-----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, Te1CZ0DvXusWNijf+Cdc0oldqaFdDuvrb5Ste4W6hKDo5NwQfhZFjtrZk6ao63Dg ZPbmkmGam69enIgHu2i0BA== 0000912057-01-514638.txt : 20010514 0000912057-01-514638.hdr.sgml : 20010514 ACCESSION NUMBER: 0000912057-01-514638 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010511 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/A SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 1630038 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 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/A SEC ACT: SEC FILE NUMBER: 001-03464 FILM NUMBER: 1630039 BUSINESS ADDRESS: STREET 1: ONE QUALITY ST CITY: LEXINGTON STATE: KY ZIP: 40507 BUSINESS PHONE: 6062552100 10-K405/A 1 a2048540z10-k405a.txt 10-K405/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K/A (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, 2000 ----------------- Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification Number ----------- ----------------------------- --------------------- 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 (859) 255-2100 Securities registered pursuant to section 12(b) of the Act: 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 28, 2001, 860,287 shares of voting preferred stock of Louisville Gas and Electric Company, with an aggregate market value of $22,831,500, were outstanding and held by non-affiliates. Additionally, Louisville Gas and Electric Company had 21,294,223 shares of common stock outstanding, all held by LG&E Energy Corp. Kentucky Utilities 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 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. DOCUMENTS INCORPORATED BY REFERENCE Proxy statements for Louisville Gas and Electric Company and Kentucky Utilities Company, currently anticipated to be prepared and filed with the Commission during April 2001, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS PART I Item 1. Business........................................................ 7 Louisville Gas and Electric Company General...................................................... 7 Electric Operations.......................................... 8 Gas Operations............................................... 9 Rates and Regulation......................................... 10 Construction Program and Financing........................... 11 Coal Supply.................................................. 11 Gas Supply................................................... 12 Environmental Matters........................................ 12 Competition.................................................. 13 Kentucky Utilities Company General...................................................... 13 Electric Operations.......................................... 13 Rates and Regulation......................................... 14 Construction Program and Financing........................... 15 Coal Supply.................................................. 16 Environmental Matters........................................ 17 Competition.................................................. 17 Employees and Labor Relations................................... 17 Item 2. Properties...................................................... 17 Item 3. Legal Proceedings............................................... 20 Item 4. Submission of Matters to a Vote of Security Holders............. 21 Executive Officers of the Companies....................................... 21 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.......................................... 25 Item 6. Selected Financial Data......................................... 26 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition: Louisville Gas and Electric Company....................... 27 Kentucky Utilities Company................................ 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...... 48 Item 8. Financial Statements and Supplementary Data: Louisville Gas and Electric Company.......................... 49 Kentucky Utilities Company................................... 74 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 95 PART III Item 10. Directors and Executive Officers of the Registrant (a).......... 95 Item 11. Executive Compensation (a)...................................... 95 Item 12. Security Ownership of Certain Beneficial Owners and Management (a)........................................... 95 Item 13. Certain Relationships and Related Transactions (a).............. 95 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 95
Signatures ............................................................... 116
(a) Incorporated by reference. INDEX OF ABBREVIATIONS Capital Corp. LG&E Capital Corp. Clean Air Act The Clean Air Act, as amended in 1990 CNN Certificate of Public Convenience and Necessity CT Combustion Turbines DSM Demand Side Management ECR Environmental Cost Recovery EEI Electric Energy, Inc. EITF Emerging Issues Task Force Issue EPA U.S. Environmental Protection Agency ESM Earnings Sharing Mechanism FAC Fuel Adjustment Clause FERC Federal Energy Regulatory Commission FPA Federal Power Act FT Firm Transportation GSC Gas Supply Clause 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 Kentucky Commission Kentucky Public Service Commission KIUC Kentucky Industrial Utility Consumers, Inc. KU Kentucky Utilities Company 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 Services LG&E Energy Services Inc. Mcf Thousand Cubic Feet 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. Mw Megawatts Mwh Megawatt hours NAAQS National Ambient Air Quality Standards NNS No-Notice Service NOx Nitrogen Oxide OMU Owensboro Municipal Utilities PBR Performance-Based Ratemaking Powergen Powergen plc PUHCA Public Utility Holding Company Act of 1935 S&P Standard & Poor's Rating Services SCR Selective Catalytic Reduction SEC Securities And Exchange Commission SERP Supplemental Employee Retirement Plan SFAS Statement of Financial Accounting Standards SIP State Implementation Plan SO2 Sulfur Dioxide Virginia Staff Virginia Commission Staff Tennessee Gas Tennessee Gas Pipeline Company Texas Gas Texas Gas Transmission Corporation TRA Tennessee Regulatory Authority Trimble County LG&E's Trimble County Unit 1 USWA United Steelworkers of America
Utility Operations Operations of LG&E and KU Virginia Commission Virginia State Corporation Commission
PART I. Item 1. Business. On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. LG&E Energy had announced on February 28, 2000, that its Board of Directors accepted the 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 became a wholly owned subsidiary of Powergen and, as a result, LG&E and KU became indirect subsidiaries of Powergen. The utility operations (LG&E and KU) of LG&E Energy have continued their separate identities and continue to serve customers in Kentucky and Virginia under their existing names. The preferred stock and debt securities of the utility operations were not affected by this transaction resulting in the utility operations' obligation to continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA, and LG&E and KU, as subsidiaries of a registered holding company, became subject to additional regulation under PUHCA. As a result of the Powergen merger and in order to comply with the Public Utility Holding Company Act of 1935, LG&E Services was formed and became effective on January 1, 2001. LG&E Services provides certain services to affiliated entities, including LG&E and KU, at cost as required under the Holding Company Act. On January 1, 2001, approximately 1,000 employees, mainly from LG&E Energy, LG&E and KU, were moved to LG&E Services. In January 2001, LG&E Energy announced voluntary workforce separation programs for certain employee groups. It is estimated that the separation programs may result in a workforce reduction of approximately 700 employees at LG&E and 250 employees at KU. LOUISVILLE GAS AND ELECTRIC COMPANY General Incorporated on July 2, 1913, LG&E is a regulated public utility that supplies natural gas to approximately 299,000 customers and electricity to approximately 364,000 customers in Louisville and adjacent areas in Kentucky. LG&E's service area covers approximately 700 square miles in 17 counties and has an estimated population of one million. Included in this area is the Fort Knox Military Reservation, to which LG&E transports gas and provides electric service, but which maintains its own distribution systems. LG&E also provides gas service in limited additional areas. LG&E's coal-fired electric generating plants, which are all equipped with systems to reduce sulfur dioxide emissions, produce most of LG&E's electricity. The remainder is generated by a hydroelectric power plant and combustion turbines. Underground natural gas storage fields help LG&E provide economical and reliable gas service to customers. See Item 2, Properties. For the year ended December 31, 2000, 72% of total operating revenues was derived from electric operations and 28% 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 $ 205,105 $ 159,670 $ 364,775 47% Commercial 171,414 61,888 233,302 30 7 Industrial 104,738 15,898 120,636 15 Public authorities 54,270 9,193 63,463 8 ------- --------- --------- --------- Total retail 535,527 246,649 782,176 100% ========= Wholesale sales 165,080 17,344 182,424 Gas transported - net -- 6,922 6,922 Provision for rate refunds (2,500) -- (2,500) Miscellaneous 12,851 1,574 14,425 --------- --------- --------- Total $ 710,958 $ 272,489 $ 983,447 ========= ========= =========
See Note 14 of LG&E's Notes to Financial Statements under Item 8 for financial information concerning segments of business for the three years ended December 31, 2000. Electric Operations The sources of LG&E's electric operating revenues and the volumes of sales for the three years ended December 31, 2000, were as follows:
2000 1999 1998 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $205,105 $214,733 $213,476 Commercial 171,414 176,457 170,954 Industrial 104,738 111,889 113,372 Public authorities 54,270 55,968 55,075 -------- ---------- -------- Total retail 535,527 559,047 552,877 Wholesale sales 165,080 221,336 99,340 Provision for rate refunds (2,500) (1,735) (4,500) Miscellaneous 12,851 12,022 10,794 -------- -------- -------- Total $710,958 $790,670 $658,511 ======== ======== ======== ELECTRIC SALES (Thousands of Mwh): Residential 3,722 3,680 3,534 Commercial 3,350 3,290 3,133 Industrial 3,043 3,047 3,097 Public authorities 1,214 1,187 1,140 ------- ------- ------- Total retail 11,329 11,204 10,904 Wholesale sales 6,834 8,428 4,970 ------- ------- ------- Total 18,163 19,632 15,874 ====== ====== ======
LG&E uses efficient coal-fired boilers, fully equipped with sulfur dioxide removal systems, to generate most of its electricity. LG&E's weighted-average system wide emission rate for sulfur dioxide in 2000 was approximately 0.65 lbs./Mmbtu of heat input and, every unit was below its emission limit. The 2000 maximum local peak load of 2,542 Mw occurred on Wednesday, August 9, 2000. The record local peak load of 2,612 Mw occurred on Friday, July 30, 1999, when the temperature was 106 degrees F. 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, 2000, 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 8 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. Gas Operations The sources of LG&E's gas operating revenues and the volumes of sales for the three years ended December 31, 2000, were as follows:
2000 1999 1998 ---- ---- ---- GAS OPERATING REVENUES (Thousands of $): Residential $159,670 $103,655 $113,430 Commercial 61,888 38,627 40,888 Industrial 15,898 10,401 11,969 Public authorities 9,193 9,013 8,884 -------- -------- -------- Total retail 246,649 161,696 175,171 Wholesale sales 17,344 8,118 8,720 Gas transported - net 6,922 6,350 6,926 Miscellaneous 1,574 1,415 728 -------- -------- -------- Total $272,489 $177,579 $191,545 ======== ======== ======== GAS SALES (Millions of cu. ft.): Residential 24,274 21,565 20,040 Commercial 10,132 9,033 8,448 Industrial 3,089 2,781 2,860 Public authorities 1,576 2,228 1,967 -------- -------- -------- Total retail 39,071 35,607 33,315 Wholesale sales 5,115 3,881 3,880 Gas transported 14,729 14,014 13,027 -------- -------- -------- Total 58,915 53,502 50,222 ======== ======== =========
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. 9 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 2000, maximum day gas sendout was 483,000 Mcf, occurring on December 17, when the average temperature for the day was 10 degrees F. Supply on that day consisted of 205,000 Mcf from purchases, 227,000 Mcf delivered from underground storage, and 51,000 Mcf transported for industrial customers. For a further discussion, see Gas Supply under Item 1. Rates and Regulation Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including LG&E, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. 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 the FPA, 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 under Item 7 and Note 3 of LG&E'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 electric rates are subject to an Earnings Sharing Mechanism. The ESM, in place for three years beginning in 2000, sets an upper and lower point for rate of return on equity, whereby if LG&E's rate of return for the calendar year falls within the range of 10.5% to 12.5%, no action is necessary. If earnings are above the upper limit, then excess earnings are shared 40% with ratepayers and 60% with shareholders; if earnings are below the lower limit, then earnings deficiency is recovered 40% from ratepayers and 60% from shareholders. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, LG&E recorded in its financial statements an estimated refund to ratepayers of $2.5 million. LG&E's rates contain an ECR surcharge which recovers certain costs incurred by LG&E that are required to comply with the Clean Air Act and other environmental regulations. See Note 3 of LG&E's Notes to Financial Statements under Item 8. LG&E's gas rates contain a GSC, whereby increases or decreases in the cost of gas supply are reflected in LG&E's 10 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. In February 2001, the Kentucky Commission ordered LG&E to make monthly GSC filings. 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. The last integrated resource plan was filed in 1999. 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, 2000, gross property additions amounted to $696 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 22% of total utility plant at December 31, 2000, and consisted of $538 million for electric properties and $158 million for gas properties. Gross retirements during the same period were $108 million, consisting of $79 million for electric properties and $29 million for gas properties. Coal Supply Coal-fired generating units provided more than 97% of LG&E's net kilowatt-hour generation for 2000. The remainder of 2000 net generation was made up of a hydroelectric plant and natural gas and oil fueled combustion turbine peaking units. 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 2001 and beyond. LG&E normally augments its coal supply agreements with spot market purchases. LG&E has a coal inventory policy which it believes provides adequate protection under most contingencies. LG&E had a coal inventory of approximately 425,811 tons, or a 22-day supply, on hand at December 31, 2000. LG&E expects to continue purchasing most of its coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky, southwest Indiana, and West Virginia for the foreseeable future. This supply is relatively low priced coal, and in combination with its sulfur dioxide removal systems is expected to enable LG&E to continue to provide adequate electric service in compliance with 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. 11 The historical average delivered costs of coal purchased by LG&E were as follows:
2000 1999 1998 ---- ---- ---- Per ton $20.96 $21.49 $22.38 Per Mmbtu $ .92 $ .95 $ .98 Spot purchases as % of all sources 1% 5% 24%
The delivered cost of coal is expected to remain flat during 2001 due to contracts to buy coal already in place, although there has been a recent coal price increase for spot purchases. Gas Supply LG&E purchases natural gas supplies from multiple sources under contracts for varying periods of time, while transportation services are purchased from Texas Gas and Tennessee Gas. During 2000, Texas Gas filed with FERC for a change in its rates as required under the settlement in its last rate case. 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 participates in that and other proceedings, as appropriate. 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 Gas system under Tennessee's Gas Rate FT-A. LG&E's contract levels with Tennessee Gas are 51,000 Mmbtu per day annually. The FT-A agreement with Tennessee Gas 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 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 $5.08 in 2000, $2.99 in 1999 and $3.05 in 1998. Natural gas prices in the unregulated wholesale market increased significantly throughout 2000, particularly as the year progressed. Natural gas prices have increased above historic levels due to record cold temperatures, decreased exploration and production levels, and higher demand by electric generators. 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 12 ending with 2000, expenditures for pollution control facilities represented $124 million or 19% of total construction expenditures. LG&E estimates that construction expenditures for the installation of nitrogen oxide control equipment from 2001 through 2004 will be approximately $150 million. For a discussion of environmental matters, see Rates and Regulation for LG&E under Item 7 and Note 12 of LG&E'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 will continue to take additional steps to better position itself for competition in the future. See Note 16 of LG&E's Notes to Financial Statements under Item 8. KENTUCKY UTILITIES COMPANY General KU was incorporated in Kentucky in 1912 and incorporated in Virginia in 1991. KU is a regulated public utility engaged in producing, transmitting and selling electric energy. KU provides electric service to approximately 464,000 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to approximately 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. Electric Operations The sources of KU's electric operating revenues and the volumes of sales for the three years ended December 31, 2000, were as follows:
2000 1999 1998 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $241,783 $242,304 $238,566 Commercial 161,291 160,895 158,340 Industrial 153,017 154,460 154,475 Mine Power 27,089 28,792 31,620 Public authorities 57,979 58,500 58,740 -------- -------- -------- Total retail 641,159 644,951 641,741 Wholesale sales 198,073 286,595 179,118 Provision for rate refunds - (5,900) (21,500) Miscellaneous 12,709 11,664 10,755 -------- -------- -------- Total $851,941 $937,310 $810,114 ======== ======== ======== ELECTRIC SALES (Thousands of Mwh): Residential 5,714 5,447 5,247 Commercial 3,954 3,760 3,644 13 Industrial 5,044 4,911 4,747 Mine Power 767 752 838 Public authorities 1,495 1,437 1,424 -------- -------- -------- Total retail 16,974 16,307 15,900 Wholesale sales 7,573 10,188 7,224 -------- -------- -------- Total 24,547 26,495 23,124 ======== ======== ========
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. KU's weighted-average system wide emission rate for sulfur dioxide in 2000 was approximately 1.3 lbs./Mmbtu of heat input and, every unit was below its emission limit. KU's current reserve margin is 12%. At December 31, 2000, KU owned steam and combustion turbine generating facilities with a capacity of 3,832 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, 2000, KU's system capability, including purchases from others, was 4,308 Mw. On August 9, 2000, a record local peak load was set at 3,775 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 2000. See Note 11 of KU'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 is entitled to take 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 2000. See Note 11 of KU's Notes to Financial Statements under Item 8. Rates and Regulation Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including KU, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. 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. 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. FERC has classified KU as a "public utility" as defined in the FPA. 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 14 other respects as provided in the FPA. 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 under Item 7 and Note 3 of KU's Notes to the Financial Statements under Item 8. KU's Kentucky retail 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. KU's Kentucky retail electric rates are subject to an Earnings Sharing Mechanism. The ESM, in place for three years beginning in 2000, sets an upper and lower point for rate of return on equity, whereby if KU's rate of return for the calendar year falls within the range of 10.5% to 12.5%, no action is necessary. If earnings are above the upper limit, then excess earnings are shared 40% with ratepayers and 60% with shareholders; if earnings are below the lower limit, then earnings deficiency is recovered 40% from ratepayers and 60% from shareholders. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, KU expects to fall within the range, therefore no adjustment was made to the financial statements. KU's Kentucky rates contain an ECR surcharge which recovers certain costs incurred by KU that are required to comply with the Clean Air Act and other environmental regulations. See Note 3 of KU's Notes to Financial Statements under Item 8. 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. The last integrated resource plan was filed in 1999. 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. KU customers in Virginia will have retail choice beginning January 2002, pursuant to the Virginia Electric Restructuring Act. KU has filed unbundled rates that become effective January 1, 2002, for those customers who choose an energy provider other than KU. Rates are capped at current levels through June 2007. The Virginia Commission will continue to require each Virginia utility to make annual filings of either a base rate change or an Annual Informational Filing consisting of a set of standard financial schedules. These filings are subject to review by the Virginia Staff. The Virginia 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, but will be limited to decreases through June 2007. Construction Program and Financing 15 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 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, 2000, gross property additions amounted to $574 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 20% of total utility plant at December 31, 2000. Gross retirements during the same period were $88 million. Coal Supply Coal-fired generating units provided more than 99% of KU's net kilowatt-hour generation for 2000. The remainder of KU's net generation for 2000 was provided by oil and/or natural gas burning units and hydroelectric plants. The historical average delivered cost of coal purchased and the percentage of spot coal purchases were as follows:
2000 1999 1998 ---- ---- ---- Per ton $25.63 $26.65 $26.97 Per Mmbtu $1.07 $1.11 $1.12 Spot purchases as % of all sources 51% 53% 42%
The delivered cost of coal is expected to increase during 2001. KU's historical average cost of coal purchased is higher than LG&E's due to the lower sulfur content of the coal KU purchases for use at its Ghent plant and higher cost to transport coal to the E.W. Brown plant. 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 a coal inventory of approximately 403,436 tons, or an 18-day supply, on hand at December 31, 2000. KU expects 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, Wyoming and Pennsylvania for the foreseeable future. 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. 16 Environmental Matters Protection of the environment is a major priority for KU. KU engages in a variety of activities within the jurisdiction of federal, state, and local regulatory agencies. Those agencies have issued KU permits for various activities subject to air quality, water quality, and waste management laws and regulations. For the five-year period ending with 2000, expenditures for pollution control facilities represented $42 million or 7% of total construction expenditures. KU estimates that construction expenditures for the installation of nitrogen oxide control equipment from 2001 through 2004 will be approximately $190 million. See Note 11 of KU'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 will continue to take additional steps to better position itself for competition in the future. See Note 14 of KU's Notes to Financial Statements under Item 8. EMPLOYEES AND LABOR RELATIONS LG&E had 2,003 full-time employees and KU had 1,475 full-time employees at December 31, 2000. Of the LG&E total, 1,192 operating, maintenance, and construction employees were members of IBEW Local 2100. The current three-year contract with the IBEW will expire in November 2001. Of the KU total, 221 operating, maintenance, and construction employees were members of IBEW Local 2100 and USWA Local 9447-01. In August 2000, KU and employees represented by IBEW Local 2100 entered into a one-year collective bargaining agreement. At the same time, KU and employees represented by USWA entered into a two-year collective bargaining agreement. As a result of the Powergen merger and in order to comply with the Public Utility Holding Company Act of 1935, LG&E Services was formed and became effective on January 1, 2001. LG&E Services provides certain services to affiliated entities, including LG&E and KU, at cost as required under the Holding Company Act. On January 1, 2001, approximately 1,000 employees, mainly from LG&E Energy, LG&E and KU, were moved to LG&E Services. See Note 16 of LG&E's Notes to Financial Statements and Note 14 of KU's Notes to Financial Statements under Item 8 for workforce separation program in effect for 2001. These separation programs are anticipated to result in workforce reductions of approximately 700 and 250 employees at LG&E and KU, respectively. 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 17 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, 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, 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, 2000, LG&E's electric transmission system included 21 substations with a total capacity of approximately 11,519,700 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, 3,693 structure miles of overhead lines, 366 miles of underground conduit, and 5,694 miles of underground conductors. LG&E's gas transmission system includes 212 miles of transmission mains, and the gas distribution system includes 3,885 miles of distribution mains. 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. 18 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 27,000 Unit 2 31,000 Unit 3 71,000 --------- Total Tyrone 129,000 Green River - South Carrollton, KY. Unit 1 26,000 Unit 2 27,000 Unit 3 71,000 Unit 4 103,000 --------- Total Green River 227,000 E.W. Brown - Burgin, KY. Unit 1 104,000 Unit 2 168,000 Unit 3 439,000 --------- Total E.W. Brown 711,000 Pineville - Four Mile, KY. Unit 3 34,000 Ghent - Ghent, KY. Unit 1 483,000 Unit 2 492,000 Unit 3 493,000 Unit 4 494,000 --------- Total Ghent 1,962,000 Combustion Turbine Generators (Peaking capability): E.W. Brown - Burgin, KY. (Units 6-11) (a) 724,000 Haefling - Lexington, KY. 45,000 --------- Total combustion turbine generators 769,000 --------- Total capability rating 3,832,000 =========
(a) Amount shown includes the KU's 62% interest in Unit 6 and 7 at E.W. Brown and 100% of four other units. See Notes 11 and 12 of KU's Notes to Financial Statements, under Item 8 for further discussion on ownership. 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. 19 At December 31, 2000, KU's electric transmission system included 112 substations with a total capacity of approximately 14,855,396 Kva and approximately 4,227 structure miles of lines. The electric distribution system included 438 substations with a total capacity of approximately 5,046,307 Kva and 14,772 structure miles of lines. 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 LG&E's and KU's PBR filings and ESM filings, (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 3 and 12 of LG&E's Notes to Financial Statements and Notes 3 and 11 of KU's Notes to Financial Statements under Item 8. Performance-Based Ratemaking In October, 1998, LG&E and KU filed applications with the Kentucky Commission for 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, 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 February 2000, LG&E and KU filed tariffs incorporating the ESM. In June 2000, the Kentucky Commission issued orders reducing the original January 2000 base rate reductions to now require reductions in base rates of approximately $26.3 million at LG&E and $30.4 million at KU, effective June 1, 2000. The orders implemented LG&E's and KU's ESM tariffs, with certain modifications, for a three year term. No parties filed appeals from the Kentucky Commission's orders within the time allowed by statute. See Rates and Regulations under Item 7 and Note 3 to LG&E's Notes to Financial Statements and Note 3 to KU's Notes to Financial Statements under Item 8. Fuel Adjustment Clause Proceedings Pursuant to Kentucky statute, LG&E and KU operate under six-month and two-year reviews by the Kentucky Commission of the fuel cost incurred to serve their customers. Both LG&E and KU have participated in proceedings in front of the Kentucky Commission concerning the recovery of fuel costs associated with wholesale sales and recovery of purchased power energy costs. As a result of these proceedings, the Kentucky Commission issued orders in August 1999 requiring aggregate refunds totaling approximately $800,000 for LG&E and $6.7 million for KU for the periods between November 1996 to August 2000. The issue of whether interest on these amounts is to be refunded has been appealed to the Kentucky Court of Appeals by LG&E, KU and the intervenor group, with a final ruling expected in late 2001 or early 2002. See also Note 3 to LG&E's Notes to Financial Statements and Note 3 to KU's Notes to Financial Statements under Item 8. 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 generating plant and LG&E's and KU's manufactured gas plant sites, and (c) other environmental items affecting LG&E and KU, see Environmental Matters under Item 7 and Note 12 of LG&E's Notes to Financial Statements and Note 11 of KU's Notes to Financial Statements under 20 Item 8, respectively. Other In the normal course of business, other lawsuits, claims, environmental actions, and other governmental proceedings arise against LG&E and KU. To the extent that damages are assessed in any of these lawsuits, 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 or KU's consolidated financial position or results of operations, respectively. ITEM 4. Submission of Matters to a Vote of Security Holders. None. Executive Officers of LG&E at December 31, 2000:
Effective Date of Election to Present Name Age Position Position ---- --- -------- -------- Roger W. Hale 56 Chairman of the January 1, 1992 Board, and Chief Executive Officer Victor A. Staffieri 46 President and June 7, 2000 Chief Operating Officer R. Foster Duncan* 46 Executive Vice February 16, 1999 President and Chief Financial Officer John R. McCall 57 Executive Vice July 1, 1994 President, General Counsel and Corporate Secretary Frederick J. Newton III 45 Senior Vice January 2, 1999 President and Chief Administrative Officer S. Bradford Rives 42 Senior Vice December 11, 2000 President - Finance and Controller Paul W. Thompson 43 Senior Vice June 7, 2000 President - Energy Services Chris Hermann 53 Senior Vice December 11, 2000 President - Distribution Operations Wendy C. Welsh 46 Senior Vice December 11, 2000 President - Information Technology Martyn Gallus 36 Senior Vice December 11, 2000 President - Energy Marketing 21 David A. Vogel 35 Vice President - December 11, 2000 Retail Services Daniel K. Arbough 39 Treasurer December 11, 2000
* Effective January 31, 2001, Richard Aitken-Davies was appointed Chief Financial Officer. 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 2001. There are no family relationships between or among executive officers of LG&E and KU. Before he was elected to his current positions, 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 positions, 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 indicated positions, 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 positions, 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 positions, 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 positions, 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 Businesses of LG&E Energy Corp. from January 1996 to March 1996; Vice President - Finance and Controller of LG&E Energy Corp. from March 1996 to February 1999; and Senior Vice President - Finance and Business Development from February 1999 to December 2000. Before he was elected to his current positions, 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; Vice President, Retail Electric Business for LG&E from December 1998 to August 1999; and Senior Vice President - Energy Services for LG&E Energy Corp. from August 1999 to June 2000. 22 Before he was elected to his current positions, 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 she was elected to her current positions, Ms. Welsh 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 positions, Mr. Gallus was Director, Risk Management, then Director, Product Development, then Vice President, Trading, then Senior Vice President, of LG&E Energy Marketing Inc., respectively, beginning in February 1996. Before he was elected to his current positions, Mr. Vogel served in management positions within the Gas Department of LG&E during the five prior years to this report. Before he was elected to his current position, Mr. Arbough was Manager, Corporate Finance of LG&E Energy Corp., and LG&E from August 1996 to May 1998; Director, Corporate Finance of LG&E Energy Corp., LG&E and KU from May 1998 to present. Executive Officers of KU at December 31, 2000:
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 Victor A. Staffieri 46 President and Chief June 7, 2000 Operating Officer R. Foster Duncan* 46 Executive Vice President February 16, 1999 and Chief Financial Officer John R. McCall 57 Executive Vice President, May 4, 1998 General Counsel and Corporate Secretary Frederick J. Newton III 45 Senior Vice President and January 2, 1999 Chief Administrative Officer S. Bradford Rives 42 Senior Vice President - December 11, 2000 Finance and Controller Paul W. Thompson 43 Senior Vice President - June 7, 2000 Energy Services Chris Hermann 53 Senior Vice President - December 11, 2000 Distribution Operations 23 Wendy C. Welsh 47 Senior Vice President - December 11, 2000 Information Technology Martyn Gallus 36 Senior Vice President - December 11, 2000 Energy Marketing Gary E. Blake 48 Vice President - Sales May 4, 1998 and Service James J. Ellington 55 Vice President - Power May 4, 1998 Generation David A. Vogel 35 Vice President - Retail December 11, 2000 Services Daniel K. Arbough 39 Treasurer December 11, 2000
* Effective January 31, 2000, Richard Aitken-Davies was appointed Chief Financial Officer. 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 2001. There are no family relationships between or among executive officers of LG&E and KU. Before he was elected to his current positions, 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 positions, 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 indicated positions, 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 positions, 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 positions, 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 positions, 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 24 1995 to December 1995; Vice President - Finance, Non-Utility Businesses of LG&E Energy Corp. from January 1996 to March 1996; Vice President - Finance and Controller of LG&E Energy Corp. from March 1996 to February 1999; and Senior Vice President - Finance and Business Development from February 1999 to December 2000. Before he was elected to his current positions, 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; Vice President, Retail Electric Business for LG&E from December 1998 to August 1999; and Senior Vice President - Energy Services for LG&E Energy Corp. from August 1999 to June 2000. Before he was elected to his current positions, 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 she was elected to her current positions, Ms. Welsh 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 positions, Mr. Gallus was Director, Risk Management, then Director, Product Development, then Vice President, Trading, then Senior Vice President, of LG&E Energy Marketing Inc., respectively, beginning in February 1996. 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 positions, Mr. Vogel served in management positions within the Gas Department of LG&E during the five prior years to this report. Before he was elected to his current position, Mr. Arbough was Manager, Corporate Finance of LG&E Energy Corp., and LG&E from August 1996 to May 1998; Director, Corporate Finance of LG&E Energy Corp., LG&E and KU from May 1998 to present. PART II. ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters. 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 $):
2000 1999 ---- ---- 25 First quarter $23,000 $22,000 Second quarter 16,500 22,000 Third quarter 16,500 22,000 Fourth quarter 17,000 23,000
KU: All KU common stock, 37,817,878 shares, is held by LG&E Energy. Therefore, there is no public market for KU's common stock. The following table sets forth KU's cash distributions on common stock paid to LG&E Energy (in thousands of $):
2000 1999 ---- ---- First quarter $19,000 $18,000 Second quarter 25,000 18,000 Third quarter 25,000 18,000 Fourth quarter 25,500 19,000
ITEM 6. Selected Financial Data.
Years Ended December 31 (Thousands of $) ---------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- LG&E: Operating revenues: Revenues $ 985,947 $ 969,984 $ 854,556 $ 845,543 $ 821,115 Provision for rate refunds (2,500) (1,735) (4,500) -- -- ----------- ----------- ----------- ----------- ----------- Total operating revenues 983,447 968,249 850,056 845,543 821,115 =========== =========== =========== =========== =========== Net operating income: Before unusual items 150,361 142,263 138,207 148,186 147,263 Provision for rate refunds (1,491) (2,172) (2,684) -- -- ----------- ----------- ----------- ----------- ----------- Total net operating income 148,870 140,091 135,523 148,186 147,263 =========== =========== =========== =========== =========== Net income: Before unusual items 112,064 108,442 104,381 113,273 107,941 Provision for rate refunds (1,491) (2,172) (2,684) -- -- Merger costs -- -- (23,577) -- -- ----------- ----------- ----------- ----------- ----------- Net income 110,573 106,270 78,120 113,273 107,941 =========== =========== =========== =========== =========== Net income available for common stock 105,363 101,769 73,552 108,688 103,373 =========== =========== =========== =========== =========== Total assets 2,226,084 2,171,452 2,104,637 2,055,641 2,006,712 =========== =========== =========== =========== =========== Long-term obligations (including amounts due within one year) $ 606,800 $ 626,800 $ 626,800 $ 646,800 $ 646,800 =========== =========== =========== =========== ===========
26 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 $) --------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- KU: Operating revenues: Revenues $ 851,941 $ 943,210 $ 831,614 $ 716,437 $ 711,711 Provision for rate refund -- (5,900) (21,500) -- -- ----------- ----------- ----------- ----------- ----------- Operating revenues 851,941 937,310 810,114 716,437 711,711 =========== =========== =========== =========== =========== Net operating income: Before unusual items 128,136 139,534 138,263 118,408 117,337 Provision for rate refund -- (3,518) (12,875) -- -- ----------- ----------- ----------- ----------- ----------- Operating income 128,136 136,016 125,388 118,408 117,337 =========== =========== =========== =========== =========== Net income: Before unusual items 95,524 110,076 107,303 85,713 86,163 Provision for rate refund -- (3,518) (12,875) -- -- Merger costs -- -- (21,664) -- -- ----------- ----------- ----------- ----------- ----------- Net income 95,524 106,558 72,764 85,713 86,163 =========== =========== =========== =========== =========== Net income available for common stock 93,268 104,302 70,508 83,457 83,907 =========== =========== =========== =========== =========== Total assets 1,739,518 1,785,090 1,761,201 1,679,880 1,673,055 =========== =========== =========== =========== =========== Long-term obligations (including amounts due within one year) $ 484,830 $ 546,330 $ 546,330 $ 546,351 $ 546,373 =========== =========== =========== =========== ===========
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: 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 2000, 1999, and 1998 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 LG&E's reports to the Securities and Exchange Commission, including Exhibit No. 99.01 to this report on Form 27 10-K. MERGER On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. LG&E Energy had announced on February 28, 2000, that its Board of Directors accepted the 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, LG&E Energy became a wholly owned subsidiary of Powergen and, as a result, LG&E became an indirect subsidiary of Powergen. LG&E will continue its separate identity and serve customers in Kentucky under its existing name. The preferred stock and debt securities of LG&E were not affected by this transaction and LG&E will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA, and LG&E, as a subsidiary of a registered holding company, became subject to additional regulation under PUHCA. See "Rates and Regulation" under Item 1. 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 $4.3 million for 2000, as compared to 1999. This increase is mainly due to higher gas sales resulting from the colder winter weather experienced in 2000, lower administrative costs and operating expenses at the electric generating stations, partially offset by decreased electric revenues due to a rate reduction ordered by the Kentucky Commission and higher maintenance expenses. Net income increased $28.2 million for 1999, 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. Revenues A comparison of operating revenues for the years 2000 and 1999, excluding the provisions recorded for refunds in 2000 and in 1999, 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 2000 1999 2000 1999 ---------------------------- --------- --------- --------- --------- Retail sales: Fuel and gas supply adjustments, etc $ (9,027) $ (2,014) $ 57,156 $ (24,791) 28 Merger surcredit (2,331) (4,194) -- -- Performance based rate 4,114 (6,076) -- -- Demand side management/ decoupling 6 (2,985) (20) (6,462) Environmental cost recovery surcharge (1,308) (570) -- -- Electric rate reduction (20,727) -- -- -- Gas rate increase -- -- 4,221 -- Variation in sales volumes 5,753 22,009 23,596 17,779 --------- --------- --------- --------- Total retail sales (23,520) 6,170 84,953 (13,474) Wholesale sales (56,256) 121,996 9,226 (602) Gas transportation-net -- -- 572 (575) Other 829 1,228 159 685 --------- --------- --------- --------- Total $ (78,947) $ 129,394 $ 94,910 $ (13,966) ========= ========= ========= =========
Electric revenues decreased in 2000 primarily due to a decrease in brokered activity in the wholesale electric sales market and the electric rate reduction ordered by the Kentucky Commission. In January 2000, the Kentucky Commission ordered an electric rate reduction and the termination of LG&E's proposed electric PBR mechanism. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause coupled with increased gas sales in 2000 due to colder weather, as heating degree days increased 15% over 1999. Increased wholesale gas sales, and the effects of a gas rate increase ordered by the Kentucky Commission in September 2000 also contributed to increased gas revenues. 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. 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 the FAC and GSC factors, subject to approval by the Kentucky Commission. In July 1999, the Kentucky Commission implemented rates proposed in LG&E's PBR filing resulting in the discontinuance of the FAC. In January 2000, the Kentucky Commission rescinded the PBR rates 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 $.3 million (.2%) in 2000 because of an increase in generation to support increased electric sales ($7.6 million), offset partially by a lower cost of coal burned ($7.3 million). 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). The average delivered cost per ton of coal purchased was $20.96 in 2000, $21.49 in 1999, and $22.38 in 1998. Power purchased decreased $72.7 million (42.9%) in 2000 primarily due to decreased brokered sales activity in the wholesale electric market. 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. Gas supply expenses increased $82.2 million (71.6%) in 2000 primarily due to an increase in cost of net gas supply ($70.4 million), and due to an increase in the volume of gas delivered to the distribution system ($11.8 29 million). 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). The average unit cost per Mcf of purchased gas was $5.08 in 2000, $2.99 in 1999, and $3.05 in 1998. Operation expenses decreased $18.7 million (12.1%) in 2000 primarily due to lower administrative costs, $13.8 million, (due to decreases in pension expense, $5.4 million, year 2000 expenses, $4.0 million, and decreased salaries due to fewer employees in 2000, $2 million) and a decrease in steam production costs primarily at the Mill Creek generating station ($5 million). 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). Maintenance expenses for 2000 increased $5.6 million (9.6%) primarily due to an increase in software maintenance agreements ($3.9 million), and maintenance of communications equipment ($1.5 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). Depreciation and amortization increased $1.1 million (1.1%) in 2000 and increased $4 million (4.3%) in 1999 over 1998 because of additional utility plant in service in both years. A depreciation study was completed in late 2000 with new depreciation rates going into effect on January 1, 2001. The new rates, as compared to rates in effect for 2000, are expected to increase LG&E's depreciation expense by about $.9 million in 2001. Property and other taxes increased $2.1 million (12.1%) in 2000 primarily due to increased payroll and property taxes. Other income - net, increased $.8 million (18.9%) in 2000 primarily due to a decrease in income tax expense associated with increased interest expenses. LG&E incurred a pre-tax charge in 1998 for costs associated with the merger of LG&E Energy and KU Energy of $32.1 million. The amount charged is in excess of the amount permitted to be deferred as a regulatory asset by the Kentucky Commission. The corresponding tax benefit of $8.5 million is recorded in other income-net. See Note 2 of LG&E's Notes to Financial Statements under Item 8. Interest charges for 2000 increased $5.3 million (13.9%) due to having short-term borrowings for entire 2000 as compared to two months in 1999 ($7.1 million), partially offset by a decrease in interest on debt to associated companies ($1 million) and lower interest rates on variable rate debt ($1 million). Interest charges for 1999 increased $1.6 million (4.5%) due to short-term borrowings, partially offset by lower interest rates on variable rate debt ($.6 million). See Note 10 of LG&E's Notes to Financial Statements under Item 8. LG&E's embedded cost of long-term debt was 5.40% at December 31, 2000, and 5.46% at December 31, 1999. 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 in 1998. 30 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. 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 $156.2 million, $180.5 million and $225.7 million in 2000, 1999, and 1998, respectively. The 2000 decrease resulted mainly from an increase in accounts receivable, and a decrease in accrued taxes. 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. Investing Activities LG&E's primary use of funds continues to be for capital expenditures and the payment of dividends. Capital expenditures were $144 million, $195 million and $138 million in 2000, 1999, and 1998, respectively. LG&E expects its capital expenditures for 2001 and 2002 will total approximately $413 million, which consists primarily of construction estimates associated with installation of nitrogen oxide control equipment as described in the section titled "Environmental Matters," purchase of two jointly owned CTs with KU and on-going construction for the distribution systems. Net cash used for investment activities decreased by $43.3 million in 2000 as compared to 1999, and increased $47.2 million in 1999 compared to 1998, primarily due to construction expenditures. Financing Activities Cash outflows for financing activities in 2000 were $67.7 million. Cash inflow from financing activities in 1999 was $26.7 million and cash outflow for 1998 was $107.6 million. In 2000, total debt was paid down by $20 million to $606.8 million at December 31, 2000. LG&E received $40 million in contributed capital from its parent company in December 2000. LG&E also refinanced $108.3 million of its pollution control bonds in 2000. As of December 2000, LG&E had committed credit facility aggregating $200 million with various banks. Unused capacity under these lines were approximately $200 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 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. LG&E anticipates funding its requirements through operating cash flow, debt, preferred stock or common equity. 31 LG&E's debt ratings as of February 28, 2001, were:
Moody's S&P Fitch ------- --- ----- First mortgage bonds A1 A- AA- Unsecured debt A2 BBB A+ Preferred stock a2 BBB- A Commercial paper P-1 A-2 F-1
The Moody's and Fitch ratings are on Credit Watch with negative implications. These ratings reflect the views of Moody's, S&P and Fitch. 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 uses various financial instruments including derivatives. 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, 2000, the potential change in interest expense associated with a 1% change in base interest rates of LG&E's unhedged debt was estimated at $1.2 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, 2000, LG&E had swaps with a combined notional value of $234.3 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, 2000, 66% 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 $6.9 million as of December 31, 2000. Changes in the market value of these swaps if held to maturity, as LG&E intends to do, are not expected to have any 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. 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 32 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 2000, LG&E incurred approximately $18.6 million in capital and operating costs in connection with the Year 2000 issue. RATES AND REGULATION Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including LG&E, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. 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 state of Kentucky, LG&E has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of LG&E's Notes to Financial Statements under Item 8. Environmental Cost Recovery In August 1999, a final order of the Kentucky Commission approved LG&E's settlement agreement concerning the refund of the recovery of costs associated with pre-1993 environmental projects. LG&E began applying the refund to customers' bills in October 1999, and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved. In March 2000, LG&E filed an application with the Kentucky Commission to obtain a CCN to construct up to three SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted LG&E's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that LG&E's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, LG&E filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects and to amend its Environmental Cost Recovery Tariff to include an overall rate of return on capital investments. Approval of LG&E's application will allow LG&E to begin to recover the costs associated with these new projects, subject 33 to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001. Electric PBR/ESM 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 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. In January 2000, the Kentucky Commission issued orders for LG&E in the subject cases, ruling 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 FAC 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 on equity 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. 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. In June 2000, the Kentucky Commission ruled that the final rate reduction should be $26.3 million, a change of approximately $900,000 and ordered LG&E to implement the revised rates effective with service rendered beginning June 1, 2000. LG&E reinstated its FAC beginning with March 2000 billings. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, LG&E recorded in its financial statements an estimated refund to ratepayers of $2.5 million. DSM 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 then current form of the decoupling rate mechanism. In 34 September 1998, the Kentucky Commission accepted LG&E's modified tariff discontinuing the decoupling mechanism effective as of June 1, 1998. In September 2000, LG&E filed a plan to continue DSM programming with the Kentucky Commission. This filing calls for the expansion of the DSM programs into the service territory served by KU and proposes a mechanism to recover revenues from lost sales associated with DSM programs based on program planning engineering estimates and post-implementation evaluation. Gas PBR 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. Since its implementation on November 1, 1997, through October 31, 2000, LG&E has achieved $19.6 million in savings. Of the total savings, LG&E has retained $8.9 million, and the remaining portion of $10.7 million has been shared with customers. In December 2000, LG&E filed an Application reporting on the operation of the experimental PBR and requested the Kentucky Commission to extend the PBR for an additional five years as a result of the benefits provided to both LG&E and its customers during the preceding three year experimental period. A ruling is expected by the summer of 2001. FAC 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 wholesale sales appropriate for recovery through the FAC. Following rehearing in December 1999, the Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and issued an order reducing 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 each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin County, Kentucky Circuit Court and in May 2000, the Court affirmed the Kentucky Commission's orders regarding the amounts disallowed and ordered the case remanded as to the Kentucky Commission's denial of interest, directing the Kentucky Commission to determine whether interest should be awarded to LG&E's ratepayers. In June 2000, LG&E appealed the Circuit Court's decision to the Kentucky Court of Appeals. A final decision on the appeal is not expected until late 2001 or early 2002. Gas Rate Case In March 2000, LG&E filed an application with the Kentucky Commission requesting an adjustment in LG&E's gas rates. LG&E asked for a general adjustment in gas rates for a test year for the twelve months ended December 31, 1999. The revenue increase applied for was $26.4 million. The Kentucky Commission subsequently suspended the effective date of the proposed new tariffs, and held hearings during August 2000. In September 2000, the Kentucky Commission granted LG&E an annual increase in its base gas revenues of $20.2 million effective September 28, 2000. The Kentucky Commission authorized a return on equity of 11.25%. The Kentucky Commission approved LG&E's proposal for a weather normalization billing adjustment mechanism that will normalize the effect of weather on revenues from gas sales. In October 2000, 35 the Kentucky Attorney General requested that the Kentucky Commission grant rehearing on a single revenue requirements issue (normalization of forfeited discounts) on the grounds that the September order did not rule on or otherwise discuss the issue. In November 2000, the Kentucky Commission granted the Attorney General's request for rehearing, rejected the Attorney General's proposed adjustment to normalize the level of forfeited discounts, and ordered that its September 2000 order be modified to reflect its findings on the issue. Kentucky Commission 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. In February 2000, the Kentucky Commission issued a draft Code of Conduct for the purpose of further consideration in the process to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice of their intent to promulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a utilities activities related to the sharing of information, databases, and resources between its employees or an affiliate involved in the marketing or the provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The legislation became law in July 2000 and LG&E has been operating pursuant thereto since that time. Environmental Matters The Clean Air 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 SO2 reductions, which commenced January 1, 2000, is to increase scrubber removal efficiency to delay additional capital expenditures and may also include fuel switching or upgrading 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 states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky is currently in the process of revising its State Implementation Plan or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E 36 units. Both rules were appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May 2004. As the court has yet to issue a final ruling on the Section 126 rule, all LG&E generating units remain subject to the May 2003 compliance date under that rule. LG&E continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court. LG&E is currently implementing a plan for adding significant additional NOx controls to its generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the final compliance date. LG&E estimates that it will incur total capital costs of approximately $160 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, LG&E will incur additional operating and maintenance costs in operating new NOx controls. 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 its environmental surcharge mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of recovery. LG&E is also monitoring several other air quality issues which may potentially impact coal-fired power plants, including the appeal of the D.C. Circuit's remand of the EPA's revised air quality standards for ozone and particulate matter, measures to implement EPA's regional haze rule, and EPA's December 2000 determination to regulate mercury emissions from power plants. In addition, LG&E is currently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant remedial measures as part of its ongoing capital construction program. LG&E owns or formerly owned three properties which are the location of past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. With respect to the sites, LG&E has completed cleanups, obtained regulatory approval of site management plans, or reached agreements for other parties to assume responsibility for cleanup. Based on currently available information, management estimates that it will incur additional costs of $400,000. Accordingly, an accrual of $400,000 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 37 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 and no such actions were taken at the 2000 or 2001 legislative sessions. 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 LG&E, which may be significant, cannot currently be predicted. While many states have moved forward in providing retail choice, many others have not. Some are reconsidering their initiatives and have even delayed implementation. Recent activities in California that have resulted in extremely high wholesale (and in some cases, consumer) electric prices are becoming significant factors in the deliberations by other states. 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 2000, 1999, and 1998 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, including Exhibit No. 99.01 to this report on Form 10-K. MERGER On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. LG&E Energy had announced on February 28, 2000, that its Board of Directors accepted the 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, LG&E Energy became a wholly 38 owned subsidiary of Powergen and, as a result, KU became an indirect subsidiary of Powergen. KU will continue its separate identity and serve customers in Kentucky and Virginia under its existing name. The preferred stock and debt securities of KU were not affected by this transaction and KU will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA and KU, as a subsidiary of a registered holding company, became subject to additional regulation under PUHCA. See "Rates and Regulation" under Item 1. 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 decreased $11 million for 2000, as compared to 1999, primarily due to retail rate reductions ordered by the Kentucky Commission . The rate reduction resulted in reduced retail revenues of $28.3 million. Excluding the impact of the rate reduction, net income would have increased approximately $6 million. The increase was due to higher retail electric sales and lower purchased power and operation expenses, offset by lower off-system sales and increased depreciation and amortization. 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 ECR 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, and lower operation and maintenance costs, offset by higher purchased power expenses for the year. Revenues A comparison of operating revenues for the years 2000 and 1999, 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 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 2000 1999 ----- ---- ---- Retail sales: Fuel clause adjustments, etc $ 6,893 $ (1,744) Merger surcredit (2,327) (4,123) Environmental cost recovery surcharge (4,994) (1,977) Performance based rate 3,439 (5,558) Electric rate reduction (28,343) -- Variation in sales volumes 20,187 19,303 --------- --------- Total retail sales (5,145) 5,901 Wholesale sales (88,522) 106,160 Other 2,398 (465) --------- --------- 39 Total $ (91,269) $ 111,596 ========= =========
Electric revenues decreased in 2000 primarily due to a decrease in brokered activity in the wholesale electric sales market and the electric rate reduction ordered by the Kentucky Commission. In January 2000, the Kentucky Commission ordered the termination of KU's proposed electric PBR mechanism and an electric rate reduction. The increase in wholesale sales in 1999 was primarily due to more aggressive marketing efforts. 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 the FAC factor, 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 KU's PBR rates 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 were approximately the same in 2000 as compared to 1999. An increase in volume burned ($5.1 million) was offset by decreases in the cost of fuel ($5.1 million). 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). KU's average delivered cost per ton of coal purchased was $25.63 in 2000, $26.65 in 1999 and $26.97 in 1998. Power purchased expense decreased $75.4 million in 2000 primarily due to the decrease in wholesale sales. Power purchased increased $115.7 million in 1999 primarily to support the aforementioned wholesale sales. Operation expenses decreased $8.4 million (7.3%) in 2000 primarily because of decreased administrative and general expenses of $10 million offset by increased transmission expenses ($2.1 million). The administrative and general expenses decrease was primarily due to decreased medical expense ($3.4 million) and pension expense ($3.9 million). Maintenance expense increased $4.3 million (7.5%) in 2000 due to increases in maintenance at the steam generating plants, primarily due to a scheduled turbine outage at Ghent Unit 1. 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. Depreciation and amortization increased $8.3 million (9.3%) in 2000 and $3.3 million (3.8%) in 1999 because of additional utility plant in service in both years. 40 A depreciation study was completed in late 2000 with new depreciation rates going into effect on January 1, 2001. The new rates, as compared to rates in effect for 2000, are expected to decrease KU's depreciation expense by about $6 million in 2001. Property and other taxes increased $2.1 million in 2000 over 1999 (13.8%) due to increases in payroll taxes ($1.4 million), property tax ($.4 million) and Kentucky Commission fees ($.3 million). 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 - net) 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 6.89% at December 31, 2000, and 7.00% at December 31, 1999. 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 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 $176.3 million, $204.2 million and $239.4 million in 2000, 1999 and 1998, respectively. The 2000 decrease resulted from a decrease in net income caused by the aforementioned electric rate reduction ordered by the Kentucky Commission. The decrease was further caused by a net increase in net current assets, including increases in accounts receivable and decreases in accounts payable, and provision for rate refunds, partially offset by decreases in inventory. The 1999 decrease resulted from an increase in net income and a net decrease in net current assets. Investing Activities KU's primary use of funds continues to be for capital expenditures and the payment of dividends. Capital expenditures were $101 million, $181 million and $92 million in 2000, 1999 and 1998, respectively. The higher amount in 1999 capital expenditures was primarily due to the purchase of a 62% interest in two combustion turbines. KU expects its capital expenditures for 2001 and 2002 will total approximately $300 million which consists primarily of construction costs associated with installation of nitrogen oxide control equipment as described in the section titled "Environmental Matters," purchase of two jointly owned CTs with LG&E and on going construction for the distribution system. Net cash used for investment activities decreased by $80.8 million in 2000 compared to 1999, and increased $89.3 million in 1999 compared to 1998, primarily due to construction expenditures. 41 Financing Activities Cash outflows from financing activities were $82.4 million, $75.2 million and $94.0 million, in 2000, 1999 and 1998, respectively. In 2000, KU retired a $61.5 million first mortgage bond and refinanced $12.9 million of its pollution control bonds. The long-term debt balance as of December 31, 2000, was $430.8 million. Short-term debt increased $61.2 million in 2000. KU received $15 million in contributed capital from its parent company in December 2000. KU maintains an uncommitted line of credit which totaled $100 million at December 31, 2000. There was no outstanding balance as of that date. Future Capital Requirements Future 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. KU anticipates funding its requirements through operating cash flow, debt, preferred stock or common equity. KU's debt ratings as of February 28, 2001, were:
Moody's S&P Fitch ------- --- ----- First mortgage bonds A1 A- AA- Preferred stock a2 BBB- A Commercial paper P-1 A-2 F-1
The Moody's and Fitch ratings are on Credit Watch with negative implications. These ratings reflect the views of Moody's, S&P and Fitch. 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 uses various financial instruments including derivatives. Derivative positions are monitored using techniques that include market value and sensitivity analysis. Interest Rate Sensitivity KU has short-term and long-term variable rate debt obligations outstanding. At December 31, 2000, the potential change in interest expense associated with a 1% change in base interest rates of KU's variable rate debt is estimated at $2.2 million. Interest rate swaps are used to hedge KU's underlying debt obligations. These swaps hedge specific debt issuances and consistent with management's designation are accorded hedge accounting treatment. As of December 31, 2000, KU has swaps with a notional value of $153 million. The swaps exchange fixed-rate interest payments for floating interest payments on KU's Series P, R, and PCS-9 Bonds. The potential loss in 42 fair value from these positions resulting from a hypothetical 1% adverse movement in base interest rates is estimated at $8.3 million as of December 31, 2000. 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 2000, KU incurred approximately $5.3 million in capital and operating costs in connection with the Year 2000 issue. RATES AND REGULATION Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including KU, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. 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 has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of KU's Notes to Financial Statements under Item 8. Environmental Cost Recovery 43 In August 1999, a final order of the Kentucky Commission approved KU's settlement agreement concerning the refund of the recovery of costs associated with pre-1993 environmental projects. KU began applying the refund to customers' bills in October 1999, and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved. In March 2000, KU filed an application with the Kentucky Commission to obtain a CCN to construct up to four SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted KU's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that KU's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, KU filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects and to amend its Environmental Cost Recovery Tariff to include an overall rate of return on capital investments. Approval of KU's application will allow KU to begin to recover the costs associated with these new projects, subject to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001. Electric PBR/ESM 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 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. In January 2000, the Kentucky Commission issued orders for KU in the subject cases, ruling 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 on equity 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. In February 2000, KU accepted the Kentucky Commission's opportunity to use an ESM by 44 filing an ESM tariff, which contains the provisions operating under such mechanism. In June 2000, the Kentucky Commission ruled that the final rate reduction should be $30.4 million, a change of approximately $6.1 million from the original order and ordered KU to implement the revised rates effective with service rendered beginning June 1, 2000. KU reinstated its FAC beginning with March 2000 billings. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, KU expects to fall within the range, therefore no adjustment was made to the financial statements. DSM In September 2000, KU filed a plan with the Kentucky Commission that would expand LG&E's current DSM programs into the service territory served by KU. The filing includes a rate mechanism that provides for concurrent recovery of DSM costs, provides an incentive for implementing DSM programs, and recovers revenues from lost sales associated with the DSM program. The Kentucky Commission has not issued an order in this case. KU expects a ruling in mid-2001. FAC 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 wholesale 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 $6.7 million ($5.8 million on Kentucky jurisdictional basis) from the original order amount of $10.1 million. In August 1999, KU recorded its estimated share of anticipated FAC refunds. KU began implementing the refund in October and completed the refund in September 2000. Both KU and the KIUC appealed the order to the Franklin Circuit Court. In October 2000, the Court affirmed the Kentucky Commission's orders concerning all issues except interest, with respect to which it held that KU will be required to pay interest on the amount disallowed "if the Commission within its discretion so determines", and ordered the case be remanded to the Kentucky Commission on that issue. In November 2000, KU appealed the Circuit Court's decision to the Kentucky Court of Appeals. A decision is not expected until late 2001 or early 2002. 45 Kentucky Commission 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. In February 2000, the Kentucky Commission issued its ruling in the case, including a draft Code of Conduct for the purpose of further consideration in the process to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice of their intent to promulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a utilities activities related to the sharing of information, databases, and resources between its employees or an affiliate involved in the marketing or the provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The legislation became law in July 2000 and KU has been operating pursuant thereto since that time. Environmental Matters The Clean Air 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 SO2 reductions, which commenced 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 states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky is currently in the process of revising its State Implementation Plan or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all KU units in the eastern half of Kentucky. Additional petitions currently pending before EPA may potentially result in rules encompassing KU's remaining generating units. Both rules were appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May 2004. As the court has yet to issue a final ruling on the Section 126 rule, all KU generating units, except for KU's Green River generating station, remain subject to the May 2003 46 compliance date under that rule. As KU's Green River station is not covered by the Section 126 rule, those facilities are subject to the May 2004 compliance date as extended by the D.C. Circuit. KU continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court. KU is currently implementing a plan for adding significant additional NOx controls to its generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the final compliance date. KU estimates that it will incur total capital costs of approximately $195 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, KU will incur additional operating and maintenance costs in operating new NOx controls. 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 mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of 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 unaware of what, if any, additional exposure or liability it may have. 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. KU expects to incur costs of approximately $1.5 million. 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 KU 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, KU 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. KU continues to be active in the national debate surrounding the restructuring of the energy industry and the move toward a competitive, market-based environment. KU 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. KU has previously advocated the implementation of this transition by January 1, 2001, and now recommends adoption 47 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 and no such actions were taken at the 2000 or 2001 legislative sessions. 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. While many states have moved forward in providing retail choice, many others have not. Some are reconsidering their initiatives and have even delayed implementation. Recent activities in California that have resulted in extremely high wholesale (and in some cases, consumer) electric prices are becoming significant factors in the deliberations by other states. KU's customers in Virginia will have retail choice beginning January 2002, pursuant to the Virginia Electric Restructuring Act. The Virginia Commission is promulgating regulations to govern the various activities required by the Act. KU has filed unbundled rates that become effective January 1, 2002, for those customers who choose to be provided the energy from a supplier other than KU. ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk. See LG&E's and KU's Management's Discussion and Analysis of Results of Operations and Financial Condition, Market Risks, under Item 7. 48 ITEM 8. Financial Statements and Supplementary Data. Louisville Gas and Electric Company Statements of Income (Thousands of $)
Years Ended December 31 2000 1999 1998 --------- --------- --------- OPERATING REVENUES: Electric .............................. $ 713,458 $ 792,405 $ 663,011 Gas ................................... 272,489 177,579 191,545 Provision for rate refunds (Note 3) ... (2,500) (1,735) (4,500) --------- --------- --------- Total operating revenues (Note 1) ... 983,447 968,249 850,056 --------- --------- --------- OPERATING EXPENSES: Fuel for electric generation .......... 159,418 159,129 154,683 Power purchased ....................... 96,894 169,573 50,176 Gas supply expenses ................... 196,912 114,745 125,894 Other operation expenses .............. 135,943 154,667 163,584 Maintenance ........................... 63,709 58,119 52,786 Depreciation and amortization ......... 98,291 97,221 93,178 Federal and state income taxes (Note 8) 64,425 57,774 56,307 Property and other taxes .............. 18,985 16,930 17,925 --------- --------- --------- Total operating expenses ............ 834,577 828,158 714,533 --------- --------- --------- Net operating income ..................... 148,870 140,091 135,523 Merger costs (Note 2) .................... -- -- 32,072 Other income - net (Note 9) .............. 4,921 4,141 10,991 Interest charges ......................... 43,218 37,962 36,322 --------- --------- --------- Net income ............................... 110,573 106,270 78,120 Preferred stock dividends ................ 5,210 4,501 4,568 --------- --------- --------- Net income available for common stock .... $ 105,363 $ 101,769 $ 73,552 ========= ========= =========
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- Balance January 1 ....................... $259,231 $247,462 $258,910 Add net income .......................... 110,573 106,270 78,120 -------- -------- -------- 369,804 353,732 337,030 -------- -------- -------- Deduct: Cash dividends declared on stock: 5% cumulative preferred ............... 1,075 1,075 1,075 Auction rate cumulative preferred ..... 2,666 1,957 2,024 $5.875 cumulative preferred ........... 1,469 1,469 1,469 Common ................................ 50,000 90,000 85,000 -------- -------- -------- 55,210 94,501 89,568 -------- -------- -------- Balance December 31 ..................... $314,594 $259,231 $247,462 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 49 Louisville Gas and Electric Company Statements of Comprehensive Income (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- Net income available for common stock .......... $ 105,363 $ 101,769 $ 73,552 Unrealized holding losses on available-for-sale securities arising during the period ........ -- (402) (14) Income tax (expense) benefit related to items of other comprehensive income .................. -- 163 (18) --------- --------- --------- Comprehensive income ........................... $ 105,363 $ 101,530 $ 73,520 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 50 Louisville Gas and Electric Company Balance Sheets (Thousands of $)
December 31 2000 1999 ---- ---- ASSETS: Utility plant, at original cost (Note 1): Electric ........................................ $2,459,206 $2,396,707 Gas ............................................. 389,371 365,128 Common .......................................... 148,530 141,009 ---------- ---------- 2,997,107 2,902,844 Less: reserve for depreciation ................. 1,296,865 1,215,032 ---------- ---------- 1,700,242 1,687,812 Construction work in progress ................... 189,218 162,995 ---------- ---------- 1,889,460 1,850,807 ---------- ---------- Other property and investments - less reserve ...... 1,357 1,224 Current assets: Cash and temporary cash investments ............. 2,495 54,761 Marketable securities (Note 6) .................. 4,056 6,936 Accounts receivable - less reserve of $1,286 in 2000 and $1,233 in 1999 .................... 170,852 113,859 Materials and supplies - at average cost: Fuel (predominantly coal) ..................... 9,325 17,350 Gas stored underground ........................ 54,441 38,780 Other ......................................... 31,685 35,010 Prepayments and other ........................... 1,317 2,775 ---------- ---------- 274,171 269,471 ---------- ---------- Deferred debits and other assets: Unamortized debt expense ........................ 5,784 5,607 Regulatory assets (Note 3) ...................... 36,808 31,443 Other ........................................... 18,504 12,900 ---------- ---------- 61,096 49,950 ---------- ---------- $2,226,084 $2,171,452 ========== ========== CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity ................................... $ 778,928 $ 683,376 Cumulative preferred stock ...................... 95,140 95,328 Long-term debt (Note 10) ........................ 360,600 380,600 ---------- ---------- 1,234,668 1,159,304 ---------- ---------- Current liabilities: Current portion of long-term debt (Note 10) ..... 246,200 246,200 Notes payable (Note 11) ......................... 114,589 120,097 Accounts payable ................................ 134,392 113,008 Provision for rate refunds ...................... 2,500 8,962 Dividends declared .............................. 1,367 24,236 Accrued taxes ................................... 8,073 23,759 Accrued interest ................................ 6,350 9,265 Other ........................................... 15,826 15,725 ---------- ---------- 529,297 561,252 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 8) 289,232 255,910 Investment tax credit, in process of amortization 62,979 67,253 Accumulated provision for pensions and related benefits (Note 7) ............................... 31,257 38,431 Customers' advances for construction ............ 9,578 11,104 Regulatory liabilities (Note 3) ................. 55,152 58,726 Other ........................................... 13,921 19,472 ---------- ---------- 462,119 450,896 ---------- ---------- Commitments and contingencies (Note 12) $2,226,084 $2,171,452 ========== ==========
The accompanying notes are an integral part of these financial statements. 51 Louisville Gas and Electric Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................... $ 110,573 $ 106,270 $ 78,120 Items not requiring cash currently: Depreciation and amortization ............... 98,291 97,221 93,178 Deferred income taxes - net ................. 31,020 (5,279) 2,747 Investment tax credit - net ................. (4,274) (4,289) (4,258) Other ....................................... 8,481 6,924 5,534 Change in certain net current assets: Accounts receivable ......................... (56,993) 28,721 (17,708) Materials and supplies ...................... (4,311) (559) 423 Accounts payable ............................ 21,384 (20,665) 34,779 Provision for rate refunds .................. (6,462) (4,299) 13 Accrued taxes ............................... (15,686) (8,170) 13,206 Accrued interest ............................ (2,915) 1,227 22 Prepayments and other ....................... 1,561 (7) 976 Other ......................................... (24,431) (16,602) 18,679 --------- --------- --------- Net cash flows from operating activities .... 156,238 180,493 225,711 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities ....................... (708) (1,144) (17,397) Proceeds from sales of securities ............. 4,089 11,662 18,841 Construction expenditures ..................... (144,216) (194,644) (138,345) --------- --------- --------- Net cash flows used for investing activities . (140,835) (184,126) (136,901) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowing .......................... (5,508) 120,097 -- Issuance of pollution control bonds ........... 106,545 -- -- Retirement of first mortgage bonds and pollution control bonds ....................... (130,627) -- (20,000) Additional paid-in capital .................... 40,000 -- -- Payment of dividends .......................... (78,079) (93,433) (87,552) --------- --------- --------- Net cash flows from financing activities .... (67,669) 26,664 (107,552) --------- --------- --------- Change in cash and temporary cash investments .... (52,266) 23,031 (18,742) Cash and temporary cash investments at beginning of year ............................. 54,761 31,730 50,472 --------- --------- --------- Cash and temporary cash investments at end of year .......................................... $ 2,495 $ 54,761 $ 31,730 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes ................................ $ 46,562 $ 76,761 $ 40,334 Interest on borrowed money .................. 42,958 33,507 34,245
The accompanying notes are an integral part of these financial statements. 52 Louisville Gas and Electric Company Statements of Capitalization (Thousands of $)
December 31 2000 1999 ---- ---- 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) Additional paid-in capital ................................... 40,000 -- Unrealized loss on marketable securities, net of income taxes ($128) in 1999 (Note 6) .............................. -- (189) Retained earnings ............................................ 314,594 259,231 ----------- ----------- 778,928 683,376 ----------- ----------- CUMULATIVE PREFERRED STOCK: Redeemable on 30 days notice by LG&E Current Shares Redemption Outstanding 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 ................... 250,000 103.53 25,000 25,000 Preferred stock expense ........... (1,367) (1,179) ----------- ---------- 95,140 95,328 ----------- ---------- LONG-TERM DEBT (Note 10): First mortgage bonds - Series due July 1, 2002, 7 1/2% ............................ -- 20,000 Series due August 15, 2003, 6% ............................. 42,600 42,600 Pollution control series: P due June 15, 2015, 7.45% ............................... -- 25,000 Q due November 1, 2020, 7 5/8% ........................... -- 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 Y due May 1, 2027, variable .............................. 25,000 -- Z due August 1, 2030, variable ........................... 83,335 -- ----------- ----------- Total first mortgage bonds ............................ 486,800 506,800 Pollution control bonds (unsecured) - Series due September 1, 2026, variable ..................... 22,500 22,500 Series due September 1, 2026, variable ..................... 27,500 27,500 Series due November 1, 2027, variable ...................... 35,000 35,000 Series due November 1, 2027, variable ...................... 35,000 35,000 ----------- ----------- Total unsecured pollution control bonds .................. 120,000 120,000 ----------- ----------- Total bonds outstanding .................................... 606,800 626,800 Less current portion of long-term debt ..................... 246,200 246,200 ----------- ----------- Long-term debt ............................................. 360,600 380,600 ----------- ----------- Total capitalization ....................................... $ 1,234,668 $ 1,159,304 =========== ===========
The accompanying notes are an integral part of these financial statements. 53 Louisville Gas and Electric Company Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES LG&E, a subsidiary of LG&E Energy and an indirect subsidiary of Powergen, is a regulated public utility engaged in the generation, transmission, distribution, and sale of electric energy and the storage, distribution, and sale of natural gas in Louisville and adjacent areas in Kentucky. LG&E Energy is an exempt public utility holding company with wholly-owned subsidiaries including LG&E, KU, Capital Corp., LEM, and LG&E Services. All of the LG&E's Common Stock is held by LG&E Energy. On December 11, 2000, LG&E Energy Corp. and Powergen plc completed the merger involving the two companies. Powergen is a registered public utility holding company under PUHCA. No costs associated with the Powergen merger nor any of the effects of purchase accounting have been reflected in the financial statements of LG&E. 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 2000 were 3.6% (3.3% electric, 3.8% gas and 7.3% common); for 1999 were 3.4% (3.2% electric, 3.2% gas, and 7.1% common); and for 1998 were 3.4% (3.2% electric, 3.4% gas, and 7.4% common) of average depreciable plant. Pursuant to a recently completed depreciation study, LG&E will implement new depreciation rates as of January 1, 2001. The new rates are expected to be 3.5% (3.3% electric, 3.4% gas, and 7.3% common). 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 $54.4 million and $38.8 million at December 31, 2000 and 1999, 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 charged or credited to other income - net. The treasury futures are now listed as assets held for sale. See Note 4, Financial Instruments. DEBT EXPENSE. Debt expense is amortized over the lives of the related bond issues, consistent with regulatory 54 practices. DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material book-tax temporary differences. INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the tax law that permitted a reduction of LG&E's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. REVENUE RECOGNITION. Revenues are recorded based on service rendered to customers through month-end. LG&E accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. The unbilled revenue estimates included in accounts receivable for LG&E at December 31, 2000 and 1999, were approximately $62.8 million and $31.1 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 2000 and 1999, 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. SFAS No. 133 could increase the volatility in earnings and other comprehensive income. 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. LG&E adopted SFAS No. 133 on January 1, 2001. The effect of this statement will be a charge of $3.6 million to cumulative effect of change in accounting principle (net of tax) in other comprehensive income. EITF No. 98-10, ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES was adopted effective January 1, 1999. The pronouncement requires 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. 55 NOTE 2 - MERGERS AND ACQUISITIONS On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. LG&E Energy had announced on February 28, 2000, that its Board of Directors accepted the 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, LG&E Energy became a wholly owned subsidiary of Powergen and, as a result, LG&E became an indirect subsidiary of Powergen. LG&E will continue its separate identity and serve customers in Kentucky under its existing name. The preferred stock and debt securities of LG&E were not affected by this transaction and LG&E will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA, and LG&E, as a subsidiary of a registered holding company, became subject to additional regulations under PUHCA. 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. Management has accounted for the LG&E Energy - KU Energy merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code. As part of its LG&E Energy - KU Energy merger order, the Kentucky Commission approved a surcredit whereby 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 surcredit is allocated 53% to KU and 47% to LG&E pursuant to Kentucky Commission order. The surcredit will be about 2% of customer bills through mid 2003 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. 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 which 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 return to customers in future rates. LG&E's current or expected recovery of deferred costs and expected return 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 56 as of December 31 (in thousands of $):
2000 1999 ---- ---- Unamortized loss on bonds $ 19,036 $ 16,556 Merger costs 9,073 12,702 Manufactured gas sites 2,368 2,185 One utility costs 6,331 - -------- --------- Total regulatory assets 36,808 31,443 -------- --------- Deferred income taxes - net (54,593) (56,767) Deferred net gain (559) (1,959) ---------- --------- Total regulatory liabilities (55,152) (58,726) --------- --------- Regulatory liabilities - net $(18,344) $(27,283) ======== ========
PUHCA. Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including LG&E, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. ENVIRONMENTAL COST RECOVERY. In August 1999, a final order of the Kentucky Commission approved LG&E's settlement agreement concerning the refund of the recovery of costs associated with pre-1993 environmental projects. LG&E began applying the refund to customers' bills in October 1999, and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved. In March 2000, LG&E filed an application with the Kentucky Commission to obtain a CCN to construct up to three SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted LG&E's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that LG&E's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, LG&E filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects and to amend its Environmental Cost Recovery Tariff to include an overall rate of return on capital investments. Approval of LG&E's application will allow LG&E to begin to recover the costs associated with these new projects, subject to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001. ELECTRIC PBR/ESM. 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 57 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 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. In January 2000, the Kentucky Commission issued orders for LG&E in the subject cases, ruling 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 FAC 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 on equity 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. 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. In June 2000, the Kentucky Commission ruled that the final rate reduction should be $26.3 million, a change of approximately $900,000 and ordered LG&E to implement the revised rates effective with service rendered beginning June 1, 2000. LG&E reinstated its FAC beginning with March 2000 billings. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, LG&E recorded in its financial statements an estimated refund to ratepayers of $2.5 million. DSM. 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 then current form of 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. In September 2000, LG&E filed a plan to continue DSM programming with the Kentucky Commission. This filing calls for the expansion of the DSM programs into the service territory served by KU and proposes a mechanism to recover revenues from lost sales associated with DSM programs based on program planning engineering estimates and post-implementation evaluation. GAS PBR. 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. Since its implementation on November 1, 1997, through October 31, 2000, LG&E has achieved $19.6 million in savings. Of the total savings, LG&E has retained $8.9 million, and the remaining portion of $10.7 million has been shared with customers. In December 2000, LG&E filed an Application reporting on the operation of the experimental PBR and requested the Kentucky Commission to extend the PBR for an additional five years as a result of the benefits provided to both 58 LG&E and its customers during the preceding three year experimental period. A ruling is expected by the summer of 2001. FAC. 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 wholesale sales appropriate for recovery through the FAC. Following rehearing in December 1999, the Kentucky Commission agreed with LG&E 's position on the appropriate loss factor to use in the FAC computation and issued an order reducing 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 each filed separate appeals from the Kentucky Commission's February 1999 orders with the Franklin County, Kentucky Circuit Court and in May 2000, the Court affirmed the Kentucky Commission's orders regarding the amounts disallowed and ordered the case remanded as to the Kentucky Commission's denial of interest, directing the Kentucky Commission to determine whether interest should be awarded to LG&E's ratepayers. In June 2000, LG&E appealed the Circuit Court's decision to the Kentucky Court of Appeals. A final decision on the appeal is not expected until late 2001 or early 2002. GAS RATE CASE. In March 2000, LG&E filed an application with the Kentucky Commission requesting an adjustment in LG&E's gas rates. LG&E asked for a general adjustment in gas rates for a test year for the twelve months ended December 31, 1999. The revenue increase applied for was $26.4 million. The Kentucky Commission subsequently suspended the effective date of the proposed new tariffs, and held hearings during August 2000. In September 2000, the Kentucky Commission granted LG&E an annual increase in its base gas revenues of $20.2 million effective September 28, 2000. The Kentucky Commission authorized a return on equity of 11.25%. The Kentucky Commission approved LG&E's proposal for a weather normalization billing adjustment mechanism that will normalize the effect of weather on revenues from gas sales. In October 2000, the Kentucky Attorney General requested that the Kentucky Commission grant rehearing on a single revenue requirements issue (normalization of forfeited discounts) on the grounds that the September order did not rule on or otherwise discuss the issue. In November 2000, the Kentucky Commission granted the Attorney General's request for rehearing, rejected the Attorney General's proposed adjustment to normalize the level of forfeited discounts, and ordered that its September 2000 order be modified to reflect its findings on the issue. KENTUCKY COMMISSION 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. In February 2000, the Kentucky Commission issued including a draft Code of Conduct for the purpose of further consideration in the process to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice 59 of their intent to promulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a utilities activities related to the sharing of information, databases, and resources between its employees or an affiliate involved in the marketing or the provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The legislation became law in July 2000 and LG&E has been operating pursuant thereto since that time. NOTE 4 - FINANCIAL INSTRUMENTS The cost and estimated fair values of LG&E's non-trading financial instruments as of December 31, 2000 and 1999 follow (in thousands of $):
2000 1999 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Marketable securities $ 4,403 $ 4,056 $ 7,253 $ 6,936 Long-term investments - Not practicable to estimate fair value 564 564 746 746 Preferred stock subject to mandatory redemption 25,000 25,275 25,000 24,861 Long-term debt (including current portion) 606,800 606,236 626,800 623,498 U.S. Treasury note and bond futures -- -- -- 81 Interest-rate swaps -- (5,998) -- 1,666
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 payment obligations without the exchange of underlying principal amounts. As of December 31, 2000, and 1999, LG&E was party to various interest rate swaps with aggregate notional amounts of $234.3 million in each year. Under swap agreements LG&E paid fixed rates averaging 4.40% and 3.80% and received variable rates averaging 4.84% and 5.46% at December 31, 2000, and 1999, respectively. The swaps mature on dates ranging from 2001 to 2020. At December 31, 2000, LG&E 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 2001. 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 299,000 customers and electricity to approximately 364,000 customers in Louisville and adjacent areas in 60 Kentucky. For the year ended December 31, 2000, 72% of total revenue was derived from electric operations and 28% 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. NOTE 6 - MARKETABLE SECURITIES In 2000, LG&E classified marketable securities as "trading securities" under the provisions of SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Prior to that, LG&E's marketable securities had been determined to be "available-for-sale." All unrealized holding gains and losses were immediately recognized in earnings on the date of transfer. Proceeds from sales of trading securities in 2000 were approximately $4.1 million. Proceeds from sales of available-for-sale securities in 1999 were approximately $11.7 million. The sales for both years resulted in immaterial net realized gains and losses, calculated using the specific identification method. Approximate cost, fair value, and other required information pertaining to LG&E's securities by major security type, as of December 31, 2000 and 1999, follow (in thousands of $):
Fixed Equity Income Total ------ ------ ----- 2000: Cost $ 4,403 $ -- $ 4,403 Realized losses (347) -- (347) ------- ------- ------- Fair values $ 4,056 $ -- $ 4,056 ======= ======= ======= Fair values: No maturity $ 4,056 $ -- $ 4,056 ------- ------- ------- Total fair values $ 4,056 $ -- $ 4,056 ======= ======= ======= 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 ======= ======= =======
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, 2000, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $): 61
2000 1999 1998 ---- ---- ---- PENSION PLANS: Change in benefit obligation Benefit obligation at beginning of year $ 283,267 $ 311,935 $ 274,095 Service cost 3,408 5,005 6,333 Interest cost 22,698 21,014 19,873 Plan amendments 17,042 (2,397) 3,724 Curtailment (gain) or loss -- -- (2,218) Special termination benefits -- -- 18,295 Benefits paid (16,656) (15,471) (10,866) Actuarial (gain) or loss and other 1,063 (36,819) 2,699 --------- --------- --------- Benefit obligation at end of year $ 310,822 $ 283,267 $ 311,935 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 360,095 $ 308,660 $ 280,238 Actual return on plan assets (6,150) 51,995 38,913 Employer contributions and plan transfers (1,804) 16,142 375 Benefits paid (16,656) (15,471) (10,866) Administrative expenses (2,107) (1,231) -- --------- --------- --------- Fair value of plan assets at end of year $ 333,378 $ 360,095 $ 308,660 ========= ========= ========= Reconciliation of funded status Funded status $ 22,556 $ 76,828 $ (3,275) Unrecognized actuarial (gain) or loss (74,086) (126,554) (72,037) Unrecognized transition (asset) or obligation (5,853) (6,965) (8,076) Unrecognized prior service cost 47,984 35,588 41,447 --------- --------- --------- Net amount recognized at end of year $ (9,399) $ (21,103) $ (41,941) ========= ========= ========= OTHER BENEFITS: Change in benefit obligation Benefit obligation at beginning of year $ 44,997 $ 44,964 $ 43,373 Service cost 822 1,205 761 Interest cost 4,225 3,270 2,946 Plan amendments 5,826 2,377 599 Curtailment (gain) or loss -- -- 344 Special termination benefits -- -- 2,855 Benefits paid (4,889) (3,050) (2,634) Actuarial (gain) or loss 6,000 (3,769) (3,280) --------- --------- --------- Benefit obligation at end of year $ 56,981 $ 44,997 $ 44,964 ========= ========= ========= Change in plan assets Fair value of plan assets at beginning of year $ 10,526 $ 6,062 $ 4,384 Actual return on plan assets (92) 1,776 199 Employer contributions 1,621 4,681 3,207 Benefits paid (4,889) (1,993) (1,728) --------- --------- --------- Fair value of plan assets at end of year $ 7,166 $ 10,526 $ 6,062 ========= ========= ========= Reconciliation of funded status Funded status $ (49,815) $ (34,471) $ (38,902) Unrecognized actuarial (gain) or loss 5,623 (1,638) (285) Unrecognized transition (asset) or obligation 13,374 14,489 18,080 Unrecognized prior service cost 8,960 4,292 3,519 --------- --------- --------- Net amount recognized at end of year $ (21,858) $ (17,328) $ (17,588) ========= ========= =========
62 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, 2000, 1999 and 1998 (in thousands of $):
2000 1999 1998 ---- ---- ---- PENSION PLANS: Amounts recognized in the balance sheet consisted of: Prepaid benefits cost $ 18,880 $ 6,466 $ -- Accrued benefit liability (28,279) (27,569) (41,977) Intangible asset -- -- 36 --------- --------- --------- Net amount recognized at year-end $ (9,399) $ (21,103) $ (41,941) ========= ========= ========= Additional year-end information for plans with accumulated benefit obligations in excess of plan assets (1): Projected benefit obligation $ 4,088 $ 4,845 $ 148,005 Accumulated benefit obligation 3,501 4,327 131,430 Fair value of plan assets -- -- 107,988
(1) 1998 includes non-union plan and SERPs. 2000 and 1999 include SERPs only. OTHER BENEFITS: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(21,858) $(17,328) $(17,588) ======== ======== ======== Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 56,981 $ 44,997 $ 44,964 Fair value of plan assets 7,166 10,526 6,062
The following table provides the components of net periodic benefit cost for the plans for 2000, 1999 and 1998 (in thousands of $):
2000 1999 1998 ---- ---- ---- PENSION PLANS: Components of net periodic benefit cost Service cost $ 3,408 $ 5,005 $ 6,333 Interest cost 22,698 21,014 19,873 Expected return on plan assets (33,025) (28,946) (23,701) Amortization of prior service cost 4,646 3,462 3,882 Amortization of transition (asset) or obligation (1,112) (1,112) (1,112) Recognized actuarial (gain) or loss (6,856) (2,621) (2,248) -------- -------- -------- Net periodic benefit cost $(10,241) $ (3,198) $ 3,027 ======== ======== ======== Special charges Curtailment gain $ -- $ -- $ (2,168) Prior service cost recognized -- -- 1,914 Special termination benefits -- -- 18,295 -------- -------- -------- Total charges $ -- $ -- $ 18,041 ======== ======== ======== OTHER BENEFITS: 63 Components of net periodic benefit cost Service cost $ 822 $ 1,205 $ 761 Interest cost 4,225 3,270 2,946 Expected return on plan assets (683) (401) (296) Amortization of prior service cost 1,158 473 367 Amortization of transition (asset) or obligation 1,114 1,114 1,315 Recognized actuarial gain (485) (183) - -------- -------- -------- Net periodic benefit cost $ 6,151 $ 5,478 $ 5,093 ======== ======== ======== 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:
2000 1999 1998 ---- ---- ---- Weighted-average assumptions as of December 31: Discount rate 7.75% 8.00% 7.00% Expected long-term rate of return on plan assets 9.50% 9.50% 8.50% Rate of compensation increase 4.75% 5.00% 3.50%-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 5.00% 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 2000 $ (246) $ 279 Effect on year-end 2000 postretirement benefit obligations (1,781) 2,009
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, $2.7 million, and $2.4 million for 2000, 1999, and 1998, respectively. NOTE 8 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
2000 1999 1998 ---- ---- ---- 64 Included in operating expenses: Current - federal $32,612 $53,981 $45,716 - state 5,018 13,680 11,895 Deferred - federal - net 24,272 (4,818) 2,276 - state - net 6,797 (780) 678 Deferred investment tax credit - - 55 Amortization of investment tax credit (4,274) (4,289) (4,313) -------- --------- -------- Total 64,425 57,774 56,307 -------- -------- -------- Included in other income - net: Current - federal (2,187) 217 660 - federal - merger costs - - (6,758) - state (568) (30) 6 - state - merger costs - - (1,737) Deferred - federal - net (39) 254 (165) - state - net (10) 65 (42) -------- -------- -------- Total (2,804) 506 (8,036) -------- -------- -------- Total income tax expense $61,621 $58,280 $48,271 ======= ======= =======
Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
2000 1999 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $329,836 $321,889 Other liabilities 22,621 5,324 ---------- ---------- 352,457 327,213 ---------- ---------- Deferred tax assets: Investment tax credit 25,444 27,145 Income taxes due to customers 22,086 22,588 Pension overfunding 5,595 2,193 Accrued liabilities not currently deductible and other 10,100 19,377 ---------- ---------- 63,225 71,303 ---------- ---------- Net deferred income tax liability $289,232 $255,910 ======== ========
A reconciliation of differences between the statutory U.S. federal income tax rate and LG&E's effective income tax rate follows:
2000 1999 1998 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.3 5.1 5.5 Amortization of investment tax credit (2.6) (2.8) (3.4) Nondeductible merger expenses - - 2.4 Other differences - net (.9) (1.9) (1.3) ----- ----- ----- Effective income tax rate 35.8% 35.4% 38.2% ==== ==== ====
65 NOTE 9 - OTHER INCOME - NET Other income - net, consisted of the following at December 31 (in thousands of $):
2000 1999 1998 ---- ---- ---- Interest and dividend income $3,103 $ 4,086 $ 4,245 Gains on fixed asset disposals 1,014 2,394 530 Income taxes and other 804 (2,339) (2,279) Income tax benefit on merger costs - - 8,495 -------- ------- ------- Other income - net $4,921 $ 4,141 $10,991 ====== ======= =======
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, 2000.
Weighted Average Stated Interest Principal Interest Rates Rate Maturities Amounts -------------- ---- ---------- ------- Noncurrent portion Variable - 6.55% 5.49% 2003 - 2030 $360,600 Current portion (pollution control bonds) Variable 4.74% 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 during 2000 was 4.74%. LG&E's First Mortgage Bonds, 6% Series of $42.6 million is scheduled to mature in 2003. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 2000. In January 2000, LG&E exercised its call option on its $20 million 7.50% First Mortgage Bonds due July 1, 2002. The bonds were redeemed utilizing proceeds from issuance of commercial paper. In May 2000, LG&E issued $25 million variable rate pollution control bonds due May 1, 2027 and exercised its call option on $25 million, 7.45%, pollution control bonds due June 15, 2015. In August 2000, LG&E issued $83 million in variable rate pollution control bonds due August 1, 2030 and exercised its call option on its $83 million, 7 5/8%, pollution control bonds due November 1, 2020. 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 that portions of retained earnings will not be available for the payment of 66 dividends on common stock, under certain specified conditions. No portion of retained earnings is presently restricted by this provision. NOTE 11 - NOTES PAYABLE LG&E had no outstanding commercial paper at December 31, 2000. LG&E had outstanding commercial paper totaling $120.1 million at an average rate of 6.02% at December 31, 1999. At December 31, 2000, LG&E had $114.6 million in notes payable to LG&E Energy Corp. The note payable is due on demand and has an average percentage rate at December 31, 2000 of 6.84%. The rate is based on the available borrowing rate as of the last day of the prior month. At December 31, 2000, 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 $12.6 million at December 31, 2000. Construction expenditures for the years 2001 and 2002 are estimated to total approximately $413 million. Included in 2001 is $57 million for the purchase of 53% of two CTs currently under construction. One of the CTs is being built at LG&E's Paddy Run location and the other at KU's E.W. Brown location. KU will own 47% of the two CTs. LG&E has received approval from the Kentucky Commission for the purchase of the CTs. OPERATING LEASE. LG&E leases office space and accounts for all of its office space leases as operating leases. Total lease expense for 2000, 1999, and 1998, less amounts contributed by the parent company, was $.9 million, $1.5 million, and $1.6 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 2000, are as follows (in thousands of $): 2001 $ 3,654 2002 3,594 2003 3,507 2004 3,507 2005 1,754 -------- Total $16,016 =======
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 was recorded in other income on the income statement in 2000, pursuant to a Kentucky Commission order. ENVIRONMENTAL. The Clean Air 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 SO2 reductions, which commenced January 1, 2000, is to increase scrubber removal efficiency to delay additional capital expenditures and may also include fuel switching or upgrading 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 67 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 states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky is currently in the process of revising its State Implementation Plan or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all LG&E units. Both rules were appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May 2004. As the court has yet to issue a final ruling on the Section 126 rule, all LG&E generating units remain subject to the May 2003 compliance date under that rule. LG&E continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court. LG&E is currently implementing a plan for adding significant additional NOx controls to its generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the final compliance date. LG&E estimates that it will incur total capital costs of approximately $160 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, LG&E will incur additional operating and maintenance costs in operating new NOx controls. 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 its environmental surcharge mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of recovery. LG&E is also monitoring several other air quality issues which may potentially impact coal-fired power plants, including the appeal of the D.C. Circuit's remand of the EPA's revised air quality standards for ozone and particulate matter, measures to implement EPA's regional haze rule, and EPA's December 2000 determination to regulate mercury emissions from power plants. In addition, LG&E is currently working with local regulatory authorities to review the effectiveness of remedial measures aimed at controlling particulate matter emissions from its Mill Creek Station. LG&E previously settled a number of property damage claims from adjacent residents and completed significant remedial measures as part of its ongoing capital construction program. LG&E owns or formerly owned three properties which are the location of past MGP operations. Various contaminants are typically found at such former MGP sites and environmental remediation measures are frequently required. With respect to the sites, LG&E has completed cleanups, obtained regulatory approval of site management plans, or reached agreements for other parties to assume responsibility for cleanup. Based on currently available information, management estimates that it will incur additional costs of $400,000. Accordingly, an accrual of $400,000 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 which the Kentucky Commission has allowed to be reflected in customer rates. Of the remaining 25% of the Unit, IMEA owns a 12.12% undivided interest, and IMPA owns a 12.88% undivided interest. Each company is responsible for its proportionate ownership share of fuel cost, operation and maintenance expenses, and incremental assets. 68 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 $555,829 Accumulated depreciation 157,252 -------- Net book value $398,577 ======== Construction work in progress (included above) $12,704
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. See also Note 12, Construction Program, for LG&E's purchase of two jointly owned CTs in 2001. 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 -------- --- ----- 2000 Operating revenues $710,958(a) $272,489 $983,447 Depreciation and amortization 84,761 13,530 98,291 Interest income 2,551 552 3,103 Interest expense 35,604 7,614 43,218 Operating income taxes 57,869 6,556 64,425 Net income 100,395 10,178 110,573 Total assets 1,760,305 465,779 2,226,084 Construction expenditures 109,798 34,418 144,216 1999 Operating revenues $ 790,670(b) $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 69 Operating revenues $ 658,511(c) $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
(a) Net of provision for rate refunds of $2.5 million. (b) Net of provision for rate refunds of $1.7 million. (c) Net of provision for rate refunds of $4.5 million. NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 2000 and 1999 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 $) 2000 Operating revenues $249,642 $209,731 $229,640 $294,434 Net operating income 26,592 37,285 48,161 36,832 Net income 17,421 28,009 38,117 27,026 Net income available for common stock 16,256 26,692 36,756 25,659 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 40,614 22,375
NOTE 16 - SUBSEQUENT EVENTS On January 9, 2001, LG&E Energy announced a voluntary workforce separation program for non-union employees. On January 18, 2001, the union members at LG&E voted to approve a similar voluntary separation package. LG&E targeted areas where reductions were necessary and employees in these targeted areas had a one-time opportunity to accept the separation package. Employees began leaving LG&E at the end of February 2001 and will continue through the end of the year. LG&E estimates that the separation program will result in a workforce reduction of approximately 700 employees. On February 1, 2001, Roger Hale, Chairman of the Board and Chief Executive Officer announced his retirement from LG&E Energy, LG&E, and KU effective April 30, 2001. Victor A. Staffieri will replace Roger Hale as Chairman and Chief Executive Officer of LG&E Energy, LG&E, and KU. On February 6, 2001, LG&E sold accounts receivables to a wholly-owned special purpose subsidiary. 70 Simultaneously, the subsidiary entered into three-year accounts receivables securitization facilities with two financial institutions whereby an undivided interest in certain receivables are sold, on a revolving basis, for up to $75 million, at a cost of funds linked to commercial paper rates. Under the program LG&E pays fees for administrative and credit support services. 71 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, 2000, 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. 72 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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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, 2001 (Except with respect to the matters discussed in Note 16, as to which the date is February 6, 2001.) 73 Kentucky Utilities Company Statements of Income (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- OPERATING REVENUES: Electric (Note 1)............................ $851,941 $943,210 $831,614 Provision for rate refunds (Note 3).......... - (5,900) (21,500) --------- ---------- ---------- Total operating revenues................... 851,941 937,310 810,114 --------- ---------- --------- OPERATING EXPENSES: Fuel for electric generation................. 219,923 219,883 217,401 Power purchased.............................. 166,918 242,315 126,584 Other operation expenses..................... 108,072 116,521 121,275 Maintenance.................................. 61,643 57,318 63,608 Depreciation and amortization................ 98,256 89,922 86,657 Federal and state income taxes (Note 7)...... 51,963 60,380 53,256 Property and other taxes..................... 17,030 14,955 15,945 --------- ---------- ---------- Total operating expenses................... 723,805 801,294 684,726 --------- ---------- ---------- Net operating income............................ 128,136 136,016 125,388 Merger costs (Note 2)........................... - - 21,830 Other income - net (Note 8)..................... 6,843 9,437 7,846 Interest charges................................ 39,455 38,895 38,640 --------- ---------- ---------- Net income...................................... 95,524 106,558 72,764 Preferred stock dividends....................... 2,256 2,256 2,256 --------- ---------- ---------- Net income available for common stock........... $ 93,268 $104,302 $ 70,508 ========= ========= ==========
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- Balance January 1............................... $329,470 $299,167 $304,750 Add net income.................................. 95,524 106,558 72,764 --------- --------- --------- 424,994 405,725 377,514 --------- --------- --------- Deduct: Cash dividends declared on stock: 4.75% cumulative preferred............. 950 950 950 6.53% cumulative preferred............. 1,306 1,306 1,306 Common................................. 75,500 73,999 76,091 ---------- ---------- ---------- 77,756 76,255 78,347 ---------- ---------- ---------- Balance December 31............................. $347,238 $329,470 $299,167 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 74 Kentucky Utilities Company Balance Sheets (Thousands of $)
December 31 2000 1999 ---- ---- ASSETS: Utility plant, at original cost (Note 1)............... $2,826,383 $2,744,380 Less: reserve for depreciation........................ 1,378,283 1,288,819 ----------- ----------- 1,448,100 1,455,561 Construction work in progress.......................... 106,380 106,686 ------------ ------------ 1,554,480 1,562,247 ------------ ------------ Other property and investments - less reserve.......... 14,538 14,349 Current assets: Cash and temporary cash investments................. 314 6,793 Accounts receivable - less reserve of $800 in 2000 and 1999....................................... 90,419 88,549 Materials and supplies - at average cost: Fuel (predominantly coal)......................... 12,495 30,225 Other............................................. 25,812 26,213 Prepayments and other............................... 1,899 3,743 -------------- -------------- 130,939 155,523 ------------ ------------ Deferred debits and other assets: Unamortized debt expense............................ 4,651 4,827 Regulatory assets (Note 3).......................... 26,441 23,033 Other............................................... 8,469 25,111 ---------- ----------- 39,561 52,971 ---------- ----------- $1,739,518 $1,785,090 ========== =========== CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity....................................... $ 669,783 $ 637,015 Cumulative preferred stock.......................... 40,000 40,000 Long-term debt (Note 9)............................. 430,830 430,830 ------------ ------------ 1,140,613 1,107,845 ------------ ------------ Current liabilities: Current portion of long-term debt (Note 9).......... 54,000 115,500 Notes payable (Note 10)............................. 61,239 - Accounts payable.................................... 76,339 116,546 Provision for rate refunds.......................... - 20,567 Dividends declared.................................. 188 19,150 Accrued taxes....................................... 19,622 10,502 Accrued interest.................................... 6,373 7,329 Other............................................... 18,579 18,617 ------------ ------------ 236,340 308,211 ------------ ------------ Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 7)... 246,680 243,620 Investment tax credit, in process of amortization... 14,901 18,575 Accumulated provision for pensions and related benefits (Note 6).................................. 47,495 48,285 Customers' advances for construction................ 1,540 1,174 Regulatory liabilities (Note 3)..................... 38,392 46,069 Other............................................... 13,557 11,311 ------------ ------------ 362,565 369,034 ------------ ------------ Commitments and contingencies (Note 11) $1,739,518 $1,785,090 ============ ============
The accompanying notes are an integral part of these financial statements. 75 Kentucky Utilities Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................... $ 95,524 $ 106,558 $ 72,764 Items not requiring cash currently: Depreciation and amortization.................. 98,256 89,922 86,657 Deferred income taxes - net.................... (2,449) (3,763) (2,437) Investment tax credit - net.................... (3,674) (3,727) (3,829) Change in certain net current assets: Accounts receivable............................ (1,870) 17,576 (31,482) Materials and supplies......................... 18,131 (8,263) 3,272 Accounts payable............................... (40,207) 6,514 71,162 Provision for rate refunds..................... (20,567) (933) 21,500 Accrued taxes.................................. 9,120 (6,231) 9,260 Accrued interest............................... (956) (781) (173) Prepayments and other.......................... 1,806 (3,042) (53) Other............................................ 23,136 10,346 12,776 --------- --------- --------- Net cash flows from operating activities....... 176,250 204,176 239,417 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from insurance reimbursement............ 259 206 179 Construction expenditures........................ (100,587) (181,341) (91,992) --------- --------- --------- Net cash flows used for investing activities... (100,328) (181,135) (91,813) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings............................ 61,239 - 381,500 Repayments of short-term borrowings.............. - - (415,100) Retirement of long-term debt..................... (74,784) - (42) Issuance of long-term debt....................... 12,900 - - Additional paid-in capital....................... 15,000 - - Payment of dividends............................. (96,756) (75,197) (60,347) --------- --------- --------- Net cash flows used for financing activities.................................... (82,401) (75,197) (93,989) --------- --------- --------- Change in cash and temporary cash investments....... (6,479) (52,156) 53,615 Cash and temporary cash investments at beginning of year.................................. 6,793 58,949 5,334 --------- --------- --------- Cash and temporary cash investments at end of year............................................... $ 314 $ 6,793 $ 58,949 ========= ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................ $ 49,871 $ 71,258 $ 46,490 Interest on borrowed money.................. 35,196 35,508 36,008
The accompanying notes are an integral part of these financial statements. 76 Kentucky Utilities Company Statements of Capitalization (Thousands of $)
December 31 2000 1999 ---- ---- COMMON EQUITY: Common stock, without par value - outstanding 37,817,878 shares....................... $ 308,140 $ 308,140 Additional paid-in capital............................ 15,000 - Retained earnings..................................... 347,238 329,470 Other................................................. (595) (595) ---------- ---------- 669,783 637,015 ---------- ---------- CUMULATIVE PREFERRED STOCK: Shares Current Outstanding Redemption Price ----------- ---------------- Without par value, 5,300,000 shares authorized - 4.75% series, $100 stated value Redeemable on 30 days notice by KU ....................... 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 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 7, due May 1, 2020, 7.60%........................... - 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 A, due May 1, 2023, variable........................ 12,900 - ------------- ----------- Total bonds outstanding............................. 484,830 546,330 Less current portion of long-term debt.............. 54,000 115,500 ------------- ------------ Long-term debt...................................... 430,830 430,830 ------------- ------------ Total capitalization................................ $1,140,613 $1,107,845 ========== ==========
The accompanying notes are an integral part of these financial statements. 77 Kentucky Utilities Company Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES KU, a subsidiary of LG&E Energy and an indirect subsidiary of Powergen, is a regulated public utility engaged in the generation, transmission, distribution, and sale of electric energy. LG&E Energy is an exempt public utility holding company with wholly-owned subsidiaries including LG&E, KU, Capital Corp., LEM, and LG&E Services. All of the KU's Common Stock is held by LG&E Energy. On December 11, 2000, LG&E Energy Corp. and Powergen plc completed the merger involving the two companies. Powergen is a registered public utility holding company under PUHCA. No costs associated with the Powergen merger nor any of the effects of purchase accounting have been reflected in the financial statements of KU. 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 significant 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 2000, 1999 and 1998. Pursuant to a recently completed depreciation study, KU will implement the new depreciation rates effective January 1, 2001. The new rate is expected to be 3%. 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. 78 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 $34.8 million and $29.6 million at December 31, 2000 and 1999, respectively. FUEL COSTS. The cost of fuel for electric generation is charged to expense as used. MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and 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 2000 and 1999, 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. SFAS No. 133 could increase the volatility in earnings and other comprehensive income. 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. KU adopted SFAS No. 133 on January 1, 2001. The effect of this statement will result in a credit of $1.6 million to cumulative effect of change in accounting principle (net of tax) in other comprehensive income. EITF No. 98-10, ACCOUNTING FOR ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES was adopted effective January 1, 1999. The pronouncement requires 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. NOTE 2 - MERGERS AND ACQUISITIONS On December 11, 2000, LG&E Energy Corp. and Powergen plc successfully completed the merger transaction involving the two companies. LG&E Energy had announced on February 28, 2000, that its Board of Directors accepted the 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, LG&E Energy became a wholly owned subsidiary of Powergen and, as a result, KU became an indirect subsidiary of Powergen. KU will continue its separate identity and serve customers in Kentucky and Virginia under its existing name. The preferred stock and debt securities of KU were not affected by this transaction and KU will continue to file SEC reports. Following the merger, Powergen became a registered holding company under PUHCA and KU, as a subsidiary of a registered holding company, became subject to additional regulations under PUHCA. LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the surviving corporation. As a 79 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 five-year period. The preferred stock and debt securities of KU were not affected by the merger. Management has accounted for the LG&E Energy - KU Energy merger as a pooling of interests and as a tax-free reorganization under the Internal Revenue Code. As part of its LG&E Energy - KU Energy merger order, the Kentucky Commission approved a surcredit whereby 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 surcredit is allocated 53% to KU and 47% to LG&E pursuant to Kentucky Commission order. The surcredit will be about 2% of customer bills through mid 2003 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 which 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 return to customers in future rates. KU's current or expected recovery of deferred costs and expected return 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 $):
2000 1999 ---- ---- Unamortized loss on bonds $ 7,011 $ 7,594 Merger costs 10,232 14,324 Other 925 1,115 One utility costs 8,273 - ----------- --------- Total regulatory assets 26,441 23,033 --------- --------- Deferred income taxes - net (37,484) (42,992) Other (908) (3,077) ----------- ---------- Total regulatory liabilities (38,392) (46,069) --------- --------- Regulatory liabilities - net $(11,951) $(23,036) ======== ========
80 PUHCA. Following the merger transaction involving LG&E Energy and Powergen, Powergen became a registered holding company under PUHCA. As a result, Powergen, its utility subsidiaries, including KU, and certain of its non-utility subsidiaries are subject to extensive regulation by the SEC under PUHCA with respect to issuances and sales of securities, acquisitions and sales of certain utility properties, and intra-system sales of certain goods and services. In addition, PUHCA generally limits the ability of registered holding companies to acquire additional public utility systems and to acquire and retain businesses unrelated to the utility operations of the holding company. Powergen believes that it has adequate authority (including financing authority) under existing SEC orders and regulations for it and its subsidiaries to conduct their businesses as proposed during 2001. Powergen will seek additional authorization when necessary. ENVIRONMENTAL COST RECOVERY. In August 1999, a final order of the Kentucky Commission approved KU's settlement agreement concerning the refund of the recovery of costs associated with pre-1993 environmental projects. KU began applying the refund to customers' bills in October 1999 and completed the refund process in the month of November 2000. All aspects of the original litigation of this issue have now been resolved. In March 2000, KU filed an application with the Kentucky Commission to obtain a CCN to construct up to four SCRs NOx reduction facilities. The construction and subsequent operation of the SCRs is intended to reduce NOx emission levels to meet the EPA's mandated NOx emission level of 0.15 lbs./ Mmbtu by May 2003. Following a period of discovery in the proceeding, the Kentucky Commission granted KU's request for a CCN in June 2000. In its order, the Kentucky Commission ruled that KU's proposed plan for construction was "reasonable, cost-effective and will not result in the wasteful duplication of facilities." In October 2000, KU filed an application with the Kentucky Commission to amend its Environmental Compliance Plan to reflect the addition of the proposed NOx reduction technology projects and to amend its Environmental Cost Recovery Tariff to include an overall rate of return on capital investments. Approval of KU's application will allow KU to begin to recover the costs associated with these new projects, subject to Kentucky Commission oversight during normal six-month and two-year reviews. Following the completion of hearings in March 2001, a ruling is expected by May 2001. ELECTRIC PBR/ESM. 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 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. In January 2000, the Kentucky Commission issued orders for KU in the subject cases, ruling 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 81 the next three years. Under this mechanism, incremental annual earnings for KU resulting in a rate of return on equity 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. 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. In June 2000, the Kentucky Commission ruled that the final rate reduction should be $30.4 million, a change of approximately $6.1 million from the original order and ordered KU to implement the revised rates effective with service rendered beginning June 1, 2000. KU reinstated its FAC beginning with March 2000 billings. The first ESM filing was made on March 1, 2001, for year ended December 31, 2000. By order of the Kentucky Commission rate changes prompted by the ESM filing go into effect in April of each year. At December 31, 2000, KU expects to fall within the range, therefore no adjustment was made to the financial statements. DSM. In September 2000, KU filed a plan with the Kentucky Commission that would expand LG&E's current DSM programs into the service territory served by KU. The filing includes a rate mechanism that provides for concurrent recovery of DSM costs, provides an incentive for implementing DSM programs, and recovers revenues from lost sales associated with the DSM program. The Kentucky Commission has not issued an order in this case. KU expects a ruling by mid-2001. FAC. 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 wholesale 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 $6.7 million ($5.8 million on Kentucky jurisdictional basis) from the original order amount of $10.1 million. In August 1999, KU recorded its estimated share of anticipated FAC refunds. KU began implementing the refund in October and completed the refund in September 2000. Both KU and the KIUC appealed the order to the Franklin Circuit Court. In October 2000, the Court affirmed the Kentucky Commission's orders concerning all issues except interest, with respect to which it held that KU will be required to pay interest on the amount disallowed "if the Commission within its discretion so determines", and ordered the case be remanded to the Kentucky Commission on that issue. In November 2000, KU appealed the Circuit Court's decision to the Kentucky Court of Appeals. A decision is not expected until late 2001 or early 2002. 82 KENTUCKY COMMISSION 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. In February 2000, the Kentucky Commission issued its ruling in the case, including a draft Code of Conduct for the purpose of further consideration in the process to promulgate a regulation. In early 2000, the Kentucky General Assembly enacted legislation, House Bill 897, which authorized the Kentucky Commission to require utilities who provide nonregulated activities to keep separate accounts and allocate costs in accordance with procedures established by the Kentucky Commission. On February 14, 2001, the Kentucky Commission published notice of their intent to promulgate new administrative regulations. In the same Bill, the General Assembly set forth provisions to govern a utilities activities related to the sharing of information, databases, and resources between its employees or an affiliate involved in the marketing or the provision of nonregulated activities and its employees or an affiliate involved in the provision of regulated services. The legislation became law in July 2000 and KU has been operating pursuant thereto since that time. NOTE 4 - FINANCIAL INSTRUMENTS The cost and estimated fair values of the KU's non-trading financial instruments as of December 31, 2000, and 1999 follow (in thousands of $):
2000 1999 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Long-term debt (including current portion) $484,830 $491,277 $546,330 $542,242 Interest-rate swaps - 3,559 - (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 SWAPS. KU is party to three interest rate swaps with notional amounts totaling $153 million. In each case, KU pays a variable rate based on either LIBOR or the Bond Market Association's municipal swap index. In return, KU receives a fixed rate equal to the rate on underlying long-term debt of Series P, R, and PCS-9. At year end, KU paid an average rate of 6.69% and received an average rate of 7.13%. The swaps mature on dates ranging from 2007 to 2025. 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 83 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 464,000 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, 2000, 100% of total utility revenue was derived from electric operations. In August 2000, KU and their employees represented by IBEW Local 2100 entered into a one-year collective bargaining agreement. At the same time, KU and their employees represented by USWA Local 9447-01 entered into a two year collective bargaining agreement with a reopener for wages only to be effective August 1, 2001. The employees represented by these two bargaining units makeup approximately 15% of KU's workforce. 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, 2000, and a statement of the funded status as of December 31 for each of the last three years (in thousands of $):
2000 1999 1998 ---- ---- ---- PENSION PLANS: Change in benefit obligation Benefit obligation at beginning of year $219,628 $233,288 $214,657 Service cost 4,312 6,210 6,672 Interest cost 17,205 15,564 15,043 Plan amendment 11,757 - 2,226 Acquisitions/divestitures - - (2,243) Curtailment (gain) or loss - - 1,901 Special termination benefits - - 5,427 Benefits paid (16,512) (12,822) (12,762) Actuarial (gain) or loss and other (3,356) (22,612) 2,367 -------- -------- -------- Benefit obligation at end of year $233,034 $219,628 $233,288 ======== ======== ======== Change in plan assets Fair value of plan assets at beginning of year $274,109 $238,124 $217,500 Actual return on plan assets (10,943) 49,883 31,209 Employer contributions and plan transfers (994) - 2,273 Benefits paid (16,512) (12,822) (12,762) Administrative expenses (983) (1,076) (96) -------- -------- -------- Fair value of plan assets at end of year $244,677 $274,109 $238,124 ======== ======== ======== Reconciliation of funded status Funded status $ 11,643 $ 54,481 $ 4,835 Unrecognized actuarial (gain) or loss (36,435) (74,579) (26,487) Unrecognized transition (asset) or obligation (847) (988) (1,128) Unrecognized prior service cost 14,176 3,564 4,943 -------- --------- -------- Net amount recognized at year-end $(11,463) $ (17,522) $(17,837) ======== ========= ======== OTHER BENEFITS: Change in benefit obligation Benefit obligation at beginning of year $ 54,201 $ 79,650 $ 72,139
84 Service cost 757 1,596 2,012 Interest cost 4,781 3,837 5,207 Plan amendments 7,127 (24,488) - Curtailment (gain) or loss - - 3,240 Special termination benefits - - - Benefits paid (4,318) (4,646) (2,617) Actuarial (gain) or loss 1,665 (1,748) (331) -------- -------- -------- Benefit obligation at end of year $ 64,213 $ 54,201 $ 79,650 ======== ======== ======== Change in plan assets Fair value of plan assets at beginning of year $ 28,720 $ 24,337 $ 17,763 Actual return on plan assets (1,162) 5,322 5,117 Employer contributions 522 3,520 3,805 Benefits paid (4,318) (4,459) (2,348) -------- -------- -------- Fair value of plan assets at end of year $ 23,762 $ 28,720 $ 24,337 ======== ======== ======== Reconciliation of funded status Funded status $(40,451) $(25,481) $(55,313) Unrecognized actuarial (gain) or loss (23,561) (28,976) (19,944) Unrecognized transition (asset) or obligation 21,871 23,694 45,701 Unrecognized prior service cost 6,109 - - -------- -------- -------- Net amount recognized at year-end $(36,032) $(30,763) $(29,556) ======== ======== ========
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, 2000, 1999 and 1998 (in thousands of $):
2000 1999 1998 ---- ---- ---- PENSION PLANS: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(11,463) $(17,522) $(17,837) Other - - (22) -------- -------- -------- Net amount recognized at year-end $(11,463) $(17,522) $(17,859) ======== ======== ======== Additional year-end information for plans with accumulated benefit obligations in excess of plan assets: Projected benefit obligation $ 1,505 $ 1,132 $ 2,300 Accumulated benefit obligation 336 40 99 OTHER BENEFITS: Amounts recognized in the balance sheet consisted of: Accrued benefit liability $(36,032) $ (30,763) $(29,556) Other - - (2,817) -------- -------- -------- Net amount recognized at year-end $(36,032) $ (30,763) $(32,373) ======== ======== ======== Additional year-end information for plans with benefit obligations in excess of plan assets: Projected benefit obligation $ 64,213 $ 54,201 $ 79,650 Fair value of plan assets 23,762 28,720 24,337
The following table provides the components of net periodic benefit cost for the plans for 2000, 1999 and 1998 85 (in thousands of $):
2000 1999 1998 ---- ---- ---- PENSION PLANS: Components of net periodic benefit cost Service cost $ 4,312 $ 6,211 $ 6,673 Interest cost 17,205 15,564 15,043 Expected return on plan assets (25,170) (21,957) (18,264) Amortization of transition (asset) or obligation (141) (141) 435 Amortization of prior service cost 1,145 410 (146) Amortization of net (gain) loss (3,410) (319) (151) -------- -------- -------- Net periodic benefit cost $ (6,059) $ (232) $ 3,590 ======== ======== ======== 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 $ 757 $ 1,596 $ 2,012 Interest cost 4,781 3,837 5,207 Expected return on plan assets (1,768) (1,897) (1,424) Amortization of prior service cost 1,018 - - Amortization of transition (asset) or obligation 1,823 1,823 3,303 Amortization of net (gain) loss (820) (445) (536) -------- -------- -------- Net periodic benefit cost $ 5,791 $ 4,914 $ 8,562 ======== ======== ======== 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. 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. The assumptions used in the measurement of the KU's benefit obligation are shown in the following table:
2000 1999 1998 ---- ---- ---- Weighted-average assumptions as of December 31: 86 Discount rate 7.75% 8.00% 7.00% Expected long-term rate of return on plan assets 9.50% 9.50% 8.25% Rate of compensation increase 4.75% 5.00% 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 5.00% 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 2000 $ (426) $ 483 Effect on year-end 2000 postretirement benefit obligations (4,085) 4,640
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 $2.5 million for 2000, $2.3 million for 1999 and $2.2 million for 1998. NOTE 7 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
2000 1999 1998 ---- ---- ---- Included in operating expenses: Current - federal $44,927 $50,969 $46,321 - state 9,333 13,459 10,245 Deferred - federal - net (3,254) (4,833) (3,186) - state - net 957 785 (124) ------- ------- ------- Total 51,963 60,380 53,256 ------- ------- ------- Included in other income - net: Current - federal 349 1,028 (617) - state 67 54 (237) Deferred - federal - net (122) 182 694 - state - net (30) 102 178 Amortization of investment tax credit (3,674) (3,727) (3,829) ------- ------- ------- Total (3,410) (2,361) (3,811) ------- ------- ------- Total income tax expense $48,553 $58,019 $49,445 ======= ======= =======
Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
2000 1999 Deferred tax liabilities: Depreciation and other plant-related items $279,047 $313,202 Other liabilities 13,718 11,286 -------- --------
87 292,765 324,488 -------- -------- Deferred tax assets: Investment tax credit 6,014 7,497 Income taxes due to customers 15,124 16,712 Pension overfunding 3,974 5,797 Accrued liabilities not currently deductible and other 20,973 50,862 -------- -------- 46,085 80,868 -------- -------- Net deferred income tax liability $246,680 $243,620 ======== ========
A reconciliation of differences between the statutory U.S. federal income tax rate and KU's effective income tax rate follows:
2000 1999 1998 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 4.9 5.7 5.4 Amortization of investment tax credit (2.6) (2.9) (3.1) Nondeductible merger expenses - - 6.4 Other differences - net (3.6) (2.5) (2.2) ----- ----- ----- Effective income tax rate 33.7% 35.3% 41.5% ==== ==== ====
NOTE 8 - OTHER INCOME - NET Other income - net, consisted of the following at December 31 (in thousands of $):
2000 1999 1998 ---- ---- ---- Equity in earnings - subsidiary company $ 2,242 $ 2,334 $ 2,167 Interest and dividend income 1,206 4,293 1,811 Gains on fixed asset disposals 5 759 272 Income taxes and other 3,390 2,051 3,596 -------- -------- -------- Other income - net $ 6,843 $9,437 $ 7,846 ======= ====== =======
NOTE 9 - 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, 2000. Stated interest rates Variable, 5.75% - 8.55% Weighted-average interest rate 6.64% Maturities 2003 - 2027 Noncurrent portion $430,830 Current portion $54,000
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 88 the bonds to be classified as current portion of long-term debt. The average annualized interest rate for these bonds during 2000 was 4.36%. In May 2000, KU issued the Mercer County Solid Waste Disposal Facility Revenue Bonds, 2000 Series A variable rate debt, for $12.9 million. These proceeds were used to redeem $4 million PCB Series 7, 7.38% bonds and $8.9 million of PCB Series 7, 7.6% bonds. In June 2000, $61.5 million Series Q, 5.95% First Mortgage Bonds matured and was paid in full. KU's First Mortgage Bond, 6.32% Series Q of $62 million is scheduled to mature in 2003. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 2000. Substantially all of KU's utility plant is pledged as security for its First Mortgage Bonds. NOTE 10 - NOTES PAYABLE At December 31, 2000, KU had $61.2 million in notes payable to LG&E Energy Corp. The note payable is due on demand and has an average percentage rate at December 31, 2000 of 6.68%. The rate is based on the available borrowing rate as of the last day of the prior month. KU had no short-term borrowings at December 31, 1999. KU maintains an uncommitted line of credit which totaled $100 million at December 31, 2000. There was no outstanding balance as of that date. NOTE 11 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM. KU had $11.5 million of commitments in connection with its construction program at December 31, 2000. Construction expenditures for the years 2001 and 2002 are estimated to total approximately $300 million. Included in 2001 is $51 million for the purchase of 47% of two CTs currently under construction. One of the CTs is being built at KU's E.W. Brown location and the other at LG&E's Paddy Run location. LG&E will own 53% of the two CTs. KU has received approval from the Kentucky Commission for the purchase of the CTs. KU is still waiting for confirmation of certain matters from the Virginia Commission. OPERATING LEASES. KU leases office space, office equipment, and vehicles. KU accounts for these leases as operating leases. Total lease expense for 2000, 1999, and 1998, was $2.3 million, $1.7 million, and $1.9 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 was recorded in other income on the income statement in 2000, pursuant to a Kentucky Commission order. ENVIRONMENTAL. The Clean Air 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 SO2 reductions, which commenced 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 89 obligations are met in the most efficient and cost-effective manner. In September 1998, the EPA announced its final "NOx SIP Call" rule requiring states to impose significant additional reductions in NOx emissions by May 2003, in order to mitigate alleged ozone transport impacts on the Northeast region. The Commonwealth of Kentucky is currently in the process of revising its State Implementation Plan or "SIP" to require reductions in NOx emissions from coal-fired generating units to the 0.15 lb./Mmbtu level on a system-wide basis. In related proceedings in response to petitions filed by various Northeast states, in December 1999, EPA issued a final rule pursuant to Section 126 of the Clean Air Act directing similar NOx reductions from a number of specifically targeted generating units including all KU units in the eastern half of Kentucky. Additional petitions currently pending before EPA may potentially result in rules encompassing KU's remaining generating units. Both rules were appealed to the U.S. Court of Appeals for the D.C. Circuit. The D.C. Circuit subsequently upheld most provisions of the NOx SIP Call rule, but extended the compliance date to May, 2004. As the court has yet to issue a final ruling on the Section 126 rule, all KU generating units, except for KU's Green River generating station, remain subject to the May 2003 compliance date under that rule. As KU's Green River station is not covered by the Section 126 rule, those facilities are subject to the May 2004 compliance date as extended by the D.C. Circuit. KU continues to monitor the status of various appeals pending in the D.C. Circuit and U.S. Supreme Court. KU is currently implementing a plan for adding significant additional NOx controls to its generating units. Installation of additional NOx controls will proceed on a phased basis, with installation of controls commencing in late 2000 and continuing through the final compliance date. KU estimates that it will incur total capital costs of approximately $195 million to reduce its NOx emissions to the 0.15 lb./Mmbtu level on a company-wide basis. In addition, KU will incur additional operation and maintenance costs in operating new NOx controls. 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 mechanism and believes that a significant portion of such costs could be recovered. However, Kentucky Commission approval is necessary and there can be no guarantee of 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 unaware of what, if any, additional exposure or liability it may have. 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. KU expects to incur costs of approximately $1.5 million. 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 2001-2005, which is expected to be approximately 10% 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 90 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 $164 million of OMU bonds outstanding at December 31, 2000. The debt service is allocated to KU based on its annual allocated share of capacity, which averaged approximately 46% in 2000. 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 2001 - 2005 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, 2005, are as follows (in thousands of $): 2001 $ 31,545 2002 30,683 2003 30,946 2004 31,155 2005 31,310 -------- Total $155,639 ========
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. See also Note 11, Construction Program, for KU's purchase of two jointly owned CTs in 2001. NOTE 13 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 2000 and 1999 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 $) 2000 Revenues $217,778 $205,324 $215,984 $212,855 Operating income 28,753 28,912 37,161 33,310 Net income 20,174 21,532 28,483 25,335 Net income available for common stock 19,610 20,968 27,919 24,771 1999 Revenues $217,349 $225,794 $281,503 $212,664 Operating income 36,966 34,997 32,529 31,524 Net income (loss) 29,628 27,757 24,426 24,747 Net income (loss) available for common stock 29,064 27,193 23,862 24,183
91 NOTE 14 - SUBSEQUENT EVENTS On January 9, 2001, LG&E Energy announced a voluntary workforce separation program for non-union employees. On January 18, 2001, the union members at KU voted to approve a similar voluntary separation package. KU targeted areas where reductions were necessary and employees in these targeted areas had a one-time opportunity to accept the separation package. Employees began leaving KU at the end of February 2001 and will continue through the end of the year. KU estimates that the separation program will result in a workforce reduction of approximately 250 employees. On February 1, 2001, Roger Hale, Chairman of the Board and Chief Executive Officer announced his retirement from LG&E Energy, LG&E, and KU effective April 30, 2001. Victor A. Staffieri will replace Roger Hale as Chairman and Chief Executive Officer of LG&E Energy, LG&E, and KU. On February 6, 2001, KU sold accounts receivables to a wholly-owned special purpose subsidiary. Simultaneously, the subsidiary entered into three-year accounts receivables securitization facilities with two financial institutions whereby an undivided interest in certain receivables are sold, on a revolving basis, for up to $50 million, at a cost of funds linked to commercial paper rates. Under the program, KU pays fees for administrative and credit support services. 92 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, 2000, 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. 93 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, 2000 and 1999, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, 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, 2001 (Except with respect to the matters discussed in Note 14, as to which the date is February 6, 2001.) 94 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 and KU is set forth in Exhibit 99.02 filed herewith and is incorporated by reference thereto. Additionally, in accordance with General Instruction G, the information required by ITEM 10 relating to executive officers of 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: Statements of income for the three years ended December 31, 2000 (page 49). Statements of retained earnings for the three years ended December 31, 2000 (page 49). Statements of comprehensive income for the three years ended December 31, 2000 (page 50). Balance sheets - December 31, 2000, and 1999 (page 51). Statements of cash flows for the three years ended December 31, 2000 (page 52). Statements of capitalization - December 31, 2000, and 1999 (page 53). Notes to financial statements (pages 54-71). Report of management (page 72). Report of independent public accountants (page 73). KU: Statements of income for the three years ended December 31, 2000 (page 74). Statements of retained earnings for the three years ended December 31, 2000 (page 74). Balance sheets - December 31, 2000, and 1999 (page 75). Statements of cash flows for the three years ended December 31, 2000 (page 76). Statements of capitalization - December 31, 2000, and 1999 (page 77). Notes to financial statements (pages 78-92). Report of management (page 93). Report of independent public accountants (page 94). 2. Financial Statement Schedules (included in Part IV): Schedule II Valuation and Qualifying Accounts for the three years ended December 31, 2000, for LG&E (page 114), and KU (page 115). 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. 95 3. Exhibits: Exhibit Applicable to Form 10-K of No. LG&E KU Description - --- ---- -- ----------- 2.01 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's and KU's Current Report on Form 8-K filed February 29, 2000 and incorporated by reference herein] 2.02 x x Amendment No. 1 to Agreement and Plan of Merger, dated as of December 8, 2000, among LG&E Energy Corp., Powergen plc, Powergen US Investments Corp. and Powergen Acquisition Corp. [Filed as Exhibit 2.01 to LG&E's and KU's Current Report on Form 8-K filed December 11, 2000 and incorporated by reference herein] 2.03 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's and KU's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 3.01 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] 3.02 x Copy of By-Laws of LG&E, as amended through June 2, 1999. [Filed as Exhibit 3.02 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated by reference herein.] 3.03 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] 3.04 x Copy of By-laws of KU, as amended through June 2, 1999. [Filed as Exhibit 3.04 to KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated by reference herein.] 4.01 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 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 Copy of Supplemental Indenture dated February 1, 1954, which is a 96 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 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 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 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 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 Copy of Supplemental Indenture dated June 1, 1970, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.08 to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 4.09 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 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 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] 97 4.12 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 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 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 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 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 Copy of Supplemental Indenture dated September 1, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.17 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1980, and incorporated by reference herein] 4.18 x 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 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 Copy of Supplemental Indenture dated March 1, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.20 to 98 LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.21 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 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 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 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 Copy of Supplemental Indenture dated November 15, 1986, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1986, and incorporated by reference herein] 4.26 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 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 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] 99 4.29 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 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 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 Copy of Supplemental Indenture dated September 1, 1992, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.32 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 4.33 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 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 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 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 Copy of Supplemental Indenture dated May 1, 2000, which is a supplemental instrument to Exhibit 4.01 hereto. 100 4.38 x Copy of Supplemental Indenture dated August 1, 2000, which is a supplemental instrument to Exhibit 4.01 hereto. 4.39 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 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. 4.40 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 101 Report of KU for the year ended December 31, 1992, and incorporated by reference herein] 4.41 x Copy of Supplemental Indenture dated May 1, 2000, which is a supplemental instrument to Exhibit 4.39 hereto. 10.01 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 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 Copy of Modification No. 2 dated March 15, 1964, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02c to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.04 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 Copy of Modification No. 5 dated August 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 13(c) to LG&E's Registration Statement 2-27316 and incorporated by reference herein] 10.06 x x Copies of (i) Inter-Company Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies (which Agreement includes as Exhibit A the Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Indiana-Kentucky Electric Corporation); (ii) First Supplementary Transmission Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iii) Inter-Company Bond 102 Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iv) Inter-Company Bank Credit Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 5.02f to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.07 x x Copy of Modification No. 1 and No. 2 dated June 3, 1966 and January 7, 1967, respectively, to Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibits 4(a)(8) and 4(a)(10) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.08 x 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 Copy of Modification No. 1, dated August 20, 1958, to First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02i to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.10 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 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 Copy of Modification No. 6 dated November 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 4(g) to LG&E's Registration Statement 2-28524 and incorporated by reference herein] 10.13 x x Copy of Modification No. 3 dated November 15, 1967, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 4.02m to LG&E's Registration Statement 2-37368 and incorporated by reference 103 herein] 10.14 x Copy of Modification No. 7 dated November 5, 1975, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02n to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.15 x x Copy of Modification No. 4 dated November 5, 1975, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 5.02o to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.16 x 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 Copy of Modification No. 8 dated June 23, 1977, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02q to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.18 x 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 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 Copy of Modification No. 11 dated September 1, 1979, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 3 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.21 x x Copy of Modification No. 5 dated September 1, 1979, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 4 to LG&E's 104 Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.22 x Copy of Modification No. 12 dated August 1, 1981, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.23 x x Copy of Modification No. 6 dated August 1, 1981, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.26 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.24 [Not used.] 10.25 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 * 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 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 Copy of Modification No. 14 dated January 15, 1992, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.29 x x Copy of Modification No. 7 dated January 15, 1992, to Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.44 to LG&E's Annual Report on Form 10-K for the year ended December 31, 105 1993, and incorporated by reference herein] 10.30 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 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 Corporation and LG&E (expires October 31, 2000) covering the transmission of natural gas. Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2003) covering the transmission of natural gas. [Filed as Exhibit 10.47 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.32 [Not used.] 10.33 x x Copy of Modification No. 8 dated January 19, 1994, to Intercompany Power Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.34 x Copy of Amendment dated March 1, 1995, to Firm No-Notice Transportation Agreements dated November 1, 1993 (2-Year, 5-Year and 8-Year), between Texas Gas Transmission Corporation and LG&E covering the transmission of natural gas. [Filed as Exhibit 10.44 of LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.35 x x Copy of Modification No. 9, dated August 17, 1995, to the Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 10.39 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 106 10.36 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] 10.37 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 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 [Not used.] 10.40 [Not used.] 10.41 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 * 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 * Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1995. [Filed as Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.44 x Copy of Form of Master Gas Purchase Agreement, dated December 14, 107 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 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 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 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 - [Not used.] 10.55 10.56 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 - [Not used.] 10.58 10.59 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 [Not used.] 108 10.61 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 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 Copies of Amendments dated September 23, 1997, to Firm No-Notice Transportation Agreements dated November 1, 1993, between Texas Gas Transmission Corporation and LG&E, as amended. [Filed as Exhibit 10.81 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated by reference herein] 10.64 x 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 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.] 10.75 10.76 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 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 109 incorporated by reference herein] 10.78 [Not used.] 10.79 [Not used.] 10.80 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 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 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 - [Not used.] 10.89 10.90 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 * 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 [Not used.] 10.93 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] 110 10.94 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. [Filed as Exhibit 10.94 to LG&E's and KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.95 x x * Copy of form of First Amendment to Employment and Severance Agreement by and among LG&E Energy, Powergen plc and certain executive officers of the Company. 10.96 x x * Copy of Amendment, effective October 1, 1999, to LG&E Energy's Non-Qualified Savings Plan. [Filed as Exhibit 10.96 to LG&E's and KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.97 x x * Copy of Amendment, effective December 1, 1999, to LG&E Energy's Non-Qualified Savings Plan. [Filed as Exhibit 10.97 to LG&E's and KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.98 - [Not used.] 10.101 10.102 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. [Filed as Exhibit 10.102 to LG&E's and KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.103 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. [Filed as Exhibit 10.103 to LG&E's and KU's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.104 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. [Filed as Exhibit 10.104 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.105 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. [Filed as Exhibit 10.105 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.106 x Copy of Letter Amendment, dated September 15, 1999, to Transportation Agreement, dated November 1, 1993, between LG&E and Texas Gas Transmission Corporation. [Filed as Exhibit 10.106 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.] 10.107 x x * Copy of Powergen Long-Term Incentive Plan, effective December 11, 2000, applicable to certain employees of LG&E Energy Corp. and its subsidiaries. 10.108 x x * Copy of Powergen Long-Term Incentive Plan - Roger Hale, effective December 11, 2000. 10.109 x x * Copy of Powergen Short-Term Incentive Plan, effective January 1, 2001, applicable to certain employees of LG&E Energy Corp. and its subsidiaries. 10.110 x x * Copy of two forms of Change-In-Control Agreement applicable to certain employees of LG&E Energy Corp. and its subsidiaries. 12 x x Computation of Ratio of Earnings to Fixed Charges for LG&E and KU. (previously filed) 21 x x Subsidiaries of the Registrant. (previously filed) 23.01 x Consent of Independent Public Accountants for LG&E. (previously filed) 23.02 x Consent of Independent Public Accountants for KU. (previously filed) 111 24 x x Power of Attorney. (previously filed) 99.01 x x Cautionary Statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. (previously filed) 99.02 x x Louisville Gas and Electric Company and Kentucky Utilities Company - Information Concerning Directors and Officers (b) Executive Compensation Plans and Arrangements: Exhibits preceded by an asterisk ("*") above are management contracts, compensation plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. (c) Reports on Form 8-K: On December 11, 2000, a report on Form 8-K was filed announcing that LG&E Energy and Powergen had completed the merger involving the two companies. (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. 112 6. Loan Agreement dated as of August 1, 1992 between KU and the County of Carroll, Kentucky, in connection with $20,930,000 County of Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project) 1992 Series B, due February 1, 2018. 7. Loan Agreement dated as of December 1, 1993, between KU and the County of Carroll, Kentucky, in connection with $50,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (KU Project) 1993 Series A, due December 1, 2023. 8. Loan Agreement dated as of November 1, 1994, between KU and the County of Carroll, Kentucky, in connection with $54,000,000 County of Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities Revenue Bonds (KU Project) 1994 Series A, due November 1, 2024. 113 Louisville Gas and Electric Company Schedule II Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 2000 (Thousands of $)
Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- --------- 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 Additions: Charged to costs and expenses - 2,803 Deductions: Net charges of nature for which reserves were created - 2,750 ---------- ------- Balance December 31, 2000 $ 63 $ 1,286 ======== =======
114 Kentucky Utilities Company Schedule II Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 2000 (Thousands of $)
Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- --------- 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 Additions: Charged to costs and expenses 64 1,430 Deductions: Net charges of nature for which reserves were created - 1,430 ---------- ------- Balance December 31, 2000 $ 751 $ 800 ======= =======
115 SIGNATURES - LOUISVILLE GAS AND ELECTRIC COMPANY 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 30, 2001 /s/ S. Bradford Rives - --------------- ---------------------------------- (Date) 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); Richard Aitken-Davies Chief Financial Officer (Principal Financial Officer); S. Bradford Rives Senior Vice President - Finance and Controller (Principal Accounting Officer); Sir Frederick Crawford Director; David J. Jackson Director; Sydney Gillibrand Director; Dr. David K-P Li Director; Paul Myners Director; Roberto Quarta Director; Edmund Wallis Director. By /s/ S. Bradford Rives March 30, 2001 --------------------------- (Attorney-In-Fact) 116 SIGNATURES - KENTUCKY UTILITIES COMPANY 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 30, 2001 /s/ S. Bradford Rives - --------------- ----------------------------------- (Date) 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); Richard Aitken-Davies Chief Financial Officer (Principal Financial Officer); S. Bradford Rives Senior Vice President - Finance and Controller (Principal Accounting Officer); Sir Frederick Crawford Director; David J. Jackson Director; Sydney Gillibrand Director; Dr. David K-P Li Director; Paul Myners Director; Roberto Quarta Director; Edmund Wallis Director. By /s/ S. Bradford Rives March 30, 2001 ------------------------- (Attorney-In-Fact) 117 EX-4.37 2 a2048540zex-4_37.txt COPY OF SUPPL IND 5/1/00 Exhibit 4.37 SUPPLEMENTAL INDENTURE FROM LOUISVILLE GAS AND ELECTRIC COMPANY TO HARRIS TRUST AND SAVINGS BANK TRUSTEE ----------- DATED MAY 1, 2000 ----------- SUPPLEMENTAL TO TRUST INDENTURE DATED NOVEMBER 1, 1949 TABLE OF CONTENTS -----------------
PAGE ---- Parties........................................................................................................1 Recitals.......................................................................................................1 Form of Bonds of Pollution Control Series Y ...................................................................6 Further Recitals .............................................................................................10 ARTICLE I. SPECIFIC SUBJECTION OF PROPERTY TO THE LIEN OF THE ORIGINAL INDENTURE. Section 1.01- Grant of certain property, including all personal property to comply with Uniform Commercial Code of the State of Kentucky, subject to permissible encumbrances and other exceptions contained in Original Indenture ............................................................11 ARTICLE II. PROVISIONS OF BONDS OF POLLUTION CONTROL SERIES Y. Section 2.01- Terms of Bonds of Pollution Control Series Y ...............................................12 Section 2.02- Payment of principal and interest-Bonds of Pollution Control Series Y ......................12 Section 2.03- Bonds of Pollution Control Series Y deemed fully paid upon payment of corresponding Pollution Control Revenue Bonds ..............................................13 Section 2.04- Interchangeability of bonds ................................................................14 Section 2.05- Charges upon exchange or transfer of bonds .................................................14 ARTICLE III. MISCELLANEOUS. Section 3.01- Recitals of fact, except as stated, are statements of the Company ..........................14 Section 3.02- Supplemental Indenture to be construed as a part of the Original Indenture..................15 Section 3.03- (a) Trust Indenture Act to control .........................................................15 (b) Severability of provisions contained in Supplemental Indenture and bonds................15 Section 3.04- Word "Indenture" as used herein includes in its meaning the Original Indenture and all indentures supplemental thereto ....................................................15 Section 3.05- References to either party in Supplemental Indenture include successors or assigns..........15 Section 3.06- (a) Provision for execution in counterparts ................................................15 (b) Table of contents and descriptive headings of Articles not to affect meaning .............................................................................15 Schedule A ...........................................................................................A-1
i SUPPLEMENTAL INDENTURE, made as of the 1st day of May, 2000, by and between LOUISVILLE GAS AND ELECTRIC COMPANY, a corporation duly organized and existing under and by virtue of the laws of the Commonwealth of Kentucky, having its principal office in the City of Louisville, County of Jefferson, in said Commonwealth of Kentucky (the "Company"), the party of the first part, and HARRIS TRUST AND SAVINGS BANK, a corporation duly organized and existing under and by virtue of the laws of the State of Illinois, having its principal office at 2 North LaSalle Street, 10th Floor, City of Chicago, County of Cook, State of Illinois 60602, as Trustee (the "Trustee"), party of the second part; WITNESSETH: WHEREAS, the Company has heretofore executed and delivered its Trust Indenture (the "Original Indenture"), made as of November 1, 1949, whereby the Company granted, bargained, sold, warranted, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed unto the Trustee under said Indenture and to its respective successors in trust, all property, real, personal and mixed then owned or thereafter acquired or to be acquired by the Company (except as therein excepted from the lien thereof) and subject to the rights reserved by the Company in and by the provisions of the Original Indenture, to be held by said Trustee in trust in accordance with the provisions of the Original Indenture for the equal pro rata benefit and security of all and each of the bonds issued and to be issued thereunder in accordance with the provisions thereof, and WHEREAS, Section 2.01 of the Original Indenture provides that bonds may be issued thereunder in one or more series, each series to have such distinctive designation as the Board of Directors of the Company may select for such series; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture, bonds of a series designated "First Mortgage Bonds, Series due November 1, 1979," bearing interest at the rate of 2 3/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1952, bonds of a series designated "First Mortgage Bonds, Series due February 1, 1982," bearing interest at the rate of 3 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1954, bonds of a series designated "First Mortgage Bonds, Series due February 1, 1984," bearing interest at the rate of 3 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1957, bonds of a series designated "First Mortgage Bonds, Series due September 1, 1987," bearing interest at the rate of 4 7/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the 1 Original Indenture as supplemented by the Supplemental Indenture dated October 1, 1960, bonds of a series designated "First Mortgage Bonds, Series due October 1, 1990," bearing interest at the rate of 4 7/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1966, bonds of a series designated "First Mortgage Bonds, Series due June 1, 1996," bearing interest at the rate of 5 5/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1968, bonds of a series designated "First Mortgage Bonds, Series due June 1, 1998," bearing interest at the rate of 6 3/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1970, bonds of a series designated "First Mortgage Bonds, Series due July 1, 2000," bearing interest at the rate of 9 1/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 1, 1971, bonds of a series designated "First Mortgage Bonds, Series due August 1, 2001," bearing interest at the rate of 8 1/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1972, bonds of a series designated "First Mortgage Bonds, Series due July 1, 2002," bearing interest at the rate of 7 1/2% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1975, bonds of a series designated "First Mortgage Bonds, Series due March 1, 2005," bearing interest at the rate of 8 7/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1975, bonds of a series designated "First Mortgage Bonds, Pollution Control Series A," bearing interest as provided therein and maturing September 1, 2000; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1976, bonds of a series designated "First Mortgage Bonds, Pollution Control Series B," bearing interest as provided therein and maturing September 1, 2006; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated October 1, 1976, bonds of a series designated "First Mortgage Bonds, Series due November 1, 2006," bearing interest at the rate of 8 1/2% per annum; and 2 WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1978, bonds of a series designated "First Mortgage Bonds, Pollution Control Series C," bearing interest as provided therein and maturing June 1,1998/2008;and WHEREAS, the Company has heretofore executed and delivered to the Trustee a Supplemental Indenture dated February 15, 1979, setting forth duly adopted modifications and alterations to the Original Indenture and all Supplemental Indentures thereto; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1979, bonds of a series designated "First Mortgage Bonds, Series due October 1, 2009," bearing interest at the rate of 10 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1979, bonds of a series designated "First Mortgage Bonds, Pollution Control Series D," bearing interest as provided therein and maturing October 1, 2004/2009; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1981, bonds of a series designated "First Mortgage Bonds, Pollution Control Series E," bearing interest as provided therein and maturing September 15, 1984; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated March 1, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series F," bearing interest as provided therein and maturing March 1, 2012; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated March 15, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series G," bearing interest as provided therein and maturing March 1, 2012; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series H," bearing interest as provided therein and maturing September 15, 1992; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 15, 1984, bonds of a series designated "First Mortgage Bonds, Pollution Control Series I," bearing interest as provided therein and maturing February 15, 2011; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated July 1, 1985, bonds of a series designated "First Mortgage Bonds, Pollution Control Series J," bearing interest as provided therein and maturing July 1,1995/2015; and 3 WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 15, 1986, bonds of a series designated "First Mortgage Bonds, Pollution Control Series K," bearing interest as provided therein and maturing December 1, 2016; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 16, 1986, bonds of a series designated "First Mortgage Bonds, Pollution Control Series L," bearing interest as provided therein and maturing December 1, 2016; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 1, 1987, bonds of a series designated "First Mortgage Bonds, Pollution Control Series M," bearing interest as provided therein and maturing August 1, 1997; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1989, bonds of a series designated "First Mortgage Bonds, Pollution Control Series N," bearing interest as provided therein and maturing February 1, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 2 1989, bonds of a series designated "First Mortgage Bonds, Pollution Control Series 0," bearing interest as provided therein and maturing February 1, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 15, 1990, bonds of a series designated "First Mortgage Bonds, Pollution Control Series P," bearing interest as provided therein and maturing June 15, 2015; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 1, 1990, bonds of a series designated "First Mortgage Bonds, Pollution Control Series Q," and bonds of a series designated "First Mortgage Bonds, Pollution Control Series R," each series bearing interest as provided therein and maturing November 1, 2020; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1992, bonds of a series designated "First Mortgage Bonds, Pollution Control Series S," bearing interest as provided therein and maturing September 1, 2017; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 2, 1992, bonds of a series designated "First Mortgage Bonds, Pollution Control Series T," bearing interest as provided therein and maturing September 1, 2017; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 15, 1993, 4 bonds of a series designated "First Mortgage Bonds, Series due August 15, 2003," bearing interest at the rate of 6% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 16, 1993, bonds of a series designated "First Mortgage Bonds, Pollution Control Series U," bearing interest as provided therein and maturing August 15, 2013 and bonds of a series designated "First Mortgage Bonds, Pollution Control Series V," bearing interest as provided therein and maturing August 15, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated October 15, 1993, bonds of a series designated "First Mortgage Bonds, Pollution Control Series W," bearing interest as provided therein and maturing October 15, 2020, and bonds of a series designated "First Mortgage Bonds, Pollution Control Series X," bearing interest as provided therein and maturing April 15, 2023; and WHEREAS, the County of Jefferson in the Commonwealth of Kentucky (the "County") has agreed to issue $25,000,000 principal amount of its Pollution Control Revenue Bonds, 2000 Series A (Louisville Gas and Electric Company Project) (the "Pollution Control Revenue Bonds") pursuant to the provisions of the Indenture of Trust, dated as of May 1, 2000 (the "Pollution Control Indenture"), between and among the County and The Bank of New York, as Trustee, Paying Agent and Bond Registrar (said Trustee or any successor trustee under the Pollution Control Indenture being hereinafter referred to as the "Pollution Control Trustee"); and WHEREAS, the proceeds of the Pollution Control Revenue Bonds (other than any accrued interest, if any, thereon) will be loaned by the County to the Company pursuant to the provisions of a Loan Agreement, dated as of May 1, 2000, between the County and the Company (the "Agreement"), to provide a portion of the funds required to pay and discharge $25,000,000 in outstanding principal amount of "County of Jefferson, Kentucky, Pollution Control Revenue Bonds, 1990 Series A (Louisville Gas and Electric Company Project)," dated June 15, 1990 (the "Refunded Bonds"), which Refunded Bonds were used to refund $25,000,000 principal amount of "County of Jefferson, Kentucky, Pollution Control Revenue Bonds, 1985 Series A," dated July 1, 1985 (the "Original Bonds"), which Original Bonds were used to finance the acquisition, construction, installation and equipping of certain facilities for the control, containment, reduction and abatement of air and water pollution and for the disposal of solid waste at the Mill Creek and Cane Run Generating Stations of the Company, which facilities are hereinafter sometimes referred to as the "Project," which Project is located in the County and which Project is more fully described in Exhibit A to the Agreement; and WHEREAS, payments by the Company under and pursuant to the Agreement have been assigned by the County to the Pollution Control Trustee in order to secure the payment of the Pollution Control Revenue Bonds; and WHEREAS, in order to further secure the payment of the Pollution Control Revenue Bonds, the Company desires to provide for the issuance under the Original Indenture to the Pollution Control Trustee of a new series of bonds designated "First Mortgage Bonds, Pollution 5 Control Series Y" (sometimes called "Bonds of Pollution Control Series Y"), in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds, and with corresponding terms and maturity, the Bonds of Pollution Control Series Y to be issued as registered bonds without coupons in denominations of a multiple of $1,000; and the Bonds of Pollution Control Series Y are to be substantially in the form and tenor following, to-wit: (Form of Bonds of Pollution Control Series Y) This Bond has not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in contravention of said Act and is not transferable except to a successor Trustee under the Indenture of Trust dated as of May 1, 2000, from the County of Jefferson, Kentucky, to The Bank of New York, New York, New York, as Trustee, Paying Agent and Bond Registrar. LOUISVILLE GAS AND ELECTRIC COMPANY (Incorporated under the laws of the Commonwealth of Kentucky) First Mortgage Bond Pollution Control Series Y No ............... $......................... Louisville Gas and Electric Company, a corporation organized and existing under and by virtue of the laws of the Commonwealth of Kentucky (herein called the "Company"), for value received, hereby promises to pay to The Bank of New York, New York, New York, as Trustee under the Indenture of Trust (the "Pollution Control Indenture") dated as of May 1, 2000, from the County of Jefferson, Kentucky, to The Bank of New York, or any successor trustee under the Pollution Control Indenture (the "Pollution Control Trustee") and at the office of Harris Trust and Savings Bank, Chicago, Illinois (the "Trustee") the sum of ........................... Dollars in lawful money of the United States of America on the Demand Redemption Date, as hereinafter defined, and to pay on the Demand Redemption Date to the Pollution Control Trustee, interest hereon from the Initial Interest Accrual Date, as hereinafter defined, to the Demand Redemption Date at the same rate or rates per annum then and thereafter from time to time borne by the Pollution Control Revenue Bonds, in like money, said interest being payable at the office of the Trustee in Chicago, Illinois, subject to the provisions hereinafter set forth in the event of a rescission of a Redemption Demand, as hereinafter defined. This bond is one of a duly authorized issue of bonds of the Company, known as its First Mortgage Bonds, unlimited in aggregate principal amount, which issue of bonds consists, or may consist of several series of varying denominations, dates and tenors, all issued and to be issued under and equally secured (except in so far as a sinking fund, or similar fund, established in accordance with the provisions of the Indenture may afford additional security for the bonds- of any specific series) by a Trust Indenture dated November 1, 1949 (the "Original Indenture"), and Supplemental Indentures thereto dated February 1, 1952, February 1, 1954, September 1, 1957, October 1, 1960, June 1, 1966, June 1, 1968, June 1, 1970, August 1, 1971, June 1, 1972, February 1, 1975, September 1, 1975, September 1, 1976, October 1, 1976, June 1, 1978, February 15, 1979, September 1, 1979, September 15, 1979, September 15, 1981, March 1, 6 1982, March 15, 1982, September 15, 1982, February 15, 1984, July 1, 1985, November 15, 1986, November 16, 1986, August 1, 1987, February 1, 1989, February 2, 1989, June 15, 1990, November 1, 1990, September 1, 1992, September 2, 1992, August 15, 1993, August 16, 1993, October 15, 1993 and May 1, 2000 (all of which instruments are herein collectively called the "Indenture"), executed by the Company to the Trustee, to which Indenture reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds as to such security, and the terms and conditions upon which the bonds may be issued under the Indenture and are secured. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Indenture, upon the happening of a completed default as in the Indenture provided. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the bonds outstanding. This bond is one of a series of bonds of the Company issued under the Indenture and designated as First Mortgage Bonds, Pollution Control Series Y. The bonds of this Series have been issued to the Pollution Control Trustee under the Pollution Control Indenture to secure payment of the Pollution Control Revenue Bonds, 2000 Series A (Louisville Gas and Electric Company Project) (the "Pollution Control Revenue Bonds") issued by the County of Jefferson, Kentucky (the "County") under the Pollution Control Indenture, the proceeds of which have been or are to be loaned to the Company pursuant to the provisions of the Loan Agreement dated as of May 1, 2000 (the "Agreement") between the Company and the County. The maturity of the obligation represented by the bonds of this Series is May 1, 2027. The date of maturity of the obligation represented by the bonds of this Series is hereinafter referred to as the Final Maturity Date. The bonds of this Series shall bear interest from the Initial Interest Accrual Date, as hereinafter defined, at the same rate or rates per annum then and thereafter from time to time borne by the Pollution Control Revenue Bonds. With the consent of the Company and to the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and/or of the holders of the bonds, and/or the terms and provisions of the Indenture and/or of any instruments supplemental thereto may be modified or altered by affirmative vote of the holders of at least seventy percent in principal amount of the bonds then outstanding under the Indenture and any instruments supplemental thereto (excluding bonds disqualified from voting by reason of the interest of the Company or of certain related persons therein as provided in the Indenture), and by the affirmative vote of at least seventy percent in principal amount of the bonds of any series entitled to vote then outstanding under the Indenture and any instruments supplemental thereto (excluding bonds disqualified from voting as aforesaid) and affected by such modification or alteration, in case one or more but less than all of the series of bonds then outstanding are so affected; provided that no such modification or alteration shall permit the extension of the maturity of the principal of this bond or the reduction in the rate of interest, if any, hereon or any other modification in the terms of payment of such principal or interest, if any, or the taking of certain other action as more fully set forth in the Indenture, without the consent of the holder hereof. Except as provided in the next succeeding paragraph, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the Pollution Control Indenture and the Pollution Control 7 Revenue Bonds) on the Pollution Control Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the bonds of this Series shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the Pollution Control Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the Pollution Control Indenture, specifying the last date to which interest on the Pollution Control Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the bonds of this Series. The Trustee shall, within 10 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the Trustee. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the bonds of this Series so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as and for the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the Pollution Control Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on the Final Maturity Date, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the Pollution Control Trustee, the Trustee or the Company. The bonds of this Series shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the Pollution Control Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate per annum set forth in the third paragraph of this Bond, from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the Pollution Control Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the bonds of this Series shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the bonds of this Series; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the bonds of this Series shall bear interest at the rate per annum set forth in the third paragraph of this bond, from the Initial Interest Accrual Date, as specified in a written notice to the Trustee from the Pollution Control Trustee, and the principal of and interest on the bonds of this Series from the Initial Interest Accrual Date shall be payable in accordance with the provisions of the Indenture. 8 Upon payment of the principal of and premium, if any, and interest on the Pollution Control Revenue Bonds, whether at maturity or prior to maturity by redemption or otherwise, and the surrender thereof to and cancellation thereof by the Pollution Control Trustee (other than any Pollution Control Revenue Bond that was cancelled by the Pollution Control Trustee and for which one or more other Pollution Control Revenue Bonds were delivered and authenticated pursuant to the Pollution Control Indenture in lieu of or in exchange or substitution for such cancelled Pollution Control Revenue Bond), or upon provision for the payment thereof having been made in accordance with the Pollution Control Indenture, bonds of this Series in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds so surrendered and cancelled or for the provision for which payment has been made shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee and shall be cancelled by the Trustee. From and after the Release Date (as defined below), the bonds of this Series shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the Pollution Control Indenture), at the request of the Company, consents to the release of the bonds of this Series as security for the Pollution Control Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of this Series) have been retired through payment, redemption or otherwise (including those bonds "deemed to be redeemed" within the meaning of that term as used in Article X of the Original Indenture) at, before or after the maturity thereof. On the Release Date, the bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee whereupon the bonds of said Series so surrendered shall be cancelled by the Trustee. No recourse shall be had for the payment of principal of, or interest, if any, on this bond, or any part thereof, or of any claim based hereon or in respect hereof or of the Indenture, against any incorporator, or any past, present or future stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company, or through any such predecessor or successor corporation, or through any receiver or trustee in bankruptcy, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released, as more fully provided in the Indenture. This bond shall not be valid or become obligatory for any purpose unless and until the certificate of authentication hereon shall have been signed by or on behalf of Harris Trust and Savings Bank, as Trustee under the Indenture, or its successor thereunder. 9 IN WITNESS WHEREOF, LOUISVILLE GAS AND ELECTRIC COMPANY has caused this instrument to be signed in its name by its President or a Vice President or with the facsimile signature of its President, and its corporate seal, or a facsimile thereof, to be hereto affixed and attested by its Secretary or Assistant Secretary or with the facsimile signature of its Secretary. Dated LOUISVILLE GAS AND ELECTRIC COMPANY Attest: By ___________________________________ Vice President ------------------------- Assistant Secretary and WHEREAS, the Company is desirous of specifically assigning, conveying, mortgaging, pledging, transferring and setting over additional property unto the Trustee and to its respective successors in trust; and WHEREAS, Sections 4.01 and 21.03 of the Original Indenture provide in substance that the Company and the Trustee may enter into indentures supplemental thereto for the purposes, among others, of creating and setting forth the particulars of any new series of bonds and of providing the terms and conditions of the issue of the bonds of any series not expressly provided for in the Original Indenture and of assigning, conveying, mortgaging, pledging and transferring unto the Trustee additional property of the Company, and for any other purpose not inconsistent with the terms of the Original Indenture; and WHEREAS, the execution and delivery of this Supplemental Indenture have been duly authorized by a resolution adopted by the Board of Directors of the Company; NOW, THEREFORE, THIS INDENTURE WITNESSETH: Louisville Gas and Electric Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and other good and valuable considerations, does hereby covenant and agree to and with Harris Trust and Savings Bank, as Trustee, and its successors in the trust under the Indenture for the benefit of those who hold or shall hold the bonds issued or to be issued thereunder, as follows: 10 ARTICLE I SPECIFIC SUBJECTION OF PROPERTY TO THE LIEN OF THE ORIGINAL INDENTURE Section 1.01. The Company in order better to secure the payment, both of principal and interest, of all bonds of the Company at any time outstanding under the Indenture, according to their tenor and effect, and the performance of and compliance with the covenants and conditions in the Indenture contained, has granted, bargained, sold, warranted, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed and by these presents does grant, bargain, sell, warrant, release, convey, assign, transfer, mortgage, pledge, set over and confirm unto Harris Trust and Savings Bank, as Trustee and to its respective successors in said trust forever, subject to the rights reserved by the Company in and by the provisions of the Indenture, all the property described and mentioned or enumerated in a schedule hereto annexed and marked Schedule A, reference to said schedule being hereby made with the same force and effect as if the same were incorporated herein at length; together with all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof with the reversion and reversions, remainder and remainders, tolls, rents and revenues, issues, income, product and profits thereof; Also, in order to subject all of the personal property and chattels of the Company to the lien of the Indenture in conformity with the provisions of the Uniform Commercial Code of the Commonwealth of Kentucky, all steam, hydro and other electric generating plants, including buildings and other structures, turbines, generators, boilers, condensing equipment, and all other equipment; substations; electric transmission and distribution systems, including structures, poles, towers, fixtures, conduits, insulators, wires, cables, transformers, services and meters; steam and heating mains and equipment; gas generating and coke plants, including buildings, holders and other structures, boilers and other boiler plant equipment, benches, retorts, coke ovens, water gas sets, condensing and purification equipment, piping and other accessory works equipment; facilities for gas storage whether above or below surface; gas transmission and distribution systems, including structures, mains, compressor stations, purifier stations, pressure holders, governors, services and meters; office, shop, garage and other general buildings and structures, furniture and fixtures; and all municipal and other franchises and all leaseholds, licenses, permits, easements, and privileges; all as now owned or hereafter acquired by the Company pursuant to the provisions of the Original Indenture; and All the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof; Excluding, however, (1) all shares of stock, bonds, notes, evidences of indebtedness and other securities other than such as may be or are required to be deposited from time to time with the Trustee in accordance with the provisions of the Indenture; (2) cash on hand and in banks other than such as may be or is required to be deposited from time to time with the Trustee in accordance with the provisions of the Indenture; (3) contracts, claims, bills and accounts receivable and chooses in action other than such as may be or are required to be from time to time assigned to the Trustee in accordance with the provisions of the Indenture; (4) motor vehicles, (5) any stock of goods, wares and merchandise, equipment, materials and supplies 11 acquired for the purpose of sale or lease in the usual course of business or for the purpose of consumption in the operation, construction or repair of any of the properties of the Company; and (6) the properties described in Schedule B annexed to the Original Indenture. To have and to hold all said property, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever, subject, however, to permissible encumbrances as defined in Section 1.09 of the Original Indenture and to the further reservations, covenants, conditions, uses and trusts set forth in the Indenture, in trust nevertheless for the same purposes and upon the same conditions as are set forth in the Indenture. ARTICLE II PROVISIONS OF BONDS OF POLLUTION CONTROL SERIES Y Section 2.01. There is hereby created, for issuance under the Original Indenture, a series of bonds designated Pollution Control Series Y, each of which shall bear the descriptive title "First Mortgage Bonds, Pollution Control Series Y" and the form thereof shall contain suitable provisions with respect to the matters specified in this section. The Bonds of Pollution Control Series Y shall be printed, lithographed or typewritten and shall be substantially of the tenor and purport previously recited. The Bonds of Pollution Control Series Y shall be issued as registered bonds without coupons in denominations of a multiple of $1,000 and shall be registered in the name of the Pollution Control Trustee. The Bonds of Pollution Control Series Y shall be dated as of the date of their authentication. The Bonds of Pollution Control Series Y shall be payable, both as to principal and interest, at the office of the Trustee in Chicago, Illinois, in lawful money of the United States of America. The maturity of the obligation represented by the Bonds of Pollution Control Series Y is May 1, 2027. The date of maturity of the obligation represented by the Bonds of Pollution Control Series Y is hereinafter referred to as the Final Maturity Date. The Bonds of Pollution Control Series Y shall bear interest from the Initial Interest Accrual Date, as hereinafter defined, at the same rate or rates then and thereafter from time to time borne by the Pollution Control Revenue Bonds. Section 2.02. Except as provided in the next succeeding paragraph of this Section 2.02, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the Pollution Control Indenture and the Pollution Control Revenue Bonds) on the Pollution Control Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the Bonds of Pollution Control Series Y shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the Pollution Control Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the Pollution Control Indenture, specifying the last date to which interest on the Pollution Control Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the Bonds of Pollution Control Series Y. The Trustee shall, within 10 12 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the Trustee. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the Bonds of Pollution Control Series Y so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the Pollution Control Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on the Final Maturity Date, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the Pollution Control Trustee, the Trustee or the Company. The Bonds of Pollution Control Series Y shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the Pollution Control Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate per annum set forth in Section 2.01 hereof, from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the Pollution Control Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the Bonds of Pollution Control Series Y shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the Bonds of Pollution Control Series Y; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the Bonds of Pollution Control Series Y shall bear interest at the rate per annum set forth in Section 2.01 hereof, from the Interest Accrual Date, as specified in a written notice to the Trustee from the Pollution Control Trustee, and the principal of and interest on the Bonds of Pollution Control Series Y from the Initial Interest Accrual Date shall be payable in accordance with the provisions of the Indenture. Anything herein contained to the contrary notwithstanding, the Trustee is not authorized to take any action pursuant to a Redemption Demand or a rescission thereof or a written notice required by this Section 2.02, and such Redemption Demand, rescission or notice shall be of no force or effect, unless it is executed in the name of the Pollution Control Trustee by one of its Vice Presidents. Section 2.03. Upon payment of the principal of and premium, if any, and interest on the Pollution Control Revenue Bonds, whether at maturity or prior to maturity by redemption or 13 otherwise, and the surrender thereof to and cancellation thereof by the Pollution Control Trustee (other than any Pollution Control Revenue Bond that was cancelled by the Pollution Control Trustee and for which one or more other Pollution Control Revenue Bonds were delivered and authenticated pursuant to the Pollution Control Indenture in lieu of or in exchange or substitution for such cancelled Pollution Control Revenue Bond), or upon provision for the payment thereof having been made in accordance with the Pollution Control Indenture, Bonds of Pollution Control Series Y in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds so surrendered and cancelled or for the provision for which payment has been made shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such Bonds of Pollution Control Series Y shall be surrendered by the Pollution Control Trustee to the Trustee and shall be cancelled and destroyed by the Trustee, and a certificate of such cancellation and destruction shall be delivered to the Company. From and after the Release Date (as defined below), the bonds of this Series shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the Pollution Control Indenture), at the request of the Company, consents to the release of the bonds of this Series as security for the Pollution Control Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of this Series) have been retired through payment, redemption or otherwise (including those bonds "deemed to be redeemed" within the meaning of that term as used in Article X of the Original Indenture) at, before or after the maturity thereof. On the Release Date, the bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee whereupon the Bonds of said Series so surrendered shall be cancelled by the Trustee. Section 2.04. Prior to the Release Date, the Pollution Control Trustee as the registered holder of the Bonds of Pollution Control Y at its option may surrender the same at the office of the Trustee, in Chicago, Illinois, or elsewhere, if authorized by the Company, for cancellation, in exchange for other bonds of the same series of the same aggregate principal amount. Thereupon, and upon receipt of any payment required under the provisions of Section 2.05 hereof, the Company shall execute and deliver to the Trustee and the Trustee shall authenticate and deliver such other registered bonds to such registered holder at its office or at any other place specified as aforesaid. Section 2.05. No charge shall be made by the Company for any exchange or transfer of Bonds of Pollution Control Series Y other than for taxes or other governmental charges, if any, that may be imposed in relation thereto. ARTICLE III MISCELLANEOUS Section 3.01. The recitals of fact herein and in the bonds (except the Trustee's Certificate) shall be taken as statements of the Company and shall not be construed as made or warranted by the Trustee. The Trustee makes no representations as to the value of any of the property subject to the lien of the Indenture, or any part thereof, or as to the title of the Company 14 thereto, or as to the security afforded thereby and hereby, or as to the validity of this Supplemental Indenture and the Trustee shall incur no responsibility in respect of such matters. Section 3.02. This Supplemental Indenture shall be construed in connection with and as a part of the Original Indenture. Section 3.03. (a) If any provision of this Supplemental Indenture limits, qualifies or conflicts with another provision of the Original Indenture or this Supplemental Indenture required to be included in indentures qualified under the Trust Indenture Act of 1939, as amended (as enacted prior to the date of this Supplemental Indenture) by any of the provisions of Sections 310 to 317, inclusive, of the said Act, such required provision shall control. (b) In case any one or more of the provisions contained in this Supplemental Indenture or in the bonds issued hereunder shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected, impaired, prejudiced or disturbed thereby. Section 3.04. Wherever in this Supplemental Indenture the word "Indenture" is used without either prefix, "Original" or "Supplemental," such word was used intentionally to include in its meaning both the Original Indenture and all indentures supplemental thereto. Section 3.05. Wherever in this Supplemental Indenture either of the parties hereto is named or referred to, this shall be deemed to include the successors or assigns of such party, and all the covenants and agreements in this Supplemental Indenture contained by or on behalf of the Company or by or on behalf of the Trustee shall bind and inure to the benefit of the respective successors and assigns of such parties, whether so expressed or not. Section 3.06. (a) This Supplemental Indenture may be simultaneously executed in several counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. (b) The Table of Contents and the descriptive headings of the several Articles of this Supplemental Indenture were formulated, used and inserted in this Supplemental Indenture for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 15 IN WITNESS WHEREOF, the party of the first part has caused its corporate name and seal to be hereunto affixed and this Supplemental Indenture to be signed by its Treasurer, and attested by its Executive Vice President, General Counsel and Corporate Secretary for and in its behalf, and the party of the second part to evidence its acceptance of the trust hereby created, has caused its corporate name and seal to be hereunto affixed, and this Supplemental Indenture to be signed by one of its Vice Presidents, and attested by its Secretary or an Assistant Secretary, for and in its behalf, all done as of the 1st day of May, 2000. LOUISVILLE GAS AND ELECTRIC COMPANY By C. A. MARKEL TREASURER (CORPORATE SEAL) ATTEST: JOHN R. MCCALL EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY HARRIS TRUST AND SAVINGS BANK By J. BARTOLINI VICE PRESIDENT (CORPORATE SEAL) ATTEST: C. POTTER ASSISTANT SECRETARY 16 COMMONWEALTH OF KENTUCKY } SS: COUNTY OF JEFFERSON BE IT REMEMBERED that on this 15th day of May, 2000, before me, a Notary Public duly commissioned in and for the County and Commonwealth aforesaid, personally appeared C. A. MARKEL and JOHN R. MCCALL, respectively, Treasurer and Executive Vice President, General Counsel and Corporate Secretary of Louisville Gas and Electric Company, a corporation organized and existing under and by virtue of the laws of the Commonwealth of Kentucky, who are personally known to me to be such officers, respectively, and who are personally known to me to be the same persons who executed as officers the foregoing instrument of writing, and such persons duly acknowledged before me the execution of the foregoing instrument of writing to be their act and deed and the act and deed of said corporation. WITNESS my hand and notarial seal this 15th day of May, 2000. NOTARY PUBLIC KENTUCKY, COMMONWEALTH AT LARGE (Notarial Seal) My Commission Expires -------------- 17 STATE OF ILLINOIS } SS: COUNTY OF COOK BE IT REMEMBERED that on this 15th day of May, 2000, before me, a Notary Public duly commissioned in and for the County and State aforesaid, personally appeared J. Bartolini and C. Potter, respectively, Vice President and Assistant Secretary of Harris Trust and Savings Bank, a corporation organized and existing under and by virtue of the laws of the State of Illinois, who are personally known to me to be such officers, respectively, and who are personally known to me to be the same persons who executed as officers the foregoing instrument of writing, and such persons duly acknowledged before me the execution of the foregoing instrument of writing to be their act and deed and the act and deed of said corporation. WITNESS my hand and notarial seal this 15th day of May, 2000. NOTARY PUBLIC IN AND FOR THE COUNTY OF COOK AND STATE OF ILLINOIS (Notarial Seal) My Commission Expires -------------- -------------- This Instrument Prepared by: John R. McCall Louisville Gas and Electric Company 220 West Main Street Louisville, Kentucky 40202 By --------------------------------------- John R. McCall, Esq. 18 SCHEDULE A The following tract of land located in the County of Oldham, Commonwealth of Kentucky, to-wit: BEGINNING at an iron rod being the northeast corner of The Torbitt & Castleman Co. property and the west right-of-way line of Kentucky Highway 146; thence, with the west right-of-way line of Kentucky Highway 146 as follows: South 03 DEG. 38' 00" West, 114.32 feet, to an iron rod; thence, South 01 DEG. 46' 07" West, 100.65 feet, to an iron rod; thence South 01 DEG. 09' 47" West 100.33 feet, to an iron rod; thence, South 00 DEG. 30' 57" West, 96.75 feet, to a concrete monument; thence, leaving the right-of-way line of Kentucky Highway 146 and following the remaining lands of The Torbitt & Castleman Co. as follows: South 68 DEG. 50' 17" West, 381.50 feet, to a concrete monument; thence, North 21 DEG. 09' 43" West, 379.20 feet, to a concrete monument; thence, North 68 DEG. 50' 17" East, 542.51 feet, to the POINT OF BEGINNING. EX-4.38 3 a2048540zex-4_38.txt COPY OF SUPPL IND 8/1/00 Exhibit 4.38 SUPPLEMENTAL INDENTURE FROM LOUISVILLE GAS AND ELECTRIC COMPANY TO HARRIS TRUST AND SAVINGS BANK TRUSTEE --------- DATED AUGUST 1, 2000 --------- SUPPLEMENTAL TO TRUST INDENTURE DATED NOVEMBER 1, 1949 TABLE OF CONTENTS ---------------------------
PAGE ---- Parties..........................................................................................1 Recitals.........................................................................................1 Form of Bonds of Pollution Control Series Z .....................................................6 Further Recitals ...............................................................................10 ARTICLE I. SPECIFIC SUBJECTION OF PROPERTY TO THE LIEN OF THE ORIGINAL INDENTURE. Section 1.01- Grant of certain property, including all personal property to comply with Uniform Commercial Code of the State of Kentucky, subject to permissible encumbrances and other exceptions contained in Original Indenture ..............................................11 ARTICLE II. PROVISIONS OF BONDS OF POLLUTION CONTROL SERIES Z. Section 2.01- Terms of Bonds of Pollution Control Series Z .................................12 Section 2.02- Payment of principal and interest-Bonds of Pollution Control Series Z ........12 Section 2.03- Bonds of Pollution Control Series Z deemed fully paid upon payment of corresponding Pollution Control Revenue Bonds ................................13 Section 2.04- Interchangeability of bonds ..................................................14 Section 2.05- Charges upon exchange or transfer of bonds ...................................14 ARTICLE III. MISCELLANEOUS. Section 3.01- Recitals of fact, except as stated, are statements of the Company ............14 Section 3.02- Supplemental Indenture to be construed as a part of the Original Indenture....15 Section 3.03- (a) Trust Indenture Act to control ...........................................15 (b) Severability of provisions contained in Supplemental Indenture and bonds..15 Section 3.04- Word "Indenture" as used herein includes in its meaning the Original Indenture and all indentures supplemental thereto ............................15 Section 3.05- References to either party in Supplemental Indenture include successors or assigns....................................................................15 Section 3.06- (a) Provision for execution in counterparts ..................................15 (b) Table of contents and descriptive headings of Articles not to affect meaning ...............................................................15 Schedule A .............................................................................A-1
i SUPPLEMENTAL INDENTURE, made as of the 1st day of August, 2000, by and between LOUISVILLE GAS AND ELECTRIC COMPANY, a corporation duly organized and existing under and by virtue of the laws of the Commonwealth of Kentucky, having its principal office in the City of Louisville, County of Jefferson, in said Commonwealth of Kentucky (the "Company"), the party of the first part, and HARRIS TRUST AND SAVINGS BANK, a corporation duly organized and existing under and by virtue of the laws of the State of Illinois, having its principal office at Two North LaSalle Street, City of Chicago, County of Cook, State of Illinois 60602, as Trustee (the "Trustee"), party of the second part; WITNESSETH: WHEREAS, the Company has heretofore executed and delivered its Trust Indenture (the "Original Indenture"), made as of November 1, 1949, whereby the Company granted, bargained, sold, warranted, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed unto the Trustee under said Indenture and to its respective successors in trust, all property, real, personal and mixed then owned or thereafter acquired or to be acquired by the Company (except as therein excepted from the lien thereof) and subject to the rights reserved by the Company in and by the provisions of the Original Indenture, to be held by said Trustee in trust in accordance with the provisions of the Original Indenture for the equal pro rata benefit and security of all and each of the bonds issued and to be issued thereunder in accordance with the provisions thereof, and WHEREAS, Section 2.01 of the Original Indenture provides that bonds may be issued thereunder in one or more series, each series to have such distinctive designation as the Board of Directors of the Company may select for such series; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture, bonds of a series designated "First Mortgage Bonds, Series due November 1, 1979," bearing interest at the rate of 2 3/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1952, bonds of a series designated "First Mortgage Bonds, Series due February 1, 1982," bearing interest at the rate of 3 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1954, bonds of a series designated "First Mortgage Bonds, Series due February 1, 1984," bearing interest at the rate of 3 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1957, bonds of a series designated "First Mortgage Bonds, Series due September 1, 1987," bearing interest at the rate of 4 7/8% per annum; and 1 WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated October 1, 1960, bonds of a series designated "First Mortgage Bonds, Series due October 1, 1990," bearing interest at the rate of 4 7/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1966, bonds of a series designated "First Mortgage Bonds, Series due June 1, 1996," bearing interest at the rate of 5 5/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1968, bonds of a series designated "First Mortgage Bonds, Series due June 1, 1998," bearing interest at the rate of 6 3/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1970, bonds of a series designated "First Mortgage Bonds, Series due July 1, 2000," bearing interest at the rate of 9 1/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 1, 1971, bonds of a series designated "First Mortgage Bonds, Series due August 1, 2001," bearing interest at the rate of 8 1/4% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1972, bonds of a series designated "First Mortgage Bonds, Series due July 1, 2002," bearing interest at the rate of 7 1/2% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1975, bonds of a series designated "First Mortgage Bonds, Series due March 1, 2005," bearing interest at the rate of 8 7/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1975, bonds of a series designated "First Mortgage Bonds, Pollution Control Series A," bearing interest as provided therein and maturing September 1, 2000; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1976, bonds of a series designated "First Mortgage Bonds, Pollution Control Series B," bearing interest as provided therein and maturing September 1, 2006; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated October 1, 1976, bonds 2 of a series designated "First Mortgage Bonds, Series due November 1, 2006," bearing interest at the rate of 8 1/2% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 1, 1978, bonds of a series designated "First Mortgage Bonds, Pollution Control Series C," bearing interest as provided therein and maturing June 1,1998/2008;and WHEREAS, the Company has heretofore executed and delivered to the Trustee a Supplemental Indenture dated February 15, 1979, setting forth duly adopted modifications and alterations to the Original Indenture and all Supplemental Indentures thereto; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1979, bonds of a series designated "First Mortgage Bonds, Series due October 1, 2009," bearing interest at the rate of 10 1/8% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1979, bonds of a series designated "First Mortgage Bonds, Pollution Control Series D," bearing interest as provided therein and maturing October 1, 2004/2009; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1981, bonds of a series designated "First Mortgage Bonds, Pollution Control Series E," bearing interest as provided therein and maturing September 15, 1984; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated March 1, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series F," bearing interest as provided therein and maturing March 1, 2012; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated March 15, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series G," bearing interest as provided therein and maturing March 1, 2012; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 15, 1982, bonds of a series designated "First Mortgage Bonds, Pollution Control Series H," bearing interest as provided therein and maturing September 15, 1992; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 15, 1984, bonds of a series designated "First Mortgage Bonds, Pollution Control Series I," bearing interest as provided therein and maturing February 15, 2011; and 3 WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated July 1, 1985, bonds of a series designated "First Mortgage Bonds, Pollution Control Series J," bearing interest as provided therein and maturing July 1,1995/2015; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 15, 1986, bonds of a series designated "First Mortgage Bonds, Pollution Control Series K," bearing interest as provided therein and maturing December 1, 2016; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 16, 1986, bonds of a series designated "First Mortgage Bonds, Pollution Control Series L," bearing interest as provided therein and maturing December 1, 2016; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 1, 1987, bonds of a series designated "First Mortgage Bonds, Pollution Control Series M," bearing interest as provided therein and maturing August 1, 1997; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 1, 1989, bonds of a series designated "First Mortgage Bonds, Pollution Control Series N," bearing interest as provided therein and maturing February 1, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated February 2 1989, bonds of a series designated "First Mortgage Bonds, Pollution Control Series 0," bearing interest as provided therein and maturing February 1, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated June 15, 1990, bonds of a series designated "First Mortgage Bonds, Pollution Control Series P," bearing interest as provided therein and maturing June 15, 2015; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated November 1, 1990, bonds of a series designated "First Mortgage Bonds, Pollution Control Series Q," and bonds of a series designated "First Mortgage Bonds, Pollution Control Series R," each series bearing interest as provided therein and maturing November 1, 2020; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 1, 1992, bonds of a series designated "First Mortgage Bonds, Pollution Control Series S," bearing interest as provided therein and maturing September 1, 2017; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated September 2, 1992, 4 bonds of a series designated "First Mortgage Bonds, Pollution Control Series T," bearing interest as provided therein and maturing September 1, 2017; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 15, 1993, bonds of a series designated "First Mortgage Bonds, Series due August 15, 2003," bearing interest at the rate of 6% per annum; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated August 16, 1993, bonds of a series designated "First Mortgage Bonds, Pollution Control Series U," bearing interest as provided therein and maturing August 15, 2013 and bonds of a series designated "First Mortgage Bonds, Pollution Control Series V," bearing interest as provided therein and maturing August 15, 2019; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated October 15, 1993, bonds of a series designated "First Mortgage Bonds, Pollution Control Series W," bearing interest as provided therein and maturing October 15, 2020, and bonds of a series designated "First Mortgage Bonds, Pollution Control Series X," bearing interest as provided therein and maturing April 15, 2023; and WHEREAS, the Company has heretofore issued in accordance with the provisions of the Original Indenture as supplemented by the Supplemental Indenture dated May 1, 2000, bonds of a series designated "First Mortgage Bonds, Pollution Control Series Y," bearing interest as provided therein and maturing May 1, 2027; and WHEREAS, the County of Trimble in the Commonwealth of Kentucky (the "County") has agreed to issue $83,335,000 principal amount of its Pollution Control Revenue Bonds, 2000 Series A (Louisville Gas and Electric Company Project) (the "Pollution Control Revenue Bonds") pursuant to the provisions of the Indenture of Trust, dated as of August 1, 2000 (the "Pollution Control Indenture"), between and among the County and The Bank of New York, as Trustee, Paying Agent and Bond Registrar (said Trustee or any successor trustee under the Pollution Control Indenture being hereinafter referred to as the "Pollution Control Trustee"); and WHEREAS, the proceeds of the Pollution Control Revenue Bonds (other than any accrued interest, if any, thereon) will be loaned by the County to the Company pursuant to the provisions of a Loan Agreement, dated as of August 1, 2000, between the County and the Company (the "Agreement"), to provide a portion of the funds required to pay and discharge $83,335,000 in outstanding principal amount of "County of Trimble, Kentucky, Pollution Control Revenue Bonds, 1990 Series A (Louisville Gas and Electric Company Project)," dated November 1, 1990 (the "Refunded Bonds"), which Refunded Bonds were used to finance the acquisition, construction, installation and equipping of certain facilities for the control, containment, reduction and abatement of air and water pollution at the Trimble County Generating Station of the Company, which facilities are hereinafter sometimes referred to as the "Project," which Project is located in the County and which Project is more fully described in Exhibit A to the Agreement; and 5 WHEREAS, payments by the Company under and pursuant to the Agreement have been assigned by the County to the Pollution Control Trustee in order to secure the payment of the Pollution Control Revenue Bonds; and WHEREAS, in order to further secure the payment of the Pollution Control Revenue Bonds, the Company desires to provide for the issuance under the Original Indenture to the Pollution Control Trustee of a new series of bonds designated "First Mortgage Bonds, Pollution Control Series Z" (sometimes called "Bonds of Pollution Control Series Z"), in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds, and with corresponding terms and maturity, the Bonds of Pollution Control Series Z to be issued as registered bonds without coupons in denominations of a multiple of $1,000; and the Bonds of Pollution Control Series Z are to be substantially in the form and tenor following, to-wit: (Form of Bonds of Pollution Control Series Z) This Bond has not been registered under the Securities Act of 1933, as amended, and may not be offered or sold in contravention of said Act and is not transferable except to a successor Trustee under the Indenture of Trust dated as of August 1, 2000, from the County of Trimble, Kentucky, to The Bank of New York, as Trustee, Paying Agent and Bond Registrar. LOUISVILLE GAS AND ELECTRIC COMPANY (Incorporated under the laws of the Commonwealth of Kentucky) First Mortgage Bond Pollution Control Series Z No $ ------------ ------------------------- Louisville Gas and Electric Company, a corporation organized and existing under and by virtue of the laws of the Commonwealth of Kentucky (herein called the "Company"), for value received, hereby promises to pay to The Bank of New York, New York, New York, as Trustee under the Indenture of Trust (the "Pollution Control Indenture") dated as of August 1, 2000, from the County of Trimble, Kentucky, to The Bank of New York, or any successor trustee under the Pollution Control Indenture (the "Pollution Control Trustee") and at the office of Harris Trust and Savings Bank, Chicago, Illinois (the "Trustee") the sum of Dollars in lawful money of the United States of - -------------------------- America on the Demand Redemption Date, as hereinafter defined, and to pay on the Demand Redemption Date to the Pollution Control Trustee, interest hereon from the Initial Interest Accrual Date, as hereinafter defined, to the Demand Redemption Date at the same rate or rates per annum then and thereafter from time to time borne by the Pollution Control Revenue Bonds, in like money, said interest being payable at the office of the Trustee in Chicago, Illinois, subject to the provisions hereinafter set forth in the event of a rescission of a Redemption Demand, as hereinafter defined. This bond is one of a duly authorized issue of bonds of the Company, known as its First Mortgage Bonds, unlimited in aggregate principal amount, which issue of bonds consists, or may consist of several series of varying denominations, dates and tenors, all issued and to be issued under and equally secured (except in so far as a sinking fund, or similar fund, established in accordance with the provisions of the Indenture may afford additional security for the bonds- of 6 any specific series) by a Trust Indenture dated November 1, 1949 (the "Original Indenture"), and Supplemental Indentures thereto dated February 1, 1952, February 1, 1954, September 1, 1957, October 1, 1960, June 1, 1966, June 1, 1968, June 1, 1970, August 1, 1971, June 1, 1972, February 1, 1975, September 1, 1975, September 1, 1976, October 1, 1976, June 1, 1978, February 15, 1979, September 1, 1979, September 15, 1979, September 15, 1981, March 1, 1982, March 15, 1982, September 15, 1982, February 15, 1984, July 1, 1985, November 15, 1986, November 16, 1986, August 1, 1987, February 1, 1989, February 2, 1989, June 15, 1990, November 1, 1990, September 1, 1992, September 2, 1992, August 15, 1993, August 16, 1993, October 15, 1993, May 1, 2000 and August 1, 2000 (all of which instruments are herein collectively called the "Indenture"), executed by the Company to the Trustee, to which Indenture reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds as to such security, and the terms and conditions upon which the bonds may be issued under the Indenture and are secured. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Indenture, upon the happening of a completed default as in the Indenture provided. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the bonds outstanding. This bond is one of a series of bonds of the Company issued under the Indenture and designated as First Mortgage Bonds, Pollution Control Series Z. The bonds of this Series have been issued to the Pollution Control Trustee under the Pollution Control Indenture to secure payment of the Pollution Control Revenue Bonds, 2000 Series A (Louisville Gas and Electric Company Project) (the "Pollution Control Revenue Bonds") issued by the County of Trimble, Kentucky (the "County") under the Pollution Control Indenture, the proceeds of which have been or are to be loaned to the Company pursuant to the provisions of the Loan Agreement dated as of August 1, 2000 (the "Agreement") between the Company and the County. The maturity of the obligation represented by the bonds of this Series is August 1, 2030. The date of maturity of the obligation represented by the bonds of this Series is hereinafter referred to as the Final Maturity Date. The bonds of this Series shall bear interest from the Initial Interest Accrual Date, as hereinafter defined, at the same rate or rates per annum then and thereafter from time to time borne by the Pollution Control Revenue Bonds. With the consent of the Company and to the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and/or of the holders of the bonds, and/or the terms and provisions of the Indenture and/or of any instruments supplemental thereto may be modified or altered by affirmative vote of the holders of at least seventy percent in principal amount of the bonds then outstanding under the Indenture and any instruments supplemental thereto (excluding bonds disqualified from voting by reason of the interest of the Company or of certain related persons therein as provided in the Indenture), and by the affirmative vote of at least seventy percent in principal amount of the bonds of any series entitled to vote then outstanding under the Indenture and any instruments supplemental thereto (excluding bonds disqualified from voting as aforesaid) and affected by such modification or alteration, in case one or more but less than all of the series of bonds then outstanding are so affected; provided that no such modification or alteration shall permit the extension of the maturity of the principal of this bond or the reduction in the rate of interest, if any, hereon or any other modification in the terms of payment of such principal or interest, if any, or the taking of certain other action as more fully set forth in the Indenture, without the consent of the holder hereof. 7 Except as provided in the next succeeding paragraph, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the Pollution Control Indenture and the Pollution Control Revenue Bonds) on the Pollution Control Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the bonds of this Series shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the Pollution Control Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the Pollution Control Indenture, specifying the last date to which interest on the Pollution Control Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the bonds of this Series. The Trustee shall, within 10 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the TRUSTEE. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the bonds of this Series so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as and for the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the Pollution Control Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on the Final Maturity Date, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the Pollution Control Trustee, the Trustee or the Company. The bonds of this Series shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the Pollution Control Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate per annum set forth in the third paragraph of this Bond, from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the Pollution Control Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the bonds of this Series shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the bonds of this Series; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the bonds of this Series shall bear interest at the rate per annum set forth in the third paragraph of this bond, from the Initial Interest Accrual Date, as specified in a 8 written notice to the Trustee from the Pollution Control Trustee, and the principal of and interest on the bonds of this Series from the Initial Interest Accrual Date shall be payable in accordance with the provisions of the Indenture. Upon payment of the principal of and premium, if any, and interest on the Pollution Control Revenue Bonds, whether at maturity or prior to maturity by redemption or otherwise, and the surrender thereof to and cancellation thereof by the Pollution Control Trustee (other than any Pollution Control Revenue Bond that was cancelled by the Pollution Control Trustee and for which one or more other Pollution Control Revenue Bonds were delivered and authenticated pursuant to the Pollution Control Indenture in lieu of or in exchange or substitution for such cancelled Pollution Control Revenue Bond), or upon provision for the payment thereof having been made in accordance with the Pollution Control Indenture, bonds of this Series in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds so surrendered and cancelled or for the provision for which payment has been made shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee and shall be cancelled by the Trustee. From and after the Release Date (as defined below), the bonds of this Series shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the Pollution Control Indenture), at the request of the Company, consents to the release of the bonds of this Series as security for the Pollution Control Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of this Series and First Mortgage Bonds, Pollution Control Series Y) have been retired through payment, redemption or otherwise (including those bonds "deemed to be redeemed" within the meaning of that term as used in Article X of the Original Indenture) at, before or after the maturity thereof. On the Release Date, the bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee whereupon the bonds of said Series so surrendered shall be cancelled by the Trustee. No recourse shall be had for the payment of principal of, or interest, if any, on this bond, or any part thereof, or of any claim based hereon or in respect hereof or of the Indenture, against any incorporator, or any past, present or future stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company, or through any such predecessor or successor corporation, or through any receiver or trustee in bankruptcy, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released, as more fully provided in the Indenture. This bond shall not be valid or become obligatory for any purpose unless and until the certificate of authentication hereon shall have been signed by or on behalf of Harris Trust and Savings Bank, as Trustee under the Indenture, or its successor thereunder. 9 IN WITNESS WHEREOF, LOUISVILLE GAS AND ELECTRIC COMPANY has caused this instrument to be signed in its name by its President or a Vice President or with the facsimile signature of its President, and its corporate seal, or a facsimile thereof, to be hereto affixed and attested by its Secretary or Assistant Secretary or with the facsimile signature of its Secretary. Dated LOUISVILLE GAS AND ELECTRIC COMPANY Attest: By --------------------------------------- Vice President ------------------------- Assistant Secretary and WHEREAS, the Company is desirous of specifically assigning, conveying, mortgaging, pledging, transferring and setting over additional property unto the Trustee and to its respective successors in trust; and WHEREAS, Sections 4.01 and 21.03 of the Original Indenture provide in substance that the Company and the Trustee may enter into indentures supplemental thereto for the purposes, among others, of creating and setting forth the particulars of any new series of bonds and of providing the terms and conditions of the issue of the bonds of any series not expressly provided for in the Original Indenture and of assigning, conveying, mortgaging, pledging and transferring unto the Trustee additional property of the Company, and for any other purpose not inconsistent with the terms of the Original Indenture; and WHEREAS, the execution and delivery of this Supplemental Indenture have been duly authorized by a resolution adopted by the Board of Directors of the Company; NOW, THEREFORE, THIS INDENTURE WITNESSETH: Louisville Gas and Electric Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and other good and valuable considerations, does hereby covenant and agree to and with Harris Trust and Savings Bank, as Trustee, and its successors in the trust under the Indenture for the benefit of those who hold or shall hold the bonds issued or to be issued thereunder, as follows: ARTICLE I SPECIFIC SUBJECTION OF PROPERTY TO THE LIEN OF THE ORIGINAL INDENTURE Section 1.01. The Company in order better to secure the payment, both of principal and interest, of all bonds of the Company at any time outstanding under the Indenture, according to 10 their tenor and effect, and the performance of and compliance with the covenants and conditions in the Indenture contained, has granted, bargained, sold, warranted, released, conveyed, assigned, transferred, mortgaged, pledged, set over and confirmed and by these presents does grant, bargain, sell, warrant, release, convey, assign, transfer, mortgage, pledge, set over and confirm unto [Harris Trust and Savings Bank,] as Trustee and to its respective successors in said trust forever, subject to the rights reserved by the Company in and by the provisions of the Indenture, all the property described and mentioned or enumerated in a schedule hereto annexed and marked Schedule A, reference to said schedule being hereby made with the same force and effect as if the same were incorporated herein at length; together with all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof with the reversion and reversions, remainder and remainders, tolls, rents and revenues, issues, income, product and profits thereof; Also, in order to subject all of the personal property and chattels of the Company to the lien of the Indenture in conformity with the provisions of the Uniform Commercial Code of the Commonwealth of Kentucky, all steam, hydro and other electric generating plants, including buildings and other structures, turbines, generators, boilers, condensing equipment, and all other equipment; substations; electric transmission and distribution systems, including structures, poles, towers, fixtures, conduits, insulators, wires, cables, transformers, services and meters; steam and heating mains and equipment; gas generating and coke plants, including buildings, holders and other structures, boilers and other boiler plant equipment, benches, retorts, coke ovens, water gas sets, condensing and purification equipment, piping and other accessory works equipment; facilities for gas storage whether above or below surface; gas transmission and distribution systems, including structures, mains, compressor stations, purifier stations, pressure holders, governors, services and meters; office, shop, garage and other general buildings and structures, furniture and fixtures; and all municipal and other franchises and all leaseholds, licenses, permits, easements, and privileges; all as now owned or hereafter acquired by the Company pursuant to the provisions of the Original Indenture; and All the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof; Excluding, however, (1) all shares of stock, bonds, notes, evidences of indebtedness and other securities other than such as may be or are required to be deposited from time to time with the Trustee in accordance with the provisions of the Indenture; (2) cash on hand and in banks other than such as may be or is required to be deposited from time to time with the Trustee in accordance with the provisions of the Indenture; (3) contracts, claims, bills and accounts receivable and chooses in action other than such as may be or are required to be from time to time assigned to the Trustee in accordance with the provisions of the Indenture; (4) motor vehicles, (5) any stock of goods, wares and merchandise, equipment, materials and supplies acquired for the purpose of sale or lease in the usual course of business or for the purpose of consumption in the operation, construction or repair of any of the properties of the Company; and (6) the properties described in Schedule B annexed to the Original Indenture. To have and to hold all said property, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors 11 and assigns forever, subject, however, to permissible encumbrances as defined in Section 1.09 of the Original Indenture and to the further reservations, covenants, conditions, uses and trusts set forth in the Indenture, in trust nevertheless for the same purposes and upon the same conditions as are set forth in the Indenture. ARTICLE II PROVISIONS OF BONDS OF POLLUTION CONTROL SERIES Z Section 2.01. There is hereby created, for issuance under the Original Indenture, a series of bonds designated Pollution Control Series Z, each of which shall bear the descriptive title "First Mortgage Bonds, Pollution Control Series Z" and the form thereof shall contain suitable provisions with respect to the matters specified in this section. The Bonds of Pollution Control Series Z shall be printed, lithographed or typewritten and shall be substantially of the tenor and purport previously recited. The Bonds of Pollution Control Series Z shall be issued as registered bonds without coupons in denominations of a multiple of $1,000 and shall be registered in the name of the Pollution Control Trustee. The Bonds of Pollution Control Series Z shall be dated as of the date of their authentication. The Bonds of Pollution Control Series Z shall be payable, both as to principal and interest, at the office of the Trustee in Chicago, Illinois, in lawful money of the United States of America. The maturity of the obligation represented by the Bonds of Pollution Control Series Z is August 1, 2030. The date of maturity of the obligation represented by the Bonds of Pollution Control Series Z is hereinafter referred to as the Final Maturity Date. The Bonds of Pollution Control Series Z shall bear interest from the Initial Interest Accrual Date, as hereinafter defined, at the same rate or rates then and thereafter from time to time borne by the Pollution Control Revenue Bonds. Section 2.02. Except as provided in the next succeeding paragraph of this Section 2.02, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the Pollution Control Indenture and the Pollution Control Revenue Bonds) on the Pollution Control Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the Bonds of Pollution Control Series Z shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the Pollution Control Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the Pollution Control Indenture, specifying the last date to which interest on the Pollution Control Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the Bonds of Pollution Control Series Z. The Trustee shall, within 10 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the Trustee. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the Bonds of Pollution Control Series Z so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The 12 date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) the Final Maturity Date. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the Pollution Control Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on the Final Maturity Date, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the Pollution Control Trustee, the Trustee or the Company. The Bonds of Pollution Control Series Z shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the Pollution Control Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate per annum set forth in Section 2.01 hereof, from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the Pollution Control Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the Bonds of Pollution Control Series Z shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the Bonds of Pollution Control Series Z; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the Bonds of Pollution Control Series Z shall bear interest at the rate per annum set forth in Section 2.01 hereof, from the Interest Accrual Date, as specified in a written notice to the Trustee from the Pollution Control Trustee, and the principal of and interest on the Bonds of Pollution Control Series Z from the Initial Interest Accrual Date shall be payable in accordance with the provisions of the Indenture. Anything herein contained to the contrary notwithstanding, the Trustee is not authorized to take any action pursuant to a Redemption Demand or a rescission thereof or a written notice required by this Section 2.02, and such Redemption Demand, rescission or notice shall be of no force or effect, unless it is executed in the name of the Pollution Control Trustee by one of its Vice Presidents. Section 2.03. Upon payment of the principal of and premium, if any, and interest on the Pollution Control Revenue Bonds, whether at maturity or prior to maturity by redemption or otherwise, and the surrender thereof to and cancellation thereof by the Pollution Control Trustee (other than any Pollution Control Revenue Bond that was cancelled by the Pollution Control Trustee and for which one or more other Pollution Control Revenue Bonds were delivered and authenticated pursuant to the Pollution Control Indenture in lieu of or in exchange or substitution for such cancelled Pollution Control Revenue Bond), or upon provision for the payment thereof having been made in accordance with the Pollution Control Indenture, Bonds of Pollution 13 Control Series Z in a principal amount equal to the principal amount of the Pollution Control Revenue Bonds so surrendered and cancelled or for the provision for which payment has been made shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such Bonds of Pollution Control Series Z shall be surrendered by the Pollution Control Trustee to the Trustee and shall be cancelled and destroyed by the Trustee, and a certificate of such cancellation and destruction shall be delivered to the Company. From and after the Release Date (as defined below), the bonds of this Series shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the Pollution Control Indenture), at the request of the Company, consents to the release of the bonds of this Series as security for the Pollution Control Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of this Series and First Mortgage Bonds, Pollution Control Series Y) have been retired through payment, redemption or otherwise (including those bonds "deemed to be redeemed" within the meaning of that term as used in Article X of the Original Indenture) at, before or after the maturity thereof. On the Release Date, the bonds of this Series shall be surrendered by the Pollution Control Trustee to the Trustee whereupon the Bonds of said Series so surrendered shall be cancelled by the Trustee. Section 2.04. Prior to the Release Date, the Pollution Control Trustee as the registered holder of the Bonds of Pollution Control Z at its option may surrender the same at the office of the Trustee, in Chicago, Illinois, or elsewhere, if authorized by the Company, for cancellation, in exchange for other bonds of the same series of the same aggregate principal amount. Thereupon, and upon receipt of any payment required under the provisions of Section 2.05 hereof, the Company shall execute and deliver to the Trustee and the Trustee shall authenticate and deliver such other registered bonds to such registered holder at its office or at any other place specified as aforesaid. Section 2.05. No charge shall be made by the Company for any exchange or transfer of Bonds of Pollution Control Series Z other than for taxes or other governmental charges, if any, that may be imposed in relation thereto. ARTICLE III. MISCELLANEOUS Section 3.01. The recitals of fact herein and in the bonds (except the Trustee's Certificate) shall be taken as statements of the Company and shall not be construed as made or warranted by the Trustee. The Trustee makes no representations as to the value of any of the property subject to the lien of the Indenture, or any part thereof, or as to the title of the Company thereto, or as to the security afforded thereby and hereby, or as to the validity of this Supplemental Indenture and the Trustee shall incur no responsibility in respect of such matters. Section 3.02. This Supplemental Indenture shall be construed in connection with and as a part of the Original Indenture. 14 Section 3.03. (a) If any provision of this Supplemental Indenture limits, qualifies or conflicts with another provision of the Original Indenture or this Supplemental Indenture required to be included in indentures qualified under the Trust Indenture Act of 1939, as amended (as enacted prior to the date of this Supplemental Indenture) by any of the provisions of Sections 310 to 317, inclusive, of the said Act, such required provision shall control. (b) In case any one or more of the provisions contained in this Supplemental Indenture or in the bonds issued hereunder shall be invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected, impaired, prejudiced or disturbed thereby. Section 3.04. Wherever in this Supplemental Indenture the word "Indenture" is used without either prefix, "Original" or "Supplemental," such word was used intentionally to include in its meaning both the Original Indenture and all indentures supplemental thereto. Section 3.05. Wherever in this Supplemental Indenture either of the parties hereto is named or referred to, this shall be deemed to include the successors or assigns of such party, and all the covenants and agreements in this Supplemental Indenture contained by or on behalf of the Company or by or on behalf of the Trustee shall bind and inure to the benefit of the respective successors and assigns of such parties, whether so expressed or not. Section 3.06. (a) This Supplemental Indenture may be simultaneously executed in several counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. (b) The Table of Contents and the descriptive headings of the several Articles of this Supplemental Indenture were formulated, used and inserted in this Supplemental Indenture for convenience only and shall not be deemed to affect the meaning or construction of any of the provisions hereof. 15 IN WITNESS WHEREOF, the party of the first part has caused its corporate name and seal to be hereunto affixed and this Supplemental Indenture to be signed by its Treasurer, and attested by its Executive Vice President, General Counsel and Corporate Secretary for and in its behalf, and the party of the second part to evidence its acceptance of the trust hereby created, has caused its corporate name and seal to be hereunto affixed, and this Supplemental Indenture to be signed by one of its Vice Presidents, and attested by its Secretary or an Assistant Secretary, for and in its behalf, all done as of the 1st day of August, 2000. LOUISVILLE GAS AND ELECTRIC COMPANY By /s/ C.A. Markel C.A. Markel TREASURER (CORPORATE SEAL) ATTEST: /s/ John R. McCall JOHN R. MCCALL EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY HARRIS TRUST AND SAVINGS BANK By /s/ F.A. Pierson F.A. Pierson VICE PRESIDENT (CORPORATE SEAL) ATTEST: /s/ C. Potter C. Potter ASSISTANT SECRETARY 16 COMMONWEALTH OF KENTUCKY ] SS: COUNTY OF JEFFERSON BE IT REMEMBERED that on this 4TH day of August, 2000, before me, a -- - Notary Public duly commissioned in and for the County and Commonwealth aforesaid, personally appeared C.A. MARKEL and JOHN R. MCCALL, respectively, Treasurer and Executive Vice President, General Counsel and Corporate Secretary of Louisville Gas and Electric Company, a corporation organized and existing under and by virtue of the laws of the Commonwealth of Kentucky, who are personally known to me to be such officers, respectively, and who are personally known to me to be the same persons who executed as officers the foregoing instrument of writing, and such persons duly acknowledged before me the execution of the foregoing instrument of writing to be their act and deed and the act and deed of said corporation. WITNESS my hand and notarial seal this 4th day of August, 2000. - - /s/ Kathy L. Wilson NOTARY PUBLIC KENTUCKY, COMMONWEALTH AT LARGE (Notarial Seal) My Commission Expires: Jan. 22, 2001 Kathy L . Wilson Notary Public State at Large, KY Commission Expires: 01-22-2001 17 STATE OF ILLINOIS ] SS: COUNTY OF COOK BE IT REMEMBERED that on this 3rd day of August, 2000, before me, - -- a Notary Public duly commissioned in and for the County and State aforesaid, personally appeared F.A. PIERSON and C. POTTER , respectively, Vice President and Assistant Secretary of Harris Trust and Savings Bank, a corporation organized and existing under and by virtue of the laws of the State of Illinois, who are personally known to me to be such officers, respectively, and who are personally known to me to be the same persons who executed as officers the foregoing instrument of writing, and such persons duly acknowledged before me the execution of the foregoing instrument of writing to be their act and deed and the act and deed of said corporation. WITNESS my hand and notarial seal this 3rd day of August, 2000. - - /s/ Linda Ellen Garcia NOTARY PUBLIC IN AND FOR THE COUNTY OF COOK AND STATE OF ILLINOIS (Notarial Seal) "OFFICIAL SEAL" LINDA ELLEN GARCIA My Commission Expires: 9/23/2002 Notary Public, State of Illinois My Commission Exp. 09/23/2002 This Instrument Prepared by: Angela N. Gardner Gardner Law Offices 11414 Main Street Suite 102 Louisville, Kentucky 40243 By /s/ Angela N. Gardner Angela N. Gardner, Esq. (502) 244-2034 18 SCHEDULE A The following property situated, lying and being in the County of Jefferson, State of Kentucky, to wit: REAL PROPERTY Containing 7-1/2 acres, more or less, and is that part of the property conveyed to John A. Floersch, Roman Catholic Bishop of Louisville, by Deed dated August 11, 1931, and of record in Deed Book 1486, Page 224, in the Office of the Clerk of Jefferson County, Kentucky, as lies West of U.S. Highway 42 which Highway was conveyed by the Right Reverend John A. Floersch, Roman Catholic Bishop of Louisville to Commonwealth of Kentucky through its State Highway Commission, by Deed dated June 28, 1935, and of record in Deed Book 1577, Page 553, in the Office aforesaid. The property conveyed being more accurately described as: TRACT 1: Beginning at an existing pipe in the west line of U.S. Highway 42 at a point common to Lot No. 17 of Glenwood Subdivision, Section 1, as shown on a plat recorded in Plat and Subdivision Book 13, Page 80 in the office of the Clerk of Jefferson County, Kentucky; thence along the west line of said Highway, North 11 degrees 33 minutes 02 seconds East, 85.77 feet to a point; thence along said west line along a curve to the left having a radius of 11,379.88 feet and a chord measuring North 10 degrees 01 minute 27 seconds East, 611.60 feet to an existing pin and cap in the southerly line of said Interstate 71, South 58 degrees 48 minutes 33 seconds West 346.82 feet to an existing pin and cap thence continuing along said southerly line along a curve to the right having a radius of 3,014.79 feet and a chord measuring South 60 degrees 12 minutes 12 seconds West, 126.73 feet to an existing pin and cap; thence leaving the southerly line of said Interstate 71, South 32 degrees 32 minutes 00 seconds East, 526.29 feet to the point of beginning containing 2.9 acres. TRACT 2: Beginning at a pin and cap with an identification number of #2988 (typical) set at the intersection of the northerly line of Interstate 71 and the westerly line of U.S. Highway 42, said pin being located 50.00 feet from the centerline of U.S. Highway 42 and 130.00 feet from the centerline of Interstate 71; thence continuing along the northerly line of said Interstate, South 56 degrees 33 minutes 57 seconds West, 380.97 feet to a pin and cap set; thence South 66 degrees 43 minutes 39 seconds West 246.45 feet to a pin and cap set; thence South 62 degrees 20 minutes 04 seconds West, 122.45 feet to a pin and cap set in the line of Regal Hill Subdivision, Section 2, recorded in Plat and Subdivision Book 17, Page 28 in the Office of the Clerk of Jefferson County, Kentucky; thence leaving the northerly line of said Interstate along a line common to Regal Hill Subdivision, Section 1, recorded in Plat and Subdivision Book 12, Page 108 in the aforesaid Clerk's office, North 56 degrees 23 minutes 40 seconds East 806.40 to a pin and cap set in the westerly line of U.s. Highway 42; thence with the line of said Highway along a curve to the right having a radius of 11,409.16 feet and a chord measuring South 6 degrees 12 minutes 47 seconds West, 75.53 feet to the point of beginning, containing 32,494 square feet. Being the same property conveyed to A. William Ferriell and Ann C. Ferriell, husband and wife and Terry A. Turbeville, married by deed dated May 8, 1997 of record in Deed Book 6882, Page 89, in the Office aforesaid. Being the same property conveyed to Louisville Gas and Electric Company by deed dated November 29, 1999 of record in Deed Book 7361, Page 0914 in the Office aforesaid. ELECTRIC TRANSMISSION LINES A 138KV steel pole transmission line #3891 in Jefferson County, Kentucky. This line is built between Hurstbourne Substation to Bluegrass Substation at a distance of approximately 2.02 miles. A 138KV steel pole transmission line #3829 in Jefferson County, Kentucky. This line is built between Ashbottom Substation to Grade Lane Substation at a distance of approximately 1.50 miles. This distance reflects .92 miles of overhead lines and .58 miles of underground lines. A 138KV steel pole transmission line #3835 in Jefferson County, Kentucky. This line is built between Grade Lane Substation to Fern Valley Substation at a distance of approximately 1.46 miles. This distance was added to existing Circuit #3835. EX-4.41 4 a2048540zex-4_41.txt COPY OF SUPPL IND 5/1/00 Exhibit 4.41 - -------------------------------------------------------------------------------- Supplemental Indenture Dated May 1, 2000 KENTUCKY UTILITIES COMPANY TO US BANK TRUST NATIONAL ASSOCIATION AND PATICK J. CROWLEY, AS TRUSTEES (SUPPLEMENTAL TO THE INDENTURE OF MORTGAGE OR DEED OF TRUST DATED MAY 1, 1947, AS AMENDED, HERETOFORE EXECUTED BY KENTUCKY UTILITIES COMPANY TO CONTINENTAL ILLINOIS NATIONAL BANK AND TRUST COMPANY OF CHICAGO AND EDMOND B. STOFFT, AS TRUSTEES.) --------------------- (PROVIDING FOR FIRST MORTGAGE BONDS, POLLUTION CONTROL SERIES NO. 11 DUE MAY 1, 2023) - -------------------------------------------------------------------------------- THIS SUPPLEMENTAL INDENTURE, dated May 1, 2000, made and entered into by and between KENTUCKY UTILITIES COMPANY, a corporation organized and existing under the laws of the Commonwealths of Kentucky and Virginia (hereinafter commonly referred to as the "Company"), and US BANK TRUST NATIONAL ASSOCIATION, a national banking association having its office or place of business in the City of Chicago, Cook County, State of Illinois, formerly named First Trust of Illinois, National Association, successor to Bank of America Illinois, formerly named Continental Bank, National Association and Continental Illinois National Bank and Trust Company of Chicago (hereinafter commonly referred to as the "Trustee"), and Patrick J. Crowley (successor Co-Trustee), of Borough of Montvale, County of Bergen, State of New Jersey, as Trustees under the Indenture of Mortgage or Deed of Trust dated May 1, 1947, as modified and amended by the several indentures supplemental thereto heretofore executed by and between the Company and the Trustees from time to time under said Indenture of Mortgage or Deed of Trust; said Indenture of Mortgage or Deed of Trust, as so modified and amended, being hereinafter commonly referred to as the "Indenture"; and said Trustees under the Indenture being hereinafter commonly referred to as the "Trustees" or the "Trustees under the Indenture"; Witnesseth: WHEREAS, the Company, by resolution of its Board of Directors or the Pricing Committee thereof duly adopted, has determined to issue forthwith an additional series of its bonds to be secured by the Indenture, as hereby modified and amended, such bonds to be known and designated as First Mortgage Bonds, Pollution Control Series No. 11 (hereinafter sometimes referred to as the "bonds of Series No. 11 or the "bonds of said Series"), and to be authorized, authenticated and issued only as registered bonds without coupons; and WHEREAS, the County of Mercer in the Commonwealth of Kentucky (the "County") has agreed to issue $12,900,000 in principal amount of its Solid Waste Disposal Facility Revenue Bonds, 2000 Series A (Kentucky Utilities Company Project) (the "Revenue Bonds"), which Revenue Bonds will be issued pursuant to the provisions of the Indenture of Trust dated as of May 1, 2000 (the "County Indenture"), between the County and The Bank of New York, New York, New York, as Trustee (said Trustee or any successor trustee under the County Indenture being hereinafter referred to as the "County Trustee"); and WHEREAS, the proceeds of the Revenue Bonds (other than any accrued interest thereon) will be loaned by the County to the Company pursuant to the provisions of the Loan Agreement dated as of May 1, 2000 (the "Agreement"), between the County and the Company, in order to provide a portion of the funds required to pay and discharge $12,900,000 in outstanding principal amount of the County of Mercer, Kentucky Collateralized Solid Waste Disposal Facility Revenue Bonds (Kentucky Utilities Company Project) 1990 Series A (the "Refunded Bonds"); and WHEREAS, the proceeds of the Refunded Bonds were used to finance the acquisition, construction, installation and equipping of certain solid waste disposal facilities used in connection with the Brown Generating Station of the Company situated in the County and which are more fully described in Exhibit A to the Agreement; and WHEREAS, payments by the Company under and pursuant to the Agreement have been assigned by the County to the County Trustee in order to secure the payment of the Revenue Bonds; and in order to further secure the payment of the Revenue Bonds, the Company desires to issue its bonds of Series No. 11 to the County Trustee as provided in the Agreement; and WHEREAS, the Company desires, in accordance with the provisions of Article I, Section 6(e) of Article II and Article XVI of the Indenture, to execute this supplemental indenture for the purpose of creating and authorizing its bonds of Series No. 11 and modifying or amending certain provisions of the Indenture in the particulars and to the extent hereinafter in this supplemental indenture specifically provided; and WHEREAS, the execution and delivery by the Company of this supplemental indenture have been duly authorized by the Board of Directors of the Company or the Pricing Committee thereof; and the Company has requested, and hereby requests, the Trustees to enter into and join with the Company in the execution and delivery of this supplemental indenture; and WHEREAS, the bonds of Series No. 11 are to be authorized, authenticated and issued only in the form of registered bonds without coupons, and each of such bonds shall be substantially in the following form, to wit: (Form of face of bond of Series No. 11 - -------------------------------------------------------------------------------- This bond is nontransferable except as may be required to effect a transfer to any successor trustee under the Indenture of Trust dated as of May 1, 2000 between Mercer County, Kentucky, and The Bank of New York as Trustee. - -------------------------------------------------------------------------------- No. ____________ $________________ Kentucky Utilities Company First Mortgage Bond, Pollution Control Series No. 11 Due May 1, 2023 Kentucky Utilities Company, a Kentucky and Virginia corporation (hereinafter referred to as the "Company"), for value received, hereby promises to pay to The Bank of New York, New York, New York, as Trustee under the Indenture of Trust (the "County Indenture") dated May 1, 2000, from the County of Mercer, Kentucky, (the "County") to The Bank of New York or any successor trustee under the County Indenture (the "County Trustee"), the principal sum of ____________________ Dollars on the Demand Redemption Date, as hereinafter defined, and to pay on the Demand Redemption Date to the County Trustee interest on said sum from the Initial Interest Accrual Date, as hereinafter defined, to the Demand Redemption Date, at the interest rate or rates determined for the "Interest Rate Mode" (as described in Section 2.02 of the County Indenture) applicable to the Revenue Bonds referred to on the reverse hereof as selected from time to time by the Company, subject to the provisions hereinafter set forth in the event of a rescission of a Redemption Demand, as hereinafter defined. Both the principal of and the interest on this bond shall be payable at the office or agency of the Company in Louisville, Kentucky, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. The provisions of this bond are continued on the reverse side hereof and such continued provisions shall have the same effect, for all purposes, as though fully set forth at this place. This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee or its successor in trust under the Indenture of the Trustee's Certificate endorsed hereon. IN WITNESS WHEREOF, Kentucky Utilities Company has caused this bond to be executed in its name by the manual or facsimile signature of its President or one of its Vice-Presidents, and its corporate seal or a facsimile thereof to be hereto affixed or imprinted hereon and attested by the manual or facsimile signature of its Secretary or one of its Assistant Secretaries. Dated as of KENTUCKY UTILITIES COMPANY By -------------------------------------------- VICE PRESIDENT ATTEST: - ------------------------------ SECRETARY (Form of reverse side of bond of Series No. 11 This bond is one of the bonds of the Company issued and to be issued from time to time under and in accordance with and all secured by the indenture of mortgage or deed of trust dated May 1, 1947, executed and delivered by the Company to US Bank Trust National Association, successor to Bank of America Illinois (formerly Continental Bank, National Association and formerly Continental Illinois National Bank and Trust Company of Chicago and hereinafter referred to as the "Trustee") and Edmond B. Stofft, as Trustees, and the indentures supplemental thereto heretofore executed and delivered by the Company to the Trustees under said indenture of mortgage, including the indenture supplemental thereto dated May 1, 2000, executed and delivered by the Company to said US Bank Trust National Association and Patrick J. Crowley (successor Co-Trustee), as Trustees (collectively the "Trustees"), prior to the authentication of this bond (said indenture of mortgage and said supplemental indentures being hereinafter referred to, collectively, as the "Indenture"). Reference to the Indenture and to all supplemental indentures, if any, hereafter executed pursuant to the Indenture is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security and the rights of the holders and registered owners of said bonds and of the Trustees and of the Company in respect of such security. By the terms of the Indenture the bonds to be secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest, redemption provisions, medium of payment and in other respects as in the Indenture provided. This bond is one of a series of bonds of the Company issued under the Indenture and designated as First Mortgage Bonds, Pollution Control Series No. 11 (hereinafter called the "bonds of Series No. 11" or the "bonds of said Series"). The bonds of Series No. 11 have been issued to The Bank of New York, as trustee (said trustee or any successor trustee being hereinafter referred to as the "County Trustee") under the Indenture of Trust dated as of May 1, 2000 (the "County Indenture"), between the County and the County Trustee, to secure payment of the Solid Waste Disposal Facility Revenue Bonds, 2000 Series A (Kentucky Utilities Company Project) (the "Revenue Bonds"), issued by the County under the County Indenture, the proceeds of which (other than any accrued interest thereon) have been loaned to the Company pursuant to the provisions of the Loan Agreement dated as of May 1, 2000 (the "Agreement"), between the Company and the County. Except as provided in the next succeeding paragraph, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the County Indenture and the Revenue Bonds) on the Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the bonds of Series No. 11 shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the County Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the County Indenture, specifying the last date to which interest on the Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the bonds of Series No. 11. The Trustee shall, within 10 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the Trustee. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the bonds of Series No. 11 so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as and for the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) May 1, 2023, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) May 1, 2023. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the County Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on May 1, 2023, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the County Trustee, the Trustee or the Company. The bonds of Series No. 11 shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the County Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate or rates then applicable to the Revenue Bonds or determined under the provisions of the County Indenture from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the County Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the bonds of Series No. 11 shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the bonds of this Series; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the bonds of Series No. 11 shall bear interest at the rate or rates applicable to the Revenue Bonds from the Initial Interest Accrual Date, as specified in a written notice to the Trustee from the County Trustee, and the principal of and interest on the bonds of said Series from the Initial Interest Accrual Date shall be payable in accordance with the provisions of Article X of the Indenture. Upon payment of the principal of and premium, if any, and interest on the Revenue Bonds, whether at maturity or prior to maturity by redemption or otherwise, and the surrender thereof to and cancellation thereof by the County Trustee (other than any Revenue Bond that was cancelled by the County Trustee and for which one or more other Revenue Bonds were delivered and authenticated pursuant to the County Indenture in lieu of or in exchange or substitution for such cancelled Revenue Bond), or upon provision for the payment thereof having been made in accordance with the County Indenture, bonds of Series No. 11 in a principal amount equal to the principal amount of the Revenue Bonds so surrendered and cancelled or for the provision for which payment has been made shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such bonds of Series No. 11 shall be surrendered by the County Trustee to the Trustee and shall be cancelled by the Trustee. From and after the Release Date (as defined below), the bonds of Series No. 11 shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the County Indenture), at the request of the Company, consents to the release of the bonds of Series No. 11 as security for the Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of Series No. 11) have been retired through payment, redemption or otherwise (including those bonds "deemed to be paid" within the meaning of that term as used in Article XII of the Indenture) at, before or after the maturity thereof. On the Release Date, the bonds of Series No. 11 shall be surrendered by the County Trustee to the Trustee whereupon the bonds of Series No. 11 so surrendered shall be cancelled by the Trustee. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture or any indenture supplemental thereto, to or against any incorporator, stockholder, officer or director, past, present or future, of the Company, or of any predecessor or successor corporation, either directly or through the Company or such predecessor or successor corporation, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders directors and officers being waived and released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. This bond is nontransferable except as may be required to effect a transfer to any successor trustee under the County Indenture. Any such transfer may be made by the registered owner hereof, in person or by attorney duly authorized, at the principal office or place of business of the Trustee under the Indenture, upon the surrender and cancellation of this bond and the payment of any stamp tax or other governmental charge, and upon any such transfer a new registered bond or bonds without coupons, of the same series and for the same aggregate principal amount, will be issued to the transferee in exchange herefor. AND WHEREAS, there is to be endorsed on each of the bonds of Series No. 11 (whether in temporary or definitive form) a certificate of the Trustee substantially in the following form, to-wit: Trustee's Certificate This bond is one of the bonds of the series designated therein, described in the within mentioned Indenture. US BANK TRUST NATIONAL ASSOCIATION AS TRUSTEE By ------------------------------------------ AUTHORIZED OFFICER NOW, THEREFORE, in consideration of the premises and of the sum of One Dollar ($1.00) duly paid by the Trustee to the Company, and of other good and valuable considerations, the receipt whereof is hereby acknowledged, and for the purpose of further assuring to the Trustees under the Indenture their title to, or lien upon, the property hereinafter described, under and pursuant to the terms of the Indenture and for the purpose of further securing the due and punctual payment of the principal of and interest and the premium, if any, on all bonds which have been heretofore or shall be hereafter issued under the Indenture and indentures supplemental thereto and which shall be at any time outstanding thereunder and secured thereby, and for the purpose of securing the faithful performance and observance of all the covenants and conditions set forth in the Indenture and/or in any indenture supplemental thereto, the Company has given, granted, bargained, sold, transferred, assigned, pledged, mortgaged, warranted the title to and conveyed, and by these presents does give, grant, bargain, sell, transfer, assign, pledge, mortgage, warrant the title to and convey unto US BANK TRUST NATIONAL ASSOCIATION AND PATRICK J. CROWLEY, as Trustees under the Indenture as therein provided, and the successors in the trusts thereby created, and to their assigns, all the right, title and interest of the Company in and to any and all premises, plants, property, leases and leaseholds, franchises, permits, rights and powers, of every kind and description, real and personal (1) which have been acquired by the Company through construction, purchase, consolidation or merger, or otherwise, and which at the date hereof are owned by the Company, and (2) which shall be acquired by the Company, through construction, purchase, consolidation, merger, or otherwise, on or subsequent to the date hereof, together, in each case, with the rents, issues, products and profits therefrom, EXCEPTING, HOWEVER, AND THERE IS HEREBY EXPRESSLY RESERVED AND EXCLUDED FROM THE LIEN AND EFFECT OF THE INDENTURE AND OF THIS SUPPLEMENTAL INDENTURE, all right, title and interest of the Company, now owned, or hereinafter acquired, in and to (a) all cash, bonds, shares of stock, obligations and other securities not deposited with the Trustee or Trustees under the Indenture, and (b) all accounts and bills receivable, judgments (other than for the recovery of real property or establishing a lien or charge thereon or right therein) and choses in action not specifically assigned to and pledged with the Trustee or Trustees under the Indenture, and (c) all lamps and supplies, machinery, appliances, goods, wares, merchandise, commodities, equipment, apparatus, materials and/or supplies acquired or held by the Company for sale, lease, rental or consumption in the ordinary course of business, and (d) the last day of each of the demised terms created by any lease of property leased to the Company and under each and every renewal of any such lease, the last day of each and every such demised term being hereby expressly reserved to and by the Company, and (e) all gas, oil, ore, copper and other minerals now or hereafter existing upon, within or under any real estate of the Company subject to, or hereby subjected to, the lien of the Indenture. Without in any way limiting or restricting the generality of the foregoing description or the foregoing exceptions and reservations, the Company hereby expressly gives, grants, bargains, sells, transfers, assigns, pledges, mortgages, warrants the title to and conveys unto said US BANK TRUST NATIONAL ASSOCIATION AND PATRICK J. CROWLEY, as Trustees under the Indenture, and unto their successor or successors in trust, and their assigns, under the trusts and for the purposes of the Indenture, as hereby amended, the properties described in Section 5 of Article V of this supplemental indenture (said description being incorporated herein by reference with the same force and effect as if set forth at length herein), and which properties have been acquired by the Company, through construction, purchase, consolidation or merger, or otherwise, and which are owned by the Company at the date of the execution hereof together with the tenements, hereditaments and appurtenances thereunto belonging or appertaining. TO HAVE AND TO HOLD all said property, right and interests hereinabove described or referred to and conveyed, assigned, pledged or mortgaged, or intended to be conveyed, assigned, pledged or mortgaged, together with the rents, issues, products and profits therefrom unto said US BANK TRUST NATIONAL ASSOCIATION AND PATRICK J. CROWLEY, as Trustees under the Indenture, as hereby modified and amended, and unto their successor or successors in trust forever, BUT IN TRUST NEVERTHELESS, upon the trusts, for the purposes and subject to all the terms, conditions, provisions and restrictions of the Indenture, as hereby modified and amended. And upon the considerations and for the purposes aforesaid, and in order to provide, pursuant to the terms of the Indenture, for the issuance under the Indenture, as hereby modified and amended, of bonds of Series No. 11 and to fix the terms, provisions and characteristics of the bonds of said Series, and to modify and amend the Indenture in the particulars and to the extent hereinafter in this supplemental indenture specifically provided, the Company hereby covenants and agrees with the Trustees as follows: ARTICLE I. A series of bonds issuable under the Indenture, as hereby modified and amended, and to be known and designated as "First Mortgage Bonds, Pollution Control Series No. 11" (hereinafter sometimes referred to as the "bonds of Series No. 11" or the "bonds of said Series"), and which shall be executed, authenticated and issued only in the form of registered bonds without coupons, in denominations of $5,000 and integral multiples thereof, is hereby created and authorized. The bonds of said Series shall be payable as provided in Section 2 of Article II hereof and shall be substantially in the form thereof hereinbefore recited. Each bond of said Series shall be issued to and registered in the name of the County Trustee and shall be nontransferable except as required to effect any transfer of bonds of said Series to any successor trustee under the County Indenture. Each bond of said Series shall be dated as of the date of issuance of the Revenue Bonds. ARTICLE II. Section 1. The bonds of Series No. 11 shall bear interest, and the principal thereof and interest thereon shall be payable, only to the extent and in the manner provided in Section 2 of this Article. The bonds of said Series shall mature on May 1, 2023. The bonds of said Series shall be payable, both as to principal and interest, at the office or agency of the Company in Louisville, Kentucky in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. The bonds of said Series shall be deemed fully paid, and the obligations of the Company thereunder shall be terminated, to the extent and in the manner provided in Section 3 of this Article. Section 2. (a) Except as provided in paragraph (b) of this Section 2, in the event of a default under Section 9.1 of the Agreement or in the event of a default in the payment of the principal of, premium, if any, or interest (and such default in the payment of interest continues for the full grace period, if any, permitted by the County Indenture and the Revenue Bonds) on the Revenue Bonds, whether at maturity, by tender for purchase, by acceleration, by sinking fund, redemption or otherwise, as and when the same becomes due, the bonds of Series No. 11 shall be redeemable in whole upon receipt by the Trustee of a written demand (hereinafter called a "Redemption Demand") from the County Trustee stating that there has been such a default, stating that it is acting pursuant to the authorization granted by Section 9.02(c) of the County Indenture, specifying the last date to which interest on the Revenue Bonds has been paid (such date being hereinafter referred to as the "Initial Interest Accrual Date") and demanding redemption of the bonds of Series No. 11. The Trustee shall, within 10 days after receiving such Redemption Demand, mail a copy thereof to the Company marked to indicate the date of its receipt by the Trustee. Promptly upon receipt by the Company of such copy of a Redemption Demand, the Company shall fix a date on which it will redeem the bonds of Series No. 11 so demanded to be redeemed (hereinafter called the "Demand Redemption Date"). Notice of the date fixed as and for the Demand Redemption Date shall be mailed by the Company to the Trustee at least 30 days prior to such Demand Redemption Date. The date to be fixed by the Company as and for the Demand Redemption Date may be any date up to and including the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) May 1, 2023, provided that if the Trustee shall not have received such notice fixing the Demand Redemption Date within 90 days after receipt by it of the Redemption Demand, the Demand Redemption Date shall be deemed to be the earlier of (i) the 120th day after receipt by the Trustee of the Redemption Demand or (ii) May 1, 2023. The Trustee shall mail notice of the Demand Redemption Date (such notice being hereinafter called the "Demand Redemption Notice") to the County Trustee not more than 10 nor less than five days prior to the Demand Redemption Date. Notwithstanding the foregoing, if a default to which this paragraph is applicable is existing on May 1, 2023, such date shall be deemed to be the Demand Redemption Date without further action (including actions specified in this paragraph) by the County Trustee, the Trustee or the Company. The bonds of Series No. 11 shall be redeemed by the Company on the Demand Redemption Date, upon surrender thereof by the County Trustee to the Trustee, at a redemption price equal to the principal amount thereof, plus accrued interest thereon at the rate or rates then applicable to the Revenue Bonds or determined under the provisions of the County Indenture from the Initial Interest Accrual Date to the Demand Redemption Date. If a Redemption Demand is rescinded by the County Trustee by written notice to the Trustee prior to the Demand Redemption Date, no Demand Redemption Notice shall be given, or, if already given, shall be automatically annulled, and interest on the bonds of Series No. 11 shall cease to accrue, all interest accrued thereon shall be automatically rescinded and cancelled and the Company shall not be obligated to make any payments of principal of or interest on the bonds of this Series; but no such rescission shall extend to or affect any subsequent default or impair any right consequent thereon. (b) In the event that all of the bonds outstanding under the Indenture shall have become immediately due and payable, whether by declaration or otherwise, and such acceleration shall not have been annulled, the bonds of Series No. 11 shall bear interest at the rate or rates applicable to the Revenue Bonds from the Initial Interest Accrual Date, as specified in a written notice to the Trustee from the County Trustee, and the principal of and interest on the bonds of said Series from the Initial Interest Accrual Date shall be payable in accordance with the provisions of Article X of the Indenture. (c) Anything herein contained to the contrary notwithstanding, the Trustee is not authorized to take any action pursuant to a Redemption Demand or a rescission thereof or a written notice required by paragraph (b) of this Section 2, and such Redemption Demand, rescission or notice shall be of no force or effect, unless it is executed in the name of the County Trustee by one of its Vice-Presidents. Section 3. Upon payment of the principal of and premium, if any, and interest on the Revenue Bonds, whether at maturity or prior to maturity by redemption or otherwise, and the surrender thereof to and cancellation thereof by the County Trustee, or upon provision for the payment thereof having been made in accordance with Article VIII of the County Indenture, bonds of Series No. 11 in a principal amount equal to the principal amount of the Revenue Bonds so surrendered and cancelled shall be surrendered by the County Trustee to the Trustee, whereupon the bonds of said Series so surrendered shall be deemed fully paid and the obligations of the Company thereunder shall be terminated, and such bonds of said Series shall be cancelled and destroyed by the Trustee by shredding, compacting or other suitable means and a certificate of such cancellation and destruction shall be delivered to the Company. From and after the Release Date (as defined below), the bonds of Series No. 11 shall be deemed fully paid, satisfied and discharged and the obligations of the Company hereunder and thereunder shall be terminated. The Release Date shall be the date that the Bond Insurer (as such term is defined in the County Indenture), at the request of the Company, consents to the release of the Bonds of Series No. 11 as security for the Revenue Bonds, provided that in no event shall that date be later than the date as of which all bonds issued under the Indenture prior to the date of initial issuance of this bond (and excluding bonds of Series No. 11) have been retired through payment, redemption or otherwise (including those Bonds "deemed to be paid" within the meaning of that term used in Article XII of the Indenture) at, before or after the maturity thereof . On the Release Date, the bonds of this Series shall be surrendered by the County Trustee to the Trustee whereupon the bonds of Series No. 11 so surrendered shall be cancelled by the Trustee. Section 4. The bonds of Series No. 11 shall be executed on behalf of the Company and sealed with the corporate seal of the Company, all in the manner provided in or permitted by Section 6 of Article I of the Indenture, as follows: (a) bonds of said Series executed on behalf of the Company by its President or a Vice-President and by its Secretary or an Assistant Secretary may be so executed by the manual or facsimile signature of such President or Vice-President and of such Secretary or Assistant Secretary, as the case may be, of the Company, or of any person or persons who shall have been such officer or officers, as the case may be, of the Company on or subsequent to the date of this supplemental indenture, notwithstanding that he or they may have ceased to be such officer or officers of the Company at the time of the actual execution, authentication, issue or delivery of any of such bonds of said Series, and any such manual or facsimile signature or signatures of such officer or officers of the Company, as above provided, on any such bonds shall constitute execution of such bonds on behalf of the Company by such officer or officers of the Company for the purposes of the Indenture, as hereby modified and amended, and shall be valid and effective for all purposes, PROVIDED that all bonds of said Series shall always be executed on behalf of the Company by the manual or facsimile signature of its President or a Vice-President and of its Secretary or an Assistant Secretary, as above provided, AND PROVIDED, FURTHER, that none of such bonds shall be executed on behalf of the Company by the manual or facsimile signature of the same officer or person acting in more than one capacity; and (b) such corporate seal of the Company may be facsimile, and any bonds of said series on which such facsimile seal of the Company shall be affixed, impressed, imprinted or reproduced shall be deemed to be sealed with the corporate seal of the Company for the purposes of the Indenture, as hereby modified and amended, and such facsimile seal shall be valid and effective for all purposes. ARTICLE III. Section 10 of Article III of the Indenture is hereby further amended to provide that the Company agrees to observe and comply with the provisions of said section as so amended hereby so long as the bonds of Series No. 11 are outstanding. The bonds outstanding on the date hereof to which said Section 10 applies are Nos. 7, 8, Series P, Nos. 1B, 2B, 3B and 4B, Series Q, No.s 9 and 10, Series R, and Series S. No covenant to provide a maintenance and renewal fund is made in respect of the bonds of Series No. 11. The absence of such a covenant shall not, however, limit the right of the Company to use, apply or certify bonds of Series No. 11 to comply with, or to satisfy its obligations under, any provision of the Indenture (including, without limitation, the provisions of Section 1 of Article VII of the Indenture). The bonds of Series No. 11 are intended to be used as collateral for and to secure payment of the Revenue Bonds as hereinabove provided, and, accordingly, the bonds of Series No. 11 shall be dated as of the date of issuance of the Revenue Bonds and shall bear interest from the Initial Interest Accrual Date, as hereinabove provided, notwithstanding anything to the contrary contained in the Indenture with respect to the dating of bonds and the date from which interest on bonds shall accrue. ARTICLE IV. Section 1. Capitalized terms used in this Article IV and not otherwise defined in this Indenture shall have the meanings set forth in the County Indenture. Section 2. Subsequent to the issuance of the Revenue Bonds, the Company shall not be required to establish compliance with the net earnings requirements of Section 5 of Article II of the Indenture in connection with any Conversion of Interest Rate Mode on the Revenue Bonds or any change in length of Long Term Rate Period. So long as the Revenue Bonds operate in any Interest Rate Mode other than the Long Term Rate where the Long Term Rate Period ends on the day prior to the final maturity of the Revenue Bonds, the Company shall include, for purposes of any required calculation of such net earnings requirement (as such requirement shall then be in effect), interest on the bonds of Series No. 11 at an annual rate of 15%. If at any time the interest rate on the Revenue Bonds is a Long Term Rate where the Long Term Rate Period ends on the day prior to the final maturity of the Revenue Bonds, the Company may include, for purposes of any calculation of such net earnings requirement, interest on bonds of Series No. 11 at the Long Term Rate then borne by the Revenue Bonds. ARTICLE V. Section 1. The provisions of this supplemental indenture shall be effective from and after the execution hereof; and the Indenture, as hereby modified and amended, shall remain in full force and effect. Section 2. Each holder or registered owner of a bond of any series not now outstanding which shall be authenticated by the Trustee and issued by the Company under the Indenture (as hereby amended) subsequent to the execution of this supplemental indenture and of any coupon pertaining to any such bond, by the acquisition, holding or ownership of such bond and coupon, thereby consents and agrees to, and shall be bound by, the provisions of this supplemental indenture. Section 3. Each reference in the Indenture, or in this supplemental indenture, to any article, section, term or provision of the Indenture shall mean and be deemed to refer to such article, section, term or provision of the Indenture, as hereby modified and amended, except where the context otherwise indicates. Section 4. All the covenants, provisions, stipulations and agreements in this supplemental indenture contained are and shall be for the sole and exclusive benefit of the parties hereto, their successors and assigns, and of the holders and registered owners from time to time of the bonds and of the coupons issued and outstanding from time to time under and secured by the Indenture, as hereby modified and amended. This supplemental indenture has been executed in a number of identical counterparts, each of which so executed shall be deemed to be an original. At the time of the execution of this supplemental indenture, the aggregate principal amount of all indebtedness outstanding, or to be outstanding, under and secured by the Indenture, as hereby modified and amended, is $559,230,000, consisting of and represented by First Mortgage Bonds, Pollution Control Series No. 7 and 8, Series P, Pollution Control Series No. 1B through No. 4B, inclusive, Series Q, Pollution Control Series No. 9 and 10, Series R, Series S and Series No. 11 of the Company, as follows:
INTEREST PRINCIPAL SERIES RATE MATURITY DATE AMOUNT ------ ---- ------------- ------ No. 7 7 3/8 May 1, 2010 4,000,000(a) 7.60 May 1, 2020 8,900,000(a) No. 8 7.45 September 15, 2016 96,000,000 P 7.92 May 15, 2007 53,000,000 8.55 May 15, 2027 33,000,000 No. 1B 6 1/4 February 1, 2018 20,930,000 No. 2B 6 1/4 February 1, 2018 2,400,000 No. 3B 6 1/4 February 1, 2018 7,200,000 No. 4B 6 1/4 February 1, 2018 7,400,000 Q 5.95 June 15, 2000 61,500,000 6.32 June 15, 2003 62,000,000 No. 9 5 3/4 December 1, 2023 50,000,000 No. 10 Variable November 1, 2024 52,300,000(b) R 7.55 June 1, 2025 50,000,000 S 5.99 January 15, 2006 36,000,000 No. 11 Variable May 1, 2023 12,900,000(c)
(a) To be paid and discharged not more than 90 days after issuance of Pollution Control Series No. 11 (b) An additional $1,700,000 remains to be issued. (c) To be presently issued by the Company under the Indenture, as hereby modified and amended. All of said bonds of Series P, Series Q, Series R and Series S, respectively, were sold by the Company to, and upon the issue thereof were owned and held by, the corporations and partnerships whose names and residences are stated in the Supplemental Indentures dated May 15, 1992, June 15, 1993, June 1, 1995 and January 15, 1996, respectively, executed by the Company to the Trustees under said Indenture as heretofore modified and amended. All of said bonds of Series No. 7 and Series No. 8 were heretofore issued and delivered by the Company to, and upon the issuance thereof were held by, First Security National Bank and Trust Company, One First Security Plaza, Lexington, Fayette County, Kentucky 40507, as trustee (now succeeded by Bank One, Lexington, N.A.). All of said bonds of Series No. 1B through 4B, inclusive, and Series No. 9, and Series No. 10 were heretofore issued and delivered by the Company to, and upon the issuance thereof were held by, Bank One, Lexington, N.A., 201 East Main Street, Lexington, Fayette County, Kentucky 40507, as trustee. The Twelve Million Nine Hundred Thousand Dollars ($12,900,000) in principal amount of bonds of Series No. 11 proposed to be issued by the Company under the Indenture, as hereby modified and amended, are to be issued and delivered by the Company to, and upon the issuance thereof held by, The Bank of New York, 101 Barclay Street, 21st Floor, New York, New York 10286, as Trustee under the County Indenture. Section 5. The Company hereby gives, grants, bargains, sells, transfers, assigns, pledges, mortgages, warrants the title to and conveys unto the Trustee under the Indenture, upon the trusts and for the purposes of the Indenture, as hereby modified, the following described properties: FIRST. The following described real estate of the Company situated in Carroll County, Kentucky: Beginning at a point in the easterly line of the Kentucky Utilities Company Tract, said point being South 24 deg. 28 min. 46 sec. East 61.3 feet from the southerly right of way line of U.S. Route 42 and being 25.00 feet south of the centerline of a railroad track spur crossing the Froman Brothers Tract and said point having coordinate values of North 4761.118; West 1173.484,as related to the Control System for the Kentucky Utilities Ghent Generating Station; thence with the easterly line of the Kentucky Utilities Company tract South 24 deg. 28 min. 46 sec. East 2773.21 feet to an iron pin at the southeast corner of the Kentucky Utilities Company tract and at the northeast corner of a tract as conveyed to William and Nancy Diuguid by deed dated 2 January, 1973 and of record in Deed Book 77, Page 490, and also by deed 28 March, 1985 and of record in Deed Book 99, Page 71 in the aforementioned County Clerk's Office; thence leaving the line of the Kentucky Utilities Company and with the easterly line of Diuguid and a fence line South 24 deg. 32 min. 52 sec. East 1104.04 feet to a wooden fence post; thence South 24 deg. 27 min. 24 sec. East 1296.65 feet to a wooden fence post; thence South 22 deg. 48 min. 16 sec. East 877.17 feet to an 8" tree; thence South 23 deg. 51 min. 25 sec. East 542.98 feet to a wooden corner fence post; thence North 77 deg. 10 min. 11 sec. East 458.70 feet to a point in the center of Smiths Branch and in the west line of a tract as conveyed to Louis and Arlene Ward by deed dated 15 March, 1967 of record in Deed Book 65, Page 569, in the aforementioned County Clerk's Office; thence leaving the line of Diuguid and with the westerly line of Ward, and the meanders of Smiths Branch North 10 deg. 45 min. 08 sec. West 154.36 feet to a point; thence North 32 deg. 25 min. 30 sec. West 173.37 feet to a point; thence North 12 deg. 17 min. 31 sec. West 146.89 feet to a point; thence North 8 deg. 14 min. 33 sec. East 69.54 feet to a point; thence North 27 deg 23 min. 18 sec. East 164.22 feet to a point; thence North 13 deg. 40 min. 43 sec. West 122.33 feet to a point; thence North 7 deg. 56 min. 14 sec. Bast 367.68 feet to a point in the westerly line of a tract as conveyed to Billy and Millie Lewis by deed dated 14 March, 1966 of record in Deed Book 34, Page 133, and also by deed dated 13 March, 1954 of record in Deed Book 28, Page 469 in the office of the County Clerk of Gallatin County; thence continuing with the meanders of Smiths Branch and with the westerly line of Lewis North 19 deg. 10 min. 20 sec. West 102.35 feet to a point; thence North 2 deg. 19 min. 05 sec. West 550.18 feet to a point; thence North 38 deg. 04 min. 30 sec. West 159.34 feet to a 52" Sycamore tree in Smiths Branch; thence North 19 deg. 21 min. 20 sec. West 245.55 feet to a point; thence North 9 deg. 01 min. 35 sec. West 266.64 feet to a point; thence North 29 deg. 34 min. 52 sec. West 133.24 feet to a point; thence North 22 deg. 47 min. 27 sec. West 238.60 feet to a point; thence North 26 deg. 01 min. 55 sec. East 100.22 feet to a point; thence North 15 deg. 52 min. 02 sec. West 260.16 feet to a point; thence North 5 deg. 30 min. 06 sec. East 264.19 feet to a point; thence leaving Smiths Branch and continuing with the westerly line of Lewis North 22 deg. 53 min. 05 sec. West 427.33 feet to a point; thence North 27 deg. 56 min. 01 sec. West 2918.59 feet to a point, said point being 25.0 feet south of the centerline of the railroad track spur crossing the Froman Brothers Tract; thence leaving the line Lewis and 25.00 feet south of and parallel to the centerline of the railroad track spur the following courses and distances, with the arc of a curve to left having a radius of 696.03 feet and a long chord at South 80 deg. 32 min. 32 sec. West 390.70 feet and a length of 396.02 feet to a point; thence South 64 deg. 14 min. 33 sec. West 136.58 feet to a point; thence with the arc of a curve to the right having a radius of 1321.62 feet and a long chord at South 65 deg. 34 min. 05 sec. West 61.14 feet and a length of 61.15 feet to a point; thence South 66 deg. 53 min. 36 sec. West 293.10 feet to a point; thence with the arc of a curve to the left having a radius of 1485.38 feet and a long chord at South 65 deg. 45 min. 20 sec. West 59.00 feet and a length of 59.00 feet to a point; thence South 64 deg. 37 min. 03 sec. West 274.06 feet to the point of beginning and containing 170.505 acres. Being a portion of a 202.84 acre tract of land conveyed to Robert C. Froman, James Perry Froman and John Craig Froman, by deed from Perry Craig Froman and Mary Carlisle Froman, his wife, dated January 2, 1976, and of record in Deed Book 82, Page 69, in the Carroll County Court Clerk's Office. John C Froman (a/k/a John Craig Froman) and Barbara B. Froman, his wife, conveyed his undivided one-third interest to John C. Froman, Trustee under a declaration of trust, by dead dated November 20, 1981, and of record in Deed Book 93, Page 496, the declaration of trust of same date being of record in Deed Book 93, Page 500, in the aforesaid Clerk's Office. SECOND. The following described real estate of the Company situated in Laurel County, Kentucky: Lying and being in Laurel County, Kentucky, and fronting on Myers-Baker Road in the City of London, and more particularly described as follows: Beginning at an iron pin found (stamped LS #2834) located in the north right-of-way of Myers-Baker Road approximately 800 feet in a westerly direction from aforementioned road and Ky. Highway 363, said corner also being the southwest corner of a tract of land conveyed to Robert Hasty (Deed Book 98, Pages 95 and 100). Thence leaving the north right-of-way of Myers-Baker Road N 15-44-56 E, 123.65 feet to an iron pin found (stamped LS #2834); thence N 16-31-13 E, 107.33 feet to an iron pin found (stamped LS #2834); thence N 74-12-52 W, 149.96 feet to an iron pin set (stamped LS #3007); thence S 16-28-20 W, 272.65 feet to an iron pin set (stamped LS #3007) located in the north right-of-way of Myers-Baker Road; thence with said right of way in an easterly direction 160 feet to the point of beginning, containing 0.88 acres, more or less. Being a portion of the same property conveyed to Don Lane Young and Jonnie Jean Young, husband and wife, by deed from Don Lane Young and Jonnie Jean Young, husband and wife, dated December 9, 1997, recorded January 26, 1998, in Deed Book 478, Page 525, records of the Laurel county Court Clerk's Office. THIRD. The following described real estate of the Company situated in Fayette County, Kentucky: PROPERTY UPON WHICH CITIZENS FIDELITY BANK OFFICE BUILDING IS LOCATED Beginning at a point in the intersection of the east right-of-way line of South Limestone Street with the south right-of-way line of Service Entrance No. 1, said point being the intersection of the back of sidewalk of South Limestone Street with the back of curb of Service Entrance No. 1; thence running with the south right-of-way line of Service Entrance No. 1, S 29 deg. 03' 38" E, 13.38 feet to a point; thence continuing with the south right-of-way line of Service Entrance No. 1, S 36 deg. 53' 08" E, 46.23 feet to a point; thence continuing with the south right-of-way line of Service Entrance No. 1, S 35 deg. 07' 54" E, 60.58 feet to a point; thence continuing with the south right-of-way line of Service Entrance No. 1, 38.27 feet along an arc whose radius is 390.97 feet, the chord of which bears S 37 deg. 56' 14" E, 38.26 feet to a point; thence continuing with the south right-of-way line of Service Entrance No. 1, S 40 deg. 44' 20" E, 69.40 feet to a point; thence running 14.38 feet along an arc whose radius is 9.00 feet, the chord of which bears S 03 deg. 28' 43" W, 12.90 feet to a point in the west right-of-way line of Service Entrance No. 2; thence running with the west right-of-way line of Service Entrance No. 2, S 48 deg. 34' 00" W, 57.23 feet to a point; thence continuing with the west right-of-way line of Service Entrance No. 2, N 41 deg. 26' 00" W, 2.57 feet to a point; thence continuing with the west right-of-way line of Service Entrance No. 2, S 49 deg. 09' 12" W, 11 .24 feet to a point; thence running 6.40 feet along an arc whose radius is 4.00 feet, the chord of which bears N 84 deg. 59' 38 W, 5.74 feet to a point in the north right-of-way line of New Vine Street; thence running with the north right-of-way line of New Vine Street, N 39 deg. 08' 28" W, 12.90 feet to a point; thence continuing with the North right-of-way line of New Vine Street 145.47 feet along an arc whose radius is 348.71 feet, the chord of which bears N 27 deg. 08' 38 W, 144.42 feet to a point; thence continuing with the north right-of-way line of New Vine Street, N 15 deg. 13' 49 W, 1.98 feet to a point; thence continuing with the north right-of-way line of New Vine Street 73.76 feet along an arc whose radius is 402.71 feet, the chord of which bears N 20 deg. 26' 19 W, 73.66 feet to a point; thence running 6.88 feet along an arc whose radius is 15.00 feet, the chord of which bears, N 12 deg. 32' 30 W, 6.82 feet to a point in the east right-of-way line of south Limestone Street; thence running with the east right-of-way line of south Limestone Street, N 48 deg. 46' 47 E, 31.17 feet to the point of beginning, containing 14.586 square feet; and being all of Disposal Block 3, Parcel 1, of a Final Record Plat for Lexington Urban Renewal and Community Development Agency, of record in the Fayette County Clerk's office in Plat Cabinet A, Slide 610. PROPERTY UPON WHICH CITIZENS FIDELITY BANK GARAGE IS LOCATED TRACT I: Beginning at a point in the intersection of the north right-of-way line of New Vine Street with the west right-of-way line of the Harrison Avenue viaduct, said point being in the intersection of the back-of-sidewalk of New Vine Street with the projected west facia of the Harrison Avenue viaduct; thence running with the north right-of-way Line of New Vine Street N 41 deg. 19' 31" W, 325.34 feet to a point in the intersection of the back-of-sidewalk of New Vine Street with the east right-of-way line of Service Entrance No. 2; thence running with the east right-of-way line of Service Entrance No. 2, N 48 deg. 36' 18 E, 34.43 feet to a point; thence continuing with the east right-of-way line of Service Entrance No. 2, N 79 deg. 50' 10 E. 17.95 feet to a point; thence running S 67 deg. 42' 48 E, 33.60 feet to a point in the south property line of Adcor Realty; thence running with the south line of Adcor Realty, S 41 deg. 24' 26 E, 286.17 feet to a point in the west right-of-way line of the Harrison Avenue viaduct; thence running with the west right-of-way line of the Harrison Avenue viaduct, S 48 deg. 48' 43 W, 65. 20 feet to the point of beginning, and containing 20,691 square feet; and being all of Disposal Block 3, Parcel 3, of a Final Record Plat for Lexington Urban Renewal and community Development Agency, of record in the Fayette County Clerk's office, in Plat Cabinet A, Slide 611. TRACT II: Beginning at an iron pin in the Intersection of the north right-of-way line of New Vine Street with the east right-of-way line of the Harrison Avenue viaduct, said pin being in the intersection of the back-of-sidewalk of New Vine Street with the projected east facia of the Harrison Avenue viaduct; thence running with the north right-of-way line of New Vine Street, N 40 deg. 42' 10 W, 43.65 feet to an iron pin in the west right-of-way line of the Harrison Avenue viaduct, said pin being in the intersection of the projected west facia of the Harrison Avenue viaduct with the north right-of-way line of New Vine Street; thence running with the west right-of-way line of the Harrison Avenue viaduct, N 48 deg. 48' 43" E, 65.20 feet to an iron pin in the extreme southwest line of property owned by Adcor Realty Company, said pin being in the intersection of the projected west facia of the Harrison Avenue viaduct with the extreme southwest line of the Adcor Realty property; thence running with the line of Adcor Realty, S 41 deg. 24' 26 E, 43.56 feet to a point in the east right-of-way line of the Harrison Avenue viaduct, said point being in the intersection of the projected east facia of the Harrison Avenue viaduct with the extreme southwest line of Adcor Realty; thence running with the east right-of-way line of the Harrison Avenue viaduct, S 48 deg. 44' 09 W, 65.74 feet to the point of the beginning, and containing 2,855 square feet, more or less, and being all of Parcel 3 of Disposal Block 2, Parcel 1-A and the area beneath the Harrison Avenue viaduct, of Final Consolidation Record Plat for the Lexington Urban Renewal and Community Development Agency, and the Lexington-Fayette Urban County Government, of record in Plat Cabinet A, Slide 756, in the aforesaid clerk's office. All bearings are referred to the true meridian. TRACT III: Beginning at an iron pin in the intersection of the north right-of-way line of New Vine Street with the east right-of-way line of the Harrison Avenue viaduct, said pin being in the intersection of the back-of-sidewalk of New Vine Street with the projected east facia of the Harrison Avenue viaduct; thence running with the east right-of-way line of the Harrison Avenue viaduct, N 48 deg. 44' 09" E, 65.74 feet to a point in the south property line of Adcor Realty; thence running with the south property line of Adcor Realty, S 41 deg. 24' 26" E, 202.45 feet to an iron pin; thence running S 48 deg. 43' 49" W, 66.62 feet to an iron pin in the north right-of-way line of New Vine Street, said pin being in the back-of-sidewalk of New Vine Street; thence with the back-of-sidewalk and north right-of-way line of New Vine Street, N 41 deg. 09' 21 W, 202.45 feet to the point of beginning and containing 13,399 square feet, more or less; and being all of Disposal Block 2, Parcel 1A, of a Final Record Plat for Lexington Urban Renewal and Community Development Agency, of record in the Fayette County Clerk's office, in Plat Cabinet A, Slide 757. All bearings are referred to the true meridian. There is included herein two easements for air rights to the following two described tracts that adjoin the above described property: TRACT I AIR RIGHTS OVER SERVICE ENTRANCE NO. 2 Beginning at a point in the intersection of the north right-of-way line of New Vine Street and the east right-of-way line of Service Entrance No. 2; and running thence N, 41 deg. 19' 31" W, 34.00 feet, more or less, to a point in the west right-of-way line of Service Entrance No. 2; thence with the west right-of-way line of Service Entrance No. 2, N 49 deg. 09' 12" E 6.20 feet, more or less, to a point; thence continuing with the right-of-way line of Service Entrance No. 2. S 41 deg. 26' 00" E, 2.57 feet to a point; thence continuing with the west right-of-way line of Service Entrance No. 2, N 48 deg. 34' 00" E, 58.23 feet, more or less, to a point; thence S 41 deg. 24' 26" E, 70.65 feet, more or less, to a point in the east right-of-way line of Service Entrance No. 2; thence with the east right-of-way line of Service Entrance No. 2 for three calls: N 67 deg. 42' 48" W, 33.60 feet; S 79 deg. 50' 10, W, 17.95 feet; and S 48 deg. 36' 18" W, 34.43 feet to the point of beginning, and containing 2,504 square feet, more or less. TRACT II AIR RIGHTS OVER SIDEWALK Beginning at a point in the intersection of the north right-of-way line of New Vine Street and the east right-of-way line of Service Entrance No. 2; and running thence with the north right-of-way line of New Vine Street for three calls: S 41 deg. 19' 31" E, 325.34 feet; S 40 deg. 42' 10 E, 43.65 feet; and S 41 deg. 09' 21" E, 70.50 feet to a point; thence S 48 deg. 40' 29" W, 2.00 feet to a point in the sidewalk on the north side of New Vine Street; thence N 41 deg. 14' 11" W, 439.49 feet to a point in the sidewalk on the north side of New Vine Street; thence N 48 deg. 40' 29" E, 2.00 feet to the point of beginning, and containing 978 square feet, more or less. All bearings are referred to the true meridian. All of the foregoing described property being the same property conveyed to KU Capital Corporation, a Kentucky corporation, by deed from Lime & Vine Realty Company dated March 25, 1992, of record in Deed Book 1620, Page 635, in the Fayette County Clerk's office. IN WITNESS WHEREOF, said Kentucky Utilities Company has caused this instrument to be executed in its corporate name by its President, Vice-President or its Treasurer and its corporate seal to be hereunto affixed and to be attested and countersigned by its Executive Vice President, General Counsel and Corporate Secretary, and said US Bank Trust National Association, for the purpose of entering into and joining with the Company in the execution of this supplemental indenture, has caused this instrument to be executed in its corporate name by one of its Vice-Presidents and its corporate seal to be hereunto affixed and to be attested by one of its Assistant Secretaries, and said Patrick J. Crowley for the purpose of entering into and joining with the Company in the execution of this supplemental indenture, has signed and sealed this instrument; all as of the day and year first above written. KENTUCKY UTILITIES COMPANY By C.A. MARKEL TREASURER ATTEST: JOHN R. MCCALL EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY (CORPORATE SEAL) US BANK TRUST NATIONAL ASSOCIATION By JOHN D. BOWMAN VICE PRESIDENT ATTEST: CYNTHIA W. BROWN ASSISTANT SECRETARY (CORPORATE SEAL) PATRICK J. CROWLEY (SEAL) COMMONWEALTH OF KENTUCKY } SS: COUNTY OF FAYETTE I, ______________, a Notary Public in and for said County in the Commonwealth aforesaid, do hereby certify that C. A. Markel, Treasurer of Kentucky Utilities Company, a Kentucky and Virginia corporation, and John R. McCall, Executive Vice President, General Counsel and Corporate Secretary of said corporation, who are both personally known to me to be the same persons whose names are subscribed to the foregoing instrument as such officers of said corporation, and who are both personally known to me to be such officers, appeared before me this day in person and severally acknowledged before me that they signed, sealed and delivered said instrument as their free and voluntary act as such officers, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth; and said C. A. Markel, upon oath, acknowledged himself to be Treasurer of said corporation and that, as such officer, being authorized so to do, he executed said instrument for the purposes therein contained, by signing the name of said corporation thereto by himself as such officer. Given under my hand and official seal this 15th day of May, 2000. ---------------------------------------- NOTARY PUBLIC My commission expires: ____________, 20___ (NOTARIAL SEAL) STATE OF NEW YORK } SS: COUNTY OF NEW YORK I, Janet P. O'Hara, a Notary Public in and for said County in the State aforesaid, do hereby certify that: (a) John D. Bowman, a Vice President of US Bank Trust National Association, a national banking association, and Cynthia W. Brown, an Assistant Secretary of said corporation, who are both personally known to me to be the same persons whose names are subscribed to the foregoing instrument as such Vice President and Assistant Secretary, respectively, of said corporation, and who are both personally known to me to be such officers, appeared before me this day in person and severally acknowledged before me that they signed, sealed and delivered said instrument as their free and voluntary act as such officers, and as the free and voluntary act and deed of said corporation, for the uses and purposes therein set forth; and said John D. Bowman upon oath, acknowledged himself to be a Vice President of said corporation and that, as such officer, being authorized so to do, he executed said instrument for the purposes therein contained, by signing the name of said corporation thereto by himself as such officer; and (b) Patrick J. Crowley, personally known to me to be the same person described in, and whose name is subscribed to, the foregoing instrument, appeared before me this day in person and acknowledged before me that he executed, signed, sealed and delivered said instrument as his free and voluntary act and deed, for the uses and purposes therein set forth. Given under my hand and official seal this 15th day of May, 2000. --------------------------------------- NOTARY PUBLIC My commission expires: _____________, 20___ (NOTARIAL SEAL) --------------------- This instrument was prepared by John R. McCall, Esq., 220 West Main Street, Louisville, Kentucky 40202. EX-10.95 5 a2048540zex-10_95.txt COPY OF FORM 1ST AMEND Exhibit 10.95 FIRST AMENDMENT TO THE EMPLOYMENT AND SEVERANCE AGREEMENT OF ---------------- WHEREAS, ______________ (the "Executive") and LG&E Energy Corp., a Kentucky corporation (the "Company") and Powergen, plc, a United Kingdom public limited company (the "Parent") entered into an Employment and Severance Agreement, dated February 25, 2000 (the "Agreement"); 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, Company and the Parent have determined that it is desirable to amend the Agreement to provide greater retention incentives to the Executive as a further inducement for the Executive to remain in the employment of the Company; WHEREAS, An amendment to the Merger Agreement has necessitated a corresponding amendment to the Agreement; and WHEREAS, the parties wish to correct the definition of a Change in Control contained in the Agreement. NOW THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. Section 1.1 shall be deleted and replaced in its entirety to read as follows: "This Agreement shall become effective at the Effective Time, provided the Company employs the Executive 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 which provides additional retention value to the Company, and the satisfaction of all of the Company's obligations under the Change-in-Control Agreement, the Company shall pay the Executive in cash $__________ on the Effective Date, if said time occurs prior to January 1, 2001. Additionally, if the Effective Time occurs prior to January 1, 2001 the Company shall pay the Executive in cash the following: $__________ on the six month anniversary of the Effective Time, $__________ on the twelve month anniversary of the Effective Time, and $__________ on the eighteen month anniversary of the Effective Time, collectively the "Retention Payments", so long as the Executive is still employed by the Company on such dates. The Retention Payments 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) at the Effective Time 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 scheduled six, twelve, and eighteen month anniversaries. In the event that Executive elects not to receive the foregoing lump sum payments, Executive may otherwise elect to defer receipt of such payments and have such payments 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). If the Effective Date occurs on or after January 1, 2001, 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). Additionally, if the Effective Date Occurs on or after January 1, 2001, 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). Parent shall, or shall cause the Company to pay to the Executive a lump sum cash payment in an amount equal to $__________ if the closing occurs prior to January 1, 2001 or an amount equal to 25% of the Deferred Change-in-Control Payment if the closing occurs on or after January 1, 2001 (without adjustment for any increases or decreases in Executive's account under the Deferred Compensation Plan) in either event (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. Section 4.5 shall be deleted and replaced in its entirety to read as follows: "4.5 EXISTING STOCK OPTIONS. In accordance with the Merger Agreement and any amendments thereto, 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 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." 3.Section 6.3(c)(5) shall be deleted and replaced in its entirety to read as follows: (5) 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. 4. A new Section 6.3(d) shall be added to read as follows: "6.3 (d) Notwithstanding the foregoing clauses (a), (b), and (c), a Change in Control shall not be deemed to occur solely because any 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 Beneficially Owned by the Subject Person, 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." 5. Section 6.3(d) of the existing Agreement shall be renumbered as Section 6.3(e) to read as follows: "6.3(e) 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." --------------------------- Executive --------------------------- Date LG&E Energy Corp. By: ------------------------ Powergen plc By: ------------------------ RELEASE THIS RELEASE ("Release") is made and entered into on this 8th day of December, 2000, by and among __________ (the "Executive"), and LG&E Energy Corp. and Powergen plc, by and for itself and their present and former agents, directors, shareholders, officers, employees, representatives, divisions, parents, subsidiaries and affiliates, and their predecessors, successors, heirs, executors, administrators and assigns (collectively, "Released Parties"). RECITALS: A. The Executive has become eligible for certain change in control benefits under the pursuant to a Change in Control Agreement between the Executive and the Company dated ______________ (the "Agreement") as a result of the proposed merger between LG&E Energy Corp. and Powergen, plc. B. The Released Parties and the Executive have entered into an Employment and Severance Agreement dated February 25, 2000, as amended as of the date hereof (the "Employment Agreement") under terms and conditions agreeable to the Executive. C. The Executive and the Released Parties desire to enter into this Release in order to fully settle and discharge all claims which are or might have been asserted by the Executive against the Released Parties for benefits under the Agreement, upon the terms and conditions set forth herein. AGREEMENT: The Parties hereby agree as follows: RELEASE: In consideration of employment under the terms and conditions outlined in the Employment Agreement, the Executive hereby completely releases and forever discharges the Released Parties, and any and all other persons, firms, insurers and/or corporations whatsoever that might have any liability through the Released Parties, of and from any and all past, present, or future claims, actions, causes of action, rights, damages, costs, and all other expenses and compensation of any nature whatsoever, whether based on contract, or other theory of recovery and whether for compensation or punitive damages, which Executive now has, or which may hereafter accrue or otherwise be acquired, on account of all injuries to him, which have resulted under the terms of the Agreement, other than those arising pursuant to Section 6 of the Agreement. This Release, on the part of Executive, shall be a fully binding and a complete settlement between the Executive, his heirs, assigns and successors and the Released Parties for all benefits under the Agreement, except those arising pursuant to Section 6 of the Agreement. ENTIRE AGREEMENT AND SUCCESSORS IN INTEREST This Release contains the entire agreement between the Executive and the Released Parties, with regard to the matters set forth herein and shall be binding upon and inure to the benefit of the executors, administrators, personal representatives, heirs, successors and assigns of each. REPRESENTATION OF COMPREHENSION OF DOCUMENT In entering into this Release, the Executive represents that he has relied upon the legal advice of his attorney, who is the attorney of his own choice and that the terms of this Release have been completely read and explained to him by his attorney, and that those terms are fully understood and voluntarily accepted by him. GOVERNING LAW This Release shall be construed and interpreted in accordance with the laws of the Commonwealth of Kentucky, and in no event will the documents be construed in a manner inconsistent with Kentucky law. CONFIDENTIALITY The Executive and the Released Parties hereby agree for themselves and their representatives, including attorneys, to hold the terms of this Release, confidential, and the parties further agree not to disclose the terms of this Release to any person, firm or corporation, including legal industry publications, who is not a party to this Release. EFFECTIVENESS This Release shall become effective upon the closing of the merger of LG&E Energy Corp. and Powergen, plc or its subsidiary. ------------------------ Executive ------------------------ Date STATE OF KENTUCKY ) ) SS: COUNTY OF JEFFERSON ) Subscribed and sworn to before me by _______________, this _____ day of _____________, 2000, in Louisville, Jefferson County, Kentucky. My Commission expires: ------------------------------------------------- ---------------------------- NOTARY PUBLIC State at Large, Kentucky LG&E Energy Corp. By: -------------------------------------------------- EX-10.107 6 a2048540zex-10_107.txt COPY OF POWERGEN LT INCENT PLAN TO CERTAIN EMPLOYE Exhibit 10.107 POWERGEN LONG-TERM INCENTIVE PLAN EFFECTIVE DECEMBER 11, 2000 ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1. ESTABLISHMENT OF THE PLAN. Powergen plc (hereinafter referred to as the "Parent"), an English public limited company establishes as of the date set forth above the Powergen Long-Term Incentive Plan" (hereinafter referred to as the "Plan"), which permits the grant of Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units and Performance Shares to employees of LG&E Energy Corp. (hereinafter referred to as the "Company") and its subsidiaries. The Plan was approved by the Board of Directors of Parent on December 6, 2000. 1.2. PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing incentives to Key Employees that will link their personal interests to the long-term financial success of the Company and its Subsidiaries and to growth in Parent shareholder value. The Plan is designed to provide flexibility to the Company and its Subsidiaries in their ability to motivate, attract, and retain the services of Key Employees upon whose judgment, interest, and special effort the successful conduct of their operations is largely dependent. 1.3. DURATION OF THE PLAN. The Plan is effective as of December 11, 2000. The Plan shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 13 herein, until all Shares subject to it shall have been purchased or acquired according to the provisions herein. ARTICLE 2. DEFINITIONS AND CONSTRUCTION 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units, or Performance Shares. 1 (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (c) "Board" or "Board of Directors" means the Board of Directors of the Parent. (d) "Cause" shall mean the occurrence of any one of the following: (i) The willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) the Participant's conviction for committing a felony in connection with the employment relationship; or (iii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his/her action or omission was in the best interest of the Company or any of its Subsidiaries. (e) "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (i) An acquisition (other than directly from Parent) of any securities of Parent entitled generally to vote on the election of directors (the "Voting Stock") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifteen percent (15%) or more of the combined voting power of Parent's then outstanding Voting Stock; PROVIDED HOWEVER, in determining whether a Change in Control has occurred, Voting Stock which is 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 by (a) Parent or (b) any corporation or other Person of which a majority of its 2 voting power or its equity securities or equity interest is owned directly and indirectly by Parent (a "Subsidiary") or (2) Parent or any Subsidiary. (ii) The individuals who, as of the effective date of the Plan (as provided in Section 1.3), 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 (iii) Approval by stockholders of Parent of: (a) 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; (b) 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; (c) 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 Parent Subsidiary); (d) A merger or other combination involving the Company as a result of which Parent ceases to beneficially own more than 50% of the 3 outstanding Voting Stock of the successor to the Company, unless Parent or a Parent Subsidiary continues to own directly or indirectly all or substantially all of the Company's assets; or (e) Any Person acquires Beneficial Ownership of a greater percentage of the Voting Stock of the Company than the percentage of such Voting Stock then held, directly or indirectly, by Parent. Notwithstanding the foregoing clauses (i) (ii) and (iii), a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Stock as a result of the acquisition of Voting Stock by Parent which, by reducing the number of Voting Stock outstanding, increases the proportional number of shares beneficially owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Stock by Parent, and after such share acquisition by Parent, the Subject Person or entity becomes the Beneficial Owner of any additional Voting Stock which increases the percentage of the then outstanding Voting Stock Beneficially Owned by the Subject Person, then a Change in Control shall occur. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the Remuneration Committee of the Board of the Parent to administer the Plan pursuant to Article 3 herein. (h) "Company" means LG&E Energy Corp., a Kentucky corporation, or any successor thereto as provided in Article 15 herein. (i) "Converted Options" means those options granted pursuant to the terms of the merger agreement by and among Powergen plc, LG&E Energy Corp., US Subholdco 2 and Merger Sub, dated as of February 27,2000 pursuant to Section 6.11 herein. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means the average of the highest price and lowest price at which the Stock was traded on the relevant date, or on the most recent date on which the Stock was traded prior to such date, as reported on the composite tape of the New York Stock Exchange. (l) "Key Employee" means an employee of the Company or any of its Subsidiaries, including an employee who is an officer or a director of the Company or any of its 4 Subsidiaries, who, in the opinion of the Committee, can contribute significantly to the growth and profitability of the Company and its Subsidiaries. "Key Employee" also may include any other employee, identified by the Committee, in special situations involving extraordinary performance, promotion, retention, or recruitment. In the case of Converted Options, "Key Employee" means an employee, former employee, director or former director of the Company who is entitle to such Options. The granting of an Award under this Plan shall be deemed a determination by the Committee that such employee is a Key Employee, but shall not create a right to remain a Key Employee. (m) "Nonqualified Stock Option" or "NQSO" means an option to purchase Stock, granted under Article 6 herein. (n) "Option" means a Nonqualified Stock Option. (o) "Parent" means Powergen, plc an English public limited company, or any successor thereto as provided in Article 15 herein. (p) "Participant" means a Key Employee who has been granted an Award under the Plan. (q) "Performance Share" means an Award, designated as a performance share, granted to a Participant pursuant to Article 9 herein. (r) "Performance Unit" means an Award, designated as a performance unit, granted to a Participant pursuant to Article 9 herein. (s) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is restricted, during which the Participant is subject to a substantial risk of forfeiture, pursuant to Article 8 herein. (t) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. (u) "Plan" means this Powergen Long-Term Incentive Plan, as herein described and as hereafter from time to time amended. (v) "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Article 8 herein. (w) "Subsidiary" shall mean any corporation of which more than 50% (by number of votes) of the Voting Stock at the time outstanding is owned, directly or indirectly, by 5 the Company. (x) "Stock" or "Shares" means the ordinary shares of 50p each in the capital of the Parent. (y) "Stock Appreciation Right" or "SAR" means an Award, designated as a Stock appreciation right, granted to a Participant pursuant to Article 7 herein. (z) "Voting Securities" shall mean securities of any class or classes of stock of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors. 2.2. GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION 3.1. THE COMMITTEE. The Plan shall be administered by the Committee or such delegatees as permitted by law and Article 3.5 delegated by the Committee to administer the Plan. To the extent required to comply with Rule 16b-3 under the Exchange Act, each member of the Committee shall qualify as a "disinterested person" as defined in Rule 16b-3 or any successor definition adopted by the Securities and Exchange Commission. 3.2. AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; to accelerate the exercisability of any Award or the end of a performance period or the termination of any Period of Restriction or any award agreement, or any other instrument relating to an Award under the Plan; and (subject to the provisions of Article 13 herein) to amend the terms and conditions of any outstanding Option, Stock Appreciation Right or other Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Also notwithstanding the foregoing, no action of the Committee (other than pursuant to Section 4.3 hereof or Section 9.4 6 hereof) may, without the consent of the person or persons entitled to exercise any outstanding Option or Stock Appreciation Right or to receive payment of any other outstanding Award, adversely affect the rights of such person or persons. 3.3. SELECTION OF PARTICIPANTS. The Committee shall have the authority to grant Awards under the Plan, from time to time, to such Key Employees (including officers and directors who are employees) as may be selected by it. The Committee shall select Participants from among those who they have identified as being Key Employees. 3.4. DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its shareholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable. 3.5. DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in its sole discretion, delegate to an officer or officers of the Parent or the Company the administration of the Plan under this Article 3. 3.6. PROCEDURES OF THE COMMITTEE. All determinations of the Committee or any delegates shall be made by not less than a majority of members present at any meeting (in person or otherwise) at which a quorum is present. A majority of the entire Committee or the number of delegates at a given time shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Committee or the delegates may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee or delegates. 3.7. AWARD AGREEMENTS. Each Award under the Plan shall be evidenced by an award agreement which shall be signed by an authorized officer of the Company and by the Participant, and shall contain such terms and conditions as may be approved by the Committee. Such terms and conditions need not be the same in all cases. 3.8. RULE 16b-3 REQUIREMENTS. 7 Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Award (including, without limitation, the right of the Board or the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Rule 16b-3. ARTICLE 4. STOCK SUBJECT TO THE PLAN 4.1. NUMBER OF SHARES. 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 12,000,000 Shares. No more than one-half of such aggregate number of such Shares shall be issued as Restricted Stock under Article 8 of the Plan. No new Shares may be issued for the purposes of the Plan. The exercise of a Stock Appreciation Right, whether paid in cash or Stock, shall be deemed to be an issuance of Stock under the Plan. The payment of Performance Shares or Performance Units shall not be deemed to constitute an issuance of Stock under the Plan unless payment is made in Stock, in which case only the number of Shares issued in payment of the Performance Share or Performance Unit Award shall constitute an issuance of Stock under the Plan. 4.2. LAPSED AWARDS. If any Award (other than Restricted Stock) granted under this Plan terminates, expires, or lapses for any reason, any Stock subject to such Award again shall be available for the grant of an Award under the Plan, subject to Section 7.2 herein. 4.3. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, Stock dividend, split-up, share combination, or other change in the corporate structure of the Parent affecting the Stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Shares, and Performance Units granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Award shall always be a whole number. ARTICLE 5. ELIGIBILITY AND PARTICIPATION 5.1. ELIGIBILITY. Persons eligible to participate in this Plan include all employees of the Company and its Subsidiaries 8 who, in the opinion of the Committee, are Key Employees. "Key Employees" may include employees who are members of the Board, but may not include directors, who are not employees, except as provided in Section 6.11. 5.2. ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may from time to time select those Key Employees to whom Awards shall be granted and determine the nature and amount of each Award. No employee shall have any right to be granted an Award under this Plan even if previously granted an Award. ARTICLE 6. STOCK OPTIONS 6.1. GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Key Employees at any time and from time to time as shall be determined by the Committee. The maximum number of Shares subject to Options granted to any individual Participant in any calendar year shall be eight hundred thousand (800,000) Shares. The Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to Options granted to any Participant. The Committee may grant any type of Option to purchase Stock that is permitted by law at the time of grant. Nothing in this Article 6 shall be deemed to prevent the grant of NQSOs in excess of the maximum established by Section 422 of the Code. Unless otherwise expressly provided at the time of grant, Options granted under the Plan will be NQSOs. 6.2. OPTION AGREEMENT. Each Option grant shall be evidenced by an Option agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. 6.3. OPTION PRICE. The purchase price per share of Stock covered by an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of such Stock at the time the option is granted. 6.4. DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant. 6.5. EXERCISE OF OPTIONS. 9 Subject to Section 3.8 herein, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for all Participants. 6.6. PAYMENT. Options shall be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option price upon exercise of any Option shall be payable to the Company in full either (a) in cash or its equivalent, (b) by tendering shares of previously acquired Stock having a Fair Market Value at the time of exercise equal to the total Option price, (c) by foregoing compensation under rules established by the Committee, or (d) by a combination of (a), (b), or (c). The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable, after receipt of written notification and payment, the Company shall deliver to the Participant Stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name. 6.7. RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable securities law, under the requirements of any stock exchange upon which such Shares are then listed. 6.8. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of a Participant is terminated by reason of death, any of such Participant's outstanding Options shall become immediately exercisable at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter, by such person or persons as shall have acquired the Participant's rights under the Option pursuant to Article 10 hereof or by will or by the laws of descent and distribution. In the event the employment of a Participant is terminated by reason of disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any of such Participant's outstanding Options shall become immediately exercisable, at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter. In the event the employment of a Participant is terminated by reason of retirement, any of such Participant's outstanding Options shall become immediately exercisable (subject to Section 3.8 herein) at any time prior to the expiration date of the Options. 6.9. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than death, disability, 10 retirement or for Cause, the Participant shall have the right to exercise such Participant's outstanding Options within the 90 days after the date of his termination, but in no event beyond the expiration of the term of the Options and only to the extent that the Participant was entitled to exercise the Options at the date of his termination of employment. In its sole discretion, the Committee may extend the 90 days to up to one year but, however, in no event beyond the expiration date of the Option. If the employment of the Participant shall terminate for Cause, all of the Participant's outstanding Options shall be immediately forfeited back to the Company. 6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 6.11 CONVERSION OF LG&E ENERGY CORP. OPTIONS. Key Employees who hold unexercised options at the time of the merger, which were granted pursuant to the terms of the Omnibus Long Term Plan of LG&E Energy Corp. or the LG&E Energy Corp. Stock Option Plan for Nonemployee Directors shall be issued Converted Options, under the same terms and conditions of the original grant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to Participants, at the discretion of the Committee, in any of the following forms: (a) In lieu of Options; (b) In addition to Options; (c) Independent of Options; or (d) In any combination of (a), (b), or (c). The maximum numbers of Shares subject to SARs granted to any individual Participant in any calendar year shall be eight hundred thousand (800,000) Shares. Subject to the immediately preceding sentence, the Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to SARs granted to any Participant. 7.2. EXERCISE OF SARS IN LIEU OF OPTIONS. 11 SARs granted in lieu of Options may be exercised for all or part of the Shares subject to the related Option upon the surrender of the related Options representing the right to purchase an equivalent number of Shares. The SAR may be exercised only with respect to the Shares of Stock for which its related Option is then exercisable. Option Stock with respect to which the SAR shall have been exercised may not be subject again to an Award under the Plan. 7.3. EXERCISE OF SARS IN ADDITION TO OPTIONS. SARs granted in addition to Options shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of SARs granted in addition to Options shall not necessitate a reduction in the number of related Options. 7.4. EXERCISE OF SARS INDEPENDENT OF OPTIONS. Subject to Section 3.8 herein and Section 7.5 herein, SARs granted independently of Options may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon the SARs, including, but not limited to, a corresponding proportional reduction in previously granted Options. 7.5. PAYMENT OF SAR AMOUNT. Upon exercise of the SAR, the holder shall be entitled to receive payment of an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the price fixed by the Committee at the date of grant (which price shall not be less than 100% of the market price of a Share on the date of grant) ("the Exercise Price"); by (b) The number of Shares with respect to which the SAR is exercised. 7.6. FORM AND TIMING OF PAYMENT. Payment to a Participant, upon SAR exercise, will be made in cash or stock, at the discretion of the Committee, within ten calendar days of the exercise. 7.7. TERM OF SAR. The term of a SAR granted under the Plan shall not exceed ten years. 7.8. TERMINATION OF EMPLOYMENT. 12 In the event the employment of a Participant is terminated by reason of death, disability, retirement, or any other reason, the exercisability of any outstanding SAR granted in lieu of or in addition to an Option shall terminate in the same manner as its related Option as specified under Sections 6.8 and 6.9 herein. The exercisability of any outstanding SARs granted independent of Options also shall terminate in the manner provided under Sections 6.8 and 6.9 hereof. 7.9. NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall be exercisable during his lifetime only by such participant. ARTICLE 8. RESTRICTED STOCK 8.1. GRANT OF RESTRICTED STOCK. 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 in such amounts and subject to such conditions as it shall determine. It is contemplated that Restricted Stock grants will be made only in extraordinary situations of performance, promotion, retention, or recruitment. 8.2. RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock Agreement that shall specify the Period of Restriction, or periods, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 8.3. TRANSFERABILITY. Except as provided in this Article 8 or in Section 3.8 herein, the Shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or for such period of time as shall be established by the Committee and as shall be specified in the Restricted Stock Agreement, or upon earlier satisfaction of other conditions (including any performance goals) as specified by the Committee in its sole discretion and set forth in the Restricted Stock Agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 8.4. OTHER RESTRICTIONS. 13 The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable securities laws, and the Committee may legend certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5. CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Powergen Long-Term Incentive Plan , in the rules and administrative procedures adopted pursuant to such Plan, and in a Restricted Stock Agreement dated __________. A copy of the Plan, such rules and procedures, and such Restricted Stock Agreement may be obtained from the Secretary of Powergen." 8.6. REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his Stock certificate. 8.7. VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.8. DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were paid. 8.9. TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries because of normal retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any remaining Period of Restriction 14 applicable to the Restricted Stock pursuant to Section 8.3 hereof shall automatically terminate and, except as otherwise provided in Section 8.4 or Section 3.8 hereof, the Shares of Restricted Stock shall thereby be free of restrictions and be freely transferable. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries because of early retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), the Committee in its sole discretion (subject to Section 3.8 herein) may waive the restrictions remaining on any or all Shares of Restricted Stock pursuant to Section 8.3 herein and add such new restrictions to those Shares of Restricted Stock as it deems appropriate. 8.10. TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the event a Participant's employment is terminated because of death or disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be) during the Period of Restriction, any remaining Period of Restriction applicable to the Restricted Stock pursuant to Section 8.3 herein shall automatically terminate and, except as otherwise provided in Section 8.4 herein, the shares of Restricted Stock shall thereby be free of restrictions and be fully transferable. 8.11. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries for any reason other than for death, disability, or retirement, as set forth in Sections 8.9 and 8.10 herein, during the Period of Restriction, then any shares of Restricted Stock still subject to restrictions as of the date of such termination shall automatically be forfeited and returned to the Company; provided, however, that in the event of an involuntary termination of the employment of a Participant by the Company or any of its Subsidiaries other than for Cause, the Committee, in its sole discretion (subject to Section 3.8 herein), may waive the automatic forfeiture of any or all such Shares and may add such new restrictions to such Shares of Restricted Stock as it deems appropriate. ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1. GRANT OF PERFORMANCE UNITS OR PERFORMANCE SHARES. Subject to the terms and provisions of the Plan, Performance Units or Performance Shares may be granted to Participants at any time and from time to time as shall be determined by the Committee or any delegate who shall have complete discretion in determining the number of Performance Units or Performance Shares granted to each officer or each other Key Employee, respectively. 9.2. VALUE OF PERFORMANCE UNITS AND PERFORMANCE SHARES. The Committee shall set performance goals over certain periods to be determined in advance by the Committee or its delegates ("Performance Periods"). Prior to each grant of Performance Units or Performance Shares, the Committee or its delegates shall establish an initial value for each 15 Performance Unit and an initial number of Shares for each Performance Share granted to each Participant for that Performance Period. Prior to each grant of Performance Units or Performance Shares, the Committee or its delegates also shall set the performance goals that will be used to determine the extent to which the Participant receives a payment of the value of the Performance Units or number of Shares for the Performance Shares awarded for such Performance Period. These goals will be based on the attainment, by the Parent, Company or its Subsidiaries, of certain objective performance measures, which shall include one or more of the following: total shareholder return, return on equity, return on capital, earnings per share, market share, stock price, sales, costs, net income, cash flow, retained earnings, profit before tax, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, service reliability, demand-side management (including conservation and load management), operating and maintenance cost management, and energy production availability performance measures or any other such measures determined by the Committee or its delegates. Such performance goals also may be based upon the attainment of specified levels of performance of the Parent, Company or one or more Subsidiaries under one or more of the measures described above relative to the performance of other corporations. With respect to each such performance measure utilized during a Performance Period, the Committee or its delegates shall assign percentages to various levels of performance which shall be applied to determine the extent to which the Participant shall receive a payout of the values of Performance Units and number of Performance Shares awarded. 9.3. PAYMENT OF PERFORMANCE UNITS AND PERFORMANCE SHARES. After a Performance Period has ended, the holder of a Performance Unit or Performance Share shall be entitled to receive the value thereof as determined by the Committee or its delegates. The Committee or its delegates shall make this determination by first determining the extent to which the performance goals set pursuant to Section 9.2 have been met. It will then determine the applicable percentage (which may exceed 100%) to be applied to, and will apply such percentage to, the value of Performance Units or number of Performance Shares to determine the payout to be received by the Participant. In addition, with respect to Performance Units and Performance Shares granted to any Covered Employee, no payout shall be made hereunder except upon written certification by the Committee that the applicable performance goal or goals have been satisfied to a particular extent. The maximum amount payable in cash to any Participant with respect to any Performance Period pursuant to any Performance Unit or Performance Share award shall be $1,000,000, one million dollars, and the maximum number of Shares that may be issued to any Participant with respect to any Performance Period pursuant to any Performance Unit or Performance Share award is one hundred thousand (100,000) (subject to adjustment as provided in Section 4.3). 9.4. DISCRETION TO ADJUST AWARDS. The Committee or its delegates shall have the authority to modify, amend or adjust the terms and conditions of any Performance Unit award or Performance Share award, at any time or from time to time, including but not limited to the performance goals. 16 9.5. FORM AND TIMING OF PAYMENT. The payment described in Section 9.3 herein shall be made in cash, Stock, or a combination thereof as determined by the Committee or its delegates. Payment may be made in a lump sum or installments as prescribed by the Committee or its delegates. If any payment is to be made on a deferred basis, the Committee or its delegates may provide for the payment of dividend equivalents or interest during the deferral period. Any stock issued in payment of a Performance Unit or Performance Share shall be subject to the restrictions on transfer in Section 3.8 herein. 9.6. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the case of death, disability, or retirement (each of disability and retirement as defined under the established rules of the Company or any of its Subsidiaries, as the case may be), the holder of a Performance Unit or Performance Share shall receive a prorated payment based on the Participant's number of full months of service during the Performance Period, further adjusted based on the achievement of the performance goals during the entire Performance Period, as computed by the Committee or its delegates. Payment shall be made at the time payments are made to Participants who did not terminate service during the Performance Period. 9.7. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates employment with the Company or any of its Subsidiaries for any reason other than death, disability, or retirement, all Performance Units and Performance Shares shall be forfeited; provided, however, that in the event of an involuntary termination of the employment of the Participant by the Company or any of its Subsidiaries other than for Cause, the Committee or its delegates in its sole discretion may waive the automatic forfeiture provisions and pay out on a prorata basis. 9.8. NONTRANSFERABILITY. No Performance Units or Performance Shares granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution until the termination of the applicable Performance Period. All rights with respect to Performance Units and Performance Shares granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 10. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living 17 trust) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 11. RIGHTS OF EMPLOYEES 11.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any of its Subsidiaries. 11.2. PARTICIPATION. No employee shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. 11.3. NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 11.4. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Parent, Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Parent, Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Parent, Company or the applicable subsidiary. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company or any of its Subsidiaries. Nothing contained in the Plan constitutes a guarantee by the Company or any of its Subsidiaries that the assets of the Company or the applicable subsidiary shall be sufficient to pay any benefit to any person. 18 ARTICLE 12. CHANGE IN CONTROL 12.1. STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Stock based awards granted under this Plan shall immediately vest 100% in each Participant (subject to Section 3.8 herein), including Nonqualified Stock Options, Stock Appreciation Rights, and Restricted Stock. 12.2. PERFORMANCE BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all performance based awards granted under this Plan shall be immediately paid out in cash, including Performance Units and Performance Shares. The amount of the payout shall be based on the higher of: (i) the extent, as determined by the Committee or its delegates, to which performance goals, established for the Performance Period then in progress have been met up through and including the effective date of the Change in Control or (ii) 100% of the value on the date of grant of the Performance Units or number of Performance Shares. ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION 13.1. AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time to time, the Committee may terminate, amend, or modify the Plan. However, without the approval of the shareholders of the Company if such approval is required by law, no such termination, amendment, or modification may: (a) Increase the total amount of Stock which may be issued under this plan, except as provided in Section 4.3 herein; or (b) Change the class of Employees eligible to participate in the Plan; or (c) Materially increase the cost of the Plan or materially increase the benefits to Participants; or (d) Extend the maximum period after the date of grant during which Options or Stock Appreciation Rights may be exercised. 13.2. AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 hereof shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant. 19 ARTICLE 14. WITHHOLDING 14.1. TAX WITHHOLDING. The Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of this Plan. 14.2. STOCK DELIVERY OR WITHHOLDING. With respect to withholding required upon the exercise of Nonqualified Stock Options, or upon the lapse of restrictions on Restricted Stock, participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by tendering to the Company shares of previously acquired Stock or by having the Company withhold Shares of Stock, in each such case in an amount having a Fair Market Value equal to the amount required to be withheld to satisfy the tax withholding obligations described in Section 14.1. The value of the Shares to be tendered or withheld is to be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined. All Stock withholding elections shall be irrevocable and made in writing, signed by the Participant on forms approved by the Committee in advance of the day that the transaction becomes taxable. Stock withholding elections made by Participants who are subject to the short-swing profit restrictions of Section 16 of the Exchange Act must comply with the additional restrictions of Section 16 and Rule 16b-3 in making their elections. ARTICLE 15. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 16. REQUIREMENTS OF LAW 16.1. REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 20 16.2. GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of England. 21 EX-10.108 7 a2048540zex-10_108.txt COPY OF POWERGEN LT INCENT - ROGER HAL Exhibit 10.108 POWERGEN LONG-TERM INCENTIVE PLAN - ROGER HALE EFFECTIVE 11 DECEMBER 2000 ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1. ESTABLISHMENT OF THE PLAN. Powergen plc (hereinafter referred to as the "Parent"), an English public limited company establishes as of the date set forth above the Powergen Long-Term Incentive Plan - Roger Hale (hereinafter referred to as the "Plan"), which permits the grant of Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units and Performance Shares to Roger Hale (the "Participant"). The Plan was approved by the Board of Directors of the Parent on 7 December 2000. 1.2. PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success of the Parent, LG&E Energy Corp. (hereinafter referred to as the "Company") and their Subsidiaries by providing incentives to the Participant that will link his personal interests to the long-term financial success of the Parent and its Subsidiaries and to growth in shareholder value. The Plan is designed to provide flexibility to the Parent and the Company in their ability to motivate, and retain the services of, the Participant. 1.3. DURATION OF THE PLAN. The Plan commenced on 11 December 2000, as described in Section 1.1 herein. The Plan shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time pursuant to Article 13 herein, until all Shares subject to it shall have been purchased or acquired according to the provisions herein. ARTICLE 2. DEFINITIONS AND CONSTRUCTION 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: 1 (a) "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Units, or Performance Shares. (b) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (c) "Board" or "Board of Directors" means the Board of Directors of the Parent. (d) "Cause" shall mean the occurrence of any one of the following: (i) The wilful and continued failure by the Participant to substantially perform his duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Parent or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed his duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) the Participant's conviction for committing a felony in connection with the employment relationship; or (iii) the wilful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Parent or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or any of its Subsidiaries. (e) "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (i) An acquisition (other than directly from the Parent) of any securities of the Parent entitled generally to vote on the election of directors (the "Voting Stock") 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 the Parent's then outstanding Voting Stock; PROVIDED, HOWEVER, in determining whether a Change in Control has occurred, Voting Stock which is acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute 2 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 by (a) the 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 the Parent (a "Subsidiary") or (2) the Parent or any Subsidiary. (ii) 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 the 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 (iii) Approval by stockholders of the Parent of: (a) A merger, consolidation or reorganization involving the Parent; unless (1) the stockholders of the 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; (b) A complete liquidation or dissolution of the Parent or the Company ; unless, in the case of the Company, the Parent continues to own directly or indirectly all or substantially all of the Company's assets; 3 (c) An agreement for the sale or other disposition of all or substantially all of the assets of the Parent or the Company to any Person (other than a transfer to a Subsidiary); (d) A merger or other combination involving the Company as a result of which the Parent ceases to beneficially own more than 50% of the outstanding Voting Stock of the successor to the Company, unless the Parent continues to own directly or indirectly all or substantially all of the Company's assets; or (e) Any Person acquires Beneficial Ownership of a greater percentage of the Voting Stock of the Company than the percentage of such Voting Stock then held, directly or indirectly, by the Parent. Notwithstanding the foregoing clauses, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Stock as a result of the acquisition of Voting Stock by the Parent which, by reducing the number of Voting Stock outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Stock by the Parent, and after such share acquisition by the Parent, the Subject Person or entity becomes the Beneficial Owner of any additional Voting Stock which increases the percentage of the then outstanding Voting Stock Beneficially Owned by the Subject Person, then a Change in Control shall occur. (f) [INTENTIONALLY BLANK] (g) "Committee" means the committee appointed by the Board to administer the Plan pursuant to Article 3 herein. (h) "Company" means LG&E Energy Corp., a Kentucky corporation, or any successor thereto as provided in Article 15 herein. (i) "Converted Options" means those options granted pursuant to the terms of the merger agreement between LG&E Energy Corp. and the Parent and pursuant to Section 6.11 herein. (j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (k) "Fair Market Value" means the average of the highest price and lowest price at which the Stock was traded on the relevant date, or on the most recent date on which the Stock was traded prior to such date, as reported on the composite tape of the New York Stock Exchange. 4 (l) [INTENTIONALLY BLANK] (m) [INTENTIONALLY BLANK] (n) "Nonqualified Stock Option" or "NQSO" means an option to purchase Stock, granted under Article 6 herein, which is not intended to be an Incentive Stock Option. (o) "Option" means a Nonqualified Stock Option. (p) "the Parent" means Powergen plc an English public limited company, or any successor thereto as provided in Article 15 herein. (q) "Participant" means Roger Hale. (r) "Performance Share" means an Award, designated as a performance share, granted to a Participant pursuant to Article 9 herein. (s) "Performance Unit" means an Award, designated as a performance unit, granted to a Participant pursuant to Article 9 herein. (t) "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock is restricted, during which the Participant is subject to a substantial risk of forfeiture, pursuant to Article 8 herein. (u) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. (v) "Plan" means this Powergen Long-Term Incentive Plan - Roger Hale, as herein described and as hereafter from time to time amended. (w) "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Article 8 herein. (x) "Subsidiary" shall mean any corporation of which more than 50% (by number of votes) of the Voting Stock at the time outstanding is owned, directly or indirectly, by the Parent. (y) "Stock" or "Shares" means the ordinary shares of 50p each in the capital of the Parent. (z) "Stock Appreciation Right" or "SAR" means an Award, designated as a Stock appreciation right, granted to a Participant pursuant to Article 7 herein. 5 (aa) "Voting Stock" shall mean securities of any class or classes of stock of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors. 2.2. GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION 3.1. THE COMMITTEE. The Plan shall be administered by the Remuneration Committee of the Board of the Parent (the "Committee") or such delegatees as permitted by law and Article 3.5 delegated by the Committee to administer the Plan. To the extent required to comply with Rule 16b-3 under the Exchange Act, each member of the Committee and any delegates shall qualify as a "disinterested person" as defined in Rule 16b-3 or any successor definition adopted by the Securities and Exchange Commission. 3.2. AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee and any delegates shall have full power to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; to accelerate the exercisability of any Award or the end of a performance period or the termination of any Period of Restriction or any award agreement, or any other instrument relating to an Award under the Plan; and (subject to the provisions of Article 13 herein) to amend the terms and conditions of any outstanding Option, Stock Appreciation Right or other Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Also notwithstanding the foregoing, no action of the Committee (other than pursuant to Section 4.3 hereof or Section 9.4 hereof) may, without the consent of the person or persons entitled to exercise any outstanding Option or Stock Appreciation Right or to receive payment of any other outstanding Award, adversely affect the rights of such person or persons. 3.3. GRANT OF AWARDS TO PARTICIPANT. The Committee shall have the authority to grant Awards under the Plan, from time to time, to the Participant but shall be under no obligation to do so (even if the Participant has previously been granted an Award). 6 3.4. DECISIONS BINDING. All determinations and decisions made by the Committee and any delegates pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its shareholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable. 3.5. NO POWER TO DELEGATE RESPONSIBILITIES. The Committee may not delegate to an officer or officers of the Parent or the Company or any other person the administration of the Plan under this Article 3. 3.6. PROCEDURES OF THE COMMITTEE. All determinations of the Committee or any delegates shall be made by not less than a majority of members present at any meeting (in person or otherwise) at which a quorum is present. A majority of the entire Committee or the number of delegates at a given time shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Committee or the delegates may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee or delegates. 3.7. AWARD AGREEMENTS. Each Award under the Plan shall be evidenced by an award agreement which shall be signed by an authorized officer of the Parent and by the Participant, and shall contain such terms and conditions as may be approved by the Committee or the delegates. Such terms and conditions need not be the same in all cases. 3.8. RULE 16b-3 REQUIREMENTS. Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Award (including, without limitation, the right of the Board or the Committee to limit the time of exercise to specified periods) as may be required to satisfy the requirements of Rule 16b-3 (or any successor rule), under the Exchange Act ("Rule 16b-3"). Notwithstanding any other provisions of the Plan, all Awards under this Plan shall be subject to the following conditions, as and to the extent required by Rule 16b-3: (i) Except in the case of disability or death, no SAR, NQSO or other option granted pursuant to Article 6 shall be exercisable for at least six months after its grant; and 7 (ii) Except in the case of disability or death, no Restricted Stock, Performance Unit or Performance Share (or a Share issued in payment thereof) shall be sold for at least six months after its acquisition. ARTICLE 4. STOCK SUBJECT TO THE PLAN 4.1. NUMBER OF SHARES. 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 4,000,000 Shares. No more than one-half of such aggregate number of such Shares shall be transferred as Restricted Stock under Article 8 of the Plan. No new Shares may be issued for the purposes of the Plan. The exercise of a Stock Appreciation Right, whether paid in cash or Stock, shall be deemed to be an issuance of Stock under the Plan. The payment of Performance Shares or Performance Units shall not be deemed to constitute an issuance of Stock under the Plan unless payment is made in Stock, in which case only the number of Shares issued in payment of the Performance Share or Performance Unit Award shall constitute an issuance of Stock under the Plan. 4.2. LAPSED AWARDS. If any Award (other than Restricted Stock) granted under this Plan terminates, expires, or lapses for any reason, any Stock subject to such Award again shall be available for the grant of an Award under the Plan, subject to Section 7.2 herein. 4.3. ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, Stock dividend, split-up, share combination, or other change in the corporate structure of the Parent affecting the Stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Shares, and Performance Units granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Award shall always be a whole number. 8 ARTICLE 5. ELIGIBILITY 5.1. ELIGIBILITY. Only the Participant is eligible to receive Awards under the Plan. ARTICLE 6. STOCK OPTIONS 6.1. GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to the Participant at any time and from time to time as shall be determined by the Committee. The maximum number of Shares subject to Options granted to any individual Participant in any calendar year shall be one million (1,000,000) Shares. The Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to Options granted to any Participant. The Committee may grant any type of Option to purchase Stock that is permitted by law at the time of grant including, but not limited to, NQSOs. Nothing in this Article 6 shall be deemed to prevent the grant of NQSOs in excess of the maximum established by Section 422 of the Code. Unless otherwise expressly provided at the time of grant, Options granted under the Plan will be NQSOs. 6.2. OPTION AGREEMENT. Each Option grant shall be evidenced by an Option agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Option agreement shall specify whether the Option is a Nonqualified Stock Option whose grant is not intended to be subject to the provisions of Code Section 422. 6.3. OPTION PRICE. The purchase price per share of Stock covered by an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of such Stock at the time the option is granted. 6.4. DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant. 6.5. EXERCISE OF OPTIONS. Subject to Section 3.8 herein, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve. 9 6.6. PAYMENT. Options shall be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option price upon exercise of any Option shall be payable to the Company in full either (a) in cash or its equivalent, (b) by tendering shares of previously acquired Stock having a Fair Market Value at the time of exercise equal to the total Option price, (c) by foregoing compensation under rules established by the Committee, or (d) by a combination of (a), (b), or (c). The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable, after receipt of written notification and payment, the Company shall deliver to the Participant Stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name. 6.7. RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable securities law, under the requirements of any stock exchange upon which such Shares are then listed. 6.8. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of the Participant is terminated by reason of death, any of the Participant's outstanding Options shall become immediately exercisable at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter, by such person or persons as shall have acquired the Participant's rights under the Option pursuant to Article 10 hereof or by will or by the laws of descent and distribution. In the event the employment of the Participant is terminated by reason of disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any of the Participant's outstanding Options shall become immediately exercisable, at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter. In the event the employment of the Participant is terminated by reason of retirement, any of such Participant's outstanding Options shall become immediately exercisable (subject to Section 3.8 herein) at any time prior to the expiration date of the Options. 6.9. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of the Participant shall terminate for any reason other than death, disability, retirement or for Cause, the Participant shall have the right to exercise the Participant's outstanding Options within the 90 days after the date of his termination, but in no event beyond the expiration of the term of the Options and only to the extent that the Participant was entitled to exercise the Options at the date of his termination of employment. In its sole discretion, the Committee may extend the 90 days to up to one year but, however, in no event beyond the expiration date of the Option. 10 If the employment of the Participant shall terminate for Cause, all of the Participant's outstanding Options shall be immediately forfeited back to the Company. 6.10. NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to the Participant, at the discretion of the Committee, in any of the following forms: (a) In lieu of Options; (b) In addition to Options; (c) Independent of Options; or (d) In any combination of (a), (b), or (c). The maximum numbers of Shares subject to SARs granted to the Participant in any calendar year shall be one million (1,000,000) Shares. Subject to the immediately preceding sentence, the Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to SARs granted to the Participant. 7.2. EXERCISE OF SARS IN LIEU OF OPTIONS. SARs granted in lieu of Options may be exercised for all or part of the Shares subject to the related Option upon the surrender of the related Options representing the right to purchase an equivalent number of Shares. The SAR may be exercised only with respect to the Shares of Stock for which its related Option is then exercisable. Option Stock with respect to which the SAR shall have been exercised may not be subject again to an Award under the Plan. 7.3. EXERCISE OF SARS IN ADDITION TO OPTIONS. SARs granted in addition to Options shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of SARs granted in addition to Options shall not necessitate a reduction in the number of related Options. 11 7.4. EXERCISE OF SARS INDEPENDENT OF OPTIONS. Subject to Section 3.8 herein and Section 7.5 herein, SARs granted independently of Options may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon the SARs, including, but not limited to, a corresponding proportional reduction in previously granted Options. 7.5. PAYMENT OF SAR AMOUNT. Upon exercise of the SAR, the holder shall be entitled to receive payment of an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the price fixed by the Committee at the date of grant (which price shall not be less than 100% of the market price of a Share on the date of grant) ("the Exercise Price"); by (b) The number of Shares with respect to which the SAR is exercised. 7.6. FORM AND TIMING OF PAYMENT. Payment to a Participant, upon SAR exercise, will be made in cash or stock, at the discretion of the Committee, within ten calendar days of the exercise. 7.7. TERM OF SAR. The term of an SAR granted under the Plan shall not exceed ten years. 7.8. TERMINATION OF EMPLOYMENT. In the event the employment of a Participant is terminated by reason of death, disability, retirement, or any other reason, the exercisability of any outstanding SAR granted in lieu of or in addition to an Option shall terminate in the same manner as its related Option as specified under Sections 6.8 and 6.9 herein. The exercisability of any outstanding SARs granted independent of Options also shall terminate in the manner provided under Sections 6.8 and 6.9 hereof. 7.9. NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all SARs granted to the Participant under the Plan shall be exercisable during his lifetime only by the Participant. 12 ARTICLE 8. RESTRICTED STOCK 8.1. GRANT OF RESTRICTED STOCK. 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 the Participant in such amounts and subject to such conditions as it shall determine. It is contemplated that Restricted Stock grants will be made only in extraordinary situations of performance, promotion, retention, or recruitment. 8.2. RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock Agreement that shall specify the Period of Restriction, or periods, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 8.3. TRANSFERABILITY. Except as provided in this Article 8 or in Section 3.8 herein, the Shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or for such period of time as shall be established by the Committee and as shall be specified in the Restricted Stock Agreement, or upon earlier satisfaction of other conditions (including any performance goals) as specified by the Committee in its sole discretion and set forth in the Restricted Stock Agreement. All rights with respect to the Restricted Stock granted to the Participant under the Plan shall be exercisable during his lifetime only by such Participant. 8.4. OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable securities laws, and the Committee may legend certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5. CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Powergen Long-Term Incentive Plan - Roger Hale, in the rules and administrative procedures adopted pursuant to such Plan, and in a Restricted Stock Agreement dated __________. A copy of the Plan, 13 such rules and procedures, and such Restricted Stock Agreement may be obtained from the Secretary of Powergen." 8.6. REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his Stock certificate. 8.7. VOTING RIGHTS. During the Period of Restriction, if the Participant holds Shares of Restricted Stock granted hereunder he may exercise full voting rights with respect to those Shares. 8.8. DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, if the Participant holds Shares of Restricted Stock granted hereunder he shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were paid. 8.9. TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. In the event that the Participant terminates his employment with the Company or any of its Subsidiaries because of normal retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any remaining Period of Restriction applicable to the Restricted Stock pursuant to Section 8.3 hereof shall automatically terminate and, except as otherwise provided in Section 8.4 or Section 3.8 hereof, the Shares of Restricted Stock shall thereby be free of restrictions and be freely transferable. In the event that the Participant terminates his employment with the Company or any of its Subsidiaries because of early retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), the Committee in its sole discretion (subject to Section 3.8 herein) may waive the restrictions remaining on any or all Shares of Restricted Stock pursuant to Section 8.3 herein and add such new restrictions to those Shares of Restricted Stock as it deems appropriate. 8.10. TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the event the Participant's employment is terminated because of death or disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be) during the Period of Restriction, any remaining Period of Restriction 14 applicable to the Restricted Stock pursuant to Section 8.3 herein shall automatically terminate and, except as otherwise provided in Section 8.4 herein, the shares of Restricted Stock shall thereby be free of restrictions and be fully transferable. 8.11. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that the Participant terminates his employment with the Company or any of its Subsidiaries for any reason other than for death, disability, or retirement, as set forth in Sections 8.9 and 8.10 herein, during the Period of Restriction, then any shares of Restricted Stock still subject to restrictions as of the date of such termination shall automatically be forfeited and returned to the Company; provided, however, that in the event of an involuntary termination of the employment of the Participant by the Company or any of its Subsidiaries other than for Cause, the Committee, in its sole discretion (subject to Section 3.8 herein), may waive the automatic forfeiture of any or all such Shares and may add such new restrictions to such Shares of Restricted Stock as it deems appropriate. ARTICLE 9. PERFORMANCE UNITS AND PERFORMANCE SHARES 9.1. GRANT OF PERFORMANCE UNITS OR PERFORMANCE SHARES. Subject to the terms and provisions of the Plan, Performance Units or Performance Shares may be granted to the Participant at any time and from time to time as shall be determined by the Committee or any delegates who shall have complete discretion in determining the number of Performance Units or Performance Shares granted to the Participant. 9.2. VALUE OF PERFORMANCE UNITS AND PERFORMANCE SHARES. The Committee shall set performance goals over certain periods to be determined in advance by the Committee or its delegates ("Performance Periods"). Prior to each grant of Performance Units or Performance Shares, the Committee or its delegates shall establish an initial value for each Performance Unit and an initial number of Shares for each Performance Share granted to each Participant for that Performance Period. Prior to each grant of Performance Units or Performance Shares, the Committee or its delegates also shall set the performance goals that will be used to determine the extent to which the Participant receives a payment of the value of the Performance Units or number of Shares for the Performance Shares awarded for such Performance Period. These goals will be based on the attainment, by Parent, the Company or its Subsidiaries, of certain objective performance measures, which shall include one or more of the following: total shareholder return, return on equity, return on capital, earnings per share, market share, stock price, sales, costs, net income, cash flow, retained earnings, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, service reliability, demand-side management (including conservation and load management), operating and maintenance cost management, energy production availability 15 performance measures or any other measures determined by the Committee on its delegates. Such performance goals also may be based upon the attainment of specified levels of performance of the Parent Company or one or more Subsidiaries under one or more of the measures described above relative to the performance of other corporations. With respect to each such performance measure utilized during a Performance Period, the Committee or its delegates shall assign percentages to various levels of performance which shall be applied to determine the extent to which the Participant shall receive a payout of the values of Performance Units and number of Performance Shares awarded. 9.3. PAYMENT OF PERFORMANCE UNITS AND PERFORMANCE SHARES. After a Performance Period has ended, the holder of a Performance Unit or Performance Share shall be entitled to receive the value thereof as determined by the Committee or its delegates. The Committee or its delegates shall make this determination by first determining the extent to which the performance goals set pursuant to Section 9.2 have been met. It will then determine the applicable percentage (which may exceed 100%) to be applied to, and will apply such percentage to, the value of Performance Units or number of Performance Shares to determine the payout to be received by the Participant. 9.4. DISCRETION TO ADJUST AWARDS. The Committee or its delegates shall have the authority to modify, amend or adjust the terms and conditions of any Performance Unit award or Performance Share award, at any time or from time to time, including but not limited to the performance goals. 9.5. FORM AND TIMING OF PAYMENT. The payment described in Section 9.3 herein shall be made in cash, Stock, or a combination thereof as determined by the Committee or its delegates. Payment may be made in a lump sum or installments as prescribed by the Committee or its delegates. If any payment is to be made on a deferred basis, the Committee or its delegates may provide for the payment of dividend equivalents or interest during the deferral period. Any stock issued in payment of a Performance Unit or Performance Share shall be subject to the restrictions on transfer in Section 3.8 herein. 9.6. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the case of death, disability, or retirement (each of disability and retirement as defined under the established rules of the Company or any of its Subsidiaries, as the case may be), the holder of a Performance Unit or Performance Share shall receive a prorated payment based on the Participant's number of full months of service during the Performance Period, further adjusted based on the achievement of the performance goals during the entire Performance Period, as 16 computed by the Committee. Payment shall be made at the time payments are made to Participants who did not terminate service during the Performance Period. 9.7. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that the Participant terminates employment with the Parent of the or for any reason other than death, disability, or retirement, all Performance Units and Performance Shares shall be forfeited; provided, however, that in the event of an involuntary termination of the employment of the Participant by the Company or any other than for Cause, the Committee or its delegates in its sole discretion may waive the automatic forfeiture provisions and pay out on a prorata basis. 9.8. NONTRANSFERABILITY. No Performance Units or Performance Shares granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution until the termination of the applicable Performance Period. All rights with respect to Performance Units and Performance Shares granted to the Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 10. BENEFICIARY DESIGNATION The Participant may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 11. EMPLOYMENT RIGHTS 11.1. EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate the Participant's employment at any time, nor confer upon the Participant any right to continue in the employ of the Company or any of its Subsidiaries. 17 11.2. [INTENTIONALLY BLANK] 11.3. NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving the Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 11.4. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company or the applicable subsidiary. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company or any of its Subsidiaries. Nothing contained in the Plan constitutes a guarantee by the Company or any of its Subsidiaries that the assets of the Company or the applicable subsidiary shall be sufficient to pay any benefit to any person. ARTICLE 12. CHANGE IN CONTROL 12.1. STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Stock based awards granted under this Plan shall immediately vest 100% in the Participant (subject to Section 3.8 herein), including, Nonqualified Stock Options, Stock Appreciation Rights, and Restricted Stock. 12.2. PERFORMANCE BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all performance based awards granted under this Plan shall be immediately paid out in cash, including Performance Units and Performance Shares. The amount of the payout shall be based on the higher of: (i) the extent, as determined by the Committee or its delegates, to which performance goals, established for the Performance Period then in progress have been met up through and including the effective date of the Change in Control or (ii) 100% of the value on the date of grant of the Performance Units or number of Performance Shares. 18 ARTICLE 13. AMENDMENT, MODIFICATION, AND TERMINATION 13.1. AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time to time, the Committee may terminate, amend, or modify the Plan. However, without the approval of the shareholders of the Company if such approval is required by law, no such termination, amendment, or modification may: (a) Increase the total amount of Stock which may be issued under this plan, except as provided in Section 4.3 herein; or (b) Make any person other than the Participant eligible to participate in the Plan; or (c) Materially increase the cost of the Plan or materially increase the benefits to the Participant; or (d) Extend the maximum period after the date of grant during which Options or Stock Appreciation Rights may be exercised. 13.2. AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 hereof shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant. ARTICLE 14. WITHHOLDING 14.1. TAX WITHHOLDING. The Parent, the Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require the Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of this Plan. 14.2. STOCK DELIVERY OR WITHHOLDING. With respect to withholding required upon the exercise of Nonqualified Stock Options, or upon the lapse of restrictions on Restricted Stock, participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by tendering to the Company shares of previously acquired Stock or by having the Company withhold Shares of Stock, in each such case in an amount having a Fair Market Value equal to the amount required to be withheld to satisfy the tax withholding obligations described in Section 14.1. The value of the Shares to be tendered or withheld is to be 19 based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined. All Stock withholding elections shall be irrevocable and made in writing, signed by the Participant on forms approved by the Committee in advance of the day that the transaction becomes taxable. Stock withholding elections made by the Participant if he is subject to the short-swing profit restrictions of Section 16 of the Exchange Act must comply with the additional restrictions of Section 16 and Rule 16b-3 in making their elections. ARTICLE 15. SUCCESSORS All obligations of the Parent under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Parent, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Parent. ARTICLE 16. REQUIREMENTS OF LAW 16.1. REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16.2. GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of England. 20 EX-10.109 8 a2048540zex-10_109.txt COPY OF POWERGEN ST INCENT PLAN Exhibit 10.109 POWERGEN SHORT TERM INCENTIVE PLAN EFFECTIVE JANUARY 1, 2001 ARTICLE 1. ESTABLISHMENT AND PURPOSE 1.1. ESTABLISHMENT OF THE PLAN. Powergen plc (hereinafter referred to as the "Parent"), an English public limited company, hereby establishes an annual incentive compensation plan to be known as the "Short Term Incentive Plan" (hereinafter referred to as the "Plan") as set forth in this document. The Plan permits the awarding of annual cash bonuses to Key Employees of LG&E Energy Corp. (hereinafter referred to as the "Company") and its Subsidiaries, based on the achievement of preestablished performance goals. With approval by the Board of Directors of the Parent, the Plan shall become effective as of January 1, 2001. The Plan shall remain in effect until terminated by the Board of Directors. 1.2. PURPOSE. The purpose of the Plan is to provide Key Employees of the Company and its Subsidiaries with a meaningful annual incentive opportunity geared toward the achievement of specific corporate, business unit, line of business, and/or individual goals. ARTICLE 2. DEFINITIONS 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the defined meaning is intended, the term is capitalized: (a) "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (b) "Board" or "Board of Directors" means the Board of Directors of the Parent. (c) "Cause" shall mean the occurrence of any one of the following: (i) The willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or 1 (ii) the Participant's conviction for committing a felony in connection with the employment relationship; or (iii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his/her action or omission was in the best interest of the Company or any of its Subsidiaries. (d) "Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (i) An acquisition (other than directly from Parent) of any securities of Parent entitled generally to vote on the election of directors (the "Voting Stock") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of fifteen percent (15%) or more of the combined voting power of Parent's then outstanding Voting Stock; PROVIDED, HOWEVER, in determining whether a Change in Control has occurred, Voting Stock which is 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 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 "Parent Subsidiary") or (2) Parent or any Parent Subsidiary. (ii) the individuals who, as of the effective date of the Plan, 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 (iii) Approval by stockholders of Parent of: (a) 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 2 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; (b) 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; (c) 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 Parent Subsidiary); (d) 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 Stock of the successor to the Company, unless Parent or a Parent Subsidiary continues to own directly or indirectly all or substantially all of the Company's assets; or (e) Any Person acquires Beneficial Ownership of a greater percentage of the Voting Stock of the Company than the percentage of such Voting Stock then held, directly or indirectly, by Parent or a Parent Subsidiary. Notwithstanding the foregoing clauses (i), (ii), and (iii), a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Stock as a result of the acquisition of Voting Stock by Parent which, by reducing the number of Voting Stock outstanding, increases the proportional number of shares beneficially owned by the Subject Person, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Stock by Parent, and after such share acquisition by Parent, the Subject Person or entity becomes the Beneficial Owner of any additional Voting Stock which increases the percentage of the then outstanding Voting Stock Beneficially Owned by the Subject Person, then a Change in Control shall occur. 3 (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Remuneration Committee of the Board of the Parent. (g) "Company" means LG&E Energy Corp., a Kentucky corporation, and any successor thereto. (h) "Company Performance Goals" shall have the meaning ascribed to it by Section 6.1 hereof. (i) "Company Performance Award" means an award established pursuant to Article 6 hereof. Such Company Performance Awards shall be expressed as a percentage of the Participant's base salary. (j) "Earned Award" means the Earned Individual Award, if any, and the Earned Company Award, if any, for a Participant for the applicable Incentive Period. (k) "Earned Company Award" means the actual award earned under a Participant's Company Performance Award during an Incentive Period as determined by the Committee at the end of the Incentive Period (pursuant to Section 6.3 hereof). (l) "Earned Individual Award" means the actual award earned under a Participant's Individual Performance Award during an Incentive Period as determined by the Committee at the end of the Incentive Period (pursuant to Section 5.4 hereof). (m) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (n) "Incentive Period" shall mean the period with respect to which a Participant is eligible to earn an Earned Award. Subject to the discretion of the Committee to select shorter or longer Incentive Periods, the Incentive Period shall be the Plan Year. (o) "Individual Performance Award" means an award established pursuant to Article 5 hereof. Such Individual Performance Award shall be expressed as a percentage of the Participant's actual base salary. (p) "Key Employee" means the Chief Executive Officer of the Company and each employee of the Company or any of its Subsidiaries who, in the opinion of the Chief Executive Officer of the Company, is in a position to significantly contribute to the growth and profitability of the Company or any of its Subsidiaries (see Article 4 herein). (q) "Parent" means Powergen plc, an English public limited company, and any successor thereto. 4 (r) "Participant" means a Key Employee who is nominated for participation by the Chief Executive Officer and then is selected by the Committee to participate in the Plan (see Article 4 herein). (s) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (t) "Plan Year" means the Company's fiscal year commencing January 1 and ending December 31. (u) "Subsidiary" shall mean any corporation of which more than 50% (by number of votes) of the Voting Stock at the time outstanding is owned, directly or indirectly, by the Parent. (v) "Target Performance Award" means the Individual Performance Award, if any, and the Company Performance Award, if any, for a Participant for the applicable Incentive Period. (w) "Voting Securities" shall mean securities of any class or classes of stock of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors. 2.2. GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 2.3. SEVERABILITY. In the event any provision of the Plan shall be held legally invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION 3.1. THE COMMITTEE. This Plan shall be administered by the Committee or such delegated as permitted by law and Article 3.3 delegated by the Committee to administer the Plan in accordance with rules that it may establish from time to time, that are not inconsistent with the provisions of this Plan. 5 3.2. AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan and to establish, amend or waive rules and regulations for its administration. The determination of the Committee as to any disputed question arising under this Plan, including questions of construction and interpretation shall be final, binding, and conclusive upon all persons and shall not be reviewable. 3.3. DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in its sole discretion, delegate to an officer or officers of the Company the administration of the Plan under this Article 3; provided, however, that no such delegation by the Committee shall be made with respect to the administration of the Plan as it affects officers of the Company or its Subsidiaries, and provided further that the Committee may not delegate its authority to correct errors, omissions or inconsistencies in the Plan. All authority delegated by the Committee under this Section 3.3 shall be exercised in accordance with the provisions of the Plan and any guidelines for the exercise of such authority that may from time to time be established by the Committee. 3.4. PROCEDURES OF THE COMMITTEE. All determinations of the Committee shall be made by not less than a majority of its members present at the meeting (in person or otherwise) at which a quorum is present. A majority of the entire Committee shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Committee may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee. 3.5. INDEMNIFICATION. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification, limitation of liability and reimbursement of expenses with respect to their services as members of the Committee to the same extent that they are entitled under the law for their services as directors of the Company. ARTICLE 4. ELIGIBILITY AND PARTICIPATION 4.1. ELIGIBILITY. Eligibility for participation in the Plan shall be limited to those Key Employees who are nominated for participation by the Chief Executive Officer of the Company and then selected by the Committee to participate in the Plan. 6 4.2. PARTICIPATION. Participation in the Plan shall be determined annually based upon nomination by the Chief Executive Officer and selection by the Committee. Specific criteria for participation shall be determined by the Committee prior to the beginning of each Incentive Period. Key Employees selected for participation shall be notified in writing of their selection, and of their performance goals and related Target Performance Awards, as soon after approval as is practicable. 4.3. PARTIAL INCENTIVE PERIOD PARTICIPATION. Subject to Article 6 herein, the Committee may, upon recommendation of the Chief Executive Officer, allow an individual who becomes eligible after the beginning of an Incentive Period to participate in the Plan for that period. In such case, the Participant's Earned Award normally shall be prorated based on the number of full months of participation during such Incentive Period. However, subject to Article 6 herein, the Chief Executive Officer, subject to Committee approval, may authorize an unreduced Earned Award. 4.4. TERMINATION OF APPROVAL. In its sole discretion, the Committee may withdraw its approval for participation in the Plan with respect to an Incentive Period for a Participant at any time during such Incentive Period; provided, however that, such withdrawal must occur before the end of such Incentive Period and provided further that, in the event a Change in Control occurs during an Incentive Period, the Committee may not thereafter withdraw its approval for a Participant during such Incentive Period. In the event of such withdrawal, the employee concerned shall cease to be a Participant as of the date designated by the Committee, and the employee shall not be entitled to any part of an Earned Award for the Incentive Period in which such withdrawal occurs. Such employee shall be notified of such withdrawal in writing as soon as practicable following such action. ARTICLE 5. INDIVIDUAL PERFORMANCE AWARDS 5.1. AWARD OPPORTUNITIES. At the beginning of each Incentive Period, the Committee or its delegates shall establish Individual Performance Award levels for each Participant who is an officer of the Company and who is to be granted an Individual Performance Award. The established levels may vary in relation to the responsibility level of the Participant. In the event a Participant changes job levels during the Incentive Period, the Individual Performance Award may be adjusted at the discretion of the Committee or its delegates, as appropriate, to reflect the amount of time at each job level. Notwithstanding any provision in this Plan to the contrary, Individual Performance Awards shall not be dependent in any manner on, and shall be established independently of and in addition to, the establishment of any Company Performance Awards or the payout of any Earned Company Awards pursuant to Article 6 herein. 7 5.2. INDIVIDUAL PERFORMANCE GOALS. At the beginning of each Incentive Period, the Committee or its delegates shall establish individual performance goals for each Participant who is granted an Individual Performance Award. The level of achievement of the individual performance goals by a Participant at the end of the Incentive Period, as determined pursuant to Section 5.4 below, will determine such Participant's Earned Individual Award, which may range from 0% to 175% of such Participant's Individual Performance Award. 5.3. ADJUSTMENT OF INDIVIDUAL PERFORMANCE GOALS. The Committee or its delegates shall have the right to adjust the individual performance goals (either up or down) during the Incentive Period if they determine that external changes or other unanticipated conditions have materially affected the fairness of the goals and unduly influenced a Participant's ability to meet them. 5.4. EARNED INDIVIDUAL AWARD DETERMINATION. At the end of each Incentive Period, the Chief Executive Officer shall review the performance of each Participant who received an Individual Performance Award. Based on the Chief Executive Officer's determination as to a Participant's level of achievement of his or her individual performance goals, the Chief Executive Officer shall make a recommendation to the Committee as to the Earned Individual Award to be received by such Participant. Notwithstanding the foregoing, however, all reviews and determinations with respect to the performance of the Chief Executive Officer , and the payment of any Earned Individual Award to the Chief Executive Officer shall be made by the Chairman of the Parent. The payment of all Earned Individual Awards is subject to approval by the Committee. The payment of an Earned Individual Award to a Participant shall not be contingent in any manner upon the attainment of, or failure to attain the Company Performance Goals for the Company Performance Awards granted to such Participant under Article 6. 5.5. MAXIMUM PAYABLE/AGGREGATE AWARD CAP. The maximum amount payable to a Participant pursuant to this Article 5 for performance by the Participant during any fiscal year of the Company shall be determined by the Committee or its delegates. The Committee also may establish guidelines governing the maximum Earned Individual Awards that may be earned by all Participants in the aggregate, in each Incentive Period. These guidelines may be expressed as a percentage of a financial measure, or such other measure as the Committee shall from time to time determine. ARTICLE 6. COMPANY PERFORMANCE AWARDS In addition to any Individual Performance Awards granted under Article 5, Company Performance Awards based solely on Company performance may be established under this Article 6 for Participants. 8 6.1. AWARD OPPORTUNITIES. On or before the 90th day of each Incentive Period and in any event before 25% or more of the Incentive Period has elapsed, the Committee or its delegates upon recommendation by the Chief Executive Officer shall establish in writing for each Participant for whom a Company Performance Award is to be granted under this Article 6, the Company Performance Award and specific objective performance goals for the Incentive Period, which goals shall meet the requirements of Section 6.2 herein (such goals are hereinafter referred to as "Company Performance Goals"). The extent, if any, to which an Earned Company Award will be payable to a Participant will be based solely upon the degree of achievement of such pre-established Company Performance Goals over the specified Incentive Period; provided, however, that the Committee or its delegates may, in its sole discretion, reduce the amount which would otherwise be payable with respect to an Incentive Period. Payment of an Earned Company Award to a Participant shall consist of a cash award from the Company to be based upon a percentage (which may exceed 100%) of the Participant's Company Performance Award. 6.2 COMPANY PERFORMANCE GOALS. The Company Performance Goals established by the Committee or its delegates pursuant to Section 6.1 will be based on one or more of the following: total shareholder return, return on equity, return on capital, earnings per share, market share, stock price, sales, costs, net income, cash flow, retained earnings, profit before tax, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, service reliability, demand-side management (including conservation and load management), operating and maintenance cost management, energy production availability performance measures, or any other measures determined by the Committee or its delegates. At the time of establishing a Company Performance Goal, the Committee shall specify the manner in which the Company Performance Goal shall be calculated. In so doing, the Committee may exclude the impact of certain specified events from the calculation of the Company Performance Goal. For example, if the Company Performance Goal were earnings per share, the Committee could, at the time this Company Performance Goal was established, specify that earnings per share are to be calculated without regard to any subsequent change in accounting standards required by the Financial Accounting Standards Board. Company Performance Goals also may be based on the attainment of specified levels of performance of the Company and/or any of its Subsidiaries under one or more of the measures described above relative to the performance of other corporations. As part of the establishment of Company Performance Goals for an Incentive Period, the Committee shall also establish a minimum level of achievement of the Company Performance Goals that must be met for a Participant to receive any portion of his Company Performance Award. 6.3 PAYMENT OF AN EARNED COMPANY AWARD. At the time the Company Performance Award for a Participant is established, the Committee shall prescribe a formula to determine the percentage (which may exceed 100%) of the Company Performance Award which may be payable to the Participant based upon the degree of attainment of the Company Performance Goals during the Incentive Period. If the minimum level of achievement of Company Performance Goals established by the Committee for a 9 Participant for an Incentive Period is not met, no payment of an Earned Company Award will be made to the Participant for that Incentive Period. To the extent that the minimum level of achievement of Company Performance Goals is satisfied or surpassed for a Participant for an Incentive Period, and upon written certification by the Committee that the Company Performance Goals have been satisfied to a particular extent and that any other material terms and conditions of the Company Performance Awards have been satisfied, payment of an Earned Company Award shall be made to the Participant for that Incentive Period in accordance with the prescribed formula unless the Committee determines, in its sole discretion, to reduce the payment to be made. 6.4 MAXIMUM PAYABLE. The maximum amount payable to a Participant pursuant to this Article 6 for performance by the Participant during any fiscal year of the Company shall be determined by the Committee or its delegates. 6.5 COMMITTEE DISCRETION. Notwithstanding Article 5 herein, the Committee shall not have discretion to modify the terms of Company Performance Awards, except as specifically set forth in this Article 6. ARTICLE 7. FORM AND TIMING OF PAYMENT OF AWARDS Subject to Article 6 herein, as soon as practicable following the applicable Incentive Period, Earned Award payments, if any, for such Incentive Period shall be paid in cash. Subject to Article 6 herein, deferral of payments may be provided for under rules to be determined by the Committee. ARTICLE 8. TERMINATION OF EMPLOYMENT 8.1. TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event a Participant's employment is terminated by reason of death, total and permanent disability (as determined by the Committee), or retirement (as determined by the Committee), the Earned Award, determined in accordance with Section 5.4 and Section 6.3 herein, shall be reduced to reflect participation prior to termination. This reduction shall be determined by multiplying said Earned Award by a fraction; the numerator of which is the months of participation through the date of termination rounded up to whole months and the denominator of which is the number of whole months in the applicable Incentive Period. The Earned Award thus determined shall be paid as soon as practicable following the release of the Company's audited financial statements pertaining to the Plan Year ending coincident with or immediately after the applicable Incentive Period. 10 8.2. TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event a Participant's employment is terminated for any reason other than death, total and permanent disability, or retirement (of which the Committee shall be the sole judge), all of the Participant's rights to an Earned Award for the Incentive Period then in progress shall be forfeited. However, except in the event of a termination of employment for Cause, the Committee, in its sole discretion, may pay a prorated award for the portion of that Incentive Period that the Participant was employed by the Company or any of its Subsidiaries, computed as determined by the Committee. ARTICLE 9. RIGHTS OF PARTICIPANTS 9.1. EMPLOYMENT. Nothing in this Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any of its Subsidiaries. 9.2. PARTICIPATION. No Participant or other employee shall at any time have a right to be selected for participation in the Plan for any Incentive Period, despite having been selected for participation in a previous Incentive Period. Except as otherwise provided in Article 8 or Article 11 herein and subject to Section 4.4 herein, a Participant shall not have any right to an Earned Award for an Incentive Period, unless the Participant is an employee of the Company at the end of such Incentive Period. 9.3. NONTRANSFERABILITY. No right or interest of any Participant in this Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge, and bankruptcy. 9.4. NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 11 9.5. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Parent, Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Parent, Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Parent, Company or the applicable Subsidiary. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Parent, Company or any of its Subsidiaries. Nothing contained in the Plan constitutes a guarantee by the Parent, Company or any of its Subsidiaries that the assets of the Company or the applicable Subsidiary shall be sufficient to pay any benefit to any person. ARTICLE 10. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any benefit under the Plan is to be paid in case of his death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation, or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 11. CHANGE IN CONTROL Notwithstanding any other provisions of the Plan, in the event a Participant's employment with the Company or any of its Subsidiaries is terminated by the Company for any reason other than for Cause, within twenty-four (24) months after a Change in Control of the Company or any of its Subsidiaries, all awards previously deferred (with earnings) shall be paid to the Participant within ten (10) business days of the termination; along with the Target Performance Award established for the Participant for the Incentive Period in progress at the time of the employment termination, prorated for the number of days in the Incentive Period in which the Participant was employed by the Company or any of its Subsidiaries, up to and including the date of termination. In the event a Participant's employment with the Company or any of its Subsidiaries is terminated for Cause, no Earned Award will be paid for the Incentive Period in progress at the time of the employment termination. 12 ARTICLE 12. AMENDMENTS The Committee, in its absolute discretion, without notice, at any time and from time to time, may modify or amend in whole or in part, any or all of the provisions of this Plan, or suspend or terminate it entirely; provided, that no such modification, amendment, suspension, or termination after an Incentive Period, may without the consent of a Participant (or his beneficiary in the case of the death of the Participant) reduce the right of a Participant (or his beneficiary, as the case may be) to a payment or distribution hereunder to which he is entitled for that Incentive Period. ARTICLE 13. REQUIREMENTS OF LAW 13.1. GOVERNING LAW. The Plan, and all agreements hereunder shall be construed in accordance with and governed by the laws of England. 13.2. WITHHOLDING TAXES. The Company shall have the right to deduct from all payments under this Plan any taxes required by the law to be withheld with respect to such payments. 13 EX-10.110 9 a2048540zex-10_110.txt COPY OF 2 FORMS OF CHANGE IN CONTROL AGREEMENT Exhibit 10.110 CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT made this DATE, by and between LG&E ENERGY CORP. (the "Company") and _____________________("Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and Powergen, plc (the "Parent") to retain the services of the Executive in the event of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company or a Subsidiary (as hereinafter defined), as the case may be, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event his employment is terminated as a result of, or in connection with, a Change in Control. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of the _____ day of _________________, 2000, and shall continue in effect until SAME MONTH/DAY, 2002, provided, however, that commencing on SAME MONTH/DAY, 2002, and on SAME MONTH/DAY thereafter, the term of this Agreement shall automatically be extended for one (1) year unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto 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. 2. DEFINITIONS. 2.1 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 and its Subsidiaries (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 Change in Control, and shall include all amounts of base salary that are deferred under any qualified and non-qualified employee benefits plans of the Company or any Subsidiary 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, (b) the annual bonus paid or payable to the Executive under the Short Term Incentive Plan for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred or (c) the Executive's target award under the Short Term Incentive Plan for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred. 2.2 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 that (i) there has been repeated gross negligence by the Executive in performing the reasonably assigned duties on behalf of an Employer required by and in accordance with his employment by such Employer, or (ii) the Executive has committed 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 seventy-five percent (75%) of the Board 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. 2.3 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: (a) 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 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. (b) 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 (c) Approval by stockholders of Parent of: (1) A merger, consolidation or reorganization involving Parent; unless (i) 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 (ii) 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); (4) 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 (5) 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. (d) Notwithstanding the foregoing clauses (a), (b), and (c), a Change in Control shall not be deemed to occur solely because any 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. (e) 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. 2.4 DISABILITY. For purposes of this Agreement, "Disability" shall mean (i) a physical or mental infirmity which has been determined to be total and permanent disability under and in accordance with the provisions of the Company's Long Term Disability Plan for Employees of Louisville Gas and Electric Company who are not members of a Bargaining Unit or (ii) in the event the Company does not maintain such plan at the time of the determination of the Executive's Disability, a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with an Employer which continues for a period of at least one hundred eighty (180) consecutive days. 2.5 AN EMPLOYER. For the purposes of this Agreement, "an Employer" shall mean: (i) in the event the Executive is an officer of the Company and not of any of its Subsidiaries at the time of a Change in Control, the Company; (ii) in the event the Executive is an officer of one or more Subsidiaries of the Company, but not of the Company, at the time of a Change in Control, any such Subsidiary; and (iii) in the event the Executive is an officer of the Company and one or more Subsidiaries at the time of a Change in Control, any such entity of which the Executive is an officer at the time of the Change in Control. 2.6 GOOD REASON. (a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control of any of the events or conditions described in subsections (1) through (8) hereof: (7) 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 thirty days of the applicable due date, provided that the Company may correct such reduction or failure within thirty (30) days of its commission; (8) Parent or the Company require the Executive to be relocated anywhere in excess of one hundred (100) miles of his present office location, except for required travel on Parent or Company business consistent with his business travel obligations; (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 the Change in Control, 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 Change in Control, 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 Change in Control, as applicable; (4) Parent or the Company fails to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 7 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 4 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; (9) any purported termination of the Executive's employment for Cause by Parent or the Company which does not comply with the terms of Section 2.2 of this Agreement; (10) the Company materially reduces, individually or in the aggregate, the Executive's title, job authorities or responsibilities as in effect prior to such reduction; or (b) Any event or condition described in this Section 2.6(a)(1) through (8) above, which occurs prior to a Change in Control but which the Executive reasonably demonstrates (i) was at the request of a Third Party, or (ii) otherwise arose in connection with or in anticipation of a Change in Control which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. (c) Until the Executive's Disability, the Executive's rights to terminate his employment pursuant to this Section 2.6 shall not be affected by his incapacity due to physical or mental illness. 3. TERMINATION OF EMPLOYMENT. 3.1 If, during the term of this Agreement, the Executive's employment with an Employer shall be terminated within twenty-four (24) months following a Change in Control, then the Executive shall be entitled to the following compensation and benefits: (a) If the Executive's employment with an Employer shall be terminated (1) by an Employer for Cause or Disability, (2) by reason of the Executive's death, or (3) by the Executive other than for Good Reason, the Company shall pay the Executive all amounts earned or accrued for or on behalf of the Company or any of its Subsidiaries 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 or any Subsidiary during the period ending on the Termination Date and (iii) vacation pay (collectively, "Accrued Compensation"). (b) If the Executive's employment with an Employer shall be terminated for any reason other than as specified in clause (1) or (2) of Section 3.1(a) or if the Executive's employment is terminated by the Executive for Good Reason, the Executive shall be entitled to the following: (i) The Company shall pay the Executive all Accrued Compensation; (ii) For terminations occurring within the first twenty-four months of the Effective Date, 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. For terminations occurring after the first twenty-four months of the Effective Date, 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; (iii) For a number of months equal to the lesser of (a) twenty-four (24) or (b) the number of months remaining until the Executive's 65th birthday (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 and/or its Subsidiaries 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 or its Subsidiaries during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b)(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 (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 (iv) The Company shall provide to the Executive outplacement services in an amount up to twenty percent (20%) of the Base Amount. (c) The amounts provided for in Section 3.1(a) and 3.1(b)(i) and (ii) shall be paid in a lump sum within thirty (30) days after the Executive's Termination Date. (d) 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 Section 3.1(b)(iii). 3.2 The provisions of this Agreement, and any payment provided for hereunder, shall not reduce or increase any amounts otherwise payable, or in any way diminish or enhance 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 A attached hereto, provided, however, the Company shall not be required to make duplicative payments of Accrued Compensation. A determination of a Change in Control under this Agreement is effective only with respect to benefits payable hereunder, and is not determinative of a change in control 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. 4. NOTICE OF TERMINATION. Any purported termination by an Employer 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. 5. 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: (a) If the Executive's employment is terminated by an Employer 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 (b) 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 the Employer. 6. CERTAIN ADDITIONAL PAYMENTS (a) Notwithstanding anything in the Agreement to the contrary, in the event that a Change in Control occurs and 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 the 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. (b) Subject to the provisions of Section 6(f) hereof, all determinations required to be made under this Section 6, 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 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 6(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. (c) 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 cooperative with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 6(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. (d) 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. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(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. (f) 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 6(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(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 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. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(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 6(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 6(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 6. 7. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and, at the time of any such succession or assignment, the Company 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 the Company would be required to perform it if no such succession or assignment had taken place. The term "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, 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. 8. FEES AND EXPENSES. The Company shall pay legal fees and related expenses (including the cost of experts, evidence and counsel) incurred by the Executive as they become due as a result of (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; provided, however, that the circumstances set forth in clauses (a) and (b) (other than as a result of the Executive's termination of employment under circumstances described in Section 2.3(d)) occurred on or after a Change in Control. 9. 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 an Employer shall be directed to the attention of the Board with a copy to the Secretary of such Employer. 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. 10. 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 or any of its Subsidiaries 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 or any of its Subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its Subsidiaries shall be payable in accordance with such plan or program. 11. 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 or any of its Subsidiaries may have against the Executive or others. 12. 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 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 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. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Kentucky. 14. 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. 15. 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 (if any), as previously amended, which shall cease to be of any further effect. 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. LG&E ENERGY CORP. ------------------------------------ Roger W. Hale Chairman and Chief Executive Officer ------------------------------------ Executive CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT made this DATE, by and between LG&E ENERGY CORP. (the "Company") and _____________________("Executive"). WHEREAS, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as hereinafter defined) exists and that the occurrence of a Change in Control can result in significant distractions of its key management personnel because of the uncertainties inherent in such a situation; WHEREAS, the Board has determined that it is essential and in the best interest of the Company and Powergen, plc (the "Parent") to retain the services of the Executive in the event of a Change in Control and to ensure his continued dedication and efforts in such event without undue concern for his personal financial and employment security; and WHEREAS, in order to induce the Executive to remain in the employ of the Company or a Subsidiary (as hereinafter defined), as the case may be, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide the Executive with certain benefits in the event his employment is terminated as a result of, or in connection with, a Change in Control. NOW, THEREFORE, in consideration of the respective agreements of the parties contained herein, it is agreed as follows: 1. TERM OF AGREEMENT. This Agreement shall commence as of the _____ day of _________________, 2000, and shall continue in effect until SAME MONTH/DAY, 2002, provided, however, that commencing on SAME MONTH/DAY, 2002, and on SAME MONTH/DAY thereafter, the term of this Agreement shall automatically be extended for one (1) year unless either the Company or the Executive shall have given written notice to the other at least ninety (90) days prior thereto 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. 2. DEFINITIONS. 2.1 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 and its Subsidiaries (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 Change in Control, and shall include all amounts of base salary that are deferred under any qualified and non-qualified employee benefits plans of the Company or any Subsidiary 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, (b) the annual bonus paid or payable to the Executive under the Short Term Incentive Plan for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred or (c) the Executive's target award under the Short Term Incentive Plan for the full fiscal year ended prior to the fiscal year during which a Change in Control occurred. 2.2 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 that (i) there has been repeated gross negligence by the Executive in performing the reasonably assigned duties on behalf of an Employer required by and in accordance with his employment by such Employer, or (ii) the Executive has committed 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 seventy-five percent (75%) of the Board 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. 2.3 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: (a) 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 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. (b) 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 (c) Approval by stockholders of Parent of: (1) A merger, consolidation or reorganization involving Parent; unless (i) 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 (ii) 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); (4) 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 (5) 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. (d) Notwithstanding the foregoing clauses (a), (b), and (c), a Change in Control shall not be deemed to occur solely because any 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. (e) 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. 2.4 DISABILITY. For purposes of this Agreement, "Disability" shall mean (i) a physical or mental infirmity which has been determined to be total and permanent disability under and in accordance with the provisions of the Company's Long Term Disability Plan for Employees of Louisville Gas and Electric Company who are not members of a Bargaining Unit or (ii) in the event the Company does not maintain such plan at the time of the determination of the Executive's Disability, a physical or mental infirmity which impairs the Executive's ability to substantially perform his duties with an Employer which continues for a period of at least one hundred eighty (180) consecutive days. 2.5 AN EMPLOYER. For the purposes of this Agreement, "an Employer" shall mean: (i) in the event the Executive is an officer of the Company and not of any of its Subsidiaries at the time of a Change in Control, the Company; (ii) in the event the Executive is an officer of one or more Subsidiaries of the Company, but not of the Company, at the time of a Change in Control, any such Subsidiary; and (iii) in the event the Executive is an officer of the Company and one or more Subsidiaries at the time of a Change in Control, any such entity of which the Executive is an officer at the time of the Change in Control. 2.6 GOOD REASON. (a) For purposes of this Agreement, "Good Reason" shall mean the occurrence after a Change in Control 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 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 one hundred (100) miles of his present office location, except for required travel on Parent or Company business consistent with his business travel obligations; (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 the Change in Control, 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 Change in Control, 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 Change in Control, as applicable; (4) Parent or the Company fails to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 7 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 4 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 2.2 of this Agreement; (8) the Company materially reduces, individually or in the aggregate, the Executive's title, job authorities or responsibilities as in effect prior to such reduction; or (b) Any event or condition described in this Section 2.6(a) (1) through (8) above, which occurs prior to a Change in Control but which the Executive reasonably demonstrates (i) was at the request of a Third Party, or (ii) otherwise arose in connection with or in anticipation of a Change in Control which actually occurs, shall constitute Good Reason for purposes of this Agreement notwithstanding that it occurred prior to the Change in Control. (c) Until the Executive's Disability, the Executive's rights to terminate his employment pursuant to this Section 2.6 shall not be affected by his incapacity due to physical or mental illness. 3. TERMINATION OF EMPLOYMENT. 3.1 If, during the term of this Agreement, the Executive's employment with an Employer shall be terminated within twenty-four (24) months following a Change in Control, then the Executive shall be entitled to the following compensation and benefits: (a) If the Executive's employment with an Employer shall be terminated (1) by an Employer for Cause or Disability, (2) by reason of the Executive's death, or (3) by the Executive other than for Good Reason, the Company shall pay the Executive all amounts earned or accrued for or on behalf of the Company or any of its Subsidiaries 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 or any Subsidiary during the period ending on the Termination Date and (iii) vacation pay (collectively, "Accrued Compensation"). (b) If the Executive's employment with an Employer shall be terminated for any reason other than as specified in clause (1) or (2) of Section 3.1(a) or if the Executive's employment is terminated by the Executive for Good Reason, 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 after the Termination Date, an amount equal to 2.99 times the sum of (a) the Base Amount and (b) the Bonus Amount; (iii) For a number of months equal to the lesser of (a) twenty-four (24) or (b) the number of months remaining until the Executive's 65th birthday (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 and/or its Subsidiaries 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 or its Subsidiaries during the Continuation Period. The coverage and benefits (including deductibles and costs) provided in this Section 3.1(b)(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 (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 (iv) The Company shall provide to the Executive outplacement services in an amount up to twenty percent (20%) of the Base Amount. (c) The amounts provided for in Section 3.1(a) and 3.1(b)(i) and (ii) shall be paid in a lump sum within thirty (30) days after the Executive's Termination Date. (d) 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 Section 3.1(b)(iii). 3.2 The provisions of this Agreement, and any payment provided for hereunder, shall not reduce or increase any amounts otherwise payable, or in any way diminish or enhance 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 A attached hereto, provided, however, the Company shall not be required to make duplicative payments of Accrued Compensation. A determination of a Change in Control under this Agreement is effective only with respect to benefits payable hereunder, and is not determinative of a change in control 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. 4. NOTICE OF TERMINATION. Any purported termination by an Employer 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. 5. 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: (a) If the Executive's employment is terminated by an Employer 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 (b) 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 the Employer. 6. CERTAIN ADDITIONAL PAYMENTS (a) Notwithstanding anything in the Agreement to the contrary, in the event that a Change in Control occurs and 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 the 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. (b) Subject to the provisions of Section 6(f) hereof, all determinations required to be made under this Section 6, 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 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 6(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. (c) 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 cooperative with the Accounting Firm in connection with the preparation and issuance of the determinations and calculations contemplated by Section 6(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. (d) 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. (e) The fees and expenses of the Accounting Firm for its services in connection with the determinations and calculations contemplated by Section 6(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. (f) 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 6(f), the Company shall control all proceedings taken in connection with the contest of any claim contemplated by this Section 6(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 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. (g) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(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 6(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 6(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 6. 7. SUCCESSORS; BINDING AGREEMENT. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns and, at the time of any such succession or assignment, the Company 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 the Company would be required to perform it if no such succession or assignment had taken place. The term "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, 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. 8. FEES AND EXPENSES. The Company shall pay legal fees and related expenses (including the cost of experts, evidence and counsel) incurred by the Executive as they become due as a result of (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; provided, however, that the circumstances set forth in clauses (a) and (b) (other than as a result of the Executive's termination of employment under circumstances described in Section 2.3(d)) occurred on or after a Change in Control. 9. 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 an Employer shall be directed to the attention of the Board with a copy to the Secretary of such Employer. 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. 10. 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 or any of its Subsidiaries 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 or any of its Subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Company or any of its Subsidiaries shall be payable in accordance with such plan or program. 11. 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 or any of its Subsidiaries may have against the Executive or others. 12. 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 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 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. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Kentucky. 14. 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. 15. 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 (if any), as previously amended, which shall cease to be of any further effect. 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. LG&E ENERGY CORP. ------------------------------------ Roger W. Hale Chairman and Chief Executive Officer ------------------------------------ Executive EX-99.02 10 a2048540zex-99_02.txt LGE & KY DIR OFFICER INFO Exhibit 99.02 LOUISVILLE GAS AND ELECTRIC COMPANY AND KENTUCKY UTILITIES COMPANY DIRECTOR AND OFFICER INFORMATION The outstanding stock of Louisville Gas and Electric Company ("LG&E") is divided into three classes: Common Stock, Preferred Stock (without par value), and Preferred Stock, par value $25 per share. At the close of business on April 20, 2001, the following shares of each were outstanding: Common Stock, without par value.......................... 21,294,223 shares Preferred Stock, par value $25 per share, 5% Series...... 860,287 shares Preferred Stock, without par value, $5.875 Series........ 250,000 shares Auction Series A (stated value $100 per share)........... 500,000 shares
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 April 20, 2001, the following shares of each were outstanding Common Stock, without par value.................................... 37,817,878 shares Preferred Stock, without par value (stated value $200 per share) 4.75% Series..................................................... 200,000 shares 6.53% Series..................................................... 200,000 shares
All of the outstanding LG&E Common Stock and KU Common Stock is owned by LG&E Energy Corp. ("LG&E Energy"). Based on information contained in a Schedule 13G originally filed with the Securities and Exchange Commission in October 1998, AMVESCAP PLC, a parent holding company, reported certain holdings in excess of five percent of LG&E's Preferred Stock. AMVESCAP PLC, with offices at 1315 Peachtree Street, N.W., Atlanta, Georgia 30309, and certain of its subsidiaries reported sole voting and dispositive power as to no shares and shared voting and dispositive power as to 43,000 shares of LG&E Preferred Stock, without par value, $5.875 Series, representing 17.2% of that class of Preferred Stock. The reporting companies indicated that they hold the shares on behalf of other persons who have the right to receive or the power to direct the receipt of dividends or the proceeds of sales of the shares. No other persons or groups are known by management to be beneficial owners of more than five percent of LG&E's Preferred Stock. As of April 20, 2001, all directors, nominees for director and executive officers of LG&E and KU as a group beneficially owned no shares of LG&E Preferred Stock or KU Preferred Stock. INFORMATION ABOUT DIRECTORS AND NOMINEES The following contains information as of April 20, 2001 (with certain biographical information as of December 31, 2001), concerning the expected nominees for directors, as well as the directors whose terms of office continue after the annual meeting. On December 11, 2000, upon the closing of the merger transaction involving Powergen and LG&E Energy, all members of the LG&E and KU Boards, with the exception of Roger W. Hale, resigned, and the size of the Boards was fixed at nine. Six Powergen directors, Paul Myners, Sir Frederick Crawford, Sidney Gillibrand, Edmund Wallis, Dr. David K-P Li, and Roberto Quarta, and one Powergen officer, David Jackson, were appointed to fill all but one of the vacancies created by the above resignations. In January 2001, Roger W. Hale announced his resignation as a member of the LG&E and KU Boards, effective April 30, 2001. Victor A. Staffieri and Peter Hickson are expected to be appointed to fill the vacancies created by the resignation of Roger W. Hale and the previously-existing vacancy. Therefore, at this Annual Meeting, it is anticipated that the following nine persons will be proposed for election to the Board of Directors, pursuant to Kentucky law requiring that directors appointed to fill vacancies stand for re-election for the remainder of their unfulfilled terms at the next meeting of shareholders at which directors are elected: FOR THREE-YEAR TERMS EXPIRING AT THE 2004 ANNUAL MEETING: Paul Myners, Sir Frederick Crawford and David Jackson. FOR TWO-YEAR TERMS EXPIRING AT THE 2003 ANNUAL MEETING: Edmund A. Wallis, Dr. David K-P Li and Roberto Quarta. FOR ONE-YEAR TERMS EXPIRING AT THE 2002 ANNUAL MEETING: Sydney Gillibrand, Victor A. Staffieri and Peter Hickson. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT THE 2004 ANNUAL MEETING OF SHAREHOLDERS PAUL MYNERS (Age 52). Mr. Myners is Deputy Chairman of the Powergen plc Board, and is the senior independent director, having been appointed on May 31, 1999. Mr. Myners has been chairman of Gartmore Investment Management plc since 1987 and is also non-executive chairman of Guardian Media Group and is a member of the Financial Reporting Council. He was formerly an executive director of National Westminster Bank plc and a non-executive director of Celltech Group plc and Orange plc. He was a non-executive director of PowerGen UK plc between 1990 and 1996. SIR FREDERICK CRAWFORD (Age 69). Sir Crawford was appointed to the Powergen plc Board on October 22, 1998, having been a non-executive director of Powergen UK plc since June 1990. He is chairman of the Criminal Cases Review Commission and a Fellow of the Royal Academy of Engineering. He has held appointments as Professor of Electrical Engineering at Stanford University, and as Vice-Chancellor of Aston University for 16 years. He was formerly a non-executive director of Legal and General Group plc and Rexam plc. DAVID JACKSON (Age 47). Mr. Jackson is General Counsel and Company Secretary of Powergen plc. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT THE 2003 ANNUAL MEETING OF SHAREHOLDERS EDMUND A. WALLIS (Age 61). Mr. Wallis is Chairman and Chief Executive of Powergen plc., and was appointed to the Board on October 22, 1998, having been Chief Executive of Powergen UK plc since March 1990 and Chairman since July 1996. He is a non-executive director of Mercury European Privatisation Trust plc and a non-executive director of London Transport. Mr. Wallis resigned as Chief Executive Officer of Powergen plc on February 21, 2001. DR. DAVID K-P LI (Age 61). Dr. Li was appointed a director of Powergen plc on October 22, 1998, having been a non-executive director of Powergen UK plc since January 1998. He is chairman and chief executive of The Bank of East Asia Limited, having been a director since 1997, and holds directorships of numerous companies in the Far East and elsewhere, including The Hong Kong and China Gas Company Limited. ROBERTO QUARTA (Age 51). Mr. Quarta was appointed a director of Powergen plc on October 22, 1998, having been a non-executive director of Powergen UK plc since July 1996. Mr. Quarta is chief executive of BBA Group plc, having joined the board in 1993, and has also been a director of BTR plc. NOMINEES FOR DIRECTORS WITH TERMS EXPIRING AT THE 2002 ANNUAL MEETING OF SHAREHOLDERS SYDNEY GILLIBRAND CBE (Age 66). Mr. Gillibrand was appointed a director of Powergen plc on May 31, 1999. He is chairman of AMEC plc and TAG Aviation (UK) and a non-executive director of ICL, and Messier-Dowty. VICTOR A. STAFFIERI (Age 46). President and Chief Operating Officer of LG&E Energy February 1999 to present; Chief Financial Officer of Energy and LG&E, May 1997 to February 2000; Chief Financial Officer of Kentucky Utilities May 1998 to February 2000. President, Distribution Services Division of Energy December 1995 to May 1997; Senior Vice President, General Counsel and Public Policy of Energy and LG&E From November 1992 to December 1993. Effective April 30, 2001, Mr. Staffieri became Chief Executive Officer of Energy. PETER HICKSON (Age 55). Mr. Hickson is Group Finance Director of Powergen plc. He was appointed a director on June 19, 1998, having been Group Finance Director of Powergen UK plc since July 1996. Prior to that, he was Group Finance Director of MAI plc from 1991, having previously held senior positions in Tarmac and United Scientific Holdings. He is also a non-executive director of Lex Service plc. INFORMATION CONCERNING THE BOARD OF DIRECTORS Prior to the Powergen-LG&E Energy merger, each member of the Board of Directors of LG&E and KU was also a director of LG&E Energy. The committees of the Board of Directors of LG&E and KU included an Audit Committee and a Compensation Committee. During this period, the directors who were members of the various committees of LG&E and KU served in the same capacity for purposes of the LG&E Energy Boards of Directors. During 2000, there were a total of seven meetings of the LG&E and KU Boards. Information concerning the Boards of Directors of LG&E and KU shown below generally relates to the period prior to the completion of the Powergen-LG&E Energy merger. COMPENSATION OF DIRECTORS Directors who were also officers of LG&E Energy or its subsidiaries received no compensation in their capacities as directors. During 2000, non-employee directors received a retainer of approximately $2,333 per month, or $28,000 annually ($30,300 annually for committee chairmen), a fee for Board meetings of $1,300 per meeting, a fee for each committee meeting of $1,150 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 2000. Prior to the Powergen-LG&E Energy merger, non-employee directors of LG&E and KU could 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. Each deferred amount was credited by LG&E Energy to a bookkeeping account and then was converted into a stock equivalent on the date the amount was credited. Following completion of the Powergen-LG&E Energy merger, all share equivalents were converted into the right to receive the merger consideration of $24.85 in cash per share and were paid out in accordance with the terms of the plan. Prior to the Powergen-LG&E Energy merger, non-employee directors also received stock options pursuant to the LG&E Energy Corp. Stock Option Plan for Non-Employee. In connection with the Powergen-LG&E Energy merger, options held by a director under this plan were converted at the director's election into either options to acquired American Depositary Shares of Powergen (at an agreed upon exchange ratio) or cash. As noted earlier, since the completion of the Powergen-LG&E Energy merger, certain current members of the LG&E and KU boards also serve on the Board of Directors of Powergen plc. In that capacity, these members received or will receive certain compensation during 2000 and 2001. Information regarding such compensation is incorporated by reference from Powergen's Annual Report on Form 20-F for the year ended December 31, 2000 to be filed with the Securities and Exchange Commission. AUDIT COMMITTEE During 2000, the Audit Committee maintained direct contact with the independent auditors and LG&E's and KU's Internal Auditor to review the following matters pertaining to LG&E and KU: the adequacy of accounting and financial reporting procedures; the adequacy and effectiveness of internal accounting controls; the scope and results of the annual audit and any other matters relative to the audit of these companies' accounts and financial affairs that the Committee, the Internal Auditor, or the independent auditors deemed necessary. The Audit Committee met two times during 2000. Since the Powergen-LG&E Energy merger, the Audit Committee of the Board is composed of Messrs. Sydney Gillibrand and Paul Myners and Sir Frederick Crawford. REMUNERATION COMMITTEE Since the Powergen-LG&E Energy merger, the Remuneration Committee, composed of non-employee directors, has succeded to certain of the functions performed by the former Compensation Committee in connection with the compensation of the executive officers of LG&E and KU. The Committee makes recommendations regarding benefits provided to executive officers and the establishment of various employee benefit plans. The former Compensation Committee met three times during 2000. Since the Powergen-LG&E Energy merger, the members of the Remuneration Committee are Messrs. Paul Myners, and Roberto Quarta and Dr, K-P Li. REPORT OF THE REMUNERATION COMMITTEE FOLLOWING THE DECEMBER 11, 2000 COMPLETION OF THE MERGER TRANSACTION INVOLVING LG&E ENERGY CORP. ("LG&E ENERGY") AND POWERGEN PLC ("POWERGEN"), A REMUNERATION COMMITTEE OF THE BOARD OF DIRECTORS OF LOUISVILLE GAS AND ELECTRIC COMPANY AND KENTUCKY UTILITIES COMPANY ("LG&E," "KU" OR, COLLECTIVELY, THE "COMPANIES") WAS ESTABLISHED TO SUCCEED TO CERTAIN OF THE RELEVANT DUTIES FORMERLY PERFORMED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANIES. THIS REPORT, ALTHOUGH ISSUED BY THE MEMBERS OF THE CURRENT REMUNERATION COMMITTEE, PRIMARILY DESCRIBES ACTIONS TAKEN BY THE FORMER COMPENSATION COMMITTEE AS CONSTITUTED DURING 2000. THE CURRENT REMUNERATION COMMITTEE DOES NOT INCLUDE ANY INDIVIDUALS WHO WERE PREVIOUSLY ON THE COMPENSATION COMMITTEE. AT PRESENT, THE MEMBERSHIP OF THE REMUNERATION COMMITTEE OF LG&E IS THE SAME AS THE MEMBERSHIP OF THE REMUNERATION COMMITTEE OF THE BOARD OF DIRECTORS OF POWERGEN. The former Compensation Committee was comprised wholly of non-employee directors of LG&E Energy, LG&E and KU and made all decisions regarding the compensation of LG&E Energy's, LG&E's and KU's executive officers, including the setting of base pay and the administration of LG&E Energy's Omnibus Long-Term Incentive Plan (the "Long-Term Plan") and Short-Term Incentive Plan (the "Short-Term Plan"), each as defined herein. The current Remuneration Committee is comprised entirely of non-employee directors of LG&E, KU and Powergen. The Companies' executive compensation program and the target awards and opportunities for executives are designed to be competitive with the compensation and pay programs of comparable companies, including utilities, utility holding companies and companies in general industry nationwide. The executive compensation program has been developed and implemented over time through consultation with, and upon the recommendations of, recognized executive compensation consultants. The Remuneration Committee and the Board of Directors have continued access to such consultants as desired, and are provided with independent compensation data for their review. Set forth below is a report addressing LG&E's and KU's compensation policies during 2000 for their officers, including the executive officers named in the following tables. In many cases, the executive officers also serve in similar capacities for affiliates of LG&E and KU, including LG&E Energy. For each of the executive officers of LG&E and KU, the policies and amounts discussed below are for all services to LG&E, KU and their affiliates, during the period prior to the Powergen transaction. COMPENSATION PHILOSOPHY During 2000, LG&E's and KU's executive compensation program had three major components: (1) base salary; (2) short-term or annual incentives; and (3) long-term incentives. The Companies developed their executive compensation program to focus on both short-term and long-term business objectives that are designed to enhance overall shareholder value. The short-term and long-term incentives were premised on the belief that the interests of executives should be closely aligned with those of LG&E Energy's shareholders. Based on this philosophy, these two portions of each executive's total compensation package were placed at risk and were linked to the accomplishment of specific results that were designed to benefit LG&E Energy's shareholders in both the short-term and long-term. Under this pay-for-performance approach, a highly competitive level of compensation could be earned in years of strong performance. Conversely, in years of below-average performance, compensation might decline below competitive benchmarks. The executive compensation program also recognized that the Companies' compensation practices must be competitive not only with utilities and utility holding companies, but also with companies in general industry to ensure that a stable and successful management team can be recruited and retained. The Compensation Committee believed that the Companies' most direct competitors for executive talent are not limited to the companies that would be included in the utility industry index against which shareholder returns may be compared. For this reason, the various compensation peer groups as discussed below, were not the same as the utility industry index in the Comparison of Five-Year Total Return graph included in any applicable proxy statement. Pursuant to this competitive market positioning philosophy, in establishing compensation levels for all executive positions for 2000, the former Compensation Committee reviewed competitive compensation information for general industry companies with revenue between $2 - $4 billion (the "Survey Group") and established targeted total direct compensation (base salary plus short-term incentives and long-term incentives) for each executive for 2000 to approach the 50th percentile of the competitive range from the Survey Group. Salaries, short-term incentives and long-term incentives for 2000 are described below. The 2000 compensation information set forth in other sections of this proxy statement, particularly with respect to the tabular information presented, reflects the considerations set forth in this report. The Base Salary, Short-Term Incentives, and Long-Term Incentives sections that follow address the compensation philosophy for 2000 for all executive officers except for Mr. Roger W. Hale. Mr. Hale's compensation was determined in accordance with the terms of his employment agreement (See "Chief Executive Officer Compensation" for a description of his 2000 compensation). BASE SALARY The base salaries for LG&E and KU executive officers for 2000 were designed to be competitive with the Survey Group at approximately the 50th percentile of the base salary range for executives in similar positions with companies in the Survey Group. Actual base salaries were determined based on individual performance and experience. SHORT-TERM INCENTIVES The Short-Term Plan provided for Company Performance Awards and Individual Performance Awards, each of which is expressed as a percentage of base salary and each of which is determined independent of the other. The former Compensation Committee established the performance goals for the Company Performance Awards and Individual Performance Awards at the beginning of the 2000 performance year. Payment of Company Performance Awards for executive officers was based 100% on Net Income Available for Common Stock ("NIAC"), including certain adjustments deemed appropriate by the Committee. Payment of Individual Performance Awards was based 100% on Management Effectiveness, which includes a customer satisfaction element for certain participants. The awards varied within the executive officer group based upon the nature of each individual's functional responsibilities. For 2000, the Company Performance Award targets for executive officers ranged from 21% to 36% of base salary, and the Individual Performance Award targets ranged from 14% to 24% of base salary. Both awards were established to be competitive with the 50th percentile of such awards granted to comparable executives employed by companies in the Survey Group. The individual officers were eligible to receive from 0% to 175% of their targeted amounts, dependent upon Company and individual performance during 2000 as measured by NIAC with regard to Company Performance Awards, and were eligible to receive from 0% to 175% of their targeted amounts dependent upon individual performance as measured by Management Effectiveness with regard to Individual Performance Awards. Using LG&E Energy and subsidiaries performance to date, in December 2000, in connection with the pending completion of the LG&E Energy-Powergen merger, the former Compensation Committee determined and established projected annual performance against targets for Company Performance Awards. Effective with the merger, the Short-Term Plan was then terminated and, using the projected performance, Company Performance Awards for 2000 to the executive officers were paid ranging from 24.7% to 45%, of base salary. Payouts for the Individual Performance Awards to the executive officers ranged from 25% to 42%, of base salary. LONG-TERM INCENTIVES Pursuant to its terms, the Long-Term Plan was administered by a committee of not less than three non-employee directors of LG&E Energy who were appointed by the Board of Directors. During 2000, the Compensation Committee performed this function. The Long-Term Plan provided for the grant of any or all of the following types of awards: stock options, stock appreciation rights, restricted stock, performance units and performance shares. In 2000, the former Compensation Committee chose to award stock options and performance units to executive officers. The Compensation Committee determined the competitive long-term grants to be awarded for each executive based on the long-term awards for the 50th percentile of the Survey Group. The aggregate expected value of the stock options and performance units (delivered approximately 40% in the form of performance units and 60% in the form of nonqualified stock options in 2000) was intended to approach the expected value of long-term incentives payable to executives in similar positions with companies in the 50th percentile of the Survey Group, depending upon achievement of targeted Company performance. Stock options were granted to executive officers and senior management during the first quarter of 2000 at an exercise price equal to the fair market value at the time of grant and were subject to a one-year vesting requirement. During the year, newly hired or promoted officers were also eligible to receive pro-rated stock option grants under the Long-Term Plan. Since options were granted with an exercise price equal to the market value of LG&E Energy's common stock at the time of grant, they provide no value unless LG&E Energy's stock price increases after the grants are awarded. Once the options vest, they are exercisable over a nine-year term. These awards are thus tied to stock price appreciation in excess of the stock's value at time of grant, rewarding executives as if they shared in the ownership of LG&E Energy. The estimated number of shares subject to options was determined by taking the expected value to be provided in options, as determined above, and dividing that amount by the estimated current value of an option using a variation of the Black-Scholes option pricing methodology provided by the outside compensation consultant. Prior awards were not considered when making new grants. The actual number of options granted were then determined by approximating the average by officer level within LG&E Energy. Pursuant to the Plan's provisions, all outstanding options vested in June 2000 upon shareholder approval of the LG&E Energy-Powergen merger. At the time of the merger, all outstanding options were converted, at the election of the holder, into options to acquire Powergen ADRs or cash based upon the difference between the option exercise price and the per share merger consideration amount. The number of performance units granted was determined by taking the amount of the executive's long-term award to be delivered in performance units (adjusted on a present value basis), as determined above, and dividing that amount by the fair market value of LG&E Energy common stock on the date of the grant. The future value of the performance units was substantially dependent upon the changing value of LG&E Energy's common stock in the marketplace. Each executive officer was entitled to receive from 0% to 150% of the performance units contingently awarded to the executive based on LG&E Energy's total shareholder return over a three-year period (defined as share price increase plus dividends paid, divided by share price at beginning of the period) measured against the total shareholder return for such period ("TSR") by a peer group selected by the Committee. The peer group for measuring LG&E Energy's TSR performance (the "Long-Term Plan Peer Group") consisted of approximately 80 utility holding companies and gas and electric utilities.(1) Pursuant to the change in control provisions of the Long-Term Plan, payouts of the three open performance period awards under the Long-Term Plan occurred in June 2000 upon shareholder approval of the LG&E Energy-Powergen merger. These payouts were based on LG&E Energy's performance through that time for each of the partially completed 1998-2000, 1999-2001 and 2000-2002 performance periods, respectively. For such periods, LG&E Energy's performance was at the 57th, 46th, and 97th percentiles, respectively, of its comparison group with respect to TSR. OTHER In connection with the LG&E Energy-Powergen merger, Messrs. Staffieri, McCall and Newton entered into revised employment and severance agreements. These agreements are discussed under "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions". In consideration for the cancellation of their prior agreements, the officers received payments described in that section. These payments are included in the "All Other Compensation" column in the Summary Compensation Table. Mr. Duncan, who resigned effective January 31, 2001, did not receive a payment at the time of the merger, but received a payment of $2,017,683 in January 2001 pursuant to the terms of his existing change in control and non-disclosure and confidentiality agreements. Chief Executive Officer Compensation The compensation of the Chief Executive Officer of LG&E and KU, Mr. Roger W. Hale, was governed by the terms of an employment agreement. Following commencement of his service with LG&E in April 1989, Mr. Hale's employment agreement has been periodically updated by the Board to recognize his fundamental role in establishing LG&E Energy as a national and international diversified energy services company. Mr. Hale's 1998 employment agreement (the "1998 Agreement") provided for a five year term ending on May 4, 2003. As part of the LG&E Energy-Powergen merger, Powergen, LG&E Energy and Mr. Hale entered into a new employment agreement dated February 25, 2000 (the "2000 Agreement") which became effective on December 11, 2000 at the effective time of the LG&E Energy-Powergen merger. In consideration for the cancellation of his 1998 Agreement and associated change in control provisions, Mr. Hale received a payment equal to the severance benefits he would have been entitled to if he had terminated his employment following the merger. This payment is included in the "All Other Compensation" column in the Summary Compensation Table. (See "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions".) The 1998 Agreement established the minimum levels of Mr. Hale's 2000 compensation, although the former Compensation Committee retained discretion to increase such compensation. For 2000, the Compensation Committee compared Mr. Hale's compensation to that of chief executive officers of companies contained in the Survey Group including electric and gas utilities and utility holding companies with comparable revenues, market capitalization and asset size. In setting long-term awards, the Companies also considered survey data from various compensation consulting firms. Mr. Hale also received Companies' contributions to the savings plan, similar to those of other officers and employees. Details of Mr. Hale's 2000 compensation are set forth below. BASE SALARY. Mr. Hale was paid a total base salary of $816,200 during 2000. This amount was based upon the minimum salary amount provided in the 1998 Agreement, plus prior increases awarded by the Compensation Committee. The Compensation Committee, in determining Mr. Hale's annual salary, including increases, focused on his individual performance (including his management effectiveness, as described below), the growth of LG&E Energy and the compensation provided to other LG&E Energy, LG&E and KU officers. The 2000 increase, granted in February 2000, was 6% . SHORT-TERM INCENTIVES. Mr. Hale's target short-term incentive award was 70% of his 2000 base salary. As with other executive officers receiving short-term incentive awards, Mr. Hale was eligible to receive more or less than the targeted amount, based on Company performance and individual performance. His 2000 short-term incentive payouts were based 60% on achievement of Company Performance Award targets and 40% on achievement of Individual Performance Award targets. For 2000, the Company Performance Award payout for Mr. Hale was 49.5% of his 2000 base salary and the Individual Performance Award payout was 45% of his 2000 base salary. As with the other executive officers, in connection with the LG&E Energy-Powergen merger, the Company Performance Award was calculated based upon projected annual Company performance as described under the heading "Short-Term Incentives." In determining the Individual Performance Award, the Compensation Committee considered Mr. Hale's effectiveness in several areas including the financial and operational performance of LG&E Energy, LG&E, KU and other subsidiaries, customer satisfaction ratings, Company growth and the successful negotiation and completion of the LG&E Energy-Powergen transaction, as well as other measures. LONG-TERM INCENTIVE GRANT. In 2000, Mr. Hale received 190,000 options and 55,307 performance units for the 2000-2002 performance period. These amounts were determined in accordance with the terms of his 1998 Agreement and provide expected value representing approximately 175% of his base salary. The terms of the options and performance units (including the manner in which performance units are earned) for Mr. Hale are the same as for other executive officers, as described under the heading "Long-Term Incentives." LONG-TERM INCENTIVE PAYOUT. As with other executive officers, in connection with the LG&E Energy-Powergen merger, Mr. Hale's Company Performance Awards were calculated based upon LG&E Energy's performance during the partially completed 1998-2000, 1999-2001 and 2000-2002 periods, respectively, as described under the heading "Long-Term Incentives." For such periods, LG&E Energy's performance was at the 57th, 46th, and 97th, percentiles, respectively, of its comparison group with respect to TSR. CONCLUSION The former Compensation Committee believed that the Company's executive compensation system served the interests of the Company and its stakeholders effectively during 2000. The Remuneration Committee looks forward to its responsibilities with respect to the Company's executive compensation system and will continue to monitor and revise the compensation policies as necessary to ensure that the Company's compensation system continues to meet the needs of the Company and its stakeholders. MEMBERS OF THE REMUNERATION COMMITTEE Paul Myners, Chairman Dr. David K-P Li Roberto Quarta - ----------- (1) While similar, the utilities and holding companies that are in the Long-Term Plan Peer Group are not necessarily the same as those in the Standard & Poor's Utility Index used in the Company Performance Graph or the Survey Group. Nevertheless, in the judgment of the Compensation Committee, the companies in the Long-Term Plan Peer Group continue to represent the appropriate peer group for performance unit compensation purposes. EXECUTIVE COMPENSATION AND OTHER INFORMATION The following table shows the cash compensation paid or to be paid by Louisville Gas and Electric Company ("LG&E"), Kentucky Utilities Company ("KU") or their parent, LG&E Energy Corp. ("LG&E Energy"), 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 and KU who were serving as such at December 31, 2000, as required, in all capacities in which they served LG&E Energy or its subsidiaries during 1998, 1999 and 2000:
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ---------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ---------------------------- ----------------------- ------------------------- OTHER RESTRICTED SECURITIES ALL OTHER ANNUAL STOCK UNDERLYING LTIP COMPEN- NAME AND YEAR SALARY BONUS COMP. AWARDS OPTIONS/SARS PAYOUTS SATION PRINCIPAL POSITION ($) ($) ($) ($) (#) ($)(1) ($) ------------------ ---- ------- ------ --------- ------------ ------------- ---------- ------------ Roger W. Hale 2000 816,200 803,761 3,546,581(2) -- 190,000 3,870,758 5,085,473(3) Chairman of the Board and 1999 770,000 703,800 47,599 2,919,489(4) 102,122 0 55,596 Chief Executive Officer 1998 700,000 649,800 32,301 -- 133,588 821,272 36,191 Victor A. Staffieri 2000 460,000 388,277 24,247 262,880(5) 90,000 1,051,694 640,160(3) President and Chief 1999 400,000 324,600 22,730 -- 53,050 0 20,604 Operating Officer 1998 300,000 150,461 10,269 -- 45,802 166,611 15,590 John R. McCall 2000 325,000 228,605 18,177 172,028(5) 40,000 570,565 677,097(3) Executive Vice President, 1999 300,000 204,930 7,171 -- 31,830 0 17,252 General Counsel and 1998 260,000 140,399 7,870 -- 34,733 96,635 15,582 Corporate Secretary Frederick J. Newton III 2000 272,000 191,325 14,970 143,974(5) 30,000 356,334 814,961(3) Senior Vice President 1999 255,000 171,641 6,731 -- 12,219 0 8,712 and Chief Administrative 1998 217,100 99,253 69,229 -- 14,875 -- 3,328 Officer R. Foster Duncan 2000 342,000 240,563 29,240 -- 60,000 720,739 24,596(3) Executive Vice President 1999 325,000 215,788 52,440 -- 34,483 0 15,623 And Chief Financial 1998 262,903 210,000 69,687(7) -- 81,221 -- 4,785 Officer (6)
- ----------- (1) Year 2000 amounts reflect acceleration of the 1998-2000, 1999-2001 and the 2000-2002 open cycles upon a change in control event as defined in the plan as a result of the LG&E Energy-Powergen merger. Due to Company stock performance compared to peer group, no Long-Term Plan payouts were made for 1997-1999 performance cycle. The 1998 amounts reflect the payment of the 1996-1998 award. (2) Other Annual Compensation includes $63,693 for business spousal travel and personal use of corporate aircraft, and $3,470,524 in tax gross-up. (3) Includes employer contributions to 401(k) plan, nonqualified thrift plan, employer paid life insurance premiums, and retention/termination payments in 2000 as follows: Mr. Hale $4,910, $40,690, $32,950 and $5,006,923, respectively; Mr. Staffieri $5,018, $30,129 $4,973 and $600,000, respectively; Mr. Duncan $5,018, $18,843, $735 and $0, respectively; Mr. McCall $5,115, $17,642, $4,340 and $650,000, respectively; and Mr. Newton $4,003, $9,896, $1,062 and $800,000, respectively. The retention/termination payments are discussed in "Employment Contracts and Termination of Employment Arrangements and Change in Control Provisions". (4) Amount shown represents dollar value of restricted stock awards, determined by multiplying the number of shares by the closing market price as of the receipt date of grant. After the effective date of the LG&E Energy-Powergen merger, pursuant to his 2000 Agreement, Mr. Hale's 147,382 restricted shares were converted to receive the merger consideration of $24.85 per share payable in respect of all outstanding shares of former LG&E Energy Common Stock. Income tax was payable upon the awards at the time of the satisfaction of this right. (5) Amount shown represents the dollar value of restricted Powergen ADR awards, determined by multiplying the number of ADRs in each award by the closing market price as of the effective date of the LG&E Energy-Powergen merger. These awards do not represent currently-realizable compensation to Mr. Staffieri, Mr. McCall, and Mr. Newton. Pursuant to the terms of the named executives' employment agreements, the restricted Powergen ADRs are forfeitable upon termination of employment prior to 18 months, without good reason or for cause. Dividends on the restricted ADRs are payable upon vesting, without interest. At December 31, 2000, the restricted ADR holdings were Mr. Staffieri 7,688 ADRs ($303,215), Mr. McCall 5,031ADRs ($198,423) and Mr. Newton 4,211 ADRs ($166,082), respectively. (6) Mr. Duncan resigned from service effective January 31, 2001 (7) Reported compensation is only for a portion of the year. Mr. Duncan joined LG&E Energy on January 12, 1998. "Other Annual Compensation" for that year includes a relocation payment of $68,686. OPTION/SAR GRANTS TABLE OPTION/SAR GRANTS IN 2000 FISCAL YEAR The following table contains information at December 31, 2000, with respect to grants of former LG&E Energy common stock options and stock appreciation rights (SARs) to the named executive officers:
INDIVIDUAL GRANTS POTENTIAL ----------------- REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM --------------------- NUMBER OF PERCENT OF SECURITIES TOTAL EXERCISE UNDERLYING OPTIONS/SARS OR BASE OPTIONS/SARS GRANTED TO PRICE GRANTED EMPLOYEES IN ($/ EXPIRATION NAME (#) (1) FISCAL YEAR SHARE) DATE 0%($) 5% ($) 10%($) ---- ------------- ------------- ---------- ---------- ------ --------- --------- Roger W. Hale 190,000 21.6% 16.94 02/02/2010 0 2,024,160 5,129,619 Victor A. Staffieri 90,000 10.2% 16.94 02/02/2010 0 958,813 2,429,820 John R. McCall 40,000 4.5% 16.94 02/02/2010 0 426,139 1,079,920 Frederick J. Newton 30,000 3.4% 16.94 02/02/2010 0 319,604 809,940 R. Foster Duncan 60,000 6.8% 16.94 02/02/2010 0 639,208 1,619,880
- ----------- (1) Former LG&E Energy common stock options were awarded at fair market value at time of grant. In connection with the LG&E Energy-Powergen merger, these options were converted into options to acquire Powergen ADRs. The options are exercisable over a ten-year term from their original grant date. OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE AGGREGATED OPTION/SAR EXERCISES IN 2000 FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth information with respect to the named executive officers concerning the exercise and cashout of LG&E Energy common stock options during 2000 and the value of unexercised Powergen ADR options and SARs held by them as of December 31, 2000:
NUMBER OF VALUE OF SECURITIES UNEXERCISED UNDERLYING IN-THE-MONEY SHARES UNEXERCISED OPTIONS/SARS AT ACQUIRED VALUE OPTIONS/SARS FY-END ON EXERCISE REALIZED AT FY-END (#) ($)(1) NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ---- ----------- ---------- ------------------------- ------------------------ Roger W. Hale 459,630 2,000,789 74,864/0 322,664/-- Victor A. Staffieri 246,338 1,229,426 38,890/0 167,616/-- John R. McCall 62,046 410,832 60,235/0 363,280/-- Frederick J. Newton 30,000 237,300 27,094/0 111,154/-- R. Foster Duncan 60,000 487,350 84,819/0 530,800/--
- ----------- (1) As discussed in the prior table, as a result of the LG&E Energy-Powergen merger, outstanding LG&E Energy options were converted into options to acquire Powergen ADRs. Dollar amounts reflect market value of Powergen ADRs at year-end, minus the exercise price. LONG-TERM INCENTIVE PLAN AWARDS TABLE LONG-TERM INCENTIVE PLAN AWARDS IN 2000 FISCAL YEAR The following table provides information concerning awards made in 2000 to the named executive officers under the Long-Term Plan.
ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE BASED PLANS (NUMBER OF SHARES) (1) ------------------------------ NUMBER PERFORMANCE OR OF SHARES, OTHER PERIOD UNITS OR UNTIL OTHER MATURATION NAME RIGHTS OR PAYOUT(1) THRESHOLD(#) TARGET(#) MAXIMUM(#) ----- ---------- --------------- ------------- ---------- ---------- Roger W. Hale 55,307 12/31/2002 22,123 55,307 82,961 Victor A. Staffieri 18,308 12/31/2002 7,323 18,308 27,462 John R. McCall 8,482 12/31/2002 3,393 8,482 12,723 Frederick J. Newton 6,004 12/31/2002 2,402 6,004 9,006 R. Foster Duncan 11,651 12/31/2002 4,660 11,651 17,477
- ----------- (1) Pursuant to the terms of the awards, the performance periods were accelerated upon the change in control resulting from the LG&E Energy-Powergen merger and were paid in cash on June 7, 2000 the date of shareholder approval of the merger. Each performance unit awarded represented 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 was to be determined by the then-fair market value of LG&E Energy common stock. For awards made in 2000, the Long- Term Plan awards were intended to reward executives on a three-year rolling basis dependent upon the total shareholder return for shareholders. The target for award eligibility required 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 set a contingent award for each management level selected to participate in the Plan and such amount was the basis upon which incentive compensation was to be determined. Depending on the level of achievement, the participant would receive from zero to 150% of the contingent award amount. As a result of the LG&E Energy-Powergen merger, awards were accelerated and paid out based upon performance to that date. Payments made under the Long-Term Plan in 2000 are reported in the summary compensation table for the year of payout. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS On May 20, 1997, Mr. Hale entered into an employment agreement (the "1998 Agreement") with LG&E Energy for services to be provided to LG&E Energy and its subsidiaries, including LG&E and KU. The 1998 Agreement had an effective date of May 5, 1998 and an initial term of five years ending on May 4, 2003. In connection with the LG&E Energy-Powergen merger, Powergen, LG&E Energy and Mr. Hale entered into a new employment agreement dated as of February 25, 2000 (the "2000 Agreement"), which replaced the 1998 Agreement and was effective on December 11, 2000 for an initial term of three years ending on December 11, 2003. Under the 2000 Agreement, Mr. Hale is entitled to an annual base salary of not less than $816,200, subject to annual review by the Powergen Remuneration Committee, and to participate in the Short-Term Plan and the Long-Term Plan. The 2000 Agreement provides for a short-term incentive target award of not less than 70% of base salary and long-term incentive grants with a present value of not less than 175% of base salary to be delivered 40% in the form of performance units/shares and 60% 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. During 2000, in connection with the LG&E Energy-Powergen merger, Messrs. Staffieri, McCall and Newton entered into revised employment and severance agreements, which were subsequently amended prior to the effectiveness of the merger, with two year terms, each containing change in control provisions, which agreements generally provide for the benefits described below. These officers of the Companies shall be entitled to the following payments if they are terminated for reasons other than cause or disability or death, or their employment responsibilities are altered: (A) acceleration of scheduled retention payments in the aggregate amounts of $2,392,330, $1,265,944 and $670,052, respectively; (B) a cash payment of $262,835, $172,028 and $143,974, respectively, and the vesting of the restricted Powergen ADR's and dividends described in the Summary Compensation Table contained in this proxy statement; and (C) an amount not less than the sum of (1) his annual base salary and (2) his bonus or "target" award paid or payable, prorated for the number of months remaining in the term of the employment period (which payment shall be increased to 2.99 times the sum of (1) and (2) in the event of a termination following a change in control of Powergen). In addition, such officers will receive, upon the earlier to occur of (a) a change in control of Powergen or (b) the 18 month anniversary of their employment agreement, the amounts described in clauses (A) and (B) above. 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, if any. Additionally, executives shall receive continuation of certain welfare benefits and payments in respect of accrued but unused vacation days and for out-placement assistance. A change in control encompasses certain merger and acquisition events, changes in board membership and acquisitions of voting securities of Powergen. At the effective time of the LG&E Energy-Powergen merger, in consideration for the cancellation of his 1998 Agreement and associated change in control provisions, Mr. Hale received a payment of approximately $5,006,923 (net of payments to reimburse him for the payment of excise taxes). Such amount was equal to the cash severance amounts to which Mr. Hale would have been entitled under such provisions had he terminated his employment following closing of the merger. In addition, upon the effectiveness of the merger, restrictions on each share of restricted stock granted to Mr. Hale under the Long-Term Plan were removed and each such share, as with other outstanding shares of LG&E Energy common stock, was converted into the right to receive the merger consideration of $24.85 per share, without interest. See "SUMMARY COMPENSATION TABLE" . At the effective time of the LG&E Energy-Powergen merger, in consideration for the cancellation of their prior change in control agreements, Messrs. Staffieri, McCall and Newton received payments of approximately $600,000, $650,000 and $800,000, respectively, (net of payments to reimburse for the payment of excise taxes). Mr. Duncan, who resigned in January 2001, received a payment of $2,017,683 pursuant to the terms of his existing change in control and non-disclosure and confidentiality agreements. Mr. Hale has announced his current intention to retire from service to the Company on or about April 30, 2001. In the event Mr. Hale retires in accordance with such announcement, he will receive, under the 2000 Agreement and in consideration for the termination of his 1998 Agreement which provided him with a supplemental retirement benefit, a new supplemental retirement benefit in an annual amount equal to 50% of the sum of his base salary and annual target bonus as in effect on the date of his retirement. He will receive no additional severance benefits. In the event of a termination of Mr. Hale's employment under circumstances other than his retirement as described above, were such event to occur, the 2000 Agreement provides for payment of certain severance and additional retirement benefits. -----END PRIVACY-ENHANCED MESSAGE-----