-----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, RJJSm7yRNMEfd/rsMILmQMrII4toTPauDhPs0Gt2Ci1bh8Yd+wiN3AzVGtVGxNq9 58VSxBarg0XBCcGTpxxPTw== 0000912057-00-014074.txt : 20000329 0000912057-00-014074.hdr.sgml : 20000329 ACCESSION NUMBER: 0000912057-00-014074 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 31 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 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-K405 SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 581374 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-K405 SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 581375 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-K405 SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 581376 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-K405 1 10-K405 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, 1999 ----------------- 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, 4.75% cumulative, Philadelphia Stock Exchange stated 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. |X| As of February 29, 2000, the aggregate market value of LG&E Energy Corp.'s voting common stock held by non-affiliates totaled $2,858,467,522, and it had 129,677,030 shares of common stock outstanding. As of February 29, 2000, the aggregate market value of Louisville Gas and Electric Company's voting preferred stock held by non-affiliates totaled $16,775,597, 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 29, 2000, 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 and Louisville Gas and Electric Company's respective proxy statements, to be filed with the Commission during April 2000, 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.... 2 Louisville Gas and Electric Company General.................................................... 3 Electric Operations........................................ 5 Gas Operations............................................. 6 Rates and Regulation....................................... 7 Construction Program and Financing......................... 7 Coal Supply................................................ 8 Gas Supply................................................. 8 Environmental Matters...................................... 9 Competition................................................ 9 Kentucky Utilities Company General.................................................... 9 Electric Operations........................................ 10 Rates and Regulation....................................... 11 Construction Program and Financing......................... 11 Coal Supply................................................ 12 Environmental Matters...................................... 12 LG&E Capital Corp............................................... 13 Power Operations................................................ 13 Western Kentucky Energy......................................... 15 Argentine Gas Distribution Division............................. 16 Capital Corp. Other............................................. 17 Discontinued Operations......................................... 19 Employees and Labor Relations................................... 19 Item 2. Properties...................................................... 20 Item 3. Legal Proceedings............................................... 24 Item 4. Submission of Matters to a Vote of Security Holders............. 26 Executive Officers of the Company.......................................... 27 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................ 34 Item 6. Selected Financial Data......................................... 35 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition: LG&E Energy Corp....................................... 38 Louisville Gas and Electric Company.................... 56 Kentucky Utilities Company............................. 66 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 74 Item 8. Financial Statements and Supplementary Data: LG&E Energy Corp........................................... 75 Louisville Gas and Electric Company........................ 119 Kentucky Utilities Company................................. 145 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 167 TABLE OF CONTENTS (CONT.) PART III Item 10. Directors and Executive Officers of the Registrant (a).......... 167 Item 11. Executive Compensation (a)...................................... 167 Item 12. Security Ownership of Certain Beneficial Owners and Management (a)......................................... 167 Item 13. Certain Relationships and Related Transactions (a).............. 167 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 167 Signatures ........................................................... 195 (a) Incorporated by reference. INDEX OF ABBREVIATIONS Act The Clean Air Act Amendments of 1990 AP&L Arkansas Power & Light Company Big Rivers Big Rivers Electric Corporation BPA Bonneville Power Administration Capital Corp. LG&E Capital Corp. Centro Distribuidora de Gas Del Centro Company LG&E Energy Corp. CRC CRC-Evans Holdings Corp. and Affiliates Cuyana Distribuidora de Gas Cuyana CWLP City of Springfield, Illinois, City Water, Light and Power Company D&P Duff & Phelps Credit Rating Co. DSM Demand Side Management ECR Environmental Cost Recovery EEI Electric Energy, Inc. EITF Emerging Issues Task Force Issue Energy Systems LG&E Energy Systems Inc. EPA U.S. Environmental Protection Agency ESM Earnings Sharing Mechanism EWG Exempt Wholesale Generator FAC Fuel Adjustment Clause FERC Federal Energy Regulatory Commission FPA Federal Power Act FT Firm Transportation FUCO Foreign Utility Company Gas BAN Gas Natural Ban, S.A. Gas Operations Natural Gas Gathering and Processing Business Gas Systems LG&E Gas Systems Inc. GSC Gas Supply Clause Hancock John Hancock Mutual Life Insurance Company Henderson City of Henderson, Kentucky Holding Company Act Public Utility Holding Company Act of 1935 IBEW International Brotherhood of Electrical Workers IMEA Illinois Municipal Electric Agency IMPA Indiana Municipal Power Agency Inversora Inversora de Gas Del Centro IT Information Technology Kenetech Kenetech Windpower, Inc. Kentucky Commission Kentucky Public Service Commission KIUC Kentucky Industrial Utility Consumers, Inc. KU Kentucky Utilities Company KU Capital KU Capital Corporation KU Energy Common Stock Each outstanding share of the common stock, without par value, of KU Energy KU Energy KU Energy Corporation Kva Kilovolt-ampere LEM LG&E Energy Marketing Inc. LG&E Louisville Gas and Electric Company LG&E Energy LG&E Energy Corp. LG&E Energy Common Stock Common stock of LG&E Energy LIBOR London Interbank Offered Rate LII LG&E International Inc. LIU Laborers International Union of North America LPI LG&E Power Inc. Mcf Thousand Cubic Feet INDEX OF ABBREVIATIONS (CONT.) Merger Agreement Agreement and Plan of Merger dated May 20, 1997 MGP Manufactured Gas Plant Mmbtu Million British thermal units Moody's Moody's Investor Services, Inc. MRA Master Restructuring Agreement Mw Megawatts Mwh Megawatt hours NAAQS National Ambient Air Quality Standards NGA Natural Gas Act NGPA Natural Gas Policy Act of 1978 NIMO Niagara Mohawk Power Corporation NNS No-Notice Service Non-Utility Operations Operations of Capital Corp. and LEM NOx Nitrogen Oxide OMU Owensboro Municipal Utilities OPC Oglethorpe Power Corporation PBR Performance-Based Ratemaking Portland General Portland General Electric Company PowerGen PowerGen Plc Power Operations Capital Corp.'s Independent Power Operations PPA Long-Term Power Purchase Agreement PUHCA Public Utility Holding Company Act of 1935 PURPA Public Utility Regulatory Policy Act of 1978 QF Qualifying Cogeneration Facility ROVA I Roanoke Valley I Facility ROVA II Roanoke Valley II Facility S&P Standard & Poor's Rating Services SEC Securities and Exchange Commission SERP Supplemental Security Plan SFAS Statement of Financial Accounting Standards SIP State Implementation Plan SO2 Sulfur Dioxide SOP Statement of Position Southampton Southampton Cogeneration Facility Staff Virginia Commission Staff Tarifa K.W. Tarifa, S.A. Tennessee Tennessee Gas Pipeline Company Texas Gas Texas Gas Transmission Corporation TLP Tenaska Limited Partnerships TRA Tennessee Regulatory Authority Trimble County LG&E's Trimble County Unit 1 UAJ-APPI United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada USEPA U.S. Environmental Protection Agency USWA United Steelworkers of America Utility Operations Operations of LG&E and KU VEPCO Virginia Electric and Power Company Virginia Commission Virginia State Corporation Commission WKE Western Kentucky Energy Corp. and its Affiliates WLP Westmoreland-LG&E Partners WPP 93 Windpower Partners 1993 WPP 94 Windpower Partners 1994 PART I. Item 1. Business. OVERVIEW OF OPERATIONS LG&E Energy, incorporated November 14, 1989, is a diversified energy-services holding company with four direct operating subsidiaries: LG&E, KU, Capital Corp., and LEM. 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 Commonwealths of Kentucky or of Virginia and is not subject to regulation as such by the Kentucky Commission or the Virginia Commission. See LG&E - Rates and Regulation and KU - Rates and Regulation for descriptions of the regulation of LG&E and KU by the Kentucky Commission, and of KU by the Virginia Commission and FERC, which includes the ability to regulate certain intercompany transactions between LG&E, KU and the Company, including the Company's non-utility subsidiaries. POWERGEN TRANSACTION On February 28, 2000, the Company announced that its Board of Directors accepted an offer to be acquired by PowerGen for cash of approximately $3.2 billion or $24.85 per share and the assumption of $2.2 billion of the Company's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction. The acquisition is expected to close 9 to 12 months from the announcement, shortly after all of the conditions to consummation of the acquisition are met. Those conditions include, without limitation, the approval of the holders of a majority of the outstanding shares of common stock of each of LG&E Energy and PowerGen, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the FERC under the FPA, the approval of the SEC under the PUHCA of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Shareholder meetings to vote upon the approval of the acquisition are expected to be held during the second quarter of 2000 for both LG&E Energy and PowerGen. During the first quarter of 2000, the Company expensed approximately $1.0 million relating to the PowerGen transaction. The foregoing description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. 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 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 1 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, a subsidiary of LG&E Energy, and KU, a subsidiary of KU Energy, were 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 enabled the Company to focus on optimizing the value of physical assets it owns or controls, and reduced the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company continues to settle commitments that obligate it to buy and sell natural gas and electric power. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the terms of 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 WKE. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial 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 resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with OPC. Other components of the write-off included costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs. At the time the Company decided to discontinue its merchant energy trading and sales business, it also decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain this business. The accompanying financial statements reflect the reclassification of the natural gas gathering and processing business as continuing operations for all periods presented. Approximately $800,000 of net losses charged to the loss on disposal of discontinued operations was reclassified to continuing operations in the accompanying income statement in each of 1999 and 1998 related to the natural gas gathering and processing business. See Note 4 of LG&E Energy's Notes to Financial Statements under Item 8 for more information. In the fourth quarter of 1999, the Company received an adverse decision from the arbitration panel considering its contract dispute with OPC, which was commenced by the Company in April 1998. As a result of this adverse decision, higher than anticipated commodity prices, increased load demands, and other factors, the Company increased its after-tax accrued loss on disposal of discontinued operations by $175 million. The additional write-off included costs related to the remaining commitments in its portfolio and exit costs expected to be incurred to serve those commitments. 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, there are inherent limitations in models to accurately predict future commodity prices, load demands and other events that could impact the amounts recorded by the Company. See Notes 3 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. 2 The Company reclassified its financial statements for prior periods to present the operating results, financial position and cash flows of the merchant energy trading and sales business as discontinued operations. See Notes 1, 3 and 4 of LG&E Energy's Notes to Financial Statements under Item 8 for more information. CRC ACQUISITION In July 1999, the Company purchased 100% of the outstanding common stock of CRC for initial consideration of $45.6 million and retirement of approximately $35.3 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. The purchase agreement provides for future annual earn-out payments to the previous owners based on CRC's meeting certain financial targets over the period ending March 31, 2002, and, under certain circumstances, a change in control of LG&E Energy may accelerate the earnout. The acquisition agreement capped the total of these payments at $34.3 million. The Company accounted for the acquisition using the purchase method and recorded goodwill of approximately $42.1 million. Additional goodwill will be recorded contingent upon future earn-out payments. Goodwill is being amortized over a period of twenty years. See Note 2 of LG&E Energy's Notes to Financial Statements under Item 8. GAS BAN ACQUISITION In March 1999, the Company acquired an indirect 20% ownership interest in Gas BAN, a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $74.3 million, including transaction costs, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company accounted for the acquisition using the purchase method, and records its share of earnings using the equity method. The purchase price exceeded the underlying equity in Gas BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their preliminary estimated fair values. See Note 2 of LG&E Energy's Notes to Financial Statements under Item 8. LEASE OF BIG RIVERS FACILITIES In July 1998, the Company closed the transaction to lease the generating assets of Big Rivers. Under the 25-year operating lease, WKE operates Big Rivers' coal-fired facilities, a combustion turbine and operates and maintains the Station Two generating facility of Henderson. The combined generating capacity of these facilities is approximately 1,700 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 three 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 5 of LG&E Energy's Notes to Financial Statements under Item 8. LOUISVILLE GAS AND ELECTRIC COMPANY General Incorporated on July 2, 1913, LG&E is a regulated public utility that supplies natural gas to approximately 295,000 customers and electricity to approximately 366,000 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 3 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. See Item 2, Properties. For the year ended December 31, 1999, 82% of total operating revenues was derived from electric operations and 18% 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 $215,019 $103,655 $318,674 44% Commercial 176,692 38,627 215,319 30 Industrial 112,038 10,401 122,439 17 Public authorities 56,042 9,013 65,055 9 -------- -------- -------- --- Total retail 559,791 161,696 721,487 100% === Wholesale sales 221,336 8,118 229,454 Gas transported - net - 6,350 6,350 Provision for rate refunds (1,735) - (1,735) Miscellaneous 11,278 1,415 12,693 -------- -------- -------- Total $790,670 $177,579 $968,249 ======== ======== ======== See Note 14 of LG&E's Notes to Financial Statements and Note 20 of LG&E Energy's Notes to Financial Statements under Item 8 for financial information concerning segments of business for the three years ended December 31, 1999. 4 Electric Operations The sources of LG&E's electric operating revenues and the volumes of sales for the three years ended December 31, 1999, were as follows: 1999 1998 1997 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $215,019 $213,476 $205,137 Small commercial and industrial 79,261 76,304 72,769 Large commercial 97,431 94,650 90,131 Large industrial 112,038 113,372 110,652 Public authorities 56,042 55,075 53,412 -------- -------- -------- Total retail 559,791 552,877 532,101 Wholesale sales 221,336 99,340 70,942 Provision for rate refunds (1,735) (4,500) - Miscellaneous 11,278 10,794 11,489 -------- -------- -------- Total $790,670 $658,511 $614,532 ======== ======== ======== ELECTRIC SALES (Thousands of Mwh): Residential 3,680 3,534 3,302 Small commercial and industrial 1,218 1,156 1,108 Large commercial 2,072 1,977 1,880 Large industrial 3,047 3,097 3,054 Public authorities 1,187 1,140 1,105 -------- -------- -------- Total retail 11,204 10,904 10,449 Wholesale sales 8,428 4,970 3,800 -------- -------- -------- Total 19,632 15,874 14,249 ======== ======== ======== LG&E uses efficient coal-fired boilers, fully equipped with sulfur dioxide removal systems, to generate most of its electricity. LG&E's system wide emission weighted-average rate for sulfur dioxide in 1999 was approximately .9 lbs./Mmbtu of heat input, which is significantly below the Year 2000 Phase II limit of 1.2 lbs./Mmbtu established by the Act. The 1999 maximum local peak load of 2,612 Mw occurred on Friday, July 30, 1999, when the temperature at the time was 106 degrees F. Prior to 1999, the record local peak load was 2,427 Mw (set on August 25, 1998). 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 12%. At December 31, 1999, LG&E owned steam and combustion turbine generating facilities with a capacity of 2,637 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. 5 Gas Operations The sources of LG&E's gas operating revenues and the volumes of sales for the three years ended December 31, 1999, were as follows: 1999 1998 1997 ---- ---- ---- GAS OPERATING REVENUES (Thousands of $): Residential $103,655 $113,430 $139,967 Commercial 38,627 40,888 52,440 Industrial 10,401 11,969 17,892 Public authorities 9,013 8,884 12,052 -------- -------- -------- Total retail 161,696 175,171 222,351 Wholesale sales 8,118 8,720 - Gas transported - net 6,350 6,926 6,997 Miscellaneous 1,415 728 1,663 -------- -------- -------- Total $177,579 $191,545 $231,011 ======== ======== ======== GAS SALES (Millions of cu. ft.): Residential 21,565 20,040 24,038 Commercial 9,033 8,448 10,212 Industrial 2,781 2,860 3,948 Public authorities 2,228 1,967 2,467 -------- -------- -------- Total retail 35,607 33,315 40,665 Wholesale sales 3,881 3,880 - Gas transported 14,014 13,027 13,452 -------- -------- -------- Total 53,502 50,222 54,117 ======== ======== ======== 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. 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. 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 degrees F. During 1999, the maximum day gas sendout was 511,000 Mcf, occurring on January 4, when the average temperature for the day was 10 degrees F. Supply on that day consisted of 230,000 Mcf from purchases, 222,000 Mcf delivered from underground storage, and 59,000 Mcf transported for industrial customers. For a further discussion, see Gas Supply under Item 1. 6 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 FPA, 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 6 of LG&E Energy's Notes to Financial Statements under Item 8. LG&E's electric rates contain a FAC, whereby increases and decreases in the cost of fuel for electric generation are reflected in the rates charged to all electric customers. 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 Kentucky Commission also requires that electric utilities, including LG&E, file certain documents relating to fuel procurement and the purchase of power and energy from other utilities. LG&E's gas rates contain a 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 Kentucky 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. 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. 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, 1999, gross property additions amounted to $645 million. Internally generated funds and external financings for the five-year period were sufficient to provide for all of these gross additions. The gross additions during this period amounted to approximately 21% of total utility plant at December 31, 1999, and consisted of $493 million for electric properties and $152 million for gas properties. Gross retirements during the same period were $116 million, consisting of $88 million for electric properties and $28 million for gas properties. 7 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 1999, were about 5% 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, 1999, a coal inventory of approximately 816,000 tons, or a 43-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. The average delivered cost of coal purchased by LG&E, per ton and per Mmbtu, for the periods shown were as follows: 1999 1998 1997 ---- ---- ---- Per ton $21.49 $22.38 $21.66 Per Mmbtu .95 .98 .94 The delivered cost of coal is expected to decrease during 2000. Gas Supply LG&E purchases transportation services from Texas Gas and Tennessee. LG&E purchases natural gas supplies from multiple sources under contracts for varying periods of time. During 2000, Texas Gas filed with FERC for a change in its rates as required under the settlement in its last rate case. LG&E plans to participate in that and other proceedings, as appropriate. The requested increase, the resolution of that case, and the timing and amounts of refunds, if any, are not known at this time. LG&E transports on the Texas Gas system under NNS and 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 2001, 2003, and 2005. 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 that are market-responsive. These firm supplies, in tandem with pipeline transportation services, provide the reliability and flexibility necessary to serve LG&E's 8 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 1999-2000 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 $2.99 in 1999, $3.05 in 1998 and $3.46 in 1997. 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 1999, expenditures for pollution control facilities represented $124 million or 19% of total construction expenditures. For a discussion of environmental matters, see Rates and Regulation for LG&E and LG&E Energy Corp. under Item 7 and Note 12 of LG&E's Notes to Financial Statements and Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. 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 commercial, industrial and residential customers; 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 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 458,000 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. 9 Electric Operations The sources of KU's electric operating revenues and the volumes of sales for the three years ended December 31, 1999, were as follows: 1999 1998 1997 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $ 242,304 $ 238,566 $ 231,824 Commercial 160,895 158,340 150,794 Industrial 154,460 154,475 146,801 Mine Power 28,792 31,620 34,541 Public authorities 58,500 58,740 56,243 --------- --------- --------- Total - ultimate consumers 644,951 641,741 620,203 Wholesale sales 286,595 179,118 87,330 Provision for rate refunds (5,900) (21,500) -- Miscellaneous 11,664 10,755 8,904 --------- --------- --------- Total $ 937,310 $ 810,114 $ 716,437 ========= ========= ========= ELECTRIC SALES (Thousands of Mwh): Residential 5,447 5,247 5,061 Commercial 3,760 3,644 3,422 Industrial 4,911 4,747 4,464 Mine Power 752 838 926 Public authorities 1,437 1,424 1,355 --------- --------- --------- Total - ultimate consumers 16,307 15,900 15,228 Wholesale sales 10,188 7,224 3,397 --------- --------- --------- Total 26,495 23,124 18,625 ========= ========= ========= 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, 1999, KU owned steam and combustion turbine generating facilities with a capacity of 3,898 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, 1999, KU's system capability, including purchases from others, was 4,229 Mw. On July 30, 1999, a record local peak load, on a one-hour integrated basis, was set at 3,764 Mw. Under a contract expiring in 2020 with 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 7% of KU's net system output during 1999. 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 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 about 6% of KU's net system output in 1999. See Note 11 of KU's Notes to Financial Statements and Note 18 of LG&E Energy's Notes to 10 Financial Statements under Item 8. 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 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 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 6 of LG&E Energy's Notes to Financial Statements under Item 8. KU's electric rates contain a FAC, whereby increases and decreases in the cost of fuel for electric generation are reflected in the rates charged to all electric customers. 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 Kentucky Commission also requires that electric utilities, including KU, file certain documents relating to fuel procurement and the purchase of power and energy from other utilities. The FAC 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. 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 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 SEC. Construction Program and Financing KU's construction program is designed to ensure that there will be adequate capacity and reliability to meet the electric 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 11 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 five years ended December 31, 1999, construction expenditures aggregated about $596 million, which included five combustion turbine peaking units. Three 126-Mw units were placed into commercial operation in 1995 and 1996. Two 164-Mw units, which are jointly owned with LG&E, were put into commercial operation in August 1999. Coal Supply Coal-fired generating units provided more than 98% of KU's net kilowatt-hour generation for 1999. The remainder of KU's net generation for 1999 was provided by oil and/or natural gas burning units and hydroelectric plants. The average delivered cost of coal purchased per Mmbtu and the percentage of spot coal purchases for the periods indicated were as follows: 1999 1998 1997 ---- ---- ---- Per ton $ 26.65 $ 26.97 $ 27.97 Per Mmbtu - all sources $ 1.11 $ 1.12 $ 1.15 Per Mmbtu - spot purchases only $ 1.11 $ 1.10 $ 1.12 Spot purchases as % of all sources 53% 42% 34% The price of coal is expected to decrease slightly during 2000. 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 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, 1999, a coal inventory of approximately 1,063,000 tons, or a 48 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 12 period ending with 1999, expenditures for pollution control facilities represented $42 million or 7% 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. 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. AND OTHER Capital Corp., the holding company for all the Company's non-utility investments other than trading operations, was formed on September 5, 1997, when the Company merged two of its former direct subsidiaries, Energy Systems and Gas Systems, and renamed the company LG&E Capital Corp. On July 24, 1998, 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 decided to discontinue its merchant energy trading and sales business, and it decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain the natural gas gathering and processing business. For a more detailed discussion of the discontinuance of the Company's merchant energy trading and sales business, and the decision to retain the natural gas gathering and processing business, see Discontinued Operations under this Item, and Notes 3, 4 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. Capital Corp. conducts its operations through three principal business segments: Power Operations, Western Kentucky Energy and Argentine Gas Distribution. Capital Corp. is also engaged in other non-utility activities including: providing specialized equipment and services used in construction and rehabilitation of gas and oil transmission pipelines; the gathering, processing, storing and transportation of natural gas; commercial and retail initiatives designed to assess the energy and utility needs of large commercial and industrial entities; providing maintenance and repair services for customers' major household appliances; and, the asset optimization of the Company's generation assets. See Notes 2, 5, 9, 10, 18 and 20 of LG&E Energy's Notes to Financial Statements under Item 8. LEM conducts asset-based energy marketing on behalf of the Company's utility and non-utility operations. POWER OPERATIONS General Capital Corp.'s 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, and ownership interests in three 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. 13 In March 1999, LG&E Westmoreland - Rensselaer, in which Power Operations owned a 50% interest, sold the assets of the Rensselaer cogeneration facility. This transaction resulted in an after-tax gain for Power Operations of approximately $8.9 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. In February 1998, Power Operations sold its interest in a 114-Mw natural gas-fired power plant in North Central Argentina. The transaction resulted in a $2.8 million pre-tax loss. Fuel Supply Power Operations operates five coal fired and three wind plants. See Item 2, Properties. Coal supply needed by Power Operations is generally purchased 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 VEPCO for Southampton, Altavista, and Hopewell in Virginia and ROVA I and ROVA II in North Carolina; Southern California Edison Co. for WPP 93 in California; Northern States Power Company for WPP 93 in Minnesota; Lower Colorado River Authority for WPP 94, Brazos Electric Power Cooperative for 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 Tarifa in Spain. WPP 94 also sells excess power to Texas Utilities. See Item 2, Properties, for a listing of Power Operations projects. In August 1999, four combustion turbines previously leased to Portland General Electric Company in Oregon were sold to that company at a pre-tax gain of $.8 million. Capital Corp. owned 100% of two of these turbines and 49% ownership interest in the others. In October, 1999, one combustion turbine previously leased to Puget Sound Power & Light Company in Washington was sold to that company at a pre-tax gain of $2.3 million. Capital Corp. held a 49% ownership interest in this turbine. Throughout 1999, three combustion turbines were leased to AP&L. Capital Corp. holds a 49% interest in these turbines through the CEC-APL, L.P. partnership. Upon expiration of the AP&L leveraged lease, the $9 million residual value of the turbines was reclassified to Investment in Unconsolidated Affiliates. See Note 9 of LG&E Energy's Notes to Financial Statements under Item 8. In February 2000, Power Operations entered into an agreement to sell its interest to its co-partner in the project. Regulatory Environment Except for its investments in wind power and ROVA I, each of Power Operations' projects in the United States 14 is a QF under PURPA. See Item 3 and Note 18 of LG&E Energy'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 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 FPA, 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 FPA, but once such an entity files its electric generation rates with FERC, it becomes a jurisdictional public utility under the FPA. 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. The foreign power generation facility in which Power Operations has an ownership interest has obtained FUCO status under the Holding Company Act. Generally, FUCO status exempts this facility from application of the Holding Company Act. Commitments and Contingencies Power Operations is party to various legal proceedings relating to its joint ventures. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for discussion regarding these legal proceedings. WESTERN KENTUCKY ENERGY General In July 1998 the Company closed the transaction to lease the generating assets of Big Rivers. Under the 25-year operating lease, WKE operates the operating assets of Big Rivers' coal-fired facilities, a combustion turbine and operates and maintains the Station Two generating facility of Henderson. The combined generating capacity of these facilities is approximately 1,700 Mw, net of Henderson's capacity and energy needs from Station Two. Under the terms of the lease agreement, WKE prepaid $55.9 million for its first two years of lease payments 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. In related transactions, power is supplied to Big Rivers at contractual prices over the term of the lease to meet the needs of three member distribution cooperatives and their retail customers, including major western Kentucky aluminum smelters. The excess generating capacity is available to WKE to market throughout the region. Also, as part of the transaction, in July 1998, WKE began advancing Big Rivers $50.0 million over a 24-month period to help it emerge from bankruptcy. 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. 15 WKE is considering a merger of its three legal entities, Western Kentucky Energy Corp., WKE Station Two Inc. and WKE Corp. to consolidate these entities into the surviving entity of Western Kentucky Energy Corp. Should WKE complete the merger of these entities, WKE anticipates decertifying as an EWG. 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. In 1999, gross property additions were $12.2 million. 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 is the predominant fuel used by WKE, with fuel oil being used for peaking capacity. WKE has entered into various multi-year coal supply agreements with suppliers for coal deliveries for 2000 and beyond. WKE normally augments its coal supply agreements with spot market purchases. At December 31, 1999, WKE had on hand coal inventory of approximately 1.5 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 1999 and 1998 respectively was $20.86 and $20.85. Environmental Matters 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 1999 and 1998, expenditures for pollution control facilities represented approximately $1.4 million and $.5 million of WKE's construction expenditures, respectively. 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 Centro and a minority interest in Cuyana. Centro and Cuyana together serve approximately 732,000 customers in six provinces in Argentina. The 16 investment in these companies totaled approximately $140 million. Each of these companies has obtained FUCO status under the Holding Company Act. Generally, FUCO status exempts these facilities from application of the Holding Company Act. In April 1999, the Company acquired an interest in another Argentine natural gas distribution company. Capital Corp., through a subsidiary, purchased a minority interest in Gas BAN, the second largest gas distribution company in Argentina. Gas BAN serves approximately 1,188,000 customers in thirty counties in the northern region of Buenos Aires. The Company's investments in Gas BAN totaled $85.4 million through December 31, 1999. 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. Gas BAN's primary source of gas supply is YPF, S.A., and its primary sources of gas transmission are TGS, S.A. and TGN, S.A. Gas BAN has a shaving plant to cover peaking demand. The Argentine federal regulator of gas transmission and distribution, Energas, has granted Centro, Cuyana and GasBAN 35-year concessions to provide gas distribution services in their service territories. The concessions end in 2028 and each concession contains a 10-year renewal option. 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 Capital investments for Centro since 1992 have totaled approximately $284 million. Centro's capital expenditures for 1999 totaled $17 million and were financed through borrowing and internal sources. Centro will spend approximately $4.5 million in 2000 to expand and maintain its gas distribution network, and it will finance the expenditures through borrowings and internal sources. CAPITAL CORP. OTHER Gas Operations As previously discussed in item 1 under Discontinuance of Merchant Energy Trading and Sales Business, effective June 30, 1998, the Company decided to discontinue its merchant energy trading and sales business, and it decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain the natural gas gathering and processing business. For a more detailed discussion of the discontinuance of the Company's merchant energy trading and sales business, and the decision to retain the natural gas gathering and processing business, see Discontinued Operations under this Item, and Notes 3, 4 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. Capital Corp.'s Gas Operations, conducted through various subsidiaries, include: 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 working 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 17 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 1999. The 11 gathering systems owned (seven 100%, one leased and ownership interests ranging from 11% to 50% in three others) and operated during 1999 gathered approximately 216,500 Mcf of natural gas per day. During 1999, 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 75,000 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 net gallons per day of natural gas liquids were extracted and sold from these facilities in 1999. 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, 1999, storage capacity of approximately 3.0 Bcf was leased to other parties. 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 pursuant to the NGA and the 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. CRC - Evans CRC provides specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. CRC sells and rents automatic pipeline welding systems, pipe bending equipment, line-up clamps, pipe coating plants, coating and cleaning equipment, pipeline rehabilitation equipment and lay barge pipe handling equipment. CRC also provides specialized services including joint coating, cement weighting, induction and resistance heating and automatic welding systems training and supervision. 18 CRC sells its products and services through its salespeople and independent international sales representatives and distributors covering 70 countries. The company's sales offices are located in Houston, Texas; Tulsa, Oklahoma; Toms River, New Jersey; Hoevelaken, Netherlands; Edmonton, Alberta; Burnley, England and Didcot, England. DISCONTINUED OPERATIONS General As previously discussed in item 1 under Discontinuance of Merchant Energy Trading and Sales Business, effective June 30, 1998, the Company decided to discontinue its merchant energy trading and sales business, and it decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain the natural gas gathering and processing business. For a more detailed discussion of the discontinuance of the Company's merchant energy trading and sales business, and the decision to retain the natural gas gathering and processing business, see Discontinued Operations under this Item, and Notes 3, 4 and 18 of LG&E Energy's Notes to Financial Statements under Item 8. In December 1999, LEM, the entity primarily conducting the discontinued operations activities and formerly an indirect subsidiary of Capital Corp., became a direct subsidiary of LG&E Energy. 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. Commitments and Contingencies For discussions of commitments and contingencies relating to Discontinued Operations, see Note 18 of LG&E Energy 's Notes to Financial Statements under Item 8. EMPLOYEES AND LABOR RELATIONS LG&E Energy and its subsidiaries had 5,836 full-time employees at December 31, 1999, including 2,237 full-time employees of LG&E and 1,747 full-time employees of KU. At December 31, 1999, LG&E had 1,297 operating, maintenance, and construction employees that were members of IBEW Local 2100. The current three year contract with the IBEW will expire in November 2001. At December 31, 1999, KU had 239 operating, maintenance and construction employees who were members of IBEW Local 101 and USWA Local 8686. The current contract will expire August 1, 2000. At December 31, 1999, WKE had 358 operating, maintenance and construction employees that were members of the IBEW Local 1701. The current contract will expire September 14, 2001. 19 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 E.W.Brown (b) 125,000 --------- Total combustion turbine generators 233,000 --------- Total capability rating 2,637,000 ========= (a) Amount shown represents LG&E's 75% interest in Trimble County. See Note 13 of LG&E's Notes to Financial Statements and Note 19 of LG&E Energy's Notes to Financial Statements, Jointly Owned Electric Utility Plant, under Item 8 for further discussion on ownership. (b) Amount shown represents LG&E's 38% interest in Unit 6 and 7 at E.W. Brown. See Notes 12 and 13 of LG&E's Notes to Financial Statements, and Notes 18 and 19 of LG&E Energy's Notes to Financial Statements 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, 1999, 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 84 substations with a total capacity of approximately 3,448,730 Kva, 3,672 structure miles of overhead lines, 342 miles of underground conduit, and 5,562 miles of underground conductors. LG&E's gas transmission system includes 209 miles of transmission mains, and the gas distribution system includes 3,789 miles of distribution mains. 20 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. 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. 21 KU's power generating system consists of the coal-fired units operated at its five steam generating stations. Combustion turbines supplement the system during peak or emergency periods. 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 Combustion Turbine Generators (Peaking capability): E.W. Brown - Burgin, KY. Unit 6 (a) 102,000 Unit 7 (a) 102,000 Unit 8 135,000 Unit 9 120,000 Unit 10 135,000 Unit 11 122,000 Haefling - Lexington, KY. Unit 1 59,000 ----------- Total combustion turbine generators 775,000 ----------- Total capability rating 3,898,000 =========== (a) Amount shown represents the KU's 62% interest in Unit 6 and 7 at E.W. Brown. See Notes 11and 12 of KU's Notes to Financial Statements, and Notes 18 and 19 of LG&E Energy's Notes to Financial Statements under Item 8 for further discussion on ownership. 22 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, 1999, KU's electric transmission system included 112 substations with a total capacity of approximately 14,755,396 Kva and approximately 4,227 structure miles of lines. The electric distribution system included 438 substations with a total capacity of approximately 5,024,307 Kva, 14,619 structure miles of lines. At December 31, 1999, 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 Windpower Partners 1993 L.P. 50 Wind 43 Palm Springs, California Windpower Partners 1993 L.P. 50 Wind 25 Buffalo Ridge, Minnesota 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 Gregory Power Partners 50 Gas 550 Gregory, Texas (under construction) Power Operations' ownership interests in these projects and the revenues from the sale of electricity and steam from the projects are pledged as security to the lenders who provided the financing for the project. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for a discussion Power Operations' commitment and contingencies relating to its joint ventures. Also see Note 9 of LG&E Energy's Notes to Financial 23 Statements under Item 8 for a discussion on investment in unconsolidated ventures. In March 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which the Company owns a 50% interest, sold substantially all the assets and major contracts of its 79 Mw gas-fired cogeneration facility in Rensselaer, New York, with net proceeds to the Company of approximately $34 million. The sale resulted in an after-tax gain to the Company of approximately $8.9 million. 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. The major gas gathering system is the Llano pipeline, a 730-mile intrastate pipeline and processing system in southeastern New Mexico with a throughput capacity of 180,000 MCF of gas per day. Capital Corp., through subsidiaries, owns two gas systems located in Texas. PowerTex Pipeline, a 76-mile pipeline serving the City of Lubbock, Texas, has a design capacity of 90,000 MCF of gas per day. The Sale Ranch system consists of a 16mmcfd processing plant and approximately 350 miles of gathering pipelines. Through a subsidiary, Capital Corp. owns majority interest and operates the Sale Ranch system. It also owns, or has interests in, and operates three natural gas processing plants located in southeastern New Mexico and western Texas with a total design capacity of 92,000 MCF of gas per day (owns a 100% interest in one of these plants, and majority interests in the two remaining plants). Under a 25-year operating lease, WKE operates Big Rivers' coal-fired facilities, a combustion turbine and operates and maintains the Station Two generating facility of Henderson. The combined generating capacity of these facilities is approximately 1,700 Mw, net of Henderson's capacity and energy needs from Station Two. Centro's gas transmission and distribution system includes 6,646 miles of transmission mains and distribution mains located in Cordoba, Argentina, and neighboring provinces. Cuyana's gas transmission and distribution system includes approximately 4,899 miles of transmission mains and distribution mains located in Mendoza Province, Argentina, and neighboring provinces. Gas BAN's transmission and distribution system includes 11,580 miles of transmission and distribution mains in the northern region of Buenos Aires. CRC owns a 29-acre equipment yard/manufacturing/maintenance facility and supply warehouse in Tulsa, Oklahoma and a 9,800 square foot sales office/warehouse/service facility in Edmonton, Canada. The company leases all other facilities used in its operations, including its corporate offices in Houston, Texas and various office facilities and equipment sites in the United States, United Kingdom and the Netherlands. LG&E Energy has operating leases for its corporate office space that expire between 2000 and 2012. ITEM 3. Legal Proceedings. Rates and Regulatory Matters For a discussion of current regulatory matters, including, among others, a discussion of (a) rate matters related to the Kentucky Commission's proceeding involving the Company's PBR filings and the KIUC's rate filing, (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, 6, 18 and 22 of LG&E Energy Corp.'s Notes to Financial Statements, Notes 3, 12 and 16 of LG&E's Notes to Financial Statements and Notes 3, 11 and 14 of KU's Notes to Financial Statements under Item 8. 24 Performance-Based Ratemaking In October, 1998, LG&E and KU filed applications with the Kentucky Commission for approval of the PBR proposal for determining electric rates. In January 2000, the Kentucky Commission issued orders requiring LG&E and KU to reduce annual base rates by $27.2 and $36.5, respectively, effective March 1, 2000. The orders also eliminated the temporary effectiveness of the PBR proposal, reinstated the FAC mechanism and offered the utilities a three year ESM program whereby incremental annual earnings above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. In January and February 2000, LG&E and KU submitted filings seeking adjustments in the rate reductions and tariffs incorporating the ESM. See Rates and Regulations under Item 7 and Notes 6 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 and 14 to KU's Notes to Financial Statements. Fuel Adjustment Clause Proceedings Pursuant to Kentucky statute, aspects of the Company's utility rates are reviewed through semi-annual 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. Kentucky Commission orders of August 1999 and January 2000 have required aggregate refunds totaling approximately $8.4 million for the periods between November 1996 to October 1999. These orders have been appealed by both KU and the intervenor group. See also Note 6 to LG&E Energy's Notes to Financial Statements, Note 3 to LG&E's Notes to Financial Statements and Note 3 to KU's Notes to Financial Statements. See Rates and Regulatory Matters above regarding further matters arising during LG&E's and KU's FAC proceedings. Environmental For a discussion of environmental matters concerning (a) currently proposed reductions in NOx and SO2 emission limits, (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 Notes 18 and 22 of LG&E Energy's Notes to Financial Statements, Notes 12 and 16 of LG&E's Notes to Financial Statements and Notes 11 and 14 of KU's Notes to Financial Statements under Item 8, respectively. Southampton For a discussion of the settlement of certain FERC proceedings and intra-party matters involving the partnership that owns the Southampton facility, regarding that facility's 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 WLP is seeking the recovery of capacity payments withheld by VEPCO in respect of the Roanoke Valley I facility. In January 2000, the Virginia Supreme Court issued an opinion remanding this matter for a second trial, setting aside an earlier trial court decision which had awarded WLP approximately $19 million plus interest until paid. See Item 1 and Notes 18 and 22 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Kenetech Bankruptcy In May 1996, Kenetech filed for protection under Chapter 11 of the United States Bankruptcy Code in the 25 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 WPP 93, WPP 94 and Tarifa projects. In April 1999, the Bankruptcy Court approved a final plan of reorganization. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. Windpower Partners 1994 WPP 94, in which the Company has a 25% interest through indirect subsidiaries, has not made semiannual payments, since September 1997, to Hancock under certain Notes issued by WPP 94 to Hancock. The parties are currently in negotiations regarding a restructuring of these obligations. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. Calgary In November 1996, LG&E Natural Canada Inc., an indirect subsidiary of the Company, 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 In July 1998, LEM, an indirect subsidiary of the Company, filed suit against the CWLP in the United States District Court for the Western District of Kentucky. In January 2000, LEM reached a settlement with CWLP pursuant to which CWLP paid LEM approximately $16.6 million. 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 OPC in connection with matters involving LEM's November 1996 power sales agreement with OPC. In December 1999, the arbitration panel issued an adverse decision in this proceeding enforcing the contract without modification. In connection therewith, the Company increased its after-tax loss on disposal of discontinued operations by $175 million. See Note 3 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. 26 Executive Officers of LG&E Energy Corp.: Effective Date of Election to Present Name Age Position Position - ---- --- -------- -------- Roger W. Hale 56 Chairman of the Board August 17, 1990 and Chief Executive Officer Victor A. Staffieri 44 President and Chief February 16, 1999 Operating Officer R. Foster Duncan 46 Executive Vice President February 16, 1999 and Chief Financial Officer Stephen R. Wood 57 Group Executive - January 1, 2000 Retail Business Robert M. Hewett 53 Group Executive - January 1, 2000 Regulatory Affairs John R. McCall 56 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary Wayne T. Lucas 52 Executive Vice President - May 4, 1998 Power Generation George W. Basinger 54 Senior Vice President - May 4, 1998 Independent Power Operations Donald F. Santa, Jr. 41 Senior Vice President - January 1, 2000 Strategic Planning Frederick J. Newton III 44 Senior Vice President and January 2, 1999 Chief Administrative Officer S. Bradford Rives 41 Senior Vice President - February 16, 1999 Finance and Business Development Paul W. Thompson 43 Senior Vice President - August 9, 1999 Energy Services Rebecca L. Farrar 40 Senior Vice President - January 1, 2000 Distribution Operations Wendy C. Heck 46 Vice President - Infor- February 3, 1998 mation Technology Chris Hermann 52 Vice President, Supply January 1, 2000 and Logistics 27 Effective Date of Election to Present Name Age Position Position - ---- --- -------- -------- Charles A. Markel 52 Vice President - January 1, 1993 Finance and Treasurer Michael D. Robinson 44 Vice President and February 16, 1999 Controller The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Shareholders, scheduled to be held in June 2000. There are no family relationships between executive officers of the Company or executive officers of its subsidiaries. Messrs. Hale, Lucas, Duncan, Wood, Hewett, McCall, Newton, Markel and Robinson, and Ms. Farrar and Ms. Heck 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. Wood is Group Executive - Retail Business of LG&E and KU; Mr. Hewett is Group Executive - Regulatory Affairs 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; Mr. Robinson is Vice President and Controller of LG&E and KU; Ms. Farrar is Senior Vice President - Distribution Operations of LG&E and KU; and Ms. Heck is Vice President - Information Technology of LG&E and KU. Mr. Hermann is also Vice President, Supply and Logistics 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 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 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 Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997 and President - Distribution Services Division and President - Louisville Gas and Electric Company from May 1997 to December 1999. 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; Senior Vice President - Customer Service and Marketing of KU from April 1997 to May 1998; and President of KU from May 1998 to December 1999. 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 May 1998. 28 Before he was elected to his current position, Mr. Basinger was 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 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; and Senior Vice President and Deputy General Counsel of LG&E Energy Corp. from October 1998 to December 1999. 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 Venator Group from August 1996 to July 1997; Senior Vice President, Human Resources, at Venator Group'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 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 he was elected to his current position, Mr. Thompson was Vice President-Business Development for LG&E Energy Corp. from July 1994 to September 1996; Vice President, Retail Electric Business for LG&E from September 1996 to June 1998; Group Vice President for LG&E Energy Marketing, Inc., from June 1998 to August 1999; and Vice President, Retail Electric Business for LG&E from December 1998 to August 1999. Before she was elected to her current position, Ms. Farrar was General Manager, Gas Operations of South Carolina Electric and Gas Company from July 1994 to February 1995 and Vice President - Gas Service Business of LG&E from February 1995 to December 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. Hermann was Vice President and General Manager, Wholesale Electric Business of LG&E from January 1993 to June 1997; Vice President, Business Integration of LG&E from June 1997 to May 1998; and Vice President, Power Generation and Engineering Services, of LG&E from May 1998 to December 1999. 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. 29 Executive Officers of LG&E: Effective Date of Election to Present Name Age Position Position - ---- --- -------- -------- Roger W. Hale 56 Chairman of the Board, January 1, 1992 and Chief Executive Officer Stephen R. Wood 57 Group Executive - January 1, 2000 Retail Business Robert M. Hewett 53 Group Executive - January 1, 2000 Regulatory Affairs R. Foster Duncan 46 Executive Vice President February 16, 1999 and Chief Financial Officer John R. McCall 56 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary Wayne T. Lucas 52 Executive Vice President - May 4, 1998 Power Generation Frederick J. Newton III 44 Senior Vice President and January 2, 1999 Chief Administrative Officer Rebecca L. Farrar 40 Senior Vice President - January 1, 2000 Distribution Operations Wendy C. Heck 46 Vice President - Infor- February 3, 1998 mation Technology Chris Hermann 52 Vice President, Supply January 1, 2000 and Logistics Michael D. Robinson 44 Vice President and May 4, 1998 Controller Charles A. Markel 52 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 in June 2000. There are no family relationships between executive officers of LG&E. Messrs. Hale, Lucas, Duncan, Wood, Hewett, McCall, Newton, Markel and Robinson, and Ms. Farrar and Ms. Heck 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. Wood is Group Executive - Retail Business of LG&E Energy Corp. and KU; Mr. Hewett is Group Executive - 30 Regulatory Affairs 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; Mr. Robinson is Vice President and Controller of LG&E Energy Corp. and KU; Ms. Farrar is Senior Vice President - Distribution Operations of LG&E Energy Corp. and KU; and Ms. Heck is Vice President - Information Technology of LG&E Energy Corp and KU. Mr. Hermann is also Vice President, Supply and Logistics of LG&E Energy Corp. Before he was elected to his current position, Mr. Wood was Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997 and President - Distribution Services Division and President - Louisville Gas and Electric Company from May 1997 to December 1999. 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; Senior Vice President - Customer Service and Marketing of KU from April 1997 to May 1998; and President of KU from May 1998 to December 1999. Before he was elected to his current position, Mr. Duncan was 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. 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 May 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 Venator Group from August 1996 to July 1997; Senior Vice President, Human Resources, at Venator Group'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 General Manager, Gas Operations of South Carolina Electric and Gas Company from July 1994 to February 1995 and Vice President - Gas Service Business of LG&E from February 1995 to December 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. Hermann was Vice President and General Manager, Wholesale Electric Business of LG&E from January 1993 to June 1997; Vice President, Business Integration of LG&E from June 1997 to May 1998; and Vice President, Power Generation and Engineering Services, of LG&E from May 1998 to December 1999. 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. 31 Executive Officers of KU: Effective Date of Election to Present Name Age Position Position - ---- --- -------- -------- Roger W. Hale 56 Chairman of the Board, May 4, 1998 and Chief Executive Officer Stephen R. Wood 57 Group Executive - January 1, 2000 Retail Business Robert M. Hewett 53 Group Executive - January 1, 2000 Regulatory Affairs Wayne T. Lucas 52 Executive Vice President - May 4, 1998 Power Generation R. Foster Duncan 46 Executive Vice President February 16, 1999 and Chief Financial Officer John R. McCall 56 Executive Vice President, May 4, 1998 General Counsel and Corporate Secretary Frederick J. Newton III 44 Senior Vice President and January 2, 1999 Chief Administrative Officer Rebecca L. Farrar 40 Senior Vice President - January 1, 2000 Distribution Operations Wendy C. Heck 46 Vice President - Infor- April 21, 1999 mation Technology Gary E. Blake 46 Vice President - Sales May 4, 1998 and Service James J. Ellington 54 Vice President - Power May 4, 1998 Generation Michael D. Robinson 44 Vice President and May 4, 1998 Controller Charles A. Markel 52 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 in June 2000. There are no family relationships between executive officers of KU. Messrs. Hale, Lucas, Duncan, Wood, Hewett, McCall, Newton, Markel and Robinson, and Ms. Farrar and Ms. Heck are also executive officers of LG&E Energy Corp. and LG&E. Mr. Hale is Chairman of the Board and 32 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. Wood is Group Executive - Retail Business of LG&E Energy Corp. and LG&E; Mr. Hewett is Group Executive - Regulatory Affairs 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; Mr. Robinson is Vice President and Controller of LG&E Energy Corp. and LG&E; Ms. Farrar is Senior Vice President - Distribution Operations of LG&E Energy Corp. and KU; and Ms. Heck is Vice President - Information Technology of LG&E Energy Corp. and KU. 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. Wood was Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997 and President - Distribution Services Division and President - Louisville Gas and Electric Company from May 1997 to December 1999. 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; Senior Vice President - Customer Service and Marketing of KU from April 1997 to May 1998; and President of KU from May 1998 to December 1999. 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 May 1998. Before he was elected to his current position, Mr. Duncan was 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 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 Venator Group from August 1996 to July 1997; Senior Vice President, Human Resources, at Venator Group'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 General Manager, Gas Operations of South Carolina Electric and Gas Company from July 1994 to February 1995 and Vice President - Gas Service Business of LG&E from February 1995 to December 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; and Vice President - Information Technology of LG&E Energy Corp. and LG&E from February 1998 to the present. 33 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. 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. 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 via the "GPC" screen by the Bloomberg L.P. Information Service 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).
1999 1998 ---- ---- Dividend High Low Dividend High Low Paid Price Price Paid Price Price ---- ----- ----- ---- ----- ----- First quarter $.3075 $28.7500 $20.7500 $.2975 $26.4375 $23.0000 Second quarter .3075 23.0000 20.6875 .2975 27.7500 24.6875 Third quarter .3075 23.6875 20.6875 .2975 27.8750 22.5000 Fourth quarter .3175 23.3125 17.3750 .3075 29.3125 26.0625
The number of record holders of Common Stock at December 31, 1999, totaled 48,296. The book value of the Company's Common Stock at December 31, 1999, was $8.80 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 $): 1999 1998 ---- ---- First quarter $22,000 $20,000 Second quarter 22,000 19,800 Third quarter 22,000 21,200 Fourth quarter 23,000 22,000 34 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 (in thousands of $): 1999 1998 ---- ---- First quarter $18,000 $17,018 Second quarter 18,000 5,673 Third quarter 18,000 17,400 Fourth quarter 19,000 18,000 ITEM 6. Selected Financial Data. Years Ended December 31 (Thousands of $ Except per Share Data)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- LG&E Energy: Revenues: Revenues $ 2,714,911 $ 2,112,246 $ 1,832,746 $ 1,645,719 $ 1,503,330 Provision for rate refunds (7,635) (26,000) -- -- (28,300) ----------- -------------- ----------- ----------- ----------- Net revenues 2,707,276 2,086,246 1,832,746 1,645,719 1,475,030 =========== ============== =========== =========== =========== Operating income: Before non-recurring items 502,230 472,561 420,971 384,867 349,578 Provision for rate refunds (7,635) (26,000) -- -- (29,800) Merger costs and non- recurring charges -- (65,318) -- (5,493) -- ----------- -------------- ----------- ----------- ----------- Operating income 494,595 381,243 420,971 379,374 319,778 =========== ============== =========== =========== =========== Net income (loss): Before non-recurring items 241,953 230,617 208,363 195,659 176,674 Provision for rate refunds (5,690) (15,556) -- -- (17,852) Merger costs and non- recurring charges -- (56,389) -- (2,400) -- ----------- -------------- ----------- ----------- ----------- Total continuing operations 236,263 158,672 208,363 193,259 158,822 Discontinued operations -- (22,852) (25,367) (7,307) 61 Loss on disposal of dis- continued operations (174,212) (224,148) -- -- -- Cumulative effect of accounting change -- (7,162) -- -- -- ----------- ----------- ----------- Net income (loss) $ 62,051 $ (95,490) $ 182,996 $ 185,952 $ 158,883 =========== ============== =========== =========== =========== Average number of com- mon shares outstand- ing (000's) 129,677 129,679 129,627 129,450 129,261
35 Years Ended December 31 (Thousands of $ Except per Share Data)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- LG&E Energy: (cont.): Basic earnings (loss) per share of common stock: Before non-recurring items $ 1.87 $ 1.78 $ 1.61 $ 1.51 $ 1.37 Provision for rate refunds (.05) (.12) -- -- (.14) Merger costs and non- recurring charges -- (.43) -- (.02) -- Other - rounding -- (.01) -- -- -- ----------- -------------- ----------- ----------- ----------- Total continuing operations 1.82 1.22 1.61 1.49 1.23 Discontinued operations -- (.17) (.20) (.05) -- Loss on disposal of dis- continued operations (1.34) (1.73) -- -- -- Cumulative effect of accounting change -- (.06) -- -- -- ----------- -------------- ----------- ----------- ----------- Basic earnings (loss) per share $ .48 $ (.74) $ 1.41 $ 1.44 $ 1.23 =========== ============== =========== =========== =========== Diluted earnings (loss) per share of common stock: Before non-recurring items $ 1.87 $ 1.77 $ 1.61 $ 1.51 $ 1.37 Provision for rate refunds (.05) (.12) -- -- (.14) Merger costs and non- recurring charges -- (.43) -- (.02) -- ----------- -------------- ----------- ----------- ----------- Total continuing operations 1.82 1.22 1.61 1.49 1.23 Discontinued operations -- (.17) (.20) (.05) -- Loss on disposal of dis- continued operations (1.34) (1.72) -- -- -- Cumulative effect of accounting change -- (.06) -- -- -- ----------- -------------- ----------- ----------- ----------- Diluted earnings (loss) per share $ .48 $ (.73) $ 1.41 $ 1.44 $ 1.23 =========== ============== =========== =========== =========== Cash dividends declared per share of common stock $ 1.250 $ 1.240 $ 1.113 $ 1.081 $ 1.050 Payout ratio (from continuing operations before non- recurring items) 67.0% 69.7% 69.3% 71.5% 76.5% Total assets $ 5,133,757 $ 4,823,118 $ 4,620,190 $ 4,190,249 $ 4,148,208 Long-term obligations (including amounts due within one year) 1,711,225 1,510,775 1,230,711 1,193,229 1,208,846
LG&E Energy'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. 36 Years Ended December 31 (Thousands of $)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- LG&E: Operating revenues: Revenues $ 969,984 $ 854,556 $ 845,543 $ 821,115 $ 751,763 Provision for rate refunds (1,735) (4,500) -- -- (28,300) ----------- ----------- ----------- ----------- ----------- Total operating revenues 968,249 850,056 845,543 821,115 723,463 =========== =========== =========== =========== =========== Net operating income: Before unusual items 142,263 138,207 148,186 147,263 138,203 Provision for rate refunds (2,172) (2,684) -- -- (16,877) ----------- ----------- ----------- ----------- ----------- Total net operating income 140,091 135,523 148,186 147,263 121,326 =========== =========== =========== =========== =========== Net income: Before unusual items 108,442 104,381 113,273 107,941 100,061 Provision for rate refunds (2,172) (2,684) -- -- (16,877) Merger costs -- (23,577) -- -- -- ----------- ----------- ----------- ----------- ----------- Net income 106,270 78,120 113,273 107,941 83,184 =========== =========== =========== =========== =========== Net income available for common stock 101,769 73,552 108,688 103,373 76,873 =========== =========== =========== =========== =========== Total assets 2,171,452 2,104,637 2,055,641 2,006,712 1,979,490 =========== =========== =========== =========== =========== Long-term obligations (including amounts due within one year) $ 626,800 $ 626,800 $ 646,800 $ 646,800 $ 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 $)
1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- KU: Operating revenues: Revenues $ 943,210 $ 831,614 $ 716,437 $ 711,711 $ 686,430 Provision for rate refund (5,900) (21,500) -- -- -- --------- --------- --------- --------- --------- Operating revenues 937,310 810,114 716,437 711,711 686,430 ========= ========= ========= ========= ========= Net operating income: Before unusual items 139,534 138,263 118,408 117,337 108,544 Provision for rate refund (3,518) (12,875) -- -- -- --------- --------- --------- --------- --------- Operating income 136,016 125,388 118,408 117,337 108,544 ========= ========= ========= ========= ========= Net income: Before unusual items 110,076 107,303 85,713 86,163 76,842 Provision for rate refund (3,518) (12,875) -- -- -- Merger costs -- (21,664) -- -- -- --------- --------- --------- --------- --------- Net income 106,558 72,764 85,713 86,163 76,842 ========= ========= ========= ========= =========
37 Years Ended December 31 (Thousands of $)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- KU (cont.): Net income available for common stock 104,302 70,508 83,457 83,907 74,586 ========== ========== ========== ========== ========== Total assets 1,785,090 1,761,201 1,679,880 1,673,055 1,659,988 ========== ========== ========== ========== ========== Long-term obligations (including amounts due within one year) $ 546,330 $ 546,330 $ 546,351 $ 546,373 $ 545,894 ========== ========== ========== ========== ==========
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. 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 LG&E Energy's financial results of operations and financial condition during 1999, 1998 and 1997 and should be read in connection with the consolidated financial statements and notes thereto. As set forth in the discussion concerning the Discontinuance of the Merchant Energy Trading and Sales Business below, future financial results from the Company's operations will continue to reflect the results from its portfolio of investments in electric generation, gas distribution and other energy-related businesses in addition to the financial results provided by the Company's regulated utilities, LG&E and 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's reports to the Securities and Exchange Commission, including Exhibit 99.01 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998. MERGERS AND ACQUISITIONS On February 28, 2000, the Company announced that its Board of Directors accepted an offer to be acquired by PowerGen for cash of approximately $3.2 billion or $24.85 per share and the assumption of $2.2 billion of the Company's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction resulting in the Utility Operations' obligation to continue to file SEC reports. The acquisition is expected to close later in 2000, shortly after all of the conditions to consummation of the acquisition are met. Those conditions include, 38 LG&E Energy: (cont.): without limitation, the approval of the holders of a majority of the outstanding shares of common stock of each of LG&E Energy and PowerGen, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the FERC under the FPA, the approval of the SEC under the PUHCA of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Shareholder meetings to vote upon the approval of the Acquisition are expected to be held during the second quarter of 2000 for both LG&E Energy and PowerGen. During the first quarter of 2000, the Company expensed approximately $1.0 million relating to the PowerGen transaction. The foregoing description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. In July 1999, the Company purchased 100% of the outstanding common stock of CRC for initial consideration of $45.6 million and retirement of approximately $35.3 million in CRC debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. The purchase agreement provides for future annual earn-out payments to the previous owners based on CRC's meeting certain financial targets over the period ending March 31, 2002, or, under certain circumstances, a change in control of LG&E Energy may accelerate the earnout. The agreement capped the total of these payments at $34.3 million. The Company accounted for the acquisition using the purchase method and recorded goodwill of approximately $42.1 million. Additional goodwill will be recorded contingent upon future earn-out payments. Goodwill is being amortized over a period of twenty years. In March 1999, the Company acquired an indirect 20% ownership interest in Gas BAN, a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $74.3 million, including transaction costs, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company records its share of earnings using the equity method. The purchase price exceeded the underlying equity in Gas BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their preliminary estimated fair values. Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy and 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 39 LG&E Energy: (cont.): contracts. Exiting the merchant energy trading and sales business enabled the Company to focus on optimizing the value of physical assets it owns or controls, and reduced the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company continues to settle commitments that obligate it to buy and sell natural gas and electric power. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the terms of 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 WKE. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial 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 resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with OPC. Other components of the write-off included costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs. At the time the Company decided to discontinue its merchant energy trading and sales business, it also decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain this business. The accompanying financial statements reflect the reclassification of the natural gas gathering and processing business as continuing operations for all periods presented. Approximately $800,000 of net losses charged to the loss on disposal of discontinued operations was reclassified to continuing operations in the accompanying income statement in each of 1999 and 1998 related to the natural gas gathering and processing business. See Note 4 of LG&E Energy's Notes to Financial Statements under Item 8. In the fourth quarter of 1999, the Company received an adverse decision from the arbitration panel considering its contract dispute with OPC, which was commenced by the Company in April 1998. As a result of this adverse decision, higher than anticipated commodity prices, increased load demands, and other factors, the Company increased its after-tax accrued loss on disposal of discontinued operations by $175 million. The additional write-off included costs related to the remaining commitments in its portfolio and exit costs expected to be incurred to serve those commitments. 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, there are inherent limitations in models to accurately predict future commodity prices, load demands and other events that could impact the amounts recorded by the Company. Total pretax charges against the accrued loss on disposal of discontinued operations through December 31, 1999, include $251.0 million for commitments prior to disposal, $69.6 million for transaction settlements, $11.1 million for goodwill, and $30.5 million for other exit costs. While the Company has been successful in settling portions of its discontinued operations, significant assets, operations and obligations remain. The Company continues to manage the remaining portfolio and believes it has hedged certain of its future obligations through various power purchase commitments and planned construction of physical assets. Management cannot predict the ultimate effectiveness of these hedges. The pretax net fair value of the remaining commitments as of December 31, 1999, are currently estimated to be approximately $46 million in 2000, $37 million to $54 million each year in 2001 through 2004 and $7 million in the aggregate thereafter. As of December 31, 1999, the Company's discontinued operations were under various contracts to buy and sell 40 LG&E Energy: (cont.): power and gas with net notional amounts of 22.1 million Mwh's of power and 44.3 million Mmbtu's of natural gas with a volumetric weighted-average period of approximately 37 and 44 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 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. As of January 26, 2000, 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 $4.9 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 26, 2000, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $8.2 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. RESULTS OF OPERATIONS Earnings Per Share Continuing operations for 1999 produced basic earnings per share of $1.82, an increase of 60 cents from $1.22 earned from continuing operations in 1998, after merger-related costs and environmental cost recovery refunds of approximately 43 cents and 12 cents, respectively. Earnings in both 1999 and 1998 include certain non-recurring items relating to rate refunds and gains. Excluding the effects of rate refunds in 1999 of 5 cents, and gains in 1999 and 1998 related to the Company's investment in the Rensselaer power facility of approximately 7 cents and 16 cents, respectively, earnings for 1999 were $1.80 per share compared with $1.61 in 1998, an increase of 19 cents or 12%. The 19 cents per share increase was primarily driven by the Company's non-utility operations including its 1999 acquisitions of Gas BAN and CRC, strong sales and excellent operating performance at WKE, and improved operating results at the Company's other Argentine gas operations. The Company's utility operations earnings from continuing operations for 1999 and 1998 were approximately the same. Continuing operations for 1998 produced basic earnings per share of $1.22, before a decrease of 6 cents due to cumulative effect of an accounting change, a decrease of 39 cents per share from $1.61 earned from continuing operations in 1997. Earnings for 1998 include non-recurring charges for merger-related costs and environmental cost recovery refunds of approximately 43 cents and 12 cents, respectively. Excluding these non-recurring charges, earnings per share from continuing operations for 1998 were $1.78, an increase of 17 cents over 1997. The 17 cent per share increase resulted from a 10 cent increase in core domestic utility business and a 14 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 Rensselaer power purchase contract settlement, 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 the Company's 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 41 LG&E Energy: (cont.): plant in San Miguel, Argentina and, the write-off of our WPP 94 investment. In the fourth quarter of 1999, the Company increased its after-tax accrued loss on disposal of discontinued operations by $175 million ($1.35) per share. This increase was triggered by an adverse decision in the arbitration proceedings with OPC and resulted from higher-than-anticipated commodity prices, increased load demands and other factors. In June 1998, after the Company's decision to exit the merchant energy trading and sales business, the Company recorded an after-tax accrual for disposal of discontinued operations of approximately $224 million ($1.72) and reclassified approximately $23 million ($0.17) of losses due to merchant energy trading and sales to loss from discontinued operations. See Note 3 of LG&E Energy's Notes to Financial Statements under Item 8 for a discussion of the Company's losses related to its discontinued operations in 1999 and 1998. Electric and Gas Utility Results Revenues A comparison of utility revenues for the years 1999 and 1998, excluding provisions recorded for rate refunds in 1999 and 1998, 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 1999 1998 1999 1998 ---- ---- ---- ---- Retail sales: Fuel and gas supply adjustments, etc $ (3,758) $ 4,908 $ (24,791) $ (4,393) Merger surcredit (8,317) (7,501) -- -- Demand side management/decoupling (2,985) (6,299) (6,462) (369) Environmental cost recovery surcharge (2,547) (807) -- -- Performance based rate reduction (11,634) -- -- -- Variation in sales volumes 41,312 52,892 17,779 (42,418) --------- --------- --------- --------- Total retail sales 12,071 43,193 (13,474) (47,180) Wholesale sales 215,374 88,851 (602) 8,720 Gas transportation-net -- -- (575) (71) Other 764 1,211 685 (935) --------- --------- --------- --------- Total $ 228,209 $ 133,255 $ (13,966) $ (39,466) ========= ========= ========= =========
Electric revenues increased in 1999 primarily due to wholesale electric sales and increased retail sales volumes, partially offset by the PBR and merger surcredit bill reductions. Wholesale sales increased in 1999 due to larger amounts of power available for off-system sales, and an increase in the unit price of electricity sold. Gas revenues decreased primarily as a result of lower gas supply costs billed to customers through the gas supply clause, partially offset by increased gas sales in 1999 due to colder weather. Electric retail sales increased primarily due to the warmer weather 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 seasonal 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. 42 LG&E Energy: (cont.): 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 an FAC and LG&E's gas rates contain a GSC, 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 Commission, the Virginia Commission and FERC. In July 1999, the Kentucky Commission approved LG&E's and KU's joint filing on PBR resulting in the discontinuance of the FAC. In January 2000, the Kentucky Commission rescinded its approval of LG&E's and KU's joint PBR filing and ordered the reinstatement of the FAC. See Note 6 for a further discussion of the PBR and the FAC. Fuel for electric generation increased $6.9 million in 1999 primarily due to an increase in generation to support increased electric sales at LG&E ($7.4 million) and KU ($5.1 million) offset partially by a lower cost of coal burned at LG&E ($3.0 million) and at KU ($2.6 million). 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). LG&E's average delivered cost per ton of coal purchased was $21.49 in 1999, $22.38 in 1998 and $21.66 in 1997. KU's average delivered cost per ton of coal purchased was $26.65 in 1999, $26.97 in 1998 and $27.97 in 1997. Power purchased increased $219.9 million (147.3%) in 1999 primarily due to increased purchases to serve native load customers and off-system sales activity. 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. Gas supply expenses decreased $11.1 million (8.9%) in 1999 primarily due to a decrease in cost of net gas supply ($17.1 million), partially offset by an increase in the volume of gas delivered to the distribution system ($6 million). Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a decrease in the volume of gas delivered to the distribution system. The average unit cost per Mcf of purchased gas was $2.99 in 1999, $3.05 in 1998 and $3.46 in 1997. Operation and maintenance expenses decreased $14.3 million (3.3%) in 1999 primarily due to decreased costs to operate LG&E's electric generating plants ($5.7 million), lower administrative costs at LG&E and KU ($7.0 million) and lower costs to maintain KU's electric generating plants ($3.3 million). Operation and maintenance expenses increased $14.6 million (3.8%) in 1998 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). Depreciation and amortization increased $7.3 million (4.1%) in 1999 because of additional utility plant in service. Depreciation and amortization increased $2.7 million (1.5%) in 1998 because of additional utility plant in service. 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 Commission. 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 5.46% at December 31, 1999 and 5.57% at December 31, 1998. KU's embedded cost of long-term debt was 7.00% at December 31, 1999 and 6.99% at December 31, 1998. 43 LG&E Energy: (cont.): 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 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. and Other Results Capital Corp., the holding company for all the Company's non-utility investments other than trading operations, conducts its operations through three principal segments: 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 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. WKE leases and operates the generating facilities of Big Rivers. Argentine Gas Distribution owns interests in three natural gas distribution companies in Argentina. Capital Corp. and LEM are also engaged in other non-utility activities including: providing specialized equipment and services used in construction and rehabilitation of gas and oil transmission pipelines; the gathering, processing, storing and transportation of natural gas; commercial and retail initiatives designed to assess the energy and utility needs of large commercial and industrial entities; providing maintenance and repair services for customers' major household appliances; and, the asset optimization of the Company's generation assets. See Notes 2, 5, 9, 10, 18 and 20 of LG&E Energy's Notes to Financial Statements under Item 8. Power Operations Revenues Revenues from Power Operations, comprised mainly of contractual revenues from various power plant operations, were approximately the same for the years 1997 to 1999. See Note 9 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. Equity in earnings for 1999 of $40.9 million was $30.4 million less than 1998, primarily due to transactions recorded by its Rensselaer venture in 1999 and 1998, including a gain on a power purchase contract settlement in 1998, the sale of the Company's ownership interest in March, and a full year of earnings in 1998 versus 2 1/2 months in 1999. Without the Rensselaer transactions in 1999 and 1998, equity in earnings of the Company's other ventures were approximately the same. Equity in earnings for 1998 were $50.8 million higher (247%) than in 1997 due primarily to the Rensselaer power purchase contract settlement and an arbitration award received by the Frederickson, Washington, venture. These increases were partially offset by a write-off of the Company's investment in a wind power venture. See Notes 9 and 20 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. Direct costs increased by $1.7 million in 1999 to $15.1 million, primarily 44 LG&E Energy: (cont.): due to development expenses of the Gregory, Texas, project. These costs were approximately the same in 1998 and 1997. Operation and maintenance expenses were approximately the same for all periods presented. Depreciation and amortization decreased by $1.7 million in 1999 primarily due to the write-off of certain intangible assets in 1998 after the Rensselaer power purchase contract settlement and the sale of a 114 Mw gas-fired power plant in San Miguel, Argentina, offset by an additional write-off of intangible assets upon the sale of the Rensselaer venture in March 1999. 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 the San Miguel, Argentina, venture and the closure of the Rensselaer power purchase contract settlement. See Note 9 of LG&E Energy's Notes to Financial Statements under Item 8. Western Kentucky Energy WKE's 1999 results include twelve-months of operations versus 5 1/2 months in 1998, the primary driver in most year-over-year increases. Total revenues increased by $205.3 million (159%) to $333.8 million due primarily to a full year of operation in 1999 and higher power sales prices in the summer of 1999. Cost of revenues increased by $136.6 million (186%) to $209.7 million due primarily to a full year of operation in 1999 and higher purchase power costs. Operations and maintenance expenses increased by $56.3 million (127%) to $103.1 million primarily due to a full year of operation in 1999 and higher depreciation expenses related to an increase in capital assets. Net interest expense increased by $1.5 million (58%) to $4.1 million related to the cost of carrying its debt for a full year. During WKE's partial year of operations in 1998 it reported a solid performance 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 totaling $55.9 million. See Note 5 of LG&E Energy's Notes to Financial Statements under Item 8. Argentine Gas Distribution The Company has interests in three Argentine natural gas distribution companies: Centro and Cuyana, both acquired in February 1997, and Gas BAN acquired in March 1999. Centro is consolidated within the Company's results while Cuyana's and Gas BAN's results are recorded using the equity method of accounting. The Company's investments in Argentina continue to contribute to non-utility operations, with Centro's revenues increasing by $8 million (5%) in 1999 and $21 million (16%) in 1998. The increase in 1999 was primarily driven by higher per customer consumption as a result of colder than normal weather. 1998's increase was due to a full year of operations 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 million (3%) in 1999 due to higher consumption. Centro's 1998 operating expenses increased by $2.4 million (8%) due to a full year of operations in 1998. Equity in earnings for 1999 increased by $6.3 million (253%) due to the Gas BAN acquisition completed in March 1999. Equity in earnings of Cuyana were approximately the same in all periods presented. See Notes 2 and 9 of LG&E Energy's Notes to Financial Statements under Item 8. 45 LG&E Energy: (cont.): Other The Company has entered into various initiatives to position itself for growth in the energy industry, including: providing specialized equipment and services used in construction and rehabilitation of gas and oil transmission pipelines; the gathering, processing, storing and transportation of natural gas; consulting services designed to assess the energy and utility needs of large commercial and industrial entities; providing maintenance and repair services for customers' major household appliances; and, the optimizing of the Company's generation assets. 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 ventures will add to our knowledge base as well as our financial results in the future. The Company's interest costs increased by $22.7 million (83%) from 1998 to 1999 and $5.0 million (5%) from 1997 to 1998. The 1999 increase was primarily due to the funding of discontinued operations and LG&E Energy's operating expenses, along with funding the Gas BAN and CRC acquisitions. The increase in 1998 was primarily due to the funding of discontinued operations and LG&E Energy's operating expenses. See Notes 2, 3, 7 and 16 of LG&E Energy's Notes to Financial Statements under Item 8. LIQUIDITY AND CAPITAL RESOURCES The Company uses net cash generated from its operations and external financing to fund construction of plant and equipment, equity investments in energy-related growth or acquisition opportunities, liquidity needs of its discontinued energy marketing and trading activities and operating its existing businesses. The Company believes that such sources of funds will be sufficient to meet the needs of its business in the foreseeable future. Operating Activities Cash provided by operations was $343.3 million, $209.6 million and $333.7 million in 1999, 1998 and 1997, respectively. The 1999 increase was primarily due to an increase in net income, a net decrease in non-cash income statement items, including the recording of the reserve on loss on disposal of discontinued operations, and a net increase in net current assets, including increases in accounts payable, accrued taxed and interest, and materials and supplies. The 1998 decrease was primarily due to a decrease in net income and an increase in materials and supplies, partially offset by a net increase in non-cash income statement items, including the recording a loss on disposal of discontinued operations and increases in accounts payable and accrued taxes and interest. Investing Activities LG&E Energy's primary use of funds continues to be for capital expenditures and investments in subsidiaries/unconsolidated ventures. Capital expenditures were $382.6 million, $343.6 million and $225.7 million in 1999, 1998 and 1997, respectively. The Company expects its capital expenditures for 2000 and 2001 will total approximately $850 million, consisting primarily of construction costs associated with installation of low nitrogen oxide burner systems for LG&E, KU and WKE as described in the section titled "Environmental Matters." 46 LG&E Energy: (cont.): Net cash used for investment activities increased by $115.4 million in 1999 compared to 1998. The increase was primarily due to the acquisition of CRC, the 20% investment in Gas BAN, and an increase in construction expenditures. This increase was partially offset by proceeds received from the sales of the Company's ownership interest in Rensselaer and five combustion turbines. Net cash used for investment activities decreased by $45.5 million in 1998 compared to 1997 primarily due to a decrease in investment in subsidiaries and unconsolidated ventures partially offset by an increase in construction expenditures. Financing Activities Cash inflows from financing activities were $84.9 million, $111.6 million and $42.8 million in 1999, 1998 and 1997, respectively. In 1999, total debt increased by $284.9 million to $2,160.8 at December 31, 1999. The increase was primarily due to funding operating expenses, discontinued operations and business development activities including the acquisitions of CRC and Gas BAN. As of December 1999, the Company had committed lines of credit aggregating $900.0 million with various banks. Unused capacity under these lines totaled $395.6 million after considering the commercial paper support and approximately $51.7 million in letters of credit securing on- and off-balance sheet commitments. The credit lines will expire at various times from 2000 through 2002. Management expects to renegotiate the lines as they expire. The lenders under the credit facilities, the commercial paper facility, the medium-term notes for Capital Corp. and the lessors of the operating lease for the Monroe plant are entitled to the benefits of a Support Agreement with LG&E Energy. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8. Future Capital Requirements Future utility capital 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. Other future capital funding requirements are dependent upon the identification of suitable investment and acquisition opportunities. The Company anticipates funding these investment opportunities through net cash generated from operations, additional debt or an issuance of preferred stock. 47 LG&E Energy: (cont.): The Company's debt ratings as of February 16, 2000, were: Moody's S&P D&P ------- --- --- LG&E First mortgage bonds A1 A+ AA- Unsecured debt A2 A- A+ Preferred stock a2 BBB+ A Commercial paper P-1 A-1 D-1 KU First mortgage bonds A1 A+ AA- Preferred stock a2 BBB+ A Commercial paper P-1 A-1 D-1 Capital Corp. Medium-term notes A3 A- A- Commercial paper P-2 A-1 D-1- The ratings stated above reflect the downgrades received by the Company following an adverse decision in the OPC arbitration case, which resulted in an additional $175 million after-tax charge to increase the Company's discontinued operations reserve, and the PBR-related order received from the Kentucky Commission to reduce base rates at LG&E and KU by $27.2 million and $36.5 million, respectively. As of March 21, 2000, Moody's, S&P and D&P had LG&E Energy, LG&E, KU and Capital Corp. on Credit Watch with negative implications. Based upon the downgrades received the Company's cost of funds could increase by .05% to .12% on short-term borrowings and .10% on new long-term borrowings. These ratings reflect the views of Moody's, S&P and D&P. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. 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 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, 1999, the potential change in interest expense associated with a 1% change in base interest rates of the Company's unswapped debt is estimated at $7.0 million. These swaps hedge specific debt issuance and consistent with management's designation are accorded hedge accounting treatment. As of December 31, 1999, the Company had swaps with a combined notional value of $404 million. LG&E and Capital Corp. have entered into $251 million of swaps to exchange their floating-rate interest payments for fixed interest payments to reduce the impact of interest rate changes on their Pollution Control Bonds and commercial paper program, respectively. LEC and KU have entered into $153 million to convert some of its fixed rate debt to variable rate debt. As of December 31, 1999, 31% of the outstanding variable interest rate 48 LG&E Energy: (cont.): borrowings were converted to fixed interest rates, while 11% of the outstanding fixed interest rate borrowings were converted to floating 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 $13.1 million as of December 31, 1999. 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 7 of LG&E Energy's Notes to Financial Statements under Item 8. Commodity Price Sensitivity LG&E and KU have limited exposure to market price volatility in prices of fuel and electricity, as long as cost-based regulations exist, including the FAC and GSC. WKE is exposed to changes in fuel prices. To mitigate this risk, WKE has entered into various multi-year fuel supply contracts which expire at various times through 2003 and is also pursuing the use of alternative fuels. Realized gains and losses are recognized in the income statement as incurred. At December 31, 1999, 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 Henderson. Some of the excess capacity generated by these assets 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, 1999, 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 electricity prices and load requirements. See Discontinuance of Merchant Energy Trading and Sales Business under Management's Discussion and Analysis and Note 3 of LG&E Energy's Notes to Financial Statements under Item 8. Exchange Rate Sensitivity The Company has investments in Argentina, Canada, Spain and the UK that 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 investments in Canada, Spain and the UK as too small to cost-effectively hedge. A 10% decline in the December 31, 1999 exchange rate for the Argentine peso, the Canadian dollar, British pound sterling 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 Result of Year 2000 Preparation The remediation efforts of the Company in preparing for potential Year 2000 computer problems were successful and resulted in the Company incurring no material disruptions in services or operations. To the extent, if any, certain third parties such as interconnected utilities, key customers or suppliers still face potential Year 2000 disruptions due to incomplete remediation, the Company may still retain risk related to Year 2000 issues. The Company is not presently aware of any such situations and does not anticipate such events will have a material effect on the Company's financial condition or results of operations. 49 LG&E Energy: (cont.): Cost of Year 2000 Issues The Company's system modification costs related to the Year 2000 issue were expensed as incurred, with new system installations being capitalized pursuant to generally accepted accounting principles. See Note 1 of LG&E Energy's Notes to Financial Statements under Item 8. Through December 1999, the Company had incurred approximately $26.7 million in capital and operating costs in connection with the Year 2000 issue. 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 SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. 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 6 of LG&E Energy's Notes to Financial Statements under Item 8. Environmental Cost Recovery In August 1994 and May 1995, respectively, KU and LG&E implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge for KU as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by LG&E and KU be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for revenues collected for such pre-1993 environmental projects. Accordingly, the Company recorded a provision for rate refunds of $26 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in the reversal of approximately $0.9 million of the provision for rate refunds established by KU and LG&E in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. Future Rate Regulation In October 1998, LG&E and KU filed applications with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky 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 proposed ratemaking method, known as PBR, included 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 proposal provided for financial penalties and rewards to assure continued high quality service and reliability. 50 LG&E Energy: (cont.): In April 1999, LG&E and KU filed a joint agreement among the companies and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of LG&E and KU by $20 million in the first year (beginning July 1999), and by $8 million annually through June 2004. The proposed amended plan also included establishment of a $6 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E and KU. Under the rate cap proposal, the companies agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger and LG&E also agreed to refrain from filing for an increase in natural gas rates through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's and KU's amended PBR plans and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for LG&E and KU of $69.6 million and $61.5 million, respectively. In January 2000, the Kentucky Commission issued Orders for LG&E and KU in the subject cases. The Kentucky Commission ruled that LG&E and KU should reduce base rates by $27.2 million and $36.5 million, respectively, effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated the utilities' proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered the utilities the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings for each utility resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, the utilities filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to LG&E and KU of $1.1 million and $7.7 million, respectively. The utilities also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base rate reductions. In February 2000, LG&E and KU accepted the Kentucky Commission's proposed ESM and filed an ESM tariff which contained detailed provisions for operation of the ESM rates. Management cannot predict final outcome of these matters before the Kentucky Commission or the timing in which resolution of these matters will ultimately be reached. Other Rate Matters LG&E's rates contain a DSM provision. The provision includes a rate mechanism that provides concurrent recovery of DSM costs and provides an incentive for implementing DSM programs. This program had allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling), but in 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. In September 1998, the Kentucky Commission accepted LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. Since October 1997, LG&E has implemented an 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 are being determined for each 12-month period 51 LG&E Energy: (cont.): beginning November 1 and ending October 31. During the first two years of the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and $3.5 million, respectively, for its share of reduced gas costs. These amounts are billed to customers through the gas supply clause. Prior to implementation of the PBR in July 1999, and following its termination in March 2000, LG&E and KU employed an FAC mechanism, which under Kentucky law allowed the utilities to recover from customers the actual fuel costs associated with retail electric sales. In February 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, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed the utilities' method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. LG&E requested that the Kentucky Commission grant rehearing on the February orders, and further requested that the Kentucky Commission stay the refund requirement until it could rule on the rehearing request. The Kentucky Commission granted the request for a stay, and in March 1999 granted rehearing on the appropriate line loss factor associated with off-system sales for the 18-month period ended April 1998. The Kentucky Commission also granted rehearing on the KIUC's request for rehearing on the Kentucky Commission's determination that it lacked authority to require the utilities to pay interest on the refund amounts. The Kentucky Commission conducted a hearing on the rehearing issues and issued a final ruling in December 1999. The Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and reduced the refund level for the 18-month period under review to approximately $800,000. LG&E implemented the refund with billings beginning in the month of January 2000. LG&E and KIUC have each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin Circuit Court. A decision on the appeals by the Court is expected in 2000. In July 1999, the Kentucky Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, in July 1999, the Kentucky Commission stayed the refund requirement pending the Kentucky Commission's final determination of any rehearing request that KU may file. In August 1999, KU filed its request for rehearing of the July orders. In August 1999, the Kentucky Commission issued a Final Order in the KU proceedings, agreeing, in part, with KU's arguments outlined in its Petition for Rehearing. While the Kentucky Commission confirmed that KU should change its method of computing the fuel costs associated with electric line losses, it agreed with KU that the line loss percentage should be based on KU's actual line losses incurred in making off-system sales rather than the percentage used in its Open Access Transmission Tariff. The Kentucky Commission also upheld its previous ruling concerning the computation of system line losses in the calculation of the FAC. The net effect of the Kentucky Commission's Final Order was to reduce the refund obligation to $5.8 million from the original Order amount of $10.1 million. In August 1999, LG&E and KU each recorded its estimated share of anticipated FAC refunds of $8.7 million. KU began implementing the refund in October and will continue the refund through September 2000. Both KU and the KIUC have appealed the Order to the Franklin Circuit Court. A decision is not expected on the appeal until later in 2000. LG&E intends to file before the end of the first quarter an application with the Kentucky Commission for authority to increase its natural gas rates in order to recoup higher costs for providing natural gas distribution services. LG&E expects implementation before the end of 2000. 52 LG&E Energy: (cont.): Kentucky PSC Administrative Case for Affiliate Transactions In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a 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 Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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. Environmental Matters The Act imposed stringent new SO2 and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units, while KU met its Phase I SO2 requirements primarily through installation of a scrubber on Ghent Unit 1. The Company's combined strategy for Phase II, commencing January 1, 2000, 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 NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all LG&E and KU stations in the eastern half of Kentucky. Additional petitions currently pending before EPA may potentially result in orders encompassing the remaining KU and WKE stations. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states implement the final regulatory mandate. However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, and 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, analysis, and the outcome of pending litigation against the EPA, the Company estimates that it may incur approximate capital costs for NOx compliance ranging from $300 million to reduce emissions to the level of .25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $550 million to reduce emissions to the level of .15 lb./Mmbtu (current EPA regulations). These costs would 53 LG&E Energy: (cont.): 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 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. The Company is also addressing other air quality issues. First, the Company is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. The Company continues to monitor EPA actions to challenge that ruling. Second, the Company was notified by regulatory agencies that the Cane Run Station may be the source of a potential exceedance of the NAAQS that could require the Company to incur additional capital expenditures or accept certain emissions limitations. After reviewing additional modeling information submitted by the Company, in January 2000, EPA concluded that the Cane Run Station does not contribute to any potential NAAQS exceedance and that no further action is required from the Company. Third, the Company is working with regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate emissions from its 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 owns or formerly owned several properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. The Company has completed the cleanup of a site owned by KU and reached agreements for other parties to assume cleanup responsibility for two other sites formerly owned by LG&E. In addition, the Company recently reached an agreement with the Kentucky Division of Waste Management with respect to a third LG&E-owned site in which the Company committed to impose certain property restrictions and conduct additional monitoring in lieu of a cleanup. Based on currently available information, management estimates that it will incur additional MGP costs of less than $500,000. Accordingly, an accrual of $500,000 has been recorded in the accompanying financial statements. With respect to other former MGP sites no longer owned by the Company, the Company is unable to determine what, if any, additional exposure or liability it may have as it lacks complete information on current site conditions. In October 1999, approximately 38,000 gallons of diesel fuel leaked from a cracked valve in an underground pipeline at KU's E.W. Brown Station. Under the oversight of EPA and state officials, the Company commenced immediate spill containment and recovery measures which prevented the spill from reaching the Kentucky River. The Company ultimately recovered approximately 34,000 gallons of diesel fuel. In November 1999, the Kentucky Division of Water issued a notice of violation for the incident. The Company is currently negotiating with the state in an effort to reach a complete resolution of this matter. To date the Company has incurred costs of approximately $1 million. The Company does not expect to incur any material additional amounts. See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for an additional discussion of the Company's environmental issues. Public Utilities Regulatory Policies Act Proposals have been introduced in Congress to repeal all or portions of the 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 54 LG&E Energy: (cont.): 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 is 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, gas distribution projects and other energy-related businesses, as described in the sections titled LG&E Capital Corp. and Other Results, and 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. Also, the Company may seek opportunities to divest certain of its existing non-utility assets under suitable market conditions. 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 was 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 each conducted 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. In November 1999, the task force issued a report to the Governor of Kentucky and a legislative agency recommending no general electric industry restructuring actions during the 2000 legislative session. 55 LG&E Energy: (cont.): Thus, 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: GENERAL 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 1999, 1998, and 1997 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's annual report on Form 10-K for the year ended December 31, 1998. MERGER Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. The outstanding preferred stock of 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 increased $28.2 million for 1999, as compared to 1998, primarily due to non-recurring charges in 1998 for merger-related expenses of $23.6 million, after tax. Excluding these non-recurring charges, net income increased $4.6 million. This increase is mainly due to higher electric revenues, lower administrative costs and operating expenses at the electric generating stations, partially offset by higher maintenance expenses at the electric generating stations. Net income decreased $35.2 million for 1998, as compared to 1997, primarily due to non-recurring charges for merger-related expenses and the ECR 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. Revenues A comparison of operating revenues for the years 1999 and 1998, excluding the provisions recorded for refunds 56 LG&E: (cont.): in 1999 and in 1998, 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 1999 1998 1999 1998 ---- ---- ---- ---- Retail sales: Fuel and gas supply adjustments, etc $ (2,014) $ 3,750 $ (24,791) $ (4,393) Merger surcredit (4,194) (3,466) -- -- Performance based rate reduction (6,076) -- -- -- Demand side management/decoupling (2,985) (6,299) (6,462) (369) Environmental cost recovery surcharge (570) (260) -- -- Variation in sales volumes 22,009 27,051 17,779 (42,418) --------- --------- --------- --------- Total retail sales 6,170 20,776 (13,474) (47,180) Wholesale sales 121,996 28,398 (602) 8,720 Gas transportation-net -- -- (575) (71) Other 1,228 (695) 685 (935) --------- --------- --------- --------- Total $ 129,394 $ 48,479 $ (13,966) $ (39,466) ========= ========= ========= =========
Electric revenues increased in 1999 primarily due to wholesale electric sales and higher levels of retail sales volumes, partially offset by the PBR and merger surcredit bill reductions. Wholesale sales increased in 1999 due to large amounts of power available. Gas revenues decreased primarily as a result of lower gas supply costs billed to customers through the gas supply clause, partially offset by increased gas sales in 1999 due to colder weather. Electric retail sales increased primarily due to the warmer weather 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 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. Expenses Fuel for electric generation and gas supply expenses comprises a large component of LG&E's total operating costs. LG&E's electric rates contain an FAC and gas rates contain a GSC, whereby increases or decreases in the cost of fuel and gas supply are reflected in base rates, subject to approval by the Kentucky Commission. In July 1999, the Kentucky Commission approved LG&E's filing on PBR resulting in the discontinuance of the FAC. In January 2000, the Kentucky Commission rescinded its approval of LG&E's PBR filing and ordered the reinstatement of the FAC. See Note 3 of LG&E's Notes to Financial Statements under Item 8 for a further discussion of the PBR and the FAC. Fuel for electric generation increased $4.4 million (2.9%) in 1999 because of an increase in generation to support increased electric sales ($7.4 million), offset partially by a lower cost of coal burned ($3 million). Fuel expenses incurred in 1998 increased $5.2 million (3.5%) because of higher cost of coal burned ($6.6 million), partially offset by a decrease in generation ($1.4 million). The average delivered cost per ton of coal purchased was $21.49 in 1999, $22.38 in 1998, and $21.66 in 1997. 57 LG&E: (cont.): Power purchased increased $119.4 million (238%) in 1999 primarily due to increased purchases to serve native load customers during the summer months and off-system sales activity. Power purchased increased $32.9 million (191%) in 1998 to support the increase in wholesale sales and increased purchases from KU of $16 million as a result of economic dispatch following the merger of the two companies in May 1998. Gas supply expenses decreased $11.1 million (8.9%) in 1999 primarily due to a decrease in cost of net gas supply ($17.1 million), partially offset by an increase in the volume of gas delivered to the distribution system ($6 million). Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a decrease in the volume of gas delivered to the distribution system. The average unit cost per Mcf of purchased gas was $2.99 in 1999, $3.05 in 1998 and $3.46 in 1997. Operation expenses decreased $8.9 million (5.4%) in 1999 primarily due to decreased costs to operate the electric generating plants ($5.7 million) and lower administrative costs ($4.6 million). Operation expenses increased $12.8 million (8.5%) in 1998 over 1997 because of increased costs to operate electric generating plants ($6.6 million), amortization of deferred merger costs ($1.8 million), and an increase in storm damage expenses ($1.4 million). Maintenance expenses for 1999 increased $5.3 million (10.1%) primarily due to increases in scheduled outages at the Mill Creek generating station units 3 and 4, and the Cane Run generating station units 4 and 6 ($2.4 million) and increased forced outages at Mill Creek units 1 and 4 and Cane Run unit 5 ($3.9 million). In 1998 maintenance expenses increased $5.2 million (10.9%) 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). Depreciation and amortization increased $4 million (4.3%) in 1999 over 1998 due to additional utility plant in service. Depreciation and amortization for 1998 were approximately the same as in 1997. 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. Interest charges for 1999 increased $1.6 million (4.5%) due to short term borrowings and interest on debt to associated companies ($2.5 million), partially offset by lower interest rates on variable rate debt ($.6 million). Interest charges for 1998 decreased $2.9 million (7.3%) due to the retirement of LG&E's 6.75% Series First Mortgage Bonds and lower variable interest rates. The embedded cost of long-term debt was 5.46% at December 31, 1999, and 5.57% at December 31, 1998. See Note 10 of LG&E'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 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. 58 LG&E: (cont.): LIQUIDITY AND CAPITAL RESOURCES LG&E uses net cash generated from its operations and external financing to fund construction of plant and equipment and the payment of dividends. LG&E believes that such sources of funds will be sufficient to meet the needs of its business in the foreseeable future. Operating Activities Cash provided by operations was $180.5 million, $225.7 million and $185.0 million in 1999, 1998 and 1997, respectively. The 1999 decrease resulted from a net decrease in non-cash income statement items and a net decrease in net current assets, including decreases in accounts payable and accrued taxes. The 1998 increase was primarily due to an increase in current assets, including increases in accounts payable and accrued taxes. Investing Activities LG&E's primary use of funds continues to be for capital expenditures and the payment of dividends. Capital expenditures were $195 million, $138 million and $111 million in 1999, 1998 and 1997, respectively. LG&E expects its capital expenditures for 2000 and 2001 will total approximately $401 million which consists primarily of construction estimates associated with installation of low nitrogen oxide burner systems as described in the section titled "Environmental Matters." Net cash used for investment activities increased by $47.2 million in 1999 compared to 1998 and increased $10 million in 1998 compared to 1997 primarily due to increased construction expenditures in both periods. Financing Activities Cash inflow from financing activities in 1999 was $26.7 million and cash outflows for 1998 and 1997 were $107.6 million and $64.5 million, respectively. In 1999, total debt increased by $120.1 million to $746.9 million at December 31, 1999. The increase was primarily due to funding operating expenses and construction expenditures. As of December 1999, LG&E had committed credit facility aggregating $200.0 million with various banks. Unused capacity under these lines were approximately $90 million after considering the commercial paper support. The credit facility will expire in 2001 and management expects to renegotiate the credit facility at that time. Future Capital Requirements Future utility 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 anticipates to fund its requirements through additional operating cash flow, debt or an issuance of preferred cstock. 59 LG&E: (cont.): LG&E's debt ratings as of February 16, 2000, were: Moody's S&P D&P ------- --- --- First mortgage bonds A1 A+ AA- Unsecured debt A2 A- A+ Preferred stock a2 BBB+ A Commercial paper P-1 A-1 D-1 The ratings stated above reflect the downgrades received following an order from the Kentucky Commission to reduce base rates at LG&E by $27.2 million. As of March 21, 2000, Moody's, S&P and D&P had LG&E on Credit Watch with negative implications. Based upon the downgrades received LG&E's cost of funds could increase by .05% to .12% on short-term borrowings and .10% on new long-term borrowings. These ratings reflect the views of Moody's, S&P and D&P. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. 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 instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Sensitivity LG&E has short-term and long-term variable rate debt obligations outstanding. At December 31, 1999, the potential change in interest expense associated with a 1% change in base interest rates of LG&E's unswapped debt is estimated at $1.0 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. As of December 31, 1999, LG&E had swaps with a combined notional value of $151 million. The swaps exchange floating-rate interest payments for fixed interest payments to reduce the impact of interest rate changes on LG&E's Pollution Control Bonds. As of December 31, 1999, 61% 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 $2.1 million as of December 31, 1999. 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 of LG&E's Notes to Financial Statements under Item 8. Commodity Price Sensitivity LG&E has limited exposure to market price volatility in prices of fuel and electricity, as long as cost-based regulations exist, including the FAC and GSC. 60 LG&E: (cont.): YEAR 2000 COMPUTER SOFTWARE ISSUE Result of Year 2000 Preparation The remediation efforts of LG&E in preparing for potential Year 2000 computer problems were successful and resulted in LG&E incurring no material disruptions in services or operations of any sort. To the extent, if any, certain third parties such as interconnected utilities, key customers or suppliers still face Year 2000 disruptions due to incomplete remediation, LG&E may still retain risk related to Year 2000 issues. LG&E is not presently aware of any such situations and does not anticipate such events will have a material effect on LG&E's financial condition or results of operations. Cost of Year 2000 Issues LG&E's system modification costs related to the Year 2000 issue were expensed as incurred, while new system installations are being capitalized pursuant to generally accepted accounting principles. See Note 1 of LG&E's Notes to Financial Statements under Item 8. Through December 1999, LG&E incurred approximately $18.6 million in capital and operating costs in connection with the Year 2000 issue. 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, their accounting is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Given LG&E's competitive position in the market and the status of regulation in the states 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. Environmental Cost Recovery In May 1995, LG&E implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by LG&E be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for revenues collected for such pre-1993 environmental projects. Accordingly, LG&E recorded a provision for rate refunds of $4.5 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in the additional accrual of approximately $0.6 million to what had been recorded in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. 61 LG&E: (cont.): Future Rate Regulation In October 1998, LG&E filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for LG&E to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed LG&E to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The proposed ratemaking method, known as PBR, included financial incentives for LG&E to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR proposal provided for financial penalties and rewards to assure continued high quality service and reliability. In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of LG&E by $9.4 million in the first year (beginning July 1999), and by $3.8 million annually through June 2004. The proposed amended plan also included establishment of a $2.8 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E and KU. Under the rate cap proposal, LG&E agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger and LG&E also agreed to refrain from filing for an increase in natural gas rates through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's amended PBR plan and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for LG&E of $69.6 million. In January 2000, the Kentucky Commission issued Orders for LG&E in the subject cases. The Kentucky Commission ruled that LG&E should reduce base rates by $27.2 million effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated LG&E's proposal to operate under its PBR plan and reinstated the fuel adjustment clause mechanism effective March 1, 2000. The Kentucky Commission offered LG&E the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, LG&E filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to LG&E of $1.1 million. LG&E also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base rate reductions. In February 2000, LG&E accepted the Kentucky Commission's proposed ESM and filed an ESM tariff which contained detailed provisions for operation of the ESM rates. Management cannot predict final outcome of these matters before the Kentucky Commission or the timing in which resolution of these matters will ultimately be reached. 62 LG&E: (cont.): Other Rate Matters LG&E's rates contain a DSM provision. The provision includes a rate mechanism that provides concurrent recovery of DSM costs and provides an incentive for implementing DSM programs. This program had allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling), but in 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. In September 1998, the Kentucky Commission accepted LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. Since October 1997, LG&E has implemented an 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 two years of the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and $3.5 million, respectively, for its share of reduced gas costs. These amounts are billed to customers through the gas supply clause. Prior to implementation of the PBR in July 1999, and following its termination in March 2000, LG&E employed an FAC mechanism, which under Kentucky law allowed LG&E to recover from customers, the actual fuel costs associated with retail electric sales. In February 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, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed LG&E's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. LG&E requested that the Kentucky Commission grant rehearing on the February orders, and further requested that the Kentucky Commission stay the refund requirement until it could rule on the rehearing request. The Kentucky Commission granted the request for a stay, and in March 1999 granted rehearing on the appropriate line loss factor associated with off-system sales for the 18-month period ended April 1998. The Kentucky Commission also granted rehearing on the KIUC's request for rehearing on the Kentucky Commission's determination that it lacked authority to require the utilities to pay interest on the refund amounts. The Kentucky Commission conducted a hearing on the rehearing issues and issued a final ruling in December 1999. The Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and reduced the refund level for the 18-month period under review to approximately $800,000. LG&E enacted the refund with billings in the month of January 2000. LG&E and KIUC have each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin Circuit Court. A decision on the appeals by the Court is expected in 2000. LG&E intends to file before the end of the first quarter an application with the Kentucky Commission for authority to increase its natural gas rates in order to recoup higher costs for providing natural gas distribution services. LG&E expects implementation before the end of 2000. Kentucky PSC Administrative Case for Affiliate Transactions In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 that could 63 result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a 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 Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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. Environmental Matters The Act imposed stringent new SO2 and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units. LG&E's strategy for Phase II, commencing January 1, 2000, 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 met the NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all LG&E stations. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states implement the final regulatory mandate. 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, analysis, and the outcome of pending litigation against the EPA, LG&E estimates that it may incur approximate capital costs for NOx compliance ranging from $65 million to reduce emissions to the level of .25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $165 million to reduce emissions to the level of .15 lb./Mmbtu (current EPA regulations). 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 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. LG&E is also addressing other air quality issues. First, LG&E is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. LG&E continues to monitor EPA actions to challenge that ruling. Second, LG&E was notified by regulatory agencies that the Cane Run Station may be the source of a potential exceedance of the NAAQS that could require LG&E to incur additional capital expenditures or accept certain emissions limitations. After reviewing additional modeling information submitted by 64 LG&E: (cont.): LG&E, in January 2000, EPA concluded that the Cane Run Station does not contribute to any potential NAAQS exceedance and that no further action is required from LG&E. 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 owns or formerly owned three properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. LG&E has reached agreements for other parties to assume cleanup responsibility for two other sites it formerly owned. In addition, LG&E recently reached an agreement with the Kentucky Division of Waste Management with respect to a third LG&E-owned site in which LG&E committed to impose certain property restrictions and conduct additional monitoring in lieu of a cleanup. Based on currently available information, management estimates that it will incur additional MGP costs of less than $500,000. Accordingly, an accrual of $500,000 has been recorded in the accompanying financial statements. See Note 12 of LG&E's Notes to Financial Statements under Item 8 for an additional discussion of environmental issues. FUTURE OUTLOOK Competition and Customer Choice LG&E 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 has taken many steps to prepare for the expected increase in competition in its business, 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 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 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 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 was 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 had 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. In November 1999, the task force issued a report to the Governor of Kentucky and a legislative agency recommending no general electric industry restructuring actions during the 2000 legislative session. Thus, 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 65 LG&E: (cont.): timing of the ultimate legislative or regulatory actions regarding industry restructuring and their impact on LG&E, which may be significant, cannot currently be 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 1999, 1998, and 1997 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 KU's reports to the Securities and Exchange Commission, and Exhibit No. 99.01 to LG&E Energy's annual report on Form 10-K for the year ended December 31, 1998. MERGER Effective May 4, 1998, following the receipt of all required state and federal regulatory approvals, LG&E Energy and KU Energy merged, with LG&E Energy as the surviving corporation. The outstanding preferred stock of KU, 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. RESULTS OF OPERATIONS Net Income KU's net income increased $33.8 million for 1999, as compared to 1998, primarily due to non-recurring charges in 1998 for merger-related expenses and environmental cost recovery refund of $21.5 million and $12.9 million, after tax, respectively, offset by net rate refunds incurred in 1999 of $3.5 million, after tax. Excluding these non-recurring charges, net income increased $2.9 million. This increase was due to higher retail electric and off-system sales results, and lower operation and maintenance costs, offset by higher purchased power expenses for the year. 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. Revenues A comparison of operating revenues for the years 1999 and 1998, excluding the provision for rate refunds for the ECR refund and the FAC refund previously recovered from customers, $5.9 million in 1999 and $21.5 66 KU (cont.): million in 1998, 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 1999 1998 ---- ---- Retail sales: Fuel clause adjustments, etc $ (1,744) $ 1,158 Merger surcredit (4,123) (4,035) Environmental cost recovery surcharge (1,977) (547) Performance based rate reduction (5,558) -- Variation in sales volumes 19,303 25,841 --------- --------- Total retail sales 5,901 22,417 Wholesale sales 106,160 90,253 Other (465) 2,507 --------- --------- Total $ 111,596 $ 115,177 ========= ========= The increase in sales for resale in 1999 was primarily due to more aggressive marketing efforts. Retail sales increased in 1998 due to increases in residential and commercial sales primarily attributable to warmer weather experienced in the second and third quarters. The increase in sales for resale was primarily due to more aggressive marketing efforts, increases 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. Provision for rate refund reflects a net charge in revenues during 1999 of $5.9 million for the refund of costs previously recovered from customers under the fuel adjustment clause and the environmental cost recovery mechanism. 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. Expenses Fuel for electric generation comprises a large component of KU's total operating expenses. KU's Kentucky jurisdictional electric rates were subject to a FAC whereby increases or decreases would be reflected in retail rates, subject to the approval of the Kentucky Commission. Effective July 2, 1999 the FAC was discontinued and replaced with an amended electric PBR. In January 2000, the Kentucky Commission rescinded its approval of KU's PBR filing and ordered the reinstatement of the FAC. See Note 3 of KU's Notes to Financial Statements under Item 8 for a further discussion of the PBR and the FAC. KU's wholesale and Virginia jurisdictional electric rates contain a fuel adjustment clause whereby increases or decreases in the cost of fuel are reflected in rates, subject to the approval of the Virginia Commission and the FERC. Fuel for electric generation increased $2.5 million (1%) in 1999 because of an increase in generation ($5.1 million), partially offset by a decrease in the cost of coal burned ($2.6 million). Fuel for electric generation increased $29 million (13%) in 1998 because of an increase in generation ($26.2 million) and an increase in the cost of coal burned ($2.8 million). KU's average delivered cost per ton of coal purchased was $26.65 in 1999, $26.97 in 1998 and $27.97 in 1997. 67 KU (cont.): Power purchased increased $115.7 million in 1999 primarily to support the aforementioned sales for resale. 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. Maintenance expense decreased $6.3 million (10%) in 1999 due to decreases in maintenance at the steam generating plants and the transmission and distribution systems. Maintenance for 1998 was flat as compared to 1997. Depreciation and amortization increased $3.3 million (3.8%) in 1999 and $2.5 million (1.5%) in 1998 because of additional utility plant in service in both years. 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). KU's embedded cost of long-term debt was 7.00% at December 31, 1999, and 6.99% at December 31, 1998. See Note 10 of KU's Notes to Financial Statements under Item 8. Variations in income tax expense 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 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 uses net cash generated from its operations and external financing to fund construction of plant and equipment and the payment of dividends. KU believes that such sources of funds will be sufficient to meet the needs of its business in the foreseeable future. Operating Activities Cash provided by operations was $204.2 million, $239.4 million and $178.9 million in 1999, 1998 and 1997, respectively. The 1999 decrease of resulted from an increase in net income and a net decrease in net current assets, including decreases in accounts receivable, accounts payable, accrued taxes and provision for rate refunds. The 1998 increase was primarily due to an increase in current assets, including increases in accounts payable, accrued taxes and provision for rate refunds, partially offset by an increase in accounts receivable. Investing Activities KU's primary use of funds continues to be for capital expenditures and the payment of dividends. Capital expenditures were $181 million, $92 million and $94 million in 1999, 1998 and 1997, respectively. The $89 million increase in 1999 capital expenditures was primarily due to the purchase of a 62% interest in the two combustion turbines. KU expects its capital expenditures for 2000 and 2001 will total approximately $324 million which consists primarily of construction costs associated with installation of low nitrogen oxide burner systems as described in the section titled "Environmental Matters." 68 KU (cont.): Net cash used for investment activities increased by $89.3 million in 1999 compared to 1998 and increased $2.1 million in 1998 compared to 1997 primarily due to increased construction expenditures in both periods. Future Capital Requirements Future utility 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. KU anticipates to fund its requirements through additional operating cash flow, debt or an issuance of preferred stock. Financing Activities Cash outflows from financing activities were $75.2 million, $94.0 million and $89.4 million, in 1999, 1998 and 1997, respectively. In 1999, there was no increase in total debt, balance as of December 31, 1999 remained $546.3 million. KU's debt ratings as of February 16, 2000, were: Moody's S&P D&P ------- --- --- First mortgage bonds A1 A+ AA- Preferred stock a2 BBB+ A Commercial paper P-1 A-1 D-1 The ratings stated above reflect the downgrades received following the PBR-related order from the Kentucky Commission to reduce base rates at KU by $36.5 million. As of March 21, 2000, Moody's, S&P and D&P had KU on Credit Watch with negative implications. Based upon the downgrades received KU's cost of funds could increase by .05% to .12% on short-term borrowings and .10% on new long-term borrowings. These ratings reflect the views of Moody's, S&P and D&P. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal at any time by the rating agency. Market Risks KU is exposed to market risks from changes in interest rates and commodity prices. To mitigate changes in cash flows attributable to these exposures, KU has entered into various derivative instruments. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Sensitivity KU has long-term variable rate debt obligations outstanding. At December 31, 1999, the potential change in interest expense associated with a 1% change in base interest rates of KU's unswapped debt is estimated at $1.0 million. These swaps hedge specific debt issuance and consistent with management's designation are accorded hedge accounting treatment. As of December 31, 1999, KU has a swap with a notional value of $53 million. The swaps exchange fixed-rate interest payments for floating interest payments on KU's 7.92% Series P Pollution Control Bond. The potential loss in fair value from these positions resulting from a hypothetical 1% adverse movement in base interest rates 69 KU (cont.): is estimated at $3.7 million as of December 31, 1999. Changes in the market value of these swaps if held to maturity, as KU intends to do, will have no effect on KU's net income or cash flow. See Note 4 of KU's Notes to Financial Statements under Item 8. Commodity Price Sensitivity KU has limited exposure to market price volatility in prices of fuel and electricity, as long as cost-based regulations exist, including the FAC. YEAR 2000 COMPUTER SOFTWARE ISSUE Result of Year 2000 Preparation The remediation efforts of KU in preparing for potential Year 2000 computer problems were successful and resulted in KU incurring no material disruptions in services or operations of any sort. To the extent, if any, certain third parties such as interconnected utilities, key customers or suppliers still face Year 2000 disruptions due to incomplete remediation, KU may still retain risk related to Year 2000 issues. KU is not presently aware of any such situations and does not anticipate such events will have a material effect on KU's financial condition or results of operations. Cost of Year 2000 Issues KU's system modification costs related to the Year 2000 issue were expensed as incurred, while new system installations are being capitalized pursuant to generally accepted accounting principles. See Note 1 of KU's Notes to Financial Statements under Item 8. Through December 1999, KU incurred approximately $5.1 million in capital and operating costs in connection with the Year 2000 issue. RATES AND REGULATION KU is subject to the jurisdiction of the Kentucky Commission, the Virginia Commission and FERC in virtually all matters related to electric utility regulation, and as such, its accounting is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Given KU's competitive position in the market and the status of regulation in the states of Kentucky and Virginia, KU no plans or intentions to discontinue its application of SFAS No. 71. See Note 6 of LG&E Energy's Notes to Financial Statements under Item 8. Environmental Cost Recovery In August 1994, KU implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by KU be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for revenues collected for such pre-1993 environmental projects. Accordingly, KU recorded a provision for rate 70 KU (cont.): refund of $21.5 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in a reduction of approximately $1.5 million to the accrual that had been recorded in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. Future Rate Regulation In October 1998, KU filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed KU to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The proposed ratemaking method, known as PBR, included financial incentives for KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR proposal provided for financial penalties and rewards to assure continued high quality service and reliability. In April 1999, KU filed a joint agreement with LG&E and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of KU by $10.6 million in the first year (beginning July 1999), and by $4.2 million annually through June 2004. The proposed amended plan also included establishment of a $3.2 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E Energy and KU Energy. Under the rate cap proposal, KU agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on KU's amended PBR plans and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for KU of $61.5 million. In January 2000, the Kentucky Commission issued Orders for KU in the subject cases. The Kentucky Commission ruled that KU should reduce base rates by $36.5 million effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated KU's proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered KU the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings for KU resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, KU filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to KU of $7.7 million. KU also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base 71 KU (cont.): rate reductions. In February 2000, KU accepted the Kentucky Commission's opportunity to use an ESM by filing an ESM tariff which contains the provisions operating under such mechanism. Management cannot predict final outcome of these matters before the Kentucky Commission or the timing in which resolution of these matters will ultimately be reached. Other Rate Matters Prior to implementation of the PBR in July 1999, and following its termination in March 2000, KU employed an FAC mechanism, which under Kentucky law allowed the utilities to recover from customers the actual fuel costs associated with retail electric sales. In July 1999, the Kentucky Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, in July 1999, the Kentucky Commission stayed the refund requirement pending the Kentucky Commission's final determination of any rehearing request that KU may file. In August 1999, KU filed its request for rehearing of the July orders. In August 1999, the Kentucky Commission issued a Final Order in the KU proceedings, agreeing, in part, with KU's arguments outlined in its Petition for Rehearing. While the Kentucky Commission confirmed that KU should change its method of computing the fuel costs associated with electric line losses, it agreed with KU that the line loss percentage should be based on KU's actual line losses incurred in making off-system sales rather than the percentage used in its Open Access Transmission Tariff. The Kentucky Commission also upheld its previous ruling concerning the computation of system line losses in the calculation of the FAC. The net effect of the Kentucky Commission's Final Order was to reduce the refund obligation to $5.8 million from the original Order amount of $10.1 million. In August 1999, KU recorded its estimated share of anticipated FAC refunds of $7.7 million. KU began implementing the refund in October and will continue the refund through September 2000. Both KU and the KIUC have appealed the Order to the Franklin Circuit Court. A decision is not expected on the appeal until later in 2000. Kentucky PSC Administrative Case for Affiliate Transactions In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a draft code of conduct and cost allocation guidelines. In January 1999, KU, as well as all parties to the proceeding, filed comments on the Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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. 72 KU (cont.): Environmental Matters The Act imposed stringent new SO2 and NOx emission limits on electric generating units. KU met its Phase I SO2 requirements primarily through installation of a scrubber on Ghent Unit 1. KU's strategy for Phase II, commencing January 1, 2000, 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 NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all KU stations in the eastern half of Kentucky. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states implement the final regulatory mandate. 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, analysis, and the outcome of pending litigation against the EPA, KU estimates that it may incur capital costs for NOx compliance ranging from $126 million to reduce emissions to the level of .25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $168 million to reduce emissions to the level of .15 lb./Mmbtu (current EPA regulations). These costs would generally be incurred beginning in 2000. KU believes its costs in this regard 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 recovery from customers under its 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. KU owns or formerly owned several properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. KU has completed the cleanup of a site owned by KU. With respect to other former MGP sites no longer owned by KU, KU is unable to determine what, if any, additional exposure or liability it may have as it lacks complete information on current site conditions. In October 1999, approximately 38,000 gallons of diesel fuel leaked from a cracked valve in an underground pipeline at KU's E.W. Brown Station. Under the oversight of EPA and state officials, KU commenced immediate spill containment and recovery measures which prevented the spill from reaching the Kentucky River. KU ultimately recovered approximately 34,000 gallons of diesel fuel. In November 1999, the Kentucky Division of Water issued a notice of violation for the incident. KU is currently negotiating with the state in an effort to reach a complete resolution of this matter. To date KU has incurred costs of approximately $1 million. 73 KU (cont.): The Company does not expect to incur any material additional amounts. KU is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. KU continues to monitor EPA actions to challenge that ruling. See Note 11 of KU's Notes to Financial Statements under Item 8 for an additional discussion of 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 business, including support for PBR 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 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 was 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 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. In November 1999, the task force issued a report to the Governor of Kentucky and a legislative agency recommending no general electric industry restructuring actions during the 2000 legislative session. Thus, 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 KU, which may be significant, cannot currently be predicted. ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk. See LG&E Energy's, LG&E's and KU's Management's Discussion and Analysis of Results of Operations and Financial Condition, Market Risks, under Item 7. 74 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 1999 1998 1997 ---- ---- ---- REVENUES: Electric utility (Note 1) .............................. $ 1,693,033 $ 1,464,824 $ 1,331,569 Gas utility (Note 1) ................................... 177,579 191,545 231,011 International and non-utility .......................... 844,299 455,877 270,166 Provision for rate refunds (Note 6) .................... (7,635) (26,000) -- ----------- ----------- ----------- Net revenues ........................................ 2,707,276 2,086,246 1,832,746 ----------- ----------- ----------- OPERATING EXPENSES: Operation and maintenance: Fuel and power purchased ............................... 1,101,054 640,438 442,949 Gas supply expenses .................................... 330,172 294,880 314,425 Utility operation and maintenance ...................... 418,510 432,763 415,882 International and non-utility operation and maintenance 193,344 138,952 67,565 Depreciation and amortization .............................. 219,318 206,450 193,891 Merger costs (Note 2) ...................................... -- 65,318 -- ----------- ----------- ----------- Total operating expenses ............................ 2,262,398 1,778,801 1,434,712 ----------- ----------- ----------- Equity in earnings of unconsolidated ventures (Note 9) ..... 49,717 73,798 22,937 ----------- ----------- ----------- OPERATING INCOME ........................................... 494,595 381,243 420,971 Other income and (deductions) (Note 14) .................... 19,305 8,100 21,683 Interest charges and preferred dividends ................... 132,066 109,389 104,427 Minority interest .......................................... 12,047 10,453 9,035 ----------- ----------- ----------- Income from continuing operations, before income taxes ..... 369,787 269,501 329,192 Income taxes (Note 13) ..................................... 133,524 110,829 120,829 ----------- ----------- ----------- Income from continuing operations .......................... 236,263 158,672 208,363 Loss from discontinued operations, net of income tax benefit of $15,008 and $16,622 (Notes 1, 3 and 4) ...... -- (22,852) (25,367) Loss on disposal of discontinued operations, net of income tax benefit of $104,716 and $123,905 (Notes 3 and 4) ... (174,212) (224,148) -- ----------- ----------- ----------- Income (loss) before cumulative effect of change in accounting principle ................................... 62,051 (88,328) 182,996 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) .......................................... $ 62,051 $ (95,490) $ 182,996 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 75 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (cont.) (Thousands of $ Except Per Share Data)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Average common shares outstanding .................. 129,677 129,679 129,627 Earnings (loss) per share of common stock - basic: Continuing operations .............................. $ 1.82 $ 1.22 $ 1.61 Loss from discontinued operations .................. -- (.17) (.20) Loss on disposal of discontinued operations ........ (1.34) (1.73) -- Cumulative effect of accounting change ............. -- (.06) -- ----------- ----------- ----------- Total .............................................. $ .48 $ (.74) $ 1.41 =========== =========== =========== Earnings (loss) per share of common stock - diluted: Continuing operations .............................. $ 1.82 $ 1.22 $ 1.61 Loss from discontinued operations .................. -- (.17) (.20) Loss on disposal of discontinued operations ........ (1.34) (1.72) -- Cumulative effect of accounting change ............. -- (.06) -- ----------- ----------- ----------- Total .............................................. $ .48 $ (.73) $ 1.41 =========== =========== ===========
Consolidated Statements of Comprehensive Income (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Net income (loss) ............................................ $ 62,051 $ (95,490) $ 182,996 Unrealized holding losses on available-for-sale securities arising during the period ................................ (403) (168) (567) Reclassification adjustment for realized gains and (losses) on available-for-sale securities included in net income ..... (294) 123 337 --------- --------- --------- Other comprehensive loss before tax .......................... (697) (45) (230) Income tax (expense) benefit related to items of other comprehensive income ..................................... 264 (5) 293 --------- --------- --------- Comprehensive income (loss) .................................. $ 61,618 $ (95,540) $ 183,059 ========= ========= =========
Consolidated Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Balance January 1 ............................................. $ 466,279 $ 722,584 $ 683,962 Add net income (loss) ......................................... 62,051 (95,490) 182,996 Deduct: Cash dividends declared on common stock ($1.250 per share in 1999, $1.240 per share in 1998, and $1.113 per share in 1997) ......................... (162,096) (160,815) (144,366) Other ................................................. -- -- (8) --------- --------- --------- Balance December 31 ........................................... $ 366,234 $ 466,279 $ 722,584 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 76 LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $)
December 31 1999 1998 ---- ---- ASSETS: Current assets: Cash and temporary cash investments .................................... $ 91,413 $ 105,604 Marketable securities (Note 11) ........................................ 10,126 20,862 Accounts receivable - less reserve of $8,285 in 1999 and $10,532 in 1998 318,914 293,340 Materials and supplies - primarily at average cost: Fuel (predominantly coal) ........................................... 91,931 78,855 Gas stored underground .............................................. 49,038 39,249 Other ............................................................... 90,259 72,456 Net assets of discontinued operations (Notes 1 and 3) .................. -- 3,219 Prepayments and other .................................................. 54,038 33,449 ---------- ---------- Total current assets ................................................ 705,719 647,034 ---------- ---------- Utility plant: At original cost (Note 1) .............................................. 5,916,905 5,581,667 Less: reserve for depreciation ........................................ 2,503,851 2,352,306 ---------- ---------- Net utility plant ................................................... 3,413,054 3,229,361 ---------- ---------- Other property and investments - less reserve: Investments in unconsolidated ventures (Notes 9 and 10) ................ 249,455 167,878 Non-utility property and plant, net (Notes 1 and 2) .................... 477,442 447,372 Other .................................................................. 25,596 117,321 ---------- ---------- Total other property and investments ................................ 752,493 732,571 ---------- ---------- Deferred debits and other assets: Regulatory assets (Note 6) ............................................. 54,476 65,871 Goodwill, net (Note 2) ................................................. 74,398 36,906 Other .................................................................. 133,617 111,375 ---------- ---------- Total deferred debits and other assets .............................. 262,491 214,152 ---------- ---------- Total assets .................................................... $5,133,757 $4,823,118 ========== ========== CAPITAL AND LIABILITIES: Current liabilities: Current portion of long-term debt (Note 16) ............................ $ 411,810 $ -- Notes payable (Note 17) ................................................ 449,578 365,135 Accounts payable ....................................................... 220,460 254,225 Net liabilities of discontinued operations (Notes 1 and 3) ............. 158,222 -- Taxes and interest accrued ............................................. 72,674 102,228 Common dividends declared .............................................. 41,172 39,876 Provision for rate refunds ............................................. 29,529 34,761 Customer deposits ...................................................... 17,838 17,404 Other .................................................................. 87,628 37,954 ---------- ---------- Total current liabilities ........................................... 1,488,911 851,583 ---------- ---------- Long-term debt (Note 16) ................................................... 1,299,415 1,510,775 Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 13) ..................... 585,880 568,103 Investment tax credit, in process of amortization ...................... 85,828 93,844 Accumulated provision for pensions and related benefit (Note 12) ....... 101,090 120,233 Regulatory liability (Note 6) .......................................... 104,795 110,081 Other .................................................................. 81,267 82,916 ---------- ---------- Total deferred credits and other liabilities ........................ 958,860 975,177 ---------- ---------- Minority interest (Note 2) ................................................. 109,952 107,815 Cumulative preferred stock ................................................. 135,328 136,530 Commitments and contingencies (Note 18) Common equity .............................................................. 1,141,291 1,241,238 ---------- ---------- Total capital and liabilities ................................... $5,133,757 $4,823,118 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 77 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ...................................... $ 62,051 $ (95,490) $ 182,996 Items not requiring cash currently: Depreciation and amortization ....................... 219,318 206,450 193,891 Deferred income taxes - net ......................... 12,041 (30,924) 11,974 Investment tax credit - net ......................... (8,016) (8,087) (8,276) Undistributed earnings of unconsolidated ventures ... (21,651) (18,833) (2,326) Loss from discontinued operations (Notes 1 and 3) ... -- 22,852 25,367 Loss on disposal of discontinued operations (Note 3) ............................. 174,212 224,148 -- Cumulative effect of change in accounting principle (Note 1) .............................. -- 7,162 -- Other ............................................... 17,978 21,838 14,213 Change in certain net current assets: Accounts receivable ................................. (1,204) (36,331) (22,371) Materials and supplies .............................. (21,009) (45,894) (8,704) Net assets of discontinued operations (Notes 1 and 3) (13,723) (156,662) (7,196) Provision for rate refunds .......................... (5,232) 21,513 (4,263) Accounts payable .................................... (41,550) 100,341 (2,400) Accrued taxes and interest .......................... (28,912) 57,216 5,859 Customer deposits ................................... 434 1,609 2,392 Prepayments and other ............................... (4,374) (25,303) (960) Other .................................................. 2,965 (35,978) (46,458) ----------- ----------- ----------- Net cash flows from operating activities ........ 343,328 209,627 333,738 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities ................................ (1,645) (18,421) (21,526) Proceeds from sales of securities ...................... 11,747 19,995 5,030 Construction expenditures .............................. (382,631) (343,628) (225,714) Investment in subsidiaries net of cash and temporary cash investments acquired (Note 2) ........ (39,693) -- (81,719) Investments in unconsolidated ventures (Notes 2 and 9) . (85,768) (1,010) (48,665) Proceeds from sale of investment in affiliate and sale of leveraged leases (Notes 9 and 10) ....... 55,569 16,000 -- ----------- ----------- ----------- Net cash flows used for investing activities .... (442,421) (327,064) (372,594) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of medium-term notes (Notes 16 and 17) ........ 200,020 300,000 -- Issuance of long-term debt ............................. -- -- 69,776 Retirement of long-term debt (Notes 2 and 16) .......... (35,288) (20,042) (71,714) Short-term borrowings .................................. 4,973,725 6,751,089 3,871,905 Repayment of short-term borrowings ..................... (4,891,553) (6,776,845) (3,690,321) Issuance of preferred stock ............................ -- -- 3,025 Redemption of preferred stock .......................... (1,202) (1,823) -- Issuance of common stock ............................... -- -- 3,781 Payment of common dividends ............................ (160,800) (140,731) (143,647) ----------- ----------- ----------- Net cash flows from financing activities ........ 84,902 111,648 42,805 ----------- ----------- ----------- Change in cash and temporary cash investments .............. (14,191) (5,789) 3,949 Beginning cash and temporary cash investments .............. 105,604 111,393 107,444 ----------- ----------- ----------- Ending cash and temporary cash investments ................. $ 91,413 $ 105,604 $ 111,393 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes ........................................ $ 29,968 $ 55,513 $ 82,662 Interest on borrowed money .......................... 115,446 96,356 93,451
The accompanying notes are an integral part of these consolidated financial statements. 78 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Capitalization (Thousands of $)
December 31 1999 1998 ---- ---- COMMON EQUITY: Common stock, without par value - Authorized 300,000,000 shares, outstanding 129,677,030 shares (Note 15) .............................. $ 777,013 $ 776,328 Common stock expense ......................................... (1,690) (1,536) Unrealized gain (loss) on marketable securities, net of income taxes (benefit) of ($170) in 1999 and $94 in 1998 (Note 11) (266) 167 Retained earnings ............................................ 366,234 466,279 ----------- ----------- Total common equity ....................................... 1,141,291 1,241,238 ----------- -----------
CUMULATIVE 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................................. 250,000 104.70 25,000 25,000 Preferred stock expense......................................................... (1,179) (1,179) ------- ------- Total LG&E cumulative preferred stock........................................ 95,328 95,328 ------- ------- Cumulative and redeemable on 30 days notice by Kentucky Utilities Company: Without par value, 5,300,000 shares authorized - 4.75% series, $100 stated value............... 200,000 $101.00 20,000 20,000 6.53% series, $100 stated value............... 200,000 Not redeemable 20,000 20,000 -------- ------- Total KU cumulative preferred stock...................................... 40,000 40,000 -------- ------- $10 nominal value, 102,089 shares authorized and outstanding, (net of shares owned by affiliates) variable rate and redeemable by Inversora de Gas del Centro (Note 15).......................... -- 1,202 -------- ------- Total cumulative preferred stock................................................ 135,328 136,530 -------- -------
LONG-TERM DEBT (Note 16): Louisville Gas and Electric Company:
First mortgage bonds - Series due July 1, 2002, 7.5%................................................ 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, 7.625%........................................... 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, 5.625%............................................ 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 consolidated financial statements. 79 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Capitalization (cont.) (Thousands of $)
December 31 1999 1998 ---- ---- 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 bonds outstanding.......................................... 626,800 626,800 ----------- ----------- Kentucky Utilities Company: 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, 7.375%........................................ 4,000 4,000 Series 8, due September 15, 2016, 7.45%.................................. 96,000 96,000 Series 1B, due February 1, 2018, 6.25%................................... 20,930 20,930 Series 2B, due February 1, 2018, 6.25%................................... 2,400 2,400 Series 3B, due February 1, 2018, 6.25%................................... 7,200 7,200 Series 4B, due February 1, 2018, 6.25%................................... 7,400 7,400 Series 7, due May 1, 2020, 7.60%......................................... 8,900 8,900 Series 9, due December 1, 2023, 5.75%.................................... 50,000 50,000 Series 10, due November 1, 2024, variable................................ 54,000 54,000 ----------- ----------- Total KU bonds outstanding............................................ 546,330 546,330 ----------- ----------- LG&E Capital Corp.: Argentine negotiable obligations, due August 2001, 10.5%........................ 37,782 37,645 Note payable, due May 2003, 6.75%............................................... 313 - Medium term notes, due September 7, 2000, variable.............................. 50,000 - Medium term notes, due May 1, 2004, 6.205%...................................... 150,000 - Medium term notes, due January 15, 2008, 6.46%.................................. 150,000 150,000 Medium term notes, due November 1, 2011, 5.75%.................................. 150,000 150,000 ----------- ----------- Total Capital Corp. bonds outstanding................................. 538,095 337,645 ----------- ----------- Total bonds outstanding......................................................... 1,711,225 1,510,775 Less current portion of long-term debt.......................................... 411,810 - ----------- ----------- Long-term debt.................................................................. 1,299,415 1,510,775 ----------- ----------- Total capitalization............................................................ $ 2,576,034 $ 2,888,543 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 80 NOTES TO CONSOLIDATED 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 and 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, a subsidiary of LG&E Energy, and 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. In 1999 the Company chose to retain the natural gas gathering and processing business. Accordingly, the accompanying financial statements reflect the merchant energy trading and sales business as discontinued operations and the natural gas and processing business as continuing operations for all periods presented. See Note 3, Discontinued Operations and Note 4, Gas Facilities Business. The consolidated financial statements include the accounts of LG&E Energy, LG&E, Capital Corp., KU, LEM and their respective wholly owned subsidiaries, collectively referred to herein as the Company. LG&E Energy's operations include utility operations and non-utility operations. Capital Corp. has various subsidiaries referred to in these financial statements, including LPI, LII, WKE, and CRC. All significant intercompany items and transactions have been eliminated from the consolidated financial statements. Certain reclassification entries have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation with no impact on previously reported net income. The Company is exempt from regulation as a registered holding company under 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, 1999 and 1998. Utility gas inventories were $38.8 million and $33.5 million at December 31, 1999 and 1998, respectively. LG&E accounts for gas inventories using the average-cost method. Non-utility gas inventories as of December 31, 1999 and 1998 were $10.2 million and $5.8 million, respectively. 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 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. 81 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 were 3.4% in 1999, 1998 and 1997. The amounts provided for KU were 3.5% in 1999, 1998 and 1997. Depreciation of non-utility plant and equipment is based on the straight-line method over periods ranging from 3 to 40 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 25 years. Financial Instruments. The Company uses over-the-counter interest-rate swap agreements to hedge its exposure to interest rates. The Company also 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 7, 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. 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 exchange of KU Energy's shares for shares of LG&E Energy. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock under the Company's Omnibus Long-Term Incentive Plan and Stock Option Plan for Non-Employee Directors resulted in the issuance of common stock that then shared in the earnings of the Company. See Note 15 for more information about these plans. 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. The unbilled revenue estimates included in accounts receivable for both LG&E and KU at December 31, 1999 and 1998, were approximately $60.7 million and $54.7 million, respectively. Under an agreement approved by the Kentucky 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 82 revenue on electric and gas residential sales. In 1998, the decoupling mechanism was suspended. See Note 6, 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 Kentucky Commission-approved experimental performance-based ratemaking mechanism related to gas procurement and off-system gas sales activity in October 1997. See Note 6, 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 1999 and 1998, the following accounting pronouncements were issued that affect the Company: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 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 the Company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified all the effects of adopting SFAS No. 133 on the financial statements. However, SFAS No. 133 could increase the volatility in earnings and other comprehensive income. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133, deferred the effective date of SFAS No. 133 until January 1, 2001. EITF No. 98-10, Accounting for Energy Trading and Risk Management Activities was adopted effective January 1, 1999. The pronouncement requires that energy trading contracts to be marked 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. Adoption of EITF No. 98-10 did not have a material impact on the Company's consolidated results of operations or financial position. SOP 98-5, Reporting on the Costs of Start-Up Activities and 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. 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 were expensed as incurred. Adoption of SOP 98-1 did not have a material effect on the Company's financial statements. 83 Note 2 - Mergers and Acquisitions CRC-Evans. In July 1999, the Company purchased 100% of the outstanding common stock of CRC for initial consideration of $45.6 million and retirement of approximately $35.3 million in debt. CRC, based in Houston, Texas, is a provider of specialized equipment and services used in the construction and rehabilitation of gas and oil transmission pipelines. The purchase agreement provides for future annual earn-out payments to the previous owners based on CRC's meeting certain financial targets over the period ending March 31, 2002. The agreement caps the total of these payments at $34.3 million. The purchase consideration was paid 55% in cash and 45% in LG&E Energy common stock. LG&E Energy will repurchase common stock from time to time in the open market or through privately negotiated transactions in amounts equal to the stock portions of the initial and subsequent earn-out payments. During the third quarter 1999, the Company purchased approximately 935,000 shares in this regard and completed the initial purchase installment. The Company accounted for the acquisition using the purchase method and recorded goodwill of approximately $42.1 million. Additional goodwill will be recorded contingent upon future earn-out payments. Goodwill is being amortized over a period of twenty years. The preliminary fair values of the net assets acquired follow (in thousands of $): Assets $ 123,444 Liabilities 78,899 --------- Cash paid, excluding transaction costs 44,545 Cash and cash equivalents acquired 5,943 --------- Net cash paid, excluding transaction costs 38,602 Transaction costs 1,091 --------- Net cash paid $ 39,693 ========= The Company's pro forma results of operations for 1999 and 1998 follow (in thousands of $, except earnings per share). The results for each period assume the Company acquired CRC at the beginning of the period. 1999 1998 ---- ---- Revenues .................................... $ 2,746,477 $ 2,181,034 Net income (loss) ........................... 60,607 (77,934) Earnings (loss) per share (basic and diluted) .47 (.60) These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as additional amortization expense as a result of recorded goodwill and increased interest expense on borrowings used to finance the acquisition. The pro forma amounts presented do not purport to be indicative of the results of operations that would have actually occurred had the combination taken place as of January 1, 1998, nor are such amounts necessarily indicative of results that may occur in future periods. Argentine Gas Distribution Companies. In March 1999, the Company acquired an indirect 20% ownership interest in Gas BAN, a natural gas distribution company that serves 1.1 million customers in the northern portion of the province of Buenos Aires, Argentina. The purchase price totaled $74.3 million, including transaction costs, which has been reflected in investments in unconsolidated ventures in the accompanying balance sheet. The Company accounted for the acquisition using the purchase method, and it records its share of earnings using the equity method. The purchase price exceeded the underlying equity in Gas BAN by $13.0 million. The Company allocated this difference to the assets and liabilities acquired based on their preliminary 84 estimated fair values. In the fourth quarter of 1999, the Company made an additional net investment in Gas BAN of approximately $11.1 million. These funds were used by the Company's Argentine holding company to repay its debt. In February 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 Centro and a combined 14.4% interest in 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 fair values of the Centro and Cuyana 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 the income statement. 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. 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 ($65.3 million) 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. Pursuant to the merger, in accordance with the terms of the merger agreement, each outstanding share KU Energy Common Stock together with the associated KU Energy stock purchase rights, was converted into 1.67 shares LG&E Energy Common Stock, together with the associated LG&E Energy stock purchase rights. 85 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. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under PUHCA. 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 Kentucky 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 Kentucky 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. See Note 6 for more information about LG&E's and KU's rates and regulatory matters. 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 enabled the Company to focus on optimizing the value of physical assets it owns or controls, and reduced the earnings impact on continuing operations of extreme market volatility in its portfolio of energy marketing contracts. The Company continues to settle commitments that obligate it to buy and sell natural gas and electric power. If the Company is unable to dispose of these commitments or assets it will continue to meet its obligations under the terms of 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 WKE. As a result of the Company's decision to discontinue its merchant energy trading and sales activity, and the initial 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 resulted primarily from several fixed-price energy marketing contracts entered into in 1996 and early 1997, including the Company's long-term contract with OPC. Other components of the write-off included costs relating to certain peaking options, goodwill associated with the Company's 1995 purchase of merchant energy trading and sales operations and exit costs. At the time the Company decided to discontinue its merchant energy trading and sales business, it also decided to sell its natural gas gathering and processing business. Effective June 30, 1999, the Company decided to retain this business. The accompanying financial statements reflect the reclassification of the natural gas gathering and processing business as continuing operations for all periods presented. Approximately $800,000 of net losses charged to the loss on disposal of discontinued operations was reclassified to continuing operations in the accompanying income statement in each of 1999 and 1998 related to the natural gas gathering and processing business. See Note 4 below. 86 In the fourth quarter of 1999, the Company received an adverse decision from the arbitration panel considering its contract dispute with OPC, which was commenced by the Company in April 1998. As a result of this adverse decision, higher than anticipated commodity prices, increased load demands, and other factors, the Company increased its after-tax accrued loss on disposal of discontinued operations by $175 million. The additional write-off included costs related to the remaining commitments in its portfolio and exit costs expected to be incurred to serve those commitments. 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, there are inherent limitations in models to accurately predict future commodity prices, load demands and other events that could impact the amounts recorded by the Company. Actual operating results for each of the last three years ended December 31 for the discontinued merchant energy trading and sales business, follow (in thousands of $). 1999 1998 1997 ---- ---- ---- Revenues $ 747,983 $ 3,755,187 $ 3,147,484 Loss before taxes (175,940) (167,109) (41,989) Net loss (70,905) (109,431) (25,367) Net (liabilities) assets of the merchant energy trading and sales business at December 31, follow (in thousands of $). 1999 1998 ---- ---- Cash and temporary cash investments $ -- $ 4,671 Accounts receivable 36,558 70,775 Price risk management assets, net 29,576 98,885 Non-utility property and plant, net -- 2,037 Accounts payable and accruals (25,233) (58,526) Price risk management liabilities, net (10,262) (32,693) Other assets and liabilities, net (18,163) 37,451 --------- --------- Net assets before accrued loss on disposal of dis- continued operations 12,476 122,600 Accrued loss on disposal of discontinued operations, net of income tax benefit of $109,503 and $74,297 170,698 119,381 --------- --------- Net assets (liabilities) of discontinued operations $(158,222) $ 3,219 ========= ========= Total pretax charges against the accrued loss on disposal of discontinued operations through December 31, 1999, include $251.0 million for commitments prior to disposal, $69.6 million for transaction settlements, $11.1 million for goodwill, and $30.5 million for other exit costs. While the Company has been successful in settling portions of its discontinued operations, significant assets, operations and obligations remain. The Company continues to manage the remaining portfolio and believes it has hedged certain of its future obligations through various power purchase commitments and planned construction of physical assets. Management cannot predict the ultimate effectiveness of these hedges. The pretax net fair value of the remaining commitments as of December 31, 1999, are currently estimated to be approximately $46 million in 2000, $37 million to $54 million each year in 2001 through 2004 and $7 million in the aggregate thereafter. 87 As of December 31, 1999, the Company's discontinued operations were under various contracts to buy and sell power and gas with net notional amounts of 22.1 million Mwh's of power and 44.3 million Mmbtu's of natural gas with a volumetric weighted-average period of approximately 37 and 44 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 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. As of January 26, 2000, 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 $4.9 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 26, 2000, the Company estimates that a 1% change in the forecasted load demand could change the value of the Company's remaining energy portfolio by $8.2 million. 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, 1999, over 97% of the Company's price risk management commitments were with counterparties rated BBB equivalent or better. As of December 31, 1999, six counterparties represented 90% of the Company's price risk management commitments. Note 4 - Gas Facilities Business In June 1999, the Company reclassified its natural gas gathering and processing business to continuing operations from discontinued operations. The Company chose to retain rather than dispose of this business at the end of the one-year period established by accounting standards because of management's expectation of more favorable future natural gas and natural gas liquids prices and the related impact on this business. The Company has reflected the operating results and net assets of the natural gas gathering and processing business as continuing operations in the accompanying financial statements for all periods presented. Operating results for the natural gas gathering and processing business follow (in thousands of $): Three Six Months Months Ended Ended Mar. 31, Dec. 31, 1999 1998 ---- ---- Revenues $ 33,302 $ 48,942 Net loss (788) (852) 88 Net assets at December 31 follow (in thousands of $): 1999 1998 ---- ---- Cash and temporary cash investments $ 12,073 $ -- Accounts receivable 24,622 7,425 Non-utility property and plant, net 146,958 161,473 Accounts payable and accruals (6,274) (6,148) Goodwill and other assets and liabilities, net (29,018) (22,318) --------- --------- Net assets $ 148,361 $ 140,432 ========= ========= No loss on disposal of the net assets of the natural gas gathering and processing business was included because the Company assumed it would sell these assets for an amount at least equal to book value. It also included an after-tax reserve of approximately $1.6 million for estimated losses from operations of the natural gas gathering and processing business through the date of disposal. Since this amount equaled the estimated losses from operations included in the original accrued loss on disposal of discontinued operations, no reversal of the accrued loss was included in income for 1999. The Company has recorded no impairment losses related to the net assets of its natural gas gathering and processing business. Note 5 - Big Rivers Electric Corporation Lease In July 1998, the Company closed the transaction to lease the generating assets of Big Rivers. Under the 25-year operating lease, WKE operates Big Rivers' coal-fired facilities, a combustion turbine and operates and maintains the Station Two generating facility of Henderson. The combined generating capacity of these facilities is approximately 1,700 Mw, net of 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 1999 and 1998 was $27.9 million and $12.8 million, respectively. See Note 18, Commitments and Contingencies, for 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 three-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 began advancing Big Rivers $50 million over a 24-month period to help it emerge from bankruptcy. The note will be repaid over a three-year period, beginning August 2000, with interest at 7.165%. 89 Note 6 - 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 SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. 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 $): 1999 1998 ---- ---- Unamortized loss on bonds $ 24,150 $ 26,302 Merger costs 27,026 34,749 Manufactured gas sites 2,185 3,684 Other 1,115 1,136 --------- --------- Total regulatory assets 54,476 65,871 Deferred income taxes - net (99,759) (109,411) Other (5,036) (670) --------- --------- Total regulatory liabilities (104,795) (110,081) --------- --------- Regulatory liabilities - net $ (50,319) $ (44,210) ========= ========= Environmental Cost Recovery. In August 1994 and May 1995, respectively, KU and LG&E implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge for KU as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by LG&E and KU be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for revenues collected for such pre-1993 environmental projects. Accordingly, the Company recorded a provision for rate refunds of $26 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in the reversal of approximately $0.9 million of the provision for rate refunds established by KU and LG&E in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. Future Rate Regulation. In October 1998, LG&E and KU filed applications with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for LG&E and KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky 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 proposed ratemaking method, known as PBR, included financial 90 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 proposal provided for financial penalties and rewards to assure continued high quality service and reliability. In April 1999, LG&E and KU filed a joint agreement among the companies and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of LG&E and KU by $20 million in the first year (beginning July 1999), and by $8 million annually through June 2004. The proposed amended plan also included establishment of a $6 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E and KU. Under the rate cap proposal, the companies agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger and LG&E also agreed to refrain from filing for an increase in natural gas rates through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's and KU's amended PBR plans and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for LG&E and KU of $69.6 million and $61.5 million, respectively. In January 2000, the Kentucky Commission issued Orders for LG&E and KU in the subject cases. The Kentucky Commission ruled that LG&E and KU should reduce base rates by $27.2 million and $36.5 million, respectively, effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated the utilities' proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered the utilities the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings for each utility resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, the utilities filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to LG&E and KU of $1.1 million and $7.7 million, respectively. The utilities also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base rate reductions. Other Rate Matters. LG&E's rates contain a DSM provision. The provision includes a rate mechanism that provides concurrent recovery of DSM costs and provides an incentive for implementing DSM programs. This program had allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling), but in 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. In September 1998, the Kentucky Commission accepted LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. Since October 1997, LG&E has implemented an 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 are being determined for each 12-month period beginning November 1 and ending October 31. During the first two years of the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and $3.5 million, respectively, for its share of reduced gas costs. These amounts are billed to customers through the gas supply clause. 91 Prior to implementation of the PBR in July 1999, and following its termination in March 2000, LG&E and KU employed an FAC mechanism, which under Kentucky law allowed the utilities to recover from customers the actual fuel costs associated with retail electric sales. In February 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, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed the utilities' method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. LG&E requested that the Kentucky Commission grant rehearing on the February orders, and further requested that the Kentucky Commission stay the refund requirement until it could rule on the rehearing request. The Kentucky Commission granted the request for a stay, and in March 1999 granted rehearing on the appropriate line loss factor associated with off-system sales for the 18-month period ended April 1998. The Kentucky Commission also granted rehearing on the KIUC's request for rehearing on the Kentucky Commission's determination that it lacked authority to require the utilities to pay interest on the refund amounts. The Kentucky Commission conducted a hearing on the rehearing issues and issued a final ruling in December 1999. The Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and reduced the refund level for the 18-month period under review to approximately $800,000. LG&E implemented the refund with billings beginning in the month of January 2000. LG&E and KIUC have each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin Circuit Court. A decision on the appeals by the Court is expected in 2000. In July 1999, the Kentucky Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, in July 1999, the Kentucky Commission stayed the refund requirement pending the Kentucky Commission's final determination of any rehearing request that KU may file. In August 1999, KU filed its request for rehearing of the July orders. In August 1999, the Kentucky Commission issued a Final Order in the KU proceedings, agreeing, in part, with KU's arguments outlined in its Petition for Rehearing. While the Kentucky Commission confirmed that KU should change its method of computing the fuel costs associated with electric line losses, it agreed with KU that the line loss percentage should be based on KU's actual line losses incurred in making off-system sales rather than the percentage used in its Open Access Transmission Tariff. The Kentucky Commission also upheld its previous ruling concerning the computation of system line losses in the calculation of the FAC. The net effect of the Kentucky Commission's Final Order was to reduce the refund obligation to $5.8 million from the original Order amount of $10.1 million. In August 1999, LG&E and KU each recorded its estimated share of anticipated FAC refunds of $8.7 million. KU began implementing the refund in October and will continue the refund through September 2000. Both KU and the KIUC have appealed the Order to the Franklin Circuit Court. A decision is not expected on the appeal until later in 2000. LG&E intends to file before the end of the first quarter an application with the Kentucky Commission for authority to increase its natural gas rates in order to recoup higher costs for providing natural gas distribution services. LG&E expects implementation before the end of 2000. Kentucky PSC Administrative Case for Affiliate Transactions. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 92 segments of the holding company are not engaged in practices that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a 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 Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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 7 - Financial Instruments 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, 1999 and 1998 follow (in thousands of $):
1999 1998 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Marketable securities $ 10,562 $ 10,126 $ 20,601 $ 20,862 Long-term investments - Not practicable to estimate fair value 2,269 2,269 2,527 2,527 Preferred stock subject to mandatory redemption 25,000 24,861 25,000 26,413 Long-term debt (including current portion) 1,711,225 1,690,752 1,510,775 1,576,502 U.S. Treasury note and bond futures -- 142 -- (87) Interest rate swaps -- (2,138) -- (9,527)
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. Interest Rate Swaps. The Company enters into interest rate swap agreements to exchange fixed and variable interest rate payment obligations without the exchange of underlying principal amounts. As of December 31, 1999 and 1998, the Company was party to various interest rate swaps with aggregate notional amounts of $487.3 million and $349.3 million, respectively. Under swap agreements the Company paid fixed rates averaging 4.53% and 4.55% and received variable rates of averaging 5.61% and 4.42% at December 31, 1999 and 1998, respectively. The Company also paid variable rates averaging 6.46% and received fixed rates averaging 7.13% at December 31, 1999. The swaps mature on dates ranging from 2000 to 2025. At December 31, 1999, the Company held U.S. Treasury note and bond futures contracts with notional amounts totaling $6.1 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 2000. Note 8 - Concentrations of Credit and Other Risk Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of 93 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 295,000 customers and electricity to approximately 366,000 customers in Louisville and adjacent areas in Kentucky. KU's customer receivables and revenues arise from deliveries of electricity to about 458,000 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, 1999, 91% of total utility revenue was derived from electric operations and 9% 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 1.9 million customers in seven provinces in Argentina. WKE's receivables and revenues arise from the deliveries of electricity and generating capacity to Big Rivers for distribution to its three member distribution cooperatives and other major wholesale customers. CRC has a concentration of customers in the oil and gas pipeline construction industry, which experiences cyclical fluctuations, and its receivables are collateralized on a limited basis with negotiable letters of credit. Ten of CRC's customers were responsible for 50% of its revenues for the period July 1, 1999, through December 31, 1999. In August 1999, KU and their employees represented by IBEW Local 101 and USWA Local 8686, which represents approximately 14% of KU's workforce, entered into a one-year collective bargaining agreement. In December 1998, LG&E and IBEW Local 2100 employees, which represent approximately 60% of LG&E's workforce, entered into a three-year collective bargaining agreement. In September 1998, WKE and IBEW Local 1701 employees entered into a three-year collective bargaining agreement. CRC contracts with employees represented by applicable locals of the LIU and the UAJ-APPI on a project basis. Note 9 - Investments in Unconsolidated Ventures The Company's investments in unconsolidated ventures reflect interests in domestic and foreign electric power and steam producing plants and two of the Argentine gas distribution companies. These investments are accounted for using the equity method. 94 The fuel type, ownership percentages and carrying amounts of the unconsolidated ventures as of December 31, 1999, are summarized as follows (in thousands of $):
Carrying Fuel Type % Owned Amount --------- ------- ------ LG&E Westmoreland - Southampton Coal 50 $ 15,466 LG&E Westmoreland - Altavista Coal 50 14,345 LG&E Westmoreland - Hopewell Coal 50 12,737 Westmoreland - LG&E Partners - Roanoke Valley Coal 50 25,196 Electric Energy, Inc. (Note 18) Coal 20 2,123 LG&E Power Gregory (under construction) Gas 50 (450) Distribuidora de Gas Cuyana (Note 2) Gas 14 42,675 Gas Natural BAN, S.A. (Note 2) Gas 20 92,231 Tenaska Limited Partnerships Gas 5-10 5,842 CEC-APL L.P. Gas 49 9,138 Windpower Partners 1994 Wind 25 -- Windpower Partners 1993 Wind 50 22,158 KW Tarifa, S.A. Wind 46 7,994 -------- Total $249,455 ========
The Company's carrying amount exceeded the underlying equity in unconsolidated ventures by $39.8 million and $33.3 million at December 31, 1999 and 1998, respectively. This difference, which is being amortized, represents adjustments to reflect the fair value of the underlying net assets acquired and related goodwill. In March 1999, LG&E-Westmoreland Rensselaer, a California general partnership in which the Company owns a 50% interest, sold substantially all the assets and major contracts of its 79 Mw gas-fired cogeneration facility in Rensselaer, New York, with net proceeds to the Company of approximately $34 million. The sale resulted in an after-tax gain to the Company of approximately $8.9 million. 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 Wind 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 Windpower Partners 1994 of $3.8 million. During 1999, the Wind projects received certain amounts in connection with such bankruptcy proceedings. 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 PPA between Tenaska Washington Partners II, L.P. and the 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 MRA with 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% 95 ownership in the Rensselaer facility. As a result of these transactions, the Company recorded a $21 million, net after-tax gain in 1998. In June 1998, the Company sold half of its interest in the Gregory, Texas, project and became a 50% partner in the 550 Mw gas-fired project. The project is currently under construction and anticipated to become operational in mid-2000. 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-tax charge to 1998 earnings. Note 10 - Leveraged Leases During 1999, all of the Company's leveraged leases in which Capital Corp. owned an equity interest expired. The lessees who leased five of the turbines exercised their options to purchase resulting in pre-tax gains totaling $3.1 million. The lessee who leased the remaining three turbines allowed its leases to terminate and Capital Corp. is investigating options on the future use of these turbines. The carrying value of Capital Corp.'s investment the three remaining turbines totals $9.1 million, and the Company has reclassified this amount to Investment in Unconsolidated Ventures at December 31, 1999. See Note 9, Investment in Unconsolidated Ventures and Note 18, Commitments and Contingencies. The following is a summary of the components of Capital Corp.'s net investment in leveraged leases at December 31, 1998 (in thousands of $): Rents receivable (net of nonrecourse debt) $ 1,556 Estimated residual value of leased property 32,707 Less: unearned and deferred income 3,319 ------- Investment in leveraged leases 30,944 Less: accumulated deferred income taxes 7,301 ------- Net investment in leveraged leases $23,643 ======= See Note 14, Other Income and Deductions for income from leveraged leases. Note 11 - Marketable Securities The Company's marketable securities have been determined to be "available-for-sale" under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1999 were approximately $11.7 million, which resulted in realized gains of approximately $.7 million and losses of approximately $.2 million, calculated using the specific identification method. Proceeds from sales of available-for-sale securities in 1998 were $20 million, which resulted in realized gains of approximately $.2 million and losses of approximately $.7 million. 96 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, 1999 and 1998, follow (in thousands of $): Fixed Equity Income Total -------- -------- -------- 1999: Cost $ 7,529 $ 3,033 $ 10,562 Unrealized gains 170 3 173 Unrealized losses (498) (111) (609) -------- -------- -------- Fair values $ 7,201 $ 2,925 $ 10,126 ======== ======== ======== Fair values: No maturity $ 7,201 $ -- $ 7,201 Contractual maturities: Less than one year -- 2,134 2,134 One to five years -- 631 631 Five to ten years -- 160 160 -------- -------- -------- Total fair values $ 7,201 $ 2,925 $ 10,126 ======== ======== ======== 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 Over ten years -- 1,706 1,706 -------- -------- -------- Total fair values $ 6,816 $ 14,046 $ 20,862 ======== ======== ======== 97 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 ending December 31, 1999, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Change in benefit obligation Benefit obligation at beginning of year $ 558,641 $ 499,143 $ 432,551 Service cost 13,761 14,242 12,675 Interest cost 37,749 35,715 32,927 Plan amendments (2,311) 6,377 3,143 Acquisitions/divestitures -- (2,243) -- Curtailment (gain) or loss -- (364) -- Special termination benefits -- 23,965 -- Benefits paid (28,475) (23,823) (22,114) Actuarial (gain) or loss (57,951) 5,629 39,961 --------- --------- --------- Benefit obligation at end of year $ 521,414 $ 558,641 $ 499,143 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 550,711 $ 501,361 $ 432,612 Actual return on plan assets 102,824 70,631 81,645 Employer contributions 19,484 2,638 10,101 Benefits paid (28,475) (23,823) (22,114) Administrative expenses (2,329) (96) (883) --------- --------- --------- Fair value of plan assets at end of year $ 642,215 $ 550,711 $ 501,361 ========= ========= ========= Reconciliation of funded status Funded status $ 120,801 $ (7,930) $ 2,218 Unrecognized actuarial (gain) or loss (200,620) (96,368) (79,891) Unrecognized transition (asset) or obligation (7,839) (9,059) (10,358) Unrecognized prior service cost 40,916 47,286 48,064 --------- --------- --------- Net amount recognized at year-end $ (46,742) $ (66,071) $ (39,967) ========= ========= =========
98
1999 1998 1997 ---- ---- ---- Other Benefits: Change in benefit obligation Benefit obligation at beginning of year $ 127,593 $ 115,894 $ 106,743 Service cost 3,040 2,870 2,633 Interest cost 7,248 8,255 7,860 Plan amendments (22,236) 613 -- Acquisitions/divestitures -- 2,283 -- Curtailment (gain) or loss -- 3,584 -- Special termination benefits -- 2,855 -- Benefits paid (7,709) (5,260) (6,648) Actuarial (gain) or loss (6,599) (3,501) 5,306 --------- --------- --------- Benefit obligation at end of year $ 101,337 $ 127,593 $ 115,894 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 30,484 $ 22,192 $ 15,568 Actual return on plan assets 7,221 5,313 3,649 Employer contributions 8,650 7,056 7,577 Benefits paid (6,458) (4,077) (4,602) --------- --------- --------- Fair value of plan assets at end of year $ 39,897 $ 30,484 $ 22,192 ========= ========= ========= Reconciliation of funded status Funded status $ (61,441) $ (97,109) $ (93,702) Unrecognized actuarial (gain) or loss (31,838) (20,115) (16,730) Unrecognized transition (asset) or obligation 38,183 63,834 70,230 Unrecognized prior service cost 4,291 3,572 3,456 --------- --------- --------- Net amount recognized at year-end $ (50,805) $ (49,818) $ (36,746) ========= ========= =========
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 balance sheet and information for plans with benefit obligations in excess of plan assets as of December 31, 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Amounts recognized in the consolidated balance sheet consisted of: Accrued benefit liability $ (56,757) $ (67,126) $ (40,296) Intangible asset 301 426 281 Prepaid benefit cost 6,471 -- -- Other (300) 706 710 --------- --------- --------- Net amount recognized at year-end $ (50,285) $ (65,994) $ (39,305) ========= ========= ========= Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation (1) $ 159,131 $ 163,722 $ 138,492 Accumulated benefit obligation (2) 11,249 142,941 11,879 Fair value of plan assets (1) 141,346 111,914 102,775
(1) All years include LG&E's non-union plan, LG&E Energy's plan and the Company's unfunded SERPs. 1999 and 1998 also include WKE's union plan. (2) All years include the Company's SERPs plus in 1999 WKE's union plan and in 1998 LG&E's non-union plan, LG&E Energy's plan and WKE's union plan. 99
1999 1998 1997 ---- ---- ---- Other Benefits: Amounts recognized in the consolidated balance sheet consisted of: Accrued benefit liability $ (50,805) $ (49,818) $ (36,746) Other -- (4,421) (4,166) --------- --------- --------- Net amount recognized at year-end $ (50,805) $ (54,239) $ (40,912) ========= ========= ========= Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 101,337 $ 127,593 $ 115,894 Fair value of plan assets 44,499 30,484 22,192
The following table provides the components of net periodic benefit cost for the plans for 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Components of net periodic benefit cost Service cost $ 13,761 $ 14,242 $ 12,675 Interest cost 37,749 35,715 32,927 Expected return on plan assets (51,435) (42,278) (35,511) Amortization of prior service cost 4,059 4,421 4,133 Amortization of transition (asset) or obligation (1,220) (1,224) (1,229) Recognized actuarial (gain) or loss (2,759) (2,248) (2,854) -------- -------- -------- Net periodic benefit cost $ 155 $ 8,628 $ 10,141 ======== ======== ======== Special charges Curtailment gain $ -- $ (2,204) $ -- Prior service cost recognized -- 2,015 -- Special termination benefits -- 23,965 -- -------- -------- -------- Total charges $ -- $ 23,776 $ -- ======== ======== ======== Other Benefits: Components of net periodic benefit cost Service cost $ 3,040 $ 2,870 $ 2,633 Interest cost 7,248 8,255 7,860 Expected return on plan assets (2,302) (1,722) (1,204) Amortization of prior service cost 473 373 332 Amortization of transition (asset) or obligation 2,937 4,621 4,682 Recognized actuarial (gain) or loss (700) (467) (810) -------- -------- -------- Net periodic benefit cost $ 10,696 $ 13,930 $ 13,493 ======== ======== ======== Special charges Curtailment loss $ -- $ 2,243 $ -- Special termination benefits -- 2,855 -- -------- -------- -------- Total 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. In May 1997, $4.7 million in lump sum payments were 100 made to retired employees of KU Energy due to a change-in-control provision in the Supplemental Security Plan of the Merger Agreement. The assumptions used in the measurement of the Company's pension benefit obligation are shown in the following table:
1999 1998 1997 ---- ---- ---- Weighted-average assumptions as of December 31 Discount rate 8.00% 7.00% 7.00% Expected long-term rate of return on plan assets (1) 9.50% 8.25%-8.50% 8.25%-8.50% Rate of compensation increase (2) 5.00% 3.50%-4.00% 2.00%-4.00%
(1) All plans used 8.50% for 1998 and 1997 except KU's. (2) All plans used 4.00% for 1998 and 1997 except LG&E's union plan which used 3.50% for 1998 and 2.00% for 1997. For measurement purposes, a 7.00% annual increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 4.75% 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 (in thousands of $):
1% Decrease 1% Increase ----------- ----------- Effect on total of service and interest cost components for 1999 $ (535) $ 621 Effect on year-end 1999 postretirement benefit obligations (5,319) 6,123
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 of this matching were approximately $6.4 million, $6.0 million and $4.7 million for 1999, 1998 and 1997, respectively. Note 13 - Income Taxes Components of income tax expense are shown in the table below (in thousands of $):
1999 1998 1997 ---- ---- ---- Included in Income Taxes: Current - federal $ 91,825 $113,990 $ 88,531 - foreign 15,160 12,208 9,055 - state 22,514 23,642 19,545 Deferred - federal - net 7,173 (25,657) 10,435 - state - net 4,868 (5,267) 1,539 Deferred investment tax credit -- -- 102 Amortization of investment tax credit (8,016) (8,087) (8,378) -------- -------- -------- Total $133,524 $110,829 $120,829 ======== ======== ========
101 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $): 1999 1998 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $716,064 $683,023 Other liabilities 44,117 39,550 -------- -------- 760,181 722,573 -------- -------- Deferred tax assets: Investment tax credit 34,642 37,878 Income taxes due to customers 39,300 43,021 Deferred income 11,294 11,626 Accrued liabilities not currently deductible and other 89,065 61,945 -------- -------- 174,301 154,470 -------- -------- Net deferred income tax liability $585,880 $568,103 ======== ======== At December 31, 1999, there were $89.9 million of net operating loss carryforwards related to discontinued operations. These carryforwards, which expire in 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 December 31, 1999 and 1998, the Company recorded valuation allowances related to these deferred tax assets of $22.8 million and $25.6 million, respectively. 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:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 4.9 4.4 3.9 Effect of foreign operations including foreign tax credit .9 1.8 1.1 Investment and other tax credits (3.9) (3.6) (3.1) Nondeductible merger expenses -- 4.7 -- Other differences - net (1.4) (2.2) (0.9) ------ ------ ------ Effective income tax rate 35.5% 40.1% 36.0% ====== ====== ======
102 Note 14 - Other Income and Deductions Other income and deductions consisted of the following at December 31 (in thousands of $): 1999 1998 1997 ---- ---- ---- Income from leveraged leases $ 3,205 $ 4,273 $ 3,974 Interest and dividend income 9,803 10,552 10,159 Gains (losses) on disposals - net 3,801 (4,942) 7,083 Other 2,496 (1,783) 467 -------- -------- -------- Total other income and (deductions) $ 19,305 $ 8,100 $ 21,683 ======== ======== ======== Note 15 - Capital Stock Changes in shares of common stock outstanding are shown in the table below (in thousands). The amounts in the table have been restated to reflect the merger-related exchange of 1.67 shares of LG&E Energy common stock for each share of KU Energy common stock. 1999 1998 1997 ---- ---- ---- Outstanding January 1 129,677 129,683 129,497 Issues under the Employee Common Stock Purchase Plan ($1,613) -- -- 77 Issues under the Omnibus Long-Term Incentive Plan ($2,195) -- -- 109 Merger-related buy-back of fractional shares -- (6) -- -------- -------- -------- Outstanding December 31 129,677 129,677 129,683 ======== ======== ======== The Company's shareholders approved an increase in the Company's authorized shares of common stock from 125.0 million to 300.0 million in October 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. Pursuant to an amendment approved by the Company's shareholders in April 1999, a total of approximately 6.5 million shares, including prior issuances, of common stock may be issued 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 may be issued 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. In October 1997, the Company announced a repurchase program authorizing the repurchase of up to 1.0 million shares of its common stock to be used for, among other things, benefit and compensation plans, including the Long-Term Plan, and has funded the plans via open market purchases since that date. The Company also repurchased approximately 935,000 shares during 1999 in connection with the funding of its acquisition of CRC. 103 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, 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 Options granted and exercisable 660,641 25.75 732,080 24.11 Options exercised (20,341) 20.89 (20,341) 20.89 Options cancelled (56,481) 24.36 (28,628) 23.58 ---------- ---------- ---------- ---------- As of December 31, 1999 2,326,288 $ 23.46 1,675,500 $ 22.59 ========== ========== ========== ==========
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 on December 19, 2000. In December 1997, 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. During 1999, Inversora redeemed the remaining 102,089 shares. 104 Note 16 - Long-Term Debt Long-term debt and the current portion of long-term debt, summarized below (in thousands of $), consists primarily of first mortgage bonds and pollution control bonds issued by LG&E and KU, and medium-term notes issued by Capital Corp. Interest rates and maturities in the table below are for the amounts outstanding at December 31, 1999.
Weighted Average Stated Interest Principal Interest Rates Rate Maturities Amounts -------------- ---- ---------- ------- LG&E 5.45% - 7.63% 6.44% 2002 - 2023 $ 380,600 KU 5.75% - 8.55% 7.02% 2003 - 2027 430,830 Capital Corp. 5.75% - 10.5% 6.48% 2001 - 2011 487,985 ---- ---------- Total long-term debt 6.65% $1,299,415 ==== ========== LG&E (pollution control bonds) Variable 3.67% 2013 - 2027 $ 246,200 KU (pollution control bonds) Variable 5.40% 2024 54,000 KU (first mortgage bond) 5.95% 5.95% 2000 61,500 Capital Corp. (medium-term notes) Variable 6.48% 2000 50,110 ---- ---------- Total current portion of long-term debt 6.15% $ 411,810 ==== ==========
Under the provisions for LG&E's and KU's variable-rate pollution control bonds, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt. The average annualized interest rate for these bonds were 3.98% and 3.35% for LG&E's and KU's bonds, respectively. Maturities of long-term debt outstanding (principal amounts stated in thousands of $) at December 31, 1999, are summarized below. 2001 $ 37,873 2002 20,091 2003 104,623 2004 150,000 2005 -- Thereafter 986,828 ---------- Total $1,299,415 ========== In December 1999, LG&E notified bondholders of its intent to exercise its call option on its $20.0 million 7.50% First Mortgage Bonds due July 1, 2002. The bonds were redeemed in January 2000 utilizing proceeds from the issuance of commercial paper. In May 1999, Capital Corp. issued $150 million of medium-term notes due May 2004 with an effective rate of 6.13%. In September 1999, Capital Corp. issued $50.0 million of floating-rate notes under its medium-note program that mature in September 2000. The notes bear interest at a rate of one-month LIBOR plus 10 basis points. In November 1998, Capital Corp. issued $150 million of Reset Put Securities due 2011 with an effective rate of 5.4% through October 2001. As of November 1, 2001, the securities will be subject to automatic purchase by a 105 remarketing agent and either the interest rate will be reset or the bonds will be repurchased by Capital Corp. In June 1998, $20 million of LG&E's First Mortgage Bonds matured and were retired. In February 1998, Capital Corp. issued $150 million of medium-term notes due in January 2008, with an effective rate of 6.82%. 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. Substantially all of LG&E's and KU's utility plants are pledged as security for its First Mortgage Bonds. LG&E's 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. Note 17 - Notes Payable Capital Corp. had outstanding commercial paper of $329.5 million at December 31, 1999, at a weighted-average interest rate of 5.97%. Capital Corp. had notes payable of $365.1 million at December 31, 1998, at a weighted-average interest rate of 5.19%. LG&E's short-term financing requirements are satisfied through the sale of commercial paper. LG&E had outstanding commercial paper of $120.1 million at December 31, 1999, at a weighted-average interest rate of 6.02%. LG&E had no short-term borrowings at December 31, 1998. KU's short-term financing requirements are satisfied through the sale of commercial paper. KU had no short-term borrowings at December 31, 1999, and 1998. At December 31, 1999, the Companies had lines of credit in place totaling $900 million ($200 million for LG&E and $700 million for Capital Corp.) for which they pay commitment or facility fees. The LG&E credit facility provides support of commercial paper borrowings. 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 $395.6 million after considering the commercial paper support and approximately $51.7 million in letters of credit securing on- and off-balance sheet commitments. The Capital Corp. and LG&E credit lines will expire at various times from 2000 through 2002. Management expects to renegotiate these lines when they expire. The KU credit facilities that provided for short-term borrowing and support of commercial paper borrowing expired on December 31, 1999. 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. Note 18 - Commitments and Contingencies Construction Program The Company had commitments, primarily in connection with the construction program of LG&E and KU, 106 aggregating approximately $28 million at December 31, 1999. LG&E's construction expenditures for 2000 and 2001 are estimated to total approximately $401 million. KU's construction expenditures for the same period are estimated to total approximately $324 million. Non-utility construction expenditures for the same two-year period are estimated to be $123 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 $27.9 million and $30.7 million at December 31, 1999 and 1998, 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 $4.9 million and $7.6 million at December 31, 1999 and 1998, respectively. Projects Springfield Municipal Contract. In January 2000, LEM reached a settlement with CWLP regarding a suit previously pending before the United States District Court for the Western District of Kentucky. Pursuant to the settlement, CWLP paid LEM approximately $16.6 million, $4.0 million less than expected. The dispute involved CWLP's 1998 failure to sell electric energy to LEM pursuant to an existing contract between the parties. Monroe Project. In 1999, a subsidiary of the Company entered into an operating lease wherein it agreed to lease three combustion turbines and related facilities to be installed and constructed at a 450 Mw natural gas-fired merchant power generation plant being developed by the Company in Monroe, Georgia. The lease has a five year term, but no rent is payable until the turbines have been completed and installed, currently anticipated in June 2001. At the end of the lease term, the Company may purchase the leased assets or assist the lessor in selling them. If the assets are sold, the Company is obligated to make up any deficiency between the lease balance and the proceeds subject to a cap. The total value of assets under the lease is expected to be approximately $175 million. Texas Project. In October 1999, a subsidiary of the Company entered into an initial agreement to purchase six natural gas combustion turbines and is negotiating terms of a definitive agreement. In connection therewith, the Company is pursuing initial development of a possible 1,600 Mw generation facility in Anderson County, Texas. Should the plant be developed as presently planned, the aggregate cost is estimated to be approximately $790 million, portions of which may be independently financed or shared with eventual outside partners. Roanoke Valley I. The Company owns a 50% interest in WLP, the owner of the Roanoke Valley I facility which sells electric power to VEPCO pursuant to a PPA. From May 1994 through December 1999, VEPCO withheld approximately $19.8 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 to the Supreme Court of Virginia regarding the Circuit Court decision. Appellate briefs were filed by the parties during1999 and a hearing was held in January 2000. A decision is anticipated in the first half of 2000. Pending resolution of all appeals by VEPCO, the Company has not recognized any income on its 50% portion of the capacity payments 107 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. Southampton. In October 1998, LG&E-Westmoreland Southampton and VEPCO entered into a settlement agreement which resolved issues pending before the FERC regarding the status of the Southampton as a QF under PURPA 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. In December 1999, the Company settled with one of its partners regarding its claims and is currently negotiating these matters with the remaining partner. The Company does not believe that the disputes with its partners, including the settlement already achieved with the one partner, will have a material adverse effect on its results of operations or financial condition. Gregory Project. 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. Windpower Partners 1994. WPP 94 is a windpower generation facility in Texas, in which the Company has a 25% interest. Since September 1997 WPP 94 has not made its semiannual payments, due in March and September each year, to Hancock under certain Notes issued by WPP 94 to Hancock. WPP 94 and Hancock have entered into cash sweep and standstill agreements, with the standstill term currently extended through March 2001, regarding the Notes and 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 wrote off its aggregate investment in WPP94 in 1998 and does not expect the ultimate resolution of this matter to have a material effect on its results of operations or financial condition. Kenetech Bankruptcy. In May 1996, 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 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 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 April 1999, the Bankruptcy Court approved a final plan of reorganization. Three initial distributions pursuant to the Plan were made during 1999 108 of which the Company's share was approximately $7.45 million, which funds were primarily used directly by the projects to pay unpaid interest and principal on debt of the projects and legal fees. The WPP93 and WPP94 projects are discussing a restructuring of their debt with their creditors, including certain revisions to ownership structure and operating arrangements. Final bankruptcy plan distributions and completion of the project restructurings are currently anticipated during the second quarter of 2000. While the Company is unable to predict the outcome of these events, it does not expect the ultimate resolution of the bankruptcy or the restructurings to have a material adverse effect on its results of operations or financial condition. 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 continued during 1999. 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. Operating Leases The Company leases office space, office equipment and vehicles and accounts for these leases as operating leases. See also Note 5 for discussion of the Big Rivers Electric Corporation operating lease. Total lease expense for 1999, 1998 and 1997, was $37.1 million, $21.7 million and $6.7 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1999, are as follows (in thousands of $): 2000 $ 19,574 2001 42,735 2002 47,605 2003 46,896 2004 216,448 Thereafter 593,028 -------- Total $966,286 ======== Future minimum annual lease payments have been reduced by rental payments to be received from noncancelable subleases of approximately $1.9 million in 2000, and $1.3 million in 2001. In December 1999, LG&E and KU entered into an 18-year cross-border lease of its two combustion turbines recently installed at KU's Brown facility. The utilities' obligations were defeased upon consummation of the cross-border lease. The transaction produced a pre-tax gain of approximately $3.1 million which has been deferred pending resolution of rate treatment by the Kentucky Commission. LG&E Power Monroe LLC, a subsidiary of Capital Corp., entered into a five-year operating lease expiring on December 31, 2004, to finance the purchase and construction of a 450-Mw gas-fired peaking facility in Monroe, Georgia. No lease payments are due during construction and payments will be based on commercial paper rates upon completion of the plant. Currently, the plant is expected to be completed by mid-2001. The cost of the leased assets is expected to total approximately $175 million. 109 Environmental The Act imposed stringent new SO2 and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units, while KU met its Phase I SO2 requirements primarily through installation of a scrubber on Ghent Unit 1. The Company's combined strategy for Phase II, commencing January 1, 2000, 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 NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all LG&E and KU stations in the eastern half of Kentucky. Additional petitions currently pending before EPA may potentially result in orders encompassing the remaining KU and WKE stations. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states implement the final regulatory mandate. However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, and 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, analysis, and the outcome of pending litigation against the EPA, the Company estimates that it may incur approximate capital costs for NOx compliance ranging from $300 million to reduce emissions to the level of 0.25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $550 million to reduce emissions to the level of 0.15 lb./Mmbtu (current EPA regulations). 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 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. The Company is also addressing other air quality issues. First, the Company is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. The Company continues to monitor EPA actions to challenge that ruling. Second, the Company was notified by regulatory agencies that the Cane Run Station may be the source of a potential exceedance of the NAAQS that could require the Company to incur additional capital expenditures or accept certain emissions limitations. After reviewing additional modeling information submitted by the Company, in January 2000, EPA concluded that the Cane Run Station does not contribute to any potential NAAQS exceedance and that no further action is required from the Company. Third, the Company is working with regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate emissions from its Mill Creek Station. The Company previously settled a number of property damage claims from adjacent residents and completed significant plant modifica- 110 tions as part of its ongoing capital construction program. The Company owns or formerly owned several properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. The Company has completed the cleanup of a site owned by KU and reached agreements for other parties to assume cleanup responsibility for two other sites formerly owned by LG&E. In addition, the Company recently reached an agreement with the Kentucky Division of Waste Management with respect to a third LG&E-owned site in which the Company committed to impose certain property restrictions and conduct additional monitoring in lieu of a cleanup. Based on currently available information, management estimates that it will incur additional MGP costs of less than $500,000. Accordingly, an accrual of $500,000 has been recorded in the accompanying financial statements. With respect to other former MGP sites no longer owned by the Company, the Company is unable to determine what, if any, additional exposure or liability it may have as it lacks complete information on current site conditions. In October 1999, approximately 38,000 gallons of diesel fuel leaked from a cracked valve in an underground pipeline at KU's E.W. Brown Station. Under the oversight of EPA and state officials, the Company commenced immediate spill containment and recovery measures which prevented the spill from reaching the Kentucky River. The Company ultimately recovered approximately 34,000 gallons of diesel fuel. In November 1999, the Kentucky Division of Water issued a notice of violation for the incident. The Company is currently negotiating with the state in an effort to reach a complete resolution of this matter. To date the Company has incurred costs of approximately $1 million. The Company does not expect to incur any material additional amounts. Purchased Power KU has purchase power arrangements with OMU, 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 2000-2004, which is expected to be approximately 7% 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 $172 million of OMU bonds outstanding at December 31, 1999. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 46% in 1999. 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. See Note 9. KU has several other contracts for purchased power during 2000 - 2004 of various Mw capacities and for varying periods with a maximum entitlement at any time of 62 Mw. 111 The estimated future minimum annual payments under purchased power agreements for the five years ended December 31, 2004, are as follows (in thousands of $): 2000 $ 28,765 2001 31,495 2002 30,683 2003 30,947 2004 31,155 -------- Total $153,045 ======== 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 Kentucky 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, IMEA owns a 12.12% undivided interest, and 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 60.00 495.00 (in thousands of $): Cost $546,497 Accumulated depreciation 140,972 -------- Net book value $405,525 ======== Construction work in progress (included above) $673
Note 20 - Segments of Business and Related Information Effective December 31, 1998, the Company adopted SFAS 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 its non-utility operations, including its Power Operations, WKE, Argentine gas distribution and other. 112 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 (sold in February 1999), and its investment in the Tarifa project in Spain. The Company acquired its interest in Gas BAN in March 1999, and it acquired its interests in Centro and Cuyana in February 1997. Financial data for business segments, revenues by product, and long-lived assets by geographic area follow (in thousands of $):
Utility Operations Non-Utility Operations -------------------------------- ------------------------------------------- Inde- Argentine Elim. pendent Western Gas Adj. LG&E LG&E KU Power Kentucky Distri- and Consol- Year Electric Gas Electric Operations Energy bution Other Corp. idated - ---- -------- --- -------- ---------- ------ ------ ----- ----- ------ 1999 Revenues $ 790,670 $ 177,579 $ 937,310 $ 24,713 $ 333,785 $ 156,249 $329,552 $ (42,582) $2,707,276 Depreciation and amortization 83,619 13,602 89,922 2,893 3,850 9,964 14,081 1,387 219,318 Interest income 2,898 536 5,001 10,297 1,326 -- 10,746 (21,001) 9,803 Interest expense 35,384 6,427 41,860 -- 5,429 16,315 44,399 (17,748) 132,066 Equity in unconsolidated ventures -- -- -- 40,897 -- 8,820 -- -- 49,717 Income taxes 57,389 891 58,019 21,388 4,041 10,943 (9,281) (9,866) 133,524 Income (loss) from continuing operations 100,598 1,171 104,302 20,475 13,385 12,173 (2,266) (13,575) 236,263 Total assets 1,821,849 349,604 1,785,090 98,327 188,421 437,764 403,851 48,851 5,133,757 Construction expenditures 160,844 33,800 181,341 669 12,227 28,343 86,756 (121,349) 382,631
Utility Operations Non-Utility Operations ---------------------------------- ------------------------------------------- Inde- Argentine Elim. pendent Western Gas Adj. LG&E LG&E KU Power Kentucky Distri- and Consol- Year Electric Gas Electric Operations Energy bution Other Corp. idated - ---- -------- --- -------- ---------- ------ ------ ----- ----- ------ 1998 Revenues $ 658,510 $ 191,545 $ 810,114 $ 24,157 $ 128,519 $ 148,162 $155,039 $ (29,800) $2,086,246 Depreciation and amortization 79,867 13,312 86,657 4,633 1,345 8,973 10,792 871 206,450 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 27,694 (15,308) 109,389 Equity in unconsolidated ventures -- -- -- 71,297 -- 2,501 -- -- 73,798 Merger costs 32,073 -- 21,830 -- -- -- -- 11,415 65,318 Income taxes 48,415 (152) 49,444 24,432 2,442 10,030 (6,315) (17,467) 110,829 Income (loss) from continuing operations 71,536 2,016 70,508 41,608 3,592 5,752 (9,802) (26,538) 158,672 Total assets 1,734,221 332,789 1,746,209 163,663 176,166 346,305 175,661 148,104 4,823,118 Construction expenditures 105,837 32,509 91,992 4,242 17,549 14,977 70,892 5,630 343,628
113
Utility Operations Non-Utility Operations -------------------------------- ------------------------------------------- Inde- Argentine Elim. pendent Western Gas Adj. LG&E LG&E KU Power Kentucky Distri- and Consol- Year Electric Gas Electric Operations Energy bution Other Corp. idated - ---- -------- --- -------- ---------- ------ ------ ----- ----- ------ 1997 Revenues $ 615,159 $ 231,011 $ 716,410 $ 19,622 $ -- $ 127,182 $123,362 $ -- $1,832,746 Depreciation and amortization 79,958 13,062 84,111 1,287 -- 7,569 7,426 478 193,891 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 -- 7,264 613 (11,084) 120,829 Income (loss) from continuing operations 104,349 4,339 83,457 17,795 -- 4,860 (138) (6,299) 208,363 Total assets 1,728,761 325,864 1,676,436 214,952 -- 340,144 76,287 257,746 4,620,190 Construction expenditures 81,713 29,180 94,006 45 -- 4,369 15,730 671 225,714
Revenue By Product: Asset-Based Retail Retail Energy Year Electric Gas Marketing Other Totals - ---- -------- --- --------- ----- ------ 1999 $1,220,048 $333,828 $826,446 $326,954 $2,707,276 1998 1,189,185 339,707 390,567 166,787 2,086,246 1997 1,173,275 358,193 158,294 142,984 1,832,746 Long-Lived Assets By Geographic Area: Inter- Year Domestic national Totals - ---- -------- -------- ------ 1999 $4,011,839 $416,199 $4,428,038 1998 3,876,640 299,444 4,176,084 1997 3,647,358 360,106 4,007,464 114 Note 21 - Selected Quarterly Data (Unaudited) Selected financial data for the four quarters of 1999 and 1998 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 ----- ---- --------- -------- 1999 Revenues $ 599,265 $ 623,657 $ 865,390 $ 618,964 Operating income 117,364 111,689 172,163 93,379 Net income (loss): Continuing operations 56,779 49,965 87,166 42,353 Gain (loss) on disposal of discontinued operations 788 -- -- (175,000) --------- --------- --------- --------- Total 57,567 49,965 87,166 (132,647) Earnings per share of common stock (basic and diluted): Continuing operations .44 .39 .67 .33 Gain on disposal of discon- tinued operations -- -- -- (1.35) --------- --------- --------- --------- Total .44 .39 .67 (1.02) 1998 Revenues $ 480,564 $ 472,188 $ 629,176 $ 504,318 Operating income 94,669 73,534 157,361 55,679 Net income (loss): Continuing operations 46,218 13,003 78,854 20,597 Discontinued operations (3,050) (19,802) -- -- Gain (loss) on disposal of dis- continued operations -- (225,000) 658 194 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) (.16) -- -- Loss on disposal of discon- tinued operations -- (1.73) -- -- Cumulative effect of account- ing change (.06) -- -- -- --------- --------- --------- --------- Total .28 (1.79) .61 .16 115 Note 22 - Subsequent Events On February 28, 2000, the Company announced that its Board of Directors accepted an offer to be acquired by PowerGen for cash of approximately $3.2 billion or $24.85 per share and the assumption of $2.2 billion of the Company's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction resulting in the Utility Operations' obligation to continue to file SEC reports. The acquisition is expected to close 9 to 12 months from the announcement, shortly after all of the conditions to consummation of the acquisition are met. Those conditions include, without limitation, the approval of the holders of a majority of the outstanding shares of common stock of each of LG&E Energy and PowerGen, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the FERC under the FPA, the approval of the SEC under the PUHCA of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Shareholder meetings to vote upon the approval of the acquisition are expected to be held during the second quarter of 2000 for both LG&E Energy and PowerGen. During the first quarter of 2000, the Company expensed approximately $1.0 million relating to the PowerGen transaction. The foregoing description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. On March 3, 2000, the U.S. Court of Appeals for the Washington D.C. Circuit issued a final opinion upholding the NOx SIP call rule requiring electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu by May 2003. Some of the litigants will likely seek further judicial review of the ruling. In March 2000, the Virginia Supreme Court, remanded the Company's case against VEPCO, pertaining to capacity payments withheld from its Roanoke Valley I joint venture, for a new trial. Since the Company has not recognized any revenue in its financial statements the remand to the trial court will have no adverse effect on the Company's financial results. In the first quarter of 2000, the Company will take a restructuring charge of approximately $15 million pre-tax relating to the reduction of approximately 250 positions and the integration of LG&E's and KU's operations, including combining retail gas and electric operations, consolidation of customer service centers and the redesigning various other processes. The Kentucky Commission responded to the motions filed by the utilities for computational and other errors made in Orders received on base rate reductions in February 2000 by reducing KU's annual revenue reductions by $2.5 million and granting rehearings for LG&E and KU on other issues. 116 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, 1999, 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. 117 LG&E Energy Corp. and Subsidiaries 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 26, 2000 (Except with respect to the matters discussed in Note 22, as to which the date is March 3, 2000.) 118 Louisville Gas and Electric Company Statements of Income (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- OPERATING REVENUES: Electric ......................................................... $ 792,405 $ 663,011 $ 614,532 Gas .............................................................. 177,579 191,545 231,011 Provision for rate refunds (Note 3) .............................. (1,735) (4,500) -- --------- --------- --------- Net operating revenues (Note 1) ............................... 968,249 850,056 845,543 --------- --------- --------- OPERATING EXPENSES: Fuel for electric generation ..................................... 159,129 154,683 149,463 Power purchased .................................................. 169,573 50,176 17,229 Gas supply expenses .............................................. 114,745 125,894 158,929 Other operation expenses ......................................... 154,667 163,584 150,750 Maintenance ...................................................... 58,119 52,786 47,586 Depreciation and amortization .................................... 97,221 93,178 93,020 Federal and state income taxes (Note 8) .......................... 57,774 56,307 64,081 Property and other taxes ......................................... 16,930 17,925 16,299 --------- --------- --------- Total operating expenses ...................................... 828,158 714,533 697,357 --------- --------- --------- Net operating income ................................................. 140,091 135,523 148,186 Merger costs (Note 2) ................................................ -- 32,072 -- Other income and (deductions) (Note 9) ............................... 4,141 10,991 4,277 Interest charges ..................................................... 37,962 36,322 39,190 --------- --------- --------- Net income ........................................................... 106,270 78,120 113,273 Preferred stock dividends ............................................ 4,501 4,568 4,585 --------- --------- --------- Net income available for common stock ................................ $ 101,769 $ 73,552 $ 108,688 ========= ========= =========
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Balance January 1 .................................................... $ 247,462 $ 258,910 $ 209,222 Add net income ....................................................... 106,270 78,120 113,273 --------- --------- --------- 353,732 337,030 322,495 --------- --------- --------- Deduct: Cash dividends declared on stock: 5% cumulative preferred ................................. 1,075 1,075 1,075 Auction rate cumulative preferred ....................... 1,957 2,024 2,041 $5.875 cumulative preferred ............................. 1,469 1,469 1,469 Common .................................................. 90,000 85,000 59,000 --------- --------- --------- 94,501 89,568 63,585 --------- --------- --------- Balance December 31 .................................................. $ 259,231 $ 247,462 $ 258,910 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 119 Louisville Gas and Electric Company Statements of Comprehensive Income (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Net income available for common stock ................................ $ 101,769 $ 73,552 $ 108,688 Unrealized holding losses on available-for-sale securities arising during the period ........................................ (402) (14) (426) Reclassification adjustment for realized gains on available-for-sale securities included in net income ............. -- -- 188 --------- --------- --------- Other comprehensive income (loss) before tax ......................... (402) (14) (238) Income tax (expense) benefit related to items of other comprehensive income ............................................. 163 (18) 119 --------- --------- --------- Comprehensive income ................................................. $ 101,530 $ 73,520 $ 108,569 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 120 Louisville Gas and Electric Company Balance Sheets (Thousands of $)
December 31 1999 1998 ---------- ---------- ASSETS: Utility plant, at original cost: Electric ................................................................................. $2,396,707 $2,268,860 Gas ...................................................................................... 365,128 339,647 Common ................................................................................... 141,009 131,271 ---------- ---------- 2,902,844 2,739,778 Less: reserve for depreciation .......................................................... 1,215,032 1,144,123 ---------- ---------- 1,687,812 1,595,655 Construction work in progress ............................................................ 162,995 156,361 ---------- ---------- 1,850,807 1,752,016 ---------- ---------- Other property and investments - less reserve ................................................ 1,224 1,154 Current assets: Cash and temporary cash investments ...................................................... 54,761 31,730 Marketable securities (Note 6) ........................................................... 6,936 17,851 Accounts receivable - less reserve of $1,233 in 1999 and $1,399 in 1998 .................. 113,859 142,580 Materials and supplies - at average cost: Fuel (predominantly coal) ............................................................. 17,350 23,993 Gas stored underground ................................................................ 38,780 33,485 Other ................................................................................. 35,010 33,103 Prepayments and other .................................................................... 2,775 2,285 ---------- ---------- 269,471 285,027 ---------- ---------- Deferred debits and other assets: Unamortized debt expense ................................................................. 5,607 5,919 Regulatory assets (Note 3) ............................................................... 31,443 37,643 Other .................................................................................... 12,900 22,878 ---------- ---------- 49,950 66,440 ---------- ---------- $2,171,452 $2,104,637 ========== ========== CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity ............................................................................ $ 683,376 $ 671,846 Cumulative preferred stock ............................................................... 95,328 95,328 Long-term debt (Note 10) ................................................................. 380,600 626,800 ---------- ---------- 1,159,304 1,393,974 ---------- ---------- Current liabilities: Current portion of long-term debt ........................................................ 246,200 -- Notes payable ............................................................................ 120,097 -- Accounts payable ......................................................................... 113,008 133,673 Provision for rate refunds ............................................................... 8,962 13,261 Dividends declared ....................................................................... 24,236 23,168 Accrued taxes ............................................................................ 23,759 31,929 Accrued interest ......................................................................... 9,265 8,038 Other .................................................................................... 15,725 15,242 ---------- ---------- 561,252 225,311 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 8) ........................................ 255,910 254,589 Investment tax credit, in process of amortization ........................................ 67,253 71,542 Accumulated provision for pensions and related benefits (Note 7) ......................... 38,431 59,529 Customers' advances for construction ..................................................... 11,104 10,848 Regulatory liability (Note 3) ............................................................ 58,726 63,529 Other .................................................................................... 19,472 25,315 ---------- ---------- 450,896 485,352 ---------- ---------- Commitments and contingencies (Note 12) $2,171,452 $2,104,637 ========== ==========
The accompanying notes are an integral part of these financial statements. 121 Louisville Gas and Electric Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................... $ 106,270 $ 78,120 $ 113,273 Items not requiring cash currently: Depreciation and amortization ................................. 97,221 93,178 93,020 Deferred income taxes - net ................................... (5,279) 2,747 (3,495) Investment tax credit - net ................................... (4,289) (4,258) (4,240) Other ......................................................... 6,924 5,534 4,640 Change in certain net current assets: Accounts receivable ........................................... 28,721 (17,708) (9,728) Materials and supplies ........................................ (559) 423 (8,492) Accounts payable .............................................. (20,665) 34,779 1,416 Provision for rate refunds .................................... (4,299) 13 (4,263) Accrued taxes ................................................. (8,170) 13,206 6,741 Accrued interest .............................................. 1,227 22 (1,978) Prepayments and other ......................................... (7) 976 1,333 Other ............................................................ (16,602) 18,679 (3,188) --------- --------- --------- Net cash flows from operating activities ...................... 180,493 225,711 185,039 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities .......................................... (1,144) (17,397) (18,529) Proceeds from sales of securities ................................ 11,662 18,841 2,544 Construction expenditures ........................................ (194,644) (138,345) (110,893) --------- --------- --------- Net cash flows from investing activities ...................... (184,126) (136,901) (126,878) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowing ............................................. 120,097 -- -- Issuance of first mortgage bonds and pollution control bonds ..... -- -- 69,776 Retirement of first mortgage bonds and pollution control bonds ... -- (20,000) (71,693) Payment of dividends ............................................. (93,433) (87,552) (62,564) --------- --------- --------- Net cash flows from financing activities ...................... 26,664 (107,552) (64,481) --------- --------- --------- Change in cash and temporary cash investments ........................ 23,031 (18,742) (6,320) Cash and temporary cash investments at beginning of year ............. 31,730 50,472 56,792 --------- --------- --------- Cash and temporary cash investments at end of year ................... $ 54,761 $ 31,730 $ 50,472 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes .................................................. $ 76,761 $ 40,334 $ 63,421 Interest on borrowed money .................................... 33,507 34,245 39,582
The accompanying notes are an integral part of these financial statements. 122 Louisville Gas and Electric Company Statements of Capitalization (Thousands of $)
December 31 1999 1998 ---- ---- 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 (loss) on marketable securities, net of income taxes ($128) in 1999 and $34 in 1998 (Note 6) ....................... (189) 50 Retained earnings ...................................................... 259,231 247,462 ---------- ---------- 683,376 671,846 ---------- ----------
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................................. 250,000 104.70 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 bonds outstanding...................................................... 626,800 626,800 Less current portion of long-term debt....................................... 246,200 -- ---------- ---------- Long-term debt............................................................... 380,600 626,800 ---------- ---------- Total capitalization......................................................... $1,159,304 $1,393,974 ========== ==========
The accompanying notes are an integral part of these financial statements. 123 Louisville Gas and Electric Company Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies LG&E is a subsidiary of 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, KU, Capital Corp., and LEM. 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 1999 were 3.4% (3.2% electric, 3.2% gas, and 7.1% common); for 1998 were 3.4% (3.2% electric, 3.4% gas, and 7.4% common); and for 1997 were 3.4% (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 $38.8 million and $33.5 million at December 31, 1999 and 1998, 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. LG&E also uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized losses on marketable securities in common equity and then charged or credited to other income and deductions when the securities are sold. See Note 4, Financial Instruments. In connection with LG&E's marketing of power from owned generation assets, exchange traded futures are used to hedge its exposure to price risk. Gains and losses on these futures contracts are reflected in other income and deductions, but are immaterial to LG&E's results of operations. At December 31, 1999, the value of these futures contracts was not material to LG&E's financial position. Debt Expense. Debt expense is amortized over the lives of the related bond issues, consistent with regulatory practices. 124 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. The unbilled revenue estimates included in accounts receivable for LG&E at December 31, 1999 and 1998, were approximately $31.1 million and $25.1 million, respectively. Under an agreement approved by the Kentucky 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 Kentucky Commission-approved experimental performance-based ratemaking mechanism related to gas procurement and off-system gas sales activity in October 1997. 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 1999 and 1998, the following accounting pronouncements were issued that affect LG&E: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 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 LG&E must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. LG&E has not yet quantified all the effects of adopting SFAS No. 133 on the financial statements. However, SFAS No. 133 could increase the volatility in earnings and other comprehensive income. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133, deferred the effective date of SFAS No. 133 until January 1, 2001. EITF No. 98-10, Accounting for Energy Trading and Risk Management Activities was adopted effective January 1, 1999. The pronouncement requires that energy trading contracts to be marked 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. Adoption of EITF No. 98-10 did not have a material impact on LG&E's consolidated results of operations or financial position. SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Adopted 125 as of 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 were expensed as incurred. Adoption of SOP 98-1 did not have a material effect on LG&E's financial statements. 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, the 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 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 ($32.1 million) 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 preferred stock and debt securities of LG&E were not affected by the merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under PUHCA. 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 Kentucky 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 such savings, be applied to reduce customer rates through a surcredit on customers' bills and the remaining 50% be retained by the companies. The Kentucky 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. Any fuel cost savings are passed to Kentucky customers through the companies' fuel adjustment clauses. See Note 3 for more information about LG&E's rates and regulatory matters. 126 Note 3 - 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 and the Kentucky Commission. LG&E is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. 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 LG&E's balance sheets as of December 31 (in thousands of $): 1999 1998 ---- ---- Unamortized loss on bonds $ 16,556 $ 17,627 Merger costs 12,702 16,332 Manufactured gas sites 2,185 3,684 -------- -------- Total regulatory assets 31,443 37,643 -------- -------- Deferred income taxes - net (56,767) (63,529) Deferred net gain (1,959) -- -------- -------- Total regulatory liabilities (58,726) (63,529) -------- -------- Regulatory liabilities - net $(27,283) $(25,886) ======== ======== Environmental Cost Recovery. In May 1995, LG&E implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge for KU as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by LG&E be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for revenues collected for such pre-1993 environmental projects. Accordingly, LG&E recorded a provision for rate refunds of $4.5 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in the additional accrual of approximately $.6 million to what had been recorded in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. Future Rate Regulation. In October 1998, LG&E filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide continued financial incentives for LG&E to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky Commission directed LG&E to indicate whether they desired to remain under traditional rate of return regulation or commence non-traditional regulation. The proposed ratemaking method, known as PBR, included financial incentives for LG&E to reduce fuel costs and increase generating efficiency, and to share any resulting savings 127 with customers. Additionally, the PBR proposal provided for financial penalties and rewards to assure continued high quality service and reliability. In April 1999, LG&E filed a joint agreement with KU and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of LG&E by $9.4 million in the first year (beginning July 1999), and by $3.8 million annually through June 2004. The proposed amended plan also included establishment by LG&E of a $2.8 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E and KU. Under the rate cap proposal LG&E agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger and LG&E also agreed to refrain from filing for an increase in natural gas rates through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's amended PBR plan and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for LG&E of $69.6 million. In January 2000, the Kentucky Commission issued an Order for LG&E in the subject cases. The Kentucky Commission ruled that LG&E should reduce base rates by $27.2 million effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated the proposal to operate under its PBR plan and reinstated the fuel adjustment clause mechanism effective March 1, 2000. The Kentucky Commission offered LG&E the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, LG&E filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to LG&E of $1.1 million. LG&E also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base rate reductions. Other Rate Matters. LG&E's rates contain a DSM provision. The provision includes a rate mechanism that provides concurrent recovery of DSM costs and provides an incentive for implementing DSM programs. This program had allowed LG&E to recover revenues from lost sales associated with the DSM program (decoupling), but in 1998, LG&E and customer interest groups requested an end to the decoupling rate mechanism. In September 1998, the Kentucky Commission accepted LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. Since October 1997, LG&E has implemented an 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 two years of the mechanism ended October 31, 1999 and 1998, LG&E recorded $2.2 million and $3.5 million, respectively, for its share of reduced gas costs. These amounts are billed to customers through the gas supply clause. 128 Prior to implementation of the PBR in July 1999, and following its termination in March 2000, LG&E employed a FAC mechanism, which under Kentucky law allowed LG&E to recover from customers, the actual fuel costs associated with retail electric sales. In February 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, of which $1.9 million was refunded in April 1999 for the period beginning November 1994 and ending October 1996. The orders changed LG&E's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC. LG&E requested that the Kentucky Commission grant rehearing on the February orders, and further requested that the Kentucky Commission stay the refund requirement until it could rule on the rehearing request. The Kentucky Commission granted the request for a stay, and in March 1999 granted rehearing on the appropriate line loss factor associated with off-system sales for the 18-month period ended April 1998. The Kentucky Commission also granted rehearing on the KIUC's request for rehearing on the Kentucky Commission's determination that it lacked authority to require LG&E to pay interest on the refund amounts. The Kentucky Commission conducted a hearing on the rehearing issues and issued a final ruling in December 1999. The Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and reduced the refund level for the 18-month period under review to approximately $800,000. LG&E implemented the refund with billings in the month of January 2000. LG&E has filed an appeal from the Kentucky Commission's February 1999 orders with the Franklin Circuit Court. A decision on the appeals by the Court is expected in 2000. LG&E intends to file before the end of the first quarter an application with the Kentucky Commission for authority to increase its natural gas rates in order to recoup higher costs for providing natural gas distribution services. LG&E expects implementation before the end of 2000. Kentucky PSC Administrative Case for Affiliate Transactions. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a 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 Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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. 129 Note 4 - Financial Instruments The cost and estimated fair values of LG&E's non-trading financial instruments as of December 31, 1999 and 1998 follow (in thousands of $): 1999 1998 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Marketable securities $ 7,253 $ 6,936 $ 17,767 $ 17,851 Long-term investments - Not practicable to estimate fair value 746 746 748 748 Preferred stock subject to mandatory redemption 25,000 24,861 25,000 26,413 Long-term debt (including current portion) 626,800 623,498 626,800 648,603 U.S. Treasury note and bond futures -- 81 -- (50) Interest-rate swaps -- 1,666 -- (7,378) 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. Interest Rate Swaps. LG&E enters into interest rate swap agreements to exchange variable interest rate payments obligations without the exchange of underlying principal amounts. As of December 31, 1999 and 1998, LG&E was party to various interest rate swaps with aggregate notional amounts of $234.3 million and $249.3 million, respectively. Under swap agreements LG&E paid fixed rates averaging 3.80% and 3.89% and received variable rates of averaging 5.46% and 4.00% at December 31, 1999 and 1998, respectively. The swaps mature on dates ranging from 2001 to 2020. At December 31, 1999, LG&E held U.S. Treasury note and bond futures contracts with notional amounts totaling $3.5 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 2000. 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 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 295,000 customers and electricity to approximately 366,000 customers in Louisville and adjacent areas in Kentucky. For the year ended December 31, 1999, 82% of total revenue was derived from electric operations and 18% from gas operations. In December 1998, LG&E and IBEW Local 2100 employees, which represent approximately 60% of LG&E's workforce, entered into a three-year collective bargaining agreement. 130 Note 6 - Marketable Securities LG&E's marketable securities have been determined to be "available-for-sale" under the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1999 were approximately $11.7 million, which resulted in an immaterial net realized gain, calculated using the specific identification method. Proceeds from sales of available-for-sale securities in 1998 were approximately $18.8 million, which resulted in immaterial realized gains and losses. 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, 1999 and 1998, follow (in thousands of $): Fixed Equity Income Total ------ ------ ----- 1999: Cost $ 4,385 $ 2,868 $ 7,253 Unrealized gains 90 3 93 Unrealized losses (304) (106) (410) -------- -------- -------- Fair values $ 4,171 $ 2,765 $ 6,936 ======== ======== ======== Fair values: No maturity $ 4,171 $ -- $ 4,171 Contractual maturities: Less than one year -- 2,134 2,134 One to five years -- 631 631 -------- -------- -------- Total fair values $ 4,171 $ 2,765 $ 6,936 ======== ======== ======== 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 Over ten years -- 1,532 1,532 -------- -------- -------- Total fair values $ 3,979 $ 13,872 $ 17,851 ======== ======== ======== 131 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, 1999, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Change in benefit obligation Benefit obligation at beginning of year $ 311,935 $ 274,095 $ 229,349 Service cost 5,005 6,333 5,214 Interest cost 21,014 19,873 17,629 Plan amendments (2,397) 3,724 3,085 Curtailment (gain) or loss -- (2,218) -- Special termination benefits -- 18,295 -- Benefits paid (15,471) (10,866) (8,735) Actuarial (gain) or loss (36,819) 2,699 27,553 --------- --------- --------- Benefit obligation at end of year $ 283,267 $ 311,935 $ 274,095 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 308,660 $ 280,238 $ 238,026 Actual return on plan assets 51,995 38,913 46,078 Employer contributions 14,911 375 4,869 Benefits paid (15,471) (10,866) (8,735) --------- --------- --------- Fair value of plan assets at end of year $ 360,095 $ 308,660 $ 280,238 ========= ========= ========= Reconciliation of funded status Funded status $ 76,828 $ (3,275) $ 6,143 Unrecognized actuarial (gain) or loss (126,554) (72,037) (61,720) Unrecognized transition (asset) or obligation (6,965) (8,076) (9,188) Unrecognized prior service cost 35,588 41,447 43,518 --------- --------- --------- Net amount recognized at end of year $ (21,103) $ (41,941) $ (21,247) ========= ========= ========= Other Benefits: Change in benefit obligation Benefit obligation at beginning of year $ 44,964 $ 43,373 $ 39,951 Service cost 1,205 761 746 Interest cost 3,270 2,946 2,942 Plan amendments 2,377 599 -- Curtailment (gain) or loss -- 344 -- Special termination benefits -- 2,855 -- Benefits paid (3,050) (2,634) (2,604) Actuarial (gain) or loss (3,769) (3,280) 2,338 --------- --------- --------- Benefit obligation at end of year $ 44,997 $ 44,964 $ 43,373 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 6,062 $ 4,384 $ 2,284 Actual return on plan assets 1,776 199 80 Employer contributions 4,681 3,207 3,696 Benefits paid (1,993) (1,728) (1,676) --------- --------- --------- Fair value of plan assets at end of year $ 10,526 $ 6,062 $ 4,384 ========= ========= =========
132 1999 1998 1997 ---- ---- ---- Reconciliation of funded status Funded status $(34,471) $(38,902) $(38,989) Unrecognized actuarial (gain) or loss (1,638) (285) 2,901 Unrecognized transition (asset) or obligation 14,489 18,080 20,053 Unrecognized prior service cost 4,292 3,519 3,410 -------- -------- -------- Net amount recognized at end of year $(17,328) $(17,588) $(12,625) ======== ======== ======== 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 balance sheet and information for plans with benefit obligations in excess of plan assets as of December 31, 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Amounts recognized in the balance sheet consisted of: Prepaid benefits cost $ 6,466 $ -- $ -- Accrued benefit liability (27,569) (41,977) (21,317) Intangible asset -- 36 70 --------- --------- --------- Net amount recognized at year-end $ (21,103) $ (41,941) $ (21,247) ========= ========= ========= Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation (1) $ 139,491 $ 148,005 $ 121,902 Accumulated benefit obligation (2) 4,327 131,430 4,179 Fair value of plan assets (1) 133,336 107,988 99,151
(1) All years include non-union plan and unfunded SERPs. (2) 1998 includes non-union plan and SERPs. 1999 and 1997 include SERPs only. Other Benefits: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(17,328) $(17,588) $(12,625) ======== ======== ======== Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 44,997 $ 44,964 $ 43,373 Fair value of plan assets 13,074 6,062 4,384 133 The following table provides the components of net periodic benefit cost for the plans for 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Components of net periodic benefit cost Service cost $ 5,005 $ 6,333 $ 5,214 Interest cost 21,014 19,873 17,629 Expected return on plan assets (28,946) (23,701) (19,849) Amortization of prior service cost 3,462 3,882 3,708 Amortization of transition (asset) or obligation (1,112) (1,112) (1,112) Recognized actuarial (gain) or loss (2,621) (2,248) (2,866) -------- -------- -------- Net periodic benefit cost $ (3,198) $ 3,027 $ 2,724 ======== ======== ======== Special charges Curtailment gain $ -- $ (2,168) $ -- Prior service cost recognized -- 1,914 -- Special termination benefits -- 18,295 -- -------- -------- -------- Total charges $ -- $ 18,041 $ -- ======== ======== ======== Other Benefits: Components of net periodic benefit cost Service cost $ 1,205 $ 761 $ 746 Interest cost 3,270 2,946 2,942 Expected return on plan assets (401) (296) (151) Amortization of prior service cost 473 367 328 Amortization of transition (asset) or obligation 1,114 1,315 1,337 Recognized actuarial gain (183) -- -- -------- -------- -------- Net periodic benefit cost $ 5,478 $ 5,093 $ 5,202 ======== ======== ======== Special charges Curtailment loss $ -- $ 1,005 $ -- Prior service cost recognized -- 124 -- Special termination benefits -- 2,855 -- -------- -------- -------- Total 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 invested approximately $18 million in special termination 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:
1999 1998 1997 ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate 8.00% 7.00% 7.00% Expected long-term rate of return on plan assets 9.50% 8.50% 8.50% Rate of compensation increase 5.00% 3.50%-4.00% 2.00%-4.00%
For measurement purposes, a 7.00% annual increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 4.75% for 2005 and remain at that level thereafter. 134 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 1999 $ (150) $ 176 Effect on year-end 1999 postretirement benefit obligations (1,189) 1,358
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 $2.7 million, $2.4 million, and $1.8 million for 1999, 1998, and 1997, respectively. Note 8 - Income Taxes Components of income tax expense are shown in the table below (in thousands of $): 1999 1998 1997 ---- ---- ---- Included in operating expenses: Current - federal $53,981 $45,716 $57,590 - state 13,680 11,895 14,593 Deferred - federal - net (4,818) 2,276 (4,565) - state - net (780) 678 703 Deferred investment tax credit -- 55 102 Amortization of investment tax credit (4,289) (4,313) (4,342) ------- ------- ------- Total 57,774 56,307 64,081 ------- ------- ------- Included in other income and (deductions): Current - federal 217 660 1,484 - federal - merger costs -- (6,758) -- - state (30) 6 161 - state - merger costs -- (1,737) -- Deferred - federal - net 254 (165) 292 - state - net 65 (42) 75 ------- ------- ------- Total 506 (8,036) 2,012 ------- ------- ------- Total income tax expense $58,280 $48,271 $66,093 ======= ======= ======= 135 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $): 1999 1998 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $321,889 $323,869 Other liabilities 5,324 9,644 -------- -------- 327,213 333,513 -------- -------- Deferred tax assets: Investment tax credit 27,145 28,876 Income taxes due to customers 22,588 25,447 Pension overfunding 2,193 2,099 Accrued liabilities not currently deductible and other 19,377 22,502 -------- -------- 71,303 78,924 -------- -------- Net deferred income tax liability $255,910 $254,589 ======== ======== A reconciliation of differences between the statutory U.S. federal income tax rate and LG&E's effective income tax rate follows:
1999 1998 1997 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 5.1 5.5 5.7 Amortization of investment tax credit (2.8) (3.4) (2.4) Nondeductible merger expenses -- 2.4 -- Other differences - net (1.9) (1.3) (1.5) ------ ------ ------ Effective income tax rate 35.4% 38.2% 36.8% ====== ====== ======
Note 9 - Other Income and Deductions Other income and deductions consisted of the following at December 31 (in thousands of $): 1999 1998 1997 ---- ---- 2---- Interest and dividend income $ 4,086 $ 4,245 $ 4,786 Interest on income tax settlement -- -- 1,446 Gain on sale of stock options -- -- 1,794 Gains (losses) on fixed asset disposal 2,394 530 77 Donations (102) (168) (147) Income taxes and other (2,237) (2,111) (3,679) Income tax benefit on merger costs -- 8,495 -- ------- -------- ------- Total other income and deductions $ 4,141 $ 10,991 $ 4,277 ======= ======== ======= 136 Note 10 - First Mortgage Bonds and Pollution Control Bonds Long-term debt and the current portion of long-term debt, summarized below (in thousands of $), consists primarily of first mortgage bonds and pollution control bonds. Interest rates and maturities in the table below are for the amounts outstanding at December 31, 1999.
Weighted Average Stated Interest Principal Interest Rates Rate Maturities Amounts -------------- ---- ---------- ------- Noncurrent portion 5.45% - 7.63% 6.44% 2002 - 2023 $380,600 Current portion (pollution control bonds) Variable 3.67% 2013 - 2027 246,200
Under the provisions for LG&E's variable-rate pollution control bonds, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt. The average annualized interest rate for these bonds were 3.98%. Maturities of LG&E's first mortgage bonds and pollution control bonds (principal amounts stated in thousands of $) at December 31, 1999, are summarized below. 2001 $ -- 2002 20,000 2003 42,600 2004 -- 2005 -- Thereafter 318,000 -------- Total $380,600 ======== In December 1999, LG&E notified bondholders of its intent to exercise its call option on its $20.0 million 7.50% First Mortgage Bonds due July 1, 2002. The bonds were redeemed in January 2000 utilizing proceeds from issuance of commercial paper. In June 1998, $20 million of LG&E's First Mortgage Bonds matured and were retired. 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. Substantially all of LG&E's utility plants are pledged as security for its first mortgage bonds. LG&E's 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. Note 11 - Notes Payable LG&E's short-term financing requirements are satisfied through the sale of commercial paper. LG&E had outstanding commercial paper of $120.1 million at December 31, 1999, at a weighted-average interest rate of 137 6.02%. LG&E had no short-term borrowings at December 31, 1998. At December 31, 1999, LG&E had unused lines of credit of $200 million, for which it pays commitment fees. The credit facility provides support of commercial paper borrowings. 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 $14.5 million at December 31, 1999. Construction expenditures for the years 2000 and 2001 are estimated to total approximately $401 million. Operating Lease. LG&E leases office space and accounts for all of its office space leases as operating leases. Total lease expense for 1999, 1998, and 1997, less amounts contributed by the parent company, was $1.5 million, $1.6 million, and $1.8 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1999, are as follows (in thousands of $): 2000 $ 3,321 2001 3,654 2002 3,594 2003 3,507 2004 3,507 Thereafter 1,754 ------- Total $19,337 ======= In December 1999, LG&E and KU entered into an 18-year cross-border lease of its two jointly owned combustion turbines recently installed at KU's Brown facility. LG&E's obligation was defeased upon consummation of the cross-border lease. The transaction produced a pre-tax gain of approximately $1.2 million which has been deferred pending resolution of rate treatment by the Kentucky Commission. Environmental. The Act imposed stringent new SO2 and NOx emission limits on electric generating units. LG&E previously had installed scrubbers on all of its generating units. LG&E's strategy for Phase II, commencing January 1, 2000, 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 met the NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all LG&E stations. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states 138 implement the final regulatory mandate. 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, analysis, and the outcome of pending litigation against the EPA, LG&E estimates that it may incur capital costs for NOx compliance ranging from $65 million to reduce emissions to the level of 0.25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $165 million to reduce emissions to the level of 0.15 lb./Mmbtu (current EPA regulations). 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 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. LG&E is also addressing other air quality issues. First, LG&E is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. LG&E continues to monitor EPA actions to challenge that ruling. Second, LG&E was notified by regulatory agencies that the Cane Run Station may be the source of a potential exceedance of the NAAQS that could require LG&E to incur additional capital expenditures or accept certain emissions limitations. After reviewing additional modeling information submitted by LG&E, in January 2000, EPA concluded that the Cane Run Station does not contribute to any potential NAAQS exceedance and that no further action is required from LG&E. 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 owns or formerly owned three properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. LG&E has reached agreements for other parties to assume cleanup responsibility for two sites it formerly owned. In addition, LG&E recently reached an agreement with the Kentucky Division of Waste Management with respect to a third LG&E-owned site in which LG&E committed to impose certain property restrictions and conduct additional monitoring in lieu of a cleanup. Based on currently available information, management estimates that it will incur additional MGP costs of less than $500,000. Accordingly, an accrual of $500,000 has been recorded in the accompanying financial statements. 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 Kentucky 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, IMEA owns a 12.12% undivided interest, and 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. 139 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 60.00 495.00 (in thousands of $): Cost $546,497 Accumulated depreciation 140,972 --------- Net book value $405,525 ========= Construction work in progress (included above) $673 In July 1999, following approval from the Kentucky Commission, LG&E purchased for $45.7 million a 38% interest in two 164.5 Mw natural gas turbines installed at KU's E.W. Brown facility (Units 6 and 7) from Capital Corp. Note 14 - Segments of Business and Related Information Effective December 31, 1998, LG&E adopted SFAS 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 -------- --- ----- 1999 Operating revenues $ 790,670(a) $ 177,579 $ 968,249 Depreciation and amortization 83,619 13,602 97,221 Interest income 3,435 651 4,086 Interest expense 31,558 6,404 37,962 Operating income taxes 56,883 891 57,774 Net income 104,853 1,417 106,270 Total assets 1,775,498 395,954 2,171,452 Construction expenditures 160,844 33,800 194,644 1998 Operating revenues $ 658,511(b) $ 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 32,072 -- 32,072 Operating 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 32,509 138,345 140 Electric Gas Total -------- --- ----- 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 Operating 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 (a) Net of provision for rate refund of $1.7 million. (b) Net of provision for rate refund of $4.5 million. Note 15 - Selected Quarterly Data (Unaudited) Selected financial data for the four quarters of 1999 and 1998 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 $) 1999 Operating revenues $226,620 $ 214,097 $296,395 $231,137 Net operating income 27,016 30,596 51,036 31,443 Net income 18,916 22,040 41,704 23,610 Net income available for common stock 17,826 20,954(a) 40,614 22,375(b) 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) 43,726 8,672 (a) The increase of $22.1 million compared to June 1998 was due to a non-recurring after-tax charge of $23.6 million from merger-related expenses. (b) The increase of $13.7 million compared to December 1998 was primarily due to a non-recurring charge to refund certain amounts collected under the ECR and colder weather in 1999. Note 16 - Subsequent Events On February 28, 2000, LG&E Energy announced that its Board of Directors accepted an offer to be acquired by PowerGen for cash of approximately $3.2 billion or $24.85 per share and the assumption of $2.2 billion of LG&E Energy's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction resulting in the Utility Operations' obligation to continue to file SEC reports. The acquisition is expected to close 9 to 12 months from the announcement, 141 shortly after all of the conditions to consummation of the acquisition are met. Those conditions include, without limitation, the approval of the holders of a majority of the outstanding shares of common stock of each of LG&E Energy and PowerGen, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the FERC under the Federal Power Act, the approval of the SEC under the Public Utility Holding Company Act of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Shareholder meetings to vote upon the approval of the acquisition are expected to be held during the second quarter of 2000 for both LG&E Energy and PowerGen. During the first quarter of 2000, the Company expensed approximately $1.0 million relating to the PowerGen transaction. The foregoing description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. On March 3, 2000, the U.S. Court of Appeals for the Washington D.C. Circuit issued a final opinion upholding the NOx SIP call rule requiring electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu by May 2003. Some of the litigants will likely seek further judicial review of the ruling. In the first quarter of 2000, LG&E will take a restructuring charge relating to the reduction of positions and the integration of LG&E's and KU's operations, including combining retail gas and electric operations, consolidation of customer service centers and the redesigning various other processes. The Kentucky Commission responded to the motions filed by LG&E for computational and other errors made in Orders received on base rate reductions in February 2000 by granting rehearings for LG&E on various issues. 142 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, 1999, 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. 143 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, 1999 and 1998, 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, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 26, 2000 (Except with respect to the matters discussed in Note 16, as to which the date is March 3, 2000.) 144 Kentucky Utilities Company Statements of Income (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- OPERATING REVENUES: Electric (Note 1) ........................ $ 943,210 $ 831,614 $716,437 Provision for rate refunds (Note 3) ...... (5,900) (21,500) -- --------- --------- -------- Total operating revenues .............. 937,310 810,114 716,437 --------- --------- -------- OPERATING EXPENSES: Fuel, principally coal, used in generation 219,883 217,401 188,439 Power purchased .......................... 242,315 126,584 72,542 Other operation expenses ................. 116,521 121,275 120,951 Maintenance .............................. 57,318 63,608 64,990 Depreciation and amortization ............ 89,922 86,657 84,111 Federal and state income taxes (Note 7) .. 60,380 53,256 51,690 Property and other taxes ................. 14,955 15,945 15,306 --------- --------- -------- Total operating expenses .............. 801,294 684,726 598,029 --------- --------- -------- Net operating income ......................... 136,016 125,388 118,408 Merger costs (Note 2) ........................ -- 21,830 -- Interest and dividend income (Note 8) ........ 4,293 1,811 1,673 Other income and (deductions) (Note 8) ....... 5,144 6,035 5,330 Interest charges ............................. 38,895 38,640 39,698 --------- --------- -------- Net income ................................... 106,558 72,764 85,713 Preferred stock dividends .................... 2,256 2,256 2,256 --------- --------- -------- Net income available for common stock ........ $ 104,302 $ 70,508 $ 83,457 ========= ========= ========
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- Balance January 1................................ $299,167 $304,750 $287,852 Add net income................................... 106,558 72,764 85,713 -------- -------- -------- 405,725 377,514 373,565 Deduct: Cash dividends declared on stock: 4.75% cumulative preferred.......... 950 950 950 6.53% cumulative preferred.......... 1,306 1,306 1,306 Common.............................. 73,999 76,091 66,559 -------- -------- -------- 76,255 78,347 68,815 -------- -------- -------- Balance December 31.............................. $329,470 $299,167 $304,750 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 145 Kentucky Utilities Company Balance Sheets (Thousands of $)
December 31 1999 1998 ---- ---- ASSETS: Utility plant, at original cost (Note 1) ........................... $2,744,380 $2,602,167 Less: reserve for depreciation .................................... 1,288,819 1,208,183 ---------- ---------- 1,455,561 1,393,984 Construction work in progress ...................................... 106,686 83,361 ---------- ---------- 1,562,247 1,477,345 ---------- ---------- Other property and investments - less reserve ...................... 14,349 14,238 Current assets: Cash and temporary cash investments ............................ 6,793 58,949 Accounts receivable - less reserve of $800 in 1999 and $520 in 1998 ............................... 88,549 106,125 Materials and supplies - at average cost: Fuel (predominantly coal) ................................... 30,225 23,927 Other ....................................................... 26,213 24,248 Prepayments and other .......................................... 3,743 3,055 ---------- ---------- 155,523 216,304 ---------- ---------- Deferred debits and other assets: Unamortized debt expense ....................................... 4,827 5,227 Regulatory assets (Note 3) ..................................... 23,033 28,228 Other .......................................................... 25,111 19,859 ---------- ---------- 52,971 53,314 ---------- ---------- $1,785,090 $1,761,201 ========== ========== CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity .................................................. $ 637,015 $ 606,713 Cumulative preferred stock ..................................... 40,000 40,000 Long-term debt (Note 9) ........................................ 430,830 546,330 ---------- ---------- 1,107,845 1,193,043 ---------- ---------- Current liabilities: Current portion of long-term debt (Note 9) ..................... 115,500 -- Accounts payable ............................................... 116,546 110,268 Provision for rate refunds ..................................... 20,567 21,500 Dividends declared ............................................. 19,150 18,188 Accrued taxes .................................................. 10,502 16,733 Accrued interest ............................................... 7,329 8,110 Other .......................................................... 18,617 20,971 ---------- ---------- 308,211 195,770 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 7) .............. 243,620 244,493 Investment tax credit, in process of amortization .............. 18,575 22,302 Accumulated provision for pensions and related benefits (Note 6) 48,285 52,287 Customers' advances for construction ........................... 1,174 1,264 Regulatory liability (Note 3) .................................. 46,069 46,552 Other .......................................................... 11,311 5,490 ---------- ---------- 369,034 372,388 ---------- ---------- Commitments and contingencies (Note 11) $1,785,090 $1,761,201 ========== ==========
The accompanying notes are an integral part of these financial statements. 146 Kentucky Utilities Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................... $ 106,558 $ 72,764 $ 85,713 Items not requiring cash currently: Depreciation and amortization .............. 89,922 86,657 84,111 Deferred income taxes - net ................ (3,763) (2,437) 4,606 Investment tax credit - net ................ (3,727) (3,829) (4,036) Change in certain net current assets: Accounts receivable ........................ 17,576 (31,482) 280 Materials and supplies ..................... (8,263) 3,272 1,104 Accounts payable ........................... 6,514 71,162 4,807 Provision for rate refunds ................. (933) 21,500 -- Accrued taxes .............................. (6,231) 9,260 2,090 Accrued interest ........................... (781) (173) 235 Prepayments and other ...................... (3,042) (53) 1,922 Other ......................................... 10,346 12,776 (1,943) --------- --------- ----------- Net cash flows from operating activities ... 204,176 239,417 178,889 --------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from insurance reimbursement ......... 206 179 4,270 Construction expenditures ..................... (181,341) (91,992) (94,006) --------- --------- ----------- Net cash flows used for investing activities (181,135) (91,813) (89,736) --------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings ......................... -- 381,500 2,645,500 Repayments of short-term borrowings ........... -- (415,100) (2,666,100) Repayment of long-term debt ................... -- (42) (21) Payment of dividends .......................... (75,197) (60,347) (68,815) --------- --------- ----------- Net cash flows from financing activities ... (75,197) (93,989) (89,436) --------- --------- ----------- Change in cash and temporary cash investments ..... (52,156) 53,615 (283) Beginning cash and temporary cash investments ..... 58,949 5,334 5,617 --------- --------- ----------- Ending cash and temporary cash investments ........ $ 6,793 $ 58,949 $ 5,334 ========= ========= =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes ............................... $ 71,258 $ 46,490 $ 44,857 Interest on borrowed money ................. 35,508 36,008 37,053
The accompanying notes are an integral part of these financial statements. 147 Kentucky Utilities Company Statements of Capitalization (Thousands of $) December 31 1999 1998 ---- ---- COMMON EQUITY: Common stock, without par value - outstanding 37,817,878 shares ......... $ 308,140 $ 308,140 Retained earnings ........................ 329,470 299,168 Other .................................... (595) (595) --------- --------- 637,015 606,713 --------- --------- CUMULATIVE PREFERRED STOCK: Cumulative and redeemable on 30 days notice by KU:
Shares Current Outstanding Redemption Price ----------- ---------------- Without par value, 5,300,000 shares authorized - 4.75% series, $100 stated value............... 200,000 $101.00 20,000 20,000 6.53% series, $100 stated value............... 200,000 Not redeemable 20,000 20,000 ---------- ---------- 40,000 40,000 ---------- ---------- LONG-TERM DEBT - first mortgage bonds (Note 9): 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, 7.375%................................................... 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 bonds outstanding...................................................... 546,330 546,330 Less current portion of long-term debt....................................... 115,500 -- ---------- ---------- Long-term debt............................................................... 430,830 546,330 ---------- ---------- Total capitalization......................................................... $1,107,845 $1,193,043 ========== ==========
The accompanying notes are an integral part of these financial statements. 148 Kentucky Utilities Company Notes to Financial Statements Note 1 - Summary of Significant Accounting Policies KU is a subsidiary of LG&E Energy. KU is a regulated public utility that is engaged in the generation, transmission, distribution, and sale of electric energy. LG&E Energy is an exempt energy services holding company with wholly-owned subsidiaries consisting of LG&E, KU, Capital Corp., and LEM. All of the KU's Common Stock is held by LG&E Energy. Certain reclassification entries have been made to the 1998 and 1997 financial statements to conform to the 1999 presentation with no impact on previously reported net income. 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. 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 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 and amortization. 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 1999, 1998 and 1997. Financial Instruments. KU uses over-the-counter interest-rate swap agreements to hedge its exposure to interest rates. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. See Note 4, Financial Instruments. 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. The unbilled revenue estimates included in accounts receivable for KU equaled approximately $29.6 million at December 31, 1999 and 1998. Fuel Costs. The cost of fuel for electric generation is charged to expense as used. 149 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 11, Commitments and Contingencies, for a further discussion. New Accounting Pronouncements. During 1999 and 1998, the following accounting pronouncements were issued that affect KU: SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 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 KU must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. KU has not yet quantified all the effects of adopting SFAS No. 133 on the financial statements. However, SFAS No. 133 could increase the volatility in earnings and other comprehensive income. The effect of this statement will be recorded in cumulative effect of change in accounting when adopted. SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of SFAS No. 133, deferred the effective date of SFAS No. 133 until January 1, 2001. EITF No. 98-10, Accounting for Energy Trading and Risk Management Activities was adopted effective January 1, 1999. The pronouncement requires that energy trading contracts to be marked 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. Adoption of EITF No. 98-10 did not have a material impact on KU's results of operations or financial position. SOP 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Adopted as of 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 were expensed as incurred. Adoption of SOP 98-1 did not have a material effect on KU's financial statements. 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, the 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 approximately $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these savings for KU 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 ($21.8 million) at the time of 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 savings, net of the deferred and amortized amount, over a 150 five-year period. The preferred stock and debt securities of KU were not affected by the merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt holding company under PUHCA. 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 Kentucky 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 Kentucky 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. Any fuel cost savings are passed to Kentucky customers through the companies' fuel adjustment clauses. See Note 3 for more information about KU's rates and regulatory matters. 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 FERC, the Kentucky Commission and the Virginia Commission. KU is subject to SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. 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 in KU's balance sheets as of December 31 (in thousands of $): 1999 1998 ---- ---- Unamortized loss on bonds $ 7,594 $ 8,675 Merger costs 14,324 18,417 Other 1,115 1,136 -------- -------- Total regulatory assets 23,033 28,228 -------- -------- Deferred income taxes - net (42,992) (45,882) Other (3,077) (670) -------- -------- Total regulatory liabilities (46,069) (46,552) -------- -------- Regulatory liabilities - net $(23,036) $(18,324) ======== ======== Environmental Cost Recovery. In August 1994 KU implemented an ECR surcharge. The Kentucky Commission's order approving the surcharge for KU as well as the constitutionality of the surcharge was challenged by certain intervenors in Franklin Circuit Court. Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December 1997, respectively, upheld the constitutionality of the ECR statute but differed on a claim of retroactive recovery of certain amounts. Based on these decisions, the Kentucky Commission ordered that certain surcharge revenues collected by KU be subject to refund pending final determination of all appeals. In December 1998, the Kentucky Supreme Court rendered an opinion upholding the constitutionality of the surcharge statute but denied recovery of costs associated with pre-1993 environmental projects through the ECR. The court remanded the case to the Kentucky Commission to determine amounts to be refunded for 151 revenues collected for such pre-1993 environmental projects. Accordingly, KU recorded a provision for rate refund of $21.5 million in December 1998. The parties to the proceedings reached a settlement agreement that was approved in a Final Order issued by the Kentucky Commission in August 1999. This Final Order resulted in the reversal of approximately $1.5 million of the provision for rate refunds established by KU in December 1998. The refund is being applied to customers' bills during the twelve-month period beginning October 1999. Future Rate Regulation. In October 1998, KU filed an application with the Kentucky Commission for approval of a new method of determining electric rates that sought to provide financial incentives for KU to further reduce customers' rates. The filing was made pursuant to the September 1997 Kentucky Commission order approving the merger of LG&E Energy and KU Energy, wherein the Kentucky 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 proposed ratemaking method, known as PBR, included financial incentives for KU to reduce fuel costs and increase generating efficiency, and to share any resulting savings with customers. Additionally, the PBR proposal provided for financial penalties and rewards to assure continued high quality service and reliability. In April 1999, KU filed a joint agreement with LG&E and the Kentucky Attorney General to adopt the PBR plan subject to certain amendments. The amended filing included requested Kentucky Commission approval of a five-year rate reduction plan which proposed to reduce the electric rates of KU by $10.6 million in the first year (beginning July 1999), and by $4.2 million annually through June 2004. The proposed amended plan also included establishment by KU of a $3.2 million program for low-income customer assistance as well as extension for one additional year of both the rate cap proposal and merger savings surcredit established in the original merger plan of LG&E and KU. Under the rate cap proposal KU agreed, in the absence of extraordinary circumstances, not to increase base electric rates for five years following the merger and LG&E also agreed to refrain from filing for an increase in natural gas rates through June 2004. In April 1999, the Kentucky Commission issued initial orders implementing the amended PBR plan, effective July 1999, and subject to modification. The Kentucky Commission also consolidated into the continuing PBR proceedings an earlier March 1999, rate complaint by a group of industrial intervenors, KIUC, in which KIUC requested significant reductions in electric rates. Hearings were conducted before the Kentucky Commission on LG&E's and KU's amended PBR plans and the KIUC rate reduction petitions in August and September 1999. Legal briefs of the parties were filed with the Kentucky Commission in October 1999. KIUC's position called for annual revenue reductions for KU of $61.5 million. In January 2000, the Kentucky Commission issued Orders for KU in the subject cases. The Kentucky Commission ruled that KU should reduce base rates by $36.5 million effective with bills rendered beginning March 1, 2000. The Kentucky Commission eliminated proposal to operate under its PBR plan and reinstated the FAC mechanism effective March 1, 2000. The Kentucky Commission offered KU the opportunity to operate under an ESM for the next three years. Under this mechanism, incremental annual earnings for each utility resulting in a rate of return either above or below a range of 10.5% to 12.5% would be shared 60% with shareholders and 40% with ratepayers. Later in January 2000, KU filed motions for correction to the January 2000 orders for computational and other errors made in the Kentucky Commission's orders which produced overstatements in the base rate reductions to KU of $7.7 million. KU also filed motions for reconsideration with the Kentucky Commission on a number of items in the case in late January. Certain intervening parties in the proceedings have also filed motions for reconsideration asserting, among other things, that the Kentucky Commission understated the amount of base rate reductions. 152 Other Rate Matters. Prior to implementation of the PBR in July 1999, and following its termination in March 2000, KU employed an FAC mechanism, which under Kentucky law allowed the utilities to recover from customers the actual fuel costs associated with retail electric sales. In July 1999, the Kentucky Commission issued a series of orders requiring KU to refund approximately $10.1 million resulting from reviews of the FAC from November 1994 to October 1998. The orders changed KU's method of computing fuel costs associated with electric line losses on off-system sales appropriate for recovery through the FAC, and KU's method for computing system line losses for the purpose of calculating the system sales component of the FAC charge. At KU's request, in July 1999, the Kentucky Commission stayed the refund requirement pending the Kentucky Commission's final determination of any rehearing request that KU may file. In August 1999, KU filed its request for rehearing of the July orders. In August 1999, the Kentucky Commission issued a Final Order in the KU proceedings, agreeing, in part, with KU's arguments outlined in its Petition for Rehearing. While the Kentucky Commission confirmed that KU should change its method of computing the fuel costs associated with electric line losses, it agreed with KU that the line loss percentage should be based on KU's actual line losses incurred in making off-system sales rather than the percentage used in its Open Access Transmission Tariff. The Kentucky Commission also upheld its previous ruling concerning the computation of system line losses in the calculation of the FAC. The net effect of the Kentucky Commission's Final Order was to reduce the refund obligation to $5.8 million from the original Order amount of $10.1 million. In August 1999, KU recorded its estimated share of anticipated FAC refunds of $7.7 million. KU began implementing the refund in October and will continue the refund through September 2000. Both KU and the KIUC have appealed the Order to the Franklin Circuit Court. A decision is not expected on the appeal until later in 2000. Kentucky PSC Administrative Case for Affiliate Transactions. In December 1997, the Kentucky Commission opened Administrative Case No. 369 to consider Kentucky Commission policy regarding cost allocations, affiliate transactions and codes of conduct governing the relationship between utilities and their non-utility operations and affiliates. The Kentucky 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 that could result in unfair competition caused by cost shifting from the non-utility affiliate to the utility. In September 1998, the Kentucky Commission issued a draft code of conduct and cost allocation guidelines. In January 1999, KU, as well as all parties to the proceeding, filed comments on the Kentucky Commission draft proposals. In December 1999, the Kentucky Commission issued guidelines on cost allocation and held a hearing in January 2000, on the draft code of conduct. 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. 153 Note 4 - Financial Instruments The cost and estimated fair values of the KU's non-trading financial instruments as of December 31, 1999 and 1998 follow (in thousands of $): 1999 1998 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Long-term debt (including current portion) $546,330 $ 542,242 $546,330 $587,245 Interest-rate swaps -- (1,951) -- -- All of the above valuations reflect prices quoted by exchanges except for the swaps. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. Interest Rate Swap. KU entered into an interest rate swap agreement to exchange fixed interest rate payment obligations for variable interest rate payments without the exchange of underlying principal amounts. As of December 31, 1999, KU was party to an interest rate swap with a notional amount of $53.0 million. Under the swap agreement KU received a fixed rate of 7.92% and paid a variable rate of 7.90% at December 31, 1999. The swap matures in 2004. 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 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 revenues arise from deliveries of electricity to about 458,000 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, 1999, 100% of total utility revenue was derived from electric operations. In August 1999, KU and their employees represented by IBEW Local 101 and USWA Local 8686, which represents approximately 14% of KU's workforce, entered into a one-year collective bargaining agreement. 154 Note 6 - Pension Plans and Retirement Benefits Pension Plans. KU sponsors 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, 1999, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Change in benefit obligation Benefit obligation at beginning of year $ 233,288 $ 214,657 $ 194,874 Service cost 6,210 6,672 6,728 Interest cost 15,564 15,043 14,680 Plan amendment -- 2,226 -- Acquisitions/divestitures -- (2,243) -- Curtailment (gain) or loss -- 1,901 -- Special termination benefits -- 5,427 -- Benefits paid (12,822) (12,762) (13,313) Actuarial (gain) or loss (22,612) 2,367 11,688 --------- --------- --------- Benefit obligation at end of year $ 219,628 $ 233,288 $ 214,657 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 238,124 $ 217,500 $ 191,879 Actual return on plan assets 49,883 31,209 35,066 Employer contributions -- 2,273 4,750 Benefits paid (12,822) (12,762) (13,314) Administrative expenses (1,076) (96) (882) --------- --------- --------- Fair value of plan assets at end of year $ 274,109 $ 238,124 $ 217,499 ========= ========= ========= Reconciliation of funded status Funded status $ 54,481 $ 4,835 $ 2,843 Unrecognized actuarial (gain) or loss (74,579) (26,487) (19,552) Unrecognized transition (asset) or obligation (988) (1,128) (1,350) Unrecognized prior service cost 3,564 4,943 3,635 --------- --------- --------- Net amount recognized at year-end $ (17,522) $ (17,837) $ (14,424) ========= ========= ========= Other Benefits: Change in benefit obligation Benefit obligation at beginning of year $ 79,650 $ 72,139 $ 66,519 Service cost 1,596 2,012 1,853 Interest cost 3,837 5,207 4,895 Plan amendments (24,488) -- -- Curtailment (gain) or loss -- 3,240 -- Special termination benefits -- -- (4,038) Benefits paid (4,646) (2,617) -- Actuarial (gain) or loss (1,748) (331) 2,910 --------- --------- --------- Benefit obligation at end of year $ 54,201 $ 79,650 $ 72,139 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 24,337 $ 17,763 $ 13,270 Actual return on plan assets 7,612 5,117 3,569 Employer contributions 3,520 3,805 3,848 Benefits paid (4,459) (2,348) (2,924) --------- --------- --------- Fair value of plan assets at end of year $ 31,010 $ 24,337 $ 17,763 ========= ========= =========
155
1999 1998 1997 ---- ---- ---- Reconciliation of funded status Funded status $(23,191) $(55,313) $(54,376) Unrecognized actuarial (gain) or loss (31,266) (19,944) (19,697) Unrecognized transition (asset) or obligation 23,694 45,701 50,118 -------- -------- -------- Net amount recognized at year-end $(30,763) $(29,556) $(23,955) ======== ======== ========
There are no plan assets in the non-qualified plan due to the nature of the plan. The following tables provide the amounts recognized in the balance sheet and information for plans with benefit obligations in excess of plan assets as of December 31, 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(17,522) $(17,837) $(14,424) Other -- (22) -- -------- -------- -------- Net amount recognized at year-end $(17,522) $(17,859) $(14,424) ======== ======== ======== Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 1,132 $ 2,300 $ 6,199 Accumulated benefit obligation 40 99 3,975 Other Benefits: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(30,763) $(29,556) $(23,955) Other -- (2,817) (2,955) -------- -------- -------- Net amount recognized at year-end $(30,763) $(32,373) $(26,910) ======== ======== ======== Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 54,201 $ 79,650 $ 72,139 Fair value of plan assets 31,010 24,337 17,763
156 The following table provides the components of net periodic benefit cost for the plans for 1999, 1998 and 1997 (in thousands of $):
1999 1998 1997 ---- ---- ---- Pension Plans: Components of net periodic benefit cost Service cost $ 6,211 $ 6,673 $ 6,728 Interest cost 15,564 15,043 14,680 Expected return on plan assets (21,957) (18,264) (15,427) Amortization of transition (asset) or obligation (141) 435 354 Amortization of prior service cost 410 (146) (150) Amortization of net (gain) loss (319) (151) (26) -------- -------- -------- Net periodic benefit cost $ (232) $ 3,590 $ 6,159 ======== ======== ======== Special charges Prior service cost recognized $ -- $ 67 $ -- Special termination benefits -- 5,427 -- -------- -------- -------- Total charges $ -- $ 5,494 $ -- ======== ======== ======== Other Benefits: Components of net periodic benefit cost Service cost $ 1,596 $ 2,012 $ 1,853 Interest cost 3,837 5,207 4,895 Expected return on plan assets (1,897) (1,424) (1,051) Amortization of transition (asset) or obligation 1,823 3,303 3,341 Amortization of net (gain) loss (445) (536) (812) -------- -------- -------- Net periodic benefit cost $ 4,914 $ 8,562 $ 8,226 ======== ======== ======== Special charges Curtailment 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. In May 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'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 postretirement benefits for eligible retired employees. 157 The assumptions used in the measurement of the KU's benefit obligation are shown in the following table: 1999 1998 1997 ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate 8.00% 7.00% 7.75% Expected long-term rate of return on plan assets 9.50% 8.25% 8.25% Rate of compensation increase 5.00% 4.00% 4.75% For measurement purposes, a 7.00% annual increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 4.75% 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 (in thousands of $):
1% Decrease 1% Increase ----------- ----------- Effect on total of service and interest cost components for 1999 $ (366) $ 423 Effect on year-end 1999 postretirement benefit obligations (4,029) 4,650
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 of this matching were approximately $2.3 million for 1999 and $2.2 million for each of 1998 and 1997. Note 7 - Income Taxes Components of income tax expense are shown in the table below (in thousands of $): 1999 1998 1997 ---- ---- ---- Included in operating expenses: Current - federal $50,969 $46,321 $39,353 - state 13,459 10,245 8,964 Deferred - federal - net (4,833) (3,186) 1,996 - state - net 785 (124) 1,377 ------- ------- ------- Total 60,380 53,256 51,690 Included in other income and (deductions): Current - federal 1,028 (617) (853) - state 54 (237) (246) Deferred - federal - net 182 694 975 - state - net 102 178 258 Amortization of investment tax credit (3,727) (3,829) (4,036) ------- ------- ------- Total (2,361) (3,811) (3,902) ------- ------- ------- Total income tax expense $58,019 $49,445 $47,788 ======= ======= ======= 158 Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $): 1999 1998 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $313,202 $289,147 Other liabilities 11,286 5,598 -------- -------- 324,488 294,745 -------- -------- Deferred tax assets: Investment tax credit 7,497 9,001 Income taxes due to customers 16,712 17,574 Accrued liabilities not currently deductible and other 5,797 6,162 Less: amounts included in current assets 50,862 17,515 -------- -------- 80,868 50,252 -------- -------- Net deferred income tax liability $243,620 $244,493 ======== ======== A reconciliation of differences between the statutory U.S. federal income tax rate and KU's effective income tax rate follows: 1999 1998 1997 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 5.7 5.4 5.0 Amortization of investment tax credit (2.9) (3.1) (3.0) Nondeductible merger expenses -- 6.4 -- Other differences - net (2.5) (2.2) (1.2) ------ ------ ------ Effective income tax rate 35.3% 41.5% 35.8% ====== ====== ====== Note 8 - Other Income and Deductions Other income and deductions consisted of the following at December 31 (in thousands of $): 1999 1998 1997 ---- ---- ---- Equity in earnings - subsidiary company $ 2,334 $ 2,167 $ 2,480 Interest and dividend income 4,293 1,811 1,673 Gains (losses) on fixed asset disposal 759 272 412 Donations (107) (453) (388) Income taxes and other 2,158 4,049 2,826 ------- ------- ------- Net other income $ 9,437 $ 7,846 $ 7,003 ======= ======= ======= 159 Note 9 - First Mortgage Bonds and Pollution Control Bonds Long-term debt and the current portion of long-term debt, summarized below in thousands, consists primarily of first mortgage bonds and pollution control bonds. Interest rates and maturities in the table below are for the amounts outstanding at December 31, 1999. Stated interest rates 5.75% - 8.55% Weighted-average interest rate 7.02% Maturities 2003 - 2027 Noncurrent portion at December 31, 1999 $430,830 Current portion at December 31, 1999 $115,500 Under the provisions for KU's variable-rate pollution control bonds, the bonds are subject to tender for purchase at the option of the holder and to mandatory tender for purchase upon the occurrence of certain events, causing the bonds to be classified as current portion of long-term debt. The average annualized interest rate for these bonds were 3.35% for KU's bonds. Maturities of KU's first mortgage bonds and pollution control bonds (principal amounts stated in thousands of $) at December 31, 1999, are summarized below. 2001 $ -- 2002 2003 62,000 2004 -- 2005 -- Thereafter 368,830 -------- Total $430,830 ======== 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, 1999, and 1998. The KU credit facilities that provided for short-term borrowing and support of commercial paper borrowing expired on December 31, 1999. Note 11 - Commitments and Contingencies Construction Program. KU had $13.8 million of commitments in connection with its construction program at December 31, 1999. Construction expenditures for the years 2000 and 2001 are estimated to total approximately $324 million. Operating Leases. KU leases office space, office equipment, and vehicles. KU accounts for these leases as operating leases. Total lease expense for 1999, 1998, and 1997, was $1.7 million, $1.9 million, and $1.8 million, respectively. In December 1999, LG&E and KU entered into an 18-year cross-border lease of its two jointly owned combustion turbines recently installed at KU's Brown facility. KU's obligation was defeased upon consummation of the cross-border lease. The transaction produced a pre-tax gain of approximately $1.9 million which has 160 been deferred pending resolution of rate treatment by the Kentucky Commission. Environmental. The Act imposed stringent new SO2 and NOx emission limits on electric generating units. KU met its Phase I SO2 requirements primarily through installation of a scrubber on Ghent Unit 1. KU's strategy for Phase II, commencing January 1, 2000, 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 NOx emission 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 EPA announced its final "NOx SIP call" rule requiring significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport to the Northeast. While each of the 22 states covered by the rule is free to allocate its assigned NOx reductions among various emissions sectors as it deems appropriate, the regulation may ultimately require electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu - an 85% reduction from 1990 levels. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule directing similar NOx reductions from a number of specifically named electric generating units including all KU stations in the eastern half of Kentucky. Additional petitions currently pending before EPA may potentially result in orders encompassing the remaining KU stations. Several states, various labor and industry groups, and individual companies have appealed both EPA rulings to the U.S. Court of Appeals for the Washington D.C. Circuit. Management is currently unable to determine the outcome or exact impact of this matter until such time as the courts rule on the pending legal challenges and the states implement the final regulatory mandate. 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, analysis, and the outcome of pending litigation against the EPA, KU estimates that it may incur approximate capital costs for NOx compliance ranging from $126 million to reduce emissions to the level of .25 lb./Mmbtu (Commonwealth of Kentucky's proposed NOx compliance level) to $168 million to reduce emissions to the level of .15 lb./Mmbtu (current EPA regulations). These costs would generally be incurred beginning in 2000. KU believes its costs in this regard 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 recovery from customers under its 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. KU is also addressing other air quality issues. First, KU is monitoring the status of EPA's revised NAAQS for ozone and particulate matter. In May 1999, the Washington D.C. Circuit remanded the final rule and directed EPA to undertake additional rulemaking efforts. KU continues to monitor EPA actions to challenge that ruling. KU owns or formerly owned several properties which contained past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. KU has completed the cleanup of a site owned by KU. With respect to other former MGP sites no longer owned by KU, KU is unable to determine what, if any, additional exposure or liability it may have as it lacks complete information on current site conditions. In October 1999, approximately 38,000 gallons of diesel fuel leaked from a cracked valve in an underground pipeline at KU's E.W. Brown Station. Under the oversight of EPA and state officials, KU commenced immediate spill containment and recovery measures which prevented the spill from reaching the Kentucky 161 River. KU ultimately recovered approximately 34,000 gallons of diesel fuel. In November 1999, the Kentucky Division of Water issued a notice of violation for the incident. KU is currently negotiating with the state in an effort to reach a complete resolution of this matter. To date KU has incurred costs of approximately $1 million. The Company does not expect to incur any material additional amounts. Purchased Power. KU has purchase power arrangements with OMU, 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 2000-2004, which is expected to be approximately 7% 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 $172 million of OMU bonds outstanding at December 31, 1999. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 46% in 1999. 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 2000 - 2004 of various Mw capacities and for varying periods with a maximum entitlement at any time of 62 Mw. The estimated future minimum annual payments under purchased power agreements for the five years ended December 31, 2004, are as follows (in thousands of $): 2000 $ 28,765 2001 31,495 2002 30,683 2003 30,947 2004 31,155 -------- Total $153,045 ======== Note 12 - Jointly Owned Electric Utility Plant In July 1999, following approval from the Kentucky Commission, KU purchased for $76.7 million a 62% interest in two 164.5 Mw natural gas turbines installed at the E.W. Brown facility (Units 6 and 7) from Capital Corp. 162 Note 13 - Selected Quarterly Data (Unaudited) Selected financial data for the four quarters of 1999 and 1998 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 $) 1999 - ---- Revenues $217,349 $ 225,794 $281,503 $212,664 Operating income 36,966 34,997 32,529 31,524 Net income 29,628 27,757 24,426 24,747 Net income available for common stock 29,064 27,193(a) 23,862(b) 24,183(c) 1998 - ---- Revenues $183,219 $ 193,079 $246,117 $187,699 Operating income 33,035 28,144 44,677 19,532 Net income (loss) 25,049 (1,119) 36,980 11,854 Net income (loss) available for common stock 24,485 (1,683) 36,416 11,290 (a) The increase of $28.9 million compared to June 1998 was primarily due to a non-recurring after-tax charge of $21.5 million from merger-related expenses. (b) The decrease of $12.6 million compared to September 1998 was primarily due to a charge to record a net provision for the refund of certain revenues under the FAC and ECR. (c) The increase of $12.9 million compared to December 1998 was primarily due to a charge to refund certain amounts collected under the ECR. Note 14 - Subsequent Events On February 28, 2000, LG&E Energy announced that its Board of Directors accepted an offer to be acquired by PowerGen for cash of approximately $3.2 billion or $24.85 per share and the assumption of $2.2 billion of LG&E Energy's debt. Pursuant to the acquisition agreement, among other things, LG&E Energy will become a wholly owned subsidiary of PowerGen and its U.S. headquarters. The Utility Operations of the Company will continue their separate identities and serve customers in Kentucky and Virginia under their present names. The preferred stock and debt securities of the Utility Operations will not be affected by this transaction resulting in the Utility Operations' obligation to continue to file SEC reports. The acquisition is expected to close 9 to 12 months from the announcement, shortly after all of the conditions to consummation of the acquisition are met. Those conditions include, without limitation, the approval of the holders of a majority of the outstanding shares of common stock of each of LG&E Energy and PowerGen, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the Federal Energy Regulatory Commission under the Federal Power Act, the approval of the SEC under the Public Utility Holding Company Act of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Shareholder meetings to vote upon the approval of the acquisition are expected to be held during the second quarter of 2000 for both LG&E Energy and PowerGen. During the first quarter of 2000, the Company expensed approximately $1.0 million relating to the PowerGen transaction. The foregoing 163 description of the acquisition does not purport to be complete and is qualified in its entirety by reference to LG&E Energy's current reports on Form 8-K, filed February 29, 2000, with the SEC. On March 3, 2000, the U.S. Court of Appeals for the Washington D.C. Circuit issued a final opinion upholding the NOx SIP call rule requiring electric generating units to reduce their NOx emissions to 0.15 lb./Mmbtu by May 2003. Some of the litigants will likely seek further judicial review of the ruling. In the first quarter of 2000, KU will take a restructuring charge relating to the reduction of positions and the integration of LG&E's and KU's operations, including combining retail gas and electric operations, consolidation of customer service centers and the redesigning various other processes. The Kentucky Commission responded to the motions filed by KU for computational and other errors made in Orders received on base rate reductions in February 2000 by reducing KU's annual revenue reductions by $2.5 million and granting rehearings on other issues. 164 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. 165 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, 1999 and 1998, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 26, 2000 (Except with respect to the matters discussed in Note 14, as to which the date is March 3, 2000.) 166 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 of Form 10-K. The information required by ITEMS 10, 11, 12 and 13 for LG&E Energy and LG&E is incorporated herein by reference to their respective definitive proxy statements to be filed during April 2000 with the Commission pursuant to Regulation 14A of the Securities and Exchange Act of 1934. 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. Additionally, in accordance with General Instruction G, the information required by ITEM 10 relating to executive officers of LG&E Energy, LG&E and 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, 1999 (page 75). Consolidated statements of retained earnings for the three years ended December 31, 1999 (page 76). Consolidated statements of comprehensive income for the three years ended December 31, 1999 (page 76) Consolidated balance sheets - December 31, 1999, and 1998 (page 77). Consolidated statements of cash flows for the three years ended December 31, 1999 (page 78). Consolidated statements of capitalization - December 31, 1999, and 1998 (page 79). Notes to consolidated financial statements (pages 81-116). Report of management (page 117). Report of independent public accountants (page 118). LG&E: Statements of income for the three years ended December 31, 1999 (page 119). Statements of retained earnings for the three years ended December 31, 1999 (page 119). Statements of comprehensive income for the three years ended December 31, 1999 (page 120). Balance sheets - December 31, 1999, and 1998 (page 121). Statements of cash flows for the three years ended December 31, 1999 (page 122). Statements of capitalization - December 31, 1999, and 1998 (page 123). Notes to financial statements (pages 124-142). Report of management (page 143). Report of independent public accountants (page 144). 167 KU: Statements of income for the three years ended December 31, 1999 (page 145). Statements of retained earnings for the three years ended December 31, 1999 (page 145). Balance sheets - December 31, 1999, and 1998 (page 146). Statements of cash flows for the three years ended December 31, 1999 (page 147). Statements of capitalization - December 31, 1999, and 1998 (page 148). Notes to financial statements (pages 149-164). Report of management (page 165). Report of independent public accountants (page 166). 2. Financial Statement Schedules (included in Part IV): Schedule II Valuation and Qualifying Accounts for the three years ended December 31, 1999, for LG&E Energy (page 192), LG&E (page 193), and KU (page 194). 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 February 27, 2000, by and among PowerGen plc, LG&E Energy Corp., US Subholdco2 and Merger Sub, including certain exhibits thereto. [Filed as Exhibit 1 to LG&E Energy's Current Report on Form 8-K filed February 29, 2000 and incorporated by reference herein] 2.02 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 June 2, 1999. 168 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 June 2, 1999. 3.05 x Copy of Amended and Restated Articles of Incorporation of KU [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 Copy of By-laws of KU, as amended through June 2, 1999. 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 169 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 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 170 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 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, 171 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] 172 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 KU 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 (Exhibit 2 to Form 10-Q 173 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 KU 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 Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02c to LG&E's 174 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 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 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 Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring 175 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 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 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] 10.17 x x Copy of Modification No. 8 dated June 23, 1977, to the Power Agreement between Ohio Valley Electric Corporation and 176 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 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 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 Plan effective January 1, 1992, covering non-employee directors of the Company and its subsidiaries. [Filed as Exhibit 10.34 to 177 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 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. Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corpora- 178 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- tion 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 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 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 February 21, 1995, and incorporated by reference herein] 179 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 180 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 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 Secu- 181 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- rities 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. [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] 182 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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] 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 183 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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 [Not used.] 10.67 [Not used.] 10.68 [Not used.] 10.69 [Not used.] 10.70 [Not used.] 10.71 [Not used.] 184 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 10.72 [Not used.] 10.73 [Not used.] 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. [Filed as Exhibit 10.76 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.77 x x Copy of Coal Supply Agreement dated January 1, 1999 between LG&E and Peabody COALSALES Company. [Filed as Exhibit 10.77 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.78 [Not used.] 10.79 [Not used.] 185 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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. [Filed as Exhibit 10.80 to KU's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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. [Filed as Exhibit 10.81 to KU's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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. [Filed as Exhibit 10.82 to KU's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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.] [Filed as Exhibit 10.83 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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.] [Filed as Exhibit 10.84 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 186 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- 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.] [Filed as Exhibit 10.85 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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.] [Filed as Exhibit 10.86 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.87 x Copy of Form of Lease and Operating Agreement Between Western Kentucky Energy Corp. and Big Rivers Electric Corporation 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.] [Filed as Exhibit 10.87 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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.] [Filed as Exhibit 10.88 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.89 x Copy of Agreement and Amendments to Agreements By and Among City of Henderson, Kentucky, City of Henderson Utility 187 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- Commission, Big Rivers Electric Corporation, WKE Station Two Inc., LG&E Energy Marketing Inc., and Western Kentucky Energy Corp. dated July 15, 1998. [Filed as Exhibit 10.89 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.90 x x x * Copy of Amendment to LG&E Energy's Supplemental Executive Retirement Plan, effective September 2, 1998. [Filed as Exhibit 10.90 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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. [Filed as Exhibit 10.91 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 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. [Filed as Exhibit 10.92 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated by reference herein] 10.93 x x x * Copy of Employment Agreement, dated as of February 25, 2000, by and among LG&E Energy, PowerGen plc and Roger W. Hale. [Filed as Exhibit 1 to Appendix A of LG&E Energy's Preliminary Proxy Statement on Schedule 14A on March 13, 2000 and incorporated by reference herein] 10.94 x x x * Copy of form of Employment and Severance Agreement, dated as of February 25, 2000, by and among LG&E Energy, PowerGen plc and certain executive officers of the Company. 10.95 x x x * Copy of Amendment dated as of April 21, 1999, to Amended and Restated Omnibus Long-Term Incentive Plan, covering officers and key employees of LG&E Energy. 10.96 x x x * Copy of Amendment, effective October 1, 1999, to LG&E Energy's Non-Qualified Savings Plan. 10.97 x x x * Copy of Amendment, effective December 1, 1999, to LG&E 188 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E KU Description - --- ------ ---- -- ----------- Energy's Non-Qualified Savings Plan. 10.98 [Not used.] 10.99 x Copy of Agency Agreement, dated September 1, 1999, between LG&E Capital Corp. and Wachovia Securities Inc. 10.100 x Copy of Terms Agreement, dated May 4, 1999, among LG&E Capital Corp., J.P. Morgan Securities Inc., Chase Securities Inc. and Merrill Lynch & Co. 10.101 x Copy of Second Supplemental Indenture, dated as of September 1, 1999 between LG&E Capital Corp. and The Bank of New York as Trustee. 10.102 x x x Copy of Modification No. 10., dated January 1, 1998, to the Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. 10.103 x x x Copy of Modification No. 11, dated April 1, 1999, to the Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. 10.104 x x Copy of Amendment No. 1, dated January 1, 2000, to Amended and Restated Coal Supply Agreement, dated April 1, 1998, among LG&E, Hopkins County Coal, LLC and Webster County Coal, LLC. 10.105 x x Copy of Amendment No. 1, dated January 1, 2000, to Coal Supply Contract, dated January 1, 1999, between LG&E and Peabody CoalSales Company. 10.106 x x Copy of Letter Amendment, dated September 15, 1999, to Transportation Agreement, dated November 1, 1993, between LG&E and Texas Gas Transmission Corporation. 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. 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. 189 (c) Reports on Form 8-K: On December 21, 1999, the Company filed a report on Form 8-K announcing that LG&E Energy, LG&E and KU realigned their management structures to support their efforts to prepare for the changing energy marketplace. On January 6, 2000, the Company filed a report on Form 8-K announcing that on December 21, 1999, it received an adverse order from the arbitration panel considering its contract dispute with OPC. On January 25, 2000, the Company filed a report on Form 8-K announcing that on January 7, 2000, it issued a statement regarding the Kentucky Commission's decision in the PBR case involving its two utility subsidiaries, LG&E and KU. On February 29, 2000, the Company filed a report on Form 8-K announcing that on February 27, 2000, it and PowerGen entered into an Agreement and Plan of Merger. (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. 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. 190 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. 191 Schedule II LG&E Energy Corp. and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1999 (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, 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 4,770 224,148 -- Other additions 1,750 248 -- -- Deductions: Net charges of nature for which reserves were created 11,399 4,648 104,767 -- Other deductions 108 25 -- -- ------- ------- -------- ------- Balance December 31, 1998 52,091 10,532 119,381 25,601 Additions: Charged to costs and expenses 26,956 4,746 174,212 -- Other additions -- 1,030 -- -- Deductions: Net charges of nature for which reserves were created 6,890 8,023 122,895 2,815 ------- ------- -------- ------- Balance December 31, 1999 $72,157 $ 8,285 $170,698 $22,786 ======= ======= ======== =======
(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. 192 Schedule II Louisville Gas and Electric Company Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1999 (Thousands of $) Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- --------- 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 Additions: Charged to costs and expenses -- 1,925 Deductions: Net charges of nature for which reserves were created -- 2,091 --- ------ Balance December 31, 1999 $63 $1,233 === ====== 193 Schedule II Kentucky Utilities Company Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1999 (Thousands of $) Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- --------- 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 Additions: Charged to costs and expenses 111 1,707 Deductions: Net charges of nature for which reserves were created -- 1,427 ---- ------ Balance December 31, 1999 $687 $ 800 ==== ====== 194 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 24, 2000 /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; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; By /s/ R. Foster Duncan March 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) 195 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 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) 196 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 24, 2000 /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; J. David Grissom Director; David B. Lewis Director; By /s/ R. Foster Duncan March 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) 197 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; Lee T. Todd, Jr., Ph.D. Director. By /s/ R. Foster Duncan March 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) 198 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 24, 2000 /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; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; By /s/ R. Foster Duncan March 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) 199 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 24, 2000 -------------------- R. Foster Duncan (Attorney-In-Fact) EX-3.03 2 EXHIBIT 3.03 BY-LAWS OF LG&E ENERGY CORP. As amended through June 2, 1999 EXHIBIT 3.03 BY-LAWS OF LG&E ENERGY CORP. (as amended and restated through June 2, 1999) ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. The Annual Meeting of the stockholders of the Company shall be held in or out of Kentucky at a time, date and place to be annually designated by the Board of Directors. Section 2. Except as otherwise mandated by Kentucky law and except as otherwise provided in or fixed by or pursuant to the Company's Articles of Incorporation, special meetings of the 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 Articles of Incorporation" shall mean the Articles of Incorporation of LG&E Energy Corp. as in effect on March 1, 1990, and as thereafter amended from time to time. Section 3. Written notice of each meeting of stockholders, stating the time and place, and, in the case of a special meeting, the purpose, shall be given at least ten (10) days prior to the meeting to each stockholder entitled to attend the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing by any stockholder and shall be waived by his attendance in person or by proxy at such meeting. Section 4. A stockholder may vote in person or by proxy. All appointments of proxies shall be in accordance with Kentucky law. Section 5. 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 by written consent of all the stockholders entitled to vote on the subject matter. Section 6. At an annual meeting of the stockholders, any business conducted must be properly brought before the meeting. To be properly brought before the 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 by a stockholder, the stockholder must have given timely written notice to the Secretary of the Company. To be timely, it 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. If 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, timely notice 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 was communicated to stockholders. This notice shall include (a) a 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. No business shall be conducted at an annual meeting except in accordance with this procedure. 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 6, and if so determined, shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. Section 7. The Chairman of the Board, if present, and in his absence the Vice Chairman of the Board, and the Secretary of the Company, shall serve as Chairman and Secretary, respectively, at each stockholders meeting. The Chairman of the stockholders meeting shall determine the order of 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 of the meeting, in his sole discretion, that any such person has unduly disrupted or is likely to disrupt the proceedings thereof, and by regulating the circumstances in which any person may make a statement or ask questions at any stockholders meeting. Section 8. 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 9. 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 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 fifteen (15). The Board of Directors may elect one of its members as Chairman of the Board. Except as otherwise provided in or fixed by or pursuant to the Company's Articles of Incorporation, the directors shall be classified, with respect to the time for which they each hold office, into three classes, as nearly 2 equal in number as possible, as determined by the Board of Directors. One class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1991, another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1992, and another class shall be originally elected for a term expiring at the annual meeting of stockholders to be held in 1993, with each member of each class to hold office until a successor is elected and qualified. At each annual meeting of stockholders of the Company and except as otherwise provided in or fixed by or pursuant to the Company's Articles of Incorporation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a three-year term. (b) Except as otherwise provided in or fixed by or pursuant to the Company's Articles of Incorporation, nominations for the election of directors may be made by the Board of Directors or any stockholder entitled to vote in the election of directors generally. However, such stockholders may nominate one or more persons for election as director or directors at a stockholders' meeting only if written notice of intent to make such nomination or nominations has been given either by personal delivery or mail to the Secretary of the Company in the time frame set out in Article I, Section 6. Each such notice shall state (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 a 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. (c) Except as otherwise required by law and except as otherwise provided in or fixed by or pursuant to the Company's Articles of Incorporation: (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 Company's Articles of Incorporation, 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 3 of the Company's Articles of Incorporation), voting together as a single class. Notwithstanding the foregoing provisions of this Paragraph (d), if at any time 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 the person as a director if cumulatively voted at an election of the class of directors of which the person is a part. Section 2. The business of the Company shall be managed by a Board of Directors. Regular meetings of the Board of Directors may be held without notice of the date, place, time or purpose at such time and place as may be fixed by the Board of Directors. Section 3. Special meetings of the Board of Directors may be called by the Chairman of the Board or the Chief Executive Officer of the Company, or, in their absence, the Vice Chairman of the Board or the Vice President, or at the request in writing of not less than three (3) directors on one (1) day's notice to each director. Section 4. Unless otherwise provided by law, at each meeting of the Board of Directors, the presence of at least one-half (1/2) of the total number of directors shall constitute a quorum for the transaction of business. Except as provided in Section 1(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. At any meeting of the Board of Directors where a quorum is not 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 5. The Chairman of the Board, if such person is present, shall serve as Chairman at each regular or special meeting of the Board of Directors and shall determine the order of business at such meeting. If the Chairman of the Board is not present at a regular or special meeting of the Board of Directors, the Vice Chairman of the Board shall serve as Chairman of such meeting and shall determine the order of business at such meeting. Section 6. Directors may receive such fees, compensation or expenses for their services as are authorized by resolution of the Board of Directors. Section 7. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if the action is taken by all members of the Board. Such action shall be evidenced by one (1) or more written consents describing the action taken, signed by each director, and included in the minutes with the Company's records reflecting the action taken. Section 8. (a) The Board of Directors may create committees and appoint members of the Board of Directors to serve on them. Each committee shall have two (2) or more members, who serve at the pleasure of the Board of Directors. (b) To the extent provided in the resolution of the Board of Directors establishing a committee, a committee shall have and exercise all the authority of the Board of 4 Directors, but no such committee shall have the authority to take any action that under Kentucky law can only be taken by the Board of Directors. (c) Sections 2, 3, 4, 6 and 7 of this Article II shall apply to committees and their members as well. Section 9. The Board of Directors may elect one of its members as Vice Chairman of the Board. ARTICLE III OFFICERS Section 1. The officers of the Company shall be a Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Chief Administrative Officer, one or more Vice Presidents, Secretary, Treasurer, Controller or such other officers (including, if so directed by a resolution of the Board of Directors, the Chairman of the Board) as the Board or the Chief Executive Officer 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. If practicable, officers are to be elected or appointed by the Board of Directors or the Chief Executive Officer at the first meeting of the Board following the annual meeting of stockholders and, unless otherwise specified, shall hold office for one year or until their successors are elected and qualified. Any vacancy shall be filled by the Board of Directors or the Chief Executive Officer. 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 and shall report directly to the Board of Directors. President Section 3. The President, should that office be created and filled, shall exercise such functions as may be delegated by the Chief Executive Officer and shall exercise the functions of the Chief Executive Officer during the absence or disability of the Chief Executive Officer. Chief Operating Officer Section 4. The Chief Operating Officer, should that office be created and filled, shall have responsibility for the management and direction of the Company, subject to the direction and approval of the Chief Executive Officer. 5 Chief Financial Officer Section 5. The Chief Financial Officer, should that office be created and filled, shall have responsibility for the financial affairs of the Company, including maintaining accurate books and records, meeting all financial reporting requirements and controlling Company funds, subject to the direction and approval of the Chief Executive Officer. Chief Administrative Officer Section 6. The Chief Administrative Officer, should that office be created and filled, shall have responsibility for the general administrative and human resources operations of the Company, subject to the direction and approval of the Chief Executive Officer. Vice Presidents Section 7. The Vice President or Vice Presidents, should such offices be created and filled, 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 8. 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 9. The Treasurer, should that office be created and filled, shall have responsibility for all receipts and disbursements of the Company and be custodian of the Company's funds. Controller Section 10. The Controller, should that office be created and filled, shall have responsibility for the accounting records of the Company. ARTICLE IV CAPITAL STOCK CERTIFICATES The Board of Directors shall approve all stock certificates as to form. The certificates for the shares of stock, issued by the Company, shall be signed (manually or by facsimile) by the President and Secretary, and the seal of the Company or a facsimile shall be affixed. The Board 6 of Directors shall appoint transfer agents to issue and transfer certificates of stock, and registrars to register such certificates. ARTICLE V FINANCE Section 1. The Board of Directors shall designate the bank or banks to be used to deposit Company funds and designate the officers and employees of the Company who may sign and countersign checks drawn against the Company accounts. The Board of Directors may authorize the use of facsimile signatures on checks. Section 2. Notes shall be signed by the Chief Executive Officer or the President and by 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. ARTICLE VI SEAL The seal of the Company shall be in the form of a circular disk, bearing the following information: ( LG&E Energy Corp. ) ( Kentucky ) ( Corporate Seal ) ARTICLE VII EMERGENCY BY-LAWS Section 1. The Board of Directors of the Company may adopt by-laws to be effective only in an emergency. For purposes of Article VII of these By-Laws, an "emergency" shall exist if a quorum of the Company's directors cannot be readily assembled because of a catastrophic event. Section 2. The stockholders of the Company may amend or repeal the by-laws adopted pursuant to Section 1 of Article VII of these By-Laws. Section 3. The by-laws adopted pursuant to Section 1 of Article VII of these By-Laws may include all provisions necessary for managing the Company during the emergency, including: (a) procedures for calling a meeting of the Board of Directors; 7 (b) quorum requirements for meetings of the Board of Directors; and (c) designation of additional or substitute directors. ARTICLE VIII AMENDMENTS Subject to the provisions of the Company's Articles of Incorporation, these By-Laws may be amended or repealed at any annual 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 at such meeting at which a quorum is present; provided that in the notice of such special meeting the purpose is given. Subject to the laws of the Commonwealth of Kentucky 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 to conduct the affairs of the Company. EX-3.04 3 EXHIBIT 3.04 BY-LAWS OF LOUISVILLE GAS AND ELECTRIC COMPANY By-Laws Adopted November 7, 1956 As Amended Through April 22, 1998 As Amended Through June 2, 1999 EXHIBIT 3.04 BY-LAWS OF LOUISVILLE GAS AND ELECTRIC COMPANY By-Laws Adopted November 7, 1956 As Amended Through April 22, 1998 As Amended Through June 2, 1999 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 2 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. (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. 3 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 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. Section 9. The Chairman of the Board, if such person is present, shall serve as Chairman at each regular or special meeting of the Board of Directors and shall determine the order of business at such meeting. If the Chairman of the Board is not present at a regular or special meeting of the Board of Directors, the Vice Chairman of the Board shall serve as Chairman of such meeting and shall determine the order of business of such meeting. The Board of Directors may elect one of its members as Vice Chairman of the Board. 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. 4 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. 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. 5 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. 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. 6 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. 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. 7 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. 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. 8 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 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 9 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 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 10 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. 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 4 EXHIBIT 3.06 BY-LAWS OF KENTUCKY UTILITIES COMPANY Dated April 28, 1998 (as amended through June 2, 1999) EXHIBIT 3.06 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 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 2 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 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. 3 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 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 4 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 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. Section 9. The Chairman of the Board, if such person is present, shall serve as Chairman at each regular or special meeting of the Board of Directors and shall determine the order of business at such meeting. If the Chairman of the Board is not present at a regular or special meeting of the Board of Directors, the Vice Chairman of the Board shall serve as Chairman of such meeting and shall determine the order of business of such meeting. The Board of Directors may elect one of its members as Vice Chairman of the Board. 5 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 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. The officers of the Company shall be a Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Chief Administrative Officer, one or more Vice Presidents, Secretary, Treasurer, Controller or such other officers (including, if so directed by a resolution of the Board of Directors, the Chairman of the Board) as the Board or the Chief Executive Officer 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. If practicable, officers are to be elected or appointed by the Board of Directors or the Chief Executive Officer at the first meeting of the Board following the annual 6 meeting of stockholders and, unless otherwise specified, shall hold office for one year or until their successors are elected and qualified. Any vacancy shall be filled by the Board of Directors or the Chief Executive Officer. 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. Section 2. The Chief Executive Officer of the Company shall have full charge of all of the affairs of the Company and shall report directly to the Board of Directors. Section 3. The President, should that office be created and filled, shall exercise such functions as may be delegated by the Chief Executive Officer and shall exercise the functions of the Chief Executive Officer during the absence or disability of the Chief Executive Officer. Section 4. The Chief Operating Officer, should that office be created and filled, shall have responsibility for the management and direction of the Company, subject to the direction and approval of the Chief Executive Officer. Section 5. The Chief Financial Officer, should that office be created and filled, shall have responsibility for the financial affairs of the Company, including maintaining accurate books and records, meeting all financial reporting requirements and controlling Company funds, subject to the direction and approval of the Chief Executive Officer. Section 6. The Chief Administrative Officer, should that office be created and filled, shall have responsibility for the general administrative and human resources operations of the Company, subject to the direction and approval of the Chief Executive Officer. Section 7. The Vice President or Vice Presidents, should such offices be created and filled, may be designated as Vice President, Senior Vice President or Executive Vice President, as the Board of Directors or Chief Executive Officer may determine. Section 8. 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. Section 9. The Treasurer, should that office be created and filled, shall have responsibility for all receipts and disbursements of the Company and be custodian of the Company's funds. Section 10. The Controller, should that office be created and filled, shall have responsibility for the accounting records of the Company. 7 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. 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 8 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 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 stockholder' meeting. 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. 9 EX-10.94 5 EXHIBIT 10.94 EXHIBIT 10.94 EXECUTION COPY EMPLOYMENT AND SEVERANCE AGREEMENT THIS AGREEMENT made February 25, 2000, by and between LG&E Energy Corporation, a Kentucky corporation (the "Company"), Powergen, plc, a United Kingdom public limited company ("Parent"), and [ NAME ] (the "Executive"). WHEREAS, Parent, Company, a Delaware corporation to be formed as an indirect wholly owned subsidiary of Parent ("US Subholdco 2") and a Kentucky corporation to be formed as a direct wholly owned subsidiary of US Subholdco 2 ("Merger Sub"), have executed a merger agreement (the "Merger Agreement") which will become effective at the Effective Time (as defined in the Merger Agreement); WHEREAS, the Merger will constitute a "Change in Control" for purposes of the Change-in-Control Agreement between the Company and the Executive dated [ PRIOR DATE ] (the "Change-In-Control Agreement"); WHEREAS, Parent and the Company have determined that it is essential and in the best interest of Parent, the Company and their stockholders to retain the services of the Executive as [ TITLE ] of the Company on and after the Effective Time, and provide the Executive with compensation and other benefits on the terms and conditions set forth in this Agreement, and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security in the event of a Change in Control after the Merger; and WHEREAS, the Executive is willing to accept such employment and perform services for the Company on the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. EFFECTIVENESS; EFFECT ON PRIOR AGREEMENTS; ADDITIONAL PAYMENTS. 1.1. This Agreement shall become effective at the Effective Time, provided the Executive is employed by the Company on that date. As of the Effective Time, the Change-in-Control Agreement shall, except as otherwise provided herein, terminate and become null and void. In consideration of the services rendered by the Executive to the Company prior to the Effective Time, the Executive's willingness to enter into this Agreement, and the satisfaction of all of the Company's obligations under the Change-in-Control Agreement, the Company shall pay the Executive in cash 60% of the amount calculated and payable under Sections 3.1(b) and 6 of the Change-in-Control Agreement (the "Initial Change-in-Control Payment") within 10 days following the Effective Time conditioned upon delivery by the Executive of an executed form of release of all claims against the Company with respect to the Change-in-Control Agreement (other than with respect to Section 6 of such Agreement) (on a form to be provided by the Company.) The balance of the amount calculated under Sections 3.1(b) and 6 of the Change-in-Control Agreement (the "Deferred Change-in-Control Payment") shall be credited to Executive's account under the Deferred Compensation Plan of the Company (or such other plan or arrangement as may be mutually agreed upon by the parties hereto) and shall be payable in a lump sum cash payment (including adjustment for any increases or decreases in Executive's account under the Deferred Compensation Plan), if the Executive so elects, within ten (10) days after the earliest to occur of (i) a termination of employment, other than a termination by the Executive without Good Reason, which occurs at any time during the eighteen consecutive months immediately following the Effective Time (the "Transition Period"), (ii) a Change in Control that occurs during the Transition Period, so long as the Executive is still employed by the Company immediately prior to the Change in Control, and (iii) the end of the Transition Period, so long as the Executive is still employed on such date. In the event that Executive elects not to receive the foregoing lump sum payment, Executive may otherwise elect to defer receipt of such payment and have such payment continue to be held in his Deferred Compensation Plan account (which account shall continue to be adjusted in accordance with the terms of the Deferred Compensation Plan, or such other plan or arrangement as may be mutually agreed upon by the parties hereto). 1.2. Parent shall, or shall cause the Company to pay to the Executive a lump sum cash payment in an amount equal to 25% of the Deferred Change-in-Control Payment (without adjustment for any increases or decreases in Executive's account under the Deferred Compensation Plan)(the "Premium Payment") within ten (10) days after the earliest to occur of (i) the date that Executive's employment is terminated by the Company without Cause, by Executive for Good Reason, or as a result of Executive's death or Disability, at any time during the eighteen consecutive months immediately following the Effective Time (the "Transition Period"), (ii) a Change in Control that occurs during the Transition Period, so long as the Executive is still employed by the Company immediately prior to the Change in Control, and (iii) the end of the Transition Period, so long as the Executive is still employed on such date. In the event that Executive elects not to receive the foregoing lump sum payment, Executive may otherwise elect to defer receipt of such payment and have such payment continue to be held in his Deferred Compensation Plan account (which account shall continue to be adjusted in accordance with the terms of the Deferred Compensation Plan, or such other plan or arrangement as may be mutually agreed upon by the parties hereto). -2- 1.3. As of the Effective Time, Parent shall grant to the Executive the number of American Depository Shares of Parent, each of which represents four Ordinary Shares of the Parent (the "ADS's"), that are equivalent in value, as of the Effective Time, to the amount of the Premium Payment (the "Premium ADS's"), which shall be subject to a risk of forfeiture and in which the Executive shall become vested upon the earliest to occur of (i) the date that Executive's employment is terminated by the Company without Cause, by Executive for Good Reason, or as a result of Executive's death or Disability, at any time during the Transition Period, (ii) a Change in Control that occurs during the Transition Period, so long as the Executive is still employed immediately prior to the Change in Control, and (iii) the end of the Transition Period, so long as the Executive is still employed on such date. In addition, in the event that during the Transition Period, Parent pays dividends in respect of ADS's (or Ordinary Shares, as applicable) to its holders thereof, the Executive shall have a right, subject to the Executive's ultimate vesting in the Premium ADS's pursuant to the preceding sentence, to receive a payment, in cash or ADS's (as the Executive shall elect), equal to the amount of any dividends actually paid on the number of Premium ADS's (or Ordinary Shares, as applicable) held by the Executive. 2. TERM OF AGREEMENT. This Agreement shall commence as of the Effective Time, and shall continue in effect until the second anniversary of the Effective Time; provided, however, that commencing on the second anniversary of the Effective Time, and on each anniversary of the Effective Time thereafter, the term of this Agreement shall automatically be extended for one (1) year unless the Company or the Executive shall have given written notice to the other at least ninety days prior thereto (if such notice is given following the second anniversary of the Effective Time, otherwise such notice period shall be one hundred and eighty days) that the term of this Agreement shall not be so extended; and provided, further, however, that notwithstanding any such notice by the Company not to extend, the term of this Agreement shall not expire prior to the expiration of twenty-four (24) months after any Change in Control which occurs while this Agreement is in effect. 3. EMPLOYMENT. 0.1. The Company agrees to employ Executive, and Executive agrees to serve during the term hereof as [TITLE] of the Company. Executive shall report to the [MANAGER FULL TITLE] of the Company (the "[MANAGER TITLE]"). 0.2. Executive agrees to devote his full working time and efforts, to the best of his ability, experience and talent, to the performance of services, duties and responsibilities in connection with the position named above. Executive shall perform such duties and exercise such powers, commensurate with his position, as the -3- [MANAGER TITLE] and the Board of Directors of the Company (the "Board") shall from time to time assign to him on such terms and conditions and subject to such restrictions as the [MANAGER TITLE] and the Board may reasonably from time to time impose. 0.3. Nothing in this Agreement shall preclude Executive from (a) engaging in charitable and community affairs so long as, in the reasonable determination of the Company, such activities do not interfere with his duties and responsibilities hereunder, (b) managing any passive investment made by him in publicly traded equity securities or other property (provided that no such investment may exceed 5% of the equity of any entity, without the prior approval of the Company, which approval shall not be unreasonably withheld) or (c) serving, subject to the prior approval of the Company, which approval shall not be unreasonably withheld, as a member of boards of directors or as a trustee of any other corporation, association or entity. 0.4. The Executive will perform his services at the Company's headquarters in Louisville, Kentucky, with the understanding that he will be required to travel as reasonably required (including travel to the United Kingdom) for the performance of his duties under this Agreement. 1. COMPENSATION. 1.1. SALARY. The Company shall pay Executive a base salary ("Base Salary") of not less than the rate in effect immediately prior to the Effective Time. The Base Salary shall be payable in accordance with the ordinary payroll practices of the Company. The Base Salary shall be reviewed by the Board as of July 1 of each year during the term of this Agreement and may be increased in the discretion of the Board and, as so increased, shall constitute "Base Salary" hereunder. At no time shall the Board be able to decrease the Base Salary. 1.2. ANNUAL BONUS. In addition to his Base Salary, Executive shall be eligible to participate in any annual incentive plan or program maintained by the Company in which other senior executives of the Company participate (the "Bonus Plan"). Such participation shall be on terms commensurate with Executive's position and level of responsibility. The Executive's target bonus under the Bonus Plan in respect of each twelve-month period of the term of this Agreement (as provided for in Section 2)(each, a "Contract Year") shall be not less than the target bonus opportunity to which the Executive is entitled as of the date hereof (50% of the Base Salary); PROVIDED, HOWEVER, that with respect to the first and second Contract Years, Executive's annual bonus amount shall not be less than 75% of the Executive's target bonus for each such Contract Year. Except as set forth in the preceding sentence, nothing in this Section 4.2 -4- will guarantee to the Executive any specific amount of incentive compensation, or prevent a Remuneration Committee appointed by the Board of Directors of Parent from establishing reasonable performance goals and compensation targets, after consultation with the Executive, applicable only to the Executive. 1.3. COMPENSATION PLANS AND PROGRAMS. Executive shall be eligible to participate in any compensation plan or program maintained by the Company in which other senior executives of the Company participate on terms commensurate with his position and level of responsibility, and to receive equity-based incentive awards based upon achievement of performance goals based partially upon Parent's and partially on the Company's performance in accordance with the general terms of the long-term incentive plan contained on Exhibit A. 1.4. OTHER COMPENSATION. Nothing in this Section 4 will preclude the Board from authorizing such additional compensation to the Executive, in cash or in property, as the Board may determine in its sole discretion to be appropriate. 4.5 EXISTING STOCK OPTIONS. In addition to any provision in the Merger Agreement, prior to the Effective Time, Executive may elect in writing delivered to Parent to convert each Company stock option he holds (each, a "Company Option"), whether vested or unvested, into an option to acquire, on the same terms and conditions as were applicable under such Company Option, the number of ADS's, equal to the result (rounded down to the nearest whole ADS) of multiplying the number of shares subject to the Company Option immediately prior to the Effective Time by the Conversion Ratio (as defined in the Merger Agreement), at an exercise price per share equal to the result (rounded up to the nearest whole cent) of dividing the per share exercise price of such Company Option immediately prior to the Effective Time by the Conversion Ratio (it being understood that the exercise price shall be converted into dollars at the rate prevailing at the close of business on the business day prior to the Effective Time). If Executive makes such election and holds the Company Option or the ADS's acquired upon the exercise of such Company Option for two years after the Effective Time, then upon the later of (i) the end of the 24th month after the Effective Time, or (ii) the exercise of such Company Option, the Parent shall issue Executive one additional ADS for every 4 ADS's acquired as a result of such exercise; PROVIDED HOWEVER in the event that either (i) a Change in Control occurs within the two years after the Effective Time and the Executive is still employed by the Company immediately prior to the Change in Control, immediately prior to such time, the Executive shall receive one additional ADS for every 4 ADS's (A) acquired by the Executive as a result of the exercise of any Company Option during the period prior to such Change in Control and (B) underlying each unexercised Company Option held by the Executive immediately prior to such Change in Control or (ii) the Executive's employment is terminated for any reason (other than by the Company -5- for Cause or by the Executive without Good Reason (other than as a result of death or Disability)) at any time during the two years after the Effective Time and prior to any Change in Control, the Executive shall receive, within 10 days after the termination of employment, one additional ADS for every 4 ADS's (A) acquired by the Executive as a result of the exercise of any Company Option during the period prior to such termination of employment and (B) underlying each unexercised Company Option held by the Executive immediately prior to such termination of employment. 2. EMPLOYEE BENEFITS. 2.1. EMPLOYEE BENEFIT PROGRAMS, PLANS AND PRACTICES. The Company shall provide Executive during the term of his employment hereunder with coverage under all employee pension and welfare benefit programs, plans and practices including, but not limited to, those specified in Exhibit B attached hereto (commensurate with his positions and level of responsibility in the Company and to the extent permitted under any employee benefit plan) in accordance with the terms thereof, which the Company makes available to its senior executives. 2.2. VACATION AND FRINGE BENEFITS. Executive shall be eligible to participate in the Company's vacation plan; PROVIDED, HOWEVER, that in no event shall Executive receive fewer vacation days than Executive is entitled to receive under the Company's vacation policy as in effect immediately prior to the Effective Time. In addition, Executive shall be entitled to perquisites and other fringe benefits that are comparable to those perquisites and fringe benefits to which Executive is entitled immediately prior to the Effective Time. 2.3. EXPENSES. Executive is authorized to incur reasonable expenses in carrying out his duties and responsibilities under this Agreement, including, without limitation, expenses for travel and similar items related to such duties and responsibilities. The Company will reimburse Executive for all such expenses upon presentation by Executive from time to time of appropriately itemized and approved (consistent with the Company's policy) accounts of such expenditures. 4. DEFINITIONS. 4.1. BASE AMOUNT; BONUS AMOUNT. For purposes of this Agreement, "Base Amount" shall mean the greater of the Executive's annual base salary from the Company (a) at the rate in effect on the Termination Date (as hereinafter defined) or (b) at the highest rate in effect at any time during the ninety (90) day period prior to the Effective Time or the Change in Control, as applicable, and shall include all amounts of base salary that are deferred under any qualified and non-qualified employee benefits -6- plans of the Company or any Subsidiary (as hereinafter defined) or under any other agreement or arrangement. For purposes of this Agreement; "Bonus Amount" shall mean the greater of (a) the most recent annual bonus paid or payable to the Executive (which may include a bonus amount paid or payable in respect of any Contract Year), (b) the annual bonus paid or payable to the Executive under the Bonus Plan for the full fiscal year ended prior to the fiscal year during which the Effective Time, or the Change in Control, as applicable, occurred or (c) the Executive's target award under the Bonus Plan for the full fiscal year ended prior to the fiscal year during which the Effective Time, or the Change in Control, as applicable, occurred. 4.2. CAUSE. For purposes of this Agreement, a termination for "Cause" is a termination evidenced by a resolution adopted in good faith by at least seventy-five percent (75%) of the Board of Directors of the Company that (i) there has been repeated willful misconduct by the Executive in performing the reasonably assigned duties on behalf of the Company required by and in accordance with his employment by the Company, or (ii) the Executive has been convicted of a felony in the course of performing those duties. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Executive after a Notice of Termination (as hereinafter defined) is given by the Executive shall constitute Cause for purposes of this Agreement. No act, or failure to act, on Executive's part shall be deemed to be "repeated" unless the Executive shall have received a written notice from the Company setting forth in detail the particulars of the act, or the failure to act, which the Company contends would constitute Cause when repeated and Executive then repeats such act or failure to act and does not resolve or otherwise cure such behavior within thirty (30) days of receipt of such notice. 2.4. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in Control" shall mean the occurrence during the term of this Agreement of any of the following events: (1) An acquisition (other than directly from Parent) of any securities of Parent entitled generally to vote on the election of directors (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifteen percent (15%) or more of the combined voting power of Parent's then outstanding Voting Securities; PROVIDED, HOWEVER, in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (1) an employee benefit plan (or a trust forming a part thereof) maintained -7- by (a) Parent or (b) any corporation or other Person of which a majority of its voting power or its equity securities or equity interest is owned directly and indirectly by Parent (a "Subsidiary") or (2) Parent or any Subsidiary. (2) The individuals who, as of the date this Agreement was approved by the Board, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by Parent's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of the Agreement, be considered as a member of the Incumbent Board; or (3) Approval by stockholders of Parent of: (1) A merger, consolidation or reorganization involving Parent; unless (1) the stockholders of Parent immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding voting securities of the corporation resulting from such merger or consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion to each other as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization, and (2) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; (2) A complete liquidation or dissolution of Parent or the Company ; unless, in the case of the Company, Parent continues to own directly or indirectly all or substantially all of the Company's assets; (3) An agreement for the sale or other disposition of all or substantially all of the assets of Parent or the Company to any Person (other than a transfer to a Subsidiary); (1) A merger or other combination involving the Company as a result of which Parent ceases to beneficially own more than 50% of the outstanding Voting Securities of the successor to the Company, unless Parent continues to own directly or indirectly all or substantially all of the Company's assets; or -8- (2) Any Person acquires Beneficial Ownership of a greater percentage of the Voting Securities of the Company than the percentage of such Voting Securities then held, directly or indirectly, by Parent. Notwithstanding the foregoing clauses (a), (b), and (c), a Change in Control shall not be deemed to occur solely because any Person Beneficially Owned by the Subject Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by Parent which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by Parent, and after such share acquisition by Parent, the Subject Person or entity becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. (4) Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated during the term of this Agreement and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control and who effectuates a Change in Control (a "Third Party") or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control which actually occurs, then for all purposes of this Agreement, the date of a Change in Control with respect to the Executive shall mean the date immediately prior to the date of such termination of the Executive's employment. 4.3. DISABILITY. For purposes of this Agreement, "Disability" shall mean a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with the Company which continues for a period of at least one hundred eighty (180) consecutive days. 4.4. GOOD REASON. (1) For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the events or conditions described in subsections (1) through (8) hereof: (1) a reduction by the Company in the Executive's Base Salary or annual target bonus opportunity as in effect prior to such reduction or any failure to pay the Executive any compensation or benefits to which the Executive is entitled within -9- thirty days of the applicable due date, provided that the Company may correct such reduction or failure within thirty (30) days of its commission; (2) Parent or the Company require the Executive to be relocated anywhere in excess of fifty (50) miles of his present office location, except for required travel on Parent or Company business consistent with his business travel obligations as in effect prior to the Effective Time and as provided in Section 3.4 of this Agreement; (3) a failure by Parent or the Company to maintain plans providing benefits at least as beneficial in the aggregate as those provided by any benefit or compensation plan, retirement or pension plan, stock option plan, bonus plan, long-term incentive plan, life insurance plan, health and accident plan or disability plan in which the Executive is participating prior to the Effective Time, or the Change in Control, as applicable, or if the Company or Parent has taken any action which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any of such plans or deprive him of any material fringe benefit enjoyed by him prior to the Effective Time, or the Change in Control, as applicable, or if the Company or Parent has failed to provide him with the number of paid vacation days to which he would be entitled in accordance with the Company's normal vacation policy immediately prior to the Effective Time, or the Change in Control, as applicable; (3) Parent or the Company materially reduces, individually or in the aggregate, the Executive's title, job authorities or responsibilities as in effect prior to such reduction; (4) Parent or the Company fails to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 11 hereof; (5) any purported termination of the Executive's employment by Parent or the Company which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 8 below; and, for purposes of this Agreement, no such purported termination shall be effective; (6) any material breach by Parent or the Company of any provision of this Agreement; (7) any purported termination of the Executive's employment for Cause by Parent or the Company which does not comply with the terms of Section 6.2 of this Agreement; or -10- (2) Until the Executive's Disability, the Executive's rights to terminate his employment pursuant to this Section 6.5 shall not be affected by his incapacity due to physical or mental illness. 5. TERMINATION OF EMPLOYMENT. 5.1. If, during the term of this Agreement, the Executive's employment with the Company shall be terminated within twenty-four months after the effective time of any Change in Control, then the Executive shall be entitled to the following compensation and benefits: (1) If the Executive's employment with the Company shall be terminated (1) by Parent or the Company for Cause or (2) by the Executive (other than for Good Reason or as a result of death or Disability), the Company shall pay the Executive all amounts earned or accrued for or on behalf of the Executive through the Termination Date (as hereinafter defined) but not paid as of the Termination Date, including (i) Base Salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Termination Date and (iii) vacation pay (collectively, "Accrued Compensation"). (2) If the Executive's employment with the Company shall be terminated (1) as a result of the Executive's death or (2) as a result of the Executive's Disability, the Executive shall be entitled to the following: (i) The Company shall pay the Executive all Accrued Compensation; (ii) the Company shall pay, as a severance amount to the Executive (or his or her personal representative or estate, as applicable) after the Termination Date, an amount equal to the Executive's annual target bonus for the year in which such Termination Date occurs; and (iii) the Company shall provide the Executive with a cash lump sum payment of any long-term incentive award granted to the Executive at the target level, prorated for Executive's actual period of service. (3) If the Executive's employment with the Company shall be terminated (1) by the Company for any reason (including as a result of the Company's notice not to extend the term of this Agreement) other than as specified in clause (1) of Section 7.1(a) or (2) by the Executive for Good Reason, the Executive shall be entitled to the following: (1) The Company shall pay the Executive all Accrued Compensation; -11- (2) The Company shall pay, as a severance amount to the Executive after the Termination Date, an amount equal to 2.99 times the sum of (a) the Base Amount and (b) the Bonus Amount; (3) For a period of thirty-six months (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries (to the same extent provided to the dependents and beneficiaries prior to the Executive's termination) the life insurance, disability, medical, dental, and hospitalization benefits provided (x) to the Executive by the Company at any time within ninety (90) days preceding a Change in Control or at any time thereafter, or (y) to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 7.1(c) (iii) during the Continuation Period shall be no less favorable to the Executive and his dependents and beneficiaries, than the most favorable of such coverages and benefits set forth in clauses (x) and (y) above. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans are no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This Subsection (c)(iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's or any Subsidiary's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; and (4) The Company shall provide to the Executive an amount equal to twenty percent (20%) of the Base Amount to be used for outplacement services. 5.2. If, during the term of this Agreement, but prior to a Change in Control, the Executive's employment with the Company shall be terminated, the Executive shall be entitled to the following: (1) If the Executive's employment with the Company shall be terminated (1) by Parent or the Company for Cause or (2) by the Executive (other than for Good Reason or as a result of death or Disability), the Company shall pay the Executive all Accrued Compensation. (2) If the Executive's employment with the Company shall be terminated (1) as a result of the Executive's death or (2) as a result of the Executive's Disability, the Executive shall be entitled to the following: (i) The Company shall pay the Executive all Accrued Compensation; (ii) the Company shall pay, as a severance amount -12- to the Executive (or his or her personal representative or estate, as applicable) after the Termination Date, an amount equal to the Executive's annual target bonus for the year in which such Termination Date occurs.; and (iii) the Company shall provide the Executive with a cash lump sum payment of any long-term incentive award granted to the Executive at the target level, prorated for Executive's actual period of service. (3) If the Executive's employment with the Company shall be terminated (1) by the Company for any reason (including as a result of the Company's notice not to extend the term of this Agreement) other than as specified in clause (1) of Section 7.2(a) or (2) by the Executive for Good Reason, the Executive shall be entitled to the following: (1) The Company shall pay the Executive all Accrued Compensation; (2) The Company shall pay, as a severance amount to the Executive after the Termination Date, an amount equal to the sum of (a) the Base Amount and (b) the Bonus Amount, divided by twelve, the quotient of which shall be multiplied by the greater of (x) twelve and (y) the number of months remaining in the term of this Agreement; (3) For a period of twenty-four (24) months (the "Continuation Period"), the Company shall at its expense continue on behalf of the Executive and his dependents and beneficiaries (to the same extent provided to the dependents and beneficiaries prior to the Executive's termination) the life insurance, disability, medical, dental, and hospitalization benefits provided to other similarly situated executives who continue in the employ of the Company during the Continuation Period. The Company's obligation hereunder with respect to the foregoing benefits shall be limited to the extent that the Executive obtains any such benefits pursuant to a subsequent employer's benefit plans, in which case the Company may reduce the coverage of any benefits it is required to provide the Executive hereunder as long as the aggregate coverages and benefits of the combined benefit plans are no less favorable to the Executive than the coverages and benefits required to be provided hereunder. This Subsection (c)(iii) shall not be interpreted so as to limit any benefits to which the Executive or his dependents may be entitled under any of the Company's or any Subsidiary's employee benefit plans, programs or practices following the Executive's termination of employment, including without limitation, retiree medical and life insurance benefits; and (4) The Company shall provide to the Executive an amount equal to twenty percent (20%) of the Base Amount to be used for outplacement services. -13- 5.3. The amounts provided for in Section 7.1(a), 7.1(b) (i) and (ii), 7.1(c) (i), (ii) and (iv), 7.2(a), 7.2(b)(i) and (ii) and 7.2(c) (i), (ii) and (iv) shall be paid in cash in a lump sum within thirty (30) days after the Executive's Termination Date. 5.4. The Executive shall not be required to mitigate the amount of any payments provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Executive in any subsequent employment except as provided in Sections 7.1(c) (iii) and 7.2(c)(iii). 5.5. The provisions of this Agreement, and any payment provided for hereunder, shall not reduce any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan, or securities plan, employment agreement or other contract, plan or arrangement with the Company, any Subsidiary or any other party, including, but not limited to, those specified in Exhibit B attached hereto, provided, however, the Company shall not be required to make duplicative payments of Accrued Compensation, and provided further that, upon execution of this Agreement, Executive shall not have any rights under his prior Change-In-Control Agreement (other than with respect to Section 6 of such Agreement), as previously amended, which agreement (as stated in Sections 1 and 22 hereof) is superseded by this Agreement. 6. NOTICE OF TERMINATION. Any purported termination by Parent or the Company or by the Executive shall be communicated by written Notice of Termination to the other. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, no such purported termination shall be effective without such Notice of Termination. 7. TERMINATION DATE. "Termination Date" shall mean, in the case of the Executive's death, his date of death and, in all other cases, the date specified in the Notice of Termination subject to the following: (1) If the Executive's employment is terminated by Parent or the Company for Cause or due to Disability, the date specified in the Notice of Termination shall be at least thirty (30) days from the date the Notice of Termination is given to the Executive, provided that, in the case of Disability, the Executive shall not have returned to the full-time performance of his duties during such period of at least (30) days; and -14- (2) If the Executive's employment is terminated for Good Reason, the date specified in the Notice of Termination shall not be more than sixty (60) days from the date the Notice of Termination is given to Parent or the Company. 8. CERTAIN ADDITIONAL PAYMENTS (1) Notwithstanding anything in the Agreement to the contrary, in the event that it is determined (as hereafter provided) that any payment or distribution by the Company or any affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (individually and collectively a "Payment"), would be subject to the excise tax imposed by Section 4999 (or any successor provision thereto) of the Internal Revenue Code of 1986, as amended (the "Code") by reason of being considered "contingent on a change in ownership or control" of the Company or Parent, within the meaning of Section 280G of the Code (or any successor provision thereto), or to any similar tax imposed by state or local law, or any interest or penalties with respect to any such taxes (such taxes, together with any such interest and penalties, being hereafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment or payments (individually and collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment. (2) Subject to the provisions of Section 10(f) hereof, all determinations required to be made under this Section 10, including whether an Excise Tax is payable by the Executive and the amount of such Excise Tax and whether a Gross-Up Payment is required to be paid to the Executive and the amount of such Gross-Up Payment, if any, shall be made by a nationally recognized accounting firm (the "Accounting Firm") selected by the Executive in his sole discretion. The Executive shall direct the Accounting Firm to submit its determination and detailed supporting calculations to both the Company and the Executive within thirty (30) calendar days after the Termination Date, if applicable, and any such other time or times as may be requested by the Company or the Executive. If the Accounting Firm determines that any Excise Tax is payable by the Executive, the Company shall pay or cause to be paid the required Gross-Up Payment in cash to the Executive within five (5) business days after receipt of such determination and calculations with respect to any Payment to the Executive. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall, at the same time as it makes such determination, furnish the Company and the Executive an opinion that the -15- Executive has substantial authority not to report any Excise Tax on his federal, state or local income or other tax return. As a result of the uncertainty in the application of Section 4999 of the Code (or any successor provision thereto) at the time of any determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts or fails to pursue its remedies pursuant to Section 10(f) hereof and the Executive thereafter is required to make a payment of any Excise Tax, the Executive shall direct the Accounting Firm to determine the amount of the Underpayment that has occurred and to submit its determination and detailed supporting calculations to both the Company and the Executive as promptly as possible. Any such Underpayment shall be promptly paid by the Company in cash to, or for the benefit of, the Executive within five (5) business days after receipt of such determination and calculations. (3) The Company and the Executive shall each provide the Accounting Firm access to and copies of any books, records and documents in the possession of the Company or the Executive, as the case may be, reasonably requested by the Accounting Firm, and otherwise cooperate with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 10(b) hereof. Any determination by the Accounting Firm as to the amount of the Gross-Up Payment will be binding on the Company and the Executive. (4) The federal, state, and local income or other tax returns filed by the Executive will be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by the Executive. The Executive will make proper payment of the amount of any Excise Payment and, at the request of the Company, provide to the Company true and correct copies (with any amendments) of the Executive's federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. If prior to the filing of the Executive's federal income tax return, or corresponding state or local tax return, if relevant, the Accounting Firm determines that the amount of the Gross-Up Payment should be reduced, the Executive will within five (5) business days pay to the Company the amount of such reduction. (5) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 10(b) hereof shall be borne by the Company. If such fees and expenses are initially paid by the Executive, the Company shall reimburse the Executive the full amount of such fees and expenses within five (5) business days after receipt from the Executive of a statement therefor and reasonable evidence of his payment thereof. -16- (6) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or any other taxing authority that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as promptly as practicable but no later than ten (10) business days after the Executive actually receives notice of such claim and the Executive shall further apprise the Company of the nature of such claim and the date on which such claim is requested to be paid (in each case, to the extent known by the Executive). The Executive shall not pay such claim prior to the earlier of (i) the expiration of the thirty (30) calendar-day period following the date on which he gives such notice to the Company and (ii) the date that any payment of amount with respect to such claim is due. If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (1) provide the Company with any written records or documents in his possession relating to such claim reasonably requested by the Company; (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including without limitation accepting legal representation with respect to such claim by an attorney competent in respect of the subject matter and reasonably selected by the Company; (3) cooperate with the Company in good faith in order effectively to contest such claim; and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including interest and penalties) incurred in connection with such contest and shall indemnify and hold harmless the Executive, on an after-tax basis, for and against any Excise Tax or income tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this Section 10(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 10(f) and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim (provided, however, that the Executive may participate therein at his own cost and expense) and may, at its option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay the tax claimed and -17- sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax, including interest or penalties with respect thereto, imposed with respect to such advance; and provided further, however, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which the contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of any such contested claim shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (7) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(f) hereof, the Executive receives any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(f) hereof) promptly pay the Company the amount of such refund (together with any interest paid or credited thereon after any taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(f) hereof, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial or refund prior to the expiration of thirty (30) calendar days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of any such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid by the Company to the Executive pursuant to this Section 10. 9. SUCCESSORS; BINDING AGREEMENT. (1) This Agreement shall be binding upon and shall inure to the benefit of Parent, the Company, their successors and assigns and, at the time of any such succession or assignment, Parent or the Company (as applicable) shall require any successor or assign to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Parent or the Company would be required to perform it if no such succession or assignment had taken place. The terms "Parent", "the Company" as used herein shall include such successors and assigns. The term "successors and assigns" as used herein shall mean a corporation or other entity acquiring ownership, directly or indirectly, of all or substantially all the assets and business of the Company (including this Agreement) whether by operation of law or otherwise. (b) Neither this Agreement nor any right or interest hereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, -18- except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal personal representative. 10. FEES AND EXPENSES. The Company shall pay all legal fees and related expenses (including the cost of experts, evidence and counsel) incurred by the Executive involving (a) the Executive's termination of employment (including all such fees and expenses, if any, incurred in contesting or disputing any such termination of employment), or (b) the Executive seeking to obtain or enforce any right or benefit provided by this Agreement. 11. NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement (including the Notice of Termination) shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses last given by each party to the other, provided that all notices to Parent or the Company shall be directed to the attention of the Board with a copy to the Secretary of Parent or the Company. All notices and communications shall be deemed to have been received on the date of delivery thereof or on the third business day after the mailing thereof, except that notice of change of address shall be effective only upon receipt. 12. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company and for which the Executive may qualify, nor shall anything herein limit or reduce such rights as the Executive may have under any other agreements with the Company. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company shall be payable in accordance with such plan or program. 13. SETTLEMENT OF CLAIMS. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Executive or others. 14. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive, Parent and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreement or representations, oral or otherwise, express or -19- implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. No additional compensation provided under any benefit or compensation plans to the Executive shall be deemed to modify or otherwise affect the terms of this Agreement or any of the Executive's entitlements hereunder. 15. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Kentucky, without reference to principles of conflicts of laws. 16. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 30 NONSOLICITATION. (0) The Executive hereby covenants and agrees that, at all times during the period of his employment and during the Restricted Period (as hereinafter defined) immediately following termination for any reason (unless such termination occurs after a Change in Control), the Executive shall not, without the prior written consent of the Board, (i) solicit or take any action to willfully and intentionally cause the solicitation of any person who as of that date is a client, customer, ("Client") of the Parent or the Company or any of their subsidiaries to transact any business with a Competitive Enterprise (as hereinafter defined) or discontinue business, in whole or in part with the Parent or the Company; or (ii) willfully or intentionally interfere with or damage any relationship between a Client and the Parent or the Company. (1) The Executive hereby covenants and agrees that, at all times during the period of his employment and during the Restricted Period immediately following the termination thereof for any reason (unless such termination occurs after a subsequent Change in Control), the Executive shall not, without the prior written consent of the Board, solicit any person employed at that time by the Parent, the Company or any of their subsidiaries to apply for or accept employment with a Competitive Enterprise or otherwise encourage or entice such person to leave his position with the Parent, the Company or any of their subsidiaries. (2) For purposes of this Agreement, (i) the term "Restricted Period" shall equal one year, provided that if Executive's employment is terminated within eighteen months of the Effective Time for any reason other than a termination for Cause, the Restricted Period shall equal six months and (ii) the term "Competitive Enterprise" shall mean any business which is in competition with a business engaged in by the Parent, the Company or any of its subsidiaries or affiliates in any state of the United -20- States or in any foreign country in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein. Notwithstanding the preceding sentence, the Executive shall not be prohibited from owning less than five (5%) percent of any publicly traded corporation, and if Executive's termination of employment shall occur within eighteen months of the Effective Time for any reason other than a termination for Cause, "Competitive Enterprise" shall mean any business which is in competition with a business engaged in by the Parent, the Company or any of its subsidiaries or affiliates in any state in which any of them are engaged in business at the time of such termination of employment for as long as they carry on a business therein or in any state contiguous to such state. (3) It is the intention of the parties hereto that the restrictions contained in this Section be enforceable to the fullest extent permitted by applicable law. Therefore, to the extent any court of competent jurisdiction shall determine that any portion of the foregoing restrictions is excessive, such provision shall not be entirely void, but rather shall be limited or revised only to the extent necessary to make it enforceable. Specifically, if any court of competent jurisdiction should hold that any portion of the foregoing description is overly broad as to one or more states of the United States or one or more foreign jurisdictions, then that state or states or foreign jurisdiction or jurisdictions shall be eliminated from the territory to which the restrictions of paragraph (a) of this Section applies and the restrictions shall remain applicable in all other states of the United States and foreign jurisdictions. 17. CONFIDENTIAL INFORMATION The Executive agrees to keep secret and retain in the strictest confidence all confidential matters which relate to the Parent, the Company, its subsidiaries and affiliates, including, without limitation, customer lists, client lists, trade secrets, pricing policies and other business affairs of the Parent, the Company, its subsidiaries and affiliates learned by him from the Parent, the Company or any such subsidiary or affiliate or otherwise before or after the date of this Agreement, and not to disclose any such confidential matter to anyone outside the Parent, the Company or any of its subsidiaries or affiliates, whether during or after his period of service with the Company, except (i) as such disclosure may be required or appropriate in connection with his work as an employee of the Company or (ii) when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Parent or the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information. The Executive agrees to give the Parent and the Company advance written notice of any disclosure pursuant to clause (ii) of the preceding sentence and to cooperate with any efforts by the Parent or the Company to limit the extent of such disclosure. Upon request by the Parent or the Company, the Executive agrees to deliver promptly to -21- the Parent or the Company upon termination of his services for the Company, or at any time thereafter as the Parent, the Company may request, all Parent, Company, subsidiary or affiliate memoranda, notes, records, reports, manuals, drawings, designs, computer files in any media and other documents (and all copies thereof) relating to the Parent or the Company's or any subsidiary's or affiliate's business and all property of the Parent or the Company or any subsidiary or affiliate associated therewith, which he may then possess or have under his direct control, other than personal notes, diaries, rolodexes and correspondence. 18. REMEDY Should the Executive engage in or perform, either directly or indirectly, any of the acts prohibited by Sections 19 or 20 hereof, it is agreed that the Parent and the Company shall be entitled to full injunctive relief, to be issued by any competent court of equity, enjoining and restraining the Executive and each and every other person, firm, organization, association, or corporation concerned therein, from the continuance of such violative acts. The foregoing remedy available to the Parent and the Company shall not be deemed to limit or prevent the exercise by the Parent or the Company of any or all further rights and remedies which may be available to the Parent or the Company hereunder or at law or in equity. 19. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings and arrangements, oral or written, between the parties hereto with respect to the subject matter hereof, including, without limiting the foregoing, his prior Change-In-Control Agreement, as previously amended, which shall cease to be of any further effect. -22- IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized representative and the Executive has executed this Agreement as of the day and year first above written. POWERGEN PLC By:_______________________ Name: Title: LG&E ENERGY CORP. By:_______________________ Name: Title: ___________________________ [NAME] -23- EXHIBIT B TO CHANGE-IN-CONTROL AGREEMENT 1. Omnibus Long-Term Incentive Plan 2. Short-Term Incentive Plan 3. Qualified Thrift Plan 4. Nonqualified Thrift Plan 5. LG&E Energy Corporation Retirement Income Plan for Employees Who Are Not Members of a Bargaining Unit 6. LG&E Energy Corporation Supplemental Executive Retirement Plan EX-10.95 6 EXHIBIT 10.95 EXHIBIT 10.95 AMENDMENT TO LG&E ENERGY CORP. AMENDED AND RESTATED OMNIBUS LONG-TERM INCENTIVE PLAN 1. The first sentence of Section 4.1 of the Plan shall be deleted and replaced in its entirety as follows: "Subject to adjustment as provided in Section 4.3 herein, the aggregate number of Shares that may be delivered under the Plan at any time shall not exceed five percent (5%) of the total outstanding Shares of common stock of the Company at such time." 2. The first sentence of Section 8.1 of the Plan shall be deleted and replaced in its entirety as follows: "Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock under the Plan to such Participants and in such amounts as it shall determine, provided that the maximum number of Shares of Restricted Stock that may by granted to any individual Participant in any calendar year shall be two hundred thousand (200,000) shares." The amendments described herein shall be effective as of April 21, 1999. EX-10.96 7 EXHIBIT 10.96 EXHIBIT 10.96 AMENDMENT TO LG&E ENERGY CORP. NONQUALIFIED SAVINGS PLAN 1. Section 5.1 shall be deleted and replaced in its entirety as follows: "Section 5. BOOKKEEPING ACCOUNT. Compensation deferred by a Participant under a written Deferral Agreement and matching Company contributions shall be credited in a dollar amount to a separate Bookkeeping Account for each Participant. Compensation deferred under subsequent written Deferral Agreements by a Participant shall be added to his Bookkeeping Account. Separate Bookkeeping Accounts shall be established by each Company, or its designee, for each Participant employed thereby." 2. Section 2.17 shall be deleted and replaced in its entirety as follows: "Section 2.17 VALUATION DATE. "Valuation Date" means each day of the Plan Year or any other date deemed appropriate by the Committee." And 3. Section 5.3 shall be deleted and replaced in its entirety as follows: "Section 5.3 CREDITING OF INTEREST. As of each Valuation Date, the amount in the Participant's Bookkeeping Account shall be credited at an interest rate equal to the Prime Interest Rate reset as of each preceding March 31, June 30, September 30, and December 31. This rate shall be applied to the Participant's Bookkeeping Account as of each Valuation Date. Notwithstanding the foregoing, that portion of a Participant's Bookkeeping Account established pursuant to Article 12, shall be credited at a rate of six percent (6%) per annum." and The amendments described herein shall be effective as of October 1, 1999. EX-10.97 8 EXHIBIT 10.97 EXHIBIT 10.97 AMENDMENT TO LG&E ENERGY CORP. NONQUALIFIED SAVINGS PLAN 1. Section 2.5 shall be deleted and replaced in its entirety as follows: "Section 2.5 COMPANY. "Company means Louisville Gas and Electric Company, LG&E Energy Corp., and LG&E Power Inc., Kentucky corporations, and any subsidiary or affiliated companies authorized by the Board of Directors to participate in this Plan." The amendments described herein shall be effective as of December 1, 1999. EX-10.99 9 EXHIBIT 10.99 EXHIBIT 10.99 LG&E CAPITAL CORP. $50,000,000 FLOATING RATE NOTES, SERIES B, DUE 2000 AGENCY AGREEMENT Wachovia Securities, Inc. 191 Peachtree Street NE Atlanta, GA 30303 7th Floor Ladies and Gentlemen: LG&E Capital Corp. (the "COMPANY"), a Kentucky corporation and a wholly-owned subsidiary of LG&E Energy Corp., a Kentucky corporation ("LG&E ENERGY"), confirms its agreement with WACHOVIA SECURITIES, INC. (the "AGENT") with respect to the issue and sale by the Company of its Notes, Series B, Due 2000, issued pursuant to the Indenture (as defined herein) (including any beneficial interests therein, the "SECURITIES"). The Securities will be issued pursuant to an Indenture dated as of January 15, 1998 (the "INDENTURE") between the Company and The Bank of New York, as trustee (the "TRUSTEE"), as supplemented, amended and modified by the Second Supplemental Indenture thereto dated as of September 1, 1999 (the "Second Supplement") between the Company and the Trustee. The Securities will be offered and sold without being registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"), in reliance upon an exemption therefrom. The Company has prepared an offering memorandum dated September 1, 1999 (the "OFFERING MEMORANDUM") setting forth information concerning the Company, LG&E Energy and the Securities. Copies of the Offering Memorandum will be delivered by the Company to the Agent pursuant to the terms of this Agreement. The term "Offering Memorandum" shall be deemed to refer to and include the Offering Memorandum relating to the Securities, all documents incorporated by reference therein and all amendments and supplements thereto and any documents attached thereto as exhibits or delivered therewith, unless otherwise noted. The Company hereby confirms that it has authorized the use of the Offering Memorandum in connection with the offering and resale of the Securities in accordance with Section 3. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Offering Memorandum. As of the date hereof, the Company has authorized the issuance and sale of $50,000,000 aggregate principal amount of Securities to the Agent as principal for resale to investors and other purchasers pursuant to the terms of this Agreement. 1. APPOINTMENT AS AGENT. (a) APPOINTMENT. Subject to the terms and conditions stated herein, the Company hereby agrees that the Securities will be sold exclusively to the Agent. The Agent is authorized to engage the services of any other broker or dealer in connection with the offer or sale of the Securities purchased by the Agent as principal for resale to others in accordance with Section 3 hereof but is not authorized to appoint sub-agents. In connection with sales by the Agent of Securities to other brokers or dealers, the Agent may allow any portion of the discount it has received in connection such purchase from the Company to such brokers or dealers. (b) METHOD OF SOLICITATION. The Agent will solicit offers to purchase the Securities upon the terms and conditions contained herein and, in connection therewith, will use only the Offering Memorandum. 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to, and agrees with, the Agent as of the date hereof as follows: (a) OFFERING MEMORANDUM. The Offering Memorandum, as of the date hereof, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that the Company makes no representation or warranty as to information contained in or omitted from the Offering Memorandum in reliance upon and in conformity with written information relating to the Agent furnished to the Company by or on behalf of the Agent specifically for use therein (the "AGENT'S INFORMATION"). In addition, the Company has been authorized by LG&E Energy to incorporate by reference in the Offering Memorandum, and will incorporate by reference into the Offering Memorandum when they are filed with the Commission, LG&E Energy's annual reports on Form 10-K for its most recently ended fiscal year, quarterly reports on Form 10-Q since its most recently ended fiscal year, current reports on Form 8-K since its most recently ended fiscal year and any other document filed by LG&E Energy with the Commission pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the rules and regulations thereunder, subsequent to the date of the Offering Memorandum and prior to the termination of the offering of the Securities (the "PERIODIC REPORTS"). (b) The documents incorporated or deemed to be incorporated by reference in the Offering Memorandum, or any amendment or supplement thereto, at the time such incorporated documents were or hereafter are filed with the Commission or last amended, as the case may be, complied and will comply in all material respects with the requirements of the Securities Act or the Exchange Act, as applicable, and the rules and regulations of the Commission thereunder, and none of such documents contained or will contain an untrue statement of a material fact or omitted or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) DUE INCORPORATION AND QUALIFICATION. Each of the Company and LG&E Energy have been duly incorporated and are validly existing as corporations in good standing under the 2 laws of their respective jurisdictions of incorporation, are duly qualified to do business and are in good standing as foreign corporations in each jurisdiction in which their respective ownership or lease of property or the conduct of their respective businesses requires such qualification, and have all power and authority necessary to own or h old their respective properties and to conduct the businesses in which they are engaged, except where the failure to so qualify or have such power or authority would not, singularly or in the aggregate, have a material adverse effect on the condition (financial or otherwise), results of operations, business or prospects of LG&E Energy and its consolidated subsidiaries, in each case taken as a whole. (d) AUTHORIZATION OF AGREEMENTS. The Company has full right, power and authority to execute and deliver this Agreement, the Indenture, the Securities and the Support Agreement dated as of September 5, 1997 between the Company and LG&E Energy (the "SUPPORT AGREEMENT" and collectively, the "TRANSACTION DOCUMENTS") and to perform its obligations hereunder and thereunder; and all corporate action required to be taken for the consummation of the transactions contemplated by the Transaction Documents have been duly and validly taken. LG&E Energy has full right, power and authority to execute and deliver the Support Agreement. (e) AGENCY AGREEMENT. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding agreement of the Company. (f) SUPPORT AGREEMENT. The Support Agreement has been duly authorized, executed and delivered by the Company and LG&E Energy and constitutes a valid and legally binding agreement of the Company and LG&E Energy enforceable against the Company and LG&E Energy in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (g) INDENTURE. The Indenture has been duly authorized by the Company and, assuming due execution and delivery in accordance with its terms by each of the parties thereto, constitutes a valid and legally binding agreement of the Company enforceable against the Company in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and by general equitable principles (whether considered in a proceeding in equity or at law). (h) THE SECURITIES. The Securities have been duly authorized by the Company for issuance, offer and sale pursuant to this Agreement and, when duly executed, authenticated, issued and delivered as provided in the Indenture and paid for as provided herein, will be duly and validly issued and outstanding and will constitute valid and legally binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws affecting creditors' rights generally and be general equitable principles (whether considered in a proceeding in equity or at law). Any Securities issued will be entitled to the benefits of the Support Agreement. 3 (i) TRANSACTION DOCUMENTS. Each Transaction Document conforms in all material respects to the description thereof contained in the Offering Memorandum, and the Securities will be in the forms heretofore delivered to the Agent and will conform in all material respects to all statements relating thereto included in the Offering Memorandum. (j) NO CONFLICTS, DEFAULTS OR VIOLATIONS. The execution, delivery and performance by the Company and LG&E Energy of each of the Transaction Documents, the issuance, authentication, sale and delivery of the Securities and compliance by the Company with the terms thereof, and the consummation of the transactions contemplated by the Transaction Documents will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or LG&E Energy pursuant to, any indenture, mortgage, deed of trust, loan agreement or other material agreement or instrument to which the Company or LG&E Energy is a party or by which the Company or LG&E Energy is bound or to which any of the property or assets of the Company or LG&E Energy is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or LG&E Energy or in any material respect any statute or any judgment, order, decree, rule or regulation of any court or arbitrator or governmental agency or body having jurisdiction over the Company or LG&E Energy or any of their properties or assets; and no consent, approval, authorization or order of, or filing or registration with, any such court or arbitrator or governmental agency or body under any such statute, judgment, order, decree, rule or regulation is required for the execution, delivery and performance by the Company or LG&E Energy of each of the Transaction Documents, the issuance, authentication, sale and delivery of the Securities and compliance by the Company and LG&E Energy with the terms thereof and the consummation of the transactions contemplated by the Transaction Documents, except for such consents, approvals, authorizations, filings, registrations or qualifications which shall have been obtained or made prior to the date hereof or which may be required under state securities laws and regulations. (k) RULE 144A. The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. 3. OFFER AND SALE OF THE SECURITIES. (a) GENERAL. Offers and sales of the Securities by the Company to the Agent as principal shall be effected pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) thereof, which exempts transactions by an issuer not involving any public offering. Securities may be resold or otherwise transferred by the holders thereof only if they are registered under the Securities Act or if an exemption (including the exemption afforded by Rule 144A under the Securities Act) from the registration requirements of the Securities Act is available. The Agent hereby agrees to observe the following procedures and the other procedures set forth in this Section 3 in connection with offers, sales and subsequent resales or other transfers of the Securities. (i) PREPARATION OF PRIVATE PLACEMENT MEMORANDUM. The Agent will send at or prior to the time of sale to each purchaser of Securities from the Agent an Offering Memorandum, together with any amendments or supplements thereto (other than any 4 such amendment or supplement which shall have been superseded by a subsequent amendment or supplement) as shall have been prepared by the Company and delivered to the Agent. (ii) RESTRICTIONS ON TRANSFER. Each Security shall contain a legend, as set forth in the Indenture, stating that such Security has not been, and will not be, registered under the Securities Act or any applicable state or other securities laws and that, so long as such Security contains such a restrictive legend, any resale or other transfer of such Security or any interest therein may be made only in accordance with any applicable state or other securities laws: 1. to the Company or to, by, through, or in a transaction approved by, the Agent; 2. so long as such Security is eligible for resale pursuant to Rule 144A, to a person whom the seller reasonably believes is a Qualified Institutional Buyer (as defined herein) acquiring such Security for its own account or as a fiduciary or agent for others (which others must also be Qualified Institutional Buyers) and to whom notice is given that such resale or other transfer is being made in reliance on Rule 144A; 3. pursuant to an exemption from registration provided by Rule 144A under the Securities Act (if available); 4. to an institutional accredited investor acquiring such Security in an offshore transaction pursuant to an exemption from registration provided by Regulation S under the Securities Act; 5. pursuant to an effective registration statement under the Securities Act. The purpose of this requirement is to ensure that Securities are resold or otherwise transferred only to Qualified Institutional Buyers and to other institutional accredited investors in an offshore transaction and not in a manner that might call into question the non-public offering character of the offer and sale of the Securities. Purchasers of the Securities will be deemed, by reason of the purchase or acceptance of such Securities, to have acknowledged and agreed to the foregoing restrictions on resales and other transfers thereof. In addition, in order to effectuate the foregoing restrictions on resales and other transfers of Securities in certificated form, if any resale or other transfer of such a Security described in clause (2) or (4) above is proposed to be made (1) directly (i.e. not to the Company or the Agent and not by, through, or in a transaction approved by, the Agent) by the holder of such Security or (2) through the services of a broker, dealer or similar intermediary other than the Agent pursuant to an exemption from registration under the Securities Act, the holder and the prospective purchaser or transferee shall be required to complete the Certificate of Transfer on the reverse of such Security or a Bond Power to advise the Trustee of the basis for such transfer and the availability of the exemption from registration provided thereby; provided, however, that a Certificate of Transfer or Bond Power shall not be required in the case of any Security in certificated form from which the restrictive legend originally set forth on the face 5 thereof (or on the face of one or more predecessor Securities) has been removed in accordance with procedures set forth in the Indenture. The Securities, the Indenture and this Agreement may be amended or supplemented by the Company from time to time, without the consent of but upon notice to the holders of Securities sent to their registered addresses, to modify the restrictions on and procedures for resales and other transfers of the Securities to reflect any change in applicable law or regulation (or the interpretation thereof) or in practices relating to resales or other transfers of restricted securities generally. The Company agrees to deliver or cause to be delivered such opinions of counsel and certificates as the Agent reasonably may request in connection with any such amendment or supplement. Each holder of a Security and any beneficial owner or any interest in such Security shall be deemed, by its acceptance or purchase thereof, to have agreed to any such amendment or supplement (each of which shall be conclusive and binding on such holder and all future holders of such Security and any Security issued in exchange or substitution for such Security, whether or not any notation thereof is made thereon). (b) NO GENERAL SOLICITATION; OFFERS, SALES AND RESALES. No general solicitation or general advertising within the meaning of Rule 502(c) of Regulation D under the Securities Act ("REGULATION D") will be used in connection with the offering of the Securities. Offers, sales, resales and other transfers of the Securities by the Agent, as part of the initial offering, will be made only to persons whom it reasonably believes to be qualified institutional buyers ("QUALIFIED INSTITUTIONAL BUYERS") as defined in Rule 144A under the Securities Act, or if any such person is buying for one or more institutional accounts for which such person is acting as fiduciary or agent, only when such person has represented to it that each such account is a Qualified Institutional Buyer to whom notice has been given that such sale or delivery is being made in reliance on Rule 144A. (c) MINIMUM PRINCIPAL AMOUNT. Securities will not be sold to any one purchaser in an amount which is less than $100,000 principal amount and no individual Security will be issued in a smaller principal amount. If the purchaser is a non-bank fiduciary acting on behalf of others, each person for whom it is acting must purchase at least $100,000 principal amount of the Securities. (d) PURCHASES AS PRINCIPAL. The purchase of the Securities, unless otherwise agreed, shall be at a purchase price equal to the principal amount of each such Security. In connection therewith, unless otherwise agreed, the Company agrees to pay the Agent the applicable commission set forth in SCHEDULE I hereto. The Agent may engage the services of any other broker or dealer in connection with Securities purchased from the Company as principal and may reallow all or any portion of the discount received in connection with such purchases from the Company to such brokers and dealers. (e) PROCEDURES. The purchase price, interest rate or formula, maturity date and other terms of the Securities shall be as specified in the Offering Memorandum and the Second Supplement. The Securities will be issued in denominations of $100,000 and integral multiples of $1,000 in excess thereof. 6 4. AGREEMENTS OF THE COMPANY. The Company agrees with the Agent from the date hereof until the earlier of 180 days after the issuance of the Securities and the date of the sale of the Securities by the Agent, to: (a) ADVICE TO AGENT. Immediately advise the Agent and, if requested, confirm such evidence in writing, of the happening of any event which makes any statement of a material fact made in the Offering Memorandum untrue or which requires the making of any additions to or changes in the Offering Memorandum (as amended or supplemented from time to time) in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and instruct the Agent to cease sales of any Securities the Agent may then own as principal; to immediately advise the Agent of any order preventing or suspending the use of the Offering Memorandum, of any suspension of the qualification of the Securities for offering or sale in any jurisdiction and of the initiation or threatening of any proceeding for any such purpose; and to use its best efforts to prevent the issuance of any such order preventing or suspending the use of the Offering Memorandum or suspending any such qualifications and, if any such suspension is issued, to obtain the lifting thereof at the earliest possible time. (b) AMENDMENT OF OFFERING MEMORANDUM. Except as a result of any incorporation by reference of information into the Offering Memorandum, prior to making any amendment or supplement to the Offering Memorandum, give the Agent advance notice of any intention to prepare any amendment or supplement to the Offering Memorandum and to furnish a copy thereof to the Agent. (c) REVISIONS OF OFFERING MEMORANDUM - MATERIAL CHANGES. If any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Offering Memorandum in order that the Offering Memorandum will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at such time, not misleading, or if it is necessary to amend or supplement the Offering Memorandum to comply with applicable law, to promptly prepare such amendment or supplement as may be necessary to correct such untrue statement or omission so that the Offering Memorandum, as so amended or supplemented, will comply with applicable law. (d) RULE 144A INFORMATION. For so long as the Securities are outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company will furnish upon request to the Agent and holders of the Securities and prospective purchasers of the Securities designated by such holders, the information (the "RULE 144A INFORMATION") required to be delivered pursuant to Rule 144(d)(4) under the Securities Act in order to allow the resale or other transfer of Securities pursuant to Rule 144A, unless the Company is then subject to and in compliance with Section 13 or 15(d) of the Exchange Act (the foregoing agreement being for the benefit of the holders from time to time of the Securities and prospective purchasers of the Securities designated by such holders). 5. CONDITIONS OF AGENT'S OBLIGATIONS. The obligations of the Agent hereunder to purchase Securities from the Company are subject (i) to the accuracy of the representations and warranties of the Company contained herein, (ii) to the performance by the Company of its obligations hereunder, and (iii) to each of the following additional terms and conditions: 7 (a) NO STOP ORDER. No stop order suspending the sale of the Securities in any jurisdiction shall have been issued and no proceeding for that purpose shall have been commenced or shall be pending or threatened. (b) SATISFACTORY DOCUMENTATION. All corporate proceedings and other legal matters incident to the authorization, form and validity of each of the Transaction Documents and the Offering Memorandum, and all other legal matters relating to the Transaction Documents and the transactions contemplated thereby, shall be satisfactory in all material respects to the Agent. (c) NO MATERIAL ADVERSE CHANGE. Since the respective dates as of which information is given or incorporated by reference in the Offering Memorandum, there shall not have been any change , or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, business affairs, management or business prospects of LG&E Energy and its consolidated subsidiaries, taken as a whole, the effect of which is, in the judgment of the Agent, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement and the Offering Memorandum. (d) NO DOWNGRADE. Subsequent to the execution and delivery of this Agreement (i) no downgrading shall have occurred in the rating accorded the Securities or any of the Company's or LG&E Energy's other debt securities or preferred stock by any "nationally recognized statistical rating organization", as such term is defined by the Commission for purposes of Rule 436(g(2) of the rules and regulations of the Commission under the Securities Act and (ii) no such organization shall have publicly announced that it has under surveillance or review (other than an announcement with positive implications of a possible upgrading) its rating of the Securities or any of the Company's or LG&E Energy's other debt securities or preferred stock. (e) NO MARKET CHANGE. Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the over-the-counter market shall have been suspended or limited, or minimum prices shall have been established on any such exchange or market by the Commission, by any such exchange or by any other regulatory body or governmental authority having jurisdiction, or trading in any securities of the Company or LG&E Energy on any exchange or in the over-the-counter market shall have been suspended or (ii) any moratorium on commercial banking activities shall have been declared by federal or New York State authorities or (iii) an outbreak or escalation of hostilities or a declaration by the United States of a national emergency or war or (iv) a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) the effect of which, in the case of this clause (iv), is, in the judgment of the Agent, so material and adverse as to make it impracticable or inadvisable to proceed with the sale or the delivery of the Securities on the terms and in the manner contemplated by this Agreement and in the Offering Memorandum. 8 6. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless the Agent, its affiliates, their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Agent within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6(a) and Section 7 as the Agent), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, without limitation, any loss, claim, damage, liability or action relating to purchases and sales of the Securities), to which the Agent may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and shall reimburse the Agent promptly upon demand for any legal or other expenses reasonably incurred by the Agent in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with any Agent's Information; and PROVIDED, FURTHER, that with respect to any such untrue statement in or omission from the Offering Memorandum, the indemnity agreement contained in this Section 6(a) shall not inure to the benefit of the Agent to the extent that the sale to the person asserting any such loss, claim, damage, liability or action was an initial sale or resale by the Agent and any such loss, claim, damage, liability or action of or with respect to the Agent results from the fact that both (A) to the extent required by applicable law, a copy of the Offering Memorandum was not sent or given to such person at or prior to the written confirmation of the sale of such Securities to such person and (B) the untrue statement in or omission was corrected in the Offering Memorandum (or any amendment or supplement thereto). (b) The Agent, severally and not jointly, shall indemnify and hold harmless the Company and its affiliates, and their respective officers, directors, employees, representatives and agents, and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act (collectively referred to for purposes of this Section 6(b) and Section 7 as the Company), from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company may become subject, whether commenced or threatened, under the Securities Act, the Exchange Act, any other federal or state statutory law or regulation, at common law or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Offering Memorandum or in any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was 9 made in reliance upon and in conformity with any Agent's Information, and shall reimburse the Company promptly upon demand for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending or preparing to defend against or appearing as a third party witness in connection with any such loss, claim, damage, liability or action as such expenses are incurred. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party pursuant to Section 6(a) or 6(b), notify the indemnifying party in writing of the claim or the commencement of that action; PROVIDED, HOWEVER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 6 except to the extent that it has been materially prejudiced (through the forfeiture of substantive rights or defenses) by such failure; and, PROVIDED, FURTHER, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 6. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly and with any similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 6 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that an indemnified party shall have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel for the indemnified party will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based upon advise of counsel to the indemnified party) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (3) a conflict or potential conflict exists (based upon advise of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying party has not in fact employed counsel reasonably satisfactory to the indemnified party to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm of attorneys (in addition to any local counsel) at any one time for all such indemnified party or parties. Each indemnified party, as a condition of the indemnity agreements contained in Sections 6(a) and 6(b), shall use all reasonable efforts to cooperate with the indemnifying party in the defense of any such action or claim. No indemnifying party shall be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with its written consent or if there be a final judgment for the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such 10 settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party (which consent shall not be unreasonably withheld), effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability of claims that are the subject matter of such proceeding. The obligations of the Company and the Agent in this Section 6 and in Section 7 are in addition to any other liability that the Company or the Agent, as the case may be, may otherwise have, including in respect of any breaches of representations, warranties and agreements made herein by any such party. 7. CONTRIBUTION. If the indemnification provided for in Section 6 is unavailable or insufficient to hold harmless an indemnified party under Section 6(a) or 6(b), then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Agent on the other from the offering of the Securities to which such claim relates or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Agent on the other with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Agent on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from such offering of the Securities (before deducting expenses (received by or on behalf of the Company, on the one hand, and the total commissions received by the Agent with respect to the Securities, on the other, bear to the total gross proceeds from the sale of the Securities. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to the Company or information supplied by the Company on the one hand or to the Agent or information supplied by the Agent on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Agent agree that it would not be just and equitable if contributions pursuant to this Section 7 were to be determined by PRO RATA allocation or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 7 shall be deemed to include, for purposes of this Section 7, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending or preparing to defend any such action or claim. Notwithstanding the provisions of this Section 7, the Agent shall not be required to contribute any amount in excess of the amount by which the total commissions received by the Agent with respect to the Securities exceeds the amount of any damages which the Agent has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 11 8. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the Agent and the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except as provided in Sections 6 and 7 with respect to affiliates, officers, directors, employees, representatives, agents and controlling persons of the Company and the Agent and in Section 4(d) with respect to holders and prospective purchasers of the Securities. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 8, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions contained herein. 9. EXPENSES. The Company agrees with the Agent to pay (a) the costs incident to the authorization, issuance, sale, preparation and delivery of the Securities; (b) the costs incident to the preparation, printing and distribution of the Offering Memorandum and any amendments or supplements thereto; (c) the costs of reproducing and distributing each of the Transaction Documents; (d) the costs incident to the preparation, printing and delivery of the certificates evidencing the Securities, including stamp duties and transfer taxes, if any, payable upon issuance of the Securities; (e) the fees and expenses of the Company's counsel and independent accountants; (f) any fees charged by rating agencies for rating the Securities; (g) the fees and expenses of the Trustee and any paying agent (including related fees and expenses of any counsel to such parties); (h) all expenses and application fees incurred in connection with the approval of the Securities for book-entry transfer by DTC; (l) any out-of-pocket expenses of the Agent incurred with the written approval of the Company; (j) the fees and expenses, if any, incurred with respect to any filing with the National Association of Securities Dealers, Inc.; and (k) all other costs and expenses incident to the performance of the obligations of the Company under this Agreement which are not otherwise specifically provided for in this Section 9; PROVIDED, HOWEVER, that except as provided in this Section 9, the Agent shall pay its own costs and expenses. 10. SURVIVAL. The respective indemnities, rights of contribution, representations, warranties and agreements of the Company and the Agent contained in this Agreement or made by or on behalf of the Company or the Agent pursuant to this Agreement shall survive the delivery of and payment for the Securities and shall remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of any of them or any of their respective affiliates, officers, directors, employees, representatives, agents or controlling persons. 11. NOTICES, ETC. All statements, requests, notices and agreements hereunder shall, unless otherwise expressly provided, be in writing, and: (a) if to the Agent, shall be delivered or sent by mail or telecopy transmission to the address set forth on the signature page hereof; and (b) if to the Company, shall be delivered or sent by mail or telecopy transmission to the address of the Company set forth in the Offering Memorandum, Attention: Treasurer (telecopier no.: 502-627-4742), with a copy to be sent to the attention of the General Counsel at the same address. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 12 12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF KENTUCKY. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts (which may include counterparts delivered by telecopier) and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 14. AMENDMENTS. No amendment or waiver of any provision of this Agreement, nor any consent or approval to any departure therefrom, shall in any event by effective unless the same shall be in writing and signed by the parties hereto. 15. HEADINGS. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us a counterpart hereof, whereupon this instrument will become a binding agreement between the Company and the Agent in accordance with its terms. Very truly yours, LG&E CAPITAL CORP. By /s/ Charles A. Markel, III ------------------------------- Name: Charles L. Markel Title: Chief Financial Officer ACCEPTED: WACHOVIA SECURITIES, INC. By /s/ R. Steven Crowley ----------------------------------- Name: R. Steven Crowley Title: Senior Managing Director Address for notices: Wachovia Securities, Inc. 191 Peachtree Street NE Atlanta, GA 30303 7th Floor 13 EX-10.100 10 EXHIBIT 10.100 EXHIBIT 10.100 LG&E CAPITAL CORP. $150,000,000 MEDIUM-TERM NOTES, SERIES A TERMS AGREEMENT May 4, 1999 J.P. Morgan Securities Inc. ("JPMSI") 60 Wall Street New York, New York 10260 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 Ladies and Gentlemen: LG&E Capital Corp., a Kentucky corporation (the "Company"), proposes to issue and sell to JPMSI, CSI and Merrill (each, an "Agent" and collectively, the "Agents"), subject in all respects to the terms and conditions of the Private Placement Agency Agreement dated February 3, 1998 (the "Agreement"), $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. The following terms and conditions of the Notes are more extensively described in the Company's Pricing Supplement, dated May 4, 1999, relating to the Notes (the "Pricing Supplement"): Title: 6.205% Notes Due 2004 Trade Date: May 4, 1999 Original Issue Date: May 7, 1999 Principal Amount: $150,000,000 Price to Public: 100% of Principal Amount, plus accrued interest, if any from and including May 7, 1999 Purchase Price: 100% of Principal Amount, plus accrued interest, if any from and including May 7, 1999 Commission: $750,000 Interest Rate: 6.205% Form: Book-Entry only Interest Payment Dates: May 1 and November 1 of each year, commencing November 1, 1999 Regular Record Date: The fifteenth calendar day (whether or not a Business Day) immediately preceding the relevant Interest Payment Date Final Maturity Date: May 1, 2004 Purchase Date and Time: 10:00 a.m., New York time, on May 7, 1999 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
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, severally and each in the amount set forth opposite its name in Schedule I to this Agreement, at a purchase price of 100% of the principal amount of the Notes, plus accrued interest, if any, from and including May 7, 1999 (the "Purchase Price"), the entire principal amount of Notes. 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 May 7, 1999 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, 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 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. 5. In further consideration of this Terms Agreement, the Company agrees that between the date hereof and the above Original Issue Date, neither the Company nor any of its majority-owned subsidiaries will offer or sell, or enter into any agreement to sell, any of their respective debt securities having terms substantially similar to the terms of the Notes without the Agents' prior written consent. 6. On July 31, 1998, Standard & Poor's downgraded its ratings of the Company's senior 2 unsecured debt to "A" from "A+" and LG&E Energy Corp.'s senior unsecured debt 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 to 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. 3 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: /signed/ ----------------------------- Name: Title: LG&E ENERGY CORP. By: /signed/ ------------------------------ Name: Title: Accepted as of the date hereof: J.P. MORGAN SECURITIES INC. By: /signed/ -------------------------------------- Name: Title: CHASE SECURITIES INC. By: /signed/ -------------------------------------- Name: Title: MERRILL LYNCH, PIERCE FENNER & SMITH INCORPORATED By: /signed/ -------------------------------------- Name: Title: SCHEDULE I
Principal Amount of ___% Notes Due 2004 -------------- J.P. Morgan Securities Inc. $__,___,___ Chase Securities Inc. $__,___,___ Merrill Lynch, Pierce, Fenner & Smith Incorporated $__,___,___
EX-10.101 11 EXHIBIT 10.101 EXHIBIT 10.101 LG&E CAPITAL CORP. AND THE BANK OF NEW YORK, as Trustee ------------------------ SECOND SUPPLEMENTAL INDENTURE Dated as of September 1, 1999 TO INDENTURE Dated as of January 15, 1998 ------------------------ Floating Rate Notes, Series B, Due 2000 SECOND SUPPLEMENTAL INDENTURE, dated as of the first day of September, 1999 (the "SECOND SUPPLEMENTAL INDENTURE"), between LG&E CAPITAL CORP., a corporation duly organized and existing under the laws of the State of Kentucky (hereinafter sometimes referred to as the "COMPANY"), and The Bank of New York, a New York banking corporation, as trustee (hereinafter sometimes referred to as the "TRUSTEE") (under the Indenture dated as of January 15, 1998, as supplemented, between the Company and the Trustee (the "INDENTURE")). WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the future issuance of its notes (the "NOTES"), which Notes are to be issued from time to time in such series as may be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered thereunder as in the Indenture provided, and which Notes are subject to the terms of the Support Agreement, as defined in the Indenture; and WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a series of its Notes to be designated as hereinafter provided, the form and substance of the Notes and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this Second Supplemental Indenture; and WHEREAS, the Company desires and has requested the Trustee to join with it in the execution and delivery of this Second Supplemental Indenture, and all requirements necessary to make this Second Supplemental Indenture a valid instrument, in accordance with its terms, and to make said Notes, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, in consideration of the purchase and acceptance of the Notes by the holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Notes and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: ARTICLE I. Definitions and Other Provisions of General Application SECTION 1.1. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Indenture. SECTION 1.2. The terms defined in this Section, for all purposes of this Second Supplemental Indenture, shall have the respective meanings specified in this Section. "BUSINESS DAY" means any day, other than a Saturday, Sunday, a legal holiday or a day on which banking institutions in The City of New York are authorized or obligated to close; which day is also a London Business Day. "CLOSING DATE" shall mean September 7, 1999. "INTEREST DETERMINATION DATE" shall mean the second London Business Day immediately preceding the applicable Interest Reset Date. "INTEREST PAYMENT DATE" shall mean the seventh day of each calendar month, commencing October 7, 1999. "INTEREST PERIOD" shall mean the period between Interest Reset Dates. "INTEREST RESET DATE" shall mean the seventh day of each calendar month, commencing October 7, 1999. "LIBOR" shall mean, with respect to any Interest Determination Date, the rate for deposits in United States dollars having a maturity of one month that appears on the display on the Bloomberg Financial Markets (or any successor service) on the page "British Bankers Association LIBOR Rates" (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates for United States dollars as of 11:00 A.M., London time, on such Interest Determination Date. With respect to an Interest Determination Date on which no such rate appears on the designated page as specified above, the Trustee will request the principal London offices of each of four major reference banks (which may include affiliates of the Agent) in the London interbank market, as selected by the Trustee, to provide the Trustee with its offered quotation for deposits in United States dollars for a period of one month, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such Interest Determination Date and in a principal amount that is not less than $1,000,000 and is representative for a single transaction in such market at such time. If at least two such quotations are so provided, then LIBOR on such Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such Interest Determination Date will be the arithmetic mean of the rates quoted in The City of New York at approximately 11:00 A.M., New York City time, on such Interest Determination Date by three major banks (which may include affiliates of the Agent) in The City of New York selected by the Trustee for loans in United States dollars to leading European banks, having a maturity of one month and in a principal amount that is not less than $1,000,000 and is representative for a single transaction in such market at such time; provided, however, that if the banks so selected by the Trustee are not quoting as mentioned in this sentence, LIBOR determined as of such Interest Determination Date will be LIBOR in effect on such Interest Determination Date. "LONDON BUSINESS DAY" shall mean a day on which dealings in Dollars are transacted in the London interbank market. "RECORD DATE" shall mean the fifteenth calendar day (whether or not a Business Day) immediately preceding the related Interest Payment Date with respect to any Series B Note. "SERIES B NOTES" has the meaning specified in Section 2.1 hereof. 2 "SPREAD" shall mean 10 basis points. "STATED MATURITY" shall mean September 7, 2000. ARTICLE II. General Terms and Conditions of the Series B Notes SECTION 2.1. There shall be and is hereby authorized a series of Notes designated the "Floating Rate Notes, Series B, Due 2000", limited in aggregate principal amount to $50,000,000 (the "SERIES B NOTES"), which shall be sold and issued on the Closing Date in accordance with the provisions hereof. The form of Series B Note is attached hereto as EXHIBIT A and by this reference incorporated herein. The Series B Notes shall mature on the Stated Maturity, unless the principal thereof becomes due and payable prior to the Stated Maturity, whether by the declaration of acceleration of maturity or otherwise. The Trustee, upon compliance by the Company with the requirements of Section 2.04 of the Indenture, shall authenticate and deliver Series B Notes in accordance with a written request for authentication of the Company. SECTION 2.2. The Series B Notes shall be issued as Global Notes and registered in the name of the Depositary or its nominee, subject to the appointment of a successor Depositary as provided in the Indenture. The Series B Notes represented by the Global Notes will not be exchangeable for, and will not otherwise be issuable as, Notes in certificated form, except as provided in the Indenture. SECTION 2.3. The Series B Notes shall be issued in fully registered form, without interest coupons, in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. SECTION 2.4. Interest payments in respect of Series B Notes shall be made in an amount equal to the interest accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity, as the case may be. The interest installment of a Series B Note punctually paid or duly provided for on any Interest Payment Date will be paid to the registered holder of such Series B Note at the close of business 15 calendar days (whether or not a Business Day) preceding such Interest Payment Date (the "Regular Record Date") Any such interest installment not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered holder on the relevant Regular Record Date, and may be paid to the person in whose name the Series B Note (or one or more predecessor Notes) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Series B Notes not less than 10 days prior to such special 3 record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Series B Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. SECTION 2.5. Interest on Series B Notes shall be payable in arrears on each Interest Payment Date and at Stated Maturity. If any Interest Payment Date (other than the Stated Maturity) for the Series B Notes would otherwise be a day that is not a Business Day, such Interest Payment Date shall be postponed to the next succeeding Business Day, except that if such Business Day falls in the next succeeding calendar month, such Interest Payment Date shall be the immediately preceding Business Day. If the Stated Maturity of the Series B Notes falls on a day that is not a Business Day, the required payment of principal and interest will be made on the next succeeding Business Day as if made on the date such payment was due and no interest will accrue on such payment for the period from and after the Stated Maturity to the date of such payment on the next succeeding Business Day. The Series B Note shall bear interest from the date of issue to the initial Interest Reset Date, at a rate per annum equal to 5.48125%, and therafter shall bear interest during each Interest Period at the applicable LIBOR, plus the Spread. The interest rate applicable to each Interest Period commencing on the related Interest Reset Date will be the rate determined by the Trustee as of the applicable Interest Rate Determination Date. The interest rate determined as of an Interest Determination Date will take effect on the applicable Interest Reset Date. Commencing on the initial Interest Reset Date for the Series B Notes, the interest rate in effect on each day shall be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. If any Interest Reset Date for the Series B Notes would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding Business Day, except that if such Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. The interest rate on Series B Notes will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Interest accrued on each Series B Notes shall be calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day in the applicable Interest Period. The interest factor for each such day shall be computed by dividing the interest rate applicable to such day by 360. All percentages resulting from any calculation on Series B Notes will be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation on Series B Notes will be rounded to the nearest cent (with one-half cent being rounded upwards). The Trustee will, at the request of any holder of Series B Notes, provide to such holder the interest rate then in effect on the Series B Notes and, if determined, the interest rate which will become effective as of the next Interest Reset Date. SECTION 2.6. All Series B Notes issued hereunder and all Series B Notes issued upon registration of transfer of, or in exchange for, such Series B Notes, shall be subject to the restrictions on transfer provided in Section 2.04, 2.05 and 2.06 of the Indenture and Exhibits B, C 4 and D of this Second Supplemental Indenture and the legends set forth on the Series B Notes, PROVIDED that in the event of a conflict between such legends and any provision of this Second Supplemental Indenture and the Indenture, such legends shall control. Such restrictions on transfer and legends shall not be removed except in accordance with the Indenture. SECTION 2.7. The Series B Notes shall be entitled to the benefits of the Indenture and this Second Supplemental Indenture, and the holders of the Series B Notes and the Trustee are entitled to the benefits of the Support Agreement available to Lenders (as defined in the Support Agreement), it being understood and agreed that the Series B Notes constitute Obligations (as defined in the Support Agreement) for purposes of the Support Agreement. SECTION 2.8. The covenants provided by Sections 4.06 and 4.09 of the Indenture shall be applicable to the Series B Notes. ARTICLE III. Original Issue of Notes Series B Notes in the aggregate principal amount of $50,000,000 may, upon execution of this Second Supplemental Indenture, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Series B Notes as provided in a written request for authentication of the Company. ARTICLE IV. Miscellaneous Provisions SECTION 4.1. Except as otherwise expressly provided in this Second Supplemental Indenture or in the form of Series B Note or otherwise clearly required by the context hereof or thereof, all terms used herein or in the form of Series B Note that are defined in the Indenture shall have the several meanings respectively assigned to them thereby. SECTION 4.2. The Indenture, as supplemented by this Second Supplemental Indenture, is in all respects ratified and confirmed, and this Second Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION 4.3. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this Second Supplemental Indenture. SECTION 4.4. THIS SECOND SUPPLEMENTAL INDENTURE AND EACH SERIES B NOTE SHALL, PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BE DEEMED A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THAT STATE, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SUCH SECTION 5-1401). 5 SECTION 4.5. Nothing in this Second Supplemental Indenture or in the Series B Notes, express or implied, shall give to any person, other than the parties hereto and their successors hereunder and the holders, any benefit or legal or equitable right, remedy or claim under this Second Supplemental Indenture. SECTION 4.6. This Second Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. LG&E CAPITAL CORP. By: /signed/ ------------------------------------ Name: Title: THE BANK OF NEW YORK, as Trustee By: /signed/ ------------------------------------ Name: Title: 6 EXHIBIT A [Form of Series B Note] EXHIBIT B FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE TO RESTRICTED REGULATION S GLOBAL NOTE (Transfers or exchanges pursuant to Section 2.06(b)(ii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E CAPITAL CORP. FLOATING RATE NOTES, SERIES B, DUE 2000 (THE "NOTES") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the Second Supplemental Indenture dated as of September 1, 1999. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of the Rule 144A Global Note (CUSIP No. [__________] with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer or exchange of such beneficial interest in the Notes for an interest in the Restricted Regulation S Global Note (CINS No. ___________) to be held with [Euroclear] [Cedel Bank] (Common Code _____________) through the Depositary. In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and pursuant to and in accordance with Regulation S under the Securities Act, and accordingly the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was an institutional accredited investor outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was an institutional accredited investor outside the United States,]* B-1 [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:_____________________________________ Name: Title: Dated:_____________________, ____ cc: LG&E Capital Corp. * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. B-2 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE TO UNRESTRICTED REGULATION S GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E CAPITAL CORP. FLOATING RATE NOTES, SERIES B, DUE 2000 (THE "NOTES") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the Second Supplemental Indenture dated as of September 1, 1999. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of the Rule 144A Global Note (CUSIP No. [__________] with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such beneficial interest in the Notes for an interest in the Unrestricted Regulation S Global Security (CUSIP No. ___________). In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and: (i) with respect to transfers made in reliance on Regulation S under the Securities Act, the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was an institutional accredited investor outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was an institutional accredited investor outside the United States,]* C-1 [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (ii) with respect to transfers made in reliance on Rule 144 under the Securities Act, certify that the Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act, (iii) with respect to transfers made in reliance on another exemption from the Securities Act, the following is the basis for the exemption: _______________, and (iv) with respect to an exchange, either (x) the Note being exchanged is not a "restricted security" as defined in Rule 144 under the Securities Act or (u) the exchange is being made to facilitate a contemporaneous transfer that complies with Section 2.06(b)(iii) of the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:__________________________________ Name: Title: Dated:_____________________, ____ cc: LG&E Capital Corp. * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. C-2 EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RESTRICTED REGULATION S GLOBAL NOTE OR UNRESTRICTED REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iv) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E CAPITAL CORP. FLOATING RATE NOTES, SERIES B, DUE 2000 (THE "NOTES") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the Second Supplemental Indenture dated as of September 1, 1999. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of [the [Restricted] [Unrestricted] Regulation S Global Note with [Euroclear] [Cedel Bank] (Common Code _____________)] [with the Depositary (CUSIP No. _______)] in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer or exchange of such beneficial interest for an interest in the Rule 144A Global Note. In connection with such request, and in respect of such Notes, the Transferor does hereby certify that such Notes are being transferred or exchanged in accordance with (i) the transfer restrictions set forth in the Indenture and the Notes and (ii) Rule 144A under the Securities Act to a transferee that the Transferor reasonably believes is purchasing the Notes for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. D-1 This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:_______________________________________ Name: Title: Dated:_____________________, ____ cc: LG&E Capital Corp. D-2 EX-10.102 12 EXHIBIT 10.102 EXHIBIT 10.102 MODIFICATION NO. 10 TO INTER-COMPANY POWER AGREEMENT DATED JULY 10, 1953 AMONG OHIO VALLEY ELECTRIC CORPORATION, APPALACHIAN POWER COMPANY (formerly APPALACHIAN ELECTRIC POWER COMPANY), THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY), THE DAYTON POWER AND LIGHT COMPANY, INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY), KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY MONONGAHELA POWER COMPANY, OHIO EDISON COMPANY, OHIO POWER COMPANY (formerly THE OHIO POWER COMPANY), PENNSYLVANIA POWER COMPANY, THE POTOMAC EDISON COMPANY, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, THE TOLEDO EDISON COMPANY, and WEST PENN POWER COMPANY. Dated as of January 1, 1998 MODIFICATION NO. 10 TO INTER-COMPANY POWER AGREEMENT THIS AGREEMENT dated as of the 1st day of January, 1998, by and among OHIO VALLEY ELECTRIC CORPORATION (herein called "OVEC" or "Corporation"), APPALACHIAN POWER COMPANY (herein called "Appalachian"), THE CINCINNATI GAS & ELECTRIC COMPANY (herein called "Cincinnati"), COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY) (herein called "Columbus"), THE DAYTON POWER AND LIGHT COMPANY (herein called "Dayton"), INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY) (herein called "Indiana"), KENTUCKY UTILITIES COMPANY (herein called "Kentucky"), LOUISVILLE GAS AND ELECTRIC COMPANY (herein called "Louisville"), MONONGAHELA POWER COMPANY (herein called "Monongahela"), OHIO EDISON COMPANY (herein called "Ohio Edison"), OHIO POWER COMPANY (herein called "Ohio Power"), PENNSYLVANIA POWER COMPANY (herein called "Pennsylvania"), THE POTOMAC EDISON COMPANY (herein called "Potomac"), SOUTHERN INDIANA GAS AND ELECTRIC COMPANY (herein called "Southern Indiana"), THE TOLEDO EDISON COMPANY (herein called "Toledo"), and WEST PENN POWER COMPANY (herein called "West Penn"), all of the foregoing, other than OVEC, being herein sometimes collectively referred to as the Sponsoring Companies and individually as a Sponsoring Company. WITNESSETH THAT WHEREAS, Corporation and the United States of America have heretofore entered into Contract No. AT-(40-1)-1530 (redesignated Contract No. E-(40-1)-1530, later redesignated Contract No. EY-76-C-05-1530 and later redesignated Contract No. DE-AC05-76OR01530), dated October 15, 1952, providing for the supply by Corporation of electric utility services to the United States Atomic Energy Commission (hereinafter called "AEC") at AEC's project near Portsmouth, Ohio (hereinafter called the "Project"), which Contract has heretofore been modified by Modification No. 1, dated July 23, 1953, Modification No. 2, dated as of March 15, 1964, Modification No. 3, dated as of May 12, 1966, Modification No. 4, dated as of January 7, 1967, Modification No. 5, dated as of August 15, 1967, Modification No. 6, dated as of November 15, 1967, Modification No. 7, dated as of November 5, 1975, Modification No. 8, dated as of June 23, 1977, Modification No. 9, dated as of July 1, 1978, Modification No. 10, dated as of August 1, 1979, Modification No. 11, dated as of September 1, 1979, Modification No. 12, dated as of August 1, 1981, Modification No. 13, dated as of September 1, 1989, Modification No. 14, dated as of January 15, 1992, and Modification No. 15, dated as of February 1, 1993 (said Contract, as so modified, is hereinafter called the "DOE Power Agreement"); and WHEREAS, pursuant to the Energy Reorganization Act of 1974, the AEC was abolished on January 19, 1975 and certain of its functions, including the procurement of electric utility services for the Project, were transferred to and vested in the Administrator of Energy Research and Development; and WHEREAS, pursuant to the Department of Energy Organization Act, on October 1, 1977, all of the functions vested by law in the Administrator of Energy Research and Development or the Energy Research and Development Administration were transferred to, and vested in, the Secretary of Energy, the statutory head of the Department of Energy (hereinafter called "DOE"); and WHEREAS, the parties hereto have entered into a contract, herein called the "Inter-Company Power Agreement," dated July 10, 1953, governing, among other things, (a) the supply by the Sponsoring Companies of Supplemental Power in order to enable Corporation to fulfill its obligations under the DOE Power Agreement, and (b) the rights of the Sponsoring Companies to receive Surplus Power (as defined in the Agreement identified in the next clause in this preamble) as may be available at the Project Generating Stations and the obligations of the Sponsoring Companies to pay therefor; and WHEREAS, the Inter-Company Power Agreement has heretofore been amended by Modification No. 1, dated as of June 3, 1966, Modification No. 2 dated as of January 7, 1967, Modification No. 3, dated as of November 15, 1967, Modification No. 4, dated as of November 5, 1975, Modification No. 5, dated as of September 1, 1979, Modification No. 6, dated as of August 1, 1981, Modification No. 7, dated as of January 15, 1992, Modification No. 8, dated as of January 19, 1994, and Modification No. 9, dated as of August 17, 1995 (said contract so amended and as modified and amended by this Modification No. 10 being herein and therein sometimes called the "Agreement"); and WHEREAS, pursuant to East Central Area Reliability Group ("ECAR") Document No. 2, entitled DAILY OPERATING RESERVE, as revised August 8, 1996 ("ECAR Document No. 2"), Corporation is required to have available spinning reserve equal to a percentage of its internal load as well as supplemental reserve equal to a percentage of its internal load, which supplemental reserve is expected to be provided by the Sponsoring Companies in proportion to their respective Power Participation Ratios as defined in SUBSECTION 1.012; and WHEREAS, OVEC and the Sponsoring Companies desire to enter into this Modification No. 10 as more particularly hereinafter provided; NOW, THEREFORE, the parties hereto agree with each other as follows: 1. Insert after SUBSECTION 1.0117 new SUBSECTIONS 1.0118, 1.0119, 1.0120 and 1.0121 as follows: 1.0118 "Spinning Reserve" means unloaded generation which is synchronized and ready to serve additional demand within ten minutes. 1.0118 "Spinning Reserve" means unloaded generation which is synchronized and ready to serve additional demand within ten minutes. 1.0119 "Supplemental Reserve" means a combination of spinning reserve, qualified interruptible load, qualified quick-start generating capacity or pre-scheduled assistance from another system which can be fully utilized within ten minutes. 1.0120 "ECAR Reserve Sharing Period" means any period of time during which any control area within ECAR ("ECAR Member") is experiencing a system contingency which requires implementation of ECAR's reserve sharing procedures. 1.0121 "ECAR Emergency Energy" means energy sold by Corporation from its Spinning Reserve during an ECAR Reserve Sharing Period. 2. Delete SUBSECTION 2.04 and substitute therefor the following: 2.04 LIMITED BURDENING OF CORPORATION'S TRANSMISSION FACILITIES. Transmission facilities provided and owned by the Corporation, including the facilities described in SECTION 2.02 hereof and the Project Transmission Facilities, shall not be burdened by power and energy flows of any Sponsoring Company to an extent which would impair or prevent the transmission of Interim Power, Supplemental Power, Surplus Power or ECAR Emergency Energy. The Project Transmission Facilities shall not be so burdened to an extent which would impair or prevent the transmission of Permanent Power. 3. Insert after SUBSECTION 2.05 new ARTICLE 3, its title and SUBSECTIONS 3.01 and 3.02 as follows: ARTICLE 3 ECAR EMERGENCY ENERGY 3.01 In order to enable Corporation to fulfill its obligation under ECAR Document No. 2 to maintain Supplemental Reserve equal to a percentage of Corporation's internal load, each Sponsoring Company shall stand ready to supply its Power Participation Ratio, as set forth in SECTION 1.012, of OVEC's Supplemental Reserve obligation to other members of ECAR during any ECAR Reserve Sharing Period. It is understood, however, that the amount which each Sponsoring Company may charge for its share of such Supplemental Reserve shall be such Sponsoring Company's FERC filed emergency energy charge. 3.02 In order to enable Corporation to fulfill its obligation under ECAR Document No. 2 to provide some or all of the energy available from OVEC's Spinning Reserve to an ECAR Member which is in need of ECAR Emergency Energy, the Sponsoring Companies shall stand ready to purchase from Corporation the energy available from its Spinning Reserve, or any portion thereof, for their own emergency use or for resale to or for another ECAR Member which is experiencing an emergency and shall also stand ready to transmit such energy to or for another ECAR Member which is experiencing an emergency. 4. Delete SUBSECTION 5.01 and substitute therefor the following: 5.01 OPERATION OF PROJECT GENERATING STATIONS. Corporation shall operate and maintain the Project Generating Stations in a manner consistent with safe, prudent, and efficient operating practice so that the Maximum Power available from said stations shall be at the highest practicable level attainable consistent with OVEC's obligations under ECAR Document No. 2 throughout the term of this Agreement. 5. Delete both the title of ARTICLE 6 and SUBSECTIONS 6.01 and 6.02 and substitute therefor the following: CHARGES FOR SURPLUS POWER AND ECAR EMERGENCY ENERGY 6.01 TOTAL MONTHLY CHARGE. The amount to be paid Corporation each month by the Sponsoring Companies for Surplus Power and Surplus Energy supplied under this Agreement shall consist of the sum of an energy charge, a demand charge and, if applicable, an emergency power surcharge, all determined as set forth in this ARTICLE 6. The amount to be paid to Corporation for ECAR Emergency Energy supplied under this Agreement shall be 98.74 mills per kilowatt hour (plus transmission charges calculated in accordance with applicable law). 6.02 ENERGY CHARGE. The energy charge to be paid each month by the Sponsoring Companies for Surplus Energy shall be determined by Corporation as follows: 6. Delete SUBSECTION 6.024 and substitute therefor the following: 6.024 Determine for such month the difference between the total cost of fuel as described in subsection 6.021 above and the sum of (a) the total energy charge to be billed DOE as described in subsection 6.022 above, (b) the energy charge to be billed as DOE Emergency Energy as described in subsection 6.023 above and (c) the total cost of fuel used to generate ECAR Emergency Energy. For the purposes hereof the difference so determined shall be the fuel cost allocable for such month to the total kilowatt-hours of energy generated at the Project Generating Stations for the supply of Surplus Energy. Each Sponsoring Company shall pay Corporation for Surplus Energy for such month, an amount equal to (a) an amount obtained by multiplying the billing kilowatt-hours of Surplus Energy availed of by such Sponsoring Company during such month by the average station heat rate of the Project Generating Stations times the average cost per Btu (determined in a uniform manner for all Sponsoring Companies in conformity with any applicable requirements of Account 703 (Fuel) of the Uniform System of Accounts) of all fuel consumed by said Sponsoring Company in its own generating stations, both averages to be computed in respect of the month next preceding that for which payment is being made, plus (b) its Power Participation Ratio of the excess, if any, for such month of the fuel costs of the Corporation allocable to the total kilowatt-hours of energy generated at the Project Generating Stations for the supply of Surplus Energy over the aggregate of the amounts computed with respect to all Sponsoring Companies under (a) above, minus (c) its Power Participation Ratio of the excess, if any, for such month of the aggregate of the amounts computed with respect to all Sponsoring Companies under (a) above over the fuel costs of the Corporation allocable to the total kilowatt-hours of energy generated at the Project Generating Stations for the supply of Surplus Energy. 7. Insert after SUBSECTION 10.06 new SUBSECTION 10.07 as follows: 10.07 ECAR EMERGENCY ENERGY. As soon as practicable after the end of each month, Corporation shall render to each Sponsoring Company a statement indicating all ECAR Emergency Energy supplied to or for the account of such Sponsoring Company during such month, specifying the amount due to the Corporation therefor pursuant to ARTICLE 6 above. Such Sponsoring Company shall make payment therefor promptly upon the receipt of such statement. In case the computation of the amount due for ECAR Emergency Energy cannot be determined at the time, it shall be estimated subject to adjustment when the actual determination can be made, and all payments shall be subject to subsequent adjustment. 8. This Modification No. 10 shall become effective at 12:00 o'clock Midnight on the day on which Corporation shall advise the other parties to this Modification No. 10 (to be later confirmed in writing) that all conditions precedent to the effectiveness of this Modification No. 10 shall have been satisfied. 9. The Inter-Company Power Agreement, as modified by Modifications Nos. 1, 2, 3, 4, 5, 6, 7, 8 and 9 and as hereinbefore provided, is hereby in all respects confirmed. 10. This Modification No. 10 may be executed in any number of copies and by the different parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute a single agreement. IN WITNESS WHEREOF, the parties hereto have executed this Modification No. 10 as of the day and year first written above. OHIO VALLEY ELECTRIC CORPORATION By: S/D. L. HART --------------------------------------- APPALACHIAN POWER COMPANY By: S/WILLIAM J. LHOTA --------------------------------------- THE CINCINNATI GAS & ELECTRIC COMPANY By: S/JACKSON H. RANDOLPH --------------------------------------- COLUMBUS SOUTHERN POWER COMPANY By: S/WILLIAM J. LHOTA --------------------------------------- THE DAYTON POWER AND LIGHT COMPANY By: S/ALLEN M. HILL --------------------------------------- INDIANA MICHIGAN POWER COMPANY By: S/WILLIAM J. LHOTA --------------------------------------- KENTUCKY UTILITIES COMPANY By: S/MICHAEL R. WHITLEY --------------------------------------- LOUISVILLE GAS AND ELECTRIC COMPANY By: S/GEORGE BASINGER --------------------------------------- MONONGAHELA POWER COMPANY By: S/ALAN J. NOIA --------------------------------------- OHIO EDISON COMPANY By: S/W. R. HOLLAND --------------------------------------- OHIO POWER COMPANY By: S/WILLIAM J. LHOTA --------------------------------------- PENNSYLVANIA POWER COMPANY By: S/W. R. HOLLAND --------------------------------------- THE POTOMAC EDISON COMPANY By: S/ALAN J. NOIA --------------------------------------- SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By: S/RONALD G. REHERMAN --------------------------------------- THE TOLEDO EDISON COMPANY By: S/W. R. HOLLAND --------------------------------------- WEST PENN POWER COMPANY By: S/ALAN J. NOIA --------------------------------------- EX-10.103 13 EXHIBIT 10.103 EXHIBIT 10.103 MODIFICATION NO. 11 TO INTER-COMPANY POWER AGREEMENT DATED JULY 10, 1953 AMONG OHIO VALLEY ELECTRIC CORPORATION, APPALACHIAN POWER COMPANY (formerly APPALACHIAN ELECTRIC POWER COMPANY), THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY), THE DAYTON POWER AND LIGHT COMPANY, INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY), KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY MONONGAHELA POWER COMPANY, OHIO EDISON COMPANY, OHIO POWER COMPANY (formerly THE OHIO POWER COMPANY), PENNSYLVANIA POWER COMPANY, THE POTOMAC EDISON COMPANY, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, THE TOLEDO EDISON COMPANY, and WEST PENN POWER COMPANY. Dated as of April 1, 1999 MODIFICATION NO. 11 TO INTER-COMPANY POWER AGREEMENT THIS AGREEMENT dated as of the 1st day of April, 1999, by and among OHIO VALLEY ELECTRIC CORPORATION (herein called "OVEC" or "Corporation"), APPALACHIAN POWER COMPANY, THE CINCINNATI GAS & ELECTRIC COMPANY, COLUMBUS SOUTHERN POWER COMPANY (formerly COLUMBUS AND SOUTHERN OHIO ELECTRIC COMPANY), THE DAYTON POWER AND LIGHT COMPANY, INDIANA MICHIGAN POWER COMPANY (formerly INDIANA & MICHIGAN ELECTRIC COMPANY), KENTUCKY UTILITIES COMPANY, LOUISVILLE GAS AND ELECTRIC COMPANY, MONONGAHELA POWER COMPANY, OHIO EDISON COMPANY, OHIO POWER COMPANY, PENNSYLVANIA POWER COMPANY, THE POTOMAC EDISON COMPANY, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY, THE TOLEDO EDISON COMPANY, and WEST PENN POWER COMPANY, all of the foregoing, other than OVEC, being herein sometimes collectively referred to as the Sponsoring Companies and individually as a Sponsoring Company. WITNESSETH THAT WHEREAS, Corporation and the United States of America have heretofore entered into Contract No. AT-(40-1)-1530 (redesignated Contract No. E-(40-1)-1530, later redesignated Contract No. EY-76-C-05-1530 and later redesignated Contract No. DE-AC05-76OR01530), dated October 15, 1952, providing for the supply by Corporation of electric utility services to the United States Atomic Energy Commission (hereinafter called "AEC") at AEC's project near Portsmouth, Ohio (hereinafter called the "Project"), which Contract has heretofore been modified by Modification No. 1, dated July 23, 1953, Modification No. 2, dated as of March 15, 1964, Modification No. 3, dated as of May 12, 1966, Modification No. 4, dated as of January 7, 1967, Modification No. 5, dated as of August 15, 1967, Modification No. 6, dated as of November 15, 1967, Modification No. 7, dated as of November 5, 1975, Modification No. 8, dated as of June 23, 1977, Modification No. 9, dated as of July 1, 1978, Modification No. 10, dated as of August 1, 1979, Modification No. 11, dated as of September 1, 1979, Modification No. 12, dated as of August 1, 1981, Modification No. 13, dated as of September 1, 1989, Modification No. 14, dated as of January 15, 1992, Modification No. 15, dated as of February 1, 1993, and Modification No. 16, dated as of January 1, 1998 (said Contract, as so modified, is hereinafter called the "DOE Power Agreement"); and WHEREAS, pursuant to the Energy Reorganization Act of 1974, the AEC was abolished on January 19, 1975 and certain of its functions, including the procurement of electric utility services for the Project, were transferred to and vested in the Administrator of Energy Research and Development; and WHEREAS, pursuant to the Department of Energy Organization Act, on October 1, 1977, all of the functions vested by law in the Administrator of Energy Research and Development or the Energy Research and Development Administration were transferred to, and vested in, the Secretary of Energy, the statutory head of the Department of Energy (hereinafter called "DOE"); and WHEREAS, the parties hereto have entered into a contract, herein called the "Inter-Company Power Agreement," dated July 10, 1953, governing, among other things, (a) the supply by the Sponsoring Companies of Supplemental Power in order to enable Corporation to fulfill its obligations under the DOE Power Agreement, and (b) the rights of the Sponsoring Companies to receive Surplus Power (as defined in the Agreement identified in the next clause in this preamble) as may be available at the Project Generating Stations and the obligations of the Sponsoring Companies to pay therefor; and WHEREAS, the Inter-Company Power Agreement has heretofore been amended by Modification No. 1, dated as of June 3, 1966, Modification No. 2 dated as of January 7, 1967, Modification No. 3, dated as of November 15, 1967, Modification No. 4, dated as of November 5, 1975, Modification No. 5, dated as of September 1, 1979, Modification No. 6, dated as of August 1, 1981, Modification No. 7, dated as of January 15, 1992, Modification No. 8, dated as of January 19, 1994, Modification No. 9, dated as of August 17, 1995, and Modification No. 10, dated as of January 1, 1998 (said contract so amended and as modified and amended by this Modification No. 11 being herein and therein sometimes called the "Agreement"); and WHEREAS, it is the goal of OVEC to assist its Sponsoring Companies during the summer of 1999 by making available to them additional surplus power; and WHEREAS, additional surplus power would be made available as a result of reductions by DOE of its contractual entitlement to power from OVEC; and WHEREAS, it is the goal of DOE to obtain reasonably priced power for its Paducah uranium enrichment plant during the summer of 1999; and WHEREAS, because there is no certainty that transmission to transfer OVEC power to Paducah will be available on an uninterrupted basis during the summer of 1999, it is desired that DOE have the option to release a portion of its contractual entitlement to OVEC power and energy in exchange for a credit to DOE's power bill, thereby making available funds which could be used to purchase power at locations closer to the Paducah uranium enrichment plant; and WHEREAS, OVEC and the Sponsoring Companies desire to enter into this Modification No. 11 as more particularly hereinafter provided; NOW, THEREFORE, the parties hereto agree with each other as follows: 1. Insert after SUBSECTION 1.0123 new SUBSECTIONS 1.0124, 1.0125 and 1.0126 as follows: 1.0124 "DOE Optional Power Release Period" means any calendar month from June 1 through September 30, 1999. 1.0125 "DOE Optional Power Release" means a reduction of the otherwise applicable DOE contract demand pursuant to this Section 1.0125, for any calendar month during the DOE Optional Power Release Period. 1.0126 "Effective Date" means the date on which Corporation notifies DOE and the Sponsoring Companies that all conditions to effectiveness, including all required waiting periods and all required regulatory acceptances or approvals, of the arrangements for DOE Optional Power Releases and reimbursement of Corporation for costs associated with such releases, have been satisfied. Such date shall be not later than two business days after all conditions to effectiveness have been satisfied. 2. Delete SUBSECTION 6.01 and substitute therefor the following: CHARGES FOR SURPLUS POWER, ECAR EMERGENCY ENERGY AND DOE OPTIONAL POWER RELEASES 6.01 TOTAL MONTHLY CHARGE. The amount to be paid Corporation each month by the Sponsoring Companies for Surplus Power and Surplus Energy supplied under this Agreement shall consist of the sum of an energy charge, a demand charge and, if applicable, an emergency power surcharge and/or a DOE Optional Power Release Surcharge, all determined as set forth in this Article 6. The amount to be paid to Corporation for ECAR Emergency Energy supply under this Agreement shall be 98.74 mills per kilowatt hour (plus transmission charges calculated in accordance with applicable law). 3. Insert after SUBSECTION 6.037 new SUBSECTION 6.038 as follows: 6.038 If DOE notifies OVEC that DOE wishes to exercise its right under a Letter Supplement dated March 31, 1999 to the DOE Power Agreement to reduce its contract demand during a DOE Optional Power Release Period and thereby to make additional surplus power and energy available to the Sponsoring Companies, the aggregate demand charge otherwise payable by each Sponsoring Company for such surplus power shall be adjusted to reflect its agreed share of a DOE Optional Power Release Surcharge, such DOE Optional Power Release Surcharge to be equal to the amount of the power released under such Letter Supplement for each month times 80% of the NYMEX monthly "Into Cinergy," firm futures price on-peak (5 x 16) for such month determined as of market closing on March 5, 1999 times the number of on-peak hours during such month, minus (a) the demand charges which DOE avoids by reason of such monthly reduction in contract demand and (b) OVEC charges for energy in amounts equal to the reductions in demand times the number of on-peak hours during such month times OVEC's energy rate per MWH. The above-referenced March 5, 1999 NYMEX closing prices were $59.25/MWH for June 1999; $120/MWH for July 1999; $113/MWH for August 1999 and $36.50/MWH for September 1999. 4. Delete SUBSECTIONS 9.01 and 9.02 and substitute therefor the following: 9.01 REPLACEMENT COSTS. The Sponsoring Companies shall reimburse Corporation for the difference between (a) the total cost of replacements chargeable to property and plant (other than facilities described in SECTION 2.02) made by Corporation during any month prior thereto (and not previously reimbursed) and (b) the amounts received by Corporation from DOE as reimbursement for the cost of replacements under the provisions of the DOE Power Agreement, or paid for out of proceeds of fire or other applicable insurance protection, or out of amounts recovered from third parties responsible for damages requiring replacement. If Corporation is unable to secure a satisfactory ruling to the effect that amounts paid by the Sponsoring Companies in reimbursement of replacement costs do not constitute taxable income to Corporation, or in case such ruling once obtained shall be reversed or rescinded, then the Sponsoring Companies shall pay to Corporation such amount, in lieu of the amounts to be paid as above provided, which, after provision for all taxes on income shall equal the costs of the replacements reimbursable by the Sponsoring Companies to Corporation as above provided. Each Sponsoring Company's share of such payment shall be the percentage of such difference represented by its Power Participation Ratio, unless DOE has been relieved of its obligation to pay a portion of the cost of replacements as a condition of a DOE request for a waiver (under Section 2.05 of the DOE Power Agreement) which has the effect of reducing the DOE contract demand, in which case each Sponsoring Company's share of such payment will be adjusted so that it equals such Sponsoring Company's reservation of surplus power made available by the aforementioned reduction in the DOE contract demand. The term cost of replacements, as used herein, shall include all components of cost, plus removal expense, less salvage. 9.02 ADDITIONAL FACILITY COSTS. The Sponsoring Companies shall reimburse Corporation for the difference between (a) the total cost of additional facilities and/or spare parts (other than facilities described in SECTION 2.02) purchased and/or installed by Corporation during any month prior thereto (and not previously reimbursed) and (b) the amounts received by Corporation from DOE as reimbursement for the cost of additional facilities and/or spare parts under the provisions of the DOE Power Agreement. If Corporation is unable to secure a satisfactory ruling to the effect that amounts paid by the Sponsoring Companies in reimbursement of additional facility and/or spare part costs do not constitute taxable income to Corporation, or in case such ruling once obtained shall be reversed or rescinded, then the Sponsoring Companies shall pay to Corporation such amount, in lieu of the amounts to be paid as above provided, which, after provision for all taxes on income, shall equal the costs of the additional facilities and/or spare parts reimbursable by the Sponsoring Companies to Corporation as above provided. Each Sponsoring Company's share of such payment shall be the percentage of such difference represented by its Power Participation Ratio, unless DOE has been relieved of its obligation to pay a portion of the cost of additional facilities as a condition of a DOE request for a waiver (under Section 2.05 of the DOE Power Agreement) which has the effect of reducing the DOE contract demand, in which case each Sponsoring Company's share of such payment will be adjusted so that it equals such Sponsoring Company's reservation of surplus power made available by the aforementioned reduction in the DOE contract demand. 5. Insert after SUBSECTION 10.07 new SUBSECTION 10.08 as follows: 10.08 DOE OPTIONAL POWER RELEASE SURCHARGE. As soon as practicable after the end of each month, Corporation shall render to each Sponsoring Company a statement indicating the DOE Optional Power Release Surcharge for the account of such Sponsoring Company during such month, specifying the amount due to the Corporation therefor pursuant to ARTICLE 6 above. Such Sponsoring Company shall make payment therefor promptly upon the receipt of such statement. In case the computation of the amount due cannot be determined at the time, it shall be estimated subject to adjustment when the actual determination can be made, and all payments shall be subject to subsequent adjustment. 5. This Modification No. 11 shall become effective at 12:00 o'clock Midnight on the Effective Date. 6. The Inter-Company Power Agreement, as modified by Modifications Nos. 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 and as hereinbefore provided, is hereby in all respects confirmed. 7. This Modification No. 11 may be executed in any number of copies and by the different parties hereto on separate counterparts, each of which shall be deemed an original but all of which together shall constitute a single agreement. IN WITNESS WHEREOF, the parties hereto have executed this Modification No. 11 as of the day and year first written above. OHIO VALLEY ELECTRIC CORPORATION By: s/ DAVID L. HART --------------------------------------- APPALACHIAN POWER COMPANY By: s/ HENRY FAYNE --------------------------------------- THE CINCINNATI GAS & ELECTRIC COMPANY By: s/ JOHN C. PROCARIO --------------------------------------- COLUMBUS SOUTHERN POWER COMPANY By: s/ HENRY FAYNE --------------------------------------- THE DAYTON POWER AND LIGHT COMPANY By: s/ PATRICK W. O'LOUGHLIN --------------------------------------- INDIANA MICHIGAN POWER COMPANY By: s/ HENRY FAYNE --------------------------------------- KENTUCKY UTILITIES COMPANY By: s/ WAYNE T. LUCAS --------------------------------------- LOUISVILLE GAS AND ELECTRIC COMPANY By: s/ WAYNE T. LUCAS FOR C. HERMANN --------------------------------------- MONONGAHELA POWER COMPANY By: s/ PETER J. SKRGIC --------------------------------------- OHIO EDISON COMPANY By: s/ W. R. HOLLAND --------------------------------------- OHIO POWER COMPANY By: s/ HENRY FAYNE --------------------------------------- PENNSYLVANIA POWER COMPANY By: s/ ARTHUR R. GARFIELD --------------------------------------- THE POTOMAC EDISON COMPANY By: s/ PETER J. SKRGIC --------------------------------------- SOUTHERN INDIANA GAS AND ELECTRIC COMPANY By: s/ J. G. HURST --------------------------------------- THE TOLEDO EDISON COMPANY By: s/ GUY L. PIPITONE --------------------------------------- WEST PENN POWER COMPANY By: s/ PETER J. SKRGIC EX-10.104 14 EXHIBIT 10.104 CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 EXHIBIT 10.104 AMENDMENT NO. 1 TO AMENDED AND RESTATED COAL SUPPLY AGREEMENT THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED COAL SUPPLY AGREEMENT ("Amendment No. 1") is entered into effective as of January 1, 2000, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "BUYER"), whose address is 220 West Main Street, Louisville, Kentucky 40202, and HOPKINS COUNTY COAL, LLC, a Delaware limited liability company and WEBSTER COUNTY COAL, LLC, a Delaware limited liability company (successor to WEBSTER COUNTY COAL CORPORATION, a Kentucky corporation), both having an address of 1717 South Boulder Avenue, Tulsa, Oklahoma 74119-4886, (the foregoing companies hereinafter referred to as "SELLER"). In consideration of the agreements herein contained, the parties hereto agree as follows. 1.0 AMENDMENTS The Amended and Restated Agreement heretofore entered into by the parties, dated effective April 1, 1998, and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement") is hereby amended as follows: 2.0 TERM 2.1 Section 2.0 TERM, is hereby modified to read as follows: "The Term of this Agreement shall continue through December 31, 2001." 3.0 QUANTITY 3.1 Section 3.0 QUANTITY, is deleted and replace with the following: "During the Term, Seller shall deliver and Buyer shall purchase and accept delivery of the following quantities of coal.
YEAR BASE QUANTITY (TONS) ---- -------------------- December 1999 60,000 * 2000 1,250,000 2001 1,250,000
CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 * The additional 60,000 tons in December 1999 are in addition to the base quantity of 1,500,000 tons for 1999 and are priced as set forth in Section 8.1. Such coal shall be delivered ratably throughout the Term in accordance with reasonable delivery schedules to be mutually agreed by Buyer and Seller." 3.2 Section 3.1 OPTION TO INCREASE OR DECREASE QUANTITY is added and reads as follows: "Buyer shall have the right to increase or decrease the Base Quantity to be delivered hereunder by up to 31,250 tons per calendar quarter (three months), for example, if Buyer increases the quantity by 31,250 tons each quarter during a calendar year, the net increase will be 125,000 tons. Buyer shall exercise such option by giving Seller such notice stating Buyer's exercise of the option and specifying the increase or decrease in tonnage, no later than thirty days prior to the first day of the quarter in which the increased or decreased tonnage will be delivered." 4.0 SOURCE 4.1 Section 4.1 SOURCE is hereby deleted and replaced with the following: "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 Seller's Hopkins County Mines, and/or from Seller's Webster County Coal, LLC Dotiki Mine Complex, (all of the foregoing sources herein after referred to as the "Coal Property")." 5.0 DELIVERY 5.1 Section 5.1 BUYER'S OPTION is hereby deleted and replaced with the following: "The Delivery Points shall be designated as follows: For the Hopkins County mines, the coal shall be delivered F.O.B. railcar at the Hopkins County rail loading facility near Madisonville, Kentucky on the Paducah and Louisville Railroad (the "Delivery Point"). For mines in the Dotiki Mine Complex, the coal shall be delivered F.O.B. railcar at the Dotiki rail loading facility near Madisonville, Kentucky on the CSXT Railroad which is accessible by the Paducah and Louisville Railroad (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Points, 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 CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 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." 5.2 Section 5.3 DELIVERY TO SEBREE DOCK is deleted in its entirety. 6.0 QUALITY 6.1 Section 6 QUALITY is amended as follows: "Seller has the option to supply coal of two different qualities, noted as Quality #1 and Quality #2. Seller shall exercise such option by giving Buyer such notice stating Seller's intent to supply coal of Quality #1 or Quality #2, no later than the fifteenth of the month, prior to the first day of the calendar month during which that particular coal Quality will be delivered. After Seller gives notice of the particular quality to be delivered for a given calendar month, Seller must supply coal of that quality for the entire calendar month. Seller shall not supply coals of Quality #1 and Quality #2 during the same calendar month. The following specifications are amended: QUALITY #1 All specifications are the same as specified in Section 6.1 of the Amended and Restated Coal Supply Agreement for coal to be delivered during the Secondary Term. QUALITY #2
Guaranteed Monthly Rejection Limits Specifications Weighted Average (Per Shipment) - -------------- ------------------ ----------------- BTU/LB. Min. 11,200 less than 10,900 ASH (lbs/Mmbtu) Max. 12.00 greater than 13.00
All other specifications are the same as specified in Section 6.1 of the Amended and Restated Coal Supply Agreement for coal to be delivered during the Secondary Term. 6.2 Section 6.4 SUSPENSION AND TERMINATION is deleted and replaced with the following: CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 "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 months during any twelve month rolling period 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." 7.0 PRICE 7.1 Section 8.1 BASE PRICE is deleted and replaced with the following: "The base price ("Base Price") of the coal to be sold hereunder will be firm and in accordance with the following schedule: QUALITY #1 - HOPKINS COUNTY MINE
BASE PRICE ---------- YEAR $ PER MMBTU $ PER TON @ 11,400BTU ---- ----------- --------------------- 2000 $0.8224 $18.75 2001 $0.8224 $18.75
QUALITY #2 - HOPKINS COUNTY MINE
BASE PRICE ---------- YEAR $ PER MMBTU $ PER TON @ 11,200 BTU ---- ----------- ---------------------- 2000 $0.8100 $18.14 2001 $0.8100 $18.14
QUALITY #1 - DOTIKI MINE
BASE PRICE ---------- YEAR $ PER MMBTU $ PER TON @ 11,400BTU - ----- ------------------ --------------------- 2000 $0.7952 $18.13 2001 $0.7952 $18.13
CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 QUALITY #2 - DOTIKI MINE
BASE PRICE ---------- YEAR $ PER MMBTU $ PER TON @ 11,200 BTU - ---- ----------- ---------------------- 2000 $0.7821 $17.52 2001 $0.7821 $17.52
7.2 Section 8.2 QUALITY PRICE DISCOUNTS, paragraph (b) is deleted and replaced with the following: "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 actual Weighted Average and the Guaranteed Monthly Weighted Average pursuant to the methodology shown in Exhibit A of the Agreement. The Guaranteed Monthly Weighted Average and Discount Points shall be calculated as follows: QUALITY #1
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. 11.50 13.00
QUALITY #2
Guaranteed Monthly Weighted Average Discount Point ---------------- -------------- BTU/Lb. Min. 11,200 11,050 LB/MMBTU
CONTRACT #96-412-026 HOPKINS COUNTY COAL, LLC AMENDMENT NO. 1 SULFUR Max. 3.125 3.325 ASH Max. 12.00 12.75 MOISTURE Max. 11.50 13.00
For example, if the Monthly Weighted Average of ash for Quality #1 equals 13.5 lb/MMBtu, then the applicable discount would be (13.5 lb - 11.75 lb.) X $0.0083/lb./MMBtu = $0.01453/MMBtu. 7.3 Section 8.3 PRICE, TERMS AND CONDITIONS REVIEW is deleted in its entirety. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 on the day and year below written, but effective as of the day and year first set forth above. HOPKINS COUNTY COAL, LLC. LOUISVILLE GAS AND ELECTRIC COMPANY BY: /SIGNED/ BY: /SIGNED/ - ------------------------------------ ------------------------------------ TITLE: TITLE: ------------------------------ --------------------------------- DATE: DATE: ------------------------------- ---------------------------------- WEBSTER COUNTY COAL, LLC BY: /SIGNED/ --------------------------------- TITLE: ------------------------------ DATE: ------------------------------- EX-10.105 15 EXHIBIT 10.105 CONTRACT #LGE 99002 PEABODY COALSALES COMPANY AMENDMENT NO. 1 EXHIBIT 10.105 AMENDMENT NO. 1 TO COAL SUPPLY CONTRACT THIS AMENDMENT NO. 1 TO COAL SUPPLY CONTRACT ("Amendment No. 1") is entered into effective as of January 1, 2000, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "BUYER"), whose address is 220 West Main Street, Louisville, Kentucky 40202, and PEABODY COALSALES COMPANY, a Delaware corporation (hereinafter referred to as "SELLER"), whose address is 701 Market Street, St. Louis, Missouri 63101-18926. In consideration of the agreements herein contained, the parties hereto agree as follows: 1.0 AMENDMENTS The Agreement heretofore entered into by the parties, dated effective January 1, 1999 and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement") is hereby amended as follows: 2.0 TERM The term of this Agreement shall continue through December 31, 2001, subject to the provisions of Section 8.4. 3.0 QUANTITY 3.1 Section 3.1 BASE QUANTITY, is modified and reads as follows:
YEAR BASE QUANTITY (TONS) - ---- -------------------- 2000 1,500,000 2001 1,500,000
3.2 Section 3.2 DELIVERY SCHEDULE is deleted in its entirety and replaced with the following. "Such coal shall be delivered ratably in accordance with reasonable delivery schedules to be mutually agreed upon between Buyer and Seller." CONTRACT #LGE 99002 PEABODY COALSALES COMPANY AMENDMENT NO. 1 3.3 Section 3.3 OPTION TO INCREASE OR DECREASE QUANTITY is added and reads as follows: "Buyer shall have the right to increase or decrease the Base Quantity to be delivered hereunder by up to 18,750 tons per calendar quarter (three months). For example, if Buyer increases the quantity by 18,750 tons each quarter during a calendar year, the net increase will be 75,000 tons. Buyer shall exercise such option by giving Seller such notice stating Buyer's exercise of the option and specifying the increase or decrease in tonnage, no later than thirty days prior to the first day of the quarter in which the increased or decreased tonnage will be delivered." 4.0 SOURCE 4.1 Section 4.1 SOURCE is hereby deleted and replaced with the following: "The coal sold hereunder, including coal purchased by Seller from third parties, shall primarily be supplied from Seller's Patriot Complex located in Henderson County, Kentucky. Seller may also provide coal supplied from Seller's Lynnville Mine located in Warrick County, Indiana, Seller's Camp Complex located in Union County, Kentucky, and Seller's Gibraltar Mine located in Muhlenberg County, Kentucky, (all of the foregoing sources hereinafter referred to as the "Coal Properties)." 5.0 DELIVERY 5.1 Section 5.1 BARGE DELIVERY is amended to include the addition of the following delivery points: "Lynnville Mine delivery point: Yankeetown dock located at Mile Point 772.5 on the Ohio River. Camp Mine Complex delivery point: Camp Breckinridge located at Mile Point 842.0 on the Ohio River. Gibraltar Mine delivery point: Gibraltar Dock located at Mile Point 85.9 on the Green River." 6.0 PRICE 6.1 Section 8.1 BASE PRICE is hereby deleted and replaced with the following: CONTRACT #LGE 99002 PEABODY COALSALES COMPANY AMENDMENT NO. 1 "The base price ("Base Price") of the coal to be sold hereunder will be firm (subject to Section 8.4 Price Review) and in accordance with the following schedule: PATRIOT MINE - BASE PRICE
YEAR $ PER MMBTU $ PER TON - ----- ----------- --------- 2000 $0.8090 $17.07 2001 $0.8090 $17.07
LYNNVILLE MINE - BASE PRICE
YEAR $ PER MMBTU $ PER TON - ----- ----------- --------- 2000 $0.8256 $17.42 2001 $0.8256 $17.42
CAMP COMPLEX - BASE PRICE
YEAR $ PER MMBTU $ PER TON - ----- ----------- --------- 2000 $0.8100 $17.09 2001 $0.8100 $17.09
GIBRALTAR - BASE PRICE YEAR $ PER MMBTU $ PER TON - ----- ------------ --------- 2000 $0.7896 $16.66 2001 $0.7896 $16.66
6.2 Section 8.4 PRICE REVIEW is added and reads as follows: CONTRACT #LGE 99002 PEABODY COALSALES COMPANY AMENDMENT NO. 1 "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, 2001. The party requesting such a review shall give written notice of its request to the other party on or before July 1, 2000. The parties then shall negotiate on new prices and/or other terms and conditions between July 1 and October 1. If the parties do not reach an agreement by October 1, 2000 then this Agreement will terminate as of December 31, 2000 without liability due to such termination for either party. This clause shall not be interpreted as a Right of First Refusal or exclusive supply agreement." IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 on the day and year below written, but effective as of the day and year first set forth above. LOUISVILLE GAS AND ELECTRIC COMPANY PEABODY COALSALES COMPANY BY: /SIGNED/ BY: /SIGNED/ ------------------------------ ------------------------------- TITLE: TITLE: --------------------------- ---------------------------- DATE: DATE: ---------------------------- ----------------------------- EX-10.106 16 EXHIBIT 10.106 EXHIBIT 10.106 WILLIAMS GAS PIPELINE Texas Gas L0007384 P.O. Box 20008 N0415 3800 Frederica Street Owensboro, KY 42304 270-926-8686 September 15, 1999 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated November 1, 1993, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, QUANTITY, Section 2.5, for the two-year Agreement with an original primary term through October 31, 1995, shall be deleted in its entirety and replaced with the following Section 2.5: 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
Seasonal Quantity Entitlement MMBtu -------------------- ----- Winter 7,500,000 Summer 1,900,000
B. ARTICLE II, QUANTITY, Section 2.5, for the five-year Agreement with an original primary term through October 31, 1998, shall be deleted in its entirety and replaced with the following Section 2.5: 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
Seasonal Quantity Entitlement MMBtu -------------------- ----- Winter 7,500,000 Summer 1,900,000
Louisville Gas and Electric Company September 15, 1999 Page 2 C. ARTICLE II, QUANTITY, Section 2.5, for the five-year Agreement with an original primary term through October 31, 2001, shall be deleted in its entirety and replaced with the following Section 2.5: 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
Seasonal Quantity Entitlement MMBtu -------------------- ----- Winter 7,500,000 Summer 1,900,000
This amendment shall become effective November 1, 2000, and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules and regulations. Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /signed/ By: /signed/ ------------------------------- ------------------------------ Title: /title/ Title: /title/ ------------------------------- ------------------------------ AGREED TO AND ACCEPTED this __21st__ day of ____September_______, 1999. EX-12.01 17 EXHIBIT 12.01 EXHIBIT 12.01 LOUISVILLE GAS AND ELECTRIC COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of $)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Earnings: Income before cumulative effect of a change in accounting principle per statements of income........................................ $ 106,270 $ 78,120 $ 113,273 $ 107,941 $ 83,184 Add: Federal income taxes - current..................... 54,198 39,618 59,074 34,019 35,824 State income taxes - current....................... 13,650 10,164 14,754 7,589 8,795 Deferred Federal income taxes - net................ (4,564) 2,167 (4,171) 19,816 4,261 Deferred State income taxes - net.................. (715) 636 778 6,648 2,788 Investment tax credit - net........................ (4,289) (4,312) (4,342) (4,406) (4,742) Fixed charges...................................... 39,323 37,571 40,928 42,198 43,550 ------- ------- ------- ------- ------- Earnings......................................... 203,873 163,964 220,294 213,805 173,660 ------- ------- ------- ------- ------- Fixed Charges: Interest Charges per statements of income.......... 37,962 36,322 39,190 40,242 41,918 Add: Interest income (1).............................. - - - 409 - One-third of rentals charged to operating expense (2).......................... 1,361 1,249 1,738 1,547 1,632 -------- -------- -------- ------- ------- Fixed charges................................ $ 39,323 $ 37,571 $ 40,928 $ 42,198 $ 43,550 ------- ------- ------- ------- ------- Ratio of Earnings to Fixed Charges.................... 5.18 4.36 5.38 5.07 3.99 ======== ======== ======== ======= =======
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-12.02 18 EXHIBIT 12.02 EXHIBIT 12.02 KENTUCKY UTILITIES COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of $)
1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Earnings: Net Income......................................... $ 106,558 $ 72,764 $ 85,713 $ 86,163 $ 76,842 Add: Federal income taxes - current..................... 51,754 45,704 38,500 39,221 24,451 State income taxes - current....................... 13,450 10,008 8,718 8,248 5,324 Deferred Federal income taxes - net................ (4,650) (2,492) 2,971 1,845 11,759 Deferred State income taxes - net.................. 887 54 1,635 1,905 3,743 Deferred investment tax credit-net................. - - - - (71) Investment tax credit - net........................ (3,727) (3,829) (4,036) (4,013) (4,024) Undistributed income of Electric Energy, Inc............................ 33 1 (37) 24 99 Fixed charges...................................... 39,486 39,318 40,324 40,266 40,694 ------- ------- ------- ------- ------- Earnings......................................... 203,791 161,528 173,788 173,659 158,817 ------- ------- ------- ------- ------- Fixed Charges: Interest Charges per statements of income.......... 38,904 38,660 39,729 39,688 40,116 Add: One-third of rentals charged to operating expense (1).......................... 582 658 595 578 578 --------- --------- --------- --------- --------- Fixed charges................................ $ 39,486 $ 39,318 $ 40,324 $ 40,266 $ 40,694 ------- ------- ------- ------- --------- Ratio of Earnings to Fixed Charges.................... 5.16 4.11 4.31 4.31 3.90 ======== ======== ======== ======= =======
NOTE: (1) In the Company's opinion, one-third of rentals represents a reasonable approximation of the interest factor. EX-21 19 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), LG&E International Inc. (a Delaware corporation), CRC-Evans International, Inc. (a Delaware corporation) and CRC-Evans Pipeline International, Inc. (a Delaware corporation) are significant subsidiaries of LG&E Energy Corp. Louisville Gas and Electric Company, Kentucky Utilities Company, LG&E Energy Marketing Inc. and LG&E Capital Corp. are wholly-owned direct subsidiaries of LG&E Energy Corp., WKE Corp., LG&E Power Inc., LG&E International Inc. and CRC-Evans 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 Power Services Inc. and LG&E Power Operations are wholly-owned direct subsidiaries of LG&E Power Inc. CRC-Evans Pipeline International, Inc. is a wholly-owned subsidiary of CRC-Evans International, Inc. LG&E Capital Corp., directly and through it subsidiaries and affiliates, including WKE Corp., LG&E Power Inc., LG&E Power Inc., and CRC-Evans International, 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 five 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 Power Services Inc. and LG&E Power Operations Inc. 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. 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. CRC-Evans International, Inc., together with CRC-Evans Pipeline International, Inc. and five other subsidiaries, provides equipment leasing and other services to the pipeline construction and repair industry in North America and worldwide. Louisville Gas and Electric Company has no subsidiaries. Kentucky Utilities Company has one subsidiary, Lexington Utilities Company (a Kentucky corporation). EX-23.01 20 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 26, 2000 (except with respect to the matters discussed in Note 22, as to which the date is March 3, 2000) included in this Form 10-K, into the Company's previously filed Registration Statement No. 333-43985 and Restoration Statement No. 333-88673 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 and the WKE Corp. Bargaining Employees' Savings Plan; 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 and Registration Statement No. 333-88653 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 23, 2000 EX-23.02 21 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 26, 2000 (except with respect to the matters discussed in Note 16, as to which the date is March 3, 2000) 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 23, 2000 EX-23.03 22 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 26, 2000 (except with respect to the matters discussed in Note 14, as to which the date is March 3, 2000) on the financial statements of Kentucky Utilities Company in this Form 10-K. /s/ Arthur Andersen LLP _________________________________ Arthur Andersen LLP Louisville, Kentucky March 23, 2000 EX-24.01 23 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, 1999 (the 1999 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 1999 Form 10-K and to any and all amendments to such 1999 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 25th day of February 2000. /s/ Roger W. Hale /s/ T. Ballard Morton, Jr. - ----------------- -------------------------- ROGER W. HALE T. BALLARD MORTON, JR. Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ Frank V. Ramsey, Jr. - ---------------- ------------------------ MIRA S. BALL FRANK V. RAMSEY, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ William L. Rouse, Jr. - --------------------------- ------------------------- WILLIAM C. BALLARD, JR. WILLIAM L. ROUSE, JR. Director Director /s/ Owsley Brown II /s/ Charles L. Shearer, Ph.D. - ------------------- ----------------------------- OWSLEY BROWN II CHARLES L. SHEARER, PH.D. Director Director /s/ Carol M. Gatton /s/ Lee T. Todd, Jr., Ph.D. - ------------------- --------------------------- CAROL M. GATTON 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 POWER OF ATTORNEY (cont.) /s/ David B. Lewis /s/ Michael D. Robinson - ------------------ ----------------------- DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller /s/ Anne H. McNamara - -------------------- ANNE H. McNAMARA Director STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 25th day of February 2000, 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 24 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, 1999 (the 1999 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 1999 Form 10-K and to any and all amendments to such 1999 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 25th day of February 2000. /s/ Roger W. Hale /s/ T. Ballard Morton, Jr. - ----------------- --------------------------- ROGER W. HALE T. BALLARD MORTON, JR. Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ Frank V. Ramsey, Jr. - ---------------- --------------------------- MIRA S. BALL FRANK V. RAMSEY, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ William L. Rouse, Jr. - --------------------------- --------------------------- WILLIAM C. BALLARD, JR. WILLIAM L. ROUSE, JR. Director Director /s/ Owsley Brown II /s/ Charles L. Shearer, Ph.D. - ------------------- --------------------------- OWSLEY BROWN II CHARLES L. SHEARER, PH.D. Director Director /s/ Carol M. Gatton /s/ Lee T. Todd, Jr., Ph.D. - ------------------- --------------------------- CAROL M. GATTON 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 POWER OF ATTORNEY (cont.) /s/ David B. Lewis /s/ Michael D. Robinson - ------------------ --------------------------- DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller /s/ Anne H. McNamara - -------------------- ANNE H. McNAMARA Director STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 25th day of February 2000, 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 25 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, 1999 (the 1999 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 1999 Form 10-K and to any and all amendments to such 1999 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 25th day of February 2000. /s/ Roger W. Hale /s/ T. Ballard Morton, Jr. - ----------------- -------------------------- ROGER W. HALE T. BALLARD MORTON, JR. Chairman and Chief Director Executive Officer /s/ Mira S. Ball /s/ Frank v. Ramsey, Jr. - ---------------- ------------------------ MIRA S. BALL FRANK V. RAMSEY, JR. Director; Director; /s/ William C. Ballard, Jr. /s/ William L. Rouse, Jr. - --------------------------- ------------------------- WILLIAM C. BALLARD, JR. WILLIAM L. ROUSE, JR. Director Director /s/ Owsley Brown II /s/ Charles L. Shearer, Ph.D. - ------------------- ----------------------------- OWSLEY BROWN II CHARLES L. SHEARER, PH.D. Director Director /s/ Carol M. Gatton /s/ Lee T. Todd, Jr., Ph.D. - ------------------- --------------------------- CAROL M. GATTON 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 POWER OF ATTORNEY (cont.) /s/ David B. Lewis /s/ Michael D. Robinson - ------------------ ----------------------- DAVID B. LEWIS MICHAEL D. ROBINSON Director Vice President and Controller /s/ Anne H. McNamara - -------------------- ANNE H. McNAMARA Director STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) On this 25th day of February 2000, 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-27.01 26 EXHIBIT 27.01
UT 0000861388 LG&E ENERGY CORP. 1,000 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 3,413,054 752,493 705,719 262,491 0 5,133,757 775,323 (266) 366,234 1,141,291 0 135,328 1,299,415 449,578 0 0 411,810 0 0 0 1,696,335 5,133,757 2,707,276 133,524 2,224,728 2,358,252 349,024 (154,907) 194,117 125,309 68,808 6,757 62,051 162,096 69,011 343,328 0.48 0.48 Includes common stock expense of $1,690. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earning of affiliates of $49,717.
EX-27.02 27 EXHIBIT 27.02
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 1,850,807 1,224 269,471 49,950 0 2,171,452 424,334 (189) 259,231 683,376 0 95,328 380,600 0 0 120,097 0 0 0 0 892,051 2,171,452 968,249 57,774 770,384 828,158 140,091 4,141 144,232 37,962 106,270 4,501 101,769 90,000 33,649 180,493 0 0 Includes common stock expense of $836. Represents unrealized gain/loss on marketable securities, net of taxes.
EX-27.03 28 EXHIBIT 27.03
UT 0000055387 KENTUCKY UTILITIES COMPANY 1,000 12-MOS DEC-31-1999 DEC-31-1999 PER-BOOK 1,562,247 14,349 155,523 52,971 0 1,785,090 307,545 0 329,470 637,015 0 40,000 484,830 0 0 0 61,500 0 0 0 561,745 1,785,090 937,310 60,380 740,914 801,294 136,016 9,437 145,453 38,895 106,558 2,256 104,302 73,999 35,362 204,176 0 0 Includes common stock expense of $595.
EX-99.01 29 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 2, 6, 18 and 22 (for LG&E Energy), Notes 3, 12 and 16 (for LG&E) and Notes 3, 11 and 14 (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; * Factors associated with market conditions in the pipeline construction and repair industry, both national and international, including, general levels of industry activity, fuels and liquids price levels, competition, foreign economic, currency, regulatory and operating risks and dependence on certain customers, suppliers and operators; * Factors associated with, resulting from or affecting the proposed merger transaction between LG&E Energy and a subsidiary of PowerGen plc, including covenants and actions of the parties thereunder, national and international economic, financial market and industry conditions, and delays or conditions imposed by regulatory authorities. 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 30 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, as amended, 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, 1999, 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 25, 2000. 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). On February 27, 2000, in connection with the announcement of the proposed merger transaction involving PowerGen plc and its affiliates ("PowerGen"), the Third Amendment to Rights Agreement was enacted following approval of the Board of Directors. This amendment provided that the execution, delivery and performance of the PowerGen Merger Agreement (as defined in the Third Amendment to Rights Agreement) will not cause any Rights to become exercisable, cause PowerGen or any of its affiliates to become an "Acquiring Person" or give rise to a "Distribution Date" a "Stock Acquisition Date" or a Triggering Event (see below). The Third Amendment to Rights Agreement also extended the expiration date of the Rights Agreement from December 19, 2000 to (a) the date of consummation of the merger contemplated in the PowerGen Merger Agreement or (b) in the event of a termination of such agreement (i) December 19, 2000, if the PowerGen Merger Agreement is terminated prior to such date or (ii) five business days after any termination of the PowerGen Merger Agreement, if such termination occurs on or after December 19, 2000. 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 time set forth in the Third Amendment to Rights Agreement (se above), 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 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. A copy of the Third Amendment to Rights Agreement has been filed with the SEC as an Exhibit to the Company's Registration Statement on Form 8-A/A filed on March 6, 2000. 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 31 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 25, 2000, 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 25, 2000, 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 25, 2000, concerning the nominees for director, as well as the directors whose terms of office continue after the 2000 Annual Meeting of shareholders (the "Annual Meeting") of KU. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT 2003 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 of Humana, Inc., a healthcare services company, from 1978 until May 1992. 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 Louisville Gas and Electric Company ("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. and Mid-America Bancorp. T. BALLARD MORTON, JR. (AGE 68) 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. WILLIAM L. ROUSE, JR. (AGE 67) 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, [Arch Coal, Inc.] and Kentucky-American Water Company, a subsidiary of American Water Works Company, Inc. CHARLES L. SHEARER, PH.D. (AGE 57) 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 57) 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 of 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. J. DAVID GRISSOM (AGE 61) 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. CAROL M. GATTON (AGE 67) Mr. Gatton has been Chairman and Director of Area Bancshares Corporation, 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 53) 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. DIRECTORS WHOSE TERMS EXPIRE AT 2002 ANNUAL MEETING OF SHAREHOLDERS MIRA S. BALL (AGE 65) 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 LG&E since May 1998 and of KU since 1992. ROGER W. HALE (AGE 56) 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 55) 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. ANNE H. MCNAMARA (AGE 52) 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 68) 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. 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 and a Nominating and Governance Committee. Pursuant to board and committee resolutions, the Long-Range Planning Committee was discontinued in December 1999. 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 boards of directors. During 1999, there were a total of 11 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 LG&E Energy or its subsidiaries, including KU, receive no compensation in their capacities as directors. During 1999, 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 during 1999. Non-employee directors of KU may elect to defer all or a part of their fees (including retainers, fees for attendance at regular and annual 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 such as the proposed merger with PowerGen 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. Accordingly, if the merger with PowerGen is completed, each share equivalent will be converted into the right to receive $24.85 in cash, without interest. 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 25, 2000, 7 directors of KU were participating in the Deferred Stock Plan. Non-employee directors also receive stock options pursuant to the LG&E Energy Corp. Stock Option Plan for Non-Employee Directors (the "Directors' Option Plan"), which was approved by the shareholders at the 1994 annual meeting. Under the terms of the Directors' Option Plan, upon initial election or appointment to the 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 295,000 shares are subject to existing options at a weighted average per share price of $21.93. As of February 25, 2000, each non-employee director held 24,000 exercisable options and 4,000 unexercisable options, with the exception of Mrs. McNamara, who held 23,000 exercisable options and 4,000 unexercisable options, and Messrs. Gatton, Ramsey and Rouse, Mrs. Ball and Drs. Shearer and Todd, who each held 8,000 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. Options held by a director under the Directors' Option Plan will be converted upon completion of the merger at the director's election into either options to acquire ADS's of PowerGen or cash. AUDIT COMMITTEE The Audit Committee of the Board is composed of Messrs. Ballard, Brown, Gatton, Grissom, Lewis and Ramsey, Mrs. Ball and Drs. Shearer and Todd. During 1999, the Audit Committee maintained direct contact with the independent auditors and KU's Internal Auditor to review the following matters: the adequacy of KU's accounting and financial reporting procedures; the adequacy and effectiveness of KU's system of internal accounting controls; the scope and results of the annual audit and any other matters relative to the audit of KU's accounts and financial affairs that the Committee, the Internal Auditor, or the independent auditors deemed necessary. The Audit Committee met four times during 1999. 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, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara. The Compensation Committee met five times during 1999. 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 shareholders. To be considered for inclusion in the slate of nominees proposed by the Board of Directors at an annual meeting, 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 shareholder nominations for election of directors at a shareholders' 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 three times during 1999. EXECUTIVE COMPENSATION AND OTHER INFORMATION The following table shows the cash compensation paid or to be paid by LG&E Energy or any of its subsidiaries, 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 LG&E Energy who were serving as such at December 31, 1999, in all capacities in which they served during 1997, 1998 and 1999: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ---------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------- ------ ------- NAME AND YEAR SALARY BONUS OTHER RESTRICTED SECURITIES LTIP ALL OTHER PRINCIPAL POSITION ---- ($) ($) ANNUAL STOCK UNDERLYING PAYOUTS COMPEN- ------------------ --- --- COMP. AWARDS OPTIONS/SARS ($)(1) SATION ($) ($) (#) ------ ($) --- --- --- --- Roger W. Hale 1999 770,000 703,800 47,599 2,919,489 102,122 0 55,596(2) Chairman of the Board and See note (3) See note (1) Chief Executive Officer 1998 700,000 649,800 32,301 133,588 821,581 36,191 1997 580,000 311,808 18,212 67,728 313,037 26,675 R. Foster Duncan 1999 325,000 215,788 52,440 ___ 34,483 0(1) 15,623(2) Executive Vice President 1998 262,903(4) 210,000 69,687(4) ___ 81,221 ___ 4,785 and Chief Financial Officer John R. McCall 1999 300,000 204,930 7,171 ___ 31,830 0(1) 17,252(2) Executive Vice President, 1998 260,000 140,399 7,870 ___ 34,733 96,635 15,582 General Counsel and 1997 245,000 114,764 6,922 ___ 15,605 32,306 11,414 Corporate Secretary Wayne T. Lucas 1999 273,000 154,818 2,919 ___ 25,345 0(1) 15,544 Executive Vice President- 1998 252,035 161,822 1,307 ___ 23,028 0 9,500 Power Generation 1997 215,792 69,555 1,271 ___ ___ 29,576 4,750 Frederick J. Newton, III 1999 255,000 171,641 6,731 ___ 20,292 0(1) 8,712 Senior Vice President and 1998 217,100(4) 99,253 69,229(4) ___ 16,668 ___ 3,328 Chief Administrative Officer
- ----------- (1) Due to Company stock performance compared to peer group, no Long-Term Plan payouts were made for 1997-1999 performance cycle. (2) Includes employer contributions to 401(k) plan, nonqualified thrift plan and employer paid life insurance premiums in 1999 as follows: Mr. Hale $4,358, $18,288 and $32,950, respectively; Mr. Duncan $4,775, $10,113 and $735, respectively; Mr. McCall $4,662, $8,250 and $4,340, respectively; Mr. Lucas $3,336, $7,508 and $4,700, respectively; and Mr. Newton $3,825, $3,825 and $1,062, respectively. (3) Amount shown represents dollar value of restricted stock awards, determined by multiplying the number of shares in each award by the closing market price as of the receipt date of grant. These awards do not represent currently-realizable compensation to Mr. Hale. The restricted shares are forfeited in the event Mr. Hale's employment is terminated for any reason prior to May 4, 2003, the term of his current employment agreement, other than due to death, disability or termination following a change in control. Under Mr. Hale's new employment agreement, the restricted shares will be converted to a right to receive merger consideration of $24.85 per share in cash, without interest. Income tax is payable upon the awards at the time of their vesting. Dividends are paid in the form of additional grants of restricted shares representing reinvested dividends and are subject to the same vesting date and conditions as the initial grant. At December 31, 1999, the aggregate restricted stock holdings of Mr. Hale were 137,571 shares ($2,398,894) valued at such year-end closing market price. (4) Reported compensation is only for a portion of the year. Mr. Duncan joined LG&E Energy on January 12, 1998 and Mr. Newton joined LG&E Energy on May 7, 1998. "Other Annual Compensation" for that year includes a relocation payments of $68,686 and $69,229, respectively. OPTION/SAR GRANTS TABLE OPTION/SAR GRANTS IN 1999 FISCAL YEAR The following table contains information at December 31, 1999, with respect to grants of stock options and stock appreciation rights (SARs) to the named executive officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM ----------------- --------------- NUMBER OF PERCENT OF SECURITIES TOTAL EXERCISE UNDERLYING OPTIONS/SARS OR BASE EXPIRATION NAME OPTIONS/SARS GRANTED TO PRICE DATE 0%($) 5% ($) 10%($) ---- GRANTED EMPLOYEES IN ($/ ---- ----- -------- --------- (#) (1) FISCAL YEAR SHARE) ------- ----------- ------ Roger W. Hale 102,122 16.8% 25.75 02/03/2009 0 1,653,767 3,819,887 R. Foster Duncan 34,483 5.7% 25.75 02/03/2009 0 558,419 1,289,841 John R. McCall 31,830 5.2% 25.75 02/03/2009 0 515,456 1,190,605 Wayne T. Lucas 25,345 4.2% 25.75 02/03/2009 0 410,438 948,033 Frederick J. Newton, III 20,292 3.3% 25.75 02/03/2009 0 328,609 759,025
- ----------- (1) Options are awarded at fair market value at time of grant; unless otherwise indicated, options vest in one year and are exercisable over a ten-year term. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE AGGREGATED OPTION/SAR EXERCISES IN 1999 FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information with respect to the named executive officers concerning the exercise of options and/or SARs during 1999 and the value of unexercised options and SARs held by them as of December 31, 1999:
VALUE OF NUMBER OF SECURITIES UNEXERCISED SHARES UNDERLYING IN-THE-MONEY ACQUIRED UNEXERCISED OPTIONS/SARS AT ON EXERCISE VALUE OPTIONS/SARS FY-END ------------ ------ AT FY-END (#) ($)(1) NAME (#) REALIZED ($) EXERCISABLE/UNEX- EXERCISABLE/UNEX- ---- --- ------------ ----------------- ----------------- ERCISABLE ERCISABLE --------- --------- Roger W. Hale 0 N/A 269,630/102,122 / R. Foster Duncan 0 N/A 81,221/34,483 / John R. McCall 0 N/A 72,384/31,830 / Wayne T. Lucas 0 N/A 23,028/25,345 / Frederick J. Newton, III 0 N/A 16,668/20,292 /
- ----------- (1) Dollar amounts reflect market value of LG&E Energy common stock at year-end, minus the exercise price. LONG-TERM INCENTIVE PLAN AWARDS TABLE LONG-TERM INCENTIVE PLAN AWARDS IN 1999 FISCAL YEAR The following table provides information concerning awards made in 1999 to the named executive officers under the Long-Term Plan.
NUMBER PERFORMANCE OR OF SHARES, OTHER PERIOD UNITS OR UNTIL OTHER MATURATION THRESHOLD(#) TARGET(#) MAXIMUM(#) NAME RIGHTS OR PAYOUT ------------ --------- ---------- ---- ------ --------- ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE BASED PLANS (NUMBER OF SHARES) (1) ---------------------- Roger W. Hale 39,346 12/31/2001 15,738 39,346 59,019 R. Foster Duncan 6,643 12/31/2001 2,657 6,643 9,965 John R. McCall 6,132 12/31/2001 2,453 6,132 9,198 Wayne T. Lucas 4,882 12/31/2001 1,953 4,882 7,323 Frederick J. Newton, III 3,909 12/31/2001 1,564 3,909 5,864
- ----------- (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 1999, 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 the 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 1999 are reported in the summary compensation table for the year of payout. 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 LG&E Energy and its subsidiaries: 1999 PENSION PLAN TABLE
REMUNERATION 15 20 25 30 OR MORE ------------ -- -- -- ---------- YEARS OF SERVICE ---------------- $100,000 $47,524 $47,524 $47,524 $55,433 $150,000 $79,524 $79,524 $79,524 $85,133 $200,000 $111,524 $111,524 $111,524 $111,524 $250,000 $143,524 $143,524 $143,524 $143,524 $300,000 $175,524 $175,524 $175,524 $175,524 $350,000 $207,524 $207,524 $207,524 $207,524 $400,000 $239,524 $239,524 $239,524 $239,524 $450,000 $271,524 $271,524 $271,524 $271,524 $500,000 $303,524 $303,524 $303,524 $303,524 $550,000 $335,524 $335,524 $335,524 $335,524 $600,000 $367,524 $367,524 $367,524 $367,524 $650,000 $399,524 $399,524 $399,524 $399,524 $700,000 $431,524 $431,524 $431,524 $431,524 $750,000 $463,524 $463,524 $463,524 $463,524 $800,000 $495,524 $495,524 $495,524 $495,524 $850,000 $527,524 $527,524 $527,524 $527,524 $900,000 $559,524 $559,524 $559,524 $559,524 $950,000 $591,524 $591,524 $591,524 $591,524 $1,000,000 $623,524 $623,524 $623,524 $623,524 $1,050,000 $655,524 $655,524 $655,524 $655,524 $1,100,000 $687,524 $687,524 $687,524 $687,524 $1,150,000 $719,524 $719,524 $719,524 $719,524 $1,200,000 $751,524 $751,524 $751,524 $751,524 $1,250,000 $783,524 $783,524 $783,524 $783,524 $1,300,000 $815,524 $815,524 $815,524 $815,524 $1,350,000 $847,524 $847,524 $847,524 $847,524 $1,400,000 $879,524 $879,524 $879,524 $879,524 $1,450,000 $911,524 $911,524 $911,524 $911,524 $1,500,000 $943,524 $943,524 $943,524 $943,524 $1,550,000 $975,524 $975,524 $975,524 $975,524 $1,600,000 $1,007,524 $1,007,524 $1,007,524 $1,007,524 $1,650,000 $1,039,524 $1,039,524 $1,039,524 $1,039,524 $1,700,000 $1,071,524 $1,071,524 $1,071,524 $1,071,524
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 LG&E Energy at December 31, 1999 is as follows: 33 years for Mr. Hale; 2 years for Mr. Duncan; 5 years for Mr. McCall; 1 year for Mr. Newton; and 30 years for Mr. Lucas. 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 Energy, LG&E and KU with at least one year of service with any 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 Energy, LG&E and KU. 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 prior 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 prior employment agreement. The special plan will terminate as of the closing of the PowerGen transaction, pursuant to Mr. Hale's new employment agreement with LG&E Energy dated as of February 25, 2000. The estimated annual benefits to be received under the Retirement Income Plan and the Supplemental Executive Retirement Plan upon normal retirement at age 65 and after deduction of Social Security benefits will be $789,649 for Mr. Hale; $294,692 for Mr. Duncan; $275,189 for Mr. McCall; $235,730 for Mr. Newton; and $147,172 for Mr. Lucas. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS On May 20, 1997, Mr. Hale entered into an employment agreement with LG&E Energy for services to be provided to LG&E Energy and its subsidiaries, including LG&E and KU with 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 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 a life insurance policy in the amount of not less than $2 million shall be provided to Mr. Hale at LG&E Energy's expense. 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. Mr. Hale has agreed that this agreement will terminate effective as of the closing of the PowerGen transaction. During 1998, officers of LG&E Energy 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 LG&E Energy shall be entitled to the following payment 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: (1) all accrued compensation; (2) 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 Code, or be subject to an excise tax imposed by Section 4999 of the Code and, in the latter case, 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 merger and acquisitions, changes in Board membership and acquisitions of voting securities of LG&E Energy, and will include the merger with PowerGen. Mr. Hale has agreed that this agreement shall terminate effective as of the closing of the merger, and in consideration of this termination, Mr. Hale has entered into a new employment agreement with LG&E Energy dated as of February 25, 2000. In addition, Mr. Hale and four senior executives agreed to terminate their current change in control agreements with LG&E Energy, in exchange for entering into new employment and change in control severance agreements. 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 either the extent to which the performance goals have been met through the effective date of the change in control (as determined by LG&E Energy's Compensation Committee), or the value of the award at the time of the grant, whichever amount is higher. Additionally, executives shall receive continuation of certain welfare benefits and payments in respect of accrued but unused vacation days and for out-placement assistance. -----END PRIVACY-ENHANCED MESSAGE-----