-----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, SlR2gySLhoE8EvnuYXDHSY+9Itz12gK4dd5TejTXichIPqtxAB0DoB5qZGmuVWkr ic+Vi8cCHny7g7Bx0qx8kA== 0001047469-98-012481.txt : 19980331 0001047469-98-012481.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012481 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LG&E ENERGY CORP CENTRAL INDEX KEY: 0000861388 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 611174555 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-10568 FILM NUMBER: 98578847 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32030 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LOUISVILLE GAS & ELECTRIC CO /KY/ CENTRAL INDEX KEY: 0000060549 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 610264150 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02893 FILM NUMBER: 98578848 BUSINESS ADDRESS: STREET 1: 220 W MAIN ST STREET 2: P O BOX 32010 CITY: LOUISVILLE STATE: KY ZIP: 40232 BUSINESS PHONE: 5026272000 MAIL ADDRESS: STREET 1: 220 WEST MAIN ST CITY: LUUISVILLE STATE: KY ZIP: 40232 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended DECEMBER 31, 1997 Commission Registrant, State of Incorporation, IRS Employer File Number Address, and Telephone Number Identification Number - ------------ ------------------------------------ ---------------------- 1-10568 LG&E ENERGY CORP. 61-1174555 (A Kentucky Corporation) 220 West Main Street P. O. Box 32030 Louisville, Kentucky 40232 (502) 627-2000 2-26720 LOUISVILLE GAS AND ELECTRIC COMPANY 61-0264150 (A Kentucky Corporation) 220 West Main Street P. O. Box 32010 Louisville, Kentucky 40232 (502) 627-2000 Securities registered pursuant to section 12(b) of the Act: LG&E Energy Corp. ----------------- Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, without par value New York Stock Exchange Rights to Purchase Series A Preferred and Stock, without par value Chicago Stock Exchange Louisville Gas and Electric Company ----------------------------------- Name of each exchange on Title of each class which registered ------------------- ----------------------- First Mortgage Bonds, Series due July 1, 2002, 7-1/2% New York Stock Exchange 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) 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 27, 1998, the aggregate market value of LG&E Energy Corp.'s voting stock held by non-affiliates totaled $1,587,922,979 and it had 66,527,636 shares of common stock outstanding. As of February 27, 1998, the aggregate market value of Louisville Gas and Electric Company's voting stock held by non-affiliates totaled $16,560,101, and it had 21,294,223 shares of common stock outstanding, all held by LG&E Energy Corp. This combined Report on Form 10-K is separately filed by LG&E Energy Corp. and Louisville Gas and Electric Company. Information contained herein related to LG&E Energy Corp. or any of its direct or indirect subsidiaries other than Louisville Gas and Electric Company is provided solely by LG&E Energy Corp. and not Louisville Gas and Electric Company and shall be deemed not included in the Report on Form 10-K of Louisville Gas and Electric Company. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- LG&E Energy Corp.'s proxy statement, filed with the Commission on March 20, 1998, and Louisville Gas and Electric Company's information statement, filed with the Commission on March 27, 1998, are incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS PART I
Item 1. Business........................................................ 1 Overview of Operations.......................................... 1 Proposed Merger with KU Energy Corporation...................... 1 Louisville Gas and Electric Company General.................................................... 6 Electric Operations........................................ 7 Gas Operations............................................. 9 Regulation and Rates....................................... 10 Construction Program and Financing......................... 11 Coal Supply................................................ 12 Gas Supply................................................. 12 Environmental Matters...................................... 13 Competition................................................ 13 LG&E Capital Corp............................................... 13 Energy Marketing and Trading Division........................... 14 Power Generation Division....................................... 17 Argentine Gas Distribution Division............................. 19 Employees and Labor Relations................................... 19 Item 2. Properties...................................................... 20 Item 3. Legal Proceedings............................................... 23 Item 4. Submission of Matters to a Vote of Security Holders............. 25 Executive Officers of the Company.......................................... 26 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................ 29 Item 6. Selected Financial Data......................................... 31 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition: LG&E Energy Corp....................................... 33 Louisville Gas and Electric Company.................... 44 Item 8. Financial Statements and Supplementary Data: LG&E Energy Corp........................................... 52 Louisville Gas and Electric Company........................ 87 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 107 PART III Item 10. Directors and Executive Officers of the Registrant (a).......... 107 Item 11. Executive Compensation (a)...................................... 107 Item 12. Security Ownership of Certain Beneficial Owners and Management (a)......................................... 107 Item 13. Certain Relationships and Related Transactions (a).............. 107 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 107 Unaudited Pro Forma Combined Condensed Financial Information............... 128 Signatures ........................................................... 135 (a) Incorporated by reference.
Part I. Item 1. Business. OVERVIEW OF OPERATIONS LG&E Energy Corp. (the Company or LG&E Energy) is a diversified energy-services holding company with two direct subsidiaries: Louisville Gas and Electric Company (LG&E) and LG&E Capital Corp. (Capital Corp.). The Company's regulated operations are conducted by LG&E. The Company and its subsidiaries currently are exempt from all provisions, except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (the "Holding Company Act") on the basis that the Company and LG&E are incorporated in the same state and their business is predominately intrastate in character and carried on substantially in the state of incorporation. It is necessary for the Company to file an annual exemption statement with the Securities and Exchange Commission (SEC). The Company is not a public utility under the laws of the Commonwealth of Kentucky and is not subject to regulation as such by the Kentucky Public Service Commission (Kentucky Commission). See Louisville Gas and Electric Company -Regulation and Rates below for a description of the regulation of LG&E by the Kentucky Commission, which includes the ability to regulate certain intercompany transactions between LG&E and the Company, including the Company's non-utility subsidiaries. On June 9, 1997, certain subsidiaries of the Company entered into a Participation Agreement with Big Rivers Electric Corporation (Big Rivers), setting forth the detailed parameters of the proposed 25-year lease by Company affiliates of the generation assets of Big Rivers as part of the confirmation of Big Rivers' Plan of Reorganization by the U.S. Bankruptcy Court. On March 18, 1998, the parties executed an Amended and Restated Participation Agreement whereby, effective with the overall proposed transaction, subsidiaries of the Company have agreed to assume responsibility for certain unforeseen future environmental, legislative and regulatory costs associated with the Big Rivers generating facilities and the loads of certain industrial customers. This amendment addresses issues raised by the Kentucky Commission in its November 1997 hearing on this transaction. Consummation of this transaction is subject to a number of conditions, including receipt of further bankruptcy court and federal and state regulatory approvals. The Company made initial filings seeking regulatory approvals from the Kentucky Commission on June 30, 1997. An order from the Commission is expected during the second quarter of 1998. Approval of various elements of the transaction is also required from the Federal Energy Regulatory Commission (FERC). See Note 3 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. PROPOSED MERGER WITH KU ENERGY CORPORATION Description of the Merger As initially announced in the Company's Current Report on Form 8-K dated May 20, 1997, the Company and KU Energy Corporation, a Kentucky corporation ("KU"), entered into an Agreement and Plan of Merger dated May 20, 1997 (the "Merger Agreement") providing for a merger of the Company and KU. Pursuant to the Merger Agreement, among other things, KU will be merged with and into the Company with the Company as the surviving corporation (the "Merger"). The Merger was unanimously approved by the respective Boards of Directors. The shareholders of the Company and KU have also approved the merger, which is expected to close shortly after all of the conditions to consummation of the Merger, including the receipt of all applicable regulatory approvals, are met or waived. Such conditions are expected to be met before the end of 1998, but could be met as early as the second quarter of 1998. As a result of the Merger, the Company, which is the parent of LG&E, will become the parent company of KU's principal operating subsidiary, Kentucky Utilities Company ("Kentucky Utilities"). The operating utility subsidiaries (LG&E and Kentucky Utilities) will maintain their separate corporate identities and will continue to serve customers in Kentucky and Virginia under their present names. LG&E Energy and KU expect more than 1 $760 million in gross non-fuel savings over a ten-year period following the Merger. Costs to achieve these synergies are estimated to be $77 million. The preferred stock and debt securities of the operating utility subsidiaries will not be affected by the Merger. The nonutility subsidiaries of KU will become subsidiaries of the Company. Incorporated herein as exhibits by reference are the press release issued in connection with the Merger filed as an exhibit to the Company's Form 8-K dated May 20, 1997 and the Merger Agreement, and the related Stock Option Agreements (defined below) filed as exhibits to the Company's Form 8-K dated May 30, 1997. The descriptions of the Merger Agreement and the Stock Option Agreements set forth herein do not purport to be complete and are qualified in their entirety by the provisions of the Merger Agreement and the Stock Option Agreements, as the case may be, and other exhibits filed with the Company's Form 8-K dated May 30, 1997. Under the terms of the Merger Agreement, each outstanding share of the common stock, without par value, of KU ("KU Common Stock") (other than shares with respect to which dissenter's rights are perfected under applicable state law), together with the associated KU stock purchase rights, will be converted into the right to receive 1.67 shares of common stock, without par value, of the Company ("LG&E Energy Common Stock"), together with the associated LG&E Energy stock purchase rights. A holder of KU Common Stock who would otherwise have been entitled to a fractional share of LG&E Energy Common Stock will be entitled to receive a cash payment in lieu of such fractional share. The outstanding shares of LG&E Energy Common Stock prior to the Merger will remain unchanged and outstanding. As of March 1, 1998, there were 66,527,636 shares of LG&E Energy Common Stock outstanding, and 37,817,517 shares of KU Common Stock outstanding. Based on such capitalization, upon consummation of the Merger, 51.3% of the outstanding LG&E Energy Common Stock will be owned by the shareholders of the Company prior to the Merger and 48.7% will be owned by former KU shareholders. Following the Merger, the Company's board is expected to continue the Company's existing dividend payment policy. However, no assurance can be given that such dividend rate will be in effect or will remain unchanged. The amount, declaration and timing of dividends will be a business decision to be made by the Company's Board from time to time based upon the results of operations and financial condition of the Company and its subsidiaries and such other business considerations as the Company's Board considers relevant in accordance with applicable laws. Conditions to Consummation of the Merger The Merger is subject to customary closing conditions, including, without limitation, the receipt of all necessary governmental approvals and the making of all necessary governmental filings, including approvals of various regulators in Kentucky and Virginia under state utility laws, the approval of the Federal Energy Regulatory Commission under the Federal Power Act, the approval of the Securities and Exchange Commission (the "SEC") under the Public Utility Holding Company Act of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. The Merger is also subject to the receipt of opinions of counsel that the Merger will qualify as a tax-free reorganization and assurances from the parties' independent accountants that the Merger will qualify as a pooling of interests for accounting purposes. In addition, the Merger is conditioned upon the approval for listing of the LG&E Energy Common Stock to be issued in the Merger on the New York Stock Exchange. It is anticipated that LG&E Energy, as parent of LG&E and Kentucky Utilities, will continue to be an exempt holding company under the Public Utility Holding Company Act of 1935. 2 During 1997 and the first quarter of 1998, in addition to shareholder and Board of Directors approval, the Company and KU took the following steps toward fulfilling the conditions to closing: - A registration statement filed by the Company with the SEC with respect to the LG&E Energy Common Stock to be issued in the Merger became effective. - The Company and KU filed for regulatory approval of the Merger Transaction with the FERC and state commissions. - The Company and KU filed for SEC approval of the Merger under the Public Utility Holding Company Act of 1935, as amended. - Notification under the Hart-Scott-Rodino Act of 1976, as amended, was filed in the first quarter of 1998 with the Department of Justice and the Federal Trade Commission. The Merger Agreement The Merger Agreement contains certain covenants of the parties pending the closing. Generally, the parties must carry on their business only as specified in the Merger Agreement (subject to ordinary course exceptions, certain negotiated dollar limitations and certain previously budgeted amounts). The Merger Agreement provides that after the effectiveness of the Merger (the "Effective Time"), the principal executive offices of LG&E Energy will remain in Louisville, Kentucky. LG&E will remain headquartered in Louisville. Kentucky Utilities will remain headquartered in Lexington, Kentucky and maintain a substantial presence elsewhere throughout its service territory in order to conduct its state-wide operations. At the Effective Time, the Company's Board of Directors will consist of a total of 15 directors, eight of whom will be designated by the Company and seven of whom will be designated by KU. Upon completion of the Merger, Mr. Roger W. Hale will continue as Chairman and Chief Executive Officer of the Company and LG&E and will become Chairman and Chief Executive Officer of Kentucky Utilities. Mr. Michael R. Whitley, the Chairman and Chief Executive Officer of KU, will become Vice Chairman, President and Chief Operating Officer of the Company and Vice Chairman and Chief Operating Officer of each of LG&E and Kentucky Utilities. The Merger Agreement may be terminated in certain circumstances, including (1) by mutual consent of the parties; (2) by either the Company or KU, if the Merger has not been consummated before May 20, 1999 (plus an extension to November 20, 1999 if all conditions to closing the Merger, other than receipt of certain consents and/or statutory approvals by the Company or KU, have been satisfied at May 20, 1999); (3) by either the Company or KU, if the stockholders of either the Company or KU do not approve the Merger or if certain legal requirements prohibit the Merger; (4) by either the Company or KU, if the other party's directors withdraw or adversely modify their recommendation of the Merger, fail to reaffirm such recommendation upon the other party's request, or approve an alternative transaction with a third party; (5) by either party if the other party has breached the Merger Agreement or if the other party's representations and warranties are inaccurate, and such breach or inaccuracy is reasonably likely to result in a material adverse effect and is not cured within 20 days after receipt of notice thereof, (6) by either party if a third party acquires more than 50% of the other party's outstanding voting securities or if the other party's directors on May 20, 1997 (together with new directors nominated by a majority of such party's directors) cease to constitute a majority of such party's directors then in office; or (7) by either party, under certain circumstances, if there is a competing third-party offer and (i) the target party's directors receive written advice from outside counsel that, as a result of the competing proposal, the directors' fiduciary duties require reconsideration of the target party's commitment to consummate the Merger, (ii) such target party's directors determine in good faith that their fiduciary duties require acceptance of 3 the competing proposal and (iii) such target party is unable, prior to termination, to negotiate adjustments to the Merger Agreement enabling the Merger to proceed. The Merger Agreement provides that if a breach or inaccuracy described in clause (5) above occurs and if such breach or inaccuracy is not willful, the non-breaching party is entitled to reimbursement of its out-of-pocket expenses and fees (including, without limitation, fees and expenses payable to all legal, accounting, financial, public relations and other professional advisors arising out of, in connection with or related to the Merger or the transactions contemplated by the Merger Agreement) not to exceed $10 million. In the event of a willful breach, the non-breaching party will be entitled to reimbursement of its actual out-of-pocket expenses (which will not be subject to the $10 million limit) and any remedies it may have at law or in equity; provided, further, that if, at the time of the breaching party's willful breach, there shall have been a third party tender offer or business combination proposal which shall not have been rejected by the breaching party and withdrawn by the bidder, and within two and one-half years following termination, the breaching party or an affiliate thereof becomes a subsidiary of the bidder or a subsidiary of an affiliate of such bidder or accepts a written offer to consummate or consummates a business combination with such bidder or an affiliate thereof, then such breaching party (jointly and severally with its affiliates), upon the signing of a definitive agreement relating to such a business combination, or, if no such agreement is signed, then at the closing (and as a condition to the closing) of such breaching party becoming such a subsidiary or of such business combination, is required to pay to the non-breaching party an additional fee equal to $50 million. If the Merger Agreement is terminated by either the Company or KU due to (i) the scenarios described in clauses (4) or (7) above, (ii) the failure of either party to comply with certain covenants requiring it to call a meeting of stockholders and recommend the Merger for approval, or (iii) the failure of either party's stockholders to approve the Merger (provided the other party's stockholders shall not have also failed to approve the Merger), and if at the time of such event there is a pending third party offer or proposal that is not rejected by the target directors and not withdrawn by the bidder, and if the third party proposal is ultimately signed or consummated within two and one-half years and the target party or an affiliate thereof becomes a subsidiary of the bidder or a subsidiary of an affiliate of such bidder, or accepts a written offer to consummate or consummates a business combination with such bidder or an affiliate thereof, then the target party (jointly and severally with its affiliates), upon the signing of a definitive agreement relating to such a business combination, or, if no such agreement is signed, then at the closing (and as a condition to the closing) of such target party becoming such a subsidiary or of such business combination, is required to pay to the other party an additional fee equal to $50 million in cash plus out-of-pocket fees and expenses incurred by the other party. Simultaneously with the execution and delivery of the Merger Agreement, the Company and KU also entered into reciprocal stock option agreements (the "Stock Option Agreements"). Pursuant to the Stock Option Agreements, the Company and KU have each granted to the other an irrevocable option to purchase up to 19.9% of the granting company's outstanding common stock, at an exercise price per share equal to (i) in the case of LG&E Energy Common Stock, the average of the daily closing sales price per share of LG&E Energy Common Stock during the ten-day period ending May 12, 1997 or (ii) in the case of KU Common Stock, the price per share of LG&E Energy Common Stock determined pursuant to clause (i) above multiplied by an exchange ratio of 1.67. The option becomes exercisable if the Merger Agreement becomes terminable by either the Company or KU in circumstances that could entitle such party to receive termination fees, generally as a result of the other party becoming the subject of a third party tender offer or business combination proposal. 4 If its option becomes exercisable, either the Company or KU may request the other party to repurchase all or part of its option at a price per share equal to the spread between the exercise price and the highest average trading price or the offered price in any business combination proposal. The aggregate amount of any termination fees and the transaction expenses payable, plus any amounts payable as a result of the required repurchase of options, is limited to a maximum amount of $70 million. In connection with the Merger, the Company has amended the terms of the Rights Agreement, dated as of December 5, 1990, as amended (the "LG&E Energy Rights Agreement"), between LG&E Energy and LG&E, as rights agent, so that the execution, delivery and performance of the Merger Agreement and the Stock Option Agreements will not cause any "Rights" (as defined in the LG&E Energy Rights Agreement) to become exercisable, cause KU or any of its affiliates to become an "Acquiring Person" (as defined in the LG&E Energy Rights Agreement) or give rise to a "Distribution Date" or "Triggering Event" (as each such term is defined in the LG&E Energy Rights Agreement). Similarly, KU has amended the terms of the Rights Agreement, dated as of January 27, 1992 (the "KU Rights Agreement"), between KU and Illinois Stock Transfer Company, as rights agent, so that the execution, delivery and performance of the Merger Agreement and the Stock Option Agreements will not cause any "Rights" (as defined in the KU Rights Agreement) to become exercisable, cause LG&E Energy or any of its affiliates to become an "Acquiring Person" (as defined in the KU Rights Agreement) or give rise to a "Distribution Date" or "Triggering Event" (as each such term is defined in the KU Rights Agreement). On March 25, 1998, the Federal Energy Regulatory Commission (FERC) issued an order approving the merger of LG&E Energy Corp. and KU Energy Corporation without conditions. The companies had submitted a joint merger application to FERC for approval on October 9, 1997. Results of the Merger Transaction A preliminary estimate indicates that the Merger will result in gross non-fuel savings of more than $760 million over a ten-year period following the Merger. Costs to achieve these synergies are estimated to be $77 million. In regulatory filings associated with approval of the Merger, LG&E and Kentucky Utilities committed not to seek increases in base rates and proposed reductions in their retail customers' bills in amounts based on 50% of the currently estimated cost savings to be achieved as a result of the Merger, less 50% of the costs to achieve such savings, in each of the five years following effectiveness of the Merger. These regulatory filings were approved substantially as filed by the Kentucky Commission, see "Regulation and Rates" and Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. The Virginia State Corporation Commission (the "Virginia Commission") entered an Order (the "Virginia Order") on January 20, 1998 approving the merger of KU Energy with the Company subject to certain conditions, including among others, the following conditions: (i) that Kentucky Utilities reduce its Virginia jurisdictional retail revenues over the first five years after the merger is consummated by at least $4,122,185, provided that, any additional merger savings shall be provided to Virginia jurisdictional customers proportionately; and submit to the Virginia Commission a copy of any such subsequent revisions together with a comparison showing how the rate reduction is calculated; (ii) that should actual merger-related savings exceed estimates provided to the Virginia Commission, such additional merger-related savings may be at issue in any future filings or proceedings addressing rates; (iii) that all merger-related savings shall be recorded above the line for purposes of Kentucky Utilities' filings or other proceedings addressing rates and in connection therewith the costs to achieve the merger shall be amortized over five years; (iv) that, within 180 days after consummation, Kentucky Utilities shall file a detailed report with the Virginia Commission describing all actual merger-related costs; (v) that commencing with 1998, the amortized balance of deferred costs to achieve the merger shall be subject to write-off or write-down in the event of over-earnings per an annual earnings test (a range of 12.0% through 13.0% until Kentucky Utilities' next rate case) to be filed with each annual filing; (vi) that no costs attributable to LG&E's regulatory assets or potential stranded costs will be included in Virginia retail rates, without prior approval of the Virginia Commission; (vii) that no merger-related costs in excess of merger-related savings will be included in Virginia retail rates in any year following the merger; (viii) that Kentucky Utilities shall quantify, in accordance with GAAP, the merger-related costs attributable to the test period used to 5 establish Virginia retail rates and demonstrate that the merger-related savings for the same period exceeds such merger-related costs; (ix) that Kentucky Utilities will not terminate merger-related surcredits at the end of the initial five years of the plan, without prior approval of the Virginia Commission; and (x) that Kentucky Utilities shall file a general rate case with the Virginia Commission no later than nine months prior to the end of the fifth year of the merger to address the future sharing of merger savings with ratepayers. LOUISVILLE GAS AND ELECTRIC COMPANY General Incorporated on July 2, 1913, LG&E is a regulated public utility that supplies natural gas to approximately 284,000 customers and electricity to approximately 356,000 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. During 1997, the Company's financial condition and results of operation depended to a large degree on the financial condition and results of operations of LG&E. LG&E's Trimble County Unit 1 (Trimble County), a 495-megawatt, coal-fired electric generating unit, which LG&E began constructing in 1979, was placed in commercial operation in December 1990. Trimble County had been subject to numerous reviews by the Kentucky Commission. In December 1995, the Commission approved a settlement agreement filed by LG&E and all intervenors in the Trimble County proceedings, including various consumer interest groups and government agencies, that in effect, resolved all of the regulatory and legal issues related to the appropriate ratemaking treatment to exclude 25% of the Trimble County costs from customer rates. LG&E owns a 75% undivided interest in Trimble County. For a more detailed discussion of the proceedings relating to Trimble County, see Electric Operations and Notes 17 and 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already complied with the stringent sulfur dioxide emission limits required by the year 2000, as it had previously installed scrubbers on all of its coal-fired generating units. Since 1990, as part of its ongoing construction program, LG&E has spent approximately $31 million through 1997 for measures to meet applicable nitrogen oxide limits. While the overall financial impact of the Act on LG&E has been minimal, LG&E is closely monitoring several significant regulatory developments which may potentially impact LG&E including efforts by local officials to address the "ozone nonattainment" status of Jefferson County, Kentucky and implementation of new ozone and particulate matter standards adopted by the United States Environmental Protection Agency (USEPA) in June, 1997. LG&E is monitoring regulations proposed by USEPA in October 1997, that could require numerous utilities including LG&E to reduce nitrogen oxide emissions by approximately 85% from 1990 levels. LG&E has already reduced its nitrogen oxide emissions by approximately 40% and the Company's independent power projects generally operate at even lower emissions levels. However, if adopted as proposed, the proposed regulations may require LG&E and the independent power projects to incur significant capital expenditures, currently estimated as potentially in excess of $100 million in the case of LG&E, and significantly increased operation and maintenance costs. LG&E currently anticipates that a significant portion of any such capital costs could be recoverable through rates, although there can be no guarantee of such recovery. For a more detailed discussion of the Clean Air Act and other environmental issues, see Environmental Matters under this Item, Item 3, Item 7, and Note 12 of LG&E's Notes to Financial Statements and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements 6 under Item 8, respectively. For the year ended December 31, 1997, 73% of total operating revenues was derived from electric operations and 27% 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 $205,137 $139,967 $345,104 46% Commercial 162,900 52,440 215,340 28 Industrial 110,652 17,892 128,544 17 Public authorities 53,412 12,052 65,464 9 --------- --------- --------- ----- Total - ultimate consumers 532,101 222,351 754,452 100% === Wholesale sales 70,942 - 70,942 Gas transported - net - 6,997 6,997 Miscellaneous 11,489 1,663 13,152 ---------- ----------- ---------- Total $614,532 $231,011 $845,543 ======== ======== ========
See Note 15 of LG&E's Notes to Financial Statements and Note 19 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for financial information concerning segments of business for the three years ended December 31, 1997. Electric Operations The sources of LG&E's electric operating revenues and the volumes of sales for the three years ended December 31, 1997, were as follows:
1997 1996 1995 ---- ---- ---- ELECTRIC OPERATING REVENUES (Thousands of $): Residential $205,137 $202,318 $201,357 Small commercial and industrial 72,769 74,034 73,074 Large commercial 90,131 88,993 87,497 Large industrial 110,652 110,914 110,800 Public authorities 53,412 54,318 53,861 Refund - Trimble County settlement - - (28,300) -------- -------- -------- Total - ultimate consumers 532,101 530,577 498,289 Wholesale sales 70,942 67,854 37,471 Miscellaneous 11,489 8,265 6,577 -------- -------- -------- Total $614,532 $606,696 $542,337 ======== ======== ======== ELECTRIC SALES (Thousands of mwh): Residential 3,302 3,382 3,415 Small commercial and industrial 1,108 1,131 1,112 Large commercial 1,880 1,850 1,802 Large industrial 3,054 3,059 3,024 Public authorities 1,105 1,122 1,113 -------- -------- -------- Total - ultimate consumers 10,449 10,544 10,466 Wholesale sales 3,800 3,589 2,001 -------- -------- -------- Total 14,249 14,133 12,467 ======== ======== ========
7 At December 31, 1997, LG&E had 356,082 electric customers. LG&E uses efficient coal-fired boilers that are fully equipped with sulfur dioxide removal systems to generate electricity. LG&E's system wide emission rate for sulfur dioxide in 1997 was approximately .98 lbs./MMBtu of heat input, which is significantly below the Phase II limit of 1.2 lbs./MMBtu established by the Clean Air Act Amendments of 1990 for the year 2000. On Monday, July 21, 1997, LG&E set a record local peak load of 2,414 Mw, when the temperature at the time of peak reached 93(degree)F (average for the day was 83(degree)F). LG&E also set the record system peak of 3,536 Mw (which included purchases from and short-term sales to other electric utilities) on Thursday, June 25, 1997. The 1996 maximum local peak load of 2,282 Mw occurred on Wednesday, August 7, when the temperature at the time of peak was 93(degree)F (average for the day was 84(degree)F). Prior to 1997, the record local peak load was 2,357 Mw (set on August 17, 1995) and the record system peak was 3,223 Mw (set on May 30, 1991). LG&E's current reserve margin is 16%. At December 31, 1997, LG&E owned steam and combustion turbine generating facilities with a capacity of 2,512 Mw and an 80 Mw hydroelectric facility on the Ohio River. See Item 2, Properties. LG&E is a participating owner with 14 other electric utilities of Ohio Valley Electric Corporation whose primary customer is the Portsmouth Area uranium-enrichment complex of the U.S. Department of Energy at Piketon, Ohio. LG&E has direct interconnections with 11 utility companies in the area and has agreements with each interconnected utility for the purchase and sale of capacity and energy. LG&E also has agreements with an increasing number of entities throughout the United States for the purchase and/or sale of capacity and energy and for the utilization of their bulk transmission system. The Illinois Municipal Electric Agency (IMEA), based in Springfield, Illinois, which is an agency of 35 municipalities that own and operate their own electric systems, has a 12.12% ownership interest in LG&E's Trimble County Unit 1. The Indiana Municipal Power Agency (IMPA), based in Carmel, Indiana, has a 12.88% interest in the Trimble County Unit. IMPA is composed of 31 municipalities that have joined together to meet their long-term electric power needs. Both IMEA and IMPA pay their proportionate share for operation and maintenance expenses of Trimble County and for fuel and reactant used. They are also responsible for their proportionate share of incremental capital assets acquired. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. 8 Gas Operations The sources of LG&E's gas operating revenues and the volumes of sales for the three years ended December 31, 1997, were as follows:
1997 1996 1995 ---- ---- ---- GAS OPERATING REVENUES (Thousands of $): Residential $139,967 $125,327 $107,762 Commercial 52,440 47,415 38,161 Industrial 17,892 21,229 17,430 Public authorities 12,052 11,731 8,679 ---------- ---------- ----------- Total - ultimate consumers 222,351 205,702 172,032 Gas transported - net 6,997 6,850 7,821 Miscellaneous 1,663 1,867 1,273 ----------- ----------- ----------- Total $231,011 $214,419 $181,126 ======== ======== ======== GAS SALES (Millions of cu. ft.): Residential 24,038 25,531 24,242 Commercial 10,212 10,656 9,885 Industrial 3,948 5,190 5,188 Public authorities 2,467 2,790 2,423 --------- --------- --------- Total - ultimate consumers 40,665 44,167 41,738 Gas transported 13,452 12,540 12,241 -------- -------- -------- Total 54,117 56,707 53,979 ======== ======== ========
At December 31, 1997, LG&E had 283,690 gas customers. LG&E has underground natural gas storage fields that help provide economical and reliable gas service to ultimate consumers. By using gas storage fields strategically, LG&E can buy gas when prices are low, store it, and retrieve the gas when demand is high. Accessing least cost gas was made easier in November 1993 when the Federal Energy Regulatory Commission Order No. 636 went into effect. Previously, LG&E and other utilities purchased most of their gas services from pipeline companies. The order "unbundled" gas services, allowing utilities to purchase gas, transportation, and storage services separately from many different sources. Currently, LG&E buys competitively priced gas from several large producers under contracts of varying duration. By purchasing from multiple suppliers and storing any excess gas, LG&E is able to secure favorably priced gas for its customers. Without storage capacity, LG&E would be forced to buy additional gas when customer demand increases, which is usually when the price is highest. A number of industrial customers purchase their natural gas requirements directly from alternate suppliers for delivery through LG&E's distribution system. Generally, transportation of natural gas for LG&E's customers does not have an adverse effect on earnings because of the offsetting decrease in gas supply expenses. Transportation rates are designed to make LG&E economically indifferent as to whether gas is sold or merely transported. 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(degree)F. During 1997, the maximum day gas sendout was 506,000 Mcf, occurring on January 16, when the average temperature for the day was 12(degree)F. Supply on that day consisted of 203,000 Mcf from purchases, 245,000 Mcf delivered from underground storage, and 58,000 Mcf transported for industrial customers. For a further discussion, see Gas Supply. Regulation and Rates The Kentucky Commission has regulatory jurisdiction over the rates and service of LG&E and over the issuance of certain of its securities. The Kentucky Commission has the ability to examine the rates LG&E charges its retail customers at any time. LG&E is a "public utility" as defined in the Federal Power Act, and is subject to the jurisdiction of the Department of Energy and the FERC with respect to the matters covered in such Act, including the sale of electric energy at wholesale in interstate commerce. In addition, the FERC has sole jurisdiction over the issuance by LG&E of short-term securities. For a discussion of current regulatory matters, see Rates and Regulation under Item 7 and Note 3 of LG&E's Notes to Financial Statements and Note 4 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Increases and decreases in the cost of fuel for electric generation are reflected in the rates charged to all of LG&E's electric customers by means of LG&E's fuel adjustment clause. The Kentucky Commission requires public hearings at six-month intervals to examine past fuel adjustments, and at two-year intervals for the purpose of additional examination and transfer of the then current fuel adjustment charge or credit to the base charges. The Commission also requires that electric utilities, including LG&E, file certain documents relating to fuel procurement and the purchase of power and energy from other utilities. LG&E's gas rates contain a gas supply clause (GSC), whereby increases or decreases in the cost of gas supply are reflected in LG&E's rates, subject to approval of the Kentucky Commission. The GSC procedure prescribed by order of the Commission provides for quarterly rate adjustments to reflect the expected cost of gas supply in that quarter. In addition, the GSC contains a mechanism whereby any over- or under-recoveries of gas supply cost from prior quarters will be refunded to or recovered from customers through the adjustment factor determined for subsequent quarters. On December 8, 1995, the Commission approved a settlement agreement that, in effect, resolved all the regulatory and legal issues related to the appropriate ratemaking treatment to exclude 25% of the Trimble County plant costs from customer rates. See Note 13 of LG&E's Notes to Financial Statements and Note 17 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion of this matter. In April 1995, in response to an application filed by LG&E, the Commission approved an environmental cost recovery surcharge that increased electric revenues by $3.2 million in 1995, an additional $2.4 million in 1996, and an additional $.4 million in 1997. An appeal of the Commission's April 1995 order by various intervenors in the proceeding (including the Kentucky Attorney General) is currently pending in the Franklin Circuit Court of Kentucky. LG&E is contesting the legal challenges to the surcharge, but cannot predict the outcome of the appeal. In a similar proceeding involving appeals from the Commission's order authorizing an environmental cost recovery surcharge for Kentucky Utilities Company by the same intervenors, the Kentucky Court of Appeals, in a decision issued on December 5, 1997, upheld the constitutionality of the surcharge statute. The intervenors have petitioned the Kentucky Supreme Court to review the decision of the Kentucky Court of Appeals. The amount of refunds that may be ordered, if any, is not expected to have a material adverse effect on LG&E's financial position or results of operations. See Rates and Regulation under Item 7 for a further discussion. In January 1994, LG&E implemented a Commission approved demand side management (DSM) program. 10 The program contains a rate mechanism that provides for the recovery of DSM program costs, allows LG&E to recover revenues due to lost sales associated with the DSM programs and provides LG&E an incentive for implementing DSM programs. See Rates and Regulation under Item 7 for a discussion of Commission approved changes to the original program and requested revisions pending before the Commission. On September 30, 1997, the Commission issued an order approving LG&E's request to implement an experimental performance-based ratemaking mechanism. This mechanism is related to gas procurement activities and gas off-system sales only and is approved for a three-year test period effective October 1, 1997. During the three-year experimental period, rate adjustments related to this mechanism will be determined for each 12 month period beginning November 1 and ending October 31. This mechanism is not expected to have a material effect on LG&E's financial position or results of operations. In its September 12, 1997 order approving the merger of LG&E Energy and KU Energy, the Kentucky Commission ordered LG&E to file by the later of the consummation of the merger or September 14, 1998, detailed plans to address the future rate regulation of LG&E. For a further discussion of this matter, see Rates and Regulation under Item 7. As part of the corporate reorganization whereby LG&E became the subsidiary of LG&E Energy Corp. (Energy Corp.), LG&E obtained the approval of the Kentucky Commission. The order of the Kentucky Commission authorizing LG&E to reorganize into a holding company structure contains certain provisions, which, among other things, ensure the Kentucky Commission access to books and records of Energy Corp. and its affiliates which relate to transactions with LG&E; requires Energy Corp. and its subsidiaries to employ accounting and other procedures and controls to protect against subsidization of non-utility activities by LG&E's customers; and precludes LG&E from guaranteeing any obligations of Energy Corp. without prior written consent from the Kentucky Commission. In addition, the order provides that LG&E's Board of Directors has the responsibility to use its dividend policy consistent with preserving the financial strength of LG&E and that the Kentucky Commission, through its authority over LG&E's capital structure, can protect LG&E's ratepayers from the financial effects resulting from non-utility activities. Construction Program and Financing LG&E's construction program is designed to ensure that there will be adequate capacity and reliability to meet the electric and gas needs of its service area. These needs are continually being reassessed and appropriate revisions are made, when necessary, in construction schedules. LG&E's estimates of its construction expenditures can vary substantially due to numerous items beyond LG&E's control, such as changes in rates, economic conditions, construction costs, and new environmental or other governmental laws and regulations. During the five years ended December 31, 1997, gross property additions amounted to $506 million. Internally generated funds for the five-year period were sufficient to provide for all of these gross additions. The gross additions during this period amounted to approximately 18% of total utility plant at December 31, 1997, and consisted of $373 million for electric properties and $133 million for gas properties. Gross retirements during the same period were $99 million, consisting of $81 million for electric properties and $18 million for gas properties. 11 Coal Supply Over 90% of LG&E's present electric generating capacity is coal-fired, the remainder being made up of a hydroelectric plant and combustion turbine peaking units fueled by natural gas and oil. Coal will be the predominant fuel used by LG&E in the foreseeable future, with natural gas and oil being used for peaking capacity and flame stabilization in coal-fired boilers or in emergencies. LG&E has no nuclear generating units and has no plans to build any in the foreseeable future. LG&E has entered into coal supply agreements with various suppliers for coal deliveries for 1998 and beyond. LG&E normally augments its coal supply agreements with spot market purchases which, during 1997, were about 14% of total purchases. LG&E has a coal inventory policy, which is in compliance with the Kentucky Commission's directives and which LG&E believes provides adequate protection under most contingencies. LG&E had on hand at December 31, 1997, a coal inventory of approximately 802,000 tons, or a 43 day supply. LG&E expects, for the foreseeable future, to continue purchasing most of its coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky and southwest Indiana. The abundant supply of this relatively low priced coal, combined with present and future desulfurization technologies, is expected to enable LG&E to continue to provide adequate electric service in a manner acceptable under existing environmental laws and regulations. Coal for LG&E's Mill Creek plant is delivered by rail and barge. Deliveries to the Cane Run and Trimble County plants are by rail and barge, respectively. Starting in the second half of 1998, Cane Run will also have the capability for barge delivery of coal. The average delivered cost of coal purchased by LG&E, per ton and per million Btu, for the periods shown were as follows:
1997 1996 1995 ---- ---- ---- Per ton $21.66 $21.73 $23.68 Per million Btu .94 .97 1.04
The delivered cost of coal is expected to increase slightly during 1998. Gas Supply Prior to the implementation of FERC Order No. 636, LG&E had purchased natural gas and pipeline transportation services from Texas Gas Transmission Corporation (Texas Gas). LG&E now purchases only transportation services from Texas Gas and, beginning in 1996, Tennessee Gas Pipeline Company (Tennessee). In addition, LG&E purchases natural gas from many other sources under contracts for varying periods of time. During 1997, Texas Gas filed for a change in its rates with FERC as required under the settlement in its last rate case with FERC. LG&E is participating in that and other proceedings, as appropriate. Resolution of that rate case is currently expected to take place sometime in 1998 and is expected to reflect a minimal increase in LG&E's rates. LG&E transports on the Texas Gas system under No-Notice Service (NNS) and Firm Transportation (FT) rates. During the winter months, LG&E has 184,900 MMBtu per day in NNS. Effective November 1, 1997, LG&E modified its contract levels with Texas Gas. LG&E's summer NNS levels were decreased from 111,000 MMBtu per day to 60,000 MMBtu per day and its summer FT levels were increased from 24,000 MMBtu per day to 54,000 MMBtu per day. Each of these NNS and FT agreements with Texas Gas expire in equal portions in 2000, 2001, and 2003. LG&E also transports on the Tennessee system under Tennessee's Rate FT-A. Effective 12 November 1, 1997, LG&E increased its contract levels with Tennessee from 30,000 MMBtu per day annually to 51,000 MMBtu per day annually. The FT-A agreement with Tennessee expires 2002. The result of the modifications on both Texas Gas and Tennessee was a net increase in LG&E's total winter pipeline capacity of 21,000 MMBtu per day and no change in LG&E's total summer pipeline capacity. The net increase in winter pipeline capacity was made to serve increased sales requirements by LG&E to its customers. LG&E also has a portfolio of supply arrangements with various suppliers in order to meet its firm sales obligations. These gas supply arrangements include pricing provisions which are market-responsive. These firm supplies, in tandem with pipeline transportation services, provide the reliability and flexibility necessary to serve LG&E's customers. LG&E operates five underground gas storage fields with a current working gas capacity of 14.6 million Mcf. Gas is purchased and injected into storage during the summer season and is then withdrawn to supplement pipeline supplies to meet the gas-system load requirements during the winter heating season. The estimated maximum deliverability from storage during the early part of the 1996-1997 heating season was approximately 373,000 Mcf per day. Deliverability decreases during the latter portion of the heating season as the storage inventory is reduced by seasonal withdrawals. The average cost per Mcf of natural gas purchased by LG&E was $3.46 in 1997 and 1996, and $2.62 in 1995. Environmental Matters Protection of the environment is a major priority for LG&E. LG&E engages in a variety of activities within the jurisdiction of federal, state, and local regulatory agencies. Those agencies have issued LG&E permits for various activities subject to air quality, water quality, and waste management laws and regulations. For the five year period ending with 1997, expenditures for pollution control facilities represented $104 million or 20% of total construction expenditures. The cost of operating and maintaining scrubber-related facilities amounted to $22 million in each of 1997 and 1996. See Note 12 of LG&E's Notes to Financial Statements and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of specific environmental proceedings affecting LG&E. Competition In the last several years, LG&E has taken many steps to prepare for the expected increase in competition in its industry, including a reduction in the number of employees; aggressive cost cutting; write-offs of previously deferred expenses; an increase in focus on not only commercial and industrial customers, but residential customers as well; an increase in employee involvement and training; a major realignment and formation of new business units, and continuous modifications of its organizational structure. LG&E could take additional steps like these to better position itself for competition in the future. LG&E CAPITAL CORP. The Company's non-regulated operations are conducted by LG&E Capital Corp. (Capital Corp.), which was formed on September 5, 1997, when the Company merged two of its former direct subsidiaries, LG&E Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems), and renamed the surviving company LG&E Capital Corp. Capital Corp. has two major subsidiaries: LG&E Power Inc. (LPI) and LG&E International Inc. (LII). LPI, in turn, has two major subsidiaries: LG&E Energy Marketing Inc. (LEM) and LG&E Power Operations Inc. 13 (LPO). LEM, together with one subsidiary operating in the United States and certain other direct subsidiaries of LPI operating in the United States, make up the Company's Energy Marketing and Trading Division, which is involved in the marketing and trading of electric power and the marketing, trading, gathering, processing, storage and transportation of natural gas. LPO, together with primary subsidiaries operating in the United States, owns, operates and maintains domestic power generation facilities that sell energy to local industries and utilities. These subsidiaries, together with the subsidiaries that hold the investments in the foreign power generation facilities mentioned in the next paragraph, make up the Company's Power Generation Division. LII, together with primary subsidiaries operating in the United States and three operating in Argentina, holds investments in foreign power generation facilities and in two Argentine natural gas distribution companies. In February 1997, LII purchased a controlling interest in Distribuidora de Gas del Centro (Centro) and acquired a minority interest in Distribuidora de Gas Cuyana (Cuyana) for approximately $140 million. Centro serves approximately 372,000 customers in Cordoba Province, Argentina; Cuyana serves approximately 305,000 customers in Mendoza Province, Argentina. The subsidiaries that hold the investments in Centro and Cuyana make up the Company's Argentine Gas Distribution Division. The Company operates an energy services company, LG&E Enertech Inc., which assesses the energy and utility needs of large commercial and industrial entities and develops energy-efficient solutions. The Company also offers maintenance and repair services on customers' major household appliances through its subsidiary, LG&E Home Services Inc. A subsidiary of the Company, LG&E Credit Corp., also provides energy-related consumer financing services in the Louisville, Kentucky area. ENERGY MARKETING AND TRADING DIVISION LPI conducts energy marketing activities through its subsidiary LEM (formerly LG&E Natural Marketing Inc. and successor by merger to LG&E Power Marketing Inc.). LEM engages in energy marketing services, including the marketing and brokering of natural gas, wholesale power, emission allowances and coal, as well as derivative products relating to such commodities. In anticipation of the continuing convergence of the natural gas and electricity markets, the Company has consolidated the trading, risk management and administrative operations of its power marketing and gas marketing divisions into a single unit in a state-of-the-art trading floor at its Louisville headquarters. Recognizing the inherent risks of its trading activities (including those associated with volatility in the markets and credit risk of its counterparties), the Company has established trading controls, including a written trading policy which contains trading limits for each trader and for the organization as a whole. The controls include a segregation of the trading and back office functions and regular reports of open positions to a risk management committee comprised of senior management. In addition, a credit function which reports to the Chief Financial Officer of the Company reviews counterparty financial statements and establishes credit limits for each counterparty. The Company has further engaged an outside consultant to review periodically its trading controls. 14 LEM's principal activities include the marketing and brokering of wholesale power and natural gas. LEM was among the first utility-affiliated marketers in the country to secure the approval of FERC to sell power at market-based rates and engage in wholesale power marketing activities. During 1996, LEM sold or brokered 17.4 million Mw hours of power in 35 states. The volume growth has continued as LEM sold or brokered 53.3 million Mw hours in 45 states in 1997. The volume of gas marketed by LEM has increased from an average of approximately 600 million cubic feet ("Mcf") per day in May 1995, when the gas marketing business was acquired, to an average 2.95 billion cubic feet ("Bcf") per day for 1996 and 2.61 Bcf per day for 1997. In November 1996, LEM entered into a purchase and sale agreement with Oglethorpe Power Corporation ("OPC") pursuant to which LEM has access to approximately one-half of OPC's 5,000 Mw of generation resources. LEM is also required to cover approximately half of the energy needs of OPC's member cooperatives. Over the course of the anticipated fifteen-year agreement, it is expected that LEM will provide more than 200 million Mw hours of electricity to OPC. In connection with the proposed lease by the Company of the operating assets of Big Rivers, LEM is expected to market approximately 600 Mw of excess power to be generated by operating assets of Big Rivers. Pursuant to a recent agreement with New Energy Ventures, Inc. ("NEV"), LEM will provide coordination of energy supplies for NEV, and administration, scheduling and billing services for NEV's clients nationally. NEV was formed in 1995 to provide commercial and industrial energy consumers with energy buying and management services. NEV's customers comprise one of the nation's largest retail electricity buyers group. LEM uses financial instruments in its power and natural gas marketing activities. These financial instruments are used to hedge price and geographic basis risk for its purchase and sales commitments and to enhance its overall portfolio of electric power and natural gas trading activities. See Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for an overall discussion of these activities. LPI's gas operations, conducted directly and through subsidiaries, include gathering, processing, storage and transportation of natural gas. LPI aggregates supplies of natural gas from gas producers and processors, contracts for transportation services on both interstate and intrastate pipelines, and provides a variety of re-bundled services to end-users and local distribution companies. The majority of gas purchased and sold by LPI is generally under spot contracts of thirty days or less. As of December 31, 1997, LPI had approximately 740 direct gas sales contracts with industrial firms, local gas distribution companies, electric utilities, large commercial entities and institutions such as hospitals, military bases and universities. LPI's natural gas gathering and processing operations are concentrated in southeastern New Mexico, the Louisiana Gulf Coast, and the Permian Basin of West Texas. Assets employed either directly by LPI or through its subsidiaries to conduct these operations include a 90-mile intrastate pipeline in New Mexico (the Llano pipeline), twelve separate gathering systems consisting of 1,363 miles of pipeline (of which LPI owns 100% of seven and ownership interests ranging from 11% to 50% in the other five), three active gas processing facilities, a gas treatment facility, an underground storage facility with a current working capacity of approximately 6.0 Bcf of gas, and two gas transmission systems located in Texas which total 76 miles. The Llano pipeline, which has a design capacity of approximately 180,000 Mcf of gas per day, is capable of delivering gas to four different interstate pipelines. LPI, through its various subsidiaries, purchases gas from over 100 producers connected to the Llano pipeline and sells the gas directly to end-user customers or delivers the gas into one of the interstate pipelines for sale. LPI, through its various subsidiaries, also transports natural gas through the Llano pipeline for third parties and is paid a transportation fee for such services. An average of 15 approximately 82,600 Mcf of natural gas per day moved through the Llano pipeline in 1997. The twelve gathering systems owned during 1997 gathered approximately 106,000 Mcf (net to LPI's ownership interests) of natural gas per day during 1997. Connected to the Llano pipeline are two operating natural gas processing facilities capable of processing approximately 85,000 MMBtu of natural gas per day. These facilities extract natural gas liquids, including propane, ethane, butanes and natural gasoline, from the natural gas stream, at which point the mixed stream of liquids is sold. Approximately 208,400 gallons per day of natural gas liquids were extracted and sold from these facilities in 1997. Also connected to the Llano pipeline is a natural gas storage facility. As noted above, this facility has current working capacity of approximately 6.0 Bcf. LPI, through a subsidiary, offers this storage capacity to third parties on a fee basis. As of December 31, 1997, storage capacity of approximately 2.5 Bcf was leased to other parties. LPI (through a wholly-owned subsidiary) and Santa Fe Energy Resources Inc. (Santa Fe) are parties to a Master Gas Purchase Contract (Gas Contract), which was entered into in December 1993 and which expires on March 31, 2001. The Gas Contract provides for the dedication by Santa Fe to LPI of all of its domestic natural gas production from specified existing wells, which consist of essentially all such entity's domestic natural gas production (except to the extent such production is dedicated under pre-existing contracts) and certain domestic development and exploration wells. LPI currently receives about 80,000 MMBtu per day under the contract. Production of gas wells acquired by Santa Fe may, by mutual agreement, be dedicated under the Gas Contract. LPI is obligated to analyze and provide its recommendation regarding the method of gathering and transporting production from exploration wells, whether by Santa Fe, LPI or third parties. LPI is required to release gas production dedicated under the Gas Contract under certain circumstances, including if LPI's financial condition changes materially and adversely and LPI does not provide financial assurances (such as letters of credit) for the value of such gas acceptable to Santa Fe. To date, Santa Fe has not elected to request any such financial assurances. Pursuant to the Gas Contract, LPI is required to pay Santa Fe, for all production delivered, the fair market price for such gas. LPI is obligated to use its best efforts to receive gas from Santa Fe at delivery points so as to maximize the set price received by Santa Fe for such production. The term of the Gas Contract runs until March 31, 2001. However, either LPI or Santa Fe has the right to terminate the contract upon a material breach of the contract or the occurrence of certain events. In addition, Santa Fe has the right to terminate the contract or suspend performance if (i) payments are overdue by more than three working days, or (ii) LPI fails to purchase specified percentages of available production from Santa Fe. The production, transportation and certain sales of natural gas are subject to federal, state or local regulations which have a significant impact upon LEM's and LPI's energy products and services businesses. Regulation at the federal level of domestically produced or transported natural gas is administered primarily by the FERC pursuant to the Natural Gas Act (NGA) and the Natural Gas Policy Act of 1978 (NGPA). Maximum selling prices of certain categories of gas, whether sold in interstate or intrastate commerce, previously were regulated pursuant to NGPA. The NGPA established various categories of gas and provided for graduated deregulation of price controls of several categories of gas and the deregulation of sales of certain categories of gas. All price deregulation contemplated under the NGPA has already taken place. Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 terminated all NGA and NGPA regulation of "first sales" of domestic natural gas on January 1, 1993. The sale for resale of certain natural gas in interstate commerce is regulated, in part, pursuant to the NGA, which requires certificate and abandonment authority to initiate and terminate such sales. In addition, natural gas marketed by LEM is usually transported by interstate pipeline companies that are subject to the jurisdiction of the FERC. Similarly, some of the transportation and storage services provided by Llano are 16 subject to FERC regulation under section 311 of the NGPA. These services are frequently sold to gas distribution companies that contract with interstate pipeline companies for transportation from the Llano facility to their respective service areas. Section 311 permits intrastate pipelines under certain circumstances to sell gas to, transport gas for, or have gas transported by, interstate pipeline companies, and assign contract rights to purchase surplus gas from producers to interstate pipeline companies without being regulated as interstate pipelines under the NGA. For a discussion of lawsuits filed as a result of the Company's discovery in the fourth quarter of 1996 that unauthorized transactions had occurred in its gas trading business, see Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. POWER GENERATION DIVISION The Power Generation Division (Power Generation) develops, owns, operates, and maintains power generation facilities that sell electric and steam energy to utility and industrial customers. It currently has ownership interests in projects capable of generating nearly 600 megawatts of electric power in North Carolina, Virginia, New York, California, Minnesota, and Texas. Power Generation also has ownership interests in a windpower generating facility in Tarifa, Spain, and recently sold its interest in a 114-megawatt natural gas-fired power plant in North Central Argentina. See Item 2, Properties, for a listing of the Power Generation Division's projects. Except for its investments in wind power and its Roanoke Valley I facility (ROVA I) (see Item 2, Properties), each of the projects Power Generation has in operation within the United States is a qualifying cogeneration facility (QF) under the Public Utility Regulatory Policy Act of 1978 (PURPA). See Item 3 and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of certain issues regarding past operations at certain of these facilities. Certain partnerships, in which companies in the Power Generation Division have ownership interests, are operating wind power facilities which are qualifying small power production facilities under PURPA. In addition, Power Generation has obtained exempt wholesale generator (EWG) status for the entities which own the ROVA I and Roanoke Valley II (ROVA II) projects in North Carolina, the Rensselaer facility in Rensselaer, New York, and the Southampton, Altavista and Hopewell projects in Virginia. Except for ROVA I, these projects continue to maintain QF status under PURPA. Generally, QF status exempts projects from the application of the Holding Company Act, many provisions of the Federal Power Act, and state laws and regulations respecting rates and financial or organization regulation of electric utilities. EWGs also are exempt from application of the Holding Company Act and many provisions of the Federal Power Act, but once such an entity files its electric generation rates with FERC, it becomes a jurisdictional public utility under the Federal Power Act. As such a "public utility," an EWG's rates and some of its corporate activities are subject to FERC regulation. EWGs also are subject to non-rate regulation under state laws governing electric utilities. While QF or EWG status entitles Power Generation's projects to certain regulatory exceptions and benefits under PURPA and the Holding Company Act, each project must still comply with other federal, state and local laws, including those regarding siting, construction, operation, licensing and pollution abatement. For a discussion of the request for rehearing filed with FERC by LG&E-Westmoreland Southampton, the partnership that owns the Southampton facility, regarding the partnership's request for an order from FERC stating that the Southampton facility remains a qualifying facility for 1992, see Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 17 The foreign power generation facilities that Power Generation has interests in have obtained foreign utility company (FUCO) status under the Holding Company Act. Generally, FUCO status exempts these facilities from application of the Holding Company Act. In December 1997, LG&E Power 15 Incorporated ("LG&E Power 15"), a subsidiary of LPO, agreed to sell one-half of LG&E Power 15's interest in the partnership that owns the Rensselaer facility, which resulted in a pre-tax gain of $4.8 million in 1997. LG&E Power 15 will retain a 25% ownership interest in the partnership. The purchase price for the partnership interest consists of an initial payment of $9 million to be paid at closing. A subsequent payment is contingent upon the consummation of certain transactions and related matters involving the partnership. Accordingly, no amounts for these contingent payments have been recorded in 1997. The effect of any subsequent contingent payment will be recorded in 1998. See Notes 7, 12 and 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Western Kentucky Energy Corp. (WKEC), a subsidiary of Capital Corp., is expected to lease and operate for 25 years all of the generating assets owned by Big Rivers, a Henderson, Kentucky-based power generation cooperative with 1,459 Mw of owned net generating capacity. The lease is subject to the receipt of necessary regulatory approvals. Big Rivers owns and operates four coal-fired plants and one combustion turbine. In addition, subject to regulatory approval, WKEC is expected to operate a 312 Mw coal-fired facility owned by the City of Henderson, Kentucky (the "Henderson Facility"), with contractual rights to any surplus power generated by such facility, which historically has been about 80% of the unit's capacity. Big Rivers provides power to four distribution cooperatives, serving 91,000 customers in 22 western Kentucky counties, and two smelters. WKEC will pay Big Rivers a total of $57 million for the first two years and $31.5 million a year for the remaining 23 years. In addition, WKEC will purchase Big Rivers' inventory, personal property and intangible assets, as well as make a one-time payment to Big Rivers of $12.1 million. Big Rivers' operating assets are expected to provide approximately 600 Mw of excess power to be marketed by LEM. The Company anticipates that if this transaction closes, Capital Corp. would incur additional indebtedness of approximately $100 million to finance the initial required payments. In February 1998, LG&E Power Argentina I Inc. ("LG&E Argentina"), a wholly-owned indirect subsidiary of the Company, sold its one-third interest in the company which owns and operates the San Miguel facility to Pluspetrol Resources Corporation ("Pluspetrol") and ASTRA Compania Argentina de Petroleo S.A. ("Astra"), for a price of $16 million. The Company's net book value in the San Miguel project as of December 31, 1997, was approximately $18.8 million. In December 1996, Westmoreland Coal Company and its four first tier subsidiaries filed for reorganization under Section 11 of the U.S. Bankruptcy Code. One of these subsidiaries, Westmoreland Energy, Inc., is the direct parent of the various entities that are partners in partnerships with LG&E Energy subsidiaries which own six independent generating facilities. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Westmoreland-LG&E Partners (WLP), the partnership that owns the Roanoke Valley I and II facilities, is seeking the recovery of capacity payments withheld by Virginia Electric and Power Company (Virginia Power). In March 1996, Virginia Power filed a motion for summary judgment which was subsequently granted by the court as to all counts. WLP appealed the court's ruling and in June 1997, the Virginia Supreme Court reversed the lower court ruling and remanded the case for a trial. A new trial date has not been set but is anticipated in late 1998. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In July 1997, LG&E Westmoreland-Rensselaer (LWR), in which the Company has a 25% interest through an indirect subsidiary, executed a master restructuring agreement with Niagara Mohawk Corporation (NIMO) and 15 other independent power companies (IPPs). LWR is the owner of the Rensselaer cogeneration facility. 18 Under this agreement, LWR has an obligation to negotiate towards a restructuring of the Power Purchase Agreement between NIMO and LWR. In February 1998, the Public Service Commission of New York approved, subject to certain conditions, the NIMO restructuring proposals. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States Bankruptcy Court in the Northern District of California for protection under Chapter 11 of the United States Bankruptcy Code seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries, on one hand, and various windpower projects located in the U.S. and abroad, on the other hand. Included in these projects are the Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A. (Tarifa) wind projects in which Power Generation has invested, collectively, approximately $31 million. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. WPP 94, in which the Company has a 25% interest through indirect subsidiaries, did not make two semiannual payments, due September 2, 1997, and March 2, 1998, to John Hancock Mutual Life Insurance Company (Hancock) under certain notes issued by WPP94 to Hancock. The Company has offered WPP 94 financial support with respect to the appropriate proportion of its debt obligations, but certain of the three other investor groups are unable to offer funds to WPP94 in support of the partnership. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. ARGENTINE GAS DISTRIBUTION DIVISION In February 1997, the Company acquired interests in two Argentine natural gas distribution companies through LII. LII purchased a controlling interest in Distribuidora de Gas del Centro (Centro) and acquired a minority interest in Distribuidora de Gas Cuyana (Cuyana). Centro serves approximately 372,000 customers in Cordoba Province, Argentina; Cuyana serves approximately 305,000 customers in Mendoza Province, Argentina. The investment in these companies totaled approximately $140 million. Each of these companies has obtained foreign utility company (FUCO) status under the Holding Company Act. Generally, FUCO status exempts these facilities from application of the Holding Company Act. EMPLOYEES AND LABOR RELATIONS LG&E Energy and its subsidiaries had 3,398 full-time employees at December 31, 1997, including 2,446 full-time employees of LG&E at that date. LG&E's 1,462 operating, maintenance, and construction employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 2100. The current three year contract will expire in November 1998. 19 ITEM 2. Properties. LG&E's power generating system consists of the coal-fired units operated at its three steam generating stations. Combustion turbines supplement the system during peak or emergency periods. At February 28, 1998, LG&E owned the following electric generating stations:
Year in Capability Service Rating (Kw) ------- ----------- Steam Stations: Mill Creek - Kosmosdale, KY. Unit 1 1972 303,000 Unit 2 1974 301,000 Unit 3 1978 386,000 Unit 4 1982 480,000 ---------- Total Mill Creek 1,470,000 Cane Run - near Louisville, KY. Unit 4 1962 155,000 Unit 5 1966 168,000 Unit 6 1969 240,000 ---------- Total Cane Run 563,000 Trimble County - Bedford, KY. (a) Unit 1 1990 371,000 Combustion Turbine Generators (Peaking capability): Zorn 1969 16,000 Paddy's Run 1968 43,000 Cane Run 1968 16,000 Waterside 1964 33,000 ----------- Total combustion turbine generators 108,000 ----------- Total capability rating 2,512,000 -----------
(a) Amount shown represents LG&E's 75% interest in Trimble County. LG&E is responsible for operation of Unit 1 and is reimbursed by IMEA and IMPA for expenditures related to Trimble County based on their proportionate share of ownership interest. See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements, Jointly Owned Electric Utility Plant, under Item 8 for further discussion on ownership. LG&E also owns an 80 Mw hydroelectric generating station located in Louisville, operated under license issued by the FERC. At December 31, 1997, LG&E's electric transmission system included 21 substations with a total capacity of approximately 11,071,700 Kva and approximately 648 structure miles of lines. The electric distribution system included 82 substations with a total capacity of approximately 3,313,730 Kva, 3,615 structure miles of overhead lines, 341 miles of underground conduit, and 5,473 miles of underground conductors. LG&E's gas transmission system includes 178 miles of transmission mains, and the gas distribution system includes 3,616 miles of distribution mains. LG&E operates underground gas storage facilities with a current working gas capacity of approximately 14.6 20 million Mcf. See Gas Supply under Item 1. In 1990, LG&E entered into an operating lease for its corporate office building located in downtown Louisville, Kentucky. The lease is for a period of 15 years and is scheduled to expire June 2005. LG&E Energy Corp. has an operating lease for its corporate office space with an expiration date of 2005. The Energy Marketing and Trading Division has operating lease commitments related to office facilities that expire between 1998 and 2012. Other properties owned by LG&E include office buildings, service centers, warehouses, garages, and other structures and equipment, the use of which is common to both the electric and gas departments. The trust indenture securing LG&E's First Mortgage Bonds constitutes a direct first mortgage lien upon much of the property owned by LG&E. 21 At December 31, 1997, Power Generation owned the percentage indicated of the following joint ventures:
Net Ownership Capability Year in Name Interest % Fuel Rating (Mw) Service - ---- ---------- ---- ----------- -------- LG&E Westmoreland-Southampton 50 Coal 63 1992 Franklin, Virginia LG&E Westmoreland-Altavista 50 Coal 63 1992 Altavista, Virginia LG&E Westmoreland-Hopewell 50 Coal 63 1992 Hopewell, Virginia Westmoreland-LG&E Partners 50 Coal 165 1994 (Roanoke Valley I) Weldon, North Carolina LG&E Westmoreland-Rensselaer 25 (1) Natural 79 1994 Rensselaer, New York Gas Windpower Partners 1993-Palm Springs 50 Wind 43 1994 Palm Springs, California Windpower Partners 1993-Buffalo Ridge 50 Wind 25 1994 Buffalo Ridge, Minnesota Windpower Partners 1994 25 Wind 25-35 1995 Culberson County, Texas Westmoreland-LG&E Partners 50 Coal 44 1995 (Roanoke Valley II) Weldon, North Carolina K.W. Tarifa, S.A. 46 Wind 30 1995 Tarifa, Spain Central Termica San Miguel 33 (2) Natural 114 1996 de Tucuman, S.A. (CTSMT) Gas Tucuman Province, Argentina
(1) Reflects the Company's sale of one-half of its interest in the project. See Power Generation Division under Item 1 and Notes 7, 12, and 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. (2) The Company sold this interest in February 1998. See Power Generation Division under Item 1 and Note 7 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Except for CTSMT, Power Generation's ownership interests in these projects and the revenues from the sale of electricity and steam from the projects are pledged as security to the lenders who provided the financing for the project. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a discussion of the bankruptcy filing of an affiliate of Power Generation's partner in the Southampton, Altavista, Hopewell, Rensselaer and Roanoke Valley joint ventures. Also, see the same note for a discussion of the bankruptcy filing of an affiliate of Power Generation's partner in the Windpower Partners 1993 and Windpower Partners 1994 joint ventures. In February 1998, the Company sold its one-third interest in the entity which owns and operates CTSMT. See Note 7 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 22 LPI, through certain subsidiaries, owns or has an interest in twelve gas gathering systems consisting of 1,363 miles of pipeline (of which LPI owns 100% of seven and ownership interests ranging from 11% to 50% in the other five). These systems are located in Texas, New Mexico, Louisiana, Montana and Oklahoma. LPI, through a subsidiary, owns the Llano pipeline, a 90-mile intrastate pipeline system in southeastern New Mexico with a throughput capacity of 180,000 MCF of gas per day. LPI, through subsidiaries, owns two gas transmission systems located in Texas which total 76 miles. This system has a design capacity of 90,000 MCF of gas per day. LPI, through certain subsidiaries, also owns, or has interests in, and operates five natural gas processing plants located in southeastern New Mexico and western Texas with a total design capacity of 125,000 MCF of gas per day. LPI owns 100% interests in three of these plants, and a majority of the two remaining plants. Only three of the five plants are active currently. Through a subsidiary, it owns and operates an underground natural gas storage facility adjacent to the Llano pipeline in southeastern New Mexico with a current working capacity of approximately six BCF of natural gas. Centro's gas transmission and distribution system includes 5,963 miles of transmission mains and distribution mains located in Cordoba, Argentina, and neighboring provinces. ITEM 3. Legal Proceedings. Rates, Regulatory Matters, and Trimble County Generating Plant For a discussion of current regulatory matters, including the status of regulatory approvals for the Merger, and a detailed discussion of the Trimble County Unit 1 settlement agreement, see Proposed Merger with KU Energy Corporation under Item 1, Rates and Regulation under Item 7 and Notes 2, 4 and 17 of LG&E Energy Corp.'s Notes to Financial Statements and Notes 3 and 13 of LG&E's Notes to Financial Statements under Item 8, respectively. Statewide Power Planning In March 1995, the Commission staff issued its report on its review of LG&E's 1993 biennial Integrated Resource Plan. The Staff Report specifically found that LG&E's plan contained some of the better analyses among those filed by the electric utilities under the Commission's jurisdiction, and presented several suggestions for LG&E's consideration when it develops its next plan. In an order issued March 17, 1995, the Commission formally closed its proceeding for the review of LG&E's plan. On May 5, 1995, the Commission granted LG&E's request to waive the requirement that LG&E file an Integrated Resource Plan during 1995. On July 21, 1995, the Kentucky Commission amended its Integrated Resource Planning regulations to replace the biennial filing requirement with a triennial requirement. The amended regulations also specified that LG&E's next Integrated Resource Plan is to be filed 39 months from the effective date of the amended regulation, or October 21, 1998. Environmental For a discussion of environmental issues concerning LG&E's Mill Creek and Cane Run generating plants and its manufactured gas plant sites, and other environmental issues affecting LG&E Energy and its subsidiaries, see Item 3, Note 12 of LG&E's Notes to Financial Statements and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8, respectively. 23 Southampton For a discussion of the request for rehearing filed with FERC by LG&E-Westmoreland Southampton, the partnership that owns the Southampton facility, regarding the partnership's request for an order from FERC stating that the Southampton facility remains a qualifying facility for 1992, see Item 1 and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Roanoke Valley I Westmoreland-LG&E Partners (WLP), the partnership that owns the Roanoke Valley I and II facilities, is seeking the recovery of capacity payments withheld by Virginia Electric and Power Company. In June 1997, the Virginia Supreme Court reversed an adverse lower court ruling and remanded the case for trial. See Item 1 and Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Rensselaer In July 1997, LG&E Westmoreland - Rensselaer (LWR), in which the Company has a 25% interest through an indirect subsidiary, executed a master restructuring agreement with Niagara Mohawk Corporation (NIMO) and 15 other independent power companies (IPPs). LWR is the owner of the Rensselaer cogeneration facility. Under this agreement, LWR has an obligation to negotiate towards a restructuring of the Power Purchase Agreement between NIMO and LWR. In February 1998, the Public Service Commission of New York approved, subject to certain conditions, the NIMO restructuring proposals. Further negotiations with NIMO, suppliers and lenders to the Rensselaer Project are required to implement any restructuring. While discussions among the projects and NIMO are continuing, the Company is not able to predict the outcome of this event. Based upon the status of current negotiations, the Company does not expect the ultimate resolution of this matter to have a material effect on its results of operations or financial condition. See Power Generation Division under Item 1, Properties under Item 2, and Notes 7 and 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Kenetech Bankruptcy In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States Bankruptcy Court in the Northern District of California for protection under Chapter 11 of the United States Bankruptcy Code seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries, on one hand, and various windpower projects located in the U.S. and abroad, on the other hand. Included in these projects are the Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A. (Tarifa) wind projects in which the Company has invested, collectively, approximately $31 million. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. Windpower Partners 1994 Windpower Partners 1994 (WPP 94), in which the Company has a 25% interest through indirect subsidiaries, did not make semiannual payments, due September 2, 1997, and March 2, 1998, to John Hancock Mutual Life Insurance Company (Hancock) under certain Notes issued by WPP 94 to Hancock. The Company has offered WPP 94 financial support with respect to the appropriate proportion of its debt obligations, but certain of the three other investor groups are unable to offer funds to WPP 94 in support of the partnership. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a further discussion. 24 Calgary On November 22, 1996 LG&E Natural Canada Inc., a subsidiary of LEM, initiated action in the Court of the Queens Bench of Alberta, Calgary against a former employee. That action and an additional action, filed on the same date in the General Division of the Calgary Court, also named a natural gas sales and marketing company and the director, president and secretary of that company. An amended statement of claim was filed in the Calgary action on December 23, 1996, naming additional parties. These lawsuits were filed as a result of LEM's discovery in the fourth quarter of 1996 that the former employee had engaged in unauthorized transactions. Counterclaims have been filed seeking damages of approximately forty million dollars for, among other things, defamation and breach of contract. In the second quarter of 1997, LG&E Energy received an insurance settlement of $7.6 million (net of expenses) related to the losses. See Note 8, Non-Recurring Charges, and Note 16, Commitments and Contingencies, under Item 8. LG&E Energy does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. Other In the normal course of business, other lawsuits, claims, environmental actions, and other governmental proceedings arise against LG&E Energy and LG&E. To the extent that damages are assessed in any of these lawsuits, LG&E Energy and LG&E believe that their insurance coverage is adequate. Management, after consultation with legal counsel, does not anticipate that liabilities arising out of other currently pending or threatened lawsuits and claims will have a material adverse effect on LG&E's Energy or LG&E's consolidated financial position or results of operations, respectively. ITEM 4. Submission of Matters to a Vote of Security Holders. a) A special meeting of the shareholders of LG&E Energy was held on October 14, 1997. b) Not applicable. c) The matters voted upon and the results of the voting at the Special Meeting are set forth below: 1. The shareholders voted to approve the Agreement and Plan of Merger between the Company and KU Energy and the transactions contemplated therein, as follows: 51,148,571.327 common shares cast in favor of approval and 718,635.766 shares withheld. Holders of 630,881.303 common shares abstained from voting on this matter. 2. The shareholders voted to approve the amendment to and restatement of the Company's Amended and Restated Articles of Incorporation so as to increase the amount of authorized common shares from 125,000,000 shares to 300,000,000 shares, as follows: 49,738,586.696 common shares cast in favor of approval and 1,678,589.993 common shares withheld. Holders of 1,082,378.707 common shares abstained from voting on this matter. d) Not applicable. 25 EXECUTIVE OFFICERS OF LG&E ENERGY CORP.:
Effective Date of Election to Present Name Age Position Position ---- --- -------- ------------------- Roger W. Hale 54 Chairman of the Board, August 17, 1990 President and Chief Executive Officer Victor A. Staffieri 42 Chief Financial Officer May 15, 1997 Stephen R. Wood 55 President - Distribution May 15, 1997 Services Division President - Louisville Gas and Electric Company Walter Z. Berger 42 Group President - January 3, 1997 Energy Marketing Division John R. McCall 54 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary R. Foster Duncan 44 Executive Vice President - January 12, 1998 Planning and Development George W. Basinger 52 Senior Vice President - August 1, 1996 Power Operations Wendy C. Heck 44 Vice President - Infor- February 3, 1998 mation Technology Charles A. Markel III 50 Vice President - January 1, 1993 Finance and Treasurer S. Bradford Rives 39 Vice President - March 15, 1996 Finance and Controller
The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Shareholders, scheduled to be held April 22, 1998. There are no family relationships between executive officers of the Company or executive officers of its subsidiaries. Messrs. Hale, Staffieri, Wood, McCall, and Markel, and Ms. Heck are also executive officers of LG&E Energy's principal subsidiary, LG&E. Mr. Hale is Chairman of the Board and Chief Executive Officer of LG&E; Mr. Staffieri is Chief Financial Officer of LG&E, Mr. Wood is President of LG&E; Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary of LG&E, and Mr. Markel is Treasurer of LG&E. Ms. Heck is Vice President - Information Technology of LG&E. Before he was elected to his current position, Mr. Staffieri was Senior Vice President, General Counsel and Corporate Secretary of LG&E Energy Corp. from March 1992 to November 1992; Senior Vice President, 26 Public Policy and General Counsel of LG&E Energy Corp. and LG&E from November 1992 to January 1994; President of LG&E from January 1994 to May 1997; and President - Distribution Services of LG&E Energy Corp. from December 1995 to May 1997. Before he was elected to his current position, Mr. Wood was Senior Vice President and Chief Administrative Officer of LG&E from December 1992 to January 1994, and Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997. Before he was elected to his current position, Mr. Berger was Vice President, Finance and Business Development of Enron Oil Trading and Transportation from November 1992 to February 1996; and Executive Vice President and Chief Financial Officer of LG&E Energy Corp. and of LG&E from February 1996 to January 1997. Before he was elected to his current position, Mr. McCall was Partner and Litigation Chairman of Brown, Todd & Heyburn, a law firm. Before he was elected to his current position, Mr. Duncan was Senior Vice President, Corporate Finance and Business Development of Freeport-McMoRan Resource Partners from March 1993 to May 1994; and Vice President and Corporate Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and their affiliates from May 1994 to January 1998. Before he was elected to his current position, Mr. Basinger was Partner of National Power Company prior to November 1993; Vice President of Venture Management of LG&E Power Inc. from December 1993 to November 1994; and Senior Vice President of Operations of LG&E Power Inc. from November 1994 to August 1996. Before she was elected to her current position, Ms. Heck was Vice President - -Fuels and Information Services of LG&E from January 1993 to December 1993; Vice President - Information Services of LG&E from January 1994 to May 1997; and Vice President, Administration of LG&E Energy Corp. from May 1997 to February 1998. Before he was elected to his current position, Mr. Rives was Director - Business Development of LG&E Energy Corp. from January 1993 to December 1993; Associate General Counsel LG&E Energy Corp. from January 1994 to June 1994; Vice President and Treasurer of LG&E Power Inc. from June 1994 to March 1995; Vice President, Controller and Treasurer of LG&E Power Inc. from March 1995 to December 1995; and Vice President - Finance, Non-Utility Business of LG&E Energy Corp. from January 1996 to March 1996. 27 Executive Officers of LG&E:
Effective Date of Election to Present Name Age Position Position ---- --- -------- ------------------- Roger W. Hale 54 Chairman of the Board, January 1, 1992 and Chief Executive Officer Stephen R. Wood 55 President May 15, 1997 Victor A. Staffieri 42 Chief Financial Officer May 15, 1997 John R. McCall 54 Executive Vice President, July 1, 1994 General Counsel and Corporate Secretary Rebecca L. Farrar 38 Vice President, Gas February 15, 1995 Service Business M. Lee Fowler 61 Vice President and September 1, 1988 Controller Wendy C. Heck 44 Vice President - Infor- February 3, 1998 mation Technology Chris Hermann 50 Vice President, June 9, 1997 Business Integration Paul W. Thompson 41 Vice President, Retail September 15, 1996 Electric Business Charles A. Markel III 50 Treasurer January 1, 1993
The present term of office of each of the above executive officers extends to the meeting of the Board of Directors following the Annual Meeting of Stockholders, scheduled to be held April 22, 1998. There are no family relationships between executive officers of LG&E. Messrs. Hale, Staffieri, Wood, McCall, and Markel, and Ms. Heck are also executive officers of LG&E's parent company, LG&E Energy Corp. Mr. Hale is Chairman of the Board and Chief Executive Officer of LG&E Energy Corp.; Mr. Staffieri is Chief Financial Officer of LG&E Energy Corp., Mr. Wood is President - Distribution Services Division of LG&E Energy Corp.; Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy Corp., and Mr. Markel is Vice President - Finance and Treasurer of LG&E Energy Corp. Ms. Heck is Vice President - Information Technology of LG&E Energy Corp. Before he was elected to his current position, Mr. Wood was Senior Vice President and Chief Administrative Officer of LG&E from December 1992 to January 1994, and Executive Vice President and Chief Administrative Officer of LG&E Energy Corp. from January 1994 to May 1997. 28 Before he was elected to his current position, Mr. Staffieri was Senior Vice President, Public Policy and General Counsel of LG&E Energy Corp. and LG&E from November 1992 to January 1994; President of LG&E from January 1994 to May 1997; and President Distribution Services of LG&E Energy Corp. from December 1995 to May 1997. Before he was elected to his current position, Mr. McCall was Partner and Litigation Chairman of Brown, Todd & Heyburn, a law firm. Before she was elected to her current position, Ms. Farrar was Division Manager, Central Division-Gas Operations of South Carolina Electric and Gas Company from February 1992 to July 1994; and General Manager, Gas Operations of South Carolina Electric and Gas Company from July 1994 to February 1995. Before she was elected to her current position, Ms. Heck was Vice President - -Fuels and Information Services of LG&E from January 1993 to December 1993; and Vice President - Information Services of LG&E from January 1994 to May 1997; and Vice President, Administration of LG&E Energy Corp. from May 1997 to February 1998. Before he was elected to his current position, Mr. Hermann was Vice President and General Manager, Wholesale Electric Business of LG&E from January 1993 to June 1997. Before he was elected to his current position, Mr. Thompson was Director-Business Development for LG&E Energy Corp. prior to December 1993; General Manager-Gas Operations for LG&E from December 1993 to July 1994; and Vice President-Business Development for LG&E Energy Corp. from July 1994 to September 1996. PART II. ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters. LG&E ENERGY: LG&E Energy 's Common Stock is listed on the New York and Chicago Stock Exchanges. The ticker symbol is "LGE." The newspaper stock exchange listings are "LGE Energy" or "LGE EN." The following table gives information with respect to price ranges, as reported in The Wall Street Journal as New York Stock Exchange Composite Transactions, and dividends paid for the periods shown.
1997 1996 ---- ---- Dividend High Low Dividend High Low Paid Price Price Paid Price Price -------- -------- -------- --------- -------- -------- First quarter $.2875 $25.8750 $23.5000 $.2775 $22.000 $20.750 Second quarter .2875 25.0000 21.8125 .2775 22.875 20.875 Third quarter .2875 23.4375 21.2500 .2775 23.625 21.625 Fourth quarter .2975 25.0625 21.2500 .2875 24.625 22.375
The number of record holders of Common Stock at December 31, 1997, was 30,607. The book value of the Company's Common Stock at December 31, 1997, was $12.55 per share. 29 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 $):
1997 1996 ---- ---- First quarter $19,000 $18,500 Second quarter - 18,500 Third quarter 19,000 18,500 Fourth quarter 20,000 19,200
30 ITEM 6. Selected Financial Data.
Years Ended December 31 (Thousands of $ Except per Share Data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- LG&E Energy: Revenues: Revenues $4,263,820 $3,589,465 (a) $1,402,980 (a) $829,663 $900,027 Refund - Trimble County settlement - - (28,300) - - -------------- -------------- ------------- ------------- --------- Revenues 4,263,820 3,589,465 1,374,680 829,663 900,027 =========== =========== =========== ========= ========= Operating income: Before non-recurring items 209,161 237,771 205,357 189,087 189,122 Trimble County settlement - - (29,800) - - Non-recurring charges 1,342 (26,330) - (48,743) - -------------- ------------- ------------ --------- -------- Operating income 210,503 211,441 175,557 140,344 189,122 ============ ============ ============ ========= ========= Net income: Before non-recurring items 96,632 121,117 100,682 95,525 80,825 Trimble County settlement - - (17,852) - - Non-recurring charges 1,185 (17,114) - (38,696) - ------------- ------------- -------------- ---------- ---------- Total continuing operations 97,817 104,003 82,830 56,829 80,825 Discontinued operations - - - - 7,435 Gain on sale of discontinued operations - - - 51,805 - Cumulative effect of accounting change - - - (3,369) - -------------- -------------- -------------- ---------- ---------- Net income $ 97,817 $ 104,003 $ 82,830 $105,265 $ 88,260 =========== =========== =========== ======== ========= Average number of com- mon shares outstanding 66,471,397 66,293,670 66,105,175 65,981,870 65,377,181 Earnings per share of common stock: Before non-recurring items $1.45 $1.83 $1.52 $1.45 $1.24 Trimble County settlement - - (.27) - - Non-recurring charges .02 (.26) - (.59) - ------- ------- --------- ------- --------- Total continuing operations 1.47 1.57 1.25 .86 1.24 Discontinued operations - - - - .11 Gain on sale of discontinued operations - - - .79 - Cumulative effect of accounting change - - - (.05) - -------- -------- -------- ------ --------- Earnings per share (basic and diluted) $1.47 $1.57 $1.25 $1.60 $1.35 ===== ===== ===== ===== ===== Cash dividends declared per share of common stock $1.17 $1.13 $1.0925 $1.0575 $1.023 Payout ratio 79.5%(b) 72.1%(b) 87.2%(b) 66.3%(b) 75.9% Total assets $3,366,391 $3,011,892 $2,628,920 $2,217,464 $2,186,468
31
Years Ended December 31 (Thousands of $ Except per Share Data) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Long-term obligations (including amounts due within one year) 684,339 646,800 662,800 662,800 662,800
(a) The significant increases in revenues in 1996 and 1995 resulted primarily from acquiring LG&E Natural in May 1995. See Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 and Management's Discussion and Analysis under Item 7. (b) Excluding mark-to-market, the Trimble County settlement, non-recurring charges, gain on sale of discontinued operations, and cumulative effect of accounting change, the payout ratios would have been 80.5%, 70.8%, 71.8% and 73.1% in 1997, 1996, 1995 and 1994, respectively. LG&E Energy Corp.'s Management's Discussion and Analysis of Results of Operations and Financial Condition and the Notes to Financial Statements should be read in conjunction with the above information.
Years Ended December 31 (Thousands of $) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- LG&E: Operating revenues $845,543 $821,115 $723,463 $759,075 $775,125 ======== ======== ========= ======== ======== Net operating income: Before unusual items 148,186 147,263 138,203 134,393 136,118 Trimble County settlement - - (16,877) - - Non-recurring charges - - - (23,353) - --------------- --------------- --------------- ---------- --------------- Total net operating income 148,186 147,263 121,326 111,040 136,118 ========= ========= ========= ========= ========= Net income: Before unusual items 113,273 107,941 100,061 94,423 90,535 Trimble County settlement - - (16,877) - - Non-recurring charges - - (32,734) - Cumulative effect of accounting change - - - (3,369) - -------------- --------------- ------------- --------- ------------- Total net income 113,273 107,941 83,184 58,320 90,535 ========= ========= ======== ======== ======== Net income available for common stock 108,688 103,373 76,873 52,492 84,554 ========= ========= ======== ======== ======== Total assets 2,055,641 2,006,712 1,979,490 1,966,590 1,974,584 ========= ========= ========= ========= ========= Long-term obligations (including amounts due within one year) $646,800 $646,800 $662,800 $662,800 $662,800 ======== ======== ======== ======== ========
LG&E's Management's Discussion and Analysis of Results of Operations and Financial Condition and LG&E's Notes to Financial Statements should be read in conjunction with the above information. 32 ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. LG&E ENERGY: The following discussion and analysis by management focuses on those factors that had a material effect on the Company's financial results of operations and financial condition during 1997, 1996, and 1995 and should be read in connection with the consolidated financial statements and notes thereto. The Company's financial results and conditions have been largely dependent on the financial results and conditions of its principal subsidiary, Louisville Gas and Electric Company (LG&E), a regulated electric and gas utility. It is anticipated that future financial results from the Company's operations will become increasingly reflective of the results from its expanding portfolio of investments in energy marketing and related services, electric generation, and gas distribution in addition to the financial results provided by LG&E. In May 1997, the Company entered into a Merger Agreement with KU Energy Corporation, which provides for the combination of KU Energy Corporation into LG&E Energy Corp. Completion of the merger remains subject to various regulatory approvals and other conditions. The following discussion and analysis and related financial statements do not reflect the impact of the Company's proposed merger with KU Energy Corporation, with the exception of the unaudited pro forma schedules included in Item 14. See Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 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, including decisions regarding the proposed combination of the Company and KU Energy Corporation and other factors described from time to time in LG&E Energy Corp.'s reports to the Securities and Exchange Commission, including Exhibit 99.01 to this Form 10-K. RESULTS OF OPERATIONS Earnings per Share Earnings per share of common stock for 1997 were $1.47, a decrease of 10(cent) per share from the $1.57 earned in 1996. The 1996 reported earnings of $1.57 included a one-time charge of 26(cent), which resulted from unauthorized trading transactions in the Company's Canadian office. See Note 8 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Excluding this charge, earnings per share for 1996 were $1.83; thus, 1997 earnings decreased 36(cent). The 36(cent) per share decrease resulted from lower earnings in the non-regulated energy marketing business of 52(cent), and an increase in corporate and other expenses, including interest expense on debt incurred to acquire non-regulated businesses, of 5(cent); partially offset by an increase in core business earnings at LG&E of 8(cent) (from $1.56 to $1.64), first year earnings related to the acquisition of an interest in two Argentine gas distribution units of 7(cent), and an increase in the non-utility power generation business of 6(cent). The decline in the energy marketing business was due primarily to abnormal weather, price volatility in the energy market and narrowing margins in the natural gas business. The 8(cent) increase in earnings at LG&E was primarily due to higher contributions from wholesale electric sales and lower maintenance expenses. Earnings per share of common stock for 1996 of $1.57 increased 32(cent) over the $1.25 per share reported for 1995. Earnings per share for 1995 included a one-time charge of 27(cent) to recognize the settlement of the long-standing issues surrounding LG&E's Trimble County electric generating plant. Excluding the Trimble County settlement 33 LG&E ENERGY (CONT.): in 1995 and the one-time non-recurring charge as discussed in the preceding paragraph for 1996, earnings per share were $1.83 in 1996, or 31(cent) more than comparable 1995 earnings of $1.52. The 31(cent) increase resulted from higher earnings at LG&E of 14(cent) and higher energy marketing and other earnings of 27(cent), partially offset by an increase in corporate and other expenses, including interest expense on debt incurred to acquire non-regulated businesses, of 10(cent). The LG&E increase of 14(cent) (from $1.42 to $1.56) is primarily the result of a significantly higher level of wholesale electric sales and increased retail sales of electricity and natural gas, partially offset by increased operation and maintenance expenses. The increase in non-utility earnings reflects growth in the Company's energy marketing and trading business and strong performance by the independent power ventures. Also, earnings attributable to energy marketing and trading for 1996 include the impact of adopting the mark-to-market method of accounting of 23(cent) per share. LG&E (Utility) Results Revenues A comparison of LG&E's revenues for the years 1997 and 1996 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 1997 1996 1997 1996 ---- ---- ---- ---- Sales to ultimate consumers: Fuel and gas supply adjustments, etc. $ (2,155) $ (4,652) $27,192 $21,176 Demand side management/decoupling 8,041 5,429 4,348 (1,989) Environmental cost recovery surcharge 448 2,410 - - Variation in sales volumes (4,810) 801 (14,891) 14,483 --------- ---------- -------- --------- Total 1,524 3,988 16,649 33,670 Wholesale sales 3,088 30,383 - - Gas transportation-net - - 147 (971) Other 3,387 1,703 (204) 594 ---------- ---------- ---------- ----------- Total $ 7,999 $ 36,074 $ 16,592 $ 33,293 ========= ======== ======== ========
Electric revenues increased in 1997 due to a slightly higher level of wholesale sales and other revenues. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause, partially offset by decreased gas sales due mainly to warmer weather. Electric revenues increased in 1996 compared with 1995 primarily because of an increase in wholesale sales of electricity which resulted from aggressive marketing efforts. Gas revenues increased as a result of the higher cost of natural gas in 1996 and because of increased sales to ultimate consumers (6%) caused mainly by colder weather experienced in the first quarter of the year. Expenses Fuel for electric generation and gas supply expenses comprise a large segment of the Company's total operating costs. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply are reflected in LG&E's rates, subject to approval by the Public Service Commission of Kentucky (Kentucky Commission or Commission). 34 LG&E ENERGY (CONT.): Fuel expenses incurred in 1997 were approximately the same as in 1996. Fuel expenses increased $11.7 million (8%) in 1996 primarily because of a 12% increase in generation ($16 million), partially offset by a decrease in the cost of coal burned ($4.3 million). The average delivered cost per ton of coal purchased was $21.66 in 1997, $21.73 in 1996, and $23.68 in 1995. Gas supply expenses for 1997 increased $18.4 million (13%) because of the higher cost of net gas supply ($29.3 million), partially offset by a decrease in the volume of gas delivered to the distribution system ($10.9 million). Gas supply expenses increased $29.7 million (27%) in 1996 mainly because of the higher cost of net gas supply ($21.8 million) and an increase in the volume of gas delivered to the distribution system ($7.9 million). The average unit cost per Mcf of purchased gas was $3.46 in 1997 and 1996, and $2.62 in 1995. Operation and maintenance expenses for 1997 were approximately the same as 1996. Maintenance decreased in 1997 due mainly to decreased repairs at the electric generating plants caused by fewer outages and a lower level of storm damage repairs. These decreases were offset by an increase in costs to operate the power plants and a write-off of certain previously deferred items that amounted to approximately $3 million. Items written off include expenses associated with the hydro-electric plant and a management audit fee. Even though LG&E believes it could have reasonably expected to recover these costs in future rate proceedings, it decided not to seek recovery and expensed these costs because of increasing competitive pressures in the industry. Operation and maintenance expenses increased $11.5 million (6%) in 1996 over 1995 primarily because of increased costs to operate LG&E's electric power plants ($2.9 million), the electric and gas transmission and distribution systems ($1.9 million), increased storm damage expenses ($2.2 million) and the recognition of proceeds in 1995 for the settlement of a commercial dispute. Pursuant to a study to determine when the settlement should be recorded, LG&E recognized $6 million as a reduction of 1995 operation expense and $2 million as a reduction of 1996 operation expense. Depreciation and amortization increased in both 1997 and 1996 primarily because of additional plant in service. In addition, 1997 reflects the accelerated write-off of losses on early retirements of facilities. Other income for 1997 increased by $3.4 million primarily because of interest income recorded as a result of a favorable tax settlement and the sale of stock options which LG&E had acquired in a commercial transaction. Other income for 1996 decreased about $3 million because of a decrease in income earned from investments and lower gains realized from the sale of property as compared to 1995. See Note 12 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Interest charges for 1997 decreased $1 million (3%) due to favorable refinancing activities in 1996. Interest charges for 1996 decreased $1.7 million (4%) primarily because of the retirement of outstanding debt. LG&E's embedded cost of long-term debt at December 31, 1997, was 5.68%; and at December 31, 1996, 6.05%. See Note 14 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for further discussion. Preferred dividends decreased $1.7 million (28%) in 1996 as compared to 1995 due primarily to the redemption of the 7.45% Series Cumulative Preferred Stock in December 1995. Variations in income tax expenses are largely attributable to changes in pre-tax income. 35 LG&E ENERGY (CONT.): 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. Energy Marketing and Trading Energy marketing and trading results include the operations of the Company's gas marketing and trading division, gas gathering and processing operations, power marketing and trading, and project development activities. Total revenues for energy marketing and trading increased $517.9 million (19%) in 1997 due primarily to higher volumes. Gross margin decreased $62.9 million, primarily due to abrupt changes in electric load demand, substantially greater price changes in certain regions of the country during the third quarter, and competitive pressure on margins experienced in both the electric and gas trading sectors and other market changes. The 1997 results also include $11.6 million in revenues from development activities associated with an independent power project in the Northeast. During 1996, $7.6 million of associated development revenues was recognized. Revenues and cost of revenues increased substantially in 1996 compared to 1995 primarily due to volume increases and higher prices associated with both the power and natural gas marketing and trading activities. Revenues also increased by $26.2 million during 1996 due to adoption of the mark-to-market method of accounting for the Company's energy marketing and trading activities. See Note 1 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Operation and maintenance expenses remained flat between 1996 and 1997. Operation and maintenance expenses increased $23.7 million in 1996 compared to 1995 primarily due to the acquisition of Hadson Corporation and higher overall levels of power marketing and trading. Depreciation and amortization increased by $6 million in 1996 primarily due to the acquisition of Hadson Corporation. Non-recurring charges in 1997 included a net insurance settlement of $7.6 million related to losses incurred in the Company's Canadian office during 1996 partially offset by a charge of $6.3 million to reflect the costs of consolidating the trading, risk management and administrative operations of the Company's power and gas marketing divisions into a single energy marketing unit, located in its Louisville headquarters. Non-recurring charges in 1996 resulted from losses recognized when an internal investigation uncovered unauthorized transactions by a marketer in the Company's Canadian office. See Notes 8 and 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Argentine Gas Distribution and Other In February 1997, the Company acquired interests in two Argentine gas distribution companies: Distribuidora de Gas del Centro (Centro) and Distribuidora de Gas Cuyana (Cuyana). Revenues and operating expenses increased $127.2 million and $29.3 million, respectively, due to the incorporation of results from Centro. Equity in earnings of joint ventures increased by $2.4 million due to the acquisition of an interest in Cuyana. Interest charges and preferred dividends increased by $10.5 million and minority interest increased by $9 million due to these acquisitions. 36 LG&E ENERGY (CONT.): Equity in earnings of joint ventures from the Company's power generation projects were essentially flat between 1996 and 1997. The decrease in equity in earnings of joint ventures in 1996 of $9.3 million compared to 1995 mainly resulted from the sale of power purchase contracts by two partnerships in June 1995. These sales resulted in gains totaling $9.7 million in 1995. Also, earnings from the three windpower joint ventures formerly managed by Kenetech Windpower, Inc. (Kenetech) decreased $1.1 million. This was primarily due to an increased level of expense incurred because of a change in operations management at the ventures during 1996 after Kenetech filed for Chapter 11 bankruptcy protection. The Company now manages operations at two of the projects, and another venture partner manages the third. See Notes 7 and 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Other income and deductions increased by $4.8 million in 1997 due to the sale of one-half of the Company's interest in the Rensselaer cogeneration facility. See Notes 7 and 12 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. LIQUIDITY AND CAPITAL RESOURCES The Company's need for capital funds is primarily related to the construction of plant and equipment necessary to meet the needs of electric and gas utility customers and equity investments in connection with independent power production projects and other energy-related growth or acquisition opportunities among the non-utility businesses. Fluctuations in the Company's energy marketing and trading activities also affect liquidity throughout the year. Lines of credit are maintained to fund these temporary capital requirements. Construction Expenditures and Equity Investments Utility construction expenditures for 1997 were $111 million compared with $108 million for 1996 and $93 million for 1995. Non-utility construction expenditures (other than generating plant expenditures incurred by joint ventures) were approximately $27 million in 1997, $8 million in 1996, and $11 million in 1995. In 1995, the Company invested equity of $34 million in several domestic and international power projects and in the redemption of its interest in the partnership that operated many of its power plants. Past Financing Activities During 1997, 1996, and 1995, the Company's primary sources of capital were internally generated funds from operating cash flows and debt financing. Internally generated funds provided financing for 100% of the Company's utility construction expenditures for 1997, 1996, and 1995. The Company acquired interests in two Argentine natural gas distribution companies in 1997 for $140 million, plus transaction related fees and expenses. It also acquired Hadson Corporation in 1995 for $143 million, plus acquisition-related fees and expenses. These acquisitions were financed with cash and lines of credit. The Company also provides its energy marketing business with additional cash to meet general working capital needs, including margin calls. Margin calls are generally required on certain of the Company's hedge and trading financial instruments to address changes in market prices. The Company had approximately $4.1 million of net margin deposits as of December 31, 1997. The Company's combined cash and marketable securities balance increased by $6.2 million in 1997 and $11.3 million in 1996. The increase for 1997 reflects cash flows from operations and an increase in borrowings, partially offset by capital expenditures and dividends paid. The 1996 increase reflects cash flows from 37 LG&E ENERGY (CONT.): operations, partially offset by capital expenditures, dividends paid, and a net decrease in borrowings. In 1995, combined cash and marketable securities decreased $79.6 million compared to 1994, which primarily resulted from the acquisition of Hadson Corporation and related working capital needs, additional investments in affiliates and dividends paid; offset by cash flows from operations, an increase in borrowings and changes in classification of investments from noncurrent to current assets. The decreases in accounts receivable and accounts payable during 1997 resulted primarily from lower gas marketing trading volumes over the last 60 days of the year. The increases in accounts receivable and accounts payable during 1996 resulted from increased energy marketing volumes. The increases in price risk management assets and liabilities in 1996 resulted from adopting the mark-to-market method of accounting for the Company's energy marketing and trading activities. Variations in accounts receivable and accounts payable are not generally significant indicators of the Company's liquidity, as such variations are primarily attributable to fluctuations in weather in LG&E's service territory, and as it relates to LG&E Energy Marketing Inc., throughout the United States, which has a direct effect on sales of electricity and natural gas. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. The interest rates for these bonds were 3.90% and 3.85%, respectively, at December 31, 1997. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79% and 3.82%, respectively, at December 31, 1997. The proceeds from these bonds were applied in December 1996 to redeem the outstanding 7.25% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due December 1, 2016. On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million matured and were retired by LG&E. The bonds were redeemed with available funds. In April 1995, LG&E issued $40 million of Jefferson County, Kentucky, Pollution Control Bonds, 5.90% Series, due April 15, 2023. The proceeds from these bonds were used to redeem the outstanding 9.25% Series of Pollution Control Bonds due July 1, 2015. In December 1995, LG&E redeemed the outstanding shares of its 7.45% Cumulative Preferred Stock with a par value of $25 per share at a redemption price of $25.75 per share. LG&E funded the $22 million redemption with cash generated internally. The Company's equity investments in non-utility projects and non-utility construction expenditures were financed through internally generated funds and short-term borrowings. Construction expenditures for new generating projects were funded through project debt. The Company had non-utility short-term borrowings outstanding of $360.2 million as of December 31, 1997. These borrowings consisted of commercial paper which had maturity dates ranging between one and 270 days. Because of the roll-over of these maturity dates, total short-term borrowings during the year were approximately $1.2 billion and total repayments of short-term borrowings during the year were approximately $1 billion. Short-term borrowings were $158 million as of December 31, 1996, and $173 million as of December 31, 1995. The increase in 1997 was primarily due to the acquisition of the interests in the Argentine natural gas 38 LG&E ENERGY (CONT.): distribution companies and the funding of working capital requirements. The Company issued $4 million of new common stock in 1997 and $2 million in 1996, under various employee plans. The Company announced a program on October 14, 1997, authorizing the repurchase of up to 1,000,000 shares of its common stock to be used for, among other things, benefit and compensation plans. See Note 13 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Future Capital Requirements Future utility financing requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions allowed by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other regulatory requirements. The Company estimates that LG&E's construction expenditures will total $260 million for 1998 and 1999. In addition, LG&E's capital requirements for 1998 include $20 million to retire long-term debt that is scheduled to mature on June 1, 1998. Capital expenditures for the non-utility businesses are anticipated to total $55 million for 1998 and 1999. Other future capital funding requirements are dependent upon the identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions. Future Sources of Financing Internally generated funds from operations are expected to fund substantially all of LG&E's anticipated construction expenditures in 1998 and 1999. Similarly, the Company anticipates having sufficient internal cash generation, borrowing capacity and access to securities markets to meet anticipated equity investments and non-utility capital expenditures in 1998 and 1999. On September 5, 1997, LG&E Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems) merged to form LG&E Capital Corp. (Capital Corp.). At the same time, Capital Corp. implemented a $600 million commercial paper facility backed by new lines of credit totaling $700 million. The Company terminated the previous lines of credit which totaled $460 million. At December 31, 1997, loan agreements and lines of credit were in place totaling $900 million ($200 million for LG&E and $700 million for Capital Corp.) for which the companies pay commitment or facility fees. The LG&E credit facility provides for short-term borrowing. The Capital Corp. facilities provide for short-term borrowing, letter of credit issuance, and support of commercial-paper borrowings. Unused capacity under these lines totaled $481.7 million after considering the commercial paper support and approximately $58.1 million in letters of credit securing on- and off-balance sheet commitments. The credit lines will expire at various times from 1998 through 2002. Management expects to renegotiate the lines when they expire. On February 6, 1998, Capital Corp. issued $150 million of medium-term notes due in January 2008. The securities were issued pursuant to an unregistered Rule 144A offering. The stated interest rate on the notes was 6.46%. After taking into account the effects of an interest rate swap entered into in 1997 to hedge the interest rate on $100 million of such medium-term notes and other issuance costs, the effective rate will be 6.82%. See Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. The proceeds were used to repay outstanding notes payable. The lenders under the credit facilities, commercial paper facility, and the medium-term notes for Capital Corp. are entitled to the benefits of Support Agreements with LG&E Energy 39 LG&E ENERGY (CONT.): Corp. See Note 15 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Year 2000 Computer Software Issue The Company began its project regarding the year 2000 issue in 1996. The board of directors approved the general year 2000 plan and receives, along with management, regular updates. Project teams are continuing to evaluate risks and to plan and implement appropriate sources of corrective action. Corrective action, including replacement or modification of certain software systems, for major applications such as customer information, financial and trading systems are in process, and in certain cases completed. Regarding the smaller, more isolated systems, the Company anticipates moving from the evaluative stage to the corrective stage during 1998. The Company has also communicated with its suppliers, customers and key business partners regarding year 2000 compliance and intends to continue monitoring their progress on this issue. The amount that has been expensed through December 31, 1997, is approximately $2 million. Based on studies and progress made to date, the Company expects to spend approximately $10 million in 1998 and 1999 for significant modification of its computer information systems to enable proper processing of transactions relating to the year 2000 and beyond. Accordingly, the Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. LG&E Energy Corp. - KU Energy Corporation Merger On May 20, 1997, the Company and KU Energy Corporation (KU) entered into an agreement and Plan of Merger providing for a merger of LG&E Energy and KU. Pursuant to the Merger Agreement, KU will be merged with and into LG&E Energy, with LG&E Energy as the surviving corporation effective with the receipt of all required approvals. The merger has been approved by the Kentucky Commission and the Virginia State Corporation Commission. For a more detailed and descriptive discussion of the merger and the additional approvals needed, see Note 2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Rates and Regulation LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric and gas utility regulation, and as such, its accounting is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Given LG&E's competitive position in the market and the status of regulation in the state of Kentucky, LG&E has no plans or intentions to discontinue its application of SFAS No. 71. See Note 4 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. On December 8, 1995, the Commission approved a settlement agreement filed by LG&E and all intervenors in the Trimble County proceedings, including various consumer interest groups and government agencies, that, in effect, resolved all of the regulatory and legal issues related to the appropriate ratemaking treatment to exclude 25% of the Trimble County plant costs from customer rates. Under the settlement, ratepayers are receiving $22 million in refunds, most of which is being refunded over the five-year period, 1996 through 2000, based on a per-kilowatt-hour credit. In addition, LG&E is providing $900,000 annually for five years, beginning in 1996, to fund low-income energy assistance programs. The Company also revised the decoupling methodology in a manner that reduced revenues collected from residential customers during 1996 and 1997 by a total of approximately $1.8 million. The overall effect of the settlement, which the Company recognized in its entirety in the fourth quarter of 1995, 40 LG&E ENERGY (CONT.): was to reduce electric revenues by $28.3 million and increase operating expenses by $1.5 million. Thus, the settlement reduced 1995 net income by $17.9 million, and earnings per share by 27(cent). See Note 17 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. In May 1995, LG&E implemented a Commission approved environmental cost recovery (ECR) surcharge to recover certain costs required to comply with the Federal Clean Air Act, as amended, and those federal, state, and local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal. As a result of this surcharge, LG&E's electric revenues increased $3.2 million in 1995, an additional $2.4 million in 1996 and an additional $.4 million in 1997. The Kentucky Attorney General (KAG), and the Kentucky Industrial Utility Customers filed an appeal in Franklin Circuit Court on various issues related to the Commission's order in this proceeding, including the constitutionality of the Kentucky statute that authorizes the surcharge. In an order dated April 10, 1996, associated with the first six-month review of the operation of the surcharge, the Commission stated that all environmental surcharge revenues collected from the date of the April 10 order will be subject to refund, pending the outcome of the legal proceedings. LG&E is contesting the legal challenges but cannot predict the outcome of this litigation. In a similar proceeding involving appeals from the Commission's order authorizing an environmental cost recovery surcharge for Kentucky Utilities Company by the same intervenors, the Kentucky Court of Appeals, in a decision issued on December 5, 1997, upheld the constitutionality of the surcharge statute. The intervenors have petitioned the Kentucky Supreme Court to review the decision of the Kentucky Court of Appeals. Any refunds that may ultimately be ordered, are not expected to have a material adverse effect on LG&E's financial position or results of operation. In January 1994, LG&E implemented a Commission approved demand side management (DSM) program that LG&E, KAG, the Jefferson County Attorney, and representatives of several customer-interest groups had filed with the Commission. The approved program included a formal collaborative process to develop future DSM programs and also contained a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs, and (3) allowed LG&E to recover revenues from lost sales associated with the DSM programs. Subsequent to the original filing, LG&E requested three significant revisions to the DSM program. In 1996, the Commission approved the addition of five new programs that increased LG&E's commitment to DSM by approximately $4 million over the next two years. In 1997, LG&E requested a change in the methodology used in determining revenues from lost sales associated with DSM programs. This change replaces the decoupling mechanism approved in the original program, with a methodology based on engineering estimates. Also in 1997, LG&E requested approval to implement a 1998 program budget in the amount of $2.5 million. The revisions requested in 1997 are currently pending before the Commission. On September 30, 1997, the Commission issued an order approving LG&E's request to implement an experimental performance-based ratemaking mechanism. This mechanism is related to gas procurement activities and gas off-system sales only and is approved for a three-year test period effective October 1, 1997. During the three-year experimental period, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. This mechanism is not expected to have a material effect on LG&E's financial position or results of operations. In its September 12, 1997 order approving the merger of LG&E Energy and KU, the Kentucky Commission ordered LG&E to file by the later of the consummation of the merger or September 14, 1998, detailed plans to address the future rate regulation of the Company. The Commission directed LG&E to indicate in its filing whether it desired to remain under traditional rate of return regulation or commence non-traditional regulation. 41 LG&E ENERGY (CONT.): LG&E was further ordered to explain the reasons for its election, and in the case of traditional regulation, include an analysis and proposals relative to its earnings at that time. If non-traditional regulation is elected, LG&E must explain the reasons for its choice and how its plan will achieve the Commission's goals of providing incentives to utilities and a sharing of the resulting benefits with customers. The Commission stated that it will fully investigate LG&E's filing and determine whether changes should be made to the existing regulation of the Company. LG&E cannot presently predict the outcome of this matter. LG&E last filed for a rate increase with the Commission in June 1990 based on the test year ended April 30, 1990. The Commission issued a final order in September 1991 that effectively granted LG&E an annual increase in rates of $6.8 million ($6.1 million electric and $.7 million gas). Environmental Matters With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already complied with the stringent sulfur dioxide emission limits required by the year 2000, as it had previously installed scrubbers on all of its coal-fired generating units. Since 1990, as part of its ongoing construction program, LG&E has spent $31 million for measures to meet applicable nitrogen oxide limits. While the overall financial impact of the Act on LG&E has been minimal, LG&E is closely monitoring several significant regulatory developments which may potentially impact the Company including regulations proposed by the United States Environmental Protection Agency (USEPA) in October 1997. These regulations address long-range ozone transport from Midwest emissions sources that allegedly contribute to ozone problems in the Northeast. If finally adopted, the proposed regulations may require numerous utilities including LG&E, and possibly independent power producers (including projects in which the Company has an interest), to incur significant capital expenditures, currently estimated as potentially in excess of $100 million in the case of LG&E, and significantly increased operation and maintenance costs required to achieve additional reductions in emissions of nitrogen oxides. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a complete discussion of the Company's environmental issues concerning the proposed USEPA ozone transport regulations, LG&E's Cane Run and Mill Creek electric generating plants, manufactured gas plant sites, and certain other environmental issues. Public Utility Regulatory Policies Act Proposals also have been introduced in Congress to repeal all or portions of the Public Utility Regulatory Policies Act (PURPA). PURPA and its implementing regulations require, among other things, that electric utilities purchase electricity generated by qualifying cogeneration facilities at a price based on the purchasing utility's avoided costs. The Company is the partial owner of several qualifying cogeneration facilities and it is the operator of several qualifying cogeneration facilities pursuant to contracts. While the Company supports the repeal of PURPA, the Company intends to oppose any efforts to nullify existing contracts between electric utilities and qualifying cogeneration facilities. The Company is involved in proceedings before the Federal Energy Regulatory Commission (FERC) regarding its Southampton cogeneration facility and in litigation with the purchasing utility of the energy from its Roanoke Valley I cogeneration facility. The Rensselaer cogeneration facility, in which the Company has a 25% interest through an indirect subsidiary, is one of a group of 16 independent power producers which have entered into an agreement with Niagara Mohawk Power Corporation, as purchasing utility, to negotiate towards restructurings of their power sales contracts. As proceedings and negotiations concerning these events are continuing, the Company is currently unable to predict the outcome of these matters. See Note 16 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. 42 LG&E ENERGY (CONT.): Impact of Nonregulated Businesses The Company expects to continue investing in nonregulated projects, including domestic and international power production and gas distribution projects, as described under Future Capital Requirements. The nonregulated projects in which the Company has invested carry a higher level of risk than LG&E's traditional utility businesses. Current investments in nonregulated projects are subject to competition, operating risks, dependence on certain suppliers and customers, and domestic and foreign environmental and energy regulations as well as political and currency risks. In addition, significant expenses may be incurred for projects pursued by the Company that do not materialize. Also, in the energy marketing business, the Company, through its subsidiaries, trades natural gas, wholesale power, emission allowances and coal, as well as derivative products relating to such commodities, in which net open positions may exist. See Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. The aggregate effect of these factors is to create the potential for more volatility in the nonregulated component of the Company's earnings. Accordingly, the historical operating results of the Company's nonregulated businesses may not necessarily be indicative of future operating results. FUTURE OUTLOOK Big Rivers Electric Corporation The Company is awaiting a decision from the Kentucky Commission regarding the outcome of the Company's proposal to lease the generating assets of Big Rivers Electric Corporation (Big Rivers). The proposal has been approved by the creditors of Big Rivers as part of the confirmation of Big Rivers' plan of reorganization by the U.S. Bankruptcy Court. The Kentucky Commission expressed concerns following hearings in November 1997 regarding the potential for future environmental, regulatory and legislative costs and whether those costs, should they materialize, would be shared equitably among all rate classes involved. On February 3, 1998, the Company, Big Rivers, and certain other parties filed with the Commission a Term Sheet describing an agreement for resolving the issue identified by the Commission. The Commission has scheduled a hearing on March 18, 1998 for consideration of the agreement. The Commission has until April 30, 1998 to make a ruling. Approvals from FERC on various elements of the transaction are also pending. See Note 3 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8. Competition and Customer Choice LG&E Energy Corp. has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, the Company has taken many steps to prepare for the expected increase in competition in its regulated and non-regulated energy services businesses, including aggressive cost reduction activities; strategic acquisitions and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. The Company continues to be active in the national debate surrounding the restructuring of the electric industry and the move toward a competitive, market-based environment. LG&E Energy Corp. has urged Congress and federal regulatory agencies to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E Energy Corp. has repeatedly advocated the implementation of this transition by January 1, 2001. The Kentucky Commission has held a series of meetings with representatives of utilities, consumers, state agencies, state legislators and other groups in Kentucky to discuss the possible effects of electric industry restructuring in Kentucky. In December 1997, the Kentucky Commission issued a set of principles which are 43 LG&E ENERGY (CONT.): intended to serve as its guide in consideration of issues relating to industry restructuring. Among these principles were: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. At the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of future legislative or regulatory actions regarding industry restructuring and their impact on the Company, which may be significant, cannot be predicted currently. LG&E: The following discussion and analysis by management focuses on those factors that had a material effect on LG&E's financial results of operations and financial condition during 1997, 1996, and 1995 and should be read in connection with LG&E's financial statements and notes thereto. In May 1997, LG&E Energy Corp. (LG&E Energy) entered into a Merger Agreement with KU Energy Corporation (KU), which provides for the combination of KU into LG&E Energy. Completion of the merger remains subject to various regulatory approvals and other conditions. The following discussion and analysis and related financial statements do not reflect the impact of LG&E's proposed merger with Kentucky Utilities Company (Kentucky Utilities). See Note 2 of LG&E's Notes to Financial Statements under Item 8. 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, including decisions regarding the proposed combination of LG&E and Kentucky Utilities; and other factors described from time to time in Louisville Gas and Electric Company's reports to the Securities and Exchange Commission, including Exhibit No. 99.01 to this Form 10-K. RESULTS OF OPERATIONS Net Income LG&E's net income increased $5.3 million for 1997 over 1996. This improvement was mainly due to increased sales of electricity to wholesale customers, a lower level of maintenance expenses and increased investment and interest income. These items were partially offset by reduced gas sales volumes due to warmer winter weather and a write-off of certain expenses deferred in prior periods. Net income for 1996 increased $7.9 million over 1995 excluding a $16.9 million charge against net income in 1995 to recognize the effects of a settlement of the long-standing issues surrounding LG&E's Trimble County electric generating plant. Without excluding the Trimble County charge-off, net income increased $24.8 million over 1995. The $7.9 million increase in net income was primarily the result of a significantly higher level of wholesale electric sales and increased retail sales of electricity and natural gas, partially offset by increased operation and maintenance expenses. 44 LG&E (CONT.): Revenues A comparison of LG&E's revenues for the years 1997 and 1996, 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 1997 1996 1997 1996 - ----- ---- ---- ---- ---- Sales to ultimate consumers: Fuel and gas supply adjustments, etc. $ (2,155) $ (4,652) $27,192 $21,176 Demand side management/decoupling 8,041 5,429 4,348 (1,989) Environmental cost recovery surcharge 448 2,410 - - Variation in sales volumes (4,810) 801 (14,891) 14,483 --------- ---------- -------- --------- Total 1,524 3,988 16,649 33,670 Wholesale sales 3,088 30,383 - - Gas transportation-net - - 147 (971) Other 3,224 1,688 (204) 594 ---------- ---------- ---------- ----------- Total $ 7,836 $ 36,059 $ 16,592 $ 33,293 ========= ======== ======== ========
Electric revenues increased in 1997 due to a slightly higher level of wholesale sales and other revenues. Gas revenues increased primarily as a result of higher gas supply costs billed to customers through the gas supply clause, partially offset by decreased gas sales due mainly to warmer weather. Electric revenues increased in 1996 compared with 1995 primarily because of an increase in wholesale sales of electricity which resulted from aggressive marketing efforts. Gas revenues increased as a result of the higher cost of natural gas in 1996 and because of increased sales to ultimate consumers (6%) caused mainly by colder weather experienced in the first quarter of the year. Expenses Fuel for electric generation and gas supply expenses comprise a large segment of LG&E's total operating costs. LG&E's electric and gas rates contain a fuel adjustment clause and a gas supply clause, respectively, whereby increases or decreases in the cost of fuel and gas supply are reflected in LG&E's rates, subject to approval by the Public Service Commission of Kentucky (Kentucky Commission or Commission). Fuel expenses incurred in 1997 were approximately the same as in 1996. Fuel expenses increased $11.7 million (8%) in 1996 primarily because of a 12% increase in generation ($16 million), partially offset by a decrease in the cost of coal burned ($4.3 million). The average delivered cost per ton of coal purchased was $21.66 in 1997, $21.73 in 1996, and $23.68 in 1995. Power purchased expense increased $.6 million (4%) in 1997 over 1996 due to an increase in the amount of purchased power needed to support native load requirements. Power purchased expense in 1996 of $16.6 million was approximately the same as in 1995. Power was purchased in 1996 primarily to supplement generation requirements related to wholesale electric power sales. Gas supply expenses for 1997 increased $18.4 million (13%) because of the higher cost of net gas supply ($29.3 million), partially offset by a decrease in the volume of gas delivered to the distribution system ($10.9 million). Gas supply expenses increased $29.7 million (27%) in 1996 mainly because of the higher cost of net gas supply 45 ($21.8 million) and an increase in the volume of gas delivered to the distribution system ($7.9 million). The average unit cost per Mcf of purchased gas was $3.46 in 1997 and 1996, and $2.62 in 1995. Other operation expenses increased $7.4 million (5%) over 1996 primarily because of increased costs to operate the electric generating plants ($5.1 million) and a write-off of certain previously deferred items ($3.2 million). Items written off include expenses associated with the hydro-electric plant and a management audit fee. Even though LG&E believes it could have reasonably expected to recover these costs in future rate proceedings, it decided not to seek recovery and expensed these costs because of increasing competitive pressures in the industry. Other operation expenses in 1996 increased $8.7 million (6%) over 1995 primarily because of increased costs to operate LG&E's electric power plants ($2.9 million), the electric and gas transmission and distribution systems ($1.9 million), and the recognition of proceeds in 1995 for the settlement of a commercial dispute. Pursuant to a study to determine when the settlement should be recorded, LG&E recognized $6 million as a reduction of 1995 operation expense and $2 million as a reduction of 1996 operation expense. Maintenance expenses decreased $7.2 million (13%) from 1996 due to decreased repairs at the electric generating plants resulting from fewer scheduled outages ($5 million) and a lower level of storm damage repairs ($1.8 million). Maintenance expenses in 1996 increased $2.7 million (5%) over 1995 primarily due to increased storm damage repairs ($1.8 million) and an increase in electric power plant expenses ($.9 million). Depreciation and amortization increased $4 million (4.5%) over 1996 because of additional utility plant in service. In addition, 1997 reflects the accelerated write-off of losses on early retirements of facilities. Depreciation and amortization increased in 1996 primarily because of additional depreciable plant in service. Variations in income tax expenses are largely attributable to changes in pre-tax income. Other income for 1997 increased by $3.4 million primarily because of interest income recorded as a result of a favorable tax settlement and the sale of stock options which LG&E had acquired in a commercial transaction. Other income for 1996 decreased about $2.9 million because of a decrease in income earned from investments and lower gains realized from the sale of property as compared to 1995. See Note 9 of LG&E's Notes to Financial Statements under Item 8. Interest charges for 1997 decreased $1.1 million (3%) due to favorable refinancing activities in 1996. Interest charges for 1996 decreased $1.7 million (4%) primarily because of the retirement of outstanding debt. The embedded cost of long-term debt at December 31, 1997, was 5.68% and at December 31, 1996, 6.05%. See Note 10 of LG&E's Notes to Financial Statements under Item 8 for further discussion. Preferred dividends decreased $1.7 million (28%) for 1996 as compared to 1995 due primarily to the redemption of the 7.45% Series Cumulative Preferred Stock in December 1995. 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's need for capital funds is primarily related to the construction of plant and equipment necessary to meet the 46 LG&E (CONT.): needs of electric and gas utility customers and protection of the environment. Construction Expenditures New construction expenditures for 1997 were $111 million compared with $108 million for 1996 and $93 million for 1995. Past Financing Activities During 1997, 1996, and 1995, LG&E's primary source of capital was internally generated funds from operating cash flows. Internally generated funds provided financing for 100% of LG&E's construction expenditures for 1997, 1996, and 1995. Variations in accounts receivable and accounts payable are not generally significant indicators of LG&E's liquidity, as such variations are primarily attributable to fluctuations in weather in LG&E's service territory, which has a direct affect on sales of electricity and natural gas. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. The interest rates for these bonds were 3.90% and 3.85%, respectively, at December 31, 1997. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79% and 3.82%, respectively, at December 31, 1997. The proceeds from these bonds were applied in December 1996 to redeem the outstanding 7.25% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due December 1, 2016. On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million matured and were retired by LG&E. The bonds were redeemed with available funds. In April 1995, LG&E issued $40 million of Jefferson County, Kentucky, Pollution Control Bonds, 5.90% Series, due April 15, 2023. The proceeds from these bonds were used to redeem the outstanding 9.25% Series of Pollution Control Bonds due July 1, 2015. In December 1995, LG&E redeemed the outstanding shares of its 7.45% Cumulative Preferred Stock with a par value of $25 per share at a redemption price of $25.75 per share. LG&E funded the $22 million redemption with cash generated internally. Future Capital Requirements Future financing requirements may be affected in varying degrees by factors such as load growth, changes in construction expenditure levels, rate actions allowed by regulatory agencies, new legislation, market entry of competing electric power generators, changes in environmental regulations and other regulatory requirements. LG&E estimates construction expenditures will total $260 million for 1998 and 1999. In addition, capital requirements for 1998 include $20 million to retire long-term debt that is scheduled to mature on June 1, 1998. 47 Future Sources of Financing Internally generated funds from operations are expected to fund substantially all anticipated construction expenditures in 1998 and 1999. At December 31, 1997, LG&E had unused lines of credit of $200 million for which it pays commitment fees. These credit facilities are scheduled to expire in 2001. Management expects to renegotiate them when they expire. To the extent permanent financings are needed in 1998 and 1999, LG&E expects that it will have ready access to the securities markets to raise needed funds. Year 2000 Computer Software Issue LG&E began its project regarding the year 2000 issue in 1996. The board of directors approved the general year 2000 plan and receives, along with management, regular updates. Project teams are continuing to evaluate risks and to plan and implement appropriate sources of corrective action. Corrective action, including replacement or modification of certain software systems, for major applications such as customer information and financial systems are in process, and in certain cases completed. Regarding the smaller, more isolated systems, LG&E anticipates moving from the evaluative stage to the corrective stage during 1998. LG&E has also communicated with its suppliers, customers and key business partners regarding year 2000 compliance and intends to continue monitoring their progress on this issue. The amount that has been expensed through December 31, 1997, is approximately $2 million. Based on studies and progress made to date, LG&E expects to spend approximately $10 million in 1998 and 1999 for significant modification of its computer information systems to enable proper processing of transactions relating to the year 2000 and beyond. Accordingly, LG&E does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. LG&E Energy Corp. - KU Energy Corporation Merger On May 20, 1997, LG&E Energy and KU entered into an agreement and Plan of Merger providing for a merger of LG&E Energy and KU. Pursuant to the Merger Agreement, KU will be merged with and into LG&E Energy, with LG&E Energy as the surviving corporation effective with the receipt of all required approvals. The merger has been approved by the Kentucky Commission and the Virginia State Corporation Commission. See Note 2 of LG&E's Notes to Financial Statements under Item 8. Rates and Regulation LG&E is subject to the jurisdiction of the Kentucky Commission in virtually all matters related to electric and gas utility regulation, and as such, its accounting is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Given LG&E's competitive position in the market and the status of regulation in the state of Kentucky, LG&E has no plans or intentions to discontinue its application of SFAS No. 71. See Note 3 of LG&E's Notes to Financial Statements under Item 8. On December 8, 1995, the Commission approved a settlement agreement filed by LG&E and all intervenors in the Trimble County proceedings, including various consumer interest groups and government agencies, that, in effect, resolved all of the regulatory and legal issues related to the appropriate ratemaking treatment to exclude 25% of the Trimble County plant costs from customer rates. Under the settlement, ratepayers are receiving $22 million in 48 refunds, most of which is being refunded over the five-year period, 1996 through 2000, based on a per kilowatt-hour credit. In addition, LG&E also is providing $900,000 annually for five years, beginning in 1996, to fund low-income energy assistance programs. LG&E also revised the decoupling methodology in a manner that reduced revenues collected from residential customers during 1996 and 1997 by a total of approximately $1.8 million. The overall effect of the settlement, which LG&E recognized in its entirety in the fourth quarter of 1995, was to reduce electric revenues by $28.3 million and net income by $16.9 million. See Note 13 of LG&E's Notes to Financial Statements under Item 8. In May 1995, LG&E implemented a Commission approved environmental cost recovery (ECR) surcharge to recover certain costs required to comply with the Federal Clean Air Act, as amended, and those federal, state, and local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal. As a result of this surcharge, LG&E's electric revenues increased $3.2 million in 1995, an additional $2.4 million in 1996 and an additional $.4 million in 1997. The Kentucky Attorney General (KAG), and the Kentucky Industrial Utility Customers filed an appeal in Franklin Circuit Court on various issues related to the Commission's order in this proceeding, including the constitutionality of the Kentucky statute that authorizes the surcharge. In an order dated April 10, 1996, associated with the first six-month review of the operation of the surcharge, the Commission stated that all environmental surcharge revenues collected from the date of the April 10 order will be subject to refund, pending the outcome of the legal proceedings. LG&E is contesting the legal challenges but cannot predict the outcome of this litigation. In a similar proceeding involving appeals from the Commission's order authorizing an environmental cost recovery surcharge for Kentucky Utilities Company by the same intervenors, the Kentucky Court of Appeals, in a decision issued on December 5, 1997, upheld the constitutionality of the surcharge statute. The intervenors have petitioned the Kentucky Supreme Court to review the decision of the Kentucky Court of Appeals. Any refunds that may ultimately be ordered, are not expected to have a material adverse effect on LG&E's financial position or results of operation. In January 1994, LG&E implemented a Commission approved demand side management (DSM) program that LG&E, KAG, the Jefferson County Attorney, and representatives of several customer-interest groups had filed with the Commission. The approved program included a formal collaborative process to develop future DSM programs and also contained a rate mechanism that (1) provided LG&E concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM programs, and (3) allowed LG&E to recover revenues from lost sales associated with the DSM. Subsequent to the original filing, LG&E requested three significant revisions to the DSM program. In 1996, the Commission approved the addition of five new programs that increased LG&E's commitment to DSM by approximately $4 million over the next two years. In 1997, LG&E requested a change in the methodology used in determining revenues from lost sales associated with DSM programs. This change would replace the decoupling mechanism approved in the original program with a methodology based on engineering estimates. Also in 1997, LG&E requested approval to implement a 1998 program budget in the amount of $2.5 million. The revisions requested in 1997 are currently pending before the Commission. On September 30, 1997, the Commission issued an order approving LG&E's request to implement an experimental performance-based ratemaking mechanism. This mechanism is related to gas procurement activities and gas off-system sales only and is approved for a three-year test period effective October 1, 1997. During the three year experimental period, rate adjustments related to this mechanism will be determined for each 12 month period beginning November 1 and ending October 31. This mechanism is not expected to have a material effect on LG&E's financial position or results of operations. 49 LG&E (CONT.): In its September 12, 1997 order approving the merger of LG&E Energy and KU, the Kentucky Commission ordered LG&E to file by the later of the consummation of the merger or September 14, 1998, detailed plans to address the future rate regulation of LG&E. The Commission directed LG&E to indicate in its filing whether it desired to remain under traditional rate of return regulation or commence non-traditional regulation. LG&E was further ordered to explain the reasons for its election, and in the case of traditional regulation, include an analysis and proposals relative to its earnings at that time. If non-traditional regulation is elected, LG&E must explain the reasons for its choice and how its plan will achieve the Commission's goals of providing incentives to utilities and a sharing of the resulting benefits with customers. The Commission stated that it will fully investigate the filing and determine whether changes should be made to the existing regulation of LG&E. LG&E cannot presently predict the outcome of this matter. LG&E last filed for a rate increase with the Commission in June 1990 based on the test year ended April 30, 1990. The Commission issued a final order in September 1991 that effectively granted LG&E an annual increase in rates of $6.8 million ($6.1 million electric and $.7 million gas). Environmental Matters With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already complied with the stringent sulfur dioxide emission limits required by the year 2000, as it had previously installed scrubbers on all of its coal-fired generating units. Since 1990, as part of its ongoing construction program, LG&E has spent $31 million for measures to meet applicable nitrogen oxide limits. While the overall financial impact of the Act on LG&E has been minimal, LG&E is closely monitoring several significant regulatory developments which may potentially impact LG&E including regulations proposed by the United States Environmental Protection Agency (USEPA) in October 1997. These regulations address long-range ozone transport from Midwest emissions sources that allegedly contribute to ozone problems in the Northeast. If finally adopted, the proposed regulations may require numerous utilities including LG&E to incur significant capital expenditures, currently estimated as potentially in excess of $100 million, and significantly increased operation and maintenance costs required to achieve additional reductions in emissions of nitrogen oxides. See Note 12 of LG&E's Notes to Financial Statements under Item 8 for a complete discussion of LG&E's environmental issues concerning the proposed USEPA ozone transport regulations, its Mill Creek and Cane Run electric generating plants, manufactured gas plant sites, and certain other environmental issues. FUTURE OUTLOOK Competition and Customer Choice LG&E Energy Corp. has moved aggressively over the past decade to be positioned for, and to help promote, the energy industry's shift to customer choice and a competitive market for energy services. Specifically, LG&E Energy has taken many steps to prepare for the expected increase in competition in its regulated and non-regulated energy services businesses, including aggressive cost reduction activities; strategic acquisitions and growth initiatives; write-offs of previously deferred expenses; an increase in focus on commercial and industrial customers; an increase in employee training; and necessary corporate and business unit realignments. LG&E Energy continues to be active in the national debate surrounding the restructuring of the electric industry and the move toward a competitive, market-based environment. LG&E Energy has urged Congress and federal regulatory agencies to set a specific date for a complete transition to a competitive market, one that will quickly and efficiently bring the benefits associated with customer choice. LG&E Energy has repeatedly advocated the implementation of this transition by January 1, 2001. 50 LG&E (CONT.): The Kentucky Commission has held a series of meetings with representatives of utilities, consumers, state agencies, state legislators and other groups in Kentucky to discuss the possible effects of electric industry restructuring in Kentucky. In December 1997, the Kentucky Commission issued a set of principles which are intended to serve as its guide in consideration of issues relating to industry restructuring. Among these principles were: consumer protection and benefit, system reliability, universal service, environmental responsibility, cost allocation, stranded costs and codes of conduct. At the time of this report, neither the Kentucky General Assembly nor the Kentucky Commission has adopted or approved a plan or timetable for retail electric industry competition in Kentucky. The nature or timing of future legislative or regulatory actions regarding industry restructuring and their impact on LG&E, which may be significant, cannot be predicted currently. 51 ITEM 8. Financial Statements and Supplementary Data. LG&E Energy Corp. and Subsidiaries Consolidated Statements of Income (Thousands of $ Except Per Share Data)
Years Ended December 31 1997 1996 1995 ---- ---- ---- REVENUES: Energy marketing and trading........................... $3,266,811 $2,748,873 $ 630,249 Electric utility....................................... 615,159 607,160 571,086 Refund - Trimble County settlement (Note 17)........... - - (28,300) Gas utility............................................ 231,011 214,419 181,126 Argentine gas distribution and other................... 150,839 19,013 20,519 ---------- ---------- ---------- Total revenues (Note 1)............................. 4,263,820 3,589,465 1,374,680 ---------- ---------- ---------- COST OF REVENUES: Energy marketing and trading........................... 3,245,234 2,664,399 604,302 Fuel and power purchased............................... 166,692 166,323 154,832 Gas supply expenses.................................... 158,929 140,482 110,738 Argentine gas distribution and other................... 84,873 13,059 19,858 ---------- ---------- ---------- Total cost of revenues.............................. 3,655,728 2,984,263 889,730 ---------- ---------- ---------- Gross profit............................................... 608,092 605,202 484,950 OPERATING EXPENSES: Operation and maintenance: Energy marketing and trading........................ 40,012 41,916 18,177 Utility............................................. 214,635 214,786 203,284 Argentine gas distribution and other................ 49,562 25,991 21,697 Depreciation and amortization.......................... 115,736 103,556 94,393 Non-recurring charges (Note 8)......................... (1,342) 26,330 - ---------- ---------- ---------- Total operating expenses............................ 418,603 412,579 337,551 ---------- ---------- ---------- Equity in earnings of joint ventures (Note 7).............. 21,014 18,818 28,158 ---------- ---------- ---------- OPERATING INCOME........................................... 210,503 211,441 175,557 Other income and (deductions) (Note 12).................... 15,476 3,808 5,389 Interest charges and preferred dividends................... 63,865 53,887 53,822 Minority interest.......................................... 9,035 - - ---------- ---------- ---------- Income before income taxes................................. 153,079 161,362 127,124 Income taxes (Note 11)..................................... 55,262 57,359 44,294 ---------- ---------- ---------- NET INCOME................................................. $ 97,817 $ 104,003 $ 82,830 ========== ========== ========== Average common shares outstanding.......................... 66,471 66,294 66,105 Earnings per share of common stock - basic and diluted..... $1.47 $1.57 $1.25 ===== ===== =====
The accompanying notes are an integral part of these financial statements. 52 LG&E Energy Corp. and Subsidiaries Consolidated Balance Sheets (Thousands of $)
December 31 1997 1996 ---- ---- ASSETS: Current assets: Cash and temporary cash investments......................................... $ 104,366 $ 114,669 Marketable securities (Note 9).............................................. 22,300 5,815 Accounts receivable - less reserve of $9,667 in 1997 and $6,601 in 1996..... 521,166 545,729 Materials and supplies - primarily at average cost: Fuel (predominantly coal)................................................ 17,651 14,576 Gas stored underground................................................... 49,396 43,258 Other.................................................................... 31,866 32,426 Price risk management assets (Note 5)....................................... 120,341 86,844 Prepayments and other....................................................... 10,599 14,255 ---------- ---------- Total current assets..................................................... 877,685 857,572 ---------- ---------- Utility plant: At original cost (Note 1)................................................... 2,779,234 2,685,209 Less: reserve for depreciation............................................. 1,072,842 999,987 ---------- ---------- Net utility plant........................................................ 1,706,392 1,685,222 ---------- ---------- Other property and investments - less reserve: Investments in affiliates (Note 7).......................................... 168,276 126,099 Non-utility property and plant, net (Notes 1 and 2)......................... 421,486 171,338 Price risk management assets (Note 5)....................................... 44,240 36,623 Other ..................................................................... 24,743 21,465 ---------- ---------- Total other property and investments..................................... 658,745 355,525 ---------- ---------- Deferred debits and other assets: Regulatory assets (Note 4).................................................. 24,899 27,729 Goodwill, net (Notes 1 and 2)............................................... 44,420 47,318 Other ..................................................................... 54,250 38,526 ---------- ---------- Total deferred debits and other assets................................... 123,569 113,573 ---------- ---------- Total assets......................................................... $3,366,391 $3,011,892 ========== ========== CAPITAL AND LIABILITIES: Current liabilities: Long-term debt due within one year.......................................... $ 20,000 - Notes payable (Note 15)..................................................... 360,184 158,000 Accounts payable............................................................ 449,230 528,556 Trimble County settlement (Note 17)......................................... 13,248 17,511 Price risk management liabilities (Note 5).................................. 131,107 108,402 Other ..................................................................... 84,966 63,366 ---------- ---------- Total current liabilities................................................ 1,058,735 875,835 ----------- ---------- Long-term debt.................................................................. 664,339 646,835 Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 11).......................... 327,343 288,107 Investment tax credit, in process of amortization........................... 75,800 80,040 Accumulated provision for pensions and related benefits..................... 43,883 44,773 Regulatory liability (Note 4)............................................... 65,502 77,287 Price risk management liabilities (Note 5).................................. 23,803 27,482 Other ..................................................................... 67,576 64,987 ---------- ---------- Total deferred credits and other liabilities............................. 603,907 582,676 ---------- ---------- Minority interest............................................................... 105,985 - - - Cumulative preferred stock...................................................... 98,353 95,328 Commitments and contingencies (Note 16) Common equity................................................................... 835,072 811,218 ---------- ---------- Total capital and liabilities............................................... $3,366,391 $3,011,892 ========== ========== The accompanying notes are an integral part of these financial statements.
53 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Cash Flows (Thousands of $)
Years Ended December 31 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 97,817 $ 104,003 $ 82,830 Items not requiring cash currently: Depreciation and amortization.................................. 115,736 103,556 94,393 Deferred income taxes - net.................................... 7,464 49,894 13,113 Investment tax credit - net.................................... (4,240) (3,997) (4,742) Change in net price risk management assets..................... (22,088) (13,913) - Undistributed earnings of joint ventures....................... (2,968) (2,581) 16,269 Non-recurring charges.......................................... - 26,330 - Other.......................................................... 16,845 8,267 5,351 Change in certain net current assets: Accounts receivable............................................ 50,946 (231,576) (161,649) Materials and supplies......................................... (8,163) 6,650 (8,756) Trimble County settlement...................................... (4,263) (12,289) 29,800 Accounts payable............................................... (91,377) 241,099 139,991 Accrued taxes.................................................. 2,022 (9,812) (5,935) Accrued interest............................................... (2,303) (1,034) (2,056) Prepayments and other.......................................... 5,486 4,310 (22,421) Other............................................................. (21,406) (38,526) (7,106) ----------- --------- --------- Net cash flows from operating activities....................... 139,508 230,381 169,082 ----------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities........................................... (21,526) (20,625) (204,391) Proceeds from sales of securities................................. 5,030 44,609 319,731 Construction expenditures......................................... (137,721) (115,450) (104,527) Investment in subsidiaries net of cash and temporary cash investments acquired (Note 2)................... (124,593) - (146,104) Investments in affiliates (Note 7)................................ (986) (180) (34,045) ----------- ---------- --------- Net cash flows from investing activities....................... (279,796) (91,646) (169,336) ----------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of bonds................................................. 69,776 49,745 39,914 Retirement of bonds............................................... (71,693) (67,013) (43,579) Short-term borrowings............................................. 1,226,405 214,500 245,315 Repayment of short-term borrowings................................ (1,024,221) (229,500) (119,632) Issuance of preferred stock....................................... 3,025 - - Redemption of preferred stock..................................... - - (22,108) Issuance of common stock.......................................... 3,781 2,293 2,711 Payment of common dividends....................................... (77,088) (74,235) (71,630) ----------- ---------- --------- Net cash flows from financing activities....................... 129,985 (104,210) 30,991 ----------- ---------- --------- Change in cash and temporary cash investments......................... (10,303) 34,525 30,737 Beginning cash and temporary cash investments......................... 114,669 80,144 49,407 ----------- ---------- --------- Ending cash and temporary cash investments............................ $ 104,366 $ 114,669 $ 80,144 ============ ========== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................................... $ 41,264 $ 22,005 $ 37,771 Interest on borrowed money..................................... 56,398 49,316 48,916
The accompanying notes are an integral part of these financial statements. 54 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Capitalization (Thousands of $)
December 31 1997 1996 ---- ---- COMMON EQUITY: Common stock, without par value - Authorized 300,000,000 shares, outstanding 66,527,636 shares in 1997 and 66,341,444 shares in 1996 (Note 13)....................... $ 470,136 $ 466,329 Common stock expense............................................................ (1,285) (1,259) Unrealized gain on marketable securities, net of income taxes of $89 in 1997 and $122 in 1996 (Note 9)............................... 217 154 Retained earnings............................................................... 366,004 345,994 ---------- ---------- Total common equity.......................................................... 835,072 811,218 ---------- ---------- PREFERRED STOCK (Note 13): $10 nominal value, 302,364 shares authorized and outstanding, variable rate, redeemable by Inversora de Gas del Centro.................................... 3,025 - Cumulative and redeemable on 30 days notice by Louisville Gas and Electric Company, except $5.875 series: Shares Current Outstanding Redemption Price $25 par value, 1,720,000 shares authorized - 5% series .................................... 860,287 $ 28.00 21,507 21,507 Without par value, 6,750,000 shares authorized - Auction rate.................................. 500,000 100.00 50,000 50,000 $5.875 series................................. 250,000 Not redeemable 25,000 25,000 Preferred stock expense......................................................... (1,179) (1,179) ---------- ---------- Total preferred stock........................................................ 98,353 95,328 ---------- ---------- LONG-TERM DEBT (Note 14): First mortgage bonds - Series due June 1, 1998, 6 3/4%.............................................. - 20,000 Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000 Series due August 15, 2003, 6%............................................... 42,600 42,600 Pollution control series: N due February 1, 2019, 7 3/4%........................................... - 35,000 O due February 1, 2019, 7 3/4%........................................... - 35,000 P due June 15, 2015, 7.45%............................................... 25,000 25,000 Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335 R due November 1, 2020, 6.55%............................................ 41,665 41,665 S due September 1, 2017, variable........................................ 31,000 31,000 T due September 1, 2017, variable........................................ 60,000 60,000 U due August 15, 2013, variable.......................................... 35,200 35,200 V due August 15, 2019, 5 5/8%............................................ 102,000 102,000 W due October 15, 2020, 5.45%............................................ 26,000 26,000 X due April 15, 2023, 5.90%.............................................. 40,000 40,000 ---------- ---------- Total first mortgage bonds............................................ 506,800 596,800 Pollution control bonds (unsecured) - Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500 Trimble County Series due September 1, 2026, variable........................ 27,500 27,500 Jefferson County Series due November 1, 2027, variable....................... 35,000 - Trimble County Series due November 1, 2027, variable......................... 35,000 - ---------- ---------- Total unsecured pollution control bonds.................................. 120,000 50,000 Argentine negotiable obligations, due August 2001, 10 1/2%...................... 37,539 - ---------- ---------- Total long-term bonds........................................................ 664,339 646,800 Unamortized premium on bonds.................................................... - 35 ---------- ---------- Total long-term debt......................................................... 664,339 646,835 ---------- ---------- Total capitalization..................................................... $1,597,764 $1,553,381 ========== ==========
The accompanying notes are an integral part of these financial statements. 55 LG&E Energy Corp. and Subsidiaries Consolidated Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1997 1996 1995 ---- ---- ---- Balance January 1..................................................... $345,994 $316,930 $307,072 Add net income........................................................ 97,817 104,003 82,830 Deduct: Cash dividends declared on common stock ($1.17 per share in 1997, $1.13 per share in 1996, and $1.0925 per share in 1995)............................. 77,807 74,939 72,253 Preferred stock redemption expense......................... - - 719 -------- -------- -------- Balance December 31................................................... $366,004 $345,994 $316,930 ======== ======== ========
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION. The consolidated financial statements include the accounts of LG&E Energy Corp., Louisville Gas and Electric Company (LG&E), and LG&E Capital Corp. (Capital Corp.) and their respective wholly-owned subsidiaries, collectively referred to herein as the "Company." On September 5, 1997, LG&E Energy Corp. merged two of its direct subsidiaries, LG&E Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems), and renamed the surviving company LG&E Capital Corp. LG&E Energy Corp.'s regulated operations are conducted by LG&E and non-regulated operations are conducted by Capital Corp. which has various subsidiaries referred to in these financial statements including LG&E Energy Marketing Inc. (LEM), LG&E Power Inc. (LPI), and LG&E International Inc. (LII). All significant intercompany items and transactions have been eliminated from the consolidated financial statements. Certain reclassification entries have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation with no impact on previously reported net income. The Company is exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). CASH AND TEMPORARY CASH INVESTMENTS. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value. GAS STORED UNDERGROUND. The costs of natural gas inventories are included in gas stored underground in the balance sheets as of December 31, 1997, and 1996. Utility and non-utility gas inventories were $41 million and $8 million, respectively, at December 31, 1997, and $36 million and $7 million, respectively, at December 31, 1996. LG&E accounts for gas inventories using the average-cost method. Changes in value of the non-utility gas inventories are included in the Company's mark-to-market calculation. See Note 5, Price Risk Management and Financial Instruments. UTILITY PLANT. LG&E'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, and, accordingly, LG&E has not recorded any allowance for funds used during construction. 56 The cost of utility plant retired or disposed of in the normal course of business is deducted from utility plant accounts and such cost plus removal expense less salvage value is charged to the reserve for depreciation. When complete operating units are disposed of, appropriate adjustments are made to the reserve for depreciation and gains and losses, if any, are recognized. DEPRECIATION AND AMORTIZATION. Utility depreciation is provided on the straight-line method over the estimated service lives of depreciable plant. The amounts provided for LG&E in 1997 were 3.4% and for 1996 and 1995 were 3.3%. Depreciation of non-utility plant and equipment is based on the straight-line method over periods ranging from 3 to 33 years for domestic operations. Intangible assets and goodwill have been allocated to the subsidiaries' lines of business and are being amortized over periods ranging from seven to 40 years. FINANCIAL INSTRUMENTS. The Company uses financial instruments associated with its energy trading and price risk management activities. See Revenue Recognition for a discussion of the methods used to account for the financial instruments. The Company also uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized losses on marketable securities in common equity and then charged or credited to other income and deductions when the securities are sold. See Note 5, Price Risk Management and Financial Instruments. DEBT EXPENSE. Utility debt expense is amortized over the lives of the related bond issues, consistent with regulatory practices. DEFERRED INCOME TAXES. Deferred income taxes have been provided for all material book-tax temporary differences. INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the tax law that permitted a reduction of the Company's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. COMMON STOCK. Effective April 15, 1996, the outstanding shares of the Company's common stock were split on a two-for-one basis. The new shares were issued to shareholders of record on April 1, 1996. Prior period shares, dividends, and earnings per share of common stock have been restated to reflect the stock split. REVENUE RECOGNITION. Effective January 1, 1996, the Company adopted the mark-to-market method of accounting for its energy marketing and trading activities. Under mark-to-market accounting, all electric power and natural gas contracts which qualify for such accounting treatment, including both physical transactions and financial instruments, are recorded at market value, net of future servicing costs and reserves, and are recognized as price risk management assets and liabilities in the accompanying balance sheet. See Note 5, Price Risk Management and Financial Instruments. To qualify for mark-to-market accounting treatment, energy marketing and trading contracts generally must include, among other factors, a firm term, volume and price and allow for settlement in cash or with another financial instrument. Changes in the value of these price risk management assets and liabilities resulting from the execution of new contracts and changes in market factors are recognized as energy marketing and trading revenues in the period of the change. 57 Revenues and cost of revenues associated with energy marketing and trading activities that do not qualify for mark-to-market accounting treatment are recognized using the accrual method of accounting at the time of delivery of the underlying commodity. Prior to January 1, 1996, all of the Company's energy marketing and trading activities were accounted for under the accrual method. The effect of this change in accounting was immaterial to prior periods at the time of adoption. In addition, the Company may enter into transactions to hedge the impact of market fluctuations in its energy-related assets, liabilities and other contractual commitments. Changes in the market value of these hedge transactions are based on the accounting treatment afforded the hedged items whereby gains and losses are deferred until the gains or losses on the hedged items are recognized. Utility revenues are recorded based on service rendered to customers through month-end. LG&E accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. Under an agreement approved by the Public Service Commission of Kentucky, LG&E has implemented a demand side management program and a "decoupling mechanism," which allows LG&E to recover a predetermined level of revenue on electric and gas residential sales. See Management's Discussion and Analysis, Rates and Regulation, for further discussion. The Company recognized revenues from non-utility construction activities using the percentage of completion method of accounting. 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. 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 16, Commitments and Contingencies, for a further discussion. NEW ACCOUNTING PRONOUNCEMENTS. Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125). This new standard is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Adopting SFAS No. 125 had no impact on the Company's financial position or results of operations. The Company adopted the provisions of Statement of Position 96-1, Environmental Remediation Liabilities, effective January 1, 1997. This statement provides authoritative guidance for recognition, measurement, and disclosure of environmental remediation liabilities in financial statements. Due to the Company's previous recognition of this type of liability, adoption did not have a material impact on the Company's financial position or results of operation. See Note 16, Commitments and Contingencies, for a further discussion of the Company's environmental commitments and contingencies. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), and No. 129, Disclosure of Information about Capital Structure (SFAS No. 129), effective for periods ending after December 15, 1997. SFAS No. 128 requires that potential additional common stock (e.g., options, warrants, convertible securities) be included in the calculation of a "dilutive EPS," in addition to the "basic EPS" which historically has been included in the consolidated statements of income. The Company`s EPS as reported is the same under both calculations. SFAS No. 129 broadens the disclosure requirements related to an entity's capital structure to include non-public entities, but requires no change in reporting by the Company. 58 In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130) and No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131), effective for periods beginning after December 15, 1997. Under SFAS No. 130, the Company will present supplemental information in the Financial Statements and Notes to Financial Statements that measures changes in equity that are not required to be measured as a component of net income. This standard will have no impact on the calculation of net income or earnings per share. The Company anticipates that its pending merger with KU Energy Corporation, the Big Rivers Electric Corporation agreement, and other organizational changes will be considered in determining segment disclosures under SFAS No. 131. NOTE 2 - MERGERS AND ACQUISITIONS KU ENERGY CORPORATION. On May 20, 1997, the Company and KU Energy Corporation, a Kentucky corporation (KU), entered into an Agreement and Plan of Merger (the Merger Agreement) providing for a merger of LG&E Energy and KU. Pursuant to the Merger Agreement, KU will be merged with and into LG&E Energy, with LG&E Energy as the surviving corporation. The merger, which was unanimously approved by the Boards of Directors of LG&E Energy and KU, is expected to close shortly after all of the conditions to consummation of the merger, including the receipt of all applicable regulatory approvals, are met or waived. As a result of the merger, the Company, which is the parent of LG&E, will become the parent company of KU's principal operating subsidiary, Kentucky Utilities Company (Kentucky Utilities). The operating utility subsidiaries (LG&E and Kentucky Utilities) will maintain their separate corporate identities and will continue to serve customers in Kentucky and Virginia under their present names. LG&E Energy and KU expect more than $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these synergies are estimated to be $77 million. In regulatory filings associated with approval of the merger, LG&E and Kentucky Utilities committed not to seek increases in base rates and proposed reductions in their retail customers' bills in amounts based on one-half of the net savings over a five-year period. The preferred stock and debt securities of the operating utility subsidiaries will not be affected by the merger. Present non-utility operations of KU will be unaffected. The non-utility subsidiaries of KU will become subsidiaries of LG&E Energy. Under the terms of the Merger Agreement, each outstanding share of the common stock, without par value, of KU (KU Common Stock) (other than shares with respect to which dissenters' rights are perfected under applicable state law), together with the associated KU stock purchase rights, will be converted into the right to receive 1.67 shares of common stock of the Company (LG&E Energy Common Stock), together with the associated LG&E Energy stock purchase rights. The shares of LG&E Energy Common Stock outstanding prior to the merger will remain unchanged. As of December 31, 1997, there were 66,527,636 shares of LG&E Energy common stock outstanding, and 37,817,878 shares of KU common stock outstanding. Based on such capitalization, upon consummation of the merger, 51.3% of the outstanding LG&E Energy common stock will be owned by the shareholders of LG&E Energy prior to the merger and 48.7% will be owned by former KU shareholders. On September 12, 1997, the Public Service Commission of Kentucky (Kentucky Commission or Commission) approved the merger application substantially as filed. In the application filed with the Commission, the utilities proposed that 50% of the net non-fuel cost savings estimated to be achieved from the merger, less 50% of the costs to achieve such savings (but not in excess of the currently estimated costs to achieve), be applied to reduce customer rates, and the remaining 50% be retained by the companies. The Commission approved and allocated the customer savings 53% to Kentucky Utilities and 47% to LG&E. The order provides for a surcredit on customers' bills for 50% of the projected net non-fuel savings in each of the five years following consummation of the merger. The credit, which will be about 2% of customer bills in the five-year period, will amount to 59 approximately $55 million in net non-fuel savings to LG&E customers. Any fuel cost savings will be passed to Kentucky customers through the companies' fuel adjustment clauses. One-half of the costs to achieve the savings will be charged to expenses as incurred once the merger is consummated, and the remaining portion (not to exceed one-half of $77 million for Kentucky Utilities and LG&E combined) will be deferred as a regulatory asset and amortized as an offset to customer savings equally over five years. It will be up to Kentucky Utilities and LG&E to actually realize the estimated level of net non-fuel savings. On October 9, 1997, LG&E Energy and KU filed for approval of the merger with the Federal Energy Regulatory Commission. On October 14, 1997, in separate meetings, stockholders from each of the companies met and the holders of over 75% of the outstanding shares of common stock of LG&E Energy and KU approved the merger. On January 20, 1998, the Virginia State Corporation Commission approved the merger substantially as filed. The merger remains subject to approval of the Federal Energy Regulatory Commission under the Federal Power Act, the approval of the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. Management plans to account for the merger as a pooling of interests and expects the transaction to qualify as a tax-free reorganization under the Internal Revenue Code. In addition, the merger is subject to the approval for listing of shares of LG&E Energy Common Stock to be issued in the merger on the New York Stock Exchange. It is anticipated that LG&E Energy, as parent of LG&E and Kentucky Utilities, will continue to be an exempt holding company under the Public Utility Holding Company Act of 1935. ARGENTINE GAS DISTRIBUTION COMPANIES. On February 13, 1997, the Company acquired interests in two Argentine natural gas distribution companies for $140 million, plus transaction-related costs and expenses. The Company acquired a controlling interest in Distribuidora de Gas del Centro (Centro), and a combined 14.4% interest in Distribuidora de Gas Cuyana (Cuyana). The Company accounted for both acquisitions using the purchase method. The Company allocated substantially all of the excess of the purchase price over the underlying equity of Centro and Cuyana to property and equipment. The Company recognized no goodwill on the acquisition. The fair values of the net assets acquired follow (in thousands of $):
Assets $330,215 Liabilities 86,455 Minority interests 103,916 -------- Cash paid, excluding transaction costs 139,844 Cash and cash equivalents acquired 16,453 -------- Net cash paid, excluding transaction costs 123,391 Transaction costs 1,202 -------- Net cash paid $124,593 ========
Centro's revenues, cost of revenues, and operating expenses since the date of acquisition are classified as components of Argentine gas distribution and other in the 1997 Statements of Income. The earnings of Cuyana are included in Equity in Earnings of Joint Ventures. The Company included Centro's property and equipment in Non-utility property and plant, net, in its balance sheet in 1997 and it included its investment in Cuyana in Investments in affiliates. Liabilities assumed in the purchase included negotiable obligations issued by Centro with a face amount of $38 60 million. The obligations mature in August 2001 and pay interest at 10.5% of face value. The Company classified the negotiable obligations as long-term debt in its balance sheet in 1997. GAS MARKETING. In 1995, the Company acquired all of the outstanding common stock of Hadson Corporation, a company engaged in natural gas marketing, gathering and processing, for $143 million, plus transaction-related costs and expenses. The Company accounted for the acquisition as a purchase, and the purchase price was allocated to the assets and liabilities acquired based on their estimated fair values. Approximately $37 million of goodwill has been recorded. A summary of the fair values of the net assets acquired follows (in thousands of $):
Assets $277,059 Liabilities 133,948 -------- Cash paid, excluding transaction costs 143,111 Cash and cash equivalents acquired 4,924 -------- Net cash paid, excluding transaction costs 138,187 Transaction costs 7,917 -------- Net cash paid $146,104 ========
The revenues, cost of revenues, and operating expenses since the date of acquisition are classified as Energy marketing and trading in the Statements of Income. The operations did not have a material impact on consolidated gross profit or operating income in 1995. The property and equipment is included in the balance sheet under Non-utility property and plant. NOTE 3 - BIG RIVERS ELECTRIC CORPORATION LEASE On June 9, 1997, certain subsidiaries of the Company entered into a Participation Agreement with Big Rivers Electric Corporation (Big Rivers), setting forth the detailed parameters of the proposed 25-year lease by Company affiliates of the generation assets of Big Rivers as part of the confirmation of Big Rivers' Plan of Reorganization by the U.S. Bankruptcy Court. Consummation of this transaction is subject to a number of conditions, including receipt of federal and state regulatory approvals. The Company made initial filings seeking regulatory approvals from the Kentucky Public Service Commission on June 30, 1997. At hearings before the Kentucky Commission in November 1997, the Commission expressed concerns regarding unforeseen future environmental, regulatory and legislative costs. The Commission staff and the Office of the Attorney General, among other interested parties, expressed their belief that, should those costs materialize, they should be shared equitably among all rate classes involved. On February 3, 1998, the Company, Big Rivers, and certain other parties filed with the Commission a Term Sheet describing an agreement for resolving this issue. The Commission has scheduled a hearing on March 18, 1998 for consideration of the agreement. In addition, all parties are working toward finalizing the documents necessary to complete the transaction. An order from the Kentucky Commission is expected during the second quarter of 1998. Approval of various elements of the transaction is also required from FERC. NOTE 4 - UTILITY RATES AND REGULATORY MATTERS Accounting for the regulated utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by the Federal Energy Regulatory Commission (FERC) and the 61 Kentucky Commission. LG&E is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71, certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowback to customers in future rates. LG&E's current or expected recovery of deferred costs and expected flowback of deferred credits is generally based on specific ratemaking decisions or precedent for each item. The following regulatory assets and liabilities were included in the consolidated balance sheets as of December 31 (in thousands of $):
1997 1996 ---- ---- Unamortized loss on bonds $ 18,698 $ 17,162 Merger costs 2,938 - Manufactured gas sites 3,263 3,244 Unamortized extraordinary retirements - 4,087 Other - 3,236 -------- -------- Total regulatory assets 24,899 27,729 Deferred income taxes - net (65,502) (77,287) -------- -------- Regulatory assets and liabilities - net $(40,603) $(49,558) ======== ========
During 1997, LG&E wrote off certain previously deferred assets that amounted to approximately $4.2 million. Items written off include expenses associated with LG&E's hydro-electric plant, a management audit fee, and the accelerated write-off of losses on early retirement of facilities. ENVIRONMENTAL COST RECOVERY. In April 1995, in response to an application filed by LG&E, the Commission approved, with modifications, an environmental cost recovery surcharge that increased electric revenues by $3.2 million in 1995, an additional $2.4 million in 1996, and an additional $.4 million in 1997. An appeal of the Commission's April 1995 order by various intervenors in the proceeding (including the Kentucky Attorney General) is currently pending in the Franklin Circuit Court of Kentucky. LG&E is contesting the legal challenges to the surcharge, but cannot predict the outcome of the appeal. In a similar proceeding involving appeals from the Commission's order authorizing an environmental cost recovery surcharge for Kentucky Utilities Company by the same intervenors, the Kentucky Court of Appeals, in a decision issued on December 5, 1997, upheld the constitutionality of the surcharge statute. The intervenors have petitioned the Kentucky Supreme Court to review the decision of the Kentucky Court of Appeals. Any refunds that may be ordered as a result of these proceedings are not expected to have a material adverse effect on the Company's financial position or results of operations. See Rates and Regulation under Management's Discussion and Analysis for a further discussion. PERFORMANCE-BASED RATEMAKING. On September 30, 1997, the Commission issued an order approving LG&E's request to implement an experimental performance-based ratemaking mechanism. This mechanism, which only applies to gas procurement activities and gas off-system sales, was approved for a three-year test period effective October 1, 1997. During the experimental period, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. This mechanism is not expected to have a material effect on LG&E's financial position or results of operations. FUTURE RATE REGULATION. In its September 12, 1997 order approving the merger of LG&E Energy Corp. and KU Energy Corporation, the Commission ordered LG&E to file by the later of the consummation of the merger or September 14, 1998, detailed plans to address the future rate regulation of the Company. The Commission directed LG&E to indicate in its filing whether it desired to remain under traditional rate of return regulation or commence non-traditional regulation. LG&E was further ordered to explain the reasons for its election, and in 62 the case of traditional regulation, include an analysis and proposals relative to its earnings at that time. If non-traditional regulation is elected, LG&E must explain the reasons for its choice and how its plan will achieve the Commission's goals of providing incentives to utilities and a sharing of the resulting benefits with customers. The Commission stated that it will fully investigate the filing and determine whether changes should be made to the existing regulation of the Company. LG&E cannot presently predict the outcome of this matter. KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. The Kentucky Commission has opened Administrative Case No. 369 to lay ground work for Commission policy addressing cost allocations, affiliate transactions, and codes of conduct governing the relationship between utilities and their non-regulated operations and affiliates. The Commission stated in its December 19, 1997, order it 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-regulated operations; and whether a code of conduct should be established to assure that non-regulated segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-regulated affiliate to the utility. Management does not expect the ultimate resolution of this matter to have a material adverse effect on the Company's financial position or results of operations. NOTE 5 - PRICE RISK MANAGEMENT AND FINANCIAL INSTRUMENTS TRADING ACTIVITIES. The Company engages in price risk management activities related to commodities associated with the energy industry, predominantly electricity and natural gas. In addition to the purchase and sale of these physical commodities, the Company enters into futures contracts, swap agreements where settlement is based on the difference between a fixed and index-based price for the underlying commodity, exchange-traded options, over-the-counter options which are settled in cash or the physical delivery of the underlying commodity, exchange-for-physical transactions in which payment for delivery of the underlying commodity is in the form of futures contracts, tolling and other contractual arrangements. The Company may buy or sell instruments such as these to manage its exposure to price risk from existing contractual commitments as well as other energy-related assets and liabilities. It may also enter into such contracts to take advantage of selected arbitrage opportunities via open positions. MARKET RISK. The Company will at times create a net open position which could result in losses for the Company if prices do not move in the manner or direction anticipated by the Company. The Company has established trading policies and limits designed to limit the Company's exposure to price risk and revalues exposures daily against the stipulated limits. The Company also continually reviews these policies to ensure they are responsive to changing business conditions. The Company utilizes various methodologies which simulate forward price curves in the energy markets to estimate the size and probability of changes in market value resulting from price movements. The use of these methodologies requires a number of key assumptions including selection of confidence levels, the holding period of the positions, and the depth and applicability to future periods of historical price information. As of December 31, 1997, the Company estimates that a $1 change in electricity prices and a 10-cent change in natural gas prices across all geographic areas and time periods could have changed the value of the Company's net price risk management assets by approximately $4.5 million. In addition to price risk, the value of the Company's entire energy portfolio is subject to operational and event risks including, among others, regulatory changes, increases in load demand, and forced outages at units providing supply for the Company. NOTIONAL AMOUNTS AND TERMS. As of December 31, 1997, the Company was under contract to pay a fixed price based on 239.1 million MWh's of electricity and 1.07 billion MMBTU's of natural gas with a volumetric weighted average period of 2.94 and 0.33 years, respectively. The Company was also under contract to receive 63 a fixed price based on 246.4 million MWh's of electricity and 1.025 billion MMBTU's of natural gas with a volumetric weighted average period of 2.93 and 0.33 years, respectively. Notional amounts reflect the nominal volume of transactions included in the Company's net price risk management assets but do not reflect actual amounts of cash, financial instruments, or quantities of the underlying commodity which may ultimately be exchanged between the parties. FAIR VALUES. The fair values of the Company's price risk management assets and liabilities as of December 31, 1997 and 1996 and the average fair values during the year by commodity are set forth below (in thousands of $):
Fair Value Average Fair Value ---------- ------------------ Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- 1997: ---- By Commodity: ------------- Electricity $ 69,704 $ 56,308 $ 81,765 $ 31,093 Natural gas 94,252 92,245 55,676 65,414 Other 625 1,119 505 848 --------- --------- --------- --------- Total 164,581 149,672 $ 137,946 $ 97,355 ========= ========= Reserves - 5,238 --------- --------- Net values $ 164,581 $ 154,910 ========= ========= 1996: ---- By Commodity: ------------ Electricity $ 52,885 $ 27,159 $ 20,784 $ 12,736 Natural gas 70,582 101,484 69,156 65,356 Other - - - - --------- --------- --------- --------- Total 123,467 128,643 $ 89,940 $ 78,092 ========= ========= Reserves - 7,241 --------- --------- Net values $ 123,467 $ 135,884 ========= =========
The fair values above are based on quotes from exchanges and over-the-counter markets, price volatility factors, the use of established pricing models and the time value of money. They also reflect management estimates of counterparty credit risk, location differentials and the potential impact of liquidating the Company's position in an orderly manner over a reasonable period of time under present market conditions. CREDIT RISK. The Company maintains policies intended to minimize credit risk and revalues credit exposures daily to monitor compliance with those policies. As of December 31, 1997, over 97% of the Company's price risk management assets were with counterparties rated BBB equivalent or better. As of December 31, 1997, seven counterparties represented 52% of the Company's price risk management assets. OTHER CONTRACTS. In addition to the above price risk management assets and liabilities, the Company's energy marketing and trading business unit is a party to various arrangements which commit the Company to the sale or purchase of electricity or natural gas without a specified firm volume. The Company has also entered into certain forward transactions and financial instruments which include futures contracts, fixed swaps and basis swaps, to hedge the price risk exposure on these transactions. The transactions and related hedges extend through April 2008, with an estimated volumetric weighted average term of 3.23 years. 64 As of December 31, 1997, the notional amount of these hedges was 8.1 million MWh's of electricity and 10.3 million MMBTU's of natural gas. No gains or losses have been explicitly deferred with respect to these transactions. The estimated fair value of the financial instrument hedges was not material as of December 31,1997. The Company's energy marketing and trading business unit is also a party to firm transportation contracts which require the Company to make specified minimum payments. At December 31, 1997, the estimated aggregate amount of such payments were $2.3 million, $1.1 million, $.9 million, $.7 million and $.6 million for 1998 through 2002, respectively, and $1.4 million for later years. OTHER FINANCIAL INSTRUMENTS. At December 31, 1997, the Company held U.S. Treasury note and bond futures contracts with notional amounts totaling $4.7 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 1998. As of December 31, 1997, LG&E had in effect one interest rate swap agreement to hedge its exposure to tax exempt rates related to Pollution Control Bonds, Variable Rate Series. The swap has a notional amount of $15 million and it matures in September 1999. The Company paid a fixed rate on the swap of 4.74% in 1997, 1996, and 1995 and received a variable rate based on the JJ Kenny Index of 3.66% in 1997, 3.46% in 1996, and 3.87% in 1995. In addition, LG&E had entered into three other tax exempt interest rate swaps that became effective in February 1998. The notional amount of each of these is $17 million, and they mature in February 2001, 2003, and 2005. The swap agreements call for LG&E to pay fixed rates averaging 4.184%, and to receive a variable rate based on the PSA Municipal Bond Index. Capital Corp. had two interest rate swaps at year end 1997 which hedge a portion of its notes payable. One swap with a notional amount of $25 million matured on January 30, 1998. The other has a notional amount of $50 million and matures in June 2002. Both of these require the Company to pay a fixed rate which averaged 6.28% at December 31, 1997. The Company receives variable rates based on the three-month London Interbank offered rate which equaled 5.885% at year end. Capital Corp. also entered into a forward starting interest-rate swap to hedge a portion of its initial issuance of medium term notes (see Note 14, Long-Term Debt). The notional amount of the swap was $100 million, its effective date was February 3, 1998, and its maturity date was February 2008. The swap required Capital Corp. to pay a fixed rate of 6.5813%, and Capital Corp. was to receive the six-month London Interbank offered rate. The swap was terminated in conjunction with the pricing and sale of the medium term notes on February 3, 1998. 65 The cost and estimated fair values of the Company's non-trading financial instruments (excluding the fair values of the Company's price risk management assets and liabilities) used for non-trading as of December 31, 1997 and 1996 follow (in thousands of $):
1997 1996 ---- ---- Fair Fair Cost Value Cost Value ---- ----- ---- ----- Marketable securities $ 21,994 $ 22,300 $ 5,539 $ 5,815 Long-term investments: Not practicable to estimate fair value 3,983 3,983 4,156 4,156 Preferred stock subject to mandatory redemption 25,000 26,250 25,000 24,938 Long-term debt 664,339 687,030 646,800 662,721 U.S. Treasury note and bond futures - (81) - 10 Interest rate swaps - (4,328) - (192)
All of the above valuations reflect prices quoted by exchanges except for the swaps and the long-term investments. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. The fair values of the long-term investments reflect cost, since the Company cannot reasonably estimate fair value. NOTE 6 - CONCENTRATIONS OF CREDIT AND OTHER RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. LG&E's customer receivables and gas and electric revenues arise from deliveries of natural gas to approximately 284,000 customers and electricity to approximately 356,000 customers in Louisville and adjacent areas in Kentucky. For the year ended December 31, 1997, 73% of total utility revenue was derived from electric operations and 27% from gas operations. The Argentine natural gas distribution companies serve 675,000 customers in six provinces in Argentina. The financial position and results of operations of the domestic joint ventures described in Note 7, Investments in Joint Ventures, and Note 16, Commitments and Contingencies, are dependent upon the continuation of long-term power sales contracts with neighboring utilities. LG&E's operation and maintenance employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 2100 which represents approximately 60% of LG&E's workforce. LG&E's collective bargaining agreement with IBEW employees expires in November 1998. NOTE 7 - INVESTMENTS IN JOINT VENTURES The Company's investments in joint ventures reflect interests in domestic and foreign electric power and steam producing plants and one of the Argentine gas distribution companies. These investments are accounted for using the equity method. 66 The fuel type, ownership percentages and carrying amounts of the joint ventures as of December 31, 1997 are summarized below (in thousands of $):
Carrying Fuel Type % Owned Amount --------- ------- -------- LG&E Westmoreland - Southampton Coal 50 $ 16,841 LG&E Westmoreland - Altavista Coal 50 12,734 LG&E Westmoreland - Hopewell Coal 50 11,493 LG&E Westmoreland - Rensselaer (1) Natural Gas 25(1) 4,742(1) Westmoreland - LG&E Partners Coal 50 28,462 Windpower Partners 1993 Wind 50 22,198 Windpower Partners 1994 Wind 25 4,251 Central Termica San Miguel de Tucuman, S.A. Natural Gas 33 16,536 KW Tarifa, S.A. Wind 46 5,642 Distribuidora de Gas Cuyana - 14 45,377 --------- Total $ 168,276 =========
(1) As more fully discussed below, this amount reflects the sale of one-half of the Company's interest in the project. The Company's carrying amount exceeded the underlying equity in joint ventures by $30.4 million and $25.3 million at December 31, 1997, and 1996, respectively. This difference, which is being amortized, represents adjustments to reflect the fair value of the underlying net assets acquired and related goodwill. With respect to the first seven projects listed above, certain of the Company's partners (or affiliates of such partners) are in bankruptcy proceedings. See Note 16, Commitments and Contingencies. On February 11, 1998, the Company sold its one-third interest in the entity which owns and operates the San Miguel facility to Pluspetrol Resources Corporation and ASTRA Compania Argentina de Petroleo S.A. The purchase price paid to the Company was $16 million. The Company's net investment in the San Miguel project as of December 31, 1997, was approximately $18.8 million (including interest and development costs incurred during construction). In December 1997, the Company agreed to sell one-half of its interest in the partnership that owns the Rensselaer facility, which resulted in a pre-tax gain of $4.8 million in 1997. The Company will retain a 25% ownership interest in the partnership. The purchase price for the partnership interest consists of an initial payment of $9 million to be paid at closing. A subsequent payment is contingent upon the consummation of certain transactions and related matters involving the partnership. Accordingly, no amounts for these contingent payments have been recorded in 1997. The effect of any subsequent contingent payment will be recorded in 1998. In June 1995, Babcock-Ultrapower West Enfield and Babcock-Ultrapower Jonesboro, two partnerships which were 17%-owned by LPI, sold power purchase contracts to Bangor Hydro-Electric Company. Equity in Earnings of Joint Ventures in the Company's Statement of Income for 1995 includes $9.7 million representing LPI's interest in the gains on the sales. In October 1996, the plants were sold to a third party and the Company's interests in the partnerships were liquidated. NOTE 8 - NON-RECURRING CHARGES During the second quarter of 1997, the Company consolidated the trading, risk management and administrative 67 operations of its power marketing and gas marketing divisions into a single energy marketing unit, located in its Louisville headquarters. The Company recorded a charge of $6.3 million in 1997 to reflect the costs of the consolidation. This charge covered employee severance, facilities, and other related costs. The Company expects future savings resulting from the integration to more than offset these costs. This represented a step in the Company's plan to integrate its two former marketing companies and to capitalize on the convergence of the electric and gas marketing industries. The consolidated division will expand the variety of commodities it will offer to include coal, emission allowances and other energy-related products. In the fourth quarter of 1996, the Company discovered that a marketer in its Calgary, Alberta, office had engaged in unauthorized transactions, resulting in significant losses in the Company's Canadian natural gas marketing business. The Company recorded an expense of $26.3 million ($17.1 million after income taxes) to reflect the losses. The activities of the marketer, which occurred primarily within the last weeks prior to discovery, included creating unsupported purchase and sales agreements. Management believes it has taken appropriate steps necessary to mitigate the likelihood of these events recurring. The Company is pursuing criminal and civil actions associated with this event. See Note 16, Commitments and Contingencies. In the second quarter of 1997, the Company received an insurance settlement of $7.6 million (net of expenses) related to the losses. The Company included the settlement amount as a credit in non-recurring charges in 1997. NOTE 9 - MARKETABLE SECURITIES The Company's marketable securities have been determined to be "available-for-sale" under the provisions of Statement of Financial Accounting Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1997 were approximately $5 million, which resulted in immaterial realized gains and losses. Proceeds from sales of available-for-sale securities in 1996 were approximately $44.6 million, which resulted in realized gains of approximately $.5 million and losses of approximately $1.4 million, calculated using the specific identification method. 68 Approximate cost, fair value, and other required information pertaining to the Company's available-for-sale securities by major security type as of December 31, 1997 and 1996, follow (in thousands of $):
Fixed 1997: Equity Income Total ---- ------ ------ ----- Cost $6,379 $15,615 $21,994 Unrealized gains 445 18 463 Unrealized losses (90) (67) (157) ------ ------- ------- Fair values $6,734 $15,566 $22,300 ====== ======= ======= Fair values: No maturity $6,734 $ 114 $ 6,848 Contractual maturities: Less than one year - 8,795 8,795 One to five years - 5,442 5,442 Five to ten years - - - Over ten years - 1,215 1,215 Not due at a single maturity date - - - ------ ------- ------- Total fair values $6,734 $15,566 $22,300 ====== ======= ======= 1996: ---- Cost $4,833 $ 706 $ 5,539 Unrealized gains 2,109 - 2,109 Unrealized losses (1,789) (44) (1,833) ------ ------- ------- Fair values $5,153 $ 662 $ 5,815 ====== ======= ======= Fair values: No maturity $4,255 $ - $ 4,255 Contractual maturities: Less than one year 898 - 898 One to five years - - - Five to ten years - - - Over ten years - 662 662 Not due at a single maturity date - - - ------ ------- ------- Total fair values $5,153 $ 662 $ 5,815 ====== ======= =======
NOTE 10 - PENSION PLANS AND RETIREMENT BENEFITS PENSION PLANS. The Company has two non-contributory, defined-benefit pension plans that cover eligible employees of LG&E Energy Corp. corporate staff and LG&E. Retirement benefits are based on the employee's age at retirement, years of service, and compensation. The Company's policy is to fund annual actuarial costs, up to the maximum amount deductible for income tax purposes, as determined under the frozen entry age actuarial cost method. The assets of the plans consist primarily of common stocks, corporate bonds, investments in international mutual funds and United States government securities. The Company also has supplemental executive retirement plans that cover eligible officers of the Company. The plans provide retirement benefits based on average earnings during the final three or five years prior to retirement, reduced by social security benefits, any pension benefits received from plans of prior employers, and by amounts received under the pension plans mentioned in the preceding paragraph. Pension costs were $4 million for 1997, $5.4 million for 1996, and $5.8 million for 1995, of which approxi- 69 mately $491,000, $751,000, and $761,000, respectively, was charged to construction. The components of periodic pension expense are shown below (in thousands of $):
1997 1996 1995 ---- ---- ---- Service cost-benefits earned during the period $ 5,947 $ 5,566 $ 4,805 Interest cost on projected benefit obligation 18,247 17,276 14,761 Actual return on plan assets (46,578) (32,250) (46,107) Amortization of transition asset (1,079) (1,079) (1,079) Net amortization and deferral 27,445 15,890 33,388 --------- --------- --------- Net pension cost $ 3,982 $ 5,403 $ 5,768 ========= ========= =========
The funded status of the pension plans at December 31 is shown below (in thousands of $):
1997 1996 ---- ---- Actuarial present value of accumulated plan benefits: Vested $215,100 $182,490 Non-vested 27,326 21,770 -------- -------- Accumulated benefit obligation 242,426 204,260 Effect of projected future compensation 42,060 33,417 -------- -------- Projected benefit obligation 284,486 237,677 Plan assets at fair value 283,862 240,733 -------- -------- Plan assets (less than) in excess of projected benefit obligation (624) 3,056 Unrecognized net transition asset (9,009) (10,088) Unrecognized prior service cost 44,429 45,064 Unrecognized net gain (60,620) (65,009) -------- -------- Accrued pension liability $(25,824) $(26,977) ======== ========
The assumptions used in determining the actuarial valuations are as follows:
1997 1996 ---- ---- Assumed discount rate to determine projected benefit obligation 7.00% 7.75% Assumed long-term rate of return on plan assets 8.50% 8.50% Assumed annual rate of increase in future compensation levels 2.00% - 4.00% 2.00% - 4.25%
POST-RETIREMENT BENEFITS. The Company provides certain health care and life insurance benefits for eligible retired employees. Post-retirement health care benefits are subject to a maximum amount payable by the Company. The Company accrues for the expected cost of post-retirement benefits other than pensions during the employee's years of service with the Company. The discounted present value of the post-retirement benefit obligation is being amortized over 20 years. 70 Post-retirement benefit costs are shown below (in thousands of $):
1997 1996 1995 ---- ---- ---- Service cost $ 780 $ 803 $ 614 Interest cost 2,965 2,994 2,717 Actual return on assets (80) - - Amortization of transition obligation 1,341 1,341 1,341 Net amortization and deferral 260 332 - ------ ------ ------ Post-retirement benefit cost $5,266 $5,470 $4,672 ====== ====== ======
The accumulated post-retirement benefit obligation at December 31 is shown below (in thousands of $):
1997 1996 ---- ---- Retirees $(21,795) $(18,568) Fully eligible active employees (3,792) (4,837) Other active employees (18,168) (16,819) -------- -------- Accumulated post-retirement benefit obligation (43,755) (40,224) Plan assets at fair value 4,429 2,297 Unrecognized prior service cost 3,456 3,788 Unrecognized transition obligation 20,111 21,452 Unrecognized net loss 2,968 500 -------- -------- Accrued post-retirement benefit liability $(12,791) $(12,187) ======== ========
The accumulated post-retirement benefit obligation was determined using an assumed discount rate of 7% for 1997 and 7.75% for 1996. Assumed compensation increases for projected life insurance benefits for affected groups was 4% for 1997 and 4.25% for 1996. An assumed health care cost trend rate of 9% was assumed for 1997, gradually decreasing to 4.25% in nine years and thereafter. A 1% increase in the assumed health care cost trend rate would increase the accumulated post-retirement benefit obligation by approximately $1.7 million and the annual service and interest cost by approximately $200,000. In 1996, the Company began funding certain liabilities for post-retirement benefits through a tax-deductible funding vehicle. The plan assets are being held in two voluntary employee benefit association (VEBA) trusts and are invested primarily in short-term United States government securities. THRIFT SAVINGS PLANS. The Company has Thrift Savings Plans under Section 401(k) of the Internal Revenue Code. Under these plans, eligible employees may defer and contribute to the plans a portion of current compensation in order to provide future retirement benefits. The Company makes contributions to the plans by matching a portion of employee's contributions. These costs were approximately $3.3 million for 1997, $2.9 million for 1996, and $3.1 million for 1995. 71 NOTE 11 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
1997 1996 1995 ---- ---- ---- Included in Income Taxes: Current - federal $39,579 $18,193 $32,526 - foreign 9,055 - - - state 3,404 (6,731) 3,397 Deferred - federal - net 4,707 34,246 8,943 - state - net 2,757 15,648 4,170 Deferred investment tax credit 102 409 - Amortization of investment tax credit (4,342) (4,406) (4,742) ------- ------- ------- Total $55,262 $57,359 $44,294 ======= ======= =======
Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1997 1996 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $419,513 $403,934 Other liabilities 42,956 29,568 --------- -------- 462,469 433,502 --------- -------- Deferred tax assets: Investment tax credit 30,595 32,306 Income taxes due to customers 26,357 31,195 Net operating loss carryforward 23,482 22,857 Deferred income 11,878 13,430 Accrued expenses not currently deductible and other 42,814 45,607 -------- -------- 135,126 145,395 -------- -------- Net deferred income tax liability $327,343 $288,107 ======== ========
Net operating loss carryforwards related to the acquisition of Hadson Corporation total $122 million at December 31, 1997. These carryforwards, which expire in 1998 through 2009, are subject to an annual limitation of approximately $6 million under Sections 382 and 383 of the Internal Revenue Code, and realization is dependent upon generating sufficient taxable income prior to their expiration. At both December 31, 1997 and 1996, the Company recorded valuation allowances of $25.6 million, related to these deferred tax assets. Unamortized goodwill will be reduced if unrecorded net operating loss carryforwards are realized. 72 A reconciliation of differences between the statutory U.S. federal income tax rate and the Company's effective income tax rate follows:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 2.9 6.2 5.0 Effect of foreign operations including foreign tax credit 2.3 - - Investment and other tax credits (3.8) (3.9) (4.7) Reduction of taxes provided in prior years (.2) (3.0) (1.3) Other differences - net (1.1) .3 (.8) ---- ----- ----- Effective income tax rate 35.1% 34.6% 33.2% ==== ==== ====
NOTE 12 - OTHER INCOME AND DEDUCTIONS Other income and deductions consisted of the following at December 31 (in thousands of $):
1997 1996 1995 ---- ---- ---- Gains (losses) on securities - net $ 68 $ (953) $(3,465) Interest and dividend income 7,652 5,965 10,195 Gain on sale of investment in Rensselaer joint venture 4,800 - - Gain on sale of stock options 1,794 - - Interest on income tax settlement 1,446 - - Gains (losses) on fixed asset disposals - net 77 (36) 1,089 Donations (423) (361) (356) Other 62 (807) (2,074) -------- -------- ------- Total other income and (deductions) $ 15,476 $ 3,808 $ 5,389 ======== ======= =======
NOTE 13 - CAPITAL STOCK Changes in shares of common stock outstanding are shown in the table below (in thousands):
1997 1996 1995 ---- ---- ---- Outstanding January 1 66,341 66,195 66,032 Issues under the Employee Common Stock Purchase Plan (1997, $1,613; 1996, $1,457; 1995, $1,354) 78 77 80 Issues under the Omnibus Long-Term Incentive Plan (1997, $2,195; 1996, $1,167; 1995, $1,371) 109 69 83 -------- --------- --------- Outstanding December 31 66,528 66,341 66,195 ====== ====== ======
The Company's shareholders approved an increase in the Company's authorized shares of common stock from 125,000,000 to 300,000,000 on October 14, 1997 in conjunction with the proposed merger with KU Energy Corporation. This increase will occur at the time of consummation of such merger. 73 The Company has an Omnibus Long-Term Incentive Plan, under which nonqualified stock options, performance units and stock appreciation rights have been granted to key personnel. A total of 2,699,250 shares of common stock have been reserved for issuance under the plan. Performance units are paid out on a three-year rolling basis in 50% stock and 50% cash based on Company performance. Directors of the Company receive stock options pursuant to the Stock Option Plan for Non-Employee Directors. A total of 500,000 shares of common stock have been reserved for issuance under this plan. Each option entitles the holder to acquire one share of the Company's stock no earlier than one year from the date granted. The options are granted at market value and generally expire 10 years from the date granted. Although shares are reserved as described above, the Company announced a repurchase program on October 14, 1997, authorizing the repurchase of up to 1,000,000 shares of its common stock to be used for, among other things, benefit and compensation plans, including the Omnibus Long-Term Incentive Plan. A summary of the status of the Company's nonqualified stock options follows:
Outstanding Exercisable Weighted Weighted Average Average Options Price Options Price ------- --------- ------- ---------- As of December 31, 1994 484,528 $17.34 256,582 $15.78 Options granted and exercisable 150,690 19.70 137,946 19.27 Options exercised (60,522) 15.48 (60,522) 15.48 Options cancelled (61,146) 19.07 (1,620) 19.30 ----------- ------- --------- ------- As of December 31, 1995 513,550 18.04 332,386 17.26 Options granted and exercisable 415,348 21.24 158,914 19.57 Options exercised (48,226) 17.26 (48,226) 17.26 Options cancelled (16,328) 21.01 - - ----------- -------------------- ---------- As of December 31, 1996 864,344 19.57 443,074 18.09 Options granted and exercisable 394,945 24.15 352,966 21.22 Options exercised (87,568) 18.97 (87,568) 18.97 Options cancelled (77,100) 23.04 - - ----------- -------------------- ---------- As of December 31, 1997 1,094,621 $21.01 708,472 $19.54 ========== ====== ======== ======
Common stock equivalents resulting from the options granted under both the Long-Term Plan and the Directors' Plan would not have a material dilutive effect on reported earnings per share. The Company has a Shareholders Rights Plan designed to protect shareholders' interests in the event the Company is ever confronted with an unfair or inadequate acquisition proposal. Pursuant to the plan, each share of common stock has one-third of a "right" entitling the holder to purchase from the Company one one-hundredth of a share of new preferred stock of the Company under certain circumstances. The holders of the rights will, under certain conditions, also be entitled to purchase either shares of common stock of LG&E Energy Corp. or common stock of the acquirer at a reduced percentage of market value. The rights will expire in the year 2000. In December 1997, Inversora de Gas del Centro (Inversora), a subsidiary of the Company that holds part of the Company's interest in Centro, issued 302,364 shares of preferred stock to unaffiliated parties. The stock has a 74 nominal value of $10 per share, and a variable dividend consisting of 5% of Inversora's annual net income. Inversora can redeem the shares at the nominal value upon shareholder approval. NOTE 14 - LONG-TERM DEBT Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other than the First Mortgage Bonds issued in connection with certain Pollution Control Bonds) are the amounts necessary to redeem 1% of the highest principal amount of each series of bonds at any time outstanding. Property additions (166 2/3% of principal amounts of bonds otherwise required to be so redeemed) have been applied in lieu of cash. It is the intent of LG&E to apply property additions to meet 1998 sinking fund requirements of the First Mortgage Bonds. The trust indenture securing the First Mortgage Bonds constitutes a direct first mortgage lien upon a substantial portion of all property owned by LG&E. The indenture, as supplemented, provides in substance that, under certain specified conditions, portions of retained earnings will not be available for the payment of dividends on common stock. No portion of retained earnings is presently restricted by this provision. Pollution Control Bonds (LG&E Projects) issued by Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan payments by LG&E to the Counties pursuant to loan agreements, and certain series are further secured by the delivery from time to time of an equal amount of LG&E's First Mortgage Bonds, Pollution Control Series. First Mortgage Bonds so delivered are summarized in the Statements of Capitalization. No principal or interest on these First Mortgage Bonds is payable unless default on the loan agreements occurs. The interest rate reflected in the Statements of Capitalization applies to the Pollution Control Bonds. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. Interest rates for these bonds were 3.90% and 3.85%, respectively, at December 31, 1997. The proceeds from these bonds were used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky, and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79% and 3.82%, respectively, as of December 31, 1997. In December 1996, the proceeds from the bonds were used to redeem the outstanding 7.25% Series of Jefferson County and Trimble County Pollution Control Bonds due December 1, 2016. On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million matured and were retired by the Company. LG&E's First Mortgage Bonds, 6.75% Series of $20 million is scheduled to mature in June 1998, and the $20 million, 7.5% Series is scheduled for maturity in 2002. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 1997. The Company has no cash sinking fund requirements. Capital Corp. has established a $500 million medium-term note program. On February 6,1998, Capital Corp. issued $150 million of medium-term notes due in January 2008. The securities were issued pursuant to an unregistered Rule 144A offering. The stated interest rate on the notes was 6.46%. After taking into account the effects of an interest-rate swap entered into in 1997 to hedge the interest rate on $100 million (See Note 5, Price Risk Management and Financial Instruments) and other issuance costs, the effective rate will be 6.82%. The proceeds were used to repay outstanding notes payable. 75 Centro maintains a $100 million global note program. As of December 31, 1997, Centro had outstanding $37.5 million in negotiable obligations, net of issuance costs as part of this program. The maturity date of the debt is August 21, 2001. The fixed annual interest rate is 10.5% payable every six months. NOTE 15 - NOTES PAYABLE On September 5, 1997, Energy Systems and Gas Systems merged to form Capital Corp. At the same time, Capital Corp. implemented a $600 million commercial paper facility backed by new lines of credit totaling $700 million. The Company terminated the previous lines of credit which totaled $460 million. Capital Corp. had outstanding commercial paper of $360.2 million at December 31, 1997, at a weighted average interest rate of 5.79%. The net proceeds were used to repay a portion of the outstanding commercial paper. On February 6, 1998, Capital Corp. issued $150 million of medium-term notes (See Note 14, Long-Term Debt). The outstanding commercial paper following the repayment totaled $199.3 million. LG&E Energy Corp., LG&E, and Capital Corp. had no other notes payable at December 31, 1997. Energy Systems and Gas Systems had notes payable of $158 million at December 31, 1996, at a weighted average interest rate of 5.83%. At December 31, 1997, the Company had lines of credit in place totaling $900 million ($200 million for LG&E, and $700 million for Capital Corp.) for which it pays commitment or facility fees. The LG&E credit facility provides for short term borrowing and support of variable rate Pollution Control Bonds. The Capital Corp. facility provides for short term borrowing, letter of credit issuance, and support of commercial paper borrowings. Unused capacity under these lines totaled $481.7 million after considering the commercial paper support and approximately $58.1 million in letters of credit securing on- and off-balance sheet commitments. The credit lines will expire at various times from 1998 through 2002. Management expects to renegotiate the lines when they expire. The lenders under the credit facilities, commercial paper program, and medium term notes for Capital Corp. are entitled to the benefits of Support Agreements with LG&E Energy Corp. The Support Agreements state, in substance, that LG&E Energy Corp. will provide Capital Corp. with the necessary funds and financial support to meet their obligations under the credit facilities, commercial paper program, and medium term notes. NOTE 16 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM. The Company had commitments, primarily in connection with the construction program of LG&E, aggregating approximately $7 million at December 31, 1997. LG&E's construction expenditures for the years 1998 and 1999 are estimated to total approximately $260 million. Non-utility construction expenditures for the same two-year period are estimated to be $55 million. LETTERS OF CREDIT. Capital Corp. has provided letters of credit issued to third parties to secure certain off-balance sheet obligations (including contingent obligations) of its subsidiaries. The letters of credit securing such obligations totaled approximately $38.3 million and $25.2 million at December 31, 1997 and 1996, respectively. These letters of credit are subject to Support Agreements as more fully described in Note 15, Notes Payable. Capital Corp. has provided a guarantee of a lease obligation to a third party. The obligation totaled $10.2 million and $12.8 million at December 31, 1997 and 1996, respectively. 76 PROJECT CONTINGENCIES SOUTHAMPTON. The Southampton plant, a 63-megawatt, coal-fired cogeneration facility in Franklin, Virginia, supplies process steam to a nearby chemical manufacturer and bulk electric power under contract to Virginia Electric and Power Company (Virginia Power) as a qualifying facility (QF) under the Public Utility Regulatory Policies Act (PURPA). The plant began commercial operation in 1992. In July 1994, FERC denied the request of LG&E-Westmoreland Southampton (the Partnership) for a waiver of certain QF requirements. The Partnership subsequently filed a request seeking a reversal of FERC's order, or, in the alternative, a clarification of FERC's order stating that, with the exception of rates, the Partnership remains a QF for 1992 exempt from regulation as a public utility under PUHCA, utility laws in Virginia and various portions of the Federal Power Act. In July 1996, the FERC entered an order in the Southampton case which included a policy statement regarding all QF facilities which fail temporarily to meet QF standards. The order affirmed the continued availability to Southampton of exemptions from PUHCA and state law for the year 1992, supporting the Partnership's request that the ruling on non-compliance should have no effect on the exemptions from regulations that would have classified the plant as a public utility. The FERC's decision to uphold these exemptions eliminates potential issues involving provisions of PUHCA, Virginia utility law and the non-rate provisions of the Federal Power Act. The FERC also concluded that the Partnership should refund a portion of the rates it received from Virginia Power during 1992. The Company had anticipated that the Partnership could be required to make a refund to Virginia Power in the event the QF standards for 1992 were not waived. The order calls for a refund with interest from the Partnership of the difference between the amount paid by Virginia Power during the period and the amount Virginia Power would have paid for energy if it had purchased energy at its incremental energy rate. The amount of the refund is currently unknown, pending further FERC review. In August 1996 the Partnership filed a Request for Clarification to better understand what the Commission intended and filed a Request for Rehearing on the grounds that the order violated the statutory standard for just and reasonable rates. In November 1996, the Partnership requested FERC approval for the contract rates it charged during the period of non-compliance minus a $500,000 refund offered by the Partnership. The Company continues to study the order and, at this time, cannot predict what, if any, further action it may take, cannot predict the determinations of FERC on the pending motions, and cannot predict what action Virginia Power may take. The Company's share of the revenues received by the Partnership in 1992 is approximately $9.5 million. WESTMORELAND BANKRUPTCY. On December 23, 1996, Westmoreland Coal Company and its four first-tier subsidiaries filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. One of these subsidiaries, Westmoreland Energy, Inc. is the direct parent of the various entities that are partners in partnerships with LG&E Energy subsidiaries (including the Partnership and WLP, as defined herein) which own six independent generating facilities. None of those partnerships and no partner of those partnerships is under bankruptcy court protection. It is unclear at this time what effect these filings will have on the value of the partnerships. Although there is no current default occasioned by the filings, defaults could occur under project loan agreements if not remedied within the specified time period. If a default occurred which was not cured within the allowed time, the lenders would have the right, among other things, to accelerate the outstanding loans. These loans, which are non-recourse to the Company above the partnership level, totaled $596.7 million at December 31, 1997. ROANOKE VALLEY I. The Company owns a 50% interest in Westmoreland-LG&E Partners (WLP), the sole owner of Roanoke Valley I, a cogeneration facility selling electric power to Virginia Power and steam energy to Patch Rubber Company. Under the Power Purchase Agreement (PPA) between WLP and Virginia Power, WLP is entitled to receive capacity payments based on availability. From May 1994 through December 1997, 77 Virginia Power withheld approximately $14.2 million of these capacity payments during periods of forced outages. To date, the Company has not realized any income on its 50% portion of the capacity payments being withheld by Virginia Power. In October 1994, WLP filed a complaint against Virginia Power in the Circuit Court of the City of Richmond, Virginia seeking damages of at least $5.7 million, contending that Virginia Power breached the PPA in withholding such payments. In June 1995, the court denied Virginia Power's motion to dismiss WLP's complaint. In March 1996, Virginia Power filed a motion for summary judgment which was subsequently granted by the court as to all counts. WLP filed a petition for appeal with the Virginia Supreme Court in July 1996, and in June 1997, the Virginia Supreme Court reversed the adverse lower court ruling and remanded the case for a trial. A new trial date has not been set, but is anticipated in late 1998. In the Company's opinion, WLP is entitled to recover the capacity payments withheld by Virginia Power and should prevail in this matter ensuring receipt of future capacity payments during forced outages billable to Virginia Power during the remaining 21 years of the PPA. However, the Company is unable to predict the outcome of this proceeding, or the amount of capacity payments, if any, which Virginia Power may be ordered to pay to WLP. However, the Company does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. RENSSELAER. In July 1997, LG&E Westmoreland - Rensselaer (LWR), in which the Company has a 25% interest through an indirect subsidiary, executed a master restructuring agreement with Niagara Mohawk Power Corporation (NIMO) and 15 other independent power companies (IPPs). LWR is the owner of the Rensselaer cogeneration facility. Under this agreement, LWR has an obligation to negotiate towards a restructuring of the Power Purchase Agreement between NIMO and LWR. Substantial further negotiations with NIMO, suppliers and lenders to the Rensselaer project are required to implement any restructuring. The Company is under no obligation to amend or terminate the Rensselaer project power purchase agreement if all conditions precedent cannot ultimately be met. Upon completion of a restructuring and satisfaction of conditions precedent, including all IPPs receiving necessary approvals and NIMO successfully arranging financing, LWR would receive consideration from NIMO. Due to the early stage of the project restructuring at this time and the existence of numerous conditions thereto, the Company is not able to predict the outcome of this event. Based upon the terms of the agreement and the current status of the restructuring, the Company does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. In December 1997, the Company sold one-half of its interest in LWR. See Note 7, Investments in Joint Ventures. KENETECH BANKRUPTCY. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States Bankruptcy Court in the Northern District of California for protection under Chapter 11 of the United States Bankruptcy Code seeking, among other things, to restructure certain contractual commitments between Kenetech and its subsidiaries, on one hand, and various windpower projects located in the U.S. and abroad, on the other hand. Included in these projects are the Windpower Partners 1993 (WPP 93), Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A. (Tarifa) wind projects in which the Company has invested, collectively, approximately $31 million. As part of the bankruptcy proceeding, Kenetech is also seeking to void certain warranty commitments made to the owners of those projects with respect to the operation and output of the facilities, and the repair and replacement of the windpower generation equipment located there. LPI has been named to the creditors' committee in the Kenetech bankruptcy on behalf of the three projects, and has been working with representatives of Kenetech and other secured and unsecured creditors to ensure that the project owners' interests are equitably treated in the bankruptcy. On January 31, 1997, the projects filed their respective breach of contract and other claims against Kenetech in the bankruptcy proceeding. In September 1996, LG&E Power Services Inc., an affiliate of the Company, assumed operating control over 78 the WPP 93 and WPP 94 facilities, pursuant to Facility Operating Agreements with the owners of those facilities. Those agreements replaced the interim operations and maintenance agreements between the owners and Kenetech that were implemented at the time of the Kenetech bankruptcy filing. The owners of the Tarifa windpower project assumed operating control over that facility shortly after the bankruptcy filing, and are considering the merits of retaining a third-party contractor to operate and maintain these facilities. In November 1996, KW Tarifa, S.A., certain of its shareholders and an affiliate of the Company, LG&E Power Finance Inc. (LPF), completed separate Settlement Transactions with affiliates of Kenetech, whereby the equity interests of Kenetech's affiliate in KW Tarifa S.A. were purchased by the other shareholders, and certain subordinated indebtedness of KW Tarifa S.A. to another Kenetech affiliate was purchased by LPF and subsequently retired by KW Tarifa S.A. The Company is unable to predict the outcome of the bankruptcy proceeding or the settlement negotiations. However, the Company does not expect the ultimate resolution of the bankruptcy to have a material adverse effect on its results of operations or financial condition. WINDPOWER PARTNERS 1994. WPP 94, in which the Company has a 25% interest through indirect subsidiaries, did not make a semiannual payment, due September 2, 1997, to John Hancock Mutual Life Insurance Company (Hancock) under certain Notes issued by WPP 94 to Hancock. The Company has offered WPP 94 financial support with respect to the appropriate proportion of its debt obligations, but certain of the three other investor groups are unable to offer funds to WPP 94 in support of the partnership. The aggregate indirect investment of the Company in WPP 94 is $4.3 million as of December 31, 1997. WPP 94 and Hancock are presently engaged in discussions concerning a possible restructuring of WPP 94's debt obligations and Hancock has informed WPP 94 that it may declare WPP 94 in default of the trust indenture relating to the Notes. WPP 94 operates wind power generation facilities in Texas. Because of the continuing nature of the negotiations, the Company is not able to predict the outcome of this event. The Company does not expect the ultimate resolution of this matter to have a material effect on its results of operations or financial condition. CALGARY On November 22, 1996, LG&E Natural Canada Inc., a subsidiary of LEM, initiated action in the Court of the Queens Bench of Alberta, Calgary against a former employee. That action and an additional action, filed on the same date in the General Division of the Ontario Court, also named a natural gas sales and marketing company and the director, president and secretary of that company (Marketing Company Defendants). The action against such Marketing Company Defendants was settled on June 6, 1997. An amended statement of claim was filed in the Calgary action on December 23, 1996, naming additional parties. These lawsuits were filed as a result of LEM's discovery in the fourth quarter of 1996 that the former employee had engaged in unauthorized transactions. Counterclaims have been filed seeking damages of approximately $40 million for, among other things, defamation and breach of contract. In the second quarter of 1997, the Company received an insurance settlement of $7.6 million (net of expenses) related to the losses. See Note 8, Non-Recurring Charges. The Company does not expect the ultimate resolution of this matter to have a material adverse effect on its results of operations or financial condition. 79 OPERATING LEASES The Company leases office space, office equipment, and vehicles. The Company accounts for these leases as operating leases. Total lease expense for 1997, 1996, and 1995, was $5 million, $4.1 million, and $5.5 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1997, are as follows (in thousands of $):
1998 $ 6,561 1999 5,476 2000 5,567 2001 5,320 2002 4,519 Thereafter 10,262 -------- Total $37,705 =======
Future minimum annual lease payments have been reduced by rental payments to be received from noncancelable subleases of approximately $1.8 million per year from 1998 through 2000, and $1.3 million in 2001. ENVIRONMENTAL With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already complied with the stringent sulfur dioxide emission limits required by the year 2000 as it had previously installed scrubbers on all of its coal-fired generating units. Since then, as part of its ongoing construction program, LG&E has spent $31 million for measures to meet applicable nitrogen oxide limits. While the overall financial impact of the Act on LG&E has been minimal, LG&E is closely monitoring several significant regulatory developments which may potentially impact the Company including efforts by local officials to address the "ozone nonattainment" status of Jefferson County, Kentucky and implementation of new ozone and particulate matter standards adopted by the United States Environmental Protection Agency (USEPA) in June 1997. Finally, LG&E is monitoring regulations proposed by USEPA in October 1997, that could require numerous utilities including LG&E to reduce nitrogen oxide emissions by approximately 85% from 1990 levels. LG&E has already reduced its nitrogen oxide emissions by approximately 40% and the Company's independent power projects generally operate at even lower emissions levels. However, if finally adopted, the proposed regulations may require LG&E and the independent power projects to incur significant capital expenditures, currently estimated as potentially in excess of $100 million in the case of LG&E, and significantly increased operation and maintenance costs. LG&E currently anticipates that a significant portion of any such capital costs could be recoverable through rates, although there can be no guarantee of such recovery. LG&E is currently addressing other emissions issues at two of its power plants. First, LG&E is conducting modeling activities in response to a notification from the Air Pollution Control District of Jefferson County (APCD) indicating that the Cane Run plant may be the source of a potential exceedance of the air quality standards for sulfur dioxide. Depending on the outcome of the modeling, LG&E may be required to undertake corrective action that could include significant capital improvements. Secondly, LG&E is working with the APCD to review the effectiveness of remedial measures aimed at controlling particulate emissions from the Mill Creek plant which allegedly damaged metal surfaces on adjacent properties. LG&E had previously established a claims resolution process which resulted in property damage settlements with adjacent residents at an aggregate cost of approximately $15 million. In related litigation, in October, 1997, the Jefferson Circuit Court dismissed all but one of the claims pursued by persons who had not previously settled with LG&E. In management's opinion, resolution of any remaining claims should not have a material adverse impact on the financial position or results of operations of LG&E. LG&E is also addressing potential liabilities for cleanup of properties where hazardous substances may have been released. LG&E has identified contamination at certain manufactured gas plant (MGP) sites currently or 80 formerly owned by the Company. One of the sites was conveyed to a new owner which assumed responsibility for environmental liabilities and LG&E is negotiating with potentially responsible parties and state agencies with respect to two other sites. Until conclusion of such discussions, LG&E is unable to precisely determine its remaining liability for cleanup costs at MGP sites. However, based on site studies, management currently estimates total cleanup costs within the range of $3 million to $8 million and has recorded an accrual of approximately $3 million in the accompanying financial statements. LG&E, along with other companies, has also been identified by USEPA as a potentially responsible party allegedly liable for cleanup costs under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) for certain off-site disposal facilities. LG&E has entered a final settlement for $7,500 for one site and has entered tentative settlements for an aggregate of $150,000 for the remaining sites. Tentative settlements are subject to approval by the government and entry by the court. LPI and its subsidiaries are also subject to extensive federal, state, and local environmental laws and regulations governing the operation of various facilities in which they participate as an owner or managing operator. To the extent that there have been any developments pursuant to environmental laws and regulations, such developments have not been material, except as otherwise disclosed herein. NOTE 17 - TRIMBLE COUNTY GENERATING PLANT Trimble County Unit 1 (Trimble County), a 495-megawatt coal-fired electric generating unit placed into service in December 1990, has been the subject of numerous legal and regulatory proceedings to determine the appropriate ratemaking treatment to implement the Kentucky Public Service Commission's 1988 decision that LG&E should not be allowed to recover 25% of the cost of Trimble County from ratepayers. In December 1995, the Commission approved a unanimous settlement agreement that was filed by LG&E and other parties. Under the agreement, which resolved all outstanding issues, LG&E agreed to refund approximately $22 million to current electric customers, most of which is being refunded by credits to customers' bills over the five years 1996 through 2000. In addition, LG&E agreed to pay $900,000 per year for five years beginning in 1996 to the Metro Human Needs Alliance, Inc., a not-for-profit Louisville-based corporation, for the sole purpose of funding low-income energy assistance programs in the service territory. LG&E also agreed to revise the residential decoupling methodology approved by the Commission in 1994 in a manner that reduced revenues collected from residential customers by approximately $1.8 million. Finally, the parties agreed to dismiss all appeals currently pending in state courts regarding the Commission's orders in LG&E's last general rate case. NOTE 18 - JOINTLY OWNED ELECTRIC UTILITY PLANT LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the 75% portion of the Unit, which the Commission has allowed to be reflected in customer rates, is similar to LG&E's accounting for other wholly owned utility plants. Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns a 12.12% undivided interest in the Unit, and Indiana Municipal Power Agency (IMPA) owns a 12.88% undivided interest. Each is responsible for their proportionate ownership share of operation and maintenance expenses and incremental assets, and for fuel used. 81 The following data represent shares of the jointly owned property:
Trimble County LG&E IMPA IMEA Total Ownership interest 75% 12.88% 12.12% 100% Mw capacity 371.25 63.75 60 495
NOTE 19 - SEGMENTS OF BUSINESS LG&E Energy Corp. has business operations in both the regulated and non-regulated energy markets. The regulated business is conducted through Louisville Gas and Electric Company (LG&E), an electric and gas 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 of Kentucky. The non-utility businesses are subsidiaries of LG&E Capital Corp. and include LG&E Power Inc. (LPI), LG&E International Inc. (LII) and LG&E Energy Marketing Inc. (LEM). LPI and its subsidiaries develop, design, own, operate, and maintain power generation facilities that sell energy to local industries and utilities throughout the United States. LPI also owns and operates certain natural gas collection and processing facilities in the United States. LII develops and owns international power-generation assets located in Spain and Argentina and acquired interests in two natural gas distribution companies located in Argentina in February 1997. LEM primarily engages in retail and wholesale marketing of natural gas and electric power, respectively, throughout the United States and Canada. LEM makes up the energy marketing and trading segment of the business. Other primarily relates to non-utility power generation activities and corporate interest and operating expenses.
(Thousands of $) 1997 1996 1995 ---- ---- ---- Operating information: Revenues: Electric $ 615,159 $ 607,160 $ 542,786(a) Gas 231,011 214,419 181,126 ----------- ---------- ---------- Total utility 846,170 821,579 723,912 Energy marketing and trading 3,266,811 2,748,873 630,249 Argentine gas distribution 127,182 - - Other 23,657 19,013 20,519 ---------- ---------- ---------- Total $4,263,820 $3,589,465 $1,374,680 ========== ========== ========== Operating income: Electric $ 197,860 $ 192,593 $ 152,648 Gas 15,034 18,393 16,651 ----------- ---------- ---------- Total utility 212,894 210,986 169,299 Energy marketing and trading (30,577) 3,259 (959) Argentine gas distribution 30,173 - Other (1,987) (2,804) 7,217 ---------- ---------- ---------- Total $ 210,503 $ 211,441 $ 175,557 ========== ========== ==========
82
Other information: Depreciation and amortization: Electric $ 79,958 $ 76,929 $ 74,437 Gas 13,062 12,073 11,322 ----------- ---------- ---------- Total utility 93,020 89,002 85,759 Energy marketing and trading 13,484 12,969 6,961 Argentine gas distribution 7,569 - - Other 1,663 1,585 1,673 ---------- ---------- ---------- Total $ 115,736 $ 103,556 $ 94,393 ========== ========== ========== Construction expenditures: Electric $ 81,713 $ 79,541 $ 66,661 Gas 29,180 28,338 26,762 ---------- ---------- ---------- Total utility (b) 110,893 107,879 93,423 Energy marketing and trading 21,596 6,081 9,020 Argentine gas distribution 4,369 - - Other 863 1,490 2,084 ---------- ---------- ---------- Total $ 137,721 $ 115,450 $ 104,527 ========== ========== ========== Identifiable assets - December 31: Electric $1,517,512 $1,505,508 $1,501,568 Gas 317,337 300,550 268,840 Other 219,776 186,346 208,517 ---------- ---------- ---------- Total utility 2,054,625 1,992,404 1,978,925 Energy marketing and trading 778,538 828,030 470,440 Argentine gas distribution 340,144 - - Other 193,084 191,458 179,555 ---------- ---------- ---------- Total $3,366,391 $3,011,892 $2,628,920 ========== ========== ==========
(a) Net of Refund - Trimble County Settlement of $28.3 million. (b) Excluding cost of removal and salvage. 83 NOTE 20 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 1997 and 1996 are shown below. Because of seasonal fluctuations in temperature and other factors, results for quarters may fluctuate throughout the year.
(Thousands of $ except per share data) Quarters Ended March June September December ----- ---- --------- -------- 1997 ----- Revenues $1,303,243 $747,566 $1,113,521 $1,099,490 Operating income 44,903 51,265 67,185 47,150 Net income 21,239 21,617 29,193 25,768 Earnings per share of common stock (1) .32 .33 .44 .38 1996 ----- Revenues $875,429 $760,913 $853,928 $1,099,195 Operating income 59,060 48,692 70,307 33,382 Net income 27,095 23,822 41,736 11,350 Earnings per share of common stock (1) .41 .36 .63 .17
(1) The Company is required to disclose basic and dilutive earnings per share under the requirements of SFAS No. 128, Earnings Per Share. The Company has determined that basic and dilutive earnings per share for the quarters presented are the same. 84 LG&E Energy Corp. REPORT OF MANAGEMENT The management of LG&E Energy Corp. and subsidiaries is responsible for the preparation and integrity of the consolidated financial statements and related information included in this Annual Report. These statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis and, necessarily, include amounts that reflect the best estimates and judgment of management. The Company's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Management has made available to Arthur Andersen LLP all the Company's financial records and related data as well as the minutes of shareholders' and directors' meetings. Management has established and maintains a system of internal controls that provides reasonable assurance that transactions are completed in accordance with management's authorization, that assets are safeguarded and that financial statements are prepared in conformity with generally accepted accounting principles. Management believes that an adequate system of internal controls is maintained through the selection and training of personnel, appropriate division of responsibility, establishment and communication of policies and procedures and by regular reviews of internal accounting controls by the Company's internal auditors. Management reviews and modifies its system of internal controls in light of changes in conditions and operations, as well as in response to recommendations from the internal auditors. These recommendations for the year ended December 31, 1997, did not identify any material weaknesses in the design and operation of the Company's internal control structure. The Audit Committee of the Board of Directors is composed entirely of outside directors. In carrying out its oversight role for the financial reporting and internal controls of the Company, the Audit Committee meets regularly with the Company's independent public accountants, internal auditors and management. The Audit Committee reviews the results of the independent accountants' audit of the consolidated financial statements and their audit procedures, and discusses the adequacy of internal accounting controls. The Audit Committee also approves the annual internal auditing program, and reviews the activities and results of the internal auditing function. Both the independent public accountants and the internal auditors have access to the Audit Committee at any time. LG&E Energy Corp. and subsidiaries maintain and internally communicate a written code of business conduct that addresses, among other items, potential conflicts of interest, compliance with laws, including those relating to financial disclosure, and the confidentiality of proprietary information. 85 LG&E Energy Corp. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of LG&E Energy Corp.: We have audited the consolidated balance sheets and statements of capitalization of LG&E Energy Corp. (a Kentucky corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of LG&E Energy Corp. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective January 1, 1996, the Company changed its method of accounting for price risk management activities. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Louisville, Kentucky Arthur Andersen LLP January 28, 1998 (Except with respect to the matters discussed in the fifth paragraph of Note 7, the eighth paragraph of Note 14 and the second paragraph of Note 15, as to which the date is February 11, 1998.) 86 Louisville Gas and Electric Company Statements of Income (Thousands of $)
Years Ended December 31 1997 1996 1995 ---- ---- ---- OPERATING REVENUES: Electric.......................................... $ 614,532 $ 606,696 $ 570,637 Gas............................................... 231,011 214,419 181,126 Refund - Trimble County settlement (Note 13)...... - - (28,300) --------- --------- --------- Total operating revenues (Note 1).............. 845,543 821,115 723,463 --------- --------- --------- OPERATING EXPENSES: Fuel for electric generation...................... 149,463 149,697 138,002 Power purchased................................... 17,229 16,626 16,830 Gas supply expenses............................... 158,929 140,482 110,738 Other operation expenses.......................... 150,750 143,338 134,655 Maintenance....................................... 47,586 54,790 52,101 Depreciation and amortization..................... 93,020 89,002 85,759 Federal and state income taxes (Note 8)........... 64,081 63,259 47,524 Property and other taxes.......................... 16,299 16,658 16,528 --------- --------- --------- Total operating expenses....................... 697,357 673,852 602,137 --------- --------- --------- Net operating income.................................. 148,186 147,263 121,326 Other income and (deductions) (Note 9)................ 4,277 920 3,776 Interest charges...................................... 39,190 40,242 41,918 --------- --------- --------- Net income............................................ 113,273 107,941 83,184 Preferred stock dividends............................. 4,585 4,568 6,311 --------- --------- --------- Net income available for common stock................. $ 108,688 $ 103,373 $ 76,873 ========= ========= =========
Statements of Retained Earnings (Thousands of $)
Years Ended December 31 1997 1996 1995 ---- ---- ---- Balance January 1..................................... $ 209,222 $ 181,049 $193,895 Add net income........................................ 113,273 107,941 83,184 --------- --------- -------- 322,495 288,990 277,079 Deduct: Cash dividends declared on stock: 5% cumulative preferred.................. 1,075 1,075 1,075 7.45% cumulative preferred............... - - 1,527 Auction rate cumulative preferred........ 2,041 2,024 2,240 $5.875 cumulative preferred.............. 1,469 1,469 1,469 Common................................... 59,000 75,200 89,000 Preferred stock redemption expense......... - - 719 --------- --------- -------- 63,585 79,768 96,030 --------- --------- -------- Balance December 31................................... $ 258,910 $ 209,222 $181,049 ========= ========= ========
The accompanying notes are an integral part of these financial statements. 87 Louisville Gas and Electric Company Balance Sheets (Thousands of $)
December 31 1997 1996 ---- ---- ASSETS: Utility plant, at original cost: Electric.................................................................. $2,242,980 $2,192,557 Gas ................................................................... 337,619 320,791 Common ................................................................... 137,496 130,678 ---------- ---------- 2,718,095 2,644,026 Less: reserve for depreciation........................................... 1,072,842 999,987 ---------- ---------- 1,645,253 1,644,039 Construction work in progress............................................. 61,139 41,183 ---------- ---------- 1,706,392 1,685,222 ---------- ---------- Other property and investments - less reserve................................. 1,365 1,028 Current assets: Cash and temporary cash investments....................................... 50,472 56,792 Marketable securities (Note 6)............................................ 19,311 3,595 Accounts receivable - less reserve of $1,295 in 1997 and $1,470 in 1996... 124,872 115,144 Materials and supplies - at average cost: Fuel (predominantly coal).............................................. 17,651 14,576 Gas stored underground................................................. 41,487 35,510 Other.................................................................. 31,866 32,426 Prepayments............................................................... 2,627 2,480 ---------- ---------- 288,286 260,523 ---------- ---------- Deferred debits and other assets: Unamortized debt expense.................................................. 6,074 6,933 Regulatory assets (Note 3)................................................ 24,899 27,729 Other ................................................................... 28,625 25,277 ---------- ---------- 59,598 59,939 ---------- ---------- $2,055,641 $2,006,712 ========== ========== CAPITAL AND LIABILITIES: Capitalization (see statements of capitalization): Common equity............................................................. $ 683,326 $ 633,757 Cumulative preferred stock................................................ 95,328 95,328 Long-term debt............................................................ 626,800 646,835 ---------- ---------- 1,405,454 1,375,920 ---------- ---------- Current liabilities: Long-term debt due within one year........................................ 20,000 - Accounts payable.......................................................... 98,894 97,478 Trimble County settlement (Note 13)....................................... 13,248 17,511 Dividends declared........................................................ 21,152 20,131 Accrued taxes............................................................. 18,723 11,982 Accrued interest.......................................................... 8,016 9,994 Other ................................................................... 14,608 13,128 ---------- ---------- 194,641 170,224 ---------- ---------- Deferred credits and other liabilities: Accumulated deferred income taxes (Notes 1 and 8)......................... 249,851 241,681 Investment tax credit, in process of amortization......................... 75,800 80,040 Accumulated provision for pensions and related benefits................... 40,608 42,554 Customers' advances for construction...................................... 10,385 10,033 Regulatory liability (Note 3)............................................. 65,502 77,287 Other ................................................................... 13,400 8,973 ---------- ---------- 455,546 460,568 ---------- ---------- Commitments and contingencies (Note 12) $2,055,641 $2,006,712 ========== ==========
The accompanying notes are an integral part of these financial statements. 88 Louisville Gas and Electric Company Statements of Cash Flows (Thousands of $)
Years Ended December 31 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 113,273 $ 107,941 $ 83,184 Items not requiring cash currently: Depreciation and amortization.................................. 93,020 89,002 85,759 Deferred income taxes - net.................................... (3,495) 26,055 7,049 Investment tax credit - net.................................... (4,240) (3,997) (4,742) Other.......................................................... 4,640 3,911 3,958 Change in certain net current assets: Accounts receivable............................................ (9,728) (9,555) (19,531) Materials and supplies......................................... (8,492) (1,418) 1,428 Trimble County settlement...................................... (4,263) (10,789) 28,300 Accounts payable............................................... 1,416 3,772 22,936 Accrued taxes.................................................. 6,741 4,168 (433) Accrued interest............................................... (1,978) (1,070) (2,330) Prepayments and other.......................................... 1,333 685 (61) Other............................................................. (3,188) (23,153) (6,917) ---------- ---------- --------- Net cash flows from operating activities....................... 185,039 185,552 198,600 ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities........................................... (18,529) (11,039) (119,151) Proceeds from sales of securities................................. 2,544 28,605 151,422 Construction expenditures......................................... (110,893) (107,879) (93,423) ---------- ---------- --------- Net cash flows from investing activities....................... (126,878) (90,313) (61,152) ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of first mortgage bonds and pollution control bonds...... 69,776 49,745 39,914 Redemption of preferred stock..................................... - - (22,108) Retirement of first mortgage bonds and pollution control bonds.... (71,693) (67,013) (41,055) Payment of dividends.............................................. (62,564) (79,310) (95,206) ---------- ---------- --------- Net cash flows from financing activities....................... (64,481) (96,578) (118,455) ---------- ---------- --------- Change in cash and temporary cash investments......................... (6,320) (1,339) 18,993 Cash and temporary cash investments at beginning of year.............. 56,792 58,131 39,138 ---------- ---------- --------- Cash and temporary cash investments at end of year.................... $ 50,472 $ 56,792 $ 58,131 ========== ========== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Income taxes................................................... $ 63,421 $ 41,508 $ 40,049 Interest on borrowed money..................................... 39,582 40,334 42,589
The accompanying notes are an integral part of these financial statements. 89 Louisville Gas and Electric Company Statements of Capitalization (Thousands of $)
December 31, 1997 1996 ---- ---- COMMON EQUITY: Common stock, without par value - Authorized 75,000,000 shares, outstanding 21,294,223 shares.................. $ 425,170 $ 425,170 Common stock expense............................................................ (836) (836) Unrealized gain on marketable securities, net of income taxes $16 in 1997 and $136 in 1996 (Note 6).................................. 82 201 Retained earnings............................................................... 258,910 209,222 ---------- ---------- 683,326 633,757 ---------- ----------
CUMULATIVE PREFERRED STOCK: Redeemable on 30 days notice by LG&E, except $5.875 series
Shares Current Outstanding Redemption Price ----------- ---------------- $25 par value, 1,720,000 shares authorized - 5% series .................................... 860,287 $ 28.00 21,507 21,507 Without par value, 6,750,000 shares authorized - Auction rate.................................. 500,000 100.00 50,000 50,000 $5.875 series................................. 250,000 Not redeemable 25,000 25,000 Preferred stock expense......................................................... (1,179) (1,179) ---------- ---------- 95,328 95,328 ---------- ----------
LONG-TERM DEBT (Note 10): First mortgage bonds - Series due June 1, 1998, 6 3/4%.............................................. - 20,000 Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000 Series due August 15, 2003, 6%............................................... 42,600 42,600 Pollution control series: N due February 1, 2019, 7 3/4%........................................... - 35,000 O due February 1, 2019, 7 3/4%........................................... - 35,000 P due June 15, 2015, 7.45%............................................... 25,000 25,000 Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335 R due November 1, 2020, 6.55%............................................ 41,665 41,665 S due September 1, 2017, variable........................................ 31,000 31,000 T due September 1, 2017, variable........................................ 60,000 60,000 U due August 15, 2013, variable.......................................... 35,200 35,200 V due August 15, 2019, 5 5/8%............................................ 102,000 102,000 W due October 15, 2020, 5.45%............................................ 26,000 26,000 X due April 15, 2023, 5.90%.............................................. 40,000 40,000 ---------- ---------- Total first mortgage bonds............................................ 506,800 596,800 Pollution control bonds (unsecured) - Jefferson County due September 1, 2026, variable............................. 22,500 22,500 Trimble County due September 1, 2026, variable............................... 27,500 27,500 Jefferson County due November 1, 2027, variable.............................. 35,000 - Trimble County due November 1, 2027, variable................................ 35,000 - ---------- ---------- Total unsecured pollution control bonds.................................. 120,000 50,000 ---------- ---------- Total long-term bonds................................................. 626,800 646,800 Unamortized premium on bonds.................................................... - 35 ---------- ---------- 626,800 646,835 ---------- ---------- Total capitalization......................................................... $1,405,454 $1,375,920 ========== ==========
The accompanying notes are an integral part of these financial statements. 90 Louisville Gas and Electric Company Notes to Financial Statements NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Louisville Gas and Electric Company (LG&E) is the primary subsidiary of LG&E Energy Corp. LG&E is a regulated public utility that is engaged in the generation, transmission, distribution, and sale of electric energy and the storage, distribution, and sale of natural gas in Louisville and adjacent areas in Kentucky. LG&E Energy Corp. is an exempt energy services holding company with wholly-owned subsidiaries consisting of LG&E and LG&E Capital Corp. All of LG&E's Common Stock is held by LG&E Energy Corp. 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, and, accordingly, 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 1997 were 3.4% (3.2% electric, 3.3% gas, and 6% common); and for 1996 and 1995 were 3.3% (3.2% electric, 3.3% gas, and 6% common) of average depreciable plant. CASH AND TEMPORARY CASH INVESTMENTS. LG&E considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Temporary cash investments are carried at cost, which approximates fair value. FINANCIAL INSTRUMENTS. LG&E uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge its exposure to fluctuations in the value of its investments in the preferred stocks of other companies. Gains and losses on interest-rate swaps used to hedge interest rate risk are reflected in interest charges monthly. Gains and losses on U.S. Treasury note and bond futures used to hedge investments in preferred stocks are initially deferred and classified as unrealized gains or losses on marketable securities in common equity and then charged or credited to other income and deductions when the securities are sold. See Note 4, Financial Instruments. 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 LG&E's tax liability based on credits for certain construction expenditures. Deferred investment tax credits are being amortized to income over the estimated lives of the related property that gave rise to the credits. REVENUE RECOGNITION. Revenues are recorded based on service rendered to customers through month-end. LG&E accrues an estimate for unbilled revenues from each meter reading date to the end of the accounting period. Under an agreement approved by the Public Service Commission of Kentucky (Kentucky Commission or 91 Commission), LG&E has implemented a demand side management program and a "decoupling mechanism," which allows LG&E to recover a predetermined level of revenue on electric and gas residential sales. See Management's Discussion and Analysis, Rates and Regulation, for further discussion. 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. 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. Effective January 1, 1997, LG&E adopted Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125). This new standard is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Adopting SFAS No. 125 had no impact on LG&E's financial position or results of operations. LG&E adopted the provisions of Statement of Position 96-1, Environmental Remediation Liabilities, effective January 1, 1997. This statement provides authoritative guidance for recognition, measurement, and disclosure of environmental remediation liabilities in financial statements. Due to LG&E's previous recognition of this type of liability, adoption did not have a material impact on LG&E's financial position or results of operation. See Note 12, Commitments and Contingencies, for a further discussion of LG&E's environmental commitments and contingencies. In February 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 128, Earnings Per Share (SFAS No. 128), and No. 129, Disclosure of Information about Capital Structure (SFAS No. 129), effective for periods ending after December 15, 1997. SFAS No. 128 will not have an effect on LG&E because the common stock is held by the parent, LG&E Energy Corp. LG&E does not expect any change in reporting by LG&E as a result of adopting SFAS No. 129. In June 1997, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 130, Reporting Comprehensive Income, and No. 131, Disclosures about Segments of an Enterprise and Related Information, effective for periods beginning after December 15, 1997. LG&E does not expect its comprehensive income to differ materially from its net income or its segment disclosures to change significantly as a result of adopting the provisions of these statements. NOTE 2 - LG&E - KENTUCKY UTILITIES MERGER On May 20, 1997, LG&E Energy Corp. (LG&E Energy), the parent company of LG&E, entered into an Agreement and Plan of Merger with KU Energy Corporation (KU). As a result of the merger, LG&E Energy will become the parent company of KU's principal operating subsidiary, Kentucky Utilities Company (Kentucky Utilities). The operating utility subsidiaries (LG&E and Kentucky Utilities) will maintain their separate corporate identities and will continue to serve customers in Kentucky and Virginia under their present names although certain functions performed by each of the utilities will be combined. LG&E Energy and KU expect more than $760 million in gross non-fuel savings over a ten-year period following the merger. Costs to achieve these synergies are estimated to be $77 million. The preferred stock and debt securities of the operating utility subsidiaries will not be affected by the merger. 92 On September 12, 1997, the Kentucky Commission approved the merger application substantially as filed. In the application filed with the Commission, the utilities proposed that 50% of the net non-fuel cost savings estimated to be achieved from the merger, less 50% of the costs to achieve such savings (but not in excess of the currently estimated costs to achieve), be applied to reduce customer rates, and the remaining 50% be retained by the companies. The Commission approved and allocated the customer savings 53% to Kentucky Utilities and 47% to LG&E. The order provides for a surcredit on customers' bills for 50% of the projected net non-fuel savings in each of the five years following consummation of the merger. The credit, which will be about 2% of customer bills in the five-year period, will amount to approximately $55 million in net non-fuel savings to LG&E customers. Any fuel cost savings will be passed to Kentucky customers through the companies' fuel adjustment clauses. One-half of the costs to achieve the savings will be charged to expenses as incurred, once the merger is consummated, and the remaining portion (not to exceed one-half of $77 million for Kentucky Utilities and LG&E combined) will be deferred as a regulatory asset and amortized as an offset to customer savings equally over five years. It will be up to Kentucky Utilities and LG&E to actually realize the estimated level of net non-fuel savings. On October 9, 1997, LG&E Energy and KU filed for approval of the merger with the Federal Energy Regulatory Commission. On October 14, 1997, in separate meetings, stockholders from each of the companies met and the holders of over 75% of the outstanding shares of common stock of LG&E Energy and KU approved the merger. On January 20, 1998, the Virginia State Corporation Commission approved the merger substantially as filed. The merger remains subject to approval of the Federal Energy Regulatory Commission under the Federal Power Act, the approval of the Securities and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, and the filing of requisite notifications with the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the expiration of all applicable waiting periods thereunder. It is anticipated that LG&E Energy, as parent of LG&E and Kentucky Utilities, will continue to be an exempt holding company under the Public Utility Holding Company Act of 1935. NOTE 3 - RATES AND REGULATORY MATTERS LG&E conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by the Federal Energy Regulatory Commission (FERC) and the Kentucky Commission. LG&E is subject to Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71, certain costs that would otherwise be charged to expense are deferred as regulatory assets based on expected recovery from customers in future rates. Likewise, certain credits that would otherwise be reflected as income are deferred as regulatory liabilities based on expected flowback to customers in future rates. LG&E's current or expected recovery of deferred costs and expected flowback of deferred credits is generally based on specific ratemaking decisions or precedent for each item. The following regulatory assets and liabilities were included in the balance sheets as of December 31 (in thousands of $):
1997 1996 ---- ---- Unamortized loss on bonds $ 18,698 $ 17,162 Merger costs 2,938 - Manufactured gas sites 3,263 3,244 Unamortized extraordinary retirements - 4,087 Other - 3,236 --------- --------- Total regulatory assets 24,899 27,729 Deferred income taxes - net (65,502) (77,287) --------- --------- Regulatory assets and (liabilities) - net $(40,603) $(49,558) ======== ========
During 1997, LG&E wrote off certain previously deferred assets that amounted to approximately $4.2 million. Items written off include expenses associated with LG&E's hydro-electric plant, a management audit fee, and the 93 accelerated write-off of losses on early retirement of facilities. ENVIRONMENTAL COST RECOVERY. In April 1995, in response to an application filed by LG&E, the Commission approved, with modifications, an environmental cost recovery surcharge that increased electric revenues by $3.2 million in 1995, an additional $2.4 million in 1996, and an additional $.4 million in 1997. An appeal of the Commission's April 1995 order by various intervenors in the proceeding (including the Kentucky Attorney General) is currently pending in the Franklin Circuit Court of Kentucky. LG&E is contesting the legal challenges to the surcharge, but cannot predict the outcome of the appeal. In a similar proceeding involving appeals from the Commission's order authorizing an environmental cost recovery surcharge for Kentucky Utilities Company by the same intervenors, the Kentucky Court of Appeals, in a decision issued on December 5, 1997, upheld the constitutionality of the surcharge statute. The intervenors have petitioned the Kentucky Supreme Court to review the decision of the Kentucky Court of Appeals. Any refunds that may be ordered as a result of these proceedings are not expected to have a material adverse effect on LG&E's financial position or results of operations. See Rates and Regulation under Management's Discussion and Analysis for a further discussion. PERFORMANCE-BASED RATEMAKING. On September 30, 1997, the Commission issued an order approving LG&E's request to implement an experimental performance-based ratemaking mechanism. This mechanism, which only applies to gas procurement activities and gas off-system sales, was approved for a three-year test period effective October 1, 1997. During the experimental period, rate adjustments related to this mechanism will be determined for each 12-month period beginning November 1 and ending October 31. This mechanism is not expected to have a material effect on LG&E's financial position or results of operations. FUTURE RATE REGULATION. In its September 12, 1997 order approving the merger of LG&E Energy and KU, the Kentucky Commission ordered LG&E to file by the later of the consummation of the merger or September 14, 1998, detailed plans to address the future rate regulation of LG&E. The Commission directed LG&E to indicate in its filing whether it desired to remain under traditional rate of return regulation or commence non-traditional regulation. LG&E was further ordered to explain the reasons for its election, and in the case of traditional regulation, include an analysis and proposals relative to its earnings at that time. If non-traditional regulation is elected, LG&E must explain the reasons for its choice and how its plan will achieve the Commission's goals of providing incentives to utilities and a sharing of the resulting benefits with customers. The Commission stated that it will fully investigate the filing and determine whether changes should be made to the existing regulation of LG&E. LG&E cannot presently predict the outcome of this matter. KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. The Kentucky Commission has opened Administrative Case No. 369 to lay ground work for Commission policy addressing cost allocations, affiliate transactions, and codes of conduct governing the relationship between utilities and their non-regulated operations and affiliates. The Commission stated in its December 19, 1997 order it 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-regulated operations; and whether a code of conduct should be established to assure that non-regulated segments of the holding company are not engaged in practices which result in unfair competition caused by cost shifting from the non-regulated affiliate to the utility. Management does not expect the ultimate resolution of this matter to have a material adverse effect on LG&E's financial position or results of operations. NOTE 4 - FINANCIAL INSTRUMENTS LG&E uses over-the-counter interest-rate swap agreements to hedge its exposure to fluctuations in the interest rates it pays on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond futures to hedge its 94 exposure to fluctuations in the value of its investments in the preferred stocks of other companies. At December 31, 1997, LG&E held U.S. Treasury notes and bond futures contracts with notional amounts totaling $2.4 million. These contracts are used to hedge price risk associated with certain marketable securities and mature in March 1998. As of December 31, 1997, LG&E had in effect one interest rate swap agreement to hedge its exposure to tax exempt rates related to Pollution Control Bonds, Variable Rate Series. The swap has a notional amount of $15 million and it matures in September 1999. LG&E paid a fixed rate on the swap of 4.74% in 1997, 1996, and 1995 and received a variable rate based on the JJ Kenny Index of 3.66% in 1997, 3.46% in 1996, and 3.87% in 1995. In addition, LG&E had entered into three other tax exempt interest rate swaps that became effective in February 1998. The notional amount of each of these is $17 million, and they mature in February 2001, 2003, and 2005. The swap agreements call for LG&E to pay fixed rates averaging 4.184%, and to receive a variable rate based on the PSA Municipal Bond Index. The cost and estimated fair values of LG&E's financial instruments as of December 31, 1997 and 1996 follow (in thousands of $):
1997 1996 ------------------------ --------------------------- Fair Fair Cost Value Cost Value --------- --------- --------- ---------- Marketable securities $ 19,213 $ 19,311 $ 3,258 $ 3,595 Long-term investments: Not practicable to estimate fair value 747 747 744 744 Preferred stock subject to mandatory redemption 25,000 26,250 25,000 24,938 Long-term debt 626,800 649,491 646,800 662,721 U.S. Treasury note and bond futures - (37) - 6 Interest rate swaps - (248) - (319)
All of the above valuations reflect prices quoted by exchanges except for the swaps and the long-term investments. The fair values of the swaps reflect price quotes from dealers or amounts calculated using accepted pricing models. The fair values of the long-term investments reflect cost, since LG&E cannot reasonably estimate fair value. NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on- or off-balance sheet) relate to groups of customers or counterparties that have similar economic or industry characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. LG&E's customer receivables and gas and electric revenues arise from deliveries of natural gas to approximately 284,000 customers and electricity to approximately 356,000 customers in Louisville and adjacent areas in Kentucky. For the year ended December 31, 1997, 73% of total revenue was derived from electric operations and 27% from gas operations. 95 LG&E's operation and maintenance employees are members of the International Brotherhood of Electrical Workers (IBEW) Local 2100 which represents approximately 60% of LG&E's workforce. LG&E's collective bargaining agreement with IBEW employees expires in November 1998. NOTE 6 - MARKETABLE SECURITIES LG&E's marketable securities have been determined to be "available-for-sale" under the provisions of Statement of Financial Accounting Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Proceeds from sales of available-for-sale securities in 1997 were approximately $2.5 million, which resulted in immaterial realized gains and losses. Proceeds from sales of available-for-sale securities in 1996 were approximately $28.6 million, which resulted in realized gains of approximately $.3 million and losses of approximately $.8 million, calculated using the specific identification method. Approximate cost, fair value, and other required information pertaining to LG&E's available-for-sale securities by major security type as of December 31, 1997 and 1996, follow (in thousands of $):
Fixed Equity Income Total ------- ------- ------- 1997: Cost $3,763 $15,450 $19,213 Unrealized gains 192 13 205 Unrealized losses (40) (67) (107) ------- ------- ------- Fair values $3,915 $15,396 $19,311 ====== ======= ======= Fair values: No maturity $3,915 $ 114 $ 4,029 Contractual maturities: Less than one year - 8,795 8,795 One to five years - 5,442 5,442 Five to ten years - - - Over ten years - 1,045 1,045 Not due at a single maturity date - - - ---------- ------------- ------------- Total fair values $3,915 $15,396 $19,311 ====== ======= ======= 1996: Cost $3,258 $ - $3,258 Unrealized gains 572 - 572 Unrealized losses (235) - (235) ------- -------- ------- Fair values $3,595 $ - $3,595 ====== ======= ====== Fair values: No maturity $2,126 $ - $ 2,126 Contractual maturities: Less than one year 1,469 - 1,469 One to five years - - - Five to ten years - - - Over ten years - - - Not due at a single maturity date - - - ---------- -------- ---------- Total fair values $3,595 $ - $3,595 ====== ======= ======
96 NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS PENSION PLANS. LG&E has two non-contributory, defined-benefit pension plans that cover all eligible employees. Retirement benefits are based on the employee's age at retirement, years of service, and compensation. LG&E's policy is to fund annual actuarial costs, up to the maximum amount deductible for income tax purposes, as determined under the frozen entry age actuarial cost method. The assets of the plans consist primarily of common stocks, corporate bonds, investments in international mutual funds, and United States government securities. LG&E also has a supplemental executive retirement plan that covers officers of LG&E. The plan provides retirement benefits based on average earnings during the final three years prior to retirement, reduced by social security benefits, any pension benefits received from plans of prior employers, and by amounts received under the pension plans referred to in the preceding paragraph. Pension costs were $2.7 million for 1997, $4.3 million for 1996, and $5 million for 1995, of which approximately $491,000, $751,000, and $761,000, respectively, were charged to construction. The components of periodic pension expense are shown below (in thousands of $):
1997 1996 1995 ---- ---- ---- Service cost-benefits earned during the period $ 5,213 $ 4,989 $ 4,361 Interest cost on projected benefit obligation 17,630 16,697 14,328 Actual return on plan assets (46,039) (31,931) (45,608) Amortization of transition asset (1,112) (1,112) (1,112) Net amortization and deferral 27,032 15,669 33,008 -------- -------- -------- Net pension cost $ 2,724 $ 4,312 $ 4,977 ========= ========= =========
The funded status of the pension plans at December 31 is shown below (in thousands of $):
1997 1996 ---- ---- Actuarial present value of accumulated plan benefits: Vested $209,240 $178,534 Non-vested 25,455 19,913 -------- -------- Accumulated benefit obligation 234,695 198,447 Effect of projected future compensation 39,400 30,902 -------- -------- Projected benefit obligation 274,095 229,349 Plan assets at fair value 280,238 238,026 ------- ------- Plan assets in excess of projected benefit obligation 6,143 8,677 Unrecognized net transition asset (9,188) (10,300) Unrecognized prior service cost 43,518 44,142 Unrecognized net gain (61,790) (65,891) -------- -------- Accrued pension liability $(21,317) $(23,372) ======== ========
97 The assumptions used in determining the actuarial valuations are as follows:
1997 1996 ---- ---- Assumed discount rate to determine projected benefit obligation 7.00% 7.75% Assumed long-term rate of return on plan assets 8.50% 8.50% Assumed annual rate of increase in future compensation levels 2.00% - 4.00% 2.00% - 4.25%
POST-RETIREMENT BENEFITS. LG&E provides certain health care and life insurance benefits for eligible retired employees. Post-retirement health care benefits are subject to a maximum amount payable by LG&E. LG&E accrues for the expected cost of post-retirement benefits other than pensions during the employee's years of service with LG&E. The discounted present value of the post-retirement benefit obligation is being amortized over 20 years. Post-retirement benefit costs are shown below (in thousands of $):
1997 1996 1995 ---- ---- ---- Service cost $ 746 $ 773 $ 595 Interest cost 2,943 2,976 2,706 Actual return on assets (80) - - Amortization of transition obligation 1,337 1,337 1,337 Net amortization and deferral 256 328 - ------ ------ ------ Post-retirement benefit cost $5,202 $5,414 $4,638 ====== ====== ======
The accumulated post-retirement benefit obligation at December 31 is shown below (in thousands of $):
1997 1996 ---- ---- Retirees $(21,735) $(18,568) Fully eligible active employees (3,783) (4,808) Other active employees (17,855) (16,575) -------- -------- Accumulated post-retirement benefit obligation (43,373) (39,951) Plan assets at fair value 4,384 2,284 Unrecognized prior service cost 3,410 3,738 Unrecognized transition obligation 20,053 21,390 Unrecognized net loss 2,901 493 -------- -------- Accrued post-retirement benefit liability $(12,625) $(12,046) ======== ========
The accumulated post-retirement benefit obligation was determined using an assumed discount rate of 7% for 1997 and 7.75% for 1996. Assumed compensation increases for projected life insurance benefits for affected groups was 4% for 1997 and 4.25% for 1996. An assumed health care cost trend rate of 9% was assumed for 1997, gradually decreasing to 4.25% in nine years and thereafter. A 1% increase in the assumed health care cost trend rate would increase the accumulated post-retirement benefit obligation by approximately $1.7 million and the annual service and interest cost by approximately $200,000. In 1996, LG&E began funding certain liabilities for post-retirement benefits through a tax-deductible funding vehicle. The plan assets are being held in two voluntary employee benefit association (VEBA) trusts and are invested primarily in short-term United States government securities. 98 THRIFT SAVINGS PLAN. LG&E has a Thrift Savings Plan under Section 401(k) of the Internal Revenue Code. The plan covers all regular full-time employees with one year or more of service at LG&E. 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 employee contributions. These costs were approximately $1.8 million for each of the years 1997, 1996, and 1995. NOTE 8 - INCOME TAXES Components of income tax expense are shown in the table below (in thousands of $):
1997 1996 1995 ---- ---- ---- Included in operating expenses: Current - federal $57,590 $33,823 $36,379 - state - net 14,593 7,685 9,138 Deferred - federal - net (4,565) 19,161 4,021 - state - net 703 6,587 2,728 Deferred investment tax credit 102 409 - Amortization of investment tax credit (4,342) (4,406) (4,742) ------- ------- ------- Total 64,081 63,259 47,524 Included in other income and (deductions): Current - federal 1,484 196 (555) - state 161 (96) (343) Deferred - federal - net 292 246 240 - state - net 75 61 60 ------- ------- ------- Total 2,012 407 (598) ------- ------- ------- Total income tax expense $66,093 $63,666 $46,926 ======= ======= =======
Net deferred tax liabilities resulting from book-tax temporary differences are shown below (in thousands of $):
1997 1996 ---- ---- Deferred tax liabilities: Depreciation and other plant-related items $321,442 $314,692 Other liabilities 6,702 14,864 -------- -------- 328,144 329,556 -------- -------- Deferred tax assets: Investment tax credit 30,595 32,305 Income taxes due to customers 26,357 31,195 Pension overfunding 7,265 7,860 Accrued liabilities not currently deductible and other 14,076 16,515 -------- -------- 78,293 87,875 -------- -------- Net deferred income tax liability $249,851 $241,681 ======== ========
99 A reconciliation of differences between the statutory U.S. federal income tax rate and LG&E's effective income tax rate follows:
1997 1996 1995 ---- ---- ---- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes net of federal benefit 5.7 5.4 5.8 Amortization of investment tax credit (2.4) (2.6) (3.6) Other differences - net (1.5) (.7) (1.1) ----- ------ ----- Effective income tax rate 36.8% 37.1% 36.1% ==== ==== ====
NOTE 9 - OTHER INCOME AND DEDUCTIONS Other income and deductions consisted of the following at December 31 (in thousands of $):
1997 1996 1995 ---- ---- ---- Gain on sale of stock options $ 1,794 $ - $ - Interest on income tax settlement 1,446 - - Interest and dividend income 4,786 4,096 5,732 Gains (losses) on fixed asset disposal 77 (36) 1,090 Donations (147) (150) (144) Income taxes and other (3,679) (2,990) (2,902) ------- -------- ------- Total other income and deductions $ 4,277 $ 920 $ 3,776 ======= ======== =======
NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other than the First Mortgage Bonds issued in connection with certain Pollution Control Bonds) are the amounts necessary to redeem 1% of the highest principal amount of each series of bonds at any time outstanding. Property additions (166 2/3% of principal amounts of bonds otherwise required to be so redeemed) have been applied in lieu of cash. It is the intent of LG&E to apply property additions to meet 1998 sinking fund requirements of the First Mortgage Bonds. The trust indenture securing the First Mortgage Bonds constitutes a direct first mortgage lien upon a substantial portion of all property owned by LG&E. The indenture, as supplemented, provides in substance that, under certain specified conditions, portions of retained earnings will not be available for the payment of dividends on common stock. No portion of retained earnings is presently restricted by this provision. Pollution Control Bonds (Louisville Gas and Electric Company Projects) issued by Jefferson and Trimble Counties, Kentucky, are secured by the assignment of loan payments by LG&E to the Counties pursuant to loan agreements, and certain series are further secured by the delivery from time to time of an equal amount of LG&E's First Mortgage Bonds, Pollution Control Series. First Mortgage Bonds so delivered are summarized in the Statements of Capitalization. No principal or interest on these First Mortgage Bonds is payable unless default on the loan agreements occurs. The interest rate reflected in the Statements of Capitalization applies to the Pollution Control Bonds. In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due November 1, 2027. Interest rates for these bonds were 3.90% and 3.85%, respectively, at December 31, 1997. The proceeds from these bonds were used to redeem 100 the outstanding 7.75% Series of Jefferson County, Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019. In October 1996, LG&E issued $22.5 million of Jefferson County, Kentucky, and $27.5 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate Series, due September 1, 2026. Interest rates for these bonds were 3.79% and 3.82%, respectively, as of December 31, 1997. In December 1996, the proceeds from the bonds were used to redeem the outstanding 7.25% Series of Jefferson County and Trimble County Pollution Control Bonds due December 1, 2016. On June 1, 1996, LG&E's First Mortgage Bonds, 5.625% Series of $16 million matured and were retired by LG&E. LG&E's First Mortgage Bonds, 6.75% Series of $20 million is scheduled to mature in June 1998, and the $20 million, 7.5% Series is scheduled for maturity in 2002. There are no scheduled maturities of Pollution Control Bonds for the five years subsequent to December 31, 1997. LG&E has no cash sinking fund requirements. NOTE 11 - NOTES PAYABLE LG&E had no notes payable at December 31, 1997, and 1996. At December 31, 1997, LG&E had unused lines of credit of $200 million, for which it pays commitment fees. The credit facility provides for short-term borrowings and support of variable rate Pollution Control Bonds. The credit lines are scheduled to expire in 2001. Management expects to renegotiate these lines when they expire. NOTE 12 - COMMITMENTS AND CONTINGENCIES CONSTRUCTION PROGRAM. LG&E had commitments in connection with its construction program aggregating approximately $7 million at December 31, 1997. Construction expenditures for the years 1998 and 1999 are estimated to total approximately $260 million. OPERATING LEASE. LG&E leases office space and accounts for all of its office space leases as operating leases. Total lease expense for 1997, 1996, and 1995, less amounts contributed by the parent company, was $1.8 million, $1.9 million, and $2 million, respectively. The future minimum annual lease payments under lease agreements for years subsequent to December 31, 1997, are as follows (in thousands of $):
1998 $ 3,071 1999 3,055 2000 3,321 2001 3,654 2002 3,594 Thereafter 8,767 ------- Total $25,462 =======
ENVIRONMENTAL. With the passage of the Clean Air Act Amendments of 1990 (the Act), LG&E already complied with the stringent sulfur dioxide emission limits required by the year 2000 as it had previously installed scrubbers on all of its coal-fired generating units. Since then, as part of its ongoing construction program, LG&E has spent $31 million for measures to meet applicable nitrogen oxide limits. While the overall financial impact of the Act on LG&E has been minimal, LG&E is closely monitoring several significant regulatory developments which may potentially impact LG&E including efforts by local officials to address the "ozone nonattainment" status of Jefferson County, Kentucky and implementation of new ozone and particulate matter standards adopted by the 101 United States Environmental Protection Agency (USEPA) in June 1997. Finally, LG&E is monitoring regulations proposed by USEPA in October 1997, that could require numerous utilities including LG&E to reduce nitrogen oxide emissions by approximately 85% from 1990 levels. LG&E has already reduced its nitrogen oxide emissions by approximately 40%. However, if finally adopted, the proposed regulations may require LG&E to incur significant capital expenditures, currently estimated as potentially in excess of $100 million, and significantly increased operation and maintenance costs. LG&E currently anticipates that a significant portion of any such capital costs could be recoverable through rates, although there can be no guarantee of such recovery. LG&E is currently addressing other emissions issues at two of its power plants. First, LG&E is conducting modeling activities in response to a notification from the Air Pollution Control District of Jefferson County (APCD) indicating that the Cane Run plant may be the source of a potential exceedance of the air quality standards for sulfur dioxide. Depending on the outcome of the modeling, LG&E may be required to undertake corrective action that could include significant capital improvements. Secondly, LG&E is working with the APCD to review the effectiveness of remedial measures aimed at controlling particulate emissions from the Mill Creek plant which allegedly damaged metal surfaces on adjacent properties. LG&E had previously established a claims resolution process which resulted in property damage settlements with adjacent residents at an aggregate cost of approximately $15 million. In related litigation, in October, 1997, the Jefferson Circuit Court dismissed all but one of the claims pursued by persons who had not previously settled with LG&E. In management's opinion, resolution of any remaining claims should not have a material adverse impact on the financial position or results of operations of LG&E. LG&E is also addressing potential liabilities for cleanup of properties where hazardous substances may have been released. LG&E has identified contamination at certain manufactured gas plant (MGP) sites currently or formerly owned by LG&E. One of the sites was conveyed to a new owner which assumed responsibility for environmental liabilities and LG&E is negotiating with potentially responsible parties and state agencies with respect to two other sites. Until conclusion of such discussions, LG&E is unable to precisely determine its remaining liability for cleanup costs at MGP sites. However, based on site studies, management currently estimates total cleanup costs within the range of $3 million to $8 million and has recorded an accrual of approximately $3 million in the accompanying financial statements. LG&E, along with other companies, has also been identified by USEPA as a potentially responsible party allegedly liable for cleanup costs under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) for certain off-site disposal facilities. LG&E has entered a final settlement for $7,500 for one site and has entered tentative settlements for an aggregate of $150,000 for the remaining sites. Tentative settlements are subject to approval by the government and entry by the court. NOTE 13 - TRIMBLE COUNTY GENERATING PLANT Trimble County Unit 1 (Trimble County), a 495-megawatt coal-fired electric generating unit placed into service in December 1990, has been the subject of numerous legal and regulatory proceedings to determine the appropriate ratemaking treatment to implement the Kentucky Public Service Commission's 1988 decision that LG&E should not be allowed to recover 25% of the cost of Trimble County from ratepayers. In December 1995, the Commission approved a unanimous settlement agreement that was filed by LG&E and other parties. Under the agreement, which resolved all outstanding issues, LG&E agreed to refund approximately $22 million to current electric customers, most of which is being refunded by credits to customers' bills over the five years 1996 through 2000. In addition, LG&E agreed to pay $900,000 per year for five years beginning in 1996 to the Metro Human Needs Alliance, Inc., a not-for-profit Louisville-based corporation, for the sole purpose of funding low-income energy assistance programs in the service territory. LG&E also agreed to revise the residential decoupling methodology approved by the Commission in 1994 in a manner that reduced revenues 102 collected from residential customers by approximately $1.8 million. Finally, the parties agreed to dismiss all appeals currently pending in state courts regarding the Commission's orders in LG&E's last general rate case. NOTE 14 - JOINTLY OWNED ELECTRIC UTILITY PLANT LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the 75% portion of the Unit, which the Commission has allowed to be reflected in customer rates, is similar to LG&E's accounting for other wholly owned utility plants. Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns a 12.12% undivided interest in the Unit, and Indiana Municipal Power Agency (IMPA) owns a 12.88% undivided interest. Each is responsible for their proportionate ownership share of operation and maintenance expenses and incremental assets, and for fuel used. The following data represent shares of the jointly owned property:
Trimble County LG&E IMPA IMEA Total ------ ------ ------ ----- Ownership interest 75% 12.88% 12.12% 100% Mw capacity 371.25 63.75 60 495
NOTE 15 - SEGMENTS OF BUSINESS 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.
(Thousands of $) 1997 1996 1995 ----------- ----------- -------------- Operating information: Operating revenues: Electric $ 614,532 $ 606,696 $ 542,337(a) Gas 231,011 214,419 181,126 ----------- ----------- ----------- Total $ 845,543 $ 821,115 $ 723,463 =========== =========== =========== Pre-tax operating income: Electric $ 197,233 $ 192,129 $ 152,199 Gas 15,034 18,393 16,651 ----------- ----------- ----------- Total $ 212,267 $ 210,522 $ 168,850 =========== =========== =========== Other information: Depreciation and amortization: Electric $ 79,958 $ 76,929 $ 74,437 Gas 13,062 12,073 11,322 ----------- ----------- ----------- Total $ 93,020 $ 89,002 $ 85,759 ============ ============ ============ Construction expenditures (b): Electric $ 81,713 $ 79,541 $ 66,661 Gas 29,180 28,338 26,762 ----------- ----------- ----------- Total $ 110,893 $ 107,879 $ 93,423 =========== =========== ============
103
(Thousands of $) 1997 1996 1995 ----------- ----------- -------------- Investment information - December 31: Identifiable assets: Electric $1,517,512 $1,505,508 $1,501,568 Gas 317,337 300,550 268,840 ----------- ----------- ----------- Total 1,834,849 1,806,058 1,770,408 Other assets (c) 220,792 200,654 209,082 ----------- ----------- ----------- Total assets $2,055,641 $2,006,712 $1,979,490 ========== ========== ==========
(a) Net of refund - Trimble County settlement of $28.3 million. (b) Excluding cost of removal and salvage. (c) Includes cash and temporary cash investments, marketable securities, accounts receivable, unamortized debt expense, and other property and investments. NOTE 16 - SELECTED QUARTERLY DATA (UNAUDITED) Selected financial data for the four quarters of 1997 and 1996 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 $) 1997 Operating revenues $225,399 $180,276 $208,435 $231,433 Net operating income 32,895 30,422 46,562 38,307 Net income 23,967 21,487 37,223 30,596 Net income available for common stock 22,840 20,326 36,077 29,445 1996 Operating revenues $226,744 $181,107 $203,818 $209,446 Net operating income 33,950 32,736 51,681 28,896 Net income 23,552 22,908 42,466 19,015 Net income available for common stock 22,396 21,772 41,320 17,885
104 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 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 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, 1997, 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. 105 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, 1997 and 1996, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of LG&E's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Louisville Gas and Electric Company as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Louisville, Kentucky Arthur Andersen LLP January 28, 1998 106 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III ITEMS 10, 11, 12 and 13 are omitted pursuant to General Instruction G, inasmuch as LG&E Energy and LG&E filed copies of their definitive proxy statement and information statement with the Commission on March 20, 1998, and March 27, 1998, respectively, pursuant to Regulation 14A under the Securities Exchange Act of 1934. Such proxy and information statements are incorporated herein by this reference. In accordance with General Instruction G of Form 10-K, the information required by Item 10 relating to executive officers has been included in Part I of this Form 10-K. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. Financial Statements (included in Item 8): LG&E Energy: Consolidated statements of income for the three years ended December 31, 1997 (page 52). Consolidated balance sheets - December 31, 1997, and 1996 (page 53). Consolidated statements of cash Flows for the three years ended December 31, 1997 (page 54). Consolidated statements of capitalization - December 31, 1997, and 1996 (page 55). Consolidated statements of retained earnings for the three years ended December 31, 1997 (page 56). Notes to consolidated financial statements (pages 56-84). Report of management (page 85). Report of independent public accountants (page 86). LG&E: Statements of income for the three years ended December 31, 1997 (page 87). Statements of retained earnings for the three years ended December 31, 1997 (page 87). Balance sheets - December 31, 1997, and 1996 (page 88). Statements of cash flows for the three years ended December 31, 1997 (page 89). Statements of capitalization - December 31, 1997, and 1996 (page 90). Notes to financial statements (pages 91-104). Report of management (page 105). Report of independent public accountants (page 106). 2. Financial Statement Schedules (included in Part IV): Schedule II Valuation and Qualifying Accounts for the three years ended December 31, 1997, for LG&E Energy (page 126) and LG&E (page 127). 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. 107 3. Unaudited Pro Forma Combined Condensed Financial Information (Page 128): Balance sheet as of December 31, 1997 (Page 129). Statements of income for the years ended December 31, 1997, 1996, and 1995 (Pages 130-132). Notes to unaudited pro forma combined condensed financial statements (Page 133). 4. Exhibits:
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 2.01 x x Copy of Agreement and Plan of Merger, dated as of May 20, 1997, by and between LG&E Energy and KU Energy, including certain exhibits thereto. [Filed as Exhibit 2 to LG&E Energy's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 3.01 x Copy of Restated Articles of Incorporation of LG&E Energy, dated November 6, 1996. [Filed as Exhibit 3.06 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated by reference herein] 3.02 x Copy of Restated Articles of Incorporation of LG&E, dated November 6, 1996. [Filed as Exhibit 3.06 to LG&E's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, and incorporated by reference herein] 3.03 x Copy of Bylaws of LG&E Energy, as amended through December 4, 1991. [Filed as Exhibit 3.03 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated by reference herein] 3.04 x Copy of By-Laws of LG&E, as amended through December 15, 1995. [Filed as Exhibit 3.06 to LG&E's Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 4.01 x x Copy of Trust Indenture dated November 1, 1949, from LG&E to Harris Trust and Savings Bank, Trustee. [Filed as Exhibit 7.01 to LG&E's Registration Statement 2-8283 and incorporated by reference herein] 4.02 x x Copy of Supplemental Indenture dated February 1, 1952, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.05 to LG&E's Registration Statement 2-9371 and incorporated by reference herein] 108
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 4.03 x x Copy of Supplemental Indenture dated February 1, 1954, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.03 to LG&E's Registration Statement 2-11923 and incorporated by reference herein] 4.04 x x Copy of Supplemental Indenture dated September 1, 1957, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.04 to LG&E's Registration Statement 2-17047 and incorporated by reference herein] 4.05 x x Copy of Supplemental Indenture dated October 1, 1960, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.05 to LG&E's Registration Statement 2-24920 and incorporated by reference herein] 4.06 x x Copy of Supplemental Indenture dated June 1, 1966, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.06 to LG&E's Registration Statement 2-28865 and incorporated by reference herein] 4.07 x x Copy of Supplemental Indenture dated June 1, 1968, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.07 to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 4.08 x x Copy of Supplemental Indenture dated June 1, 1970, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.08 to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 4.09 x x Copy of Supplemental Indenture dated August 1, 1971, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.09 to LG&E's Registration Statement 2-44295 and incorporated by reference herein] 4.10 x x Copy of Supplemental Indenture dated June 1, 1972, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.10 to LG&E's Registration Statement 2-52643 and incorporated by reference herein] 4.11 x x Copy of Supplemental Indenture dated February 1, 1975, which is a supplemental instrument to exhibit 4.01 hereto. [Filed as Exhibit 2.11 to LG&E's Registration Statement 2-57252 and incorporated by reference herein]
109
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 4.12 x x Copy of Supplemental Indenture dated September 1, 1975, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.12 to LG&E's Registration Statement 2-57252 and incorporated by reference herein] 4.13 x x Copy of Supplemental Indenture dated September 1, 1976, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.13 to LG&E's Registration Statement 2-57252 and incorporated by reference herein] 4.14 x x Copy of Supplemental Indenture dated October 1, 1976, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.14 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.15 x x Copy of Supplemental Indenture dated June 1, 1978, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.15 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.16 x x Copy of Supplemental Indenture dated February 15, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 2.16 to LG&E's Registration Statement 2-65271 and incorporated by reference herein] 4.17 x x Copy of Supplemental Indenture dated September 1, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.17 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1980, and incorporated by reference herein] 4.18 x x Copy of Supplemental Indenture dated September 15, 1979, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.18 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1980, and incorporated by reference herein] 4.19 x x Copy of Supplemental Indenture dated September 15, 1981, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.19 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 4.20 x x Copy of Supplemental Indenture dated March 1, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.20 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein]
110
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 4.21 x x Copy of Supplemental Indenture dated March 15, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.21 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.22 x x Copy of Supplemental Indenture dated September 15, 1982, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.22 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1982, and incorporated by reference herein] 4.23 x x Copy of Supplemental Indenture dated February 15, 1984, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.23 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1984, and incorporated by reference herein] 4.24 x x Copy of Supplemental Indenture dated July 1, 1985, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.24 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1985, and incorporated by reference herein] 4.25 x x Copy of Supplemental Indenture dated November 15, 1986, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1986, and incorporated by reference herein] 4.26 x x Copy of Supplemental Indenture dated November 16, 1986, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.26 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1986, and incorporated by reference herein] 4.27 x x Copy of Supplemental Indenture dated August 1, 1987, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.27 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated by reference herein] 4.28 x x Copy of Supplemental Indenture dated February 1, 1989, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.28 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated by reference herein] 4.29 x x Copy of Supplemental Indenture dated February 2, 1989, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.29 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated by reference herein]
111
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 4.30 x x Copy of Supplemental Indenture dated June 15, 1990, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.30 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated by reference herein] 4.31 x x Copy of Supplemental Indenture dated November 1, 1990, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.31 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1990, and incorporated by reference herein] 4.32 x x Copy of Supplemental Indenture dated September 1, 1992, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.32 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 4.33 x x Copy of Supplemental Indenture dated September 2, 1992, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.33 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 4.34 x x Copy of Supplemental Indenture dated August 15, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.34 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 4.35 x x Copy of Supplemental Indenture dated August 16, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.35 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 4.36 x x Copy of Supplemental Indenture dated October 15, 1993, which is a supplemental instrument to Exhibit 4.01 hereto. [Filed as Exhibit 4.36 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.01 x x Copies of Agreement between Sponsoring Companies re: Project D of Atomic Energy Commission, dated May 12, 1952, Memorandums of Understanding between Sponsoring Companies re: Project D of Atomic Energy Commission, dated September 19, 1952 and October 28, 1952, and Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission, dated October 15, 1952. [Filed as Exhibit 13(y) to LG&E's Registration Statement 2-9975 and incorporated by reference herein] 10.02 x x Copy of Modification No. 1 dated July 23, 1953, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 4.03(b) to LG&E's Registration Statement 2-24920 and incorporated by reference herein]
112
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- ------------- ---- ----------- 10.03 x x Copy of Modification No. 2 dated March 15, 1964, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02c to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.04 x x Copy of Modification No. 3 and No. 4 dated May 12, 1966 and January 7, 1967, respectively, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibits 4(a)(13) and 4(a)(14) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.05 x x Copy of Modification No. 5 dated August 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 13(c) to LG&E's Registration Statement 2-27316 and incorporated by reference herein] 10.06 x x Copies of (i) Inter-Company Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies (which Agreement includes as Exhibit A the Power Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Indiana-Kentucky Electric Corporation); (ii) First Supplementary Transmission Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iii) Inter-Company Bond Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies; (iv) Inter-Company Bank Credit Agreement, dated July 10, 1953, between Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 5.02f to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.07 x x Copy of Modification No. 1 and No. 2 dated June 3, 1966 and January 7, 1967, respectively, to Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibits 4(a)(8) and 4(a)(10) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.08 x x Copies of Amendments to Agreements (iii) and (iv) referred to under 10.06 above as follows: (i) Amendment to Inter-Company Bond Agreement and (ii) Amendment to Inter-Company Bank Credit Agreement. [Filed as Exhibit 5.02h to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.09 x x Copy of Modification No. 1, dated August 20, 1958, to First 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]
113
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.10 x x Copy of Modification No. 2, dated April 1, 1965, to the First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02j to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.11 x x Copy of Modification No. 3, dated January 20, 1967, to First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 4(a)(7) to LG&E's Registration Statement 2-26063 and incorporated by reference herein] 10.12 x x Copy of Modification No. 6 dated November 15, 1967, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 4(g) to LG&E's Registration Statement 2-28524 and incorporated by reference herein] 10.13 x x Copy of Modification No. 3 dated November 15, 1967, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 4.02m to LG&E's Registration Statement 2-37368 and incorporated by reference herein] 10.14 x x Copy of Modification No. 7 dated November 5, 1975, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02n to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.15 x x Copy of Modification No. 4 dated November 5, 1975, to the Inter-Company Power Agreement dated July 10, 1953. [Filed as Exhibit 5.02o to LG&E's Registration Statement 2-56357 and incorporated by reference herein] 10.16 x x Copy of Modification No. 4 dated April 30, 1976, to First Supplementary Transmission Agreement, dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 5.02p to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 10.17 x x Copy of Modification No. 8 dated June 23, 1977, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02q to LG&E's Registration Statement 2-61607 and incorporated by reference herein] 114 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.18 x x Copy of Modification No. 9 dated July 1, 1978, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 5.02r to LG&E's Registration Statement 2-63149 and incorporated by reference herein] 10.19 x x Copy of Modification No. 10 dated August 1, 1979, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 2 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.20 x x Copy of Modification No. 11 dated September 1, 1979, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 3 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.21 x x Copy of Modification No. 5 dated September 1, 1979, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 4 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1979, and incorporated by reference herein] 10.22 x x Copy of Modification No. 12 dated August 1, 1981, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.25 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.23 x x Copy of Modification No. 6 dated August 1, 1981, to Inter-Company Power Agreement dated July 5, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.26 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1981, and incorporated by reference herein] 10.25 x x Copy of Supplemental Executive Retirement Plan as amended through January 3, 1990, 115 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- covering all officers of LG&E. [Filed as Exhibit 10.29 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated by reference herein] 10.26 x x Copy of LG&E Energy Corp. Deferred Stock Compensation Plan effective January 1, 1992, covering non-employee directors of the Company and its subsidiaries. [Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated by reference herein] 10.27 x x Copy of form of change in control agreement for officers of LG&E Energy Corp. [Filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 10.28 x x Copy of Supplemental Executive Retirement Plan for R. W. Hale, effective June 1, 1989. [Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 10.29 x x Copy of Nonqualified Savings Plan covering officers of the Company, effective January 1, 1992. [Filed as Exhibit 10.43 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 10.30 x x Copy of Modification No. 13 dated September 1, 1989, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.31 x x Copy of Modification No. 14 dated January 15, 1992, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 10.43 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.32 x x Copy of Modification No. 7 dated January 15, 1992, to Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and Sponsoring Companies. [Filed as Exhibit 10.44 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.33 x x Copy of Modification No. 15 dated February 15, 1993, to the Power Agreement between Ohio Valley Electric Corporation and Atomic Energy Commission. [Filed as Exhibit 116 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.45 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.34 x x Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2001) covering the transmission of natural gas. Copy of Firm No Notice Transportation Agreement effective November 1, 1993, between Texas Gas Transmission 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, 1998) 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] 10.35 x x Copy of LG&E Energy Corp. Stock Option Plan for Non-Employee Directors. [Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] 10.36 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] 10.37 x x Copy of Amendment dated March 1 1995, to Firm No-Notice Transportation Agreements dated November 1, 1993 (2-Year, 5-Year and 8-Year), between Texas Gas Transmission Corporation and LG&E covering the transmission of natural gas. [Filed as Exhibit 10.44 of LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.38 x x Copy of Modification No. 9, dated August 17, 1995, to the Inter-Company Power Agreement dated July 10, 1953, among Ohio Valley Electric Corporation and the Sponsoring Companies. [Filed as Exhibit 10.39 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.39 x x Copy of Agreement and Plan of Merger, dated February 10, 1995, between LG&E Natural Inc., formerly known as Hadson Corporation, Carousel Acquisition Corporation and the 117 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- Company. [Filed as Exhibit 2 of Schedule 13D by the Company on February 21, 1995, and incorporated by reference herein] 10.40 x x Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E (expires October 31, 1998) 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] 10.41 x x Copy of Firm Transportation Agreement, dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E (expires October 31, 2000) covering the transportation of natural gas [Filed as Exhibit 10.41 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.42 x x Copy of Coal Supply Agreement, dated January 1, 1996, between Lafayette Coal Company, Black Beauty Coal Company and LG&E covering the purchase of coal. [Filed as Exhibit 10.46 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.43 x x Copy of Coal Supply Agreement, dated December 15, 1995, between W.B. Coal Company, Inc., Windsor Coal Company and LG&E covering the purchase of coal. [Filed as Exhibit 10.48 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.44 x x Copy of Coal Supply Agreement, dated June 1, 1996, between Peabody Coalsales Company and LG&E covering the purchase of coal. [Filed as Exhibit 10.49 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.45 x x Copy of Coal Supply Agreement, dated June 1, 1996, between Kindill Mining, Inc. and LG&E covering the purchase of coal. [Filed as Exhibit 10.46 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.46 x x Copy of Letter Amendment, dated October 31, 1996, to the Coal Supply Agreement dated June 1, 1996, between Kindill Mining, Inc. and LG&E covering the purchase of coal. [Filed as Exhibit 10.47 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 118
Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.47 x x Copy of Amended and Restated Omnibus Long-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.48 x x Copy of Short-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.53 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.49 x x Copy of form of first amendment to change in control agreement for officers of the Company and key employees dated as of January 1, 1996. [Filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.50 x x Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1992. [Filed as Exhibit 10.55 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.51 x x Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1995. [Filed as Exhibit 10.56 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.52 x x Copy of Amendment to the Non-Qualified Savings Plan, effective January 1, 1995. [Filed as Exhibit 10.57 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.53 x x Copy of Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1992. [Filed as Exhibit 10.58 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.54 x x Copy of Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1993. [Filed as Exhibit 10.59 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.55 x x Copy of Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1995. [Filed as Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 119 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.56 x x Copy of Amendment to the Supplemental Executive Retirement Plan, effective May 1, 1995. [Filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 10.57 x x Copy of Form of Master Gas Purchase Agreement, dated December 14, 1993, among Santa Fe, SFEOP and AGPC. [Filed as Exhibit 10.23 to LG&E Natural Inc.'s, formerly known as Hadson Corporation, Registration Statement on Form S-4, File No. 33-68224, and incorporated by reference herein] 10.58 x x Copy of Credit Agreement, dated as of December 18, 1995, among LG&E, as Borrower, the Banks named therein, PNC Bank, Kentucky, Inc. as Agent and Bank of Montreal as Co-Agent. [Filed as Exhibit 10.01 to the LG&E's Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1996, and incorporated by reference herein] 10.59 x x Copy of Firm Transportation Agreement, dated November 1, 1996, between LG&E and Tennessee Gas Pipeline Company for 30,000 MMBtu per day in Firm Transportation Service under Tennessee's Rate FT-A (expires October 31, 2001). [Filed as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.60 x x Copy of Amendment No. 1, dated as of November 5, 1996, to Credit Agreement dated as of December 18, 1995, by and among Louisville Gas and Electric Company, the Banks party thereto, and PNC Bank, Kentucky, Inc. as Agent and Bank of Montreal as Co-Agent. [Filed as Exhibit 10.59 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.61 x x Copy of Power Purchase and Sale Agreement, dated as of November 19, 1996, among the Company, LG&E Power Marketing Inc., and Oglethorpe Power Corporation. [Filed as Exhibit 10.66 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 10.62 x x Copy of Power Purchase and Sale Agreement, dated as of January 1, 1997, among LG&E Power Marketing Inc., LG&E Power Inc., and Oglethorpe Power Corporation. [Filed as Exhibit 10.67 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 120 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.63 x Copy of U.S. $500,000,000 Credit Agreement, dated as of September 5, 1997, among LG&E Capital Corp., as Borrower, and the Banks named therein, as Lenders, and Chase Securities Inc., as Syndication Agent, Bank of Montreal, as Administrative Agent, and Morgan Guaranty Trust Company of New York, PNC Bank, Kentucky, Inc., The Bank of New York, The First National Bank of Chicago and Wachovia Bank, N.A., as Co-Agents. [Filed as Exhibit 10.01 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.64 x Copy of U.S. $ 200,000,000 Credit Agreement, dated as of September 5, 1997, among LG&E Capital Corp., as Borrower, and the Banks named therein, as Lenders, and Chase Securities Inc., as Syndication Agent, Bank of Montreal, as Administrative Agent, and Morgan Guaranty Trust Company of New York, PNC Bank, Kentucky, Inc., The Bank of New York, The First National Bank of Chicago and Wachovia Bank, N.A., as Co-Agents. [Filed as Exhibit 10.02 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.65 x Copy of Support Agreement, dated as of September 5, 1997, between LG&E Energy Corp. and LG&E Capital Corp. [Filed as Exhibit 10.03 to LG&E Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated by reference herein] 10.66 x KU Energy Stock Option Agreement, dated as of May 20, 1997, by and between KU Energy and LG&E Energy. [Filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 10.67 x Copy of LG&E Energy Stock Option Agreement, dated as of May 20, 1997, by and between KU Energy and LG&E Energy. [Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed May 30, 1997 and incorporated by reference herein] 121 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.68 x x Copy of Employment Agreement between LG&E Energy and Roger W. Hale dated May 20, 1997, effective following the Merger. [Filed as Annex D to Exhibit 2.01 of this Form 10-K and incorporated by reference herein] 10.69 x x Copy of LG&E Energy Corp. and Louisville Gas and Electric Company Non-Officer Senior Management Pension Restoration Plan, effective May 1, 1996. [Filed as Exhibit 10.69 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.70 x x Copy of Employment Contract between the Company and Roger W. Hale effective January 1, 1997. [Filed as Exhibit 10.70 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] 10.72 x Copy of Indenture between LG&E Capital Corp. and the Bank of New York as Trustee dated as of January 15, 1998. 10.73 x Copy of First Supplemental Indenture between LG&E Capital Corp. and The Bank of New York as Trustee dated as of January 15, 1998. 10.74 x x Copy of Supplemental Executive Retirement Plan as amended through January 1, 1998, covering officers of LG&E Energy. 10.75 x x Copy of form of Change in Control Agreement for officers of LG&E Energy Corp. 10.76 x x Copy of Coal Supply Agreement between LG&E and Kindill Mining, Inc., dated July 1, 1997. 10.77 x x Copy of Coal Supply Agreement between LG&E and Lafayette Coal dated January 1, 1997. 10.78 x x Copy of Coal Supply Agreement between LG&E and Charolais Corp. dated January 1, 1997, and assigned to Centennial Resources Inc. as of March 7, 1997, and Amendments #1 and #2 dated August 1, 1997, and January 1, 1998, thereto. 122 Applicable to Form 10-K of Exhibit LG&E No. Energy LG&E Description - ------- -------------- ---- ----------- 10.79 x x Copy of Coal Supply Agreement between LG&E and Warrior Coal Corp. dated January 1, 1997, and Amendments #1 and #2 dated May 1, 1997, and December 1, 1997, thereto. 10.80 x x Copy of Coal Supply Agreement between LG&E and Andalex Resources, Inc., dated April 1, 1997, and an Amendment dated August 1, 1997, thereto. 10.81 x x Copies of Amendments dated September 23, 1997, to Firm No-Notice Transportation Agreements dated November 1, 1993, between Texas Gas Transmission Corporation and LG&E, as amended. 10.82 x x Copies of Amendments dated September 23, 1997, to Firm Transportation Agreements dated March 1, 1995, between Texas Gas Transmission Corporation and LG&E, as amended. 10.83 x x Copy of Gas Transportation Agreement dated November 1, 1996, between Tennessee Gas Pipeline Company and LG&E and amendments dated February 4, 1997, thereto. [Certain portions of this exhibit have been omitted pursuant to a confidential treatment request filed with the Securities and Exchange Commission] 12 x Computation of Ratio of Earnings to Fixed Charges for LG&E. 21 x x Subsidiaries of the Registrant. 23.01 x Consent of Independent Public Accountants for LG&E Energy Corp. 23.02 x Consent of Independent Public Accountants for LG&E. 23.03 x x Consent of Independent Public Accountants for KU Energy. 24 x x Power of Attorney. 27 x x Financial Data Schedules for LG&E Energy Corp. and LG&E. 99.01 x x Cautionary Statement for purposes of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. 99.02 x Description of Common Stock. 99.03 x x Audited Financial Statements of KU Energy Corporation. [Item 8 of Part II of KU Energy Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 1-10944, and incorporated by reference herein]
(b) Executive Compensation Plans and Arrangements: Supplemental Executive Retirement Plan as amended through January 3, 1990, covering all officers of 123 LG&E. [Filed as Exhibit 10.29 to LG&E's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated by reference herein] LG&E Energy Corp. Deferred Stock Compensation Plan effective January 1, 1992, covering non-employee directors of the Company and its subsidiaries. [Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated by reference herein] Form of change in control agreement for officers of LG&E Energy Corp. [Filed as Exhibit 10.40 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated by reference herein] 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] 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] LG&E Energy Corp. Stock Option Plan for Non-Employee Directors. [Filed as Exhibit 10.51 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated by reference herein] Amended and Restated Omnibus Long-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Short-Term Incentive Plan effective January 1, 1996, covering officers and key employees of the Company. [Filed as Exhibit 10.53 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Form of first amendment to change in control agreement for officers of the Company and key employees dated as of January 1, 1996. [Filed as Exhibit 10.54 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] 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] 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] 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] 124 Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1992. [Filed as Exhibit 10.58 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1993. [Filed as Exhibit 10.59 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Amendment to the Supplemental Executive Retirement Plan, effective January 1, 1995. [Filed as Exhibit 10.60 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Amendment to the Supplemental Executive Retirement Plan, effective May 1, 1995. [Filed as Exhibit 10.61 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated by reference herein] Copy of Employment Contract between the Company and Roger W. Hale effective January 1, 1997. [Filed as Exhibit 10.70 to LG&E Energy's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated by reference herein] Copy of Employment Agreement between LG&E Energy and Roger W. Hale dated May 20, 1997, effective following the merger [Filed as Annex D to Exhibit 2.01 of this Form 10-K] 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] Copy of form of Change in Control Agreement for officers of LG&E Energy Corp. [Filed as Exhibit 10.75 to this Form 10-K] (c) Reports on Form 8-K: On October 17, 1997, LG&E Energy Corp. filed a report on Form 8-K stating that on October 14, 1997, the board of directors of LG&E Energy Corp. elected Jeffery T. Grade, 53, to the boards of LG&E Energy Corp. and Louisville Gas and Electric Company. Mr. Grade will fulfill the term of Mr. Ronald L. Bittner, who passed away Aug. 31. On January 8, 1998, LG&E Energy Corp. filed a report on Form 8-K stating that: (1) On December 19, 1997, LG&E Power Argentina I Inc. ("LG&E Argentina"), a wholly-owned indirect subsidiary of the Company, entered into a Put and Call Agreement with Pluspetrol Resources Corporation ("Pluspetrol") and ASTRA Compania Argentina de Petroleo S.A. ("Astra") pursuant to which Pluspetrol and Astra have an option to purchase from LG&E Argentina, and LG&E Argentina has an option to sell to Pluspetrol and Astra, LG&E Argentina's one-third interest in the company which owns and operates the San Miguel facility, at a purchase price which is established based upon a variable pricing structure. (2) On December 30, 1997, LG&E Energy Corp. announced that it elected R. Foster Duncan, 43, to the position of executive vice president, planning and development, effective January 12, 1998. 125
LG&E Energy Corp. and Subsidiaries Schedule II Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1997 (Thousands of $) (a) Accumulated Other Accounts Price Deferred Property Receivable Risk Income Taxes and (Uncollectible Management (NOL Carry- Investments Accounts) Reserves forwards) ----------- -------------- ---------- ------------- Balance December 31, 1994 $ 2,545 $ 1,539 $ - $ - Additions: Charged to costs and expenses 6,523 4,039 - - Other additions 41 4,614 - 29,501 Deductions: Net charges of nature for which reserves were created - 3,923 - - Other deductions 502 - - - --------- ---------- ---------- ----------- Balance December 31, 1995 8,607 6,269 - 29,501 Additions: Charged to costs and expenses 10,934 2,940 7,241 - Other additions 641 616 - - Deductions: Net charges of nature for which reserves were created - 3,224 - - Other deductions 1,479 - - 3,900 -------- ---------- ---------- -------- Balance December 31, 1996 18,703 6,601 7,241 25,601 Additions: Charged to costs and expenses 11,793 3,982 - - Other additions 7,570 1,997 - - Deductions: Net charges of nature for which reserves were created 354 2,838 - - Other deductions - 75 2,003 - ---------- --------- ------- ------------ Balance December 31, 1997 $37,712 $ 9,667 $ 5,238 $25,601 ======= ======= ======= =======
(a) Partially offsets a deferred tax debit included in accumulated deferred income taxes. The debit represents net operating loss carryforwards available from a previous acquisition. 126
Louisville Gas and Electric Company Schedule II Schedule II - Valuation and Qualifying Accounts For the Three Years Ended December 31, 1997 (Thousands of $) Other Accounts Property Receivable and (Uncollectible Investments Accounts) ----------- -------------- Balance December 31, 1994 $ 63 $ 1,203 Additions: Charged to costs and expenses - 3,200 Deductions: Net charges of nature for which reserves were created - 3,043 ---------- ------- Balance December 31, 1995 63 1,360 Additions: Charged to costs and expenses - 2,600 Deductions: Net charges of nature for which reserves were created - 2,490 ---------- ------- Balance December 31, 1996 63 1,470 Additions: Charged to costs and expenses - 2,300 Deductions: Net charges of nature for which reserves were created - 2,475 ---------- ------- Balance December 31, 1997 $ 63 $ 1,295 ======== =======
127 Unaudited Pro Forma Combined Condensed Consolidated Financial Information The following unaudited pro forma financial information combines the historical balance sheets and statements of income of LG&E Energy and KU Energy, including their respective subsidiaries, after giving effect to the Merger. The unaudited pro forma combined condensed balance sheet at December 31, 1997 gives effect to the Merger as if it had occurred at December 31, 1997. The unaudited pro forma combined condensed statements of income for all periods give effect to the Merger as if it had occurred at the beginning of the periods presented. These statements are prepared on the basis of accounting for the Merger as a pooling of interests and are based on the assumptions set forth in the notes thereto. The pro forma financial information does not give effect to the expected synergies of the transaction. The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical financial statements and related notes thereto of LG&E Energy and KU Energy. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Merger been consummated on the date as of which, or at the beginning of the periods for which, the Merger is being given effect, nor is it necessarily indicative of future operating results or financial position. 128 LG&E Energy Corp. Unaudited Pro Forma Combined Condensed Balance Sheet At December 31, 1997 (Thousands of $)
LG&E KU Energy Pro Forma Pro Forma Energy (As Reported) Adjustment Combined (As Reported) (Note 1) (Note 2) (Note 3) ------------- -------- -------- -------- ASSETS: Current assets: Cash and temporary cash investments....................... $ 104,366 $ 21,726 $ - $ 126,092 Marketable securities..................................... 22,300 - - 22,300 Accounts receivable - less reserve........................ 521,166 74,937 (156) 595,947 Materials and supplies - primarily at average cost: Fuel (predominantly coal).............................. 17,651 27,799 - 45,450 Gas stored underground................................. 49,396 - - 49,396 Other.................................................. 31,866 23,648 - 55,514 Price risk management assets.............................. 120,341 - - 120,341 Prepayments and other..................................... 10,599 5,769 - 16,368 ------------ ------------ ---------------- ----------- Total current assets................................... 877,685 153,879 (156) 1,031,408 ------------ ------------ ---------------- ----------- Utility plant: At original cost.......................................... 2,779,234 2,611,634 - 5,390,868 Less: reserve for depreciation........................... 1,072,842 1,128,282 - 2,201,124 ------------ ------------ ---------------- ----------- Net utility plant...................................... 1,706,392 1,483,352 - 3,189,744 ------------ ------------ ---------------- ----------- Other property and investments - less reserve: Investments in affiliates................................. 168,276 2,157 - 170,433 Non-utility property and plant, net....................... 421,486 2,666 - 424,152 Price risk management assets.............................. 44,240 - - 44,240 Other ................................................... 24,743 42,409 - 67,152 ------------ ------------ ---------------- ----------- Total other property and investments................... 658,745 47,232 - 705,977 ------------ ------------ ---------------- ----------- Deferred debits and other assets.............................. 123,569 52,799 (5,012) 171,356 ------------ ------------ ---------------- ----------- Total assets.............................................. $ 3,366,391 $ 1,737,262 $ (5,168) $ 5,098,485 ============ ============ ================ =========== CAPITAL AND LIABILITIES: Current liabilities: Long-term debt due within one year........................ $ 20,000 $ 21 $ - $ 20,021 Notes payable............................................. 360,184 33,600 - 393,784 Accounts payable.......................................... 449,230 29,561 3,082 481,873 Trimble County settlement................................. 13,248 - - 13,248 Price risk management liabilities......................... 131,107 - - 131,107 Other ................................................... 84,966 42,733 (3,330) 124,369 ------------ ------------ ---------------- ----------- Total current liabilities.............................. 1,058,735 105,915 (248) 1,164,402 ------------ ------------ ---------------- ----------- Long-term debt................................................ 664,339 546,351 - 1,210,690 Deferred credits and other liabilities: Accumulated deferred income taxes......................... 327,343 252,492 - 579,835 Investment tax credit, in process of amortization......... 75,800 26,131 - 101,931 Accumulated provision for pensions and related benefits... 43,883 35,664 79,547 Regulatory liability...................................... 65,502 51,577 - 117,079 Price risk management liabilities......................... 23,803 - - 23,803 Other ................................................... 67,576 15,010 - 82,586 ------------ ------------ ---------------- ----------- Total deferred credits and other liabilities........... 603,907 380,874 - 984,781 ------------ ------------ ---------------- ----------- Minority interest............................................. 105,985 - - 105,985 Cumulative preferred stock.................................... 98,353 40,000 - 138,353 Common equity................................................. 835,072 664,122 (4,920) 1,494,274 ------------ ------------ ---------------- ----------- Total capital and liabilities............................. $ 3,366,391 $ 1,737,262 $ (5,168) $ 5,098,485 ============ ============ ================ ===========
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements. 129 LG&E Energy Corp. Unaudited Pro Forma Combined Condensed Statement of Income Year Ended December 31, 1997 (Thousands of $ Except Per Share Data)
LG&E KU Energy Pro Forma Pro Forma Energy (As Reported) Adjustment Combined (As Reported) (Note 1) (Note 2) (Note 3) ------------- -------- -------- -------- REVENUES: Energy marketing and trading.............................. $3,266,811 $ - $ (4) $3,266,807 Electric utility.......................................... 615,159 716,410 (305) 1,331,264 Gas utility............................................... 231,011 - - 231,011 Argentine gas distribution and other...................... 150,839 5,899 - 156,738 ---------- --------------- ------------- ---------- Total revenues......................................... 4,263,820 722,309 (309) 4,985,820 ---------- --------------- ------------- ---------- COST OF REVENUES: Energy marketing and trading.............................. 3,245,234 - (14) 3,245,220 Fuel and power purchased.................................. 166,692 260,981 (295) 427,378 Gas supply expenses....................................... 158,929 - - 158,929 Argentine gas distribution and other...................... 84,873 - - 84,873 ---------- --------------- ------------- ---------- Total cost of revenues................................. 3,655,728 260,981 (309) 3,916,400 ---------- --------------- ------------- ---------- Gross profit.................................................. 608,092 461,328 - 1,069,420 OPERATING EXPENSES: Operation and maintenance: Energy marketing and trading........................... 40,012 - - 40,012 Utility................................................ 214,635 201,247 - 415,882 Argentine gas distribution and other................... 49,562 3,661 - 53,223 Depreciation and amortization............................. 115,736 84,297 - 200,033 Non-recurring charges..................................... (1,342) - - (1,342) ---------- --------------- ------------- ---------- Total operating expenses............................... 418,603 289,205 - 707,808 ---------- --------------- ------------- ---------- Equity in earnings of joint ventures.......................... 21,014 - - 21,014 ---------- --------------- ------------- ---------- OPERATING INCOME.............................................. 210,503 172,123 - 382,626 Other income and (deductions)................................. 15,476 3,960 - 19,436 Interest charges and preferred dividends...................... 63,865 41,959 - 105,824 Minority interest............................................. 9,035 - - 9,035 ---------- --------------- ------------- ---------- Income before income taxes.................................... 153,079 134,124 - 287,203 Income taxes.................................................. 55,262 48,945 - 104,207 ---------- --------------- ------------- ---------- NET INCOME (Note 5)........................................... $ 97,817 $ 85,179 $ - $ 182,996 ========== =============== ============= ========== Average common shares outstanding (Note 4).................... 66,471 37,818 25,338 129,627 Earnings per share of common stock - basic and diluted........ $1.47 $2.25 $ - $1.41 ===== ===== ======= =====
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements. 130 LG&E Energy Corp. Unaudited Pro Forma Combined Condensed Statement of Income Year Ended December 31, 1996 (Thousands of $ Except Per Share Data)
LG&E KU Energy Pro Forma Pro Forma Energy (As Reported) Adjustment Combined (As Reported) (Note 1) (Note 2) (Note 3) ------------- -------- -------- -------- REVENUES: Energy marketing and trading (Note 6)..................... $2,748,873 $ - $ - $2,748,873 Electric utility.......................................... 607,160 711,686 (760) 1,318,086 Gas utility............................................... 214,419 - - 214,419 Argentine gas distribution and other...................... 19,013 4,522 - 23,535 ----------- --------- ------------ ----------- Total revenues......................................... 3,589,465 716,208 (760) 4,304,913 ----------- --------- ------------ ----------- COST OF REVENUES: Energy marketing and trading.............................. 2,664,399 - (257) 2,664,142 Fuel and power purchased.................................. 166,323 260,688 (503) 426,508 Gas supply expenses....................................... 140,482 - - 140,482 Argentine gas distribution and other...................... 13,059 - - 13,059 ----------- --------- ------------ ----------- Total cost of revenues................................. 2,984,263 260,688 (760) 3,244,191 ----------- --------- ------------ ----------- Gross profit.................................................. 605,202 455,520 - 1,060,722 OPERATING EXPENSES: Operation and maintenance: Energy marketing and trading........................... 41,916 - - 41,916 Utility................................................ 214,786 201,811 - 416,597 Argentine gas distribution and other................... 25,991 2,759 - 28,750 Depreciation and amortization............................. 103,556 80,612 - 184,168 Non-recurring charges (Notes 7 and 8)..................... 26,330 5,493 - 31,823 ----------- --------- ------------ ----------- Total operating expenses............................... 412,579 290,675 - 703,254 ----------- --------- ------------ ----------- Equity in earnings of joint ventures.......................... 18,818 - - 18,818 ----------- --------- ------------ ----------- OPERATING INCOME.............................................. 211,441 164,845 - 376,286 Other income and (deductions)................................. 3,808 5,327 - 9,135 Interest charges and preferred dividends...................... 53,887 41,889 - 95,776 ----------- --------- ------------ ----------- Income before income taxes.................................... 161,362 128,283 - 289,645 Income taxes.................................................. 57,359 46,334 - 103,693 ----------- --------- ------------ ----------- NET INCOME ...... $ 104,003 $ 81,949 $ - $ 185,952 =========== ========= ============ =========== Average common shares outstanding (Note 4).................... 66,294 37,818 25,338 129,450 Earnings per share of common stock - basic and diluted........ $1.57 $2.17 $ - $1.44 ===== ===== ======= ===== See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
131 LG&E Energy Corp. Unaudited Pro Forma Combined Condensed Statement of Income Year Ended December 31, 1995 (Thousands of $ Except Per Share Data)
LG&E KU Energy Pro Forma Pro Forma Energy (As Reported) Adjustment Combined (As Reported) (Note 1) (Note 2) (Note 3) ----------- --------- ------------ ----------- REVENUES: Energy marketing and trading.............................. $ 630,249 $ - $ (1,616) $ 628,633 Electric utility.......................................... 571,086 686,400 (2,212) 1,255,274 Refund - Trimble County settlement (Note 9)............... (28,300) - - (28,300) Gas utility............................................... 181,126 - - 181,126 Argentine gas distribution and other...................... 20,519 4,028 - 24,547 ----------- --------- ------------ ----------- Total revenues......................................... 1,374,680 690,428 (3,828) 2,061,280 ----------- --------- ------------ ----------- COST OF REVENUES: Energy marketing and trading.............................. 604,302 - - 604,302 Fuel and power purchased.................................. 154,832 259,424 (3,828) 410,428 Gas supply expenses....................................... 110,738 - - 110,738 Argentine gas distribution and other...................... 19,858 - - 19,858 ----------- --------- ------------ ----------- Total cost of revenues................................. 889,730 259,424 (3,828) 1,145,326 ----------- --------- ------------ ----------- Gross profit.................................................. 484,950 431,004 - 915,954 OPERATING EXPENSES: Operation and maintenance: Energy marketing and trading........................... 18,177 - - 18,177 Utility................................................ 203,284 198,712 - 401,996 Argentine gas distribution and other................... 21,697 2,969 - 24,666 Depreciation and amortization............................. 94,393 75,268 - 169,661 ----------- --------- ------------ ----------- Total operating expenses............................... 337,551 276,949 - 614,500 ----------- --------- ------------ ----------- Equity in earnings of joint ventures.......................... 28,158 - - 28,158 ----------- --------- ------------ ----------- OPERATING INCOME.............................................. 175,557 154,055 - 329,612 Other income and (deductions)................................. 5,389 6,092 - 11,481 Interest charges and preferred dividends...................... 53,822 42,273 - 96,095 ----------- --------- ------------ ----------- Income before income taxes.................................... 127,124 117,874 - 244,998 Income taxes.................................................. 44,294 41,821 - 86,115 ------------ ---------- -------------- ------------ NET INCOME ................................................... $ 82,830 $ 76,053 $ - $ 158,883 =========== ========= ============== =========== Average common shares outstanding (Note 4).................... 66,105 37,818 25,338 129,261 Earnings per share of common stock - basic and diluted........ $1.25 $2.01 $ - $1.23 ===== ===== ======= ===== See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Statements.
132
LG&E Energy Corp. Notes to Unaudited Pro Forma Combined Condensed Financial Statements. 1. Reclassifications have been made to certain "as reported" account balances reflected in KU Energy's financial statements to conform to this reporting presentation. All other financial statement presentation and accounting policy differences are immaterial and have not been adjusted in the pro forma combined condensed financial statements. 2. Intercompany transactions (power purchased and power sales transactions) between LG&E Energy and KU Energy during the periods presented were eliminated through pro forma adjustments. 3. Merger-related transaction costs are currently estimated to be approximately $16.5 million (including fees for financial advisors, attorneys, accountants, consultants, filings and printing). LG&E Energy and KU Energy have incurred transaction costs of $13.3 million through December 31, 1997, which are included in deferred debits and other assets in the pro forma combined condensed balance sheet. None of the estimated cost savings resulting from the Merger or costs to achieve such savings have been reflected in the pro forma combined condensed statements of income. A charge of $4.92 million ($8.25 million, net of income taxes of $3.33 million) as a pro forma adjustment to retained earnings and a credit of $5.0 million ($8.25 million less $13.3 million actual charges incurred through December 31, 1997) as a pro forma adjustment to deferred debits and other assets have been made in the pro forma combined condensed balance sheet to recognize such estimated transaction costs and the proposed treatment following the consummation of the Merger. 4. The pro forma combined condensed financial statements reflect the conversion of each share of KU Energy Common Stock (no par value) outstanding into 1.67 shares of LG&E Energy Common Stock (no par value) as provided in the Merger Agreement. The pro forma combined condensed financial statements are presented as if the companies were combined during all periods included therein. 5. LG&E Energy's non-recurring charges for the year ended December 31, 1997, included a net insurance settlement of $7.6 million related to losses incurred in its Canadian office during 1996, partially offset by a charge of $6.3 million to reflect the costs of consolidating the trading, risk management and administrative operations of its power and gas marketing divisions into a single energy marketing unit, located in its Louisville headquarters. 6. LG&E Energy adopted the mark-to-market method of accounting for its energy trading and price risk management activities during 1996. This resulted in an increase in Energy Marketing and Trading revenues and income from operations of $26.2 million for 1996. The impact on prior period financial results was immaterial. 7. LG&E Energy's net income for the year ended December 31, 1996, includes a non-recurring after-tax charge of $17.1 million for losses in its natural gas marketing business resulting from unauthorized transactions entered into by a marketer in its Calgary, Alberta, office. This charge is reflected in non-recurring charges on the respective statements of income. 8. KU Energy's net income for the year ended December 31, 1996, includes a non-recurring write-off of nonutility investments of $5.5 million which is reflected in non-recurring charges. 9. LG&E Energy's 1995 operating revenues were reduced by $28.3 million related to a settlement agreement approved by the Kentucky Commission on December 8, 1995, which resolved numerous legal and regulatory 133 proceedings to determine the appropriate ratemaking treatment to implement the Kentucky Commission's 1988 decision that LG&E should not be allowed to recover 25% of the cost of Trimble County Unit 1 (Trimble County) from ratepayers.
134 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LG&E ENERGY CORP. Registrant March 4, 1998 /s/ Victor A. Staffieri - ------------- ---------------------------- (Date) Victor A. Staffieri Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- Roger W. Hale Chairman of the Board, President and Chief Executive Officer (Prin- cipal Executive Officer); Victor A. Staffieri Chief Financial Officer (Principal Financial and Accounting Officer); William C. Ballard, Jr. Director; Owsley Brown, II Director; S. Gordon Dabney Director; Gene P. Gardner Director; Jeffrey T. Grade Director; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; T. Ballard Morton, Jr. Director; and Dr. Donald C. Swain Director. By /s/ Victor A. Staffieri March 4, 1998 ----------------------- Victor A. Staffieri (Attorney-In-Fact)
135 SIGNATURES 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 4, 1998 /s/ Victor A. Staffieri - ------------- ----------------------------- (Date) Victor A. Staffieri Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date - --------- ----- ---- Roger W. Hale Chairman of the Board and Chief Executive Officer (Principal Executive Officer); Victor A. Staffieri Chief Financial Officer (Principal Financial and Accounting Officer); William C. Ballard, Jr. Director; Owsley Brown, II Director; S. Gordon Dabney Director; Gene P. Gardner Director; Jeffrey T. Grade Director; J. David Grissom Director; David B. Lewis Director; Anne H. McNamara Director; T. Ballard Morton, Jr. Director; and Dr. Donald C. Swain Director. By /s/ Victor A. Staffieri March 4, 1998 ----------------------- Victor A. Staffieri (Attorney-In-Fact)
136 EX-10.72 2 EX-10.72 INDENTURE (101 PAGES) Exhibit 10.72 LG&E CAPITAL CORP. AND THE BANK OF NEW YORK, AS TRUSTEE ______________ INDENTURE DATED AS OF JANUARY 15, 1998 ______________ NOTES TABLE OF CONTENTS*
PAGE ---- PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 RECITALS: Purpose of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Compliance with legal requirements . . . . . . . . . . . . . . . . . . . . . . . . .1 Purpose of and consideration for Indenture . . . . . . . . . . . . . . . . . . . . .1 ARTICLE ONE Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 SECTION 1.01. Certain Terms Defined. . . . . . . . . . . . . . . . . . . . . .2 "Accredited Investor Notes". . . . . . . . . . . . . . . . . . . . . . . .2 "Affiliate". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 "Agent Members". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 "Attributable Debt". . . . . . . . . . . . . . . . . . . . . . . . . . . .2 "Authenticating Agent" . . . . . . . . . . . . . . . . . . . . . . . . . .2 "Authorized Officer" . . . . . . . . . . . . . . . . . . . . . . . . . . .2 "Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Board Resolution" . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Capitalized Lease". . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Cedel". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Certificate of Authentication". . . . . . . . . . . . . . . . . . . . . .3 "Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Company". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 "Consolidated Current Liabilities" . . . . . . . . . . . . . . . . . . . .3 "Consolidated Net Tangible Assets" . . . . . . . . . . . . . . . . . . . .3 "Consolidated Total Assets". . . . . . . . . . . . . . . . . . . . . . . .3 "Corporate Trust Office" . . . . . . . . . . . . . . . . . . . . . . . . .4 "Default". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Depositary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Dollars" or "$" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Energy Corp." . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Euroclear". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Federal Bankruptcy Code". . . . . . . . . . . . . . . . . . . . . . . . .4
ii
PAGE ---- "GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Global Note". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 "Governmental Obligations" . . . . . . . . . . . . . . . . . . . . . . . .4 "Indebtedness" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "Indenture". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "Intangible Assets". . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "Interest Payment Date". . . . . . . . . . . . . . . . . . . . . . . . . .5 "Legend" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "LG&E" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "Lien" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 "Material Consolidated Subsidiary" . . . . . . . . . . . . . . . . . . . .5 "Non-Recourse Indebtedness". . . . . . . . . . . . . . . . . . . . . . . .6 "Note" or "Notes". . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Note Register" and "Note Registrar" . . . . . . . . . . . . . . . . . . .6 "Noteholder," "holder of Notes," "registered holder" . . . . . . . . . . .6 "Officer's Certificate". . . . . . . . . . . . . . . . . . . . . . . . . .6 "Opinion of Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Original Issue Date". . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Outstanding". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Predecessor Note" . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 "Regulation S" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Relevant Parties" . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Responsible Officer". . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Restricted Regulation S Global Note". . . . . . . . . . . . . . . . . . .7 "Rule 144" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Rule 144A". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Rule 144A Global Note". . . . . . . . . . . . . . . . . . . . . . . . . .7 "Rule 144A Information". . . . . . . . . . . . . . . . . . . . . . . . . .7 "Sale and Leaseback Transaction" . . . . . . . . . . . . . . . . . . . . .7 "Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Stated Maturity". . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Support Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Trade Obligations". . . . . . . . . . . . . . . . . . . . . . . . . . . .7 "Trust Indenture Act". . . . . . . . . . . . . . . . . . . . . . . . . . .8 "Trustee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 "Unrestricted Regulation S Global Note". . . . . . . . . . . . . . . . . .8
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PAGE ---- ARTICLE TWO The Notes and the Support Agreement. . . . . . . . . . . . . . . . . . .8 SECTION 2.01. Amount Unlimited; Issuable in Series.. . . . . . . . . . . . . .8 SECTION 2.02. Form of Notes. . . . . . . . . . . . . . . . . . . . . . . . . 10 SECTION 2.03. Denominations, Interest and Principal. . . . . . . . . . . . . 13 SECTION 2.04. Printing, Execution and Authentication of Notes. . . . . . . . 15 SECTION 2.05. Global Notes . . . . . . . . . . . . . . . . . . . . . . . . . 16 SECTION 2.06 Registration, Registration of Transfer and Exchange. . . . . . 17 SECTION 2.07. Temporary Notes. . . . . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.08. Mutilated, Destroyed, Lost and Stolen Notes. . . . . . . . . . 22 SECTION 2.09. Cancellations. . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.10. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.11. Authenticating Agent.. . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.12. CUSIP Numbers. . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 2.13. Support Agreement. . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE THREE Redemption of Notes, Repayment at the Option of the Holder . . . . . 24 SECTION 3.01. Redemption of Notes; Repayment at the Option of the Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 3.02. Notices of Redemption. . . . . . . . . . . . . . . . . . . . . 25 SECTION 3.03. Presentation and Surrender of Notes. . . . . . . . . . . . . . 26 SECTION 3.04. Sinking Fund . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 3.05. Satisfaction of Sinking Fund Payment.. . . . . . . . . . . . . 26 SECTION 3.06. Redemption of Securities for Sinking Fund. . . . . . . . . . . 27
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PAGE ---- ARTICLE FOUR Particular Covenants of the Company . . . . . . . . . . . . . . . . . 27 SECTION 4.01. Payment of Principal, Premium and Interest . . . . . . . . . . 27 SECTION 4.02. Maintenance of Office and Agency . . . . . . . . . . . . . . . 27 SECTION 4.03. Money for Note Payments to be held in Trust. . . . . . . . . . 27 SECTION 4.04. Appointment of Trustee.. . . . . . . . . . . . . . . . . . . . 28 SECTION 4.05. Consolidation, Merger or Sale. . . . . . . . . . . . . . . . . 28 SECTION 4.06. Limitation on Liens. . . . . . . . . . . . . . . . . . . . . . 29 SECTION 4.07. Certificate to Trustee . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.08. Reports by the Company . . . . . . . . . . . . . . . . . . . . 30 SECTION 4.09. Restrictions on Sales and Leasebacks . . . . . . . . . . . . . 31 SECTION 4.10. Support Agreement. . . . . . . . . . . . . . . . . . . . . . . 32 ARTICLE FIVE Noteholders' Lists and Reports by the Company . . . . . . . . . . . . 32 SECTION 5.01. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 5.02. Information from Trustee . . . . . . . . . . . . . . . . . . . 32 ARTICLE SIX Remedies of the Trustee and Noteholders. . . . . . . . . . . . . . . . 33 SECTION 6.01. Event of Default Defined; Acceleration of Maturity; Waiver of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 6.02. Collection of Indebtedness by Trustee; Trustee May Prove Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 6.03. Application of Proceeds. . . . . . . . . . . . . . . . . . . . 38 SECTION 6.04. Limitation of Suits by Noteholders.. . . . . . . . . . . . . . 38 SECTION 6.05. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default. . . . . . . . . . . . . . . . . . . . . . . . . . 39 SECTION 6.06. Control by Noteholders . . . . . . . . . . . . . . . . . . . . 39 SECTION 6.07. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 6.08. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . 40
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PAGE ---- ARTICLE SEVEN Concerning the Trustee . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 7.01. Duties and Responsibilities of the Trustee Prior to and During Event of Default. . . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 7.02. Certain Rights of the Trustee. . . . . . . . . . . . . . . . . 42 SECTION 7.03. Trustee Not Responsible for Recitals, Disposition of Securities or Application of Proceeds Thereof. . . . . . . . . . . . . .43 SECTION 7.04. Trustee and Agents May Hold Securities; Collections, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 7.05. Moneys Held by Trustee . . . . . . . . . . . . . . . . . . . . 43 SECTION 7.06. Compensation and Indemnification of Trustee and its Prior Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 7.07. Right of Trustee to Rely on Officer's Certificate, etc.. . . . 44 SECTION 7.08. Conflicting Interest . . . . . . . . . . . . . . . . . . . . . 44 SECTION 7.09. Persons Eligible for Appointment as Trustee. . . . . . . . . . 45 SECTION 7.10. Resignation and Removal; Appointment of Successor Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 7.11. Acceptance of Appointment by Successor . . . . . . . . . . . . 46 SECTION 7.12. Merger, Conversion, Consolidation or Succession to Business of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . 47 SECTION 7.13. Preferential Collection of Claims Against Company. . . . . . . 48 ARTICLE EIGHT Concerning the Noteholders . . . . . . . . . . . . . . . . . . . . . 48 SECTION 8.01. Acts of Noteholders. . . . . . . . . . . . . . . . . . . . . . 48 SECTION 8.02. Trustee May Require Proof of Ownership . . . . . . . . . . . . 48 SECTION 8.03. Noteholders to be Treated as Owners. . . . . . . . . . . . . . 49 SECTION 8.04. Notes Held by Company Deemed Not Outstanding . . . . . . . . . 49 SECTION 8.05. Right of Revocation of Action Taken. . . . . . . . . . . . . . 49
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PAGE ---- ARTICLE NINE Supplemental Indentures; Amendments to Support Agreement. . . . . . . 50 SECTION 9.01. Supplemental Indentures Without Consent of Noteholders . . . . 50 SECTION 9.02. Supplemental Indentures With Consent of Noteholders. . . . . . 51 SECTION 9.03. Effect of Supplemental Indenture . . . . . . . . . . . . . . . 51 SECTION 9.04. Notation of Notes in Respect of Supplemental Indenture . . . . 52 SECTION 9.05. Documents to be Given to Trustee . . . . . . . . . . . . . . . 52 SECTION 9.06. Amendments to Support Agreement. . . . . . . . . . . . . . . . 52 ARTICLE TEN Consolidation, Merger and Sale . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.01. Consolidation, Merger and Sale of Substantially all of Company's Assets . . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 10.02. Successor Corporation Substituted . . . . . . . . . . . . . . 54 SECTION 10.03. Opinion of Counsel to Trustee . . . . . . . . . . . . . . . . 54
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PAGE ---- ARTICLE ELEVEN Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . 55 SECTION 11.01. Satisfaction and Discharge of Indenture . . . . . . . . . . . 55 SECTION 11.02. Covenant Defeasance . . . . . . . . . . . . . . . . . . . . . 55 SECTION 11.03. Defeasance and Discharge. . . . . . . . . . . . . . . . . . . 56 SECTION 11.04. Deposited Money and Governmental Obligations to be Held in Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 SECTION 11.05. Deposited Moneys Held in Trust. . . . . . . . . . . . . . . . 56 SECTION 11.06. Repayment to the Company; Miscellaneous . . . . . . . . . . . 56 ARTICLE TWELVE Immunity of Incorporators, Stockholders, Officers . . . . . . . . . 57 SECTION 12.01. Incorporators, Stockholders, Officers and Directors of Company Exempt from Individual Liability. . . . . . . . . . . . . . . 57
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PAGE ---- ARTICLE THIRTEEN Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . 57 SECTION 13.01. Successors and Assigns of Company Bound by Indenture. . . . . 57 SECTION 13.02. Acts by Successors and Assigns of Company . . . . . . . . . . 57 SECTION 13.03. Notices and Demands on Company, Trustee and Noteholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 13.04. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . 58 SECTION 13.05. Officer's Certificates and Opinions of Counsel; Statements to be Contained Therein . . . . . . . . . . . . . . . . . 58 SECTION 13.06. Opinion of Counsel Required . . . . . . . . . . . . . . . . . 58 SECTION 13.07. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 13.08. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 13.09. Separability Clause . . . . . . . . . . . . . . . . . . . . . 59 SECTION 13.10. Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . 59
- ------------------------- * This Table of Contents does not constitute part of the Indenture and should not have any bearing upon the interpretation of any of its terms or provisions. ix EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF RESTRICTED PERIOD CERTIFICATE EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO RESTRICTED REGULATION S GLOBAL NOTE EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE TO UNRESTRICTED REGULATION S GLOBAL NOTE EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RESTRICTED REGULATION S GLOBAL NOTE, UNRESTRICTED REGULATION S GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO RULE 144A GLOBAL NOTE EXHIBIT F FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE, RESTRICTED REGULATION S GLOBAL NOTE OR UNRESTRICTED REGULATION S GLOBAL NOTE TO ACCREDITED INVESTOR NOTE EXHIBIT G SUPPORT AGREEMENT x THIS INDENTURE, dated as of the 15th day of January, 1998, between LG&E Capital Corp., a corporation duly organized and existing under the laws of the State of Kentucky (hereinafter sometimes referred to as the "COMPANY"), and The Bank of New York, a New York banking corporation, as trustee (hereinafter sometimes referred to as the "TRUSTEE"): WHEREAS, the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of notes and other evidences of Indebtedness (hereinafter referred to as the "NOTES"), in an unlimited aggregate principal amount to be issued from time to time in one or more series as in this Indenture provided as registered Notes without coupons, to be authenticated by the certificate of the Trustee; WHEREAS, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution of this Indenture; WHEREAS, the Notes and the certificate of authentication to be borne by the Notes (the "CERTIFICATE OF AUTHENTICATION") are to be substantially in such forms as may be approved by the Board of Directors (as defined below) or set forth in any indenture supplemental to this Indenture; and WHEREAS, the Company and LG&E Energy Corp., a Kentucky corporation and the parent of the Company ("ENERGY CORP."), have entered into a Support Agreement, dated as of September 5, 1997 (as such Support Agreement may be hereafter amended, modified or supplemented from time to time in accordance with its terms and the provisions of this Indenture, the "SUPPORT AGREEMENT"), a copy of which is attached as EXHIBIT G hereto, pursuant to which Energy Corp. will agree, if, and only if, the obligation to do so is made applicable pursuant to any indenture supplemental hereto relating to a particular series of Notes hereunder, to provide funds to the Company in an amount sufficient to permit the Company to make timely payment of principal of and premium, if any, and interest on such series of Notes; WHEREAS, all things necessary to make this Indenture the valid, binding and legal obligations of the Company, and to constitute these presents a valid indenture and agreement according to its terms, have been done and performed or will be done and performed prior to the issuance of the Notes, and the execution of this Indenture and the issuance hereunder of the Notes have been or will be prior to issuance in all respects duly authorized, and the Company, in the exercise of the legal right and power in it vested, executes this Indenture and proposes to make, execute, issue and deliver the Notes; NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in consideration of the premises, of the purchase and acceptance of the Notes by the holders thereof, the Company covenants and agrees with the Trustee, for the equal and proportionate benefit (subject to the provisions of this Indenture) of the respective holders from time to time of the Notes, without any discrimination, preference or priority of any one Note over any other by reason of priority in the time of issue, sale or negotiation thereof, or otherwise, except as provided herein, as follows: ARTICLE ONE Definitions SECTION 1.01. CERTAIN TERMS DEFINED. (a) The terms defined in this Section (except as in this Indenture otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture, any Board Resolution and of any indenture supplemental hereto shall have the respective meanings specified in this Section. All other terms used in this Indenture which are defined in the Trust Indenture Act, or which are by reference in the Trust Indenture Act defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires), shall have the meanings assigned to such terms in the Trust Indenture Act and in the Securities Act as in force at the date of the execution of this instrument. "Accredited Investor Notes" has the meaning set forth in Section 2.02(d). "Affiliate" of any specified person means any other Person directly or indirectly controlling or controlled by or under direct of indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Members" has the meaning set forth in Section 2.02(e)(ii). "Attributable Debt" means, as to any particular Sale and Leaseback Transaction, at the time of determination, the present value (discounted at the rate per annum of 10%, compounded semiannually) of the obligation of the lessee of the property subject to such Sale and Leaseback Transaction for rental payments under the remaining term of the lease included in such transaction, including any period for which such lease has been extended or may, at the option of the lessor, be extended or until the earliest date on which the lessee may terminate such lease upon payment of a penalty (in which case the rental payments shall include such penalty), after excluding all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges. "Authenticating Agent" means an authenticating agent with respect to all or any series of the Notes, as the case may be, appointed with respect to all or any series of the Notes, as the case may be, by the Trustee pursuant to Section 2.11. "Authorized Officer" means the Chief Executive Officer, the President, a Vice President, the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company. 2 "Board of Directors" means the Board of Directors of the Company, or any committee of such Board duly authorized to act on behalf thereof hereunder. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification. "Business Day" means, unless otherwise specified in an indenture supplemental hereto, with respect to any series of Notes, any day other than a Saturday, Sunday, a legal holiday or a day on which banking institutions in The City of New York are authorized or obligated to close. "Capitalized Lease" means any lease of property, real or personal, the obligation for which is required, in accordance with GAAP, to be capitalized on the balance sheet of the lessee. "Cedel" has the meaning set forth in Section 2.02(b). "Certificate of Authentication" has the meaning set forth in the recitals to this Indenture. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, the body (if any) performing such duties at such time. "Company" means LG&E Capital Corp., a corporation duly organized and existing under the laws of the Commonwealth of Kentucky, or, subject to the provisions of Article Ten, its successors and assigns. "Consolidated Current Liabilities" means, with respect to any Person, as of the date of determination thereof, the current liabilities (excluding, however, any commercial paper notes or other Indebtedness for which such Person and/or any of its Subsidiaries have a commitment by one or more financial institutions to provide financing sufficient to pay such Indebtedness at maturity) of such Person determined on a consolidated basis in accordance with GAAP. "Consolidated Net Tangible Assets" means, with respect to any Person, as of the date of determination thereof, Consolidated Total Assets less the sum of (i) Consolidated Current Liabilities and (ii) Intangible Assets. "Consolidated Total Assets" means, with respect to any Person, as of the date of determination thereof, the total amount of all assets of such Person determined on a consolidated basis in accordance with GAAP. 3 "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of the execution of this Indenture is located at 101 Barclay Street, 21st Floor, New York, New York 10286, Attention: Corporate Trust Trustee Administration. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Depositary" means, with respect to Notes of any series for which the Company shall determine that such Notes will be issued as a Global Note, The Depository Trust Company, New York, New York, another clearing agency or any successor registered as a clearing agency under the Exchange Act or other applicable statute or regulation, which, in each case, shall be designated by the Company pursuant to either Section 2.01 or 2.06. "Dollars" or "$" means any lawful coin or currency of the United States of America which at the time of any payment or transfer is legal tender for the payment of all public and private debts. "Energy Corp." means LG&E Energy Corp., a Kentucky corporation, and any successor entity thereto. "Euroclear" has the meaning set forth in Section 2.02(b). "Event of Default" means, with respect to Notes of a particular series, any event specified in Section 6.01, continued for the period of time, if any, therein designated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Federal Bankruptcy Code" means the Federal Bankruptcy Code of 1978, as amended from time to time. "GAAP" means generally accepted accounting principles in the United States applied on a basis consistent with the principles, methods, procedures and practices employed from time to time in the preparation of the Company's audited financial statements, including, without limitation, those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. "Global Note" has the meaning set forth in Section 2.02(e)(i). "Governmental Obligations" means direct obligations of the United States for the payment of which its full faith and credit is pledged, or obligations of a person controlled or supervised by and acting as an agency or instrumentality of the United States and the payment of which is unconditionally guaranteed by the United States, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific 4 payment of interest on or principal of any such Government Obligation held by such custodian for the account of a holder of a depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of interest on or principal of the Government Obligation evidenced by such depository receipt. "Indebtedness" means, with respect to any Person at any date of determination (without duplication), all liabilities, obligations and indebtedness of such Person (i) for borrowed money, (ii) evidenced by bonds, indentures, notes or other similar instruments, (iii) to pay the deferred purchase price of property or services, (iv) as lessee under Capitalized Leases (to the extent the aggregate rentals due and to become due thereunder are, in accordance with GAAP, reflected as a liability on the consolidated balance sheet of such Person), (v) under reimbursement agreements or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of letters of credit (to the extent undrawn) opened to provide for the payment of goods or services purchased or other obligations incurred in the ordinary course of business), and (vi) under direct guaranties and indemnities in respect of, or to assure an obligee against failure to make payment in respect of, liabilities, obligations or indebtedness of others of the kinds referred to in clause (i) through (v) above, in each case to the extent reasonably quantifiable; provided that for all purposes of this Indenture "Indebtedness" shall not include any Non-Recourse Indebtedness or Trade Obligations. "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. "Intangible Assets" means, with respect to any Person, as of the date of determination thereof, all assets of such Person properly classified as intangible assets determined on a consolidated basis in accordance with GAAP. "Interest Payment Date" means, when used with respect to any installment of interest on a Note of a particular series, the date specified in such Note, a Board Resolution (or Officer's Certificate) or an indenture supplemental hereto with respect to that series as the fixed date on which an installment of interest with respect to Notes of that series is due and payable. "Legend" has the meaning set forth in Section 2.06(d). "LG&E" means Louisville Gas and Electric Company, a Kentucky corporation, and any successor entity thereto. "Lien" means any lien (statutory or other), mortgage, pledge, hypothecation, assignment, encumbrance or other security agreement (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Material Consolidated Subsidiary" means for any Person a Subsidiary whose financial statements shall be consolidated with the financial statements of such Person in accordance with GAAP, with assets, income or net worth which constituted 10% or more of the assets, income or net worth, respectively, of such Person and all of its Subsidiaries computed as of the last day of the fiscal quarter most recently completed prior to determination of whether such Subsidiary is a Material Consolidated Subsidiary. 5 "Non-Recourse Indebtedness" means, any Indebtedness of any Person which is a special purpose entity or which Indebtedness is nonrecourse to such Person, other than with respect to the interest of such Person in the collateral, if any, securing such Indebtedness. "Note" or "Notes" means any Note or Notes, as the case may be, authenticated and delivered under this Indenture. "Note Register" and "Note Registrar" have the respective meanings set forth in Section 2.06(a). "Noteholder," "holder of Notes," "registered holder" or other similar term means the person or persons in whose name or names a particular Note shall be registered on the books of the Company kept for that purpose in accordance with the terms of this Indenture. "Officer's Certificate" means a certificate signed by an Authorized Officer. "Opinion of Counsel" means a written opinion of legal counsel, who may be an employee of or regular counsel for the Company, reasonably acceptable to the Trustee. Each such opinion shall include the statements provided for in Section 13.05, if and to the extent required by the provisions thereof. "Original Issue Date" of any Note (or portion thereof) means the earlier of (a) the date of such Note or (b) the date of any Note (or portion thereof) in exchange for which such Note was issued (directly or indirectly) on registration of transfer, exchange or substitution. "Outstanding" means, when used with reference to Notes of any series, subject to the provisions of Section 8.04, as of any particular time, all Notes of that series theretofore authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore canceled by the Trustee or any paying agent, or delivered to the Trustee or any paying agent for cancellation or which have previously been canceled; (b) Notes or portions thereof for the payment or redemption of which moneys or Governmental Obligations in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, however, that if such Notes or portions of such Notes are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as provided in Article Three, or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Notes in lieu of or in substitution for which other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.08; and (d) Notes paid pursuant to Section 2.03 or (if certificated) surrendered for payment pursuant to Section 2.09. "Person" means any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Predecessor Note" of any particular Note means every previous Note evidencing all or a portion of the same debt as that evidenced by that particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.08 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note. 6 "Regulation S" has the meaning set forth in Section 2.02(b). "Relevant Parties" has the meaning specified in Section 6.01(a)(5). "Responsible Officer" means, when used with respect to the Trustee, any vice president, assistant secretary, assistant treasurer, any trust officer, any corporate trust officer or any other officer or assistant officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Regulation S Global Note" has the meaning set forth in Section 2.02(b). "Rule 144" has the meaning set forth in Section 2.06(b)(iii). "Rule 144A" has the meaning set forth in Section 2.02(c). "Rule 144A Global Note" has the meaning set forth in Section 2.02(c). "Rule 144A Information" has the meaning specified in Section 4.08(b). "Sale and Leaseback Transaction" has the meaning specified in Section 4.09. "Securities Act" means the Securities Act of 1933, as amended. "Stated Maturity" means, with respect to any debt security or any installment of interest thereon, the date specified in such debt security as the fixed date on which any principal of such debt security or any such installment of interest is due and payable. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Company. "Support Agreement" means the Support Agreement dated as of September 5, 1997, between Energy Corp. and the Company as amended, modified and supplemented from time to time in accordance with the terms thereof. "Trade Obligations" means future obligations for the payment of goods or services or other obligations (other than obligations for borrowed money) incurred in the ordinary course of its energy marketing business. 7 "Trust Indenture Act," subject to the provisions of Sections 9.01 and 9.02, means the Trust Indenture Act of 1939, as amended and in effect at the date of execution of this Indenture. "Trustee" means The Bank of New York, a New York banking corporation, and, subject to the provisions of Article Seven, shall also include its successors and assigns, and if at any time there is more than one person acting in such capacity hereunder, "Trustee" means each such person. The term "Trustee" as used with respect to a particular series of the Notes means the trustee with respect to that series. "Unrestricted Regulation S Global Note" has the meaning set forth in Section 2.02(b). (b) In this Indenture, unless otherwise indicated, the singular includes the plural and plural the singular; words importing any gender include the other gender; references to statutes are to be construed as including all statutory provisions consolidating, amending or replacing the statute referred to; references to "writing" include printing, typing lithography and other means of reproducing words in a tangible visible form; the words "including", "includes" and "include" shall be deemed to be followed by the words "without limitation"; references to articles, sections (or subdivisions of sections), exhibits, annexes or schedules are to this Indenture unless otherwise indicated; references to agreements and other contractual instruments shall be deemed to include all subsequent written amendments, extensions and other modifications to such instruments; and references to persons and business entities include their respective permitted successors and assigns and references to governmental entities include governmental entities succeeding to their respective functions and capacities. ARTICLE TWO The Notes and the Support Agreement SECTION 2.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is unlimited. The Notes may be issued in one or more series up to the aggregate principal amount of Notes of that series from time to time authorized by or pursuant to a Board Resolution or pursuant to one or more indentures supplemental hereto, prior to the initial issuance of Notes of a particular series. Prior to the initial issuance of Notes of any series, there shall be established in or pursuant to a Board Resolution delivered to the Trustee, and, subject to Section 2.04 hereof, set forth in an Officer's Certificate delivered to the Trustee, or established in one or more indentures supplemental hereto: (1) the title of the Notes of the series (which shall distinguish the Notes of that series from all other Notes); (2) any limit upon the aggregate principal amount of the Notes of that series that may be authenticated and delivered under this Indenture (except for Notes authenticated and delivered upon registration of transfer of, in exchange for or in lieu of other Notes of that series and except for any Notes which, pursuant to Section 2.04(b) hereof, are deemed never to have been authenticated and delivered hereunder); 8 (3) the date or dates on which the principal of the Notes of that series is payable; (4) the rate or rates at which the Notes of that series shall bear interest or the manner of calculation of such rate or rates, if any; (5) the date or dates from which such interest shall accrue, the Interest Payment Dates on which such interest will be payable or the manner of determination of such Interest Payment Dates and the record date for the determination of holders to whom interest is payable on any such Interest Payment Dates; (6) the period or periods within which, the price or prices at which and the terms and conditions upon which Notes of that series may be redeemed, in whole or in part, at the option of the Company; (7) the obligation, if any, of the Company to redeem or purchase Notes of that series pursuant to any sinking fund or analogous provisions (including payments made in cash in anticipation of future sinking fund obligations) or at the option of a holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which, Notes of that series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (8) the form of the Note of that series including the form of the Certificate of Authentication for that series; (9) if denominations of other than $100,000 or integral multiples of $1,000 in excess thereof, the denominations in which Notes of that series shall be issuable; (10) if other than the principal amount thereof, the portion of the principal amount of the Notes of the series which shall be payable upon declaration of the acceleration of the maturity thereof pursuant to Section 6.01; (11) whether the Notes are issuable in whole or in part in the form of one or more Global Notes and, in such case, the identity of the Depositary for that series and the related procedures with respect to transfer and exchange of such Global Notes; (12) any provisions permitted by this Indenture relating to Events of Default or covenants of the Company with respect to such series of Notes; and (13) any and all other terms with respect to that series (which terms shall not be inconsistent with the terms of this Indenture), including, without limitation, any terms required (i) to establish one or more series of medium-term notes or (ii) to cause any Notes of any series to be issued with or without the benefit of the Support Agreement. All Notes of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to any such Board Resolution or in any indentures supplemental hereto. 9 If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officer's Certificate setting forth the terms of that series. SECTION 2.02. FORM OF NOTES. (a) The Notes of any series and the Certificate of Authentication to be borne by such Notes shall be substantially of the tenor and purport as set forth in one or more indentures supplemental hereto or as provided in a Board Resolution and as set forth in an Officer's Certificate, and may have such letters, numbers or other marks of identification or designation and such legends or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which Notes of that series may be listed, or to conform to usage. (b) Notes offered and sold in reliance on Regulation S under the Securities Act ("REGULATION S") shall be issued in the form of one or more permanent Global Notes for each series of Notes in definitive, fully registered form without interest coupons substantially in the form of the Note attached as EXHIBIT A hereto or as set forth in an indenture supplemental hereto with such legends as may be applicable thereto in accordance with such form, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee at the Corporate Trust Office, as custodian for the Depositary and registered in the name of a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided, for credit to their respective accounts (or to such other accounts as they may direct) at Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("EUROCLEAR") or Cedel Bank, societe anonyme ("CEDEL"). Until the termination of the restricted period (as defined in Regulation S) with respect to the offer and sale of any such Notes, interests in any such Global Note may only be held by the Agent Members for Euroclear and Cedel. Until such time as the restricted period shall have terminated, any such Global Notes shall be referred to herein as the "RESTRICTED REGULATION S GLOBAL NOTES." After such time as the restricted period shall have terminated, such Global Notes shall be referred to herein as "UNRESTRICTED REGULATION S GLOBAL NOTES." The aggregate principal amount of the Restricted Regulation S Global Notes and the Unrestricted Regulation S Global Notes of any series may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, as hereinafter provided. The Company shall notify the Trustee of the termination of the restricted period with respect to any series of Notes by furnishing to the Trustee a certificate substantially in the form of Exhibit B hereto. (c) Notes offered and sold in reliance on Rule 144A under the Securities Act ("RULE 144A") shall be issued in the form of one or more permanent Global Notes (the "RULE 144A GLOBAL NOTES") for each series of Notes in definitive, fully registered form without interest coupons substantially in the form of the Note attached as EXHIBIT A hereto or as set forth in an indenture supplemental hereto with such legends as may be applicable thereto in accordance with such form, which shall be deposited with the Trustee, at the Corporate Trust Office, as custodian for the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Notes with respect to any series of Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, and the Depositary or its nominee, as the case may be, as hereinafter provided. 10 (d) Notes offered and sold to institutions that are "accredited investors" within the meaning of Rule 501(a)(1), (2), (3) or (7) of the Securities Act shall be issued in the form of certificated Notes (the "ACCREDITED INVESTOR NOTES") in definitive, fully registered form without interest coupons substantially in the form of the Note attached as EXHIBIT A hereto or in an indenture supplemental hereto with such legends as may be applicable thereto, duly executed by the Company and authenticated and delivered by the Trustee as hereinafter provided. (e) (i) This Section 2.02(e)(i) shall apply only to Notes in global form ("GLOBAL NOTES") deposited with the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.02(e)(i), authenticate and deliver Global Notes for each series of Notes that (a) shall be registered in the name of the Depositary for such Global Notes or the nominee of such Depositary, (b) shall be deposited on behalf of Agent Members (as defined herein) with the Trustee as custodian for the Depositary and (c) shall bear legends substantially to the following effect: "UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME AND ADDRESS OF DEPOSITARY] TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF DEPOSITARY], OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF DEPOSITARY]) OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF DEPOSITARY], HAS AN INTEREST HEREIN". "TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF [INSERT NAME OF DEPOSITARY] OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF". (ii) This Section 2.02(e)(ii) shall apply only to the Global Notes deposited on behalf of the purchasers of the Notes represented thereby with the Trustee as custodian for the Depositary for credit to their respective accounts (or to such other accounts as they may direct) at Euroclear or Cedel insofar as interests in the Global Notes are held by the Agent Members for Euroclear or Cedel. 11 The provisions of the "Operating Procedures of the Euroclear System" and the "Terms and Conditions Governing Use of Euroclear" and the "Management Regulations" and "Instructions to Participants" of Cedel, respectively, shall be applicable to such Global Notes insofar as interests therein are held by the Agent Members for Euroclear and Cedel. Members of, or participants in, a Depositary ("AGENT MEMBERS") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary or under any Global Note, and the Depositary may be treated by the Company, the Trustee, and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a holder of any security. (iii) This Section 2.02(e)(iii) shall apply only to the Rule 144A Global Notes, any certificated Notes issued in accordance with Section 2.05 hereof in exchange therefor (and any certificated securities issued to qualified institutional buyers in exchange therefor) and to Accredited Investor Notes. The Company shall execute and the Trustee shall, in accordance with this Section 2.02(e)(iii), authenticate and deliver Rule 144A Global Notes, certificated Notes issued in accordance with Section 2.05 hereof in exchange therefor (and any certificated securities issued to qualified institutional buyers in exchange therefor) and Accredited Investor Notes for each series of Notes that shall bear legends substantially to the following effect or as set forth in an indenture supplemental hereto: THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO LG&E CAPITAL CORP. (THE "ISSUER") OR THE AGENTS, (B) SO LONG AS SUCH NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A) ("QIB") ACQUIRING SUCH NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS), AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a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he Notes shall be issuable as registered Notes and in minimum denominations of $100,000 or integral multiples of $1,000 in excess thereof, subject to Section 2.01(9). The Notes of a particular series shall bear interest payable on the dates and at the rate or rates specified with respect to that series. The principal of and the interest on the Notes of any series, as well as any premium thereon in case of redemption thereof prior to maturity, shall be payable in Dollars, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, the City and State of New York (which, unless changed, shall be a corporate trust office or agency of the Trustee). For so long as any Notes are issued as a Global Note, payments of principal and interest shall be made by the Company in immediately available funds by wire transfer to the Depositary or its nominee. At the Company's option, payments on the Notes of any series, if such Notes are issued in certificated form, may also be made (i) by checks mailed by the Trustee to the holders entitled thereto at their registered addresses or (ii) to a holder of $1,000,000 or more in aggregate principal amount of the Notes who has delivered a written request to the Trustee at least 14 days prior to the relevant Interest Payment Date electing to have payments made by wire transfer to a designated account in the United States of America, by wire transfer of immediately available funds to such designated account; provided that, in either case, the payment of principal with respect to any Note will be made only upon surrender of that Note to the Trustee. Each Note shall be dated the date of its authentication. Unless otherwise specified in an indenture supplemental hereto, interest on the Notes shall be computed on the basis of a 360-day year composed of twelve 30-day months and, for any period shorter than a full calendar month, on the basis of the actual number of days elapsed in such period. The interest installment on a Note of any series which is payable, and is punctually paid or duly provided for, on any Interest Payment Date for Notes of that series shall be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the regular record date for such interest installment. In the event that any Note of a particular series or portion thereof is called for redemption and the redemption date is subsequent to a regular record date 13 with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on that Note will be paid upon presentation and surrender of that Note as provided in Section 3.03. Any interest on any Note of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date for Notes of the same series (herein called "Defaulted Interest") shall forthwith cease to be payable to the registered holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Company, at its election, as provided in clause (1) or clause (2) below: (1) The Company may elect to make payment of any Defaulted Interest on Notes to the Persons in whose names such Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Note and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon, the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each holder of such Notes at such Noteholder's address as it appears in the Note Register (as hereinafter defined), not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Notes (or their respective Predecessor Notes) are registered on such special record date and shall be no longer payable pursuant to the following cause (2). (2) The Company may make payment of any Defaulted Interest on any Notes in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Notes may be listed, and upon such notice as may be required by such exchange if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Unless otherwise set forth in a Board Resolution (or in an Officer's Certificate) or one or more indentures supplemental hereto establishing the terms of any series of Notes pursuant to Section 2.01 hereof, the term "regular record date" as used in this Section with respect to a series of Notes with respect to any Interest Payment Date for certificated Notes of that series shall mean either the 15th day of the month immediately preceding the month in which an Interest Payment Date established for that series pursuant to Section 2.01 hereof shall occur, if such Interest Payment Date is the first day of a month, or the last day of the month immediately preceding the month in which an Interest Payment Date established for such series pursuant to Section 2.01 hereof shall occur, if such Interest Payment Date is the 15th day of a month, whether or not such date is a Business Day. 14 Subject to the foregoing provisions of this Section, each Note of a series delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Note of such series shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Note. SECTION 2.04. PRINTING, EXECUTION AND AUTHENTICATION OF NOTES. (a) The Notes shall, subject to the provisions of Section 2.07, be printed on steel engraved borders or fully or partially engraved, or legibly typed, as the proper officers of the Company may determine, and shall be signed on behalf of the Company by an Authorized Officer and need not be attested. The signature of the Authorized Officer upon the Notes may be in the form of a facsimile signature of a present or any future Authorized Officer and may be imprinted or otherwise reproduced on the Notes and for that purpose the Company may use the facsimile signature of any person who shall have been an Authorized Officer, notwithstanding the fact that at the time the Notes shall be authenticated and delivered or disposed of that person shall have ceased to be an Authorized Officer. (b) Only such Notes as shall bear thereon a Certificate of Authentication substantially in the form established for such Notes, executed manually by an authorized signatory of the Trustee, or by any Authenticating Agent with respect to such Notes, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate executed by the Trustee, or by any Authenticating Agent appointed by the Trustee with respect to such Notes, upon any Notes executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. Notwithstanding the foregoing, if any Note shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Note to the Trustee for cancellation as provided in Section 2.09 hereof together with a written statement (which need not comply with Section 13.05 hereof and need not be accompanied by an Opinion of Counsel) stating that such Note has never been issued and sold by the Company, for all purposes of this Indenture such Note shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Notes of any series executed by the Company to the Trustee for authentication, together with a written order of the Company for the authentication and delivery of such Notes, signed by an Authorized Officer, and the Trustee in accordance with such written order shall authenticate and make such Notes available for delivery. In authenticating such Notes and accepting the additional responsibilities under this Indenture in relation to such Notes, the Trustee shall be entitled to receive, and (subject to Section 7.01) shall be fully protected in relying upon (i) an Opinion of Counsel and (ii) an Officer's Certificate, each stating that the form and terms thereof have been established in conformity with the provisions of this Indenture and all conditions that must be met by the Company to issue the Notes under the Indenture have been met, an Opinion of Counsel stating that such Notes are legal, valid and binding obligations of the Company (subject to customary exceptions) and, if the Notes are issued with the benefit of the Support Agreement, the Notes are entitled to the benefits of the Support Agreement, and an Officer's Certificate stating that the Company is not, and upon the authentication by the Trustee of the series of Notes, will not be in default under any of the terms of or covenants contained in the Indenture. Each Opinion of Counsel and Officer's Certificate delivered pursuant to this Section 2.04 shall include all statements prescribed by Section 13.05(b) hereof. If all the Notes of any series are not to be issued at one time, it 15 shall not be necessary to deliver an Opinion of Counsel and Officer's Certificate at the time of issuance of each Note, but such opinion and certificate shall be delivered at or before the time of issuance of the first Note of such series to be issued. If all of the Notes of a series are not authenticated and issued at one time, for each issuance of Notes after the initial issuance of Notes, the Company shall be required only to deliver to the Trustee the Note executed by the Company together with a written order to the Trustee to authenticate such Note and to deliver such Note in accordance with the instructions specified by such written order. Any such written order shall constitute a representation and warranty by the Company that the statements made in the Officer's Certificate delivered to the Trustee prior to the authentication and issuance of the first Note of such series are true and correct on the date thereof as if made on and as of the date thereof. (c) Any of the Notes may be issued with appropriate insertions, omissions, substitutions and variations, and may have imprinted or otherwise reproduced thereon such legend or legends, not inconsistent with the provisions of this Indenture, as may be required to comply with any law or with any rules or regulations pursuant thereto, or with the rules of any securities market in which the Notes are admitted to trading, or to conform to general usage. SECTION 2.05. GLOBAL NOTES. (a) Except for a transfer pursuant to the provisions of Section 2.06(b)(v) hereof, portions of a Global Note of any series deposited with the Depositary pursuant to Section 2.02 shall be transferred in certificated form to the beneficial owners thereof only if such transfer complies with Section 2.06 and (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Note or if at any time such Depositary ceases to be a "clearing agency" registered under the Exchange Act and a successor depositary is not appointed by the Company within 90 days of such notice, (ii) an Event of Default has occurred and is continuing with respect to the Notes of such series and payment of principal thereof and interest thereon has been accelerated and the owners of beneficial interests in the Global Notes with fractional undivided interests aggregating not less than a majority interest advise the Trustee, the Company and the Depositary through Agent Members in writing that the continuation of a book-entry system through the Depositary or its successors is no longer in their best interest or (iii) the Company determines that the Notes of such series shall no longer be represented by such Global Note. (b) Portions of any Global Note of any series that are transferable to the beneficial owners thereof pursuant to this Section 2.05 shall be surrendered by the Depositary to the Trustee at its New York office for registration of transfer, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such registration of transfer of each portion of such Global Note, an equal aggregate principal amount of Notes of such series of authorized denominations. Any portion of a Global Note whose registration is transferred pursuant to this Section 2.05 shall be executed, authenticated and delivered only in the denominations, if other than as specified in Section 2.01(9), specified in the Board Resolution or indenture supplemental hereto with respect to such series of Notes and registered in such names as the Depositary shall direct. Any Note of any series delivered in exchange for a portion of a Rule 144A Global Note of such series shall bear the Legend regarding transfer restrictions applicable to Rule 144A Global Notes set forth on the form of Note attached as Exhibit A hereto. (c) Subject to the provisions of Section 2.02(e) above, the registered holder of any Global Note may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold 16 interests through Agent Members, to take any action which a Noteholder is entitled to take under this Indenture or the Notes of the applicable series. (d) In the event of the occurrence of any of the events specified in paragraph (a) of this Section 2.05, the Company shall promptly make available to the Trustee a reasonable supply of certificated Notes of each applicable series in definitive fully registered form without interest coupons. (e) The Global Notes of each series issued and authenticated pursuant to Section 2.02(b) (both before and after the expiration of the restricted period) and the Rule 144A Global Notes of each series shall each be assigned separate securities identification numbers. SECTION 2.06 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Company shall cause to be kept at each office or agency to be maintained for the purpose as provided in Section 4.02 hereof in the Borough of Manhattan, the City and State of New York or such other location as designated by the Company, a register or registers (herein referred to as the "NOTE REGISTER") in which, subject to such reasonable regulations as it may prescribe, it will register or cause to be registered, and will register or cause to be registered the transfer of, Notes as in this Article provided. The Trustee is hereby appointed "NOTE REGISTRAR" for the purpose of registering Notes and transfers of Notes as herein provided. Any successor Note Registrar shall be appointed as authorized by a Board Resolution. If at any time the Trustee or the Company, respectively, shall not be serving as Note Registrar, at all reasonable times such Notes Register shall be open for inspection by the Trustee or the Company, as the case may be. Upon due presentation for registration of transfer of any Note at each such office or agency, the Company shall execute and the Trustee shall authenticate and deliver in the name of the transferee or transferees a new Note or Notes of the same series in authorized denominations for a like aggregate principal amount. Any Note or Notes may be exchanged for a Note or Notes of the same series in other authorized denominations, in an equal aggregate principal amount. Notes to be exchanged shall be surrendered at the office or agency of the Company designated for such purpose in the Borough of Manhattan, the City and State of New York, and the Company shall execute and the Trustee shall authenticate and make available for delivery in exchange therefor the Note or Notes of the same series which the Noteholder making the exchange shall be entitled to receive, bearing numbers not contemporaneously outstanding. All Notes presented for registration of transfer, exchange, redemption or payment shall (if so required by the Company or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee, duly executed by the Noteholder or its attorney duly authorized in writing. The Company or Trustee shall not be required to exchange or register a transfer of (a) any Notes of any series for a period of 15 days next preceding the first mailing of notice of redemption of Notes of such series to be redeemed, (b) any Note of any series selected, called or being called for redemption except, in the case of any Note of such series where public notice has been given that such Note is to be redeemed in part, the portion thereof not so to be redeemed or (c) any Note of any series that, in 17 accordance with its terms, has been surrendered for repayment at the option of the Noteholder, except the portion, if any, of such Note not to be so repaid. All Notes of any series issued upon any registration of transfer or exchange of Notes shall be valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes of such series surrendered upon such registration of transfer or exchange. (b) Notwithstanding any provision to the contrary herein, so long as a Global Note of any series remains outstanding and is held by or on behalf of the Depositary, transfers of a Global Note of such series, in whole or in part, shall only be made (x) in the case of transfers of portions of a Global Note of such series to beneficial owners thereof in certificated form, in accordance with Section 2.05, and (y) in all other cases, in accordance with this Section 2.06(b) (and subject, in each case, to the provisions of any Legend (as defined herein) imprinted on such Global Note). (i) TRANSFERS OF GLOBAL NOTES AS SUCH. Subject to clauses (ii) through (vi) of this Section 2.06(b), transfers of a Global Note shall be limited to transfers of such Global Note in whole, and not in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (ii) RULE 144A GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO A RESTRICTED REGULATION S GLOBAL NOTE. If a holder of a beneficial interest in the Rule 144A Global Note of any series deposited with the Depositary, or the holder of an Accredited Investor Note of any series, as the case may be, wishes at any time to exchange its interest in such Note for an interest in the Restricted Regulation S Global Note or transfer its interest in such Note to a Person who wishes to take delivery thereof in the form of an interest in the Restricted Regulation S Global Note, such holder may, subject to the rules and procedures of the Depositary, exchange or transfer or cause the exchange or transfer of such interest for an equivalent beneficial interest in the Restricted Regulation S Global Note of such series in accordance with, and subject to, this clause (ii). Upon receipt by the Trustee at the Corporate Trust Office of (1) instructions given in accordance with the Depositary's procedures from an Agent Member directing the Trustee to credit or cause to be credited a beneficial interest in the Restricted Regulation S Global Note of any series in an amount equal to (x) the beneficial interest in the Rule 144A Global Note of such series or (y) the aggregate principal amount of the Accredited Investor Note of such series, as the case may be, to be exchanged or transferred, (2) a written order given in accordance with the Depositary's procedures containing information regarding the Euroclear or Cedel account to be credited with such increase and the name of such account, and (3) a certificate in the form of EXHIBIT C attached hereto given by the holder of such interest stating that the exchange or transfer of such interest has been made in compliance with the transfer restrictions applicable to the Notes of such series and pursuant to and in accordance with Regulation S, the Trustee shall instruct the Depositary to reduce the Rule 144A Global Note of such series by the aggregate principal amount of the beneficial interest in the Rule 144A Global Note of such series to be so exchanged or transferred or, in the case of an Accredited Investor Note of such series, shall cancel such Note surrendered for transfer or exchange in accordance with Section 2.09 hereof, and the Trustee shall instruct the Depositary, concurrently with such reduction or cancellation to increase the principal amount of the Restricted Regulation S Global Note of such series by the aggregate principal amount of the beneficial interest in the Rule 144A Global Note of such series or, in the case of an Accredited Investor Note, by the 18 aggregate principal amount of the Accredited Investor Note of such series to be so exchanged or transferred, and to credit or cause to be credited to the account of the Person specified in such instructions (who shall be the Agent Member for Euroclear or Cedel, or both, as the case may be) a beneficial interest in the Restricted Regulation S Global Note of such series equal to the reduction in the principal amount of the Rule 144A Global Note of such series or to the aggregate principal amount of the Accredited Investor Note of such series, as the case may be. (iii) RULE 144A GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO UNRESTRICTED REGULATION S GLOBAL NOTE. If a holder of a beneficial interest in the Rule 144A Global Note of any series deposited with the Depositary, or the holder of an Accredited Investor Note of any series, as the case may be, wishes at any time to exchange its interest in such Note for an interest in the Unrestricted Regulation S Global Note of such series or transfer its interest in such Note to a Person who wishes to take delivery thereof in the form of an interest in the Unrestricted Regulation S Global Note of such series, such holder may, subject to the rules and procedures of the Depositary, exchange or cause the exchange or transfer or cause the transfer of such interest for an equivalent beneficial interest in the Unrestricted Regulation S Global Note of such series in accordance with, and subject to, this clause (iii). Upon receipt by the Trustee at the Corporate Trust Office of (1) instructions given in accordance with the Depositary's procedures from an Agent Member directing the Trustee to credit or cause to be credited a beneficial interest in the Unrestricted Regulation S Global Note of a series in an amount equal to (x) the beneficial interest in the Rule 144A Global Note of such series or (y) the aggregate principal amount of the Accredited Investor Note of such series, as the case may be, to be exchanged or transferred, (2) a written order given in accordance with the Depositary's procedures containing information regarding the participant account of the Depositary and, in the case of a transfer pursuant to and in accordance with Regulation S, the Euroclear or Cedel account to be credited with such increase and (3) a certificate in the form of EXHIBIT D attached hereto given by the holder of such interest stating that the exchange or transfer of such interest has been made in compliance with the transfer restrictions applicable to the Notes of such series and (A) in the case of an exchange, that either (x) the Note being exchanged is not a "restricted security" as defined in Rule 144 under the Securities Act ("RULE 144"), or (y) the exchange is being made to facilitate a contemporaneous transfer that complies with this clause (iii), (B) in the case of a transfer pursuant to Regulation S, that the Note is being transferred pursuant to and in accordance with Regulation S, (C) in the case of a transfer pursuant to Rule 144, that the Note is being transferred pursuant to and in accordance with Rule 144 or (D) in the case of a transfer pursuant to another exemption from the Securities Act (including without limitation Rule 144A), specifying the basis for such exemption, the Trustee shall instruct the Depositary to reduce the Rule 144A Global Note of such series by the aggregate principal amount of the beneficial interest in the Rule 144A Global Note of such series to be so exchanged or transferred or, in the case of an Accredited Investor Note of such series, shall cancel such Note surrendered for transfer or exchange in accordance with Section 2.09 hereof, and the Trustee shall instruct the Depositary, concurrently with such reduction or cancellation, to increase the principal amount of the Unrestricted Regulation S Global Note of such series by the aggregate principal amount of the beneficial interest in the Rule 144A Global Note of such series or, in the case of an Accredited Investor Note, by the aggregate principal amount of the Accredited Investor Note of such series to be so exchanged or transferred, and to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Unrestricted Regulation S Global Note of such series equal to the reduction 19 in the principal amount of the Rule 144A Global Note of such series or to the aggregate principal of the Accredited Investor Note of such series, as the case may be. (iv) RESTRICTED REGULATION S GLOBAL NOTE, UNRESTRICTED REGULATION S GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO RULE 144A GLOBAL NOTE. If a holder or a beneficial interest in the Restricted Regulation S Global Note of any series or the Unrestricted Regulation S Global Note of any series deposited with the Depositary, or the holder of an Accredited Investor Note of any series, as the case may be, wishes at any time to exchange its interest in such Note for an interest in the Rule 144A Global Note of such series or transfer its interest in such Note to a Person who wishes to take delivery thereof in the form of an interest in the Rule 144A Global Note of such series such holder may, subject to the rules and procedures of Euroclear or Cedel and the Depositary, as the case may be, exchange or transfer or cause the exchange or transfer of such interest for an equivalent beneficial interest in the Rule 144A Global Note of such series, in accordance with, and subject to, this clause (iv). Upon receipt by the Trustee, at the Corporate Trust Office of (1) instructions from Euroclear or Cedel or the Depositary, as the case may be, directing the Trustee to credit or cause to be credited a beneficial interest in the Rule 144A Global Note of a series in an amount equal to (x) the beneficial interest in the Restricted Regulation S Global Note of such series or the Unrestricted Regulation S Global Note of such series, or (y) the aggregate principal amount of the Accredited Investor Note, to be exchanged or transferred, such instructions to contain information regarding the Agent Member's account with the Depositary to be credited with such increase, and, with respect to an exchange or transfer of an interest in the Unrestricted Regulation S Global Note of such series or Restricted Regulation S Global Note of such series, information regarding the Agent Member's account with the Depositary to be debited with such decrease, and (2) a certificate in the form of EXHIBIT E attached hereto given by the holder of such interest and stating that the Person exchanging or transferring such interest in the Restricted Regulation S Global Note of such series, the Unrestricted Regulation S Global Note of such series or the Accredited Investor Note of such series, as the case may be, reasonably believes that the Person acquiring such interest in the Rule 144A Global Note is a qualified institutional buyer (as defined in Rule 144A) and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A, Euroclear or Cedel or the Trustee, as the case may be, shall instruct the Depositary to reduce the Restricted Regulation S Global Note of such series or the Unrestricted Regulation S Global Note of such series, as the case may be, by the aggregate principal amount of the beneficial interest in the Restricted Regulation S Global Note of such series or the Unrestricted Regulation S Global Note of such series to be exchanged or transferred, or, in the case of an Accredited Investor Note, shall cancel such Note surrendered for transfer or exchange in accordance with Section 2.09 hereof, and the Trustee shall instruct the Depositary, concurrently with such reduction or cancellation to increase the principal amount of the Rule 144A Global Note of such series by the aggregate principal amount of the beneficial interest in the Restricted Regulation S Global Note of such series or the Unrestricted Regulation S Global Note of such series, or by the aggregate principal amount of the Accredited Investor Note of such series, as the case may be, to be so exchanged or transferred, and to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Rule 144A Global Note of such series equal to the reduction in the principal amount of the Restricted Regulation S Global Note of such series, the Unrestricted Regulation S Global Note of such series, or to the aggregate principal amount of the Accredited Investor Note of such series, as the case may be. 20 (v) RULE 144A GLOBAL NOTE, RESTRICTED REGULATION S GLOBAL NOTE OR UNRESTRICTED REGULATION S GLOBAL NOTE TO ACCREDITED INVESTOR NOTE. If a holder of a beneficial interest in the Rule 144A Global Note of any series, the Restricted Regulation S Global Note of any series or the Unrestricted Regulation S Global Note of any series deposited with the Depositary wishes at any time to exchange its interest in such Global Note for an Accredited Investor Note or transfer its interest in such Note to a Person who wishes to take delivery thereof in the form of an Accredited Investor Note of such series such holder may, subject to the rules and procedures of Euroclear or Cedel and the Depositary, as the case may be, exchange or transfer or cause the exchange or transfer of such interest for an equivalent interest in an Accredited Investor Note of such series, in accordance with, and subject to, this clause (v). Upon receipt by the Trustee, at the Corporate Trust Office, of a certificate in the form of EXHIBIT F attached hereto given by the holder of such beneficial interest and stating that the Person exchanging or transferring such interest reasonably believes that the Person acquiring such interest in an Accredited Investor Note of such series is an institution that is an "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and is obtaining such interest in a transaction exempt from the Securities Act, Euroclear or Cedel or the Trustee, as the case may be, shall instruct the Depositary to reduce the Restricted Regulation S Global Note of such series, the Unrestricted Regulation S Global Note of such series or the Rule 144A Global Note of such series, as the case may be, by the aggregate principal amount of the beneficial interest in such Global Notes to be exchanged or transferred (such instructions to contain information regarding the Agent Member's account with the Depositary to be debited with such decrease), the Company shall execute, and the Trustee shall authenticate and deliver in the name of the Person specified in such instructions an Accredited Investor Note of such series equal to the reduction in the principal amount of the Restricted Regulation S Global Note of such series, the Unrestricted Regulation S Global Note of such series or the Rule 144A Global Note of such series, as the case may be. (vi) OTHER EXCHANGES. In the event that a Global Note is exchanged for Notes in definitive registered form without interest coupons pursuant to Section 2.05 hereof, such Notes may be exchanged or transferred for one another only in accordance with such procedures as are substantially consistent with the provisions of clauses (ii) through (v) above (including, without limitation, the certification requirements intended to insure that such exchanges or transfers comply with Rule 144A, Rule 144 or Regulation S and generally with the Securities Act, as the case may be) and as may be from time to time adopted by the Company and the Trustee. (c) Successive registrations and registrations of transfers and exchanges as aforesaid may be made from time to time as desired, and each such registration shall be noted on the Note Register. No service charge shall be made for any registration of transfer or exchange of the Notes, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith and any other amounts required to be paid by the provisions of the Notes. (d) If Notes are issued upon the registration of transfer, exchange or replacement of Notes not bearing the legends required by the form of Note attached as EXHIBIT A hereto (collectively, the "LEGEND"), the Notes so issued shall not bear the Legend. If Notes are issued upon the registration or transfer, exchange or replacement of Notes bearing the Legend, or if a request is made to remove the Legend on a Note, the Notes so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Trustee such satisfactory evidence, which 21 may include an opinion of counsel of recognized standing licensed to practice law in the State of New York and experienced in matters involving the Securities Act, as may be reasonably required by the Company that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S or that such Notes are not "restricted securities" within the meaning of Rule 144. Upon provision of such satisfactory evidence, the Trustee, at the direction of the Company, shall authenticate and deliver a Note that does not bear the Legend. If a Legend is removed from the face of a Note and the Note is subsequently held by an affiliate of the Company, the Legend shall be reinstated. Each Holder of a Note agrees to indemnify the Company and the Trustee against any liability that may result from the transfer, exchange or assignment of such Holder's Note in violation of any provision of this Indenture and/or applicable United States federal or state securities law. The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Note other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.07. TEMPORARY NOTES. Pending the preparation of definitive Notes of any series, the Company may execute, and the Trustee shall authenticate and deliver, temporary Notes (printed, lithographed or typewritten) of any authorized denomination, and substantially in the form of the definitive Notes in lieu of which they are issued, but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every temporary Note of any series shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with like effect, as the definitive Notes of that series in accordance with the terms of Section 2.04 hereof. Without unnecessary delay the Company will execute and will furnish definitive Notes of such series and thereupon any or all temporary Notes of that series may be surrendered in exchange therefor (without charge to the holders), at the office or agency of the Company designated for the purpose in the Borough of Manhattan, the City and State of New York, and the Trustee shall authenticate and such office or agency shall make available for delivery in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes of that series, unless the Company advises the Trustee to the effect that definitive Notes need not be executed and furnished until further notice from the Company. Until so exchanged, the temporary Notes of that series shall be entitled to the same benefits under this Indenture as definitive Notes of that series authenticated and delivered hereunder. SECTION 2.08. MUTILATED, DESTROYED, LOST AND STOLEN NOTES. In case any temporary or definitive Note shall become mutilated or be destroyed, lost or stolen, the Company (subject to the next succeeding sentence) shall execute, and upon its request the Trustee (subject as aforesaid) shall authenticate and make available for delivery, a new Note of the same series bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company and to the Trustee such security or indemnity as may be required by them to save each of them harmless and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and to the Trustee evidence to their satisfaction of the destruction, loss or theft of the applicant's Note and of the ownership thereof. The Trustee may authenticate any such substituted 22 Note and make available for delivery the same upon the written order of the Company. Upon the issuance of any substituted Note, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and the expenses of the Trustee) connected therewith. In case any Note which has matured or is about to mature or has been called for redemption shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substituted Note, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Note) if the applicant for such payment shall furnish to the Company and to the Trustee such security or indemnity as they may require to save them harmless and, in case of destruction, loss or theft, evidence to the satisfaction of the Company and the Trustee of the destruction, loss or theft of such Note and of the ownership thereof. Every Note issued pursuant to the provisions of this Section in substitution for any Note which is mutilated, destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Note shall be found at any time, or be enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Notes of the same series duly issued hereunder. All Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes, and shall preclude (to the extent lawful) any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.09. CANCELLATIONS. All Notes surrendered for the purpose of payment, redemption, exchange or registration of transfer shall, if surrendered to the Company or any paying agent, be delivered to the Trustee for cancellation or, if surrendered to the Trustee, shall be canceled by it, and no Notes shall be issued in lieu thereof except as expressly required or permitted by any of the provisions of this Indenture. On request of the Company, the Trustee shall deliver to the Company canceled Notes held by the Trustee. All canceled Notes held by the Trustee shall be disposed of in accordance with the Trustee's policy of disposal of canceled Notes; provided that the Trustee shall not be required to destroy canceled Notes. If the Company shall otherwise acquire any of the Notes, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. SECTION 2.10. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, express or implied, shall give or be construed to give to any Person, other than the parties hereto and the holders of the Notes, any legal or equitable right, remedy or claim under or in respect of this Indenture, or under any covenant, condition or provision herein contained; all such covenants, conditions and provisions being for the sole benefit of the parties hereto and of the holders of the Notes. SECTION 2.11. AUTHENTICATING AGENT. So long as any of the Notes of any series remain Outstanding, there may be an Authenticating Agent for any or all such series of Notes which the Trustee shall have the right to appoint. The Authenticating Agent shall be authorized to act on behalf of the Trustee to authenticate Notes of such series issued upon exchange, transfer or partial redemption thereof, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. All references in this Indenture to the authentication of Notes of any series by the Trustee shall be deemed to include authentication by an Authenticating Agent for such series except for authentication upon original issuance or pursuant to Section 2.07 hereof. Each Authenticating Agent shall be acceptable to the Company and shall be a bank 23 or trust company or corporation which has a combined capital and surplus, as most recently reported or determined by it, of not less than $50 million, and which is otherwise authorized under such laws to conduct a trust business and is subject to supervision or examination by Federal or state authorities. If at any time any Authenticating Agent shall cease to be eligible in accordance with these provisions, it shall resign immediately. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time (and upon request by the Company shall) terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon resignation, termination or cessation of eligibility of any Authenticating Agent, the Trustee may appoint an eligible successor Authenticating Agent acceptable to the Company and shall mail written notice of such appointment to all Noteholders of the series with respect to which such Authenticating Agent shall serve, as their names and addresses appear in the Note Register. Any successor Authenticating Agent, upon acceptance of its appointment hereunder, shall become vested with all the rights, powers and duties of its predecessor hereunder as if originally named as an Authenticating Agent pursuant hereto. SECTION 2.12. CUSIP NUMBERS. The Company in issuing the Notes may, and in the case of Global Notes pursuant to Section 2.02(c) shall, use "CUSIP" numbers (if then generally in use), and, if so used, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to holders of Notes; PROVIDED that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Notes, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP numbers. SECTION 2.13. SUPPORT AGREEMENT. Holders of Notes of a particular series and the Trustee in respect thereof are entitled to the benefits of the Support Agreement available to the Lenders (as defined in the Support Agreement), if, and only if, provided for in an indenture supplemental hereto or in an Officer's Certificate delivered to the Trustee pursuant to Section 2.01 hereof, it being understood and agreed that the Notes of such series shall constitute Obligations (as defined in the Support Agreement) for the purposes of the Support Agreement. ARTICLE THREE Redemption of Notes, Repayment at the Option of the Holder and Sinking Fund Provisions SECTION 3.01. REDEMPTION OF NOTES; REPAYMENT AT THE OPTION OF THE HOLDER. The Company may redeem the Notes of any series issued hereunder on and after the dates and in accordance with the terms established for that series pursuant to Section 2.01 hereof. The Notes may be repayable by the Company at the option of the holders thereof on and after the dates in accordance with the terms established for that series pursuant to Section 2.01 hereof. 24 SECTION 3.02. NOTICES OF REDEMPTION. (a) In case the Company shall desire to exercise such right to redeem all or, as the case may be, a portion of the Notes of any series in accordance with the right reserved so to do, it shall give notice of such redemption to holders of the Notes of the series to be redeemed by mailing, first-class postage prepaid, a notice of such redemption not less than 30 days and not more than 60 days before the date fixed for redemption of that series to such holders at their last addresses as they shall appear upon the Note Register. Any notice which is mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the registered holder receives the notice. In any case, failure duly to give such notice to the holder of any Note of any series designated for redemption in whole or in part, or any defect in the notice, shall not affect the validity of the proceedings for the redemption of any other Notes of that series or any other series. In the case of any redemption of Notes prior to the expiration of any restriction on such redemption or pursuant to an election of the Company which is subject to a condition provided in the terms of such Notes or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officer's Certificate evidencing compliance with any such restriction or condition. Each such notice of redemption shall identify the Notes to be redeemed (including CUSIP numbers), specify the date fixed for redemption and the redemption price at which Notes of that series are to be redeemed, and shall state that payment of the redemption price of the Notes to be redeemed will be made at the office or agency of the Company in the Borough of Manhattan, the City and State of New York, upon presentation and surrender of such Notes, that interest accrued to the date fixed for redemption will be paid as specified in that notice, that from and after that date interest will cease to accrue, and that the redemption is for a sinking fund, if such is the case. If less than all the Notes of a series are to be redeemed, the notice to the holders of Notes of that series to be redeemed shall specify the particular Notes to be so redeemed. In case any Note is to be redeemed in part only, the notice which relates to such Note shall state the portion of the principal amount thereof to be redeemed, and shall state that on and after the redemption date, upon surrender of such Note, a new Note or Notes of that series in principal amount equal to the unredeemed portion thereof will be issued. (b) The Company shall give the Trustee at least 45 days' advance notice (provided that such notice is required solely with respect to a redemption at the option of the Company) of the date fixed for redemption (unless shorter notice shall be acceptable to the Trustee) as to the aggregate principal amount of Notes of the series to be redeemed, and thereupon the Trustee shall select, by lot or in such other manner as it shall deem appropriate and fair in its discretion and which may provide for the selection of a portion or portions (equal to $100,000 or integral multiples of $1,000 in excess thereof) of the principal amount of Notes of such series of a denomination larger than $100,000, the Notes to be redeemed and shall thereafter promptly notify the Company and the Note Registrar (if other than itself) in writing of the numbers of the Notes to be redeemed. The Company may, if and whenever it shall so elect, by delivery of instructions signed on its behalf by an Authorized Officer, instruct the Trustee or any paying agent to call all or any part of the Notes of a particular series for redemption and to give notice of redemption in the manner set forth in this Section, such notice to be in the name of the Company or its own name as the Trustee or such paying agent may deem advisable. In any case in which notice of redemption is to be given by the Trustee or any such paying agent, the Company shall deliver or cause to be delivered to, or permit to remain with, the Trustee or such paying agent, as the same may be, such Note Register, transfer books or other records, or 25 suitable copies or extracts therefrom, sufficient to enable the Trustee or such paying agent to give any notice by mail that may be required under the provisions of this Section. SECTION 3.03. PRESENTATION AND SURRENDER OF NOTES. (a) If the giving of notice of redemption shall have been completed as above provided, the Notes or portions of Notes of the series to be redeemed specified in such notice shall become due and payable on the date and at the place stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and interest on such Notes or portions of Notes shall cease to accrue on and after the date fixed for redemption, unless the Company shall default in the payment of such redemption price and accrued interest with respect to any such Note or portion thereof. On presentation and surrender of such Notes on or after the date fixed for redemption at the place of payment specified in the notice, such Notes shall be paid and redeemed at the applicable redemption price for such series, together with interest accrued thereon to the date fixed for redemption (but if the date fixed for redemption is an interest payment date, the interest installment payable on such date shall be payable to the registered holder at the close of business on the applicable record date pursuant to Section 2.03). (b) Upon presentation of any Note of such series which is to be redeemed in part only, the Company shall execute, the Trustee shall authenticate and the office or agency where the Note is presented shall make available for delivery to the holder thereof, at the expense of the Company, a new Note or Notes of the same series, of authorized denominations in principal amount equal to the unredeemed portion of the Note so presented. SECTION 3.04. SINKING FUND. The provisions of this Section 3.04 and Sections 3.05 and 3.06 shall apply to any sinking fund for the retirement of Notes of a series, except as otherwise specified as contemplated by Section 2.01 for Notes of that series. The minimum amount of any sinking fund payment provided for by the terms of Notes of any series is herein referred to as a "mandatory sinking fund payment," and any payment in excess of such minimum amount provided for by the terms of Notes of any series is herein referred to as an "optional sinking fund payment." If provided for by the terms of Notes of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 3.05. Each sinking fund payment shall be applied to the redemption of Notes of any series as provided for by the terms of Notes of that series. SECTION 3.05. SATISFACTION OF SINKING FUND PAYMENT. The Company (i) may deliver Outstanding Notes of a series (other than any previously called for redemption) and (ii) may apply as a credit Notes of a series which have been redeemed either at the election of the Company pursuant to the terms of such Notes or through the application of permitted optional sinking fund payments pursuant to the terms of such Notes, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Notes of such series required to be made pursuant to the terms of such Notes as provided for by the terms of that series; provided that such Notes have not been previously so credited. Such Notes shall be received and credited for such purpose by the Trustee at the redemption price specified in such Notes for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. 26 SECTION 3.06. REDEMPTION OF SECURITIES FOR SINKING FUND. Not less than 45 days prior to each sinking fund payment date for any series of Notes, the Company will deliver to the Trustee an Officer's Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of that series, the portion thereof, if any, which is to be satisfied by delivering and crediting Notes of that series pursuant to Section 3.05 and the basis for such credit and will, together with such Officer's Certificate, deliver to the Trustee any Notes to be so delivered. Not less than 30 days before each such sinking fund payment date, the Trustee shall select the Notes to be redeemed upon such sinking fund payment date in the manner specified in Section 3.02 and cause notice to be given in the name of and at the expense of the Company in the manner provided in Section 3.02. Such notice having been duly given, the redemption of such Notes shall be made upon the terms and in the manner stated in Section 3.03. ARTICLE FOUR Particular Covenants of the Company Unless otherwise provided in a supplemental indenture executed in accordance with Article Nine hereof, the covenants contained in this Article Four shall apply to each series of the Notes. The Company covenants and agrees for each series of the Notes as follows: SECTION 4.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company will duly and punctually pay or cause to be paid the principal of (and premium, if any) and interest on the Notes of that series at the time and place and in the manner provided herein and established with respect to such Notes. SECTION 4.02. MAINTENANCE OF OFFICE AND AGENCY. So long as any series of the Notes remains Outstanding, and thereafter as provided in Article Eleven, the Company agrees to maintain an office or agency in the Borough of Manhattan, the City and State of New York (which, unless changed, shall be a corporate trust office or agency of the Trustee), with respect to each such series and at such other location or locations as may be designated as provided in this Section 4.02, where (i) Notes of that series may be presented for payment, (ii) Notes of that series may be presented as hereinabove authorized for registration of transfer and exchange and (iii) notices and demands to or upon the Company in respect of the Notes of that series and this Indenture may be given or served, such designation to continue with respect to such office or agency until the Company shall, by written notice signed by its Chief Executive Officer, its President, a Vice President or its Treasurer and delivered to the Trustee, designate some other office or agency for such purposes or any of them. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, notices and demands. SECTION 4.03. MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. (a) If the Company shall appoint one or more paying agents, other than the Trustee, for all or any series of the Notes, the Company will cause each such paying agent to execute and deliver 27 to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section, that it will: (1) hold all sums held by it as such agent for the payment of the principal of (and premium, if any) or interest on the Notes of that series (whether such sums have been paid to it by the Company or by any other obligor of such Notes) in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any failure by the Company (or by any other obligor of such Notes) to make any payment of the principal of (and premium, if any) or interest on the Notes of that series when the same shall be due and payable; (3) at any time during the continuance of any failure referred to in the preceding paragraph (a)(2) above, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent; and (4) perform all other duties of paying agent as set forth in this Indenture. (b) If the Company shall act as its own paying agent with respect to any series of the Notes, it will, on or before each due date of the principal of (and premium, if any) or interest on Notes of that series set aside, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay such principal (and premium, if any) or interest so becoming due on Notes of that series until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of such action, or any failure (by it or any other obligor on such Notes) to take such action. Whenever the Company shall have one or more paying agents for any series of Notes, it will, no later than 11:00 A.M. New York time on or prior to each due date of the principal of (and premium, if any) or interest on any Notes of that series, deposit with the paying agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum in immediately available funds to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. (c) Anything in this Section 4.03 to the contrary notwithstanding, (i) the agreement to hold sums in trust as provided in this Section 4.03 is subject to the provisions of Section 11.06 and (ii) the Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or direct any paying agent to pay, to the Trustee all sums held in trust by the Company or such paying agent, such sums to be held by the Trustee upon the same terms and conditions as those upon which such sums were held by the Company or such paying agent; and, upon such payment by any paying agent to the Trustee, such paying agent shall be released from all further liability with respect to such sums. SECTION 4.04. APPOINTMENT OF TRUSTEE. The Company, whenever necessary to avoid or fill a vacancy in the Office of Trustee, will appoint, in the manner provided in Section 7.10, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 4.05. CONSOLIDATION, MERGER OR SALE. The Company will not, while any of the Notes remain Outstanding, consolidate with, merge into, merge into itself or sell or convey all or 28 substantially all of its property to any other Person, unless the provisions of Article Ten hereof are complied with. SECTION 4.06. LIMITATION ON LIENS. If this covenant shall be made applicable to the Notes of a particular series, so long as any of the Notes of that series are outstanding, the Company covenants and agrees that it will not create or suffer to exist, or permit any of its Subsidiaries to create or suffer to exist, any Lien, security interest or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its property, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income, in each case to secure or provide for the payment of any Indebtedness, without effectively providing that the Outstanding Notes to which this section shall have been made applicable (together with, if the Company so determines, any other indebtedness or obligation then existing or thereafter created ranking equally with the Notes) shall be secured equally and ratably with (or prior to) such Indebtedness so long as such Indebtedness shall be so secured, except that the foregoing provisions shall not apply to: (a) Liens or security interests existing on such property at the time of its acquisition (other than any such Lien or security interest created in the contemplation of such acquisition or of such Person becoming a Subsidiary); (b) Liens created by purchase money mortgages or other security interests upon or in any property acquired or held by the Company or any Subsidiary in the ordinary course of business to secure the purchase price of such property or to secure Indebtedness incurred soley for the purpose of financing the acquisition of such property; (c) Liens or security interests upon or with respect to any of the Company's interests in its Subsidiaries (other than direct Subsidiaries of the Company) or any of the Company's Subsidiaries' assets incurred solely to secure repayment of project financing for, or utility obligations of, such Subsidiary; (d) Margin deposits securing Indebtedness of up to $10,000,000 at any one time outstanding relating to obligations incurred in the ordinary course of its energy marketing business; (e) Liens securing obligations, neither assumed by the Company or any Subsidiary nor on account of which the Company or any Subsidiary customarily pays interest, upon real estate upon or under which the Company or any Subsidiary has a right-of-way, easement, franchise or other servitude or of which the Company or any Subsidiary is the lessee of the whole thereof or any interest therein for the purpose of locating pipe lines, substations, measuring stations, tanks or pumping or delivery equipment; (f) Liens or security interests on assets of a Subsidiary securing Indebtedness of such Subsidiary, provided that the aggregate principal amount of outstanding Indebtedness of Subsidiaries secured by Liens or security interests incurred pursuant to this clause (f) shall not exceed $10,000,000 at any time; (g) Liens on any assets of any Subsidiary of the Company in favor of he Company or any Subsidiary of the Company; and 29 (h) Extensions and renewals of any Lien or security interest described in clauses (a) through (g) above, PROVIDED that (A) any such extension or renewal shall be limited to the property theretofore subject to such Lien or security interest and additions and/or improvements thereto and (B) the principal amount of the Indebtedness secured by such Lien or security interest shall not be increased. Notwithstanding the foregoing, the Company and one or more Subsidiaries may issue, assume or guarantee Indebtedness secured by Liens upon or with respect to any property of the Company or any Subsidiary which would otherwise be subject to the foregoing restrictions, provided that at the time of such issuance, assumption or guarantee of Indebtedness, after giving effect thereto and to the retirement of any Indebtedness which is concurrently being retired, the sum of (i) the aggregate principal amount of all outstanding Indebtedness secured by such Liens which could not have been issued, assumed or guaranteed by the Company or a Subsidiary without equally and ratably securing the Notes of each series then Outstanding, except for the provisions of this paragraph, plus (ii) the Attributable Debt of the Company and its Subsidiaries in respect of Sale and Leaseback Transactions entered into pursuant to the final paragraph under Section 4.09 below, does not at such time exceed 15% of Consolidated Net Tangible Assets of the Company computed as of the end of the most recent fiscal quarter preceding such issuance, assumption or guarantee. SECTION 4.07. CERTIFICATE TO TRUSTEE. So long as any of the Notes are Outstanding, the Company shall furnish to the Trustee on or before May 15 in each year (beginning with May 15, 1998) a brief certificate from the principal executive, financial or accounting officer of the Company as to his or her knowledge of the Company's compliance with all covenants under this Indenture (such compliance to be determined without regard to any period of grace or requirement of notice provided under this Indenture). SECTION 4.08. REPORTS BY THE COMPANY. (a) If the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, then the Company shall file with the Trustee, and the Trustee shall provide Noteholders, within 30 days after it files them with the Commission, copies of its annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. (b) As long as the Company is not subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, nor is exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act and the Notes are "restricted securities" within the meaning of Rule 144 under the Securities Act, upon the request of a Noteholder who is a "qualified institutional buyer" (as defined in Rule 144A) or any owner of a beneficial interest in a Note who is a "qualified institutional buyer" (as defined in Rule 144A), the Company shall promptly furnish or cause to be furnished "Rule 144A Information" (as defined herein) to such Noteholder or beneficial owner or to a prospective purchaser of such Note who is a "qualified institutional buyer" (as defined in Rule 144A) designated by such Noteholder or beneficial owner who is a "qualified institutional buyer" (as defined in Rule 144A). "RULE 144A INFORMATION" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto). 30 (c) So long as any of the Notes are Outstanding, in addition to the requirement to furnish Rule 144A Information as provided in subsection (b), the Company shall file with the Trustee and the Trustee shall provide to all Noteholders and (upon the request thereof delivered to the Company or the Trustee) to holders of an interest in any Global Note annual consolidated financial statements of the Company prepared in accordance with GAAP (together with notes thereto and, with respect to financial statements for fiscal year 1998 and thereafter, a report thereon by an independent accountant of established national reputation), such statements to be filed with the Trustee within 120 days after the end of the fiscal year covered thereby. In addition, the Company will file with the Trustee, and the Trustee will provide upon written request to each holder (and beneficial holder) of not less than 10% of the outstanding principal amount of the Notes of any series, unaudited condensed consolidated balance sheets of the Company as of the end of each of the first three fiscal quarters of each fiscal year prepared on a basis consistent with the annual financial statements furnished pursuant to clause (c)(i), such statements to be filed with the Trustee within 60 days after the end of each such fiscal quarter. (d) As long as Notes remain outstanding and the Support Agreement is still in effect, the Company shall file with the Trustee, and the Trustee shall provide to all holders of Notes that have the benefit of the Support Agreement, within 30 days after they are filed with the Commission, copies of Energy Corp.'s annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may by rules and regulations prescribe) that Energy Corp. is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company's compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officer's Certificates). SECTION 4.09. RESTRICTIONS ON SALES AND LEASEBACKS. If this covenant shall be made applicable to the Notes of a particular series, the Company shall not and shall not permit any Subsidiary to enter into any arrangement with any Person (not including arrangements between the Company and a Subsidiary or between Subsidiaries) providing for the sale and leasing back by the Company or any Subsidiary for a period, including renewal, in excess of three years of any property which has been owned or operated for more than nine months after the acquisition thereof or the completion of construction and commencement of full operation thereof by the Company or any Subsidiary (a "Sale and Leaseback Transaction"), unless: (1) immediately after giving effect to such Sale and Leaseback Transaction, no Event of Default, or event that with the giving of notice or passage of time or both would constitute an Event of Default, shall have occurred and be continuing, and (2) an amount equal to the fair market value (as determined in good faith by the Company's Board of Directors at the time of entering into such arrangements) is received for the property so sold and leased back and is (i) invested in, or is held in cash or cash-equivalents for reinvestment in, other energy-related assets owned or to be owned by the Company or its Subsidiaries or (ii) applied to the payment or prepayment of Indebtedness of the Company or any of its Subsidiaries (other than Indebtedness owed to the Company or any of its Subsidiaries). 31 Notwithstanding the foregoing, the Company and its Subsidiaries, or any of them, may enter into a Sale and Leaseback Transaction which would otherwise be prohibited by the above restriction, provided that at the time of such transaction, after giving effect thereto, the sum of (i) the aggregate amount of the Attributable Debt in respect of all Sale and Leaseback Transactions existing at such time which could not have been entered into except for the provisions of this paragraph, plus (ii) the aggregate principal amount of outstanding Indebtedness secured by Liens in reliance on the last paragraph under Section 4.06 above does not at such time exceed 15% of Consolidated Net Tangible Assets of the Company computed as of the end of the most recent fiscal quater preceding such Sale and Leaseback Transaction. SECTION 4.10. SUPPORT AGREEMENT. The Company covenants and agrees with respect to any Notes that are entitled to the benefit of the Support Agreement that (a) it will perform its obligations under the Support Agreement, and request funds from Energy Corp. in accordance with the terms of the Support Agreement in the event the Company is unable to make timely payment, when due, of interest, principal or premium, if any, on the Notes, and (b) it will not agree to any amendment or termination of the Support Agreement as in effect on the date of this Indenture, except in accordance with the terms of the Support Agreement as in effect on the date of this Indenture. ARTICLE FIVE Noteholders' Lists and Reports by the Company and the Trustee SECTION 5.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Company will furnish or cause to be furnished to the Trustee (a) not later than 10 days after each regular record date (as defined in Section 2.03), a list, in such form as the Trustee may reasonably require, of the names and addresses of the holders of each series of Notes as of such regular record date; provided that the Company shall not be obligated to furnish or cause to furnish such list at any time that the list shall not differ in any respect from the most recent list furnished to the Trustee by the Company and (b) at such other times as the Trustee may request in writing within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; PROVIDED, HOWEVER, no such list need be furnished for any series for which the Trustee shall be the Note Registrar. SECTION 5.02. INFORMATION FROM TRUSTEE. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 5.01 and as to the names and addresses of holders of Notes received by the Trustee in its capacity as Note Registrar (if acting in such capacity). (b) The Trustee may destroy any list furnished to it as provided in Section 5.01 upon receipt of a new list so furnished. (c) In case three or more holders of Notes of a series (hereinafter referred to as "applicants") holding not less than 10% in aggregate principal amount of the Notes of such series apply in writing to the Trustee, and furnish to the Trustee reasonable proof that each such applicant has owned 32 a Note for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Notes of that series or holders of all Notes with respect to their rights under this Indenture or under such Notes, and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Trustee shall, within five Business Days after the receipt of such application, at its election, either: (1) afford to such applicants access to the information preserved at the time by the Trustee in accordance with the provisions of Section 5.02(a); or (2) inform such applicants as to the approximate number of holders of Notes of such series or of all Notes, as the case may be, whose names and addresses appear in the information preserved at the time by the Trustee, in accordance with the provisions of Section 5.02(a), and as to the approximate cost of mailing to such Noteholders the form of proxy or other communication, if any, specified in such application. (d) If the Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each holder of that series or of all Notes, as the case may be, whose name and address appears in the information preserved at the time by the Trustee in accordance with the provisions of Section 5.02(a), a copy of the form of proxy or other communication which is specified in such request, with reasonable promptness after a tender to the Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing. (e) Each and every holder of the Notes, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any paying agent nor any Note Registrar shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Notes in accordance with the provisions of Section 5.02(c), regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under Section 5.02(c). ARTICLE SIX Remedies of the Trustee and Noteholders on Event of Default SECTION 6.01. EVENT OF DEFAULT DEFINED; ACCELERATION OF MATURITY; WAIVER OF DEFAULT. (a) Unless otherwise provided in a supplemental indenture executed in accordance with Article Nine hereof, the Events of Default contained in this Article Six shall apply to each series of the Notes. Whenever used herein with respect to Notes of a particular series, "Event of Default" means any one or more of the following events which has occurred and is continuing: (1) default in the payment of the principal of (or any premium on) any of the Notes of that series as and when the same shall become due and payable, whether at maturity, upon redemption, by declaration or otherwise, or in any payment required by any sinking or analogous fund established with respect to that series; 33 (2) default in the payment of any installment of interest upon any of the Notes of that series, as and when the same shall become due and payable, and continuance of such default for a period of 30 days; (3) (i) an event of default, as defined in any instrument of the Company or any of its Material Consolidated Subsidiaries under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of the Company or any Material Consolidated Subsidiary of the Company, that has resulted in the acceleration of such Indebtedness and such acceleration shall not have been rescinded or annulled within 30 days of the occurrence thereof, or any default occurring in the payment of such Indebtedness at final maturity (and after the expiration of any applicable grace period and such default shall not have been cured within 90 days), other than such Indebtedness (x) which is payable solely out of the property or assets of a partnership, joint venture or similar entity of which the Company or any of its Subsidiaries or Affiliates is a participant, or which is secured solely by a lien on the property or assets owned or held by such entity, (y) which is Non-Recourse Indebtedness of the Company or any Material Consolidated Subsidiary of the Company, or (z) the principal of such Indebtedness, which, when added to the principal of all other such Indebtedness (exclusive of Indebtedness under clauses (x) and (y) above), does not exceed the greater of $15,000,000 (or the equivalent in another currency) and 2% of the Consolidated Net Tangible Assets of the Company computed as of the end of the most recent fiscal quarter; or (ii) an event of default, as defined in any instrument of Energy Corp. or LG&E under which there may be issued, or by which there may be secured or evidenced, any Indebtedness of Energy Corp. or LG&E, that has resulted in the acceleration of such Indebtedness and such acceleration shall not have been rescinded or annulled within 30 days of the occurrence thereof, or any default occurring in the payment of such Indebtedness at final maturity (and after the expiration of any applicable grace period and such default shall not have been cured within 90 days), other than such Indebtedness (x) which is payable solely out of the property or assets of a partnership, joint venture or similar entity of which Energy Corp. or any of its Subsidiaries or Affiliates is a participant, or which is secured solely by a lien on the property or assets owned or held by such entity, (y) which is Non-Recourse Indebtedness of Energy Corp. or LG&E, as the case may be, or (z) the principal of such Indebtedness, which, when added to the principal of all other such Indebtedness (exclusive of Indebtedness under clauses (x) and (y) above), does not exceed the greater of $25,000,000 (or the equivalent in another currency) and 1% of the Consolidated Net Tangible Assets of Energy Corp. computed as of the end of the most recent fiscal quarter; (4) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company with respect to that series contained in such Notes or otherwise established with respect to that series of Notes pursuant to Section 2.01 hereof or contained in this Indenture or the Support Agreement, if applicable to that series of Notes (other than a covenant or agreement which has been expressly included in this Indenture solely for the benefit of one or more series of Notes other than such series) for a period of 30 days after the date on which written notice of 34 such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to the Company by the Trustee, by registered or certified mail, or to the Company and the Trustee by the holders of at least 25% in principal amount of the Notes of that series at the time outstanding; (5) a decree or order by a court having jurisdiction in the premises shall have been entered adjudging the Company, Energy Corp., LG&E or any Material Consolidated Subsidiary of the Company (collectively, the "RELEVANT PARTIES") as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation or reorganization of any Relevant Party under the Federal Bankruptcy Code or any other similar applicable Federal or state law, and such decree or order shall have continued unvacated and unstayed for a period of 90 days; an involuntary case shall be commenced under the Federal Bankruptcy Code in respect of any Relevant Party and shall continue undismissed for a period of 90 days or an order for relief in such case shall have been entered; or a decree or order of a court having jurisdiction in the premises shall have been entered for the appointment on the ground of insolvency or bankruptcy of a receiver, custodian, liquidator, trustee or assignee in bankruptcy or insolvency of any Relevant Party or of its property, or for the winding up or liquidation of its affairs, and such decree or order shall have remained in force unvacated and unstayed for a period of 90 days; (6) any Relevant Party shall institute proceedings to be adjudicated a voluntary bankrupt, shall consent to the filing of a bankruptcy proceeding against it, shall file a petition or answer or consent seeking liquidation or reorganization under the Federal Bankruptcy Code or other similar applicable Federal or state law, shall consent to the filing of any such petition or shall consent to the appointment on the ground of insolvency or bankruptcy of a receiver or custodian or liquidator or trustee or assignee in bankruptcy or insolvency of it or of its property, or shall make a general assignment for the benefit of creditors; (7) one or more final judgments, decrees or orders of any court, tribunal, arbitration, administrative or other governmental body or similar entity for the payment of money shall be rendered against the Company or any Material Consolidated Subsidiary of the Company or any of their respective properties in an aggregate amount in excess of the greater of $15,000,000 or 2% of Consolidated Net Tangible Assets of the Company computed as of the end of the most recent fiscal quarter (excluding the amount thereof covered by (i) insurance or (ii) a performance or similar bond) and such judgment, decree or order shall remain unvacated, undischarged and unstayed for more than 90 days, except while being contested in good faith by appropriate proceedings; or (8) one or more final judgments, decrees or orders of any court, tribunal, arbitration, administrative or other governmental body or similar entity for the payment of money shall be rendered against Energy Corp. or LG&E or any of their respective properties in an aggregate amount in excess of the greater of $25,000,000 or 1% of the Consolidated Net Tangible Assets of Energy Corp. computed as of the end of the most recent fiscal quarter (excluding the amount thereof covered by (i) insurance or (ii) a performance or similar bond) and such judgment, decree or order shall remain 35 unvacated, undischarged and unstayed for more than 90 days, except while being contested in good faith by appropriate proceedings; or (9) at any time that any of the Notes are entitled to be to the benefits of the Support Agreement, failure on the part of Energy Corp. duly to observe or perform any of the covenants or agreements on the part of Energy Corp. under the Support Agreement (after giving effect to any applicable grace periods) for a period of 90 days after the date on which written notice of such failure, requiring the same to be remedied and stating that such notice is a "Notice of Default" hereunder, shall have been given to Energy Corp. by the Trustee, by registered or certified mail, or to Energy Corp. and the Trustee by the holders of at least 25% in principal amount of the Notes of that series at the time outstanding. (b) In each and every such case, the Company shall file with the Trustee written notice of the occurrence of any Event of Default within five Business Days of the Company's becoming aware of any such Event of Default, and unless the principal of all the Notes of that series shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes of that series then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by such Noteholders), may declare the principal of all the Notes of that series to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything contained in this Indenture or in the Notes of that series or established with respect to that series pursuant to Section 2.01 hereof to the contrary notwithstanding; provided that in the case of an Event of Default described in Section 6.01(a)(5) hereof (with respect to the Company and the Parent only), the entire principal amount of all Outstanding Notes, all interest accrued and unpaid thereon, and all premium (if any) and other amounts payable under the Notes and this Indenture, if any, shall automatically become due and payable without presentment, demand, protest or notice of any kind, all of which are hereby waived. (c) The provisions of subsection (b) of this Section, however, are subject to the condition that if, at any time after the principal of the Notes of that series shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Notes of that series and the principal of (and premium, if any, on) any and all Notes of that series which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that such payment is enforceable under applicable law, upon overdue installments of interest, at the rate per annum expressed in the Notes of that series to the date of such payment or deposit) and the amount payable to the Trustee under Section 7.06, and any and all defaults under the Indenture, other than the nonpayment of principal on Notes of that series which shall not have become due by their terms, shall have been remedied or waived as provided in Section 6.06, then and in every such case the holders of the majority in aggregate principal amount of the Notes of that series then outstanding, by written notice to the Company and to the Trustee, may rescind and annul such declaration and its consequences; but no such rescission and annulment shall extend to or shall affect any subsequent default, or shall impair any right consequent thereon. (d) In case the Trustee shall have proceeded to enforce any right with respect to Notes of that series under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been 36 determined adversely to the Trustee, then and in every such case the Company and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Company and the Trustee shall continue as though no such proceedings had been taken. SECTION 6.02. COLLECTION OF INDEBTEDNESS BY TRUSTEE; TRUSTEE MAY PROVE DEBT. (a) The Company covenants that (1) in case default shall be made in the payment of any installment of interest on any of the Notes of a series, and such default shall have continued for a period of 30 days, or (2) in case default shall be made in the payment of the principal of (or premium, if any, on) any of the Notes of a series when the same shall have become due and payable, whether upon maturity of the Notes of a series or upon redemption or upon declaration or otherwise, or in any payment required by any sinking or analogous fund established with respect to that series as and when the same shall have become due and payable, then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Notes of that series, the whole amount that then shall have become due and payable on all such Notes for principal (and premium, if any) or interest, or both, as the case may be, with interest upon the overdue principal (and premium, if any) and (to the extent that payment of such interest is enforceable under applicable law) upon overdue installments of interest at the rate per annum expressed in the Notes of that series; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, and the amount payable to the Trustee under Section 7.06. (b) In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree (i) against the Company, or any other obligor upon the Notes of that series and collect in the manner provided by law out of the property of the Company or any other obligor upon the Notes of that series wherever situated the moneys adjudged or decreed to be payable or (ii) against the Energy Corp., pursuant to Energy Corp.'s obligations under the Support Agreement, and collect in the manner provided by law out of the property of Energy Corp. (subject to the limitations set forth in the Support Agreement) the moneys adjudged or decreed to be payable. (c) In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, readjustment, arrangement, composition or other judicial proceedings affecting the Company, any other obligor on such Notes or the creditors or property of either, the Trustee shall have power to intervene in such proceedings and take any action therein that may be permitted by the court and shall (except as may be otherwise provided by law) be entitled to file such proofs of claim and other papers and documents as may be necessary or advisable in order to have the claims of the Trustee and of the holders of Notes of such series allowed for the entire amount due and payable by the Company or such other obligor under the Indenture at the date of institution of such proceedings and for any additional amount which may become due and payable by the Company or such other obligor after such date, and to collect and receive any moneys or other property payable or deliverable on any such claim, and to distribute the same after the deduction of the amount payable to the Trustee under Section 7.06; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the holders of Notes of that series to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to such Noteholders, to pay to the Trustee any amount due it under Section 7.06. (d) All rights of action and of asserting claims under this Indenture or the Support Agreement, or under any of the terms established with respect to Notes of that series, may be enforced by 37 the Trustee without the possession of any of such Notes, or the production thereof at any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for payment to the Trustee of any amounts due under Section 7.06, be for the ratable benefit of the holders of the Notes of that series. In case of an Event of Default hereunder, the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either at law, in equity, in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or the Support Agreement or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Nothing herein contained shall be deemed to authorize the Trustee to authorize, consent to, accept or adopt on behalf of any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting the Notes of that series or the rights of any holder thereof or to authorize the Trustee to vote in respect of the claim of any Noteholder in any such proceeding. SECTION 6.03. APPLICATION OF PROCEEDS. Any moneys collected by the Trustee pursuant to Section 6.02 with respect to a particular series of Notes shall be applied in the order following, at the date or dates fixed by the Trustee and, in case of the distribution of such moneys on account of principal (or premium, if any) or interest, upon presentation of the several Notes of that series, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: FIRST: To the payment of costs and expenses of collection and of all amounts payable to the Trustee under Section 7.06; SECOND: To the payment of the amounts then due and unpaid upon Notes of that series for principal (and premium, if any) and interest, in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Notes for principal (and premium, if any) and interest, respectively; and THIRD: To the Company. SECTION 6.04. LIMITATION OF SUITS BY NOTEHOLDERS. No holder of any Note of any series shall have any right by virtue or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof with respect to Notes of that series specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Notes of such series then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as trustee hereunder and shall have offered to the Trustee such reasonable security and indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of security and indemnity, shall have failed to institute any such action, suit or proceeding; it being understood and intended, and being expressly covenanted by the taker and holder of every Note of that series with every other such taker and holder 38 and the Trustee, that no one or more holders of Notes of that series shall have any right in any manner whatsoever by virtue or by availing of any provision of this Indenture or the Support Agreement to affect, disturb or prejudice the rights of the holders of any other of such Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture or the Support Agreement, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes of that series. For the protection and enforcement of the provisions of this Section, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provisions of this Indenture, however, the right of any holder of any Note to receive payment of the principal of (and premium, if any) and interest on such Note, as therein provided, on or after the respective due dates expressed in such Note (or in the case of redemption, on the redemption date), or to institute suit for the enforcement of any such payment on or after such respective dates or redemption date, shall not be impaired or affected without the consent of such holder. SECTION 6.05. POWERS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER OF DEFAULT. (a) All powers and remedies given by this Article to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any others thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to such Notes. (b) No delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed as a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 6.04, every power and remedy given by this Article or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. SECTION 6.06. CONTROL BY NOTEHOLDERS. The holders of a majority in aggregate principal amount of the Notes of any series at the time outstanding, determined in accordance with Section 8.04, shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to that series; PROVIDED, HOWEVER, that such direction shall not be in conflict with any rule of law or with this Indenture or unduly prejudicial to the rights of holders of Notes of any other series at the time outstanding determined in accordance with Section 8.04 not parties thereto and provided further that such holders have offered to the Trustee reasonable indemnity against expenses and liabilities. The holders of a majority in aggregate outstanding principal amount of the Notes of all series at the time outstanding affected thereby, determined in accordance with Section 8.04, may on behalf of the holders of all of the Notes of such series, waive any past default or Event of Default in the performance of any of the covenants contained herein or established pursuant to Section 2.01 with respect to such series and its consequences, except a default in the payment of the principal of, or premium, if any, or interest on, any of the Notes of that series as and when the same shall become due by the terms of such Notes, which default may be waived by the unanimous consent of the holders affected. Upon any such waiver, the default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Company, 39 the Trustee and the holders of the Notes of that series shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 6.07. NOTICE OF DEFAULTS. The Trustee shall, within 90 days after the occurrence of a default with respect to a particular series, transmit by mail, first-class postage prepaid, to the holders of Notes of that series, as their names and addresses appear upon the Note Register, notice of all defaults with respect to that series actually known to the Trustee, unless such defaults shall have been cured or waived before the giving of such notice (the term "defaults" for the purposes of this Section being hereby defined to be the events specified in subsections (1), (2), (3), (4), (5), (6), (7), (8) and (9) of Section 6.01 (a), not including any grace periods provided for therein and irrespective of the giving of notice provided for by subsections (4) and (9) of Section 6.01(a)); provided, that, except in the case of default in the payment of the principal of (or premium, if any) or interest on any of the Notes of that series or in the payment of any sinking fund installment established with respect to that series, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interests of the holders of Notes of that series; provided further, that in the case of any default of the character specified in Section 6.01(a)(4) and (9) (other than a payment default under Section 6.01(a)(9)) with respect to Notes of that series, no such notice to the holders of the Notes of that series shall be given until at least 30 days after the occurrence thereof. The Trustee shall not be deemed to have knowledge of any default, except (i) a default under Section 6.01(a)(1), (a)(2) or a payment default under Section 6.01(a)(9) as long as the Trustee is acting as paying agent for such series of Notes or (ii) any default as to which the Trustee shall have received written notice or a Responsible Officer charged with the administration of this Indenture shall have actual knowledge or obtained written notice. SECTION 6.08. UNDERTAKING FOR COSTS. All parties to this Indenture agree, and each holder of any Notes by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, any suit instituted by any Noteholder, or group of Noteholders, holding more than 10% in aggregate principal amount of the outstanding Notes of any series, or any suit instituted by any Noteholder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Note of such series, on or after the respective due dates expressed in such Note or established pursuant to this Indenture. ARTICLE SEVEN Concerning the Trustee 40 SECTION 7.01. DUTIES AND RESPONSIBILITIES OF THE TRUSTEE PRIOR TO AND DURING EVENT OF DEFAULT. (a) The Trustee, prior to the occurrence of an Event of Default with respect to Notes of a series and after the curing of all Events of Default with respect to Notes of that series which may have occurred, shall undertake to perform with respect to Notes of that series such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants shall be read into this Indenture against the Trustee. In case an Event of Default with respect to Notes of a series has occurred (which has not been cured or waived), the Trustee shall exercise with respect to Notes of that series such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent individual would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1)(x) the duties and obligations of the Trustee shall with respect to Notes of that series be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable with respect to Notes of that series except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (y) in the absence of bad faith on the part of the Trustee, the Trustee may with respect to Notes of that series conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein); (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Notes of any series at the time outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee under this Indenture with respect to the Notes of that series; and (4) none of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur or risk personal financial liability in the performance of any of its duties or in the exercise of any of its rights or 41 powers, if there is reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity or security against such risk is not reasonably assured to it. (c) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 7.01. SECTION 7.02. CERTAIN RIGHTS OF THE TRUSTEE. Except as otherwise provided in Section 7.01: (a) The Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) Any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by a Board Resolution or an instrument signed in the name of the Company by an Authorized Officer (unless other evidence in respect thereof is specifically prescribed herein); (c) Whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) is entitled to receive and may, in the absence of bad faith on its part, rely upon an Officer's Certificate; (d) The Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted hereunder in good faith and in reliance thereon; (e) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders, pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; nothing herein contained shall, however, relieve the Trustee of the obligation, upon the occurrence of an Event of Default with respect to a series of the Notes (which has not been cured or waived) to exercise with respect to Notes of that series such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) If an Event of Default shall have occurred and be continuing, the Trustee shall be under no obligation to follow any request, order or direction of the Company if in the reasonable judgment of the Trustee the following of such request, order or direction would not be in the best interests of all the holders; (g) The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; 42 (h) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, security, or other papers or documents, unless requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Notes of the particular series affected thereby (determined as provided in Section 8.04); provided, however, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable security or indemnity against such costs, expenses or liabilities as a condition to so proceeding; (i) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (j) The Trustee may (but shall not be required to) at any time bring an action on behalf of the Noteholders against third parties. SECTION 7.03. TRUSTEE NOT RESPONSIBLE FOR RECITALS, DISPOSITION OF SECURITIES OR APPLICATION OF PROCEEDS THEREOF. (a) The recitals contained herein and in the Notes (other than the Certificate of Authentication on the Notes) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. (b) The Trustee makes no representations as to the validity or sufficiency of this Indenture, the Support Agreement or of the Notes. (c) The Trustee shall not be accountable for the use or application by the Company of any of the Notes or of the proceeds of the Notes, or for the use or application of any moneys paid over by the Trustee in accordance with any provision of this Indenture or the Support Agreement or established pursuant to Section 2.01, or for the use or application of any moneys received by any paying agent other than the Trustee. SECTION 7.04. TRUSTEE AND AGENTS MAY HOLD SECURITIES; COLLECTIONS, ETC. The Trustee or any paying agent or Note Registrar, in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent or Note Registrar. SECTION 7.05. MONEYS HELD BY TRUSTEE. Subject to the provisions of Section 11.06, all moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any moneys received by it hereunder except such as it may agree in writing with the Company to pay thereon. SECTION 7.06. COMPENSATION AND INDEMNIFICATION OF TRUSTEE AND ITS PRIOR CLAIM. (a) The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as the Company and the Trustee may agree upon in 43 writing (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust) for all services rendered by it in the execution of the trusts hereby created and in the exercise and performance of any of the powers and duties hereunder of the Trustee, and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the documented expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Company also covenants to indemnify the Trustee for, and to hold it harmless against, any loss, damage, claim, loss, liability or expense, including taxes (other than taxes based on the income of the Trustee) incurred without negligence or bad faith on the part of the Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses reasonably incurred of defending itself against any claim of liability in the premises. (b) The obligations of the Company under this Section to compensate and indemnify the Trustee and to pay or reimburse the Trustee for documented expenses, disbursements and advances shall constitute additional indebtedness hereunder and shall survive the termination of this Indenture and the resignation or removal of the Trustee. Such additional indebtedness shall be a senior lien to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes, and the Notes are hereby subordinated to each such senior lien. (c) When the Trustee incurs expenses or renders services in connection with an Event of Default, the expenses (including the reasonable charges and expenses of its counsel) and compensation for its services are intended to constitute expenses of administration under applicable Federal or State bankruptcy, insolvency or similar law. SECTION 7.07. RIGHT OF TRUSTEE TO RELY ON OFFICER'S CERTIFICATE, ETC. Except as otherwise provided in Section 7.01, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or suffering or omitting to take any action hereunder, it shall be entitled to receive, and such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively provided and established by an Officer's Certificate delivered to the Trustee and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken, suffered or omitted to be taken by it under the provisions of this Indenture upon the faith thereof. SECTION 7.08. CONFLICTING INTEREST. If the Trustee has acquired or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 7.09. PERSONS ELIGIBLE FOR APPOINTMENT AS TRUSTEE. There shall at all times be a Trustee with respect to the Notes issued hereunder which shall at all times be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or other person permitted to act as trustee by the Commission, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $100 million, and subject to supervision or examination by Federal, State, Territorial or District 44 of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Company may not, nor may any person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect specified in Section 7.10. SECTION 7.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR TRUSTEE. (a) The Trustee or any successor hereafter appointed may at any time resign with respect to the Notes of one or more series by giving written notice thereof to the Company. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee with respect to Notes of that series by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor trustee with respect to Notes of that series, or any Noteholder of that series who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 6.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with the provisions of Section 7.08 after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 7.09 and shall fail to resign after written request therefor by the Company or by any such Noteholder; or (3) the Trustee shall become incapable of acting, shall be adjudged a bankrupt or insolvent, a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee with respect to all Notes and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 6.08, unless the Trustee's duty to resign is stayed as provided herein, any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. If a notice of removal shall have been delivered to the Trustee and no successor 45 trustee shall have been appointed and have accepted appointment within 30 days after the Trustee's receipt of such notice of removal, the Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee. (c) The holders of a majority in aggregate principal amount of the Notes of any series at the time outstanding may at any time remove the Trustee with respect to that series and appoint a successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 30 days after the removal of the Trustee, the removed Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor trustee with respect to Notes of that series, or any Noteholder of that series who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 6.08, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee with respect to the Notes of a series pursuant to any of the provisions of this Section shall become effective upon acceptance of appointment by the successor trustee as provided in Section 7.11. (e) Any successor trustee appointed pursuant to this Section may be appointed with respect to the Notes of one or more series or all of such series, and at any time there shall be only one Trustee with respect to the Notes of any particular series. SECTION 7.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. (a) In case of the appointment hereunder of a successor trustee with respect to all Notes, every such successor trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor trustee all the rights, powers, and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor trustee all property and money held by such retiring Trustee hereunder, subject to any prior lien provided for in Section 7.06(b). (b) In case of the appointment hereunder of a successor trustee with respect to the Notes of one or more (but not all) series, the Company, the retiring Trustee and each successor trustee with respect to the Notes of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor trustee shall accept such appointment and which shall (1) contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Notes of that or those series to which the appointment of such successor trustee relates, (2) contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Notes of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee and (3) add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust, that each such Trustee shall be 46 trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee and that no Trustee shall be responsible for any act or failure to act on the part of any other Trustee hereunder; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein, such retiring Trustee shall with respect to the Notes of that or those series to which the appointment of such successor trustee relates have no further responsibility for the exercise of rights and powers or for the performance of the duties and obligations vested in the Trustee under this Indenture, and each such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Notes of that or those series to which the appointment of such successor trustee relates; but, on request of the Company or any successor trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor trustee, to the extent contemplated by such supplemental indenture, the property and money held by such retiring Trustee hereunder with respect to the Notes of that or those series to which the appointment of such successor trustee relates. (c) Upon request of any such successor trustee or retiring Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor trustee shall accept its appointment unless at the time of such acceptance such successor trustee shall be qualified and eligible under this Article. (e) Upon acceptance of appointment by a successor trustee as provided in this Section, the Company shall transmit notice of the succession of such trustee hereunder by mail, first-class postage prepaid, to the Noteholders, as their names and addresses appear upon the Note Register. If the Company fails to transmit such notice within 10 days after acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be transmitted at the expense of the Company. SECTION 7.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS OF TRUSTEE. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such corporation shall be qualified under the provisions of Section 7.08 and eligible under the provisions of Section 7.09, without the execution or filing of any paper or any further act on the part of any of the parties hereto, anything herein to the contrary notwithstanding. In case any Notes shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Notes so authenticated with the same effect as if such successor Trustee had itself authenticated such Notes. SECTION 7.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. If and when the Trustee shall become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any other obligor upon the Notes). 47 ARTICLE EIGHT Concerning the Noteholders SECTION 8.01. ACTS OF NOTEHOLDERS. Whenever in this Indenture it is provided that the holders of a majority or specified percentage in aggregate principal amount of the Notes of a particular series may take any action (including the making any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such majority or specified percentage of that series have joined therein may be evidenced by any instrument or any number of instruments of similar tenor executed by such holders of Notes of that series in person or by agent or proxy appointed in writing. If the Company shall solicit from the Noteholders of any series any request, demand, authorization, direction, notice, consent, waiver or other action, the Company may, at its option, as evidenced by an Officer's Certificate, fix in advance a record date for that series for the determination of Noteholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Company shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Noteholders of record at the close of business on the record date shall be deemed to be Noteholders for the purposes of determining whether Noteholders of the requisite proportion of outstanding Notes of that series have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Notes of that series shall be computed as of the record date; provided that no such authorization, agreement or consent by such Noteholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 8.02. TRUSTEE MAY REQUIRE PROOF OF OWNERSHIP. Subject to the provisions of Section 7.01, proof of the execution of any instrument by a Noteholder (such proof will not require notarization) or his, her or its agent or proxy and proof of the holding by any person of any of the Notes shall be sufficient if made in the following manner: (a) the fact and date of the execution by any such person of any instrument may be proved in any reasonable manner acceptable to the Trustee; (b) the ownership of Notes shall be proved by the Note Register of such Notes or by a certificate of the Note Registrar thereof; or (c) the Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. SECTION 8.03. NOTEHOLDERS TO BE TREATED AS OWNERS. Prior to the due presentment for registration of transfer of any Note, the Company, the Trustee, any paying agent and any Note Registrar may deem and treat the Person in whose name such Note shall be registered upon the books of the Company as the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notice of ownership or writing thereon made by anyone other than the Note Registrar) for the purpose of receiving payment of or on account of the principal of and premium, if any, and (subject to Section 2.03) interest on such Note and for all other purposes; and neither the Company 48 nor the Trustee nor any paying agent nor any Note Registrar shall be affected by any notice to the contrary. All such payments so made to any such Person, or upon such Person's order, shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for monies payable upon or in respect of any such Note. SECTION 8.04. NOTES HELD BY COMPANY DEEMED NOT OUTSTANDING. In determining whether the holders of the requisite aggregate principal amount of Notes of a particular series have concurred in any direction, consent or waiver under this Indenture, Notes of that series which are owned by the Company or any other obligor on the Notes of that series or by any person directly or indirectly controlling or controlled by or under common control with the Company or any other obligor on the Notes of that series shall be disregarded and deemed not to be outstanding for the purpose of any such determination, except that for the purpose of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Notes of such series which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Notes so owned may be regarded as outstanding for the purposes of this Section, if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right so to act with respect to such Notes and that the pledgee is not a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 8.05. RIGHT OF REVOCATION OF ACTION TAKEN. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 8.01, of the taking of any action by the holders of the majority or percentage in aggregate principal amount of the Notes of a particular series specified in this Indenture in connection with such action, any holder of a Note of that series which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee, and upon proof of holding as provided in Section 8.02, revoke such action so far as concerns such Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note, and of any Note issued in exchange therefor, on registration of transfer thereof or in place thereof, irrespective of whether or not any notation in regard thereto is made upon such Note. Any action taken by the holders of a majority or greater percentage in aggregate principal amount of the Notes of a particular series specified in this Indenture in connection with such action shall be conclusively binding upon the Company, the Trustee and the holders of all the Notes of that series. ARTICLE NINE Supplemental Indentures; Amendments to Support Agreement SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. In addition to any supplemental indenture otherwise authorized by this Indenture, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Noteholders, for one or more of the following purposes: 49 (a) to evidence the succession of another corporation to the Company, and the assumption by any such successor of the covenants of the Company contained herein or otherwise established with respect to the Notes; (b) to add to the covenants of the Company such further covenants, restrictions, conditions or provisions for the protection of the holders of the Notes of all or any series as the Board of Directors shall reasonably consider to be for the protection of the holders of Notes of all or any series, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions, conditions or provisions a default or an Event of Default with respect to that series permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction, condition or provision, such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults), may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the holders of a majority in aggregate principal amount of the Notes of such series to waive such default; (c) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture as shall not be inconsistent with the provisions of this Indenture and shall not adversely affect the interests of the holders of the Notes of any series; (d) to change or eliminate any of the provisions of this Indenture, provided that any such change or elimination shall become effective only when there is no Note outstanding of any series created prior to the execution of such supplemental indenture which is entitled to the benefit of such provision; or (e) to modify or supplement this Indenture or any indenture supplemental hereto in such manner as to permit the qualification thereof under the Trust Indenture Act or any other similar Federal statute hereafter in effect. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, and to make any further appropriate agreements and stipulations which may be therein contained, but the Trustee shall not be obligated to enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. With the consent (evidenced as provided in Section 8.01) of the holders of not less than a majority in aggregate principal amount of the Notes of each series affected by such supplemental indenture or indentures at the time outstanding, the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to 50 the provisions of the Trust Indenture Act as then in effect) for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Notes of that series under this Indenture; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the fixed maturity of any Notes of any series, reduce the principal amount thereof, reduce the rate or extend the time of payment of interest thereon or reduce any premium payable upon the redemption thereof without the consent of the holder of each Note then outstanding and affected thereby or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, or modify any provision of Section 6.01(c) (except to increase the percentage of the principal amount of Notes required to rescind and annul any declaration of amounts due and payable under the Notes) without the consent of the holder of each Note then outstanding and affected thereby. Upon the request of the Company, accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders required to consent thereto as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders of any series affected thereby under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first-class postage prepaid, a notice, setting forth in general terms the substance of such supplemental indenture, to the Noteholders of all series affected thereby as their names and addresses appear upon the Note Register. Any failure of the Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 9.03. EFFECT OF SUPPLEMENTAL INDENTURE. Upon the execution of any supplemental indenture pursuant to the provisions of this Article or of Article 10, this Indenture shall, with respect to that series, be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes of the series affected thereby shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04. NOTATION OF NOTES IN RESPECT OF SUPPLEMENTAL INDENTURE. Notes of any series affected by a supplemental indenture, authenticated and delivered after the execution of such supplemental indenture pursuant to the provisions of this Article or of Article 10, may bear a notation in form approved by the Company, provided such form meets the requirements of any exchange upon which such series may be listed, as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Notes of that series so modified as to conform, in the opinion of the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Notes of that series then outstanding. 51 SECTION 9.05. DOCUMENTS TO BE GIVEN TO TRUSTEE. The Trustee, subject to the provisions of Section 7.01, is entitled to receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and that it is proper for the Trustee under the provisions of this Article to join in the execution thereof. SECTION 9.06. AMENDMENTS TO SUPPORT AGREEMENT. (a) The Company and Energy Corp. may from time to time and at any time enter into an amendment to the Support Agreement, without the prior written consent of the holders of outstanding Notes, (i) to add to the covenants of the Company or Energy Corp. such further covenants, restrictions, conditions or provisions for the protection of the holders of the Notes of all or any series that have the benefit of the Support Agreement as the Board of Directors shall reasonably consider to be for the protection of such holders of Notes, (ii) to cure any ambiguity or to correct or supplement any provision contained in the Support Agreement which may be defective or inconsistent with any other provision contained in the Support Agreement, provided that the amendment shall not adversely affect the rights of any holder of Outstanding Notes of any series that have the benefit of the Support Agreement or (iii) to evidence the succession of another corporation to the Company, to the extent such succession is in accordance with the terms of this Indenture, and the assumption by any such successor of the covenants of the Company contained herein or otherwise established with respect to the Notes . (b) With the consent (evidenced as provided in Section 8.01) of the holders of not less than a majority in aggregate principal amount of the Notes of each series affected by such amendment at the time outstanding, the Company and Energy Corp., when authorized by a Board Resolution, may from time to time and at any time enter into an amendment to the Support Agreement for the purpose of adding any provisions to, or changing in any manner or eliminating any of the provisions of, the Support Agreement or of modifying in any manner the rights of the holders of the Notes of that series under the Support Agreement; PROVIDED, HOWEVER, that no such amendment shall, without the prior written consent of the holder of each Note then Outstanding and affected thereby (i) reduce the amount payable or increase the time in which Energy Corp. has to make payment under the Support Agreement in respect of the obligations of Energy Corp. to the holders of Notes of such series, (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such amendment, or (iii) except with respect to any amendment to any of Sections 2, 3 and 4 of the Support Agreement, adversely affect the rights of any holder of an Outstanding Note. It shall not be necessary for the consent of the Noteholders of any series affected thereby under this Section to approve the particular form of any proposed amendment to the Support Agreement, but it shall be sufficient if such consent shall approve the substance thereof. Promptly after the execution by the Company and Energy Corp. of any amendment to the Support Agreement pursuant to the provisions of this Section, the Company shall transmit by mail, first-class postage prepaid, a notice, setting forth in general terms the substance of such amendment, to the Noteholders of all series affected thereby as their names and addresses appear upon the Note Register. Any failure to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment. 52 (c) Upon the execution of any amendment to the Support Agreement pursuant to the provisions of this Article, the Support Agreement shall, with respect to all series of Notes affected thereby, be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under the Support Agreement of the Company, Energy Corp. and the holders of Notes of any series affected thereby shall thereafter be determined, exercised and enforced hereunder and thereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such amendment shall be and be deemed to be part of the terms and conditions of the Support Agreement for any and all purposes. (d) Notes of any series affected by an amendment to the Support Agreement, authenticated and delivered after the execution of such amendment pursuant to the provisions of this Article, may bear a notation in form approved by the Company, provided such form meets the requirements of any exchange upon which such series may be listed, as to any matter provided for in such amendment. If the Company shall so determine, new Notes of that series so modified as to conform, in the opinion of the Board of Directors, to any modification of the Support Agreement may be prepared by the Company, authenticated by the Trustee and delivered in exchange for the Notes of that series then outstanding. (e) The Trustee, subject to the provisions of Section 7.01, is entitled to receive an Opinion of Counsel as conclusive evidence that any amendment executed pursuant to this Article is authorized or permitted by, and conforms to, the terms of this Article and the Support Agreement. ARTICLE TEN Consolidation, Merger and Sale SECTION 10.01. CONSOLIDATION, MERGER AND SALE OF SUBSTANTIALLY ALL OF COMPANY'S ASSETS. Nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of the Company with or into any other Person (whether or not affiliated with the Company), or any merger or consolidation of any Person (whether or not affiliated with the Company) with or into the Company or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the assets or other property of the Company or its successor or successors substantially as an entirety to any other Person (whether or not affiliated with the Company or its successor or successors), provided that (a) no Event of Default shall result from such consolidation, merger, sale or lease and (b) the Company is the surviving or continuing corporation, or the surviving or continuing corporation or corporation that acquires the Company's assets by sale, conveyance, transfer or lease is incorporated under the laws of the United States of America or Canada and expressly assumes the payment and performance of all obligations of the Company under the Indenture and the Notes. SECTION 10.02. SUCCESSOR CORPORATION SUBSTITUTED. (a) In case of any such consolidation, merger, sale, conveyance, transfer or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes of all series outstanding and the due and punctual performance of all of the covenants and conditions of this Indenture and the Support Agreement, if 53 applicable, or established with respect to each series of the Notes pursuant to Section 2.01 to be performed by the Company with respect to each series, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part, and thereupon the predecessor corporation shall be relieved of all obligations and covenants under this Indenture, the Support Agreement and the Notes, except the provisions of Section 7.06 to the extent such provisions relate to matters occurring before any such consolidation, merger, sale, conveyance, transfer or other disposition. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of the Company or any other predecessor obligor on the Notes, any or all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor company, instead of the Company, and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Notes which previously shall have been signed and delivered by the officers of the predecessor Company to the Trustee for authentication, and any Notes which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. (b) In case of any such consolidation, merger, sale, conveyance, transfer or other disposition, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. (c) Nothing contained in this Indenture or in any of the Notes shall prevent the Company from merging into itself or acquiring by purchase or otherwise all or any part of the property of any other corporation (whether or not affiliated with the Company). SECTION 10.03. OPINION OF COUNSEL TO TRUSTEE. The Trustee, subject to the provisions of Section 7.01, is entitled to receive an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance, transfer or other disposition, and any such assumption, comply with the provisions of this Article. ARTICLE ELEVEN Satisfaction and Discharge of Indenture; Unclaimed Moneys SECTION 11.01. SATISFACTION AND DISCHARGE OF INDENTURE. If at any time: (a) the Company shall have delivered to the Trustee for cancellation all Notes of a series theretofore authenticated (other than any Notes which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.08) and Notes for whose payment money or Governmental Obligations have theretofore been deposited in trust or segregated and held in trust by the Company (and thereupon repaid to the Company or discharged from such trust, as provided in Section 11.06); (b) all such Notes of a particular series not theretofore delivered to the Trustee for cancellation shall have become due and payable and the Company shall deposit or cause to be deposited with the Trustee as trust funds the entire amount in moneys or Governmental Obligations sufficient; or (c) a combination thereof, sufficient in the opinion of a nationally recognized firm of independent public 54 accountants expressed in a written certification thereof delivered to the Trustee, to pay at maturity or upon redemption all Notes of that series not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder with respect to that series by the Company, then this Indenture shall thereupon cease to be of further effect with respect to that series except for the provisions of Sections 2.06, 2.08, 4.02 and 7.10, which shall survive until the date of maturity or redemption date, as the case may be, and Sections 7.06 and 11.06 which shall survive to such date and thereafter, and the obligations of LG&E Energy under the Support Agreement shall cease to be of further effect with respect to the series and the Noteholders of such series shall and shall be deemed to have consented to the termination of the provisions of the Support Agreement as they relate to the Notes of that series, and the Trustee, on demand of the Company and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture with respect to such series (and acknowledging termination of the provisions of the Support Agreement as they relate to that series). SECTION 11.02. COVENANT DEFEASANCE. If at any time all such Notes of a particular series not heretofore delivered to the Trustee for cancellation or which have not become due and payable as described in Section 11.01 shall have been paid by the Company by depositing irrevocably with the Trustee as trust funds moneys or an amount of Governmental Obligations sufficient to pay at maturity or upon redemption all such Notes of that series not theretofore delivered to the Trustee for cancellation, including principal (and premium, if any) and interest due or to become due to such date of maturity or date fixed for redemption, as the case may be, and if the Company shall also pay or cause to be paid all other sums payable hereunder by the Company with respect to that series, then after the date such moneys or Governmental Obligations, as the case may be, are deposited with the Trustee the obligations of the Company under this Indenture with respect to such series shall cease to be of further effect except for the provisions of Sections 2.06, 2.08, 4.02 and 7.10 hereof which shall survive until such Notes shall mature and be paid and Section 7.06 and 11.06 which shall survive to such date and thereafter, and the obligations of LG&E Energy under the Support Agreement shall cease to be of further effect with respect to that series and the Noteholders of such series shall and shall be deemed to have consented to the termination of the provisions of the Support Agreement as they relate to the Notes of that series. The release of the Company from its obligations under this Indenture, as provided for in this Section 11.02, shall be subject to the further condition that the Company first shall have caused to be delivered to the Trustee an Opinion of Counsel to the effect that Noteholders of a series with respect to which a deposit has been made in accordance with this Section 11.02 will not realize income, gain or loss for Federal income tax purposes as a result of such deposit and release, and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and release had not occurred. SECTION 11.03. DEFEASANCE AND DISCHARGE. If, in addition to satisfying the conditions set forth in Section 11.01 or 11.02 (except for the requirement of an Opinion of Counsel), the Company delivers to the Trustee an Opinion of Counsel to the effect that (a) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (b) since the date of this Indenture there has been a change in applicable Federal income tax law, in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, the Noteholders of a series with respect to which a deposit has been made in accordance with Section 11.01 or 11.02 will not realize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount, in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred and (c) the deposit shall not result in 55 the Company, the Trustee or the trust being deemed an "investment company" under the Investment Company Act of 1940, as amended, then, in such event, the Company will be deemed to have paid and discharged the entire indebtedness on that series and the holder thereof shall thereafter be entitled to receive payment solely from the trust fund described above. SECTION 11.04. DEPOSITED MONEY AND GOVERNMENTAL OBLIGATIONS TO BE HELD IN TRUST. All moneys or Governmental Obligations deposited with the Trustee pursuant to Sections 11.01 or 11.02 shall be held in trust and shall be available for payment as due, either directly or through any paying agent (including the Company acting as its own paying agent), to the holders of the particular series of Notes for the payment or redemption of which such moneys or Governmental Obligations have been deposited with the Trustee. SECTION 11.05. DEPOSITED MONEYS HELD IN TRUST. In connection with the satisfaction and discharge of this Indenture all moneys or Governmental Obligations then held by any paying agent under the provisions of this Indenture shall, upon demand of the Company, be repaid to the Company or paid to the Trustee and thereupon such paying agent shall be released from all further liability with respect to such moneys or Governmental Obligations. SECTION 11.06. REPAYMENT TO THE COMPANY; MISCELLANEOUS. Any moneys or Governmental Obligations deposited with any paying agent or the Trustee, or then held by the Company, in trust for payment of principal of or premium or interest on the Notes of a particular series that are not applied but unclaimed by the holders of such Notes for at least two years after the date upon which the principal of (and premium, if any) or interest on such Notes shall have respectively become due and payable, shall, upon written notice from the Company, be repaid to the Company on May 31 of each year or (if then held by the Company) shall be discharged from such trust; and thereupon the paying agent and the Trustee shall be released from all further liability with respect to such moneys or Governmental Obligations, and the holder of any of the Notes entitled to receive such payment shall thereafter, as an unsecured general creditor, look only to the Company for the payment thereof and all liability of the Company as trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such Paying Agent, before being required to make any such repayment, shall, pursuant to an Officer's Certificate, cause to be published once, at the Company's expense, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Governmental Obligations deposited pursuant to this Article or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Notes. ARTICLE TWELVE Immunity of Incorporators, Stockholders, Officers and Directors 56 SECTION 12.01. INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS OF COMPANY EXEMPT FROM INDIVIDUAL LIABILITY. No recourse under or upon any obligation, covenant or agreement of this Indenture or of any Note, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, past, present or future as such, of the Company, Energy Corp. or of any predecessor or successor corporation, either directly or through the Company, Energy Corp. or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the Support Agreement and the obligations issued hereunder and thereunder are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers or directors as such, of the Company, Energy Corp. or of any predecessor or successor corporation, or any of them, because of the creation of the indebtedness hereby or thereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture and the Support Agreement or in any of the Notes or implied therefrom; and that any and all such personal liability of every name and nature, either at common law, in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture and the Support Agreement or in any of the Notes or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture, the issuance of such Notes and the execution of the Support Agreement. ARTICLE THIRTEEN Miscellaneous Provisions SECTION 13.01. SUCCESSORS AND ASSIGNS OF COMPANY BOUND BY INDENTURE. All the covenants, stipulations, promises and agreements in this Indenture contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. SECTION 13.02. ACTS BY SUCCESSORS AND ASSIGNS OF COMPANY. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the corresponding board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. SECTION 13.03. NOTICES AND DEMANDS ON COMPANY, TRUSTEE AND NOTEHOLDERS. Except as otherwise expressly provided herein, any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes to or on the Company may be given or served by being deposited first-class postage prepaid in a post-office letter box addressed (until another address is filed in writing by the Company with the Trustee), as follows: LG&E Capital Corp., 220 West Main Street, Louisville, KY 40202, Attention: Treasurer. Any notice, election, request or demand by the Company or any Noteholder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the Corporate Trust Office of the Trustee. 57 SECTION 13.04. GOVERNING LAW. THIS INDENTURE AND EACH NOTE SHALL, PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THAT STATE, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SUCH SECTION 5-1401). SECTION 13.05. OFFICER'S CERTIFICATES AND OPINIONS OF COUNSEL; STATEMENTS TO BE CONTAINED THEREIN. (a) Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, at the request of the Trustee, the Company shall furnish to the Trustee an Officer's Certificate stating that all conditions precedent provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent have been complied with, except that in the case of any such application or demand as to which the furnishing of such documents is specifically required by any provision of this Indenture, relating to such particular application or demand, no additional certificate or opinion need be furnished. (b) Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant in this Indenture (other than the certificate provided pursuant to Section 4.07 of this Indenture) shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.06. OPINION OF COUNSEL REQUIRED. Simultaneously with the execution of this Indenture, the Company shall deliver to the Trustee an Opinion of Counsel stating that, in the opinion of such counsel, (a) this Indenture has been duly authorized by and lawfully executed and delivered on behalf of the Company, is in full force and effect and is legal, valid and binding upon the Company in accordance with its terms, except to the extent limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights and (b) the Notes have been authorized, executed and delivered by the Company and constitute legal, valid and binding obligations of the Company in accordance with their terms. SECTION 13.07. LEGAL HOLIDAYS. Except as provided pursuant to Section 2.01 pursuant to a Board Resolution, and as set forth in an Officer's Certificate, or established in one or more supplemental to this Indenture, in any case where the date of maturity of interest or principal of any Note or the date of redemption of any Note shall not be a Business Day then payment of interest or principal (and premium, if any) may be made on the next succeeding Business Day with the same force and effect as if made on the nominal date of maturity or redemption, and no interest shall accrue for the period after such nominal date. 58 SECTION 13.08. COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute one and the same instrument. SECTION 13.09. SEPARABILITY CLAUSE. In case any one or more of the provisions contained in this Indenture or in the Notes of any series shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of such Notes, but this Indenture and such Notes shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 13.10. ASSIGNMENT. The Company will have the right at all times without the consent of the Noteholders to assign any of its rights or obligations under this Indenture to a direct or indirect wholly-owned subsidiary of the Company; provided that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, the Indenture is binding upon and inures to the benefit of the parties thereto and their respective successors and assigns. The Indenture may not otherwise be assigned by the parties hereto. The Bank of New York, as Trustee, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the day and year first above written. LG&E Capital Corp. By:___________________________ Name: Title: The Bank of New York as Trustee By:___________________________ Name: Title: 59 EXHIBIT A (FORM OF FACE OF NOTE) [INCLUDE IF NOTE IS A GLOBAL NOTE DEPOSITED WITH THE DEPOSITORY -- UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME AND ADDRESS OF DEPOSITARY] , TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY NOTE IS REGISTERED IN THE NAME OF [INSERT NAME OF NOMINEE OF DEPOSITARY] OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY] (AND ANY PAYMENT IS MADE TO [INSERT NAME OF NOMINEE OF DEPOSITARY] OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF [INSERT NAME OF DEPOSITARY]), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, [INSERT NAME OF NOMINEE OF DEPOSITARY], HAS AN INTEREST HEREIN. TRANSFERS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF [INSERT NAME OF DEPOSITARY] OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE REFERRED TO ON THE REVERSE HEREOF.] [INCLUDE IF NOTE IS A RULE 144A GLOBAL NOTE, RESTRICTED REGULATION S GLOBAL NOTE, ANY CERTIFICATED NOTE ISSUED IN ACCORDANCE WITH SECTION 2.05 OF THE INDENTURE IN EXCHANGE FOR A GLOBAL NOTE (AND ANY CERTIFICATED NOTES ISSUED TO QUALIFIED INSTITUTIONAL BUYERS IN EXCHANGE THEREFOR), OR AN ACCREDITED INVESTOR NOTE -- THE NOTE (OR ITS PREDECESSOR) EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ACQUISITION HEREOF, THE HOLDER (1) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO LG&E CAPITAL CORP. (THE "ISSUER"), (B) SO LONG AS SUCH NOTE IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB ACQUIRING SUCH NOTE FOR ITS OWN ACCOUNT OR AS A FIDUCIARY OR AGENT FOR OTHERS (WHICH OTHERS MUST ALSO BE QIBS), AND TO WHOM NOTICE IS GIVEN THAT THE RESALE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a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
No.______________ $__________________ [CUSIP No.________] [Common Code_______] [CINS No._________] [ISIN No.__________]
LG&E CAPITAL CORP. ____% NOTES DUE ___________ LG&E CAPITAL CORP., a corporation duly organized and existing under the laws of the State of Kentucky (herein referred to as the "Company," which term includes any successor corporation under the Indenture), for value received, hereby promises to pay to _________ or registered assigns, the principal sum equal to ___________ Dollars ($____________), on ______________, and to pay interest on such principal sum from and including __________ or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, payable semiannually in arrears on __________ and __________ of each year [if applicable-insert other payment dates for floating rate Notes], commencing on __________, at the rate of ____% per annum [if applicable-insert method of calculation of interest rate for floating rate Notes] until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. [The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months.] In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for on any Interest Payment Date will, as provided in the Indenture, be paid A-2 to the person in whose name this Note (or one or more Predecessor Notes, as defined in the Indenture) is registered at the close of business on the __________ or __________, respectively, preceding that Interest Payment Date (each, a "Record Date"). Any such interest installment not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered holder on the relevant Record Date, and may be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Notes not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes may then be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture hereinafter referred to. The principal of (and premium, if any) and the interest on this Note shall be payable at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, in Dollars; PROVIDED, HOWEVER, that [include if Note is in certificated form -- payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Note Register or, with respect to a registered holder of $1,000,000 or more in aggregate principal amount of Notes who has delivered a written request to the Trustee at least 14 days prior to the relevant Interest Payment Date electing to have payments made by wire transfer to a designated account in the United States, by wire transfer of immediately available funds to such designated account] [include if Note is in global form -- payment of principal and interest shall be made by the Company in immediately available funds by wire transfer to the Depositary or its nominee]. This Note shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Note are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has caused this Instrument to be executed. LG&E Capital Corp. By__________________________ CERTIFICATE OF AUTHENTICATION Dated: ___________ This is one of the Notes of the series of Notes described in the within-mentioned Indenture. The Bank of New York, as Trustee, The Bank of New York, By _______________________ as Trustee or as Authentication Agent By__________________________ _________________________ Authorized Signatory Authorized Signatory A-3 A-4 (REVERSE) ____% NOTES DUE ___________ This Note is one of a duly authorized series of notes of the Company (herein sometimes referred to as the "Notes"), specified in the Indenture (as described below), all issued or to be issued in one or more series under and pursuant to an Indenture dated as of January 15, 1998 duly executed and delivered between the Company and The Bank of New York, as Trustee (the "Trustee"), (such Indenture, as amended and supplemented, being referred to herein as the "Indenture") to which Indenture reference is hereby made for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. By the terms of the Indenture, the Notes are issuable in series which may vary as to amount, date of maturity, rate of interest and in other respects as in the Indenture provided. [This series of Notes is limited to the aggregate principal amount of $___________.] [This Note is not subject to redemption prior to maturity.] [If applicable, insert - The Notes may be redeemed in whole or in part (if in part, by lot or by such other method as the Trustee shall deem fair or appropriate) prior to maturity at the option of the Company, at any time and from time to time, upon mailing a notice of such redemption not less than 30 nor more than 60 days prior to the date fixed for redemption to the holders of Notes, all as provided in the Indenture, at a redemption price equal to [_______________]] [if applicable -- the principal amount thereof plus accrued and unpaid interest thereon, if any, to the date of redemption, plus the applicable premium.] In the event of redemption of this Note in part only, a new Note or Notes of this series for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, with respect to the Notes of this series shall have occurred and be continuing, the principal of all of the Notes of this series may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for defeasance at any time of the entire indebtedness of the Notes of this series upon compliance by the Company with certain conditions set forth therein. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes of each series affected at the time outstanding, as defined in the Indenture, to execute supplemental indentures for the purpose of adding any provisions to, changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the fixed maturity of any Notes of any series, reduce the principal amount thereof, reduce the rate or extend the time of payment of interest thereon or reduce any premium payable upon the redemption thereof, without the consent of the holder of each Note then outstanding and affected thereby or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, or (iii) modify any provision of Section 6.01(c) of the Indenture (except to increase the percentage of the principal amount of Notes required to rescind and annul any declaration of amounts due and payable under the Notes) without the consent of the holder of each Note then outstanding and affected thereby. The Indenture also contains provisions permitting the holders of a majority in aggregate principal A-5 amount of the Notes of all series at the time outstanding affected thereby, on behalf of the holders of the Notes of such series, to waive any past default or Event of Default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture with respect to such series, and its consequences, except a default in the payment of the principal of or premium, if any, or interest on any of the Notes of such series, which default may be waived by the unanimous consent of the holders affected. Any such consent or waiver by the registered holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and of any Note issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Note. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Note at the time and place and at the rate and in the money herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, this Note is transferable by the registered holder hereof on the Note Register of the Company, upon surrender of this Note for registration of transfer at the office or agency of the Company designated for such purpose in the Borough of Manhattan, The City of New York duly endorsed by or accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and the Trustee duly executed by the registered holder hereof or its attorney duly authorized in writing, and thereupon one or more new Notes of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Note, the Company, the Trustee, any paying agent and any Note Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Note shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Note Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any paying agent nor any Note Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Note, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, 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 issuance hereof, expressly waived and released. The Notes of this series are issuable in registered form without coupons in denominations of $100,000 and integral multiples of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations herein and therein set forth, Notes of this series so issued are exchangeable for a like aggregate principal amount of Notes of this series of a different authorized denomination, as requested by the holder surrendering the same. A-6 This Note shall, pursuant to Section 5-1401 of the New York General Obligations Law, be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of that state, without regard to the conflicts of laws principals thereof (other than such Section 5-1401). All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. A-7 TRANSFER NOTICE FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s) unto ________________________________________________________________________ whose taxpayer identification number is ______________________________________ and whose address including postal/zip code is ________________________________________________________ the within Note and all rights thereunder, hereby irrevocably constituting and appointing _________________________________________ attorney-in-fact to transfer said Note on the books of the Company with full power of substitution in the premises. [Include if Note is a Rule 144A Global Note, Restricted Regulation S Global Note, any certificated Note issued in accordance with Section 2.05 of the Indenture in exchange for a Global Note (and any certificated Notes issued to qualified institutional buyers in exchange therefor), or an Accredited Investor Note:] In connection with the transfer of this Note, the undersigned certifies that: (Check one) / / (a) This Note is being transferred to a person the undersigned reasonably believes is a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) (a "QIB") acquiring such Notes for its own account or as a fiduciary or agent for others (which others are also QIBs) and such person has been given notice that the transfer is being made in reliance on Rule 144A. / / (b) This Note is being transferred outside the United States in compliance with Rule 904 of Regulation S under the Securities Act. / / (c) This Note is being transferred to an institutional "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act) pursuant to another available exemption under the Securities Act. / / (d) This Note is being transferred to LG&E Capital Corp. / / (e) This Note is being transferred pursuant to the exemption from registration provided by Rule 144 under the Securities Act. A-8 / / (f) This Note is being transferred pursuant to a registration statement that has been declared effective under the Securities Act. Dated: ___________________ Name:__________________________ By:____________________________ Title:_________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever. SIGNATURE GUARANTEED __________________________________________ A-9 EXHIBIT B FORM OF RESTRICTED PERIOD CERTIFICATE LG&E Capital Corp. [DATE] The Depository Trust Company 55 Water Street New York, NY 10041 The Bank of New York, as Trustee 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E CAPITAL CORP. __________ (THE "NOTES") Ladies and Gentlemen: Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee. Capitalized terms used and not defined herein shall have the meanings given them in the Indenture. This letter is related to $_____________ principal amount of the Notes represented by the Restricted Regulation S Global Security, held by the Trustee pursuant to Section 2.06 of the Indenture. We hereby certify that the offering of the Notes has closed and that the restricted period (as defined in Regulation S) with respect to the offer and sale of the Notes has terminated. LG&E Capital Corp. By:_________________________ Name: Title: cc: Euroclear CEDEL Bank B-1 EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO RESTRICTED REGULATION S GLOBAL NOTE (Transfers or exchanges pursuant to Section 2.06(b)(ii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ___________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of [the Rule 144A Global Note (CUSIP No. [__________] with the Depositary] [an Accredited Investor Note] in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer or exchange of such beneficial interest in the Notes [Note] for an interest in the Restricted Regulation S Global Note (CINS No. ___________) to be held with [Euroclear] [Cedel Bank] (Common Code _____________) through the Depositary. In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and pursuant to and in accordance with Regulation S under the Securities Act, and accordingly the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States,]* [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* C-1 (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:______________________________ Name: Title: Dated:_____________________, 199_ cc: LG&E Capital Corp. * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. C-2 EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE OR ACCREDITED INVESTOR NOTE TO UNRESTRICTED REGULATION S GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ___________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of [the Rule 144A Global Note (CUSIP No. [__________] with the Depositary] [an Accredited Investor Note] in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such [beneficial interest in the Notes] [Note] for an interest in the Unrestricted Regulation S Global Security (CUSIP No. ___________). In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and: (i) with respect to transfers made in reliance on Regulation S under the Securities Act, the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was outside the United States,]* [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* D-1 (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (ii) with respect to transfers made in reliance on Rule 144 under the Securities Act, certify that the Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act, (iii) with respect to transfers made in reliance on another exemption from the Securities Act, the following is the basis for the exemption: _______________, and (iv) with respect to an exchange, either (x) the Note being exchanged is not a "restricted security" as defined in Rule 144 under the Securities Act or (u) the exchange is being made to facilitate a contemporaneous transfer that complies with Section 2.06(b)(iii) of the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:____________________________________ Name: Title: Dated: _____________________, 199_ cc: LG&E Capital Corp. ____________________ * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. D-2 EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RESTRICTED REGULATION S GLOBAL NOTE, UNRESTRICTED REGULATION S GLOBAL NOTE OR ACCREDITED NOTE TO RULE 144A GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iv) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ____________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of [the [Restricted] [Unrestricted] Regulation S Global Note with [Euroclear] [Cedel Bank] (Common Code _____________)] [with the Depositary (CUSIP No. _______)] [an Accredited Investor Note] in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer or exchange of such [beneficial interest] [Note] for an interest in the Rule 144A Global Note. In connection with such request, and in respect of such Notes, the Transferor does hereby certify that such Notes are being transferred or exchanged in accordance with (i) the transfer restrictions set forth in the Indenture and the Notes and (ii) Rule 144A under the Securities Act to a transferee that the Transferor reasonably believes is purchasing the Notes for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. E-1 This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:____________________________________ Name: Title: Dated: _____________________, 199_ cc: LG&E Capital Corp. E-2 EXHIBIT F FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE, RESTRICTED REGULATION S GLOBAL NOTE OR UNRESTRICTED REGULATION S GLOBAL NOTE TO ACCREDITED INVESTOR NOTE (Exchanges or transfers pursuant to Section 2.06(b)(v) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ___________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of the [Rule 144A Global Note (CUSIP No. [__________] with the Depositary] [Restricted] [Unrestricted] Regulation S Global Note (CUSIP No. [__________] with [Euroclear] [Cedel Bank] in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such beneficial Global Notes for an Accredited Investor Note. In connection with such request with respect to a transfer or exchange for an Accredited Investor Note, the Transferor does hereby certify that such exchange or transfer has been effected in accordance with the transfer restrictions set forth in the Rule 144A Global Note, the Restricted Regulation S Global Note and the Unrestricted Regulation S Global Note (as the case may be) and, with respect to transfers made in reliance on Rule 144 under the Securities Act, certify that the Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act. In connection with such request with respect to a transfer or exchange for an Accredited Investor Note, and in respect of such Rule 144A Global Note, Restricted Regulations S Global Note and Unrestricted Regulation S Global Note (as the case may be), the Transferor does hereby certify that such Global Note is being transferred or exchanged in accordance with (i) the transfer restrictions set forth in the Indenture and the Notes and (ii) the Securities Act to a transferee that the Transferor reasonably believes is purchasing the Accredited Investor Note for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is an F-1 institution that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act, in each case purchasing Accredited Investor Notes in a transaction exempt from the Securities Act, and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:____________________________________ Name: Title: Dated: _____________________, 199_ cc: LG&E Capital Corp. F-2 EXHIBIT G SUPPORT AGREEMENT G-1 EX-10.73 3 EX-10.73 FIRST SUPPLEMENTAL INDENTURE (28 PAGES) Exhibit 10.73 LG&E CAPITAL CORP. AND THE BANK OF NEW YORK, as Trustee ________________________ FIRST SUPPLEMENTAL INDENTURE Dated as of January 15, 1998 TO INDENTURE Dated as of January 15, 1998 ________________________ Medium-Term Notes Due Nine Months or More from Date of Issue, Series A FIRST SUPPLEMENTAL INDENTURE, dated as of the 15th day of January, 1998 (the "FIRST SUPPLEMENTAL INDENTURE"), between LG&E CAPITAL CORP., a corporation duly organized and existing under the laws of the State of Kentucky (hereinafter sometimes referred to as the "COMPANY"), and The Bank of New York, a New York banking corporation, as trustee (hereinafter sometimes referred to as the "TRUSTEE") (under the Indenture dated as of January 15, 1998, as supplemented, between the Company and the Trustee (the "INDENTURE")). WHEREAS, the Company executed and delivered the Indenture to the Trustee to provide for the future issuance of its notes (the "NOTES"), which Notes are to be issued from time to time in such series as may be determined by the Company under the Indenture, in an unlimited aggregate principal amount which may be authenticated and delivered thereunder as in the Indenture provided, and which Notes are subject to the terms of the Support Agreement, as defined in the Indenture; and WHEREAS, pursuant to the terms of the Indenture, the Company desires to provide for the establishment of a series of its Notes to be designated as hereinafter provided, the form and substance of the Notes and the terms, provisions and conditions thereof to be set forth as provided in the Indenture and this First Supplemental Indenture; and WHEREAS, the Company desires and has requested the Trustee to join with it in the execution and delivery of this First Supplemental Indenture, and all requirements necessary to make this First Supplemental Indenture a valid instrument, in accordance with its terms, and to make said Notes, when executed by the Company and authenticated and delivered by the Trustee, the valid obligations of the Company, have been performed and fulfilled, and the execution and delivery hereof have been in all respects duly authorized; NOW, THEREFORE, in consideration of the purchase and acceptance of the Notes by the holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Notes and the terms, provisions and conditions thereof, the Company covenants and agrees with the Trustee as follows: ARTICLE ONE Definitions and Other Provisions of General Application SECTION 1.01. Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Indenture. SECTION 1.02. The terms defined in this Section, for all purposes of this First Supplemental Indenture, shall have the respective meanings specified in this Section. "ADMINISTRATIVE PROCEDURES" shall have the meaning ascribed to such term in Section 2.01 of this First Supplemental Indenture. "AGENTS" means the Persons acting as Agents under the Private Placement Agency Agreement dated February 3, 1998 between the Company and the Agents thereunder. "ANNUAL REDEMPTION PERCENTAGE REDUCTION" shall mean the percentage specified as such in the applicable Note Terms Certificate. "BUSINESS DAY" means any day, other than a Saturday, Sunday, a legal holiday or a day on which banking institutions in The City of New York are authorized or obligated to close; provided, however, that, with respect to Medium-Term Notes as to which LIBOR is an applicable Interest Rate Basis, such day is also a London Business Day. "CALCULATION AGENT" shall mean an agent appointed from time to time by the Company for the purpose of determining the rates of interest in effect from time to time with respect to one or more issues of the Medium-Term Notes and calculating the amount of interest payable from time to time with respect thereto. Unless otherwise specified in the Note Terms Certificate with respect to an issue of the Medium-Term Notes, the Calculation Agent shall be the Trustee. "CALCULATION DATE", as it pertains to any Interest Determination Date, shall, unless otherwise specified in the applicable Note Terms Certificate, mean the earlier of (i) the tenth calendar day after such Interest Determination Date or, if such day is not a Business Day, the next succeeding Business Day or (ii) the Business Day immediately preceding the applicable Interest Payment Date or the Stated Maturity, as the case may be. "FIXED RATE NOTES" shall have the meaning ascribed to such term in Section 2.01 of this First Supplemental Indenture. "FLOATING RATE NOTES" shall have the meaning ascribed to such term in Section 2.01 of this First Supplemental Indenture. "INDEX MATURITY" shall mean the period to maturity of the instrument or obligation with respect to which the related Interest Rate Basis or Bases will be calculated. "INITIAL REDEMPTION DATE" shall mean the date set forth on the face of a Medium-Term Note that is the first date on which a Medium-Term Note that is subject to redemption prior to its Stated Maturity at the option of the Company may be redeemed. "INITIAL REDEMPTION PERCENTAGE" shall mean, with respect to a Medium-Term Note that is redeemable prior to its Stated Maturity at the option of the Company, the percentage specified in the applicable Note Terms Certificate, which Initial Redemption Percentage shall decline at each anniversary of the Initial Redemption Date by an amount equal to the applicable Annual Redemption Percentage Reduction, if any, until the Redemption Price is equal to 100% of the unpaid principal amount to be redeemed. "INTEREST DETERMINATION DATE" shall mean, (i) with respect to the CD Rate, the CMT Rate, the Commercial Paper Rate, the Federal Funds Rate and the Prime Rate, the second Business Day immediately preceding the applicable Interest Reset Date; (ii) with respect to the Eleventh District Cost of Funds Rate, the last working day of the month immediately preceding the applicable Interest Reset Date on which the Federal Home Loan Bank of San Francisco publishes the Index; (iii) with respect to LIBOR, the second London Business Day immediately preceding the applicable Interest Reset Date; and (iv) with respect to the Treasury Rate, the day in the week in which the Interest Reset Date occurs on which Treasury Bills are normally auctioned (except that if the auction is held on the Friday of the immediately preceding week, the Interest Determination Date shall be that Friday and that if the Interest Determination Date would otherwise fall on an Interest Reset Date, then such Interest Reset Date will be postponed to the next succeeding Business Day). The Interest Determination Date pertaining to a Floating Rate Note the interest rate of which is determined by reference to two or more Interest Rate Bases shall be the second Business Day next preceding the Interest Reset Date for such Floating 2 Rate Note on which each Interest Rate Basis is determinable; each Interest Rate Basis shall be determined as of such date, and the applicable interest rate shall take effect on the applicable Interest Reset Date. "INTEREST PAYMENT DATE" shall have the meanings ascribed to such term in Sections 2.05 and 2.06 of this First Supplemental Indenture. "INTEREST PERIOD" shall have the meaning ascribed to such term in Section 2.04 of this First Supplemental Indenture. "INTEREST RATE BASIS" has the meaning set forth in Section 1.03 hereof. "INTEREST RESET DATE" shall mean the date or dates specified in the applicable Note Terms Certificate on which the rate of interest on a Floating Rate Note will be reset. "INTEREST RESET PERIOD" shall mean the period, whether daily, weekly, monthly, quarterly, semiannual or annual, or other specified basis, between Interest Reset Dates relating to a Floating Rate Note, as specified in the applicable Note Terms Certificate. "LONDON BUSINESS DAY" means a day on which dealings in Dollars are transacted in the London interbank market. "MAXIMUM INTEREST RATE" shall have the meaning ascribed to such term in Section 2.06 of this First Supplemental Indenture. "MEDIUM-TERM NOTES" has the meaning specified in Section 2.01 hereof. "MINIMUM INTEREST RATE" shall have the meaning ascribed to such term in Section 2.06 of this First Supplemental Indenture. "NOTE TERMS CERTIFICATE" shall have the meaning ascribed to such term in Section 2.01 of this First Supplemental Indenture. "OPTIONAL REPAYMENT DATE" shall mean the date set forth on the face of a Medium-Term Note that is the first date on which a Medium-Term Note that is subject to prepayment prior to its Stated Maturity at the option of the holder may be repaid. "PERIODIC OFFERING" means an offering of Notes of a series from time to time, the specific terms of which Notes, including, without limitation, the rate or rates of interest, if any, thereon, the stated maturity or maturities thereof and the redemption provisions, if any, with respect thereto, are to be determined by the Issuer or its agents upon the issuance of such Notes. "RECORD DATE" shall, unless otherwise specified in the applicable Note Terms Certificate, mean the fifteenth calendar day (whether or not a Business Day) immediately preceding the related Interest Payment Date with respect to any Medium-Term Note. 3 "REDEMPTION PRICE" shall mean, with respect to a Medium-Term Note that is redeemable prior to its Stated Maturity at the option of the Company, an amount equal to the Initial Redemption Percentage specified in the applicable Note Terms Certificate, as adjusted by any applicable Annual Redemption Percentage Reduction, multiplied by the unpaid principal amount to be redeemed. "SPREAD" shall mean the number of basis points to be added to or subtracted from the related Interest Rate Basis or Bases applicable to a Floating Rate Note. "SPREAD MULTIPLIER" shall mean the percentage of the related Interest Rate Basis or Bases applicable to a Floating Rate Note by which such Interest Rate Basis or Bases shall be multiplied to determine the applicable interest rate on such Floating Rate Note. "STATED MATURITY" shall have the meaning ascribed to such term in Section 2.01 of this First Supplemental Indenture. SECTION 1.03. The rate of interest of a Floating Rate Note is determined by reference to one or more of the CD Rate, the CMT Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR, the Prime Rate and the Treasury Rate or such other interest rate basis as may be specified in the Note Terms Certificate (each, an "INTEREST RATE BASIS"). Each of the following terms is defined in EXHIBIT A attached hereto and by this reference incorporated herein: the "CD Rate," the "CMT Rate," the "Commercial Paper Rate," the "Eleventh District Cost of Funds Rate," the "Federal Funds Rate," "LIBOR," the "Prime Rate," and the "Treasury Rate," as well as each of the defined terms used in such definitions. ARTICLE TWO General Terms and Conditions of the Medium-Term Notes SECTION 2.01. There shall be and is hereby authorized a series of Notes designated the "Medium-Term Notes Due Nine Months or More From Date of Issue, Series A," limited in aggregate principal amount to $500,000,000 (the "MEDIUM-TERM NOTES") (or the equivalent thereof in one or more foreign or composite currencies), which may be sold and issued from time to time as set forth in any written order of the Company for the authentication and delivery of Medium-Term Notes pursuant to Section 2.04(b) of the Indenture (a "NOTE TERMS CERTIFICATE"). Forms of a Fixed Rate Note and a Floating Rate Note, excluding in each case terms and provisions to be included therein pursuant to a Note Terms Certificate, are attached hereto as EXHIBITS B-1 and B-2, respectively, and by this reference incorporated herein. The Medium-Term Notes shall mature on their Stated Maturity, unless the principal thereof (or any installment of principal thereof) becomes due and payable prior to such Stated Maturity, whether by the declaration of acceleration of maturity, notice of redemption at the option of the Company, notice of the holder's option to elect repayment or otherwise. The Medium-Term Notes may be authenticated and issued in one or more issues or tranches of Medium-Term Notes of like tenor and terms. The entire series of Medium-Term Notes shall be deemed to be subject to a Periodic Offering; the procedures for authentication and delivery of one or more issues or tranches of Medium-Term Notes subject to such Periodic Offering to which reference is made in Section 2.04 of the Indenture are set forth in the Administrative Procedures (the "ADMINISTRATIVE PROCEDURES") authorized and adopted by the Board of Directors of the Company and attached hereto as EXHIBIT B-3; and the Trustee, upon compliance by the Company with the requirements of Section 2.04 of the Indenture, shall authenticate and deliver Medium-Term Notes in accordance with the Administrative Procedures. To the extent that the terms of 4 any such issue or tranche are not set forth in the Indenture, as supplemented and amended by this First Supplemental Indenture, they shall be established by means of the Note Terms Certificate. In accordance with the procedures set forth in the Indenture and the Administrative Procedures, and to the extent the following terms and provisions are set forth in a Note Terms Certificate: (a) Each Medium-Term Note shall be dated a date determined in accordance with the Administrative Procedures, which date may vary among the Notes; (b) each Medium-Term Note will mature on a day nine months or more from its date of issue (its "STATED MATURITY") determined in accordance with the Administrative Procedures, which Stated Maturity may vary among the Medium-Term Notes; (c) each Medium-Term Note shall bear interest, if any, at a fixed rate (a "FIXED RATE NOTE") or at a floating rate (a "FLOATING RATE NOTE"), and the interest rate for a Fixed Rate Note or the Interest Rate Basis for determining the floating interest rate for a Floating Rate Note shall be established in accordance with the Administrative Procedures, which interest rate or Interest Rate Basis may vary among the Medium-Term Notes; (d) interest on each Fixed Rate Note and each Floating Rate Note shall accrue from its date of issue; (e) the floating interest rate on each Floating Rate Note shall be reset on such date or dates as shall be established in accordance with the Administrative Procedures, which date or dates may vary among the Medium-Term Notes; (f) interest on each Medium-Term Note shall be payable in arrears on the date or dates specified therein and determined in accordance with the applicable Note Terms Certificate, which date or dates may vary among the Medium-Term Notes; provided that, unless otherwise specified in the applicable Note Terms Certificate, the Interest Reset Dates will be, in the case of Floating Rate Notes which reset: (i) daily, each Business Day; (ii) weekly, the Tuesday of each week (except for weekly reset Floating Rate Notes as to which the Treasury Rate is an applicable Interest Rate Basis where the Interest Reset Date falls on an Interest Determination Date, such Interest Reset Date will be postponed to the next succeeding Business Day); (iii) monthly, the third Tuesday of each month (with the exception of monthly reset Floating Rate Notes as to which the Eleventh District Cost of Funds Rate is an applicable Interest Rate Basis, which will reset on the first calendar day of the month); (iv) quarterly, the third Tuesday of March, June, September and December of each year; (v) semiannually, the third Tuesday of the two months specified in the applicable Note Terms Certificate; and (vi) annually, the third Tuesday of the month specified in the applicable Note Terms Certificate; provided, however, that, with respect to Floating Rate/Fixed Rate Notes, the rate of interest thereon will not reset after the applicable Fixed Rate Commencement Date; (g) each Medium-Term Note may be subject to redemption, in whole or in part, prior to its Stated Maturity at the option of the Company to the extent so provided in accordance with the Administrative Procedures; and 5 (h) each Medium-Term Note may be subject to repayment, in whole or in part, prior to its Stated Maturity Date at the option of the holder thereof to the extent so provided in accordance with the Administrative Procedures. SECTION 2.02. The Medium-Term Notes shall be issued either (i) as Global Notes and registered in the name of the Depositary or its nominee, subject to the appointment of a successor Depositary as provided in the Indenture or (ii) in definitive form and registered in the name of the holder thereof. The Medium-Term Notes represented by the Global Notes will not be exchangeable for, and will not otherwise be issuable as, Notes in certificated form, except as provided in the Indenture. SECTION 2.03. Unless otherwise specified in an applicable Note Terms Certificate, the Medium-Term Notes created hereby shall be issued in fully registered form, without interest coupons, in minimum denominations of $100,000 and integral multiples of $1,000 in excess thereof. SECTION 2.04. Unless otherwise specified in an applicable Note Terms Certificate: (a) Each interest-bearing Medium-Term Note shall bear interest from the date of its issue at the rate per annum, in the case of a Fixed Rate Note, or pursuant to the interest rate formula, in the case of a Floating Rate Note, in each case as specified in the Medium-Term Note; (b) Interest payments in respect of Fixed Rate Notes and Floating Rate Notes shall be made in an amount equal to the interest accrued from and including the immediately preceding Interest Payment Date in respect of which interest has been paid or duly made available for payment (or from and including the date of issue, if no interest has been paid or duly made available for payment) to but excluding the applicable Interest Payment Date or the Stated Maturity, as the case may be (each, an "INTEREST PERIOD"); and (c) Interest on Fixed Rate Notes and Floating Rate Notes will be paid in arrears on each Interest Payment Date and on the Stated Maturity. The first payment of interest on any such Medium-Term Note originally issued between a Record Date and the related Interest Payment Date shall be made on the Interest Payment Date immediately following the next succeeding Record Date to the holder on such next succeeding Record Date. Any such interest installment not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the registered holder on the relevant Record Date, and may be paid to the person in whose name the Medium-Term Note (or one or more predecessor Notes) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Medium-Term Notes not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Medium-Term Note may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. SECTION 2.05. Interest on Fixed Rate Notes will be payable on January 15 and July 15 of each year or on such other date or dates specified in the applicable Note Terms Certificate (each, an "INTEREST PAYMENT DATE" with respect to Fixed Rate Notes) and on the Stated Maturity with respect to all or part of the principal thereof. If any Interest Payment Date or the Stated Maturity of a Fixed Rate Note falls on a day that is not a Business Day, the required payment of principal, premium, if any, and/or interest will be made on the next succeeding Business Day as if made on the date such payment was due, 6 and no interest will accrue on such payment for the period from and after such Interest Payment Date or the Stated Maturity, as the case may be, to the date of such payment on the next succeeding Business Day. Unless otherwise specified in the applicable Note Terms Certificate, interest on Fixed Rate Notes shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 2.06. Interest on Floating Rate Notes shall be payable on the date or dates specified in the applicable Note Terms Certificate (each, an "INTEREST PAYMENT DATE" with respect to Floating Rate Notes); provided that, except as provided below or in the applicable Note Terms Certificate, interest will be payable, in the case of Floating Rate Notes which reset: (i) daily, weekly or monthly, on the third Tuesday of each month or on the third Wednesday of March, June, September and December of each year, as specified in the applicable Note Terms Certificate; (ii) quarterly, on the third Tuesday of March, June, September and December of each year; (iii) semiannually, on the third Tuesday of the two months of each year specified in the applicable Note Terms Certificate; and (iv) annually, on the third Tuesday of the month of each year specified in the applicable Note Terms Certificate and, in each case, on the Stated Maturity. Interest on Floating Rate Notes shall be determined as follows: (a) Any Floating Rate Note (a "REGULAR FLOATING RATE NOTE"), other than a Floating Rate/Fixed Rate Note, an Inverse Floating Rate Note or a Note that is subject to an addendum attached thereto or to "Other/Additional Provisions," shall, except as otherwise provided in the applicable Note Terms Certificate, bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any. Commencing on the initial Interest Reset Date for such Note (the "INITIAL INTEREST RESET DATE"), the rate at which interest on such Regular Floating Rate Note shall be payable shall be reset as of each Interest Reset Date; (b) If a Medium-Term Note is designated as a Floating Rate/Fixed Rate Note, such Medium-Term Note shall, except as otherwise provided in the applicable Note Terms Certificate, bear interest at the rate determined by reference to the applicable Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any. Commencing on the Initial Interest Reset Date, the rate at which interest on such Floating Rate/Fixed Rate Note shall be payable shall be reset as of each Interest Reset Date; provided, however, that the interest rate in effect for the period commencing on, and including, the date specified in the applicable Note Terms Certificate (the "FIXED RATE COMMENCEMENT DATE") to the Stated Maturity shall be the Fixed Interest Rate, if such rate is specified in the Note Terms Certificate or, if no such Fixed Interest Rate is specified, the interest rate in effect thereon on the day immediately preceding the Fixed Rate Commencement Date; and (c) If a Medium-Term Note is designated as an Inverse Floating Rate Note, such Medium-Term Note shall, except as otherwise provided in the applicable Note Terms Certificate, bear interest at the Fixed Interest Rate minus the rate determined by reference to the applicable Interest Rate Basis or Bases (i) plus or minus the applicable Spread, if any, and/or (ii) multiplied by the applicable Spread Multiplier, if any; provided, however, that, unless otherwise specified in the applicable Note Terms Certificate, the interest rate thereon shall not be less than zero. Commencing on the Initial Interest Reset Date, the rate at which interest on such Inverse Floating Rate Note shall be payable shall be reset as of each Interest Reset Date; provided, however, that, in each case, the interest rate in effect for the period, if any, from the date of issue to the Initial Interest Reset Date shall be the initial interest rate of such Medium-Term Note (the "INITIAL INTEREST RATE"). Unless otherwise specified in an applicable Note Terms Certificate, the interest 7 rate in effect on each day shall be (i) if such day is an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding such Interest Reset Date or (ii) if such day is not an Interest Reset Date, the interest rate determined as of the Interest Determination Date immediately preceding the most recent Interest Reset Date. If any Interest Reset Date for any Floating Rate Note would otherwise be a day that is not a Business Day, such Interest Reset Date shall be postponed to the next succeeding Business Day, except that in the case of a Floating Rate Note as to which LIBOR is an applicable Interest Rate Basis and such Business Day falls in the next succeeding calendar month, such Interest Reset Date shall be the immediately preceding Business Day. If the Stated Maturity of a Floating Rate Note falls on a day that is not a Business Day, the required payment of principal, premium, if any, and interest will be made on the next succeeding Business Day as if made on the date such payment was due and no interest will accrue on such payment for the period from and after the Stated Maturity to the date of such payment on the next succeeding Business Day. Notwithstanding the foregoing, a Floating Rate Note may also have either or both of the following: a maximum interest rate, or ceiling, that may accrue during any Interest Period (a "MAXIMUM INTEREST RATE") and a minimum interest rate, or floor, that may accrue during any Interest Period (a "MINIMUM INTEREST RATE"). In addition to any Maximum Interest Rate that may apply to any Floating Rate Note, the interest rate on Floating Rate Notes will in no event be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Interest accrued on a Floating Rate Note shall be calculated by multiplying its principal amount by an accrued interest factor. Such accrued interest factor shall be computed by adding the interest factor calculated for each day in the applicable Interest Period. Unless otherwise provided in the applicable Note Terms Certificate, the interest factor for each such day shall be computed by dividing the interest rate applicable to such day by 360, in the case of Floating Rate Notes for which an applicable Interest Rate Basis is the CD Rate, the Commercial Paper Rate, the Eleventh District Cost of Funds Rate, the Federal Funds Rate, LIBOR or the Prime Rate, or by the actual number of days in the year in the case of Floating Rate Notes for which an applicable Interest Rate Basis is the CMT Rate or the Treasury Rate. Unless otherwise specified in the applicable Note Terms Certificate, if the interest rate is to be calculated with reference to two or more Interest Rate Bases, such interest rate shall be calculated in each Interest Period in the same manner as if only the applicable Interest Rate Basis specified in the applicable Note Terms Certificate applied. All percentages resulting from any calculation on Floating Rate Notes will be rounded to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards (e.g., 9.876545% (or .09876545) would be rounded to 9.87655% (or .0987655)), and all amounts used in or resulting from such calculation on Floating Rate Notes will be rounded to the nearest cent (with one-half cent being rounded upwards). If the Trustee hereunder is also acting as Calculation Agent, the Calculation Agent will, at the request of any holder of Medium-Term Notes, provide to such holder the interest rate then in effect on the Medium-Term Notes and, if determined, the interest rate which will become effective as of the next Interest Reset Date. SECTION 2.07. To the extent an applicable Note Terms Certificate provides for an Initial Redemption Date, Notes shall be redeemable on any date on and after such Initial Redemption Date but prior to their Stated Maturity in whole or in part at the option of the Company in accordance with the provisions of Article Three of the Indenture; provided, however, that any partial redemption of Notes shall be in increments of $100,000 or integral multiples of $1,000 in excess of $100,000 and that any remaining principal amount thereof shall be at least $100,000. Any such redemption shall be at the applicable Redemption Price, together with unpaid interest accrued to the date of redemption. SECTION 2.08. To the extent an applicable Note Terms Certificate provides for one or more Optional Repayment Dates, Medium-Term Notes shall be subject to repayment at the option of the holders thereof on any such Optional Repayment Date in whole or in part; provided, however, that any 8 partial repayment of Medium-Term Notes shall be in increments of $100,000 or integral multiples of $1,000 in excess of $100,000 and that any remaining principal amount thereof shall be at least $100,000. Any such repayment shall be at a repayment price of 100% of the unpaid principal amount to be repaid on such Optional Repayment Date, together with unpaid interest accrued to the date of repayment. For any Note to be repaid, such Note shall be received, together with the form thereon entitled "Option to Elect Repayment" duly completed, by the Trustee at its Corporate Trust Office not more than 60 nor less than 30 calendar days prior to the date of repayment. Exercise of such repayment option by the holder will be irrevocable. In the case of a repayment of a Note in part only, a new Note or Notes of like tenor and terms for the unrepaid portion thereof shall be issued by the Company to the holder thereof, without charge, upon the surrender of the partially repaid Note. SECTION 2.09. All Medium-Term Notes issued hereunder and all Medium-Term Notes issued upon registration of transfer of, or in exchange for, such Medium-Term Notes, shall be subject to the restrictions on transfer provided in Section 2.04, 2.05 and 2.06 of the Indenture and Exhibits C, D and E of this First Supplemental Indenture and the legends set forth on the Medium-Term Notes, PROVIDED that in the event of a conflict between such legends and any provision of this First Supplemental Indenture and the Indenture, such legends shall control. Such restrictions on transfer and legends shall not be removed except in accordance with the Indenture. SECTION 2.10. The Medium-Term Notes shall be entitled to the benefits of the Indenture and this First Supplemental Indenture, and the holders of the Medium-Term Notes and the Trustee are entitled to the benefits of the Support Agreement available to Lenders (as defined in the Support Agreement), it being understood and agreed that the Medium-Term Notes constitute Obligations (as defined in the Support Agreement) for purposes of the Support Agreement. SECTION 2.11. The covenants provided by Sections 4.06 and 4.09 of the Indenture shall be applicable to the Medium-Term Notes. ARTICLE THREE Original Issue of Notes Medium-Term Notes in the aggregate principal amount of $500,000,000 may, upon execution of this First Supplemental Indenture, or from time to time thereafter, be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver such Medium-Term Notes to or upon the delivery of the Note Terms Certificate to the Trustee, signed by any Authorized Officer of the Company. ARTICLE FOUR Miscellaneous Provisions SECTION 4.01. Except as otherwise expressly provided in this First Supplemental Indenture or in the forms of Medium-Term Notes or otherwise clearly required by the context hereof or thereof, all terms used herein or in the forms of Medium-Term Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby. SECTION 4.02. The Indenture, as supplemented by this First Supplemental Indenture, is in all respects ratified and confirmed, and this First Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. 9 SECTION 4.03. The recitals herein contained are made by the Company and not by the Trustee, and the Trustee assumes no responsibility for the correctness thereof. The Trustee makes no representation as to the validity or sufficiency of this First Supplemental Indenture. SECTION 4.04. THIS FIRST SUPPLEMENTAL INDENTURE AND EACH MEDIUM-TERM NOTE SHALL, PURSUANT TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW, BE DEEMED A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THAT STATE, WITHOUT REGARD TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF (OTHER THAN SUCH SECTION 5-1401). SECTION 4.05. Nothing in this First Supplemental Indenture or in the Medium-Term Notes, express or implied, shall give to any person, other than the parties hereto and their successors hereunder and the holders, any benefit or legal or equitable right, remedy or claim under this First Supplemental Indenture. SECTION 4.06. This First Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 10 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. LG&E CAPITAL CORP. By:_______________________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By:________________________________ Name: Title: 11 EXHIBIT A INTEREST RATE DEFINITIONS Unless otherwise specified in the applicable Note Terms Certificate, the Calculation Agent shall determine each Interest Rate Basis in accordance with the following provisions. CD RATE. Unless otherwise specified in the applicable Note Terms Certificate, "CD Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the CD Rate (a "CD RATE INTEREST DETERMINATION DATE"), the rate on such date for negotiable United States dollar certificates of deposit having the Index Maturity specified in the applicable Note Terms Certificate as published by the Board of Governors of the Federal Reserve System in "Statistical Release H.15(519), Selected Interest Rates" or any successor publication ("H.15(519)") under the heading "CDS (Secondary Market)," or if not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such CD Rate Interest Determination Date for negotiable United States dollar certificates of deposit of the Index Maturity specified in the applicable Note Terms Certificate as published by the Federal Reserve Bank of New York in its daily statistical release "Composite 3:30 P.M. Quotations for U.S. Government Securities" or any successor publication ("COMPOSITE QUOTATIONS") under the heading "Certificates of Deposit." If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the CD Rate on such CD Rate Interest Determination Date shall be calculated by the Calculation Agent as the arithmetic mean of the secondary market offered rates as of 10:00 A.M., New York City time, on such CD Rate Interest Determination Date, of three leading nonbank dealers in negotiable United States dollar certificates of deposit in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent for negotiable United States dollar certificates of deposit of major United States money center banks for negotiable certificates of deposit with a remaining maturity closest to the Index Maturity specified in the applicable Note Terms Certificate in an amount that is representative for a single transaction in that market at that time; provided, however, that, if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the CD Rate determined as of such CD Rate Interest Determination Date shall be the CD Rate in effect immediately prior to such CD Rate Interest Determination Date. CMT RATE. Unless otherwise specified in the applicable Note Terms Certificate, "CMT Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the CMT Rate (a "CMT RATE INTEREST DETERMINATION DATE"), the rate displayed on the Designated CMT Telerate Page under the caption ". . . Treasury Constant Maturities . . . Federal Reserve Board Release H.15 . . . Mondays Approximately 3:45 P.M.," under the column for the Designated CMT Index Maturity for (i) if the Designated CMT Telerate Page is 7055, the rate on such CMT Rate Interest Determination Date and (ii) if the Designated CMT Telerate Page is 7052, the weekly or monthly average, as specified in the applicable Note Terms Certificate, for the week or the month, as applicable, ended immediately preceding the week or the month, as applicable, in which the related CMT Rate Interest Determination Date falls. If such rate is no longer displayed on the relevant page or is not displayed by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date shall be such treasury constant maturity rate for the Designated CMT Index Maturity for such CMT Rate Interest Determination Date as published in H.15(519). If such rate is no longer published or is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate for such CMT Rate Interest Determination Date shall be such treasury constant maturity rate for the Designated CMT Index Maturity (or such other United States Treasury rate for the Designated CMT Index Maturity) for such CMT Rate Interest Determination Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury and as the Calculation Agent determines to be comparable to the rate formerly displayed on the Designated CMT Telerate Page and published in H.15(519). If such information is not provided by 3:00 P.M., New York City time, on the related Calculation Date, then the CMT Rate on the CMT Rate Interest Determination Date shall be calculated by the Calculation Agent as a yield to maturity, based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date reported, according to their written records, by three leading United States government securities dealers in The City of New York (which may include the Agents or their affiliates) (each, a "REFERENCE DEALER") selected by the Calculation Agent (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for the most recently issued direct noncallable fixed rate obligations of the United States ("TREASURY NOTES") with an original maturity of approximately the Designated CMT Index Maturity and a remaining term to maturity of not less than such Designated CMT Index Maturity minus one year. If the Calculation Agent is unable to obtain three such Treasury Note quotations, the CMT Rate on such CMT Rate Interest Determination Date shall be calculated by the Calculation Agent as a yield to maturity based on the arithmetic mean of the secondary market offered rates as of approximately 3:30 P.M., New York City time, on such CMT Rate Interest Determination Date of three Reference Dealers in The City of New York (from five such Reference Dealers selected by the Calculation Agent and eliminating the highest quotation (or, in the event of equality, one of the highest) and the lowest quotation (or, in the event of equality, one of the lowest)), for Treasury Notes with an original maturity of the number of years that is the next highest to the Designated CMT Index Maturity and a remaining term to maturity closest to the Designated CMT Index Maturity and in an amount of at least $100 million. If three or four (and not five) of such Reference Dealers are quoting as described above, then the CMT Rate shall be based on the arithmetic mean of the offered rates obtained and neither the highest nor the lowest of such quotes shall be eliminated; provided, however, that, if fewer than three Reference Dealers so selected by the Calculation Agent are quoting as mentioned herein, the CMT Rate determined as of such CMT Rate Interest Determination Date shall be the CMT Rate in effect on such CMT Rate Determination Date. If two Treasury Notes with an original maturity as described in the second preceding sentence have remaining terms to maturity equally close to the Designated CMT Index Maturity, the Calculation Agent shall obtain quotations for the Treasury Note with the shorter remaining term to maturity. "Designated CMT Telerate Page" means the display on the Dow Jones Telerate Service (or any successor service) on the page specified in the applicable Note Terms Certificate (or any other page as may replace such page on such service) for the purpose of displaying Treasury Constant Maturities as reported in H.15(519). If no such page is specified in the applicable Note Terms Certificate, the Designated CMT Telerate Page shall be 7052. "Designated CMT Index Maturity" means the original period to maturity of the U.S. Treasury securities (either 1, 2, 3, 5, 7, 10, 20 or 30 years) specified in the applicable Note Terms Certificate with respect to which the CMT Rate will be calculated or, if no such maturity is specified in the applicable Note Terms Certificate, 2 years. COMMERCIAL PAPER RATE. Unless otherwise specified in the applicable Note Terms Certificate, "Commercial Paper Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Commercial Paper Rate (a "COMMERCIAL PAPER RATE INTEREST DETERMINATION DATE"), the Money Market Yield (as hereinafter defined) on such date of the rate for the commercial paper having the Index 2 Maturity specified in the applicable Note Terms Certificate as published in H.15(519) under the heading "Commercial Paper--Nonfinancial." If such rate is not published by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date shall be the Money Market Yield of the rate for commercial paper having the Index Maturity specified in the applicable Note Terms Certificate as published in Composite Quotations under the heading "Commercial Paper" (with an Index Maturity of one month or three months being deemed to be equivalent to an Index Maturity of 30 days or 90 days, respectively). If such rate is not yet published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Commercial Paper Rate on such Commercial Paper Rate Interest Determination Date shall be calculated by the Calculation Agent as the Money Market Yield of the arithmetic mean of the offered rates at approximately 11:00 A.M., New York City time, on such Commercial Paper Rate Interest Determination Date of three leading dealers of commercial paper in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent for commercial paper having the Index Maturity specified in the applicable Note Terms Certificate placed for an Index Maturity specified in the applicable Note Terms Certificate placed for an industrial issuer whose bond rating is "Aa," or the equivalent, from a nationally recognized statistical rating organization; provided, however, that, if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Commercial Paper Rate determined as of such Commercial Paper Rate Interest Determination Date will be the Commercial Paper Rate in effect immediately prior to such Commercial Paper Rate Interest Determination Date. "Money Market Yield" means a yield (expressed as a percentage) calculated in accordance with the following formula: Money Market Yield = D X 360 x 100 --------- 360 - (D x M) where "D" refers to the applicable per annum rate for commercial paper quoted on a bank discount basis and expressed as a decimal, and "M" refers to the actual number of days in the applicable Interest Reset Period. ELEVENTH DISTRICT COST OF FUNDS RATE. Unless otherwise specified in the applicable Note Terms Certificate, "Eleventh District Cost of Funds Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Eleventh District Cost of Funds Rate (an "ELEVENTH DISTRICT COST OF FUNDS RATE INTEREST DETERMINATION DATE"), the rate equal to the monthly weighted average cost of funds for the calendar month immediately preceding the month in which such Eleventh District Cost of Funds Rate Interest Determination Date falls, as set forth under the caption "11th District" on Telerate page 7058 as of 11:00 A.M., San Francisco time, on such Eleventh District Cost of Funds Rate Interest Determination Date. If such rate does not appear on Telerate Page 7058 on such Eleventh District Cost of Funds Rate Interest Determination Date, then the Eleventh District Cost of Funds Rate on such Eleventh District Cost of Funds Rate Interest Determination Date shall be the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District that was most recently announced (the "INDEX") by the Federal Home Loan Bank ("FHLB") of San Francisco as such cost of funds for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date. If the FHLB of San Francisco fails to announce the Index on or prior to such Eleventh District Cost of Funds Rate Interest Determination Date for the calendar month immediately preceding such Eleventh District Cost of Funds Rate Interest Determination Date, the Eleventh District Cost of Funds Rate determined as of such Eleventh District Cost of Funds Rate Interest Determination 3 Date will be the Eleventh District Cost of Funds Rate in effect on such Eleventh District Cost of Funds Rate Interest Determination Date. "Telerate Page 7058" means the display designated as "7058" (or such other page as may replace the 7058 page on that service for the purpose of displaying the monthly weighted average cost of funds paid by member institutions of the Eleventh Federal Home Loan Bank District) on the Dow Jones Telerate Service (or any successor service). FEDERAL FUNDS RATE. Unless otherwise specified in the applicable Note Terms Certificate, "Federal Funds Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Federal Funds Rate (a "FEDERAL FUNDS RATE INTEREST DETERMINATION DATE"), the rate on such date for United States dollar federal funds as published in H.15(519) under the heading "Federal Funds (Effective)" or, if not published by 3:00 P.M., New York City time, on the related Calculation Date, the rate on such Federal Funds Rate Interest Determination Date as published in Composite Quotations under the heading "Federal Funds/Effective Rate." If such rate is not published in either H.15(519) or Composite Quotations by 3:00 P.M., New York City time, on the related Calculation Date, then the Federal Funds Rate on such Federal Funds Rate Interest Determination Date shall be calculated by the Calculation Agent as the arithmetic mean of the rates for the last transaction in overnight United States dollar federal funds arranged by three leading brokers of federal funds transactions in The City of New York (which may include the Agents or their affiliates) selected by the Calculation Agent prior to 9:00 A.M., New York City time, on such Federal Funds Rate Interest Determination Date; provided, however, that, if the brokers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Federal Funds Rate determined as of such Federal Funds Rate Interest Determination Date shall be the Federal Funds Rate in effect on such Federal Funds Rate Interest Determination Date. LIBOR. Unless otherwise specified in the applicable Note Terms Certificate, "LIBOR" means the rate determined in accordance with the following provisions: (i) With respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to LIBOR (a "LIBOR INTEREST DETERMINATION DATE"), LIBOR will be either: (a) if "LIBOR Reuters" is specified in the applicable Note Terms Certificate, the arithmetic mean of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate shall be used) for deposits in Dollars having the Index Maturity specified in such Note Terms Certificate, commencing on the applicable Interest Reset Date, that appear (or, if only a single rate is required as aforesaid, appears) on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date, or (b) if "LIBOR Telerate" is specified in the applicable Note Terms Certificate or if neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable Note Terms Certificate as the method for calculating LIBOR, the rate for deposits in Dollars having the Index Maturity specified in such Note Terms Certificate, commencing on such Interest Reset Date, that appears on the Designated LIBOR Page as of 11:00 A.M., London time, on such LIBOR Interest Determination Date. If fewer than two such offered rates so appear, or if no such rate so appears, LIBOR on such LIBOR Interest Determination Date shall be determined in accordance with the provisions described in clause (ii) below. (ii) With respect to a LIBOR Interest Determination Date on which fewer than two offered rates appear, or if no rate appears, as the case may be, on the Designated LIBOR Page as specified in clause (i) above, the Calculation Agent will request the principal London offices of 4 each of four major reference banks (which may include affiliates of the Agents) in the London interbank market, as selected by the Calculation Agent, to provide the Calculation Agent with its offered quotations for deposits in Dollars for the period of the Index Maturity specified in the applicable Note Terms Certificate, commencing on the applicable Interest Reset Date, to prime banks in the London interbank market at approximately 11:00 A.M., London time, on such LIBOR Interest Determination Date and in a principal amount that is not less than $1,000,000 and is representative for a single transaction in such market at such time. If at least two such quotations are provided, then LIBOR determined on such LIBOR Interest Determination Date will be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, then LIBOR on such LIBOR Interest Determination Date shall be the arithmetic mean of the rates quoted in The City of New York at approximately 11:00 A.M., New York City time, on such LIBOR Interest Determination Date by three major banks (which may include affiliates of the Agents) in The City of New York, selected by the Calculation Agent for loans in Dollars to leading European banks, having the Index Maturity specified in the applicable Note Terms Certificate and in a principal amount that is not less than $1,000,000 and is representative for a single transaction in such market at such time; provided, however, that, if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined as of such LIBOR Interest Determination Date shall be LIBOR in effect immediately prior to such LIBOR Interest Determination Date. "Designated LIBOR Page" means (a) if "LIBOR Reuters" is specified in the applicable Note Terms Certificate, the display on the Reuter Monitor Money Rates Service (or any successor service) on the page specified in each Note Terms Certificate (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for Dollars, or (b) if "LIBOR Telerate" is specified in the applicable Note Terms Certificate or neither "LIBOR Reuters" nor "LIBOR Telerate" is specified in the applicable Note Terms Certificate as the method for calculating LIBOR, the display on the Dow Jones Markets Limited (or any successor service) on the page specified in such Note Terms Certificate (or any other page as may replace such page on such service) for the purpose of displaying the London interbank rates of major banks for the Dollars. PRIME RATE. Unless otherwise specified in the applicable Note Terms Certificate, "Prime Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined with reference to the Prime Rate (a "PRIME RATE INTEREST DETERMINATION DATE"), the rate on such date as such rate is published in H.15(519) under the heading "Bank Prime Loan". If such rate is not published prior to 3:00 P.M., New York City time, on the related Calculation Date, then the Prime Rate shall be the arithmetic mean of the rates of interest publicly announced by each bank that appears on the Reuters Screen USPRIME1 Page (as hereinafter defined) as such bank's prime rate or base lending rate as in effect for such Prime Rate Interest Determination Date. If fewer than four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Interest Determination Date, then the Prime Rate on such Prime Rate Interest Determination Date shall be the arithmetic mean of the prime rates or base lending rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date by four major money center banks (which may include affiliates of the Agents) in The City of New York selected by the Calculation Agent. If fewer than four such quotations are so provided, then the Prime Rate on such Prime Rate Interest Determination Date shall be the arithmetic mean of four prime rates quoted on the basis of the actual number of days in the year divided by a 360-day year as of the close of business on such Prime Rate Interest Determination Date as furnished in The City of New York by the major money center banks, if any, that have provided such quotations and by a reasonable number of substitute banks or trust companies (which may include affiliates of the Agents) to 5 obtain four such prime rate quotations, provided that such substitute banks or trust companies are organized and doing business under the laws of the United States, or any State thereof, each having total equity capital of at least $500 million and being subject to supervision or examination by Federal or State authority, selected by the Calculation Agent to provide such rate or rates; provided, however, that, if the banks or trust companies so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Prime Rate determined as of such Prime Rate Interest Determination Date shall be the Prime Rate in effect on such Prime Rate Interest Determination Date. "Reuters Screen USPRIME1 Page" means the display on the Reuter Monitor Money Rate Service (or any successor service) on the "USPRIME1" page (or such other page as may replace the USPRIME1 page on such service) for the purpose of displaying prime rates or base lending rates of major United States banks. TREASURY RATE. Unless otherwise specified in the applicable Note Terms Certificate, "Treasury Rate" means, with respect to any Interest Determination Date relating to a Floating Rate Note for which the interest rate is determined by reference to the Treasury Rate (a "TREASURY RATE INTEREST DETERMINATION DATE"), the rate from the auction held on such Treasury Rate Interest Determination Date (the "AUCTION") of direct obligations of the United States ("TREASURY BILLS") having the Index Maturity specified in the applicable Note Terms Certificate, as such rate is published in H.15(519) under the heading "Treasury Bills-auction average (investment)" or, if not published by 3:00 P.M., New York City time, on the related Calculation Date, the auction average rate of such Treasury Bills (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as otherwise announced by the United States Department of the Treasury. If the results of the Auction of Treasury Bills having the Index Maturity specified in the applicable Note Terms Certificate are not reported as provided by 3:00 P.M., New York City time, on the related Calculation Date or if no such Auction is held, then the Treasury Rate will be calculated by the Calculation Agent as a yield to maturity (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean of the secondary market bid rates, as of approximately 3:30 P.M., New York City time, on such Treasury Rate Interest Determination Date, of three leading United States government securities dealers (which may include the Agents or their affiliates) selected by the Calculation Agent, for the issue of Treasury Bills with a remaining maturity closest to the Index Maturity specified in the applicable Note Terms Certificate; provided, however, that, if the dealers so selected by the Calculation Agent are not quoting as mentioned in this sentence, the Treasury Rate determined as of such Treasury Rate Interest Determination Date will be the Treasury Rate in effect on such Treasury Rate Interest Determination Date. OTHER/ADDITIONAL PROVISIONS; ADDENDUM Any provisions with respect to the Medium-Term Notes, including the specification and determination of one or more Interest Rate Bases, the calculation of the interest rate applicable to a Floating Rate Note, the Interest Payment Dates, the Stated Maturity Date, any redemption or repayment provisions or any other term relating thereto, may be modified and/or supplemented as specified under "Other/Additional Provisions" on the face thereof or in an addendum relating thereto, if so specified on the face thereof and described in the applicable Note Terms Certificate. AMORTIZING NOTES The Company may from time to time offer Medium-Term Notes ("AMORTIZING NOTES") with the amount of principal thereof and interest thereon payable in installments over the term of such Medium- 6 Term Notes. Unless otherwise specified in the applicable Note Terms Certificate, interest on each Amortizing Note will be computed on the basis of a 360-day year of twelve 30-day months. Payments with respect to Amortizing Notes will be applied first to interest due and payable thereon and then to the reduction of the unpaid principal amount thereof. Further information concerning additional terms and provisions of Amortizing Notes will be specified in the applicable Note Terms Certificate, including a table setting forth repayment information for such Amortizing Notes. 7 EXHIBIT B-1 [Form of Fixed Rate Note] EXHIBIT B-2 [Form of Floating Rate Note] EXHIBIT B-3 [Administrative Procedures] EXHIBIT C FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE TO RESTRICTED REGULATION S GLOBAL NOTE (Transfers or exchanges pursuant to Section 2.06(b)(ii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ___________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the First Supplemental Indenture dated as of January 15, 1998. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of the Rule 144A Global Note (CUSIP No. [__________] with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested a transfer or exchange of such beneficial interest in the Notes for an interest in the Restricted Regulation S Global Note (CINS No. ___________) to be held with [Euroclear] [Cedel Bank](Common Code _____________) through the Depositary. In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and pursuant to and in accordance with Regulation S under the Securities Act, and accordingly the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was an institutional accredited investor outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was an institutional accredited investor outside the United States,]* [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* C-1 (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:____________________________________ Name: Title: Dated:_____________________, 199_ cc: LG&E Capital Corp. ____________________ * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. C-2 EXHIBIT D FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RULE 144A GLOBAL NOTE TO UNRESTRICTED REGULATION S GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iii) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ___________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the First Supplemental Indenture dated as of January 15, 1998. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of the Rule 144A Global Note (CUSIP No. [__________] with the Depositary in the name of [insert name of transferor] (the "Transferor"). The Transferor has requested an exchange or transfer of such beneficial interest in the Notes for an interest in the Unrestricted Regulation S Global Security (CUSIP No. ___________). In connection with such request and in respect of such Notes, the Transferor does hereby certify that such transfer or exchange has been effected in accordance with the transfer restrictions set forth in the Indenture and the Notes and: (i) with respect to transfers made in reliance on Regulation S under the Securities Act, the Transferor does hereby certify that: (1) the offer of the Notes was not made to a person in the United States; [(2) at the time the buy order was originated, the transferee was an institutional accredited investor outside the United States or the Transferor and any person acting on its behalf reasonably believed that the transferee was an institutional accredited investor outside the United States,]* [(2) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was pre-arranged with a buyer in the United States,]* D-1 (3) no directed selling efforts have been made in contravention of the requirements of Rule 903(b) or 904(b) of Regulation S, as applicable, and (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. (ii) with respect to transfers made in reliance on Rule 144 under the Securities Act, certify that the Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act, (iii) with respect to transfers made in reliance on another exemption from the Securities Act, the following is the basis for the exemption: _______________, and (iv) with respect to an exchange, either (x) the Note being exchanged is not a "restricted security" as defined in Rule 144 under the Securities Act or (u) the exchange is being made to facilitate a contemporaneous transfer that complies with Section 2.06(b)(iii) of the Indenture. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] By:____________________________________ Name: Title: Dated:_____________________, 199_ cc: LG&E Capital Corp. ____________________ * Insert one of these two provisions, which come from the definition of "offshore transactions" in Regulation S. D-2 EXHIBIT E FORM OF TRANSFER CERTIFICATE FOR TRANSFER OR EXCHANGE FROM RESTRICTED REGULATION S GLOBAL NOTE OR UNRESTRICTED REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE (Exchanges or transfers pursuant to Section 2.06(b)(iv) of the Indenture) The Bank of New York 101 Barclay Street, Floor 21 West New York, New York 10286 Attention: Corporate Trust Trustee Administration Re: LG&E Capital Corp. ____________ (the "Notes") Reference is hereby made to the Indenture dated as of January 15, 1998 (the "Indenture") between LG&E Capital Corp. and The Bank of New York, as Trustee, as supplemented by the First Supplemental Indenture dated as of January 15, 1998. Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________________ principal amount of the Notes which are held in the form of [the [Restricted] [Unrestricted] Regulation S Global Note with [Euroclear] [Cedel Bank] (Common Code _____________)] [with the Depositary (CUSIP No. _______)] in the name of [insert name of transferor](the "Transferor"). The Transferor has requested a transfer or exchange of such beneficial interest for an interest in the Rule 144A Global Note. In connection with such request, and in respect of such Notes, the Transferor does hereby certify that such Notes are being transferred or exchanged in accordance with (i) the transfer restrictions set forth in the Indenture and the Notes and (ii) Rule 144A under the Securities Act to a transferee that the Transferor reasonably believes is purchasing the Notes for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. This certificate and the statements contained herein are made for your benefit and the benefit of the Issuer. [Insert Name of Transferor] E-1 By:____________________________________ Name: Title: Dated:_____________________, 199_ cc: LG&E Capital Corp. E-2 EX-10.74 4 EX-10.74 SUPPLEMENTAL EXECUTIVE RETMENT PLAN EXHIBIT 10.74 LG&E ENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN Effective January 1, 1998 As Amended and Restated LG&E ENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN INTRODUCTION Effective May 1, 1987, Louisville Gas and Electric Company, a Kentucky corporation with principal offices located at Louisville, Kentucky (hereinafter referred to as the "Company"), established the Louisville Gas and Electric Company Supplemental Executive Retirement Plan (hereinafter referred to as the "Plan"). Effective January 1, 1998, the Company (n/k/a LG&E Energy Corp.) hereby amends and restates the Plan as the LG&E Energy Corp. Supplemental Executive Retirement Plan in order to incorporate various amendments made to the Plan since its inception. The terms of the Plan are hereinafter set forth. The purpose of the Plan continues to be to provide additional retirement security to certain executive employees of the Company to supplement the benefits payable under the Company's qualified retirement plans and the benefit payable under the Federal Social Security program. ARTICLE 1 DEFINITIONS As used herein, the following words and phrases shall have the meanings specified herein, unless a different meaning is plainly required by the context, viz., Section 1.1 AVERAGE MONTHLY COMPENSATION shall mean the average of Compensation as determined for the thirty-six (36) consecutive months preceding the Member's disability, Early or Normal Retirement Date that yield the highest average. If the Member has fewer than thirty-six (36) months of continuous employment, his Average Monthly Compensation shall be the average of Compensation for all consecutive months of continuous employment. Section 1.2 BOARD OF DIRECTORS means the Board of Directors of LG&E Energy Corp. Section 1.3 COMMITTEE means the Benefit Committee appointed pursuant to Article XII of the Retirement Income Plan for Employees of LG&E Energy Corp. Who Are Not Members of a Bargaining Unit. Section 1.4 COMPANY means LG&E Energy Corp., a Kentucky corporation with principal offices located at Louisville, Kentucky. Section 1.5 COMPENSATION means the Employee's total cash compensation (base salary plus short term incentive pay) prior to any deferrals under any qualified or non-qualified deferred compensation plan. Effective on the date of the merger between KU Energy Corporation and LG&E Energy a Transferred Participant's Compensation means the Employee's base compensation for the months prior to said date which are included in Average Monthly Compensation. Section 1.6 EARLY RETIREMENT DATE means, in the case of a Member who has been credited with at least five (5) years of Service and whose age is at least fifty (50), the first day of the month coincident with or otherwise immediately following the later of the date the Member shall leave the employ of the Employer or the date the Member reaches age fifty-five (55). The Member may select the first day of any later month as his Early Retirement Date. Section 1.7 EFFECTIVE DATE means May 1, 1987. The effective date of this amended and restated Plan is January 1, 1998. Section 1.8 EMPLOYEE means any person who is an officer in the regular full-time employ of the Company or a Participating Company, as determined by the personnel rules and practices of the Company or Participating Company. Section 1.9 EMPLOYER means LG&E Energy Corp. and any subsidiary or affiliated company. Section 1.10 MEMBER means any Employee who has satisfied the requirements for membership set forth in Section 2.1. Section 1.11 NORMAL RETIREMENT DATE means the first day of the month coincident with or otherwise immediately following the Member's sixty-fifth (65th) birthday. Section 1.12 PARTICIPATING COMPANY means any subsidiary or affiliate of the Company listed in Appendix A. Section 1.13 PLAN means the LG&E Energy Corp. Supplemental Executive Retirement Plan. Section 1.14 PLAN YEAR means the twelve (12) month period beginning on the first day of May and ending on the last day of April in the following calendar year. Section 1.15 SERVICE means the number of years of Service (as such term is defined in the LG&E Energy Corp. and Louisville Gas and Electric Company Retirement Income Plan or effective on the date of the merger of KU Energy Corporation and LG&E Energy Corp., the Kentucky Utilities Company Revised Retirement Plan, collectively the "Qualified Plans") with the Company or a Participating Company, plus a Member's years of continuous employment with LG&E Energy Corp. and any of its wholly owned subsidiaries to the extent such years of continuous employment have not been counted as a year of Service under the Qualified Plans. Section 1.16 TOTALLY AND PERMANENTLY DISABLED refers to a Member's total disability as defined in the Long-Term Disability Plan for Employees of LG&E Energy Corp. Who Are Not Members of a Bargaining Unit, or effective on the date of the merger of KU Energy Corporation and LG&E Energy Corp., the Kentucky Utilities Company Long Term Disability Plan. Section 1.17 TRANSFERRED PARTICIPANT means a participant who was formerly employed by KU Energy Corporation or its subsidiaries. ARTICLE 2 ELIGIBILITY AND MEMBERSHIP Section 2.1 ELIGIBILITY The following employees were approved for membership on January 3, 1990: Robert L. Royer William W. Hancock, Jr. Frederick Wright C. Gregory Uligian Frank L. Wilkerson Milton L. Fowler Charles A. Markel, III Wendy Heck In addition to the above, any other Employee shall become a Member of the Plan on the first day of the month following the completion of one (1) year of Service. An employee of the Company or a Participating Company who becomes an Employee shall become a Member of the Plan on the first day of the month following his becoming an Employee, provided that he has completed at least one (1) year of Service. ARTICLE 3 RETIREMENT BENEFITS Section 3.1 BENEFITS AT NORMAL RETIREMENT Upon termination of his employment at or after his Normal Retirement Date, a Member shall be entitled to retire and to receive a monthly retirement income in an amount equal to sixty-four percent (64%) of his Average Monthly Compensation, less (a) one hundred percent (100%) of his retirement benefit payable at age sixty-five (65) as a straight life annuity under the Qualified Plans (without regard to any assignment of benefits under a qualified domestic relations order), (b) one hundred percent (100%) of his Primary Social Security Benefit payable at age sixty-five (65) under the Social Security law in effect at the beginning of the Plan Year in which occurs the earlier of his Normal Retirement Date or date of severance for any reason, (c) one hundred percent (100%) of any matching contribution or other Employer contribution made on behalf of the Member under a defined contribution plan sponsored by the Employer (provided the defined contribution plan sponsored by the Employer was the Member's primary retirement vehicle) and (d) effective on the date of the merger of KU Energy Corporation and LG&E Energy Corp., the benefit provided under Article 12 of the LG&E Corp. Nonqualified Savings Plan by converting the lump sum value of the account established under that Article 12 to a life annuity payable at age sixty-five (65) using a six percent (6%) interest rate and the 1983 Group Annuity Mortality Table for the post-age sixty-five (65) time period only, (e) one hundred percent (100%) of his retirement benefit payable at age sixty-five (65) as a straight life annuity under any qualified defined benefit plan or defined contribution plan (provided such qualified defined contribution plan was the employer's primary vehicle for retirement security) sponsored by an employer by whom the Member was employed at any time prior to the date such Member became employed by the Company (without regard to any assignment of benefits under a qualified domestic relations order). The conversion of the Member's account balance at date of termination from his prior employer or accrued benefit under any such qualified defined benefit or defined contribution plan to a straight life annuity shall be based on the adjustment factors set forth in the LG&E Energy Corp. and Louisville Gas and Electric Company Retirement Income Plan (including the factors set forth in Article VI of such Plan to convert an account balance). The Member's benefit determined under the preceding provisions of this Section shall be multiplied by a fraction not to exceed one (1), the numerator of which is the Member's years of Service at his Normal Retirement Date, and the denominator of which is fifteen (15). Section 3.2 FORMS OF PAYMENT The normal form of benefit payment (to which the formula indicated in Section 3.1 applies) shall be a straight life annuity. Prior to the Member's benefit commencement date, he may elect to receive his benefit in the form of an actuarially equivalent (based on the factors set forth in Section 3.1) joint and fifty percent (50%) survivor annuity, which shall provide a reduced monthly benefit payable for the life of the Member and continued thereafter in an amount fifty percent (50%) as large to a beneficiary designated in writing by the Member. Section 3.3 BENEFITS AT EARLY RETIREMENT A Member whose age is at least fifty (50) and who has been credited with five (5) years or more of Service may, after giving the Company at least three (3) months written notice, retire as of an Early Retirement Date. Commencing at his Early Retirement Date, such Member shall be entitled to receive a monthly retirement income calculated under the formula in Section 3.1with the numerator of the fraction to be the Member's years of Service at his Early Retirement Date. In applying the formula, the retirement benefit payable under the Retirement Income Plan will be the benefit payable at age sixty-five (65), based on Average Monthly Compensation and Service to the Member's Early Retirement Date. The Social Security benefit will be the benefit payable at age sixty-five (65) based on the Employee's earnings to his Early Retirement Date. The benefit payable under any other qualified plan will be the benefit payable at age sixty-five (65). The amount so determined shall be reduced in accordance with the following factors to reflect the Member's age at the date his benefits commence:
Age at Percentage of Commencement Benefit payable ------------- --------------- 62 - 65 100% 61 96% 60 92% 59 86% 58 80% 57 74% 56 68% 55 62%
Section 3.4 DISABILITY BENEFITS In the event a Member who has completed five (5) or more years of Service becomes Totally and Permanently Disabled before reaching age sixty-five (65), he shall be entitled to a deferred benefit beginning at his Normal Retirement Date computed in accordance with Section 3.1 but based on the assumptions that his Compensation in effect at date of disability continued without change and that the Member continued to earn Service to his Normal Retirement Date. ARTICLE 4 SOURCE OF BENEFITS Section 4.1 DISCHARGE OF EMPLOYER OBLIGATION Benefits payable hereunder shall be paid exclusively from the general assets of the Company, and no person entitled to payment hereunder shall have any claim, right, security interest or other interest in any asset of the Company which may be looked to for such payment. The Company's liability for the payment of benefits hereunder shall be evidenced only by this Plan. The Company shall have no obligation of any nature whatsoever to a Member under the Plan except as otherwise expressly provided under the Plan. ARTICLE 5 TERMINATION OF EMPLOYMENT Section 5.1 TERMINATION OF EMPLOYMENT This Plan does not in any way obligate the Company or any subsidiary of the Company to continue the employment of a Member with the Company, nor does it limit the right of the Company or subsidiary at any time and for any reason to terminate the Member's employment. Termination of a Member's employment with the Company or any subsidiary for any reason, whether by action of the Company, the subsidiary, or the Member, shall immediately terminate his participation in the Plan and all future obligations of either party hereunder; provided, however, that if the Member has completed at least five (5) years of Service and reached at least age fifty (50), he shall be vested in his benefit earned hereunder, with such benefit to be payable no earlier than when the Member reaches age fifty-five (55). In no event shall the Plan, by its terms or implications, constitute an employment contract of any nature whatsoever between the Company, a Participating Company or any other subsidiary, and a Member. ARTICLE 6 TERMINATION, AMENDMENT, MODIFICATION OR SUPPLEMENT OF PLAN Section 6.1 EMPLOYER'S RIGHTS The Company reserves the right to terminate, amend, modify or supplement this Plan, wholly or partially, at any time; provided, however, that no amendment to the Plan shall retroactively reduce benefits earned prior to the effective date of the amendment. Section 6.2 MEMBER'S RIGHTS IF PLAN TERMINATES In the event the Company terminates this Plan, no action will be taken to terminate any benefit payments to a Member or beneficiary that are in pay status. For those Members who are not receiving benefit payments under the Plan at the time of Plan termination, the Company shall determine the value of the retirement benefit accrued to the date of termination and shall at that time determine the timing for providing such benefits to the Member. In the event of Plan termination, all Members shall become fully vested in all benefits accrued to the date of Plan termination. ARTICLE 7 OTHER BENEFITS AND AGREEMENTS Section 7.1 OTHER BENEFITS The benefits provided for a member and a Member's beneficiary under the Plan are in addition to any other benefits available to such member under any plan or program of the Company, Participating Company or any other subsidiary for their employees and, except as may otherwise be expressly provided for herein, the Plan shall supplement and shall not supersede, modify or amend any other plan or program of the Company, Participating Company or any other subsidiary. Moreover, benefits under the Plan shall not be considered compensation for the purpose of computing contributions or benefits under any plan maintained by the Company, Participating Company or any other subsidiary which is qualified under sections 401(a) and 501(a) of the Internal revenue Code of 1986, as amended. ARTICLE 8 RESTRICTIONS ON BENEFITS Section 8.1 RESTRICTIONS ON BENEFITS No right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber or charge the same shall be void. No right or benefit shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefit. If any Member or beneficiary under the Plan should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber or charge any right to a benefit hereunder, then such right or benefit, in the discretion of the Company, shall cease and, in such event, the Company may hold or apply the same or any part thereof for the benefit of such Member or beneficiary, his or her spouse, children, or other dependents, or any of them, in any manner and in such portion as the Company may deem proper. Section 8.2 BENEFITS FORFEITABLE A Member shall forfeit his interest under the Plan upon his commission of and conviction for a criminal act against the Company or for any conduct, before or after his retirement from the Company, that is, in the opinion of the Committee, detrimental to the interests of the Company. ARTICLE 9 ADMINISTRATION OF THE PLAN Section 9.1 GENERAL The general administration of the Plan, as well as construction and interpretation thereof, shall be vested in the Committee. The Committee may delegate the routine administration duties to the Employment and Fringe Benefits Department of Louisville Gas and Electric Company. Section 9.2 COMMITTEE STRUCTURE The Committee may designate one of its members as chairman and may appoint a secretary who need not be a member of the Committee. The secretary shall keep minutes of the Committee' proceedings and all data, records and documents relating to the Committee's administration of the Plan. The Committee may appoint from its number such sub-committees with such powers as the Committee shall determine and may authorize one or more members of the Committee or any agent to execute or deliver any instrument or make any payment on behalf of the Committee. Section 9.3 COMMITTEE ACTIONS All determinations or other actions taken by the Committee shall be by the vote of a majority of those present at a meeting at which a majority of members are present., or in writing by all members at the time in office if they act without a meeting. Section 9.4 COMMITTEE'S RIGHTS Subject to the Plan, the Committee shall from time to time establish rules, forms and procedures for the administration of the Plan. Except as herein otherwise expressly provided, the Committee shall have the exclusive right to interpret the Plan and to decide any and all matters arising thereunder or in connection with the administration of the Plan, and it shall endeavor to act, whether by general rules or by particular decisions, so as not to discriminate in favor of or against any person. The Committee shall have the exclusive right to determine (i) disability in respect of a Member and (ii) the degree thereof, either or both determinations to be made on the basis of medical and/or other evidence as the Committee, in its sole judgment, may require, and (iii) whether a Member's benefit is to be forfeited under section 8.2. Such decisions, actions and records of the Committee shall be conclusive and binding upon the Company and all persons having or claiming to have any right to or interest in or under the Plan. Section 9.5 COMMITTEE RELIANCE The members of the Committee and the officers and directors of the Company shall be entitled to rely on all certificates and reports made by any duly appointed accountants, and on all opinions given by any duly appointed legal counsel. Such legal counsel may be counsel for the Company. Section 9.6 INDEMNIFICATION No member of the Committee shall be liable for any act or omission of any other member of the Committee, nor for any act or omission on his own part, excepting only his own willful misconduct. The Company shall indemnify and save harmless each member of the Committee against any and all expenses and liabilities arising out of his membership on the Committee, excepting only expenses and liabilities arising out of his own willful misconduct. Expenses against which a member of the Committee shall be indemnified hereunder shall include, without limitation, the amount of any settlement or judgment, costs, counsel fees, and related charges reasonably incurred in connection with a claim asserted, or a proceeding brought or settlement thereof. The foregoing right of indemnification shall be in addition to any other rights to which any such member may be entitled as a matter of law. Section 9.7 COMPUTATION OF BENEFITS In addition to the powers hereinabove specified, the Committee shall have the power to compute and certify under the Plan the amount and kind of benefits from time to time payable to Members and their beneficiaries and to authorize all disbursements for such purposes. Section 9.8 EMPLOYER'S OBLIGATIONS To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the compensation of all Members, their retirement, death or other cause for termination of employment, and such other pertinent facts as the Committee may require. Upon submission of proper documentation, the Company and any successor employer shall reimburse a Member for all reasonable legal fees and expenses actually incurred in the enforcement or attempted enforcement of rights under this Plan, without regard to the success of any such attempt. ARTICLE 10 MISCELLANEOUS Section 10.1 NOTICES Any notice which shall be or may be given under the Plan shall be in writing and shall be mailed by United States mail, postage prepaid. If notice is to be given to the Company, such notice shall be addressed to the Company, marked for the attention of the Manager of Benefits, Louisville Gas and Electric Company, or, if notice is to a Member, addressed to the address shown on such Member's personnel records. Section 10.2 CHANGE IN ADDRESS Any party may, from time to time, change the address to which notices shall be mailed by giving written notice of such new address. Section 10.3 PLAN BINDING The Plan shall be binding upon the Company and its successors and assigns, and upon a Member, his beneficiaries, assigns, heirs, executors and administrators. Section 10.4 PRONOUNS Masculine pronouns wherever used shall include feminine pronouns and the singular shall include the plural. ARTICLE 11 CONSTRUCTION Section 11.1 CONSTRUCTION This Plan shall be construed under the laws of the Commonwealth of Kentucky. ARTICLE 12 CHANGE IN CONTROL Section 12.1 CHANGE OF CONTROL For purposes of this Plan, a "Change in Control" shall mean the occurrence of any of the following events: (1) An acquisition (other than directly from the Company) of any securities of the Company entitled generally to vote on the election of directors ("Voting Securities") by any "person" (as the term person is used for purposes of sections 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 twenty percent (20%) or more of the combined voting power of the Company'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) the Company 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 or indirectly by the Company, or (2) the Company or any subsidiary. (2) The individuals who are members of the Board cease for any reason to constitute at least two-thirds (2/3) of the Board; provided, however, that if the election or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the incumbent Board, such new director, for purposes of this Plan, shall be considered as a member of the incumbent Board; provided, further, however, that no member shall be considered a member of the incumbent Board if such individual initially assumed office as the result of either an actual or threatened Election Contest (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of an agreement intended to avoid or settle any Election Contest or Proxy Contest; or (3) Approval by stockholders of the Company of (1) a merger, consolidation or reorganization involving the Company, unless (i) the stockholders of the Company 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 then outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corporation") in substantially the same proportion 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 (2/3) of the board of directors of the Surviving Corporation; (2) a complete liquidation or dissolution of the Company; or (3) an agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a subsidiary). Notwithstanding the preceding clauses (1), (2) and (3), 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 the Company 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 of Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such acquisition by the Company, the Subject Person 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. Section 12.2 VESTING Upon the occurrence of a Change in Control, all Members of the Plan as of the date of the Change in Control shall become fully vested. ARTICLE 13 CLAIMS PROCEDURE Section 13.1 WRITTEN CLAIM REQUIRED Benefits shall be paid in accordance with the provisions of this agreement. The Member, or a designated recipient or any other person claiming through the Member shall make a written request for benefits under this agreement. This written claim shall be mailed or delivered to the Committee. Such claim shall be reviewed by the Committee or its delegate. Section 13.2 PROCEDURE IF CLAIM DENIED If the claim is denied, in full or in part, the Committee shall provide a written notice within ninety (90) days setting forth the specific reasons for denial, and any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary, and appropriate information and explanation of the steps to be taken if a review of the denial is desired. Section 13.3 REVIEW OF CLAIM DENIAL If the claim is denied and a review is desired, the Member (or beneficiary) shall notify the Committee in writing within sixty (60) days (a claim shall be deemed denied if the Committee does not take any action within the aforesaid ninety (90) day period) after receipt of the written notice of denial. In requesting a review, the Member or his Beneficiary may request a review of the Plan Document or other pertinent documents with regard to the employee benefit plan created under this agreement, may submit any written issues and comments, may request an extension of time for such written submission of issues and comments, and may request that a hearing be held, but the decision to hold a hearing shall be within the sole discretion of the Committee. Section 13.4 FINAL DECISION The decision on the review of the denied claim shall be rendered by the Committee within sixty (60) days after the receipt of the request for review (if no hearing is held) or within sixty (60) days after the hearing if one is held. The decision shall be written and shall state the specific reasons for the decision, including reference to specific provisions of this Plan on which the decision is based. SIGNATURES IN WITNESS WHEREOF, the Company has caused this instrument to be executed by its duly authorized officer on this day of , 1998, but effective as of the first day of January, 1998, unless otherwise provided for herein. LG&E ENERGY CORP. By ATTEST: By APPENDIX A PARTICIPATING EMPLOYERS LG&E Energy Corp. Louisville Gas and Electric Company Kentucky Utilities Company (effective date of the merger of KU Energy Corporation and LG&E Energy Corp.) EX-10.75 5 EX-10.75 CHANGE-IN-CONTROL AGREEMENT Exhibit 10.75 CHANGE-IN-CONTROL AGREEMENT THIS AGREEMENT made this DATE, by and between LG&E ENERGY CORP. (the "Company") and NAME (the "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 its stockholders 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 _________________, 1998, and shall continue in effect until SAME MONTH/DAY, 2000, provided, however, that commencing on SAME MONTH/DAY, 2000, 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 the later to occur of: (i) any Change in Control which occurs while this Agreement is in effect or (ii) the Effective Time. 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 the Company) of any securities of the Company entitled generally to vote on the election of directors (the "Voting Securities") by any "Person" (as the term person in 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 Company'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) the Company 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 Company (a "Subsidiary") or (2) the Company 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 the Company'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; PROVIDED FURTHER, HOWEVER, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or 2 (c) Approval by stockholders of the Company of: (1) A merger, consolidation or reorganization involving the Company; unless (i) the stockholders of the Company 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 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 the Company; or (3) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). 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 the Company 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 the Company, and after such share acquisition by the Company, the Subject Person 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. (d) 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 3 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 (11) hereof: (1) a reduction by an Employer in the Executive's base salary in effect immediately prior to the Change in Control or any failure to pay the Executive any compensation or benefits to which the Executive is entitled within five days of the due date; (2) an Employer requires the Executive to be relocated anywhere in excess of fifty (50) miles of his present office location, except for required travel on an Employer's business to an extent substantially consistent with his present business travel obligations; (3) a failure by the Company and its Subsidiaries to maintain plans providing benefits at least as beneficial 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 at the time of a Change in Control, or if the Company or any Subsidiary 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 at the time of the Change in Control, or if the Company or any Subsidiary has failed to provide him with the number of paid vacation days to which he would be entitled in accordance with the Company's or the Subsidiary's normal vacation policy in effect at the time of the Change in Control; (4) Prior to the Effective Time, an Employer reduces in any manner which the Executive considers important the Executive's title, job authorities or responsibilities as in effect immediately prior to the Change in Control; 4 (5) On the Effective Time, Executive shall not be TITLE of COMPANY(IES) with the authorities and responsibilities typically associated with such positions; (6) After the Effective Time, an Employer reduces in any manner which the Executive considers important the Executive's title, job authorities or responsibilities as in effect on the Effective Time; (7) the Company fails to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 7 hereof; (8) any purported termination of the Executive's employment by an Employer 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; (9) any material breach by the Company of any provision of this Agreement; (10) any purported termination of the Executive's employment for Cause by an Employer which does not comply with the terms of Section 2.2 of this Agreement; or (11) the insolvency or the filing (by any party, including an Employer) of a petition for bankruptcy of an Employer, which petition is not dismissed within 60 days. (b) Any event or condition described in this Section 2.6(a)(1) through (11) 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. 2.7 EFFECTIVE TIME. For purposes of this Agreement, "Effective Time" shall have the meaning ascribed to such term by Section 1.3 of the Agreement and Plan of Merger, dated May 20, 1997, by and between LG&E Energy Corp. and KU Energy Corp. 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 the later of: (i) a Change in Control or (ii) the Effective Time, then the Executive shall be entitled to the following compensation and benefits: 5 (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 an amount equal to twenty percent (20%) of the Base Amount to be used for out-placement services. 6 (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 any amounts otherwise payable, or in any way diminish the Executive's existing rights, or rights which would accrue solely as a result of the passage of time, under any benefit plan, incentive plan, or securities plan, employment agreement or other contract, plan or arrangement with the Company, any Subsidiary or any other party, including, but not limited to, those specified in Exhibit A attached hereto, provided, however, the Company shall not be required to make duplicative payments of Accrued Compensation, and provided further that, upon execution of this Agreement, Executive shall not have any rights under his prior Change-In-Control Agreement, as previously amended, which agreement (as stated in Section 15 hereof) is superseded by this Agreement. 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 7 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 8 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 9 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 10 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 all 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 11 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, 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 ____________________________________ NAME 12 EXHIBIT A TO CHANGE-IN-CONTROL AGREEMENT 1. Omnibus Long-Term Incentive Plan 2. Short-Term Incentive Plan 3. Qualified Thrift Plan 4. Nonqualified Thrift Plan 5. LG&E Retirement Income Plan for Employees Who Are Not Members of a Bargaining Unit 6. LG&E Supplemental Executive Retirement Plan 13 EX-10.76 6 EX-10.76 COAL SUPPLY AGREEMENT (34 PAGES) EXHIBIT 10.76 CONTRACT #96-413-026 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated July 1, 1997 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and KINDILL MINING, INC., an Indiana corporation, 101 Court Street, Suite 106, Evansville, Indiana 47708 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL. Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM. The term of this Agreement shall commence on July 1, 1997 and shall continue through December 31, 2006. SECTION 3. QUANTITY. SECTION 3.1 BASE QUANTITY. Seller shall sell and deliver and Buyer shall purchase and accept delivery of the following annual base quantity of coal ("Base Quantity"):
YEAR BASE QUANTITY (TONS) 1997 150,000 1998 900,000 1999 900,000 2000 900,000 2001 900,000 2002 900,000 2003 900,000 2004 900,000 CONTRACT #97-211-026 YEAR BASE QUANTITY (TONS) 2005 900,000 2006 900,000
SECTION 3.2 DELIVERY SCHEDULE. By November 1 of each year except 1997, Buyer and Seller shall mutually agree and shall specify in writing the quantities to be delivered in each month of the following year. For 1997, Buyer and Seller shall mutually agree and shall specify in writing such delivery schedule within ten (10) business days after this Agreement is fully executed. Such quantities shall be shipped in accordance with such schedule. Time is of the essence with respect to the schedule so established; and failure by Seller to deliver in a timely fashion shall constitute a material breach within the meaning of SECTION 16 of this Agreement. SECTION 3.3 RIGHT OF FIRST REFUSAL. (a) During the term of this Agreement, Buyer shall have the right of first refusal to purchase any additional tonnage which Seller is not contractually committed to sell to Buyer or a third party as of July 1, 1997 and which becomes available from the following sources (the "Additional Tonnage"): (i) the Coal Property (as defined in SECTION 4.1); and (ii) Indiana 5 and 6 seams from the South Arthur Property, Pike County, Indiana. Seller shall notify Buyer by the fifteenth of each month of the expected Additional Tonnage for the succeeding three months. Included in this notice Seller shall quote a price, coal quality and schedule for the Additional Tonnage. If the aggregate price of the Additional Tonnage does not exceed one million dollars ($1,000,000), Buyer shall, within two working days of receiving the notice, give Seller notice of its intent to purchase or refusal to purchase the Additional Tonnage. If the aggregate price of the 2 CONTRACT #97-211-026 Additional Tonnage exceeds one million dollars ($1,000,000), Buyer shall, within seven working days of receiving the notice, give Seller notice of its intent to purchase or refusal to purchase the Additional Tonnage. Any Additional Tonnage which Buyer exercises its right to purchase under this SECTION 3.3 hereinafter shall be referred to as "Right of First Refusal Tonnage." (b) If Buyer refuses to purchase the Additional Tonnage or does not accept the purchase of the Additional Tonnage within the aforementioned time period, Seller shall be free to sell the Additional Tonnage to a third party at an equivalent quality and at a price no lower than that quoted to Buyer. If Seller obtains an offer from a third party to purchase at an equivalent quality and at a lower price (or at a higher quality and at the same price) than that quoted to Buyer which is acceptable to Seller, then Seller must offer Buyer the new sale price or quality terms pursuant to the provisions of SECTION 3.3(a) above. Within five working days after Seller enters into any contract with a third party to sell the Additional Tonnage pursuant to this SECTION 3.3, Seller shall give written confirmation to Buyer of the sale. Buyer shall have the right to audit Seller's records to verify the sale and price of any such transactions subject to appropriate confidentiality restrictions. SECTION 3.4 OPTION TO INCREASE QUANTITY. In addition to Buyer's right of first refusal set forth in SECTION 3.3, for each year of the agreement, Buyer shall have the right to increase the quantity to be delivered hereunder by up to an additional 400,000 tons. Buyer shall exercise such option by giving to Seller notice stating Buyer's exercise of the option and specifying the increased tonnage sixty (60) days prior to the end of each quarter; provided, however, the maximum tonnage that can be nominated for delivery during the immediately following quarter shall not be more than 100,000 tons. Buyer's exercise of the option in any given quarter shall not obligate 3 CONTRACT #97-211-026 Buyer to take delivery of the increased quantity in any following quarter or any following year, and Buyer's failure to exercise the option in 1998 will not negate Buyer's right to exercise the option in 1999 or thereafter. Any additional tonnage which Buyer exercises its right to purchase under this SECTION 3.4 hereinafter shall be referred to as "Option Tonnage" and shall be subject to all the terms and conditions hereof (including price). SECTION 4. SOURCE. SECTION 4.1 SOURCE. The coal sold hereunder shall be supplied from the following mines and geological seams (collectively, the "Coal Property"): (i) from July 1, 1997 through December 31, 1997, Indiana 5 and 6 seams from the Kindill 1 mine property, Pike County, Indiana; and (ii) from no later than December 1, 1997 through December 31, 2006, Indiana 5 and 6 seams from the Kindill 2 mine property (White Church Property), Pike County, Indiana. Seller shall have the right to add coal reserves and/or add or expand existing or new mining operations to the Coal Property during the term of this Agreement so long as such mining operation or coal reserves are under lease, ownership, or are managed or operated by Seller or one of its affiliated companies. Seller shall notify Buyer at least 30 days in advance of any election to make such changes to the Coal Property and update Seller's mining plan as required under SECTION 4.4. Buyer shall have the right to review and approve the changes to the Coal Property. Buyer's approval shall not be unreasonably withheld provided the coal meets the quality and delivery requirements of this Agreement. The price of coal shall not be changed from that provided under SECTION 8 of this Agreement as a result of changes to the Coal Property as provided hereunder, except that the provisions of SECTION 5 concerning deliveries at locations other than the Delivery Point shall apply. 4 CONTRACT #97-211-026 SECTION 4.2 ASSURANCE OF OPERATION AND RESERVES. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment, facilities and/or Coal Property and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. SECTION 4.3 NON-DIVERSION OF COAL. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. SECTION 4.4 SELLER'S PREPARATION OF MINING PLAN. Seller shall have prepared a complete mining plan for the Coal Property with adequate supporting data to demonstrate Seller's capability to have coal produced from the Coal Property which meets the quantity and quality specifications of this Agreement. Seller shall provide Buyer with two copies of such mining plan which shall contain maps and a narrative depicting areas and seams of coal to be mined and shall include (but not be limited to) the following information: (i) reserves from which the coal will be produced during the term hereof and the mining sequence, by year (or such other time intervals as mutually 5 CONTRACT #97-211-026 agreed) during the term of this Agreement, from which coal will be mined; (ii) methods of mining such coal; (iii) methods of transporting and, in the event a preparation plant is constructed at the Coal Property, methods of washing coal to insure compliance with the quantity and quality requirements of this Agreement including a description and flow sheet of the preparation plant; (iv) quality data plotted on the maps depicting data points and isolines by ash, sulfur, and B.T.U.; (v) quality control plans including sampling and analysis procedures to insure individual shipments meet quality specifications; and (vi) Seller's aggregate commitments to others to sell coal from the Coal Property during the term of this Agreement. Such complete mining plan shall be delivered to Buyer on or before December 1, 1997. Buyer's receipt of the mining plan or other information or data furnished by Seller shall not in any way relieve Seller of any of Seller's obligations or responsibilities under this Agreement; nor shall such review be construed as constituting an approval of Seller's proposed mining plan as prudent mining practices, such review by Buyer being limited solely to a determination, for Buyer's purposes only, of Seller's capability to supply coal on a long-term basis to fulfill Buyer's requirements of a dependable coal supply. Seller shall annually provide Buyer with a mining plan update ("Update") showing progress to date, conformity to original mining plan, and then known changes in reserve data and planned changes in mining progression, plans or procedures. The update shall be submitted annually on or before December 1 of each year during the term of this Agreement. SECTION 4.5 SUBSTITUTE COAL. Notwithstanding the above representations and warranties, in the event that Seller is unable to produce or obtain coal from the Coal Property in the quantity and of 6 CONTRACT #97-211-026 the quality required by this Agreement, then Seller will have the option to supply substitute coal from other facilities and mines under all the terms and conditions of this Agreement including, but not limited to, the price provisions of SECTION 8, the quality specifications of SECTION 6.1, and the provisions of SECTION 5 concerning reimbursement to Buyer for increased transportation costs. Seller's delivery of coal not produced from the Coal Property without having received the express written consent of Buyer shall constitute a material breach of this Agreement. SECTION 5. DELIVERY. SECTION 5.1 RAIL OR TRUCK DELIVERY. The coal shall be delivered to Buyer at the following locations (collectively, the "Delivery Point"): (i) between July 1, 1997 and December 31, 1997, F.O.B. railcar at the rail loading facility located at Kindill 1, near Enosville, Indiana on the Algers, Winslow, and Western / Norfolk Southern Railway; and (ii) beginning no later than December 1, 1997, F.O.B. railcar or F.O.B. truck at the Kindill 2 loadout at Algers, Indiana, as specified from time to time by Buyer. Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be shared equally between Buyer and Seller. Title to and risk of loss respecting coal will pass to Buyer and the coal will be considered to be delivered when it is loaded into the railcars at the rail loading facility or trucks, as the case may be. Buyer or its contractor shall furnish suitable railcars or trucks in accordance with a delivery schedule provided by Buyer to Seller. Seller shall be responsible for and pay the cost of repairs for any damages caused by Seller to railcars or trucks owned or leased by Buyer while 7 CONTRACT #97-211-026 such railcars or trucks are in Seller's control or custody. Seller shall comply with the applicable provisions of Buyer's rail or truck contractor's tariff. SECTION 5.2 FREEZE CONDITIONING. At Buyer's request, Seller shall treat (or have treated) any shipment of coal hereunder with a freeze conditioning agent approved by Buyer in order to maintain coal handling characteristics during shipment. If requested by Buyer, Seller shall also treat (or have treated) any railcars specified by Buyer with a side release agent approved by Buyer. The price for each such requested chemical treatment shall be an amount equal to Seller's cost of materials applied on a per gallon basis for each application of freeze conditioning agent or side release agent, as the case may be. Seller shall invoice Buyer for all such treatment which occurred in a calendar month by the fifteenth of the following month; and payment shall be mailed by the twenty-fifth of such following month or within ten days after receipt of Seller's invoice, whichever is later. SECTION 6. QUALITY. SECTION 6.1 SPECIFICATIONS. (a) The coal delivered hereunder shall conform to the following specifications on an "as received" basis:
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - ---------------------------------------------------------------------------------------------- CHLORINE max. 0.05 lbs/MMB.T.U. GREATER THAN 0.10 FLUORINE max. 0.006 lbs/MMBT.U. GREATER THAN 0.01 NITROGEN max. 1.20 lbs/MMBT.U. GREATER THAN 1.50 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1 8 CONTRACT #97-211-026 GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - ---------------------------------------------------------------------------------------------- SIZE (3" x 0"): Top size (inches)* max. 3"x 0" GREATER THAN 3"x 0" Fines (% by wgt) Passing 1/4" screen max. 45% GREATER THAN 55% % BY WEIGHT: ------------ VOLATILE max. 38.0% GREATER THAN 40.0% VOLATILE min. 30.0% LESS THAN 29.0% FIXED CARBON max. 46.0% GREATER THAN 48.0% FIXED CARBON min. 35.0% LESS THAN 30.0% GRINDABILITY (HGI) min. 52 LESS THAN 50 BASE ACID RATIO (B/A) max. .50 GREATER THAN .60 SLAGGING FACTOR** max. 1.90 GREATER THAN 2.10 FOULING FACTOR*** max. 0.50 GREATER THAN 1.00 ASH FUSION TEMPERATURE (DEG. F) (ASTM D1857) -------------------------------------------- REDUCING ATMOSPHERE ------------------- Initial Deformation min. 1950 min. 1900 Softening (H=W) min. 2005 min. 1975 Softening (H=1/2W) min. 2050 min. 2000 Fluid min. 2135 min. 2100 OXIDIZING ATMOSPHERE -------------------- Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2330 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375
* All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than forty five percent (45%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by WeightDry) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by WeightDry) 9 CONTRACT #97-211-026 The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0) ---------------------------------------- (Si0(2) + A1(2)0(3) + T10(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. (b) In addition to the specifications set forth in SECTION 6.1(a), the coal delivered hereunder from the Kindill 1 mine property on a raw basis ("Kindill 1 Raw Coal") shall conform on an "as received" basis to the following specifications:
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ----------------- B.T.U./lb. min. 10,900 LESS THAN 10,600 LBS./MMB.T.U. - ------------- Ash max. 13.76 GREATER THAN 16.00 Moisture max. 13.76 GREATER THAN 16.00 Sulfur max. 5.05 GREATER THAN 5.50
(c) In addition to the specifications set forth in SECTION 6.1(a), the coal delivered hereunder from the Kindill 1 mine property on a clean basis ("Kindill 1 Clean Coal") shall conform on an "as received" basis to the following specifications:
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ----------------- B.T.U./lb. min. 11,250 LESS THAN 10,950 LBS./MMB.T.U. - ------------- Ash max. 10.25 GREATER THAN 11.50 Moisture max. 11.75 GREATER THAN 12.75 Sulfur max. 3.55 GREATER THAN 4.00
10 CONTRACT #97-211-026 (d) In addition to the specifications set forth in SECTION 6.1(a), the coal delivered hereunder from the Kindill 2 mine property (White Church Property) ("White Church Coal") shall conform on an "as received" basis to the following specifications:
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ----------------- B.T.U./lb. min. 11,000 LESS THAN 10,750 LBS./MMB.T.U. - ------------- Ash max. 10.45 GREATER THAN 10.75 Moisture max. 11.82 GREATER THAN 12.50 Sulfur max. 3.18 GREATER THAN 3.27
(e) During 1997, Seller shall deliver either Kindill 1 Raw Coal or Kindill 1 Clean Coal pursuant to Buyer's nomination. Buyer may change the nominated qualities from time to time by giving to Seller at least thirty (30) days advance notice of such change. SECTION 6.2 DEFINITION OF "SHIPMENT". As used herein, a "shipment" shall mean one barge load, a barge lot load, one unit trainload, or the aggregate of the truckloads that are unloaded on any one day, in accordance with Buyer's sampling and analyzing practices. SECTION 6.3 REJECTION. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in SECTION 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in SECTION 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, title to and risk of loss of the coal shall be considered to have never passed to Buyer and Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost and risk. Seller shall replace the rejected coal within five (5) 11 CONTRACT #97-211-026 working days from notice of rejection with coal conforming to the Rejection Limits set forth in SECTION 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in SECTION 6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by Buyer; however, the quantity Seller is obligated to sell to Buyer under the Agreement may or may not be reduced by the amount of each such non-conforming shipment at Buyer's sole option and the shipment shall nevertheless be considered "rejectable" under SECTION 6.4. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. SECTION 6.4 SUSPENSION AND TERMINATION. If the coal sold hereunder fails to meet two or more of the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1 for any two (2) consecutive months in a six (6) month period, or if nine (9) barge shipments or nine (9) truck shipments in a 30 12 CONTRACT #97-211-026 day period are rejectable by Buyer, or if Buyer receives at generating station(s) two (2) rail shipments which are rejectable in any 30 day period, Buyer may upon notice confirmed in writing and sent to Seller by certified mail, suspend future shipments except shipments already loaded into barges and/or railcars. Seller shall, within 10 days, provide Buyer with reasonable assurances that subsequent monthly deliveries of coal shall meet or exceed the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1 and that the source will exceed the rejection limits set forth in SECTION 6.1. If Seller fails to provide such assurances within said 10 day period, Buyer may terminate this Agreement by giving written notice of such termination at the end of the 10 day period. A waiver of this right for any one period by Buyer shall not constitute a waiver for subsequent periods. If Seller provides such assurances to Buyer's reasonable satisfaction, shipments hereunder shall resume and any tonnage deficiencies resulting from suspension may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its acceptance of Seller's assurances, or delay the resumption of shipment. If Seller, after such assurances, fails to meet any of the Guaranteed Monthly Weighted Averages for any one (1) month within the next six (6) months or if three (3) barge shipments or three (3) truck shipments or one (1) rail shipment are rejectable within any one (1) month during such six (6) month period, then Buyer may terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS. SECTION 7.1 WEIGHTS. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another 13 CONTRACT #97-211-026 method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any reasonable time or frequency. If the scales are found to be over or under the tolerance range allowable for the scale based on industry accepted standards, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. SECTION 7.2 SAMPLING AND ANALYSIS. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with industry-accepted standards. Samples for analyses shall be taken by any industry-accepted standard, mutually acceptable to both parties, may be composited and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. 14 CONTRACT #97-211-026 Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. 15 CONTRACT #97-211-026 For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE. SECTION 8.1 Base Price. The base price ("Base Price") of the coal to be sold hereunder will be firm and will also be determined by the nominated coal quality during 1997 and the year in which the coal is delivered as defined in SECTION 5 in accordance with the following schedule:
(i) KINDILL 1 RAW COAL ------------------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.70500 (ii) KINDILL 1 CLEAN COAL -------------------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.81000 (iii) WHITE CHURCH COAL ----------------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.81800 1998 $0.81800 1999 $0.81800 2000 $0.81800 2001 $0.84254 2002 $0.84254 2003 $0.84254 2004 $0.86782 2005 $0.86782 2006 $0.86782
16 CONTRACT #97-211-026 SECTION 8.2 QUALITY PRICE DISCOUNTS. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in SECTION 6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1, as determined pursuant to SECTION 7.2, subject to the provisions set forth below. The discount values used are as follows:
DISCOUNT VALUES --------------- $/MMB.T.U. ---------- B.T.U./LB. 0.2604 $/LB./MMB.T.U. -------------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016
(b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall apply and shall be calculated on the basis of the difference between the actual Monthly Weighted Average AND THE GUARANTEED MONTHLY WEIGHTED AVERAGE pursuant to the methodology shown in Exhibit A attached hereto. 17 CONTRACT #97-211-026
(i) KINDILL 1 RAW COAL ------------------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS - --------------- B.T.U./lb. min. 10,900 10,700 LBS./MMB.T.U. - ------------- Ash max. 13.76 15.50 Moisture max. 13.76 15.50 Sulfur max. 5.05 5.35 (ii) KINDILL 1 CLEAN COAL --------------------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS - -------------- B.T.U./lb. min. 11,250 11,050 LBS./MMB.T.U. - ------------- Ash max. 10.25 11.00 Moisture max. 11.75 12.25 Sulfur max 3.55 3.90 (iii) WHITE CHURCH COAL ----------------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS - -------------- B.T.U./lb. min. 11,000 10,850 LBS./MMB.T.U. - ------------- Ash max. 10.45 10.65 Moisture max. 11.82 12.00 Sulfur max. 3.18 3.22
18 CONTRACT #97-211-026 For example, for White Church Coal, if the actual Monthly Weighted Average of sulfur equals 3.3 lb/MMB.T.U., then the applicable discount would be (3.3 lb. - 3.18 lb.) X $0.1232/lb/MMB.T.U. = $.01478/MMB.T.U.. SECTION 8.3 PRICE REVIEW.The Base Price and all other terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1, 2001 and January 1, 2004. The party requesting such review shall give written notice of its request to the other party between September 1 and October 1 of the year preceding the effective January 1 date of the revision (the "Review Year"). The parties shall then negotiate an agreement on new prices and/or other terms and conditions between October 1 and December 1 of the Review Year. If the parties do not reach an agreement by December 1 of the Review Year, then this Agreement will terminate as of December 31 of the Review Year without liability due to such termination for either party. SECTION 8.4 PAYMENT CALCULATION. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 9. INVOICES, BILLING AND PAYMENT. SECTION 9.1 INVOICING ADDRESS. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Procurement and Delivery 19 CONTRACT #97-211-026 With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable SECTION 9.2 INVOICE AND BI-MONTHLY PAYMENT PROCEDURES. For all coal delivered (as defined in SECTION 5 hereof) between the first and fifteenth days of any calendar month, Buyer shall make preliminary payment by the twenty-fifth day of such month. For all coal delivered between the sixteenth and the last days of any calendar month, Buyer shall make preliminary payment by the tenth day of the succeeding calendar month. Payment shall be made by electronic funds transfer to Seller's account. Preliminary payment shall be in the amount of seventy five percent (75%) of the then current price on a dollar per ton basis as calculated by applicable coal type, guaranteed monthly weighted average B.T.U., and the then current Base Price in cents per MMB.T.U.. After the end of each calendar month, there will be a true-up as follows. The amount due for all coal (based on the Base Price minus any Quality Price Discounts) delivered during any calendar month shall be calculated and compared to the sum of the preliminary payments made for coal delivered during such month. The difference shall be paid by or paid to the Seller, as applicable, by the twenty-fifth day of the following month. SECTION 9.3 WITHHOLDING. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this 20 CONTRACT #97-211-026 Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE. SECTION 10.1 GENERAL FORCE MAJEURE. If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, failure of a piece of Seller's equipment known as the 1370 Bucyrus Erie drag-line for at least 30 consecutive days, failure of Norfolk Southern Railway Corporation ("NS") to transport the coal from the Delivery Point for any reason other than Buyer's breach of its agreement with NS, fires, floods or earthquakes, which are beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is 21 CONTRACT #97-211-026 similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. Tonnage deficiencies resulting from a force majeure event shall be made up at Buyer's sole option on a reasonable schedule. SECTION 10.2 ENVIRONMENTAL LAW FORCE MAJEURE. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt environmental laws, regulations, policies and/or restrictions which will make it impossible or commercially impracticable for Buyer to utilize this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies, or restrictions, or change in the interpretation or enforcement thereof, Buyer decides that it will be impossible or commercially impracticable (uneconomical) for Buyer to utilize such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at Seller's mine and/or in the handling and utilization of the coal at Buyer's generating station; and if in Buyer's sole judgment such actions will not, without unreasonable expense to Buyer, make it possible and commercially practicable for Buyer to so utilize coal which thereafter would be delivered hereunder without 22 CONTRACT #97-211-026 violating any applicable law, regulation, policy or order, Buyer shall have the right, upon the later of 60 days notice to Seller or the effective date of such restriction, to terminate this Agreement without further obligation hereunder on the part of either party. SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any time by written notice pursuant to SECTION 12 of this Agreement, make changes within the general scope of this Agreement in any one or more of the following: quality of coal or coal specifications, quantity of coal, method or time of shipments, place of delivery (including transfer of title and risk of loss), method(s) of weighing, sampling or analysis and such other provision as may affect the suitability and amount of coal for Buyer's generating stations. If any such changes makes necessary or appropriate an increase or decrease in the then current price per ton of coal, or in any other provision of this Agreement, an equitable adjustment shall be made in: price, whether current or future or both, and/or in such other provisions of this Agreement as are affected directly or indirectly by such change, and the Agreement shall thereupon be modified in writing accordingly. Any claim by the Seller for adjustment under this SECTION 11 shall be asserted within thirty (30) days after the date of Seller's receipt of the written notice of change, it being understood, however that Seller shall not be obligated to proceed under this Agreement as changed until an equitable adjustment has been agreed upon. The parties agree to negotiate promptly and in good faith to agree upon the nature and extent of any equitable adjustment. 23 CONTRACT #97-211-026 SECTION 12. NOTICES. SECTION 12.1 FORM AND PLACE OF NOTICE. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, Kentucky 40232 Attn.: Director, Fuels Procurement and Delivery with a copy to: Louisville Gas and Electric Company 820 West Broadway P.O. Box 32020 Louisville, Kentucky 40232 Attn.: Manager, Procurement Services If to Seller: Kindill Mining, Inc. 101 Court Street, Suite 106 Evansville, Indiana 47708 Attn: Sales Manager with a copy to: Kindill Mining, Inc. 313 Frederica Street, Suite 301 P.O. Box 845 Owensboro, KY 42302 Attn: Controller 24 CONTRACT #97-211-026 SECTION 12.2 CHANGE OF PERSON OR ADDRESS. Either party may change the person or address specified above upon giving written notice to the other party of such change. SECTION 12.3 ELECTRONIC DATA TRANSMITTAL. Seller hereby agrees, at Seller's cost, to electronically transmit shipping notices and/or other data to Buyer in a format acceptable to and established by Buyer upon Buyer's request. Buyer shall provide Seller with the appropriate format and will inform Seller as to the electronic data requirements at the appropriate time. SECTION 13. EARLY TERMINATION. Each party hereto shall have the right of early termination for any reason or no reason, in whole or in part, of its rights and obligations under this Agreement as follows: The party desiring to exercise its right of early termination shall give written notice thereof to the other party and pay the price for early termination (the "Early Termination Price") as described herein. Notice may be given by either party no later than September 1 of any calendar year; and this Agreement will be terminated at the end of such year. If this Agreement is terminated early in whole, then the Early Termination Price shall be $3.50 times the Remaining Quantity. For the purposes of this SECTION 13, the "Remaining Quantity" shall mean the Base Quantity plus any Right of First Refusal Tonnage and Option Tonnage for the year immediately preceding termination hereunder multiplied by the number of years until December 31 of the next Review Year (as defined in SECTION 8.3) or the termination date of this Agreement, whichever is earlier. For example, if Buyer nominates an additional 200,000 tons of Option Tonnage for 1998, and if Seller terminates this Agreement in whole effective December 31, 1998 pursuant to this SECTION 13, then Seller would owe Buyer $7,700,000 (1,100,000 x 2 x $3.50) under this SECTION 13. If this Agreement is terminated 25 CONTRACT #97-211-026 early in part, then the Early Termination Price shall be $3.50 times the total tonnage reduced from the Remaining Quantity. For example, if Buyer nominates an additional 200,000 tons of Option Tonnage for 1998, and if Seller terminates this Agreement in part effective December 31, 1998 by reducing the Base Quantity from 900,000 to 500,000 tons, then Seller would be obligated to deliver 700,000 tons in 1999 (500,000 tons Base Quantity plus 200,000 tons Option Tonnage) and would owe Buyer $2,800,000 (400,000 x 2 x $3.50) under this SECTION 13. The Early Termination Price shall be paid in four equal installments on January 1, April 1, July 1, and October 1 of the year immediately succeeding the early termination. This provision is not intended to limit, liquidate, or otherwise affect in any manner damages recoverable for breach of this Agreement. SECTION 14. RIGHT TO RESELL. Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. SECTION 15. INDEMNITY AND INSURANCE. SECTION 15.1 INDEMNITY. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable inside and outside attorney's fees) (i) relating to the barges, trucks, or railcars provided by Buyer or Buyer's contractor while such barges, trucks, or railcars are in the care and custody of Seller's loading dock or loading facility, (ii) due to any failure of Seller to 26 CONTRACT #97-211-026 comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. SECTION 15.2 INSURANCE. Seller agrees to carry insurance coverage with minimum limits as follows: (a) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (b) Automobile General Liability, $1,000,000 single limit liability. (c) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (d) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than thirty (30) calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. 27 CONTRACT #97-211-026 SECTION 16. TERMINATION FOR DEFAULT. Subject to SECTION 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than thirty (30) days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 17. TAXES, DUTIES AND FEES. Seller shall pay when due, and the price set forth in SECTION 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. SECTION 18. DOCUMENTATION AND RIGHT OF AUDIT. Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses, and source for all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for two years thereafter. 28 CONTRACT #97-211-026 SECTION 19. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CFR SECTION 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CFR SECTION 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CFR SECTION 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC SECTION 637(d)(3); and subcontracting plan requirements set forth in 15 USC SECTION 637(d). SECTION 20. COAL PROPERTY INSPECTIONS. Buyer and its representatives and others as may be required by applicable laws, ordinances and regulations shall have the right at all reasonable times and at their own expense to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall make every reasonable effort to comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures 29 CONTRACT #97-211-026 mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 21. MISCELLANEOUS. SECTION 21.1 APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. SECTION 21.2 HEADINGS. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. SECTION 21.3 WAIVER. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. SECTION 21.4 REMEDIES CUMULATIVE. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. SECTION 21.5 SEVERABILITY. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the 30 CONTRACT #97-211-026 transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. SECTION 21.6 BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. SECTION 21.7 ASSIGNMENT. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied; provided, however, Buyer shall have the right, without consent of Seller, to assign all or any part of this Agreement to any company, controlling, controlled by, or under common control with Buyer. SECTION 21.8 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. SECTION 21.9 AMENDMENTS. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. 31 CONTRACT #97-211-026 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LOUISVILLE GAS AND ELECTRIC COMPANY KINDILL MINING, INC. By: ___________________________ By: ___________________________ George Basinger, Sr. Vice President Power Operations Title: ___________________________ Date: ___________________________ Date: ___________________________ 32 CONTRACT #97-211-026 Page 1 of 2 EXHIBIT A KINDILL 2 (WHITE CHURCH COAL) SAMPLE COAL PAYMENT CALCULATIONS TOTAL EVALUATED COAL COSTS FOR CONTRACT NO. 976-221-026 - ------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
SECTION I BASE DATA -------------------------------------- ----------------------- 1) Base F.O.B. price per ton: $ 18.00 /ton ----------------------- 1a) Tons of coal delivered: tons ----------------------- 2) Guaranteed average heat content: 11,000 BTU/LB. ----------------------- 2r) As received monthly avg. heat content: BTU/LB. ----------------------- 2a) Energy delivered in MMBTU: MMBTU ----------------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $0.81800 /MMBTU ----------------------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.180 LBS./MMBTU ----------------------- 3r) As received monthly avg. sulfur LBS./MMBTU ----------------------- 4) Guaranteed monthly avg. ash 10.450 LBS./MMBTU ----------------------- 4r) As received monthly avg. ash LBS./MMBTU ----------------------- 5) Guaranteed monthly avg. max. moisture 11.820 LBS./MMBTU ----------------------- 5r) As received monthly avg. moisture LBS./MMBTU ----------------------- SECTION II DISCOUNTS ------------------------------------------- ----------------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r LESS THAN 10,850 BTU/lb. then: {1-(line 2r)/(line 2)}*$0.2604/MMBTU {1-( )/(11,000)}*$0.2604= $ /MMBTU -------------- 7d) SULFUR: If line 3r is greater than 3.22 lbs./MMBTU [1-[(line 3r)-(line 3)]}*0.1232/lb. Sulfur [1-[( )/(3.18)]}*0.1232= $ /MMBTU -------------- 8d) ASH: If line 4r is greater than 10.65 lbs./MMBTU [1-[(line 4r)-(line 4)]}*0.0083/MMBTU [1-[( )/(10.45)]}*0.0083= $ /MMBTU -------------- 9d) MOISTURE: If line 5r is greater than 12.00 lbs./MMBTU [1-[(line 5r)-(line 5)]}*0.0016/MMBTU [1-[( )/(11.82)]}*0.0016= $ /MMBTU --------------
33
CONTRACT #97-211-026 Page 2 of 2 TOTAL PRICE SECTION III ADJUSTMENTS -------------------------------------------- -------------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $_____________/MMBTU Line 7d $_____________/MMBTU Line 8d $_____________/MMBTU Line 9d $_____________/MMBTU 10) Total Discounts (-): Algebraic sum of above: $_____________/MMBTU 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $________/MMBTU + $____________/MMBTU = $__________ 13) Total base cost of coal (line 2a) * (line 2b) $________/MMBTU + $____________/MMBTU = $__________ 14) Total coal payment for month (line 12) + (line 13) $________/MMBTU + $____________ = $__________
34 EX-10.77 7 EX-10.77 COAL SUPPLY AGREEMENT (30 PAGES) EXHIBIT 10.77 CONTRACT #96-439-026 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated January 1, 1997 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and Lafayette Coal Company, an Illinois corporation, 200 Frontage Road, Burr Ridge, Illinois 60521 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL. Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM. The term of this Agreement shall commence on January 1, 1997 and shall continue through December 31, 2000, subject to the provisions of SECTION 8.3. SECTION 3. QUANTITY. SECTION 3.1 QUANTITY. Seller shall sell and deliver and Buyer shall purchase and accept delivery of the following annual quantity of coal ("Quantity"):
YEAR BASE QUANTITY (TONS) ---- -------------------- 1997 600,000 1998 1,000,000 1999 1,000,000 2000 1,000,000
SECTION 3.2 DELIVERY SCHEDULE. By December 1 of each year (except for 1997, within 10 business days after this Agreement becomes fully executed), Buyer shall specify in writing to Seller the quantities to be delivered in each month of the following year pursuant to mutual agreement of Buyer and Seller a reasonable schedule. Such quantities shall be shipped in CONTRACT #96-439-026 accordance with such schedule. Time is of the essence with respect to the schedule so established; and failure by Seller to deliver in a timely fashion shall constitute a material breach within the meaning of SECTION 15 of this Agreement. SECTION 4. SOURCE. SECTION 4.1 SOURCE. The coal sold hereunder shall be supplied from the geological seam Pittsburgh #8, Powhatan #4 Mine, Monroe County, Ohio and Shoemaker Mine and McElroy Mine, Marshall County, West Virginia (the "Coal Property"). SECTION 4.2 ASSURANCE OF OPERATION AND RESERVES. Seller represents and warrants that the operator of the Coal Property (the "Operator") has provided Seller with representations and warranties that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller represents and warrants that the Operator has provided Seller with agreements and warranties that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further represents and warrants that the Operator has provided Seller with agreements to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller represents and warrants that the Operator has provided Seller with 2 CONTRACT #96-439-026 agreements that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Operator shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby represents and warrants that the Operator has provided Seller with agreements that it dedicates to this Agreement sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. SECTION 4.3 NON-DIVERSION OF COAL. Seller represents and warrants that the Operator has provided Seller with agreements and warranties it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. SECTION 4.4 PRODUCER CONTRACT. It is a condition to the obligations of Seller hereunder that the operator of the Coal Property will enter into and execute a Coal Purchase Contract with Seller in the form of Exhibit A attached hereto. Seller will deliver to Buyer within 10 days after this Agreement is executed a fully executed copy of this Coal Purchase Contract. If Seller fails to deliver said Coal Purchase Contract, then Buyer shall have the right to declare this Agreement void. SECTION 4.5 SUBSTITUTE COAL. Notwithstanding the above representations and warranties, in the event that Seller is unable to obtain coal from the Coal Property in the quantity and of the quality required by this Agreement, and such inability is not caused by a force majeure event as defined in SECTION 10, then Buyer will have the option of requiring that Seller supply substitute coal from other facilities and mines under all the terms and conditions of this Agreement including, but not limited to, the price provisions of SECTION 8, the quality specifications of SECTION 6.1, and the provisions of SECTION 5 concerning reimbursement to Buyer for increased transportation costs. Seller's delivery of coal 3 CONTRACT #96-439-026 not produced from the Coal Property without having received the express written consent of Buyer, which consent shall not be unreasonably withheld, shall constitute a material breach of this Agreement. SECTION 5. DELIVERY. The coal shall be delivered to Buyer F.O.B. barge at mile point 115.6 on the Ohio River (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Title to and risk of loss of coal sold will pass to Buyer and the coal will be considered to be delivered when barges containing the coal are disengaged by Buyer's barging contractor from the loading dock. Buyer or its contractor shall furnish suitable barges in accordance with a delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for all costs of transporting the coal from the mines to the loading docks and loading and trimming the coal into barges to the proper draft and the proper distribution within the barges. Buyer shall arrange for transporting the coal by barge from the loading dock to its generating station(s) and shall pay for the cost of such transportation. For delays caused by Seller in handling the scheduling of shipments with Buyer's barging contractor, Seller shall be responsible for any demurrage or other penalties assessed by said barging contractor (or assessed by Buyer) which accrue at the Delivery Point, including the demurrage, penalties for loading less than the specified minimum tonnage per barge, or other penalties assessed for barges not loaded in conformity with applicable 4 CONTRACT #96-439-026 requirements. Buyer shall be responsible to deliver barges in as clean and dry condition as practicable. Seller shall require of the loading dock operator that the barges and towboats provided by Buyer or Buyer's barging contractor be provided convenient and safe berth free of wharfage, dockage and port charges; that while the barges are in the care and custody of the loading dock, all U.S. Coast Guard regulations and other applicable laws, ordinances, rulings, and regulations shall be complied with, including adequate mooring and display of warning lights; that the loading operations be performed in a workmanlike manner and in accordance with the reasonable loading requirements of Buyer and Buyer's barging contractor; and that the loading dock operator carry landing owners or wharfinger's insurance with basic coverage of not less than $300,000.00 and total of basic coverage and excess liability coverage of not less than $1,000,000.00, and provide evidence thereof to Buyer in the form of a certificate of insurance from the insurance carrier or an acceptable certificate of self-insurance with requirement for 30 days advance notification of Buyer in the event of termination of or material reduction in coverage under the insurance. SECTION 6. QUALITY. SECTION 6.1 SPECIFICATIONS. The coal delivered hereunder shall conform to the following specifications on an "as received" basis:
Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) - ------------------------------------------------------------------------ BTU/LB. min. 12,000 LESS THAN 11,600 LBS/MMBTU: MOISTURE max. 6.25 GREATER THAN 9.00
5
CONTRACT #96-439-026 Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) - ------------------------------------------------------------------------ ASH max. 8.50 GREATER THAN 11.25 SULFUR max. 3.75 GREATER THAN 4.25 SULFUR min. 1.8 LESS THAN 1.8 CHLORINE max. .03 GREATER THAN .05 NITROGEN max. 1.0 GREATER THAN 1.6 ASH/SULFUR RATIO min. 2.2 LESS THAN 2.0 SIZE (3" x 0"): Top size (inches)* max. 3.0" GREATER THAN 3.0" Fines (% by wgt) Passing 1/4" screen max. 45 GREATER THAN 50 % BY WEIGHT: VOLATILE max. 38 GREATER THAN 39 VOLATILE min. 33 LESS THAN 32 FIXED CARBON max. 44 GREATER THAN 47 FIXED CARBON min. 42 LESS THAN 40 GRINDABILITY (HGI) min. 54 LESS THAN 52 BASE ACID RATIO (B/A) SLAGGING FACTOR** max. 2.9 GREATER THAN 3.3 FOULING FACTOR*** max. 0.4 GREATER THAN 0.5 ASH FUSION TEMPERATURE (DEG.F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1985 min. 1960 Softening (H=W) min. 2020 min. 1985 Softening (H=1/2W) min. 2125 min. 2100 Fluid min. 2220 min. 2200 OXIDIZING ATMOSPHERE Initial Deformation min. 2475 min. 2400 Softening (H=W) min. 2520 min. 2470 Softening (H=1/2W) min. 2540 min. 2510 Fluid min. 2560 min. 2540
* All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than fifty percent (50%) by 6 CONTRACT #96-439-026 weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by Weight(Dry)) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by Weight(Dry)) The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0) ----------------------------------------- (Si0(2) + Al(2)0(3) + Tl0(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. SECTION 6.2 DEFINITION OF "SHIPMENT". As used herein, a "shipment" shall mean one barge load or a barge lot load, in accordance with Buyer's sampling and analyzing practices. SECTION 6.3 REJECTION. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in SECTION 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in SECTION 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, title to and risk of loss of the coal shall be considered to have never passed to Buyer and Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost and risk. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in SECTION 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully 7 CONTRACT #96-439-026 rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in SECTION 6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by Buyer; however, the quantity Seller is obligated to sell to Buyer under the Agreement may or may not be reduced by the amount of each such non-conforming shipment at Buyer's sole option and the shipment shall nevertheless be considered "rejectable" under SECTION 6.4. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. SECTION 6.4 SUSPENSION AND TERMINATION. If the coal sold hereunder fails to meet one or more of the Discount Points set forth in 8.2, except for excess moisture and related effect on BTU values caused by weather conditions, for any three (3) consecutive months in a six (6) month period, or, except for excess moisture and related effect on BTU values caused by weather conditions, if nine (9) barge shipments in a 30 day period are rejectable by Buyer, Buyer may 8 CONTRACT #96-439-026 upon notice confirmed in writing and sent to Seller by certified mail, suspend future shipments except shipments already loaded into barges. Seller shall, within 10 days, provide Buyer with reasonable assurances that subsequent monthly deliveries of coal shall meet or exceed the Discount Points set forth in SECTION 8.2 and that the source will exceed the rejection limits set forth in 6.1. If Seller fails to provide such assurances within said 10 day period, Buyer may terminate this Agreement by giving written notice of such termination at the end of the 10 day period. A waiver of this right for any one period by Buyer shall not constitute a waiver for subsequent periods. If Seller provides such assurances to Buyer's reasonable satisfaction, shipments hereunder shall resume and any tonnage deficiencies resulting from suspension may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its acceptance of Seller's assurances, or delay the resumption of shipment. If Seller, after such assurances, fails to meet any of the Discount Points for any one (1) month within the next six (6) months or if three (3) barge shipments are rejectable within any one (1) month during such six (6) month period, then Buyer may terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS. SECTION 7.1 WEIGHTS. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any 9 CONTRACT #96-439-026 reasonable time or frequency. If the scales are found to be over or under the tolerance range allowable for the scale based on industry accepted standards, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. SECTION 7.2 SAMPLING AND ANALYSIS. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with industry-accepted standards. Samples for analyses shall be taken by any industry-accepted standard, mutually acceptable to both parties, may be composited and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the 10 CONTRACT #96-439-026 "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost 11 CONTRACT #96-439-026 of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE. SECTION 8.1 BASE PRICE. Subject to SECTION8.3 and SECTION8.5, the base price ("Base Price") of the coal to be sold hereunder will be $0.7750/MMBtu. SECTION 8.2 QUALITY PRICE DISCOUNTS. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in SECTION 6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1, as determined pursuant to SECTION 7.2, subject to the provisions set forth below. The discount values used are as follows:
DISCOUNT VALUES ---------------- $/LB./MMBTU SULFUR 0.1250 ASH 0.0350
(b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall apply. For sulfur, the discount shall be calculated on the basis of the difference between the actual Monthly Weighted Average AND THE GUARANTEED MONTHLY WEIGHTED AVERAGE pursuant to the methodology shown below. For ash, the discount 12 CONTRACT #96-439-026 shall be calculated on the basis of the difference between the actual Monthly Weighted Average and the Discount Point.
GUARANTEED MONTHLY WEIGHTED AVERAGE -------------------- DISCOUNT POINT -------------- LB/MMBTU: - --------- SULFUR max. 3.75 4.00 ASH max. 8.50 9.17
For example if the actual Monthly Weighted Average of sulfur equals 4.05 lb/MMBTU, then the applicable discount would be (4.05 lb. - 3.75 lb.) x $.1250/lb/MMBTU = $.03750/MMBTU. And, for example, if the Monthly Weighted Average of ash equals 9.40 lb/MMBTU, then the applicable discount would be (9.40 lb. - 9.17 lb.) x $.0350/lb/MMBTU = $.00805/MMBTU. SECTION 8.3 PRICE REVIEW. The Base Price and all other terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1 of any year hereunder. The party requesting such a review shall give written notice of its request to the other party on or before any October 1. The parties then shall negotiate an agreement on new prices and/or other terms and conditions between October 1 and December 1. If the parties do not reach an agreement by December 1, then this Agreement will terminate as of December 31 of that year without liability due to such termination for either party. 13 CONTRACT #96-439-026 SECTION 8.4 PAYMENT CALCULATION. Exhibit B attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 8.5 GOVERNMENTAL IMPOSITIONS. Seller shall pay when due, and the Base Price set forth in SECTION 8 of this Agreement without any adjustments is inclusive of all federal, state, municipal and local taxes, fees and costs of any kind whether arising from government law, rule, regulation or otherwise including, without limitation, all costs of conforming to federal and state mining and reclamation laws, rules and regulations and all other and/or additional mining and operating costs and expenses in effect on the effective date of this Agreement. In the event of any one enactment, promulgation or change in any statute, regulations, or the like or of any one governmental imposition (collectively "Governmental Imposition") enacted or promulgated after the effective date of this Agreement, Seller shall give Buyer prompt written notice thereof, including the amount of increase or decrease in Seller's cost of performance caused by such Governmental Imposition. If Buyer and Seller are unable to come to agreement on the increase or decrease of the Base Price with regard to such change in cost within fifteen (15) days from notice, then either Party may terminate this Agreement upon the latter of fifteen (15) days from date of notice or the effective date of such Governmental Imposition. In no event shall the increase or decrease in Base Price be more than the increase or decrease in Seller's change in cost of performance per MMBTU caused by such Governmental Imposition. 14 CONTRACT #96-439-026 SECTION 9. INVOICES, BILLING AND PAYMENT. SECTION 9.1 INVOICING ADDRESS. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Procurement and Delivery With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable SECTION 9.2 INVOICE PROCEDURES FOR COAL SHIPMENTS. Seller shall invoice Buyer at the Base Price, minus any quality price discounts, for all coal unloaded in a calendar month by the fifteenth of the following month. SECTION 9.3 PAYMENT PROCEDURES FOR COAL SHIPMENTS. Payment for coal unloaded in a calendar month shall be mailed by the 25th of the month following the month of unloading or within ten days after receipt of Seller's invoice, whichever is later. Buyer shall mail all payments to Seller's account at Lafayette Coal Company, P.O. Box 74761, Chicago, Illinois 60694. SECTION 9.4 WITHHOLDING. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller 15 CONTRACT #96-439-026 promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE. SECTION 10.1 GENERAL FORCE MAJEURE. If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, fires, floods or earthquakes, which are beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event 16 CONTRACT #96-439-026 in place at the beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. During any period in which Buyer's ability to perform hereunder is affected by a force majeure event, Buyer shall not take delivery of any coal from any other sellers from whom Buyer's ability to take delivery is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall take delivery from Seller under this Agreement of at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its sellers from whom Buyer's ability to purchase is similarly affected by such force majeure event in place at the beginning of the force majeure event. Tonnage deficiencies resulting from a force majeure event shall be made up by mutual agreement of Buyer and Seller. SECTION 10.2 ENVIRONMENTAL LAW FORCE MAJEURE. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt environmental laws, regulations, policies and/or restrictions which will make it impossible or commercially impracticable for Buyer to utilize this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies, or restrictions, or change in the interpretation or enforcement thereof, Buyer decides that it will be impossible or commercially impracticable (uneconomical) for Buyer to utilize such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall promptly consider whether corrective 17 CONTRACT #96-439-026 actions can be taken in the mining and preparation of the coal at Seller's mine and/or in the handling and utilization of the coal at Buyer's generating station; and if in Buyer's sole judgment such actions will not, without unreasonable expense to Buyer, make it possible and commercially practicable for Buyer to so utilize coal which thereafter would be delivered hereunder without violating any applicable law, regulation, policy or order, Buyer shall have the right, upon the later of 60 days notice to Seller or the effective date of such restriction, to terminate this Agreement without further obligation hereunder on the part of either party. SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any time by written notice pursuant to SECTION 12 of this Agreement, make changes within the general scope of this Agreement in any one or more of the following: quality of coal or coal specifications, quantity of coal, method or time of shipments, place of delivery (including transfer of title and risk of loss), method(s) of weighing, sampling or analysis and such other provision as may affect the suitability and amount of coal for Buyer's generating stations. If any such changes makes necessary or appropriate an increase or decrease in the then current price per ton of coal, or in any other provision of this Agreement, an equitable adjustment shall be made in: price, whether current or future or both, and/or in such other provisions of this Agreement as are affected directly or indirectly by such change, and the Agreement shall thereupon be modified in writing accordingly. Any claim by the Seller for adjustment under this SECTION 11 shall be asserted within thirty (30) days after the date of Seller's receipt of the written notice of change, it being understood, however that Seller shall not be obligated to proceed under this Agreement as changed until an 18 CONTRACT #96-439-026 equitable adjustment has been agreed upon. The parties agree to negotiate promptly and in good faith to agree upon the nature and extent of any equitable adjustment. SECTION 12. NOTICES. SECTION 12.1 FORM AND PLACE OF NOTICE. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, Kentucky 40232 Attn.: Director, Fuels Procurement and Delivery with a copy to: Louisville Gas and Electric Company 820 West Broadway P.O. Box 32020 Louisville, Kentucky 40232 Attn.: Manager, Procurement Services If to Seller: Lafayette Coal Company 200 Frontage Road Burr Ridge, Illinois 60521 SECTION 12.2 CHANGE OF PERSON OR ADDRESS. Either party may change the person or address specified above upon giving written notice to the other party of such change. 19 CONTRACT #96-439-026 SECTION 12.3 ELECTRONIC DATA TRANSMITTAL. Seller hereby agrees, at Seller's cost, to electronically transmit shipping notices and/or other data to Buyer in a format acceptable to and established by Buyer upon Buyer's request. Buyer shall provide Seller with the appropriate format and will inform Seller as to the electronic data requirements at the appropriate time. SECTION 13. RIGHT TO RESELL. Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. SECTION 14. INDEMNITY AND INSURANCE. SECTION 14.1 INDEMNITY. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable inside and outside attorney's fees) (i) relating to the barges or railcars provided by Buyer or Buyer's contractor while such barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. SECTION 14.2 INSURANCE. Seller represents and warrants that the Operator has agreed to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (2) Automobile General Liability, $1,000,000 single limit liability. 20 CONTRACT #96-439-026 (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 15. TERMINATION FOR DEFAULT. Subject to SECTION 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than 30 days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall 21 CONTRACT #96-439-026 terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 16. DOCUMENTATION AND RIGHT OF AUDIT. Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses, and source for all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 17. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CRF SECTION 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CRF SECTION 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CRF SECTION 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC SECTION 637(d)(3); and subcontracting plan requirements set forth in 15 USC SECTION 637(d). SECTION 18. COAL PROPERTY INSPECTIONS. Buyer and its representatives, and others as may be required by applicable laws, ordinances and regulations 22 CONTRACT #96-439-026 shall have the right at all reasonable times and at their own expense to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall make every reasonable effort to comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 19. MISCELLANEOUS. SECTION 19.1 APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. SECTION 19.2 HEADINGS. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. SECTION 19.3 WAIVER. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. 23 CONTRACT #96-439-026 SECTION 19.4 REMEDIES CUMULATIVE. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. SECTION 19.5 SEVERABILITY. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. SECTION 19.6 BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. SECTION 19.7 ASSIGNMENT. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied; provided, however, that Buyer shall have the right, without consent of Seller, to assign all or any part of this Agreement to any company, controlling, controlled by, or under common control with Buyer. SECTION 19.8 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. SECTION 19.9 AMENDMENTS. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. 24 CONTRACT #96-439-026 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
LOUISVILLE GAS AND ELECTRIC COMPANY LAFAYETTE COAL COMPANY By: ___________________________ By: ___________________________ Chris Hermann, Vice President & General Manager, Wholesale Electric Title: ___________________________ Business Date: ___________________________ Date: ___________________________
25 CONTRACT #96-439-026
Exhibit A Page 1 of 2 EXHIBIT A MID-SULFUR EXAMPLE SAMPLE COAL PAYMENT CALCULATIONS TOTAL EVALUATED COAL COSTS FOR CONTRACT NO. 96-440-026 - ------------------------------------------------------------------------------------------------------ For contracts supplied from multiple "origins", each "origin will be calculated individually. SECTION I BASE DATA -------------------------- --------------------- 1) Base F.O.B. price per ton: $ 18.93 /ton ---------------- 1a) Tons of coal delivered: tons ---------------- 2) Guaranteed average heat content: 11,400 BTU/LB. ---------------- 2r) As received monthly avg. heat content: BTU/LB. ---------------- 2a) Energy delivered in MMBTU: MMBTU ---------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $0.83026 /MMBTU ---------------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.40 LBS./MMBTU ---------------- 3r) As received monthly avg. sulfur LBS./MMBTU ---------------- 4) Guaranteed monthly avg. ash 13.50 LBS./MMBTU ---------------- 4r) As received monthly avg. ash LBS./MMBTU ---------------- 5) Guaranteed monthly avg. max. moisture 9.00 LBS./MMBTU ---------------- 5r) As received monthly avg. moisture LBS./MMBTU ---------------- SECTION II DISCOUNTS ------------------------------------------- ---------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) SULFUR: If line 3r is greater than 3.40 lbs./MMBTU [1-[(line 3r)-(line 3)]}*0.1232/lb. sulfur [1-[( )/( ]}*0.1232= $ /MMBTU -------------- 7d) ASH: If line 4r is greater than 13.50 lbs./MMBTU [1-[(line 4r)-(line 4)]}*0.0083/MMBTU [1-[( )/( ]}*0.0083= $ /MMBTU -------------- 8d) MOISTURE: If line 5r is greater than 10.00 lbs./MMBTU [1-[(line 5r)-(line 5)]}*0.0016/MMBTU [1-[( )/( ]}*0.0016= $ /MMBTU -------------- 26 CONTRACT #96-439-026 Exhibit A Page 2 of 2 TOTAL PRICE SECTION III ADJUSTMENTS -------------------------------------- ------------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $------------- /MMBTU Line 7d $------------- /MMBTU Line 8d $------------- /MMBTU 10) Total Discounts (-): Algebraic sum of above: $------------- /MMBTU 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $------- /MMBTU + $------------- /MMBTU = $------- 13) Total base cost of coal (line 2a) * (line 2b) $------- /MMBTU + $------------- /MMBTU = $------- 14) Total coal payment for month (line 12) + (line 13) $------- /MMBTU + $------------- /MMBTU = $------- 27 CONTRACT #96-439-026 EXHIBIT B PAGE 1 OF 2 EXHIBIT B SAMPLE COAL PAYMENT CALCULATIONS TOTAL EVALUATED COAL COSTS FOR CONTRACT NO. 96-440-026 - ------------------------------------------------------------------------------------------------------ For contracts supplied from multiple "origins", each "origin will be calculated individually. SECTION I BASE DATA ---------------------------------- -------------- 1) Base F.O.B. price per ton: $ 18.60 /ton -------------- 1a) Tons of coal delivered: tons -------------- 2) Guaranteed average heat content: 12,000 BTU/LB. -------------- 2r) As received monthly avg. heat content: BTU/LB. -------------- 2a) Energy delivered in MMBTU: MMBTU -------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $0.77500 /MMBTU -------------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.75 LBS./MMBTU -------------- 3r) As received monthly avg. sulfur LBS./MMBTU -------------- 4) Guaranteed monthly avg. ash 8.50 LBS./MMBTU -------------- 4r) As received monthly avg. ash LBS./MMBTU -------------- 5) Guaranteed monthly avg. max. moisture 6.25 LBS./MMBTU -------------- 5r) As received monthly avg. moisture LBS./MMBTU -------------- SECTION II DISCOUNTS ------------------------------------------- ---------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) SULFUR: If line 3r is greater than 4.00 lbs./MMBTU [1-[(line 3r)-(line 3)]}*0.1250/lb. Sulfur [1-[( )/( ]}*0.1250= $ /MMBTU -------------- 7d) ASH: If line 4r is greater than 9.17 lbs./MMBTU [1-[(line 4r)-(9.17)]}*0.0350/MMBTU [1-[( )/(9.17]}*0.0350= $ /MMBTU -------------- 28 CONTRACT #96-439-026 Exhibit B Page 2 of 2 TOTAL PRICE SECTION III ADJUSTMENTS ----------------------------------------- ------------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $------------- /MMBTU Line 7d $------------- /MMBTU 10) Total Discounts (-): Algebraic sum of above: $------------- /MMBTU 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $------- /MMBTU + $------------- /MMBTU = $------- 13) Total base cost of coal (line 2a) * (line 2b) $------- /MMBTU + $------------- /MMBTU = $------- 14) Total coal payment for month (line 12) + (line 13) $------- /MMBTU + $------------- /MMBTU = $-------
29 CONTRACT #96-439-026 AMENDMENT #1 AMENDMENT TO CONTRACT THIS AMENDMENT IS entered into, effective as of April 28, 1997, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "LG&E"), whose address is: 220 W. Main Street, Louisville, Kentucky 40202 and Lafayette Coal Company, an Illinois corporation, 200 Frontage Road, Burr Ridge, Illinois 60521 ("Seller"). In consideration of the agreements herein contained, the parties hereto agree as follows: 1.0 AMENDMENTS The Agreement heretofore entered into by the parties, dated effective January 1, 1997 and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement"), is hereby amended as follows: 1.1 In Section 3.1 QUANTITY, the base quantity (tons) of coal for 1997 is changed from 600,000 to 670,000. 2.0 STATUS OF AGREEMENT As amended herein, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year below written, but effective as of the day and year first set forth above.
LOUISVILLE GAS AND ELECTRIC LAFAYETTE COAL COMPANY COMPANY By ________________________ By ___________________________ George Basinger Senior Vice President Title EXECUTIVE VICE PRESIDENT Power Operations Date 6/5/97 Date 6/12/97 ________________________ _____________________________
EX-10.78 8 EX-10.78 COAL SUPPLY AGREEMENT (40 PAGES) CONTRACT #96-440-026 Exhibit 10.78 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated January 1, 1997 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and CHAROLAIS CORPORATION, a Kentucky corporation, Highway 862, P.O. Box 562, Madisonville, Kentucky 42431 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL. Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM. The term of this Agreement shall commence on January 1, 1997 and shall continue through December 31, 2001, subject to SECTION 8.3. SECTION 3. QUANTITY; DELIVERY SCHEDULE; OPTIONS. SECTION 3.1 BASE QUANTITY. Seller shall sell and deliver and Buyer shall purchase and accept delivery of 1,000,000 tons of coal per year (the "Base Quantity"). SECTION 3.2 DELIVERY SCHEDULE. Within 10 business days after this Agreement becomes fully executed, Buyer shall specify in writing to Seller the quantities to be delivered in each month of 1997. For subsequent years, Buyer shall so specify monthly deliveries by December 1 of the preceding year. Such quantities shall be shipped in accordance with such schedule. Time is of the essence with respect to the schedule so established; and failure by Seller to deliver in a timely fashion shall constitute a material breach within the meaning of SECTION 15 of this Agreement. SECTION 3.3 BUYER'S OPTIONS. For each year after 1997, Buyer shall have the option to purchase from Seller up to an additional 350,000 tons of coal as follows. Buyer shall exercise such option CONTRACT #96-440-026 by giving to Seller notice stating Buyer's exercise of the option and specifying the amount of the tonnage by October 1 of the preceding year. Coal sold by Seller and purchased by Buyer under Buyer's option set forth in this SECTION 3.3 shall be subject to all the terms and conditions of this Agreement. SECTION 4. SOURCE. SECTION 4.1 SOURCE. The coal sold hereunder, including coal purchased by Seller from third parties, shall be supplied from: geological seam Western Kentucky #13, Wier's Creek or DB94 Mine, Hopkins County, Kentucky; Western Kentucky #9, Sacramento Surface Mine, McLean County, Kentucky; Western Kentucky #4, Mark Energy I and II, Hopkins County, Kentucky; or Western Kentucky #9, Henderson County Property, Henderson County, Kentucky (the "Coal Property"). SECTION 4.2 ASSURANCE OF OPERATION AND RESERVES. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby dedicates to this Agreement 2 CONTRACT #96-440-026 sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. SECTION 4.3 NON-DIVERSION OF COAL. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. SECTION 4.4 SELLER'S PREPARATION OF MINING PLAN. Seller shall have prepared a complete mining plan for the Coal Property with adequate supporting data to demonstrate Seller's capability to have coal produced from the Coal Property which meets the quantity and quality specifications of this Agreement. Seller shall provide Buyer with two copies of such mining plan which shall contain maps and a narrative depicting areas and seams of coal to be mined and shall include (but not be limited to) the following information: (i) reserves from which the coal will be produced during the term hereof and the mining sequence, by year (or such other time intervals as mutually agreed) during the term of this Agreement, from which coal will be mined; (ii) methods of mining such coal; (iii) methods of transporting and, in the event a preparation plant is constructed at the Coal Property, methods of washing coal to insure compliance with the quantity and quality requirements of this Agreement including a description and flow sheet of the preparation plant; (iv) quality data plotted on the maps depicting data points and isolines by ash, sulfur, and Btu; (v) quality control plans including sampling and analysis procedures to insure individual shipments meet quality specifications; and (vi) Seller's aggregate commitments to 3 CONTRACT #96-440-026 others to sell coal from the Coal Property during the term of this Agreement. Such complete mining plan shall be delivered to Buyer on or before April 30, 1997. Buyer's receipt of the mining plan or other information or data furnished by Seller shall not in any way relieve Seller of any of Seller's obligations or responsibilities under this Agreement; nor shall such review be construed as constituting an approval of Seller's proposed mining plan as prudent mining practices, such review by Buyer being limited solely to a determination, for Buyer's purposes only, of Seller's capability to supply coal on a long-term basis to fulfill Buyer's requirements of a dependable coal supply. Seller shall annually provide Buyer with a mining plan update ("Update") showing progress to date, conformity to original mining plan, and then known changes in reserve data and planned changes in mining progression, plans or procedures. The update shall be submitted annually on or before April 30 of each year during the term of this Agreement. SECTION 4.5 SUBSTITUTE COAL. Notwithstanding the above representations and warranties, in the event that Seller is unable to produce or obtain coal from the Coal Property in the quantity and of the quality required by this Agreement, and such inability is not caused by a force majeure event as defined in SECTION 10, then Buyer will have the option of requiring that Seller supply substitute coal from other facilities and mines under all the terms and conditions of this Agreement including, but not limited to, the price provisions of SECTION 8, the quality specifications of SECTION 6.1, and the provisions of SECTION 5 concerning reimbursement to Buyer for increased transportation costs. Seller's delivery of coal not produced from the Coal Property without having received the express written consent of Buyer shall constitute a material breach of this Agreement. 4 CONTRACT #96-440-026 SECTION 5. DELIVERY. SECTION 5.1 GENERAL. The coal shall be delivered FOB barge or FOB railcar, at Buyer's option. SECTION 5.2 BARGE. If Buyer shall have opted for coal to be delivered FOB barge, then the coal shall be delivered to Buyer F.O.B. barge at the Sebree dock at mile point 43.6 on the Green River or FOB barge at the Island loadout at mile point 32.9 on the Green River (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Title to and risk of loss of coal sold will pass to Buyer and the coal will be considered to be delivered when barges containing the coal are disengaged by Buyer's barging contractor from the loading dock. Buyer or its contractor shall furnish suitable barges in accordance with a delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for all costs of transporting the coal from the mines to the loading docks and loading and trimming the coal into barges to the proper draft and the proper distribution within the barges. Buyer shall arrange for transporting the coal by barge from the loading dock to its generating station(s) and shall pay for the cost of such transportation. For delays caused by Seller in handling the scheduling of shipments with Buyer's barging contractor, Seller shall be responsible for any demurrage or other penalties assessed by said barging contractor (or assessed by Buyer) which accrue at the Delivery Point, including the demurrage, penalties for loading less than the specified minimum tonnage 5 CONTRACT #96-440-026 per barge, or other penalties assessed for barges not loaded in conformity with applicable requirements. Buyer shall be responsible to deliver barges in as clean and dry condition as practicable. Seller shall require of the loading dock operator that the barges and towboats provided by Buyer or Buyer's barging contractor be provided convenient and safe berth free of wharfage, dockage and port charges; that while the barges are in the care and custody of the loading dock, all U.S. Coast Guard regulations and other applicable laws, ordinances, rulings, and regulations shall be complied with, including adequate mooring and display of warning lights; that any water in the cargo boxes of the barges be pumped out by the loading dock operator prior to loading; that the loading operations be performed in a workmanlike manner and in accordance with the reasonable loading requirements of Buyer and Buyer's barging contractor; and that the loading dock operator carry landing owners or wharfinger's insurance with basic coverage of not less than $300,000.00 and total of basic coverage and excess liability coverage of not less than $1,000,000.00, and provide evidence thereof to Buyer in the form of a certificate of insurance from the insurance carrier or an acceptable certificate of self-insurance with requirement for 30 days advance notification of Buyer in the event of termination of or material reduction in coverage under the insurance. SECTION 5.3 RAIL DELIVERY. If Buyer shall have opted for coal to be delivered FOB railcar, then the coal shall be delivered to Buyer F.O.B. railcar at the St. Charles B-4 loadout on the Paducah and Louisville Railway (the "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting 6 CONTRACT #96-440-026 increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Title to and risk of loss respecting coal will pass to Buyer and the coal will be considered to be delivered when it is loaded into the railcars at the rail loading facility. Buyer or its contractor shall furnish suitable railcars in accordance with a delivery schedule provided by Buyer to Seller. Seller shall be responsible for and pay the cost of repairs for any damages caused by Seller to railcars owned or leased by Buyer while such railcars are in Seller's control or custody. Seller shall comply with the applicable provisions of Buyer's rail contractor's tariff. SECTION 5.4 FREEZE CONDITIONING. At Buyer's request, Seller shall treat (or have treated) any shipment of coal hereunder with a freeze conditioning agent approved by Buyer in order to maintain coal handling characteristics during shipment. If requested by Buyer, Seller shall also treat (or have treated) any railcars specified by Buyer with a side release agent approved by Buyer. The price for each such requested chemical treatment shall be an amount equal to Seller's cost of materials applied on a per gallon basis for each application of freeze conditioning agent or side release agent, as the case may be. Seller shall invoice Buyer for all such treatment which occurred in a calendar month by the fifteenth of the following month; and payment shall be mailed by the 25th of such following month or within ten days after receipt of Seller's invoice, whichever is later. 7 CONTRACT #96-440-026 SECTION 6. QUALITY. SECTION 6.1 SPECIFICATIONS. (a) The coal delivered hereunder shall conform to the following specifications on an "as received" basis: QUALITY A COAL
Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) ---------------------- -------------------- ------------------ BTU/LB. min. 11,250 LESS THAN 10,800 LBS/MMBTU: MOISTURE max. 9.50 GREATER THAN 13.0 ASH max. 10.67 GREATER THAN 13.0 SULFUR max. 3.244 GREATER THAN 3.5 SULFUR min. 1.8 LESS THAN 1.8 CHLORINE max. .10 GREATER THAN .10 FLUORINE max. .013 GREATER THAN .013 NITROGEN max. 1.30 GREATER THAN 1.40 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.0:1 SIZE (3" x 0"): Top size (inches)* max. 3"x0 GREATER THAN 3"x0 Fines (% by wgt) Passing 1/4" screen max. 35% GREATER THAN 40% % BY WEIGHT: VOLATILE max. 39 GREATER THAN 40 VOLATILE min. 30 LESS THAN 29 FIXED CARBON max. 50 GREATER THAN 51 FIXED CARBON min. 40 LESS THAN 40 GRINDABILITY (HGI) min. 53 LESS THAN 50 BASE ACID RATIO (B/A) .59 GREATER THAN 1.2 SLAGGING FACTOR** max. 2.2 GREATER THAN 2.5 FOULING FACTOR*** max. 0.5 GREATER THAN 0.5
8 CONTRACT #96-440-026
ASH FUSION TEMPERATURE (DEG.F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1940 min. 1900 Softening (H=W) min. 1975 min. 1950 Softening (H=1/2W) min. 2035 min. 2000 Fluid min. 2190 min. 2100 OXIDIZING ATMOSPHERE Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2330 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375 QUALITY B COAL Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) ----------------------- --------------------- ------------------ BTU/LB. min. 11,250 LESS THAN 10,000 LBS/MMBTU: MOISTURE max. 10.0 GREATER THAN 13.0 ASH max. 16.0 GREATER THAN 18.0 SULFUR max. 3.95 GREATER THAN 3.95 SULFUR min. 1.8 LESS THAN 1.8 CHLORINE max. .10 GREATER THAN .10 FLUORINE max. .013 GREATER THAN .013 NITROGEN max. 1.30 GREATER THAN 1.40 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1 SIZE (3" x 0"): Top size (inches)* max. 3"x0 GREATER THAN 3"x0 Fines (% by wgt) Passing 1/4" screen max. 35% GREATER THAN 40%
9 CONTRACT #96-440-026
% BY WEIGHT: VOLATILE max. 39 GREATER THAN 40 VOLATILE min. 30 LESS THAN 29 FIXED CARBON max. 50 GREATER THAN 51 FIXED CARBON min. 40 LESS THAN 40 GRINDABILITY (HGI) min. 53 LESS THAN 50 BASE ACID RATIO (B/A) .59 GREATER THAN 1.2 SLAGGING FACTOR** max. 2.5 GREATER THAN 2.7 FOULING FACTOR*** max. 0.50 GREATER THAN 0.5 ASH FUSION TEMPERATURE (DEG.F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1940 min. 1900 Softening (H=W) min. 1975 min. 1950 Softening (H=1/2W) min. 2035 min. 2000 Fluid min. 2190 min. 2100 OXIDIZING ATMOSPHERE Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2330 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375
* All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than thirty-five per cent (35%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by WeightDry) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by WeightDry) 10 CONTRACT #96-440-026 The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + C(a)0 + M(g)0 + Na(2)0 + K(2)0) ---------------------------------------- (Si0(2) + A1(2)0(3) + T10(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. (b) At least two-thirds of the total tonnage delivered in any year hereunder shall be Quality A Coal. For each shipment hereunder, Seller shall indicate to Buyer whether the shipment is Quality A Coal or Quality B Coal and such shipment shall be treated accordingly for all purposes hereunder including determining compliance with specifications under this SECTION 6 and applying quality price discounts under SECTION 8.2. SECTION 6.2 DEFINITION OF "SHIPMENT". As used herein, a "shipment" shall mean one barge load, a barge lot load, or one unit trainload, in accordance with Buyer's sampling and analyzing practices. SECTION 6.3 REJECTION. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in SECTION 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in SECTION 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, title to and risk of loss of the coal shall be considered to have never passed to Buyer and Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost and risk. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in SECTION 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the 11 CONTRACT #96-440-026 replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in SECTION 6.1 or because such shipment contained extraneous amount of each such non-conforming shipment at Buyer's sole option and the shipment shall nevertheless be considered "rejectable" under SECTION 6.4. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. SECTION 6.4 SUSPENSION AND TERMINATION. If the coal sold hereunder fails to meet one or more of the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1 for any two (2) months in a six (6) month period, or if nine (9) barge shipments in a 30 day period are rejectable by Buyer, or if Buyer receives at generating station(s) 12 CONTRACT #96-440-026 two (2) rail shipments which are rejectable in any 30 day period, Buyer may upon notice confirmed in writing and sent to Seller by certified mail, suspend future shipments except shipments already loaded into barges and/or railcars. Seller shall, within 10 days, provide Buyer with reasonable assurances that subsequent monthly deliveries of coal shall meet or exceed the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1 and that the source will exceed the rejection limits set forth in SECTION 6.1. If Seller fails to provide such assurances within said 10 day period, Buyer may terminate this Agreement by giving written notice of such termination at the end of the 10 day period. A waiver of this right for any one period by Buyer shall not constitute a waiver for subsequent periods. If Seller provides such assurances to Buyer's reasonable satisfaction, shipments hereunder shall resume and any tonnage deficiencies resulting from suspension may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its acceptance of Seller's assurances, or delay the resumption of shipment. If Seller, after such assurances, fails to meet any of the Guaranteed Monthly Weighted Averages for any one (1) month within the next six (6) months or if three (3) barge shipments or 1 rail shipment are rejectable within any one (1) month during such six (6) month period, then Buyer may terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS. SECTION 7.1 WEIGHTS. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an 13 CONTRACT #96-440-026 appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any reasonable time or frequency. If the scales are found to be over or under the tolerance range allowable for the scale based on industry accepted standards, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. SECTION 7.2 SAMPLING AND ANALYSIS. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with industry-accepted standards. Samples for analyses shall be taken by any industry-accepted standard, mutually acceptable to both parties, may be composited and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used 14 CONTRACT #96-440-026 for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the 15 CONTRACT #96-440-026 analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE. SECTION 8.1 BASE PRICE. The base price ("Base Price") of the coal to be sold hereunder will be firm and will be $.85636/MMBtu for coal delivered in 1997, $.89061/MMBtu for coal delivered in 1998, and $.92623/MMBtu for coal delivered in 1999 through 2001. SECTION 8.2 QUALITY PRICE DISCOUNTS. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in SECTION 6.1. For each coal quality, quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1, as determined pursuant to SECTION 7.2, subject to the provisions set forth below. The discount values used are as follows:
DISCOUNT VALUES $/MMBTU ------------ BTU/LB. 0.2604 $/LB./MMBTU ------------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016
(b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable 16 CONTRACT #96-440-026 Discount Point, then the discount shall apply and shall be calculated on the basis of the difference between the actual Monthly Weighted Average AND THE GUARANTEED MONTHLY WEIGHTED AVERAGE pursuant to the methodology shown in Exhibit A attached hereto. QUALITY A COAL
CONTRACT #96-440-026 Guaranteed Monthly Weighted Average Discount Point ------------------------- --------------------- --------------- BTU/LB min. 11,250 10,800 LB/MMBTU: SULFUR max. 3.244 3.344 ASH max. 10.67 11.67 MOISTURE max. 9.50 10.50 QUALITY B COAL Guaranteed Monthly Weighted Average Discount Point ------------------------- --------------------- --------------- BTU/LB min. 11,250 10,100 LB/MMBTU: SULFUR max. 3.95 3.95 ASH max. 16.00 16.00 MOISTURE max. 10.00 11.00
17 CONTRACT #96-440-026 For example, for Quality A Coal, if the actual Monthly Weighted Average of sulfur equals 3.544 lb./MMBTU, then the applicable discount would be (3.544 lb. - 3.244 lb.) X $.1232/lb/MMBTU = $.03696/MMBTU. SECTION 8.3 PRICE REVIEW. The Base Price and all the terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1 of each year hereunder beginning January 1, 1998. The party requesting such a review shall give written notice of its request to the other party on or before October 1 preceding the effective January 1 date of the revision. The parties then shall negotiate an agreement on new prices and/or other terms and conditions between October 1 and December 1. If the parties do not reach an agreement by December 1, then this Agreement will terminate as of December 31 of the applicable year without liability due to such termination for either party. However, the parties will review the Agreement again at mutually agreeable times between August and November of the year immediately succeeding termination and will consider reinstating, but shall not be obligated to reinstate, the Agreement under the same terms or modified terms. SECTION 8.4 PAYMENT CALCULATION. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. 18 CONTRACT #96-440-026 SECTION 9. INVOICES, BILLING AND PAYMENT. SECTION 9.1 INVOICING ADDRESS. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Procurement and Delivery With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable SECTION 9.2 INVOICE PROCEDURES FOR COAL SHIPMENTS. Seller shall invoice Buyer at the Base Price, minus any quality price discounts, for all coal unloaded in a calendar month by the fifteenth of the following month. SECTION 9.3 PAYMENT PROCEDURES FOR COAL SHIPMENTS. Payment for coal unloaded in a calendar month shall be mailed by the 25th of the month following the month of unloading or within ten days after receipt of Seller's invoice, whichever is later. Buyer shall mail all payments to Seller's account at Seller's address as set forth in the preamble hereto. SECTION 9.4 WITHHOLDING. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller 19 CONTRACT #96-440-026 promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE. SECTION 10.1 GENERAL FORCE MAJEURE. If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, fires, floods or earthquakes, which are beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the 20 CONTRACT #96-440-026 beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. Tonnage deficiencies resulting from a force majeure event shall be made up at Buyer's sole option on a reasonable schedule. SECTION 10.2 ENVIRONMENTAL LAW FORCE MAJEURE. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt environmental laws, regulations, policies and/or restrictions which will make it impossible or commercially impracticable for Buyer to utilize this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies, or restrictions, or change in the interpretation or enforcement thereof, Buyer decides that it will be impossible or commercially impracticable (uneconomical) for Buyer to utilize such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at Seller's mine and/or in the handling and utilization of the coal at Buyer's generating station; and if in Buyer's sole judgment such actions will not, without unreasonable expense to Buyer, make it possible and commercially practicable for Buyer to so utilize coal which thereafter would be delivered hereunder without violating any applicable law, regulation, policy or order, Buyer shall have the right, upon the later of 60 days notice to Seller or the effective date of such restriction, to terminate this Agreement without further obligation hereunder on the part of either party. 21 CONTRACT #96-440-026 SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any time by written notice pursuant to SECTION 12 of this Agreement, make changes within the general scope of this Agreement in any one or more of the following: quality of coal or coal specifications, quantity of coal, method or time of shipments, place of delivery (including transfer of title and risk of loss), method(s) of weighing, sampling or analysis and such other provision as may affect the suitability and amount of coal for Buyer's generating stations. If any such changes makes necessary or appropriate an increase or decrease in the then current price per ton of coal, or in any other provision of this Agreement, an equitable adjustment shall be made in: price, whether current or future or both, and/or in such other provisions of this Agreement as are affected directly or indirectly by such change, and the Agreement shall thereupon be modified in writing accordingly. Any claim by the Seller for adjustment under this SECTION 11 shall be asserted within thirty (30) days after the date of Seller's receipt of the written notice of change, it being understood, however that Seller shall not be obligated to proceed under this Agreement as changed until an equitable adjustment has been agreed upon. The parties agree to negotiate promptly and in good faith to agree upon the nature and extent of any equitable adjustment. SECTION 12. NOTICES. SECTION 12.1 FORM AND PLACE OF NOTICE. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, 22 CONTRACT #96-440-026 transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, Kentucky 40232 Attn.: Director, Fuels Procurement and Delivery with a copy to: Louisville Gas and Electric Company 820 West Broadway P.O. Box 32020 Louisville, Kentucky 40232 Attn.: Manager, Procurement Services If to Seller: Charolais Corporation P.O. Box 526 Highway 862 Madisonville, Kentucky 42431 Attn.: President SECTION 12.2 CHANGE OF PERSON OR ADDRESS. Either party may change the person or address specified above upon giving written notice to the other party of such change. SECTION 12.3 ELECTRONIC DATA TRANSMITTAL. Seller hereby agrees, at Seller's cost, to electronically transmit shipping notices and/or other data to Buyer in a format acceptable to and established by Buyer upon Buyer's request. Buyer shall provide Seller with the appropriate format and will inform Seller as to the electronic data requirements at the appropriate time. SECTION 13. RIGHT TO RESELL. Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. 23 CONTRACT #96-440-026 SECTION 14. INDEMNITY AND INSURANCE. SECTION 14.1 INDEMNITY. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable inside and outside attorney's fees) (i) relating to the barges or railcars provided by Buyer or Buyer's contractor while such barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. SECTION 14.2 INSURANCE. Seller agrees to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (2) Automobile General Liability, $1,000,000 single limit liability. (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 24 CONTRACT #96-440-026 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 15. TERMINATION FOR DEFAULT. Subject to SECTION 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than 30 days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 16. TAXES, DUTIES AND FEES. Seller shall pay when due, and the price set forth in SECTION 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. 25 CONTRACT #96-440-026 SECTION 17. DOCUMENTATION AND RIGHT OF AUDIT. Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses, and source for all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 18. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CRF SECTION 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CRF SECTION 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CRF SECTION 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC SECTION 637(d)(3); and subcontracting plan requirements set forth in 15 USC SECTION 637(d). SECTION 19. COAL PROPERTY INSPECTIONS. Buyer and its representatives, and others as may be required by applicable laws, ordinances and regulations shall have the right at all reasonable times and at their own expense to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining 26 CONTRACT #96-440-026 equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall make every reasonable effort to comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 20. MISCELLANEOUS. SECTION 20.1 APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. SECTION 20.2 HEADINGS. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. SECTION 20.3 WAIVER. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. SECTION 20.4 REMEDIES CUMULATIVE. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. 27 CONTRACT #96-440-026 SECTION 20.5 SEVERABILITY. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. SECTION 20.6 BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. SECTION 20.7 ASSIGNMENT. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied; provided, however, that Seller shall have the right, without consent of Buyer, to assign all or any part of this Agreement to Centennial Resources, Inc., a Delaware corporation, or any company controlling, controlled by, or under common control with Centennial Resources, Inc. SECTION 20.8 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. SECTION 20.9 AMENDMENTS. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. 28 CONTRACT #96-440-026 LOUISVILLE GAS AND ELECTRIC COMPANY CHAROLAIS CORPORATION By: ___________________________ By: ___________________________ Chris Hermann, Vice President & General Manager, Wholesale Electric Title: ___________________________ Business Date: ___________________________ Date: ___________________________ 29 CONTRACT #96-440-026 Exhibit A Quality A EXHIBIT A QUALITY A Page 1 of 2 SAMPLE COAL PAYMENT CALCULATIONS TOTAL EVALUATED COAL COSTS FOR CONTRACT NO. 96-440-026 - ------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
SECTION I BASE DATA - ----- ---------------------------------------------------- ------------------------------------ 1) Base F.O.B. price per ton: $ 19.27 /ton ----------------------- 1a) Tons of coal delivered: tons ----------------------- 2) Guaranteed average heat content: 11,250 BTU/LB. ----------------------- 2r) As received monthly avg. heat content: BTU/LB. ----------------------- 2a) Energy delivered in MMBTU: MMBTU ----------------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $ /MMBTU ----------------------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.244 LBS./MMBTU ----------------------- 3r) As received monthly avg. sulfur LBS./MMBTU ----------------------- 4) Guaranteed monthly avg. ash 10.67 LBS./MMBTU ----------------------- 4r) As received monthly avg. ash LBS./MMBTU ----------------------- 5) Guaranteed monthly avg. max. moisture 9.50 LBS./MMBTU ----------------------- 5r) As received monthly avg. moisture LBS./MMBTU ----------------------- SECTION II DISCOUNTS - ----- ---------------------------------------------------- ---------------------------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r is less than 10,800 BTU/lb. then: {1-(line 2r)/(line 2)}*$0.2604/MMBTU {1-( )/(11,000)}*$0.2604= $ /MMBTU -------------- 7d) SULFUR: If line 3r is greater than 3.344 lbs./MMBTU [1-[(line 3r)-(line 3)]}*0.1232/lb. Sulfur [1-[( )/( ]}*0.1232= $ /MMBTU -------------- 8d) ASH: If line 4r is greater than 11.67 lbs./MMBTU [1-[(line 4r)-(line 4)]}*0.0083/MMBTU [1-[( )/( ]}*0.0083= $ /MMBTU -------------- 9d) MOISTURE: If line 5r is greater than 10.50 lbs./MMBTU [1-[(line 5r)-(line 5)]}*0.0016/MMBTU [1-[( )/( ]}*0.0016= $ /MMBTU --------------
30 CONTRACT #96-440-026 Exhibit A Quality A Page 2 of 2
TOTAL PRICE SECTION III ADJUSTMENTS - ----- ---------------------------------------------------- ------------------------------------ Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $ /MMBTU ----------------------- Line 7d $ /MMBTU ----------------------- Line 8d $ /MMBTU ----------------------- Line 9d $ /MMBTU ----------------------- 10) Total Discounts (-): Algebraic sum of above: $ /MMBTU ----------------------- 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $ /MMBTU + $ /MMBTU = $ -------------- ----------------------- --------- 13) Total base cost of coal (line 2a) * (line 2b) $ /MMBTU + $ /MMBTU = $ -------------- ----------------------- --------- 14) Total coal payment for month (line 12) + (line 13) $ /MMBTU + $ = $ -------------- ----------------------- ---------
31 CONTRACT #96-440-026 LOUISVILLE GAS AND ELECTRIC COMPANY ACKNOWLEDGMENT OF ASSIGNMENT AND RELEASE OF ASSIGNOR Louisville Gas and Electric Company ("LG&E") hereby (a) acknowledges the assignment by Charolais Corporation ("Charolais") of the Coal Supply Agreement dated January 1, 1997 (the "Coal Supply Agreement"), between LG&E and Charolais, to Centennial Resources, Inc. ("Centennial") pursuant to the terms of Section 20.7 of the Coal Supply Agreement and the Assignment and Assumption Agreement between Charolais and Centennial, a copy of which is attached hereto; and (b) hereby releases and forever discharges Charolais from any and all obligations and liabilities under the Coal Supply Agreement effective as of the assignment of the Coal Supply Agreement to Centennial. LOUISVILLE GAS AND ELECTRIC COMPANY By _________________________________ Vice President and General Manager Wholesale Electric Business Date: MARCH 7, 1997 ------------------------------ 32 CONTRACT #96-440-026 ASSIGNMENT AND ASSUMPTION AGREEMENT ASSIGNMENT AND ASSUMPTION AGREEMENT, dated March 7, 1997, between CHAROLAIS CORPORATION, a Kentucky corporation (the "Assignor") and CENTENNIAL RESOURCES, INC., a Delaware corporation (the "Assignee"). W I T N E S S E T H: WHEREAS, Assignor, Assignee, Betty J. Bowles, Donald E. Bowles, and Mark Energy, Inc., a Kentucky corporation, have entered into a Stock and Asset Purchase Agreement, dated February 13, 1997 (the "Agreement"), pursuant to which Assignee has agreed to purchase from Assignor all of the "Acquired Assets" (as defined in the Agreement); and WHEREAS, Assignor desires to assign to Assignee all of Assignor's interests in the customer contracts and other agreements listed in Schedule 1 attached hereto (the "Assigned Contracts") currently possessed by Assignor; NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy is hereby acknowledged by both Assignor and Assignee, the parties hereto hereby agree as follows: SECTION 1: DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall have the meaning given to those terms in the Agreement. SECTION 2: ASSIGNMENT. Assignor hereby grants, transfers and assigns to Assignee all of the rights, title, and interest of Assignor in, to and under the Assigned Contracts; PROVIDED, HOWEVER, that with respect to any Assigned Contract the assignment of which requires the consent of any other party 33 CONTRACT #96-440-026 thereto, which consent has not been obtained as of the date hereof, the assignment contemplated hereby shall be conditional until such consent shall have been obtained as to such contract. Upon obtaining such consent, such Assigned Contract for which consent has not heretofore been obtained shall, automatically and without the taking of any further action hereunder, be assigned. Notwithstanding the foregoing, this Section 2 is deemed to be subject to and not to vary in any respect the terms of the Agreement. SECTION 3: COVENANTS OF ASSIGNEE. Subject to Section 2.3 of the Agreement, Assignee hereby expressly and unconditionally assumes and agrees to perform fully and faithfully each and every term, covenant and condition of each Assigned Contract required to be performed by Assignor thereunder, arising after the date hereof (but excluding any liability arising under such agreements as a result of any breach, default or failure of Assignor to perform any covenants or obligations required to be performed by Assignor thereunder on or prior to the date hereof), and shall indemnify and hold harmless Assignor from and against any loss, claim, damage or expense caused by or attributable to the failure of Assignee to so perform its obligations hereunder; PROVIDED, HOWEVER, that to the extent that such breach or default by Assignor arises from Assignor's performance or failure to perform a non-monetary obligation, Assignee shall promptly take any and all reasonable actions to cure any such breach or default by Assignor and to mitigate the liability for such breach or default subject to Assignor's obligation to indemnify Assignee for any and all reasonable expenses incurred by Assignee in connection with curing such breach or default by Assignor. 34 CONTRACT #96-440-026 SECTION 4: COVENANTS OF ASSIGNOR. Pursuant to the terms of Section 6.3 of the Agreement, Assignor shall indemnify and hold harmless Assignee from and against any loss, claim, damage or expense caused by or attributable to the failure of Assignor to perform each and every term, covenant and condition of the Assigned Contracts required to be performed by it on or prior to the Closing Date. SECTION 5: MISCELLANEOUS Nothing contained herein shall limit or otherwise affect any of Assignee's rights under the Agreement, including Assignee's rights to indemnification contained in the Agreement, or any other document or other instrument executed in connection therewith or the consummation of the transactions contemplated thereby. This Assignment shall be governed by and construed under the laws of the Commonwealth of Kentucky. Reference is made to Section 6.1(d) of the Agreement for certain further assurances and procedures with respect to obtaining the consent of other parties applicable to the assignments contemplated by the Agreement. This Assignment and Assumption Agreement may be amended, and the observance of any term of this Assignment and Assumption Agreement may be waived, with, but only with, the prior written consent of both parties hereto. Two or more duplicate originals of this Assignment Agreement may be signed by the parties hereto, each of which shall be an original, but all of which together shall constitute one and the same instrument. 35 CONTRACT #96-440-026 IN WITNESS WHEREOF, each of the parties hereto has caused this Assignment Agreement to be executed on its behalf by officers thereunto duly authorized, all as of the day and year first written above. CENTENNIAL RESOURCES, INC. CHAROLAIS CORPORATION (Assignee) (Assignor) By: ______________________ By: __________________________ Name: Douglas P. Sumner Name: Donald E. Bowles Title: President Title: President 36 CONTRACT #96-440-026 March 7, 1997 Louisville Gas and Electric Company 220 West Main Street Louisville, Kentucky 40202 Attention: Director, Fuels Procurement and Delivery Manager, Accounts Payable Gentlemen: Effective March 7, 1997, Charolais Corporation ("Charolais") assigned to Centennial Resources, Inc. ("Centennial") all of Charolais' rights and obligations under the Coal Supply Agreement dated January 1, 1997, between Louisville Gas and Electric Company ("LG&E") and Charolais (Contract #96-440-026) (the "Supply Agreement"), pursuant to an Assignment and Assumption Agreement dated March 7, 1997 (the "Assignment"), between Charolais and Centennial. Pursuant to the Assignment, Centennial has assumed and agreed to perform fully and faithfully each and every term, covenant and condition of the Supply Agreement. Pursuant to the assignment of the Supply Agreement, all payments for any coal loaded or shipped to LG&E under the Supply Agreement on or before March 7, 1997 (the "Effective Date") shall be made to Charolais at P.O. Box 526, Highway 862, Madisonville, Kentucky 42431. With respect to any payments for coal loaded or shipped to LG&E after the Effective Date, LG&E shall direct all payments for such coal shipments to Centennial at 220 West Main Street, Suite 2200, Louisville, Kentucky 40202. We appreciate your cooperation and assistance in this matter. Please contact either Charolais or Centennial if you have any questions related to this matter. Sincerely, CHAROLAIS CORPORATION By ________________________ Donald E. Bowles President CENTENNIAL RESOURCES, INC. By ________________________ Douglas P. Sumner President 37 CONTRACT #96-440-026 AMENDMENT #1 AMENDMENT TO CONTRACT THIS AMENDMENT IS entered into, effective as of August 1, 1997, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "LG&E"), whose address is: 220 W. Main Street, Louisville, Kentucky 40202 and Centennial Resources, Inc., a Delaware corporation, whose address is: 220 W. Main Street, Suite 2200, Louisville, Kentucky 40202 ("Seller"). In consideration of the agreements herein contained, the parties agree as follows: 1.0 AMENDMENTS The Agreement heretofore entered into by the parties, dated effective January 1, 1997 and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement"), is hereby amended as follows: 1.1 In Section 6.1 SPECIFICATIONS, the sulfur max. in Quality A Coal is changed from 3.244 lbs/MMBTU to 3.25 lbs/MMBTU. 1.2 Section 8.2 QUALITY PRICE DISCOUNTS, the sulfur discount point in Quality A Coal is changed from 3.344 lbs/MMBTU to 3.35 lbs/MMBTU. 2.0 STATUS OF AGREEMENT As amended herein, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year below written, but effective as of the day and year first set forth above. LOUISVILLE GAS AND ELECTRIC CENTENNIAL RESOURCES, INC. COMPANY By ________________________ By ___________________________ George Basinger Senior Vice President Title PRESIDENT & CEO Power Operations ---------------- Date 12/23/97 Date 12/23/97 ------------------------ -------------------- 38 CONTRACT #96-440-026 AMENDMENT #2 AMENDMENT NO. 2 TO CONTRACT THIS AMENDMENT NO. 2 IS entered into effective as of January 1, 1998, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "LG&E"), whose address is: 220 West Main Street, Louisville, Kentucky 40202, and CENTENNIAL RESOURCES, INC., a Delaware corporation, whose address is: 220 West Main Street, Suite 2200, Louisville, Kentucky 40202 ("Seller"). In consideration of the agreements herein contained, the parties hereto agree as follows. 1.0 AMENDMENTS. The Agreement heretofore entered into by the parties, dated effective January 1, 1997, and identified by the Contract Number set forth above, as amended by Amendment dated effective August 1, 1997 (hereinafter together referred to as "Agreement"), is hereby further amended as follows: 2.0 STATUS OF AGREMENT 2.1 Section 2, TERM, is hereby revised as follows: "The parties hereto acknowledge that because no agreement was reached regarding "Price" under the price review requirements of Section 8.3 of the Agreement, the Agreement terminated on December 31, 1997. The parties agree that, in order for Seller to provide to LG&E the Shortfall, as defined below, the Term of the Agreement is hereby extended through February 28, 1998 (the "Temporary Extension"), at which time the Agreement shall automatically terminate without liability therefor for either party. 2.2 Section 3.1, BASE QUANTITY, is hereby revised to add the following sentence: "During the Temporary Extension, the Base Quantity shall mean the Shortfall." 2.3 Section 3.2, DELIVERY SCHEDULE, is hereby revised to provide that the quantity to be delivered during the Temporary Extension shall be the Shortfall, which is defined as the difference between the Base Quantity, defined in SECTION 3.1, and the amount of coal delivered by Seller during 1997. The Shortfall is agreed by the parties to be 93,000 tons. Seller shall deliver such Shortfall ratably during the Temporary Extension 3.0 STATUS OF AGREEMENT As amended herein, the Agreement is hereby ratified and confirmed and shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year below written, but effective as of the day and year first set forth above. LOUISVILLE GAS AND ELECTRIC CENTENNIAL RESOURCES, INC. COMPANY By ___________________________ By ______________________________ George Basinger Senior Vice President, Power Operations Title VICE PRESIDENT, SALES AND SERVICE --------------------------------- 39 CONTRACT #96-440-026 Date 2/27/98 Date 2/27/98 ---------------- ------------------ 40 EX-10.79 9 EX-10.79 COAL SUPPLY AGREEMENT (33 PAGES) CONTRACT # 96-413-026 Exhibit 10.79 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated January 1, 1997 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and WARRIOR COAL CORPORATION, a Kentucky corporation, P.O. Box 1223, 1690 Columbia School House Road, Madisonville, Kentucky 42431 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL; PRIOR AGREEMENTS. (a) Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. (b) This Agreement supersedes the Option Agreement dated February 27, 1997 and the letter agreement dated February 27, 1997 covering 52,500 tons. SECTION 2. TERM. The term of this Agreement shall commence on January 1, 1997 and shall continue through December 31, 2002, subject to the provisions of Section 8.3. SECTION 3. QUANTITY. SECTION 3.1 BASE QUANTITY. Seller shall sell and deliver and Buyer shall purchase and accept delivery of the following annual base quantity of coal ("Base Quantity"):
YEAR BASE QUANTITY (TONS) ---- -------------------- 1997 750,000 1998 1,000,000 1999 1,000,000 2000 1,000,000 2001 1,000,000 2002 1,000,000
1 CONTRACT # 96-413-026 SECTION 3.2 DELIVERY SCHEDULE. By December 1 of each year, Buyer shall specify in writing to Seller the quantities to be delivered in each month of the following year (except that, for 1997, such delivery schedule shall be specified within 10 business days after this Agreement becomes fully executed). The monthly schedule specified by Buyer shall be in approximately equal monthly amounts provided that Seller shall coordinate shipments so as to meet Buyer's changing requirements so long as such scheduling variations do not hamper the efficient operations of Seller's facilities. Such quantities shall be shipped in accordance with such schedule. Time is of the essence with respect to the schedule so established; and failure by Seller to deliver in a timely fashion shall constitute a material breach within the meaning of SECTION 16 of this Agreement. SECTION 3.3 RIGHT OF FIRST REFUSAL. (a) Buyer shall have the right of first refusal to purchase any additional tonnage which becomes available from the Coal Property during the term of this Agreement which is beyond Seller's contract commitments as of January 1, 1997. Seller shall notify Buyer by the 15th of each month of the expected available tonnage for the succeeding three months or longer if Seller has a specific sales opportunity with a corresponding term longer than three months under consideration. Included in this notice Seller shall quote a price, coal quality and schedule for the coal which may be available to Buyer. Buyer shall within two working days of receiving the notice give Seller notice of its purchase or refusal to purchase this coal provided the aggregate price does not exceed $1.0 million. If the aggregate price exceeds $1.0 million, Buyer 2 CONTRACT #96-413-026 shall within seven working days of receiving the notice give Seller notice of its purchase or refusal to purchase this coal. (b) If Buyer refuses to purchase this coal or does not accept the purchase of this coal within the aforementioned time period, Seller shall be free to sell this coal to a third party at an equivalent quality and at a price no lower than that quoted to Buyer. If Seller obtains an offer from a third party to purchase at an equivalent quality and at a lower price (or at a higher quality) than that quoted to Buyer which is acceptable to Seller, then Seller must offer Buyer the new sale price or quality terms under the acceptance provisions of Subsection (a) above. Within five working days after Seller enters into any contract with the third party to sell coal pursuant to this Section 3.3, Seller shall give written confirmation to Buyer of the sale. Buyer shall have the right to audit Seller's records to verify the sale and price of any such transactions subject to appropriate confidentiality restrictions. Any additional tonnage which Buyer exercises its right to purchase under this SECTION 3.3 hereinafter shall be referred to as "Right of First Refusal Tonnage." SECTION 3.4 OPTION TO INCREASE QUANTITY. In addition to Buyer's right of first refusal set forth in SECTION 3.3, for 1998 through 2002, Buyer shall have the right to increase the quantity to be delivered hereunder by up to an additional 250,000 tons. Buyer shall exercise such option by giving to Seller notice stating Buyer's exercise of the option and specifying the increased tonnage by July 1 of the year preceding the year in which the increased tonnage will be delivered. Buyer's exercise of the option for 1998 will not obligate the Buyer to take delivery of the increased quantity in 1999; and Buyer's failure to exercise the option in 1998 will not negate the Buyer's right to exercise the option in 1999 and so forth. Any additional tonnage which Buyer exercises 3 CONTRACT #96-413-026 its right to purchase under this SECTION 3.4 hereinafter shall be referred to as "Option Tonnage" and shall be subject to all the terms and conditions hereof (including price). SECTION 4. SOURCE. SECTION 4.1 SOURCE. The coal sold hereunder, including coal purchased by Seller from third parties, shall be supplied from the mines and geological seams, hereinafter referred to as the "Coal Property" as follows: Western Ky. #9 and #11 from Cardinal Mine, Hopkins County, Kentucky, and Western Ky. #15 (including all splits of these seams) from the East Hanson Mine, Hopkins County, Kentucky. Seller shall have the right to add coal reserves and/or add or expand existing or new mining operations to the Coal Property during the term of this Agreement so long as such mining operation or coal reserves are under lease, ownership, or are managed or operated by Seller or one of its affiliated companies. Seller shall notify Buyer at least 30 days in advance of any election to make such changes to the Coal Property and update Seller's mining plan as required under SECTION 4.4. Buyer shall have the right to review and approve the changes to the Coal Property. Buyer's approval shall not be unreasonably withheld provided the coal meets the quality and delivery requirements of this Agreement. The price of coal shall not be changed from that provided under SECTION 8 of this Agreement as a result of changes to the Coal Property as provided hereunder, except that the provisions of SECTION 5 concerning deliveries at locations other than the Delivery Point shall apply. SECTION 4.2 ASSURANCE OF OPERATION AND RESERVES. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will 4 CONTRACT #96-413-026 have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby dedicates to this Agreement sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. SECTION 4.3 NON-DIVERSION OF COAL. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. SECTION 4.4 SELLER'S PREPARATION OF MINING PLAN. Seller shall have prepared a complete mining plan for the Coal Property with adequate supporting data to demonstrate Seller's capability to have coal produced from the Coal Property which meets the quantity and quality specifications of this Agreement. Seller shall provide Buyer with two copies of such mining plan which shall contain maps and a narrative depicting areas and seams of coal to be mined and shall include (but not be limited to) the following information: (i) reserves from which the coal will be produced during the term hereof and the mining sequence, by year (or such other time intervals as mutually agreed) during the term of this Agreement, from which coal will be mined; (ii) methods of 5 CONTRACT #96-413-026 mining such coal; (iii) methods of transporting and, in the event a preparation plant is constructed at the Coal Property, methods of washing coal to insure compliance with the quantity and quality requirements of this Agreement including a description and flow sheet of the preparation plant; (iv) quality data plotted on the maps depicting data points and isolines by ash, sulfur, and Btu; (v) quality control plans including sampling and analysis procedures to insure individual shipments meet quality specifications; and (vi) Seller's aggregate commitments to others to sell coal from the Coal Property during the term of this Agreement. Such complete mining plan shall be delivered to Buyer on or before April 30, 1997. Buyer's receipt of the mining plan or other information or data furnished by Seller shall not in any many relieve Seller of any of Seller's obligations or responsibilities under this Agreement; nor shall such review be construed as constituting an approval of Seller's proposed mining plan as prudent mining practices, such review by Buyer being limited solely to a determination, for Buyer's purposes only, of Seller's capability to supply coal on a long-term basis to fulfill Buyer's requirements of a dependable coal supply. Seller shall annually provide Buyer with a mining plan update ("Update") showing progress to date, conformity to original mining plan, and then known changes in reserve data and planned changes in mining progression, plans or procedures. The update shall be submitted annually on or before January 31 of each year during the term of this Agreement. SECTION 4.5 SUBSTITUTE COAL. Notwithstanding the above representations and warranties, in the event that Seller is unable to produce or obtain coal from the Coal Property in the quantity and of the quality required by this Agreement, then Seller will have the option to supply substitute coal 6 CONTRACT #96-413-026 from other facilities and mines under all the terms and conditions of this Agreement including, but not limited to, the price provisions of SECTION 8, the quality specifications of SECTION 6.1, and the provisions of SECTION 5 concerning reimbursement to Buyer for increased transportation costs. Seller's delivery of coal not produced from the Coal Property without having received the express written consent of Buyer shall constitute a material breach of this Agreement. SECTION 5. DELIVERY. 5.1 RAIL OR TRUCK DELIVERY. The coal shall be delivered to Buyer either F.O.B. railcar at the rail loading facility near the Cardinal Mine on the Paducah and Louisville Railway or FOB truck at the Cardinal Mine (the "Delivery Point") as specified from time to time by Buyer. Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Title to and risk of loss respecting coal will pass to Buyer and the coal will be considered to be delivered when it is loaded into the railcars at the rail loading facility or trucks, as the case may be. Buyer or its contractor shall furnish suitable railcars or trucks in accordance with a delivery schedule provided by Buyer to Seller. Seller shall be responsible for and pay the cost of repairs for any damages caused by Seller to railcars or trucks owned or leased by Buyer while such railcars or trucks are in Seller's control or custody. Seller shall comply with the applicable provisions of Buyer's rail or truck contractor's tariff. 7 CONTRACT #96-413-026 SECTION 5.2 FREEZE CONDITIONING. At Buyer's request, Seller shall treat (or have treated) any shipment of coal hereunder with a freeze conditioning agent approved by Buyer in order to maintain coal handling characteristics during shipment. If requested by Buyer, Seller shall also treat (or have treated) any railcars specified by Buyer with a side release agent approved by Buyer. The price for each such requested chemical treatment shall be an amount equal to Seller's cost of materials applied on a per gallon basis for each application of freeze conditioning agent or side release agent, as the case may be. Seller shall invoice Buyer for all such treatment which occurred in a calendar month by the fifteenth of the following month; and payment shall be mailed by the 25th of such following month or within ten days after receipt of Seller's invoice, whichever is later. SECTION 6. QUALITY. SECTION 6.1 SPECIFICATIONS. (a) The coal delivered hereunder shall conform to the following specifications on an "as received" basis:
LOW-SULFUR COAL --------------- GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ---------------- BTU/lb. 12,150 LESS THAN 11,750 lbs./MMBTU - ---------- Ash 9.00 GREATER THAN 12.00 Moisture 9.00 GREATER THAN 12.00 Sulfur 2.90 GREATER THAN 3.30
8 CONTRACT #96-413-026
MID-SULFUR COAL --------------- GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ---------------- BTU/lb. 11,400 LESS THAN 10,950 lbs./MMBTU - ---------- Ash 13.50 GREATER THAN 14.25 Moisture 9.00 GREATER THAN 12.00 Sulfur 3.40 GREATER THAN 3.45
HIGH-SULFUR COAL ---------------- GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - -------------- ------------------ ---------------- BTU/lb. 10,650 LESS THAN 10,300 lbs./MMBTU - ---------- Ash 19.00 GREATER THAN 21.00 Moisture 9.00 GREATER THAN 12.00 Sulfur 4.00 GREATER THAN 4.40
All the coal will also meet the following specifications on an "as received" basis:
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - ---------------------------------------------------------------------------------------------- CHLORINE max. 0.20 lbs/MMBTU GREATER THAN 0.25 FLUORINE max. 0.006 lbs/MMBTU GREATER THAN 0.01 NITROGEN max. 1.20 lbs/MMBTU GREATER THAN 1.50 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1 SIZE (3" x 0"): Top size (inches)* max. 3"x 0" GREATER THAN 3"x 0" Fines (% by wgt) Passing 1/4" screen max. 45% GREATER THAN 50%
9 CONTRACT #96-413-026
GUARANTEED MONTHLY REJECTION LIMITS SPECIFICATIONS WEIGHTED AVERAGE (PER SHIPMENT) - ---------------------------------------------------------------------------------------------- % BY WEIGHT: ------------ VOLATILE max. 40.0% GREATER THAN45.0% VOLATILE min. 30.0% LESS THAN 29.0% FIXED CARBON max. 50.0% GREATER THAN 55.0% FIXED CARBON min. 30.0% LESS THAN 30.0% GRINDABILITY (HGI) min. 50 LESS THAN 48 BASE ACID RATIO (B/A) SLAGGING FACTOR** max. 2.0 GREATER THAN 2.0 FOULING FACTOR*** max. 1.0 GREATER THAN 1.0 ASH FUSION TEMPERATURE (DEG.F) (ASTM D1857) ------------------------------------------- REDUCING ATMOSPHERE ------------------- Initial Deformation min. 1940 min. 1900 Softening (H=W) min. 2035 min. 1975 Softening (H=1/2W) min. 2085 min. 2000 Fluid min. 2190 min. 2100 OXIDIZING ATMOSPHERE -------------------- Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2330 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375
* All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than forty five percent (45%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by WeightDry) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by WeightDry) The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0) ------------------------------------------ (Si0(2) + Al(2)0(3) + Tl0(2)) 10 CONTRACT #96-413-026 Note: As used herein GREATER THAN means greater than: LESS THAN means less than. (b) Seller shall deliver Low Sulfur Coal, Mid Sulfur Coal, or High Sulfur Coal in any ratio Buyer desires hereunder at Buyer's option, subject to the pricing provision set forth in SECTION 8.1. Buyer may change the nominated qualities from time to time by giving to Seller at least thirty (30) days advance notice of such change. SECTION 6.2 DEFINITION OF "SHIPMENT". As used herein, a "shipment" shall mean one barge load, a barge lot load, one unit trainload, or the aggregate of the truckloads that are unloaded on any one day, in accordance with Buyer's sampling and analyzing practices. SECTION 6.3 REJECTION. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in SECTION 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in SECTION 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, title to and risk of loss of the coal shall be considered to have never passed to Buyer and Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost and risk. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in SECTION 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation 11 CONTRACT #96-413-026 costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in SECTION6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by Buyer; however, the quantity Seller is obligated to sell to Buyer under the Agreement may or may not be reduced by the amount of each such non-conforming shipment at Buyer's sole option and the shipment shall nevertheless be considered "rejectable" under SECTION 6.4. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. SECTION 6.4 SUSPENSION AND TERMINATION. If the coal sold hereunder fails to meet any two of the following criteria ("Suspension Criteria") based upon coal quality selected by Buyer pursuant to SECTION 6.1(b):
LOW SULFUR SUSPENSION CRITERIA ------------------------------ 11,900 BTU/lb. 9.00 lbs./MMBTU Ash 2.90 lbs./MMBTU Sulfur 9.75 lbs./MMBTU Moisture
12 CONTRACT #96-413-026
MID SULFUR SUSPENSION CRITERIA ------------------------------ 11,100 BTU/lb. 13.50 lbs./MMBTU Ash 3.40 lbs./MMBTU Sulfur 10.00 lbs./MMBTU Moisture
HIGH SULFUR SUSPENSION CRITERIA ------------------------------- 10,650 BTU/lb. 19.00 lbs./MMBTU Ash 4.00 lbs./MMBTU Sulfur 12.00 lbs./MMBTU Moisture
on a Monthly Weighted Average basis for any two (2) consecutive months in a six (6) month period, or if nine (9) barge shipments or nine (9) truck shipments in a 30 day period are rejectable by Buyer, or if Buyer receives at generating station(s) two (2) rail shipments which are rejectable in any 30 day period, Buyer may upon notice confirmed in writing and sent to Seller by certified mail, suspend future shipments except shipments already loaded into barges and/or railcars. Seller shall, within 10 days, provide Buyer with reasonable assurances that subsequent monthly deliveries of coal shall meet or exceed the Suspension Criteria and that the source will exceed the rejection limits set forth in SECTION 6.1. If Seller fails to provide such assurances within said 10 day period, Buyer may terminate this Agreement by giving written notice of such termination at the end of the 10 day period. A waiver of this right for any one period by Buyer shall not constitute a waiver for subsequent periods. If Seller provides such assurances to Buyer's reasonable satisfaction, shipments hereunder shall resume and any tonnage deficiencies resulting from suspension may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its acceptance of Seller's assurances, or delay the resumption of shipment. If Seller, after such assurances, fails to meet any of the Suspension Criteria on a Monthly Weighted Average basis 13 CONTRACT #96-413-026 for any one (1) month within the next six (6) months or if three (3) barge shipments or three (3) truck shipments or 1 rail shipment are rejectable within any one (1) month during such six (6) month period, then Buyer may terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS. SECTION 7.1 WEIGHTS. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy at any reasonable time or frequency. If the scales are found to be over or under the tolerance range allowable for the scale based on industry accepted standards, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. SECTION 7.2 SAMPLING AND ANALYSIS. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. Buyer shall send to Seller by telecopier or electronic data transmittal a copy of the analysis within ten (10) business days after sampling the applicable shipment. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with industry-accepted standards. Samples for analyses shall be taken by any industry-accepted standard, mutually acceptable to both parties, may be composited and shall 14 CONTRACT #96-413-026 be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") 15 CONTRACT #96-413-026 mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE. SECTION 8.1 BASE PRICE. The base price ("Base Price") of the coal to be sold hereunder will be firm and will be determined by the nominated coal quality and the year in which the coal is delivered as defined in SECTION 5 in accordance with the following schedule:
LOW-SULFUR ---------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.94321 1998 $0.95896 1999 $0.97498 2000 $0.99186 2001 $1.00781 2002 $1.02464
16 CONTRACT #96-413-026
MID-SULFUR ---------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.83026 1998 $0.85351 1999 $0.87368 2000 $0.89989 2001 $0.92689 2002 $0.95470
HIGH-SULFUR ----------- YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.81831 1998 $0.83198 1999 $0.84587 2000 $0.85600 2001 $0.87030 2002 $0.88483
SECTION 8.2 QUALITY PRICE DISCOUNTS. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in SECTION 6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1, as determined pursuant to SECTION 7.2, subject to the provisions set forth below. The discount values used are as follows:
DISCOUNT VALUES --------------- $/LB./MMBTU ----------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016
17 CONTRACT #96-413-026 (b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall apply and shall be calculated on the basis of the difference between the actual Monthly Weighted Average AND THE GUARANTEED MONTHLY WEIGHTED AVERAGE pursuant to the methodology shown in Exhibit A attached hereto.
LOW SULFUR ---------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS LBS./MBTU - --------------- Ash 9.00 9.75 Moisture 9.00 9.75 Sulfur 2.90 3.0
MID SULFUR ---------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS LBS./MBTU - --------------- Ash 13.50 13.5 Moisture 9.00 10.0 Sulfur 3.40 3.4
HIGH SULFUR ----------- GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- SPECIFICATIONS LBS./MBTU - --------------- Ash 19.00 19.0 Moisture 9.00 12.0 Sulfur 4.00 4.2
18 CONTRACT #96-413-026 For example, for Low Sulfur Coal, if the actual Monthly Weighted Average of sulfur equals 3.3 lb/MMBTU, then the applicable discount would be (3.3 lb. - 2.90 lb.) X $0.1232/lb/MMBTU = $.04928/MMBTU. SECTION 8.3 PRICE REVIEW. The Base Price and all other terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1, 2000. The party requesting such a review shall give written notice of its request to the other party on or before July 1, 1999. The parties then shall negotiate an agreement on new prices and/or other terms and conditions between July 1 and October 1. If the parties do not reach an agreement by December 1, then this Agreement will terminate as of December 31, 1999 without liability due to such termination for either party. SECTION 8.4 PAYMENT CALCULATION. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 9. INVOICES, BILLING AND PAYMENT. SECTION 9.1 INVOICING ADDRESS. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Procurement and Delivery 19 CONTRACT #96-413-026 With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable SECTION 9.2 INVOICE AND BI-MONTHLY PAYMENT PROCEDURES. For all coal delivered (as defined in SECTION 5 hereof) between the first and fifteenth days of any calendar month, Buyer shall make preliminary payment by the twenty-fifth day of such month. For all coal delivered between the sixteenth and the last days of any calendar month, Buyer shall make preliminary payment by the tenth day of the succeeding calendar month. Payment shall be made by electronic funds transfer to Seller's account at Farmer's Bank and Trust, Madisonville, Kentucky. Preliminary payment shall be in the amount of 75% of the then current price on a dollar per ton basis as calculated by applicable coal type, guaranteed monthly weighted average Btu, and the then current Base Price in cents per MMBTU. After the end of each calendar month, there will be a true-up as follows. The amount due for all coal (based on the Base Price minus any Quality Price Discounts) delivered during any calendar month shall be calculated and compared to the sum of the preliminary payments made for coal delivered during such month. The difference shall be paid by or paid to the Seller, as applicable, by the twenty-fifth day of the following month. SECTION 9.3 WITHHOLDING. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller 20 CONTRACT #96-413-026 promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE. SECTION 10.1 GENERAL FORCE MAJEURE. If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to acts of God, war, riots, civil insurrection, acts of the public enemy, strikes, lockouts, fires, floods or earthquakes, which are beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the 21 CONTRACT #96-413-026 beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. Tonnage deficiencies resulting from a force majeure event shall be made up at Buyer's sole option on a reasonable schedule. SECTION 10.2 ENVIRONMENTAL LAW FORCE MAJEURE. The parties recognize that, during the continuance of this Agreement, legislative or regulatory bodies or the courts may adopt environmental laws, regulations, policies and/or restrictions which will make it impossible or commercially impracticable for Buyer to utilize this or like kind and quality coal which thereafter would be delivered hereunder. If as a result of the adoption of such laws, regulations, policies, or restrictions, or change in the interpretation or enforcement thereof, Buyer decides that it will be impossible or commercially impracticable (uneconomical) for Buyer to utilize such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall promptly consider whether corrective actions can be taken in the mining and preparation of the coal at Seller's mine and/or in the handling and utilization of the coal at Buyer's generating station; and if in Buyer's sole judgment such actions will not, without unreasonable expense to Buyer, make it possible and commercially practicable for Buyer to so utilize coal which thereafter would be delivered hereunder without violating any applicable law, regulation, policy or order, Buyer shall have the right, upon the later of 60 days notice to Seller or the effective date of such restriction, to terminate this Agreement without further obligation hereunder on the part of either party. 22 CONTRACT #96-413-026 SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any time by written notice pursuant to SECTION 12 of this Agreement, make changes within the general scope of this Agreement in any one or more of the following: quality of coal or coal specifications, quantity of coal, method or time of shipments, place of delivery (including transfer of title and risk of loss), method(s) of weighing, sampling or analysis and such other provision as may affect the suitability and amount of coal for Buyer's generating stations. If any such changes makes necessary or appropriate an increase or decrease in the then current price per ton of coal, or in any other provision of this Agreement, an equitable adjustment shall be made in: price, whether current or future or both, and/or in such other provisions of this Agreement as are affected directly or indirectly by such change, and the Agreement shall thereupon be modified in writing accordingly. Any claim by the Seller for adjustment under this SECTION 11 shall be asserted within thirty (30) days after the date of Seller's receipt of the written notice of change, it being understood, however that Seller shall not be obligated to proceed under this Agreement as changed until an equitable adjustment has been agreed upon. The parties agree to negotiate promptly and in good faith to agree upon the nature and extent of any equitable adjustment. SECTION 12. NOTICES. SECTION 12.1 FORM AND PLACE OF NOTICE. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, transmitted by facsimile or other electronic media, delivered to an established mail service for 23 CONTRACT #96-413-026 same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows: If to Buyer: Louisville Gas and Electric Company P.O. Box 32010 Louisville, Kentucky 40232 Attn.: Director, Fuels Procurement and Delivery with a copy to: Louisville Gas and Electric Company 820 West Broadway P.O. Box 32020 Louisville, Kentucky 40232 Attn.: Manager, Procurement Services If to Seller: Warrior Coal Corporation 1690 Columbia Schoolhouse Road P.O. Box 1223 Madisonville, Kentucky 42431 SECTION 12.2 CHANGE OF PERSON OR ADDRESS. Either party may change the person or address specified above upon giving written notice to the other party of such change. SECTION 12.3 ELECTRONIC DATA TRANSMITTAL. Seller hereby agrees, at Seller's cost, to electronically transmit shipping notices and/or other data to Buyer in a format acceptable to and established by Buyer upon Buyer's request. Buyer shall provide Seller with the appropriate format and will inform Seller as to the electronic data requirements at the appropriate time. SECTION 13. EARLY TERMINATION. Each party hereto shall have the right of early termination for any reason or no reason, in whole or in part, of its rights and obligations under this Agreement as follows: The party desiring to exercise its right of early termination shall give written notice thereof to the other party and pay the price for early termination (the 24 CONTRACT #96-413-026 "Early Termination Price") as described herein. Notice may be given by either party no later than September 1 of any calendar year; and this Agreement will be terminated at the end of such year. If this Agreement is terminated early in whole, then the Early Termination Price shall be $3.50 times the Remaining Quantity. For the purposes of this SECTION13, the "Remaining Quantity" shall mean the Base Quantity plus any Right of First Refusal Tonnage and Option Tonnage for the year immediately preceding termination hereunder multiplied by the number of years until the effective date of the next price review hereunder (e.g., January 1, 2000) or the termination date of this Agreement, as applicable. For example, if Buyer nominates an additional 250,000 tons of Option Tonnage for 1998, and if Seller terminates this Agreement in whole effective December 31, 1998 pursuant to this SECTION13, then Seller would owe Buyer $4,375,000 (1,250,000 x $3.50) under this SECTION13. If this Agreement is terminated early in part, then the Early Termination Price shall be $3.50 times the total tonnage reduced from the Remaining Quantity. For example, if Buyer nominates an additional 250,000 tons of Option Tonnage for 1998, and if Seller terminates this Agreement in part effective December 31, 1998 by reducing the Base Quantity from 1,000,000 to 500,000 tons, then Seller would be obligated to deliver 750,000 tons in 1999 (500,000 tons Base Quantity plus 250,000 tons Option Tonnage) and would owe Buyer $1,750,000 (500,000 x $3.50) under this SECTION13. The Early Termination Price shall be paid in four equal installments on January 1, April 1, July 1, and October 1 of the year immediately succeeding the early termination. This provision is not intended to limit, liquidate, or otherwise affect in any manner damages recoverable for breach of this Agreement. 25 CONTRACT #96-413-026 SECTION 14. RIGHT TO RESELL. Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. SECTION 15. INDEMNITY AND INSURANCE. SECTION 15.1 INDEMNITY. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable inside and outside attorney's fees) (i) relating to the barges or railcars provided by Buyer or Buyer's contractor while such barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. SECTION 15.2 INSURANCE. Seller agrees to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (2) Automobile General Liability, $1,000,000 single limit liability. (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of 26 CONTRACT #96-413-026 Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 16. TERMINATION FOR DEFAULT. Subject to SECTION 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than 30 days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. 27 CONTRACT #96-413-026 SECTION 17. TAXES, DUTIES AND FEES. Seller shall pay when due, and the price set forth in SECTION 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. SECTION 18. DOCUMENTATION AND RIGHT OF AUDIT. Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses, and source for all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 19. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CRF SECTION 60-1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CRF SECTION 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CRF SECTION 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC SECTION 637(d)(3); and subcontracting plan requirements set forth in 15 USC SECTION 637(d). 28 CONTRACT #96-413-026 SECTION 20. COAL PROPERTY INSPECTIONS. Buyer and its representatives shall have the right at all reasonable times with prior notice to Seller at its own expense and at its own risk without liability to Seller to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall make every reasonable effort to comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. SECTION 21. MISCELLANEOUS. SECTION 21.1 APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. SECTION 21.2 HEADINGS. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning or interpretation of this Agreement. 29 CONTRACT #96-413-026 SECTION 21.3 WAIVER. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. SECTION 21.4 REMEDIES CUMULATIVE. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. SECTION 21.5 SEVERABILITY. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. SECTION 21.6 BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. SECTION 21.7 ASSIGNMENT. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied. SECTION 21.8 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. 30 CONTRACT #96-413-026 SECTION 21.9 AMENDMENTS. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LOUISVILLE GAS AND ELECTRIC COMPANY WARRIOR COAL CORPORATION By: ___________________________ By: ___________________________ Chris Hermann, Vice President & General Manager, Wholesale Electric Title: ___________________________ Business Date: ___________________________ Date: ___________________________ 31 Contract #96-413-026 Amendment #1 AMENDMENT TO CONTRACT THIS AMENDMENT IS entered into, effective as of May 1, 1997, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "LG&E"), whose address is: 220 W. Main St., Louisville, Kentucky 40202 and WARRIOR COAL CORPORATION, a Kentucky corporation, P.O. Box 1223, 1690 Columbia School House Road, Madisonville, Kentucky 42431 ("Seller"). In consideration of the agreements herein contained, the parties hereto agree as follows: 1.0 AMENDMENTS The Agreement heretofore entered into by the parties, dated effective January 1, 1997 and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement"), is hereby amended as follows: 1.1 In Section 3.1 QUALITY, the base quantity (tons) of coal for 1997 is changed from 750,000 to 780,000. 1.2 In Section 3.2 DELIVERY SCHEDULE, is amended to add the following at the end: Additional 30,000 tons in 1997 shall be delivered in May (15,000 tons) and June (15,000 tons). 2.0 PRICING SUMMARY 2.1 Pricing for the additional 30,000 tons shall be $0.95395/MMBTU f.o.b. railcar, Cardinal #9 load-out. 3.0 STATUS OF AGREEMENT As amended herein, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment on the day and year below written, but effective as of the day and year first set forth above. LOUISVILLE GAS AND ELECTRIC WARRIOR COAL COMPANY COMPANY By: ________________________ By: ________________________ George Basinger Senior Vice President Title: ________________________ Power Operations Date ________________________ Date ________________________ Contract #96-413-026 Amendment #2 AMENDMENT NO. 2 TO CONTRACT THIS AMENDMENT NO. 2 IS entered into, effective as of December 1, 1997, by and between LOUISVILLE GAS AND ELECTRIC COMPANY (hereinafter referred to as "LG&E"), whose address is: 220 W. Main Street, Louisville, Kentucky 40202 and WARRIOR COAL CORPORATION, a Kentucky corporation, P.O. Box 1223, 1690 Columbia School House Road, Madisonville, Kentucky 42431 ("Seller"). In consideration of the agreements herein contained, the parties hereto agree as follows: 1.0 AMENDMENTS The Agreement heretofore entered into by the parties, dated effective January 1, 1997 and identified by the Contract Number set forth above, (hereinafter referred to as "Agreement") is hereby amended as follows: 1.1 In Section 3.1 QUANTITY, the base quantity (tons) of coal for 1997 is changed from 780,000 to 795,000. 1.2 Section 3.2 DELIVERY SCHEDULE, is amended to add the following at the end: The additional 15,000 tons referenced above shall be delivered in December, 1997. 2.3 PRICING SUMMARY 2.1 Pricing for the additional 15,000 tons to be delivered in December 1997 shall be $0.95395/MMBTU F.O.B. railcar at the Delivery Point. 3.0 STATUS OF AGREEMENT As amended herein, the Agreement shall continue in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 on the day and year below written, but effective as of the day and year first set forth above. LOUISVILLE GAS AND ELECTRIC WARRIOR COAL CORPORATION COMPANY By: _____________________________ By: __________________________ George Basinger David L. Roberts Senior Vice President President Power Operations Date: ____________________________ Date: __________________________ EX-10.80 10 EX-10.80 COAL SUPPLY AGREEMENT (30 PAGES) CONTRACT #96-412-026 Exhibit 10.80 COAL SUPPLY AGREEMENT This is a coal supply agreement (the "Agreement") dated April 1, 1997 between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and ANDALEX RESOURCES, INC., a Delaware corporation, 1200 Hurstbourne Place, 9300 Shelbyville Road, Louisville, Kentucky 40222 ("Seller"). The parties hereto agree as follows: SECTION 1. GENERAL Seller will sell to Buyer and Buyer will buy from Seller steam coal under all the terms and conditions of this Agreement. SECTION 2. TERM The term of this Agreement shall commence on April 1, 1997 and shall continue through December 31, 2001, subject to SECTION 8.3. SECTION 3. QUANTITY Seller shall sell and deliver and Buyer shall purchase and accept delivery of 62,500 tons of coal per month. Such coal shall be delivered ratably in accordance with reasonable delivery schedules to be mutually agreed upon by Buyer and Seller. SECTION 4. SOURCE SECTION 4.1 SOURCE. The coal sold hereunder shall be supplied from geological seam Western Kentucky #11, #12, and #9 (surface and underground), any of the mines in Seller's Cimarron CONTRACT #96-412-026 Division as of the effective date of this Agreement (the "Coal Property"). Seller shall have the right to add to the Coal Property mines in Seller's Cimarron Division developed after the effective date of this Agreement with Buyer's prior written consent, which will not be unreasonably withheld. SECTION 4.2 ASSURANCE OF OPERATION AND RESERVES. Seller represents and warrants that the Coal Property contains economically recoverable coal of a quality and in quantities which will be sufficient to satisfy all the requirements of this Agreement. Seller agrees and warrants that it will have at the Coal Property adequate machinery, equipment and other facilities to produce, prepare and deliver coal in the quantity and of the quality required by this Agreement. Seller further agrees to operate and maintain such machinery, equipment and facilities in accordance with good mining practices so as to efficiently and economically produce, prepare and deliver such coal. Seller agrees that Buyer is not providing any capital for the purchase of such machinery, equipment and/or facilities and that Seller shall operate and maintain same at its sole expense, including all required permits and licenses. Seller hereby dedicates to this Agreement sufficient reserves of coal meeting the quality specifications hereof and lying on or in the Coal Property so as to fulfill the quantity requirements hereof. SECTION 4.3 NON-DIVERSION OF COAL. Seller agrees and warrants that it will not, without Buyer's express prior written consent, use or sell coal from the Coal Property in a way that will reduce the economically recoverable balance of coal in the Coal Property to an amount less than that required to be supplied to Buyer hereunder. SECTION 5. DELIVERY SECTION 5.1 BUYER'S OPTION. The coal shall be delivered F.O.B. railcar at the Cimarron rail loading facility near Madisonville, Kentucky on the Paducah and Louisville Railway (the 2 CONTRACT #96-412-026 "Delivery Point"). Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Buyer may request to change the Delivery Point to either F.O.B. truck or F.O.B. barge. Upon Buyer's notification to Seller of its desire to change the Delivery Point, Buyer and Seller shall mutually agree in writing upon the change(s) and the time frame wherein such change will take place. SECTION 5.2 RAIL OR TRUCK DELIVERY. If the coal is delivered F.O.B. railcar or F.O.B. truck, then title to and risk of loss respecting the coal will pass to Buyer and the coal will be considered to be delivered when it is loaded into the railcars or trucks at the rail or truck loading facility. Buyer or its contractor shall furnish suitable railcars or trucks in accordance with a delivery schedule provided by Buyer to Seller. Seller shall be responsible for and pay the cost of repairs for any damages caused by Seller to railcars or trucks owned or leased by Buyer while such railcars or trucks are in Seller's control or custody. Seller shall comply with the applicable provisions of Buyer's rail or truck contractor's tariff. At Buyer's request, Seller shall treat (or have treated) any shipment of coal hereunder with a freeze conditioning agent approved by Buyer in order to maintain coal handling characteristics during shipment. If requested by Buyer, Seller shall also treat (or have treated) any railcars specified by Buyer with a side release agent approved by Buyer. The price for each such requested chemical treatment shall be an amount equal to Seller's cost of materials applied on a per gallon basis for each applicable of freeze conditioning agent or side release agent, as the case may be. Seller shall invoice Buyer for all such treatment which occurred in a calendar month by the 3 CONTRACT #96-412-026 fifteenth of the following month; and payment shall be mailed by the 25th of such following month or within ten days after receipt of Seller's invoice, whichever is later. SECTION 5.3 BARGE DELIVERY. If the coal is delivered F.O.B. barge, then title to and risk of loss of coal sold will pass to Buyer and the coal will be considered to be delivered when barges containing the coal are disengaged by Buyer's barging contractor from the loading dock. Buyer or its contractor shall furnish suitable barges in accordance with a delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for all costs of transporting the coal from the mines to the loading docks and loading and trimming the coal into barges to the proper draft and the proper distribution within the barges. Buyer shall arrange for transporting the coal by barge from the loading dock to its generating station(s) and shall pay for the cost of such transportation. For delays caused by Seller in handling the scheduling of shipments with Buyer's barging contractor, Seller shall be responsible for any demurrage or other penalties assessed by said barging contractor (or assessed by Buyer) which accrue at the Delivery Point, including the demurrage, penalties for loading less than the specified minimum tonnage per barge, or other penalties assessed for barges not loaded in conformity with applicable requirements. Buyer shall be responsible to deliver barges in as clean and dry condition as practicable. Seller shall require of the loading dock operator that the barges and towboats provided to Buyer or Buyer's barging contractor be provided convenient and safe berth free of wharfage, dockage and port charges; that while the barges are in the care and custody of the loading dock, all U.S. Coast Guard regulations and other applicable laws, ordinances, rulings, and regulations shall be complied with, including adequate mooring and display of warning lights; that any water in the cargo boxes of the barges be pumped out by the loading dock operator prior to loading; that the loading operations be performed in a workmanlike manner 4 CONTRACT #96-412-026 and in accordance with the reasonable loading requirements of Buyer and Buyer's barging contractor; and that the loading dock operator carry landing owners or wharfinger's insurance with basic coverage of not less than $300,000.00 and total of basic coverage and excess liability coverage of not less than $1,000,000.00, and provide evidence thereof to Buyer in the form of a certificate of insurance from the insurance carrier or an acceptable certificate of self-insurance with requirement for 30 days advance notification of Buyer in the event of termination of or material reduction in coverage under the insurance. SECTION 6. QUALITY SECTION 6.1 SPECIFICATIONS. The coal delivered hereunder shall conform to the following specifications on an "as received" basis:
Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) -------------- ------------------ ---------------- BTU/LB. min. 11,500 LESS THAN 11,200 LBS/MMBTU: MOISTURE max. 10.5 GREATER THAN 12 ASH max. 10.5 GREATER THAN 13 SULFUR max. 3.0 GREATER THAN 3.3 SULFUR min. 1.8 LESS THAN 1.8 CHLORINE max. .04 GREATER THAN .05 FLUORINE max. .006 GREATER THAN .006 NITROGEN max. 1.1 GREATER THAN 1.5 ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1 Size (3" x 0"): Top size (inches)* max. 3x0 GREATER THAN 3x0 Fines (% by wgt) Passing 1/4" screen max. 45% GREATER THAN 50%
5 CONTRACT #96-412-026
Guaranteed Monthly Rejection Limits Specifications Weighted Average (per shipment) -------------- ------------------ ---------------- % BY WEIGHT: VOLATILE max. 40 GREATER THAN 41 VOLATILE min. 35 LESS THAN 33 FIXED CARBON max. 48 GREATER THAN 49 FIXED CARBON min. 44 LESS THAN 40 GRINDABILITY (HGI) min. 55 LESS THAN 52 BASE ACID RATIO (B/A) .39 .43 SLAGGING FACTOR** max. 1.6 GREATER THAN 1.9 FOULING FACTOR*** max. .2 GREATER THAN .3 ASH FUSION TEMPERATURE ((DEGREE)F) (ASTM D1857) REDUCING ATMOSPHERE Initial Deformation min. 1940 min. 1900 Softening (H=W) min. 2035 min. 1975 Softening (H=1/2W) min. 2085 min. 2000 Fluid min. 2190 min. 2100 OXIDIZING ATMOSPHERE Initial Deformation min. 2300 min. 2200 Softening (H=W) min. 2320 min. 2280 Softening (H=1/2W) min. 2425 min. 2300 Fluid min. 2490 min. 2375
* All the coal will be of such size that it will pass through a screen having circular perforations three (3) inches in diameter, but shall not contain more than thirty-five percent (35%) by weight of coal that will pass through a screen having circular perforations one-quarter (1/4) of an inch in diameter. ** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by WeightDry) *** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by WeightDry) The Base Acid Ratio (B/A) is herein defined as: BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0) ---------------------------------------- (Si0(2) + Al(2)0(3) + Tl0(2)) Note: As used herein GREATER THAN means greater than: LESS THAN means less than. 6 CONTRACT #96-412-026 SECTION 6.2 DEFINITION OF "SHIPMENT". As used herein, a "shipment" shall mean one barge load, a barge lot load, or one unit trainload, in accordance with Buyer's actual sampling and analyzing practices. SECTION 6.3 REJECTION. Buyer has the right, but not the obligation, to reject any shipment which fail(s) to conform to the Rejection Limits set forth in SECTION 6.1 or contains extraneous materials. Buyer must reject such coal within seventy-two (72) hours of receipt of the coal analysis provided for in SECTION 7.2 or such right to reject is waived. In the event Buyer rejects such non-conforming coal, Buyer shall return the coal to Seller or, at Seller's request, divert such coal to Seller's designee, all at Seller's cost. Seller shall replace the rejected coal within five (5) working days from notice of rejection with coal conforming to the Rejection Limits set forth in SECTION 6.1. If Seller fails to replace the rejected coal within such five (5) working day period or the replacement coal is rightfully rejected, Buyer may purchase coal from another source in order to replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by which the actual price plus transportation costs to Buyer of such coal purchased from another source exceed the price of such coal under this Agreement (as adjusted under SECTION 8.3 for coal of the quality actually supplied by the other source) plus transportation costs to Buyer from the Delivery Point; and (ii) any and all transportation, storage, handling, or other expenses that have been incurred by Buyer for rightfully rejected coal. This remedy is in addition to all of Buyer's other remedies under this Agreement and under applicable law and in equity for Seller's breach. 7 CONTRACT #96-412-026 If Buyer fails to reject a shipment of non-conforming coal which it had the right to reject for failure to meet any or all of the Rejection Limits set forth in SECTION 6.1 or because such shipment contained extraneous materials, then such non-conforming coal shall be deemed accepted by Buyer; however, the price shall be adjusted in accordance with SECTION 8.3 and the quantity Buyer is obligated to purchase from Seller, at Buyer's sole option, shall be reduced by the amount of each such non-conforming shipment. Further, for shipments containing extraneous materials, which include, but are not limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the estimated weight of such materials shall be deducted from the weight of that shipment. SECTION 6.4 SUSPENSION AND TERMINATION. If the coal sold hereunder fails to meet one or more of the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1 for any one month during the term of this Agreement, or if 3 barge shipments in a 7 day period are rejectable by Buyer, of if Buyer receives at generating station(s) 2 rail shipments which are rejectable in any 10 day period, Buyer may, upon notice confirmed in writing and sent to Seller by certified mail, terminate this Agreement and exercise all its other rights and remedies under applicable law and in equity for Seller's breach. SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS SECTION 7.1 WEIGHTS. The weight of the coal delivered hereunder shall be determined on a per shipment basis by Buyer on the basis of scale weights at the generating station(s) unless another method is mutually agreed upon by the parties. Such scales shall be duly reviewed by an appropriate testing agency and maintained in an accurate condition. Seller shall have the right, at Seller's expense and upon reasonable notice, to have the scales checked for accuracy 8 CONTRACT #96-412-026 at any reasonable time or frequency. If the scales are found to be inaccurate, over or under the tolerance range allowable for the scale, either party shall pay to the other any amounts owed due to such inaccuracy for a period not to exceed thirty (30) days before the time any inaccuracy of scales is determined. SECTION 7.2 SAMPLING AND ANALYSIS. The sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. Buyer shall send to Seller by telecopier or electronic data transmittal a copy of the analysis within (10) business days after sampling the applicable shipment. All analyses shall be made in Buyer's laboratory at Buyer's expense in accordance with reliable and industry accepted standards. Samples for analyses shall be taken by any reliable and industry accepted standard acceptable to both parties, may be composited, and shall be taken with a frequency and regularity sufficient to provide reasonably accurate representative samples of the deliveries made hereunder. Seller represents that it is familiar with Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer shall notify Seller in writing of any significant changes in Buyer's sampling and analysis practices. Any such changes in Buyer's sampling and analysis practices shall, except for industry accepted changes in practices, provide for no less accuracy than the sampling and analysis practices existing at the time of the execution of this Agreement, unless the Parties otherwise mutually agree. Each sample taken by Buyer shall be divided into 4 parts and put into airtight containers, properly labeled and sealed. One part shall be used for analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer in its sole judgment determines it is necessary; one part shall be retained by Buyer until the 25th of the month following the month 9 CONTRACT #96-412-026 of unloading (the "Disposal Date") and shall be delivered to Seller for analysis if Seller so requests before the Disposal Date; and one part ("Referee Sample") shall be retained by Buyer until the Disposal Date. Seller shall be given copies of all analyses made by Buyer by the 12th day of the month following the month of unloading. Seller, on reasonable notice to Buyer shall have the right to have a representative present to observe the sampling and analyses performed by Buyer. Unless Seller requests a Referee Sample analysis before the Disposal Date, Buyer's analysis shall be used to determine the quality of the coal delivered hereunder. The Monthly Weighted Averages shall be determined by utilizing the individual shipment analyses. If any dispute arises before the Disposal Date, the Referee Sample retained by Buyer shall be submitted for analysis to an independent commercial testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For each coal quality specification in question, a dispute shall be deemed not to exist and Buyer's analysis shall prevail and the analysis of the Independent Lab shall be disregarded if the analysis of the Independent Lab differs from the analysis of Buyer by an amount equal to or less than: (i) 0.50% moisture (ii) 0.50% ash on a dry basis (iii) 100 Btu/lb. on a dry basis (iv) 0.10% sulfur on a dry basis. For each coal quality specification in question, if the analysis of the Independent Lab differs from the analysis of Buyer by an amount more than the amounts listed above, then the analysis of the Independent Lab shall prevail and Buyer's analysis shall be disregarded. The cost of the analysis made by the Independent Lab shall be borne by Seller to the extent that 10 CONTRACT #96-412-026 Buyer's analysis prevails and by Buyer to the extent that the analysis of the Independent Lab prevails. SECTION 8. PRICE SECTION 8.1 BASE PRICE. The base price (the "Base Price") of the coal to be sold hereunder will be firm and will be determined by the year in which the coal is delivered as defined in SECTION 5 in accordance with the following schedule:
YEAR BASE PRICE ($ PER MMBTU) ---- ------------------------ 1997 $0.78000 1998 $0.79000 1999 $0.80000 2000 $0.81000 2001 $0.82000
SECTION 8.2 QUALITY PRICE ADJUSTMENTS. (a) The Base Price is based on coal meeting or exceeding the Guaranteed Monthly Weighted Average specifications as set forth in SECTION 6.1. Quality price discounts shall be applied for each specification each month to reflect failures to meet the Guaranteed Monthly Weighted Averages set forth in SECTION 6.1, as determined pursuant to SECTION 7.2, subject to the provisions set forth below. The discount values used are as follows: DISCOUNT VALUES $/MMBTU ------- BTU/LB 0.2604 $/LB./MMBTU ----------- SULFUR 0.1232 ASH 0.0083 MOISTURE 0.0016 (b) Notwithstanding the foregoing, for each specification each month, there shall be no discount if the actual Monthly Weighted Average meets the applicable Discount Point set 11 CONTRACT #96-412-026 forth below. However, if the actual Monthly Weighted Average fails to meet such applicable Discount Point, then the discount shall be calculated on the basis of the difference between the actual Monthly Weighted Average AND THE GUARANTEED MONTHLY WEIGHTED AVERAGE pursuant to the methodology shown in Exhibit A attached hereto.
GUARANTEED MONTHLY WEIGHTED AVERAGE DISCOUNT POINT ------------------ -------------- BTU/LB min. 11,500 11,350 LB/MMBTU - -------- SULFUR max. 3.0 3.2 ASH max. 10.5 12.0 MOISTURE max. 10.5 11.0
For example, if the actual Monthly Weighted Average of ash equals 12.5 lb/MMBTU, then the applicable discount would be (12.5 lb. - 10.5 lb.) x $0.0083/lb./MMBTU = $.0166/MMBTU. SECTION 8.3 PRICE REVIEW. The Base Price and all other terms and conditions of this Agreement shall be subject to review for any reason at the request of either party for revisions to become effective on January 1, 1999, January 1, 2000, and January 1, 2001, respectively. The party requesting such a review shall give written notice of its request to the other party on or before the September 1 preceding the applicable revision effective date. The parties then shall negotiate an agreement on new prices and/or other terms and conditions between October 1 and December 1. If the parties do not reach an agreement by December 1, then this Agreement will terminate as of December 31 of the applicable year without liability due to such termination for either party. If this Agreement is terminated under this SECTION 8.3, the Seller 12 CONTRACT #96-412-026 nevertheless shall have the opportunity to propose a new coal supply agreement each subsequent October through 2001. Buyer shall consider any such proposals, but shall have no obligation to accept any of them. SECTION 8.4 PAYMENT CALCULATION. Exhibit A attached hereto shows the methodology for calculating the coal payment and quality price discounts for the month Seller's coal was unloaded by Buyer. If there are any such discounts, Buyer shall apply credit to amounts owed Seller for the month the coal was unloaded. SECTION 9. INVOICES, BILLING AND PAYMENT. SECTION 9.1 INVOICING ADDRESS. Invoices will be sent to Buyer at the following address: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Director, Fuels Procurement and Delivery With a copy to: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, KY 40232 Attention: Manager, Accounts Payable SECTION 9.2 INVOICE PROCEDURES FOR COAL SHIPMENTS. Seller shall invoice Buyer at the Base Price, minus any quality price discounts, for all coal unloaded in a calendar month by the fifteenth of the following month. SECTION 9.3 PAYMENT PROCEDURES FOR COAL SHIPMENTS. By the 25th of the month following the month of unloading or within ten days after receipt of Seller's invoice, whichever is later, Buyer shall pay for coal unloaded in a calendar month either by mailing payment to Seller's 13 CONTRACT #96-412-026 account at Andalex Resources, Inc., Dept. 97292, Louisville, Kentucky 40297, or by transferring the payment by wire to Seller's account. SECTION 9.4 WITHHOLDING. Buyer shall have the right to withhold from payment of any billing or billings (i) any sums which it is not able in good faith to verify or which it otherwise in good faith disputes, (ii) any damages resulting from or likely to result from any breach of this Agreement by Seller, and (iii) any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in writing of any such issue, stating the basis of its claim and the amount it intends to withhold. Payment by Buyer, whether knowing or inadvertent, of any amount in dispute shall not be deemed a waiver of any claims or rights by Buyer with respect to any disputed amounts or payments made. SECTION 10. FORCE MAJEURE If either party hereto is delayed in or prevented from performing any of its obligations or from utilizing the coal sold under this Agreement due to (i) acts of God, (ii) war, (iii) riots, (iv) civil insurrection, (v) acts of the public enemy, (vi) strikes, (vii) lockouts, (viii) fires, (ix) floods, (x) earthquakes, (xi) explosions, (xii) mine accidents that are solely responsible for delaying or preventing performance of Seller for 10 consecutive days, (xiii) breakdown of or damage to equipment, plant, transmission systems, or transportation providers that is solely responsible for delaying or preventing the performance of Seller for 10 consecutive days, (xiv) unforeseen adverse geologic conditions which were not detected despite prudent mine planning and mining processes and which are solely responsible for delaying or preventing the performance of Seller for 10 consecutive days, or (xv) the inability to obtain necessary mining permit(s) after applying for such with prudent and reasonable diligence, and such event is 14 CONTRACT #96-412-026 beyond the reasonable control and without the fault or negligence of the party affected thereby, then the obligations of both parties hereto shall be suspended to the extent made necessary by such event; provided that the affected party gives written notice to the other party as early as practicable of the nature and probable duration of the force majeure event. The party declaring force majeure shall exercise due diligence to avoid and shorten the force majeure event and will keep the other party advised as to the continuance of the force majeure event. During any period in which Seller's ability to perform hereunder is affected by a force majeure event, Seller shall not deliver any coal to any other buyers to whom Seller's ability to supply is similarly affected by such force majeure event unless contractually committed to do so at the beginning of the force majeure event; and further shall deliver to Buyer under this Agreement at least a pro-rata portion (on a per ton basis) of its total contractual commitments to all its buyers to whom Seller's ability to supply is similarly affected by such force majeure event in place at the beginning of the force majeure event. An event which affects the Seller's ability to produce or obtain coal from a mine other than the Coal Property will not be considered a force majeure event hereunder. Tonnage deficiencies resulting from Seller's declared force majeure event shall be made up at Buyer's sole option on a reasonable schedule. Tonnage deficiencies resulting from Buyer's declared force majeure event shall be made up at Seller's sole option on a reasonable schedule. SECTION 11. NOTICES SECTION 11.1 FORM AND PLACE OF NOTICE. Any official notice, request for approval or other document required to be given under this Agreement shall be in writing, unless otherwise provided herein, and shall be deemed to have been sufficiently given when delivered in person, 15 CONTRACT #96-412-026 transmitted by facsimile or other electronic media, delivered to an established mail service for same day or overnight delivery, or dispatched in the United States mail, postage prepaid, for mailing by first class, certified, or registered mail, return receipt requested, and addressed as follows:
If to Buyer: Louisville Gas and Electric Company 220 West Main Street P.O. Box 32010 Louisville, Kentucky 40232 Attn: Director, Fuels Procurement and Delivery with a copy to: Louisville Gas and Electric Company 820 West Broadway P.O. Box 32020 Louisville, Kentucky 40232 Attn: Manager, Procurement Services If to Seller: Andalex Resources, Inc. 1200 Hurstbourne Place 9300 Shelbyville Road Louisville, Kentucky 40222 Attn: Director of Eastern Sales
SECTION 11.2 CHANGE OF PERSON OR ADDRESS. Either party may change the person or address specified above upon giving written notice to the other party of such change. SECTION 12. RIGHT TO SELL Buyer shall have the unqualified right to sell all or any of the coal purchased under this Agreement. SECTION 13. INDEMNITY AND INSURANCE SECTION 13.1 INDEMNITY. Seller agrees to indemnify and save harmless Buyer, its officers, directors, employees and representatives from any responsibility and liability for any and all claims, demands, losses, legal actions for personal injuries, property damage and pollution (including reasonable attorney's fees) (i) relating to the barges or railcars provided by Buyer or 16 CONTRACT #96-412-026 Buyer's contractor while such barges or railcars are in the care and custody of the loading dock or loading facility, (ii) due to any failure of Seller to comply with laws, regulations or ordinances, or (iii) due to the acts or omissions of Seller in the performance of this Agreement. SECTION 13.2 INSURANCE. Seller agrees to carry insurance coverage with minimum limits as follows: (1) Commercial General Liability, including Completed Operations and Contractual Liability, $1,000,000 single limit liability. (2) Automobile General Liability, $1,000,000 single limit liability. (3) In addition, Seller shall carry excess liability insurance covering the foregoing perils in the amount of $4,000,000 for any one occurrence. (4) Workers' Compensation and Employer's Liability with statutory limits. If any of the above policies are written on a claims made basis, then the retroactive date of the policy or policies will be no later than the effective date of this Agreement. Certificates of Insurance satisfactory in form to the Buyer and signed by the Seller's insurer shall be supplied by the Seller to the Buyer evidencing that the above insurance is in force and that not less than 30 calendar days written notice will be given to the Buyer prior to any cancellation or material reduction in coverage under the policies. The Seller shall cause its insurer to waive all subrogation rights against the Buyer respecting all losses or claims arising from performance hereunder. Evidence of such waiver satisfactory in form and substance to the Buyer shall be exhibited in the Certificate of Insurance mentioned above. Seller's liability shall not be limited to its insurance coverage. SECTION 14. TERMINATION FOR DEFAULT. 17 CONTRACT #96-412-026 Subject to SECTION 6.4, if either party hereto commits a material breach of any of its obligations under this Agreement at any time, then the other party has the right to give written notice describing such breach and stating its intention to terminate this Agreement no sooner than 15 days after the date of the notice (the "notice period"). If such material breach is curable and the breaching party cures such material breach within the notice period, then the Agreement shall not be terminated due to such material breach. If such material breach is not curable or the breaching party fails to cure such material breach within the notice period, then this Agreement shall terminate at the end of the notice period in addition to all the other rights and remedies available to the aggrieved party under this Agreement and at law and in equity. SECTION 15. TAXES, DUTIES AND FEES Seller shall pay when due, and the price set forth in SECTION 8 of this Agreement shall be inclusive of, all taxes, duties, fees and other assessments of whatever nature imposed by governmental authorities with respect to the transactions contemplated under this Agreement. SECTION 16. DOCUMENTATION AND RIGHT OF AUDIT Seller shall maintain all records and accounts pertaining to payments, quantities, quality analyses and source of all coal supplied under this Agreement for a period lasting through the term of this Agreement and for two years thereafter. Buyer shall have the right at no additional expense to Buyer to audit, copy and inspect such records and accounts at any reasonable time upon reasonable notice during the term of this Agreement and for 2 years thereafter. SECTION 17. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller shall comply with all of the following provisions which are incorporated herein by reference: Equal Opportunity regulations set forth in 41 CRF SECTION 60- 18 CONTRACT #96-412-026 1.4(a) and (c) prohibiting discrimination against any employee or applicant for employment because of race, color, religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance Act regulations set forth in 41 CRF SECTION 50-250.4 relating to the employment and advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CRF SECTION 60-741.4 relating to the employment and advancement of qualified disabled employees and applicants for employment; the clause known as "Utilization of Small Business Concerns and Small Business Concerns Owned and Controlled by Socially and Economically Disadvantaged Individuals" set forth in 15 USC SECTION 637(d)(3); and subcontracting plan requirements set forth in 15 USC SECTION 637(d). SECTION 18. COAL PROPERTY INSPECTIONS Buyer and its representatives, and others as may be required by applicable laws, ordinances and regulations shall have the right at all reasonable times and at their own expense to inspect the Coal Property, including the loading facilities, scales, sampling system(s), wash plant facilities, and mining equipment for conformance with this Agreement. Seller shall undertake reasonable care and precautions to prevent personal injuries to any representatives, agents or employees of Buyer (collectively, "Visitors") who inspect the Coal Property. Any such Visitors shall comply with Seller's regulations and rules regarding conduct on the work site, made known to Visitors prior to entry, as well as safety measures mandated by state or federal rules, regulations and laws. Buyer understands that underground mines and related facilities are inherently high-risk environments. Buyer's failure to inspect the Coal Property or to object to defects therein at the time Buyer inspects the same shall not relieve Seller of any of its responsibilities nor be deemed to be a waiver of any of Buyer's rights hereunder. 19 CONTRACT #96-412-026 SECTION 19. MISCELLANEOUS SECTION 19.1 APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and all questions of performance of obligations hereunder shall be determined in accordance with such laws. SECTION 19.2 HEADINGS. The paragraph headings appearing in this Agreement are for convenience only and shall not affect the meaning of interpretation of this Agreement. SECTION 19.3 WAIVER. The failure of either party to insist on strict performance of any provision of this Agreement, or to take advantage of any rights hereunder, shall not be construed as a waiver of such provision or right. SECTION 19.4 REMEDIES CUMULATIVE. Remedies provided under this Agreement shall be cumulative and in addition to other remedies provided under this Agreement or by law or in equity. SECTION 19.5 SEVERABILITY. If any provision of this Agreement is found contrary to law or unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms, unless such unlawful or unenforceable provision is material to the transactions contemplated hereby, in which case the parties shall negotiate in good faith a substitute provision. SECTION 19.6 BINDING EFFECT. This Agreement shall bind and inure to the benefit of the parties and their successors and assigns. SECTION 19.7 ASSIGNMENT. Neither party may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld or denied; provided, however, that Buyer shall have the right, 20 CONTRACT #96-412-026 without consent of Seller, to assign all or any part of this Agreement to any company, controlling, controlled by, or under common control with Buyer. SECTION 19.8 ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties as to the subject matter hereof, and there are no representations, understandings or agreements, oral or written, which are not included herein. SECTION 19.9 AMENDMENTS. Except as otherwise provided herein, this Agreement may not be amended, supplemented or otherwise modified except by written instrument signed by both parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.
LOUISVILLE GAS AND ELECTRIC ANDALEX RESOURCES, INC. COMPANY By: __________________________ By: __________________________ Chris Hermann, Vice President & Title: _________________________ General Manager Wholesale Electric Business Date: __________________________ Date: __________________________
21 CONTRACT #96-412-026 Exhibit A Page 1 of 2 EXHIBIT A SAMPLE COAL PAYMENT CALCULATIONS TOTAL EVALUATED COAL COSTS FOR CONTRACT NO. - ------------------------------------------------------------------------------- For contracts supplied from multiple "origins", each "origin will be calculated individually.
SECTION I BASE DATA ----------------------------------------------- -------------- 1) Base F.O.B. price per ton: $ 17.94 /ton -------------- 1a) Tons of coal delivered: tons -------------- 2) Guaranteed average heat content: 11,500 BTU/LB. -------------- 2r) As received monthly avg. heat content: BTU/LB. -------------- 2a) Energy delivered in MMBTU: MMBTU -------------- [(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU [( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU 2b) Base F.O.B. price per MMBTU: $ 0.78000 MMBTU -------------- {[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU {[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU 3) Guaranteed monthly avg. max. sulfur 3.00 LBS./MMBTU -------------- 3r) As received monthly avg. sulfur LBS./MMBTU -------------- 4) Guaranteed monthly avg. ash 10.50 LBS./MMBTU -------------- 4r) As received monthly avg. ash LBS./MMBTU -------------- 5) Guaranteed monthly avg. max. moisture 10.50 LBS./MMBTU -------------- 5r) As received monthly avg. moisture LBS./MMBTU -------------- SECTION II DISCOUNTS ---------------------------------------------- ---------------- Assign a (-) to all discounts (round to (5) decimal places) 6d) BTU/LB.: If line 2r is greater than 11,350 BTU/lb. then: {1-(line 2r)/(line 2)}*$0.2604/MMBTU {1-( )/(11,350)}*$0.2604= $ /MMBTU -------------- 7d) SULFUR: If line 3r is greater than 3.20 lbs./MMBTU [1-[(line 3r)-(line 3)]}*0.1232/lb. Sulfur [1-[( )/(3.20)]}*0.1232= $ /MMBTU -------------- 8d) ASH: If line 4r is greater than 12.00 lbs./MMBTU [1-[(line 4r)-(line 4)]}*0.0083/MMBTU [1-[( )/(12.00)]}*0.0083= $ /MMBTU -------------- 9d) MOISTURE: If line 5r is greater than 11.0 lbs./MMBTU [1-[(line 5r)-(line 5)]}*0.0016/MMBTU [1-[( )/(11.0)]}*0.0016= $ /MMBTU --------------
22 CONTRACT #96-412-026 Exhibit A Page 2 of 2
TOTAL PRICE SECTION II ADJUSTMENTS ---------------------------------------------- ---------------- Determine total Discounts as follows: Assign a (-) to all discounts (round to (5) decimal places) Line 6d: $ /MMBTU -------------- Line 7d $ /MMBTU -------------- Line 8d $ /MMBTU -------------- Line 9d $ /MMBTU -------------- 10) Total Discounts (-): Algebraic sum of above: $ /MMBTU -------------- 11) Total evaluated coal price = (line 2b) + (line 10) 12) Total discount price adjustment for Energy delivered: (line 2a) * (line 10) (-) $ /MMBTU + $ /MMBTU = $ ------ -------------- ------ 13) Total base cost of coal (line 2a) * (line 2b) $ /MMBTU + $ /MMBTU = $ ------ -------------- ------ 14) Total coal payment for month (line 12) + (line 13) $ /MMBTU + $ = $ ------ -------------- ------
23 EXHIBIT B [NONE] 24 CONTRACT #96-412-026 AMENDMENT TO COAL SUPPLY AGREEMENT This is an amendment (the "Amendment") effective ____________, 1997 to the Coal Supply Agreement dated April 1, 1997 (the "Agreement") between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer") and ANDALEX RESOURCES, INC., a Delaware corporation, 1200 Hurstbourne Place, 9300 Shelbyville Road, Louisville, Kentucky 40222 ("Seller"). The parties hereto agree as follows: 1. Section 5.1 of the Agreement is deleted in its entirety and replaced with the following: SECTION 5.1 BUYER'S OPTION. The coal shall be delivered to one of the following locations as directed by Buyer (collectively, the "Delivery Point"): (a) F.O.B. railcar at the Cimarron rail loading facility near Madisonville, Kentucky on the Paducah and Louisville Railway; and (b) F.O.B. Sebree Dock, mile point 44 on the Green River. Seller may deliver the coal at a location different from the Delivery Point, provided, however, that Seller shall reimburse Buyer for any resulting increases in the cost of transporting the coal to Buyer's generating stations. Any resulting savings in such transportation costs shall be retained by Buyer. Buyer may request to change the Delivery Point to either F.O.B. truck or F.O.B. barge. Upon Buyer's notification to Seller of its desire to change the Delivery Point, Buyer and Seller shall mutually agree in writing upon the change(s) and the time frame wherein such change will take place. 2. Section 5.4 is added to the Agreement and shall read as follows: SECTION 5.4 DELIVERY TO SEBREE DOCK. For coal delivered F.O.B. Sebree Dock, title to and risk of loss respecting the coal will pass to Buyer and the coal will be considered to be delivered when the coal is unloaded at Sebree Dock. Buyer or its contractor shall furnish suitable barges in accordance with a delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for all costs of transporting the coal from the mines to the loading docks, and Buyer shall arrange and pay for all costs of loading and trimming the coal into barges to the proper draft and the proper distribution within the barges. Buyer shall also arrange for transporting the coal by barge from the loading dock to its generating station(s) and shall pay for the cost of such transportation. 3. The first sentence of Section 7.2 is amended to read as follows: Unless another method of sampling and analysis is mutually agreed upon by the parties, the sampling and analysis of the coal delivered hereunder shall be performed by Buyer and the results thereof shall be accepted and used for the quality and characteristics of the coal delivered under this Agreement. CONTRACT #96-412-026 4. Section 8.1 of the Agreement is deleted in its entirety and replaced with the following: SECTION 8.1 BASE PRICE AND TRANSPORTATION CHARGE. (a) BASE PRICE. The base price (the "Base Price") of the coal to be sold hereunder will be firm and will be determined by the year in which the coal is delivered as defined in SECTION 5 in accordance with the following schedule:
YEAR BASE PRICE ($ PER MMBTU) ------- ------------------------ 1997 $0.78000 1998 $0.79000 1999 $0.80000 2000 $0.81000 2001 $0.82000
(b) TRANSPORTATION CHARGE. In addition to the Base Price, Buyer shall pay a transportation charge for coal delivered pursuant to SECTION5.1(b) in an amount equal to $3.00/ton. 5. Except as specifically amended herein, all provisions of the Agreement will remain in full force and effect. In case of any conflict between the provisions of this Amendment and the provisions of the Agreement, the provisions of this Amendment shall prevail. 6. This is the final and complete agreement of the parties relating to the subject matter hereof and hereby supersedes any prior or contemporaneous oral or written understanding, statements or agreements between the parties relating thereto. The parties have executed this Amendment through their duly authorized representatives on the dates set forth below. LOUISVILLE GAS AND ELECTRIC COMPANY By: ______________________________ Title: ______________________________ Date: ______________________________ ANDALEX RESOURCES, INC. By: ______________________________ Title: ______________________________ Date: ______________________________ CONTRACT #96-412-026 CONSENT TO ASSIGNMENT AND ESTOPPEL AGREEMENT THIS CONSENT TO ASSIGNMENT AND ESTOPPEL AGREEMENT (this "Agreement") is made and entered into this 23rd day of January 1998, by and among Louisville Gas and Electric Company, a Kentucky corporation ("Coal Buyer"), having an address at 220 West Main Street, Louisville, Kentucky 40202; ANDALEX RESOURCES, INC., a Delaware corporation ("Assignor"), having an address at Suite 401, 45 West 10000 South, Sandy, Utah 84070; and HOPKINS COUNTY COAL LLC, a Delaware limited liability company ("Assignee"), having an address in care of MAPCO Coal, Inc., 771 Corporate Drive, Suite 1000, Lexington, Kentucky 40503; Attn: Thomas J. Dostart, Esq. W I T N E S S E T H: WHEREAS, Assignor is the seller and Coal Buyer is the buyer of certain coal, as more fully described in the coal supply agreement (the "Coal Supply Agreement"), a copy of which is attached hereto and made a part hereof as EXHIBIT A and as amended by EXHIBIT B; and WHEREAS, Assignor and Assignee have heretofore entered into or anticipate they may enter into an Agreement for Purchase and Sale of Assets whereby Assignee has agreed or may agree to acquire certain assets of the Assignor, including the Coal Supply Agreement (such acquisition hereinafter referred to as the "Transfer"); and WHEREAS, to facilitate the Transfer, Coal buyer is willing [i] to grant its consent to Assignee's replacement of Assignor under the Coal Supply Agreement subject to the terms of the Coal Supply Agreement and this Agreement, and [ii] to make the representations and agreements set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiently of which are hereby acknowledged, the parties hereto agree as follows: 1. Coal Buyer represents and warrants to Assignor and Assignee that it has full right and lawful authority to enter into this Agreement. 2. Coal Buyer hereby consents to and waives any objection to or claim based on assignment of the Coal Supply Agreement by Assignor to Assignee. Such consent is given only to the assignment by Assignor to Assignee and any further assignment, sublease, or other transfer of any interest in the Coal Supply Agreement shall be made only after compliance with all of the terms and conditions set forth in the Coal Supply Agreement. 3. Coal Buyer hereby agrees, represents and warrants for the benefit of Assignor and Assignee, and Assignor hereby agrees, represents and warrants for the benefit of Coal Buyer as follows: a. The Coal Supply Agreement is in full force and effect and has not been amended or modified except as provided in EXHIBIT B and such modifications are binding on the parties and are a part of the Coal Supply Agreement. The attached EXHIBIT A and EXHIBIT B together constitute a true, accurate and complete copy of the Coal Supply Agreement. b. Assignor is not presently in default pursuant to any provision of the Coal Supply Agreement or this Agreement. CONTRACT #96-412-026 c. There has been no act or omission which would with notice or the passage of time constitute a default pursuant to the terms of the Coal Supply Agreement or this Agreement. d. The assignment of the Coal Supply Agreement by Assignor to Assignee will not or if completed did not, in and of itself, constitute a default pursuant to the terms of the Coal Supply Agreement. e. All payments and deliveries under the Coal Supply Agreement are current through ______________, 199___ (taking into account all modifications reflected on EXHIBIT B), and all of the covenants and obligations of any party to be performed and observed under the Coal Supply Agreement prior to the Effective Date have been fully performed and observed. The term "Effective Date" as used in this Agreement shall mean the later of the date specified above in this subpart (e) or such later "Effective Date" as may be set forth in any writing signed or agreed to by Coal Buyer and hereafter provided to Assignor and/or Assignee. 4. The Assignee shall not be responsible for any liabilities, obligations or performance of Assignor under the Coal Supply Agreement which arose or were due prior to the Effective Date (except for those liabilities and obligations the performance of which has been expressly extended past the Effective Date as reflected on EXHIBIT B), nor shall Assignee be responsible for any acts or omissions which occurred or failed to occur prior to the Effective Date. 5. Upon the assignment of the Coal Supply Agreement by Assignor to Assignee and the assumption by Assignee of all of Assignor's liabilities and obligations thereunder (taking into account the modifications reflected on EXHIBIT B) arising on or after the Effective Date, Assignor shall be released from any liabilities and obligations arising on and after the Effective Date and Assignor shall not be responsible for any acts or omissions of the Assignee which occur or failed to occur after the Effective Date. 6. Assignor, Assignee and Webster County Coal Corporation have executed Amendment No. 2, attached hereto as Exhibit C, of the Coal Supply Agreement to evidence the terms and conditions pursuant to which Coal Buyer has given its consent to the assignment and assumption. 7. The provisions of this Agreement shall bind and inure to the benefit of the heirs, representatives, successors and assigns of the parties hereto. 8. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. 9. All notices, requests, consents, and other communications under this Agreement shall be in writing and shall be mailed by first-class, registered, or certified mail, postage prepaid, or sent via overnight courier service, or delivered personally at the addresses in the introduction of this Agreement or to such other address of which the addressee shall have notified the sender in writing. Notices mailed in accordance with this section shall be deemed given when mailed and notices sent by overnight courier service shall be deemed given when placed in the hands of a representative of such service. 10. This Agreement shall at all times be governed by and construed in accordance with the laws of the Commonwealth of Kentucky, without regard to the choice of law principles thereof. CONTRACT #96-412-026 11. This Agreement and the Coal Supply Agreement contain the entire agreement between Assignor and Coal buyer with respect to the subject matter hereof and the Coal Supply Agreement, and supersede all prior or contemporaneous representations, understandings or agreements, oral or written between Assignor and Coal Buyer, which pertain to the subject matter hereof, and are not included herein. This Agreement and the Coal Supply Agreement contain the entire agreement between Assignee and Coal Buyer with respect to the subject matter hereof and the Coal Supply Agreement, and supersede all prior or contemporaneous representations, understandings or agreements, oral or written between Assignee and coal Buyer, which pertain to the subject matter hereof, and are not included herein. This Agreement may not be changed or modified in any manner except by an instrument in writing duly executed by the authorized officer or representative of each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized representatives the date and year first above written. "COAL BUYER" LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation By: -------------------------------- Name: GEORGE W. BASINGER Title: SENIOR VICE PRESIDENT POWER OPERATIONS "ASSIGNOR" ANDALEX RESOURCES, INC., a Delaware corporation By: -------------------------------- Name: DOUGLAS H. SMITH Title: PRESIDENT "ASSIGNEE" HOPKINS COUNTY COAL LLC, a Delaware limited liability company By: --------------------------------- Name: W. DELL JAGGERS Title: V.P. ENGINEERING AND PLANNING CONTRACT #96-412-026 EXHIBIT A [ATTACH A COPY OF THE COAL SUPPLY AGREEMENT] EX-10.81 11 EX-10.81 TEXAS GAS LETTER EXHIBIT 10.81 TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006002 OWENSBORO, KENTUCKY 42304 N0415 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated November 1, 1993, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, QUANTITY, Sections 2.2, 2.3, 2.4, and 2.5 for the 2-year agreement shall be deleted in their entirety and the following inserted in place thereof. 2.2 The maximum daily quantity of gas which Texas Gas shall be obligated to transport and redeliver to Customer, and which Customer shall be obligated to receive, is Customer's applicable Contract Demand expressed on a seasonal basis as set forth below:
DAILY CONTRACT DEMAND MMBTU/D --------------- ------- Winter 61,633 Summer 20,000 Shoulder Month (April) 32,480 Shoulder Month (October) 39,007
2.3 The above Contract Demands consist of a Nominated Daily Quantity, for which Customer is responsible for scheduling the delivery of gas supplies into Texas Gas's system, and an Unnominated Daily Quantity, which is automatically delivered from storage by Texas Gas to meet Customer's requirements. Those quantities, expressed on a seasonal basis, are set forth below:
NOMINATED DAILY QUANTITY MMBTU/D ------------------------ ------- Winter 49,000 Summer (except October) 20,000 October 24,000
Louisville Gas and Electric Company September 23, 1997 Page 2
UNNOMINATED DAILY QUANTITY MMBTU/D -------------------------- ------- Winter 12,633 Summer (except October) 6,316 October 8,843
2.4 Customer's Excess Unnominated Daily Quantity shall be 6,163 MMBtu per day, which is ten percent (10%) of its Winter Contract Demand. 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
SEASONAL QUANTITY ENTITLEMENT MMBTU/D -------------------- ---------- Winter 8,740,000 Summer 1,900,000
B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ------------------------------------- ---------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice ----------------------------------- -------------------- AGREED TO AND ACCEPTED this 30th day of September, 1997. TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006003 OWENSBORO, KENTUCKY 42304 N0415 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated November 1, 1993, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, QUANTITY, Sections 2.2, 2.3, 2.4, and 2.5 for the 5-year agreement shall be deleted in their entirety and the following inserted in place thereof. 2.2 The maximum daily quantity of gas which Texas Gas shall be obligated to transport and redeliver to Customer, and which Customer shall be obligated to receive, is Customer's applicable Contract Demand expressed on a seasonal basis as set forth below:
DAILY CONTRACT DEMAND MMBTU/D --------------- ------- Winter 61,633 Summer 20,000 Shoulder Month (April) 32,480 Shoulder Month (October) 39,006
2.3 The above Contract Demands consist of a Nominated Daily Quantity, for which Customer is responsible for scheduling the delivery of gas supplies into Texas Gas's system, and an Unnominated Daily Quantity, which is automatically delivered from storage by Texas Gas to meet Customer's requirements. Those quantities, expressed on a seasonal basis, are set forth below:
NOMINATED DAILY QUANTITY MMBTU/D ------------------------ ------- Winter 49,000 Summer (except October) 20,000 October 24,000
Louisville Gas and Electric Company September 23, 1997 Page 2
UNNOMINATED DAILY QUANTITY MMBTU/D -------------------------- ------- Winter 12,633 Shoulder Month (April) 6,317 Shoulder Month (October) 8,843
2.4 Customer's Excess Unnominated Daily Quantity shall be 6,163 MMBtu per day, which is ten percent (10%) of its Winter Contract Demand. 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
SEASONAL QUANTITY ENTITLEMENT MMBTU/D -------------------- ---------- Winter 8,740,000 Summer 1,900,000
B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ------------------------------------- ---------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice ----------------------------------- -------------------- AGREED TO AND ACCEPTED this 30th day of September, 1997. TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006004 OWENSBORO, KENTUCKY 42304 N0415 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated November 1, 1993, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, QUANTITY, Sections 2.2, 2.3, 2.4, and 2.5 for the 8-year agreement shall be deleted in their entirety and the following inserted in place thereof. 2.2 The maximum daily quantity of gas which Texas Gas shall be obligated to transport and redeliver to Customer, and which Customer shall be obligated to receive, is Customer's applicable Contract Demand expressed on a seasonal basis as set forth below:
DAILY CONTRACT DEMAND MMBTU/D --------------- ------- Winter 61,634 Summer 20,000 Shoulder Month (April) 32,480 Shoulder Month (October) 39,007
2.3 The above Contract Demands consist of a Nominated Daily Quantity, for which Customer is responsible for scheduling the delivery of gas supplies into Texas Gas's system, and an Unnominated Daily Quantity, which is automatically delivered from storage by Texas Gas to meet Customer's requirements. Those quantities, expressed on a seasonal basis, are set forth below:
NOMINATED DAILY QUANTITY MMBTU/D ------------------------ ------- Winter 49,000 Summer (except October) 20,000 October 24,000
Louisville Gas and Electric Company September 23, 1997 Page 2
UNNOMINATED DAILY QUANTITY MMBTU/D -------------------------- ------- Winter 12,634 Shoulder Month (April) 6,317 Shoulder Month (October) 8,844
2.4 Customer's Excess Unnominated Daily Quantity shall be 6,163 MMBtu per day, which is ten percent (10%) of its Winter Contract Demand. 2.5 The maximum seasonal quantities of gas which Texas Gas shall be obligated to transport and deliver to Customer, and which Customer shall be obligated to receive, are Customer's Seasonal Quantity Entitlements as set forth below:
SEASONAL QUANTITY ENTITLEMENT MMBTU/D -------------------- ---------- Winter 8,740,000 Summer 1,900,000
B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ------------------------------------- ---------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice ----------------------------------- -------------------- AGREED TO AND ACCEPTED this 30th day of September, 1997. EX-10.82 12 EX-10.82 TEXAS GAS LETTER,2 EXHIBIT 10.82 TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006006 OWENSBORO, KENTUCKY 42304 T6487 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated March 1, 1995, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, Transportation Service, Section 2.1 for the 5-year agreement shall be deleted in its entirety and the following inserted in place thereof: ARTICLE II TRANSPORTATION SERVICE 2.1 Subject to the terms and provisions of this Agreement, Customer agrees to deliver or cause to be delivered to Texas Gas, at the Point(s) of Receipt in Exhibit "A" hereunder, Gas for Transportation, and Texas Gas agrees to receive, transport, and redeliver, at the Point(s) of Delivery in Exhibit "B" hereunder, Equivalent Quantities of Gas to Customer or for the account of Customer, in accordance with Section 3 of Texas Gas's effective FT Rate Schedule and the terms and conditions contained herein, up to - 0 - MMBtu per day during the winter season, and up to 18,000 MMBtu per day during the summer season, which shall be Customer's Firm Transportation Contract Demand, and up to -0- MMBtu during the winter season, and up to 3,852,000 MMBtu during the summer season, which shall be Customer's Seasonal Quantity Levels. B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Louisville Gas and Electric Company September 23, 1997 Page 2 Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ----------------------------------- ------------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice AGREED TO AND ACCEPTED this 30th day of September , 1997. ------ ------------ TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006007 OWENSBORO, KENTUCKY 42304 T6487 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated March 1, 1995, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, Transportation Service, Section 2.1 for the 8-year agreement shall be deleted in its entirety and the following inserted in place thereof: ARTICLE II TRANSPORTATION SERVICE 2.1 Subject to the terms and provisions of this Agreement, Customer agrees to deliver or cause to be delivered to Texas Gas, at the Point(s) of Receipt in Exhibit "A" hereunder, Gas for Transportation, and Texas Gas agrees to receive, transport, and redeliver, at the Point(s) of Delivery in Exhibit "B" hereunder, Equivalent Quantities of Gas to Customer or for the account of Customer, in accordance with Section 3 of Texas Gas's effective FT Rate Schedule and the terms and conditions contained herein, up to - 0 - MMBtu per day during the winter season, and up to 18,000 MMBtu per day during the summer season, which shall be Customer's Firm Transportation Contract Demand, and up to -0- MMBtu during the winter season, and up to 3,852,000 MMBtu during the summer season, which shall be Customer's Seasonal Quantity Levels. B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Louisville Gas and Electric Company September 23, 1997 Page 2 Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ----------------------------------- ------------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice AGREED TO AND ACCEPTED this 30th day of September , 1997. ------ ------------ TEXAS GAS TRANSMISSION ONE OF THE WILLIAMS COMPANIES, INC. P.O. BOX 20008 - 3800 FREDERICA STREET L0006005 OWENSBORO, KENTUCKY 42304 T6487 TEL. (502) 926-8686 September 23, 1997 Louisville Gas and Electric Company 820 West Broadway Louisville, Kentucky 40202 Attention: Mr. J. Clay Murphy Gentlemen: Reference is made to the Transportation Agreement (Agreement) dated March 1, 1995, as amended, between Texas Gas Transmission Corporation (Texas Gas) and Louisville Gas and Electric Company (LG&E) providing for the transportation of natural gas by Texas Gas for LG&E. Accordingly, Texas Gas and LG&E hereby desire to amend the Agreement between them as follows: A. ARTICLE II, Transportation Service, Section 2.1 for the 2-year agreement shall be deleted in its entirety and the following inserted in place thereof: ARTICLE II TRANSPORTATION SERVICE 2.1 Subject to the terms and provisions of this Agreement, Customer agrees to deliver or cause to be delivered to Texas Gas, at the Point(s) of Receipt in Exhibit "A" hereunder, Gas for Transportation, and Texas Gas agrees to receive, transport, and redeliver, at the Point(s) of Delivery in Exhibit "B" hereunder, Equivalent Quantities of Gas to Customer or for the account of Customer, in accordance with Section 3 of Texas Gas's effective FT Rate Schedule and the terms and conditions contained herein, up to - 0 - MMBtu per day during the winter season, and up to 18,000 MMBtu per day during the summer season, which shall be Customer's Firm Transportation Contract Demand, and up to -0- MMBtu during the winter season, and up to 3,852,000 MMBtu during the summer season, which shall be Customer's Seasonal Quantity Levels. B. EXHIBIT "C", SUPPLY LATERAL CAPACITY, shall be deleted in its entirety and replaced with the attached EXHIBIT "C", SUPPLY LATERAL CAPACITY. This amendment shall become effective November 1, 1997 and shall remain in force for a term to coincide with the term of the Agreement. The operation of the provisions of this amendment shall be subject to all applicable governmental statutes and all applicable and lawful orders, rules, and regulations. Louisville Gas and Electric Company September 23, 1997 Page 2 Except as herein amended, the Agreement between the parties hereto shall remain in full force and effect. If the foregoing is in accordance with your understanding of our Agreement, please execute both copies and return to us. We will, in turn, execute them and return one copy for your records. Very truly yours, LOUISVILLE GAS AND ELECTRIC COMPANY TEXAS GAS TRANSMISSION CORPORATION By: /s/ Rebecca L. Farrar By: /s/ Signed ----------------------------------- ------------------------------- Title: Vice President-Gas Service Business ATTEST /s/ Sherry L. Rice AGREED TO AND ACCEPTED this 30th day of September , 1997. ------ ------------ EX-10.83 13 EX-10.83 TEXAS GAS LETTER,3 EXHIBIT 10.83 February 4, 1997 Mr. J. Clay Murphy, Mgr. - Gas Supply Louisville Gas and Electric Company P.O. Box 32020 Louisville, KY 40232 RE: Amendment of Gas Transportation Agreement Dated November 1, 1996 Service Package No. 10609 Dear Clay: Tennessee Gas Pipeline Company and Louisville Gas and Electric Company agree to amend the above mentioned Agreement which Amendment will be effective November 1, 1997; (i) to extend the term of the Agreement for one year through October 31, 2002; and (ii) to increase the Transportation Quantity from 30,000 Dth to 51,000 Dth pursuant to the terms and conditions of Tennessee Gas Pipeline Company's FERC Gas Tariff. Except as amended herein, all terms and provisions of the Agreement shall remain in full force and effect as written. If the foregoing is in accordance with your understanding of the Agreement, please so indicate by signing and returning to my attention both originals of this letter. Upon Tennessee's execution, an original will be forwarded to you for your files. Should you have any questions, please do not hesitate to contact me at (713) 757-3720. Sincerely, /s/ Gregory P. Jallans Gregory P. Jallans Tennessee Gas Pipeline Company ACCEPTED AND AGREED TO ACCEPTED AND AGREED TO This 6th Day of February , 1997 This Day of ----- ---------- ---- -------------- LOUISVILLE GAS AND ELECTRIC CO. TENNESSEE GAS PIPELINE CO. By: /s/ Rebecca L. Farrar By: /s/ Signed ---------------------------------- ------------------------------- Title: Vice President-Gas Service Business Title: Vice President and Agent and Attorney-In-Fact February 4, 1997 Mr. J. Clay Murphy Manager-Gas Supply Louisville Gas and Electric Company P.O. Box 32020 Louisville, Kentucky 40232 RE: Firm Transportation Discount Agreement TGP FT-A Contract No. 10609 Dear Clay: In response to your request and pursuant to Section 5.1 of Tennessee Gas Pipeline Company's ("TGP") FT-A Rate Schedule (Fifth Revised Volume No. 1, Original Sheet Number 159), TGP hereby agrees to adjust its Rate Schedule FT-A Transportation rate, as it may be established from time to time, as follows: 1. a) For the period commencing November 1, 1997 and extending through October 31, 2002, for gas delivered by TGP on behalf of Louisville Gas and Electric Company ("LG&E") at Calvary, meter number 02-0844, or Monroe SMS, meter number 02-0843, under TGP Service Package No. 10609 (the "FT-A Agreement") the applicable FT-A rates for volumes received by TGP shall be the lesser of (i) the 100% load factor derivative of the then-effective maximum Rate Schedule FT-A reservation and commodity rate, or (ii) the 100% load factor daily equivalent weighted average rate of $.3307 per Dth. This rate will be composed of a monthly reservation rate of $9.08 per Dth and a daily commodity rate of $.0490 per Dth for receipts in TGP's Zone 0 and a monthly reservation rate of $7.63 per Dth and a daily commodity rate of $.0192 per Dth for receipts in TGP's Zone 1. In the event LG&E amends the FT-A Agreement in a manner that transfers receipt capacity held in one zone to another, the parties agree to adjust the aforementioned reservation and commodity rates such that the 100% load factor daily equivalent weighted average rate of $.3307 per Dth is maintained. These rates are inclusive of all surcharges. b) [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] Mr. J. Clay Murphy February 4, 1997 Page 2 c) LG&E shall provide or otherwise pay for fuel, use and lost and unaccounted for gas pursuant to the fuel factors and other terms and conditions of TGP's FERC Gas Tariff. Except as provided in any settlement or any other agreement between LG&E and TGP, LG&E shall not be prohibited from challenging such fuel factors and other provisions of the General Terms and Conditions of TGP's FERC Gas Tariff. d) LG&E shall not be subject to any additional charges, surcharges, or direct bills beyond the rates described above during the term of this Agreement and any extension thereof. LG&E also shall not be subject to liability or responsibility for PCB or other environmental clean-up costs charged against TGP unless such charges are a result of work performed by LG&E or its agent(s). e) [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] f) [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] 2. a) [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] b) The special rates in Section 1(a) of this Agreement shall apply only to firm transportation to Calvary and Monroe. The discount rates specified herein will continue to be available to LG&E should LG&E release any portion, including any segmentation thereof, of the capacity rights secured by this Agreement at the point(s) of delivery at Calvary and Monroe. TGP's maximum reservation and commodity rates for firm transportation under Rate Schedule FT-A shall apply to deliveries of gas at other points. 3. Upon expiration of the primary term of the FT-A Agreement, LG&E may elect to extend such FT Agreement for one or more years. [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] Mr. J. Clay Murphy February 4, 1997 Page 3 [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] LG&E shall also not be subject to any liability or responsibility for PCB or other environmental clean-up costs unless said liability is the direct result of work performed by LG&E. 4. The discounted rate specified herein will become effective subject to the conditions specified herein. Should the Federal Energy Regulatory Commission ("FERC"), or any court having jurisdiction, at any time disallow any rate discount agreed to by TGP herein, then TGP's maximum applicable FT-A rate shall apply to all transportation services affected by such disallowances from the effective date of the order. TGP agrees to seek rehearing of FERC's order disallowing TGP's rate discount to LG&E agreed to by TGP herein. LG&E may require TGP to appeal such order to the appropriate court having jurisdiction. If LG&E elects to require TGP to file such appeal, LG&E hereby agrees to assume one-half of the costs of such appeal. Should TGP prevail on rehearing or appeal, TGP agrees to refund to LG&E the difference between (a) the maximum FT-A rate charged by TGP to LG&E as of the effective date of the FERC order disallowing the rate discount, and (b) the discounted rate agreed to herein. TGP agrees to make such refund within thirty (30) days of the date that FERC grants rehearing or the court reverses FERC's order disallowing the rate discount. No policy statement, rulemaking, or rate order of general applicability shall be deemed to have disallowed the discount to LG&E provided for by this Discount Agreement, unless TGP seeks clarification of such Commission action and the Commission specifically finds that the discount to LG&E is to be disallowed. In no event will TGP charge LG&E in excess of the applicable maximum FT-A transportation rates established in TGP's tariff nor less than the applicable minimum FT-A rates. 5. In case of a conflict, the terms of this Discount Agreement will take precedence over the terms of the FT-A Agreement. 6. This agreement and any succeeding agreement pertaining to discounted rates shall be known as the Discount Agreement. 7. Effective November 1, 1997, this Discount Agreement replaces in its entirety the discount agreement between TGP and LG&E dated October 18, 1995. Mr. J. Clay Murphy February 4, 1997 Page 4 8. [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] Please acknowledge your acceptance of this proposal by signing below and returning one copy to the undersigned. Retain the other original for your records. Sincerely, /s/ Greg Jallans Gregory P. Jallans TENNESSEE GAS PIPELINE COMPANY By: /s/ Signed ---------------------------------- Its: Agent and Attorney-In-Fact LOUISVILLE GAS AND ELECTRIC COMPANY By: /s/ Rebecca L. Farrar ---------------------------------- Date: February 6, 1997 Exhibit "B" February 4, 1997 Mr. J. Clay Murphy Manager - Gas Supply Louisville Gas and Electric Company P.O. Box 32020 Louisville, KY 40232 Re: Letter of Understanding Regarding Redesigning Special Reservation and Daily Commodity Rate Pursuant to Firm Transportation Discount Agreement Dated February 4, 1997 Dear Clay: [Omitted pursuant to confidential treatment request. Material filed separately with SEC.] Mr. J. Clay Murphy February 4, 1997 Page 2 LG&E does not intend by such agreement to concede to any other interpretation or construction of Sections 1(e), 1(f), and 9 of the Discount Agreement or to have waived its right to insist on strict enforcement of all terms and conditions of the Discount Agreement. Due to limitations in Tennessee's computerized billing system, Tennessee agrees to henceforth provide LG&E with individually-generated monthly invoices to reflect the changes noted above. Tennessee further agrees that, beginning November 1, 1997, and throughout the term of the Discount Agreement, at least ten (10) days before rendering its monthly invoice to LG&E, Tennessee will provide LG&E with a letter setting forth the base reservation and daily commodity rate components of the Special Rates and each of the applicable surcharges (E.G., GRI, PCB, GSR, ACA, ETC.) to be billed pursuant to the terms of the Discount Agreement. Very truly yours, /s/ Greg Jallans Gregory P. Jallans Agreed and Accepted this Agreed and Accepted this [Date] day of February , 1997 6th day of February , 1997 - ------ ---------- ---- ----------- /s/ Jay Dickerson /s/ Rebecca L. Farrar - -------------------------------- -------------------------------------- Jay Dickerson, Rebecca H. Farrar Director - Central Team Vice President - Gas Service Business Tennessee Gas Pipeline Company Louisville Gas and Electric Company EX-12 14 EX-12 LG&E COMPARISON OF RATIO OF EARNGS FIXED/CHG EXHIBIT 12 LOUISVILLE GAS AND ELECTRIC COMPANY COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of $)
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Earnings: Income before cumulative effect of a change in accounting principle per statements of income . . . . . . . . . . . . . . . . . . . . $ 113,273 $ 107,941 $ 83,184 $ 61,689 $ 90,535 Add: Federal income taxes - current . . . . . . . . . . . 59,074 34,019 35,824 30,926 42,091 State income taxes - current . . . . . . . . . . . . 14,754 7,589 8,795 7,726 12,954 Deferred Federal income taxes - net. . . . . . . . . (4,171) 19,816 4,261 (950) 4,712 Deferred State income taxes - net. . . . . . . . . . 778 6,648 2,788 956 226 Investment tax credit - net. . . . . . . . . . . . . (4,342) (4,406) (4,742) (4,619) (7,821) Fixed charges. . . . . . . . . . . . . . . . . . . . 40,928 42,198 43,550 44,665 49,640 ------- ------- ------- ------- ------- Earnings. . . . . . . . . . . . . . . . . . . . . 220,294 213,805 173,660 140,393 192,337 ------- ------- ------- ------- ------- Fixed Charges: Interest Charges per statements of income. . . . . . 39,190 40,242 41,918 42,856 47,496 Add: Interest income (1) . . . . . . . . . . . . . . . - 409 - - - One-third of rentals charged to operating expense (2) . . . . . . . . . . . . . 1,738 1,547 1,632 1,809 2,144 ------- ------- ------- ------- ------- Fixed charges. . . . . . . . . . . . . . . . $ 40,928 $ 42,198 $ 43,550 $ 44,665 $ 49,640 ------- ------- ------- ------- ------- Ratio of Earnings to Fixed Charges . . . . . . . . . . 5.38 5.07 3.99 3.14 3.87 ===== ===== ===== ===== =====
NOTE: (1) Interest income earned on pollution control revenue bond proceeds held and invested by trustees - netted against interest charges above. (2) In the Company's opinion, one-third of rentals represents a reasonable approximation of the interest factor. EX-21 15 EX-21 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANTS Louisville Gas and Electric Company (a Kentucky corporation), LG&E Capital Corp. (a Kentucky corporation), LG&E Power Inc. (a Delaware corporation), LG&E Power Operations Inc. (a California corporation), LG&E Energy Marketing Inc. (an Oklahoma corporation), and LG&E International Inc. (a Delaware corporation) are significant subsidiaries of LG&E Energy Corp. Louisville Gas and Electric Company and LG&E Capital Corp. are wholly-owned direct subsidiaries of LG&E Energy Corp. LG&E Power Inc. and LG&E International Inc. are wholly-owned direct subsidiaries of LG&E Capital Corp., and LG&E Energy Marketing Inc. and LG&E Power Operations are wholly-owned direct subsidiaries of LG&E Power Inc. LG&E Energy Marketing Inc., together with one subsidiary operating in the United States, markets and brokers electric power and natural gas in the United States. LG&E Power Operations, together with approximately 18 subsidiaries operating in the United States, operates and maintains domestic power generation facilities. Approximately twenty-seven other subsidiaries of LG&E Power Inc. (26 operating in the United States and one operating in Canada) together are involved in the gathering, processing, storage and transportation of natural gas in the United States and the marketing of natural gas in Canada. LG&E International Inc., together with nine subsidiaries operating in the United States, three operating in Argentina and two in Spain, holds LG&E Energy Corp.'s investments in the Argentine gas distribution companies and its current and former investments in foreign power generation facilities. Louisville Gas and Electric Company has no subsidiaries. EX-23.01 16 EX-23.01 CONSENT (1 PAGE) Exhibit 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 28, 1998, (except with repect to the matters discussed in the fifth paragraph of Note 7, the eight paragraph of Note 14 and the second paragraph of Note 15, as to which the date is February 11, 1998) included in this Form 10-K, into the Company's previously filed Registration Statement No. 333-43985 relating to the Company's Savings Plan and the 401(K) Savings Plan for Employees of the Louisville Gas and Electric Company who are represented by Local 2100 of IBEW, Post-Effective Amendment No. One to Registration Statement No. 33-56942 and Post-Effective Amendment No.1-C to Registration Statement No. 33-33687 relating to the Automatic Dividend Reinvestment and Stock Purchase Plan of the Company, Registration Statement No. 333-05457 and Post-Effective Amendment No. 2-C to Registration Statement No. 33-33687 relating to the Employee Common Stock Purchase Plan of the Company, Registration No. 333-05459 and Post-Effective Amendment No. Two to Registration Statement No. 33-38557 relating to the Omnibus Long-Term Incentive Plan of the Company, Post-Effective Amendment No. One to Registration Statement No. 33-56525 relating to the Stock Option Plan for Non-Employee Directors of the Company, and Post-Effective Amendment No. One to Registration Statement No. 33-60765 relating to the Deferred Stock Compensation Plan for Non-Employee Directors of the Company. ______________________________________ Arthur Andersen LLP Louisville, Kentucky March 25,1998 EX-23.02 17 EX-23.02 CONSENT (1 PAGE) Exhibit 23.02 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 28, 1998, included in this Form 10-K, into the Company's previously filed Registration Statement No. 33-13427. ______________________________________ Arthur Andersen LLP Louisville, Kentucky March 25,1998 EX-23.03 18 EX-23.03 CONSENT (1 PAGE) EXHIBIT 23.03 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in LG&E Energy Corp.'s Annual Report on Form 10-K for the year ended December 31, 1997 of our report dated January 26, 1998 relating to the Consolidated Financial Statements of KU Energy Corporation which is incorporated by reference in the Form 10-K of LG&E Energy Corp. for the year ended December 31, 1997, into LG&E Energy Corp.'s previously filed Registration Statement No. 333-43985 relating to the LG&E Energy Corp.'s Savings Plan and the 401(K) Savings Plan for Employees of the Louisville Gas and Electric Company who are represented by Local 2100 of IBEW, Post-Effective Amendment No. One to Registration Statement No. 33-56942 and Post-Effective Amendment No. 1-C to Registration Statement No. 33-33687 relating to the Automatic Dividend Reinvestment and Stock Purchase Plan of LG&E Energy Corp., Registration Statement No. 333-05457 and Post-Effective Amendment No. 2-C to Registration Statement No. 33-33687 relating to the Employee Common Stock Purchase Plan of LG&E Energy Corp., Registration Statement No. 333-05459 and Post-Effective Amendment No. Two to Registration Statement No. 33-38557 relating to the Omnibus Long-Term Incentive Plan of LG&E Energy Corp., Post-Effective Amendment No. One to Registration Statement No. 33-56525 relating to the Stock Option Plan for Non-Employee Directors of LG&E Energy Corp., and Post-Effective Amendment No. One to Registration Statement No. 33-60765 relating to the Deferred Stock Compensation Plan for Non-Employee Directors of LG&E Energy Corp. Arthur Andersen LLP Chicago, Illinois March 25, 1998 EX-24.01 19 EX-24.01 POWER OF ATTORNEY (2 PAGES) Exhibit 24.01 POWER OF ATTORNEY WHEREAS, LG&E ENERGY CORP., a Kentucky corporation, is to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, its Annual Report on Form 10-K for the year ended December 31, 1997 (the 1997 Form 10-K); and WHEREAS, each of the undersigned holds the office or offices in LG&E ENERGY CORP. set opposite his or her name; NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER W. HALE and VICTOR A. STAFFIERI, and each of them, individually, his attorney, with full power to act for him and in his name, place, and stead, to sign his name in the capacity or capacities set forth below to the 1997 Form 10-K and to any and all amendments to such 1997 Form 10-K and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 4th day of March 1998. /s/ Roger W. Hale /s/ J. David Grissom _______________________ _______________________ ROGER W. HALE J. DAVID GRISSOM Principal Executive Director Officer and Director /s/ William C. Ballard /s/ David B. Lewis _______________________ _______________________ WILLIAM C. BALLARD DAVID B. LEWIS Director Director /s/ Owsley Brown, II /s/ Anne H. McNamara _______________________ _______________________ OWSLEY BROWN, II ANNE H. McNAMARA Director Director /s/ S. Gordon Dabney /s/ T. Ballard Morton, Jr. _______________________ _______________________ S. GORDON DABNEY T. BALLARD MORTON, JR. Director Director /s/ Gene P. Gardner /s/ Dr. Donald C. Swain _______________________ _______________________ GENE P. GARDNER DR. DONALD C. SWAIN Director Director /s/ Jeffrey T. Grade /s/ Victor A. Staffieri _______________________ _______________________ JEFFREY T. GRADE Victor A. Staffieri, Principal Director Financial and Accounting Officer STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) 1 Exhibit 24 POWER OF ATTORNEY (cont.) On this 4th day of March 1998, before me, Margaret L. Cowan, a Notary Public, State of Kentucky at Large, personally appeared the above named directors and officers of LG&E ENERGY CORP., a Kentucky corporation, and known to me to be the persons whose names are subscribed to the foregoing instrument, and they severally acknowledged to me that they executed the same as their own free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date above set forth. My Commission expires: /s/ Margaret L. Cowan July 28, 2000 _______________________ Margaret L. Cowan, Notary Public State of Kentucky at Large 2 EX-24.02 20 EX-24-02 POWER OF ATTORNEY (2 PAGES) Exhibit 24.02 POWER OF ATTORNEY WHEREAS, LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, is to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1934, as amended, its Annual Report on Form 10-K for the year ended December 31, 1997 (the 1997 Form 10-K); and WHEREAS, each of the undersigned holds the office or offices in LOUISVILLE GAS AND ELECTRIC COMPANY set opposite his or her name; NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER W. HALE and VICTOR A. STAFFIERI, and each of them, individually, his attorney, with full power to act for him and in his name, place, and stead, to sign his name in the capacity or capacities set forth below to the 1997 Form 10-K and to any and all amendments to such 1997 Form 10-K and hereby ratifies and confirms all that said attorney may or shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals this 4th day of March 1998. /s/ Roger W. Hale /s/ J. David Grissom _______________________ _______________________ ROGER W. HALE J. DAVID GRISSOM Principal Executive Director Officer and Director /s/ William C. Ballard /s/ David B. Lewis _______________________ _______________________ WILLIAM C. BALLARD DAVID B. LEWIS Director Director /s/ Owsley Brown, II /s/ Anne H. McNamara _______________________ _______________________ OWSLEY BROWN, II ANNE H. McNAMARA Director Director /s/ S. Gordon Dabney /s/ T. Ballard Morton, Jr. _______________________ _______________________ S. GORDON DABNEY T. BALLARD MORTON, JR. Director Director /s/ Gene P. Gardner /s/ Dr. Donald C. Swain _______________________ _______________________ GENE P. GARDNER DR. DONALD C. SWAIN Director Director /s/ Jeffrey T. Grade /s/ Victor A. Staffieri _______________________ _______________________ JEFFREY T. GRADE Victor A. Staffieri, Principal Director Financial and Accounting Officer STATE OF KENTUCKY ) )ss. COUNTY OF JEFFERSON ) 1 Exhibit 24 POWER OF ATTORNEY (cont.) On this 4th day of March 1998, before me, Margaret L. Cowan, a Notary Public, State of Kentucky at Large, personally appeared the above named directors and officers of LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, and known to me to be the persons whose names are subscribed to the foregoing instrument, and they severally acknowledged to me that they executed the same as their own free act and deed. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal on the date above set forth. My Commission expires: /s/ Margaret L. Cowan July 28, 2000 _______________________ Margaret L. Cowan, Notary Public State of Kentucky at Large 2 EX-27.1 21 EX-27.1 FDS
UT 0000060549 LOUISVILLE GAS AND ELECTRIC COMPANY 1,000 YEAR DEC-31-1997 DEC-31-1997 PER-BOOK 1,706,392 1,365 288,286 59,598 0 2,055,641 424,334 82 258,910 683,326 0 95,328 626,800 0 0 0 20,000 0 0 0 630,187 2,055,641 845,543 64,081 633,276 697,357 148,186 4,277 152,463 39,190 113,273 4,585 108,688 59,000 37,605 186,060 0 0
EX-27.2 22 EX-27.2
UT 0000861388 LG&E ENERGY CORP. 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 1,706,392 658,745 877,685 123,569 0 3,366,391 468,851 217 366,004 835,072 0 98,353 664,339 360,184 0 0 20,000 0 0 0 1,388,443 3,366,391 4,263,820 55,262 4,062,352 4,117,614 146,206 15,476 161,682 59,280 102,402 4,585 97,817 77,807 37,605 139,508 2.22 2.22 Includes common stock expense of $1,285. Represents unrealized loss on marketable securities, net of taxes. Includes equity in earnings of affiliates of $21,014.
EX-99.1 23 EX-99.1 LG&E & LOUIVILLE GAS & ELEC CAUTIONARY FAC EXHIBIT 99.01 LG&E Energy Corp. and Louisville Gas and Electric Company Cautionary Factors The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation providing those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been and will be made in written documents and oral presentations of LG&E Energy Corp. ("LG&E Energy") and Louisville Gas and Electric Company ("LG&E") (collectively, the "Companies"). Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used in the Companies' documents or oral presentations, the words "anticipate," "estimate," "expect," "objective" and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Companies' actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: * Increased competition in the utility, natural gas and electric power marketing industries, including effects of: decreasing margins as a result of competitive pressures; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of investments made under traditional regulation; nature of competitors entering the industry; retail wheeling; a new pricing structure; and former customers entering the generation market; * Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, transmission, currency, interest rate and warranty risks; * Risks associated with price risk management strategies intended to mitigate exposure to adverse movement in the prices of electricity and natural gas on both a global and regional basis; * Legal, regulatory, economic and other factors which may result in redetermination or cancellation of revenue payment streams under power sales agreements resulting in reduced operating income and potential asset impairment related to the Companies' investments in independent power production ventures, as applicable; * Economic conditions including inflation rates and monetary fluctuations; * Trade, monetary, fiscal, taxation, and environmental policies of governments, agencies and similar organizations in geographic areas where the Companies have a financial interest; 1 * Customer business conditions including demand for their products or services and supply of labor and materials used in creating their products and services; * Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Federal Energy Regulatory Commission, state public utility commissions, state entities which regulate natural gas transmission, gathering and processing and similar entities with regulatory oversight; * Availability or cost of capital such as changes in: interest rates, market perceptions of the utility and energy-related industries, the Companies or any of their subsidiaries or security ratings; * Factors affecting utility and non-utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, unusual maintenance or repairs; unanticipated changes to fossil fuel, or gas supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline system constraints; * Employee workforce factors including changes in key executives, collective bargaining agreements with union employees, or work stoppages; * Rate-setting policies or procedures of regulatory entities, including environmental externalities; * Social attitudes regarding the utility, natural gas and power industries; * Identification of suitable investment opportunities to enhance shareholder returns and achieve long-term financial objectives through business acquisitions; * Some future project investments made by the Companies, respectively, as applicable, could take the form of minority interests, which would limit the Companies' ability to control the development or operation of the project; * Legal and regulatory delays and other unforeseeable obstacles associated with mergers, acquisitions and investments in joint ventures; * Costs and other effects of legal and administrative proceedings, settlements, investigations, claims and matters, including but not limited to those described in Note 16 (for LG&E Energy) and Note 12 (for LG&E) of the respective Notes to Financial Statements of the Companies' Annual Reports on Form 10-K for the year ended December 31, 1997, under the caption Commitments and Contingencies; 2 * Technological developments, changing markets and other factors that result in competitive disadvantages and create the potential for impairment of existing assets; * Factors associated with non-regulated investments, including but not limited to: continued viability of partners, foreign government actions, foreign economic and currency risks, political instability in foreign countries, partnership actions, competition, operating risks, dependence on certain customers, third-party operators, suppliers and domestic and foreign environmental and energy regulations; * Other business or investment considerations that may be disclosed from time to time in the Companies' Securities and Exchange Commission filings or in other publicly disseminated written documents. In addition, numerous matters associated with the proposed combination of LG&E Energy and KU Energy Corporation, including: * Regulatory authorities' decisions regarding business combination issues including the approval of the business combination as proposed, the rate structure of utility operating companies after the merger, transmission system operation and administration, or divestiture of portions of LG&E Energy's business; * Qualification of the transaction as a pooling of interest; * Factors affecting the anticipated cost savings including national and regional economic conditions, national and regional competitive conditions, inflation rates, weather conditions, financial market conditions, and synergies resulting from the business combination; * Allocation of benefits of cost savings between shareholders and customers, which will depend, among other things, upon the results of regulatory proceedings in various jurisdictions; * Different or additional federal and state regulatory requirements or restrictions to which LG&E Energy and its subsidiaries may be subject as a result of the business combination (including conditions which may be imposed in connection with obtaining the regulatory approvals necessary to consummate the business combination); * Factors affecting dividend policy including results of operations and financial condition of LG&E Energy and its subsidiaries and such other business considerations as LG&E Energy's Board of Directors considers relevant. The Companies undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 3 EX-99.2 24 EX-99.2 DESCRIPTION OF LG&E ENERGY COMMON STOCK EXHIBIT 99.02 DESCRIPTION OF LG&E ENERGY COMMON STOCK The information under this caption is a succinct summary of certain provisions and is subject to the detailed provisions of LG&E Energy's (the "Company's") Restated Articles of Incorporation, as amended, and of its By-Laws, which have been filed (or incorporated by reference) as exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and which are incorporated herein by this reference. Authorized Stock Under the Company's Articles of Incorporation, the Company is authorized to issue 125,000,000 shares of Common Stock, without par value (the "Common Stock"), of which approximately 66,527,636 shares were outstanding on February 17, 1998. The Company is also authorized to issue 5,000,000 shares of preferred stock, without par value (the "Preferred Stock"). As discussed below under the caption "Rights to Purchase Series A Preferred Stock," the Company has created a series of Preferred Stock designated as "Series A Preferred Stock," and the number of shares constituting such series is 750,000. No shares of such Series A Preferred Stock and no shares of any other Preferred Stock are currently outstanding. Preferred Stock may be issued in the future in such series as may be designated by the Company's Board of Directors. In creating any such series, the Company's Board of Directors has the authority to fix the rights and preferences of each series with respect to, among other things, the dividend rate, redemption provisions, liquidation preferences, and sinking fund provisions. On October 14, 1997, the Company's shareholders approved an increase in the Company's authorized shares of Common Stock from 125,000,000 to 300,000,000, in conjunction with the Company's proposed merger (the "Merger") with KU Energy Corporation ("KU Energy"). This increase will occur at the time of consummation of such Merger. Dividend Rights Subject to the prior payment in full of all accrued and unpaid dividends on the Series A Preferred Stock and possible prior rights of holders of other Preferred Stock that may be issued in the future, holders of the Company's Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Company out of funds legally available therefor. The funds required by the Company to enable it to pay dividends on its Common Stock are expected to be derived principally from dividends paid by Louisville Gas and Electric Company, the Company's principal subsidiary ("LG&E"), on LG&E's Common Stock. The Company's ability to receive dividends on LG&E's Common Stock is subject to the prior rights of the holders of LG&E's preferred stock and the covenants of debt instruments limiting the ability of LG&E to pay dividends. 1 The only existing covenant limiting LG&E's ability to pay dividends is in LG&E's trust indenture, as supplemented, securing LG&E's first mortgage bonds. It provides in substance that retained income of LG&E equal to the amount by which the aggregate of (a) provisions for retirement and depreciation and (b) expenditures for maintenance, for the period from January 1, 1978, to the end of the last preceding month for which a balance sheet of LG&E is available, is less than 2.25% of depreciable property, including construction work in progress, as of the end of that period, shall not be available for the payment of cash dividends on the Common Stock of LG&E. No portion of retained income of LG&E is presently restricted by this provision. Voting Rights Every holder of Common Stock and every holder of Series A Preferred Stock that may be issued in the future is entitled to one vote per share for the election of directors and upon all other matters on which such holder is entitled to vote. At all elections of directors, any eligible shareholder may vote cumulatively. The Board of Directors of the Company has the authority to fix conversion and voting rights for any new series of Preferred Stock (including the right to elect directors upon a failure to pay dividends), provided that no share of Preferred Stock can have more than one vote per share. Notwithstanding the foregoing, if any Series A Preferred Stock is issued in the future and if and when dividends payable on such Series A Preferred Stock that may be issued in the future shall be in default for six full quarterly dividends and thereafter until all defaults shall have been paid, the holders of the Series A Preferred Stock, voting separately as one class, to the exclusion of the holders of Common Stock, will be entitled to elect two (2) directors of the Company. The Company's Articles of Incorporation contain "fair price" provisions, which require that mergers and certain other business combinations or transactions involving the Company and any substantial (10% or more) holder of the Company's Voting Stock (as defined below) must be approved by the holders of at least 80% of the voting power of the Company's outstanding Voting Stock and by the holders of at least 66-2/3% of the voting power of the Company's Voting Stock not beneficially owned by the 10% owner unless the transaction is either approved by a majority of the members of the Board of Directors who are unaffiliated with the substantial holder or certain minimum price and procedural requirements are met. Any amendment to the foregoing provisions must be approved by the holders of at least 80% of the voting power of the Company's outstanding Voting Stock and by the holders of at least 66-2/3% of the voting power of the Company's Voting Stock not beneficially owned by any 10% owner. The Company's Voting Stock consists of all outstanding shares of the Company generally entitled to vote in the election of directors and currently consists of the Company's Common Stock. Subject to the rights of the Series A Preferred Stock (if any are issued) to elect directors under certain circumstances described above and any voting rights of the holders of the Company's Preferred Stock that may be issued in the future, the Company's Articles and By-Laws contain provisions stating that: (a) the Board of Directors shall be divided into three classes, as nearly equal in number as possible, each of which, after an interim arrangement, will serve for three years, with one class being elected each year, (b) directors may be removed only with the approval of the holders of at least 80% of the voting power of the shares of the Company 2 generally entitled to vote, except that so long as cumulative voting applies no director may be removed if the votes cast against removal would be sufficient to elect the director if cumulatively voted at an election of the class of directors of which such director is a part, (c) any vacancy on the Board of Directors shall be filled by the remaining directors then in office, though less than a quorum, (d) advance notice of introduction by shareholders of business at annual shareholders' meetings and of shareholder nominations for the election of directors shall be given and that certain information be provided with respect to such matters, (e) shareholder action may be taken only by unanimous written consent or at an annual meeting of shareholders or a special meeting of shareholders called by the President, the Board of Directors or, to the extent required by Kentucky law, shareholders, and (f) the foregoing provisions may be amended only by the approval of the holders of at least 80% of the voting power of the shares of the Company generally entitled to vote. These provisions along with the "fair price" provisions and cumulative voting provisions discussed above and the Rights described below, may deter attempts to change control of the Company (by proxy contest, tender offer or otherwise) and will make more difficult a change in control of the Company that is opposed by the Company's Board of Directors. Liquidation Rights Subject to the prior rights of the holders of the Series A Preferred Stock that may be issued in the future and the possible prior rights of holders of other Preferred Stock that may be issued in the future, in the event of liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Common Stock are entitled to the remaining assets. Other Provisions No holder of Common Stock or any future holder of Preferred Stock has the preemptive right to subscribe for and purchase any part of any new or additional issue of stock or securities convertible into stock. The Common Stock is not subject to redemption and does not have any conversion or sinking fund provisions. The issued and outstanding shares of Common Stock are fully paid and nonassessable shares of Common Stock of the Company. Under the Company's Articles of Incorporation, the Board of Directors may issue additional shares of authorized but unissued Common Stock for such consideration as it may from time to time determine. Rights to Purchase Series A Preferred Stock On December 5, 1990, the Board of Directors of the Company: (i) declared a dividend distribution of one Preferred Stock purchase right (a "Right" or "Rights") for each outstanding share of Common Stock to shareholders of record on December 19, 1990, and issuable as of such Record Date and (ii) further authorized the issuance of one Right with respect to each share of Common Stock of the Company that becomes outstanding after such Record Date and before the Distribution Date (as defined below). The Company declared a three-for-two split of the Common Stock to shareholders of record on 3 April 30, 1992. As a result of the stock split and in accordance with the terms of the Rights, the number of Rights associated with a share of Common Stock was reduced, effective May 15, 1992, from one Right per share to two-thirds of a Right per share. The Company declared a two-for-one split of the Common Stock to shareholders of record on April 1, 1996. As a result of the two-for-one split and in accordance with the terms of the Rights, the number of Rights associated with a share of Common Stock was reduced from two-thirds of a Right per share to one-third of a Right per share, effective April 15, 1996. On June 7, 1995, the Board of Directors approved the First Amendment to Rights Agreement, whereby the definition of "Acquiring Person" (see below) was modified to provide that an "Acquiring Person" shall be any person who has acquired, or obtained the rights to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company. The previous ownership threshold was 20%. In connection with the Merger, on May 20, 1997, the Board of Directors approved the Second Amendment to Rights Agreement so that the execution, delivery and performance of the Merger Agreement and the LG&E Energy Stock Option Agreement (as defined in the Second Amendment to Rights Agreement) will not cause any Rights to become exercisable, cause KU Energy or any of its affiliates to become an "Acquiring Person" or give rise to a "Distribution Date" or "Stock Acquisition Date" (see below). Each whole Right entitles the holder of record to purchase from the Company one one-hundredth of a share of Series A Preferred Stock, without par value, of the Company ("Series A Preferred Stock") at a price of $110 per one one-hundredth of a share (the "Purchase Price"). The description and terms of the Rights are set forth in the Rights Agreement, as amended (the "Rights Agreement"). Initially the Rights will not be exercisable, certificates will not be sent to shareholders and the rights will automatically trade with the Common Stock. The Rights will be evidenced by the Common Stock certificates until the close of business on the earlier to occur of the tenth day following (i) a public announcement (or, if earlier, the date a majority of the Board of Directors of the Company becomes aware) that a person or group of affiliated or associated persons has become an "Acquiring Person", which is defined as a person who has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company (the "Stock Acquisition Date"), or (ii) the commencement of, or public announcement of an intention to commence, a tender or exchange offer the consummation of which would result in the ownership of 15% or more of the outstanding Common Stock (the earlier of the dates in clause (i) or (ii) being called the "Distribution Date"). Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a person who would otherwise be an "Acquiring Person," has become such inadvertently and without any intention of changing or influencing control of the Company, and such person, as promptly as practicable after being advised of such determination, divests himself or itself of beneficial ownership of a sufficient number of shares of Common Stock so that such person would no longer be an "Acquiring Person," then such person shall not be deemed to be an "Acquiring Person" for any purposes of the Rights Agreement. Until the Distribution Date, 4 (i) the Rights will be evidenced by the Common Stock certificates and will be transferred with and only with such Common Stock certificates, (ii) new Common Stock certificates will contain a notation incorporating the Rights Agreement by reference and (iii) the surrender for transfer of any certificates for Common Stock outstanding will also constitute the transfer of the Rights associated with the Common Stock represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Company's Common Stock as of the close of business on the Distribution Date, and such separate certificates alone will evidence the rights from and after the Distribution Date. Each of the following persons (an "Exempt Person") will not be deemed to be an Acquiring Person, even if they have acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding Common Stock of the Company: (i) the Company, any subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or of any subsidiary of the Company; and (ii) any person who becomes an Acquiring Person solely by virtue of a reduction in the number of outstanding shares of Common Stock, unless and until such person shall become the beneficial owner of, or make a tender offer for, any additional shares of Common Stock. The Rights are not exercisable until the Distribution Date. The Rights will expire at the close of business on December 19, 2000, unless earlier redeemed or exchanged by the Company as described below. The Purchase Price payable, and the number of shares of Series A Preferred Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Series A Preferred Stock, (ii) upon the grant to holders of the Series A Preferred Stock of certain rights or warrants to subscribe for Series A Preferred Stock or convertible securities at less than the current market price of the Series A Preferred Stock or (iii) upon the distribution to holders of the Series A Preferred Stock of evidences of indebtedness or assets (excluding dividends payable in Series A Preferred Stock) or of subscription rights or warrants (other than those referred to above). The number of Rights associated with a share of the Company's Common Stock is subject to adjustment from time to time in the event of a stock dividend on, or a subdivision or combination of, the Common Stock. In the event any Person (other than an Exempt Person) becomes the beneficial owner of 15% or more of the then outstanding shares of Common Stock (except pursuant to an offer for all outstanding shares of Common Stock that the independent directors determine to be fair to and otherwise in the best interest of the Company and its shareholders) or any Exempt Person who is the beneficial owner of 15% or more of the outstanding Common Stock fails to continue to qualify as an Exempt Person, then each holder of record of a whole Right, other than the Acquiring Person, will thereafter have the right to receive, upon payment of the Purchase Price, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a market value at the time of the transaction equal to twice the Purchase Price. However, Rights are not exercisable following such event until such time as the Rights are no longer 5 redeemable by the Company as set forth below. Any Rights that are or were at any time, on or after the Distribution Date, beneficially owned by an Acquiring Person shall become null and void. For example, at an exercise price of $110 per Right, each whole Right not owned by an Acquiring Person (or by certain related parties) following an event set forth in the preceding paragraph would entitle its holder to purchase $220 worth of Common Stock (or other consideration, as noted above) for $110. Assuming that the Common Stock had a per share value of $22 at such time, the holder of each valid Right would be entitled to purchase 10 shares of Common Stock for $110. After the Rights have become exercisable, if the Company is acquired in a merger or other business combination (in which any shares of the Company's Common Stock are changed into or exchanged for other securities or assets) or more than 50% of the assets or earning power of the Company and its subsidiaries (taken as a whole) are sold or transferred in one or a series of related transactions, the Rights Agreement provides that proper provision shall be made so that each holder of record of a whole Right will have the right to receive, upon payment of the Purchase Price, that number of shares of common stock of the acquiring company having a market value at the time of such transaction equal to two times the Purchase Price. After any such event, to the extent that insufficient shares of Common Stock are available for the exercise in full of the Rights, holders of Rights will receive upon exercise shares of Common Stock to the extent available and then other securities of the Company, including units of shares of Series A Preferred Stock with rights substantially comparable to those of the Common Stock, property, or cash, in proportions determined by the Company, so that the aggregate value received is equal to twice the Purchase Price. The Company, however, shall not be required to issue any cash, property or debt securities upon exercise of the Rights to the extent their aggregate value would exceed the amount of cash the Company would otherwise be entitled to receive upon exercise in full of the then exercisable Rights. No fractional shares of Series A Preferred Stock or Common Stock will be required to be issued upon exercise of the Rights and, in lieu thereof, a payment in cash may be made to the holder of such Rights equal to the same fraction of the current market value of a share of Series A Preferred Stock or, if applicable, Common Stock. At any time until ten days after the Stock Acquisition Date (subject to extension by the Board of Directors), the Company may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (subject to certain anti-dilution adjustments) (the "Redemption Price"). After such redemption period, the Company's right of redemption may be reinstated, under certain circumstances, if an Acquiring Person reduces his beneficial ownership of Common Stock to below 10% and there is no other Acquiring Person. Immediately upon the action of the Board of Directors of the Company authorizing redemption of the Rights, the right to exercise the rights will terminate, and the only right of the holders of Rights will be to receive the Redemption Price without any interest thereon. The Board of Directors may, at its option, at any time after any Person becomes an Acquiring 6 Person, exchange all or part of the outstanding Rights (other than Rights held by the Acquiring Person and certain related parties) for shares of Common Stock at an exchange ratio of three (3) shares of Common Stock per Right (subject to certain anti-dilution adjustments). However, the Board may not effect such an exchange at any time any Person or group owns 50% or more of the shares of Common Stock then outstanding. Immediately after the Board orders such an exchange, the right to exercise the Rights shall terminate and the holders of Rights shall thereafter only be entitled to receive shares of Common Stock at the applicable exchange ratio. The Board of Directors of the Company may amend the Rights Agreement. After the Distribution Date, however, the provisions of the Rights Agreement may be amended by the Board only to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person or an affiliate or associate of an Acquiring Person), or to shorten or lengthen any time period under the Rights Agreement; provided, however, that no amendment to adjust the time period governing redemption shall be made at such time as the Rights are not redeemable. In addition, no supplement or amendment may be made which changes the Redemption Price, the final expiration date, the Purchase Price or the number one one-hundredths of a share of Series A Preferred Stock for which a Right is exercisable, unless at the time of such supplement or amendment there has been no occurrence of a Stock Acquisition Date and such supplement or amendment does not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an associate or affiliate of an Acquiring Person). Until a Right is exercised, the holder, as such, will have no rights as a shareholder of the Company, including, without limitation, the right to vote or to receive dividends. The issuance of the Rights is not taxable to the Company or to shareholders under presently existing federal income tax law, and will not change the way in which shareholders can presently trade the Company's shares of Common Stock. If the Rights should become exercisable, shareholders, depending on then existing circumstances, may recognize taxable income. The Rights may have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors and, accordingly, will make more difficult a change of control that is opposed by the Company's Board of Directors. However, the Rights should not interfere with a proposed change of control (including a merger or other business combination) approved by a majority of the Board of Directors since the Rights may be redeemed by the Company at the Redemption Price at any time until ten days after the Stock Acquisition Date (subject to extension by the Board of Directors). Thus, the Rights are intended to encourage persons who may seek to acquire control of the Company to initiate such an acquisition through negotiations with the Board of Directors. Nevertheless, the Rights also may discourage a third party from making a partial tender offer or otherwise attempting to obtain a substantial equity position in, or seeking to obtain control of, the Company. To the extent any potential acquirors are deterred by the Rights, the Rights may have the effect of preserving incumbent management in office. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to the Company's Registration Statement on Form S-8, Registration No. 33-38557. A 7 copy of the First Amendment to Rights Agreement has been filed with the SEC as an Exhibit to the Company's Registration Statement on Form 8-A/A, Registration No. 1-10568, filed on June 20, 1995. A copy of the Second Amendment to Rights Agreement has been filed with the SEC as an Exhibit to the Company's Registration Statement on Form S-4, Registration No. 333-34219. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, as amended, which is incorporated in this summary description herein by reference. Miscellaneous The Company's outstanding Common Stock is listed on the New York and Chicago Stock Exchanges. Transfer Agents and Registrar The Transfer Agents for the Common Stock are the Company and Harris Trust and Savings Bank, Chicago, Illinois (effective April 1998). Registrars for the Common Stock are PNC Bank, Kentucky, Inc., Louisville, Kentucky, and Harris Trust and Savings Bank, Chicago, Illinois. 8 -----END PRIVACY-ENHANCED MESSAGE-----