sell such Power to LEM, and LEM shall have the right (but not the obligation) to purchase such Power at the price and in accordance with the terms set forth in the Station Two Power Sales Agreement that are applicable to purchases by Big Rivers. LEM may accept or reject Henderson's offer to sell such Power to LEM within 15 days after the date of its receipt of that offer. If LEM shall reject Henderson's offer, or fails to deliver its acceptance within the foregoing 15-day period, Henderson shall be entitled to sell the Power which LEM did not accept to one or more third parties on such terms as Henderson shall deem appropriate. The foregoing rights of LEM shall also apply during the Phase I Subcontract Term with respect to any breach or default by Big Rivers under the Station Two Power Sales Agreement, unless that breach or default was the result of a breach or default by any LG&E Company under this Agreement or any other Operative Document. 5. REPRESENTATIONS AND WARRANTIES OF HENDERSON. Henderson hereby represents and warrants to Big Rivers (solely with respect to Sections 5.1, 5.2, 5.3 and 5.15 (but only as expressly set forth in Section 5.15) of this Agreement) and to the LG&E Companies (with respect to all Sections of this Section 5) as follows: 5.1 Organization and Powers of Henderson. The City is a municipal corporation and city of the third class duly organized and existing under the laws of the Commonwealth of Kentucky. HUC is a public body politic and corporation duly organized and existing under Kentucky Revised Statutes ss. 96.530 and related statutes. The execution, delivery and performance of this Agreement by Henderson has been duly authorized by all necessary action, governmental, corporate or otherwise, including approval by ordinance or other official action of the City Board of Commissioners and Mayor of the City. Henderson has all -17- requisite power and authority to own Station Two and the other Station Two Assets (excluding, however, the Joint Use Facilities owned by Big Rivers which Henderson has the power, right and authority to use in its operation of Station Two) and to carry on its business as now being conducted at Station Two and, subject to satisfaction or waiver of all conditions relevant to Henderson that are set forth in Schedules 2.1, 2.2 or 2.3 hereof, as applicable, as proposed to be conducted pursuant to the terms of this Agreement. 5.2 No Violation. Except as set forth in Schedule 5.2, Henderson's execution and delivery of this Agreement and consummation of the transactions contemplated hereunder (a) will not violate any existing statute, law, rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will not under any existing statute or law or any existing rule, regulation, order, writ, injunction or decree of any court or governmental authority require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental agency, instrumentality, commission, authority, board or body, except to the extent such authorization, consent, approval, exemption, notice or other action is required solely as a result of actions taken by Big Rivers or any LG&E Company after the Effective Date, and, (c) subject to obtaining the consents referred to in Schedule 5.2, will not violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Lien upon the Station Two Assets under, any terms or provisions of the Station Two Bonds or the Bond Ordinance, the Station Two Contracts, or any other material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which the City or HUC is a party or by which Station Two or the other Station Two Assets may be bound or affected. No consents or approvals of this Agreement or the transactions contemplated in this Agreement are required from the holders of any Station Two Bonds or from any trustee or other fiduciary appointed under or in connection with the Bond Ordinance. In connection with the representations made in this Section 5.2, insofar as they relate to KRS ss. 96.520, Henderson is relying upon the representations of the LG&E Companies and the determination of the KPSC as to compliance with KRS ss. 96.520. -18- 5.3 Effect of Agreement; Consents. This Agreement and the Station Two Contracts have been duly and validly authorized, executed and delivered by Henderson, and constitute valid and legally binding agreements enforceable against Henderson in accordance with their respective terms, except as the foregoing may be limited by (a) general principles of equity or (b) bankruptcy, insolvency, reorganization, arrangement, moratorium or other laws or equitable principles relating to or affecting creditor's rights generally. 5.4 Output. Except for sales of the type contemplated by Section 4.2(c)(2) of this Agreement and for the HMP&L Contract, there are no contracts or other arrangements in place by which any of the Station Two Surplus Capacity has been sold, dedicated or committed by Henderson to any use, purpose or Person. The Capacity and associated Energy generated by Station Two is free and clear of all Liens, except for any Permitted Liens or any Liens created by the Bond Ordinance, which Liens (including Permitted Liens) in such Capacity and Energy are automatically released upon the sale and delivery of the same pursuant to the Station Two Power Sales Agreement, upon payment therefor. 5.5 Station Two Contracts. Exhibit A contains a list of all agreements relating to, or affecting, Station Two or the other Station Two Assets to which Henderson is a party. Henderson has not received notice from any third party (including Big Rivers) to the effect that any such agreements are not in full force and effect. Neither Henderson nor, to the best of Henderson's knowledge, Big Rivers is in material default under any such agreements, and no event has occurred which, with notice or the passage of time, or both, would constitute a material default under any such agreements. Henderson holds its interest in each such agreement free and clear of any Liens, except for any Liens created by the Bond Ordinance. 5.6 Bond Ordinance. Henderson has not defaulted, and is not now in default, under the terms and provisions of the Station Two Bonds or the Bond Ordinance, and no event has occurred which, with notice or the passage of time, or both, would constitute a default thereunder. -19- 5.7 Condition of Station Two Assets. Except as set forth on Schedule 5.7, to the best knowledge of Henderson each of the tangible assets included in the Station Two Assets owned by Henderson is in all material respects well maintained and in good condition and state of repair consistent with Prudent Utility Practice and the Station Two Contracts, subject only to ordinary wear and tear and to the performance of regularly scheduled maintenance that is yet to be performed in the ordinary course of the operation of Station Two consistent with Prudent Utility Practice and the Station Two Contracts. 5.8 Water Supply. Henderson currently has rights in or to a water supply and Permits for waste water disposal sufficient for the operation of Station Two at a Capacity of 312 net MW, and, as of the date hereof, no permit, license or other governmental or private action or permission is required to utilize such water supply (provided the ordinary charges for consumption or disposition thereof are paid). Henderson has no knowledge of any pending or threatened impediment to the continuation of such water supply and waste water disposal as set forth above for the duration of the Phase I Subcontract Term and, as applicable, the Phase II Assignment Term, other than renewals of Permits required in the ordinary course of business. Henderson has no knowledge of any breach, impediment or other reason why such renewals may not be granted to Henderson. 5.9 Permits. To the best knowledge of Henderson, Schedule 5.9 contains a listing of all material Permits currently required for the ownership or operation of Station Two at a Capacity of 312 net MW (including, without limitation, for the performance by Station Two Subsidiary of its obligations set forth in this Agreement) and specifically identifies those material Permits that expire prior to the end of the Phase I Subcontract Term and Phase II Assignment Term. Each such Permit is in full force and effect. Henderson is in material compliance with the terms of each such Permit and Henderson holds its interest in each such Permit free and clear of any Liens, other than any Liens created by the Bond Ordinance. -20- 5.10 Litigation and Insurance Claims. Schedule 5.10 contains a description of (i) all pending or, to the best of Henderson's knowledge, threatened suits, actions, arbitrations, claims, administrative proceedings or other proceedings, or, to the best of Henderson's knowledge, governmental investigations relating in any way to the ownership or operation of Station Two or the other Station Two Assets owned by Henderson, or to the Station Two Bonds, and (ii) any claim, demand or notice tendered to an insurer by Henderson with respect to any matter related in any way to the ownership or operation of Station Two or the other Station Two Assets. 5.11 Compliance with Laws. To Henderson's knowledge, the use and operation of Station Two and the other Station Two Assets owned by Henderson are in material compliance with all applicable laws, rules, orders, regulations or restrictions, except any existing or previous noncompliance (whether or not cured) that does not and will not materially interfere with the use or operation of Station Two or the other Station Two Assets owned by Henderson or the use or sale of Power generated therefrom, nor result in the imposition of any material civil or criminal fines or penalties or other material liability on Henderson or any of the LG&E Companies. Henderson has received no notice of material violation or notice of material noncompliance which has not been cured. 5.12 Environmental Matters. To the knowledge of Henderson, other than the matters set forth in the Baseline Environmental Audit Report or Schedule 5.1.19 attached to the Participation Agreement, there is no pending administrative or judicial investigation, proceeding or action or any outstanding claim, demand, order, administrative or legal proceeding or settlement, consent decree or order under, or relating to any Environmental Law and further relating to or involving Station Two or any other Station Two Assets, nor is there now, nor has there been, any pattern of violations that would lead to any of the foregoing (collectively, "Environmental Violations"). To the knowledge of Henderson, (i) no Hazardous Substance or other waste (including without limitation garbage and refuse) has been disposed of, spilled, leaked or otherwise released at, on, under or from Station Two or the other Station Two Assets, any real property on which Station Two or any other Station Two -21- Assets is situated, or any land subject to any rights-of-way or easements used in or committed to the operation of Station Two or the other Station Two Assets, and (ii) there are no underground storage tanks at Station Two or on the real property on which Station Two or any other Station Two Assets is situated or the land subject to the rights-of-way used in or committed to the operation of Station Two (collectively "Environmental Conditions"). For purposes of this Section 5.12 only, the LG&E Companies acknowledge and agree that "knowledge" shall mean the actual knowledge of the commissioners of HUC, the general manager of HMPL or the project manager for Station Two on behalf of HUC, without any such representatives of HUC or HMPL undertaking an independent audit or other investigation (other than a review of written notices or correspondence in Henderson's records) of Environmental Violations or Environmental Conditions relating to or affecting Station Two or the other Station Two Assets. The LG&E Companies further acknowledge and agree that Henderson shall have no obligation to disclose to the LG&E Companies under this Section 5.12 any Environmental Violations or Environmental Conditions that are set forth and identified in Schedule 5.1.19 of Big Rivers' disclosure schedules attached to the Participation Agreement, as the same shall be in existence on the Effective Date, or in the Baseline Environmental Audit Report as such report shall be in existence on the Effective Date and may thereafter be supplemented by quarterly groundwater data in accordance with the terms of the Participation Agreement. In the event the Parties at any time share any information relating to environmental matters regarding Station Two or any other Station Two Asset, they each agree to hold all such information in the strictest confidence and secrecy to the fullest extent permitted by applicable law, absent the prior consent of the other Parties, which approval will not be unreasonably withheld, conditioned or delayed. 5.13 No Condemnation, Expropriation or Restrictions. Neither the whole nor any portion of Station Two or the other Station Two Assets is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor to Henderson's knowledge, has any such condemnation, expropriation, taking or material new assessment been proposed. Henderson has received no notice that any zoning, land use or other governmental proceeding -22- specific to Station Two or the other Station Two Assets is pending, nor to the best of Henderson's knowledge is any such proceeding proposed, which would materially adversely affect Station Two or any of the other Station Two Assets, or the use and operation thereof in accordance with the terms of this Agreement and the Station Two Contracts. 5.14 Miscellaneous Payments. Effective as of October 31, 2003, no further payments shall be due and owing to Henderson pursuant to Section 6.6 of the Station Two Power Sales Agreement. 5.15 Completeness of Statements. Henderson has disclosed to the LG&E Companies and Big Rivers (limited to those representations and warranties made to Big Rivers herein) in writing all material facts known to it relating to the representations and warranties made by it to each such Party in this Agreement. No representation, warranty or covenant of Henderson made to the LG&E Companies and, as applicable, to Big Rivers in this Agreement contains any untrue statement of a material fact, any misstatement of a material fact or omits to state a material fact necessary to make the statements herein not misleading to such Party. 6. REPRESENTATIONS AND WARRANTIES OF BIG RIVERS. Big Rivers hereby represents and warrants to the LG&E Companies and Henderson as follows: 6.1 Organization and Powers of Big Rivers. Big Rivers is a rural electric cooperative corporation, duly organized and existing under the laws of the Commonwealth of Kentucky. Big Rivers has all requisite cooperative power and authority to own, operate, and lease its properties, and to carry on its business as now being conducted and, subject to satisfaction or waiver of all conditions relevant to Big Rivers that are set forth in Schedules 2.1, 2.2 and 2.3 hereof, as proposed to be conducted pursuant to the terms of this Agreement. The execution, delivery and performance of this Agreement by Big Rivers has been duly authorized by all necessary action, and no further cooperative or Member authorization is necessary. -23- 6.2 No Violation. Except as set forth in Schedule 6.2, Big Rivers' execution and delivery of this Agreement and consummation of the transactions contemplated hereby, including performance in all material respects of all of its obligations hereunder, (a) will not violate any existing statute or law or any existing rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will not under any existing statute or law or any existing rule, regulation, order, writ, injunction or decree of any court or governmental authority, require any authorization, consent, approval, exemption or other action by or notice to any court or any administrative or governmental agency, instrumentality, commission, authority, board or body, except to the extent such authorization, consent, approval, exemption, notice or other action is required solely as a result of actions taken by Henderson or any of the LG&E Companies after the Effective Date, and, (c) subject to obtaining the consents referred to in Schedule 6.2, will not violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Lien upon any of the Station Two Assets (other than a Permitted Lien) under, any terms or provisions of the Articles of Incorporation or By-laws of Big Rivers, the Station Two Contracts or any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Big Rivers is a party or, to its knowledge, by which Station Two or any of the other Station Two Assets may be bound or affected. 6.3 Effect of Agreement; Consents. This Agreement and the Station Two Contracts have been duly and validly authorized, executed and delivered by Big Rivers and constitute valid and legally binding obligations of Big Rivers enforceable against Big Rivers in accordance with their respective terms, except as the foregoing may be limited by (a) general principles of equity or (b) bankruptcy, insolvency, reorganization, arrangement, moratorium, or other laws or equitable principles relating to or affecting creditors' rights generally. 6.4 Completeness of Statements. Big Rivers has disclosed to the LG&E Companies and Henderson in writing all material facts known to it relating to the representations and warranties made by it in this Agreement. No representation, warranty or covenant of Big -24- Rivers in this Agreement contains any untrue statement of a material fact, any misstatement of a material fact or omits to state a material fact necessary to make the statements herein not misleading. 7. REPRESENTATIONS AND WARRANTIES OF THE LG&E COMPANIES. Each of The LG&E Companies, for itself only, hereby represents and warrants to Henderson and Big Rivers as follows: 7.1 Organization and Powers. Such LG&E Company is duly organized, existing and in good standing under the laws of the state of its organization. Such LG&E Company has all requisite corporate power and authority to own, operate, and lease its properties, and to carry on its business as now being conducted and, subject to satisfaction or waiver of all conditions relevant to that LG&E Company set forth in Schedules 2.1, 2.2 and 2.3 hereof, as proposed to be conducted pursuant to the terms of this Agreement. Station Two Subsidiary and LEM are each an "affiliate" of a utility subject to regulation by the KPSC in compliance with KRS ss. 96.520. 7.2 No Violation. Except as set forth in Schedule 7.2, the execution and delivery of this Agreement by such LG&E Company, and the consummation by such LG&E Company, of the transactions contemplated hereunder, including performance in all material respects of all of its obligations hereunder, (a) will not violate any existing statute or law or any existing rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will not under any existing statute or law or any existing rule, regulation, order, writ, injunction or decree of any court or any administrative or governmental authority, require any authorization, consent, approval, exemption or other action by or notice to any court or any administrative or governmental agency, instrumentality, commission, authority, board or body, except to the extent such authorization, consent, approval, exemption, notice or other action is required solely as a result of actions taken by Big Rivers or Henderson after the Effective Date, and, (c) subject to obtaining the consents referred to in Schedule 7.2, will not violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would -25- constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any Lien upon any of the assets of such LG&E Company under any terms or provisions of the respective Articles of Incorporation, By-laws or other constituent documents of such LG&E Company, or of any material contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which such LG&E Company is a party or by which the assets or properties of such LG&E Company may be bound or affected. 7.3 Effect of Agreement. This Agreement has been duly and validly authorized, executed and delivered by such LG&E Company and constitutes a valid and legally binding obligation of such LG&E Company enforceable against such LG&E Company in accordance with its terms, except as the foregoing may be limited by (a) general principles of equity or (b) bankruptcy, insolvency, reorganization, arrangement, moratorium, or other laws or equitable principles relating to or affecting creditors' rights generally. 7.4 Completeness of Statements. Each of the LG&E Companies has disclosed to Henderson and Big Rivers in writing all material facts known by it relating to the representations and warranties made by it in this Agreement. No representation, warranty or covenant of any such LG&E Company in this Agreement contains any untrue statement of a material fact, any misstatement of a material fact or omits to state a material fact necessary to make the statements herein not misleading. 8. PHASE I SUBCONTRACT. During the Phase I Subcontract Term, Big Rivers hereby engages Station Two Subsidiary, and Station Two Subsidiary accepts such engagement, to perform as Big Rivers' subcontractor those obligations of Big Rivers under certain of the Station Two Contracts as are specifically identified in Section 8.2 of this Agreement, upon and subject to the terms and conditions of this Agreement (the "Phase I Subcontract"). Henderson consents to and approves of such limited engagement for all purposes. Henderson further acknowledges and agrees that it shall have no implied rights or rights as a third party beneficiary or otherwise, unless otherwise expressly granted to Henderson in this Agreement, -26- to pursue any of the LG&E Companies for failure of performance of any of the duties or obligations due Big Rivers under this Section 8. The terms and provisions of this Section 8 shall only apply during the Phase I Subcontract Term, unless otherwise expressly provided below or elsewhere in this Agreement. 8.1 Term of Engagement. The term (the "Phase I Subcontract Term") of the engagement of Station Two Subsidiary as the subcontractor of Big Rivers shall commence on the Phase I Effective Date and shall end on the earlier of (a) the Phase II Effective Date, (b) the December 31st that is closest to the twenty-fifth anniversary of the Phase I Effective Date, or (c) the date of any termination of this Agreement pursuant to Section 13 of this Agreement, entitled "Termination; Default; Remedies." 8.2 Duties of Station Two Subsidiary. Station Two Subsidiary hereby agrees with Big Rivers that, during the Phase I Subcontract Term, Station Two Subsidiary, as Big Rivers' subcontractor, shall: (a) Pay or perform, as applicable, for Big Rivers all of the obligations of Big Rivers under the following sections of the Station Two Operating Agreement which arise or accrue on or after the Phase I Effective Date and during the Phase I Subcontract Term: (i) Section 13 (Operation, Maintenance and Control), but excluding Section 13.8(c) (obligation to provide fuel), Section 13.8(d) (concerning allocation of transmission system costs), and Section 13.10 (but solely those provisions in Section 13.10 that require that access be given to transmission and transformation facilities or any other facilities, lands or properties in which Station Two Subsidiary, WKEC or any of its Affiliates has no interest as an operator or lessee, or to facilities (or portions thereof) control over which by the LG&E Companies has been denied by reason of a breach or default by Big Rivers or Henderson under this Agreement or any other Operative Document); (ii) Section 14 (Budgeting), provided that the Operating Budget prepared by Station Two Subsidiary for Big Rivers' submission to Henderson shall also comply with the procedures set forth in Section 8.15 of this Agreement and Section 6 of the Facilities Operating Agreement; (iii) Section 15 (Accounting and Auditing); (iv) Section 16 -27- (Billing and Payments); (v) Section 18 (Insurance), subject to those modifications set forth in Section 10.8 of this Agreement; and (vi) Section 20 (Inspections, Rights of Access), except that Station Two Subsidiary shall have no obligation to grant access or rights of inspection to any facilities or any portions thereof in which Station Two Subsidiary, WKEC or any other LG&E Company has no interest as an operator or lessee, and except that Station Two Subsidiary's responsibilities and obligations to Big Rivers with respect to Section 20.2 of the Station Two Operating Agreement shall be limited to the safety of Station Two Subsidiary's representatives and employees, and to hold harmless and indemnify Big Rivers from any loss or damage incurred by Big Rivers by reason of injury to Station Two Subsidiary's representatives and employees during such representatives' and employees' access to the premises of Big Rivers or Henderson, unless such injury is due to the negligence or the willful misconduct of Big Rivers or Henderson or their respective agents, employees or representatives, or to the breach of this Agreement, any of the Station Two Contracts or any of the other Operative Documents by Big Rivers or Henderson, as the case may be (which act or omission is not itself the direct result of an act or omission of any of the LG&E Companies). (b) Pay or perform, as applicable, for Big Rivers all of the obligations of Big Rivers under the following sections of the Joint Facilities Agreement which arise or accrue on or after the Phase I Effective Date and during the Phase I Subcontract Term: (i) Section 6 (Operation and Maintenance), except for the operation and maintenance of facilities located between the step-up transformer and the Station Two disconnect switches on the high-voltage side of the unit step-up transformers, which shall be governed solely by reference to Section 5.1 of the Transmission Services and Interconnection Agreement and the agreement referenced therein, and except that the obligation to renew or replace the Joint Use Facilities and any obligation respecting Henderson Incremental Environmental O&M shall be governed by the terms of Sections 8.16 and 8.17 of this Agreement; and (ii) Section 7 (Access), except that Station Two Subsidiary shall have no obligation to grant access to facilities or any portions thereof in which the Station Two Subsidiary, WKEC or any other LG&E Company has no interest as an operator or lessee, or to facilities (or portions thereof) control over which by the LG&E -28- Companies has been denied by reason of a breach or default by Big Rivers or Henderson under this Agreement or any other Operative Document. Except for those obligations set forth above or as otherwise provided in this Section 8, entitled "Phase I Subcontract," during the Phase I Subcontract Term, Station Two Subsidiary shall not in any manner have any obligation, responsibility, liability or duty to perform or discharge for Big Rivers any other liabilities or obligations of Big Rivers under the Station Two Contracts, and Big Rivers hereby covenants to the LG&E Companies that Big Rivers shall retain, pay and perform all other obligations of Big Rivers under the Station Two Contracts. Notwithstanding anything contained in this Section 8, entitled "Phase I Subcontract," or any provision of the Station Two Contracts that purports to obligate an LG&E Company for the payment of costs and expenses relating to the Reid steam generating plant of Big Rivers (the "Reid Station") or any of the Joint Use Facilities that may be owned by Big Rivers, the LG&E Companies and Big Rivers hereby agree that their respective rights and obligations as to each other for such costs and expenses shall nonetheless be governed by the provisions of the Cost Sharing Agreement, the Power Purchase Agreement, the Facilities Operating Agreement, the Lease or the Participation Agreement, as applicable. Henderson and Big Rivers each hereby represents to the LG&E Companies that, for purposes of this Agreement and the Station Two Contracts, the Reid combustion turbine generating plant of Big Rivers is not a Joint Use Facility and is not the "Reid Station" nor the "Reid Generating Station," nor does it comprise a portion thereof, for purposes of one or more of the Station Two Contracts, and that Henderson has no right or interest (legal, contractual or otherwise) in or to the Reid combustion turbine generating plant of Big Rivers, including, without limitation, any Right of First Offer (as such term is defined in Section 9.6 of this Agreement). 8.3 Standards of Performance. (a) Unless different standards or specifications are otherwise required by any regulatory authority having jurisdiction thereof and such standards or specifications make it impossible or illegal to comply with the following, Station Two Subsidiary shall perform its -29- duties under Section 8 of this Agreement, entitled "Phase I Subcontract," as Big Rivers' subcontractor in accordance with standards and specifications equal to the more stringent of (a) those set forth in the National Electric Safety Code of the United States Bureau of Standards, (b) Prudent Utility Practice, and (c) any other standards or specifications as may be expressly required of Big Rivers under the relevant provisions of the Station Two Contracts which Station Two Subsidiary has expressly agreed to perform for Big Rivers hereunder, unless such performance by Station Two Subsidiary in accordance with Prudent Utility Practice would result in a breach or default by Big Rivers under the Station Two Contracts or by Henderson under the Bond Ordinance, in which event the provisions of subclause (b) above shall not apply. Station Two Subsidiary will, at all times, faithfully obey and substantially comply with existing and future laws, rules and regulations of federal, state and local governmental bodies lawfully affecting the operations and activities of Station Two and, in its performance of its obligations under Section 8, entitled "Phase I Subcontract," Station Two Subsidiary will operate and maintain Station Two and the other Station Two Assets in substantial compliance with any standards imposed by any insurance policies required to be maintained by Big Rivers under the Station Two Contracts or otherwise hereunder. Station Two Subsidiary's performance of its duties under this Section 8 shall at all times be subject to Big Rivers' right of control, review and approval as set forth in this Agreement, and shall be conducted in a manner that would not cause Big Rivers to be in material default under the provisions of the Station Two Contracts. At all times during which the Station Two Bonds shall remain outstanding, Station Two subsidiary shall perform its duties in a manner that is consistent with the provisions of the Bond Ordinance and that would not cause Big Rivers to be in material default under any provisions of the Station Two Contracts as it relates to the Bond Ordinance. Station Two Subsidiary shall have no authority to act on behalf of or bind Big Rivers in any way except as expressly set forth in this Agreement. The standards of performance set forth in this Section 8.3 are made solely for the benefit of Big Rivers and shall not be enforceable by Henderson against any of the LG&E Companies. (b) In the performance of the services under this Section 8, entitled "Phase I Sub-Contract," Station Two Subsidiary shall be an independent contractor and shall act as agent of -30- Big Rivers solely in those instances expressly provided for in this Section 8, entitled "Phase I Subcontract." Except as expressly provided in this Section 8, neither Station Two Subsidiary nor any of its employees, subcontractors or agents shall be deemed to be a servant, employee or agent of Big Rivers or its Affiliates to any extent or for any purpose, nor shall anything herein be deemed to create an association, joint venture, partnership, trust or similar legal arrangement, or to impose a trust or partnership covenant, obligation or liability on or with regard to the Parties to this Agreement. During the Phase I Subcontract Term, Station Two Subsidiary shall have no power of decision or authority regarding the conduct or management of the business or affairs of Big Rivers, and shall have no power to bind or commit Big Rivers in any manner whatsoever, except as otherwise expressly provided in this Section 8 or pursuant to a written authorization or consent from Big Rivers. Station Two Subsidiary shall at all times during the Phase I Subcontract Term follow the directives of Big Rivers regarding the scope of the services and the results to be achieved by Station Two Subsidiary, but shall be permitted, subject to the terms and conditions of this Agreement and the Annual Budget, to employ any reasonable means and methods which it deems necessary and appropriate to achieve such results. 8.4 Station Two Subsidiary Negative Covenants. Unless Station Two Subsidiary shall have obtained the prior written consent of Big Rivers, Station Two Subsidiary hereby covenants to Big Rivers that it will not do, or, to the extent the same is within its reasonable control, permit to occur, any of the following: (a) make any expenditure of, or otherwise use, any funds of Big Rivers (including the making of any loans or advances to any Person), except as permitted in the Annual Budget or to the extent otherwise expressly permitted in this Agreement; (b) commit Big Rivers to be or become directly or contingently responsible or liable for any liability or other obligations to any other Person, by contract, agreement, assumption, undertaking, guarantee, endorsement or otherwise; or -31- (c) settle, compromise, file or prosecute any claims, suits or litigation for or on behalf of Big Rivers. 8.5 Reporting Obligations. Station Two Subsidiary shall report to and consult with Big Rivers about the operation of Station Two on a continuing basis, as reasonably requested by Big Rivers, and shall provide Big Rivers with a monthly written operating report which shall include but not be limited to the following matters with respect to Station Two: (a) net Power production; (b) fuel consumption and costs; (c) lime, limestone and scrubber reagent consumption and costs; (d) summary of outages and costs; (e) major maintenance activities, including costs; (f) safety statistics; (g) environmental compliance; (h) ash and waste water disposal; (i) solid waste and landfill (Pozotec) production, including costs; (j) staffing levels; and (k) heat rate and other operational efficiencies. -32- 8.6 Communication of Certain Events. Station Two Subsidiary shall communicate to Big Rivers, both orally and in writing as soon as possible after the event, regarding (i) all significant operating and management events relating to or affecting Station Two or the other Station Two Assets, including, but not limited to, all forced and scheduled outages, partial or full load restrictions due to equipment unavailability, deaths or injuries, governmental inquiries or investigations, claims under any insurance policies, Operating Emergencies and any other events or causes which may, in Station Two Subsidiary's reasonable judgment, jeopardize personnel or property or result in the unavailability of major equipment used in the operation of Station Two, and (ii) all events and circumstances which are required to be reported to the KPSC or any other governmental or regulatory authority or any insurance carrier, in each case regarding the Station Two Assets or the operation thereof. 8.7 Maintenance of Books and Records. Station Two Subsidiary hereby covenants to Big Rivers that it shall keep, or cause to be kept, up-to-date books and records of financial transactions and other arrangements that carry out the terms of this Agreement, which books and records shall be sufficiently detailed to allow Big Rivers to fulfill its obligations under the Station Two Contracts to Henderson or as it may otherwise be obligated under applicable Law. Station Two Subsidiary hereby covenants to Big Rivers that it shall retain, or cause to be retained, those books and records during the Phase I Subcontract Term (unless the destruction or disposal thereof is otherwise approved by Big Rivers or the Operating Committee, or Station Two Subsidiary delivers the books and records it desires to destroy or dispose of to Big Rivers) and, upon prior written request from Big Rivers to Station Two Subsidiary and at Big Rivers' cost and expense, shall make those books and records available during normal business hours for inspection and audit by Big Rivers. Big Rivers shall have no duty to the LG&E Companies to make any such inspection or inquiry and shall not waive any rights hereunder or incur any liability or obligation by reason of not making such inspection or inquiry. All accounts maintained by Station Two Subsidiary pursuant to this Section 8.7 shall be kept consistent with the Accounting Practices and, where a different standard is required by the Station Two Contracts, also in accordance with the Station Two Contracts. -33- 8.8 Statements and Reports. Station Two Subsidiary hereby covenants to Big Rivers that it shall prepare and file, on Big Rivers' behalf, all required reports, notices or filings with respect to the operation of the Station Two Assets with governmental or other regulatory authorities (other than the RUS) to the extent Station Two Subsidiary possesses the information to be included in such reports, notices or filings. Big Rivers agrees to provide Station Two Subsidiary, upon its request, with any and all information to be included in such reports, notices or filings which Big Rivers possesses and which is not otherwise available to Station Two Subsidiary, and agrees to reasonably cooperate with Station Two Subsidiary in its preparation and filing of such reports, notices and filings, including, without limitation, providing Station Two Subsidiary with reasonable advance notice of deadlines for the filing of any reports, notices and filings which are required by reason of Big Rivers' status as a rural electric cooperative, and the authorities with which such reports, notices and filings must be filed. Station Two Subsidiary shall furnish to Big Rivers monthly statements of the costs incurred and expenditures made with respect to Station Two pursuant to the Annual Budget approved and adopted for Station Two. Station Two Subsidiary also covenants to Big Rivers that it shall furnish to Big Rivers copies of all material reports, notices or filings made by Station Two Subsidiary to any governmental or other regulatory authority with respect to Station Two. Station Two Subsidiary shall also furnish to Big Rivers such other reports in connection with the operation of the Station Two Assets as may from time to time be reasonably requested by Big Rivers (but exclusive of any information relating to the sale by LEM or any of its Affiliates of Station Two Surplus Capacity to Persons other than Big Rivers); provided, that Big Rivers shall bear one-half (1/2) of all costs and expenses incurred by Station Two Subsidiary and its Affiliates in generating any such requested reports which are not otherwise prepared and maintained by Station Two Subsidiary to comply with this Section 8 or in the ordinary course of its business. 8.9 Confidentiality of Books and Records. The LG&E Companies and Big Rivers shall each treat as confidential all books, records and other information developed or acquired by that Party in connection with the Station Two Contracts or the Station Two Assets and no such Party shall reveal or otherwise disclose such confidential information to third parties (other -34- than Henderson as required by the Station Two Contracts or under this Agreement) without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed. These restrictions shall not apply to the disclosure of confidential information: (a) to any Affiliate of the disclosing Party; (b) to each Party and its employees, attorneys, agents and auditors; (c) to any public or private financing agency or institution which has either lent money or committed to lend money to any Party hereto or is considering such action; (d) to any third party to which a Party contemplates a permitted transfer or assignment pursuant to Section 15.1 of this Agreement (provided, however, that in any such case only such confidential information as such third party shall have a legitimate business need to know shall be disclosed); provided, in the case of any disclosure pursuant to (a), (b), (c) or (d), that the Person receiving the disclosure first agrees to keep the information confidential; (e) that otherwise comes into the public domain unless as a result of a breach by such Party of its obligations under this Section 8.9; or (f) that is required by applicable Laws, in the opinion of either Party's legal counsel, to be disclosed to the RUS, KPSC or any other federal, state or local government or appropriate regulatory agencies and departments of such agencies, or that is required by applicable Laws, in the opinion of either Party's legal counsel, to be publicly announced. Big Rivers and the LG&E Companies each shall be responsible to the other Party(s) for any disclosures of confidential information by its employees, attorneys, agents and auditors in violation of this Section 8.9, which shall themselves constitute a breach hereof by the responsible Party. 8.10 Fees and Expenses; Assignment of Rights. Big Rivers shall, during the Phase I Subcontract Term, make the following payments to Station Two Subsidiary (or an Affiliate designated by it), and assign the following rights and interests to Station Two Subsidiary (or an Affiliate designated by it), which, together with Big Rivers' other covenants to Station Two Subsidiary and its Affiliates set forth in this Agreement, shall be the exclusive compensation for the services provided by, and the exclusive reimbursement for the expenses incurred by, Station Two Subsidiary during the Phase I Subcontract Term, except as otherwise expressly provided elsewhere in this Agreement. Station Two Subsidiary shall provide Big Rivers invoices hereunder in accordance with Section 8.11(a) of this Agreement. -35- (a) Notwithstanding Station Two Subsidiary's covenant to pay certain costs of operation and maintenance allocated to the Reid Station under Sections 13.8(a) and 13.8(b) of the Station Two Operating Agreement (including costs for operating and maintaining the Joint Use Facilities allocated in accordance with such sections to the Reid Station, but specifically excluding any such costs which, as between Big Rivers and the LG&E Companies or WKEC, are Incremental Environmental O&M subject to the terms of Article 5 of the Cost Sharing Agreement or are expenditures for a Capital Asset subject to the terms of Article 7 of the Cost Sharing Agreement and, in each such case, subject to the payment and reimbursement obligations set forth in the Cost Sharing Agreement), and notwithstanding Station Two Subsidiary's covenant, as Big Rivers' agent, to procure and pay for all of Big Rivers' fuel and reagents relating to Station Two under Section 8.14(c) of this Agreement (collectively, the "Fuel and Reid Station Operating Expenses"), Big Rivers shall pay or reimburse Station Two Subsidiary for all of the Fuel and Reid Station Operating Expenses incurred by Station Two Subsidiary in the performance of its obligations hereunder in accordance with the terms of Section 8.11 of this Agreement, but only to the extent not otherwise paid by Big Rivers to WKEC under the Facilities Operating Agreement or the Cost Sharing Agreement. The LG&E Companies hereby acknowledge that the Fuel and Reid Station Operating Expenses shall constitute "Operating Pass Through Costs" payable by LEM to Big Rivers during the Phase I Subcontract Term pursuant to Section 3.3(b) of the Power Purchase Agreement and, as such, the payment thereof shall be made consistent with the provisions of Section 6.5 of the Power Purchase Agreement. (b) During the Phase I Subcontract Term, Big Rivers hereby assigns, grants and conveys to Station Two Subsidiary all of Big Rivers' rights to receive payments due it from Henderson pursuant to (1) Section 13.6 of the Station Two Operating Agreement, including, without limitation, all payments attributable to general and administrative expenses of the Parties incurred in connection with Station Two, and any late payment interest and sums due Big Rivers pursuant to the annual reconciliation provided for in Section 16.6 of the Station Two Operating Agreement, and (2) Section 3.3 of the Joint Facilities Agreement. -36- Notwithstanding anything in this Section 8.10(b) to the contrary, Station Two Subsidiary shall promptly pay to Big Rivers a portion of any amounts that Station Two Subsidiary receives from Henderson pursuant to this Section 8.10(b) that corresponds to the portion of Henderson's obligation under Section 13.6 of the Station Two Operating Agreement to pay to Big Rivers the additional 14 1/2(cent) per month, per kilowatt of total Capacity of Station Two (the "14 1/2 Cent Payments") (which obligation the Parties acknowledge will expire no later than October 31, 2003). The portion of the 14 1/2 Cent Payments owing to Big Rivers (the "Additional Payment") shall equal the percentage by which Henderson's reserved Capacity from Station Two as of the relevant payment date bears to the total rated Capacity of Station Two as of that date. Big Rivers acknowledges and agrees that such Additional Payment shall at all times be subject to Henderson's right of off-set set forth in Section 16.4 of the Station Two Operating Agreement and its right of off-set set forth in Section 8.13 of this Agreement. (c) (1) Big Rivers hereby agrees that Station Two Subsidiary (or its designated Affiliate) shall be entitled to the full use, enjoyment and benefit, free of additional charge, of Big Rivers' rights in all SO2 allowances allocated to Station Two (the "Station Two Allowances"), except as provided in subsection (2) of this Section 8.10(c), and except (i) those allowances used by Station Two to comply with emission standards applicable for the period beginning on January 1 immediately preceding the Effective Date and ending on the Effective Date, (ii) Big Rivers' rights in the 154,384 Station Two Allowances previously transferred by Big Rivers and Henderson in accordance with the Station Two Contracts, (iii) Big Rivers' rights in any additional Station Two Allowances that may be sold prior to the Effective Date with the LG&E Companies' prior written consent, and (iv) Big Rivers' rights in any Station Two Allowances having a vintage year prior to January 1 of the calendar year in which the Effective Date occurs (which rights of Big Rivers in the Station Two Allowances referred to in this Subclause (iv) represent part of the Inventory to be sold by Big Rivers to WKEC on the Effective Date). The LG&E Companies and Big Rivers further agree that, for purposes of the above described covenants of Big Rivers, Station Two Allowances which Station Two Subsidiary (or its designated Affiliate) shall be -37- entitled to use shall also include Big Rivers' rights in (x) all bonuses, extensions or transfer allowances allocated by the Environmental Protection Agency to Station Two for a particular calendar year (or portion thereof) during the Phase I Subcontract Term or the Phase II Assignment Term, and (y) all bonuses, extensions or transfer allowances allocated by the Environmental Protection Agency to Station Two, but not so allocated for a particular calendar year (or portion thereof) during the Phase I Subcontract Term or the Phase II Assignment Term, which shall be deemed to be allocated ratably to the period commencing on the Effective Date and ending December 31, 1999, subject, however, to Henderson's rights (if any) in and to such additional allowances and the agreed upon allocation of any such additional allowances (or the proceeds therefrom) set forth in the Station Two Contracts. Subject to subsection (2) of this Section 8.10(c), upon the date of expiration or termination of this Agreement, and provided Big Rivers has rights in those Station Two Allowances which must be returned to it on such date of expiration or termination, Station Two Subsidiary hereby acknowledges and agrees that it shall immediately return to Big Rivers (free of all Liens), Station Two Subsidiary's (and its Affiliate's, as applicable) rights in all of the Station Two Allowances allocated by the Environmental Protection Agency for all years beginning on or after such date of expiration or termination and Station Two Subsidiary's rights in a pro rata portion of the Station Two Allowances allocated by the Environmental Protection Agency for the remainder of the year in which such date of expiration or termination occurs. Station Two Subsidiary further acknowledges and agrees that, to the extent Station Two Subsidiary (or its Affiliate, as applicable), together with Henderson, previously disposed of any Station Two Allowances, and provided Big Rivers has rights in those Station Two Allowances which must be returned to it on such date of expiration or termination, Station Two Subsidiary shall have the obligation on such date of expiration or termination to replace, at its sole expense, Station Two Allowances which are equivalent to Big Rivers' rights in those Station Two Allowances so disposed of by it (or its Affiliate, as applicable), together with Henderson, and to transfer such replacement Station Two Allowances to Big Rivers (free of all Liens). Notwithstanding anything in this Agreement to the contrary, the LG&E Companies agree with Henderson that the LG&E Companies shall not be entitled to use, -38- nor shall the LG&E Companies have any right, title or interest in, any Station Two Allowances which have been allocated to Henderson's share of Station Two Capacity. As of the Effective Date, Big Rivers shall assign, grant and convey to Station Two Subsidiary (or its designated Affiliate) all rights and interests of Big Rivers under the Station Two Contracts (a) to utilize the Station Two Allowances during the Phase I Subcontract Term and (b) to receive proceeds from the sale of the Station Two Allowances, from whatever source. (2) If the date of expiration or termination of this Agreement occurs prior to the December 31st that is closest to the twenty-fifth anniversary of the Effective Date, this Section 8.10(c)(2) shall apply and the year of termination shall be called the "Final Year of Agreement;" provided that Big Rivers has rights in those Station Two Allowances which must be returned to it on such date of expiration or termination. In the event SO2 emissions from Station Two during the portion of the Final Year of Agreement prior to the date of such expiration or termination exceed the pro rata amount of the Station Two Allowances allocated by the Environmental Protection Agency to Station Two for the entire Final Year of Agreement, Station Two Subsidiary shall transfer to Big Rivers SO2 allowances equal to the amount by which SO2 emissions from Station Two exceed the pro rata amount of the SO2 Allowances for the Final Year of Agreement allocable to Station Two, multiplied by the then current percentage that reflects the proportion of the rights in such Station Two Allowances allocable to Henderson and Big Rivers and/or Station Two Subsidiary under Section 4.7 of the Station Two Operating Agreement. In the event SO2 emissions from Station Two during the portion of the Final Year of Agreement prior to the date of termination are less than the pro rata amount of the Station Two Allowances allocated by the Environmental Protection Agency for the entire Final Year of Agreement, Big Rivers shall transfer to Station Two Subsidiary (or its designated Affiliate) SO2 Allowances equal to the amount by which SO2 emissions from Station Two are less than the pro rata amount of the SO2 Allowances for the Final Year of Agreement allocable to Station Two, multiplied by the then current percentage that reflects the proportion of such -39- Station Two Allowances allocable to Henderson and Big Rivers and/or Station Two Subsidiary under Section 4.7 of the Station Two Operating Agreement. (d) Henderson hereby recognizes the assignments in Sections 8.10(b) and 8.10(c) of this Agreement and agrees to make all such payments and to remit all such amounts contemplated therein, in accordance with Sections 4.7, 13.6 and 16 of the Station Two Operating Agreement, directly to Station Two Subsidiary during the Phase I Subcontract Term. All such payments and remissions, when made by Henderson to Station Two Subsidiary in accordance with the terms hereof, shall be deemed to discharge Henderson's obligations to Big Rivers for such amounts. 8.11 Invoicing Procedure; Reid Station Operating Account(s). (a) Big Rivers shall pay or reimburse Station Two Subsidiary or its designated Affiliate (in lieu of paying WKEC for such expenses as required by Section 9.2 of the Facilities Operating Agreement) for all Fuel and Reid Station Operating Expenses on the Monthly Payment Date immediately following receipt of an invoice from Station Two Subsidiary. The invoicing of Fuel and Reid Station Operating Expenses shall be done by Station Two Subsidiary (or by WKEC or any other designated Affiliate of Station Two Subsidiary, on its behalf) in the same manner and in accordance with the time schedule set forth in Section 9.2 of the Facilities Operating Agreement. (b) Station Two Subsidiary (or WKEC or any other designated Affiliate of Station Two Subsidiary, on its behalf) shall have the authority to establish on behalf of Big Rivers one or more operating bank accounts, with a mutually acceptable financial institution (the "Fuel and Reid Station Operating Account(s)"). Station Two Subsidiary (or WKEC or any other designated Affiliate of Station Two Subsidiary, on its behalf) will be given signatory authority to make disbursements for all Fuel and Reid Station Operating Expenses by drawing checks against these accounts in accordance with the terms of this Section 8. Payment of Fuel and Reid Station Operating Expenses encompassing wages and salaries of operating and -40- maintenance personnel may be made from the Fuel and Reid Station Operating Account(s), from any of them, or from any other Operating Account(s) established under the Facilities Operating Agreement, as Station Two Subsidiary or its designated Affiliate deems appropriate, as and to the extent required by Station Two Subsidiary (or WKEC or any other designated Affiliate of Station Two Subsidiary). On each Monthly Payment Date, Big Rivers shall make provisions for adequate funds to be deposited into the Fuel and Reid Station Operating Account(s) to fund disbursements required to be made by Station Two Subsidiary (or WKEC or any other designated Affiliate of Station Two Subsidiary, on its behalf), including the payment of all Fuel and Reid Station Operating Expenses. 8.12 Station Two Surplus Capacity. Big Rivers and the LG&E Companies hereby affirm and agree that, during the Phase I Subcontract Term, Station Two Surplus Capacity shall be purchased and sold in accordance with the terms of the Power Purchase Agreement and any additional or different terms as may be set forth below: (a) All Station Two Surplus Capacity allocated to Big Rivers under the Station Two Power Sales Agreement shall be purchased by Big Rivers in accordance with the Station Two Power Sales Agreement, including, without limitation, in accordance with the requirement therein that Big Rivers pay to Henderson or the Trustee all Capacity charges for the Station Two Surplus Capacity under Section 6.1 of the Station Two Power Sales Agreement. In addition, Big Rivers shall purchase from Henderson (1) solely at the request of LEM, all surplus Capacity resulting from good faith over-estimates of the needs of the City and its inhabitants at such times as such surplus Capacity is offered to Big Rivers, pursuant to Section 3.4 of the Station Two Power Sales Agreement, (2) solely at the request of LEM, all or designated portions of any Excess Henderson Energy (as defined in Section 11.5 of this Agreement) that may then be available, and (3) all Energy associated with Excess Henderson Capacity (as defined in Section 11.5 of this Agreement) that may be available, which purchases by Big Rivers described in (2) and (3), above, shall be made pursuant to Section 11.5 of this Agreement. -41- (b) Big Rivers and the LG&E Companies hereby acknowledge that all Station Two Surplus Capacity allocated to Big Rivers, any Excess Henderson Energy and/or Energy associated with Excess Henderson Capacity purchased by Big Rivers as contemplated in (a), above, and all surplus Capacity and associated Energy acquired by Big Rivers pursuant to Section 3.4 of the Station Two Power Sales Agreement as contemplated in (a), above, shall constitute Unit Output from Station Two and shall be sold by Big Rivers to LEM pursuant to Section 3.2 of the Power Purchase Agreement (regardless of whether the Participation Agreement Phase I or Participation Agreement Phase II shall then be in effect). As consideration for such Unit Output from Station Two ("Station Two Unit Output") purchased from Big Rivers pursuant to the Power Purchase Agreement as contemplated herein, LEM shall pay for such Unit Output pursuant to Section 3.3 of the Power Purchase Agreement. For purposes of Section 3.3(b) of the Power Purchase Agreement, Operating Pass-Through Costs (as defined in Exhibit X to the Participation Agreement) payable for Station Two Unit Output shall be deemed to include only the sum of (i) the Capacity charges (excluding, however, from such Capacity charges specified in this item (i) any expenditures or costs that constitute a payment for a Station Two Improvement that are subject to the payment provisions set forth in Sections 8.17 and 10.3(e) of this Agreement) allocated to and paid by Big Rivers under Sections 6.1 and 6.2 of the Station Two Power Sales Agreement solely as they relate to Sections 6.3(b), 6.3(c)(i) (relating solely to payments into the Station Two O&M Account), 6.3(e) (but subject to the provisions of the agreement described in Section 10.29 of this Agreement), 6.3(f) and 6.3(g) of the Station Two Power Sales Agreement (collectively, the "LEM Capacity Charge Share"), plus (ii) any taxes lawfully imposed upon Henderson and paid by Big Rivers in the prior month pursuant to Section 6.5 of the Station Two Power Sales Agreement, plus (iii) any amounts paid by Big Rivers to Henderson in the prior month pursuant to Section 6.6 of the Station Two Power Sales Agreement, plus (iv) any amounts paid by Big Rivers to Henderson pursuant to Section 11.2 of this Agreement during the current month for Excess Henderson Energy or Energy associated with Excess Henderson Capacity purchased by Big Rivers and resold as Station Two Unit Power to LEM during the prior month. The amount payable by LEM under Section 3.3 of the Power Purchase Agreement, -42- and determined by reference to this Section 8.12(b), shall be paid monthly no later than the Monthly Payment Date (as established by Big Rivers and LEM under the Power Purchase Agreement) and, with respect to the Capacity charges described above, shall be based upon the sum due for the current monthly billing period under the Annual Budget established for Station Two. Payments to Big Rivers under this Section 8.12 (other than those to be made directly to Henderson or the trustee as contemplated in (d) below) shall be made to the bank and for the credit of the account that is designated by Big Rivers under Section 6.5 of the Power Purchase Agreement. In the event that the annual reconciliation of Capacity charges under Section 9.4 of the Station Two Power Sales Agreement determines that the actual Capacity charges with respect to the Station Two Surplus Capacity under Sections 6.3(b), 6.3(c)(i) (relating solely to payments into the Station Two O&M Account), 6.3(e) (but subject to the provisions of the agreement described in Section 10.29 of this Agreement), 6.3(f) and 6.3(g) of the Station Two Power Sales Agreement are less than the LEM Capacity Charge Share, such excess shall be credited against and shall reduce LEM's next monthly payment(s) due Big Rivers hereunder or if no such monthly payments are thereafter due to Big Rivers from LEM, shall be paid by Big Rivers to LEM within 15 days after the date of the reconciliation. In the event that such annual reconciliation determines that the actual Capacity charges with respect to Station Two Surplus Capacity under Sections 6.3(b), 6.3(c)(i) (relating solely to payments into the Station Two O&M Account), 6.3(e) (but subject to the provisions of the agreement described in Section 10.29 of this Agreement), 6.3(f) and 6.3(g) of the Station Two Power Sales Agreement are greater than the LEM Capacity Charge Share, LEM shall pay to Big Rivers the additional amount which Big Rivers is due for such Capacity charges on the next Monthly Payment Date or, if no further payments are due to Big Rivers, within 15 days after the date of the reconciliation. (c) If the Power Purchase Agreement (or Section 3 thereof) shall at any time expire or be terminated, or otherwise be rendered of no further force or effect, for any reason prior to the expiration or termination of the Phase I Subcontract Term, then Big Rivers agrees to sell and deliver all Station Two Unit Output to LEM throughout the remainder of the Phase I Subcontract Term pursuant to this Section 8.12 and otherwise upon the same terms and -43- conditions as were set forth in Sections 3.2 and 3.3 of the Power Purchase Agreement (and such other provisions of the Power Purchase Agreement as shall be reasonably necessary to give effect and meaning to Sections 3.2 and 3.3), which terms and conditions shall then and thereafter be deemed to be incorporated by reference in this Section 8.12 to the extent such provisions relate to Station Two for all purposes; provided, that LEM shall not thereafter be required to pay for that Station Two Unit Output any Initial Fixed Payment or Annual Fixed Payments that are contemplated in Section 3.3(a) of the Power Purchase Agreement (other than as expressly contemplated in Section 10.7(d) of this Agreement), it being expressly understood that the consideration to Big Rivers contemplated in Section 3.3(b) of the Power Purchase Agreement (modified as contemplated in (b), above) shall alone be payable by LEM for such Station Two Unit Output. (d) Big Rivers hereby assigns, grants and conveys to Henderson all of Big Rivers' rights under Section 8.12(b) of this Agreement to receive from LEM that portion of such Operating Pass-Through Costs which represents (1) the portion of the Capacity charges relating to operating and maintenance expenses of Station Two under Section 6.3(b) of the Station Two Power Sales Agreement and (2) any Excess Henderson Energy and Capacity Charges payable by Big Rivers to Henderson. LEM hereby recognizes such assignment and agrees, during the Phase I Subcontract Term, to make all such payments (less any applicable off-sets under Section 8.13 of this Agreement) directly to the Trustee until the Station Two Bonds are canceled, retired or expire and thereafter to Henderson. The Parties acknowledge and agree that the payment obligations of LEM assigned hereunder to the Trustee (on behalf of Henderson) or Henderson, as the case may be, may be off-set by Henderson pursuant to Section 8.13 of this Agreement against the amount of operating and maintenance expenses for Station Two due from Henderson to Big Rivers and assigned to Station Two Subsidiary under Section 8.10(b) of this Agreement, which off-set shall be deemed to discharge Henderson's obligations to Big Rivers and Station Two Subsidiary under such Section and Section 13.6 of the Station Two Operating Agreement, and Big Rivers' and Station Two Subsidiary's payment obligations contemplated in this Section 8.12, in each case to the extent of the amounts so off-set. In addition, the Parties acknowledge and agree that the payment obligations of LEM -44- assigned hereunder to the Trustee (on behalf of Henderson) or Henderson, as the case may be, to the extent paid by LEM to the Trustee or Henderson or otherwise off-set by Henderson against Henderson's obligation to pay to Station Two Subsidiary (as assigned to Station Two Subsidiary under Section 8.10(b) of this Agreement) operating and maintenance expenses for Station Two, shall be deemed for purposes of Section 6.1 of the Station Two Power Sales Agreement and Section 8.12(b) of this Agreement to be a payment by Big Rivers in discharge of its obligations thereunder. (e) In lieu of any rights that Big Rivers may have pursuant to Section 6.4(b) of the Power Purchase Agreement or elsewhere to pay amounts to LEM in lieu of actually purchasing Power under such agreement, during such period of time as the Letter Ruling of the IRS dated January 26, 1971 (the "Letter Ruling") shall remain in effect and continue to limit the distribution of Energy from Station Two to customers within Henderson and Daviess Counties, Kentucky, Big Rivers hereby covenants to the LG&E Companies and Henderson that Big Rivers shall actually repurchase and accept delivery from LEM, and LEM hereby covenants to Henderson and Big Rivers that it shall deliver to Big Rivers, all Station Two Unit Output, less such amounts (if any) of Station Two Power (x) as LEM sells to Henderson or otherwise delivers to Big Rivers pursuant to or in connection with one or more Pre-Closing Development Agreements or Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement, or (y) as LEM sells to Henderson Union Electric Cooperative Corporation ("Henderson Union") for the benefit of Alcan pursuant to the Agreement for Electric Service dated July 15, 1998, between Henderson Union and LEM (the "LEM/Henderson Union Agreement"), at the price provided for in Section 8.12(h) of this Agreement. Big Rivers agrees to resell all such Station Two Unit Output solely to all or any of Henderson Union, Green River Electric Corporation ("Green River") or Henderson, including, without limitation, pursuant to the HMP&L Contract, for retail distribution solely within Henderson and Daviess Counties, Kentucky. All such Power repurchased by Big Rivers (other than Power resold by Big Rivers pursuant to the HMP&L Contract or Power purchased from LEM in connection with a Pre-Closing Development Agreement or an Economic Development Agreement) shall be credited toward any minimum obligation of Big -45- Rivers to purchase Power, and any maximum obligation of LEM to sell Power, under Section 4.1 of the Power Purchase Agreement. Big Rivers agrees that, until the Station Two Bonds have been fully retired, its sales of Power to Henderson Union, Green River and Henderson (including, without limitation Big Rivers' sales pursuant to the HMP&L Contract) shall be fulfilled by Big Rivers under its wholesale Power agreements with Henderson Union, Green River or Henderson (or any additional or successor agreements) by first using Station Two Unit Output that is purchased from LEM. For purposes of determining whether Big Rivers has fulfilled its obligation under this Section 8.12(e), the amount of Station Two Unit Output which Big Rivers is obligated to use in accordance with the prior sentence shall be equal to the hourly output of Station Two allocated to Big Rivers under Sections 3.3 and 4.1 of the Station Two Power Sales Agreement, less the hourly sales (if any) of Station Two Unit Output by LEM to Henderson under the terms of one or more Pre-Closing Development Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement and the hourly sales (if any) of Station Two Unit Output by LEM to Henderson Union under the LEM/Henderson Union Agreement. Henderson shall have the right to enforce the provisions of this Section 8.12(e) against LEM, Station Two Subsidiary and Big Rivers. In the event the Power Purchase Agreement (or the portions thereof requiring Big Rivers to purchase Power from LEM thereunder) shall at any time expire or be terminated, or otherwise be rendered of no further force or effect, for any reason prior to the expiration or termination of this Agreement and LEM continues to have the right or obligation to receive Station Two Unit Output, then Big Rivers agrees to actually purchase and accept delivery from LEM of, and LEM agrees to deliver to Big Rivers, all Station Two Unit Output (other than Unit Output sold by LEM (x) to Henderson or otherwise delivered to Big Rivers pursuant to or in connection with one or more Pre-Closing Development Agreements or Economic Development Agreements or (y) to Henderson Union under the LEM/Henderson Union Agreement) throughout the period commencing on that expiration or termination date and expiring upon the redemption or retirement of the Station Two Bonds, pursuant to this Section 8.12(e) and otherwise upon the same terms and conditions as were set forth in the Power Purchase Agreement, which terms shall then be deemed to be incorporated by reference in this Section 8.12 to the extent they relate to Station Two Unit Output for all purposes. -46- (f) Notwithstanding any provision of this Agreement or any other Operative Document to the contrary, including, without limitation, the immediately preceding Section 8.12(e) of this Agreement, Big Rivers shall not at any time during the Phase I Subcontract Term be obligated to actually repurchase and accept from LEM (in lieu of making the payments contemplated in Section 6.4(b) of the Power Purchase Agreement) any Station Two Unit Output to the extent (but only to the extent) that Big Rivers does not then have the right to resell that Power to Henderson (whether pursuant to the HMP&L Contract, one or more Pre-Closing Development Agreements or Economic Development Agreements, or otherwise), Henderson Union and Green River (or any of them) to meet the needs of their respective customers located in Henderson County or Daviess County in Kentucky, or there is no demand for such Unit Output from the respective customers of Henderson, Henderson Union and Green River located in Henderson or Daviess County, Kentucky, unless in either such situation the reason that Big Rivers can not resell such Unit Output to Henderson, Henderson Union and/or Green River for distribution in those Counties is due to (1) a breach or default by Big Rivers of its wholesale Power agreements with Henderson, Henderson Union or Green River (that was not itself the direct result of a breach or default by any LG&E Company or Affiliate of an LG&E Company under any of the Operative Documents or the negligence or willful misconduct of any LG&E Company or Affiliate of an LG&E Company), whether or not such agreements are terminated by Henderson or those Members as a result thereof, or (2) any other actions or omissions on the part of Big Rivers or its employees, agents or representatives that constitutes a breach or default by Big Rivers under any other agreement to which it is a party (including, without limitation, any Operative Document), that violates applicable Laws, or that constitutes negligence or willful misconduct by Big Rivers or its employees, agents or representatives. Big Rivers shall not, by reason of the foregoing provisions, be released from its obligations under Section 6.4(b) of the Power Purchase Agreement to pay LEM amounts in lieu of purchasing and accepting delivery of Station Two Unit Output as contemplated above, if such provisions of the Power Purchase Agreement are applicable. Notwithstanding the foregoing, and regardless of whether Big Rivers shall have an -47- obligation to also pay amounts to LEM pursuant to Section 6.4(b) of the Power Purchase Agreement (and not in lieu of those payment obligations), in the event Big Rivers shall not be released from its obligation to actually purchase and accept delivery of Station Two Unit Output by reason of the circumstances (or any of them) described in subclauses (1) and (2), above, Big Rivers shall be entitled, in its discretion, and in lieu of actually purchasing, accepting delivery of and paying the entire price for such Unit Output, to pay to LEM an amount for each megawatt-hour of Energy that it was obligated to accept from LEM equal to (A) 16% multiplied by (B) the applicable rate per megawatt-hour of Base Power under Section 6.3 of the Power Purchase Agreement; provided, that the foregoing right of Big Rivers to make payments in lieu of accepting delivery of Station Two Unit Output shall apply only when there is insufficient customer load in the two counties as described above, and then only to the extent that Station Two Subsidiary shall have been given reasonable advance notice from Big Rivers of the impending load constraints in Henderson and/or Daviess Counties so that Station Two Subsidiary shall have had a reasonable opportunity to reduce the output of Station Two accordingly. Big Rivers shall in no event be released from any breach or default by Big Rivers under this Agreement arising by reason of the actions, events or circumstances described in Subclauses (1) or (2), above. The rights and obligations of LEM and Big Rivers, respectively, set forth in this Section 8.12(f), including, without limitation, Big Rivers' release from its obligation to repurchase and accept from LEM any Station Two Unit Output pursuant to Section 8.12(e) of this Agreement, shall be subject to Section 10.5 of this Agreement and such Party's fulfillment of its obligations (provided such obligations shall then be effective under such section) under Section 10.6 of this Agreement to cooperate in the refinancing of the Station Two Bonds and to pay its respective percentage of the costs associated with such refinancing. (g) Nothing contained in this Agreement or in the Power Purchase Agreement shall be deemed to prevent LEM from selling to any Person any Energy associated with the Station Two Unit Output without also selling to that Person the associated Capacity, subject, however, to the provisions of Sections 8.12(e) and 10.5 of this Agreement. -48- (h) Consistent with Section 8.12(e) of this Agreement, all Station Two Unit Output sold to Big Rivers by LEM as contemplated in Section 8.12(e) of this Agreement shall be sold either (i) at the Base Power Price established pursuant to Section 6.4 of the Power Purchase Agreement; or (ii) to the extent such Unit Output is resold to Henderson pursuant to the HMP&L Contract, at the price provided for in Section 6.2(c) of the Power Purchase Agreement. 8.13 Phase I Off-Sets. (a) The Parties hereby agree that LEM shall have the right to off-set the amounts payable by Henderson to Station Two Subsidiary (as assignee of Big Rivers pursuant to Section 8.10(b) of this Agreement) pursuant to Section 13.6 of the Station Two Operating Agreement, against the payments LEM owes Henderson (payable to the Trustee during the term of the Station Two Bonds), as the assignee of Big Rivers under Section 8.12(d) of this Agreement, and that Henderson (and the Trustee) shall have the right to off-set the amounts payable by LEM to Henderson pursuant to Section 8.12(d) of this Agreement against the payments Henderson owes Station Two Subsidiary (as the assignee of Big Rivers) pursuant to Section 13.6 of the Station Two Operating Agreement. Any such off-set shall be deemed to discharge the relevant obligation against which the off-set is made, to the extent of the amounts so off-set. Notwithstanding anything set forth in Section 13.5(h) of this Agreement or elsewhere in this Agreement to the contrary, during the Phase I Subcontract Term, Big Rivers shall not, pursuant to Section 9.3 of the Station Two Power Sales Agreement or pursuant to any other provision of any Station Two Contract or this Agreement, off-set any amounts payable by Big Rivers to Henderson or to an LG&E Company, against accounts receivable or other sums due from Henderson or any LG&E Company to Big Rivers under the terms of the Station Two Power Sales Agreement, the Station Two Contracts or this Agreement, or otherwise, the effect of which would impair any payment due by Big Rivers or by Henderson to Station Two Subsidiary or any other LG&E Company pursuant to Section 8.10(a) or 8.10(b) of this Agreement, or any provisions of the Station Two Contracts. -49- (b) Should Henderson at any time off-set any accounts payable or other sums due from Henderson to any LG&E Company against any accounts receivable or other sums due from Big Rivers to Henderson, the effect of which is that the right of any LG&E Company to receive payment from Henderson is impaired thereby, including, without limitation, an impairment of the right of Station Two Subsidiary (as assigned by Big Rivers to Station Two Subsidiary pursuant to Section 8.10(b) of this Agreement) to receive the payment due it from Henderson under Section 13.6 of the Station Two Operating Agreement, such off-set by Henderson shall automatically create a payment obligation by Big Rivers to the relevant LG&E Company for the amount so off-set by Henderson, which obligation by Big Rivers must be discharged within five (5) Business Days after written notice of the off-set by Henderson is delivered by that LG&E Company to Big Rivers. Failure by Big Rivers to timely pay such amount shall constitute a payment default by Big Rivers to that LG&E Company which, if not cured by Big Rivers as set forth in Section 13.5 of this Agreement, may (in addition to all other remedies provided in this Agreement or at law or in equity) be off-set by that or any other LG&E Company, or by WKEC, against any sums then or thereafter due and owing Big Rivers under this Agreement (including, without limitation, the Capacity charges due Big Rivers and assigned to Henderson (or the Trustee) pursuant to Section 8.12(d) of this Agreement) or under any of the other Operative Documents. Notwithstanding the foregoing, no payment default by Big Rivers of the type described in this Subsection (b) shall give rise to a right of any LG&E Company to terminate this Agreement in the event (i) there remain sums then or thereafter due and owing to Big Rivers by any LG&E Company which are sufficient to cover such Henderson off-set and against which that LG&E Company shall be entitled to exercise an off-set right, or (ii) Big Rivers notifies that LG&E Company that it is disputing its obligation to pay to Henderson the account(s) receivable or other sum(s) which were the basis for Henderson's off-set, until (with respect to (ii) above) such time thereafter as it is determined in a final, non-appealable decision of a court, arbitration panel or other tribunal having jurisdiction thereof, that Big Rivers did, in fact, owe such sums to Henderson, in which event that LG&E Company shall be entitled to so terminate this Agreement at any time following the fifth Business Day after that determination (unless Big Rivers shall pay to that LG&E Company all amounts so off-set by Henderson that have not been previously recovered -50- by that LG&E Company through off-sets against amounts due and owing to Big Rivers as contemplated above). In the event it shall be finally determined that Big Rivers did not owe such amounts to Henderson, that LG&E Company agrees to promptly pay to Big Rivers all amounts previously off-set against payments otherwise owing by that LG&E Company to Big Rivers; provided, that such LG&E Company may pursue whatever rights and remedies that it may have against Henderson for its initial off-set. 8.14 Additional Covenants of Big Rivers. During the Phase I Subcontract Term Big Rivers hereby covenants to the LG&E Companies as follows: (a) Big Rivers shall not do or permit anything within its reasonable control to be done which would constitute a material default by Big Rivers under any of the Station Two Contracts or omit to perform any of its material obligations under the terms of any of the Station Two Contracts. (b) Big Rivers shall not amend, modify or waive any provision of any of the Station Two Contracts, or exercise any right that it may have to terminate any of those contracts, without the prior written consent of Station Two Subsidiary (which consent shall not be unreasonably withheld). (c) Big Rivers shall continue to have the primary obligation to Henderson to purchase all fuel and reagents as required by the terms of the Station Two Contracts, including, without limitation, replacement of fuel reserves as required of Big Rivers under Section 7.2 of the Station Two Operating Agreement and full replacement, at its own cost, of all fuels consumed from the Station Two fuel reserves for the production of Energy acquired by Big Rivers during each month as required by Section 6.7 of the Station Two Power Sales Agreement. Station Two Subsidiary shall have the exclusive right to administer, as agent for Big Rivers, and shall administer, or cause to be administered, all of Big Rivers' fuel and reagent supply agreements (including those supply agreements existing at the Effective Date and all supply agreements executed thereafter), and shall procure, or cause to be procured, and initially pay for all fuel -51- and reagents (which fuel and reagents are to be procured pursuant to such fuel and reagents supply agreements), in accordance with Big Rivers' obligations under the Station Two Contracts. The costs of such fuel and reagents shall constitute Fuel and Reid Station Operating Expenses which are reimbursable or payable by Big Rivers as contemplated in Section 8.10(a) of this Agreement, and are covered by the Operating Pass - Through Costs payable by LEM. 8.15 Budget Process; Operating Committee. The Parties acknowledge that Station Two Subsidiary will perform for Big Rivers its obligations under Section 14 of the Station Two Operating Agreement (preparation of the Operating Budget) as an independent sub-contractor of Big Rivers, as follows: (a) Station Two Subsidiary shall prepare the Operating Budget for the Contract Year as contemplated in the first sentence of Section 14.1 of the Station Two Operating Agreement. Station Two Subsidiary will separately identify therein each item that represents anticipated expenditures associated with (1) a Station Two Improvement (as defined in Section 8.17(a) of this Agreement), including specification therein whether expenses related to that Station Two Improvement are Henderson Incremental Capital Costs or Henderson Non-Incremental Capital Costs, and (2) a Henderson Incremental Environmental O&M cost. As between Big Rivers and Station Two Subsidiary, special arrangements described in Sections 8.16 and 8.17 of this Agreement shall apply to all Henderson Incremental Environmental O&M and Station Two Improvements, respectively. Those distinctions among items in the Operating Budget shall have no meaning, however, as between (x) Henderson and (y) Big Rivers and Station Two Subsidiary. (b) Prior to submittal to Henderson of the Operating Budget for Station Two as contemplated in the last sentence of Section 14.1 of the Station Two Operating Agreement, and in any event on or before November 1 of each Year subsequent to the Effective Date, Station Two Subsidiary shall submit in writing to each member of the Operating Committee (which Committee is described in Section 8.15(c) of this Agreement) a proposed Operating Budget for -52- Station Two for the next Year. Within 30 days after receipt of Station Two Subsidiary's proposed Operating Budget for Station Two, Big Rivers may propose modifications to the proposed Operating Budget. The Operating Committee shall meet in December and January of each year to review and discuss the Operating Budget proposed by Station Two Subsidiary and to review and approve any modifications thereof proposed by Station Two Subsidiary or Big Rivers. The Operating Committee, by agreement of its members representing Big Rivers and Station Two Subsidiary, may determine to adopt an amendment to the proposed budget, in which case the proposed budget will thereafter be as so amended. Absent agreement of the members of both Parties to modify the budget, the Operating Committee must approve the Operating Budget as proposed by Station Two Subsidiary if such budget is consistent with Prudent Utility Practice; provided, that the responsibility of Big Rivers and the LG&E Companies with respect to the costs incurred for items identified in the Operating Budget shall be determined as provided elsewhere in this Agreement. In the event of a dispute between Big Rivers and Station Two Subsidiary as to whether such budget (including those amendments adopted by agreement) is consistent with Prudent Utility Practice, those Parties will submit the dispute to arbitration consistent with Section 15 of the Participation Agreement; provided, however, if the expenditure disputed by Station Two Subsidiary and Big Rivers is ultimately determined to be a required expenditure under the Station Two Operating Agreement, Big Rivers and Station Two Subsidiary shall not have the right to further arbitrate such expenditure and the expenditure shall be included in the Operating Budget for Station Two and paid or shared by Big Rivers and the LG&E Companies in accordance with the terms and provisions set forth in Section 8 of this Agreement, entitled "Phase I Subcontract." The Operating Budget, as approved in accordance with this Section 8.15(b), shall be the only budget submitted by either the LG&E Companies or Big Rivers to Henderson for its review as required by Section 14 of the Station Two Operating Agreement; provided, however, that Station Two Subsidiary (on behalf of Big Rivers) shall be entitled to submit to Henderson an Operating Budget that may be the subject of a dispute between Big Rivers and Station Two Subsidiary to the extent required for compliance with the Station Two Operating Agreement, it being understood by Big Rivers and Station Two Subsidiary that their respective obligations under this Agreement for items set forth in that Operating Budget shall thereafter be -53- determined through the dispute resolution procedures described above or as otherwise agreed to by Big Rivers and Station Two Subsidiary. Henderson shall have the final authority to modify and approve the budget or approve it without modifications, subject however to whatever approval rights are available to Big Rivers under the Station Two Operating Agreement. (c) Each of Station Two Subsidiary and Big Rivers hereby establishes an Operating Committee consisting of not more than two representatives appointed by each such Party. Each such Party shall promptly designate its representatives on the Operating Committee by notice given to the other such Party. Each such Party may appoint one or more alternates to act in the absence of a regular member or members, and may replace its representatives and alternates at any time, in its sole discretion, by notice to the other Party. The chair of the Operating Committee shall be a representative of Station Two Subsidiary. The chair shall be responsible for calling meetings and establishing agendas in consultation with the other committee members. (d) The Operating Committee shall meet at least twice annually including in December and January (for review and approval of the Operating Budget) or more often by mutual agreement of Big Rivers and Station Two Subsidiary. Meetings shall be held at Henderson, Kentucky or any other mutually agreed place. Big Rivers and Station Two Subsidiary agree to cooperate and to provide the Operating Committee with such information as is reasonably necessary for the Operating Committee to perform its responsibilities. The Operating Committee shall continue to be constituted, shall continue to act, and shall continue to be governed by Sections 8.15(c) through 8.15(g), inclusive, of this Agreement throughout any Phase II Assignment Term pursuant to Section 9 of this Agreement, entitled "Phase II Assignments." (e) Station Two Subsidiary shall give not less than ten (10) days' notice to Big Rivers of regular Operating Committee meetings. Each meeting notice shall include an agenda prepared by Station Two Subsidiary. Notice may be waived by written consent of both Big -54- Rivers and Station Two Subsidiary. A quorum for any meeting shall exist if each of Big Rivers and Station Two Subsidiary is represented by at least one of its two members. Station Two Subsidiary shall maintain minutes of Operating Committee meetings and telephone conference calls. One of Station Two Subsidiary's representatives shall prepare and distribute the minutes to Big Rivers' representatives within 45 days after each meeting or telephone conference call of the Operating Committee. The minutes, when signed by the respective representatives of Big Rivers and Station Two Subsidiary, shall be the official record of the decisions made by the Operating Committee and shall bind Station Two Subsidiary and Big Rivers. Each of Station Two Subsidiary and Big Rivers shall bear for its own account all expenses incurred by such Party's representatives on the Operating Committee in connection with their duties on the Operating Committee. Where such approval authority exists, the Operating Committee may condition its approval of any Operating Budget hereunder (or modification thereof) upon receipt of such studies and other information as they may reasonably deem appropriate. (f) In lieu of meetings, the Operating Committee may hold telephone conference calls with Station Two Subsidiary and Big Rivers simultaneously and in which each such Party shall be represented by at least one of its two representatives on the Operating Committee. The Operating Committee, in lieu of deciding any matter at a meeting or by telephone conference, may act by instrument in writing signed by each such Party's representatives on the Operating Committee. (g) The Operating Committee may not modify any of the terms, covenants or conditions of this Agreement or any Station Two Contract. 8.16 Adjustment for Henderson Incremental Environmental O&M. . If any of the Capacity charges payable by Big Rivers under Section 6.3 of the Station Two Power Sales Agreement represent payments attributable to Henderson Incremental Environmental O&M incurred following the Closing, such Capacity charge costs shall thereafter be shared by LEM and Big Rivers in accordance with this Section 8.16. If any of the operating and maintenance -55- expenses allocated to the Reid Station under Section 13.8 of the Station Two Operating Agreement constitute Incremental Environmental O&M, such costs shall be allocated between and paid by Big Rivers and WKEC in accordance with the payment and reimbursement procedures set forth in Article 5 of the Cost Sharing Agreement. (a) Notwithstanding the payments and reimbursements for Henderson Incremental Environmental O&M made between Big Rivers, Station Two Subsidiary, LEM and Henderson as contemplated in the Station Two Contracts or elsewhere in this Agreement, Big Rivers shall pay a share of all Henderson Incremental Environmental O&M incurred by Station Two Subsidiary each year during the Phase I Subcontract Term, as and when incurred by LEM, Station Two Subsidiary or any of their Affiliates, as follows (in each case "Big Rivers' Henderson Incremental Environmental O&M Share"): (i) Big Rivers' share of Henderson Incremental Environmental O&M incurred during the period from the Effective Date until December 31, 2010, inclusive, is 20%; (ii) Big Rivers' share of Henderson Incremental Environmental O&M incurred during the period from January 1, 2011 to December 31, 2011, inclusive, is 40.26%; and (iii) Big Rivers' share of Henderson Incremental Environmental O&M incurred during the period from January 1, 2012 until the Termination Date, inclusive, is 33.9%. Big Rivers' payment shall be made by reducing each monthly payment required to be made by LEM for the Station Two Unit Output pursuant to Section 3.3(a)(ii) of the Power Purchase Agreement (which monthly payment is further contemplated in Section 8.12(b) of this Agreement) by an amount equal to Big Rivers' Henderson Incremental Environmental O&M Share based on the Henderson Incremental Environmental O&M estimated by Station Two Subsidiary to be incurred in such month by Station Two Subsidiary consistent with the Operating Budget. LEM shall pay the remaining share of the Henderson Incremental Environmental O&M monthly through its Operating Pass-Through Cost payments to Big Rivers as contemplated in Section 8.12(b) of this Agreement. (b) Within 120 days after the end of each Year, LEM shall compute the actual Henderson Incremental Environmental O&M for the Year ("Actual Henderson Environmental O&M"). LEM shall compare the Actual Henderson Environmental O&M with the aggregate -56- payments made by Big Rivers (through reductions in the monthly payment due pursuant to Section 3.3 of the Power Purchase Agreement) pursuant to this Section 8.16 during such Year. If Big Rivers' Henderson Incremental Environmental O&M Share of the Actual Henderson Environmental O&M is more than the sum of such payments made by Big Rivers during the year, Big Rivers shall promptly pay such difference to LEM. If Big Rivers' Henderson Incremental Environmental O&M Share of the Actual Henderson Environmental O&M is less than such payments made by Big Rivers, LEM shall promptly pay such difference to Big Rivers. (c) Except as expressly provided in this Section 8.16 or Section 9.9, elsewhere in this Agreement or in any other Operative Document to the contrary, Big Rivers shall have no obligation or liability to Station Two Subsidiary (or its Affiliates) for any operating or maintenance costs relating to the Station Two Assets. 8.17 Station Two Improvements -- Forecasts, Budgeting and Payments. (a) For purposes of this Agreement (including without limitation, Section 9 of this Agreement, entitled "Phase II Assignments") as between Big Rivers and Station Two Subsidiary, "Station Two Improvements" shall mean any betterments, renewals, replacements or additions to the Station Two Assets used in the operation of Station Two and/or the Reid Station (but only if not otherwise accounted for under the Cost Sharing Agreement or the Lease, as applicable), (i) that are made pursuant to the Operating Budget, or an approved modification thereof, or a deviation therefrom as permitted by Section 8.17(f) or Section 9.10(d), as applicable, or that result from an Operating Emergency as contemplated in those Sections, or that are required to be made under the Station Two Contracts in the absence of an approved Operating Budget, and (ii) that should ordinarily be capitalized in accordance with the RUS Uniform System of Accounts Bulletin 1767 B, as such Bulletin may be amended, modified, or replaced from time to time (but subject to the Capitalization Guidelines). Notwithstanding anything contained in this Section 8.17 or any provision of the Station Two Contracts that purports to obligate an LG&E Company for the payment of costs and expenses relating to the Reid Station (including, without limitation, any such costs or expenses that -57- would otherwise be includable in the "Operating Pass-Through Costs" payable by LEM to Big Rivers for Station Two Unit Output), the LG&E Companies and Big Rivers hereby agree that any operating and maintenance expense allocated to the Reid Station under Section 13.8 of the Station Two Operating Agreement, and which otherwise constitutes an expense for a "Capital Asset" under the Cost Sharing Agreement, shall be allocated between and paid by Big Rivers and WKEC in accordance with the payment and reimbursement procedures set forth in Article 7 of the Cost Sharing Agreement. (b) Station Two Improvements made during the Phase I Subcontract Term, including, without limitation, Station Two Improvements funded by draws against amounts deposited by Big Rivers or Station Two Subsidiary into the Station Two R&R Account, shall be paid for or reimbursed in accordance with this Section 8.17, to the extent such expense is not the responsibility of Henderson. Notwithstanding anything to the contrary in this Agreement or in any other Operative Document, Big Rivers shall have no obligation to (1) authorize the acquisition or construction of or pay for any Station Two Improvements unless such Station Two Improvements are necessary, consistent with Prudent Utility Practice, to maintain the Capacity of Station Two that is physically available and can be legally utilized at 312 net MW (the "Station Two Rated Capacity"), or to comply with any requirement of applicable Laws or administrative or judicial interpretation of an applicable Law (including, without limitation, to comply with any requirement of Environmental Law or any regulatory authority (including, without limitation, any change in position of the KNREPC regarding compliance with applicable opacity limitations based upon concurrent measurement of particulate matter emissions affecting the Green Facility and which also affects a Joint Use Facility), and including for the avoidance of doubt, and without regard for the actual time of enactment or implementation of the same, without limitation, the Proposed SIP Call and any Laws that may be enacted or implemented pursuant thereto or in connection therewith) in which case Big Rivers shall be obligated to so authorize the acquisition or construction of and pay for (based on the proportion of Capacity allocation then existing between Big Rivers and Henderson and otherwise in accordance with this Section 8.17) such Station Two Improvements, (2) make any -58- expenditure for Station Two Improvements which would not be capitalized pursuant to the Accounting Practices (as interpreted, modified or supplemented by the Capitalization Guidelines), (3) make any expenditure in connection with any personal property or other asset which does not constitute a Station Two Improvement (other than such expenditures as may be required by Big Rivers as a result of any breach or default by Big Rivers under this Agreement or any of the other Operative Documents, or pursuant to any indemnification or hold harmless covenant of Big Rivers under this Agreement or any other Operative Documents (unless such expenditures for such personal property or other asset is part of Henderson Incremental Environmental O&M, in which event the provision of Section 8.16 of this Agreement shall govern, or unless such an expenditure involves a repurchase of the End of Term Personal Property (defined in Section 10.35) by Big Rivers in accordance with Section 10.35 of this Agreement), or (4) make any expenditure for a Station Two Improvement the principal purpose of which is to increase the Capacity of Station Two above the Station Two Rated Capacity or to improve the efficiency of Station Two. Notwithstanding the limitations set forth in subclauses (1), (3) and (4) of the immediately preceding sentence, if requested by Station Two Subsidiary, Big Rivers shall authorize and approve, and shall pay for (based on the proportion of Capacity then allocated to Big Rivers from Station Two) all renewals, replacements and additions pursuant to Section 13.8(a)(3) of the Station Two Operating Agreement, Sections 6.3(c)(ii) and 6.3(d) of the Station Two Power Sales Agreement and Section 6 of the Joint Facilities Agreement, to the extent such renewals, replacements and additions are Station Two Improvements that comply with Subclause (2) above and are required to be made to Station Two to comply with Big River's obligations under any Station Two Contracts or the Bond Ordinance; provided, however, should a dispute exist between the LG&E Companies and Big Rivers with respect to whether the Station Two Contracts or the Bond Ordinance required any such expenditure, the dispute shall be resolved, as between the LG&E Companies and Big Rivers, pursuant to the dispute resolution procedures set forth in Article 15 of the Participation Agreement (as contemplated in Section 13.5(e) of this Agreement). All Station Two Improvements and all other renewals, replacements and additions contemplated by this Section 8.17(b) shall in all events be further subject to the approval rights, if any, of Henderson under the Station Two Contracts. -59- (c) At least ten (10) days before the commencement of each quarterly period referenced below, Station Two Subsidiary shall submit to Big Rivers a forecast of cash requirements for each Station Two Improvement set forth in the Annual Budget or any modification of that budget approved by the Operating Committee under Section 8.15(b) of this Agreement (including specification of requirements for Henderson Incremental Capital Costs and Henderson Non-Incremental Capital Costs), together with a summary of all amounts that have been required under the terms of the Station Two Contracts and/or the Bond Ordinance to be deposited by Station Two Subsidiary into the Station Two R&R Account (to the extent such information has been made available at that time by Henderson), and that have been drawn out of that account to fund any one or more Station Two Improvements. This forecast shall set forth cash requirements with respect to such Station Two Improvements (i) for each quarterly period commencing on the first day of June, September, December and March in which costs for such Station Two Improvements shall become due and (ii) for each month of the first two quarterly periods immediately following the issuance of the forecast. Station Two Subsidiary shall revise and furnish the forecast to Big Rivers no less often than every three months thereafter until completion of the Station Two Improvement. Notwithstanding anything contained in this Section 8.17(c), Article 5 of the Cost Sharing Agreement or Section 2.3 of the Lease, or elsewhere in this Agreement or any other Operative Document to the contrary, none of Station Two Subsidiary or WKEC (in the case of the Lease), or WKEC (in the case of the Cost Sharing Agreement) or LEM shall be obligated to pay for their proportionate share, if any, of the costs and expenses associated with any Station Two Improvement to a Joint Use Facility or a Henderson Incremental Environmental O&M required in order for the Green Facility to comply with applicable opacity limitations imposed under Laws unless the provisions of Section 7.1 of the Cost Sharing Agreement or Section 2.3 of the Lease shall require Station Two Subsidiary or WKEC to share in such costs and expenses, and then solely to the extent so required by such provisions. Big Rivers and the LG&E Companies (for themselves and on behalf of WKEC) each hereby acknowledge that those Parties intend to include the costs for Station Two Improvements to the Joint Use Facilities and Henderson Incremental Environmental O&M costs, to the extent required to -60- bring the Green Facility into compliance with applicable opacity limitations, within the agreed upon procedure for allocation and sharing of such costs and expenses as set forth in Section 7.1 of the Cost Sharing Agreement and Section 8.1 of the Lease. (d) Station Two Subsidiary shall maintain an interest-bearing account (the "Station Two Improvements Account") into which Big Rivers and Station Two Subsidiary shall pay amounts as provided in this Section 8.17 and from which Station Two Subsidiary shall be permitted to withdraw funds to pay for Station Two Improvements at such time when Big Rivers or Station Two Subsidiary, as applicable, shall have an obligation to pay for the same under the Station Two Operating Agreement. On the first day of each month during the Phase I Subcontract Term Station Two Subsidiary and Big Rivers shall each deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e) below) but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Henderson Non-Incremental Capital Costs that are not for Henderson Major Capital Repairs (as defined in the Participation Agreement) (i) to cover all cash requirements forecast under Section 8.17(c) for that month for all Station Two Improvements (less any excess between funds deposited and interest accrued thereon and funds actually required for all Station Two Improvements during the previous month) and (ii) to cover any shortfall between funds deposited and funds actually required for all Station Two Improvements during the previous month. With respect to funds deposited in the prior month, which are remaining in the present month, and shortfalls in funds deposited in the prior month relative to expenses for that month, Big Rivers' and Station Two Subsidiary's obligation in the present month shall be adjusted proportionately based on that Party's deposit during the prior month and that Party's relative share of responsibility in that prior month for the Station Two Improvement for which funds were withdrawn or not used. An illustration of the operation of this Section is set forth in Schedule 8.17(d). Upon the expiration or earlier termination of this Agreement (other than a Phase II Termination), all funds remaining in the Station Two Improvements Account shall be immediately distributed to Station Two Subsidiary and Big Rivers in accordance with the same methodology as used in the prior sentence. -61- (e) Station Two Improvement Sharing Ratios. Subject to the provisions of Section 8.17(b), Station Two Subsidiary and Big Rivers shall directly contribute to the payment of each Station Two Improvement in accordance with its respective "Station Two Improvement Sharing Ratio," which will be as follows: (1) Each capital expenditure made by Big Rivers and/or Station Two Subsidiary for a Station Two Improvement in accordance with Section 8.17(d) of this Agreement and to comply with a new Law or any revision to an existing Law, including but not limited to a new or revised Environmental Law (including for the avoidance of doubt, and without regard for the actual time for the enactment or implementation of the same, without limitation, the Proposed SIP Call and any Laws that may be enacted or implemented pursuant thereto or in connection therewith), or to comply with any change in applicable judicial or administrative interpretation of a Law, occurring after the Effective Date shall be deemed a "Henderson Incremental Capital Cost." Big Rivers' share of each Henderson Incremental Capital Cost determined as of the date payment for such Station Two Improvement is required to be made to the Station Two Improvements Account pursuant to the forecast prepared by Station Two Subsidiary pursuant to Section 8.17(c), shall be as follows: (i) from the Effective Date until December 30, 2010, inclusive, 20%; (ii) from January 1, 2011 to December 31, 2011, inclusive, 40.26%; (iii) from January 1, 2012 until the Termination Date, inclusive, 33.9%. Station Two Subsidiary's share of each Henderson Incremental Capital Cost shall be as follows: (i) from the Effective Date until December 31, 2010, inclusive, 80%; (ii) from January 1, 2011 to December 31, 2011, inclusive, 59.74%; and (iii) from January 1, 2012 until the Termination Date, inclusive, 66.1%. (2) Each capital expenditure made by Big Rivers and/or Station Two Subsidiary for a Station Two Improvement in accordance with Section 8.17(d) of this Agreement, but which does not constitute a Henderson Incremental Capital Cost, shall be deemed a "Henderson Non-Incremental Capital Cost." Big Rivers' share of each Henderson Non- -62- Incremental Capital Cost, determined as of the date payment for such Station Two Improvement is required to be made to the Station Two Improvements Account pursuant to the forecast prepared by Station Two Subsidiary pursuant to Section 8.17(c), shall be as follows: (i) from the Effective Date until December 31, 2010, inclusive, 49%; (ii) from January 1, 2011 to December 31, 2011, inclusive, 40.26%; and (iii) from January 1, 2012 until the Termination Date, inclusive, 33.9%. Station Two Subsidiary's share of each Henderson Non-Incremental Capital Cost shall be as follows: (i) from the Effective Date until December 31, 2010, inclusive, 51%; (ii) from January 1, 2011 to December 31, 2011, inclusive, 59.74%; and (iii) from January 1, 2012 until the Termination Date, inclusive, 66.1%. (f) Station Two Subsidiary and Big Rivers agree with each other as follows: Station Two Subsidiary shall immediately notify the Operating Committee of any anticipated departure of 10% or more from the budget for Station Two Improvements or for operating and maintenance expenses included in any approved Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a) operate within 90 percent to 110 percent of the total approved budget for Station Two Improvements included in an Operating Budget, and (b) to spend at least 90 percent of the total approved budget for operating and maintenance expenses included in an Operating Budget (not including the fuel or reagent budget). Subject to the provisions set forth below, any increase of 10 percent or more proposed by Station Two Subsidiary to either the Station Two Improvements budget or the operating and maintenance expense budget set forth in an approved Operating Budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the operating and maintenance expense budgets that are included in an Operating Budget that is a part of the Initial Period Budgets, it being understood that increases of 10 percent or more proposed by Station Two Subsidiary to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs that are allocable to Big Rivers under the Station Two -63- Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless they constitute Henderson Incremental Environmental O&M required to be borne by both Station Two Subsidiary and Big Rivers in the manner provided for in Section 8.16. If Station Two Subsidiary exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive of such costs as are for Henderson Major Capital Repairs) that are included in an approved budget for Station Two Improvements in an Operating Budget, the additional cost of those Henderson Non-Incremental Capital Costs that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the parties agree otherwise, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Operating Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding sentence, if Station Two Subsidiary exceeds 110 percent of the total approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Major Capital Repairs, in either case that are included in an approved Operating Budget, the additional costs of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by -64- Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement (and contemplated in Section 13.5(e) of this Agreement) determines that at the time Station Two Subsidiary proposed the applicable portions of the Operating Budget (or modification thereof) relating to those expenditures Station Two Subsidiary acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e) of this Agreement. Notwithstanding the provisions of the immediately preceding sentence, if Station Two Subsidiary exceeds 110 percent of the total of any approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Major Capital Repairs, that are included in an Operating Budget that is a part of the Initial Period Budgets, the additional cost of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, the dispute resolution procedure set forth in Article 15 of the Participation Agreement determines that the purchase and installation of those Station Two Improvements, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or Station Two Subsidiary's actions in connection with the same, were consistent with Prudent Utility Practice at the time that the budget was prepared, in which case the additional costs that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e) of this Agreement. If Station Two Subsidiary fails or refuses to use reasonable efforts to spend at least 90 percent of the total budget for Station Two Improvements or for operating and maintenance expenses included in an approved Operating Budget (excluding that portion relating to Henderson Incremental Environment O&M), and pursuant to the dispute resolution procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal was inconsistent with Prudent Utility Practice, Station Two Subsidiary shall make the omitted expenditures as required pursuant to the applicable dispute resolution procedure. Notwithstanding anything contained in this Section 8.17(f) to the contrary, Station Two Subsidiary shall in no event be required to expend the monies included in an approved Operating Budget where to do so would cause Station Two Subsidiary to be in breach or default under any Station Two Contract. Additional capital expenditures incurred by Station Two Subsidiary in response to an Operating Emergency (as defined in the Participation Agreement) which are not already included in an approved Operating Budget, and which are allocated to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be paid for by Station Two Subsidiary unless (a) the same represents a Henderson Incremental Capital Cost or expenditures for a Henderson Major Capital Repair (as defined in the Participation Agreement), in which case such expenditures shall be paid by Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and 8.17(e), or (b) there are remaining amounts in the Big Rivers Contribution for that Year that were not included in the budget for Henderson Non-Incremental Capital Costs in the approved Operating Budget, as contemplated in Section 20.6.2 of the Participation Agreement, in which case that remaining amount will be allocated to any Henderson Non-Incremental -65- Capital Costs in that Year resulting from that Operating Emergency as contemplated in Section 20.6.2. 8.18 Reimbursement for Debt Service. At the Closing of the Phase I Subcontract and thereafter on the first day of each month during the Phase I Subcontract Term, commencing with the first day of the month following the Closing, Station Two Subsidiary or its designated Affiliate shall pay to Big Rivers a monthly payment, determined as set forth below, for that portion of the Debt Service (as defined in the Bond Ordinance) allocable to and payable by Big Rivers pursuant to Section 6.3(a) of the Station Two Power Sales Agreement during that current month; provided, that Station Two Subsidiary's payment obligation with respect to any Debt Service paid or payable by Big Rivers during the month in which the Closing occurs shall be proportionally reduced by a fraction, the numerator of which is the total number of days in that month which preceded the Closing and the denominator of which is the total number of days in that month; and provided further, that Station Two Subsidiary shall have no payment obligation to Big Rivers hereunder with respect to Debt Service paid by Big Rivers during any month that precedes the month in which the Closing occurs. The monthly payment by Station Two Subsidiary (or its designated Affiliate) relative to each such Debt Service payment by Big Rivers shall be an amount equal to one-half of the portion of the Debt Service allocable to and payable by Big Rivers pursuant to Section 6.3(a) of the Station Two Power Sales Agreement during that current month. 8.19 Big Rivers' Performance Responsibility. Notwithstanding anything in Section 8 of this Agreement, entitled "Phase I Subcontract," to the contrary, throughout the Phase I Subcontract Term, Big Rivers shall continue to be primarily responsible to Henderson for the full performance of all obligations and covenants made under the Station Two Contracts in accordance with the respective terms thereof, and for any and all claims, liabilities, expenses, actions, damages, losses or other sums that are claimed by or otherwise due to Henderson arising out of or resulting from any breach or default by Big Rivers in its performance of covenants and obligations under the Station Two Contracts. The LG&E Companies, with respect to their respective performance obligations under this Section 8, have agreed to -66- indemnify and save harmless Big Rivers in the manner set forth in Section 10.15(a) of this Agreement. 9. PHASE II ASSIGNMENTS. During the Phase II Assignment Term (as defined in Section 9.3), Big Rivers shall assign to Station Two Subsidiary certain of its rights and responsibilities under the Station Two Contracts (the "Phase II Assignment"), in lieu of the subcontracting arrangements described in Section 8 of this Agreement, entitled "Phase I Subcontract," upon and subject to the terms and conditions of this Agreement (including this Section 9). 9.1 Assignment. Effective as of the Phase II Effective Date, and without any additional consideration from Station Two Subsidiary or any of the other LG&E Companies, Big Rivers hereby grants, sells, bargains, conveys, transfers and assigns to Station Two Subsidiary, its successors and permitted assigns, except as otherwise provided in this Section 9.1 and Sections 9.4 and 9.5 of this Agreement, all of Big Rivers' rights, title and interests under, in and to the following agreements and undertakings (or portions thereof), as those agreements or undertakings have been amended through the date of this Agreement or any amendments to those agreements or undertakings effected pursuant to this Agreement, including, without limitation, the 1993 Amendments and the 1998 Amendments, which rights, title and interests shall remain with Station Two Subsidiary, its successors and permitted assigns, throughout the Phase II Assignment Term: (a) the Station Two Power Sales Agreement; (b) the Station Two Operating Agreement; and (c) the Joint Facilities Agreement (the agreements or portions thereof described in (a) through (c), above, but subject to any modifications of portions of such agreements in this Section 9.1 or Sections 9.4 or 9.5, being hereinafter collectively referred to as the "Assigned Station Two Contracts"). -67- The foregoing assignments by Big Rivers to Station Two Subsidiary shall be irrevocable throughout the Phase II Assignment Term absent an earlier termination of this Agreement in accordance with its terms. The Parties acknowledge that Big Rivers shall retain substantial rights and obligations under the "Terms of General Applicability" (defined in Section 9.5 of this Agreement), and that such Terms of General Applicability will continue to inure to the benefit of, and will continue to be binding upon and enforceable against, Big Rivers as the context of such provisions shall require (or as further described in Section 9.5 of this Agreement). The Terms of General Applicability shall also inure to the benefit of, and shall be binding upon and be enforceable against, Station Two Subsidiary as the context of such provisions shall require (or as further described in Section 9.5 of this Agreement). Notwithstanding any provision of Section 9 of this Agreement, entitled "Phase II Assignments," to the contrary, the provisions of Section 11 of this Agreement, entitled "Additional Agreements Respecting Station Two Power," shall govern the rights and obligations of the Parties with respect to the matters provided for in Section 28 of the Station Two Power Sales Agreement. 9.2 Assumption of Assumed Station Two Liabilities. Station Two Subsidiary hereby agrees as of the Phase II Effective Date to accept the grant, sale, bargain, conveyance, transfer and assignment by Big Rivers to Station Two Subsidiary, its successors and permitted assigns, of Big Rivers' rights, title and interests under, in and to the Assigned Station Two Contracts during the Phase II Assignment Term, as contemplated in Section 9.1 of this Agreement, and hereby agrees as of the Phase II Effective Date to assume, perform and discharge, except as otherwise provided in Sections 9.4 and 9.5 of this Agreement, such obligations of Big Rivers' under the Assigned Station Two Contracts which arise or accrue on or after the Phase II Effective Date and during the Phase II Assignment Term (the "Assumed Station Two Liabilities"). Notwithstanding anything contained in this Section 9, entitled "Phase II Assignments," or any provision of the Station Two Contracts that purports to obligate an LG&E Company for the payment of costs and expenses relating to the Reid Station or any of the Joint Use Facilities that may be owned by Big Rivers, the LG&E Companies and Big Rivers hereby agree that their respective rights and obligations as to each other for such costs -68- and expenses shall nonetheless be governed solely by the provisions of the Cost Sharing Agreement, the Facilities Operating Agreement, the Power Purchase Agreement, the Lease or the Participation Agreement, as applicable. 9.3 Term of Assignment. The term (the "Phase II Assignment Term") of the assignment by Big Rivers to Station Two Subsidiary, its successors and permitted assigns, of certain rights and obligations under the Assigned Station Two Contracts, as contemplated in Section 9.1 of this Agreement, shall commence on the Phase II Effective Date and shall end on the earlier of (a) December 31st that is closest to the twenty-fifth anniversary of the Effective Date or (b) the date of any termination of this Agreement pursuant to Section 13 of this Agreement, entitled "Termination; Default; Remedies." 9.4 Excluded Station Two Contracts or Liabilities. Notwithstanding Section 9.2 of this Agreement, Station Two Subsidiary shall not as of the Phase II Effective Date assume, and shall not in any manner become responsible or liable for, and Big Rivers shall retain, pay and perform, any debts, obligations or liabilities of Big Rivers, whether known or unknown, fixed, contingent or otherwise arising under the following contracts or portions thereof: (a) all Station Two Contracts (or portions thereof) except for the Assigned Station Two Contracts, including, without limitation: the 1980 Funds Agreement (as defined on Exhibit A attached hereto); the Agreement for Transmission and Transformation Capacity dated April 11, 1975; the Switchyard Agreement dated June 1, 1978; the Spare Transformer Agreement dated July 11, 1972 (subject, however, to those further rights granted by Big Rivers and Henderson to Station Two Subsidiary and WKEC for Station Two Subsidiary's or WKEC's use of the Spare Transformer set forth in Section 10.28 of this Agreement); the letter agreement dated December 22, 1982; the letter from Big Rivers to Henderson dated April 3, 1989; the letter agreement dated July 30, 1984 (regarding the Henderson - SEPA Contract); the Systems Reserves Agreement dated January 1, 1974, (it being understood by the Parties that the rights and responsibilities of the LG&E Companies with respect to operating reserves and system reserves during the Term shall be set forth solely in the New Reserves Agreement -69- identified in Section 10.30 of this Agreement); the Amended Interconnection Agreement dated October 13, 1981; the Agreement dated August 31, 1981; and the First Amendment to Amended Interconnection Agreement dated January 10, 1989; (b) the obligations and liabilities of Big Rivers set forth in or arising under the specific provisions of the Assigned Station Two Contracts as described below: (1) The Station Two Power Sales Agreement - Section 10.3; Section 15.2(4); Section 23.2; Section 25 (Assignment), it being hereby agreed by Big Rivers and Henderson that Station Two Subsidiary shall have the right to assign its rights and obligations under the Station Two Power Sales Agreement pursuant to Section 15.1 of this Agreement; and Sections 3.8, 19.2 and 19.3, it being understood by the Parties that the respective rights and obligations of Henderson and Big Rivers under those Sections are being retained by those Parties, but are being suspended, modified or supplemented by the provisions of Sections 11.5, 10.3(g) and 10.3(f), respectively, of this Agreement during the Phase I Subcontract Term and the Phase II Assignment Term. (2) The Station Two Operating Agreement - Sections 4.8, 4.9, 4.10 and 4.11 (relating to the installation costs of the Station Two FGD System and the billing and payment procedures relating thereto), the full costs of which shall remain with and will be paid and discharged by Henderson and Big Rivers in accordance with the provisions set forth in such sections; Section 5 (Transmission and Transformation Facilities); Section 6 (Joint Use Facilities); Section 7 (Fuel Supply), except that the provisions of Section 7.2 shall be assumed by Station Two Subsidiary; Section 11 (Construction Assistance); Section 12 (Start-up Assistance); Section 13.8(d) (relating to operation, maintenance and repair of transmission and transformation facilities); Section 13.10, but solely to the extent such provision contemplates access to transmission and transformation facilities or other lands, properties and/or facilities in which Station Two Subsidiary or any of its Affiliates has no interest as an operator or lessee; Section 20.2, but solely with respect to any responsibility or indemnity or hold harmless obligation of Big Rivers arising under Section 20.2 to the -70- extent (A) relating to events or circumstances occurring or existing prior to the Effective Date, or (B) relating to liability or expense resulting from or by reason of the negligence or willful misconduct of Big Rivers or its authorized agents, employees or representatives, or resulting from or by reason of Big Rivers breach or default of this Agreement, any of the Station Two Contracts or any of the Operative Documents, without regard for when such liability or expense shall arise; Section 22.1, but solely with respect to any indemnification and hold harmless obligations of Big Rivers arising under Section 22.1 to the extent (A) relating to events or circumstances occurring or existing prior to the Effective Date, or (B) relating to liability or expense resulting from the negligence or any malfeasance or nonfeasance of Big Rivers, its agents, servants, employees and representatives, or from the breach of this Agreement, any of the Station Two Contracts or any of the other Operative Documents, without regard for when such liability or expenses shall arise; Section 34 (Sale or Other Disposition of Plant); and Section 37 (Assignment), it being agreed that Station Two Subsidiary shall have the right to assign its rights and obligations under the Station Two Operating Agreement pursuant to Section 15.1 of this Agreement. (3) The Joint Facilities Agreement - Section 3.1, to the extent that such provision requires Big Rivers to allocate to the continuing joint use of the Parties (which shall be inclusive of the LG&E Companies and Henderson) in the operation of Station Two and the Reid Station certain auxiliary facilities (including modifications thereto), provided, that any auxiliary facilities in which WKEC or any of its Affiliates holds a leasehold interest, and only for so long as the term of such interest, shall continue to be allocated for the joint use of the Parties and will continue to be subject to the modifications contemplated by Section 3.1 of the Joint Facilities Agreement; Section 3.3, to the extent such provision requires Big Rivers to allocate the Green Station FGD System Facilities (including modifications thereto) for the continuing joint use of the Parties (which shall be inclusive of the LG&E Companies and Henderson) in the operation of Station Two and the Reid Station, provided, that (i) to the extent of WKEC's or any of its Affiliate's leasehold interest in the Green Station FGD System Facilities, and only for so long as the term of such interest, WKEC or -71- its Affiliate (as applicable) shall continue to allocate such Facilities for the joint use of the Parties in their operation of Station Two, the Reid Station and the Green Generating Facility, and (ii) Station Two Subsidiary shall be entitled throughout the Phase II Assignment Term to receive the payment from Henderson of the carrying costs of the Green Station FGD System Facilities set forth in Section 3.3 of the Joint Facilities Agreement (as such section has been modified by Big Rivers and Henderson by the 1998 Amendments); Section 4 (Title To Joint Use Facilities), provided, that Big Rivers and Henderson acknowledge that WKEC or its Affiliate shall have a leasehold interest in Big Rivers' Joint Use Facilities during the Phase II Assignment Term, and LEM commits that any Joint Use Facilities in which any of its Affiliates holds a leasehold interest, and only for so long as the term of such interest, shall continue to be allocated for the joint use of Henderson and Station Two Subsidiary; Section 15 (Assignment), it being hereby agreed by Henderson and Big Rivers that Station Two Subsidiary shall have the right to assign its rights and obligations under the Joint Facilities Agreement pursuant to Section 15.1 of this Agreement; and any other provisions in the Joint Facilities Agreement to the extent the joint facilities covered thereby relate to transmission and facilities related to transmission, but only with respect to such transmission and related facilities, including, without limitation, Big Rivers' continuing obligation to maintain and operate, at its cost, any such transmission and related facilities in accordance with the operating standards set forth in the Joint Facilities Agreement. (4) Section 8 of the 1993 Amendments relating to decommissioning costs of Station Two to be borne by Big Rivers and Henderson, with Big Rivers' obligation thereunder to remain unchanged; (c) All obligations and liabilities of Big Rivers under the Terms of General Applicability, as further described in Sections 9.5 of this Agreement (provided, the LG&E Companies acknowledge that they (or certain of them) have undertaken obligations and liabilities to Henderson under the Terms of General Applicability as described in Section 9.5 of this Agreement); and -72- (d) Any debts, obligations or liabilities of Big Rivers to Henderson (including any liability for reclamation or corrective actions) that now exist, or may hereafter arise, for any Environmental Violations or Environmental Conditions existing as of, or prior to, the Effective Date. Nothing in this subsection (d) shall affect or limit the respective rights and obligations of Big Rivers and the LG&E Companies under Section 10.15(j) of this Agreement. 9.5 Terms of General Applicability. The terms and provisions of the Assigned Station Two Contracts set forth below (hereinafter, "Terms of General Applicability") shall continue to create rights and obligations of Big Rivers, enforceable against or for the benefit of Henderson, notwithstanding the assignments of certain provisions of the Assigned Station Two Contracts effected by this Agreement, and, by virtue of such assignments and the assumption of the Assumed Station Two Liabilities, shall also create rights and obligations of Station Two Subsidiary, its successors and permitted assigns, enforceable against or for the benefit of Henderson. The Terms of General Applicability shall inure to the benefit of all Parties and shall be binding upon and enforceable against such Parties, as the context shall require. Notwithstanding anything herein to the contrary, the Terms of General Applicability shall at all times during the Phase II Assignment Term inure to the benefit of Henderson, and shall be enforceable by Henderson against Big Rivers and Station Two Subsidiary, respectively, as the context shall require. Big Rivers and Station Two Subsidiary shall have no obligation or liability to the other Party for any breach or default by it of the terms and provisions of any of the Terms of General Applicability, except where the other Party exercises such other Party's right in accordance with this Agreement to cure Big Rivers' or Station Two Subsidiary's (as the case may be) breach or default thereof and for which said other Party seeks indemnification, a right of contribution or other remedy to which it is entitled as a consequence of the cure effected by such other Party, it being understood by Big Rivers and Station Two Subsidiary that the covenants in the Terms of General Applicability are made by each of them solely for Henderson's benefit and not for the benefit of the other Party. In addition, neither Big Rivers nor Station Two Subsidiary shall have any obligation or liability to Henderson by reason of any breach or default by the other Party under the Terms of General Applicability. Henderson further agrees that during the Phase II Assignment Term it -73- shall perform all obligations it is required to perform under the Terms of General Applicability for the benefit of Big Rivers and Station Two Subsidiary. (a) The following Sections of the Station Two Power Sales Agreement, subject to the exceptions and modifications set forth below, shall constitute Terms of General Applicability in the Station Two Power Sales Agreement Section 11 (Annual Audit); Section 13 (Uncontrollable Forces - Continuing Obligation for Payments); Section 14 (Arbitration); Section 15 (Default), except that (i) neither Big Rivers nor Station Two Subsidiary (nor any other LG&E Company), nor their respective successors or permitted assigns, shall be responsible for the default of the other Party in their performance of any one or more of the provisions of the Station Two Power Sales Agreement, (ii) clause (b) of Section 15.2 of the Station Two Power Sales Agreement shall not apply during the Phase II Assignment Term, and (iii) the default provisions of Section 15 of the Station Two Power Sales Agreement shall be in addition to, and not in limitation of, the provisions regarding default set forth in Section 13 of this Agreement; Section 16 (Waiver); Section 17 (Notices), except that the Parties shall provide all notices, consents, payments and other communications to Station Two Subsidiary and the other LG&E Companies pursuant to Section 18.3 of this Agreement; Section 21 (Henderson-Daviess and City Electric Systems), provided, however, that each Party's obligations with respect to compliance with the Ruling Request during the Phase II Assignment Term are as further described in Sections 9.7, 10.2, 10.5, 10.6, and 10.18 of this Agreement; Section 22 (Term and Termination); Section 23 (Amendments), provided, that in the event Station Two Subsidiary desires to amend, modify or alter the Station Two Power Sales Agreement (with the consent of Henderson), and has obtained the prior consent of Big Rivers as contemplated elsewhere in this Agreement, then upon the request of Station Two Subsidiary, Big Rivers shall promptly request the approval of such amendment, modification or alteration from the Administrator of the RUS as contemplated in Section 23.2 of the Station Two Power Sales Agreement (assuming that approval shall still be required), and Big Rivers agrees to use its reasonable best efforts (at the expense of Station Two Subsidiary) to obtain that approval at the earliest practicable time; and Section 24 (Severability), except that this -74- provision shall not be enforced or interpreted by any Party in such a way as to materially frustrate the essential objectives of any of the Parties as expressed in this Agreement. (b) The following Sections of the Station Two Operating Agreement, subject to the exceptions and modifications set forth below, shall constitute Terms of General Applicability in the Station Two Operating Agreement Section 20 (Inspections, Right of Access), except that each Party shall be responsible for providing access to its premises for the purposes specified in Section 20.1, and each Party shall be responsible under Section 20.2 for the safety of its own employees and representatives while on another Party's premises and to indemnify such other Party for loss or damage resulting from injuries to those representatives or employees while on such other Party's premises, unless such loss or damage is due to the negligence or willful misconduct of such other Party; Section 21 (Relationship of the Parties); Section 23 (Uncontrollable Forces); Section 24 (Arbitration), except that any arbitrable matter between Big Rivers and any LG&E Company shall be arbitrated instead pursuant to the terms set forth in the Participation Agreement; Section 25 (Default), except that neither Big Rivers nor Station Two Subsidiary (nor any other LG&E Company), nor their respective successors or permitted assigns, shall be responsible for the default of the other Party in their performance of any one or more provisions of the Station Two Operating Agreement, and the default provisions of Section 25 shall be in addition to and not in limitation of, the provisions regarding default set forth in Section 13 of this Agreement, entitled "Termination; Default; Remedies;" Section 26 (Waiver); Section 27 (Notices), except that the Parties shall provide all notices, payments and other communications to Station Two Subsidiary and the other LG&E Companies pursuant to Section 18.3 of this Agreement; Section 30 (Compliance with Governmental Regulations), with each Party to be solely responsible for its faithful observance and compliance with such laws, rules and regulations; Section 33 (Term and Termination; Section 35 (Amendments), provided, that in the event Station Two Subsidiary desires to amend, modify or alter the Station Two Operating Agreement (with the consent of Henderson), and has obtained the prior consent of Big Rivers as contemplated elsewhere in this Agreement, then upon the request of Station Two Subsidiary, Big Rivers shall promptly request the approval of such amendment, modification or alteration from the Administrator of -75- the RUS as contemplated in Section 35.2 of the Station Two Operating Agreement (assuming that approval shall still be required), and Big Rivers agrees to use its reasonable best efforts (at the expense of Station Two Subsidiary) to obtain that approval at the earliest practicable time; and Section 36 (Severability), except that this provision shall not be enforced or interpreted by any Party in such a way as to materially frustrate the essential objectives of the LG&E Companies as expressed in this Agreement. (c) The following Sections of the Joint Facilities Agreement, subject to the exceptions and the modifications set forth below, shall constitute Terms of General Applicability in the Joint Facilities Agreement - Section 3.2, whereby Henderson allocates for the continuing joint use of the Parties, and their respective successors and permitted assigns, in the operation of Station Two and the Reid Station certain designated auxiliary facilities (including, without limitation, those facilities identified on Exhibit 1, Pages 1 and 2, Part B to the 1993 Amendments and Exhibit 1, page 3, Parts A and B, to the 1993 Amendments); Section 7 (Access); Section 8 (Term); Section 10 (Uncontrollable Forces); Section 13 (Amendments), provided, that in the event Station Two Subsidiary desires to amend, modify or alter the Joint Facilities Agreement (with the consent of Henderson), and has obtained the prior consent of Big Rivers as contemplated elsewhere in this Agreement, then, upon the request of Station Two Subsidiary, Big Rivers shall promptly request the approval of such amendment, modification or alteration from the Administrator of the RUS as contemplated in Section 13.2 of the Joint Facilities Agreement (assuming that approval shall still be required), and Big Rivers agrees to use its reasonable best efforts (at the expense of Station Two Subsidiary) to obtain that approval at the earliest practicable time. 9.6 Consents to Assignment. Henderson hereby consents for all purposes to the assignment by Big Rivers to Station Two Subsidiary of the Assigned Station Two Contracts, and the assumption by Station Two Subsidiary of the Assumed Station Two Liabilities thereunder, upon the terms and conditions of this Agreement. Henderson hereby waives any right of first offer or first purchase (the "Right of First Offer") that it may have under Section 34 of the Station Two Operating Agreement or under any other provision of the Station Two -76- Contracts, or otherwise, with respect to the Assets of Big Rivers or the Station Two Assets by reason of such assignment and assumption. 9.7 Sale of Station Two Surplus Capacity. The Parties hereby affirm and agree that, during the Phase II Assignment Term, Station Two Surplus Capacity shall be purchased and sold in accordance with the terms of the Station Two Power Sales Agreement and as otherwise provided in this Section 9.7: (a) All Station Two Surplus Capacity allocated to Station Two Subsidiary (as Big Rivers' assignee) under the Station Two Power Sales Agreement shall be purchased by Station Two Subsidiary, or its successors or permitted assigns, in accordance with that agreement, including, without limitation, in accordance with the requirement therein that Station Two Subsidiary pay to Henderson or the Trustee all Capacity charges for the Station Two Surplus Capacity under Section 6.1 of the Station Two Power Sales Agreement. In addition, Station Two Subsidiary (or its successors or permitted assigns) may, but shall not be obligated to, purchase from Henderson (1) all surplus Capacity resulting from good faith overestimates of the needs of the City and its inhabitants at such times as such surplus Capacity is offered to Station Two Subsidiary, pursuant to Section 3.4 of the Station Two Power Sales Agreement, and (2) all or a designated portion of any Excess Henderson Energy, as contemplated in Section 11.5 of this Agreement. However, Station Two Subsidiary (or its successors or permitted assigns) shall be obligated to purchase from Henderson all Energy associated with Excess Henderson Capacity in accordance with Section 11.5 of this Agreement. (b) Notwithstanding the obligation of Station Two Subsidiary to Henderson to pay such Capacity charges under Section 9.7(a) of this Agreement, Big Rivers shall promptly pay to Station Two Subsidiary (or its successors or permitted assigns) on each Monthly Payment Date during the Phase II Assignment Term an amount (the "Debt Service and R&R Capacity Payment") equal to the sum of (i) one-half of the portion of Debt Service allocable to and payable by Station Two Subsidiary (as the assignee of Big Rivers) pursuant to Section 6.3(a) -77- of the Station Two Power Sales Agreement during such month plus (ii) the Capacity charges that are due to Henderson or the Trustee during such month under the Station Two Power Sales Agreement, and that are attributable to: (A) required payments into the Station Two R&R Account pursuant to Section 6.3(c)(ii) of the Station Two Power Sales Agreement; and (B) required payments for the costs for Station Two Improvements under Section 6.3(d) of the Station Two Power Sales Agreement or that may otherwise be a required payment for a Station Two Improvement under Section 6.1 of the Station Two Power Sales Agreement (subject, however, to the payment obligations relating to Station Two Improvements set forth in Section 9.10 of this Agreement) or under Section 9.10 of this Agreement. Station Two Subsidiary shall invoice Big Rivers prior to the fifth day of each month for the Debt Service and R&R Capacity Payment (exclusive of any payment under (iii) above relating to a Station Two Improvement, which shall not be invoiced hereunder and shall be paid by Big Rivers in accordance with the terms of Section 9.10(c) of this Agreement) due for such month. Big Rivers' payment for these Debt Service R&R Capacity Payments shall be made to a bank account designated from time to time by Station Two Subsidiary for receipt of these Debt Service and R&R Capacity Payments and may be immediately drawn from such account by Station Two Subsidiary for payment of such obligation or to reimburse Station Two Subsidiary if it has already paid such obligation. Big Rivers and Station Two Subsidiary agree to implement and employ an adjustment procedure for the payments owing by Big Rivers to Station Two Subsidiary as contemplated above (including for this specific purpose all of such Debt Services and R&R Capacity Payments) comparable to that provided for in Section 8.12(b) of this Agreement, based upon the annual reconciliation of the Capacity charges under Section 9.4 of the Station Two Power Sales Agreement, and reconciliation payments (if any) by Big Rivers to Station Two Subsidiary, or by Station Two Subsidiary to Big Rivers, shall be made within the time required by Section 8.12(b) for reconciliation payments between Big Rivers and LEM. Notwithstanding anything herein to the contrary, in the event that the Phase II Effective Date shall occur prior to the Phase I Effective Date, the respective obligations of Big Rivers and Station Two Subsidiary for the portion of the Debt Service due under Section 6.3(a) of the Station Two Power Sales Agreement to Henderson or the Trustee during the month in which the Closing occurs shall be determined as follows: (x) if such Debt Service -78- payment is paid by Big Rivers to Henderson or the Trustee prior to the Closing, then Station Two Subsidiary shall pay to Big Rivers at Closing an amount equal to the product of (1) one-half of such Debt Service payment multiplied by (2) a fraction, the numerator of which is the number of days that Station Two Subsidiary will operate Station Two in that month (inclusive of the Closing Date) and the denominator of which is the total number of days in that month; and (y) if such Debt Service payment is due to Henderson or the Trustee after the Closing, then Big Rivers shall pay to Station Two Subsidiary (at the Closing or on the Monthly Payment Date, whichever is later) an amount equal to the difference between (1) the Debt Service payment due to Henderson or the Trustee in such month and (2) the product determined by application of the formula set forth above in (x) of this sentence. Station Two Subsidiary shall in no event have a payment obligation to Henderson, the Trustee or Big Rivers hereunder with respect to Debt Service paid by Big Rivers during any month that precedes the month in which the Closing occurs. (c) All Station Two Surplus Capacity allocated to Station Two Subsidiary, all surplus Capacity resulting from good faith over-estimates of the needs of the City and its inhabitants offered to and purchased by Station Two Subsidiary pursuant to Section 3.4 of the Station Two Power Sales Agreement, and all Excess Henderson Energy and/or any Energy associated with Excess Henderson Capacity purchased by Station Two Subsidiary from Henderson may be sold by Station Two Subsidiary to LEM, subject, however, to the obligation of LEM to sell such Power to Big Rivers as provided below. Consistent with Section 8.12(b) of this Agreement, all such Capacity and Energy shall constitute Station Two Unit Output during the Phase II Assignment Term. In lieu of any rights that Big Rivers may have pursuant to Section 6.4(b) of the Power Purchase Agreement or elsewhere to pay amounts to LEM in lieu of actually purchasing and accepting delivery of Power thereunder, during the period of time that the Letter Ruling shall remain in effect and continue to limit the distribution of Energy from Station Two to customers within Henderson and Daviess Counties, Kentucky, Big Rivers hereby covenants with the LG&E Companies and Henderson that Big Rivers shall actually purchase and accept delivery from Station Two Subsidiary and/or LEM, and Station Two -79- Subsidiary and/or LEM hereby covenants to Henderson and Big Rivers that it shall sell and deliver to Big Rivers, all Station Two Unit Output, less such amounts (if any) of Station Two Power (x) as LEM and/or Station Two Subsidiary sells to Henderson or otherwise delivers to Big Rivers pursuant to or in connection with one or more Pre-Closing Development Agreements or Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement, or (y) as LEM sells to Henderson Union under the LEM/Henderson Union Agreement, at the price provided for in (d), below. Big Rivers agrees to resell all such Station Two Unit Output purchased by Big Rivers solely to all or any of Henderson Union, Green River or Henderson, including, without limitation, pursuant to the HMP&L Contract, for retail distribution solely within Henderson and Daviess Counties, Kentucky. All such Station Two Unit Output purchased by Big Rivers (other than Power resold by Big Rivers to Henderson pursuant to the HMP&L Contract or Power purchased from LEM in connection with a Pre-Closing Development Agreement or an Economic Development Agreement) shall be credited toward any minimum obligation of Big Rivers to purchase Power, and any maximum obligation of LEM to sell Power, under Section 4.1 of the Power Purchase Agreement. Big Rivers agrees that, until the Station Two Bonds have been fully retired, its sales of Power to Henderson Union, Green River and Henderson (including, without limitation, Big Rivers' sales pursuant to the HMP&L Contract) shall be fulfilled by Big Rivers under its wholesale Power agreements with Henderson Union, Green River or Henderson (or any successor agreements) by first using Station Two Unit Output that is purchased from LEM and/or Station Two Subsidiary. For purposes of determining whether Big Rivers has fulfilled its obligation under this Section 9.7(c), the amount of Station Two Unit Output which Big Rivers is obligated to use in accordance with the prior sentence shall be equal to the hourly output of Station Two allocated to Big Rivers or Station Two Subsidiary under Sections 3.3 and 4.1 of the Station Two Power Sales Agreement, less the hourly sales (if any) of Station Two Unit Output by LEM to Henderson under the terms of one or more Pre-Closing Development Agreements or Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement and the hourly sales (if any) of Station Two Unit Output by LEM to Henderson Union under the LEM/Henderson Union Agreement. Henderson shall have the right to enforce the provisions of this Section 9.7(c) against LEM, Station Two -80- Subsidiary and Big Rivers. In the event the Power Purchase Agreement (or the portions thereof requiring Big Rivers to purchase Power from LEM thereunder) shall at any time expire or be terminated, or otherwise be rendered of no further force or effect, for any reason prior to the expiration or termination of this Agreement and LEM continues to have the right or obligation to receive Station Two Unit Output, then Big Rivers agrees to actually purchase and accept delivery from LEM and/or Station Two Subsidiary of, and LEM and/or Station Two Subsidiary agrees to deliver to Big Rivers, all Station Two Unit Output (other than Unit Output sold by LEM (x) to Henderson or otherwise delivered to Big Rivers pursuant to or in connection with one or more Pre-Closing Development Agreements or Economic Development Agreements or (y) to Henderson Union under the LEM/Henderson Union Agreement) throughout the period commencing on that expiration or termination date and expiring upon the redemption or retirement of the Station Two Bonds, pursuant to this Section 9.7(c) and otherwise upon the same terms and conditions as were set forth in the Power Purchase Agreement, which Terms shall then be deemed to be incorporated by reference in this Section 9.7 to the extent they relate to Station Two Unit Output for all purposes. (d) Consistent with Section 9.7(c) of this Agreement, all Station Two Unit Output sold to Big Rivers by Station Two Subsidiary or LEM as contemplated in Section 9.7(c) of this Agreement (other than Station Two Unit Output sold in connection with one or more Pre-Closing Development Agreements or Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement) shall be sold either (1) at the Base Power Price established pursuant to Section 6.4 of the Power Purchase Agreement, or, (2) in the case of Station Two Surplus Capacity that is resold by Big Rivers to Henderson pursuant to the HMP&L Contract, at the price provided for in Section 6.2(c) of the Power Purchase Agreement. (e) Notwithstanding any provision of this Agreement or any other Operative Document to the contrary, including, without limitation, Section 9.7(c) of this Agreement, Big Rivers shall not at any time during the Phase II Assignment Term be obligated to actually purchase -81- and accept from LEM (in lieu of making the payments contemplated in Section 6.4(b) of the Power Purchase Agreement) any Station Two Unit Output to the extent (but only to the extent) that Big Rivers does not then have the right to resell that Power to Henderson (whether pursuant to the HMP&L Contract, one or more Pre-Closing Development Agreements or Economic Development Agreements, or otherwise), Henderson Union and Green River (or any of them) to meet the needs of their respective customers located in Henderson County or Daviess County in Kentucky, or there is no demand for such Station Two Unit Output from the respective customers of Henderson, Henderson Union and Green River located in Henderson or Daviess County, Kentucky, unless in any such situation the reason that Big Rivers cannot resell such Station Two Unit Output to Henderson, Henderson Union and/or Green River for distribution in those counties is due to (1) a breach or default by Big Rivers of its wholesale Power agreement(s) with Henderson, Henderson Union or Green River (that was not itself the direct result of a breach or default by any LG&E Company or Affiliate of an LG&E Company under any of the Operative Documents or the negligence or willful misconduct of any LG&E Company or Affiliate of an LG&E Company), whether or not such agreements are terminated by those Members as a result thereof, or (2) any other actions or omissions on the part of Big Rivers or its employees, agents or representatives that constitutes a breach or default by Big Rivers under any other agreement to which it is a party (including without limitation, any Operative Document), that violates applicable Laws, or that constitutes negligence or willful misconduct by Big Rivers or its employees, agents or representatives. Big Rivers shall not, by reason of the foregoing provisions, be released from its obligations under Section 6.4(b) of the Power Purchase Agreement to pay LEM amounts in lieu of purchasing and accepting delivery of the Station Two Unit Output as contemplated above, if such provisions of the Power Purchase Agreement are applicable. Notwithstanding the foregoing, and regardless of whether Big Rivers shall have an obligation to also pay amounts to LEM pursuant to Section 6.4(b) of the Power Purchase Agreement (and not in lieu of those payment obligations), in the event Big Rivers shall not be released from its obligation to actually purchase and accept delivery of Station Two Unit Output by reason of the circumstances (or any of them) described in Subclauses (1) and (2), above, Big Rivers shall be entitled, in its discretion, and in lieu of actually purchasing, accepting delivery of and paying -82- the entire price for that Unit Output (for which there is no demand for the reasons described in Subclauses (1) and (2), above), to pay to LEM or Station Two Subsidiary an amount for each megawatt-hour of Energy that it was obligated to accept from LEM equal to (A) 16% multiplied by (B) the applicable Base Power rate per megawatt-hour under Section 6.3 of the Power Purchase Agreement; provided, that the foregoing right of Big Rivers to make payments in lieu of accepting delivery of Station Two Unit Output shall apply only when there is insufficient customer load in the two counties as described above, and then only to the extent that Station Two Subsidiary shall have been given reasonable advance notice from Big Rivers of the impending load constraints in Henderson and/or Daviess Counties so that Station Two Subsidiary shall have had a reasonable opportunity to reduce the outputs of Station Two accordingly. Big Rivers shall in no event be released from any breach or default by Big Rivers under this Agreement arising by reason of the actions, events or circumstances described in Subclauses (1) or (2), above. The rights and obligations of LEM, Station Two Subsidiary and Big Rivers, respectively, set forth in this Section 9.7(e), including, without limitation, Big Rivers' release from its obligation to repurchase and accept from LEM any Station Two Unit Output pursuant to Section 9.7(c) of this Agreement, shall be subject to Section 10.5 of this Agreement and such Party's fulfillment of its obligations (provided such obligations shall then be effective under such Section) under Section 10.6 of this Agreement to cooperate in the refinancing of the Station Two Bonds and to pay its percentage of the costs associated with such refinancing. (f) Nothing contained in this Agreement or in the Power Purchase Agreement shall be deemed to prevent LEM from selling to any Person any Energy associated with the Station Two Unit Output without also selling to that Person the associated Capacity, subject, however, to the provisions of Sections 9.7(c) and 10.5 of this Agreement. (g) Big Rivers, Henderson and Station Two Subsidiary each agree that those costs contemplated in Section 6.3(f) and Section 6.3(g) of the Station Two Power Sales Agreement as being payable by Big Rivers during the Phase I Subcontract Term and by Station Two Subsidiary during the Phase II Assignment Term shall not include costs and expenses -83- associated with any damages arising out of any breach by Henderson, Big Rivers or Station Two Subsidiary, respectively, of its obligations under this Agreement or any Station Two Contract, or arising out of any negligence or willful misconduct by Henderson, Big Rivers or Station Two Subsidiary, respectively, or its agents or employees, all of which costs and expenses will be the sole responsibility of such Party. (h) Notwithstanding any provision of this Agreement or the Station Two Contracts to the contrary, the Parties hereby agree that Station Two Subsidiary (or its successors or permitted assigns) shall have the right to off-set the amounts payable by Henderson to Station Two Subsidiary (or its successors or permitted assigns) pursuant to Section 13.6 of the Station Two Operating Agreement against the payments Station Two Subsidiary (or its successors or permitted assigns) owes Henderson (payable to the Trustee during the term of the Station Two Bonds) pursuant to Sections 6.1 and 6.2 of the Station Two Power Sales Agreement, and that Henderson shall have the right to off-set the amounts payable by Station Two Subsidiary (or its successors or permitted assigns) to Henderson pursuant to Sections 6.1 and 6.2 of the Station Two Power Sales Agreement against the payments that Henderson owes to Station Two Subsidiary (or its successors or permitted assigns) pursuant to Section 13.6 of the Station Two Operating Agreement. Any such off-set shall be deemed to discharge the relevant obligation against which the off-set is made, to the extent of the amounts so off-set. 9.8 Budget Process for Phase II Assignment. The Parties acknowledge that Station Two Subsidiary, as the assignee of Big Rivers, will perform the obligations set forth in Section 14 of the Station Two Operating Agreement (preparation of the Operating Budget) theretofore performed by Big Rivers, as follows: (a) Station Two Subsidiary shall prepare the Operating Budget for the Contract Year as contemplated in the first sentence of Section 14.1 of the Station Two Operating Agreement. Station Two Subsidiary will separately identify therein each item that represents anticipated expenditures associated with (1) a Station Two Improvement, including specification therein whether expenses related to that Station Two Improvement are Henderson Incremental Capital Costs or Henderson Non-Incremental Capital Costs, and (2) a Henderson Incremental -84- Environmental O&M cost. As between Big Rivers and Station Two Subsidiary, special arrangements described in Sections 9.9 and 9.10 below shall apply to all Henderson Incremental Environmental O&M costs and Station Two Improvements. Those distinctions among items in the Operating Budget shall have no meaning, however, as between (x) Henderson and (y) Big Rivers and Station Two Subsidiary. (b) Prior to submittal to Henderson of the Operating Budget for Station Two as contemplated in the last sentence of Section 14.1 of the Station Two Operating Agreement, and in any event on or before November 1 of each Year subsequent to the Phase II Effective Date, Station Two Subsidiary shall submit in writing to each member of the Operating Committee (the composition and operating procedures of which are set forth in Section 8.15 of this Agreement) a proposed Operating Budget for Station Two for the next Year. With respect to operating and maintenance costs, within 30 days after receipt of Station Two Subsidiary's proposed Operating Budget for Station Two, Big Rivers may propose to the Operating Committee modifications to the operating and maintenance cost components of the Operating Budget proposed by Station Two Subsidiary. The Operating Committee shall meet in December and January of each Year to review and discuss the Operating Budget proposed by Station Two Subsidiary and review and approve any modifications thereof proposed by Station Two Subsidiary or Big Rivers. The Operating Committee, by agreement of its members representing Big Rivers and Station Two Subsidiary, may determine to adopt an amendment to the operations and maintenance cost components of the proposed budget, in which case the proposed budget will thereafter be as so amended. Absent agreement of the members of both of those Parties to modify the budget proposed by Station Two Subsidiary, as recommended by Big Rivers, Station Two Subsidiary will determine what portion of Big Rivers' proposed modifications to the operations and maintenance components of the Operating Budget it will adopt, if any, and its decision shall be final as between the Big Rivers and Station Two Subsidiary. With respect to any component of the Operating Budget which constitutes a Station Two Improvement or Henderson Incremental Environmental O&M costs, within 60 days after its receipt of the proposed Operating Budget for Station Two from Station Two Subsidiary, Big Rivers may also propose to the Operating Committee modifications to such -85- components of the Operating Budget as proposed by Station Two Subsidiary. The Operating Committee, by agreement of its members representing Big Rivers and Station Two Subsidiary, may determine to adopt an amendment to the components of the Operating Budget relating to Station Two Improvements and Henderson Incremental Environmental O&M, in which event the proposed budget will thereafter be so amended. Absent agreement of the members of both Parties to modify the budget proposed by Station Two Subsidiary relating to a Station Two Improvement or a Henderson Incremental Environmental O&M cost, as proposed by Big Rivers, the Operating Committee must approve those components of the Operating Budget as proposed by Station Two Subsidiary if such budget is consistent with Prudent Utility Practice; provided, that the responsibility of Big Rivers and the LG&E Companies with respect to the costs incurred for items identified in the Operating Budget shall be determined as provided elsewhere in this Agreement. In the event of a dispute as to whether such budget (including those amendments adopted by agreement) is consistent with Prudent Utility Practice, those Parties will submit the dispute to arbitration consistent with Section 15 of the Participation Agreement; provided, however, if the expenditure disputed by Station Two Subsidiary and Big Rivers is ultimately determined to be a required expenditure under the Station Two Operating Agreement, Big Rivers and Station Two Subsidiary shall not have the right to further arbitrate such expenditure and the expenditure shall be included in the Operating Budget for Station Two and paid or shared by Big Rivers and the LG&E Companies in accordance with the terms and provisions set forth in Section 9 of this Agreement, entitled "Phase II Assignment." The Operating Budget, as approved in accordance with this Section 9.8, shall be the only budget submitted by either the LG&E Companies or Big Rivers to Henderson for its review as required by Section 14 of the Station Two Operating Agreement; provided, however, that Station Two Subsidiary shall be entitled to submit to Henderson an Operating Budget that may be the subject of a dispute between Big Rivers and Station Two Subsidiary to the extent required for compliance with the Station Two Operating Agreement, it being understood by Big Rivers and Station Two Subsidiary that their respective obligations for items set forth in that Operating Budget shall thereafter be determined through the dispute resolution procedures described above or as otherwise agreed by Big Rivers and Station Two Subsidiary. Henderson shall have the final authority to modify and approve the budget or approve it without -86- modifications, subject however to whatever approval rights are available to Station Two Subsidiary under the Station Two Operating Agreement. (c) Notwithstanding anything in this Section 9.8 to the contrary, the Operating Committee may not modify any of the terms, covenants or conditions of this Agreement or any Station Two Contract. 9.9 Adjustment for Henderson Incremental Environmental O&M. Notwithstanding the assignment to Station Two Subsidiary (or its successors or permitted assigns) of the obligation to pay Capacity costs under Section 6.3 of the Station Two Power Sales Agreement arising or accruing during the Phase II Assignment Term, in the event any of those Capacity costs represent payments attributable to Henderson Incremental Environmental O&M, such costs shall continue to be initially paid by Station Two Subsidiary in accordance with that agreement, but shall thereafter be shared by Station Two Subsidiary and Big Rivers in accordance with this Section 9.9. If any of the operating and maintenance expenses allocated to the Reid Station under Section 13.8 of the Station Two Operating Agreement constitute Incremental Environmental O&M, such costs shall be subject to the payment and reimbursement procedures set forth in Section 2.3.3 of the Lease. (a) Big Rivers shall pay to Station Two Subsidiary, Big Rivers' Henderson Incremental Environmental O&M Share (as then applicable) of all Henderson Incremental Environmental O&M incurred by Station Two Subsidiary during the Phase II Assignment Term, as follows: (i) Big Rivers' payment shall be paid to Station Two Subsidiary on each Monthly Payment Date in an amount equal to Big Rivers' Henderson Incremental Environmental O&M Share, multiplied by the Henderson Incremental Environmental O&M estimated by Station Two Subsidiary to be incurred in such month by Station Two Subsidiary consistent with the Operating Budget. Within 120 days after the end of each Year, Station Two Subsidiary shall compute the Actual Henderson Environmental O&M for the Year. Station Two Subsidiary shall compare the Actual Henderson Environmental O&M with the aggregate payments made by Big Rivers pursuant to this Section 9.9(a) during such Year. If -87- Big Rivers' Henderson Incremental Environmental O&M Share of the Actual Henderson Environmental O&M is more than such payments made by Big Rivers (or on its behalf), Big Rivers shall promptly pay such difference to Station Two Subsidiary. If Big Rivers' Henderson Incremental Environmental O&M Share of the Actual Henderson Environmental O&M is less than such payments made by Big Rivers, Station Two Subsidiary shall promptly pay such difference to Big Rivers. 9.10 Station Two Improvements -- Forecasts, Budgeting and Payments. (a) During the Phase II Assignment Term, "Station Two Improvement" shall not include any operating and maintenance expenses allocated to the Reid Station under Section 13.8 of the Station Two Operating Agreement that constitute a "Capital Asset" under the Lease, it being understood that such expenses shall instead be allocated between and paid by Big Rivers and WKEC or its Affiliate in accordance with the payment and reimbursement procedures set forth in Article 8 of the Lease. Station Two Improvements made during the Phase II Assignment Term, including, without limitation, Station Two Improvements funded by draws against amounts deposited by Big Rivers or Station Two Subsidiary into the Station Two R&R Account, shall be paid for or reimbursed in accordance with this Section 9.10. Notwithstanding anything to the contrary in this Agreement or in any other Operative Document, Big Rivers shall have no obligation to (1) authorize the acquisition or construction of or to pay for any Station Two Improvements unless such Station Two Improvements are necessary, consistent with Prudent Utility Practice, to maintain the Capacity of Station Two that is physically available and can be legally utilized at the Station Two Rated Capacity, or to comply with any requirement of applicable Laws or administrative or judicial interpretation of an applicable Law (including, without limitation, Environmental Law) or any regulatory authority (including, without limitation, any change in position of the KNREPC regarding compliance with applicable opacity limitations based upon concurrent measurement of particulate matter emissions affecting the Green Facility and which also affects a Joint Use Facility and including for the avoidance of doubt, and without regard for the actual time of enactment or implementation of the same, without limitation, the Proposed SIP Call and any -88- Laws that may be enacted or implemented pursuant thereto or in connection therewith), in which case Big Rivers shall be obligated to so authorize the acquisition or construction of and pay for (based on the proportion of Capacity allocation then existing between Station Two Subsidiary and Henderson and otherwise in accordance with this Section 9.10) such Station Two Improvements, (2) make any expenditure for Station Two Improvements which would not be capitalized pursuant to the Accounting Practices (as interpreted, modified or supplemented by the Capitalization Guidelines), (3) make any expenditure in connection with Station Two Personal Property or other asset which does not constitute a Station Two Improvement (other than such expenditures by Big Rivers as may be required as a result of any breach or default by Big Rivers under this Agreement or any of the other Operative Documents, or pursuant to any indemnification or hold harmless covenant of Big Rivers under this Agreement or any of the other Operative Documents) (unless such expenditure for such Station Two Personal Property is part of Henderson Incremental Environmental O&M, in which event the provisions of Section 9.9 of this Agreement shall govern, or unless a purchase involves a repurchase of the End of Term Personal Property by Big Rivers in accordance with Section 10.35 of this Agreement), or (4) make any expenditure for a Station Two Improvement the principal purpose of which is to increase the Capacity of Station Two above the Station Two Rated Capacity or to improve the efficiency of Station Two. Notwithstanding the limitations set forth in subclauses (1), (3) and (4) of the preceding sentence, if requested by Station Two Subsidiary, Big Rivers shall authorize and approve, and shall pay for, or shall promptly reimburse Station Two Subsidiary for (based on the proportion of Capacity then allocated between Henderson and Station Two Subsidiary) all renewals, replacements and additions pursuant to Section 13.8(a)(3) of the Station Two Operating Agreement, Sections 6.3(c)(ii) and 6.3(d) of the Station Two Power Sales Agreement and Section 6 of the Joint Facilities Agreement, to the extent such renewals, replacements and additions are Station Two Improvements that comply with subclause (2), above, and are required to be made to Station Two to comply with any obligation of Big Rivers or any LG&E Company under any Station Two Contracts or the Bond Ordinance; provided, however, should a dispute exist between the LG&E Companies and Big Rivers with respect to whether the Station Two Contracts or the Bond Ordinance required any such expenditure, the dispute shall be resolved, as between the -89- LG&E Companies and Big Rivers, pursuant to the dispute resolution procedures set forth in Article 15 of the Participation Agreement (as contemplated in Section 13.5(e) of this Agreement). All Station Two Improvements and all renewals, replacements and additions contemplated by this Section 9.10 shall in all events be further subject to approval rights, if any, of Henderson under the Station Two Contracts. (b) At least ten (10) days before the commencement of each quarterly period referenced below, Station Two Subsidiary shall submit to Big Rivers a forecast of cash requirements for each Station Two Improvement set forth in the Annual Budget or any modification of that budget approved by the Operating Committee under Section 9.8 of this Agreement (including specification of requirements for Henderson Incremental Capital Costs and Henderson Non-Incremental Capital Costs), together with a summary of all amounts that have been required under the terms of the Station Two Contracts and/or the Bond Ordinance to be deposited by Station Two Subsidiary into the Station Two R&R Account (to the extent such information has been made available at that time by Henderson), and that have been drawn out of that account to fund any one or more Station Two Improvements. This forecast shall set forth cash requirements with respect to such Station Two Improvements (including all sums in the Annual Budget to be paid under Section 13.8(a)(3) of the Station Two Operating Agreement or as a component of Capacity charges under Section 6.3 of the Station Two Power Sales Agreement, as applicable) (i) for each quarterly period commencing on the first day of June, September, December and March in which costs for such Station Two Improvements shall become due and (ii) for each month of the first two quarterly periods immediately following the issuance of the forecast. Station Two Subsidiary shall revise the forecast and furnish the revised forecast to Big Rivers no less often than every three months thereafter until completion of the Station Two Improvement. Notwithstanding anything contained in this Section 9.10(b), Article 5 of the Cost Sharing Agreement or Section 2.3 of the Lease, or elsewhere in this Agreement or any other Operative Document to the contrary, none of LG&E Companies or WKEC shall be obligated to pay for their proportionate share, if any, of the costs and expenses associated with any Station Two Improvement to a Joint Use Facility or a -90- Henderson Incremental Environmental O&M required in order for the Green Facility to comply with applicable opacity limitations imposed under Laws unless the provisions of Section 7.1 of the Cost Sharing Agreement or Section 2.3 of the Lease shall require any such LG&E Company or WKEC to share in such costs and expenses, and then solely to the extent so required by such provisions. Big Rivers and the LG&E Companies each hereby acknowledge that those Parties intend to include the costs for Station Two Improvements to the Joint Use Facilities and Henderson Incremental Environmental O&M costs, to the extent required to bring the Green Facility into compliance with applicable opacity limitations, within the agreed upon procedure for allocation and sharing of such costs and expenses as set forth in Section 7.1 of the Cost Sharing Agreement and Section 2.3 of the Lease. (c) Big Rivers and Station Two Subsidiary shall pay into the Station Two Improvements Account amounts as provided in this Section 9.10(c). Station Two Subsidiary shall be permitted to withdraw such funds (x) for its own account at such times when Big Rivers shall have an obligation to pay or reimburse Station Two Subsidiary for the costs of Station Two Improvements, whether paid or payable by Station Two Subsidiary directly to third parties or as a component of the Capacity charges Station Two Subsidiary owes Henderson (or the Trustee) pursuant to Section 9.7(a) of this Agreement (including without limitation, in order to reimburse Station Two Subsidiary for amounts that were deposited by it in the Station Two R&R Account that were subsequently drawn upon by Henderson or the Trustee to fund one or more Station Two Improvements), or (y) to pay for a Station Two Improvement at such time when Big Rivers or Station Two Subsidiary, as applicable, shall otherwise have an obligation to pay for Station Two Improvements under this Agreement or any of the Station Two Contracts. On the first day of each month during the Phase II Assignment Term Station Two Subsidiary and Big Rivers shall each directly deposit sufficient funds into the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios (defined in Section 8.17(e)), as then applicable, but limited in the case of Big Rivers to the remaining Big Rivers Contribution (as defined in Section 20.6 of the Participation Agreement) for that Year with respect to Henderson Non-Incremental Capital Costs that are not for Henderson Major Capital Repairs (as defined in the Participation -91- Agreement) (i) to cover all cash requirements forecast under or otherwise specified in Section 9.10(b) of this Agreement for that month for all Station Two Improvements (less any excess between funds deposited and interest accrued thereon and funds actually required for all Station Two Improvements during the previous month) and (ii) to cover any shortfall between funds deposited and funds actually required for all Station Two Improvements during the previous month. With respect to funds deposited in the prior month, which are remaining in the present month, and shortfalls in funds deposited in the prior month relative to expenses for that month, Big Rivers' and Station Two Subsidiary's respective obligations in the present month shall be adjusted proportionally based on that Party's deposit during the prior month and that Party's relative share of responsibility in that prior month for the Station Two Improvements for which funds were withdrawn or not used. An illustration of the operation of this Section (and Section 8.17(d) of this Agreement) is set forth in Schedule 8.17(d) attached to this Agreement. Upon the expiration or earlier termination of this Agreement, all funds remaining in the Station Two Improvements Account shall be immediately distributed to Station Two Subsidiary and Big Rivers in accordance with the same methodology as is used in the prior sentence; provided, Station Two Subsidiary may first withdraw and retain all such funds from the Station Two Improvements Account (including interest accrued thereon) and apply such funds (and interest), (i) to reimburse Station Two Subsidiary for all amounts deposited by it into the Station Two R&R Account (and not otherwise paid by Big Rivers to Station Two Subsidiary as required by Section 9.7(b) of this Agreement) which were drawn upon by Henderson or the Trustee to fund any one or more Station Two Improvements, and (ii) to fund any other Station Two Improvements for which Station Two Subsidiary has a continuing obligation to fund (whether directly or as a component of the Capacity charges under Section 6.3(d) of the Station Two Power Sales Agreement). To the extent amounts remaining in the Station Two Improvements Account are insufficient to satisfy the foregoing obligations to Station Two Subsidiary, Big Rivers shall pay and satisfy those obligations within five (5) days after the expiration or termination of this Agreement (unless this Agreement expressly provides elsewhere for a later payment date). -92- (d) Station Two Subsidiary and Big Rivers agree with each other as follows: Station Two Subsidiary shall immediately notify the Operating Committee of any anticipated departure of 10% or more from the budget for Station Two Improvements or for operating and maintenance expenses included in any approved Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a) operate within 90 percent to 110 percent of the total approved budget for Station Two Improvements included in an Operating Budget, and (b) to spend at least 90 percent of the total approved budget for operating and maintenance expenses included in an Operating Budget (not including the fuel or reagent budget). Subject to the provisions set forth below, any increase of 10 percent or more proposed by Station Two Subsidiary to either the Station Two Improvements budget or the operating and maintenance expense budget set forth in an approved Operating Budget shall be subject to review and approval by the Operating Committee; provided, that such review and approval shall not apply to the operating and maintenance expense budgets that are included in an Operating Budget that is a part of the Initial Period Budgets, it being understood that increases of 10 percent or more proposed by Station Two Subsidiary to those budgets shall be permissible without that review and approval if the relevant expenditures are consistent with Prudent Utility Practice, in which case the additional costs shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless they constitute Henderson Incremental Environmental O&M required to be borne by both Station Two Subsidiary and Big Rivers in the manner provided for in Section 9.9. If Station Two Subsidiary exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive of such costs as are for Henderson Major Capital Repairs (as defined in the Participation Agreement) that are included in an approved budget for Station Two Improvements in an Operating Budget, the additional cost of those Henderson Non-Incremental Capital Costs that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the parties agree otherwise, or unless remaining portions of the Big Rivers Contribution for that Year that were not included in the approved Operating Budget are available as contemplated in Section 20.6.2 of the Participation Agreement (in which event such amounts will be applied as contemplated in that Section). Subject to the next succeeding -93- sentence, if Station Two Subsidiary exceeds 110 percent of the total approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Henderson Major Capital Repairs, in either case that are included in an approved Operating Budget, the additional costs of those Station Two Improvements that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure under Article 15 of the Participation Agreement (and contemplated in Section 13.5(e) of this Agreement) determines that at the time Station Two Subsidiary proposed the applicable portions of the Operating Budget (or modification thereof) relating to those expenditures Station Two Subsidiary acted consistent with Prudent Utility Practice, in which case the additional costs shall be borne by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of this Agreement. Notwithstanding the provisions of the immediately preceding sentence, if Station Two Subsidiary exceeds 110 percent of the total of any approved budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for Henderson Major Capital Repairs, that are included in an Operating Budget that is a part of the Initial Period Budgets, the additional cost of those Station Two Improvements that are allocable to Big Rivers under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute resolution procedure set forth in Article 15 of the Participation Agreement determines that the purchase and installation of those Station Two Improvements, and the costs thereof, are consistent with Prudent Utility Practice, regardless of whether the relevant Initial Period Budget, or Station Two Subsidiary's actions in connection with the same, were consistent with Prudent Utility Practice at the time that the budget was prepared, in which case the additional costs that are allocable to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of this Agreement. If Station Two Subsidiary fails or refuses to use reasonable efforts to spend at least 90 percent of the total budget for Station Two Improvements or for operating and maintenance expenses included in an approved Operating Budget (excluding that portion relating to Henderson Incremental Environment O&M), and pursuant to the dispute resolution -94- procedure under Article 15 of the Participation Agreement it is determined that such failure or refusal was inconsistent with Prudent Utility Practice, Station Two Subsidiary shall make the omitted expenditures as required pursuant to the applicable dispute resolution procedure. Notwithstanding anything contained in this Section 9.10(d) to the contrary, Station Two Subsidiary shall in no event be required to expend the monies included in an approved Operating Budget where to do so would cause Station Two Subsidiary to be in breach or default under any Station Two Contract. Additional capital expenditures incurred by Station Two Subsidiary in response to an Operating Emergency (as defined in the Participation Agreement) which are not already included in an approved Operating Budget, and which are allocated to Station Two Subsidiary under the Station Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be paid for by Station Two Subsidiary unless (a) the same represents a Henderson Incremental Capital Cost or expenditures for a Henderson Major Capital Repair, in which case such expenditures shall be paid by Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c), or (b) there are remaining amounts in the Big Rivers Contribution for that Year that were not included in the budget for Henderson Non-Incremental Capital Costs in the approved Operating Budget, as contemplated in Section 20.6.2 of the Participation Agreement, in which case that remaining amount will be allocated to any Henderson Non-Incremental Capital Costs in that Year resulting from that Operating Emergency as contemplated in Section 20.6.2. (e) Station Two Subsidiary and Big Rivers agree with each other as follows: In the absence of an approved Operating Budget, Station Two Subsidiary shall operate and maintain Station Two in accordance with Prudent Utility Practice, unless otherwise required or permitted under this Agreement. In the absence of an approved Operating Budget or an approved acquisition of a Station Two Improvement, Station Two Subsidiary may (but shall not be obligated to, as a condition of mediation or arbitration of the disputed budget or Station Two Improvement) install or cause to be installed a disputed Station Two Improvement; provided, however, that as between Station Two Subsidiary and Big Rivers, Station Two Subsidiary shall bear the full cost of such Station Two Improvement for its own account unless those Parties otherwise agree, or unless the dispute resolution procedure set forth in Article 15 -95- of the Participation Agreement (and as contemplated in Section 13.5(e) of this Agreement) determines that Station Two Subsidiary is entitled to reimbursement from Big Rivers because Big Rivers was obligated to pay for the Station Two Improvement pursuant to this Section 9.10, or unless Station Two Subsidiary shall have been required to fund that Station Two Improvement under the terms of the Station Two Contracts, in which case the costs of that Station Two Improvement shall be borne by Big Rivers and Station Two Subsidiary in accordance with this Section 9.10. If the Operating Committee fails to approve an Operating Budget for the following Year on or before May 15 of the prior Year, Big Rivers and Station Two Subsidiary will promptly proceed with the dispute resolution procedures described above to resolve that issue. 9.11 [Intentionally Omitted]. 9.12 Phase I Adjustments. The LG&E Companies and Big Rivers hereby agree with each other that notwithstanding the termination of the Phase I Subcontract Term, any of the following commitments or adjustments to the extent made during the Phase I Subcontract Term and existing as of the Phase II Effective Date shall survive the termination of the Phase I Subcontract Term and be carried forward throughout the Phase II Assignment Term (the "Phase I Adjustments"): (a) A continuation of any adjustments previously made to the payments owing by LEM to Big Rivers pursuant to Section 3.3 of the Power Purchase Agreement, as such adjustments shall be required pursuant to any provision of this Agreement, resulting from the application of the Station Two PP Price Reduction (defined in Section 10.35 of this Agreement), reductions or abatements relating to condemnation or damage or destruction of the Station Two Assets, or any reductions or abatements relating to a termination of this Agreement, all of which shall continue as an adjustment to the Annual Fixed Payments thereafter due under the Power Purchase Agreement or the Rental Payments thereafter due under the Lease. -96- (b) Any payments due as refunds of the Initial Fixed Payment, as may be required under any provision of this Agreement, shall continue without adjustment as to amount or timing of payment. (c) A continuation of the calculation of Actual Henderson Incremental Environmental O&M and Henderson Incremental Environmental O&M for the entire Year which includes the transition from the Phase I Subcontract Term to the Phase II Assignment Term (the "Transitional Year"). Big Rivers and Station Two Subsidiary shall reconcile Actual Henderson Incremental Environmental O&M incurred during the Transitional Year with Henderson Incremental Environmental O&M incurred during the Transitional Year within 120 days after the end of the Transitional Year. (d) A continuation, without adjustment, of balances and other accounting with respect to the Station Two Improvements Account and a continuation of the allocation of Station Two Improvements funded in accordance with Sections 8.17 of this Agreement. (e) A continuation of the effectiveness of the portion of any approved capital expenditures for Station Two Improvements and operating and maintenance expenditures pursuant to the Annual Budget as it relates to Station Two and the other Station Two Assets in effect during any such Transitional Year. (f) A continuation of the relative percentages of Shared Costs between Big Rivers and any of the LG&E Companies (as the case may be). The Parties acknowledge that all payments or other sums due under the Station Two Operating Agreement and the Station Two Power Sales Agreement to any other Party shall continue to be paid without interruption (except that the primary obligor for such sums may, as applicable, change from Big Rivers to Station Two Subsidiary) and based upon the budget for such Transitional Year approved by Henderson and Big Rivers (with the advice and consent of -97- Station Two Subsidiary). The annual reconciliations required under Section 16.6 of the Station Two Operating Agreement and Section 9.4 of the Station Two Power Sales Agreement in the Transitional Year to the Phase II Assignment shall be inclusive of all payments made by the Parties throughout such Year without regard to the termination of the Phase I Subcontract, and any sums due by Henderson shall be paid to Station Two Subsidiary and thereafter, as among Station Two Subsidiary, LEM and Big Rivers, shall be allocated among such Parties (subject to any applicable off-sets) based on whether the amount disbursed by Henderson relates to a Station Two Improvement funded by Big Rivers (which shall be allocated to Big Rivers and credited to any reimbursement payment due it by Station Two Subsidiary) or another expenditure (which shall be allocated to Station Two Subsidiary or LEM, as appropriate). On or prior to the Monthly Payment Date in the month in which the transition from the Phase I Subcontract to the Phase II Assignment occurs, and in addition to the payment owing by Big Rivers to Station Two Subsidiary under Section 9.7(b) of this Agreement for that month, Big Rivers shall pay to Station Two Subsidiary an amount equal to any payment previously made by Station Two Subsidiary or its designated Affiliate to Big Rivers during that month pursuant to Section 8.18 of this Agreement, relating to Station Two Subsidiary's share of Debt Service payment due Henderson or the Trustee under Section 6.3(a) of the Station Two Power Sales Agreement during that month; provided, that no such payment by Big Rivers shall be payable to Station Two Subsidiary to the extent that Big Rivers has already paid that amount to Henderson or the Trustee in satisfaction of the Debt Service payment due and owing to Henderson or the Trustee for that month. 9.13 Survival of Phase I Subcontract Provisions and Claims. Notwithstanding anything in this Agreement to the contrary, including, without limitation, Section 8 of this Agreement, entitled "Phase I Subcontract," and Section 13 of this Agreement, entitled "Termination; Default; Remedies," the following terms and provisions set forth in Section 8, entitled "Phase I Subcontract," shall survive the termination of the Phase I Subcontract Term by virtue of the Phase II Effective Date and shall continue in full force and effect from and after such termination throughout the Phase II Assignment Term: (a) the terms relating to Station Two Allowances set forth in Section 8.10(c) of this Agreement; (b) the agreed upon allocation of -98- general and administrative costs as set forth in the G & A Allocation Agreement provided for in Section 10.29 of this Agreement; (c) the terms of Section 8.13(b) of this Agreement, to the extent that any payment default which may exist thereunder has not been fully paid or otherwise discharged as of the Phase II Effective Date; (d) the terms for composition of the Operating Committee and agreed upon operating procedures set forth in Section 8.15 of this Agreement; and (e) all definitions of terms contained in a provision within Section 8, entitled "Phase I Subcontract," to the extent such defined terms have application in any other Section of this Agreement. In addition, all indemnification claims and all other claims or causes of action that any of the Parties may have for breach or default of this Agreement or the Station Two Contracts, and all claims for payment or other sums due and owing a Party under this Agreement or the Station Two Contracts, arising or accruing during the Phase I Subcontract Term or otherwise relating to the Phase I Subcontract shall survive the expiration or termination of the Phase I Subcontract Term. 9.14 No Release; Big River's Responsibility. Notwithstanding anything in this Section 9 to the contrary, Big Rivers shall not throughout the Phase II Assignment Term, by virtue of the assignments contemplated hereby, be released from any of its covenants or agreements set forth in the Assigned Station Two Contracts, or from any damages, actions, liabilities or obligations that may result from or arise out of the performance or failure of performance of the obligations thereunder from and after the Phase II Effective Date. The LG&E Companies, with respect to their respective performance of the Assumed Station Two Liabilities, have agreed to give Big Rivers the indemnity set forth in Section 10.15(a) of this Agreement. 9.15 Standards of Performance. Unless different standards or specifications are otherwise required by any regulatory authority having jurisdiction thereof and such standards or specifications make it impracticable or illegal to comply with the following, Station Two Subsidiary (or its successors or permitted assigns) shall perform its duties under Section 9 of this Agreement, entitled "Phase II Assignment," in accordance with standards and specifications equal to the more stringent of (a) those set forth in the National Electric Safety Code of the United States Bureau of Standards, (b) Prudent Utility Practice, and (c) any other -99- standards or specifications as may be expressly required of Station Two Subsidiary (as the assignee of Big Rivers) under the relevant provisions of the Assigned Station Two Contracts which Station Two Subsidiary has expressly agreed to perform hereunder, unless such performance by Station Two Subsidiary in accordance with Prudent Utility Practice would result in a breach or default by Station Two Subsidiary under the Assigned Station Two Contracts or by Henderson under the Bond Ordinance, in which event the provisions of subclause (b) above shall not apply. Station Two Subsidiary will, at all times, faithfully obey and substantially comply with existing and future laws, rules and regulations of federal, state and local governmental bodies lawfully affecting the operations and activities of Station Two and, in its performance of its obligations under Section 9, entitled "Phase II Assignment," Station Two Subsidiary will operate and maintain Station Two and the other Station Two Assets in substantial compliance with any standards imposed by any insurance policies required to be maintained by Station Two Subsidiary under the Assigned Station Two Contracts or otherwise hereunder. Station Two Subsidiary's performance of its duties under this Section 9 shall at all times be conducted in a manner that is at all times consistent with the provisions of the Bond Ordinance and that would not cause Station Two Subsidiary or Big Rivers to be in material default under any terms of the Station Two Contracts as it relates to the Bond Ordinance or otherwise (but only until redemption or retirement of the Station Two Bonds). The standards of performance set forth in this Section 9.15 are made solely for the benefit of Big Rivers and shall not be enforceable by Henderson against any of the LG&E Companies. 9.16 Communication of Certain Events. Station Two Subsidiary shall communicate to Big Rivers, both orally and in writing as soon as possible after the event, regarding (i) all significant operating and management events relating to or affecting Station Two or the other Station Two Assets, including, but not limited to, all forced and scheduled outages, partial or full load restrictions due to equipment unavailability, deaths or injuries, governmental inquiries or investigations, claims under any insurance policies, Operating Emergencies and any other events or causes which may, in Station Two Subsidiary's reasonable judgment, jeopardize personnel or property or result in the unavailability of major equipment used in the -100- operation of Station Two, and (ii) all events and circumstances which are required by Laws to be reported to the KPSC or any other governmental or regulatory authority or any insurance carrier, in each case regarding the Station Two Assets or the operation thereof. 9.17 Additional Payments to Big Rivers. Notwithstanding anything in Section 9, entitled "Phase II Assignment," to the contrary, Station Two Subsidiary shall pay to Big Rivers the Additional Payments promptly following Station Two Subsidiary's receipt of the corresponding 14 1/2 Cent Payments from Henderson, the same as contemplated in Section 8.10(b) of this Agreement. In the event that Henderson shall off-set against the 14 1/2 Cent Payment due and owing Station Two Subsidiary an amount payable by Station Two Subsidiary or any of its Affiliates to Henderson, and as a consequence thereof the corresponding Additional Payment payable to Big Rivers pursuant to this Section 9.17 is reduced by such off-set, Station Two Subsidiary shall pay to Big Rivers the amount by which that Additional Payment was so reduced by Henderson's exercise of such off-set, which payment shall be made promptly following Station Two Subsidiary's receipt of sufficient information relating to such off-set to determine the amount of the corresponding reduction in such Additional Payment. 10. ADDITIONAL AGREEMENTS OF THE PARTIES. 10.1 Interim Period Reconciliations. (a) In any Year which includes either the Effective Date or the date of termination or expiration of the Term, Big Rivers, on the one hand, and Station Two Subsidiary and LEM, on the other hand, hereby agree that, on or before 30 days after the Effective Date or the date of termination or expiration of the Term, as the case may be (or as soon thereafter as is reasonably possible, in the event the relevant data is not available within 30 days), there shall be a reconciliation between Big Rivers and the LG&E Companies of the following charges and costs actually paid or accrued while Station Two was being operated by Big Rivers prior to the Effective Date or by Station Two Subsidiary during the Term, as compared with the estimates -101- of such charges and costs paid or accrued (based on the Annual Budget with Henderson) during the period of operation of Station Two by Big Rivers or Station Two Subsidiary, respectively: (1) all charges and costs for operation and maintenance of Station Two under the Station Two Operating Agreement, as actually paid or accrued by Big Rivers or Station Two Subsidiary, respectively, during the period of their respective operations of Station Two, as compared with payments made or accrued by Henderson to Big Rivers or Station Two Subsidiary, respectively, under Section 13.6 of the Station Two Operating Agreement based upon estimates included in the Annual Budget; and (2) all amounts paid or accrued to Henderson or the Trustee (pursuant to Section 6.1 of the Station Two Power Sales Agreement) of estimated Capacity costs and charges (based on the Annual Budget with Henderson) by Big Rivers or Station Two Subsidiary or LEM during the period of Big Rivers' and Station Two Subsidiary's respective operations of Station Two, as compared with the actual aggregate Capacity costs and charges that should have been paid or accrued (based on actual charges and costs so paid or accrued in the operation of Station Two) by Big Rivers or by LEM or Station Two Subsidiary during the period of their respective operation of Station Two. (b) For purposes of reconciling operating and maintenance costs and Capacity charges between Big Rivers, on the one hand, and LEM and Station Two Subsidiary, on the other hand, before the Effective Date, the provisions of this Section 10.1(b) shall govern. If (1) the sum of the operating and maintenance costs actually paid or accrued by Big Rivers during the Partial Year prior to the Effective Date plus the estimated Capacity costs and charges paid or accrued by Big Rivers during the Partial Year prior to the Effective Date exceeds (2) the sum of the estimated operating and maintenance costs paid or accrued by Henderson as a reimbursement to Big Rivers during the Partial Year prior to the Effective Date plus the Capacity costs and charges that should have been paid or accrued (based on actual charges and costs paid or accrued in the operation of Station Two) by Big Rivers during the Partial Year prior to the Effective Date, then LEM and/or Station Two Subsidiary shall pay to Big Rivers the excess amount on the next Monthly Payment Date. If, however, the sum described in (2), above, exceeds the sum described in (1), above, then LEM and/or Station Two Subsidiary shall have the right to off-set the amount of such deficiency against any payments due and owing by LEM and/or Station Two Subsidiary to Big Rivers on the next Monthly Payment -102- Date or, if no sums shall then be due and owing, Big Rivers shall promptly pay the amount of the deficiency to LEM and/or Station Two Subsidiary on the next Monthly Payment Date. As between Big Rivers, on the one hand, and Station Two Subsidiary and LEM, on the other hand, such Parties acknowledge and agree that Station Two Subsidiary and LEM shall either be entitled to receive the benefit of any sums payable by Henderson, or shall be obligated to pay Henderson any sums owed to Henderson, as a result of the annual reconciliations required by Section 9.4 of the Station Two Power Sales Agreement and Section 16.6 of the Station Two Operating Agreement for the Year which includes the Effective Date. Amounts which have accrued or become payable during the Partial Year but which have not been paid to the relevant Party as of the Effective Date shall continue to be payable to that Party following the Effective Date by the Party having the obligation to make such payment prior to the Effective Date. (c) For purposes of reconciling operating and maintenance costs and Capacity charges between Big Rivers, on the one hand, and LEM and Station Two Subsidiary, on the other hand, incurred during the Partial Year prior to the date of expiration or termination of this Agreement, the provisions of this Section 10.1(c) shall govern. If during the Partial Year ending on the termination or expiration date: (1) the sum of the operating and maintenance costs actually paid or accrued by Station Two Subsidiary in such Partial Year plus the estimated Capacity costs and charges (A) during the Phase I Subcontract Term, reimbursed in or reimbursable for such Partial Year to Big Rivers by LEM and/or Station Two Subsidiary (including all dollar-for-dollar reimbursements of Big Rivers for certain Capacity charges associated with Station Two operating and maintenance expenses (including payments for Henderson Incremental Environmental O&M), Station Two Subsidiary's (or its successors' or permitted assigns') share of all Station Two Improvements funded during that Partial Year, and all reimbursements of Big Rivers for Station Two Subsidiary's (or its successors' or permitted assigns') corresponding share of Capacity charges incurred during such Partial Year associated with Debt Service), and/or (B) during the Phase II Assignment Term, paid in or payable for such Partial Year directly to Henderson or the Trustee by Station Two Subsidiary -103- (or its successors or permitted assigns) (reduced, however, by the amounts that Big Rivers reimburses or must reimburse Station Two Subsidiary for Capacity charges in such Partial Year associated with Big Rivers' share of Debt Service, Big Rivers' share of Henderson Incremental Environmental O&M or Big Rivers' share of all Station Two Improvements funded during that Partial Year) exceeds (2) the sum of the estimated operating and maintenance costs paid or accrued by Henderson as a reimbursement to Station Two Subsidiary during such Partial Year plus the Capacity costs and charges that (based on actual charges and costs paid or accrued in the operation of Station Two during such Partial Year, and not based on estimates) should have been either (A) during the Phase I Subcontract Term, reimbursed in or reimbursable for such Partial Year to Big Rivers by LEM and/or Station Two Subsidiary (including all dollar-for-dollar reimbursements of Big Rivers for certain Capacity charges associated with Station Two operating and maintenance expenses (including payments for Henderson Incremental Environmental O&M), Station Two Subsidiary's (or its successors' or permitted assigns') share of all Station Two Improvements funded during that Partial Year, and all reimbursements of Big Rivers for Station Two Subsidiary's (or its successors' or permitted assigns') corresponding share of Capacity charges incurred during such Partial Year associated with Debt Service), and/or (B) during the Phase II Assignment Term, paid in or payable for the Partial Year directly to Henderson or the Trustee by Station Two Subsidiary (or its successors or permitted assigns) (reduced, however, by the amounts that Big Rivers reimburses or must reimburse Station Two Subsidiary for Capacity charges incurred during such Partial Year associated with Big Rivers' share of Debt Service, Big Rivers' share of Henderson Incremental Environmental O&M or Big Rivers' share of Station Two Improvements funded during that Partial Year); then Big Rivers shall pay to LEM and/or Station Two Subsidiary such excess amount within 45 days after the termination or expiration date (or, if the determination of those amounts cannot reasonably be made within the initial 30- -104- day period as contemplated in Section 10.1(a), then within 15 days after that determination can be reasonably made). If, however, the sum described in (2), above, exceeds the sum described in (1), above, then Station Two Subsidiary (or its designated Affiliate) shall pay to Big Rivers the amount of such deficiency within 45 days after the termination or expiration date (or, if the determination of those amounts cannot reasonably be made within the initial 30-day period as contemplated in Section 10.1(a), then within 15 days after that determination can be reasonably made). As between Big Rivers, on the one hand, and Station Two Subsidiary and LEM, on the other hand, such Parties acknowledge and agree that neither Station Two Subsidiary nor LEM, nor any other LG&E Company, shall have any right or interest in the proceeds due from Henderson, or any duty or obligation to Big Rivers or Henderson for proceeds due to Henderson, in the annual reconciliation required by Section 9.4 of the Station Two Power Sales Agreement and Section 16.6 of the Station Two Operating Agreement for the Year which includes the date of expiration or termination of the Term. Amounts which have accrued or become payable during the Partial Year prior to the expiration or termination of the Term, but which have not been paid to the relevant Party as of the date of that expiration or termination, shall continue to be payable to that Party thereafter by the Party having the obligation to make such payment prior to the date of expiration or termination of the Term. (d) Notwithstanding anything herein to the contrary, the agreements set forth above are solely between Big Rivers, Station Two Subsidiary and LEM, and shall not impose upon Henderson any duty or obligation to Big Rivers, Station Two Subsidiary or LEM relating to such interim period reconciliations or the annual reconciliations required by the Station Two Operating Agreement and the Station Two Power Sales Agreement which are in addition to or different than the duties and obligations required of Henderson under such Station Two Contracts; provided, however, that Henderson hereby agrees to reasonably cooperate and assist Big Rivers, Station Two Subsidiary and LEM in determining the actual and estimated charges and costs paid, payable or accrued by the Parties for the respective Partial Years of operation of Station Two by Big Rivers and Station Two Subsidiary, respectively. 10.2 Transfer of Title to Station Two Surplus Capacity. Consistent with and subject to the provisions of Sections 8.12(e), 8.12(f), 9.7(c), and 9.7(e) of this Agreement, during the Phase I Subcontract Term and the Phase II Assignment Term, but only during such period as the Letter Ruling shall continue to limit the distribution of Energy from Station Two solely to customers within Henderson and Daviess Counties, all Energy associated with the Station Two -105- Unit Output sold by Station Two Subsidiary, LEM or their respective Affiliates from Station Two shall be delivered to Big Rivers or Henderson, or to Henderson Union, under the LEM/Henderson Union Agreement for resale to Alcan, as applicable, and title thereto transferred by Station Two Subsidiary, LEM or their Affiliate, as applicable, at the point of interconnection between Station Two and Big River's Transmission System without exception. Big Rivers and Henderson hereby agree to accept title to such Energy (exclusive of Energy sold under the LEM/Henderson Union Agreement), as applicable, and delivery of such Energy, as applicable, from Station Two Subsidiary, LEM or their Affiliate, as applicable, at such point of interconnection during such period as the restriction of the Letter Ruling shall remain in effect. Big Rivers and Henderson each hereby acknowledge and agree that the delivery by Station Two Subsidiary, LEM or their Affiliate of title to the Power from Station Two at such point of interconnection shall not constitute a violation of the delivery requirements in the Letter Ruling or any other requirements or restrictions relating to delivery of the Power from Station Two set forth in the Station Two Contracts or the Bond Ordinance, and thereafter no LG&E Company shall have any further responsibility for compliance with the distribution requirements of the Letter Ruling, the Station Two Contracts and the Bond Ordinance with respect to that Power. Following the retirement or the redemption in full of the Station Two Bonds, Station Two Subsidiary, LEM or their Affiliate may, but shall not be obligated to, deliver all Power from Station Two sold by it to Big Rivers or to Henderson Union at that same point of interconnection. 10.3 Sharing of Station Two O&M or R&R Account Balances. (a) At the Closing, the chief financial officer of Big Rivers and the General Manager of Henderson shall execute and deliver a certificate to the LG&E Companies certifying and agreeing to the following: (1) the balances of funds contained in the Station Two O&M Account and the Station Two R&R Account as of the Effective Date; (2) the total amount of contributions and payments of Big Rivers and Henderson, respectively, into the Station Two O&M Account and the Station Two R&R Account with respect to that portion (if any) of the combined balance in such accounts that exceeds $1,250,000; and (3) Big Rivers' and Henderson's respective shares, as of the Effective Date, of the excess (if any) of the balance of -106- such funds (with any investments included in such accounts to be valued in accordance with the Bond Ordinance) in the Station Two O&M Account and the Station Two R&R Account, respectively, over $1,250,000 (taking into consideration, for purposes of such calculation, any accrued and unpaid expenses on the Effective Date, and any outstanding, uncleared checks or unconfirmed wire transfers as of the Effective Date). Big Rivers' share of each such excess account balance (if any) is referred to hereinafter as the "O&M Closing Balance" as such excess may exist in the Station Two O&M Account and the "R&R Closing Balance" as such excess may exist in the Station Two R&R Account. (b) Notwithstanding anything to the contrary in Section 1(b) of the Agreement dated April 8, 1980, between Big Rivers and Henderson, and provided that this Agreement shall be in force and effect on the date of the disbursement of the then remaining balances of monies contained in the Station Two O&M Account and the Station Two R&R Account in accordance with Section 1 of said Agreement, to the extent that the combined balance of such accounts are then in excess of $1,250,000, Henderson shall, on that disbursement date, disburse to Station Two Subsidiary a proportionate share of such excess account balances, which is determined based upon the percentage of the excess balances that were contributed by Big Rivers and Station Two Subsidiary (and all other LG&E Companies), as compared with the percentage of those excess balances that were contributed by Henderson. Station Two Subsidiary, in turn, shall have the obligation to make disbursements (less appropriate off-sets as may be applicable thereto and permissible under Section 10.3(c), below) to Big Rivers of that portion of such excess balances in the Station Two O&M Account and the Station Two R&R Accounts determined in Section 10.3(c) of this Agreement. Upon making the disbursement to Station Two Subsidiary from excess account balances as provided above, neither Henderson nor any LG&E Company shall have any further responsibility or liability to Big Rivers for any payments from excess account balances under the Agreement dated April 8, 1980 or under this Agreement. (c) Within five (5) Business Days after Station Two Subsidiary receives a disbursement of the excess account balances from Henderson, as provided in (b) above, Station Two -107- Subsidiary shall allocate and pay to Big Rivers the following sums: (i) an amount equal to the O&M Closing Balance; (ii) an amount equal to the sum of the R&R Closing Balance plus any additional sums over the R&R Closing Balance as may have been disbursed by Henderson to Station Two Subsidiary as excess fund balances in the Station Two R&R Account, but then only to the extent those excess fund balances represent amounts that were contributed by Big Rivers to that account since the Effective Date; and (iii) an amount equal to all interest that has accrued on the O&M Closing Balance and the R&R Closing Balance, that has not otherwise been applied toward the Debt Service, and that has been disbursed by Henderson to Station Two Subsidiary; provided, that Station Two Subsidiary shall have the right to off-set against the payment it is required to make (if any) to Big Rivers under (i), (ii) and (iii), above, (x) any amounts that may then be due and payable to Station Two Subsidiary pursuant to Section 10.3(e) of this Agreement, and (y) any then existing deficiency in any payment obligations of Big Rivers under this Agreement and the Station Two Contracts relating to the Capacity payments and reimbursement payments described above. Any remaining balances from the Station Two O&M Account and the Station Two R&R Account that are disbursed by Henderson to Station Two Subsidiary to be retained by Station Two Subsidiary. In addition, Station Two Subsidiary shall have no obligation to pay to Big Rivers any deficiency in the amounts disbursed to Station Two Subsidiary by Henderson relating to the Station Two R&R Account below the R&R Closing Balance to the extent such deficiency is caused by a withdrawal by Henderson or the Trustee of funds from such account that were used to fund a Station Two Improvement (except to the extent that an LG&E Company otherwise has a current obligation under this Agreement to pay to Big Rivers (or into the Station Two Improvements Account as required under Section 8.17(d) or Section 9.10(c) of this Agreement) its share of the capital costs for such Station Two Improvement funded by the amounts so withdrawn from that account at the time of that withdrawal). To the extent those additional sums from the Station Two R&R Account are less than the aggregate contributions made by Big Rivers and Station Two Subsidiary, those additional sums shall be prorated between Big Rivers and Station Two Subsidiary based on the portion of unreimbursed payments made into that account after the Effective Date by Big Rivers and Station Two Subsidiary, respectively, since the Effective Date. -108- (d) Notwithstanding that Big Rivers shall at all times during the Term have the obligation to pay the Trustee (during the Phase I Subcontract Term) or to pay or reimburse Station Two Subsidiary (during the Phase II Assignment Term) for the portion of the Capacity charges attributable to required payments into the Station Two R&R Account pursuant to Sections 8.12(a) and 9.7(b) of this Agreement, respectively, should any funds be withdrawn from the Station Two R&R Account by Henderson to fund an operating and maintenance expense for Station Two during the Phase I Subcontract Term or the Phase II Assignment Term (which is not otherwise a capital expense characterized by Big Rivers and the LG&E Companies in this Agreement as a Station Two Improvement), within five (5) Business Days after notice is given by Big Rivers or Henderson, of the withdrawal of those funds from that account specifying the type and character of such expenditure made, Station Two Subsidiary (or its designated Affiliate) shall pay to the Trustee (for further credit to the Station Two R&R Account) the amount so withdrawn for the operating and maintenance expenditure from that account and shall not require Big Rivers to reimburse it for such payment. Any such payments by Station Two Subsidiary (or its designated Affiliate) shall, during the Phase I Subcontract Term, be on behalf of Big Rivers, and shall, during the Phase II Assignment Term, be on behalf of Station Two Subsidiary. In the event, following the distribution of funds described in (c), above, the Station Two R&R Account contemplated in the Bond Ordinance is eliminated and replaced, with the Parties' approval, by another similar account to fund renewals, replacements and additions at Station Two, the payments contemplated in this Section 10.3(d) as being payable by Station Two Subsidiary to the Trustee shall be paid instead into that replacement account. In the event such a replacement account is not so established by the Parties following the disbursement of excess funds from the Station Two R&R Account, then, notwithstanding anything contained elsewhere in this Section 10.3 to the contrary, Station Two Subsidiary shall have no obligation to repay to Henderson or the Trustee the amount previously withdrawn from the Station Two R&R Account for such operating and maintenance expenses, but shall pay such amounts to Big Rivers to the extent that the withdrawal occurred prior to Henderson's disbursements contemplated in (b), above, and then only to the extent such withdrawal had the effect of reducing the amounts from the Station -109- Two R&R Account that would otherwise have been payable by Station Two Subsidiary to Big Rivers as contemplated in (c), above. (e) Henderson is only entitled to use funds in the Station Two O&M Account for the payment of "Operating Expenses" as defined in the Bond Ordinance, subject, however, to the pledge in favor of bondholders thereunder. Notwithstanding that Station Two Subsidiary shall at all times during the Term have the obligation to pay or reimburse Big Rivers (during the Phase I Subcontract Term) or to pay the Trustee (during the Phase II Assignment Term) for the portion of the Capacity charges attributable to required payments into the Station Two O&M Account to restore minimum fund balances in that account pursuant to Sections 8.12(b) and 9.7(a) of this Agreement, respectively, should any funds be withdrawn from the Station Two O&M Account by Henderson to fund a Station Two Improvement, within five (5) Business Days after notice is given by Station Two Subsidiary or Henderson of the withdrawal of those funds from that account specifying the type and character of such expenditure made, Station Two Subsidiary shall be permitted to withdraw from the Station Two Improvements Account sufficient funds to restore to the Station Two O&M Account the amount so withdrawn for the Station Two Improvement from that account, with Big Rivers and Station Two Subsidiary each bearing responsibility for the amounts so withdrawn from the Station Two Improvements Account based on their respective Station Two Improvement Sharing Ratios or if there is not sufficient funds in the Station Two Improvements Account to restore in full the amounts so withdrawn from the Station Two O&M Account for the Station Two Improvement, then Big Rivers shall (1) during the Phase I Subcontract Term pay to the Trustee (for further credit to the Station Two O&M Account) an amount equal to the product of its then applicable Station Two Improvement Sharing Ratio multiplied by the amount so withdrawn for the Station Two Improvement from that account (which LEM shall not be required to reimburse Big Rivers for such payment) and (2) during the Phase II Assignment Term pay to Station Two Subsidiary (for its account) an amount equal to the product of its then applicable Station Two Improvement Sharing Ratio multiplied by the amount withdrawn for the Station Two Improvement from that account. The LG&E Companies and Big Rivers intend that the foregoing provisions of this Section 10.3(e), and Big Rivers' payment obligations to the -110- Trustee and to Station Two Subsidiary hereunder, shall be subject to the agreements between the LG&E Companies and Big Rivers in this Agreement relating to Station Two Improvements, including, without limitation, those agreements relating to the funding and payment for Station Two Improvements. (f) (1) The Parties acknowledge that, pursuant to Section 19.3 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments), Big Rivers and Henderson have agreed to separately establish and fund, on or before the date of Henderson's disbursement of funds as described in (b), above, a new Big Rivers Station Two O&M Fund (the "Big Rivers Replacement O&M Fund") and a new Henderson Station Two O&M Fund (the "Henderson Replacement O&M Fund") (such funds being collectively referred to herein as the "Replacement O&M Funds"), which funds are intended to be used to support the operation and maintenance of Station Two throughout the remaining term of the Station Two Power Sales Agreement, subject to the provisions of that agreement. Big Rivers and Henderson have further agreed to maintain a minimum balance in their respective Replacement O&M Funds, and to replenish that fund up to its required minimum balance with monthly payments thereto (but subject to certain maximum monthly payment limits). In the event the Closing has occurred and this Agreement remains in effect, Station Two Subsidiary hereby agrees to fully fund the Big Rivers Replacement O&M Fund in the amount required from Big Rivers under Section 19.3 of the Station Two Power Sales Agreement (and in lieu of Big Rivers' funding obligation under that section), promptly following the disbursement of funds to Station Two Subsidiary described in (b), above. If for whatever reason Big Rivers shall have funded the Big Rivers Replacement O&M Fund, in whole or in part, prior to Station Two Subsidiary's funding thereof as required by the preceding sentence, then promptly following the payment by Station Two Subsidiary of funds into the Big Rivers Replacement O&M Fund, in accordance with the preceding sentence, Henderson shall pay to Big Rivers from the Big Rivers Replacement O&M Fund an amount equal to the lesser of the amount of Station Two Subsidiary's payment or the amount so funded by Big Rivers into the Big Rivers Replacement O&M Fund. Furthermore, Station Two Subsidiary agrees to replenish that fund up to that minimum balance (i.e., that amount required from Big Rivers under the 1998 Amendments) in -111- the event amounts therein are withdrawn by Station Two Subsidiary or Henderson to fund operating and maintenance expenses required during the Term as contemplated below (but subject to the monthly funding limits provided for in the Station Two Power Sales Agreement). Once fully funded, neither Big Rivers nor Station Two Subsidiary shall have any obligation to fund the Big Rivers Replacement O&M Fund to a level above the amount provided for in the 1998 Amendments. In the event the initial funding of the Big Rivers Replacement O&M Fund by Station Two Subsidiary is required during the Phase I Subcontract Term, Station Two Subsidiary shall deposit those amounts directly into that account on behalf of Big Rivers, with the assistance of Henderson. In the event that amounts are withdrawn by Henderson from the Big Rivers Replacement O&M Fund during the Phase I Subcontract Term to fund one or more Station Two Improvements, but those amounts have not been withdrawn by Station Two Subsidiary from the Station Two Improvements Account or Big Rivers' share thereof has not been repaid by Big Rivers to the Trustee prior to the disbursement of funds by Henderson as contemplated in (e), above, then Big Rivers shall pay its share of the amounts so withdrawn for that Station Two Improvement based on its Station Two Improvement Sharing Ratio) directly to Station Two Subsidiary (for its account), and Station Two Subsidiary shall have no obligation to pay such funds into the Big Rivers Replacement O&M Fund to the extent that Station Two Subsidiary has already fully funded that account as contemplated above. (2) During the Term, the Big Rivers Replacement O&M Fund shall be maintained by Henderson as an interest bearing depository account at a commercial bank in Henderson, Kentucky that is reasonably acceptable to Station Two Subsidiary. All interest accruing on that account shall be the sole property of Station Two Subsidiary, and shall be held by Henderson for the sole benefit of Station Two Subsidiary and shall not be disbursed except as provided in (4), below. The Parties agree that any funds deposited by Station Two Subsidiary into the Big Rivers Replacement O&M Fund (exclusive of interest accruing thereon, which may not be utilized by Henderson) may be used by Henderson and Station Two Subsidiary only to fund costs and expenses required for the operation and maintenance of Station Two during the Term, and which would have been required or permitted to be paid or incurred as "Operating Expenses" under the Bond Ordinance, but then, in the case of -112- withdrawals from that fund by Henderson, only to the extent that (y) Station Two Subsidiary has failed or refused to directly fund those operating and maintenance expenses (as Big Rivers' subcontractor during the Phase I Subcontract Term or for its own account during the Phase II Assignment Term) in the ordinary course, or thereafter promptly following a written request to do so by Henderson, and (z) Henderson has made a corresponding withdrawal from the Henderson Replacement O&M Fund to fund a portion of that same cost or expense in proportion to the then effective allocation of Station Two Capacity between Henderson and Big Rivers (during the Phase I Subcontract Term) or Station Two Subsidiary (during the Phase II Assignment Term), in accordance with Section 3 of the Station Two Power Sales Agreement. No such funds which are so deposited by Station Two Subsidiary shall be used to fund Station Two Improvements, Station Two Debt Service obligations or any other costs or expenses, or to prepay expenditures required for the operation or maintenance of Station Two following the Term, except that Henderson shall have the right of off-set against such funds to the extent that Station Two Subsidiary has not satisfied any payment obligation which became due and owing to Henderson during the Phase I Subcontract Term or the Phase II Assignment Term. In addition, no funds of Henderson or Big Rivers, whether or not relating to Station Two, shall be deposited or commingled with the amounts deposited by Station Two Subsidiary into the Big Rivers Replacement O&M Fund, or the interest accruing thereon. (3) During the Phase I Subcontract Term, only Henderson shall have signatory authority to deposit funds into, and withdraw funds from, the Big Rivers Replacement O&M Fund. During the Phase II Assignment Term, only Henderson and Station Two Subsidiary shall have such signatory authority. (4) On May 31 of each Year during the Term, Henderson shall withdraw and pay to Station Two Subsidiary all interest accrued on amounts deposited in the Big Rivers Replacement O&M Fund during the prior Year. Upon any expiration or earlier termination of this Agreement, Station Two Subsidiary shall be entitled to an immediate disbursement of all amounts that were previously funded by Station Two Subsidiary into the Big Rivers Replacement O&M Fund and that remain in that account as of the expiration or termination of -113- this Agreement, together with (A) all accrued but unpaid interest thereon, and (B) an additional payment from Henderson in the amount of the portion (if any) of the Big Rivers Replacement O&M Fund that was previously withdrawn by Henderson for use in violation of the restrictions set forth above. Promptly, following the disbursement to Station Two Subsidiary described above, Big Rivers shall separately fund the Big Rivers Replacement O&M Fund to the same extent as would have initially been required of it under Section 19.3 of the Station Two Power Sales Agreement. Nothing contained in this Section 10.3(f) shall affect or limit any rights that Station Two Subsidiary or any of its Affiliates may have to reimbursement from Big Rivers (during the Phase I Subcontract Term) or Henderson (during the Phase II Assignment Term) for operating and maintenance expenses as contemplated elsewhere in this Agreement. (g) (1) The Parties acknowledge that, pursuant to Section 19.2 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments), Big Rivers and Henderson have agreed to separately establish and fund, on or before the date of Henderson's disbursement of funds as described in (b), above, and thereafter as contemplated in that agreement, a new Big Rivers Station Two Renewals and Replacements Fund (the "Big Rivers Replacement R&R Fund") and a new Henderson Station Two Renewals and Replacements Fund. Those funds are intended to be used to support expenditures for renewals and replacements for Station Two throughout the remaining term of the Station Two Power Sales Agreement, subject to the provisions of that agreement. Notwithstanding anything contained in this Agreement or any Station Two Contract to the contrary, the Parties agree that, throughout the Phase I Subcontract Term and the Phase II Assignment Term, the provisions of Section 19.2 of the Station Two Power Sales Agreement shall be suspended and shall have no applicability to the Parties, and the provisions of this Section 10.3(g) shall govern the Parties' respective rights and obligations in lieu of Section 19.2. (2) In the event the Closing occurs and this Agreement remains in effect, and in the event the disbursement of funds to Station Two Subsidiary contemplated in (b), above, shall have occurred, then LEM (during the Phase I Subcontract Term) or Station Two -114- Subsidiary (during the Phase II Assignment Term) hereby agrees to thereafter remit and pay to Henderson by wire transfer, within two (2) Business Days following that LG&E Company's receipt of a written request therefor from Henderson, immediately available funds in an amount not to exceed $600,000 in the aggregate from LEM and Station Two Subsidiary collectively (the "Maximum Funding Limit"), for use by Henderson solely to fund one or more major renewals or replacements with respect to Station Two that are then permitted to be made under the Station Two Contracts in order to keep Station Two in good operating condition at its rated capacity then in effect (including without limitation, any such major renewals or replacements required to correct any unusual loss or damage with respect to Station Two). Henderson's use of the funds contemplated above shall be further limited to those situations where a sufficient budget was not previously established in the then-current Annual Budget for Station Two, but then only to the extent that the expenditure for such renewal or replacement is required on an expedited basis and in advance of the time by which the Parties could otherwise meet to separately budget for the expenditure. Henderson's written request for funds contemplated above shall be effective only if delivered to LEM or Station Two Subsidiary (as applicable) during the Phase I Subcontract Term or the Phase II Assignment Term, and then only if it includes a description of the major renewal(s) or replacement(s) for which the funds are requested, the reason for their expenditure, the amount of funds so requested, Henderson's good faith estimate of the actual cost of the relevant renewal(s) or replacement(s), and the bank account of Henderson to which the funds are to be wire transferred (with appropriate wiring instructions). LEM and Station Two Subsidiary shall not be responsible for delays incurred in any wire-transfer of funds to Henderson, so long as their bank has initiated that wire transfer within the two (2)-Business Day period described above. (3) Henderson shall be entitled, from time-to-time, in its discretion, to submit multiple requests for funds from LEM or Station Two Subsidiary pursuant to this Section 10.3(g); provided, however, that the following additional conditions or limitations shall apply to the funding obligations of LEM and Station Two Subsidiary hereunder for all purposes: (i) the maximum amount of funds that LEM and Station Two Subsidiary, collectively, shall be -115- obligated to remit and pay to Henderson throughout the Term under this Section 10.3(g) for all renewals and replacements, collectively, shall not exceed the Maximum Funding Limit, (ii) Henderson may not request funds hereunder in increments of less than $10,000, (iii) LEM or Station Two Subsidiary (as applicable) shall not be required to remit or pay funds to Henderson hereunder in excess of that portion of the cost of the relevant renewal(s) or replacement(s) corresponding with the Capacity from Station Two then reserved for use by Big Rivers or Station Two Subsidiary (as contemplated in the Station Two Power Sales Agreement and/or this Agreement), (iv) Henderson shall not request funds in excess of its good faith estimate of the cost of such renewal(s) or replacement(s), and hereby agrees to promptly repay to LEM or Station Two Subsidiary (as applicable) any amounts funded by them in excess of the actual cost thereof (which obligation of Henderson shall be deemed to survive any expiration or termination of this Agreement), and (v) Henderson must also contemporaneously fund, out of its own resources, that portion of the cost of such renewal(s) and replacement(s) corresponding with Henderson's reserved Capacity from Station Two at that time. (4) Upon any expiration or termination of this Agreement, Henderson agrees to immediately cease all expenditures of funds previously remitted and paid by LEM or Station Two Subsidiary to Henderson as contemplated in this Section 10.3(g), and agrees to promptly remit and pay to LEM or Station Two Subsidiary, as applicable, all such funds then remaining in the possession or control of Henderson, subject, however, to any rights of off-set Henderson may have against any LG&E Company under this Agreement or the Assigned Station Two Contracts. Big Rivers agrees that, within two (2) Business Days following that expiration or termination, Big Rivers shall fund the Big Rivers Replacement R&R Fund, to the same extent as would have initially been required of it under Section 19.2 of the Station Two Power Sales Agreement upon Henderson's release of the funds as provided for in Section 10.3(b) of this Agreement, and Henderson shall thereafter be entitled to withdraw amounts from that fund as contemplated in the Station Two Power Sales Agreement. Henderson further agrees to promptly reimburse LEM or Station Two Subsidiary (as applicable) for any amounts paid by them under this Section 10.3(g) to the extent Henderson receives insurance proceeds -116- by reason of the casualty, damage, event or other circumstance giving rise to the relevant renewal(s) or replacement(s). (5) Except as provided above with respect to Section 19.2 of the Station Two Power Sales Agreement, and as expressly contemplated in this Section 10.3(g), nothing contained in this Section 10.3(g) is intended by the Parties to modify their respective rights and obligations under this Agreement or any Station Two Contract with respect to renewals or replacements relating to Station Two or the funding of the same. Consistent with the foregoing, the limitations on LEM's and Station Two Subsidiary's respective obligations to provide funds to Henderson pursuant to this Section 10.3(g) shall not affect, limit or eliminate the obligation of any LG&E Company to Henderson or Big Rivers to ultimately share responsibility for the cost of such renewals or replacements to the extent otherwise required under the terms of this Agreement or the Assigned Station Two Contracts, nor shall they affect, limit or eliminate the obligation of Henderson or Big Rivers (as applicable) under this Agreement or any Station Two Contract to reimburse the LG&E Companies, or any of them, for such costs, or to otherwise share responsibility for the same; provided, the Parties each agree that any payment of funds by LEM or Station Two Subsidiary to Henderson pursuant to this Section 10.3(g), upon the request of Henderson as contemplated above, shall, to the extent of that payment, be deemed to satisfy any obligations of the LG&E Companies and Big Rivers to Henderson to thereafter fund that portion of the relevant renewals or replacements, whether under this Agreement or any Station Two Contracts, including without limitation, any obligation to pay that portion of any Capacity charges to Henderson or the Trustee attributable to the costs and expenses of such renewal(s) or replacement(s). (6) In the event LEM and Station Two Subsidiary, or either of them, shall be required at any time to provide funds to Henderson pursuant to this Section 10.3(g), that LG&E Company shall provide Big Rivers with written notice thereof, and Big Rivers agrees to reimburse that LG&E Company for its share (based on its Station Two Improvement Sharing Ratio) of such amounts within five (5) Business Days after its receipt of that written notice. -117- 10.4 [Intentionally Omitted]. 10.5 Two County Restriction. In addition to any covenants or obligations of Big Rivers under the Station Two Contracts, Big Rivers hereby further covenants and agrees with the LG&E Companies and Henderson that, during the Phase I Subcontract Term and the Phase II Assignment Term, Big Rivers will comply with the requirements of the Letter Ruling and Section 21.1 of the Station Two Power Sales Agreement with respect to all Station Two Power received by it from any LG&E Company or transmitted by it over its transmission system. The preceding covenant by Big Rivers shall continue until such time as compliance with the terms of the Letter Ruling are no longer required under applicable Laws to maintain and preserve the exemption from federal income taxation of the interest on the Station Two Bonds. Notwithstanding anything in this Agreement to the contrary, LEM and Station Two Subsidiary hereby acknowledge and agree that, during the period that the Letter Ruling shall remain in effect and shall continue to limit the distribution of Energy from Station Two to customers within Henderson and Daviess Counties, (a) LEM and Station Two Subsidiary shall sell Energy associated with the Station Two Surplus Capacity (directly or indirectly) only to either Big Rivers, as contemplated in this Agreement and in accordance with the Power Purchase Agreement, to Henderson, or to Henderson Union pursuant to the terms of LEM/Henderson Union Agreement for resale to Alcan, in each such case solely for distribution within such two county area, and (b) the total amount of Energy produced from Station Two during the month divided by the number of hours in the applicable month shall not exceed the KWh Energy consumption by those retail customers served by Henderson, Henderson Union or Green River located within Henderson and Daviess Counties divided by the number of hours in the applicable month. 10.6 Two Counties' Demand. During the Phase I Subcontract Term and the Phase II Assignment Term, the LG&E Companies or Big Rivers shall have the right, in their discretion, upon written notice to Henderson and the other Party, to request that the Station Two Bonds be refinanced in such a manner as will eliminate the two county limitation of the -118- Letter Ruling on the distribution and sale of Energy from Station Two, in the event the LG&E Companies or Big Rivers, as the case may be, shall at any time reasonably determine that the demand for Energy of the customers located in Henderson and Daviess Counties to whom an LG&E Company or Big Rivers (directly or through the Members) shall have a legal and contractual right to distribute such Energy, is or is likely to become less than the amount of Station Two Unit Output that is then or shall thereafter become available, for whatever reason, including, without limitation, for the reason set forth in Section 8.12(f) and 9.7(e) of this Agreement. The Parties hereby agree that, immediately following receipt of such a request from the LG&E Companies or Big Rivers, as the case may be, Henderson, Big Rivers and the LG&E Companies shall take immediate steps, using their respective commercially reasonable efforts, to cause Henderson to refinance the Station Two Bonds at the earliest possible time with taxable bonds or other forms of indebtedness of Henderson that will eliminate the limitation of the Letter Ruling on distribution and sale of the Energy from Station Two outside the two counties, and that otherwise contains terms that are customary and commercially available at the time of such request for the type of financing sought by the Parties. The Parties shall reasonably cooperate with each other and take all action within their reasonable control as may be reasonably necessary to complete the refinancing. The Parties hereby agree to share all of the costs, fees and expenses associated with such refinancing, including the incremental increase (if any) in interest costs (determined on a net present value basis using a discount rate of eight percent (8%)) associated with refinancing the Station Two Bonds with other taxable or tax-exempt indebtedness (collectively, the "Refinancing Costs"), in proportion to the percentage of Capacity allocated to Henderson, on the one hand, and to Big Rivers or Station Two Subsidiary, on the other hand, for the month immediately preceding the month in which the refinancing occurs, and with the further agreement between Big Rivers and the LG&E Companies that the costs, fees and expenses of such refinancing allocated to Big Rivers and Station Two Subsidiary shall be borne equally by Big Rivers and Station Two Subsidiary. Notwithstanding the foregoing, in the event that, during the period commencing on the date of the refinancing of the Station Two Bonds and expiring on the earlier of March 1, 2002 or the date which is three (3) years following the date of that refinancing, Henderson has not recouped its proportionate share of the Refinancing Costs from profits realized from sales of -119- capacity or energy from its Station One generating station and/or from profits realized from sales of its reserved Capacity or associated Energy from Station Two (to the extent such sales are otherwise permitted under the Station Two Contracts), in either case directly or indirectly to customers located outside of Henderson and Daviess Counties, Kentucky, then the LG&E Companies shall be obligated to pay to Henderson an amount in immediately available funds equal to that portion of the Refinancing Costs not so recouped by Henderson. The foregoing payment (if one shall become due) shall be paid by the LG&E Companies within 10 days after the written request of Henderson is delivered following the expiration of the period described above. Henderson agrees to use commercially reasonable efforts to sell all such capacity and energy to the extent required to recoup its Refinancing Costs as contemplated above, and shall maintain appropriate records of all such transactions so that the Parties shall be able to verify the profits realized therefrom by Henderson. If Big Rivers was the Party which requested such refinancing, Big Rivers shall, within 15 days after the written request of any of he LG&E Companies, reimburse the LG&E Companies the amounts, if any, paid by the LG&E Companies to Henderson under this Section 10.6 to cover the portion of the Refinancing Costs not recouped by Henderson in the manner described above. 10.7 Suspension of Performance. (a) Prior to any LG&E Company's exercise of any rights that it may have to terminate this Agreement (which rights shall not be affected or limited by the provisions of this Section 10.7), and subject to any rights of off-set or similar rights that may be available under this Agreement, the Station Two Contracts or applicable Laws, the obligations of that LG&E Company under Section 8 of this Agreement, entitled "Phase I Subcontract," and, during the Phase II Assignment Term, under any of the Assigned Station Two Contracts shall not be disturbed, excused or suspended by reason of any breach or default by Big Rivers or Henderson under this Agreement or any Station Two Contract, or by reason of any breach or default by Big Rivers of any of the other Operative Documents (including the termination of any of the Operative Documents), unless and only to the extent that Big Rivers also has (and can exercise) the concomitant right to disturb, excuse or suspend its performance under the -120- corresponding portion(s) of such Station Two Contract by reason of a breach or default by Henderson hereunder or thereunder (which rights Big Rivers acknowledges it has an obligation to diligently pursue pursuant to Section 13.8(c) of this Agreement). (b) Notwithstanding the limitations on the suspension of performance by the LG&E Companies set forth in (a), above, and in addition to the termination rights provided for in Section 13 of this Agreement, entitled "Termination; Default; Remedies," the Parties hereby agree that: (i) the LG&E Companies shall have the right to terminate this Agreement if at any time during the Term (x) the Participation Agreement, the Power Purchase Agreement, the Transmission Services and Interconnection Agreement, the Cost Sharing Agreement and the Facilities Operating Agreement are terminated in accordance with their respective terms by any of the LG&E Companies, or by WKEC, by reason of any breach of default by Big Rivers under all or any of those agreements, or (y) the Participation Agreement, the Power Purchase Agreement, the Transmission Services and Interconnection Agreement and the Lease are terminated in accordance with their respective terms by any of the LG&E Companies, or by WKEC, by reason of any breach or default by Big Rivers under all or any of those agreements (provided, that, the LG&E Companies' rights to terminate this Agreement by reason of any of the circumstances described in (x) or (y), above, shall be further conditioned upon the LG&E Companies then or thereafter having been directly or indirectly denied access to, or the full use and enjoyment of, any of the Fundamental Rights (as defined in Section 10.7(c) of this Agreement) for any of the reasons described in Section 10.7(c) of this Agreement or as permitted under Subclause (iv) of this Section 10.7(b)); (ii) Big Rivers shall have the right to terminate this Agreement if at any time during the Term (x) the Participation Agreement, the Power Purchase Agreement, the Transmission Services and Interconnection Agreement, the Cost Sharing Agreement and the Facilities Operating Agreement are terminated in accordance with their respective terms by Big Rivers by reason of any breach or default by any of the LG&E Companies or WKEC under all or any of those agreements, or (y) the Participation Agreement, the Power Purchase Agreement, the Transmission Services and Interconnection Agreement and the Lease are terminated in accordance with their respective terms by Big -121- Rivers by reason of any breach or default by any of the LG&E Companies or WKEC under all or any of those agreements; (iii) the LG&E Companies and Big Rivers shall at all times have the right to pursue each of their other respective rights (if any) under this Agreement and the Station Two Contracts to terminate this Agreement and/or any of the Station Two Contracts by reason of a breach or default hereunder or thereunder by Henderson (subject, however, to any consent rights in this Agreement as may exist as between the LG&E Companies and Big Rivers prior to their taking any action to terminate any of the Station Two Contracts); and (iv) following the retirement or redemption in full of the Station Two Bonds, in the event that a breach or default by Henderson of this Agreement or any of the Station Two Contracts, or any negligent or willful misconduct of Henderson or any of its employees, agents or representatives, shall have the effect, directly or indirectly, of denying the LG&E Companies and Big Rivers access to, or the full use and enjoyment of, any of the Fundamental Rights, then until such time as Henderson shall fully restore that Fundamental Right the LG&E Companies and Big Rivers, in addition to all other rights and remedies available to such Parties under this Agreement or the Station Two Contracts, or in law or at equity, shall be excuse (without any obligations or liability to Henderson or any other Party for breach or default of this Agreement or the Station Two Contracts) from all obligations to Henderson under the Station Two Power Sales Agreement to pay any Capacity charge payments and reimbursement payments with respect to the Station Two Unit Output that is no longer available, and under the Station Two Operating Agreement. In the event the LG&E Companies are denied access to, or the full use and enjoyment of, any of the Fundamental Rights by reason of a breach or default, or the negligence or willful misconduct, of Henderson or its employees, agents or representatives, as contemplated above, whether or not Big Rivers is also denied such access, use or enjoyment, then the LG&E Companies shall be entitled to pursue and exercise any and all rights and remedies that they may have against Henderson by reason thereof, including without limitation, specific performance by Henderson of its obligations under this Agreement and the Station Two Contracts, and under those circumstances Big Rivers agrees to reasonably cooperate with the LG&E Companies in their efforts to restore all of their Fundamental Rights at the earliest practicable time. To the extent that the LG&E Companies and Big Rivers shall be excused from their Capacity charge -122- payment obligations to Henderson as contemplated above, then (A) in the case of the LG&E Companies, they shall also be released from any obligation under this Agreement to pay to Big Rivers, or reimburse Big Rivers for, any amounts representing portions of those Capacity charge payments, and (B) in the case of Big Rivers, it shall also be released from any obligation under this Agreement to pay to the LG&E Companies, or reimburse them for, any amounts representing portions of those Capacity charge payments. (c) For purposes of this Section 10.7, the following rights, entitlements and benefits from or relating to Station Two shall each constitute a "Fundamental Right": (1) the access to and right throughout the Term to operate and maintain Station Two and the other Station Two Assets (including, without limitation, access to all of the Joint Use Facilities) as contemplated in this Agreement and the Station Two Contracts; (2) the access to and right throughout the Term to the full use and enjoyment of the Station Two Unit Output (including, without limitation, the right of LEM and/or Station Two Subsidiary to purchase, accept delivery of and resell such Unit Output to Big Rivers, Henderson or Henderson Union (as contemplated in Sections 8.12(e) and 9.7(c)), or to other Persons following the redemption or retirement in full of the Station Two Bonds) in the manner, to the extent and at the costs contemplated in this Agreement, the Station Two Power Sales Agreement and the LEM/Henderson Union Agreement or, in the case of the rights of Big Rivers, under the Station Two Power Sales Agreement alone; and (3) the access to and right throughout the Term to reserve Big Rivers' available transmission capacity at tariffed or market rates in quantities sufficient for (y) delivery of all Station Two Unit Output to Henderson and to the Members of Big Rivers for distribution by them solely within Henderson and Daviess Counties until such time as the Station Two Bonds have been fully redeemed or retired, and (z) delivery of all Station Two Unit Output to one or more interconnection points between the transmission systems of Big Rivers and each interconnected utility's transmission system after the Station Two Bonds have been fully redeemed or retired, in accordance with Big Rivers' open access transmission tariff or any successor tariff of Big Rivers or any other tariff that replaces Big Rivers' open access transmission tariff or successor tariff that has been approved by FERC and that relates to the Big Rivers' transmission system. -123- (d) In the event (1) the Operative Documents (excluding this Agreement, the Settlement Promissory Note, the Settlement Mortgage and the Subordinate Mortgage and Security Agreement) shall terminate at any time during the Term of this Agreement and (2) LEM and/or Station Two Subsidiary shall thereafter continue to operate Station Two and to receive the Station Two Unit Output pursuant to this Agreement, then Big Rivers shall, throughout the remainder of the Term, continue to be entitled to receive on each Monthly Payment Date a portion (determined on the basis of the formula set forth below in this Section 10.7(d)) of the monthly installments of the Annual Fixed Payment or Rental Payment that it would have received under the Power Purchase Agreement or the Lease had such agreements not been terminated (but excluding any adjustments to the Annual Fixed Payments or Rental Payment that otherwise would be contemplated because the Contract Limits have been eliminated due to the termination of the Power Purchase Agreement), and a portion (determined on the basis of the formula set forth below in this Section 10.7(d)) of the refund payment otherwise due to WKEC or its Affiliate under Section 21.8 of the Participation Agreement shall not be due and owing to WKEC or such Affiliate, but only for so long as (i) Big Rivers continues to fulfill its obligation to purchase the Station Two Unit Output from LEM and/or Station Two Subsidiary upon the terms and conditions specified in Section 8.12(e) of this Agreement, or to make the payments to LEM and/or Station Two Subsidiary in lieu of those purchases as permitted under Section 8.12(f), (ii) Big Rivers continues to fulfill and discharge all payment and other obligations to LEM under the Settlement Promissory Note, and (iii) the LG&E Companies continue to receive all of the Fundamental Rights in all material respects or, should any of the Fundamental Rights be denied the LG&E Companies, the denial of such right is not by reason of a breach or default of this Agreement or any Station Two Contract by Big Rivers or by reason of the negligence or willful misconduct of Big Rivers or its employees, agents or representatives. The portion of each monthly installment of any Annual Fixed Payment or Rental Payment, if any, that shall be due Big Rivers under this Section 10.7(d) shall be an amount equal to (1) the monthly installment of Annual Fixed Payment or Rental Payment that would have been due Big Rivers at that time under either the -124- Power Purchase Agreement or the Lease had it continued in force and effect (subject to all adjustments in such installment payments as shall then be applicable under the terms of the Power Purchase Agreement and the Lease, but excluding any adjustments to the Annual Fixed Payments or Rental Payment that otherwise would be contemplated because the Contract Limits have been eliminated due to the termination of the Power Purchase Agreement), multiplied by (2) the ratio by which: (A)(i) the total number of megawatts of Station Two Surplus Capacity allocated to Big Rivers and/or Station Two Subsidiary (or its successors or permitted assigns) under the Station Two Power Sales Agreement on the date on which the last of the Operative Documents (other than this Agreement) terminates minus (ii) 50% multiplied by the difference (if any) between (x) the average number of megawatts of Power anticipated to be reserved for each hour by Henderson from Station Two between the relevant Monthly Payment Date and the fourth (4th) anniversary thereof (as reflected in the current five (5) year forecast of Henderson's needs required to be made under the Station Two Power Sales Agreement, but adjusted to include any Economic Development Power reserved by Henderson for its customers as contemplated in the 1998 Amendments and Sections 11.1, 11.2 and 11.3 of this Agreement) and (y) the average number of megawatts of Power from Station Two that were reserved by Henderson for each hour during the four (4) year period immediately preceding the relevant Monthly Payment Date, including, without limitation, any Economic Development Power reserved by Henderson during the preceding four (4) year period; bears to (B) 1708 Megawatts. The portion of the refund of the Initial Fixed Payment or the Initial Rental Payment that will not be due to WKEC or its Affiliate, if any, shall be an amount equal to the amount of such refund payment that is due by Big Rivers to WKEC or such Affiliate under Section 21.8 of the Participation Agreement multiplied by the ratio described in (2) of the immediately preceding sentence of this Section 10.7(d). 10.8 Insurance. (a) Station Two Subsidiary shall have in place on the Effective Date, and shall thereafter maintain in effect at all times during the Term, in accordance with standards prevailing in the electric power industry (including the independent power industry) for assets -125- of similar size and nature to Station Two, insurance coverage for Station Two with responsible insurers, for the benefit of Station Two Subsidiary, Henderson and Big Rivers as their respective interests may appear, to protect and insure against: third party liability for bodily injury and property damage, all risks of physical damage to property or equipment, including transportation and installation perils, catastrophic losses due to either third party liability or damage to first party property, workers compensation insurance and such other insurance as Station Two Subsidiary deems necessary, with reasonable limits and subject to appropriate exclusions and deductibles/retentions. Such insurance shall at all times be subject to prior approval by Henderson, which approval shall not be unreasonably withheld, conditioned or delayed by Henderson. In no event, however, shall the coverage maintained in effect by Station Two Subsidiary at any time be less than the insurance coverages of the types and in the minimum amounts set forth in Section 18.1 of the Station Two Operating Agreement or as required in the Bond Ordinance or the Debt Restructuring Documents, whichever is greater; provided, that Henderson shall in no event bear any responsibility for payment of the increase in insurance premiums caused by the requirements of the Debt Restructuring Documents. Station Two Subsidiary may, at its option, continue and maintain in effect, the insurance policies and coverage on Station Two in effect on the Effective Date and to have itself named as an additional insured party, and Henderson and Big Rivers agree to reasonably cooperate with Station Two Subsidiary to accomplish the same, upon its request. Henderson agrees to promptly notify Station Two Subsidiary at such time as the provisions of the Bond Ordinance require insurance coverages that are different than those required by the Station Two Operating Agreement. (b) At all times during the Term, when the Station Two Bonds shall remain outstanding, all insurance proceeds from policies obtained pursuant hereto or pursuant to any other provision of the Station Two Contracts ("Station Two Assets Insurance") shall be paid and applied by Henderson, Big Rivers, the LG&E Companies and/or the insurance company or companies providing such insurance in accordance with the provisions of the Bond Ordinance and Section 12.2 of this Agreement. -126- (c) Henderson shall be named as the first named insured and each of Big Rivers and Station Two Subsidiary shall be named as additional named insureds on all policies of Station Two Assets Insurance (except for any crime policy and any workers' compensation and employers' liability policy), and such policies that do not carry a "separation of insureds" provision shall carry cross-liability endorsements. (d) Station Two Subsidiary shall notify Henderson and Big Rivers of the assertion of any claim relating to the Station Two Assets immediately upon assertion of the same, or of the occurrence of an event likely to result in the assertion of such a claim. Station Two Subsidiary shall report annually to Henderson, Big Rivers and the Operating Committee all claims asserted in the amount of $100,000 or more, and shall provide Henderson, Big Rivers and the Operating Committee with all notices provided to insurers with respect to any such claim. (e) Station Two Subsidiary shall furnish the Parties with Certificates of Insurance evidencing the existence of the Station Two Assets Insurance and shall furnish Henderson a copy of all policies of insurance providing coverage for Station Two. Upon the request of Big Rivers or Henderson, Station Two Subsidiary shall make available for inspection and copying a certified copy of each of the policy forms of Station Two Assets Insurance, together with a line sheet therefor (and any subsequent amendments) naming the insurers and underwriters and the extent of their participation. (f) Each of the Station Two Assets Insurance policies shall be endorsed so as to provide that the Parties shall be given the same advance notice of cancellation or material change as that required to be given to Station Two Subsidiary. (g) Nothing in this Agreement or the Station Two Contracts shall prohibit Station Two Subsidiary from combining the coverage required by this Agreement with coverage outside the scope of that required by this Agreement as long as such combining of coverage in no way adversely affects the coverage required hereunder. -127- (h) Station Two Subsidiary shall assist any insurer in the investigation, adjustment and settlement of any loss or claim covered by Station Two Assets Insurance. Station Two Subsidiary and Henderson shall jointly present and prosecute claims against insurers providing Station Two Assets Insurance in respect of any loss of or damage to the Station Two Assets or liability of any Party to third parties covered by such insurance. 10.9 Cooperation in Fuel Procurement. During the Phase I Subcontract Term and the Phase II Assignment Term, Station Two Subsidiary or its Affiliates may advise and assist Henderson, as and when requested by Henderson, in its procurement of fuel and reagents for Station Two. Subject to applicable laws of the Commonwealth of Kentucky, during the Phase I Subcontract Term and Phase II Assignment Term, Henderson shall provide Station Two Subsidiary reasonable advance notice each time that it intends to purchase fuel or reagents for Station Two and shall offer Station Two Subsidiary or its designated Affiliates a reasonable opportunity to participate in any procedures required of Henderson by the Laws of the Commonwealth of Kentucky relating to its fuel and reagent procurement for Station Two. Big Rivers acknowledges and agrees that Station Two Subsidiary or its Affiliate may advise and assist Henderson in Henderson's purchase of fuel and reagents for Station Two, and hereby agrees that it will take no action that would in any manner interfere with such arrangement between Henderson and Station Two Subsidiary (or any of its Affiliates); provided, Big Rivers shall have no responsibility, liability or obligation, of any nature whatsoever, relating to Station Two Subsidiary's advice and assistance to Henderson hereunder. Station Two Subsidiary has agreed to indemnify Big Rivers, upon the terms set forth in Section 10.15(b), for certain costs, liabilities and obligations that it may incur during the Phase I Subcontract Term under certain fuel supply agreements. 10.10 Maintenance Power. During the Phase I Subcontract Term and the Phase II Assignment Term, Henderson agrees that, in the event both of the generating units at Station Two are out of service by reason of a scheduled or unscheduled outage, Henderson shall provide to Station Two all Power required for its operation, maintenance and repair during that scheduled or unscheduled outage. Henderson shall be paid by Station Two Subsidiary all -128- of Henderson's actual costs to provide such Power to Station Two, and such expenditures by Station Two Subsidiary shall be deemed to be reasonable and necessary operations and maintenance expenses of Station Two for all purposes under this Agreement and the Station Two Contracts. 10.11 Access to Premises; Rights-of-Way. (a) Big Rivers and Henderson shall provide rights of access, ingress and egress, to the LG&E Companies and their respective agents, attorneys, representatives, Affiliates and employees to all plants, facilities, land and properties for the purpose of enabling the LG&E Companies, and their agents, attorneys, representatives, Affiliates and employees, to perform or fulfill their respective obligations under this Agreement and the Assigned Station Two Contracts (or pursuant to a new agreement entered into by the LG&E Companies and Henderson in accordance with Section 13.8(f) of this Agreement), provided such access does not unreasonably interfere with Big Rivers' ability to fulfill its responsibilities and exercise its rights under this Agreement or to otherwise conduct its operations, including, without limitation, its operation of the facilities. Big Rivers (to the extent such right is not provided to the LG&E Companies in any Operative Document or in the event such right is provided to the LG&E Companies in an Operative Document but that Operative Document shall at any time be terminated, rescinded or revoked prior to termination or expiration of this Agreement) and Henderson each hereby further grants, or shall hereafter grant, to the LG&E Companies such non-exclusive rights-of-way and easements over its real property or the non-exclusive right to use any easement or rights-of-way from others in which either Big Rivers or Henderson may possess an interest, as may be reasonably necessary to enable the LG&E Companies and their respective agents, attorneys, representatives, Affiliates and employees to perform or fulfill their respective obligations to Big Rivers or Henderson under this Agreement or the Assigned Station Two Contracts (or pursuant to a new agreement entered into by the LG&E Companies and Henderson in accordance with Section 13.8(f) of this Agreement), including, without limitation, all such rights-of-way and easements that Big Rivers and Henderson shall have granted to the other prior to the Effective Date or may -129- hereafter grant to the other, in relation to Station Two or the other Station Two Assets, provided such access does not unreasonably interfere with Big Rivers' ability to fulfill its responsibilities and exercise its rights under this Agreement or to otherwise conduct its operations, including, without limitation, its operation of its transmission facilities. Neither Big Rivers nor Henderson shall take any action to disturb the right or authority of the other Party or any of the LG&E Companies at any time during the Phase I Subcontract Term or the Phase II Assignment Term to any such rights, rights-of-way or easements, or to the use thereof. At the request of the LG&E Companies, the Parties shall execute and file with appropriate governmental offices such short-form instruments or other agreements, instruments and documents, in form reasonably satisfactory to the LG&E Companies, evidencing the LG&E Companies' rights and interests in the properties granted in this Section 10.11. At such time as Station Two Subsidiary or its Affiliates, successors or permitted assigns under Section 15 of this Agreement shall no longer have the right to operate and maintain Station Two, the LG&E Companies shall execute and file with appropriate governmental offices such instruments and other agreements and documents in form reasonably satisfactory to Henderson and Big Rivers, respectively, releasing the LG&E Companies' rights and interest in those properties granted in this Section 10.11. (b) Big Rivers shall at all times have access to, and the right of ingress and egress from, Station Two solely for the purposes of (1) providing the services required of it under this Agreement and the other Operative Documents or, (2) upon reasonable prior written notice to Station Two Subsidiary, examining and observing the operation of the Station Two Assets, provided such access does not unreasonably interfere with Station Two Subsidiary's ability to fulfill its responsibilities and exercise its rights under this Agreement and the Assigned Station Two Contracts. Any entry by Big Rivers or its employees, agents or representatives on the premises of Station Two, and each examination or inspection conducted by Big Rivers or its employees, agents or representatives, shall be done at the expense and risk of Big Rivers, and shall be conducted during normal business hours upon reasonable prior notice to Station Two Subsidiary. -130- 10.12 Covenants to Exercise Rights and Remedies. (a) At any time during the Phase I Subcontract Term, Big Rivers shall exercise such rights in respect of the Station Two Contracts as are reasonably requested from time to time by Station Two Subsidiary, LEM or WKEC to the extent the exercise of such rights is reasonably necessary for any LG&E Company to receive the full benefit, use and enjoyment of the LG&E Companies' respective rights under the Phase I Subcontract. At any time during the Phase II Assignment Term, Big Rivers shall exercise all such rights and shall consent to the taking of such actions in respect of the Station Two Contracts as are reasonably requested from time to time by any LG&E Company and as are reasonably necessary to preserve the LG&E Company's rights and interests under this Agreement and the Station Two Contracts. Such rights and consents that may be requested of Big Rivers at any time during the Term shall include, to the extent such rights reside in Big Rivers, without limitation, (a) exercising the right to request a test to determine the total Capacity of Station Two pursuant to Section 3.6 of the Station Two Power Sales Agreement, and (b) fully enforcing all rights and legal remedies Big Rivers has under the Station Two Contracts (as further provided in Section 13.8 of this Agreement), whether or not on account of a breach or default thereunder by Henderson, and refraining from waiving compliance by Henderson with any of its obligations under the Station Two Contracts or this Agreement. (b) Notwithstanding anything in this Agreement to the contrary, none of the LG&E Companies or Big Rivers shall waive any rights, or fail to enforce any remedy, that it may have against Henderson, the waiver or failure of which would materially adversely affect the other Party's rights and interests under this Agreement or the Station Two Contracts; provided, however, in fulfilling the foregoing covenants, Big Rivers shall have no obligation to terminate this Agreement or any Station Two Contract or exercise any option it may have to purchase any property or assets related to Station Two, and the LG&E Companies shall have no obligation to terminate this Agreement. -131- 10.13 Notice of Delivery Obligations. Big Rivers and the LG&E Companies hereby agree that each shall provide the other Party with all notices, reports, documents or other written communications that it directs to or receives from Henderson pursuant to or relating to the Station Two Assets, the Station Two Contracts or the Bond Ordinance. 10.14 Access to Records. From and after the Effective Date, and at all times during the Term, each of the Parties shall, at the reasonable request of another Party, afford or cause to be afforded to the agents, attorneys, accountants and other authorized representatives of such other Party reasonable access during normal business hours to all employees, representatives, properties, books, records (excluding employee records), data, contracts and documents, to which such requesting Party reasonably needs access to perform its obligations under, or to exercise its rights and obtain the full benefits under, this Agreement and the Station Two Contracts, and shall permit such representatives, at the requesting Party's expense, to use and, if necessary, make copies of such books, records, data, contracts and documents. Notwithstanding anything herein to the contrary, each of the Parties shall maintain dominion and control over their respective books, records, data, contracts and documents at all times during the Term. 10.15 Indemnification; Waivers and Limitations of Liability. (a) Station Two Subsidiary shall be fully responsible to Big Rivers during the Phase I Subcontract Term for the performance, on behalf of Big Rivers, of those provisions of the Station Two Operating Agreement and the Joint Facilities Agreement that Station Two Subsidiary has expressly agreed to perform under Section 8 of this Agreement, entitled "Phase I Subcontract," and during the Phase II Assignment Term for the Assumed Station Two Liabilities that it has expressly agreed to perform and discharge under Section 9 of this Agreement, entitled "Phase II Assignment" (collectively, the "Station Two Subsidiary's Performance Obligations"), in each case to the extent and in the manner required by those Station Two Contracts and this Agreement. From and after the Execution Date, Station Two Subsidiary hereby agrees to indemnify and save harmless Big Rivers and Henderson from all -132- claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants fees) suffered or incurred by, or made against, each such Party, or their respective agents, representatives and employees, arising out of, resulting from or related to the following: (1) Any inaccurate representation or warranty made by the LG&E Companies to that Party in this Agreement. (2) Any breach or default by an LG&E Company in the performance or discharge of any of the covenants or agreements made to that Party in this Agreement; provided, however, that with respect to the LG&E Companies' performance obligations under Section 8.2 of this Agreement, such performance shall be irrespective of any materiality standard set forth in Section 8.3 of this Agreement. (3) All liability and expense incurred by that Party on account of any and all damages, claims or actions, including injury to or death of Persons or damage to property, arising from any act, omission or accident in connection with Station Two (including in the case of Henderson only, without limitation, damages, liability and expense arising out of Environmental Violations or Environmental Conditions), in each case, to the extent caused by the negligence or any willful misconduct of Station Two Subsidiary, or its agents, representatives and/or employees. (4) For the benefit of Big Rivers only throughout the entire Term, any breach or noncompliance by any LG&E Company with the Bond Ordinance in performing or not performing its obligations under this Agreement and/or the Station Two Contracts during the Term (it being understood that in the event such breach or non-compliance by the LG&E Companies causes Henderson to be in breach of the Bond Ordinance, the indemnity provided by the LG&E Companies pursuant to this paragraph shall include the reasonable costs of refinancing the Station Two Bonds incurred by Station Two Subsidiary (including without limitation, incremental interest costs) if such refinancing is deemed appropriate by -133- Henderson and Big Rivers as a consequence of such breach or non-compliance by an LG&E Company). Nothing in this Section 10.15(a) shall impose on Station Two Subsidiary any obligation for any such liability or expense incurred by that Party that arises out of or otherwise is the result of the negligence or the willful misconduct of Big Rivers or Henderson, or any of their respective agents, representatives or employees (which negligence or willful misconduct is not the direct result of an act or omission of any LG&E Company or its agents, representatives or employees), or the breach or default of any of the terms or provisions of this Agreement or the Station Two Contracts or any other Operative Document, which Big Rivers or Henderson, respectively, is required to perform from and after the Effective Date (in any such event which breach or default is not the direct result of a breach or default by any LG&E Company under such agreements or any LG&E Company's acts or omissions) or was required to perform prior to the Effective Date. Notwithstanding anything contained in this Section 10.15(a) or elsewhere in this Agreement to the contrary, and except to the extent contemplated in Section 10.15(j) of this Agreement, no LG&E Company shall have liability to Big Rivers under this Agreement for environmental matters (including, without limitation, Environmental Violations and Environmental Conditions), or any damages, liabilities, claims, injuries, costs, or expenses arising out of, or relating to, such environmental matters, at or relating to Station Two or any other Station Two Assets, or associated with its operation of Station Two or any other Station Two Assets, and its sole obligation (if any) to Big Rivers relating thereto shall be as set forth in Article 14 of the Participation Agreement and Section 10.15(j) of this Agreement. (b) During the Phase I Subcontract Term, Station Two Subsidiary shall indemnify, defend and hold harmless Big Rivers and its directors, officers and employees for any liability, loss, damage, claim, and cost (including reasonable attorneys' fees) arising or accruing after the Effective Date in connection with each and every fuel supply contract held by Big Rivers as of the Execution Date for use in connection with Station Two, and all other fuel supply contracts entered into by Big Rivers after the Execution Date with Station Two Subsidiary's -134- prior written consent, in each case including liabilities, losses, damages, claims, and costs (including reasonable attorneys' fees) arising from any act or omission of Big Rivers following the Effective Date, provided that, if such liability, loss, damage, claim or cost (including reasonable attorneys' fees) arises from any act or omission of Big Rivers that constitutes a breach or default by Big Rivers under any such fuel supply contract, or negligence or willful misconduct by Big Rivers or its employees, agents or representatives, (which breach, default, negligence or willful misconduct by Big Rivers under any such fuel supply contract is not related to or caused by any act or omission of Station Two Subsidiary or any other LG&E Company), then Station Two Subsidiary shall have no obligation to Big Rivers under this provision unless Station Two Subsidiary or any other LG&E Company requested or concurred in writing to such act or omission by Big Rivers (in which case Station Two Subsidiary's obligations under this Section shall not be excused). (c) From and after the Execution Date, Henderson, in addition to and not in substitution for any indemnities given in any provision of the Station Two Contracts, hereby agrees to indemnify and save harmless the LG&E Companies and Big Rivers, and each of their respective agents, representatives, servants and employees, from any and all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) suffered or incurred by, or made against, such LG&E Companies (or any of them) or Big Rivers, or their respective agents, representatives and employees, arising out of, resulting from or related to the following: (1) Any inaccurate representation or warranty made by Henderson to that Party in this Agreement; (2) Any breach or default by Henderson in the performance or discharge of any of the covenants or agreements made to that Party in this Agreement. (3) For the benefit of each of the LG&E Companies throughout the entire Term, all liability and expense incurred or suffered by that LG&E Company on account of any -135- and all damages, claims or actions, including injury to or death of Persons or damage to property, arising from any act, omission or accident in connection with Station Two (including, without limitation, damages, liability and expense arising out of Environmental Violations or Environmental Conditions), in each case to the extent caused by the negligence or any willful misconduct of Henderson, its agents, representatives and/or employees. Nothing in this Section 10.15(c) shall impose on Henderson any obligation for any such liability or expense incurred by any of the LG&E Companies or Big Rivers that arises out of or otherwise is the result of the negligence or willful misconduct of any of the LG&E Companies or Big Rivers, respectively, or their respective agents, representatives and/or employees (which negligence or willful misconduct is not the direct result of an act or omission of Henderson or its agents, representatives or employees), or the breach or default of any of the terms or provisions of this Agreement or the Station Two Contracts which any of the LG&E Companies or Big Rivers, respectively, is required to perform from and after the Effective Date (which breach or default is not the direct result of a breach or default by Henderson under such agreements or Henderson's or its agent's, representative's or employee's acts or omissions). (d) From and after the Execution Date, Big Rivers, in addition to and not in substitution for any indemnities given in any provision of the Station Two Contracts, hereby agrees to indemnify and save harmless each of the LG&E Companies and Henderson, and the respective agents, representatives and employees of Station Two Subsidiary and Henderson, from any and all claims, losses, liabilities, damages, costs (including court costs) and expenses (including reasonable attorneys' and accountants' fees) suffered or incurred by or made against any LG&E Companies or Henderson, or their respective agents, representatives and employees, arising out of, resulting from or related to the following: (1) Any inaccurate representation or warranty made by Big Rivers to that Party in this Agreement. -136- (2) Any breach or default by Big Rivers in the performance or discharge of any of the covenants or agreements made to that Party in this Agreement. (3) For the benefit of the LG&E Companies only throughout the entire Term, all liability and expense incurred or suffered by that LG&E Company on account of any and all damages, claims or actions, including injury to or death of Persons or damage to property, arising from any act, omission or accident in connection with Station Two to the extent caused by the negligence or any willful misconduct of Big Rivers or its agents, representatives and/or employees. (4) For the benefit of each of the LG&E Companies only throughout the entire Term, any breach or noncompliance by Big Rivers with the Bond Ordinance in performing or not performing its obligations under this Agreement and/or the Station Two Contracts during the Term (it being understood that in the event such breach or non-compliance by Big Rivers causes Henderson to be in breach of the Bond Ordinance, the indemnity provided by Big Rivers pursuant to this paragraph shall include the reasonable costs of refinancing the Station Two Bonds incurred by Station Two Subsidiary (including without limitation, incremental interest costs) if such refinancing is deemed appropriate by Henderson and Station Two Subsidiary as a consequence of such breach or non-compliance of Big Rivers). Nothing in this Section 10.15(d) shall impose on Big Rivers any obligation for any such liability or expense incurred by any of the LG&E Companies or Henderson that arises out of or otherwise is the result of the negligence or willful misconduct of any of the LG&E Companies or Henderson, respectively, or any of their respective agents, representatives and/or employees (which negligence or willful misconduct is not the direct result of an act or omission of Big Rivers or its agents, representatives or employees), or the breach or default of any of the terms or provisions of this Agreement or the Station Two Contracts which an LG&E Company or Henderson, respectively, is required to perform from and after the -137- Effective Date (which breach or default is not the direct result of a breach or default by Big Rivers under such agreements or acts or omissions of Big Rivers or its agents, representatives or employees). Notwithstanding anything contained in this Section 10.15(d) or elsewhere in this Agreement to the contrary, and except to the extent contemplated in Section 10.15(j) of this Agreement, Big Rivers shall have no liability to any LG&E Company under this Agreement for environmental matters (including, without limitation, Environmental Violations and Environmental Conditions), or any damages, liabilities, claims, injuries, costs, or expenses arising out of, or relating to, such environmental matters, at or relating to Station Two or any other Station Two Assets, or associated with its operation of Station Two or any other Station Two Assets, and its sole obligation (if any) to the LG&E Companies relating thereto shall be as set forth in Article 14 of the Participation Agreement and Section 10.15(j) of this Agreement. (e) Station Two Subsidiary shall not be liable or in any way responsible for, and Henderson and Big Rivers each hereby waives all claims or actions against Station Two Subsidiary and its Affiliates, agents, representatives and employees for, any breach or default by Big Rivers of this Agreement or any of the Station Two Contracts, as the same are now or may hereafter be in effect (unless such breach or default is the result of an act or omission by any LG&E Company). (f) None of the LG&E Companies, unless otherwise specifically provided in this Agreement or in the Assumed Station Two Liabilities, shall be liable at any time for any act, omission or legal obligation (i) of any other Party to this Agreement; (ii) of the agents, representatives and/or employees of any other Parties, or (iii) of any persons, corporations or other entities not a Party to this Agreement. The provisions of this Section 10.15(f) are intended to provide the LG&E Companies, throughout the Term, with the same rights and entitlements as those that are provided to Henderson and Big Rivers in Section 21.2 of the Station Two Operating Agreement. -138- (g) Neither Big Rivers nor any of the LG&E Companies (the "Released Party"), nor any of the Released Party's respective Affiliates, successors and assigns, nor any of the Released Party's officers, consultants or agents, will be liable or in any way responsible to the other Party(s) (the "Releasing Party"), and the Releasing Party waives all claims that it may have against each Released Party and each Released Party's Affiliates, agents, representatives or employees, for any liability, loss, damage, claim or cost (including attorneys' fees) suffered by the Releasing Party in connection with the performance of the Released Party's (or any of its Affiliates') obligations under this Agreement or the Station Two Contracts (including in the case of an LG&E Company any such liability, loss, damage, claim or cost suffered by it in connection with the use and/or operation of the Station Two Assets by that LG&E Company and its Affiliates, agents, representatives or employees), except to the extent such liability, loss, damage, claim or cost shall have been caused by the negligence or willful act or omission of the Released Party, its Affiliates, successors and assigns (unless the Released Party shall be released from such obligations caused by its successors and assigns under Section 15.2 of this Agreement), or their respective agents, representatives or employees, or by the breach or default by the Released Party under this Agreement, any of the Station Two Contracts or any of the other Operative Documents (which act or omission of any such Released Party or its Affiliates, or their respective agents, representatives or employees, is itself not the direct result of an act or omission of any Releasing Party or any of its Affiliates, or their respective agents representatives or employees), and except for losses, injuries and damages specifically assumed by the Released Party or covered by any indemnification or hold harmless covenant of the Released Party in this Agreement, any of the Station Two Contracts or any of the Operative Documents. This Section 10.15(g) is solely between Big Rivers and the LG&E Companies and is not intended to modify or in any way limit the respective rights and obligations specified in this Agreement or the Station Two Contracts, or otherwise, between Henderson and Big Rivers or Henderson and any of the LG&E Companies. (h) Station Two Subsidiary does not assume and shall not in any manner be responsible or liable for, and Big Rivers and Henderson each hereby agrees, for itself only, to indemnify and hold Station Two Subsidiary harmless from and against, any and all loss, cost, -139- expense (including reasonable attorneys' fees), claims and causes of action, debts, obligations, liabilities or responsibilities, whether known or unknown, fixed, contingent or otherwise, and not otherwise specifically assumed or undertaken hereunder by Station Two Subsidiary (1) that arose or accrued under the Station Two Contracts prior to the Effective Date, or (2) that arose out of or relating to any failure by Big Rivers or Henderson, as applicable, to perform any covenants or conditions under the Station Two Contracts which were required to be performed or fulfilled by it prior to the Effective Date, or (3) that are asserted by third parties (including, all claims asserted by Henderson or, in the case of Henderson, all claims asserted by Big Rivers) related to the ownership, use, operation and/or maintenance by Big Rivers or Henderson, as applicable, of Station Two or the Station Two Assets, as the case may be, prior to the Effective Date, including, in the case of Henderson only, and without limitation, any Environmental Violation or Environmental Condition existing as of the Effective Date. Notwithstanding anything contained in this Section 10.15(h) or elsewhere in this Agreement to the contrary, and except to the extent contemplated in Section 10.15(j) of this Agreement, Big Rivers shall have no obligation or liability to the LG&E Companies by reason of this Agreement or the provisions hereof for any environmental matters (including without limitation, Environmental Violation or Environmental Condition) at or relating to Station Two, and Big Rivers' sole obligation or liability (if any) to the LG&E Companies for such Environmental Violations and/or Environmental Conditions shall be as set forth in the Participation Agreement and Section 10.15(j) of this Agreement. The Parties further acknowledge that notwithstanding anything contained in this Agreement to the contrary, Big Rivers shall have no obligation or liability to Henderson, and Henderson shall have no obligation or liability to Big Rivers, by reason of this Agreement or the provisions hereof for any Environmental Violation or Environmental Condition at or relating to Station Two, and that Big Rivers' sole obligation and liability to Henderson (if any), and Henderson's sole obligation and liability to Big Rivers (if any) for such Environmental Violations or Environmental Conditions shall be as set forth in the Station Two Contracts. (i) Station Two Subsidiary hereby agrees that, in connection with any reversion and assignment to Big Rivers of all rights and obligations under the Assigned Station Two -140- Contracts which is to occur upon the expiration or termination of this Agreement as provided for and in accordance with Section 10.16 of this Agreement, Big Rivers shall not assume and shall not in any manner be responsible or liable for, and Station Two Subsidiary hereby agrees to indemnify and hold Big Rivers harmless from and against, any and all loss, costs, expense (including reasonable attorneys' fees), claims, causes of action, debts, obligations, liabilities and responsibilities, whether known or unknown, fixed, contingent or otherwise, (1) arising out of or relating to any failure by Station Two Subsidiary during the Term to perform any of the Station Two Subsidiary's Performance Obligations, or (2) which are asserted against Big Rivers by any third party (including Henderson) related to the use, operation and/or maintenance by Station Two Subsidiary of Station Two or the other Station Two Assets during the Term; provided, that Station Two Subsidiary shall have no obligation or liability to Big Rivers under this Section 10.15(i) for any such losses, costs, expenses, claims, causes of action, debts, obligations, liabilities or responsibilities that arise out of or otherwise are the result of the negligence or the willful misconduct of Big Rivers or Henderson, or any of their respective agents, representatives and/or employees (which negligent or willful act or omission is not the direct result of an act or omission of any LG&E Company), or the breach or default of this Agreement or any of the terms or provisions of the Station Two Contracts or any other Operative Document which Big Rivers or Henderson is required to perform at any time prior to the date of such reversion or assignment to Big Rivers (which breach or default is not the direct result of a breach or default by any LG&E Company under such agreements). Notwithstanding the foregoing, Big Rivers further acknowledges that neither Station Two Subsidiary nor any other LG&E Company shall have any obligation or liability to Big Rivers by reason of this Agreement or the provisions hereof for any Environmental Violations or Environmental Conditions relating to Station Two or any other Station Two Assets, or to the real property on which Station Two or the other Station Two Assets are situated, and that the LG&E Companies' sole obligation or liability (if any) for such Environmental Conditions shall be as set forth in the Participation Agreement and Section 10.15(j) of this Agreement. (j) Big Rivers and each of the LG&E Companies acknowledge and agree with each other, but not with Henderson, that the provisions of Article 14 of the Participation Agreement -141- shall apply with equal effect to Station Two, and the other Station Two Assets, and the real property on which Station Two and the other Station Two Assets are situated, and to all Environmental Violations and Environmental Conditions at, affecting or relating to Station Two, the other Station Two Assets and the real property on which Station Two and the other Station Two Assets are situated, the same as such provisions may apply to the Facilities and the real property on which the Facilities are situated, and that the Baseline Environmental Audit Report, the End of Term Baseline Audit and the scope of the related environmental audits shall each be caused to encompass all such assets, facilities and real property. On or prior to the Effective Date, Big Rivers, the LG&E Companies and WKEC intend to amend the Participation Agreement to reflect the Parties' acknowledgments and agreements described above; provided, that in the event such amendments are not so made, the provisions of this Section 10.15(j) shall continue to govern the respective rights and responsibilities of Big Rivers and the LG&E Companies with respect to Hazardous Substances or other Environmental Violations or Environmental Conditions or circumstances at, affecting or relating to Station Two or the other Station Two Assets, or the real property upon which those assets and facilities are situated, and the provisions of Article 14 of the Participation Agreement, as between Big Rivers and the LG&E Companies, shall be deemed to be incorporated by reference herein and shall be made a part of this Agreement for all purposes relating to Station Two and the other Station Two Assets and the real property upon which such Assets are situated, and the use and operation of the same. No expiration or termination of the Participation Agreement prior to the expiration or termination of this Agreement shall affect the respective rights and obligations of the LG&E Companies and Big Rivers under this Section 10.15(j) or Article 14 of the Participation Agreement with respect to the Station Two Assets and the real property on which such assets are situated, and the use and operation of the same. 10.16 Reversion to Big Rivers. At the expiration or termination of this Agreement, other than a termination due to a breach or default by Big Rivers, the rights and obligations under the Station Two Contracts assigned to and assumed by Station Two Subsidiary pursuant to Section 9 of this Agreement, entitled "Phase II Assignment," shall automatically revert and be -142- assigned to Big Rivers without any action on the part of any of the Parties hereto, no LG&E Company shall retain any interest in the Assigned Station Two Contracts following that reversion (except as provided below), and Big Rivers shall thereafter assume and agree to pay and perform all obligations and liabilities of Big Rivers under the terms of the Station Two Contracts that arise or accrue from and after the expiration or termination date of this Agreement; provided that no such reversion shall occur to the extent any of the Station Two Contracts shall have been terminated prior to the expiration or termination of this Agreement; and provided further, that no such reversion shall result in any waiver or relinquishment by any LG&E Company of any claims or causes of action that it may have arising out of any breach or default by Henderson under the Assigned Station Two Contracts arising or accruing prior to the date of expiration or termination of the Assigned Station Two Contracts. The Parties agree that the LG&E Companies shall be released from any and all debts, obligations and liabilities that arise or accrue under the Station Two Contracts from and after the date that the Station Two Contracts revert to Big Rivers, except for those debts, obligations or liabilities that are covered by any indemnity given by the LG&E Companies to Big Rivers or Henderson under this Agreement or any other Operative Document. 10.17 Rights of First Offer; Waivers. (a) Henderson hereby waives and releases all of its Rights of First Offer under the Station Two Contracts in connection with the proposed operating and lease transactions contemplated between Big Rivers, the LG&E Companies and WKEC in the Participation Agreement. Henderson further agrees not to object to the proposed transactions among the LG&E Companies and Big Rivers contemplated in the other Operative Documents, and agrees to support the transactions contemplated in this Agreement. Henderson hereby waives and releases any and all rights to object to or otherwise withhold its approval thereof in any manner whatsoever, whether before the Bankruptcy Court, the KPSC or FERC or before any other regulatory agency having the right to assert jurisdiction over such Parties or the transactions so contemplated by such Parties. -143- (b) The LG&E Companies agree that each mortgage and security interest held by the LG&E Companies, or any of them, in the Reid Station and the Joint Use Facilities shall be subject to Henderson's Rights of First Offer relating to such plant and facilities set forth in the Station Two Contracts; provided, however, that the LG&E Companies' agreement set forth in this Section 10.17(b) shall be conditioned upon Henderson's agreement that, and Henderson hereby agrees that, upon Henderson's purchase of any such plant or facility pursuant to its exercise of such Right of First Offer, (i) Henderson shall assume in writing all the duties and obligations of Big Rivers under the Participation Agreement and all of the agreements and instruments executed in furtherance of the transactions contemplated therein with respect to the assets and interests so purchased by Henderson, to the extent those duties and obligations arise or accrue following Henderson's purchase of the same, (ii) Henderson shall continue to honor and fulfill all of its obligations and liabilities to such Parties and their successors and permitted assigns under the Station Two Contracts and this Agreement, and (iii) Henderson will assume and agree to perform and discharge all of the duties, liabilities and obligations of Big Rivers under the Station Two Contracts and this Agreement arising or accruing following that purchase, in each such event relating to those plants and facilities so purchased by Henderson. Henderson's assumption of Big Rivers' obligations pursuant to the preceding sentence shall not release Big Rivers from responsibility for the future performance of such obligations or liabilities for the benefit of the LG&E Companies arising under the Station Two Contracts, this Agreement, the Participation Agreement or such other agreements and instruments, regardless of whether such obligations or liabilities first arise or accrue before or after such assumption. The LG&E Companies agree to recognize an assignment of Big River's rights, title and interest in and to those plants and facilities purchased by Henderson in accordance with its Rights of First Offer, and the assignment of Big Rivers' rights and interest in and to the Participation Agreement, all agreements and instruments executed pursuant thereto, this Agreement and the Station Two Contracts to the extent they relate to those plants and facilities; provided, that the LG&E Companies' agreement is conditioned upon all the terms and conditions of this Section 10.17(b) being fully satisfied and performed by Henderson and Henderson having effected such assignments lawfully and in accordance with its contractual obligations to Big Rivers. -144- (c) The Parties hereby agree that, in the event Henderson shall at any time purchase the Reid Station pursuant to, and in accordance with, its Rights of First Offer, and Henderson shall otherwise fulfill the terms and conditions of this Section 10.17(c), Henderson shall be entitled from and after the date of its purchase of the Reid Station to be paid by LEM a portion of the Annual Fixed Payments otherwise payable by LEM to Big Rivers pursuant to Section 3.3(a) of the Power Purchase Agreement (but only if the Phase I Agreements shall then be in effect), and to be paid by WKEC or its Affiliate a portion of the monthly installments of the Rental Payment otherwise payable by WKEC or such Affiliate to Big Rivers pursuant to Section 2.3.2 of the Lease (but only if the Phase II Agreements shall then be in effect), in each case in the amount determined by multiplying 1.5 mils times the total number of kilowatt-hours of Energy generated by the Reid Station during the calendar month immediately preceding that monthly installment; provided, however, that in no event shall the amounts payable by LEM, WKEC and such Affiliate, collectively, to Henderson under the foregoing provisions exceed $700,000 in any Year (prorated for Partial Years). Prior to each relevant Monthly Payment Date, Big Rivers shall provide to Henderson and either LEM (during the Participation Agreement Phase I) or WKEC and its relevant Affiliate (during the Participation Agreement Phase II), notice of the portion of the monthly installment of the Annual Fixed Payment payable by LEM, or the portion of the monthly installment of Rental Payment payable by WKEC and such Affiliate, as the case may be, to Henderson on that Monthly Payment Date pursuant to this Section 10.17(c). Any such payments by LEM, WKEC or such Affiliate to Henderson of the amount set forth in Big Rivers' notice, as contemplated above, shall be deemed to satisfy and discharge any obligation that they may have to pay those amounts to Big Rivers pursuant to the Power Purchase Agreement or the Lease (as applicable). Henderson and Big Rivers agree that in the event LEM, WKEC or its Affiliate shall make a payment to Henderson under this Section 10.17(c) in error, either due to an overpayment or underpayment to Henderson, but shall have otherwise paid Henderson the amount set forth in Big Rivers' notice as due Henderson on that Monthly Payment Date, LEM, WKEC or such Affiliate, as the case may be, shall have no obligation to Big Rivers or Henderson by reason of -145- that error, and Big Rivers and Henderson shall reconcile the error through appropriate payments made between them. (d) Big Rivers hereby agrees that, upon its exercise of any purchase option or right of first refusal with respect to Station Two or any Station Two Assets, Big Rivers shall assume and agree to perform and discharge all the duties and obligations of Henderson to the LG&E Companies under this Agreement and the Station Two Contracts with respect to such assets, plant and facilities so purchased by Big Rivers, to the extent arising or accruing following the date that purchase is consummated. Big Rivers' assumption of Henderson's obligations pursuant to the preceding sentence shall not release Henderson from responsibility for the future performance of such obligations or liabilities for the benefit of the LG&E Companies arising under the Station Two Contracts or this Agreement, regardless of whether such liabilities first arise or accrue before or after such assumption. Notwithstanding anything in this Agreement to the contrary, each of the LG&E Companies acknowledges that it has no right to force Big Rivers to exercise any such purchase option or right of first refusal that Big Rivers may have from Henderson. If Big Rivers shall at any time exercise any such purchase option or right of first refusal, such exercise, in and of itself, shall not release the LG&E Companies from their respective obligations under this Agreement or the Assigned Station Two Contracts. 10.18 Compliance with Bond Ordinance. This Agreement and all Station Two Contracts shall be subject to the terms and provisions of the Bond Ordinance, as the same may exist from time to time. Each of the Parties agrees that, in the performance of its obligations under this Agreement or the Station Two Contracts, it shall comply with the terms and provisions of the Bond Ordinance and shall take all action, and shall not fail to take action, within its reasonable control as may be necessary or required to comply with the Bond Ordinance. Each of the Parties agrees that neither this Agreement nor any of the Station Two Contracts will be amended, modified or otherwise altered in a manner that will conflict with or violate the terms and provisions of the Bond Ordinance as the same may, from time to time, exist. -146- 10.19 Additional Covenants of Henderson. (a) Henderson hereby agrees to promptly provide to Station Two Subsidiary: (1) after Henderson's delivery or receipt thereof, all copies of written correspondence and notices of (A) the occurrence of an "Event of Default" under the Bond Ordinance, (B) the occurrence of any other event or circumstance that, with notice or the passage of time, may constitute a default or breach of the Bond Ordinance, and (C) potential violations or conflicts with the terms and provisions of the Bond Ordinance that may exist as a result of the performance of this Agreement or the Station Two Contracts by any of the Parties hereto; (2) all notices, reports, documents or other written communications that Henderson directs to Big Rivers pursuant to or relating to the Station Two Assets or the Station Two Contracts; and (3) all subsequent written correspondence or notices that may be delivered or received by Henderson relating to any of the foregoing. During the Phase I Subcontract Term, the reports provided by Henderson to Station Two Subsidiary shall be inclusive of, without limiting those other reports otherwise to be provided pursuant hereto, the annual audit report for Station Two described in Section 11.1 of the Station Two Power Sales Agreement. (b) Without in any manner limiting the rights that will be assigned to Station Two Subsidiary throughout the Phase II Assignment Term, Henderson hereby agrees with Station Two Subsidiary that it shall not: (1) Without the prior written consent of Station Two Subsidiary, during the Phase I Subcontract Term or the Phase II Assignment Term, authorize or issue any additional bonds or other indebtedness under the Bond Ordinance or any other ordinance the debt service on which would constitute Capacity costs under the Station Two Power Sales Agreement, subject, however, to Section 10.18 of this Agreement. (2) During the Phase I Subcontract Term, add any additional generating units to Station Two unless Station Two Subsidiary shall have agreed with Henderson as to the terms and conditions applicable thereto (including without limitation, the respective rights -147- of those Parties with respect to the operation and maintenance thereof and the use of the Power generated therefrom). (3) Without the prior written consent of Station Two Subsidiary, at any time during the Term sell, transfer, convey or assign any rights or interests in or to Station Two, the Station Two Assets, or the Station Two Contracts unless the transferee takes such assets and facilities subject to all the rights, obligations, terms and conditions of this Agreement and the Station Two Contracts applicable to Henderson; provided, nothing in this Section 10.19(b)(3) shall restrict Henderson from selling Excess Station Two Capacity and Excess Station Two Energy pursuant to Section 11.5 of this Agreement, in accordance with the terms thereof. As a condition of any such sale, transfer, conveyance and assignment, such transferee shall assume all duties, obligations and liabilities of Henderson under this Agreement and the Station Two Contracts, by execution and delivery to the LG&E Companies of a written instrument in form and substance reasonably satisfactory to the LG&E Companies. (c) During the Phase I Subcontract Term, and not in limitation of similar rights the LG&E Companies shall have in the Phase II Assignment Term by virtue of the Assigned Station Two Contracts, Henderson hereby confirms and agrees for the benefit of the LG&E Companies that: (1) Henderson shall give Station Two Subsidiary advance notice of, and Station Two Subsidiary may have representatives present for, tests and inspections of the printing demand meters and all other meters relating to Station Two or the operation thereof, and shall at all times during such period be promptly advised by Henderson of the results of such tests. (2) Subject to approval of the regulatory bodies having jurisdiction thereof, at all times maintain rates for services rendered by its electric system which will be sufficient to adequately meet the costs of proper operation and maintenance thereof, to provide for the -148- depreciation thereof through renewals and replacements, or otherwise, and to provide for the full and prompt payment of all obligations of Henderson on all of its outstanding Electric Revenue Bonds, including, without limitation, its Station Two Bonds. (3) Station Two Subsidiary and its agents, authorized representatives or employees shall have the right at all reasonable times during the Phase I Subcontract Term to examine the books, accounts and records of Henderson in order to determine the accuracy of the Capacity charges and other charges to be paid by LEM and/or Station Two Subsidiary to Big Rivers during the Phase I Subcontract. (4) Except to the extent such obligation or duty is imposed on Big Rivers under the Station Two Contracts, Henderson shall use its reasonable best efforts to maintain all necessary Permits for the maintenance, improvement and operation of Station Two, and shall use its reasonable best efforts to obtain all renewals and extensions of such Permits for the term of the Station Two Contracts. (d) In addition to all other rights and entitlements granted by Henderson in this Agreement or in the Station Two Contracts, and not in limitation thereof, Henderson hereby irrevocably commits to Station Two Subsidiary for the continuing use by Station Two Subsidiary and its Affiliates, successors and assigns in the operation and maintenance of Station Two and/or the Reid Station throughout the continuance of the term of all Station Two Contracts, or for such longer period as Station Two Subsidiary (or its Affiliates, successors or assigns) shall continue to operate or maintain Station Two or the Reid Station, all of Henderson's Joint Use Facilities that it has committed to the joint use of such generating facilities on the Effective Date, or as may thereafter be committed by Henderson for use in the operation or maintenance of such facilities. Henderson's commitment hereunder shall in any event continue for so long as Station Two Subsidiary or its Affiliates, successors or assigns shall continue to operate or maintain a generating station (as a subcontractor or operator) served by any such Joint Use Facilities, and shall survive and not be terminated by reason of a -149- termination of this Agreement, any Station Two Contract or any other agreement between or among the Parties. 10.20 Acknowledgments and Affirmations by Big Rivers. Big Rivers hereby agrees that, throughout the Phase I Subcontract Term and the Phase II Assignment Term, and in addition to all other rights and entitlements granted by Big Rivers in this Agreement or any Station Two Contract, and not by way of limitation thereof, Big Rivers hereby commits to Station Two Subsidiary (or its successors or permitted assigns) for the continuing use by Station Two Subsidiary in the operation and maintenance of Station Two and in the transmission of Power by Station Two Subsidiary from such facilities throughout the continuance of the term of all Station Two Contracts, and for such longer period as Station Two Subsidiary (or its Affiliates, successors or assigns) shall continue to operate or maintain Station Two or the Reid Station, all of Big Rivers' transmission facilities and all Joint Use Facilities (including the Green Station FGD System Facility) that it has committed (and in accordance with the terms of that commitment) to the joint use of such generating facilities on the Effective Date under the Station Two Contracts, or as may thereafter be committed by Big Rivers for use in the operation or maintenance of such facilities. Big Rivers' commitment under this Section 10.20 shall in any event continue for so long as any LG&E Company, or their respective Affiliates, successors or permitted assigns, shall continue to operate or maintain Station Two or the Reid Station, and shall survive and not be terminated by reason of any expiration or termination of this Agreement, any Station Two Contracts, or any other agreement between or among the Parties; provided, however, such commitment shall terminate upon the termination of this Agreement and (a) the Power Purchase Agreement, the Transmission Services and Interconnection Agreement, the Cost Sharing Agreement, the Facilities Operating Agreement and the Participation Agreement, or (b) the Power Purchase Agreement, the Transmission Services and Interconnection Agreement, the Lease and the Participation Agreement, as the case may be, by Big Rivers in accordance with the terms of this Agreement and those agreements due to a default by any LG&E Company or its Affiliate. -150- 10.21 SEPA Power. As soon as practicable following the Execution Date, Big Rivers and the LG&E Companies shall cooperate with one another in good faith in an attempt to structure and submit to Henderson at the earliest practicable time a proposal for the purchase by Big Rivers and scheduling by LEM and/or Station Two Subsidiary of peaking Power and associated Energy ("SEPA Power") from the Southeastern Power Administration ("SEPA") that may be made available to Henderson at any time during the Term pursuant to any new contract that may be entered into following the Execution Date by Henderson with SEPA in place of the existing contract between Henderson and SEPA dated July 1, 1984, but that may be in excess of Henderson's needs for that SEPA Power. Until that new contract and associated arrangements among the Parties have been entered into, Big Rivers shall schedule through LEM (as further provided below) and purchase from Henderson all SEPA Power that may be made available by Henderson to Big Rivers in connection with the contract with SEPA dated July 1, 1984 (the "Existing SEPA Contract"). In the event Big Rivers shall purchase SEPA Power, whether from Henderson or SEPA in connection with the Existing SEPA Contract or any replacement contract therefor, or from SEPA pursuant to any existing contracts between Big Rivers and SEPA, at any time when the Letter Ruling shall remain in effect and shall continue to limit the distribution of Energy from Station Two to customers within Henderson and Daviess Counties, all such SEPA Power shall be taken by Big Rivers for resale, and shall be resold or otherwise utilized by Big Rivers, solely outside of Henderson and Daviess Counties unless the customer load for those two counties in the hour(s) in which such SEPA Power is to be delivered is in excess of the Station Two Unit Output generated for that hour, in which event, for that hour, Big Rivers may take and resell in that two-county area an amount of SEPA Power that is no greater than necessary to meet such excess load in those two counties. At least 30 days prior to the expected Effective Date and each October 1 thereafter during the period of time that Big Rivers shall continue to have the legal and contractual right to take SEPA Power from Henderson in excess of the needs of Henderson, Big Rivers shall submit to LEM a schedule showing the amount of SEPA Power Big Rivers desires to have delivered to it under its agreement with Henderson during each month ("SEPA Schedule") of the following Partial Year or Year, and which Henderson has notified Big Rivers will be made available to it during those months. In addition, Big Rivers shall notify -151- LEM at the earliest possible time after Big Rivers receives that notice from Henderson, of the amount of SEPA Power that will be made available by Henderson to Big Rivers, the time(s) at which and duration(s) for which it shall be available, and point(s) of interconnection at which it will be made available to Big Rivers. Henderson agrees to notify LEM that Henderson will make SEPA Power available to Big Rivers as contemplated above, including the data regarding that Power described above, as soon as is reasonably possible following Henderson's notice of the same to Big Rivers, and Henderson agrees to keep LEM reasonably apprised of any changes in those plans or such data. LEM shall act as Big Rivers' agent for the scheduling of all SEPA Power that may be made available to it by Henderson (whether in connection with the Existing SEPA Contract or otherwise), and shall have the right to determine (consistent with the provisions of the Existing SEPA Contract or any replacement therefor) the timing of deliveries of such Power during each month; provided, however, for purposes of the administration of this Agreement, such deliveries shall be deemed, after-the-fact, to have occurred consistent with the SEPA Schedule and, to the maximum extent allowable under the Existing SEPA Contract or any replacement therefor, during hours of the Members' demand on Big Rivers' system. 10.22 Green Station FGD System Facility. Big Rivers and Henderson acknowledge that the portion of the Green Station FGD System Facilities owned by Big Rivers and described in Section 3.3 of the Joint Facilities Agreement is subject to contractual rights, a license and a leasehold interest in favor of WKEC or one of its Affiliates pursuant to the Operative Documents. The Parties acknowledge that the portion of the Green Station FGD System Facilities owned by Big Rivers is further subject to the terms of the Joint Facilities Agreement and the Cross-Grants of Rights of Access and of Easements dated July 20, 1993 between Big Rivers and Henderson. In consideration of such rights and interests of WKEC or its Affiliate, Big Rivers and Henderson hereby agree that at all times during the Phase I Subcontract Term and the Phase II Assignment Term all of the payments due by Henderson for a prorated share of the carrying costs of the Green Station FGD System Facilities pursuant to Section 3.3 of the Joint Facilities Agreement shall be paid by Henderson to Station Two Subsidiary, WKEC or their designated Affiliate, rather than to Big Rivers, subject, however, to Henderson's right of -152- off-set set forth in Section 16.4 of the Station Two Operating Agreement. Such carrying costs shall continue to be included as a cost under Section 6.3(g) of the Station Two Power Sales Contract (payable by Big Rivers in the Phase I Subcontract Term and by Station Two Subsidiary (or its successors or permitted assigns) in the Phase II Assignment Term), subject, however, to LEM's right of off-set in Section 8.13 of this Agreement during the Phase I Subcontract Term and Station Two Subsidiary's (or its successors' or permitted assigns') right of off-set in Section 9.3 of the Station Two Power Sales Agreement or Section 9.7(h) of this Agreement. Nothing in this Section 10.22 is intended to in any way limit any Party's right of off-set which is set forth in any other provision of this Agreement or any of the Station Two Contracts. 10.23 Transmission and Transformation Facilities. Throughout the Term, Big Rivers and Henderson shall each provide, maintain and operate, to the extent required of such Party by Section 5 of the Station Two Operating Agreement and in accordance with Prudent Utility Practice, the 161 KV step-up transformers, the 69 KV transmission line and related transformation facilities connecting Station Two to Henderson's Existing System, surplus capacity on Big Rivers 69 KV transmission lines and other lines and transmission facilities as necessary for the delivery of Power from the point of Station Two to Big Rivers and to Henderson's Existing System, and all other transmission and transformation facilities used in or in connection with Station Two or necessary for the delivery of Power from Station Two to Big Rivers' transmission system. 10.24 Governmental Consents. Promptly following the execution of this Agreement, the Parties will proceed to prepare and file with the appropriate governmental authorities any requests for approval or waiver that are required (or that the Parties otherwise agree to seek) from governmental authorities in connection with the transactions contemplated hereby, and that have not been filed prior to the Execution Date, and the Parties shall diligently and expeditiously prosecute and cooperate fully in the prosecution of such requests for approval or waiver and all proceedings necessary to secure such approvals and waivers. Compliance by the Parties with this Section 10.24 shall not affect or limit the provisions of Section 3.1 of this -153- Agreement which require, as a condition precedent to the Closing, that each of the conditions set forth on Schedule 2.1 or Schedule 2.2 be satisfied or waived, including such conditions as relate to the receipt of governmental approvals. 10.25 Third Party Consents. Promptly following the execution of this Agreement, the Parties will use their reasonable best efforts to procure all consents that are required from third parties in connection with the transactions contemplated hereby, and the Parties shall diligently and expeditiously seek such consents and cooperate fully in the procurement of such consents. 10.26 Reasonable Best Efforts. Each Party agrees to use its reasonable best efforts to effect the transactions contemplated by this Agreement and to fulfill the conditions to the obligations of the Parties set forth in Schedule 2.1, 2.2 or, as applicable, 2.3 to this Agreement at the earliest practicable time. 10.27 Further Assurances. Each of the Parties shall take, from time to time, for no additional consideration, such actions and execute such additional instruments as may be reasonably necessary or convenient to implement and carry out the intent and purposes of this Agreement, including, without limitation, such instruments of conveyance and assignment as shall be necessary or appropriate in order to effect the assignment of the Assigned Station Two Contracts and the assumption of the Assumed Station Two Liabilities as contemplated by this Agreement. Station Two Subsidiary presently intends to explore the possible repeal of KRS ss.96.520 insofar as it requires that sales of wholesale Power by Henderson within the Commonwealth of Kentucky, or that the operation and maintenance of the Station Two, be restricted to utilities regulated by the KPSC or having customers located solely outside the Commonwealth of Kentucky. To the extent that Station Two Subsidiary determines to seek such repeal, each of the Parties hereto, at Station Two Subsidiary's request, shall reasonably cooperate with and assist Station Two Subsidiary to effect such repeal; provided that Station Two Subsidiary hereby agrees to pay for all reasonable out-of-pocket costs and expenses -154- incurred by Big Rivers in providing such cooperation and assistance to Station Two Subsidiary. 10.28 Access to Spare Transformer. Throughout the Phase I Subcontract Term and the Phase II Assignment Term, Henderson and Big Rivers agree that the spare 161 KV step-up Power transformer subject to the Spare Transformer Agreement between Henderson and Big Rivers shall be available for use at Station Two, the Coleman Facility of Big Rivers and such other facilities of Henderson or Big Rivers as are permitted under the Spare Transformer Agreement. If Henderson or Station Two Subsidiary shall determine that the spare transformer is needed at Station Two, and the transformer is not then subject to a prior use at the Coleman Facility or any other facility of Henderson or Big Rivers, as permitted under the Spare Transformer Agreement, then Big Rivers and Henderson shall make the spare transformer available for use at Station Two. Similarly, if Big Rivers or WKEC, as the case may be, shall determine that the spare transformer is needed at the Coleman Facility or any other facility of Big Rivers, as permitted under the Spare Transformer Agreement, and the transformer is not then subject to a prior use at Station Two, then Big Rivers and Henderson shall make the spare transformer available for use at the Coleman Facility or such other Big Rivers' facility. The availability and usage of the spare transformer shall at all times be subject to the terms of the Spare Transformer Agreement. In addition to making the spare transformer available for use at Station Two, the Coleman Facility or any other facility of Big Rivers, as permitted under the Spare Transformer Agreement, Big Rivers shall ready the spare transformer for operation, install, operate and maintain the spare transformer and, with respect to its use at Station Two only, shall charge Station Two Subsidiary only its direct costs (without mark-up) incurred in providing such services and shall be entitled to no other compensation from any of the LG&E Companies, WKEC or Henderson for such services. The Parties shall account for the costs paid to Big Rivers associated with the use of the spare transformer at Station Two as an operating and maintenance expense of Station Two. Big Rivers and Henderson shall fully enforce their respective rights under the Spare Transformer Agreement to obtain and use the spare transformer whenever reasonably requested to do so by Station Two Subsidiary or WKEC. Station Two Subsidiary and the other LG&E Companies -155- agree to indemnify and save harmless Big Rivers from all claims, losses, liabilities, damages, costs (including court costs), and expenses (including reasonable attorneys' fees and accountants fees) suffered or incurred by, or made against, Big Rivers or its respective agents, representatives and employees, arising out of, resulting from or related to Station Two Subsidiary's use of the Spare Transformer, but exclusive of any such claims, losses, liabilities, damages, costs or expenses that (y) are a direct result of a breach or default by Big Rivers or Henderson under the Spare Transformer Agreement, any Station Two Contract, this Agreement or any other Operative Document, the negligence or willful misconduct of Big Rivers or Henderson, or any of their respective agents, representatives or employees, or (z) are a direct result of any latent defects in the Spare Transformer or in any of Big Rivers' or Henderson's assets or properties; provided, that the LG&E Companies shall at no time have any obligation or liability to Big Rivers or Henderson for any costs of remediation or any other costs, expenses or liabilities arising under Environmental Laws or in connection with compliance with such Environmental Laws, at or associated with the Spare Transformer to the extent arising out of events or circumstances occurring or existing at any time prior to the Effective Date. Notwithstanding the foregoing, none of the LG&E Companies shall have any obligation to indemnify and save harmless Big Rivers or any of its agents, representatives or employees by reason of any damages to the Spare Transformer resulting from, arising out of or relating to any defects (whether or not latent), or any costs or expenses to repair or replace the same not arising out of the negligence or willful misconduct of those LG&E Companies or their employees, agents or representatives. 10.29 General and Administrative Expenses. On or prior to the Effective Date, the Parties shall execute and deliver an agreement substantially in the form of Exhibit C attached hereto providing for an appropriate and reasonable allocation to Station Two of the Parties' anticipated general and administrative expenses associated with their respective performance obligations relating to Station Two under this Agreement and the Station Two Contracts following the Effective Date (the "G & A Allocation Agreement"). On the Effective Date, the agreements between Big Rivers and Henderson specifically relating to general and -156- administrative expenses, as set forth in the Agreement dated February 15, 1991, shall terminate and be of no further force or effect. 10.30 Systems and Operating Reserves. On or prior to the Effective Date, Big Rivers, Henderson and LEM shall enter into an agreement in substantially the form attached hereto as Exhibit D (the "New Reserves Agreement"). 10.31 Rights and Remedies Not Waived. (a) Notwithstanding anything in this Agreement to the contrary, (1) Henderson shall continue to be responsible to Big Rivers for the full performance of all of its covenants and obligations under the Station Two Contracts, and shall not, by virtue of the assignment of Big Rivers' rights, title and interests in and to the Assigned Station Two Contracts to Station Two Subsidiary (or its successors or permitted assigns) or the assumption of the Assumed Station Two Liabilities by Station Two Subsidiary (or its successors or permitted assigns) during the Phase II Assignment Term as provided in this Agreement, or by virtue of any other term or provision of this Agreement, be released from any of its covenants and obligations under the Station Two Contracts, and (2) Big Rivers shall not be deemed to have waived or to have otherwise limited or restricted the availability to it of any of its rights or remedies against Henderson under the Station Two Contracts. (b) Notwithstanding anything in this Agreement to the contrary, (1) Big Rivers shall continue to be responsible to Henderson for the full performance of all of its covenants and obligations under the Station Two Contracts, and shall not, by virtue of the assignment of its rights, title and interests in and to the Assigned Station Two Contracts to Station Two Subsidiary (or its successors or permitted assigns) or the assumption of the Assumed Station Two Liabilities by Station Two Subsidiary (or its successors or permitted assigns) during the Phase II Assignment Term as provided in this Agreement, or by virtue of any other term or provision of this Agreement, be released from any of its covenants and obligations under the Station Two Contracts (except to the extent that any such covenant or obligation shall have been performed, paid or otherwise discharged or satisfied under the terms and provisions of -157- the Station Two Contracts by Big Rivers or any LG&E Company), and (2) Henderson shall not be deemed to have waived or to have otherwise limited or restricted the availability to it of any of its rights or remedies against Big Rivers under the Station Two Contracts. 10.32 Survival Of Representations and Warranties. All of the representations and warranties set forth in this Agreement shall survive the date of this Agreement and the Effective Date, and shall continue to be binding on the Party or Parties making such representations and warranties. 10.33 Station Two Inventories. On the Effective Date, Big Rivers shall sell and assign to Station Two Subsidiary, free and clear of all Liens, all of Big Rivers' (but not Henderson's) rights, title and interest under, in and to the Station Two Inventory in Big Rivers' possession or control. Pursuant to the procedures set forth on Schedule 9.1 attached to the Participation Agreement, Big Rivers and Station Two Subsidiary shall jointly conduct an inventory survey and agree upon the fair market value of the Station Two Inventory sold to Station Two Subsidiary pursuant to this Section 10.33 prior to the Effective Date. Station Two Subsidiary (or its designated Affiliate) shall pay Big Rivers for the fair market value as so determined on the Effective Date or, if Station Two Subsidiary and Big Rivers are unable to agree on such fair market value and either party submits the issue of fair market value to the arbitration procedure described in Section 13.5(e) of this Agreement, then within five (5) days after final determination pursuant to that procedure. On the date of termination or expiration of this Agreement, Station Two Subsidiary shall immediately sell and assign to Big Rivers, free and clear of all Liens, all of Station Two Subsidiary's rights, title and interest under, in and to the fuel and scrubber reagent inventory, spare parts and materials and supplies inventory then owned by Station Two Subsidiary or its Affiliates and held exclusively for use by Station Two Subsidiary (or its Affiliates) at that time in connection with its operation of Station Two and the other Station Two Assets, and in Station Two Subsidiary's (or its Affiliates') possession or control (the "End of Term Inventory"). Within 30 days after such sale, Station Two Subsidiary and Big Rivers shall utilize the procedures set forth above and on Schedule 9.1 of the Participation Agreement to determine the fair market value of the End of Term Inventory -158- sold to Big Rivers, and Big Rivers shall pay Station Two Subsidiary (or its designated Affiliate) the fair market value of such inventory. In connection with any such sale of the End of Term Inventory to Big Rivers upon the termination or expiration or this Agreement, should any portion of such inventory have been paid for by Big Rivers as Henderson Incremental Environmental O&M (determined on a first in, first out basis) prior to the date of expiration or termination of this Agreement, either pursuant to Section 8.16 or Section 9.9 of this Agreement, Big Rivers shall receive a credit against the fair market value of the End of Term Inventory in an amount equal to that portion for which it paid the applicable Henderson Incremental Environmental O&M. If Station Two Subsidiary and Big Rivers are unable to agree upon the fair market value of Station Two Inventory or the End of Term Inventory, the issue shall be submitted to the arbitration procedure described in Section 13.5(e) of this Agreement. Schedule 9.1 of the Participation Agreement is incorporated by reference in this Agreement at the first place where such reference appears in this Agreement and shall survive any termination or expiration of the Participation Agreement prior to the date of termination or expiration of the terms and provisions of this Section 10.33. 10.34 Assignment of Certain Station Two Intangible Assets. (a) On the Effective Date, and pursuant to an assignment and assumption agreement in substantially the same form as that agreement attached as Schedule 9.2 to the Participation Agreement, Big Rivers shall assign or transfer to Station Two Subsidiary all of Big Rivers' (but not Henderson's) right, title and interest in and to, and all of its obligations (if any) under, the Station Two Intangible Assets (except (i) the Station Two Allowances, which are subject to Section 8.10(c) of this Agreement, and (ii) if the Effective Date is the Phase I Effective Date, the Permits), free and clear of all Liens, and Station Two Subsidiary shall assume and agree to perform and discharge Big Rivers' performance obligations, if any, under those Station Two Intangible Assets which first arise or accrue on or after the Effective Date. Station Two Subsidiary shall maintain and replace the Station Two Intangible Assets (if any such assets shall exist) as shall be necessary, in its reasonable discretion, to operate the Station Two Assets in a manner consistent with Prudent Utility Practice and the Station Two -159- Contracts. Station Two Subsidiary shall inform the Operating Committee of any material change in the status of any material Station Two Intangible Asset, of any pending applications for new Permits, and of the receipt of new material intangible assets that are required of it, as operator of the Station Two Assets, to comply with the performance standards set forth in Sections 8.3 and 9.15 of this Agreement, as the case may be. On the date of termination or expiration of this Agreement, Station Two Subsidiary shall (subject to the receipt of all third-party consents and approvals required therefor, if any) assign to Big Rivers, free and clear of all Liens, its rights, title and interest under, in and to the remaining Station Two Intangible Assets (exclusive of rights in the Station Two Allowances, which are addressed in Section 8.10(c) of this Agreement) and any additions, modifications or replacements of the Station Two Intangible Assets (exclusive of the rights in the Station Two Allowances) previously approved by Big Rivers in writing, and Big Rivers shall assume all of Station Two Subsidiary's obligations thereunder arising after such date of termination or expiration of this Agreement. Station Two Subsidiary shall utilize its best efforts to obtain the third-party consents and approvals referred to in the parenthetical in the prior sentence and agrees, to the extent such consents or approvals are not obtained, to utilize its best efforts to provide Big Rivers with its benefits and rights in, to and under such Station Two Intangible Assets at no expense to Big Rivers. (b) Notwithstanding the assignment provisions set forth in (a), above, Big Rivers and the LG&E Companies agree that during the Phase I Subcontract Term, (i) all Permits in which Big Rivers may have an interest (including, without limitation, those held in its name as operator of Station Two) and which relate in any manner to its operation of Station Two or any other Station Two Asset, will not be assigned by Big Rivers to Station Two Subsidiary, and (ii) all Permits which may be required or necessary in connection with the operation of Station Two or any Station Two Asset shall be obtained by Big Rivers in its name as operator of Station Two. Big Rivers shall take any and all action to maintain and preserve in full force and effect, and shall timely renew, all of those Permits as may be required or necessary for the operation of Station Two and the other Station Two Assets in a manner consistent with Prudent -160- Utility Practice and as may otherwise be required for Big Rivers and Station Two Subsidiary to fulfill their respective obligations under this Agreement and the Station Two Contracts. Notwithstanding the foregoing provisions of this Section 10.34(b), at all times during the Phase I Subcontract Term and thereafter during the Term until such Permits are assigned to Station Two Subsidiary (or its designated Affiliate), Station Two Subsidiary, solely to the extent permitted by applicable Laws and the Station Two Contracts, shall administer, maintain, preserve, renew and, where necessary, procure the Permits described above on behalf of Big Rivers, as the agent of Big Rivers. Big Rivers and Henderson acknowledge and agree that, where Station Two Subsidiary shall be precluded by applicable Laws or the Station Two Contracts from doing so, Station Two Subsidiary shall have no obligation, as the agent of Big Rivers or in any other capacity, to administer, maintain, preserve, renew, procure or take any other action of the type described above in respect of any such Permits, and in such event Big Rivers shall be responsible for that action which must be taken in respect of such Permits. On the Phase II Effective Date, or as soon as reasonably practicable thereafter, Big Rivers and Station Two Subsidiary shall execute and deliver an assignment and assumption agreement with respect to all Permits held by Big Rivers with respect to its operation of Station Two or any Station Two Asset to the extent such Permit may be assigned to Station Two Subsidiary or its designated Affiliate) under applicable Laws. To the extent that any such Permit is not so assignable by Big Rivers, Big Rivers agrees to make such Permit otherwise available at no additional cost, to the greatest extent possible, to Station Two Subsidiary in connection with the performance of its obligations under this Agreement and the Station Two Contracts. Station Two Subsidiary agrees, to the extent permitted by Law, to take during the Phase II Assignment Term any and all actions necessary to administer, maintain or renew such non-transferable Permits, consistent with those requirements and standards set forth above for Big Rivers; provided, however, to the extent Station Two Subsidiary is precluded from doing so under applicable Law or the Station Two Contracts, Big Rivers, shall continue to maintain, preserve, renew and otherwise take actions with respect to the non-transferable Permits consistent with its obligations set forth above relating to the Permits during the Phase I Subcontract. At all times during the Phase I Subcontract Term and thereafter until the Permits are assigned to Station Two Subsidiary (or its designated Affiliate), Big Rivers (x) -161- shall cooperate with and assist Station Two Subsidiary in its actions taken in respect of the Permits, to the extent reasonably requested by Station Two Subsidiary or Henderson, and (y) shall obtain the consent of Station Two Subsidiary and, where requested by Station Two Subsidiary or Henderson, shall exercise all rights and remedies it may have in respect of such Permits, to the extent the exercise of such rights or remedies is reasonably necessary for any LG&E Company or Henderson to receive the full benefit, use and enjoyment of the Station Two Assets and their respective rights under this Agreement and the Station Two Contracts. (c) Notwithstanding the assignment provision set forth in (a), above, Big Rivers and the LG&E Companies agree that during the Phase I Subcontract Term, all fuel or reagent supply agreements that Big Rivers may have with respect to its operations at Station Two will not be assigned by Big Rivers to Station Two Subsidiary and any additional fuel or reagent agreements required during the Phase I Subcontract Term shall be entered into by Big Rivers in its own name (subject to Station Two Subsidiary's rights as Big Rivers' exclusive agent for administering Big Rivers' fuel and reagent supply agreements as is further set forth in Section 8.14(c) of this Agreement). On the Phase II Effective Date, Big Rivers and Station Two Subsidiary agree to execute an assignment and assumption agreement with respect to the fuel or reagent supply agreements to which Big Rivers may be a party and that relate to Big Rivers' obligations as the operator of Station Two; provided, that Station Two Subsidiary shall have no obligation to assume any fuel or reagent supply agreement entered into by Big Rivers during the Phase I Subcontract Term to the extent Big Rivers did not receive Station Two Subsidiary's consent to that agreement prior to executing that agreement. On the date of termination or expiration of this Agreement, Big Rivers shall not be obligated to assume any fuel supply agreements entered into by Station Two Subsidiary during the Phase II Assignment Term to the extent Station Two Subsidiary did not receive Big Rivers' written approval prior to executing such fuel supply agreement. (d) Nothing in this Section 10.34 shall in any way limit any additional or different commitment of Big Rivers or any LG&E Company (or WKEC) relating to Station Two Intangible Assets (including, without limitation, commitments related to fuel and reagent -162- supply in connection with operation of Station Two) as may be set forth in any of the Operative Documents, including, without limitation, Section 9.2 of the Participation Agreement. 10.35 Station Two Personal Property. On the Effective Date, Big Rivers shall sell to Station Two Subsidiary (or its designated Affiliate) and Station Two Subsidiary (or its designated Affiliate) shall purchase from Big Rivers, free and clear of all Liens, all of Big Rivers' (but not Henderson's) rights, title and interest under, in and to the Station Two Personal Property (if any) in Big Rivers' possession, including, without limitation, any such Station Two Personal Property which may be identified on Schedule 5.1.11 attached to the Participation Agreement. Station Two Subsidiary shall pay Big Rivers an amount equal to the net book value of the Station Two Personal Property as so determined on the Effective Date (the "Station Two PP Price"). Upon such payment, (a) in the event that the Effective Date is the Phase I Effective Date, the Initial Fixed Payment referenced in Section 3.3(a) of the Power Purchase Agreement shall be reduced by an amount equal to twenty percent (20%) of the Station Two PP Price and the remaining monthly fixed installments payable pursuant to such Section 3.3 shall each be reduced by an amount equal to 0.78% of the Station Two PP Price, (b) in the event that the Effective Date is the Phase II Effective Date, the Initial Rental Payment referenced in Section 2.3.1 of the Lease shall be reduced by an amount equal to twenty percent (20%) of the Station Two PP Price and the remaining monthly installments of Rental Payment payable pursuant to Section 2.3.2 of the Lease shall each be reduced by an amount equal to 0.78% of the Station Two PP Price and (c) in the event that the Phase II Effective Date follows the Phase I Effective Date, all remaining monthly rental installments payable on and after the Phase II Effective Date pursuant to Section 2.3.2 of the Lease shall each be reduced by an amount equal to 0.78% of the Station Two PP Price (any such reduction set forth in (a), (b) and (c), above, is sometimes referred to in this Agreement as the "Station Two PP Price Reduction"). On the date of termination or expiration of this Agreement, Station Two Subsidiary shall immediately sell to Big Rivers, free and clear of all Liens, all of Station Two Subsidiary's rights, title and interest under, in and to all tangible personal -163- property (other than fuel and scrubber reagent, inventory, spare parts and materials, and supplies) then owned by Station Two Subsidiary (or its Affiliates) and used or held at that time exclusively for use in connection with its use and operation of the Station Two Assets (the "End of Term Personal Property"), and Big Rivers shall pay Station Two Subsidiary (or its designated Affiliate) the net book value of such End of Term Personal Property as so determined on the date of such termination or expiration of this Agreement. If as of the date of any such termination or expiration of this Agreement, any portion of the End of Term Personal Property has been paid for by Big Rivers as Henderson Incremental Environmental O&M (determined on a first in, first out basis), either pursuant to Section 8.16 or Section 9.9 of this Agreement, Big Rivers shall receive a credit against the net book value of such End of Term Personal Property in an amount equal to that portion for which it paid the applicable Henderson Incremental Environmental O&M. 10.36 LG&E Parties' Residual Value Payment. In the event the Participation Agreement terminates or expires prior to the date that this Agreement terminates or expires, the terms and provisions of Section 22 of the Participation Agreement relating to the LG&E Parties' Residual Value Payment on the Station Two Assets shall survive the expiration or termination of the Participation Agreement and shall be incorporated by this reference in this Agreement. 10.37 Survival of Monthly Margin Payments. LEM and WKEC hereby agree with Big Rivers that the Monthly Margin Payments owing by LEM or WKEC (as applicable), or their respective successors or permitted assigns, pursuant to Section 3.3(a)(iv)(A) of the Power Purchase Agreement or Section 2.3.2(c)(i) of the Lease shall survive the termination of the Power Purchase Agreement or the Lease, as the case may be, and shall continue to be binding on LEM and WKEC pursuant to this Agreement in accordance with their respective terms. 11. ADDITIONAL AGREEMENTS RESPECTING STATION TWO POWER. . 11.1 Pre-Closing Economic Development Opportunities. . -164- (a) Notwithstanding anything contained in this Agreement or the 1998 Amendments to the contrary, neither the Closing, the Phase II Assignment nor the consummation of any other transactions contemplated in this Agreement shall constitute an undertaking by any LG&E Company of Big Rivers' obligation, under one or more Power sales or similar agreements entered into prior to the Effective Date, to sell and deliver Power to Henderson to meet all or any portion of the Economic Development Load (as defined in the 1998 Amendments) of one or more customers of Henderson (each a "Pre-Closing Development Agreement"), unless such Power sales are to be made during the Term at the applicable Economic Development Rate(s) set forth on Exhibit 1 to the 1998 Amendments, and Henderson has agreed with LEM to pay all transmission fees that Big Rivers (or its successor) is required or permitted to charge in order to deliver such Power to Henderson over Big Rivers' transmission system, and then only to the extent that LEM approved in writing the other material terms and conditions of those Pre-Closing Development Agreements prior to their execution by Big Rivers and Henderson. Prior to execution and delivery of any Pre-Closing Economic Development Agreement, and as a condition precedent to the obligation of the LG&E Companies to assume and undertake any obligation of Big Rivers set forth in the Pre-Closing Economic Development Agreement, Big Rivers shall deliver a copy of the Pre-Closing Economic Development Agreement to LEM for its determination whether the material terms and conditions set forth in the Pre-Closing Economic Development Agreement are acceptable to LEM. LEM shall notify Big Rivers and Henderson of its approval or disapproval of the proposed terms of the Pre-Closing Economic Development Agreement within 15 days after its receipt of the Pre-Closing Economic Development Agreement. At the Closing, Big Rivers shall assign and transfer to LEM, without further consideration (but subject to the provisions of Subsection (d) below), all of Big Rivers' rights, title and interests in and to all Pre-Closing Development Agreements pre-approved by LEM as contemplated above. Upon any such assignment or transfer of any Pre-Closing Economic Development Agreement to LEM, LEM shall be deemed to have assumed and undertaken all of Big Rivers' obligations thereunder which arise or accrue following that assignment or transfer; provided, in the event Big Rivers shall have modified or amended in any material respect a Pre-Closing Development Agreement without the consent of LEM, then -165- in lieu of any obligation of LEM to assume that agreement, as otherwise provided for in this Section 11.1(a), LEM shall have the option to have that agreement assigned to and assumed by it (which option shall be exercised by LEM in accordance with the procedures set forth below). If LEM shall decline or otherwise fail to pre-approve a Pre-Closing Development Agreement within the 15-day period provided above, then LEM shall be deemed to have fully and forever waived its right to elect to take an assignment of that Pre-Closing Development Agreement at the Closing and Big Rivers shall retain, perform and discharge that Pre-Closing Development Agreement. If Big Rivers shall fail to present to LEM one or more Pre-Closing Economic Development Agreements as required by this Section 11.1, then LEM shall be entitled, in its discretion (and not in limitation of any claim or remedies that LEM may elect to pursue for failure of Big Rivers to conform to that criteria), to elect to cause Big Rivers to assign and transfer to LEM without further consideration all of Big Rivers' rights, title and interest under, in and to each of those Pre-Closing Economic Development Agreements upon written notice delivered to Big Rivers prior to or within 30 days following the Effective Date. If LEM shall fail to make such an election, Big Rivers shall remain solely responsible for the performance of the relevant Pre-Closing Economic Development Agreement(s). If LEM makes such an election, Big Rivers shall assign and transfer the relevant agreement to LEM within two (2) Business Days following its receipt of LEM's election notice (but subject to the provisions of subsection (d) below). (b) Upon an assignment and transfer as described in (a) above, LEM agrees to assume and undertake to perform and discharge all of Big Rivers' Power delivery obligations under the relevant Pre-Closing Development Agreements which arise or accrue following the assignment or transfer LEM shall not assume or be responsible for, and Big Rivers shall retain, pay and perform, any transmission service obligations or any other obligations or liabilities under those Pre-Closing Development Agreements. Big Rivers shall retain all rights (if any) to charge and receive payment for the transmission service obligations it discharges only to the extent that such right is contemplated in Section 28 of the Station Two Power Sales Agreement. Big Rivers and LEM shall enter into an Assignment and Assumption Agreement in substantially the form attached as Schedule 9.2 to the Participation Agreement, evidencing -166- the assignment to and assumption by LEM of the relevant Pre-Closing Development Agreement(s), if any. (c) In the event Henderson shall have pre-paid Big Rivers for any of the Power to be delivered by LEM to Henderson during the Term under any Pre-Closing Development Agreement which LEM has assumed, Big Rivers agrees to pay to LEM all such pre-paid amounts as they relate to Power deliveries to be made after the assignment and assumption at the same time as its rights, title and interest thereunder are assigned and transferred to LEM. (d) The Parties acknowledge that the assignment and transfer of any Pre-Closing Development Agreements by Big Rivers to LEM as contemplated above may require the prior approval of the FERC or other federal, state or local governmental authorities, which may take extended periods of time and considerable expense to obtain. In light of this, the Parties agree that, notwithstanding the provisions of Subsection (a) and (b), above, no such assignment or transfer shall be deemed to have occurred in the event LEM shall reasonably determine, and shall notify Big Rivers and Henderson in writing, that any such approval by FERC or another governmental authority shall be required for the same but shall not have been obtained. In such event, and in lieu of the assignment and transfer of the relevant Pre-Closing Development Agreement as contemplated in subsection (a), above, LEM shall be deemed by that notice to have elected to (and shall then be obligated to) sell and deliver to Big Rivers, and Big Rivers shall then be obligated to purchase from LEM, seventy-five percent (75%) of all Power required by Big Rivers to meet its obligations to Henderson under the relevant Pre-Closing Development Agreement(s), for a purchase price payable by Big Rivers to LEM therefor equal to the total revenues actually received by Big Rivers from Henderson for the corresponding Power that it delivered to Henderson in connection with that agreement (but exclusive of revenues attributable to transmission charges or reimbursements payable by Henderson). (e) In the event LEM elects to sell Power to Big Rivers to service a Pre-Closing Development Agreement, in lieu of taking assignment of that agreement, as contemplated in subsection (d), above, LEM agrees to sell and deliver that Power to Big Rivers at one or more -167- interconnection points on Big Rivers' transmission system, or at one or more Points of Delivery (as defined in the Power Purchase Agreement), in either case at the same time(s) that Big Rivers is required to deliver the corresponding Power to Henderson under that agreement, and Big Rivers agrees to use its commercially reasonable efforts to enforce all of its rights thereunder and to continue the same in full force and effect for the remaining term thereof. LEM agrees to reimburse Big Rivers for seventy-five percent (75%) of its reasonable out-of-pocket costs and expenses incurred in connection with such enforcement, promptly after being invoiced by Big Rivers for the same. LEM shall be entitled at any time, and without further consideration, to elect to take assignment and transfer of any Pre-Closing Development Agreement for which an initial election was made to sell Power to Big Rivers in lieu of taking such assignment and transfer, upon written notice delivered to Big Rivers. Upon such election, LEM shall be responsible for obtaining all FERC and other governmental approvals required for such assignment and transfer (at LEM's expense), and Big Rivers and Henderson agree to reasonably cooperate with LEM in obtaining all such approvals. Henderson hereby consents for all purposes to the assignments and transfers described in this Section 11.1. (f) In the event LEM shall at any time take an assignment and transfer of a Pre-Closing Development Agreement from Big Rivers as contemplated in this Section 11.1, Big Rivers agrees to sell and deliver to LEM, and LEM agrees to purchase from Big Rivers, not less than twenty-five percent (25%) of the total amount of Power required by LEM to service that Pre-Closing Development Agreement with Henderson, for a purchase price payable by LEM to Big Rivers therefor equal to the total revenues actually received by LEM from Henderson for the corresponding Power that is delivered by LEM to Henderson under that agreement (but exclusive of revenues attributable to transmission charges or reimbursements that are payable by Henderson). Such Power shall be so delivered by Big Rivers to LEM at one or more interconnection points on Big Rivers' transmission system at the same time that the corresponding Power must be delivered by LEM to Henderson. Big Rivers agrees to reimburse LEM for twenty-five percent (25%) of its reasonable out-of-pocket costs and expenses incurred in connection with LEM's enforcement of its rights under such agreements, promptly after being invoiced by LEM for the same. Big Rivers agrees that all such Power -168- sales and deliveries shall be satisfied using Power other than the Unit Output or Station Two Unit Output required to be sold by Big Rivers to LEM pursuant to Section 3 of the Power Purchase Agreement; provided, that Big Rivers may provide such Power from the Base Power sold to Big Rivers by LEM under Section 4 of the Power Purchase Agreement. (g) Except as otherwise provided in the relevant Pre-Closing Development Agreement, Henderson shall be responsible for coordinating and paying for any transmission services over the Big Rivers transmission system required for the delivery of Power to Henderson or its customers (subject to any rights of Henderson under the Station Two Contracts to use that system without such payments). Where LEM is selling that Power directly to Henderson, Big Rivers agrees to invoice Henderson separately for such transmission charges (if any). Big Rivers and LEM agree with each other that they shall be solely responsible for the costs and risks which each has undertaken in the relevant Pre-Closing Development Agreement associated with their procuring and delivering the Power for which they are responsible as described in this Section 11.1, including without limitation any responsibility undertaken regarding the transmission and related costs required in order to transmit that Power to Big Rivers' transmission system. Big Rivers and LEM each agree to pay to the other Party, the purchase price amounts for which they are responsible under this Section 11.1 within 15 days after receipt of the corresponding revenues from Henderson. 11.2 Economic Development Opportunities During The Term. Notwithstanding anything contained in the 1998 Amendments or elsewhere in this Agreement to the contrary, the Parties agree that during the Phase I Subcontract Term and the Phase II Assignment Term the rights and obligations of Big Rivers under Section 28 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments), pertaining to "Economic Development Opportunities" of Henderson ("Section 28") (other than its rights and obligations relating to Pre-Closing Development Agreements, which shall continue to be governed by Section 28 and by Sections 11.1 and 11.3 of this Agreement) shall be deemed to be suspended, and Section 28, as modified and supplemented by this Section 11.2 and Section 11.3, below, shall be deemed to represent separate and distinct rights and obligations of LEM and Henderson to each other that -169- shall continue in force and effect until such time as this Agreement expires or is terminated in accordance with its terms. Notwithstanding the foregoing, the Parties agree that Henderson shall continue to enjoy all of the rights and benefits arising under Section 28, as well as under any other provisions of the Station Two Power Sales Agreement to which Section 28 may relate; provided, that Henderson hereby agrees that such rights and benefits shall be subject to the provisions of Sections 11.1, 11.2 and 11.3 of this Agreement throughout the Term. The covenants and agreements made by LEM and Big Rivers to each other in this Section 11.2 and Section 11.3, below, shall be deemed to be independent of the provisions of Section 28. Consistent with the foregoing, and for the purpose of implementing the agreements contemplated in this Section 11.2, references to Big Rivers in Sections 28.1 and 28.2 of the Station Two Power Sales Agreement shall be deemed to be references to LEM throughout the Phase I Subcontract Term and the Phase II Assignment Term. The Parties acknowledge that (a) the availability of Station Two Economic Development Power to Henderson as contemplated in this Section 11.2 shall take into consideration any Economic Development Power utilized by Henderson in connection with any Pre-Closing Development Agreements that may remain in effect at that time, and (b) except to the extent otherwise provided for herein, Station Two Economic Development Power shall be treated under this Section 11.2 in the same manner and with the same effect as provided in Section 28. (a) In the event Henderson shall elect to use available Station Two Economic Development Power with respect to a particular "Economic Development Opportunity" pursuant to Section 28 at any time during the Phase I Subcontract Term or the Phase II Assignment Term (other than uses of that Power in connection with Pre-Closing Development Agreements between Henderson, on the one hand, and Big Rivers or LEM, on the other hand), Henderson shall be required, as a condition to its right to utilize that Power: (i) to enter into an agreement with LEM for the purchase by Henderson and the delivery by LEM of all capacity and Energy requirements of such Economic Development Opportunity to the extent not supplied by -170- Henderson with its reserved capacity or with Station Two Economic Development Power, which shall in no event be less than one-half of all capacity and Energy required to meet the needs of that Economic Development Opportunity not supplied by Henderson from its reserved Capacity in compliance with the Station Two Contracts ("Surplus Power"), at a price and upon terms and conditions which those Parties determine are based on the then-prevailing market for such Surplus Power, or (ii) to make a binding written offer to LEM to purchase from LEM all of that Surplus Power, at the price determined in accordance with the process provided below (the "Offer Price") and on the other terms and conditions which are determined in accordance with the process described below (the "Offer"). In the event of such a negotiated agreement or an acceptance by LEM of an Offer, Henderson shall be obligated to purchase and LEM shall be obligated to deliver such Surplus Power in accordance with the terms of such negotiated agreement or the agreement created by that Offer and acceptance. (b) Any Offer made by Henderson to LEM, to be effective for purposes of this Section 11.2, must be preceded by a notice by Henderson to LEM of Henderson's desire to so utilize all or a portion of the remaining Station Two Economic Development Power (a "Notice"), and by a completed bidding process as contemplated below, and must otherwise comply with the provisions of this Section 11.2, in each case absent the written agreement of LEM to the contrary. Any Notice shall, upon its delivery to LEM, be deemed to be the commencement of the bidding process provided for below in order to determine the relevant Offer Price for the relevant Surplus Power (the "RFP Process"). The Notice must identify the particular Economic Development Opportunity for which the Surplus Power is being sought and the amount of Surplus Power and Station Two Economic Development Power, respectively, that would be required for the same, and must include a description in reasonable detail of the load characteristics and other terms that would be relevant to the Surplus Power purchases to be made by Henderson (which shall in no event materially deviate from the load characteristics and other terms (exclusive of pricing terms) and conditions upon which Henderson is to supply the capacity and Energy requirements of that Economic Development Opportunity), including without limitation, the quantity or quantities of Surplus Power to be delivered, the date for the Commencement of service, the period or periods during which deliveries would be required, the duration of the proposed agreement, the relevant delivery points to which the Surplus Power must be delivered at the Power supplier's expense, the relevant load factor(s), whether -171- sales would be firm or interruptible, and all other material terms and conditions upon which the Surplus Power sales would be made to Henderson. (c) Promptly following its delivery of the Notice to LEM, Henderson shall initiate the RFP Process by delivering a written request for proposal to not less than six (6) power suppliers (other than LEM) which are then authorized by applicable Laws to sell Power on a wholesale basis at market-based rates in the Commonwealth of Kentucky (each a "Qualified Power Marketer"), soliciting from those Qualified Power Marketers one (but not more than one) firm offer to sell to Henderson all (but not less than all) of the Surplus Power required to meet the needs of that Economic Development Opportunity. All such requests for proposals shall be delivered by Henderson to the Qualified Power Marketers on the same Business Day, shall specify the date by which proposals must be received by Henderson, shall include the same terms and conditions for Surplus Power sales as were set forth in the Notice delivered by Henderson to LEM, and shall not include any different or additional terms or conditions. Any proposal that may be received by Henderson in response to its requests for proposals, in order to be valid for purposes of this Section 11.2, (i) must be in writing, (ii) must contain a single price per megawatt-hour at which the relevant Qualified Power Marketer is willing to sell the Surplus Power to Henderson during each period specified in the request for proposals (with annual adjustments, if any, to that price based on a nationally recognized industry index which references price levels) but without any separate demand or capacity charge absent the written agreement of LEM and Henderson to the contrary, (iii) must represent a binding offer by that Qualified Power Marketer to sell and deliver to Henderson all Surplus Power included in the request for proposals on the terms and subject to the conditions set forth therein without material condition or reservation (and must expressly recite that it is such a binding offer), and (iv) must be irrevocable and not subject to modification by that Qualified Power Marketer until at least 4:00 P.M. Henderson, Kentucky time on the first Business Day following the date on which Henderson shall deliver the Offer to LEM as contemplated in Subsection (e), below. Any offer or proposal from a Qualified Power Marketer that does not meet each of the criteria set forth in (i), (ii), (iii) and (iv), above, shall be disqualified from consideration, but Henderson shall be free to obtain a replacement offer which meets those criteria from that or -172- any other Qualified Power Marketer. In order to facilitate the receipt of at least three offers from Qualified Power Marketers that meet the foregoing criteria, Henderson shall be permitted, following its delivery of the relevant Notice to LEM, to provide to prospective power suppliers in advance and on an informal basis the relevant information to be included in its formal request for proposals, and to discuss with those prospective power suppliers the load characteristics and other terms and conditions upon which Surplus Power sales would be required. (d) Henderson shall promptly deliver to LEM (i) a complete copy of all requests for proposals that are delivered to prospective power suppliers, and (ii) copies of all proposals that are received by Henderson from Qualified Power Marketers in response to those requests, and Henderson shall notify LEM promptly following the specified date by which proposals shall be received by Henderson that Henderson has received at least three (3) qualifying proposals that will remain effective through the period described in Section (c)(iv), above, and that otherwise meet the criteria described in (c), above (including the identities of those Qualified Power Marketers). Henderson shall rank such qualifying offers from highest to lowest, based on the megawatt-hour prices specified therein for the Surplus Power. In the event that a proposal shall specify different prices for separate periods of time as permitted by the request for proposals, the megawatt-hour price for such proposal shall be determined by calculating the weighted average of the megawatt-hour prices so specified, weighted based on the quantity of Energy to be purchased in each period. For purposes of calculating the megawatt-hour prices of an offer which specifies annual adjustments thereto based on an index as provided for in Subsection (c) above, the amount of each such adjustment during the term of the proposed agreement shall be assumed to be the same as the latest annual rate of adjustment for such index as of the time of the price determination. Any demand or capacity charges that are agreed to by LEM and Henderson as contemplated in Subsection (c) above, shall be calculated for purposes of determining the ranking of the proposals in the manner provided in such agreement. Based on the ranking of the proposals as aforesaid: (i) if five or more qualifying proposals are received by Henderson, then of the five qualifying proposals specifying the lowest prices the highest and lowest of those proposals shall be eliminated, the proposal which -173- is the mean of the remaining three proposals shall constitute the "Mean Proposal"; and (ii) if less than five but at least three qualifying proposals are received by Henderson, then of the three qualifying proposals specifying the lowest prices, the highest and lowest proposals shall be eliminated and the remaining proposal shall be the Mean Proposal. The megawatt-hour price or prices specified in the Mean Proposal (together with the adjustments thereto, if any, specified in such proposal as are permitted by the request for proposals, shall constitute the "Offer Price." In the event Henderson does not receive at least three such qualifying proposals, then absent the written agreement of LEM and Henderson to the contrary, that entire RFP Process shall be deemed to be disqualified, and Henderson may elect (but shall be required as a condition to its right of access to and use of the relevant Station Two Economic Development Power) to once again deliver a Notice to LEM, commence and complete a new RFP Process with those or other Qualified Power Marketers, and make a corresponding Offer to LEM. (e) Following a determination of the relevant Mean Proposal and Offer Price as contemplated in (d), above, Henderson may, as a condition to its right of access to and use of the relevant Station Two Economic Development Power, but shall not be obligated to, deliver an Offer to LEM based solely on that Offer Price and the other terms and conditions for Surplus Power sales and deliveries as were set forth in the Mean Proposal; provided, however, that any such Offer by Henderson, as an additional condition to its effectiveness hereunder, must be delivered by Henderson to LEM within two (2) Business Days following Henderson's determination of the relevant Mean Proposal. Any proposed Offer by Henderson to LEM which does not follow a determination of the relevant Mean Proposal and Offer Price as contemplated above, or which does not otherwise comply with the provisions of this Section 11.2, shall be disqualified, and Henderson may request (but shall be required as a condition to its right of access to and use of the relevant Station Two Economic Development Power) to commence a new RFP Process to once again determine the relevant Mean Proposal and Offer Price, and to make a corresponding new Offer to LEM (absent the written agreement of LEM and Henderson to the contrary) -174- (f) LEM shall have a period of five (5) Business Days following receipt of Henderson's Offer to accept the terms of such Offer and agree to supply the Surplus Power at the Offer Price and on the other terms and conditions included in the Offer. If LEM rejects or fails to accept such Offer within that five-Business Day period, Henderson may pursue its rights provided for in Section 28.2 of the Station Two Power Sales Agreement to seek alternative sources for such Surplus Power, by either (i) accepting one of the original qualifying proposals from any of the Qualified Power Marketers described in Subsection (d), above, whose proposal was ranked lower than or constituted the Mean Proposal, or (ii) accepting a new proposal from any such Qualified Power Marketer or other third-party supplier based on the same material terms and conditions as were included in the Offer, and that meets the criteria set forth in Subclauses (i), (ii) and (iii) of Subsection (c), above; provided, that any such new proposal, based on the method of calculation set forth in Subsection (d), above, shall be ranked equal to or lower than the Mean Proposal on which the Offer was based. If Henderson shall fail to so accept one of the original qualifying proposals or a new proposal meeting the criteria described above, then as a condition to Henderson's right to utilize the relevant Station Two Economic Development Power, Henderson shall, prior to entering into an agreement to buy the Surplus Power (or any of it) from a third-party Power supplier, offer to LEM the right, in LEM's discretion, to match the price and other material terms and conditions offered by or to that third-party supplier (a "Matching Offer"), thereby agreeing to supply the Surplus Power to Henderson on those terms and conditions in lieu of that supplier. Such a Matching Offer by Henderson to LEM shall be accompanied by a copy of the proposed agreement with, or binding written offer from or to, that third-party supplier. If the Matching Offer is accepted by LEM, Henderson shall be obligated to purchase and LEM shall be obligated to sell the relevant Surplus Power at the price and upon the other material terms and conditions set forth or deemed to be included in the Matching Offer. If LEM rejects the Matching Offer or fails to accept it within five (5) Business Days after its receipt thereof and of a copy of the relevant third party agreement or offer, Henderson shall be free to enter into that agreement with the third-party supplier; provided, however, that if Henderson shall fail to enter into that agreement for the purchase of the relevant Surplus Power within thirty (30) days after the expiration of that five-Business Day period, no such agreement shall be -175- entered into without again first offering LEM the right to match the price and material terms and conditions thereof as contemplated in this Subsection (f). Big Rivers shall have no rights with respect to any Offer or Matching Offer that is not accepted by LEM, absent the agreement of Henderson to the contrary. Following any acceptance by LEM of an Offer or Matching Offer made by Henderson as contemplated in this Section 11.2, and subject to the provisions of Subsection (h), below, LEM shall be given at least ten (10) Business Days prior written notice by Henderson of the date on which initial Surplus Power deliveries by LEM must commence under their relevant agreement, and of the date on which Henderson shall begin taking the relevant Station Two Economic Development Power from Station Two for sale to that Economic Development Opportunity (which shall not pre-date the date of such initial Surplus Power deliveries). (g) Any acceptance by LEM of an Offer or Matching Offer made by Henderson must be in writing, and shall be deemed to obligate Henderson to purchase and accept delivery of, and LEM to sell and deliver, Surplus Power on the relevant terms and conditions for that Offer or Matching Offer described above. Any such agreements that may be created between LEM and Henderson are hereinafter referred to individually as an "Economic Development Agreement" and collectively as the "Economic Development Agreements." Following any acceptance by LEM of an Offer or Matching Offer made by Henderson in accordance with the terms hereof, those Parties and their counsel may restate, without limitation, the Economic Development Agreement created thereby in a separate written instrument executed by LEM and Henderson. (h) Notwithstanding anything contained in Section 28 or Section 11.2 of this Agreement to the contrary, and notwithstanding LEM's acceptance of any Offer or Matching Offer made by Henderson as contemplated herein, LEM shall be entitled, in its discretion and upon written notice to Henderson, to terminate any agreement created by that acceptance without further obligation to Henderson, and to terminate Henderson's right pursuant to Section 28 and this Section 11.2 to use the Station Two Economic Development Power relating to that Offer or Matching Offer, in the event Power purchases by the relevant Economic Development Op- -176- portunity from Henderson under their agreement, and the corresponding Surplus Power purchases by Henderson from LEM under their Economic Development Agreement, have not commenced in accordance with their respective terms by the date for commencement of service (the "Start Date") as set forth in the Offer or Matching Offer, unless the relevant Economic Development Agreement between Henderson and LEM expressly provides for Henderson's payment in the event that service has not commenced by the Start Date of demand or capacity charges to LEM commencing with the Start Date and continuing until service shall be commenced in which event the foregoing termination rights of LEM shall not be exercisable by LEM unless such purchases of Surplus Power by Henderson have not commenced in accordance with the terms of those agreements within 36 months following the date of LEM's acceptance of the Offer or the Matching Offer (or such shorter period as is provided for in the relevant Economic Development Agreement). In the event that the demand and/or use of Power by any Economic Development Opportunity shall be reduced due to any unexpected inability to utilize such Power or refusal to purchase such Power, or such Economic Development Opportunity shall otherwise no longer be a customer of Henderson, upon notification by Henderson to LEM of such an event, (i) in the case of such reduction in Power requirement, the amount of the Power reduction shall be applied to reduce the relevant Economic Development Power allocated and available to Henderson under this Section 11.2 and Section 28, and the Surplus Power purchased by Henderson and sold by LEM under the relevant Economic Development Agreement, pro-rata based on the respective amounts of Power thereof, and (ii) in the case of Henderson's loss of such Economic Development Opportunity as a customer, the allocation to Henderson of the relevant Economic Development Power shall end and the relevant Economic Development Agreement shall be deemed terminated by the Parties. No Economic Development Power to which Henderson becomes entitled pursuant to this Section 11.2 or Section 28 shall be used other than for the relevant Economic Development Opportunity, except for the use of Excess Henderson Energy associated with the Capacity of such Economic Development Power as provided in Section 3.8 of the 1998 Amendments and Section 11.5 of this Agreement. The foregoing termination rights shall be in addition to and not in lieu of, any other termination rights that LEM or Henderson may have under or with respect to the relevant Economic Development Agreement, -177- all of which, together with all other rights and remedies, shall be cumulative to the fullest extent permitted by applicable Laws. (i) The provisions of Section 28.3 of the Station Two Power Sales Agreement shall continue to govern the Parties' respective rights and obligations throughout the Phase I Subcontract Term and Phase II Assignment Term, except that references therein to Big Rivers shall be deemed to be to LEM, and the reference therein to the specified prices contained in Exhibit 1 shall be deemed to be a reference to the relevant Offer Price or the price identified in the relevant Matching Offer (as applicable). The Parties agree that the provisions of Section 28.4 of the Station Two Power Sales Agreement shall have no applicability during the Phase I Subcontract Term or the Phase II Assignment Term. (j) Within five (5) Business Days after any acceptance by LEM of an Offer or Matching Offer made by Henderson with respect to an Economic Development Opportunity as contemplated above, LEM shall notify Big Rivers of the resulting Economic Development Agreement, shall provide Big Rivers with a copy of Henderson's Offer or Matching Offer (as applicable), and shall offer in writing to Big Rivers the right to sell and deliver to LEM twenty-five percent (25%) of all Power required by LEM to service that Economic Development Agreement with Henderson, for a purchase price payable by LEM to Big Rivers for such Power equal to the total revenues actually received by LEM for the corresponding amount of Surplus Power delivered to Henderson under that Economic Development Agreement (inclusive of all corresponding Energy and demand or capacity charges, if any, but exclusive of revenues attributable to transmission charges or reimbursements (if any) payable by Henderson to LEM under that agreement). The Power sales and deliveries contemplated by any such offer from LEM to Big Rivers would be on the same material terms and conditions as are provided for in the corresponding Economic Development Agreement between LEM and Henderson, and deliveries by Big Rivers would be required to be made to LEM at one or more interconnection points on Big Rivers' transmission system. Big Rivers shall have five (5) Business Days following its receipt of that offer by LEM to accept the same -178- by written notice to LEM. Such acceptance by Big Rivers shall obligate it to sell all such Power to LEM for the duration of LEM's corresponding Economic Development Agreement with Henderson and on the other terms and conditions described above. LEM shall be entitled, without obligation to Big Rivers, to sell and deliver all Surplus Power required under that Economic Development Agreement, solely for LEM's account, until such time as Big Rivers shall have notified LEM of its acceptance of the foregoing offer from LEM, and, thereafter, (i) until such time as Big Rivers has commenced deliveries of the relevant Power as contemplated herein, or (ii) to the extent that Big Rivers shall at any time fail to deliver the corresponding quantities of Power to LEM. LEM shall have no obligation to enter into any Economic Development Agreement with Henderson, and shall be entitled to terminate any such agreement as contemplated in Subsection (h) above without the consent or approval of Big Rivers. Any failure by Big Rivers to accept LEM's offer within that five (5) day period as to all Power covered thereby, any failure by Big Rivers, following its timely acceptance of that offer, to commence deliveries of the relevant Power to LEM within 24 hours after such acceptance (or such later time at which LEM's corresponding Power deliveries to Henderson are required to commence), or any failure by Big Rivers to thereafter fulfill in all material respects all Power delivery and other obligations of Big Rivers to LEM under their agreement, shall immediately entitle LEM to revoke or terminate its offer or that agreement (as applicable) by written notice to Big Rivers and without further obligation to Big Rivers, and shall, following such revocation or termination, be deemed to release and discharge LEM from any further obligation to Big Rivers, whether under this Section 11.2(j) or otherwise, to purchase or offer to purchase from Big Rivers any Power required by LEM for that or any future Economic Development Agreement with Henderson; provided, that such revocation or termination by LEM shall not be deemed to affect Big Rivers' rights and obligations under any other similar power sales agreements with LEM in existence as of that revocation or termination and relating to another existing Economic Development Agreement. Big Rivers agrees that all Power sales and deliveries by it to LEM in connection with one or more Economic Development Agreements shall be satisfied using Power other than the Unit Output or Station Two Unit Output required to be sold by Big Rivers to LEM pursuant to Section 3 of the Power Purchase Agreement; provided, that Big Rivers may provide such Power from the -179- Base Power sold to Big Rivers by LEM under Section 4 of the Power Purchase Agreement. LEM agrees to pay to Big Rivers the purchase price amounts for which it is responsible under this Section 11.2(j) within 15 days after LEM's receipt of the corresponding revenues from Henderson. (k) Throughout the term of any agreement created between Big Rivers and LEM as contemplated in (j), above, Big Rivers agrees to reimburse LEM for 25% of all out-of-pocket costs and expenses incurred by LEM in enforcing its corresponding Economic Development Agreement with Henderson, promptly after being invoiced by LEM for the same, and LEM agrees to use its commercially reasonable efforts to so enforce that agreement against Henderson. Except as otherwise provided in the relevant Economic Development Agreement, Henderson shall be responsible for coordinating and paying for any transmission services over the Big Rivers transmission system required for the delivery of Surplus Power to Henderson or its customers (subject to any rights of Henderson under the Station Two Contracts to use that system without such payments). Big Rivers agrees to invoice Henderson separately for those transmission charges (if any). Big Rivers and LEM agree with each other that they shall be solely responsible for the costs and risks which each may undertake in the relevant Economic Development Agreement associated with their procuring and delivering the Power for which they are or may become responsible as described in this Section 11.2, including without limitation, any responsibility undertaken regarding the transmission and related costs required in order to transmit that Power to Big Rivers' transmission system. The agreements between Big Rivers and LEM described in this Subsection (k) and Subsection (j) above, and the performance and non-performance thereof, shall have no effect on LEM's or Henderson's rights and obligations under any Economic Development Agreements between them. (l) In the event that, with respect to any Economic Development Opportunity, Henderson shall for any reason elect not to, or shall fail to, submit to LEM an Offer for Surplus Power that complies with the provisions of this Section 11.2 or to otherwise negotiate and enter into an agreement with LEM to supply that Surplus Power (in either case thereby foregoing its right to use Station Two Economic Development Power for sale to the relevant -180- Economic Development Opportunity), but Henderson shall instead pursue the purchase of all or any portion of the Power needs of that Economic Development Opportunity from one or more other power suppliers, and in the event Henderson shall thereafter desire to enter into one or more agreements with a third-party power supplier to purchase Power for resale to that Economic Development Opportunity, then, prior to so entering into that agreement Henderson shall provide a copy thereof (or the relevant offer(s) from or to that supplier) to LEM, and shall offer in writing to LEM the right, in LEM's discretion, to match the price and the other material terms and conditions offered by or to that third-party supplier. If LEM rejects that offer or fails to accept it within five (5) Business Days after its receipt thereof, Henderson shall be entitled to enter into an agreement with that third-party supplier for the price and upon the same material terms and conditions as were offered to LEM. In the event LEM accepts any offer made by Henderson as contemplated in this Subsection (l), LEM shall be obligated to sell and deliver, and Henderson shall be obligated to purchase, all such Power at the price and upon the other material terms and conditions described above. In the event LEM accepts an Offer under this Section 11.2(l), it shall have no obligation or liability whatsoever to Big Rivers with respect to the resulting agreement between LEM and Henderson. 11.3 Treatment of Economic Development Agreements Following the Term. (a) Upon the expiration or earlier termination of this Agreement for any reason: (i) LEM shall assign and transfer to Big Rivers all of LEM's rights, title and interest under, in and to any Pre-Closing Development Agreements that were previously assigned and transferred to LEM in accordance with Section 11.1 and that continue in effect as of that expiration or termination date (other than LEM's rights to payment thereunder for Power deliveries made prior to the assignment or transfer to Big Rivers, and other than damage claims of LEM arising thereunder prior to that assignment or transfer); (ii) any agreements between LEM and Big Rivers providing for LEM's sale of Power to Big Rivers for resale to Henderson under any Pre-Closing Development Agreement (as contemplated in Section 11.1) shall be terminated (other than LEM's rights to payment thereunder for Power deliveries already made to Big Rivers, and other than damage claims of LEM or Big Rivers arising -181- thereunder prior to that termination); (iii) any agreements between LEM and Big Rivers providing for Big Rivers' sale of Power to LEM for resale to Henderson under any Pre-Closing Development Agreement (as contemplated in Section 11.1) shall be deemed to be terminated (other than Big River's rights to payment thereunder for Power deliveries already made to LEM, and other than damage claims of Big Rivers of LEM arising thereunder prior to that termination); and (iv) LEM shall be deemed to be fully released and discharged by Big Rivers and Henderson from further obligation or liability in connection with the agreements described in (i), (ii) and (iii), above, except as contemplated above, and except for breaches or defaults under those agreements on the part of LEM occurring prior to the assignment, transfer or termination, as applicable, of such agreements (which breaches or defaults on the part of LEM, and all liabilities arising therefrom, shall remain an obligation of LEM after such assignment, transfer or termination). Upon any assignment or transfer by LEM to Big Rivers of any Pre-Closing Development Agreements as contemplated above, Big Rivers shall be deemed to have assumed and undertaken all of LEM's obligations thereunder which arise or accrue following that assignment or transfer; provided, that in the event LEM shall have modified or amended in any material respect a Pre-Closing Development Agreement without the consent of Big Rivers, then in lieu of any obligation of Big Rivers to assume that agreement, as otherwise provided for in this Section 11.3(a), Big Rivers shall have the option to assume the agreement (which option shall be exercised by Big Rivers in accordance with the procedures set forth in Section 11.3(b) relating to all other Economic Development Agreements). (b) In addition, upon the expiration or earlier termination of this Agreement for any reason, LEM shall be deemed to have offered to Big Rivers the right to cause LEM to assign and transfer to Big Rivers all (but not less than all) of LEM's remaining rights, title and interest (if any) under, in and to any Economic Development Agreements which are then in effect and to which LEM is then a party (other than LEM's rights and entitlements thereunder for payments owing by Henderson as of the assignment or transfer, and other than LEM's damage claims arising thereunder prior to the assignment or transfer). Big Rivers shall have a period of 30 days following the expiration or termination of this Agreement to accept that offer -182- from LEM by designating in writing to LEM, in reasonable detail, the specific Economic Development Agreement(s) that will be assigned and transferred by LEM to Big Rivers. If Big Rivers fails to so designate a particular Economic Development Agreement within that 30-day period, its rights under this Section 11.3 with respect to that agreement shall be deemed to have been fully and forever waived, its rights under Section 11.2 (or under any related agreement with LEM contemplated in Section 11.2) to sell Power to LEM for resale to Henderson under that Economic Development Agreement shall, at the election of LEM made at any time thereafter upon notice to Big Rivers, be terminated without further obligation on the part of LEM, and LEM shall thereafter supply all such Power to Henderson from any source satisfactory to LEM during the remainder of that Economic Development Agreement. (c) The Parties acknowledge and agree that the assignment or transfer of the Pre-Closing Development Agreements and Economic Development Agreements contemplated by or made pursuant to Sections 11.3(a) and 11.3(b), above, may require notice to or the prior approval of the FERC or other federal, state or local governmental agencies. LEM shall be solely responsible for submitting all notices or obtaining all approvals of the FERC or any other governmental authority required for the assignment or transfer of such Power sales agreements. LEM will pay the first $25,000, and Big Rivers will pay the remaining balance due, of all reasonable fees and expenses incurred by LEM in filing the notices and seeking the required approvals contemplated in this Section 11.3(c), including, without limitation, consultant and legal fees, administrative fees and filing fees. After the Term, and promptly following Big Rivers' request therefor, LEM shall proceed in good faith and use its reasonable best efforts to file such notices and to obtain such approvals as may be required to transfer and assign such Power sales agreements to Big Rivers. In light of the regulatory notices and approvals which may be required, the Parties further agree that, notwithstanding the provisions of Subsection (a) and (b), above, no such assignment or transfer shall be deemed to have occurred in the event Big Rivers shall reasonably determine, and shall notify LEM and Henderson in writing, that any such approval by the FERC or any other governmental authority shall be required for the same but shall not have been obtained. In any event, no -183- such assignment or transfer shall occur until all necessary notices and approvals to such assignments and transfers, and the terms thereof, are so obtained from the FERC and all other governmental authorities, and the provisions of the Pre-Closing Development Agreements and the Economic Development Agreements shall remain unchanged except for such assignment or transfer. If Big Rivers provides a notice to LEM and Henderson to the effect contemplated in the preceding sentence, Big Rivers shall be deemed by that notice to have elected to (and shall then be obligated to) sell and deliver to LEM during the period specified below, and LEM shall have an obligation to purchase and accept delivery from Big Rivers during the period specified below (provided Big Rivers shall not then or at any time during that period be in breach or default of any obligation that may be due and owing to any LG&E Company), all Power required by LEM to meet its obligation to Henderson under the relevant Pre-Closing Development Agreement(s) and Economic Development Agreement(s), for a purchase price payable by LEM to Big Rivers therefor equal to the total revenues actually received by LEM from Henderson for the corresponding Power that it delivered to Henderson in connection with that agreement(s) (but exclusive of revenues attributable to transmission charges or reimbursements payable by Henderson). The period during which the purchase and sale obligations specified in the preceding sentence shall be effective shall commence on the date of Big Rivers' notice to LEM and Henderson and shall expire on the earlier of (x) the date of receipt of all required regulatory and governmental approvals to the proposed assignment or transfers of the relevant Pre-Closing Development Agreement(s) and Economic Development Agreement(s) or (y) the date of expiration or termination of the relevant Pre-Closing Development Agreement(s) and Economic Development Agreement(s). Big Rivers and Henderson agree to reasonably cooperate with LEM's efforts to submit such notices and obtain such approvals, and Big Rivers agrees to seek such approvals expeditiously. Upon any assignment or transfer by LEM to Big Rivers of the Pre-Closing Development Agreement(s) and Economic Development Agreement(s) as contemplated herein, LEM shall be deemed to be released and discharged from any further obligation or liability to Henderson or Big Rivers thereunder or under this Section 11.3(c), or with respect thereto or hereto, except for any breaches or defaults by LEM under that agreement or under this Section 11.3(c) occurring prior to that assignment or transfer. -184- 11.4 Section 3.4 of Power Sales Contract. By way of clarification only and not in limitation of the Parties' respective rights and obligations thereunder, the Parties acknowledge and agree that the annual adjustment to Henderson's five year capacity reservation forecasts in amounts not exceeding five (5) megawatts per Contract Year provided for in Section 3.3 of the Station Two Power Sales Agreement, as applied as contemplated in the concluding sentence of Section 3.4 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments), is limited to five (5) megawatts per Contract Year for all commercial or industrial customers of Henderson collectively, not five (5) megawatts per Contract Year for each such customer. 11.5 Use of Excess Energy and Capacity. The Parties hereby agree that, during the Phase I Subcontract Term and the Phase II Assignment Term, the provisions of this Section 11.5 shall apply and govern their respective rights and obligations with respect to Excess Henderson Energy and Energy associated with Excess Henderson Capacity (each as defined below), in lieu of the provisions of Section 3.8 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments). Consistent with the foregoing, the Parties agree that the provisions of Section 3.8 of the Station Two Power Sales Agreement shall be suspended throughout the Phase I Subcontract Term and the Phase II Assignment Term. Notwithstanding the foregoing, the provisions of Sections 8.12 and 9.7 of the Agreement, as they relate to Excess Henderson Energy and Energy associated with Excess Henderson Capacity, shall also govern the Parties' respective rights and obligations to the extent contemplated therein. (a) In the event that at any time and from time to time Henderson does not schedule or take the full amount of Energy associated with its reserved Capacity from Station Two (determined in accordance with Station Two Power Sales Agreement), (1) Big Rivers shall, during the Phase I Subcontract Term, upon the prior request of LEM, and (2) Station Two Subsidiary may, during the Phase II Assignment Term, in its discretion, take and utilize all such Energy (or any portion thereof designated by Station Two Subsidiary) not so scheduled or taken by Henderson (the "Excess Henderson Energy"), as provided herein. Henderson agrees -185- to permit Big Rivers or Station Two Subsidiary (as applicable) to take and utilize all or any portion of such Excess Henderson Energy as contemplated above. (b) If at any time Station Two Capacity is generated in excess of the Total Capacity of Station Two determined in accordance with Section 3.6 of the Station Two Power Sales Agreement ("Excess Henderson Capacity"), (1) Big Rivers shall during the Phase I Subcontract Term, and (2) Station Two Subsidiary shall, during the Phase II Assignment Term, take and utilize all Energy associated with such Excess Henderson Capacity as provided herein (unless otherwise agreed to by Station Two Subsidiary and Henderson). Henderson agrees to permit Big Rivers or Station Two Subsidiary (as applicable) to take and utilize all such Energy as contemplated above. (c) Promptly following the end of each calendar month during the Phase I Subcontract Term and the Phase II Assignment Term, Station Two Subsidiary shall notify Henderson and Big Rivers of the amount of Excess Henderson Energy and Energy associated with the Excess Henderson Capacity, if any, taken by Big Rivers or Station Two Subsidiary, as the case may be, during the previous month. Big Rivers or Station Two Subsidiary (whichever Party so took the Excess Henderson Energy and/or Energy associated with Excess Henderson Capacity) shall pay to Henderson, prior to the 25th day of the then current month, for the amount of Excess Henderson Energy and Energy associated with the Excess Henderson Capacity so taken by it during that prior month, a purchase price per megawatt hour equal to $1.50. In addition, Big Rivers or Station Two Subsidiary, as the case may be, shall (i) provide, at its own cost, the full replacement of all fuels and reagents consumed from the Station Two fuel and reagent reserves for the production of the Excess Henderson Energy and Energy associated with the Excess Henderson Capacity so taken by it, and (ii) pay the portion of the sludge disposal costs attributable to that Excess Henderson Energy and Energy associated with Excess Henderson Capacity, as calculated in accordance with Section 3.4 of the Joint Facilities Agreement. Notwithstanding the foregoing, Station Two Subsidiary agrees to promptly reimburse Big Rivers for its out-of-pocket costs and expenses incurred in connection with such fuels, reagents and sludge disposal to the extent not paid by LEM as an Operating Pass Through Cost -186- pursuant to Section 8.12 of this Agreement, and Station Two Subsidiary shall administer all such fuel and reagent procurement on behalf of Big Rivers pursuant to Section 8.14 (c) of this Agreement. (d) Henderson and Big Rivers agree that Station Two Subsidiary shall be allowed, but shall not be required, to operate Station Two to obtain Capacity above the Total Capacity of Station Two determined in accordance with Section 3.6 of the Station Two Power Sales Agreement; provided, however, that Station Two Subsidiary's operation of Station Two shall at all times be subject to its operating covenants to Big Rivers and Henderson, respectively, set forth elsewhere in this Agreement or the Assigned Station Two Contracts, as applicable. Henderson further agrees that it shall not at any time be permitted to sell or commit to any Person (other than to Big Rivers or Station Two Subsidiary as contemplated in this Section 11.5) any Excess Henderson Energy without having first offered Big Rivers or Station Two Subsidiary the opportunity to purchase such Excess Henderson Energy as contemplated herein. Big Rivers or Station Two Subsidiary (as applicable) shall have a reasonable period of time after submission of Henderson's scheduled Energy requirements to decide whether to purchase any Excess Henderson Energy not scheduled by Henderson. Big Rivers or Station Two Subsidiary (as applicable) agrees to notify Henderson thereafter if it does not intend to purchase such Energy, and agrees to give Henderson a response within a reasonable time so that Henderson may take efforts to resell that Energy to third-parties. Henderson agrees to compensate Big Rivers according to Big Rivers' Open Access Transmission Tariff to the extent Henderson utilizes any transmission on Big Rivers' transmission system in marketing Excess Henderson Energy. In the event Big Rivers or Station Two Subsidiary (as applicable) decline to purchase any Excess Henderson Energy as contemplated above, then LEM agrees, upon the written request of Henderson delivered within a reasonable period of time prior to the production of such Excess Henderson Energy (but in no event prior to the redemption or retirement in full of the Station Two Bonds), to reasonably assist Henderson it its efforts to market that Excess Henderson Energy to third-parties for Henderson's own account. 12. CONDEMNATION; DAMAGE OR DESTRUCTION OF STATION TWO ASSETS. -187- 12.1 Condemnation. If all or substantially all of the Station Two Assets are condemned or become the subject of any taking through powers of eminent domain, this Agreement shall terminate when possession of the Station Two Assets is taken by the condemning or taking authority. Upon such termination, the Parties hereto shall have no further liability or obligation under this Agreement (other than liabilities accrued under this Agreement before the date of such condemnation or taking). If less than substantially all of the Station Two Assets are condemned or taken, then this Agreement shall not terminate. 12.2 Damage or Destruction. If at any time during the Phase I Subcontract Term or the Phase II Assignment Term the Station Two Assets are damaged or destroyed and such damage or destruction was caused by a casualty covered by an insurance policy required by Section 18 of the Station Two Operating Agreement or Section 10.8 of this Agreement, the proceeds of such insurance shall, to the extent made available to the Parties (including the Trustee under the Station Two Bonds) and to the extent consistent with Prudent Utility Practice, be used to restore the Station Two Assets as soon as reasonably possible to substantially the same general condition, character or use as existed before the damage, and this Agreement shall remain in effect. To the extent not covered by the proceeds of insurance, the capital costs of such restoration of the Station Two Assets shall be allocated to and paid by the Parties as required by Section 6.3(d) of the Station Two Power Sales Agreement and Section 13(a) of the Station Two Operating Agreement and, as between Big Rivers and Station Two Subsidiary to the extent consistent with either Section 8.17(b) or 9.10(a) of this Agreement, shall be deemed payments for Station Two Improvements pursuant to an approved modification of the Operating Budget and shall be paid and reimbursed, as the case may be, in accordance with the provisions of Sections 8.17(d) and 8.17(e) or Section 9.10(c) of this Agreement, as then applicable, provided, that the Station Two Improvement Sharing Ratios applied to such restoration shall be those appropriate based on whether it is a Henderson Incremental Capital Cost or a Henderson Non-Incremental Capital Cost. Each of the Parties shall pay the restoration costs as provided above unless the damage or destruction to the Station Two Assets resulted (a) from the negligence or willful misconduct of Station Two Subsidiary or its -188- Affiliates, or their respective employees, agents or representatives, in which event Station Two Subsidiary shall bear such additional costs alone, (b) from the negligence or willful misconduct of Big Rivers, or its employees, agents or representatives, in which event Big Rivers shall bear such additional costs alone, or (c) from the negligence or willful misconduct of Henderson, or its employees, agents or representatives, in which event Henderson, if the Station Two Bonds shall have been retired or redeemed prior to the restoration, or shall at any time during the restoration process be retired or redeemed, shall bear such additional costs alone from and after the date of any such retirement or redemption; provided, however, that with respect to any negligence or willful misconduct of Henderson or its employees, agents or representatives, and notwithstanding anything herein to the contrary, Big Rivers and the LG&E Companies shall retain and have the right, in their sole discretion, to pursue any and all rights, causes of action and remedies that any of them may have against Henderson relating to such negligence or willful misconduct, whether at law or in equity and whether pursuant to this Agreement or any of the Station Two Contracts, including, without limitation, any claims under Section 22 of the Station Two Operating Agreement and Section 10.15 of this Agreement; and provided, further, that with respect to any negligence or willful misconduct of either Big Rivers or any LG&E Company, respectively, or of their respective employees, agents or representatives, and notwithstanding anything herein to the contrary, Henderson shall retain and have the right, in its sole discretion, to pursue any and all rights, causes of action and remedies that it may have against Big Rivers or any of the LG&E Companies, respectively, relating to such negligence or willful misconduct, whether at law or in equity and whether pursuant to this Agreement or any of the Station Two Contracts, including, without limitation, any claims under Section 22 of the Station Two Operating Agreement (which shall not be applicable to the LG&E Companies during the Phase I Subcontract Term) and Section 10.15 of this Agreement. 13. TERMINATION; DEFAULT; REMEDIES. 13.1 Termination Prior to Effective Date. This Agreement may be terminated prior to the Effective Date, upon notice delivered by the terminating Party(s) to the other Parties, under the following circumstances: -189- (a) by the LG&E Companies if (1) one or more of the Station Two Power Sales Agreement, Station Two Operating Agreement or the Joint Facilities Agreement are terminated, or (2) any other Station Two Contract is terminated by Henderson or Big Rivers and the termination of such other Station Two Contract would have a material adverse effect on the rights of the LG&E Companies under this Agreement taken as a whole; provided, however, Henderson and Big Rivers agree to promptly provide the LG&E Companies with notice of any default, breach or other event that, with notice or the lapse of time, or both, may result in the termination of any Station Two Contract prior to the Effective Date and, if the proposed termination results from a breach or default of the terms and provisions thereof by Big Rivers, Henderson and Big Rivers shall afford to the LG&E Companies the cure rights and rights of off-set as are further set forth in Section 13.5(f) of this Agreement. (b) by the LG&E Companies or Big Rivers if the Participation Agreement shall be terminated for any of the reasons set forth in Section 17.1.1 of the Participation Agreement; or (c) by the LG&E Companies, Big Rivers or Henderson if the Effective Date shall not have occurred on or prior to December 31, 1998, other than by reason of a breach or default under this Agreement on the part of the Party seeking to effect such Termination. 13.2 Pre-Effective Date Remedies; Conditions Precedent. In the event of a termination of this Agreement pursuant to Section 13.1, each of the Parties shall be released from all liabilities and obligations arising under this Agreement which do not survive such termination under Section 13.10 of this Agreement, other than obligations or liabilities arising from their breach or default under this Agreement. In addition, Big Rivers and the LG&E Companies each acknowledge and agree that, in the event this Agreement is executed and delivered by the Parties prior to the Participation Agreement Effective Date, but is subsequently terminated by any Party(s) pursuant to Section 13.1 of this Agreement or otherwise for any reason on or prior to that Participation Agreement Effective Date, then the conditions precedent described in (a) Item 4 of Section I and Item 5 of Section II, respectively, of Schedule 3.1 of the -190- Participation Agreement, (b) Item 5 of Section I and Item 3 of Section II, respectively, of Schedule 3.2 of the Participation Agreement, and (c) Item 4 of Section I and Item 2 of Section II, respectively, of Schedule 3.3 of the Participation Agreement (as applicable), shall be deemed not to have been fulfilled, and none of the LG&E Companies or Big Rivers shall be obligated to consummate the transactions contemplated in the Participation Agreement and the Phase I Agreements or the Phase II Agreements (as applicable) until an agreement with respect to Station Two of the type contemplated in the above-described items, which is mutually satisfactory to Big Rivers and the LG&E Companies, is thereafter executed and delivered by them with Henderson, or until the relevant conditions precedent to such transactions have been waived by Big Rivers and the LG&E Companies in the manner contemplated in the Participation Agreement, and then only to the extent all other conditions precedent to such transactions set forth in that agreement have been appropriately fulfilled or waived. 13.3 Default During the Phase I Subcontract Term. During the Phase I Subcontract Term, the terms and provisions of the respective Station Two Contracts shall continue to govern the default and termination rights of Big Rivers and Henderson for a breach or default under the terms of the Station Two Contracts. A default under this Section 13.3 shall not, in and of itself, create an additional basis for a breach or default by that Party under any of the Station Two Contracts. Consistent with the preceding two sentences, the occurrence of any of the following events at any time during the Phase I Subcontract Term shall constitute a default by a Party under this Agreement: (a) Failure by that Party to pay when due any and all amounts payable to any other Party in accordance with the terms of Section 8 of this Agreement, entitled "Phase I Subcontract," or any other provision of this Agreement. (b) Any rejection in bankruptcy of this Agreement or any Station Two Contract by that Party, or any other rescission or termination of this Agreement or any Station Two Contract (in whole or in material part) by that Party in breach or default of this Agreement or such contract. -191- (c) Failure of that Party to perform any material covenant or obligation that it may have under this Agreement (other than a payment obligation of the type described in (a) of this Section 13.3, above, or a breach of the type described in (d) of this Section 13.3, below; provided, that neither Big Rivers, on the one hand, nor any LG&E Company, on the other, shall at any time during the Phase I Subcontract Term be deemed to be in default under this Section 13.3(c) by reason of any act or omission on the part of the other which constitutes a default by that other Party under this Section 13.3(c). (d) Any attempt by that Party to transfer an interest in this Agreement in breach of Section 15 of this Agreement. (e) Except with respect to the Chapter 11 Case, any filing by that Party of a Petition in Bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency laws, or voluntarily taking advantage of any such laws by answer or otherwise or the commencement of any involuntary proceedings under any such laws if such proceedings are not withdrawn or dismissed within 60 days after their institution (with default occurring as of the 61st day after such institution). (f) Assignment by that Party for the benefit of creditors of any of its rights or interests under this Agreement or any Station Two Contracts or, in the case of Henderson, any of its rights or interests in the Station Two Assets. (g) Allowance by that Party of the appointment of a receiver or trustee of all or a material portion of its property if such receiver or trustee is not discharged within 60 days after appointment (with default occurring as of the 61st day after such appointment). (h) Any breach by that Party of a representation or warranty made by that Party in this Agreement, provided that such breach has had a material adverse effect on the non-defaulting Parties or their respective rights under this Agreement and the Station Two Contracts taken as -192- a whole; provided, however, the Parties acknowledge and agree that any breach of any representation or warranty made by a Party as of the Effective Date in this Agreement shall give rise to the right of the other Party to damages or availability of other remedies provided for hereunder arising from such breach only if the claim for damages or other relief is made within one year following the Effective Date. (i) For the benefit of Big Rivers and the LG&E Companies only, any failure, inability or refusal of that Party, or its Affiliates, to cure a default or breach by such Party or such Party's Affiliate under the Power Purchase Agreement, the Cost Sharing Agreement, the Transmission Service and Interconnection Agreement, the Facilities Operating Agreement or the Participation Agreement that gives rise to a termination of such agreement, or any termination by that Party or its Affiliates of any of the foregoing agreements in breach or default under such agreement (including without limitation, through a rejection in Bankruptcy). (j) For the benefit of the LG&E Companies only, any failure by Big Rivers to pay to LEM, when due, an amount owed pursuant to the Settlement Promissory Note. 13.4 Default During the Phase II Assignment Term. During the Phase II Assignment Term, the terms and provisions of the respective Station Two Contracts shall govern the default and termination rights of Big Rivers, Station Two Subsidiary and Henderson for a breach or default of their respective obligations under the Station Two Contracts. A default under this Section 13.4 shall not, in and of itself, create an additional basis for a breach or default by that Party under any of the Station Two Contracts. Consistent with the preceding two sentences, the occurrence of any of the following events at any time during the Phase II Assignment Term shall constitute a default by a Party under this Agreement: (a) Failure by that Party to pay when due any and all amounts payable to any other Party in accordance with the terms of Section 9 of this Agreement, entitled "Phase II Assignment," or any other provision of this Agreement. -193- (b) Any rejection in bankruptcy of this Agreement or any Station Two Contract by that Party, or any other rescission or termination of this Agreement or any Station Two Contract (in whole or in material part) by that Party in breach or default of this Agreement or such contract. (c) Failure of that Party to perform any material covenant or obligation that it may have under this Agreement (other than a payment obligation of the type described in (a) of this Section 13.4, above, or a breach of the type described in (d) of this Section 13.4, below); provided, that neither Big Rivers, on the one hand, nor any LG&E Company, on the other, shall at any time during the Phase II Assignment Term be deemed to be in default under this Section 13.4(c) by reason of any act or omission on the part of the other which constitutes a default by that other Party under this Section 13.4(c). (d) Any attempt by a Party to transfer an interest in this Agreement in breach of Section 15 of this Agreement. (e) Except with respect to the Chapter 11 Case, any filing by that Party of a Petition in Bankruptcy or insolvency, or for reorganization or arrangement under any bankruptcy or insolvency laws, or voluntarily taking advantage of any such laws by answer or otherwise or the commencement of any involuntary proceedings under any such laws if such proceedings are not withdrawn or dismissed within 60 days after such institution (with default occurring as of the 61st day after such institution). (f) Assignment by that Party for the benefit of creditors of any of its respective rights or interests under this Agreement or any Station Two Contracts or, in the case of Henderson, any of its rights or interests in the Station Two Assets. (g) Allowance by that Party of the appointment of a receiver or trustee of all or a material portion of its property if such receiver or trustee is not discharged within 60 days after appointment (with default occurring as of the 61st day after such appointment). -194- (h) Any breach by that Party of a representation or warranty made by that Party in this Agreement, provided that such breach has had a material adverse effect on the non-defaulting Parties or their respective rights under this Agreement and the Station Two Contracts taken as a whole; provided, however, the Parties acknowledge and agree that any breach of any representation or warranty made by a Party as of the Effective Date in this Agreement shall give rise to the right of the other Party to damages or availability of other remedies provided for hereunder arising from such breach only if the claim for damages or other relief is made within one year following the Effective Date. (i) For the benefit of Big Rivers and the LG&E Companies only, failure, inability or refusal of that Party, or its Affiliates, to cure a default or breach by such Party or such Party's Affiliate under the Lease, the Transmission Service and Interconnection Agreement, the Power Purchase Agreement or the Participation Agreement that gives rise to a termination of such agreement, or any termination by that Party or by its Affiliates of any of the foregoing agreements in breach or default under such agreement (including without limitation, through a rejection in Bankruptcy). (j) For the benefit of the LG&E Companies only, any failure by Big Rivers to pay to LEM, when due, an amount owed pursuant to the Settlement Promissory Note. 13.5 Notice of Defaults; Cure Rights. (a) The Party in default under any provision of this Agreement shall be referred to as the "Defaulting Party" and each other Party shall be referred to as a "Non-Defaulting Party." (b) Each Non-Defaulting Party shall have the right to give the Defaulting Party a notice of default ("Notice of Default"), which shall describe the default in reasonable detail and shall state the date by which the default must be cured, which shall be at least 30 days after receipt of the notice, except as to a default under Section 13.3(a) or Section 13.4(a) of -195- this Agreement which shall be cured within three days after receipt of the notice, except as to a default under Section 13.3(d) or 13.4(d) of this Agreement which shall be cured within two days after receipt of the notice (and which shall remain subject to the provisions of Section 15 of this Agreement), and except as to a default under Sections 13.3(b), 13.3(e), 13.3(f), 13.3(g), 13.3(h), 13.3(i), 13.3(j), 13.4(b), 13.4(e), 13.4(f), 13.4(g), 13.4(h), 13.4(i) or 13.4(j) of this Agreement, as to which the Defaulting Party shall have no right or opportunity to cure. (c) If within the three day period with respect to a default under Section 13.3(a) or Section 13.4(a) the Defaulting Party cures the default, if within the two-day period with respect to defaults under Section 13.3(d) or 13.4(d) of this Agreement, or if within the 30 day period with respect to defaults under Section 13.3(c) or 13.4(c) (which are not also a default under Sections 13.3(b), 13.3(d), 13.3(e), 13.3(f), 13.3(g), 13.3(h), 13.3(i) or 13.3(j), or under Sections 13.4(b), 13.4(d), 13.4(e), 13.4(f), 13.4(g),13.4(h), 13.4(i) or 13.4(j) of this Agreement), the Defaulting Party cures the default or if the default is one that cannot in good faith be cured within such period and the Defaulting Party (x) certifies to each Non-Defaulting Party that it agrees to cure such default, (y) certifies a reasonable date by which the cure will be effected, and (z) begins to correct the default within the 30 day period and continues corrective efforts with diligence until a cure is effected, the Notice of Default shall be inoperative and the rights under either Section 13.6 or 13.7 of this Agreement, as applicable, of each Non-Defaulting Party shall not be triggered. Subject to the Defaulting Party's right to contest under Section 13.5(d) of this Agreement, if the Defaulting Party does not cure or begin (and diligently continue) to cure the default as provided above or effect the cure within the period allotted above or such extension thereof as to which the Parties in good faith agree, each Non-Defaulting Party which has incurred actual damages of any kind by reason of the default or by reason of the actions or omissions giving rise to that default, shall have (x) in the Phase I Subcontract Term, the rights specified in Section 13.6 of this Agreement and (y) in the Phase II Assignment Term, the rights specified in Section 13.7 of this Agreement. A Non-Defaulting Party's right to damages or other relief resulting from a default by a Defaulting Party hereunder shall begin to accrue as of the first day of the default without regard to the -196- availability of the cure opportunities hereunder, and without regard to whether the default is cured. (d) If the Defaulting Party disputes the existence or the nature of a default asserted in a Notice of Default, then the Defaulting Party shall pay the disputed payment or perform the disputed obligation, but may do so under protest. The protest shall be in writing, shall accompany the disputed payment or precede the performance of the disputed obligation, and shall specify the reasons upon which the protest is based. The Defaulting Party shall deliver copies of the protest to each Non-Defaulting Party. If it is later determined pursuant to the dispute resolution, mediation or arbitration procedure required by Section 13.5(e) of this Agreement that a protesting Defaulting Party is entitled to a refund of all or any portion of a disputed payment or payments or is entitled to the reasonable equivalent in money of non-monetary performance of a disputed obligation theretofore made, then, upon such determination, the Non-Defaulting Party(s) for whom such obligation was performed, or to whom such payments were made, shall pay such amount to the Defaulting Party, together with interest thereon at a rate equal to the Prime Rate from the date of payment or from the date of completion of performance of a disputed obligation to the date of reimbursement. (e) Disputes relating to this Agreement or Station Two, or the other Station Two Assets, that are solely between Big Rivers and any of the LG&E Companies shall be resolved in accordance with the procedure set forth in Article 15 of the Participation Agreement. All other disputes relating to this Agreement or Station Two, or the other Station Two Assets, in which Henderson is one of the Parties in dispute shall be resolved in accordance with the dispute resolution procedures contained in the relevant Station Two Contract(s) or, in the absence of such procedures, by any other legal means that may be available. In the event the Participation Agreement shall expire or terminate for any reason prior to the expiration or termination of this Agreement, then the provisions of Article 15 of the Participation Agreement shall be deemed to survive such expiration or termination for purposes of this Agreement and shall be incorporated by reference in this Section 13.5(e). -197- (f) Big Rivers and Henderson each agree to provide Station Two Subsidiary with a copy of any Notice of Default or similar notice given by such Party under this Agreement or any Station Two Contract at the same time as such notice is given to Henderson or Big Rivers, respectively, under this Agreement or such contract and, provided such default is not the result of a violation by Station Two Subsidiary of its duties and obligations under this Agreement, each of Big Rivers and Henderson shall permit Station Two Subsidiary (which shall have no obligation to do so) to cure, or assist the Defaulting Party in curing, such default (including any payment default for which there may otherwise be no cure opportunity afforded to Big Rivers) by making payment to the Non-Defaulting Party or by fulfilling any other obligation of the Defaulting Party under the Station Two Contracts or this Agreement before any termination of any Station Two Contract or this Agreement by that Non-Defaulting Party (assuming that Non-Defaulting Party then has the right, pursuant to this Agreement or the relevant Station Two Contract, to terminate the same). Any cure by Station Two Subsidiary of a default by Big Rivers or Henderson shall be done according to the terms of the Station Two Contracts or this Agreement, as applicable, except that Station Two Subsidiary shall be afforded a reasonable period of time, in addition to the cure period afforded Big Rivers or Henderson (as applicable), to effect such cure; provided, in the event that Big Rivers shall have no right or opportunity to cure a payment default by Big Rivers under the terms of any of the Station Two Contracts or this Agreement, then the period of time afforded to the LG&E Companies hereunder to cure that payment default shall be no less than 60 days. Nothing in this Section 13.5(f) shall deny any right to Big Rivers or Henderson, or otherwise limit Big Rivers or Henderson from exercising any right, that it may have under this Agreement or the Station Two Contract, as applicable, to a notice of default, to any opportunity to cure the default, or to protest the default. If Station Two Subsidiary elects to cure or attempt to cure a perceived default of Big Rivers or Henderson, as applicable, and if it is later determined pursuant to the dispute resolution, mediation or arbitration procedure described in Section 13.5(e) of this Agreement, or by mutual agreement of the Parties, that Big Rivers or Henderson, as the case may be, was not then in default, all sums, costs and expenses paid or incurred by, and any other obligations undertaken by, Station Two Subsidiary in curing the purported default shall be solely for Station Two Subsidiary's account (but Station Two -198- Subsidiary's actions in reliance upon the notice of default shall not prejudice its right to pursue any other claims or actions that it may have against the Party that delivered the Notice of Default (or the similar notice) or any other third party to recover any sums, costs and expenses that Station Two Subsidiary may have paid or incurred, or to rescind or otherwise terminate any obligations it may have undertaken, in reliance upon such notice). If it is ultimately determined pursuant to the dispute resolution, mediation or arbitration procedure, (or by agreement of the Parties) that Big Rivers or Henderson, as the case may be, was in default under the relevant Station Two Contract, then so long as such default is not the result of a default by Station Two Subsidiary under this Agreement, Station Two Subsidiary shall be entitled to reimbursement from the Defaulting Party for all sums, costs and expenses incurred by it in effecting or attempting to effect such cure, or, in lieu of such reimbursement, may off-set the same against any sums then or thereafter due by Station Two Subsidiary to the Defaulting Party under this Agreement or any Station Two Contract (but, in the case of amounts so due to Henderson, only after the Station Two Bonds have been retired or redeemed) and, in the event the Defaulting Party is Big Rivers, may during the Phase II Assignment Term off-set against any sums due to Big Rivers from any of Station Two Subsidiary's Affiliates under any of the other Operative Documents. (g) During the Phase II Assignment Term, Henderson and Station Two Subsidiary agree each to provide Big Rivers with a copy of any Notice of Default or similar notice given by that Party under any Station Two Contract or this Agreement at the same time as such notice is given to Station Two Subsidiary or Henderson, respectively, under this Agreement or such contract and, provided such default is not the result of a violation by Big Rivers of its duties and obligations under this Agreement, each of Henderson and Station Two Subsidiary shall permit Big Rivers (which shall have no obligation to do so) to cure, or to assist the Defaulting Party in curing, such default by making payment to the Non-Defaulting Party or by fulfilling any other obligation of the Defaulting Party under the Station Two Contracts or this Agreement before any termination of any Station Two Contract or this Agreement by that Non-Defaulting Party (assuming that Non-Defaulting Party then has the right, pursuant to this -199- Agreement or the relevant Station Two Contract, to so terminate the same). Any cure by Big Rivers of a default by Station Two Subsidiary or Henderson shall be done according to the terms of the Station Two Contracts or this Agreement, as applicable, except that Big Rivers shall be afforded a reasonable period of time, in addition to the cure period afforded Station Two Subsidiary or Henderson (as applicable), to effect such cure. Nothing in this Section 13.5(g) shall deny any rights to Station Two Subsidiary or Henderson, or otherwise limit Station Two Subsidiary or Henderson from exercising any right, that it may have under this Agreement or the Station Two Contract, as applicable, to a notice of default, to any opportunity to cure the default, or to protest the default. If Big Rivers elects to cure or attempt to cure the perceived default of Station Two Subsidiary or Henderson, and if it is later determined pursuant to the dispute resolution, mediation or arbitration procedure required by Section 13.5(e) of this Agreement, or by mutual agreement of the Parties, that Station Two Subsidiary or Henderson, as the case may be, was not then in default, all sums, costs and expenses paid or incurred by, and any obligations undertaken by, Big Rivers in curing the purported default shall be solely for Big Rivers' account (but Big Rivers' actions in reliance upon the Notice of Default (or the similar notice) shall not prejudice its right to pursue any other claims that it may have against the Party that delivered the Notice of Default (or the similar notice) or any other third party to recover any sums, costs and expenses that Big Rivers may have paid or incurred, or to rescind or otherwise terminate any obligations it may have undertaken, in reliance upon such notice). If it is ultimately determined pursuant to the dispute resolution, mediation or arbitration procedure (or by agreement of the Parties) that Station Two Subsidiary or Henderson was in default under the relevant Station Two Contract, then so long as such default is not the result of a default by Big Rivers under this Agreement, Big Rivers shall be entitled to reimbursement from the Defaulting Party for all sums, costs and expenses incurred by it in effecting or attempting to effect such cure, or, in lieu of such reimbursement, may off-set the same against any sums then or thereafter due by Big Rivers to the Defaulting Party under this Agreement (but in the case of amounts so due to Henderson, only after the Station Two Bonds have been retired or redeemed) and, in the event the Defaulting Party is Station Two Subsidiary, may during the Phase II Assignment Term off-set -200- against any sums due by Big Rivers to Station Two Subsidiary or any of its Affiliates under any of the other Operative Documents. (h) Notwithstanding anything contained in Section 13, entitled "Termination; Defaults; Remedies," or elsewhere in this Agreement, the Station Two Contracts or the other Operative Documents to the contrary, and in addition to any other rights of off-set set forth herein or therein, each Party shall have the right to off-set any payments or other sums due and owing by another Party to it under this Agreement, including, without limitation, any payments owing at any time by Big Rivers to any of the LG&E Companies as contemplated in Section 13.8(a) of this Agreement, and any damages or other sums awarded to or otherwise due and owing by another Party to the off-setting Party pursuant to any dispute resolution proceeding, mediation or arbitration procedure of the type described in Section 13.5(e) of this Agreement, against any payments or other sums that the off-setting Party may owe to such other Party (i) under this Agreement (including, without limitation, damages or other sums awarded such other Party under that or any other dispute resolution procedure between those Parties), (ii) under any of the Station Two Contracts (but, in the case of amounts so due to Henderson, only after the Station Two Bonds have been retired or redeemed), and (iii) during the Phase II Assignment Term, as between Big Rivers and the LG&E Companies or their Affiliates, under any of the other Operative Documents. 13.6 Remedies During Phase I Subcontract Term. If the Defaulting Party's default under this Agreement during the Phase I Subcontract Term is one for which there is no right or opportunity to cure, or if the Defaulting Party fails or refuses to cure a default under this Agreement for which a cure opportunity is available within the time described above, each Non-Defaulting Party which has incurred actual damages by reason of the default or by reason of the Defaulting Party's actions or omissions giving rise to the default (including, in the case of the LG&E Companies, any reasonable replacement Power costs which they may suffer or incur (which costs shall be deemed to be direct damages for all purposes under this Agreement), in addition to any other damages) shall have, in addition to any rights that Party may have at law, in equity or otherwise (including without limitation, rights to indemnification -201- pursuant to Section 10.15), the following remedies, all of which shall be cumulative, but subject to the limitations provided below: (a) If any Party (together with that Party's Affiliates, collectively "X") shall fail to make any payment or shall fail to perform any obligation under this Agreement or the Settlement Promissory Note, the other Parties individually or collectively (together with such Parties' Affiliates, collectively referred to as "Y") will have the right (but not the obligation) without prior notice to X to perform such obligation and to off-set the costs of such performance incurred by Y or the amount of any such past due payment owing to Y against any obligation of Y owing to X (whether or not matured) under this Agreement or the Station Two Contracts, or to otherwise assert against X its right to reimbursement for the costs of such performance; provided, that Big Rivers and Station Two Subsidiary, and their respective Affiliates, shall have the further right to, during the Phase II Assignment Term, off-set the costs of such performance or the amount of any such past due payment against any obligation owing to the other Party (or such Affiliates) under any of the other Operative Documents. (b) If the damages incurred by a Non-Defaulting Party (or such Affiliates) have had a material adverse effect on that Non-Defaulting Party's respective rights under this Agreement and the Station Two Contracts, taken as a whole, or on that Non-Defaulting Party's business, financial condition or results of operations, then that Non-Defaulting Party may terminate this Agreement upon 30 days' advance notice to the Defaulting Party and any other Non-Defaulting Parties of its intent to do so; provided, however, if Henderson is the Defaulting Party, Big Rivers and the LG&E Companies hereby covenant for the benefit of the other, but not for the benefit of Henderson, that neither Big Rivers nor the LG&E Companies, nor any of them, shall exercise the right of that Party to terminate this Agreement until such time as the Station Two Bonds are retired or redeemed in full. (c) If Big Rivers is the Defaulting Party, and if Henderson or the LG&E Companies terminate this Agreement pursuant to Section 13.6(b) of this Agreement (but subject to Station Two Subsidiary's rights and Henderson's fulfillment of its obligations under Section 13.5(f) of -202- this Agreement), then (1) Henderson, from and after the date the Station Two Bonds are redeemed or retired, in full, shall be entitled to terminate all (but not less than all) of the Station Two Contracts upon 30 days' advance notice to Big Rivers and Station Two Subsidiary (which notice may be included in Henderson's notice to Big Rivers of termination of this Agreement, if applicable); and (2) the LG&E Companies shall be entitled to terminate all of the other Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days' advance notice to Big Rivers (which notice may be included in any notice to Big Rivers of termination of this Agreement by the LG&E Companies, if applicable), or the LG&E Companies may elect in accordance with Section 14.3 of this Agreement, in lieu of terminating the other Operative Documents, to pursue their rights to an abatement against the Annual Fixed Payments or Rental Payment, as applicable, to a reimbursement of the Initial Fixed Payment or the Initial Rental Payment, as applicable, and to a reduction in the then applicable maximum Contract Limits (provided, however, that any right of the LG&E Companies to cross-terminate to the other Operative Documents or to abate payments, seek reimbursement of payments and adjust the Contract Limits, as contemplated above, shall be further subject to Big Rivers' rights under Section 13.8(a)(1) or 13.8(a)(2) of this Agreement, as applicable). Any termination of the Station Two Contracts by Henderson or any of the other Operative Documents by the LG&E Companies shall be effective as of the date of termination of this Agreement. Henderson shall have no right to terminate this Agreement for a default by Station Two Subsidiary of its obligations to Big Rivers under the terms of the Phase I Subcontract, but shall instead rely upon the rights and remedies (other than any termination, rescission or other similar right) that it may have at law or in equity and otherwise pursuant to this Agreement. (d) If Henderson is the Defaulting Party, and provided Big Rivers or the LG&E Companies have terminated this Agreement pursuant to Section 13.6(b) of this Agreement (and in compliance with Sections 13.5(f), 13.6(b) and 13.8(b) of this Agreement), then Big Rivers, -203- from and after the date the Station Two Bonds are redeemed or retired, in full, shall also be entitled to terminate all (but not less than all) of the Station Two Contracts upon 30 days' advance notice to Henderson and Station Two Subsidiary (which notice may be included by Big Rivers in its termination notice to Henderson contemplated in Section 13.6(b) of this Agreement). (e) If Big Rivers is the Defaulting Party under Section 13.3(b) or Section 13.3(j) of this Agreement, and as a result of that default this Agreement is terminated, or if Big Rivers defaults under its covenant set forth in Section 13.8(b) not to terminate any of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement, or to waive its rights thereunder, without the prior consent of the LG&E Companies, then the provisions of Section 13.8(a)(1) and 13.8(a)(2) of this Agreement shall not apply, and each of the LG&E Companies may terminate the Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate the other Operative Documents) upon notice to Big Rivers, or may pursue their rights, in accordance with Section 14.3 of this Agreement, to abate the Annual Fixed Payment or Rental Payment (as applicable), to a reimbursement of the Initial Fixed Payment or Initial Rental Payment (as applicable) and to reduce the maximum Contract Limits. If Henderson is the Defaulting Party under Section 13.3(b) of this Agreement by reason of its rejection in bankruptcy, rescission or termination of any Station Two Contract, in whole or in part, then Big Rivers agrees that it shall not be entitled to terminate this Agreement by reason of that default without the prior consent of Station Two Subsidiary (provided, that in the event the LG&E Companies elect to terminate this Agreement by reason of that default, Big Rivers shall have the cross-termination rights set forth in Section 13.6(d) of this Agreement). (f) If Station Two Subsidiary is the Defaulting Party under Section 13.3(b) of this Agreement, and as a result of that default this Agreement is terminated, or if any LG&E -204- Company defaults under its obligation set forth in Section 13.8(b) of this Agreement not to terminate any of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement, or to waive its rights thereunder, without the prior consent of Big Rivers, then the provisions of Section 13.8(a)(4) of this Agreement shall not apply. (g) Notwithstanding anything contained elsewhere in this Agreement to the contrary, (i) Big Rivers may terminate this Agreement at any time that the Guarantee (Big Rivers), as in effect on the Effective Date, provides Big Rivers with the right to terminate the Operative Documents (other than the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement and the Non-Disturbance Agreement, which Big Rivers shall not have a right to terminate) upon notice delivered to the LG&E Companies and Henderson, but only to the extent that Big Rivers also terminates all of the other Operative Documents (other than the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement and the Non-Disturbance Agreement, which Big Rivers shall not have a right to terminate) pursuant to the Guarantee Agreement, and (ii) Henderson may terminate this Agreement at any time that the Guaranty, as in effect on the Effective Date, provides Henderson with the right to terminate this Agreement, upon notice delivered to Big Rivers and the LG&E Companies. (h) Notwithstanding anything contained elsewhere in this Agreement to the contrary, the LG&E Companies shall be entitled to terminate this Agreement upon notice to the other Parties in the event Henderson exercises any rights that it may have to terminate the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement by reason of a breach or default thereunder by Big Rivers (other than a breach or default by Big Rivers directly resulting from a breach or default of this Agreement by, or the negligence or willful misconduct of, an LG&E Company). Upon any such termination of this Agreement by the LG&E Companies, and subject to the provisions of Sections 13.8(a)(1) or -205- 13.8(a)(2) (as applicable), the LG&E Companies may also terminate all of the Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days' advance notice to Big Rivers (which notice may be included in the notice of termination of this Agreement by the LG&E Companies), or the LG&E Companies may elect in accordance with Section 14.3 of this Agreement to pursue their rights to an abatement against the Annual Fixed Payments or Rental Payment , as applicable, to seek reimbursement of the Initial Fixed Payment or Initial Rental Payment, as applicable, and to reduce the then applicable maximum Contract Limits, in lieu of terminating the Operative Documents, in addition to all other rights and remedies. (i) The provisions of this Section 13.6 shall be in addition to, and not in lieu of, any other termination rights of the Parties expressly set forth elsewhere in this Agreement. (j) The LG&E Companies shall not have the right, by reason of a termination of this Agreement or any of the Station Two Contracts (other than a termination of this Agreement or any of the Station Two Contracts by Big Rivers in breach or default of this Agreement) based upon a breach or default by Henderson or any LG&E Company hereunder or thereunder, to an abatement against the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement of the Initial Fixed Payment or Initial Rental Payment, as applicable, to a reduction in the maximum Contract Limits pursuant to Section 14.3 of this Agreement, or to terminate any of the other Operative Documents, unless permitted under Section 13.8(a)(3) or 13.8(a)(4) of this Agreement, respectively, as applicable. 13.7 Remedies During Phase II Assignment Term. If the Defaulting Party's default under this Agreement during the Phase II Assignment Term is one for which there is no right -206- or opportunity to cure, or if the Defaulting Party fails or refuses to cure a default under this Agreement for which a cure opportunity is available within the time described above, each Non-Defaulting Party which has incurred actual damages by reason of the default or by reason of the Defaulting Party's actions or omissions giving rise to the default (including any reasonable replacement Power costs which they may suffer or incur, in addition to any other damages) shall have, in addition to any rights that Party may have at law, in equity or otherwise (including without limitation, rights to indemnification pursuant to Section 10.15), the following remedies, all of which shall be cumulative, but subject to the limitations provided below: (a) If any Party (together with that Party's Affiliates, collectively "X") shall fail to make any payment or shall fail to perform any obligation under this Agreement or the Settlement Promissory Note, the other Parties individually or collectively (together with such Parties' Affiliates collectively referred to as "Y") will have the right (but not the obligation) without prior notice to X to perform such obligation and to off-set the costs of such performance by Y or the amount of any such past due payment owing to Y against any obligation of Y owing to X (whether or not matured) under this Agreement or the Station Two Contracts, or to otherwise assert against X its right to reimbursement for the costs of such performance; provided, that Big Rivers and Station Two Subsidiary, and their respective Affiliates, shall have the further right to off-set the costs of such performance or the amount of any such past due payment against any obligation owing to the other Party (or such Affiliates) under any of the other Operative Documents. (b) If the damages incurred by a Non-Defaulting Party have had a material adverse effect on that Non-Defaulting Party's respective rights under this Agreement and the Station Two Contracts, taken as a whole, or on its business, financial condition or results of operations, then that Non-Defaulting Party may terminate this Agreement upon 30 days' advance notice to the Defaulting Party and any other Non-Defaulting Parties of its intent to do -207- so; provided, however, if Henderson is the Defaulting Party, Big Rivers and the LG&E Companies hereby covenant for the benefit of the other, but not for the benefit of Henderson, that neither Big Rivers nor the LG&E Companies, nor any of them, shall exercise the right of such Party to terminate this Agreement (other than a termination right either of them may have under Section 10.7 of this Agreement for a reason other than Henderson's breach or default) until such time as the Station Two Bonds are retired or redeemed in full; and provided further, that except for the LG&E Companies' right to terminate this Agreement under Section 10.7, Section 13.7(c) or Section 13.7(g) of this Agreement, or Big Rivers' right to terminate this Agreement under Section 10.7, Section 13.7(f) or Section 13.7(g) of this Agreement, Big Rivers and the LG&E Companies hereby covenant for the benefit of the other, but not for the benefit of Henderson, that neither Station Two Subsidiary and its Affiliates (as to a Big Rivers' or Henderson's default) nor Big Rivers (as to any LG&E Company's or Henderson's default) may terminate this Agreement during the Phase II Assignment Term without the prior consent of the other of those two Parties, and each shall rely solely upon such Party's rights and remedies (other than any termination, rescission or other similar right) that they may have at law or in equity or otherwise pursuant to this Agreement. (c) If Big Rivers is the Defaulting Party under Section 13.4(b) or Section 13.4(j) of this Agreement, and as a result of that default this Agreement or any Station Two Contract is terminated, or in the event Big Rivers defaults under its covenant set forth in Section 13.8(b) not to terminate any of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement, or to waive any rights thereunder, without the prior consent of the LG&E Companies, then the provisions of Sections 13.8(a)(1) and 13.8(a)(2) of this Agreement shall not apply, and each of the LG&E Companies may terminate the Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) without -208- further notice to Big Rivers, or may pursue their rights in accordance with Section 14.3 of this Agreement, to abate the Annual Fixed Payments or Rental Payment , as applicable, to seek reimbursement of the Initial Fixed Payment or Initial Rental Payment, as applicable, and to adjust the maximum Contract Limits. If Henderson is the Defaulting Party under Section 13.4(b) of this Agreement by reason of Henderson's rejection in bankruptcy or rescission or termination (in breach) of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement, in whole or in part, then the LG&E Companies (but not Big Rivers) shall be entitled to terminate this Agreement upon notice to the other Parties, it being understood that Big Rivers' rights with respect to any such action by Henderson shall be to pursue its damages resulting therefrom (including any losses or damages which may affect Big Rivers' reversionary interests in the Assigned Station Two Contracts following the expiration or termination of this Agreement), and to pursue injunctive relief and specific performance with respect to Henderson's default (unless the LG&E Companies so elect to terminate this Agreement, in which event Big Rivers shall have the cross-termination rights set forth in Section 13.7(h) of this Agreement). (d) If Station Two Subsidiary is the Defaulting Party under Section 13.4(b) of this Agreement, and as a result of that default this Agreement is terminated, or if an LG&E Company defaults under its obligation set forth in Section 13.8(b) of this Agreement not to terminate any of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement, or to waive its rights thereunder, without the prior consent of Big Rivers, then the provisions of Section 13.8(a)(4) of this Agreement shall not apply. (e) If Big Rivers is the Defaulting Party, and if Henderson or any of the LG&E Companies terminate this Agreement pursuant to Section 13.7(b) of this Agreement (but subject to the limitations on such termination provided for in Section 13.7(b), and to the provisions of Section 13.5(f)), then (1) Henderson, from and after the date the Station Two -209- Bonds are redeemed or retired, in full, shall be entitled to terminate all (but not less than all) of the Station Two Contracts upon 30 days' advance notice to Big Rivers and Station Two Subsidiary (which notice may be included in Henderson's notice to Big Rivers of termination of this Agreement), and (2) the LG&E Companies shall be entitled to terminate all of the other Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days advance notice to Big Rivers (which notice may be included in any notice to Big Rivers of termination of this Agreement), or the LG&E Companies may elect in accordance with Section 14.3 of this Agreement, in lieu of terminating the other Operative Documents, to pursue their rights to an abatement against the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement of the Initial Fixed Payment or the Initial Rental Payment, as applicable, and to a reduction in the then applicable maximum Contract Limits (provided, however, that any right of the LG&E Companies to cross-terminate to the other Operative Documents or to abate payments, pursue reimbursement of payments and adjust the Contract Limits, as contemplated above, shall be further subject to Big Rivers' rights under Section 13.8(a)(1) or 13.8(a)(2) of this Agreement, as applicable). Any termination of the Station Two Contracts by Henderson or any of the other Operative Documents by the LG&E Companies shall be effective as of the date of termination of this Agreement. Henderson shall have no right to terminate this Agreement for a default by Station Two Subsidiary of its obligations to Big Rivers under the terms of the Phase II Assignment, but shall instead rely solely upon the rights and remedies (other than any termination, rescission or other similar right) that it may have at law or in equity or otherwise pursuant to this Agreement. (f) Notwithstanding anything contained elsewhere in this Agreement to the contrary, (1) Big Rivers may terminate this Agreement at any time that the Guarantee (Big Rivers), as in effect on the Effective Date, provides Big Rivers with the right to terminate the Operative -210- Documents (other than the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement and Non-Disturbance Agreement, which Big Rivers shall not have a right to terminate), upon notice delivered to the LG&E Companies and Henderson, but only to the extent that Big Rivers also terminates all of the other Operative Documents (other than the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement and the Non-Disturbance Agreement, which Big Rivers shall not have a right to terminate) pursuant to the Guarantee Agreement, and (2) Henderson may terminate this Agreement at any time that the Guaranty, as in effect on the Effective Date, provides Henderson with the right to terminate this Agreement, upon notice delivered to Big Rivers and the LG&E Companies. (g) Notwithstanding anything contained elsewhere in this Agreement to the contrary, either Big Rivers, on the one hand, or the LG&E Companies, on the other hand, shall be entitled to terminate this Agreement upon notice to the other Parties in the event Henderson exercises any rights that it may have to terminate the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement by reason of a breach or default thereunder by the LG&E Companies (in the case of termination by Big Rivers, but other than a breach or default by any LG&E Company directly resulting from a breach or default of this Agreement by, or the negligence or willful misconduct of, Big Rivers) or by Big Rivers (in the case of termination by the LG&E Companies, but other than a breach or default by Big Rivers directly resulting from a breach or default of this Agreement by, or the negligence or willful misconduct of, an LG&E Company). Upon any such termination of this Agreement by the LG&E Companies, and subject to the provisions of Sections 13.8(a)(1) or 13.8(a)(2), as applicable, the LG&E Companies may also terminate all of the other Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage or the Subordinate Mortgage and Security Agreement, and the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days' -211- advance notice to Big Rivers (which notice may be included in the notice of termination of this Agreement by the LG&E Companies), or the LG&E Companies may elect in accordance with Section 14.3 of this Agreement, in lieu of terminating the other Operative Documents and in addition to all other rights and remedies, to pursue their rights to an abatement against the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement of the Initial Fixed Payment or the Initial Rental Payment, as applicable, and to reduce the then applicable maximum Contract Limits. (h) If Henderson is the Defaulting Party, and provided Big Rivers or the LG&E Companies have terminated this Agreement pursuant to Section 13.7(b) by reason of that default (with the prior consent of the other Non-Defaulting Party as contemplated in Section 13.7(b) of this Agreement), then Big Rivers, from and after the date the Station Two Bonds are redeemed or retired, in full, shall also be entitled to terminate all (but not less than all) of the Station Two Contracts upon 30 days' advance notice to Henderson and Station Two Subsidiary (which notice may be included by Big Rivers in its termination notice to Henderson contemplated in Section 13.7(b) of this Agreement). (i) The provisions of this Section 13.7 shall be in addition to, and not in lieu of, any other termination rights of the Parties expressly set forth elsewhere in this Agreement. (j) The LG&E Companies shall not have the right, by reason of a termination of this Agreement or any of the Station Two Contracts (other than a termination of this Agreement or any of the Station Two Contracts by Big Rivers in breach or default of this Agreement) based upon a breach or default by Henderson or any LG&E Company hereunder or thereunder, to an abatement against the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement of the Initial Fixed Payment or the Initial Rental Payment, as applicable, to a reduction in the maximum Contract Limits pursuant to Section 14.3 of this Agreement, or to -212- terminate any of the other Operative Documents, unless permitted under Section 13.8(a)(3) or 13.8(a)(4) of this Agreement, respectively, as applicable. 13.8 Additional Covenants Concerning the Parties' Rights and Remedies. (a) The terms and conditions of this Section 13.8(a) shall provide to Big Rivers the right, solely in those limited circumstances specifically described below, to suspend the enforcement by the LG&E Companies and their Affiliates of their rights provided in this Agreement (i) to terminate any of the other Operative Documents, (ii) to abate the Annual Fixed Payments and Rental Payment payable to Big Rivers under the Power Purchase Agreement and Lease, respectively, and to seek reimbursement from Big Rivers of a portion of the Initial Fixed Payment or Initial Rental Payment, in each case pursuant to Section 14.3 of this Agreement, and (iii) to reduce the Contract Limits set forth in the Power Purchase Agreement pursuant to Section 14.3 of this Agreement (other than the cross-termination rights, abatement and reimbursement rights and Contract Limit reductions permitted under Section 13.6(e) and 13.7(c) of this Agreement, which rights shall in no event be suspended by any actions taken by Big Rivers under this Section 13.8(a)) (collectively, the "LG&E Rights"). If, however, Big Rivers shall fail at any time to satisfy each of the relevant terms and conditions set forth below in this Section 13.8(a), then in addition to all other rights and remedies available to the LG&E Companies at law or in equity, or pursuant to this Agreement, the Station Two Contracts or the other Operative Documents, the LG&E Companies shall be entitled to exercise their respective rights to terminate other Operative Documents or, in their discretion, to abate the payments, seek reimbursement for the prior payments and reduce the Contract Limits, each as provided in Section 13.6 or 13.7 of this Agreement, Section 14 of this Agreement or elsewhere in this Section 13.8, as applicable. (1) In the event a default under this Agreement by Big Rivers results in a termination of this Agreement by Henderson or any of the LG&E Companies in accordance with -213- its terms (other than a termination pursuant to Section 13.6(e) or Section 13.7(c) of this Agreement), and in the event the Station Two Power Sales Agreement and the Station Two Operating Agreement remain in full force and effect and Henderson's material obligations thereunder have not been waived by Big Rivers, excused by reason of a default thereunder by Big Rivers, or otherwise relinquished pursuant to any amendments to those agreements effected following the termination of this Agreement, then Big Rivers must fulfill each of the conditions set forth below in order to avoid the exercise by the LG&E Companies of the LG&E Rights, or any of them: (A) Big Rivers must have satisfied its indemnification and hold harmless covenants to the LG&E Companies set forth in this Agreement, and must use its reasonable best efforts, consistent with the Station Two Contracts and Prudent Utility Practice to minimize the generating costs at Station Two; (B) Big Rivers must pay to LEM for all Power thereafter allocated to Big Rivers under the terms of the Station Two Power Sales Agreement for a particular month (without regard to any waiver of its rights or entitlements thereunder or any amendments thereto following the date hereof that may reduce Big Rivers' right or entitlement to such Power, and without regard to the amount of Power actually generated or taken by Big Rivers), an amount equal to the difference between (i) the Base Power rate set forth in Section 6.3 of the Power Purchase Agreement that would have been applicable had this Agreement remained in effect and (ii) the actual generating costs to produce the Power from Station Two (i.e., the Capacity charge payable to Henderson or the Trustee for such Power plus the cost of all fuels and reagents consumed in the generation of such Power) (the "LEM Margin"), which amount must be paid by Big Rivers to LEM on or prior to the 25th day of the month following the month for which determined; (C) Big Rivers must agree that the maximum annual and hourly Contract Limits set forth in Section 4.3 of the Power Purchase Agreement shall be reduced by the amount of Power from Station Two (in -214- megawatt hours) allocated to Big Rivers during the relevant hour and Year as contemplated in subclause (B), above, but that the minimum Contract Limits set forth in Section 4.3 of the Power Purchase Agreement shall be reduced only by the product of (x) the total amount of Power from Station Two (in megawatt hours) so allocated to Big Rivers during the relevant hour or Year, times (y) a fraction, the numerator of which is the then applicable minimum Contract Limit under Section 4.3 of the Power Purchase Agreement and the denominator of which is the then applicable maximum hourly or annual (as applicable) Contract Limit under Section 4.3 of the Power Purchase Agreement, and (D) Big Rivers must continue to meet the Power purchase requirements under those minimum Contract Limits, or to fulfill its payment obligations under Section 6.4(b) of the Power Purchase Agreement for any deficiencies in those Power purchases. (2) In the event that a default under this Agreement by Big Rivers results in a termination of this Agreement by Henderson or any of the LG&E Companies in accordance with its terms (other than a termination pursuant to Section 13.6(e) or Section 13.7(c) of this Agreement), and at any time thereafter either the Station Two Power Sales Agreement or the Station Two Operating Agreement (or both of them) are no longer in force or effect, or any of Henderson's material obligations thereunder have been waived by Big Rivers, excused by reason of a default thereunder by Big Rivers, or otherwise relinquished pursuant to any amendments to those agreements effected following the termination of this Agreement, then the LG&E Companies shall thereafter have the right, pursuant to Section 14.3 of this Agreement, to an abatement against the Annual Fixed Payments or Rental Payment (as applicable) due by them to Big Rivers, to a reimbursement of the Initial Fixed Payment or Initial Rental Payment, and to a reduction in the Contact Limits to the extent provided for in Section 14.3 of this Agreement, unless and until such time as: (A) (y) Big Rivers has restored all of its rights and entitlements under the Station Two Power Sales Agreement and the Station Two Operating Agreement to reasonably comparable levels as existed prior to the time they were terminated or rendered of no -215- further force or effect, or otherwise prior to the waiver, excuse or amendment(s) described above, or Big Rivers has entered into new contractual arrangements with Henderson affording Big Rivers rights and entitlements reasonably comparable to those that existed under the Station Two Power Sales Agreement and the Station Two Operating Agreement prior to the events described above, and (z) following the restoration of rights and entitlements or establishment of new arrangements (as applicable) described above, Big Rivers has commenced to perform each of the obligations of Big Rivers described in Subclauses (A) through (D), inclusive, of Section 13.8(a)(1) of this Agreement, in which event the LG&E Rights shall be suspended for so long thereafter as Big Rivers continues to perform those obligations, but the maximum and minimum Contract Limits shall remain reduced to the extent provided for in Section 14.3 of this Agreement notwithstanding that the abatement rights of the LG&E Companies have been so suspended; or (B) (x) the LG&E Companies and Henderson, in their discretion, have entered into new contractual arrangements affording the LG&E Companies with rights and entitlements reasonably comparable to those which the LG&E Companies would have had under this Agreement, the Station Two Power Sales Agreement, the Station Two Operating Agreement and the Joint Facilities Agreement had this Agreement and those contracts not been terminated, including without limitation, the right to operate and maintain the Station Two Assets and to purchase the Station Two Unit Output on terms reasonably comparable to those set forth in this Agreement and those contracts, and (y) to the extent that Big Rivers -216- then has continuing rights with respect to the Station Two Assets, the Joint Use Facilities and/or the Station Two Unit Output, whether pursuant to any of the Station Two Contracts or otherwise, Big Rivers has entered into an agreement in form reasonably acceptable to the LG&E Companies that waives such of those rights, or grants to the LG&E Companies such additional rights, as are necessary to afford the LG&E Companies with the rights and entitlements described in (x), above, and Big Rivers continues to perform its obligations under that agreement, and (z) Big Rivers agrees to purchase from the relevant LG&E Companies all Station Two Unit Output to the extent and for the period contemplated in Section 8.12(e) or Section 9.7(c) of this Agreement (whichever was effective immediately prior to the termination of this Agreement), which provision shall survive the termination of this Agreement for the purposes hereof, and agrees to promptly reimburse the LG&E Companies for any additional capacity charge expenses for Station Two Unit Output (or their equivalent), including, without limitation, components thereof attributable to Debt Service payments, Station Two Improvements and Henderson Incremental Environmental O&M, that are or may thereafter become payable to Henderson or the Trustee under the new contractual arrangements described in this Section 13.8(a)(2)(B), by reason of the inability of the LG&E Companies to otherwise collect those expenses from Big Rivers under Section 8 or Section 9 (as applicable) of this Agreement, and Big Rivers continues to perform those obligations and make those reimbursement payments upon being invoiced for the same. In the event the provisions of this Section 13.8(a)(2)(B) are and remain fulfilled by Big Rivers, the abatement and reimbursement rights of -217- the LG&E Companies contemplated in Section 14.3 of this Agreement shall be suspended and the maximum and minimum hourly and annual Contract Limits shall be reinstated to their levels in effect immediately prior to the termination of this Agreement described in this Section 13.8(a)(2); or (C) Big Rivers has commenced to perform and discharge each of the following obligations for the benefit of the LG&E Companies, in which event the LG&E Rights shall be suspended for so long thereafter as Big Rivers continues to perform those obligations, but the maximum and minimum Contract Limits shall be and remain reduced in the manner provided for below: (w) Big Rivers must satisfy all of its indemnification and hold harmless covenants to the LG&E Companies set forth in this Agreement; (x) Big Rivers must pay to LEM on or before the 25th day of each month during the remaining term of the Power Purchase Agreement an amount determined by reference to the following formula: X = (Y x 16%) x Z Where: X = The monthly payment owing by Big Rivers to LEM for the relevant month. -218- Y = The Base Power rate applicable under Section 6.3 of the Power Purchase Agreement during the month in which such monthly payment by Big Rivers is due. Z = The total number of megawatt-hours of Station Two Surplus Capacity to which Big Rivers and/or Station Two Subsidiary were entitled under the terms of the Station Two Power Sales Agreement throughout the calendar month immediately preceding the date on which the Station Two Power Sales Agreement or Station Two Operating Agreement (as applicable) was terminated, determined without regard to any waiver by Big Rivers or Station Two Subsidiary of its rights or entitlements under the Station Two Power Sales Agreement, or any amendments thereto following the Execution Date not approved in writing by Station Two Subsidiary, in either case that reduced Big Rivers' and/or Station Two Subsidiary's rights or entitlements to such Station Two Surplus Capacity during that prior month, and without regard to the amount of Power actually generated or taken by Big Rivers and/or Station Two Subsidiary during that prior month; (y) Big Rivers must agree that the Contract Limits set forth in Section 4.3 of the Power Purchase Agreement shall thereafter be reduced as follows: (1) the Maximum Hourly Power Purchase Amount shall be and remain reduced by the total number of megawatt-hours of Station Two Surplus Capacity to which Big Rivers was entitled under the terms of the Station Two Power Sales Agreement for the period from 12:00 noon to 1:00 p.m. on the last day of the month immediately preceding the date on which the Station Two Power Sales Agreement or Station Two Operating Agreement (as applicable) was terminated; -219- (2) the Maximum Annual Power Purchase Amount shall be and remain reduced by the product of total number of megawatt-hours determined as described in (1), above, multiplied by 8,760; (3) the Minimum Hourly Power Purchase Amount shall be and remain reduced by the product of the total number of megawatt-hours determined as described in (1), above, multiplied by a fraction, the numerator of which is the Minimum Hourly Power Purchase Amount in effect on the last day of the month described in (1), above, and the denominator of which is the Maximum Hourly Power Purchase Amount in effect on that same day; and (4) the Minimum Annual Power Purchase Amount shall be and remain reduced by the product of the total number of megawatt-hours determined as described in (3), above, multiplied by 8,760; and (z) Big Rivers must continue to meet the Power purchase requirements under those minimum Contract Limits, or to fulfill its payment obligations under Section 6.4(b) of the Power Purchase Agreement for any deficiencies in those Power purchases. Notwithstanding anything contained in this Section 13.8(a)(2) to the contrary, in the event each of the requirements of either Section 13.8(a)(2)(A), Section 13.8(a)(2)(B) or 13.8(a)(2)(C) have not been fulfilled on or prior to the first anniversary of the termination of this Agreement, or following their initial fulfillment they shall at any time cease to be fulfilled by reason of any failure by Big Rivers to perform the obligations or meet the conditions thereunder, then the LG&E Companies shall be entitled, in their discretion and in lieu of continuing their abatement of the Annual Fixed Payments or Rental Payment , as applicable, their pursuit of reimbursement of the Initial Fixed Payment or Initial Rental Payment, as applicable, and their reduction in the maximum hourly and annual Contract Limits, to terminate all of the other Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security -220- Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days' prior notice delivered to Big Rivers at any time thereafter that such requirements are not being fulfilled. (3) In the event Big Rivers or the LG&E Companies shall terminate this Agreement in accordance with its terms by reason of a default hereunder by Henderson, and either (A) Big Rivers shall not exercise its rights, pursuant to Section 13.6(d) or 13.7(h) of this Agreement, to also terminate all of the Station Two Contracts, or (B) Big Rivers shall exercise its termination rights under Section 13.6(d) or 13.7(h) of this Agreement, but shall at any time during the Participation Agreement Phase I or the Participation Agreement Phase II enter into new contractual arrangements with Henderson affording Big Rivers rights and remedies that are reasonably comparable to any of the rights or remedies maintained by Big Rivers under the Station Two Power Sales Agreement or the Station Two Operating Agreement prior to their termination, then Big Rivers must thereafter fulfill each of the obligations set forth in Subclauses (A) through (D), inclusive, of Section 13.8(a)(1) of this Agreement in order to avoid the exercise by the LG&E Companies of the LG&E Rights, or any of them. The failure of Big Rivers to do so shall give the LG&E Companies the right to exercise the LG&E Rights. (4) In the event that a default under this Agreement by any LG&E Company results in a termination of this Agreement by Big Rivers or Henderson in accordance with its terms, none of the LG&E Companies shall have any right as a result of that termination to also exercise any of the LG&E Rights; provided, however, that if following that termination of this Agreement Big Rivers continues to have access to and the right to purchase and utilize any of the Station Two Unit Output, or subsequently obtains such access and rights, in either case on reasonably comparable terms, but Big Rivers fails to promptly pay to LEM the LEM Margins associated with that Unit Output (determined as described in Section 13.8(a)(2)(B)), or fails to acknowledge a reduction in the maximum -221- and minimum Contract Limits to the extent contemplated in Section 13.8(a)(1)(C), or fails at any time to meet those minimum Contract Limits or to fulfill its payment obligations under Section 6.4(b) of the Power Purchase Agreement for any deficiencies in those Power purchases, then the LG&E Companies shall thereafter during such time as the requirements are not being fulfilled have the right, consistent with the procedures described in Section 14.3 of this Agreement, to abate the Annual Fixed Payments or Rental Payment (as applicable) due to Big Rivers, to seek reimbursement of the Initial Fixed Payment or Initial Rental Payment, and to reduce the maximum Contract Limits or, in their discretion, to terminate all of the other Operative Documents (excluding, at the sole option of the LG&E Companies, any duty to also terminate one or more of the Settlement Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in the event the LG&E Companies shall determine to terminate other Operative Documents) upon 30 days' prior notice to Big Rivers, but only at such time as the LG&E Companies shall have fulfilled their respective indemnification and hold harmless obligations to Big Rivers set forth in this Agreement. (b) In addition to the limitations on termination provided for elsewhere in this Section 13, neither Big Rivers nor any LG&E Company may at any time during the Term take any action, or exercise any rights that they may have, to terminate any of the Station Two Contracts, or to waive any rights thereunder that may adversely affect the economic interests of the other Party, without the prior consent of the other Party. Big Rivers also agrees that it shall not, throughout the Term, have the right upon a default under this Agreement by Henderson or the LG&E Companies, in and of itself, or upon any termination of this Agreement for any reason, to terminate any of the other Operative Documents, nor shall any such breach or default constitute a default under any other Operative Document. The covenants of Big Rivers and the LG&E Companies set forth in this Section 13.8(b) are made solely for the benefit of each other and are not made for the benefit of Henderson. -222- (c) In addition to the covenants made by Big Rivers to the LG&E Companies in Sections 10.12, 10.7(b) and 10.34(b) of this Agreement, during the Phase I Subcontract Term Big Rivers shall, upon the request of any of the LG&E Companies, diligently pursue and fully enforce all rights and remedies under this Agreement, the Station Two Contracts, and at law or in equity, that it has, or may then have, against Henderson upon any breach or default by Henderson of a Station Two Contract that adversely affects Station Two Subsidiary or its Affiliate(s), or their respective rights and interests to enjoy the full use and benefit of the Station Two Assets and the Station Two Surplus Capacity as contemplated in the Phase I Subcontract; provided, Big Rivers shall have no obligation to pursue a termination of the Station Two Contracts, and agrees not to pursue any termination of the Station Two Contracts, unless Big Rivers and the LG&E Companies agree that such termination is the appropriate remedy or action to be taken under the given circumstances. Station Two Subsidiary shall reimburse Big Rivers for the reasonable out-of-pocket costs and expenses incurred by Big Rivers in complying with its obligations under Sections 10.12, 10.7(b) (but with respect to Section 10.7(b) of this Agreement only to the extent of Big Rivers' commitment thereunder to reasonably cooperate with the LG&E Companies) and 10.34(b) of this Agreement (except to the extent that Big Rivers has expressly agreed elsewhere in this Agreement to be responsible for such costs and expenses) and in pursuing and enforcing its rights and remedies under the Station Two Contracts to the extent, but only to the extent, the relevant breach or default by Henderson does not or would not adversely affect Big Rivers' rights and interests under the Station Two Contracts or, following the assignment to Station Two Subsidiary of the Assigned Station Two Contracts, Big Rivers' reversionary interest in the Station Two Contracts. If the relevant breach or default by Henderson adversely affects Big Rivers' rights and interests under the Station Two Contracts or its reversionary interest in the Station Two Contracts, Station Two Subsidiary shall reimburse Big Rivers for an equitable percentage of the reasonable out-of-pocket costs and expenses incurred by Big Rivers relative to the rights and interests of each of the Parties that are adversely affected by the breach or default by Henderson. Each of Big Rivers and Station Two Subsidiary (and its Affiliate(s)) shall -223- cooperate with one another in Big Rivers' assertion of any rights and remedies against Henderson with the purpose, where possible and not adverse to the economic interests of any such Parties, of minimizing or reducing the potential adverse effect that the assertion of such right or remedy may have on the other Party or such other Party's rights and interests under this Agreement and the Station Two Contracts. Any sums or damages recovered by Big Rivers from Henderson for a breach or default of the Station Two Contracts shall be equitably allocated among Station Two Subsidiary and its Affiliates and Big Rivers as their respective interests may appear. (d) During the Phase II Assignment Term, Big Rivers hereby agrees that Station Two Subsidiary shall have the right to control all remedies that Big Rivers may have against Henderson for breach or default by Henderson of any Station Two Contract. Station Two Subsidiary agrees that, except as provided below, during the Phase II Assignment Term it shall, upon the request of Big Rivers, diligently pursue and fully enforce all rights and remedies under the Station Two Contracts, and at law or in equity, that it has or may have against Henderson upon any breach or default by Henderson of the Station Two Contract, to the extent required to protect the economic or reversionary interests of Big Rivers in the Station Two Contracts or to minimize or reduce the potential adverse effect that such breach or default may have on Big Rivers' rights and interests under this Agreement and the Station Two Contracts; provided, Station Two Subsidiary shall have no obligation to pursue a termination of the Station Two Contracts, and agrees not to pursue a termination of the Station Two Contracts, unless Big Rivers and the LG&E Companies agree that such termination is the appropriate remedy or action to be taken under the given circumstances. Big Rivers shall reimburse Station Two Subsidiary for the reasonable out-of-pocket costs and expenses incurred by Station Two Subsidiary in pursuing and enforcing rights and remedies under the Station Two Contracts to the extent, but only to the extent, the relevant breach or default by Henderson does not or would not adversely affect any LG&E Company's rights, interests, use and benefits under this Agreement or any of the Assigned Station Two Contracts or any LG&E -224- Company's use and benefit of the Station Two Assets and the Station Two Surplus Capacity. If the relevant breach or default by Henderson would so adversely affect any LG&E Company's rights, interests, uses and benefits, then Big Rivers shall reimburse Station Two Subsidiary for an equitable percentage of the reasonable out-of-pocket costs and expenses incurred by Station Two Subsidiary relative to the rights and interests of each of the Parties that are adversely affected by the breach or default by Henderson. Each of Big Rivers and Station Two Subsidiary shall cooperate with one another in Station Two Subsidiary's assertion of any rights and remedies against Henderson with the purpose, where possible and not adverse to the economic interests of any such Parties, of minimizing or reducing the potential adverse effect that the assertion of such right or remedy may have on the other Party or such other Party's rights and interests under this Agreement and the Assigned Station Two Contracts. Any sums or damages recovered by Station Two Subsidiary from Henderson for a breach or default of the Station Two Contracts shall be equitably allocated among Station Two Subsidiary and its Affiliates and Big Rivers as their respective interests may appear. (e) Nothing contained in this Section 13 shall be deemed to affect, limit or eliminate any rights that Big Rivers, on the one hand, or any of the LG&E Companies, on the other hand, may have to terminate any of the Operative Documents other than this Agreement in accordance with their respective terms, or any other rights or remedies that they may have under those other Operative Documents. (f) If any of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement shall at any time during the Phase I Subcontract Term or the Phase II Assignment Term be terminated by Big Rivers or by Henderson for any reason other than a breach or default by any of the LG&E Companies under this Agreement or, during the Phase II Assignment Term, under any Assigned Station Two Contract, then the LG&E Companies and Henderson each agree between themselves (but not with Big Rivers) -225- that each shall negotiate with the other Party(s), to effect a new agreement among themselves (including a guaranty of LEC in substantially the same form and substance as the Guaranty). The new agreement among the LG&E Companies and Henderson shall be by means of a structure substantially the same as the Phase II Assignment structure contemplated in this Agreement and the Station Two Contracts or by some other mutually agreed upon structure that preserves or enhances the relative economic benefits contemplated by the LG&E Companies and Henderson, and that otherwise does not impose additional material risks or obligations upon any of the LG&E Companies or Henderson than the risks and obligations undertaken or assumed by such Parties in this Agreement and the Station Two Contracts (unless any such Party, in its discretion, agrees to accept lesser economic benefits or greater risks or obligations than undertaken or assumed by such Party in this Agreement and the Station Two Contracts). All negotiations undertaken or required pursuant to this Section 13.8(f) shall be conducted in good faith and each Party participating in such negotiations shall use their reasonable best efforts to effect the new agreement. Notwithstanding anything herein to the contrary: (i) in connection with the foregoing negotiations, neither Henderson nor the LG&E Companies shall have an obligation to agree to perform for the other certain services or to furnish or commit to Station Two certain assets and properties that were unique to Big Rivers in such Station Two Contracts, including, without limitation, providing or furnishing transmission related services, transmission facilities and lines, the Joint Use Facilities owned by Big Rivers (except to enforce rights they may have with respect thereto or to provide any interests that such Party may have in such Joint Use Facilities), and common employees and supplies in the operation of Station Two and the Reid Station; provided, however, if Henderson shall then have the right, on account of such termination or any other event or circumstance, to purchase the Joint Use Facilities owned by Big Rivers and/or the Reid Station, or the right to use transmission facilities or services in connection with the delivery of Station Two Power, then Henderson and the LG&E Companies agree with each other to negotiate in good faith terms of financing and other commercially reasonable terms associated with that purchase or use of transmission facilities or services with a view toward securing for -226- both Henderson and the LG&E Companies the continued enjoyment, use and benefit of those Joint Use Facilities, the Reid Station and transmission facilities or services upon terms no less favorable to either Henderson or the LG&E Companies than those that are contemplated by the Parties in this Agreement or the Station Two Contracts; and (ii) in the event the termination of the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement (as applicable) shall result from a material breach or default of Henderson, the provisions of this Section 13.8(f) shall be applicable only at the option of Station Two Subsidiary, in its sole discretion. The LG&E Companies and Henderson further agree to negotiate in good faith such other commercially reasonable terms and provisions as either such Party may reasonably request to enable such Party to enter into and perform their respective obligations under the new agreements and to continue to obtain and enjoy the benefits of the Capacity and Energy from Station Two as contemplated in this Agreement for the Phase II Assignment Term. Big Rivers, without waiving or releasing any other rights under this Agreement, the other Operative Documents, the Station Two Contracts, or at law or in equity, hereby consents to the LG&E Companies and Henderson negotiating and entering into a new agreement as provided for in this Section 13.8(f), and hereby waives any claims or rights that it may have to operate and maintain Station Two or to purchase or acquire the Station Two Assets (including Henderson's interest in any Joint Use Facilities) or any Station Two Surplus Capacity by virtue of such negotiations or new agreement between Henderson and any one or more of the LG&E Companies (or their Affiliates), in the event that the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement are (1) terminated by Henderson for a breach or default by Big Rivers of those Station Two Contracts or this Agreement (other than a breach or default resulting from the act or omission of any LG&E Company in breach of this Agreement) or (2) terminated by Big Rivers during the Term for any reason other than a termination of this Agreement for a default of this Agreement by the LG&E Companies. Big Rivers shall not be deemed by virtue of the consents and waivers set forth above to have consented to the foregoing or waived any rights or interests that it may have to operate Station Two or to purchase any of the Station Two -227- Assets or Station Two Surplus Capacity, to the extent such rights or interests were not set forth in the Station Two Contracts that were terminated, nor shall any such consent or waiver exist for any termination by Henderson or the LG&E Companies that is in breach or default of this Agreement or any of those Station Two Contracts. (g) Unless otherwise expressly provided in this Agreement, a Party shall not be liable to any of the other Parties for any special, incidental or consequential damages arising in connection with this Agreement, or any breach or default hereunder and, from and after the retirement or redemption of the Station Two Bonds, for any special, incidental or consequential damages arising in connection with the Station Two Contracts or any breach or default thereof. In the event that the negligence or willful misconduct of any LG&E Company or a breach or default by any LG&E Company of this Agreement shall directly result in Henderson obtaining a judgment or other award of special, incidental or consequential damages from Big Rivers, then the LG&E Companies hereby agree that, notwithstanding any limitations in this Section 13.8(g) between those Parties for those types of damages, as between the LG&E Companies and Big Rivers such damages (if awarded) shall be deemed to be direct damages for which Big Rivers may pursue against the LG&E Companies its right to indemnification or any other legal or equitable right it may have against the LG&E Companies as a result of such breach or default. (h) The LG&E Companies agree that they shall not at any time during the Phase I Subcontract Term or the Phase II Assignment Term authorize or approve any amendments or modifications of any Station Two Contracts, or any suspensions of performance under any Station Two Contracts, in either case without the prior consent of Big Rivers, which consent shall not be unreasonably withheld, conditioned or delayed. (i) Should any breach or default by Big Rivers under this Agreement, any of the Station Two Contracts or any of the other Operative Documents, or should the negligence or -228- willful misconduct of Big Rivers or any of its employees, agents or representatives, have the effect, directly or indirectly, of denying the LG&E Companies access to, or the full use and enjoyment of, any of the "Fundamental Rights" (as defined in Section 10.7) in any material respects, then the damages that shall be recoverable by the LG&E Companies from Big Rivers shall include, without limitation, (1) any costs that the LG&E Companies may suffer or incur in purchasing Power in place of the Station Two Unit Output that was thereby rendered unavailable for purchase, use, transmission or sale by the LG&E Companies; (2) any transmission charges incurred to transmit that replacement Power that would not have otherwise been incurred had it been available from Station Two; (3) any costs and expenses incurred by the LG&E Companies (including without limitation, Capacity charges) associated with the Station Two Unit Output that can be generated but cannot be utilized by the LG&E Companies by reason of the denial of one or more of the Fundamental Rights; and (4) any increased Capacity Charges that may be payable by any LG&E Company for Station Two Surplus Capacity that may still be available for use notwithstanding the denial in any material respect of the Fundamental Right described in Section 10.7(c), but only to the extent those increased charges resulted from that denial. 13.9 Termination Date True Up. On the date this Agreement expires or is terminated for any reason, Big Rivers and the LG&E Companies (and without in any manner impairing Big Rivers' refund obligations, if any, under Section 21.8 of the Participation Agreement) agree that all amounts due and owing under this Agreement to the other Party, or any outstanding credits, in each case, shall be so paid within five (5) days after the date of termination or expiration after netting all such amounts and credits owed by each of those Parties to the other(s) or their Affiliates under this Agreement or the Operative Documents. The Parties agree that all credits shall be converted to a cash amount for purposes of this provision. 13.10 Survival of Terms and Conditions. The provisions of this Agreement, other than those which specifically address the period of time prior to the Closing, shall survive the -229- Closing. Upon the expiration or earlier termination of this Agreement, each of the Parties shall be released from all liabilities and obligations arising under the terms and provisions of this Agreement, except for liabilities and obligations arising under terms and provisions of this Agreement which expressly provide for the survival thereof following such expiration or earlier termination, and except for the following terms and provisions which shall survive any such expiration or earlier termination of this Agreement, all of which shall continue to be binding on the relevant Party(s): (a) the covenants of confidentiality set forth in Sections 4.1(b) and Section 8.9 of this Agreement; (b) the agreement of Station Two Subsidiary set forth in Section 10.8(h) of this Agreement to assist any insurer in investigating, adjusting and settling any loss or claim covered by Station Two Assets Insurance, but only to the extent such loss or claim arises or accrues during the Phase I Subcontract Term or the Phase II Assignment Term; (c) all of the terms and provisions of Section 10.16, relating to the reversion of the Station Two Contracts and the Parties' respective rights and obligations in connection therewith, as may be applicable on the date of termination; (d) each of the commitments set forth in this Agreement of Henderson and Big Rivers, respectively, regarding access to and the right to utilize the Joint Use Facilities (including, without limitation, the Green Station FGD System Facility) and, in the case of Big Rivers only, its commitments to provide transmission access and certain transmission and transformation facilities, including, without limitation, those commitments of Henderson and Big Rivers set forth in Sections 10.19(d) and 10.20 of this Agreement, respectively; (e) those provisions of Sections 11.1, 11.2 and 11.3 of this Agreement (relating to Economic Development Power) which specifically contemplate their survival for the benefit of one or more of the Parties following the expiration or termination of this Agreement; (f) all rights of first purchase of LEM provided for in Section 4.4 of this Agreement to purchase Station Two Surplus Capacity from Henderson following Henderson's election, pursuant to Section 15.2 of the Station Two Power Sales Agreement, not to sell such Power to Big Rivers; (g) the terms and provisions of Section 13.9 of this Agreement, until each of the Parties' respective obligations thereunder are performed and discharged in full; (h) any rights to terminate the other Operative Documents, -230- any rights to an abatement of the Annual Fixed Payments or the Rental Payment due to Big Rivers under either the Power Purchase Agreement or the Lease, any rights to reimbursements of portions of the Initial Fixed Payment or the Initial Rental Payment, as applicable, and any rights to adjustments of the Contract Limits, in each case as provided for in Sections 13.6, 13.7, 13.8 or 14 of this Agreement, and any rights of Big Rivers set forth in Section 13.8(a) of this Agreement to suspend the enforcement of the foregoing rights by the LG&E Companies and their Affiliates; (i) all terms and provisions of this Agreement which create or provide for obligations between the Parties for sums due and owing any other Party, or credits due any other Party, under this Agreement as of its expiration or termination (which payment obligations shall survive until finally paid in full or off-set by such Parties against sums that may otherwise be owed by any such Party under this Agreement or any Operative Document); (j) the agreement between Henderson and the LG&E Companies to negotiate a new agreement relating to Station Two and the Station Two Surplus Capacity pursuant to the terms of Section 13.8(f) of this Agreement; (k) any indemnification claims or actions for breach or default to the extent that the events or actions that gave rise to liability occurred prior to the expiration or termination of this Agreement and the Station Two Contracts, including without limitation, claims relating to breaches or defaults occurring prior to the Effective Date; and (l) the terms and provisions of Section 18.15 of this Agreement. 14. ABATEMENT AND OTHER RIGHTS. 14.1 Abatement and Other Rights For Condemnation. In the event of a condemnation or taking by governmental authority of all or substantially all of the Station Two Assets, or of both or either of the Station Two generating units, Big Rivers agrees that the Annual Fixed Payments payable by LEM for each month during the condemnation or taking (prorated for partial months) pursuant to Section 3.3(a) of the Power Purchase Agreement or the Rental Payment payable by WKEC (or its Affiliates) for each month during the condemnation or taking (prorated for partial months) pursuant to Section 2.3.2 of the Lease, whichever is then -231- applicable, shall be reduced proportionately from and after possession is taken based upon the ratio of (a) the fair market value at the time of the condemnation or taking of the specific Station Two Assets condemned or taken to (b) the sum of (y) the fair market value at the time of the condemnation or taking of all the Station Two Assets and (z) the fair market value at the time of the condemnation or taking of the Generating Assets of Big Rivers which are not also Station Two Assets hereunder, each determined on the basis that said condemnation or taking had not occurred (the "Fair Market Value Ratio"). In addition, if the initial condemnation or taking of the Station Two Assets occurs prior to the second anniversary of the Effective Date, Big Rivers shall refund to LEM, as agent for the LG&E Companies and their Affiliates, an amount equal to (a) the amount of the Initial Fixed Payment or the Initial Rental Payment, as the case may be, paid to Big Rivers under the Power Purchase Agreement or the Lease on the Effective Date, multiplied by (b) the ratio of (1) the number of days between the date of the initial condemnation or the taking and the second anniversary of the Effective Date over (2) 730, multiplied by (c) the Fair Market Value Ratio. Such refund amount shall be payable by Big Rivers, free of interest, in twenty-four equal monthly installments commencing on the one-month anniversary of the date of the condemnation or the taking. The LG&E Companies and Big Rivers agree that the fair market value of the Station Two Assets taken shall be determined equitably by taking into consideration, among other relevant factors, the amount of surplus Capacity that is not available from Station Two by virtue of the condemnation or the taking, the amount of the Station Two Surplus Capacity that was available to Station Two Subsidiary and/or LEM, directly or through Big Rivers, immediately prior to the condemnation or the taking of the Station Two Assets, and a reasonable estimate of the future allocation of Station Two Surplus Capacity that would have been made available to Station Two Subsidiary and/or LEM from Station Two based on historical allocations of Capacity from Station Two reserved by Henderson and the reasonably foreseeable and determinable future needs for such Capacity by Henderson (for its governmental and proprietary facilities and its retail sales to inhabitants of the City, present and future). The Contract Limits provided for in Section 4.3 of the Power -232- Purchase Agreement shall not be affected or modified by reason of any condemnation or taking, in whole or in part, of the Station Two Assets. 14.2 Abatement and Other Rights for Damage or Destruction. (a) There shall be no refund of the Initial Fixed Payment or the Initial Fixed Rental Payment , no abatement in the Annual Fixed Payments by LEM under Section 3.3 of the Power Purchase Agreement, the Rental Payment payable by WKEC (or its Affiliates) under Section 2.3.2 of the Lease or the Debt Service reimbursement payments of Station Two Subsidiary (or its successors or permitted assigns) to Big Rivers under Sections 8.18 and 9.11 of this Agreement, and no adjustments made to the Contract Limits set forth in Section 4.3 of the Power Purchase Agreement, if the Station Two Assets are damaged or destroyed during the Term for any reason (including, without limitation, an Uncontrollable Force or the negligence or willful misconduct of any of the LG&E Companies or Henderson, or any of their respective employees, agents or representatives) other than the negligence or willful misconduct of Big Rivers or any of its employees, agents or representatives, but then only to the extent provided for in this Section 14.2. (b) If the Station Two Assets are damaged or destroyed during the Term and the damage or destruction was caused by the negligence or willful misconduct of Big Rivers, or any of its employees, agents or representatives, then the Annual Fixed Payments by LEM under Section 3.3 of the Power Purchase Agreement and the Rental Payment payable under Section 2.3.2 of the Lease shall be abated, and the Debt Service reimbursement payments to Big Rivers pursuant to Section 8.18 of this Agreement shall on each Monthly Payment Date be abated, until such time as the Station Two Assets are restored in the manner provided in Section 12.2 of this Agreement, in each case in an amount equal to (1) the monthly installment of Annual Fixed Payment, Rental Payment and/or Debt Service reimbursement payment that is -233- due Big Rivers at that time under either the Power Purchase Agreement, the Lease or this Agreement (subject to all adjustments in such installment payments as shall then be applicable under the terms of the Power Purchase Agreement, the Lease or this Agreement), multiplied by (2) the ratio by which (A) the average number of megawatts of Station Two Surplus Capacity that were allocated to Big Rivers (prior to the Effective Date or during the Phase I Subcontract Term, as applicable) and Station Two Subsidiary (during the Phase II Assignment Term) under the Station Two Power Sales Agreement for each hour during the four (4) year period immediately preceding the date of the damage or destruction, but with an equitable reduction in that number to reflect the increase (if any) in (y) the average number of megawatts of Power anticipated to be reserved for each hour by Henderson from Station Two between the relevant Monthly Payment Date and the fourth (4th) anniversary thereof (as reflected in the then current forecast of Henderson's needs required to be made under the Station Two Power Sales Agreement, but adjusted to include any Economic Development Power reserved by Henderson for its customers as contemplated in the 1998 Amendments and Sections 11.1, 11.2 and 11.3 of this Agreement) over (z) the average number of megawatts of Power from Station Two that were reserved by Henderson for each hour during the four (4) year period immediately preceding the relevant Monthly Payment Date, bears to (B) 1708 Megawatts, multiplied by (3) the percentage of Station Two Power which can no longer be generated by Station Two by reason of the damage or destruction (the multipliers in (2) and (3), above, being hereinafter collectively referred to as the "Damage Multipliers"). In addition, the Debt Service payments by Big Rivers to Station Two Subsidiary pursuant to Section 9.7(b ) shall on each Monthly Payment Date be increased, until such time as the Station Two Assets are restored in the manner provided in Section 12.2 of this Agreement, by an amount equal to such Debt Service payment by Big Rivers multiplied by the Damage Multipliers. In addition, if the damage or destruction to the Station Two Assets occurs prior to the second anniversary of the Effective Date, which damage or destruction was caused by the negligence or willful misconduct of Big Rivers or any of its employees, agents or representatives, Big Rivers agrees to refund to LEM, as agent for the LG&E Companies and their Affiliates, an amount equal to (i) the amount of the Initial Annual Fixed Payment or the Initial Rental Payment, as the case may be, paid to Big Rivers under the Power Purchase -234- Agreement or the Lease on the Effective Date, multiplied by (ii) the ratio of (A) the number of days between such damage or destruction date and the earlier of the date the Station Two Assets are restored in the manner provided in Section 12.2 of this Agreement or second anniversary of the Effective Date over (B) 730, multiplied by (iii) the Damage Multipliers in the order described above. Such refund amount shall be payable by Big Rivers, free of interest, in twenty-four equal monthly installments commencing on the one-month anniversary of the damage or destruction date. No adjustments shall be made to the Contract Limits set forth in Section 4.3 of the Power Purchase Agreement as a consequence of such damage or destruction. 14.3 Abatement and Other Rights Upon Termination. (a) At the time(s), and under the circumstances permitted by Section 13.6, 13.7 and 13.8 of this Agreement (but subject to Big Rivers' rights provided for in Section 13.8(a) of this Agreement), and at such time prior to a termination of this Agreement as Henderson shall terminate the Station Two Power Sales Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement by reason of a breach or default thereunder by Big Rivers, the relevant LG&E Companies and their relevant Affiliates shall be entitled (1) to an immediate abatement against, and the right to reduce, any Annual Fixed Payments thereafter owing by LEM to Big Rivers under Section 3.3 of the Power Purchase Agreement, and any Rental Payment thereafter owing by WKEC or its Affiliates to Big Rivers under Section 2.3 of the Lease, (2) where applicable (as described below), to a reimbursement by Big Rivers to LEM, WKEC and its Affiliates of a portion of the Initial Fixed Payment or the Initial Rental Payment (as applicable), and (3) to an immediate reduction in the maximum and minimum Contract Limits, in each case to the extent provided in this Section 14.3. Any such abatement, reimbursement and Contract Limit reduction rights, once effective, shall remain in effect at all times during the remainder of the Term (or, if this Agreement shall have been terminated for the remainder of the Participation Agreement Phase I or the Participation Agreement Phase II, as applicable), but subject to Big Rivers' rights provided for in Section 13.8(a) of this Agreement. -235- (b) In the event that an abatement against the Annual Fixed Payments or the Rental Payment , as applicable, is required or permitted under this Section 14.3, then on each Monthly Payment Date such abatement shall be in an amount equal to (1) the monthly installment of Annual Fixed Payment, or Rental Payment that is due to Big Rivers at that time under either the Power Purchase Agreement, the Lease or this Agreement (subject to all adjustments in such installment payments as shall then be applicable under the terms of the Power Purchase Agreement, the Lease and this Agreement), multiplied by (2) the ratio by which (A) the average number of megawatts of Station Two Surplus Capacity that was allocated to Big Rivers (prior to the Effective Date or during the Phase I Subcontract Term, as applicable) and Station Two Subsidiary (during the Phase II Assignment Term) under the Station Two Power Sales Agreement for each hour during the four (4) year period immediately preceding the date on which the LG&E Companies' respective abatement rights first accrue under Sections 13.6, 13.7 or 13.8 of this Agreement, but with an equitable reduction in that number to reflect the increase (if any) in (y) the average number of megawatts of Power anticipated to be reserved for each hour by Henderson from Station Two between the relevant Monthly Payment Date and the fourth (4th) anniversary thereof (as reflected in the then current forecast of Henderson's needs required to be made under the Station Two Power Sales Agreement, but adjusted to include any Economic Development Power reserved by Henderson for its customers as contemplated in the 1998 Amendments and Sections 11.1, 11.2 and 11.3 of this Agreement) over (z) the average number of megawatts of Power from Station Two that were reserved by Henderson for each hour during the four (4) year period immediately preceding the relevant Monthly Payment Date, bears to (B) 1708 Megawatts, (the multipliers identified in (1) and (2), above, being hereinafter collectively referred to as the "Termination Multipliers"). (c) In the event that the relevant termination of this Agreement or a Station Two Contract giving rise to abatement rights hereunder occurred prior to the second anniversary of the Effective Date, then in addition to the abatement rights described above, Big Rivers agrees to refund to LEM, as agent for the LG&E Companies and their Affiliates, an amount equal to -236- (i) the amount of the Initial Fixed Payment or the Initial Rental Payment, as the case may be, paid to Big Rivers under the Power Purchase Agreement or the Lease on the Effective Date, multiplied by (ii) the ratio of (A) the number of days between such termination date and the second anniversary of the Effective Date over (B) 730, multiplied by (iii) the Termination Multipliers in the order described above. Such refund amount shall be payable by Big Rivers, free of interest, in twenty-four equal monthly installments commencing on the one-month anniversary of the termination date. (d) At such time as any of the LG&E Companies shall be entitled to an abatement against its payment obligations as contemplated in Section 14.3(a), above, and for so long as that abatement right shall continue, then the Contract Limits provided for in Section 4.3 of the Power Purchase Agreement shall be and remain reduced as follows: (1) the maximum Contract Limits set forth in Section 4.3 of the Power Purchase Agreement shall be reduced by the amount of Power from Station Two allocated to Big Rivers during the relevant hour or Year under the terms of the Station Two Power Sales Agreement (without regard to any waiver of its rights or entitlements thereunder or any amendments thereto following the date hereof that may reduce Big Rivers' right or entitlement to such Power, and without regard to the amount of Power actually generated or taken by Big Rivers), or if the Station Two Power Sales Agreement has been terminated as contemplated in Section 14.3(a), then the amount of Power that would have been allocated to Big Rivers had that agreement remained in effect; and (2) the minimum Contract Limits set forth in Section 4.3 of the Power Purchase Agreement shall be reduced only by the product of (x) the total amount of Power from Station Two (in megawatt hours) so allocated to Big Rivers during the relevant hour or Year, times (y) a fraction, the numerator of which is the then applicable minimum Contract Limit under Section 4.3 of the Power Purchase Agreement and the denominator of which is the then applicable maximum hourly or annual (as applicable) Contract Limit under Section 4.3 of the Power Purchase Agreement. 14.4 Abatement Rights Cumulative. The rights of the LG&E Companies specified in this Section 14, entitled "Abatement," shall be in addition to, and not be exclusive of, any other rights or remedies that the LG&E Companies may have in this Agreement, the Station Two -237- Contracts or the Operative Documents, or at law or in equity, as a consequence of any breach or default under, or termination of, this Agreement, any of the Station Two Contracts or any of the other Operative Documents. 15. TRANSFERS AND ASSIGNMENTS. 15.1 Permitted Assignments. No Party shall assign any of its rights or obligations under this Agreement or any of the Station Two Contracts without the prior consent of the other Parties, except that with respect to an assignment of the type described in (a) or (c) below, only the consent of Henderson shall be required (which consent shall not be unreasonably withheld, conditioned or delayed by Henderson) and, with respect to an assignment of the type described in (b) or (d) below, no prior consent shall be required with respect to such an assignment: (a) to any Person into which or with which the Party making the assignment is merged or consolidated or to which the Party transfers substantially all of its assets including this Agreement and/or the Station Two Contracts. (b) with respect to Station Two Subsidiary, LEM or WKEC, to any Affiliate of those Parties. (c) with respect to Station Two Subsidiary, LEM or WKEC, to any third party which is authorized by all appropriate regulatory authorities and under applicable law to fulfill such Party's obligations under this Agreement or that Station Two Contract (as applicable) to which such Party is a party and which provides assurances of payment and performance of equal or greater value to that provided in this Agreement or such Station Two Contract, as reasonably determined by Henderson and Big Rivers. (d) in the case of either Big Rivers or Henderson, unless to do so would violate the terms of the Station Two Contracts as in effect on the date hereof, and in the case of the LG&E Companies, to any (a) creditor holding a Permitted Lien as security for the underlying obligation, (b) other mortgagee or other secured party as security for indebtedness incurred for -238- borrowed money by such Party for any renewal, replacement, improvement or addition to Station Two, or (c) other entity as security for indebtedness for borrowed money loaned to Big Rivers or any LG&E Company; provided, that each such secured party of Big Rivers or any LG&E Company referenced herein executes a Non-Disturbance Agreement in substantially the form of Exhibit H attached to the Participation Agreement (or, in the case of an assignment by an LG&E Company, in a form reasonably acceptable to Big Rivers and Henderson), and each such secured party may transfer or assign the interest given as security pursuant to, or in lieu of, a foreclosure of the Lien (or the exercise of power of sale) held by such secured party, provided that the transferee or assignee assumes all of the duties and obligations of the pledging Party under this Agreement and the Station Two Contracts, including, without limitation, the obligation to enter into a nondisturbance agreement, and all other agreements that relate to the interest being transferred or assigned. No such assignment by any Party pursuant to this Section 15.1(d) shall be deemed to release that Party from any of its obligations hereunder. Notwithstanding anything in this Section 15.1 to the contrary, Henderson may withhold its consent (without regard to whether the withholding thereof is otherwise unreasonable) to any assignment by an LG&E Company of the type described in (a) or (c), above, if (y) such assignment is to any Person that is not an Affiliate of LEC and (z) the request for Henderson's consent to such assignment is not accompanied by an opinion of counsel to LEC, in substantially the form of the legal opinion to be delivered by Kentucky counsel at the Closing pursuant to Item 29 of Schedule 2.1 to this Agreement, as to the enforceability of the Guaranty as it relates to such non-affiliated Person's performance of its obligations to Henderson under this Agreement from and after the date of such assignment. In addition, all of the assignments described in this Section 15.1 shall in any event be subject to compliance with all applicable Laws. Subject to the foregoing restrictions in this Section, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and assigns. 15.2 Assignment and Assumption of Related Agreements. No transfer or assignment of any interest in the Station Two Assets or in this Agreement or the Station Two Contracts, or -239- any part thereof, pursuant to Sections 15.1(a), 15.1(b) or 15.1(c) of this Agreement may be made unless, simultaneously, the transferring Party's rights under this Agreement and all Station Two Contracts and all other agreements that relate to such interest are similarly transferred or assigned to the same Person or Persons (or one or more Affiliates of such Person or Persons), and such Person or Persons (or one or more Affiliates of such Person or Persons) assumes in writing all the duties and obligations of the Party making such transfer or assignment under such agreements that relate to the interest being transferred or assigned and that accrue or arise after the date of assignment. Unless the provisions of Sections 15.1(a), 15.1(b) or 15.1(c) of this Agreement and the immediately preceding sentence are satisfied, no such assignment or transfer shall release the transferring or assigning Party from any of its obligations pursuant to this Agreement or the Station Two Contracts or such other agreements; provided, in no event shall Big Rivers be released by virtue of any such assignment. Nothing in this Section 15.2, as it relates to Big Rivers and Henderson, shall modify or amend any such additional or different rights or obligations that either such Party has or owes the other Party under the terms of the Station Two Contracts on the date hereof, including, without limitation, the rights of first refusal of each such Party under the Station Two Contracts. 15.3 Noncomplying Assignment. Any attempted or purported assignment or transfer made other than in accordance with this Section 15, entitled "Transfers and Assignments," whether voluntarily, involuntarily or by operation of law, including, without limitation, by merger or consolidation shall be void and of no effect. 15.4 Regulatory Approvals. Assignments or transfers under this Agreement or any Station Two Contract may be subject to the jurisdiction of state or federal regulatory agencies. Such assignments or transfers shall not be effective until all required approvals and all other required action by such agencies having jurisdiction shall have been obtained. 15.5 Liens. No Party shall directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Station Two Assets, except Permitted Liens or the Liens created by the Bond Ordinance. Station Two Subsidiary agrees to pay before delinquency all costs for work, services or materials furnished or used during the Term in connection with the -240- Station Two Assets, the non-payment of which could result in any Lien against the Station Two Assets. Henderson will keep title to the Assets free and clear of any and all Liens other than Permitted Liens and Liens in existence under the Bond Ordinance on the date hereof. Each Party hereto will immediately notify the other Parties of the filing of any other Lien which such Party creates, incurs, assumes or suffers to exist upon the Station Two Assets and any pending claims or proceedings related to any such Lien, and will indemnify and hold the other Parties harmless from and against all loss, damages and expenses (including reasonable attorneys' fees) suffered or incurred by such other Parties as a result of the imposition of such Lien (regardless of whether or not Station Two Subsidiary knew of the existence of such Lien). In case any such other Lien attaches, the Party which creates, incurs, assumes or suffers to exist a Lien upon the Station Two Assets agrees to cause it to be immediately released and removed of record (failing which any of the other Parties may do so at such defaulting Party's sole expense). Notwithstanding anything herein to the contrary, the Party who creates, incurs, assumes or suffers to exist any such other Lien shall have the right to contest in good faith such Lien even if such contest prolongs or permits the existence of such Lien. 16. UNCONTROLLABLE FORCES. 16.1 Suspension of Performance for Uncontrollable Forces. Except as may be further limited in Section 16.2 of this Agreement, none of the Parties shall be considered in default or breach with respect to any obligation under this Agreement if prevented from fulfilling such obligation by reason of an "Uncontrollable Force" (as defined in Exhibit B attached hereto). If LEM or Station Two Subsidiary is unable to fulfill any obligation by reason of an Uncontrollable Force, it shall exercise due diligence to remove such disability as soon as reasonably possible; provided, that no Party shall be relieved of any payment obligation that it may have to any other Party (or to the Trustee) under this Agreement or any Station Two Contract by reason of an Uncontrollable Force. 16.2 Uncontrollable Forces. -- Station Two Contracts. Station Two Subsidiary shall not be considered in default or breach with respect to any obligation under Section 8 of this -241- Agreement entitled "Phase I Subcontract" and Section 9 of this Agreement entitled "Phase II Assignment," if prevented from fulfilling such obligation by reason of an "Uncontrollable Force" (as hereinafter defined), but only to the extent that such obligation arises under the terms of the Station Two Contracts or the corresponding provisions of Section 8, and provided, that no Party shall be relieved of any payment obligation that it may have to any other Party (or to the Trustee) under this Agreement or any Station Two Contract by reason of an Uncontrollable Force. If Station Two Subsidiary is unable to fulfill any such obligation by reason of an Uncontrollable Force, it shall exercise due diligence to remove such disability as soon as reasonably possible. For purposes of this Section 16.2, with respect to each specific obligation, the term "Uncontrollable Force" shall have the same meaning as set forth in the Station Two Contract under which the obligation arises, and no performance under Section 8 of this Agreement and Section 9 of this Agreement shall be excused by reason of an Uncontrollable Force unless performance of such obligation is also excused under the terms of such Station Two Contract. 17. TAXES. The provisions of this Section 17 shall apply only as to the respective rights and obligations of the LG&E Companies and Big Rivers with respect to each other, and not as to their respective rights and obligations with respect to Henderson, and then only to the extent that such rights and obligations have not been addressed in Section 11 of the Participation Agreement. 17.1 Sales and Use Taxes. Notwithstanding anything in this Agreement or any other Operative Document to the contrary, (a) Big Rivers shall pay (or reimburse the LG&E Companies for) any and all sales and use Taxes imposed on (1) its transfer of Station Two Inventory and Station Two Personal Property to Station Two Subsidiary pursuant to Sections 10.33 and 10.35 of this Agreement, (2) its lease of any Station Two Assets to WKEC or its Affiliates pursuant to the Lease or any characterization of this transaction, or any portion thereof, as a lease by Big Rivers to any LG&E Company of Station Two Assets, and (3) if the Phase I Subcontract Term become effective, its sale of Station Two Unit Output to LEM pursuant to the Power Purchase Agreement, to the extent of the lesser of (i) the sales Tax imposed on Big Rivers with respect to the consideration described in Section 3.3(a) of the -242- Power Purchase Agreement, and (ii) the sales Tax that would have been imposed on Big Rivers if the Phase II Assignment Term (rather than the Phase I Subcontract Term) were effective as of the Effective Date, and (b) an LG&E Company shall pay (or reimburse Big Rivers for) any and all sales and use Taxes imposed on (1) Station Two Subsidiary's transfer of the End of Term Inventory and the End of Term Personal Property to Big Rivers on date of expiration or termination of this Agreement, and (2), if the Phase I Subcontract Term becomes effective, Big Rivers' sale of Station Two Unit Output to LEM pursuant to the Power Purchase Agreement and this Agreement, to the extent that the amount of such sales Tax exceeds the amount of the Tax described in clause (a)(3) of this sentence. The allocation of responsibility for sales and use Taxes pursuant to this Section 17.1 also shall apply to any Taxes enacted after the date hereof in replacement of any such sales or use Tax. 17.2 Property Taxes. Big Rivers shall pay when finally due and owing all property Taxes assessed, levied, or exacted on the Station Two Assets (but specifically excluding for purposes of this Section 17.2 all Station Two Inventory and Station Two Personal Property from the Station Two Assets) that are the obligation of Big Rivers or Station Two Subsidiary under applicable Law or pursuant to any of the Station Two Contracts, including, without limitation, any property taxes that may be treated as an operating and maintenance expense of Station Two and payable in whole or in part, as a component of the Capacity charges due the trustee or Henderson, as the case may be, under Section 6.1 and 6.3 of the Station Two Power Sales Agreement. Where Station Two Subsidiary or any other LG&E Company is required to pay such Taxes directly to the relevant taxing authority, Henderson or the trustee, Big Rivers agrees to promptly reimburse that LG&E Company for the same, but subject to the following sentence. Station Two Subsidiary shall, following the Effective Date, reimburse Big Rivers for thirty (30) percent of all such property Taxes described in the immediately preceding sentence that are actually paid by Big Rivers and allocable to the period beginning on the Effective Date and ending on the date of termination or expiration of this Agreement; provided, however, that the thirty (30) percent sharing ratio shall be changed to 43.64% for the year 2011 and to 52.54% as of January 1, 2012 and remain at 52.54% throughout the remainder of the Term. In the event that Big Rivers elects to reduce the Contract Limits pursuant to Section 4.3(e) of the Power Purchase Agreement, the property Taxes sharing ratio -243- shall be adjusted by multiplying Big Rivers' then applicable percentage share of property taxes by the sum of one (1) plus the CCAP in effect on the date of assessment of such taxes. Any adjustments to the property Tax sharing ratio made pursuant to the preceding sentence shall be effective for taxable periods (or portions thereof) beginning on the effective date for the Reduction in Contract Limits set forth in Section 4.3(e) of the Power Purchase Agreement. For purposes of this Section 17.2, property Taxes imposed on the Station Two Assets for a taxable period shall be allocated to each day in such period on a pro rata basis. Station Two Subsidiary shall reimburse Big Rivers for Station Two Subsidiary's portion of such property Taxes within thirty (30) days of receiving notice from Big Rivers showing the nature and amount of such property Taxes, proof of Big Rivers' payment of such property Taxes, and the computation of Station Two Subsidiary's share of such property Taxes. The allocation of property Taxes pursuant to this Section 17.2 also shall apply to any Taxes enacted and effective on or after the date hereof in replacement of such property Tax. 17.3 Unidentified Asset-Related Taxes. Following the Effective Date, the LG&E Companies shall pay when due all Taxes that are imposed upon Big Rivers and/or Station Two Subsidiary in connection with the operation or maintenance of the Station Two Assets that are presently the obligation of Big Rivers or Station Two Subsidiary under applicable Law or pursuant to any of the Station Two Contracts and that are not otherwise described in Section 17.1 or 17.2 of this Agreement; provided, however, that this Section 17.3 shall not apply to (i) any income or franchise Tax (except to the extent that LEC assumes an income or franchise Tax pursuant to the Tax Indemnification Agreement) or (ii) any utility gross receipts license Tax. 17.4 Change of Tax Law. Except as provided in Sections 17.1 and 17.2 concerning replacement Taxes, Big Rivers shall pay any Tax imposed on Big Rivers that is attributable to a change in law or regulation (or any interpretation thereof) after the Effective Date to the extent that the amount of such Tax does not exceed the amount of the Tax that would have been imposed on Big Rivers if the Phase II Assignment Term (rather than the Phase I Subcontract Term) had been in effect as of the Effective Date. The LG&E Companies shall pay any Tax imposed on Big Rivers following the Effective Date that is attributable to a -244- change in law or regulation (or any interpretation thereof) after the Effective Date to the extent that such Tax exceeds the amount of the Tax that would have been imposed on Big Rivers if the Phase II Assignment Term (rather than the Phase I Subcontract Term) had been in effect as of the Effective Date. Nothing in this Section 17.4 shall relieve Big Rivers of its obligations under Section 8 of the Power Purchase Agreement or Big Rivers or any LG&E Company of their respective obligations under Section 8.17 or Section 9.10 of this Agreement. 17.5 Other Taxes. Any Tax imposed on an LG&E Company or Big Rivers during the Term of this Agreement and that is not specifically allocated between those Parties (either by direct payment or reimbursement) pursuant to the Station Two Contracts, Sections 17.1, 17.2, 17.3, or 17.4 of this Agreement, Article 11 of the Participation Agreement, Section 8 of the Power Purchase Agreement, or the Tax Indemnification Agreement, shall be borne by the Party that is primarily obligated under governing Laws, to pay such Tax. 17.6 Kentucky Tax Rulings. At the request of Big Rivers or the LG&E Companies, each of Big Rivers and the LG&E Companies shall request jointly and in writing, that the KRC determine, or issue a certificate or other statement to each of those Parties to the effect, that an exemption and/or a reduced rate of property Tax are allowable with respect to all or any portion of the Station Two Assets owned, leased and/or used by Big Rivers or Station Two Subsidiary in the operation and maintenance of Station Two or the Reid Station for any taxable period; provided, however, that, if the KRC determines that an exemption or reduced rate of Tax is not allowable for a taxable period with respect to all or any portion of the Station Two Assets, then the Parties shall also request that the KRC determine the amount of such exemption or rate and advise Big Rivers and the LG&E Companies of the nature and computation of the amount of Tax in controversy. Big Rivers and the LG&E Companies shall have the right to participate in the preparation and filing of any and all written and oral submissions to the KRC for purposes of obtaining the determination, certificate, and/or statement described in this Section 17.6, and each of those Parties shall have the right to join in all negotiations and communications with the KRC for such purpose. Each of Big Rivers and the LG&E Companies shall cooperate fully and shall execute all applicable documents and -245- necessary waivers of confidentiality of Tax and other information that is or may be reasonably related to the subject matter of the determinations, statements, and certificates described in this Section 17.6. 17.7 Appeal of Tax Assessment. Except as otherwise provided in the Tax Indemnification Agreement, each Party shall have the right to appeal and contest the assessment of any Tax that is or may be imposed upon such Party by operation of law or that is allocated to such Party (either by direct payment or reimbursement) pursuant to this Section 17, entitled "Taxes," Section 8 of the Power Purchase Agreement or any other provision of this Agreement or any Station Two Contract. 18. MISCELLANEOUS. 18.1 Miscellaneous Disclaimers. The respective covenants of the Parties set forth in this Agreement are several and not joint and, except as expressly provided otherwise, (a) the covenants of Big Rivers or Henderson made solely to the LG&E Companies are for the benefit of only the LG&E Companies, (b) Big Rivers and Henderson shall have no obligation or liability under this Agreement to each other for a breach of any covenant made by either of them solely to any LG&E Company set forth in this Agreement, and (c) except as expressly provided in Sections 15 and 13.11 of this Agreement, this Agreement may not be assigned to, or relied upon by, anyone other than the Parties hereto and WKEC. 18.2 No General Obligations of the City. Nothing herein contained shall constitute general obligations of the City within Kentucky Constitutional restrictions on such obligations. The obligations herein imposed on the City shall be borne entirely from revenues or other legally available funds or resources of Henderson's electric light and power system. 18.3 Notices. All notices, consents, waivers, demands, requests, payments and other communications required or permitted to be made or given under this Agreement by a Party to one or more other Parties, or under any other Operative Document, must be in writing, and shall be addressed respectively as follows: -246- For the City and HUC, addressed to: City of Henderson, Kentucky City Building P.O. Box 716 Henderson, Kentucky 42420 Phone No.: (502) 831-1200 Kendel D. Bryan Henderson Municipal Power & Light P.O. Box 8 100 Fifth Street Henderson, Kentucky 42420 Facsimile No.: (502) 826-9650 With a copy to: Robert E. Ferdon, Esq. O'Melveny & Myers LLP Attorney at Law Citicorp Center 153 East 53rd Street 54th Floor New York, New York 10022-4611 Phone No.: (212) 326-2000 Facsimile: (212) 326-2061 Charles B. West, Esq. The Law Firm Of Sheffer Hoffman 300 First Street Henderson, Kentucky 42420 For Big Rivers, addressed to: Michael Core David Spainhoward Big Rivers Electric Corporation 201 Third Street Post Office Box 24 Henderson, Kentucky 42420 Phone No. (502) 827-2561 Facsimile: (502) 827-2558 With a copy to: -247- James M. Miller, Esq. Sullivan, Mountjoy, Stainback & Miller, P.S.C. 100 St. Ann Building Post Office Box 727 Owensboro, Kentucky 42302-0727 Phone No. (502) 926-4000 Facsimile: (502) 683-6694 For Station Two Subsidiary, LEM, WKEC, LEC, or their Affiliates, addressed to the Chief Operating Officer of such entity: c/o LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-2585 With a copy to: John R. McCall, Esq. Executive Vice President, General Counsel and Secretary LG&E Energy Corp. 220 West Main Street Louisville, KY 40202 Phone: (502) 627-3665 Facsimile: (502) 627-2585 Daniel E. Fisher, Esq. Greenebaum Doll & McDonald PLLC 3300 National City Tower Louisville, Kentucky 40202-3197 Phone No. (502) 587-3620 Facsimile: (502) 587-3695 Each Party may change such address by notice given to the other Parties in the manner set forth above. All such notices shall be effective, and all such other consents, waivers, demands, requests, payments and other communications shall be deemed to have been -248- delivered (i) if sent by messenger or courier service, when delivered, (ii) if sent by U.S. Mail, three days after posting, assuming it is then or thereafter actually delivered to the relevant address in the ordinary course, and (iii) if sent by facsimile, when sent (provided that, if sent by facsimile, a duplicate copy thereof is promptly sent by U.S. Mail which is actually delivered to the relevant address in the ordinary course); provided that if a provisions hereof specifies that a period shall be measured by a fixed number of days after receipt of a notice, notice shall be effective when received, irrespective of the means of delivery. 18.4 Waiver. The failure of a Party to insist on the strict performance of any provision of this Agreement or to exercise any right, power or remedy upon a breach of any provision of this Agreement shall not constitute a waiver of any provision of this Agreement or limit the Party's right thereafter to enforce any provision or exercise any right. 18.5 Amendment and Modification. No amendment or modification of this Agreement shall be valid unless made in writing and duly executed by the Parties. 18.6 Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the Commonwealth of Kentucky. 18.7 Successors and Assigns. This Agreement shall bind and inure to the benefit of the Parties and their respective successors and permitted assigns. 18.8 Counterparts. This Agreement may be executed in counterparts, each of which taken together shall constitute a single Agreement. 18.9 Severability. If any provision of this Agreement or the application thereof to any Person or circumstance shall to any extent be held in any proceeding to be invalid, illegal or unenforceable, the remainder of this Agreement, or the application of such provision to such Persons or circumstances other than those to which it was held to be invalid, illegal or -249- unenforceable, shall not be effected thereby, and shall be valid, legal and enforceable to the fullest extent permitted by law, but only if and to the extent such enforcement would not materially and adversely frustrate the Parties' objectives as expressed herein. Notwithstanding the foregoing, the Parties hereto shall endeavor in good faith and negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 18.10 Headings. The headings in this Agreement are included for purposes of convenience only and should not be considered a part of this Agreement in construing or interpreting any provision hereof. 18.11 Entire Agreement. This Agreement, including all attached Exhibits and Schedules, together with the Station Two Contracts contain the entire and final understanding of the Parties and supersedes all prior agreements and understandings between the parties related to the subject matter of those agreements. 18.12 Construction. This Agreement was the product of negotiations between the Parties and, therefore, the rule of contract construction that an agreement shall be construed against the drafter shall not be applied to this Agreement. 18.13 Production of Operative Documents. At or prior to the Closing, the LG&E Companies and Big Rivers shall deliver to Henderson an executed copy of all of the Operative Documents. 18.14 Zero Capacity Allocations. Notwithstanding anything contained elsewhere in this Agreement or any Station Two Contract to the contrary, the consummation of the transactions contemplated in this Agreement (including without limitation, the Phase II Assignment) shall not, in and of themselves, be deemed to cause Big Rivers' allocation of Capacity from Station -250- Two to be reduced to zero, it being expressly understood by the Parties that, throughout the Term, such Capacity from Station Two shall at no time be deemed to be so reduced to zero for purposes of the Station Two Contracts unless and until the allocation of Station Two Capacity to Big Rivers under the Station Two Contracts and to Station Two Subsidiary under the Assigned Station Two Contracts shall have each been reduced to zero. 18.15 Continuation of Agreement. (a) Big Rivers recognizes and acknowledges that the RUS, the Members and the LG&E Companies have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the Members and the LG&E Companies that Big Rivers has in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated term (i.e., approximately 25 years). In order to enable Big Rivers to comply with certain requirements of the KPSC related to approval of its proposed rates, and to provide additional assurances of its good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 years), and without any implication by any of the Parties that Big Rivers is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, Big Rivers additionally commits and undertakes that for the period prior to January 1, 2012, in the event of any filing by Big Rivers of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against Big Rivers under any such Law, neither Big Rivers nor its successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it -251- subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency laws (the "Insolvency Assurance"). Thereafter, Big Rivers shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and the LG&E Companies shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that Big Rivers ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. (b) The LG&E Companies recognize and acknowledge that the RUS, the Members and Big Rivers have in good faith entered into the transactions to which this Agreement and the other Operative Documents relate, and have agreed to consummate those transactions, in specific reliance upon the fact that the transactions contemplated in the Operative Documents shall continue for the stated Term (i.e., approximately 25 years). The LG&E Companies have informed the RUS, the Members and Big Rivers that the LG&E Companies have in good faith entered into this Agreement in reliance upon and with the specific intent of continuing this transaction through the stated term (i.e., approximately 25 years). In order to facilitate the approval of the proposed rates of Big Rivers and to provide additional assurances of their good faith and commitment, and without in any way intending to reduce or otherwise avoid abiding by this Agreement throughout its stated Term (i.e., approximately 25 years), and without any implication by any of the Parties that any of the LG&E Companies is or would be entitled to attempt to reduce or otherwise avoid the terms of this Agreement, the LG&E Companies additionally commit and undertake that for the period prior to January 1, 2012, in the event of any filing by any of the LG&E Companies of a petition or similar filing for bankruptcy or reorganization or arrangement under any federal or state bankruptcy or insolvency or similar Law, or the commencement of involuntary proceedings against any of the LG&E Companies under any such Law, none of the LG&E Companies or their respective successors or assigns, if any, shall file, direct the filing of, join in, consent to, or otherwise support any other party -252- to any such proceedings in a motion, complaint, pleading, statement, testimony or otherwise make any attempt to terminate, reject or modify this Agreement (other than in accordance with its terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or supplemented or any other similar, applicable federal or state bankruptcy or insolvency laws (the "Insolvency Assurance"). Thereafter, the LG&E Companies shall continue the Insolvency Assurance unless and until the RUS, in the exercise of its discretion, were to consent to any of the foregoing. In all events and throughout the Term, each of the RUS, the Members and Big Rivers shall be entitled to rely upon the specific provisions of this Agreement, including but not limited to the stated Term (i.e., approximately 25 years), and shall be entitled to take whatever actions may prove to be necessary or appropriate to maintain the benefit of their bargain in the event that any of the LG&E Companies ever attempts to cause the rejection or termination of this Agreement (other than in accordance with its terms) in a subsequent bankruptcy or reorganization proceeding or otherwise. (c) Nothing in this Section 18.15 shall modify, reduce or diminish: (i) the rights of the RUS under the New RUS Loan Documents (as defined in that certain New RUS Loan Agreement between Big Rivers and the RUS to be executed and delivered on the Effective Date; (ii) the rights of the Mortgagees under the New RUS Mortgage (as defined in said New RUS Loan Agreement); including without limitation, any right to withhold consent with respect to any sale or disposition of Big Rivers' property except on terms acceptable to the RUS and/or such mortgages; but subject in the case of (i) or (ii) above, in all cases to the Non-Disturbance Agreement. IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the date first written above. CITY OF HENDERSON, KENTUCKY By: /s/ Glenn L. Johnson ---------------------------------- -253- Title: Mayor ------------------------------- ("City") CITY OF HENDERSON UTILITY COMMISSION By: /s/ B.E. Higginson ---------------------------------- Title: Chairman ------------------------------- ("HUC") BIG RIVERS ELECTRIC CORPORATION By: /s/ Michael H. Core ---------------------------------- Title: President and CEO ------------------------------- ("Big Rivers") WKE STATION TWO INC. By: /s/ George Basinger ---------------------------------- Title: President ------------------------------- ("Station Two Subsidiary") LG&E ENERGY MARKETING INC. By: /s/ John R. McCall ---------------------------------- Title: Vice President and Secretary ------------------------------- ("LEM") -254- WESTERN KENTUCKY ENERGY CORP. By: /s/ George Basinger ---------------------------------- Title: President ------------------------------- ("WKEC") -255- EX-10.90 18 EXHIBIT 10.90 EXHIBIT 10.90 FIRST AMENDMENT TO LG&E ENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1. Section 3.2 shall be deleted and replaced in its entirety to read as follows: "Section 3.2 FORMS OF PAYMENT The normal form of benefit payment (to which the formula in Section 3.1 applies) shall be a straight life annuity. Prior to the Member's benefit commencement date, he may elect to receive his benefit in the form of an actuarially equivalent (based on the factors set forth in Section 3.1) joint and survivor annuity, which shall provide a reduced monthly benefit payable for the life of the Member and continued thereafter in an amount of one of the following: fifty percent (50%), sixty-six and two-thirds percent (66 2/3%), seventy-five percent (75%), or one hundred percent (100%) to a beneficiary designated in writing by the Member." 2. Article 3 shall be further amended by adding a new Section 3.5 to the end thereof to read as follows: " Section 3.5 PRE-RETIREMENT DEATH BENEFIT A. Eligibility: If a Member whose age is at least fifty (50) and who has been credited with five (5) years or more of Service or a Member who has been fully vested pursuant to Section 12.2, dies after September 2, 1998 but prior to commencing benefits under Section 3.1, Section 3.3 or Section 3.4 herein, then the Member's Beneficiary shall be entitled to a pre-retirement death benefit, pursuant to this Section. B. Amount of Benefit: The Pre-retirement Death Benefit shall equal fifty percent (50%) of the Member's accrued benefit calculated in accordance with Section 3.1 at the time of the Member's death. C. Form of Distribution. The Pre-retirement Death Benefit shall be payable as a monthly annuity over the life expectancy of the Beneficiary, except in the case of a non-spouse Beneficiary whose life expectancy is greater than five (5) years, in which case the benefit shall be payable in sixty (60) equal monthly payments." and The amendments described herein shall be effective as of September 2, 1998. EX-10.91 19 EXHIBIT 10.91 EXHIBIT 10.91 FIRST AMENDMENT TO LOUISVILLE GAS AND ELECTRIC COMPANY AND LG&E ENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN FOR R.W. HALE 1. Section 3.2 shall be deleted and replaced in its entirety to read as follows: "Section 3.2 FORMS OF PAYMENT The normal form of benefit payment (to which the formula in Section 3.1 applies) shall be a straight life annuity. Prior to the Employees benefit commencement date, he may elect to receive his benefit in the form of an actuarially equivalent (based on the factors set forth in Section 3.1) joint and survivor annuity, which shall provide a reduced monthly benefit payable for the life of the Employee and continued thereafter in an amount of one of the following: fifty percent (50%), sixty-six and two-thirds percent (66 2/3%), seventy-five percent (75%), or one hundred percent (100%) to a beneficiary designated in writing by the Employee." 2. Article 3 shall be further amended by adding a new Section 3.5 to the end thereof to read as follows: "Section 3.5 PRE-RETIREMENT DEATH BENEFIT A. Eligibility: If the Employee dies after September 2, 1998 but prior to commencing benefits under Section 3.1, Section 3.3 or Section 3.4 herein, then the Employee's Beneficiary shall be entitled to a pre-retirement death benefit, pursuant to this Section. B. Amount of Benefit: The Pre-retirement Death Benefit shall equal fifty percent (50%) of the Employee's accrued benefit calculated in accordance with Section 3.1 at the time of the Employee's death. C. Form of Distribution. The Pre-retirement Death Benefit shall be payable as a monthly annuity over the life expectancy of the Beneficiary, except in the case of a non-spouse Beneficiary whose life expectancy is greater than five (5) years, in which case the benefit shall be payable in sixty (60) equal monthly payments."; and The amendments described herein shall be effective as of September 2, 1998. EX-10.92 20 EXHIBIT 10.92 LG&E CAPITAL CORP. MEDIUM-TERM NOTES, SERIES A U.S. $150,000,000 OF 5 3/4% RESET PUT SECURITIES TERMS AGREEMENT October 29, 1998 Morgan Stanley & Co. Incorporated ("Morgan Stanley") 1585 Broadway, 2nd Floor New York, New York 10036 Chase Securities Inc. ("CSI") 270 Park Avenue New York, New York 10017 Merrill Lynch & Co. ("Merrill") Merrill Lynch, Pierce, Fenner & Smith Incorporated World Financial Center - North Tower 250 Vesey Street New York, New York 10281 J.P. Morgan Securities Inc. ("JPMSI") 60 Wall Street New York, New York 10260 Ladies and Gentlemen: LG&E Capital Corp., a Kentucky corporation (the "Company"), proposes to issue and sell to Morgan Stanley, CSI, Merrill and JPMSI (the "Agents"), subject in all respects to the terms and conditions of the Private Placement Agency Agreement dated February 3, 1998 (the "Agreement"), U.S. $150,000,000 aggregate principal amount of its Medium-Term Notes, Series A, described in the Pricing Supplement (as defined below). This agreement (this "Terms Agreement") is supplemental to the Agreement. The notes to be issued pursuant to this Terms Agreement are referred to herein as the "Notes". All terms used herein have the meanings given to them in the Agreement except as otherwise indicated. 2 The following terms and conditions of the Notes are more extensively described in the Company's Pricing Supplement, dated October 29, 1998, relating to the Notes (the "Pricing Supplement"): Title: 5 3/4% REset Put Securities ("REPS(SM)")* Trade Date: October 29, 1998 Original Issue Date: November 3, 1998 Principal Amount: $150,000,000 Price to Public: 100% of Principal Amount, plus accrued interest, if any, from and including November 3, 1998 Purchase Price: 100% of Principal Amount, plus accrued interest, if any, from and including November 3, 1998 Commission: $525,000 Interest Rate: To but excluding November 1, 2001, 5 3/4%. From and including November 1, 2001, as described in the Pricing Supplement under "Additional Terms--Interest Rate and Interest Payment Dates" Form: Book-Entry Only Interest Payment Dates: November 1 and May 1 of each year, commencing May 1, 1999 Maturity Date: November 1, 2011, subject to the purchase and repurchase rights referred to below Remarketing: The Notes may be purchased by the Remarketing Dealer prior to the Maturity Date, as described in the Pricing Supplement under "Description of the REPS--Purchase by the Remarketing Dealer; Remarketing" Remarketing Dealer: Morgan Stanley & Co. Incorporated Repurchase by the Company: The Notes are subject to repurchase by the Company prior to the Maturity Date if the Notes are not purchased by the Remarketing Dealer, as described in the Pricing Supplement under " Description of the REPS --Mandatory Repurchase by the - -------- * REPS is a service mark of Morgan Stanley Dean Witter & Co. 3 Company" and "--Optional Repurchase by the Company" Purchase Date and Time: 10:00 a.m., New York time, on November 3, 1998 Place for Delivery of Notes and Payment Therefor: New York, New York Method of Payment: Wire transfer of immediately available funds Address for notices: As set forth in Section 6 hereof Period during which additional debt securities may not be sold pursuant to Section 4(m) of the Agreement (until the Purchase Date, unless otherwise specified herein): From the date hereof through and including November 3, 1998. 1. On the terms and subject to the conditions of the Agreement and this Terms Agreement, the Company hereby agrees to issue the Notes and to pay to the Agents the aggregate Commission set forth above, and the Agents agree to purchase from the Company, at a purchase price of 100% of the principal amount of the Notes, plus accrued interest, if any, from and including November 3, 1998 (the "Purchase Price"), the entire principal amount of Notes; provided, however, that the Company's obligations hereunder are subject to the receipt by the Company on or prior to the Purchase Date of documentation evidencing the termination (without payment by either party) of the transactions described and confirmed in the Confirmation dated September 28, 1998 between Morgan Stanley Capital Services Inc. and the Company. 2. As a condition precedent to the Agents' obligations to consummate the transaction referred to above, the Agents shall have received the following: (1) a letter from each of John R. McCall, Esq., the General Counsel of the Company, and Gardner, Carton & Douglas, counsel for the Company, to the effect set forth in Section 6(c) of the Agreement and such other legal matters as the Agents shall reasonably request; (2) a letter from counsel for the Agents, to the effect set forth in Section 6(c) of the Agreement, and such other legal matters as the Agents shall reasonably request; (3) a letter from Arthur Anderson LLP, to the effect set forth in Section 6(d) of the Agreement; and (4) a certificate of the Company and LG&E Energy Corp. dated as of November 3, 1998 to the effect set forth in Section 6(b) of the Agreement. 3. This Terms Agreement is subject to termination by any Agent, as to itself, as set forth in Section 7 of the Agreement. In the event of such termination, no party shall have any liability to any other party hereto, except as provided in Section 7 of the Agreement and except for any direct liability arising before or in relation to such termination. 4. If at any time when an Offering Memorandum is to be delivered in connection with sales of the Notes (including any sale of the Notes by the Remarketing Dealer or any Agent or any of their affiliates in connection with any remarketing referenced above), any event shall occur or condition shall exist as a result of which it is necessary, in the reasonable opinion of counsel for such Agent or for the Company, to amend or supplement any Offering Memorandum or Pricing Supplement in order that such Offering Memorandum or Pricing Supplement will not 4 include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, the Company shall prepare such amendment or supplement as may be necessary to correct such statement or omission, or prepare any such new offering memorandum, offering memorandum supplement and pricing supplement as may be necessary for such purpose, and furnish to such Agent such number of copies of such amendment, supplement or other document as they may reasonably request. In addition, the Company shall, in connection with any such sale of the applicable principal amount of Notes by any Agent or any of its affiliates in connection with such remarketing, (i) execute and deliver or cause to be executed and delivered legal documentation (including, but not limited to, a purchase agreement with customary indemnities, covenants, representations and warranties, comfort letters and legal opinions) reasonably requested to facilitate a successful Coupon Reset Process in accordance with the terms of the Remarketing Agreement, in form and substance reasonably satisfactory to such Agent, (ii) provide promptly upon request updated consolidated financial statements as provided for in the Agreement, and (iii) to the extent the Company and such Agent deem reasonably necessary for successful completion of the Coupon Reset Process, make available senior management of the Company for road show and one-on-one presentations. The Remarketing Dealer and or such Agent will conduct the remarketing in a manner (i) substantially consistent with the original offering and sale of the Notes, to the extent required by law, and (ii) which complies with any applicable transfer restrictions set forth in the Indenture; provided, however, that each of the Remarketing Dealer and the Agents acknowledges and agrees that the Notes have not been registered or qualified, and the Company has no obligations to register or qualify, the Notes under the Securities Act of 1933, as amended, or, subject to Section 4(i) of the Agreement, any other applicable securities laws. 5. On July 31, 1998, Standard & Poor's downgraded its ratings of the Company's senior unsecured debt to "A" from "A+" and LG&E Energy Corp.'s senior unsecured debt and preferred stock to "A" from "A+". Solely with respect to the Notes, the Agents hereby waive the condition to their obligations set forth in Section 5(m) (the No Downgrade condition) of the Agreement with respect to the July 31, 1998 downgrade. Such waiver shall not apply to (i) any downgrading, surveillance or review of the Company's or LG&E Energy Corp.'s debt securities or preferred stock as set forth in Section 5(m) of the Agreement occurring from and after the date hereof and prior to the Purchase Date, (ii) any other condition to the Agents' obligations set forth in the Agreement or (iii) any other notes issued or to be issued by the Company. 6. All notices to the Agents pursuant to Section 15 of the Agreement shall be sent (i) with respect to Morgan Stanley, to Morgan Stanley & Co. Incorporated, 1585 Broadway, 3rd Floor, New York, New York 10036, Attention: DPG, Telephone: 212-761-2566, Telecopy: 212-761-0580 and (ii) with respect to any other Agent, at the address for such Agent set forth in Section 15 of the Agreement. 7. This agreement is a Terms Agreement referred to in the Agreement and shall be governed by and construed in accordance with the laws of the State of New York and shall be binding upon the parties hereto and their respective successors. 5 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement between the Company and you. Very truly yours, LG&E CAPITAL CORP. By: /s/ C. A. Markel -------------------------------------------- Name: Charles A. Markel III Title: Chief Financial Officer and Treasurer LG&E ENERGY CORP. By: /s/ C. A. Markel -------------------------------------------- Name: Charles A. Markel III Title: Vice President - Finance and Treasurer 6 Accepted as of the date hereof: MORGAN STANLEY & CO. INCORPORATED By: /s/ signed ------------------------------------- Name: Title: CHASE SECURITIES INC. By: /s/ William Dexter Rogers ------------------------------------- Name: William D. Rogers Title: Managing Director MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: /s/ Richard N. Doyle ------------------------------------- Name: Title: J.P. MORGAN SECURITIES INC. By: /s/ Kevin O'Brien ------------------------------------- Name: Title: EX-12.01 21 EXHIBIT 12.01 EXHIBIT 12.01 KENTUCKY UTILITIES COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of $)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Earnings: Net Income......................................... $ 72,764 $ 85,713 $ 86,163 $ 76,842 $ 77,512 Add: Federal income taxes - current..................... 45,704 38,500 39,221 24,451 38,594 State income taxes - current....................... 10,008 8,718 8,248 5,324 9,157 Deferred Federal income taxes - net................ (2,492) 2,971 1,845 11,759 (1,479) Deferred State income taxes - net.................. 54 1,635 1,905 3,743 (80) Deferred investment tax credit-net................. - - - (71) (86) Investment tax credit - net........................ (3,829) (4,036) (4,013) (4,024) (4,024) Undistributed income of............................ Electric Energy, Inc............................ 622 (37) 24 99 (39) Fixed charges...................................... 39,318 40,324 40,266 40,694 35,136 ------- ------- ------- ------- ------- Earnings......................................... 162,149 173,788 173,659 158,817 154,691 ---------- --------- --------- --------- --------- Fixed Charges: Interest Charges per statements of income.......... 38,660 39,729 39,688 40,116 34,558 Add: One-third of rentals charged to operating expense (1).......................... 658 595 578 578 578 ---------- --------- --------- --------- --------- Fixed charges................................ $ 39,318 $ 40,324 $ 40,266 $ 40,694 $ 35,136 ---------- --------- --------- --------- --------- Ratio of Earnings to Fixed Charges.................... 4.12 4.31 4.31 3.90 4.40 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- ---------
NOTE: (1) In the Company's opinion, one-third of rentals represents a reasonable approximation of the interest factor. EX-12.02 22 EXHIBIT 12.02 EXHIBIT 12.02 LOUISVILLE GAS AND ELECTRIC COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of $)
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Earnings: Income before cumulative effect of a change in accounting principle per statements of income........................................ $ 78,120 $ 113,273 $ 107,941 $ 83,184 $ 61,689 Add: Federal income taxes - current..................... 39,618 59,074 34,019 35,824 30,926 State income taxes - current....................... 10,164 14,754 7,589 8,795 7,726 Deferred Federal income taxes - net................ 2,167 (4,171) 19,816 4,261 (950) Deferred State income taxes - net.................. 636 778 6,648 2,788 956 Investment tax credit - net........................ (4,312) (4,342) (4,406) (4,742) (4,619) Fixed charges...................................... 37,571 40,928 42,198 43,550 44,665 ---------- --------- --------- --------- --------- Earnings......................................... 163,964 220,294 213,805 173,660 140,393 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- Fixed Charges: Interest Charges per statements of income.......... 36,322 39,190 40,242 41,918 42,856 Add: Interest income (1).............................. - - 409 - - One-third of rentals charged to operating expense (2).......................... 1,249 1,738 1,547 1,632 1,809 ---------- --------- --------- --------- --------- Fixed charges................................ $ 37,571 $ 40,928 $ 42,198 $ 43,550 $ 44,665 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- --------- Ratio of Earnings to Fixed Charges.................... 4.36 5.38 5.07 3.99 3.14 ---------- --------- --------- --------- --------- ---------- --------- --------- --------- ---------
NOTE: (1) Interest income earned on pollution control revenue bond proceeds held and invested by trustees - netted against interest charges above. (2) In the Company's opinion, one-third of rentals represents a reasonable approximation of the interest factor. EX-21 23 EXHIBIT 21 Exhibit 21 SUBSIDIARIES OF THE REGISTRANTS Louisville Gas and Electric Company (a Kentucky corporation), Kentucky Utilities Company (a Kentucky and Virginia corporation), LG&E Capital Corp. (a Kentucky corporation), WKE Corp. (a Kentucky corporation), Western Kentucky Energy Corp. (a Kentucky corporation), LG&E Power Inc. (a Delaware corporation), LG&E Power Services Inc. (a California corporation), LG&E Power Operations Inc. (a California corporation), LG&E Energy Marketing Inc. (an Oklahoma corporation), and LG&E International Inc. (a Delaware corporation) are significant subsidiaries of LG&E Energy Corp. Louisville Gas and Electric Company, Kentucky Utilities Company and LG&E Capital Corp. are wholly-owned direct subsidiaries of LG&E Energy Corp. WKE Corp., LG&E Power Inc. and LG&E International Inc. are wholly-owned direct subsidiaries of LG&E Capital Corp. Western Kentucky Energy Corp. is a wholly-owned direct subsidiary of WKE Corp. LG&E Energy Marketing Inc., LG&E Power Services Inc. and LG&E Power Operations are wholly-owned direct subsidiaries of LG&E Power Inc. LG&E Capital Corp., directly and through it subsidiaries and affiliates, including WKE Corp., LG&E Power Inc. and LG&E Power Inc., is a holding company for non-regulated domestic energy and energy related operations, investments, activities and services. WKE Corp., together with Western Kentucky Energy Corp. and two other subsidiaries, leases and operates power generation facilities in western Kentucky and related assets. LG&E Power Inc. conducts non-regulated domestic energy operations and activities through its subsidiaries and affiliates, including LG&E Energy Marketing Inc., LG&E Power Services Inc. and LG&E Power Operations Inc. LG&E Energy Marketing Inc., together with one subsidiary operating in the United States, markets and brokers electric power and natural gas in the United States. LG&E Power Services Inc. operates and maintains domestic power generation facilities. LG&E Power Operations Inc., together with approximately 37 subsidiaries or affiliates operating in the United States, owns interests in domestic power generation facilities. Approximately twenty-one other subsidiaries of LG&E Power Inc. (20 operating in the United States and one operating in Canada) together are involved in the gathering, processing, storage and transportation of natural gas in the United States and the marketing of natural gas in Canada. LG&E International Inc., together with eight subsidiaries operating in the United States, three operating in Argentina and two in Spain, holds LG&E Energy Corp.'s investments in the Argentine gas distribution companies and its current investments in foreign power generation facilities. Louisville Gas and Electric Company has no subsidiaries. Kentucky Utilities Company has one subsidiary, Lexington Utilities Company (a Kentucky corporation). EX-23.01 24 EXHIBIT 23.01 Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 27, 1999 (except with respect to the matters discussed in the eighth and ninth paragraphs of Note 5, as to which the date is February 12, 1999, and Note 22, as to which the date is March 15, 1999) included in this Form 10-K, into the Company's previously filed Registration Statement No. 333-43985 relating to the Company's Savings Plan and the 401(K) Savings Plan for Employees of the Louisville Gas and Electric Company who are represented by Local 2100 of IBEW, Post-Effective Amendment No. One to Registration Statement No. 33-56942 and Post-Effective Amendment No.1-C to Registration Statement No. 33-33687 relating to the Automatic Dividend Reinvestment and Stock Purchase Plan of the Company, Registration Statement No. 333-05457 and Post-Effective Amendment No. 2-C to Registration Statement No. 33-33687 relating to the Employee Common Stock Purchase Plan of the Company, Registration No. 333-05459 and Post-Effective Amendment No. Two to Registration Statement No. 33-38557 relating to the Omnibus Long-Term Incentive Plan of the Company, Post-Effective Amendment No. One to Registration Statement No. 33-56525 relating to the Stock Option Plan for Non-Employee Directors of the Company, and Post-Effective Amendment No. One to Registration Statement No. 33-60765 relating to the Deferred Stock Compensation Plan for Non-Employee Directors of the Company. /S/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Louisville, Kentucky March 26, 1999 EX-23.02 25 EXHIBIT 23.02 Exhibit 23.02 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 27, 1999 (except with respect to the matters discussed in the eighth and ninth paragraphs of Note 3, as to which the date is February 12, 1999, and Note 16, as to which the date is March 11, 1999) included in this Form 10-K, into Louisville Gas and Electric Company's previously filed Registration Statement No. 33-13427. /S/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Louisville, Kentucky March 26, 1999 EX-23.03 26 EXHIBIT 23.03 Exhibit 23.03 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion of our report dated January 27, 1999 (except with respect to the matters discussed in the fifth paragraph of Note 3, as to which the date is February 12, 1999, and Note 13, as to which the date is March 8, 1999) on the financial statements of Kentucky Utilities Company in this Form 10-K. /S/ ARTHUR ANDERSEN LLP ----------------------- Arthur Andersen LLP Louisville, Kentucky March 26, 1999 EX-24.01 27 EXHIBIT 24.01 Exhibit 24.01 POWER OF ATTORNEY WHEREAS, LG&E ENERGY CORP., a Kentucky corporation, is to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, its Annual Report on Form 10-K for the year ended December 31, 1998 (the 1998 Form 10-K); and WHEREAS, each of the undersigned holds the office or offices in LG&E ENERGY CORP. set opposite his or her name; NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them, individually, his attorney, with full power to act for him and in his name, place, and stead, to sign his name in the capacity or capacities set forth below to the 1998 Form 10-K and to any and all amendments to such 1998 Form 10-K and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 3rd day of March 1999. /s/ Roger W. Hale /s/ Anne H. McNamara - --------------------- -------------------------- ROGER W. HALE ANNE H. McNAMARA Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ T. Ballard Morton, Jr. - --------------------- -------------------------- MIRA S. BALL T. BALLARD MORTON, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr. - --------------------- -------------------------- WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR. Director Director /s/ Owsley Brown II /s/ William L. Rouse, Jr. - --------------------- -------------------------- OWSLEY BROWN II WILLIAM L. ROUSE, JR. Director Director /s/ Carol M. Gatton /s/ Charles L. Shearer, Ph.D. - --------------------- ----------------------------- CAROL M. GATTON CHARLES L. SHEARER, PH.D. Director Director /s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D. - --------------------- --------------------------- JEFFERY T. GRADE LEE T. TODD, JR., PH.D. Director Director /s/ J. David Grissom /s/ R. Foster Duncan - --------------------- -------------------------- J. DAVID GRISSOM R. FOSTER DUNCAN Director Chief Financial Officer 1 Exhibit 24.01 POWER OF ATTORNEY (cont.) /s/ David B. Lewis /s/ Michael D. Robinson - --------------------- -------------------------- DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public, State of Kentucky at Large, personally appeared the above named directors and officers of LG&E ENERGY CORP., a Kentucky corporation, and known to me to be the persons whose names are subscribed to the foregoing instrument, and they severally acknowledged to me that they executed the same as their own free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date above set forth. My Commission expires: /s/ Margaret L. Cowan July 28, 2000 -------------------------------- Margaret L. Cowan, Notary Public State of Kentucky at Large 2 EX-24.02 28 EXHIBIT 24.02 Exhibit 24.02 POWER OF ATTORNEY WHEREAS, LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, is to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, its Annual Report on Form 10-K for the year ended December 31, 1998 (the 1998 Form 10-K); and WHEREAS, each of the undersigned holds the office or offices in LOUISVILLE GAS AND ELECTRIC COMPANY set opposite his or her name; NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them, individually, his attorney, with full power to act for him and in his name, place, and stead, to sign his name in the capacity or capacities set forth below to the 1998 Form 10-K and to any and all amendments to such 1998 Form 10-K and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 3rd day of March 1999. /s/ Roger W. Hale /s/ Anne H. McNamara - ---------------------- ------------------------------ ROGER W. HALE ANNE H. McNAMARA Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ T. Ballard Morton, Jr. - ---------------------- ------------------------------ MIRA S. BALL T. BALLARD MORTON, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr. - ---------------------- ------------------------------ WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR. Director Director /s/ Owsley Brown II /s/ William L. Rouse, Jr. - ---------------------- ------------------------------ OWSLEY BROWN II WILLIAM L. ROUSE, JR. Director Director /s/ Gene P. Gardner /s/ Charles L. Shearer, Ph.D. - ---------------------- ------------------------------ GENE P. GARDNER CHARLES L. SHEARER, PH.D. Director Director /s/ Carol M. Gatton /s/ Dr. Donald C. Swain - ---------------------- ------------------------------ CAROL M. GATTON DR. DONALD C. SWAIN Director Director /s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D. - ---------------------- ------------------------------ JEFFERY T. GRADE LEE T. TODD, JR., PH.D. Director Director 1 Exhibit 24.02 POWER OF ATTORNEY (cont.) /s/ J. David Grissom /s/ R. Foster Duncan - ---------------------- ------------------------------ J. DAVID GRISSOM R. FOSTER DUNCAN Director Chief Financial Officer /s/ David B. Lewis /s/ Michael D. Robinson - ---------------------- ------------------------------ DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public, State of Kentucky at Large, personally appeared the above named directors and officers of LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, and known to me to be the persons whose names are subscribed to the foregoing instrument, and they severally acknowledged to me that they executed the same as their own free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date above set forth. My Commission expires: /s/ Margaret L. Cowan July 28, 2000 -------------------------------- Margaret L. Cowan, Notary Public State of Kentucky at Large 2 EX-24.03 29 EXHIBIT 24.03 Exhibit 24.03 POWER OF ATTORNEY WHEREAS, KENTUCKY UTILITIES COMPANY, a Kentucky corporation, is to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, its Annual Report on Form 10-K for the year ended December 31, 1998 (the 1998 Form 10-K); and WHEREAS, each of the undersigned holds the office or offices in KENTUCKY UTILITIES COMPANY set opposite his or her name; NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them, individually, his attorney, with full power to act for him and in his name, place, and stead, to sign his name in the capacity or capacities set forth below to the 1998 Form 10-K and to any and all amendments to such 1998 Form 10-K and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 3rd day of March 1999. /s/ Roger W. Hale /s/ Anne H. McNamara - ---------------------- ------------------------------ ROGER W. HALE ANNE H. McNAMARA Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ T. Ballard Morton, Jr. - ---------------------- ------------------------------ MIRA S. BALL T. BALLARD MORTON, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr. - ---------------------- ------------------------------ WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR. Director Director /s/ Owsley Brown II /s/ William L. Rouse, Jr. - ---------------------- ------------------------------ OWSLEY BROWN II WILLIAM L. ROUSE, JR. Director Director /s/ Carol M. Gatton /s/ Charles L. Shearer, Ph.D. - ---------------------- ------------------------------ CAROL M. GATTON CHARLES L. SHEARER, PH.D. Director Director /s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D. - ---------------------- ------------------------------ JEFFERY T. GRADE LEE T. TODD, JR., PH.D. Director Director /s/ J. David Grissom /s/ R. Foster Duncan - ---------------------- ------------------------------ J. DAVID GRISSOM R. FOSTER DUNCAN Director Chief Financial Officer 1 Exhibit 24.03 POWER OF ATTORNEY (cont.) /s/ David B. Lewis /s/ Michael D. Robinson - ---------------------- ------------------------------ DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public, State of Kentucky at Large, personally appeared the above named directors and officers of KENTUCKY UTILITIES COMPANY, a Kentucky corporation, and known to me to be the persons whose names are subscribed to the foregoing instrument, and they severally acknowledged to me that they executed the same as their own free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date above set forth. My Commission expires: /s/ Margaret L. Cowan July 28, 2000 -------------------------------- Margaret L. Cowan, Notary Public State of Kentucky at Large 2 EX-27.1 30 EXHIBIT 27.1
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 1,752,016 1,154 285,027 66,440 0 2,104,637 424,334 50 247,462 671,846 0 95,328 626,800 0 0 0 0 0 0 0 710,663 2,104,637 850,056 56,307 658,226 714,533 135,523 (21,081) 114,442 36,322 78,120 4,568 73,552 85,000 34,267 225,711 0 0 Includes common stock expense of $836. Represents unrealized gain/loss on marketable securities, net of taxes. Includes $32,072 Merger costs to achieve.
EX-27.2 31 EXHIBIT 27.2
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 1,477,345 14,238 218,900 53,314 0 1,763,797 307,545 0 299,167 606,712 0 40,000 546,330 0 0 0 0 0 0 0 570,755 1,763,797 810,114 53,256 631,470 684,726 125,388 (13,984) 111,404 38,640 72,764 2,256 70,508 78,347 37,290 257,420 0 0 Includes common stock expense of $595.
EX-27.3 32 EXHIBIT 27.3
UT 0000861388 LG&E ENERGY CORP. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 PER-BOOK 3,229,361 571,097 782,270 190,540 0 4,773,268 774,792 167 466,279 1,241,238 0 136,530 1,510,775 365,135 0 0 0 0 0 0 1,519,590 4,773,268 1,976,413 111,823 1,602,899 1,714,722 261,691 (248,310) 13,381 102,047 (88,666) 6,824 (95,490) 160,815 71,557 211,722 (0.74) (0.74) Includes common stock expense of $3,481. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $73,798. Includes loss from discontinued operations of $23,599 and loss on disposal of discontinued operations of $225,000, both net of income taxes. Also includes cumulative effect of accounting change of $7,162, net of income taxes.
EX-99.01 33 EXHIBIT 99.01 Exhibit 99.01 Cautionary Factors for LG&E Energy Corp., Louisville Gas and Electric Company and Kentucky Utilities Company The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation providing those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been and will be made in written documents and oral presentations of LG&E Energy Corp. ("LG&E Energy"), Louisville Gas and Electric Company ("LG&E") and Kentucky Utilities Company ("KU") (collectively, the "Companies"). Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in the Companies' documents or oral presentations, the words "anticipate," "estimate," "expect," "objective" 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 Companies' actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: * Increased competition in the utility, natural gas and electric power marketing industries, including effects of: decreasing margins as a result of competitive pressures; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of investments made under traditional regulation; nature of competitors entering the industry; retail wheeling; a new pricing structure; and former customers entering the generation market; * Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, transmission, currency, interest rate and warranty risks; * Risks associated with price risk management strategies intended to mitigate exposure to adverse movement in the prices of electricity and natural gas on both a global and regional basis; * Legal, regulatory, public policy-related and other developments which may result in redetermination, adjustment or cancellation of revenue payment streams paid to, or increased capital expenditures or operating and maintenance costs incurred by, the Companies, in connection with rate, fuel, transmission, environmental and other proceedings applicable to the Companies; * Legal, regulatory, economic and other factors which may result in redetermination or cancellation of revenue payment streams under power sales agreements resulting in reduced operating income and potential asset impairment related to the Companies' investments in independent power production ventures, as applicable; * Economic conditions including inflation rates and monetary fluctuations; * Trade, monetary, fiscal, taxation, and environmental policies of governments, agencies and similar organizations in geographic areas where the Companies have a financial interest; * Customer business conditions including demand for their products or services and supply of labor and materials used in creating their products and services; * Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, state public utility commissions, state entities which regulate natural gas transmission, gathering and processing and similar entities with regulatory oversight; * Availability or cost of capital such as changes in: interest rates, market perceptions of the utility and energy-related industries, the Companies or any of their subsidiaries or security ratings; * Factors affecting utility and non-utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, unusual maintenance or repairs; unanticipated changes to fossil fuel, or gas supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints; * Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages; * Rate-setting policies or procedures of regulatory entities, including environmental externalities; * Social attitudes regarding the utility, natural gas and power industries; * Identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions; * Some future project investments made by the Companies, respectively, as applicable, could take the form of minority interests, which would limit the Companies' ability to control the development or operation of the project; * Legal and regulatory delays and other unforeseeable obstacles associated with mergers, acquisitions and investments in joint ventures; * Costs and other effects of legal and administrative proceedings, settlements, investigations, claims and matters, including but not limited to those described in Notes 5, 18 and 22 (for LG&E Energy), Notes 3, 12 and 16 (for LG&E) and Notes 3, 11 and 13 (for KU) of the respective Notes to Financial Statements of the Companies' Annual Reports on Form 10-K for the year ended December 31, 1997, and items under the caption Commitments and Contingencies; * Technological developments, changing markets and other factors that result in competitive disadvantages and create the potential for impairment of existing assets; * Factors associated with non-regulated investments, including but not limited to: continued viability of partners, foreign government actions, foreign economic and currency risks, political instability in foreign countries, partnership actions, competition, operating risks, dependence on certain customers, third-party operators, suppliers and domestic and foreign environmental and energy regulations; * Other business or investment considerations that may be disclosed from time to time in the Companies' Securities and Exchange Commission filings or in other publicly disseminated written documents. * Factors affecting the realization of anticipated cost savings associated with the merger between LG&E Energy and KU Energy Corporation including national and regional economic conditions, national and regional competitive conditions, inflation rates, weather conditions, financial market conditions, and synergies resulting from the business combination; The Companies undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. EX-99.02 34 EXHIBIT 99.02 EXHIBIT 99.02 DESCRIPTION OF LG&E ENERGY COMMON STOCK The information under this caption is a succinct summary of certain provisions and is subject to the detailed provisions of LG&E Energy Corp.'s (the "Company's") Amended and Restated Articles of Incorporation, as amended, and of its By-Laws, which have been filed (or incorporated by reference) as exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and which are incorporated herein by this reference. Authorized Stock Under the Company's Articles of Incorporation, the Company is authorized to issue 300,000,000 shares of Common Stock, without par value (the "Common Stock"), of which approximately 129,677,030 shares were outstanding on February 26, 1999. The Company is also authorized to issue 5,000,000 shares of preferred stock, without par value (the "Preferred Stock"). As discussed below under the caption "Rights to Purchase Series A Preferred Stock," the Company has created a series of Preferred Stock designated as "Series A Preferred Stock," and the number of shares constituting such series is 2,000,000. No shares of such Series A Preferred Stock and no shares of any other Preferred Stock are currently outstanding. Preferred Stock may be issued in the future in such series as may be designated by the Company's Board of Directors. In creating any such series, the Company's Board of Directors has the authority to fix the rights and preferences of each series with respect to, among other things, the dividend rate, redemption provisions, liquidation preferences, and sinking fund provisions. Dividend Rights Subject to the prior payment in full of all accrued and unpaid dividends on the Series A Preferred Stock and possible prior rights of holders of other Preferred Stock that may be issued in the future, holders of the Company's Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Company out of funds legally available therefor. The funds required by the Company to enable it to pay dividends on its Common Stock are expected to be derived principally from dividends paid by Louisville Gas and Electric Company ("LG&E") and Kentucky Utilities Company ("KU"), the Company's principal subsidiaries, on LG&E's and KU's respective Common Stock. LG&E and KU may declare dividends on their respective Common Stock out of any surplus or net profits legally available for such purpose. The Company's ability to receive dividends on LG&E's Common Stock is also subject to the prior rights of the holders of LG&E's preferred stock and the covenants of debt instruments limiting the ability of LG&E to pay dividends. The only existing covenant limiting LG&E's ability to pay dividends is in LG&E's trust indenture, as supplemented, securing LG&E's first mortgage bonds. It provides in substance that retained income of LG&E equal to the amount by which the aggregate of (a) provisions for retirement and depreciation and (b) expenditures for maintenance, for the period from January 1, 1978, to the end of the last preceding month for which a balance sheet of LG&E is available, is less than 2.25% of depreciable property, including construction work in progress, as of the end of that period, shall not be available for the payment of cash dividends on the Common Stock of LG&E. No portion of retained income of LG&E is presently restricted by this provision. The Company's ability to receive dividends on KU's Common Stock is also subject to the prior rights of holders of KU's preferred and preference stock and the covenants of debt instruments limiting the ability of KU to pay dividends. KU's articles of incorporation provide that full cumulative dividends on the preferred and preference stock for the current and all past quarterly dividend periods shall have been paid or declared and set apart for payment and KU shall not be in arrears in its sinking fund obligations in respect of any shares of preferred or preference stock. KU's mortgage indenture securing its first mortgage bonds provides that, so long as certain currently outstanding series of first mortgage bonds are outstanding, KU will not declare or pay and 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 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. KU's articles of incorporation provide, in effect, that, so long as any of the KU preferred stock is outstanding, the total amount of all dividends or other distributions on KU 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. No portion of retained earnings of KU is presently restricted by the indenture or articles. Voting Rights Every holder of Common Stock and every holder of Series A Preferred Stock that may be issued in the future is entitled to one vote per share for the election of directors and upon all other matters on which such holder is entitled to vote. At all elections of directors, any eligible shareholder may vote cumulatively. The Board of Directors of the Company has the authority to fix conversion and voting rights for any new series of Preferred Stock (including the right to elect directors upon a failure to pay dividends), provided that no share of Preferred Stock can have more than one vote per share. Notwithstanding the foregoing, if any Series A Preferred Stock is issued in the future and if and when dividends payable on such Series A Preferred Stock that may be issued in the future shall be in default for six full quarterly dividends and thereafter until all defaults shall have been paid, the holders of the Series A Preferred Stock, voting separately as one class, to the exclusion of the holders of Common Stock, will be entitled to elect two (2) directors of the Company. The Company's Articles of Incorporation contain "fair price" provisions, which require that mergers and certain other business combinations or transactions involving the Company and any substantial (10% or more) holder of the Company's Voting Stock (as defined below) must be approved by the holders of at least 80% of the voting power of the Company's outstanding Voting Stock and by the holders of at least 66-2/3% of the voting power of the Company's Voting Stock not beneficially owned by the 10% owner unless the transaction is either approved by a majority of the members of the Board of Directors who are unaffiliated with the substantial holder or certain minimum price and procedural requirements are met. Any amendment to the foregoing provisions must be approved by the holders of at least 80% of the voting power of the Company's outstanding Voting Stock and by the holders of at least 66-2/3% of the voting power of the Company's Voting Stock not beneficially owned by any 10% owner. The Company's Voting Stock consists of all outstanding shares of the Company generally entitled to vote in the election of directors and currently consists of the Company's Common Stock. Subject to the rights of the Series A Preferred Stock (if any are issued) to elect directors under certain circumstances described above and any voting rights of the holders of the Company's Preferred Stock that may be issued in the future, the Company's Articles and By-Laws contain provisions stating that: (a) the Board of Directors shall be divided into three classes, as nearly equal in number as possible, each of which, after an interim arrangement, will serve for three years, with one class being elected each year, (b) directors may be removed only with the approval of the holders of at least 80% of the voting power of the shares of the Company generally entitled to vote, except that so long as cumulative voting applies no director may be removed if the votes cast against removal would be sufficient to elect the director if cumulatively voted at an election of the class of directors of which such director is a part, (c) any vacancy on the Board of Directors shall be filled by the remaining directors then in office, though less than a quorum, (d) advance notice of introduction by shareholders of business at annual shareholders' meetings and of shareholder nominations for the election of directors shall be given and that certain information be provided with respect to such matters, (e) shareholder action may be taken only by unanimous written consent or at an annual meeting of shareholders or a special meeting of shareholders called by the President, the Board of Directors or, to the extent required by Kentucky law, shareholders, and (f) the foregoing provisions may be amended only by the approval of the holders of at least 80% of the voting power of the shares of the Company generally entitled to vote. These provisions along with the "fair price" provisions and cumulative voting provisions discussed above and the Rights described below, may deter attempts to change control of the Company (by proxy contest, tender offer or otherwise) and will make more difficult a change in control of the Company that is opposed by the Company's Board of Directors. Liquidation Rights Subject to the prior rights of the holders of the Series A Preferred Stock that may be issued in the future and the possible prior rights of holders of other Preferred Stock that may be issued in the future, in the event of liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Common Stock are entitled to the remaining assets. Other Provisions No holder of Common Stock or any future holder of Preferred Stock has the preemptive right to subscribe for and purchase any part of any new or additional issue of stock or securities convertible into stock. The Common Stock is not subject to redemption and does not have any conversion or sinking fund provisions. The issued and outstanding shares of Common Stock are fully paid and nonassessable shares of Common Stock of the Company. Under the Company's Articles of Incorporation, the Board of Directors may issue additional shares of authorized but unissued Common Stock for such consideration as it may from time to time determine. Rights to Purchase Series A Preferred Stock On December 5, 1990, the Board of Directors of the Company: (i) declared a dividend distribution of one Preferred Stock purchase right (a "Right" or "Rights") for each outstanding share of Common Stock to shareholders of record on December 19, 1990, and issuable as of such Record Date and (ii) further authorized the issuance of one Right with respect to each share of Common Stock of the Company that becomes outstanding after such Record Date and before the Distribution Date (as defined below). The Company declared a three-for-two split of the Common Stock to shareholders of record on April 30, 1992. As a result of the stock split and in accordance with the terms of the Rights, the number of Rights associated with a share of Common Stock was reduced, effective May 15, 1992, from one Right per share to two-thirds of a Right per share. The Company declared a two-for-one split of the Common Stock to shareholders of record on April 1, 1996. As a result of the two-for-one split and in accordance with the terms of the Rights, the number of Rights associated with a share of Common Stock was reduced from two-thirds of a Right per share to one-third of a Right per share, effective April 15, 1996. On June 7, 1995, the Board of Directors approved the First Amendment to Rights Agreement, whereby the definition of "Acquiring Person" (see below) was modified to provide that an "Acquiring Person" shall be any person who has acquired, or obtained the rights to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company. The previous ownership threshold was 20%. On May 20, 1997, in connection with the announcement of the Merger with KU Energy Corporation ("KU Energy"), the Board of Directors approved the Second Amendment to Rights Agreement so that the execution, delivery and performance of the Merger Agreement and the LG&E Energy Stock Option Agreement (as defined in the Second Amendment to Rights Agreement) will not cause any Rights to become exercisable, cause KU Energy or any of its affiliates to become an "Acquiring Person" or give rise to a "Distribution Date" or "Stock Acquisition Date" (see below). Each whole Right entitles the holder of record to purchase from the Company one one-hundredth of a share of Series A Preferred Stock, without par value, of the Company ("Series A Preferred Stock") at a price of $110 per one one-hundredth of a share (the "Purchase Price"). The description and terms of the Rights are set forth in the Rights Agreement, as amended (the "Rights Agreement"). Initially the Rights will not be exercisable, certificates will not be sent to shareholders and the rights will automatically trade with the Common Stock. The Rights will be evidenced by the Common Stock certificates until the close of business on the earlier to occur of the tenth day following (i) a public announcement (or, if earlier, the date a majority of the Board of Directors of the Company becomes aware) that a person or group of affiliated or associated persons has become an "Acquiring Person", which is defined as a person who has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company (the "Stock Acquisition Date"), or (ii) the commencement of, or public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in the ownership of 15% or more of the outstanding Common Stock (the earlier of the dates in clause (i) or (ii) being called the "Distribution Date"). Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a person who would otherwise be an "Acquiring Person," has become such inadvertently and without any intention of changing or influencing control of the Company, and such person, as promptly as practicable after being advised of such determination, divests himself or itself of beneficial ownership of a sufficient number of shares of Common Stock so that such person would no longer be an "Acquiring Person," then such person shall not be deemed to be an "Acquiring Person" for any purposes of the Rights Agreement. Until the Distribution Date, (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Company's Common Stock as of the close of business on the Distribution Date, and such separate certificates alone will evidence the rights from and after the Distribution Date. Each of the following persons (an "Exempt Person") will not be deemed to be an Acquiring Person, even if they have acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company: (i) the Company, any subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or of any subsidiary of the Company; and (ii) any person who becomes an Acquiring Person solely by virtue of a reduction in the number of outstanding shares of Common Stock, unless and until such person shall become the beneficial owner of, or make a tender offer for, any additional shares of Common Stock. The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on December 19, 2000, unless earlier redeemed or exchanged by the Company as described below. The Purchase Price payable, and the number of shares of Series A Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) upon the grant to holders of the Series A Preferred Stock of certain rights or warrants to subscribe for Series A Preferred Stock or convertible securities at less than the current market price of the Series A Preferred Stock or (iii) upon the distribution to holders of the Series A Preferred Stock of evidences of indebtedness or assets (excluding dividends payable in Series A Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of Rights associated with a share of the Company's Common Stock is subject to adjustment from time to time in the event of a stock dividend on, or a subdivision or combination of, the Common Stock. In the event any Person (other than an Exempt Person) becomes the beneficial owner of 15% or more of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock that the independent directors determine to be fair to and otherwise in the best interest of the Company and its shareholders) or any Exempt Person who is the beneficial owner of 15% or more of the outstanding Common Stock fails to continue to qualify as an Exempt Person, then each holder of record of a whole Right, other than the Acquiring Person, will thereafter have the right to receive, upon payment of the Purchase Price, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a market value at the time of the transaction equal to twice the Purchase Price. However, Rights are not exercisable following such event until such time as the Rights are no longer redeemable by the Company as set forth below. Any Rights that are or were at any time, on or after the Distribution Date, beneficially owned by an Acquiring Person shall become null and void. For example, at an exercise price of $110 per Right, each whole Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $220 worth of Common Stock (or other consideration, as noted above) for $110. Assuming that the Common Stock had a per share value of $22 at such time, the holder of each valid Right would be entitled to purchase 10 shares of Common Stock for $110. After the Rights have become exercisable, if the Company is acquired in a merger or other business combination (in which any shares of the Company's Common Stock are changed into or exchanged for other securities or assets) or more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) are sold or transferred in one or a series of related transactions, the Rights Agreement provides that proper provision shall be made so that each holder of record of a whole Right will have the right to receive, upon payment of the Purchase Price, that number of shares of common stock of the acquiring company having a market value at the time of such transaction equal to two times the Purchase Price. After any such event, to the extent that insufficient shares of Common Stock are available for the exercise in full of the Rights, holders of Rights will receive upon exercise shares of Common Stock to the extent available and then other securities of the Company, including units of shares of Series A Preferred Stock with rights substantially comparable to those of the Common Stock, property, or cash, in proportions determined by the Company, so that the aggregate value received is equal to twice the Purchase Price. The Company, however, shall not be required to issue any cash, property or debt securities upon exercise of the Rights to the extent their aggregate value would exceed the amount of cash the Company would otherwise be entitled to receive upon exercise in full of the then exercisable Rights. No fractional shares of Series A Preferred Stock or Common Stock will be required to be issued upon exercise of the Rights and, in lieu thereof, a payment in cash may be made to the holder of such Rights equal to the same fraction of the current market value of a share of Series A Preferred Stock or, if applicable, Common Stock. At any time until ten days after the Stock Acquisition Date (subject to extension by the Board of Directors), the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (subject to certain anti-dilution adjustments) (the "Redemption Price"). After such redemption period, the Company's right of redemption may be reinstated, under certain circumstances, if an Acquiring Person reduces his beneficial ownership of Common Stock to below 10% and there is no other Acquiring Person. Immediately upon the action of the Board of Directors of the Company authorizing redemption of the Rights, the right to exercise the rights will terminate, and the only right of the holders of Rights will be to receive the Redemption Price without any interest thereon. The Board of Directors may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or part of the outstanding Rights (other than Rights held by the Acquiring Person and certain related parties) for shares of Common Stock at an exchange ratio of three (3) shares of Common Stock per Right (subject to certain anti-dilution adjustments). However, the Board may not effect such an exchange at any time any Person or group owns 50% or more of the shares of Common Stock then outstanding. Immediately after the Board orders such an exchange, the right to exercise the Rights shall terminate and the holders of Rights shall thereafter only be entitled to receive shares of Common Stock at the applicable exchange ratio. The Board of Directors of the Company may amend the Rights Agreement. After the Distribution Date, however, the provisions of the Rights Agreement may be amended by the Board only to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person or an affiliate or associate of an Acquiring Person), or to shorten or lengthen any time period under the Rights Agreement; provided, however, that no amendment to adjust the time period governing redemption shall be made at such time as the Rights are not redeemable. In addition, no supplement or amendment may be made which changes the Redemption Price, the final expiration date, the Purchase Price or the number one one-hundredths of a share of Series A Preferred Stock for which a Right is exercisable, unless at the time of such supplement or amendment there has been no occurrence of a Stock Acquisition Date and such supplement or amendment does not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an associate or affiliate of an Acquiring Person). Until a Right is exercised, the holder, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. The issuance of the Rights is not taxable to the Company or to shareholders under presently existing federal income tax law, and will not change the way in which shareholders can presently trade the Company's shares of Common Stock. If the Rights should become exercisable, shareholders, depending on then existing circumstances, may recognize taxable income. The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and, accordingly, will make more difficult a change of control that is opposed by the Company's Board of Directors. However, the Rights should not interfere with a proposed change of control (including a merger or other business combination) approved by a majority of the Board of Directors since the Rights may be redeemed by the Company at the Redemption Price at any time until ten days after the Stock Acquisition Date (subject to extension by the Board of Directors). Thus, the Rights are intended to encourage persons who may seek to acquire control of the Company to initiate such an acquisition through negotiations with the Board of Directors. Nevertheless, the Rights also may discourage a third party from making a partial tender offer or otherwise attempting to obtain a substantial equity position in, or seeking to obtain control of, the Company. To the extent any potential acquirors are deterred by the Rights, the Rights may have the effect of preserving incumbent management in office. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-38557. A copy of the First Amendment to Rights Agreement has been filed with the SEC as an Exhibit to the Company's Registration Statement on Form 8-A/A, Registration No. 1-10568, filed on June 20, 1995. A copy of the Second Amendment to Rights Agreement has been filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4, Registration No. 333-34219. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as amended, which is incorporated in this summary description herein by reference. Miscellaneous The Company's outstanding Common Stock is listed on the New York and Chicago Stock Exchanges. Transfer Agents and Registrar The Transfer Agents for the Common Stock are the Company and Harris Trust and Savings Bank, Chicago, Illinois. Registrars for the Common Stock are PNC Bank, Kentucky, Inc., Louisville, Kentucky, and Harris Trust and Savings Bank, Chicago, Illinois. EX-99.03 35 EXHIBIT 99.03 Exhibit 99.03 Kentucky Utilities Company Director and Officer Information The outstanding stock of Kentucky Utilities Company ("KU") is divided into three classes: Common Stock, without par value, Preferred Stock, without par value, and Preference Stock, without par value. As of the close of business on February 16, 1999, the record date for the 1999 Annual Meeting of Shareholders (the "Annual Meeting") of KU, the following shares of each were outstanding:
Common Stock, without par value......................................... 37,817,878 shares Preferred Stock, without par value (stated value $100 per share) 4.75% series ................................................. 200,000 shares 6.53% series ................................................. 200,000 shares
All of the outstanding common stock of Kentucky Utilities Company ("KU") is owned by LG&E Energy Corp. ("LG&E Energy"). As of February 16, 1999, all directors, nominees for director and executive officers of KU as a group beneficially owned no shares of KU Preferred Stock. INFORMATION ABOUT DIRECTORS AND NOMINEES The following contains certain information as of February 16, 1999, concerning the nominees for director, as well as the directors whose terms of office continue after the 1999 Annual Meeting. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2002 ANNUAL MEETING OF SHAREHOLDERS MIRA S. BALL (AGE 64) Mrs. Ball has been Secretary-Treasurer and Chief Financial Officer of Ball Homes, Inc., a residential developer and property management company in Lexington, Kentucky, since August 1959. Mrs. Ball is a graduate of the University of Kentucky. Mrs. Ball has been a director of LG&E Energy and Louisville Gas and Electric Company ("LG&E") since May 1998 and of KU since 1992. ROGER W. HALE (AGE 55) Mr. Hale has been a Director and Chairman of the Board and Chief Executive Officer of LG&E Energy since August 1990. Mr. Hale served as President of LG&E Energy from August 1990 to May 1998. Mr. Hale has also been Chief Executive Officer and a Director of LG&E since June 1989, Chairman of the Board of LG&E since February 1, 1990, and served as President of LG&E from June 1989 until January 1, 1992. Mr. Hale has been a Director and Chairman of the Board and Chief Executive Officer of KU since May 1998. Prior to his coming to LG&E, Mr. Hale served as Executive Vice President of Bell South Enterprises, Inc. Mr. Hale is a graduate of the University of Maryland, and received a master's degree in management from the Massachusetts Institute of Technology, Sloan School of Management. Mr. Hale is also a member of the Board of Directors of Global TeleSystems Group, Inc. and H&R Block, Inc. DAVID B. LEWIS (AGE 54) Mr. Lewis is a founding partner of the law firm of Lewis & Munday, a Professional Corporation, in Detroit, Michigan. Since 1972, Mr. Lewis has served as Chairman of the Board and a Director of the firm. Mr. Lewis is a graduate of Oakland University and received his law degree from the University of Michigan Law School. He also received a master's degree in business administration from the University of Chicago Graduate School of Business. Mr. Lewis has been a director of LG&E Energy and LG&E since November 1992 and of KU since May 1998. Mr. Lewis is also a member of the Board of Directors of TRW, Inc., M.A. Hanna Company and Comerica Bank, a subsidiary of Comerica Incorporated. 1 ANNE H. MCNAMARA (AGE 51) Mrs. McNamara has been Senior Vice President and General Counsel of AMR Corporation and its subsidiary, American Airlines, Inc., since June 1988. Mrs. McNamara is a graduate of Vassar College, and received her law degree from Cornell University. She has been a director of LG&E Energy and LG&E since November 1991 and of KU since May 1998. Mrs. McNamara is also a member of the Board of Directors of The SABRE Group Holdings, Inc. FRANK V. RAMSEY, JR. (AGE 67) Mr. Ramsey has been President and a Director of Dixon Bank, Dixon, Kentucky, since October 1972. Mr. Ramsey is a graduate of the University of Kentucky. Mr. Ramsey has been a director of LG&E Energy and LG&E since May 1998 and of KU since 1986. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2001 ANNUAL MEETING OF SHAREHOLDERS CAROL M. GATTON (AGE 66) Mr. Gatton has been Chairman and Director of Area Bancshares Corpora-tion, an Owensboro, Kentucky bank holding company, since April 1976. Mr. Gatton is also owner of Bill Gatton Chevrolet-Cadillac-Isuzu in Bristol, Tennessee. Mr. Gatton is a graduate of the University of Kentucky, and received a master's degree in business administration from the University of Pennsylvania, Wharton School of Business. Mr. Gatton has been a director of LG&E Energy and LG&E since May 1998 and of KU since 1996. LEE T. TODD, JR., PH.D. (AGE 52) Dr. Todd has been President and Chief Executive Officer and Director of DataBeam Corporation, a Lexington, Kentucky high-technology firm, since April 1976. Dr. Todd is a graduate of the University of Kentucky. He also received a master's degree and doctorate in electrical engineering from the Massachusetts Institute of Technology. Dr. Todd has been a director of LG&E Energy and LG&E since May 1998 and of KU since 1995. 2 NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2000 ANNUAL MEETING OF SHAREHOLDERS WILLIAM L. ROUSE, JR. (AGE 66) Mr. Rouse was Chairman of the Board and Chief Executive Officer and director of First Security Corporation of Kentucky, an Owensboro, Kentucky multi-bank holding company, prior to his retirement in 1992. Mr. Rouse is a graduate of the University of Kentucky. Mr. Rouse has been a director of LG&E Energy and LG&E since May 1998 and of KU since 1989. Mr. Rouse is also a member of the Board of Directors of Ashland, Incorporated and Kentucky-American Water Company, a subsidiary of American Water Works Company, Inc. CHARLES L. SHEARER, PH.D. (AGE 56) Dr. Shearer has been President of Transylvania University since July 1983. Dr. Shearer is a graduate of the University of Kentucky and received a master's degree in diplomacy and international commerce from that institution. He also received a master's degree and a doctorate in economics from Michigan State University. Dr. Shearer has been a director of LG&E Energy and LG&E since May 1998 and of KU since 1987. DIRECTORS WHOSE TERMS EXPIRE AT 2001 ANNUAL MEETING OF SHAREHOLDERS OWSLEY BROWN II (AGE 56) Mr. Brown has been the Chairman and Chief Executive Officer of Brown-Forman Corporation, a consumer products company, since July 1995, and was President of Brown-Forman Corporation from 1987 to 1995. Mr. Brown was first named Chief Executive Officer of Brown-Forman Corporation in July 1994. Mr. Brown is a graduate of Yale University, and received his master's degree in business administration from Stanford University. He has been a director of LG&E Energy since August 1990, of LG&E since May 1989 and KU since May 1998. Mr. Brown is also a member of the Board of Directors of Brown-Forman Corporation and North American Coal Corporation, a subsidiary of NACCO Industries, Inc. 3 J. DAVID GRISSOM (AGE 60) Mr. Grissom has been Chairman of Mayfair Capital, Inc., a private investment firm, since April 1989. He served as Chairman and Chief Executive Officer of Citizens Fidelity Corporation from April 1977 until March 31, 1989. Upon the acquisition of Citizens Fidelity Corporation by PNC Financial Corp. in February 1987, Mr. Grissom served as Vice Chairman and as a Director of PNC Financial Corp. until March 1989. Mr. Grissom is a graduate of Centre College and the University of Louisville School of Law. Mr. Grissom has been a director of LG&E Energy since August 1990, of LG&E since January 1982 and of KU since May 1998. He is also a member of the Board of Directors of Providian Financial Corporation and Churchill Downs, Inc. DIRECTORS WHOSE TERMS EXPIRE AT 2000 ANNUAL MEETING OF SHAREHOLDERS WILLIAM C. BALLARD, JR. (AGE 58) Mr. Ballard has been of counsel to the law firm of Greenebaum Doll & McDonald PLLC since May 1992. He served as Executive Vice President and Chief Financial Officer from 1978 until May 1992, of Humana, Inc., a healthcare services company. Mr. Ballard is a graduate of the University of Notre Dame, and received his law degree, with honors, from the University of Louisville School of Law. He also received a Master of Law degree in taxation from Georgetown University. Mr. Ballard has been a director of LG&E Energy since August 1990, of LG&E since May 1989 and of KU since May 1998. Mr. Ballard is also a member of the Board of Directors of United Healthcare Corp., Health Care REIT, Inc., Healthcare Recoveries, Inc., MidAmerica Bancorp, American Safety Razor, Inc. and Jordan Telecommunications Products, Inc. JEFFERY T. GRADE (AGE 55) Mr. Grade has been Chairman and Chief Executive Officer and Director of Harnischfeger Industries, Inc., which is engaged in the manufacture and distribution of equipment for the mining and papermaking industries, since January 1993. He served as President and Chief Executive Officer from 1992 to 1993 and President and Chief Operating Officer from 1986 to 1992. Mr. Grade is a graduate of the Illinois Institute of Technology and received a master's degree in business administration from DePaul University. Mr. Grade has been a director of LG&E Energy and LG&E since October 1997 and of KU since May 1998. He is also a member of the Board of Directors of Case Corporation. T. BALLARD MORTON, JR. (AGE 66) Mr. Morton has been Executive in Residence at the College of Business and Public Administration of the University of Louisville since 1983. Mr. Morton is a graduate of Yale University. Mr. Morton has been a director of LG&E Energy since August 1990, of LG&E since May 1967 and of KU since May 1998. Mr. Morton is also a member of the Board of Directors of the Kroger Company. 4 INFORMATION CONCERNING THE BOARD OF DIRECTORS Each member of the Board of Directors of KU is also a director of LG&E Energy and LG&E. The committees of the Board of Directors of KU include an Audit Committee, a Compensation Committee, a Nominating and Governance Committee and a Long-Range Planning Committee. The directors who are members of the various committees of KU serve in the same capacity for purposes of the LG&E Energy and LG&E Board of Directors. During 1998, there were a total of nine meetings of the KU Board. All directors attended 75% or more of the total number of meetings of the Board of Directors and Committees of the Board on which they served. COMPENSATION OF DIRECTORS Directors who are also officers of KU receive no compensation in their capacities as directors. During 1998, non-employee directors received a retainer of approximately $2,333 per month, or $28,000 annually ($30,000 annually for committee chairmen), a fee for Board meetings of $1,100 per meeting, a fee for each committee meeting of $1,000 and, where appropriate, reimbursement for expenses incurred in traveling to meetings. Non-employee directors residing out of Kentucky received an additional $1,000 compensation for each Board or committee meeting they attended. The foregoing amounts represent the aggregate fees paid to directors in their capacities as directors of LG&E Energy, LG&E and KU, as applicable, during 1998. Upon their resignation as directors of LG&E Energy during 1998, Messrs. Dabney and Gardner and Dr. Swain each received one-time awards of $10,000 in recognition of their years of service on that Board. Non-employee directors of KU may elect to defer all or a part of their fees (including retainers, fees for attendance at regular and special meetings, committee meetings and travel compensation) pursuant to the LG&E Energy Corp. Deferred Stock Compensation Plan (the "Deferred Stock Plan"). Each deferred amount is credited by LG&E Energy to a bookkeeping account and then is converted into a stock equivalent on the date the amount is credited. The number of stock equivalents credited to the director is based upon the average of the high and the low sale price of LG&E Energy Common Stock on the New York Stock Exchange for the five trading days prior to the conversion. Additional stock equivalents will be added to stock accounts at the time that dividends are declared on LG&E Energy Common Stock, in an amount equal to the amount of LG&E Energy Common Stock that could be purchased with dividends that would be paid on the stock equivalents if converted to LG&E Energy Common Stock. In the event that LG&E Energy is a party to any consolidation, recapitalization, merger, share exchange or other business combination in which all or a part of the outstanding LG&E Energy Common Stock is changed into or exchanged for stock or other securities of the other entity or LG&E Energy, or for cash or other property, the stock account of a participating director shall be converted to such new securities or consideration equal to the amount each share of LG&E Energy Common Stock received, multiplied by the number of share equivalents in the stock account. A director will be eligible to receive a distribution from his or her account only upon termination of service by death, retirement or otherwise. Following departure from the Board, the distribution will occur, at the director's election, either in one lump sum or in no more than five annual installments. The distribution will be made, at the director's election, either in LG&E Energy Common Stock or in cash equal to the then-market price of the LG&E Energy Common Stock allocated to the director's stock account. At February 16, 1999, eight directors of LG&E were participating in the Deferred Stock Plan. Non-employee directors who are also directors of LG&E Energy also receive stock options pursuant to the LG&E Energy Corp. Stock Option Plan for Non-Employee Directors (the "Directors' 5 Option Plan"), which was approved by LG&E Energy's shareholders at the 1994 Annual Meeting. Under the terms of the Directors' Option Plan, upon initial election or appointment to the LG&E Energy Board, each new director, who has not been an employee or officer of LG&E Energy within the preceding three years, receives an option grant for 4,000 shares of LG&E Energy Common Stock. Following the initial grant, eligible directors receive an annual option grant of 4,000 shares on the first Wednesday of each February. Option grants for 1994-1996 were for 2,000 shares, all of which were adjusted in April 1996 to reflect a two-for-one stock split. The option exercise price per share for each share of LG&E Energy Common Stock is the fair market value at the time of grant. Options granted are not exercisable during the first twelve months from the date of grant and will terminate 10 years from the date of grant. In the event of a tender offer or an exchange offer for shares of LG&E Energy Common Stock, all then exercisable, but unexercised options granted under the Directors' Option Plan will continue to be exercisable for thirty days following the first purchase of shares pursuant to such tender or exchange offer. The Directors' Option Plan authorizes the issuance of up to 500,000 shares of LG&E Energy Common Stock, of which 251,000 shares are subject to existing options at a weighted average per share price of $22.83. As of February 16, 1999, each non-employee director held 20,000 exercisable options and 4,000 unexercisable options to purchase LG&E Energy Common Stock, with the exception of Mr. Grade, who held 8,000 exercisable options and 4,000 unexercisable options, and Messrs. Gatton, Ramsey and Rouse, Mrs. Ball and Drs. Shearer and Todd, who each held 4,000 exercisable and 4,000 unexercisable options. The number of shares subject to the Directors' Option Plan and subject to awards outstanding under the plan will adjust with any stock dividend or split, recapitalization, reclassification, merger, consolidation, combination or exchange of shares, or any similar corporate change. AUDIT COMMITTEE The Audit Committee of the Board is composed of Messrs. Ballard, Brown, Gatton, Grade, Grissom, Lewis and Ramsey, Mrs. Ball and Drs. Shearer and Todd. During 1998, the Audit Committee maintained direct contact with the independent auditors and KU's Internal Auditor to review the following matters pertaining to KU and to LG&E Energy and its subsidiaries, including LG&E: the adequacy of accounting and financial reporting procedures; the adequacy and effectiveness of internal accounting controls; the scope and results of the annual audit and any other matters relative to the audit of these companies' accounts and financial affairs that the Committee, the Internal Auditor, or the independent auditors deemed necessary. The Audit Committee met three times during 1998. COMPENSATION COMMITTEE The Compensation Committee, composed of non-employee directors, approves the compensation of the Chief Executive Officer and the executive officers of LG&E Energy, LG&E and KU. The Committee makes recommendations to the full Board regarding benefits provided to executive officers and the establishment of various employee benefit plans. The members of the Compensation Committee are Messrs. Gatton, Grade, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara. The Compensation Committee met seven times during 1998. NOMINATING AND GOVERNANCE COMMITTEE The Nominating and Governance Committee is composed of the Chairman of the Board and certain other directors. The Committee reviews and recommends to the Board of Directors nominees to serve on the Board and their compensation. The Committee considers nominees suggested by other members of the Board, by members of management and by voting shareholders. To be considered for inclusion in the slate of nominees proposed by the Board of Directors at an annual meeting, voting shareholder recommendations must be submitted in writing to the Secretary of KU not later than 120 days prior to the Annual Meeting. In addition, the Articles of Incorporation and bylaws of KU contain procedures governing voting shareholder nominations for election of directors at a shareholders' 6 meeting. The Chairman of the Annual Meeting may refuse to acknowledge the nomination of any person not made in compliance with these procedures. The members of the Nominating and Governance Committee are Messrs. Ballard, Brown, Hale (ex officio), Lewis, Ramsey and Rouse, Mrs. Ball and Mrs. McNamara and Dr. Shearer. The Nominating and Governance Committee met two times during 1998. LONG-RANGE PLANNING COMMITTEE The Long-Range Planning Committee is composed of Messrs. Grade, Grissom, Lewis, Morton, Rouse and Todd, Mrs. Ball and Mrs. McNamara and Dr. Shearer. The Long-Range Planning Committee considers and makes recommendations to the Board regarding KU's future strategy and direction, long-term goals and other matters of long-term importance. The Long-Range Planning Committee did not meet during 1998. 7 EXECUTIVE COMPENSATION AND OTHER INFORMATION The following table shows the cash compensation paid or to be paid by KU, KU Energy or LG&E Energy and any of its subsidiaries including LG&E, as well as certain other compensation paid or accrued for those years, to the Chief Executive Officer and the next four highest compensated executive officers of KU who were serving as such at December 31, 1998, in all capacities in which they served during 1996, 1997 and 1998: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------- ANNUAL COMPENSATION AWARDS ----------------------------------- ---------- OTHER SECURITIES PAYOUTS ANNUAL UNDERLYING -------- ALL OTHER COMPEN- OPTIONS/ LTIP COMPEN- NAME AND SALARY BONUS SATION SARS PAYOUTS SATION PRINCIPAL POSITION YEAR ($) ($) ($) (#)(2) ($) ($) - ----------------------------------------------- ---- ------------ -------- ------------ ---------- -------- ------------ Roger W. Hale 1998 $ 700,000 $649,800 $ 32,301 133,588 $821,581 $ 36,191(1) Chairman of the Board 1997 580,000 311,808 18,212 67,728 313,037 26,675 and Chief Executive Officer 1996 510,000 416,068 11,010 55,000 641,092 26,909 Victor A. Staffieri 1998 300,000 150,461 10,269 45,802 166,611 15,590(1) Former Chief Financial Officer 1997 270,000 159,064 8,063 27,946 57,416 10,635 (Currently President and Chief 1996 245,000 175,310 7,431 26,022 124,950 9,336 Operating Officer of LG&E Energy) John R. McCall 1998 260,000 140,399 7,870 34,733 96,635 15,582(1) Executive Vice President, 1997 245,000 114,764 6,922 15,605 32,306 11,414 General Counsel and Corporate Secretary 1996 231,000 112,303 7,230 15,098 35,868 11,029 Wayne T. Lucas 1998 252,035 161,822 1,307 23,028 0 9,500(1) Executive Vice President-- 1997 215,792 69,555 1,271 0 29,576 4,750 Power Generation 1996 208,137 49,043 749 0 33,124 6,361 Robert M. Hewett 1998 211,484 126,469 919 19,928 0 7,405(1) President, Kentucky Utilities 1997 183,727 45,033 1,768 0 29,576 4,750 Company 1996 164,681 32,052 363 0 33,124 4,500 Michael R. Whitley 1998 431,205 74,770 2,667,167(3) 58,203 0 4,024,014(1)(4) Former Vice Chairman and 1997 444,427 186,173 2,477 0 50,967 4,750 Chief Operating Officer 1996 387,737 99,741 2,164 0 79,768 6,242
- ------------------------ (1) Includes employer contributions to 401(k) plan, nonqualified thrift plan and employer paid life insurance premiums in 1998 as follows: Mr. Hale $4,375, $16,625 and $15,191, respectively; Mr. Staffieri $4,875, $8,897 and $1,818, respectively; Mr. McCall $4,318, $6,925 and $4,340, respectively; Mr. Lucas, $4,800, $0 and $4,700, respectively; Mr. Hewett $4,800, $0 and $2,604, respectively; and Mr. Whitley $4,800, $7,072 and $64,610, respectively. (2) As adjusted for the 2 for 1 stock split effective in April 1996. (3) Includes tax gross-up of $2.6 million. (4) Includes contract termination benefits of $3.9 million. 8 OPTION/SAR GRANTS TABLE OPTION/SAR GRANTS IN 1998 FISCAL YEAR The following table contains information at December 31, 1998, with respect to grants of stock options and stock appreciation rights (SARs) to the named executive officers:
INDIVIDUAL GRANTS POTENTIAL ------------------------------------ REALIZABLE VALUE AT NUMBER OF PERCENT OF ASSUMED ANNUAL SECURITIES TOTAL RATES OF STOCK UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------------- NAME (#) (1) FISCAL YEAR ($/ SHARE) DATE 0%($) 5%($) 10%($) - ------------------- --------------- ------------------- ----------- ------------ ------ --------- --------- Roger W. Hale 133,588 16.8% 23.47 02/04/2008 0 1,971,780 4,996,877 Victor A. Staffieri 45,802 5.8% 23.47 02/04/2008 0 676,045 1,713,230 John R. McCall 34,733 4.4% 23.47 02/04/2008 0 512,665 1,299,193 Wayne T. Lucas 23,028 2.9% 26.50 05/04/2008 0 383,778 860,876 Robert M. Hewett 19,928 2.5% 26.5 05/04/2008 0 332,114 744,986 Michael R. Whitley 58,203 7.3% 26.5 05/04/2008 0 969,994 2,175,854
- ------------------------ (1) Options are awarded at fair market value at time of grant; unless otherwise indicated, options vest in one year and are exercisable over a ten-year term. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE AGGREGATED OPTION/SAR EXERCISES IN 1998 FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information with respect to the named executive officers concerning the exercise of options and/or SARs during 1998 and the value of unexercised options and SARs held by them as of December 31, 1998:
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED SHARES UNEXERCISED IN-THE-MONEY ACQUIRED OPTIONS/SARS OPTIONS/SARS AT ON VALUE AT FY-END (#) FY-END ($)(1) EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE - ----------------------------------------------------------------------- -------- -------- ------------- ---------------- Roger W. Hale 29,900 $183,379 136,042/133,588 784,583/646,900 Victor A. Staffieri 0 N/A 110,536/45,802 837,050/221,796 John R. McCall 0 N/A 37,651/34,733 235,255/168,195 Wayne T. Lucas 0 N/A --/23,028 --/41,681 Robert M. Hewett 0 N/A --/19,928 --/36,070 Michael R. Whitley 0 N/A 58,203/-- 105,304/--
- ------------------------ (1) Dollar amounts reflect market value of LG&E Energy Common Stock at year-end, minus the exercise price. 8 LONG-TERM INCENTIVE PLAN AWARDS TABLE LONG-TERM INCENTIVE PLAN AWARDS IN 1998 FISCAL YEAR The following table provides information concerning awards made in 1998 to the named executive officers under the Long-Term Plan.
NUMBER PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER OF SHARES, OTHER PERIOD NON-STOCK PRICE BASED PLANS UNITS OR UNTIL (NUMBER OF SHARES) (1) OTHER MATURATION --------------------------------------------- NAME RIGHTS OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#) - ------------------------------------ ------------- ----------------- --------------- ----------- --------------- Roger W. Hale 39,244 12/31/2000 15,698 39,244 58,866 Victor A. Staffieri 6,728 12/31/2000 2,691 6,728 10,092 John R. McCall 5,102 12/31/2000 2,041 5,102 7,653 Wayne T. Lucas 2,996 12/31/2000 1,198 2,996 4,494 Robert M. Hewett 2,592 12/31/2000 1,037 2,592 3,888 Michael R. Whitley 11,357 12/31/2000 4,543 11,357 17,036
- ------------------------ (1) The table indicates the number of performance units that are paid 50% in stock and 50% in cash at maturation. Each performance unit awarded represents the right to receive an amount payable 50% in LG&E Energy Common Stock and 50% in cash on the date of payout, the latter portion being payable in cash in order to facilitate the payment of taxes by the recipient. The amount of the payout is determined by the then-fair market value of LG&E Energy Common Stock. For awards made in 1998, the Long-Term Plan rewards executives on a three-year rolling basis dependent upon the total shareholder return for shareholders. The target for award eligibility requires that LG&E Energy shareholders earn a total return at a preset level in comparison to that of the utility holding companies and gas and electric utilities in LG&E Energy's Long-Term Plan Peer Group. The Committee sets a contingent award for each management level selected to participate in the Plan and such amount is the basis upon which incentive compensation is determined. Depending on the level of achievement, the participant can receive from zero to 150% of the contingent award amount. Payments made under the Long-Term Plan in 1998 are reported in the summary compensation table for the year of payout. 9 PENSION PLANS The following table shows the estimated pension benefits payable to a covered participant at normal retirement age under LG&E Energy's qualified defined benefit pension plans, as well as non-qualified supplemental pension plans that provide benefits that would otherwise be denied participants by reason of certain Internal Revenue Code limitations for qualified plan benefits, based on the remuneration that is covered under the plan and years of service with KU, LG&E Energy and its subsidiaries: 1998 PENSION PLAN TABLE
YEARS OF SERVICE ------------------------------------------------------ REMUNERATION 15 20 25 30 OR MORE - --------------- ------------ ------------ ------------ ------------ $ 100,000 $ 47,896 $ 47,896 $ 47,896 $ 55,665 $ 200,000 $ 111,896 $ 111,896 $ 111,896 $ 111,896 $ 300,000 $ 175,896 $ 175,896 $ 175,896 $ 175,896 $ 400,000 $ 239,896 $ 239,896 $ 239,896 $ 239,896 $ 500,000 $ 303,896 $ 303,896 $ 303,896 $ 303,896 $ 600,000 $ 367,896 $ 367,896 $ 367,896 $ 367,896 $ 700,000 $ 431,896 $ 431,896 $ 431,896 $ 431,896 $ 800,000 $ 495,896 $ 495,896 $ 495,896 $ 495,896 $ 900,000 $ 559,896 $ 559,896 $ 559,896 $ 559,896 $1,000,000 $ 623,896 $ 623,896 $ 623,896 $ 623,896 $1,100,000 $ 687,896 $ 687,896 $ 687,896 $ 687,896 $1,200,000 $ 751,896 $ 751,896 $ 751,896 $ 751,896 $1,300,000 $ 815,896 $ 815,896 $ 815,896 $ 815,896 $1,400,000 $ 879,896 $ 879,896 $ 879,896 $ 879,896 $1,500,000 $ 943,896 $ 943,896 $ 943,896 $ 943,896 $1,600,000 $ 1,007,896 $ 1,007,896 $ 1,007,896 $1,007,896 $1,700,000 $ 1,071,896 $ 1,071,896 $ 1,071,896 $1,071,896
A participant's remuneration covered by the Retirement Income Plan (the "Retirement Income Plan") is his or her average base salary and short-term incentive payment (as reported in the Summary Compensation Table) for the five calendar plan years during the last ten years of the participant's career for which such average is the highest. The estimated years of service for each named executive employed by the Company at December 31, 1998 is as follows: 32 years for Mr. Hale; 29 years for Mr. Lucas; 4 years for Mr. McCall; 6 years for Mr. Staffieri and 30 years for Mr. Hewett. Benefits shown are computed as a straight life single annuity beginning at age 65. Current Federal law prohibits paying benefits under the Retirement Income Plan in excess of $120,000 per year. Officers of LG&E, KU and LG&E Energy with at least one year of service with either company are eligible to participate in LG&E Energy's Supplemental Executive Retirement Plan (the "Supplemental Executive Retirement Plan"), which is an unfunded supplemental plan that is not subject to the $120,000 limit. Presently, participants in the Supplemental Executive Retirement Plan consist of all of the eligible officers of LG&E, KU and LG&E Energy. This plan provides generally for retirement benefits equal to 64% of average current earnings during the final 36 months prior to retirement, reduced by Social Security benefits, by amounts received under the Retirement Income Plan and by benefits from other employers. As part of its employment agreement with Mr. Hale, LG&E established a separate Supplemental Executive Retirement Plan. The special plan generally provides for a retirement benefit for Mr. Hale of 2% for each of his first 20 years of service with LG&E Energy, LG&E or with certain prior employers, 1.5% for each of the next 10 years of service and 1% for each remaining year of service completed prior to age 65, all multiplied by Mr. Hale's final 36 months average compensation, less benefits payable from the Retirement Income Plan, benefits payable from any other qualified or nonqualified plan sponsored by LG&E Energy, LG&E or certain prior employers, and primary Social Security benefits. Under Mr. Hale's employment agreement (see below), he may elect to commence payment of his retirement benefits at age 50. If he retires prior to age 65, Mr. Hale's benefits will be reduced by factors set forth in the employment agreement. 10 The estimated annual benefits to be received under the Retirement Income Plan and the Supplemental Executive Retirement Plans upon normal retirement at age 65 and after deduction of Social Security benefits will be $712,328 for Mr. Hale; $122,371 for Mr. Lucas; $249,108 for Mr. McCall; $292,023 for Mr. Staffieri; and $112,580 for Mr. Hewett. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS On May 20, 1997, Mr. Hale entered into a new employment agreement with LG&E Energy for services to be provided to LG&E Energy and its subsidiaries, including LG&E and KU. This agreement became effective upon the May 4, 1998 consummation of the merger with KU Energy and has an initial term of five years ending on May 4, 2003. Under the agreement, Mr. Hale is entitled to an annual base salary of not less than $675,000, subject to annual review by the Compensation Committee, and to participate in the Short-Term Plan and the Long-Term Plan. Mr. Hale's agreement with LG&E Energy provides for a short-term incentive target award of not less than 60% of base salary and long-term incentive grants with a present value of not less than 110% of base salary to be delivered two-thirds in the form of performance units/shares and one-third in the form of non-qualified stock options. In addition, the agreement provides that at the Company's expense a life insurance policy in the amount of not less than $2 million shall be provided to Mr. Hale. LG&E Energy's Board of Directors may terminate the agreement at any time and, if it does so for reasons other than cause, LG&E Energy must pay Mr. Hale's base salary plus his target short-term incentive award for the remaining term of his employment contract, but not less than two years. During 1998, officers of LG&E Energy and KU entered into revised change in control agreements, which agreements generally provide for the benefits described below. In the event of a change in control, all such officers of KU and LG&E Energy shall be entitled to the following payments if, within twenty-four months after such change in control, they are terminated for reasons other than cause or disability, or their employment responsibilities are altered: (i) all accrued compensation; (ii) a severance amount equal to 2.99 times the sum of (a) his or her annual base salary and (b) his or her bonus or "target" award paid or payable pursuant to the Short-Term Plan. Payments may be made to executives which would equal or exceed an amount which would constitute a nondeductible payment pursuant to Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), or be subject to an excise tax imposed by Section 4999 of the Code and, in the latter case, KU and LG&E Energy will "gross up" the applicable severance payments to the executive to cover any excise taxes that may be due. The executive is entitled to receive such amounts in a lump-sum payment within thirty days of termination. A change in control encompasses certain mergers and acquisitions, changes in Board membership and acquisitions of voting securities of LG&E Energy. Also upon a change in control of LG&E Energy, all stock-based awards shall vest 100%, and all performance-based awards, such as performance units and performance shares, shall immediately be paid out in cash, based upon the extent to which the performance goals have been met through the effective date of the change in control or based upon the assumed achievement of such goals, whichever amount is higher and prorated for the executive's deemed period of service during the relevant performance period. Additionally, executives shall receive continuation of certain welfare benefits and payments in respect of accrued but unused vacation days and for out-placement assistance. During 1998, Michael R. Whitley, former Vice Chairman and Chief Operating Officer received cash payments before tax "gross up" of approximately $3.9 million, pursuant to existing employment and change in control agreements, in addition to the stock-based awards and other benefits described above, in connection with his departure from KU. 11 -----END PRIVACY-ENHANCED MESSAGE-----