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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1998
Commission Registrant, State of Incorporation, IRS Employer
File Number Address, and Telephone Number Identification Number
- ----------- ----------------------------- ----------------------
1-10568 LG&E ENERGY CORP. 61-1174555
(A Kentucky Corporation)
220 West Main Street
P. O. Box 32030
Louisville, Kentucky 40232
(502) 627-2000
2-26720 LOUISVILLE GAS AND ELECTRIC COMPANY 61-0264150
(A Kentucky Corporation)
220 West Main Street
P. O. Box 32010
Louisville, Kentucky 40232
(502) 627-2000
1-3464 KENTUCKY UTILITIES COMPANY 61-0247570
(A Kentucky and Virginia Corporation)
One Quality Street
Lexington, Kentucky 40507-1428
(606) 255-2100
Securities registered pursuant to section 12(b) of the Act:
LG&E ENERGY CORP.
-----------------
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, without par value New York Stock Exchange
and
Rights to Purchase Series A Preferred Chicago Stock Exchange
Stock, without par value
LOUISVILLE GAS AND ELECTRIC COMPANY
-----------------------------------
Name of each exchange on
Title of each class which registered
------------------- ----------------
First Mortgage Bonds, Series due
July 1, 2002, 7 1/2% New York Stock Exchange
<PAGE>
KENTUCKY UTILITIES COMPANY
--------------------------
Name of each exchange on
Title of each class which registered
------------------- ----------------
Preferred Stock, 4 3/4% cumulative, Philadelphia Stock Exchange
tated value $100 per share
Securities registered pursuant to section 12(g) of the Act:
LOUISVILLE GAS AND ELECTRIC COMPANY
-----------------------------------
5% Cumulative Preferred Stock, $25 Par Value
$5.875 Cumulative Preferred Stock, Without Par Value
Auction Rate Series A Preferred Stock, Without Par Value
(Title of class)
KENTUCKY UTILITIES COMPANY
--------------------------
Preferred Stock, cumulative, stated value $100 per share
(Title of class)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 26, 1999, the aggregate market value of LG&E Energy Corp.'s
voting common stock held by non-affiliates totaled $2,915,904,217, and it had
129,677,030 shares of common stock outstanding. As of February 26, 1999, the
aggregate market value of Louisville Gas and Electric Company's voting preferred
stock held by non-affiliates totaled $18,066,027, and it had 21,294,223 shares
of common stock outstanding, all held by LG&E Energy Corp, and 860,287 shares of
voting preferred stock outstanding. As of February 26, 1999, the aggregate
market value of Kentucky Utility Company's voting stock held by non-affiliates
totaled zero, and it had 37,817,878 shares of common stock outstanding, all held
by LG&E Energy Corp.
This combined Form 10-K is separately filed by LG&E Energy Corp., Louisville Gas
and Electric Company and Kentucky Utilities Company. Information contained
herein related to any individual registrant is filed by such registrant on its
own behalf. Each registrant makes no representation as to information relating
to the other registrants. In particular, information contained herein related to
LG&E Energy Corp. or any of its direct or indirect subsidiaries other than
Louisville Gas and Electric Company or Kentucky Utilities Company is provided
solely by LG&E Energy Corp., not Louisville Gas and Electric Company or Kentucky
Utilities Company, and shall be deemed not included in the Form 10-K of
Louisville Gas and Electric Company or the Form 10-K of Kentucky Utilities
Company.
DOCUMENTS INCORPORATED BY REFERENCE
LG&E Energy Corp.'s proxy statement, filed with the Commission on March 26,
1999, and Louisville Gas and Electric Company's proxy statement, filed with the
Commission on March 26, 1999, are incorporated by reference into Part III of
this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business........................................................ 1
Overview of Operations.......................................... 1
Merger with KU Energy Corporation............................... 1
Discontinuance of Merchant Energy Trading and Sales Business.... 1
Louisville Gas and Electric Company
General..................................................... 3
Electric Operations......................................... 4
Gas Operations.............................................. 6
Rates and Regulation........................................ 7
Construction Program and Financing..........................10
Coal Supply.................................................10
Gas Supply..................................................11
Environmental Matters.......................................11
Competition.................................................11
Kentucky Utilities Company
General.....................................................12
Electric Operations.........................................13
Rates and Regulation........................................14
Construction Program and Financing..........................16
Coal Supply.................................................17
Environmental Matters.......................................17
LG&E Capital Corp...............................................18
Independent Power Operations....................................18
Western Kentucky Energy.........................................20
Argentine Gas Distribution Division.............................22
Discontinued Operations.........................................23
Employees and Labor Relations...................................24
Item 2. Properties......................................................25
Item 3. Legal Proceedings...............................................29
Item 4. Submission of Matters to a Vote of Security Holders.............31
Executive Officers of the Company..........................................32
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................39
Item 6. Selected Financial Data.........................................40
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition:
LG&E Energy Corp.........................................44
Louisville Gas and Electric Company......................62
Kentucky Utilities Company...............................73
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.....................................................83
Item 8. Financial Statements and Supplementary Data:
LG&E Energy Corp.........................................84
Louisville Gas and Electric Company.....................127
Kentucky Utilities Company..............................152
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.....................172
<PAGE>
TABLE OF CONTENTS (CONT.)
PART III
Item 10. Directors and Executive Officers of the Registrant (a)........172
Item 11. Executive Compensation (a)....................................172
Item 12. Security Ownership of Certain Beneficial Owners
and Management (a).......................................172
Item 13. Certain Relationships and Related Transactions (a)............172
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K..................................172
Signatures .........................................................198
(a) Incorporated by reference.
<PAGE>
PART I.
Item 1. Business.
OVERVIEW OF OPERATIONS
LG&E Energy Corp. (the Company or LG&E Energy), incorporated November 14, 1989,
is a diversified energy-services holding company with three direct subsidiaries:
Louisville Gas and Electric Company (LG&E), Kentucky Utilities Company (KU) and
LG&E Capital Corp. (Capital Corp.). The Company's domestic regulated operations
are conducted by LG&E and KU.
The Company and its subsidiaries currently are exempt from all provisions,
except Section 9(a)(2), of the Public Utility Holding Company Act of 1935 (the
"Holding Company Act") on the basis that the Company, LG&E and KU are
incorporated in the same state and their business is predominately intrastate in
character and carried on substantially in the state of incorporation.
The Company is not a public utility under the laws of the Commonwealth of
Kentucky and is not subject to regulation as such by the Kentucky Public Service
Commission (Kentucky Commission) or the Virginia State Corporation Commission
(Virginia Commission). See LG&E - Rates and Regulation and - Rates and
Regulation for descriptions of the regulation of LG&E and KU by the Kentucky
Commission, and of KU by the Virginia Commission, which includes the ability to
regulate certain intercompany transactions between LG&E, KU and the Company,
including the Company's non-utility subsidiaries.
MERGER WITH KU ENERGY CORPORATION
Effective May 4, 1998, following the receipt of all required state and federal
regulatory approvals, LG&E Energy and KU Energy Corporation (KU Energy) merged,
with LG&E Energy as the surviving corporation. The accompanying consolidated
financial statements reflect the accounting for the merger as a pooling of
interests and are presented as if the companies were combined as of the earliest
period presented. However, the financial information is not necessarily
indicative of the results of operations, financial position or cash flows that
would have occurred had the merger been consummated for the periods for which it
is given effect, nor is it necessarily indicative of future results of
operations, financial position, or cash flows. The financial statements reflect
the conversion of each outstanding share of KU Energy common stock into 1.67
shares of LG&E Energy common stock. The outstanding preferred stock of LG&E and
KU were not affected by the Merger. See Note 2 of LG&E Energy Corp.'s Notes to
Financial Statements under Item 8.
DISCONTINUANCE OF MERCHANT ENERGY TRADING AND SALES BUSINESS
Effective June 30, 1998, the Company discontinued its merchant energy trading
and sales business. This business consisted primarily of a portfolio of energy
marketing contracts entered into in 1996 and early 1997, nationwide deal
origination and some level of speculative trading activities, which were not
directly supported by the Company's physical assets. The Company's decision to
discontinue these operations was primarily based on the impact that volatility
and rising prices in the power market had on its portfolio of energy marketing
contracts. Exiting the merchant energy trading and sales business enables the
Company to focus on optimizing the value of physical assets it owns or controls,
and to reduce the earnings impact on continuing operations of extreme market
volatility in its portfolio of energy marketing contracts. The Company is in the
process of settling commitments that obligate it to buy and sell natural gas and
electric power. It also plans to sell its natural gas gathering and processing
business. If the Company is unable to dispose of these commitments or assets it
will continue to meet its obligations under the contracts. The Company, however,
has maintained sufficient market knowledge, risk management skills, technical
systems and experienced personnel to maximize
1
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the value of power sales from physical assets it owns or controls, including
LG&E, KU and the Big Rivers Electric Corporation (Big Rivers).
As a result of the Company's decision to discontinue its merchant energy trading
and sales activity, and the decision to sell the associated gas gathering and
processing business, the Company recorded an after-tax loss on disposal of
discontinued operations of $225 million in the second quarter of 1998. The loss
on disposal of discontinued operations results primarily from several
fixed-price energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power Corporation
(OPC). Other components of the write-off include costs relating to certain
peaking options, goodwill associated with the Company's 1995 purchase of
merchant energy trading and sales operations and exit costs, including labor and
related benefits, severance and retention payments, and other general and
administrative expenses. Although the Company used what it believes to be
appropriate estimates for future energy prices among other factors to calculate
the net realizable value of discontinued operations, it also recognizes that
there are inherent limitations in models to accurately predict future events. As
a result, there is no guarantee that higher-than-anticipated future commodity
prices or load demands, lower- than-estimated asset sales prices or other
factors could not result in additional losses. The Company has been successful
in settling portions of its discontinued operations, but significant assets,
operations and obligations remain. As of January 27, 1999, the Company estimates
that a $1 change in electricity prices and a 10 cent change in natural gas
prices across all geographic areas and time periods could change the value of
the Company's remaining energy portfolio by approximately $8.8 million. In
addition to price risk, the value of the Company's remaining energy portfolio is
subject to operational and event risks including, among others, increases in
load demand, regulatory changes, and forced outages at units providing supply
for the Company. As of January 27, 1999, the Company estimates that a 1% change
in the forecasted load demand could change the value of the Company's remaining
energy portfolio by $9.3 million. See Notes 3 and 18 of LG&E Energy Corp.'s
Notes to Financial Statements under Item 8.
The Company reclassified its financial statements for prior periods to present
the operating results, financial position and cash flows of these businesses as
discontinued operations. See Notes 1 and 3 of LG&E Energy Corp.'s Notes to
Financial Statements under Item 8 for more information.
LEASE OF BIG RIVERS FACILITIES
On July 15, 1998, the Company closed the transaction to lease the generating
assets of Big Rivers following receipt of necessary regulatory approvals. Under
the 25-year operating lease, Western Kentucky Energy Corp. and its affiliates
(WKE) are leasing and operating Big Rivers' three coal-fired facilities. In
addition, WKE operates and maintains the Station Two generating facility of the
City of Henderson (Henderson). The combined generating capacity of these
facilities amounts to approximately 1,700 megawatts (Mw), net of the Henderson's
capacity and energy needs from Station Two. In related transactions, power is
supplied to Big Rivers at contractual prices over the term of the lease to meet
the needs of four member distribution cooperatives and their retail customers,
including major western Kentucky aluminum smelters. Excess generating capacity
is available to WKE to market throughout the region. In connection with these
transactions, WKE has undertaken to bear certain of the future capital
requirements of those generating assets, certain defined environmental
compliance costs and other obligations. Big Rivers' personnel at the plants
became employees of WKE upon the completion of the transactions. See Note 4 of
LG&E Energy Corp.'s Notes to Financial Statements under Item 8.
2
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LOUISVILLE GAS AND ELECTRIC COMPANY
General
Incorporated on July 2, 1913, LG&E is a regulated public utility that supplies
natural gas to approximately 289,000 customers and electricity to approximately
360,000 customers in Louisville and adjacent areas in Kentucky. LG&E's service
area covers approximately 700 square miles in 17 counties and has an estimated
population of one million. Included in this area is the Fort Knox Military
Reservation, to which LG&E transports gas and provides electric service, but
which maintains its own distribution systems. LG&E also provides gas service in
limited additional areas. LG&E's coal-fired electric generating plants, which
are all equipped with systems to reduce sulfur dioxide emissions, produce most
of LG&E's electricity. The remainder is generated by a hydroelectric power plant
and combustion turbines. Underground natural gas storage fields help LG&E
provide economical and reliable gas service to customers.
LG&E's Trimble County Unit 1 (Trimble County), a 495-Mw, coal-fired electric
generating unit was placed in commercial operation in December 1990. In December
1995, the Commission approved a settlement agreement that excluded 25% of the
Trimble County costs from customer rates. LG&E owns a 75% undivided interest in
Trimble County. See Electric Operations under Item 1, Note 13 of LG&E's Notes to
Financial Statements and Note 19 of LG&E Energy Corp.'s Notes to Financial
Statements under Item 8.
In September 1998, the U.S. Environmental Protection Agency announced its final
regulation requiring significant additional reductions in nitrogen oxide (NOx)
emissions to mitigate alleged ozone transport to the Northeast. While each state
is free to allocate its assigned NOx reductions among various emissions sectors
as it deems appropriate, the regulation may ultimately require utilities to
reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units) -
an 85% reduction from 1990 levels. Under the regulation, each state must
incorporate the additional NOx reductions in its State Implementation Plan (SIP)
by September 1999 and affected sources must install control measures by May
2003, unless granted extensions. Several states, various labor and industry
groups, and individual companies have appealed the final regulation to the U.S.
Court of Appeals for the D.C. Circuit. Management is currently unable to
determine the outcome or exact impact of this matter until such time as the
states identify specific emissions reductions in their SIPs and the courts rule
on the various legal challenges to the final rule. However, if the 0.15 lb.
target is ultimately imposed, LG&E will be required to incur significant capital
expenditures and increased operation and maintenance costs for additional
controls.
Subject to further study and analysis, LG&E estimates that it may incur capital
costs in the range of $100 million to $200 million. These costs would generally
be incurred beginning in 2000. LG&E believes its costs in this regard to be
comparable to those of similarly situated utilities with like generation assets.
LG&E anticipates that such capital and operating costs are the type of costs
that are eligible for cost recovery from customers under its environmental
surcharge mechanism and believes that a significant portion of such costs could
be recovered. However, Kentucky Commission approval is necessary and there can
be no guarantee of such recovery.
3
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For the year ended December 31, 1998, 77% of total operating revenues was
derived from electric operations and 23% from gas operations. Electric and gas
operating revenues and the percentages by classes of service on a combined basis
for this period were as follows:
<TABLE>
<CAPTION>
(Thousands of $)
Electric Gas Combined %Combined
-------- --- -------- ---------
<S> <C> <C> <C> <C>
Residential $213,476 $113,430 $326,906 45%
Commercial 170,954 40,888 211,842 29
Industrial 113,372 11,969 125,341 17
Public authorities 55,075 8,884 63,959 9
-------- -------- -------- ---
Total retail 552,877 175,171 728,048 100%
---
---
Wholesale sales 99,340 8,720 108,060
Gas transported - net - 6,926 6,926
Provision for rate refund - ECR (4,500) - (4,500)
Miscellaneous 10,794 728 11,522
-------- -------- --------
Total $658,511 $191,545 $850,056
-------- -------- --------
-------- -------- --------
</TABLE>
See Note 14 of LG&E's Notes to Financial Statements and Note 20 of LG&E Energy
Corp.'s Notes to Financial Statements under Item 8 for financial information
concerning segments of business for the three years ended December 31, 1998.
Electric Operations
The sources of LG&E's electric operating revenues and the volumes of sales for
the three years ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ELECTRIC OPERATING REVENUES
(Thousands of $):
Residential $213,476 $205,137 $202,318
Small commercial and industrial 76,304 72,769 74,034
Large commercial 94,650 90,131 88,993
Large industrial 113,372 110,652 110,914
Public authorities 55,075 53,412 54,318
-------- -------- --------
Total retail 552,877 532,101 530,577
Wholesale sales 99,340 70,942 67,854
Provision for rate refund - ECR (4,500) - -
Miscellaneous 10,794 11,489 8,265
-------- -------- --------
Total $658,511 $614,532 $606,696
-------- -------- --------
-------- -------- --------
ELECTRIC SALES (Thousands of mwh):
Residential 3,534 3,302 3,382
Small commercial and industrial 1,156 1,108 1,131
Large commercial 1,977 1,880 1,850
Large industrial 3,097 3,054 3,059
Public authorities 1,140 1,105 1,122
------ ------ ------
Total retail 10,904 10,449 10,544
Wholesale sales 4,970 3,800 3,589
------ ------ ------
Total 15,874 14,249 14,133
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1998, LG&E had 360,024 electric customers.
4
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LG&E uses efficient coal-fired boilers that are fully equipped with sulfur
dioxide removal systems to generate electricity. LG&E's system wide emission
weighted-average rate for sulfur dioxide in 1998 was approximately .97
lbs./MMBtu of heat input, which is significantly below the Phase II limit of 1.2
lbs./MMBtu established by the Clean Air Act Amendments of 1990 for the year
2000.
The 1998 maximum local peak load of 2,427 Mw occurred on Tuesday, August 25,
1998, when the temperature at the time was 94(degree)F. Prior to 1998, the
record local peak load was 2,414 Mw (set on July 21, 1997).
The electric utility business is affected by seasonal weather patterns. As a
result, operating revenues (and associated operating expenses) are not generated
evenly throughout the year. See LG&E's Results of Operations under Item 7.
LG&E's current reserve margin is 14%. At December 31, 1998, LG&E owned steam and
combustion turbine generating facilities with a capacity of 2,512 Mw and an 80
Mw hydroelectric facility on the Ohio River. See Item 2, Properties.
LG&E is a participating owner with 14 other electric utilities of Ohio Valley
Electric Corporation whose primary customer is the Portsmouth Area
uranium-enrichment complex of the U.S. Department of Energy at Piketon, Ohio.
LG&E has direct interconnections with 11 utility companies in the area and has
agreements with each interconnected utility for the purchase and sale of
capacity and energy. LG&E also has agreements with an increasing number of
entities throughout the United States for the purchase and/or sale of capacity
and energy and for the utilization of their bulk transmission system.
The Illinois Municipal Electric Agency (IMEA), based in Springfield, Illinois,
which is an agency of 35 municipalities that own and operate their own electric
systems, has a 12.12% ownership interest in LG&E's Trimble County Unit 1. The
Indiana Municipal Power Agency (IMPA), based in Carmel, Indiana, has a 12.88%
interest in the Trimble County Unit. IMPA is composed of 31 municipalities that
have joined together to meet their long-term electric power needs. Both IMEA and
IMPA pay their proportionate share for operation and maintenance expenses of
Trimble County and for fuel and reactant used. They are also responsible for
their proportionate share of incremental capital assets acquired. See Note 13 of
LG&E's Notes to Financial Statements and Note 19 of LG&E Energy Corp.'s Notes to
Financial Statements under Item 8 for a further discussion.
5
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Gas Operations
The sources of LG&E's gas operating revenues and the volumes of sales for the
three years ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GAS OPERATING REVENUES
(Thousands of $):
Residential $113,430 $139,967 $125,327
Commercial 40,888 52,440 47,415
Industrial 11,969 17,892 21,229
Public authorities 8,884 12,052 11,731
-------- -------- --------
Total retail 175,171 222,351 205,702
Wholesale sales 8,720 - -
Gas transported - net 6,926 6,997 6,850
Miscellaneous 728 1,663 1,867
-------- -------- --------
Total $191,545 $231,011 $214,419
-------- -------- --------
-------- -------- --------
GAS SALES (Millions of cu. ft.):
Residential 20,040 24,038 25,531
Commercial 8,448 10,212 10,656
Industrial 2,860 3,948 5,190
Public authorities 1,967 2,467 2,790
-------- -------- --------
Total retail 33,315 40,665 44,167
Wholesale sales 3,880 - -
Gas transported 13,027 13,452 12,540
-------- -------- --------
Total 50,222 54,117 56,707
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1998, LG&E had 288,777 gas customers.
The gas utility business is affected by seasonal weather patterns. As a result,
operating revenues (and associated operating expenses) are not generated evenly
throughout the year. See LG&E's Results of Operations under Item 7.
LG&E has underground natural gas storage fields that help provide economical and
reliable gas service to ultimate consumers.
By using gas storage fields strategically, LG&E can buy gas when prices are low,
store it, and retrieve the gas when demand is high. Accessing least cost gas was
made easier in November 1993 when the Federal Energy Regulatory Commission Order
No. 636 went into effect. Previously, LG&E and other utilities purchased most of
their gas services from pipeline companies. The order "unbundled" gas services,
allowing utilities to purchase gas, transportation, and storage services
separately from many different sources. Currently, LG&E buys competitively
priced gas from several large producers under contracts of varying duration. By
purchasing from multiple suppliers and storing any excess gas, LG&E is able to
secure favorably priced gas for its customers. Without storage capacity, LG&E
would be forced to buy additional gas when customer demand increases, which is
usually when the price is highest.
A number of industrial customers purchase their natural gas requirements
directly from alternate suppliers for delivery through LG&E's distribution
system. Generally, transportation of natural gas for LG&E's customers does not
have an adverse effect on earnings because of the offsetting decrease in gas
supply expenses. Transportation rates are designed to make LG&E economically
indifferent as to whether gas is sold or merely transported.
6
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The all-time maximum day gas sendout of 545,000 Mcf occurred on Sunday, January
20, 1985, when the average temperature for the day was -11(degree)F. During
1998, the maximum day gas sendout was 425,000 Mcf, occurring on March 11, when
the average temperature for the day was 20(degree)F. Supply on that day
consisted of 105,000 Mcf from purchases, 263,000 Mcf delivered from underground
storage, and 57,000 Mcf transported for industrial customers.
For a further discussion, see Gas Supply under Item 1.
Rates and Regulation
The Kentucky Commission has regulatory jurisdiction over the rates and service
of LG&E and over the issuance of certain of its securities. The Kentucky
Commission has the ability to examine the rates LG&E charges its retail
customers at any time. LG&E is a "public utility" as defined in the Federal
Power Act, and is subject to the jurisdiction of the Department of Energy and
the FERC with respect to the matters covered in such Act, including the sale of
electric energy at wholesale in interstate commerce. In addition, the FERC has
sole jurisdiction over the issuance by LG&E of short-term securities.
For a discussion of current regulatory matters, see Rates and Regulation for
LG&E and LG&E Energy Corp. under Item 7 and Note 3 of LG&E's Notes to Financial
Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial Statements under
Item 8.
Increases and decreases in the cost of fuel for electric generation are
reflected in the rates charged to all of LG&E's electric customers by means of
LG&E's fuel adjustment clause (FAC). The Kentucky Commission requires public
hearings at six-month intervals to examine past fuel adjustments, and at
two-year intervals to review past operations of the fuel clause and transfer of
the then current fuel adjustment charge or credit to the base charges. The
Commission also requires that electric utilities, including LG&E, file certain
documents relating to fuel procurement and the purchase of power and energy from
other utilities.
As of February 12, 1999, LG&E received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC for the period from November 1994 through
April 1998. LG&E estimates up to an additional $1.3 million could be refundable
to retail electric customers for the period from May 1998 through December 1998.
See Note 3 of LG&E's Notes to Financial Statements and Note 5 of LG&E Energy
Corp.'s Notes to Financial Statements under Item 8.
LG&E filed a Petition of Rehearing of all of the orders and a motion to suspend
the refund obligation. On February 25, 1999, the Commission suspended the
obligation to refund pending further direction by the Commission. It also
advised that LG&E may have to pay interest on the refund amounts for the
suspension period. On March 11, 1999 the Commission denied LG&E's Petition for
Rehearing for the period November 1994 through October 1996 and directed LG&E to
reduce future fuel expense by $1.9 million in the first billing month after the
Order. The Company is considering the filing of an Appeal with the Franklin
Circuit Court. In a separate series of Orders on March 11, 1999, the PSC granted
LG&E's Petition for Rehearing for the period November 1996 through April 1998
and established a procedural schedule for LG&E and other parties to submit
evidence and for a hearing before the Commission. In the same Orders the PSC
granted the Petition for Rehearing of the Kentucky Industrial Utility Customers
to determine if interest should be paid on any fuel refunds for this latter
period.
LG&E's gas rates contain a gas supply clause (GSC), whereby increases or
decreases in the cost of gas supply are reflected in LG&E's rates, subject to
approval of the Kentucky Commission. The GSC procedure prescribed by order of
the Commission provides for quarterly rate adjustments to reflect the expected
cost of gas supply in that quarter. In addition, the GSC contains a mechanism
whereby any over- or under-recoveries of gas supply cost from prior quarters
will be refunded to or recovered from customers through the adjustment factor
determined for subsequent quarters.
7
<PAGE>
In May 1995, LG&E implemented an environmental cost recovery (ECR) surcharge to
recover certain environmental compliance costs, including costs to comply with
the 1990 Clean Air Act, as amended, and other environmental regulations,
including those applicable to coal combustion wastes and related by-products.
The ECR mechanism was authorized by state statute in 1992 and was first approved
by the Kentucky Commission in a KU case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by LG&E be subject to refund
pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying
recovery through the ECR of costs associated with pre-1993 environmental
projects. The court remanded the case to the Commission to determine the proper
adjustments to refund amounts collected for such pre-1993 environmental
projects. The parties to the proceeding have notified the Commission that they
have reached agreement as to the terms, proper adjustments and forward
application of the ECR. The settlement agreement is subject to Commission
approval. LG&E recorded a provision for rate refund of $4.5 million in December
1998. See Rates and Regulation for LG&E and LG&E Energy Corp. under Item 7 for a
further discussion.
Integrated resource planning regulations in Kentucky require LG&E and the other
major utilities to make triennial filings with the Kentucky Commission of
various historical and forecasted information relating to forecasted load,
capacity margins and demand-side management techniques.
Pursuant to Kentucky law, the Kentucky Commission has established the boundaries
of the service territory or area of each retail electric supplier in Kentucky
(including LG&E), other than municipal corporations, within which each such
supplier has the exclusive right to render retail electric service.
In January 1994, LG&E implemented a Commission-approved demand side management
(DSM) program that LG&E, the Jefferson County Attorney, and representatives of
several customer interest groups had filed with the Commission. The program
included a rate mechanism that (1) provided LG&E concurrent recovery of DSM
costs, (2) provided an incentive for implementing DSM programs and (3) allowed
LG&E to recover revenues from lost sales associated with the DSM program
(decoupling). In June 1998, LG&E and customer interest groups requested an end
to the decoupling rate mechanism. On June 1, 1998, LG&E discontinued recording
revenues from lost sales due to DSM. Accrued decoupling revenues recorded for
periods prior to June 1, 1998, will continue to be collected through the DSM
recovery mechanism. In September 1998, the Commission accepted LG&E's modified
tariff reflecting this proposal effective as of June 1, 1998. See Rates and
Regulation for LG&E and LG&E Energy Corp. under Item 7 for a discussion of
Commission approved changes to the original program and requested revisions
pending before the Commission.
In October 1997, LG&E implemented a Commission-approved, experimental
performance-based ratemaking mechanism related to gas procurement activities and
off-system gas sales. During the three-year test period beginning October 1997,
rate adjustments related to this mechanism will be determined for each 12-month
period beginning November 1 and ending October 31. During the first year of
operation of the mechanism LG&E recorded $3.6 million for its share of reduced
gas costs. The $3.6 million will be billed to customers through the gas supply
clause beginning February 1, 1999.
8
<PAGE>
In October 1998, LG&E and KU filed separate, but parallel applications with the
Commission for approval of a new method of determining electric rates that
provides financial incentives for LG&E and KU to further reduce customers'
rates. The filing was made pursuant to the September 1997 Commission order
approving the merger of LG&E Energy and KU Energy, wherein the Commission
directed LG&E and KU to indicate whether they desired to remain under
traditional rate of return regulation or commence non-traditional regulation.
The new ratemaking method, known as performance-based ratemaking (PBR), would
include financial incentives for LG&E and KU to reduce fuel costs and increase
generating efficiency, and to share any resulting savings with customers.
Additionally, the PBR provides financial penalties and rewards to assure
continued high quality service and reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the difference
will be absorbed by LG&E Energy's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to $10
million annually of benefits from this performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to LG&E Energy of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision likely will occur in 1999.
Several intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR.
On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint
with the Kentucky Commission alleging that LG&E's electric rates are excessive
and should be reduced by an amount between $43 and $90 million and that the
Kentucky Commission establish a proceeding to reduce LG&E's electric rates. LG&E
has asked the Kentucky Commission to dismiss the Complaint.
LG&E is not able to predict the ultimate outcome of these proceedings, however,
should the Commission mandate significant rate reductions at LG&E, through the
PBR proposal or otherwise, such actions could have a material effect on LG&E's
financial condition and results of operations.
As part of the corporate reorganization whereby LG&E became the subsidiary of
LG&E Energy, LG&E obtained the approval of the Kentucky Commission. The order of
the Kentucky Commission authorizing LG&E to reorganize into a holding company
structure contains certain provisions, which, among other things, ensure the
Kentucky Commission access to books and records of LG&E Energy and its
affiliates which relate to transactions with LG&E; requires LG&E Energy and its
subsidiaries to employ accounting and other procedures and controls to
9
<PAGE>
protect against subsidization of non-utility activities by LG&E's customers; and
precludes LG&E from guaranteeing any obligations of LG&E Energy without prior
written consent from the Kentucky Commission. In addition, the order provides
that LG&E's Board of Directors has the responsibility to use its dividend policy
consistent with preserving the financial strength of LG&E and that the Kentucky
Commission, through its authority over LG&E's capital structure, can protect
LG&E's ratepayers from the financial effects resulting from non-utility
activities.
Construction Program and Financing
LG&E's construction program is designed to ensure that there will be adequate
capacity and reliability to meet the electric and gas needs of its service area.
These needs are continually being reassessed and appropriate revisions are made,
when necessary, in construction schedules. LG&E's estimates of its construction
expenditures can vary substantially due to numerous items beyond LG&E's control,
such as changes in rates, economic conditions, construction costs, and new
environmental or other governmental laws and regulations.
During the five years ended December 31, 1998, gross property additions amounted
to $546 million. Internally generated funds for the five-year period were
sufficient to provide for all of these gross additions. The gross additions
during this period amounted to approximately 20% of total utility plant at
December 31, 1998, and consisted of $405 million for electric properties and
$141 million for gas properties. Gross retirements during the same period were
$112 million, consisting of $91 million for electric properties and $21 million
for gas properties.
Coal Supply
Over 90% of LG&E's present electric generating capacity is coal-fired, the
remainder being made up of a hydroelectric plant and combustion turbine peaking
units fueled by natural gas and oil. Coal will be the predominant fuel used by
LG&E in the foreseeable future, with natural gas and oil being used for peaking
capacity and flame stabilization in coal-fired boilers or in emergencies. LG&E
has no nuclear generating units and has no plans to build any in the foreseeable
future. LG&E has entered into coal supply agreements with various suppliers for
coal deliveries for 1999 and beyond. LG&E normally augments its coal supply
agreements with spot market purchases which, during 1998, were about 21% of
total purchases. LG&E has a coal inventory policy which it believes provides
adequate protection under most contingencies. LG&E had on hand at December 31,
1998, a coal inventory of approximately 1,015,000 tons, or a 56 day supply.
LG&E expects, for the foreseeable future, to continue purchasing most of its
coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky,
southwest Indiana, West Virginia and Ohio. The abundant supply of this
relatively low priced coal, combined with present and future desulfurization
technologies, is expected to enable LG&E to continue to provide adequate
electric service in a manner acceptable under existing environmental laws and
regulations.
Coal is delivered for LG&E's Mill Creek plant by rail and barge; Trimble County
plant by barge and Cane Run plant by rail. Starting the second half of 2000,
Cane Run is also expected to have the capability for barge delivery of coal.
The average delivered cost of coal purchased by LG&E, per ton and per million
Btu, for the periods shown were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Per ton $22.38 $21.66 $21.73
Per million Btu .98 .94 .97
</TABLE>
10
<PAGE>
The delivered cost of coal is expected to decrease during 1999.
Gas Supply
LG&E purchases transportation services from Texas Gas Transmission Corporation
(Texas Gas) and Tennessee Gas Pipeline Company (Tennessee). LG&E purchases
natural gas supplies from multiple sources under contracts for varying periods
of time.
During 1997, Texas Gas filed with FERC for a change in its rates as required
under the settlement in its last rate case. LG&E participated in that and other
proceedings, as appropriate. Resolution of that rate case took place in 1998
when the settlement was approved effective December 1. LG&E received a refund of
$1.5 million from Texas Gas in January 1999 which will be refunded to customers
in 1999.
LG&E transports on the Texas Gas system under No-Notice Service (NNS) and Firm
Transportation (FT) rates. During the winter months, LG&E has 184,900 MMBtu per
day in NNS. LG&E's summer NNS levels are 60,000 MMBtu per day and its summer FT
levels are 54,000 MMBtu per day. Each of these NNS and FT agreements with Texas
Gas expire in equal portions in 2000, 2001, and 2003. LG&E also transports on
the Tennessee system under Tennessee's Rate FT-A. LG&E's contract levels with
Tennessee are 51,000 MMBtu per day annually. The FT-A agreement with Tennessee
expires 2002.
LG&E also has a portfolio of supply arrangements with various suppliers in order
to meet its firm sales obligations. These gas supply arrangements include
pricing provisions which are market-responsive. These firm supplies, in tandem
with pipeline transportation services, provide the reliability and flexibility
necessary to serve LG&E's customers.
LG&E operates five underground gas storage fields with a current working gas
capacity of 14.6 million Mcf. Gas is purchased and injected into storage during
the summer season and is then withdrawn to supplement pipeline supplies to meet
the gas-system load requirements during the winter heating season.
The estimated maximum deliverability from storage during the early part of the
1998-1999 heating season was approximately 373,000 Mcf per day. Deliverability
decreases during the latter portion of the heating season as the storage
inventory is reduced by seasonal withdrawals.
The average cost per Mcf of natural gas purchased by LG&E was $3.05 in 1998 and
$3.46 in each of 1997 and 1996.
Environmental Matters
Protection of the environment is a major priority for LG&E. LG&E engages in a
variety of activities within the jurisdiction of federal, state, and local
regulatory agencies. Those agencies have issued LG&E permits for various
activities subject to air quality, water quality, and waste management laws and
regulations. For the five year period ending with 1998, expenditures for
pollution control facilities represented $106 million or 19% of total
construction expenditures. See Note 12 of LG&E's Notes to Financial Statements
and Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8
for a discussion of specific environmental proceedings affecting LG&E.
Competition
In the last several years, LG&E has taken many steps to prepare for the expected
increase in competition in its industry, including a reduction in the number of
employees; aggressive cost cutting; write-offs of previously deferred expenses;
an increase in focus on not only commercial and industrial customers, but
residential customers
11
<PAGE>
as well; an increase in employee involvement and training;
a major realignment and formation of new business units, and continuous
modifications of its organizational structure. LG&E could take additional steps
like these to better position itself for competition in the future.
KENTUCKY UTILITIES COMPANY
General
KU was incorporated in Kentucky in 1912 and incorporated in Virginia in 1991. KU
is a public utility engaged in producing, transmitting and selling electric
energy. KU provides electric service to about 449,000 customers in over 600
communities and adjacent suburban and rural areas in 77 counties in central,
southeastern and western Kentucky, and to about 29,000 customers in 5 counties
in southwestern Virginia. In Virginia, KU operates under the name Old Dominion
Power Company. KU operates under appropriate franchises in substantially all of
the 160 Kentucky incorporated municipalities served. No franchises are required
in unincorporated Kentucky or Virginia communities. The lack of franchises is
not expected to have a material adverse effect on KU's operations. KU also sells
wholesale electric energy to 12 municipalities.
In September, 1998, the U.S. Environmental Protection Agency (USEPA) announced
its final regulation requiring significant additional reductions in nitrogen
oxide (NOx) emissions to mitigate alleged ozone transport to the Northeast.
While each state is free to allocate its assigned NOx reductions among various
emissions sectors as it deems appropriate, the regulation may ultimately require
utilities to reduce their NOx emissions to 0.15 lb./MMBTU - an 85% reduction
from 1990 levels. Under the regulation, each state must incorporate the
additional NOx reductions in its State Implementation Plan (SIP) by September
1999 and affected sources must install control measures by May 2003, unless
granted extensions. Several states, various labor and industry groups, and
individual companies have appealed the final regulation to the U.S. Court of
Appeals for the D.C. Circuit. Management is currently unable to determine the
outcome or exact impact of this matter until such time as the states identify
specific emissions reductions in their SIP and the courts rule on the various
legal challenges to the final rule. However, if the 0.15 lb. target is
ultimately imposed, KU will be required to incur significant capital
expenditures and increased operation and maintenance costs for additional
controls.
Subject to further study and analysis, KU estimates that it may incur capital
costs of approximately $100 to $200 million. These costs would generally be
incurred beginning in 2000. KU believes its costs for these matters to be
comparable to those of similarly situated utilities with like generation assets.
KU anticipates that such capital and operating costs are the type of costs that
are eligible for cost recovery from customers under its environmental surcharge
mechanisms and believes that a significant portion of such costs could be so
recovered. However, Kentucky Commission approval is necessary and there can be
no guarantee of such recovery.
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<PAGE>
Electric Operations
The sources of KU's electric operating revenues and the volumes of sales for the
three years ended December 31, 1998, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
ELECTRIC OPERATING REVENUES
(Thousands of $):
Residential $238,898 $231,824 $236,229
Commercial 158,549 150,794 150,640
Industrial 154,662 146,801 136,856
Mine Power 31,697 34,541 34,014
Public authorities 58,814 56,243 56,023
-------- -------- --------
Total - ultimate consumers 642,620 620,203 613,762
Wholesale sales 179,118 87,330 89,208
Provision for rate refund - ECR (21,500) - -
Miscellaneous 9,876 8,904 8,741
-------- -------- --------
Total $810,114 $716,437 $711,711
-------- -------- --------
-------- -------- --------
ELECTRIC SALES (Thousands of mwh):
Residential 5,247 5,061 5,148
Commercial 3,644 3,422 3,411
Industrial 4,747 4,464 4,107
Mine Power 838 926 894
Public authorities 1,424 1,355 1,350
------ ------ ------
Total - ultimate consumers 15,900 15,228 14,910
Wholesale sales 7,224 3,397 3,721
------ ------ ------
Total 23,124 18,625 18,631
------ ------ ------
------ ------ ------
</TABLE>
The electric utility business is affected by seasonal weather patterns. As a
result, operating revenues (and associated operating expenses) are not generated
evenly throughout the year. See KU's Results of Operations under Item 7.
At December 31, 1998, KU owned steam and combustion turbine generating
facilities with a capacity of 3,694 Mw and a 24 Mw hydroelectric facility. See
Item 2, Properties. KU obtains power from other utilities under bulk power
purchase and interchange contracts. At December 31, 1998, KU's system
capability, including purchases from others, was 4,235 Mw. On August 25, 1998, a
record local peak load, on a one-hour integrated basis, was set at 3,559 Mw.
Under a contract expiring 2020 with Owensboro Municipal Utilities (OMU), KU has
agreed to purchase from OMU the surplus output of the 150-Mw and 250-Mw
generating units at OMU's Elmer Smith station. Purchases under the contract are
made under a contractual formula which has resulted in costs which were and are
expected to be comparable to the cost of other power purchased or generated by
KU. Such power constituted about 9% of KU's net system output during 1998. See
Note 11 of KU's Notes to Financial Statements and Note 18 of LG&E Energy's Notes
to Financial Statements under Item 8.
KU owns 20% of the common stock of Electric Energy, Inc. (EEI), which owns and
operates a 1,000-Mw generating station in southern Illinois. KU's entitlement is
20% of the available capacity of the station. Purchases from EEI are made under
a contractual formula which has resulted in costs which were and are expected to
be comparable to the cost of other power purchased or generated by KU. Such
power constituted
13
<PAGE>
about 8% of KU's net system output in 1998. See Note 11 of KU's Notes to
Financial Statements and Note 18 of LG&E Energy Corp.'s Notes to Financial
Statements under Item 8. See also Item 3, Legal Proceedings.
Rates and Regulation
The Kentucky Commission and the Virginia Commission have regulatory jurisdiction
over KU's retail rates and service, and over the issuance of certain of its
securities. FERC has jurisdiction under the Federal Power Act (FPA) over certain
of the electric utility facilities and operations, wholesale sale of power and
related transactions and accounting practices of KU, and in certain other
respects as provided in the FPA. FERC has classified KU as a "public utility" as
defined in the FPA. By reason of owning and operating a small amount of electric
utility property in one county in Tennessee (having a gross book value of about
$225,000) from which KU serves five customers, KU is subject to the jurisdiction
of the Tennessee Regulatory Authority (TRA). In addition, the FERC has sole
jurisdiction over the issuance by KU of short-term securities.
For a discussion of current regulatory matters, see Rates and Regulation for KU
and LG&E Energy Corp. under Item 7 and under Note 3 of KU's Notes to the
Financial Statements and Note 5 of LG&E Energy Corp.'s Notes to Financial
Statements under Item 8.
KU's fuel adjustment clause (FAC) for Kentucky customers operates to reflect
changes in the cost of fuel in billings to customers, and is designed to conform
with the Kentucky Commission's regulation providing for a uniform monthly fuel
adjustment clause for all electric utilities in Kentucky subject to the
jurisdiction of the Kentucky Commission. The Kentucky Commission's regulation is
based on a formula approved by FERC but with certain modifications, including
the exclusion of excess fuel expense attributable to certain forced outages, the
filing of fuel procurement documentation, a procedure for billing over- and
under-recoveries of fuel cost fluctuations from the base rate level and
provision for periodic public hearings to review past adjustments, to make
allowance for any past adjustments found not justified, to disallow any improper
expenses and to re-index base rates to include current fuel costs. The fuel
adjustment clause mechanism for Virginia customers uses an average fuel cost
factor based primarily on projected fuel costs. The fuel cost factor may be
adjusted annually for over- or under collections of fuel costs from the previous
year.
As of February 12, 1999, the Kentucky Commission ordered KU's affiliate utility,
LG&E, to refund FAC charges to retail electric customers after a review of
LG&E's FAC from November 1994 through April 1998. The Kentucky Commission
subsequently on March 11, 1999, denied LG&E's Petition for Rehearing for the
period November 1994 through October 1996, but granted rehearing for the period
November 1996 through April 1998 on the same issue. KU has not received an order
from the Kentucky Commission but estimates that it may be required to refund to
its retail electric customers up to $3.5 million in FAC charges for the period
November 1994 through October 1998.
Rate regulation in Kentucky allows each electric utility, with the Kentucky
Commission's approved environmental compliance plan and environmental surcharge,
to recover on a current basis the cost of complying with federal, state or local
environmental requirements, including the Federal Clean Air Act as amended,
applicable to coal combustion wastes and byproducts from facilities utilized for
the production of energy from coal. In 1994, the Kentucky Commission approved
KU's environmental surcharge, which is designed to allow KU to recover
compliance related operating expenses and to earn a return on those
compliance-related capital expenditures not already included in existing rates
through the application of the surcharge each month to customers' bills.
Surcharge billings are subject to periodic Kentucky Commission review of the
level of environmental expenditures and reconciliation of previous surcharge
billings with actual costs. For additional information regarding the
environmental surcharge, including information concerning pending legal
proceedings, see Note 3 of KU's Notes to Financial Statements and Note 5 of LG&E
Energy Corp.'s Notes to Financial Statements under Item 8.
14
<PAGE>
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by KU be subject to refund
pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying
recovery of costs associated with pre-1993 environmental projects through the
ECR. The court remanded the case to the Commission to determine the proper
adjustments to refund amounts collected for such pre-1993 environmental
projects. The parties to the proceeding have notified the Commission that they
have reached agreement as to the terms, proper adjustments and forward
application of the ECR. The settlement agreement is subject to Commission
approval. KU recorded a provision for rate refund of $21.5 million in December
1998. See Rates and Regulation for KU and LG&E Energy Corp. under Item 7 for a
further discussion.
Integrated resource planning regulations in Kentucky require KU and the other
major utilities to make triennial filings with the Kentucky Commission of
various historical and forecasted information relating to forecasted load,
capacity margins and demand-side management techniques.
Pursuant to Kentucky law, the Kentucky Commission has established the boundaries
of the service territory or area of each retail electric supplier in Kentucky
(including KU), other than municipal corporations, within which each such
supplier has the exclusive right to render retail electric service.
The Virginia Commission requires each Virginia utility to make annual filings of
either a base rate change or an Annual Informational Filing consisting of a set
of standard financial schedules. These filings are subject to review by the
Virginia Commission Staff (Staff). The Staff issues a Staff Report, which
includes any findings or recommendations to the Virginia Commission relating to
the individual utility's financial performance during the historic 12-month
period, including previously accepted adjustments. The Staff Report can lead to
an adjustment in rates.
As a result of its ownership in EEI, KU is considered a holding company under
the Holding Company Act. KU however is presently exempt from all the provisions
of the Holding Company Act, except Section 9(a)(2) thereof (which relates to the
acquisition of securities of public utility companies), by virtue of the
exemption granted by an order of the Securities and Exchange Commission.
For information regarding regulatory matters related to the merger of LG&E
Energy and KU Energy, see Note 2 of KU's Notes to Financial Statements and Note
2 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8.
In October 1998, LG&E and KU filed separate but parallel applications with the
Commission for approval of a new method of determining electric rates that
provides financial incentives for LG&E and KU to further reduce customers'
rates. The filing was made pursuant to the September 1997 Commission order
approving the merger of LG&E Energy and KU Energy, wherein the Commission
directed LG&E and KU to indicate whether they desired to remain under
traditional rate of return regulation or commence non-traditional regulation.
The new ratemaking method, known as performance-based ratemaking (PBR), would
include financial incentives for LG&E and KU to reduce fuel costs and increase
generating efficiency, and to share any resulting savings with customers.
Additionally, the PBR provides financial penalties and rewards to assure
continued high quality service and reliability.
15
<PAGE>
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the difference
will be absorbed by LG&E Energy's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to $10
million annually of benefits from this performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to LG&E Energy of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision may occur in 1999. Several
intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR.
On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint
with the Kentucky Commission alleging that KU's electric rates are excessive and
should be reduced by an amount between $42 and $56 million, and that the
Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked
the Kentucky Commission to dismiss the Complaint.
KU is not able to predict the ultimate outcome of these proceedings, however,
should the Commission mandate significant rate reductions at KU, through the PBR
proposal or otherwise, such actions could have a material effect on KU's
financial condition and results of operations.
Construction Program and Financing
KU's construction program is designed to ensure that there will be adequate
capacity and reliability to meet the electric and gas needs of its service area.
These needs are continually being reassessed and appropriate revisions are made,
when necessary, in construction schedules. KU's estimates of its construction
expenditures can vary substantially due to numerous items beyond KU's control,
such as changes in rates, economic conditions, construction costs, and new
environmental or other governmental laws and regulations.
During the last five years ended December 31, 1998, construction expenditures
aggregated about $609 million, which included four 126-Mw combustion turbine
peaking units. The first peaking unit was placed into commercial operation in
late 1994. The second and third units were placed into commercial operation in
February 1995 and December 1995, respectively. The fourth unit was placed into
commercial operation in May 1996.
16
<PAGE>
Coal Supply
Coal-fired generating units provided more than 98% of KU's net kilowatt- hour
generation for 1998. The remainder of KU's net generation for 1998 was provided
by oil and/or natural gas burning units and hydroelectric plants. The average
delivered cost of coal purchased per million BTU (MBTU) and the percentage of
spot coal purchases for the periods indicated were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Per ton $26.97 $27.97 $27.54
Per MBTU - all sources $1.12 $1.15 $1.14
Per MBTU - spot purchases only $1.10 $1.12 $1.08
Spot purchases as % of all sources 42% 34% 33%
</TABLE>
The price of coal, due to using low sulfur content coal and transportation costs
are expected to increase slightly during 1998.
KU maintains its fuel inventory at levels estimated to be necessary to avoid
operational disruptions at its coal-fired generating units. Reliability of coal
deliveries can be affected from time to time by a number of factors, including
fluctuations in demand, coal mine labor issues and other supplier or transporter
operating difficulties.
KU believes there are adequate reserves available to supply its existing
base-load generating units with the quantity and quality of coal required for
those units throughout their useful lives. KU intends to meet a substantial
portion of its coal requirements with three-year or shorter contracts. As part
of this strategy, KU will continue to negotiate replacement contracts as
contracts expire. KU does not anticipate any problems negotiating new contracts
for future coal needs. The balance of coal requirements will be met through spot
purchases. KU had on hand at December 31, 1998, a coal inventory of
approximately 866,000 tons, or a 42 day supply.
KU expects, for the foreseeable future, to continue purchasing most of its coal,
which has a sulfur content in the .7% - 3.5% range, from western and eastern
Kentucky, West Virginia, southwest Indiana and Pennsylvania.
Coal for Ghent is delivered by barge. Deliveries to the Tyrone, Green River and
Pineville locations are by
truck. Delivery to E.W. Brown is by rail.
KU has no long-term contracts in place for the purchase of natural gas for its
combustion turbine peaking units. KU has met its gas requirements through spot
purchases and does not anticipate encountering any significant problems
acquiring an adequate supply of fuel necessary to operate its peaking units.
Environmental Matters
Protection of the environment is a major priority for KU. KU engages in a
variety of activities within the jurisdiction of federal, state, and local
regulatory agencies. Those agencies have issued KU permits for various
activities subject to air quality, water quality, and waste management laws and
regulations. For the five year period ending with 1998, expenditures for
pollution control facilities represented $174 million or 29% of total
construction expenditures. See Note 11 of KU's Notes to Financial Statements and
Note 18 of LG&E Energy's Notes to Financial Statements under Item 8.
17
<PAGE>
Competition
KU has taken many steps to prepare for the expected increase in competition in
its industry, including a reduction in the number of employees; aggressive cost
cutting; an increase in focus on not only commercial and industrial customers,
but residential customers as well; an increase in employee involvement and
training; and continuous modifications of its organizational structure. KU could
take additional steps like these to better position itself for competition in
the future.
LG&E CAPITAL CORP.
LG&E Capital Corp. (Capital Corp.), the holding company for all non-utility
investments, was formed on September 5, 1997, when the Company merged two of its
former direct subsidiaries, LG&E Energy Systems Inc. and LG&E Gas Systems Inc.,
and renamed the company LG&E Capital Corp. On July 24, 1998, KU Capital
Corporation (KU Capital), a former subsidiary of KU Energy, was merged into
Capital Corp., with the latter as the survivor corporation.
As previously discussed in item 1 under Discontinuance of Merchant Energy
Trading and Sales Business, effective June 30, 1998, the Company discontinued
this business operation. For a more detailed discussion of the discontinuance of
the Company's merchant energy trading and sales business, see Discontinued
Operations under this Item, and Notes 3 and 18 of LG&E Energy's Notes to
Financial Statements under Item 8.
Capital Corp. conducts its operations through three principal business segments:
Independent Power Operations, Western Kentucky Energy and Argentine Gas
Distribution. See Note 20 of LG&E Energy's Notes to Financial Statements under
Item 8.
INDEPENDENT POWER OPERATIONS
General
Capital Corp.'s Independent Power Operations (Power Operations) develop,
operate, maintain and own domestic and international power generation facilities
that sell electric and steam energy to utility and industrial customers. Power
Operations currently has domestic ownership interests in projects capable of
generating nearly 600 Mw of electric power in North Carolina, Virginia,
California, Minnesota, Texas and Washington, and international ownership
interest in a windpower generating facility in Tarifa, Spain. Additionally,
Power Operations owns and / or has ownership interests in eight combustion
turbines. Ownership interests in each of these projects and the revenues from
the sale of electricity and steam are pledged as security to the lenders which
provided the financing. See Item 2, Properties, for a listing of the Power
Operations' projects.
On March 15, 1999, LG&E Westmoreland - Rensselaer, in which Power Operations has
a 50% interest, sold the assets of the Rensselaer cogeneration facility. This
transaction will result in a pre-tax gain for Power Operations of approximately
$14.5 million.
In June 1998, Power Operations entered into a partnership with Columbia Electric
Corporation for the development of a natural gas-fired cogeneration project in
Gregory, Texas, providing electricity and steam equivalent of 550 Mw.
Construction commenced in August 1998 and non-recourse financing for a majority
of the construction and other costs was obtained in November 1998. The project
will sell steam and a portion of its electric output to Reynolds Metals Company.
A medium-term fixed-price contract has also been entered into with a third party
for a portion of the remaining electric output. The project is expected to begin
commercial operation in the summer of 2000. The Company's equity contribution is
expected to be approximately $30 to $35 million in connection with its 50%
interest in the project.
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<PAGE>
In February 1998, Power Operations sold its interest in a 114-Mw natural
gas-fired power plant in North Central Argentina.
Fuel Supply
Power Operations operates five coal fired and three wind plants. See Item 2,
Properties. Coal supply needed by Power Operations is under long-term contracts
expiring at various times from 2008 through 2014. Each contract has two
five-year renewal options. All coal is delivered by rail.
Customer Base
Each project has long-term power purchase agreements with a single power
purchaser, except one of the Tenaska Limited Partnerships which has two. The
power purchasers are Virginia Electric and Power (VEPCO) for Southampton,
Altavista, and Hopewell in Virginia and Roanoke Valley I (ROVA I) and Roanoke
Valley II (ROVA II) in North Carolina; Southern California Edison Co. for
Windpower Partners 1993 (WPP 93) in California; Northern States Power Company
for WPP 93 in Minnesota; Lower Colorado River Authority for Windpower Partners
1994 (WPP 94), Brazos Electric Power Cooperative for Tenaska Limited
Partnerships (TLP), Texas Utilities Electric Company for TLP and Campbell Soup
for TLP in Texas; Puget Sound Power & Light for TLP in Washington; and Compania
Sevillana de Electricidad for K.W. Tarifa in Spain. WPP 94 also sells excess
power to Texas Utilities. See Item 2, Properties, for a listing of Power
Operations projects.
Each of Power Operations combustion turbines are leased to utility companies.
The lessees are Portland General Electric Company (Portland General) in Oregon,
Arkansas Power and Light Company in Arkansas and Puget Sound Power & Light
Company in Washington. The leases expire in 1999. Upon expiration each of the
leases, each of the lessees has the option to extend the lease, purchase the
unit or allow the lease to terminate. Portland General has notified the Company
that it will exercise its rights to purchase the units covered by its leases
when they expire.
Regulatory Environment
Except for its investments in wind power and ROVA I, each of Power Operations'
projects in the United States is a qualifying cogeneration facility (QF) under
the Public Utility Regulatory Policy Act of 1978 (PURPA). See Item 3 and Note 18
of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a
discussion of certain issues regarding past operations at certain of these
facilities. Certain partnerships, in which companies in the Power Operations
business segment have ownership interests, are operating wind power facilities
which are qualifying small power production facilities under PURPA. In addition,
Power Operations has obtained exempt wholesale generator (EWG) status for the
entities which own the ROVA I and ROVA II projects in North Carolina and the
Southampton, Altavista and Hopewell projects in Virginia.
Generally, QF status exempts projects from the application of the Holding
Company Act, many provisions of the Federal Power Act, and state laws and
regulations respecting rates and financial or organization regulation of
electric utilities. EWGs also are exempt from application of the Holding Company
Act and many provisions of the Federal Power Act, but once such an entity files
its electric generation rates with FERC, it becomes a jurisdictional public
utility under the Federal Power Act. As a "public utility," an EWG's rates and
some of its corporate activities are subject to FERC regulation. EWGs also are
subject to non-rate regulation under state laws governing electric utilities.
While QF or EWG status entitles Power Operations' projects to certain regulatory
exceptions and benefits under PURPA and the Holding Company Act, each project
must still comply with other federal, state and local laws, including those
regarding siting, construction, operation, licensing and pollution abatement.
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<PAGE>
The foreign power generation facility in which Power Operations has an ownership
interest has obtained foreign utility company (FUCO) status under the Holding
Company Act. Generally, FUCO status exempts this facility from application of
the Holding Company Act.
Commitments & Contingencies
In January 1999, a final order was entered in the bankruptcy proceedings
involving Westmoreland Coal Company and certain of its subsidiaries, including
Westmoreland Energy, Inc., the parent of various entities that are partners in
four of Power Operations' independent generating facilities. However, none of
the partnerships and no partner of the current partnerships has been under
bankruptcy court protection, nor were these partnerships in a default occasioned
under the project loan documents. See Note 18 of LG&E Energy Corp.'s Notes to
Financial Statements under Item 8.
Westmoreland-LG&E Partners (WLP), the partnership that owns the ROVA I and II
facilities, is seeking the recovery of capacity payments withheld by VEPCO. In
November 1998, the Circuit Court for the City of Richmond, Virginia, issued a
decision awarding WLP approximately $19 million, plus interest until paid, and
ruled WLP was entitled to receive future capacity payments for eligible forced
outages during the remainder of the PPA term. In January 1999, VEPCO filed a
notice of appeal regarding the Circuit Court decision. See Note 18 of LG&E
Energy Corp.'s Notes to Financial Statements under Item 8.
In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in the United States
Bankruptcy Court in the Northern District of California for protection under
Chapter 11 of the United States Bankruptcy Code seeking, among other things, to
restructure certain contractual commitments between Kenetech and its
subsidiaries and various windpower projects located in the U.S. and abroad.
Included in these projects are the WPP 93, WPP 94 and KW Tarifa, S.A. (Tarifa)
wind projects in which Power Operations has invested, collectively,
approximately $31 million. See Note 18 of LG&E Energy Corp.'s Notes to Financial
Statements under Item 8.
WPP 94, in which the Company has a 25% interest through indirect subsidiaries,
did not make its semiannual payments, due September 1997, March 1998, September
1998 and March 1999, to John Hancock Mutual Life Insurance Company (Hancock)
under certain notes issued by WPP94 to Hancock. WPP 94 and Hancock are presently
engaged in discussions concerning a possible restructuring of WPP 94's debt
obligations. Because of the continuing nature of the negotiations, the Company
is not able to predict the outcome of this event. The Company does not expect
the ultimate resolution of this matter to have a material effect on its results
of operations or financial condition. During the third quarter of 1998, the
Company wrote off its aggregate remaining investment in WPP94. See Note 18 of
LG&E Energy Corp.'s Notes to Financial Statements under Item 8.
WESTERN KENTUCKY ENERGY
General
In July 1998, following receipt of necessary regulatory approvals, the Company
closed the transaction to lease the generating assets of Big Rivers. Under the
25-year operating lease, Western Kentucky Energy Corp. and its affiliates (WKE)
lease and operate the operating assets of Big Rivers (three coal-fired plants
and one combustion turbine). In addition, WKE operates and maintains the Station
Two generating facility of the City of Henderson (Henderson). The combined
generating capacity of these facilities amounts to approximately 1,700 Mw, net
of Henderson's capacity and energy needs from Station Two. Under the terms of
the lease agreement, WKE paid Big Rivers a total of $55.9 million for the first
two years and will pay $31.0 million for each of the remaining 23 years. In
addition, WKE purchased Big Rivers' inventory, personal property and emission
allowances, and made a one-time payment to Big Rivers of $12.1 million.
20
<PAGE>
In related transactions, power is supplied to Big Rivers at contractual prices
over the term of the lease to meet the needs of four member distribution
cooperatives serving approximately 91,000 customers in 22 western Kentucky
counties and two aluminum smelters. The excess generating capacity is available
to WKE to market throughout the region.
Also, as part of the transaction, WKE agreed to provide Big Rivers a $50.0
million note to help it emerge from bankruptcy. The terms of the note are that
WKE will provide $1.7 million per month for the first 12 months beginning August
1998 and $2.5 million per month over the subsequent 12 months. The note will be
repaid over a three-year period, beginning August 2000, with interest at 7.165%.
WKE's business is affected by seasonal weather patterns. As a result, operating
revenues (and associated expenses) are not generated evenly throughout the year.
Construction Program and Financing
In connection with these transactions, WKE has undertaken to bear certain of the
future capital requirements of these generating assets. WKE's estimates of its
construction expenditures can vary substantially due to numerous items beyond
WKE's control, such as economic conditions, construction costs, and new
environmental or other governmental laws and regulations. During 1998 gross
property additions amounted to $11.8 million excluding personal property
acquired from Big Rivers. Internally generated funds and intercompany financing
from Capital Corp. provided 100% of the construction expenditures.
Coal Supply
Coal-fired generating units provided 90% of the electric generating capacity
controlled by WKE, the remainder being made up of a combustion turbine peaking
unit fueled by fuel oil. Coal will be the predominant fuel used by WKE, with
fuel oil being used for peaking capacity. WKE has entered into coal supply
agreements with various suppliers for coal deliveries for 1999 and beyond. WKE
normally augments its coal supply agreements with spot market purchases. At
December 31, 1998, WKE had on hand coal inventory of approximately 1.1 million
tons, or a 75 day supply.
WKE expects, for the foreseeable future, to continue purchasing most of its
coal, which has a sulfur content in the 2%-4.5% range, from western Kentucky and
southwest Indiana. The abundant supply of this relatively low priced coal,
combined with present and future desulfurization technologies, is expected to
enable WKE to continue to provide adequate electric service in a manner
acceptable under existing environmental laws and regulations.
Coal for WKE's operations are delivered by barge and truck.
The average delivered cost per ton of coal purchased by WKE for 1998 was $20.85.
Environmental Matters
In September 1998, the U.S. Environmental Protection Agency announced its final
regulation requiring significant additional reductions in NOx emissions to
mitigate alleged ozone transport to the Northeast. While each state is free to
allocate its assigned NOx reductions among various emissions sectors as it deems
appropriate, the regulation may ultimately require utilities to reduce their NOx
emissions to 0.15 lb./mmBtu (million British thermal units) - an 85% reduction
from 1990 levels. Under the regulation, each state must incorporate the
additional NOx reductions in its State Implementation Plan (SIP) by September
1999 and affected sources must install control measures by May 2003, unless
granted extensions. Several states, various
21
<PAGE>
labor and industry groups, and individual companies have appealed the final
regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is
currently unable to determine the outcome or exact impact of this matter until
such time as the states identify specific emissions reductions in their SIP and
the courts rule on the various legal challenges to the final rule. However, if
the 0.15 lb. target is ultimately imposed, WKE will be required to incur
significant capital expenditures and increased operation and maintenance costs
for additional controls. Subject to further study and analysis, WKE estimates
that it may incur capital costs of approximately $100 million. These costs would
generally be incurred beginning in 2000.
WKE engages in a variety of activities within the jurisdiction of federal, state
and local regulatory agencies. Those agencies have issued WKE permits for
various activities subject to air quality, water quality and waste management
laws and regulations. During 1998, expenditures for pollution controlled
facilities represented $.5 million of WKE's construction expenditures. See Note
18 of LG&E Energy's Notes to Financial Statements under Item 8 for a discussion
of specific environmental proceedings.
ARGENTINE GAS DISTRIBUTION
General
In February 1997, the Company acquired interests in two Argentine natural gas
distribution companies. Capital Corp., through a subsidiary, purchased a
controlling interest in Distribuidora de Gas del Centro (Centro) and a minority
interest in Distribuidora de Gas Cuyana (Cuyana). Centro and Cuyana together
serve approximately 706,000 customers in six provinces in Argentina. The
investment in these companies totaled approximately $140 million. Each of these
companies has obtained foreign utility company (FUCO) status under the Holding
Company Act. Generally, FUCO status exempts these facilities from application of
the Holding Company Act.
Gas Operations
Centro's and Cuyana's primary source of gas supply is YPF, S.A., and its primary
source of gas transmission is TGN, S.A. Centro and Cuyana have no underground
storage facilities.
The Argentine federal regulator of gas transmission and distribution, Energas,
has granted Centro a concession that gives Centro the exclusive right to
distribute natural gas in its service territories. The concession ends in 2028.
Centro and Cuyana have been granted exclusive 35-year concessions to provide gas
distribution services to their respective service territories. These
concessions, which originally expire in 2028, also contain the possibility of a
single 10-year extension.
Centro derives approximately 12% of its revenues from electric power plants
located in its service territory. Some of these power plants are state-owned.
Centro sells gas to these plants under contracts ranging from two to 15 years.
Construction Program and Financing
Centro's capital expenditures for 1998 totaled $15 million and were financed
internally. Centro will spend approximately $30 million in 1999 to expand and
maintain its gas distribution network, and it will finance the expenditures
through borrowings and internal sources.
22
<PAGE>
DISCONTINUED OPERATIONS
General
Effective June 30, 1998, the Company discontinued its merchant energy trading
and sales business and announced a plan to sell its natural gas gathering and
processing business (Gas Operations). For a more detailed discussion of the
costs incurred see Discontinuance of Merchant Energy Trading and Sales Business
previously discussed in this Item and Notes 3 and 18 of LG&E Energy's Notes to
Financial Statements under Item 8.
Product and Services
The merchant energy trading and sales business consisted primarily of a
portfolio of energy marketing contracts entered into in 1996 and 1997,
nationwide deal origination and some level of speculative trading activities,
which were not directly supported by the Company's physical assets.
Capital Corp.'s Gas Operations, conducted through various subsidiaries, include:
a transportation operation consisting of a 90-mile intrastate pipeline located
in southeast New Mexico (Llano pipeline); gathering and processing operations
consisting of 1,200 miles of pipeline concentrated in southeastern New Mexico
and the Permian Basin of west Texas; and a 6.0 Bcf gas storage facility
connected to the Llano pipeline. For a more detailed explanation of these assets
see Item 2, Properties.
The Llano pipeline has a design capacity of approximately 180,000 Mcf of gas per
day and is capable of delivering gas to three different interstate pipelines.
Capital Corp., through its various subsidiaries, purchases gas from over 50
producers connected to the Llano pipeline and sells the gas directly to end-user
customers or delivers the gas into one of the interstate pipelines for sale.
Also, through its various subsidiaries, Capital Corp. transports natural gas
through the Llano pipeline for third parties and is paid a transportation fee
for such services. An average of approximately 100,000 Mcf of natural gas per
day moved through the Llano pipeline in 1998.
The 11 gathering systems owned (seven 100%, one leased and ownership interests
ranging from 11% to 50% in three others) and operated during 1998 gathered
approximately 205,000 Mcf of natural gas per day during 1998. During 1998,
Capital Corp. divested itself of its three partially owned gathering systems.
Connected to the Llano pipeline are two operating natural gas processing
facilities capable of processing approximately 85,000 MMBtu of natural gas per
day. These facilities extract natural gas liquids, including propane, ethane,
butanes and natural gasoline, from the natural gas stream, at which point the
mixed stream of liquids is sold. Approximately 215,000 gallons per day of
natural gas liquids were extracted and sold from these facilities in 1998.
Also connected to the Llano pipeline is a natural gas storage facility. As noted
above, this facility has current working capacity of approximately 6.0 Bcf.
Capital Corp., through a subsidiary, offers this storage capacity to third
parties on a fee basis. As of December 31, 1998, storage capacity of
approximately 3.0 Bcf was leased to other parties.
Governmental Regulations
The production, transportation and certain sales of natural gas are subject to
federal, state or local regulations which have a significant impact upon Capital
Corp.'s energy products and services businesses. Regulation at the federal level
of domestically produced or transported natural gas is administered primarily by
the FERC
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<PAGE>
pursuant to the Natural Gas Act (NGA) and the Natural Gas Policy Act of 1978
(NGPA). Maximum selling prices of certain categories of gas, whether sold in
interstate or intrastate commerce, previously were regulated pursuant to NGPA.
The NGPA established various categories of gas and provided for graduated
deregulation of price controls of several categories of gas and the deregulation
of sales of certain categories of gas. All price deregulation contemplated under
the NGPA has already taken place. Subsequently, the Natural Gas Wellhead
Decontrol Act of 1989 terminated all NGA and NGPA regulation of "first sales" of
domestic natural gas on January 1, 1993. The sale for resale of certain natural
gas in interstate commerce is regulated, in part, pursuant to the NGA, which
requires certificate and abandonment authority to initiate and terminate such
sales. In addition, natural gas marketed by a Capital Corp. subsidiary is
usually transported by interstate pipeline companies that are subject to the
jurisdiction of the FERC. Similarly, some of the transportation and storage
services provided by Llano are subject to FERC regulation under section 311 of
the NGPA. These services are frequently sold to gas distribution companies that
contract with interstate pipeline companies for transportation from the Llano
facility to their respective service areas. Section 311 permits intrastate
pipelines under certain circumstances to sell gas to, transport gas for, or have
gas transported by, interstate pipeline companies, and assign contract rights to
purchase surplus gas from producers to interstate pipeline companies without
being regulated as interstate pipelines under the NGA. Capital Corp., through a
subsidiary, submitted a rate case for transportation and storage rates to the
FERC in 1998 which was approved without intervention.
Commitments and Contingencies
For discussions of lawsuits filed as a result of the Company's discovery in the
fourth quarter of 1996 that unauthorized transactions had occurred in its gas
trading business, a lawsuit related to the failure to sell electricity to the
Company pursuant to an interchange agreement, and an arbitration proceeding
related to load projections provided as inducement to enter into a power supply
agreement see Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under
Item 8.
EMPLOYEES AND LABOR RELATIONS
LG&E Energy and its subsidiaries had 5,403 full-time employees at December 31,
1998, including 2,315 full-time employees of LG&E and 1,779 full-time employees
of KU. At December 31, 1998, LG&E had 1,385 operating, maintenance, and
construction employees that were members of the International Brotherhood of
Electrical Workers (IBEW) Local 2100. The current three year contract with the
IBEW will expire in November 2001. At December 31, 1998, KU had 233 operating,
maintenance and construction employees who were members of IBEW Local 101 and
United Steelworkers of America (USWA) Local 8686. The current contract will
expire August 1, 1999. At December 31, 1998, WKE had 352 operating, maintenance
and construction employees that were members of the IBEW Local 1701.
The current contract will expire September 14, 2001.
24
<PAGE>
ITEM 2. Properties.
LG&E's power generating system consists of the coal-fired units operated at its
three steam generating stations. Combustion turbines supplement the system
during peak or emergency periods. LG&E owns and operates the following electric
generating stations:
<TABLE>
<CAPTION>
Capability
Rating (Kw)
-----------
<S> <C>
Steam Stations:
Mill Creek - Kosmosdale, KY.
Unit 1 303,000
Unit 2 301,000
Unit 3 386,000
Unit 4 480,000
----------
Total Mill Creek 1,470,000
Cane Run - near Louisville, KY.
Unit 4 155,000
Unit 5 168,000
Unit 6 240,000
----------
Total Cane Run 563,000
Trimble County - Bedford, KY. (a)
Unit 1 371,000
Combustion Turbine Generators (Peaking capability):
Zorn 16,000
Paddy's Run 43,000
Cane Run 16,000
Waterside 33,000
-----------
Total combustion turbine generators 108,000
-----------
Total capability rating 2,512,000
-----------
-----------
</TABLE>
(a) Amount shown represents LG&E's 75% interest in Trimble
County. LG&E is responsible for operation of Unit 1 and is
reimbursed by IMEA and IMPA for expenditures related to
Trimble County based on their proportionate share of
ownership interest. See Note 19 of LG&E Energy Corp.'s
Notes to Financial Statements, Jointly Owned Electric
Utility Plant, under Item 8 for further discussion on
ownership.
LG&E also owns an 80 Mw hydroelectric generating station located in Louisville,
operated under license issued by the FERC.
At December 31, 1998, LG&E's electric transmission system included 21
substations with a total capacity of approximately 11,071,700 Kva and
approximately 652 structure miles of lines. The electric distribution system
included 82 substations with a total capacity of approximately 3,313,730 Kva,
3,659 structure miles of overhead lines, 341 miles of underground conduit, and
5,451 miles of underground conductors.
LG&E's gas transmission system includes 209 miles of transmission mains, and the
gas distribution system includes 3,720 miles of distribution mains.
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<PAGE>
LG&E operates underground gas storage facilities with a current working gas
capacity of approximately 14.6 million Mcf. See Gas Supply under Item 1.
In 1990, LG&E entered into an operating lease for its corporate office building
located in downtown Louisville, Kentucky. The lease is for a period of 15 years
and is scheduled to expire June 2005. LG&E Energy has operating leases for its
corporate office space that expire between 1999 and 2012.
Other properties owned by LG&E include office buildings, service centers,
warehouses, garages, and other structures and equipment, the use of which is
common to both the electric and gas departments.
The trust indenture securing LG&E's First Mortgage Bonds constitutes a direct
first mortgage lien upon much of the property owned by LG&E.
KU's power generating system consists of the coal-fired units operated at its
five steam generating stations. KU owns and operates the following electric
generating stations:
<TABLE>
<CAPTION>
Capability
Rating (kw)
-----------
Steam Stations:
Tyrone - Tyrone, KY.
<S> <C>
Unit 1 30,000
Unit 2 33,000
Unit 3 73,000
-----------
Total Tyrone 136,000
Green River - South Carrollton, KY.
Unit 1 29,000
Unit 2 30,000
Unit 3 73,000
Unit 4 107,000
----------
Total Green River 239,000
E.W. Brown - Burgin, KY.
Unit 1 106,000
Unit 2 170,000
Unit 3 441,000
----------
Total E.W. Brown 717,000
Pineville - Four Mile, KY.
Unit 3 34,000
Ghent - Ghent, KY.
Unit 1 487,000
Unit 2 497,000
Unit 3 513,000
Unit 4 500,000
----------
Total Ghent 1,997,000
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Capability
Rating (kw)
-----------
<S> <C>
Combustion Turbine Generators (Peaking capability):
E.W. Brown - Burgin, KY.
Unit 8 135,000
Unit 9 120,000
Unit 10 135,000
Unit 11 122,000
----------
Total E.W. Brown 512,000
Haefling - Lexington, KY.
Unit 1 59,000
-----------
Total capability rating 3,694,000
----------
----------
</TABLE>
Substantially all properties are subject to the lien of KU's Mortgage Indenture.
KU also owns a 24 Mw hydroelectric generating station located in Burgin,
Kentucky, operated under license issued by the FERC.
At December 31, 1998, KU's electric transmission system included 107 substations
with a total capacity of approximately 14,538,240 Kva and approximately
4,272,330 structure miles of lines. The electric distribution system included
437 substations with a total capacity of approximately 4,302,120 Kva, 4,272
structure miles of overhead lines.
At December 31, 1998, Power Operations owned the percentage indicated of the
following joint ventures:
<TABLE>
<CAPTION>
Net
Ownership Capability
Name Interest % Fuel Rating (Mw)
------- ---------- ---- -----------
<S> <C> <C> <C>
LG&E Westmoreland-Southampton 50 Coal 63
Franklin, Virginia
LG&E Westmoreland-Altavista 50 Coal 63
Altavista, Virginia
LG&E Westmoreland-Hopewell 50 Coal 63
Hopewell, Virginia
Westmoreland-LG&E Partners 50 Coal 165
(Roanoke Valley I)
Weldon, North Carolina
LG&E Westmoreland-Rensselaer 50 Natural 79
Rensselaer, New York (sold March 15, Gas
1999 - see below)
Windpower Partners 1993 L.P. 50 Wind 43
Palm Springs, California
Windpower Partners 1993 L.P. 50 Wind 25
Buffalo Ridge, Minnesota
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Net
Ownership Capability
Name Interest % Fuel Rating (Mw)
------ ---------- ---- -----------
<S> <C> <C> <C>
Windpower Partners 1994 L.P. 25 Wind 25-35
Culberson County, Texas
Westmoreland-LG&E Partners 50 Coal 44
(Roanoke Valley II)
Weldon, North Carolina
K.W. Tarifa, S.A. 46 Wind 30
Tarifa, Spain
Tenaska Limited Partnerships 5-10 Gas 223-258
</TABLE>
Power Operations' ownership interests in these projects (except Rensselaer) and
the revenues from the sale of electricity and steam from the projects are
pledged as security to the lenders who provided the financing for the project.
See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8
for a discussion of the bankruptcy filing of an affiliate of Power Operations'
partner in the Southampton, Altavista, Hopewell, Rensselaer and Roanoke Valley
joint ventures. Also, see the same note for a discussion of the bankruptcy
filing of an affiliate of Power Operations' partner in the Windpower Partners
1993 and Windpower Partners 1994 joint ventures. See Note 8 of LG&E Energy
Corp.'s Notes to Financial Statements under Item 8.
On March 15, 1999, LG&E Westmoreland - Rensselaer, in which Power Operations has
a 50% interest, sold the assets of the Rensselaer cogeneration facility. This
transaction will result in a pre-tax gain for Power Operations of approximately
$14.5 million.
At December 31, 1998, Power Operations owned equity interests in the following
combustion turbine units which are leased to utility companies. The leases
expire in 1999. Upon expiration of each of the leases, each of the lessees has
the option to extend the lease, purchase the unit or allow the lease to
terminate.
<TABLE>
<CAPTION>
Capacity
Ownership (Mw)
Unit Quantity Fuel Interest % Per Unit
----- -------- ---- ---------- --------
<S> <C> <C> <C> <C>
Beaver, OR 2 Gas/Oil 100 59.3
Blytheville, AR 3 Gas 49 64.6
Beaver, OR 2 Gas/Oil 49 59.3
Ferndale, WA 1 Gas 49 56.9
</TABLE>
Portland General Electric Company (Portland General) is the lessee of the units
in Beaver, Arkansas Power & Light Company (AP&L) is the lessee of the units in
Blytheville, and Puget Sound Power & Light Company (PSP&L) is the lessee of the
unit in Ferndale.
Portland General has agreed to purchase the four units in Beaver for
approximately $20 million. This transaction is expected to close in the second
half of 1999. AP&L has decided to allow its lease to terminate and not to buy
the turbines in Blytheville. PSP&L has not decided if it will exercise its
option to extend its lease, purchase the unit in Ferndale, or allow its lease to
terminate.
28
<PAGE>
Capital Corp., through certain subsidiaries, owns or has an interest in eight
gas gathering systems consisting of 1,200 miles of pipeline (of which it owns
100% of four, leases one, and has ownership interests ranging from 11% to 50% in
the other three). These systems are located in Texas, New Mexico, Louisiana,
Montana and Oklahoma. These gas gathering systems make up part of the Company's
Merchant Energy Trading and Sales Business, which the Company discontinued
effective June 30, 1998. See Discontinued Operations under this Item.
The major gas gathering system is the Llano pipeline, a 90-mile intrastate
pipeline system in southeastern New Mexico with a throughput capacity of 180,000
MCF of gas per day. Capital Corp., through subsidiaries, owns two gas
transmission systems located in Texas which total 76 miles. This system has a
design capacity of 90,000 MCF of gas per day. It also owns, or has interests in,
and operates five natural gas processing plants located in southeastern New
Mexico and western Texas with a total design capacity of 125,000 MCF of gas per
day (owns 100% interests in three of these plants, and a majority of the two
remaining plants). Only three of the five plants are active currently. In
addition, Capital Corp. owns and operates a sour gas treating facility in Texas
and an underground natural gas storage facility adjacent to the Llano pipeline
in southeastern New Mexico with a current working capacity of approximately six
BCF of natural gas. The Llano pipeline makes up part of the Company's Merchant
Energy Trading and Sales Business, which the Company discontinued effective June
30, 1998.
WKE is leasing and operating for 25 years all of the generating assets owned by
Big Rivers, a Henderson, Kentucky-based power generation cooperative with 1,459
Mw of owned net generating capacity. Big Rivers owns three coal-fired plants and
one combustion turbine. In addition, WKE operates a 312 Mw coal-fired facility
owned by the City of Henderson, Kentucky, with contractual rights to any surplus
power generated by such facility, which historically has been about 80% of the
unit's capacity.
Centro's gas transmission and distribution system includes 5,963 miles of
transmission mains and distribution mains located in Cordoba, Argentina, and
neighboring provinces. Cuyana's gas transmission and distribution system
includes approximately 4,800 miles of transmission mains and distribution mains
located in Mendoza Province, Argentina, and neighboring provinces.
ITEM 3. Legal Proceedings.
Rates and Regulatory Matters
For a discussion of current regulatory matters, including a discussion of (a)
rate matters addressed in the Kentucky Commission's order approving the KU
Merger, (b) proceedings before the Kentucky Supreme Court and the Kentucky
Commission regarding environmental cost recovery surcharge refunds, and (c) fuel
adjustment clause proceedings before the Kentucky Commission regarding electric
line loss refunds, see Rates and Regulation under Item 7 and Notes 2, 5 and 18
of LG&E Energy Corp.'s Notes to Financial Statements, Note 3 LG&E's Notes to
Financial Statements and Notes 3 of KU's Notes to Financial Statements under
Item 8.
Performance-Based Ratemaking
In October, 1998, LG&E and KU filed applications with the Kentucky Commission
for appeal of a performance-based method for determining electric rates. The
companies' proposals include financial incentives to reduce fuel costs and
increase generating efficiency, as well as financial penalties and rewards in
other performance areas. The proposals are subject to approval by the Kentucky
Commission, with a decision likely to occur during 1999. Certain intervenors
have requested that the Kentucky Commission significantly reduce base rates
before implementing PBR. See Rates and Regulations under Item 7 and Notes 5 and
22 to LG&E Energy's Notes to Financial Statements, Notes 3 and 16 to LG&E's
Notes to Financial Statements and Notes 3
29
<PAGE>
and 13 to KU's Notes to Financial Statements.
Fuel Adjustment Clause Proceedings
Pursuant to Kentucky statute, aspects of the Company's utilities rates are
reviewed through semi-annual fuel adjustment clause (FAC) proceedings at the
Kentucky Commission. Although the proceedings are routine, some items are noted
herein. Certain intervenors have challenged KU's recovery of certain energy
charges for power purchased from Owensboro Municipal Utilities and requested
rate refunds for such amounts. Although the outcome of this proceeding cannot be
predicted, the Company believes that, based upon its review of the legal and
regulatory precedence, its position should prevail and that the PSC should not
disallow any of the energy charges in this category for any part of the four
year period. KU estimates the amount of disputed costs to be approximately $12.8
million through October 31, 1998. See also Note 18 to LG&E Energy's Notes to
Financial Statements and Note 11 to KU's Notes to Financial Statements. See
Rates and Regulatory Matters above regarding electric line loss matters arising
during LG&E's and KU's FAC proceedings.
Environmental
For a discussion of environmental matters concerning (a) currently proposed NOx
and SO2 emission limit decreases, (b) issues at LG&E's Mill Creek and Cane Run
generating plants and LG&E's and KU's manufactured gas plant sites, and (c)
other environmental items affecting LG&E Energy and its subsidiaries, see
Environmental Matters under Item 7 and Note 18 of LG&E Energy's Notes to
Financial Statements, Note 12 of LG&E's Notes to Financial Statements and Note
11 of KU's Notes to Financial Statements under Item 8, respectively.
Southampton
For a discussion of the settlement of certain FERC proceedings involving
LG&E-Westmoreland Southampton, the partnership that owns the Southampton
facility, regarding the Southampton facility status as a qualifying facility for
1992, see Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under
Item 8.
Roanoke Valley I
Westmoreland-LG&E Partners (WLP), the partnership that owns the Roanoke Valley I
and II facilities, is seeking the recovery of capacity payments withheld by
Virginia Electric and Power Company (VEPCO). In November 1998, the Circuit Court
for the City of Richmond, Virginia issued an opinion awarding WLP approximately
$19 million plus interest until paid, and addressed certain other issues. In
January 1999, VEPCO appealed the decision. See Item 1 and Note 18 of LG&E Energy
Corp.'s Notes to Financial Statements under Item 8.
Kenetech Bankruptcy
In May 1996, Kenetech Windpower, Inc. (Kenetech) filed for protection under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court in the Northern District of California seeking, among other things, to
restructure certain contractual commitments between Kenetech and its
subsidiaries, on one hand, and various windpower projects located in the U.S.
and abroad, on the other hand. Included in these projects are the Windpower
Partners 1993, Windpower Partners 1994 and KW Tarifa, S.A. wind projects. In
January 1999, the Bankruptcy Court approved an initial plan of reorganization.
See Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8
for a further discussion.
30
<PAGE>
Windpower Partners 1994
Windpower Partners 1994 (WPP 94), in which the Company has a 25% interest
through indirect subsidiaries, did not make semiannual payments, due September
1997, March 1998, September 1998 and March 1999 to John Hancock Mutual Life
Insurance Company (Hancock) under certain Notes issued by WPP 94 to Hancock. The
Company has offered WPP 94 financial support with respect to the appropriate
proportion of its debt obligations, but certain of the three other investor
groups are unable to offer funds to WPP 94 in support of the partnership. See
Note 18 of LG&E Energy Corp.'s Notes to Financial Statements under Item 8 for a
further discussion.
Calgary
On November 22, 1996 LG&E Natural Canada Inc., an indirect subsidiary of LG&E
Energy, initiated action in the Court of the Queens Bench of Alberta, Calgary
against a former employee as a result of the discovery that the former employee
had engaged in unauthorized transactions. See Note 18 to LG&E Energy's Notes to
Financial Statements, under Item 8 for a further discussion.
Springfield Municipal Contract
LG&E Energy Marketing Inc. (LEM), an indirect subsidiary of LG&E Energy, filed
suit against the City of Springfield, Illinois, City Water, Light and Power
Company in the United States District Court for the Western District of
Kentucky. See Note 18 to LG&E Energy's Notes to Financial Statements under Item
8 for a further discussion.
Oglethorpe Power Contract
In October 1998, LEM initiated an arbitration proceeding against Oglethorpe
Power Corporation (OPC) in connection with matters involving LEM's November 1996
power sales agreement with OPC. Selection of arbitrators was completed in
February 1999 and discovery proceedings have commenced in this matter. See Note
18 to LG&E Energy's Notes to Financial Statements under Item 8 for a further
discussion.
Other
In the normal course of business, other lawsuits, claims, environmental actions,
and other governmental proceedings arise against LG&E Energy and its
subsidiaries, including LG&E and KU. To the extent that damages are assessed in
any of these lawsuits, LG&E Energy, LG&E and KU believe that their insurance
coverage is adequate. Management, after consultation with legal counsel, does
not anticipate that liabilities arising out of other currently pending or
threatened lawsuits and claims will have a material adverse effect on LG&E's
Energy's, LG&E's or KU's consolidated financial position or results of
operations, respectively.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
31
<PAGE>
Executive Officers of LG&E Energy Corp.:
<TABLE>
<CAPTION>
Effective Date of
Election to Present
Name Age Position Position
------ --- -------- --------------------
<S> <C> <C> <C>
Roger W. Hale 55 Chairman of the Board August 17, 1990
and Chief Executive
Officer
Victor A. Staffieri 43 President and Chief February 16, 1999
Operating Officer
R. Foster Duncan 45 Executive Vice President February 16, 1999
and Chief Financial Officer
Stephen R. Wood 56 President - Distribution May 15, 1997
Services Division
President - Louisville Gas
and Electric Company
Robert M. Hewett 52 President - Kentucky May 4, 1998
Utilities Company
John R. McCall 55 Executive Vice President, July 1, 1994
General Counsel and
Corporate Secretary
Wayne T. Lucas 51 Executive Vice President - May 4, 1998
Power Generation
George W. Basinger 53 Senior Vice President - May 4, 1998
Independent Power
Operations
Donald F. Santa, Jr. 40 Senior Vice President and October 1, 1998
Deputy General Counsel
Frederick J. Newton III 43 Senior Vice President and January 2, 1999
Chief Administrative
Officer
S. Bradford Rives 40 Senior Vice President - February 16, 1999
Finance and Business
Development
Wendy C. Heck 45 Vice President - Infor- February 3, 1998
mation Technology
Charles A. Markel 51 Vice President - January 1, 1993
Finance and Treasurer
Michael D. Robinson 43 Vice President and February 16, 1999
Controller
</TABLE>
32
<PAGE>
The present term of office of each of the above executive officers extends to
the meeting of the Board of Directors following the Annual Meeting of
Shareholders, scheduled to be held April 21, 1999.
There are no family relationships between executive officers of the Company or
executive officers of its subsidiaries.
Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also
executive officers of LG&E and KU. Mr. Hale is Chairman of the Board and Chief
Executive Officer of LG&E and KU; Mr. Lucas is Executive Vice President - Power
Generation of LG&E and KU; Mr. Duncan is Chief Financial Officer of LG&E and KU;
Mr. McCall is Executive Vice President, General Counsel and Corporate Secretary
of LG&E and KU; Mr. Newton is Senior Vice President and Chief Administrative
Officer of LG&E and KU; Mr. Markel is Treasurer of LG&E and KU; and Mr. Robinson
is Vice President and Controller of LG&E and KU. Mr. Wood and Ms. Heck are also
officers of LG&E. Mr. Wood is President of LG&E; and Ms. Heck is Vice President
- - Information Technology of LG&E.
Mr. Hale was President of LG&E Energy from December 1992 to May 1998.
Before he was elected to his current position, Mr. Staffieri was Senior Vice
President, Public Policy and General Counsel of LG&E Energy Corp. and LG&E from
November 1992 to January 1994; President of LG&E from January 1994 to May 1997;
President - Distribution Services of LG&E Energy Corp. from December 1995 to May
1997; Chief Financial Officer of LG&E Energy Corp. and LG&E from May 1997 to
February 1999; and Chief Financial Officer of KU from May 1998 to February 1999.
Before he was elected to his current position, Mr. Duncan was Senior Vice
President, Corporate Finance and Business Development of Freeport-McMoRan
Resource Partners from March 1993 to May 1994; Vice President and Corporate
Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and
their affiliates from May 1994 to January 1998; and Executive Vice President -
Planning and Development of LG&E Energy Corp. from January 1998 to February
1999.
Before he was elected to his current position, Mr. Wood was Senior Vice
President and Chief Administrative Officer of LG&E from August 1990 to January
1994, and Executive Vice President and Chief Administrative Officer of LG&E
Energy Corp. from January 1994 to May 1997.
Before he was elected to his current position, Mr. Hewett was Vice President -
Regulation and Economic Planning of KU from January 1982 to April 1997; and
Senior Vice President - Customer Service and Marketing of KU from April 1997 to
May 1998.
Before he was elected to his current position, Mr. McCall was Partner and
Litigation Chairman of Brown, Todd & Heyburn, a law firm.
Before he was elected to his current position, Mr. Lucas was Vice President,
Energy Supply of KU from November 1986 to November 1994; and Senior Vice
President, Energy Supply of KU from November 1994 to June 1998.
Before he was elected to his current position, Mr. Basinger was Partner of
National Power Company prior to November 1993; Vice President of Venture
Management of LG&E Power Inc. from December 1993 to November 1994; Senior Vice
President of Operations of LG&E Power Inc. from November 1994 to August 1996;
and Senior Vice President - Power Operations of LG&E Energy Corp. from August
1996 to May 1998.
Before he was elected to his current position, Mr. Santa was a member of the
Federal Energy Regulatory
33
<PAGE>
Commission from May 1993 to August 1997; and Vice President and Deputy General
Counsel of LG&E Energy Corp. from September 1997 to October 1998.
Before he was elected to his current position, Mr. Newton was Director of Human
Resources, Manufacturing and Engineering at Unilever from October 1993 to July
1995; Senior Director, Human Resources, Supply Chain, at Unilever from August
1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation
from August 1996 to July 1997; Senior Vice President, Human Resources, at
Woolworth Corporation's Champs Sports Division from August 1997 to April 1998;
and Senior Vice President - Human Resources and Administration of LG&E Energy
Corp., LG&E and KU from May 1998 to January 1999.
Before he was elected to his current position, Mr. Rives was Associate General
Counsel of LG&E Energy Corp. from January 1994 to June 1994; Vice President and
Treasurer of LG&E Power Inc. from June 1994 to March 1995; Vice President,
Controller and Treasurer of LG&E Power Inc. from March 1995 to December 1995;
Vice President - Finance, Non-Utility Business of LG&E Energy Corp. from January
1996 to March 1996; and Vice President - Finance and Controller of LG&E Energy
Corp. from March 1996 to February 1999.
Before she was elected to her current position, Ms. Heck was Vice President -
Information Services of LG&E from January 1994 to May 1997; and Vice President,
Administration of LG&E Energy Corp. from May 1997 to February 1998.
Before he was elected to his current position, Mr. Robinson was Controller of KU
Energy Corporation from June 1990 to May 1998; Controller of KU from August 1990
to May 1998, and Vice President and Controller of LG&E and KU from May 1998 to
the present.
Executive Officers of LG&E:
<TABLE>
<CAPTION>
Effective Date of
Election to Present
Name Age Position Position
------ --- -------- -------------------
<S> <C> <C> <C>
Roger W. Hale 55 Chairman of the Board, January 1, 1992
and Chief Executive
Officer
Stephen R. Wood 56 President May 15, 1997
R. Foster Duncan 45 Executive Vice President February 16, 1999
and Chief Financial Officer
John R. McCall 55 Executive Vice President, July 1, 1994
General Counsel and
Corporate Secretary
Wayne T. Lucas 51 Executive Vice President - May 4, 1998
Power Generation
Frederick J. Newton III 43 Senior Vice President and January 2, 1999
Chief Administrative
Officer
Rebecca L. Farrar 39 Vice President, Gas February 15, 1995
Service Business
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Effective Date of
Election to Present
Name Age Position Position
---- --- -------- -------------------
<S> <C> <C> <C>
Wendy C. Heck 45 Vice President - Infor- February 3, 1998
mation Technology
Chris Hermann 51 Vice President, Power May 4, 1998
Generation and Engineering
Services
Paul W. Thompson 42 Vice President, Retail September 15, 1996
Electric Business
Ronald L. Willhite 52 Vice President - May 4, 1998
Regulatory Affairs
Michael D. Robinson 43 Vice President and May 4, 1998
Controller
Charles A. Markel 51 Treasurer January 1, 1993
</TABLE>
The present term of office of each of the above executive officers extends to
the meeting of the Board of Directors following the Annual Meeting of
Shareholders, scheduled to be held April 21, 1999.
There are no family relationships between executive officers of LG&E.
Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also
executive officers of LG&E Energy Corp. and KU. Mr. Hale is Chairman of the
Board and Chief Executive Officer of LG&E Energy Corp. and KU; Mr. Lucas is
Executive Vice President - Power Generation of LG&E Energy Corp. and KU; Mr.
Duncan is Chief Financial Officer of LG&E Energy Corp. and KU; Mr. McCall is
Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy
Corp. and KU; Mr. Newton is Senior Vice President and Chief Administrative
Officer of LG&E Energy Corp. and KU; Mr. Markel is Vice President - Finance and
Treasurer of LG&E Energy Corp. and Treasurer of KU; and Mr. Robinson is Vice
President and Controller of LG&E Energy Corp. and KU. Mr. Wood and Ms. Heck are
also officers of LG&E Energy Corp. Mr. Wood is President - Distribution Services
of LG&E Energy Corp.; and Ms. Heck is Vice President - Information Technology of
LG&E Energy Corp. Mr. Willhite is also Vice President - Regulatory Affairs of
KU.
Before he was elected to his current position, Mr. Wood was Senior Vice
President and Chief Administrative Officer of LG&E from August 1990 to January
1994, and Executive Vice President and Chief Administrative Officer of LG&E
Energy Corp. from January 1994 to May 1997.
Before he was elected to his current position, Mr. Duncan was Senior Vice
President, Corporate Finance and Business Development of Freeport-McMoRan
Resource Partners from March 1993 to May 1994; Vice President and Corporate
Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and
their affiliates from May 1994 to January 1998; and Executive Vice President -
Planning and Development of LG&E Energy Corp. from January 1998 to February
1999.
Before he was elected to his current position, Mr. McCall was Partner and
Litigation Chairman of Brown, Todd & Heyburn, a law firm.
35
<PAGE>
Before he was elected to his current position, Mr. Lucas was Vice President,
Energy Supply of KU from November 1986 to November 1994; and Senior Vice
President, Energy Supply of KU from November 1994 to June 1998.
Before he was elected to his current position, Mr. Newton was Director of Human
Resources, Manufacturing and Engineering at Unilever from October 1993 to July
1995; Senior Director, Human Resources, Supply Chain, at Unilever from August
1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation
from August 1996 to July 1997; Senior Vice President, Human Resources, at
Woolworth Corporation's Champs Sports Division from August 1997 to April 1998;
and Senior Vice President - Human Resources and Administration of LG&E Energy
Corp., LG&E and KU from May 1998 to January 1999.
Before she was elected to her current position, Ms. Farrar was Division Manager,
Central Division-Gas Operations of South Carolina Electric and Gas Company from
February 1992 to July 1994; and General Manager, Gas Operations of South
Carolina Electric and Gas Company from July 1994 to February 1995.
Before she was elected to her current position, Ms. Heck was Vice President -
Information Services of LG&E from January 1994 to May 1997; and Vice President,
Administration of LG&E Energy Corp. from May 1997 to February 1998.
Before he was elected to his current position, Mr. Hermann was Vice President
and General Manager, Wholesale Electric Business of LG&E from January 1993 to
June 1997; and Vice President, Business Integration of LG&E from June 1997 to
May 1998.
Before he was elected to his current position, Mr. Thompson was
Director-Business Development for LG&E Energy Corp. prior to December 1993;
General Manager-Gas Operations for LG&E from December 1993 to July 1994; and
Vice President-Business Development for LG&E Energy Corp. from July 1994 to
September 1996.
Before he was elected to his current position, Mr. Willhite was Director of
Regulation for Kentucky Utilities prior to April 1997; and Vice President of
Regulation and Economic Planning for Kentucky Utilities from April 1997 to May
1998.
Before he was elected to his current position, Mr. Robinson was Controller of KU
Energy Corporation from June 1990 to May 1998; and Controller of KU from August
1990 to May 1998.
Executive Officers of KU:
<TABLE>
<CAPTION>
Effective Date of
Election to Present
Name Age Position Position
---- --- -------- -------------------
<S> <C> <C> <C>
Roger W. Hale 55 Chairman of the Board, May 4, 1998
and Chief Executive
Officer
Robert M. Hewett 52 President May 4, 1998
Wayne T. Lucas 51 Executive Vice President - May 4, 1998
Power Generation
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Effective Date of
Election to Present
Name Age Position Position
---- --- -------- -------------------
<S> <C> <C> <C>
R. Foster Duncan 45 Executive Vice President February 16, 1999
and Chief Financial Officer
John R. McCall 55 Executive Vice President, May 4, 1998
General Counsel and
Corporate Secretary
Frederick J. Newton III 43 Senior Vice President and January 2, 1999
Chief Administrative
Officer
Gary E. Blake 45 Vice President - Sales May 4, 1998
and Service
James J. Ellington 53 Vice President - Power May 4, 1998
Generation
Ronald L. Willhite 52 Vice President - May 4 1998
Regulatory Affairs
Michael D. Robinson 43 Vice President and August 1, 1990
Controller
Charles A. Markel 51 Treasurer May 4, 1998
</TABLE>
The present term of office of each of the above executive officers extends to
the meeting of the Board of Directors following the Annual Meeting of
Shareholders, scheduled to be held April 21, 1999.
There are no family relationships between executive officers of KU.
Messrs. Hale, Lucas, Duncan, McCall, Newton, Markel and Robinson are also
executive officers of LG&E Energy Corp. and LG&E. Mr. Hale is Chairman of the
Board and Chief Executive Officer of LG&E Energy Corp. and LG&E; Mr. Lucas is
Executive Vice President - Power Generation of LG&E Energy Corp. and LG&E; Mr.
Duncan is Chief Financial Officer of LG&E Energy Corp. and LG&E; Mr. McCall is
Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy
Corp. and LG&E; Mr. Newton is Senior Vice President and Chief Administrative
Officer of LG&E Energy Corp. and LG&E; Mr. Markel is Vice President - Finance
and Treasurer of LG&E Energy Corp. and Treasurer of LG&E; and Mr. Robinson is
Vice President and Controller of LG&E Energy Corp. and LG&E. Mr. Willhite is
also Vice President - Regulatory Affairs of LG&E.
Before he was elected to his current position, Mr. Hale was Chairman of the
Board and Chief Executive Officer of LG&E Energy Corp. from August 1990 to the
present and Chairman of the Board and Chief Executive Officer of LG&E from
January 1992 to the present.
Before he was elected to his current position, Mr. Hewett was Vice President -
Regulation and Economic Planning of KU from January 1982 to April 1997; and
Senior Vice President - Customer Service and Marketing of KU from April 1997 to
May 1998.
Before he was elected to his current position, Mr. Lucas was Vice President,
Energy Supply of KU from
37
<PAGE>
November 1986 to November 1994; and Senior Vice President, Energy Supply of KU
from November 1994 to June 1998.
Before he was elected to his current position, Mr. Duncan was Senior Vice
President, Corporate Finance and Business Development of Freeport-McMoRan
Resource Partners from March 1993 to May 1994; Vice President and Corporate
Treasurer of Freeport-McMoRan, Inc. and Freeport-McMoRan Copper & Gold Inc. and
their affiliates from May 1994 to January 1998; and Executive Vice President -
Planning and Development of LG&E Energy Corp. from January 1998 to February
1999.
Before he was elected to his current position, Mr. McCall was Partner and
Litigation Chairman of Brown, Todd & Heyburn, a law firm, through June 1994; and
Executive Vice President, General Counsel and Corporate Secretary of LG&E Energy
Corp. and LG&E from July 1994 to the present.
Before he was elected to his current position, Mr. Newton was Director of Human
Resources, Manufacturing and Engineering at Unilever from October 1993 to July
1995; Senior Director, Human Resources, Supply Chain, at Unilever from August
1995 to July 1996; Vice President, Human Resources, at Woolworth Corporation
from August 1996 to July 1997; Senior Vice President, Human Resources, at
Woolworth Corporation's Champs Sports Division from August 1997 to April 1998;
and Senior Vice President - Human Resources and Administration of LG&E Energy
Corp., LG&E and KU from May 1998 to January 1999.
Before he was elected to his current position, Mr. Blake was Vice President -
Retail Marketing of KU from November 1992 to May 1998.
Before he was elected to his current position, Mr. Ellington was Superintendent
of KU's Ghent plant from May 1986 to May 1998.
Before he was elected to his current position, Mr. Willhite was Director of
Regulation for Kentucky Utilities prior to April 1997; and Vice President of
Regulation and Economic Planning for Kentucky Utilities from April 1997 to May
1998.
Before he was elected to his current position, Mr. Robinson was Controller of KU
Energy Corporation from June 1990 to May 1998 and Controller of KU from August
1990 to May 1998.
Before he was elected to his current position, Mr. Markel was Vice President -
Finance and Treasurer of LG&E Energy Corp. and Treasurer of LG&E from January
1993 to the present.
38
<PAGE>
PART II.
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
LG&E ENERGY: LG&E Energy 's Common Stock is listed on the New York and
Chicago Stock Exchanges. The ticker symbol is "LGE." The newspaper stock
exchange listings are "LGE Energy" or "LGE EN." The following table gives
information with respect to price ranges, as reported in THE WALL STREET
JOURNAL as New York Stock Exchange Composite Transactions, and dividends paid
for the periods shown (dividends paid have not been restated to reflect the
KU merger).
<TABLE>
<CAPTION>
1998 1997
---- ----
Dividend High Low Dividend High Low
Paid Price Price Paid Price Price
--------- ----- ----- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
First quarter $.2975 $26.4375 $23.0000 $.2875 $25.8750 $23.5000
Second quarter .2975 27.7500 24.6875 .2875 25.0000 21.8125
Third quarter .2975 27.8750 22.5000 .2875 23.4375 21.2500
Fourth quarter .3075 29.3125 26.0625 .2975 25.0625 21.2500
</TABLE>
The number of record holders of Common Stock at December 31, 1998, totaled
50,199. The book value of the Company's Common Stock at December 31, 1998, was
$9.57 per share.
LG&E:
All LG&E common stock, 21,294,223 shares, is held by LG&E Energy. Therefore,
there is no public market for LG&E's common stock.
The following table sets forth LG&E's cash distributions on common stock paid to
LG&E Energy (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First quarter $20,000 $19,000
Second quarter 19,800 -
Third quarter 21,200 19,000
Fourth quarter 22,000 20,000
</TABLE>
39
<PAGE>
KU:
All KU common stock, 37,817,878 shares, is held by LG&E Energy. Therefore,
there is no public market for KU's common stock.
The following table sets forth KU's cash distributions on common stock paid to
LG&E Energy (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First quarter $17,018 $16,639
Second quarter 23,071 16,640
Third quarter 18,000 16,640
Fourth quarter 18,000 16,640
</TABLE>
ITEM 6. Selected Financial Data.
<TABLE>
<CAPTION>
Years Ended December 31
(Thousands of $ Except Per Share Data)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LG&E ENERGY:
Revenues:
Revenues $2,002,413 $1,725,055 $1,560,460 $1,460,980 $1,467,258
Provision for rate refunds (26,000) -- -- (28,300) --
----------- ----------- ----------- ----------- -----------
Net revenues 1,976,413 1,725,055 1,560,460 1,432,680 1,467,258
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Operating income:
Before non-recurring items 475,285 418,855 380,038 350,898 335,691
Provision for rate refunds (26,000) -- -- (29,800) --
Merger costs to achieve and
non-recurring charges (65,318) -- (5,493) -- (48,743)
----------- ----------- ----------- ----------- -----------
Operating income 383,967 418,855 374,545 321,098 286,948
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Net income (loss):
Before non-recurring items 232,216 207,040 192,786 177,467 171,622
Provision for rate refunds (15,556) -- -- (17,852) --
Merger costs to achieve and
non-recurring charges (56,389) -- (2,400) -- (38,696)
----------- ----------- ----------- ----------- -----------
Total continuing
operations 160,271 207,040 190,386 159,615 132,926
Discontinued operations (23,599) (24,044) (4,434) (732) (241)
Gain (loss) on sale of
discontinued operations (225,000) -- -- -- 51,805
Cumulative effect of
accounting change (7,162) -- -- -- (3,369)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (95,490) $ 182,996 $ 185,952 $ 158,883 $ 181,121
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Average number of com-
mon shares outstanding 129,679,020 129,626,875 129,449,526 129,261,031 129,137,726
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
(Thousands of $ Except Per Share Data)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LG&E ENERGY (CONT.):
Earnings (loss) per share of
common stock (basic):
Before non-recurring items $1.79 $1.60 $1.49 $1.37 $1.33
Provision for rate refunds (.12) -- -- (.14) --
Merger costs to achieve and
non-recurring charges (.43) -- (.02) -- (.30)
----------- ----------- ----------- ----------- -----------
Total continuing
operations 1.24 1.60 1.47 1.23 1.03
Discontinued operations (.18) (.19) (.03) -- --
Gain (loss) on sale of
discontinued operations (1.74) -- -- -- .40
Cumulative effect of
accounting change (.06) -- -- -- (.03)
----------- ----------- ----------- ----------- -----------
Earnings (loss) per
share $(.74) $1.41 $1.44 $1.23 $1.40
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings (loss) per share of
common stock (diluted):
Before non-recurring items $1.79 $1.60 $1.49 $1.37 $1.33
Provision for rate refunds (.12) -- -- (.14) --
Merger costs to achieve and
non-recurring charges (.44) -- (.02) -- (.30)
----------- ----------- ----------- ----------- -----------
Total continuing
operations 1.23 1.60 1.47 1.23 1.03
Discontinued operations (.17) (.19) (.03) -- --
Gain (loss) on sale of
discontinued operations (1.73) -- -- -- .40
Cumulative effect of
accounting change (.06) -- -- -- (.03)
----------- ----------- ----------- ----------- -----------
Earnings (loss) per
share $(.73) $1.41 $1.44 $1.23 $1.40
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cash dividends declared per
share of common stock $1.240 $1.113 $1.081 $1.050 $1.021
Payout ratio (from continuing
operations before non-
recurring items) 69.3% 69.7% 72.6% 76.5% 76.8%
Total assets $4,773,268 $4,562,944 $4,132,599 $4,101,526 $3,887,122
Long-term obligations
(including amounts
due within one year) 1,510,775 1,230,711 1,193,229 1,208,846 1,158,895
</TABLE>
LG&E Energy Corp.'s Management's Discussion and Analysis of Results of
Operations and Financial Condition and the Notes to Financial
Statements should be read in conjunction with the above information.
41
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
(Thousands of $)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
LG&E:
Operating revenues:
Revenues $854,556 $845,543 $821,115 $751,763 $759,075
Provision for rate refunds (4,500) -- -- (28,300) --
---------- ---------- ---------- ---------- ----------
Total operating revenues 850,056 845,543 821,115 723,463 759,075
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net operating income:
Before unusual items 138,207 148,186 147,263 138,203 134,393
Provision for rate refunds (2,684) -- -- (16,877) --
Non-recurring charges -- -- -- -- (23,353)
---------- ---------- ---------- ---------- ----------
Operating income 135,523 148,186 147,263 121,326 111,040
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income:
Before unusual items 104,381 113,273 107,941 100,061 94,423
Provision for rate refunds (2,684) -- -- (16,877) --
Merger costs to achieve and
non-recurring charges (23,577) -- -- -- (32,734)
Cumulative effect of
accounting change -- -- -- -- (3,369)
---------- ---------- ---------- ---------- ----------
Net income 78,120 113,273 107,941 83,184 58,320
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income available
for common stock 73,552 108,688 103,373 76,873 52,492
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets 2,104,637 2,055,641 2,006,712 1,979,490 1,966,590
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Long-term obligations
(including amounts
due within one year) $626,800 $646,800 $646,800 $662,800 $662,800
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
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.
<TABLE>
<CAPTION>
Years Ended December 31
(Thousands of $)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
KU:
Operating revenues:
Revenues $831,614 $716,437 $711,711 $686,430 $656,013
Provision for rate refund (21,500) -- -- -- (19,385)
---------- ---------- ---------- ---------- ----------
Operating revenues 810,114 716,437 711,711 686,430 636,628
---------- ---------- ---------- ---------- ----------
Net operating income:
Before unusual items 138,263 118,408 117,337 108,544 120,571
Provision for rate refund (12,875) -- -- -- (19,385)
---------- ---------- ---------- ---------- ----------
Operating income 125,388 118,408 117,337 108,544 101,186
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
(Thousands of $)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
KU (CONT.):
Net income:
Before unusual items 107,303 85,713 86,163 76,842 96,897
Provision for rate refund (12,875) -- -- -- (19,385)
Merger cost to achieve (21,664) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income 72,764 85,713 86,163 76,842 77,512
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income available
for common stock 70,508 83,457 83,907 74,586 75,128
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Total assets 1,763,797 1,679,880 1,673,055 1,659,988 1,618,100
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Long-term obligations
(including amounts
due within one year) $546,330 $546,351 $546,373 $545,894 $495,916
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
KU's Management's Discussion and Analysis of Results of Operations and
Financial Condition and KU's Notes to Financial Statements should be
read in conjunction with the above information.
43
<PAGE>
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
LG&E ENERGY:
GENERAL
The following discussion and analysis by management focuses on those factors
that had a material effect on the Company's financial results of operations
and financial condition during 1998, 1997 and 1996 and should be read in
connection with the consolidated financial statements and notes thereto. As
set forth in the discussion concerning Discontinued Operations below, future
financial results from the Company's operations will continue to reflect the
results from its portfolio of investments in electric generation and gas
distribution in addition to the financial results provided by the Company's
regulated utilities, Louisville Gas and Electric Company (LG&E) and Kentucky
Utilities Company (KU).
Some of the following discussion may contain forward-looking statements that
are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document by
the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include: general
economic conditions; business and competitive conditions in the energy
industry; changes in federal or state legislation; unusual weather; actions
by state or federal regulatory agencies; and other factors described from
time to time in LG&E Energy Corp.'s reports to the Securities and Exchange
Commission, including Exhibit 99.01 to LG&E Energy Corp.'s report on Form 8-K
filed October 21, 1998.
MERGER
Effective May 4, 1998, following the receipt of all required state and
federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy
Corporation (KU Energy) merged, with LG&E Energy as the surviving
corporation. The accompanying consolidated financial statements reflect the
accounting for the merger as a pooling of interests and are presented as if
the companies were combined as of the earliest period presented. However, the
financial information is not necessarily indicative of the results of
operations, financial position or cash flows that would have occurred had the
merger been consummated for the periods for which it is given effect, nor is
it necessarily indicative of future results of operations, financial
position, or cash flows. The financial statements reflect the conversion of
each outstanding share of KU Energy common stock into 1.67 shares of LG&E
Energy common stock. The outstanding preferred stock of LG&E and KU was not
affected by the merger. See Note 2 of LG&E Energy's Notes to Financial
Statements under Item 8.
DISCONTINUANCE OF MERCHANT ENERGY TRADING AND SALES BUSINESS
Effective June 30, 1998, the Company discontinued its merchant energy trading
and sales business. This business consisted primarily of a portfolio of
energy marketing contracts entered into in 1996 and early 1997, nationwide
deal origination and some level of speculative trading activities, which were
not directly supported by the Company's physical assets. The Company's
decision to discontinue these operations was primarily based on the impact
that volatility and rising prices in the power market had on its portfolio of
energy marketing contracts. Exiting the merchant energy trading and sales
business enables the Company to focus on optimizing the value of physical
assets it owns or controls, and to reduce the earnings impact on continuing
operations of extreme market volatility in its portfolio of energy marketing
contracts. The Company is in the process of settling commitments that
obligate it to buy and sell natural gas and electric power. It also plans to
sell its natural gas gathering and processing business. If the Company is
unable to dispose of these commitments or assets it will continue to meet its
obligations under the contracts. The Company, however, has maintained
sufficient market knowledge, risk management skills, technical systems and
experienced personnel to maximize
44
<PAGE>
LG&E Energy (cont.):
the value of power sales from physical assets it owns or controls, including
LG&E, KU and the Big Rivers Electric Corporation (Big Rivers).
As a result of the Company's decision to discontinue its merchant energy
trading and sales activity, and the decision to sell the associated gas
gathering and processing business, the Company recorded an after-tax loss on
disposal of discontinued operations of $225 million in the second quarter of
1998. The loss on disposal of discontinued operations results primarily from
several fixed-price energy marketing contracts entered into in 1996 and early
1997, including the Company's long-term contract with Oglethorpe Power
Corporation (OPC). Other components of the write-off include costs relating
to certain peaking options, goodwill associated with the Company's 1995
purchase of merchant energy trading and sales operations and exit costs,
including labor and related benefits, severance and retention payments, and
other general and administrative expenses. Although the Company used what it
believes to be appropriate estimates for future energy prices among other
factors to calculate the net realizable value of discontinued operations, it
also recognizes that there are inherent limitations in models to accurately
predict future events. As a result, there is no guarantee that
higher-than-anticipated future commodity prices or load demands, lower-
than-estimated asset sales prices or other factors could not result in
additional losses. The Company has been successful in settling portions of
its discontinued operations, but significant assets, operations and
obligations remain. As of January 27, 1999, the Company estimates that a $1
change in electricity prices and a 10(cent) change in natural gas prices
across all geographic areas and time periods could change the value of the
Company's remaining energy portfolio by approximately $8.8 million. In
addition to price risk, the value of the Company's remaining energy portfolio
is subject to operational and event risks including, among others, increases
in load demand, regulatory changes, and forced outages at units providing
supply for the Company. As of January 27, 1999, the Company estimates that a
1% change in the forecasted load demand could change the value of the
Company's remaining energy portfolio by $9.3 million. See Notes 3 and 18 of
LG&E Energy's Notes to Financial Statements under Item 8.
The Company reclassified its financial statements for prior periods to
present the operating results, financial position and cash flows of these
businesses as discontinued operations. See Notes 1 and 3 of LG&E Energy's
Notes to Financial Statements under Item 8 for more information.
MASTER RESTRUCTURING AGREEMENT
On June 30, 1998, the partnership that owns the Rensselaer cogeneration
facility, along with 14 other independent power producers, participated in
the consummation of a Master Restructuring Agreement (MRA) with Niagara
Mohawk Power Corporation (NIMO), the utility purchasing energy from the
Rensselaer facility. The Company recognized a net after-tax gain on the MRA
transaction and settlement of $21 million. See Note 8 of LG&E Energy's Notes
to Financial Statements under Item 8.
LEASE OF BIG RIVERS FACILITIES
On July 15, 1998, the Company closed the transaction to lease the generating
assets of Big Rivers following receipt of necessary regulatory approvals.
Under the 25-year operating lease, Western Kentucky Energy Corp. and its
affiliates (WKE) are leasing and operating Big Rivers' three coal-fired
facilities. In addition, WKE operates and maintains the Station Two
generating facility of the City of Henderson (Henderson). The combined
generating capacity of these facilities amounts to approximately 1,700
megawatts, net of the Henderson's capacity and energy needs from Station Two.
In related transactions, power is supplied to Big Rivers at contractual
prices over the term of the lease to meet the needs of four member
distribution cooperatives and their retail customers, including major western
Kentucky aluminum smelters. Excess generating capacity is available to WKE to
market throughout the region. In connection with these transactions, WKE has
45
<PAGE>
LG&E Energy (cont.):
undertaken to bear certain of the future capital requirements of those
generating assets, certain defined environmental compliance costs and other
obligations. Big Rivers' personnel at the plants became employees of WKE upon
the completion of the transactions.
RESULTS OF OPERATIONS
Earnings per Share
Continuing operations for 1998 produced basic earnings per share of $1.24,
before a decrease of 6 cents due to cumulative effect of an accounting
change, a decrease of 36 cents per share from $1.60 earned from continuing
operations in 1997. Earnings for 1998 include non-recurring charges for
merger-related costs and environmental cost recovery refunds of 43 cents and
12 cents, respectively. Excluding these non-recurring charges, earnings per
share from continuing operations for 1998 were $1.79, an increase of 19 cents
over 1997. The 19 cent per share increase resulted from a 10 cent increase in
core domestic utility business and a 16 cent increase in non-utility
business, partially offset by an increase in corporate and other expenses of
7 cents. The 1998 non-utility results included 16 cents relating to the
consummation of the MRA with NIMO, 3 cents for first-year earnings related to
the Big Rivers transactions, 1 cent due to a full year of operations and an
increase in core business of our Argentine operations, partially offset by an
increase in non-utility expenses of 4 cents, primarily related to the loss on
disposition of our gas-fired power plant in San Miguel, Argentina and, the
write-off of our Windpower Partners 1994 investment.
Earnings per share from continuing operations for 1997 were $1.60, an
increase of 13 cents per share from the $1.47 earned from continuing
operations in 1996. Earnings for 1996 included a charge of 2 cents resulting
from a write-off associated with non-utility investments. Excluding this
charge, earnings per share from continuing operations for 1996 were $1.49;
thus, 1997 earnings from continuing operations increased 11 cents. The 11
cent per share increase resulted from an increase in core utility business
earnings of 3 cents, first-year earnings related to the acquisition of
interests in two Argentine gas distribution units of 4 cents, and an increase
in the non-utility power generation business of 8 cents, partially offset by
an increase in corporate and other expenses, including interest expense on
debt incurred to acquire non-utility businesses of 4 cents. The 3 cent
increase in utility earnings was primarily due to higher contributions from
wholesale electric sales and lower maintenance expenses.
Loss from discontinued operations decreased from 19 cents in 1997 to 18 cents
in 1998, due primarily to the Company's decision to exit the merchant energy
trading and sales business effective June 30, 1998. See Note 3 of LG&E
Energy's Notes to Financial Statements under Item 8.
Loss from discontinued operations increased from 3 cents in 1996 to 19 cents
in 1997, due primarily to abnormal weather, price volatility in the energy
market and narrowing margins in the natural gas business.
46
<PAGE>
LG&E Energy (cont.):
Electric and Gas Utility Results
Revenues
A comparison of utility revenues for the years 1998 and 1997, excluding the
$26 million provision recorded for refund of environmental costs previously
recovered from customers (ECR refund), with the immediately preceding year
reflects both increases and decreases, which have been segregated by the
following principal causes (in thousands of $):
<TABLE>
<CAPTION>
Increase (Decrease) From Prior Period
Electric Revenues Gas Revenues
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales to ultimate consumers:
Fuel and gas supply adjustments, etc. $ 4,908 $ (7,569) $ (4,393) $ 27,192
Merger surcredit (7,501) -- -- --
Demand side management/decoupling (6,299) 8,041 (369) 4,348
Environmental cost recovery surcharge (807) 1,002 -- --
Variation in sales volumes 52,892 6,491 (42,418) (14,891)
----------- --------- --------- --------
Total retail sales 43,193 7,965 (47,180) 16,649
Wholesale sales 90,386 1,210 8,720 --
Gas transportation-net -- -- (71) 147
Other (324) 3,548 (935) (204)
----------- --------- --------- --------
Total $ 133,255 $ 12,723 $ (39,466) $ 16,592
----------- --------- --------- --------
----------- --------- --------- --------
</TABLE>
Electric retail sales increased primarily due to the warmer weather
experienced in 1998 as compared to 1997. Wholesale sales increased due to
larger amounts of power available for off-system sales, and an increase in
the unit price of the sales. Gas retail sales decreased from 1997 due to the
warmer weather in 1998. Gas wholesale sales increased to $8.7 million in 1998
from zero in 1997 due to the implementation of LG&E's performance-based
ratemaking mechanism. See Note 5 of LG&E Energy's Notes to Financial
Statements under Item 8.
Electric revenues increased in 1997 due to a higher level of industrial sales
and other revenues. Gas revenues increased primarily as a result of higher
gas supply costs billed to customers through the gas supply clause, partially
offset by decreased gas sales due mainly to warmer weather.
Expenses
Fuel for electric generation and gas supply expenses comprise a large
component of the Company's total operating costs. LG&E's and KU's electric
rates contain a fuel adjustment clause (FAC) and LG&E's gas rates contain a
gas supply clause, whereby increases or decreases in the cost of fuel and gas
supply are reflected in LG&E's and KU's rates, subject to approval by the
Kentucky Public Service Commission (Kentucky Commission or Commission), the
Virginia State Corporation Commission (Virginia Commission) and the Federal
Energy Regulatory Commission (FERC).
Fuel for electric generation increased $34.1 million in 1998 primarily due to
an increase in generation to support increased electrical sales at KU ($27.3
million) and a higher cost of coal burned at LG&E ($6.6 million). Fuel
expenses incurred in 1997 decreased $10 million primarily due to a decrease
in generation at KU which resulted from an increase in economic power
purchased. LG&E's average delivered cost per ton of coal purchased was $22.38
in 1998, $21.66 in 1997, and $21.73 in 1996. KU's average delivered cost per
ton of coal purchased was
47
<PAGE>
LG&E Energy (cont.):
$26.97 in 1998, $27.97 in 1997, and $27.54 in 1996.
Power purchased increased $59.5 million in 1998 to support the increase in
wholesale sales and due to increases in the unit price of purchases.
Purchased power expense increased $10.7 million (13%) in 1997, due to an
increase at KU in kilowatt hour (kWh) purchases associated with increased
availability of surplus power on favorable pricing terms and to a one-time
reduction at KU in demand costs in 1996 of about $4 million under a contract
with a neighboring utility.
Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a
decrease in the volume of gas delivered to the distribution system. Gas
supply expenses for 1997 increased $18.4 million (13%) because of the higher
cost of net gas supply ($29.3 million), partially offset by a decrease in the
volume of gas delivered to the distribution system ($10.9 million). The
average unit cost per thousand cubic feet (Mcf) of purchased gas was $3.05 in
1998 and $3.46 in 1997 and 1996.
Operation and maintenance expenses increased $14.6 million (3.8%) over 1997
because of increased costs to operate and maintain LG&E's electric generating
plants ($8.8 million), amortization of deferred merger costs ($3.8 million),
and an increase in storm damage expenses ($1.4 million).
Operation and maintenance expenses for 1997 were approximately the same as
1996. Maintenance decreased in 1997 due mainly to decreased repairs at LG&E's
electric generating plants caused by fewer outages and a lower level of storm
damage repairs. These decreases were offset by an increase in costs to
operate LG&E's power plants and a write-off of certain previously deferred
items at LG&E that amounted to approximately $3 million. Items written off
include expenses associated with the hydroelectric plant and a management
audit fee. Even though LG&E believes it could have reasonably expected to
recover these costs in future rate proceedings, it decided not to seek
recovery and expensed these costs because of increasing competitive pressures
in the industry.
Depreciation and amortization increased $2.7 million (1.5%) in 1998 because
of additional utility plant in service. Depreciation and amortization
increased in 1997 primarily because of additional plant in service at both KU
and LG&E. In addition, 1997 reflects the accelerated write-off of losses on
early retirements of facilities at LG&E.
The companies incurred a pre-tax charge in the second quarter of 1998 for
costs associated with the merger of LG&E Energy and KU Energy of $53.9
million (of this amount, $32.1 million was for LG&E, and $21.8 million was
for KU). The amount charged is in excess of the amount permitted to be
deferred as a regulatory asset by the Kentucky Public Service Commission. See
Note 2 of LG&E Energy's Notes to Financial Statements under Item 8.
Interest charges for 1998 decreased $3.9 million (7%) due to the retirement
of LG&E's 6.75% Series First Mortgage Bonds and lower interest rates. LG&E's
embedded cost of long-term debt was 5.57% at December 31, 1998 and 5.68% at
December 31, 1997. KU's embedded cost of long-term debt was 6.99% at December
31, 1998 and 6.98% at December 31, 1997. See Note 16 of LG&E Energy's Notes
to Financial Statements under Item 8.
Variations in income tax expenses are largely attributable to changes in
pre-tax income as well as non-deductible merger expenses.
The rate of inflation may have a significant impact on the Company's utility
operations, its ability to control
48
<PAGE>
LG&E Energy (cont.):
costs and the need to seek timely and adequate rate adjustments. However,
relatively low rates of inflation in the past few years have moderated the
impact on current operating results.
LG&E Capital Corp. Results
LG&E Capital Corp. (Capital Corp.), the holding company for all non-utility
investments, conducts its operations through three principal segments:
Independent Power Operations, WKE and Argentine Gas Distribution. Involvement
in these and other non-utility businesses represents the Company's commitment
to understand, respond to, and capitalize on the opportunities presented by
an emerging competitive energy services industry. The Independent Power
Operations develop, operate, maintain and own interests in domestic and
international power generation facilities that sell electric and steam energy
to utility and industrial customers, and own equity interests in combustion
turbines which are leased to others. WKE leases and operates the generating
facilities of Big Rivers. Argentine Gas Distribution owns interests in two
natural gas distribution companies in Argentina. Capital Corp. is also
engaged in commercial and retail initiatives designed to assess the energy
and utility needs of large commercial and industrial entities, provide
maintenance and repair services for customers' major household appliances and
provide third party metering and billing services. See Notes 2, 4, 8, 9, 18
and 20 of LG&E Energy's Notes to Financial Statements under Item 8.
Independent Power Operations
Revenues
Revenues from Independent Power Operations, comprised mainly of contractual
revenues from various power plant operations, were approximately the same in
1998 and 1997. Revenues increased 9% to $19.6 million in 1997 due to the
addition of plant operating contracts at the Windpower Partners 1993 (WPP 93)
California and Minnesota facilities, as well as the Windpower Partners 1994
(WPP 94) Texas facility. See Note 18 of LG&E Energy's Notes to Financial
Statements under Item 8.
Equity in Earnings of unconsolidated ventures includes the Company's share of
earnings from the ventures in which it maintains an equity interest, but does
not consolidate the results of operations. The 247% increase in equity in
earnings in 1998 to $71.3 million was primarily attributable to the closure
of the MRA transaction with NIMO and an arbitration award received by the
Frederickson, Washington, venture, partially offset by a write-off of the
Company's investment in the WPP 94 venture. Equity in Earnings were
approximately the same in 1997 and 1996. See Notes 8 and 18 of LG&E Energy's
Notes to Financial Statements under Item 8.
Expenses
Direct costs of revenues are primarily comprised of labor and related
expenses associated with the Company 's operation of various power plants.
These costs were approximately the same in 1998 and 1997. Expenses increased
9% to $12.2 million in 1997 due to the addition of the operating contracts at
the WPP 93 and WPP 94 facilities.
Operation and maintenance expenses were approximately the same for all
periods presented. Depreciation and amortization increased $3.3 million in
1998 due to the write-off of certain intangible assets and capitalized
interest associated with the sale of the Company's interest in a 114 MW
gas-fired power plant in San Miguel, Argentina and the closure of the MRA
transaction with NIMO. Depreciation and amortization expenses were
approximately the same in 1997 and 1996. See Note 8 of LG&E Energy's Notes to
Financial Statements under Item 8.
49
<PAGE>
LG&E Energy (cont.):
Western Kentucky Energy
WKE commenced operations effective July 15, 1998, after closing its lease
transaction with Big Rivers and reported solid performance during its first
partial year of operations with revenues of $128.5 million. WKE's cost of
revenues, primarily composed of fuel and purchased power expenses, amounted
to $73.1 million for the year. Operation and maintenance expenses of $45.4
million include $12.8 million of rent expense associated with the lease of
Big Rivers' operating facilities. WKE incurred interest expense of
approximately $2.6 million associated with borrowings to fund the initial
purchase of certain materials and supplies from Big Rivers and to prepay the
first two years' lease payments of $55.9 million. See Note 4 of LG&E Energy's
Notes to Financial Statements under Item 8.
Argentine Gas Distribution
In February 1997, the Company acquired interests in two Argentine natural gas
distribution companies: Distribuidora de Gas del Centro (Centro) and
Distribuidora de Gas Cuyana (Cuyana). Centro is consolidated within the
Company's results while Cuyana's results are recorded using the equity method
of accounting. Our investments in Argentina continue to contribute to our
non-utility operations, with Centro's revenues increasing by 16% or $21
million due to a full year of operations in 1998 versus 10 1/2 months in
1997, higher per customer consumption and an increase in the customer base.
Centro's operating expenses increased by 8% or $2.4 million due to a full
year of operations in 1998. Equity in earnings of Cuyana were approximately
the same in 1997 and 1998. See Notes 2 and 8 of LG&E Energy's Notes to
Financial Statements under Item 8.
Other
The Company has entered into various commercial and retail initiatives to
position itself for growth in the energy industry. The commercial initiatives
represent new businesses and products designed to leverage the Company's
existing assets and experience, and to gain access to new markets. Our retail
initiatives enhance value for LG&E's and KU's customers and are designed to
help ensure that LG&E and KU remain the utility of choice within their
respective service areas when a fully competitive industry framework takes
shape. These commercial and retail initiatives have not had a significant
impact on the Company's financial position or required significant capital
investment over the last three years. We remain optimistic that these
non-traditional developing ventures will add to our knowledge base as well as
our financial results in the future.
Interest costs increased by $10.4 million, or 62%, from 1997 to 1998
primarily due to the funding of discontinued operations and LG&E Energy's
operating expenses. The increase of $7.5 million, or 80%, from 1996 to 1997
was primarily due to the Argentine gas distribution acquisition. See Notes 2,
3, 6 and 16 of LG&E Energy's Notes to Financial Statements under Item 8.
LIQUIDITY AND CAPITAL RESOURCES
The Company's need for capital funds is largely related to the construction
of plant and equipment necessary to meet the needs of electric and gas
utility customers and equity investments in connection with independent power
production projects and other energy-related growth or acquisition
opportunities among the non-utility businesses. Capital funds are also needed
for the Company's capital obligations under the Big Rivers lease
arrangements, losses incurred in connection with the discontinuance of the
merchant energy trading and sales business, information system enhancements,
and other business development opportunities. Fluctuations in the Company's
discontinued energy marketing and trading activities also affected liquidity
throughout the year. Lines of credit and commercial paper programs are
maintained to fund these temporary capital requirements.
50
<PAGE>
LG&E Energy (cont.):
Construction Expenditures and Equity Investments
Utility construction expenditures for 1998 were $230 million compared with
$205 million for 1997 and $215 million for 1996. Non-utility construction
expenditures (other than unconsolidated ventures) were approximately $112
million in 1998, $5 million in 1997, and $1 million in 1996. The 1998
increase for non-utility is mainly due to the purchase of two gas turbine
peaking units by Capital Corp., system expansion and refurbishment at Centro,
and generating asset upgrades at WKE.
Past Financing Activities
During 1998, 1997 and 1996, the Company's primary sources of capital were
internally generated funds from operating cash flows and debt financing.
Internally generated funds provided financing for 100% of the Company's
utility construction expenditures for 1998, 1997 and 1996. In 1998, the
Company financed $92 million in closing costs related to the WKE lease with
commercial paper. The Company provided its merchant energy trading and sales
business with additional cash to meet obligations and general working capital
needs from funds obtained via Capital Corp.'s borrowings. The results of the
merchant energy trading and sales business are included in discontinued
operations. The Company acquired interests in two Argentine natural gas
distribution companies in 1997 for $140 million, plus transaction related
fees and expenses. This acquisition was financed with cash and lines of
credit.
The Company's combined cash and marketable securities balance decreased by
$3.7million in 1998 and increased by $21 million in 1997. The decrease in
1998 reflects expenses incurred to discontinue our merchant energy trading
and sales business, merger costs and an increase in capital expenditures,
partially offset by increased borrowings and cash flow from continuing
operations. The increase for 1997 reflects cash flows from operations and an
increase in borrowings, partially offset by capital expenditures and
dividends paid. In 1996, combined cash and marketable securities decreased
$15.7 million. This decrease reflects capital expenditures, dividends paid
and a net decrease in borrowings, partially offset by cash flows from
operations.
The increases in accounts receivable and accounts payable during 1998
resulted primarily from the Big Rivers transaction. Variations in accounts
receivable and accounts payable are not generally significant indicators of
the Company's liquidity, as such variations are primarily attributable to
fluctuations in weather in LG&E's and KU's service territories.
In November 1998, Capital Corp. issued $150 million of Reset Put Securities
due 2011. The interest rate is set at 5.75% through November 1, 2001. The
securities will be subject to automatic purchase by a remarketing agent, at
which time the interest rate will be reset, or to automatic repurchase by
Capital Corp. on November 1, 2001. After taking into account the net effect
of the derivative instruments entered into in September 1998 to hedge the
interest rate on the notes and other issuance costs, the effective rate
through October 31, 2001 is approximately 5.4%. The proceeds were used to
repay a portion of Capital Corp.'s outstanding commercial paper. See Note 16
of LG&E Energy's Notes to Financial Statements under Item 8.
On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by LG&E. The bonds were redeemed with available
funds.
In February 1998, Capital Corp. issued $150 million of medium-term notes due
January 2008, with a stated interest rate on the notes of 6.46%. After taking
into account the effects of an interest rate swap entered into in 1997 to
hedge the interest rate on $100 million of such medium-term notes and other
issuance costs, the effective rate will be 6.82%. The proceeds were used to
repay outstanding commercial paper. See Note 16 of
51
<PAGE>
LG&E Energy (cont.):
LG&E Energy's Notes to Financial Statements under Item 8.
In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and
$35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. The interest rates for these bonds were
3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these
bonds were used to redeem the outstanding 7.75% Series of Jefferson County,
Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February
1, 2019.
In September 1997, LG&E Energy Systems Inc. and LG&E Gas Systems Inc. merged
to form Capital Corp. At the same time, Capital Corp. implemented a $600
million commercial paper facility backed by new lines of credit totaling $700
million. The Company terminated the previous lines of credit which totaled
$460 million.
The Company's equity investments in non-utility projects and non-utility
construction expenditures were financed through internally generated funds
and short-term borrowings. Construction expenditures for new generating
projects were generally funded through project debt.
The Company had non-utility short-term borrowings outstanding of $365.1
million as of December 31, 1998. These borrowings consisted of commercial
paper, which had maturity dates ranging between 1 and 270 days. Because of
the rollover of these maturity dates, total short-term borrowings and
repayments during the year were approximately $6.8 billion. Short-term
borrowings were $360.2 million as of December 31, 1997, and $158 million as
of December 31, 1996. The increase in 1997 was primarily due to the
acquisition of the interests in the Argentine natural gas distribution
companies and the funding of working capital requirements.
KU had no short-term borrowings at December 31, 1998. At the end of 1997,
KU's short-term borrowings were $34 million compared to $54 million at
December 31, 1996. KU has used short-term borrowings to temporarily finance
ongoing construction expenditures and general corporate requirements. The
decrease in 1998 from 1997 and 1997 from 1996 was due primarily to KU's cash
provided by operations exceeding cash required for investing and financing
activities (exclusive of short-term borrowings). LG&E had no short-term
borrowings at December 31, 1998 or 1997.
In May 1998, upon closing of the merger with KU Energy, the Company issued
63,149,394 shares of common stock to former KU Energy shareholders. The
Company issued 186,192 shares of new common stock in 1997 and 146,678 shares
in 1996, under various employee plans. The Company announced a program on
October 14, 1997, authorizing the repurchase of up to 1,000,000 shares of its
common stock to be used for, among other things, benefit and compensation
plans. See Note 15 of LG&E Energy's Notes to Financial Statements under Item
8.
Future Capital Requirements
Future utility financing requirements may be affected in varying degrees by
factors such as load growth, changes in construction expenditure levels, rate
actions by regulatory agencies, new legislation, market entry of competing
electric power generators, changes in environmental regulations and other
regulatory requirements. The Company estimates that LG&E's construction
expenditures will total $384 million for 1999 and 2000, and that KU's
construction expenditures for the same period will total approximately $341
million. Both utilities construction estimates include capital expenditures
associated with installation of low nitrogen oxide burner systems as
described in the section titled "Environmental Matters." In addition, KU's
capital requirements for 2000 include $61.5 million for scheduled debt
retirements. Capital expenditures for the non-utility businesses are
anticipated to total $68 million for 1999 and 2000. Other future capital
funding requirements are dependent
52
<PAGE>
LG&E Energy (cont.):
upon the identification of suitable investment opportunities to enhance
shareholder returns and achieve long-term financial objectives through
business acquisitions.
In October 1998, the Company negotiated for the purchase of two gas turbine
peaking units at a total cost of approximately $125 million, of which $62
million was expended in 1998.
In July 1998, as part of the deal structure with Big Rivers, WKE agreed to
provide Big Rivers a $50 million note to help it emerge from bankruptcy. WKE
will provide $1.7 million per month for the first 12 months of the note,
beginning August 1998, and $2.5 million per month over the subsequent 12
months. The note will be repaid over a three-year period, beginning August
2000, with interest at 7.165%.
In July 1998, following the Company's decision to discontinue its merchant
energy trading and sales business, Standard & Poor's (S&P) downgraded the
credit ratings of the Company and its subsidiaries while Moody's and Duff &
Phelps (D&P) kept the Company and its subsidiaries at their prior ratings.
The Company's current debt ratings are:
<TABLE>
<CAPTION>
Moody's S&P D&P
------- ------ ------
<S> <C> <C> <C>
LG&E
First mortgage bonds Aa2 A+ AA
Unsecured debt Aa3 A AA-
Preferred stock aa3 A- AA-
KU
First mortgage bonds Aa2 AA- AA
Preferred stock aa3 A- AA-
Commercial paper P-1 A-1 D-1+
CAPITAL CORP.
Medium-term notes A1 A A+
Commercial paper P-1 A-1 D-1+
</TABLE>
These ratings reflect the views of Moody's, S&P and D&P. An explanation of
the significance of these ratings may be obtained from them. A security
rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal at any time by the rating agency.
Future Sources of Financing
Internally generated funds from operations and new debt are expected to fund
LG&E's and KU's anticipated construction expenditures in 1999 and 2000.
Similarly, the Company anticipates having sufficient internal cash
generation, borrowing capacity and access to securities markets to meet
anticipated equity investments and non-utility capital expenditures in 1999
and 2000.
At December 31, 1998, loan agreements and lines of credit were in place
totaling $960 million ($200 million for LG&E, $60 million for KU, and $700
million for Capital Corp.) for which the companies pay commitment or facility
fees. The LG&E credit facility provides for short-term borrowing. KU's credit
facilities provide for short-term borrowing and support of commercial paper
borrowings. The Capital Corp. facilities provide for short-term borrowing,
letter of credit issuance, and support of commercial paper borrowings. Unused
capacity
53
<PAGE>
LG&E Energy (cont.):
under these lines totaled $536.8 million after considering the commercial
paper support and approximately $58.1 million in letters of credit securing
on- and off-balance sheet commitments. The credit lines will expire at
various times from 1999 through 2002. Management expects to renegotiate the
lines when they expire.
The lenders under the credit facilities, commercial paper facility and the
medium-term notes for Capital Corp. are entitled to the benefits of a Support
Agreement with LG&E Energy Corp. See Note 17 of LG&E Energy's Notes to
Financial Statements under Item 8.
Market Risks
LG&E Energy is exposed to market risks in both its regulated and non-utility
operations. Both operations are exposed to market risks from changes in
interest rates and commodity prices, while the non-utility operations are
also exposed to changes in foreign exchange rates. To mitigate changes in
cash flows attributable to these exposures, the Company has entered into
various derivative financial instruments. Derivative positions are monitored
using techniques that include market value and sensitivity analysis.
Interest Rate Sensitivity
The Company has short-term and long-term variable rate debt obligations
outstanding. At December 31, 1998, the potential change in interest expense
associated with a 1% change in base interest rates of the Company's unswapped
debt is estimated at $4 million.
Interest rate swaps are used to hedge the Company's underlying variable rate
debt obligations. These swaps hedge specific debt issuance and consistent
with management's designation are accorded hedge accounting treatment.
LG&E and Capital Corp. have entered into swaps to reduce the impact of
interest rate changes on their Pollution Control Bonds and commercial paper
program. The swap agreements involve the exchange of floating-rate interest
payments for fixed interest payments over the life of the agreements. As of
December 31, 1998, 40% of the outstanding variable interest rate borrowings
were converted to fixed interest rates through swaps. The potential loss in
fair value from these positions resulting from a hypothetical 1% adverse
movement in base interest rates is estimated at $5.6 million as of December
31, 1998. Changes in the market value of these swaps if held to maturity, as
the Company intends to do, will have no effect on the Company's net income or
cash flow. See Note 6 of LG&E Energy's Notes to Financial Statements under
Item 8.
In April 1998, LG&E entered into a forward starting swap agreement. The
forward swap involves the exchange of floating-rate interest payments for
fixed interest payments over the life of the agreement. The forward swap was
entered into to hedge LG&E's exposure to interest rates for the anticipated
call of its Trimble County, Kentucky, Pollution Control Bonds, 7 5/8% Series,
due November 1, 2020. The potential loss in fair value from this position
resulting from a hypothetical 10% change in the yield curve is estimated at
$7.5 million as of December 31, 1998. See Note 6 of LG&E Energy's Notes to
Financial Statements under Item 8.
Commodity Price Sensitivity
LG&E and KU have limited exposure to market volatility in prices of fuel or
electricity, as long as cost-based regulations exist. To mitigate residual
risks relative to the movements in fuel or electricity prices, LG&E and KU
have entered into primarily fixed-priced contracts for the purchase and sale
of electricity through the wholesale electricity market. WKE is exposed to
changes in fuel prices. To mitigate this risk, WKE has
54
<PAGE>
LG&E Energy (cont.):
entered into various fuel supply contracts which expire at various times
through 2001. Realized gains and losses are recognized in the income
statement as incurred. At December 31, 1998, exposure from these activities
was not material to the consolidated financial statements of the Company.
Capital Corp. through its subsidiaries operates and controls the generating
capacity of Big Rivers and the City of Henderson. Some of the excess capacity
generated by Big Rivers and the City is currently being marketed by WKE. To
mitigate residual risks relative to the movements in electricity prices, WKE
has entered into primarily fixed-priced contracts for the purchase and sale
of electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31,
1998, exposure from these activities was not material to the consolidated
financial statements of the Company.
The Company's discontinued merchant energy trading and sales business has
exposure to market volatility in prices of electricity. See Discontinuance of
Merchant Energy Trading and Sales Business under Management's Discussion and
Analysis and Note 3 of Notes to Financial Statements.
Exchange Rate Sensitivity
The Company has investments in Argentina and Spain which are not hedged. The
Company relies on the Argentine peso's currency peg to the U.S. dollar to
mitigate currency risk attributable to its Argentine investments and views
its Spanish investment as too small to hedge cost-effectively. A 10% decline
in the December 31, 1998 exchange rate for the Argentine peso and the Spanish
peseta (versus the U.S. dollar) would not have a material effect on income
from continuing operations.
YEAR 2000 COMPUTER SOFTWARE ISSUE
The Company and its subsidiaries use various software, systems and technology
that may be affected by the "Year 2000 Issue." This concerns the ability of
electronic processing equipment (including microprocessors embedded in other
equipment) to properly process the millennium change to the year 2000 and
related issues. A failure to timely correct any such processing problems
could result in material operational and financial risks if significant
systems either cease to function or produce erroneous data. Such risks are
more fully detailed in the sections that follow, but could include an
inability to operate its generating plants, disruptions in the operation of
transmission and distribution systems and an inability to access
interconnections with the systems of neighboring utilities.
The Company began its project regarding the Year 2000 issue in 1996. The
Board of Directors has approved the general Year 2000 plan and receives
regular updates. In addition, monthly reporting procedures have been
established at senior management levels. Since 1996, a single-purpose Year
2000 team has been established in the Information Technology (IT) Department.
This team, which is headed by an officer of the Company, is responsible for
planning, implementing and documenting the Company's Year 2000 process. The
team also provides direct and detailed assistance to the Company's
operational divisions and smaller units, where identified personnel are
responsible for Year 2000 work and remediation in their specific areas. In
many cases, the Company also uses the services of third parties, including
technical consultants, vendor representatives and auditors.
The Company's Year 2000 effort generally follows a three-phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
55
<PAGE>
LG&E Energy (cont.):
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work plans
regarding Company and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency planning.
The Company has long recognized the complexity of the Year 2000 issue. Work
has progressed concurrently on (a) replacing or modifying IT systems,
including mainframes, client-server, PCs and software applications, (b)
replacing or modifying non-IT systems, including embedded systems such as
mechanical control units and (c) evaluating the readiness of key third
parties, including customers, suppliers, business partners and neighboring
utilities.
State of Readiness
As of January 1999, the Company and its subsidiaries have substantially
completed the internal inventory, vendor survey and compliance assessment
portions (Phases I and II) of their Year 2000 plan for critical mainframe and
PC hardware and software. Remediation efforts (Phase III) in these areas are
approximately 60% complete. With respect to embedded systems, the Company,
LG&E and KU have substantially completed their Phase I and Phase II efforts.
For each entity, Phase III remediation efforts are also in progress for
embedded systems. Testing has commenced and will continue as remediation
efforts are implemented and are expected to run until July 1999.
As a general matter, corrective action for major IT systems, including
customer information, financial and trading systems, are in process or have
been completed. For smaller or more isolated systems, including embedded and
plant operational systems, the Company has completed much of the evaluative
process and is commencing corrective plans. The Company has communicated with
its key suppliers, customers and business partners regarding their Year 2000
progress, particularly in the IT software and embedded component areas, to
determine the areas in which the Company's operations are vulnerable to those
parties' failure to complete their remediation efforts. The Company is
currently evaluating and, in certain cases, initiating follow-up actions
regarding the responses from these parties. The Company regularly attends and
participates in trade group efforts focusing on Year 2000 issues in the
energy industry.
Cost of Year 2000 Issues
The Company's system modification costs related to the Year 2000 issue are
being expensed as incurred, while new system installations are generally
being capitalized pursuant to generally accepted accounting principles. See
Note 1 of LG&E Energy' Notes to Financial Statements under Item 8. Through
December 1998, the Company has incurred approximately $20.2 million in
capital and operating costs in connection with the Year 2000 issue. Based
upon studies and projections to date, the Company expects to spend an
additional $11.9 million to complete its Year 2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with the Company's Year 2000 issues will not be
higher.
56
<PAGE>
LG&E Energy (cont.):
Risks of Year 2000 Issues
As described above, the Company has made significant progress in the
implementation of its Year 2000 plan. Based upon the information currently
known regarding its internal operations and assuming successful and timely
completion of its remediation plan, the Company does not anticipate material
business disruptions from its internal systems due to the Year 2000 issue.
However, the Company may possibly experience limited interruptions to some
aspects of its activities, whether IT, generation, transmission or
distribution, operational, administrative functions or otherwise, and the
Company is considering such potential occurrences in planning for the most
reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties with
key business or operational importance to the Company. Year 2000 problems
affecting key customers, interconnected utilities, fuel suppliers and
transporters, telecommunications providers or financial institutions could
result in lost power or gas sales, reduced power production or transmission
capabilities or internal operational or administrative difficulties on the
part of the Company. The Company is not presently aware of any such
situations; however, severe occurrences of this type could have material
adverse impacts upon the business, operating results or financial condition
of the Company. There can be no assurance that the Company will be able to
identify and correct all aspects of the Year 2000 problem among these third
parties that affect it in sufficient time, that it will develop adequate
contingency plans or that the costs of achieving Year 2000 readiness will not
be material.
Contingency planning is under way for material areas of Year 2000 risk. This
effort will address certain areas, including the most reasonably likely
worst-case scenarios and delays in completion in the Company's remediation
plans, failure or incomplete remediation results and failure of key third
parties to be Year 2000 compliant. Contingency plans will include provisions
for extra staffing, back-up communications, review of unit dispatch and load
shedding procedures, carrying of additional energy reserves and manual energy
accounting procedures. Completion of contingency plan formulation is
scheduled for June 1999.
Forward-Looking Statements
The foregoing discussion regarding the timing, effectiveness, implementation
and cost of the Company's Year 2000 efforts, contains forward-looking
statements, which are based on management's best estimates and assumptions.
These forward-looking statements involve inherent risks and uncertainties,
and actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability of key Year 2000 personnel, the Company's
ability to locate and correct all relevant computer codes, the readiness of
third parties and the Company's ability to respond to unforeseen Year 2000
complications and other factors described from time to time in the Company's
reports to the Securities and Exchange Commission, including Exhibit 99.01 to
the Form 8-K filed October 21, 1998. Such material differences could result
in, among other things, business disruption, operational problems, financial
loss, legal liability and similar risks.
RATES AND REGULATION
LG&E and KU are subject to the jurisdiction of the Kentucky Commission in
virtually all matters related to electric and gas utility regulation, and as
such, their accounting is subject to Statement of Financial Accounting
Standards No. 71, Accounting for the Effects of Certain Types of Regulation
(SFAS No. 71). KU is also subject to the jurisdiction of the Virginia
Commission and FERC. Given LG&E's and KU's competitive position in the market
and the status of regulation in the states of Kentucky and Virginia, neither
LG&E nor KU has plans or intentions to discontinue its application of SFAS
No. 71. See Note 5 of LG&E Energy's Notes to
57
<PAGE>
LG&E Energy (cont.):
Financial Statements under Item 8.
Since May 1995 and August 1994, respectively, LG&E and KU have implemented an
environmental cost recovery (ECR) surcharge to recover certain environmental
compliance costs. Such costs include compliance with the 1990 Clean Air Act,
as amended, and other environmental regulations, including those applicable
to coal combustion wastes and related by-products. The ECR mechanism was
authorized by state statute in 1992 and was first approved by the Kentucky
Commission in a KU case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge were challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by LG&E and
KU be subject to refund pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion
upholding the constitutionality of the surcharge statute. The decision,
however, reversed the ruling of the Court of Appeals on the retroactivity
claim, thereby denying recovery of costs associated with pre-1993
environmental projects through the ECR. The court remanded the case to the
Commission to determine the proper adjustments to refund amounts collected
for such pre-1993 environmental projects. The parties to the proceeding have
notified the Commission that they have reached agreement as to the terms,
proper adjustments and forward application of the ECR. The settlement
agreement is subject to Commission approval. The Company recorded a provision
for rate refund of $26 million in December 1998.
In January 1994, LG&E implemented a Commission-approved demand side
management (DSM) program that LG&E, the Jefferson County, Kentucky, Attorney
and representatives of several customer interest groups had filed with the
Commission. The program included a rate mechanism that (1) provided LG&E
concurrent recovery of DSM costs, (2) provided an incentive for implementing
DSM programs and (3) allowed LG&E to recover revenues from lost sales
associated with the DSM program (decoupling). In June 1998, LG&E and customer
interest groups requested an end to the decoupling rate mechanism. On June 1,
1998, LG&E discontinued recording revenues from lost sales due to DSM.
Accrued decoupling revenues recorded for periods prior to June 1, 1998, will
continue to be collected through the DSM recovery mechanism. On September 23,
1998, the Commission accepted LG&E's modified tariff reflecting this proposal
effective as of June 1, 1998.
In October 1998, LG&E and KU filed separate but parallel applications with
the Commission for approval of a new method of determining electric rates
that provides financial incentives for LG&E and KU to further reduce
customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to
remain under traditional rate of return regulation or commence
non-traditional regulation. The new ratemaking method, known as
performance-based ratemaking (PBR), would include financial incentives for
LG&E and KU to reduce fuel costs and increase generating efficiency, and to
share any resulting savings with customers. Additionally, the PBR provides
financial penalties and rewards to assure continued high quality service and
reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits
58
<PAGE>
LG&E Energy (cont.):
recovery of actual changes in fuel cost to changes in a fuel price index
for a five-state region. If the utilities outperform the index, benefits
will be shared equally between shareholders and customers. If the
utilities' fuel costs exceed the index, the difference will be absorbed
by the Company's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share in up to $10 million annually of benefits from this
performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to the Company of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost, and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision likely will occur
in 1999. Several intervenors are participating in the case. Some have
requested that the Commission reduce base rates before implementing PBR.
On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint
with the Kentucky Commission alleging that LG&E's and KU's electric rates are
excessive and should be reduced by an amount between $85 and $146 million and
that the Kentucky Commission establish a proceeding to reduce LG&E's and KU's
electric rates. LG&E and KU have asked the Kentucky Commission to dismiss the
Complaint.
The Company is not able to predict the ultimate outcome of these proceedings,
however, should the Commission mandate significant rate reductions at LG&E
and/or KU, through the PBR proposal or otherwise, such actions could have a
material effect on the Company's financial condition and results of
operations.
Since October 1997, LG&E has implemented a Commission-approved, experimental
performance-based ratemaking mechanism related to gas procurement activities
and off-system gas sales only. During the three-year test period beginning
October 1997, rate adjustments related to this mechanism will be determined
for each 12-month period beginning November 1 and ending October 31. During
the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6
million for its share of reduced gas costs. The $3.6 million will be billed
to customers through the gas supply clause beginning February 1, 1999.
In December 1997, the Kentucky Commission opened Administrative Case No. 369
to consider Commission policy regarding cost allocations, affiliate
transactions and codes of conduct governing the relationship between
utilities and their non-utility operations and affiliates. The Commission
intends to address two major areas in the proceedings: the tools and
conditions needed to prevent cost shifting and cross-subsidization between
regulated and non-utility operations; and whether a code of conduct should be
established to assure that non-utility segments of the holding company are
not engaged in practices which result in unfair competition caused by cost
shifting from the non-utility affiliate to the utility. In September 1998,
the Commission issued draft code of conduct and cost allocation guidelines.
In January 1999, the Company, as well as all parties to the proceeding, filed
comments on the Commission draft proposals. Initial hearings are scheduled
for the first
59
<PAGE>
LG&E Energy (cont.):
quarter of 1999. Management does not expect the ultimate resolution of this
matter to have a material adverse effect on the Company's financial position
or results of operations.
As of February 12, 1999, LG&E received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC from November 1994 through April 1998. The
Company estimates up to an additional $4.8 million could be refundable to
LG&E and KU retail electric customers through future Kentucky Commission
orders. See Note 5 of LG&E Energy's Notes to Financial Statements under Item
8.
Environmental Matters
The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur
dioxide (SO2) emission limits. LG&E is currently in compliance with the Phase
II SO2 emission limits required by the year 2000, as it had previously
installed scrubbers on all of its coal-fired generating units. KU met the
Phase I requirements of the Act primarily through the installation of a
scrubber on Unit 1 of the Ghent Generating Station, while WKE utilized fuel
switching and emission allowance strategies. The Company's combined strategy
for Phase II is to use accumulated emissions allowances to delay additional
capital expenditures and may also include fuel switching or the installation
of additional scrubbers. LG&E, KU, and WKE met the nitrogen oxide (NOx)
emission reduction requirements of the Act through installation of low-NOx
burner systems. The Company's compliance plans are subject to many factors
including developments in the emission allowance and fuel markets, future
regulatory and legislative initiatives, and advances in clean air control
technology. The Company will continue to monitor these developments to ensure
that its environmental obligations are met in the most efficient and
cost-effective manner.
In September 1998, the U.S. Environmental Protection Agency announced its
final regulation requiring significant additional reductions in NOx emissions
to mitigate alleged ozone transport to the Northeast. While each state is
free to allocate its assigned NOx reductions among various emissions sectors
as it deems appropriate, the regulation may ultimately require utilities to
reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal
units)-an 85% reduction from 1990 levels. Under the regulation, each state
must incorporate the additional NOx reductions in its State Implementation
Plan (SIP) by September 1999 and affected sources must install control
measures by May 2003, unless granted extensions. Several states, various
labor and industry groups, and individual companies have appealed the final
regulation to the U.S. Court of Appeals for the D.C. Circuit. Management is
currently unable to determine the outcome or exact impact of this matter
until such time as the states identify specific emissions reductions in their
SIPs and the courts rule on the various legal challenges to the final rule.
However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, WKE and the
independent power projects in which the Company has an interest will be
required to incur significant capital expenditures and increased operation
and maintenance costs for additional controls.
Subject to further study and analysis, the Company estimates that it may
incur capital costs in the range of $300 million to $500 million in the
aggregate for LG&E, KU and WKE. These costs would generally be incurred
beginning in 2000. The Company believes its costs in this regard to be
comparable to those of similarly situated utilities with like generation
assets. LG&E and KU anticipate that such capital and operating costs are the
type of costs that are eligible for cost recovery from customers under their
environmental surcharge mechanisms and believe that a significant portion of
such costs could be recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of recovery.
See Note 18 of LG&E Energy's Notes to Financial Statements under Item 8 for a
complete discussion of the Company's environmental issues concerning
manufactured gas plant sites and certain other environmental
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LG&E Energy (cont.):
issues.
Public Utilities Regulatory Policies Act
Proposals also have been introduced in Congress to repeal all or portions of
the Public Utility Regulatory Policies Act (PURPA). PURPA and its
implementing regulations require, among other things, that electric utilities
purchase electricity generated by qualifying cogeneration facilities at a
price based on the purchasing utility's avoided costs. The Company is the
partial owner and contractual operator of several qualifying cogeneration
facilities. While the Company supports the repeal of PURPA, the Company
intends to oppose any efforts to nullify existing contracts between electric
utilities and qualifying cogeneration facilities. The Company has been
involved in proceedings before FERC regarding its Southampton cogeneration
facility and in litigation with the purchasing utility of the energy from its
Roanoke Valley I cogeneration facility. See Note 18 of LG&E Energy's Notes to
Financial Statements under Item 8.
IMPACT OF NON-UTILITY BUSINESSES
The Company expects to continue investing in non-utility projects, including
domestic and international power production and gas distribution projects, as
described under Future Capital Requirements. The non-utility projects in
which the Company has invested carry a higher level of risk than LG&E's or
KU's traditional utility businesses. Current investments in non-utility
projects are subject to competition, operating risks, dependence on certain
suppliers and customers, environmental and energy regulations, as well as
political and currency risks. In addition, significant expenses may be
incurred for projects pursued by the Company that do not materialize. The
aggregate effect of these factors creates the potential for more volatility
in the non-utility component of the Company's earnings. Accordingly, the
historical operating results of the Company's non-utility businesses may not
necessarily be indicative of future operating results.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E Energy has moved aggressively over the past decade to be positioned for,
and to help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, the Company has taken
many steps to prepare for the expected increase in competition in its
regulated and non-utility energy services businesses, including support for
performance-based ratemaking structures, aggressive cost reduction
activities; strategic acquisitions, dispositions and growth initiatives;
write-offs of previously deferred expenses; an increase in focus on
commercial and industrial customers; an increase in employee training; and
necessary corporate and business unit realignments. The Company continues to
be active in the national debate surrounding the restructuring of the energy
industry and the move toward a competitive, market-based environment. LG&E
Energy has urged Congress to set a specific date for a complete transition to
a competitive market, one that will quickly and efficiently bring the
benefits associated with customer choice. LG&E Energy has previously
advocated the implementation of this transition by January 1, 2001, and now
recommends adoption of federal legislation specifying a date certain and
appropriate transition regulations implementing deregulation.
In December 1997, the Kentucky Commission issued a set of principles which
are intended to serve as its guide in consideration of issues relating to
industry restructuring. Among the issues addressed by these principles are:
consumer protection and benefit, system reliability, universal service,
environmental responsibility, cost allocation, stranded costs and codes of
conduct. During 1998, the Kentucky Commission and a task force of the
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LG&E Energy (cont.):
Kentucky General Assembly have each initiated proceedings, including meetings
with representatives of utilities, consumers, state agencies and other groups
in Kentucky, to discuss the possible structure and effects of energy industry
restructuring in Kentucky. The purpose of the task force is to make
recommendations to the Kentucky General Assembly for possible legislative
action during its 2000 session.
However, at the time of this report, neither the Kentucky General Assembly
nor the Kentucky Commission has adopted or approved a plan or timetable for
retail electric industry competition in Kentucky. The nature or timing of the
ultimate legislative or regulatory actions regarding industry restructuring
and their impact on the Company, which may be significant, cannot currently
be predicted.
LG&E:
The following discussion and analysis by management focuses on those factors
that had a material effect on LG&E's financial results of operations and
financial condition during 1998, 1997, and 1996 and should be read in
connection with the financial statements and notes thereto.
Some of the following discussion may contain forward-looking statements that
are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document by
the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include: general
economic conditions; business and competitive conditions in the energy
industry; changes in federal or state legislation; unusual weather; actions
by state or federal regulatory agencies; and other factors described from
time to time in Louisville Gas and Electric Company's reports to the
Securities and Exchange Commission, and Exhibit No. 99.01 to LG&E Energy
Corp's report on Form 8-K filed October 21, 1998.
MERGER
Effective May 4, 1998, following the receipt of all required state and
federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy
Corporation (KU Energy) merged, with LG&E Energy as the surviving
corporation. The outstanding preferred stock of Louisville Gas and Electric
Company (LG&E), a subsidiary of LG&E Energy, was not affected by the merger.
See Note 2 of LG&E's Notes to Financial Statements under Item 8.
RESULTS OF OPERATIONS
Net Income
LG&E's net income decreased $35.2 million for 1998, as compared to 1997,
primarily due to non-recurring charges for merger-related expenses and the
Environmental Cost Recovery refund of $23.6 million and $2.7 million, after
tax, respectively. Excluding these non-recurring charges, net income
decreased $8.9 million. This decrease is mainly due to higher operating
expenses at the electric generating stations and lower gas sales, partially
offset by increased electric sales.
Net income increased $5.3 million for 1997 over 1996. This improvement was
mainly due to increased sales of electricity to wholesale customers, a lower
level of maintenance expenses and increased investment and interest income.
These items were partially offset by reduced gas sales volumes due to warmer
winter weather and a write-off of certain expenses deferred in prior periods.
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LG&E (cont.):
Revenues
A comparison of operating revenues for the years 1998 and 1997, excluding the
$4.5 million provision recorded for refund of environmental costs previously
recovered from customers (ECR refund), with the immediately preceding year
reflects both increases and decreases, which have been segregated by the
following principal causes (in thousands of $):
<TABLE>
<CAPTION>
Increase (Decrease) From Prior Period
Electric Revenues Gas Revenues
CAUSE 1998 1997 1998 1997
----- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales to ultimate consumers:
Fuel and gas supply adjustments, etc. $ 3,750 $ (2,155) $ (4,393) $ 27,192
Merger surcredit (3,466) -- -- --
Demand side management/decoupling (6,299) 8,041 (369) 4,348
Environmental cost recovery surcharge (260) 448 -- --
Variation in sales volumes 27,051 (4,810) (42,418) (14,891)
--------- --------- --------- --------
Total retail sales 20,776 1,524 (47,180) 16,649
Wholesale sales 28,398 3,088 8,720 --
Gas transportation-net -- -- (71) 147
Other (695) 3,224 (935) (204)
--------- --------- --------- --------
Total $ 48,479 $ 7,836 $ (39,466) $ 16,592
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
Electric retail sales increased primarily due to the warmer weather
experienced in 1998 as compared to 1997. Wholesale sales increased due to
larger amounts of power available for off-system sales, an increase in the
unit price of the sales and sales to Kentucky Utilities (KU) of $11.6 million
due to economic dispatch following the merger in May 1998 of LG&E Energy and
KU Energy. Gas retail sales decreased from 1997 due to the warmer weather in
1998. Gas wholesale sales increased to $8.7 million in 1998 from zero in 1997
due to the implementation of LG&E's gas performance-based ratemaking
mechanism. See Note 3 of LG&E's Notes to Financial Statements under Item 8.
Electric revenues increased in 1997 due to a slightly higher level of
wholesale sales and other revenues. Gas revenues increased primarily as a
result of higher gas supply costs billed to customers through the gas supply
clause, partially offset by decreased gas sales due mainly to warmer weather.
Expenses
Fuel for electric generation and gas supply expenses comprise a large
component of LG&E's total operating costs. LG&E's electric and gas rates
contain a fuel adjustment clause (FAC) and a gas supply clause, respectively,
whereby increases or decreases in the cost of fuel and gas supply are
reflected in LG&E's rates, subject to approval by the Public Service
Commission of Kentucky (Kentucky Commission or Commission).
Fuel for electric generation increased $5.2 million (3.5%) in 1998 because of
higher cost of coal burned ($6.6 million), partially offset by a decrease in
generation ($1.4 million). Fuel expenses incurred in 1997 were approximately
the same as in 1996. The average delivered cost per ton of coal purchased was
$22.38 in 1998, $21.66 in 1997, and $21.73 in 1996.
Power purchased expense increased $32.9 million in 1998 to support the
increase in electric sales and increased purchases from KU of $16 million as
a result of economic dispatch following the merger of the two companies
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LG&E (cont.):
in May 1998. Power purchased expense increased $.6 million (4%) in 1997 due
to an increase in the amount of purchased power needed to support native load
requirements.
Gas supply expenses decreased $33 million (21%) in 1998 primarily due to a
decrease in the volume of gas delivered to the distribution system. Gas
supply expenses for 1997 increased $18.4 million (13%) because of the higher
cost of net gas supply ($29.3 million), partially offset by a decrease in the
volume of gas delivered to the distribution system ($10.9 million). The
average unit cost per thousand cubic feet (Mcf) of purchased gas was $3.05 in
1998 and $3.46 in each of 1997 and 1996.
Other operation expenses increased $12.8 million (8.5%) over 1997 because of
increased costs to operate the electric generating plants ($6.6 million),
increased administrative costs ($2.2 million), and amortization of deferred
merger costs ($1.8 million). Other operation expenses increased $7.4 million
(5%) in 1997 primarily because of increased costs to operate the electric
generating plants ($5.1 million) and a write-off of certain previously
deferred items ($3.2 million). Items written off include expenses associated
with the hydro-electric plant and a management audit fee. Even though LG&E
believes it could have reasonably expected to recover these costs in future
rate proceedings, it decided not to seek recovery and expensed these costs
because of increasing competitive pressures in the industry.
Maintenance expenses increased $5.2 million (11%) in 1998 as compared to 1997
primarily because of an increase in scheduled outages and general repairs at
the electric generating plants ($2.2 million) and an increase in storm damage
expenses ($1.4 million). Maintenance expenses decreased $7.2 million (13%) in
1997 from 1996 due to decreased repairs at the electric generating plants
resulting from fewer scheduled outages ($5 million) and a lower level of
storm damage repairs ($1.8 million).
Depreciation and amortization for 1998 were approximately the same as in
1997. Depreciation and amortization increased $4 million (4.5%) in 1997
because of additional utility plant in service. In addition, 1997 reflects
the accelerated write-off of losses on early retirements of facilities.
Variations in income tax expenses are largely attributable to changes in
pre-tax income.
LG&E incurred a pre-tax charge in the second quarter of 1998 for costs
associated with the merger of LG&E Energy and KU Energy of $32.1 million. The
corresponding tax benefit of $8.5 million is recorded in other income and
(deductions). The amount charged is in excess of the amount permitted to be
deferred as a regulatory asset by the Kentucky Commission. See Note 2 of
LG&E's Notes to Financial Statements under Item 8.
Other income for 1997 increased by $3.4 million primarily because of the
recording in 1997 of interest income due to a favorable tax settlement and
the sale of stock options which LG&E had acquired in a commercial
transaction. See Note 9 of LG&E's Notes to Financial Statements under Item 8.
Interest charges for 1998 decreased $2.9 million (7%) due to the retirement
of LG&E's 6.75% Series First Mortgage Bonds and lower interest rates.
Interest charges for 1997 decreased $1.1 million (3%) due to favorable
refinancing activities in 1996. The embedded cost of long-term debt was 5.57%
at December 31, 1998, and 5.68% at December 31, 1997. See Note 10 of LG&E's
Notes to Financial Statements under Item 8.
The rate of inflation may have a significant impact on LG&E's operations, its
ability to control costs and the need to seek timely and adequate rate
adjustments. However, relatively low rates of inflation in the past few years
have moderated the impact on current operating results.
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LG&E (cont.):
LIQUIDITY AND CAPITAL RESOURCES
LG&E's need for capital funds is largely related to the construction of plant
and equipment necessary to meet the needs of electric and gas utility customers
and protection of the environment.
Construction Expenditures
New construction expenditures for 1998 were $138 million compared with $111
million for 1997 and $108 million for 1996.
Past Financing Activities
During 1998, 1997 and 1996, LG&E's primary source of capital was internally
generated funds from operating cash flows. Internally generated funds
provided financing for 100% of LG&E's construction expenditures for 1998,
1997, and 1996.
LG&E's combined cash and marketable securities balance decreased by $20
million in 1998 and increased $9 million in 1997. The decrease for 1998
reflects retirement of a $20 million first mortgage bond. In 1997, the
increase reflects cash flows from operations, partially offset by
construction expenditures and dividends paid.
Variations in accounts receivable and accounts payable are not generally
significant indicators of LG&E's liquidity, as such variations are primarily
attributable to fluctuations in weather in LG&E's service territory, which
has a direct affect on sales of electricity and natural gas.
On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by LG&E. The bonds were redeemed with available
funds.
In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and
$35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. The interest rates for these bonds were
3.09% and 3.39%, respectively, at December 31, 1998. The proceeds from these
bonds were used to redeem the outstanding 7.75% Series of Jefferson County,
Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February
1, 2019.
Future Capital Requirements
Future financing requirements may be affected in varying degrees by factors
such as load growth, changes in construction expenditure levels, rate actions
by regulatory agencies, new legislation, market entry of competing electric
power generators, changes in environmental regulations and other regulatory
requirements. LG&E estimates construction expenditures will total $384
million for 1999 and 2000. This estimate includes capital expenditures
associated with installation of low nitrogen oxide burner systems as
described in "Environmental Matters."
In July 1998, following LG&E Energy's decision to discontinue its merchant
energy trading and sales business, Standard & Poor's (S&P) downgraded the
credit ratings of LG&E Energy and its subsidiaries while Moody's and Duff &
Phelps (D&P) kept LG&E Energy and its subsidiaries at their prior ratings.
65
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LG&E (cont.):
LG&E's current debt ratings are:
<TABLE>
<CAPTION>
Moody's S&P D&P
------- --- ---
<S> <C> <C> <C>
First mortgage bonds Aa2 A+ AA
Unsecured debt Aa3 A AA-
Preferred stock aa3 A- AA-
</TABLE>
These ratings reflect the views of Moody's, S&P and D&P. An explanation of
the significance of these ratings may be obtained from them. A security
rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal at any time by the rating agency.
Future Sources of Financing
Internally generated funds from operations and new debt are expected to fund
substantially all anticipated construction expenditures in 1999 and 2000.
At December 31, 1998, LG&E had unused lines of credit of $200 million for
which it pays commitment fees. These credit facilities provide for short-term
borrowing and are scheduled to expire in 2001. Management expects to
renegotiate them when they expire.
To the extent permanent financings are needed in 1999 and 2000, LG&E expects
that it will have ready access to the securities markets to raise needed
funds.
Market Risks
LG&E is exposed to market risks from changes in interest rates and commodity
prices. To mitigate changes in cash flows attributable to these exposures,
LG&E has entered into various derivative financial instruments. Derivative
positions are monitored using techniques that include market value and
sensitivity analysis.
Interest Rate Sensitivity
LG&E has certain variable rate Pollution Control Bonds outstanding. At
December 31, 1998, the potential change in interest expense associated with a
1% change in base interest rates of LG&E's unswapped debt is estimated at $.8
million.
Interest rate swaps are used to hedge LG&E's underlying variable rate debt
obligations. These swaps hedge specific debt issuance and consistent with
management's designation are accorded hedge accounting treatment.
LG&E has entered into swaps to reduce the impact of interest rate changes on
its Pollution Control Bonds. The swap agreements involve the exchange of
floating-rate interest payments for fixed interest payments over the life of
the agreements. As of December 31, 1998, 67% of the outstanding variable
interest rate borrowings were converted to fixed interest rates through
swaps. The potential loss in fair value from these positions resulting from a
hypothetical 1% adverse movement in base interest rates is estimated at $3.5
million as of December 31, 1998. Changes in the market value of these swaps
if held to maturity, as LG&E intends to do, will have no effect on LG&E's net
income or cash flow. See Note 4 LG&E's of Notes to Financial Statements under
Item 8.
In April 1998, LG&E entered into a forward starting swap agreement. The
forward swap involves the exchange
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LG&E (cont.):
of floating-rate interest payments for fixed interest payments over the life
of the agreement. The forward swap was entered into to hedge LG&E's exposure
to interest rates for the anticipated call of its Trimble County, Kentucky,
Pollution Control Bonds, 7 5/8% Series, due November 1, 2020. The potential
loss in fair value from this position resulting from a hypothetical 10%
change in the yield curve is estimated at $7.5 million as of December 31,
1998. See Note 4 of LG&E's Notes to Financial Statements under Item 8.
Commodity Price Sensitivity
LG&E has limited exposure to market volatility in prices of fuel or
electricity, as long as cost-based regulations exist. To mitigate residual
risks relative to the movements in fuel or in electricity prices, LG&E has
entered into primarily fixed-priced contracts for the purchase and sale of
electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31,
1998, exposure from these activities was not material to the financial
statements of LG&E.
Year 2000 Issue
LG&E uses various software, systems and technology that may be affected by
the "Year 2000 Issue." This concerns the ability of electronic processing
equipment (including microprocessors embedded in other equipment) to properly
process the millennium change to the year 2000 and related issues. A failure
to timely correct any such processing problems could result in material
operational and financial risks if significant systems either cease to
function or produce erroneous data. Such risks are more fully described in
the sections that follow, but could include an inability to operate its
generating plants, disruptions in the operation of transmission and
distribution systems and an inability to access interconnections with the
systems of neighboring utilities.
LG&E began its project regarding the Year 2000 issue in 1996. The Board of
Directors has approved the general Year 2000 plan and receives regular
updates. In addition, monthly reporting procedures have been established at
senior management levels. Since 1996, a single-purpose Year 2000 team has
been established in the Information Technology (IT) Department. This team,
which is headed by an officer of LG&E, is responsible for planning,
implementing, and documenting LG&E's Year 2000 process. The team also
provides direct and detailed assistance to LG&E's operational divisions and
smaller units, where identified personnel are responsible for Year 2000 work
and remediation in their specific areas. In many cases, LG&E also uses the
services of third parties, including technical consultants, vendor
representatives and auditors.
LG&E's Year 2000 effort generally follows a three-phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work plans
regarding LG&E and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency planning.
LG&E has long recognized the complexity of the Year 2000 issue. Work has
progressed concurrently on (a) replacing or modifying IT systems, including
mainframes, client-server, PCs and software applications, (b) replacing or
modifying non-IT systems, including embedded systems such as mechanical
control units, (c) evaluating the readiness of key third parties, including
customers, suppliers, business partners and neighboring utilities, and (d)
contingency planning.
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LG&E (cont.):
State of Readiness
As of January 1999, LG&E has substantially completed the internal inventory,
vendor survey and compliance assessment portions (Phases I and II) of its
Year 2000 plan for critical mainframe and PC hardware and software, as well
as embedded systems. Remediation efforts (Phase III) in these areas are
approximately 65% complete. Phase III remediation efforts are also in
progress for embedded systems. Testing and contingency planning has commenced
and will continue as remediation efforts are implemented and are expected to
run until July 1999.
As a general matter, corrective action for major IT systems, including
customer information and financial systems, and smaller or more isolated
systems, including embedded and plant operational systems, are in process or
have been completed. LG&E has communicated with its key suppliers, customers
and business partners regarding their Year 2000 progress, particularly in the
IT software and embedded component areas, to determine the areas in which
LG&E's operations are vulnerable to those parties' failure to complete their
remediation efforts. LG&E is currently evaluating and, in certain cases,
initiating follow-up actions regarding the responses from these parties. LG&E
regularly attends and participates in trade group efforts focusing on Year
2000 issues in the energy industry.
Costs of Year 2000 Issues
LG&E's system modification costs related to the Year 2000 issue are being
expensed as incurred, while new system installations are generally being
capitalized pursuant to generally accepted accounting principles. See Note 1
of LG&E's Notes to Financial Statements under Item 8. Through December 1998,
LG&E has incurred approximately $16 million in capital and operating costs in
connection with the Year 2000 issue. Based upon studies and projections to
date, LG&E expects to spend an additional $4.6 million to complete its Year
2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect.
Additionally, many costs are not incremental costs, but constitute
redeployment of existing IT and other resources. These costs represent
management's current estimates; however, there can be no assurance that
actual costs associated with LG&E's Year 2000 issues will not be higher.
Risks of Year 2000 Issues
As described above, LG&E has made significant progress in the implementation
of its Year 2000 plan. Based upon the information currently known regarding
its internal operations and assuming successful and timely completion of its
remediation plan, LG&E does not anticipate material business disruptions from
its internal systems due to the Year 2000 issue. However, LG&E may possibly
experience limited interruptions to some aspects of its activities, whether
IT, generation, transmission or distribution, operational, administrative
functions or otherwise, and LG&E is considering such potential occurrences in
planning for the most reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties with
key business or operational importance to LG&E. Year 2000 problems affecting
key customers, interconnected utilities, fuel suppliers and transporters,
telecommunications providers or financial institutions could result in lost
power or gas sales, reduced power production or transmission capabilities or
internal operational or administrative difficulties on
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LG&E (cont.):
the part of LG&E. LG&E is not presently aware of any such situations;
however, severe occurrences of this type could have material adverse impacts
upon the business, operating results or financial condition of LG&E. There
can be no assurance that LG&E will be able to identify and correct all
aspects of the Year 2000 problem among these third parties that affect it in
sufficient time, that it will develop adequate contingency plans or that the
costs of achieving Year 2000 readiness will not be material.
Contingency planning is under way for material areas of Year 2000 risk. This
effort will address certain areas, including the most reasonably likely
worst-case scenarios and delays in completion in LG&E's remediation plans,
failure or incomplete remediation results and failure of key third parties to
be Year 2000 compliant. Contingency plans will include provisions for extra
staffing, back-up communications, review of unit dispatch and load shedding
procedures, carrying of additional energy reserves and manual energy
accounting procedures. Completion of contingency plan formation is scheduled
for June 1999.
Forward-Looking Statements
The foregoing discussion regarding the timing, effectiveness, implementation
and cost of LG&E's Year 2000 efforts, contains forward-looking statements,
which are based on management's best estimates and assumptions. These
forward-looking statements involve inherent risks and uncertainties, and
actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability of key Year 2000 personnel, LG&E's ability
to locate and correct all relevant computer codes, the readiness of third
parties and LG&E's ability to respond to unforeseen Year 2000 complications
and other factors described from time to time in LG&E's reports to the
Securities and Exchange Commission, and Exhibit 99.01 to LG&E Energy Corp.'s
Form 8-K filed October 21, 1998. Such material differences could result in,
among other things, business disruption, operational problems, financial
loss, legal liability and similar risks.
Rates and Regulation
LG&E is subject to the jurisdiction of the Kentucky Commission in virtually
all matters related to electric and gas utility regulation, and as such, its
accounting is subject to Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Given LG&E's competitive position in the market and the status of regulation
in the state of Kentucky, LG&E has no plans or intentions to discontinue its
application of SFAS No. 71. See Note 3 of LG&E's Notes to Financial
Statements under Item 8.
Since May 1995, LG&E implemented an environmental cost recovery (ECR)
surcharge to recover certain environmental compliance costs. Such costs
include compliance with the 1990 Clean Air Act, as amended, and other
environmental regulations, including those applicable to coal combustion
wastes and related by-products. The ECR mechanism was authorized by state
statute in 1992 and was first approved by the Kentucky Commission in a KU
case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge were challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by LG&E be
subject to refund pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the
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LG&E (cont.):
surcharge statute. The decision, however, reversed the ruling of the Court of
Appeals on the retroactivity claim, thereby denying recovery of costs
associated with pre-1993 environmental projects through the ECR. The court
remanded the case to the Commission to determine the proper adjustments to
refund amounts collected for such pre-1993 environmental projects. The
parties to the proceeding have notified the Commission that they have reached
agreement as to the terms, proper adjustments and forward application of the
ECR. The settlement agreement is subject to Commission approval. LG&E
recorded a provision for rate refund of $4.5 million in December 1998.
In January 1994, LG&E implemented a Commission-approved demand side
management (DSM) program that LG&E, the Jefferson County Attorney, and
representatives of several customer interest groups had filed with the
Commission. The program included a rate mechanism that (1) provided LG&E
concurrent recovery of DSM costs, (2) provided an incentive for implementing
DSM programs and (3) allowed LG&E to recover revenues from lost sales
associated with the DSM program (decoupling). In June 1998, LG&E and customer
interest groups requested an end to the decoupling rate mechanism. On June 1,
1998, LG&E discontinued recording revenues from lost sales due to DSM.
Accrued decoupling revenues recorded for periods prior to June 1, 1998, will
continue to be collected through the DSM recovery mechanism. On September 23,
1998, the Commission accepted LG&E's modified tariff reflecting this proposal
effective as of June 1, 1998.
In October 1998, LG&E and KU filed separate, but parallel applications with
the Commission for approval of a new method of determining electric rates
that provides financial incentives for LG&E and KU to further reduce
customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to
remain under traditional rate of return regulation or commence
non-traditional regulation. The new ratemaking method, known as
performance-based ratemaking (PBR), would include financial incentives for
LG&E and KU to reduce fuel costs and increase generating efficiency, and to
share any resulting savings with customers. Additionally, the PBR provides
financial penalties and rewards to assure continued high quality service and
reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the
difference will be absorbed by LG&E Energy's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to $10
million annually of benefits from this performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to LG&E Energy of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the
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LG&E (cont.):
option to elect standard tariff service.
These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision likely will occur
in 1999. Several intervenors are participating in the case. Some have
requested that the Commission reduce base rates before implementing PBR.
On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint
with the Kentucky Commission alleging that LG&E's electric rates are
excessive and should be reduced by an amount between $43 and $90 million and
that the Kentucky Commission establish a proceeding to reduce LG&E's electric
rates. LG&E has asked the Kentucky Commission to dismiss the Complaint.
LG&E is not able to predict the ultimate outcome of these proceedings,
however, should the Commission mandate significant rate reductions at LG&E,
through the PBR proposal or otherwise, such actions could have a material
effect on LG&E's financial condition and results of operations.
Since October 1997, LG&E has implemented a Commission-approved, experimental
performance-based ratemaking mechanism related to gas procurement activities
and off-system gas sales only. During the three-year test period beginning
October 1997, rate adjustments related to this mechanism will be determined
for each 12-month period beginning November 1 and ending October 31. During
the first year of the mechanism ended October 31, 1998, LG&E recorded $3.6
million for its share of reduced gas costs. The $3.6 million will be billed
to customers through the gas supply clause beginning February 1, 1999.
In December 1997, the Kentucky Commission opened Administrative Case No. 369
to consider Commission policy regarding cost allocations, affiliate
transactions and codes of conduct governing the relationship between
utilities and their non-utility operations and affiliates. The Commission
intends to address two major areas in the proceedings: the tools and
conditions needed to prevent cost shifting and cross-subsidization between
regulated and non-utility operations; and whether a code of conduct should be
established to assure that non-utility segments of the holding company are
not engaged in practices which result in unfair competition caused by cost
shifting from the non-utility affiliate to the utility. In September 1998,
the Commission issued draft code of conduct and cost allocation guidelines.
In January 1999, LG&E, as well as all parties to the proceeding, filed
comments on the Commission draft proposals. Initial hearings are scheduled
for the first quarter of 1999. Management does not expect the ultimate
resolution of this matter to have a material adverse effect on LG&E's
financial position or results of operations.
As of February 12, 1999, LG&E received orders from the Kentucky Commission
requiring a refund to retail electric customers of approximately $3.9 million
resulting from reviews of the FAC from November 1994 through April 1998. LG&E
estimates up to an additional $1.3 million could be refundable to retail
electric customers for the period from May 1998 through December 1998. See
Note 3 of LG&E's Notes to Financial Statements under Item 8.
LG&E filed a Petition for Rehearing of all of the orders and a motion to
suspend the refund obligation. On February 25, 1999, the Commission suspended
the obligation to refund pending further direction by the Commission. It also
advised that LG&E may have to pay interest on the refund amounts for the
suspension period. On March 11, 1999 the Commission denied LG&E's Petition
for Rehearing for the period November 1994 through October 1996 and directed
LG&E to reduce future fuel expense by $1.9 million in the first billing month
after the Order. The Company is considering the filing of an Appeal with the
Franklin Circuit Court. In a separate series of Orders on March 11, 1999, the
PSC granted LG&E's Petition for Rehearing for the period November 1996
through April 1998 and established a procedural schedule for LG&E and other
parties to
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LG&E (cont.):
submit evidence and for a hearing before the Commission. In the same Orders
the PSC granted the Petition for Rehearing of the Kentucky Industrial Utility
Customers to determine if interest should be paid on any fuel refunds for
this latter period.
Environmental Matters
The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur
dioxide (SO2) emission limits. LG&E is currently in compliance with the Phase
II SO2 emission limits required by the year 2000, as it had previously
installed scrubbers on all of its coal-fired generating units. LG&E met the
nitrogen oxide (NOx) emission reduction requirements of the Act through
installation of low-NOx burner systems. LG&E's compliance plans are subject
to many factors including developments in the emission allowance and fuel
markets, future regulatory and legislative initiatives, and advances in clean
air control technology. LG&E will continue to monitor these developments to
ensure that its environmental obligations are met in the most efficient and
cost-effective manner.
In September 1998, the U.S. Environmental Protection Agency announced its
final regulation requiring significant additional reductions in NOx emissions
to mitigate alleged ozone transport to the Northeast. While each state is
free to allocate its assigned NOx reductions among various emissions sectors
as it deems appropriate, the regulation may ultimately require utilities to
reduce their NOx emissions to 0.15 lb./mmBtu (million British thermal units)
- - an 85% reduction from 1990 levels. Under the regulation, each state must
incorporate the additional NOx reductions in its State Implementation Plan
(SIP) by September 1999 and affected sources must install control measures by
May 2003, unless granted extensions. Several states, various labor and
industry groups, and individual companies have appealed the final regulation
to the U.S. Court of Appeals for the D.C. Circuit. Management is currently
unable to determine the outcome or exact impact of this matter until such
time as the states identify specific emissions reductions in their SIP and
the courts rule on the various legal challenges to the final rule. However,
if the 0.15 lb. target is ultimately imposed, LG&E will be required to incur
significant capital expenditures and increased operation and maintenance
costs for additional controls.
Subject to further study and analysis, LG&E estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. LG&E believes its costs in this
regard to be comparable to those of similarly situated utilities with like
generation assets. LG&E anticipates that such capital and operating costs are
the type of costs that are eligible for cost recovery from customers under
its environmental surcharge mechanism and believes that a significant portion
of such costs could be recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.
See Note 12 of LG&E's Notes to Financial Statements under Item 8 for a
complete discussion of LG&E's environmental issues concerning manufactured
gas plant sites and certain other environmental issues.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E Energy has moved aggressively over the past decade to be positioned for,
and to help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, LG&E Energy has taken
many steps to prepare for the expected increase in competition in its
regulated and non-utility energy services businesses, including support for
performance-based ratemaking structures; aggressive cost reduction
activities;
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LG&E (cont.):
strategic acquisitions, dispositions and growth initiatives; write-offs of
previously deferred expenses; an increase in focus on commercial and
industrial customers; an increase in employee training; and necessary
corporate and business unit realignments. LG&E Energy continues to be active
in the national debate surrounding the restructuring of the energy industry
and the move toward a competitive, market-based environment. LG&E Energy has
urged Congress to set a specific date for a complete transition to a
competitive market, one that will quickly and efficiently bring the benefits
associated with customer choice. LG&E Energy has previously advocated the
implementation of this transition by January 1, 2001, and now recommends that
adoption of federal legislation specifying a date certain and appropriate
transition regulations implementing deregulation.
In December 1997, the Kentucky Commission issued a set of principles which
are intended to serve as its guide in consideration of issues relating to
industry restructuring. Among the issues addressed by these principles are:
consumer protection and benefit, system reliability, universal service,
environmental responsibility, cost allocation, stranded costs and codes of
conduct. During 1998, the Kentucky Commission and a task force of the
Kentucky General Assembly have each initiated proceedings, including meetings
with representatives of utilities, consumers, state agencies and other groups
in Kentucky, to discuss the possible structure and effects of energy industry
restructuring in Kentucky. The purpose of the task force is to make
recommendations to the Kentucky General Assembly for possible legislative
action during its 2000 session.
However, at the time of this report, neither the Kentucky General Assembly
nor the Kentucky Commission has adopted or approved a plan or timetable for
retail electric industry competition in Kentucky. The nature or timing of the
ultimate legislative or regulatory actions regarding industry restructuring
and their impact on LG&E, which may be significant, cannot be currently
predicted.
KU
General
The following discussion and analysis by management focuses on those factors
that had a material effect on KU's financial results of operations and
financial condition during 1998, 1997, and 1996 and should be read in
connection with KU's financial statements and notes thereto.
Some of the following discussion may contain forward-looking statements that
are subject to certain risks, uncertainties and assumptions. Such
forward-looking statements are intended to be identified in this document by
the words "anticipate," "expect," "estimate," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially.
Factors that could cause actual results to differ materially include: general
economic conditions; business and competitive conditions in the energy
industry; changes in federal or state legislation; unusual weather; actions
by state or federal regulatory agencies, and other factors described from
time to time in Kentucky Utilities Company's reports to the Securities and
Exchange Commission, including Exhibit No. 99.01 to LG&E Energy Corp.'s
report on Form 8-K filed October 21, 1998.
Merger
Effective May 4, 1998, following the receipt of all required state and
federal regulatory approvals, LG&E Energy Corp. (LG&E Energy) and KU Energy
Corporation (KU Energy) merged, with LG&E Energy as the surviving
corporation. The outstanding preferred stock of Kentucky Utilities Company
(KU), which was a subsidiary of KU Energy before the merger, was not affected
by the merger. See Note 2 of KU's Notes to Financial Statements under Item 8.
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<PAGE>
KU (cont.):
RESULTS OF OPERATIONS
Net Income
KU's net income decreased $12.9 million for 1998 as compared to 1997,
primarily due to non-recurring charges for merger-related expenses and
Environmental Cost Recovery refund of $21.5 million and $12.9 million, after
tax, respectively. Excluding these non-recurring charges, net income
increased $21.5 million. The increase is mainly due to higher residential
sales, commercial sales, industrial sales and sales for resale caused by the
warmer weather and increased marketing efforts. Net income for 1997 as
compared to 1996 was flat.
Revenues
A comparison of KU's revenues for the years 1998 and 1997, excluding the
provision recorded for refund of environmental costs previously recovered
(ECR refund) from customers (which reduced electric revenues by $21.5
million), with the immediately preceding year reflects both increases and
decreases, which have been segregated by the following principal causes (in
thousands of $):
<TABLE>
<CAPTION>
Increase (Decrease)
From Prior Period
CAUSE 1998 1997
----- ---- ----
<S> <C> <C>
Sales to ultimate consumers:
Fuel clause adjustments, etc. $ 1,158 $ (5,414)
Merger surcredit (4,035) -
Environmental cost recovery surcharge (547) 554
Variation in sales volumes 25,841 11,301
-------- --------
Total retail sales 22,417 6,441
Sales for resale 91,788 (1,878)
Other 972 163
-------- --------
Total $115,177 $ 4,726
-------- --------
-------- --------
</TABLE>
Retail sales increased due to increases in residential and commercial sales
primarily attributable to warmer weather experienced in the second and third
quarters of 1998 as compared to 1997. The increase in sales for resale
(7,224,156 megawatt-hours versus 3,397,423 megawatt-hours) was primarily due
to a more aggressive marketing efforts, increase in the unit price of the
sales, efficiencies achieved from coordinated dispatch of a larger available
pool of generation following completion of the merger, and sales to LG&E of
$16 million due to economic dispatch following the merger in May 1998 of LG&E
Energy and KU Energy.
Total sales for 1997 were flat as compared to 1996. Residential sales
decreased 2% for the year due to milder weather in 1997 compared to 1996.
Industrial sales increased 9% reflecting continued growth in the
manufacturing sector of the service area economy. Sales for resale, which
include wholesale and opportunity sales, declined 9% in 1997; however,
revenues did not decline by a comparable amount due to higher market prices
per megawatt-hour on opportunity sales.
Provision for rate refund reflects a charge in revenues during 1998 of $21.5
million for the refund of environmental costs previously recovered from
customers. See Note 3 of KU's Notes to Financial Statements under Item 8.
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<PAGE>
KU (cont.):
Expenses
Fuel for electric generation comprises a large component of KU's total
operating costs. KU's electric rates contain a fuel adjustment clause (FAC),
whereby increases or decreases in the cost of fuel are reflected in KU's
rates, subject to approval by the Public Service Commission of Kentucky
(Kentucky Commission or Commission), Virginia State Corporation Commission
(Virginia Commission), and the Federal Energy Regulatory Commission (FERC).
Fuel for electric generation increased $27.4 million (15%) in 1998 primarily
due to a 12% increase in MBTU (Million British Thermal Units) used. Fuel
expenses increased by $30.3 million (22%) in 1997 primarily due to a 18%
increase in MBTU (Million British Thermal Units) used. The increased
consumption was primarily caused by the previously mentioned increase in
kilowatt-hour sales. KU's average delivered cost per ton of coal purchased
was $26.97 in 1998 , $27.97 in 1997, and $27.54 in 1996.
Power purchased expense increased $54 million (75%) in 1998 because of a 67%
increase in megawatt-hour purchases which was primarily attributable to
increased marketing efforts and purchases from LG&E of $11.6 million as a
result of economic dispatch following the merger of the two companies in May
1998. Power purchased expense increased $10.1 million (16%) in 1997 due to a
19% increase in kWH purchases associated with increased availability of
surplus power on favorable pricing terms and to a one-time reduction in
demand costs in 1996 of about $4 million under a contract with a neighboring
utility.
Depreciation and amortization increased $2.5 million (1.5%) in 1998 because
of additional utility plant in service. Depreciation and amortization
increased in 1997 primarily because of additional plant in service at KU.
KU's embedded cost of long-term debt was 6.99% at December 31, 1998, and
6.98% at December 31, 1997. See Note 10 of KU's Notes to Financial
Statements under Item 8.
Merger costs to achieve reflects the one-time charge during 1998 of $21.7
million (the corresponding tax benefit of $.2 million is recorded in other
income and (deductions) for merger related expenses as discussed in Note 2 of
KU's Notes to Financial Statements under Item 8).
Variations in income tax expense are largely attributable to changes in
pre-tax income.
The rate of inflation may have a significant impact on KU's utility
operations, its ability to control costs and the need to seek timely and
adequate rate adjustments. However, relatively low rates of inflation in the
past few years have moderated the impact on current operating results.
LIQUIDITY AND CAPITAL RESOURCES
KU's need for capital funds is largely related to the construction of plant
and equipment necessary to meet the needs of electric utility customers and
protection of the environment.
Construction Expenditures
New construction expenditures for 1998 were $92 million compared with $94
million for 1997 and $106.5 million for 1996.
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<PAGE>
KU (cont.):
Past Financing Activities
During 1998, 1997, and 1996, KU's primary source of capital was internally
generated funds from operating cash flows and debt financing. Internally
generated funds provided financing for 100% of KU's construction expenditures
for 1998, 1997, and 1996.
Variations in accounts receivable and accounts payable are not generally
significant indicators of KU's liquidity, as such variations are primarily
attributable to fluctuations in weather in KU's service territory, which has
a direct affect on sales of electricity.
KU has no short-term borrowings outstanding at December 31, 1998. At the end
of 1997, KU's short-term borrowings were $34 million compared to $54 million
at December 31, 1996. KU has used short-term borrowings to temporarily
finance ongoing construction expenditures and general corporate requirements.
The decrease in 1997 from 1996 was due primarily to KU's cash provided by
operations exceeding cash required for investing and financing activities
(exclusive of short-term borrowings).
Future Capital Requirements
Future financing requirements may be affected in varying degrees by factors
such as load growth, changes in construction expenditure levels, rate actions
allowed by regulatory agencies, new legislation, market entry of competing
electric power generators, changes in environmental regulations and other
regulatory requirements. KU estimates construction expenditures will total
$341 million for 1999 and 2000. In addition, KU's capital requirements for
2000 include $61.5 million for scheduled debt retirements.
In July 1998, following LG&E Energy's decision to discontinue its merchant
energy trading and sales business, Standard & Poor's (S&P) downgraded the
credit ratings of LG&E Energy and its subsidiaries while Moody's and Duff &
Phelps (D&P) kept LG&E Energy and its subsidiaries at their prior ratings.
KU's current debt ratings are:
<TABLE>
<CAPTION>
Moody's S&P D&P
------- --- ---
<S> <C> <C> <C>
First mortgage bonds Aa2 A+ AA
Preferred stock Aa3 A- AA-
Commercial paper P-1 A-1 D-1+
</TABLE>
These ratings reflect the views of Moody's, S&P and D&P. An explanation of
the significance of these ratings may be obtained from them. A security
rating is not a recommendation to buy, sell or hold securities and is subject
to revision or withdrawal at any time by the rating agency.
Future Sources of Financing
Internally generated funds from operations and new debt are expected to fund
substantially all anticipated construction expenditures in 1999 and 2000.
At December 31, 1998, KU had unused lines of credit of $60 million for which
it pays commitment fees. The KU credit facilities provide for short-term
borrowing and support of commercial-paper borrowings. These credit facilities
are scheduled to expire in 1999. Management expects to renegotiate them when
they expire.
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<PAGE>
KU (cont.):
To the extent permanent financings are needed in 1999 and 2000, KU expects
that it will have ready access to the securities markets to raise needed
funds.
Interest Rate Sensitivity
KU has variable rate debt obligations outstanding. At December 31, 1998, the
potential change in interest expense associated with a 1% change in base
interest rates is immaterial.
Commodity Price Sensitivity
KU has limited exposure to market volatility in prices of fuel or
electricity, as long as cost-based regulations exist. To mitigate residual
risks relative to the movements in fuel or electricity prices, KU entered
into primarily fixed priced contracts for the purchase and sale of
electricity through the wholesale electricity market. Realized gains and
losses are recognized in the income statement as incurred. At December 31,
1998, exposure from these activities was not material to the financial
statements.
Year 2000 Issue
KU uses various software, systems and technology that are affected by the
"Year 2000 Issue." This issue concerns the ability of electronic processing
equipment (including microprocessors embedded in other equipment) to properly
process the millennium change to 2000 and related issues. A failure to timely
correct any such processing problems could result in material operational and
financial risks if significant systems either cease to function or produce
erroneous data. Such risks are described in more detail following, but could
include an inability to operate its generating plants, disruptions in the
operation of transmission and distribution systems, and an inability to
access interconnections with the systems of neighboring utilities.
KU began its project regarding the Year 2000 issue in 1996. The Board of
Directors has approved the general Year 2000 plan and receives regular
updates. In addition, monthly reporting procedures have been established at
senior management levels. Since 1996, a single-purpose Year 2000 team has
been established in the Information Technology (IT) Department. This team,
which is headed by an officer, is responsible for planning, implementing, and
documenting KU's Year 2000 process. The team also provides direct and
detailed assistance to KU's operational divisions and smaller units, where
identified personnel are responsible for Year 2000 work and remediation in
their specific areas. In many cases, KU also uses the services of third
parties, including technical consultants, vendor representatives and auditors.
KU's Year 2000 effort generally follows a three phase process:
Phase I - inventory and identify potential Year 2000 issues, determine
solutions;
Phase II - survey vendors regarding their Year 2000 readiness, determine
solutions to deal with possible vendor non-compliance, develop work plans
regarding KU and vendors non-compliance issues; and
Phase III - implementation, testing, certification, contingency planning.
KU has long recognized the complexity of the Year 2000 issue. Work has
progressed concurrently on (a) replacing or modifying IT systems, including
mainframes, PC's and software applications, (b) replacing or modifying non-IT
systems, including embedded systems such as mechanical control units, (c)
evaluating the readiness of key third parties, including customers,
suppliers, business partners and neighboring utilities, and (d)
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<PAGE>
KU (cont.):
contingency planning.
State of Readiness
As of January 1999, KU has substantially completed the internal inventory,
vendor survey, and compliance assessment portions (Phases I and II) of their
Year 2000 plan for critical mainframe and PC hardware and software, as well
as embedded systems. Remediation efforts (Phase III) in these areas are
approximately 55% complete. Testing and contingency planning has commenced
and will continue as remediation efforts are implemented and are expected to
run until July 1999.
As a general matter, corrective action for major IT systems, including
customer information, financial and trading systems, and smaller or more
isolated systems, including embedded and plant operational systems, are in
process or have been completed. KU has communicated with its key suppliers,
customers and business partners regarding their Year 2000 progress,
particularly in the IT software and embedded component areas, to determine
the areas in which KU's operations are vulnerable to those parties failure to
complete their remediation efforts. KU is currently evaluating and, in
certain cases, initiating follow-up actions regarding the responses from
these parties. KU regularly attends and participates in trade group efforts
focusing on Year 2000 issues in the energy industry context.
Costs of Year 2000 Issues
KU's system modification costs related to the Year 2000 issue are being
expensed as incurred, while new system installations are generally being
capitalized pursuant to generally accepted accounting principles. (See Note 1
of KU's Notes to Financial Statements under Item 8). Through December 1998,
KU has incurred approximately $2.4 million in capital and operating costs in
connection with the Year 2000 issue. Based upon studies and projections to
date, KU expects to spend an additional $4.5 million to complete its Year
2000 efforts.
It should be noted that these figures include total hardware, software,
embedded systems and consulting costs. In many cases, these costs include
system replacements which were already contemplated or which provided
additional benefits or efficiencies beyond the Year 2000 aspect. Additionally
many costs are not incremental costs, but constitute redeployment of existing
IT and other resources. These costs represent management's current estimates;
however, there can be no assurance that actual costs associated with KU's
Year 2000 issues will not be higher.
Risks of Year 2000 Issues
As described above, KU has made significant progress in the implementation of
its Year 2000 plan. Based upon the information currently known regarding its
internal operations and assuming successful and timely completion of its
remediation plan, KU does not anticipate material business disruptions from
its internal systems due to the Year 2000 issue. However, KU may possibly
experience limited interruptions to some aspects of its activities, whether
IT, generation, transmission or distribution, operational, administrative
functions or otherwise, and KU is considering such potential occurrences in
planning for the most reasonably likely worst-case scenarios.
Additionally, risk exists regarding the non-compliance of third parties with
key business or operational importance to KU. Year 2000 problems affecting
key customers, interconnected utilities, fuel suppliers and transporters,
telecommunications providers or financial institutions could result in lost
power or gas sales,
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<PAGE>
KU (cont.):
reduced power production or transmission capabilities or internal operational
or administrative difficulties on the part of the KU. KU is not presently
aware of any such situations; however, severe occurrences of this type could
have material adverse impacts upon the business, operating results or
financial condition of KU. There can be no assurance that KU will be able to
identify and correct all aspects of the Year 2000 problem among these third
parties that affect it in sufficient time, that it will develop adequate
contingency plans or that the costs of achieving Year 2000 readiness will not
be material.
Contingency planning is under way for material areas of Year 2000 risk. This
effort will address certain areas, including the most reasonably likely
worst-case scenarios and delays in completion in KU's remediation plans,
failure or incomplete remediation results and failure of key third parties to
be Year 2000 compliant. Contingency plans will include provisions for extra
staffing, back-up communications, review of unit dispatch and load shedding
procedures, carrying of additional energy reserves and manual energy
accounting procedures. Completion of contingency plan formation is scheduled
for June 1999.
Forward Looking Statements
The foregoing discussion regarding the timing, effectiveness, implementation,
and cost of KU's Year 2000 efforts, contains forward-looking statements,
which are based on management's best estimates and assumptions. These
forward-looking statements involve inherent risks and uncertainties, and
actual results could differ materially from those contemplated by such
statements. Factors that might cause material differences include, but are
not limited to, the availability of key Year 2000 personnel, KU's ability to
locate and correct all relevant computer codes, the readiness of third
parties, and KU's ability to respond to unforeseen Year 2000 complications
and other factors described from time to time in KU's reports to the
Securities and Exchange Commission, including Exhibit 99.01 to LG&E Energy
Corp.'s report on Form 8-K filed October 21, 1998. Such material differences
could result in, among other things, business disruption, operational
problems, financial loss, legal liability and similar risks.
Rates and Regulation
KU is subject to the jurisdiction of the Kentucky Commission in virtually all
matters related to electric utility regulation, and as such, their accounting
is subject to Statement of Financial Accounting Standards No. 71, Accounting
for the Effects of Certain Types of Regulation (SFAS No. 71). KU is also
subject to the jurisdiction of the Virginia Commission and FERC. Given KU's
competitive position in the market and the status of regulation in the states
of Kentucky and Virginia, KU has no plans or intentions to discontinue its
application of SFAS No. 71. See Note 3 of KU's Notes to Financial Statements
under Item 8.
In August 1994, KU implemented an environmental cost recovery (ECR) surcharge
to recover certain environmental compliance costs. Such costs include
compliance with the 1990 Clean Air Act, as amended, as well as other
environmental regulations, including those applicable to coal combustion
wastes and related by-products. The ECR mechanism was authorized by state
statute in 1992 and was first approved by the Kentucky Commission in a KU
case in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by KU be
subject to refund pending final determination of all appeals.
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KU (cont.):
On December 19, 1998, the Kentucky Supreme Court rendered an opinion
upholding the constitutionality of the surcharge statute. The decision,
however, reversed the ruling of the Court of Appeals on the retroactivity
claim, thereby denying recovery of costs associated with pre-1993
environmental projects. The court remanded the case to the Commission to
determine the proper adjustments to refund amounts collected for such
pre-1993 environmental projects. The parties to the proceeding have notified
the Commission that they have reached agreement as to the terms, proper
adjustments and forward application of the ECR. The settlement agreement is
subject to Commission approval. KU recorded a provision for rate refund of
$21.5 million in December 1998. See Rates and Regulation in KU's Management's
Discussion and Analysis of Results of Operations and Financial Condition
under Item 7 for a further discussion.
In October 1998, LG&E and KU filed separate but parallel applications with
the Commission for approval of a new method of determining electric rates
that provides financial incentives for LG&E and KU to further reduce
customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to
remain under traditional rate of return regulation or commence
non-traditional regulation. The new ratemaking method, known as
performance-based ratemaking (PBR), would include financial incentives for
LG&E and KU to reduce fuel costs and increase generating efficiency, and to
share any resulting savings with customers. Additionally, the PBR provides
financial penalties and rewards to assure continued high quality service and
reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the difference
will be absorbed by the LG&E Energy's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to $10
million annually of benefits from this performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to LG&E Energy of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision may occur in 1999.
Several intervenors are participating in the case. Some have requested that
the Commission reduce base rates before implementing PBR.
In December 1997, the Kentucky Commission opened Administrative Case No. 369
to consider Commission policy regarding cost allocations, affiliate
transactions and codes of conduct governing the relationship between
80
<PAGE>
KU (cont.):
utilities and their non-utility operations and affiliates. The Commission
intends to address two major areas in the proceedings: the tools and
conditions needed to prevent cost shifting and cross-subsidization between
regulated and non-utility operations; and whether a code of conduct should be
established to assure that non-utility segments of the holding company are
not engaged in practices which result in unfair competition caused by cost
shifting from the non-utility affiliate to the utility. In September 1998,
the Commission issued draft code of conduct and cost allocation guidelines.
In January 1999, KU, as well as all parties to the proceeding, filed comments
on the Commission draft proposals. Initial hearings are scheduled for the
first quarter of 1999. Management does not expect the ultimate resolution of
this matter to have a material adverse effect on KU's financial position or
results of operations.
As of February 12, 1999, the Kentucky Commission ordered KU's affiliate
utility, LG&E, to refund FAC charges to retail electric customers after a
review of LG&E's FAC from November 1994 through April 1998. The Kentucky
Commission subsequently on March 11, 1999, denied LG&E's Petition for
Rehearing for the period November 1994 through October 1996, but granted
rehearing for the period November 1996 through April 1998 on the same issue.
KU has not received an order from the Kentucky Commission but estimates that
it may be required to refund to its retail electric customers approximately
$3.5 million in FAC charges for the period November 1994 through October 1998.
On March 8, 1999, the Kentucky Industrial Utility Customers filed a Complaint
with the Kentucky Commission alleging that KU's electric rates are excessive
and should be reduced by an amount between $42 and $56 million, and that the
Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked
the Kentucky Commission to dismiss the Complaint.
KU is not able to predict the ultimate outcome of these proceedings, however,
should the Commission mandate significant rate reductions at KU, through the
PBR proposal or otherwise, such actions could have a material effect on KU's
financial condition and results of operations.
Environmental Matters
The Clean Air Act Amendments of 1990 (the Act) imposed stringent new sulfur
dioxide (SO2) emission limits. KU met the Phase I requirements of the Act
primarily through the installation of a scrubber on Unit 1 of the Ghent
Generating Station. KU's current strategy for Phase II is to use accumulated
emissions allowances to delay additional capital expenditures and may also
include fuel switching or the installation of additional scrubbers. KU met
the nitrogen oxide (NOx) emission reduction requirements of the Act through
installation of low-NOx burner systems. KU's compliance plans are subject to
many factors including developments in the emission allowance and fuel
markets, future regulatory and legislative initiatives, and advances in clean
air control technology. KU will continue to monitor these developments to
ensure that its environmental obligations are met in the most efficient and
cost-effective manner.
In September 1998, the U.S. Environmental Protection Agency (USEPA) announced
its final regulation requiring significant additional reductions in NOx
emissions to mitigate alleged ozone transport to the Northeast. While each
state is free to allocate its assigned NOx reductions among various emissions
sectors as it deems appropriate, the regulation may ultimately require
utilities to reduce their NOx emissions to 0.15 lb./mmBtu (million British
thermal units) -an 85% reduction from 1990 levels. Under the regulation, each
state must incorporate the additional NOx reductions in its State
Implementation Plan (SIP) by September 1999 and affected sources must install
control measures by May 2003, unless granted extensions. Several states,
various labor and industry groups, and individual companies have appealed the
final regulation to the U.S. Court of Appeals for the D.C. Circuit.
Management is currently unable to determine the outcome or exact impact of
this
81
<PAGE>
KU (cont.):
matter until such time as the states identify specific emissions reductions
in their SIP and the courts rule on the various legal challenges to the final
rule. However, if the 0.15 lb. target is ultimately imposed KU will be
required to incur significant capital expenditures and increased operation
and maintenance costs for additional controls. Subject to further study and
analysis, KU estimates that it may incur capital costs in the range of $100
million to $200 million. These costs would generally be incurred beginning in
the year 2000.
KU believes its costs for these matters to be comparable to those of
similarly situated utilities with like generation assets. KU anticipates that
such capital and operating costs are the type of costs that are eligible for
cost recovery from customers under its environmental surcharge mechanism and
believes that a significant portion of such costs could be so recovered.
However, Kentucky Commission approval is necessary and there can be no
guarantee of such recovery. See Note 11 of KU's Notes to Financial Statements
under Item 8 for a complete discussion of KU's environmental issues.
In July, 1997, USEPA issued revised National Ambient Air Quality Standards
(NAAQS) for ozone and particulate matter. KU is monitoring USEPA's
implementation of the revised standards. Until USEPA completes additional
implementation steps, including monitoring and nonattainment demonstrations,
management is unable to determine the precise impact of the revised standards.
FUTURE OUTLOOK
Competition and Customer Choice
LG&E Energy has moved aggressively over the past decade to be positioned for,
and to help promote, the energy industry's shift to customer choice and a
competitive market for energy services. Specifically, LG&E Energy has taken
many steps to prepare for the expected increase in competition in its
regulated and non-utility energy services businesses, including support for
performance-based ratemaking structures, aggressive cost reduction
activities; strategic acquisitions, dispositions, and growth initiatives;
write-offs of previously deferred expenses; an increase in focus on
commercial and industrial customers; an increase in employee training; and
necessary corporate and business unit realignments. LG&E Energy continues to
be active in the national debate surrounding the restructuring of the energy
industry and the move toward a competitive, market-based environment. LG&E
Energy has urged Congress and federal regulatory agencies to set a specific
date for a complete transition to a competitive market, one that will quickly
and efficiently bring the benefits associated with customer choice. LG&E
Energy has previously advocated the implementation of this transition by
January 1, 2001, and now recommends that federal legislation be adopted
specifying a date certain and appropriate transition regulations implementing
deregulation.
In December 1997, the Kentucky Commission issued a set of principles which
are intended to serve as its guide in consideration of issues relating to
industry restructuring. Among these principles were: consumer protection and
benefit, system reliability, universal service, environmental responsibility,
cost allocation, stranded costs and codes of conduct. During 1998, the
Kentucky Commission and a task force of the Kentucky General Assembly have
each initiated proceedings, including meetings with representatives of
utilities, consumers, state agencies, and other groups in Kentucky, to
discuss the possible structure and effects of energy industry restructuring
in Kentucky. The purpose of the task force is to make recommendations to the
Kentucky General Assembly for possible legislative action during its 2000
session.
However, at the time of this report, neither the Kentucky General Assembly
nor the Kentucky Commission has adopted or approved a plan or timetable for
retail electric industry competition in Kentucky. The nature or timing of
future legislative or regulatory actions regarding industry restructuring and
their impact on KU, which may be significant, cannot be predicted currently.
82
<PAGE>
KU (cont.):
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.
See Management's Discussion and Analysis of Results of Operations and
Financial Condition, Market Risks, under Item 7.
83
<PAGE>
ITEM 8. Financial Statements and Supplementary Data.
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income
(Thousands of $ Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Electric utility........................... $1,464,824 $1,331,569 $1,318,846
Gas utility................................ 191,545 231,011 214,419
International and non-utility.............. 346,044 162,475 27,195
---------- ---------- -----------
Total revenues.......................... 2,002,413 1,725,055 1,560,460
Provision for rate refund (Note 5)......... (26,000) - -
---------- ---------- -----------
Net revenues (Note 1)................... 1,976,413 1,725,055 1,560,460
---------- ---------- -----------
OPERATING EXPENSES:
Operation and maintenance:
Fuel and power purchased................... 640,438 442,949 440,570
Gas supply expenses........................ 207,041 229,033 140,482
Utility operation and maintenance.......... 432,763 415,882 416,597
International and non-utility operation
and maintenance.......................... 123,267 54,724 31,101
Depreciation and amortization.................. 197,417 186,549 171,399
Merger costs to achieve and
non-recurring charges (Notes 2 and 10)..... 65,318 - 5,493
---------- ---------- -----------
Total operating expenses................ 1,666,244 1,329,137 1,205,642
---------- ---------- ----------
Equity in earnings of unconsolidated
ventures (Note 8)............................ 73,798 22,937 19,727
---------- ---------- -----------
OPERATING INCOME............................... 383,967 418,855 374,545
Other income and (deductions) (Note 14)........ 7,451 20,970 11,575
Interest charges and preferred dividends....... 108,871 104,427 94,412
Minority interest.............................. 10,453 9,035 -
---------- ---------- -----------
Income from continuing operations, before
income taxes................................. 272,094 326,363 291,708
Income taxes (Note 13)......................... 111,823 119,323 101,322
---------- ---------- -----------
Income from continuing operations.............. 160,271 207,040 190,386
Loss from discontinued operations,
net of income tax (benefit) expense
of $(14,907), $(15,116) and $2,371
(Notes 1 and 3).............................. (23,599) (24,044) (4,434)
Loss on disposal of discontinued operations,
net of income tax benefit of $125,000
(Note 3) .................................... (225,000) - -
---------- ---------- -----------
Income (loss) before cumulative effect of
change in accounting principle............... (88,328) 182,996 185,952
Cumulative effect of change in accounting
for start-up costs, net of income tax
benefit of $5,061 (Note 1)................... (7,162) - -
---------- ---------- -----------
NET INCOME (LOSS).............................. $ (95,490) $ 182,996 $ 185,952
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
84
<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Income (cont.)
(Thousands of $ Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average common shares outstanding........................... 129,679 129,627 129,450
Earnings (loss) per share of common stock - basic:
Continuing operations....................................... $1.24 $1.60 $1.47
Loss from discontinued operations........................... (.18) (.19) (.03)
Loss on disposal of discontinued operations................. (1.74) - -
Cumulative effect of accounting change...................... (.06) - -
------- -------- --------
Total ..................................................... $ (.74) $1.41 $1.44
------- -------- --------
------- -------- --------
Earnings (loss) per share of common stock - diluted:
Continuing operations....................................... $1.23 $1.60 $1.47
Loss from discontinued operations........................... (.17) (.19) (.03)
Loss on disposal of discontinued operations................. (1.73) - -
Cumulative effect of accounting change...................... (.06) - -
------- -------- ---------
Total ..................................................... $ (.73) $1.41 $1.44
------- -------- ---------
------- -------- ---------
</TABLE>
Consolidated Statements of Comprehensive Income
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss)............................................ $(95,490) $182,996 $185,952
Unrealized holding gains (losses) on available-for-sale
securities arising during the period....................... (168) (567) 196
Reclassification adjustment for realized and losses on
available-for-sale securities included in net income..... 123 337 981
------- -------- ---------
Other comprehensive income (loss) before tax................. (45) (230) 1,177
Income tax expense (benefit) related to items of other
comprehensive income..................................... 5 (293) 450
------- -------- ---------
Comprehensive income (loss).................................. $(95,540) $183,059 $186,679
------- -------- ---------
------- -------- ---------
</TABLE>
Consolidated Statements of Retained Earnings
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance January 1........................................... $722,584 $683,962 $637,996
Add net income (loss)....................................... (95,490) 182,996 185,952
Deduct: Cash dividends declared on common stock
($1.240 per share in 1998, $1.113 per share
in 1997, and $1.081 per share in 1996)............. (160,815) (144,366) (139,986)
Preferred stock redemption expense and other....... - (8) -
--------- --------- ---------
Balance December 31......................................... $466,279 $722,584 $683,962
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
85
<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Balance Sheets
(Thousands of $)
<TABLE>
<CAPTION> December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash investments............................... $ 108,723 $ 111,003
Marketable securities (Note 11)................................... 20,862 22,300
Accounts receivable - less reserve of $10,532 in 1998 and
$10,187 in 1997.......................................... 285,794 242,942
Materials and supplies - primarily at average cost:
Fuel (predominantly coal)...................................... 78,855 45,450
Gas stored underground......................................... 34,144 42,104
Other.......................................................... 72,457 55,514
Net assets of discontinued operations (Notes 1 and 3)............. 143,651 222,784
Prepayments and other............................................. 37,784 9,304
------------ ------------
Total current assets........................................... 782,270 751,401
------------ ------------
Utility plant:
At original cost (Note 1)......................................... 5,581,667 5,390,868
Less: reserve for depreciation................................... 2,352,306 2,201,124
------------ ------------
Net utility plant.............................................. 3,229,361 3,189,744
------------ ------------
Other property and investments - less reserve:
Investments in unconsolidated ventures (Note 8)................... 167,877 177,006
Non-utility property and plant, net (Notes 1 and 2)............... 285,899 248,119
Other ........................................................... 117,321 53,534
------------ ------------
Total other property and investments........................... 571,097 478,659
------------ ------------
Deferred debits and other assets:
Regulatory assets (Note 5)........................................ 65,871 39,672
Goodwill, net..................................................... 13,273 13,675
Other ........................................................... 111,396 89,793
----------- -------------
Total deferred debits and other assets......................... 190,540 143,140
------------ ------------
Total assets............................................... $4,773,268 $4,562,944
------------ ------------
------------ ------------
CAPITAL AND LIABILITIES:
Current liabilities:
Long-term debt due within one year................................ $ - $ 20,021
Notes payable (Note 17)........................................... 365,135 393,784
Accounts payable.................................................. 237,820 134,714
Taxes and interest accrued........................................ 104,656 45,011
Common dividends declared......................................... 39,876 19,792
Provision for rate refunds........................................ 34,761 13,248
Customer deposits................................................. 17,404 15,795
Other ........................................................... 47,002 42,182
------------ ------------
Total current liabilities...................................... 846,654 684,547
------------ ------------
Long-term debt (Note 16).............................................. 1,510,775 1,210,690
Deferred credits and other liabilities:
Accumulated deferred income taxes (Notes 1 and 13)................ 520,721 548,477
Investment tax credit, in process of amortization................. 93,844 101,931
Accumulated provision for pensions and related benefits........... 120,233 80,217
Regulatory liability (Note 5)..................................... 109,411 117,079
Other ........................................................... 86,047 76,471
------------- ------------
Total deferred credits and other liabilities................... 930,256 924,175
------------- ------------
Minority interest (Note 2)............................................ 107,815 105,985
Cumulative preferred stock............................................ 136,530 138,353
Commitments and contingencies (Note 18)
Common equity........................................................ 1,241,238 1,499,194
------------- ------------
Total capital and liabilities..................................... $4,773,268 $4,562,944
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
86
<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Cash Flows
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ (95,490) $ 182,996 $ 185,952
Items not requiring cash currently:
Depreciation and amortization.................................. 197,417 186,549 171,399
Deferred income taxes - net.................................... (30,860) 10,316 55,589
Investment tax credit - net.................................... (8,087) (8,276) (8,010)
Undistributed earnings of unconsolidated ventures.............. (18,833) (2,326) (2,102)
Loss from discontinued operations (Notes 1 and 3).............. 23,599 24,044 4,434
Loss on disposal of discontinued
operations (Note 3)........................................ 225,000 - -
Cumulative effect of change in accounting
principle (Note 1)......................................... 7,162 - -
Other.......................................................... 21,838 14,213 10,147
Change in certain net current assets:
Accounts receivable............................................ (42,852) (22,771) (3,976)
Materials and supplies......................................... (42,388) (7,514) (1,468)
Net assets of discontinued operations (Notes 1 and 3).......... (145,867) (10,946) 13,539
Provision for rate refunds..................................... 21,513 (4,263) (12,289)
Accounts payable............................................... 103,106 1,826 (11,396)
Accrued taxes and interest..................................... 59,645 5,859 (5,009)
Customer deposits.............................................. 1,609 2,392 2,867
Prepayments and other.......................................... (23,660) (411) 4,022
Other............................................................. (41,130) (52,942) (35,313)
--------- ----------- -----------
Net cash flows from operating activities....................... 211,722 318,746 368,386
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities........................................... (18,421) (21,526) (20,625)
Proceeds from sales of securities................................. 19,995 5,030 44,609
Construction expenditures......................................... (342,214) (210,131) (215,954)
Investment in subsidiaries net of cash and
temporary cash investments acquired (Note 2)................... - (124,593) -
Investments in unconsolidated ventures (Note 8)................... (1,010) (5,791) (1,490)
Proceeds from sale of investment in affiliate..................... 16,000 - -
--------- ---------- ----------
Net cash flows from investing activities....................... (325,650) (357,011) (193,460)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of medium-term notes..................................... 300,000 - -
Issuance of bonds................................................. - 69,776 89,190
Retirement of bonds............................................... (20,042) (71,714) (103,205)
Short-term borrowings............................................. 6,751,089 3,871,905 2,784,700
Repayment of short-term borrowings................................ (6,776,845) (3,690,321) (2,801,100)
Issuance of preferred stock....................................... - 3,025 -
Redemption of preferred stock..................................... (1,823) - -
Issuance of common stock.......................................... - 3,781 2,293
Payment of common dividends....................................... (140,731) (143,647) (139,282)
--------- ----------- ----------
Net cash flows from financing activities....................... 111,648 42,805 (167,404)
--------- ----------- ----------
Change in cash and temporary cash investments....................... (2,280) 4,540 7,522
Beginning cash and temporary cash investments....................... 111,003 106,463 98,941
---------- ---------- ----------
Ending cash and temporary cash investments.......................... $ 108,723 $ 111,003 $ 106,463
--------- ---------- ----------
--------- ---------- ----------
Supplemental disclosures of cash flow information: Cash paid
during the year for:
Income taxes................................................. $ 55,513 $ 82,662 $ 67,780
Interest on borrowed money................................... 96,356 93,451 86,045
</TABLE>
The accompanying notes are an integral part of these financial statements.
87
<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Capitalization
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C> <C> <C>
COMMON EQUITY:
Common stock, without par value -
Authorized 300,000,000 shares, outstanding 129,677,030
shares in 1998 and 129,682,889 shares in 1997 (Note 15)...................... $ 778,273 $ 778,273
Common stock expense............................................................ (3,481) (1,880)
Unrealized gain on marketable securities, net of income
taxes of $94 in 1998 and $89 in 1997 (Note 11)............................... 167 217
Retained earnings............................................................... 466,279 722,584
------------ ------------
Total common equity.......................................................... 1,241,238 1,499,194
------------ ------------
PREFERRED STOCK (Note 15):
Shares Current
Outstanding Redemption Price
----------- ----------------
Cumulative and redeemable on 30 days notice by
Louisville Gas and Electric Company:
$25 par value, 1,720,000 shares authorized -
5% series .................................... 860,287 $28.00 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction rate.................................. 500,000 100.00 50,000 50,000
$5.875 series................................. 250,000 105.875 25,000 25,000
Preferred stock expense......................................................... (1,179) (1,179)
------------ -----------
Total LG&E preferred stock................................................... 95,328 95,328
------------ -----------
Cumulative and redeemable on 30 days notice by Kentucky Utilities Company:
$100 stated value, 200,000 shares authorized -
4 3/4% series................................. 200,000 $101.00 20,000 20,000
$100 stated value, 200,000 shares authorized -
6.53% series.................................. 200,000 Not redeemable 20,000 20,000
------------ -----------
Total KU preferred stock..................................................... 40,000 40,000
------------ -----------
$10 nominal value, 102,089 and 302,364 shares authorized and outstanding,
(net of shares owned by affiliates) for 1998 and 1997, respectively,
variable rate and redeemable by Inversora de Gas del Centro.................. 1,202 3,025
------------- ------------
Total preferred stock........................................................... 136,530 138,353
------------- ------------
LONG-TERM DEBT (Note 16):
Louisville Gas and Electric Company:
First mortgage bonds -
Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000
Series due August 15, 2003, 6%............................................... 42,600 42,600
Pollution control series:
P due June 15, 2015, 7.45%............................................... 25,000 25,000
Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335
R due November 1, 2020, 6.55%............................................ 41,665 41,665
S due September 1, 2017, variable........................................ 31,000 31,000
T due September 1, 2017, variable........................................ 60,000 60,000
U due August 15, 2013, variable.......................................... 35,200 35,200
V due August 15, 2019, 5 5/8%............................................ 102,000 102,000
W due October 15, 2020, 5.45%............................................ 26,000 26,000
X due April 15, 2023, 5.90%.............................................. 40,000 40,000
------------- -------------
Total first mortgage bonds............................................ 506,800 506,800
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
88
<PAGE>
LG&E Energy Corp. and Subsidiaries
Consolidated Statements of Capitalization (cont.)
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
Pollution control bonds (unsecured) -
Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500
Trimble County Series due September 1, 2026, variable........................ 27,500 27,500
Jefferson County Series due November 1, 2027, variable....................... 35,000 35,000
Trimble County Series due November 1, 2027, variable......................... 35,000 35,000
------------- ------------
Total unsecured pollution control bonds.................................. 120,000 120,000
------------- ------------
Total LG&E long-term debt............................................. 626,800 626,800
------------ ------------
Kentucky Utilities Company:
First mortgage bonds:
Series Q, due June 15, 2000, 5.95%........................................... 61,500 61,500
Series Q, due June 15, 2003, 6.32%........................................... 62,000 62,000
Series S, due January 15, 2006, 5.99%........................................ 36,000 36,000
Series P, due May 15, 2007, 7.92%............................................ 53,000 53,000
Series R, due June 1, 2025, 7.55%............................................ 50,000 50,000
Series P, due May 15, 2027, 8.55%............................................ 33,000 33,000
Pollution Control Series:
Series 7, due May 1, 2010, 7 3/8%........................................ 4,000 4,000
Series 8, due September 15, 2016, 7.45%.................................. 96,000 96,000
Series 1B, due February 1, 2018, 6 1/4%.................................. 20,930 20,930
Series 2B, due February 1, 2018, 6 1/4%.................................. 2,400 2,400
Series 3B, due February 1, 2018, 6 1/4%.................................. 7,200 7,200
Series 4B, due February 1, 2018, 6 1/4%.................................. 7,400 7,400
Series 7, due May 1, 2020, 7.60%......................................... 8,900 8,900
Series 9, due December 1, 2023, 5 3/4%................................... 50,000 50,000
Series 10, due November 1, 2024, variable................................ 54,000 54,000
------------ -----------
Total first mortgage bonds............................................ 546,330 546,330
Other ................................................................... - 21
------------ -----------
Total KU long-term debt...................................................... 546,330 546,351
------------ -----------
LG&E Capital Corp.:
Argentine negotiable obligations, due August 2001, 10 1/2%...................... 37,645 37,539
Medium term notes, due January 15, 2008, 6.46% (Note 16)........................ 150,000 -
Medium term notes, due November 1, 2011, 5.75% (Note 16)........................ 150,000 -
------------ -----------
Total Capital Corp. long-term debt........................................... 337,645 37,539
------------ -----------
Total long-term debt............................................................ 1,510,775 1,210,690
------------ -----------
Total capitalization............................................................ $ 2,888,543 $ 2,848,237
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
89
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Effective May 4, 1998, following the receipt of all
required state and federal regulatory approvals, LG&E Energy Corp. (LG&E Energy
or the Company) and KU Energy Corporation (KU Energy) merged, with LG&E Energy
as the surviving corporation. The accompanying consolidated financial statements
reflect the accounting for the merger as a pooling of interests and are
presented as if the companies were combined as of the earliest period presented.
However, the financial information is not necessarily indicative of the results
of operations, financial position or cash flows that would have occurred had the
merger been consummated for the periods for which it is given effect, nor is it
necessarily indicative of future results of operations, financial position, or
cash flows. The financial statements reflect the conversion of each outstanding
share of KU Energy common stock into 1.67 shares of LG&E Energy common stock.
The outstanding preferred stock of Louisville Gas and Electric Company (LG&E), a
subsidiary of LG&E Energy, and Kentucky Utilities Company (KU), a subsidiary of
KU Energy, were not affected by the Merger.
Effective June 30, 1998, the Company discontinued its merchant energy trading
and sales business and announced its plans to sell its natural gas gathering
and processing business. As a result of this decision, the Company recorded
an after-tax loss on disposal of discontinued operations of $225 million in
the second quarter of 1998. See Note 3, Discontinued Operations.
The consolidated financial statements include the accounts of LG&E Energy, LG&E,
LG&E Capital Corp. (Capital Corp.), KU and their respective wholly owned
subsidiaries, collectively referred to herein as the Company. KU and KU Capital
Corporation (KU Capital) were subsidiaries of KU Energy before the merger. On
September 5, 1997, LG&E Energy merged two of its direct subsidiaries, LG&E
Energy Systems Inc. (Energy Systems) and LG&E Gas Systems Inc. (Gas Systems),
and renamed the surviving company LG&E Capital Corp. In July 1998, KU Capital
was merged into Capital Corp. with the latter as the surviving corporation.
LG&E Energy's regulated operations are conducted by LG&E and KU. Its non-utility
operations are conducted by Capital Corp., which has various subsidiaries
referred to in these financial statements, including LG&E Power Inc. (LPI), LG&E
Energy Marketing (LEM), LG&E International Inc. (LII) and Western Kentucky
Energy Corp. (with its affiliates, WKE).
All significant intercompany items and transactions have been eliminated from
the consolidated financial statements. The Company is exempt from regulation as
a registered holding company under the Public Utility Holding Company Act of
1935 (PUHCA).
CASH AND TEMPORARY CASH INVESTMENTS. The Company considers all highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which approximates
fair value.
GAS STORED UNDERGROUND. The costs of utility natural gas inventories are
included in gas stored underground in the balance sheets as of December 31, 1998
and 1997. Utility gas inventories were $33 million and $41 million at December
31, 1998 and 1997, respectively. LG&E accounts for gas inventories using the
average-cost method. Non-utility gas inventories are included in net assets or
liabilities of discontinued operations.
UTILITY PLANT. LG&E's and KU's utility plant is stated at original cost, which
includes payroll-related costs such as taxes, fringe benefits, and
administrative and general costs. Construction work in progress has been
included in the rate base for determining retail customer rates. Neither LG&E
nor KU has recorded any significant
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allowance for funds used during construction.
The cost of utility plant retired or disposed of in the normal course of
business is deducted from utility plant accounts and such cost, plus removal
expense less salvage value, is charged to the reserve for depreciation. When
complete operating units are disposed of, appropriate adjustments are made to
the reserve for depreciation, and gains and losses, if any, are recognized.
DEPRECIATION AND AMORTIZATION. Utility depreciation is provided on the
straight-line method over the estimated service lives of depreciable plant. The
amounts provided for LG&E in 1998 and 1997 were 3.4% and for 1996 were 3.3%. The
amounts provided for KU were 3.5% in 1998, 1997 and 1996.
Depreciation of non-utility plant and equipment is based on the straight-line
method over periods ranging from 3 to 33 years for domestic operations.
Intangible assets and goodwill have been allocated to the subsidiaries' lines of
business and are being amortized over periods ranging up to 40 years.
FINANCIAL INSTRUMENTS. The Company uses over-the-counter interest-rate swap
agreements to hedge its exposure to fluctuations in the interest rates it pays
on variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond
futures to hedge its exposure to fluctuations in the value of its investments in
the preferred stocks of other companies. Gains and losses on interest-rate swaps
used to hedge interest rate risk are reflected in interest charges monthly.
Gains and losses on U.S. Treasury note and bond futures used to hedge
investments in preferred stocks are initially deferred and classified as
unrealized losses on marketable securities in common equity and then charged or
credited to other income and deductions when the securities are sold. See Note
6, Financial Instruments.
In connection with the Company's marketing of power from owned or controlled
generation assets, exchange traded futures are used to hedge its exposure to
price risk. The Company also uses financial instruments associated with its
discontinued merchant energy trading and sales business, the financial impact of
which is included in discontinued operations. See Note 3, Discontinued
Operations.
DEBT EXPENSE. Utility debt expense is amortized over the lives of the
related bond issues, consistent with regulatory practices.
DEFERRED INCOME TAXES. Deferred income taxes have been provided for all
material book-tax temporary differences.
INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the
tax law that permitted a reduction of the Company's tax liability based on
credits for certain construction expenditures. Deferred investment tax credits
are being amortized to income over the estimated lives of the related property
that gave rise to the credits.
COMMON STOCK. Effective April 15, 1996, the outstanding shares of the Company's
common stock were split on a two-for-one basis. The new shares were issued to
shareholders of record on April 1, 1996. On May 4, 1998, 63,149,394 shares were
issued to shareholders of KU Energy to effect the merger, and the KU Energy
shares were retired. Prior period shares, dividends and earnings per share of
common stock have been restated to reflect the stock split and to reflect the
exchange of KU Energy's shares for shares of LG&E Energy.
REVENUE RECOGNITION. Utility revenues are recorded based on service rendered to
customers through month-end. LG&E and KU accrue estimates for unbilled revenues
from each meter reading date to the end of the accounting period. Under an
agreement approved by the Public Service Commission of Kentucky (Kentucky
Commission or Commission) in 1995, LG&E implemented a demand-side management
program, including a
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"decoupling mechanism" which allowed LG&E to recover a predetermined level of
revenue on electric and gas residential sales. In 1998, the decoupling
mechanism was suspended. See Note 5, Utility Rates and Regulatory Matters.
FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to
expense as used, and the cost of gas supply is charged to expense as delivered
to the distribution system. LG&E implemented a Commission approved experimental
performance-based ratemaking mechanism related to gas procurement and off-system
gas sales activity. See Note 5, Utility Rates and Regulatory Matters.
MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent items at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. See Note 18, Commitments and
Contingencies, for a further discussion.
NEW ACCOUNTING PRONOUNCEMENTS. During 1998, the Company adopted the
following accounting pronouncements:
Statements of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS No. 132), No. 131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131) and No. 130, Reporting Comprehensive Income (SFAS No. 130). Pursuant to
SFAS No. 132, the Company has disclosed additional information on changes in
benefit obligations and fair values of plan assets and eliminated certain
disclosures that are no longer relevant. This standard does not change the
measurement or financial statement recognition of the plans (see Note 12,
Pension Plans and Retirement Benefits). Under SFAS No. 131, the Company has
provided information about its various business segments that is intended to
allow readers to view certain financial information as if "through the eyes
of management" (see Note 20, Segments of Business and Related Information
Disclosures). Pursuant to SFAS No. 130, the Company has presented
information in the Consolidated Statements of Comprehensive Income that
measures changes in equity that are not required to be recorded as a
component of net income. These standards had no impact on the calculation of
net income or earnings per share presented in the Consolidated Statements of
Income.
Statement of Position Nos. 98-5, Reporting on the Costs of Start-Up Activities
(SOP 98-5) and 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use (SOP 98-1). SOP 98-5, adopted as of January 1, 1998,
requires companies to expense the costs of start-up activities as incurred. The
statement also requires certain previously capitalized costs to be charged to
expense at the time of adoption as a cumulative effect of a change in accounting
principle. The Company had previously capitalized start-up costs related to its
investments in various unconsolidated ventures and other non-utility businesses.
The cumulative effect of adoption resulted in a $7.2 million after-tax charge.
The effect of this change on 1998 income before cumulative effect of changes in
accounting principles was not significant. SOP 98-1, adopted as of January 1,
1998, clarifies the criteria for capital or expense treatment of costs incurred
by an enterprise to develop or obtain computer software to be used in its
internal operations. The statement does not change treatment of costs incurred
in connection with correcting computer programs to properly process the
millennium change to the Year 2000, which must be expensed as incurred. Adoption
of SOP 98-1 did not have a material effect on the Company's financial
statements. The following accounting pronouncements have been issued but are not
yet effective:
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for fiscal years
beginning after June 15, 1999, and establishes accounting and reporting
standards that every derivative instrument be recorded in the balance sheet as
either an asset or
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liability measured at its fair value. The statement requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on
the hedged item in the income statement, and requires that a company must
formally document, designate, and assess the effectiveness of transactions
that use hedge accounting. The Company is currently analyzing the provisions
of the statement and cannot predict the impact this statement will have on
its consolidated operations and financial position; however, the statement
could increase volatility in earnings and other comprehensive income. The
effect of this statement will be recorded in cumulative effect of change in
accounting when adopted.
Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and
Risk Management Activities (EITF No. 98-10). This pronouncement is effective for
fiscal years beginning after December 15, 1998. The task force concluded that
energy trading contracts should be recorded at mark to market on the balance
sheet, with the gains and losses shown net in the income statement. EITF No.
98-10 more broadly defines what represents energy trading to include economic
activities related to physical assets which were not previously marked to market
by established industry practice. The effects of adopting EITF No. 98-10, if
applicable, will be reported as a cumulative effect of a change in accounting
principle with no prior period restatement. The Company does not expect the
adoption of EITF No. 98-10 to have a material adverse impact on its consolidated
operations and financial position.
NOTE 2 - MERGERS AND ACQUISITIONS
KU ENERGY CORPORATION. LG&E Energy and KU Energy merged on May 4, 1998, with
LG&E Energy as the surviving corporation. As a result of the merger, the
Company, which is the parent of LG&E, became the parent company of KU. The
operating utility subsidiaries (LG&E and KU) have continued to maintain their
separate corporate identities and serve customers in Kentucky and Virginia under
their present names. LG&E Energy has estimated approximately $760 million in
gross non-fuel savings over a ten-year period following the merger. Costs to
achieve these savings of $103.9 million were recorded in the second quarter of
1998, $38.6 million of which were initially deferred and are being amortized
over a five-year period pursuant to regulatory orders. Primary components of the
merger costs were separation benefits, relocation costs, and transaction fees,
the majority of which were paid by December 31, 1998. The Company, LG&E and KU
expensed the remaining costs associated with the merger in the second quarter of
1998. In regulatory filings associated with approval of the merger, LG&E and KU
committed not to seek increases in existing base rates and proposed reductions
in their retail customers' bills in amounts based on one-half of the savings,
net of the deferred and amortized amount, over a five-year period. The preferred
stock and debt securities of the operating utility subsidiaries were not
affected by the merger. The non-utility subsidiaries of KU Energy have become
subsidiaries of Capital Corp.
Under the terms of the Agreement and Plan of Merger dated May 20, 1997 (the
Merger Agreement), each outstanding share of the common stock, without par
value, of KU Energy (KU Energy Common Stock) together with the associated KU
Energy stock purchase rights, was converted into 1.67 shares of common stock of
LG&E Energy (LG&E Energy Common Stock), together with the associated LG&E Energy
stock purchase rights. Immediately preceding the merger, there were 66,527,636
shares of LG&E Energy common stock outstanding, and 37,817,517 shares of KU
Energy common stock outstanding. Based on such capitalization, immediately
following the merger, 51.3% of the outstanding LG&E Energy common stock was
owned by the shareholders of LG&E Energy prior to the merger and 48.7% was owned
by former KU Energy shareholders.
Regulatory and administrative approvals were obtained from the Federal Energy
Regulatory Commission (FERC), the Federal Trade Commission, the Securities and
Exchange Commission, the Virginia State Corporation Commission and the
stockholders of LG&E Energy and KU Energy prior to the effective date of the
merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt
holding company under
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the Public Utility Holding Company Act of 1935. Management has accounted for
the merger as a pooling of interests and as a tax-free reorganization under
the Internal Revenue Code.
In the application filed with the Commission, the utilities proposed that 50% of
the net non-fuel cost savings estimated to be achieved from the merger, less
$38.6 million or 50% of the originally estimated costs to achieve such savings,
be applied to reduce customer rates through a surcredit on customers' bills and
the remaining 50% be retained by the companies. The Commission approved the
surcredit and allocated the customer savings 53% to KU and 47% to LG&E. The
surcredit will be about 2% of customer bills over the next five years and will
amount to approximately $55 million in net non-fuel savings to LG&E customers
and approximately $63 million in net non-fuel savings to KU customers. Any fuel
cost savings are passed to Kentucky customers through the companies' fuel
adjustment clauses.
ARGENTINE GAS DISTRIBUTION COMPANIES. On February 13, 1997, the Company acquired
interests in two Argentine natural gas distribution companies for $140 million,
plus transaction-related costs and expenses. The Company acquired a controlling
interest in Distribuidora de Gas del Centro (Centro) and a combined 14.4%
interest in Distribuidora de Gas Cuyana (Cuyana). The Company accounted for both
acquisitions using the purchase method. The Company allocated substantially all
of the excess of the purchase price over the underlying equity of Centro and
Cuyana to property and equipment. The Company recognized no goodwill on the
acquisition.
The fair values of the net assets acquired follow (in thousands of $):
<TABLE>
<S> <C>
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
--------
--------
</TABLE>
Centro's revenues, cost of revenues and operating expenses since the date of
acquisition are classified as components of international and non-utility in
these Statements of Income. The earnings of Cuyana are included in Equity in
Earnings of Unconsolidated Ventures. The Company includes Centro's property and
equipment in Non-utility property and plant, net, in its balance sheet, and it
includes its investment in Cuyana in Investments in Unconsolidated Ventures.
Portions of Centro not owned directly or indirectly by the Company are reported
as minority interests in the financial statements.
Liabilities assumed in the purchase included negotiable obligations issued by
Centro with a face amount of $38 million. The obligations mature in August 2001,
pay interest at 10.5% of face value and are classified as long-term debt.
NOTE 3 - DISCONTINUED OPERATIONS
Effective June 30, 1998, the Company discontinued its merchant energy trading
and sales business. This business consisted primarily of a portfolio of energy
marketing contracts entered into in 1996 and early 1997, nationwide deal
origination and some level of speculative trading activities, which were not
directly supported by the Company's physical assets. The Company's decision to
discontinue these operations was primarily based on the impact that volatility
and rising prices in the power market had on its portfolio of energy marketing
contracts. Exiting the merchant energy trading and sales business enables the
Company to focus on optimizing the value of physical assets it owns or controls,
and to reduce the earnings impact on continuing operations of
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extreme market volatility in its portfolio of energy marketing contracts. The
Company is in the process of settling commitments that obligate it to buy and
sell natural gas and electric power. It also plans to sell its natural gas
gathering and processing business. If the Company is unable to dispose of
these commitments or assets it will continue to meet its obligations under
the contracts. The Company, however, has maintained sufficient market
knowledge, risk management skills, technical systems and experienced
personnel to maximize the value of power sales from physical assets it owns
or controls, including LG&E, KU and the Big Rivers Electric Corporation (Big
Rivers).
As a result of the Company's decision to discontinue its merchant energy trading
and sales activity, and the decision to sell the associated gas gathering and
processing business, the Company recorded an after-tax loss on disposal of
discontinued operations of $225 million in the second quarter of 1998. The loss
on disposal of discontinued operations results primarily from several
fixed-price energy marketing contracts entered into in 1996 and early 1997,
including the Company's long-term contract with Oglethorpe Power Corporation
(OPC). Other components of the write-off include costs relating to certain
peaking options, goodwill associated with the Company's 1995 purchase of
merchant energy trading and sales operations and exit costs, including labor and
related benefits, severance and retention payments, and other general and
administrative expenses. Although the Company used what it believes to be
appropriate estimates for future energy prices among other factors to calculate
the net realizable value of discontinued operations, it also recognizes that
there are inherent limitations in models to accurately predict future events. As
a result, there is no guarantee that higher-than-anticipated future commodity
prices or load demands, lower-than-estimated asset sales prices or other factors
could not result in additional losses. The Company has been successful in
settling portions of its discontinued operations, but significant assets,
operations and obligations remain. As of January 27, 1999, the Company estimates
that a $1 change in electricity prices and a 10 cents change in natural gas
prices across all geographic areas and time periods could change the value of
the Company's remaining energy portfolio by approximately $8.8 million. In
addition to price risk, the value of the Company's remaining energy portfolio is
subject to operational and event risks including, among others, increases in
load demand, regulatory changes, and forced outages at units providing supply
for the Company. As of January 27, 1999, the Company estimates that a 1% change
in the forecasted load demand could change the value of the Company's remaining
energy portfolio by $9.3 million. See Note 18, Commitments and Contingencies,
for a discussion of the OPC contract. See also Note 1, Summary of Significant
Accounting Policies.
Operating results for discontinued operations follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 3,865,020 $ 3,255,175 $ 2,740,691
Loss before taxes (173,423) (39,160) (2,063)
Loss from discontinued operations,
net of income taxes $ (113,273) $ (24,044) $ (4,434)
</TABLE>
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Net assets of discontinued operations at December 31 follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash and temporary cash investments $ 1,674 $ 15,089
Accounts receivable 78,200 353,162
Price risk management assets, net 98,885 164,581
Non-utility property and plant, net 163,510 176,032
Accounts payable and accruals (71,265) (344,265)
Price risk management liabilities, net (32,693) (154,910)
Goodwill and other assets and liabilities, net 24,721 13,095
--------- ----------
Net assets before accrued loss on disposal of dis-
continued operations 263,032 222,784
Accrued loss on disposal of discontinued operations,
net of income tax benefit of $74,297 119,381 -
--------- ----------
Net assets of discontinued operations $ 143,651 $ 222,784
--------- ----------
--------- ----------
</TABLE>
ACCOUNTING TREATMENT. Effective January 1, 1996, the Company adopted the mark to
market method of accounting for most of its merchant energy trading and sales
activities. The Company has included these activities in Discontinued Operations
in the accompanying financial statements. Under mark to market accounting, all
electric power and natural gas contracts which qualify for such accounting
treatment, including both physical transactions and financial instruments, were
recorded at market value, net of future servicing costs and reserves, and were
recognized as price risk management assets and liabilities in the balance sheet.
To qualify for mark to market accounting treatment, merchant energy trading and
sales contracts generally must include, among other factors, a firm term, volume
and price and allow for settlement in cash or with another financial instrument.
Changes in the value of these price risk management assets and liabilities
resulting from the execution of new contracts and changes in market factors were
recognized as merchant energy trading and sales revenues in the period of the
change.
Revenues and cost of revenues associated with merchant energy trading and sales
activities that did not qualify for mark to market accounting treatment were
recognized using the accrual method of accounting at the time of delivery of the
underlying commodity. Prior to January 1, 1996, all of the Company's merchant
energy trading and sales activities were accounted for under the accrual method.
The effect of this change in accounting was immaterial to prior periods at the
time of adoption.
In addition, the Company entered into transactions to hedge the impact of market
fluctuations in its energy-related assets, liabilities and other contractual
commitments. Changes in the market value of these hedge transactions were
afforded hedge accounting treatment whereby gains and losses were deferred until
the gains or losses on the hedged items were recognized or the instrument was
terminated.
As a result of the Company's decision to discontinue its merchant energy trading
and sales activity, all transactions are recorded using discontinued operations
accounting. Most transactions previously recorded using the mark to market
method of accounting have now been settled. The effects of the previously
adopted mark to market method of accounting for the remaining unsettled
transactions are applied against the reserve for discontinued operations.
Total charges against the reserve through December 31, 1998 include $77.3
million for commitments prior to disposal, $51.2 million for transaction
settlements, $11.1 million for goodwill, and $16.7 million for other exit
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costs. The reserve as of December 31, 1998, represents management's best
estimate of the loss from remaining discontinued operations until disposal
and the costs of disposing of these operations.
MARKET RISK. The primary market risk inherent in the Company's discontinued
operations relates to commodity price risk principally associated with
fluctuations in the supply and demand of electricity and natural gas. The
Company's price risk management strategy involved using various derivative
instruments to hedge the impact of market fluctuations in its energy-related
assets, liabilities and other contractual commitments. Derivative instruments
utilized as hedges include futures contracts; swap agreements, where settlement
is based on the difference between a fixed and index-based price;
exchange-traded options; over-the-counter options, which are settled in cash or
the physical delivery of the commodity; exchange-for-physical transactions, in
which payment for delivery of the underlying commodity is in the form of futures
contracts; and tolling arrangements. The changes in the market value of these
instruments correspond to the price changes in the underlying commodities.
The Company has reduced its price risk by settling contracts or entering into
back-to-back agreements with third parties to act on its behalf as the purchaser
or seller for specified transactions. For all other transactions, the Company is
actively attempting to mitigate its risk and no new overall positions are being
taken. The remaining net open positions on these transactions could result in
additional losses to the Company if prices do not move in the manner or
direction anticipated.
The Company has established trading policies and limits designed to minimize its
exposure to price risk and regularly revalues exposures against the stipulated
limits. The Company also continually reviews these policies to ensure they are
responsive to changing business conditions.
The Company's discontinued operations utilize various methodologies which
simulate forward price curves in the energy markets to estimate the size and
probability of changes in market value resulting from price movements. The use
of these methodologies requires a number of key assumptions including selection
of confidence levels, the holding period of the positions, and the depth and
applicability to future periods of historical price information. In addition to
price risk, the value of the Company's entire energy portfolio is subject to
operational and event risks including, among others, regulatory changes,
increases in load demand, and forced outages at units providing supply for the
Company.
NOTIONAL AMOUNTS. As of December 31, 1998, the Company's discontinued operations
were under various contracts to buy and sell power and gas with net notional
amounts of 30.6 million MWh's of power and 22.7 million MMBTU's of natural gas
with a volumetric weighted-average period of approximately 45 and 16 months,
respectively. These notional amounts are based on estimated loads since various
commitments do not include specified firm volumes. The Company is also under
contract to buy or sell immaterial amounts of coal and SO2 allowances in support
of its power contracts. Notional amounts reflect the nominal volume of
transactions included in the Company's price risk management commitments, but do
not reflect actual amounts of cash, financial instruments, or quantities of the
underlying commodity which may ultimately be exchanged between the parties.
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<PAGE>
FAIR VALUES. The fair values of discontinued operations' price risk management
assets and liabilities recorded on a mark to market basis as of December 31,
1998 and 1997, and the average fair values during the year by commodity are set
forth below (in thousands of $):
<TABLE>
<CAPTION>
Fair Value Average Fair Value
--------------------------- ----------------------------
Assets Liabilities Assets Liabilities
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
1998:
By Commodity:
-------------
Electricity $ 98,823 $ 31,950 $ 230,816 $ 194,233
Natural gas 62 - 69,972 61,701
Other - - 265 -
--------- --------- --------- ---------
Total 98,885 31,950 $ 301,053 $ 255,934
Reserves - 743 --------- ---------
--------- --------- --------- ---------
Net values $ 98,885 $ 32,693
--------- ---------
--------- ---------
1997:
-----
By Commodity:
-------------
Electricity $ 69,704 $ 56,308 $ 81,765 $ 31,093
Natural gas 94,252 92,245 55,676 65,414
Other 625 1,119 505 848
--------- --------- --------- ---------
Total 164,581 149,672 $ 137,946 $ 97,355
Reserves - 5,238 --------- ---------
--------- --------- --------- ---------
Net values $164,581 $154,910
--------- ---------
--------- ---------
</TABLE>
The table above does not include the fair value of various transactions not
previously recorded using mark to market accounting since these transactions
commit the Company to the sale or purchase of electricity or natural gas without
specified firm volumes.
The fair values above are based on quotes from exchanges and over-the-counter
markets, price volatility factors, the use of established pricing models and the
time value of money. They also reflect management estimates of counterparty
credit risk, location differentials and the potential impact of liquidating the
Company's position in an orderly manner over a reasonable period of time under
present market conditions. The increase in values from 1997 to 1998 results from
volatility and risk management actions taken in connection with discontinuing
the merchant energy trading and sales business.
If the Company is unable to dispose of its remaining commitments, it will
continue to meet its obligations through the terms of the contracts. The net
fair value of these commitments as of December 31, 1998 are currently estimated
to be approximately $24.6 million in 1999, $19.6 million to $36.6 million each
year in 2000 through 2004, and $5.4 million for later years.
CREDIT RISK. The Company's discontinued operations maintain policies intended to
minimize credit risk and revalue credit exposures daily to monitor compliance
with those policies. As of December 31, 1998, over 90% of the Company's price
risk management commitments were with counterparties rated BBB equivalent or
better. As of December 31, 1998, seven counterparties represented 86% of the
Company's price risk management commitments.
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NOTE 4 - BIG RIVERS ELECTRIC CORPORATION LEASE
On July 15, 1998, the Company closed the transaction to lease the generating
assets of Big Rivers Electric Corporation (Big Rivers). Under the 25-year
operating lease, WKE is leasing and operating Big Rivers' three coal-fired
facilities. In addition, WKE operates and maintains the Station Two generating
facility of the City of Henderson (Henderson). The combined generating capacity
of these facilities amounts to approximately 1,700 megawatts, net of the
Henderson's capacity and energy needs from Station Two. WKE prepaid $55.9
million for its first two years of lease payments. Lease expense for 1998 was
$12.8 million. See Note 18, Commitments and Contingencies, for a further
discussion.
In related transactions, power is supplied to Big Rivers at contractual prices
over the term of the lease to meet the needs of four-member distribution
cooperatives and their retail customers, including major western Kentucky
aluminum smelters. Excess generating capacity is available to WKE to market
throughout the region. In connection with these transactions, WKE has undertaken
to bear certain of the future capital requirements of those generating assets,
certain defined environmental compliance costs and other obligations.
In July 1998, as part of the deal structure with Big Rivers, WKE agreed to
provide Big Rivers a $50 million note to help it emerge from bankruptcy. WKE
will provide $1.7 million per month for the first 12 months of the note,
beginning August 1998, and $2.5 million per month over the subsequent 12 months.
The note will be repaid over a three-year period, beginning August 2000, with
interest at 7.165%.
NOTE 5 - UTILITY RATES AND REGULATORY MATTERS
Accounting for the regulated utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as prescribed
by FERC, the Kentucky Commission and the Virginia Commission. LG&E and KU are
subject to Statement of Financial Accounting Standards No. 71, Accounting for
the Effects of Certain Types of Regulation (SFAS No. 71). Under SFAS No. 71,
certain costs that would otherwise be charged to expense are deferred as
regulatory assets based on expected recovery from customers in future rates.
Likewise, certain credits that would otherwise be reflected as income are
deferred as regulatory liabilities based on expected flowback to customers in
future rates. LG&E's and KU's current or expected recovery of deferred costs and
expected flowback of deferred credits is generally based on specific ratemaking
decisions or precedent for each item. The following regulatory assets and
liabilities were included in the consolidated balance sheets as of December 31
(in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unamortized loss on bonds $ 26,302 $ 28,454
Merger costs 34,749 7,000
Manufactured gas sites 3,684 3,263
Other 1,136 955
---------- ----------
Total regulatory assets 65,871 39,672
Deferred income taxes - net (109,411) (117,079)
---------- ----------
Regulatory assets and liabilities - net $ (43,540) $ (77,407)
---------- ----------
---------- ----------
</TABLE>
During 1997, LG&E wrote off certain previously deferred assets that amounted to
approximately $4.2 million. Items written off include expenses associated with
LG&E's hydro-electric plant, a management audit fee, and the accelerated
write-off of losses on early retirement of facilities.
ENVIRONMENTAL COST RECOVERY. Since May 1995 and August 1994, respectively, LG&E
and KU have implemented an environmental cost recovery (ECR) surcharge to
recover certain environmental compliance costs, including costs to comply with
the 1990 Clean Air Act, as amended, as well as other environmental
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<PAGE>
regulations, including those applicable to coal combustion wastes and related
by-products. The ECR mechanism was authorized by state statute in 1992 and
was first approved by the Kentucky Commission in KU's Case No. 93-465 in July
1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by LG&E and KU be subject to
refund pending final determination of all appeals.
On December 19, 1998 the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying
recovery of costs associated with pre-1993 environmental projects through the
ECR. The court remanded the case to the Commission to determine the proper
adjustments to refund amounts collected for such pre-1993 environmental
projects. The parties to the proceeding have notified the Commission that they
have reached agreement as to the terms, refund amounts, refund procedure and
forward application of the ECR. The settlement agreement is subject to
Commission approval. The Company recorded a provision for rate refund of $26
million in December 1998.
OTHER RATE MATTERS. In January 1994, LG&E implemented a Commission-approved
demand side management (DSM) program that LG&E, the Jefferson County, Kentucky,
Attorney and representatives of several customer interest groups had filed with
the Commission. The program included a rate mechanism that (1) provided LG&E
concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM
programs and (3) allowed LG&E to recover revenues from lost sales associated
with the DSM program (decoupling). In June 1998, LG&E and customer interest
groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E
discontinued recording revenues from lost sales due to DSM. Accrued decoupling
revenues recorded for periods prior to June 1, 1998, will continue to be
collected through the DSM recovery mechanism. On September 23, 1998, the
Commission accepted LG&E's modified tariff reflecting this proposal effective as
of June 1, 1998.
Since October 1997, LG&E has implemented a Commission-approved, experimental
performance-based ratemaking mechanism related to gas procurement activities and
off-system gas sales only. During the three-year test period beginning October
1997, rate adjustments related to this mechanism will be determined for each
12-month period beginning November 1 and ending October 31. During the first
year of the mechanism ended October 31, 1998, LG&E recorded $3.6 million for its
share of reduced gas costs. The $3.6 million will be billed to customers through
the gas supply clause beginning February 1, 1999.
LG&E and KU employ a fuel adjustment clause (FAC) mechanism, which under
Kentucky law allows the companies to recover from customers, the actual fuel
costs associated with retail electric sales. As of February 12, 1999, LG&E
received orders from the Kentucky Commission requiring a refund to retail
electric customers of approximately $3.9 million resulting from reviews of the
FAC from November 1994 through April 1998. The orders changed the Company's
method of computing fuel costs associated with electric line losses on
off-system sales appropriate for recovery through the FAC. The orders require
these amounts to be refunded to customers during first quarter 1999.
The Kentucky Commission has not issued LG&E an order for the review period May
1998 through October 1998, nor have they issued orders pertaining to KU's FAC
for review periods after November 1994. However, following the methods set forth
in the LG&E orders, the Company estimates up to an additional $4.8 million could
be refundable to LG&E and KU retail electric customers for open review periods
through December
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<PAGE>
1998. Management intends to file a request for rehearing on the Kentucky
Commission's rulings. Management does not believe final resolution of these
proceedings will have a material adverse effect on the Company's financial
position or results of operations.
FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate but parallel
applications with the Commission for approval of a new method of determining
electric rates that provides financial incentives for LG&E and KU to further
reduce customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein the
Commission directed LG&E and KU to indicate whether they desired to remain under
traditional rate of return regulation or commence non-traditional regulation.
The new ratemaking method, known as performance-based ratemaking (PBR), would
include financial incentives for LG&E and KU to reduce fuel costs and increase
generating efficiency, and to share any resulting savings with customers.
Additionally, the PBR provides financial penalties and rewards to assure
continued high quality service and reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utility
outperform the index, benefits will be shared equally between shareholders
and customers. If the utility's fuel costs exceed the index, the difference
will be absorbed by the Company's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share in up to $10 million annually of benefits from this
performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to the Company of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision likely will occur in 1999.
Several intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR. The Company is not able to
predict the ultimate outcome of these proceedings, however, should the
Commission mandate significant rate reductions at LG&E or KU, through the PBR
proposal or otherwise, such actions could have a material effect on the
Company's financial condition and results of operations.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997,
the Kentucky Commission opened Administrative Case No. 369 to consider
Commission policy regarding cost allocations, affiliate transactions and codes
of conduct governing the relationship between utilities and their non-utility
operations and affiliates. The Commission intends to address two major areas in
the proceedings: the tools and conditions needed to prevent cost shifting and
cross-subsidization between regulated and non-utility operations;
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<PAGE>
and whether a code of conduct should be established to assure that
non-utility segments of the holding company are not engaged in practices
which result in unfair competition caused by cost shifting from the
non-utility affiliate to the utility. In September 1998, the Commission
issued draft code of conduct and cost allocation guidelines. In January 1999,
the Company, as well as all parties to the proceeding, filed comments on the
Commission draft proposals. Initial hearings are scheduled for the first
quarter of 1999. Management does not expect the ultimate resolution of this
matter to have a material adverse effect on the Company's financial position
or results of operations.
NOTE 6 - FINANCIAL INSTRUMENTS
At December 31, 1998, the Company held U.S. Treasury note and bond futures
contracts with notional amounts totaling $4.9 million. These contracts are used
to hedge price risk associated with certain marketable securities and mature in
March 1999.
As of December 31, 1998, LG&E had in effect six interest-rate swap agreements to
hedge its exposure to tax exempt rates related to Pollution Control Bonds,
Variable Rate Series. The swaps have notional amounts totaling $166 million and
mature at various times from 1999 to 2005. LG&E pays a weighted-average fixed
rate on the swaps of 3.89% and receives a variable rate based on the JJ Kenny
Index (in the case of one of the swaps) or the Bond Market Association Municipal
Swap Index. The indices averaged 3.48% in 1998.
In April 1998, LG&E entered into a forward-starting interest-rate swap with a
notional amount of $83.3 million. The swap will hedge anticipated variable-rate
borrowing commitments. It will start in August 2000 and mature in November 2020.
LG&E will pay a fixed rate of 5.21% and receive a variable rate based on the
Bond Market Association Municipal Swap Index. Under certain conditions, the
counterparty to the agreement may terminate the swap at no cost after August
2010.
Capital Corp. had two interest rate swaps outstanding at December 31, 1998,
which hedge a portion of its notes payable. One swap has a notional amount of
$50 million and matures in June 2002. Capital Corp. receives a variable rate
based on the three-month London Interbank Offered Rate which equaled 5.24% at
year end and pays a fixed rate of 6.49%. The second swap has a notional amount
of $50 million and matures in January 2000. The Company receives a variable rate
based on a one-month commercial paper rate index and pays a fixed rate of 4.78%.
The index for December 1998 was 5.23%.
The cost and estimated fair values of the Company's non-trading financial
instruments (excluding the fair values of the Company's price risk management
assets and liabilities) as of December 31, 1998 and 1997 follow (in thousands of
$):
<TABLE>
<CAPTION>
1998 1997
---- ----
Fair Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Marketable securities $ 20,592 $ 20,862 $ 21,994 $ 22,300
Long-term investments -
Not practicable to estimate
fair value 1,721 1,721 3,983 3,983
Preferred stock subject
to mandatory redemption 25,000 26,413 25,000 26,250
Long-term debt 1,510,795 1,576,502 1,210,690 1,266,030
U.S. Treasury note and
bond futures - (87) - (81)
Interest rate swaps - (9,527) - (4,328)
</TABLE>
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<PAGE>
All of the above valuations reflect prices quoted by exchanges except for the
swaps and the long-term investments. The fair values of the swaps reflect price
quotes from dealers or amounts calculated using accepted pricing models. The
fair values of the long-term investments reflect cost, since the Company cannot
reasonably estimate fair value.
NOTE 7 - CONCENTRATIONS OF CREDIT AND OTHER RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on- or off-balance sheet) relate to
groups of customers or counterparties that have similar economic or industry
characteristics that would cause their ability to meet contractual obligations
to be similarly affected by changes in economic or other conditions.
LG&E's customer receivables and gas and electric revenues arise from deliveries
of natural gas to approximately 289,000 customers and electricity to
approximately 360,000 customers in Louisville and adjacent areas in Kentucky.
KU's customer receivables and revenues arise from deliveries of electricity to
about 449,000 customers in over 600 communities and adjacent suburban and rural
areas in 77 counties in central, southeastern and western Kentucky and to about
29,000 customers in five counties in southwestern Virginia. For the year ended
December 31, 1998, 90% of total utility revenue was derived from electric
operations and 10% from gas operations.
The financial position and results of operations of the domestic unconsolidated
ventures are substantially dependent upon the continuation of long-term power
sales contracts with purchasing utilities. The Argentine natural gas
distribution companies serve approximately 706,000 customers in six provinces in
Argentina. WKE's customer receivables and revenues arise from the deliveries of
electricity and generating capacity to Big Rivers for distribution to its four
members distribution cooperatives, as well as to other major wholesale
customers.
LG&E's operation and maintenance employees are members of the International
Brotherhood of Electrical Workers (IBEW) Local 2100 which represents
approximately 60% of LG&E's workforce. On December 10, 1998, LG&E and IBEW
employees entered into a three-year collective bargaining agreement following a
vote by IBEW members which ratified the contract providing for certain wage and
benefit improvements, and opportunities for early retirement. KU's operation and
maintenance employees are members of the IBEW Local 101 and United Steelworkers
of America (USWA) Local 8686. KU has approximately 15% of its workforce covered
by union contracts expiring August 1, 1999. In September 1998, WKE and
approximately 350 WKE employees entered into a three-year collective bargaining
agreement providing for, among other things, annual wage increases and fixed
pension benefits.
NOTE 8 - INVESTMENTS IN UNCONSOLIDATED VENTURES
The Company's investments in unconsolidated ventures reflect interests in
domestic and foreign electric power and steam producing plants and one of the
Argentine gas distribution companies. These investments are accounted for using
the equity method.
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<PAGE>
The fuel type, ownership percentages and carrying amounts of the unconsolidated
ventures as of December 31, 1998 are summarized as follows (in thousands of $):
<TABLE>
<CAPTION>
Carrying
Fuel Type % Owned Amount
--------- ------- --------
<S> <C> <C> <C>
LG&E Westmoreland - Southampton Coal 50 $ 13,784
LG&E Westmoreland - Altavista Coal 50 12,669
LG&E Westmoreland - Hopewell Coal 50 11,330
LG&E Westmoreland - Rensselaer Natural Gas 50 23,023
Westmoreland - LG&E Partners Coal 50 25,141
Windpower Partners 1993 Wind 50 21,345
Windpower Partners 1994 Wind 25 -
KW Tarifa, S.A. Wind 46 5,999
Distribuidora de Gas Cuyana - 14 44,531
Tenaska Limited Partnerships Gas 5-10 7,899
Electric Energy, Inc. (Note 18) Coal 20 2,156
--------
Total $167,877
--------
--------
</TABLE>
The Company's carrying amount exceeded the underlying equity in unconsolidated
ventures by $33.3 million and $32.9 million at December 31, 1998 and 1997,
respectively. This difference, which is being amortized, represents adjustments
to reflect the fair value of the underlying net assets acquired and related
goodwill.
In January 1999, a final order was entered in the bankruptcy proceedings
involving Westmoreland Coal Company and certain of its subsidiaries, including
Westmoreland Energy, Inc., the parent of various entities that are partners with
company subsidiaries in five of the independent generating facilities. However,
none of the partnerships and no partner of the current partnerships has been
under bankruptcy court protection, nor were these partnerships in a default
occasioned under the project loan documents.
With respect to the Windpower Partners 1993 and Windpower Partners 1994 (WPP94)
projects listed above, certain of the Company's partners (or affiliates of such
partners) are in bankruptcy proceedings. During the third quarter of 1998, the
Company wrote off its aggregate remaining investment in WPP94 of $3.8 million.
See Note 18, Commitments and Contingencies.
In November 1998, the Company received approximately $8.5 million in connection
with an arbitration proceeding concerning a former Power Purchase Agreement
between Tenaska Washington Partners II, L.P. and the Bonneville Power
Administration (BPA). The Company has a 10% interest in this partnership, which
owned a partially constructed facility in Frederickson, Washington. This
facility was transferred to the BPA following payment of the award.
In June 1998, the partnership that owns the Rensselaer facility, along with 14
other independent power producers, participated in the consummation of a Master
Restructuring Agreement (MRA) with Niagara Mohawk Power Corporation (NIMO). As
part of the MRA, the partnership restructured its power purchase agreement with
NIMO and entered into a new multi-year agreement with the utility. Concurrent
with the MRA, the Company reached a settlement with other parties to retain a
50% ownership in the Rensselaer facility. As a result of these transactions, the
Company recorded a $21 million, net after-tax gain in 1998. See Note 18,
Commitments and Contingencies.
In February 1998, the Company sold its indirect, one-third interest in the
company which owned and operated the San Miguel, Argentina generating facility
for a price of $16 million. The sale resulted in a $2.8 million pre-
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<PAGE>
tax charge to 1998 earnings.
NOTE 9 - LEVERAGED LEASES
Capital Corp. owns equity interests in several leveraged leases for combustion
turbine units leased to utility companies. The leases expire in 1999 at which
time the Company will release, sell or reacquire these assets. Capital Corp.'s
equity investment represents 75% of the aggregate purchase price of the leases.
The remaining 25% represents the non-recourse debt provided by lenders at the
inception of the leases in 1974. The lenders have been granted, as their sole
remedy in the event of default by the lessees, an assignment of rentals due
under the leases and a security interest in the leased properties.
The following is a summary of the components of Capital Corp.'s net investment
in leveraged leases at December 31 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Rents receivable (net of nonrecourse debt) $ 1,556 $ 3,039
Estimated residual value of leased property 32,707 32,707
Less: unearned and deferred income 3,319 7,594
-------- --------
Investment in leveraged leases 30,944 28,152
Less: accumulated deferred income taxes 7,301 5,750
-------- --------
Net investment in leveraged leases $23,643 $22,402
-------- --------
-------- --------
</TABLE>
See Note 14, Other Income and Deductions for income from leveraged leases.
NOTE 10 - NON-RECURRING CHARGES
Under certain agreements with Tenaska, Inc., a developer of domestic gas-fired
cogeneration and independent power generation projects, the Company has been
funding a portion of the costs associated with identifying and pursuing
potential independent power projects in North America. Such funding, which was
expensed as incurred, totaled about $1 million in 1997. In 1996, the Company
wrote off $5.5 million of costs funded during 1994-1996 that was associated with
unsuccessful projects. As of December 31, 1998, the Company has no remaining
funding commitment.
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<PAGE>
NOTE 11 - MARKETABLE SECURITIES
The Company's marketable securities have been determined to be
"available-for-sale" under the provisions of Statement of Financial Accounting
Standards SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Proceeds from sales of available-for-sale securities in 1998 were
approximately $20 million, which resulted in realized gains of approximately $.2
million and losses of approximately $.7 million, calculated using the specific
identification method. Proceeds from sales of available-for-sale securities in
1997 were approximately $5 million, which resulted in immaterial realized gains
and losses.
Approximate cost, fair value and other required information pertaining to the
Company's available-for-sale securities by major security type, as of December
31, 1998 and 1997, follow (in thousands of $):
<TABLE>
<CAPTION>
Fixed
Equity Income Total
------ ------ -----
<S> <C> <C> <C>
1998:
-----
Cost $6,467 $14,134 $20,601
Unrealized gains 545 40 585
Unrealized losses (196) (128) (324)
------ ------- -------
Fair values $6,816 $14,046 $20,862
------ ------- -------
------ ------- -------
Fair values:
No maturity $6,816 $ 178 $ 6,994
Contractual maturities:
Less than one year - 8,301 8,301
One to five years - 3,861 3,861
Five to ten years - - -
Over ten years - 1,706 1,706
Not due at a single maturity date - - -
------ ------- -------
Total fair values $6,816 $14,046 $20,862
------ ------- -------
------ ------- -------
1997:
-----
Cost $6,379 $15,615 $21,994
Unrealized gains 445 18 463
Unrealized losses (90) (67) (157)
------ ------- -------
Fair values $6,734 $15,566 $22,300
------ ------- -------
------ ------- -------
Fair values:
No maturity $6,734 $ 114 $ 6,848
Contractual maturities:
Less than one year - 8,795 8,795
One to five years - 5,442 5,442
Five to ten years - - -
Over ten years - 1,215 1,215
Not due at a single maturity date - - -
------ ------- -------
Total fair values $6,734 $15,566 $22,300
------ ------- -------
------ ------- -------
</TABLE>
NOTE 12 - PENSION PLANS AND RETIREMENT BENEFITS
PENSION PLANS AND RETIREMENT BENEFITS. LG&E Energy Corp. sponsors several
qualified and non-qualified pension plans and other postretirement benefit plans
for its employees. The following tables provide a reconciliation of the changes
in the plans' benefit obligations and fair value of assets over the three-year
period
106
<PAGE>
ending December 31, 1998 and a statement of the funded status as of December
31 for each of the last three years (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Change in benefit obligation
Benefit obligation at beginning of year $499,143 $432,551 $397,155
Service cost 14,242 12,675 11,965
Interest cost 35,715 32,927 31,132
Plan amendments 6,377 3,143 19,186
Acquisitions/divestitures (2,243) - -
Curtailment (gain) or loss (364) - -
Special termination benefits 23,965 - -
Benefits paid (23,823) (22,114) (16,811)
Actuarial (gain) or loss 5,629 39,961 (10,076)
-------- -------- --------
Benefit obligation at end of year $558,641 $499,143 $432,551
-------- -------- --------
-------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year $501,361 $432,612 $389,303
Actual return on plan assets 70,631 81,645 53,713
Employer contributions 2,638 10,101 7,139
Benefits paid (23,823) (22,114) (16,811)
Administrative expenses (96) (883) (732)
-------- -------- --------
Fair value of plan assets at end of year $550,711 $501,361 $432,612
-------- -------- --------
-------- -------- --------
Reconciliation of funded status
Funded status $ (7,930) $ 2,218 $ 61
Unrecognized actuarial (gain) or loss (96,368) (79,891) (77,495)
Unrecognized transition (asset) or obligation (9,059) (10,358) (11,587)
Unrecognized prior service cost 47,286 48,064 49,054
-------- -------- --------
Net amount recognized at year-end $(66,071) $(39,967) $ (39,967)
-------- -------- --------
-------- -------- --------
Other Benefits:
---------------
Change in benefit obligation
Benefit obligation at beginning of year $115,894 $106,743 $101,667
Service cost 2,870 2,633 2,661
Interest cost 8,255 7,860 7,746
Plan amendments 613 - 4,120
Acquisitions/divestitures 2,283 - -
Curtailment (gain) or loss 3,584 - -
Special termination benefits 2,855 - -
Benefits paid (5,260) (6,648) (6,535)
Actuarial (gain) or loss (3,501) 5,306 (2,917)
-------- -------- --------
Benefit obligation at end of year $127,593 $115,894 $106,742
-------- -------- --------
-------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year $ 22,192 $ 15,568 $ 10,427
Actual return on plan assets 5,313 3,649 1,582
Employer contributions 7,056 7,577 6,037
Benefits paid (4,077) (4,602) (2,478)
Administrative expenses - - -
-------- -------- --------
Fair value of plan assets at end of year $ 30,484 $ 22,192 $ 15,568
-------- -------- --------
-------- -------- --------
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reconciliation of funded status
Funded status $(97,109) $(93,702) $(91,175)
Unrecognized actuarial (gain) or loss (20,115) (16,730) (19,477)
Unrecognized transition (asset) or obligation 63,834 70,230 74,912
Unrecognized prior service cost 3,572 3,456 3,787
-------- -------- --------
Net amount recognized at year-end $(49,818) $(36,746) $(31,953)
-------- -------- --------
-------- -------- --------
</TABLE>
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the statement of
financial position and information for plans with benefit obligations in excess
of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $(67,126) $(40,296) $(40,032)
Intangible asset 426 281 65
Other 706 710 -
-------- -------- --------
Net amount recognized at year-end $(65,994) $(39,305) $(39,967)
-------- -------- --------
-------- -------- --------
Additional year-end information for plans with benefit
obligations in excess of plan assets:
Projected benefit obligation (1) $163,722 $138,492 $120,254
Accumulated benefit obligation (2) 142,941 11,879 14,656
Fair value of plan assets (1) 111,914 102,775 84,555
(1) All years include LG&E's non-union plan, Energy Corp.'s plan and all of the Company's unfunded
Supplemental Executive Retirement Plans (SERPs).
(2) 1998 includes LG&E's non-union plan, Energy Corp.'s plan and all SERPs. 1997 and 1996 include
SERPs only.
Other Benefits:
---------------
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $(49,818) $(36,746) $(31,953)
Intangible asset - - -
Other (4,421) (4,166) -
-------- -------- --------
Net amount recognized at year-end $(54,239) $(40,912) $(31,953)
-------- -------- --------
-------- -------- --------
Additional year-end information for plans with benefit
obligations in excess of plan assets:
Projected benefit obligation $127,593 $115,894 $106,743
Fair value of plan assets 30,484 22,192 15,568
</TABLE>
108
<PAGE>
The following table provides the components of net periodic benefit cost for the
plans for 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Components of net periodic benefit cost
Service cost $ 14,242 $ 12,675 $ 11,965
Interest cost 35,715 32,927 31,132
Expected return on plan assets (42,278) (35,511) (32,320)
Amortization of prior service cost 4,421 4,133 3,911
Amortization of transition (asset) or obligation (1,224) (1,229) (1,229)
Recognized actuarial (gain) or loss (2,248) (2,854) (2,031)
---------- --------- ---------
Net periodic benefit cost $ 8,628 $ 10,141 $ 11,428
---------- --------- ---------
---------- --------- ---------
FAS88 special charges
Curtailment (gain)/loss $ (2,204) $ - $ -
Prior service cost recognized 2,015 - -
Special termination benefits 23,965 - -
---------- --------- ---------
Total FAS88 charges $ 23,776 $ - $ -
---------- --------- ---------
---------- --------- ---------
Other Benefits:
---------------
Components of net periodic benefit cost
Service cost $ 2,870 $ 2,633 $ 2,662
Interest cost 8,255 7,860 7,746
Expected return on plan assets (1,722) (1,204) (827)
Amortization of prior service cost 373 332 332
Amortization of transition (asset) or obligation 4,621 4,682 4,682
Recognized actuarial (gain) or loss (467) (810) (704)
---------- --------- ---------
Net periodic benefit cost $ 13,930 $ 13,493 $ 13,891
---------- --------- ---------
---------- --------- ---------
FAS88 special charges
Curtailment (gain)/loss $ 2,243 $ - $ -
Special termination benefits 2,855 - -
---------- --------- ---------
Total FAS88 charges $ 5,098 $ - $ -
---------- --------- ---------
---------- --------- ---------
</TABLE>
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. At the time of the merger KU Energy had both qualified
and nonqualified pension plans. During 1998, the Company invested approximately
$24.0 million in special termination benefits as a result of its early
retirement program offered to eligible employees post-merger. On May 30, 1997,
$4.7 million in lump sum payments were made to retired employees of KU Energy
due to a change-in-control provision in the provisions of the Supplemental
Security Plan of the Merger Agreement.
109
<PAGE>
The assumptions used in the measurement of the Company's pension benefit
obligation are shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions as of December 31
Discount rate 7.00% 7.00% 7.75%
Expected long-term rate of return on plan assets (1) 8.25%-8.50% 8.25%-8.50% 8.25%-8.50%
Rate of compensation increase (2) 3.50%-4.00% 2.00%-4.00% 2.00%-4.75%
</TABLE>
(1) All plans used 8.50% except KU's.
(2) All plans used 4.00% except LG&E's union plan which used 3.50% for
1998 and 2.00% for 1997. Rate of compensation increase for 1996
was 2.00% for LG&E's union plan, 4.25% for LG&E and 4.75% for KU.
For measurement purposes, a 7% annual increase in the per capita cost of covered
health care benefits was assumed for 1999. The rate was assumed to decrease
gradually to 4.25% for 2005 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Change
<S> <C>
Effect on total of service and interest cost components for 1998 $ (1,214)
Effect on year-end 1998 postretirement benefit obligations (11,752)
Effect on total of service and interest cost components for 1998 1,544
Effect on year-end 1998 postretirement benefit obligations 15,197
</TABLE>
THRIFT SAVINGS PLANS. The Company has thrift savings plans under section 401(k)
of the Internal Revenue Code. Under these plans, eligible employees may defer
and contribute to the plans a portion of current compensation in order to
provide future retirement benefits. The Company makes contributions to the plans
by matching a portion of the employee's contributions. The costs were
approximately $6.0 million, $4.7 million and $4.2 million for 1998, 1997 and
1996, respectively.
NOTE 13 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands of
$):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Included in Income Taxes:
Current - federal $114,741 $ 88,654 $ 52,018
- foreign 12,208 9,055 -
- state 23,821 19,574 1,725
Deferred - federal - net (25,605) 9,024 36,848
- state - net (5,255) 1,292 18,741
Deferred investment tax credit - 102 409
Amortization of investment tax credit (8,087) (8,378) (8,419)
-------- -------- --------
Total $111,823 $119,323 $101,322
-------- -------- --------
-------- -------- --------
</TABLE>
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<PAGE>
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation and other
plant-related items $632,593 $670,540
Other liabilities 39,966 43,199
-------- --------
672,559 713,739
-------- --------
Deferred tax assets:
Investment tax credit 37,878 41,142
Income taxes due to customers 43,021 45,574
Deferred income 11,626 11,878
Accrued expenses not currently
deductible and other 59,313 66,668
-------- --------
151,838 165,262
-------- --------
Net deferred income tax liability $520,721 $548,477
-------- --------
-------- --------
</TABLE>
At December 31, 1998, there were $116 million of net operating loss
carryforwards related to discontinued operations. These carryforwards, which
expire in years 2000 through 2009, are subject to an annual limitation of
approximately $6 million under provisions of the Internal Revenue Code, and
realization is dependent upon generating sufficient taxable income prior to
their expiration. At both December 31, 1998 and 1997, the Company recorded
valuation allowances of $25.6 million, related to these deferred tax assets.
Unamortized goodwill will be reduced if unrecorded net operating loss
carryforwards are realized.
A reconciliation of differences between the statutory U.S. federal income tax
rate and the Company's effective income tax rate as a percentage of income from
continuing operations before income taxes and preferred dividends follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 4.4 3.9 4.7
Effect of foreign operations including foreign tax credit 1.8 1.1 -
Investment and other tax credits (3.6) (3.1) (3.6)
Nondeductible merger expenses 4.7 - -
Other differences - net (2.2) (1.1) (2.2)
---- ---- -----
Effective income tax rate 40.1% 35.8% 33.9%
---- ---- -----
---- ---- -----
</TABLE>
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<PAGE>
NOTE 14 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income from leveraged leases $ 4,273 $ 3,974 $ 3,613
Interest and dividend income 10,552 11,605 8,765
Gains (losses) on disposals - net (4,942) 7,083 51
Other (2,432) (1,692) (854)
-------- -------- --------
Total other income and (deductions) $ 7,451 $ 20,970 $ 11,575
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 15 - CAPITAL STOCK
Changes in shares of common stock outstanding are shown in the table below (in
thousands). The amounts in the table reflect the merger-related exchange of 1.67
shares of LG&E Energy common stock for each share of KU Energy common stock.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Outstanding January 1 129,683 129,497 129,350
Issues under the Employee
Common Stock Purchase
Plan (1997, $1,613;
1996, $1,457) - 77 78
Issues under the Omnibus
Long-Term Incentive Plan
(1997, $2,195; 1996, $1,167) - 109 69
Merger-related buy-back of
fractional shares (6) - -
------- ------- -------
Outstanding December 31 129,677 129,683 129,497
------- ------- -------
------- ------- -------
</TABLE>
The Company's shareholders approved an increase in the Company's authorized
shares of common stock from 125,000,000 to 300,000,000 on October 14, 1997 in
conjunction with the proposed merger with KU Energy. This increase was
effective at the consummation of the merger on May 4, 1998.
The Company has an Omnibus Long-Term Incentive Plan, under which nonqualified
stock options, performance units and stock appreciation rights have been granted
to key personnel. A total of 3,000,000 shares of common stock have been reserved
for issuance under the plan. Performance units are paid out on a three-year
rolling basis in 50% stock and 50% cash based on Company performance. Directors
of the Company receive stock options pursuant to the Stock Option Plan for
Non-Employee Directors. A total of 500,000 shares of common stock have been
reserved for issuance under this plan. Each option entitles the holder to
acquire one share of the Company's stock no earlier than one year from the date
granted. The options are granted at market value and generally expire 10 years
from the date granted. Although shares are reserved as described above, the
Company announced a repurchase program on October 14, 1997, authorizing the
repurchase of up to 1,000,000 shares of its common stock to be used for, among
other things, benefit and compensation plans, including the Omnibus Long-Term
Incentive Plan.
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<PAGE>
A summary of the status of the Company's nonqualified stock options follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted- Weighted-
Average Average
Options Price Options Price
------- --------- ------- ---------
<S> <C> <C> <C> <C>
As of December 31, 1995 513,550 18.04 332,386 17.26
Options granted and
exercisable 415,348 21.24 158,914 19.57
Options exercised (48,226) 17.26 (48,226) 17.26
Options cancelled (16,328) 21.01 - -
--------- ------ ------- ------
As of December 31, 1996 864,344 19.57 443,074 18.09
Options granted and
exercisable 394,945 24.15 352,966 21.22
Options exercised (87,568) 18.97 (87,568) 18.97
Options cancelled (77,100) 23.04 - -
--------- ------ ------- ------
As of December 31, 1997 1,094,621 21.01 708,472 19.54
Options granted and
exercisable 901,588 24.19 437,373 24.19
Options exercised (153,456) 20.42 (153,456) 20.42
Options cancelled (100,284) 23.05 - -
--------- ------ ------- ------
As of December 31, 1998 1,742,469 $22.60 992,389 $21.46
--------- ------ ------- ------
--------- ------ ------- ------
</TABLE>
Common stock equivalents resulting from the options granted under both the
Long-Term Plan and the Directors' Plan would not have a material dilutive effect
on reported earnings per share.
The Company has a Shareholders' Rights Plan designed to protect shareholders'
interests in the event the Company is ever confronted with an unfair or
inadequate acquisition proposal. Pursuant to the plan, each share of common
stock has one-third of a "right" entitling the holder to purchase from the
Company one one-hundredth of a share of new preferred stock of the Company under
certain circumstances. The holders of the rights will, under certain conditions,
also be entitled to purchase either shares of common stock of LG&E Energy or
common stock of the acquirer at a reduced percentage of market value. The rights
will expire in the year 2000.
In December 1997, Inversora de Gas del Centro (Inversora), a subsidiary of the
Company that holds part of the Company's interest in Centro, issued 302,364
shares of preferred stock to unaffiliated parties. The stock has a nominal value
of $10 per share and a variable dividend consisting of 5% of Inversora's annual
net income. Inversora can redeem the shares at the nominal value upon
shareholder approval. During 1998 Inversora redeemed 200,275 shares of preferred
stock.
NOTE 16 - LONG-TERM DEBT
Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other
than the First Mortgage Bonds issued in connection with certain Pollution
Control Bonds) are the amounts necessary to redeem 1% of the highest principal
amount of each series of bonds at any time outstanding. Property additions (166
2/3% of principal amounts of bonds otherwise required to be so redeemed) have
been applied in lieu of cash. It is the intent of LG&E to apply property
additions to meet 1999 sinking fund requirements of the First Mortgage Bonds.
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<PAGE>
The trust indenture securing the First Mortgage Bonds constitutes a direct first
mortgage lien upon a substantial portion of all property owned by LG&E. The
indenture, as supplemented, provides in substance that, under certain specified
conditions, portions of retained earnings will not be available for the payment
of dividends on common stock. No portion of retained earnings is presently
restricted by this provision.
Pollution Control Bonds (LG&E Projects) issued by Jefferson and Trimble
Counties, Kentucky, are secured by the assignment of loan payments by LG&E to
the Counties pursuant to loan agreements, and certain series are further secured
by the delivery from time to time of an equal amount of LG&E's First Mortgage
Bonds, Pollution Control Series. First Mortgage Bonds so delivered are
summarized in the Statements of Capitalization. No principal or interest on
these First Mortgage Bonds is payable unless default on the loan agreements
occurs. The interest rate reflected in the Statements of Capitalization applies
to the Pollution Control Bonds.
On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by the Company.
In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and $35
million of Trimble County, Kentucky, Pollution Control Bonds, Flexible Rate
Series, due November 1, 2027. Interest rates for these bonds were 3.09% and
3.39%, respectively, at December 31, 1998. The proceeds from these bonds were
used to redeem the outstanding 7.75% Series of Jefferson County, Kentucky and
Trimble County, Kentucky, Pollution Control Bonds due February 1, 2019.
LG&E's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to mature
in 2002, and the $42.6 million, 6% Series is scheduled for maturity in 2003.
There are no scheduled maturities of Pollution Control Bonds for the five years
subsequent to December 31, 1998. The Company has no cash sinking fund
requirements.
Under the provisions for the KU's variable rate Pollution Control Bonds Series
10, KU can choose between various interest rate options. The daily interest rate
option was utilized at December 31, 1998. The average annual interest rate on
the bonds during 1998 and 1997 was 3.54% and 3.77%, respectively. The variable
rate bonds are subject to tender for purchase at the option of the holder and to
mandatory tender for purchase upon the occurrence of certain events. If tendered
bonds are not remarketed, KU has available lines of credit which may be used to
repurchase the bonds.
Substantially all of KU's utility plant is pledged as security for its first
mortgage bonds.
Capital Corp. has established a $500 million medium-term note program. On
November 3, 1998, Capital Corp. issued $150 million of Reset Put Securities due
2011. The interest rate is set at 5.75% through November 1, 2001. The securities
will be subject to automatic purchase by a remarketing agent, at which time the
interest rate will be reset, or to automatic repurchase by Capital Corp., on
November 1, 2001. After taking into account the net effect of the derivative
instruments entered into in September 1998 to hedge the interest rate on the
notes and other issuance costs, the effective rate through October 31, 2001, is
approximately 5.4%. The proceeds were used to repay a portion of Capital Corp.'s
outstanding commercial paper. In February 1998, Capital Corp. issued $150
million of medium-term notes due in January 2008, with a stated interest rate on
the notes of 6.46%. After taking into account the effects of an interest-rate
swap entered into in 1997 to hedge the interest rate on $100 million (See Note
6, Financial Instruments) and other issuance costs, the effective rate will be
6.82%. The proceeds were used to repay outstanding commercial paper.
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<PAGE>
Centro maintains a $100 million global note program. As of December 31, 1998 and
1997, Centro had outstanding $37.6 million in negotiable obligations, net of
issuance costs as part of this program. The maturity date of the debt is August
21, 2001. Interest is paid semi-annually based upon a fixed rate of 10.5%.
NOTE 17 - NOTES PAYABLE
Capital Corp. had outstanding commercial paper of $365.1 million at December
31, 1998, at a weighted-average interest rate of 5.19%. The Company had no
other notes payable at December 31, 1998. Capital Corp. had notes payable of
$360.2 million at December 31, 1997, at a weighted-average interest rate of
5.79%.
KU's short-term financing requirements are satisfied through the sale of
commercial paper. KU had no short-term borrowings at December 31, 1998. KU had
outstanding commercial paper of $33.6 million at December 31, 1997, at a
weighted-average interest rate of 6.79%.
At December 31, 1998, the Company had lines of credit in place totaling $960
million ($200 million for LG&E, $60 million for KU, and $700 million for Capital
Corp.) for which the Companies pays commitment or facility fees. The LG&E credit
facility provides for short-term borrowing. KU credit facilities provide for
short-term borrowing and support of commercial paper borrowing. The Capital
Corp. facility provides for short-term borrowing, letter of credit issuance, and
support of commercial-paper borrowings. Unused capacity under these lines
totaled $536.8 million after considering the commercial paper support and
approximately $58.1 million in letters of credit securing on- and off-balance
sheet commitments. The credit lines will expire at various times from 1999
through 2002. Management expects to renegotiate the lines when they expire.
The lenders under the credit facilities, commercial paper program, and
medium-term notes for Capital Corp. are entitled to the benefits of a Support
Agreement with LG&E Energy. The Support Agreement states, in substance, that
LG&E Energy will provide Capital Corp. with the necessary funds and financial
support to meet their obligations under the credit facilities, commercial paper
program, and medium-term notes.
On September 5, 1997, Energy Systems and Gas Systems merged to form Capital
Corp. At the same time, Capital Corp. implemented a $600 million commercial
paper facility backed by new lines of credit totaling $700 million. The
Company terminated the previous lines of credit which totaled $460 million.
NOTE 18 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM
The Company had commitments, primarily in connection with the construction
program of LG&E and KU, aggregating approximately $15 million at December 31,
1998. LG&E's construction expenditures for the years 1999 and 2000 are estimated
to total approximately $384 million. KU's construction expenditures for the same
period are estimated to total approximately $341 million. Non-utility
construction expenditures for the same two-year period are estimated to be $68
million.
LETTERS OF CREDIT
Capital Corp. has provided letters of credit issued to third parties to secure
certain off-balance sheet obligations (including contingent obligations) of its
subsidiaries. The letters of credit securing such obligations totaled
approximately $30.7 million and $38.3 million at December 31, 1998 and 1997,
respectively. These letters of credit are subject to Support Agreements as more
fully described in Note 17, Notes Payable.
Capital Corp. has provided a guarantee of a lease obligation to a third
party. The obligation totaled $7.6 million
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<PAGE>
and $10.2 million at December 31, 1998 and 1997, respectively.
PROJECT CONTINGENCIES
SOUTHAMPTON. In October 1998, LG&E-Westmoreland Southampton and Virginia
Electric and Power Company (VEPCO) entered into a settlement agreement which
resolved issues pending before the FERC regarding the status of the Southampton
cogeneration facility (Southampton) as a qualifying facility (QF) under the
Public Utility Regulatory Policies Act for the year 1992, including the possible
payment of FERC-ordered refunds by Southampton of capacity payments previously
received from VEPCO for such year. The settlement, which has been approved by
the FERC, provides for, among other items, payments by Southampton to VEPCO of
$1 million annually for the years 1999-2001, followed by a reduction in capacity
payments from VEPCO to Southampton by $500,000 annually for the years 2002-2008.
Following 2008, VEPCO may elect to terminate its power purchases from
Southampton or continue to receive the annual reduction in capacity payments for
the remainder of the power purchase agreement. The Company has also been
notified that its partners in the Southampton partnership are disputing their
responsibilities for their share of the refunds and are asserting that the
Company should bear full responsibility for such amounts. The Company and its
partners are currently negotiating these matters. The Company does not believe
that the disputes with its partners will have a material adverse effect on its
results of operations or financial condition.
ROANOKE VALLEY I. The Company owns a 50% interest in Westmoreland-LG&E Partners
(WLP), the owner of the Roanoke Valley I facility which sells electric power to
VEPCO pursuant to a long-term power purchase agreement (PPA). From May 1994
through December 1998, VEPCO withheld approximately $14.8 million of capacity
payments during periods of forced outages. In October 1994, WLP filed a
complaint against VEPCO seeking damages related to the withholding of such
payments. In June 1997, the Virginia Supreme Court reversed a lower court ruling
granting summary judgment in favor of VEPCO and remanded the case for a trial
which occurred in October 1998. In November 1998, the Circuit Court for the City
of Richmond, Virginia issued a decision awarding WLP approximately $19 million,
plus interest until paid, and ruled WLP was entitled to receive future capacity
payments for eligible forced outages during the remainder of the PPA term.
In January 1999, VEPCO filed a notice of appeal regarding the Circuit Court
decision. Pending resolution of all appeals by VEPCO, the Company has not
recognized any income on its 50% portion of the capacity payments being withheld
by VEPCO. In the Company's opinion, WLP is entitled to recover the withheld
capacity payments, as well as the future capacity payments during forced
outages. The Company does not expect the ultimate resolution of this matter to
have a material adverse effect on its results of operations or financial
condition.
RENSSELAER. In November 1998, LG&E Westmoreland-Rensselaer (LWR), in which the
Company has a 50% interest, entered into a non-binding letter of intent for the
sale of the assets of the Rensselaer cogeneration facility. The proposed sale is
subject to a number of contingencies, including satisfactory completion of
certain due diligence, corporate approvals by buyer and seller parties, receipt
of all necessary regulatory and third party approvals and consents and other
matters. Should all conditions precedent be satisfied or waived, a sale is
scheduled for early 1999.
KENETECH BANKRUPTCY. In May 1996, Kenetech Windpower, Inc. (Kenetech) filed in
the United States Bankruptcy Court in the Northern District of California for
protection under Chapter 11 of the United States Bankruptcy Code seeking, among
other things, to restructure certain contractual commitments between Kenetech
and its subsidiaries, and various windpower projects located in the U.S. and
abroad. Included in these projects are the Windpower Partners 1993 (WPP 93),
Windpower Partners 1994 (WPP 94) and KW Tarifa, S.A. (Tarifa) wind projects in
which the Company has invested, collectively, approximately $31 million. As part
of the bankruptcy proceeding, Kenetech is also seeking to void certain warranty
commitments made to the owners
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<PAGE>
of those projects with respect to the operation and output of the facilities,
and the repair and replacement of the windpower generation equipment located
there. In January 1997, the projects filed their respective breach of
contract and other claims against Kenetech in the bankruptcy proceeding. In
January 1999, the Bankruptcy Court approved an initial plan of
reorganization. The Plan is subject to a number of filed objections, the
resolution of which and satisfaction of other conditions precedent are
required prior to initial distributions currently planned for the first
quarter 1999.
The projects are discussing with their creditors the allocation of any such
distributions. The Company is unable to predict the outcome of these
proceedings. However, the Company does not expect the ultimate resolution of the
bankruptcy to have a material adverse effect on its results of operations or
financial condition.
WINDPOWER PARTNERS 1994. WPP 94 is a windpower generation facility in Texas, in
which the Company has a 25% interest. WPP 94 did not make its semiannual
payments, due September 1997, March 1998 and September 1998 to John Hancock
Mutual Life Insurance Company (Hancock) under certain Notes issued by WPP 94 to
Hancock. WPP 94 and Hancock are presently engaged in discussions concerning a
possible restructuring of WPP 94's debt obligations. Because of the continuing
nature of the negotiations, the Company is not able to predict the outcome of
this event. The Company does not expect the ultimate resolution of this matter
to have a material effect on its results of operations or financial condition.
GREGORY. In June 1998, LPI entered into a partnership with Columbia Electric
Corporation for the development of a natural gas-fired cogeneration project in
Gregory, Texas, providing electricity and steam equivalent of 550 MW. Initial
construction commenced in August 1998 and non-recourse financing for a majority
of the construction and other costs was obtained in November 1998. The project
will sell steam and a portion of its electric output to Reynolds Metals Company.
A medium-term fixed-price contract has also been entered into with a third party
for a portion of the remaining electric output. The project is expected to begin
commercial operation in the summer of 2000 at an anticipated total project cost
of approximately $240 million. The Company's equity contribution is expected to
be approximately $30 to $35 million in connection with its 50% interest in the
project.
CALGARY. In November 1996, LG&E Natural Canada Inc., a subsidiary of LEM,
initiated action in the Court of the Queens Bench of Alberta, Calgary against a
former employee. An amended statement of claim was filed in the Calgary action
in December 1996, naming additional parties. These lawsuits were filed as a
result of LEM's discovery in the fourth quarter of 1996 that the former employee
had engaged in unauthorized transactions. Counterclaims have been filed seeking
damages of approximately $40 million for, among other things, defamation and
breach of contract. In the second quarter of 1997, the Company received an
insurance settlement of $7.6 million (net of expenses) related to the losses.
Discovery proceedings in this action have occurred in 1998. The Company does not
expect the ultimate resolution of this matter to have a material adverse effect
on its results of operations or financial condition.
SPRINGFIELD MUNICIPAL CONTRACT. In July 1998, LEM filed suit in the United
States District Court for the Western District of Kentucky in Louisville,
against the City of Springfield, Illinois, City Water, Light and Power Company
(Springfield CWLP). The action seeks damages for Springfield CWLP's failure,
including in late June 1998, to sell electric energy to LEM pursuant to a
February 1997 Interchange Agreement and transaction confirmations thereunder, as
well as for other related claims. LEM has estimated that its damages in this
matter may be approximately $21 million. The parties have commenced discovery
which is scheduled to continue into late 1999.
OGLETHORPE POWER CONTRACT. In November 1996, the Company, through LEM, entered
into a 15-year agreement with OPC to supply approximately one-half of OPC's
systemwide power needs during the term of the agreement and with rights to
market OPC's surplus power. The Company has been in settlement negotia-
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<PAGE>
tions with OPC over load projections provided by OPC as an inducement for LEM
to enter into the 1996 agreement. In October 1998, LEM initiated an
arbitration proceeding against OPC related to these load projections. Final
selection of the arbitration panel is expected to occur in the first quarter
of 1999. See also Discontinuance of Merchant Energy Trading and Sales
Business in Management's Discussion and Analysis of Operations and Financial
Condition.
OPERATING LEASES
The Company leases office space, office equipment and vehicles. See also Note 4
for discussion of the Big Rivers Electric Corporation operating lease. The
Company accounts for these leases as operating leases. Total lease expense for
1998, 1997 and 1996, was $21.7 million, $6.7 million and $7.8 million,
respectively. The future minimum annual lease payments under lease agreements
for years subsequent to December 31, 1998 are as follows (in thousands of $):
<TABLE>
<S> <C>
1999 $ 5,650
2000 19,926
2001 36,669
2002 37,072
2003 36,574
Thereafter 627,073
--------
Total $762,964
--------
--------
</TABLE>
Future minimum annual lease payments have been reduced by rental payments to be
received from noncancelable subleases of approximately $1.8 million per year
through 1999 and 2000, and $1.3 million in 2001.
ENVIRONMENTAL
In September 1998, the U.S. Environmental Protection Agency (USEPA) announced
its final regulation requiring significant additional reductions in NOx
emissions to mitigate alleged ozone transport to the Northeast. While each state
is free to allocate its assigned NOx reductions among various emissions sectors
as it deems appropriate, the regulation may ultimately require utilities to
reduce their NOx emissions to 0.15 lb./mmBtu-an 85% reduction from 1990 levels.
Under the regulation, each state must incorporate the additional NOx reductions
in its State Implementation Plan (SIP) by September 1999 and affected sources
must install control measures by May 2003, unless granted extensions. Several
states, various labor and industry groups, and individual companies have
appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit.
Management is currently unable to determine the outcome or exact impact of this
matter until such time as the states identify specific emissions reductions in
their SIPs and the courts rule on the various legal challenges to the final
rule. However, if the 0.15 lb. target is ultimately imposed, LG&E, KU, WKE and
the independent power projects in which the Company has an interest will be
required to incur significant capital expenditures and increased operation and
maintenance costs for additional controls.
Subject to further study and analysis, the Company estimates that it may incur
capital costs in the range of $300 million to $500 million in the aggregate for
LG&E, KU, and WKE. These costs would generally be incurred beginning in 2000.
The Company believes its costs in this regard to be comparable to those of
similarly situated utilities with like generation assets. The Company
anticipates that such capital and operating costs are the type of costs that are
eligible for cost recovery from customers under its environmental surcharge
mechanisms and believes that, in the cases of LG&E and KU, a significant portion
of such costs could be so recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.
The Company is also addressing other air quality issues. First, the Company is
monitoring USEPA's
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<PAGE>
implementation of the revised National Ambient Air Quality Standards (NAAQS)
for ozone and particulate matter. Until USEPA completes additional
implementation steps, including monitoring and nonattainment designations,
management is unable to determine the precise impact of the revised
standards. Second, the Company is conducting modeling activities at LG&E's
Cane Run Station and WKE's Coleman Station in response to notifications from
regulatory agencies that those plants may be the source of potential
exceedances of the NAAQS for SO2. Depending on future regulatory
determinations, the Company may be required to undertake corrective action
that could include significant capital expenditures or emissions limitations.
Third, the Company is working with regulatory authorities to review the
effectiveness of remedial measures aimed at controlling particulate emissions
from LG&E's Mill Creek Station. The Company previously settled a number of
property damage claims from adjacent residents and completed significant
plant modifications as part of its ongoing capital construction program. The
Company is currently awaiting a final regulatory determination regarding
remedial measures. In management's opinion, resolution of any remaining
property damage claims from adjacent residents should not have a material
adverse impact on the financial position or results of operations of the
Company.
The Company is addressing potential liabilities for the cleanup of properties
where hazardous substances may have been released. The Company has identified
contamination at certain manufactured gas plant (MGP) sites currently or
formerly owned by the Company. A cleanup has been completed at a site owned by
KU and the Company is negotiating with state agencies with respect to cleanup of
a site owned by LG&E. In addition, several other former MGP sites have been
conveyed to other parties over a substantial period of time. In agreements
reached in 1996 and 1998 with the current owners of two sites formerly owned by
LG&E, the current owners of those sites have expressly agreed to assume
responsibility for environmental liabilities in return for an aggregate payment
of $400,000. Until conclusion of discussions with state agencies regarding the
site currently owned by LG&E and the receipt of additional information on sites
no longer owned by the Company, management is unable to precisely determine
remaining liability for cleanup costs at MGP sites. However, management
estimates total cleanup costs to be approximately $3 million. Accordingly, an
accrual of $3 million has been recorded in the accompanying financial
statements.
LG&E and KU along with other companies have been identified by USEPA as
potentially responsible parties allegedly liable for cleanup of certain off-site
disposal facilities under the Comprehensive Environmental Response Compensation
and Liability Act. LG&E has entered into final settlements for an aggregate of
$150,000 resolving liability in two cases, while KU is currently participating
as a de minimis party in an additional case.
WKE and LPI and subsidiaries are also subject to extensive federal, state and
local environmental laws and regulations governing the operation of various
facilities in which they participate as an owner or managing operator. To the
extent that there have been any developments pursuant to environmental laws and
regulations, such developments have not been material, except as otherwise
disclosed herein.
PURCHASED POWER
KU has purchase power arrangements with Owensboro Municipal Utilities (OMU),
Electric Energy, Inc. (EEI) and other parties. Under the OMU agreement, which
expires on January 1, 2020, KU purchases all of the output of a 400-MW
generating station not required by OMU. The amount of purchased power available
to KU during 1999-2003, which is expected to be approximately 9% of KU's total
kWh requirements, is dependent upon a number of factors including the units'
availability, maintenance schedules, fuel costs and OMU requirements. Payments
are based on the total costs of the station allocated per terms of the OMU
agreement, which generally follows delivered kWh. Included in the total costs is
KU's proportionate share of debt service requirements on $180 million of OMU
bonds outstanding at December 31, 1998. The debt service is allocated to KU
based on its annual allocated share of capacity, which averaged approximately
49% in 1998.
119
<PAGE>
KU has a 20% equity ownership in EEI, which is accounted for on the equity
method of accounting. See Note 8. KU's entitlement is 20% of the available
capacity of a 1,000-MW station. Payments are based on the total costs of the
station allocated per terms of an agreement among the owners, which generally
follows delivered kWh.
KU has several other contracts for purchased power during 1999-2003 of various
MW capacities and for varying periods with a maximum entitlement at any time of
282 MW.
The estimated future minimum annual payments under purchased power agreements
for the five years ended December 31, 2003, are as follows (in thousands of $):
<TABLE>
<S> <C>
1999 $ 34,291
2000 26,712
2001 29,621
2002 29,561
2003 29,670
--------
Total $149,855
--------
--------
</TABLE>
NOTE 19 - JOINTLY OWNED ELECTRIC UTILITY PLANT
LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for the
75% portion of the Unit, which the Commission has allowed to be reflected in
customer rates, is similar to LG&E's accounting for other wholly owned utility
plants.
Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA) owns
a 12.12% undivided interest, and Indiana Municipal Power Agency (IMPA) owns a
12.88% undivided interest. Each is responsible for its proportionate ownership
share of fuel cost, operation and maintenance expenses, and incremental assets.
The following data represents shares of the jointly owned property:
<TABLE>
<CAPTION>
Trimble County
LG&E IMPA IMEA TOTAL
---- ---- ---- -----
<S> <C> <C> <C> <C>
Ownership interest 75% 12.88% 12.12% 100%
Mw capacity 371.25 63.75 60 495
</TABLE>
NOTE 20 - SEGMENTS OF BUSINESS AND RELATED INFORMATION
Effective December 31, 1998, the Company adopted Statements of Financial
Accounting Standards No. 131, Disclosure About Segments of an Enterprise and
Related Information. The Company's principal business segments consist of LG&E's
regulated electric and gas utility operations, KU's regulated electric utility
operations and Capital Corp.'s non-utility operations. Capital Corp.'s principal
business segments include its independent power operations, WKE and Argentine
gas distribution subsidiaries.
120
<PAGE>
The All Other category consists of elimination entries, adjustments and other
corporate. The Company does not allocate all expenses from corporate to
reportable segments. International long-lived assets consist of the long-lived
assets of the Argentine gas distribution companies, the Company's investment in
the San Miguel project in Argentina, and its investment in the Tarifa project in
Spain. The Company acquired its interests in the Argentine gas distribution
companies in February 1997, and it sold its interest in the San Miguel project
in February 1998. Financial data for business segments, revenues by product, and
long-lived assets by geographic area follow (in thousands of $):
<TABLE>
<CAPTION>
LG&E CAPITAL CORP.
-------------------------------------------
Inde- Argentine
pendent Western Gas Other
LG&E LG&E KU Power Kentucky Distri- Capital All Consol-
Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated
- ---- -------- --- -------- ---------- ------ ------ ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998
- ----
Revenues $ 658,510 $191,545 $ 810,114 $ 19,884 $128,519 $148,162 $49,479 $(29,800) $1,976,413
Depreciation and
amortization 79,867 13,312 86,657 4,633 1,345 8,973 1,759 871 197,417
Interest income 3,672 679 1,811 5,025 18 2,313 14,734 (17,700) 10,552
Interest expense 34,221 6,668 40,896 6 2,631 12,581 27,176 (15,308) 108,871
Equity in unconsolidated
ventures - - - 71,297 - 2,501 - - 73,798
Merger costs to achieve 32,073 - 21,830 - - - - 11,415 65,318
Income taxes 48,415 (152) 49,444 24,432 2,442 10,030 (5,321) (17,467) 111,823
Income from continuing
operations 71,536 2,016 70,508 41,608 3,592 5,752 (8,203) (26,538) 160,271
Total assets 1,734,221 332,789 1,751,048 163,663 176,166 346,305 120,972 148,104 4,773,268
Construction expenditures 105,837 32,509 91,992 4,242 17,549 14,977 69,478 5,630 342,214
</TABLE>
(1) This column includes eliminations, adjustments and corporate.
<TABLE>
<CAPTION>
LG&E CAPITAL CORP.
-------------------------------------------
Inde- Argentine
pendent Western Gas Other
LG&E LG&E KU Power Kentucky Distri- Capital All Consol-
Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated
- ---- -------- --- -------- ---------- ------ ------ ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997
- ----
Revenues $ 615,159 $231,011 $ 716,410 $ 19,622 $ - $127,182$ 15,671 $ - $1,725,055
Depreciation and
amortization 79,958 13,062 84,111 1,287 - 7,569 84 478 186,549
Interest income 5,400 953 1,673 2,321 - 1,697 7,836 (9,721) 10,159
Interest expense 37,236 6,539 41,955 - - 10,472 16,819 (8,594) 104,427
Equity in unconsolidated
ventures - - - 20,526 - 2,411 - - 22,937
Income taxes 61,426 4,667 47,789 10,154 - 7,264 (893) (11,084) 119,323
Income from continuing
operations 104,349 4,339 83,457 17,795 - 4,860 (1,461) (6,299) 207,040
Total assets 1,728,761 325,864 1,679,676 214,952 - 340,144 15,801 257,746 4,562,944
Construction expenditures 81,713 29,180 94,006 45 - 4,369 147 671 210,131
</TABLE>
(1) This column includes eliminations, adjustments and corporate.
121
<PAGE>
<TABLE>
<CAPTION>
LG&E CAPITAL CORP.
-------------------------------------------
Inde- Argentine
pendent Western Gas Other
LG&E LG&E KU Power Kentucky Distri- Capital All Consol-
Year Electric Gas Electric Operations Energy Bution Corp. Other (1) idated
- ---- -------- --- -------- ---------- ------ ------ ----- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
- ----
Revenues $ 607,160 $214,419 $ 711,711 $ 17,956 $ - $ - $ 9,239 $ (25) $1,560,460
Depreciation and
amortization 76,929 12,073 80,424 1,308 - - 250 415 171,399
Interest income 3,521 576 2,800 127 - - 1,134 607 8,765
Interest expense 38,488 6,322 41,873 (1,281) - - 9,337 (327) 94,412
Equity in unconsolidated
ventures - - - 19,727 - - - - 19,727
Non-recurring charges - - - 5,493 - - - - 5,493
Income taxes 58,854 4,812 47,206 4,522 - - (6,146) (7,926) 101,322
Income from continuing
operations 96,197 7,176 83,907 10,337 - - (963) (6,268) 190,386
Total assets 1,709,942 294,444 1,672,954 214,421 - - 21,122 219,716 4,132,599
Construction expenditures 79,541 28,338 106,582 1,080 - - 74 339 215,954
</TABLE>
(1) This column includes eliminations, adjustments and corporate.
Revenue By Product:
<TABLE>
<CAPTION>
Asset-Based
Retail Retail Energy
Year Electric Gas Marketing Other Totals
<S> <C> <C> <C> <C> <C>
1998 $1,189,185 $339,707 $390,567 $56,954 $1,976,413
1997 1,173,275 358,193 158,294 35,293 1,725,055
1996 1,153,039 214,419 165,832 27,170 1,560,460
</TABLE>
Long-Lived Assets By Geographic Area:
<TABLE>
<CAPTION>
Inter-
Year Domestic national Totals
<S> <C> <C> <C>
1998 $3,691,554 $299,444 $3,990,998
1997 3,451,437 360,106 3,811,543
1996 3,441,488 25,089 3,466,577
</TABLE>
122
<PAGE>
NOTE 21 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1998 and 1997 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year.
<TABLE>
<CAPTION>
(Thousands of $ except per share data) Quarters Ended
March June September December
----- ---- --------- --------
<S> <C> <C> <C> <C>
1998
- ----
Revenues $ 450,724 $ 441,137 $ 603,855 $ 480,697
Operating income 94,850 73,650 158,583 56,884
Net income (loss):
Continuing operations 46,674 13,294 (a) 79,512 20,791(b)
Discontinued operations (3,506) (20,093) - -
Loss on disposal of discon-
tinued operations - (225,000) - -
Cumulative effect of account-
ing change (7,162) - - -
-------- --------- --------- ---------
Total 36,006 (231,799) 79,512 20,791
Earnings per share of common
stock (basic and diluted):
Continuing operations .36 .10 .61 .16
Discontinued operations (.02) (.15) - -
Loss on disposal of discon-
tinued operations - (1.74) - -
Cumulative effect of account-
ing change (.06) - - -
-------- --------- --------- ---------
Total .28 (1.79) .61 .16
1997
- ----
Revenues $ 423,073 $ 388,538 $ 461,512 $ 451,932
Operating income 96,090 75,945 143,124 103,696
Net income (loss):
Continuing operations 47,530 32,784 70,869 55,857
Discontinued operations (1,428) 883 (15,123) (8,376)
-------- --------- --------- ---------
Total 46,102 33,667 55,746 47,481
Earnings per share of common
stock (basic and diluted):
Continuing operations .37 .25 .55 .43
Discontinued operations (.01) .01 (.12) (.06)
----- --- ----- -----
Total .36 .26 .43 .37
</TABLE>
(a) The decrease of $20.4 million compared to June 1997 was due to an
after-tax charge of $56.4 million from merger-related expenses, offset by an
increase in our core utility business of approximately $13.0 million and the
consummation of the MRA with NIMO resulting in a $21.0 million gain.
(b) The decrease of $26.7 million compared to December 1997 was due to an
after-tax charge of $15.6 million related to refunds of certain amounts
collected under the environmental cost recovery surcharge, warmer weather and
higher utility operating expenses.
123
<PAGE>
NOTE 22 - SUBSEQUENT EVENT
On March 8, 1999, the Kentucky Industrial Utility Customers (KIUC) filed a
separate complaints with the Kentucky Commission alleging that LG&E's and KU's
electric rates are excessive and should be reduced by an amount between $85 and
$146 million and that the Kentucky Commission establish a proceeding to reduce
LG&E's and KU's electric rates. LG&E and KU have asked the Kentucky Commission
to dismiss the complaint. The Company is not able to predict the ultimate
outcome of these proceedings, however, should the Commission mandate significant
rate reductions at LG&E and KU, through the PBR proposal or otherwise, such
actions could have a material effect on LG&E's and KU's financial condition and
results of operations.
On March 11, 1999, the Commission denied LG&E's Petition for Rehearing for the
period November 1994 through October 1996 and directed LG&E to reduce future
fuel expense by $1.9 million in the first billing month after the Order. The
Company is considering the filing of an Appeal with the Franklin Circuit Court.
In a separate series of Orders on March 11,1999, the PSC granted LG&E's Petition
for Rehearing for the period November 1996 through April 1998 and established a
procedural schedule for LG&E and other parties to submit evidence and for a
hearing before the Commission. In the same Orders the PSC granted the Petition
for Rehearing of the KIUC to determine if interest should be paid on any fuel
refunds for this latter period.
On March 15, 1999, LG&E Westmoreland - Rensselaer, in which the Company has a
50% interest, sold the assets of the Rensselaer cogeneration facility. This
transaction will result in a pre-tax gain for the Company of approximately $14.5
million.
124
<PAGE>
LG&E Energy Corp.
REPORT OF MANAGEMENT
The management of LG&E Energy Corp. and subsidiaries is responsible for the
preparation and integrity of the consolidated financial statements and related
information included in this Annual Report. These statements have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis and, necessarily, include amounts that reflect the best
estimates and judgment of management.
The Company's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur Andersen
LLP all the Company's financial records and related data as well as the minutes
of shareholders' and directors' meetings. Management has established and
maintains a system of internal controls that provides reasonable assurance that
transactions are completed in accordance with management's authorization, that
assets are safeguarded and that financial statements are prepared in conformity
with generally accepted accounting principles. Management believes that an
adequate system of internal controls is maintained through the selection and
training of personnel, appropriate division of responsibility, establishment and
communication of policies and procedures and by regular reviews of internal
accounting controls by the Company's internal auditors. Management reviews and
modifies its system of internal controls in light of changes in conditions and
operations, as well as in response to recommendations from the internal
auditors. These recommendations for the year ended December 31, 1998, did not
identify any material weaknesses in the design and operation of the Company's
internal control structure.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of the Company, the Audit Committee meets regularly with the
Company's independent public accountants, internal auditors and management. The
Audit Committee reviews the results of the independent accountants' audit of the
consolidated financial statements and their audit procedures, and discusses the
adequacy of internal accounting controls. The Audit Committee also approves the
annual internal auditing program and reviews the activities and results of the
internal auditing function. Both the independent public accountants and the
internal auditors have access to the Audit Committee at any time.
LG&E Energy Corp. and subsidiaries maintain and internally communicate a written
code of business conduct that addresses, among other items, potential conflicts
of interest, compliance with laws, including those relating to financial
disclosure and the confidentiality of proprietary information.
125
<PAGE>
LG&E Energy Corp.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of LG&E Energy Corp.:
We have audited the accompanying consolidated balance sheets and statements of
capitalization of LG&E Energy Corp. (a Kentucky corporation) and subsidiaries as
of December 31, 1998 and 1997, and the related consolidated statements of
income, retained earnings, cash flows and comprehensive income for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of LG&E Energy Corp.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As explained in Notes 1 and 3 to the consolidated financial statements,
effective January 1, 1998, the Company changed its method of accounting for
start-up costs and effective January 1, 1996, the Company changed its method of
accounting for price risk management activities.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Louisville, Kentucky Arthur Andersen LLP
January 27, 1999 (Except with respect
to the matters discussed in the
eighth and ninth paragraphs of Note
5, as to which the date is February
12, 1999, and Note 22, as to which
the date is March 15, 1999.)
126
<PAGE>
Louisville Gas and Electric Company
Statements of Income
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Electric.......................................................... $ 663,011 $ 614,532 $ 606,696
Gas............................................................... 191,545 231,011 214,419
--------- --------- ---------
Total operating revenues....................................... 854,556 845,543 821,115
Provision for rate refund (Note 3)................................ (4,500) - -
--------- --------- ---------
Net operating revenues (Note 1)................................ 850,056 845,543 821,115
--------- --------- ---------
OPERATING EXPENSES:
Fuel for electric generation...................................... 154,683 149,463 149,697
Power purchased................................................... 50,176 17,229 16,626
Gas supply expenses............................................... 125,894 158,929 140,482
Other operation expenses.......................................... 163,584 150,750 143,338
Maintenance....................................................... 52,786 47,586 54,790
Depreciation and amortization..................................... 93,178 93,020 89,002
Federal and state income taxes (Note 8)........................... 56,307 64,081 63,259
Property and other taxes.......................................... 17,925 16,299 16,658
--------- --------- ---------
Total operating expenses....................................... 714,533 697,357 673,852
--------- --------- ---------
Net operating income.................................................. 135,523 148,186 147,263
Merger costs to achieve (Note 2)...................................... 32,072 - -
Other income and (deductions) (Note 9)................................ 10,991 4,277 920
Interest charges...................................................... 36,322 39,190 40,242
--------- --------- ---------
Net income............................................................ 78,120 113,273 107,941
Preferred stock dividends............................................. 4,568 4,585 4,568
--------- --------- ---------
Net income available for common stock................................. $ 73,552 $ 108,688 $ 103,373
--------- --------- ---------
--------- --------- ---------
</TABLE>
Statements of Retained Earnings
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance January 1..................................................... $258,910 $209,222 $181,049
Add net income........................................................ 78,120 113,273 107,941
-------- -------- --------
337,030 322,495 288,990
Deduct: Cash dividends declared on stock:
5% cumulative preferred.................................. 1,075 1,075 1,075
Auction rate cumulative preferred........................ 2,024 2,041 2,024
$5.875 cumulative preferred.............................. 1,469 1,469 1,469
Common................................................... 85,000 59,000 75,200
-------- -------- --------
89,568 63,585 79,768
-------- -------- --------
Balance December 31................................................... $247,462 $258,910 $209,222
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
127
<PAGE>
Louisville Gas and Electric Company
Statements of Comprehensive Income
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income available for common stock................................. $ 73,552 $108,688 $103,373
Unrealized holding gains (losses) on available-for-sale securities
arising during the period......................................... (14) (426) 169
Reclassification adjustment for realized and losses on
available-for-sale securities included in net income.............. - 188 547
-------- -------- --------
Other comprehensive income (loss) before tax.......................... (14) (238) 716
Income tax expense (benefit) related to items of other
comprehensive income.............................................. 18 (119) 289
-------- -------- --------
Comprehensive income.................................................. $ 73,520 $108,569 $103,800
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
128
<PAGE>
Louisville Gas and Electric Company
Balance Sheets
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Utility plant, at original cost:
Electric.................................................................... $2,268,860 $2,242,980
Gas ..................................................................... 339,647 337,619
Common ..................................................................... 131,271 137,496
---------- ----------
2,739,778 2,718,095
Less: reserve for depreciation............................................. 1,144,123 1,072,842
---------- ----------
1,595,655 1,645,253
Construction work in progress............................................... 156,361 61,139
---------- ----------
1,752,016 1,706,392
---------- ----------
Other property and investments - less reserve................................... 1,154 1,365
Current assets:
Cash and temporary cash investments......................................... 31,730 50,472
Marketable securities (Note 6).............................................. 17,851 19,311
Accounts receivable - less reserve of $1,399 in 1998 and $1,295 in 1997..... 142,580 124,872
Materials and supplies - at average cost:
Fuel (predominantly coal)................................................ 23,993 17,651
Gas stored underground................................................... 33,485 41,487
Other.................................................................... 33,103 31,866
Prepayments................................................................. 2,285 2,627
---------- ----------
285,027 288,286
---------- ----------
Deferred debits and other assets:
Unamortized debt expense.................................................... 5,919 6,074
Regulatory assets (Note 3).................................................. 37,643 24,899
Other ..................................................................... 22,878 28,625
---------- ----------
66,440 59,598
---------- ----------
$2,104,637 $2,055,641
---------- ----------
---------- ----------
CAPITAL AND LIABILITIES:
Capitalization (see statements of capitalization):
Common equity............................................................... $ 671,846 $ 683,326
Cumulative preferred stock.................................................. 95,328 95,328
Long-term debt (Note 10).................................................... 626,800 626,800
---------- ----------
1,393,974 1,405,454
---------- ----------
Current liabilities:
Long-term debt due within one year.......................................... - 20,000
Accounts payable............................................................ 133,673 98,894
Provision for rate refunds.................................................. 13,261 13,248
Dividends declared.......................................................... 23,168 21,152
Accrued taxes............................................................... 31,929 18,723
Accrued interest............................................................ 8,038 8,016
Other ..................................................................... 15,242 14,608
---------- ----------
225,311 194,641
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes (Notes 1 and 8)........................... 254,589 249,851
Investment tax credit, in process of amortization........................... 71,542 75,800
Accumulated provision for pensions and related benefits (Note 7)............ 59,529 33,872
Customers' advances for construction........................................ 10,848 10,385
Regulatory liability (Note 3)............................................... 63,529 65,502
Other ..................................................................... 25,315 20,136
---------- ----------
485,352 455,546
---------- ----------
Commitments and contingencies (Note 12)
$2,104,637 $2,055,641
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
129
<PAGE>
Louisville Gas and Electric Company
Statements of Cash Flows
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 78,120 $ 113,273 $ 107,941
Items not requiring cash currently:
Depreciation and amortization.................................. 93,178 93,020 89,002
Deferred income taxes - net.................................... 2,747 (3,495) 26,055
Investment tax credit - net.................................... (4,258) (4,240) (3,997)
Other.......................................................... 5,534 4,640 3,911
Change in certain net current assets:
Accounts receivable............................................ (17,708) (9,728) (9,555)
Materials and supplies......................................... 423 (8,492) (1,418)
Accounts payable............................................... 34,779 1,416 3,772
Provision for rate refunds..................................... 13 (4,263) (10,789)
Accrued taxes.................................................. 13,206 6,741 4,168
Accrued interest............................................... 22 (1,978) (1,070)
Prepayments and other.......................................... 976 1,333 685
Other............................................................. 18,679 (3,188) (23,153)
--------- ---------- ----------
Net cash flows from operating activities....................... 225,711 185,039 185,552
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities........................................... (17,397) (18,529) (11,039)
Proceeds from sales of securities................................. 18,841 2,544 28,605
Construction expenditures......................................... (138,345) (110,893) (107,879)
--------- ---------- ----------
Net cash flows from investing activities....................... (136,901) (126,878) (90,313)
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of first mortgage bonds and pollution control bonds...... - 69,776 49,745
Retirement of first mortgage bonds and pollution control bonds.... (20,000) (71,693) (67,013)
Payment of dividends.............................................. (87,552) (62,564) (79,310)
--------- ---------- ----------
Net cash flows from financing activities....................... (107,552) (64,481) (96,578)
--------- ---------- ----------
Change in cash and temporary cash investments......................... (18,742) (6,320) (1,339)
Cash and temporary cash investments at beginning of year.............. 50,472 56,792 58,131
--------- ---------- ----------
Cash and temporary cash investments at end of year.................... $ 31,730 $ 50,472 $ 56,792
--------- ---------- ----------
--------- ---------- ----------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes................................................... $ 40,334 $ 63,421 $ 41,508
Interest on borrowed money..................................... 34,245 39,582 40,334
</TABLE>
The accompanying notes are an integral part of these financial statements.
130
<PAGE>
Louisville Gas and Electric Company
Statements of Capitalization
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
COMMON EQUITY:
Common stock, without par value -
Authorized 75,000,000 shares, outstanding 21,294,223 shares.................. $ 425,170 $ 425,170
Common stock expense............................................................ (836) (836)
Unrealized gain on marketable securities, net of income
taxes $34 in 1998 and $16 in 1997 (Note 6)................................... 50 82
Retained earnings............................................................... 247,462 258,910
---------- ----------
671,846 683,326
---------- ----------
CUMULATIVE PREFERRED STOCK:
Redeemable on 30 days notice by LG&E
Shares Current
Outstanding Redemption Price
----------- ----------------
$25 par value, 1,720,000 shares authorized -
5% series .................................... 860,287 $28.00 21,507 21,507
Without par value, 6,750,000 shares authorized -
Auction rate.................................. 500,000 100.00 50,000 50,000
$5.875 series................................. 250,000 105.875 25,000 25,000
Preferred stock expense......................................................... (1,179) (1,179)
---------- ----------
95,328 95,328
---------- ----------
LONG-TERM DEBT (Note 10):
First mortgage bonds -
Series due July 1, 2002, 7 1/2%.............................................. 20,000 20,000
Series due August 15, 2003, 6%............................................... 42,600 42,600
Pollution control series:
P due June 15, 2015, 7.45%............................................... 25,000 25,000
Q due November 1, 2020, 7 5/8%........................................... 83,335 83,335
R due November 1, 2020, 6.55%............................................ 41,665 41,665
S due September 1, 2017, variable........................................ 31,000 31,000
T due September 1, 2017, variable........................................ 60,000 60,000
U due August 15, 2013, variable.......................................... 35,200 35,200
V due August 15, 2019, 5 5/8%............................................ 102,000 102,000
W due October 15, 2020, 5.45%............................................ 26,000 26,000
X due April 15, 2023, 5.90%.............................................. 40,000 40,000
---------- ----------
Total first mortgage bonds............................................ 506,800 506,800
Pollution control bonds (unsecured) -
Jefferson County Series due September 1, 2026, variable...................... 22,500 22,500
Trimble County Series due September 1, 2026, variable........................ 27,500 27,500
Jefferson County Series due November 1, 2027, variable....................... 35,000 35,000
Trimble County Series due November 1, 2027, variable......................... 35,000 35,000
---------- ----------
Total unsecured pollution control bonds.................................. 120,000 120,000
---------- ----------
Total long-term bonds................................................. 626,800 626,800
---------- ----------
Total capitalization......................................................... $1,393,974 $1,405,454
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
Louisville Gas and Electric Company
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Louisville Gas and Electric Company (LG&E) is a subsidiary of LG&E Energy Corp.
(LG&E Energy). LG&E is a regulated public utility that is engaged in the
generation, transmission, distribution, and sale of electric energy and the
storage, distribution, and sale of natural gas in Louisville and adjacent areas
in Kentucky. LG&E Energy is an exempt energy services holding company with
wholly-owned subsidiaries consisting of LG&E, Kentucky Utilities Company (KU),
and LG&E Capital Corp. (Capital Corp.). All of the LG&E's Common Stock is held
by LG&E Energy.
UTILITY PLANT. LG&E's plant is stated at original cost, which includes
payroll-related costs such as taxes, fringe benefits, and administrative and
general costs. Construction work in progress has been included in the rate base
for determining retail customer rates. LG&E has not recorded any allowance for
funds used during construction.
The cost of plant retired or disposed of in the normal course of business is
deducted from plant accounts and such cost, plus removal expense less salvage
value, is charged to the reserve for depreciation. When complete operating units
are disposed of, appropriate adjustments are made to the reserve for
depreciation and gains and losses, if any, are recognized.
DEPRECIATION. Depreciation is provided on the straight-line method over the
estimated service lives of depreciable plant. The amounts provided for 1998 were
3.4% (3.2% electric, 3.4% gas, and 7.4% common); for 1997 were 3.4% (3.2%
electric, 3.3% gas, and 6% common); and for 1996 were 3.3% (3.2% electric, 3.3%
gas, and 6% common) of average depreciable plant.
CASH AND TEMPORARY CASH INVESTMENTS. LG&E considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which approximates
fair value.
GAS STORED UNDERGROUND. Gas inventories of $33 million and $41 million at
December 31, 1998 and 1997, respectively, are included in gas stored underground
in the balance sheet. The inventory is accounted for using the average-cost
method.
FINANCIAL INSTRUMENTS. LG&E uses over-the-counter interest-rate swap agreements
to hedge its exposure to fluctuations in the interest rates it pays on
variable-rate debt, and it uses exchange-traded U.S. Treasury note and bond
futures to hedge its exposure to fluctuations in the value of its investments in
the preferred stocks of other companies. Gains and losses on interest-rate swaps
used to hedge interest rate risk are reflected in interest charges monthly.
Gains and losses on U.S. Treasury note and bond futures used to hedge
investments in preferred stocks are initially deferred and classified as
unrealized gains or losses on marketable securities in common equity and then
charged or credited to other income and deductions when the securities are sold.
See Note 4, Financial Instruments.
In connection with the LG&E's marketing of power from owned generation assets,
exchange traded futures are used to hedge market risk associated with price
fluctuations for commitments to sell or purchase electricity. Gains and losses
on these futures contracts are reflected in other income and deductions, but are
immaterial to the LG&E's results of operations. At December 31, 1998, the value
of these futures contracts was not material to the LG&E's financial position.
DEBT EXPENSE. Debt expense is amortized over the lives of the related bond
issues, consistent with regulatory
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<PAGE>
practices.
DEFERRED INCOME TAXES. Deferred income taxes have been provided for all
material book-tax temporary differences.
INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of the
tax law that permitted a reduction of LG&E's tax liability based on credits for
certain construction expenditures. Deferred investment tax credits are being
amortized to income over the estimated lives of the related property that gave
rise to the credits.
REVENUE RECOGNITION. Revenues are recorded based on service rendered to
customers through month-end. LG&E accrues an estimate for unbilled revenues from
each meter reading date to the end of the accounting period. Under an agreement
approved by the Public Service Commission of Kentucky (Kentucky Commission or
Commission) in 1994, LG&E implemented a demand side management program,
including a "decoupling mechanism" which allowed LG&E to recover a predetermined
level of revenue on electric and gas residential sales. In 1998, the decoupling
mechanism was suspended. See Note 3, Rates and Regulatory Matters.
FUEL AND GAS COSTS. The cost of fuel for electric generation is charged to
expense as used, and the cost of gas supply is charged to expense as delivered
to the distribution system. LG&E implemented a Commission-approved experimental
performance-based ratemaking mechanism related to gas procurement and off-system
gas sales activity. See Note 3, Rates and Regulatory Matters.
MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported assets and liabilities
and disclosure of contingent items at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. See Note 12, Commitments and
Contingencies, for a further discussion.
NEW ACCOUNTING PRONOUNCEMENTS. During 1998, LG&E adopted the following
accounting pronouncements:
Statements of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits (SFAS No. 132), No. 130,
Reporting Comprehensive Income (SFAS No. 130), and No. 131, Disclosures about
Segments of an Enterprise and Related Information (SFAS No. 131). Pursuant
to SFAS No. 132, LG&E has disclosed additional information on changes in
benefit obligations and fair values of plan assets and eliminated certain
disclosures that are no longer relevant. This standard does not change the
measurement or financial statement recognition of the plans. See Note 7,
Pension Plans and Retirement Benefits. Under SFAS No. 131, LG&E has provided
information about its various business segments that is intended to allow
readers to view certain financial information as if "through the eyes of
management". See Note 14, Segments of Business and Related Information.
Pursuant to SFAS No. 130, LG&E has presented information in the Statements of
Comprehensive Income that measures changes in equity that are not required to
be recorded as a component of net income. These standards had no impact on
the calculation of net income presented in the Statements of Income.
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1, adopted as of
January 1, 1998, clarifies the criteria for capital or expense treatment of
costs incurred by an enterprise to develop or obtain computer software to be
used in its internal operations. The statement does not change treatment of
costs incurred in connection with correcting computer programs to properly
process the millennium change to the Year 2000, which must be expensed as
incurred. Adoption of SOP 98-1 did not have a material effect on LG&E's
financial statements.
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<PAGE>
The following accounting pronouncements have been issued but are not yet
effective:
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement is effective for fiscal years
beginning after June 15, 1999, and establishes accounting and reporting
standards that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that use hedge accounting. LG&E is currently analyzing the provisions of the
statement and cannot predict the impact this statement will have on its results
of operations and financial position, however, the statement could increase
volatility in earnings and other comprehensive income. The effect of this
statement will be recorded in cumulative effect of change in accounting when
adopted.
Emerging Issues Task Force Issue No. 98-10, Accounting for Energy Trading and
Risk Management Activities (EITF No. 98-10). This pronouncement is effective for
fiscal years beginning after December 15, 1998. The task force concluded that
energy trading contracts should be recorded at mark to market on the balance
sheet, with the gains and losses shown net in the income statement. EITF No.
98-10 more broadly defines what represents energy trading to include economic
activities related to physical assets which were not previously marked to market
by established industry practice. The effects of adopting EITF No. 98-10, if
applicable, will be reported as a cumulative effect of a change in accounting
principle with no prior period restatement. LG&E does not expect the adoption of
EITF No. 98-10 to have a material adverse impact on its operations and financial
position.
NOTE 2 - MERGER
LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the
surviving corporation. As a result of the merger, LG&E Energy, which is the
parent of LG&E, became the parent company of Kentucky Utilities Company (KU).
LG&E and KU have continued to maintain their separate corporate identities and
serve customers under their present names. LG&E Energy has estimated
approximately $760 million in gross non-fuel savings over a ten-year period
following the merger. Costs to achieve these savings for LG&E of $50.2 million
were recorded in the second quarter of 1998, $18.1 million of which were
initially deferred and are being amortized over a five-year period pursuant to
regulatory orders. Primary components of the merger costs were separation
benefits, relocation costs, and transaction fees, the majority of which were
paid by December 31, 1998. LG&E expensed the remaining costs associated with the
merger in the second quarter of 1998. In regulatory filings associated with
approval of the merger, LG&E committed not to seek increases in existing base
rates and proposed reductions in their retail customers' bills in amounts based
on one-half of the savings, net of the deferred and amortized amount, over a
five-year period. The common stock, preferred stock and debt securities of LG&E
were not affected by the merger.
Regulatory and administrative approvals were obtained from the Federal Energy
Regulatory Commission, (FERC), the Federal Trade Commission, the Securities and
Exchange Commission, the Public Service Commission of Kentucky (Kentucky
Commission or Commission), the Virginia State Corporation Commission and the
stockholders of LG&E Energy and KU Energy prior to the effective date of the
merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt
holding company under the Public Utility Holding Company Act of 1935. Management
has accounted for the merger as a pooling of interests and as a tax-free
reorganization under the Internal Revenue Code.
In the application filed with the Commission, the utilities proposed that 50%
of the net non-fuel cost savings estimated to be achieved from the merger,
less $18.1 million or 50% of the originally estimated costs to achieve
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<PAGE>
such savings by LG&E, be applied to reduce customer rates through a surcredit
on customers' bills and the remaining 50% be retained by the companies. The
Commission approved the surcredit and allocated the customer savings 53% to
KU and 47% to LG&E. The surcredit will be about 2% of customer bills over the
next five years and will amount to approximately $55 million in net non-fuel
savings to LG&E's customers. Any fuel cost savings are passed to customers
through LG&E's fuel adjustment clause.
NOTE 3 - RATES AND REGULATORY MATTERS
LG&E conforms with generally accepted accounting principles as applied to
regulated public utilities and as prescribed by FERC and the Kentucky
Commission. LG&E is subject to Statement of Financial Accounting Standards No.
71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Under SFAS No. 71, certain costs that would otherwise be charged to expense are
deferred as regulatory assets based on expected recovery from customers in
future rates. Likewise, certain credits that would otherwise be reflected as
income are deferred as regulatory liabilities based on expected flowback to
customers in future rates. LG&E's current or expected recovery of deferred costs
and expected flowback of deferred credits is generally based on specific
ratemaking decisions or precedent for each item. The following regulatory assets
and liabilities were included in the balance sheets as of December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unamortized loss on bonds $ 17,627 $ 18,698
Merger costs 16,332 2,938
Manufactured gas sites 3,684 3,263
-------- --------
Total regulatory assets 37,643 24,899
Deferred income taxes - net (63,529) (65,502)
-------- --------
Regulatory assets and (liabilities) - net $(25,886) $(40,603)
-------- --------
-------- --------
</TABLE>
During 1997, LG&E wrote off certain previously deferred assets that amounted to
approximately $4.2 million. Items written off include expenses associated with
LG&E's hydro-electric plant, a management audit fee, and the accelerated
write-off of losses on early retirement of facilities.
ENVIRONMENTAL COST RECOVERY. Since May 1995, LG&E implemented an environmental
cost recovery (ECR) surcharge to recover certain environmental compliance costs,
including costs to comply with the 1990 Clean Air Act, as amended, as well as
other environmental regulations, including those applicable to coal combustion
wastes and related by-products. The ECR mechanism was authorized by state
statute in 1992 and was first approved by the Kentucky Commission in a KU case
in July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court. Decisions
of the Circuit Court and the Kentucky Court of Appeals in July 1995 and December
1997, respectively, have upheld the constitutionality of the ECR statute but
differed on a claim of retroactive recovery of certain amounts. The Commission
ordered that certain surcharge revenues collected by LG&E be subject to refund
pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion upholding
the constitutionality of the surcharge statute. The decision, however, reversed
the ruling of the Court of Appeals on the retroactivity claim, thereby denying
recovery of costs associated with pre-1993 environmental projects through the
ECR. The court remanded the case to the Commission to determine the proper
adjustments to refund amounts collected for such pre-1993 environmental
projects. The parties to the proceeding have notified the Commission that they
have reached agreement as to the terms, refund amounts, refund procedure and
forward application of the ECR. The
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<PAGE>
settlement agreement is subject to Commission approval. LG&E recorded a
provision for rate refund of $4.5 million in December 1998.
DEMAND SIDE MANAGEMENT. In January 1994, LG&E implemented a Commission-approved
demand side management (DSM) program that LG&E, the Jefferson County Attorney,
and representatives of several customer interest groups had filed with the
Commission. The program included a rate mechanism that (1) provided LG&E
concurrent recovery of DSM costs, (2) provided an incentive for implementing DSM
programs and (3) allowed LG&E to recover revenues from lost sales associated
with the DSM program (decoupling). In June 1998, LG&E and customer interest
groups requested an end to the decoupling rate mechanism. On June 1, 1998, LG&E
discontinued recording revenues from lost sales due to DSM. Accrued decoupling
revenues recorded for periods prior to June 1, 1998, will continue to be
collected through the DSM recovery mechanism. On September 23, 1998, the
Commission accepted LG&E's modified tariff reflecting this proposal effective as
of June 1, 1998.
PERFORMANCE-BASED RATEMAKING. Since October 1997, LG&E has implemented a
Commission-approved, experimental performance-based ratemaking mechanism related
to gas procurement activities and off-system gas sales. During the three-year
test period beginning October 1997, rate adjustments related to this mechanism
will be determined for each 12-month period beginning November 1 and ending
October 31. During the first year of the mechanism ended October 31, 1998, LG&E
recorded $3.6 million for its share of reduced gas costs. The $3.6 million will
be billed to customers through the gas supply clause beginning February 1, 1999.
FUEL ADJUSTMENT CLAUSE. LG&E has a fuel adjustment clause (FAC) mechanism, which
under Kentucky law allows LG&E to recover from customers, the actual fuel costs
associated with retail electric sales. As of February 12, 1999, LG&E received
orders from the Kentucky Commission requiring a refund to retail electric
customers of approximately $3.9 million resulting from reviews of the FAC from
November 1994 through April 1998. The orders changed LG&E's method of assigning
fuel costs associated with electric line losses on off-system sales through the
FAC. The orders require these amounts to be refunded to customers during 1999
and to include in the FAC calculation the cost of fuel associated with line
losses incurred in making off-system sales.
The Kentucky Commission has not issued LG&E an order for the review period May
1998 through October 1998, however, following the methods set forth in the
previous orders, LG&E estimates up to an additional $1.3 million could be
refundable to retail electric customers for open review periods through December
1998. LG&E filed a request for rehearing on the Kentucky Commission's rulings.
LG&E does not believe final resolution of these proceedings will have a material
adverse effect on LG&E's financial position or results of operations.
The Kentucky Commission granted LG&E's motion to suspend the refund obligation
until further direction by the Commission. The Commission advised that LG&E may
have to pay interest on the refund amounts for the suspension period. LG&E is
awaiting a Commission response to a motion to revoke the orders, or in the
alternative, grant a rehearing.
FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate, but
parallel applications with the Commission for approval of a new method of
determining electric rates that provides financial incentives for LG&E and KU to
further reduce customers' rates. The filing was made pursuant to the September
1997 Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether they desired to remain
under traditional rate of return regulation or commence non-traditional
regulation. The new ratemaking method, known as performance-based ratemaking
(PBR), would include financial incentives for LG&E and KU to reduce fuel costs
and increase generating efficiency, and to share any resulting savings with
customers. Additionally, the PBR provides financial
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<PAGE>
penalties and rewards to assure continued high quality service and
reliability.
The PBR plan proposed by LG&E and KU consists of five components:
The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost to
changes in a fuel price index for a five-state region. If the utilities
outperform the index, benefits will be shared equally between shareholders
and customers. If the utilities' fuel costs exceed the index, the difference
will be absorbed by LG&E Energy's shareholders.
Customers will continue to receive the benefits from the post-merger joint
dispatch of power from LG&E's and KU's generating plants.
Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to $10
million annually of benefits from this performance at each of LG&E and KU.
The utilities will be encouraged to maintain and improve service quality,
reliability, customer satisfaction and safety, which will be measured
against six objective benchmarks. The plan provides for annual rewards or
penalties to LG&E Energy of up to $5 million per year at each of LG&E and
KU.
The plan provides the utilities with greater flexibility to customize rates
and services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to elect
standard tariff service.
These proposals are subject to approval by the Commission. Approval proceedings
commenced in October 1998 and a final decision likely will occur in 1999.
Several intervenors are participating in the case. Some have requested that the
Commission reduce base rates before implementing PBR. LG&E is not able to
predict the ultimate outcome of these proceedings, however, should the
Commission mandate significant rate reductions at LG&E, through the PBR proposal
or otherwise, such actions could have a material effect on LG&E's financial
condition and results of operations.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December 1997,
the Kentucky Commission opened Administrative Case No. 369 to consider
Commission policy regarding cost allocations, affiliate transactions and codes
of conduct governing the relationship between utilities and their non-utility
operations and affiliates. The Commission intends to address two major areas in
the proceedings: the tools and conditions needed to prevent cost shifting and
cross-subsidization between regulated and non-utility operations; and whether a
code of conduct should be established to assure that non-utility segments of the
holding company are not engaged in practices which result in unfair competition
caused by cost shifting from the non-utility affiliate to the utility. In
September 1998, the Commission issued draft code of conduct and cost allocation
guidelines. In January 1999, LG&E, as well as all parties to the proceeding,
filed comments on the Commission draft proposals. Initial hearings are scheduled
for the first quarter of 1999. Management does not expect the ultimate
resolution of this matter to have a material adverse effect on LG&E's financial
position or results of operations.
NOTE 4 - FINANCIAL INSTRUMENTS
At December 31, 1998, LG&E held U.S. Treasury note and bond futures contracts
with notional amounts totaling $2.8 million. These contracts are used to hedge
price risk associated with certain marketable securities and mature in March
1999.
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<PAGE>
As of December 31, 1998, LG&E had in effect six interest-rate swap agreements
to hedge its exposure to tax exempt rates related to Pollution Control Bonds,
Variable Rate Series. The swaps have notional amounts totaling $166 million
and mature at various times from 1999 to 2005. LG&E pays a weighted-average
fixed rate on the swaps of 3.89% and receives a variable rate based on the JJ
Kenny Index (in the case of one of the swaps) or the Bond Market Association
Municipal Swap Index. The indices averaged 3.48% in 1998.
In April 1998, LG&E entered into a forward-starting interest-rate swap with a
notional amount of $83.3 million. The swap will hedge anticipated
variable-rate borrowing commitments. It will start in August 2000 and mature
in November 2020. LG&E will pay a fixed rate of 5.21% and receive a variable
rate based on the Bond Market Association Municipal Swap Index. Under certain
conditions, the counterparty to the agreement may terminate the swap at no
cost after August 2010.
The cost and estimated fair values of LG&E's non-trading financial
instruments as of December 31, 1998 and 1997 follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Marketable securities $ 17,767 $ 17,851 $ 19,213 $ 19,311
Long-term investments -
Not practicable to estimate
fair value 748 748 747 747
Preferred stock subject
to mandatory redemption 25,000 26,413 25,000 26,250
Long-term debt 626,800 648,603 626,800 649,491
U.S. Treasury note and
bond futures - (50) - (37)
Interest-rate swaps - (7,378) - (248)
</TABLE>
All of the above valuations reflect prices quoted by exchanges except for the
swaps and the long-term investments. The fair values of the swaps reflect
price quotes from dealers or amounts calculated using accepted pricing
models. The fair values of the long-term investments reflect cost, since LG&E
cannot reasonably estimate fair value.
NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on- or off-balance sheet) relate to
groups of customers or counterparties that have similar economic or industry
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions.
LG&E's customer receivables and gas and electric revenues arise from
deliveries of natural gas to approximately 289,000 customers and electricity
to approximately 360,000 customers in Louisville and adjacent areas in
Kentucky. For the year ended December 31, 1998, 77% of total revenue was
derived from electric operations and 23% from gas operations.
LG&E's operation and maintenance employees are members of the International
Brotherhood of Electrical Workers (IBEW) Local 2100 which represents
approximately 60% of LG&E's workforce. On December 10, 1998, LG&E and IBEW
employees entered into a three-year collective bargaining agreement following
a vote by IBEW members which ratified the contract providing for certain wage
and benefit improvements, and opportunities for early retirement.
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<PAGE>
NOTE 6 - MARKETABLE SECURITIES
LG&E's marketable securities have been determined to be "available-for-sale"
under the provisions of Statement of Financial Accounting Standards SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Proceeds from sales of available-for-sale securities in 1998 were
approximately $18.8 million, which resulted in immaterial realized gains and
losses. Proceeds from sales of available-for-sale securities in 1997 were
approximately $2.5 million, which resulted in immaterial realized gains and
losses, calculated using the specific identification method.
Approximate cost, fair value, and other required information pertaining to
LG&E's available-for-sale securities by major security type, as of December
31, 1998 and 1997, follow (in thousands of $):
<TABLE>
<CAPTION>
Fixed
Equity Income Total
------ ------ -----
<S> <C> <C> <C>
1998:
Cost $3,798 $13,969 $17,767
Unrealized gains 276 31 307
Unrealized losses (95) (128) (223)
-------- ---------- ----------
Fair values $3,979 $13,872 $17,851
-------- ---------- ----------
-------- ---------- ----------
Fair values:
No maturity $3,979 $ 178 $ 4,157
Contractual maturities:
Less than one year - 8,301 8,301
One to five years - 3,861 3,861
Five to ten years - - -
Over ten years - 1,532 1,532
Not due at a single maturity date - - -
-------- ---------- ----------
Total fair values $3,979 $13,872 $17,851
-------- ---------- ----------
-------- ---------- ----------
1997:
Cost $3,763 $15,450 $19,213
Unrealized gains 192 13 205
Unrealized losses (40) (67) (107)
-------- ----------- ----------
Fair values $3,915 $15,396 $19,311
-------- ---------- ----------
-------- ---------- ----------
Fair values:
No maturity $3,915 $ 114 $ 4,029
Contractual maturities:
Less than one year - 8,795 8,795
One to five years - 5,442 5,442
Five to ten years - - -
Over ten years - 1,045 1,045
Not due at a single maturity date - - -
---------- ------------- -------------
Total fair values $3,915 $15,396 $19,311
-------- ---------- ----------
-------- ---------- ----------
</TABLE>
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<PAGE>
NOTE 7 - PENSION PLANS AND RETIREMENT BENEFITS
PENSION PLANS. LG&E sponsors several qualified and non-qualified pension
plans and other postretirement benefit plans for its employees. The following
tables provide a reconciliation of the changes in the plans' benefit
obligations and fair value of assets over the three-year period ending
December 31, 1998 and a statement of the funded status as of December 31 for
each of the last three years (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Change in benefit obligation
Benefit obligation at beginning of year $274,095 $229,349 $206,866
Service cost 6,333 5,214 4,989
Interest cost 19,873 17,629 16,697
Plan amendments 3,724 3,085 18,694
Curtailment (gain) or loss (2,218) - -
Special termination benefits 18,295 - -
Benefits paid (10,866) (8,735) (7,745)
Actuarial (gain) or loss 2,699 27,553 (10,152)
--------- --------- ----------
Benefit obligation at end of year $311,935 $274,095 $229,349
--------- --------- ----------
--------- --------- ----------
Change in plan assets
Fair value of plan assets at beginning of year $280,238 $238,026 $207,471
Actual return on plan assets 38,913 46,078 31,921
Employer contributions 375 4,869 6,379
Benefits paid (10,866) (8,735) (7,745)
--------- --------- ----------
Fair value of plan assets at end of year $308,660 $280,238 $238,026
--------- --------- ----------
--------- --------- ----------
Reconciliation of funded status
Funded status $ (3,275) $ 6,143 $ 8,677
Unrecognized actuarial (gain) or loss (72,037) (61,720) (65,850)
Unrecognized transition (asset) or obligation (8,076) (9,188) (10,300)
Unrecognized prior service cost 41,447 43,518 44,141
--------- --------- ----------
Net amount recognized at end of year $ (41,941) $ (21,247) $ (23,332)
--------- --------- ----------
--------- --------- ----------
Other Benefits:
--------------
Change in benefit obligation
Benefit obligation at beginning of year $43,373 $39,951 $37,815
Service cost 761 746 773
Interest cost 2,946 2,942 2,976
Plan amendments 599 - 4,066
Curtailment (gain) or loss 344 - -
Special termination benefits 2,855 - -
Benefits paid (2,634) (2,604) (2,678)
Actuarial (gain) or loss (3,280) 2,338 (3,001)
--------- --------- ----------
Benefit obligation at end of year $44,964 $43,373 $39,951
--------- --------- ----------
--------- --------- ----------
Change in plan assets
Fair value of plan assets at beginning of year $ 4,384 $ 2,284 $ -
Actual return on plan assets 199 80 -
Employer contributions 3,207 3,696 2,284
Benefits paid (1,728) (1,676) -
--------- --------- ----------
Fair value of plan assets at end of year $ 6,062 $ 4,384 $ 2,284
--------- --------- ----------
--------- --------- ----------
</TABLE>
140
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reconciliation of funded status
Funded status $ (38,902) $ (38,989) $ (37,667)
Unrecognized actuarial (gain) or loss (285) 2,901 493
Unrecognized transition (asset) or obligation 18,080 20,053 21,390
Unrecognized prior service cost 3,519 3,410 3,738
----------- ----------- -----------
Net amount recognized at end of year $ (17,588) $ (12,625) $ (12,046)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the statement of
financial position and information for plans with benefit obligations in excess
of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $ (41,977) $ (21,317) $ (23,372)
Intangible asset 36 70 40
----------- ----------- -----------
Net amount recognized at year-end $ (41,941) $ (21,247) $ (23,332)
----------- ----------- -----------
----------- ----------- -----------
Additional year-end information for plans with
benefit obligations in excess of plan assets:
Projected benefit obligation (1) $148,005 $121,902 $101,260
Accumulated benefit obligation (2) 131,430 4,179 3,634
Fair value of plan assets (1) 107,988 99,151 81,848
(1) All years include LG&E's non-union plan and unfunded Supplemental Executive Retirement Plans (SERPs).
(2) 1998 includes LG&E's non-union plan and SERPs. 1997 and 1996 include SERPs only.
Other Benefits:
---------------
Amounts recognized in the balance sheet consisted of:
Accrued benefit liability $ (17,588) $ (12,625) $ (12,046)
----------- ----------- -----------
----------- ----------- -----------
Additional year-end information for plans with benefit obligations in
excess of plan assets:
Projected benefit obligation $44,964 $43,373 $39,951
Fair value of plan assets 6,062 4,384 2,284
</TABLE>
141
<PAGE>
The following table provides the components of net periodic benefit cost for the
plans for 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pension Plans:
--------------
Components of net periodic benefit cost
Service cost $ 6,333 $ 5,214 $ 4,989
Interest cost 19,873 17,629 16,697
Expected return on plan assets (23,701) (19,849) (17,706)
Amortization of prior service cost 3,882 3,708 3,491
Amortization of transition (asset) or obligation (1,112) (1,112) (1,112)
Recognized actuarial (gain) or loss (2,248) (2,866) (2,047)
--------- --------- ---------
Net periodic benefit cost $ 3,027 $ 2,724 $ 4,312
--------- --------- ---------
--------- --------- ---------
FAS88 special charges
Curtailment (gain)/loss $ (2,168) $ - $ -
Prior service cost recognized 1,914 - -
Special termination benefits 18,295 - -
--------- --------- ---------
Total FAS88 charges $ 18,041 $ - $ -
--------- --------- ---------
--------- --------- ---------
Other Benefits:
---------------
Components of net periodic benefit cost
Service cost $ 761 $ 746 $ 773
Interest cost 2,946 2,942 2,976
Expected return on plan assets (296) (151) -
Amortization of prior service cost 367 328 328
Amortization of transition (asset) or obligation 1,315 1,337 1,337
--------- --------- ---------
Net periodic benefit cost $ 5,093 $ 5,202 $ 5,414
--------- --------- ---------
--------- --------- ---------
FAS88 special charges
Curtailment (gain)/loss $ 1,005 $ - $ -
Prior service cost recognized 124 - -
Special termination benefits 2,855 - -
--------- --------- ---------
Total FAS88 charges $ 3,984 $ - $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
On May 4, 1998, LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. During 1998, LG&E incurred approximately $18 million in
special termination pension benefits as a result of its early retirement program
offered to eligible employees post-merger.
The assumptions used in the measurement of LG&E's pension benefit obligation are
shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions as of December 31:
Discount rate 7.00% 7.00% 7.75%
Expected long-term rate of return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 3.50%-4.00% 2.00%-4.00% 2.00%-4.25%
</TABLE>
For measurement purposes, a 7% annual increase in the per capita cost of covered
health care benefits was assumed for 1999. The rate was assumed to decrease each
year to 4.25% for 2005 and remain at that level thereafter.
142
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects (in thousands of $):
<TABLE>
<CAPTION>
1% Decrease 1% Increase
----------- -----------
<S> <C> <C>
Effect on total of service and interest cost components for 1998 $ 122 $ 146
Effect on year-end 1998 postretirement benefit obligations 1,188 1,971
</TABLE>
THRIFT SAVINGS PLANS. LG&E has a thrift savings plan under section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may defer and
contribute to the plan a portion of current compensation in order to provide
future retirement benefits. LG&E makes contributions to the plan by matching a
portion of the employee contributions. The costs were approximately $2.4 million
for 1998 and $1.8 million for each of 1997 and 1996.
NOTE 8 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands
of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Included in operating expenses:
Current - federal $45,716 $57,590 $33,823
- state 11,895 14,593 7,685
Deferred - federal - net 2,276 (4,565) 19,161
- state - net 678 703 6,587
Deferred investment tax credit 55 102 409
Amortization of investment tax credit (4,313) (4,342) (4,406)
-------- -------- --------
Total 56,307 64,081 63,259
Included in other income and (deductions):
Current - federal 660 1,484 196
- federal - merger costs (6,758) - -
- state 6 161 (96)
- state - merger costs (1,737) - -
Deferred - federal - net (165) 292 246
- state - net (42) 75 61
-------- -------- --------
Total (8,036) 2,012 407
-------- -------- --------
Total income tax expense $48,271 $66,093 $63,666
-------- -------- --------
-------- -------- --------
</TABLE>
143
<PAGE>
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation and other
plant-related items $323,869 $321,442
Other liabilities 9,644 6,702
--------- ---------
333,513 328,144
--------- ---------
Deferred tax assets:
Investment tax credit 28,876 30,595
Income taxes due to customers 25,447 26,357
Pension overfunding 2,099 7,265
Accrued liabilities not currently
deductible and other 22,502 14,076
--------- ---------
78,924 78,293
--------- ---------
Net deferred income tax liability $254,589 $249,851
--------- ---------
--------- ---------
</TABLE>
A reconciliation of differences between the statutory U.S. federal income tax
rate and LG&E's effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.5 5.7 5.4
Amortization of investment tax credit (3.4) (2.4) (2.6)
Nondeductible merger expenses 2.4 - -
Other differences - net (1.3) (1.5) (.7)
----- ----- -----
Effective income tax rate 38.2% 36.8% 37.1%
----- ----- -----
----- ----- -----
</TABLE>
NOTE 9 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income $ 4,245 $ 4,786 $ 4,096
Interest on income tax settlement - 1,446 -
Gain on sale of stock options - 1,794 -
Gains (losses) on fixed asset disposal 530 77 (36)
Donations (168) (147) (150)
Income taxes and other (2,111) (3,679) (2,990)
Income tax benefit on merger costs to achieve 8,495 - -
--------- --------- ---------
Total other income and deductions $ 10,991 $ 4,277 $ 920
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 10 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS
Annual requirements for the sinking funds of LG&E's First Mortgage Bonds (other
than the First Mortgage Bonds issued in connection with certain Pollution
Control Bonds) are the amounts necessary to redeem 1% of the highest principal
amount of each series of bonds at any time outstanding. Property additions (166
2/3% of principal
144
<PAGE>
amounts of bonds otherwise required to be so redeemed) have been applied in
lieu of cash. It is the intent of LG&E to apply property additions to meet
1999 sinking fund requirements of the First Mortgage Bonds.
The trust indenture securing the First Mortgage Bonds constitutes a direct
first mortgage lien upon a substantial portion of all property owned by LG&E.
The indenture, as supplemented, provides in substance that, under certain
specified conditions, portions of retained earnings will not be available for
the payment of dividends on common stock. No portion of retained earnings is
presently restricted by this provision.
Pollution Control Bonds (Louisville Gas and Electric Company Projects) issued
by Jefferson and Trimble Counties, Kentucky, are secured by the assignment of
loan payments by LG&E to the Counties pursuant to loan agreements, and
certain series are further secured by the delivery from time to time of an
equal amount of LG&E's First Mortgage Bonds, Pollution Control Series. First
Mortgage Bonds so delivered are summarized in the Statements of
Capitalization. No principal or interest on these First Mortgage Bonds is
payable unless default on the loan agreements occurs. The interest rate
reflected in the Statements of Capitalization applies to the Pollution
Control Bonds.
On June 1, 1998, LG&E's First Mortgage Bonds, 6.75% Series of $20 million
matured and were retired by LG&E.
In November 1997, LG&E issued $35 million of Jefferson County, Kentucky and
$35 million of Trimble County, Kentucky, Pollution Control Bonds, Flexible
Rate Series, due November 1, 2027. Interest rates for these bonds were 3.09%
and 3.39%, respectively, at December 31, 1998. The proceeds from these bonds
were used to redeem the outstanding 7.75% Series of Jefferson County,
Kentucky and Trimble County, Kentucky, Pollution Control Bonds due February
1, 2019.
LG&E's First Mortgage Bonds, 7.5% Series of $20 million is scheduled to
mature in 2002, and the $42.6 million, 6% Series is scheduled for maturity in
2003. There are no scheduled maturities of Pollution Control Bonds for the
five years subsequent to December 31, 1998. LG&E has no cash sinking fund
requirements.
NOTE 11 - NOTES PAYABLE
LG&E had no notes payable at December 31, 1998, and 1997.
At December 31, 1998, LG&E had unused lines of credit of $200 million, for
which it pays commitment fees. The credit facility provides for short-term
borrowings and support of variable rate Pollution Control Bonds. The credit
lines are scheduled to expire in 2001. Management expects to renegotiate
these lines when they expire.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM. LG&E had commitments in connection with its
construction program aggregating approximately $8 million at December 31,
1998. Construction expenditures for the years 1999 and 2000 are estimated to
total approximately $384 million.
145
<PAGE>
OPERATING LEASE. LG&E leases office space and accounts for all of its office
space leases as operating leases. Total lease expense for 1998, 1997, and
1996, less amounts contributed by the parent company, was $1.6 million, $1.8
million, and $1.9 million, respectively. The future minimum annual lease
payments under lease agreements for years subsequent to December 31, 1998,
are as follows (in thousands of $):
<TABLE>
<S> <C>
1999 $ 3,055
2000 3,321
2001 3,654
2002 3,594
2003 3,507
Thereafter 5,260
---------
Total $22,391
---------
---------
</TABLE>
ENVIRONMENTAL. In September 1998, the U.S. Environmental Protection Agency
(USEPA) announced its final regulation requiring significant additional
reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone
transport to the Northeast. While each state is free to allocate its assigned
NOx reductions among various emissions sectors as it deems appropriate, the
regulation may ultimately require utilities to reduce their NOx emissions to
0.15 lb./mmBtu (million British thermal units ) - an 85% reduction from 1990
levels. Under the regulation, each state must incorporate the additional NOx
reductions in its State Implementation Plan (SIP) by September 1999 and
affected sources must install control measures by May 2003, unless granted
extensions. Several states, various labor and industry groups, and individual
companies have appealed the final regulation to the U.S. Court of Appeals for
the D.C. Circuit. Management is currently unable to determine the outcome or
exact impact of this matter until such time as the states identify specific
emissions reductions in their SIP and the courts rule on the various legal
challenges to the final rule. However, if the 0.15 lb. target is ultimately
imposed, LG&E will be required to incur significant capital expenditures and
increased operation and maintenance costs for additional controls.
Subject to further study and analysis, LG&E estimates that it may incur
capital costs in the range of $100 million to $200 million. These costs would
generally be incurred beginning in 2000. LG&E believes its costs in this
regard to be comparable to those of similarly situated utilities with like
generation assets. LG&E anticipates that such capital and operating costs are
the type of costs that are eligible for cost recovery from customers under
its environmental surcharge mechanism and believes that a significant portion
of such costs could be so recovered. However, Kentucky Commission approval is
necessary and there can be no guarantee of such recovery.
LG&E is also addressing other air quality issues. First, LG&E is monitoring
USEPA's implementation of the revised National Ambient Air Quality Standards
(NAAQS) for ozone and particulate matter. Until USEPA completes additional
implementation steps, including monitoring and nonattainment designations,
management is unable to determine the precise impact of the revised
standards. Second, LG&E is conducting modeling activities at its Cane Run
Station in response to notifications from regulatory agencies that the plant
may be the source of potential exceedances of the NAAQS for sulfur dioxide
(SO2). Depending on future regulatory determinations, LG&E may be required to
undertake corrective action that could include significant capital
expenditures or emissions limitations. Third, LG&E is working with regulatory
authorities to review the effectiveness of remedial measures aimed at
controlling particulate emissions from its Mill Creek Station. LG&E
previously settled a number of property damage claims from adjacent residents
and completed significant plant modifications as part of its ongoing capital
construction program. LG&E is currently awaiting a final regulatory
determination regarding remedial measures. In management's opinion,
resolution of any remaining property damage claims from adjacent residents
should not have a material adverse impact on the financial position or
results of operations of LG&E.
147
<PAGE>
LG&E is addressing potential liabilities for the cleanup of properties where
hazardous substances may have been released. LG&E has identified
contamination at certain manufactured gas plant (MGP) sites currently or
formerly owned by LG&E. LG&E is negotiating with state agencies with respect
to cleanup of a site owned by LG&E. In agreements reached in 1996 and 1998
with the current owners of two sites formerly owned by LG&E, the current
owners of those sites have expressly agreed to assume responsibility for
environmental liabilities in return for an aggregate payment of $400,000.
Until conclusion of discussions with state agencies regarding the site
currently owned by LG&E, management is unable to precisely determine
remaining liability for cleanup costs at MGP sites. However, management
estimates total cleanup costs to be $3 million. Accordingly, an accrual of $3
million has been recorded in the accompanying financial statements.
LG&E, along with other companies, has been identified by USEPA as potentially
responsible parties allegedly liable for cleanup of certain off-site disposal
facilities under the Comprehensive Environmental Response Compensation and
Liability Act. LG&E has entered into final settlements for an aggregate of
$150,000 resolving liability in these matters.
NOTE 13 - JOINTLY OWNED ELECTRIC UTILITY PLANT
LG&E owns a 75% undivided interest in Trimble County Unit 1. Accounting for
the 75% portion of the Unit, which the Commission has allowed to be reflected
in customer rates, is similar to LG&E's accounting for other wholly owned
utility plants.
Of the remaining 25% of the Unit, Illinois Municipal Electric Agency (IMEA)
owns a 12.12% undivided interest and Indiana Municipal Power Agency (IMPA)
owns a 12.88% undivided interest. Each is responsible for their proportionate
ownership share of fuel cost, operation and maintenance expenses, and
incremental assets.
The following data represent shares of the jointly owned property:
<TABLE>
<CAPTION>
Trimble County
LG&E IMPA IMEA TOTAL
---- ---- ---- -----
<S> <C> <C> <C> <C>
Ownership interest 75% 12.88% 12.12% 100%
Mw capacity 371.25 63.75 60 495
</TABLE>
147
<PAGE>
NOTE 14 - SEGMENTS OF BUSINESS AND RELATED INFORMATION
Effective December 31, 1998, LG&E adopted Statements of Financial Accounting
Standards No. 131, Disclosure About Segments of an Enterprise and Related
Information. LG&E is a regulated public utility engaged in the generation,
transmission, distribution, and sale of electricity and the storage,
distribution, and sale of natural gas. Financial data for business segments,
follow (in thousands of $):
<TABLE>
<CAPTION>
Electric Gas Total
<S> <C> <C> <C>
1998
Operating revenues $ 658,511(a) $191,545 $ 850,056
Depreciation and amortization 79,866 13,312 93,178
Interest income 3,566 679 4,245
Interest expense 30,389 5,933 36,322
Merger costs to achieve 32,072 - 32,072
Income taxes 56,401 (94) 56,307
Net income 75,368 2,752 78,120
Total assets 1,727,463 377,174 2,104,637
Construction expenditures 105,836 32,509 138,345
1997
Operating revenues $ 614,532 $231,011 $ 845,543
Depreciation and amortization 79,958 13,062 93,020
Interest income 5,279 953 6,232
Interest expense 33,349 5,841 39,190
Income taxes 59,415 4,666 64,081
Net income 108,236 5,037 113,273
Total assets 1,677,278 378,363 2,055,641
Construction expenditures 81,713 29,180 110,893
1996
Operating revenues $ 606,696 $214,419 $ 821,115
Depreciation and amortization 76,929 12,073 89,002
Interest income 3,520 576 4,096
Interest expense 34,566 5,676 40,242
Income taxes 58,448 4,811 63,259
Net income 100,119 7,822 107,941
Total assets 1,673,857 332,855 2,006,712
Construction expenditures 79,541 28,338 107,879
</TABLE>
(a) Net of provision for rate refund of $4.5 million.
148
<PAGE>
NOTE 15 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1998 and 1997 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year.
<TABLE>
<CAPTION>
Quarters Ended
March June September December
----- ---- --------- --------
(Thousands of $)
<S> <C> <C> <C> <C>
1998
Operating revenues $233,344 $201,389 $229,885 $185,438
Net operating income 32,326 33,629 53,420 16,148
Net income 23,399 21 44,861 9,839
Net income (loss) available
for common stock 22,276 (1,122) (a) 43,726 8,672(b)
1997
Operating revenues $225,399 $180,276 $208,435 $231,433
Net operating income 32,895 30,422 46,562 38,307
Net income 23,967 21,487 37,223 30,596
Net income (loss) available
for common stock 22,840 20,326 36,077 29,445
</TABLE>
(a) The decrease of $21.5 million compared to June 1997 was due to a
non-recurring after-tax charge of $23.6 million from
merger-related expenses offset by increased electric sales caused
by warmer weather.
(b) The decrease of $20.8 million compared to December 1997 was due to
a non-recurring charge to refund certain amounts collected under
the Environmental Cost Recovery surcharge, decreased gas sales due
to warmer weather and higher operating expenses at the electric
generating stations.
NOTE 16 - SUBSEQUENT EVENT
On March 8,1999, the Kentucky Industrial Utility Customers (KIUC) filed a
complaint with the Kentucky Commission alleging that LG&E's electric rates are
excessive and should be reduced by an amount between $43 and $90 million and
that the Kentucky Commission establish a proceeding to reduce LG&E's electric
rates. LG&E has asked the Kentucky Commission to dismiss the complaint. LG&E is
not able to predict the ultimate outcome of these proceedings, however, should
the Commission mandate significant rate reductions at LG&E, through the PBR
proposal or otherwise, such actions could have a material effect on LG&E's
financial condition and results of operations.
On March 11, 1999, the Commission denied LG&E's Petition for Rehearing for the
period November 1994 through October 1996 and directed LG&E to reduce future
fuel expense by $1.9 million in the first billing month after the Order. The
Company is considering the filing of an Appeal with the Franklin Circuit Court.
In a separate series of Orders on March 11,1999, the PSC granted LG&E's Petition
for Rehearing for the period November 1996 through April 1998 and established a
procedural schedule for LG&E and other parties to submit evidence and for a
hearing before the Commission. In the same Orders the PSC granted the Petition
for Rehearing of the KIUC to determine if interest should be paid on any fuel
refunds for this latter period.
149
<PAGE>
Louisville Gas and Electric Company
REPORT OF MANAGEMENT
The management of Louisville Gas and Electric Company is responsible for the
preparation and integrity of the financial statements and related information
included in this Annual Report. These statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis and, necessarily, include amounts that reflect the best
estimates and judgment of management.
LG&E's financial statements have been audited by Arthur Andersen LLP,
independent public accountants. Management has made available to Arthur
Andersen LLP all LG&E's financial records and related data as well as the
minutes of shareholders' and directors' meetings. Management has established
and maintains a system of internal controls that provides reasonable
assurance that transactions are completed in accordance with management's
authorization, that assets are safeguarded and that financial statements are
prepared in conformity with generally accepted accounting principles.
Management believes that an adequate system of internal controls is
maintained through the selection and training of personnel, appropriate
division of responsibility, establishment and communication of policies and
procedures and by regular reviews of internal accounting controls by LG&E's
internal auditors. Management reviews and modifies its system of internal
controls in light of changes in conditions and operations, as well as in
response to recommendations from the internal auditors. These recommendations
for the year ended December 31, 1998, did not identify any material
weaknesses in the design and operation of LG&E's internal control structure.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of LG&E, the Audit Committee meets regularly with LG&E's
independent public accountants, internal auditors and management. The Audit
Committee reviews the results of the independent accountants' audit of the
financial statements and their audit procedures, and discusses the adequacy
of internal accounting controls. The Audit Committee also approves the annual
internal auditing program and reviews the activities and results of the
internal auditing function. Both the independent public accountants and the
internal auditors have access to the Audit Committee at any time.
Louisville Gas and Electric Company maintains and internally communicates a
written code of business conduct that addresses, among other items, potential
conflicts of interest, compliance with laws, including those relating to
financial disclosure and the confidentiality of proprietary information.
150
<PAGE>
Louisville Gas and Electric Company
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Louisville Gas and Electric Company:
We have audited the accompanying balance sheets and statements of
capitalization of Louisville Gas and Electric Company (a Kentucky corporation
and a wholly-owned subsidiary of LG&E Energy Corp.) as of December 31, 1998
and 1997, and the related statements of income, retained earnings, cash flows
and comprehensive income for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of
LG&E's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Louisville Gas and Electric
Company as of December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2
is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Louisville, Kentucky Arthur Andersen LLP
January 27, 1999 (Except with respect
to the matters discussed in the eighth
and ninth paragraphs of Note 3, as to
which the date is February 12, 1999,
and Note 16, as to which the date is
March 11, 1999.)
151
<PAGE>
Kentucky Utilities Company
Statements of Income
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUES:
Electric.......................................................... $ 831,614 $ 716,437 $ 711,711
Provision for rate refund (Note 3)................................ (21,500) - -
--------- --------- ---------
Total operating revenues (Note 1).............................. 810,114 716,437 711,711
--------- --------- ---------
OPERATING EXPENSES:
Fuel, principally coal, used in generation........................ 217,401 188,439 198,198
Power purchased................................................... 126,584 72,542 62,490
Other operation expenses.......................................... 121,275 120,951 122,872
Maintenance....................................................... 63,608 64,990 64,161
Depreciation and amortization..................................... 86,657 84,111 80,424
Federal and state income taxes (Note 7)........................... 53,256 51,690 51,452
Property and other taxes.......................................... 15,945 15,306 14,777
--------- --------- ---------
Total operating expenses....................................... 684,726 598,029 594,374
--------- --------- ---------
Net operating income.................................................. 125,388 118,408 117,337
Merger costs to achieve (Note 2)...................................... 21,830 - -
Interest and dividend income.......................................... 1,811 1,673 1,733
Other income and (deductions) (Note 8)................................ 6,035 5,330 6,710
Interest charges...................................................... 38,640 39,698 39,617
--------- --------- ---------
Net income............................................................ 72,764 85,713 86,163
Preferred stock dividends............................................. 2,256 2,256 2,256
--------- --------- ---------
Net income available for common stock................................. $ 70,508 $ 83,457 $ 83,907
--------- --------- ---------
--------- --------- ---------
</TABLE>
Statements of Retained Earnings
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance January 1..................................................... $304,750 $287,852 $268,992
Add net income........................................................ 72,764 85,713 86,163
-------- -------- --------
377,514 373,565 355,155
Deduct: Cash dividends declared on stock:
4.75% cumulative preferred............................... 950 950 950
6.53% cumulative preferred............................... 1,306 1,306 1,306
Common................................................... 76,091 66,559 65,047
-------- -------- --------
78,347 68,815 67,303
-------- -------- --------
Balance December 31................................................... $299,167 $304,750 $287,852
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
152
<PAGE>
Kentucky Utilities Company
Balance Sheets
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS:
Utility plant, at original cost................................................. $2,602,167 $2,552,695
Less: reserve for depreciation................................................. 1,208,183 1,128,282
---------- ----------
1,393,984 1,424,413
Construction work in progress................................................... 83,361 58,939
---------- ----------
1,477,345 1,483,352
---------- ----------
Other property and investments - less reserve................................... 14,238 12,808
Current assets:
Cash and temporary cash investments......................................... 59,071 5,453
Accounts receivable - less reserve of $520 in 1998 and 1997................. 106,003 74,524
Materials and supplies - at average cost:
Fuel (predominantly coal)................................................ 23,927 27,799
Other.................................................................... 24,877 24,466
Prepayments and other....................................................... 5,022 4,951
---------- ----------
218,900 137,193
---------- ----------
Deferred debits and other assets:
Unamortized debt expense.................................................... 5,227 5,628
Regulatory assets (Note 3).................................................. 28,228 14,771
Other ..................................................................... 19,859 26,128
---------- ----------
53,314 46,527
---------- ----------
$1,763,797 $1,679,880
---------- ----------
---------- ----------
CAPITAL AND LIABILITIES:
Capitalization (see statements of capitalization):
Common equity............................................................... $ 606,713 $ 612,295
Cumulative preferred stock.................................................. 40,000 40,000
Long-term debt.............................................................. 546,330 546,351
---------- ----------
1,193,043 1,198,646
---------- ----------
Current liabilities:
Long-term debt due within one year.......................................... - 21
Notes payable............................................................... - 33,600
Accounts payable............................................................ 100,012 33,386
Provision for rate refund................................................... 21,500 -
Dividends declared.......................................................... 18,188 188
Accrued taxes............................................................... 16,733 7,473
Accrued interest............................................................ 8,110 8,283
Other ..................................................................... 31,226 26,216
---------- ----------
195,769 109,167
---------- ----------
Deferred credits and other liabilities:
Accumulated deferred income taxes (Note 7).................................. 247,088 245,150
Investment tax credit, in process of amortization........................... 22,302 26,131
Accumulated provision for pensions and related benefits..................... 50,044 41,334
Customers' advances for construction........................................ 1,265 1,464
Regulatory liability (Note 3)............................................... 45,882 51,576
Other ..................................................................... 8,404 6,412
---------- ----------
374,985 372,067
---------- ----------
Commitments and contingencies (Note 11)
$1,763,797 $1,679,880
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
153
<PAGE>
Kentucky Utilities Company
Statements of Cash Flows
(Thousands of $)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 72,764 $ 85,713 $ 86,163
Items not requiring cash currently:
Depreciation and amortization.................................. 86,657 84,111 80,424
Deferred income taxes - net.................................... (2,437) 4,606 3,750
Investment tax credit - net.................................... (3,829) (4,036) (4,013)
Deferred merger-related costs.................................. (14,322) (4,062) -
Change in certain net current assets and liabilities:
Accounts receivable............................................ (31,479) 297 2,551
Fuel inventory................................................. 3,872 3,095 (1,456)
Materials and supplies......................................... (411) (1,755) 1,764
Accounts payable............................................... 66,626 4,426 (9,040)
Provision for rate refund...................................... 21,500 - -
Accrued taxes.................................................. 9,260 2,090 182
Accrued interest............................................... (173) 235 492
Prepayments and other.......................................... 71 (1,481) 278
Other............................................................. 49,321 5,667 10,702
---------- ---------- ----------
Net cash flows from operating activities....................... 257,420 178,906 171,797
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds form insurance reimbursement............................. 179 4,270 257
Construction expenditures......................................... (91,992) (94,006) (106,503)
Other............................................................. - - (79)
---------- ---------- ----------
Net cash flows from investing activities....................... (91,813) (89,736) (106,325)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings............................................. 381,500 2,645,500 2,570,200
Repayments of short-term borrowings............................... (415,100) (2,666,100) (2,571,600)
Issuance of first mortgage bonds.................................. - - 39,445
Repayment of first mortgage bonds................................. (42) (21) (36,192)
Payment of dividends.............................................. (78,347) (68,815) (67,303)
---------- ---------- ----------
Net cash flows from financing activities....................... (111,989) (89,436) (65,450)
---------- ---------- ----------
Change in cash and temporary cash investments......................... 53,618 (266) 22
Cash and temporary cash investments at beginning of year.............. 5,453 5,719 5,697
---------- ---------- ----------
Cash and temporary cash investments at end of year.................... $ 59,071 $ 5,453 $ 5,719
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Income taxes................................................... $ 46,490 $ 44,857 $ 47,539
Interest on borrowed money..................................... 36,008 37,053 36,729
</TABLE>
The accompanying notes are an integral part of these financial statements.
154
<PAGE>
Kentucky Utilities Company
Statements of Capitalization
(Thousands of $)
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
COMMON EQUITY:
Common stock, without par value -
outstanding 37,817,878 shares, respectively.................................. $ 308,140 $ 308,140
Retained earnings............................................................... 299,168 304,750
Other........................................................................... (595) (595)
---------- ----------
606,713 612,295
---------- ----------
</TABLE>
CUMULATIVE PREFERRED STOCK:
Redeemable on 30 days notice by KU, except 6.53% series
<TABLE>
<CAPTION>
Shares Current
Outstanding Redemption Price
----------- ----------------
<S> <C> <C> <C> <C>
Without par value, 5,300,000 shares authorized -
4.75% series.................................. 200,000 100.00 20,000 20,000
6.53% series.................................. 200,000 Not redeemable 20,000 20,000
---------- ----------
40,000 40,000
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
LONG-TERM DEBT (Note 10):
First mortgage bonds -
Q due June 15, 2000, 5.95%................................................... 61,500 61,500
Q due June 15, 2003, 6.32%................................................... 62,000 62,000
S due January 15, 2006, 5.99%................................................ 36,000 36,000
P due May 15, 2007, 7.92%.................................................... 53,000 53,000
R due June 1, 2025, 7.55%.................................................... 50,000 50,000
P due May 15, 2027, 8.55%.................................................... 33,000 33,000
Pollution control series:
1B due February 1, 2018, 6.25%........................................... 20,930 20,930
2B due February 1, 2018, 6.25%........................................... 2,400 2,400
3B due February 1, 2018, 6.25%........................................... 7,200 7,200
4B due February 1, 2018, 6.25%........................................... 7,400 7,400
7, due May 1, 2010, 7.38%................................................ 4,000 4,000
7, due May 1, 2020, 7.60%................................................ 8,900 8,900
8, due September 15, 2016, 7.45%......................................... 96,000 96,000
9, due December 1, 2023, 5.75%........................................... 50,000 50,000
10, due November 1, 2024, variable....................................... 54,000 54,000
---------- ----------
Total first mortgage bonds............................................ 546,330 546,330
8% secured note, due January 5, 1999 (net of current maturity).................. - 21
---------- ----------
Total long-term bonds........................................................ 546,330 546,351
---------- ----------
Total capitalization......................................................... $1,193,043 $1,198,646
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
155
<PAGE>
Kentucky Utilities Company
Notes to Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Kentucky Utilities Company (KU) is a subsidiary of LG&E Energy Corp. KU is a
regulated public utility that is engaged in the generation, transmission,
distribution, and sale of electric energy. Effective May 4, 1998, following
the receipt of all required state and federal regulatory approvals, LG&E
Energy Corp. (LG&E Energy) and KU Energy Corporation (KU Energy) merged, with
LG&E Energy as the surviving corporation. LG&E Energy is an exempt energy
services holding company with wholly-owned subsidiaries consisting of KU,
Louisville Gas and Electric Company (LG&E) and LG&E Capital Corp (Capital
Corp.) All of KU's Common Stock is held by LG&E Energy.
Certain reclassifications have been made to the 1997 and 1996 financial
statements to conform to the 1998 presentation with no impact on previously
reported income.
UTILITY PLANT. KU's utility plant is stated at original cost, which includes
payroll-related costs such as taxes, fringe benefits, and administrative and
general costs. Construction work in progress has been included in the rate
base for determining retail customer rates. KU has not recorded any
significant allowance for funds used during construction.
The cost of utility plant retired or disposed of in the normal course of
business is deducted from utility plant accounts and such cost, plus removal
expense less salvage value, is charged to the reserve for depreciation. When
complete operating units are disposed of, appropriate adjustments are made to
the reserve for depreciation and gains and losses, if any, are recognized.
DEPRECIATION. Depreciation is provided on the straight-line method over the
estimated service lives of depreciable plant. The amounts provided for KU
approximated 3.5% in 1998, 1997 and 1996.
CASH AND TEMPORARY CASH INVESTMENTS. KU considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Temporary cash investments are carried at cost, which
approximates fair value.
DEBT EXPENSE. Debt expense is amortized over the lives of the related bond
issues, consistent with regulatory practices.
DEFERRED INCOME TAXES. Deferred income taxes have been provided for all
material book-tax temporary differences.
INVESTMENT TAX CREDITS. Investment tax credits resulted from provisions of
the tax law that permitted a reduction of KU's tax liability based on credits
for certain construction expenditures. Deferred investment tax credits are
being amortized to income over the estimated lives of the related property
that gave rise to the credits.
REVENUE RECOGNITION. Revenues are recorded based on service rendered to
customers through month-end. KU accrues an estimate for unbilled revenues
from each meter reading date to the end of the accounting period.
FUEL COSTS. The cost of fuel for electric generation is charged to expense
as used.
MANAGEMENT'S USE OF ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported assets and
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<PAGE>
liabilities and disclosure of contingent items at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. See Note
11, Commitments and Contingencies, for a further discussion.
NEW ACCOUNTING PRONOUNCEMENTS. During 1998, KU adopted the following
accounting pronouncements:
Statements of Financial Accounting Standards No. 132, Employers' Disclosures
about Pensions and Other Post retirement Benefits (SFAS No. 132), effective
for periods beginning after December 15, 1997. Pursuant to SFAS No. 132, KU
has disclosed additional information on changes in benefit obligations and
fair values of plan assets and eliminated certain disclosures that are no
longer relevant. This standard does not change the measurement or financial
statement recognition of the plans (See Note 6, Pension Plans and Retirement
Benefits).
Statement of Position No 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SOP 98-1), adopted January 1, 1998.
SOP 98-1 clarifies the criteria for capital or expense treatment of costs
incurred by an enterprise to develop or obtain computer software to be used
in its internal operations. The statement does not change treatment of costs
incurred in connection with correcting computer programs to properly process
the millennium change to the Year 2000, which must be expensed as incurred.
Adoption of SOP 98-1 did not have a material effect on KU's financial
statements.
The following accounting pronouncements have been issued but are not yet
effective:
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities. The statement is effective for
fiscal years beginning after June 15, 1999, and establishes accounting and
reporting standards that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that use hedge accounting. KU is currently
analyzing the provisions of the statement and cannot predict the impact this
statement will have on its operations and financial position; however, the
statement could increase volatility in earnings. The effect of this statement
will be recorded in cumulative effect of change in accounting when adopted.
The Emerging Issues Task Force issue No. 98-10, Accounting for Energy Trading
and Risk Management Activities (EITF No. 98-10), which is effective for
fiscal years beginning after December 15, 1998. The task force concluded that
energy trading contracts should be recorded at mark to market on the balance
sheet, with the gains and losses shown net in the income statement. EITF
98-10 more broadly defines what represents energy trading to include economic
activities related to physical assets which were not previously recorded at
mark to market by established industry practice. The effects of adopting EITF
No. 98-10, if applicable, will be reported as a cumulative effect of a change
in accounting principle with no prior period restatement. KU does not expect
the adoption of EITF No. 98-10 to have a material adverse impact on its
operations and financial position.
NOTE 2 - LG&E - KENTUCKY UTILITIES MERGER
LG&E Energy and KU Energy merged on May 4, 1998, with LG&E Energy as the
surviving corporation. As a result of the merger, LG&E Energy, which is the
parent of LG&E, became the parent company of KU. The operating utility
subsidiaries (LG&E and KU) have continued to maintain their separate corporate
identities and serve customers in Kentucky and Virginia under their present
names. LG&E Energy has estimated approxi-
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<PAGE>
mately $760 million in gross non-fuel savings over a ten-year period
following the merger. Costs to achieve these savings of $42.3 million were
recorded in the second quarter of 1998, $20.5 million of which were initially
deferred and are being amortized over a five-year period pursuant to
regulatory orders. Primary components of the merger costs were separation
benefits, relocation costs, and transaction fees, the majority of which were
paid by December 31, 1998. KU expensed the remaining costs associated with
the merger in the second quarter of 1998. In regulatory filings associated
with approval of the merger, KU committed not to seek increases in existing
base rates and proposed reductions in their retail customers' bills in
amounts based on one-half of the net savings, net of the deferred and
amortized amount, over a five-year period. The preferred stock and debt
securities of the operating utility subsidiaries were not affected by the
merger. The non-utility subsidiaries of KU Energy have become subsidiaries of
Capital Corp.
Under the terms of the Agreement and Plan of Merger dated May 20, 1997 (the
Merger Agreement) each outstanding share of the common stock, without par
value, of KU Energy (KU Common Stock) together with the associated KU Energy
stock purchase rights, was converted into 1.67 shares of common stock of LG&E
Energy (LG&E Energy Common Stock), together with the associated LG&E Energy
stock purchase rights. Immediately preceding the merger, there were
66,527,636 shares of LG&E Energy common stock outstanding, and 37,817,517
shares of KU Energy common stock outstanding. Based on such capitalization,
immediately following the merger, 51.3% of the outstanding LG&E Energy common
stock was owned by the shareholders of LG&E Energy prior to the merger and
48.7% was owned by former KU Energy shareholders.
Regulatory and administrative approvals were obtained from the Federal Energy
Regulatory Commission (FERC), the Federal Trade Commission, the Securities
and Exchange Commission, the Virginia State Corporation Commission and the
stockholders of LG&E Energy and KU Energy prior to the effective date of the
merger. LG&E Energy, as the parent of LG&E and KU, continues to be an exempt
holding company under the Public Utility Holding Company Act of 1935.
Management has accounted for the merger as a pooling of interests and as a
tax-free reorganization under the Internal Revenue Code.
In the application filed with the Commission, the utilities proposed that 50%
of the net non-fuel cost savings estimated to be achieved from the merger,
less $38.6 million or 50% of the originally estimated costs to achieve such
savings, be applied to reduce customer rates through a surcredit on
customers' bills and the remaining 50% be retained by the companies. The
Commission approved the surcredit and allocated the customer savings 53% to
KU and 47% to LG&E. The surcredit will be about 2% of customer bills over the
next five years and will amount to approximately $63 million in net non-fuel
savings to KU customers. Any fuel cost savings are passed to Kentucky
customers through KU's fuel adjustment clause.
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<PAGE>
NOTE 3 - UTILITY RATES AND REGULATORY MATTERS
Accounting for the regulated utility business conforms with generally
accepted accounting principles as applied to regulated public utilities and
as prescribed by the FERC, the Kentucky Commission and the Virginia
Commission. KU is subject to Statement of Financial Accounting Standards No.
71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71).
Under SFAS No. 71, certain costs that would otherwise be charged to expense
are deferred as regulatory assets based on expected recovery from customers
in future rates. Likewise, certain credits that would otherwise be reflected
as income are deferred as regulatory liabilities based on expected flowback
to customers in future rates. KU's current or expected recovery of deferred
costs and expected flowback of deferred credits is generally based on
specific ratemaking decisions or precedent for each item. The following
regulatory assets and liabilities were included on the balance sheet as of
December 31 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unamortized loss on bonds $ 8,675 $ 9,756
Merger costs 18,417 4,062
Other 1,136 953
--------- ---------
Total regulatory assets 28,228 14,771
Deferred income taxes - net (45,882) (51,576)
Other regulatory liability (670) (673)
--------- ---------
Regulatory assets and (liabilities) - net $(18,324) $(37,478)
--------- ---------
--------- ---------
</TABLE>
ENVIRONMENTAL COST RECOVERY. In August 1994, KU implemented an environmental
cost recovery (ECR) surcharge to recover certain environmental compliance
costs, including costs to comply with the 1990 Clean Air Act, as amended, as
well as, other environmental regulations, including those applicable to coal
combustion wastes and related by-products. The ECR mechanism was authorized
by state statute in 1992 and was first approved by the Kentucky Commission in
July 1994.
The Commission's order approving the surcharge in the KU case and the
constitutionality of the surcharge was challenged by certain intervenors,
including the Attorney General of Kentucky, in Franklin Circuit Court.
Decisions of the Circuit Court and the Kentucky Court of Appeals in July 1995
and December 1997, respectively, have upheld the constitutionality of the ECR
statute but differed on a claim of retroactive recovery of certain amounts.
The Commission ordered that certain surcharge revenues collected by KU be
subject to refund pending final determination of all appeals.
On December 19, 1998, the Kentucky Supreme Court rendered an opinion
upholding the constitutionality of the surcharge statute. The decision,
however, reversed the ruling of the Court of Appeals on the retroactivity
claim, thereby denying recovery of costs associated with pre-1993
environmental projects through the ECR. The court remanded the case to the
Commission to determine the proper adjustments to refund amounts collected
for such pre-1993 environmental projects. The parties to the proceeding have
notified the Commission that they have reached agreement as to the terms,
refund amounts, refund procedure and forward application of the ECR. The
settlement agreement is subject to Commission approval. KU recorded a
provision for rate refund of $21.5 million in December 1998.
FUEL ADJUSTMENT CLAUSE. KU employs a fuel adjustment clause (FAC) mechanism,
which under Kentucky law allows the company to recover from customers, the
actual fuel costs associated with retail electric sales. As of February 12,
1999, LG&E, a subsidiary of LG&E Energy Corp., received orders from the
Kentucky Commission requiring a refund to retail electric customers which
resulted from reviews of the FAC from November 1994 through April 1998. The
orders changed the method of assigning fuel costs associated with electric
line losses on off-system sales appropriate for recovery through the FAC. The
orders require these
159
<PAGE>
amounts to be refunded to customers during first quarter 1999 and to include
in the FAC calculation the cost of fuel associated with line losses incurred
in making off-system sales. KU has not received an order from the Kentucky
Commission but anticipates that it will be required to refund to retail
electric customers of approximately $3.5 million for the review period
November 1994 through December 1998. Management does not believe final
resolution of these proceedings will have a material adverse effect on KU's
financial position or results of operations.
FUTURE RATE REGULATION. In October 1998, LG&E and KU filed separate but
parallel with the Commission for approval of a new method of determining
electric rates that provides financial incentives for LG&E and KU to further
reduce customers' rates. The filing was made pursuant to the September 1997
Commission order approving the merger of LG&E Energy and KU Energy, wherein
the Commission directed LG&E and KU to indicate whether it desired to remain
under traditional rate of return regulation or commence non-traditional
regulation. The new ratemaking method, known as performance-based ratemaking
(PBR), would include financial incentives for LG&E and KU to reduce fuel
costs and increase generating efficiency, and to share any resulting savings
with customers. Additionally, the PBR provides financial penalties and
rewards to assure continued high quality service and reliability.
The PBR plan proposed by LG&E and KU consists of five components:
1) The utilities' fuel adjustment clause mechanism will be withdrawn and
replaced with a cap that limits recovery of actual changes in fuel cost
to changes in a fuel price index for a five-state region. If the
utilities outperform the index, benefits will be shared equally between
shareholders and customers. If the utilities' fuel costs exceed the
index, the difference will be absorbed by LG&E Energy's shareholders.
2) Customers will continue to receive the benefits from the post-merger
joint dispatch of power from LG&E's and KU's generating plants.
3) Power plant performance will be measured against the best performance
achieved between 1991 and 1997. If the performance exceeds this level,
customers will share equally with LG&E Energy's shareholders in up to
$10 million annually of benefits from this performance at each of LG&E
and KU.
4) The utilities will be encouraged to maintain and improve service
quality, reliability, customer satisfaction and safety, which will be
measured against six objective benchmarks. The plan provides for annual
rewards or penalties to LG&E Energy of up to $5 million per year at
each of LG&E and KU.
5) The plan provides KU with greater flexibility to customize rates and
services to meet customer needs. Services will continue to be priced
above marginal cost and customers will continue to have the option to
elect standard tariff service.
These proposals are subject to approval by the Commission. Approval
proceedings commenced in October 1998 and a final decision likely will occur
in 1999. Several intervenors are participating in the case. Some have
requested the Commission to reduce base rates before implementing PBR. KU is
not able to predict the ultimate outcome of these proceedings, however,
should the Commission mandate significant rate reductions at KU, through the
PBR proposal or otherwise, such actions could have a material effect on KU's
financial condition and result of operations.
KENTUCKY PSC ADMINISTRATIVE CASE FOR AFFILIATE TRANSACTIONS. In December
1997, the Kentucky Commission opened Administrative Case No. 369 to consider
Commission policy regarding cost allocations, affiliate transactions and
codes of conduct governing the relationship between utilities and their
non-utility
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<PAGE>
operations and affiliates. The Commission intends to address two major areas
in the proceedings: the tools and conditions needed to prevent cost shifting
and cross-subsidization between regulated and non-utility operations; and
whether a code of conduct should be established to assure that non-utility
segments of the holding company are not engaged in practices which result in
unfair competition caused by cost shifting from the non-utility affiliate to
the utility. In September 1998, the Commission issued draft code of conduct
and cost allocation guidelines. In January 1999, KU, as well as all parties
to the proceeding, issued comments on the Commission draft proposals. Initial
hearings are scheduled for the first quarter of 1999. Management does not
expect the ultimate resolution of this matter to have a material adverse
effect on KU's financial position or results of operations.
NOTE 4 - FINANCIAL INSTRUMENTS
The cost and estimated fair values of the KU's non-trading financial
instruments as of December 31, 1998 and 1997 follow (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Long-term debt $546,330 $587,245 $546,351 $578,835
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The above valuations reflect prices quoted by exchanges.
NOTE 5 - CONCENTRATIONS OF CREDIT AND OTHER RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on- or off-balance sheet) relate to
groups of customers or counterparties that have similar economic or industry
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions.
KU's customer receivables and electric revenues arise from deliveries of
electricity to about 449,000 customers in over 600 communities and adjacent
suburban and rural areas in 77 counties in central, southeastern and western
Kentucky and to about 29,000 customers in five counties in southwestern
Virginia. For the year ended December 31, 1998, 100% of total utility revenue
was derived from electric operations.
KU's operation and maintenance employees are members of the International
Brotherhood of Electrical Workers (IBEW) Local 101 and United Steelworkers of
America (USWA) Local 8686. KU has approximately 15% of its workforce covered
by union contracts expiring August 1, 1999.
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<PAGE>
NOTE 6 - PENSION PLANS AND RETIREMENT BENEFITS
PENSION PLANS. KU sponsors a qualified and non-qualified pension plans and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations and
fair value of assets over the three-year period ending December 31, 1998 and
a statement of the funded status as of December 31 of the three years (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PENSION PLANS:
Change in benefit obligation
Benefit obligation at beginning of year $214,657 $194,874 $183,795
Service cost 6,702 6,728 6,399
Interest cost 14,939 14,680 13,856
Acquisitions/divestitures (2,243) -- --
Curtailment (gain) or loss 1,901 -- --
Special termination benefits 5,427 -- --
Benefits paid (12,762) (13,313) (9,001)
Actuarial (gain) or loss 2,367 11,688 (175)
-------- -------- --------
Benefit obligation at end of year $230,988 $214,657 $194,874
-------- -------- --------
-------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year $217,500 $191,879 $179,371
Actual return on plan assets 31,209 35,066 21,463
Employer contributions 2,273 4,750 777
Benefits paid (12,762) (13,314) (9,001)
Administrative expenses (96) (882) (731)
-------- -------- --------
Fair value of plan assets at end of year $238,124 $217,499 $191,879
-------- -------- --------
-------- -------- --------
Reconciliation of funded status
Funded status $ 7,135 $ 2,843 $ (2,995)
Unrecognized actuarial (gain) or loss (26,487) (19,552) (12,549)
Unrecognized transition (asset) or obligation (1,128) (1,350) (1,500)
Unrecognized prior service cost 2,831 3,635 3,990
-------- -------- --------
Net amount recognized at year-end $(17,649) $(14,424) $(13,054)
-------- -------- --------
-------- -------- --------
OTHER BENEFITS:
Change in benefit obligation
Benefit obligation at beginning of year $ 72,139 $66,519 $63,656
Service cost 2,012 1,853 1,859
Interest cost 5,207 4,895 4,751
Curtailment (gain) or loss 3,240 -- --
Special termination benefits - (4,038) (3,857)
Benefits paid (2,617) -- --
Actuarial (gain) or loss (331) 2,910 110
-------- -------- --------
Benefit obligation at end of year $ 79,650 $ 72,139 $66,519
-------- -------- --------
-------- -------- --------
Change in plan assets
Fair value of plan assets at beginning of year $ 17,763 $ 13,270 $ 10,427
Actual return on plan assets 5,117 3,569 1,581
Employer contributions 3,805 3,848 3,740
Benefits paid (2,348) (2,924) (2,478)
-------- -------- --------
Fair value of plan assets at end of year $ 24,337 $ 17,763 $ 13,270
-------- -------- --------
-------- -------- --------
</TABLE>
162
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reconciliation of funded status
Funded status $(55,313) $(54,376) $ (53,249)
Unrecognized actuarial (gain) or loss (19,944) (19,697) (19,977)
Unrecognized transition (asset) or obligation 45,701 50,118 53,460
-------- -------- --------
Net amount recognized at year-end $(29,556) $(23,955) $ (19,766)
-------- -------- --------
-------- -------- --------
</TABLE>
There are no plan assets in the nonqualified plan due to the nature of the plan.
The following tables provide the amounts recognized in the statement of
financial position and information for plans with benefit obligations in excess
of plan assets as of December 31, 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PENSION PLANS:
Amounts recognized in the statement
financial position consisted of:
Accrued benefit liability $(17,649) $ (14,424) $ (13,054)
Other (22) -- --
-------- -------- --------
Accrued benefit liability $(17,671) $ (14,424) $ (13,054)
-------- -------- --------
-------- -------- --------
Additional year-end information for plans with benefit obligations in
excess of plan assets:
Projected benefit obligation $ 2,300 $ 6,199 $ 10,667
Accumulated benefit obligation 99 3,975 8,235
OTHER BENEFITS:
Amounts recognized in the statement
financial position consisted of:
Accrued benefit liability $ (29,556) $ (23,955) $ (19,766)
Other (2,817) (2,955) --
-------- -------- --------
Net amount recognized at year-end $ (32,373) $ (26,910) $ (19,766)
-------- -------- --------
-------- -------- --------
Additional year-end information for plans with benefit obligations in
excess of plan assets:
Projected benefit obligation $ 79,650 $ 72,139 $ 66,519
Fair value of plan assets 24,337 17,763 13,270
</TABLE>
163
<PAGE>
The following table provides the components of net periodic benefit cost for
the plans for fiscal years 1998, 1997 and 1996 (in thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
PENSION PLANS:
Components of net periodic benefit cost
Service cost $ 6,703 $ 6,728 $ 6,399
Interest cost 14,939 14,680 13,856
Expected return on plan assets (18,264) (15,427) (14,410)
Amortization of transition (asset) or obligation 321 354 354
Amortization of prior service cost (146) (150) (150)
Amortization of net (gain) loss (151) (26) (24)
---------- ---------- ----------
Net periodic benefit cost $ 3,402 $ 6,159 $ 6,025
---------- ---------- ----------
---------- ---------- ----------
FAS88 special charges
Prior service cost recognized $ 67 $ -- $ --
Special termination benefits 5,427 -- --
---------- ---------- ----------
Total FAS88 charges $ 5,494 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
OTHER BENEFITS:
Components of net periodic benefit cost
Service cost $ 2,012 $ 1,853 $ 1,859
Interest cost 5,207 4,895 4,751
Expected return on plan assets (1,424) (1,051) (827)
Amortization of transition (asset) or obligation 3,303 3,341 3,341
Amortization of net (gain) loss (536) (812) (703)
---------- ---------- ----------
Net periodic benefit cost $ 8,562 $ 8,226 $ 8,421
---------- ---------- ----------
---------- ---------- ----------
FAS88 special charges
Curtailment (gain)/loss $ 1,114 $ -- $ --
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
On May 4, 1998 LG&E Energy and KU Energy merged, with LG&E Energy as the
surviving corporation. At the time of the merger KU had both qualified and
nonqualified pension plans. Under the provisions of the Supplemental Security
Plan (SERP), the Merger Agreement constituted a change-in-control which required
that a lump sum present value payment be made out of KU's SERP to retired
employees entitled to retirement benefits on the date of the Merger Agreement.
On May 30, 1997, $4.7 million in lump sum payments were made to these retired
employees.
Effective May 4, 1998, due to the change in control, the present value balance
of KU's SERP of $4.9 million was transferred and allocated between LG&E Energy
Corp's Nonqualified Savings Plan and KU's Nonqualified Savings plan of $2.2
million and $2.7 million, respectively. The plan is an unfunded, pretax deferred
compensation program which provides officers and senior managers of KU the
opportunity to defer earnings above the qualified savings plan limits. As an
"Unfunded" plan the money is not specifically invested or secured and future
distributions will be made from the general assets of KU. Currently interest is
credited at a rate equal to the average yield on five-year Treasury notes.
During 1998, KU invested approximately $6.6 million in special termination
benefits as a result of its early retirement program offered to eligible
employees post-merger.
KU provides nonpension post retirement benefits for eligible retired employees.
164
<PAGE>
The assumptions used in the measurement of the KU's benefit obligation are shown
in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted-average assumptions as of December 31:
Discount rate 7.00% 7.75% 7.75%
Expected long-term rate of return on plan assets 8.25% 8.25% 8.25%
Rate of compensation increase 4.00% 4.75% 4.75%
</TABLE>
For measurement purposes, a 7.00% annual increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 4.25% for 2005 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1% INCREASE
-----------
<S> <C>
Effect on total of service and interest cost components for 1998 $ (1,071)
Effect on year-end 1998 postretirement benefit obligation (10,219)
Effect on total of service and interest cost components for 1998 1,373
Effect on year-end 1998 postretirement benefit obligation 12,815
</TABLE>
THRIFT SAVINGS PLANS. KU has a thrift savings plan under section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may defer and
contribute to the plan a portion of current compensation in order to provide
future retirement benefits. KU makes contributions to the plan by matching a
portion of the employee contributions. The costs were approximately $2.2 million
for each of 1998 and 1997, and $2.1 million for 1996.
NOTE 7 - INCOME TAXES
Components of income tax expense are shown in the table below (in thousands of
$):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Included in operating expenses:
Current - federal $46,321 $39,353 $35,656
- state - net 10,245 8,964 7,387
Deferred - federal - net (3,186) 1,996 5,510
- state - net (124) 1,377 2,899
--------- --------- --------
Total 53,256 51,690 51,452
Included in other income and (deductions):
Current - federal (617) (853) 3,565
- state (237) (246) 861
Deferred - federal - net 694 975 (3,665)
- state - net 178 258 (994)
Amortization of investment tax credit (3,829) (4,036) (4,013)
--------- ---------- ----------
Total (3,811) (3,902) (4,246)
--------- ---------- ----------
Total income tax expense $49,445 $47,788 $47,206
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
165
<PAGE>
Net deferred tax liabilities resulting from book-tax temporary differences are
shown below (in thousands of $):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Depreciation and other
plant-related items $289,147 $285,034
Other liabilities 5,598 5,389
--------- ---------
294,745 290,423
--------- ---------
Deferred tax assets:
Investment tax credit 9,001 10,547
Income taxes due to customers 17,574 19,217
Accrued liabilities not currently
deductible and other 23,677 18,750
Less: amounts included in
current assets 2,595 3,241
--------- ---------
47,657 45,273
--------- ---------
Net deferred income tax liability $247,088 $245,150
--------- ---------
--------- ---------
</TABLE>
A reconciliation of differences between the statutory U.S. federal income tax
rate and KU's effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal benefit 5.4 5.0 4.9
Amortization of investment tax credit (3.1) (3.0) (3.0)
Nondeductible merger expenses 6.4 -- --
Other differences - net (2.2) (1.2) (1.5)
----- ----- -----
Effective income tax rate 41.5% 35.8% 35.4%
----- ----- -----
----- ----- -----
</TABLE>
NOTE 8 - OTHER INCOME AND DEDUCTIONS
Other income and deductions consisted of the following at December 31 (in
thousands of $):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Equity in earnings - subsidiary company $ 2,167 $ 2,480 $ 2,436
Interest and dividend income 1,811 1,673 1,733
Gains (losses) on fixed asset disposal 272 412 87
Donations (453) (388) (379)
Income taxes and other 4,049 2,826 4,566
-------- -------- --------
Total other income and deductions $ 7,846 $ 7,003 $ 8,443
-------- -------- --------
-------- -------- --------
</TABLE>
NOTE 9 - FIRST MORTGAGE BONDS AND POLLUTION CONTROL BONDS
Under the provisions for the KU's variable rate Pollution Control Bonds Series
10, KU can choose between various interest rate options. The daily interest rate
option was utilized at December 31, 1998. The average annual interest rate on
the bonds during 1998 and 1997 was 3.54% and 3.77%, respectively. The variable
rate
166
<PAGE>
bonds are subject to tender for purchase at the option of the holder and to
mandatory tender for purchase upon the occurrence of certain events. If tendered
bonds are not remarketed, KU has available lines of credit which may be used to
repurchase the bonds.
Substantially all of KU's utility plant is pledged as security for its first
mortgage bonds.
NOTE 10 - NOTES PAYABLE
KU's short-term financing requirements are satisfied through the sale of
commercial paper, KU had no short-term borrowings at December 31, 1998. KU had
outstanding commercial paper of $33.6 million at December 31, 1997, at a
weighted average interest rate of 6.79%.
At December 31, 1998, KU had lines of credit in place totaling $60 million, all
of which remained unused at December 31, 1998. In support of these lines of
credit, KU pays commitment or facility fees. The KU credit facilities provide
for short-term borrowing and support of commercial paper borrowings. The credit
lines will expire in December 1999. Management expects to renegotiate these
lines when they expire.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
CONSTRUCTION PROGRAM. KU had $6.5 million of commitments in connection with its
construction program at December 31, 1998. Construction expenditures for the
years 1999 and 2000 are estimated to total approximately $341 million.
OPERATING LEASES. KU leases office space, office equipment, and vehicles. KU
accounts for these leases as operating leases. Total lease expense for 1998,
1997, and 1996, was $1.9 million, $1.8 million, and $1.7 million, respectively.
The future minimum annual lease payments under lease agreements for years
subsequent to December 31, 1998, are as follows (in thousands of $):
<TABLE>
<S> <C>
1999 $ 1,059
2000 983
2001 927
2002 862
2003 811
--------
Total $ 4,642
--------
--------
</TABLE>
ENVIRONMENTAL. In September, 1998, the U.S. Environmental Protection Agency
(USEPA) announced its final regulation requiring significant additional
reductions in nitrogen oxide (NOx) emissions to mitigate alleged ozone transport
to the Northeast. While each state is free to allocate its assigned NOx
reductions among various emissions sectors as it deems appropriate, the
regulation may ultimately require utilities to reduce their NOx emissions to
0.15 lb./mmBtu (million British thermal units) - an 85% reduction from 1990
levels. Under the regulation, each state must incorporate the additional NOx
reductions in its State Implementation Plan (SIP) by September 1999 and affected
sources must install control measures by May 2003, unless granted extensions.
Several states, various labor and industry groups, and individual companies have
appealed the final regulation to the U.S. Court of Appeals for the D.C. Circuit.
Management is currently unable to determine the outcome or exact impact of this
matter until such time as the states identify specific emissions reductions in
their SIP and the courts rule on the various legal challenges to the final rule.
However, if the 0.15 lb. target is ultimately imposed, KU will be required to
incur significant capital expenditures and increased operation and maintenance
costs for additional controls. Subject to further study and analysis, KU
estimates that it may incur capital costs of approximately $100 to $200 million
for KU. These costs would generally be incurred beginning in 2000.
167
<PAGE>
KU believes its costs for these matters to be comparable to those of similarly
situated utilities with like generation assets. KU anticipates that such capital
and operating costs are the type of costs that are eligible for cost recovery
from customers under its environmental surcharge mechanisms and believes that,
in the case of KU, a significant portion of such costs could be so recovered.
However, Kentucky Commission approval is necessary and there can be no guarantee
of such recovery.
In July, 1997, USEPA issued revised National Ambient Air Quality Standards
(NAAQS) for ozone and particulate matter. KU is monitoring USEPA's
implementation of the revised standards. Until USEPA completes additional
implementation steps, including monitoring and nonattainment demonstrations,
management is unable to determine the precise impact of the revised standards.
KU is addressing potential liabilities for the cleanup of properties where
hazardous substances may have been released. KU along with other companies has
been identified by USEPA as a potentially responsible party allegedly liable for
cleanup of off-site disposal facilities under the Comprehensive Environmental
Response Compensation and Liability Act. KU is currently participating as a de
minimis party in one such matter. In addition, KU has conducted various
voluntary cleanups of KU owned properties, including cleanup of a former
manufactured gas plant site.
PURCHASED POWER. KU has purchase power arrangements with Owensboro Municipal
Utilities (OMU), Electric Energy, Inc. (EEI), and other parties. Under the OMU
agreement, which expires on January 1, 2020, KU purchases all of the output of a
400-MW generating station not required by OMU. The amount of purchased power
available to KU during 1999-2003, which is expected to be approximately 9% of
KU's total kWh requirements, is dependent upon a number of factors including the
units' availability, maintenance schedules, fuel costs and OMU requirements.
Payments are based on the total costs of the station allocated per terms of the
OMU agreement, which generally follows delivered kWh. Included in the total
costs is KU's proportionate share of debt service requirements on $180 million
of OMU bonds outstanding at December 31, 1998. The debt service is allocated to
KU based on its annual allocated share of capacity, which averaged approximately
49% in 1998.
KU has a 20% equity ownership in EEI, which is accounted for on the equity
method of accounting. KU's entitlement is 20% of the available capacity of a
1,000-MW station. Payments are based on the total costs of the station allocated
per terms of an agreement among the owners, which generally follows delivered
kWh.
KU has several other contracts for purchased power during 1999-2003 of various
MW capacities and for varying periods with a maximum entitlement at any time of
282 MW.
The estimated future minimum annual payments under purchased power agreements
for the five years ended December 31, 2003 follow (in thousands of $):
<TABLE>
<S> <C>
1999 $ 34,291
2000 26,712
2001 29,621
2002 29,561
2003 29,670
----------
Total $ 149,855
----------
----------
</TABLE>
168
<PAGE>
NOTE 12 - SELECTED QUARTERLY DATA (UNAUDITED)
Selected financial data for the four quarters of 1998 and 1997 are shown below.
Because of seasonal fluctuations in temperature and other factors, results for
quarters may fluctuate throughout the year.
<TABLE>
<CAPTION>
Quarters Ended
March June September December
------------ ----------- ------------- ------------
(Thousands of $)
<S> <C> <C> <C> <C>
1998
Revenues $183,219 $193,079 $246,117 $187,699
Operating income 33,035 28,144 44,677 19,531
Net income (loss) 25,049 (1,119) 36,980 11,854
Net income (loss) available
for common stock 24,485 (1,683) (a) 36,416 (b) 11,290(c)
1997
Revenues $178,914 $162,868 $192,102 $182,553
Operating income 33,424 19,742 35,343 29,889
Net income 24,961 12,088 26,924 21,740
Net income available
for common stock 24,397 11,524 26,360 21,176
</TABLE>
(a) The decrease of $13.2 million compared to June 1997 was due to a
non-recurring after-tax charge of $21.5 million from
merger-related expenses, offset by an increase of $8.3 million due
to increased sales caused by warmer weather and lower maintenance
expenses.
(b) The increase of $10.1 million compared to September 1997 was due
to increased sales caused by warmer weather and an increase in
wholesale sales.
(c) The decrease of $9.9 million compared to December 1997 was due to
an after-tax charge of $12.9 million related to refunds of certain
amounts collected under the Environmental Cost Recovery surcharge,
partially offset by higher wholesale sales.
NOTE 13 - SUBSEQUENT EVENT
On March 8, 1999, the Kentucky Industrial Utility Customers filed a complaint
with the Kentucky Commission alleging that KU's electric rates are excessive and
should be reduced by an amount between $42 and $56 million, and that the
Kentucky Commission establish a proceeding to reduce KU's rates. KU has asked
the Kentucky Commission to dismiss the complaint. KU is not able to predict the
ultimate outcome of these proceedings, however, should the Commission mandate
significant rate reductions at KU, through the PBR proposal or otherwise, such
actions could have a material effect on KU's financial condition and results of
operations.
169
<PAGE>
Kentucky Utilities Company
REPORT OF MANAGEMENT
The management of Kentucky Utilities Company is responsible for the preparation
and integrity of the financial statements and related information included in
this Annual Report. These statements have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis and,
necessarily, include amounts that reflect the best estimates and judgment of
management.
KU's financial statements have been audited by Arthur Andersen LLP, independent
public accountants. Management has made available to Arthur Andersen LLP all
KU's financial records and related data as well as the minutes of shareholders'
and directors' meetings.
Management has established and maintains a system of internal controls that
provide reasonable assurance that transactions are completed in accordance with
management's authorization, that assets are safeguarded and that financial
statements are prepared in conformity with generally accepted accounting
principles. Management believes that an adequate system of internal controls is
maintained through the selection and training of personnel, appropriate division
of responsibility, establishment and communication of policies and procedures
and by regular reviews of internal accounting controls by KU's internal
auditors. Management reviews and modifies its system of internal controls in
light of changes in conditions and operations, as well as in response to
recommendations from the internal auditors. These recommendations for the year
ended December 31, 1998, did not identify any material weaknesses in the design
and operation of KU's internal control structure.
The Audit Committee of the Board of Directors is composed entirely of outside
directors. In carrying out its oversight role for the financial reporting and
internal controls of KU, the Audit Committee meets regularly with KU's
independent public accountants, internal auditors and management. The Audit
Committee reviews the results of the independent accountants' audit of the
financial statements and their audit procedures, and discusses the adequacy of
internal accounting controls. The Audit Committee also approves the annual
internal auditing program, and reviews the activities and results of the
internal auditing function. Both the independent public accountants and the
internal auditors have access to the Audit Committee at any time.
Kentucky Utilities Company maintains and internally communicates a written code
of business conduct that addresses, among other items, potential conflicts of
interest, compliance with laws, including those relating to financial
disclosure, and the confidentiality of proprietary information.
170
<PAGE>
Kentucky Utilities Company
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kentucky Utilities Company:
We have audited the accompanying balance sheets and statements of
capitalization of Kentucky Utilities Company (a Kentucky and Virginia
corporation and a wholly-owned subsidiary of LG&E Energy Corp.) as of
December 31, 1998 and 1997, and the related statements of income, retained
earnings and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of KU's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kentucky Utilities Company as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a)2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Louisville, Kentucky Arthur Andersen LLP
January 27, 1999 (Except with respect
to the matters discussed in the fifth paragraph of Note 3, as to which the date
is February 12, 1999, and Note 13, as to which the date is March 8, 1999.)
171
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEMS 10, 11, 12 and 13 are omitted pursuant to General Instruction G, inasmuch
as LG&E Energy and LG&E filed copies of their definitive proxy statements with
the Commission on March 26, 1999, respectively, pursuant to Regulation 14A under
the Securities Exchange Act of 1934. Such proxy and information statements are
incorporated herein by this reference. In accordance with General Instruction G
of Form 10-K, the information required by Item 10 relating to executive officers
has been included in Part I of this Form 10-K. The information required by ITEMS
10, 11, 12 and 13 for KU is incorporated herein by reference to the material
appearing in Exhibit 99.03, which is filed herewith. In accordance with General
Instruction G of Form 10-K, the information required by Item 10 relating to
executive officers of KU has been included in Part I of this Form 10-K.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements (included in Item 8):
LG&E ENERGY:
Consolidated statements of income for the three years ended
December 31, 1998 (page 84).
Consolidated statements of retained earnings for the three years
ended December 31, 1998 (page 85).
Consolidated statements of comprehensive income for the three years
ended December 31, 1998 (page 85)
Consolidated balance sheets - December 31, 1998, and 1997 (page 86).
Consolidated statements of cash flows for the
three years ended December 31, 1998 (page 87).
Consolidated statements of capitalization - December 31, 1998, and
1997 (page 88).
Notes to consolidated financial statements (pages 90-123).
Report of management (page 125).
Report of independent public accountants (page 126).
LG&E:
Statements of income for the three years ended December 31, 1998
(page 127).
Statements of retained earnings for the three years ended
December 31, 1998 (page 127).
Statements of comprehensive income for the three years ended
December 31, 1998 (page 128).
Balance sheets - December 31, 1998, and 1997 (page 129).
Statements of cash flows for the three years ended December 31, 1998
(page 130).
Statements of capitalization - December 31, 1998, and 1997
(page 131).
Notes to financial statements (pages 132-149).
Report of management (page 150).
Report of independent public accountants (page 151).
172
<PAGE>
(a) 1. Financial Statements (included in Item 8) (continued):
KU:
Statements of income for the three years ended December 31, 1998
(page 152).
Statements of retained earnings for the three years ended
December 31, 1998 (page 152).
Balance sheets - December 31, 1998, and 1997 (page 153).
Statements of cash flows for the three years ended December 31, 1998
(page 154).
Statements of capitalization - December 31, 1998, and 1997
(page 155).
Notes to financial statements (pages 156-169).
Report of management (page 170).
Report of independent public accountants (page 170).
2. Financial Statement Schedules (included in Part IV):
Schedule II Valuation and Qualifying Accounts for the
three years ended December 31, 1998, for LG&E
Energy (page 195), LG&E (page 196), and
KU (page 197).
All other schedules have been omitted as not applicable or not
required or because the information required to be shown is included
in the Financial Statements or the accompanying Notes to Financial
Statements.
3. Exhibits:
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
2.01 x x x Copy of Agreement and Plan of Merger, dated as of May 20,
1997, by and between LG&E Energy and KU Energy, including
certain exhibits thereto. [Filed as Exhibit 2 to LG&E
Energy's Current Report on Form 8-K filed May 30, 1997 and
incorporated by reference herein]
3.01 x Copy of LG&E Energy's Amended and Restated Articles of
Incorporation dated May 4, 1998. [Filed as Exhibit 4.1 to
LG&E Energy's Current Report on Form 8-K dated May 4,
1998, and incorporated by reference herein]
3.02 x Copy of Restated Articles of Incorporation of LG&E, dated
November 6, 1996. [Filed as Exhibit 3.06 to LG&E's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated by reference herein]
3.03 x Copy of Bylaws of LG&E Energy, as amended through May 4,
1998. [Filed as Exhibit 4.2 to LG&E Energy's Current
Report on Form 8-K dated May 4, 1998, and incorporated by
reference herein]
</TABLE>
173
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
3.04 x Copy of By-Laws of LG&E, as amended through May 4, 1998.
3.05 x Amended and Restated Articles of Incorporation of Kentucky
Utilities Company [Filed as Exhibits 4.03 and 4.04 to
Form 8-K Current Report of KU, dated December 10, 1993,
and incorporated by reference herein]
3.06 x By-laws of Kentucky Utilities Company dated April 28, 1998.
4.01 x x Copy of Trust Indenture dated November 1, 1949, from LG&E
to Harris Trust and Savings Bank, Trustee. [Filed as
Exhibit 7.01 to LG&E's Registration Statement 2-8283 and
incorporated by reference herein]
4.02 x x Copy of Supplemental Indenture dated February 1, 1952,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.05 to LG&E's Registration
Statement 2-9371 and incorporated by reference herein]
4.03 x x Copy of Supplemental Indenture dated February 1, 1954,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.03 to LG&E's Registration
Statement 2-11923 and incorporated by reference herein]
4.04 x x Copy of Supplemental Indenture dated September 1, 1957,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.04 to LG&E's Registration
Statement 2-17047 and incorporated by reference herein]
4.05 x x Copy of Supplemental Indenture dated October 1, 1960,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.05 to LG&E's Registration
Statement 2-24920 and incorporated by reference herein]
4.06 x x Copy of Supplemental Indenture dated June 1, 1966, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.06 to LG&E's Registration Statement
2-28865 and incorporated by reference herein]
4.07 x x Copy of Supplemental Indenture dated June 1, 1968, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.07 to LG&E's Registration Statement
2-37368 and incorporated by reference herein]
4.08 x x Copy of Supplemental Indenture dated June 1, 1970, which
is a
</TABLE>
174
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.08 to LG&E's Registration Statement
2-37368 and incorporated by reference herein]
4.09 x x Copy of Supplemental Indenture dated August 1, 1971, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.09 to LG&E's Registration Statement
2-44295 and incorporated by reference herein]
4.10 x x Copy of Supplemental Indenture dated June 1, 1972, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.10 to LG&E's Registration Statement
2-52643 and incorporated by reference herein]
4.11 x x Copy of Supplemental Indenture dated February 1, 1975,
which is a supplemental instrument to exhibit 4.01
hereto. [Filed as Exhibit 2.11 to LG&E's Registration
Statement 2-57252 and incorporated by reference herein]
4.12 x x Copy of Supplemental Indenture dated September 1, 1975,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.12 to LG&E's Registration
Statement 2-57252 and incorporated by reference herein]
4.13 x x Copy of Supplemental Indenture dated September 1, 1976,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.13 to LG&E's Registration
Statement 2-57252 and incorporated by reference herein]
4.14 x x Copy of Supplemental Indenture dated October 1, 1976,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.14 to LG&E's Registration
Statement 2-65271 and incorporated by reference herein]
4.15 x x Copy of Supplemental Indenture dated June 1, 1978, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 2.15 to LG&E's Registration Statement
2-65271 and incorporated by reference herein]
4.16 x x Copy of Supplemental Indenture dated February 15, 1979,
which
</TABLE>
175
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 2.16 to LG&E's Registration
Statement 2-65271 and incorporated by reference herein]
4.17 x x Copy of Supplemental Indenture dated September 1, 1979,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.17 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1980, and
incorporated by reference herein]
4.18 x x Copy of Supplemental Indenture dated September 15, 1979,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.18 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1980, and
incorporated by reference herein]
4.19 x x Copy of Supplemental Indenture dated September 15, 1981,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.19 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1981, and
incorporated by reference herein]
4.20 x x Copy of Supplemental Indenture dated March 1, 1982, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 4.20 to LG&E's Annual Report on Form
10-K for the year ended December 31, 1982, and
incorporated by reference herein]
4.21 x x Copy of Supplemental Indenture dated March 15, 1982, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 4.21 to LG&E's Annual Report on Form
10-K for the year ended December 31, 1982, and
incorporated by reference herein]
4.22 x x Copy of Supplemental Indenture dated September 15, 1982,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.22 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1982, and
incorporated by reference herein]
4.23 x x Copy of Supplemental Indenture dated February 15, 1984,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.23 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1984, and
incorporated by reference herein]
4.24 x x Copy of Supplemental Indenture dated July 1, 1985, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 4.24 to LG&E's Annual Report on Form
10-K for the year ended December 31, 1985, and
incorporated by reference herein]
4.25 x x Copy of Supplemental Indenture dated November 15, 1986,
</TABLE>
176
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.25 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1986, and
incorporated by reference herein]
4.26 x x Copy of Supplemental Indenture dated November 16, 1986,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.26 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1986, and
incorporated by reference herein]
4.27 x x Copy of Supplemental Indenture dated August 1, 1987, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 4.27 to LG&E's Annual Report on Form
10-K for the year ended December 31, 1987, and
incorporated by reference herein]
4.28 x x Copy of Supplemental Indenture dated February 1, 1989,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.28 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1988, and
incorporated by reference herein]
4.29 x x Copy of Supplemental Indenture dated February 2, 1989,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.29 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1988, and
incorporated by reference herein]
4.30 x x Copy of Supplemental Indenture dated June 15, 1990, which
is a supplemental instrument to Exhibit 4.01 hereto.
[Filed as Exhibit 4.30 to LG&E's Annual Report on Form
10-K for the year ended December 31, 1990, and
incorporated by reference herein]
4.31 x x Copy of Supplemental Indenture dated November 1, 1990,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.31 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1990, and
incorporated by reference herein]
4.32 x x Copy of Supplemental Indenture dated September 1, 1992,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.32 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1992, and
incorporated by reference herein]
</TABLE>
177
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
4.33 x x Copy of Supplemental Indenture dated September 2, 1992,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.33 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1992, and
incorporated by reference herein]
4.34 x x Copy of Supplemental Indenture dated August 15, 1993,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.34 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein]
4.35 x x Copy of Supplemental Indenture dated August 16, 1993,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.35 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein]
4.36 x x Copy of Supplemental Indenture dated October 15, 1993,
which is a supplemental instrument to Exhibit 4.01
hereto. [Filed as Exhibit 4.36 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein]
4.37 x x Indenture of Mortgage or Deed of Trust dated May 1, 1947,
between Kentucky Utilities Company and First Trust
National Association (successor Trustee) and a successor
individual co-trustee, as Trustees (the Trustees) (Amended
Exhibit 7(a) in File No. 2-7061), and Supplemental
Indentures thereto dated, respectively, January 1, 1949
(Second Amended Exhibit 7.02 in File No. 2-7802), July 1,
1950 (Amended Exhibit 7.02 in File No. 2-8499), June 15,
1951 (Exhibit 7.02(a) in File No. 2-8499), June 1, 1952
(Amended Exhibit 4.02 in File No. 2-9658), April 1, 1953
(Amended Exhibit 4.02 in File No. 2-10120), April 1, 1955
(Amended Exhibit 4.02 in File No. 2-11476), April 1, 1956
(Amended Exhibit 2.02 in File No. 2-12322), May 1, 1969
(Amended Exhibit 2.02 in File No. 2-32602), April 1, 1970
(Amended Exhibit 2.02 in File No. 2-36410), September 1,
1971 (Amended Exhibit 2.02 in File No. 2-41467), December
1, 1972 (Amended Exhibit 2.02 in File No. 2-46161), April
1, 1974 (Amended Exhibit 2.02 in File No. 2-50344),
September 1, 1974 (Exhibit 2.04 in File No. 2-59328), July
1, 1975 (Exhibit 2.05 in File No. 2-59328), May 15, 1976
(Amended Exhibit 2.02 in File No. 2-56126), April 15, 1977
(Exhibit 2.06 in File No. 2-59328), August 1, 1979
(Exhibit 2.04 in File No. 2-64969), May 1, 1980
</TABLE>
178
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
(Exhibit 2 to Form 10-Q Quarterly Report of KU for the quarter
ended June 30, 1980), September 15, 1982 (Exhibit 4.04 in File
No. 2-79891), August 1, 1984 (Exhibit 4B to Form 10-K
Annual Report of KU for the year ended December 31, 1984),
June 1, 1985 (Exhibit 4 to Form 10-Q Quarterly Report of
KU for the quarter ended June 30, 1985), May 1, 1990
(Exhibit 4 to Form 10-Q Quarterly Report of KU for the
quarter ended June 30, 1990), May 1, 1991 (Exhibit 4 to
Form 10-Q Quarterly Report of KU for the quarter ended
June 30, 1991), May 15, 1992 (Exhibit 4.02 to Form 8-K of
KU dated May 14, 1992), August 1, 1992 (Exhibit 4 to Form
10-Q Quarterly Report of KU for the quarter ended
September 30, 1992), June 15, 1993 (Exhibit 4.02 to Form
8-K of KU dated June 15, 1993) and December 1, 1993
(Exhibit 4.01 to Form 8-K of KU dated December 10, 1993),
November 1, 1994 (Exhibit 4.C to Form 10-K Annual Report
of KU for the year ended December 31, 1994), June 1, 1995
(Exhibit 4 to Form 10-Q Quarterly Report of KU for the
quarter ended June 30, 1995) and January 15, 1996 (Exhibit
4.E to Form 10-K Annual Report of KU for the year ended
December 31, 1995). Incorporated by reference.
4.38 x x Supplemental Indenture dated March 1, 1992 between
Kentucky Utilities Company and the Trustees, providing for
the conveyance of properties formerly held by Old Dominion
Power Company [Filed as Exhibit 4B to Form 10-K Annual
Report of KU for the year ended December 31, 1992, and
incorporated by reference herein]
10.01 x x Copies of Agreement between Sponsoring Companies re:
Project D of Atomic Energy Commission, dated May 12, 1952,
Memorandums of Understanding between Sponsoring Companies
re: Project D of Atomic Energy Commission, dated
September 19, 1952 and October 28, 1952, and Power
Agreement between Ohio Valley Electric Corporation and
Atomic Energy Commission, dated October 15, 1952. [Filed
as Exhibit 13(y) to LG&E's Registration Statement 2-9975
and incorporated by reference herein]
10.02 x x Copy of Modification No. 1 dated July 23, 1953, to the
Power Agreement between Ohio Valley Electric Corporation
and Atomic Energy Commission. [Filed as Exhibit 4.03(b)
to LG&E's Registration Statement 2-24920 and incorporated
by reference herein]
10.03 x x Copy of Modification No. 2 dated March 15, 1964, to the
Power
</TABLE>
179
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
180
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Supplementary Transmission Agreement, dated July 10,
1953, among Ohio Valley Electric Corporation and the
Sponsoring Companies. [Filed as Exhibit 5.02i to LG&E's
Registration Statement 2-61607 and incorporated by
reference herein]
10.10 x x Copy of Modification No. 2, dated April 1, 1965, to the
First Supplementary Transmission Agreement, dated July 10,
1953, among Ohio Valley Electric Corporation and the
Sponsoring Companies. [Filed as Exhibit 5.02j to LG&E's
Registration Statement 2-61607 and incorporated by
reference herein]
10.11 x x Copy of Modification No. 3, dated January 20, 1967, to
First Supplementary Transmission Agreement, dated July 10,
1953, among Ohio Valley Electric Corporation and the
Sponsoring Companies. [Filed as Exhibit 4(a)(7) to LG&E's
Registration Statement 2-26063 and incorporated by
reference herein]
10.12 x x Copy of Modification No. 6 dated November 15, 1967, to the
Power Agreement between Ohio Valley Electric Corporation
and Atomic Energy Commission. [Filed as Exhibit 4(g) to
LG&E's Registration Statement 2-28524 and incorporated by
reference herein]
10.13 x x Copy of Modification No. 3 dated November 15, 1967, to the
Inter-Company Power Agreement dated July 10, 1953. [Filed
as Exhibit 4.02m to LG&E's Registration Statement 2-37368
and incorporated by reference herein]
10.14 x x Copy of Modification No. 7 dated November 5, 1975, to the
Power Agreement between Ohio Valley Electric Corporation
and Atomic Energy Commission. [Filed as Exhibit 5.02n to
LG&E's Registration Statement 2-56357 and incorporated by
reference herein]
10.15 x x Copy of Modification No. 4 dated November 5, 1975, to the
Inter-Company Power Agreement dated July 10, 1953. [Filed
as Exhibit 5.02o to LG&E's Registration Statement 2-56357
and incorporated by reference herein]
10.16 x x Copy of Modification No. 4 dated April 30, 1976, to First
Supplementary Transmission Agreement, dated July 10, 1953,
among Ohio Valley Electric Corporation and the Sponsoring
Companies. [Filed as Exhibit 5.02p to LG&E's Registration
Statement 2-61607 and incorporated by reference herein]
</TABLE>
181
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
10.17 x x Copy of Modification No. 8 dated June 23, 1977, to the
Power Agreement between Ohio Valley Electric Corporation
and Atomic Energy Commission. [Filed as Exhibit 5.02q to
LG&E's Registration Statement 2-61607 and incorporated by
reference herein]
10.18 x x Copy of Modification No. 9 dated July 1, 1978, to the
Power Agreement between Ohio Valley Electric Corporation
and Atomic Energy Commission. [Filed as Exhibit 5.02r to
LG&E's Registration Statement 2-63149 and incorporated by
reference herein]
10.19 x x Copy of Modification No. 10 dated August 1, 1979, to the
Power Agreement between Ohio Valley Electric Corporation and Atomic
Energy Commission. [Filed as Exhibit 2 to LG&E's
Annual Report on Form 10-K for the year ended December 31, 1979, and
incorporated by reference herein]
10.20 x x Copy of Modification No. 11 dated September 1, 1979, to
the Power Agreement between Ohio Valley Electric
Corporation and Atomic Energy Commission. [Filed as
Exhibit 3 to LG&E's Annual Report on Form 10-K for the
year ended December 31, 1979, and incorporated by
reference herein]
10.21 x x Copy of Modification No. 5 dated September 1, 1979, to
Inter-Company Power Agreement dated July 5, 1953, among
Ohio Valley Electric Corporation and Sponsoring
Companies. [Filed as Exhibit 4 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1979, and
incorporated by reference herein]
10.22 x x Copy of Modification No. 12 dated August 1, 1981, to the
Power Agreement between Ohio Valley Electric
Corporation and Atomic Energy Commission. [Filed
as Exhibit 10.25 to LG&E's Annual Report on
Form 10-K for the year ended December 31, 1981,
and incorporated by reference herein]
10.23 x x Copy of Modification No. 6 dated August 1, 1981, to
Inter-Company Power Agreement dated July 5, 1953, among
Ohio Valley Electric Corporation and Sponsoring
Companies. [Filed as Exhibit 10.26 to LG&E's Annual
Report on Form 10-K for the year ended December 31, 1981,
and incorporated by reference herein]
10.24 x x * Copy of LG&E Energy Corp. Deferred Stock Compensation
</TABLE>
182
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Plan effective January 1, 1992, covering non-employee
directors of the Company and its subsidiaries. [Filed as
Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1991, and incorporated by
reference herein]
10.25 x x * Copy of Supplemental Executive Retirement Plan for R.
W. Hale, effective June 1, 1989. [Filed as Exhibit 10.42
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1992, and incorporated by reference
herein]
10.26 x x * Copy of Nonqualified Savings Plan covering officers of
the Company, effective January 1, 1992. [Filed as Exhibit
10.43 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992, and incorporated by
reference herein]
10.27 x x Copy of Modification No. 13 dated September 1, 1989, to
the Power Agreement between Ohio Valley Electric
Corporation and Atomic Energy Commission. [Filed as
Exhibit 10.42 to LG&E's Annual Report on Form 10-K for the
year ended December 31, 1993, and incorporated by
reference herein]
10.28 x x Copy of Modification No. 14 dated January 15, 1992, to the
Power Agreement between Ohio Valley Electric Corporation and
Atomic Energy Commission. [Filed as Exhibit 10.43 to LG&E's
Annual Report on Form 10-K for the year ended December 31,
1993, and incorporated by reference herein]
10.29 x x Copy of Modification No. 7 dated January 15, 1992, to
Inter-Company Power Agreement dated July 10, 1953, among
Ohio Valley Electric Corporation and Sponsoring
Companies. [Filed as Exhibit 10.44 to LG&E's Annual
Report on Form 10-K for the year ended December 31, 1993,
and incorporated by reference herein]
10.30 x x Copy of Modification No. 15 dated February 15, 1993, to
the Power Agreement between Ohio Valley Electric
Corporation and Atomic Energy Commission. [Filed as
Exhibit 10.45 to LG&E's Annual Report on Form 10-K for the
year ended December 31, 1993, and incorporated by
reference herein]
10.31 x x Copy of Firm No Notice Transportation Agreement effective
November 1, 1993, between Texas Gas Transmission
Corporation and LG&E (expires October 31, 2001) covering
the transmission of natural gas.
</TABLE>
183
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Copy of Firm No Notice Transportation Agreement
effective November 1, 1993, between Texas Gas
Transmission Corporation and LG&E (expires October
31, 2000) covering the transmission of natural gas.
Copy of Firm No Notice Transportation Agreement
effective November 1, 1993, between Texas Gas
Transmission Corporation and LG&E (expires October
31, 2003) covering the transmission of natural gas.
[Filed as Exhibit 10.47 to LG&E's Annual Report
on Form 10-K for the year ended December 31, 1993,
and incorporated by reference herein]
10.32 x x x * Copy of LG&E Energy Corp. Stock Option Plan for
Non-Employee Directors. [Filed as Exhibit 10.51 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and incorporated by reference herein]
10.33 x x Copy of Modification No. 8 dated January 19, 1994, to
Intercompany Power Agreement, dated July 10, 1953, among
Ohio Valley Electric Corporation and the Sponsoring
Companies. [Filed as Exhibit 10.43 to LG&E's Annual Report
on Form 10-K for the year ended December 31, 1995, and
incorporated by reference herein]
10.34 x x Copy of Amendment dated March 1 1995, to Firm No-Notice
Transportation Agreements dated November 1, 1993 (2-Year,
5-Year and 8-Year), between Texas Gas Transmission
Corporation and LG&E covering the transmission of natural
gas. [Filed as Exhibit 10.44 of LG&E's Annual Report on
Form 10-K for the year ended December 31, 1995, and
incorporated by reference herein]
10.35 x x Copy of Modification No. 9, dated August 17, 1995, to the
Inter-Company Power Agreement dated July 10, 1953, among
Ohio Valley Electric Corporation and the Sponsoring
Companies. [Filed as Exhibit 10.39 to LG&E's Annual
Report on Form 10-K for the year ended December 31, 1996,
and incorporated by reference herein]
10.36 x x Copy of Agreement and Plan of Merger, dated February 10,
1995, between LG&E Natural Inc., formerly known as Hadson
Corporation, Carousel Acquisition Corporation and the
Company. [Filed as Exhibit 2 of Schedule 13D by the
Company on
</TABLE>
184
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
February 21, 1995, and incorporated by reference herein]
10.37 x x Copy of Firm Transportation Agreement, dated March 1,
1995, between Texas Gas Transmission Corporation and LG&E
(expires October 31, 2003) covering the transportation of
natural gas.
Copy of Firm Transportation Agreement,
dated March 1, 1995, between Texas Gas
Transmission Corporation and LG&E (expires October
31, 2001) covering the transportation of natural
gas. [Filed as Exhibit 10.45 to LG&E's Annual
Report on Form 10-K for the year ended December
31, 1995, and incorporated by reference herein]
10.38 x x Copy of Firm Transportation Agreement, dated March 1,
1995, between Texas Gas Transmission Corporation and LG&E
(expires October 31, 2000) covering the transportation of
natural gas [Filed as Exhibit 10.41 to LG&E's Annual
Report on Form 10-K for the year ended December 31, 1996,
and incorporated by reference herein]
10.39 x x x * Copy of Amended and Restated Omnibus Long-Term
Incentive Plan effective January 1, 1996, covering
officers and key employees of the Company. [Filed as
Exhibit 10.52 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated by
reference herein]
10.40 x x x * Copy of Short-Term Incentive Plan effective January 1,
1996, covering officers and key employees of the Company.
[Filed as Exhibit 10.53 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995, and
incorporated by reference herein]
10.41 x x * Copy of Amendment to the Non-Qualified Savings Plan,
effective January 1, 1992. [Filed as Exhibit 10.55 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated by reference herein]
10.42 x x * Copy of Amendment to the Non-Qualified Savings Plan,
effective January 1, 1995. [Filed as Exhibit 10.56 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated by reference herein]
10.43 x x * Copy of Amendment to the Non-Qualified Savings Plan,
effective January 1, 1995. [Filed as Exhibit 10.57 to the
Company's
</TABLE>
185
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated by reference herein]
10.44 x x Copy of Form of Master Gas Purchase Agreement, dated
December 14, 1993, among Santa Fe, SFEOP and AGPC. [Filed
as Exhibit 10.23 to LG&E Natural Inc.'s, formerly known as
Hadson Corporation, Registration Statement on Form S-4,
File No. 33-68224, and incorporated by reference herein]
10.45 x x Copy of Credit Agreement, dated as of December 18, 1995,
among LG&E, as Borrower, the Banks named therein, PNC
Bank, Kentucky, Inc. as Agent and Bank of Montreal as
Co-Agent. [Filed as Exhibit 10.01 to the LG&E's Quarterly
Report on Form 10-Q/A for the quarter ended March 31,
1996, and incorporated by reference herein]
10.46 x x Copy of Firm Transportation Agreement, dated November 1,
1996, between LG&E and Tennessee Gas Pipeline Company for
30,000 MMBtu per day in Firm Transportation Service under
Tennessee's Rate FT-A (expires October 31, 2001). [Filed
as Exhibit 10.42 to LG&E's Annual Report on Form 10-K for
the year ended December 31, 1996, and incorporated by
reference herein]
10.47 x x Copy of Amendment No. 1, dated as of November 5, 1996, to
Credit Agreement dated as of December 18, 1995, by and
among Louisville Gas and Electric Company, the Banks party
thereto, and PNC Bank, Kentucky, Inc. as Agent and Bank of
Montreal as Co-Agent. [Filed as Exhibit 10.59 to LG&E's
Annual Report on Form 10-K for the year ended December 31,
1996, and incorporated by reference herein]
10.48 x x Copy of Power Purchase and Sale Agreement, dated as of
November 19, 1996, among the Company, LG&E Power Marketing
Inc., and Oglethorpe Power Corporation. [Filed as Exhibit
10.66 to LG&E Energy's Annual Report on Form 10-K for the
year ended December 31, 1996, and incorporated by
reference herein] [Certain portions of this exhibit have
been omitted pursuant to a confidential treatment request
filed with the Securities and Exchange Commission]
10.49 x x Copy of Power Purchase and Sale Agreement, dated as of
January 1, 1997, among LG&E Power Marketing Inc., LG&E
Power Inc., and Oglethorpe Power Corporation. [Filed as
Exhibit 10.67 to LG&E Energy's Annual Report on Form 10-K
for
</TABLE>
186
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
the year ended December 31, 1996, and incorporated by
reference herein] [Certain portions of this exhibit have
been omitted pursuant to a confidential treatment request
filed with the Securities and Exchange Commission]
10.50 x Copy of U.S. $500,000,000 Credit Agreement, dated as of
September 5, 1997, among LG&E Capital Corp., as Borrower,
and the Banks named therein, as Lenders, and Chase
Securities Inc., as Syndication Agent, Bank of Montreal,
as Administrative Agent, and Morgan Guaranty Trust Company
of New York, PNC Bank, Kentucky, Inc., The Bank of New
York, The First National Bank of Chicago and Wachovia
Bank, N.A., as Co-Agents. [Filed as Exhibit 10.01 to LG&E
Energy's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, and incorporated by reference
herein]
10.51 x Copy of U.S. $ 200,000,000 Credit Agreement, dated as of
September 5, 1997, among LG&E Capital Corp., as Borrower,
and the Banks named therein, as Lenders, and Chase
Securities Inc., as Syndication Agent, Bank of Montreal,
as Administrative Agent, and Morgan Guaranty Trust Company
of New York, PNC Bank, Kentucky, Inc., The Bank of New
York, The First National Bank of Chicago and Wachovia
Bank, N.A., as Co-Agents. [Filed as Exhibit 10.02 to LG&E
Energy's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, and incorporated by reference
herein]
10.52 x Copy of Support Agreement, dated as of September 5, 1997,
between LG&E Energy Corp. and LG&E Capital Corp. [Filed
as Exhibit 10.03 to LG&E Energy's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997, and
incorporated by reference herein]
10.53 x KU Energy Stock Option Agreement, dated as of May 20,
1997, by and between KU Energy and LG&E Energy. [Filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K
filed May 30, 1997 and incorporated by reference herein]
10.54 x Copy of LG&E Energy Stock Option Agreement, dated as of
May 20, 1997, by and between KU Energy and LG&E Energy.
[Filed as Exhibit 99.2 to the Company's Current Report on
Form 8-K filed May 30, 1997 and incorporated by reference
herein]
10.55 x x x * Copy of Employment Agreement between LG&E Energy and
Roger W. Hale dated May 20, 1997, effective May 4, 1998.
</TABLE>
187
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
[Filed as Annex D to Exhibit 2.01 of LG&E Energy's Annual
Report on Form 10-K for the year ended December 31, 1997,
and incorporated by reference herein]
10.56 x x * Copy of LG&E Energy Corp. and Louisville Gas and
Electric Company Non-Officer Senior Management Pension
Restoration Plan, effective May 1, 1996. [Filed as
Exhibit 10.69 to LG&E Energy's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated by
reference herein]
10.57 x Copy of Indenture between LG&E Capital Corp. and the Bank
of New York as Trustee dated as of January 15, 1998.
[Filed as Exhibit 10.72 to LG&E Energy's Annual Report on
Form 10-K for the year ended December 31, 1997, and
incorporated by reference herein]
10.58 x Copy of First Supplemental Indenture between LG&E Capital
Corp. and The Bank of New York as Trustee dated as of
January 15, 1998. [Filed as Exhibit 10.73 to LG&E
Energy's Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated by reference herein]
10.59 x x x * Copy of Supplemental Executive Retirement Plan as
amended through January 1, 1998, covering
officers of LG&E Energy. [Filed as Exhibit 10.74
to LG&E Energy's Annual Report on Form 10-K for
the year ended December 31, 1997, and
incorporated by reference herein]
10.60 x x x * Copy of form of Change in Control Agreement for
officers of LG&E Energy Corp. [Filed as Exhibit 10.75 to
LG&E Energy's Annual Report on Form 10-K for the year
ended December 31, 1997, and incorporated by reference
herein]
10.61 x x Copy of Coal Supply Agreement between LG&E and Kindill
Mining, Inc., dated July 1, 1997. [Filed as Exhibit 10.76
to LG&E Energy's Annual Report on Form 10-K for the year
ended December 31, 1997, and incorporated by reference
herein]
10.62 x x Copy of Coal Supply Agreement between LG&E and Warrior
Coal Corp. dated January 1, 1997, and Amendments #1 and #2
dated May 1, 1997, and December 1, 1997, thereto. [Filed
as Exhibit 10.79 to LG&E Energy's Annual Report on Form
10-K for the year ended December 31, 1997, and
incorporated by reference herein]
</TABLE>
188
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
10.63 x x Copies of Amendments dated September 23, 1997, to Firm
No-Notice Transportation Agreements dated November 1,
1993, between Texas Gas Transmission Corporation and LG&E,
as amended. [Filed as Exhibit 10.81 to LG&E Energy's
Annual Report on Form 10-K for the year ended December 31,
1997, and incorporated by reference herein]
10.64 x x Copies of Amendments dated September 23, 1997, to Firm
Transportation Agreements dated March 1, 1995, between
Texas Gas Transmission Corporation and LG&E, as amended.
[Filed as Exhibit 10.82 to LG&E Energy's Annual Report on
Form 10-K for the year ended December 31, 1997, and
incorporated by reference herein]
10.65 x x Copy of Gas Transportation Agreement dated November 1,
1996, between Tennessee Gas Pipeline Company and LG&E and
amendments dated February 4, 1997, thereto. [Filed as
Exhibit 10.83 to LG&E Energy's Annual Report on Form 10-K
for the year ended December 31, 1997, and incorporated by
reference herein] [Certain portions of this exhibit have
been omitted pursuant to a confidential treatment request
filed with the Securities and Exchange Commission]
10.66 x x * KU's Amended and Restated Performance Share Plan
[Filed as Exhibit 10.A to Form 10-Q Quarterly Report of KU
for the quarter ended June 30, 1993, and incorporated by
reference herein]
10.67 x x * KU's Annual Performance Incentive Plan [Filed as
Exhibit 10B to Form 10-K Annual Report of KU for the year
ended December 31, 1990, and incorporated by reference
herein]
10.68 x x * Amendment No. 1 to KU's Performance Share Plan [Filed
as Exhibit 10.03 to Form 10-K Annual Report for KU for the
year ended December 31, 1996, and incorporated by
reference herein]
10.69 x x * Amendment No. 1 to KU's Annual Performance Incentive
Plan [Filed as Exhibit 10D to Form 10-K Annual Report of
KU for the year ended December 31, 1991, and incorporated
by reference herein]
10.70 x x * Amendment No. 2 to KU's Annual Performance Incentive
Plan [Filed as Exhibit 10.H to Form 10-K Annual Report of
KU for the year ended December 31, 1993, and incorporated
by reference herein]
</TABLE>
189
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
10.71 x x * Amendment No. 3 to KU's Annual Performance Incentive
Plan [Filed as Exhibit 10.I to Form 10-K Annual Report of
KU for the year ended December 31, 1993, and incorporated
by reference herein]
10.72 x x * Amendment No. 4 to KU's Annual Performance Incentive
Plan [Filed as Exhibit 10.07 to Form 10-K Annual Report
for KU for the year ended December 31, 1996, and
incorporated by reference herein]
10.73 x x * KU's Executive Optional Deferred Compensation Plan
[Filed as Exhibit 10.08 to Form 10-K Annual Report for KU
for the year ended December 31, 1996, and incorporated by
reference herein]
10.74 x x * KU Energy's Long-Term Incentive Plan [Filed as Exhibit
10.27 to Form 10-K Annual Report of KU Energy for the year
ended December 31, 1996, and incorporated by reference
herein]
10.75 x * Employment Agreement by and between KU Energy
Corporation and Michael R. Whitley [Filed as Exhibit
(2)-5 to S-4 Registration Statement File No. 333-34219;
Annex E to Form DEFM14A Joint Proxy Statement of LG&E
Energy Corp. and KU Energy Corporation dated August 22,
1997, and incorporated by reference herein]
10.76 x x Copy of Amended and Restated Coal Supply Agreement dated
April 1, 1998 between LG&E and Hopkins County Coal LLC.
10.77 x x Copy of Coal Supply Agreement dated January 1, 1999
between LG&E and Peabody COALSALES Company.
10.78 x x Copy of Coal Supply Agreement dated December 31, 1997
between KU and Leslie Resources, Inc.
10.79 x x Copy of Amendment No. One to Contract dated November 16,
1998 between KU, Leslie Resources, Inc., AEI Coal Sales
Company, Inc. and AEI Holding Company, Inc. regarding Coal
Supply Agreement dated December 31, 1997.
10.80 x x Copy of Assignment and Assumption Agreement dated November
16, 1998 between KU, Leslie Resources, Inc. and AEI Coal
Sales Company, Inc. regarding Coal Supply Agreement dated
December 31, 1997.
</TABLE>
190
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
10.81 x x Copy of Coal Supply Agreement dated April 1, 1995 between
KU and Consolidation Coal Company, Quarto Mining Company,
McElroy Coal Company, Consol Pennsylvania Coal Company,
Greenon Coal Company and Nineveh Coal Company.
10.82 x x Copy of Amendment to Coal Supply Agreement dated October
1, 1996 between KU and Consolidation Coal Company, Quarto
Mining Company, McElroy Coal Company, Consol Pennsylvania
Coal Company, Greenon Coal Company and Nineveh Coal
Company regarding Coal Supply Agreement dated April 1,
1995.
10.83 x Copy of New Participation Agreement dated April 6, 1998
among Big Rivers Electric Corporation. LG&E Energy Marketing
Inc., Western Kentucky Leasing Corp., WKE Station Two Inc.
and Western Kentucky Energy Corp. [Certain portions of this
exhibit have been omitted pursuant to a confidential treatment
request filed with the Securities and Exchange Commission.]
10.84 x Copy of Letter Agreement from WKE Station Two Inc. to Big
Rivers Electric Corporation dated April 6, 1998 amending
New Participation Agreement dated April 6, 1998 among Big
Rivers Electric Corporation. LG&E Energy Marketing Inc.,
Western Kentucky Leasing Corp., WKE Station Two Inc. and
Western Kentucky Energy Corp. [Certain portions of this
exhibit have been omitted pursuant to a confidential
treatment request filed with the Securities and Exchange
Commission.]
10.85 x Copy of Second Amendment dated June 15, 1998 to New
Participation Agreement dated April 6, 1998 among Big
Rivers Electric Corporation. LG&E Energy Marketing Inc.,
Western Kentucky Leasing Corp., WKE Station Two Inc. and
Western Kentucky Energy Corp. [Certain portions of this
exhibit have been omitted pursuant to a confidential
treatment request filed with the Securities and Exchange
Commission.]
10.86 x Copy of Third Amendment dated July 15, 1998 to New
Participation Agreement dated April 6, 1998 among Big
Rivers Electric Corporation. LG&E Energy Marketing Inc.,
Western Kentucky Leasing Corp., WKE Station Two Inc. and
Western Kentucky Energy Corp. [Certain portions of this
exhibit have been omitted pursuant to a confidential
treatment request filed with the Securities and Exchange
Commission.]
10.87 x Copy of Form of Lease and Operating Agreement Between
Western Kentucky Energy Corp. and Big Rivers Electric
Corporation
</TABLE>
191
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
dated July 15, 1998. [Certain portions of this
exhibit have been omitted pursuant to a confidential
treatment request filed with the Securities and Exchange
Commission.]
10.88 x Copy of Power Purchase Agreement Between Big Rivers
Electric Corporation and LG&E Energy Marketing Inc. dated
July 15, 1998. [Certain portions of this exhibit have
been omitted pursuant to a confidential treatment request
filed with the Securities and Exchange Commission.]
10.89 x Copy of Agreement and Amendments to Agreements By and
Among City of Henderson, Kentucky, City of Henderson
Utility Commission, Big Rivers Electric Corporation, WKE
Station Two Inc., LG&E Energy Marketing Inc., and Western
Kentucky Energy Corp. dated July 15, 1998.
10.90 x x x * Copy of Amendment to LG&E Energy's Supplemental
Executive Retirement Plan, effective September 2, 1998.
10.91 x x x * Copy of Amendment effective September 2, 1998 to
Supplemental Executive Retirement Plan for R. W. Hale
effective June 1, 1989.
10.92 x Copy of Terms Agreement among LG&E Capital Corp., LG&E
Energy Corp., Morgan Stanley & Co. Incorporated, Chase
Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc. dated October
29, 1998.
12 x x Computation of Ratio of Earnings to Fixed Charges for LG&E
and KU.
21 x x x Subsidiaries of the Registrant.
23.01 x Consent of Independent Public Accountants for LG&E Energy
Corp.
23.02 x Consent of Independent Public Accountants for LG&E.
23.03 x Consent of Independent Public Accountants for KU.
24 x x x Power of Attorney.
27 x x x Financial Data Schedules for LG&E Energy Corp., LG&E and
KU.
</TABLE>
192
<PAGE>
<TABLE>
<CAPTION>
Applicable
to Form 10-K of
Exhibit LG&E
No. Energy LG&E KU Description
- ------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
99.01 x x x Cautionary Statement for purposes of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act
of 1995.
99.02 x Description of Common Stock.
99.03 x Director and Officer Information.
</TABLE>
(b) Executive Compensation Plans and Arrangements:
Exhibits preceded by an asterisk ("*") above are management contracts,
compensation plans or arrangements required to be filed as an exhibit
pursuant to Item 14(c) of Form 10-K.
(c) Reports on Form 8-K:
On October 2, 1998, the Company filed a report on Form 8-K announcing
that Michael R. Whitley, Vice Chairman of the Board of Directors,
President and Chief Operating Officer of LG&E Energy Corp. announced his
retirement, effective November 1, 1998. Mr. Whitley also retired from the
positions of Vice Chairman of the Board of Directors and Chief Operating
Officer of Louisville Gas and Electric Company and Kentucky Utilities
Company, two public utility subsidiaries of the Company.
On October 21, 1998, the Company filed a report on Form 8-K containing
management's discussion and analysis and consolidated financial
statements of the Company as of December 31, 1997. The Company filed this
report in connection with the May 4, 1998, merger of KU Energy
Corporation and LG&E Energy Corp.
On December 21, 1998, the Company filed a report on Form 8-K announcing
that LG&E Energy Corp. noted the recent decision of the Kentucky Supreme
Court regarding the environmental cost recovery mechanism allowing its
subsidiaries, Kentucky Utilities Company and Louisville Gas and Electric
Company, to recover certain costs associated with environmental
compliance and requiring certain refunds.
On February 11, 1999, the Company filed a report on Form 8-K announcing
that it had realigned its management structure to support its strategy of
aggressively growing the company as the energy services industry moves
toward deregulation.
On March 23, 1999, the Company filed a report on Form 8-K announcing that
on March 15, 1999, LG&E-Westmoreland Rensselaer, a California general
partnership in which LG&E Energy owns a 50% interest, completed the sale
of substantially all the assets and major contracts of its 79 MW
gas-fired cogeneration facility in Rensselaer, New York to Fulton
Cogeneration Associates, L.P., an affiliate of The Coastal Corporation.
(d) The following instruments defining the rights of holders of certain long-
term debt of KU have not been filed with the Securities and Exchange
Commission but will be furnished to the Commission upon request.
193
<PAGE>
1. Loan Agreement dated as of May 1, 1990 between KU and the County of
Mercer, Kentucky, in connection with $12,900,000 County of Mercer,
Kentucky, Collateralized Solid Waste Disposal Facility Revenue Bonds
(KU Project) 1990 Series A, due May 1, 2010 and May 1, 2020.
2. Loan Agreement dated as of May 1, 1991 between KU and the County of
Carroll, Kentucky, in connection with $96,000,000 County of Carroll,
Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project)
1992 Series A, due September 15, 2016.
3. Loan Agreement dated as of August 1, 1992 between KU and the County
of Carroll, Kentucky, in connection with $2,400,000 County of
Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU
Project) 1992 Series C, due February 1, 2018.
4. Loan Agreement dated as of August 1, 1992 between KU and the County
of Muhlenberg, Kentucky, in connection with $7,200,000 County of
Muhlenberg, Kentucky, Collateralized Pollution Control Revenue Bonds
(KU Project) 1992 Series A, due February 1, 2018.
5. Loan Agreement dated as of August 1, 1992 between KU and the County
of Mercer, Kentucky, in connection with $7,400,000 County of Mercer,
Kentucky, Collateralized Pollution Control Revenue Bonds (KU Project)
1992 Series A, due February 1, 2018.
6. Loan Agreement dated as of August 1, 1992 between KU and the County
of Carroll, Kentucky, in connection with $20,930,000 County of
Carroll, Kentucky, Collateralized Pollution Control Revenue Bonds (KU
Project) 1992 Series B, due February 1, 2018.
7. Loan Agreement dated as of December 1, 1993, between KU and the
County of Carroll, Kentucky, in connection with $50,000,000 County of
Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities
Revenue Bonds (KU Project) 1993 Series A, due December 1, 2023.
8. Loan Agreement dated as of November 1, 1994, between KU and the
County of Carroll, Kentucky, in connection with $54,000,000 County of
Carroll, Kentucky, Collateralized Solid Waste Disposal Facilities
Revenue Bonds (KU Project) 1994 Series A, due November 1, 2024.
194
<PAGE>
Schedule II
LG&E Energy Corp. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 1998
(Thousands of $)
<TABLE>
<CAPTION>
(b)
(a) Accumulated
Other Accounts Discon- Deferred
Property Receivable tinued Income Taxes
and (Uncollectible Operations (NOL Carry-
Investments Accounts) Reserve Forwards)
----------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Balance December 31, 1995 $ 8,785 $ 6,724 $ - $29,501
Additions:
Charged to costs and expenses 11,019 4,840 - -
Other additions 641 616 - -
Deductions:
Net charges of nature for which
reserves were created - 5,059 - -
Other deductions 1,479 - - 3,900
--------- --------- ---------- --------
Balance December 31, 1996 18,966 7,121 - 25,601
Additions:
Charged to costs and expenses 11,875 5,356 - -
Other additions 7,570 1,997 - -
Deductions:
Net charges of nature for which
reserves were created 354 4,212 - -
Other deductions - 75 - -
--------- --------- ---------- --------
Balance December 31, 1997 38,057 10,187 - 25,601
Additions:
Charged to costs and expenses 23,791 4,770 225,000 -
Other additions 1,750 248 - -
Deductions:
Net charges of nature for which
reserves were created 11,399 4,648 105,619 -
Other deductions 108 25 -
--------- --------- ---------- --------
Balance December 31, 1998 $52,091 $10,532 $119,381 $25,601
--------- --------- ---------- --------
--------- --------- ---------- --------
</TABLE>
(a) Amounts presented are after tax.
(b) Partially offsets a deferred tax debit included in net assets of
discontinued operations. The debit represents net operating loss
carryforwards available from a previous acquisition.
195
<PAGE>
Schedule II
Louisville Gas and Electric Company
Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 1998
(Thousands of $)
<TABLE>
<CAPTION>
Other Accounts
Property Receivable
and (Uncollectible
Investments Accounts)
----------- --------------
<S> <C> <C>
Balance December 31, 1995 $ 63 $ 1,360
Additions:
Charged to costs and expenses - 2,600
Deductions:
Net charges of nature for which
reserves were created - 2,490
-------- --------
Balance December 31, 1996 63 1,470
Additions:
Charged to costs and expenses - 2,300
Deductions:
Net charges of nature for which
reserves were created - 2,475
-------- --------
Balance December 31, 1997 63 1,295
Additions:
Charged to costs and expenses - 2,300
Deductions:
Net charges of nature for which
reserves were created - 2,196
-------- --------
Balance December 31, 1998 $ 63 $ 1,399
-------- --------
-------- --------
</TABLE>
196
<PAGE>
Schedule II
Kentucky Utilities Company
Schedule II - Valuation and Qualifying Accounts
For the Three Years Ended December 31, 1998
(Thousands of $)
<TABLE>
<CAPTION>
Other Accounts
Property Receivable
and (Uncollectible
Investments Accounts)
----------- --------------
<S> <C> <C>
Balance December 31, 1995 $ 178 $ 455
Additions:
Charged to costs and expenses 85 1,900
Deductions:
Net charges of nature for which
reserves were created - 1,835
------- -------
Balance December 31, 1996 263 520
Additions:
Charged to costs and expenses 82 1,374
Deductions:
Net charges of nature for which
reserves were created - 1,374
------- -------
Balance December 31, 1997 345 520
Additions:
Charged to costs and expenses 231 1,308
Deductions:
Net charges of nature for which
reserves were created - 1,308
------- -------
Balance December 31, 1998 $ 576 $ 520
------- -------
------- -------
</TABLE>
197
<PAGE>
SIGNATURES - LG&E ENERGY CORP.
(First of Two Pages)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LG&E ENERGY CORP.
Registrant
March 31, 1999 /s/ R. Foster Duncan
- -------------- ------------------------------
(Date) R. Foster Duncan
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Roger W. Hale Chairman of the Board,
and Chief Executive
Officer (Principal
Executive Officer);
R. Foster Duncan Executive Vice President and
Chief Financial Officer
(Principal Financial Officer);
Michael D. Robinson Vice President and Controller
(Principal Accounting Officer);
Mira S. Ball Director;
William C. Ballard, Jr. Director;
Owsley Brown, II Director;
Carol M. Gatton Director;
Jeffery T. Grade Director;
J. David Grissom Director;
David B. Lewis Director;
Anne H. McNamara Director;
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
198
<PAGE>
SIGNATURES - LG&E ENERGY CORP.
(Second of Two Pages)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
T. Ballard Morton, Jr. Director;
Frank V. Ramsey, Jr. Director;
William L. Rouse, Jr. Director;
Charles L. Shearer, Ph.D. Director; and
Lee T. Todd, Jr., Ph.D. Director.
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
199
<PAGE>
SIGNATURES - LOUISVILLE GAS AND ELECTRIC COMPANY
(First of Two Pages)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LOUISVILLE GAS AND ELECTRIC COMPANY
Registrant
March 31, 1999 /s/ R. Foster Duncan
- -------------- --------------------
(Date) R. Foster Duncan
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Roger W. Hale Chairman of the Board
and Chief Executive
Officer (Principal
Executive Officer);
R. Foster Duncan Executive Vice President and
Chief Financial Officer
(Principal Financial Officer);
Michael D. Robinson Vice President and Controller
(Principal Accounting Officer);
Mira S. Ball Director;
William C. Ballard, Jr. Director;
Owsley Brown, II Director;
Gene P. Gardner Director;
Carol M. Gatton Director;
Jeffery T. Grade Director;
J. David Grissom Director;
David B. Lewis Director;
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
200
<PAGE>
SIGNATURES - LOUISVILLE GAS AND ELECTRIC COMPANY
(Second of Two Pages)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Anne H. McNamara Director;
T. Ballard Morton, Jr. Director;
Frank V. Ramsey, Jr. Director;
William L. Rouse, Jr. Director;
Charles L. Shearer, Ph.D. Director;
Dr. Donald C. Swain Director; and
Lee T. Todd, Jr., Ph.D. Director.
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
201
<PAGE>
SIGNATURES - KENTUCKY UTILITIES COMPANY
(First of Two Pages)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KENTUCKY UTILITIES COMPANY
Registrant
March 31, 1999 /s/ R. Foster Duncan
- -------------- --------------------
(Date) R. Foster Duncan
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Roger W. Hale Chairman of the Board
and Chief Executive
Officer (Principal
Executive Officer);
R. Foster Duncan Executive Vice President and
Chief Financial Officer
(Principal Financial Officer);
Michael D. Robinson Vice President and Controller
(Principal Accounting Officer);
Mira S. Ball Director;
William C. Ballard, Jr. Director;
Owsley Brown, II Director;
Carol M. Gatton Director;
Jeffery T. Grade Director;
J. David Grissom Director;
David B. Lewis Director;
Anne H. McNamara Director;
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
202
<PAGE>
SIGNATURES - KENTUCKY UTILITIES COMPANY
(Second of Two Pages)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
T. Ballard Morton, Jr. Director;
Frank V. Ramsey, Jr. Director;
William L. Rouse, Jr. Director;
Charles L. Shearer, Ph.D. Director; and
Lee T. Todd, Jr., Ph.D. Director.
By /s/ R. Foster Duncan March 31, 1999
--------------------
R. Foster Duncan
(Attorney-In-Fact)
</TABLE>
203
<PAGE>
LOUISVILLE GAS AND ELECTRIC COMPANY
By-Laws Adopted November 7, 1956
As Amended Through May 4, 1998
Article I.
Meetings of Stockholders
Section 1. The Annual Meeting of the stockholders of the Company shall be held
at a location in or out of Kentucky at a time and date to be fixed by the Board
of Directors each year. Notice of the annual meeting shall be mailed to each
stockholder entitled to notice at least ten (10) days before the Annual Meeting.
Section 2. Except as otherwise mandated by Kentucky law and except as otherwise
provided in or fixed by or pursuant to the provisions of Article Fourth of the
Company's Amended Articles of Incorporation relating to the rights of the
holders of any class or series of stock having a preference over the Company's
Common Stock as to dividends or upon liquidation to elect directors under
specified circumstances, special meetings of stockholders may be called only by
the President of the Company or by the Board of Directors pursuant to a
resolution approved by a majority of the entire Board of Directors. For purposes
of these By-Laws, the phrase "Company's Amended Articles of Incorporation" shall
mean the Amended Articles of Incorporation of Louisville Gas and Electric
Company as in effect on February 1, 1987, and as thereafter amended from time to
time.
Section 3. A stockholder may vote in person or by proxy, filed with the
Secretary of the Company before or immediately upon the convening of the
meeting.
Section 4. Any action required or permitted to be taken by the stockholders of
the Company at a meeting of such holders may be taken without such a meeting
only if a consent in writing setting forth the action so taken shall be signed
by all of the stockholders entitled to vote with respect to the subject matter
thereof.
Section 5. At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly be requested to
be brought before the meeting by a stockholder. For business to be properly
requested to be brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Company. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Company,
<PAGE>
not less than 90 days prior to the meeting; provided, however, that in the event
that the date of the meeting is not publicly announced by the Company by mail,
press release or otherwise more than 100 days prior to the meeting, notice by
the stockholder to be timely must be delivered to the Secretary of the Company
not later than the close of business on the tenth day following the day on which
such announcement of the date of the meeting was communicated to stockholders. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Company's books, of the stockholder proposing such business,
(c) the class and number of shares of the Company which are beneficially owned
by the stockholder, and (d) any material interest of the stockholder in such
business. Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at an annual meeting except in accordance with the procedures
set forth in this Section 5. The Chairman of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this Section 5, and if he should so determine, he shall so declare to the
meeting that any such business not properly brought before the meeting shall not
be transacted.
Article II.
Board of Directors
Section 1. (a) The number of directors of the Company shall be fixed from time
to time by the Board of Directors, but shall be no fewer than nine (9) and no
more than twenty (20). The Board of Directors may elect one of its members as
Chairman of the Board. Regular meetings of the Board of Directors shall be held
at such time and place as may be fixed by the Board of Directors. Except as
otherwise provided in or fixed by or pursuant to the provisions of Article
Fourth of the Company's Amended Articles of Incorporation relating to the rights
of the holders of any class or series of stock having a preference over the
Company's Common Stock as to dividends or upon liquidation to elect directors
under specified circumstances, the directors shall be classified, with respect
to the time for which they severally hold office, into three classes, as nearly
equal in number as possible, as determined by the Board of Directors, one class
to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1988, another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1989, and
another class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 1990, with each member of each class to hold
office until his successor is elected and qualified. At each annual meeting of
the stockholders of the Company and except as otherwise provided in or fixed by
or pursuant to the provisions of Article Fourth of the Company's Amended
Articles of Incorporation relating to the rights of the holders of any class or
series of stock having a preference over the Company's Common Stock as to
dividends or upon liquidation to elect directors under specified circumstances,
the successors of the class of directors whose term expires at that meeting
shall be elected to hold office for a term expiring at the annual meeting of
stockholders held in the third year following the year of their election.
2
<PAGE>
(b) Advance notice of stockholder nominations for the election of
directors shall be given in the manner provided in Section 2 of Article IV of
these By-Laws.
(c) Except as otherwise provided in or fixed by or pursuant to the
provisions of Article Fourth of the Company's Amended Articles of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Company's Common Stock as to dividends or upon liquidation
to elect directors under specified circumstances: (i) newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors; (ii) any director elected in accordance with
the preceding clause (i) shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor shall have been elected and
qualified; and (iii) no decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
(d) Except as otherwise provided in or fixed by or pursuant to the
provisions of Article Fourth of the Company's Amended Articles of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Company's Common Stock as to dividends or upon liquidation
to elect directors under specified circumstances, any director may be removed
from office, with or without cause, only by the affirmative vote of the holders
of at least 80% of the combined voting power of the then outstanding shares of
the Company's stock entitled to vote generally (as defined in Article Eighth of
the Company's Amended Articles of Incorporation), voting together as a single
class. Notwithstanding the foregoing provisions of this Paragraph (d), if at any
time any stockholders of the Company have cumulative voting rights with respect
to the election of directors and less than the entire Board of Directors is to
be removed, no director may be removed from office if the votes cast against his
removal would be sufficient to elect him as a director if then cumulatively
voted at an election of the class of directors of which he is a part.
Section 2. Regular Meetings shall be held at such time and place as may be fixed
by the Board of Directors.
Section 3. Special Meetings of the Board of Directors shall be held at the call
of the Chairman or of the President, or, in their absence, of a Vice President,
or at the request in writing of not less than three (3) members of the Board.
Section 4. Regular and Special Meetings may be held outside of the State of
Kentucky.
Section 5. Notices of Regular and Special Meetings shall be sent to each
director at least one (1) day prior to the meeting.
Section 6. The business and affairs of the Company shall be managed by or under
the direction of the Board of Directors, except as may be otherwise provided by
law or by the Company's Amended Articles of Incorporation. Unless otherwise
provided by law, at each meeting of the Board of Directors, the presence of a
majority of the total number of directors
3
<PAGE>
shall constitute a quorum for the transaction of business. Except as provided in
Section l(c) of this Article II, the vote of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the Board of
Directors. In case at any meeting of the Board of Directors a quorum shall not
be present, the members of the Board of Directors present may by majority vote
adjourn the meeting from time to time until a quorum shall attend.
Section 7. Directors may receive such fees or compensation for their services as
may be authorized by resolution of the Board of Directors. In addition, expenses
of attendance, if any, may be allowed for attendance at each regular or special
meeting.
Section 8. The Board of Directors, by resolution adopted by a majority of the
full Board of Directors, may designate from among its members an executive
committee and one or more other committees each of which, to the extent provided
in such resolution, shall have and exercise all the authority of the Board of
Directors, but no such committee shall have the authority to take action that
under Kentucky law can only be taken by a board of directors.
Article III.
Officers
Section 1. The officers of the Company shall be a Chief Executive Officer,
President, Chief Financial Officer, one or more Vice Presidents, Secretary,
Treasurer, Controller and such other officers (including, if so directed by a
resolution of the Board of Directors, Chairman of the Board) as the Board may
from time to time elect or appoint. Any two of the offices may be combined in
one person, but no officer shall execute, acknowledge, or verify any instrument
in more than one capacity. Officers are to be elected by the Board of Directors
of the Company at the first meeting of the Board following the annual meeting of
stockholders and, unless otherwise specified by the Board of Directors, shall be
elected to hold office for one year or until their successors are elected and
qualified. Any vacancy shall be filled by the Board of Directors, provided that
the Chief Executive Officer may fill such a vacancy until the Board of Directors
shall elect a successor. Except as provided below, officers shall perform those
duties usually incident to the office or as otherwise required by the Board of
Directors, the Chief Executive Officer, or the officer to whom they report. An
officer may be removed with or without cause and at any time by the Board of
Directors or by the Chief Executive Officer.
Chief Executive Officer
Section 2. The Chief Executive Officer of the Company shall have full charge of
all of the affairs of the Company, shall preside at all meetings of the
stockholders and, in the absence of the Chairman of the Board, at meetings of
the Board of Directors.
President
Section 3. The President shall exercise the functions of the Chief Executive
Officer during the absence or disability of the Chief Executive Officer.
4
<PAGE>
Chief Financial Officer
Section 4. The Chief Financial Officer of the Company shall have full charge of
all of the financial affairs of the Company, including maintaining accurate
books and records, meeting all reporting requirements and controlling Company
funds.
Vice Presidents
Section 5. The Vice President or Vice Presidents may be designated as Vice
President, Senior Vice President or Executive Vice President, as the Board of
Directors or Chief Executive Officer may determine.
Secretary
Section 6. The Secretary shall be present at and record the proceedings of all
meetings of the Board of Directors and of the stockholders, give notices of
meetings of Directors and stockholders, have custody of the seal of the Company
and affix it to any instrument requiring the same, and shall have the power to
sign certificates for shares of stock of the Company.
Treasurer
Section 7. The Treasurer shall have charge of all receipts and disbursements of
the Company and be custodian of the Company's funds.
Controller
Section 8. The Controller shall have charge of the accounting records of the
Company.
Chairman of the Board
Section 9. In the event the Board of Directors elects a Chairman of the Board
and designates by resolution that the Chairman of the Board shall be an officer
of the corporation, the Chairman of the Board shall preside at all meetings of
the Board of Directors and serve the corporation in an advisory capacity.
Article IV.
Capital Stock Certificates and Director Nominations
Section 1. The Board of Directors shall approve all stock certificates as to
form. The certificates for the various classes of stock, issued by the Company,
shall be printed or engraved with the facsimile signatures of the President and
Secretary and a facsimile seal of the Company. The Board of Directors shall
appoint transfer agents to issue and transfer certificates of stock, and
registrars to register said certificates.
5
<PAGE>
Section 2. Except as otherwise provided in or fixed by or pursuant to the
provisions of Article Fourth of the Company's Amended Articles of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Company's Common Stock as to dividends or upon liquidation
to elect directors under specified circumstances, nominations for the election
of directors may be made by the Board of Directors or a committee appointed by
the Board of Directors or by any stockholder entitled to vote in the election of
directors generally. However, any stockholder entitled to vote in the election
of directors generally may nominate one or more persons for election as director
or directors at a stockholders' meeting only if written notice of such
stockholder's intent to make such nomination or nominations has been given
either by personal delivery or by United States mail, postage prepaid, to the
Secretary of the Company not later than 90 days in advance of such meeting;
provided, however, that in the event the date of the meeting is not publicly
announced by the Company by mail, press release or otherwise more than 100 days
prior to the meeting, notice by the stockholder to be timely must be delivered
not later than the close of business on the tenth day following the date on
which notice of such meeting was first communicated to stockholders. Each such
notice shall set forth (a) the name and address of the stockholder who intends
to make the nomination and of the person or persons to be nominated; (b) a
representation that the stockholder is a holder of record of stock of the
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to nominate the person or persons specified in the notice;
(c) a description of all arrangements or understandings between the stockholder
and each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
stockholder; (d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (e) the consent of each nominee to serve as a director of the Company if so
elected. The Chairman of the meeting may refuse to acknowledge the nomination of
any person not made in compliance with the foregoing procedure.
Article V.
Lost Stock Certificates
The Board of Directors may, in its discretion, direct that a new
certificate or certificates of stock be issued in place of any certificate or
certificates of stock theretofore issued by the Company, alleged to have been
stolen, lost or destroyed, and the Board of Directors when authorizing the
issuance of such new certificate or certificates may, in its discretion, and as
a condition precedent thereto, require the owner of such stolen, lost or
destroyed certificate or certificates or the legal representatives of such
owner, to give to the Company, its transfer agent or agents, its registrar or
registrars, as may be authorized or required to sign and countersign such new
certificate or certificates, a corporate surety bond in such sum as it may
direct as indemnity against any claim or claims that may be made against the
Company, its transfer agent or agents, its registrar or registrars, for or in
respect to the shares of stock represented by the certificate or certificates
alleged to have been stolen, lost or destroyed.
6
<PAGE>
Article VI.
Dividends on Preferred Stock
Dividends upon the 5% Cumulative Preferred Stock, $25 Par value, if
declared, shall be payable on January 15, April 15, July 15 and October 15 of
each year. If the date herein designated for the payment of any dividend shall,
in any year, fall upon a legal holiday, then the dividend payable on such date
shall be paid on the next day not a legal holiday.
Dividends in respect of each share of $8.90 Cumulative Preferred Stock
(without par value) of the Company shall be payable on October 16, 1978, when
and as declared by the Board of Directors of the Company, to holders of record
on September 29, 1978, and shall accrue from the date of original issuance of
said series. Thereafter, such dividends shall be payable on January 15, April
15, July 15, and October 15 in each year (or the next business day thereafter in
each case), when and as declared by the Board of Directors of the Company, for
the quarter-yearly period ending on the last business day of the preceding
month.
Dividends in respect of each share of Preferred Stock, Auction Series A
(without par value), of the Company shall be payable when and as declared by the
Board of Directors of the Company, on the dates and in the manner set forth in
the Amendment to the Articles of Incorporation of the Company setting forth the
terms of such series.
Dividends in respect of each share of $5.875 Cumulative Preferred Stock,
of the Company shall be payable when and as declared by the Board of Directors
of the Company, on the dates and in the manner set forth in the Amendment to the
Articles of Incorporation of the Company setting forth the terms of such series.
Article VII.
Finance
Section 1. The Board of Directors shall designate the bank or banks to be used
as depositories of the funds of the Company and shall designate the officers and
employees of the Company who may sign and countersign checks drawn against the
various accounts of the Company. The Board of Directors may authorize the use of
facsimile signatures on checks drawn against certain bank accounts of the
Company.
Section 2. Notes shall be signed by the President and either a Vice President or
the Treasurer. In the absence of the President, notes shall be signed by two
Vice Presidents, or a Vice President and the Treasurer.
7
<PAGE>
Article VIII.
Seal
The seal of this Company shall be in the form of a circular disk, bearing
the following information:
( Louisville Gas and Electric Company )
( Incorporated Under the Laws of )
( Kentucky )
( Seal )
( 1913 )
Article IX.
Amendments
Subject to the provisions of the Company's Amended Articles of
Incorporation, these By-Laws may be amended or repealed at any regular meeting
of the stockholders (or at any special meeting thereof duly called for that
purpose) by the holders of at least a majority of the voting power of the shares
represented and entitled to vote thereon at such meeting at which a quorum is
present; provided that in the notice of such special meeting notice of such
purpose shall be given. Subject to the laws of the State of Kentucky, the
Company's Amended Articles of Incorporation and these By-Laws, the Board of
Directors may by majority vote of those present at any meeting at which a quorum
is present amend these By-Laws, or adopt such other By-Laws as in their judgment
may be advisable for the regulation of the conduct of the affairs of the
Company.
Article X.
Indemnification
Section 1. Right to Indemnification. Each person who was or is a director of the
Company and who was or is made a party or is threatened to be made a party to or
is otherwise involved (including, without limitation, as a witness) in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Company or is or was serving at the
request of the Company as a director, officer, partner, trustee, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnified Director"), whether the basis of such proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Company to the fullest extent permitted by the Kentucky Business
Corporation Act, as the same exists or may hereafter be amended, against all
expense, liability and loss (including, without limitation, attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) reasonably
8
<PAGE>
incurred or suffered by such Indemnified Director in connection therewith and
such indemnification shall continue as to an Indemnified Director who has ceased
to be a director or officer and shall inure to the benefit of the Indemnified
Director's heirs, executors and administrators. Each person who was or is an
officer of the Company and not a director of the Company and who was or is made
a party or is threatened to be made a party to or is otherwise involved
(including, without limitation, as a witness) in any proceeding, by reason of
the fact that he or she is or was an officer of the Company or is or was serving
at the request of the Company as a director, officer, partner, trustee, employee
or agent of another corporation or of a partnership, joint venture, trust or
other enterprise, including service with respect to an employee benefit plan
(hereinafter an "Indemnified Officer"), whether the basis of such proceeding is
alleged action in an official capacity as an officer or in any other capacity
while serving as an officer, shall be indemnified and held harmless by the
Company against all expense, liability and loss (including, without limitation,
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such Indemnified Officer
to the same extent and under the same conditions that the Company must indemnify
an Indemnified Director pursuant to the immediately preceding sentence and to
such further extent as is not contrary to public policy and such indemnification
shall continue as to an Indemnified Officer who has ceased to be an officer and
shall inure to the benefit of the Indemnified Officer's heirs, executors and
administrators. Notwithstanding the foregoing and except as provided in Section
2 of this Article X with respect to proceedings to enforce rights to
indemnification, the Company shall indemnify any Indemnified Director or
Indemnified Officer in connection with a proceeding (or part thereof) initiated
by such Indemnified Director or Indemnified Officer only if such proceeding (or
part thereof) was authorized by the Board of Directors of the Company. As
hereinafter used in this Article X, the term "indemnitee" means any Indemnified
Director or Indemnified Officer. Any person who is or was a director or officer
of a subsidiary of the Company shall be deemed to be serving in such capacity at
the request of the Company for purposes of this Article X. The right to
indemnification conferred in this Article shall include the right to be paid by
the Company the expenses incurred in defending any such proceeding in advance of
its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Kentucky Business Corporation Act requires, an advancement
of expenses incurred by an indemnitee who at the time of receiving such advance
is a director of the Company shall be made only upon: (i) delivery to the
Company of an undertaking (hereinafter an "undertaking"), by or on behalf of
such indemnitee, to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal (hereinafter, a "final adjudication") that such indemnitee is not
entitled to be indemnified for such expenses under this Article or otherwise;
(ii) delivery to the Company of a written affirmation of the indemnitee's good
faith belief that he has met the standard of conduct that makes indemnification
by the Company permissible under the Kentucky Business Corporation Act; and
(iii) a determination that the facts then known to those making the
determination would not preclude indemnification under the Kentucky Business
Corporation Act. The right to indemnification and advancement of expenses
incurred in this Section 1 shall be a contract right.
Section 2. Right of Indemnitee to Bring Suit. If a claim under Section 1 of this
Article X is not paid in full by the Company within sixty days after a written
claim has been received by the Company (except in the case of a claim for an
advancement of expenses, in which case the
9
<PAGE>
applicable period shall be twenty days), the indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim. If successful in whole or in part to any such suit or in a suit brought
by the Company to recover an advancement of expenses pursuant to the terms of an
undertaking, the indemnitee also shall be entitled to be paid the expense of
prosecuting or defending such suit. In (i) any suit brought by the indemnitee to
enforce a right to indemnification hereunder (other than a suit to enforce a
right to an advancement of expenses brought by an indemnitee who will not be a
director of the Company at the time such advance is made) it shall be a defense
that, and in (ii) any suit by the Company to recover an advancement of expenses
pursuant to the terms of an undertaking the Company shall be entitled to recover
such expenses upon a final adjudication that, the indemnitee has not met the
standard of conduct that makes it permissible hereunder or under the Kentucky
Business Corporation Act (the "applicable standard of conduct") for the Company
to indemnify the indemnitee for the amount claimed. Neither the failure of the
Company (including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct, nor an actual
determination by the Company (including its Board of Directors, independent
legal counsel or its stockholders) that the indemnitee has not met the
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Company to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Article X or otherwise shall be on the Company.
Section 3. Non-Exclusivity of Rights. The rights to indemnification and to the
advancement of expenses conferred in this Article X shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Company's Articles of Incorporation, these By-Laws, any agreement,
any vote of stockholders or disinterested directors or otherwise.
Section 4. Insurance. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss under
the Kentucky Business Corporation Act.
Section 5. Indemnification of Employees and Agents. The Company may, to the
extent authorized from time to time by the Board of Directors, grant rights to
indemnification and to the advancement of expenses to any employee or agent of
the Company and to any person serving at the request of the Company as an agent
or employee of another corporation or of a partnership, joint venture, trust or
other enterprise to the fullest extent of the provisions of this Article X with
respect to the indemnification and advancement of expenses of directors and
officers of the Company.
10
<PAGE>
Section 6. Repeal or Modification. Any repeal or modification of any provision
of this Article X shall not adversely affect any rights to indemnification and
to advancement of expenses that any person may have at the time of such repeal
or modification with respect to any acts or omissions occurring prior to such
repeal or modification.
Section 7. Severability. In case any one or more of the provisions of this
Article X, or any application thereof, shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions of this Article X, and any other application thereof, shall
not in any way be affected or impaired thereby.
11
<PAGE>
BY-LAWS
OF
KENTUCKY UTILITIES COMPANY
Dated April 28, 1998
<PAGE>
BY-LAWS
OF
KENTUCKY UTILITIES COMPANY
ARTICLE I
STOCK TRANSFERS
Section 1. Each holder of fully paid stock shall be entitled to a
certificate or certificates of stock stating the number and the class of shares
owned by such holder, provided that, the Board of Directors may, by resolution,
authorize the issue of some or all of the shares of any or all classes or series
of stock without certificates. All certificates of stock shall, at the time of
their issuance, be signed by the Chairman of the Board, the President or a
Vice-President and by the Secretary or Assistant Secretary, and may be
authenticated and registered by a duly appointed registrar. If the stock
certificate is authenticated by a registrar, the signatures of the corporate
officers may be facsimiles. In case any officer designated for the purpose who
has signed or whose facsimile signature has been used on any stock certificate
shall, from any cause, cease to be such officer before the certificate has been
delivered by the Company, the certificate may nevertheless be adopted by the
Company and be issued and delivered as though the person had not ceased to be
such officer.
Section 2. Shares of stock shall be transferable only on the books
of the Company and upon proper endorsement and surrender of the outstanding
certificates representing the same. If any outstanding certificate of stock
shall be lost, destroyed or stolen, the officers of the Company shall have
authority to cause a new certificate to be issued to replace such certificate
upon the receipt by the Company of satisfactory evidence that such certificate
has been lost, destroyed or stolen and of a bond of indemnity deemed sufficient
by the officers to protect the Company and any registrar and any transfer agent
of the Company against loss which may be sustained by reason of issuing such new
certificate to replace the certificate reported lost, destroyed or stolen; and
any transfer agent of the Company shall be authorized to issue and deliver such
new certificate and any registrar of the Company is authorized to register such
new certificate, upon written directions signed by the Chairman of the Board,
the President or a Vice-President and by the Treasurer or the Secretary of the
Company.
Section 3. All certificates representing each class of stock shall be
numbered and a record of each certificate shall be kept showing the name of the
person to whom the
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certificate was issued with the number and the class of shares and the date
thereof. All certificates exchanged or returned to the Company shall be
cancelled and an appropriate record made.
Section 4. The Board of Directors may fix a date not exceeding
seventy days preceding the date of any meeting of shareholders, or the date
fixed for the payment of any dividend or distribution, or the date of allotment
of rights, or, subject to contract rights with respect thereto, the date when
any change or conversion or exchange of shares shall be made or go into effect,
as a record date for the determination of the shareholders entitled to notice of
and to vote at any such meeting, or entitled to receive payment of any such
dividend, or allotment of rights, or to exercise the rights with respect to any
such change, conversion or exchange of shares, and in such case only
shareholders of record on the date so fixed shall be entitled to notice of and
to vote at such meeting, or to receive payment of such dividend or allotment of
rights or to exercise such rights, as the case may be, notwithstanding any
transfer of shares on the books of the Company after the record date fixed as
aforesaid. The Board of Directors may close the books of the Company against
transfer of shares during the whole or any part of such period. When a
determination of shareholders entitled to notice of and to vote at any meeting
of shareholders has been made as provided in this section, such determination
shall apply to any adjournment thereof except as otherwise provided by statute.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. An Annual Meeting of Stockholders of the Company shall be
held at such date and time as shall be designated from time to time by the Board
of Directors. Each such Annual Meeting shall be held at the principal office of
the Company in Kentucky or at such other place as the Board of Directors may
designate from time to time.
Section 2. Special meetings of the stockholders may be called by the
Board of Directors or by the holders of not less than 51% of all the votes
entitled to be cast on each issue proposed to be considered at the special
meeting, or in such other manner as may be provided by statute. Business
transacted at special meetings shall be confined to the purposes stated in the
notice of meeting.
Section 3. Notice of the time and place of each annual or special
meeting of stockholders shall be sent by mail to the recorded address of each
stockholder entitled to vote not less than ten or more than sixty days before
the date of the meeting, except in cases where other special method of notice
may be required by statute, in which case the statutory
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method shall be followed. The notice of special meeting shall state the object
of the meeting. Notice of any meeting of the stockholders may be waived by any
stockholder.
Section 4. At an Annual Meeting of the Stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting in accordance with the procedures set forth in these By-laws. To be
properly brought before the Annual Meeting, business must be (a) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (b) otherwise properly brought before the meeting by
or at the direction of the Board of Directors, or (c) otherwise be a proper
matter for consideration and otherwise be properly requested to be brought
before the meeting by a stockholder as hereinafter provided. For business to be
properly requested to be brought before an Annual Meeting by a stockholder, a
stockholder of a class of shares of the Company entitled to vote upon the matter
requested to be brought before the meeting (or his designated proxy as provided
below) must have given timely and proper notice thereof to the Secretary. To be
timely, a stockholder's notice must be given by personal delivery or mailed by
United States mail, postage prepaid, and received by the Secretary not fewer
than sixty calendar days prior to the meeting; provided, however, that in the
event that the date of the meeting is not publicly announced by mail, press
release or otherwise or disclosed in a public report, information statement, or
other filing made with the Securities and Exchange Commission, in either case,
at least seventy calendar days prior to the meeting, notice by the stockholder
to be timely must be received by the Secretary, as provided above, not later
than the close of business on the tenth day following the day on which such
notice of the date of the meeting or such public disclosure or filing was made.
To be proper, a stockholder's notice to the Secretary must be in writing and
must set forth as to each matter the stockholder proposes to bring before the
Annual Meeting (a) a description in reasonable detail of the business desired to
be brought before the Annual Meeting and the reasons for conducting such
business at the Annual Meeting, (b) the name and address, as they appear on the
Company books, of the stockholder proposing such business or granting a proxy to
the proponent or an intermediary, (c) a representation that the stockholder is a
holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice, (d) the name and address of the proponent, if
the holder of a proxy from a qualified stockholder of record, and the names and
addresses of any intermediate proxies, (e) the class and number of shares of the
Company which are beneficially owned by the stockholder, and (f) any material
interest of the stockholder or the proponent in such business. The chairman of
an Annual Meeting shall determine whether business was properly brought before
the meeting, which determination absent manifest error will be conclusive for
all purposes.
Section 5. The Chairman of the Board, if present, and in his absence
the President, and the Secretary of the Company, shall act as Chairman and
Secretary, respectively, at each stockholders meeting, unless otherwise provided
by the Board of Directors prior to the meeting. Unless otherwise determined by
the Board of Directors prior to the meeting, the Chairman of the stockholders'
meeting shall determine the order of
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business and shall have the authority in his discretion to regulate the conduct
of any such meeting, including, without limitation, by imposing restrictions on
the persons (other than stockholders of the Company or their duly appointed
proxies) who may attend any such stockholders' meeting, by determining whether
any stockholder or his proxy may be excluded from any stockholders' meeting
based upon any determination by the Chairman, in his sole discretion, that any
such person has unduly disrupted or is likely to disrupt the proceedings
thereat, and by regulating the circumstances in which any person may make a
statement or ask questions at any stockholders' meeting.
Section 6. The Company shall be entitled to treat the holder of
record of any share or shares as the holder in fact thereof and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such share on the part of any other person whether or not it shall have express
or other notice thereof, except as expressly provided by law.
Section 7. The Board of Directors may postpone and reschedule any
previously scheduled annual or special meeting of stockholders and may adjourn
any convened meeting of stockholders to another date and time as specified by
the chairman of the meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 1. The Board of Directors shall consist of no more than
fifteen and no less than nine members as determined from time to time by
resolution of the Board of Directors. Subject to the special rights of the
holders of shares of the Preferred Stock and the holders of shares of the
Preference Stock to elect Directors as specified in the Articles of
Incorporation, the Directors shall be divided into three groups, with each group
containing one-third of the total, as near as may be, to be elected and to serve
staggered terms as provided in the Articles of Incorporation of the Company.
Except as otherwise expressly provided by the Articles of Incorporation, the
Board of Directors may accept resignations of individual Directors and may fill,
until the first annual election thereafter and until the necessary election
shall have taken place, vacancies occurring at any time in the membership of the
Board by death, resignation or otherwise. Written notice of such resignation
shall be made as provided by law.
Section 2. Nominations for the election of directors may be made by
the Board of Directors or a committee appointed by the Board of Directors or by
any stockholder entitled to vote in the election of directors generally.
However, any stockholder entitled to vote in the election of directors generally
may nominate one or more persons for election as directors at a meeting only if
the stockholder has given timely and proper notice thereof to
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the Secretary. To be timely, a stockholder's notice must be given by personal
delivery or mailed by United States mail, postage prepaid, and received by the
Secretary not fewer than sixty calendar days or more than ninety calendar days
prior to the meeting; provided, however, that in the event that the date of the
meeting is not publicly announced by mail, press release or otherwise or
disclosed in a public report, information statement or other filing made with
the Securities and Exchange Commission, in either case, at least seventy
calendar days prior to the meeting, notice by the stockholder to be timely must
be so received by the Secretary, as provided above, not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting or such public disclosure or filing was made. To be proper, a
stockholder's notice of nomination to the Secretary must be in writing and must
set forth as to each nominee: (a) the name and address, as they appear on the
Company books, of the stockholder who intends to make the nomination or granting
a proxy to the proponent or an intermediary; (b) the name and address of the
person or persons to be nominated; (c) a representation that the stockholder is
a holder of record of stock of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (d) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (e) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission, had the nominee been nominated, or intended
to be nominated, by the Board of Directors, provided that (i) such information
does not in any way violate any applicable Securities and Exchange Commission
regulation, including regulations concerning public availability of information,
and (ii) any information withheld on such basis shall be provided by separate
notice at such time as would not be in violation of any applicable Securities
and Exchange Commission regulation, such notice to be a supplement to the notice
otherwise required herein; (f) the class and number of shares of the Company
which are beneficially owned by the stockholder; and (g) the signed consent of
each nominee to serve as a director of the Company if so elected.
Section 3. If the Chairman of the meeting for the election of
Directors determines that a nomination of any candidate for election as a
director at such meeting was not made in accordance with the applicable
provisions of these By-laws, such nomination shall be void.
Section 4. The Board of Directors may adopt such special rules and
regulations for the conduct of their meetings and the management of the affairs
of the Company as they may determine to be appropriate, not inconsistent with
law or these By-laws.
Section 5. A regular meeting of the Board of Directors shall be held
as soon as practicable after the annual meeting of stockholders in each year. In
addition, regular
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quarterly meetings of the Board may be held at the general offices of the
Company in Kentucky, or at such other place as shall be specified in the notice
of such meeting on the last Monday of January, July and October in each year.
Written notice of every regular meeting of the Board, stating the time of day at
which such meeting will be held, shall be given to each Director not less than
two days prior to the date of the meeting. Such notice may be given personally
in writing, or by telegraph or other written means of electronic communication,
or by depositing the same, properly addressed, in the mail.
Section 6. Special meetings of the Board may be called at any time
by the Chairman of the Board, or the President, or by a Vice-President when
acting as President, or by any two Directors. Notice of such meeting, stating
the place, day and hour of the meeting shall be given to each Director not less
than one day prior to the date of the meeting. Such notice may be given
personally in writing, or by telegraph or other written means of electronic
communication, or by depositing the same, properly addressed, in the mail.
Section 7. Notice of any meeting of the Board may be waived by any
Director.
Section 8. A majority of the Board of Directors shall constitute a
quorum for the transaction of business at any meeting of the board, but a less
number may adjourn the meeting to some other day or sine die. The Board of
Directors shall keep minutes of their proceedings at their meetings. The members
of the Board may be paid such fees or compensations for their services as
Directors as the Board, from time to time, by resolution, may determine.
ARTICLE IV
COMMITTEES
Section 1. The Board of Directors may, by resolution passed by a
majority of the whole Board, appoint an Executive Committee of not less than
three members of the Board, including the Chairman of the Board, if there be
one, and the President of the Company. The Executive Committee may make its own
rules of procedure and elect its Chairman, and shall meet where and as provided
by such rules, or by resolution of the Board of Directors. A majority of the
members of the Committee shall constitute a quorum for the transaction of
business. During the intervals between the meetings of the Board of Directors,
the Executive Committee shall have all the powers of the Board in the management
of the business and affairs of the Company except as limited by statute,
including power to authorize the seal of the Company to be affixed to all papers
which require it, and, by majority vote of all its members, may exercise any and
all such powers in such manner as such Committee shall deem best for the
interests of the Company, in all cases in which specific directions shall not
have been given by the Board of Directors. The Executive
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Committee shall keep regular minutes of its proceedings and report the same to
the Board at meetings thereof.
Section 2. The Board of Directors may appoint other committees,
standing or special, from time to time from among their own number, or
otherwise, and confer powers on such committees, and revoke such powers and
terminate the existence of such committees at its pleasure.
Section 3. Meetings of any committee may be called in such manner
and may be held at such times and places as such committee may by resolution
determine, provided that a meeting of any committee may be called at any time by
the Chairman of the Board or by the President. Notice of such meeting, stating
the place, day and hour of the meeting shall be given to each Director not less
than one day prior to the meeting. Such notice may be given personally in
writing, or by telegraph or other written means of electronic communication, or
by depositing the same, properly addressed, in the mail. Members of all
committees may be paid such fees for attendance at meetings as the Board of
Directors may determine.
ARTICLE V
OFFICERS
Section 1. There shall be elected by the Board of Directors in each
year, and if practicable at its first meeting after the annual election of
Directors, the following principal officers, namely: a President, one or more
Vice-Presidents (any one or more of whom may be designated Executive
Vice-President or Senior Vice-President), a Secretary, a Treasurer, and a
Controller; and the Board may provide for and elect a Chairman of the Board and
such other officers and prescribe such duties for them as in its judgment may,
from time to time, be required to conduct the business of the Company. If the
Board shall elect a Chairman of the Board, the Board may, but need not,
designate the Chairman of the Board as the chief executive officer of the
Company. In absence of the election of a Chairman of the Board or any such
designation, the President shall be the chief executive officer of the Company.
All references in the By-laws of the Company to a Vice-President or
Vice-Presidents shall include any Executive Vice-President and any Senior
Vice-President. All officers, unless sooner removed, shall hold their respective
offices until the first meeting of the Board of Directors after the next
succeeding annual election of Directors, and until their successors, willing to
serve, shall have been elected, but any officer may be removed from office at
the pleasure of the Board.
Section 2. The chief executive officer of the Company (whether the
Chairman of the Board or the President) shall have responsibility for the
general management and direction, subject to the approval of the Board of
Directors and of the Executive Committee,
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of the business of the Company, including the power to appoint and to remove and
discharge any and all agents and employees of the Company not elected or
appointed directly by the Board of Directors. He shall have such other power and
duties as usually devolve upon the chief executive officer of the corporation
and such further powers and duties as may from time to time be prescribed by the
Board of Directors.
Section 3. The Chairman of the Board, if there be one elected and
when present, shall preside at all meetings of the Board of Directors, and at
all meetings of the stockholders of the Company at which the stockholders shall
not choose some other person to preside. He shall be a member of the Executive
Committee, if there be one, and may attend any meeting of any committee of the
Board whether or not he is a member of such committee. The Chairman of the
Board, when requested so to do, shall give the President and the Board of
Directors of the Company the benefit of his advice and experience with respect
to the Company's affairs and, when not designated as the chief executive
officer, shall perform such other duties as may be delegated to him by the Board
of Directors.
Section 4. The President, when not designated as the chief executive
officer or when not acting as the chief executive officer, shall have such other
powers and duties as usually devolve upon the President of a corporation and
such further powers and duties as may from time to time be prescribed by the
Board of Directors or as may be delegated to him by the Chairman of the Board.
The President shall be a member of the Executive Committee, if there be one, and
may attend any meeting of any committee of the Board whether or not he is a
member of such committee. In the absence or inability of the Chairman of the
Board to act, if there be one elected, the powers and duties of the Chairman of
the Board (including those as chief executive officer if he shall have been
designated as such) shall temporarily devolve upon the President. The President
shall, unless a Chairman of the Board shall have been elected and present,
preside at all meetings of the Board of Directors and at all meetings of the
stockholders at which the stockholders shall not choose some other person to
preside. He may, with the approval of the Board of Directors, appoint, to aid
him in his duties, an assistant to be known as Assistant to the President, and
may assign to said Assistant such duties as he shall think advisable and as
shall not be inconsistent with the By-laws of the Company.
Section 5. Each of the Vice-Presidents shall have such powers and
duties as may be prescribed for him by the Board of Directors, or be delegated
to him by the Chairman of the Board or the President. In the absence or
inability of the President, or in case of his death, resignation or removal from
office, the powers and duties of the President shall temporarily devolve upon
such of the Vice-Presidents as the Board shall have designated or shall
designate for the purpose, and the officer so designated shall have and exercise
all powers and duties of the President during such absence or disability, or
until the vacancy in the office of President shall be filled.
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Section 6. The Secretary shall attend all meetings of the Board of
Directors and of the Executive Committee, shall keep a true and faithful record
thereof in proper books to be provided for that purpose, and shall have the
custody and care of the corporate seal, records, minutes and stock books of the
Company. He shall also act as Secretary of all stockholders' meetings, and keep
a record thereof, except as some other person may be selected as Secretary or as
may be prescribed for him by the Board or the Executive Committee.
Section 7. The Treasurer shall have charge of, and be responsible
for, the collection, receipt, custody and disbursement of the funds of the
Company, and shall deposit its funds in the name of the Company in such banks,
trust companies, or safety vaults as he shall select, subject to the approval of
the chief executive officer. He shall have the custody of such books, receipted
vouchers and other books and papers as in the practical business operations of
the Company shall naturally belong in the office or custody of the Treasurer, or
shall be placed in his custody by the Board of Directors, by the Executive
Committee, by the Chairman of the Board, by the President, or by any one of the
Vice-Presidents when acting as or on behalf of the President. He shall sign
checks, drafts and other papers providing for the payment of money by the
Company for approved purposes in the usual course of business, and shall have
such other powers and duties as are commonly incidental to the office of
Treasurer, or as may be prescribed for him by the Board or the Executive
Committee. He may be required to give bond to the Company for the faithful
discharge of his duties in such form and to such amount and with such sureties
as shall be determined by the Board of Directors.
Section 8. The Controller shall have general supervision over all
books and accounts of the Company relating to receipts and disbursements, and
shall arrange the form of all vouchers, accounts, reports and returns required
by the various departments. He shall examine the accounts of all officers and
employees from time to time, and as often as practicable, and shall see that
proper returns are made of all receipts from all sources, and that correct
vouchers are turned over to him for all disbursements for any purpose. All bills
for the previous month, properly made in detail and certified, shall be
submitted to him, and he shall audit and approve the same if found satisfactory
and correct, but he shall not approve or audit any voucher unless the charges
covered by the voucher have been previously approved through working order,
requisition or otherwise by the head of the department in which it originated or
unless he shall be otherwise satisfied of its propriety and correctness. He
shall have full access to all contracts, correspondence and other papers and
records of the Company relating to its business matters, and shall have the
custody of its account books, original contracts, and other papers relating to
the accounts of the Company, except such as in the practical business operations
of the Company shall naturally belong in the custody of the Treasurer, or shall
be placed in his custody by the Board of Directors, by the Executive Committee,
by the Chairman of the Board, by the President, or by one of the Vice-Presidents
when acting as or on behalf of the President. The Controller shall have such
other powers
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and duties as are commonly incidental to the office of Controller or as may be
prescribed for him. He may be required to give bond to the Company for the
faithful discharge of his duties in such form and to such amount and with such
sureties as shall be determined by the Board of Directors.
Section 9. Assistant Secretaries, Assistant Treasurers and Assistant
Controllers, when elected, shall, respectively, assist the Secretary, Treasurer
and Controller of the Company in the performance of their respective duties
assigned to such principal officers, and in assisting his principal officer,
each assistant officer shall, for such purpose, have the same powers as his
principal officer. The powers and duties of any such principal officer, shall,
except as otherwise ordered by the Board of Directors, temporarily devolve upon
his assistant in case of the absence, disability, death, resignation or removal
from office of such principal officer.
ARTICLE VI
MISCELLANEOUS
Section 1. The funds of the Company shall be deposited to its credit
in such banks or trust companies as are selected by the Treasurer, subject to
the approval of the chief executive officer. Such funds shall be withdrawn only
on checks or drafts of the Company for the purpose of the Company, except that
such funds may be withdrawn without the issuance of a check or draft (a) to
effect a transfer of funds between accounts maintained by the Company at one or
more depositaries; (b) to effect the withdrawal of funds, pursuant to resolution
of the Board of Directors, for the payment of either commercial paper promissory
notes of other entities or government securities purchased by the Company; (c)
to effect a withdrawal of funds by the Company pursuant to the terms of any
agreement or other document, approved by the Board of Directors, which requires
or contemplates payment or payments by the Company by means other than a check
or draft; or (d) to effect a withdrawal of funds for such other purpose as the
Board of Directors by resolution shall provide. All checks and drafts of the
Company shall be signed in such manner and by such officer or officers or such
individuals as the Board of Directors, from time to time by resolution, shall
determine. Only checks and drafts so signed shall be valid checks or drafts of
the Company.
Section 2. No debt shall be contracted except for current expenses
unless authorized by the Board of Directors or the Executive Committee, and no
bills shall be paid by the Treasurer unless audited and approved by the
Controller or some other person or committee expressly authorized by the Board
of Directors or the Executive Committee, to audit and approve bills for payment.
All notes of the Company shall be executed by two different officers of the
Company. Either or both of such executions may be by facsimile.
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Section 3. The fiscal year of the Company shall close at the end of
December annually.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
Section 1. Unless prohibited by law, the Company shall indemnify
each of its Directors, officers, employees and agents against expenses
(including attorneys' fees), judgments, taxes, fines and amounts paid in
settlement, incurred by such person in connection with, and shall advance
expenses (including attorneys' fees) incurred by such person in defending any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) to which such person was, is, or is
threatened to be made a party by reason of the fact that such person is or was a
Director, officer, employee or agent of another domestic or foreign corporation,
partnership, joint venture, trust, other enterprise, or employee benefit plan.
Advancement of expenses shall be made upon receipt of a written statement of his
good faith belief that he has met the standard of conduct as required by statute
and a written undertaking, with such security, if any, as the Board may
reasonably require, by or on behalf of the person seeking indemnification, to
repay amounts advanced if it shall ultimately be determined that such person is
not entitled to be indemnified by the Company.
Section 2. In addition (and not by way of limitation of) the
foregoing provisions of Section 1 of this Article VII and the provisions of the
Kentucky Business Corporation Act, each person (including the heirs, executors,
administrators and estate of such person) who is or was or had agreed to become
a Director, officer, employee or agent of the Company and each person (including
the heirs, executors, administrators and estate of such person) who is or was
serving or who had agreed to serve at the request of the Directors or any
officer of the Company as a Director, officer, employee, trustee, partner or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise shall be indemnified by the Company to the
fullest extent permitted by the Kentucky Business Corporation Act or any other
applicable laws as presently or hereafter in effect. Without limiting the
generality or the effect of the foregoing, the Company is authorized to enter
into one or more agreements with any person which provide for indemnification
greater or different than that provided in this Article VII. Any repeal or
modification of this Article by the stockholders of the Company shall not
adversely affect any indemnification of any person hereunder in respect of any
act or omission occurring prior to the time of such repeal or modification.
Section 3. The Company may purchase and maintain insurance on behalf
of any
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person who is or was entitled to indemnification as described above, whether or
not the Company would have the power or duty to indemnify such person against
such liability under this Article VII or applicable law.
Section 4. To the extent required by applicable law, any
indemnification of, or advance of expenses to, any person who is or was entitled
to indemnification as described above, if arising out of a proceeding by or in
the right of the Company, shall be reported in writing to the stockholders with
or before the notice of the next stockholders' meeting.
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Section 5. The indemnification provided by this Article VII: (a)
shall not be deemed exclusive of any other rights to which the Company's
Directors, officers, employees or agents may be entitled pursuant to the
Articles of Incorporation, any agreement of indemnity, as a matter of law or
otherwise; and (b) shall continue as to a person who has ceased to be a
Director, officer, employee or agent and shall inure to the benefit of such
person's heirs, executors and administrators.
ARTICLE VIII
AMENDMENT OR REPEAL OF BY-LAWS
These By-laws may be added to, amended or repealed at any meeting of
the Board of Directors, and may also be added to, amended or repealed by the
stockholders.
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Contract #96-412-026
AMENDED AND RESTATED COAL SUPPLY AGREEMENT
This is an amended and restated coal supply agreement (the "Agreement")
dated as of April 1, 1998 between LOUISVILLE GAS AND ELECTRIC COMPANY, a
Kentucky corporation, 220 West Main Street, Louisville, Kentucky 40202 ("Buyer")
and HOPKINS COUNTY COAL LLC ("Seller"), a Delaware limited liability company,
having an address of 1717 South Boulder Avenue, Tulsa Oklahoma 74119-4886
("Seller"), and WEBSTER COUNTY COAL CORPORATION ("Guarantor"), a Kentucky
corporation, having an address of 1717 South Boulder Avenue, Tulsa Oklahoma
74119-4886.
W I T N E S S E T H:
A. Seller's predecessor in interest, Andalex Resources, Inc. ("Andalex"),
and Buyer entered into a coal supply agreement dated April 1, 1997, as amended
by Amendment to Coal Supply Agreement ("Amendment No. 1") dated effective August
1, 1997, whereby Andalex agreed to sell and supply and Buyer agreed to purchase
steam coal under the terms and conditions set forth therein.
B. Andalex and Seller entered into an Agreement for Purchase and Sale of
Assets whereby Seller agreed to acquire certain assets of Andalex, including
mines in Andalex's Cimarron Division.
C. Pursuant to Amendment No. 2 to Coal Supply Agreement ("Amendment No.
2"), Buyer consented to Seller's assumption of all Andalex's obligations and
liabilities under the Agreement arising on and after the date of the consent, on
the condition that Seller's sole member's subsidiary guaranty the performance of
Seller's obligations and liabilities under the
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Contract #96-412-026
Agreement. Hereinafter, the Agreement, as modified by Amendment No. 1 and
Amendment No. 2 shall be referred to as the "Agreement."
D. Buyer and Seller wish to amend and restate the Agreement in its
entirety pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
SECTION 1. GENERAL
Seller will sell to Buyer and Buyer will buy from Seller steam coal under
all the terms and conditions of this Agreement.
SECTION 2. TERM
The term of this Agreement shall commence on April 1, 1997 (the
"Commencement Date") and shall continue through December 31, 2001, subject to
the price, terms and conditions review set forth in ss.8.3 (the "Term"). The
period of April 1, 1997, through March 31, 1998, shall hereinafter be referred
to as the "Initial Term"; the period of April 1, 1998, through December 31, 1999
(as it may be extended through December 31, 2001, pursuant to the price, terms
and conditions review set forth in ss. 8.3), shall be referred to as the
"Secondary Term."
SECTION 3. QUANTITY
During the period of the Commencement Date through March 31, 1998 (the
"Initial Term"), Seller shall sell and deliver and Buyer shall purchase and
accept delivery of 62,500 tons of coal per month. Such coal shall be delivered
ratably in accordance with reasonable delivery schedules to be mutually agreed
upon by Buyer and Seller.
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Contract #96-412-026
Subject to ss. 8.3, during the following portions of the Secondary Term,
Seller shall deliver and Buyer shall purchase and accept delivery of the
following quantities of coal:
YEAR BASE QUANTITY (TONS)
---- --------------------
April 1, 1998, through December 31, 1998 897,000 - 927,000
January 1, 1999, through December 31, 1999 1,500,000
January 1, 2000, through December 31, 2000 1,500,000
January 1, 2001 through December 31, 2001 1,500,000
Such coal shall be delivered ratably in accordance with reasonable
delivery schedules to be mutually agreed upon by Buyer and Seller.
SECTION 4. SOURCE
ss. 4.1 Source. The coal sold hereunder shall be supplied from any one of
the geological seams Western Kentucky #11, #12, and #9 (surface and
underground), of any one of the mines in Seller's Cimarron Division as of the
effective date of this Agreement (the "Coal Property"). Seller shall have the
right to add to the Coal Property mines in Seller's Cimarron Division developed
after the effective date of this Agreement with Buyer's prior written consent,
which will not be unreasonably withheld.
ss. 4.2 Assurance of Operation and Reserves. Seller represents and
warrants that the Coal Property contains economically recoverable coal of a
quality and in quantities which will be sufficient to satisfy all the
requirements of this Agreement. Seller agrees and warrants that it will have at
the Coal Property adequate machinery, equipment and other facilities to produce,
prepare and deliver coal in the quantity and of the quality required by this
Agreement. Seller further agrees to operate and maintain such machinery,
equipment and facilities in accordance with good mining practices so as to
efficiently and economically produce, prepare and deliver such coal.
3
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Contract #96-412-026
Seller agrees that Buyer is not providing any capital for the purchase of such
machinery, equipment and/or facilities and that Seller shall operate and
maintain same at its sole expense, including all required permits and licenses.
Seller hereby dedicates to this Agreement sufficient reserves of coal meeting
the quality specifications hereof and lying on or in the Coal Property so as to
fulfill the quantity requirements hereof.
ss. 4.3 Non-Diversion of Coal. Seller agrees and warrants that it will
not, without Buyer's express prior written consent, use or sell coal from the
Coal Property in a way that will reduce the economically recoverable balance of
coal in the Coal Property to an amount less than that required to be supplied to
Buyer hereunder.
"ss. 4.4 Substitute Coal. In the event Seller is unable to
produce or obtain coal from the Coal Property in the quantity and of the quality
required by this Agreement, and such inability is not caused by a force majeure
event as defined in ss. 10 of this Agreement, then Buyer will have the option of
requiring that Guarantor supply coal (the "Substitute Coal") from the Dotiki
facilities and mines owned by Guarantor.
If Seller's inability to supply coal from the Coal Property is caused by a force
majeure event as accepted by Buyer, then Buyer shall have the option of
requesting that Guarantor supply Substitute Coal and Guarantor shall have the
option of supplying Substitute Coal, but Guarantor shall have no obligation to
perform unless Guarantor has elected to exercise its option. Buyer's option to
request performance by Guarantor must be exercised in writing within ten (10)
days of Buyer's receipt of Seller's declaration of force majeure. Guarantor's
option to accept Buyer's offer must be exercised in writing within ten (10) days
of Guarantor's receipt of Buyer's notice of election.
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Contract #96-412-026
All Substitute Coal supplied hereunder shall be supplied pursuant to all
the terms and conditions of this Agreement, including, but not limited to, the
price provisions of ss. 8, the quality specifications of ss. 6.1, and the
provisions of ss. 5 concerning reimbursement to Buyer for increased
transportation costs. The determination of whether the Substitute Coal
materially meets or exceeds these parameters shall be made by Buyer in Buyer's
sole opinion. Seller's or Guarantor's delivery of coal not produced from the
Coal Property without having received the express written consent of Buyer shall
constitute a material breach of this Agreement. If Guarantor supplies Substitute
Coal with the express consent of Buyer, such coal shall be considered delivered
from the Coal Property for all purposes of this Agreement except with regard to
any increased transportation costs."
SECTION 5. DELIVERY
ss. 5.1 Buyer's Option. During the Initial Term, the Delivery Point shall
be designated as set forth in Amendment No. 1.
During the Secondary term, the Delivery Point shall be designated as
follows: the coal shall be delivered F.O.B. railcar at the Cimarron rail loading
facility near Madisonville, Kentucky on the Paducah and Louisville Railway (the
"Delivery Point"). Seller may deliver the coal at a location different from the
Delivery Point, provided, however, that Seller shall reimburse Buyer for any
resulting increases in the cost of transporting the coal to Buyer's generating
stations. Any resulting savings in such transportation costs shall be shared by
Buyer and Seller. Buyer may request to change the Delivery Point to either
F.O.B. truck or F.O.B. barge. Upon Buyer's notification to Seller of its desire
to change the Delivery Point, Buyer and Seller shall mutually agree in writing
upon the change(s) and the time frame wherein such change will take place.
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Contract #96-412-026
ss. 5.2 Rail or Truck Delivery. If the coal is delivered F.O.B. railcar or
F.O.B. truck, then title to and risk of loss respecting the coal will pass to
Buyer and the coal will be considered to be delivered when it is loaded into the
railcars or trucks at the rail or truck loading facility. Buyer or its
contractor shall furnish suitable railcars or trucks in accordance with a
delivery schedule provided by Buyer to Seller. Seller shall be responsible for
and pay the cost of repairs for any damages caused by Seller to railcars or
trucks owned or leased by Buyer while such railcars or trucks are in Seller's
control or custody. Seller shall comply with the applicable provisions of
Buyer's rail or truck contractor's tariff. At Buyer's request, Seller shall
treat (or have treated) any shipment of coal hereunder with a freeze
conditioning agent approved by Buyer in order to maintain coal handling
characteristics during shipment. If requested by Buyer, Seller shall also treat
(or have treated) any railcars specified by Buyer with a side release agent
approved by Buyer. The price for each such requested chemical treatment shall be
an amount equal to Seller's cost of materials applied on a per gallon basis for
each applicable of freeze conditioning agent or side release agent, as the case
may be. Seller shall invoice Buyer for all such treatment which occurred in a
calendar month by the fifteenth of the following month; and payment shall be
mailed by the 25th of such following month or within ten days after receipt of
Seller's invoice, whichever is later.
ss. 5.3. Delivery to Sebree Dock. During the Initial Term, delivery
obligations to Sebree Dock shall be governed by Amendment No. 1.
SECTION 6. QUALITY
ss. 6.1 Specifications. During the Initial Term, the coal delivered
hereunder shall conform to the following specifications on an "as received"
basis:
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Contract #96-412-026
Guaranteed Monthly Rejection Limits
Specifications Weighted Average (per shipment)
- --------------------------------------------------------------------------------
BTU/LB. min. 11,500 LESS THAN 11,200
LBS/MMBTU:
MOISTURE max. 10.5 GREATER THAN 12
ASH max. 10.5 GREATER THAN 13
SULFUR max. 3.0 GREATER THAN 3.3
SULFUR min. 1.8 LESS THAN 1.8
CHLORINE max. .04 GREATER THAN .05
FLUORINE max. .006 GREATER THAN .006
NITROGEN max. 1.1 GREATER THAN 1.5
ASH/SULFUR RATIO min. 2.5:1 LESS THAN 2.5:1
Size (3" x 0"):
Top size (inches)* max. 3x0 GREATER THAN 3x0
Fines (% by wgt)
Passing 1/4" screen max. 45% GREATER THAN 50%
% BY WEIGHT:
VOLATILE max. 40 GREATER THAN 41
VOLATILE min. 35 LESS THAN 33
FIXED CARBON max. 48 GREATER THAN 49
FIXED CARBON min. 44 LESS THAN 40
GRINDABILITY (HGI) min. 55 LESS THAN 52
BASE ACID RATIO (B/A) .39 .43
SLAGGING FACTOR** max. 1.6 GREATER THAN 1.9
FOULING FACTOR*** max. .2 GREATER THAN .3
ASH FUSION TEMPERATURE ((degree)F) (ASTM D1857)
REDUCING ATMOSPHERE
Initial Deformation min. 1940 min. 1900
Softening (H=W) min. 2035 min. 1975
Softening (H=1/2W) min. 2085 min. 2000
Fluid min. 2190 min. 2100
OXIDIZING ATMOSPHERE
Initial Deformation min. 2300 min. 2200
Softening (H=W) min. 2320 min. 2280
Softening (H=1/2W) min. 2425 min. 2300
Fluid min. 2490 min. 2375
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Contract #96-412-026
* All the coal will be of such size that it will pass through a screen
having circular perforations three (3) inches in diameter, but shall not contain
more than thirty-five percent (35%) by weight of coal that will pass through a
screen having circular perforations one-quarter (1/4) of an inch in diameter.
** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by Weight(Dry))
*** Fouling Factor (R(f))=(B/A) x (Percent Na(2)0 by Weight(Dry))
The Base Acid Ratio (B/A) is herein defined as:
BASE ACID RATIO (B/A) = (Fe(2)0(3) + Ca0 + Mg0 + Na(2)0 + K(2)0)
----------------------------------------
(Si0(2) + Al(2)0(3) + Ti0(2))
Note: As used herein GREATER THAN means greater than:
LESS THAN means less than.
During the Secondary Term, the coal delivered hereunder shall conform to
the above specifications on an "as received" basis, with the exception of the
following different specifications:
Guaranteed Monthly Rejection Limits
Specifications Weighted Average (per shipment)
- --------------------------------------------------------------------------------
BTU/LB. min. 11,400 LESS THAN 11,100
LBS/MMBTU:
MOISTURE max. 11.5 GREATER THAN 13.5
ASH max. 11.75 GREATER THAN 13.0
SULFUR max. 3.125 GREATER THAN 3.4
Size (3" x 0"):
Top size (inches)* max. 3x0 GREATER THAN 3x0
* All the coal will be of such size that it will pass through a screen
having circular perforations three (3) inches in diameter, but shall not contain
more than fifty percent (50%) by weight of coal that will pass through a screen
having circular perforations one-quarter (1/4) of an inch in diameter.
8
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Contract #96-412-026
ss. 6.2 Definition of "Shipment". As used herein, a "shipment" shall mean
one (1) unit trainload or a day's loading of trucks or individual barge or barge
lot, in accordance with Buyer's actual sampling and analyzing practices.
ss. 6.3 Rejection.
Buyer has the right, but not the obligation, to reject any shipment which
fail(s) to conform to the Rejection Limits set forth in ss. 6.1 or contains
extraneous materials. Buyer must reject such coal within seventy-two (72) hours
of receipt of the coal analysis provided for in ss. 7.2 or such right to reject
is waived. In the event Buyer rejects such non-conforming coal, Buyer shall
return the coal to Seller or, at Seller's request, divert such coal to Seller's
designee, all at Seller's cost. Seller shall replace the rejected coal within
five (5) working days from notice of rejection with coal conforming to the
Rejection Limits set forth in ss. 6.1. If Seller fails to replace the rejected
coal within such five (5) working day period or the replacement coal is
rightfully rejected, Buyer may purchase coal from another source in order to
replace the rejected coal. Seller shall reimburse Buyer for (i) any amount by
which the actual price plus transportation costs to Buyer of such coal purchased
from another source exceed the price of such coal under this Agreement (as
adjusted under ss. 8.2 for coal of the quality actually supplied by the other
source) plus transportation costs to Buyer from the Delivery Point; and (ii) any
and all transportation, storage, handling, or other expenses that have been
incurred by Buyer for rightfully rejected coal. This remedy is in addition to
all of Buyer's other remedies under this Agreement and under applicable law and
in equity for Seller's breach.
If Buyer fails to reject a shipment of non-conforming coal which it had
the right to reject for failure to meet any or all of the Rejection Limits set
forth in ss.6.1 or because such shipment contained extraneous materials, then
such non-conforming coal shall be deemed accepted by
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Contract #96-412-026
Buyer; however, the price shall be adjusted in accordance with ss.8.2 and the
quantity Buyer is obligated to purchase from Seller, at Buyer's sole option,
shall be reduced by the amount of each such non-conforming shipment. Further,
for shipments containing extraneous materials, which include, but are not
limited to, slate, rock, wood, corn husks, mining materials, metal, steel, etc.,
the estimated weight of such materials shall be deducted from the weight of that
shipment.
ss. 6.4 Suspension and Termination.
If the coal sold hereunder fails to meet one or more of the Guaranteed
Monthly Weighted Averages set forth in ss.6.1 for any one month during the term
of this Agreement, or if two (2) truck shipments or three (3) barge shipments in
a seven-day period are rejectable by Buyer, or if Buyer receives at its
generating station two (2) rail shipments which are rejectable in any ten-day
period, Buyer may, upon notice confirmed in writing and sent to Seller by
certified mail, terminate this Agreement and exercise all its other rights and
remedies under applicable law and in equity for Seller's breach.
SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS
ss. 7.1 Weights. The weight of the coal delivered hereunder shall be
determined on a per shipment basis by Buyer on the basis of scale weights at the
generating station(s) unless another method is mutually agreed upon by the
parties. Such scales shall be duly reviewed by an appropriate testing agency and
maintained in an accurate condition. Seller shall have the right, at Seller's
expense and upon reasonable notice, to have the scales checked for accuracy at
any reasonable time or frequency. If the scales are found to be inaccurate, over
or under the tolerance range allowable for the scale, either party shall pay to
the other any amounts owed due to such inaccuracy for a period not to exceed
thirty (30) days before the time any inaccuracy of scales is determined. Buyer
shall send to seller, by telecopier or electronic data transmittal, a listing of
the
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Contract #96-412-026
daily shipment weights within three (3) business days after Buyer's
determination of such weights.
ss. 7.2 Sampling and Analysis. The sampling and analysis of the coal
delivered hereunder shall be performed by Buyer and the results thereof shall be
accepted and used for the quality and characteristics of the coal delivered
under this Agreement. Buyer shall send to Seller by telecopier or electronic
data transmittal a copy of the analysis within (10) business days after sampling
the applicable shipment. All analyses shall be made in Buyer's laboratory at
Buyer's expense in accordance with reliable and industry accepted standards.
Samples for analyses shall be taken by any reliable and industry accepted
standard acceptable to both parties, may be composited, and shall be taken with
a frequency and regularity sufficient to provide reasonably accurate
representative samples of the deliveries made hereunder. Seller represents that
it is familiar with Buyer's sampling and analysis practices, and finds them to
be in accordance with reliable and industry accepted standards. Buyer shall
notify Seller in writing of any significant changes in Buyer's sampling and
analysis practices. Any such changes in Buyer's sampling and analysis practices
shall, except for industry accepted changes in practices, provide for no less
accuracy than the sampling and analysis practices existing at the time of the
execution of this Agreement, unless the Parties otherwise mutually agree.
Each sample taken by Buyer shall be divided into 4 parts and put into
airtight containers, properly labeled and sealed. One part shall be used for
analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer
in its sole judgment determines it is necessary; one part shall be retained by
Buyer until the 25th of the month following the month of unloading (the
"Disposal Date") and shall be delivered to Seller for analysis if Seller so
requests before the Disposal Date; and one part ("Referee Sample") shall be
retained by Buyer until the Disposal
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Contract #96-412-026
Date. Seller shall be given copies of all analyses made by Buyer by the 12th day
of the month following the month of unloading. Seller, on reasonable notice to
Buyer shall have the right to have a representative present to observe the
sampling and analyses performed by Buyer. Unless Seller requests a Referee
Sample analysis before the Disposal Date, Buyer's analysis shall be used to
determine the quality of the coal delivered hereunder. The Monthly Weighted
Averages shall be determined by utilizing the individual shipment analyses.
If any dispute arises before the Disposal Date, the Referee Sample
retained by Buyer shall be submitted for analysis to an independent commercial
testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For
each coal quality specification in question, a dispute shall be deemed not to
exist and Buyer's analysis shall prevail and the analysis of the Independent Lab
shall be disregarded if the analysis of the Independent Lab differs from the
analysis of Buyer by an amount equal to or less than:
(i) 0.50% moisture
(ii) 0.50% ash on a dry basis
(iii) 100 Btu/lb. on a dry basis
(iv) 0.10% sulfur on a dry basis.
For each coal quality specification in question, if the analysis of the
Independent Lab differs from the analysis of Buyer by an amount more than the
amounts listed above, then the analysis of the Independent Lab shall prevail and
Buyer's analysis shall be disregarded. The cost of the analysis made by the
Independent Lab shall be borne by Seller to the extent that Buyer's analysis
prevails and by Buyer to the extent that the analysis of the Independent Lab
prevails.
SECTION 8. PRICE
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Contract #96-412-026
ss. 8.1 Base Price. The base price (the "Base Price") of the coal to be
sold hereunder will be firm and will be determined by the year in which the coal
is delivered as defined in ss. 5 in accordance with the following schedule:
YEAR BASE PRICE ($ PER MMBTU)
---- ------------------------
(the Initial Term)
------------------
1997 $0.7800
1998 $0.7900
(the Secondary Term)
1998 $0.8285
1999 $0.8285
2000 $0.8485
2001 $0.8585
ss. 8.2 Quality Price Adjustments.
(a) The Base Price is based on coal meeting or exceeding the Guaranteed
Monthly Weighted Average specifications as set forth in ss.6.1. Quality price
discounts shall be applied for each specification each month to reflect failures
to meet the Guaranteed Monthly Weighted Averages set forth in ss.6.1, as
determined pursuant to ss.7.2, subject to the provisions set forth below. The
discount values used are as follows:
DISCOUNT VALUES
---------------
$/MMBTU
-------
BTU/LB 0.2604
$/LB./MMBTU
-----------
SULFUR 0.1232
ASH 0.0083
MOISTURE 0.0016
(b) Notwithstanding the foregoing, for each specification each month,
there shall be no discount if the actual Monthly Weighted Average meets the
applicable Discount Point set forth below. However, if the actual Monthly
Weighted Average fails to meet such applicable Discount Point, then the discount
shall be calculated on the basis of the difference between the
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Contract #96-412-026
actual Monthly Weighted Average and the Guaranteed Monthly Weighted Average
pursuant to the methodology shown in Exhibit A attached hereto.
During the Initial Term, the Guaranteed Monthly Weighted Average and
Discount Points shall be calculated as follows:
Guaranteed Monthly
Weighted Average Discount Point
---------------- --------------
BTU/LB min. 11,500 11,350
LB/MMBTU
- --------
SULFUR max. 3.0 3.2
ASH max. 10.5 12.0
MOISTURE max. 10.5 11.0
For example, if the actual Monthly Weighted Average of ash equals 12.5
lb/MMBTU, then the applicable discount would be (12.5 lb. - 10.5 lb.) x
$0.0083/lb./MMBTU = $.0166/MMBTU.
During the Secondary Term, the Guaranteed Monthly Weighted Average and
Discount Points shall be calculated as follows:
Guaranteed Monthly
Weighted Average Discount Point
---------------- --------------
BTU/LB min. 11,400 11,250
LB/MMBTU
- --------
SULFUR max. 3.125 3.325
ASH max. 11.75 12.50
MOISTURE max. 11.5 13.0
For example, if the actual Monthly Weighted Average of ash equals 13.5
lb/MMBTU, then the applicable discount would be (13.5 lb. - 11.75 lb.) x
$0.0083/lb./MMBTU = $.01453/MMBTU.
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Contract #96-412-026
ss. 8.3 Price, Terms and Conditions Review. The Base Price and all other
terms and conditions of this Agreement shall be subject to review for any reason
at the request of either party for revisions to become effective on January 1,
2000. The party requesting such a review shall give written notice of its
request to the other party on or before October 1, 1999. The parties then shall
negotiate an agreement on new prices and/or other terms and conditions between
October 1, 1999 and December 1, 1999. If the parties do not reach an agreement
by December 1, 1999, then this Agreement will terminate as of December 31, 1999
without liability due to such termination for either party, and the parties
shall have no further obligations hereunder except those incurred prior to the
date of termination.
ss. 8.4 Payment Calculation. Exhibit A attached hereto shows the
methodology for calculating the coal payment and quality price discounts for the
month Seller's coal was unloaded by Buyer. If there are any such discounts,
Buyer shall apply credit to amounts owed Seller for the month the coal was
unloaded.
SECTION 9. INVOICES, BILLING AND PAYMENT.
ss. 9.1 Invoicing Address. Invoices will be sent to Buyer at the following
address:
Louisville Gas and Electric Company
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
Attention: Director, Fuels Management
With a copy to:
Louisville Gas and Electric Company
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
Attention: Manager, Accounts Payable
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Contract #96-412-026
ss. 9.2 Invoice Procedures for Coal Shipments. Seller shall invoice Buyer
at the Base Price, minus any quality price discounts, for all coal unloaded in a
calendar month by the twentieth (20th) day of the following month.
ss. 9.3 Payment Procedures for Coal Shipments. For all coal delivered
pursuant to Article 5 hereof, and unloaded at the Delivery Point between the
first (1st) and fifteenth (15th) days of any calendar month. Buyer shall make
preliminary payment for seventy-five percent (75%) of the amount owed for the
coal (based on the assumption that the coal will meet all guaranteed monthly
quality parameters) by the twenty-fifth (25th) day of such month of delivery,
except that, if the 25th is not a regular work day, payment shall be made on the
next regular work day. For all coal delivered, as defined in Article 5 hereof,
and unloaded at the Delivery Point between the sixteenth (16th) and the last day
of any calendar month. Buyer shall make preliminary payment for seventy-five
percent (75%) of the delivered coal by the tenth (10th) day of the month
following the month of delivery, except that, if the 10th is not a regular work
day, payment shall be made on the next regular work day.
Preliminary payment shall be in the amount of seventy-five percent (75%)
of the then current price on a dollar per ton basis as calculated by the
guaranteed monthly weighted average BTU/lb. and the then current Base Price in
cents per MMBTU.
A reconciliation of amounts paid and amounts owed shall occur on the
twenty-fifth (25th) day of the month following the month of delivery. (For
example, Buyer will make one initial payment on September 25 for seventy-five
percent of coal delivered September 1 through 15, and another initial payment on
October 10 for seventy-five percent of coal delivered September 16 through 30. A
reconciliation will occur on October 25 for all deliveries made in September.)
The reconciliation shall be made as follows: Seller shall invoice Buyer on or
before the 20th day
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Contract #96-412-026
of the month following the month of delivery. The amount due for all coal (based
on the Base Price minus any Quality Price Discounts) delivered and unloaded and
accepted by Buyer during any calendar month shall be calculated and compared to
the sum of the preliminary payments made for coal delivered and unloaded and
accepted during such month. The difference shall be paid by or paid to Seller,
as applicable, by the twenty-fifth (25th) day of the month following the month
of delivery, except, that, if the 25th is not a regular work day, payment shall
be made in the next regular work day.
In the event Seller notifies Buyer that a pattern has developed whereby
payments are not being paid when due, as set forth herein, Buyer shall review
its internal approval and payment procedures and remedy such payment practices,
if any develop.
ss. 9.4 Withholding. Buyer shall have the right to withhold from payment
of any billing or billings (i) any sums which it is not able in good faith to
verify or which it otherwise in good faith disputes, (ii) any damages resulting
from or likely to result from any breach of this Agreement by Seller, and (iii)
any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in
writing of any such issue, stating the basis of its claim and the amount it
intends to withhold.
Payment by Buyer, whether knowing or inadvertent, of any amount in dispute
shall not be deemed a waiver of any claims or rights by Buyer with respect to
any disputed amounts or payments made.
SECTION 10. FORCE MAJEURE
If either party hereto is delayed in or prevented from performing any of
its obligations or from utilizing the coal sold under this Agreement due to (i)
acts of God, (ii) war, (iii) riots, (iv) civil insurrection, (v) acts of the
public enemy, (vi) strikes, (vii) lockouts, (viii) fires, (ix) floods,
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Contract #96-412-026
(x) earthquakes, (xi) explosions, (xii) mine accidents that are solely
responsible for delaying or preventing performance of Seller for 10 consecutive
days, (xiii) breakdown of or damage to equipment, plant, transmission systems,
or transportation providers that is solely responsible for delaying or
preventing the performance of Seller for 10 consecutive days, (xiv) unforeseen
adverse geologic conditions which were not detected despite prudent mine
planning and mining processes and which are solely responsible for delaying or
preventing the performance of Seller for 10 consecutive days, or (xv) the
inability to obtain necessary mining permit(s) after applying for such with
prudent and reasonable diligence, and such event is beyond the reasonable
control and without the fault or negligence of the party affected thereby, then
the obligations of both parties hereto shall be suspended to the extent made
necessary by such event; provided that the affected party gives written notice
to the other party as early as practicable of the nature and probable duration
of the force majeure event. The party declaring force majeure shall exercise due
diligence to avoid and shorten the force majeure event and will keep the other
party advised as to the continuance of the force majeure event.
During any period in which Seller's ability to perform hereunder is
affected by a force majeure event, Seller shall not deliver any coal to any
other buyers to whom Seller's ability to supply is similarly affected by such
force majeure event unless contractually committed to do so at the beginning of
the force majeure event; and further shall deliver to Buyer under this Agreement
at least a pro-rata portion (on a per ton basis) of its total contractual
commitments to all its buyers to whom Seller's ability to supply is similarly
affected by such force majeure event in place at the beginning of the force
majeure event. An event which affects the Seller's ability to produce or obtain
coal from a mine other than the Coal Property will not be considered a force
majeure event hereunder.
18
<PAGE>
Contract #96-412-026
Tonnage deficiencies resulting from Seller's declared force majeure event
shall be made up at Buyer's sole option on a mutually agreed-upon schedule.
Tonnage deficiencies resulting from Buyer's declared force majeure event shall
be made up at Seller's sole option on a mutually agreed-upon schedule.
SECTION 11. NOTICES
ss. 11.1 Form and Place of Notice. Any official notice, request for
approval or other document required to be given under this Agreement shall be in
writing, unless otherwise provided herein, and shall be deemed to have been
sufficiently given when delivered in person, transmitted by facsimile or other
electronic media, delivered to an established mail service for same day or
overnight delivery, or dispatched in the United States mail, postage prepaid,
for mailing by first class, certified, or registered mail, return receipt
requested, and addressed as follows:
If to Buyer: Louisville Gas and Electric Company
220 West Main Street
P.O. Box 32010
Louisville, Kentucky 40232
Attn: Director, Fuels Management
If to Seller: Hopkins County Coal LLC
1717 S. Boulder Avenue; Sixth Floor
P.O. Box 22027
Tulsa, Oklahoma 74121-2027
Attn: Mr. Gary J. Rathburn
Senior Vice President, Marketing
With a copy to: Mapco Coal, Inc.
771 Corporate Drive, Suite 900
Lexington, Kentucky 40503
Att: James E. Plaisted,
Sales Manager, Central Region
ss. 11.2 Change of Person or Address. Either party may change the person
or address specified above upon giving written notice to the other party of such
change.
19
<PAGE>
Contract #96-412-026
SECTION 12. RIGHT TO RESELL
Buyer shall have the unqualified right to re-sell all or any of the coal
purchased under this Agreement.
SECTION 13. INDEMNITY AND INSURANCE
ss. 13.1 Indemnity. Seller agrees to indemnify and save harmless Buyer,
its officers, directors, employees and representatives from any responsibility
and liability for any and all claims, demands, losses, legal actions for
personal injuries, property damage and pollution (including reasonable
attorney's fees) (i) relating to the barges or railcars provided by Buyer or
Buyer's contractor while such barges or railcars are in the care and custody of
the loading dock or loading facility, (ii) due to any failure of Seller to
comply with laws, regulations or ordinances, or (iii) due to the acts or
omissions of Seller in the performance of this Agreement.
ss. 13.2 Insurance. Seller agrees to carry insurance coverage with minimum
limits as follows:
(1) Commercial General Liability, including Completed Operations and
Contractual Liability, $1,000,000 single limit liability.
(2) Automobile General Liability, $1,000,000 single limit liability.
(3) In addition, Seller shall carry excess liability insurance
covering the foregoing perils in the amount of $4,000,000 for any one
occurrence.
(4) Workers' Compensation and Employer's Liability with statutory
limits.
If any of the above policies are written on a claims made basis, then the
retroactive date of the policy or policies will be no later than the effective
date of this Agreement. Certificates of
20
<PAGE>
Contract #96-412-026
Insurance satisfactory in form to the Buyer and signed by the Seller's insurer
shall be supplied by the Seller to the Buyer evidencing that the above insurance
is in force and that not less than 30 calendar days written notice will be given
to the Buyer prior to any cancellation or material reduction in coverage under
the policies. The Seller shall cause its insurer to waive all subrogation rights
against the Buyer respecting all losses or claims arising from performance
hereunder. Evidence of such waiver satisfactory in form and substance to the
Buyer shall be exhibited in the Certificate of Insurance mentioned above.
Seller's liability shall not be limited to its insurance coverage.
SECTION 14. TERMINATION FOR DEFAULT.
If either party hereto commits a material breach of any of its obligations
under this Agreement at any time (with the exception of defaults occurring under
ss.6.4), then the other party has the right to give written notice describing
such breach and stating its intention to terminate this Agreement no sooner than
thirty (30) days after the date of the notice (the "notice period"). If such
material breach is curable and the breaching party cures such material breach
within the notice period, then the Agreement shall not be terminated due to such
material breach. If such material breach is not curable or the breaching party
fails to cure such material breach within the notice period, then this Agreement
shall terminate at the end of the notice period in addition to all the other
rights and remedies available to the aggrieved party under this Agreement and at
law and in equity.
SECTION 15. TAXES, DUTIES AND FEES
Seller shall pay when due, and the price set forth in ss. 8 of this
Agreement shall be inclusive of, all taxes, duties, fees and other assessments
of whatever nature imposed by governmental authorities with respect to the
transactions contemplated under this Agreement.
21
<PAGE>
Contract #96-412-026
SECTION 16. DOCUMENTATION AND RIGHT OF AUDIT
Seller shall maintain all records and accounts pertaining to payments,
quantities, quality analyses and source of all coal supplied under this
Agreement for a period lasting through the term of this Agreement and for two
years thereafter. Buyer shall have the right at no additional expense to Buyer
to audit, copy and inspect such records and accounts at any reasonable time upon
reasonable notice during the term of this Agreement and for 2 years thereafter.
SECTION 17. EQUAL EMPLOYMENT OPPORTUNITY.
To the extent applicable, Seller shall comply with all of the following
provisions which are incorporated herein by reference: Equal Opportunity
regulations set forth in 41 CRF ss. 60-1.4(a) and (c) prohibiting discrimination
against any employee or applicant for employment because of race, color,
religion, sex, or national origin; Vietnam Era Veterans Readjustment Assistance
Act regulations set forth in 41 CRF ss. 50-250.4 relating to the employment and
advancement of disabled veterans and veterans of the Vietnam Era; Rehabilitation
Act regulations set forth in 41 CRF ss. 60-741.4 relating to the employment and
advancement of qualified disabled employees and applicants for employment; the
clause known as "Utilization of Small Business Concerns and Small Business
Concerns Owned and Controlled by Socially and Economically Disadvantaged
Individuals" set forth in 15 USC ss. 637(d)(3); and subcontracting plan
requirements set forth in 15 USC ss. 637(d).
SECTION 18. COAL PROPERTY INSPECTIONS
Buyer and its representatives, and others as may be required by applicable
laws, ordinances and regulations shall have the right at all reasonable times
and at their own expense to
22
<PAGE>
Contract #96-412-026
inspect the Coal Property, including the loading facilities, scales, sampling
system(s), wash plant facilities, and mining equipment for conformance with this
Agreement. Seller shall undertake reasonable care and precautions to prevent
personal injuries to any representatives, agents or employees of Buyer
(collectively, "Visitors") who inspect the Coal Property. Any such Visitors
shall comply with Seller's regulations and rules regarding conduct on the work
site, made known to Visitors prior to entry, as well as safety measures mandated
by state or federal rules, regulations and laws. Buyer understands that
underground mines and related facilities are inherently high-risk environments.
Buyer's failure to inspect the Coal Property or to object to defects therein at
the time Buyer inspects the same shall not relieve Seller of any of its
responsibilities nor be deemed to be a waiver of any of Buyer's rights
hereunder.
SECTION 19. MISCELLANEOUS
ss. 19.1 Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of Kentucky, and all questions of performance of
obligations hereunder shall be determined in accordance with such laws.
ss. 19.2 Headings. The paragraph headings appearing in this Agreement are
for convenience only and shall not affect the meaning of interpretation of this
Agreement.
ss. 19.3 Waiver. The failure of either party to insist on strict
performance of any provision of this Agreement, or to take advantage of any
rights hereunder, shall not be construed as a waiver of such provision or right.
ss. 19.4 Remedies Cumulative. Remedies provided under this Agreement shall
be cumulative and in addition to other remedies provided under this Agreement or
by law or in equity.
ss. 19.5 Severability. If any provision of this Agreement is found
contrary to law or unenforceable by any court of law, the remaining provisions
shall be severable and enforceable
23
<PAGE>
Contract #96-412-026
in accordance with their terms, unless such unlawful or unenforceable provision
is material to the transactions contemplated hereby, in which case the parties
shall negotiate in good faith a substitute provision.
ss. 19.6 Binding Effect. This Agreement shall bind and inure to the
benefit of the parties and their successors and assigns.
ss. 19.7 Assignment. Neither party may assign this Agreement or any rights
or obligations hereunder without the prior written consent of the other party,
which consent shall not be unreasonably withheld or denied; provided, however,
that Buyer shall have the right, without consent of Seller, to assign all or any
part of this Agreement to any company, controlling, controlled by, or under
common control with Buyer.
ss. 19.8 Entire Agreement. This Agreement contains the entire agreement
between the parties as to the subject matter hereof, and there are no
representations, understandings or agreements, oral or written, which are not
included herein.
ss. 19.9 Amendments. Except as otherwise provided herein, this Agreement
may not be amended, supplemented or otherwise modified except by written
instrument signed by both parties hereto.
SECTION 20. GUARANTY OF PERFORMANCE AND GUARANTOR'S INDEMNIFICATION.
ss. 20.1 Guaranty of Performance. As a material inducement for Buyer's
giving its consent to the Assignment and Assumption, and in consideration
thereof, Guarantor hereby guarantees the full, prompt and complete performance
by Seller of all the terms and conditions of the Agreement to be performed by
Seller thereunder (the "Guaranty"). Guarantor hereby indemnifies and holds Buyer
and Buyer's successors and assigns harmless from and against all liability
24
<PAGE>
Contract #96-412-026
and expense, including reasonable attorney's fees, sustained by Buyer by reason
of the failure of Guarantor fully to perform and comply with the terms and
obligations of the Agreement, or by reason of any misrepresentation of Guarantor
hereunder. It is understood this is a continuing, absolute and unconditional
Guaranty, co-extensive and co-terminous with the Agreement between the Seller
and Buyer, as it may be extended and amended by Buyer and Seller. Guarantor
hereby expressly waives notice of acceptance of this Guaranty, notice of the
defaults by Seller or of nonpayment or nonfulfillment of any or all of Seller's
liabilities and obligations. The delay or failure of Buyer to insist on strict
performance of any provision of this Agreement, or to take advantage of any
rights hereunder, shall not be construed as a waiver of such provision or right
or of the Guaranty.
ss.20.2 Guarantor's Consent for Amendments and Extensions. The Guarantor hereby
expressly gives the Buyer and Seller from time to time, without notice to
Guarantor, authority and consent to give and make such extensions, renewals,
settlements, and compromises at it may deem proper with respect to any of the
duties or liabilities of the Seller under this Agreement.
ss. 20.3 Buyer's Consent to Assignment and Assumption. In reliance on the
Guaranty and on the representations and warranties of Seller/Assignor, Seller
and Guarantor set forth herein, Buyer hereby consents to the Assignment and
Assumption. Buyer's consent thereto shall not be construed as a consent to any
future assignments, or as a waiver of ss. 19.7 of the Agreement, which provision
is hereby ratified and confirmed.
ss. 20.4 Guarantor's Additional Representations, Warranties and Covenants.
Guarantor hereby represents and warrants it has the power and authority, and
promptly will, take all necessary actions to enable Guarantor to supply
Substitute Coal.
25
<PAGE>
Contract #96-412-026
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
HOPKINS COUNTY COAL LLC LOUISVILLE GAS AND ELECTRIC
COMPANY
By: /s/ signed By: /s/ Wayne T. Lucas
--------------------------- -------------------------------
Wayne T. Lucas
Title: Senior Vice President - Marketing EVP - Power Generation
---------------------------------
Date: December 4, 1998 Date: December 9, 1998
----------------------------------- ------------------------------
WEBSTER COUNTY COAL CORPORATION
By: /s/ signed
--------------------------
Title: Senior Vice President - Marketing
----------------------------------
Date: December 4, 1998
-----------------------------------
26
<PAGE>
Contract #96-412-026
Exhibit A
Page 1 of 4
EXHIBIT A - INITIAL TERM
SAMPLE COAL PAYMENT CALCULATIONS
Total Evaluated Coal Costs for Contract No. 96-412-26
- --------------------------------------------------------------------------------
For contracts supplied from multiple "origins", each "origin will be calculated
individually.
<TABLE>
<CAPTION>
Section I Base Data
-------------------------------------- --------------
<S> <C> <C>
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
-----------
<CAPTION>
Section II Discounts
-------------------------------------- ------------
<S> <C> <C>
Assign a (-) to all discounts (round to (5) decimal places)
6d) BTU/LB.: If line 2r LESS THAN 11,350 BTU/lb. then:
{1 - (line 2r) / (line 2)} * $0.2604/MMBTU
{1 - ( ) / (11,500)} * $0.2604 = $ /MMBTU
-----------
7d) SULFUR: If line 3r is greater than 3.20 lbs./MMBTU
[ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur
[ ( ) - (3.00) ] * 0.1232 = $ /MMBTU
-----------
8d) ASH: If line 4r is greater than 12.00 lbs./MMBTU
[ (line 4r) - (line 4) ] * 0.0083/MMBTU
[ ( ) - (10.50) ] * 0.0083 = $ /MMBTU
-----------
9d) MOISTURE: If line 5r is greater than 11.00 lbs./MMBTU
[ (line 5r) - (line 5) ] * 0.0016/MMBTU
[ ( ) - (10.50) ] * 0.0016 = $ /MMBTU
-----------
</TABLE>
27
<PAGE>
Contract #96-412-026
Exhibit A
Page 2 of 4
<TABLE>
<CAPTION>
Total Price
Section III Adjustments
-------------------------------------- -----------
<S> <C> <C>
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 + $ = $
----- ------------ ----------
</TABLE>
28
<PAGE>
Contract #96-412-026
Exibit A
Page 3 of 4
EXHIBIT A - SECONDARY TERM
SAMPLE COAL PAYMENT CALCULATIONS
Total Evaluated Coal Costs for Contract No. 96-412-26
- --------------------------------------------------------------------------------
For contracts supplied from multiple "origins", each "origin will be calculated
individually.
<TABLE>
<CAPTION>
Section I Base Data
-------------------------------------- ---------------
<S> <C> <C>
1) Base F.O.B. price per ton: $ 18.89 /ton
------------
1a) Tons of coal delivered: tons
------------
2) Guaranteed average heat content: 11,400 BTU/LB.
------------
2r) As received monthly avg. heat content: BTU/LB.
------------
2a) Energy delivered in MMBTU: MMBTU
------------
[(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU
[( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU
2b) Base F.O.B. price per MMBTU: $ 0.8285 MMBTU
------------
[ (Line 1) / (Line 2) ] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU
[ ( /ton) / ( BTU/LB) ] * (1 ton/2,000 lb.) * 1,000,000 BTU/MMBTU
3) Guaranteed monthly avg. max. sulfur 3.125 LBS./MMBTU
------------
3r) As received monthly avg. sulfur LBS./MMBTU
------------
4) Guaranteed monthly avg. ash 11.75 LBS./MMBTU
------------
4r) As received monthly avg. ash LBS./MMBTU
------------
5) Guaranteed monthly avg. max. moisture 11.50 LBS./MMBTU
------------
5r) As received monthly avg. moisture LBS./MMBTU
------------
Section II Discounts
-------------------------------------- --------------
Assign a (-) to all discounts (round to (5) decimal places)
6d) BTU/LB.: If line 2r LESS THAN 11,250 BTU/lb. then:
{1 - (line 2r) / (line 2)} * $0.2604/MMBTU
{1 - ( ) / (11,400)} * $0.2604 = $ /MMBTU
------------
7d) SULFUR: If line 3r is greater than 3.325 lbs./MMBTU
[ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur
[ ( ) - (3.125) ] * 0.1232 = $ /MMBTU
------------
8d) ASH: If line 4r is greater than 12.50 lbs./MMBTU
[ (line 4r) - (line 4) ] * 0.0083/MMBTU
[ ( ) - (11.75) ] * 0.0083 = $ /MMBTU
------------
9d) MOISTURE: If line 5r is greater than 13.00 lbs./MMBTU
[ (line 5r) - (line 5) ] * 0.0016/MMBTU
[ ( ) - (11.50) ] * 0.0016 = $ /MMBTU
------------
</TABLE>
29
<PAGE>
Contract #96-412-026
Exhibit A
Page 4 of 4
<TABLE>
<CAPTION>
Total Price
Section III Adjustments
-------------------------------------- ------------
<S> <C> <C>
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 + $ = $
----- ----------- --------
</TABLE>
30
<PAGE>
Contract #LGE 99-002
COAL SUPPLY AGREEMENT
This is a coal supply agreement (the "Agreement") dated January 1, 1999
between LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, 220 West
Main Street, Louisville, Kentucky 40202 ("Buyer") and PEABODY COALSALES COMPANY,
a Delaware corporation, 701 Market Street, Suite 830, St. Louis, Missouri
63101-1826 ("Seller").
The parties hereto agree as follows:
SECTION 1. GENERAL. Seller will sell to Buyer and Buyer will buy from
Seller steam coal under all the terms and conditions of this Agreement.
SECTION 2. TERM. The term of this Agreement shall commence on January 1,
1999 and shall continue through December 31, 2000, subject to the price
renegotiation set forth in ss. 8.1.
SECTION 3. QUANTITY.
ss. 3.1 Base Quantity. Subject to the price renegotiation set forth in ss.
8.1, Seller shall sell and deliver and Buyer shall purchase and accept delivery
of the following annual base quantity of coal ("Base Quantity"):
YEAR BASE QUANTITY (TONS)
---- --------------------
1999 1,860,000
2000 1,860,000
ss. 3.2 Delivery Schedule. Buyer shall specify in writing to Seller the
monthly quantities to be delivered in 1999 within ten (10) business days after
this agreement is fully executed. Time is of the essence with respect to the
schedule so established; and failure by Seller to deliver in a timely fashion
shall constitute a material breach within the meaning of ss. 16 of this
Agreement.
<PAGE>
Contract #LGE 99-002
SECTION 4. SOURCE.
ss. 4.1 Source. The coal sold hereunder, including coal purchased by
Seller from third parties, shall be supplied from geological seam Kentucky #9,
from Seller's Patriot Complex, Henderson County, Kentucky (the "Coal Property").
ss. 4.2 Assurance of Operation and Reserves. Seller represents and
warrants that the Coal Property contains economically recoverable coal of a
quality and in quantities which will be sufficient to satisfy all the
requirements of this Agreement. Seller agrees and warrants that it will have at
the Coal Property adequate machinery, equipment and other facilities to produce,
prepare and deliver coal in the quantity and of the quality required by this
Agreement. Seller further agrees to operate and maintain such machinery,
equipment and facilities in accordance with good mining practices so as to
efficiently and economically produce, prepare and deliver such coal. Seller
agrees that Buyer is not providing any capital for the purchase of such
machinery, equipment and/or facilities and that Seller shall operate and
maintain same at its sole expense, including all required permits and licenses.
Seller hereby allocates to this Agreement sufficient reserves of coal meeting
the quality specifications hereof and lying on or in the Coal Property so as to
fulfill the quantity requirements hereof.
ss. 4.3 Non-Diversion of Coal. Seller agrees and warrants that it will
not, without Buyer's express prior written consent, use or sell coal from the
Coal Property in a way that will reduce the economically recoverable balance of
coal in the Coal Property to an amount less than that required to be supplied to
Buyer hereunder.
2
<PAGE>
Contract #LGE 99-002
ss. 4.4 Seller's Preparation of Mining Plan. Seller shall have prepared a
complete mining plan for the Coal Property with adequate supporting data to
demonstrate Seller's capability to have coal produced from the Coal Property
which meets the quantity and quality specifications of this Agreement. Seller
shall, upon Buyer's request during Coal Property Inspections, if any (made
pursuant to ss. 20), provide information to Buyer of such mining plan which
shall contain maps and a narrative depicting areas and seams of coal to be mined
and shall include (but not be limited to) the following information: (i)
reserves from which the coal will be produced during the term hereof and the
mining sequence, by year (or such other time intervals as mutually agreed)
during the term of this Agreement, from which coal will be mined; (ii) methods
of mining such coal; (iii) methods of transporting and, in the event a
preparation plant is utilized by Seller, the methods of washing coal to insure
compliance with the quantity and quality requirements of this Agreement
including a description and flow sheet of the preparation plant; (iv) quality
data plotted on the maps depicting data points and isolines by ash, sulfur, and
Btu; (v) quality control plans including sampling and analysis procedures to
insure individual shipments meet quality specifications; and (vi) Seller's
aggregate commitments to others to sell coal from the Coal Property during the
term of this Agreement.
Buyer's receipt of information or data furnished by Seller (the "Mining
Information") shall not in any many relieve Seller of any of Seller's
obligations or responsibilities under this Agreement; nor shall such review be
construed as constituting an approval of Seller's proposed mining plan as
prudent mining practices, such review by Buyer being limited solely to a
determination, for Buyer's purposes only, of Seller's capability to supply coal
to fulfill Buyer's requirements of a dependable coal supply.
3
<PAGE>
Contract #LGE 99-002
ss. 4.5 Substitute Coal. Notwithstanding the above representations and
warranties, in the event that Seller is unable to produce or obtain coal from
the Coal Property in the quantity and of the quality required by this Agreement,
and such inability is not caused by a force majeure event as defined in ss. 10,
then Buyer will have the option of requiring that Seller supply substitute coal
from other facilities and mines. Seller shall also have the right to supply
substitute coal after having received Buyer's prior written consent (which shall
not be unreasonably withheld). Such substitute coal shall be provided under all
the terms and conditions of this Agreement including, but not limited to, the
price provisions of ss.8, the quality specifications of ss. 6.1, and the
provisions of ss. 5 concerning reimbursement to Buyer for increased
transportation costs. Seller's delivery of coal not produced from the Coal
Property without having received the express written consent of Buyer shall
constitute a material breach of this Agreement.
SECTION 5. DELIVERY.
ss. 5.1 Barge Delivery. The coal shall be delivered to Buyer F.O.B. barge
at the Demao Dock at mile point 31.5 on the Green River (the "Delivery Point").
Seller may deliver the coal at a location different from the Delivery Point,
provided, however, that Seller shall reimburse Buyer for any resulting increases
in the cost of transporting the coal to Buyer's generating stations. Any
resulting savings in such transportation costs shall be retained by Buyer.
Title to and risk of loss of coal sold will pass to Buyer and the coal
will be considered to be delivered when barges containing the coal are
disengaged by Buyer's barging contractor from the loading dock. Buyer or its
contractor shall furnish suitable barges in accordance with a
4
<PAGE>
Contract #LGE 99-002
delivery schedule provided by Buyer to Seller. Seller shall arrange and pay for
all costs of transporting the coal from the mines to the loading docks and
loading and trimming the coal into barges to the proper draft and the proper
distribution within the barges. Buyer shall arrange for transporting the coal by
barge from the loading dock to its generating station(s) and shall pay for the
cost of such transportation. For delays caused by Seller in handling the
scheduling of shipments with Buyer's barging contractor, Seller shall be
responsible for any demurrage or other penalties assessed by said barging
contractor (or assessed by Buyer) which accrue at the Delivery Point, including
the demurrage, penalties for loading less than the specified minimum tonnage per
barge, or other penalties assessed for barges not loaded in conformity with
applicable requirements. Buyer shall be responsible to deliver barges in as
clean and dry condition as practicable. Seller shall require of the loading dock
operator that the barges and towboats provided by Buyer or Buyer's barging
contractor be provided convenient and safe berth free of wharfage, dockage and
port charges; that while the barges are in the care and custody of the loading
dock, all U.S. Coast Guard regulations and other applicable laws, ordinances,
rulings, and regulations shall be complied with, including adequate mooring and
display of warning lights; that any water in the cargo boxes of the barges be
pumped out by the loading dock operator prior to loading; that the loading
operations be performed in a workmanlike manner and in accordance with the
reasonable loading requirements of Buyer and Buyer's barging contractor; and
that the loading dock operator carry landing owners or wharfinger's insurance
with basic coverage of not less than $300,000.00 and total of basic coverage and
excess liability coverage of not less than $1,000,000.00, and provide evidence
thereof to Buyer in the form of a certificate of insurance from the insurance
carrier or an acceptable certificate of self-insurance with
5
<PAGE>
Contract #LGE 99-002
requirement for 30 days advance notification of Buyer in the event of
termination of or material reduction in coverage under the insurance.
SECTION 6. QUALITY.
ss. 6.1 Specifications. The coal delivered hereunder shall conform to the
following specifications on an "as received" basis:
Guaranteed Monthly Rejection Limits
Specifications Weighted Average (per shipment)
- --------------------------------------------------------------------------------
BTU/LB. min. 10,550 LESS THAN 10,300
------ ------
LBS/MMBTU:
MOISTURE max. 11.94 GREATER THAN 14.70
------ ------
ASH max. 12.89 GREATER THAN 14.60
------ ------
SULFUR max. 3.22 GREATER THAN 3.80
------ ------
SULFUR min. 2.75 LESS THAN 2.55
------ ------
CHLORINE max. 0.05 GREATER THAN 0.06
------ ------
FLUORINE max. 0.010 GREATER THAN 0.015
------ ------
NITROGEN max. 1.35 GREATER THAN 1.45
------ ------
ASH/SULFUR RATIO min. 2.75:1 LESS THAN 2.5:1
------ ------
SIZE (3" x 0"):
Top size (inches)* max. 3x0 GREATER THAN 3x0
------ ------
Fines (% by wgt)
Passing 1/4" screen max. 50 GREATER THAN 55
------ ------
% BY WEIGHT:
VOLATILE min. 31 LESS THAN 29
------ ------
FIXED CARBON min. 38 LESS THAN 30
------ ------
GRINDABILITY (HGI) min. 55 LESS THAN 50
------ ------
BASE ACID RATIO (B/A) 0.60 .90
------ ------
SLAGGING FACTOR** max. 2.0 GREATER THAN 2.0
------ ------
FOULING FACTOR*** max. 0.5 GREATER THAN 0.7
------ ------
6
<PAGE>
Contract #LGE 99-002
ASH FUSION TEMPERATURE ((degree)F) (ASTM D1857)
REDUCING ATMOSPHERE
Initial Deformation min. 1940 min. 1900
---- ----
Softening (H=W) min. 2035 min. 1975
---- ----
Softening (H=1/2W) min. 2085 min. 2000
---- ----
Fluid min. 2190 min. 2100
---- ----
OXIDIZING ATMOSPHERE
Initial Deformation min. 2300 min. 2200
---- ----
Softening (H=W) min. 2330 min. 2280
---- ----
Softening (H=1/2W) min. 2425 min. 2300
---- ----
Fluid min. 2490 min. 2375
---- ----
* All the coal will be of such size that it will pass through a screen
having circular perforations three (3) inches in diameter, but shall not contain
more than fifty per cent (50%) by weight of coal that will pass through a
screen having circular perforations one-quarter (1/4) of an inch in diameter.
** Slagging Factor (R(s))=(B/A) x (Percent Sulfur by Weight(Dry))
*** Fouling Factor (R(f))=(B/A) x (Percent Na(2)O by Weight(Dry))
The Base Acid Ratio (B/A) is herein defined as:
BASE ACID RATIO (B/A) = (Fe(2)O(3) + CaO + MgO + Na(2)O + K(2)O)
----------------------------------------
(SiO(2) + Al(2)O(3) + TiO(2))
Note: As used herein GREATER THAN means greater than:
LESS THAN means less than.
ss. 6.2 Definition of "Shipment". As used herein, a "shipment" shall mean
one barge load, a barge lot load, in accordance with Buyer's sampling and
analyzing practices.
ss. 6.3 Rejection.
7
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Contract #LGE 99-002
Buyer has the right, but not the obligation, to reject any shipment which
fail(s) to conform to the Rejection Limits set forth in ss. 6.1 or contains
extraneous materials. Buyer must reject such coal within seventy-two (72) hours
of receipt of the coal analysis provided for in ss. 7.2 or such right to reject
is waived. In the event Buyer rejects such non-conforming coal, title to and
risk of loss of the coal shall be considered to have never passed to Buyer and
Buyer shall return the coal to Seller or, at Seller's request, divert such coal
to Seller's designee, all at Seller's cost and risk. Seller shall replace the
rejected coal within five (5) working days from notice of rejection with coal
conforming to the Rejection Limits set forth in ss. 6.1. If Seller fails to
replace the rejected coal within such five (5) working day period or the
replacement coal is rightfully rejected, Buyer may purchase coal from another
source in order to replace the rejected coal. Seller shall reimburse Buyer for
(i) any amount by which the actual price plus transportation costs to Buyer of
such coal purchased from another source exceed the price of such coal under this
Agreement plus transportation costs to Buyer from the Delivery Point; and (ii)
any and all transportation, storage, handling, or other expenses that have been
incurred by Buyer for rightfully rejected coal. This remedy is in addition to
all of Buyer's other remedies under this Agreement and under applicable law and
in equity for Seller's breach.
If Buyer fails to reject a shipment of non-conforming coal which it had
the right to reject for failure to meet any or all of the Rejection Limits set
forth in ss.6.1 or because such shipment contained extraneous materials, then
such non-conforming coal shall be deemed accepted by Buyer; however, the
quantity Seller is obligated to sell to Buyer under the Agreement may or may not
be reduced by the amount of each such non-conforming shipment at Buyer's sole
option and the shipment shall nevertheless be considered "rejectable" under ss.
6.4. Further, for
8
<PAGE>
Contract #LGE 99-002
shipments containing extraneous materials, which include, but are not limited
to, slate, rock, wood, corn husks, mining materials, metal, steel, etc., the
estimated weight of such materials shall be deducted from the weight of that
shipment.
ss. 6.4 Suspension and Termination.
If the coal sold hereunder fails to meet one or more of the Guaranteed
Monthly Weighted Averages set forth in ss.6.1 for any two (2) months in a six
(6) month period, or if nine (9) barge shipments in a 30 day period are
rejectable by Buyer, or if Buyer receives at generating station(s) two (2) rail
shipments which are rejectable in any 30 day period, Buyer may upon notice
confirmed in writing and sent to Seller by certified mail, suspend future
shipments except shipments already loaded into barges and/or railcars. Seller
shall, within 10 days, provide Buyer with reasonable assurances that subsequent
monthly deliveries of coal shall meet or exceed the Guaranteed Monthly Weighted
Averages set forth in ss.6.1 and that the source will exceed the rejection
limits set forth in ss.6.1. If Seller fails to provide such assurances within
said 10 day period, Buyer may terminate this Agreement by giving written notice
of such termination at the end of the 10 day period. A waiver of this right for
any one period by Buyer shall not constitute a waiver for subsequent periods. If
Seller provides such assurances to Buyer's reasonable satisfaction, shipments
hereunder shall resume and any tonnage deficiencies resulting from suspension
may be made up at Buyer's sole option. Buyer shall not unreasonably withhold its
acceptance of Seller's assurances, or delay the resumption of shipment. If
Seller, after such assurances, fails to meet any of the Guaranteed Monthly
Weighted Averages for any one (1) month within the next six (6) months or if
three (3) barge shipments or 1 rail shipment are rejectable within any one (1)
month during such six (6) month period, then Buyer may terminate
9
<PAGE>
Contract #LGE 99-002
this Agreement and exercise all its other rights and remedies under applicable
law and in equity for Seller's breach.
SECTION 7. WEIGHTS, SAMPLING AND ANALYSIS.
ss. 7.1 Weights. The weight of the coal delivered hereunder shall be
determined on a per shipment basis by Buyer on the basis of scale weights at the
generating station(s) unless another method is mutually agreed upon by the
parties. Such scales shall be duly reviewed by an appropriate testing agency and
maintained in an accurate condition. Seller shall have the right, at Seller's
expense and upon reasonable notice, to have the scales checked for accuracy at
any reasonable time or frequency. If the scales are found to be over or under
the tolerance range allowable for the scale based on industry accepted
standards, either party shall pay to the other any amounts owed due to such
inaccuracy for a period not to exceed thirty (30) days before the time any
inaccuracy of scales is determined.
ss. 7.2 Sampling and Analysis. The sampling and analysis of the coal
delivered hereunder shall be performed by Buyer and the results thereof shall be
accepted and used for the quality and characteristics of the coal delivered
under this Agreement. All analyses shall be made in Buyer's laboratory at
Buyer's expense in accordance with industry-accepted standards. Samples for
analyses shall be taken by any industry-accepted standard, mutually acceptable
to both parties, may be composited and shall be taken with a frequency and
regularity sufficient to provide reasonably accurate representative samples of
the deliveries made hereunder. Seller represents that it is familiar with
Buyer's sampling and analysis practices, and finds them to be acceptable. Buyer
shall notify Seller in writing of any significant changes in Buyer's sampling
and analysis practices. Any such changes in Buyer's sampling and analysis
practices shall, except for industry
10
<PAGE>
Contract #LGE 99-002
accepted changes in practices, provide for no less accuracy than the sampling
and analysis practices existing at the time of the execution of this Agreement,
unless the Parties otherwise mutually agree.
Each sample taken by Buyer shall be divided into 4 parts and put into
airtight containers, properly labeled and sealed. One part shall be used for
analysis by Buyer; one part shall be used by Buyer as a check sample, if Buyer
in its sole judgment determines it is necessary; one part shall be retained by
Buyer until the 25th of the month following the month of unloading (the
"Disposal Date") and shall be delivered to Seller for analysis if Seller so
requests before the Disposal Date; and one part ("Referee Sample") shall be
retained by Buyer until the Disposal Date. Seller shall be given copies of all
analyses made by Buyer by the 12th business day of the month following the month
of unloading. Seller, on reasonable notice to Buyer shall have the right to have
a representative present to observe the sampling and analyses performed by
Buyer. Unless Seller requests a Referee Sample analysis before the Disposal
Date, Buyer's analysis shall be used to determine the quality of the coal
delivered hereunder. The Monthly Weighted Averages shall be determined by
utilizing the individual shipment analyses.
If any dispute arises before the Disposal Date, the Referee Sample
retained by Buyer shall be submitted for analysis to an independent commercial
testing laboratory ("Independent Lab") mutually chosen by Buyer and Seller. For
each coal quality specification in question, a dispute shall be deemed not to
exist and Buyer's analysis shall prevail and the analysis of the Independent Lab
shall be disregarded if the analysis of the Independent Lab differs from the
analysis of Buyer by an amount equal to or less than:
(i) 0.50% moisture
11
<PAGE>
Contract #LGE 99-002
(ii) 0.50% ash on a dry basis
(iii) 100 Btu/lb. on a dry basis
(iv) 0.10% sulfur on a dry basis.
For each coal quality specification in question, if the analysis of the
Independent Lab differs from the analysis of Buyer by an amount more than the
amounts listed above, then the analysis of the Independent Lab shall prevail and
Buyer's analysis shall be disregarded. The cost of the analysis made by the
Independent Lab shall be borne by Seller to the extent that Buyer's analysis
prevails and by Buyer to the extent that the analysis of the Independent Lab
prevails.
SECTION 8. PRICE.
ss. 8.1 Base Price. The base price ("Base Price") of the coal to be sold
hereunder will be firm and will be determined by the year in which the coal is
delivered as defined in ss.5 in accordance with the following schedule:
YEAR BASE PRICE ($ PER MMBTU)
---- ------------------------
1999 0.8303 F.O.B. barge
2000 *
* Buyer and Seller will begin price negotiations on or before October 1, 1999,
for prices to be effective during the year 2000. The parties then shall attempt
to negotiate an agreement on new prices and/or other terms and conditions
between October 1, 1999 and December 1, 1999. If the parties do not reach an
agreement by December 1, 1999, then this Agreement will terminate as of December
31, 1999 without liability due to such termination for either party, and the
parties shall have no further obligations hereunder except those incurred prior
to the date of termination.
12
<PAGE>
Contract #LGE 99-002
ss.8.2 Quality Price Discounts.
(a) The Base Price is based on coal meeting or exceeding the Guaranteed
Monthly Weighted Average specifications as set forth in ss.6.1. Quality price
discounts shall be applied for each specification each month to reflect failures
to meet the Guaranteed Monthly Weighted Averages set forth in ss.6.1, as
determined pursuant to ss.7.2, subject to the provisions set forth below. The
discount values used are as follows:
DISCOUNT VALUES
---------------
$/MMBTU
-------
BTU/LB. 0.2604
$/LB./MMBTU
-----------
SULFUR 0.1232
ASH 0.0083
MOISTURE 0.0016
(b) Notwithstanding the foregoing, for each specification each month,
there shall be no discount if the actual Monthly Weighted Average meets the
applicable Discount Point set forth below. However, if the actual Monthly
Weighted Average fails to meet such applicable Discount Point, then the discount
shall apply and shall be calculated on the basis of the difference between the
actual Monthly Weighted Average and the Guaranteed Monthly Weighted Average
pursuant to the methodology shown in Exhibit A attached hereto.
Guaranteed Monthly
Weighted Average Discount Point
---------------- --------------
BTU/LB min. 10,550 10,350
LB/MMBTU:
SULFUR max. 3.22 3.50
ASH max. 12.89 14.25
13
<PAGE>
Contract #LGE 99-002
MOISTURE max. 11.94 13.50
For example, if the actual Monthly Weighted Average of sulfur equals 3.62
lb/MMBTU, then the applicable discount would be ( 3.62 lb. - 3.22 lb.) X
$.1232/lb/MMBTU = $.04928/MMBTU.
ss. 8.3 Payment Calculation. Exhibit A attached hereto shows the
methodology for calculating the coal payment and quality price discounts for the
month Seller's coal was unloaded by Buyer. If there are any such discounts,
Buyer shall apply credit to amounts owed Seller for the month the coal was
unloaded.
SECTION 9. INVOICES, BILLING AND PAYMENT.
ss. 9.1 Invoicing Address. Invoices will be sent to Buyer at the following
address:
Louisville Gas and Electric Company
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
Attention: Director, Fuels Management
With a copy to:
Louisville Gas and Electric Company
220 West Main Street
P.O. Box 32010
Louisville, KY 40232
Attention: Manager, Accounts Payable
14
<PAGE>
Contract #LGE 99-002
ss. 9.2 Invoice Procedures for Coal Shipments. Seller shall invoice Buyer
at the Base Price, minus any quality price discounts, for all coal unloaded in a
calendar month by the fifteenth (15th) of the following month.
ss. 9.3 Payment Procedures for Coal Shipments. For all coal delivered
pursuant to Article 5 hereof, and unloaded at the Delivery Point between the
first (1st) and fifteenth (15th) days of any calendar month. Buyer shall make
preliminary payment for seventy-five percent (75%) of the amount owed for the
coal (based on the assumption that the coal will meet all guaranteed monthly
quality parameters) by the twenty-fifth (25th) day of such month of delivery,
except that, if the 25th is not a regular work day, payment shall be made on the
next regular work day. For all coal delivered, as defined in Article 5 hereof,
and unloaded at the Delivery Point between the sixteenth (16th) and the last day
of any calendar month. Buyer shall make preliminary payment for seventy-five
percent (75%) of the delivered coal by the tenth (10th) day of the month
following the month of delivery, except that, if the 10th is not a regular work
day, payment shall be made on the next regular work day.
Preliminary payment shall be in the amount of seventy-five percent (75%)
of the then current price on a dollar per ton basis as calculated by the
guaranteed monthly weighted average BTU/lb. and the then current Base Price in
cents per MMBTU.
A reconciliation of amounts paid and amounts owed shall occur by the
twenty-fifth (25th) day of the month following the month of delivery. (For
example, Buyer will make one initial payment by September 25 for seventy-five
percent of coal delivered September 1 through 15, and another initial payment by
October 10 for seventy-five percent of coal delivered September 16 through 30. A
reconciliation will occur by October 25 for all deliveries made in September.)
15
<PAGE>
Contract #LGE 99-002
The reconciliation shall be made as follows: Seller shall invoice Buyer on or
before the 15th day of the month following the month of delivery. The amount due
for all coal (based on the Base Price minus any Quality Price Discounts)
delivered and unloaded and accepted by Buyer during any calendar month shall be
calculated and compared to the sum of the preliminary payments made for coal
delivered and unloaded and accepted during such month. The difference shall be
paid by or paid to Seller, as applicable, by the twenty-fifth (25th) day of the
month following the month of delivery, except, that, if the 25th is not a
regular work day, payment shall be made in the next regular work day. Buyer
shall mail all payments to Seller's account at Peabody COALSALES Company, P.O.
Box 503099, St. Louis, MO 63150-3099 or electronically transfer funds as
requested by Seller.
ss. 9.4 Withholding. Buyer shall have the right to withhold from payment
of any billing or billings (i) any sums which it is not able in good faith to
verify or which it otherwise in good faith disputes, (ii) any damages resulting
from or likely to result from any breach of this Agreement by Seller, and (iii)
any amounts owed to Buyer from Seller. Buyer shall notify Seller promptly in
writing of any such issue, stating the basis of its claim and the amount it
intends to withhold.
Payment by Buyer, whether knowing or inadvertent, of any amount in dispute
shall not be deemed a waiver of any claims or rights by Buyer with respect to
any disputed amounts or payments made.
SECTION 10. FORCE MAJEURE.
16
<PAGE>
Contract #LGE 99-002
ss. 10.1 General Force Majeure. If either party hereto is delayed in or
prevented from performing any of its obligations or from utilizing the coal sold
under this Agreement due to acts of God, war, riots, civil insurrection, acts of
the public enemy, strikes, lockouts, fires, floods or earthquakes, which are
beyond the reasonable control and without the fault or negligence of the party
affected thereby, then the obligations of both parties hereto shall be suspended
to the extent made necessary by such event; provided that the affected party
gives written notice to the other party as early as practicable of the nature
and probable duration of the force majeure event. The party declaring force
majeure shall exercise due diligence to avoid and shorten the force majeure
event and will keep the other party advised as to the continuance of the force
majeure event.
During any period in which Seller's ability to perform hereunder is
affected by a force majeure event, Seller shall not deliver any coal to any
other buyers to whom Seller's ability to supply is similarly affected by such
force majeure event unless contractually committed to do so at the beginning of
the force majeure event; and further shall deliver to Buyer under this Agreement
at least a pro rata portion (on a per ton basis) of its total contractual
commitments to all its buyers to whom Seller's ability to supply is similarly
affected by such force majeure event in place at the beginning of the force
majeure event. An event which affects the Seller's ability to produce or obtain
coal from a mine other than the Coal Property will not be considered a force
majeure event hereunder.
Tonnage deficiencies resulting from a force majeure event shall be made up
at Buyer's sole option on a mutually agreeable schedule.
ss. 10.2 Environmental Law Force Majeure. The parties recognize that,
during the continuance of this Agreement, legislative or regulatory bodies or
the courts may adopt
17
<PAGE>
Contract #LGE 99-002
environmental laws, regulations, policies and/or restrictions which will make it
impossible or commercially impracticable for Buyer to utilize this or like kind
and quality coal which thereafter would be delivered hereunder. If as a result
of the adoption of such laws, regulations, policies, or restrictions, or change
in the interpretation or enforcement thereof, Buyer decides that it will be
impossible or commercially impracticable (uneconomical) for Buyer to utilize
such coal, Buyer shall so notify Seller, and thereupon Buyer and Seller shall
promptly consider whether corrective actions can be taken in the mining and
preparation of the coal at Seller's mine and/or in the handling and utilization
of the coal at Buyer's generating station; and if in Buyer's sole judgment such
actions will not, without unreasonable expense to Buyer, make it possible and
commercially practicable for Buyer to so utilize coal which thereafter would be
delivered hereunder without violating any applicable law, regulation, policy or
order, Buyer shall have the right, upon the later of 60 days notice to Seller or
the effective date of such restriction, to terminate this Agreement without
further obligation hereunder on the part of either party.
SECTION 11. CHANGES. Buyer may, by mutual agreement with Seller, at any
time by written notice pursuant to ss. 12 of this Agreement, make changes within
the general scope of this Agreement in any one or more of the following: quality
of coal or coal specifications, quantity of coal, method or time of shipments,
place of delivery (including transfer of title and risk of loss), method(s) of
weighing, sampling or analysis and such other provision as may affect the
suitability and amount of coal for Buyer's generating stations.
If any such changes makes necessary or appropriate an increase or decrease
in the then current price per ton of coal, or in any other provision of this
18
<PAGE>
Contract #LGE 99-002
Agreement, an equitable adjustment shall be made in: price, whether current or
future or both, and/or in such other provisions of this Agreement as are
affected directly or indirectly by such change, and the Agreement shall
thereupon be modified in writing accordingly.
Any claim by the Seller for adjustment under this ss. 11 shall be asserted
within thirty (30) days after the date of Seller's receipt of the written notice
of change, it being understood, however that Seller shall not be obligated to
proceed under this Agreement as changed until an equitable adjustment has been
agreed upon. The parties agree to negotiate promptly and in good faith to agree
upon the nature and extent of any equitable adjustment.
SECTION 12. NOTICES.
ss. 12.1 Form and Place of Notice. Any official notice, request for
approval or other document required to be given under this Agreement shall be in
writing, unless otherwise provided herein, and shall be deemed to have been
sufficiently given when delivered in person, transmitted by facsimile or other
electronic media, delivered to an established mail service for same day or
overnight delivery, or dispatched in the United States mail, postage prepaid,
for mailing by first class, certified, or registered mail, return receipt
requested, and addressed as follows:
If to Buyer: Louisville Gas and Electric Company
P.O. Box 32010
Louisville, Kentucky 40232
Attn.: Director, Fuels Management
If to Seller: Peabody COALSALES Company
701 Market Street, Suite 930
St. Louis, Missouri 63101
Attn: Vice-President, Sales
19
<PAGE>
Contract #LGE 99-002
ss. 12.2 Change of Person or Address. Either party may change the person
or address specified above upon giving written notice to the other party of such
change.
ss. 12.3 Electronic Data Transmittal. Seller hereby agrees, at Seller's
cost, to electronically transmit shipping notices and/or other data to Buyer in
a format acceptable to and established by Buyer upon Buyer's request. Buyer
shall provide Seller with the appropriate format and will inform Seller as to
the electronic data requirements at the appropriate time.
SECTION 13. (Intentionally Omitted)
SECTION 14. RIGHT TO RESELL. Buyer shall have the unqualified right to
sell all or any of the coal purchased under this Agreement.
SECTION 15. INDEMNITY AND INSURANCE.
ss. 15.1 Indemnity. Seller agrees to indemnify and save harmless Buyer,
its officers, directors, employees and representatives from any responsibility
and liability for any and all claims, demands, losses, legal actions for
personal injuries, property damage and pollution (including reasonable inside
and outside attorney's fees) (i) relating to the trucks, barges or railcars
provided by Buyer or Buyer's contractor while such trucks, barges or railcars
are in the care and custody of the loading dock or loading facility, (ii) due to
any failure of Seller to comply with laws, regulations or ordinances, or (iii)
due to the acts or omissions of Seller in the performance of this Agreement.
ss. 15.2 Insurance. Seller agrees to carry insurance coverage with minimum
limits as follows:
(1) Commercial General Liability, including Completed Operations and
Contractual Liability, $1,000,000 single limit liability.
20
<PAGE>
Contract #LGE 99-002
(2) Automobile General Liability, $1,000,000 single limit liability.
(3) In addition, Seller shall carry excess liability insurance
covering the foregoing perils in the amount of $4,000,000 for any one
occurrence.
(4) Workers' Compensation and Employer's Liability with statutory
limits.
If any of the above policies are written on a claims made basis, then the
retroactive date of the policy or policies will be no later than the effective
date of this Agreement. Certificates of Insurance satisfactory in form to the
Buyer and signed by the Seller's insurer shall be supplied by the Seller to the
Buyer evidencing that the above insurance is in force and that not less than 30
calendar days written notice will be given to the Buyer prior to any
cancellation or material reduction in coverage under the policies. The Seller
shall cause its insurer to waive all subrogation rights against the Buyer
respecting all losses or claims arising from performance hereunder. Evidence of
such waiver satisfactory in form and substance to the Buyer shall be exhibited
in the Certificate of Insurance mentioned above. Seller's liability shall not be
limited to its insurance coverage.
SECTION 16. TERMINATION FOR DEFAULT.
Subject to ss. 6.4, if either party hereto commits a material breach of
any of its obligations under this Agreement at any time, including, but not
limited to, a breach of a representation and warranty set forth herein, then the
other party has the right to give written notice describing such breach and
stating its intention to terminate this Agreement no sooner than 30 days after
the date of the notice (the "notice period"). If such material breach is curable
and the breaching party cures such material breach within the notice period,
then the Agreement shall not be terminated due to such material breach. If such
material breach is not curable or the breaching party fails to
21
<PAGE>
Contract #LGE 99-002
cure such material breach within the notice period, then this Agreement shall
terminate at the end of the notice period in addition to all the other rights
and remedies available to the aggrieved party under this Agreement and at law
and in equity.
SECTION 17. TAXES, DUTIES AND FEES.
Seller shall pay when due, and the price set forth in ss. 8 of this
Agreement shall be inclusive of, all taxes, duties, fees and other assessments
of whatever nature imposed by governmental authorities with respect to the
transactions contemplated under this Agreement.
SECTION 18. DOCUMENTATION AND RIGHT OF AUDIT.
Seller shall maintain all records and accounts pertaining to payments,
quantities, quality analyses, and source for all coal supplied under this
Agreement for a period lasting through the term of this Agreement and for two
years thereafter. Buyer shall have the right at no additional expense to Buyer
to audit, copy and inspect such records and accounts at any reasonable time upon
reasonable notice during the term of this Agreement and for 2 years thereafter.
SECTION 19. EQUAL EMPLOYMENT OPPORTUNITY. To the extent applicable, Seller
shall comply with all of the following provisions which are incorporated herein
by reference: Equal Opportunity regulations set forth in 41 CFR ss. 60-1.4(a)
and (c) prohibiting discrimination against any employee or applicant for
employment because of race, color, religion, sex, or national origin; Vietnam
Era Veterans Readjustment Assistance Act regulations set forth in 41 CFR ss.
50-250.4 relating to the employment and advancement of disabled veterans and
veterans of the Vietnam Era; Rehabilitation Act regulations set forth in 41 CFR
ss. 60-741.4
22
<PAGE>
Contract #LGE 99-002
relating to the employment and advancement of qualified disabled employees and
applicants for employment; the clause known as "Utilization of Small Business
Concerns and Small Business Concerns Owned and Controlled by Socially and
Economically Disadvantaged Individuals" set forth in 15 USC ss. 637(d)(3); and
subcontracting plan requirements set forth in 15 USC ss. 637(d).
SECTION 20. COAL PROPERTY INSPECTIONS. Buyer and its representatives, and
others as may be required by applicable laws, ordinances and regulations shall
have the right at all reasonable times and at their own expense to inspect the
Coal Property, including the loading facilities, scales, sampling system(s),
wash plant facilities, and mining equipment for conformance with this Agreement.
Seller shall undertake reasonable care and precautions to prevent personal
injuries to any representatives, agents or employees of Buyer (collectively,
"Visitors") who inspect the Coal Property. Any such Visitors shall make every
reasonable effort to comply with Seller's regulations and rules regarding
conduct on the work site, made known to Visitors prior to entry, as well as
safety measures mandated by state or federal rules, regulations and laws. Buyer
understands that mines and related facilities are inherently high-risk
environments. Buyer's failure to inspect the Coal Property or to object to
defects therein at the time Buyer inspects the same shall not relieve Seller of
any of its responsibilities nor be deemed to be a waiver of any of Buyer's
rights hereunder.
SECTION 21. MISCELLANEOUS.
ss. 21.1 Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of Kentucky, and all questions of performance of
obligations hereunder shall be determined in accordance with such laws.
23
<PAGE>
Contract #LGE 99-002
ss. 21.2 Headings. The paragraph headings appearing in this Agreement are
for convenience only and shall not affect the meaning or interpretation of this
Agreement.
ss. 21.3 Waiver. The failure of either party to insist on strict
performance of any provision of this Agreement, or to take advantage of any
rights hereunder, shall not be construed as a waiver of such provision or right.
ss. 21.4 Remedies Cumulative. Remedies provided under this Agreement shall
be cumulative and in addition to other remedies provided under this Agreement or
by law or in equity.
ss. 21.5 Severability. If any provision of this Agreement is found
contrary to law or unenforceable by any court of law, the remaining provisions
shall be severable and enforceable in accordance with their terms, unless such
unlawful or unenforceable provision is material to the transactions contemplated
hereby, in which case the parties shall negotiate in good faith a substitute
provision.
ss. 21.6 Binding Effect. This Agreement shall bind and inure to the
benefit of the parties and their successors and assigns.
ss. 21.7 Assignment.
A. Seller shall not, without Buyer's prior written consent, make any
assignment or transfer of this Agreement, by operation of law or otherwise,
including without limitation any assignment or transfer as security for any
obligation, and shall not assign or transfer the performance of or right or duty
to perform any obligation of Seller hereunder; provided, however, that Seller
may assign the right to receive payments for coal directly from Buyer to a
24
<PAGE>
Contract #LGE 99-002
lender as part of any accounts receivable financing or other revolving credit
arrangement which Seller may have now or at any time during the term of this
Agreement.
B. Buyer shall not, without Seller's prior written consent, assign this
Agreement or any right for the performance of or right or duty to perform any
obligation of Buyer hereunder; except that, without such consent, Buyer may
assign this Agreement in connection with a transfer by Buyer of all or a part
interest in the generating station comprising the Delivery Point, or as part of
a merger or consolidation involving Buyer.
C. In the event of an assignment or transfer contrary to the provisions of
this section, the non-assigning party may terminate this Agreement immediately.
ss. 21.8 Entire Agreement. This Agreement contains the entire agreement
between the parties as to the subject matter hereof, and there are no
representations, understandings or agreements, oral or written, which are not
included herein.
ss. 21.9 Amendments. Except as otherwise provided herein, this Agreement
may not be amended, supplemented or otherwise modified except by written
instrument signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
LOUISVILLE GAS AND ELECTRIC PEABODY COALSALES COMPANY
COMPANY
By: /s/ Wayne T. Lucas By: /s/ Richard A. Navarre
------------------------------ ----------------------------
Wayne T. Lucas Richard A. Navarre
EVP - Power Generation President
Date: January 7, 1999 Date: January 3, 1999
---------------------------- --------------------------
25
<PAGE>
Contract #LGE 99-002
Exhibit A
Page 1 of 2
EXHIBIT A
SAMPLE COAL PAYMENT CALCULATIONS
Total Evaluated Coal Costs for Contract No.
- --------------------------------------------------------------------------------
For contracts supplied from multiple "origins", each "origin will be calculated
individually.
<TABLE>
<CAPTION>
Section I Base Data
-------------------------------------------- ---------------
<S> <C> <C>
1) Base F.O.B. price per ton: $ 17.52 /ton
-----------
1a) Tons of coal delivered: tons
-----------
2) Guaranteed average heat content: 10,550 BTU/LB.
-----------
2r) As received monthly avg. heat content: BTU/LB.
-----------
2a) Energy delivered in MMBTU: MMBTU
-----------
[(Line 1a) *2,000 lb./ton*(Line 2r)] *MMBTU/1,000,000 BTU
[( ) *2,000 lb./ton*( )]*MMBTU/1,000,000 BTU
2b) Base F.O.B. price per MMBTU: $ 0.8303 MMBTU
-----------
{[(Line 1)/(Line 2)]*(1 ton/2,000 lb.)]}*1,000,000 BTU/MMBTU
{[( /ton)/( BTU/LB)]*(1 ton/2,000 lb.)}*1,000,000 BTU/MMBTU
3) Guaranteed monthly avg. max. sulfur 3.22 LBS./MMBTU
-----------
3r) As received monthly avg. sulfur LBS./MMBTU
-----------
4) Guaranteed monthly avg. ash 12.89 LBS./MMBTU
-----------
4r) As received monthly avg. ash LBS./MMBTU
-----------
5) Guaranteed monthly avg. max. moisture 11.94 LBS./MMBTU
-----------
5r) As received monthly avg. moisture LBS./MMBTU
-----------
<CAPTION>
Section II Discounts
-------------------------------------------- ---------------
Assign a (-) to all discounts (round to (5) decimal places)
6d) BTU/LB.: If line 2r LESS THAN 10,350 BTU/lb. then:
{1 - (line 2r) / (line 2)} *
$0.2604/MMBTU
{1 - ( ) / ( )} * $0.2604 = $ /MMBTU
----------
7d) SULFUR: If line 3r is greater than 3.50 lbs./MMBTU
[ (line 3r) - (line 3) ] * 0.1232/lb. Sulfur
[ ( ) - ( ) ] * 0.1232 = $ /MMBTU
----------
8d) ASH: If line 4r is greater than 14.25 lbs./MMBTU
[ (line 4r) - (line 4) ] * 0.0083/MMBTU
[ ( ) - ( ) ] * 0.0083 = $ /MMBTU
----------
9d) MOISTURE: If line 5r is greater than 1350 lbs./MMBTU
[ (line 5r) - (line 5) ] * 0.0016/MMBTU
[ ( ) - ( ) ] * 0.0016 = $ /MMBTU
----------
</TABLE>
26
<PAGE>
Contract #LGE 99-002
Exhibit A
Page 2 of 2
<TABLE>
<CAPTION>
Total Price
Section III Adjustments
-------------------------------------------- ---------------
<S> <C>
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 + $ = $
----- ---------- -----
</TABLE>
27
<PAGE>
EXHIBIT 10.78
F-98627
COAL SUPPLY AGREEMENT
THIS AGREEMENT, made and entered into effective the 31st day of
December, 1997, by and between, LESLIE RESOURCES, INC.(hereafter called Seller),
being a Kentucky corporation having its principal offices at Hazard, Kentucky,
and KENTUCKY UTILITIES COMPANY, (hereafter called KU), a Kentucky corporation,
having its principal office at Lexington, Kentucky;
WITNESSETH:
That, in consideration of the mutual covenants and agreements herein
contained, the parties agree as follows:
SECTION I. TERM AND TERMINATION. Subject to the provisions of Section V
and XII, and unless sooner terminated as elsewhere herein provided, this
Agreement shall commence January 1, 1998 and end December 31, 2000.
SECTION II. QUANTITIES OF COAL TO BE SOLD, PURCHASED AND DELIVERED;
MANNER OF DELIVERIES.
1. As used in this Agreement, "ton" shall mean a short ton of 2,000
pounds avoirdupois weight. "Month" shall mean a calendar month; and "Contract
Year" shall mean a period of twelve successive months commencing on any January
1 within the term hereof. "As-received" shall mean at unloading at E.W. Brown.
2. In accordance with and subject to all terms, provisions and
conditions herein, during the term hereof, Seller shall sell and ship to KU, and
KU shall purchase, receive and pay
<PAGE>
Seller for, a Base Quantity of 1,200,000 tons of coal. This Base Quantity
shall be sold, purchased and delivered in the quantities set forth below in
subparagraph (a), as ratable on a monthly basis as possible.
(a) During the term, the quantities of coal to be sold, purchased and
delivered hereunder shall be as follows:
<TABLE>
<CAPTION>
PERIOD BASE QUANTITY
------ -------------
<S> <C>
January 1, 1998 through 400,000 tons
December 31, 1998
January 1, 1999 through 400,000 tons
December 31, 1999
January 1, 2000 through 400,000 tons
December 31, 2000
</TABLE>
(b) Deliveries shall be by unit trains of 60 to 80 cars, with deliveries
spaced evenly throughout the period.
(c) At KU's option, delivery may be in rail cars provided by KU.
(d) KU will coordinate with Seller in mutually scheduling all trains
delivering coal under this Agreement.
SECTION III. SOURCE AND SHIPMENT OF, AND TITLE TO, COAL.
1. The primary source of coal to supply the requirements of this
Agreement shall be Seller's mines in Perry, Knott, Letcher, Breathitt, and
Leslie Counties, Kentucky, consisting of its mine Permits listed in Exhibit (A)
and including any areas or seams adjacent or nearby which may hereinafter be
added through additional Permits or by renewal or modification of existing
Permits. Seller may substitute
- - 2 -
<PAGE>
comparable quality coal from other operations that Seller controls now or in
the future, so long as such coal (A) is delivered to KU at no greater
delivered cost per million BTU including taxes, (B) is of a quality and in
conformity with the Specifications set forth in Section IV and (C) prior
written approval for such substitution has been obtained from KU, which shall
not be unreasonably withheld.
It is understood that Seller may from time to time purchase small
quantities of coal from independent third parties in the ordinary course of
Seller's business, and that such coal may also be commingled with Seller's
production and shipped to KU provided each of the conditions of subpart (a) and
(b) above are fully satisfied.
2. Seller represents and warrants that the coal reserves now
controlled by Seller and the production capacity are sufficient to satisfy all
the requirements of this Agreement. It is understood that some of the production
may be sold to purchasers other than KU; provided, however, that Seller shall,
at all times while this Agreement remains in effect, maintain sufficient coal
reserves and production capacity for Seller's full performance of its
obligations hereunder.
3. Seller shall prepare and load the coal into railroad cars,
including as above specified, at KU's election, cars provided by KU. Seller
shall load the coal at Seller's loading point at Typo, Kentucky. Notwithstanding
any of the foregoing provisions of this Section III, coal shall be loaded by
- - 3 -
<PAGE>
Seller at a fast loading tipple which shall have the capacity of loading a unit
train within four (4) hours, and shall otherwise conform to the definition of a
fast loading tipple as contained in the tariffs of the carrying railroad.
Seller shall deliver the coal to KU f.o.b. the railroad cars at the
loading facility at Typo.
4. KU and Seller hereby agree among themselves to be responsible for
any rail deficit charges because of movement of less than required minimum in
the same proportion that each party has caused the incurrence of such deficit,
except in the case of Force Majeure.
5. Coal mined, processed, and transported under this Agreement shall
comply in all material respects, with all applicable federal, state, and local
laws and regulations.
SECTION IV. QUALITY AND SPECIFICATIONS OF COAL.
1. GENERAL. Coal delivered hereunder shall be:
(a) coal meeting the Specifications set out in Paragraph 2(a) below,
(b) coal shall be freeze-proofed by Seller upon reasonable notice by KU
to Seller. Costs of freeze-proofing shall be borne by KU upon a
calculation to be mutually agreed upon.
2. SPECIFICATIONS.
(a) All coal received hereunder shall, on an as-received basis, meet the
following specifications:
<TABLE>
<S> <C>
Calorific Value 12,000 BTU/lb.
Ash 12.00% Maximum
</TABLE>
- - 4 -
<PAGE>
<TABLE>
<S> <C>
Moisture 10.00% Maximum
Grindability (hardgrove Index) 45 Minimum
Ash Softening (H=1/2W)
(Temperature in reducing atmosphere) 2300 DEG. F Minimum
Volatile Matter 32% Minimum
Fixed Carbon 42%
S02** 2.75 lbs/MMBTU Maximum
Percent Sulfur 0.80% Minimum *
Sizing 2" x 0
Fines (less than 1/4") 35% Maximum
</TABLE>
*The stated Percent Sulfur of 0.80% Minimum shall be effective for only
such time as KU does not experience operating difficulties. If, in KU's
sole judgment, operating difficulties are encountered, KU shall notify
Seller in writing of such difficulties. KU and Seller shall then attempt
to reach a mutually agreeable solution to increase the sulfur content of
coal shipments hereunder in order to alleviate the operating difficulties
(including potential purchase by Seller of third party coal for a portion
of the coal required hereunder). If no mutually agreeable solution can be
reached within 30 days of KU's notification to Seller of operating
difficulties, either party may terminate this agreement without incurring
further obligation or liability hereunder.
(b) All coal to be delivered hereunder, on an as-received basis, shall
be classified as rejectable at the qualities specified below:
<TABLE>
<S> <C>
Calorific Value 11,500 BTU/lb. Minimum
Ash 14.50% Maximum
Moisture 12.00% Maximum
Grindability (Hardgrove Index) 42 Minimum
Ash Softening (H=1/2W) (Temperature 2300 DEG. F Minimum
in reducing atmosphere)
Volatile Matter 32% Minimum
S02** 2.75 lbs/MMBTU Maximum
Percent Sulfur 0.80% Minimum
Fines (less than 1/4") 45% Maximum
</TABLE>
20,000
**SO2 = ---------------- x % Sulfur
BTU/lb
(c) KU shall have the right to classify as rejectable any trainload
of coal which, when sampled and analyzed in
- - 5 -
<PAGE>
accordance with the provisions of Section VIII, fails to meet the
Specifications set out in Paragraph 2(b) of this Section IV. If
KU does reject coal failing to meet such Specifications, and the
coal has not been unloaded from the railroad cars, Seller shall
forthwith remove the coal from the property where the coal is to
be unloaded from railcars. Should KU reject any railcar load(s)
of coal in any shipment, Seller shall arrange for the removal at
Seller's cost of such rejected car(s). Seller's removal cost
shall include, but not be limited to, all costs assessed by the
railroad, reconsignment charges, transportation charges, and
demurrage charges. In addition, if the rejected car(s) of coal
are KU-provided car(s), then Seller shall also pay the per diem
and mileage charges as defined in the Car Hire Tables of the
Official Railway Equipment Register, ICC-RED-6411 Series, as
amended. Such per diem charges shall be effective as of the first
7:00 AM following KU's rejection until the railcar(s) are
unloaded at a destination specified by Seller and then returned
to a destination specified by KU (or by the railroad, if
applicable) for further utilization. Such mileage charges shall
be based on the loaded and empty miles traveled by the rejected
car(s) from the point of rejection to such specified return
- - 6 -
<PAGE>
destination. If one or more trains received hereunder by KU
during any calendar month are classified by KU as rejectable
coal, or if KU has other reasonable grounds to anticipate that
further shipments will be rejectable coal, KU shall have the
option of stopping further shipments of coal by Seller until
such time as Seller furnishes to KU reasonable assurance that
the quality of coal to be shipped hereunder will meet the
Specifications in Paragraph 2(a). In lieu of rejecting the
coal, KU may at its option purchase the rejected coal on a basis
mutually agreed upon.
SECTION V. PRICES OF COAL Prices hereafter specified are to be paid by KU
to Seller for coal delivered and accepted hereunder. Such prices shall not be
increased by increases in Seller's cost of Production, except such prices shall
be subject only to the Adjustments herein specified in Section V.1 and V.2.
1. BEGINNING JANUARY 1, 1998. The Price to be paid by KU to Seller
for coal delivered and accepted hereunder, shipped by Seller from Typo Kentucky
shall be as follows:
<TABLE>
<CAPTION>
PERIOD COAL RECEIVED PRICE PER TON F.O.B. RAILCAR
-------------------- ----------------------------
<S> <C>
January 1, 1998 through
December 31, 1998 $20.55
</TABLE>
Such price shall remain fixed during the contract year.
2. BEGINNING JANUARY 1, 1999 AND JANUARY 1, 2000. Buyer and Seller
will begin price negotiation for each year, 1999 & 2000, by September 1 of the
preceding year, with the intent to
- - 7 -
<PAGE>
reach a mutually agreed price which would begin on January 1, 1999 or January
1, 2000, as appropriate. Such prices shall remain fixed during each contract
year.
If mutual agreement cannot be reached by November 1, of either year, this
coal supply agreement will terminate on December 31, 1998 or December 31, 1999,
as appropriate, without either party incurring further obligation or liability.
3. The above price shall be subject to adjustment only in the event
that new applicable federal or state statutes, regulations, or other
governmental impositions, including but not limited to tax increases or
decreases that occur after January 1, 1998, which cause Seller's cost for
providing coal to KU under this Agreement to increase or decrease. Seller shall
promptly notify KU of any such changes and supply sufficient documentation for
KU to verify any such changes. Such adjustments shall be made effective on the
first day of the calendar month following the effective date of any change,
(except when such change is effective on the first day of the month in which
case the adjustment shall be made as of such date).
SECTION VI. CALORIFIC, ASH AND S02 ADJUSTMENTS.
1. As soon as practicable after the end of each month, KU shall
determine and report to Seller the weighted average calorific value, in BTU per
pound, the weighted average ash content, in percent, and the weighted average
S02 value, in pounds per MMBTU, from the weights of such coal determined as
provided in Section VII and from analyses thereof made as
- - 8 -
<PAGE>
provided in Section VIII. The debits or credits resulting from the calorific,
ash and SO2 adjustments described in the following paragraphs (2), (3), (4),
and (5) will be made by the end of the following month.
2. CALORIFIC ADJUSTMENT. Such weighted average calorific value shall
be used in adjusting the price of coal in the following manner. The F.O.B.
Railcar Price then in effect, specified and determined as provided in Section V,
but before any Ash or S02 Adjustment provided for hereafter in this Section VI,
shall be adjusted to reflect variation from 12,000 BTU per pound in such
weighted average calorific value of the coal received, in arriving at the price
(exclusive of any Ash or SO2 Adjustment) to be paid by KU to Seller for such
coal, in accordance with the following formula (assuming, for purposes of
illustration, an adjusted price, prior to the Calorific Adjustment, of $20.55):
ACTUAL BTU/LB. - 12,000 x $20.55 = Premium/Penalty Per Ton
-----------------------
12,000
3. ASH ADJUSTMENT.
(a) If no more than two individual shipment received in a month exceeds
13.50% ash, KU shall determine the weighted average ash percentage
of coal received during such month, and:
(i) If the monthly weighted average percent of ash is in excess
of 13.00% and is less than or equal to 14.00%, the downward
price adjustment shall be $0.20/ton per percent with a base
of 13.00%, I.E.,
- - 9 -
<PAGE>
$0.20/ ton x (monthly weighted ash %-13.00%) = downward price
adjustment).
Example: Monthly weighted average ash analysis 13.50%,
$0.20/ton x (13.50%-13.00%) = $0.10/ton is the downward
price adjustment.
(ii) If the monthly weighted average percent of ash is greater
than 14.00%, and is less than or equal to 15.00%, the
downward price adjustment shall be $0.40/ton per percent
with a base of 13.00% I.E., $0.40/ton x (monthly weighted
ash % - 13.00%) = downward price adjustment.
Example: Monthly weighted average ash analysis 14.50%,
$0.40/ton x (14.50% - 13.00%) = $0.60/ton is the downward
price adjustment.
(iii) If the monthly weighted average percent of ash is greater
than 15.00%, the downward price adjustment shall be
$0.70/ton per percent with a base of $13.00%, I.E.,
$0.70/ton x (monthly weighted ash % - 13.00%) = downward
price adjustment.
Example: Monthly weighted average ash analysis 15.50%,
$0.70/ton x (15.50% - 13.00%) = $1.75/ton is the downward
price adjustment.
(b) If the percent of ash of three or more shipments received in a month
is greater than 13.50%, then the ash penalty for the entire month
shall be computed on a
- - 10 -
<PAGE>
shipment by shipment basis.
(i) If the shipment percent of ash is in excess of 13.00% and
is less than or equal to 14.00%, the downward price
adjustment shall be $0.20/ton per percent with the base of
13.00%, I.E., $0.20/ton x (shipment ash % - 13.00%) =
downward price adjustment.
Example: Shipment ash analysis is 13.50%, $0.20/ton x
(13.50% - 13.00%) = $0.10/ton is the downward price
adjustment.
(ii) If the shipment percent of ash is greater than 14.00% and
is less than or equal to 15.00%, the downward price
adjustment shall be $0.40/ton per percent with a base of
13.00%, I.E., $0.40/ton x (shipment ash % - 13.00%) -
downward price adjustment.
Example: Shipment ash analysis is 14.50%, $0.40/ton x
(14.50% - 13.00%) = $0.60/ton is the downward price
adjustment.
(iii) If the shipment percent of ash is greater than 15.00%, the
downward price adjustment shall be $0.70/ton per percent with
a base of 13.00%, I.E., $0.70/ton x (shipment ash % - 13.00%)
= downward price adjustment.
Example: Shipment ash analysis 15.50%, $0.70/ton
- - 11 -
<PAGE>
x (15.50% - 13.00%) - $1.75/ton is the downward price
adjustment.
4. SO2 ADJUSTMENT.
(a) Such weighted average S02, value shall be used in adjusting the
price of coal in the following manner. The price of coal accepted
containing a monthly weighted average S02 in excess of the 2.75
lbs./mmbtu guarantee will be adjusted downward according to the
following formula:
(ACTUAL S02 - 2.75) (ACTUAL BTU/LB.)
------------------------------------
9434 = $ per ton downward adjustment
Example: Monthly weighted average SO2 = 3.00; monthly weighted
average BTU per lb. = 12,000: SO2 Guarantee = 2.75.
(3.00 - 2.75) (12.000)
----------------------
9434 = $0.32 per ton downward adjustment
(b) If any individual shipment received in a month exceeds E.W. Brown's
State Implementation Plan limit of 5.15 Lbs. S02/mmbtu, KU shall
reduce said shipment by $2.00 per ton. This reduction is in addition
to any S02 adjustment as stated in Section VI, paragraph 4(a).
5. COMBINATION OF ADJUSTMENTS. The 11,500 BTU per pound Minimum
Calorific Value, 14.50% Maximum Ash, and 2.75 Lbs./mmbtu maximum SO2,
Specifications in Paragraph 2(b) of Section IV shall apply in the determination
of coal rejectability; but if KU receives and burns coal not meeting
- - 12 -
<PAGE>
Specifications in Paragraph 2(a) of Section IV, the actual BTU per pound, actual
Ash content and actual SO2/mmbtu of the coal shall be used in computation of the
Adjustments provided for in this Section VI. When the Calorific Adjustment, Ash
Adjustment, and SO2 Adjustment have been independently made as above provided,
the results shall be combined, and the final adjustment to the price payable for
such coal is so determined.
SECTION VII. WEIGHT DETERMINATIONS. The determinations of the weight of
the coal, for purposes of payment, shall be made by the rail carrier on its
scales or other scales approved by rail carrier.
SECTION VIII. SAMPLING AND ANALYSIS.
1. The Seller has sole responsibility for quality control of the
coal and shall forward its loading quality to KU as soon after train loading as
practicable. KU will, for purposes of payment, take a representative sample at
E.W. Brown of each shipment. Samples taken by KU, for purposes of payment, shall
be taken in accordance with KU's approved procedures of sampling. The analyses
shall be performed in KU's laboratory in accordance with KU's approved methods.
Each sample shall be analyzed for the as-received average moisture, ash, BTU and
sulfur content.
2. KU shall compute the as-received weighted average moisture, ash,
BTU and sulfur content for all coal received during each calendar month. Such
calculations and payment of any
- - 13 -
<PAGE>
premium/penalty adjustments will be delivered to Seller before the end of the
following month. The values so determined shall be binding upon the parties
unless and until it is established, by one or more independent laboratories
using the referee sample as designated in Section VIII.3., that such analyses
or calculations have been erroneous.
3. Prior to testing, each gross sample shall be divided into four
equal portions and used as follows: one shall be analyzed to determine the
quality of the coal; one shall be available for Seller (Seller sample); one
shall be retained by KU, as the referee sample for a period of 30 days. If
requested by either party, such retained referee sample will be sent to the
location mutually agreed to for testing. All testing of any such sample by third
parties shall be at requester's expense unless the results differ by more than
the applicable ASTM reproducibility standards, in such case, KU will pay for
testing. If the independent laboratory results differ by more than the
applicable ASTM reproducibility, independent laboratory results will govern.
4. KU shall provide to Seller by mail or more expedient methods as
required, the as-received weighted average moisture, ash, BTU and sulfur content
of each sample.
5. Seller shall have the right to inspect, observe the operation of
any sampling device or appurtenance thereto, sample crusher, reducer, sample
container, laboratory equipment
- - 14 -
<PAGE>
or procedure of KU. A proven deficiency in KU's sampling or testing
procedures or facilities discovered by Seller shall be brought to KU's
attention, and KU shall take any needed corrective action.
SECTION IX. BILLING AND PAYMENT. Seller shall invoice KU for coal in each
shipment. Such invoices shall be itemized to the extent required by KU, and
shall be paid within 15 days after receipt of coal and receipt of invoice by KU.
SECTION X. RECORDS AND AUDITS. Seller shall maintain accurate and complete
books of account and records regarding coal delivered hereunder. KU, or
independent consultants or firms designated by KU, shall have the right at all
times to observe and inspect Seller's operations, and at any reasonable time or
times to examine and audit all pertinent books of account and records of Seller
for the purpose of verifying transactions and matters hereunder. If any such
examination or audit discloses that an error has occurred and resulted in an
overpayment or underpayment hereunder, the amount thereof shall be established
and promptly paid, by the owing party, to the party owed. This provision shall
survive the termination or expiration of this Agreement.
SECTION XI. COMPLIANCE WITH LAWS, REGULATIONS, POLICIES AND
RESTRICTIONS.
1. The parties recognize that, during the continuance of this
Agreement, legislative or regulatory bodies or the courts may adopt laws,
regulations, policies and/or restrictions which
- - 15 -
<PAGE>
will make it impossible or commercially impractical for Seller to continue
delivery hereunder. If as a result of the adoption of such laws, regulations,
policies or restrictions, or change in interpretation or enforcement thereof
Seller decides that it will be impossible, or economically or otherwise
impracticable for Seller to continue delivery hereunder, Seller shall so
notify KU, and thereupon Seller and KU shall promptly consider whether
corrective actions can be taken in the mining and preparation of the coal at
the mine and/or in the handling and utilization of the coal at KU's E.W.
Brown Station; and if in Seller's judgment such actions will not, without
unreasonable expense to Seller, make it possible and practical for Seller to
continue to deliver coal hereunder and without violating any applicable law,
regulation, policy or restriction, Seller shall have the right, upon notice
to KU, to terminate this Agreement without further obligation hereunder on
the part of either party; provided, however, that if the impracticality
pursuant to this Section XI of Seller's continuing to deliver coal hereunder
is only on economical grounds, KU may, at its option, prevent such
termination by agreeing to reimburse Seller for such expense to the extent
that Seller deems such expense to be unreasonable.
2. The parties also recognize that, during the continuance of this
Agreement, legislative or regulatory bodies or the courts may adopt laws,
regulations, policies and/or restrictions or change in interpretation or
enforcement thereof which will make it impossible or commercially impracticable
for
- - 16 -
<PAGE>
KU to utilize at E.W. Brown, this or like kind and quality coal which
thereafter would be delivered hereunder. If as a result of the adoption of
such laws, regulations, policies or restrictions, KU decides that it will be
impossible or economically or otherwise impracticable for KU to utilize at
KU's E.W. Brown Station coal which would be delivered hereunder, KU shall so
notify Seller, and thereupon KU and Seller shall promptly consider whether
corrective actions can be taken in the mining and preparation of the coal at
the mine and/or in the handling and utilization of the coal at KU's said
Station; and if in KU's judgment such actions will not, without unreasonable
expense to KU, make it possible and practical for KU to so utilize coal which
thereafter would be delivered hereunder and without violating any applicable
law, regulation, policy or order, KU shall have the right, upon notice to
Seller, to terminate this Agreement without further obligation hereunder on
the part of either party; provided, however, that, if the impracticality
pursuant to this Section XI of KU's utilizing the coal is only on economical
grounds, Seller may, at its option, prevent such termination by agreeing to
reimburse KU for such expense to the extent that KU deems such expense to be
unreasonable.
SECTION XII. FORCE MAJEURES.
1. DEFINITION. The term "force majeure" as used herein shall mean
any and all causes reasonably beyond the control of the party failing to
perform, such as but not limited to acts of God, acts of the public enemy,
insurrections, riots,
- - 18 -
<PAGE>
labor disputes, government closures, boycotts, labor and material shortages,
fires, explosions, floods, breakdowns or outages (including scheduled outages
for maintenance or repairs) of or damage to plants, equipment or facilities,
interruptions to power supplies or transportation, embargoes, and acts of
military or civil authorities, which wholly or partly prevent the mining,
processing, loading and/or delivering of the coal by Seller, or the
receiving, accepting and/or utilizing of the coal by KU. As used in the
preceding sentence, the phrase "prevent the receiving or accepting" (of the
coal by KU) shall include, but not be limited to, breakdowns or outages of
the material handling systems at the E.W. Brown Station. The parties
recognize that coal purchased by KU hereunder is intended by it for use in
its E.W. Brown Station. As used in this Paragraph, "scheduled outages for
maintenance or repairs" includes, but is not limited to, outages determined
by KU to be necessary for warranty inspections, periodic major overhauls,
identification and/or correction of causes of unsatisfactory performance
including but not limited to failure to meet environmental requirements,
and/or performance of maintenance or repairs reasonably believed to be
necessary to the avoidance of involuntary or forced outages. The outages do
not include outages for normal maintenance performed on an annual basis. Each
party shall promptly notify the other party following commencement of a force
majeure.
2. EFFECT HEREUNDER--GENERAL. If because of a force majeure either
party is unable to carry out any of its
- - 18 -
<PAGE>
obligations under this Agreement (other than the obligation to pay money in
connection with performance of the Agreement), and if such party shall
promptly give to the other party written notice of such force majeure, then
the obligations of the party giving such notice and the corresponding
obligations of the other party shall be suspended to the extent made
necessary by such force majeure and during its continuance; provided,
however, that the party giving such notice shall act promptly in reasonable
manner to eliminate such force majeure. Either party shall have the right to
elect to suspend the production, delivery, receipt, acceptance and/or sale or
purchase of coal, as the case may be, for the period of time during which
such force majeure exists; and, in the event of a force majeure declared by
Seller, KU, if it so elects, shall have the right during such period to
purchase coal from other sources, and, in the event of a force majeure
declared by KU, Seller, if it so elects, shall have the right during such
period to sell coal to others. Any deficiencies in deliveries of coal
hereunder caused by force majeures shall not be made up except by mutual
consent; but if Seller for any reason other than a KU force majeure fails to
deliver coal to KU pursuant to normal established shipment schedules but does
not notify KU of the occurrence of a force majeure, KU shall have the right
to require, but shall not be obligated to accept, make-up tonnages or
deliveries of tonnages so lost, at the price in effect when lost.
- -19 -
<PAGE>
3. TERMINATION FOR PROTRACTED FORCE MAJEURE(S). If (A) a force
majeure occurs, (B) the obligations of the parties are suspended pursuant to
provisions of this Section XII, (C) such condition (alone or extended by other
force majeures) continues so that the obligations of the parties remain
suspended for a period of six months, and (D) at the end of such six months or
at any time thereafter during the continuance of the force majeure(s) the party
other than the party suffering the force majeure(s), in the exercise of
reasonable judgment, concludes that there is no likelihood of discontinuance in
the immediate future of the force majeure(s) or the resulting suspension of the
obligations of the parties, then such party may terminate this Agreement without
liability to the party suffering the force majeure(s) by giving to such party
sixty days written notice of intention to terminate, unless the force majeure(s)
are discontinued and the obligations are restored within such sixty days.
SECTION XIII. WAIVERS AND REMEDIES.
1. The failure of either party to insist in any one or more
instances upon strict performance of any provision of this Agreement by the
other party, or to take advantage of any of its rights hereunder, shall not be
construed as a waiver by it of any such rights with respect to any subsequent
non-performance of such provision or other matter hereunder; but the provision
shall retain its effectiveness and enforceability, and the rights of
- - 20 -
<PAGE>
the parties shall continue and remain in full force and effect.
2. If, at the time a party takes action hereunder requested or
demanded by the other party, the party taking the action gives written notice
that it is doing so under protest and without agreement as to the
appropriateness of the action, then the taking of the action, even if thereafter
repeated without further notice, shall not give rise to application of the
principles of contemporaneous construction by the parties.
3. Each remedy specifically provided for under this Agreement shall
be taken and construed as cumulative and in addition to every other remedy
provided for herein or by law.
4. Except with respect to a termination by either party pursuant to
the provisions of Section XV, no default by either party in the performance of
any of its covenants or obligations hereunder, which except for this provision
would be the legal basis for the right of rescission or termination of this
Agreement by the other party, shall give or result in such a right unless and
until the defaulting party shall fail to correct or take all such actions as are
necessary to correct such default within thirty days after written notice of
claim of such default is given to the defaulting party by the other party.
SECTION XIV. NOTICES.
1. Any notice, request, consent, demand, report or statement which
is given to, or served upon, any party under any provision of or in relation to
this Agreement, shall be in
- - 21 -
<PAGE>
writing unless otherwise specifically provided herein, and shall be treated
as duly delivered when the same either is personally delivered to the
President or Vice President of KU in case of a notice to KU, or personally
delivered to the President or a Vice President of Seller in the case of a
notice to Seller, or is deposited in the United States mail, postage prepaid,
and properly addressed as follows:
If the notice is to KU,
Mr. Wayne T. Lucas
Senior Vice President
Kentucky Utilities Company
One Quality Street
Lexington, Kentucky 40507
Copy to: President
Kentucky Utilities Company
One Quality Street
Lexington, Kentucky 40507
(or to such other person or such other address as KU shall have
designated by due notice to Seller),
and
If the notice is to Seller,
Leslie Resources, Inc.
1921 Tori Drive
Hazard, Kentucky 41701
Attn: Mr. Greg Wells, President
(or to such other person or such other address as Seller shall have
designated by due notice to KU).
2. Notwithstanding the provisions in Paragraph 1, any notice,
request or demand pertaining to routine matters of an operating nature may be
delivered by mail, messenger, telephone, telegraph, telecopy or orally to the
party being notified as may be appropriate, and, if given by telephone,
telegraph, telecopy
- - 22 -
<PAGE>
or orally, shall be confirmed in writing as soon as practicable thereafter,
if the party to which the notice is given so requests in any particular
instance.
SECTION XV. ASSIGNMENT.
1. Seller shall not, without KU's prior written consent, make any
assignment or transfer of this Agreement, by operation of law or otherwise,
including any assignment or transfer as security for any obligation, and shall
not assign or transfer the performance of or right or duty to perform any
obligation of Seller hereunder; provided, however, that Seller may assign the
right to receive payments for coal directly from KU, as part of any accounts
receivable financing or other revolving credit arrangement which Seller may have
now or at any time during the term of this Agreement.
2. KU shall not, without Seller's prior written consent, assign this
Agreement or any right or the performance of or right or duty to perform any
obligation of KU hereunder; except that, without such consent, KU may assign
this Agreement in connection with and as part of a sale and transfer by KU of
all or a part interest in KU's E.W. Brown Generating Station, or as part of a
merger or consolidation involving KU.
3. In the event of any assignment or transfer contrary to the
provisions of this Section XV, the party not making such assignment or transfer
may terminate this Agreement immediately.
SECTION XVI. HEADINGS NOT TO AFFECT CONSTRUCTION. The
- - 23 -
<PAGE>
headings of the Sections, Paragraphs and Subparagraphs of this Agreement are
for convenient reference, and do not constitute any part of the provisions
hereof; nor shall the heading control or affect the meaning, construction or
effect of such provisions.
SECTION XVII. WRITTEN INSTRUMENT CONTAINS ENTIRE AGREEMENT. This written
instrument contains the entire agreement between the parties in respect of the
subject matter; and there are no other understandings or agreements between the
parties in respect thereof.
SECTION XVIII. CONSTRUCTION OF AGREEMENT. This Agreement shall be
governed by and construed according to the laws of the State of Kentucky.
IN TESTIMONY WHEREOF, witness the signatures of the parties, as of the day
and year written first above.
LESLIE RESOURCES, INC.
By: /S/ GREG WELLS - PRES.
-----------------------------
Greg Wells, President
KENTUCKY UTILITIES COMPANY
By: /S/ MICHAEL R. WHITLEY /S/WTL
-----------------------------
Michael R. Whitley, President
- - 24 -
<PAGE>
Exhibit (A)
<TABLE>
<CAPTION>
STATE FEDERAL
PERMITTEE OPERATOR MINES COUNTY STATE PERMIT # MSHA #
<S> <C> <C> <C> <C> <C> <C> <C>
Leslie Resources, Inc. Leslie Resources, Inc. Job #2-Walkers Branch Knott KY 860-0315 15-17013
Knott KY 860-0356 15-17013
Leslie Resources, Inc Leslie Resources, Inc. Job #5-Chavies Perry KY 897-0323 15-16606
987-0345
Leslie Resources, Inc Leslie Resources, Inc. Job #6-Wooten Leslie KY 866-0196 15-17281
Leslie Resources, Inc Leslie Resources, Inc. Job #8-Big Creek Perry KY 866-0219 15-17534
(A) Kem Coal, Inc. Leslie Resources, Inc. Job #8-Big Creek Perry KY 886-0225
Leslie Resources, Inc Leslie Resources, Inc. Job #8-Big Creek Perry KY 866-0226
(A) Mountain Clay, Inc. Leslie Resources, Inc. Job #24-Camp Creek Leslie KY 866-0229 15-17746
(A) Kem Coal, Inc. Meade & Sheperd Coal Job #25-Pads Branch Perry KY 497-0122 15-17747
(A) Kem Coal, Inc. Leslie Resources, Inc. Job #28-Ball Creek Perry KY 860-0351 15-17838
(A) Mountain Clay, Inc. Meade & Sheperd Coal Job #27-Perkins Perry KY 897-0384 15-17747
(A) Kem Coal, Inc. Leslie Resources, Inc. Job #31-Little Willard Perry KY 897-0358 15-10180
(A) Kem Coal, Inc. Leslie Resources, Inc. Job #30-Briar Fork Perry KY 897-0369 Pending
LOADOUT
(A) Acecc, Inc. Leslie Resources, Inc. Typo Tipple-Station No. 42621 Perry KY 897-6002 15-13495
</TABLE>
(A) All these companies are subsidiaries of Leslie Resources
Management, Inc., which is a holding company formed by
Mr. Greg Wells who owns a 100% of Leslie Resources
Management, Inc. and Leslie Resources, Inc.
- - 25 -
<PAGE>
Contract # F-98627
Amendment #1
AMENDMENT NO. ONE TO CONTRACT
THIS AMENDMENT NO. ONE IS entered into effective as of November 16, 1998,
by and between KENTUCKY UTILITIES COMPANY (hereinafter referred to as "KU"),
whose address is: 220 West Main Street, Louisville, Kentucky 40202, LESLIE
RESOURCES, INC. a Kentucky corporation and a subsidiary of AEI Holding Company,
Inc., with a principal address of 1500 North Big Run Road, Ashland, Kentucky
41102 ("Assignor") AEI COAL SALES COMPANY, INC., a Kentucky corporation
("Seller"), and AEI HOLDING COMPANY, INC., a Delaware corporation ("Guarantor").
In consideration of the agreements herein contained, the parties hereto
agree as follows:
1.0 MODIFICATIONS TO AGREEMENT
The Agreement heretofore entered into by KU and Assignor, dated effective
December 31, 1997, and identified by the Contract Number set forth above
(hereinafter referred to as "Agreement"), is hereby amended as follows:
1.1 KU hereby consents to Assignor's assignment and Seller's assumption
of all Assignor's right, title and interest in and to the Agreement,
pursuant to that certain Assignment and Assumption Agreement dated
November 16, 1998, between Assignor and Seller. KU's consent is
expressly conditioned on: (a) Seller's assumption of all Assignor's
obligations under the Agreement; and (b) Guarantor's guaranty of
Seller's obligations as set forth in that certain Guaranty Agreement
given by Guarantor to KU in connection with Seller's assumption of
Assignor's obligations. Hereinafter, references to "Seller" in the
Agreement, as amended hereby, shall be deemed to be references to
AEI Coal Sales Company, Inc.
1.2 Section II.2, Quantities, is hereby revised to provide that the Base
Quantity shall be defined as 1,600,000 tons of coal.
1.3 Section II.2(a) is hereby revised to provide that the quantities of
coal to be sold, purchased and delivered during the period of
December 15, 1998 through December 31, 1999 shall be 800,000 tons.
1.4 In Section IV.2 (a), Specifications, the as-received quality
specifications for Calorific value, Ash and SO2 are hereby revised
to provide that the following specifications shall be applicable
beginning on December 15, 1998, and continuing through the end of
the term:
Calorific Value 11,800 BTU/lb.
Ash 13.00% Maximum
SO2 3.00 Lbs. SO2/MMBtu Maximum
<PAGE>
Contract # F-98627
Amendment #1
1.5 In Section IV.2.(b), the as-received quality specification for SO2
classified as rejectable are hereby revised to provide that the
following specification shall be applicable beginning on December
15, 1998, and continuing through the end of the term:
SO2 3.75 Lbs. SO2/MMBtu Maximum
1.6 In Section V.1, Prices of Coal, the price per ton F.O.B. rail car
beginning on December 15, 1998, will be as follows:
December 15, 1998 through
December 31, 1999 $21.73 per ton
1.7 Section VI. (2) Calorific Adjustment and Section VI. 4 (a) SO2
Adjustment, are hereby revised to provide that beginning on December
15, 1998, and continuing through the end of the term, the following
specifications shall be applicable:
Section VI.(2). Calorific Adjustment. Such weighted average
calorific value shall be used in adjusting the price of coal
in the following manner. The F.O.B. Railcar Price then in
effect, specified and determined as provided in Section V, but
before any Ash or SO2 Adjustment provided for hereafter in
this Section VI, shall be adjusted to reflect variation from
11,800 BTU per pound in such weighted average calorific value
of the coal received, in arriving at the price (exclusive of
any Ash or SO2 Adjustment) to be paid by KU to Seller for such
coal, in accordance with the following formula (assuming, for
purposes of illustration, an adjusted price, prior to the
Calorific Adjustment, of $21.73):
Actual BTU/lb. - 11,800 x $21.73 = Premium/Penalty Per Ton.
-----------------------
11,800
Section VI.(4). SO2 Adjustment.
(a) Such weighted average SO2 value shall be used in
adjusting the price of coal in the following manner. The
price of coal accepted containing a monthly weighted
average SO2 in excess of the 3.00 Lbs./MMBtu guarantee
will be adjusted downward according to the following
formula:
(Actual SO2 - 3.00)(Actual Btu/lb.) = $ per ton downward adjustment
------------------------------------
9434
Example: Monthly weighted average SO2 = 3.50;
monthly weighted BTU per lb. = 12,000:
SO2 Guarantee = 3.00.
<PAGE>
Contract # F-98627
Amendment #1
(3.50 - 3.00) (12,000.) = $0.64 per ton downward adjustment
-----------------------
9434
1.8 Section VI.5, Combination of Adjustments, is hereby revised to add
the following sentence: "Beginning on December 15, 1998, and
continuing through the remainder of the term of the Contract, the
reference to SO2 set forth in this shall be revised to indicate an
SO2 of 3.00 lbs./MM BTU Maximum."
2.0 STATUS OF AGREEMENT
As amended herein, the Agreement is hereby ratified and shall continue in
full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
on the day and year written, but effective as of the day and year first set
forth above.
KENTUCKY UTILITIES COMPANY LESLIE RESOURCES, INC.
By: /s/ Wayne T. Lucas By: /s/ Larry Addington
-------------------------------- ---------------------------
Wayne T. Lucas Larry Addington
EVP - Power Generation Chairman
Date: 01/08/99 Date: 01/06/99
---------------------------- -------------------------
AEI COAL SALES COMPANY, INC.
By: /s/ Marc Merritt
-----------------------------
Marc R. Merritt
Its: President
Date: 01/06/99
---------------------------
<PAGE>
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT ("this Agreement") is made and entered
into this 16th day of November, 1998, by and between LESLIE RESOURCES, INC., a
Kentucky corporation, and a subsidiary of AEI RESOURCES, INC., a Delaware
corporation ("Assignor"), and AEI COAL SALES COMPANY, INC., a Kentucky
corporation ("Assignee").
WHEREAS Assignor entered into a Coal Supply Agreement dated December 31, 1997,
with Kentucky Utilities Company (the "Agreement") for the sale of coal from
various mines in Kentucky.
WHEREAS Assignor wishes to assign and Assignee wishes to accept all of
Assignor's rights and obligations under the Agreement.
NOW THEREFORE, for and in consideration of the mutual promises and terms and
conditions contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree to the following:
1. Transfer and Assignment. Assignor hereby transfers, conveys, assigns, sets
over and delivers to Assignee, and Assignee hereby accepts the transfer,
conveyance, assignment, set over and delivery of all of Assignor's present
and future right title and interest in and to the Agreement.
2. Assumption. Assignee hereby assumes and agrees to be bound by all of the
terms of and shall undertake all of Assignor's liabilities and obligations
of any kind related to the Agreement from and after the date of this
Agreement and all references to Assignor in the Agreement shall be deemed
to be references to the Assignee.
3. Notice to Third Parties; Consent of Third Parties. Assignor and Assignee
shall give notice to any necessary third party of the assignment and
transfer of the Agreement. The parties hereto agree to cooperate with one
another and execute such further documents and instruments, if any, and
take such other actions as may be necessary to give effect to this
Agreement. To the extent that the transfer to or assumption by Assignee of
the Agreement is deemed to require the consent of a third party, this
Agreement shall not constitute a transfer or assumption of same if such
transfer or assumption would constitute a breach, violation or termination
thereof or affect adversely Assignor's ability to convey such interest to
Assignee without impairment until such time as an appropriate consent of
such third party is obtained.
4. No Third Party Beneficiaries. Nothing in this Agreement shall confer any
rights upon any person or entity other than the parties hereto and each
such party's respective successors and assigns.
5. Successors and Assigns. The terms of this Agreement shall be binding upon,
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
6. Amendments and Waivers. No amendment, modification or discharge of this
Agreement and no waiver hereunder shall be valid or binding unless it is
set forth in writing and duly
<PAGE>
executed by the party against whom enforcement of the amendment
modification, waiver or discharge is sought. Any such waiver shall
constitute a waiver only with respect to the specific matter described in
such writing and shall in no way impair the rights of the party granting
such waiver in any other respect to at any other time.
7. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
8. Entire Agreement. This Agreement constitutes the entire agreement of the
parties and supersedes all prior agreements and understandings, both
written and oral, between the parties hereto with respect to the subject
matter hereof.
9. Headings. The headings contained in this Agreement are for purposes of
convenience only and shall not affect the meaning or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their authorized representatives as of the date first written above.
LESLIE RESOURCES, INC. AEI COAL SALES COMPANY, INC.
/s/ John Lynch /s/ Marc Merritt
- ------------------------------------ --------------------------------------
By: John Lynch By: Marc Merritt
Its: Sec. Its: President
Consent acknowledged:
KENTUCKY UTILITIES COMPANY
/s/ Wayne T. Lucas
- ------------------------------------
By: Wayne T. Lucas
Its: Executive Vice President, Power Production
<PAGE>
EXHIBIT 10.81
F-95513
COAL SUPPLY AGREEMENT
THIS AGREEMENT, made and entered into effective the 1st day of April,
1995, by and between CONSOLIDATION COAL COMPANY, QUARTO MINING COMPANY,
McELROY COAL COMPANY, CONSOL PENNSYLVANIA COAL COMPANY, GREENON COAL COMPANY
and NINEVEH COAL COMPANY, (hereafter collectively called Seller), being
Delaware corporations, with their principal offices in, Pittsburgh,
Pennsylvania, and KENTUCKY UTILITIES COMPANY, (hereafter called KU), a
Kentucky corporation, having its principal office at Lexington, Kentucky;
WITNESSETH:
That, in consideration of the mutual covenants and agreements herein
contained, the parties agree as follows:
SECTION I. TERM AND TERMINATION. Subject to the provisions of Section
XII, and unless sooner terminated as elsewhere herein provided, this
Agreement shall commence April 1, 1995 and end March 31, 2000.
SECTION II. QUANTITIES OF COAL TO BE SOLD, PURCHASED AND DELIVERED;
MANNER OF DELIVERIES.
1. As used in this Agreement, "ton" shall mean a short ton of 2,000 pounds
avoirdupois weight. "Month" shall mean a calendar month; and "Contract Year"
shall mean a period of twelve successive months commencing on any April 1 within
the term
-1-
<PAGE>
hereof. "As-received" shall mean at unloading at Ghent.
2. In accordance with and subject to all terms, provisions and
conditions herein, during the term hereof, Seller shall sell and ship to KU,
and KU shall purchase, receive and pay Seller for, a Base Quantity of
2,100,000 tons of coal. This Base Quantity shall be sold, purchased and
delivered in the quantities set forth below in subparagraph (a), as ratable
on a monthly basis as possible.
(a) During the term, the quantities of coal to be sold, purchased and
delivered hereunder shall be as follows:
<TABLE>
<CAPTION>
PERIOD BASE QUANTITY
------ --------------
<S> <C>
April 1, 1995 through 420,000 tons + 10% quarterly
March 31, 1996 -
April 1, 1996 through 420,000 tons + 10% quarterly
March 31, 1997 -
April 1, 1997 through 420,000 tons + 10% quarterly
March 31, 1998 -
April 1, 1998 through 420,000 tons + 10% quarterly
March 31, 1999 -
April 1, 1999 through 420,000 tons + 10% quarterly
March 31, 2000 -
</TABLE>
(b) On or before March 1, June 1, September 1, and December 1 of each
contract year, KU may give Seller notice in writing that KU elects to
increase or decrease the tons of coal to be sold, purchased and delivered
hereunder during the next Contract Quarter (April 1, July 1, October 1 and
January 1), by an amount, up to 10,500 tons for the Quarter.
(c) Seller shall cooperate with KU in the scheduling of the loading of
barges so that the delivery of coal from Seller
-2-
<PAGE>
may be coordinated with other barge deliveries to the Ghent Generating
Station.
SECTION III. SOURCE AND SHIPMENT OF, AND TITLE TO, COAL.
1. The primary source of coal to supply the requirements of this
Agreement shall be the Shoemaker Mine and the McElroy Mine in Marshall
County, West Virginia. As necessary to comply with the quality requirements
of this Agreement, Seller may blend with coal from such primary sources, coal
from Seller's Dilworth, Mahoning Valley, Bailey and/or Enlow Fork Mines.
Seller may substitute comparable quality coal from other reserves that Seller
controls now or in the future, so long as such coal (A) is delivered to KU at
no greater delivered cost per million BTU including taxes, (B) is of a
quality and in conformity with the Specifications set forth in Section IV and
(C) prior written approval for such substitution has been obtained from KU.
2. Seller represents and warrants that the coal reserves now controlled
by Seller and Seller's production capacity are sufficient to satisfy all the
requirements of this Agreement. It is understood that some of the production
may be sold to purchasers other than KU; provided, however, that Seller
shall, at all times while this Agreement remains in effect, maintain
sufficient coal reserves and production capacity for Seller's full
performance of its obligations hereunder.
3. Seller shall prepare and load the coal into barges provided by KU's
barge carrier. Seller shall deliver the coal to
-3-
<PAGE>
KU f.o.b. barge at the loading facilities between M.P. 93.7 and 115.6 on the
Ohio River.
4. Coal mined, processed, and transported under this Agreement shall
comply with all applicable federal, state, and local laws and regulations.
SECTION IV. QUALITY AND SPECIFICATIONS OF COAL.
1. GENERAL. Coal delivered hereunder shall be:
(a) Predominantly washed coal meeting the Specifications set out in
Paragraph 2(a) below,
(b) free of extraneous material, crushed to the size of 2" x 0 with no
more than 55% classified as (less than 1/4") fines, with no stoker or
other selected size or sizes or types of coal removed from the coal
delivered hereunder unless, and only to the extent, necessary to bring the
coal into compliance with Specifications herein.
2. SPECIFICATIONS.
(a) All coal received hereunder shall, on an as-received basis, meet the
following specifications:
<TABLE>
<CAPTION>
<S> <C>
Calorific Value 12,000 BTU/lb.
Ash 11.00% Maximum
Moisture 10.00% Maximum
Grindability (Hardgrove Index) 50 Minimum
Ash Softening (H=1/2W)
(Temperature in reducing atmosphere) 2100DEG. F Minimum
Volatile Matter 32% Minimum
Fixed Carbon 43% Minimum
Sulfur 1.5% Minimum
SO2 Emission Limit * 6.25 lbs/MMBTU Maximum
Sizing 2" x 0
Fines (less than 1/4") 55% Maximum
Chlorine (Dry) 0.12% Maximum
</TABLE>
-4-
<PAGE>
(b) All coal to be delivered hereunder, on an as-received basis, shall be
classified as rejectable at the qualities specified below:
<TABLE>
<CAPTION>
<S> <C>
Calorific Value 11,700 BTU/lb. Minimum
Ash 13.00% Maximum
Moisture 10.00% Maximum
Grindability (Hardgrove Index) 45.00 Minimum
Ash Softening (H=1/2W)
(Temperature in reducing atmosphere) 21000 F Minimum
Volatile Matter 32% Minimum
Sulfur 1.5% Minimum
S02 Emission Limit * 6.25 lbs/MMBTU Maximum
Fines (less than 1/4") 55% Maximum
Chlorine (Dry) 0.16% Maximum
</TABLE>
*SO2 = 20,000 X % Sulfur
-------------
BTU
(c) KU shall have the right to classify as rejectable any barge of coal
which, when sampled and analyzed in accordance with the provisions of
Section VIII, fails to meet the Specifications set out in Paragraph 2(b)
of this Section IV. If KU does reject coal failing to meet such
Specifications, Seller shall forthwith arrange for coal to be removed from
the barge or shipped to another purchaser at Seller's expense, including
but not limited to sampling and barge demurrage. If all coal received
hereunder by KU for three consecutive barges is classified by KU as
rejectable coal, or if KU has other reasonable grounds to anticipate that
-5-
<PAGE>
further shipments will be of rejectable coal, KU shall have the option of
stopping further shipments of coal by Seller until such time as Seller
furnishes to KU reasonable assurance that the quality of coal to be
shipped hereunder will meet the Specifications in Paragraph 2(a). In lieu
of rejecting the coal, KU may at its option purchase the rejected coal on
a "distress" basis mutually agreed upon.
(d) If 20-percent or more of monthly ratable shipments do not meet the
Specifications in Paragraph 2(a), KU shall also have the option of
stopping shipments until Seller furnishes reasonable assurance that the
quality of coal shipped hereunder meets the Specifications in Paragraph
2(a).
(e) SELLER HEREBY DISCLAIMS, AND BUYER HEREBY WAIVES, ANY AND ALL
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR
PURPOSE.
SECTION V. PRICES OF COAL. Prices hereafter specified are to be paid by KU
to Seller for coal delivered and accepted hereunder and include any barge
fleeting or switching charges. Such prices shall not be increased before April
1, 1995, by increases in Seller's cost of Reclamation, Royalty expenses,
Severance Taxes, any other applicable Taxes, or any other costs included in the
Price f.o.b. Barge. After April 1, 1995, such prices shall be subject only to
the Adjustments herein specified.
-6-
<PAGE>
1. BEGINNING APRIL 1, 1995. The Price f.o.b. Barge to be paid by KU to
Seller for coal delivered and accepted hereunder, shipped by Seller from M.P.
93.7 to M.P. 115.6 on the Ohio River shall be as follows:
<TABLE>
<CAPTION>
<S> <C>
PERIOD COAL RECEIVED PRICE PER TON F.O.B. BARGE
---------------------- ---------------------------
April 1, 1995 through $18.00
March 31, 1996
April 1, 1996 through $18.40
March 31, 1997
April 1, 1997 through $18.75
March 31, 1998
April 1, 1998 through $19.15
March 31, 1999
April 1, 1999 through $19.50
March 31, 2000
</TABLE>
Such prices shall remain fixed during each contract year.
2. The above price shall be subject to adjustment only in the event of
the enactment or change of any applicable federal or state statutes,
regulations, or other governmental impositions occurring after April 1, 1995,
which cause Seller's cost for providing coal to KU under this Agreement to
increase or decrease. Seller shall promptly notify KU of any such changes and
supply sufficient documentation for KU to verify any such changes. Such
adjustments shall be made effective on the first day of the calendar month
following the effective date of any change, (except when such change is
effective on the first day of the month in which case the adjustment shall be
made as of such date).
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<PAGE>
SECTION VI. CALORIFIC, ASH AND MOISTURE ADJUSTMENTS.
1. As soon as practicable after the end of each month, KU shall
determine and report to Seller the weighted average calorific value, in BTU
per pound, the weighted average ash content, in percent, and weighted average
moisture content, in percent, from the weights of such coal determined as
provided in Section VII and from analyses thereof made as provided in Section
VIII. The debits or credits resulting from the calorific, ash and moisture
adjustments described in the following paragraphs (2), (3), (4), and (5) will
be made by the end of the following month.
2. CALORIFIC ADJUSTMENT. Such weighted average calorific value shall be
used in adjusting the price of coal in the following manner. The f.o.b. Barge
Price then in effect, specified and determined as provided in Section V, but
before any Ash or Moisture Adjustment provided for hereafter in this Section VI,
shall be adjusted to reflect variation from 12,000 BTU per pound in such
weighted average calorific value of the coal received, in arriving at the price
(exclusive of any Ash or Moisture Adjustment) to be paid by KU to Seller for
such coal, in accordance with the following formula (assuming, for purposes of
illustration, an f.o.b. Barge Price, prior to the Calorific Adjustment, of
$18.00):
ACTUAL BTU/LB. - 12,000 x $18.00 = Premium/Penalty Per Ton
-----------------------------
12,000
3. ASH ADJUSTMENT.
(a) If the monthly weighted average percent of ash for all
-8-
<PAGE>
receipt(s) received is less than 8.00%, the upward price adjustment shall be
$0.20/ton per percent with a base of 8.00%, I.E., ($0.20/ton x (8.00% -
monthly weighted ash %) = upward price adjustment).
Example: Monthly weighted average ash analysis is 5.80%,
$0.20/ton x (8.00% - 5.80%) = $0.44/ton is the upward price adjustment.
(b) If the monthly weighted average percent of ash is in excess of 11.00% and is
less than or equal to 12.00%, the downward price adjustment shall be $0.20/ton
per percent with a base of 11.00%, I.E., ($0.20/ton x (monthly weighted ash % -
11.00%) = downward price adjustment).
Example: Monthly weighted average ash analysis is 11.50%,
$0.20/ton x (11.50% - 11.00%) = $0.10/ton is the downward price adjustment.
(c) If the monthly weighted average percent of ash is greater than 12.00% and is
less than or equal to 13.00%, the downward price adjustment shall be $0.40/ton
per percent with a base of 11.00% I.E., ($0.40/ton x (monthly weighted ash % -
11.00%) = downward price adjustment).
Example: Monthly weighted average ash analysis is 12.50%, $0.40/ton x
(12.50% - 11.00%) = $0.60/ton is the downward price adjustment.
(d) If the monthly weighted average percent of ash is greater than 13.00%, the
downward price adjustment shall be $0.70/ton per
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<PAGE>
percent with a basis of 11.00%, I.E., ($0.70/ton x (monthly weighted ash % -
11.00%) = downward price adjustment).
Example: Monthly weighted average ash analysis is 13.50%, $0.70/ton x
(13.50% - 11.00%) = $1.75/ton is the downward price adjustment.
4. MOISTURE ADJUSTMENT.
(a) If the monthly weighted average percent of moisture is in excess of 10.00%
and is less than or equal to 11.00%, the downward price adjustment shall be
$0.04/ton per percent with a base of 10.00%, I.E., ($0.04/ton x (monthly
weighted moisture % - 10.00%) = downward price adjustment). Example: Monthly
weighted average moisture analysis is 10.50%, $0.04/ton x (10.50% - 10.00%) =
$0.02/ton is the downward price adjustment.
(b) If the monthly weighted average percent of moisture is greater than 11.00%
and is less than or equal to 12.00%, the downward price adjustment shall be
$0.08/ton per percent with a base of 10.00%, I.E., ($0.08/ton x (monthly
weighted moisture % - 10.00%) = downward price adjustment). Example: Monthly
weighted average moisture analysis is 11.50%, $0.08/ton x (11.50% - 10.00%) =
$0.12/ton is the downward price adjustment.
(c) If the monthly weighted average percent of moisture is greater than 12.00%,
the downward price adjustment shall be $0.12/ton per percent with a base of
10.00%, I.E., ($0.12/ton x
-10-
<PAGE>
(monthly weighted moisture % - 10.00%) = downward price adjustment).
Example: Monthly weighted average moisture analysis is 12.50%, $0.12/ton x
(12.50% - 10.00%) = $0.30/ton is the downward price adjustment.
5. COMBINATION OF ADJUSTMENTS. The 11,700 BTU per pound Minimum Calorific
Value, 13.00% Maximum Ash, and 10.00% Maximum Moisture. Specifications in
Paragraph 2(b) of Section IV shall apply in the determination of coal
rejectability; but if KU receives and burns coal not meeting Specifications in
Paragraph 2(a) of Section IV, the actual BTU per pound, actual Ash content and
actual Moisture content of the coal shall be used in computation of the
Adjustments provided for in this Section VI. When the Calorific Adjustment, Ash
Adjustment, and Moisture Adjustment have been independently made as above
provided, the results shall be combined, and the final adjustment to the price
payable for such coal is so determined.
SECTION VII. WEIGHT DETERMINATIONS. The determinations of the weight of
the coal, for purposes of payment, shall be made with KU's belt scales at Ghent.
KU will provide to Seller by fax or other expeditious means, the barge weights,
as they become available. Said scales shall be inspected and certified in
accordance with the appropriate provisions of the laws of Kentucky. Seller shall
have the right to inspect at reasonable times and witness the certification of
said scales. If a
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<PAGE>
discrepancy is found as a result of said inspection or certification, same
shall be resolved by mutual consent.
SECTION VIII. SAMPLING AND ANALYSIS.
1. The Seller has sole responsibility for quality control of the coal and
shall forward its loading quality to KU as soon after barge loading as
practicable. KU will, for purposes of payment, take a representative sample at
Ghent. Samples taken by KU, for purposes of payment, shall be taken in
accordance with KU's approved procedures of sampling. Each barge shall be
sampled and analyzed by KU. The analyses shall be performed in KU's laboratory
in accordance with KU's approved methods. Each barge sample shall be analyzed
for the as-received average moisture, ash, BTU and sulfur content. KU will
furnish Seller revisions of KU's approved sampling procedures.
2. KU shall compute the as-received weighted average moisture, ash, BTU
and sulfur content for all coal received during each calendar month. Such
calculations and payment of any premium/penalty adjustments will be delivered to
Seller before the end of the following month. The values so determined shall be
binding upon the parties unless and until it is established, by one or more
independent laboratories using the referee sample as designated in Section
VIII.3., that such analyses or calculations have been erroneous.
3. Prior to testing, each gross sample shall be divided into four equal
portions and used as follows: one shall be
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<PAGE>
analyzed to determine the quality of the coal; one shall be available for
Seller (Seller sample); one shall be retained by KU, as the referee sample
for a period of 30 days. If requested by either party, such retained referee
sample will be sent to the location mutually agreed to for testing. All
testing of any such sample by third parties shall be at requester's expense
unless the results differ by more than the applicable ASTM reproducibility
standards, in such case, KU will pay for testing. If the independent
laboratory results differ by more than the applicable ASTM reproducibility,
independent laboratory results will govern.
4. KU shall provide to Seller, by mail or more expedient methods as
required, the as-received weighted average moisture, ash, BTU and sulfur content
of each barge received.
5. Seller shall have the right to inspect, observe the operation of any
sampling device or appurtenance thereto, sample crusher, reducer, sample
container, laboratory equipment or procedure of KU. A proven deficiency in KU's
sampling or testing procedures or facilities discovered by Seller shall be
brought to KU's attention, and KU shall take any needed corrective action.
SECTION IX. BILLING AND PAYMENT. Seller shall invoice KU for coal in each
shipment. Such invoices shall be itemized to the extent required by KU, and
shall be paid within 15 days after receipt of coal and receipt of invoice by KU.
-13-
<PAGE>
SECTION X. RECORDS AND AUDITS. Seller shall maintain accurate and
complete books of account and records regarding coal delivered hereunder. KU,
or independent consultants or firms designated by KU, shall have the right at
all times to observe and inspect Seller's operations, and at any reasonable
time or times to examine and audit all pertinent books of account and records
of Seller for the purpose of verifying transactions and matters hereunder. If
any such examination or audit discloses that an error has occurred and
resulted in an overpayment or underpayment hereunder, the amount thereof
shall be established and promptly paid, by the owing party, to the party
owed. This provision shall survive the termination or expiration of this
Agreement.
SECTION XI. COMPLIANCE WITH LAWS, REGULATIONS, POLICIES AND
RESTRICTIONS.
1. The parties recognize that, during the continuance of this Agreement,
legislative or regulatory bodies or the courts may adopt laws, regulations,
policies and/or restrictions which will make it impossible or commercially
impractical for Seller to continue delivery hereunder. If as a result of the
adoption of such laws, regulations, policies or restrictions, or change in
interpretation or enforcement thereof Seller decides that it will be impossible,
or economically or otherwise impracticable for Seller to continue delivery
hereunder, Seller shall so notify KU, and thereupon Seller and KU shall promptly
consider whether corrective actions can be taken in the mining and preparation
of
-14-
<PAGE>
the coal at Seller's mine and/or in the handling and utilization of the coal
at KU's Ghent Unit 1; and if in Seller's judgment such actions will not,
without unreasonable expense to Seller, make it possible and practical for
Seller to continue to deliver coal hereunder and without violating any
applicable law, regulation, policy or restriction, Seller shall have the
right, upon notice to KU, to terminate this Agreement without further
obligation hereunder on the part of either party; provided, however, that if
the impracticality of Seller's continuing to deliver coal hereunder is only
on economical grounds, KU may, at its option, prevent such termination by
agreeing to reimburse Seller for such expense to the extent that Seller deems
such expense to be unreasonable.
2. The parties also recognize that, during the continuance of this
Agreement, legislative or regulatory bodies or the courts may adopt laws,
regulations, policies and/or restrictions or change in interpretation or
enforcement thereof which will make it impossible or commercially impracticable
for KU to utilize in Ghent 1 Unit this or like kind and quality coal which
thereafter would be delivered hereunder. If as a result of the adoption of such
laws, regulations, policies or restrictions, KU decides that it will be
impossible or economically or otherwise impracticable for KU to utilize in KU's
Ghent Unit 1 coal which would be delivered hereunder, KU shall so notify Seller,
and thereupon KU and Seller shall promptly consider whether corrective actions
can
-15-
<PAGE>
be taken in the mining and preparation of the coal at the mine and/or in the
handling and utilization of the coal at KU's said Station; and if in KU's
judgment such actions will not, without unreasonable expense to KU, make it
possible and practical for KU to so utilize coal which thereafter would be
delivered hereunder and without violating any applicable law, regulation,
policy or order, KU shall have the right, upon notice to Seller, to terminate
this Agreement without further obligation hereunder on the part of either
party; provided, however, that, if the impracticality of KU's utilizing the
coal is only on economical grounds, Seller may, at its option, prevent such
termination by agreeing to reimburse KU for such expense to the extent that
KU deems such expense to be unreasonable.
SECTION XII. FORCE MAJEURES.
1. DEFINITION. The term "force majeure" as used herein shall mean any and
all causes reasonably beyond the control of the party failing to perform, such
as but not limited to acts of God, acts of the public enemy, insurrections,
riots, labor disputes, government closures, boycotts, labor and material
shortages, fires, explosions, floods, breakdowns or outages (including scheduled
outages for maintenance or repairs) of or damage to plants, equipment or
facilities, interruptions to power supplies or transportation, embargoes, and
acts of military or civil authorities, which wholly or partly prevent the
mining, processing, loading and/or delivering of the coal by Seller, or
-16-
<PAGE>
the receiving, accepting and/or utilizing of the coal by KU. As used in the
preceding sentence, the phrase "prevent the receiving or accepting" (of the
coal by KU) shall include, but not be limited to, breakdowns or outages of
the material handling systems at the Ghent Station. The parties recognize
that coal purchased by KU hereunder is intended by it for use in its Ghent
Unit 1. No breakdown or outage of any KU generating unit other than Ghent
Unit 1 shall constitute a force majeure hereunder; nor shall any asserted
ability of KU to use coal in any generating unit other than Ghent Unit 1 be
deemed to negate or eliminate a force majeure hereunder. As used in this
Paragraph, "scheduled outages for maintenance or repairs" includes, but is
not limited to, outages determined by KU to be necessary for warranty
inspections, periodic major overhauls, identification and/or correction of
causes of unsatisfactory performance including but not limited to failure to
meet environmental requirements, and/or performance of maintenance or repairs
reasonably believed to be necessary to the avoidance of involuntary or forced
outages. The outages do not include outages for normal maintenance performed
on an annual basis. For purposes of this Section XII, any force majeure
events which wholly or partly prevent the mining, processing, loading and/or
delivering of the coal by Seller from the Shoemaker and/or McElroy mine(s)
shall be deemed to equally prevent the mining, processing, loading and/or
delivering of the coal by Seller from all other sources listed in Section
III.1.
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<PAGE>
Each party shall promptly notify the other party following commencement of a
force majeure.
2. EFFECT HEREUNDER--GENERAL. If because of a force majeure either party
is unable to carry out any of its obligations under this Agreement (other than
the obligation to pay money in connection with performance of the Agreement),
and if such party shall promptly give to the other party written notice of such
force majeure, then the obligations of the party giving such notice and the
corresponding obligations of the other party shall be suspended to the extent
made necessary by such force majeure and during its continuance; provided,
however, that the party giving such notice shall act promptly in reasonable
manner to eliminate such force majeure. Either party shall have the right to
elect to suspend the production, delivery, receipt, acceptance and/or sale or
purchase of coal, as the case may be, for the period of time during which such
force majeure exists; and, in the event of a force majeure declared by Seller,
KU, if it so elects, shall have the right during such period to purchase coal
from other sources, and, in the event of a force majeure declared by KU, Seller,
if it so elects, shall have the right during such period to sell coal to others.
Any deficiencies in deliveries of coal hereunder caused by force majeures shall
not be made up except by mutual consent; but if Seller for any reason other than
a KU force majeure fails to deliver coal to KU pursuant to normal established
shipment schedules but does not
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<PAGE>
notify KU of the occurrence of a force majeure, KU shall have the right to
require, but shall not be obligated to accept, make-up tonnages or deliveries
of tonnages so lost, at the price in effect when lost.
3. TERMINATION FOR PROTRACTED FORCE MAJEURE(S). If (A) a force majeure
occurs, (B) the obligations of the parties are suspended pursuant to provisions
of this Section XII, (C) such condition (alone or extended by other force
majeures) continues so that the obligations of the parties remain suspended for
a period of six months, and (D) at the end of such six months or at any time
thereafter during the continuance of the force majeure(s) the party other than
the party suffering the force majeure(s), in the exercise of reasonable
judgment, concludes that there is no likelihood of discontinuance in the
immediate future of the force majeure(s) or the resulting suspension of the
obligations of the parties, then such party may terminate this Agreement without
liability to the party suffering the force majeure(s) by giving to such party
sixty days written notice of intention to terminate, unless the force majeure(s)
are discontinued and the obligations are restored within such sixty days.
SECTION XIII. WAIVERS AND REMEDIES.
1. The failure of either party to insist in any one or more instances upon
strict performance of any provision of this Agreement by the other party, or to
take advantage of any of its
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<PAGE>
rights hereunder, shall not be construed as a waiver by it of any such rights
with respect to any subsequent non-performance of such provision or other
matter hereunder; but the provision shall retain its effectiveness and
enforceability, and the rights of the parties shall continue and remain in
full force and effect.
2. If, at the time a party takes action hereunder requested or demanded
by the other party, the party taking the action gives written notice that it
is doing so under protest and without agreement as to the appropriateness of
the action, then the taking of the action, even if thereafter repeated
without further notice, shall not give rise to application of the principles
of contemporaneous construction by the parties.
3. Each remedy specifically provided for under this Agreement shall be
taken and construed as cumulative and in addition to every other remedy provided
for herein or by law.
4. Except with respect to a termination by either party pursuant to the
provisions of Section XV, no default by either party in the performance of
any of its covenants or obligations hereunder, which except for this
provision would be the legal basis for the right of rescission or termination
of this Agreement by the other party, shall give or result in such a right
unless and until the defaulting party shall fail to correct or take all such
actions as are necessary to correct such default within thirty days after
written notice of claim of such default is given to the defaulting party by
the other party.
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<PAGE>
5. In no event shall either party be liable to the other for any
consequential damages as the result of any breach of warranty or default in
performance hereunder.
SECTION XIV. NOTICES.
1. Any notice, request, consent, demand, report or statement which is
given to, or served upon, any party under any provision of or in relation to
this Agreement, shall be in writing unless otherwise specifically provided
herein, and shall be treated as duly delivered when the same either is
personally delivered to the President or Vice President of KU in case of a
notice to KU, or personally delivered to the President or a Vice President of
Seller in the case of a notice to Seller, or is deposited in the United
States mail, postage prepaid, and properly addressed as follows:
If the notice is to KU,
Mr. Wayne T. Lucas
Senior Vice President
Kentucky Utilities Company
One Quality Street
Lexington, Kentucky 40507
Copy to: President
Kentucky Utilities Company
One Quality Street
Lexington, Kentucky 40507
(or to such other person or such other address as KU shall have
designated by due notice to Seller),
and
If the notice is to Seller,
CONSOL, Inc.
Attn: Executive Vice President - Sales
1800 Washington Road
Pittsburgh, PA 15241
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<PAGE>
(or to such other person or such other address as Seller shall have
designated by due notice to KU).
2. Notwithstanding the provisions in Paragraph 1, any notice, request or
demand pertaining to routine matters of an operating nature may be delivered by
mail, messenger, telephone, telegraph, telecopy or orally to the party being
notified as may be appropriate, and, if given by telephone, telegraph, telecopy
or orally, shall be confirmed in writing as soon as practicable thereafter, if
the party to which the notice is given so requests in any particular instance.
3. CONSOL, Inc. ("CONSOL") shall administer this AGREEMENT exclusively on
behalf of Seller, to include as follows:
(a) the administration, of this Agreement;
(b) all payments by Buyer to Seller hereunder shall be made to CONSOL;
(c) all notices to be given or received by Seller shall be given or received by
CONSOL; and
(d) any amendment, supplement or modification to this Agreement shall be
negotiated by CONSOL, on behalf of Seller.
SECTION XV. ASSIGNMENT.
1. Except as part of any merger or consolidation involving any of the
companies comprising Seller, Seller shall not, without KU's prior written
consent, make any assignment or transfer of this Agreement, by operation of law
or otherwise, including any
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<PAGE>
assignment or transfer as security for any obligation, and shall not assign
or transfer the performance of or right or duty to perform any obligation of
Seller hereunder; provided, however, that Seller may assign the right to
receive payments for coal directly from KU, as part of any accounts
receivable financing or other revolving credit arrangement which Seller may
have now or at any time during the term of this Agreement.
2. KU shall not, without Seller's prior written consent, assign this
Agreement or any right or the performance of or right or duty to perform any
obligation of KU hereunder; except that, without such consent, KU may assign
this Agreement in connection with and as part of a sale and transfer by KU of
all or a part interest in KU's Ghent Generating Station, or as part of a
merger or consolidation involving KU.
3. In the event of any assignment or transfer contrary to the
provisions of this Section XV, the party not making such assignment or
transfer may terminate this Agreement immediately.
SECTION XVI. HEADINGS NOT TO AFFECT CONSTRUCTION. The headings of the
Sections, Paragraphs and Subparagraphs of this Agreement are for convenient
reference, and do not constitute any part of the provisions hereof; nor shall
the heading control or affect the meaning, construction or effect of such
provisions.
SECTION XVII. WRITTEN INSTRUMENT CONTAINS ENTIRE AGREEMENT. This
written instrument contains the entire agreement between the parties in
respect of the subject matter; and there are no other
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<PAGE>
understandings or agreements between the parties in respect thereof. Any
amendments to this agreement must be in writing and executed by both parties
to be effective.
SECTION XVIII. CONSTRUCTION OF AGREEMENT. This Agreement shall be
governed by and construed according to the laws of the State of Kentucky.
IN TESTIMONY WHEREOF, witness the signatures of the parties, as of the day
and year written first above.
CONSOLIDATION COAL COMPANY
QUARTO MINING COMPANY
McELROY COAL COMPANY
CONSOL PENNSYLVANIA COAL COMPANY
GREENON COAL COMPANY
NINEVEH COAL COMPANY
By: /S/ SIGNED
----------------------------
Vice President, Consol, Inc.
Attorney in Fact
KENTUCKY UTILITIES COMPANY
By: /S/ MICHAEL R. WHITLEY
----------------------------
President
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<PAGE>
AMENDMENT TO COAL SUPPLY AGREEMENT
The undersigned, being the parties to the Coal Supply Agreement dated
April 1, 1995 (the "Agreement"), hereby agree to amend the Agreement, effective
October 1, 1996, as follows:
1. Island Creek Coal Company, a Delaware corporation, and Laurel Run
Mining Company, a Virginia corporation, are added to the Agreement as additional
parties within the group of parties collectively called "Seller" therein. Island
Creek Coal Company and Laurel Run Mining Company have executed this Amendment to
indicate their agreement to such addition.
2. Section II.2 of the Agreement is amended to read as follows:
"2. In accordance with and subject to all terms, provisions and
conditions herein, during the term hereof, Seller shall sell and ship to KU, and
KU shall purchase, receive and pay for, a Base Quantity of 3,360,000 tons of
coal. This Base Quantity shall be sold, purchased and delivered in the
quantities set forth below in subparagraph (a), as ratable on a monthly basis as
possible.
(a) During the term, the quantities of coal to be sold, purchased
and delivered hereunder shall be as follows:
_________Period_________ _________Base Quantity_________
April 1, 1995 through 420,000 tons (35,000 tons per month)
March 31, 1996
April 1, 1996 through 210,000 tons (35,000 tons per month)
September 30, 1996
October 1, 1996 through 390,000 tons (65,000 tons per month)
March 31, 1997
April 1, 1997 through 780,000 tons (65,000 tons per month)
March 31, 1998
<PAGE>
April 1, 1998 through 780,000 tons (65,000 tons per month)
March 31, 1999
April 1, 1999 through 780,000 tons (65,000 tons per month)
March 31, 2000
(b) On or before March 1, June 1, September 1 and December 1 of each
contract year, KU may give Seller notice in writing that KU elects
to increase or decrease the tons of coal to be sold, purchased and
delivered hereunder during the next Contract Quarter (April 1, July
1, October 1, and January 1), by an amount, up to 19,500 tons.
(c) Seller shall cooperate with KU in the scheduling of the loading of
barges so that the delivery of coal from Seller may be coordinated
with other barge deliveries to the Ghent Generating Station."
3. Section III.1 of the Agreement is amended to read as follows: ".
1. The primary source of coal to supply the requirements of this
Agreement shall be the Shoemaker Mine and McElroy Mine in Marshall County, West
Virginia. As necessary to comply with the quality requirements of this
Agreement, Seller may blend with coal from such primary sources, coal from
Seller's Dilworth, Mahoning Valley, Bailey, Enlow Fork, VP#3, VP#8, Buchanan
and/or Twin Branch Mines. Seller may substitute comparable quality coal from
other reserves that Seller controls now or in the future so long as such coal
(a) is delivered to KU at no greater delivered cost per million BTU including
taxes, (b) is of a quality and in conformity with the Specifications set forth
in Section IV, and (c) prior written approval for such substitution has been
obtained from KU."
4. Except as specifically amended herein, all terms and conditions of the
Agreement remain in full force and effect.
2
<PAGE>
WITNESS the signatures of the parties, as of October 14, 1997.
CONSOLIDATION COAL COMPANY
QUARTO MINING COMPANY
McELROY COAL COMPANY
CONSOL PENNSYLVANIA COAL COMPANY
GREENON COAL COMPANY
NINEVEH COAL COMPANY
ISLAND CREEK COAL COMPANY
LAUREL RUN MINING COMPANY
By: /s/ signed
-------------------------------------
Vice President, CONSOL Inc.
Attorney in Fact
KENTUCKY UTILITIES COMPANY
By: /s/ Michael R. Whitley /s/ WTL
-------------------------------------
Its: President & CEO
<PAGE>
EXECUTION COPY
NEW
PARTICIPATION AGREEMENT
AMONG
BIG RIVERS ELECTRIC CORPORATION,
LG&E ENERGY MARKETING INC.,
WESTERN KENTUCKY LEASING CORP.,
WKE STATION TWO INC.
AND
WESTERN KENTUCKY ENERGY CORP.
APRIL 6, 1998
[* REDACTED = Omitted pursuant to confidentiality request. Material filed
separately with SEC.]
<PAGE>
TABLE OF CONTENTS
Page
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ARTICLE 1 DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS...........................4
ARTICLE 2 PARTICIPATION EFFECTIVE DATE........................................4
ARTICLE 3 PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE..................5
ARTICLE 4 CLOSING.............................................................5
ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF BIG RIVERS........................8
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF LG&E PARTIES.....................15
ARTICLE 7 COVENANTS OF BIG RIVERS............................................16
ARTICLE 8 COVENANTS OF CERTAIN LG&E PARTIES..................................19
ARTICLE 9 TRANSFERS AND ASSIGNMENTS TO OCCUR ON THE EFFECTIVE DATE...........20
ARTICLE 10 TRANSFERRED EMPLOYEE MATTERS......................................25
ARTICLE 11 TAXES.............................................................28
ARTICLE 12 ACCOUNTING........................................................31
ARTICLE 13 INSURANCE COVERAGE................................................32
ARTICLE 14 ENVIRONMENTAL LIABILITIES AND INDEMNITIES.........................34
ARTICLE 15 DISPUTE RESOLUTION AND ARBITRATION................................38
ARTICLE 16 TRANSFERS AND ASSIGNMENTS.........................................41
ARTICLE 17 TERMINATION.......................................................43
ARTICLE 18 WAIVER; LG&E INDEMNITIES..........................................48
ARTICLE 19 SEVERAL OBLIGATIONS...............................................49
ARTICLE 20 MUTUAL COVENANTS..................................................50
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ARTICLE 21 GENERAL PROVISIONS................................................52
ARTICLE 22...................................................................58
ARTICLE 23 MISCELLANEOUS.....................................................60
ARTICLE 24 GENERAL PROVISIONS................................................61
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Participation Agreement
[*All Exhibits REDACTED.]
Exhibit A Cost Sharing Agreement
Exhibit B Facilities Operating Agreement
Exhibit C Lease and Operating Agreement
Exhibit D Power Purchase Agreement
Exhibit E Transmission Services and Interconnection Agreement
Exhibit F Tax Indemnification Agreement
Exhibit G Mortgage and Security Agreement
Exhibit H Non-Disturbance Agreement
Exhibit I [RESERVED]
Exhibit J [RESERVED]
Exhibit K Settlement Promissory Note
Exhibit L Form of Smelter Undertaking
Exhibit M Station Two Agreement
Exhibit N Settlement Mortgage
Exhibit O Promissory Note (LEM Advances)
Exhibit P Capitalization Guidelines
Exhibit X Definitions
Schedules [*All Schedules REDACTED.]
2.1 CCAP Calculation
3.1 Conditions Precedent to Phase I
3.2 Conditions Precedent to Phase II
3.3 Conditions Precedent to Phase II (Phase I pre Phase II)
5.1.3 Consents
5.1.5 Output
5.1.6 Real Property
5.1.7 Rights-of-Way
5.1.8 Station Two Contracts
5.1.9 Real Property Leases
5.1.10 Water Supply
5.1.11 Personal Property
5.1.12 Equipment Leases
5.1.13 Contracts
5.1.14 Permits
5.1.15 Condition of Tangible Assets
5.1.16 SO(2) Allowances
5.1.17 Litigation and Insurance Claims
5.1.18 Compliance with Laws
5.1.19 Environmental Matters
5.1.20 Benefit Plans
5.1.21 Labor
5.1.22 Transferred Employees
5.1.23 No Condemnation
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5.1.26 Intellectual Property
6.1.3 No Violation
9.1 Inventory Procedures
9.2 Assignment and Assumption Agreement
9.2.1 Big Rivers' Fuel Supply Agreements
9.3 Excluded Assets
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NEW PARTICIPATION AGREEMENT
THIS NEW PARTICIPATION AGREEMENT ("Agreement") is dated this 6th day
of April, 1998 (the "Execution Date") among BIG RIVERS ELECTRIC CORPORATION, a
Kentucky rural electric cooperative ("Big Rivers"), LG&E ENERGY MARKETING INC.,
an Oklahoma corporation ("LEM"), WESTERN KENTUCKY LEASING CORP., a Kentucky
corporation and agent of the LG&E Parties (as hereinafter defined) for purposes
of this Agreement ("Leaseco"), WKE STATION TWO INC., a Kentucky corporation
formerly known as LG&E Station Two Inc. ("Station Two Subsidiary") and WESTERN
KENTUCKY ENERGY CORP., a Kentucky corporation ("WKEC") (hereinafter, LEM,
Leaseco, Station Two Subsidiary and WKEC are collectively referred to as the
"LG&E Parties" and together with Big Rivers, the "Parties").
RECITALS
A. Big Rivers owns or operates certain Generating Plants which
generate electric capacity and energy and it sells power to its Members and to
other third parties. On September 25, 1996, Big Rivers filed for relief under
Chapter 11 of the Bankruptcy Code.
B. Big Rivers and the LG&E Parties desire to enter into a
transaction (the "Phase II Transaction") pursuant to which, inter alia, one of
the LG&E Parties, or an affiliate thereof, will lease from Big Rivers its
Facilities and certain other Assets and will operate the Facilities and obtain
title to the electric energy and capacity produced by such Generating Plants,
supply power to Big Rivers and certain Members and market excess power, in
exchange for such consideration as agreed upon by Big Rivers and the LG&E
Parties.
C. Big Rivers and the LG&E Parties also desire to enter into such
agreements and instruments of assignment that would permit one or more of the
LG&E Parties, or an affiliate thereof, either directly or as agent for Big
Rivers, to operate and sell power from Station Two.
D. Big Rivers and the LG&E Parties recognize that certain regulatory
approvals and other preconditions must be met before the contemplated Phase II
Transactions can be consummated.
E. The Parties therefore desire to enter into the Phase I
Agreements, whereby Big Rivers and the LG&E Parties would begin to receive the
economic benefits of the contemplated transactions at an earlier date than
otherwise would be feasible.
F. The Parties desire that such Phase I Agreements continue until
the earlier of approximately twenty-five years after the Effective Date or such
time as Big Rivers and the LG&E Parties are able to implement the Phase II
Transaction, at which time the Phase I Agreements will terminate and the Phase
II Agreements will become effective and will remain in effect until such time as
the duration of Phase I and Phase II equals approximately twenty-five years, as
defined more specifically in the Operative Documents.
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G. On June 9, 1997, the Parties entered into the Original
Participation Agreement which set forth the circumstances and conditions under
which the agreements relating to the above-referenced transactions would be
executed and become effective, various other matters of interest and agreements
of Big Rivers and the LG&E Parties and common provisions relating to certain of
the Operative Documents.
H. On the same date, LEC executed and delivered the Original
Guaranty to Big Rivers.
I. On June 9, 1997, Big Rivers filed its First Amended Plan of
Reorganization Proposed by Debtor Big Rivers Electric Corporation under Chapter
11 of the Bankruptcy Code as Modified and Restated June 9, 1997 which
contemplated the Original Participation Agreement, certain of the Operative
Documents and the transactions contemplated thereby.
J. A confirmation hearing concerning the above-referenced plan was
held and said plan was confirmed. The Bankruptcy Court order confirming said
plan approved the transactions contemplated by the form of Operative Documents
as filed therewith.
K. Subsequently, Big Rivers and certain of the LG&E Parties applied
to the Kentucky Public Service Commission ("KPSC") for approval of certain
aspects of the plan, including approval of the rates to be charged by Big Rivers
to its Members for electric power service for resale to their customers.
L. The KPSC set the matter for hearing and at the conclusion of the
hearing directed the Parties to try to reach a resolution on the treatment of
unforeseen costs affecting the operation of the Generating Plants with the
intention that unforeseen costs would be allocated among the classes of Members'
customers in a manner other than as contemplated in the plan.
M. In response to the KPSC directive, Big Rivers and the LG&E
Parties have agreed to modify the transactions as contemplated in the Original
Participation Agreement and the form of the Operative Documents attached
thereto.
N. On March 18, 1998, Big Rivers and the LG&E Parties executed an
Amended and Restated Participation Agreement, the effectiveness of which was
conditioned on certain events which failed to occur, thus rendering such
document of no effect.
O. In order to effectuate the contemplated modifications, to assure
compatibility among all of the forms of Operative Documents, including the
Station Two Agreement, to make certain technical corrections to the form of the
existing Operative Documents prior to their execution, and to create certain
additional Operative Documents that will be required to effectuate a transaction
on modified terms from those contemplated in the Original Participation
Agreement, the Parties have agreed to enter into this Agreement, and to suspend
their obligations under the Original Participation Agreement until such time as
it is determined if the transactions contemplated in this Agreement can be
effectuated in accordance with the terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth
below, the Parties agree as follows:
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ARTICLE 1
DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS
1.1 Terms Defined in this Agreement. All capitalized terms used
herein and not otherwise defined herein shall have the meanings set forth in
Exhibit X hereto.
1.2 Whole Agreement. The schedules and exhibits to this Agreement
constitute an integral part of this Agreement, and all references to this
Agreement shall include all such schedules, attachments and exhibits.
1.3 Method of Payment. All payments required to be made by a Party
to the other Party under the terms of this Agreement or any other Operative
Document, unless otherwise provided herein or in such other Operative Document,
shall be made in immediately available United States funds no later than 2:00
p.m. eastern time on the due date therefor. A Party desiring to receive any such
payment by wire transfer shall provide written notice to the other Party not
less than five (5) business days prior to the due date indicating the wire
instructions and applicable account information. A written notice shall be
applicable to all future payments unless revoked or modified by that notice or
any subsequent written notice.
1.4 Late and Partial Payments. All amounts payable under this
Agreement or any other Operative Document by a Party, if not paid when due, will
bear interest from the due date until paid at the Default Rate. No receipt by
the Party to whom a payment is due of an amount less than the full amount due
will be deemed to be other than payment on account, nor will any endorsement or
statement on any check or any accompanying letter effect or evidence an accord
or satisfaction. The receiving Party may accept such check or payment without
prejudice to its right to recover the balance or pursue any right hereunder.
ARTICLE 2
PARTICIPATION EFFECTIVE DATE
2.1 This Agreement will be effective on the date on which all of the
following have occurred (the "Participation Effective Date"): (a) this Agreement
is executed and delivered by the Parties hereto; (b) the Bankruptcy Court has
entered an order, which order approves (i) this Agreement and the other
Operative Documents in substantially the form attached hereto, and (ii)
modifications to the Plan, as contemplated herein, in accordance with Section
1127 of the Bankruptcy Code; and (c) the RUS has accepted such modifications to
the Plan and this Agreement (including the Exhibits hereto), which acceptance
shall be evidenced by the RUS failing to notify Big Rivers that it has changed
its acceptance of the Plan by the date established by the Bankruptcy Court for
such notifications, under Bankruptcy Code Section 1127(d).
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ARTICLE 3
PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE
3.1 The Phase I Agreements will become effective on the Phase I
Effective Date; provided, however, that LEC has not determined, in its
discretion, based upon advice of its tax advisors, that it would incur
unacceptable liabilities by reason of the Tax Indemnification Agreement, in
which case the Parties agree that Phase I shall not commence and the Parties
shall proceed with Phase II in accordance with Section 3.2 hereof.
3.2 In the event that (a) the regulatory conditions set forth in
Schedule 3.2 are satisfied (or waived by the applicable Parties) prior to the
commencement of Phase I or (b) the determination set forth in the proviso
described in Section 3.1 has been made by LEC, the Parties agree that the Phase
I Agreements shall never become effective and that the Closing referred to below
shall consummate the transactions contemplated by the Phase II Agreements rather
than the transactions contemplated by the Phase I Agreements.
3.3 At any time subsequent to the occurrence of the Phase I
Effective Date, upon the satisfaction (or waiver by the applicable Parties) of
all conditions set forth in Schedule 3.3, (i) the Phase II Agreements will
become effective and (ii) the Phase I Agreements (other than those which are
also Phase II Agreements) will terminate (subject to survival of specific
provisions as provided therein). Such date shall hereinafter be referred to as
the "Phase II Effective Date." At such time as either Big Rivers or Leaseco (as
agent for the LG&E Parties) in good faith believes that each of the conditions
precedent set forth in Schedule 3.3 have been satisfied or waived by the
relevant Party, the Party having that belief may, in its discretion, notify the
other Party of its belief. For purposes of this Section 3.3 only "Party" shall
refer to (i) Big Rivers or (ii) Leaseco, acting as agent for all the LG&E
Parties. The Party receiving such notice agrees to notify the first Party of
whether it agrees with or disputes the first Party's belief within ten (10)
Business Days after delivery of the initial notice. In the event a Party fails
to respond within that ten-day period, it shall be deemed to have agreed with
the initial Party's belief. The Phase II Effective Date shall, for purposes of
this Agreement, be deemed to have commenced two (2) Business Days following the
expiration of the ten-day notice period described above or, if the initial
Party's belief shall have been disputed by the other Party as contemplated
above, two (2) Business Days after a determination that such conditions
precedent have been so satisfied or waived is made (i) by the mutual agreement
of the disputing Parties, or (ii) pursuant to a final, non-appealable decision
rendered pursuant to Article 15.
ARTICLE 4
CLOSING
4.1 The Closing. The consummation of the transactions contemplated
in this Agreement and the Phase I Agreements or the Phase II Agreements, as the
case may be (the "Closing"), other than the transactions which are required by
this Agreement to be consummated prior to the Closing, shall take place at the
offices of Sullivan, Mountjoy, Stainback & Miller, P. S. C., Owensboro, Kentucky
(or at such other location as the parties may agree) at 10:00 a.m.,
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local time, on the date (the "Effective Date") that is 10 business days
following the earlier to occur of (i) the date on which all conditions set forth
in Schedule 3.1 of this Agreement have been fulfilled or waived in writing or
(ii) the date on which all conditions set forth in Schedule 3.2 of this
Agreement have been fulfilled or waived in writing.
4.2 Actions Simultaneous. Notwithstanding the order of the
deliveries by the Parties set forth below, all deliveries shall occur
simultaneously and shall not be deemed to have been completed until each of the
steps set forth in this Article 4 has been completed or has been waived by the
Party who is required to waive the same.
4.3 Big Rivers Deliveries. Subject to fulfillment or waiver of the
conditions set forth in Schedule 3.1 or Schedule 3.2, as the case may be, at the
Closing, Big Rivers shall deliver to the LG&E Parties all of the following (duly
executed where appropriate):
4.3.1 Copies of Big Rivers' Articles of Incorporation
certified as of a date no more than thirty (30) calendar days prior to the
Effective Date by the Secretary of the Commonwealth of Kentucky.
4.3.2 Certificate of Existence of Big Rivers issued as of a
recent date by the Secretary of the Commonwealth of Kentucky.
4.3.3 Certificate of the Secretary or an Assistant Secretary
of Big Rivers, dated the Effective Date, in form and substance reasonably
satisfactory to the LG&E Parties, as to (i) no amendments to the Articles
of Incorporation of Big Rivers since the certification date referred to in
Section 4.3.1, (ii) the By-laws of Big Rivers, and (iii) the resolutions
of the Board of Directors of Big Rivers authorizing the execution and
performance of the Operative Documents, the Debt Restructuring Documents,
Big Rivers' obligations with respect to the letters of credit described
therein, the Baseline Study Agreement between Big Rivers and WKEC, the
Member Contracts and the Station Two Agreement and the transactions
contemplated thereby.
4.3.4 The Operative Documents (including, without limitation,
the Settlement Note) duly executed by an authorized officer of Big Rivers,
and copies of the executed Debt Restructuring Documents.
4.3.5 The opinions of each of Sullivan, Mountjoy, Stainback &
Miller, P. S. C. and Long Aldridge Norman LLP referenced in Item I (17) of
Schedule 3.1.
4.3.6 A certificate of an authorized officer of Big Rivers,
stating that (i) the representations and warranties set forth in Article 5
hereof are true and correct in all material respects on the Effective
Date, except to the extent that such representations and warranties
expressly relate to an earlier date, in which case such representations
and warranties shall be true and correct as of such earlier date and (ii)
the conditions precedent to Big Rivers' obligations set forth in Schedule
3.1 or Schedule 3.2, as the case may be, have been satisfied or waived by
Big Rivers, provided that the foregoing shall
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not relieve any other party to any Operative Document for any
misrepresentation by such party in such Operative Document.
4.3.7 Such bills of sale and other appropriate documents of
transfer, conveyance and assignment (in form reasonably satisfactory to
Big Rivers and the LG&E Parties) as shall be necessary or appropriate in
order for the assignment by Big Rivers to Leaseco of the Inventory, the
Personal Property, the Intangible Assets and the SO(2) Allowances as
contemplated in Sections 9.1, 9.2, 9.3 and 9.4, including, without
limitation, the Assignment and Assumption Agreement.
4.3.8 All amounts required to be paid by Big Rivers to any
LG&E Party pursuant to the Operative Documents on such date.
4.3.9 The "Marketing Payment" payable by Big Rivers to LEM as
contemplated in the Interim Wholesale Marketing Assistance Agreement,
dated June 18, 1997, as amended.
4.4 LG&E Parties' Deliveries. Subject to fulfillment or waiver of
the conditions set forth in Schedule 3.1 or Schedule 3.2, as the case may be, at
the Closing, the LG&E Parties shall deliver to Big Rivers all of the following
(duly executed where appropriate):
4.4.1 Copies of the Articles of Incorporation of each LG&E
Party, each certified as of a date no more than thirty (30) calendar days
prior to the Effective Date by the Secretary of State of the state of
their respective incorporation.
4.4.2 Certificate of Existence or Certificate of Good
Standing, as appropriate, each issued as of a recent date by the Secretary
of State of the state of their incorporation and an Authorization to
Transact Business in the Commonwealth of Kentucky, to the extent an LG&E
Party is not a Kentucky Corporation, of each LG&E Party.
4.4.3 Certificate of the Secretary or an Assistant Secretary
of each LG&E Party, each dated the Effective Date, in form and substance
reasonably satisfactory to Big Rivers, as to (i) no amendments to the
Articles of Incorporation of any LG&E Party since the certification date
referred to in Section 4.4.1, (ii) their By-laws and (iii) their
resolutions of the Board of Directors authorizing the execution and
performance of the Operative Documents to which each is a party, if any,
the transactions contemplated thereby, and all other documents executed in
connection therewith.
4.4.4 The Operative Documents, duly executed by an authorized
officer of the relevant LG&E Party.
4.4.5 The Initial Fixed Payment, as defined in Section 3.3 of
the Power Purchase Agreement, or the Initial Rental Payment under Section
2.3.1 of the Lease, as the case may be.
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4.4.6 A payment in consideration of transfer of Inventory and
Personal Property as contemplated by Sections 9.1 and 9.3, respectively.
4.4.7 A payment in the amount of $[REDACTED], representing the
Closing Date enhancement payment.
4.4.8 All other amounts required to be paid by any LG&E Party
to Big Rivers pursuant to the Operative Documents on such date.
4.4.9 The opinions of each of Dewey Ballantine LLP and
Greenebaum Doll & McDonald PLLC referenced in Item II (14) of Schedule
3.1.
4.4.10 Commitments or other evidence of insurance referenced
in, and in accordance with, Article 13.
4.4.11 A certificate of an authorized officer of each LG&E
Party stating that (i) the representations and warranties set forth in
Article 6 hereof are true and correct in all material respects on the
Effective Date, except to the extent that such representations and
warranties expressly relate to an earlier date, in which case such
representations and warranties shall be true and correct as of such
earlier date and (ii) the conditions precedent to the LG&E Parties'
obligations set forth in Schedule 3.1 or Schedule 3.2, as the case may be,
have been satisfied or waived by the LG&E Parties, provided that the
foregoing shall not relieve any other party to any Operative Document for
any misrepresentation by such party in such Operative Document.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BIG RIVERS
5.1 Representations and Warranties of Big Rivers. Big Rivers hereby
represents and warrants to the LG&E Parties as follows:
5.1.1 Organization and Powers of Big Rivers. Big Rivers is a
rural electric cooperative, duly organized and existing under the laws of
the Commonwealth of Kentucky. Big Rivers has all requisite cooperative
power and authority to own the Facilities and all other assets and
properties held by it, and to carry on its business as now being
conducted.
5.1.2 Authority Relative to Agreement. No further cooperative
or member authorization is necessary for the execution, delivery and
performance of this Agreement.
5.1.3 No Violation. Except as set forth in Schedule 5.1.3, the
execution and delivery of the Operative Documents and the consummation by
Big Rivers of the transactions contemplated thereby, including performance
in all material respects of all of its obligations thereunder (a) will not
violate any statute or law or any rule, regulation, order, writ,
injunction or decree of any court or governmental authority, (b) will not
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require any authorization, consent, approval, exemption or other action by
or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body, except to the
extent such authorization, consent, approval, exemption, notice or other
action is required solely as a result of actions taken by any LG&E Party
after the Effective Date and (c) subject to obtaining the consents
referred to in Schedule 5.1.3, will not violate or conflict with, or
constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or result in the creation of
any Lien upon any of the Assets (other than a Permitted Lien), under any
term or provisions of the Articles of Incorporation or By-laws of Big
Rivers or of any material contract, commitment, understanding,
arrangement, agreement or restriction of any kind or character to which
Big Rivers is a party or by which Big Rivers or any of the Assets may be
bound or affected.
5.1.4 Effect of Agreement. This Agreement has been, and each
of the other Operative Documents will be, duly and validly authorized,
executed and delivered by Big Rivers, subject to Bankruptcy Court
approval, and constitutes, or will constitute when executed, a valid and
legally binding agreement enforceable against Big Rivers in accordance
with its terms, except as the foregoing may be limited by (a) general
principles of equity or (b) bankruptcy, insolvency, reorganization,
arrangement, moratorium, or other laws or equitable principles relating to
or affecting creditors' rights generally.
5.1.5 Output. Except as disclosed on Schedule 5.1.5, there are
no contracts or other arrangements in place by which any of the electrical
output of the Facilities or Station Two has been sold, dedicated or
committed. Except as set forth on Schedule 5.1.5 and for Permitted Liens,
the output of the Facilities and Station Two is free and clear of any
claims and Liens.
5.1.6 Real Property. Schedule 5.1.6 contains a complete
description of all Real Property. The Real Property includes all real
property (and improvements and fixtures thereon) owned by Big Rivers and
used or currently held exclusively for use by Big Rivers in connection
with the operation of the Facilities or Station Two. Except as disclosed
on Schedule 5.1.6 and for Permitted Liens, Big Rivers owns the Real
Property free and clear of any claims and Liens.
5.1.7 Rights-of-Way. Schedule 5.1.7 contains a complete
description of all material Rights-of-Way. The Rights-of-Way include all
rights-of-way, easements, licenses and other rights owned by Big Rivers
and used or currently held exclusively for use by Big Rivers in connection
with the operation of the Facilities or Station Two. Except as disclosed
on Schedule 5.1.7 and for Permitted Liens, Big Rivers owns all
Rights-of-Way free and clear of any claims and Liens.
5.1.8 Station Two Contracts. Schedule 5.1.8 contains a list of
all agreements relating to, or affecting, Station Two to which Big Rivers
is a party. Big Rivers has not received notice from any third party to the
effect that any such agreement
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is not in full force and effect. Neither Big Rivers nor, to the best of
Big Rivers' knowledge, Henderson, is in material default thereunder and
Big Rivers holds its interest in each such agreement free and clear of any
Liens (other than Permitted Liens).
5.1.9 Real Property Leases. Schedule 5.1.9 lists all Real
Property Leases. Except as disclosed on Schedule 5.1.9, (i) each Real
Property Lease is in full force and effect, (ii) Big Rivers is not in
material default under any Real Property Lease, and (iii) Big Rivers holds
the lessee's interest in each Real Property Lease free and clear of any
Liens (other than Permitted Liens).
5.1.10 Water Supply. Except as disclosed on Schedule 5.1.10,
Big Rivers currently has rights in or to a water supply and Permits for
waste water disposal sufficient for the operation of the Facilities at a
Capacity of 1459 net MW and for the operation of Station Two at a capacity
of 312 net MW, and, as of the date hereof, no permit, license or other
governmental or private action or permission is required to utilize such
water supply (provided WKEC, Station Two Subsidiary or Leaseco, as the
case may be, pays the ordinary charges for consumption or disposition).
Big Rivers has no knowledge of any pending or threatened impediment to the
continuation of such water supply and waste water disposal as set forth
above for the duration of the Term.
5.1.11 Personal Property. Schedule 5.1.11 lists each item of
Personal Property with a book value in excess of $100,000. Except as
disclosed on Schedule 5.1.11, Big Rivers owns such Personal Property free
and clear of any Liens (other than Permitted Liens).
5.1.12 Equipment Leases. Schedule 5.1.12 lists each of the
Equipment Leases requiring Big Rivers to make lease payments in excess of
$20,000 annually under such lease. Except as disclosed on Schedule 5.1.12,
(i) each Equipment Lease is in full force and effect, (ii) Big Rivers is
not in material default under any Equipment Lease, and (iii) Big Rivers
holds the lessee's interest in each Equipment Lease free and clear of any
Liens (other than Permitted Liens).
5.1.13 Contracts. Schedule 5.1.13 contains a listing of all
Contracts that involve obligations of Big Rivers in excess of $100,000 or
extend beyond six months after the Effective Date and any amendments or
modifications to any such Contract. Except as disclosed on Schedule 5.1.13
attached hereto (i) each such Contract, the Hoosier Contracts, the
Oglethorpe Contract, the HMP&L Contract, the Member Contracts and each
fuel supply agreement listed on Schedule 9.2.1 (collectively the
"Representation Contracts") is in full force and effect, (ii) Big Rivers
is not in material default under any Representation Contract and (iii) Big
Rivers holds its interests in each Representation Contract free and clear
of any Liens (other than Permitted Liens).
5.1.14 Permits. Schedule 5.1.14 contains a listing of all
material Permits currently required to operate the Facilities at a
Capacity of 1459 net MW and Station Two at a capacity of 312 net MW (in
accordance with the Station Two Contracts) and specifically identifies
those material Permits that expire prior to the end of the Term.
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Except as disclosed on Schedule 5.1.14, (i) each such Permit is in full
force and effect, (ii) Big Rivers is in material compliance with the terms
of each such Permit, (iii) Big Rivers holds its interest in each such
Permit free and clear of any Liens (other than Permitted Liens) and (iv)
each such Permit is assignable to WKEC, Station Two Subsidiary or Leaseco
without the consent or approval of, or payment to, any person,
governmental authority or regulatory body, which has not yet been obtained
or made.
5.1.15 Condition of Tangible Assets. Except as disclosed on
Schedule 5.1.15, each of the Tangible Assets and the tangible assets
comprising Station Two is in all material respects in good condition and
state of repair consistent with Prudent Utility Practice, subject only to
ordinary wear and tear.
5.1.16 SO(2) Allowances. Schedule 5.1.16 discloses all SO(2)
Allowances allocated by the Environmental Protection Agency by year
through December 31, 2023 or otherwise attributable to the Facilities and
Station Two and such allowances (or Big Rivers' interest in such
allowances, with respect to Station Two) are free of all Liens, including
but not limited to claims of brokers (other than Permitted Liens).
5.1.17 Litigation and Insurance Claims. Schedule 5.1.17
contains a description of (i) all pending or, to the best of Big Rivers'
knowledge, threatened suits, actions, arbitrations, claims, administrative
proceedings or other proceedings or, to the best of Big Rivers' knowledge,
governmental investigations related in any way to the ownership or
operation of the Facilities or Station Two, and (ii) any claim, demand or
notice tendered to an insurer by Big Rivers with respect to any matter
related in any way to the ownership or operation of the Facilities or
Station Two.
5.1.18 Compliance with Laws. Except as disclosed on Schedule
5.1.18, to Big Rivers' knowledge, Big Rivers' operation of the Facilities
and Station Two and use of the Assets and the Station Two Assets are in
material compliance with all applicable laws, rules, orders, regulations,
or restrictions, except (a) any noncompliance that has been cured and (b)
noncompliance that does not and will not materially interfere with the
operation of the Facilities or Station Two nor result in the imposition of
any material civil or criminal fines or penalties on Big Rivers or any
LG&E Party. Except as disclosed on Schedule 5.1.18, Big Rivers has
received no notice of material violation or notice of material
noncompliance which has not been cured.
5.1.19 Environmental Matters. To the knowledge of Big Rivers,
except as disclosed in Schedule 5.1.19 or in the Baseline Environmental
Audit Report, there is no pending administrative or judicial
investigation, proceeding or action or any outstanding claim, demand,
order, administrative or legal proceeding or settlement or consent decree
or order under or relating to any Environmental Law and relating to or
involving the Facilities or Station Two, nor is there now, nor has there
been, any pattern of violations that would lead to any of the foregoing.
To the knowledge of Big Rivers, except as disclosed on Schedule 5.1.19 or
identified in the Baseline Environmental Audit Report, (i) no Hazardous
Substance or other waste (including without limitation garbage and refuse)
have been disposed of, spilled, leaked or otherwise released at, on, under
or
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from the Facilities, Station Two, the Real Property, or the land subject
to the Rights-of-Way, the Real Property Leases, or any other properties
and (ii) there are no underground storage tanks at the Facilities or at
Station Two or on the Real Property or the land subject to the
Rights-of-Way or the Real Property Leases.
5.1.20 Benefit Plans.
5.1.20.1 Schedule 5.1.20 lists all plans, policies, agreements
and other arrangements concerning remuneration, including, but not limited
to, employee compensation, pension or welfare benefits of Big Rivers. As
applicable, such plans have been maintained in compliance in all material
respects with ERISA and the applicable provisions of the Code, except (a)
any noncompliance that has been cured and (b) noncompliance that does not
materially interfere with the rights of any Transferred Employee. Except
as disclosed on Schedule 5.1.20, Big Rivers has received no notice of
material violation or notice of material noncompliance which has not been
cured.
5.1.20.2 Big Rivers Electric Corporation Bargaining Employees'
Thrift and 401(k) Savings Plan, Big Rivers Electric Corporation Salaried
Employees' Thrift and 401(k) Savings Plan, Big Rivers Electric Corporation
Bargaining Employees' Retirement Plan, and Big Rivers Electric Corporation
Salaried Employees' Retirement Plan (collectively, the "Big Rivers
Qualified Plans") have been determined by the Internal Revenue Service to
be qualified under the Code 401(a), and nothing has occurred which has
resulted or is likely to result in the revocation of such qualification.
Big Rivers has heretofore delivered to the LG&E Parties a copy of the most
recent determination letter for each of the Big Rivers Qualified Plans,
and each of the Big Rivers Qualified Plans has been administered in all
material respects in accordance with ERISA and applicable provisions of
the Code.
5.1.20.3 Full payment will be made as of the Effective Date of
all amounts which Big Rivers is required, under applicable law and/or the
Big Rivers Qualified Plans, to have paid as a contribution to each of the
Big Rivers Qualified Plans as of the last day of the most recent fiscal
year of such plan, and no accumulated funding deficiency (as defined in
ERISA ss. 312 or Code ss. 412), whether or not waived, exists with respect
to the Big Rivers Qualified Plans. All contributions to the Big Rivers
Qualified Plans that are defined contribution plans owed by Big Rivers
with respect to compensation for periods up to the Effective Date will
have been paid to such Big Rivers Qualified Plans as of the Effective
Date.
5.1.20.4 No reportable event (as such term is defined in ERISA
ss. 4043, but not including an event described in ERISA ss. 4043(c)(9) or
any event for which the requirement of notice within 30 days to the
Pension Benefit Guaranty Corporation has been waived) has occurred with
respect to any of the Big Rivers Qualified Plans within the preceding 36
months. Neither Big Rivers nor any other Person has engaged in any
transaction with respect to any of the Big Rivers Qualified Plans which
would subject Big Rivers or such Person to a Tax, penalty or liability for
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prohibited transactions under ERISA or the Code within the preceding 36
months. To the best of Big Rivers' knowledge, no director, officer or
employee of Big Rivers, to the extent he/she is a fiduciary with respect
to any of the Big Rivers Qualified Plans, has breached any of his/her
responsibilities or obligations imposed upon fiduciaries under Title I of
ERISA or which would result in any claim being made under, by or on behalf
of any of the Big Rivers Qualified Plans, or a participant or beneficiary
under any of the Big Rivers Qualified Plans.
5.1.21 Labor. Except as disclosed on Schedule 5.1.21, no
employee of Big Rivers is represented for purposes of collective
bargaining by any labor organization of any type and within the last five
years Big Rivers has not experienced any material labor disputes or any
work stoppages due to labor agreements. Except as disclosed on Schedule
5.1.21, Big Rivers is not obligated under the terms of any labor agreement
to negotiate with, or seek approval from, any labor organization regarding
any term or condition of this Agreement. Except as disclosed on Schedule
5.1.21, there are no pending claims, and to Big Rivers' knowledge no
threatened claims, related to the Transferred Employees under any federal,
state or local labor or employment laws or regulations, including but not
limited to, the Fair Labor Standards Act, National Labor Relations Act,
Labor Management Relations Act, Civil Rights Act of 1964, Walsh-Healy Act,
Davis Bacon Act, Civil Rights Act of 1866, Age Discrimination in
Employment Act, Older Workers Benefit Protection Act, Equal Pay Act of
1963, Executive Order No. 11246, Federal Unemployment Tax Act, Vietnam Era
Veterans Readjustment Act, Occupational Safety and Health Act, Civil
Rights Act of 1991, American With Disabilities Act, Rehabilitation Act of
1973, Family and Medical leave Act, Worker Adjustment and Retraining
Notification Act ("WARN"), ERISA, applicable workers' and unemployment
compensation laws, all as amended, or any applicable contract, tort or
other common law theories; and no claim under any such laws or regulations
is pending or, to the best of Big Rivers' knowledge, threatened against
Big Rivers.
5.1.22 Employment Compensation and Credit Service. Schedule
5.1.22 contains a true and correct list of all Transferred Employees. Big
Rivers shall provide on or before the Effective Date, a schedule of all
sick leave, vacation pay or retiree medical obligations with respect to
each Transferred Employee, and except as provided on such schedule there
are no other obligations for these benefits. Big Rivers shall, on or as
soon as administratively practicable after the Effective Date, provide a
listing of all such employees which identifies the "Compensation Rate" of
each such employee as of the date immediately preceding the Effective Date
as calculated pursuant to Section 1.11 of Big Rivers Severance Plan and
which identifies the service credited as of the date immediately preceding
the Effective Date under the applicable Big Rivers pension plans for all
such employees.
5.1.23 No Condemnation, Expropriation or Restrictions. Neither
the whole nor any portion of the Facilities or Station Two is subject to
any governmental decree or order to be sold or is being condemned,
expropriated or otherwise taken by any public authority with or without
payment of compensation therefor, nor to Big Rivers' knowledge, has any
such condemnation, expropriation, taking or material new
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assessment been proposed. Except as set forth in Schedule 5.1.23, Big
Rivers has received no notice of any zoning, land use or other
governmental proceeding specific to a Facility or Station Two pending, nor
to the best of Big Rivers' knowledge proposed, which would materially
adversely affect the Facilities or Station Two including without
limitation any of the Facilities or Station Two for their present uses.
5.1.24 Taxes. Big Rivers has timely filed all Tax Returns
required to be filed by Big Rivers on or before the date upon which this
representation is being made, taking into account extensions of time for
filing. All Taxes that are or were due and payable by Big Rivers on or
before the date upon which this representation is being made, with or
without a Return, have been timely paid. Big Rivers has complied with all
material requirements of the Code relating to the payment and withholding
of Taxes, and Big Rivers has, within the time and in the manner prescribed
by applicable law, paid over to the proper Taxing authorities all amounts
required to be so withheld and paid over. Big Rivers has received no
written notification of any Tax deficiency, proposal for the assessment of
a Tax, or the intention of any Taxing authority to audit any Big Rivers'
Tax Return. None of the Assets is subject to a Lien for Taxes, except
Permitted Liens.
5.1.25 No Brokers. Big Rivers has not employed any broker or
finder in connection with the transactions contemplated by the Operative
Documents, and it has taken no action that would give rise to a valid
claim against any party for a brokerage commission, finder's fee, or other
like payment.
5.1.26 Intellectual Property. Schedule 5.1.26 lists each item
of Intellectual Property. Except as disclosed on Schedule 5.1.26, Big
Rivers owns or has valid rights to use such Intellectual Property free and
clear of any Liens (other than Permitted Liens).
5.1.27 Disclaimer of Other Representations and Warranties. THE
REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 5 ARE IN LIEU OF
ALL OTHER REPRESENTATIONS AND WARRANTIES OF BIG RIVERS WHETHER WRITTEN,
ORAL OR IMPLIED, WITH RESPECT TO THIS AGREEMENT, ANY OTHER OPERATIVE
DOCUMENT OR THE ASSETS, EXCEPT AS EXPRESSLY PROVIDED IN THIS ARTICLE 5 OR
IN THE STATION TWO AGREEMENT. THE LG&E PARTIES HEREBY ACKNOWLEDGE AND
AGREE THAT BIG RIVERS SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER
REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE
ASSETS OR ANY PART THEREOF, THE MERCHANTABILITY THEREOF OR THE FITNESS
THEREOF FOR ANY PARTICULAR PURPOSE. THE PROVISIONS OF THIS ARTICLE 5 HAVE
BEEN NEGOTIATED, AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY PROVIDED IN
THIS ARTICLE 5 OR IN THE STATION TWO AGREEMENT, THE FOREGOING PROVISIONS
ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY
REPRESENTATIONS OR
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WARRANTIES BY BIG RIVERS, EXPRESS OR IMPLIED, WITH RESPECT TO THE ASSETS,
OR OTHERWISE.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF LG&E PARTIES
6.1 Representations and Warranties of Each LG&E Party. Each LG&E
Party represents and warrants to Big Rivers as follows:
6.1.1 Organization and Powers of LG&E Parties. Each LG&E Party
is duly organized, existing and in good standing under the laws of its
jurisdiction of organization and, in the case of LEM, is duly qualified to
do business as a foreign corporation in the Commonwealth of Kentucky. Each
LG&E Party has all requisite corporate power and authority and holds all
material approvals, permits, authorizations, consents, licenses, orders
and restrictions required to own, operate, and lease its properties, and
to carry on its business as now being conducted and, subject to
satisfaction of all conditions set forth in Schedules 3.1, 3.2 and 3.3
hereof (as applicable), as proposed to be conducted pursuant to the terms
of this Agreement and the other Operative Documents.
6.1.2 Authority Relative to Operative Documents. The
execution, delivery, and performance of each Operative Document by the
relevant LG&E Party has been duly authorized by all necessary corporate
and shareholder action.
6.1.3 No Violation. Except as set forth in Schedule 6.1.3, the
execution and delivery of the Operative Documents by the relevant LG&E
Parties, and the consummation by the LG&E Parties of the transactions
contemplated thereby, including performance in all material respects of
all of their obligations thereunder (a) will not violate any statute or
law or any rule, regulation, order, writ, injunction or decree of any
court or governmental authority, (b) will not require any authorization,
consent, approval, exemption or other action by or notice to any court,
administrative or governmental agency, instrumentality, commission,
authority, board or body, and (c) will not violate or conflict with, or
constitute a default (or an event which, with notice or lapse of time, or
both, would constitute a default) under, or result in the termination of,
or accelerate the performance required by, or result in the creation of
any Lien upon any of the assets of the relevant LG&E Party, under any term
or provisions of the Articles of Incorporation, By-Laws or other
constituent documents of such LG&E Party or of any contract, commitment,
understanding, arrangement, agreement or restriction of any kind or
character to which such LG&E Party is a party or by which such LG&E Party
or any of its assets or properties may be bound or affected.
6.1.4 Effect of Agreement. This Agreement has been, and each
of the other Operative Documents will be, duly and validly authorized,
executed and delivered by the relevant LG&E Party and constitutes, or will
constitute when executed, a valid and legally binding agreement of such
LG&E Party enforceable against such LG&E Party in
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accordance with its terms, except as the foregoing may be limited by (a)
general principles of equity or (b) bankruptcy, insolvency,
reorganization, arrangement, moratorium or other laws or equitable
principles relating to or affecting creditors' rights generally.
6.1.5 No Brokers. No LG&E Party, nor any Affiliate thereof,
has employed any broker or finder in connection with the transactions
contemplated by the Operative Documents, and it has taken no action that
would give rise to a valid claim against any party for a brokerage
commission, finder's fee, or other like payment.
6.1.6 Staffing. WKEC or Leaseco, as the case may be, will
maintain, or acquire, adequate personnel to operate the Assets and perform
their respective obligations pursuant to the terms and conditions of the
Facilities Operating Agreement and the Lease, as the case may be.
6.1.7 Disclaimer of Other Representations and Warranties. THE
REPRESENTATIONS AND WARRANTIES SET FORTH IN THIS ARTICLE 6 ARE IN LIEU OF
ALL OTHER REPRESENTATIONS AND WARRANTIES OF THE LG&E PARTIES WHETHER
WRITTEN, ORAL OR IMPLIED, WITH RESPECT TO THIS AGREEMENT, ANY OTHER
OPERATIVE DOCUMENT OR THE ASSETS, EXCEPT AS EXPRESSLY PROVIDED IN THIS
ARTICLE 6 OR IN THE STATION TWO AGREEMENT. THE PROVISIONS OF THIS ARTICLE
6 HAVE BEEN NEGOTIATED, AND, EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY
PROVIDED IN THIS ARTICLE 6 OR IN THE STATION TWO AGREEMENT, THE FOREGOING
PROVISIONS ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY
REPRESENTATIONS OR WARRANTIES BY THE LG&E PARTIES, EXPRESS OR IMPLIED,
WITH RESPECT TO THE ASSETS, OR OTHERWISE.
ARTICLE 7
COVENANTS OF BIG RIVERS
7.1 Access to Properties, Books and Records. Prior to the Effective
Date (and with respect to Section 7.1.2 on and after the Effective Date), Big
Rivers shall, at the request of any LG&E Party to Big Rivers' President and
Chief Executive Officer:
7.1.1 Afford or cause to be afforded to the agents, attorneys,
accountants and other authorized representatives of such LG&E Party
reasonable access during normal business hours to all employees,
properties, books, records, data, contracts and documents relating to the
Assets and Transferred Employees and shall permit such persons, at such
LG&E Party's expense, to make copies of such books, records, data,
contracts and documents. In particular, Big Rivers shall afford such LG&E
Party and its authorized representatives reasonable access to the Real
Property and Station Two for the purpose of conducting investigations and
examinations thereof and for preparation of surveys, making appraisals and
ascertaining the condition thereof.
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7.1.2 For the purpose of protecting the common interest of Big
Rivers and the LG&E Parties in identifying and avoiding tax liability that
would be subject to indemnification pursuant to the Tax Indemnification
Agreement, permit access by any LG&E Party and its advisors to Big Rivers'
employees, agents, independent accountants and accounting firms
(including, but not limited to, Mr. James Howard Smith of Arthur Andersen
LLP), and other advisors (other than legal counsel associated with law
firms) and require such persons (whether an individual or entity) (i) to
provide to such LG&E Party, in a timely manner, access to all Big Rivers'
Tax Returns, and all workpapers, schedules, memoranda, financial
projections, and other written materials that relate to Big Rivers' income
Tax liabilities (or potential liabilities) for any past, present, or
future taxable year and (ii) to disclose their work product (whether or
not such work product is in written form and whether or not subject to
privilege) concerning Big Rivers' expected or potential income Tax
consequences of the transactions contemplated by the Phase I Agreements
and the Phase II Agreements including, but not limited to, their work
product relating to any actual or potential Phase I Tax Detriment Item (as
such term is defined in the Tax Indemnification Agreement). All costs,
fees, and expenses incurred by Big Rivers (either directly or indirectly
through its independent attorneys, accountants, or other advisors) in
connection with Big Rivers' compliance with this Section 7.1.2 for periods
ending on or before the Effective Date shall be borne by Big Rivers, and
all such costs, fees, and expenses for periods beginning after the
Effective Date shall be borne by the LG&E Parties.
7.1.3 Each LG&E Party shall treat, and shall cause all of its
agents, attorneys, accountants, and other authorized representatives to
treat, all information obtained pursuant to this Section 7.1 as
confidential.
7.1.4 No investigation by any LG&E Party or any of its
authorized representatives pursuant to this Section 7.1 shall affect any
representation, warranty, or closing condition of any party hereto.
7.2 Negative Covenants. Except as otherwise permitted by this
Agreement or the other Operative Documents or with the prior written consent of
Leaseco, as agent for the LG&E Parties (not to be unreasonably withheld), prior
to the Closing, Big Rivers shall not:
7.2.1 No Liens. Directly or indirectly create, incur, assume
or suffer to exist any Lien on or with respect to the Assets, except for
Permitted Liens.
7.2.2 No Disposal. Dispose of, or agree to dispose of, any of
the Assets or any Station Two Contract (or any portion thereof) or Station
Two Asset outside the ordinary course of business.
7.2.3 No New Contracts. Enter into any power sale,
maintenance, fuel supply or transportation contracts or make any
commitment to do the same in each case, involving the payment of an amount
in excess of $500,000 annually or having a termination date after May 31,
1998. Notwithstanding the foregoing, Big Rivers shall be entitled to enter
into Pre-Closing Development Agreements with Henderson as
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contemplated in the "1998 Amendments" (as defined in the Station Two
Agreement) for Economic Development Opportunities, provided, that such
agreements do not specifically commit Power from any of the Generating
Plants from and after the Closing.
7.2.4 No Increase. Implement any general wage increases, but
may continue normal salary administration practices, with such changes
subject to the review by WKEC prior to Closing.
7.2.5 WARN. Temporarily or permanently close or shut down any
"single site of employment" or any "facility" or any "operating unit,"
department or service within a single site of employment, as such terms
are used in WARN within the ninety (90) day period ending on the day
before the Effective Date.
7.2.6 No Implementation. Implement or agree to any
implementation of or amendment or supplement to any employee profit
sharing, stock option, stock purchase, pension, bonus, commission,
incentive, retirement medical reimbursement, life insurance, deferred
compensation or any other employee compensation or benefit plan or
arrangement applicable to any Transferred Employee except for (i)
non-material modifications or amendments, (ii) modifications or amendments
which are required to be made by applicable law or pursuant to a
determination letter request, (iii) modifications or amendments required
by written employment agreements, employment policies or applicable
collective bargaining agreements existing on March 19, 1997, and (iv) any
amendments or modifications which (1) are reasonable given the
circumstances, (2) do not result in a substantial increase in benefits,
and (3) are approved in writing in advance by the LG&E Parties (such
approval not to be unreasonably withheld). The exercise of discretion by
Big Rivers under an existing employment agreement, policy or other
arrangement that does not increase or alter the liability of the LG&E
Parties shall not be considered a violation of Section 7.2.6.
7.2.7 Contracts. Terminate, which termination shall have a
material adverse effect on the LG&E Parties' collective rights under the
Operative Documents, taken as a whole, or materially modify or amend, or
suffer such termination, modification or amendment of any of the
Contracts, the Member Contracts, the Hoosier Contract, the Oglethorpe
Contract, the HMP&L Contract or the Station Two Contracts (other than
pursuant to the 1998 Amendments contemplated in the Station Two
Agreement), or any tariffs relating to any of the foregoing; provided,
however, that Big Rivers shall be permitted to amend its Member Contracts
as necessary to satisfy the conditions to closing set forth in Schedule
3.1, Items (I)(10) and (II)(15).
7.2.8 No Commitment. Agree or commit to do any of the
foregoing.
7.3 Affirmative Covenants. Except as otherwise permitted by this
Agreement or the other Operative Documents or with the prior written consent of
Leaseco, as agent for the LG&E Parties (not to be unreasonably withheld), prior
to Closing, Big Rivers shall:
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7.3.1 Ordinary Course. Operate its business as presently
operated and only in the ordinary course and consistent with past
practices and with the 1998 Amendments.
7.3.2 Adverse Changes. Advise Leaseco, as agent for the LG&E
Parties, in writing of any litigation or administrative proceeding (other
than in the Bankruptcy Court) that challenges or otherwise materially
affects the transactions contemplated by this Agreement or the remaining
Operative Documents and of any material adverse change in the Assets or
the Station Two Assets.
7.3.3 Maintain Assets. Use its reasonable best efforts to
maintain all of the Tangible Assets in good operating condition,
reasonable wear and tear excepted, consistent with Prudent Utility
Practice and past practices.
7.3.4 Cancellation. Maintain at all times prior to the Closing
policies of insurance relating to the Assets providing substantially the
same coverage as is in effect on the Participation Effective Date.
7.3.5 Comply with Laws. Operate and maintain the Assets in
substantial compliance with all applicable Laws.
7.3.6 Additional Employee Matters. Fully vest accrued benefits
related to all of the "benefit liabilities" (as defined in ERISA ss.
4001(a)(16)) ("Benefit Liabilities") as of the Effective Date under each
Big Rivers Qualified Plan with respect to all Transferred Employees who
have been hired by WKEC or its Affiliates as of the Effective Date, cause
the Big Rivers Qualified Plans to be funded so that the assets of such
plans are sufficient to provide all Benefit Liabilities under such plans
with respect to each participant and each beneficiary of a deceased
participant under such plans.
7.4 Station Two Contracts. Perform all of its duties and
obligations under all Station Two Contracts (as amended by the 1998
Amendments, where applicable) in all material respects thereunder,
consistent with the terms and provisions thereof.
ARTICLE 8
COVENANTS OF CERTAIN LG&E PARTIES
8.1 Use by Other LG&E Parties. Leaseco hereby agrees to make
available to all other LG&E Parties during Phase I, for such other LG&E Party's
use in the operation, maintenance, management and upkeep of the Facilities and
Station Two, the following:(i) the Inventories; (ii) the Personal Property;
(iii) the Intangible Assets and the (iv) SO(2) Allowances, in each case at and
after such time as such assets and properties have been assigned or otherwise
made available to Leaseco in accordance with Article 9, below. Each such LG&E
Party hereby agrees to reimburse Leaseco for its proportionate share of all
out-of-pocket costs incurred by
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Leaseco in connection with any of the foregoing assets or the replacement
thereof. Leaseco hereby covenants and agrees that it will not transfer, assign,
sell or otherwise dispose of any of the Intangible Assets (other than the SO(2)
Allowances, the disposition of which is addressed in Section 9.4), to the extent
that such Intangible Asset is necessary to the operation and maintenance of the
Facilities or Station Two.
8.2 LG&E Party Cross Defaults. Notwithstanding anything to the
contrary contained in this Agreement or any other Operative Document, (i) Big
Rivers shall not be deemed to have breached or be in default under this
Agreement or any other Operative Document as the result of any act or omission
of any LG&E Party or any of its Affiliates (which act or omission is itself not
the direct result of an act or omission by Big Rivers), provided such act or
omission by any LG&E Party or any of its Affiliates (A) is in breach of or
default under any Operative Document or (B) constitutes negligence or willful
misconduct on the part of such LG&E Party or any of its Affiliates, (ii) any
waiver or consent granted or action taken by any LG&E Party with respect to this
Agreement or any other Operative Document shall be binding on all LG&E Parties
with respect to all Operative Documents, and (iii) a failure on the part of any
LG&E Party to perform its obligations under any Operative Document shall not be
excused (unless otherwise expressly provided for in such Operative Document) to
the extent performance is prevented or frustrated by any action or inaction of
any other LG&E Party, which action or inaction on the part of such other LG&E
Party is in breach of the provisions of such other Operative Document(s) to
which such other LG&E Party is a party.
8.3 Big Rivers Defaults. Notwithstanding anything to the contrary
contained in this Agreement or any other Operative Document, no LG&E Party shall
be deemed to have breached or be in default under this Agreement or any other
Operative Document as the result of any act or omission of Big Rivers (which act
or omission is itself not the direct result of an act or omission by any LG&E
Party or any of its Affiliates), provided such act or omission by Big Rivers (A)
is in breach of or default under any Operative Document or (B) constitutes
negligence or willful misconduct on the part of Big Rivers.
ARTICLE 9
TRANSFERS AND ASSIGNMENTS TO OCCUR ON THE EFFECTIVE DATE
9.1 Inventories. On the Effective Date, Big Rivers shall sell and
assign to Leaseco, free and clear of all Liens, all of Big Rivers' rights, title
and interest under, in and to the Inventory in Big Rivers' possession or
control. Pursuant to the procedures set forth on Schedule 9.1 hereto, the
Parties shall jointly conduct an inventory survey and agree upon the fair market
value of the Inventory sold to Leaseco pursuant to this Section 9.1 prior to the
Effective Date. Leaseco shall pay Big Rivers for the fair market value as so
determined on the Effective Date or, if the parties are unable to agree on such
fair market value and either party submits the issue of fair market value to the
arbitration procedure described in Section 15, then within five days after final
determination pursuant to that procedure. On the Termination Date, Leaseco shall
immediately sell and assign to Big Rivers, free and clear of all Liens all of
Leaseco's rights, title
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and interest under, in and to the fuel and scrubber reagent inventory, spare
parts and materials and supplies held exclusively for use by any of the LG&E
Parties at that time in connection with its operation of the Assets, and in the
LG&E Parties' possession or control. Within 30 days after such assignment, the
parties shall utilize the procedures set forth above and on Schedule 9.1 and Big
Rivers shall pay Leaseco the fair market value of such inventories, parts,
materials and supplies. If as of the Termination Date, any portion of such
inventories, parts, materials and supplies has been paid for by Big Rivers as
Incremental Environmental O&M (determined on a first in, first out basis) either
pursuant to the Cost Sharing Agreement or the Lease, Big Rivers shall receive a
credit against the fair market value of such inventories, parts, materials and
supplies in an amount equal to that portion of such Incremental Environmental
O&M that was paid by Big Rivers (determined by reference to the Lease or the
Cost Sharing Agreement, as applicable). If the Parties are unable to agree upon
the fair market value of inventories, parts, materials and supplies, the issue
shall be submitted to the arbitration procedure described in Section 15.
9.2 Assignment of Certain Intangible Assets. On the Effective Date,
and pursuant to an Assignment and Assumption Agreement in the form attached
hereto as Schedule 9.2 (the "Assignment and Assumption Agreement"), Big Rivers
shall assign or transfer to Leaseco all of Big Rivers' right, title and interest
in and to all of its obligations under, the Intangible Assets (except the SO(2)
Allowances, which are subject to Section 9.4 of this Agreement and except to the
extent such Intangible Assets are Excluded Assets), free and clear of all Liens,
and Leaseco shall assume and agree to perform and discharge Big Rivers'
performance obligations under those Intangible Assets which first arise or
accrue on or after the Effective Date. Leaseco shall maintain and replace the
Intangible Assets as necessary, in its reasonable discretion, in order to
operate the Assets in a manner consistent with Prudent Utility Practice. Leaseco
shall inform the Oversight Committee or the Operating Committee, as applicable,
of any material change in the status of any Intangible Assets, of any pending
applications for new Permits, and of the receipt of new material Intangible
Assets. On the Termination Date, Leaseco shall (subject to the receipt of all
third-party consents and approvals required therefor, if any) assign or transfer
to Big Rivers, free and clear of all Liens, Leaseco's rights, title and interest
under, in and to the remaining Intangible Assets (exclusive of SO(2) Allowances,
which are addressed in Section 9.4) and any additions, modifications or
replacements of the Intangible Assets (exclusive of SO(2) Allowances) previously
approved by Big Rivers in writing, and Big Rivers shall assume all of Leaseco's
obligations thereunder arising after the Termination Date. Leaseco shall utilize
its best efforts to obtain the third-party consents and approvals referred to in
the parenthetical in the prior sentence and agrees, to the extent such consents
or approvals are not obtained, to utilize its best efforts to provide Big Rivers
with its benefits and rights in, to and under such Intangible Assets at no
expense to Big Rivers. To the extent that any Permit constituting an Intangible
Asset is not assignable by Big Rivers, Big Rivers agrees to make such Permit
otherwise available at no additional cost, to the greatest extent possible, to
Leaseco and WKEC in connection with the performance of their respective
obligations under the Operative Documents. Leaseco agrees (i) to the extent
permitted by Law, to take any and all actions necessary to maintain or renew
such non-transferable Permits and (ii) to reimburse Big Rivers for any
out-of-pocket expenses incurred in connection with the renewal or maintenance of
such non-transferable Permits to the extent action by Big Rivers is required by
applicable Law.
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Notwithstanding the above assignment provision, the Parties agree
that during Phase I, no fuel supply agreements will be assigned by Big Rivers to
Leaseco and any additional fuel supply agreements required during Phase I shall
be entered into by Big Rivers in its own name. WKEC, as operator, will pursuant
to the Facilities Operating Agreement arrange for the acquisition and delivery
of all fuel to the Generating Plants and will, as agent to Big Rivers, make all
payments required under all fuel supply agreements, subject to reimbursement for
such expenditure as provided in Sections 5.7 and 9.1 of the Facilities Operating
Agreement. On the Phase II Effective Date, the Parties agree to execute an
Assignment and Assumption Agreement with respect to the fuel supply agreements,
provided that Leaseco shall not be obligated to assume any fuel supply
agreements entered into by Big Rivers during Phase I to the extent Big Rivers
did not receive Leaseco's written approval prior to executing such fuel supply
agreement. On the Termination Date, Big Rivers shall not be obligated to assume
any fuel supply agreements entered into by Leaseco during Phase II to the extent
Leaseco did not receive Big Rivers' written approval prior to executing such
fuel supply agreement. Subject to Section 18.3, Section 5.7 of the Facilities
Operating Agreement, and any comparable provisions of the Station Two Agreement,
Big Rivers shall, during Phase I, make available to WKEC for use at the
Facilities, and to Station Two Subsidiary for use at Station Two, all fuel which
is available under each of Big Rivers' fuel supply agreements as identified on
Schedule 9.2.1.
9.3 Personal Property. On the Effective Date, Big Rivers shall
sell to Leaseco, free and clear of all Liens, and Leaseco shall purchase from
Big Rivers, all of Big Rivers' rights, title and interest under, in and to
the Personal Property in Big Rivers' possession, including, without
limitation, the Personal Property listed in Schedule 5.1.11 hereto, but
excluding the property identified as Excluded Assets on Schedule 9.3 hereto.
Leaseco shall pay Big Rivers an amount equal to [REDACTED] of the Personal
Property as so determined on the Effective Date (the "PP Price"). Upon such
payment, (a) in the event that the Effective Date is the Phase I Effective
Date, the Initial Fixed Payment referenced in Section 3.3(a) of the Power
Purchase Agreement shall be reduced by an amount equal to [REDACTED] percent
([REDACTED]%) of the PP Price and the remaining monthly fixed installments
payable pursuant to such Section 3.3 shall each be reduced by an amount equal
to [REDACTED]% of the PP Price, (b) in the event that the Effective Date is
the Phase II Effective Date, the Initial Rental Payment referenced in Section
2.3.1 of the Lease shall be reduced by an amount equal to [REDACTED] percent
([REDACTED]%) of the PP Price and the remaining monthly rental installments
payable pursuant to Section 2.3.2 of the Lease shall each be reduced by an
amount equal to [REDACTED]% of the PP Price and (c) in the event that Phase
II follows Phase I, all remaining monthly rental installments payable on and
after the Phase II Effective Date pursuant to Section 2.3.2 of the Lease
shall each be reduced by an amount equal to [REDACTED]% of the PP Price. On
the Termination Date, Leaseco shall immediately sell to Big Rivers, free and
clear of all Liens, all of Leaseco's rights, title and interest under, in and
to all tangible personal property (other than fuel and scrubber reagent,
inventory, spare parts and materials, and supplies) then in any LG&E Party's
possession and used or held at that time exclusively for use in connection
with Leaseco's and/or WKEC's use and operation of the Assets, and Big Rivers
shall pay Leaseco [REDACTED] of such personal property as so determined on
the Termination Date. If as of the Termination Date, any portion of such
personal property has been paid for by Big Rivers as Incremental
Environmental O&M (determined on a first in, first out basis) either pursuant
to the Cost Sharing Agreement or the Lease, Big Rivers shall receive a credit
against the [REDACTED]
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[REDACTED] of such personal property in an amount equal to that portion of
such Incremental Environmental O&M that was paid by Big Rivers (determined by
reference to the Lease or the Cost Sharing Agreement, as applicable).
9.4 SO(2) Allowances
9.4.1 Except as provided in Section 9.4.2, and except those
allowances used by Big Rivers to comply with emissions standards
applicable to the Facilities for the period beginning on January 1
immediately preceding the Effective Date and ending on the Effective Date,
Leaseco shall, without further compensation to Big Rivers, be entitled to
the full and exclusive use, enjoyment and benefit (free of all Liens
arising prior to such use, enjoyment or benefit) including the right to
sell, exchange or otherwise dispose of, for Leaseco's account, all of the
SO(2) Allowances identified on Schedule 5.1.16 hereof (other than those
specifically excluded as contemplated by Section 9.1 and the allowances
allocated to Station Two, the use of which SO(2) Allowances by the LG&E
Parties shall be governed by the Station Two Agreement), and all other
SO(2) Allowances that are allocated by the Environmental Protection Agency
to the Facilities for any calendar year falling within Phase I and Phase
II. Subject to Section 9.4.2, on the Termination Date, Leaseco shall
immediately return (free of all Liens) to Big Rivers all of the SO(2)
Allowances allocated by the Environmental Protection Agency to the
Facilities for all years beginning on or after the Termination Date and a
pro rata portion of the SO(2) Allowances allocated by the Environmental
Protection Agency to the Facilities for the remainder of the year in which
the Termination Date occurs. To the extent Leaseco previously disposed of
any such SO(2) Allowances which must otherwise be returned to Big Rivers
on the Termination Date, Leaseco shall have the obligation on the
Termination Date to replace, at its sole expense, such SO(2) Allowances
and to transfer such replacement SO(2) Allowances to Big Rivers (free of
all Liens). Bonus, extension or transfer SO(2) Allowances not allocated by
the Environmental Protection Agency to the Facilities for a particular
year shall be deemed allocated ratably to the period commencing on the
Effective Date and ending December 31, 1999. Leaseco shall have sole
discretion during Phase I and Phase II of this transaction over the sale,
exchange or other disposition of bonus, extension and transfer SO(2)
Allowances but shall be obligated to return immediately (free of all
Liens) to Big Rivers a pro rata portion of such bonus, extension or
transfer S02 Allowances (or replacements thereof) if the Termination Date
occurs prior to December 31, 1999. Big Rivers shall designate (and shall
cause the City of Henderson to designate) a Leaseco nominee as its
designated representative for all matters related to SO(2) Allowances and
shall execute all documents needed to implement the foregoing entitlement.
9.4.2 If the Termination Date occurs prior to the December
31st that is closest to the twenty-fifth anniversary of the Effective
Date, this Section 9.4.2 shall apply and the year of termination shall be
called the "Final Year of Agreement." In the event SO(2) emissions from
the Facilities during the portion of the Final Year of Agreement prior to
the Termination Date exceed the pro rata amount of the SO(2) Allowances
allocated by the Environmental Protection Agency to the Facilities for the
entire Final Year of Agreement, Leaseco shall transfer to Big Rivers SO(2)
Allowances equal to the amount by
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which SO(2) emissions from the Facilities exceed the pro rata amount of
the SO(2) Allowances for the Final Year of Agreement. In the event SO(2)
emissions from the Facilities during the portion of the Final Year of
Agreement prior to the Termination Date are less than the pro rata amount
of the SO(2) Allowances allocated by the Environmental Protection Agency
to the Facilities for the entire Final Year of Agreement, Big Rivers shall
transfer to Leaseco SO(2) Allowances equal to the amount by which SO(2)
emissions from the Facilities are less than the pro rata amount of the
SO(2) Allowances for the Final Year of Agreement. The pro rata allocation
contemplated by this paragraph 9.4.2 shall be calculated based upon the
ratio of the number of days prior to termination to the total number of
days in the Final Year of Agreement.
9.5 [RESERVED]
9.6 Transmission Use Payment Compensation Adjustment. LEM and
certain of its Affiliates have contracted with Big Rivers pursuant to the
Transmission Services and Interconnection Agreement for certain services as
specified therein for which they will pay Big Rivers according to the rates
set forth in Rate Schedules FTS, STNF, and HNF of Big Rivers' Open Access
Tariff. In the event the annual total charge for transmission services
rendered by Big Rivers to LEM or its Affiliates does not equal or exceed
$[REDACTED], LEM shall credit Big Rivers, pursuant to Section 6.6(c) of the
Power Purchase Agreement, the difference between $[REDACTED] and the total
charge for transmission services billed LEM and its Affiliates by Big Rivers
during such Year ("Transmission Use Credit"). In making the determination
required by the immediately preceding sentence and in each subsequent
calculation pursuant to this Section 9.6, payments made by LEM or its
Affiliates to Big Rivers, if any, for the transmission of power to [REDACTED]
shall be excluded if such power is for resale to [REDACTED] and (a) is
transmitted during or prior to [REDACTED] or [REDACTED], respectively, and
constitutes Tier 1 Energy or Tier 2 Energy (as defined in the Smelter Power
Purchase Agreements) or (b) is transmitted during or prior to [REDACTED] and
constitutes Tier 3 Energy ("Member Transmission Exclusion"). Subject to the
Member Transmission Exclusion, in the event that the annual total charge for
transmission services rendered to LEM and its Affiliates by Big Rivers
pursuant to the Transmission Services and Interconnection Agreement is in
excess of $[REDACTED] and the average rate per megawatt hour for non-firm
transmission service under the Transmission Services and Interconnection
Agreement during such Year exceeded $[REDACTED] per megawatt-hour, escalated
at the rate of [REDACTED]% per annum from January 1, [REDACTED], Big Rivers
shall credit LEM and its Affiliates pursuant to Section 10 of the
Transmission Services and Interconnection Agreement an amount equal to the
number of megawatt hours of non-firm transmission service provided during the
Year to LEM multiplied by the amount by which the average rate for such
service exceeded $[REDACTED] per megawatt-hour escalated at [REDACTED]% per
annum from January 1, [REDACTED]("Non-Firm Transmission Use Credit");
provided, in no event shall such credit exceed the difference between (1) the
annual total charge for transmission services rendered by Big Rivers pursuant
to the Transmission Services and Interconnection Agreement to LEM and its
Affiliates with respect to Power purchased or sold by LEM and its Affiliates
(subject to the Member Transmission Exclusion) (i) to fulfill LEM's or such
Affiliate's
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obligations under the Operative Documents or (ii) which is produced by the
Generating Plants and (2) $[REDACTED]. For purposes of this Section 9.6, the
annual total charge for service shall be calculated on January 15 of the
subsequent Year and shall be calculated based upon total transmission charges
billed to LEM and its Affiliates by Big Rivers for services provided from
January 1 through December 31 of the preceding Year pursuant to the
Transmission Services and Interconnection Agreement. Any credit owing
pursuant to this Section 9.6 shall be made on February 1 of the year
following the Year in which it accrues. Any such credit due on the February 1
subsequent to any Partial Year during the Term of this Agreement shall be
calculated on a pro-rated basis. Subject to the Member Transmission
Exclusion, purchases of transmission service from Big Rivers made by LEM or
any of its Affiliates will be credited toward the $[REDACTED] annual minimum
payment, such that if the cumulative purchases of LEM and its Affiliates of
transmission service from Big Rivers exceeds $[REDACTED]annually, LEM will
not owe Big Rivers any further payment under this paragraph, provided that
(1) for the purposes of this paragraph, the term "Affiliates" does not
include Kentucky Utilities Company and (2) no Non-Firm Transmission Credit
shall be due with respect to any Power transmitted under the Transmission
Services and Interconnection Agreement for LEM or its Affiliates other than
with respect to Power purchased or sold by LEM or its Affiliates (i) to
fulfill LEM's or such Affiliate's obligations under the Operative Documents
or (ii) which is produced by the Generating Plants. The Parties intend that
the credit obligations set forth in this Section 9.6 remain unchanged over
the Term of this Agreement. In addition to the agreement of the Parties set
forth in Section 8 of the Power Purchase Agreement, the Parties agree that
the rates set forth in this Section 9.6 shall not increase or decrease over
the Term of the Transmission Services and Interconnection Agreement by reason
of regulatory action including but not limited to any filing by Big Rivers
with FERC pursuant to Order No. 888. Big Rivers agrees that it will take such
measures as necessary to assure that the rights, obligations and economic
benefits of LEM and its affiliates under this paragraph remain unchanged. LEM
agrees that it waives any rights it may have to seek rates lower than those
required by this Section 9.6.
ARTICLE 10
TRANSFERRED EMPLOYEE MATTERS
10.1 Treatment of Employees. In order to permit the LG&E Parties to
perform their respective obligations set forth in the Operative Documents, Big
Rivers shall permit WKEC or any of its Affiliates to employ such of Big Rivers'
Transferred Employees, as WKEC, in its sole discretion, deems necessary in this
connection. WKEC or its Affiliates shall promptly notify Big Rivers of any
Transferred Employee who, as of 12:01 a.m. on the day immediately following the
Effective Date, is not offered employment by WKEC or its Affiliates in a
position substantially similar to that held with Big Rivers, with compensation
not less than substantially equivalent to that provided by Big Rivers to such
Transferred Employees and with benefits not less than substantially equivalent
to those provided by WKEC to its other employees generally.
10.2 Service Credit to Transferred Employees. The Transferred
Employees whom WKEC or any of its Affiliates retains and who agree to become
employees of WKEC or
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such Affiliate shall be offered participation in the employee benefit plans and
programs available to similarly situated employees of WKEC or such Affiliate, as
applicable, upon terms and conditions which are generally no less favorable in
the aggregate than those afforded other similarly situated employees of WKEC or
such Affiliate, as applicable. Transferred Employees shall receive credit for
their service with Big Rivers for purposes of (i) determining their
participation and vesting (but not benefit accrual except to the extent
expressly provided in this Section 10) under, and (ii) determining eligibility
for early retirement or any subsidized benefit provided under, the tax-qualified
retirement plans available to employees of WKEC, Leaseco or their Affiliates.
For purposes of computing deductible amounts (or like adjustments or limitations
on coverage) under any employee benefit plan or program of WKEC or such
Affiliate, as applicable, expenses and claims previously recognized for similar
purposes under the applicable similar plan or program of Big Rivers shall be
credited or recognized under the comparable plan or program maintained after the
Effective Date by WKEC or such Affiliate, as applicable, and any preexisting
condition requirements under any such plan or program that may otherwise be
applicable to such Transferred Employees shall be waived (to the extent such
condition would be covered under Big Rivers' plan or program). Transferred
Employees shall also receive credit for their service with Big Rivers for
purposes of determining future accruals of sick leave, vacation and any other
service-based employee welfare benefit plans or programs of WKEC or such
Affiliate, as applicable.
10.3 Collective Bargaining Agreement. WKEC shall not adopt, assume
or undertake any responsibility for the currently existing collective bargaining
agreement of Big Rivers with the International Brotherhood of Electrical
Workers, Local 1701, which had an original term extending through October 14,
1997, and which was extended by Big Rivers and the Union through October 14,
1998.
10.4 Benefit Claims. Big Rivers shall retain responsibility for all
workers' compensation, health, life insurance, dependent care, and disability
benefit claims of Transferred Employees pending as of the Effective Date, or
made after the Effective Date, but relating to events occurring on or prior to
the Effective Date. Following the Effective Date, WKEC or its Affiliate (as
applicable) shall have responsibility for all workers' compensation, health,
life insurance, dependent care, and disability benefit claims of Transferred
Employees made after the Effective Date or its Affiliate (as applicable) which
relate to events occurring after the Effective Date.
10.5 Severance for Certain Employees of Big Rivers. As contemplated
by Section 1.9 of Big Rivers Severance Plan as in effect on August 31, 1996, and
as subsequently amended and restated on May 27, 1997 as modified by resolution
dated July 11, 1997 and as further amended on March 13, 1998 (the "Big Rivers
Severance Plan"), following the Effective Date, Big Rivers shall remain liable
for any benefits which become payable under such plan, but WKEC shall reimburse
Big Rivers for severance benefits paid by Big Rivers pursuant to Sections 3.4
and 3.5 of Big Rivers Severance Plan, but only to any Transferred Employee not
hired by WKEC or such Affiliate or, if hired by WKEC or such Affiliate,
subsequently terminated under conditions that require Big Rivers to provide
severance benefits pursuant to Big Rivers
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Severance Plan. Within 60 days following the Effective Date, WKEC shall also
reimburse Big Rivers for (i) the severance benefits paid by Big Rivers pursuant
to Big Rivers Severance Plan to Transferred Employees whose employment with Big
Rivers was terminated as part of a workforce reduction between September 1, 1996
and the Effective Date, (ii) one-half of the cost of outplacement assistance
provided by Big Rivers to any employees whose employment was terminated by Big
Rivers as part of a workforce reduction between September 1, 1996 and the
Effective Date, (iii) one-half of the costs of the outplacement assistance
provided by Big Rivers to any employees who are terminated during the period
from September 1, 1996 through the one-year anniversary of the Effective Date,
and (iv) the full cost of the $150 retiree medical subsidy paid by Big Rivers
under the terms of the Big Rivers Severance Plan, under conditions that require
Big Rivers to provide severance benefits pursuant to the Big Rivers Severance
Plan. This Agreement is not intended to, and shall not be construed to, make any
employee of Big Rivers a third-party beneficiary of this Subsection or of any
other provision of this Agreement. Big Rivers shall not be responsible for
compliance with the Older Workers' Benefit Protection Act in conjunction with
the offer and payment of severance benefits to applicable Transferred Employees.
The release of claims provided for under the Big Rivers Severance Plan to
applicable Transferred Employees terminated on or after the Execution Date shall
specifically include WKEC and its Affiliates within the scope of the release of
claims, and WKEC shall indemnify and hold harmless Big Rivers and all other
fiduciaries of the Big Rivers Severance Plan on and against all liability
arising from the inclusion of WKEC or its Affiliates within the scope of the
release of claims, if any.
10.6 WARN Act. As of the Effective Date, Big Rivers shall terminate
the employment of Transferred Employees (certain of whom in turn may be hired by
WKEC or its Affiliates). WKEC agrees to indemnify and hold harmless Big Rivers
from and against all liability arising under WARN with respect to the
Transferred Employees, whose termination of employment occurs on the Effective
Date. This indemnification shall survive the Effective Date and shall remain
effective concurrent with the legal limitations period applicable to such WARN
liability. In the event it becomes necessary, Big Rivers agrees to reasonably
cooperate with WKEC and its relevant Affiliates (if any) in their efforts to
comply with WARN in connection with the transactions contemplated by the
Operative Documents including, without limitation, the actions to be taken on or
after the Effective Date.
10.7 Certain Benefit Obligations. As of the Effective Date, WKEC
shall assume the obligation of Big Rivers to provide to each Transferred
Employee employed by WKEC or its Affiliates immediately following the Effective
Date the amount of unused sick leave and vacation time credited to such employee
by Big Rivers as of the Effective Date. Such unused sick leave and vacation
shall be provided in accordance with WKEC or its Affiliate's sick leave and
vacation policies as in effect from time to time, except that WKEC shall allow
non-bargaining Transferred Employees who are age 50 or over on the Effective
Date the right to take a cash-out of such unused sick leave credited as of the
Effective Date, in accordance with Big Rivers' policy on cash-outs of unused
sick leave as set forth in Big Rivers Severance Plan. WKEC shall provide medical
benefits to the Transferred Employees upon their retirement in accordance with
the retiree medical plan or program of WKEC or its Affiliate, as the case may
be, as in effect at the time of such retirement and such retiree medical
benefits provided by WKEC or its Affiliate, as the case may be, shall have an
aggregate present value as of the Effective Date determined in accordance with
Financial Accounting Standard ("FAS") 106 that is no less than the present value
as of such date of Big Rivers' obligation to provide retiree
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medical benefits to the Transferred Employees as determined in accordance with
FAS 106. The items described in 10.8.1, 10.8.2 and 10.8.3 below shall be paid by
Big Rivers to WKEC in cash on the Effective Date, and if not so paid shall, in
the case of any such payment owed to WKEC, be applied as an offset to the
Initial Fixed Payment or the Initial Rental Payment (as defined in the Lease),
as applicable.
10.7.1 Sick Leave. The following cost of the obligation to
provide sick leave to the Transferred Employees shall be paid by Big
Rivers. Such cost shall be the sum of (i) and (ii) below based on the
product resulting from multiplying the number of sick leave hours for each
Transferred Employee as of the Effective Date, times the employee's hourly
pay rate with Big Rivers on that date:(i) the entire resulting product
times [REDACTED] percent; plus (ii) the portion of the resulting product
attributable to accumulations of over [REDACTED] hours of sick leave for
non-bargaining Transferred Employees over the age of 50 on the Effective
Date, times [REDACTED] percent.
10.7.2 Vacation. The following cost of the obligation to
provide vacation to the Transferred Employees shall be paid by Big Rivers.
Such cost shall be determined by multiplying the number of vacation hours
for each Transferred Employee as of the Effective Date, times the
employee's hourly pay rate with Big Rivers on that date.
10.7.3 Retiree Medical Benefits. The following cost of the
obligation to provide retiree medical benefits to the Transferred
Employees shall be paid by Big Rivers. Such cost shall be the present
value as of the Effective Date, of Big Rivers' obligation to provide
retiree medical benefits to the Transferred Employees under Financial
Accounting Standard 106, minus $[REDACTED].
ARTICLE 11
TAXES
11.1 Sales and Use Taxes. Notwithstanding anything in the Operative
Documents to the contrary, (i) Big Rivers shall pay any and all sales and use
Taxes imposed on (A) its transfer of Inventory and Personal Property to Leaseco
pursuant to Sections 9.1 and 9.3 hereof, (B) its lease of the Facilities
pursuant to the Lease and Operating Agreement, and (C), if the Phase I
Agreements become effective, its sale of power to LEM pursuant to the Power
Purchase Agreement to the extent of the lesser of (1) the sales Tax imposed on
Big Rivers with respect to the consideration described in Section 3.3(a) thereof
and (2) the sales Tax that would have been imposed on Big Rivers if the Phase II
Agreements (rather than the Phase I Agreements) were effective as of the
Effective Date, and (ii) an LG&E Party shall pay any and all sales and use Taxes
imposed on (A) Leaseco's transfer of fuel and scrubber reagent inventory, spare
parts, materials, supplies and other tangible personal property (as required by
Sections 9.1 and 9.3 of this Agreement) to Big Rivers on the Termination Date
and (B), if the Phase I Agreements become effective, Big Rivers' sale of power
to LEM pursuant to the Power Purchase Agreement to the extent that the amount of
such sales Tax exceeds the amount of the Tax described in clause (i)(C) of this
sentence. The allocation of sales and use Tax pursuant to this Section 11.1 also
shall apply to any Tax enacted after the date hereof in replacement of any such
sales or use Tax.
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11.2 Property Taxes. Big Rivers shall pay when due all property
Taxes assessed, levied, or exacted on the Assets, but Leaseco shall,
following the Effective Date, reimburse Big Rivers for [REDACTED] percent of
such Taxes that are allocable to the period beginning on the Effective Date
and ending on the Termination Date, provided, however, that the [REDACTED]
percent sharing ratio shall be changed to [REDACTED]% for the year [REDACTED]
and to [REDACTED]% as of January 1, [REDACTED] and remain at [REDACTED]%
throughout the remainder of the Term. In the event that Big Rivers elects to
reduce the Contract Limits pursuant to Section 4.3(e) of the Power Purchase
Agreement, the property Tax sharing ratio shall be adjusted by multiplying
Big Rivers' then-applicable percentage share of property Taxes by the sum of
one (1) plus the CCAP in effect on the date of assessment of such Taxes. Any
adjustments to the property Tax sharing ratio made pursuant to the preceding
sentence shall be effective for taxable periods (or portions thereof)
beginning on the effective date for the Reduction in Contract Limits set
forth in Section 4.3(e) of the Power Purchase Agreement. For purposes of this
Section 11.2, property Taxes imposed on the Assets for a taxable period shall
be allocated to each day in such period on a pro rata basis. Leaseco shall
reimburse Big Rivers for Leaseco's portion of such Taxes within thirty (30)
days of receiving notice from Big Rivers showing the nature and amount of
such Taxes, proof of Big Rivers' payment of such Taxes, and the computation
of Leaseco's share of such Taxes. The allocation of property Tax pursuant to
this Section 11.2 also shall apply to any Tax enacted after the date hereof
in replacement of such Tax.
11.3 Unidentified Asset-Related Taxes. Following the Effective Date,
the LG&E Parties shall pay when due all Taxes that are imposed upon Big Rivers
in connection with the lease, operation, or maintenance of the Assets and not
described in Section 11.1 or 11.2 of this Agreement, provided, however, that
this Section 11.3 shall not apply to (i) any income or franchise Tax (except to
the extent that LEC assumes an income or franchise Tax pursuant to the Tax
Indemnification Agreement) or (ii) any utility gross receipts license Tax.
11.4 Change of Law. Except as provided in Sections 11.1 and 11.2
concerning replacement Taxes, Big Rivers shall pay any Tax imposed on Big Rivers
that is attributable to a change in law or regulation (or any interpretation
thereof) after the Effective Date to the extent that the amount of such Tax does
not exceed the amount of the Tax that would have been imposed on Big Rivers if
the Phase II Agreements (rather than the Phase I Agreements) had been in effect
as of the Effective Date, and the LG&E Parties shall pay any Tax imposed on Big
Rivers following the Effective Date that is attributable to a change in law or
regulation (or any interpretation thereof) after the Effective Date to the
extent that such Tax exceeds the amount of the Tax that would have been imposed
on Big Rivers if the Phase II Agreements (rather than the Phase I Agreements)
had been in effect as of the Effective Date. Nothing in this Section 11.4 shall
relieve Big Rivers of its obligations under Section 8 of the Power Purchase
Agreement or Big Rivers or any LG&E Party of their respective obligations under
Article 8 of the Lease or Article 7 of the Cost Sharing Agreement.
11.5 Other Taxes. Any Tax imposed on a Party during the term of this
Agreement and that is not specifically allocated between the Parties (either by
direct payment or reimbursement) pursuant to Sections 11.1, 11.2, 11.3, or 11.4
of this Agreement, Section 8 of the Power Purchase Agreement, or the Tax
Indemnification Agreement shall be borne by the Party that is primarily
obligated to pay such Tax.
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11.6 IRS Ruling Request. The LG&E Parties shall have the right, but
not the obligation, to require Big Rivers to join LEC in jointly submitting to
the IRS a request for a private letter ruling to the effect that the
transactions contemplated by the Phase I Agreements, for Federal income tax
purposes, should be treated as a lease (or, if reasonably acceptable to Big
Rivers, as an arrangement the income taxation of which is substantially
identical to that of a lease) of the Assets by Big Rivers to the LG&E Parties
(such request, together with any exhibits, attachments, and supplements thereto,
the "Ruling Request"). The Parties shall request that the IRS issue the ruling
to both Big Rivers and the LG&E Parties but, if the IRS will not agree to such
joint ruling, then the Parties shall request that the IRS issue the ruling
solely to Big Rivers. The Ruling Request may solicit additional rulings that
relate to ancillary issues concerning the Federal income tax consequences of the
transactions arising from the Phase I Agreements subject to the express written
consent of Big Rivers, which consent shall not be unreasonably withheld. The
LG&E Parties shall draft the Ruling Request and submit such draft to Big Rivers
for its review and comment, and the Parties shall work expeditiously to file the
Ruling Request with the IRS as promptly as possible. The LG&E Parties and Big
Rivers shall cooperate in taking all reasonable actions necessary to secure the
requested rulings, including the execution of powers of attorney and
declarations of the accuracy of the statements made in the Ruling Request. The
LG&E Parties shall have the ultimate decision-making authority with respect to
the preparation, submission, filing, and negotiations for the requested rulings,
but the LG&E Parties shall consult in good faith with Big Rivers to reasonably
resolve any disagreement concerning any matter relating to the Ruling Request.
Each Party shall have the right to participate in all negotiations and
communications with the IRS concerning any matter relating to the Ruling
Request. The LG&E Parties shall pay the costs and expenses that the LG&E Parties
incur in connection with the Ruling Request and, if Big Rivers retains Arthur
Andersen LLP to represent Big Rivers in connection with the Ruling Request, then
the LG&E Parties shall pay the fees and expenses charged Big Rivers by Arthur
Andersen LLP for such representation to the extent that such fees and expenses
exceed those that Arthur Andersen LLP charges Big Rivers in connection with Big
Rivers obligations pursuant to Section 7.1.2 hereof. The Parties further agree
that a Ruling Request may be submitted to the IRS under the provisions of this
section a second time if the LG&E Parties determine, in their sole discretion,
and notify Big Rivers of such determination by April 15, 1998, that
modifications to the transaction could be deemed to raise the question of
whether a material change in facts has occurred such that an IRS response to a
prior Ruling Request could no longer be relied upon.
11.7 Kentucky Tax Rulings. At the request of Big Rivers or the LG&E
Parties, the Parties shall request, in writing, that the KRC determine, or issue
a certificate or other statement to each Party to the effect, that (i) no Party
is liable for any sales or use Tax pursuant to the transactions contemplated by
the Operative Documents, (ii) no Party is required to withhold any portion of
the payments made thereunder on account of any sales or use Tax, and/or (iii) an
exemption and/or a reduced rate of property Tax are allowable with respect to
all or any portion of the Assets for any taxable period; provided, however,
that, if the KRC determines that any party hereto has any obligation to pay or
withhold any sales or use Tax, or that an exemption or reduced rate of Tax is
not allowable for a taxable period with respect to all or any portion of the
Assets, then the parties also shall request that the KRC determine the amount of
such liability, obligation, exemption, or rate and advise each party of the
nature and
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computation of the amount of Tax in controversy. Each party shall have the right
to participate in the preparation and filing of any and all written and oral
submissions to the KRC for purposes of obtaining the determination, certificate,
and/or statement described in this Section 11.7, and each party shall have the
right to join in all negotiations and communications with the KRC for such
purpose. Each party shall execute all necessary waivers of confidentiality of
Tax and other information that is or may be reasonably related to the subject
matter of the determinations, statements, and certificates described in this
Section 11.7.
11.8 Appeal of Tax Assessment. Except as otherwise provided in the
Tax Indemnification Agreement, each Party shall have the right to appeal and
contest the assessment of any Tax that is imposed upon such Party by operation
of law or that is allocated to such Party (either by direct payment or
reimbursement) pursuant to this Article 11 or pursuant to Section 8 of the Power
Purchase Agreement.
ARTICLE 12
ACCOUNTING
12.1 Maintenance of Books and Records. Leaseco shall keep up-to-date
books and records of financial transactions and other arrangements that carry
out the terms of the Operative Documents, which books and records shall be
sufficiently detailed to allow the Parties to fulfill their respective
obligations under applicable law. Leaseco shall retain these books and records
until the Termination Date (unless otherwise approved by the Operating Committee
or unless Leaseco delivers the records it desires to destroy to Big Rivers) and
shall make these books and records available for inspection and audit by Big
Rivers at any reasonable time pursuant to Section 12.3 of this Agreement.
12.2 Accounting Practices. Leaseco shall keep all accounts
consistent with the Accounting Practices.
12.3 Audit. At the request of Big Rivers, Leaseco shall cause the
books and records pertaining to operations under the Annual Capital Budget and
the Annual O&M Budget for any year to be audited by independent Certified Public
Accountants of national reputation acceptable to both Parties. Copies of such
audits shall be supplied to each Party. The cost of such audits shall be shared
equally by the Parties.
12.4 Statements and Reports. Leaseco shall furnish to the Parties
monthly statements of costs incurred and expenditures made pursuant to the
Annual Capital Budget and the Annual O&M Budget and copies of all material
reports, notice or filings made to any governmental or other regulatory
authority. Leaseco shall also furnish to the Parties such other reports as may
from time to time reasonably be requested.
12.5 Access to Records. Each of Leaseco and Big Rivers reserves the
right to inspect, copy or perform audits of financial records and operations of
the Assets. Leaseco shall allow reasonable access to records, reports and
supporting documentation regarding the operation of the Assets. From time to
time, requirements of Federal or state tax and regulatory
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agencies of a Party may necessitate access to records held by the other Party
and such access shall not be denied unreasonably.
12.6 Confidentiality of Books and Records. Each Party shall treat as
confidential books, records and other information developed or acquired by that
Party in connection with the Assets and no Party shall reveal or otherwise
disclose such confidential information to third parties without the prior
written consent of the other Party. These restrictions shall not apply to the
disclosure of confidential information (i) to any Affiliate of the disclosing
Party; (ii) to each Party and its employees, attorneys, agents and auditors;
(iii) to any public or private financing agency or institution which has either
lent money, committed to lend money to any Party hereto or is considering such
action; (iv) to any third party to which a Party contemplates a permitted
transfer under Section 16 provided, however, that in any such case only such
confidential information as such third party shall have a legitimate business
need to know shall be disclosed; provided, in the case of any disclosure
pursuant to (i), (ii), (iii) and (iv), that the Party receiving the disclosure
first agrees to keep the information confidential; (v) that otherwise comes into
the public domain unless as a result of a breach by such Party of its
obligations under this Section 12.6; or (vi) that is required, in the opinion of
either Party's counsel, to be disclosed to the RUS or any other federal, state
or local government or appropriate regulatory agencies and departments of such
agencies or that is required, in the opinion of either Party's counsel, to be
publicly announced, to the extent required by law. Each Party shall be
responsible to the other Party to this Agreement for any disclosures of
confidential information by its employees, attorneys, agents and auditors in
violation of this Section 12.6.
ARTICLE 13
INSURANCE COVERAGE
13.1 Leaseco to Obtain and Maintain Assets Insurance. Leaseco, at
its own expense, shall have in place on the Effective Date, and thereafter
maintain in effect at all times during the Term, in accordance with standards
prevailing in the electric power industry (including the independent power
industry) for assets of similar size and nature, insurance coverage for the
Assets with responsible insurers, for the benefit of the parties as their
interests may appear, to protect and insure against third party liability for
bodily injury and property damage, all risks of physical damage to property or
equipment, including transportation and installation perils, catastrophic losses
due to either third party liability or damage to first party property and such
other insurance as Leaseco deems necessary, with reasonable limits and subject
to appropriate exclusions, and deductibles/retentions. In addition to, and not
in any way limiting the foregoing, Leaseco shall have in place on the Effective
Date and maintain in effect at all times during the Term, insurance coverage of
the type and in the minimum amounts set forth on Schedule 13.1 or as required in
any Debt Restructuring Documents, whichever is greater.
13.2 Notice of Claims. Leaseco shall notify the other parties of
the assertion of any claim in excess of $[REDACTED] relating to the Assets
immediately upon assertion of the same, or of the occurrence of an event
likely to result in the assertion of such a claim. Leaseco shall report
annually to the Operating Committee all claims asserted in the amount of
$[REDACTED] or
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more, and shall provide such Operating Committee with all notices provided to
insurers with respect to any claim.
13.3 General Provisions Affecting Assets Insurance. The following
provisions shall apply to the Assets Insurance obtained by Leaseco in compliance
with this Article 13.3:
13.3.1 Named Insureds. Leaseco shall be named as the first
named insured and each of Big Rivers and WKEC shall also be named as named
insureds on all policies of Assets Insurance (except for the crime policy
and the workers' compensation and employers' liability policy) and such
policies that do not carry a "separation of insureds" provision shall
carry cross-liability endorsements.
13.3.2 Primary Insurance. Assets Insurance policies shall be
primary insurance for all purposes and shall be so endorsed. Any other
insurance carried by the parties individually shall not participate with
insurance for the Assets as to any loss or claim for which valid and
collectible Assets Insurance shall apply. Such other insurance shall apply
solely as to the individual interest of the parties; provided, however,
the parties shall accept any reasonably restrictive endorsement to their
separate insurance policies as may be required by an insurer as a
condition precedent to the issuance of a policy of Assets Insurance.
13.3.3 Certificates of Insurance. Leaseco shall furnish the
parties with Certificates of Insurance evidencing the existence of the
Assets Insurance required by this Article 13. Upon request of Big Rivers,
Leaseco shall make available for inspection and copying a certified copy
of each of the policy forms of Assets Insurance, together with a line
sheet therefor (and any subsequent amendments) naming the insurers and
underwriters and the extent of their participation.
13.3.4 Notice of Cancellation or Material Change. Each of the
Assets Insurance policies shall be endorsed so as to provide that the
parties shall be given the same advance notice of cancellation or material
change as that required to be given to Leaseco.
13.3.5 Insurers. Leaseco shall obtain Assets Insurance from
such responsible insurers or underwriters, including stock companies,
mutuals and pools or groups of insurers or underwriters, as it in its sole
discretion may select, provided that the insurance carriers have a
policyholder's rating of "A-" or better and a financial size of "Class
VII" or better, as published in the latest edition of Best's Insurance
Reports.
13.3.6 Refunds. Any refunds of premiums or dividends received
by Leaseco on any Assets Insurance shall be retained by Leaseco.
13.3.7 Combined Coverage. Nothing in any Operative Document
shall prohibit Leaseco from combining the coverage required by this
Agreement with coverage outside the scope of that required by this
Agreement as long as such combining of coverage in no way adversely
affects the coverage required hereunder.
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13.4 Relations with Insurers. Leaseco shall assist any insurer in
the investigation, adjustment and settlement of any loss or claim covered by
Assets Insurance. Leaseco shall present and prosecute claims against insurers
and indemnitors providing Assets Insurance or indemnities in respect of any loss
of or damage to the Assets or liability of either Party to third parties covered
by any indemnity agreement, and to the extent that any such loss, damage or
liability is not covered by Assets Insurance or by any indemnity agreement,
present and prosecute claims therefor against any parties who may be liable
therefor.
13.5 Station Two Insurance Proceeds. Notwithstanding anything
contained in this Agreement or any other Operative Document to the contrary, but
subject to the provisions of the Station Two Agreement, in the event any Station
Two Improvement is damaged or destroyed following the Effective Date and any
insurance proceeds are paid or payable to Big Rivers and/or any LG&E Party as a
result thereof, and in the event such Station Two Improvement is not repaired or
replaced in compliance with the Station Two Agreement and the Station Two
Contracts, and Big Rivers and/or Station Two Subsidiary are entitled to retain
those proceeds for their account in accordance with those agreements (or such
Station Two Improvement is so repaired or replaced using only a portion of the
insurance proceeds, and the remaining portion of those proceeds may be so
retained by Big Rivers and/or Station Two Subsidiary), then all such insurance
proceeds that are not so used for the repair or replacement of such Station Two
Improvement shall be divided between Big Rivers and Station Two Subsidiary (with
appropriate payments between those Parties) within 30 days after the later of
(a) the decision is made not to repair or replace the Station Two Improvement or
(b) insurance proceeds have been received (in the case of (a) and (b), together
with any interest that may have accrued on those proceeds since their receipt),
based on the respective Station Two Improvement Sharing Ratios of Big Rivers and
Station Two Subsidiary that applied to the Station Two Improvement at the time
of its original construction, purchase or installation.
ARTICLE 14
ENVIRONMENTAL LIABILITIES AND INDEMNITIES
14.1 Big Rivers' Environmental Liabilities and Indemnities. Except
as set forth in Section 14.2 and Sections 14.7, Big Rivers shall bear, at its
sole cost, and, following the Effective Date shall indemnify and hold harmless
Leaseco, the other LG&E Parties and their respective Affiliates from and against
(i) all costs of responding to a release or threat of release of a Hazardous
Substance or other waste (including, without limitation, garbage and refuse)
whether (y) on, under or from the Facilities or the Real Property on which the
Facilities are located or (z) on, under or from any off-site disposal locations
utilized by Big Rivers, but in the case of subclause (y) alone, only to the
extent disclosed on Schedule 5.1.19, stipulated by the Parties in writing or
identified in the Baseline Environmental Audit Report (or to the extent not
first identified in the End Of Term Baseline Audit (as defined in Section 14.5))
and, in the case of subclause (y) and (z), only to the extent that the response
is required by Environmental Law, and (ii) any claims, demands, losses, damages,
liabilities, costs, expenses, obligations and deficiencies (including, without
limitation, costs of corrective or remedial actions, fines, civil or criminal
penalties, settlements and attorney's fees) asserted or imposed against, or
incurred by,
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Leaseco, its directors, members of governing bodies, agents, officers,
Affiliates, partners and employees, directly or indirectly, in connection with
the presence of Hazardous Substances or other waste (including, without
limitation, garbage and refuse) whether (X) on, under or from the Facilities or
the Real Property on which the Facilities are located or (Y) on, under or from
any off-site disposal location utilized by Big Rivers, but in the case of
subparagraph (X) alone, only to the extent disclosed on Schedule 5.1.19,
stipulated by the Parties in writing or identified in the Baseline Environmental
Audit Report (or to the extent not identified in the End Of Term Baseline
Audit). Except as provided above, the indemnities contained in this Article 14
shall not apply to incidental, consequential and other special damages that may
be incurred by Leaseco or its Affiliates, including lost profits. Without
limiting the generality of the foregoing, Big Rivers hereby waives all claims
and causes of action against Leaseco whether arising under statute, common law,
or otherwise at law or in equity with respect to items (i) and (ii) of this
Section, except to the extent covered by Leaseco's indemnity set forth in
Section 14.2 below. In the event that a condition covered by this Article 14 is
identified in the Baseline Environmental Audit Report or elsewhere as described
above, but is contributed to or exacerbated by the action or inaction of Leaseco
during Phase II or WKEC during Phase I, Leaseco and Big Rivers shall share
equitably in any losses, liabilities, costs or expenses associated with that
condition. Notwithstanding anything contained in this Section 14.1 to the
contrary, the obligation of Big Rivers to indemnify and hold harmless Leaseco
and its Affiliates shall not apply to costs and expenses which constitute
Incremental Environmental O&M or costs and expenses for Capital Assets that are
necessary to comply with any requirement of any Environmental Law or any
environmental regulatory authority.
14.2 Leaseco's and WKEC's Environmental Liabilities and Indemnities.
Except as set forth in Section 14.1, Leaseco and WKEC shall, following the
Effective Date, bear, at their sole cost, and indemnify and hold harmless Big
Rivers from and against (i) all costs of responding to a release or threat of
release of a Hazardous Substance or other waste (including, without limitation,
garbage and refuse) whether (y) on, under or from the Facilities or the Real
Property on which the Facilities are located, or (z) on, under or from any
off-site locations utilized by Leaseco or WKEC, but in the case of subclause (y)
alone, only to the extent not disclosed on Schedule 5.1.19, not stipulated by
the Parties in writing or not identified in the Baseline Environmental Audit
Report (including any Hazardous Substance or other waste to the extent first
identified in the End Of Term Baseline Audit) and in the case of subclause (y)
and (z) to the extent that the response is required by Environmental Law, and
(ii) any claims, demands, losses, damages, liabilities, costs, expenses,
obligations and deficiencies (including, without limitation, costs of corrective
or remedial actions, fines, civil or criminal penalties, settlements and
attorney's fees) asserted or imposed against, or incurred by, Big Rivers, its
directors, members, agents, officers, partners and employees, directly or
indirectly, in connection with the presence of Hazardous Substances or other
waste (including, without limitation, garbage and refuse) whether (x) on, under
or from the Facilities or the Real Property on which the Facilities are located,
(y) on, under, or from any off-site disposal location used by Leaseco or WKEC,
but in the case of subparagraph (x) alone, to the extent not disclosed on
Schedule 5.1.19 or not stipulated by the Parties in writing or identified in the
Baseline Environmental Audit Report (including any Hazardous Substance to the
extent first identified in the End Of Term Baseline Audit). Nothing contained in
this Section 14.2 shall limit Big Rivers' rights (if any) to indemnity
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from Leaseco or any of its Affiliates under any Operative Documents by reason of
any of their failure to exercise Prudent Utility Practices. Without limiting the
generality of the foregoing, Leaseco and WKEC hereby waive all claims and causes
of action against Big Rivers whether arising under statute, common law, or
otherwise at law or in equity with respect to items (i) and (ii) of this Section
except to the extent covered by Big Rivers' indemnity set forth in Section 14.1.
In the event that a condition covered by this Section 14.2 is identified in the
End Of Term Baseline Audit or elsewhere as described above, but is contributed
to or exacerbated by the action or inaction of Big Rivers after the Effective
Date, Big Rivers, Leaseco, and WKEC shall share equitably in any losses,
liabilities, costs or expenses associated with that condition. Except as
provided elsewhere in this Agreement, the indemnities contained in this Article
14 shall not apply to incidental, consequential and other special damages that
may be incurred by Big Rivers, including lost profits. Notwithstanding anything
contained in this Section 14.2 to the contrary, the obligation of Leaseco and
its Affiliates to indemnify and hold harmless Big Rivers shall not apply to
costs and expenses which constitute Incremental Environmental O&M or costs and
expenses for Capital Assets that are necessary to comply with any requirement of
any Environmental Law or any environmental regulatory authority.
14.3 Minimizing Costs, Expenses and Liabilities. Leaseco and WKEC
shall during Phases I and II and Big Rivers shall after the Termination Date,
use reasonable efforts to minimize costs, expenses and liabilities of the type
described in Sections 14.1, 14.2 and 14.7, below.
14.4 No Effect on Insurance. The provisions of this Article 14 shall
not be construed to relieve any insurer of its obligation to pay any insurance
proceeds in accordance with the terms and conditions of valid and collectible
Assets Insurance policies.
14.5 End Of Term Baseline Environmental Audit. As soon as
possible following the Termination Date, the parties shall promptly conduct
an environmental survey of the Assets utilizing the same guidelines
established in the Baseline Environmental Audit performed in advance of the
Closing and on the three additional quarterly dates post-closing on which
certain supplemental groundwater testing was performed, to the study reported
in the Baseline Environmental Audit Report, pursuant to the same terms as the
Baseline Study Agreement between Big Rivers and Leaseco or such other terms
as the parties may mutually agree upon. The results of that end of term study
shall be referred to as the "End Of Term Baseline Audit." Leaseco's share of
the expense of the End Of Term Baseline Audit shall not exceed $[REDACTED],
adjusted to reflect the change in the preliminary index value of the Implicit
Price Deflators for Gross Domestic Product as published in Economic
Indicators prepared for the Joint Economic Committee by the Council of
Economic Advisers (or any successor index mutually agreed upon by the
parties) for the calendar quarter most recently then ended (at the time the
contract for such study is executed) from its preliminary value for the third
quarter of 1996.
14.6 Areas Expressly Excluded from Scope of Baseline Environmental
Audit Report. Notwithstanding anything to the contrary, Big Rivers and Leaseco
agree that the provisions of Section 14.1 and Section 14.2 shall not apply to
any release or threat of release of Hazardous Substances in or beneath the Green
River or the Ohio River (as measured by the
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ordinary high water mark), whether occurring before or after the Effective Date.
With regard to any such releases or threats of releases of Hazardous Substances
in or beneath the Green River or the Ohio River, Big Rivers and Leaseco hereby
reserve all rights, whether at law or in equity, each may have against the other
or against any third party.
14.7 Opacity Indemnity. Notwithstanding anything contained elsewhere
in this Article 14 to the contrary, and in lieu of any indemnification and hold
harmless covenants set forth in Section 14.1 and 14.2, above:
(a) Big Rivers agrees that it shall bear at its sole cost and,
following the Effective Date, shall indemnify and hold harmless Leaseco, the
other LG&E Parties and their respective Affiliates from and against, any claims,
demands, losses, damages, liabilities, costs, expenses, obligations and
deficiencies (including without limitation, costs of corrective or remedial
actions, fines, civil or criminal penalties, settlements and attorneys fees)
(collectively "Opacity Damages"), asserted or imposed against, or incurred by,
Leaseco, the other LG&E Parties, their Affiliates, or their respective
directors, agents, officers and employees, directly or indirectly, in connection
with: (i) any failure of any one or more of the Generating Plants to comply with
applicable opacity limitations prior to the Effective Date; (ii) any failure of
the Green and Wilson facilities of Big Rivers to comply with applicable opacity
limitations at any time from the Effective Date through and including the date
on which Big Rivers has received its final Title V Air Quality Permits for the
Green and Wilson facilities from the KNREPC (exclusive of violations resulting
from the operation of the Green and Wilson facilities by the relevant LG&E
Parties during that period in a manner that is materially different than the
operation of those facilities by Big Rivers immediately prior to the Effective
Date); and (iii) following the receipt by Big Rivers of its Title V Air Quality
Permits for the Green and Wilson facilities, (A) any failure by those permits to
comply with applicable Environmental Laws at the time of their issuance, (B) any
failure by Big Rivers to have obtained those permits in compliance with
applicable Environmental Laws at the time of their issuance (including without
limitation, any defect in those permits attributable to the compliance
certifications included by Big Rivers in its applications for those permits),
(C) any challenge to the Title V Air Quality Permits for the Green and Wilson
facilities by any Person or governmental or regulatory authority based on the
compliance certifications described in (B) above, (D) any operation by any of
the LG&E Parties of the Green or Wilson facilities in reliance upon (and in
compliance with) those permits where it is determined that any of the
circumstances described in (A) or (B), above, existed or (E) any failure of the
Title V Air Quality Permits for the Green and Wilson facilities to shield or
protect the LG&E Parties, their Affiliates or such other Persons, from and
against all such Opacity Damages that may arise following the issuance of those
permits by reason of or resulting from the operation of the Green or Wilson
facility by the relevant LG&E Parties in compliance with those permits and in a
manner that is materially consistent with the operation of those facilities by
Big Rivers prior to the Effective Date, and such failure to shield or protect is
based upon the circumstances described in (A) or (B) above; including in the
case of (i), (ii) and (iii), above, without limitation, any Opacity Damages
incurred by any of the LG&E Parties or other Persons identified above following
the Effective Date, or following the issuance of the Title V Air Quality Permits
for the Green and Wilson facilities, arising out of acts or omissions on the
part of Big Rivers, its employees, agents or representatives, occurring prior to
the Effective Date or the issuance of those permits (as applicable).
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(b) Leaseco and WKEC shall, following the Effective Date, bear, at
their sole cost, and indemnify and hold harmless Big Rivers from and against any
Opacity Damages asserted or imposed against, or incurred by, Big Rivers or its
directors, members of governing bodies, agents, officers and employees, directly
or indirectly, in connection with any failure of the Generating Plants to comply
with applicable opacity limitations subsequent to the Effective Date, other than
the Opacity Damages resulting from or under the circumstances described in
Section 14.7(a)(ii) or Section 14.7(a)(iii), above.
(c) Without limiting the generality of the foregoing, Big Rivers
hereby waives all claims and causes of action against the LG&E Parties, whether
arising under statute, common law or otherwise at law or in equity, with respect
to the Opacity Damages for which Big Rivers is responsible as described in (a),
above, and the LG&E Parties hereby waive all claims and causes of action against
Big Rivers, whether arising under statute, common law or otherwise at law or in
equity, with respect to the Opacity Damages for which Leaseco and WKEC are
responsible as described in (b), above. The indemnities contained in this
Section 14.7 shall not apply to (y) incidental, consequential and other special
damages that may be incurred by the LG&E Parties, Big Rivers or the other
Persons identified in (a) or (b) above, including lost profits, or (z) costs and
expenses which constitute Incremental Environmental O&M or costs and expenses
for Capital Assets that are necessary to comply with any requirement of any
Environmental Law or any environmental regulatory authority (including without
limitation, any change in position of the KNREPC regarding compliance with
applicable opacity limitations based on concurrent measurement of particulate
matter emissions affecting the Green and Wilson facilities).
ARTICLE 15
DISPUTE RESOLUTION AND ARBITRATION
15.1 Dispute Resolution. If during the term of this Agreement, any
issue, dispute or controversy ("Dispute") should arise hereunder or under any of
the Operative Documents, then representatives of the affected parties shall
promptly confer and exert their best efforts in good faith to reach a reasonable
and equitable resolution of such Dispute. If such representatives are unable to
resolve such Dispute within five (5) business days, the Dispute shall be
referred within two (2) business days of the lapse of the aforementioned five
(5) business day period to the responsible senior management of the affected
parties for resolution. No party shall seek any other means of resolving any
Dispute arising in connection with any Operative Document until all parties'
responsible senior managements have had at least five (5) business days to
resolve the Dispute following referral of the Dispute to such responsible senior
management. Each party shall have the right to join in any such proceeding any
other party or entity having an interest therein. If the parties are unable to
resolve the Dispute in accordance with the foregoing procedure, either party may
then, at any time, initiate mediation of the Dispute, as described in Section
15.2 below.
15.2 Mediation.
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15.2.1 If either Party initiates mediation, such mediation
shall proceed in accordance with the Commercial Mediation Rules of the
American Arbitration Association then in effect on the date of this
Agreement by a mediator who (x) has the qualifications and experience set
forth in Section 15.2.2 below, and (y) is selected as provided in 15.2.3.
15.2.2 Unless the parties agree otherwise, the mediator shall
be a lawyer with excellent academic and professional credentials who (w)
is familiar with contracts governing the operation of electric generating
plants and is otherwise qualified in the subject area of the issue in
dispute, (x) is or has been a partner in or counsel to a highly respected
law firm for at least 10 years as a practicing attorney specializing in
either general commercial litigation or general corporate and commercial
matters, (y) has had both training and experience as a mediator in the
federal or state courts or with a reputable commercial ADR firm or
non-profit ADR organization, and (z) is impartial.
15.2.3 Either Party may initiate mediation of the Dispute by
giving the other party a written notice setting forth the list of the
names and resumes of three persons who that party ("Initiating Party")
believes would be qualified as a mediator. Within 15 days after delivery
of this notice, the Recipient Party shall give a counter-notice to the
Initiating Party in which the Recipient Party may designate a person to
serve as the mediator from among the three persons listed by the
Initiating Party, or if no such selection is made, the Recipient Party may
set forth a list of names and resumes of three persons who the Recipient
Party believes to be qualified as a mediator. Within 10 days after
delivery of the counter-notice the Initiating Party may designate a person
to serve as mediator from among the three persons listed by the Recipient
Party. If the parties cannot agree on a mediator from the three nominees
submitted by each party, the mediator shall be selected by the American
Arbitration Association.
15.2.4 Within thirty (30) days after the mediator has been
selected, both parties and their respective attorneys shall meet with the
mediator for one mediation session of at least four hours. Each party's
representative attending the mediation session shall have authority to
settle the Dispute. If the Dispute cannot be settled at such mediation
session or at any mutually agreed upon continuation thereof, either party
may give the other and the mediator written notice declaring the mediation
process to be at an end, in which case the Dispute shall be resolved by
arbitration as provided in Section 15.3 below.
15.2.5 All conferences and discussions which occur in
connection with the mediation conducted pursuant to this Agreement shall
be deemed settlement discussions and nothing said or disclosed nor any
document produced which is not otherwise independently discoverable shall
be offered or received as evidence or used for impeachment or for any
other purpose in any current or future arbitration or litigation.
15.2.6 The cost of the mediation shall be shared equally by
the Parties.
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15.3 Arbitration.
15.3.1 If the Parties are unable to resolve the Dispute in
accordance with the mediation procedure set forth in Section 15.2 within
60 days of the initiation of such procedure, or if either Party refuses to
participate in the mediation procedure, either Party may then, at any
time, deliver notice to the other party of its intent to submit the
Dispute to arbitration, which notice shall include the specific issues
concerning the Dispute which must be resolved (the "Arbitration Notice").
At any time following the 10th day after delivery of an Arbitration
Notice, either party (for purposes of this Section 15.3, the "First
Party") may give notice to the other party (for purposes of this Section
15.3, the "Second Party") that it has designated an arbitrator. Within 15
days of the delivery of the aforesaid notice of designation the Second
Party shall be required to designate a second arbitrator and to notify the
First Party of such designation. Within 15 days of the designation of the
second arbitrator, the two designated arbitrators shall meet and shall
jointly designate a third arbitrator, who shall be neutral and impartial.
Arbitrators shall be qualified by education and experience in the subject
matter of the Dispute and issues to be arbitrated. The arbitrator
designated by the party-appointed arbitrators shall be the Chairman of the
arbitration panel. A determination by a majority of the panel shall be
binding upon and enforceable against each party.
15.3.2 If for any reason (i) the Second Party shall fail
timely to designate an arbitrator after notice of designation is delivered
by the First Party or (ii) the two party-appointed arbitrators fail timely
to designate a third arbitrator, or the third arbitrator shall fail for
any reason to serve, said arbitrator(s) shall be designated by the
American Arbitration Association upon the demand of either Party.
15.3.3 All proceedings before the arbitrators shall be held at
such place as the affected Parties may agree. Failing such agreement, such
proceedings shall be held in Louisville, Kentucky in a location other than
an office of a Party or counsel to a Party.
15.3.4 The parties agree that any Dispute being resolved by
arbitration hereunder shall be determined pursuant to the provisions set
forth herein and pursuant to the applicable Commercial Arbitration Rules
of the American Arbitration Association then in effect insofar as such
rules are not inconsistent with the provisions set forth herein.
15.3.5 The authority of the arbitrators shall be limited to
the specific Dispute and related issue(s) in controversy as designated by
the parties.
15.3.6 Notwithstanding any provision to the contrary contained
in this Section 15.3, the Parties agree that if an Arbitration Notice
identifies as the sole issue a determination as to a particular dollar
amount owing under this Agreement and does not involve a request for any
form of equitable relief, then (a) at the commencement of the arbitration
hearing, each Party shall submit a proposed arbitration award and the
arbitrators shall be required to adopt in full the proposed arbitration
award of one of the
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Parties and (b) the Party whose proposed arbitration award is not selected
shall pay all the costs of the arbitration, including the reasonable
attorney's fees of the prevailing Party.
15.3.7 If the Arbitration Notice identifies one or more issues
that do not fit the criteria described in Section 15.3.6, then the
arbitration panel shall award such relief as they determine appropriate
and otherwise in accordance with the terms of this Agreement. If Section
15.3.6 is not applicable, then (i) if a single Party prevails in the
arbitration, then the Party that does not prevail in the arbitration shall
pay all the costs of the arbitration, including the costs and reasonable
attorneys' fees of the prevailing Party and (ii) in the event that no
single Party prevails in all respects, the arbitration panel shall
determine the appropriate allocation of costs (other than attorneys' fees,
in which case each Party will pay their own counsel) in accordance to the
extent reasonably possible with the intentions of the Parties, as
expressed in 15.3.7(i), that the non-prevailing Party with respect to each
issue should bear a proportionate share of the costs imposed on the
Parties by arbitration of that issue.
15.3.8 Any decision or award of the arbitrators shall be final
and binding upon the Parties. Judgment upon the award rendered may be
entered in any court having jurisdiction, or application may be made to
such court for a judicial acceptance of the award or any order of
enforcement, as the case may be.
15.4 Exclusiveness of Procedures. Subject to the retained
jurisdiction of the Bankruptcy Court to resolve disputes between the Parties,
the procedures specified in this Section 15, shall be the sole and exclusive
procedures for the resolution of disputes between the Parties arising out of or
relating to this Agreement and each of the other Operative Documents; provided,
that a Party may seek a preliminary injunction or other preliminary judicial
relief if in its judgment such action is necessary to avoid irreparable damage.
Despite such action the Parties will continue to participate in good faith in
the procedures specified in this Section 15. All applicable statutes of
limitation shall be tolled while the procedures specified in this Section 15 are
pending. The Parties will take such action, if any, required to effectuate such
tolling.
ARTICLE 16
TRANSFERS AND ASSIGNMENTS
16.1 Permitted Assignments. No party shall assign any of its rights
or obligations under any Operative Document without the prior written consent of
the other Parties, however that no prior consent shall be required with respect
to an assignment:
(1) to any Person into which or with which the Party making the
assignment is merged or consolidated or to which the Party transfers
substantially all of its assets.
(2) with respect to each LG&E Party, to any Affiliate.
(3) with respect to each LG&E Party, to any third party which is
authorized by all appropriate regulatory authorities to fulfill such LG&E
Party's obligations under
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the Operative Documents to which such LG&E Party is a Party and which
provides assurances of payment and performance of equal or greater value
to that provided in such Operative Documents, as reasonably determined by
Big Rivers; provided, however, and notwithstanding Section 16.2, that
following such assignment, the Guaranty provided by LEC shall remain in
full force and effect, unless and until a replacement guaranty, acceptable
to Big Rivers and the RUS, is provided to Big Rivers.
(4) in the case of either Big Rivers or any LG&E Party, to any (a)
creditor holding a Permitted Lien as security for the underlying
obligation, (b) other mortgagee or other secured party as security for
indebtedness incurred for borrowed money by such party to fund its
acquisition of a Capital Asset pursuant to Article 7 of the Cost Sharing
Agreement or Article 8 of the Lease, as applicable, or (c) other entity as
security for indebtedness for borrowed money loaned to Big Rivers or any
LG&E Party, provided that each such secured party of Big Rivers or any
LG&E Party referenced herein executes a Non-Disturbance Agreement in
substantially the form attached hereto as Exhibit H (or, in the case of an
assignment by an LG&E Party, in a form reasonably acceptable to Big
Rivers), and such secured party may transfer or assign the interest given
as security pursuant to, or in lieu of, a foreclosure of the Lien (or the
exercise of power of sale) held by such secured party, provided that the
transferee or assignee assumes all of the duties and obligations of the
pledging Party under the Operative Documents, including without limitation
the obligation to enter into a Non-Disturbance Agreement, and all other
agreements that relate to the interest being transferred or assigned.
The rights of Big Rivers and the LG&E Parties (exclusive of WKEC) to
assign any of their rights or obligations under the Station Two Agreement are
further subject to the limitations on assignment set forth therein. Subject to
the foregoing restrictions in this Section, the Operative Documents shall be
binding upon, inure to benefit of and be enforceable by the Parties that are
signatories thereto and their respective successors and assigns.
16.2 Assignment and Assumption of Related Agreements. No transfer or
assignment of any interest in the Assets or in the Operative Documents, or any
part thereof pursuant to subsections 16.1(1), 16.1(2) or 16.1(3) may be made
unless, simultaneously, the transferring party's rights under all Operative
Documents and all other agreements that relate to such interest are similarly
transferred or assigned to the same Person or Persons, and such Person or
Persons assumes in writing all the duties and obligations of the Party making
such transfer or assignment under such agreements that relate to the interest
being transferred or assigned. Unless the provisions of subsections 16.1(1),
16.1(2) or 16.1(3) and the immediately preceding sentence are satisfied, no such
assignment or transfer shall release the transferring or assigning Party from
any of its obligations pursuant to any Operative Document or such other
agreements.
16.3 Noncomplying Assignment. Any attempted or purported assignment
or transfer made other than in accordance with this Article 16 either
voluntarily or by operation of law (including, without limitation, by merger or
consolidation) shall be void and of no effect.
16.4 Regulatory Approvals. Assignments or transfers under any
Operative Document may be subject to the jurisdiction of state or federal
regulatory agencies. Such
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transfers shall not be effective until all required approvals and all other
required action by such agencies having jurisdiction shall have been obtained.
16.5 Liens. No Party shall directly or indirectly create, incur,
assume or suffer to exist any Lien on or with respect to the Assets, except
Permitted Liens. Leaseco agrees to pay before delinquency all costs for work,
services or materials furnished for use in connection with the Assets, the
non-payment of which could result in any Lien against the Assets. Leaseco will
keep title to the Assets free and clear of any and all Liens other than
Permitted Liens. Leaseco will immediately notify Big Rivers of the filing of any
such Lien or any pending claims or proceedings related to any such Lien as and
when it comes to the attention of Leaseco, and will indemnify and hold Big
Rivers harmless from and against all loss, damages and expenses (including
reasonable attorneys' fees) suffered or incurred by Big Rivers as a result of
such Lien (regardless of whether or not Leaseco knew of the existence of such
Lien). In case any such Lien attaches, Leaseco agrees to cause it to be
immediately released and removed of record (failing which Big Rivers may do so
at Leaseco's sole expense). Notwithstanding anything herein to the contrary,
Leaseco shall have the right to contest in good faith any such Lien even if such
contest prolongs or permits the existence of such Lien, and (i) Big Rivers shall
not be responsible or liable for the removal or release of any Lien on or with
respect to the Assets which is created or imposed by the actions of any of the
LG&E Parties, or in connection with any services performed for or materials
furnished to any of the LG&E Parties, or for the costs or expenses of such
removal or release, or for any losses, damages or expenses incurred by any of
the LG&E Parties in connection therewith and (ii) the LG&E Parties shall not be
responsible or liable for the removal or release of any Lien on or with respect
to the Assets which is created or imposed by the actions of Big Rivers, or in
connection with any services performed for or materials furnished to Big Rivers,
or for the costs or expenses of such removal or release, or for any losses,
damages, or expenses incurred by Big Rivers in connection therewith.
ARTICLE 17
TERMINATION
17.1 Right of Parties to Terminate.
17.1.1 Termination Prior to the Effective Date. This Agreement
may be terminated prior to the Effective Date:
(a) Subject to Section 20.5, by Leaseco, on behalf of all LG&E
Parties, if any of the authorizations, consents, approvals, filings or
registrations required as a condition to both Phase I and Phase II in Schedule
3.1 and Schedule 3.2 hereof shall have been denied, not permitted to go into
effect or obtained on terms not reasonably satisfactory to the LG&E Parties and
all reasonable final appeals shall have been exhausted;
(b) Subject to Section 20.5, by Big Rivers, if any of the
authorizations, consents, approvals, filings or registrations required as a
condition to both Phase I and Phase II in Schedule 3.1 and Schedule 3.2 hereof
shall have been denied, not permitted to go into effect or obtained on
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terms not reasonably satisfactory to Big Rivers and all reasonable final appeals
shall have been exhausted;
(c) By Leaseco, on behalf of all LG&E Parties, if Big Rivers shall
have breached or defaulted under any of its obligations hereunder in any
material respect and such breach or default, if curable, is not cured by the
defaulting Party within the period prescribed in Section 17.2;
(d) By Big Rivers, if any of the LG&E Parties shall have breached or
defaulted under any of its obligations hereunder in any material respect, and
such breach or default, if curable, is not cured by the defaulting Party within
the period prescribed in Section 17.2;
(e) By either Big Rivers or Leaseco, on behalf of all LG&E Parties,
by written notice to the other Party, if the Closing shall not have occurred on
or prior to December 31, 1998;
(f) [RESERVED]
(g) By Big Rivers, if, after notice to Leaseco, as agent for the
LG&E Parties, and a hearing, the Bankruptcy Court determines, after taking into
consideration the Parties obligations under Section 20.5, that it is reasonably
certain that any of the conditions precedent to Big Rivers' obligations to close
the Phase I transaction or, if it is to precede the Phase I transaction, the
Phase II transaction, will not occur or be satisfied prior to December 31, 1998;
or
(h) By Leaseco, as agent for the LG&E Parties, if, after notice to
Big Rivers, and a hearing, the Bankruptcy Court determines, after taking into
consideration the Parties obligations under Section 20.5, that it is reasonably
certain that any of the conditions precedent to Big Rivers' obligations to close
the Phase I transaction or, if it is to precede the Phase I transaction, the
Phase II transaction, will not occur or be satisfied prior to December 31, 1998.
17.1.2 Termination After the Effective Date. After the
Effective Date, the occurrence of any of the following events shall
constitute a default under this Agreement:
(1) Failure by a Party to pay when due any and all amounts payable
to other Party in accordance with the terms of this Agreement;
(2) Any attempt by a Party to transfer an interest in this Agreement
in breach of Article 16;
(3) Failure of a Party to perform any material obligation set forth
herein;
(4) Except with respect to the Chapter 11 Case, any filing by a
Party of a petition in bankruptcy or insolvency, or for reorganization or
arrangement under any bankruptcy or insolvency laws, or voluntarily taking
advantage of any such laws by answer or otherwise or the commencement of
involuntary proceedings under any such laws if such proceedings are not
withdrawn or dismissed within 60 days after such institution;
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(5) Assignment by a Party for the benefit of creditors;
(6) Allowance by a Party of the appointment of a receiver or trustee
of all or a material part of its property if such receiver or trustee is not
discharged within 60 days after appointment;
(7) Any breach of a representation or warranty made by a Party in
this Agreement, provided that such breach would have a material adverse effect
on the Non-Defaulting Party or its rights under this Agreement or any other
Operative Document taken as a whole; provided, however, the Parties acknowledge
and agree that any breach occurring on or after the Effective Date of any
representation or warranty made by a Party as of the Effective Date in this
Agreement shall give rise to the right of the other Party to damages or
availability of other remedies provided for hereunder arising from such breach
only if the claim for damages or other relief is made within one (1) year
following the Effective Date;
(8) Failure, inability or refusal of a Party to cure a default or
breach under (a) during Phase I, the Power Purchase Agreement, the Cost Sharing
Agreement, the Transmission Service and Interconnection Agreement or the
Facilities Operating Agreement which gives rise to a termination of such other
Phase I Agreement and (b) during Phase II, the Lease, the Transmission Service
and Interconnection Agreement or the Power Purchase Agreement which gives rise
to a termination of such Phase II Agreement, or any termination by that Party of
any of the foregoing agreements in breach or in default thereof; or
(9) Failure by Big Rivers to pay to LEM, when due, an amount owed
pursuant to the Settlement Promissory Note.
(10) The Party in default under any provision of this Section 17.1.2
shall be referred to as the "Defaulting Party" and the other Party shall be
referred to as the "Non-Defaulting Party."
17.2 Pre-Effective Date Remedies. If either the LG&E Parties or Big
Rivers decides to terminate this Agreement pursuant to Section 17.1.1, such
Party shall promptly give written notice to the other Party to this Agreement of
such decision. In the event such notice relates to termination due to a breach
of a covenant of the other Party contained in this Agreement or any other
Operative Document, such notice shall state a date by which such breach must be
cured, which shall be at least 30 days after receipt of the notice. If within
the 30-day period, the breaching Party cures the breach or if the breach is one
that cannot in good faith be corrected within such period and the breaching
Party begins to correct the breach within the 30-day period and (a) continues
corrective efforts with diligence until a cure is effected and (b) produces
reasonably satisfactory evidence that such breach can be cured by December 31,
1998, the notice of termination shall be inoperative and the breaching Party
shall lose no rights under this Agreement, provided, that the breaching Party
shall remain liable to the other Parties for any damages incurred by them
resulting from that breach or default. In the event of a termination pursuant to
Section 17.1.1, the Parties shall be released from all liabilities and
obligations arising under this Agreement, other than for damages arising from a
breach of this Agreement, provided, however, that the Parties acknowledge and
agree that notwithstanding any provision to the
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contrary in this Agreement any breach or default occurring prior to the
Effective Date of any representation or warranty made by a Party as of the date
hereof in this Agreement or any other Operative Document (other than, in the
case of Big Rivers, those representations made in Sections 5.1.1, 5.1.2, 5.1.3
and 5.1.4 of this Agreement and, in the case of the LG&E Parties, in Sections
6.1.1, 6.1.2, 6.1.3 and 6.1.4 of this Agreement) shall not give rise to the
right of the other Party to damages, and the non-breaching Party's sole remedy
in the event of such a breach or default shall be the right to refuse to
consummate the transactions contemplated by this Agreement.
17.3 Post-Effective Date Defaults; Remedies.
17.3.1 Notice of Default. The Non-Defaulting Party shall have
the right to give the Defaulting Party a written notice of default ("Notice of
Default"), which shall describe the default in reasonable detail and state the
date by which the default must be cured, which shall be at least 30 days after
receipt of the notice, except as to a breach or default under Subsection (1) of
Section 17.1.2 which shall be three days after receipt of notice, and under
Subsections (2), (4), (5), (6), (7), (8) or (9) of Section 17.1.2, as to which
there will be no cure right.
17.3.2 Opportunity to Cure. If within the three day period
with respect to a breach or default under Subsection (1) of Section 17.1.2 the
Defaulting Party cures the breach or default, or if within the 30 day period
with respect to breaches or defaults under Subsection (3) of Section 17.1.2
(which are not also defaults under Subsections (2), (4), (5), (6), (7), (8) or
(9) of Section 17.1.2) the Defaulting Party cures the breach or default or if
the failure is one that cannot in good faith be corrected within such period and
the Defaulting Party certifies to the Non-Defaulting Party that it agrees to
cure such breach or default and begins to correct the breach or default within
the 30 day period and continues corrective efforts with diligence until a cure
is effected, the notice of default shall be inoperative and the rights of the
Non-Defaulting Party under Section 17.3.4 shall not be triggered. Subject to the
Defaulting Party's right to contest under Section 17.3.3, if the Defaulting
Party does not cure or begin (and diligently continue) to cure the breach or
default as provided above, the Non-Defaulting Party shall have the rights
specified in Section 17.3.4. A Non-Defaulting Party's right to damages or other
relief resulting from a breach by a Defaulting Party hereunder shall begin to
accrue as of the first day of the breach without regard to the availability of
any cure rights hereunder, and without regard to whether the breach or default
is cured.
17.3.3 Contest. If the Defaulting Party disputes the existence
or nature of a default asserted in a Notice of Default, then the Defaulting
Party shall pay the disputed payment or perform the disputed obligation, but may
do so under protest. The protest shall be in writing, shall accompany the
disputed payment or precede the performance of the disputed obligation, and
shall specify the reasons upon which the protest is based. The Defaulting Party
shall deliver copies of the protest to the Non-Defaulting Party. If it is later
determined pursuant to the dispute resolution, mediation or arbitration under
Section 15 that a protesting party is entitled to a refund of all or any portion
of a disputed payment or payments or is entitled to the reasonable equivalent in
money of nonmonetary performance of a disputed obligation theretofore made,
then, upon such determination, the nonprotesting Party shall pay such amount to
the
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protesting Party, together with interest thereon at a rate equal to the Prime
Rate from the date of payment or from the date of completion of performance of a
disputed obligation to the date of reimbursement.
17.3.4 Remedies. If the Defaulting Party's breach or default
is one for which there is no cure right, or if the Defaulting Party fails or
refuses to cure the breach or default under Section 17.3 for which a cure right
is available within the time described hereunder, the Non-Defaulting Party shall
have, in addition to any other rights and remedies that a Party may have at law,
in equity (including, without limitation, to pursue recovery of damages from the
Defaulting Party, subject to any limitations on remedies set forth in this
Agreement) or otherwise, the following remedies:
17.3.4.1 If Big Rivers, on the one hand, or any of the LG&E
Parties, on the other hand, ("X") shall fail to make any payment or shall
fail to perform any obligation under this Agreement or the Settlement
Promissory Note, then the other Party ("Y") or any of its Affiliates will
have the right (but not the obligation) without prior notice to X to
perform such obligation and set-off the costs of such performance or the
amount of any such past due payment owing to Y against any obligation of Y
or any of its Affiliates owing to X or any of its Affiliates hereunder or,
in the event the breach or default shall occur during Phase II, under any
other Operative Document (whether or not matured).
17.3.4.2 The Non-Defaulting Party may terminate this Agreement
upon 30 days' notice to the Defaulting Party of its intent to do so.
17.3.4.3 Notwithstanding anything contained herein or in any
Operative Document to the contrary, Big Rivers may also terminate this
Agreement at any time that the Guaranty provides Big Rivers with the right
to terminate this Agreement.
17.3.4.4 The termination rights provided for in this Section
17.3 are in addition to, and not in lieu of, any rights to terminate this
Agreement as are set forth in the Station Two Agreement or the Guaranty,
which termination rights shall be cumulative.
17.4 Automatic Termination. This Agreement shall terminate
automatically on December 31, 1998 and the Parties hereto shall subsequently
have no duties or obligations under this Agreement or the other Operative
Documents (except for any breach or default hereunder by the Parties occurring
prior to the termination, and except for indemnity claims that have accrued
hereunder prior to the termination) unless, prior to December 31, 1998, all
conditions to the effectiveness of a confirmed plan of reorganization filed by
Big Rivers, which plan incorporates the LG&E Transaction (as defined in the
Plan) and which plan is consented to by (i) that number of the Members whose
action is required under Section 279.140 of the Kentucky Revised Statutes in
order to constitute an action by the membership of Big Rivers, (ii) each of the
Banks, (iii) the RUS, (iv) each of the Smelters and (v) Big Rivers, shall have
been satisfied or duly waived in accordance with the provisions of such plan.
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17.5 Condemnation Termination. Upon the occurrence of a total
condemnation with respect to all or substantially all of the Tangible Assets,
which condemnation causes, during Phase I, the termination of the Cost Sharing
Agreement or, during Phase II, the termination of the Lease, all provisions of
this Agreement except Section 9.6 hereof shall automatically terminate at such
time, and the Settlement Promissory Note shall become immediately payable in
full. Section 9.6 shall be treated from that time forward as a part of the
Transmission Services and Interconnection Agreement and shall be governed by the
provisions thereof.
17.6 Monthly Margin Payments. No provision of this Agreement or any
other Operative Document purporting to limit special, incidental and
consequential damages that may be recoverable by Big Rivers shall bar or
constitute any waiver of any claim by Big Rivers for any Monthly Margin Payments
as its damages arising by reason of a default by Leaseco under the Lease or by
LEM under the Power Purchase Agreement (including without limitation under
Section 2.2(a)(ix) of the Power Purchase Agreement and Section 11.1(8) of the
Lease); provided, that nothing contained herein shall be deemed to be an
admission by Leaseco that the loss of such payments by Big Rivers is or shall be
an actual or direct damage incurred by Big Rivers arising out of such a default
by Leaseco or LEM.
ARTICLE 18
WAIVER; LG&E INDEMNITIES
18.1 Waiver. Except to the extent caused by the willful or grossly
negligent act or omission by Big Rivers, its Affiliates, successors and assigns,
or their respective officers, employees, consultants or agents (the "Protected
Parties") or by the breach of this Agreement or any other Operative Document by
Big Rivers (which act or omission is itself not the direct result of an act or
omission of any LG&E Party or any of its Affiliates, successors or assigns or
their respective officers, employees, consultants or agents), and except for
losses, injuries and damages specifically assumed by Big Rivers or covered by
any indemnification or hold harmless covenant of Big Rivers in this Agreement or
any of the other Operative Documents, Big Rivers and the Protected Parties will
not be liable or in any way responsible for, and following the Effective Date,
Leaseco and WKEC waive all claims against Big Rivers and the Protected Parties
for, any liability, loss, damage, claim or cost (including attorneys' fees)
suffered by Leaseco or WKEC or any of their Affiliates, successors, or assigns,
or their respective officers, employees, consultants or agents in connection
with the use and/or operation of the Assets by Leaseco or WKEC or any of their
Affiliates, successors, or assigns, or their respective officers, employees,
consultants or agents.
18.2 General Indemnity. Except to the extent limited pursuant to
Section 10.2.1 of the Lease or Section 9.2 of the Cost Sharing Agreement, as
applicable, in the event that insurance proceeds are insufficient to restore the
Facilities, and notwithstanding the limitations set forth with respect to WKEC
in Sections 13.2 and 13.3 of the Facilities Operating Agreement, following the
Effective Date, Leaseco shall indemnify and reimburse Big Rivers and the
Protected Parties for any and all claims, losses, liabilities, damages, costs
(including court costs) and expenses (including reasonable attorneys' and
accountants' fees) (collectively, "Damages") suffered or incurred by Big Rivers
or the Protected Parties as a result of, or with respect to,
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Leaseco's and/or WKEC's or any of their Affiliates, successors or assigns or
their respective officers, employees, consultants or agents, operation and/or
use of the Assets, except to the extent that any of the foregoing Damages arise
as a result of (a) the gross negligence or willful misconduct of, or breach of
any Operative Document by, Big Rivers or the Protected Parties seeking
indemnification (which act or omission is itself not the direct result of an act
or omission of any LG&E Party or any of their Affiliates, successors or assigns
or their respective officers, employees, consultants or agents) or (b) any
action, event or circumstance for which Big Rivers has an indemnification and
hold harmless obligation pursuant to Article 14 (environmental indemnity) or
pursuant to any other Operative Document, or for which Big Rivers has expressly
assumed responsibility in any Operative Document. Nothing in this Section 18.2
shall be construed to impose an additional or different indemnification
obligation upon any of the Parties resulting from, or respecting, any
environmental matters than such Party's obligations under Article 14 hereof.
18.3 Fuel Indemnity. During Phase I, Leaseco shall indemnify, defend
and hold harmless Big Rivers, and its directors, officers, employees,
consultants and agents for any liability, loss, damage, claim, and cost
(including attorneys' fees) arising in connection with each and every fuel
supply contract held by Big Rivers as of the Effective Date for use in the
Generating Plants, and all other fuel supply contracts entered into by Big
Rivers after the Effective Date with Leaseco's prior written consent, in each
case including liabilities, losses, damages, claims, and costs (including
attorneys' fees) arising from any act or omission of Big Rivers, provided that,
if such liability, loss, damage, claim or cost (including attorneys' fees)
arises from an action of Big Rivers that constitutes breach, default, gross
negligence or willful misconduct by Big Rivers under any such fuel supply
contract (which breach, default, gross negligence or willful misconduct by Big
Rivers under any such fuel supply contract is not related to or caused by any
act or omission of any LG&E Party or any of their Affiliates, successors or
assigns or their respective officers, employees, consultants or agents), then
Leaseco shall have no obligation under this provision unless an LG&E Party
requested or concurred in such action by Big Rivers (in which case Leaseco's
obligations under this paragraph shall not be excused).
ARTICLE 19
SEVERAL OBLIGATIONS
Nothing contained in this Agreement or the remaining Operative
Documents shall ever be construed to create an association, joint venture, trust
or partnership, or to impose a trust or partnership covenant, obligation or
liability on or with regard to the Parties. Except as otherwise provided herein
or in the other Operative Documents with respect to the LG&E Parties, each Party
shall be individually responsible for its own covenants, obligations and
liabilities as herein or therein provided.
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ARTICLE 20
MUTUAL COVENANTS
Big Rivers and the LG&E Parties covenant and agree that they will
act in accordance with the following, and shall bear their own costs and
expenses in doing so:
20.1 Governmental Consents. Promptly following the execution of this
Agreement, the Parties will proceed to prepare and file with the appropriate
governmental authorities any requests for approval or waiver that are required
(or that the Parties otherwise agree to seek) from governmental authorities in
connection with the transactions contemplated hereby or in the other Operative
Documents (including the Phase II Agreements), and the Parties shall diligently
and expeditiously prosecute and cooperate fully in the prosecution of such
requests for approval or waiver and all proceedings necessary to secure such
approvals and waivers.
20.2 Third Party Consents. Promptly following the execution of this
Agreement, the Parties will use reasonable best efforts to procure all consents
that are required from third parties, including the Members, in connection with
the transactions contemplated hereby or in the other Operative Documents, and
the Parties shall diligently and expeditiously seek such consents and cooperate
fully in the procurement of such consents.
20.3 Reasonable Efforts. Each party will use its reasonable best
efforts to effect the transactions contemplated by this Agreement and the
remaining Operative Documents and to fulfill the conditions to the obligations
of the parties set forth in Schedules 3.1, 3.2 and 3.3 to this Agreement.
20.4 Wholesale Power Contracts. From and after the Execution Date,
Big Rivers shall use its commercially reasonable efforts to maintain the Member
Contracts (as amended in accordance with this Agreement), the Hoosier Contracts,
the Oglethorpe Contract and the HMP&L Contract in full force and effect, to
exercise Big Rivers' rights and entitlements thereunder to the fullest extent
permissible under those agreements and applicable laws, and to fully and timely
perform and discharge its duties and obligations thereunder, in each case
throughout the remaining terms of those agreements. In addition, Big Rivers
shall not attempt to assign or convey to any other Person (other than an LG&E
Party or its Affiliate) any rights or interests that it may have under or
pursuant to the Member Contracts, the Hoosier Contracts, the Oglethorpe Contract
or the HMP&L Contract throughout the remaining terms of those agreements.
20.5 Further Assurances. Prior to December 31, 1998, the LG&E
Parties and Big Rivers will execute such further documents and instruments and
take such further actions as may be reasonably requested by Big Rivers or the
LG&E Parties, respectively, in order to cause the Closing to occur in accordance
with the terms hereof. The LG&E Parties and Big Rivers expressly acknowledge and
agree that, although it is their intention to effect a transaction among
themselves in the form contemplated by this Agreement and by the Operative
Documents in the form attached hereto on the date hereof, it may be preferable
to effectuate such a transaction by
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means of an alternative structure in light of the conditions set forth in
Schedule 3.1, 3.2 and 3.3. Accordingly, if (x) a condition to the Effective Date
which is not yet satisfied or waived is the receipt of any one or more of the
governmental approvals referred to in those provisions of Schedule 3.1, 3.2 or
3.3 entitled "Commission Approval," "Hart Scott Rodino," "Consents,"
"Governmental Approvals," "FERC Approval" and "Securities and Exchange
Approvals", (y) Big Rivers or the LG&E Parties believe that such condition(s)
will not be satisfied through the continued use of the transaction structure
contemplated by the Operative Documents in the form attached hereto, and (z) Big
Rivers or the LG&E Parties believe that the adoption of an alternative structure
(that otherwise substantially preserves for each of the LG&E Parties, on the one
hand, and Big Rivers, on the other hand, the relative risks and economic
benefits contemplated by the Operative Documents in the form attached hereto on
the date hereof) would result in such conditions being satisfied or waived, then
the LG&E Parties and Big Rivers shall use their respective reasonable best
efforts to effect a transaction among themselves by means of a mutually agreed
upon structure other than the structure contained in the Operative Documents in
the form attached hereto on the date hereof or with mutually agreed upon
revisions to the currently contemplated structure, that in either case so
preserves such benefits; provided that, prior to the Closing of any such
restructured or revised transaction, (A) all Affected Parties (as defined below)
shall have consented to such restructured or revised transaction and all
governmental authority declarations, filings, registrations, notices,
authorizations, consents or approvals necessary for the effectuation of such
alternative structure or revisions to the currently contemplated structure shall
have been obtained and (B) all other conditions to the Effective Date, as
applied to such alternative structure or revisions, shall have been satisfied or
waived. For purposes of this Section 20.5, the term "Affected Party" shall mean
(i) that number of the Members whose action is required under Section 279.140 of
the Kentucky Revised Statutes in order to constitute an action by the membership
of Big Rivers, (ii) each of the Smelters, (iii) each of the Banks and (iv) the
RUS, but, in each case, only if the restructured or revised transaction
contemplated by this Section 20.5 materially adversely affects (X) such party's
rights under, or relating to, the Plan or (Y) such party's rights, if any,
under, or relating to, the Operative Documents in the form attached hereto. In
the event that Big Rivers and the LG&E Parties disagree as to whether or not a
party identified in clauses (i) through (iv) above is an "Affected Party," the
Parties agree to present such issue to the Bankruptcy Court for determination.
20.6 Operating Committee; Budget Preparation. The Parties agree,
notwithstanding the date upon which the Closing occurs, that they will continue
to work together to (i) develop an Annual O&M Budget and an Annual Capital
Budget with respect to the "Initial Budget Period" (as defined in the Facilities
Operating Agreement or the Lease (as applicable), and (ii) consider matters of
concern relating to the operation of the Assets and Station Two following the
Closing with respect to which the Operating Committee is given a role pursuant
to the terms of the Lease or the Facilities Operating Agreement. The applicable
provisions contained in the Phase I or Phase II Agreements, as applicable, shall
replace this provision on and after the Effective Date. Notwithstanding the
preceding sentence, the Parties hereby agree that the Annual Capital Budgets for
the Initial Budget Period to be agreed to by the Parties as contemplated in
Schedule 3.1 attached to this Agreement shall include as the aggregate budgeted
amount for the relevant Year (or portion thereof) the following amounts which
amounts shall not be increased or decreased without the written approval of the
Parties (but subject to Section 6.5
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of the Facilities Operating Agreement and Section 7.5 of the Lease dealing
with budget deviations): (i) First Partial Year following the Effective Date
(assuming there are five full months then remaining in that Year) --
$[REDACTED]; (ii) First full Year following the Effective Date -- $[REDACTED]
; and (iii) Second full Year following the Effective Date -- $[REDACTED].
Notwithstanding the foregoing, in the event an item or expense included in
any Annual Capital Budget that is a part of the Initial Period Budgets is
determined to be an Enhancement or Major Capital Improvement, or is
determined not to be a Capital Asset or Station Two Improvement that Big
Rivers would otherwise have an obligation to fund a portion thereof, then Big
Rivers will not be responsible for a share of such expenditure,
notwithstanding the provisions of Articles 7 or 8 of the Lease, Article 7 of
the Cost Sharing Agreement or Article 6 of the Facilities Operating Agreement
to the contrary or the inclusion of such item in the Initial Period Budgets.
ARTICLE 21
GENERAL PROVISIONS
21.1 Notices. All notices, payments and other communications to each
Party under this Agreement or any other Operative Document must be in writing,
and shall be addressed respectively as follows:
Addressed to:
Big Rivers Electric Corporation
201 Third Street
Post Office Box 24
Henderson, Kentucky 42419
Phone No. (502) 827-2561
Telecopy No. (502) 827-2558
Attn: Michael Core
David Spainhoward
With a copy to:
James M. Miller, Esq.
Sullivan, Mountjoy, Stainback & Miller, P. S. C.
100 St. Ann Building
Post Office Box 727
Owensboro, Kentucky 42302-0727
Phone No. (502) 926-4000
Telecopy No. (502) 683-6694
Addressed to:
Western Kentucky Energy Corp.
c/o LG&E Energy Corp.
220 West Main Street
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Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-4622
Attn: President
Addressed to:
LG&E Energy Marketing Inc.
c/o LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-4622
Attn: President
Addressed to:
Western Kentucky Leasing Corp.
c/o LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-4622
Attn: President
Addressed to:
LG&E Station Two, Inc.
c/o LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-4622
Attn: President
In the case of all LG&E Parties, with a copy to:
Richard S. Miller, Esq.
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
Phone: (212) 259-7070
Facsimile: (212) 259-6333
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John R. McCall
Executive Vice President, General Counsel
and Secretary
LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-2585
Daniel E. Fisher, Esq.
Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202-3197
Phone No. (502) 587-3620
Telecopy No. (503) 587-3695
Each Party may change such address by notice given to the other Parties in the
manner set forth above. All notices shall be effective (i) if sent by messenger
or courier service, when delivered, (ii) if sent by mail, three days after
posting, and (iii) if sent by telecopy, when sent (provided that, if sent by
telecopy, a duplicate copy thereof is promptly sent by mail); provided that if a
provision hereof specifies that a period shall be measured by a fixed number of
days after receipt of a notice, notice shall be effective when received,
irrespective of the means of delivery.
21.2 Waiver. The failure of a Party to insist on the strict
performance of any provision of this Agreement or to exercise any right, power
or remedy upon a breach of any provision of this Agreement shall not constitute
a waiver of any provision of this Agreement or limit the Party's right
thereafter to enforce any provision or exercise any right.
21.3 Amendment and Modification. No amendment or modification of
this Agreement shall be valid unless made in writing and duly executed by the
Parties; provided, however, subject to the LG&E Parties' rights pursuant to
Schedule 3.1(I)(8), Big Rivers shall be permitted, at any time prior to the
Effective Date, without the consent of the LG&E Parties, to update or amend any
disclosure schedule referred to in Article 5, which disclosure schedule is
attached hereto on the date hereof, solely to the extent necessary to make its
representations and warranties on the Effective Date true and correct in all
material respects. Notwithstanding the foregoing proviso, updates or amendments
made by Big Rivers to Schedule 5.1.19 shall not in any way diminish or otherwise
reduce Big Rivers' indemnification obligations pursuant to Section 14.1, as
established by reference to Schedule 5.1.19 as provided on the Execution Date.
Updates and amendments to such Schedule 5.1.19 made by Big Rivers pursuant to
the foregoing proviso following the Execution Date, shall, however, to the
extent identifying new or increased liabilities, serve to increase Big Rivers'
indemnification obligations under Section 14.1.
21.4 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the internal laws of the Commonwealth of
Kentucky.
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21.5 Additional Actions. Each Party shall take, from time to time,
for no additional consideration, such actions and execute such additional
instruments as may be reasonably necessary or convenient to implement and carry
out the intent and purpose of this Agreement and the remaining Operative
Documents.
21.6 Survival of Terms and Conditions; Phase I Adjustments. The
provisions of this Agreement, other than those which specifically address the
period of time prior to the Closing, shall survive the Closing. The Parties
hereby agree that notwithstanding the termination of the Phase I Agreements, any
of the following adjustments to the extent made during Phase I and existing as
of the Phase II Termination shall survive and be carried forward to Phase II
(the "Phase I Adjustments"):
21.6.1 Any adjustments previously made to the payments made by
LEM to Big Rivers pursuant to Section 3.3 of the Power Purchase Agreement
resulting from a change in Contract Limits, application of a portion of
the PP Price reduction or reductions relating to condemnation or
destruction of the Assets.
21.6.2 A reconciliation of Actual Environmental O&M with the
Environmental Rent Reduction under the Lease.
21.6.3 A continuation, without adjustment, of balances and
other accounting with respect to the Capital Account and a continuation of
allocation of Capital Assets funded in accordance with the Cost Sharing
Agreement.
21.6.4 Any adjustments in the rental payments, Annual Fixed
Payments, Tax sharing ratios or Monthly Margin Payments as contemplated in
Section 11.2 of this Agreement and Sections 2.3 and 3.3(a) of the Lease
and the Power Purchase Agreement, respectively.
21.6.5 A continuation of the effectiveness of any Annual
Capital Budget or Annual O&M Budget in effect during any such transitional
year, without change.
21.6.6 A continuation of the relative percentages of Shared
Costs.
21.7 Termination Date True Up. On the Termination Date, the Parties
agree that all amounts due and owing (other than any amounts owed pursuant to
Section 21.8), or any outstanding credits, in each case, pursuant to the
Operative Documents by Big Rivers to any LG&E Party or LEC and/or any LG&E Party
or LEC to Big Rivers shall be so paid on the Termination Date after netting all
such amounts and credits owed by the respective Parties. The Parties agree that
all credits shall be converted to a cash amount for purposes of this provision.
21.8 Refund Obligation. Without in any way limiting a Non-Defaulting
Party's or Performing Party's rights and remedies hereunder or under applicable
law, in the event that this Agreement and the other Operative Documents
terminate prior to the second anniversary of the Effective Date, which
termination does not result from an exercise by Big Rivers of its rights
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pursuant to this Agreement or such other Operative Document by reason of a
breach or default by any LG&E Party thereunder, Big Rivers agrees to refund to
Leaseco, as agent for the LG&E Parties, an amount equal to (i) the amount of
Initial Fixed Payment or the Initial Rental Payment, as the case may be, paid to
Big Rivers on the Effective Date multiplied by (ii) the ratio of (A) the number
of days between such Termination Date and the second anniversary of the
Effective Date over (B) 730. Such refund amount shall be payable by Big Rivers,
free of interest, in twenty-four equal monthly installments commencing on the
one-month anniversary of the Termination Date.
21.9 Successors and Assigns. This Agreement shall bind and inure to
the benefit of the Parties and their respective successors and permitted
assigns.
21.10 Counterparts. This Agreement may be executed in counterparts,
both of which taken together shall constitute a single Agreement.
21.11 Entire Agreement. This Agreement, including all attached
Exhibits and Schedules, together with the Operative Documents (when executed)
and all other agreements referred to in this Agreement or in the other Operative
Documents, contains the entire and final understanding of the Parties and
supersedes all prior agreements and understandings between the Parties related
to the subject matter of those agreements.
21.12 Construction. This Agreement was the product of negotiations
between the Parties and, therefore, the rule of contract construction that an
agreement shall be construed against the drafter shall not be applied to this
Agreement.
21.13 Rights and Obligations Under the Original Participation
Agreement. (a) Upon the Participation Effective Date, and for so long thereafter
as this Agreement shall remain in effect, the provisions of the Original
Participation Agreement, and the rights and obligations of Big Rivers and each
of the LG&E Parties pursuant to the Original Participation Agreement, shall be
immediately suspended and held in abeyance, and neither Big Rivers nor any of
the LG&E Parties shall have any duty to perform its obligations nor any right to
receive its benefits or exercise its rights thereunder until the earlier of (i)
the termination of this Agreement or (ii) the occurrence of the Phase I
Effective Date or the Phase II Effective Date pursuant to Article 3 of this
Agreement. Upon the first to occur of the Phase I Effective Date or the Phase II
Effective Date pursuant to Article 3 of this Agreement, if such date occurs
prior to termination of this Agreement, the Original Participation Agreement
shall terminate. In the event that this Agreement terminates pursuant to Section
17.1.1 or 17.4 then the suspension of the Original Participation Agreement and
the Parties' rights and obligations thereunder caused by the first sentence of
this paragraph will be reversed, and the Original Participation Agreement, as
amended, including the rights and obligations of each of the LG&E Parties and
Big Rivers thereunder will be restored and thereafter will continue in full
force and effect in accordance with the terms of that Original Participation
Agreement.
(b) Any and all rights and obligations of the Parties pursuant to
the Original Participation Agreement, including pursuant to each amendment to
such agreement, which had accrued or been received prior to or as of the
Participation Effective Date of this Agreement,
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shall be carried forward and continued under this Agreement such that the rights
and obligations of the Parties which were received or performed under the
Original Participation Agreement will be deemed to have been received or
performed under this Agreement as if this Agreement had been executed as of June
9, 1997. No Party shall be held to have breached this Agreement or be in default
of this Agreement for failure to perform prior to the execution date of this
Agreement an obligation under this Agreement which was not also an obligation
under the Original Participation Agreement, as amended. Nothing contained in
this Agreement shall be deemed to release any Party from any breach or default
by that Party under the Original Participation Agreement occurring prior to the
date of this Agreement.
(c) In the event that pursuant to Section 21.13(a) of this
Agreement, the Original Participation Agreement is suspended and then restored
to full force and effect, all rights and obligations of the Parties pursuant to
this Agreement, including pursuant to each amendment to the Agreement (if any),
which had accrued or been received prior to or as of the date on which the
Original Participation Agreement is restored to its full force and effect, shall
be carried forward and continued under the Original Participation Agreement such
that the rights and obligations of the Parties which were received or performed
under this Agreement will be deemed to have been received or performed under the
Original Participation Agreement as if the Parties' rights and obligations
thereunder had not been suspended. No Party shall be held to have breached the
Original Participation Agreement or be in default of the Original Participation
Agreement for failure to perform during the period of suspension an obligation
under that agreement which was not also an obligation under this Agreement.
Nothing in this Section 21.13 shall be deemed to release any Party from any
breach or default by that Party under this Agreement occurring prior to its
termination.
21.14 Survival of Certain Obligations
(a) Notwithstanding anything contained in this Agreement or in any other
Operative Document to the contrary: (i) Big Rivers shall not at any time be
entitled to terminate, cancel or otherwise nullify the Settlement Promissory
Note, the Settlement Mortgage, the Mortgage and Security Agreement, or the
Non-Disturbance Agreement or its payment or performance obligations under those
agreements or instruments, by reason of any breach or default by any of the LG&E
Parties under the other of those Operative Documents, or under any other
Operative Documents not identified above, or by reason of the expiration or
termination of any of such other Operative Documents for any reason, to the
extent that Big Rivers has any continuing obligations or liabilities under those
Operative Documents, including without limitation, where this Agreement, the
Guaranty or any such other Operative Document otherwise expressly provides Big
Rivers with the right to terminate all or any portion of the Operative Documents
under the circumstances described therein; and (ii) in the event any of the LG&E
Parties shall, under the terms of any Operative Document, be required to
terminate all of the Operative Documents as a condition to their exercising any
termination rights with respect to that or any other Operative Document, Big
Rivers agrees that the LG&E Parties shall not be required to terminate, cancel
or surrender the Settlement Promissory Note, the Settlement Mortgage, the
Mortgage and Security Agreement or the Non-Disturbance Agreement as a condition
to its right to so terminate all or any of the other Operative Documents.
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(b) Notwithstanding anything contained in this Agreement or in any other
Operative Document to the contrary: (i) neither LEC nor any of the LG&E Parties
shall at any time be entitled to terminate, cancel or otherwise nullify the
Guaranty or the payment or performance obligations of LEC thereunder, by reason
of any breach or default by Big Rivers under any of the other Operative
Documents, or by reason of the expiration or termination of any of such other
Operative Documents for any reason, to the extent that any of the LG&E Parties
have any continuing obligations or liabilities under those Operative Documents,
including without limitation, where this Agreement or any such other Operative
Document otherwise expressly provides LEC or any of the LG&E Parties with the
right to terminate all or any portion of the Operative Documents under the
circumstances described therein; and (ii) in the event Big Rivers shall, under
the terms of any Operative Document, be required to terminate all of the
Operative Documents as a condition to its exercising any termination rights with
respect to that or any other Operative Document, the LG&E Parties agree that Big
Rivers shall not be required to terminate, cancel or surrender the Guaranty as a
condition to its right to so terminate all or any of the other Operative
Documents.
(c) The provisions of this Section 21.14 shall survive any expiration or
termination of this Agreement for any reason, and shall continue to be binding
on the Parties. The Parties agree and acknowledge that adequate separate
consideration is being provided which would support the Parties' continuing
obligations under Section 21.14 despite an earlier termination of the Operative
Documents.
21.15 SO(2) Issue
The Parties each agree that, from and after the Participation Effective Date
they shall reasonably cooperate with each other in good faith, and shall use
their commercially reasonable efforts, to obtain at the earliest possible time a
Title V Air Quality Permit for the Coleman facility that contains a maximum
permit limit of 5.2 lbs/mmbtu Sulfur Dioxide (SO(2)), and, upon the election of
the LG&E Parties, a separate affirmative ruling or decision from the KNREPC that
the current permit limit of 5.2 lbs/mmbtu SO(2) for the Coleman facility will be
maintained following the Effective Date and for the foreseeable future.
Consistent with the foregoing, Big Rivers and the LG&E Parties agree that none
of them shall conduct any oral or written communications with the KNREPC
regarding the maximum permit limit for SO(2) for the Coleman facility without
first offering in writing to the other Party(s) a reasonable opportunity to
participate in those written or oral communications.
ARTICLE 22
22.1 LEM Advances. During the first twelve months following the
Effective Date, LEM shall advance to Big Rivers the sum of $[REDACTED] in 11
monthly installments of $[REDACTED] each and a final installment in the sum
of $[REDACTED]. During the second twelve months following the Effective Date,
LEM shall advance to Big Rivers the sum of $[REDACTED] in 12 equal monthly
installments of $[REDACTED] each. The first of such installments shall be
delivered to Big Rivers on the first day of the first month following the
Effective Date
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and the successive installments shall be delivered on the first day of the next
23 succeeding months. Big Rivers' obligation to repay such advances shall be
evidenced by the Promissory Note from Big Rivers payable to LEM in the form of
Exhibit O attached to this Agreement (the "Promissory Note (LEM Advances)"),
which shall be executed and delivered by Big Rivers at the Closing; provided,
that, LEM and the LG&E Parties acknowledge and agree that LEM's sole recourse
for the collection of amounts owing by Big Rivers thereon shall (during Phase I)
be a set-off by LEM against the Monthly Margin Payments that are or may be owing
by LEM to Big Rivers pursuant to Section 3.3 of the Power Purchase Agreement,
and shall (during Phase II) be a set-off-by Leaseco, on behalf of LEM, against
the Monthly Margin Payments that are or may be owing by LEM to Big Rivers
pursuant to Section 2.3.2 of the Lease, which set-off, Big Rivers acknowledges
and agrees, shall be an unqualified right of LEM or Leaseco (as applicable)
under the provisions of those Operative Documents.
22.2 Big Rivers' Reimbursement Obligations. LEM covenants and
agrees, and Big Rivers acknowledges and agrees, that on the Closing Date and
in the event the Marketing Payment contemplated in Section 4.3.9 exceeds
$[REDACTED], LEM will execute and deliver to the RUS a Demand Promissory note
in a principal amount equal to the amount by which such Marketing Payment so
exceeds $[REDACTED], which Demand Promissory Note will be payable on demand
("the Demand Note"). The Demand Note, if one is so delivered, will provide
that following a default by Big Rivers under either of the two Promissory
Notes to be issued by Big Rivers to the RUS pursuant to the New RUS Agreement
(as defined in the Non-Disturbance Agreement) (together, the "RUS Notes"),
RUS may demand payment by LEM in an amount equal to the amount then due and
owing by Big Rivers under the RUS Notes, provided such amounts, in the
aggregate, do not exceed the principal amount of such Demand Note. Big Rivers
acknowledges and agrees that in the event that LEM is required to make one or
more payments to the RUS pursuant to the Demand Note, Big Rivers will
reimburse LEM the amounts so paid by LEM (each a "Big Rivers' Reimbursement
Obligation") on the dates so paid by LEM to RUS (the "Demand Dates"). In the
event that Big Rivers' Reimbursement Obligation(s) is not paid on the
applicable Demand Dates, interest at the Default Rate will begin to accrue as
of such Demand Date on Big Rivers' Reimbursement Obligation(s).
Notwithstanding the foregoing, so long as any amount remains outstanding
under either of the RUS Notes or the "1983 Reimbursement Agreement" or the
"1985 Reimbursement Agreement" or the "AMBAC Notes" (each with AMBAC as
referred to in Recital A of the Non-Disturbance Agreement), or Big Rivers'
pollution control bonds as outstanding on the Effective Date, Big Rivers
shall have no obligation to pay any amount with respect to Big Rivers'
Reimbursement Obligation(s), provided however, that interest at the Default
Rate will continue to accrue during all such periods during which Big Rivers
has no payment obligation. Within 30 days, following such suspension period,
Big Rivers must satisfy its Big Rivers' Reimbursement Obligations (and
accrued and unpaid interest thereon).
22.3 Upon receipt by Big Rivers of notice of any event of default
with respect to the RUS Notes, Big Rivers must, as soon as practical, but in any
event within two days of receipt, provide written notice to LEM of the same and,
if notice from the RUS was provided in written form, Big Rivers must enclose in
its written notice to LEM a copy of the same.
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ARTICLE 23
MISCELLANEOUS
23.1 Sale/Leaseback Transactions.
Notwithstanding anything to the contrary contained in this Agreement
or any of the other Operative Documents (including, without limitation the
restrictions on transfers and assignments set forth in Article 16 hereof and the
right of first refusal set forth in Article 24 hereof), Big Rivers shall have
the right to enter into a sale, lease, or other similar transaction with respect
to any of the Assets and any improvements, modifications or additions thereto
(including any such improvements, modifications, or additions paid for, in whole
or in part, by any of the LG&E Parties) if, substantially contemporaneous
therewith, Big Rivers enters into a leaseback of the Assets subject to such
transaction from the transferee, and maintains the absolute right and obligation
following the expiration or termination of that sale/leaseback transaction (and
agrees with the LG&E Parties that it will exercise that right if it accrues
during the Term), to repurchase all such Assets; provided, however, that no such
transaction(s) shall be consummated by Big Rivers without providing the LG&E
Parties at least 30 days prior written notice thereof (together with a
description in reasonable detail of the nature of the transaction), nor shall
they be consummated if such consummation would: (a) have a material adverse
effect on any of the LG&E Parties or their respective rights and interests under
this Agreement or any of the other Operative Documents; (b) impose duties or
obligations on any of the LG&E Parties which are materially more burdensome than
the duties and obligations set forth in the Operative Documents; (c) impair in
any material respect the rights and remedies of the LG&E Parties under or
pursuant to the Settlement Note, the Settlement Mortgage, the Mortgage and
Security Agreement or the Non-Disturbance Agreement, or their security interests
and mortgage interests created thereby; (d) or, in the opinion of counsel to the
LG&E Parties, place in jeopardy the Exempt Wholesale Generator status of WKEC or
the public utility status of Station Two Subsidiary, or the status of LEC as a
holding company exempt from registration under the Public Utility Holding
Company Act (or any successor Laws that may require such status). In addition to
the foregoing, no such transactions may be consummated by Big Rivers unless the
assignee or transferee of the Assets executes and delivers to the LG&E Parties a
Non-Disturbance and Attornment Agreement in a form reasonably satisfactory to
the LG&E Parties. Any such transaction, provided it meets the conditions and
limitations described above, shall not constitute a transfer or assignment of
this Agreement or any of the other Operative Documents, and Big Rivers shall
remain liable for all obligations of Big Rivers to the LG&E Parties under this
Agreement and the other Operative Documents. The LG&E Parties shall cooperate
with Big Rivers, at Big Rivers' expense, to accomplish any such transaction,
including, without limitation, by entering into such modifications and
amendments to this Agreement and the other Operative Documents as Big Rivers may
reasonably request in order to accomplish such transaction, consistent with the
conditions and limitations described above.
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ARTICLE 24
GENERAL PROVISIONS
24.1 Residual Value Payment
(a) General. Following the Effective Date, and upon the occurrence
of:
(i) (A) the expiration or termination for any reason (other
than as expressly provided below) of this Agreement (during Phase I only), the
Power Purchase Agreement (during Phase I only), the Facility Operating Agreement
(other than a termination coincident with the Phase II Effective Date), the
Lease or the Station Two Agreement, or (B) the expiration or termination for any
reason (other than as expressly provided below) of the Transmission Services and
Interconnection Agreement (unless Big Rivers shall at that time have in place an
effective Open Access Transmission Tariff ("OATT"), then upon any later
expiration, termination or withdrawal of the OATT, whether or not voluntary);
provided, that the expirations and terminations identified in (A) and (B), above
shall specifically exclude (1) any wrongful termination by an LG&E Party of
those agreements or instruments, (2) any rejection by an LG&E Party of those
agreements or instruments in any bankruptcy proceeding involving that LG&E
Party, and (3) any termination by an LG&E Party of this Agreement, the Power
Purchase Agreement, the Facility Operating Agreement, the Lease or the
Transmission Services and Interconnection Agreement in accordance with its terms
which is not followed by a termination of the other of those Operative Documents
that remain in effect by one or more LG&E Parties in accordance with their
respective terms or by Big Rivers in breach or default thereof (each such
expiration, termination or withdrawal identified in (A) and (B), above,
individually and collectively, being hereinafter referred to as a "Transaction
Termination"); or
(ii) any "Transfers" from time-to-time by Big Rivers of the
"Subject Assets" (each as defined in Section 24.2 below) or of any of them,
whether alone or together with any other assets or properties of Big Rivers,
including without limitation, any Transfers to WKEC or Station Two Subsidiary
pursuant to Section 24.2, or any involuntary sales, assignments or transfers of
any of the Subject Assets such as a foreclosure sale, a deed or sale in lieu of
foreclosure or a condemnation action, whether or not such Transfers or
involuntary sales, assignments or transfers are permissible under the terms of
the Operative Documents, but specifically excluding (A) a Transfer of any
Station Two Contracts other than the "Station Two Operating Agreement", the
"Station Two Power Sales Agreement" and the "Joint Facilities Agreement" (each
as defined in the Station Two Agreement), and (B) any foreclosure under the
Restated Mortgage (as defined in the Non-Disturbance Agreement) in circumstances
in which this Agreement and the other Operative Documents remain in effect (each
such Transfer or involuntary sale, assignment or transfer being hereinafter
referred to as a "Triggering Transfer");
then an LG&E Parties' Residual Value Payment, calculated in the manner set forth
in Subsection (e), below (if any shall result from that calculation) shall be
due and owing by Big Rivers to Station Two Subsidiary; provided, that in the
case of an involuntary sale, assignment or transfer of the Subject Assets as
described in (ii), above, the Triggering Transfer that results from the
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same shall be deemed to have occurred on the date immediately prior to the date
of the involuntary sale, assignment or transfer, so that the LG&E Parties'
Residual Value Payment associated with those Subject Assets shall accrue and
become owing by Big Rivers prior to that involuntary sale, assignment or
transfer. Big Rivers, Leaseco and, in the case of the tangible Station Two
Assets or the Station Two Agreement, Station Two Subsidiary, shall, as soon as
is reasonably practicable after the Transaction Termination or Triggering
Transfer, jointly commission the completion of a fair market valuation (on a
going-concern basis where possible) of all Capital Assets (including without
limitation, Enhancements and Major Capital Improvements, if any) and all Station
Two Improvements, that are at the time of such valuation included in,
incorporated in or constituting a part of (x) all of the Tangible Assets (in the
case of a Transaction Termination regarding this Agreement, the Power Purchase
Agreement, the Facilities Operating Agreement, the Lease, the Transmission
Services and Interconnection Agreement and/or the OATT), (y) the Station Two
Assets (as defined in the Station Two Agreement) (in the case of a Transaction
Termination regarding the Station Two Agreement or any Triggering Transfer of
the Station Two Power Sales Agreement, the Station Two Operating Agreement or
the Joint Facilities Agreement (collectively, the "Key Station Two Contracts")
(or any material portion thereof)), or (z) the relevant Subject Assets (in the
case of a Triggering Transfer of any Subject Assets other than the Key Station
Two Contracts) (collectively, the "Relevant Assets").
(b) Valuation. The fair market valuation of such Relevant Assets
shall be determined pursuant to the process described in this Subsection (b)
and, as applicable, Subsection (c) below. The valuation shall be conducted by a
reputable, independent and impartial appraisal or valuation firm having
substantial experience in the field of power facility appraisal or valuation
("Appraiser"), and the results of the valuation by the Appraiser shall be set
forth in a written valuation report (the "Valuation Report") made available to
all Parties. In the case of any Subject Assets (other than the Key Station Two
Contracts) that have been transferred by Big Rivers, Big Rivers shall ensure
that the transferee(s) affords the representatives of the Appraiser reasonable
access to those Subject Assets and all other assets to which they are affixed or
with which they are operated in order to complete the valuation of those Subject
Assets; provided, that in the event an LG&E Party or any of its Affiliates is
that transferee, then that LG&E Party (or Affiliate) shall itself afford such
access to the Subject Assets to the representatives of the Appraiser. The
Parties agree to use commercially reasonable efforts to expedite the completion
of the relevant valuation, and the Valuation Report of the Appraiser selected
shall be made available to all the Parties. The fair market valuation shall
consider the age, condition and remaining useful life of the Relevant Assets,
the usefulness and importance of the Relevant Assets in the operation or
maintenance of the other assets and facilities to which they relate or are
affixed, the "going concern" value (if any) of the Relevant Assets, and such
other factors or criteria as are customary in the industry for such valuations.
Notwithstanding the immediately preceding sentence, in the case of a Triggering
Transfer of any of the Relevant Assets, the purchase price paid or payable to
Big Rivers (or its successors or permitted assigns) for those Relevant Assets
shall be deemed for the purposes of this Section 24.1 to be determinative of
their fair market value, unless: (i) such Triggering Transfer shall have been
made by Big Rivers in breach or default under Section 24.2 of this Agreement; or
(ii) WKEC and/or Station Two Subsidiary (as applicable) shall have been
prevented by legal process
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(including without limitation, any injunction, restraining order or stay imposed
in connection with a bankruptcy proceeding involving Big Rivers), by a wrongful
termination of this Agreement by Big Rivers, or by a rejection of this Agreement
in any bankruptcy proceeding involving Big Rivers, from exercising their
respective rights to purchase the Relevant Assets pursuant to Section 24.2 of
this Agreement; or (iii) such Triggering Transfer shall have taken the form of
an involuntary sale, assignment or transfer of the Relevant Assets of the type
contemplated in Subsection (a)(ii), above (including without limitation, a
foreclosure of the type described in Subclause (a)(ii)(B) above); in which event
the purchase price so paid or payable shall, at the election of Leaseco and/or
Station Two Subsidiary (as applicable), not be determinative of the fair market
value of the Relevant Assets but shall instead be only one of the factors
considered by the Appraiser in its valuation of those assets. In the event such
purchase price is deemed to be determinative of the fair market value of the
Relevant Assets, then there shall be no valuation of those assets by the
Appraiser as contemplated above. Notwithstanding the foregoing, in the event a
Triggering Transfer of any Relevant Assets is effected together with a sale,
transfer, conveyance or assignment of any other Subject Assets, directly or
indirectly, in one transaction or a series of related transactions, to the same
Person(s), and (A) in the event any of the LG&E Parties reasonably believe that
the portion of the aggregate purchase price payable for the Subject Assets in
the transaction(s) that is proposed by Big Rivers to be allocated to or paid for
the Relevant Assets does not reflect the actual fair value of those Relevant
Assets, or (B) in the event the parties to the transaction(s) fail to designate
the portion of that aggregate purchase price that is allocated to or paid for
the Relevant Assets, then, upon the written election of that LG&E Party
delivered not later than ten (10) days after its receipt of notice of the
relevant Triggering Transfer from Big Rivers (including reasonable details of
the allocation (if any) of the aggregate purchase price among the Subject
Assets), the fair market value of the Relevant Assets shall be determined for
purposes of this Section 24.1 pursuant to the dispute resolution and arbitration
procedures described in Subsection (c), below (determined as if the purchase
price allocation proposed by Big Rivers were the Valuation Report) or, if no
such purchase price allocation shall have been made, pursuant to the fair market
valuation processes described in this Subsection (b) and Subsection (c), below
(but without regard to the sixth and seventh sentences of this Subsection (b)).
Subject to the foregoing, the Appraiser shall be selected by the mutual
agreement of Big Rivers, on the one hand, and Leaseco and/or Station Two
Subsidiary (as applicable), on the other hand, as soon after the relevant
Transaction Termination or Triggering Transfer as is reasonably possible, and
the Parties each agree to promptly inform the other Parties in the event they
shall be informed of or shall cause such a Transaction Termination or Triggering
Transfer; provided, that in the event the Parties described above have not
mutually selected the Appraiser within 30 days after first commencing their
discussion regarding the selection, either Big Rivers, Leaseco or Station Two
Subsidiary shall be entitled to refer the matter for resolution pursuant to the
dispute resolution provisions of Article 15 of this Agreement. Big Rivers and
Station Two Subsidiary (for itself and on behalf of Leaseco) shall share equally
in the costs, expenses and fees associated with the Appraiser and its valuation,
and shall jointly retain (or be deemed to have jointly retained) the Appraiser.
(c) Dispute Over Valuations. In the event, following the completion
of the valuation and the issuance of the Appraiser's Valuation Report, either
Big Rivers, on the one hand, or Station Two Subsidiary (on behalf of the LG&E
Parties), on the other hand, in good
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faith believes that the Valuation Report regarding the Relevant Assets does not
adequately reflect the true fair market value of those assets at that time, or
that the Valuation Report is otherwise defective or deficient, that Party shall
notify the other Party of its belief within ten (10) days following its receipt
of the Valuation Report. Failure to so notify the other Party of that belief
shall be deemed to be the acceptance by that Party (and, in the case of Station
Two Subsidiary, by all of the LG&E Parties) of the results of the Valuation
Report for purposes of this Section 24.1. If such a notice is so delivered to
the other Party, then representatives of those Parties shall promptly meet to
review the Valuation Report and attempt to confirm the accuracy and completeness
of the Valuation Report or, if the Parties shall agree that the Valuation Report
is inaccurate, defective or deficient, attempt to rectify the defect or
deficiency or to assign a more accurate value to the Relevant Assets. If the
Parties are unable to resolve their differences and settle upon a valuation of
the Relevant Assets within 30 days after the issuance of the Valuation Report,
then either Party shall be entitled to refer the matter directly to arbitration
pursuant to the relevant provisions pertaining to the arbitration of disputes in
Article 15 of this Agreement (exclusive of Section 15.3.6), for the purpose of
determining whether the Valuation Report represented a valuation of the Relevant
Assets that was within five percent (5%), above or below, of the actual fair
market value of those assets. If, pursuant to that dispute resolution process,
the Valuation Report is determined to fall within that range of values, then the
Valuation Report shall be deemed to be determinative of the fair market value of
the Relevant Assets for purposes of this Section 24.1. If the Valuation Report
is determined to fall outside that range of values, then the actual fair market
value shall be determined pursuant to arbitration under Article 15 (but without
regard to the provisions of Section 15.3.6 of this Agreement).
(d) Accounting. Throughout the Term, Big Rivers, on the one hand,
and the relevant LG&E Parties, on the other hand, shall separately account for
all Capital Assets (including without limitation, Enhancements and Major Capital
Improvements) and Station Two Improvements that may be funded by them and/or by
Henderson during the Term, including, in the case of the tangible Station Two
Assets, without limitation, any Station Two Improvements that may be directly
funded by Henderson, Big Rivers or Station Two Subsidiary, that may be
indirectly funded by any of them or LEM through reimbursement payments made
between those parties, that may be funded through the capacity charge payments
made by them, directly or indirectly, pursuant to the Station Two Agreement or
the Key Station Two Contracts, and that may be funded by them indirectly through
withdrawals from any reserve accounts established pursuant to the Station Two
Agreement or the Key Station Two Contracts. Such accounting by the Parties shall
include, without limitation, the maintenance of records regarding the original
cost and estimated useful lives of the Capital Assets and Station Two
Improvements, and their respective contributions to those costs. For purposes of
this Section 24.1 only and the calculations to be made hereunder, and to
facilitate those calculations, the Capital Assets and Station Two Improvements
that may be funded by any of the LG&E Parties, Big Rivers and/or Henderson,
directly or indirectly, shall be deemed to be depreciated by each of those
Parties and Henderson on a straight-line basis over the entire estimated useful
lives of those assets, and otherwise on a consistent basis (regardless of any
other methodology for the depreciation or amortization of those assets that may
be utilized by the LG&E Parties, Big Rivers or Henderson for internal, tax
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or accounting purposes, and regardless of whether those assets are assets that
may be capitalized, or are characterized as leasehold improvements or otherwise
for internal, tax or accounting purposes). In the event the Parties cannot agree
on the estimated useful life of one or more Capital Assets or Station Two
Improvements, that determination shall be made pursuant to the dispute
resolution procedures set forth in Article 15 of this Agreement. At least
annually, representatives of Big Rivers, Leaseco and Station Two Subsidiary
shall meet to compare their respective records regarding the Capital Assets and
Station Two Improvements previously funded, in whole or in part, by Big Rivers,
any of the LG&E Parties or, in the case of the tangible Station Two Assets,
Henderson, and they shall attempt to resolve any discrepancies that may exist
between their respective records. Those Parties shall also consult with
Henderson on a periodic basis for the same purpose. In the event of a dispute
between the Parties over which party funded which portion of any Capital Assets
or Station Two Improvements, over the costs to purchase or install the same,
over the estimated useful lives of those assets, or over whether an expenditure
was properly characterized as a Capital Asset or Station Two Improvement, that
dispute shall be resolved pursuant to the dispute resolution procedures set
forth in Article 15 of this Agreement.
(e) Payments. At such time following any Transaction Termination or
Triggering Transfer as the valuation of the Relevant Assets has been completed
and the Valuation Report has been issued by the Appraiser (or at such other time
as the fair market value of the Relevant Assets shall be determined or deemed to
be determined as contemplated above), Big Rivers shall pay to Station Two
Subsidiary, on behalf of all the LG&E Parties, the amounts determined as set
forth in (i), (ii) or (iii), as applicable, below (each an "LG&E Parties'
Residual Value Payment"). All such amounts, if they shall not have been
determined and paid in full by Big Rivers to Station Two Subsidiary within 180
days after the relevant Transaction Termination or Triggering Transfer, shall
bear interest payable by Big Rivers at a rate per annum equal to 135 percent of
the then current market yield on U.S. Treasury obligations having a remaining
maturity of one year, from the 90th day after the Transaction Termination or
Triggering Transfer through and including the date on which payment is
eventually made. Such interest amounts shall be paid in arrears at the time of
and together with the relevant LG&E Parties' Residual Value Payment.
Notwithstanding the foregoing, in the event the relevant Triggering Transfer
takes the form of a foreclosure, a deed in lieu of foreclosure or any other
involuntary Transfer, Station Two Subsidiary shall be entitled to participate in
that Triggering Transfer, and to make a claim for any of the proceeds thereof,
to secure and recover its LG&E Parties' Residual Value Payment (if any)
resulting from that Triggering Transfer or from any other Transaction
Termination or Triggering Transfer, without regard to any other provision that
may allow payment of that amount by Big Rivers at a later date.
(i) In the case of (x) a Transaction Termination regarding
this Agreement, the Power Purchase Agreement, the Facilities Operating
Agreement, the Lease and the Transmission Services and Interconnection Agreement
(or the OATT, as applicable), or regarding any of those agreements, instruments
or tariff, or (y) a Triggering Transfer of any of the Subject Assets other than
the Key Station Two Contracts, in either case, that occurs on or after the
December 31st that is closest to the twenty-fifth anniversary of the Effective
Date, then the LG&E Parties' Residual Value Payment with respect to that
Transaction Termination or Triggering Transfer shall be an amount equal to the
greater of (A) the amount determined by reference to the following formula, or
(B) the LG&E Parties' Residual Plant Value (as defined below) for the Relevant
Assets:
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[REDACTED]
Where:
M = The aggregate fair market value of the Relevant Assets set forth in the
Valuation Report (or otherwise determined as provided above);
L = The LG&E Parties' Residual Plant Value (as defined below) for the Relevant
Assets;
B = Big Rivers' Depreciated Book Value (as defined below) for the Relevant
Assets; and
E = The Depreciated Book Value of all Enhancements and Major Capital
Improvements (as defined below) included in the Relevant Assets.
For the avoidance of doubt, the Parties agree that no LG&E Parties' Residual
Value Payments shall become owing under this Subsection 24.1(e)(i) in respect of
any Enhancements, Major Capital Improvements or Station Two Improvements.
(ii) In the case of (x) a Transaction Termination regarding
the agreements, instruments or tariff described in (i), above, or any of them,
or (y) a Triggering Transfer of any of the Subject Assets other than the Key
Station Two Contracts, in either case that occurs prior to the December 31st
that is closest to the twenty-fifth anniversary of the Effective Date, then the
LG&E Parties' Residual Value Payment with respect to that Transaction
Termination or Triggering Transfer shall be an amount equal to the greater of
(A) the amount determined by reference to the following formula, or (B) the sum
of the LG&E Parties' Residual Plant Value (as defined below) for the Relevant
Assets, plus the Depreciated Book Value of all Enhancements and Major Capital
Improvements (as defined below) for the Relevant Assets:
[REDACTED]
Where: M, L, B and E have the meanings set forth in (i) above; and "ET" means
the Depreciated Book Value of all Enhancements and Major Capital Improvements
calculated as though the Term had continued through the December 31st that is
closest to the twenty-fifth anniversary of the Effective Date.
(iii) In the case of: (x) a Transaction Termination regarding
the Station Two Agreement; or (y) any Triggering Transfer of the Key Station Two
Contracts (or any material portion thereof) (A) without the prior consent of the
LG&E Parties and Henderson as required by the Station Two Agreement or the Key
Station Two Contracts, or (B) to any Person that does not simultaneously assume
and agree to perform Big Rivers' obligations under all such Key Station Two
Contracts and the Station Two Agreement with those agreements remaining in full
force and effect following the Triggering Transfer in accordance with their
respective terms; then the LG&E Parties' Residual Value Payment regarding that
Transaction Termination or Triggering Transfer, as applicable, shall be an
amount equal to the greater of (1) the amount
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determined by reference to the following formula, or (2) the LG&E Parties'
Residual Plant Value (as defined below) for the Relevant Assets (it being
understood that so long as the consents described in (A), above, have been
obtained and the Person(s) described in (B), above, have so assumed and are
performing Big Rivers' obligations described therein, no LG&E Parties' Residual
Value Payment with respect to that Triggering Transfer as contemplated in this
Subsection (iii) shall become due and owing):
[REDACTED]
Where LT, BT and HT have the meanings set forth in subsection (f), below, and:
M = The aggregate fair market value of the Relevant Assets set forth in the
Valuation Report (or otherwise determined as provided above);
L = The LG&E Parties' Residual Plant Value for the Relevant Assets; and
B = Big Rivers' Depreciated Book Value for the Relevant Assets.
Notwithstanding anything contained in this Subsection 24.1(e)(iii) to the
contrary, no LG&E Parties' Residual Value Payment shall become owing hereunder
by reason of a Transaction Termination regarding the Station Two Agreement if,
within 60 days after that Transaction Termination, Big Rivers shall have taken
such actions, in compliance with Section 13.8 of the Station Two Agreement, as
shall be necessary to prevent the LG&E Parties (or any of them) from having the
right, pursuant to Section 13.8 of that agreement, to an abatement against the
Annual Fixed Payments or the Rental Payments (as applicable) due by them to Big
Rivers, to a reimbursement of the Initial Fixed Payment or Initial Rental
Payment, to a reduction in the Contract Limits, or to terminate any of the
Operative Documents other than the Station Two Agreement, each as contemplated
in Section 13.8 of that agreement; provided, that in the event those LG&E
Parties shall at any time thereafter have the immediate right to take any of the
foregoing actions or exercise any of the foregoing rights or remedies in
accordance with Section 13.8, then the LG&E Parties' Residual Value Payment with
respect to that Transaction Termination shall become payable by Big Rivers to
Station Two Subsidiary under this Subsection 24.1(e)(iii).
(f) Definitions. As used in this Section 24.1:
(i) The "LG&E Parties' Residual Plant Value" shall mean the
aggregate amount derived from combining for all Capital Assets (excluding any
Enhancements or Major Capital Improvements) and Station Two Improvements of the
type described below the amounts determined as set forth below: (x) the sum of
the original Installed Costs, purchase price amounts and other costs incurred by
Big Rivers, each of the LG&E Parties and (in the case of Station Two
Improvements) Henderson, collectively, whether directly or indirectly, for each
Capital Asset or Station Two Improvement (as applicable), or portion thereof,
that has been incorporated into or made a part of the Relevant Assets during the
Term and through the Transaction Termination or Triggering Transfer (as
applicable), or that has been funded by Big
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Rivers, any of the LG&E Parties and/or Henderson during the Term, directly or
indirectly, but has not been fully incorporated into or made a part of the
Relevant Assets as of the Termination Transaction or Triggering Transfer; minus
(y) the portion of those Installed Costs, purchase price amounts and other costs
that would have been depreciated or amortized by those parties through the
Transaction Termination or the Triggering Transfer assuming a straight line
depreciation or amortization of that Capital Asset or Station Two Improvement
over its estimated useful life; then multiplied by (z)(A) Leaseco's Capital
Asset Sharing Ratio that applied to that Capital Asset during the Term
(determined by reference to Section 7.4 of the Cost Sharing Agreement or Section
8.4, as of the Lease, as applicable), or (B) in the case of the Station Two
Improvements, Station Two Subsidiary's Station Two Improvement Sharing Ratio
that applied to that Station Two Improvement (determined by reference to Section
8.17(e) or Section 9.10(c) of the Station Two Agreement, as applicable);
(ii) "Big Rivers' Depreciated Book Value" shall mean (A) the
aggregate amount determined by reference to Section 24.1(f)(i), above, but after
substituting prior to the calculation the relevant Capital Asset Sharing Ratio
of Big Rivers (determined by reference to Section 7.4 of the Cost Sharing
Agreement or Section 8.4 of the Lease, as applicable) and Big Rivers' Station
Two Improvement Sharing Ratio (determined by reference to Section 8.17(e) or
Section 9.10(c) of the Station Two Agreement, as applicable) for Leaseco's
Capital Asset Sharing Ratio and Station Two Subsidiary's Station Two Improvement
Sharing Ratio, respectively, in Subclause (z) of that Section.
(iii) "Depreciated Book Value of all Enhancements and Major
Capital Improvements" shall mean the aggregate amount derived from combining for
all Enhancements and Major Capital Improvements (if any) that have been
incorporated into or made a part of the Relevant Assets during the Term and
through the Transaction Termination or Triggering Transfer (as applicable), or
that have been funded by any of the LG&E Parties during the Term but have not
been fully incorporated or made a part of the Relevant Assets as of the
Transaction Termination or Triggering Transfer, the amounts determined as set
forth below: (x) the sum of the original Installed Costs, purchase price amounts
and other costs incurred by any of the LG&E Parties for each such Enhancement or
Major Capital Improvement, minus (y) the portion of those Installed Costs,
purchase price amounts and other costs that would have been depreciated or
amortized by those LG&E Parties through the Transaction Termination or
Triggering Transfer assuming a straight line depreciation or amortization of
those assets over their estimated useful lives.
(iv) "LT" shall mean the aggregate amount of the original
Installed Costs, purchase price amounts and other costs incurred by any of the
LG&E Parties, whether directly or indirectly, for the construction, purchase or
installation of the Relevant Assets, including without limitation, any Relevant
Assets that have been funded by any of the LG&E Parties during the Term,
directly or indirectly, but that have not been installed or delivered as of the
Termination Transaction or Triggering Transfer, whether funded directly by the
LG&E Parties, funded indirectly by them through reimbursement payments made
between them and Big Rivers or Henderson, funded through capacity charge
payments made by them, directly or indirectly, pursuant to the Station Two
Agreement or the Key Station Two Contracts, or funded
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by them indirectly through withdrawals from any reserve accounts established
pursuant to those agreements.
(v) "BT" shall mean the aggregate amount of the original
Installed Costs, purchase price amounts and other costs incurred by Big Rivers,
whether directly or indirectly, for the construction, purchase or installation
of the Relevant Assets, including without limitation, any Relevant Assets that
have been funded by Big Rivers during the Term, directly or indirectly, but that
have not been installed or delivered as of the Termination Transaction or
Triggering Transfer, whether funded directly by Big Rivers, funded indirectly by
it through reimbursement payments made between it and the LG&E Parties or
Henderson, funded through capacity charge payments made by it, directly or
indirectly, pursuant to the Station Two Agreement or the Key Station Two
Contracts, or funded by it indirectly through withdrawals from any reserve
accounts established pursuant to those agreements.
(vi) "HT" shall mean the aggregate amount of the original
Installed Costs, purchase price amounts and other costs incurred by Henderson,
whether directly or indirectly, for the construction, purchase or installation
of the Relevant Assets, including without limitation, any Relevant Assets that
have been funded by Henderson during the Term, directly or indirectly, but that
have not been installed or delivered as of the Termination Transaction or
Triggering Transfer, whether funded directly by Henderson, funded indirectly by
it through reimbursement payments made between it and Big Rivers or the LG&E
Parties, funded through capacity charge payments made by it, directly or
indirectly, pursuant to the Station Two Agreement or the Key Station Two
Contracts, or funded by it indirectly through withdrawals from any reserve
accounts established pursuant to those agreements.
(g) Security Interests. All LG&E Parties' Residual Value Payments
that may become due to any LG&E Party(s) under this Section 24.1 shall be
secured by the Settlement Mortgage, and shall be further subject to the
Non-Disturbance Agreement to be entered into by Big Rivers, RUS, the LC Issuer
and the LG&E Parties.
(h) Credit for Other Recoveries. Notwithstanding anything contained
in this Section 24.1 to the contrary, in the event the LG&E Parties receive from
Big Rivers an LG&E Parties' Residual Value Payment upon the condemnation of any
of the Tangible Assets as contemplated in Section 9.1 of the Cost Sharing
Agreement or Section 10.1 of the Lease, that payment by Big Rivers shall be
deemed to discharge its obligation under this Section 24.1 to make that payment
to the relevant LG&E Party. In addition, (i) in the event following the
destruction of any Enhancements or Major Capital Improvements the LG&E Parties
shall elect not to replace or rebuild the same, the LG&E Parties shall not
thereafter be entitled to any LG&E Parties' Residual Value Payments with respect
to those assets, and (ii) in the event any other Capital Asset or any Station
Two Improvement is destroyed but not replaced or rebuilt as contemplated in
Section 9.2.3 of the Cost Sharing Agreement, Section 10.2.3 of the Lease or
Section 13.5 of this Agreement (as applicable), and Leaseco or Station Two
Subsidiary (as applicable) receives its share of insurance proceeds relative to
those Capital Assets or Station Two Improvements as contemplated in those
Sections, then the LG&E Parties shall not thereafter be entitled to any LG&E
Parties' Residual Value Payments with respect to those assets.
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24.2 Right of First Refusal.
(a) Restriction on Transfer of Assets or Station Two Contracts.
Except in the limited circumstances described in this Section 24.2, and then
only in accordance with the terms, conditions and provisions of this Section
24.2, Big Rivers agrees that it shall not, at any time during the Term or for a
period of one year following the expiration or termination thereof
(collectively, the "Option Period"), voluntarily sell, assign, pledge, give,
encumber, dispose of, or otherwise voluntarily transfer by operation of law
(including without limitation, by merger or consolidation) (each a "Transfer"),
any of Big Rivers' rights, title or interests under, in or to (i) the Tangible
Assets, any of the Tangible Assets, any other tangible assets or properties
relating to or comprising one or more Facilities (including without limitation,
any Capital Assets, Enhancements or Major Capital Improvements) or any Real
Property on which the Facilities are situated (or any portions(s) of the
Facilities or such Real Property), (ii) any tangible assets or properties
relating to or comprising the Station Two Assets or the real property on which
the Station Two Assets are situated and in which Big Rivers may own or acquire
an interest during the Term (including without limitation, any Station Two
Improvements), or (iii) the Station Two Contracts (or any material portion
thereof), other than a Transfer of the Assigned Station Two Contracts to Station
Two Subsidiary pursuant to Station Two Agreement (collectively, the "Subject
Assets"). Notwithstanding the foregoing, in the case of the Tangible Assets and
the tangible Station Two Assets, Big Rivers shall be entitled to so Transfer the
same free of the restrictions of this Section 24.2 if done so by Big Rivers in
the ordinary course of the business consistent with past practices (but subject
in all cases to any other restrictions on such Transfers set forth in this
Agreement or any other Operative Document).
(b) Sales or Other Voluntary Transfers. In the event Big Rivers
desires to Transfer in any manner all or any portion of the Subject Assets
during the Option Period, and has received a bona fide binding written offer to
purchase those assets from one or more other Persons (a "Bona Fide Offer")
during the Option Period, Big Rivers shall, by written notice to WKEC (in the
case of the Tangible Assets) or Station Two Subsidiary (in the case of the
Station Two Assets and the Station Two Contracts), including therewith a copy of
the Bona Fide Offer, and before any acceptance of that Bona Fide Offer or any
agreement to sell those Subject Assets to such other Person(s), first offer the
Subject Assets to WKEC or Station Two Subsidiary (as applicable) for purchase by
them at the price and upon and subject to the other terms and conditions set
forth in the Bona Fide Offer (but without any additional or different terms or
conditions), except as provided in (c) below. If it desires to so exercise the
same, WKEC or Station Two Subsidiary must, not later than midnight of the 60th
day following the date of its receipt of such notice, exercise its right to so
purchase all (but not less than all) of the relevant Subject Assets upon the
terms and subject to the conditions set forth in the Bona Fide Offer, by giving
written notice to Big Rivers of such exercise. In the event WKEC or Station Two
Subsidiary does not so exercise its right to purchase all of the Subject Assets
within the time period described above, Big Rivers shall thereafter be entitled
to Transfer all (but not less than all) of those Subject Assets to the Person(s)
who made the Bona Fide Offer, solely on the terms of that Bona Fide Offer,
without material modification, at any time during the period commencing on the
expiration of the foregoing 60-day period and expiring 210 days thereafter;
provided, that in the event such Transfer to that Person shall not have been
completed within that
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210-day period, Big Rivers agrees that it shall not thereafter attempt to
Transfer all or any portion of those Subject Assets to that or any other Person
(other than WKEC or Station Two Subsidiary) without once again offering to
transfer the same to WKEC or Station Two Subsidiary (as applicable) pursuant to
this Section 24.2(b). In the event WKEC or Station Two Subsidiary shall so
exercise their right pursuant hereto, the closing of the resulting sale of the
Subject Assets by Big Rivers to that LG&E Party shall occur at the offices of
Leaseco (or Station Two Subsidiary) in Louisville, Kentucky, not later than
ninety (90) days following the delivery of the relevant exercise notice, or at
such other time and places as those Parties shall mutually agree to.
(c) Use of Residual Value Payments. In exercising its right to
purchase any Subject Assets pursuant to this Section 24.2, the relevant LG&E
Party shall be entitled, in its discretion, to elect to reduce the purchase
price payable by that Party for the Subject Assets by the amount of any unpaid
LG&E Parties' Residual Value Payment(s) that may then be owing by Big Rivers to
any LG&E Party pursuant to Section 24.1, whether or not in connection with the
Subject Assets that are being purchased by the relevant LG&E Party; provided,
that for purposes of calculating the LG&E Party's Residual Value Payment that
shall be available for reduction of that purchase price, the aggregate fair
market value of the Subject Assets for purposes of Section 24.1(d) shall be
deemed to be the purchase price set forth in the Bona Fide Offer. Any such
reduction shall, upon the consummation of that purchase transaction, and to the
extent of the reduction, be deemed to correspondingly reduce the obligation of
Big Rivers to make that LG&E Parties' Residual Value Payment.
24.3 Continuation of Agreement.
Big Rivers recognizes and acknowledges that the RUS, the Members and
the LG&E Parties have or will in good faith enter into the transactions to which
this Agreement and the other Operative Documents relate, and have agreed to
consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for the
stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the
Members and the LG&E Parties that Big Rivers has in good faith entered into this
Agreement and will enter into the other Operative Documents in reliance upon and
with the specific intent of continuing these transactions through the stated
Term (i.e., approximately 25 years). In order to enable Big Rivers to comply
with certain requirements of the KPSC related to approval of its proposed rates,
and to provide additional assurances of its good faith and commitment and
without in any way intending to reduce or otherwise avoid abiding by the
Operative Documents throughout their stated Term (i.e., approximately 25 years)
and without any implication by any of the Parties that Big Rivers is or would be
entitled to attempt to reduce or otherwise avoid the terms of the Operative
Documents, Big Rivers additionally commits and undertakes that for the period
prior to January 1, 2012, in the event of any filing by Big Rivers of a petition
or similar filing for bankruptcy or reorganization or arrangement under any
federal or state bankruptcy or insolvency or similar Law, or the commencement of
involuntary proceedings against Big Rivers under any such Law, neither Big
Rivers nor its successor or assigns, if any, shall file, direct the filing of,
join in, consent to, or otherwise support any other party to any such
proceedings in a motion, complaint, pleading, statement, testimony or otherwise
make any attempt to terminate, reject or modify any of the Operative Documents
under (other than in
71
<PAGE>
accordance with their respective terms) Section 365 of the United States
Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended,
modified or supplemented or any other similar, applicable federal or state
bankruptcy or insolvency laws (the "Insolvency Assurance"). Thereafter, Big
Rivers shall continue the Insolvency Assurance unless and until the RUS, in the
exercise of its discretion, were to consent to any of the foregoing. In all
events and throughout the Term, each of the RUS, the Members and the LG&E
Parties shall be entitled to rely upon the specific provisions of each of the
Operative Documents, including but not limited to their stated term (i.e.,
approximately 25 years), and shall be entitled to take whatever actions may
prove to be necessary or appropriate to maintain the benefit of their bargain in
the event that Big Rivers ever attempts to cause the rejection or termination of
any of the Operative Documents (other than in accordance with their respective
terms) in a subsequent bankruptcy or reorganization proceeding or otherwise.
24.4 LG&E Parties Commitment.
The LG&E Parties recognize and acknowledge that the RUS, the Members
and Big Rivers have in good faith entered into the transactions to which this
Agreement and the other Operative Documents relate, and have agreed to
consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for their
stated term (i.e., approximately 25 years). The LG&E Parties have informed the
RUS, the Members and Big Rivers that the LG&E Parties have in good faith entered
into this Agreement in reliance upon and with specific intent of continuing this
transaction through the stated term (i.e., approximately 25 years). In order to
facilitate approval of the proposed rates of Big Rivers and to provide
additional assurances of their good faith and commitment, and without in any way
intending to reduce or otherwise avoid abiding by this Agreement and the other
Operative Documents throughout their stated term (i.e., approximately 25 years),
and without any implication by any of the Parties that the LG&E Parties are or
would be entitled to attempt to reduce or otherwise avoid the terms of this
Agreement or any other Operative Document, the LG&E Parties additionally commit
and undertake that for the period prior to January 1, 2012, in the event of any
filing by any of the LG&E Parties of a petition or similar filing for bankruptcy
or reorganization or arrangement under any federal or state bankruptcy or
insolvency or similar Law, or the commencement of involuntary proceedings
against any of the LG&E Parties under any such Law, none of the LG&E Parties nor
their respective successors or assigns, if any, shall file, direct the filing
of, join in, consent to, or otherwise support any other party to any such
proceedings in a motion, complaint, pleading, statement, testimony or otherwise
make any attempt to terminate, reject or modify this Agreement or any other
Operative Document (other than in accordance with their respective terms) under
Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss.101, et seq., as
it subsequently may be amended, modified or supplemented or any other similar,
applicable federal or state bankruptcy or insolvency Laws (the "Insolvency
Assurance"). Thereafter, the LG&E Parties shall continue the Insolvency
Assurance unless and until the RUS, in the exercise of its discretion, were to
consent to any of the foregoing. In all events and throughout the Term, each of
the RUS, the Members and Big Rivers shall be entitled to rely upon the specific
provisions of this Agreement, including but not limited to the stated Term
(i.e., approximately 25 years), and shall be entitled to take whatever actions
may prove to be necessary or appropriate to maintain the benefit of their
bargain in the
72
<PAGE>
event that any of the LG&E Parties ever attempt to cause the rejection or
termination of this Agreement or any other Operative Document (other than in
accordance with their respective terms) in a subsequent bankruptcy or
reorganization proceeding or otherwise.
24.5 No Limitation on Rights Under New RUS Loan Documents.
Nothing in this Article 24 shall modify, reduce or diminish: (i) the
rights of the RUS under the New RUS Loan Documents (as defined in that certain
New RUS Loan Agreement between Big Rivers and the RUS to be executed and
delivered on the Effective Date); or (ii) the rights of the Mortgagees under the
New RUS Mortgage (as defined in said New RUS Loan Agreement), including without
limitation, any right to withhold consent with respect to any sale or
disposition of Big Rivers' property except on terms acceptable to the RUS and/or
such mortgagees; but subject, in the case of (i) and (ii), above, to the
Non-Disturbance Agreement of even date herewith among Big Rivers, RUS, AMBAC and
the LG&E Parties.
24.6 Survival; No Limitation on Remedies.
The provisions of this Article 24 shall survive the expiration or
termination of this Agreement following the Effective Date for any reason, and
shall continue to be binding on the Parties. The payments and other rights
provided for in this Article 24 shall be in addition to, and not in lieu of, all
other rights and remedies of the LG&E Parties provided for in this Agreement and
the other Operative Documents (including without limitation, any rights and
remedies in respect of any breach or default by Big Rivers hereunder or
thereunder), and all such rights and remedies shall be deemed to be cumulative
unless expressly provided otherwise in this Agreement or any other Operative
Document.
73
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of the day and year first written above.
BIG RIVERS ELECTRIC CORPORATION
By: /s/ Michael H. Core
----------------------------
Printed Name: Michael H. Core
Title: President/CEO
WESTERN KENTUCKY ENERGY CORP.
By: /s/ John R. McCall
----------------------------
Printed Name: John R. McCall
Title: Vice President
LG&E ENERGY MARKETING INC.
By: /s/ John R. McCall
----------------------------
Printed Name: John R. McCall
Title: Vice President
WESTERN KENTUCKY LEASING CORP.
By: /s/ John R. McCall
----------------------------
Printed Name: John R. McCall
Title: Vice President
WKE STATION TWO INC.
By: /s/ John R. McCall
----------------------------
Printed Name: John R. McCall
Title: Vice President
[* All schedules and
Exhibits REDACTED]
74
<PAGE>
WKE STATION TWO INC.
220 West Main Street
Louisville, Kentucky 40232-2030
April 6, 1998
Mr. Michael H. Core [* REDACTED = Omitted pursuant to a
President confidential treatment request.
Big Rivers Electric Corporation Material filed separately with SEC.]
201 Third Street
P.O. Box 24
Henderson, KY 42420-0024
Re: Station Two Agreement - Debt Service Payments on Station Two Bonds
Dear Mr. Core:
Attached as Exhibit M to the New Participation Agreement of even date
herewith by and among Big Rivers Electric Corporation, LG&E Energy Marketing
Inc., Western Kentucky Leasing Corp., WKE Station Two Inc. and Western Kentucky
Energy Corp., is the Station Two Agreement (as defined in the New Participation
Agreement). Sections 8.18, 9.7(b)(i) and 9.11 of the Station Two Agreement set
forth the terms for funding and payment of Debt Service on the Station Two
Bonds. This letter amends the New Participation Agreement by setting forth new
understandings and agreements with respect to the terms for funding and payment
of such Debt Service on the Station Two Bonds. Capitalized Terms that are not
defined herein shall have the meaning ascribed to such terms in the Station Two
Agreement.
Each of the parties set forth below hereby agrees that, in lieu of the
payments provided for in Section 8.18 and Sections 9.7(b)(i) and 9.11 of the
Station Two Agreement, Station Two Subsidiary and Big Rivers shall each have
responsibility (until the earlier of (x) termination of the Station Two
Agreement or (y) the Station Two Bonds shall be retired or redeemed) for
payment, monthly, of an amount equal to [REDACTED] of the portion of the Debt
Service due and owing in the current month by Big Rivers to the Trustee pursuant
to Section 6.3(a) of the Station Two Power Sales Agreement. During the Phase I
Subcontract Term, Big Rivers shall remain primarily liable to Henderson for
timely and full payment of the portion of the Debt Service due and owing by Big
Rivers to the Trustee under the Station Two Power Sales Agreement. Big Rivers
shall be deemed by each monthly payment of Debt Service it makes to the Trustee
during the Phase I Subcontract Term, to the extent such payment is made in
accordance with the terms of the Station Two Power Sales Agreement, to have
fulfilled its obligation to the LG&E Companies hereunder for payment of its
portion of the Debt Service for that month. On the first day of each month
during the Phase I Subcontract Term, Station Two Subsidiary shall pay to Big
Rivers an amount equal to [REDACTED] of the portion of Debt Service due by Big
Rivers to the Trustee during the current month under Section 6.3(a) of the
Station Two Power Sales Agreement.
<PAGE>
Mr. Michael H. Core
April 6, 1998
Page 2
During the Phase II Assignment Term, Station Two Subsidiary shall be
primarily liable to Henderson for timely and full payment of the portion of the
Debt Service due and owing by Station Two Subsidiary (as Big Rivers' assignee)
to the Trustee under Section 6.3(a) of the Station Two Power Sales Agreement.
Station Two Subsidiary shall be deemed by each monthly payment of Debt Service
it makes to the Trustee during the Phase II Assignment Term, to the extent such
payment is made in accordance with the terms of the Station Two Power Sales
Agreement, to have fulfilled its obligation to Big Rivers hereunder for payment
of its portion of the Debt Service for that month. On or prior to each Monthly
Payment Date during the Phase II Assignment Term, Big Rivers shall pay to
Station Two Subsidiary an amount equal to [REDACTED] of the portion of Debt
Service due by Station Two Subsidiary (as Big Rivers' assignee) to the Trustee
during the current month under Section 6.3(a) of the Station Two Power Sales
Agreement.
The foregoing terms and provisions for payment of such Debt Service shall
take effect, if ever, from and after the first to occur of the Phase I Effective
Date or the Phase II Effective Date under the Station Two Agreement. On or prior
to the Effective Date (as defined in the New Participation Agreement), the
parties will in good faith work together to make appropriate amendments to the
Station Two Agreement to reflect the agreements and understandings set forth in
this letter.
Please acknowledge your agreement to the terms of this letter by signing
in the space provided below.
Sincerely,
WKE STATION TWO INC.
By: /s/ John R. McCall
-------------------------------------
John R. McCall, Vice President
WESTERN KENTUCKY ENERGY CORP.
By: /s/ John R. McCall
-------------------------------------
John R. McCall, Vice President
<PAGE>
Mr. Michael H. Core
April 6, 1998
Page 3
LG&E ENERGY MARKETING INC.
By: /s/ John R. McCall
-------------------------------------
John R. McCall, Vice President
WESTERN KENTUCKY LEASING CORP.
By: /s/ John R. McCall
-------------------------------------
John R. McCall, Vice President
AGREED:
BIG RIVERS ELECTRIC CORPORATION
By: /s/ Michael H. Core
-------------------------------------
Title: President and CEO
<PAGE>
[*REDACTED = Omitted pursuant to confidential
treatment request. Material filed separately
with SEC.]
EXHIBIT 10.85
Privileged and Confidential
EXECUTION ORIGINAL
SECOND AMENDMENT TO THE
NEW PARTICIPATION AGREEMENT
This SECOND AMENDMENT TO THE NEW PARTICIPATION AGREEMENT ("AMENDMENT")
dated this ___ day of June, 1998, is among BIG RIVERS ELECTRIC CORPORATION, a
Kentucky rural electric cooperative ("BIG RIVERS"), LG&E ENERGY MARKETING
INC., an Oklahoma corporation ("LEM"), WESTERN KENTUCKY LEASING CORP., a
Kentucky corporation ("LEASECO"), WKE Station Two Inc., a Kentucky
corporation ("STATION TWO SUBSIDIARY") and WESTERN KENTUCKY ENERGY CORP., a
Kentucky corporation ("WKEC") (hereinafter, LEM, Leaseco, Station Two
Subsidiary and WKEC are collectively referred to as the "LG&E PARTIES" and
together with Big Rivers, the "PARTIES").
RECITALS
WHEREAS, the Parties are signatories to the New Participation Agreement
dated April 6, 1998, as amended by that certain Letter Agreement dated April 6,
1998 (collectively, the "New Participation Agreement").
WHEREAS, the Parties wish to amend the New Participation Agreement in
certain respects as described herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Amendment, the Parties agree as follows:
Each direction to capitalize or make lower case a word or phrase means to
make the initial letter of each referenced word a capital letter or a lower case
letter, as directed.
1. NEW PARTICIPATION AGREEMENT. The Parties hereby agree to amend the
New Participation Agreement as follows:
- - Section 4.3.6 (p. 6). The phrase "and in Sections 23.3 and 23.5" is hereby
added immediately following the words "Article 5".
- - Section 5.1.24 (p.14). In the references to "Taxing authority," "Taxing" is
hereby made lower case.
- - Section 7.1.2 (p.17). In the reference to "tax liability", "tax" is hereby
capitalized.
- - Section 7.3.6 (p. 19). In the phrase "Effective Date, cause the Big
Rivers Qualified Plans" the word "and" is hereby inserted between the
word "date" and the word "cause."
- - Section 8.1 (p.19). The reference to "LG&E Parties" is hereby changed to
"LG&E Parties and their Affiliates." The reference to "such other LG&E
Party's use" is hereby changed to "use by the LG&E Parties or their
Affiliates," and the reference to "such LG&E Party agrees" is hereby
changed to "such LG&E Party agrees, and agrees to cause its Affiliates."
<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
- - Section 9.3 (p. 22). In the parenthetical phrase "fuel and scrubber
reagent, inventory, spare parts and materials, and supplies" the commas
immediately following the words "reagent" and "materials" are hereby
deleted.
- - Section 9.6 (p.24-25). Each reference to "Transmission Services and
Interconnection Agreement" is hereby changed to "Transmission Service
and Interconnection Agreement."
- - Section 9.7 (p. 25 ): A new Section 9.7 is hereby added as follows:
9.7 INCREMENTAL REVENUE ALLOCATION
(a) On the 25th day of each month, commencing on the second
occurrence of a 25th day of the month after the Effective Date
and continuing until and including January 25, [REDACTED], Big
Rivers will pay to LEM [REDACTED]% of the total revenue
received by Big Rivers from [REDACTED] for transmission of
Tier 3 Energy to [REDACTED] (if any) during the preceding
month.
(b) On the 25th day of each month, commencing on February 25,
[REDACTED] and continuing until and including January 25,
[REDACTED], provided that [REDACTED] has entered into a
contract with Big Rivers for the transmission of Tier 3
Energy to [REDACTED], which contract provides for service to
commence January 1, [REDACTED], is of a duration of no less
than [REDACTED] years, assures Big Rivers of receipt of no
less than $[REDACTED] annually in transmission revenues, and
such minimum revenues are received by Big Rivers, Big Rivers
will pay to LEM an amount equal to $[REDACTED]. In addition,
on each February 25, commencing on February 25, [REDACTED]
and continuing until and including February 25, [REDACTED],
Big Rivers will pay LEM an amount equal to the lesser of
(i) $[REDACTED] or (ii) the difference between (a) the
total amount of revenue received by Big Rivers from
[REDACTED] for transmission of Tier 3 Energy to Southwire
in the preceding 12 calendar months and (b) $[REDACTED] less
the sum of amounts received by LEM from Big Rivers pursuant to
this Section 9.7(b) in the preceding 12 calendar months;
provided that if Big Rivers' OATT rate for firm point-to-point
service declines to less than $[REDACTED] per KW per month,
then the amount "$[REDACTED]" set forth in the preceding
clause will be reduced proportionally.
- - Section 10.3 (p.26). The reference to "WKEC shall not" is hereby
changed to "Neither WKEC nor its Affiliates shall."
- - Section 10.4 (p.26). The last reference to "or its Affiliates (as
applicable)" is hereby deleted.
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<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
- - Section 10.5 (p. 26). The word "the" is hereby inserted before each of
the first, third, fourth and fifth references to "Big Rivers Severance
Plan."
- - Section 10.7 (p.28). The reference to "10.8.1, 10.8.2 and 10.8.3" is
hereby changed to "10.7.1, 10.7.2 and 10.7.3."
- - Section 11.6 (p.30). In each reference to "Federal income tax," "tax" is
hereby capitalized.
- - Section 12.1 (p.31). References to "Leaseco shall keep" and "Leaseco shall
retain" are hereby changed to "Leaseco shall keep, or cause to be kept,"
and "Leaseco shall retain, or cause to be retained,".
- - Section 12.4 (p. 31). The word "notice" is hereby made plural.
- - Section 14.5 (p.36). Each reference to "parties" is hereby capitalized.
- - Section 15.1 (p.38). The first and second references to "parties" are
hereby capitalized and the first, second and third references to "party"
is hereby capitalized.
- - Section 15.2.1 (p.39). The reference to "Party" is hereby made lower case.
- - Section 15.2.3 (p.39). The first reference to "Party" is hereby made lower
case.
- - Section 15.2.6 (p.39). The reference to "Parties" is hereby made lower
case.
- - Section 15.3.1 (p.40). The first and second references to "Party" are
hereby made lower case and the first reference to "Parties" is hereby made
lower case.
- - Section 15.3.2 (p.40). The last reference to "Party" is hereby made lower
case.
- - Section 15.3.4 (p.40). The first reference to "parties" is hereby
capitalized.
- - Section 15.3.6 (pp.40-41). Each reference to "Parties" or "Party" is hereby
made lower case.
- - Section 15.3.7 (p.41). Each reference to "Parties" or "Party" is hereby
made lower case.
- - Section 15.3.8 (p.41). The reference to "Parties" is hereby made lower
case.
- - Section 16.1 (p.41). The first reference to "party" is hereby
capitalized and the word "provided" is hereby inserted before the first
use of "however."
- - Section 16.2 (p.42). The first reference to "party" is hereby capitalized.
- - Section 20.3 (p.50). The reference to "party" is hereby capitalized.
- - Section 20.6 (p. 51). Section 20.6 is hereby amended to be and read in
its entirety as follows:
20.6 DEVELOPMENT OF BUDGETS; CAPITAL BUDGET LIMITS.
20.6.1 The Parties agree, notwithstanding the date upon which the
Closing occurs, that they will continue to work together to (i) develop
an Annual O&M Budget and an Annual Capital Budget with respect to the
"Initial Budget Period" (as defined in the Facilities Operating
Agreement or the Lease, as applicable), and (ii) consider matters of
concern relating to the operation of the Assets and Station Two
following the Closing with respect to which the Operating Committee is
given a role pursuant to the terms of the Lease or the Facilities
Operating Agreement. The applicable provisions contained in the Phase I
or Phase II Agreements, as applicable, shall replace this provision on
and after the Effective Date.
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<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
20.6.2. Notwithstanding Section 20.6.1, above, the Parties hereby
agree that the Annual Capital Budgets for the Initial Budget Period to
be agreed to by the Parties as contemplated in Schedule 3.1 attached to
this Agreement, and the Annual Capital Budgets for each Year thereafter
during the Term, shall include as the aggregate budgeted amount for the
relevant Year (or portion thereof), in respect of all Non-Incremental
Capital Costs and Henderson Non-Incremental Capital Costs (as defined
in the Station Two Agreement) that are not for Major Capital Repairs or
Henderson Major Capital Repairs, respectively, the following amounts
(the "Capital Budget Limits"), which Capital Budget Limits shall not be
increased or decreased without the written approval of the Parties, but
shall be subject to adjustment pursuant to the procedures to be
developed by Big Rivers and Leaseco as contemplated in Section 20.6.4
below, and shall be subject to the other provisions of this Section
20.6:
<TABLE>
<CAPTION>
<S> <C>
- - First Partial Year following Effective Date
(assuming there are five full months then
remaining in that Year): $
- - First full Year following Effective Date: $
- - Second full Year following Effective Date: $
- - Third full Year following Effective Date: $
- - Fourth full Year following Effective Date: $
- - Fifth full Year following Effective Date: $
- - Sixth full Year following Effective Date: $
- - Seventh full Year following Effective Date: $
- - Eighth full Year following Effective Date: $
- - Ninth full Year following Effective Date: $
- - Tenth full Year following Effective Date: $
- - Eleventh full Year following Effective Date: $[REDACTED]
- - Twelfth full Year following Effective Date: $
- - Thirteenth full Year following Effective Date: $
- - Fourteenth full Year following Effective Date: $
- - Fifteenth full Year following Effective Date: $
- - Sixteenth full Year following Effective Date: $
- - Seventeenth full Year following Effective Date: $
- - Eighteenth full Year following Effective Date: $
- - Nineteenth full Year following Effective Date: $
- - Twentieth full Year following Effective Date: $
- - Twenty-First full Year following Effective Date: $
- - Twenty-Second full Year following Effective Date: $
- - Twenty-Third full Year following Effective Date: $
- - Twenty-Fourth full Year following Effective Date: $
- - Twenty-Fifth full Year following Effective Date: $
</TABLE>
-4-
<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
Except as otherwise provided below, Big Rivers, Leaseco and/or Station
Two Subsidiary each agree to contribute their respective share of the
Capital Budget Limit for each Year (or portion thereof) during the
Term, based upon their respective Capital Asset Sharing Ratios or
Station Two Improvement Sharing Ratios (as defined in the Station Two
Agreement), as applicable; provided, that so long as the aggregate
budgeted amount for Non-Incremental Capital Costs and Henderson
Non-Incremental Capital Costs that are included in the approved Annual
Capital Budget and Operating Budget (in the case of Station Two) for a
particular Year, but which are not for Major Capital Repairs or
Henderson Major Capital Repairs, respectively (the "Approved Capital
Amount"), is equal to or greater than the Big Rivers Contribution for
that Year, then Big Rivers will contribute the entire Big Rivers
Contribution (as defined in Section 20.6.3 below) for that Year and
Leaseco and/or Station Two Subsidiary will contribute the remainder of
the Approved Capital Amount; and provided further, that in the event
the Approved Capital Amount for a particular Year is less than the Big
Rivers Contribution for that Year, then Big Rivers alone shall
contribute the entire Approved Capital Amount. Notwithstanding anything
contained in this Section 20.6 to the contrary Leaseco and/or Station
Two Subsidiary shall be entitled to propose an aggregate annual budget
for Non-Incremental Capital Costs (exclusive of costs for Major Capital
Repairs) and Henderson Non-Incremental Capital Costs (exclusive of
Costs for Henderson Major Capital Repairs) that is less than the
Capital Budget Limits for that Year, provided such budget is consistent
with Prudent Utility Practice, and such budget as proposed by Leaseco
and/or Station Two Subsidiary shall be approved if it meets the
criteria for such approval in Article 6 of the Cost Sharing Agreement,
Article 7 of the Lease and Section 8.15 or 9.8 of the Station Two
Agreement (as applicable) notwithstanding that it may be less than the
Capital Budget Limit. In addition to the foregoing, in the event the
Approved Capital Amount for a particular Year is less in the aggregate
than the Big Rivers Contribution for that Year, Big Rivers agrees to
contribute the amount by which the Big Rivers Contribution exceeds the
Approved Capital Amount, to fund any Non-Incremental Capital Costs and
Henderson Non-Incremental Capital Costs (in each case exclusive of
costs for Major Capital Repairs and Henderson Major Capital Repairs)
that were not included in the relevant approved budget, but which (i)
are required during that Year, consistent with Prudent Utility
Practice, to be expended in order to address unanticipated operating
problems at one or
-5-
<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
more of the Generating Plants, and (ii) meet the criteria and
conditions set forth in Article 7 of the Cost Sharing Agreement,
Article 8 of the Lease or Section 8.17 or 9.10 of the Station Two
Agreement (as applicable) for Big Rivers' obligation to fund the
same. Such contributions by Big Rivers will serve as an approved
deviation from the Annual Capital Budget for that Year as
contemplated in Section 6.5 of the Facilities Operating Agreement,
Section 7.5 of the Lease or Section 8.17(f) or 9.10(d) of the
Station Two Agreement, as applicable.
20.6.3 Except as otherwise provided in this Section 20.6, Big Rivers
agrees that its respective share of the Capital Budget Limit for each
Year shall be the amounts set forth below (collectively, the "Big
Rivers Contributions"), which amounts shall be paid by Big Rivers at
the time(s) provided in Article 7 of the Cost Sharing Agreement,
Article 8 of the Lease and Section 8.17 or 9.10 of the Station Two
Agreement, as applicable:
<TABLE>
<CAPTION>
<S> <C>
- - First Partial Year: $
- - First full Year: $
- - Second full Year: $
- - Third full Year: $
- - Fourth full Year: $
- - Fifth full Year: $
- - Sixth full Year: $
- - Seventh full Year: $
- - Eighth full Year: $
- - Ninth full Year: $
- - Tenth full Year: $
- - Eleventh full Year: $[REDACTED]
- - Twelfth full Year: $
- - Thirteenth full Year: $
- - Fourteenth full Year: $
- - Fifteenth full Year: $
- - Sixteenth full Year: $
- - Seventeenth full Year: $
- - Eighteenth full Year: $
- - Nineteenth full Year: $
- - Twentieth full Year: $
- - Twenty-First full Year: $
- - Twenty-Second full Year: $
- - Twenty-Third full Year: $
- - Twenty-Fourth full Year: $
- - Twenty-Fifth full Year: $
</TABLE>
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<PAGE>
Privileged and Confidential
EXECUTION ORIGINAL
Big Rivers agrees that the amount of the Big Rivers Contribution for a
particular Year shall not be reduced in the event the Approved Capital
Amount is less than the Capital Budget Limit for the year, so long as
the Approved Capital Amount is equal to or greater than the Big Rivers
Contribution.
20.6.4 The Parties agree that, as an additional condition to the
Closing and the Parties' obligation to consummate the transactions
contemplated at the Closing, Big Rivers and Leaseco must agree upon a
mutually satisfactory procedure by which the Capital Budget Limits and
the Big Rivers Contributions will be adjusted during the Term to
reflect inflationary increases in the cost of Non-Incremental Capital
Costs over that period. The Parties agree to negotiate in good faith to
develop and agree upon that procedure at the earliest practicable time
following the Execution Date, and shall document their agreement (if
any) in writing at or prior to the Closing.
20.6.5 Notwithstanding anything contained in any Operative
Document to the contrary, but subject to the limitations and conditions
set forth in this Section 20.6, at such time as Big Rivers shall have
paid the entire Big Rivers Contribution for a particular Year (or the
required portion thereof, as contemplated in Section 20.6.2 above)
toward the funding of one or more Non-Incremental Capital Costs (other
than for Major Capital Repairs) and/or Henderson Non-Incremental
Capital Costs (other than for Henderson Major Capital Repairs), in
either case in accordance with Article 7 of the Cost Sharing Agreement,
Article 8 of the Lease and/or Section 8.17 or 9.10 of the Station Two
Agreement (as applicable), then (a) Big Rivers shall be deemed to have
paid its entire share of all Non-Incremental Capital Costs (other than
for Major Capital Repairs) and Henderson
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Non-Incremental Capital Costs (other than for Henderson Major
Capital Repairs) for that Year (or portion thereof), regardless of
whether additional expenditures for those or other Non-Incremental
Capital Costs (other than for Major Capital Repairs) or Henderson
Non-Incremental Capital Costs (other than for Henderson Major
Capital Repairs) have been budgeted for, or are thereafter required
during that Year for the maintenance and upkeep of the Generating
Plants in accordance with the Operative Documents, and (b) Leaseco
or Station Two Subsidiary, as applicable, agree that they shall be
responsible for the payment of all other Non-Incremental Capital
Costs (exclusive of costs for Major Capital Repairs) and Henderson
Non-Incremental Capital Costs (exclusive of costs for Henderson
Major Capital Repairs) during that Year to maintain and operate the
Facilities and Station Two in accordance with the Operative
Documents notwithstanding the Capital Budget Limit for that Year
(or portion thereof). Notwithstanding the immediately preceding
sentence or any other provision in any Operative Document to the
contrary, Big Rivers' payment of the Big Rivers Contribution for a
particular Year as contemplated above shall not, and shall not be
deemed to, affect, limit or eliminate Big Rivers' continuing
obligation under Article 7 of the Cost Sharing Agreement, Article 8
of the Lease or Section 8.17 or 9.10 (as applicable) of the Station
Two Agreement for the payment of Big Rivers' relevant Capital Asset
Sharing Ratio or Station Two Improvement Sharing Ratio with respect
to (a) any Incremental Capital Costs or Henderson Incremental
Capital Costs, and (b) any Non-Incremental Capital Costs for Major
Capital Repairs or Henderson Non-Incremental Capital Costs for
Henderson Major Capital Repairs, in each case that are required to
be funded by Big Rivers, directly or indirectly, in accordance with
those Articles or Sections, it being expressly understood that all
such obligations of Big Rivers shall continue in accordance with
those provisions irrespective of the provisions of this Section
20.6, and, where reasonably possible, shall be separately budgeted
for by the Parties in the Annual Capital Budgets or Operating
Budgets (in the case of Station Two) in accordance with the Cost
Sharing Agreement, the Facilities Operating Agreement, the Lease or
the Station Two Agreement, as applicable. In addition to the
foregoing, and except as otherwise provided in this Section 20.6,
nothing in this Section 20.6 shall be deemed to affect, limit or
eliminate Big Rivers' or the LG&E Parties' respective obligations
or liabilities under or pursuant to this or any other Operative
Document by reason of any misrepresentation, breach of warranty or
non-fulfillment of any covenant or agreement of Big Rivers or such
LG&E Parties, including without limitation, any indemnification and
hold harmless covenant of Big Rivers or such LG&E Parties set forth
herein or therein.
20.6.6 To the extent any portion of a Big Rivers Contribution that
is included in an approved Annual Capital Budget or Operating Budget
(in the case of Station Two) is not thereafter used by Leaseco or
Station Two Subsidiary in the Year for which payable because the
project for which such funds were allocated was deferred or was not
completed during that Year, after complying with the provisions of the
Operative Documents, then such portion of the Big Rivers Contribution
necessary to complete such project will be carried forward and included
as an approved addition to the Annual Capital Budget or Operating
Budget (as applicable) for the following Year (for use solely in
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connection with the completion of such project), but shall not serve as
a credit against, or reduce, the Big Rivers Contribution for that
following Year; provided, that the obligation of Big Rivers to so
contribute any such portion of the Big Rivers Contribution in that
following Year shall be further conditioned on either (i) Leaseco or
Station Two Subsidiary having actually contributed, during the Year for
which budgeted, its commitment for Non-Incremental Capital Costs or
Henderson Non-Incremental Capital Costs that corresponds with such
portion of the Big Rivers Contribution (based upon Leaseco's Capital
Asset Sharing Ratio or Station Two Subsidiary's Station Two Improvement
Sharing Ratio, as applicable), or (ii) Leaseco's or Station Two
Subsidiary's agreement with Big Rivers to make those corresponding
contributions at the same time in the following Year as such
contributions are required by Big Rivers. References in this Section
20.6 to the Operating Budgets required for Station Two shall be deemed
to relate solely to the items and amounts set forth in those budgets
for which Big Rivers and/or Station Two Subsidiary are responsible
under the Station Two Agreement and the Station Two Contracts
referenced therein.
20.6.7 Notwithstanding anything contained in this Agreement or
in any other Operative Document to the contrary, the Parties agree that
they shall not, at any time after the sixtieth (60th) day following the
close of any Year, attempt to claim or assert any claim (A) that an
expenditure incurred in that Year and included in the approved Annual
O&M Budget, the approved Annual Capital Budget or the approved
Operating Budget (in the case of Station Two) for that Year (including
without limitation, items that were included in those budgets by
agreement of the Parties, by decision of the Operating Committee or
Oversight Committee (as applicable), or at the direction of an
arbitration panel pursuant to the procedures set forth in Article 15)
should in fact have been included in the other budget for that Year,
(B) that an expenditure incurred in that Year and included as an
expenditure for a Capital Asset or Station Two Improvement in any of
those approved budgets is in fact an operation or maintenance expense
or an Enhancement or Major Capital Improvement, or is a Capital Asset
or Station Two Improvement that Big Rivers is not otherwise obligated
to fund in part, (C) that an expenditure incurred in that Year and
included as an operation or maintenance expense in any of those
approved budgets is in fact an expenditure for a Capital Asset or
Station Two Improvement that Big Rivers is obligated to fund in part,
(D) that an expenditure incurred in that Year and included in those
approved budgets is or is not for a Major Capital Repair or a Henderson
Major Capital Repair, (E) that an expenditure incurred in that Year and
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included as Incremental Environmental O&M in any of those approved
budgets is not in fact Incremental Environmental O&M, or (F) that an
expenditure incurred in that Year and included as an operation and
maintenance expense that is not Incremental Environmental O&M is in
fact Incremental Environmental O&M; provided, however that nothing
contained in this Section 20.6.7 shall be deemed to affect, limit or
eliminate any such claims that are specifically asserted with respect
to one or more items included in those approved budgets at any time
prior to the expiration of the foregoing sixty-day period following the
close of any Year, any such claims that are asserted prior to the
approval of such budgets (or deemed approval pursuant to an arbitration
award as contemplated above), or any claims regarding expenditures the
approval or characterization of which was obtained by a Party through
any misrepresentation or fraudulent or other willful misconduct, all of
which claims shall be deemed to survive that sixty-day period for all
purposes.
- - Section 21.4 (p.54). The phrase "but without giving effect to the conflict
of law rules of such jurisdiction" is hereby added to the end of the
sentence.
- - Section 22.2 (p.59). The first and second sentences of Section 22.2
are hereby deleted and are replaced with the following new sentence:
"LEM covenants and agrees, and Big Rivers acknowledges and agrees, that
on the Closing Date and in the event the Marketing Payment contemplated
in Section 4.3.9 exceeds $[REDACTED], LEM will execute and deliver to the
RUS a Demand Promissory Note in a principal amount equal to the amount
by which such Marketing Payment so exceeds $[REDACTED], and in the form
attached to this Agreement as Exhibit Q (the "Demand Note")." Exhibit Q
attached to this Amendment shall constitute Exhibit Q of the New
Participation Agreement as contemplated above. The fifth sentence of
Section 22.2 is hereby amended to be and read in its entirety as
follows: "Notwithstanding the foregoing, so long as any amount remains
outstanding under either of the two Promissory Notes to be issued by Big
Rivers to the RUS pursuant to the New RUS Agreement (as defined in the
Non-Disturbance Agreement) or under the "1983 Reimbursement Agreement",
the "1985 Reimbursement Agreement" or the "AMBAC Notes" (each with AMBAC
as referred to in Recital A of the Non-Disturbance Agreement), or under
Big Rivers' pollution control bonds as outstanding on the Effective
Date, Big Rivers agrees that it shall not, and LEM agrees that Big
Rivers shall have no obligation to, pay any amount with respect to Big
Rivers' Reimbursement Obligation(s), provided however, that interest at
the Default Rate will continue to accrue during all such periods during
which Big Rivers has no payment obligation." A new sentence is hereby
added to the end of Section 22.2 of the New Participation Agreement as
follows: "Big Rivers' Reimbursement Obligation(s), together with its
obligation to pay interest accruing on such reimbursement amounts, shall
survive any expiration or termination of this Agreement and shall
continue to be binding on Big Rivers."
- - New Sections (p.60). New Sections 23.2 through 23.9, inclusive, are hereby
added to Article
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23 of the New Participation Agreement as follows:
23.2 COLEMAN UNIT NO. 2 ISSUES. Big Rivers agrees that it will fully
repair and rectify, at its expense and consistent with Prudent Utility
Practice, all equipment and operating problems at the Coleman Unit No.
2 facility identified in the letter dated May 14, 1998 from Michael
Core to George Basinger, as well as all other problems (whether or not
related) that may exist and that may prevent bringing that unit back on
line for regular operation to its full rated capacity. Big Rivers will
use its commercially reasonable efforts to address those problems at
the earliest practicable time, in an effort to return the Coleman Unit
No. 2 facility on-line prior to July 14, 1998 (or as soon thereafter as
is reasonably possible). The foregoing obligations of Big Rivers will
survive the Closing and shall continue to be binding on Big Rivers.
Notwithstanding the foregoing, Big Rivers acknowledges and agrees that
the LG&E Parties shall be under no obligation to effect the Closing or
to consummate the transactions contemplated at the Closing until such
time as the Coleman Unit 2 facility is repaired in accordance with the
preceding provisions.
23.3 GREEN AND WILSON LANDFILL ISSUES. Big Rivers hereby represents and
warrants to the LG&E Parties that the landfill located at the Green
Station has a remaining useful life and capacity, based upon coal
qualities that are consistent with Big Rivers' prior practices, of at
least nine (9) years, without modification of any of the existing
Permits relative to that landfill, without the need for capital
improvements or the disruption or removal of materials located in that
landfill, and based upon both vertical and horizontal measurement
limitations, but assuming the continuation of Big Rivers' past
operation and disposal practices by WKEC or Leaseco, as applicable,
following the Effective Date. Big Rivers agrees that prior to the
Closing (or as soon thereafter as is reasonably possible, using its
commercially reasonable efforts) Big Rivers will, at its expense and
consistent with Prudent Utility Practice, construct a new retainment
road/wall at the Green Station landfill as contemplated by the pending
Permit modification filed with the KNREPC and in compliance with all
applicable Laws and Permits. Big Rivers further agrees, at its expense
and at the earliest practicable time, to obtain all changes in existing
Permits required for the full and lawful use and operation of the Green
landfill (as expanded) and the Wilson landfill by the LG&E Parties
following the Closing. In the event changes in existing Permits that
would allow Big Rivers to forego such removal action in compliance with
applicable Laws cannot be obtained despite Big Rivers' commercially
reasonable efforts to do so, Big Rivers
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agrees, at its expense and consistent with Prudent Utility Practice,
to ensure that any landfill materials that have been placed or
disposed of outside the permitted boundaries of the Green landfill
and the Wilson landfill are removed along with any affected soil or
debris, and disposed of in compliance with applicable Laws at the
earliest possible time. Big Rivers also agrees to be solely
responsible for, and to indemnify and hold harmless the LG&E Parties
from and against, all claims, demands, losses, damages, liabilities,
costs, expenses, obligations and deficiencies (including without
limitation, costs of corrective or remedial actions, fines, civil or
criminal penalties, settlements and attorney's fees) that have been
or may be suffered or incurred resulting from or arising out of any
failure of the Green landfill and/or the Wilson landfill to comply
with applicable Permits and/or conditions thereof at any time prior
to the Closing or completion of the construction work described
above, or the approval by the KNREPC of changes to the existing
Permits as described above, whichever is later, unless such failure
is caused by any action by any of the LG&E Parties or any of their
Affiliates, successors or assigns or their respective officers,
employees, consultants or agents.
23.4 COLEMAN ASH POND ISSUES. The LG&E Parties agree that, except as
otherwise required by applicable Laws, the LG&E Parties shall not
attempt to unilaterally close the "Southern Ash Pond" or the "Former
Ash Pond" at the Coleman facility without the prior written consent of
Big Rivers. Big Rivers agrees that it shall be solely responsible, at
its expense and as and when required by applicable Laws, for promptly
taking all actions, and duly filing all instruments and documents with
federal, state and local governmental agencies, as shall be required to
officially close the "Southern Ash Pond" and the "Former Ash Pond" at
the Coleman facility (as identified on the Coleman facility site map
prepared in connection with the Baseline Environmental Audit Report) in
accordance with all applicable Laws, Permits and Prudent Utility
Practice. Notwithstanding the foregoing, in the event the LG&E Parties
elect, in their discretion, to dispose of materials in the Southern Ash
Pond or the Former Ash Pond, WKEC or Leaseco, as applicable, shall be
responsible for a pro rata portion of those closure costs based on the
total amount (in tons) of ash disposed of in those ash ponds by the
LG&E Parties as compared with the total amount of ash in the ponds at
their closure. In addition to the foregoing, Big Rivers agrees, at its
expense, to promptly commence and continue to dredge and excavate the
remaining active ash pond (the "Active Ash Pond") at the Coleman
facility in such a manner as shall be sufficient to cause the remaining
useful life and capacity of that ash pond (based on horizontal and
vertical measurements) as of one (1) month following the Closing to be
at least
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EXECUTION ORIGINAL
thirteen (13) months under its existing Permits, assuming a
continuation of the current capacity factor of the Coleman facility,
and assuming no additional dredging or excavation of that ash pond
during that 13-month period. All materials so dredged from the Coleman
ash pond shall be disposed of by Big Rivers, at its expense, at a
permitted landfill or other permitted site located outside the
boundaries of any of the Generating Plants or related facilities other
than the Coleman Station, and otherwise in compliance with all
applicable Laws. Big Rivers also agrees to be solely responsible for,
and to indemnify and hold harmless the LG&E Parties from and against,
all claims, demands, losses, damages, liabilities, costs, expenses,
obligations, and deficiencies (including without limitation, costs of
corrective or remedial actions, fines, civil or criminal penalties,
settlements and attorney's fees) that have been or may be suffered or
incurred resulting from or arising out of (a) any failure of the Active
Ash Pond to comply with all applicable Permits at any time prior to the
Closing or the completion of the dredging and excavation work described
above, whichever is later, (b) any use or disturbance of the "Southern
Ash Pond" or the "Former Ash Pond" by Big Rivers at any time prior to
the Closing, or any failure of those ash ponds to comply with all
applicable Permits at any time prior to the closure of the same as
contemplated above (except to the extent that such non-compliance is
caused by the use of or the failure to permit (assuming they are
otherwise permittable) those ash ponds by the LG&E Parties following
the Closing), and (c) any delay in the closure of the "Southern Ash
Pond" or the "Former Ash Pond" at the Coleman facility (except to the
extent that such delay is caused by the LG&E Parties or any of their
Affiliates, successors or assigns or their respective officers,
employees, consultants or agents).
23.5 COLEMAN OPACITY ISSUE. Big Rivers hereby represents and warrants
to the LG&E Parties that Big Rivers has taken all such actions, and has
made all such repairs (at its expense and consistent with Prudent
Utility Practice), in respect of the Coleman facility as were necessary
to eliminate the opacity issues or problems identified in the letter
from Big Rivers to the KNREPC dated February 11, 1998, relating to
opacity exceedances at that facility.
23.6 YEAR 2000 COMPLIANCE ISSUE. Big Rivers hereby agrees to take all
such actions, at its expense and consistent with Prudent Utility
Practice, as shall be necessary in order to avoid any loss of
transmission or other services in violation of its obligations under
the Transmission Agreement or Big Rivers' Open Access Transmission
Tariff by any of the LG&E Parties, the Members, the Smelters or Big
Rivers over or in respect of
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EXECUTION ORIGINAL
Big Rivers' transmission system and related facilities by reason of
the passage of time from the year 1999 to the year 2000 (otherwise
known as the "millennium problem" or the "Year 2000 problem").
23.7 M&S INVENTORY. Consistent with Section 9.1 of the New
Participation Agreement, Big Rivers and Leaseco agree that, assuming
the Parties agree upon the procedures to be set forth on Schedule 9.1
to this Agreement as of the Closing (which agreement is a condition to
the Closing), the fair market value to be paid by Leaseco at the
Closing for all materials and supplies Inventory of Big Rivers shall be
$[REDACTED].
23.8 MAJOR CAPITAL REPAIRS. As an additional condition to the Parties'
obligations to consummate the transactions contemplated at the Closing,
the Parties shall have agreed upon a definition of "Major Capital
Repairs" which generally shall include expenditures for Capital Assets
which (i) are necessary to repair any turbine, scrubber or boiler at
any of the Generating Plants, (ii) are not covered by insurance or any
warranty, (iii) are not the result of the negligence or willful
misconduct of any of the LG&E Parties or any of their Affiliates,
successors or assigns or their respective officers, employees,
consultants or agents or any breach or default by any of the LG&E
Parties or their Affiliates under any of the Operative Documents and
(iv) exceed a threshold amount to be agreed upon by the Parties.
23.9 MISCELLANEOUS. Notwithstanding the provisions of Section 5.1.27 of
this Agreement, the Parties acknowledge that the representations and
warranties of Big Rivers set forth in Sections 23.2 through 23.9,
inclusive, shall supplement the representations and warranties set
forth in Article 5, and shall be in addition to and not in lieu of
those representations and warranties.
- - Section 24.3 (p.71). In the phrase "Big Rivers nor its successor or
assigns," the word successor is hereby made plural.
- - Section 24.5 (p.72). The reference to "Mortgagees" is hereby changed to
lower case.
2. COST SHARING AGREEMENT. The Parties hereby agree to amend Exhibit A to the
New Participation Agreement (Cost Sharing Agreement) as follows:
- - Article 1 (p.1). The phrase "on Exhibit X" is hereby changed to "in
Exhibit X."
- - Section 6.7 (p.4). The phrase "ACTION. Without Meeting" is hereby
changed to "ACTION WITHOUT MEETING."
- - Section 6.10 (p.4). The reference to "parties" is hereby capitalized.
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- - Section 7.1 (p.5). The reference to "Section 5.1" is hereby changed to
"Article 5."
- - Section 7.3 (p.5). The phrase "On the first day of each month during
the Term Leaseco and Big Rivers shall each deposit sufficient funds into
the Capital Account based on their Capital Asset Sharing Ratios (defined
in Section 7.4 below) (i)" is hereby changed to "On the first day of
each month during the Term, Leaseco and Big Rivers shall each deposit
sufficient funds into the Capital Account based on their Capital Asset
Sharing Ratios (defined in Section 7.4 below), but limited in the case
of Big Rivers to the remaining Big Rivers Contribution (as defined in
Section 20.6 of the Participation Agreement) for that Year with respect
to Non-Incremental Capital Costs that are not for Major Capital Repairs
(i)".
- - Section 7.4(1) (p.6). The reference to "Incremental Capital Asset" is
hereby changed to "Capital Asset" and the phrase "Leaseco's share of each
Incremental Capital Cost, determined as of the date payment for such
Capital Asset is required," is hereby changed to "Leaseco's share of each
Incremental Capital Cost, determined as of the date payment for such
Capital Asset is required to be made to the Capital Account pursuant to the
forecast prepared by Leaseco pursuant to Section 7.2,".
- - Section 7.4(2) (p.7). The reference to "Non-Incremental Capital Asset" is
hereby changed to "Capital Asset" and the phrase "Leaseco's share of each
Non-Incremental Capital Cost" is hereby changed to "Leaseco's share of each
Non-Incremental Capital Cost, determined as of the date payment for such
Capital Asset is required to be made to the Capital Account pursuant to the
forecast prepared by Leaseco pursuant to Section 7.2,".
- - Section 14.1 (p.13). The reference to "Notices" is hereby changed to
"notices (Section 21.1)."
- - Section 14.4 (p.13). The phrase "but without giving effect to the conflict
of law rules of such jurisdiction" is hereby added to the end of the
sentence.
- - Section 14.14.2 (p.15). In the phrase "Leaseco nor its successor or
assigns," the word successor is hereby made plural.
- - Section 14.14.3 (p.16). The reference to "Mortgagees" is hereby made lower
case.
3. FACILITIES OPERATING AGREEMENT. The Parties hereby agree to amend Exhibit B
to the New Participation Agreement (Facilities Operating Agreement) as follows:
- - Section 5.4(a) (p.3). The reference to "Big Rivers' transmission
system" is hereby changed to "Big Rivers' Transmission System."
- - Section 5.6 (p.4). The phrase "the books and records that WKEC is required
to keep pursuant to this Agreement" is hereby changed to "the books and
records that WKEC is required to keep, or cause to be kept, pursuant to
this Agreement."
- - Section 5.7 (p.4). The phrase "shall administer all Big Rivers' fuel supply
agreements, procure and pay for all fuel" is hereby changed to "shall
administer, or cause to be administered, all Big Rivers' fuel supply
agreements, procure, or cause to be procured, and pay for all fuel."
- - Section 5.11 (p.5). The phrase "WKEC shall keep up-to-date books and
records" is hereby changed to "WKEC shall keep, or cause to be kept,
up-to-date books and records."
- - Section 6.5. Section 6.5 is hereby deleted and replaced in its entirety as
follows:
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6.5 BUDGET DEVIATIONS. WKEC shall immediately notify the Operating
Committee of any anticipated departure of [REDACTED]% or more from an
approved Annual Capital Budget or Annual O&M Budget. WKEC shall use
reasonable efforts to (a) operate within [REDACTED] percent to
110 percent of the total approved Annual Capital Budget and
(b) spend at least [REDACTED] percent of the total approved Annual
O&M Budget (not including the fuel or reagent budget). Subject to
the provisions set forth below, any increase of [REDACTED]%
or more proposed by WKEC to either budget shall be subject to review
and approval by the Operating Committee (or in the case of the Annual
Capital Budget, the Oversight Committee); provided, that such review
and approval shall not apply to the Annual O&M Budgets that are
included in the Initial Period Budgets, it being understood that
increases of [REDACTED]% or more proposed by WKEC to those budgets
shall be permissible without that review and approval if the relevant
expenditures are consistent with Prudent Utility Practice, in which
case the additional costs will be borne by WKEC unless they constitute
Incremental Environmental O&M required to be borne solely by Leaseco
and Big Rivers in the manner provided for in Section 5 of the Cost
Sharing Agreement. If WKEC exceeds the total budget for Non-Incremental
Capital Costs (exclusive of such costs as are for Major Capital
Repairs) that are included in an approved Annual Capital Budget, the
additional cost of those Non-Incremental Capital Costs shall be borne
by Leaseco unless the Parties otherwise agree, or unless remaining
portions of the Big Rivers Contribution for that Year that were not
included in the approved Annual Capital Budget are available as
contemplated in Section 20.6.2 of the Participation Agreement (in which
event such amounts will be applied as contemplated in that Section).
Subject to the next succeeding sentence, if WKEC exceeds [REDACTED]
percent of the total budget for Incremental Capital Costs, or for Non-
Incremental Capital Costs for Major Capital Repairs, in either case
that are included in an approved Annual Capital Budget, the additional
costs of those Capital Assets shall be borne by Leaseco unless the
Parties otherwise agree, or unless the dispute resolution procedure
under Article 15 of the Participation Agreement determines that at the
time WKEC proposed the applicable portions of the Annual Capital
Budget (or modification thereof) relating to those expenditures WKEC
acted consistent with Prudent Utility Practice, in which case the
additional costs shall be borne by Leaseco and Big Rivers in accordance
with Sections 7.3 and 7.4 of the Cost Sharing Agreement.
Notwithstanding the provisions of the immediately preceding sentence,
if WKEC exceeds [REDACTED] percent of the total of any budget for
Incremental Capital Costs, or for Non-Incremental Capital Costs for
Major Capital Repairs, that are included in
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an approved Annual Capital Budget that is a part of the Initial
Period Budgets, the additional cost of those Capital Assets shall be
borne by Leaseco unless the Parties otherwise agree, or unless the
dispute resolution procedure under Article 15 of the Participation
Agreement determines that the purchase and installation of those
Capital Assets, and the costs thereof, are consistent with Prudent
Utility Practice, regardless of whether the relevant Initial Period
Budget, or WKEC's or Leaseco's (as applicable) actions in connection
with the same, were consistent with Prudent Utility Practice at the
time that budget was prepared, in which case the additional costs
shall be borne by Leaseco and Big Rivers in accordance with Sections
7.3 and 7.4 of the Cost Sharing Agreement. If WKEC fails or refuses
to use reasonable efforts to spend at least [REDACTED] percent of the
total approved Annual Capital Budget or the total approved Annual O&M
Budget (excluding that portion relating to Incremental Environmental
O&M) and pursuant to the dispute resolution procedure under Article
15 of the Participation Agreement it is determined that such failure
or refusal is inconsistent with Prudent Utility Practice, WKEC shall
make the omitted expenditure as required pursuant to the applicable
dispute resolution procedure.
- - Section 6.6 (p.8). The last sentence of Section 6.6 is hereby deleted and
replaced with the following sentence:
Additional capital expenditures incurred by WKEC in response to an
Operating Emergency which are not already included in an approved
Annual Capital Budget shall be paid for by Leaseco unless (a) the same
represents an Incremental Capital Cost or expenditures for a Major
Capital Repair, in which case such expenditures shall be paid by
Leaseco and Big Rivers in accordance with Article 7 of the Cost Sharing
Agreement, or (b) Big Rivers shall not have paid the entire Big Rivers
Contribution for that Year toward funding of one or more
Non-Incremental Capital Costs (other than costs for Major Capital
Repairs) and/or Henderson Non-Incremental Capital Costs (other than
costs for Henderson Major Capital Costs) in accordance with Article 7
of the Cost Sharing Agreement, Article 8 of the Lease and/or Section
8.17 or 9.10 of the Station Two Agreement (as applicable), then that
remaining amount will be allocated to any Non-Incremental Capital Costs
in that Year resulting from that Operating Emergency as contemplated in
Section 20.6.2 of the Participation Agreement.
- - Section 15.2 (pp.15-16). The phrase "WKEC shall deliver to Big Rivers" is
hereby changed to "WKEC shall deliver, or cause to be delivered, to Big
Rivers" and the phrase "developed by WKEC" is hereby changed to "developed,
or caused to be developed, by WKEC."
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- - Section 17.9 (p.16). The first reference to "parties"" is hereby changed to
"Parties'", and the second reference to "parties" is hereby capitalized.
- - Section 17.13(a) (p.17). In the phrase "Big Rivers nor its successor or
assigns," the word successor is hereby made plural.
- - Section 17.13(b) (p.18). In the phrase "WKEC nor its successor or assigns,"
the word successor is hereby made plural.
- - Section 17.13(c) (p.19). The reference to "Mortgagees" is hereby made lower
case.
4. LEASE AND OPERATING AGREEMENT. The Parties hereby agree to amend Exhibit C to
the New Participation Agreement (Lease and Operating Agreement) as follows:
- - Article 1 (p.1). The phrase "on Exhibit X" is hereby changed to "in
Exhibit X."
- - Section 2.3.2(c). The reference to "LEM" is hereby changed to
"Leaseco."
- - Section 2.3.2(f)(iii) (p.5). The reference to "Federal Energy
Regulatory Commission" is hereby changed to "FERC."
- - Section 5.4.1 (p.8). The reference to "Big Rivers' transmission
system" is hereby changed to "Big Rivers' Transmission System."
- - Section 5.4.3 (p.9). The phrase "the books and records Leaseco is required
to keep pursuant to this Agreement" is hereby changed to "the books and
records Leaseco is required to keep, or cause to be kept, pursuant to this
Agreement."
- - Sections 7.5 and 7.6. Sections 7.5 and 7.6 are hereby amended to be and
read in their entirety as follows:
7.5 BUDGET DEVIATIONS. Leaseco shall immediately notify the
Operating Committee of any anticipated departure of [REDACTED]% or more
from an approved Annual Capital Budget or Annual O&M Budget. Leaseco
shall use reasonable efforts to (a) operate within [REDACTED] percent
to [REDACTED] percent of the total approved Annual Capital Budget and
(b) spend at least [REDACTED] percent of the total approved Annual
O&M Budget (not including the fuel and reagent budget). Subject to
the provisions set forth below, any increase of [REDACTED]% or more
proposed by Leaseco to either budget shall be subject to review and
approval by the Operating Committee; provided, that such review and
approval shall not apply to the Annual O&M Budgets that are included
in the Initial Period Budgets, it being understood that increases of
[REDACTED]% or more proposed by Leaseco to those budgets shall be
permissible without that review and approval if the relevant
expenditures are consistent with Prudent Utility Practice, in which
case the additional costs will be borne by Leaseco unless they
constitute Incremental Environmental O&M required to be borne solely by
Leaseco and Big Rivers in the manner provided for in Section 2.3.3. If
Leaseco exceeds the total budget for Non-Incremental Capital Costs
(exclusive of such costs as are for Major Capital Repairs) that are
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included in an approved Annual Capital Budget, the additional cost of
those Non-Incremental Capital Costs shall be borne by Leaseco unless
the Parties otherwise agree, or unless remaining portions of the Big
Rivers Contribution for that Year that were not included in the
approved Annual Capital Budget are available as contemplated in Section
20.6.2 of the Participation Agreement (in which event such amounts will
be applied as contemplated in that Section). Subject to the next
succeeding sentence, if Leaseco exceeds [REDACTED] percent of the total
budget for Incremental Capital Costs, or for Non-Incremental Capital
Costs for Major Capital Repairs, in either case that are included in an
approved Annual Capital Budget, the additional costs of those Capital
Assets shall be borne by Leaseco unless the Parties otherwise agree, or
unless the dispute resolution procedure under Article 15 of the
Participation Agreement determines that at the time Leaseco proposed
the applicable portions of the Annual Capital Budget (or modification
thereof) relating to those expenditures Leaseco acted consistent with
Prudent Utility Practice, in which case the additional costs shall be
borne by Leaseco and Big Rivers in accordance with Sections 8.3 and
8.4. Notwithstanding the provisions of the immediately preceding
sentence, if Leaseco exceeds [REDACTED] percent of the total of any
budget for Incremental Capital Costs, or for Non-Incremental Capital
Costs for Major Capital Repairs, that are included in an approved
Annual Capital Budget that is a part of the Initial Period Budgets,
the additional cost of those Capital Assets shall be borne by Leaseco
unless the Parties otherwise agree, or unless the dispute resolution
procedure under Article 15 of the Participation Agreement determines
that the purchase and installation of those Capital Assets, and the
costs thereof, are consistent with Prudent Utility Practice, regardless
of whether the relevant Initial Period Budget, or Leaseco's actions in
connection with the same, were consistent with Prudent Utility Practice
at the time that budget was prepared, in which case the additional
costs shall be borne by Leaseco and Big Rivers in accordance with
Sections 8.3 and 8.4. If Leaseco fails or refuses to use reasonable
efforts to spend at least [REDACTED] percent of the total approved
Annual Capital Budget or the total approved Annual O&M Budget
(excluding that portion relating to Incremental Environmental O&M) and
pursuant to the dispute resolution procedure under Article 15 of the
Participation Agreement it is determined that such failure or refusal
is inconsistent with Prudent Utility Practice, Leaseco shall make the
omitted expenditure as required pursuant to the applicable dispute
resolution procedure.
7.6 OPERATING EMERGENCY. Notwithstanding any other provision of
this Agreement, in the event of an Operating Emergency, Leaseco
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EXECUTION ORIGINAL
may take such action as in its sole discretion it may deem prudent
or necessary to terminate the Operating Emergency, to preserve and
maintain the safety, integrity and operability of the Tangible
Assets and to maintain Capacity and the availability of the Tangible
Assets to the maximum extent. Additional capital expenditures
incurred by Leaseco in response to an Operating Emergency which are
not already included in an approved Annual Capital Budget shall be
paid for by Leaseco unless (a) the same represents an Incremental
Capital Cost or expenditures for a Major Capital Repair, in which
case such expenditures shall be paid by Leaseco and Big Rivers in
accordance with Article 8 of this Agreement, or (b) Big Rivers shall
not have paid the entire Big Rivers Contribution for that year
toward funding of one or more Non-Incremental Capital Costs (other
than costs for Major Capital Repairs) and/or Henderson
Non-Incremental Capital Costs (other than costs for Henderson Major
Capital Costs) in accordance with Article 7 of the Cost Sharing
Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the
Station Two Agreement (as applicable), then that remaining amount
will be allocated to any Non-Incremental Capital Costs resulting
from that Operating Emergency as contemplated in Section 20.6.2 of
the Participation Agreement.
- - Section 8.3 (p.15). The phrase "On the first day of each month during
the Term Leaseco and Big Rivers shall each deposit sufficient funds into
the Capital Account based on their Capital Asset Sharing Ratios (defined
in Section 8.4 below) (i)" is hereby changed to "On the first day of
each month during the Term, Leaseco and Big Rivers shall each deposit
sufficient funds into the Capital Account based on their Capital Asset
Sharing Ratios (defined in Section 8.4 below), but limited in the case
of Big Rivers to the remaining Big Rivers Contribution (as defined in
Section 20.6 of the Participation Agreement) for that Year with respect
to Non-Incremental Capital Costs that are not for Major Capital Repairs
(i)".
- - Section 10.2.2 (p.19). The phrase "the fixed rental payments payable by
Leaseco under Section 2.3.2 and the Monthly Margin Payments payable by
Leaseco pursuant to Article 2 of this Agreement" is hereby changed to the
"fixed rental payments and the Monthly Margin Payments payable by Leaseco
pursuant to Section 2.3.2 of this Agreement."
- - Section 11.6 (p.22). The reference to the "Transmission Agreement" is
hereby changed to the "Transmission Service and Interconnection
Agreement."
- - Section 13.4 (p.22). The phrase "but without giving effect to the conflict
of law rules of such jurisdiction" is hereby added to the end of the
sentence.
- - Section 13.14.2 (p.24). In the phrase "Leaseco nor its successor or
assigns," the word successor is hereby made plural.
- - Section 13.14.3 (p.25). The reference to "Mortgagees" is hereby made lower
case.
- - Schedule 2.3 (in the form attached hereto) is hereby added to the Lease and
Operating Agreement.
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5. POWER PURCHASE AGREEMENT. The Parties hereby agree to amend Exhibit D to the
New Participation Agreement (Power Purchase Agreement) as follows:
- - Section 2.2(d) (p.5). The reference to "tangible assets" is hereby
capitalized.
- - Section 3.3(a)(iii) (p.8). The phrase "The first Monthly Margin Payment
shall be due on the second occurrence" is hereby changed to "The first
Monthly Margin Payment shall be due from LEM to Big Rivers on the second
occurrence."
- - Section 3.3(a)(viii)(3) (p.11). The phrase "Federal Energy Regulatory
Commission" is hereby changed to "FERC."
- - Section 4.2 (p.14). The phrase "(i) the Members may acquire Power from a
Person other than Big Rivers after the first January 1 that is three full
Years after the Effective Date to the extent necessary for the Members to
fulfill their obligations to provide market-priced Power to certain of
their non-Smelter industrial customers as contemplated in the Plan, and
(ii)" is hereby deleted.
- - Section 4.3(b)(iv). (p.15). The phrase "(determined by reference to
(iii), above)" is hereby deleted.
- - Section 4.3(d)(iv) (p.16). The phrase "(determined by reference to (iii),
above)" is hereby deleted.
- - Section 4.3(e)(p.16). The reference to "December 31, 1997" is hereby
changed to "December 31, 1998."
- - Section 4.4(a)(iii) (p.18). The phrases "market-priced" and "as
contemplated in the Plan or Big Rivers' Transaction Tariff" are hereby
deleted.
- - Section 5.4 (p.21). The references to "transmission system" are hereby
capitalized.
- - Sections 5.5(b)(iii), 5.6, 5.6 and 5.8 (pp.22-24). The references to
"Control Area" are hereby made lower case.
- - Section 5.7 (p.23). Section 5.7 is hereby modified by deleting the last
sentence of the Section and inserting at the end of the second to last (now
last) sentence the following:
;provided, that in the event that two or more Generating Plant units
are off-line and Big Rivers is experiencing low voltage problems, the
Operator of the Generating Plants will, without adjustment in the Power
Value Amount, operate the Generating Plant units down to the design
lagging power factor without a loss of megawatt output, but only to the
extent necessary to produce an amount of megavars equal to [REDACTED]
multiplied by the net output of the Generating Plants that would exist
if the units that are off-line at the time the calculation was made are
operating. At any time, any additional megavars requested by Big Rivers
in excess of [REDACTED] multiplied by the net output of the Generating
Plants, assuming no units are off-line, if available from the
Generating Plants without loss of megawatt output capabilities, shall
be provided to Big Rivers from LEM at LEM's rates for sale of reactive
power set forth in its tariff for the sale of ancillary services (as
filed with FERC and revised from time-to-time). LEM may also elect (but
is not obligated) to
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EXECUTION ORIGINAL
provide, in any hour at Big Rivers' request, megavars in such
quantities that their production adversely impacts the Generating
Plants' capability to produce megawatts at the rated lagging power
factor, but shall do so only at the rate set forth in LEM's tariff
for the sale of ancillary services (as filed with FERC and revised
from time-to-time) or such other rates as FERC may accept for filing.
- - Section 6.2(g) (p.25). The reference to "transmission system" is hereby
capitalized.
- - Section 6.4(a) (p.28). In the reference to "Base Power Rates," "Rates" is
hereby made lower case.
- - Section 6.6(b) (p.30). The references to "Excess Credit" are hereby made
lower case.
- - Section 9.1(a) (p.32). A close parenthesis is hereby added after
"Section 15.2."
- - Section 13 (p.36) is hereby deleted and left as a "Reserved" section.
- - Section 17.3 (p.40). The reference to "Mortgagees" is hereby made
lower case.
- - Section 18.1 (p.40). The reference to "Notices" is hereby changed to
"notices (Section 21.1)."
- - Section 18.4 (p.41). The phrase "but without giving effect to the conflict
of law rules of such jurisdiction" is hereby added to the end of the
sentence.
- - Signature Block (p.42). The reference to "LG&E Power Marketing Inc."
is hereby changed to "LG&E Energy Marketing Inc."
- - Schedule 3.3(a) (in the form attached hereto) is hereby added to the Power
Purchase Agreement.
- - Exhibit C. The reference to "26 rural delivery points" under Green River
Electric is hereby changed to "27 rural delivery points."
- - Exhibit C. An additional delivery point for Green River Electric is
hereby added as follows: "ACMI 13,800 volts."
- - Exhibit C. The reference to "Costain East Portal" under Henderson
Union Electric is hereby changed to "Lodestar Energy."
- - Exhibit C. The reference to "Green Coal" under Henderson Union
Electric is hereby changed to "C.R. Mining."
- - Exhibit C. The reference to "Peabody Breck" under Henderson Union
Electric is hereby changed to "Peabody Breckenridge."
- - Exhibit C. The reference to "Providence Mine" under Henderson Union
Electric is hereby changed to "Victory Processing."
- - Exhibit C. The reference to "Sextet Dorea Mine 69,000 volts" under
Henderson Union Electric is hereby deleted.
- - Exhibit C. An additional delivery point for Henderson Union Electric
is hereby added as follows: "Dotiki #3 12,470 volts."
6. TRANSMISSION SERVICE AND INTERCONNECTION AGREEMENT. The Parties hereby agree
to amend Exhibit E to the New Participation Agreement (Transmission Service and
Interconnection Agreement) as follows:
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EXECUTION ORIGINAL
- - Recital B (p.2). The reference to "ancillary services" is hereby
capitalized.
- - Before Section 2.5 (ECAR) (p.4), a new Section is hereby added which states
"`Default Rate' shall have the meaning set forth in Exhibit X to the
Participation Agreement."
- - Section 2.8 (p.4). The reference to "`Guaranty Agreement'" is hereby
changed to "`Guaranty.'"
- - Section 3.2(a)(iv) (p.9). The phrase "Chapter 11 Case" is hereby changed to
"Big Rivers' Chapter 11 case pending before the U.S. Bankruptcy Court for
the Western District of Kentucky, Case No.
96-41168."
- - Section 5.1 (p.15). A comma is hereby inserted after the phrase "Big Rivers
shall operate and maintain, or cause to be operated and maintained."
- - Section 5.2 (p.16). The reference to "Firm Transmission Services
Agreement" is hereby changed to "Service Agreement."
- - Section 6.2 (p.17). The references to "Short-Term Firm Transmission
Service" are hereby changed to "Short-Term Firm Point-to-Point Transmission
Service" and the references to "Non-Firm Transmission Service" are hereby
changed to "Non-Firm Point-to-Point Transmission Service."
- - Section 6.3 (p.18). The reference to "Firm Transmission Service" is hereby
changed to "Firm Point-to-Point Transmission Service," the references to
"Long-Term Firm Transmission Service" are hereby changed to "Long-Term Firm
Point-to-Point Transmission Service" and the reference to "completed
Transmission Services Agreement" is hereby changed to "a completed Service
Agreement."
- - Section 6.5.1 (p.20). The reference to "RUS" is hereby changed to
"Administrator of the Rural Utilities Service, U.S. Department of
Agriculture or any successor agency or administration."
- - Section 6.5.2 (pp.21-25). The reference to "Open Access Transmission
Tariff" is hereby changed to "Tariff," the references to "Lease" are hereby
changed to "Lease and Operating Agreement" and the reference to
"Transmission Service Agreement" is hereby changed to "Service Agreement."
- - Section 6.5.3 (p.25). The reference to "FPA" is hereby changed to
"Federal Power Act."
- - Section 7.1 (p.26). The reference to "Transmission Provider" is hereby
changed to "Transmission Provider (as defined in FERC's Order No. 888)" and
the reference "WKEC and Station Two Subsidiary" is hereby changed to "LEM."
- - Section 8.1.1.1 (p.27). The reference to "Transmission system" is
hereby changed to "Transmission System."
- - Section 8.1.1.9 (p.28). The reference to "Transmission Facilities" is
hereby made lower case.
- - Section 8.1.2.8 (p.30). The reference to "control area" is hereby
capitalized.
- - Section 9.1 (p.33). The reference to "Firm Transmission Service" is
hereby changed to "Firm Point-to-Point Transmission Service."
- - Section 9.3 (pp.34-35). The references to "Lease Agreement" and "Lease" are
hereby changed to "Lease and Operating Agreement," the reference to "Green
River Electric Corporation" is hereby changed to "Green River Electric,"
and the reference to
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EXECUTION ORIGINAL
"Henderson Union Electric Cooperative Corporation" is hereby changed to
"Henderson Union."
- - Section 9.4 (p.35). The reference to "Kentucky Utilities" is hereby changed
to "Kentucky Utilities Company" and the reference to "tariff" is hereby
capitalized.
- - Section 9.6 (p.36). The reference to "Transmission Providers" is
hereby changed to "Transmission Providers (as defined in FERC's Order
No. 888)."
- - Section 10 (p.37). The references to "Non-Firm Transmission Credit"
are hereby changed to "Non-Firm Transmission Use Credit."
- - Section 11.1 (p.39). The reference to "Power Contract" is hereby changed to
"Power Purchase Agreement" and, in the reference to "Control Area
Operator," "Operator" is hereby made lower case.
- - Section 16.3 (pp.49-51). The references to "power" and "energy" are hereby
capitalized, the references to "Lease" are hereby changed to "Lease and
Operating Agreement," and the references to "transmission service" and
"transmission system" are hereby capitalized.
- - Section 18.4 (p.54). The reference to "Firm Transmission Services
Agreements" is hereby changed to "Service Agreements for Firm
Point-to-Point Transmission Service."
- - Exhibit 5. The reference to "26 rural delivery points" under Green River
Electric is hereby changed to "27 rural electric points."
- - Exhibit 5. The reference to "Southwire #1 13,800 volts" under Green River
Electric is hereby deleted.
- - Exhibit 5. The reference to "Southwire #2 13,800 volts" under Green River
Electric is hereby deleted.
- - Exhibit 5. An additional delivery point for Green River Electric is
hereby added as follows: "ACMI 13,800 volts."
- - Exhibit 5. The reference to "Costain East Portal" under Henderson
Union Electric is hereby changed to "Lodestar Energy."
- - Exhibit 5. The reference to "Green Coal" under Henderson Union
Electric is hereby changed to "C.R. Mining."
- - Exhibit 5. The reference to "Peabody Breck" under Henderson Union
Electric is hereby changed to "Peabody Breckenridge."
- - Exhibit 5. The reference to "Providence Mine" under Henderson Union
Electric is hereby changed to "Victory Processing."
- - Exhibit 5. The reference to "Sextet Dorea Mine 69,000 volts" under
Henderson Union Electric is hereby deleted.
- - Exhibit 5. An additional delivery point for Henderson Union Electric
is hereby added as follows: "Dotiki #3 12,470 volts."
7. TAX INDEMNIFICATION AGREEMENT. The Parties hereby agree to amend Exhibit F
to the New Participation Agreement (Tax Indemnification Agreement) as follows:
- - Recital A (p.1). The reference to "Participation Agreement" is hereby
changed to "New Participation Agreement."
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EXECUTION ORIGINAL
- - Recitals B and C (p.1). The references to "LPM" are hereby changed to
"LEM."
- - Section 2 (p.4). The reference to "December 31, 1997" is hereby changed to
"December 31, 1998," and the reference to "member" is hereby capitalized.
- - Section 6(c) (p.6). The reference to "Section 7" is hereby changed to
"Article 7."
- - Section 8(a) (p.7). The reference to "Section 7" is hereby changed to
"Article 7."
- - Section 9(b) (p.8). The reference to "Operative Agreements" is hereby
changed to "Operative Documents."
- - Section 11(b) (p.10). After the reference to "(July 7, 1985)," the phrase
"("ABA Opinion 352")" is hereby added.
- - Section 11(f) (p.11). The phrase "but without giving effect to the conflict
of law rules of such jurisdiction" is hereby added to the end of the
sentence.
8. MORTGAGE AND SECURITY AGREEMENT. The Parties hereby agree to amend Exhibit G
to the New Participation Agreement (Mortgage and Security Agreement) as follows:
- - The reference to "Participation Agreement" on the fourth line of page 2 is
hereby changed to "New Participation Agreement."
- - Section 6 (p.3). The following clause is added within the parenthetical at
the end of subpart (a) of Section 6, following the text contained in that
parenthetical: "and which are stipulated to be Permitted Liens"; and the
following parenthetical is hereby added at the end of subpart (b) of
Section 6: "(which is also stipulated to be a Permitted Lien)."
9. STATION TWO AGREEMENT. The Parties hereby agree to amend Exhibit M to the
New Participation Agreement (Station Two Agreement) as follows:
- - Section 3.5(d) (p.10). Section 3.5(d) is hereby deleted and replaced with
the following new section: "(d) A Certificate of an authorized officer of
Station Two Subsidiary certifying that, as of the effective date of the
Station Two Agreement, Station Two Subsidiary is an "affiliate" of a
utility subject to regulation by the KPSC in compliance with KRS
Section 96.520."
- - Section 8.7 (p.32). The phrase "keep up-to-date books and records" is
hereby changed to "keep, or cause to be kept, up-to-date books and
records." The phrase "retain those books and records" is hereby changed to
"retain, or cause to be retained, those books and records."
- - Section 8.14(c) (p.50). The phrase "administer, all of Big Rivers' fuel and
reagent supply agreements" is hereby changed to "administer, or cause to be
administered, all of Big Rivers' fuel and reagent supply agreements." The
phrase "procure and initially pay for all fuel and reagents" is hereby
changed to "procure, or cause to be procured, and initially pay for all
fuel and reagents."
- - Section 8.17(a) (p.56). The first sentence of Section 8.17(a) is hereby
amended to be and read in its entirety as follows:
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EXECUTION ORIGINAL
For purposes of this Agreement (including without limitation, Section 9
of this Agreement, entitled "Phase II Assignments") as between Big
Rivers and Station Two Subsidiary, "Station Two Improvements" shall
mean any betterments, renewals, replacements or additions to the
Station Two Assets used in the operation of Station Two and/or the Reid
Station (but only if not otherwise accounted for under the Cost Sharing
Agreement or the Lease, as applicable), (i) that are made pursuant to
the Operating Budget, or an approved modification thereof, or a
deviation therefrom as permitted by Section 8.17(f) or Section 9.10(d),
as applicable, or that result from an Operating Emergency as
contemplated in those Sections, or that are required to be made under
the Station Two Contracts in the absence of an approved Operating
Budget, and (ii) that should ordinarily be capitalized in accordance
with the RUS Uniform System of Accounts Bulletin 1767 B, as such
bulletin may be amended, modified, or replaced from time to time (but
subject to the Capitalization Guidelines).
- - The reference on the last line of Section 8.17(a) to "Article 17" is
hereby changed to "Article 7."
- - Section 8.17(d) (p.59). The phrase "On the first day of each month
during the Phase I Subcontract Term Station Two Subsidiary and Big
Rivers shall each deposit sufficient funds into the Station Two
Improvements Account based on their respective Station Two Improvement
Sharing Ratios (defined in Section 8.17(e) below) (i)" is hereby changed
to "On the first day of each month during the Phase I Subcontract Term
Station Two Subsidiary and Big Rivers shall each deposit sufficient
funds into the Station Two Improvements Account based on their
respective Station Two Improvement Sharing Ratios (defined in Section
8.17(e) below) but limited in the case of Big Rivers to the remaining
Big Rivers Contribution (as defined in Section 20.6 of the Participation
Agreement) for that Year with respect to Henderson Non-Incremental
Capital Costs that are not for Henderson Major Capital Repairs (as
defined in the Participation Agreement) (i)".
- - Section 8.17(f). Section 8.17(f) is hereby amended to be and read in its
entirety as follows:
(f) Station Two Subsidiary and Big Rivers agree with each other as
follows: Station Two Subsidiary shall immediately notify the Operating
Committee of any anticipated departure of [REDACTED]% or more from the
budget for Station Two Improvements or for operating and maintenance
expenses included in any approved Operating Budget. Station Two
Subsidiary shall use reasonable efforts to (a) operate within
[REDACTED] percent to [REDACTED] percent of the total approved budget
for Station Two Improvements included in an Operating Budget, and
(b) to spend at least [REDACTED] percent of the total approved budget
for operating and maintenance expenses included in an Operating Budget
(not including the fuel or
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EXECUTION ORIGINAL
reagent budget). Subject to the provisions set forth below, any
increase of [REDACTED] percent or more proposed by Station Two
Subsidiary to either the Station Two Improvements budget or the
operating and maintenance expense budget set forth in an approved
Operating Budget shall be subject to review and approval by the
Operating Committee; provided, that such review and approval shall
not apply to the operating and maintenance expense budgets that are
included in an Operating Budget that is a part of the Initial Period
Budgets, it being understood that increases of [REDACTED] percent or
more proposed by Station Two Subsidiary to those budgets shall be
permissible without that review and approval if the relevant
expenditures are consistent with Prudent Utility Practice, in which
case the additional costs that are allocable to Big Rivers under
the Station Two Contracts shall, as between Big Rivers and Station
Two Subsidiary, be borne by Station Two Subsidiary unless they
constitute Henderson Incremental Environmental O&M required to be
borne by both Station Two Subsidiary and Big Rivers in the manner
provided for in Section 8.16. If Station Two Subsidiary exceeds
the total budget for Henderson Non-Incremental Capital Costs
(exclusive of such costs as are for Henderson Major Capital Repairs)
that are included in an approved budget for Station Two Improvements
in an Operating Budget, the additional cost of those Henderson Non-
Incremental Capital Costs that are allocable to Big Rivers under
the Station Two Contracts shall, as between Big Rivers and Station
Two Subsidiary, be borne by Station Two Subsidiary unless the
parties agree otherwise, or unless remaining portions of the Big
Rivers Contribution for that Year that were not included in the
approved Operating Budget are available as contemplated in
Section 20.6.2 of the Participation Agreement (in which event such
amounts will be applied as contemplated in that Section). Subject
to the next succeeding sentence, if Station Two Subsidiary exceeds
[REDACTED] percent of the total approved budget for Henderson
Incremental Capital Costs, or for Henderson Non-Incremental Capital
Costs for Major Capital Repairs, in either case that are included
in an approved Operating Budget, the additional costs of those
Station Two Improvements that are allocable to Big Rivers under the
Station Two Contracts shall, as between Big Rivers and Station Two
Subsidiary, be borne by Station Two Subsidiary unless the Parties
otherwise agree, or unless the dispute resolution procedure under
Article 15 of the Participation Agreement (and contemplated in
Section 13.5(e) of this Agreement) determines that at the time
Station Two Subsidiary proposed the applicable portions of the
Operating Budget (or modification thereof) relating to those
expenditures Station Two Subsidiary acted consistent with Prudent
Utility Practice, in which case the additional costs shall be borne
by Station Two Subsidiary and Big Rivers in accordance with
Sections 8.17(d) and 8.17(e) of this Agreement. Notwithstanding
the provisions
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of the immediately preceding sentence, if Station Two Subsidiary
exceeds [REDACTED] percent of the total of any approved budget for
Henderson Incremental Capital Costs, or for Henderson
Non-Incremental Capital Costs for Major Capital Repairs, that are
included in an Operating Budget that is a part of the Initial Period
Budgets, the additional cost of those Station Two Improvements that
are allocable to Big Rivers under the Station Two Contracts shall,
as between Big Rivers and Station Two Subsidiary, be borne by
Station Two Subsidiary unless the Parties otherwise agree, or unless
the dispute resolution procedure set forth in Article 15 of the
Participation Agreement determines that the purchase and
installation of those Station Two Improvements, and the costs
thereof, are consistent with Prudent Utility Practice, regardless of
whether the relevant Initial Period Budget, or Station Two
Subsidiary's actions in connection with the same, were consistent
with Prudent Utility Practice at the time that the budget was
prepared, in which case the additional costs that are allocable to
Big Rivers under the Station Two Contracts shall, as between Big
Rivers and Station Two Subsidiary, be borne by Station Two
Subsidiary and Big Rivers in accordance with Sections 8.17(d) and
8.17(e) of this Agreement. If Station Two Subsidiary fails or
refuses to use reasonable efforts to spend at least [REDACTED] percent
of the total budget for Station Two Improvements or for operating and
maintenance expenses included in an approved Operating Budget
(excluding that portion relating to Henderson Incremental
Environment O&M), and pursuant to the dispute resolution procedure
under Article 15 of the Participation Agreement it is determined
that such failure or refusal was inconsistent with Prudent Utility
Practice, Station Two Subsidiary shall make the omitted expenditures
as required pursuant to the applicable dispute resolution procedure.
Notwithstanding anything contained in this Section 8.17(f) to the
contrary, Station Two Subsidiary shall in no event be required to
expend the monies included in an approved Operating Budget where to
do so would cause Station Two Subsidiary to be in breach or default
under any Station Two Contract. Additional capital expenditures
incurred by Station Two Subsidiary in response to an Operating
Emergency (as defined in the Participation Agreement) which are not
already included in an approved Operating Budget, and which are
allocated to Big Rivers under the Station Two Contracts shall, as
between Big Rivers and Station Two Subsidiary, be paid for by
Station Two Subsidiary unless (a) the same represents a Henderson
Incremental Capital Cost or expenditures for a Henderson Major
Capital Repair (as defined in the Participation Agreement), in which
case such expenditures shall be paid by Station Two Subsidiary and
Big Rivers in accordance with Sections 8.17(d) and 8.17(e), or (b)
there are remaining amounts in the Big Rivers Contribution for that
Year that were not included in the budget for
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Henderson Non-Incremental Capital Costs in the approved Operating
Budget, as contemplated in Section 20.6.2 of the Participation
Agreement, in which case that remaining amount will be allocated to
any Henderson Non-Incremental Capital Costs in that Year resulting
from that Operating Emergency as contemplated in Section 20.6.2.
- - Section 8.18 (p.62). The reference to "Section 6.3(a) of the Station Two
Operating Agreement is hereby changed to "Section 6.3(a) of the Station Two
Power Sales Agreement."
- - Section 9.3 (p.65). The reference to "LG&E" is hereby changed to
"Station Two Subsidiary."
- - Section 9.10(c) (p.86). In the third sentence, the phrase "On the
first day of each month during the Phase II Assignment Term Station Two
Subsidiary and Big Rivers shall each directly deposit sufficient funds
into the Station Two Improvements Account based on their respective
Station Two Improvement Sharing Ratios (defined in Section 8.17(e)), as
then applicable, (i)" is hereby changed to "On the first day of each
month during the Phase II Assignment Term Station Two Subsidiary and Big
Rivers shall each deposit sufficient funds into the Station Two
Improvements Account based on their respective Station Two Improvement
Sharing Ratios (defined in Section 8.17(e)), as then applicable, but
limited in the case of Big Rivers to the remaining Big Rivers
Contribution (as defined in Section 20.6 of the Participation Agreement)
for that Year with respect to Henderson Non-Incremental Capital Costs
that are not for Henderson Major Capital Repairs (as defined in the
Participation Agreement) (i)".
- - Section 9.10(d). Section 9.10(d) is hereby amended to be and read in its
entirety as follows:
(d) Station Two Subsidiary and Big Rivers agree with each other as
follows: Station Two Subsidiary shall immediately notify the Operating
Committee of any anticipated departure of [REDACTED]% or more from the
budget for Station Two Improvements or for operating and maintenance
expenses included in any approved Operating Budget. Station Two
Subsidiary shall use reasonable efforts to (a) operate within
[REDACTED] percent to [REDACTED] percent of the total approved budget
for Station Two Improvements included in an Operating Budget, and
(b) to spend at least [REDACTED] percent of the total approved budget
for operating and maintenance expenses included in an Operating Budget
(not including the fuel or reagent budget). Subject to the provisions
set forth below, any increase of [REDACTED] percent or more proposed
by Station Two Subsidiary to either the Station Two Improvements budget
or the operating and maintenance expense budget set forth in an
approved Operating Budget shall be subject to review and approval by
the Operating Committee; provided, that such review and approval shall
not apply to the operating and maintenance expense budgets that are
included in an Operating Budget that is a part of the Initial Period
Budgets, it being understood that
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increases of [REDACTED] percent or more proposed by Station Two
Subsidiary to those budgets shall be permissible without that review
and approval if the relevant expenditures are consistent with Prudent
Utility Practice, in which case the additional costs shall, as
between Big Rivers and Station Two Subsidiary, be borne by Station
Two Subsidiary unless they constitute Henderson Incremental
Environmental O&M required to be borne by both Station Two
Subsidiary and Big Rivers in the manner provided for in Section 9.9.
If Station Two Subsidiary exceeds the total budget for Henderson
Non-Incremental Capital Costs (exclusive of such costs as are for
Henderson Major Capital Repairs (as defined in the Participation
Agreement) that are included in an approved budget for Station Two
Improvements in an Operating Budget, the additional cost of those
Henderson Non-Incremental Capital Costs that are allocable to
Station Two Subsidiary under the Station Two Contracts shall, as
between Big Rivers and Station Two Subsidiary, be borne by Station
Two Subsidiary unless the parties agree otherwise, or unless
remaining portions of the Big Rivers Contribution for that Year that
were not included in the approved Operating Budget are available as
contemplated in Section 20.6.2 of the Participation Agreement (in
which event such amounts will be applied as contemplated in that
Section). Subject to the next succeeding sentence, if Station Two
Subsidiary exceeds [REDACTED] percent of the total approved budget for
Henderson Incremental Capital Costs, or for Henderson
Non-Incremental Capital Costs for Henderson Major Capital Repairs,
in either case that are included in an approved Operating Budget,
the additional costs of those Station Two Improvements that are
allocable to Station Two Subsidiary under the Station Two Contracts
shall, as between Big Rivers and Station Two Subsidiary, be borne by
Station Two Subsidiary unless the Parties otherwise agree, or unless
the dispute resolution procedure under Article 15 of the
Participation Agreement (and contemplated in Section 13.5(e) of this
Agreement) determines that at the time Station Two Subsidiary
proposed the applicable portions of the Operating Budget (or
modification thereof) relating to those expenditures Station Two
Subsidiary acted consistent with Prudent Utility Practice, in which
case the additional costs shall be borne by Station Two Subsidiary
and Big Rivers in accordance with Section 9.10(c) of this Agreement.
Notwithstanding the provisions of the immediately preceding
sentence, if Station Two Subsidiary exceeds 110 percent of the total
of any approved budget for Henderson Incremental Capital Costs, or
for Henderson Non-Incremental Capital Costs for Henderson Major
Capital Repairs, that are included in an Operating Budget that is a
part of the Initial Period Budgets, the additional cost of those
Station Two Improvements that are allocable to Big Rivers under the
Station Two Contracts shall, as between Big Rivers and Station Two
Subsidiary, be borne by Station
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Two Subsidiary unless the Parties otherwise agree, or unless the
dispute resolution procedure set forth in Article 15 of the
Participation Agreement determines that the purchase and
installation of those Station Two Improvements, and the costs
thereof, are consistent with Prudent Utility Practice, regardless of
whether the relevant Initial Period Budget, or Station Two
Subsidiary's actions in connection with the same, were consistent
with Prudent Utility Practice at the time that the budget was
prepared, in which case the additional costs that are allocable to
Station Two Subsidiary under the Station Two Contracts shall, as
between Big Rivers and Station Two Subsidiary, be borne by Station
Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of
this Agreement. If Station Two Subsidiary fails or refuses to use
reasonable efforts to spend at least [REDACTED] percent of the total
budget for Station Two Improvements or for operating and maintenance
expenses included in an approved Operating Budget (excluding that
portion relating to Henderson Incremental Environmental O&M), and
pursuant to the dispute resolution procedure under Article 15 of the
Participation Agreement it is determined that such failure or
refusal was inconsistent with Prudent Utility Practice, Station Two
Subsidiary shall make the omitted expenditures as required pursuant
to the applicable dispute resolution procedure. Notwithstanding
anything contained in this Section 9.10(d) to the contrary, Station
Two Subsidiary shall in no event be required to expend the monies
included in an approved Operating Budget where to do so would cause
Station Two Subsidiary to be in breach or default under any Station
Two Contract. Additional capital expenditures incurred by Station
Two Subsidiary in response to an Operating Emergency (as defined in
the Participation Agreement) which are not already included in an
approved Operating Budget, and which are allocated to Station Two
Subsidiary under the Station Two Contracts shall, as between Big
Rivers and Station Two Subsidiary, be paid for by Station Two
Subsidiary unless (a) the same represents a Henderson Incremental
Capital Cost or expenditures for a Henderson Major Capital Repair,
in which case such expenditures shall be paid by Station Two
Subsidiary and Big Rivers in accordance with Section 9.10(c), or (b)
there are remaining amounts in the Big Rivers Contribution for that
Year that were not included in the budget for Henderson
Non-Incremental Capital Costs in the approved Operating Budget, as
contemplated in Section 20.6.2 of the Participation Agreement, in
which case that remaining amount will be allocated to any Henderson
Non-Incremental Capital Costs in that Year resulting from that
Operating Emergency as contemplated in Section 20.6.2.
- - Section 10.9 (p.120). The first reference to "Station Two Subsidiary"
is hereby changed to "Station Two Subsidiary or its Affiliates."
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- - Section 10.19(c)(3) (p.141). The first reference to "Station Two Subsidiary"
is hereby changed to "Station Two Subsidiary and its agents, authorized
representatives or employees."
- - Section 11.1(a) (p.157). In the phrase "Pre-closing Development Agreements,"
"closing" is hereby capitalized.
- - Section 16.2 (p.229). The reference to "uncontrollable force" is hereby
capitalized.
- - Section 17 (p.229). The reference to "section 17" is hereby capitalized.
10. ADDITIONAL DEFINITIONS TO STATION TWO AGREEMENT. The Parties agree to amend
Exhibit B to the Station Two Agreement (Additional Definitions to Station Two
Agreement) as follows:
- - Section 7 (Bankruptcy Code) is hereby moved to precede Section 6 (Bankruptcy
Court) and those sections are hereby renumbered accordingly.
- - Section 6 (p.2). The reference to "Western District of Kentucky" is
hereby changed to "Western District of Kentucky, Owensboro Division."
- - Section 27 (Facilities) is hereby moved to precede Section 26 (Facilities
Operating Agreement) and those sections are hereby renumbered accordingly.
- - Section 32 (p.5). The reference to "Amended and Restated Guarantee
Agreement" is hereby changed to "New Guarantee Agreement."
- - Section 33 (p.5). Section 33 is hereby amended to be and read in its entirety
as follows: "'GUARANTY' shall mean the Guarantee Agreement (Station Two
Obligations) executed by LEC on the Execution Date for the benefit of
Henderson, pursuant to which LEC guarantees the obligations of the LG&E
Companies pursuant to the Station Two Agreement, as well as their obligations
pursuant to the Systems Reserves Agreement and the G&A Allocation Agreement
to be entered into in connection therewith."
- - Section 53 (p.7). The phrase "of this Agreement" is hereby deleted.
- - Section 54 (p.7). The phrase "of this Agreement" is hereby deleted.
- - Section 56 (p.7). The reference to "Kentucky Public Service
Commission" is hereby changed to "KPSC."
- - Section 59 (p.8). The phrase "of this Agreement" is hereby deleted.
- - Section 60 (p.8). The phrase "of this Agreement" is hereby deleted.
- - Section 63 (p.8). The reference therein to "subordination,
Non-Disturbance, Attornment and Inter-Creditor Agreement" is hereby
changed to "Subordination, Non-Disturbance, Attornment and Inter-Creditor
Agreements."
- - Section 65 (p.8). The reference to "Section 8.16" is hereby changed to
"Section 8.15."
- - Section 74 (p.9). The phrase "PERMITTED LIEN" shall mean the liens
granted by Big Rivers in favor of the RUS and the LC Issuer securing all
indebtedness outstanding on the Effective Date to the RUS and the LC
Issuer, provided that RUS has executed a Non-Disturbance Agreement with
the LG&E Parties and WKEC, and including any lien of the RUS shared by an
LC Issuer, provided the LC Issuer has also executed a Non-Disturbance
Agreement with the LG&E Parties and KEC, and any of the following
additional liens:" is hereby changed to "PERMITTED LIEN" shall mean the
liens granted by Big Rivers in favor of the
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RUS, the LC Issuer and the [Bank] provided that the RUS, the LC Issuer
and/or the [Bank], in each case, has executed a Non-Disturbance
Agreement with the LG&E Parties, and any of the following additional
liens:"
- - Section 94 (Tax or Taxes) is hereby moved to precede Section 93 (Tax
Indemnification Agreement) and those sections are hereby renumbered
accordingly.
- - Section 96 (p.13) Each reference to "Transmission Services and
Interconnection Agreement" is hereby changed to "Transmission Service and
Interconnection Agreement."
- - Section 100 (p.13). The phrase "of this Agreement" is hereby deleted.
11. G&A ALLOCATION AGREEMENT. The Parties hereby agree to amend Exhibit C to
the Station Two Agreement (G&A Allocation Agreement) as follows:
- - Section 4.3(d) (p.6). The reference to "each administrative building
occupied by personnel of Station Two Subsidiary (or its successor in
interest) in a Station Two Subsidiary Support Position" is hereby
changed to "each administrative building located in Henderson County,
Kentucky occupied by personnel of Station Two Subsidiary or its
Affiliates (or their successors in interest) in a Station Two Subsidiary
Support Position."
- - Section 5.2(a) (p.7). The reference to "Section 4.2" is hereby changed
to "Section 4.1."
12. OPERATING RESERVES AGREEMENT. The Parties hereby agree to amend the
"A greement with Respect to Operating Reserves and Amendment No. 1 to Systems
Re serves Agreement" as follows:
- - Section J(a) (p.3). The amount "$[REDACTED] per KW" is hereby changed
to "$[REDACTED] per KW."
- - Section J(b) (p.4). The amount "$[REDACTED] per KW" is hereby changed
to "$[REDACTED] per KW."
13. SETTLEMENT MORTGAGE. The Parties hereby agree to amend Exhibit N to the New
Participation Agreement (Settlement Mortgage) as follows:
- - The reference to "Participation Agreement" in the second sentence of the
second full paragraph on page 1 is hereby changed to "New Participation
Agreement."
14. EXHIBIT X. The Parties hereby agree to amend Exhibit X to the New
Participation Agreement (Definitions) as follows:
- - New Section (p. 1). A new section is hereby added between Section 4
(Alcan) and Section 5 (Ancillary Services) which reads: "AMENDED AND
RESTATED GUARANTEE AGREEMENT. `AMENDED AND RESTATED GUARANTEE AGREEMENT'
shall mean the Guaranty dated March 18, 1998, and made by LEC in favor of
Big Rivers."
- - Section 5 (p.1). The reference to "Open Access Transmission Service
Tariff" is hereby changed to "Open Access Transmission Tariff."
- - New Section (p.7). A new Section is hereby added between Section 59
(Hazardous Substances) and Section 60 (Henderson Union) which reads:
"HENDERSON MAJOR CAPITAL
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EXECUTION ORIGINAL
REPAIRS. `HENDERSON MAJOR CAPITAL REPAIRS' shall mean Major Capital Repairs
conducted at or with respect to Station Two."
- - New Section (p.10). A new Section is hereby added between Section 93 (Major
Capital Improvement) and Section 94 (Management Fee) which reads: "MAJOR
CAPITAL REPAIRS. `MAJOR CAPITAL REPAIRS' shall be as defined by the Parties
and set forth in a written document prior to the Closing.
- - Section 11 (Assets) is hereby moved to precede Section 10 (Assets Insurance)
and those sections are hereby renumbered accordingly.
- - Section 14 (Bankruptcy Code) is hereby moved to precede Section 13
(Bankruptcy Court) and those sections are hereby renumbered accordingly.
- - Section 13 (p.2). The reference to "Western District of Kentucky" is
hereby changed to "Western District of Kentucky, Owensboro Division."
- - Section 23 (p.3) The phrase "prior to April 7, 1998" is hereby changed to "on
or prior to May 29, 1998."
- - Section 26 (p.3). Section 26 is amended to include after the reference to
"Annual Capital Budget" therein the following: ", an approved modification
thereof, or a deviation therefrom as permitted by Section 6.5 of the
Facilities Operating Agreement, Section 7.5 of the Lease, or Section 8.17(f)
or 9.10(d) of the Station Two Agreement (as applicable), or that result from
an Operating Emergency as contemplated in Section 6.6 of the Facilities
Operating Agreement and Section 7.6 of the Lease."
- - Section 27 (p.3). In the reference to "Capitalization guidelines,"
"capitalization" is hereby made lower case.
- - Section 58 (p.6). The phrase "Amended and Restated Guarantee
Agreement" is hereby changed to "New Guarantee Agreement."
- - Section 86 (p.9). The phrase "prior to April 7, 1998" is hereby
changed to "on or prior to May 29, 1998."
- - Section 87 (p.9). The phrase "prior to April 7, 1998" is hereby
changed to "on or prior to May 29, 1998."
- - Section 95 (p.10). The phrase "of this Agreement" is hereby deleted.
- - Section 96 (p.10). The phrase "of this Agreement" is hereby deleted.
- - Section 98 (p.10). The reference to "Kentucky Public Service
Commission" is hereby changed to "KPSC."
- - Section 102 (p.11). The reference to "Kentucky Public Service
Commission" is hereby changed to "KPSC."
- - Section 103 (p.11). The phrase "of this Agreement" is hereby deleted.
- - Section 104 (p.11). The phrase "of this Agreement" is hereby deleted.
- - Section 106 (Minimum Requirement) is hereby moved to precede Section
105 (Minimum Requirement Revision Event) and those sections are renumbered
accordingly.
- - Section 123 (p.13). The reference to "the Guaranty dated" is hereby changed
to "the Guarantee Agreement dated" and the following phrase is added to the
end of the sentence: ",which was superseded and replaced by the Amended and
Restated Guarantee Agreement dated March 18, 1998."
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- - Section 128 (Participation Agreement) is hereby amended by adding ", as
amended" at the end of the Section.
- - Section 128 (Participation Agreement) is hereby moved to precede Section 127
(Participation Effective Date) and those sections are renumbered accordingly.
- - Section 130 (p.14). The phrase "`PERMITTED LIEN' shall mean the liens
granted by Big Rivers in favor of the RUS and the LC Issuer securing all
indebtedness outstanding on the Effective Date to the RUS and the LC
Issuer, provided that RUS has executed a Non-Disturbance Agreement with
the LG&E Parties, and including any lien of the RUS shared by an LC
Issuer, provided the LC Issuer has also executed a Non-Disturbance
Agreement with the LG&E Parties, and any of the following additional
liens:" is hereby changed to "`PERMITTED LIEN' shall mean the liens
granted by Big Rivers in favor of the RUS, the LC Issuer and the [Bank],
in each case, provided that the RUS, the LC Issuer and/or the [Bank] has
executed a Non-Disturbance Agreement with the LG&E Parties, and any of the
following additional liens:"
- - Section 158 (SO2 Allowances) is hereby moved to precede Section 166
(Southwire) and Sections 159 through 165 are hereby renumbered accordingly.
- - Section 164 (p.18). The phrase "on or prior to April 7, 1998" is hereby
changed to "on or prior to May 29, 1998."
- - Section 167 (p.19). The reference to "the City of Henderson's" is
hereby changed to "HMP&L's."
- - Section 175 (Tax or Taxes) is hereby moved to precede Section 173 (Tax Return
or Return) and Section 174 (Tax Indemnification Agreement) and those sections
are hereby renumbered accordingly.
- - Section 180 (p.20) Each reference to "Transmission Services and
Interconnection Agreement" is hereby changed to "Transmission Service and
Interconnection Agreement."
- - Section 186 (p.21). The reference to "Henderson" is hereby changed to
"HMP&L."
- - Section 189 (p.21). The phrase "of this Agreement" is hereby deleted.
15. NON-DISTURBANCE AGREEMENT. The parties hereby agree to amend the
Non-Disturbance Agreement as follows:
- - Section 1.5(c)(i) (p. 5). The phrase "excluding any sums owed in respect of
Enhancements or Major Capital Improvements if any amounts are paid to the
LG&E Parties under Section 1.5(b)" is hereby added at the end of the Section,
immediately following the term "New Participation Agreement."
16. NEW GUARANTEE AGREEMENT. The parties agree to amend the New Guarantee
Agreement as follows:
- - Second paragraph of the preamble, third sentence (p. 1). The phrase
"as amended" is hereby added after "LG&E Affiliates."
- - Second paragraph of the preamble, last sentence (p.1). The phrase "as
amended," preceded
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by a comma, is hereby added after "June 9, 1997" and before the period.
17. CAPITALIZATION GUIDELINES. The parties agree to amend the Capitalization
Guidelines attached to the New Participation Agreement as Exhibit P as follows:
- - To delete therefrom in its entirety Section 1.a., which reads "a. The
Big Rivers 20,000- item Continuing Property Record (CPR) file."
- - To renumber the remaining subsections of Section 1 as a., b. and c.
- - To change the reference in Section 1.d. from "a, b or c, above" to "a
or b, above."
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Except as expressly provided herein, the provisions of the New
Participation Agreement shall remain in full force and effect from and after
the execution hereof to the same extent as prior to such execution.
IN WITNESS WHEREOF, the Parties have caused this Amendment to be
executed as of the day and year first written above.
BIG RIVERS ELECTRIC CORPORATION
By: /S/ MICHAEL H. CORE
---------------------------
Printed Name: Michael H. Core
Title: President/CEO
WESTERN KENTUCKY ENERGY CORP.
By: /S/ GEORGE BASINGER
---------------------------
Printed Name: George W. Basinger
Title: President
LG&E ENERGY MARKETING INC.
By: /S/ JOHN R. McCALL
---------------------------
Printed Name: John R. McCall
Title: Secretary
WESTERN KENTUCKY LEASING CORP.
By: /S/ GEORGE BASINGER
---------------------------
Printed Name: George W. Basinger
Title: President
WKE STATION TWO INC.
By: /S/ GEORGE BASINGER
---------------------------
Printed Name: George W. Basinger
Title: President
- --------------
[* All Exhibits and Schedules REDACTED.]
<PAGE>
[* REDACTED=Omitted pursuant to confidential treatment request.
Material filed separately with SEC.]
EXHIBIT 10.86
THIRD AMENDMENT TO
NEW PARTICIPATION AGREEMENT
THIS THIRD AMENDMENT TO THE NEW PARTICIPATION AGREEMENT ("Amendment")
dated this 15th day of July, 1998, is among BIG RIVERS ELECTRIC CORPORATION, a
Kentucky rural electric cooperative ("Big Rivers"), LG&E ENERGY MARKETING INC.,
an Oklahoma corporation ("LEM"), WKE STATION TWO INC., a Kentucky corporation
("Station Two Subsidiary"), and WESTERN KENTUCKY ENERGY CORP., a Kentucky
corporation ("WKEC"), for itself and as successor by merger to Western Kentucky
Leasing Corp., a Kentucky corporation ("Leaseco") (hereinafter, LEM, Station Two
Subsidiary and WKEC are collectively referred to as the "LG&E Parties" and
together with Big Rivers, the "Parties"). LG&E ENERGY CORP., a Kentucky
corporation ("LEC"), is made a party to this Amendment for the sole limited
purpose of making the acknowledgment and agreement provided for in Section 21.
RECITALS
WHEREAS, the Parties, together with Leaseco, are signatories to the New
Participation Agreement dated April 6, 1998, as amended by that certain Letter
Agreement dated April 6, 1998 and by the Second Amendment to New Participation
Agreement dated June 15, 1998 (collectively, the "New Participation Agreement").
WHEREAS, prior to the execution and delivery of this Amendment Leaseco was
merged with and into WKEC, the parent company of Leaseco, in accordance with the
General Corporation Laws of the Commonwealth of Kentucky, and WKEC was the
surviving corporation in that merger and succeeded to all of the rights and
obligations of Leaseco, including without limitation, those under the New
Participation Agreement.
WHEREAS, the Parties wish to further amend the New Participation Agreement
in certain respects, as well as to set forth their agreements in respect of
certain matters related to or contemplated in the New Participation Agreement,
upon and subject to the terms and conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Amendment, the Parties agree as follows:
1. DEFINITIONS. Capitalized terms used but not defined in this Amendment
shall have their same respective meanings as in the New Participation Agreement
(including without limitation, Exhibit X attached thereto).
2. PHASE II CLOSING. The LG&E Parties have informed Big Rivers that they
believe that, prior to the date hereof, the LG&E Parties received all applicable
approvals from the FERC that were required from that commission for the Phase II
Effective Date and the consummation by the LG&E Parties of the transactions
contemplated in the Phase II Agreements. At the Closing,
<PAGE>
as a condition precedent thereto, the LG&E Parties will certify to Big Rivers
as to their receipt of those FERC approvals pursuant to the Certificate to be
delivered in accordance with Section 4.4.11 of the New Participation
Agreement. In light of the LG&E Parties' belief, and assuming delivery of the
foregoing Certificate, the Parties agree to proceed to consummate the
transactions contemplated in the Phase II Agreements as of the Effective Date
(upon the satisfaction of the other conditions precedent to the Phase II
Effective Date), rather than the transactions contemplated in the Phase I
Agreements.
3. MARKETING PAYMENT. Assuming the Closing occurs on July 15, 1998 as
proposed, the Parties agree that the Marketing Payment to be paid by Big Rivers
to LEM as contemplated in Section 4.3.9 of the New Participation Agreement shall
equal $[REDACTED]. In the event the Closing does not occur on July 15, 1998,
the Marketing Payment will be recalculated as contemplated in the Interim
Wholesale Marketing Assistance Agreement dated June 18, 1997, as amended.
4. RENTAL PAYMENTS. The Parties agree that, by reason of the adjustment
contemplated in Section 9.3 of the New Participation Agreement: (a) the Initial
Rental Payment to be paid to Big Rivers on the Effective Date as contemplated in
Section 4.4.5 of the New Participation Agreement shall be reduced to
$[REDACTED]; (b) the annual rental payments to be paid to Big Rivers pursuant
to Section 2.3.2 of the Lease (subject to further adjustment as contemplated in
that Section) shall be reduced to $[REDACTED]; and (c) the equal monthly
installments to be paid to Big Rivers pursuant to Section 2.3.2 of the Lease
(subject to further adjustment as contemplated in that Section) shall be reduced
to $[REDACTED].
5. INVENTORY QUANTIFICATION AND VALUATION. The Parties agree that attached
hereto as EXHIBIT A is Schedule 9.1 to the New Participation Agreement. The
Parties further agree that, based upon the quantification and valuation
procedures set forth in Schedule 9.1, the aggregate purchase price to be paid by
WKEC (or its successors or permitted assigns) and Station Two Subsidiary,
collectively, to Big Rivers on the Effective Date for the Inventory and the
Station Two Inventory, pursuant to Section 9.1 of the New Participation
Agreement and Section 10.33 of the Station Two Agreement, shall be as follows:
<TABLE>
<CAPTION>
<S> <C>
a. Coal Inventory: $[REDACTED]
b. Fuel Oil Inventory: $[REDACTED]
c. DBA (Reagent) Inventory: $[REDACTED]
d. Reagent (Lime/Limestone)
Inventory: $[REDACTED]
e. Propane Inventory: $[REDACTED]
f. SO2 Allowances Inventory: $[REDACTED]
g. Spare Parts, Materials and
Supplies Inventory: $[REDACTED]
Total Purchase Price $[REDACTED]
</TABLE>
2
<PAGE>
6. PERSONAL PROPERTY. Notwithstanding the provisions of Section 9.3 of the
New Participation Agreement or Section 10.35 of the Station Two Agreement that
may require Leaseco and Station Two Subsidiary to pay Big Rivers on the
Effective Date a "PP Price" or "Station Two PP Price" equal to the "net book
value" of the Personal Property and Station Two Personal Property, the Parties
agree that all such Personal Property and Station Two Personal Property shall be
sold by Big Rivers and purchased by WKEC and Station Two Subsidiary,
collectively, on the Effective Date for an aggregate purchase price payable to
Big Rivers of $[REDACTED]. As used in the Operative Documents, the "PP Price"
and the "Station Two PP Price" shall be deemed to mean the respective portions
of the aggregate purchase price amount described above, which portions shall
collectively equal that aggregate purchase price. The Parties further agree that
the Personal Property and Station Two Personal Property to be sold by Big Rivers
to WKEC and Station Two Subsidiary on the Effective Date shall include, without
limitation, the items of Personal Property identified on EXHIBIT B attached
hereto. The LG&E Parties acknowledge that EXHIBIT B includes more than one list
of Personal Property, and that individual items of personal property may have
been inadvertently included on each such list. In light of this, the LG&E
Parties agree that in the event any item of Personal Property is specifically
listed on more than one list (as opposed to being multiple items of the same
type or version of Personal Property), the LG&E Parties will only be entitled to
receive that single item of Personal Property. In addition, the LG&E Parties
shall not be entitled to receive any item of Personal Property that has been
previously retired or replaced by Big Rivers.
7. EMPLOYEE MATTERS.
(a) Section 10.1 of the New Participation Agreement is hereby
deleted in its entirety and the following language is substituted in lieu
thereof:
10.1 TREATMENT OF EMPLOYEES. In order to permit the LG&E Parties to
perform their respective obligations set forth in the Operative Documents,
Big Rivers shall permit WKEC or any of its Affiliates to employ such of
Big Rivers' Transferred Employees, as WKEC, in its sole discretion, deems
necessary in this connection. WKEC or its Affiliates shall promptly notify
Big Rivers of any Transferred Employee who, as of 12:01 a.m. on the day
immediately following the Effective Date is not offered employment by WKEC
or its Affiliates in a position substantially similar to that held with
Big Rivers, with compensation not less than substantially equivalent to
that provided by Big Rivers to such Transferred Employee and with benefits
not less than substantially equivalent to those provided by WKEC to its
other employees generally. For purposes of this Section 10, Time of
Closing shall have the same meaning as provided in the Closing of
Transactions Letter Agreement dated July 17, 1998 between Big Rivers
Electric Corporation, Western Kentucky Energy Corp., WKE Station Two Inc.
and LG&E Energy Marketing Inc.
(b) Section 10.4 of the New Participation Agreement is hereby
deleted in its entirety and the following language is substituted in lieu
thereof:
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10.4 BENEFIT CLAIMS. Big Rivers shall retain responsibility for all
workers' compensation, health, life insurance, dependent care, and
disability benefit claims of Transferred Employees pending as of the Time
of Closing, or made after the Time of Closing, but relating to events
occurring on or prior to the Time of Closing. Following the Time of
Closing, WKEC or its Affiliate (as applicable) shall have responsibility
to reimburse Big Rivers for the health claims made pursuant to the Big
Rivers medical plan(s) providing coverage to the Transferred Employees
within thirty (30) days after receipt by WKEC from Big Rivers of notice of
said claims for the sixty-eight (68) individuals identified on the
Transferred Employee listing (Schedule 5.1.22) plus the Retained Employees
under the Generation Dispatching Services Agreement as currently covered
employees or former employees which claims relate to events occurring
after the Time of Closing.
(c) Section 10.5 of the New Participation Agreement is hereby
deleted in its entirety and the following language is substituted in lieu
thereof:
10.5 SEVERANCE FOR CERTAIN EMPLOYEES OF BIG RIVERS. As contemplated by
Section 1.9 of the Big Rivers Severance Plan as in effect on August 31,
1996, and as subsequently amended and restated on May 27, 1997, as
modified by resolution dated July 11, 1997, and further amended on March
13, 1998 (the "Big Rivers Severance Plan"), Big Rivers shall remain liable
for any benefits which become payable under such plan, but WKEC shall
reimburse Big Rivers for severance benefits paid by Big Rivers pursuant to
Section 3.4 and 3.5 of the Big Rivers Severance Plan in accordance with
the following:
(a) For benefits payable by Big Rivers to Transferred
Employees who terminate employment on the Time of Closing, WKEC or
its Affiliate (as applicable) shall reimburse Big Rivers within
seven (7) business days after the Time of Closing, for such
severance benefits payable pursuant to Sections 3.4 and 3.5(a) and
(b) of the Big Rivers Severance Plan.
(b) Within sixty (60) days following the Time of Closing, WKEC
or its Affiliate (as applicable) shall also reimburse Big Rivers for
the severance benefits payable pursuant to Sections 3.4 and 3.5 (a)
and (b) of the Big Rivers Severance Plan by Big Rivers to
Transferred Employees whose employment with Big Rivers terminated as
part of a workforce reduction between September 1, 1996 and the Time
of Closing.
(c) Within thirty (30) days after receipt by WKEC from Big
Rivers of notice, WKEC or its Affiliate (as applicable) shall also
reimburse Big Rivers for the severance benefits payable pursuant to
Sections 3.4 and 3.5 (a) and (b) of the Big Rivers Severance Plan by
Big Rivers to Transferred Employees whose employment with WKEC or
its Affiliate (as applicable) terminated after the Time of Closing
under conditions that require Big Rivers to provide such severance
benefits.
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(d) Within sixty (60) days following the Time of Closing, WKEC
or its Affiliate (as applicable) shall also reimburse Big Rivers for
one-half of the cost of outplacement assistance provided by Big
Rivers to any employee whose employment terminated with Big Rivers
as part of a workforce reduction from September 1, 1996, through the
Time of Closing.
(e) Within thirty (30) days after receipt by WKEC from Big
Rivers of notice, WKEC or its Affiliate (as applicable) shall also
reimburse Big Rivers for one-half of the cost of outplacement
assistance provided by Big Rivers to any employee whose employment
terminated after the Time of Closing and on or before the one year
anniversary of the Time of Closing.
(f) Within sixty (60) days following the Time of Closing, WKEC
or its Affiliate (as applicable) shall also reimburse Big Rivers for
the full cost of the $150 retiree medical subsidy paid by Big Rivers
to any employee whose employment with Big Rivers terminated on or
prior to the Time of Closing.
(g) Within thirty (30) days after receipt by WKEC from Big
Rivers of notice, WKEC or its Affiliate (as applicable) shall also
reimburse Big Rivers for the full cost of the $150 retiree medical
subsidy paid by Big Rivers to any employee whose employment
terminated after the Time of Closing.
The parties acknowledge that all of the information necessary to determine
the entire payment obligation contemplated in this Section may not be
reasonably available as of the times contemplated therein. In light of
this, if within sixty (60) days following the payment it is determined
that the actual payment amount due therein is different than such
previously paid amounts, then an adjustment payment or reimbursement shall
be made by the appropriate party to the other party within ninety (90)
days of the payment.
(d) Section 10.6 of the New Participation Agreement is hereby
amended by striking the phrase "Effective Date" each place it appears therein
and inserting in lieu thereof the phrase "Time of Closing".
(e) Section 10.7 of the New Participation Agreement is hereby
deleted in its entirety and the following language is substituted in lieu
thereof:
10.7 CERTAIN BENEFIT OBLIGATIONS. As of the Time of Closing, WKEC shall
assume the obligation of Big Rivers to provide to each Transferred
Employee employed by WKEC or its Affiliates immediately following the Time
of Closing the amount of unused sick leave and vacation time credited to
such employee by Big Rivers as of the Time of Closing. Such unused sick
leave and vacation shall be provided in accordance with WKEC or its
Affiliate's sick leave and vacation policies as in effect from time to
time, except that WKEC shall allow nonbargaining Transferred Employees the
right to take a cash-out of
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such unused sick leave in excess of [REDACTED] hours at a rate of
[REDACTED] credited as of the Time of Closing. WKEC shall provide
medical benefits to the Transferred Employees employed by them or their
Affiliates upon their retirement in accordance with the retiree medical
plan or program of WKEC or its Affiliates, as the case may be, as in
effect at the time of such retirement and such retiree medical benefits
provided by WKEC or its Affiliates, as the case may be, shall have an
aggregate present value as of the Time of Closing determined in
accordance with Financial Accounting Standard ("FAS") 106 that is no
less than the present value as of such date of Big Rivers' obligation
to provide retiree medical benefits to such Transferred Employees as
determined in accordance with FAS 106. The items described in 10.7.1,
10.7.2, 10.7.3 and 10.7.4 below shall be paid by Big Rivers to WKEC in
cash as of the Time of Closing. If within sixty (60) days following the
Time of Closing it is determined that the actual payment amount due
therein is different than such paid amount, then an adjustment payment
or reimbursement shall be made by the appropriate party to the other
party within ninety (90) days of the Time of Closing.
10.7.1 SICK LEAVE. The following cost of the obligation to
provide sick leave to the Transferred Employees employed by WKEC
or its Affiliates shall be paid by Big Rivers. Such cost shall be
the sum of (i) and (ii) below based on the product resulting from
multiplying the number of sick leave hours for each such
Transferred Employee as of 12:01 a.m. CST on July 16, 1998, times
the employee's hourly pay rate with Big Rivers on that date: (i)
the entire resulting product times [REDACTED]%; plus (ii) the
portion of the resulting product attributable to accumulations of
over [REDACTED] hours of sick leave for such non-bargaining
Transferred Employees over the age of 50 on the Closing, times
[REDACTED]%.
10.7.2 VACATION. The following cost of the obligation to provide
vacation to the Transferred Employees employed by WKEC or its
Affiliates shall be paid by Big Rivers. Such cost shall be
determined by multiplying the number of vacation hours for each such
Transferred Employee as of 12:01 a.m. CST on July 16, 1998, times
the employee's hourly pay rate with Big Rivers on that date.
10.7.3 CERTAIN RETIREE MEDICAL BENEFITS. The following cost of the
obligation to provide retiree medical benefits to the Transferred
Employees employed by WKEC or its Affiliates shall be paid by Big
Rivers. Such cost shall be the present value as of 12:01 a.m. CST on
July 16, 1998, of Big Rivers' obligation to provide retiree medical
benefits to such Transferred Employees under Financial Accounting
Standard 106, minus $[REDACTED].
10.7.4 CERTAIN ADDITIONAL MEDICAL BENEFITS. Additionally, Big
Rivers shall pay WKEC the sum of $[REDACTED] in consideration for
the benefit reimbursement obligations assumed by WKEC pursuant to
Section 10.4 with respect to the Transferred Employees not hired
by them or their Affiliates.
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(f) A new Section 10.8 is added to the New Participation Agreement
after Section 10.7 to read as follows:
Section 10.8 SCHEDULE 5.1.22. The parties also acknowledge that some of
the information contained on Schedule 5.1.22 to the New Participation
Agreement may not be reasonably available as of the Closing. In light
of this, the parties agree that the information contained on Schedule
5.1.22 shall constitute Big Rivers' good faith effort, based on
available information, to provide as of the Closing the information
required pursuant to Section 5.1.22. The parties acknowledge that the
information required on Schedule 5.1.22 with respect to service
credited under the Big Rivers pension plans will not be provided at
Closing, but shall be provided within seven (7) working days thereof.
If within thirty (30) days following the Closing, it is determined that
the information contained on Schedule 5.1.22 or provided thereafter is
different from the actual information required to be disclosed thereon,
then the information contained on Schedule 5.1.22 shall be revised so
that the information contained thereon is the actual information as of
the Closing.
(g) A new Section 10.9 is added to the New Participation Agreement
after new Section 10.8 to read as follows:
Section 10.9 REIMBURSEMENT FOR CERTAIN EMPLOYEE CLAIMS AND OR
LIABILITIES. WKEC and or its Affiliates shall be responsible for the
first $[REDACTED], and [REDACTED] of any amounts in excess of
$[REDACTED], of any liability or claim resulting from any events
occurring during the period beginning as of 1:00 p.m. CST on July
15, 1998 and ending on the Time of Closing which relate to Employee
claims and or liabilities. Within 30 days after receipt by WKEC from
Big Rivers of notice, WKEC shall reimburse Big Rivers for amounts
payable pursuant to this Section 10.9.
8. INFLATION ESCALATOR. The procedure set forth on EXHIBIT C attached hereto
shall constitute the mutually satisfactory procedure by which the Capital Budget
Limits and the Big Rivers Contributions will be adjusted during the Term to
reflect inflationary increases, as contemplated in Section 20.6.4 of the New
Participation Agreement.
9. AMENDMENTS TO SECTION 24.1(f) OF THE NEW PARTICIPATION AGREEMENT.
Consistent with Section 20.6 of the New Participation Agreement, and
notwithstanding the provisions of Section 24.1(f)(i) or 24.1(f)(ii) of that
agreement to the contrary, the Parties agree that in the event WKEC (or its
successors or permitted assigns), on the one hand, or Big Rivers, on the other
hand, shall fund a portion of a Non-Incremental Capital Cost that is greater
than WKEC's or Big Rivers' (as applicable) Capital Asset Sharing Ratio in
respect of that cost under Section 8.4 of the Lease, or in the event Station Two
Subsidiary (or its successors or permitted assigns), on the one hand, or Big
Rivers, on the other hand, shall fund a portion of a Henderson Non-Incremental
Capital Cost that is greater than Station Two Subsidiary's or Big Rivers' (as
applicable) Station Two Improvements Sharing Ratio in respect of that cost under
Section 9.10(c) of the Station Two Agreement, then the portion of the LG&E
Parties' Residual Plant Value relating to the Capital Assets and/or Station Two
Improvements to which that cost relates, and the portion of the Big
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Rivers' Depreciated Book Value relating to the Capital Assets and/or Station
Two Improvements to which that cost relates, shall each be determined based
upon the ratio by which the amount of the costs actually funded by WKEC,
Station Two Subsidiary (or their successors or permitted assigns) or Big
Rivers (as applicable) for those Capital Assets and/or Station Two
Improvements, bears to the total costs incurred for those Capital Assets
and/or Station Two Improvements, rather than based upon their respective
Capital Asset Sharing Ratio or Station Two Improvement Sharing Ratio (as
applicable).
10. INITIAL PERIOD BUDGETS; RETIREMENT UNIT LIST; OTHER BUDGET ISSUES.
(a) The Parties agree that the budgets attached hereto as EXHIBITS D-1,
D-2 AND D-3 are the approved Annual O&M Budgets for the Initial Budget Period,
and that the budgets attached hereto as EXHIBITS E-1, E-2 AND E-3 are the
approved Annual Capital Budgets for the Initial Budget Period, each as
contemplated in Section I, Item 24 and Section II, Item 21 of Schedule 3.1
attached to the New Participation Agreement. Such Initial Period Budgets shall
be attached to the Lease as of the Effective Date as contemplated in Section 7.1
thereof. The Parties further agree that, notwithstanding anything to the
contrary contained in the New Participation Agreement, the Lease or any other
Operative Document, and except as otherwise provided in this Section 10, no
Party shall be entitled to claim or assert, whether during the Initial Budget
Period or at any time thereafter, that any of the items or expenditures
reflected in the Annual Capital Budgets (including those relating to Capital
Assets or Station Two Improvements) or Annual O&M Budgets that are included in
the Initial Period Budgets are to be expended, or were expended (a) for
operations or maintenance expenses rather than expenditures for Capital Assets
or Station Two Improvements as noted in the relevant budget, (b) for Capital
Assets or Station Two Improvements rather than for operations or maintenance
expenses as noted in the relevant budget, (c) in the case of Big Rivers, for
Enhancements or Major Capital Improvements, (d) in the case of Big Rivers, for
Capital Assets or Station Two Improvements which Big Rivers otherwise has no
obligation to fund or contribute under the Operative Documents, or (e) in the
case of the LG&E Parties, for Incremental Environmental O&M rather than other
operations or maintenance expenses or Capital Assets or Station Two
Improvements, as noted in the relevant budget, it being understood by the
Parties that Big Rivers, on the one hand, and WKEC and Station Two Subsidiary
(and/or any Affiliate of those LG&E Parties to which their funding obligations
may be assigned in compliance with Section 16 of the New Participation Agreement
and Section 15 of the Station Two Agreement) on the other hand, shall each fund
their respective share of the Annual Capital Budgets (including those relating
to Capital Assets or Station Two Improvements) included in the Initial Period
Budgets (limited in the case of Big Rivers to the Big Rivers Contribution for
the relevant Year or portion thereof in respect of Non-Incremental Capital Costs
and Henderson Non-Incremental Capital Costs which are not for Major Capital
Repairs or Henderson Major Capital Repairs, respectively) without objection,
absent their mutual agreement to the contrary. The relevant LG&E Parties agree
that any expenditure by them during the Initial Budget Period for an item
included in the Initial Period Budgets, in excess of the Big Rivers Contribution
and up to the Capital Budget Limit for that Year (or portion thereof), shall be
expended by that LG&E Party solely for a Capital Asset or Station Two
Improvement. In the event any such item that is included in the Initial Period
Budgets, and that is so funded by
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an LG&E Party in excess of the relevant Big Rivers Contribution, is not for a
Capital Asset or Station Two Improvement, then the asset for which expended
shall be deemed to be excluded from the Relevant Assets, and such costs shall
be excluded from the calculation of the "LG&E Parties' Residual Plant Value",
"Big Rivers' Depreciated Book Value", the "Depreciated Book Value of all
Enhancements and Major Capital Improvements" and "LT", in each case solely
for the purposes of determining the Residual Value Payment (if any) that
shall be owing by Big Rivers to the relevant LG&E Party pursuant to Section
24.1 of the New Participation Agreement. The Parties further agree that, in
the event the LG&E Parties, individually or collectively, shall fund in any
Year (or partial Year) included in the Initial Budget Period any
Non-Incremental Capital Costs (which are not for Major Capital Repairs)
and/or Henderson Non-Incremental Capital Costs (which are not for Henderson
Major Capital Repairs) which, when combined with the total of such costs that
have been funded by Big Rivers during that Year (or partial year), would
exceed the Capital Budget Limit for that Year (or partial Year) set forth in
Section 20.6.2 of the New Participation Agreement (as fixed on the date
hereof and subject only to adjustment pursuant to Section 20.6.4 of the New
Participation Agreement), then the Capital Assets or Station Two Improvements
associated with that portion of the Non-Incremental Capital Costs and/or
Henderson Non-Incremental Capital Costs that so exceed the Capital Budget
Limit for that Year (or partial Year) shall be deemed to be excluded from the
Relevant Assets, and such costs that exceed that Capital Budget Limit for
that Year (or partial Year) shall be excluded from the calculation of the
"LG&E Parties' Residual Plant Value", "Big Rivers' Depreciated Book Value",
the "Depreciated Book Value of all Enhancements and Major Capital
Improvements" and "LT", in each case solely for the purpose of determining
the Residual Value Payment (if any) that shall be owing by Big Rivers to the
relevant LG&E Party. The limitations set forth in the immediately preceding
sentence shall not apply to such costs as are incurred by any of the LG&E
Parties following the Initial Budget Period. Notwithstanding anything in the
New Participation Agreement or any other Operative Document to the contrary
(including without limitation, the provisions of this Section 10), the
Parties agree that (a) the Initial Period Budgets shall have no precedential
effect on any of the rights or obligations of the Parties with respect to any
Annual O&M Budget or Annual Capital Budget (including any budgets for Capital
Assets or Station Two Improvements) for any period subsequent to the Initial
Budget Period or any process for establishing those subsequent budgets, and
(b) in all events, the Big Rivers Contribution shall be used solely for
expenditures characterized in the Initial Period Budgets as "Capital" in the
column entitled "Comments from BREC letter of 6/25", or which otherwise are
properly characterized as Capital Assets or Station Two Improvements.
(b) The Parties shall each use their commercially reasonable efforts to
develop, prior to November 30, 1998, a mutually satisfactory "Retirement Unit
Property List" based upon the Capitalization Guidelines that will serve,
together with the Capitalization Guidelines, to reflect their agreement with
respect to whether a particular item to be funded by the Parties (or any of
them) is a Capital Asset or Station Two Improvement, on the one hand, or an
operations and maintenance expense, on the other hand. In the event the Parties
are unable to agree on such a Retirement Unit Property List within that time
period, then the Parties agree to promptly refer the matter to a mutually
acceptable, disinterested, national certified public accounting firm, which
shall be charged with the task of developing a Retirement Unit Property List
that is consistent
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with the Capitalization Guidelines. The Parties shall each be entitled to
submit their own proposed version of the Retirement Unit Property List with
that accounting firm, and to thereafter confer with that accounting firm
regarding their respective viewpoints regarding the nature and contents of
that list; provided, that no Party shall confer or communicate with that
accounting firm regarding its engagement or the Retirement Unit Property List
to be developed by it unless accompanied by a representative of all other
Parties. The costs and expenses associated with the engagement of that
accounting firm shall be shared equally by Big Rivers and LEM, and the
Retirement Unit Property List that is developed by it shall be final and
binding on the Parties throughout the Term; provided, that in the event there
shall thereafter be amendments, modifications or supplements made to the RUS
Uniform System of Accounts Bulletins or the FERC guidelines described in the
Capitalization Guidelines that, in the view of either Party, requires a
revision to or replacement of the Retirement Unit Property List in order for
it to continue to be substantially consistent with those bulletins and
guidelines, such Party shall, upon 30 days prior written notice to the other
Parties, be entitled to refer the list once again to that accounting firm (or
another firm agreed to by the Parties) for a determination of whether such a
revision or replacement list is appropriate under the circumstances. Any such
revision or replacement list deemed appropriate by that accounting firm shall
thereafter be final and binding on the Parties. Solely for purposes of
calculating any Residual Value Payment that may be owing to the LG&E Parties,
at such time as a Retirement Unit Property List has been initially developed
as contemplated above, any expenditures that have been made by the Parties
prior to that time shall be determined to be either a Capital Asset or
Station Two Improvement, on the one hand, or an operations and maintenance
expense, on the other hand, based on the Capitalization Guidelines as
supplemented by that Retirement Unit Property List, notwithstanding any
different characterization that may have been previously made by any of the
Parties.
(c) The LG&E Parties will not seek to recover amounts from Big Rivers
on the basis that they are for Major Capital Repairs or Henderson Major Capital
Repairs until such time as all LG&E Parties (or such of them as shall be
responsible for the same) have collectively expended amounts for Major Capital
Repairs and/or Henderson Major Capital Repairs equal to the difference between
the Capital Budget Limit for that Year (or portion thereof) (as fixed on the
date hereof, and subject only to adjustment pursuant to Section 20.6.4 of the
New Participation Agreement) and the amount of the actual Annual Capital Budget
(including permitted deviations therefrom) for Non-Incremental Capital Costs and
Henderson Non-Incremental Capital Costs for that Year. In the event the LG&E
Parties collectively incur costs in any Year (or portion thereof) for
Non-Incremental Capital Costs and Henderson Non-Incremental Capital Costs
("Actual Non-Incremental Expenditures") that are less than the aggregate amounts
budgeted for such costs in the Annual Capital Budget (including the budget for
Station Two Improvements) for that Year (or portion thereof) ("Budgeted
Non-Incremental Expenditures"), then within 90 days after the close of that Year
WKEC (or its successor or permitted assign) or Station Two Subsidiary (or its
successor or permitted assign) shall pay Big Rivers an amount equal to THE
LESSER OF (i) the amount of the Major Capital Repairs that were funded by Big
Rivers during that Year (or portion thereof) OR (ii) the amount by which the
Actual Non-Incremental Expenditures were less than the Budgeted Non-Incremental
Expenditures.
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11. EXHIBIT X: MAJOR CAPITAL REPAIRS DEFINED. Pursuant to Section 96 (Major
Capital Repairs) of Exhibit X attached to the New Participation Agreement, and
consistent with the provisions of Section 20.6 of the New Participation
Agreement, Article 8 of the Lease and Section 9.10 of the Station Two Agreement,
the Parties hereby agree that the defined term "Major Capital Repairs" as used
in the New Participation Agreement and those other Operative Documents shall
have the meaning set forth on EXHIBIT F attached hereto.
12. DISCLOSURE SCHEDULES. Attached hereto as EXHIBIT G are amendments,
modifications and supplements to the Disclosure Schedules of Big Rivers attached
to and contemplated in the New Participation Agreement. Except as set forth in
EXHIBIT G, those Disclosure Schedules have not been amended, modified or
supplemented since their delivery to the LG&E Parties on April 6, 1998 in
connection with the execution and delivery of the New Participation Agreement.
The Parties acknowledge and agree that the Disclosure Schedules attached to the
New Participation Agreement were dated April 7, 1998 in error, and that the same
should have been dated April 6, 1998 (the date on which the New Participation
Agreement was executed and delivered). The Disclosure Schedules are hereby
amended accordingly. Big Rivers agrees that upon the delivery to the LG&E
Parties of the certificate of its authorized officer as contemplated in Section
4.3.6 of the New Participation Agreement, that certificate shall represent,
among other things, the acknowledgment and agreement of Big Rivers that each of
the authorizations, consents and approvals set forth on Schedule 5.1.3 of the
New Participation Agreement and required to proceed with the Phase II Closing
have been obtained by Big Rivers or are no longer required as of the Closing.
The LG&E Parties agree that upon the delivery to Big Rivers of the certificate
of their authorized officers as contemplated in Section 4.4.11 of the New
Participation Agreement, that certificate shall represent, among other things,
the acknowledgment and agreement of the LG&E Parties that each of the
authorizations, consents and approvals set forth on Schedule 6.1.3 of the New
Participation Agreement and required to proceed with the Phase II Closing, and
each of the notices, acceptances, disclaimers, declarations, orders and waiting
periods described on that schedule and required to proceed with the Phase II
Closing, have been obtained by the LG&E Parties or are no longer required as of
the Closing.
13. OPERATING COMMITTEE REPRESENTATIVES. As contemplated in Section 6.1 of
the Lease and Section 8.15(c) of the Station Two Agreement, WKEC, Station Two
Subsidiary and Big Rivers hereby designate the following initial representatives
and alternates for service on the Operating Committees for the Facilities and
Station Two, respectively:
(a) THE FACILITIES.
REPRESENTATIVES ALTERNATES
WKEC: George W. Basinger Robert E. Henriques
Bruce D. Hamilton
Big Rivers: Mark Hite Travis Housley
David Spainhoward
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(b) STATION TWO.
REPRESENTATIVES ALTERNATES
Station Two
Subsidiary: George W. Basinger Robert E. Henriques
Bruce D. Hamilton
Big Rivers: Mark Hite Travis Housley
David Spainhoward
14. EXHIBITS TO MORTGAGES. Attached hereto as EXHIBITS H-1, H-2 AND H-3 are
the following:
(a) Exhibits C (Description of Real Property), D (Real Property Leases)
and E (Permitted Liens and other Permitted Title Exceptions), respectively, to
the form of Mortgage and Security Agreement attached to the New Participation
Agreement as Exhibit G; and
(b) Exhibits C (Description of Real Property), D (Real Property Leases)
and E (Permitted Liens and other Permitted Title Exceptions), respectively, to
the form of Settlement Mortgage attached to the New Participation Agreement as
Exhibit N.
Each of those Exhibits will be attached to the mortgages described above upon
their execution and delivery on the Effective Date.
15. AMENDMENTS TO STATION TWO AGREEMENT. The Parties agree that the form of
Station Two Agreement attached to the New Participation Agreement as Exhibit M
is hereby amended in the manner set forth on the revised pages of that agreement
attached hereto as EXHIBIT I, and the Station Two Agreement shall be revised
accordingly prior to its execution and delivery on the Effective Date.
16. CLOSING; ACTIONS FOLLOWING THE CLOSING. Notwithstanding anything
contained in the New Participation Agreement or the Station Two Agreement to the
contrary, the Parties agree that the Closing (and the "Closing" under the
Station Two Agreement) shall take place at the offices of Greenebaum Doll &
McDonald PLLC, Louisville, Kentucky, at the time and upon the satisfaction of
the conditions precedent to the Closing set forth in those agreements. Each
Party hereby waives the 10-day waiting period set forth in Section 4.1 of the
New Participation Agreement and Section 3.1 of the Station Two Agreement, and
each Party agrees that the Closing will occur at one (1) minute past the hour
during which the last of the deliveries contemplated in Sections 4.3 and 4.4 of
the New Participation Agreement and Sections 3.3, 3.4 and 3.5 of the Station Two
Agreement has occurred, on the date on which all conditions set forth in
Schedule 3.2 of the New Participation Agreement and Schedule 2.2 of the Station
Two Agreement have been satisfied or waived. Notwithstanding anything contained
in the New Participation Agreement or in any other Operative Document to the
contrary, the Parties agree that the Transferred Employees that will be offered
employment by WKEC (or its successors or permitted
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assigns) as contemplated in Section 10.1 of the New Participation Agreement
will, if they elect to accept the same, commence such employment immediately
following the Closing, rather than at 12:01 a.m. on the day immediately
following the Effective Date. The Parties agree to reasonably cooperate with
each other to determine their respective responsibilities for employee
salaries, benefit costs and the like based upon the period of the Effective
Date before and after the Closing, and each Party agrees to promptly
reimburse the other Party(s) to the extent such other Party(s) shall incur
any expense associated with those salaries and benefit costs that are not
properly allocable to them. The Parties further agree that WKEC's possession,
use and occupancy of the Facilities and other Tangible Assets, and Station
Two Subsidiary's possession, use and occupancy of Station Two, shall commence
immediately following the Closing.
17. TRANSFERRED EMPLOYEES NOT TO BE OFFERED EMPLOYMENT. Pursuant to Section
10.1 of the New Participation Agreement, WKEC hereby notifies Big Rivers that
the Transferred Employees identified on EXHIBIT J attached hereto will not be
offered employment with WKEC or any of its Affiliates as of the Closing on the
terms contemplated in that Section.
18. ELIMINATION OF AGREEMENTS. In light of the fact that the Parties will
proceed with the consummation of the Phase II transactions rather than the Phase
I transactions, they each agree that the execution and delivery by Big Rivers
and the relevant LG&E Party or LEC (as applicable) of a Cost Sharing Agreement,
a Facilities Operating Agreement and a Tax Indemnification Agreement in the form
attached to the New Participation Agreement as Exhibits A, B and F,
respectively, will not be required, and the Parties hereby waive any requirement
that such agreements be executed and delivered as a condition precedent to the
Closing.
19. TRANSMISSION PAYMENT. Big Rivers and the LG&E Parties previously
agreed pursuant to Section 9.6 of the Participation Agreement that certain
payments that may be made by the LG&E Parties (or any of them), or their
successors or permitted assigns, to Big Rivers under Big Rivers' Open Access
Transmission Tariff for the transmission of Tier 3 power during the period
from the Effective Date through December 31, [REDACTED] to [REDACTED] for
resale to [REDACTED], and to [REDACTED] for resale to [REDACTED], shall be
considered incremental transmission revenues that shall not be counted toward
the minimum annual transmission use payment set forth in Section 9.6 of the
New Participation Agreement. Pursuant to Section 9.7 of the Participation
Agreement, Big Rivers and the LG&E Parties also made certain agreements with
respect to incremental transmission revenues that might be received by Big
Rivers for transmission of Tier 3 Energy to [REDACTED] and from [REDACTED]
for transmission of Tier 3 Energy to [REDACTED]pursuant to a long-term
transmission contract. To clarify their agreements with respect to the
foregoing, Big Rivers and the LG&E Parties hereby further agree as follows.
(a) (i) Section 9.7(a) of the Participation Agreement is amended by deleting
the words "from [REDACTED]."; and
(ii) Section 9.7(b) of the Participation Agreement is amended by
deleting the phrase "from [REDACTED]", adding after the second
occurrence of "Tier 3 Energy" a comma followed by the phrase "directly or
indirectly," and inserting after the phrase "the preceding 12
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calendar months" the phrase "whether paid by [REDACTED] or any
other Person."
(b) Big Rivers and the LG&E Parties will not count toward the Section 9.6
minimum transmission use payment the revenue received by Big Rivers for
transmission service purchased by any Person (whether or not an LG&E Party)
(i) for transmission of the Tier 3 Energy sold to Henderson Union for resale
to [REDACTED] from the Effective Date through December 31, [REDACTED] and
(ii) for service from January 1, [REDACTED] through December 31, [REDACTED],
up to a maximum exclusion from the Section 9.6 minimum transmission use
payment calculation in any year of $[REDACTED] (inclusive of purchases of
transmission service for Tier 3 Energy made by Persons other than LEM or
other of the LG&E Parties). The exclusions in the preceding sentence shall
apply at any time in which the transmission used to transmit the Tier 3
Energy described above is purchased, whether or not an LG&E Party is the
supplier of that wholesale power. Big Rivers and the LG&E Parties agree that
they will count toward the $[REDACTED] minimum annual transmission use
payment described in Section 9.6 of the Participation Agreement all amounts
paid by an LG&E Party to Big Rivers for transmission related to the provision
of Tier 3 power directly or indirectly (i) to [REDACTED] on or after
January 1, [REDACTED] or (ii) to [REDACTED] on or after January 1, [REDACTED]
provided that Big Rivers has received during the year for which such
determination is made, at least $[REDACTED] in revenue (whether from one or
more of the LG&E Parties or another Person or Persons) for the transmission
of Tier 3 energy, directly or indirectly, to [REDACTED]. Furthermore, Big
Rivers and the LG&E Parties agree that amounts paid by an LG&E Party to Big
Rivers for transmission related to Tier 3 power shall be applied toward the
$[REDACTED] minimum annual transmission use payment only when such
transmission payments relate to Tier 3 power supplied by an LG&E Party.
20. ASSIGNMENT OF INTERESTS.
(a) RIGHTS OF ASSIGNMENT. Subject to Subsections (b), (c) and (d),
below, Big Rivers acknowledges and agrees that, at any time following the
Closing, the consent of Big Rivers is not required:
(i) For WKEC to assign and transfer to WKE Corp., a Kentucky
corporation and the parent company of WKEC ("WKE Corp.") or to another
Affiliate of WKEC, all or any portion of the rights, interests and
obligations of WKEC arising under or pursuant to the Lease and/or any other
Operative Document and relating to the Tangible Assets, the Inventory, the
Personal Property, the Intangible Assets or any assets or properties of HMP&L
that are dedicated to or used exclusively in connection with Station Two or
dedicated, pursuant to the Joint Facilities Agreement (as defined in the
Station Two Agreement), the Station Two Agreement and/or any other Operative
Document, for the joint or common use by, or the support of, the Green
Station or Reid Station of Big Rivers, on the one hand, and Station Two, on
the other hand, or that are otherwise used (exclusively or non-exclusively)
at or for the support of Station Two (collectively the "Common Properties"),
including without limitation, the following:
(A) the rights and interests of WKEC granted in any of
the Common Properties pursuant to the Lease (including without limitation, the
real property on which any of
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<PAGE>
the Common Properties are located), and any other rights related or
appurtenant to those leasehold interests provided for in the Lease or any
other Operative Document;
(B) any rights of enforcement and collection of WKEC
against Big Rivers and/or HMP&L in respect of the Common Properties arising
under or pursuant to the Lease or any other Operative Document; and
(C) any obligations and liabilities of WKEC
arising under the Lease or any other Operative Document in respect of the
Common Properties, whether arising before or after the effectiveness of that
assignment and transfer, including without limitation, the obligation of WKEC
under the Lease for the payment to Big Rivers or HMP&L of that portion of the
rental payments relating to the Common Properties (which portion shall be
determined by WKEC in its discretion, but shall in no event exceed [REDACTED]
of the total rental payments owing to Big Rivers for the Tangible Assets
under the Lease).
(ii) For any of the LG&E Parties to assign and transfer to WKE
Corp. or to another Affiliate of such LG&E Party, all or any portion of the
rights, interests and obligations of that LG&E Party, arising under or pursuant
to the Operative Documents (in addition to the rights, interests and obligations
of WKEC that may be assigned and transferred as contemplated in (i), above),
including without limitation, the following:
(A) the obligations of any one or more of the LG&E
Parties to pay Big Rivers or HMP&L all or any portion of the rental amounts, the
Monthly Margin Payments and/or any other amounts arising under the Lease or the
other Operative Documents;
(B) the right to receive and collect any payments or
other amounts owing by Big Rivers or HMP&L to any LG&E Party(s) under the Power
Purchase Agreement, any other Operative Document or the Promissory Note (LEM
Advances);
(C) the right to exercise any abatement rights,
set-off rights and other similar rights of all or any of the LG&E Parties in
respect of any of the payment obligations of Big Rivers or HMP&L to any of the
LG&E Parties under any of the Operative Documents and/or the Promissory Note
(LEM Advances); and
(D) any rights of enforcement and collection against
Big Rivers and/or HMP&L arising under or pursuant to any of the Operative
Documents.
(iii) Subject to the receipt of any consents and waivers from
HMP&L required for the same (the receipt of which shall be the sole
responsibility of Station Two Subsidiary), for Station Two Subsidiary to assign
and transfer to LEM or another Affiliate of Station Two Subsidiary all or any
portion of its rights, interests and obligations under or pursuant to the
Station Two Power Sales Agreement (as defined in the Station Two Agreement) and
under the Station Two Agreement and relating to the Station Two Power Sales
Agreement, including without limitation, the following:
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<PAGE>
(A) the right of Station Two Subsidiary to purchase
Station Two Surplus Capacity, Excess Henderson Capacity and Excess Henderson
Energy under the Station Two Power Sales Agreement, and the obligation of
Station Two Subsidiary to pay Capacity charges and other amounts to HMP&L
thereunder; and
(B) the right of Station Two Subsidiary to receive and
collect any payments or other amounts owing by, and receive notices due from,
HMP&L under the Station Two Power Purchase Agreement, or by or from Big Rivers
or HMP&L under the Station Two Agreement and relating to the Station Two Power
Sales Agreement.
(b) FURTHER COMMITMENTS. Consistent with Section 16.2 of the New
Participation Agreement and Section 15.2 of the Station Two Agreement, any LG&E
Party electing to make an assignment and transfer to WKE Corp. or another
Affiliate as contemplated in Subsection (a), above, agrees to simultaneously
assign and transfer to WKE Corp. or such Affiliate (as applicable) all rights of
the assigning and transferring Party under all Operative Documents and all other
agreements that relate to the interests being assigned and transferred, and
agrees to cause WKE Corp. or such Affiliate (as applicable) to assume in writing
all duties and obligations of the assigning and transferring LG&E Party under
such agreements that relate to the interests being assigned and transferred.
Nothing contained in this Section 20 shall amend or otherwise modify the rights
and obligations of the Parties under Article 16 of the New Participation
Agreement or Article 15 of the Station Two Agreement.
(c) WKE CORP. AS AN AFFILIATE. Each LG&E Party hereby represents and
warrants to Big Rivers that WKE Corp. is an Affiliate of such LG&E Parties
organized and existing under the laws of the Commonwealth of Kentucky, and
hereby covenants and agrees that WKE Corp. shall be such an Affiliate at such
time (if any) as an assignment and transfer by any LG&E Party to WKE Corp. shall
occur as contemplated in Subsections (a) and (b), above.
(d) REGULATORY APPROVALS. The LG&E Parties acknowledge that, consistent
with Section 16.4 of the New Participation Agreement, in the event any
assignment or transfer of the type contemplated in Subsection (a) or (b), above,
is subject to the jurisdiction of any state or federal regulatory agency, the
LG&E Parties shall bear sole responsibility for obtaining any required approvals
from and other action by that agency, and shall indemnify and hold harmless Big
Rivers (and its respective successors and permitted assigns) from and against
all claims, losses, liabilities, damages, costs (including court costs) and
expenses (including reasonable attorneys' and accountants' fees) suffered or
incurred by Big Rivers as a result of, or with respect to, the LG&E Parties'
failure to obtain the same; provided, that such a failure to obtain a required
consent shall not affect the validity of the transfer unless the transfer is
made void or voidable by applicable laws.
(e) RECOGNITION OF ASSIGNEE. Upon any assignment and transfer of
rights, interests and/or obligations by any of the LG&E Parties to LEM, WKE
Corp. or another Affiliate as contemplated in Subsections (a) and (b), above,
WKE Corp. or such other Affiliate (as
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<PAGE>
applicable) shall be deemed to be an "LG&E Party" for all purposes under the
Operative Documents, and, subject to compliance with this Section 20, Big
Rivers agrees to accept and honor all of the rights, interests and
obligations of WKE Corp. or such Affiliate (if any) so assigned and
transferred to it the same as if it were an original signatory to the
relevant Operative Document(s), agrees to remit and pay to LEM, WKE Corp. or
such Affiliate (as applicable) all amounts (if any) to which it may be
entitled under the Operative Documents as directed by LEM, WKE Corp. or such
Affiliate, consistent with the provisions of those agreements, and agrees to
look solely to LEM, WKE Corp. or such Affiliate (as applicable) for the
performance of such obligations (subject in all cases to the obligations of
LEC under the Guarantee described in Section 21, below, and any other rights
and remedies of Big Rivers under the Operative Documents).
(f) NOTICES. Upon any assignment or transfer of any rights, interests
or obligations of any of the LG&E Parties to WKE Corp. or any other Affiliate of
the LG&E Parties as contemplated in this Section 20 of which Big Rivers has been
notified, any notices, requests, demands or other communications that may be
required or permitted to be made to WKE Corp. or such other Affiliate under any
of the Operative Documents shall be addressed as follows: c/o LG&E Energy Corp.,
220 West Main Street, Louisville, Kentucky 40202, Attn: President, Phone: (502)
627-3665, Facsimile: (502) 627-4622, with a copy to the same additional Persons
as may be set forth in the relevant Operative Document with respect to the LG&E
Parties.
21. LEC ACKNOWLEDGMENT AND AGREEMENT. Consistent with Section 17 of the New
Guarantee Agreement dated April 6, 1998 between LEC and Big Rivers (the
"Guarantee"), upon any assignment and transfer by an LG&E Party to WKE Corp.
and/or another Affiliate of the LG&E Parties as contemplated in Section 20
above, LEC acknowledges and agrees that (i) WKE Corp. and/or such Affiliate
shall be deemed to be an "LG&E Affiliate" for all purposes under the Guarantee,
(ii) any Operative Documents or any other agreements entered into by WKE Corp.
and/or such Affiliate with Big Rivers (or any obligations assumed by WKE Corp.
thereunder) on or prior to the Effective Date, or thereafter by reason of any
assignments or transfers in accordance with Section 16 of the New Participation
Agreement or Section 15 of the Station Two Agreement, shall be deemed
"Agreements" for all purposes under the Guarantee, and (iii) the Guarantee shall
continue in full force and effect in accordance with its terms and apply to any
and all liabilities and obligations of WKE Corp. and/or such Affiliate to Big
Rivers under the "Agreements".
22. ADDITIONAL INTELLECTUAL PROPERTY INDEMNITY AND COVENANTS. In addition to
any other rights that the LG&E Parties may have under the New Participation
Agreement or any other Operative Document, Big Rivers agrees that, following the
Closing, Big Rivers shall indemnify and hold harmless the LG&E Parties (and
their respective successors and permitted assigns) from and against all claims,
losses, liabilities, damages, costs (including court costs) and expenses
(including reasonable attorneys' and accountants' fees) suffered or incurred by
any LG&E Party as a result of, or with respect to, Big Rivers' failure to obtain
any third-party consent or approval (a) to the transfer or assignment to any of
the LG&E Parties (or such successors or permitted assigns) of any of the
Intellectual Property (or any rights to utilize the same) pursuant to the
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<PAGE>
terms of the New Participation Agreement or an Assignment and Assumption
Agreement entered into by Big Rivers with any of the LG&E Parties at the
Closing, or (b) to the leasehold interests, use rights and other rights and
interests granted or purported to be granted pursuant to the Lease and
relating to any patents, patent applications, trade secrets, license rights,
license agreements and franchises (including without limitation, computer
programs and source programs) that are not Intellectual Property
(collectively, "Other Intellectual Property"), which consent or approval Big
Rivers was required to obtain prior to that assignment, transfer, grant or
purported grant pursuant to the terms of any agreement to which Big Rivers is
a party or by which the Intellectual Property or the Other Intellectual
Property is bound. In addition to the foregoing, Big Rivers agrees, upon the
request of any LG&E Party and at Big Rivers' expense, to use its commercially
reasonable efforts following the Closing to obtain any consent or approval of
the type described above which was not obtained by Big Rivers prior to the
Closing. The LG&E Parties agree to reasonably cooperate with Big Rivers in
its attempts to obtain such consents or approvals. The LG&E Parties and Big
Rivers agree that no LG&E Party shall (A) be permitted to use any of the
Intellectual Property or Other Intellectual Property for any purpose other
than the operation and maintenance of the Generating Plants, (B) assign,
sell, license or otherwise divest itself or any interest in such Intellectual
Property other than as contemplated in Section 16 of the New Participation
Agreement, Section 15 of the Station Two Agreement or the Software License
Agreement, or (C) be obligated to provide Big Rivers any additional
consideration for the purchase or use of such Intellectual Property and other
patents, patent applications, trade secrets, license agreements or franchises
other than as expressly contemplated in the Operative Documents or the
Software License Agreement. The foregoing covenants set forth in this Section
22 shall survive any expiration or termination of the New Participation
Agreement for any reason and shall continue to be binding on the Parties,
and, in the case of Big Rivers' covenants, such covenants shall not be
affected, limited or eliminated by reason of any knowledge by the LG&E
Parties that any such consent or approval is required but has not been
obtained by Big Rivers prior to the Closing.
23. ADDITIONAL AMENDMENTS TO NEW PARTICIPATION AGREEMENT. The Parties agree
to make the following additional amendments to the New Participation Agreement:
(a) The reference in Section 4.1 to "business days" is hereby
capitalized.
(b) The reference in Section 4.3.4 to "Settlement Note" is hereby
changed to "Settlement Promissory Note."
(c) The reference in Section 4.4.7 to "Closing Date" is hereby changed
to "Closing date."
(d) The reference in Section 5.1.8 to "Henderson" is hereby changed to
"HMP&L."
(e) The reference in Section 6.1.6 to "WKEC or Leaseco" is hereby
amended to refer to "WKEC or its permitted assignee under the Lease", and the
reference in that Section to
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"the Facilities Operating Agreement and" is hereby deleted.
(f) The reference in Section 7.2.3 to "Henderson" is hereby changed to
"HMP&L."
(g) The reference in Section 7.2.7 to "closing" is hereby capitalized.
(h) The reference in Section 9.4.1 to "City of Henderson" is hereby
changed to "HMP&L."
(i) The reference in Section 11.1 to "Lease and Operating Agreement is
hereby changed to "Lease."
(j) Section 13.1 shall be amended by adding the following language to
the end of that Section:
"The Parties hereby acknowledge that the LG&E Parties have elected,
with respect to the property insurance, general liability insurance,
and boiler and machinery insurance required to be maintained by WKEC
pursuant to Sections 2, 3, and 4, respectively, of Schedule 13.1 to the
Participation Agreement, to enter into a "deductible buy back"
arrangement with Allendale Mutual Insurance Company which effectively
creates a layer of "LG&E Self-Insurance" above the required deductible
levels set forth in Sections 2, 3, and 4 of Schedule 13.1 to the New
Participation Agreement. Any amounts that would be covered by proceeds
of the insurance coverage otherwise required to be maintained by WKEC
pursuant to Sections 2, 3, and 4 of Schedule 13.1 absent the election
referred to in the preceding sentence shall be referred to as "LG&E
Self-Insurance Proceeds."
(k) The reference in Section 14.5 to "post-closing" is hereby changed
to "post-Closing."
(l) The reference in the first sentence of the last paragraph of
Section 16.1 to "(exclusive of WKEC)" is hereby deleted.
(m) The reference in Section 17.1.1(g) to "Parties obligations" is
hereby changed to "Parties' obligations."
(n) The reference in Section 17.4 to "each of the Banks" is hereby
changed to "each of the banks which are parties to the Chapter 11 Case."
(o) The reference in Section 22.2 to "Closing Date" is hereby changed
to "Closing date" and the reference to "Demand Promissory note" is hereby
changed to "Demand Promissory Note."
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(p) The reference in the first sentence of Section 23.3 to "WKEC or
Leaseco" is hereby amended to refer to "the LG&E Parties".
(q) The references in Section 24.1(d) to "Henderson" are hereby changed
to "HMP&L."
(r) The reference in Section 24.1(e)(iii) to "Henderson" is hereby
changed to "HMP&L."
(s) The references in Section 24.1(f) to "Henderson" are hereby changed
to "HMP&L."
(t) The reference in Schedule 3.1, Item I.3 to "Kentucky Public Service
Commission" is hereby changed to "KPSC."
(u) The reference in Schedule 3.1, Sections I.10 and II.15 to "April 7"
is hereby deleted and replaced with "June 15", and the references therein to
"and after the first January 1 that is three full Years after the Effective
Date, their obligation to provide market-priced power to certain of their
industrial customers in accordance with the Plan" is hereby deleted.
(v) The reference in Schedule 3.1, Item I.20 to "each of the Banks" is
hereby changed to "each of the banks which are parties to the Chapter 11 Case."
(w) The reference in Schedule 3.1, Item I.22 to "LEM/Member Agreements
for Electric Service" is hereby changed to "LEM/Green River Electric Agreement
and LEM/Henderson Union Agreement."
(x) The reference in Schedule 3.1, Item I.26 to "Henderson" is hereby
changed to "HMP&L."
(y) The reference in Schedule 3.1, Item II.4 to "Kentucky Public
Service Commission" is hereby changed to "KPSC."
(z) The reference in Schedule 3.1, Item II.19 to "each of the Banks" is
hereby changed to "each of the banks which are parties to the Chapter 11 Case."
(aa) The reference in Schedule 3.1, Item II.20 to "Phase I
Transactions' is hereby changed to "Phase I transactions."
(bb) The reference in Schedule 3.2, Item I.2 to "it is it
necessary" is hereby changed to "it is necessary."
(cc) The reference in Schedule 3.2, Item I.3 to "Kentucky Public
Service
20
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Commission" is hereby changed to "KPSC."
(dd) The reference in Schedule 3.2, Item II (Preamble) to "The
obligations of Big Rivers each of the Phase II Agreements" is hereby changed to
"The obligations of Big Rivers under each of the Phase II Agreements."
(ee) The reference in Schedule 3.2, Item II.2 to "Kentucky Public
Service Commission" is hereby changed to "KPSC."
(ff) The reference in Schedule 3.3, Item I.2 to "Kentucky Public
Service Commission" is hereby changed to "KPSC."
(gg) The reference in Schedule 3.3, Item II.1 to "Kentucky Public
Service Commission" is hereby changed to "KPSC."
24. SETTLEMENT PROMISSORY NOTE. The Parties agree that, assuming the
Closing occurs on July 15, 1998, the principal balance of the Settlement
Promissory Note shall be $[REDACTED], rather than $[REDACTED], reflecting an
agreed upon reduction of $[REDACTED] for each month (pro-rated for the month
of July) from March 1, 1998 through and including the Effective Date. The
Parties further agree that the monthly installments of principal and interest
under the Settlement Promissory Note attached to the New Participation
Agreement as Exhibit K shall be due on the twenty-fifth (25th) day of the
applicable month.
25. PROMISSORY NOTE (LEM ADVANCES). The form of Promissory Note (LEM
Advances) attached to the New Participation Agreement as Exhibit O shall be
revised as follows: (a) in Section 1(a) the period following the word "months"
is deleted and replaced with a comma, and (b) in Sections 1(a), 1(b) and 1(c)
the word "first" is deleted wherever it appears and replaced with the word
"twenty-fifth".
26. REPRESENTATIONS AND WARRANTIES. The Parties acknowledge and agree that
their respective representations and warranties set forth in the New
Participation Agreement shall, when once again made by the Parties at the
Closing pursuant to the Certificates of their authorized officers contemplated
in Sections 4.3.6 and 4.4.11 of the New Participation Agreement, apply to the
New Participation Agreement as amended by this Amendment and the Letter
Agreement and Second Amendment to New Participation Agreement identified in the
first recital of this Amendment. As used in those representations and
warranties, the terms "this Agreement" and the "Operative Documents" shall be
deemed to include, without limitation, the New Participation Agreement as so
amended.
27. ELIMINATION OF DOCUMENTS. The Parties acknowledge and agree that the Oil
Testing Agreement referenced in Schedule 3.1 of the New Participation Agreement
shall not be entered into by them, and shall no longer be a condition precedent
to the Closing. The Parties further acknowledge and agree that the Step-Up
Transformer and Meter O&M Agreement referenced in that Schedule will be divided
into two separate agreements that will be entered into at the
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Closing, entitled Transformer Operation and Maintenance Agreement, and Meter
and Telemetry Equipment Operation and Maintenance Agreement.
28. METER INSTALLATION AND METERING ISSUES. The LG&E Parties agree to install
revenue quality meters and current transformers, as specified in EXHIBIT K-1
attached hereto, at each unit of the Generating Plants on or before the
following dates:
<TABLE>
<CAPTION>
<S> <C>
Wilson - November 1, 1998
Green - November 1, 1998
Station Two - October 1, 1998
Reid and Reid GT - October 1, 1998
Coleman - September 15, 1998
</TABLE>
The LG&E Parties agree to use any unexpected outage opportunity between the
Closing and the dates set forth above to install the meters and current
transformers, rather than waiting until the dates set forth above. The loss
calculation methodology attached hereto as EXHIBIT K-2 will be used to
calculate the losses which are added to the KWh derived from meter readings
to determine the Energy transmitted through the respective Transformer from
the Closing through the time at which the revenue quality meters and current
transformers have been installed. WKEC and, in the case of Station Two,
Station Two Subsidiary agree to pay Big Rivers a penalty of $[REDACTED] for
each day that the installation of the foregoing revenue quality meters and
transformers is delayed beyond the dates set forth above. Notwithstanding the
foregoing, the LG&E Parties will be excused from their performance and
payment obligations set forth in this Section 28 to the extent that any "as
received" meter or transformer equipment is defective when delivered. The
LG&E Parties agree that Big Rivers shall have no obligation to install the
above described meters and current transformers pursuant to either the
Transformer Operation & Maintenance Agreement or the Meter and Telemetry
Operation & Maintenance Agreement, it being expressly understood that the
LG&E Parties shall install or cause to be installed such equipment.
29. MISCELLANEOUS. The Parties acknowledge and agree that the Operative
Documents that will be executed by the Parties at the Closing have been altered
by agreement of the Parties in certain respects from the form of documents
attached to the New Participation Agreement. Except as amended, modified or
supplemented by this Amendment, the provisions of the New Participation
Agreement shall remain in full force and effect from and after the execution
hereof to the same extent as prior to such execution.
30. KEY OIL PAYMENT. At the Closing, the purchase price payable by the LG&E
Parties to Big Rivers for Inventory includes an amount to compensate Big Rivers
for certain quantities of oil which may be in transit from Key Oil Company to
Big Rivers as of the Closing (see Big Rivers Purchase Requisition P660 5). Big
Rivers agrees that it will be solely responsible to Key Oil for the payment for
such oil following its delivery, whether before or after the Closing.
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31. MEMBER TRANSMISSION.
(a) Big Rivers and the LG&E Parties agree that, to the extent
consistent with the directives of the KPSC's July 14, 1998 order in Case No.
98-267 ("KPSC July 1998 Order"), the provisions of Section 6.5 of the
Transmission Service and Interconnection Agreement shall continue to govern
their respective obligations with respect to Member Transmission. The LG&E
Parties and Big Rivers agree that in order to reconcile the KPSC's approval
of Big Rivers' OATT rates with its directive that "unforeseen changes in
transmission costs due to the Smelters' load" be shared, it is appropriate to
interpret the KPSC's order as permitting the Monthly Margin Payments to be
deemed to be full payment at Big Rivers' OATT rates as approved in the KPSC
July 1998 Order. Therefore, and notwithstanding provisions of Section 6.5 of
the Transmission Service and Interconnection Agreement to the contrary, Big
Rivers and the LG&E Parties agree that (i) the Monthly Margin Payments shall
be as set forth in the Operative Documents, (ii) that in the event that Big
Rivers' transmission revenue requirement is not changed or is reduced by
order of the KPSC, Big Rivers will continue to provide as Member Transmission
[REDACTED] MW of network service and up to [REDACTED] MW of non-firm
point-to-point transmission service (so long as no more than [REDACTED] MW is
used simultaneously) as part of the Monthly Margin Payment for so long as the
Monthly Margin Payments are not reduced, (iii) in the event that Big Rivers'
transmission revenue requirement is increased by order of the KPSC (whether
or not after a filing by Big Rivers), that Big Rivers will provide [REDACTED]
MW of network service and up to [REDACTED] MW of non-firm point-to-point
transmission service (so long as no more than [REDACTED] MW is used
simultaneously) for the Monthly Margin Payment PLUS an additional monthly
payment from LEM equal to (x) the product of [REDACTED] multiplied by
[REDACTED] the KPSC approved increase in the annual transmission revenue
requirement multiplied by the load ratio share applicable to the network
transmission service taken as Member Transmission, and (y) in the event that
some portion of the [REDACTED] MW of network transmission service has been
converted to point-to-point transmission service for a period equal to or
longer than a full billing month, [REDACTED] the difference between the
applicable OATT rate for point-to-point transmission (for the portion of the
[REDACTED] MW converted) and the modeled rate of $[REDACTED]/kW/mo.
multiplied by the converted point-to-point transmission service taken in such
month as Member Transmission, and (iv) for the purpose of Section 6.5.2 of
the Transmission Service and Interconnection Agreement, the references
to"$[REDACTED]" and "$[REDACTED]" will be deemed to refer to the OATT rate
approved in the KPSC July 14 Order applicable to the type of service for
which the charge is being determined. In addition, the LG&E Parties agree
that in light of the KPSC July 1998 Order, nothing in Section 6.5.3 of the
Transmission Services and Interconnection Agreement shall be read or enforced
so as to prevent Big Rivers from filing for an increase in its transmission
revenue requirement at the KPSC or any other regulatory commission asserting
jurisdiction over the rates for such service . To the extent the KPSC should
ever direct Big Rivers to determine the payment for Member Transmission other
than as set forth herein, Big Rivers and the LG&E Parties agree to use their
reasonable best efforts to cooperate to amend Section 6.5 of the Transmission
Service and Interconnection Agreement so as to preserve their respective
economic benefits in a manner consistent with the applicable transmission
cost allocations included in any final order of the KPSC.
(b) Big Rivers and the LG&E Parties agree that the provisions in
Section 6.5 of the Transmission Services and Interconnection Agreement with
respect to Member Transmission are
23
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based on Monthly Margin Payments calculated based on the sale of [REDACTED]
MW to [REDACTED] and [REDACTED] MW to [REDACTED], for a total Member
Transmission obligation of [REDACTED] MW of Network Transmission Service. In
recognition of the termination of Monthly Margin Payments with respect to the
[REDACTED] MW of [REDACTED] as of December 31, [REDACTED], Big Rivers and the
LG&E Parties agree that, as of January 1, [REDACTED], all megawatt amounts
included in Member Transmission shall be proportionately reduced. Thus,
during the period from January 1, 2011 to December 31, [REDACTED], Member
Transmission shall consist of [REDACTED] MW of network transmission service
and [REDACTED] MW of non-firm point-to-point transmission, and all references
to [REDACTED] MW of network transmission service in Section 6.5 during this
period shall instead refer to [REDACTED] MW, and all references to [REDACTED]
MW of non-firm point-to-point transmission in Section 6.5 during this period
shall refer to [REDACTED] MW.
24
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to be executed as
of the day and year first written above.
BIG RIVERS ELECTRIC CORPORATION
By: /S/ MICHAEL H. CORE
----------------------------
Name: MICHAEL H. CORE
Title: PRESIDENT AND CEO
LG&E ENERGY MARKETING INC.
By: /S/ JOHN R. McCALL
----------------------------
Name: JOHN R. McCALL
Title: EXECUTIVE VICE PRESIDENT AND
SECRETARY
WKE STATION TWO INC.
By: /S/ GEORGE BASINGER
----------------------------
Name: GEORGE BASINGER
Title: PRESIDENT
WESTERN KENTUCKY ENERGY CORP.
By: /S/ GEORGE BASINGER
----------------------------
Name: GEORGE BASINGER
Title: PRESIDENT
LG&E ENERGY CORP.
By: /S/ GEORGE BASINGER
----------------------------
Name: GEORGE BASINGER
Title: PRESIDENT
25
<PAGE>
EXHIBITS TO THE
THIRD AMENDMENT TO NEW PARTICIPATION AGREEMENT
[* ALL EXHIBITS REDACTED.]
A -- Schedule 9.1 - Inventory Quantification and Valuation
Procedures
B -- Personal Property Lists
C -- Inflation Escalator
D-1,
D-2 &
D-3 -- Initial Period O&M Budgets
E-1,
E-2 &
E-3 -- Initial Period Capital Budgets
F -- Major Capital Repairs Definition
G -- Disclosure Schedule Supplements
H-1,
H-2 &
H-3 -- Exhibits to Mortgages
I -- Amendments to Station Two Agreement
J -- List of Transferred Employees Not to be Employed
26
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CONFIDENTIAL - SUBJECT TO COURT ORDER
- --------------------------------------------------------------------------------
FORM OF
LEASE AND
OPERATING AGREEMENT
BETWEEN
WESTERN KENTUCKY ENERGY CORP.
AND
BIG RIVERS ELECTRIC CORPORATION
July 15, 1998
[* REDACTED=Omitted pursuant to confidential treatment request.
Material filed separately with PSC.]
<PAGE>
CONFIDENTIAL - SUBJECT TO COURT ORDER
LEASE AND OPERATING AGREEMENT
PARTIES
THIS LEASE AND OPERATING AGREEMENT ("Agreement") is dated this 15th
day of July, 1998 (the "Lease Execution Date") between WESTERN KENTUCKY ENERGY
CORP., a Kentucky corporation ("WKEC") and BIG RIVERS ELECTRIC CORPORATION, a
Kentucky rural electric cooperative ("Big Rivers" and together with WKEC, the
"Parties").
RECITALS
A. Pursuant to the New Participation Agreement dated as of April 6,
1998, among Big Rivers, WKEC and certain of WKEC's Affiliates (the
"Participation Agreement"), the parties thereto have entered into various
arrangements for the operation and maintenance of the Assets and the sale of
electricity produced therefrom. This Agreement is one of the Phase II Agreements
described in the Participation Agreement.
B. This Agreement is intended to be an operating lease, and is
intended to establish during the term hereof the respective obligations of WKEC
and Big Rivers with respect to the ownership, lease and operation of the Assets
and all existing and future additions to those Assets, and to govern the
day-to-day operation of the Assets by WKEC.
NOW, THEREFORE, in consideration of the mutual covenants set forth
below, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, capitalized terms not otherwise
defined herein shall have the meaning set forth in Exhibit X to the
Participation Agreement.
ARTICLE 2
LEASE
2.1. Lease Grant. Subject to the terms and conditions of this Agreement,
on the Phase II Effective Date, Big Rivers shall, on an exclusive basis, lease
to WKEC, and WKEC shall lease from Big Rivers (and, with respect to the property
subject to the Real Property Leases, shall sublease), the Tangible Assets during
Phase II, except to the extent such assets are Excluded Assets, Personal
Property or Inventory.
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2.2. Term. The term of the lease contemplated by Section 2.1 ("Term")
shall commence on the Phase II Effective Date and end on the earliest of (i) the
December 31st that is closest to the twenty-fifth anniversary of the Effective
Date and (ii) the date of any termination of this Agreement pursuant to Article
11 hereof or pursuant to the relevant provisions of the Guaranty or the Station
Two Agreement.
2.3. Rental and Margin Payments
2.3.1. Initial Rental Payment. In the event that the Phase II
Effective Date occurs prior to the Phase I Effective Date, WKEC shall pay to
Big Rivers on the Phase II Effective Date, as an initial rental payment (the
"Initial Rental Payment"), an amount equal to $[REDACTED], subject to
adjustment as set forth in Section 9.3 of the Participation Agreement (PP
Price adjustment). In the event that the Phase II Effective Date occurs
following the Phase I Effective Date but prior to the second anniversary of
the Phase I Effective Date, an amount equal to the amount actually refunded
by Big Rivers to LEM pursuant to Section 3.3(a) of the Power Purchase
Agreement shall be due and payable hereunder by WKEC to Big Rivers on the
Phase II Effective Date. For the avoidance of doubt, the parties acknowledge
that, except as set forth in this Section 2.3.1 and Section 10.7(d) of the
Station Two Agreement, no rental shall be due for the period from the
Effective Date until the second anniversary of such date.
2.3.2. Annual Rental; Monthly Installment Payments; Monthly Margin
Payments. (a) On the later to occur of (x) the Phase II Effective Date and (y)
the second anniversary of the Effective Date, and for each subsequent year
during Phase II, after taking into account all applicable Phase I Adjustments,
if any, and any reduction effected pursuant to Section 10.1.2, 10.2.2 or 11.6
hereof, WKEC shall pay Big Rivers an annual rental payment of $[REDACTED],
subject to adjustment pursuant to Section 9.3 of the Participation Agreement (PP
Price adjustment), as follows: WKEC shall pay the annual rental in equal monthly
installments of $[REDACTED] (subject to adjustment as set forth in this Article
2), with the first monthly installment to be paid on the later of (x) the Phase
II Effective Date and (y) the second anniversary of the Effective Date, and each
remaining monthly installment to be paid on the first day of each calendar month
through the December 1st that is closest to the twenty-fifth anniversary of the
Effective Date; provided, that if the Phase II Effective Date occurs after the
second anniversary of the Effective Date, WKEC shall not be obligated hereunder
to pay rent with respect to any month, or portion thereof, prior to the Phase II
Effective Date, and all rental payments on an annual basis as well as a monthly
basis shall be pro rated to reflect this understanding; and provided, further,
that if the first monthly installment of the rental payment under this Section
2.3.2 is due on a day other than the first day of the month, WKEC shall pro rate
that installment by the ratio that the remaining number of days in the month
bears to the total number of days in that month. After taking into account all
applicable Phase I Adjustments, if any, if Big Rivers elects to reduce the
Contract Limits pursuant to Subsection 4.3(e) of the Power Purchase Agreement,
the total annual rental payment provided for in this Subsection 2.3.2 shall be
increased effective on January 1 of the Year in which the reduction becomes
effective to an amount equal to the product of $[REDACTED] (subject to
adjustment pursuant to Section 9.3 of the Participation Agreement) multiplied by
the sum of one (1) plus the CCAP. The monthly installment due on such
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CONFIDENTIAL - SUBJECT TO COURT ORDER
January 1 and on the first day of each month during the remainder of Phase II
shall be adjusted accordingly. The Parties acknowledge that Big Rivers may elect
to reduce the Contract Limits under Subsection 4.3(e) of the Power Purchase
Agreement on more than one occasion, and that the annual rental payment and
associated monthly installments shall be adjusted as provided in this Subsection
2.3.2 on each such occasion.
(b) WKEC shall also pay to Big Rivers a Monthly Margin Payment as follows:
In the event the Phase II Effective Date occurs prior to the Phase I Effective
Date, the first Monthly Margin Payment under this Agreement shall be due on the
second occurrence of a 25th day of the month after the Effective Date, and a
Monthly Margin Payment will be due from WKEC to Big Rivers on each 25th day of
the month thereafter until and including January 25, [REDACTED], at which time
no additional Monthly Margin Payments will accrue. In the event the Phase I
Effective Date occurs prior to the Phase II Effective Date, the first Monthly
Margin Payment under this Agreement shall be due on the first 25th day of the
month immediately following the Phase II Effective Date (or on the Phase II
Effective Date, if the Phase II Effective Date occurs on the 25th day of the
Month), and a Monthly Margin Payment will be due from WKEC to Big Rivers on each
25th day of the month thereafter until and including January 25, [REDACTED].
Each Monthly Margin Payment is due in the amount set forth in the Schedule of
Monthly Margin Payments attached to this Agreement as Schedule 2.3; provided
that if the Phase II Effective Date occurs prior to the Phase I Effective
Date and on other than the first day of a month, then the first Monthly
Margin Payment (due at the relevant time described above) will be the amount
designated on Schedule 2.3 for the month in which the Effective Date
occurred, multiplied by the ratio of (i) the number of days between the
Effective Date and the last day of the month and (ii) the total number of
days in that month. In the event the Term shall end prior to January 25,
[REDACTED], but on a date other than the last day of a month, then WKEC shall
pay to Big Rivers a prorated share of the Monthly Margin Payment for the
month in which the Term ended based on the ratio by which the number of days
in that month through and including the date on which the Term ended bears to
the total number of days in that month.
(c) Notwithstanding any provisions of this Section 2.3 to the contrary:
(i) in the event this Agreement shall be terminated but the Station Two
Agreement shall thereafter continue in effect, then so long as the Station
Two Agreement shall continue in effect (and through January 25, [REDACTED] in
accordance with Schedule 2.3), WKEC shall continue to pay to Big Rivers a
portion of the Monthly Margin Payments equal to (x) the relevant Monthly
Margin Payment, multiplied by (y) a fraction, the numerator of which is the
amount determined by subtracting from [REDACTED] the total number of
megawatts of capacity from Station Two that are reserved for use by HMP&L
during that month, and the denominator of which is the amount determined by
subtracting from [REDACTED] the total number of megawatts of capacity from
Station Two that are reserved for use by HMP&L during that month, and (ii) in
the event the Station Two Agreement shall be terminated but this Agreement
shall thereafter continue in effect, then the Monthly Margin Payments that
shall thereafter be owing by WKEC to Big Rivers shall be reduced by the
amount established by multiplying (x) by (y) as described in Subclause
(c)(i), above. No cessation or modification of the Monthly Margin Payments
pursuant to this Subsection (c) shall constitute or be construed as a waiver
or bar to any right of Big Rivers to seek to
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CONFIDENTIAL - SUBJECT TO COURT ORDER
recover any damages resulting from any breach or default by WKEC hereunder, or
by any other LG&E Party under any of the other Operative Documents, to which Big
Rivers otherwise would be entitled.
(d) Notwithstanding anything contained in Section 2.3.2(c)(ii) of this
Agreement to the contrary, upon any termination of the Station Two Agreement
that would otherwise result in a reduction in the Monthly Margin Payments
pursuant thereto such reduction shall nonetheless be suspended, and the relevant
Monthly Margin Payments shall once again become payable by WKEC hereunder, if,
within 60 days after the termination of the Station Two Agreement, Big Rivers
shall have taken such actions, in compliance with Section 13.8 of the Station
Two Agreement, as shall be necessary to prevent the LG&E Parties (or any of
them) from having the right, pursuant to Section 13.8 of that agreement, to an
abatement against the Annual Fixed Payments or the rental payments (as
applicable, due by them to Big Rivers, to a reimbursement of the Initial Fixed
Payment or Initial Rental Payment, to a reduction in the Contract Limits, or to
terminate any of the Operative Documents other than the Station Two Agreement,
each as contemplated in Section 13.8 of that agreement; provided, that in the
event those LG&E Parties shall at any time thereafter have the immediate right
to take any of the foregoing actions or exercise any of the foregoing rights or
remedies in accordance with Section 13.8, then the provisions of this Subsection
2.3.2(d) shall no longer suspend operation of Subsection 2.3.2(c)(ii).
(e) Big Rivers agrees with WKEC that WKEC shall have the right, on behalf
of its Affiliate, LEM, to set-off against the Monthly Margin Payments that may
become due and owing to Big Rivers hereunder, at any time following the second
anniversary of the Effective Date, the monthly installments of principal and
interest that may be due and owing by Big Rivers to LEM under the Promissory
Note (LEM Advances) in accordance with the terms and conditions of such note,
and any such set-off by WKEC shall be deemed to satisfy its obligations to Big
Rivers hereunder with respect to the Monthly Margin Payments (or any portions
thereof) so set-off.
(f) (i) If the Monthly Margin Payment has been adjusted pursuant to
Section 2.3.2.(c)(ii) of this Agreement and Big Rivers is permitted pursuant to
the Station Two Power Sales Agreement (as defined in the Station Two Agreement)
to purchase energy or capacity from Station Two, then: (A) Big Rivers will sell
to LEM and LEM will buy Bundled Ancillary Services (as defined in section
(f)(iii) below) for resale to [REDACTED] for the benefit of [REDACTED] and (B)
the Monthly Margin Payment will be reduced by an amount equal to the amount due
to Big Rivers from LEM for such services during that month; provided, however,
that WKEC will continue to make payments to Big Rivers in the same amount as the
regularly scheduled Monthly Margin Payment that is otherwise due pursuant to the
Operative Documents (taking into consideration, inter alia, any adjustment
required by Section 2.3.2.(c)) and Big Rivers will accept such payment as
payment, in full, of the amount owed to Big Rivers by WKEC for the Monthly
Margin Payment then due and by LEM for the services described above for such
month. Pursuant to this paragraph, Big Rivers must provide such services to LEM
in the same quantities as LEM is required to provide such services to
[REDACTED] to meet the requirements of [REDACTED].
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CONFIDENTIAL - SUBJECT TO COURT ORDER
(ii) If the Monthly Margin Payment has been adjusted pursuant to
Section 2.3.2.(c)(i) of this Agreement, then (A) Big Rivers will sell to LEM
and LEM will buy Bundled Ancillary Services (as defined below) for resale to
[REDACTED] for the benefit of [REDACTED] and (B) the Monthly Margin Payment
will be reduced by an amount equal to the amount due to Big Rivers from LEM
for such services during that month; provided, however, that WKEC will
continue to make payments to Big Rivers in the same amount as the regularly
scheduled Monthly Margin Payment that is otherwise due pursuant to the
Operative Documents (taking into consideration, inter alia, any adjustment
required by Section 2.3.2.(c)) and Big Rivers will accept such payment as
payment, in full, of the amount owed to Big Rivers by WKEC for the Monthly
Margin Payment then due and by LEM for the services described above for such
month. Pursuant to this paragraph, Big Rivers must provide such services to
LEM in the same quantities as LEM must provide such services to [REDACTED] to
meet the power requirements of [REDACTED].
(iii) The Bundled Ancillary Services are (A) those services
described by Big Rivers in Schedules 3, 4, 5, and 6 of the Open Access
Transmission Service Tariff attached as Exhibit 1 to the Transmission Services
and Interconnection Agreement, or (B) such services that the FERC determines
transmission providers must provide in lieu of or as extensions of the services
described in subpart (A) of this sentence.
2.3.3. Adjustment for Incremental Environmental O&M. WKEC shall
include Incremental Environmental O&M within the Annual O&M Budget(s). After
taking into account all applicable Phase I Adjustments, if any, pursuant to
the payment terms described in this Section 2.3.3, Big Rivers shall directly
pay a share of all Incremental Environmental O&M incurred by WKEC each year
during Phase II, as and when incurred by WKEC, as follows (in each case "Big
Rivers' Incremental Environmental O&M Share"): (i) Big Rivers' share of
Incremental Environmental O&M incurred during the period from the Effective
Date until December 31, [REDACTED], inclusive, is [REDACTED]; (ii) Big
Rivers' share of Incremental Environmental O&M incurred during the period
from January 1, [REDACTED] to December 31, [REDACTED], inclusive, is
[REDACTED]%; and (iii) Big Rivers' share of Incremental Environmental O&M
incurred during the period from January 1, [REDACTED] until the Termination
Date, inclusive, is [REDACTED]%. Big Rivers' payments shall be made by
reducing each monthly installment of rent by an amount equal to Big Rivers'
Incremental Environmental O&M Share based on the Incremental Environmental
O&M estimated by WKEC to be incurred in such month by WKEC consistent with
the Annual O&M Budget (including all modifications thereto approved by the
Parties in accordance with this Agreement). Within 120 days after the end of
each year, WKEC shall compute the actual Incremental Environmental O&M for
the year ("Actual Environmental O&M") and shall compare the Actual
Environmental O&M with the aggregate payments made by Big Rivers (through
reductions in the rent) pursuant to the immediately preceding sentence of
this Section 2.3.3 during such year ("Environmental Rent Reduction"). If Big
Rivers' Incremental Environmental O&M Share of the Actual Environmental O&M
is more than the Environmental Rent Reduction, Big Rivers shall promptly pay
such difference to WKEC. If Big Rivers' Incremental Environmental O&M
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CONFIDENTIAL - SUBJECT TO COURT ORDER
Share of the Actual Environmental O&M is less than the Environmental Rent
Reduction, WKEC shall promptly pay such difference to Big Rivers. Except as
expressly provided in this Section 2.3.3, elsewhere in this Agreement or in any
other Operative Document to the contrary, Big Rivers shall have no obligation or
liability to the LG&E Parties for any operating or maintenance costs relating to
the Assets.
2.3.4. [RESERVED.]
2.4. Covenant of Quiet Enjoyment. Subject to the terms, covenants,
conditions and provisions of this Agreement and the other Phase II Agreements,
WKEC shall have the exclusive use and enjoyment of the Tangible Assets and the
Energy output of the Tangible Assets during the Term, without interference from
Big Rivers.
2.5. No Other Interest. Except as expressly provided in Section 9 of the
Participation Agreement, this Agreement is intended as and shall constitute an
agreement of lease and nothing herein or elsewhere contained shall be construed
as conveying to WKEC any right, title or interest in or to the Tangible Assets,
except as lessee only.
2.6. Return of the Tangible Assets. Upon the expiration or other
termination of the Term, WKEC will immediately return the Tangible Assets to
Big Rivers by surrendering the same into the possession of Big Rivers, in
good condition and state of repair consistent with Prudent Utility Practice
subject only to ordinary wear and tear, including any replacements,
improvements or additions to the Tangible Assets. WKEC acknowledges and
agrees that it does not have the right to hold over at any time and Big
Rivers may exercise any and all remedies at law or in equity to recover
possession of the Tangible Assets, as well as any damages incurred by Big
Rivers, due to WKEC's failure to return and surrender possession of the
Tangible Assets as required by this Agreement. If WKEC holds over after the
expiration or earlier termination of the Term without Big Rivers' prior
written consent, WKEC will be deemed a tenant at sufferance, at a daily
rental rate equal to the sum of (i) [REDACTED]% of the daily rent payable
pursuant to Section 2.3.2 during the last year of the Term, and (ii) the
quotient of (x) the relevant Monthly Margin Payment divided by (y) the number
of days in that month, and WKEC will be bound by all of the other terms,
covenants and agreements of this Agreement as the same may apply to a tenancy
at sufferance.
ARTICLE 3
DISCLAIMER OF REPRESENTATIONS AND WARRANTIES
THE REPRESENTATIONS AND WARRANTIES SET FORTH IN ARTICLE 5 OF THE
PARTICIPATION AGREEMENT AND IN SECTION 6 OF THE STATION TWO AGREEMENT ARE IN
LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF BIG RIVERS, WHETHER WRITTEN,
ORAL, OR IMPLIED, WITH RESPECT TO THIS AGREEMENT AND ANY OTHER OPERATIVE
DOCUMENT, OR THE ASSETS. WKEC HEREBY ACKNOWLEDGES AND AGREES THAT, SUBJECT TO
THE PROVISIONS OF
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ARTICLE 5 OF THE PARTICIPATION AGREEMENT, BIG RIVERS LEASES AND WKEC TAKES THE
ASSETS AS IS AND WHERE IS AND BIG RIVERS SHALL NOT BE DEEMED TO HAVE MADE ANY
OTHER REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE ASSETS
OR ANY PART THEREOF, THE MERCHANTABILITY THEREOF OR THE FITNESS THEREOF FOR ANY
PARTICULAR PURPOSE. THE PROVISIONS OF THIS ARTICLE 3 HAVE BEEN NEGOTIATED AND,
EXCEPT AS EXPRESSLY PROVIDED IN ARTICLE 5 OF THE PARTICIPATION AGREEMENT AND IN
SECTION 6 OF THE STATION TWO AGREEMENT, ARE INTENDED TO BE A COMPLETE EXCLUSION
AND NEGATION OF ANY REPRESENTATIONS OR WARRANTIES BY BIG RIVERS, EXPRESS OR
IMPLIED, WITH RESPECT TO THE TANGIBLE ASSETS.
ARTICLE 4
ADDITIONAL OBLIGATIONS OF BIG RIVERS
In addition to all other obligations of Big Rivers set forth herein,
Big Rivers shall, during Phase II, upon WKEC's reasonable request, make
available to WKEC, to the extent not previously provided to WKEC, the original
or a copy of any and all information in Big Rivers' possession related to the
operation and maintenance of the Tangible Assets, including but not limited to
reports, drawings, instructions or manuals, warranties, recall notices,
protocols, testing results, etc. provided to Big Rivers by equipment
manufacturers or other sources.
ARTICLE 5
WKEC AND OPERATIONS
5.1. Designation. WKEC shall be the operator of the Tangible Assets during
Phase II.
5.2. Powers and Duties of WKEC
5.2.1. Use. WKEC agrees to use the Assets only for the generation of
electric Energy and uses incidental thereto, so long as such incidental use does
not decrease the Capacity or increase the cost of electric Energy generated from
the Assets.
5.2.2. Maintenance and Operation. Subject to Section 10.2 with
respect to WKEC's right to determine whether or not to restore an Enhancement or
a Major Capital Improvement, WKEC, solely at its own expense, except as
otherwise expressly contemplated by this Agreement, shall at all times,
maintain, operate, service and repair the Tangible Assets, Enhancements and
Major Capital Improvements and any additions, alterations or improvements
thereto in accordance with Prudent Utility Practice. In addition to, and not in
any way limiting the foregoing, WKEC shall, subject to Section 10.2 with respect
to its right to determine whether or not to restore an Enhancement or a
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Major Capital Improvement, operate and maintain the Tangible Assets,
Enhancements and Major Capital Improvements and any additions, alterations or
improvements thereto:
(a) In substantial compliance with any and all Laws or as
otherwise provided in Item 137 of Schedule 5.1.19 of the Participation
Agreement; and
(b) In substantial compliance with any standards imposed by
any insurance policies required to be maintained by WKEC hereunder, under the
Participation Agreement, or under any other Operative Document.
WKEC shall be responsible for overseeing the design, construction and placing in
service of each Capital Asset authorized in any Annual Capital Budget or any
modification to such budget approved by the Operating Committee pursuant to
Article 7.
5.3. Marketing of Energy. Subject to the terms and conditions of this
Agreement and the other Phase II Agreements, WKEC shall control the output of
the Facilities in its sole discretion and shall have the right to market and
dispatch Energy generated by the Facilities in its sole discretion and for its
own account.
5.4. Cooperation Between Big Rivers and WKEC
5.4.1. System Dispatch. WKEC shall not be responsible for
dispatching Big Rivers' Transmission System, it being agreed that Big Rivers
shall be responsible for such dispatch consistent with the Transmission Service
and Interconnection Agreement. WKEC shall cooperate with Big Rivers' requests in
this connection if such cooperation is required in order for Big Rivers to
perform its obligations under the Transmission Service and Interconnection
Agreement.
5.4.2. Permits; Reports. Big Rivers shall cooperate with WKEC in
timely preparing, submitting and executing such information, records, statements
or other materials required to obtain and continue in effect any Permits
required in connection with the Tangible Assets and any changes to those Permits
deemed necessary or desirable, in the reasonable discretion of WKEC consistent
with Prudent Utility Practice, to operate the Tangible Assets during Phase II in
accordance with Prudent Utility Practice; provided, however, that Big Rivers
shall not be required to incur any out-of-pocket expenses to fulfill its
obligations under this Section 5.4.2 unless WKEC agrees to reimburse Big Rivers
for such out-of-pocket expenses. In addition, Big Rivers agrees to provide WKEC,
upon its request, with any and all information to be included in any report,
notice or filing which WKEC is obligated to make with respect to the operation
of the Facilities with governmental or other regulatory authorities, which
information Big Rivers possesses and which is not otherwise available to WKEC.
5.4.3. Access to Facilities; Inspection. Big Rivers shall have
access to, and ingress and egress from, the Facilities and the Real Property at
all times for the purposes of (a) expanding, maintaining, operating, repairing,
renewing, replacing and upgrading Excluded Assets (including, without
limitation, constructing new transmission facilities) and (b) upon prior written
notice to WKEC, examining and observing the operation of the Tangible Assets,
provided such activity does not unreasonably interfere
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with WKEC's operation of the Facilities or its ability to otherwise fulfill its
responsibilities under this Agreement. In addition, upon prior written notice to
WKEC, Big Rivers and its authorized representatives may visit and inspect the
Tangible Assets and obtain copies (at Big Rivers' expense) of any documents or
instruments evidencing any Intangible Assets, and the books and records WKEC is
required to keep, or cause to be kept, pursuant to this Agreement, and make
copies and extracts therefrom, and may discuss any matters relating to this
Agreement or any other Phase II Agreement with the officers and employees of
WKEC and, in the presence of any officer of WKEC with WKEC's independent
accountants. Each such inspection and review shall be conducted at the expense
and risk of Big Rivers during normal business hours upon reasonable prior notice
to WKEC. Big Rivers shall have no duty to make any such inspection or inquiry
and shall not waive any rights hereunder or incur any liability or obligation by
reason of not making such inspection or inquiry.
ARTICLE 6
OPERATING COMMITTEE
6.1. Establishment and Purpose. Each of Big Rivers and WKEC hereby
establish an Operating Committee consisting of not more than two representatives
appointed by each such Party. Each such Party shall promptly designate its
representatives on the Operating Committee by notice given to the other such
Party. Each such Party may appoint one or more alternates to act in the absence
of a regular member or members. The chair of the Operating Committee shall be a
representative of WKEC. The chair shall be responsible for calling meetings and
establishing agendas in consultation with the other such Party.
The purpose of the Operating Committee shall be to serve as a means
of securing effective cooperation and interchange of information and of
providing consultation on a prompt and orderly basis among all parties to the
various Operative Documents in connection with various administrative and
technical matters which may arise from time to time in connection with the
obligations of the parties thereunder. The Operating Committee shall have the
following responsibilities:
(a) Provide liaison among the parties with respect to their
obligations under the Operative Documents.
(b) Establish such other ad hoc committees which may be necessary
from time to time pursuant to this Section 6.1 and exercise general supervision
over such ad hoc committees.
(c) Attempt to resolve disputes among the parties arising under the
Operative Documents.
(d) Review and approve the Annual O&M Budget and the Annual Capital
Budget (including deviations therefrom) as provided in Article 7 hereof.
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(e) Review and confirm the Environmental Rent Reduction and
the Actual Environmental O&M.
(f) Review and confirm WKEC's analysis of the total
expenditures caused by any Operating Emergency.
(g) Perform any other responsibility established for it under
any Operative Document.
6.2. Decisions. WKEC shall make recommendations to Big Rivers with respect
to all matters taken under consideration by the Operating Committee. With
respect to all matters other than budget approval (which are addressed in
Section 7 hereof) considered by the Operating Committee, each of Big Rivers and
WKEC shall have one vote on the Operating Committee. Each Party's vote may be
exercised by the representatives appointed by the Party or, in the absence of
one or both, by an alternate(s). The members or alternates voting on behalf of a
Party shall cast that Party's vote as a single unit and shall not have the right
to vote separately. Decisions made by the Operating Committee shall be by
unanimous vote of the Parties. If the Operating Committee is unable to reach a
decision in accordance with the terms of this Section 6, the matter shall be
resolved in accordance with Article 15 of the Participation Agreement.
6.3. Meetings. The Operating Committee shall meet at least twice annually
including in November or December (for review and approval of the Annual O&M
Budget and the Annual Capital Budget) or more often by mutual agreement.
Meetings shall be held at Henderson, Kentucky or any other mutually agreed
place.
6.4. Notice. WKEC shall give not less than ten days' notice to Big Rivers
of regular meetings. Each meeting notice shall include an agenda prepared by
WKEC. Notice may be waived by written consent of both Big Rivers and WKEC.
6.5. Quorum. A quorum for any meeting shall exist if each of Big Rivers
and WKEC is represented by at least one of its two members.
6.6. Minutes. WKEC shall maintain minutes of Operating Committee meetings
and telephone conference calls. WKEC's representative shall prepare and
distribute the minutes to Big Rivers' representatives within 45 days after each
meeting or telephone conference call of the Operating Committee. The minutes,
when signed by Big Rivers and WKEC, shall be the official record of the
decisions made by the Operating Committee and shall bind WKEC and Big Rivers.
6.7. Action Without Meeting. In lieu of meetings, the Operating Committee
may hold telephone conference calls with WKEC and Big Rivers simultaneously and
in which each such Party shall be represented by at least one of its two
representatives. The Operating Committee, in lieu of deciding any matter at a
meeting or by telephone conference, may act by instrument in writing signed by
each such Party's representatives on the Operating Committee.
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6.8. Costs. Each of WKEC and Big Rivers shall bear for its own account all
expenses incurred by such Party's representatives on the Operating Committee in
connection with their duties on the Operating Committee. The Operating Committee
may condition its approval of any Annual O&M Budget or Annual Capital Budget
hereunder (or modification of either) upon receipt of such studies and other
information as they may deem appropriate.
6.9. No Modification of Agreement. The Operating Committee may not modify
any of the terms, covenants or conditions of any Operative Document.
6.10. Cooperation of the Parties. The Parties agree to cooperate and to
provide the Operating Committee with such information as is reasonably necessary
for the Operating Committee to perform its responsibilities.
ARTICLE 7
ANNUAL BUDGETS
7.1. Operations Pursuant to Budgets. During the partial Year following the
Effective Date, if any, and during the two full Years immediately following that
partial Year or the Effective Date, as applicable, (collectively, the "Initial
Budget Period"), the Annual O&M Budgets and the Annual Capital Budgets attached
hereto as Schedule 7.1 shall govern (the "Initial Period Budgets"). The Parties
may review and modify such Initial Period Budgets by mutual agreement. WKEC
shall, for each Year following the Initial Budget Period during the remainder of
Phase II, prepare an Annual O&M Budget and an Annual Capital Budget pursuant to
this Article 7. Operations shall be conducted and expenses shall be incurred
pursuant to the Annual O&M Budget and the Annual Capital Budget approved by the
Operating Committee. WKEC shall also provide the Operating Committee with 5-year
plan projections of the Annual O&M Budget and the Annual Capital Budget for
information purposes only.
7.2. Content of Annual Capital Budget and Annual O&M Budget. The Annual
O&M Budget for each Year shall include details of all anticipated costs and
expenses relating to the operation and maintenance of the Tangible Assets for
the Year and shall separately identify all Incremental Environmental O&M for the
period. The Annual Capital Budget shall describe each Capital Asset in detail
(including, but not limited to, equipment or construction specifications), shall
specify whether expenses related to that Capital Asset are Incremental Capital
Costs or Non-Incremental Capital Costs and shall include cash flow forecasts,
cost estimates, and proposed dates for installation and/or replacement in
reasonable detail.
7.3. Review and Approval of Annual Capital Budget and Annual O&M Budget.
On or before September 1 of the last year of the Initial Budget Period and each
subsequent Year, WKEC shall submit in writing to each member of the Operating
Committee a proposed Annual O&M Budget and a proposed Annual Capital Budget in
each case for the next calendar year. Within 60 days after receipt of WKEC's
proposed Annual O&M Budget and proposed Annual Capital Budget, Big Rivers may
propose
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modifications thereto. The Operating Committee shall meet to consider any
proposed modifications and to approve the Annual O&M Budget and the Annual
Capital Budget. The Operating Committee shall approve each calendar year's
Annual O&M Budget and the Annual Capital Budget so long as such budgets are
consistent with Prudent Utility Practice and this Agreement, subject to the
limitations set forth in Section 8.1. Unless the Operating Committee unanimously
approves a proposed modification, subject to the requirements of this paragraph,
the Operating Committee must approve the Annual O&M Budget and the Annual
Capital Budget without such modification if such unmodified budgets are
consistent with Prudent Utility Practice and this Agreement, subject to the
limitations set forth in Section 8.1.
7.4. Deadlock. In the absence of an approved Annual O&M Budget, WKEC shall
operate and maintain the Assets in accordance with Prudent Utility Practice. In
the absence of an approved Annual Capital Budget or an approved acquisition of a
Capital Asset, WKEC may (but shall not be obligated to, as a condition of
mediation or arbitration of the disputed budget or Capital Asset) install or
cause a disputed Capital Asset to be installed; provided, however, that WKEC
shall bear the full cost of such Capital Asset for its own account unless the
Parties otherwise agree or mediation or arbitration under Article 15 of the
Participation Agreement finds that WKEC is entitled to reimbursement from Big
Rivers because Big Rivers was obligated to pay for the Capital Asset pursuant to
Article 8. If the Operating Committee fails to approve an Annual O&M Budget or
an Annual Capital Budget for the following calendar year on or before December
15th the Parties will proceed with the dispute resolution procedures set forth
in Article 15 of the Participation Agreement.
7.5. Budget Deviations. WKEC shall immediately notify the Operating
Committee of any anticipated departure of [REDACTED] or more from an approved
Annual Capital Budget or Annual O&M Budget. WKEC shall use reasonable efforts
to (a) operate within [REDACTED] percent to [REDACTED] percent of the total
approved Annual Capital Budget and (b) spend at least [REDACTED] percent of
the total approved Annual O&M Budget (not including the fuel and reagent
budget). Subject to the provisions set forth below, any increase of [REDACTED]
% or more proposed by WKEC to either budget shall be subject to review and
approval by the Operating Committee; provided, that such review and approval
shall not apply to the Annual O&M Budgets that are included in the Initial
Period Budgets, it being understood that increases of [REDACTED]% or more
proposed by WKEC to those budgets shall be permissible without that review
and approval if the relevant expenditures are consistent with Prudent Utility
Practice, in which case the additional costs will be borne by WKEC unless
they constitute Incremental Environmental O&M required to be borne solely by
WKEC and Big Rivers in the manner provided for in Section 2.3.3. If WKEC
exceeds the total budget for Non- Incremental Capital Costs (exclusive of
such costs as are for Major Capital Repairs) that are included in an approved
Annual Capital Budget, the additional cost of those Non-Incremental Capital
Costs shall be borne by WKEC unless the Parties otherwise agree, or unless
remaining portions of the Big Rivers Contribution for that Year that were not
included in the approved Annual Capital Budget are available as contemplated
in Section 20.6.2 of the Participation Agreement (in which event such amounts
will be applied as contemplated in that Section). Subject to the next
succeeding sentence, if WKEC exceeds [REDACTED] percent of the total budget
for Incremental Capital Costs,
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or for Non-Incremental Capital Costs for Major Capital Repairs, in either
case that are included in an approved Annual Capital Budget, the additional
costs of those Capital Assets shall be borne by WKEC unless the Parties
otherwise agree, or unless the dispute resolution procedure under Article 15
of the Participation Agreement determines that at the time WKEC proposed the
applicable portions of the Annual Capital Budget (or modification thereof)
relating to those expenditures WKEC acted consistent with Prudent Utility
Practice, in which case the additional costs shall be borne by WKEC and Big
Rivers in accordance with Sections 8.3 and 8.4. Notwithstanding the
provisions of the immediately preceding sentence, if WKEC exceeds [REDACTED]
percent of the total of any budget for Incremental Capital Costs, or for
Non-Incremental Capital Costs for Major Capital Repairs, that are included in
an approved Annual Capital Budget that is a part of the Initial Period
Budgets, the additional cost of those Capital Assets shall be borne by WKEC
unless the Parties otherwise agree, or unless the dispute resolution
procedure under Article 15 of the Participation Agreement determines that the
purchase and installation of those Capital Assets, and the costs thereof, are
consistent with Prudent Utility Practice, regardless of whether the relevant
Initial Period Budget, or WKEC's actions in connection with the same, were
consistent with Prudent Utility Practice at the time that budget was
prepared, in which case the additional costs shall be borne by WKEC and Big
Rivers in accordance with Sections 8.3 and 8.4. If WKEC fails or refuses to
use reasonable efforts to spend at least [REDACTED] percent of the total
approved Annual Capital Budget or the total approved Annual O&M Budget
(excluding that portion relating to Incremental Environmental O&M) and
pursuant to the dispute resolution procedure under Article 15 of the
Participation Agreement it is determined that such failure or refusal is
inconsistent with Prudent Utility Practice, WKEC shall make the omitted
expenditure as required pursuant to the applicable dispute resolution
procedure.
7.6. Operating Emergency. Notwithstanding any other provision of this
Agreement, in the event of an Operating Emergency, WKEC may take such action as
in its sole discretion it may deem prudent or necessary to terminate the
Operating Emergency, to preserve and maintain the safety, integrity and
operability of the Tangible Assets and to maintain Capacity and the availability
of the Tangible Assets to the maximum extent. Additional capital expenditures
incurred by WKEC in response to an Operating Emergency which are not already
included in an approved Annual Capital Budget shall be paid for by WKEC unless
(a) the same represents an Incremental Capital Cost or expenditures for a Major
Capital Repair, in which case such expenditures shall be paid by WKEC and Big
Rivers in accordance with Article 8 of this Agreement, or (b) Big Rivers shall
not have paid the entire Big Rivers Contribution for that year toward funding of
one or more Non- Incremental Capital Costs (other than costs for Major Capital
Repairs) and/or Henderson Non-Incremental Capital Costs (other than costs for
Henderson Major Capital Repairs) in accordance with Article 7 of the Cost
Sharing Agreement, Article 8 of the Lease and/or Section 8.17 or 9.10 of the
Station Two Agreement (as applicable), then that remaining amount will be
allocated to any Non-Incremental Capital Costs resulting from that Operating
Emergency as contemplated in Section 20.6.2 of the Participation Agreement.
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ARTICLE 8
PAYMENT OF CAPITAL ASSETS
8.1. Annual Capital Budget. Capital Assets included in an Annual
Capital Budget or any modification of that budget approved by the Operating
Committee shall be paid for or reimbursed in accordance with this Article 8.
Notwithstanding anything to the contrary in this Agreement or in any other
Operative Document, Big Rivers shall have no obligation to (a) authorize the
acquisition or construction of or pay for any Capital Assets unless such
Capital Assets are necessary, consistent with Prudent Utility Practice, to
maintain the Capacity of the Facilities that is physically available and can
be legally utilized at [REDACTED] net MW or to comply with any requirement of
applicable Laws or administrative or judicial interpretation of an applicable
Law (including without limitation, Environmental Laws) or any regulatory
authority (including for the avoidance of doubt, and without regard for the
actual time for the enactment or implementation of the same, without
limitation, the Proposed SIP Call and any Laws that may be enacted or
implemented pursuant thereto or in connection therewith), in which case Big
Rivers shall be obligated to so authorize the acquisition or construction of
and pay for such Capital Assets in accordance with the terms of this Article
8, (b) make any expenditure for Capital Assets which would not be capitalized
pursuant to the Accounting Practices (as interpreted, modified or
supplemented by the Capitalization Guidelines), or (c) make any expenditure
in connection with any personal property or other asset which does not
constitute a Capital Asset (other than such expenditures as may be required
by Big Rivers as a result of any breach or default by Big Rivers under any of
the Operative Documents, or pursuant to any indemnification or hold harmless
covenant of Big Rivers under any of the Operative Documents) (unless such
expenditure for such personal property or other asset is part of Incremental
Environmental O&M, in which case the provisions of Section 2.3.3 shall
govern, or unless such expenditure involves Big Rivers' repurchase of
personal property on the Termination Date pursuant to Section 9.3 of the
Participation Agreement). Big Rivers shall not be required to make any
expenditure for Capital Assets which does not meet the foregoing criteria,
including, without limitation, any expenditures for Capital Assets, the
principal purpose of which is to increase Capacity above [REDACTED] net MW or
to improve the efficiency of any Facility. WKEC shall provide written notice
to Big Rivers of its intention to make any capital expenditure (an
"Enhancement") the principal purpose of which is to increase Capacity above
[REDACTED] net MW or to improve the efficiency of any Facility. Big Rivers
shall have no approval rights with respect to such Enhancement, provided that
such Enhancement (i) is consistent with Prudent Utility Practice, (ii) causes
no physical damage to the Facilities, (iii) does not constitute a Major
Capital Improvement (as hereinafter defined) and (iv) does not adversely
affect the fair market value of the Facilities (using as a basis of
comparison the fair market value of the Facilities on the Effective Date).
The capital costs incurred prior to the Termination Date which are associated
with any Enhancement or Major Capital Improvement shall at all times remain
exclusively with WKEC, including, without limitation, following the
termination of this Agreement and the other Operative Documents. All
Enhancements and Major Capital Improvements shall (i) become part of the
Facilities and owned by Big Rivers (subject to the provisions of Article 24
of the Participation Agreement), (ii) be maintained by WKEC in accordance
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with Prudent Utility Practice as provided herein and (iii) subject to Section
10.2 with respect to WKEC's right to determine whether or not to restore an
Enhancement or a Major Capital Improvement, be turned over to Big Rivers with
the Tangible Assets on the Termination Date. WKEC shall not undertake any
significant structural expansion of the Facilities or to construct any new
generating plants on the Real Property (in each case, a "Major Capital
Improvement"), without Big Rivers' and the RUS' prior written consent thereto.
To the extent that there has been any Enhancement or Major Capital Improvement
to the Facilities during either Phase I or Phase II, Big Rivers' funding
obligations hereunder with respect to both Capital Assets and Incremental
Environmental O&M shall not be increased as a result thereof; Big Rivers'
obligations shall remain subject to the standard described in Section 8.1(a)
above.
8.2. Forecasts. WKEC shall submit to Big Rivers a forecast of cash
requirements for each Capital Asset subject to the dollar limitations with
respect to such Capital Asset set forth in an Annual Capital Budget or any
modification of that budget approved by the Operating Committee. This forecast
shall set forth cash requirements with respect to such Capital Asset (i) for
each quarterly period commencing on the first day of January, April, July and
October in which costs for such Capital Asset shall become due and (ii) for each
month of the first two quarterly periods immediately following the issuance of
the forecast. WKEC shall revise the forecast and furnish it to Big Rivers no
less often than every three months thereafter until completion of the Capital
Asset.
8.3. Payment for Capital Assets. WKEC shall maintain an interest-bearing
account (the "Capital Account") into which Big Rivers and WKEC shall pay amounts
as provided in this Section 8.3 and from which WKEC shall be permitted to
withdraw funds to pay when due the cost of Capital Assets. On the first day of
each month during the Term, WKEC and Big Rivers shall each deposit sufficient
funds into the Capital Account based on their Capital Asset Sharing Ratios
(defined in Section 8.4 below), but limited in the case of Big Rivers to the
remaining Big Rivers Contribution (as defined in Section 20.6 of the
Participation Agreement) for that Year with respect to Non- Incremental Capital
Costs that are not for Major Capital Repairs (i) to cover all cash requirements
forecast under Section 8.2 for that month for all Capital Assets (less any
excess between funds deposited and interest accrued thereon and funds actually
required for Capital Asset expenditures during the previous month) and (ii) to
cover any shortfall between funds deposited and actual expenditures required for
Capital Assets during the previous month. With respect to funds deposited in the
prior month, which are remaining in the present month, and shortfalls in funds
deposited in the prior month relative to that month's expenditures, each Party's
obligation in the present month shall be adjusted proportionally based on that
Party's deposit during the prior month and the Party's relative share of
responsibility in that prior month for the Capital Assets for which funds were
withdrawn or not used. An illustration of the operation of this Section is set
forth in Schedule 8.3. On the Termination Date, all funds remaining in the
Capital Account shall be immediately distributed to Big Rivers and WKEC in
accordance with the same methodology as used in the prior sentence.
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8.4. Capital Asset Sharing Ratios. Subject to the provisions of Section
8.1, WKEC and Big Rivers shall directly contribute to the payment of each
Capital Asset in accordance with its respective Capital Asset Sharing Ratio,
which will be as follows:
(a) Each capital expenditure made for a Capital Asset in
accordance with Section 8.1 and to comply with a new Law or any revision or
change to an existing Law, including but not limited to a new or revised
Environmental Law (including for the avoidance of doubt, and without regard
for the actual time for the enactment or implementation of the same, without
limitation, the Proposed SIP Call and any Laws that may be enacted or
implemented pursuant thereto or in connection therewith), or to comply with
any change in applicable judicial or administrative interpretation of a Law,
occurring after the Effective Date shall be deemed an Incremental Capital
Cost. Big Rivers' share of each Incremental Capital Cost, determined as of
the date payment for such Incremental Capital Asset is required to be made to
the Capital Account pursuant to the forecast prepared by WKEC pursuant to
Section 8.2, shall be as follows: (i) from the Effective Date until December
31,[REDACTED], inclusive, [REDACTED]%; (ii) from January 1, [REDACTED] to
December 31, [REDACTED], inclusive, [REDACTED]%; (iii) from January 1,
[REDACTED] until the Termination Date, inclusive, [REDACTED]%. WKEC's share
of each Incremental Capital Cost, determined as of the date payment for such
Capital Asset is required, shall be as follows: (i) from the Effective Date
until December 31, [REDACTED], inclusive, [REDACTED]%; (ii) from January 1,
[REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]%; and (iii) from
January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED].
(b) Each capital expenditure made for a Capital Asset in
accordance with Section 8.1, but which does not constitute an Incremental
Capital Cost as determined in accordance with Section 8.4(a), shall be deemed
a Non- Incremental Capital Cost. Big Rivers' share of each Non- Incremental
Capital Cost, determined as of the date payment for such Non-Incremental
Capital Asset is required to be made to the Capital Account pursuant to the
forecast prepared by WKEC pursuant to Section 8.2, shall be as follows: (i)
from the Effective Date until December 31, [REDACTED], inclusive,
[REDACTED]%; (ii) from January 1, [REDACTED] to December 31, [REDACTED],
inclusive, [REDACTED]%; and (iii) from January 1, [REDACTED] until the
Termination Date, inclusive, [REDACTED]%. WKEC's share of each
Non-Incremental Capital Cost shall be as follows: (i) from the Effective Date
until December 31, [REDACTED], inclusive, [REDACTED]%; (ii) from January 1,
[REDACTED] to December 31, [REDACTED], inclusive, [REDACTED]% and (iii) from
January 1, [REDACTED] until the Termination Date, inclusive, [REDACTED]%.
(c) Nothing in this Section 8.4 shall require Big Rivers to
pay any portion of an Enhancement or Major Capital Improvement. Further nothing
in this Section 8.4 shall require WKEC, or any of its Affiliates, to assume any
responsibility related to opacity compliance at the Green or Wilson facilities
other than as contemplated in Section 8.1.
8.5. [RESERVED]
8.6. Facilities Retired From Service. Facilities retired from service,
whether considered original construction or Capital Assets, shall be disposed of
by WKEC in
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accordance with Prudent Utility Practice as soon as practicable. The net
proceeds, if any, shall be first applied to the costs of any replacement
Capital Assets and the remainder, if any, paid to Big Rivers.
8.7. Title to Assets. Title to each new Capital Asset and any additions,
alterations or improvements to the Tangible Assets (including without
limitation, Enhancements and Major Capital Improvements) shall, without any
action on the part of either Party, automatically vest in Big Rivers.
ARTICLE 9
[RESERVED]
ARTICLE 10
CONDEMNATION: DAMAGE OR DESTRUCTION OF TANGIBLE ASSETS
10.1. Condemnation.
10.1.1. Taking of All or Substantially All of the Tangible Assets.
If all or substantially all of the Tangible Assets are condemned, this Agreement
shall terminate when possession of the Tangible Assets is taken by the
condemning authority. Upon such termination, WKEC shall have no further
liability or obligation under this Agreement (other than liabilities accrued
under this Agreement before the date of such condemnation). Payment from the
condemnation proceeds shall be as follows: (i) first, in the event that any
Enhancements or Major Capital Improvements were included in the Tangible Assets
condemned, to WKEC, an amount equal to the LG&E Parties' Residual Value Payment
regarding those Enhancements or Major Capital Improvements, determined by
reference to Section 24.1(e)(ii) of the Participation Agreement (which shall be
deemed to be owing under that Section as if the condemnation were a "Triggering
Transfer"), but after defining "M" in that calculation as the total amount of
the condemnation proceeds received with respect to all Tangible Assets that were
condemned; (ii) second, in full payment of all priority claims of holders of
Permitted Liens, in the priority order in which their respective claims appear
(including the priority claims held by the LG&E Parties (x) under the Settlement
Mortgage and (y) under the Mortgage and Security Agreement, but only to the
extent that the LG&E Parties' claims thereunder relate to matters other than any
Residual Value Payment for Enhancements or Major Capital Improvements due as
result of such condemnation, WKEC's loss of the use and enjoyment of the
Tangible Assets (including Enhancements and Major Capital Improvements)
associated with the period of time remaining prior to the December 31st that is
closest to the twenty-fifth anniversary of the Effective Date or, with respect
to Enhancements and Major Capital Improvements, the lesser of the remaining
weighted average useful life of the Enhancements and Major Capital Improvements,
or the time remaining prior to the December 31st that is closest to the
twenty-fifth anniversary of the
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Effective Date, as applicable, by reason of the condemnation, for which WKEC's
compensation is as described in clause (i) and in clause (iii) of this Section
10.1.1); and (iii) third, WKEC shall then be entitled to share in the
condemnation award (net of the payments described in clauses (i) and (ii) of
this Section 10.1.1) in the proportion that the net present value of the use and
enjoyment of the Assets (other than Enhancements and Major Capital Improvements)
by WKEC over the period of time remaining prior to the December 31st that is
closest to the twenty-fifth anniversary of the Effective Date bears to the fair
market value of the Tangible Assets on the date of the taking, determined on the
basis that such taking had not occurred.
10.1.2. Partial Condemnation. If less than substantially all of the
Tangible Assets are condemned, then this Agreement shall not terminate but the
rent payable by WKEC under Section 2.3.2 shall be reduced proportionately after
possession is taken by the condemning authority based upon the ratio of the fair
market value of the specific Tangible Assets taken to the fair market value of
all Generating Plants at the time of the taking (exclusive of HMP&L's interests
in and rights to the value of Station Two not allocated to Big Rivers or Station
Two subsidiary pursuant to the Station Two Contracts at the time of the taking),
determined on the basis that said taking had not occurred.
10.2. Damage or Destruction; Abatement.
10.2.1. Damage or Destruction. If at any time during Phase II the
Tangible Assets are damaged or destroyed and such damage or destruction was
caused by a casualty covered by an insurance policy required by Article 13 of
the Participation Agreement, WKEC shall, to the extent insurance proceeds are
made available to WKEC and to the extent consistent with the Prudent Utility
Practice, use such proceeds to restore the Tangible Assets as soon as reasonably
possible to substantially the same general condition, character or use as
existed before the damage and this Agreement shall remain in effect; provided,
however, that to the extent that any Enhancement or Major Capital Improvement
has been damaged or destroyed as a result of a casualty covered by an insurance
policy, (i) all insurance proceeds associated with such damage or destruction
shall belong to WKEC to be applied by WKEC as it may determine in its sole
discretion and (ii) WKEC shall be under no obligation to restore such
Enhancement or Major Capital Improvement. In the event that WKEC determines that
it will not restore such Enhancement or Major Capital Improvement, WKEC agrees
that (i) it shall, prior to the Termination Date, continue to maintain the
Tangible Assets (including the remains of such Enhancement or Major Capital
Improvement) in accordance with Prudent Utility Practice, all Laws and
requirements of all insurance policies in effect pursuant to Article 13 of the
Participation Agreement and (ii) remove from the Real Property, at its sole
expense, the remains of such Enhancement or Major Capital Improvement, no later
than the Termination Date (or within a reasonable period thereafter in the event
such termination occurs prior to the December 31st that is closest to the
twenty-fifth anniversary of the Effective Date). To the extent the capital cost
of such restoration of Tangible Assets, other than Enhancements and Capital
Improvements (determined in accordance with Accounting Practices) (i) is not
covered by the proceeds of insurance and (ii) is not covered by LG&E
Self-Insurance proceeds, then such capital cost shall, to the extent consistent
with Section 8.1, be deemed payments for Capital Assets pursuant to
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an approved modification of the Annual Capital Budget and shall be paid for in
accordance with the provisions of Sections 8.3 and 8.4, provided that the
Capital Asset Sharing Ratios applied to such restoration shall be those
appropriate based on whether it is a Non-Incremental Capital Cost or Incremental
Capital Cost, and further provided that these costs will be paid for by WKEC and
Big Rivers unless such damage or destruction resulted from (a) the gross
negligence or willful misconduct of WKEC or its Affiliates, in which case WKEC
shall bear such additional costs alone or (b) from the gross negligence or
willful misconduct of Big Rivers, in which case Big Rivers shall bear such
additional cost alone. WKEC agrees that it shall, upon Big Rivers' request on
the Termination Date (or reasonable period thereafter in the event such
termination occurs prior to the December 31st that is closest to the
twenty-fifth anniversary of the Effective Date), remove any Enhancement or Major
Capital Improvement from the Real Property, which removal shall be effected in a
manner such that it will not adversely affect the value or utility of the
remaining Assets.
10.2.2. Abatement. If the Tangible Assets are destroyed or damaged,
other than as set forth in the following sentence, the fixed rental payments and
the Monthly Margin Payments payable by WKEC pursuant to Section 2.3.2 of this
Agreement (but subject to the limitations set forth therein), for the period
during which said damage, repair or restoration continues shall not be abated,
nor shall they be abated if the Tangible Assets are not restored because such
restoration is determined to be inconsistent with Prudent Utility Practice. In
the event that any of the Tangible Assets are destroyed or damaged by reason of
the gross negligence or willful misconduct of Big Rivers, the fixed rental
payments and the Monthly Margin Payments payable by WKEC under Section 2.3.2
will be abated only for the period during which said damage, repair or
restoration continues and only in the event the amount of electrical capacity
available to LEM from the Generating Plants (exclusive of the capacity reserved
by HMP&L from Station Two from time-to-time) is thereby reduced, and then only
in proportion with the reduction in such electric capacity below [REDACTED] MW
(exclusive of the capacity reserved by HMP&L from Station Two from time to
time).
10.2.3. Insurance Proceeds. Notwithstanding anything contained in
this Agreement or any other Operative Document to the contrary, but subject to
the provisions of Section 10.2.1, above, in the event any Capital Asset
(exclusive of Enhancements and Major Capital Improvements) is damaged or
destroyed and any insurance proceeds are paid or payable to Big Rivers and/or
any LG&E Party as a result thereof, and in the event such Capital Asset is not
repaired or replaced in compliance with the Operative Documents (or is so
repaired or replaced using only a portion of such insurance proceeds), then all
such insurance proceeds that are not so used for the repair or replacement of
such Capital Asset or so budgeted for that use shall be divided between Big
Rivers and WKEC (with appropriate payments between those Parties) within 30 days
after the later of (a) the decision is made not to repair or replace the Capital
Assets or (b) insurance proceeds have been received (in the case of (a) and (b),
together with any interest that may have accrued on those proceeds since their
receipt), based on the respective Capital Asset Sharing Ratio of Big Rivers and
WKEC that applied to the relevant Capital Asset at the time of its original
construction, purchase or installation.
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CONFIDENTIAL - SUBJECT TO COURT ORDER
ARTICLE 11
DEFAULT AND TERMINATION
11.1. Events of Default. Subject to the terms and conditions of this
Section 11, the occurrence of any of the following events shall constitute a
default under this Agreement:
(1) Failure by either Party to pay when due any and all
amounts payable to the other Party in accordance with the terms of this
Agreement;
(2) Any attempt by a Party to transfer an interest in this
Agreement or in the Assets in breach of Section 16 of the Participation
Agreement;
(3) [RESERVED];
(4) Failure of a Party to perform any material obligation set
forth in this Agreement;
(5) Except with respect to the Chapter 11 Case, any filing of
a petition in bankruptcy or insolvency, or for reorganization or arrangement
under any bankruptcy or insolvency laws, or voluntarily taking advantage of any
such laws by answer or otherwise or the commencement of involuntary proceedings
under any such laws if such proceedings are not withdrawn or dismissed within 60
days after such institution;
(6) Assignment by a Party for the benefit of creditors;
(7) Allowance by a Party of the appointment of a receiver or
trustee of all or a material part of its property if such receiver or trustee is
not discharged within 60 days after appointment; or
(8) Failure, inability or refusal of a Party or a Party's
Affiliate to cure a default or breach by such Party or such Party's Affiliate
under the Power Purchase Agreement, the Participation Agreement or the
Transmission Service and Interconnection Agreement which gives rise to a
termination of such other Phase II Agreement or any termination by that Party of
any of the foregoing agreements in breach or in default thereof.
The Party in default under any provision of this Agreement shall be
referred to as the "Defaulting Party" and the other Party shall be referred to
as the "Non- Defaulting Party"
11.2. Notice of Default. The Non-Defaulting Party shall have the right to
give the Defaulting Party a written notice of default ("Notice of Default"),
which shall describe the default in reasonable detail and state the date by
which the default must be cured, which shall be at least 30 days after receipt
of the notice, except as to a default under Subsection (1) of Section 11.1 which
shall be three days after receipt of notice, and
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CONFIDENTIAL - SUBJECT TO COURT ORDER
under Subsections (2), (5), (6), (7) or (8) of Section 11.1, as to which there
will be no cure right.
11.3. Opportunity to Cure. If within the three day period with respect to
a default under Subsection (1) of Section 11.1 the Defaulting Party cures the
default, or if within the 30 day period with respect to defaults under
Subsection (4) (which is not also a default under Subsection (2), (5), (6), (7)
or (8) of Section 11.1), the Defaulting Party cures the default or if the
failure is one that cannot in good faith be corrected within such period and the
Defaulting Party certifies to the Non-Defaulting Party that it agrees to cure
such default, certifies a reasonable date by which the cure will be effected,
and begins to correct the default within the 30 day period and continues
corrective efforts with diligence until a cure is effected, the notice of
default shall be inoperative and the rights of the Non- Defaulting Party under
Section 11.5 shall not be triggered. Subject to the Defaulting Party's right to
contest under Section 11.4, if the Defaulting Party does not cure or begin (and
diligently continue) to cure the default as provided above, the Non-Defaulting
Party shall have the rights specified in Section 11.5. A Non-Defaulting Party's
right to damages or other relief resulting from a breach by a Defaulting Party
hereunder shall begin to accrue as of the first day of the breach without regard
to the availability of any cure periods hereunder, and without regard to whether
the breach or default is cured.
11.4. Contest. If the Defaulting Party disputes the existence or nature of
a default asserted in a Notice of Default, then the Defaulting Party shall pay
the disputed payment or perform the disputed obligation, but may do so under
protest. The protest shall be in writing, shall accompany the disputed payment
or precede the performance of the disputed obligation, and shall specify the
reasons upon which the protest is based. The Defaulting Party shall deliver
copies of the protest to the Non-Defaulting Party. If it is later determined
pursuant to the dispute resolution, mediation or arbitration procedure under
Article 15 of the Participation Agreement that a protesting party is entitled to
a refund of all or any portion of a disputed payment or payments or is entitled
to the reasonable equivalent in money of non-monetary performance of a disputed
obligation theretofore made, then, upon such determination, the nonprotesting
Party shall pay such amount to the protesting Party, together with interest
thereon at a rate equal to the Prime Rate from the date of payment or from the
date of completion of performance of a disputed obligation to the date of
reimbursement.
11.5. Remedies. If the Defaulting Party's default is one for which there
is no cure right, or if the Defaulting Party fails or refuses to cure the
default under Section 11.3 for which a cure right is available within the time
described hereunder, the Non-Defaulting Party shall have, in addition to any
rights a Party may have by law or otherwise, the following remedies:
(i) If Big Rivers, on the one hand, or WKEC, on the other
hand, ("X") shall fail to make any payment or shall fail to perform any
obligation under this Agreement, then the other Party ("Y") or any of its
Affiliates will have the right (but not the obligation) without prior notice to
X to perform such obligations and set-off the costs of such performance or the
amount of any such past due payment owing to Y against any
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CONFIDENTIAL - SUBJECT TO COURT ORDER
obligation of Y or any of its Affiliates owing to X or any of its Affiliates
hereunder or under any other Phase II Agreement (whether or not matured).
(ii) The Non-Defaulting Party may terminate this Agreement
upon 30 days' notice to the Defaulting Party of its intent to do so. The
termination rights provided for in this Section 11.5 are in addition to, and not
in lieu of, any rights to terminate this Agreement as are set forth in the
Guaranty and the Station Two Agreement, which termination rights shall be
cumulative.
(iii) Notwithstanding anything contained herein or in any
Operative Document to the contrary, Big Rivers may also terminate this Agreement
at any time that the Guaranty provides Big Rivers with the right to terminate
this Agreement. No provision of this Agreement or any other Operative Document
purporting to limit special, incidental and consequential damages that may be
recoverable by Big Rivers shall bar or constitute any waiver of any claim by Big
Rivers for any Monthly Margin Payments as its damages arising by reason of a
default by WKEC under this Agreement; provided, that nothing contained herein
shall be deemed to be an admission by WKEC that the loss of such payments by Big
Rivers is or shall be an actual or direct damage incurred by Big Rivers arising
out of such a default by WKEC.
11.6. Special Abatement. The annual rental payments payable by WKEC
pursuant to Section 2.3.2 hereunder shall be reduced in accordance with the
provisions of Section 16.3 of the Transmission Service and Interconnection
Agreement, and in accordance with the provisions of the Station Two Agreement.
ARTICLE 12
SEVERAL OBLIGATIONS
Nothing contained in this Agreement shall ever be construed to
create an association, joint venture, trust or partnership, or to impose a trust
or partnership covenant, obligation or liability on or with regard to either of
the Parties. Each Party shall be individually responsible for its own covenants,
obligations and liabilities as herein provided.
ARTICLE 13
GENERAL PROVISIONS
13.1. Notices. All provisions set forth in the Participation Agreement
with respect to Notices shall apply hereto.
13.2. Waiver. The failure of a Party to insist on the strict performance
of any provision of this Agreement or to exercise any right, power or remedy
upon a breach of any provision of this Agreement shall not constitute a waiver
of any provision of this Agreement or limit the Party's right thereafter to
enforce any provision or exercise any right.
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CONFIDENTIAL - SUBJECT TO COURT ORDER
13.3. Amendment and Modification. No amendment or modification of this
Agreement shall be valid unless made in writing and duly executed by the
Parties.
13.4. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the internal laws of the Commonwealth of Kentucky but without
giving effect to the conflict of law rules of such jurisdiction.
13.5. Further Assurances. Each Party shall take from time to time, for no
additional consideration, such actions and execute such additional instruments
as may be reasonably (a) necessary to implement and carry out the intent and
purpose of this Agreement or (b) desirable but not necessary to implement and
carry out the intent and purpose of this Agreement without incurring material
cost.
13.6. Survival of Terms and Conditions. The provisions of this Agreement
related to the recovery of damages sustained hereunder and the exercise of
remedies generally shall survive its termination to the full extent necessary
for their enforcement and the protection of the Party in whose favor they run.
13.7. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the Parties and their respective successors and permitted assigns.
13.8. Recordation. WKEC shall prepare a short form of this Agreement in
form and substance satisfactory to Big Rivers, which shall be executed and
acknowledged by the Parties and recorded by WKEC. WKEC may, in its sole
discretion, elect to record this entire Agreement.
13.9. Time of the Essence. A material consideration of the Parties
entering into this Agreement is that the Parties will make all required payments
as and when due and will perform all other obligations under this Agreement in a
timely manner. Except as otherwise specifically provided in this Agreement, time
is of the essence of each and every provision of this Agreement.
13.10. Counterparts. This Agreement may be executed in counterparts, both
of which taken together shall constitute a single agreement.
13.11. Entire Agreement. This Agreement, including all attached Schedules,
together with the other Operative Documents, contain the entire and final
understanding of the Parties, are intended fully to integrate the Parties'
agreement, and supersede all prior agreements and understandings between the
Parties related to the subject matter of those agreements.
13.12. Schedules. Any matter disclosed by a Party on any schedule hereto
shall be deemed to be disclosed by such Party on all other applicable schedules,
provided that such Party has attempted in good faith to disclose such matter on
all schedules wherein such disclosure is appropriate to make such schedules true
and correct.
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CONFIDENTIAL - SUBJECT TO COURT ORDER
13.13. Construction. This Agreement was the product of negotiations
between the Parties, and therefore the rule of contract construction that an
agreement shall be construed against the drafter shall not be applied to this
Agreement.
13.14. Continuation of Agreement.
13.14.1. Big Rivers recognizes and acknowledges that the RUS, the
Members and the LG&E Parties have in good faith entered into the transactions to
which this Agreement and the other Operative Documents relate, and have agreed
to consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for the
stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the
Members and the LG&E Parties that Big Rivers has in good faith entered into this
Agreement in reliance upon and with the specific intent of continuing this
transaction through the stated Term (i.e., approximately 25 years). In order to
enable Big Rivers to comply with certain requirements of the KPSC related to
approval of its proposed rates, and to provide additional assurances of its good
faith and commitment, and without in any way intending to reduce or otherwise
avoid abiding by this Agreement throughout its stated Term (i.e., approximately
25 years), and without any implication by any of the Parties that Big Rivers is
or would be entitled to attempt to reduce or otherwise avoid the terms of this
Agreement, Big Rivers additionally commits and undertakes that for the period
prior to January 1, 2012, in the event of any filing by Big Rivers of a petition
or similar filing for bankruptcy or reorganization or arrangement under any
federal or state bankruptcy or insolvency or similar Law, or the commencement of
involuntary proceedings against Big Rivers under any such Law, neither Big
Rivers nor its successors or assigns, if any, shall file, direct the filing of,
join in, consent to, or otherwise support any other party to any such
proceedings in a motion, complaint, pleading, statement, testimony or otherwise
make any attempt to terminate, reject or modify this Agreement (other than in
accordance with its terms) under Section 365 of the United States Bankruptcy
Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended, modified or
supplemented or any other similar, applicable federal or state bankruptcy or
insolvency Laws (the "Insolvency Assurance"). Thereafter, Big Rivers shall
continue the Insolvency Assurance unless and until the RUS, in the exercise of
its discretion, were to consent to any of the foregoing. In all events and
throughout the Term, each of the RUS, the Members and the LG&E Parties shall be
entitled to rely upon the specific provisions of this Agreement, including but
not limited to the stated Term (i.e., approximately 25 years), and shall be
entitled to take whatever actions may prove to be necessary or appropriate to
maintain the benefit of their bargain in the event that Big Rivers ever attempts
to cause the rejection or termination of this Agreement (other than in
accordance with its specific terms) in a subsequent bankruptcy or reorganization
proceeding or otherwise.
13.14.2. WKEC recognizes and acknowledges that the RUS, the Members
and Big Rivers have in good faith entered into the transactions to which this
Agreement and the other Operative Documents relate, and have agreed to
consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for their
stated Term (i.e., approximately 25 years). WKEC has informed the RUS, the
Members and Big Rivers that WKEC has in good faith entered into this Agreement
in reliance upon and with the specific intent of continuing this transaction
through the stated Term (i.e., approximately 25 years). In order to facilitate
approval of the proposed rates of Big Rivers and provide additional assurances
of its good faith and commitment, and without in any way intending to reduce or
otherwise avoid abiding by this Agreement throughout its stated Term (i.e.,
approximately 25
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CONFIDENTIAL - SUBJECT TO COURT ORDER
years), and without any implication by any of the Parties that WKEC is or would
be entitled to attempt to reduce or otherwise avoid the terms of this Agreement,
WKEC additionally commits and undertakes that for the period prior to January 1,
2012, in the event of any filing by WKEC of a petition or similar filing for
bankruptcy or reorganization or arrangement under any federal or state
bankruptcy or insolvency or similar Law, or the commencement of involuntary
proceedings against WKEC under any such Law, neither WKEC nor its successors or
assigns, if any, shall file, direct the filing of, join in, consent to, or
otherwise support any other party to any such proceedings in a motion,
complaint, pleading, statement, testimony or otherwise make any attempt to
terminate, reject or modify this Agreement (other than in accordance with its
terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss.
101, et seq., as it subsequently may be amended, modified or supplemented or any
other similar, applicable federal or state bankruptcy or insolvency Laws (the
"Insolvency Assurance"). Thereafter, WKEC shall continue the Insolvency
Assurance unless and until the RUS, in the exercise of its discretion, were to
consent to any of the foregoing. In all events and throughout the Term, each of
the RUS, the Members and Big Rivers shall be entitled to rely upon the specific
provisions of this Agreement, including but not limited to the stated Term
(i.e., approximately 25 years), and shall be entitled to take whatever actions
may prove to be necessary or appropriate to maintain the benefit of their
bargain in the event that WKEC ever attempts to cause the rejection or
termination of this Agreement (other than in accordance with its specific terms)
in a subsequent bankruptcy or reorganization proceeding or otherwise.
13.14.3. Nothing in this Section 13.14 shall modify, reduce or
diminish: (i) the rights of the RUS under the New RUS Loan Documents (as defined
in that certain New RUS Loan Agreement between Big Rivers and the RUS to be
executed and delivered on the Effective Date); or (ii) the rights of the
mortgagees under the New RUS Mortgage (as defined in said New RUS Loan
Agreement); including without limitation, any right to withhold consent with
respect to any sale or disposition of Big Rivers' property except on terms
acceptable to the RUS and/or such mortgagees; but subject, in the case of (i)
and (ii) above, in all cases to the Non-Disturbance Agreement of even date
herewith among Big Rivers, RUS, AMBAC Assurance Corporation and the LG&E
Parties.
13.14.4. The provisions of this Section 13.14 shall survive the
expiration or termination of this Agreement for any reason, and shall continue
to be binding on the Parties.
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CONFIDENTIAL - SUBJECT TO COURT ORDER
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of this 15th day of July, 1998.
BIG RIVERS ELECTRIC CORPORATION
By /s/ Michael H. Core
--------------------------------------
Printed Name: Michael H. Core
---------------------------
Title: President and CEO
----------------------------------
WESTERN KENTUCKY ENERGY CORP.
By /s/ George Basinger
--------------------------------------
Printed Name: George W. Basinger
---------------------------
Title: President
----------------------------------
[*All Schedules and Exhibits REDACTED]
26
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS.........................................................1
ARTICLE 2 LEASE...............................................................1
2.1. Lease Grant...........................................................1
2.2. Term..................................................................2
2.3. Rental and Margin Payments............................................2
2.3.1. Initial Rental Payment............................................2
2.3.2. Annual Rental; Monthly Installment Payments; Monthly
Margin Payments................................................2
2.3.3. Adjustment for Incremental Environmental O&M......................5
2.3.4. [RESERVED]........................................................6
2.4. Covenant of Quiet Enjoyment...........................................6
2.5. No Other Interest.....................................................6
2.6. Return of the Tangible Assets.........................................6
ARTICLE 3 DISCLAIMER OF REPRESENTATIONS AND WARRANTIES........................6
ARTICLE 4 ADDITIONAL OBLIGATIONS OF BIG RIVERS................................7
ARTICLE 5 WKEC AND OPERATIONS.................................................7
5.1. Designation...........................................................7
5.2. Powers and Duties of WKEC.............................................7
5.2.1. Use...............................................................7
5.2.2. Maintenance and Operation.........................................7
5.3. Marketing of Energy...................................................8
5.4. Cooperation Between Big Rivers and WKEC...............................8
5.4.1. System Dispatch...................................................8
5.4.2. Permits; Reports..................................................8
5.4.3. Access to Facilities; Inspection..................................8
ARTICLE 6 OPERATING COMMITTEE.................................................9
6.1. Establishment and Purpose.............................................9
6.2. Decisions............................................................10
6.3. Meetings.............................................................10
6.4. Notice...............................................................10
6.5. Quorum...............................................................10
6.6. Minutes..............................................................10
6.7. Action Without Meeting...............................................10
6.8. Costs................................................................11
6.9. No Modification of Agreement.........................................11
6.10. Cooperation of the Parties..........................................11
ARTICLE 7 ANNUAL BUDGETS.....................................................11
7.1. Operations Pursuant to Budgets.......................................11
7.2. Content of Annual Capital Budget and Annual O&M Budget...............11
7.3. Review and Approval of Annual Capital Budget and
Annual O&M Budget..................................................11
7.4. Deadlock.............................................................12
7.5. Budget Deviations....................................................12
7.6. Operating Emergency..................................................13
ARTICLE 8 PAYMENT OF CAPITAL ASSETS..........................................14
8.1. Annual Capital Budget................................................14
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CONFIDENTIAL - SUBJECT TO COURT ORDER
Page
----
8.2. Forecasts............................................................15
8.3. Payment for Capital Assets...........................................15
8.4. Capital Asset Sharing Ratios.........................................16
8.5. [RESERVED]...........................................................16
8.6. Facilities Retired From Service......................................16
8.7. Title to Assets......................................................17
ARTICLE 9 [RESERVED].........................................................17
ARTICLE 10 CONDEMNATION: DAMAGE OR DESTRUCTION OF TANGIBLE
ASSETS.........................................................17
10.1. Condemnation.........................................................17
10.1.1. Taking of All or Substantially All of the
Tangible Assets...............................................17
10.1.2. Partial Condemnation............................................18
10.2. Damage or Destruction; Abatement.....................................18
10.2.1. Damage or Destruction...........................................18
10.2.2. Abatement.......................................................19
10.2.3. Insurance Proceeds..............................................19
ARTICLE 11 DEFAULT AND TERMINATION...........................................20
11.1. Events of Default...................................................20
11.2. Notice of Default...................................................20
11.3. Opportunity to Cure.................................................21
11.4. Contest.............................................................21
11.5. Remedies............................................................21
11.6. Special Abatement...................................................22
ARTICLE 12 SEVERAL OBLIGATIONS...............................................22
ARTICLE 13 GENERAL PROVISIONS................................................22
13.1. Notices.............................................................22
13.2. Waiver..............................................................22
13.3. Amendment and Modification..........................................23
13.4. Governing Law.......................................................23
13.5. Further Assurances..................................................23
13.6. Survival of Terms and Conditions....................................23
13.7. Successors and Assigns..............................................23
13.8. Recordation.........................................................23
13.9. Time of the Essence.................................................23
13.10. Counterparts........................................................23
13.11. Entire Agreement....................................................23
13.12. Schedules...........................................................23
13.13. Construction........................................................24
13.14. Continuation of Agreement...........................................24
SCHEDULES [*All Schedules REDACTED]
Description Schedules
Monthly Margin Payment 2.3
Initial Period Budgets 7.1
Illustration of Operation of Section 8.3 8.3
ii
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SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION -
SUBJECT TO PROTECTIVE ORDER
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
Exhibit 10.88
POWER PURCHASE AGREEMENT
BETWEEN
BIG RIVERS ELECTRIC CORPORATION,
AND
LG&E ENERGY MARKETING INC.
July 15 , 1998
<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
TABLE OF CONTENTS
Page
Section 1: Definitions......................................................1
Section 2: Effective Date and Termination...................................2
Section 3: Unit Power Sales Agreement.......................................5
Section 4: Big Rivers' Purchases from LEM..................................11
Section 5: Scheduling and Ancillary Services...............................19
Section 6: Metering, Pricing and Billing...................................24
Section 7: Audit Rights....................................................30
Section 8: Cost Determination Changes......................................31
Section 9: Remedies........................................................31
Section 10: Governing Law..................................................33
[Section 11: Reserved].....................................................33
Section 12: Uncontrollable Forces..........................................33
[Section 13: Reserved].....................................................34
[Section 14: Reserved].....................................................35
Section 15: Liability and Indemnity........................................35
Section 16: Entire Agreement...............................................36
Section 17: Continuation of Agreement......................................36
Section 18: General Provisions.............................................38
Exhibit A Points of Delivery For Unit Power
Exhibit B Points of Delivery For Purchases By Big Rivers
Exhibit C Points of Metering
Schedule 3.3(a) Monthly Margin Payment
- i -
<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
POWER PURCHASE AGREEMENT
BETWEEN
BIG RIVERS ELECTRIC CORPORATION
AND
LG&E ENERGY MARKETING INC.
This POWER PURCHASE AGREEMENT ("Agreement") dated this 15th day of
July , 1998, is between Big Rivers Electric Corporation, a Kentucky rural
electric cooperative ("Big Rivers"), and LG&E Energy Marketing Inc., an Oklahoma
corporation ("LEM"). LEM and Big Rivers are sometimes referred to herein
collectively as "Parties" and individually as "Party."
RECITALS
WHEREAS, Big Rivers and LEM are parties to certain other agreements
as are set forth in the New Participation Agreement dated April 6, 1998 among
Big Rivers, LEM, WKEC, Leaseco, and Station Two Subsidiary ("Participation
Agreement"), which contemplates the execution and delivery of this Agreement;
WHEREAS, Big Rivers and LEM wish to enter into a unit power sales
agreement for the duration of Phase I pursuant to which Big Rivers will sell and
LEM will purchase the net output of each of the Generating Plants (exclusive of
the portion of the net output of Station Two reserved for HMP&L);
WHEREAS, during Phase II, Big Rivers will lease the Tangible Assets
to Leaseco and assign its right to operate Station Two and purchase Station Two
Power to Station Two Subsidiary, and LEM may purchase from Leaseco and Station
Two Subsidiary the net output of each of the Generating Plants (exclusive of the
portion of the net output of Station Two reserved for HMP&L); and
WHEREAS, throughout the Term of this Agreement, Big Rivers wishes to
purchase and LEM wishes to sell firm power in the quantities and in accordance
with the terms specified herein;
NOW, THEREFORE, in consideration of the mutual covenants set forth
in this Agreement, the Parties agree as follows:
Section 1: Definitions
As used herein, the terms set forth in Exhibit X attached to the
Participation Agreement have the meanings set forth therein when used with
initial capitalization, whether singular or plural,
- 1 -
<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
unless that term is also expressly defined in this Agreement, in which event the
definition in this Agreement shall control.
Section 2: Effective Date and Termination
2.1 Term of this Agreement. This Agreement will be effective on the
Effective Date and shall terminate on the earlier of (a) the December 31 of that
Year which is closest to the twenty-fifth (25th) anniversary of the Effective
Date; or (b) the date of a termination of this Agreement pursuant to Section 2.2
or pursuant the relevant provisions of the Guaranty or the Station Two
Agreement.
2.2 Default and Termination.
(a) Subject to the terms and conditions of this Section 2.2 and of
Section 12, the occurrence of any of the following events, unless otherwise
excused pursuant to the terms of this Agreement, shall constitute a default
under this Agreement:
(i) Failure by a Party to make any payments as and when due
hereunder;
(ii) Failure of a Party to perform any material duty imposed
on it by this Agreement;
(iii) Any attempt by a Party to transfer an interest in this
Agreement in breach of Article 16 of the Participation
Agreement;
(iv) Failure of Big Rivers during Phase I to deliver all Unit
Output to LEM in accordance with this Agreement
including without limitation Section 3.2, for more than
30 days, whether or not consecutive, in any 365 day
period;
(v) Failure of LEM to deliver to Big Rivers all amounts of
Power which Big Rivers is entitled to receive from LEM
in accordance with this Agreement for more than 30 days,
whether or not consecutive, in any 365 day period;
(vi) Except with respect to the Chapter 11 Case, any filing
of a petition in bankruptcy or insolvency, or for
reorganization or arrangement under any bankruptcy or
insolvency laws, or voluntarily taking advantage of any
such laws by answer or otherwise or the commencement of
involuntary proceedings under any such laws by a Party
if such proceedings
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
are not withdrawn or dismissed within 60 days after such
institution (in which case default occurs on the 61st
day after filing);
(vii) Assignment by a Party for the benefit of creditors;
(viii) Allowance by a Party of the appointment of a receiver
or trustee of all or a material part of its property if
such receiver or trustee is not discharged within 60
days after appointment (in which case default occurs on
the 61st day after appointment); or
(ix) Failure, inability or refusal of a Party to cure a
default or breach under (a) during Phase I, the Cost
Sharing Agreement, the Facilities Operating Agreement,
the Transmission Service and Interconnection Agreement
or the Participation Agreement which gives rise to a
termination of such other Phase I Agreement or (b)
during Phase II, the Lease, the Transmission Service and
Interconnection Agreement or the Participation Agreement
which gives rise to a termination of such Phase II
Agreement; or during either Phase I or Phase II, any
termination by a Party of any of the Agreements
described above in breach or default thereof.
Any Party in default under any provision of this Agreement shall be referred to
as the "Defaulting Party" and the other Party shall be referred to as the
"Non-Defaulting Party."
(b) The Non-Defaulting Party shall have the right to give the
Defaulting Party a written notice of default ("Notice of Default"), which shall
describe the default in reasonable detail and state the date by which the
default must be cured, which shall be at least 30 days after receipt of the
Notice of Default, except as to a default under Section 2.2(a)(i) which shall be
3 days after receipt of notice, and under Section 2.2(a)(iii) through (ix),
inclusive, as to which there will be no cure right. If within the 3 day period
with respect to a default under Section 2.2(a)(i) the Defaulting Party cures the
default, or if within the 30 day period with respect to defaults under Section
2.2(a)(ii) (that are not also defaults under Sections 2.2(a)(iii) through
(viii), inclusive) the Defaulting Party cures the default, or if the default
under Section 2.2(a)(ii) is one that cannot in good faith be corrected within
such 30 day period and the Defaulting Party certifies to the Non-Defaulting
Party that it
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
agrees to cure such default, certifies a reasonable date by which the cure will
be effected, begins to correct the default within the 30 day period and
continues corrective efforts with diligence until a cure is effected, the Notice
of Default shall be inoperative and the rights of the Non-Defaulting Party under
Section 2.2(c) shall not be triggered with respect to such default under Section
2.2(a)(i) or Section 2.2(a)(ii), provided that the cure is effected within the
period allotted or such extension as to which the Parties in good faith consent.
(c) If the Defaulting Party's default is one for which there is no
cure right, or if the Defaulting Party fails or refuses to cure a default for
which a cure right is available hereunder within the period described hereunder,
the Non-Defaulting Party shall have, in addition to any rights such Party may
have by law or otherwise, the right to terminate this Agreement upon 30 days'
notice to the Defaulting Party of its intent to do so. The termination rights
provided for in this Section 2.2 are in addition to, and not in lieu of, any
rights to terminate this Agreement as are set forth in the Guaranty or the
Station Two Agreement, which termination rights shall be cumulative.
(d) Notwithstanding anything contained elsewhere in this Agreement
to the contrary and without extending any period otherwise specified in this
Agreement for cure or remedy, in the event (1) a breach or default by the
Defaulting Party under this Agreement is curable as contemplated in Section
2.2(b) of this Agreement and (2) such breach or default is of such a nature that
it cannot be remedied or cured by repair to or replacement of or construction of
Tangible Assets or properties the use or enjoyment of which are required in
order for the Non-Defaulting Party to enjoy all of its material rights or
interests as contemplated in this Agreement, then such breach or default must be
cured within 180 days after notice thereof is delivered by the Non-Defaulting
Party(s) or the Non-Defaulting Party(s) shall have the right to terminate this
Agreement upon two (2) Business Days prior written notice delivered to the
Defaulting Party. Any re-occurrence of a breach or default of the type described
in the preceding sentence that arises from a common cause or a continuation of
the same event or legal proceeding as the first occurrence following its remedy
or cure by the Defaulting Party shall also be grounds for termination of this
Agreement if not once again cured or remedied within thirty (30) Business Days
after notice thereof delivered by the Non-Defaulting Party. In the event the
breach or default of the type described in the first sentence of this Section
2.2(d) reoccurs more than twice in any consecutive 365-day period, it shall be
deemed to be no longer curable and the Non-Defaulting Party shall be entitled to
exercise its termination rights provided for in (c) above, in addition to all of
its other rights and remedies hereunder.
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(e) Except as expressly set forth elsewhere in this Section 2.2, in
Section 9 of this Agreement, in Sections 8.2 and 8.3 of the Participation
Agreement, or in any other Operative Document (including without limitation, any
provision of such Operative Document that may permit a Party or any of its
Affiliates to set-off amounts that it may be owed under that document against
amounts that it may owe to the other Party or any of its Affiliates under this
Agreement), the obligations and rights of the Parties under this Agreement shall
be independent and not be affected by either Party's performance or failure to
perform under the Facilities Operating Agreement, the Transmission Services and
Interconnection Agreement, the Cost Sharing Agreement, the Lease, the
Participation Agreement and any other Operative Document or other contract or
agreement contemplated therein. Notwithstanding anything in this Agreement to
the contrary, Big Rivers' failure to purchase required minimum quantities of
Power hereunder shall not constitute a default but shall simply give rise to the
rights of LEM under Section 6.4(b).
(f) Notwithstanding anything contained herein to the contrary,
during Phase I, upon the occurrence of a total condemnation with respect to all
or substantially all of the Assets, which condemnation causes the termination of
the Cost Sharing Agreement, Section 3 of this Agreement (Unit Power Sales) and
all related provisions of this Agreement implementing the Parties' rights and
obligations with respect to the Unit Power Sales Agreement set forth in Section
3 shall be null and void and all remaining provisions of this Agreement shall
remain in full force and effect.
Section 3: Unit Power Sales Agreement
3.1 Phase I Only. The provisions of this Section 3, Unit Power Sales
Agreement, will terminate as of the termination of Phase I. In the event that
the Effective Date of this Agreement is the Phase II Effective Date, the Unit
Power Sales contemplated herein will never occur and this Section 3 will never
become effective.
3.2 Purchase of Unit Output. During Phase I, Big Rivers will sell to LEM
and LEM will purchase from Big Rivers the Unit Output under the terms and
conditions set forth in this Agreement from the generating units that constitute
the Generating Plants. Big Rivers is obligated to sell the Unit Output only when
the dedicated generating units are operational. LEM is entitled to all Unit
Output including, but not limited to, the Generating Plants' capability to
provide generation-based Ancillary Services. Big Rivers agrees to direct the
Operator of the Generating Plants (during Phase I) to use its commercially
reasonable efforts, consistent with Prudent Utility Practice to maximize the
amount of Unit Output available for sale to LEM, and consistent with Big Rivers'
obligations and rights under the Facilities Operating Agreement and the Station
Two Agreement, Big Rivers agrees it will not interfere with the Operator's
attempts, consistent with Prudent Utility Practice and Big Rivers' rights and
obligations under the
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
Facilities Operating Agreement and the Station Two Agreement, to maximize the
efficiency and output of the Generating Plants. Big Rivers, through its
Operator, will deliver Unit Output to LEM at the Points of Delivery specified in
Exhibit A with the output of each Generating Plant to be delivered to its
respective Point of Delivery.
3.3 Payments Due. LEM's sole payment obligations with respect to the Unit
Output to be purchased by it pursuant to this Unit Power Sales Agreement, and
Big Rivers' sole entitlement to payment for such Unit Output, is as set forth in
this Section 3.3 as adjusted pursuant to Section 6.6, if applicable.
(a) Initial Fixed Payment; Annual Fixed Payments; Monthly
Margin Payments.
(i) LEM shall pay to Big Rivers on the Phase I Effective
Date an Initial Fixed Payment of $57.0 million as
adjusted pursuant to Section 9.3 of the Participation
Agreement (PP Price adjustment).
(ii) Beginning on the second anniversary of the Phase I
Effective Date and each subsequent Year during Phase
I, LEM shall pay Big Rivers an Annual Fixed Payment
of $31.5 million as adjusted pursuant to Section 9.3
of the Participation Agreement (PP Price adjustment),
as follows: LEM shall pay the Annual Fixed Payments
in equal monthly installments of $2,625,000 as
adjusted pursuant to Section 9.3 of the Participation
Agreement, with the first monthly installment to be
paid on the second anniversary of the Phase I
Effective Date and each remaining monthly installment
to be paid on the first day of each calendar month up
to and including the first day of the calendar month
in which Phase I terminates; provided that, if the
first installment is due on a day other than the
first day of the month, LEM shall prorate that
installment by the ratio that the remaining number of
days in the month bears to the total number of days
in that month. If Phase II commences prior to the
second anniversary of the Phase I Effective Date, LEM
shall be entitled to a refund of the Initial Fixed
Payment prorated by the ratio that the remaining
number of days until the second anniversary of the
Phase I Effective Date bears to the total number of
days between the Phase I Effective Date and the
second anniversary of the Phase I Effective Date. If
Phase II commences after the second anniversary of
the Phase I Effective Date and Phase I terminates on
a day other than the last day of a month, LEM shall
be entitled to a refund of the installment of the
Annual Fixed Payment paid for such month prorated by
the ratio that the remaining number of days
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
in the month bears to the total number of days in that
month. If Big Rivers elects to reduce the Contract
Limits pursuant to Section 4.3(e) of this Agreement, the
Annual Fixed Payment provided for in this Section 3.3(a)
as adjusted pursuant to Section 9.3 of the Participation
Agreement shall be increased effective on January 1 of
the Year in which the reduction becomes effective to an
amount equal to the product of the Annual Fixed Payment
as adjusted pursuant to Section 9.3 of the Participation
Agreement multiplied by the sum of one (1) plus the
CCAP. The monthly installment of the Annual Fixed
Payment due on such January 1 and on the first day of
each month during the remainder of Phase I shall be
adjusted accordingly. The Parties acknowledge that Big
Rivers may elect to reduce the Contract Limits under
Section 4.3(e) of this Agreement on more than one
occasion, and that the Annual Fixed Payment and
associated monthly installments shall be adjusted as
provided in this Section 3.3(a) on each such occasion.
Subject to the right of set-off provided for in Section
9.3 of this Agreement or in any other Operative Document
(which shall not be an abatement), except as expressly
provided in Section 3.3(a)(iv) or Section 12.2 of this
Agreement, Section 16.3 of the Transmission Service and
Interconnection Agreement and Section 9.1.2 and 9.2.2 of
the Cost-Sharing Agreement, and except as provided in
the Station Two Agreement, there is to be no abatement
in the obligation of LEM to make the payments specified
in this Section 3.3(a) and in Section 3.3(b), regardless
of the actual Unit Output of the Generating Plants or
whether there has been any damage or destruction of any
portion or all of the Tangible Assets.
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(iii) LEM shall also pay to Big Rivers a Monthly Margin
Payment during Phase I as follows: The first Monthly
Margin Payment shall be due from LEM to Big Rivers on
the second occurrence of a 25th day of a month after the
Effective Date, and a Monthly Margin Payment will be due
from LEM to Big Rivers on each 25th day of the month
thereafter until and including the earlier of January
25, 2012 (at which time no further Monthly Margin
Payments will accrue), or the 25th day of the month
immediately preceding the Phase II Effective Date. Each
Monthly Margin Payment is due in the amount set forth in
the Schedule of Monthly Margin Payments attached to this
Agreement as Schedule 3.3(a); provided, that if the
Effective Date occurs on other than the first day of a
month, then the Monthly Margin Payment applicable to the
month in which the Effective Date occurs will be the
amount designated on Schedule 3.3(a) for the month in
which the Effective Date occurred, multiplied by the
ratio of (A) the number of days between the Effective
Date and the last day of the month to (B) the total
number of days in that month. In the event the Term
shall end prior to January 25, 2012, but on a date other
than the last day of a month, then LEM shall pay to Big
Rivers a prorated share of the Monthly Margin Payment
for the month in which the Term ended based on the ratio
by which the number of days in that month through and
including the date on which the Term ended bears to the
total number of days in that month.
(iv) Notwithstanding any provisions of Section 3.3(a)(iii)
to the contrary, in the event during Phase I: (A)
this Agreement shall be terminated but the Station
Two Agreement shall thereafter continue in effect,
then so long as the Station Two Agreement shall
continue in effect (through January 25, 2012 in
accordance with Schedule 3.3(a)), LEM shall continue
to pay to Big Rivers a portion of the Monthly Margin
Payments equal to (x) the relevant Monthly Margin
Payment, multiplied by (y) a fraction, the numerator
of which is the amount determined by subtracting from
312 the total number of megawatts of capacity from
Station Two that are reserved for use by Henderson
during that month, and the denominator of which is
the amount determined by
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
subtracting from 1771 the total number of megawatts of
capacity from Station Two that are reserved for use by
Henderson during that month, and (B) the Station Two
Agreement shall be terminated but this Agreement shall
thereafter continue in effect, then the Monthly Margin
Payments that shall thereafter be owing by LEM to Big
Rivers shall be reduced by the amount established by
multiplying (x) by (y), as described in Subclause (A),
above. No cessation or modification of the Monthly
Margin Payments pursuant to this Subsection 3.3(a)(iv)
shall constitute or be construed as a waiver or bar to
any right of Big Rivers to seek to recover any damages
resulting from any breach or default by LEM hereunder,
or by any other LG&E Party under any of the other
Operative Documents, to which Big Rivers otherwise would
be entitled.
(v) Notwithstanding anything contained in Section
3.3.(a)(iv) of this Agreement to the contrary, upon
any termination of the Station Two Agreement that
would otherwise result in a reduction in the Monthly
Margin Payments pursuant to that Section 3.3(a)(iv),
such reduction shall be suspended, and the relevant
Monthly Margin Payments shall once again become
payable by LEM hereunder, if, within 60 days after
the termination of the Station Two Agreement, Big
Rivers shall have taken such actions, in compliance
with Section 13.8 of the Station Two Agreement, as
shall be necessary to prevent the LG&E Parties (or
any of them) from having the right, pursuant to
Section 13.8 of that agreement, to an abatement
against the Annual Fixed Payments or the Rental
Payments (as applicable) due by them to Big Rivers,
to a reimbursement of the Initial Fixed Payment or
Initial Rental Payment, to a reduction in the
Contract Limits, or to terminate any of the Operative
Documents other than the Station Two Agreement, each
as contemplated in Section 13.8 of that agreement;
provided, that in the event those LG&E Parties shall
at any time thereafter have the immediate right to
take any of the foregoing actions or exercise any of
the foregoing rights or remedies in accordance with
Section 13.8, then the provisions of this Subsection
3.3(a)(v) shall no longer suspend operation of
Subsection 3.3(a)(iv)(B).
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(vi) Big Rivers agrees with LEM that LEM shall have the
right to set-off against the Monthly Margin Payments
that may become due and owing to Big Rivers
hereunder, at any time following the second
anniversary of the Effective Date, the monthly
installments of principal and interest that may be
due and owing by Big Rivers to LEM under the
Promissory Note (LEM Advances) in accordance with the
terms and conditions of such note, and any such
set-off by LEM shall be deemed to satisfy its
obligations to Big Rivers hereunder with respect to
the Monthly Margin Payments (or any portions thereof)
so set-off.
(vii) (1) If the Monthly Margin Payment has been adjusted
pursuant to Section 3.3(a)(iv)(B) of this Agreement and
Big Rivers is permitted pursuant to the Station Two
Power Sales Agreement (as defined in the Station Two
Agreement) to purchase energy or capacity from Station
Two, then: (A) Big Rivers will sell to LEM and LEM will
buy Bundled Ancillary Services (as defined in Section
3.3(a)(vii)(3) below) for resale to Henderson Union for
the benefit of Alcan and (B) the Monthly Margin Payment
will be reduced by an amount equal to the amount due to
Big Rivers from LEM for such services during that month;
provided, however, that LEM will continue to make
payments to Big Rivers in the same amount as the
regularly scheduled Monthly Margin Payment that is
otherwise due pursuant to the Operative Documents
(taking into consideration, inter alia, any adjustment
required by Section 3.3(a)(iv)) and Big Rivers will
accept such payment as payment, in full, of the amount
owed to Big Rivers by Leaseco for the Monthly Margin
Payment then due and by LEM for the services described
above for such month. Pursuant to this paragraph, Big
Rivers must provide such services to LEM in the same
quantities as LEM is required to provide such services
to Henderson Union to meet the requirements of Alcan.
(2) If the Monthly Margin Payment has been adjusted
pursuant to Section 3.3(a)(iv)(A) of this Agreement,
then (A) Big Rivers will sell to LEM and LEM will buy
Bundled Ancillary Services (as defined in Section
3.3(a)(vii)(3) below) for resale to Green River Electric
for the benefit of
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
Southwire and (B) the Monthly Margin Payment will be
reduced by an amount equal to the amount due to Big
Rivers from LEM for such services during that month;
provided, however, that Leaseco will continue to make
payments to Big Rivers in the same amount as the
regularly scheduled Monthly Margin Payment that is
otherwise due pursuant to the Operative Documents
(taking into consideration, inter alia, any adjustment
required by Section 3.3(a)(iv)) and Big Rivers will
accept such payment as payment, in full, of the amount
owed to Big Rivers by Leaseco for the Monthly Margin
Payment then due and by LEM for such month (regardless
of whether LEM's actual amount due that month for
Bundled Ancillary Services exceeds the amount paid by
Leaseco during that month pursuant to this Section
3.3(a) during that month). Pursuant to this paragraph,
Big Rivers must provide such services to LEM in the same
quantities as LEM must provide such services to Green
River Electric to meet the power requirements of
Southwire.
(3) The Bundled Ancillary Services are (A) those
services described by Big Rivers in Schedules 3, 4, 5,
and 6 of the Open Access Transmission Service Tariff
attached as Exhibit 1 to the Transmission Services and
Interconnection Agreement, or (B) such services that the
FERC determines transmission providers must provide in
lieu of or as extensions of the services described in
subpart (A) of this sentence.
(b) Operating Pass-Through Costs. In addition to amounts due under
Section 3.3(a), throughout Phase I, LEM shall pay to Big Rivers an amount each
month equal to the Operating Pass-Through Costs. Billing and payment of the
Operating Pass-Through Costs is to be made in accordance with Section 6.5.
Section 4: Big Rivers' Purchases from LEM
4.1 Power Sales to Big Rivers. During the Term of this Agreement, Big
Rivers will purchase from LEM, and LEM will sell to Big Rivers, Power in amounts
as follows (where each of the following are independent and cumulative):
(a) Base Power. During the Term of this Agreement, LEM shall be
obligated to supply to Big Rivers and Big Rivers shall be
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
obligated to purchase at a cost equal to the amounts set forth in Section 6.2(d)
from LEM Base Power as follows:
(i) in each hour,
(A) no less than the Minimum Requirement;
(B) no more than the Maximum Hourly Power Purchase
Amount; and
(ii) in each Year or Partial Year,
(A) no less than the Minimum Annual Power Purchase
Amount; and
(B) no more than the Maximum Annual Power Purchase
Amount.
All deliveries of Base Power shall be made at the Points of Delivery
as set forth in Exhibit B.
(b) Oglethorpe, Hoosier & HMP&L Power. During the Term of this
Agreement, LEM shall provide and Big Rivers shall purchase from LEM all its
requirements for Oglethorpe Power, HMP&L Power and Hoosier Power at a cost equal
to the amounts set forth in Sections 6.2(a) through (c). As used in this
Agreement, Big Rivers' requirements for Oglethorpe Power, HMP&L Power and
Hoosier Power shall constitute the amount of Power which Big Rivers, at a given
moment, sells to Oglethorpe, HMP&L or Hoosier (as applicable) pursuant to the
Oglethorpe Contract, the HMP&L Contract and the Hoosier Contracts, respectively.
Unless LEM has provided written consent, Big Rivers will not amend, extend or
renew any of the contracts pursuant to which it provides Oglethorpe Power, HMP&L
Power or Hoosier Power or assign, waive or limit any of its rights or interests
pursuant to such contracts throughout the remainder of their terms (and any
extensions thereto). To the extent that Big Rivers, under the terms of such
contracts, has any existing rights to extend or renew such contracts, Big Rivers
shall not extend or renew such contracts without LEM's prior consent, and Big
Rivers agrees to so extend or renew those contracts upon the request of LEM and
in accordance with the terms of these contracts; provided, however, that Big
Rivers shall have no obligation to extend such contracts for any period beyond
the end of the Term. Big Rivers agrees to perform each and every obligation for
which it is responsible under the Hoosier Contracts, HMP&L Contract and the
Oglethorpe Contract and to fully enforce all of its rights under those
agreements. Without limiting the foregoing sentences, Big Rivers agrees to use
commercially reasonable efforts (which shall not include a requirement to engage
the services of any collection agency or institute litigation) to collect all
amounts due to Big Rivers for Oglethorpe Power, Hoosier Power and HMP&L Power,
and to assign to LEM without cost collection rights and all such receivables not
collected within 120 days, so that LEM shall be entitled to attempt to collect
the same for its own account. LEM will deliver, or arrange for
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
delivery of, all Oglethorpe Power at either (a) the interconnection between the
TVA and Big Rivers systems or (b) the point or points connecting the Georgia
Integrated Transmission System and the TVA transmission system or other
transmission system or systems from or through which the capacity and energy
subject to the Oglethorpe Contract is delivered; all HMP&L Power at Henderson's
161 kV interconnection and the 69kV interconnections with Big Rivers; and all
Hoosier Power at the 161 kV interconnection between Hoosier and Big Rivers. All
of the foregoing deliveries shall be according to the rates, terms and
conditions of Big Rivers' Open Access Transmission Tariff to the extent delivery
of such power utilizes Big Rivers' Transmission System; provided, that such Open
Access Transmission Tariff exists and continues to exist during all applicable
periods, or that transmission access is provided on a non-discriminatory basis
under another cost-based transmission tariff on terms comparable to those under
which Big Rivers provides transmission service to itself. LEM shall indemnify
and hold Big Rivers harmless from and against any and all liabilities, losses,
claims, damages, costs and expenses (including reasonable attorneys' fees)
suffered or incurred by Big Rivers as a result of (i) any breach by Big Rivers
of any of its obligations under the Hoosier Contracts, the Oglethorpe Contract,
or the HMP&L Contract which result from any failure by LEM to perform its
obligations hereunder, (ii) any and all reasonable costs incurred by Big Rivers
in enforcing its rights under the Hoosier Contracts, the Oglethorpe Contract, or
the HMP&L Contract, (iii) any and all reasonable costs incurred by Big Rivers in
collecting (or attempting to collect) amounts due to Big Rivers for Hoosier
Power, Oglethorpe Power, or HMP&L Power and (iv) any and all reasonable costs
incurred by Big Rivers in exercising its rights, upon the prior request of LEM,
to extend or renew the Hoosier Contracts, the Oglethorpe Contract or the HMP&L
Contract.
(c) Generation-Based Ancillary Services. During the Term of this
Agreement, Big Rivers shall be entitled to receive from LEM those
generation-based Ancillary Services which constitute Transmission Support
Services, dispatch, Load Following, reactive power support and operating reserve
services as specified in Section 5 of this Agreement; and such generation-based
services as Big Rivers is required to provide to meet ECAR automatic reserve
requirements. As specified in this Agreement, certain generation-based Ancillary
Services and certain Load Following services will be provided by LEM to Big
Rivers without adjustment to the Power Value Amount; and additional
generation-based Ancillary Services and Load Following services will be
available at a cost equal to the amounts set forth in Section 6.2(f).
Notwithstanding any other provision of this Agreement, LEM shall be required to
provide the services identified in this Section 4.1(c) only to the extent that
such services can be provided from the Generating Plants, consistent with
Prudent Utility Practice and any applicable limitations on the use of Station
Two
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
power, and shall be excused in the event that an Uncontrollable Force prevents
LEM from providing such services from the Generating Plants to the extent such
Uncontrollable Force affects such Generating Plants. Notwithstanding the
preceding sentence, to the extent feasible, LEM may elect, at its sole
discretion, to meet its obligations under this Section 4.1(c) using whatever
resources it chooses.
4.2 Additional Provisions Regarding Member Power. During the Term of this
Agreement, Big Rivers shall supply all of the Members' Requirements for Member
Power and shall not amend any Member Contract to permit any Member to acquire
its requirements for Power to serve its non-Smelter customers from any Person
other than Big Rivers except as specifically provided in this Section 4.2.;
provided that Henderson Union and Green River Electric, (x) subject to Section
4.4, may enter into agreements with LEM to purchase Power needed to serve any or
all Smelter Requirements, and with any supplier to purchase Energy after
December 31, 2000 necessary to meet the Smelters' Tier 3 Energy requirements,
and (y) are permitted to resell power in accordance with the LEM/Henderson Union
Agreement and the LEM/Green River Agreement, respectively and in accordance with
the Agreements for Electric Service between those Members and the Smelters. In
the event that Big Rivers defaults under a Member Contract and such default
could be cause for termination of such Member Contract, then, notwithstanding
any other provision of this Agreement, Big Rivers agrees to permit (but not
require) LEM, in LEM's sole discretion, to attempt to cure such default. If a
Member terminates a Member Contract as a result of a default by Big Rivers
(regardless of whether LEM attempts to cure that default), but which default is
not the direct result of an act or omission by any LG&E Party, then a "Minimum
Requirement Revision Event" will be deemed to have occurred and thereafter, the
Minimum Requirement shall be the Minimum Hourly Power Purchase Amount. Big
Rivers acknowledges and agrees that any failure or refusal of any Member to
purchase Power from Big Rivers by reason of Big Rivers' breach or default under
any Member Contract is not an excusable cause for failure of Big Rivers to meet
the Minimum Requirement or Minimum Annual Power Purchase Amount and therefore at
any time at which Big Rivers fails to meet its Minimum Requirement or Minimum
Annual Power Purchase Amount LEM will be entitled to the minimum payments
contemplated in Section 6.4(b). Big Rivers may enter into a contract for the
sale or resale of Power purchased from LEM to any non-Member or for the purchase
or sale of Power from or to Parties other than LEM without limitation provided
that nothing in this sentence shall be construed to alter in any manner LEM's
obligations to supply or Big Rivers' obligation to purchase Power as otherwise
set forth herein.
4.3 Base Power Contract Limits. Throughout the Term of this Agreement,
Base Power is subject to the following Contract Limits:
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<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(a) Minimum Hourly Power Purchase Amount. During any hour through
December 31, 2000, the Minimum Hourly Power Purchase Amount is 272
megawatt-hours of Base Power and during any hour of any Year between January 1,
2001 and December 31, 2010 (inclusive), the Minimum Hourly Power Purchase Amount
is 297 megawatt-hours of Base Power. During any hour during the Year 2011, the
Minimum Hourly Power Purchase Amount is 517 megawatt hours of Base Power, and
during any hour of any Year following December 31, 2011, the Minimum Hourly
Power Purchase Amount is 600 megawatt-hours of Base Power.
(b) Minimum Annual Power Purchase Amount is as follows:
(i) During each full Year during the period beginning on the
Effective Date through December 31, 2000, the Minimum
Annual Power Purchase Amount is 2,687,750
megawatt-hours of Base Power.
(ii) During each full Year during the period beginning on
January 1, 2001 through December 31, 2010(inclusive),
the Minimum Annual Power Purchase Amount is 2,902,285
megawatt-hours of Base Power.
(iii) During the Year 2011, the Minimum Annual Power Purchase
Amount is 3,699,741 megawatt-hours of Base Power and
during each Year following December 31, 2011, the
Minimum Annual Power Purchase Amount is 4,300,000
megawatt-hours.
(iv) During any Partial Year, the Minimum Annual Power
Purchase Amount is the Minimum Annual Power Purchase
Amount for that Year, multiplied by a fraction whose
numerator is the number of days in such Partial Year and
whose denominator is 365.
(c) Maximum Hourly Power Purchase Amount. During any hour through
December 31, 2000, the Maximum Hourly Power Purchase Amount is not more than 572
megawatt-hours of Base Power and during any hour of any Year between January 1,
2001 and December 31, 2010 (inclusive), the Maximum Hourly Power Purchase Amount
is not more than 597 megawatt-hours of Base Power. During any hour during the
Year 2011, the Maximum Hourly Power Purchase Amount is not more than 717
megawatt-hours of Base Power, and during any hour of any Year following December
31, 2011, the Maximum Hourly Power Purchase Amount is not more than 800
megawatt-hours of Base Power.
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(d) Maximum Annual Power Purchase Amount is as follows:
(i) During each full Year during the period beginning on the
Effective Date through December 31, 2000, the Maximum
Annual Power Purchase Amount is 5,112,750
megawatt-hours of Base Power.
(ii) During each full Year during the period beginning on
January 1, 2001 through December 31, 2010(inclusive),
the Maximum Annual Power Purchase Amount is 5,327,285
megawatt-hours of Base Power.
(iii) During the Year 2011, the Maximum Annual Power Purchase
Amount is 6,321,741 megawatt-hours of Base Power and
during each Year following December 31, 2011, the
Maximum Annual Power Purchase Amount is 7,008,000
megawatt-hours of Base Power.
(iv) During any Partial Year, the Maximum Annual Power
Purchase Amount is the Maximum Annual Power Purchase
Amount for that Year, multiplied by a fraction whose
numerator is the number of days in such Partial Year and
whose denominator is 365.
(e) Reduction in Contract Limits. At any time during the Term of
this Agreement, subsequent to the later to occur of the Effective Date or
December 31, 1998, Big Rivers may decrease the Contract Limits by giving written
notice to LEM of its election to decrease the Contract Limits, subject to the
following:
(i) Any such reduction (pursuant to this Section 4.3(e))
shall be made as a uniform decrease, measured in
megawatt-hours, to all the Contract Limits in all
Years, such that upon a change in the Contract Limits
that is required by Section 4.3(a) through (d), the
changed Contract Limits will be adjusted downward
prior to becoming effective by the cumulative number
of megawatt-hour reductions elected pursuant to this
Section 4.3(e) (assuming such election is effective,
consistent with the other requirements of this
Section 4.3(e), as of the date the new Contract
Limits designated in Section 4.3(a), (b), (c) and (d)
become effective).
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(ii) Any such reduction (pursuant to this Section 4.3(e))
shall remain effective for the balance of the Term of
this Agreement;
(iii) Any notice of a reduction (pursuant to this Section
4.3(e)) shall not become effective until the expiration
of two consecutive Years after it is given (for example
a notice given in 2001 shall result in Contract Limit
reductions starting January 1, 2004);
(iv) The cumulative amount of Contract Limit reductions
(pursuant to this Section 4.3(e)) during the Term of the
Agreement shall not exceed 72 megawatts;
(v) No annual reduction (pursuant to this Section 4.3(e))
shall exceed 12 megawatts; and
(vi) Any reduction (pursuant to this Section 4.3(e)) of
the Minimum Annual Power Purchase Amount shall not
result in a Minimum Annual Power Purchase Amount
which is less than 102% of actual requirements for
Base Power for the Year prior to the effective date
of the reduction (notwithstanding any adjustments for
Partial Years); provided, that in the event that any
notice of a reduction specifies a reduction in the
Minimum Annual Power Purchase Amount greater than is
permitted pursuant to this Section 4.3(e)(vi), the
Minimum Annual Power Purchase Amount shall be reduced
each year by the maximum amount permissible until
such time as the Minimum Annual Power Purchase Amount
has been reduced to the full extent specified in such
notice of reduction.
(f) The Contract Limits shall be subject to further adjustments as
provided in the Station Two Agreement.
(g) Notwithstanding anything in this Agreement to the contrary, Base
Power shall not include Hoosier Power, Oglethorpe Power or HMP&L Power.
4.4 Exclusivity.
(a) In consideration of Big Rivers' agreements as set forth herein,
LEM agrees that during the Term of this Agreement, Big Rivers shall be the
exclusive distributor (through the Members) of
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
Power furnished directly or indirectly to end-users located, or for use within
the boundaries of the Members' Franchised Service Territories; provided that Big
Rivers shall not be the exclusive distributor with respect to Power to be
supplied, directly or indirectly, to meet the Smelter Requirements. LEM and its
Affiliates will not, directly or indirectly, sell or furnish, or offer or agree
to sell or furnish, Power to or for the benefit or account of any such end user,
other than Power to be supplied by LEM to certain Members to meet the Smelter
Requirements, except through Big Rivers' exclusive distributorship in accordance
with this Agreement, as otherwise expressly permitted by this Agreement, or as
expressly permitted in the Station Two Agreement. Notwithstanding the foregoing:
(i) LEM or its Affiliates shall be permitted to sell,
directly or indirectly, to the Members any Power
required to serve the Smelter Requirements during the
Term of this Agreement;
(ii) LEM or its Affiliates shall be permitted to sell Power,
directly or indirectly, to the Smelters to the extent
that the Smelters are free to purchase such Power from
entities other than the Members under applicable Law and
any agreement existing between any Smelter and any
Member; and
(iii) LEM or its Affiliates shall be permitted (but not
required) to sell to Big Rivers for resale to the
Members, or to the Members (to the extent the Members
are permitted by law and contract to purchase from a
Person other than Big Rivers), Power required by the
Members to enable the Members to supply Power to certain
of their non-Smelter industrial customers.
(b) Big Rivers agrees that until December 31, 2011, it will not,
directly or indirectly, sell or furnish, or offer or agree to sell or furnish,
Power to Henderson Union for sale to Alcan, or to Alcan, other than with respect
to the portions of Tier 3 Energy which Henderson Union is explicitly permitted
to purchase from a supplier other than LEM, unless the obligation of LEM (during
Phase I) or Leaseco (during Phase II) to pay Monthly Margin Payments to Big
Rivers under this Agreement or the Lease has terminated, or unless and for the
period that LEM or Leaseco (as applicable) has failed to pay such Monthly Margin
Payments in breach of this Agreement or the Lease. The provisions of this
Section 4.4(b) shall survive any termination of this Agreement for any reason
and shall continue to be binding on Big Rivers for so long as the Lease or the
Station Two Agreement shall continue in force and effect, and then only in the
event Big Rivers
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
continues to receive the Monthly Margin Payments (or portions thereof) in
accordance with the Lease.
(c) Big Rivers agrees that until December 31, 2010, it will not,
directly or indirectly, sell or furnish, or offer or agree to sell or furnish,
Power to Green River for sale to Southwire, or to Southwire, other than with
respect to the portions of Tier 3 Energy which Green River is explicitly
permitted to purchase from a supplier other than LEM, unless the obligation of
LEM (during Phase I) or Leaseco (during Phase II) to pay Monthly Margin Payments
to Big Rivers under this Agreement or the Lease has terminated or unless and for
the period that LEM or Leaseco (as applicable) has failed to pay such Monthly
Margin Payments in breach of this Agreement or the Lease. The provisions of this
Section 4.4.(c), shall survive any termination of this Agreement for any reason
and shall continue to be binding on Big Rivers for so long thereafter as the
Lease or the Station Two Agreement shall continue in force and effect, and then
only in the event Big Rivers continues to receive the Monthly Margin Payments
(or portions thereof) in accordance with the Lease.
Section 5: Scheduling and Ancillary Services
5.1 Projected Monthly Schedules. At least 30 days prior to the expected
Effective Date and each October 1 thereafter during the Term of this Agreement,
Big Rivers shall submit to LEM in writing the projected monthly amounts of Base
Power, Oglethorpe Power, HMP&L Power, Hoosier Power, Transmission Support
Services and other generation-based Ancillary Services it expects to require
during the following Partial Year or Year. Such projections shall represent a
good faith estimate by Big Rivers of its anticipated requirements hereunder;
provided, that such estimates shall not be binding and shall be used by LEM for
planning and information purposes only. The estimates by Big Rivers shall be for
all Power and generation-based Ancillary Services to be purchased by Big Rivers
pursuant to this Agreement, with a gross up for average annual transmission
losses associated with Base Power. Big Rivers shall have full freedom of
schedule, subject to the provisions of Section 5.1 and 5.3 and the Contract
Limits.
5.2 SEPA Contract. At least 30 days prior to the expected Effective Date
and each October 1 thereafter during the Term of this Agreement, Big Rivers
shall submit to LEM a schedule showing the amount of Power Big Rivers wishes to
have delivered to it under the SEPA Contract during each month ("SEPA Schedule")
of the following Partial Year or Year. LEM shall act as Big Rivers' agent for
the scheduling of Power under the SEPA Contract and shall have the right to
determine (consistent with the provisions of the SEPA Contract) the timing of
deliveries of such Power during each month; provided, however, for purposes of
the administration of this contract, such
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
deliveries shall be deemed, after-the-fact, to have occurred consistent with the
SEPA Schedule and, to the maximum extent allowable under the SEPA Contract,
during hours of the Members' demand on Big Rivers' system.
5.3 Daily Preschedules. Big Rivers shall preschedule all deliveries of
Power no later than 9:00 a.m., Central Time, on the Business Day immediately
preceding the day or days of delivery, or as otherwise mutually agreed by the
Parties' dispatchers and schedulers. Big Rivers' preschedule shall specify for
each hour of each day scheduled its best estimate of its requirements for Base
Power, Oglethorpe Power, HMP&L Power, Hoosier Power, Transmission Support
Services and other generation-based Ancillary Services as Big Rivers is entitled
to receive pursuant to this Agreement. Big Rivers shall provide its preschedule
to LEM and the operator responsible for the dispatch and real-time control of
the Generating Plants. Following receipt of Big Rivers' preschedule, LEM shall
provide its own preschedule to the operator responsible for the dispatch and
real-time control of the Generating Plants specifying for each hour of each day
scheduled its best estimate of its requirement for Unit Output. Within three
hours of receipt of Big Rivers' preschedule, LEM will provide Big Rivers with a
schedule showing the Point(s) of Delivery at which Big Rivers' Base Power,
Oglethorpe Power, HMP&L Power, Hoosier Power and other scheduled services will
be delivered. The Parties shall make reasonable efforts to minimize changes in
Big Rivers' and LEM's preschedules and delivery schedules, but such changes
shall be accommodated by the Parties up to 30 minutes prior to the hour of
delivery.
5.4 Redispatch. If delivery of Big Rivers' Power requirements, amounts of
Power scheduled to be provided by LEM to Green River Electric and Henderson
Union to meet the Smelter Requirements and LEM's off-system sales at LEM's
specified Points of Delivery is not consistent with operation of Big Rivers'
Transmission System in accordance with Prudent Utility Practice, or is not
consistent with allowing all requested, otherwise feasible wheeling transactions
to occur in Big Rivers' system, then, to the extent consistent with Prudent
Utility Practice, LEM will permit Big Rivers to direct redispatch of the
Generating Plants as needed (i) to maintain Firm Point-to-Point Transmission
Service and Network Integration Transmission Service, including the transmission
of Member Power to the Members' Franchised Service Territories, under emergency
conditions, and (ii) to permit additional Firm Point-to-Point Transmission
Service and Network Integration Transmission Service to be scheduled over
congested transmission paths. LEM shall modify the specified Points of Delivery
to allow Big Rivers' Transmission System to operate in accordance with Prudent
Utility Practice, provided that such redispatch permits LEM to continue to meet
its energy delivery commitments. Big Rivers shall pay LEM the incremental cost,
if any,
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
of such redispatch, with such cost to be as quoted by Big Rivers or its Operator
(during Phase I) or Leaseco (during Phase II) at the time the redispatch service
is requested. Big Rivers' obligation pursuant to the preceding sentence is not
to be subsumed by or diminished by LEM's separate obligation during Phase I to
pay the Operating Pass-Through Costs, but rather requires that throughout the
Term, Big Rivers, not LEM or any of its Affiliates, bear the cost of redispatch;
provided, that LEM or any of its Affiliates shall be required to pay any
increased transmission charge assessed by Big Rivers reflecting the incremental
cost of such redispatch where that entity's use of the Transmission System
necessitates such redispatch to create the additional transmission capacity used
by it. The quoted charge for such redispatch shall be calculated by Big Rivers
or its Operator (during Phase I), and by Leaseco (during Phase II), in a manner
consistent with the FERC's policies for the calculation of redispatch costs.
5.5 Load Following.
(a) Metering. In order to facilitate the provision of Load Following
services, LEM, at its sole expense, shall install, or cause to have installed,
and cause to be monitored, metering and telemetry equipment, which may include
the use of loss compensators, and which in combination with existing metering
equipment, if any, is of metering grade accuracy, for measuring power flows at
each of the Points of Delivery identified in Exhibit A.
(b) Load Following.
(i) LEM will provide all of Big Rivers' Load Following
requirements with respect to Member Power, without
adjustment to the Power Value Amount for the applicable
period, subject to the following conditions:
(A) LEM shall not be obligated to provide Load
Following services for Big Rivers, that, when
combined with the provision of Base Power
requirements (after adjustment for the SEPA
Contract pursuant to Section 5.2), would exceed
the Maximum Hourly Power Purchase Amount at any
time; and
(B) LEM shall not be obligated to provide Load
Following services for loss of generation under
the control of Big Rivers, or any third-party
resource serving Big Rivers, other than from the
Generating Plants; and
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(C) LEM shall not be obligated to provide Load
Following services for any of Big Rivers' loads
that are added to the Big Rivers' system after
1996, and that require Load Following services
that are materially different than the
aggregate of all loads that were served by Big
Rivers as of December 31, 1996 exclusive of the
Smelter Requirements.
(ii) During the Term of this Agreement, LEM will provide all
of Big Rivers' Load Following requirements, if any, with
respect to Oglethorpe Power, Hoosier Power and HMP&L
Power without adjustment to the Power Value Amount for
the applicable period.
(iii) Any additional amounts of Load Following required by Big
Rivers for the load of its Members that it serves or any
transmission customer serving load within Big Rivers'
control area shall be supplied to Big Rivers by LEM with
a corresponding adjustment to the Power Value Amount
equivalent to the LEM rates for such Load Following
Service, in accordance with in Section 6.2(f).
5.6 Operating Reserves. LEM will maintain sufficient spinning and
non-spinning reserves consistent with reliability guides, principles, and
responsibilities set forth in ECAR documents and guides and NERC criteria to
support that portion of the Base Power that is consumed in Big Rivers' control
area, and such other spinning and non-spinning reserves as may be required
pursuant to the Oglethorpe Contract, HMP&L Contract and Hoosier Contracts, each
on terms in accordance with this Agreement. With respect to use of the
Generating Plants by Big Rivers pursuant to this Section 5.6, there will be no
adjustment to the Power Value Amount for the applicable period.
5.7 Reactive Power. LEM shall provide in any hour from its entitlement to
the Unit Output of the Generating Plants, at Big Rivers' request and without
adjustment to the Power Value Amount, an amount of megavars for Control Area
operations up to the electrical net output of such Generating Plants in such
hour, multiplied by 0.329 but in no event an amount of megavars equal to less
than 608 megawatts multiplied by 0.329. For example, if the electrical output of
such Generating Plants in an hour is 1000 MW, up to 329 megavars will be so
provided. Subject to the above aggregate limit, Big Rivers shall be entitled to
request and receive an amount of megavars up to the maximum net dependable
capacity of the Generating Plant unit expressed
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
in megawatts multiplied by 0.329 from any specific unit of any Generating Plant
specified by Big Rivers and in operation during the hour; provided that Big
Rivers will identify the specific Generating Plant unit required to produce
megavars only if such specification is necessitated by localized voltage
problems. The current maximum net dependable capacity of each Generation Plant
unit, expressed in megawatts, is set forth in Exhibit 6 of the Transmission
Service and Interconnection Agreement. However, the Parties shall at all times
use the then applicable maximum net dependable capacity of the Generation Plant
units, which amount may change from time to time over the course of this
Agreement; provided, that in the event that two or more Generating Plant units
are off-line and Big Rivers is experiencing low voltage problems, the Operator
of the Generating Plants will, without adjustment in the Power Value Amount,
operate the Generating Plant units down to the design lagging power factor
without a loss of megawatt output, but only to the extent necessary to produce
an amount of megavars equal to .329 multiplied by the net output of the
Generating Plants that would exist if the units that are off-line at the time
the calculation was made are operating. At any time, any additional megavars
requested by Big Rivers in excess of .329 multiplied by the net output of the
Generating Plants, assuming no units are off-line, if available from the
Generating Plants without loss of megawatt output capabilities, shall be
provided to Big Rivers from LEM at LEM's rates for sale of reactive power set
forth in its tariff for the sale of ancillary services (as filed with FERC and
revised from time-to-time). LEM may also elect (but is not obligated) to
provide, in any hour at Big Rivers' request, megavars in such quantities that
their production adversely impacts the Generating Plants' capability to produce
megawatts at the rated lagging power factor, but shall do so only at the rate
set forth in LEM's tariff for the sale of ancillary services (as filed with FERC
and revised from time-to-time) or such other rates as FERC may accept for
filing.
5.8 Transmission Support Services. Upon Big Rivers' request, LEM shall
obtain and provide from the Generating Plants, to the extent available from the
Generating Plants, to all users of Big Rivers' Transmission System and to Big
Rivers, in its capacity as both a Transmission System user when requiring
Ancillary Services in excess of the level of such services otherwise provided in
this Agreement, and to meet Big Rivers' own Ancillary Services requirements to
third-parties as a transmission services provider, any generation-based
Ancillary Services that the FERC requires from time to time to be provided by a
transmission provider similarly situated to Big Rivers and owning and operating
the Generating Plants ("Transmission Support Services"). A request by Big Rivers
for Transmission Support Services of the type that cannot be physically provided
by a generator located outside of Big Rivers' Control area shall be given first
priority by LEM relative to other uses of the Generating Plants. Such
generation-based Ancillary Services shall be provided at such rates as LEM
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
establishes, subject to any applicable regulatory policies, for such
generation-based Ancillary Services, and LEM will charge such amounts to Big
Rivers by adjustment to the Power Value Amount. Neither Big Rivers nor any
third-party user of Big Rivers' Transmission System shall be required to
purchase such Ancillary Services from LEM to the extent they are able to provide
those services themselves or acquire them from an alternative supplier.
5.9 System Logs. All deliveries shall be made in accordance with the
Parties' schedules which are in effect 30 minutes prior to each hour of
delivery, except deliveries associated with Load Following service which shall
reflect the integrated amount accumulated over the hour and shall be deemed to
be made during the hours and in the amounts as accounted for in LEM's and Big
Rivers' system logs. If scheduled deliveries are interrupted due to an
Uncontrollable Force as defined in Section 12, such schedules shall be adjusted
to reflect actual deliveries.
Section 6: Metering, Pricing and Billing
6.1 Metering. The amounts of Unit Output, Oglethorpe Power, HMP&L Power,
Hoosier Power and Base Power delivered during the prior month and the
Transmission Support Services and other services provided pursuant to Section
4.1(c) that are provided during the prior month shall be metered at the Points
of Delivery and at the Points of Metering and, on a monthly basis, reported by
Big Rivers to LEM in accordance with Section 12 of the Transmission Service and
Interconnection Agreement. Such information will be used as a basis for
determining the Power Value Amount, as defined in Section 6.2. Pursuant to
Section 6.5, Big Rivers will issue a statement to LEM once per month, and LEM
will issue a statement to Big Rivers once per month, each based on such metered
information. LEM shall be entitled to have a representative present when meters
are read or to institute other reasonable measures to verify meter readings.
Disputes concerning the accuracy of meter reading will be subject to the dispute
resolution, mediation and arbitration provisions applicable to this Agreement as
set forth in the Participation Agreement.
6.2 In addition to such amounts which Big Rivers may be obligated to pay
to LEM pursuant to Sections 8 and 9.2, Big Rivers will pay to LEM each month the
"Power Value Amount," which equals the sum of the following:
(a) An amount equal to Big Rivers' total revenues actually collected
for Oglethorpe Power sold to Oglethorpe by Big Rivers during the prior month
(exclusive of any revenue received by Big Rivers from Oglethorpe pursuant to
Section 5.3 of the Oglethorpe Contract).
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(b) An amount equal to Big Rivers' total revenues actually collected
for Hoosier Power sold to Hoosier by Big Rivers during the prior month.
(c) An amount equal to Big Rivers' total revenues actually collected
for HMP&L Power sold to HMP&L by Big Rivers during the prior month.
(d) An amount equal to the Base Power Price for such month as
determined pursuant to Section 6.4.
(e) An amount equal to the redispatch costs incurred by Big Rivers
pursuant to Section 5.4 during the prior month.
(f) An amount based upon the quantity of generation-based Ancillary
Services, ECAR reserves or Transmission Support Services provided by LEM to Big
Rivers during the prior month in excess of the type and quantity of such
services which are explicitly to be provided pursuant to this Agreement without
adjustment to the Power Value Amount, priced in accordance with LEM's rates for
such services.
(g) To the extent that Big Rivers purchases from a third-party ECAR
automatic reserves or generation-based emergency services necessary to support
operation of its Transmission System, the Power Value Amount shall be reduced by
an amount equal to Big Rivers' actual cost of such purchases during the prior
month; provided that ECAR automatic reserves or generation-based emergency
services shall not be purchased in amounts greater than the minimum amount
required under ECAR regulations.
6.3 Base Power Rates.
(a) Base Power. During the first Partial Year through December 31,
2001, the rate per megawatt-hour of Base Power is $18.917. For the balance of
the Term of this Agreement, the following rates per megawatt-hour for Base Power
apply:
2002 $19.117
2003 $19.217
2004 $19.317
2005 $19.417
2006 $19.517
2007 $19.717
2008 $20.017
2009 $20.327
2010 $20.627
2011 $20.947
2012 $20.267
2013 $20.587
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
2014 $20.917
2015 $21.247
2016 $21.587
2017 $21.927
2018 $22.277
2019 $22.627
2020 $22.987
2021 $23.357
2022 $23.717
2023 $24.082
2024 $24.452
(b) Base Power Rate Adjustments. Prior to February 1 of the Years
2004, 2011 and 2018, the Parties shall perform the following calculations:
Let Pn represent the rate for Base Power for year n as defined in Section
6.3(a).
Define Qn = 9.52x + 7.25y + 3.23 where, for each year n of 2004, 2011, and
2018:
x = The ratio of the value of the Coal Index (DRI Price of Coal
to Electric Utilities - National) at January 1 of year n to
the value at January 1 of the seventh preceding year; and
y = The ratio of the value of the Labor Index (DRI Unit Labor
Cost - National) at January 1 of year n to the value at
January 1 of the seventh preceding year.
(i) 2004 Adjustment
(A) If Q2004 is less than 16.69, then set F2004 =
Q2004 / 16.69
(B) If Q2004 is greater than 35.32, then set F2004 =
Q2004 / 35.32
(C) If neither determination (1) or (2) is made, then
set F2004 = 1.0.
(D) The adjusted rate for Base Power, P'n for each
year n from 2004 through 2010 shall be determined
as P'n = Pn o F2004
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POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
(ii) 2011 Adjustment
(A) If Q2011 is less than 20.66 o F2004, then set
F2011 = Q2011 / 20.66
(B) If Q2011 is greater than 43.73 o F2004, then set
F2011 = Q2011 / 43.73
(C) If neither determination (1) or (2) is made, then
set F2011 = F2004
(D) The adjusted rate for Base Power, P'n for each
year n from 2011 through 2017 shall be determined
as P'n = Pn o F2011
(iii) 2018 Adjustment
(A) If Q2018 is less than 25.59 o F2004 o F2011, then
set F2018 = Q2018 / 25.59
(B) If Q2018 is greater than 54.15 o F2004 o F2011,
then set F2018 = Q2018 / 54.15
(C) If neither determination (1) or (2) is made, then
set F2018 = F2004 o F2011
(D) The adjusted rate for Base Power, P'n, for each
year n from 2018 through the Term of this
Agreement shall be determined as P'n = Pn o F2018
(iv) Base Power rate adjustments will be effective on January
1 of the Year the calculation is performed.
(c) In the event that the Effective Date does not occur on or before
December 31, 1998 then Section 6.3(a) will be modified, effective January 1,
1999, and on each January 1 thereafter until the Effective Date occurs (after
which time the Section will remain fixed in the form then current), subject to
an earlier termination of the Participation Agreement, as follows: each Year
stated will be increased by one, such that the rate in the first Partial Year
that the Agreement is in effect and through the three calendar years immediately
following the first Partial Year will be $18.917 and the remainder of the rates
will become effective in the corresponding Year indicated after such
modification is made.
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SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION -
SUBJECT TO PROTECTIVE ORDER
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
6.4 Calculation of the Base Power Price
(a) Base Power Price. For the purposes of Section 6.2(d), the Base
Power Price is equal to the sum of (i) the Base Power rates established in
Sections 6.3 multiplied by the number of megawatt-hours of Base Power delivered
to Big Rivers during the prior month and (ii) such other amount as determined
pursuant to Section 6.4(b). Base Power delivered to Big Rivers during the prior
month shall be determined as the total metered load delivered by Big Rivers to
Members during the prior month at the Points of Metering as set forth in Exhibit
C, plus the total megawatt-hours of Base Power Big Rivers scheduled from LEM
during the previous month for resale to third parties other than Members metered
at the applicable Point(s) of Delivery as set forth in Exhibit B, plus average
annual transmission losses imputed to Power delivered by Big Rivers to the
Members and Power delivered for resale to third parties (with such losses to be
equal to the effective annual loss rate applied to transmission service during
the same period, as calculated pursuant to the Transmission Service and
Interconnection Agreement), minus any purchases from SEPA or other third-parties
delivered through the Points of Metering. In no event shall the amount of Power
priced in accordance with this Section 6.4 exceed the amount of Base Power
available pursuant to Section 4.1(a).
(b) Minimum Power Purchase Obligation.
[*REDACTED. Omitted pursuant to confidential treatment request.
Material filed separately with SEC.]
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SECTION 6.4(b) OF THIS DOCUMENT CONTAINS CONFIDENTIAL PROTECTED INFORMATION -
SUBJECT TO PROTECTIVE ORDER
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
[* REDACTED. Omitted pursuant to confidentiality request.
Material filed separately with SEC.]
6.5 Billing and Payment. Big Rivers and LEM shall reconcile all monthly
amounts due and owing other than the Initial Fixed Payment or Annual Fixed
Payment as soon after the month's end as detailed information is available. Each
month, Big Rivers shall bill LEM for the Operating Pass-Through Costs due
pursuant to Section 3.3(b) within two days of receipt of an invoice for such
Operating Pass-Through Costs from its Operator, if any, and, separately, for any
other amounts due hereunder, if any, and LEM shall bill Big Rivers for the Power
Value Amount and any other amounts due hereunder, if any, after adjusting for
the credits set forth in Section 6.6 which may apply for that month. Each Party
shall bill the other by facsimile (with the original of such bill transmitted to
LEM or to Big Rivers, as applicable, by certified mail) for amounts owing
pursuant to this Section 6 or as otherwise specified in this Agreement. Payment
shall be made for the amount of such bill, including any disputed amounts, by
electronic wire transfer by the later of 15 days after facsimile receipt of such
bill or the last Business Day of the month except with respect to the Operating
Pass-Through Costs which LEM shall pay no later than the Monthly Payment Date;
provided, however, Big Rivers shall not be required to pay any amounts under
this Section 6.5 to LEM unless all Operating Pass-Through Costs due and owing by
LEM to Big Rivers, and for which LEM has been properly billed, shall have first
been paid in full. Payments rendered to Big Rivers with respect to the Operating
Pass-Through Costs shall be made to (not applicable) or such other financial
institution or account number as Big Rivers and its Operator may specify from
time to time in writing. Payments rendered to Big Rivers with respect to other
than the Operating Pass-Through Costs shall be made to Farmers Bank of
Henderson, Kentucky, ABA No. 083900538 for the credit of Big Rivers General
Fund, Account No. 1085559, or such other financial institution or account number
as Big Rivers may specify from time to time in writing. Payments rendered to LEM
shall be made to PNC Bank, Kentucky, ABA No. 083000108, for the credit of LG&E
Marketing, Inc., Account No. 3100532665, or such other financial institution or
account number as LEM may specify from time to time in writing. Simple interest
shall accrue on any unpaid amounts or any credits at a rate equal to the
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Default Rate during the period, if any, of delinquency or outstanding credit.
6.6 Credits.
(a) At the end of Year 2011, LEM shall credit Big Rivers' account
$2,610,557 and at the end of each Year following December 31, 2011, LEM shall
credit Big Rivers' account $4,110,750.
(b) In the event that any credit due to Big Rivers for any Year
pursuant to subparagraph (a) above (a "Load Reduction Credit") exceeds the Power
Value Amount during the final month of such Year (as determined pursuant to
Section 6.6(a)), then, LEM shall, at Big Rivers' option either (i) pay to Big
Rivers, within thirty (30) days after receiving a request from Big Rivers, an
amount equal to the difference between the Load Reduction Credit for such Year
and the Power Value Amount due for the final month of such Year or (ii) apply
the excess credit against the Power Value Amount due during subsequent months
until the excess credit has been reduced to zero.
(c) With respect to any year for which LEM owes to Big Rivers
pursuant to Section 9.6 of the Participation Agreement a Transmission Use
Credit, LEM shall, on February 1 of the following year, credit to Big Rivers'
account the full amount of such Transmission Use Credit, which credit will
satisfy LEM's obligations under Section 9.6 of the Participation Agreement.
(d) [Reserved]
(e) On the first day of each month beginning with the first month
following the Effective Date and continuing for fifty-five (55) months, LEM
shall credit Big Rivers' account $89,000.
Section 7: Audit Rights
During the Term of this Agreement, each Party may review accounting
records and supporting documents of the other Party relevant to the
determination of any rate charged pursuant to this Agreement which is not fixed,
of amounts of Power, Load Following service or generation-based Ancillary
Services provided or received together with the loads and resources involved in
such service, and of average loss rates applied hereunder during the prior
thirty-six months, provided that each Party may conduct no more than one such
audit during any consecutive six month period. If a Party believes there are any
errors in the determination of a bill including prices, it shall pay the full
amount of such bill and the Parties shall meet to review the accounting records
and supporting documents and agree on any adjustments that may be appropriate.
If the Parties agree that the billing is incorrect, a corrected bill shall be
prepared and the
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difference between the incorrect bill and corrected bill, including simple
interest at a rate equal to the Default Rate for the period of under or
overpayment. Each Party shall take all steps reasonably available to secure the
confidentiality of the other Party's accounting records and supporting documents
and shall use them only for the purpose of confirming the accuracy of billings
under this Agreement. Disclosure of accounting records and supporting documents
to the other Party is not intended to, and shall not be interpreted to, waive a
Party's right to maintain that such records and supporting documents are
privileged, confidential, proprietary, or otherwise protected from disclosure to
the public. In the event such information is required in a legal or regulatory
proceeding, the Party affected shall advise the other Party of the requirement
to disclose such information prior to disclosing it and at the Party's request
shall ask that the confidentiality of any such information be maintained.
Section 8: Cost Determination Changes
The cost methodologies utilized for pricing purposes in this Agreement and
the rates and rate formulae specified herein shall remain in effect through the
Term of this Agreement and neither Party shall petition the FERC or any other
governmental agency pursuant to the provisions of Section 205 or 206 of the
Federal Power Act or any other provision of law to amend such methodologies or
formulae absent the agreement in writing of the other Party or support such a
petition filed by any third party. Notwithstanding the foregoing, if a tax on
plant emissions should be enacted, LEM may increase the Power Value Amount to
reasonably reflect the increased cost associated with the Power sold to Big
Rivers hereunder due to the imposition of such tax.
Section 9: Remedies
9.1 Rights and Remedies Cumulative. A Party's right to damages or other
relief resulting from a breach on the part of any other Party under this
Agreement accrues as of the first day of the breach without regard to whether
such breach leads to a default under Section 2.2(a). Upon the breach by either
Party of its obligations under this Agreement, whether or not such breach is or
becomes a default for purposes of Section 2.2(a), the other Party shall have all
of the rights and remedies available hereunder, under any other agreement
between the Parties as otherwise applicable, and under all applicable laws, all
of which rights and remedies shall be cumulative and nonexclusive to the extent
permitted by law; provided, however, that:
(a) neither Party shall be entitled to recover any loss of earnings,
revenues (except as provided in Sections 2.2 or 9.2 of this Agreement),
indirect, consequential, incidental or special damages (except as provided in
Section 15.2);
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(b) LEM's exclusive right and remedy for Big Rivers' failure to
utilize the Minimum Requirements or the Minimum Annual Power Purchase Amount of
Base Power hereunder shall be the remedy set forth in Section 6.4(b);
(c) except as provided in Sections 2.2 and 15.2 of this Agreement, a
Party's sole right to damages for a failure by the other Party to deliver Power
as required by this Agreement shall be the remedies and rights set forth in
Section 9.2; and
(d) the provisions of Subsection 9.1(a), above, shall not bar or
constitute any waiver of any claim by Big Rivers for any Monthly Margin Payments
as its damages arising by reason of a default by LEM under this Agreement;
provided, that nothing contained herein shall be deemed to be an admission by
LEM that the loss of such payments by Big Rivers is or shall be an actual or
direct damage incurred by Big Rivers arising out of such a default by LEM.
9.2 Failure to Deliver Power. From time to time, but not more frequently
than once each month, LEM may invoice Big Rivers for its damages arising from
any failure of Big Rivers to deliver to LEM that Unit Output which through the
willful or negligent action of Big Rivers, or through any voluntary or
involuntary bankruptcy proceeding involving Big Rivers, was withheld from LEM or
delivered other than as directed by LEM in breach of this Agreement, except as
such failure may be excused by an Uncontrollable Force or made impossible due to
LEM's own negligence or willful act or omission. From time to time, but not more
frequently than once each month, Big Rivers may invoice LEM for its damages
arising from any failure of LEM to deliver in accordance with this Agreement
Base Power, Oglethorpe Power, HMP&L Power, Hoosier Power or any of the services
to which Big Rivers is entitled pursuant to Section 4.1(c) except as such
failure may be excused by an Uncontrollable Force or made impossible due to Big
Rivers' own negligence or willful act or omission. In each of the preceding
circumstances in which damages are due, such damages shall equal the damaged
Party's reasonably incurred replacement Power costs (including costs of any
related Ancillary Services). An invoice rendered in accordance with this Section
9.2 shall be paid, in full, by the receiving party within 30 days of its
receipt.
9.3 Offsets. In addition to the rights and remedies described above and
elsewhere in this Agreement, but subject to the limitations set forth in
Sections 9.1(a), (b) and (c), above, Big Rivers and LEM each agree that if Big
Rivers, on the one hand, or LEM, on the other hand, ("X") shall fail to make
any payment or shall fail to perform any obligation under this Agreement, then
the other Party ("Y") or any of its Affiliates will have the right (but not the
obligation) without prior notice to X to perform such obligations and set-off
the costs of
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such performance or the amount of any such past due payment owing to Y against
any obligation of Y or any of its Affiliates owing to X or any of its Affiliates
hereunder or, during Phase II, under any of the other Operative Documents.
Section 10: Governing Law
This Agreement shall be subject to and be construed under the laws of the
Commonwealth of Kentucky, exclusive of choice of law provisions.
[Section 11: Reserved]
Section 12: Uncontrollable Forces
12.1 Neither Party to this Agreement shall be considered to be in default
in performance of any obligation hereunder if failure of performance shall be
due to an Uncontrollable Force. The term "Uncontrollable Force" means any cause
beyond the control of the Party affected, including, but not limited to, flood,
earthquake, storm, fire, lightning, epidemic, war, riot, civil disturbance,
labor disturbance, sabotage, and restraint by court order or public authority
(other than any filing of a petition in bankruptcy or reorganization or
arrangement under any bankruptcy or insolvency laws), which by exercise of due
foresight such Party could not reasonably have been expected to avoid, and to
the extent that by exercise of due diligence it shall be unable to overcome. A
Party shall not, however, be relieved of liability for failure of performance if
such failure is due to causes arising out of removable or remediable causes
which it fails to remove or remedy with reasonable dispatch. Furthermore, no
Party claiming an Uncontrollable Force shall be relieved or excused by reason of
such Uncontrollable Force from any payment obligation it may have. Any Party
rendered unable to fulfill any obligation by reason of an Uncontrollable Force
shall exercise due diligence to remove such inability with all reasonable
dispatch. Nothing contained herein, however, shall be construed to require a
Party to prevent or settle a strike against its will. Notwithstanding anything
in this Section 12 to the contrary, (a) any obligation of Big Rivers to purchase
Power under this Agreement (or to make any payment based on a deemed delivery of
Power pursuant to Section 6.4(b)) shall be excused to the extent, and only to
the extent, that LEM's failure to provide such Power is excused pursuant to this
Section 12 and (b) subject to Section 4.1(c), LEM's failure to supply Power to
Big Rivers pursuant to this Agreement shall not be excused under this Section 12
unless such Uncontrollable Force prevents LEM from supplying such Power not only
from the Generating Plants but also from any other resource or supply.
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12.2 Notwithstanding anything contained elsewhere in this Agreement to the
contrary and without extending any period otherwise specified in this Agreement
for remedy, in the event (1) Big Rivers fails to deliver or is prevented from
delivering to LEM the Unit Output as is required pursuant to Section 3 of this
Agreement or is restrained from permitting one or more of the Generating Plants
to be operated, (2) such failure or restraint is caused by an Uncontrollable
Force which is of such a nature that it cannot be remedied or cured by repair to
or replacement of or construction of tangible assets or properties the use or
enjoyment of which are required in order for LEM to receive those amounts of
Unit Output to which it is entitled under this Agreement, then such failure of
performance or restraint must be remedied within 180 days after notice thereof
is delivered by LEM or LEM shall have the right to reduce its Annual Fixed
Payment obligations under Section 3.3(a) as follows. For each month following
the 180th day after the commencement of such Uncontrollable Force and continuing
until such time as the failure of performance or restraint is remedied (prorated
for each partial month), LEM's Annual Fixed Payment obligation for such month
under Section 3.3(a) shall be equal to the Annual Fixed Payment amount due under
Section 3.3(a) during such month multiplied by the ratio of AR to UOP (provided
that if AR divided by UOP is equal to or greater than 1 it shall be deemed to
equal 1), where each of AR and UOP are measured in megawatt-hours and AR is set
equal to the amount of Unit Output actually received by LEM from Big Rivers at
the Points of Delivery, as specified in Exhibit A, during such month and UOP is
the average monthly Unit Output as determined over the shorter of (i) the 12
full months immediately preceding the commencement of such Uncontrollable Force
or (ii) all of the months between the Effective Date and up to and including the
last full month immediately preceding the commencement of such Uncontrollable
Force. Following the occurrence and remedy of a failure of performance or
restraint of the type described in the first sentence of this Section 12.2, any
re-occurrence of the failure of performance or restraint that arises from a
common cause or a continuation of the same event or legal proceeding as the
first occurrence shall also be grounds for LEM to reduce the payment due in
Section 3.3(a) in the same manner as described in the preceding sentence, but
which right of reduction shall be effective thirty (30) Business Days after
notice of the failure of performance or restraint delivered by LEM to BREC and
only if such failure of performance or restraint is not cured within such 30 day
period.
12.3 Nothing in this Section 12 relieves LEC of its obligations to
indemnify Big Rivers pursuant to Section 9 of the Guaranty Agreement.
[Section 13: Reserved]
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[Section 14: Reserved]
Section 15: Liability and Indemnity
15.1 General Indemnity. Each Party shall indemnify and save the other
Party and the directors, officers, and employees of such other Party harmless
from liability, loss, damage, claim, costs, and expenses (including attorneys'
fees) on account of injury to persons (including death) or damage or destruction
of property, occasioned by the negligence, whether active or passive, or willful
misconduct of such indemnifying Party and its officers, directors, employees, or
contractors in the performance of this Agreement; provided, however, that:
(a) Each Party shall be solely responsible to its own employees for
all claims or benefits due for injuries occurring in the course of their
employment or arising out of any workers compensation law. Neither Party shall
seek reimbursement or subrogation from the other Party for any benefits paid to
the employees of either Party pursuant to any workers compensation law except as
necessary to prevent double recovery by the employee.
(b) Neither Party and its directors, officers, and employees shall
be liable for any loss of earnings, revenues (except as provided in Sections 2.2
or 9.2 of this Agreement), indirect, consequential, incidental or special
damages (except as provided in Section 15.2), or injury which may occur to the
other Party as a result of outages in delivery of services hereunder by reason
of any cause whatsoever, including negligence.
15.2 Indemnity With Respect to Customer Claims. Each Party shall indemnify
and save the other Party, and its directors, officers, and employees harmless
for any liability, loss, claim, cost (including attorneys' fees) for any claims
made by the indemnified Party's electric service customers as a result of any
failure of the indemnifying Party to provide electric Power contemplated by this
Agreement for any reason or any cause whatsoever including the willful or
negligent act of the indemnifying Party or its breach of this Agreement, or any
of the Operative Documents, except to the extent that the indemnifying Party's
failure to provide Power is excused pursuant to Section 12 or is the result of
the negligent or willful actions or omissions of the indemnified Party or its
agents or employees. Further, neither Party shall have any indemnification
obligation with respect to claims made by the other Party's electric service
customers pursuant to any agreement or amendment entered into by such other
party after the Effective Date, unless the Party from whom indemnification is
sought has agreed to such new contract or
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amendment, in writing, which consent shall not be unreasonably withheld.
Section 16: Entire Agreement
16.1 The Parties' obligations pursuant to this Agreement will be further
governed by the Participation Agreement and the other Operative Documents to the
extent indicated therein. The requirements of the Participation Agreement and
the other Operative Documents and this Agreement are to be interpreted to be in
accord wherever possible, but in the event of a direct conflict between the
requirements of the Participation Agreement and the other Operative Documents
and this Agreement, the provisions of this Agreement govern.
16.2 This Agreement and such applicable portions of the Participation
Agreement and the other Operative Documents constitutes the entire agreement of
the Parties hereto with respect to the transaction addressed herein and
supersedes all prior agreements, whether oral or written. This Agreement may be
amended only by a written document signed by both Parties hereto.
Section 17: Continuation of Agreement
17.1 Big Rivers recognizes and acknowledges that the RUS, the Members and
the LG&E Parties have in good faith entered into the transactions to which this
Agreement and the other Operative Documents relate and have agreed to consummate
those transactions in specific reliance upon the fact that the transactions
contemplated in the Operative Documents shall continue for the stated Term
(i.e., approximately 25 years). Big Rivers has informed the RUS, the Members and
the LG&E Parties that Big Rivers has in good faith entered into this Agreement
in reliance upon and with the specific intent of continuing this transaction
through the stated Term (i.e., approximately 25 years). In order to enable Big
Rivers to comply with certain requirements of the KPSC related to approval of
its proposed rates, and to provide additional assurances of its good faith and
commitment, and without in any way intending to reduce or otherwise avoid
abiding by this Agreement throughout its stated Term (i.e., approximately 25
years), and without any implication by any of the Parties that Big Rivers is or
would be entitled to attempt to reduce or otherwise avoid the terms of this
Agreement, Big Rivers additionally commits and undertakes that for the period
prior to January 1, 2012, in the event of any filing by Big Rivers of a petition
or similar filing for bankruptcy or reorganization or arrangement under any
federal or state bankruptcy or insolvency or similar Law, or the commencement of
involuntary proceedings against Big Rivers under any such Law, neither Big
Rivers nor its successors or assigns, if any, shall file, direct the filing of,
join in, consent to, or otherwise support any other party to any such
proceedings in a
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motion, complaint, pleading, statement, testimony or otherwise make any attempt
to terminate, reject or modify this Agreement (other than in accordance with its
terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss.
101, et seq., as it subsequently may be amended, modified or supplemented or any
other similar, applicable federal or state bankruptcy or insolvency Laws (the
"Insolvency Assurance"). Thereafter, Big Rivers shall continue the Insolvency
Assurance unless and until the RUS, in the exercise of its discretion, were to
consent to any of the foregoing. In all events and throughout the Term, each of
the RUS, the Members and the LG&E Parties shall be entitled to rely upon the
specific provisions of this Agreement, including but not limited to the stated
Term (i.e., approximately 25 years), and shall be entitled to take whatever
actions may prove to be necessary or appropriate to maintain the benefit of
their bargain in the event that Big Rivers ever attempts to cause the rejection
or termination of this Agreement (other than in accordance with its terms) in a
subsequent bankruptcy or reorganization proceeding or otherwise.
17.2 LEM recognizes and acknowledges that the RUS, the Members and Big
Rivers have in good faith entered into the transactions to which this Agreement
and the other Operative Documents relate, and have agreed to consummate those
transactions in specific reliance upon the fact that the transaction
contemplated in the Operative Documents shall continue for the stated Term
(i.e., approximately 25 years). LEM has informed the RUS, the Members and Big
Rivers that LEM has in good faith entered into this Agreement in reliance upon
and with the specific intent of continuing this transaction through the stated
Term (i.e., approximately 25 years). In order to facilitate the approval of the
proposed rates of Big Rivers and to provide additional assurances of its good
faith and commitment, and without in any way intending to reduce or otherwise
avoid abiding by this Agreement throughout its stated Term (i.e., approximately
25 years), and without any implication by any of the Parties that LEM is or
would be entitled to attempt to reduce or otherwise avoid the terms of this
Agreement, LEM additionally commits and undertakes that for the period prior to
January 1, 2012, in the event of any filing by LEM of a petition or similar
filing for bankruptcy or reorganization or arrangement under any federal or
state bankruptcy or insolvency or similar Law, or the commencement of
involuntary proceedings against LEM under any such Law, neither LEM nor its
successors or assigns, if any, shall file, direct the filing of, join in,
consent to, or otherwise support any other party to any such proceedings in a
motion, complaint, pleading, statement, testimony or otherwise make any attempt
to terminate, reject or modify this Agreement (other than in accordance with its
terms) under Section 365 of the United States Bankruptcy Code, 11 U.S.C. ss.
101, et seq., as it subsequently may be amended, modified or supplemented or any
other similar, applicable federal or state bankruptcy or insolvency Laws (the
"Insolvency Assurance").
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Thereafter, LEM shall continue the Insolvency Assurance unless and until the
RUS, in the exercise of its discretion, were to consent to any of the foregoing.
In all events and throughout the Term, each of the RUS, the Members and Big
Rivers shall be entitled to rely upon the specific provisions of this Agreement,
including but not limited to the stated Term (i.e., approximately 25 years), and
shall be entitled to take whatever actions may prove to be necessary or
appropriate to maintain the benefit of their bargain in the event that LEM ever
attempts to cause the rejection or termination of this Agreement (other than in
accordance with its terms) in a subsequent bankruptcy or reorganization
proceeding or otherwise.
17.3 Nothing in this Section 17 shall modify, reduce or diminish: (i) the
rights of the RUS under the New RUS Loan Documents (as defined in that certain
New RUS Loan Agreement between Big Rivers and the RUS to be executed and
delivered on the Effective Date); or (ii) the rights of the mortgagees under the
New RUS Mortgage (as defined in said New RUS Loan Agreement); including without
limitation, any right to withhold consent with respect to any sale or
disposition of Big Rivers' property except on terms acceptable to the RUS and/or
such mortgages; but subject, the case of (i) and (ii) above, in all cases to the
Non-Disturbance Agreement of even date herewith among Big Rivers, RUS, AMBAC and
the LG&E Parties.
17.4 The provisions of this Section 17 shall survive any expiration or
termination of this Agreement for any reason and shall continue to be binding on
the Parties.
Section 18: General Provisions
18.1 Notices. All provisions set forth in the Participation Agreement with
respect to notices (Section 21.1) shall apply hereto.
18.2 Waiver. The failure of a Party to insist on the strict performance of
any provision of this Agreement or to exercise any right, power or remedy upon a
breach of any provision of this Agreement shall not constitute a waiver of any
provision of this Agreement or limit the Party's right thereafter to enforce any
provision or exercise any right.
18.3 Amendment and Modification. No amendment or modification of this
Agreement shall be valid unless made in writing and duly executed by the
Parties.
18.4 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the Commonwealth of Kentucky but without
giving effect to the conflict of law rules of such jurisdiction.
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18.5 Further Assurances. Each Party shall take from time to time, for no
additional consideration, such actions and execute such additional instruments
as may be reasonably (a) necessary to implement and carry out the intent and
purpose of this Agreement or (b) desirable but not necessary to implement and
carry out the intent and purpose of this Agreement without incurring material
cost.
18.6 Survival of Terms and Conditions. The provisions of this Agreement
related to the recovery of damages sustained hereunder and the exercise of
remedies generally shall survive its termination to the full extent necessary
for their enforcement and the protection of the Party in whose favor they run.
18.7 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the Parties and their respective successors and permitted assigns.
18.8 Time of the Essence. A material consideration of the Parties entering
into this Agreement is that the Parties will make all required payments as and
when due and will perform all other obligations under this Agreement in a timely
manner. Except as otherwise specifically provided in this Agreement, time is of
the essence of each and every provision of this Agreement.
18.9 Counterparts. This Agreement may be executed in counterparts, both of
which taken together shall constitute a single agreement.
18.10 Dispute Resolution. The Parties agree that any disputes arising with
respect to this Agreement shall be resolved in accordance with Section 15 of the
Participation Agreement.
18.11 Construction. This Agreement was the product of negotiations between
the Parties, and therefore the rule of contract construction that an agreement
shall be construed against the drafter shall not be applied to this Agreement.
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IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be executed in their respective names by their respective officers thereunder
duly authorized.
LG&E Energy Marketing Inc.
By /s/ John R. McCall
-----------------------------------
Title: Vice President and Secretary
Big Rivers Electric Corporation
By /s/ Michael H. Core
-----------------------------------
Title: President and CEO
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EXHIBIT A
POINTS OF DELIVERY FOR UNIT POWER
The Points of Delivery at which Big Rivers may deliver and LEM shall
accept all Unit Output from the Generating Plants hereunder shall be at the
following generating plant disconnect switches for the high voltage side of the
unit step up transformer in amounts up to the net plant capacity at any time.
PLANTS
Robert D. Reid
Reid Gas Turbine
D.B. Wilson
Kenneth C. Coleman
Robert D. Green
Henderson Municipal Power and Light
- Station Two
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POWER PURCHASE AGREEMENT BETWEEN
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EXHIBIT B
POINTS OF DELIVERY FOR PURCHASES BY BIG RIVERS
The Points of Delivery at which LEM may deliver and Big Rivers shall
accept all Base Power hereunder shall be as follows:
A. At the following generating plant disconnect switches for high
voltage side of the unit step up transformer in amounts up to the net
plant capacity at any time:
PLANTS
Robert D. Reid
Reid Gas Turbine
D.B. Wilson
Kenneth C. Coleman
Robert D. Green
Henderson Municipal Power and Light - Station Two
B. At the points of interchange between the Big Rivers Electric
Corporation system and the following entities in amounts not to exceed 80%
of the then-effective transfer capability of each individual point of
delivery:
Tennessee Valley Authority
Shawnee Plant
Marshall (2)
Barkley (3) (SEPA)
Paradise
Southern Illinois Power Cooperative
Morganfield
Livingston County
Louisville Gas and Electric Company
Cloverport
Kentucky Utilities Company
Hardinsburg
D.B. Wilson
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POWER PURCHASE AGREEMENT BETWEEN
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Southern Indiana Gas and Electric Company
Henderson County Substation
Hoosier Energy Rural Electric Cooperative
Kenneth C. Coleman
C. At any new point of interchange that may be established during
the Term of this Agreement in amounts equal to 50% of the then-effective
transfer capability.
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POWER PURCHASE AGREEMENT BETWEEN
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EXHIBIT C
POINTS OF METERING
The Points of Metering, which are those points at which Big Rivers
delivers Power to the Members, shall be as set forth below.
GREEN RIVER ELECTRIC
All 27 rural delivery points are metered at 12,470 volts
Industrials' delivery point metering voltage
- ACMI 13,800 volts
- Commonwealth Aluminum #1 13,800 volts
- Commonwealth Aluminum #2 13,800 volts
- Commonwealth Aluminum #3 13,800 volts
- Alcoa-Hawesville Works 13,800 volts
- Kimberly-Clark #1 161,000 volts
- Kimberly-Clark #2 161,000 volts
- Willamette #1 12,470 volts
- Willamette #2 12,470 volts
- Willamette #3 12,470 volts
- Worldsource #1 13,800 volts
- Worldsource #2 13,800 volts
HENDERSON UNION ELECTRIC
14 rural delivery points are measured at 12,470 volts
1 rural delivery point is measured at 25,000 volts
Industrials' delivery point metering voltage
- Accuride 12,470 volts
- Black Diamond Mine 7,200 volts
- C.R. Mining 69,000 volts
- Cardinal River Resources 7,200 volts
- Dotiki #3 12,470 volts
- Hudson Foods #1 25,000 volts
- Hudson Foods #2 25,000 volts
- KBA #1 4,160 volts
- KBA #2 4,160 volts
- Lodestar Energy 69,000 volts
- Peabody Breckenridge 69,000 volts
- P&M Mine 69,000 volts
- Patriot Mine 69,000 volts
- Smith Coal 69,000 volts
- Valley Grain 12,470 volts
- Victory Processing 7,200 volts
<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
JACKSON PURCHASE ELECTRIC
All 23 rural delivery points are metered at 12,470 volts
Industrials' delivery point metering voltage:
- Shell Oil 4,160 volts
MEADE COUNTY ELECTRIC
All 14 rural delivery points are metered at 12,470 volts
No industrial delivery points
<PAGE>
POWER PURCHASE AGREEMENT BETWEEN
BIG RIVERS ELECTRIC CORPORATION AND LG&E ENERGY MARKETING INC.
POWER PURCHASE AGREEMENT (Schedule 3.3(a))
MONTHLY MARGIN PAYMENTS
Monthly
Margin
Payment
($1,000's)
- --------------------------------------------------------------------------------
1998 $2,276
- --------------------------------------------------------------------------------
1999 $2,276
- --------------------------------------------------------------------------------
2000 $2,276
- --------------------------------------------------------------------------------
2001 $2,219
- --------------------------------------------------------------------------------
2002 $2,202
- --------------------------------------------------------------------------------
2003 $1,448
- --------------------------------------------------------------------------------
2004 $1,423
- --------------------------------------------------------------------------------
2005 $1,419
- --------------------------------------------------------------------------------
2006 $1,410
- --------------------------------------------------------------------------------
2007 $1,418
- --------------------------------------------------------------------------------
2008 $1,397
- --------------------------------------------------------------------------------
2009 $1,384
- --------------------------------------------------------------------------------
2010 $1,363
- --------------------------------------------------------------------------------
2011 $643
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
AGREEMENT AND AMENDMENTS TO AGREEMENTS
BY AND AMONG
CITY OF HENDERSON, KENTUCKY,
CITY OF HENDERSON UTILITY COMMISSION,
BIG RIVERS ELECTRIC CORPORATION,
WKE STATION TWO INC.,
LG&E ENERGY MARKETING INC.,
AND
WESTERN KENTUCKY ENERGY CORP.
- --------------------------------------------------------------------------------
July 15, 1998
<PAGE>
TABLE OF CONTENTS
Section Page
@@1. Definitions, Whole Agreement and Payments...............................3
1.1 Definitions..........................................................3
1.2 Schedules and Exhibits...............................................3
1.3 Method of Payment....................................................3
1.4 Late and Partial Payments............................................4
2. Phase I Effective Date and Phase II Effective Date........................4
2.1 Phase I Effective Date...............................................4
2.2 Phase II Assignment Preceding Phase I Subcontract....................4
2.3 Successive Phase I and Phase II Effective Dates......................4
2.4 Effective Date; Term.................................................5
3. Closing; Deliveries at Closing............................................5
3.1 The Closing and the Phase I and Phase II Effective Dates.............5
3.2 Actions Simultaneous.................................................6
3.3 Big Rivers' Deliveries...............................................6
3.4 Henderson's Deliveries..............................................8
3.5 LG&E Companies' Deliveries..........................................10
4. Covenants of the Parties Pending Effective Date..........................11
4.1 Access Pending Effective Date.......................................11
4.2 Negative Covenants..................................................12
4.3 Affirmative Covenants...............................................14
4.4 Purchase Option on Default..........................................16
5. Representations and Warranties of Henderson..............................17
5.1 Organization and Powers of Henderson................................17
5.2 No Violation........................................................17
5.3 Effect of Agreement; Consents.......................................18
5.4 Output..............................................................18
5.5 Station Two Contracts...............................................19
5.6 Bond Ordinance......................................................19
5.7 Condition of Station Two Assets.....................................19
5.8 Water Supply........................................................19
5.9 Permits.............................................................20
5.10 Litigation and Insurance Claims....................................20
5.11 Compliance with Laws...............................................20
5.12 Environmental Matters..............................................21
5.13 No Condemnation, Expropriation or Restrictions.....................22
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TABLE OF CONTENTS
Section Page
5.14 Miscellaneous Payments.............................................22
5.15 Completeness of Statements.........................................22
6. Representations and Warranties of Big Rivers.............................23
6.1 Organization and Powers of Big Rivers...............................23
6.2 No Violation........................................................23
6.3 Effect of Agreement; Consents.......................................24
6.4 Completeness of Statements..........................................24
7. Representations and Warranties of the LG&E Companies.....................24
7.1 Organization and Powers.............................................24
7.2 No Violation........................................................24
7.3 Effect of Agreement.................................................25
7.4 Completeness of Statements..........................................25
8. Phase I Subcontract......................................................26
8.1 Term of Engagement..................................................26
8.2 Duties of Station Two Subsidiary....................................26
8.3 Standards of Performance............................................29
8.4 Station Two Subsidiary Negative Covenants...........................30
8.5 Reporting Obligations...............................................31
8.6 Communication of Certain Events.....................................32
8.7 Maintenance of Books and Records....................................32
8.8 Statements and Reports..............................................33
8.9 Confidentiality of Books and Records................................34
8.10 Fees and Expenses; Assignment of Rights............................34
8.11 Invoicing Procedure; Reid Station Operating Account(s).............39
8.12 Station Two Surplus Capacity.......................................40
8.13 Phase I Off-Sets...................................................48
8.14 Additional Covenants of Big Rivers.................................50
8.15 Budget Process; Operating Committee................................51
8.16 Adjustment for Henderson Incremental Environmental O&M. ...........54
8.17 Station Two Improvements -- Forecasts, Budgeting and Payments......56
8.18 Reimbursement for Debt Service.....................................64
8.19 Big Rivers' Performance Responsibility.............................65
9. Phase II Assignments.....................................................65
9.1 Assignment..........................................................65
9.2 Assumption of Assumed Station Two Liabilities.......................66
9.3 Term of Assignment..................................................67
9.4 Excluded Station Two Contracts or Liabilities.......................67
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TABLE OF CONTENTS
Section Page
9.5 Terms of General Applicability......................................71
9.6 Consents to Assignment..............................................74
9.7 Sale of Station Two Surplus Capacity................................75
9.8 Budget Process for Phase II Assignment..............................82
9.9 Adjustment for Henderson Incremental Environmental O&M..............85
9.10 Station Two Improvements -- Forecasts, Budgeting and Payments......86
9.11 [Intentionally Omitted].............................................93
9.12 Phase I Adjustments................................................94
9.13 Survival of Phase I Subcontract Provisions and Claims..............96
9.14 No Release; Big River's Responsibility.............................97
9.15 Standards of Performance...........................................97
9.16 Communication of Certain Events....................................98
9.17 Additional Payments to Big Rivers..................................98
10. Additional Agreements of the Parties....................................99
10.1 Interim Period Reconciliations.....................................99
10.2 Transfer of Title to Station Two Surplus Capacity.................103
10.3 Sharing of Station Two O&M or R&R Account Balances................104
10.4 [Intentionally Omitted]...........................................115
10.5 Two County Restriction............................................115
10.6 Two Counties' Demand..............................................115
10.7 Suspension of Performance.........................................117
10.8 Insurance.........................................................122
10.9 Cooperation in Fuel Procurement...................................125
10.10 Maintenance Power................................................125
10.11 Access to Premises; Rights-of-Way................................126
10.12 Covenants to Exercise Rights and Remedies........................127
10.13 Notice of Delivery Obligations...................................128
10.14 Access to Records................................................129
10.15 Indemnification; Waivers and Limitations of Liability............129
10.16 Reversion to Big Rivers..........................................139
10.17 Rights of First Offer; Waivers...................................140
10.18 Compliance with Bond Ordinance...................................143
10.19 Additional Covenants of Henderson................................143
10.20 Acknowledgments and Affirmations by Big Rivers...................146
10.21 SEPA Power.......................................................147
10.22 Green Station FGD System Facility................................148
10.23 Transmission and Transformation Facilities.......................149
10.24 Governmental Consents............................................149
10.25 Third Party Consents.............................................150
10.26 Reasonable Best Efforts..........................................150
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TABLE OF CONTENTS
Section Page
10.27 Further Assurances...............................................150
10.28 Access to Spare Transformer......................................151
10.29 General and Administrative Expenses..............................152
10.30 Systems and Operating Reserves...................................153
10.31 Rights and Remedies Not Waived...................................153
10.32 Survival Of Representations and Warranties.......................154
10.33 Station Two Inventories..........................................154
10.34 Assignment of Certain Station Two Intangible Assets..............155
10.35 Station Two Personal Property....................................158
10.36 LG&E Parties' Residual Value Payment.............................160
10.37 Survival of Monthly Margin Payments..............................160
11. Additional Agreements Respecting Station Two Power. ...................160
11.1 Pre-Closing Economic Development Opportunities. ..................160
11.2 Economic Development Opportunities During The Term................165
11.3 Treatment of Economic Development Agreements Following the Term...176
11.4 Section 3.4 of Power Sales Contract...............................180
11.5 Use of Excess Energy and Capacity.................................180
12. Condemnation; Damage or Destruction of Station Two Assets..............183
12.1 Condemnation......................................................183
12.2 Damage or Destruction.............................................183
13. Termination; Default; Remedies.........................................185
13.1 Termination Prior to Effective Date...............................185
13.2 Pre-Effective Date Remedies; Conditions Precedent.................185
13.3 Default During the Phase I Subcontract Term.......................186
13.4 Default During the Phase II Assignment Term.......................188
13.5 Notice of Defaults; Cure Rights...................................191
13.6 Remedies During Phase I Subcontract Term..........................196
13.7 Remedies During Phase II Assignment Term..........................201
13.8 Additional Covenants Concerning the Parties' Rights and Remedies..207
13.9 Termination Date True Up..........................................222
13.10 Survival of Terms and Conditions.................................223
14. Abatement and Other Rights.............................................224
14.1 Abatement and Other Rights For Condemnation.......................224
14.2 Abatement and Other Rights for Damage or Destruction..............226
14.3 Abatement and Other Rights Upon Termination.......................228
14.4 Abatement Rights Cumulative.......................................230
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TABLE OF CONTENTS
Section Page
15. Transfers and Assignments..............................................230
15.1 Permitted Assignments.............................................230
15.2 Assignment and Assumption of Related Agreements...................232
15.3 Noncomplying Assignment...........................................233
15.4 Regulatory Approvals..............................................233
15.5 Liens.............................................................233
16. Uncontrollable Forces..................................................234
16.1 Suspension of Performance for Uncontrollable Forces...............234
16.2 Uncontrollable Forces.............................................234
17. Taxes..................................................................234
17.1 Sales and Use Taxes...............................................235
17.2 Property Taxes....................................................235
17.3 Unidentified Asset-Related Taxes..................................236
17.4 Change of Tax Law.................................................237
17.5 Other Taxes.......................................................237
17.6 Kentucky Tax Rulings..............................................237
17.7 Appeal of Tax Assessment..........................................238
18. Miscellaneous.........................................................238
18.1 Miscellaneous Disclaimers.........................................238
18.2 No General Obligations of the City................................239
18.3 Notices...........................................................239
18.4 Waiver............................................................241
18.5 Amendment and Modification........................................241
18.6 Governing Law.....................................................241
18.7 Successors and Assigns............................................241
18.8 Counterparts......................................................242
18.9 Severability......................................................242
18.10 Headings.........................................................242
18.11 Entire Agreement.................................................242
18.12 Construction.....................................................242
18.13 Production of Operative Documents................................243
18.14 Zero Capacity Allocations........................................243
18.15 Continuation of Agreement........................................243
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TABLE OF CONTENTS
Section Page
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TABLE OF CONTENTS
Section Page
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TABLE OF CONTENTS
Section Page
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<PAGE>
EXHIBITS
Description Exhibit
Station Two Contracts........................................................A
Definitions .................................................................B
G & A Allocation Agreement...................................................C
Amended Systems Reserve Agreement............................................D
SCHEDULES
Description Schedule
Conditions Precedent to Phase I Effective Date ............................2.1
Conditions Precedent to Phase II Effective Date in the Event Phase
II Precedes Commencement of Phase I........................................2.2
Conditions Precedent to Phase II Effective Date in the Event Phase
II follows Phase I.........................................................2.3
Henderson's No Violation...................................................5.2
Condition of Station Two Assets............................................5.7
Permits....................................................................5.9
Litigation and Insurance Claims...........................................5.10
Big Rivers' No Violation...................................................6.2
Effect of Agreement; Consents..............................................6.3
LG&E Companies' No Violation...............................................7.2
Payments for Station Two Improvements..................................8.17(d)
GLOSSARY OF DEFINED TERMS
Defined Term Section
Actual Henderson Environmental O&M.....................................8.17(c)
Additional Payment.....................................................8.10(b)
Agreement.........................................................Introduction
Assigned Station Two Contracts..........................................9.1(d)
Assumed Station Two Liabilities............................................9.2
Big Rivers........................................................Introduction
Big Rivers' Henderson Incremental Environmental O&M Share..............8.16(a)
Big Rivers' Replacement O&M Fund.......................................10.3(f)
Big Rivers' Replacement R&R Fund.......................................10.3(g)
Bond Ordinance.......................................................Recital A
City..............................................................Introduction
Closing....................................................................3.1
Damage Multipliers.....................................................14.2(b)
Debt Service and R&R Capacity Payment...................................9.7(b)
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Defaulting Party.......................................................13.5(a)
Economic Development Agreement.........................................11.2(g)
Economic Development Opportunity.......................................11.2(a)
Effective Date.............................................................2.4
Environmental Condition...................................................5.12
Environmental Violations..................................................5.12
Excess Henderson Capacity..............................................11.5(b)
Excess Henderson Energy................................................11.5(a)
Existing SEPA Contract...................................................10.21
Fair Market Value Ratio...................................................14.1
Final Year of Agreement................................................8.10(c)
14 1/2 Cent Payments...................................................8.10(b)
Fuel and Reid Station Operating Accounts...............................8.11(b)
Fuel and Reid Station Operating Expenses...............................8.10(a)
Fundamental Rights.....................................................10.7(c)
G & A Allocation Agreement...............................................10.29
Green River............................................................8.12(e)
Henderson.........................................................Introduction
Henderson Environmental-Related Capital Cost...........................8.17(e)
Henderson Non-Incremental Capital Cost.................................8.17(e)
Henderson Replacement O&M Fund.........................................10.3(f)
Henderson Union........................................................8.12(e)
LEM/Henderson Union Agreement..........................................8.12(e)
HMPL..............................................................Introduction
HUC...............................................................Introduction
Joint Facilities Agreement...........................................Recital B
Knowledge.................................................................5.12
Letter Ruling..........................................................8.12(e)
LG&E Companies....................................................Introduction
LG&E Company......................................................Introduction
LG&E Rights............................................................13.8(a)
LEM...............................................................Introduction
LEM Capacity Charge Share .............................................8.12(b)
LEM Margin..........................................................13.8(a)(1)
Matching Offer.........................................................11.2(f)
Maximum Funding Limit...............................................10.3(g)(2)
Mean Proposal..........................................................11.2(d)
1993 Amendment.......................................................9.4(b)(4)
1998 Amendments......................................................Recital B
New Reserves Agreement...................................................10.30
Non-Defaulting Party...................................................13.5(a)
Notice.................................................................11.2(b)
Notice of Default......................................................13.5(b)
O&M Closing Balance....................................................10.3(a)
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<PAGE>
Offer..................................................................11.2(a)
Offer Price............................................................11.2(a)
Operating Pass Through Costs...........................................8.10(a)
Participation Agreement..............................................Recital D
Parties...........................................................Introduction
Party.............................................................Introduction
Phase I Adjustments.......................................................9.12
Phase I Effective Date.....................................................3.1
Phase I Subcontract..........................................................8
Phase I Subcontract Term...................................................8.1
Phase II Assignment..........................................................9
Phase II Assignment Term...................................................9.3
Phase II Effective Date....................................................2.3
Plan.................................................................Recital D
Pre-Closing Development Agreement......................................11.1(a)
Qualified Power Marketer...............................................11.2(c)
R&R Closing Balance....................................................10.3(a)
Refinancing Costs.........................................................10.6
Reid Station............................................................8.2(b)
Releasing Party ......................................................10.15(g)
Released Party........................................................10.15(g)
Replacement O&M Fund...................................................10.3(f)
RFP Process............................................................11.2(b)
Right of First Offer.......................................................9.6
Section 28................................................................11.2
SEPA.....................................................................10.21
SEPA Power...............................................................10.21
SEPA Schedule............................................................10.21
Station Two..........................................................Recital A
Station Two Allowances.................................................8.10(c)
Station Two Assets......................................................4.1(a)
Station Two Assets Insurance...........................................10.8(b)
Station Two Bonds....................................................Recital A
Station Two Contracts................................................Recital B
Station Two Improvements...............................................8.17(a)
Station Two Improvements Account.......................................8.17(d)
Station Two Improvement Sharing Ratio..................................8.17(e)
Station Two O&M Account.................................................3.3(d)
Station Two Operating Agreement......................................Recital B
Station Two Power Sales Agreement....................................Recital B
Station Two PP Price Reduction...........................................10.35
Station Two R&R Account.................................................3.3(d)
Station Two Rated Capacity.............................................8.17(b)
Station Two Subsidiary............................................Introduction
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<PAGE>
Station Two Subsidiary's Performance Obligations......................10.15(a)
Station Two Surplus Capacity.........................................Recital B
Station Two Unit Output................................................8.12(b)
Surplus Power..........................................................11.2(a)
Surplus Power Notice...................................................11.2(b)
Systems Improvement Project.............................................4.2(d)
Term.......................................................................2.4
Termination Multipliers................................................14.3(b)
Terms of General Applicability.............................................9.5
Transitional Year......................................................9.12(d)
Uncontrollable Force......................................................16.2
WKEC..............................................................Introduction
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<PAGE>
AGREEMENT AND AMENDMENTS TO AGREEMENTS
THIS AGREEMENT AND AMENDMENTS TO AGREEMENTS ("Agreement") is entered into
and effective as of July 15, 1998, by and among (i) THE CITY OF HENDERSON,
KENTUCKY (the "City"), a municipal corporation and city of the third class
organized under the laws of Kentucky, THE CITY OF HENDERSON UTILITY Commission
("HUC"), a public body politic and corporation organized under Kentucky Revised
Statutes ss. 96.530 and related statutes, doing business as HENDERSON MUNICIPAL
POWER & LIGHT ("HMPL") (the City and HUC being sometimes hereinafter
collectively referred to as "Henderson"), (ii) BIG RIVERS ELECTRIC CORPORATION
("Big Rivers"), a Kentucky rural electric cooperative corporation, and (iii) WKE
STATION TWO INC., formerly known as LG&E Station Two Inc. ("Station Two
Subsidiary"), a Kentucky corporation, LG&E ENERGY MARKETING INC., ("LEM"), an
Oklahoma corporation, and WESTERN KENTUCKY ENERGY CORP., a Kentucky corporation
("WKEC") and the successor by merger to Western Kentucky Leasing Corp.
(hereinafter, Station Two Subsidiary, LEM and WKEC are referred to collectively
as the "LG&E Companies" and individually as an "LG&E Company," and together with
Henderson and Big Rivers are referred to collectively as the "Parties" or
individually as a "Party").
RECITALS:
A. The City owns an electric generating station, consisting of two
175-megawatt coal-fired, steam-electric generators with related facilities
located on a site near the Green River in Henderson County, Kentucky ("Station
Two"), having as of the date of this Agreement a net rated Capacity of 312 MW.
The City financed the costs of acquisition, construction and start-up of Station
Two through the issuance of the Electric Light & Power Revenue Bonds, Station
Two Series, due March 1, 2003, in an initial aggregate principal amount of
$82,500,000 and with an aggregate outstanding principal balance as of March 2,
1998 of $25,035,000 (such bonds, together with any bonds issued to refund such
bonds, are hereinafter referred to as the "Station Two Bonds"), which were
authorized, sold and issued by the City pursuant to the
<PAGE>
Electric Light & Power Revenue Bond Ordinance adopted by the City on August 27,
1970, together with supplemental ordinances and amendments thereto as of the
date hereof (such ordinance, together with any ordinance (in form and substance
reasonably satisfactory to each of the Parties) authorizing any refunding bonds,
are hereinafter referred to as the "Bond Ordinance").
B. Big Rivers currently operates Station Two, purchases all Capacity and
associated Energy of Station Two surplus to the immediate needs of the City and
its inhabitants, determined in accordance with the Station Two Power Sales
Agreement described below ("Station Two Surplus Capacity"), and otherwise has
arranged with Henderson for the joint utilization by Big Rivers and Henderson of
certain auxiliary facilities and operating personnel. The respective rights and
obligations of Big Rivers and Henderson with respect to Station Two are set
forth in that certain Power Plant Construction and Operation Agreement dated
August 1, 1970, as amended (the "Station Two Operating Agreement"), that certain
Power Sales Contract dated August 1, 1970, as amended (the "Station Two Power
Sales Agreement"), that certain Joint Facilities Agreement dated August 1, 1970,
as amended (the "Joint Facilities Agreement"), and other agreements, all of
which (together with all amendments thereto, including, without limitation, the
Amendments to Contracts dated May 1, 1993 (the "1993 Amendments") and the
Amendments to Contracts dated July 15, 1998 (the "1998 Amendments"), are
identified on Exhibit A attached hereto (all such agreements, as amended, being
referred to hereinafter collectively as the "Station Two Contracts").
C. On September 25, 1996, Big Rivers filed for relief under Chapter 11 of
the Bankruptcy Code.
D. The LG&E Companies and Big Rivers entered into a New Participation
Agreement dated April 6, 1998 (the "Participation Agreement") which contemplates
(among other transactions) the lease, use and operation of all Facilities and
related assets owned by Big Rivers, the purchase, sale and transmission of the
Energy and capacity produced by such Facilities, and the transactions
contemplated in this Agreement. The proposed transactions
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<PAGE>
among Big Rivers and the LG&E Companies are substantially described in Big
Rivers' Plan of Reorganization.
E. As contemplated in the Plan of Reorganization and the Participation
Agreement, Big Rivers and the LG&E Companies desire to enter into this Agreement
which provides, among other terms, for the performance by Station Two Subsidiary
of certain obligations of Big Rivers under certain of the Station Two Contracts
and for the purchase and sale by Station Two Subsidiary or LEM of the Station
Two Surplus Capacity.
AGREEMENT:
NOW, THEREFORE, the Parties hereby agree as follows:
1. DEFINITIONS, WHOLE AGREEMENT AND PAYMENTS.
1.1 Definitions. All capitalized terms used in this Agreement but not
otherwise defined in this Agreement shall have the meanings set forth in Exhibit
B attached hereto or, if not defined therein, shall have the meanings set forth
in the Station Two Operating Agreement or the Station Two Power Sales Agreement.
A Glossary of terms defined in this Agreement is included with this Agreement
for ease of reference only.
1.2 Schedules and Exhibits. The schedules and exhibits to this Agreement
constitute an integral part of this Agreement, and all references to this
Agreement shall include all such schedules and exhibits.
1.3 Method of Payment. All payments required to be made by a Party to any
other Party under the terms of, or as contemplated in, this Agreement, unless
otherwise provided in this Agreement or the Station Two Contracts, shall be made
in immediately available United States funds no later than 2:00 p.m. eastern
time on the due date therefor. A Party desiring to receive any such payment by
wire transfer shall provide written notice to the paying Party not
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<PAGE>
less than five (5) Business Days prior to the due date indicating the wire
instructions and applicable account information. A written notice shall be
applicable to all future payments unless revoked or modified by that notice or
any subsequent written notice.
1.4 Late and Partial Payments. All amounts payable between any LG&E
Company and Big Rivers under this Agreement, if not paid when due, shall bear
interest from the due date until paid at the Default Rate. No receipt by any
such Party to whom a payment is due of an amount less than the full amount due
will be deemed to be other than payment on account, nor will any endorsement or
statement on any check or any accompanying letter effect or evidence an accord
or satisfaction. The receiving Party may accept such check or payment without
prejudice to its right to recover the balance or pursue any right hereunder.
2. PHASE I EFFECTIVE DATE AND PHASE II EFFECTIVE DATE.
2.1 Phase I Effective Date. The "Phase I Subcontract" (defined in Section
8 of this Agreement, entitled "Phase I Subcontract") shall commence and become
effective on the "Phase I Effective Date" (as defined in Section 3.1 of this
Agreement).
2.2 Phase II Assignment Preceding Phase I Subcontract. In the event that
the conditions set forth in Schedule 2.2 for each Party have been fulfilled or
waived by each such Party on a date prior to the Phase I Effective Date, the
Phase I Subcontract shall never become effective and the Closing referred to in
Section 3.1 of this Agreement shall consummate the "Phase II Assignment" (as
defined in Section 9 of this Agreement, entitled "Phase II Assignments") rather
than the Phase I Subcontract.
2.3 Successive Phase I and Phase II Effective Dates. At any time
subsequent to the occurrence of the Phase I Effective Date, upon the
satisfaction or waiver by each Party of all conditions set forth in Schedule 2.3
for such Party, (a) the Phase II Assignment shall thereafter commence and become
effective as set forth below, and (b) the Phase I Subcontract and the provisions
of this Agreement relating thereto, shall, upon the commencement of the Phase II
Assignment, immediately terminate and be of no further force or effect (subject
to survival of
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<PAGE>
specific provisions set forth in Section 8 of this Agreement, entitled "Phase I
Subcontract," or elsewhere in this Agreement which by their terms shall survive
the termination of the Phase I Subcontract). The date on which the Phase II
Assignment takes effect, whether pursuant to Section 2.2 of this Agreement or
Section 2.3 of this Agreement, shall hereinafter be referred to as the "Phase II
Effective Date." At such time as any Party shall in good faith believe that each
of the conditions precedent set forth in Schedule 2.3 for all Parties have been
satisfied or waived by the relevant Party(s), the Party having that belief may,
in its discretion, notify all (but not less than all) of the other Parties of
its belief, and each such other Party agrees to notify the first Party of
whether it agrees with or in good faith disputes the first Party's belief within
ten (10) Business Days after delivery of the initial notice. In the event a
Party fails to respond within that ten-day period, it shall be deemed to have
agreed with the initial Party's belief. The Phase II Effective Date shall
commence two (2) Business Days following the expiration of the ten-day notice
period described above or, if the initial Party's belief shall have been
disputed by one or more other Parties as contemplated above, two (2) Business
Days after a determination that such conditions precedent have been so satisfied
or waived is made (i) by the mutual agreement of the disputing Parties, or (ii)
pursuant to a final, non-appealable decision rendered by a court of competent
jurisdiction or other tribunal acceptable to the Parties. The successful
Party(s) in any legal proceeding commenced to obtain a decision of the type
described in (ii), above, shall be entitled to recover from the unsuccessful
Party(s) its reasonable attorneys fees and court costs incurred in connection
with that legal proceeding.
2.4 Effective Date; Term. For purposes of this Agreement, the "Effective
Date" shall mean the earlier of the Phase I Effective Date or the Phase II
Effective Date. The term of this Agreement ("Term") shall commence on the
Execution Date and shall, unless sooner terminated as contemplated in Section 13
of this Agreement, continue until the later of expiration of (a) the Phase I
Subcontract Term (as defined in Section 8.1 of this Agreement), other than such
an expiration occurring upon the Phase II Effective Date, or (b) the Phase II
Assignment Term (as defined in Section 9.3 of this Agreement).
3. CLOSING; DELIVERIES AT CLOSING.
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3.1 The Closing and the Phase I and Phase II Effective Dates. The
consummation of the transactions contemplated in this Agreement and commencement
of the Phase I Subcontract Term or the Phase II Assignment Term, (whichever is
earlier) (the "Closing"), shall take place at the offices of Sullivan, Mountjoy,
Stainback & Miller, P.S.C., Owensboro, Kentucky (or at such other location as
the Parties may agree) at 10:00 a.m., local time, on the date that is 10
Business Days following the earlier to occur of (i) the date on which all
conditions set forth in Schedule 2.1 of this Agreement for each Party have been
fulfilled or waived in writing by such Party in its sole discretion (other than
the conditions set forth in items 1.1, 1.9, 2.1, and 2.7 of Schedule 2.1, which
the Parties intend shall be fulfilled immediately prior to or contemporaneously
with the Closing, unless so waived), (the "Phase I Effective Date"), or (ii) the
date on which all conditions set forth in Schedule 2.2 of this Agreement for
each Party have been fulfilled or waived in writing by such Party in its sole
discretion (other than the conditions set forth in items 1.1, 1.9, 2.1, and 2.7
of Schedule 2.1, which are incorporated by reference in items 1.1 and 2.1 of
Schedule 2.2, which the Parties intend shall be fulfilled immediately prior to
or contemporaneously with the Closing, unless so waived). Notwithstanding
anything contained in this Section 3.1 to the contrary, in no event shall the
Effective Date under this Agreement commence prior to the "Effective Date" under
the Participation Agreement.
3.2 Actions Simultaneous. Notwithstanding the order of the deliveries by
the Parties set forth below, all deliveries shall be deemed to have occurred
simultaneously and shall not be deemed to have been completed until each of the
steps or conditions set forth or identified in this Section 3, entitled
"Closing; Deliveries at Closing," has been completed or has been waived by the
Party who is required or permitted to waive the same.
3.3 Big Rivers' Deliveries. At the Closing Big Rivers shall deliver to the
LG&E Companies and/or Henderson, as appropriate, all of the following (duly
executed where appropriate):
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(a) A Certificate of the Secretary or an Assistant Secretary of Big
Rivers, dated the Effective Date, in form and substance reasonably satisfactory
to the LG&E Companies and Henderson, certifying as to the due adoption of the
resolutions of the Board of Directors of Big Rivers authorizing the execution,
delivery and performance by Big Rivers of this Agreement and the transactions
contemplated in this Agreement.
(b) The opinions of each of Sullivan, Mountjoy, Stainback & Miller,
P.S.C. and Long Aldridge & Norman LLP referenced in items 1.11 and 3.7 of
Schedule 2.1.
(c) A Certificate of an authorized officer of Big Rivers certifying
that (i) the representations and warranties set forth in Section 6 of this
Agreement, entitled "Representations and Warranties of Big Rivers," are true and
correct in all material respects on the Effective Date as though made on the
Effective Date, and (ii) the conditions precedent to Big Rivers' obligations set
forth in Section 2 of Schedule 2.1 or Schedule 2.2, as the case may be, have
been satisfied or waived by Big Rivers, provided that the foregoing shall not
relieve any other Party from its responsibility or liability for any
misrepresentation or breach of warranty by such other Party made in this
Agreement.
(d) A Certificate of the chief financial officer of Big Rivers
certifying as to those items affecting or relating to the Station Two Account in
the Operation and Maintenance Fund (the "Station Two O&M Account") and the
Station Two Account in the Renewals and Replacements Fund (the "Station Two R&R
Account") and as to Big Rivers' rights in respect of such accounts in accordance
with Section 10.3(a) of this Agreement.
(e) Such short-form instruments or other instruments, in recordable
form reasonably acceptable to the LG&E Companies and Big Rivers, solely
evidencing the rights and interests of the LG&E Companies in and to Big Rivers'
properties, rights-of-way and easements granted in Section 10.11 of this
Agreement.
(f) The New Reserves Agreement contemplated in Section 10.30 of this
Agreement.
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(g) The G & A Allocation Agreement contemplated in Section 10.29 of
this Agreement.
(h) Such consents of third parties, instruments of assignment and
assumption or other agreements, instruments and documents as may be necessary to
effect the provisions of Section 11.1 of this Agreement with respect to the
Pre-Closing Development Agreements.
(i) Such bills of sale and other appropriate documents of transfer,
conveyance and assignment (in form reasonably satisfactory to Big Rivers and the
LG&E Companies) as shall be necessary or appropriate for the assignment by Big
Rivers to Station Two Subsidiary of the Station Two Inventory, the Station Two
Personal Property and the Station Two Allowances as contemplated in Sections
10.33, 10.35 and 8.10(c) of this Agreement.
(j) An assignment and assumption agreement, in substantially the
same form as the Agreement attached as Schedule 9.2 of the Participation
Agreement, providing for the assignment from Big Rivers to Station Two
Subsidiary of certain of Big Rivers' rights, title and interest under, in and to
the Station Two Intangible Assets (other than the Station Two Allowances), as
contemplated in Section 10.34 of this Agreement.
(k) Such other agreements, instruments and documents as shall be
reasonably necessary for the consummation of the transactions contemplated in
this Agreement, consistent with Section 10.27 of this Agreement.
3.4 Henderson's Deliveries. At the Closing, Henderson shall deliver to Big
Rivers and the LG&E Companies, as appropriate, all of the following (duly
executed where appropriate):
(a) A Certificate of the City Clerk of the City, dated the Effective
Date, in form and substance reasonably satisfactory to Big Rivers and the LG&E
Companies, certifying as to due adoption of the resolution or ordinance of the
City Commission authorizing and approving the
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execution, delivery and performance by Henderson of this Agreement and the
transactions contemplated in this Agreement.
(b) A Certificate of the Secretary of HUC, dated the Effective Date,
in form and substance reasonably satisfactory to Big Rivers and the LG&E
Companies, certifying as to the due adoption of the resolutions of HUC
authorizing the execution, delivery and performance by HUC of this Agreement and
the transactions contemplated in this Agreement.
(c) A Certificate of the General Manager of HMPL stating that (i)
the representations and warranties set forth in Section 5 of this Agreement,
entitled "Representations and Warranties of Henderson," are true and correct in
all material respects on the Effective Date, as though made on the Effective
Date, and (ii) the conditions precedent to Henderson's obligations set forth in
Section 3 of Schedule 2.1 or Schedule 2.2, as the case may be, have been
satisfied or waived by Henderson, provided, that the foregoing shall not relieve
any other Party from its responsibility or liability for any misrepresentation
or breach of warranty by such other Party made in this Agreement.
(d) A Certificate of the General Manager of HMPL certifying as to
those items affecting or relating to the Station Two O&M Account and the Station
Two R&R Account and as to Henderson's rights in respect of such accounts in
accordance with Section 10.3(a) of this Agreement.
(e) The opinions of O'Melveny & Meyers LLP and The Law Firm of
Sheffer Hoffman referenced in items 1.11 and 2.9 of Schedule 2.1.
(f) Such short-form instruments or other instruments, in recordable
form reasonably acceptable to the LG&E Companies, solely evidencing the rights
and interests of the LG&E Companies in and to Henderson's properties,
rights-of-way and easements as contemplated in Section 10.11 of this Agreement.
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(g) The New Reserves Agreement contemplated in Section 10.30 of this
Agreement.
(h) The G & A Allocation Agreement contemplated in Section 10.29 of
this Agreement.
(i) Such other agreements, instruments and documents as shall be
reasonably necessary for the consummation of the transactions contemplated in
this Agreement, consistent with Section 10.27 of this Agreement.
3.5 LG&E Companies' Deliveries. At the Closing, each of the LG&E Companies
shall deliver to Big Rivers and Henderson, as appropriate, all of the following
(duly executed where appropriate):
(a) A Certificate of the Secretary or an Assistant Secretary of each
LG&E Company, each dated the Effective Date, in form and substance reasonably
satisfactory to Big Rivers and Henderson, certifying as to the due adoption of
the resolutions of each such LG&E Company's Board of Directors authorizing the
execution, delivery and performance by such LG&E Company of this Agreement and
the transactions contemplated in this Agreement.
(b) A Certificate of an authorized officer of each LG&E Company
certifying that (i) the representations and warranties of that LG&E Company set
forth in Section 7 of this Agreement, entitled "Representations and Warranties
of the LG&E Companies," are true and correct in all material respects on the
Effective Date, as though made on the Effective Date, and (ii) the conditions
precedent to that LG&E Company's obligations set forth in Section 1 of Schedule
2.1 or Schedule 2.2, as the case may be, have been satisfied or waived by that
LG&E Company, provided that the foregoing shall not relieve any other Party from
its responsibility or liability for any misrepresentation or breach of warranty
by such other Party made in this Agreement.
(c) The opinions of Greenebaum Doll & McDonald PLLC and Dewey
Ballantine LLP referenced in items 2.9 and 3.7 of Schedule 2.1.
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(d) A Certificate of an authorized officer of Station Two Subsidiary
certifying that, as of the effective date of the Station Two Agreement, Station
Two Subsidiary is an "affiliate" of a utility subject to regulation by the KPSC
in compliance with KRS ss. 96.520, but only if such compliance is required as of
the Effective Date.
(e) The New Reserves Agreement contemplated in Section 10.30 of this
Agreement.
(f) The G & A Allocation Agreement contemplated in Section 10.29 of
this Agreement.
(g) Such instruments of assignment and assumption or other
agreements, instruments and documents as may be necessary for LEM to execute and
deliver to effect the provisions of Section 11.1 of this Agreement with respect
to the Pre-Closing Development Agreements.
(h) Certificates of Insurance, and copies of the policies of
Insurance, required by Section 10.8(e) of this Agreement.
(i) An assignment and assumption agreement, in substantially the
same form as the Agreement attached as Schedule 9.2 of the Participation
Agreement, providing for the assumption by Station Two Subsidiary of certain of
Big Rivers' performance obligations under the Station Two Intangible Assets
(other than the Station Two Allowances), as contemplated in Section 10.34 of
this Agreement.
(j) Such other agreements, instruments and documents as shall be
reasonably necessary for the consummation of the transactions contemplated in
this Agreement, consistent with Section 10.27 of this Agreement.
4. COVENANTS OF THE PARTIES PENDING EFFECTIVE DATE.
4.1 Access Pending Effective Date.
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(a) Prior to the Effective Date, Big Rivers and Henderson shall, at
the request of any of the LG&E Companies, afford or cause to be afforded to the
employees, agents, attorneys, accountants and other authorized representatives
of the LG&E Companies reasonable access during normal business hours to all
assets, facilities and properties, tangible and intangible, real and personal,
fixed and contingent, comprising Station Two and the Joint Use Facilities, and
to all employees, agents, representatives, books, records, data, contracts and
documents relating to those assets, facilities and properties (hereinafter,
collectively, the "Station Two Assets"), including, without limitation,
affording or causing such access for the purpose of conducting investigations
and examinations, preparing surveys, making appraisals and ascertaining the
condition thereof, and shall permit such persons, at the LG&E Companies'
expense, to make copies of such books, records, data, contracts and documents.
(b) The LG&E Companies shall treat, and shall cause all of their
respective employees, agents, attorneys, accountants and other authorized
representatives to treat, all information obtained pursuant to this Section 4.1
that otherwise is not in the public domain as confidential.
(c) No investigation by any of the LG&E Companies or any of their
respective employees, agents, attorneys, accountants or other authorized
representatives pursuant to this Section 4.1 shall affect any representation,
warranty, or closing condition of any Party hereto.
4.2 Negative Covenants. Except as otherwise permitted by this Agreement or
with the prior written consent of Station Two Subsidiary, for itself and as
agent for the other LG&E Companies (which consent shall not be unreasonably
withheld), each of Big Rivers and Henderson agree with the LG&E Companies, but
not with each other, as follows for all periods prior to the Closing:
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(a) No Liens. Neither Big Rivers nor Henderson shall, directly or
indirectly, create, incur, assume or suffer to exist any Lien on or with respect
to any of the Station Two Assets, except for Permitted Liens and Liens created
by the Bond Ordinance.
(b) No Disposal. Except as may otherwise be required to comply with
the Bond Ordinance, neither Big Rivers nor Henderson shall dispose of, or agree
to dispose of, any of the Station Two Assets or any rights under the Station Two
Contracts outside the ordinary course of business, nor shall either of them
assign, or agree to assign, any rights that it may have under any of the Station
Two Contracts (or any portion of any of those contracts).
(c) No New Contracts.
(1) Big Rivers shall not enter into any Power sales contract
that commits Energy or Capacity from Station Two, or any
maintenance, fuel supply or transportation contracts relating to the
operation or maintenance of Station Two or the other Station Two
Assets or in furtherance of its obligations under the Station Two
Contracts, in any such case, involving the payment or receipt by Big
Rivers of an amount in excess of $500,000 annually or having an
expiration or termination date after May 31, 1998. Notwithstanding
the foregoing or Section 7.2.3 of the Participation Agreement, Big
Rivers shall be entitled to enter into Pre-Closing Development
Agreements with Henderson as contemplated in the 1998 Amendments for
Economic Development Opportunities provided that such agreements do
not specifically commit Power from and after the Closing from any of
the Generating Plants.
(2) Henderson shall not permit Big Rivers to enter into any of
the commitments described in (1) above on behalf of Henderson, but
only to the extent that Henderson has the right to do so, and
Henderson shall not itself, without the written consent of Station
Two Subsidiary (unless Henderson reasonably determines that the
failure to enter into such a contract would impair Henderson's
duties and obligations to the Trustee or the holders of the Station
Two Bonds), enter into (A) any contracts relating to the operations
or maintenance of Station Two or the other Station Two Assets, or
(B) any Power sales
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contract that commits Capacity (excluding, however, any Station Two
Economic Development Power committed to Henderson in accordance with
Section 28 of the 1998 Amendments and as contemplated in Section
11.1 of this Agreement), other than such contracts as are permitted
under the terms of the Station Two Contracts following a breach or
default thereunder by Big Rivers as contemplated in Section 15.2 of
the Station Two Power Sales Agreement, and then only to the extent
that such breach or default has not been cured by Big Rivers or an
LG&E Company in accordance with the terms of the Station Two
Contracts and this Agreement, subject, however, to LEM's option to
purchase Energy and Capacity as contemplated in Section 4.4 of this
Agreement.
(d) Station Two Contracts; Station Two Bonds. Henderson shall not
breach or default under, nor shall Henderson suffer to exist any breach or
default under, the Bond Ordinance or any of the Station Two Bonds or the Station
Two Contracts. Big Rivers shall not terminate or materially modify or amend, or
suffer to exist any termination or material modification or amendment of, any of
the Station Two Contracts or the Station Two Bonds to the extent the same is
within its reasonable control. Big Rivers, without the written approval of the
LG&E Companies, shall not authorize Henderson to issue, and Henderson agrees
that without the written consent of Big Rivers and Station Two Subsidiary it
shall not issue, additional bonds or other indebtedness under the Bond
Ordinance, whether or not to finance any major renewals or replacements of
Station Two, any major additions or improvements thereto, or any expansion
thereof (each a "Systems Improvement Project"), unless (x) such Systems
Improvement Project is such that no duty, obligation or liability shall be
imposed thereby, or in connection therewith, upon Big Rivers or any of the LG&E
Companies under this Agreement or any of the Station Two Contracts (including
without limitation, in the form of increased Capacity charges under the Station
Two Power Sales Agreement), and (y) such Systems Improvement Project would not
otherwise adversely affect the rights of any of the LG&E Companies under the
Phase I Subcontract or the Phase II Assignment, or under any other transactions
contemplated by this Agreement or the Station Two Contracts.
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(e) No Commitment. Neither Big Rivers nor Henderson shall agree or
commit to do any of the foregoing matters which they are otherwise prohibited
from doing under the terms of this Section 4.2.
(f) Monthly Operations and Demand. Big Rivers agrees with the LG&E
Companies that it has not operated, and shall not at any time during each of the
12 calendar months immediately preceding the Effective Date operate, Station Two
in such a manner that, when measured on a monthly basis, would violate the
Letter Ruling.
4.3 Affirmative Covenants. Except as otherwise permitted by this Agreement
or with the prior written consent of Station Two Subsidiary, for itself and as
agent for the other LG&E Companies (which consent shall not be unreasonably
withheld), each of Big Rivers and Henderson agrees with the LG&E Companies, but
not with each other, that it shall at all times prior to the Closing:
(a) Ordinary Course. Unless different standards or specifications
are otherwise required by any regulatory authority having jurisdiction thereof
and such standards or specifications make it impracticable or illegal to comply
with the following, operate Station Two as presently operated and only in the
ordinary course and consistent with the Station Two Operating Agreement and
Prudent Utility Practices unless such performance by those Parties in accordance
with Prudent Utility Practice would result in a breach or default by those
Parties under the Station Two Contracts or the Bond Ordinance, in which event
the covenant regarding Prudent Utility Practices shall not apply.
(b) Adverse Changes. Advise Station Two Subsidiary in writing
(except to the extent disclosed in this Agreement or in any disclosure schedule
hereto) of any litigation or administrative proceeding (other than in the
Bankruptcy Court) that challenges or otherwise materially affects, or that, to
the best of its knowledge in the case of Henderson, reasonably could be expected
to materially affect the transactions contemplated in this Agreement or the
respective rights and entitlements of the Parties under the Station Two
Contracts as
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contemplated in this Agreement from and after the Closing, and of any material
adverse change in the Station Two Assets, their respective interests therein or
the condition thereof.
(c) Maintain Assets. Unless different standards or specifications
are otherwise required by any regulatory authority having jurisdiction thereof,
and such standards or specifications make it impracticable or illegal to comply
with the following, use its reasonable best efforts to maintain all tangible
assets included in the Station Two Assets in good operating condition,
reasonable wear and tear excepted, consistent with the Station Two Contracts and
Prudent Utility Practice unless such performance by those Parties in accordance
with Prudent Utility Practice would result in a breach or default by those
Parties under the Station Two Contracts or the Bond Ordinance, in which event
the covenant regarding Prudent Utility Practices shall not apply.
(d) Insurance. Maintain at all times prior to the Closing policies
of insurance relating to the Station Two Assets and operation of Station Two as
required by, and in material compliance with, the Station Two Contracts and the
Bond Ordinance and which in any event provide no less coverage than is in effect
on the date hereof.
(e) Comply with Laws. Operate and maintain Station Two and the other
Station Two Assets in substantial compliance with all applicable Laws.
(f) Station Two Contracts. Unless different standards or
specifications are otherwise required by any regulatory authority having
jurisdiction thereof, and such standards or specifications make it impracticable
or illegal to comply with the following, perform all of their respective duties
and obligations under all Station Two Contracts in all material respects,
consistent with the terms and provisions thereof, and not waive or release the
other Party thereto (or any other parties thereto) from any material obligation
that they may have to perform under any Station Two Contracts in all material
respects consistent with the terms and provisions thereof.
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4.4 Purchase Option on Default. If at any time prior to the Effective Date
Henderson shall have the right under Section 15.2 of the Station Two Power Sales
Agreement to sell Station Two Surplus Capacity otherwise allocated to Big Rivers
thereunder on account of a breach or default under such agreement by Big Rivers
that is not timely cured by Big Rivers or by any LG&E Company (to the extent it
elects to do so in accordance with the terms of this Agreement), and Henderson
determines to exercise such right, Henderson shall first offer (in a binding
written offer delivered to LEM) to sell such Power to LEM, and LEM shall have
the right (but not the obligation) to purchase such Power at the price and in
accordance with the terms set forth in the Station Two Power Sales Agreement
that are applicable to purchases by Big Rivers. LEM may accept or reject
Henderson's offer to sell such Power to LEM within 15 days after the date of its
receipt of that offer. If LEM shall reject Henderson's offer, or fails to
deliver its acceptance within the foregoing 15-day period, Henderson shall be
entitled to sell the Power which LEM did not accept to one or more third parties
on such terms as Henderson shall deem appropriate. The foregoing rights of LEM
shall also apply during the Phase I Subcontract Term with respect to any breach
or default by Big Rivers under the Station Two Power Sales Agreement, unless
that breach or default was the result of a breach or default by any LG&E Company
under this Agreement or any other Operative Document.
5. REPRESENTATIONS AND WARRANTIES OF HENDERSON. Henderson hereby represents and
warrants to Big Rivers (solely with respect to Sections 5.1, 5.2, 5.3 and 5.15
(but only as expressly set forth in Section 5.15) of this Agreement) and to the
LG&E Companies (with respect to all Sections of this Section 5) as follows:
5.1 Organization and Powers of Henderson. The City is a municipal
corporation and city of the third class duly organized and existing under the
laws of the Commonwealth of Kentucky. HUC is a public body politic and
corporation duly organized and existing under Kentucky Revised Statutes ss.
96.530 and related statutes. The execution, delivery and performance of this
Agreement by Henderson has been duly authorized by all necessary action,
governmental, corporate or otherwise, including approval by ordinance or other
official action of the City Board of Commissioners and Mayor of the City.
Henderson has all
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requisite power and authority to own Station Two and the other Station Two
Assets (excluding, however, the Joint Use Facilities owned by Big Rivers which
Henderson has the power, right and authority to use in its operation of Station
Two) and to carry on its business as now being conducted at Station Two and,
subject to satisfaction or waiver of all conditions relevant to Henderson that
are set forth in Schedules 2.1, 2.2 or 2.3 hereof, as applicable, as proposed to
be conducted pursuant to the terms of this Agreement.
5.2 No Violation. Except as set forth in Schedule 5.2, Henderson's
execution and delivery of this Agreement and consummation of the transactions
contemplated hereunder (a) will not violate any existing statute, law, rule,
regulation, order, writ, injunction or decree of any court or governmental
authority, (b) will not under any existing statute or law or any existing rule,
regulation, order, writ, injunction or decree of any court or governmental
authority require any authorization, consent, approval, exemption or other
action by or notice to any court, administrative or governmental agency,
instrumentality, commission, authority, board or body, except to the extent such
authorization, consent, approval, exemption, notice or other action is required
solely as a result of actions taken by Big Rivers or any LG&E Company after the
Effective Date, and, (c) subject to obtaining the consents referred to in
Schedule 5.2, will not violate or conflict with, or constitute a default (or an
event which, with notice or lapse of time, or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in the creation of any Lien upon the Station Two Assets under, any
terms or provisions of the Station Two Bonds or the Bond Ordinance, the Station
Two Contracts, or any other material contract, commitment, understanding,
arrangement, agreement or restriction of any kind or character to which the City
or HUC is a party or by which Station Two or the other Station Two Assets may be
bound or affected. No consents or approvals of this Agreement or the
transactions contemplated in this Agreement are required from the holders of any
Station Two Bonds or from any trustee or other fiduciary appointed under or in
connection with the Bond Ordinance. In connection with the representations made
in this Section 5.2, insofar as they relate to KRS ss. 96.520, Henderson is
relying upon the representations of the LG&E Companies and the determination of
the KPSC as to compliance with KRS ss. 96.520.
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5.3 Effect of Agreement; Consents. This Agreement and the Station Two
Contracts have been duly and validly authorized, executed and delivered by
Henderson, and constitute valid and legally binding agreements enforceable
against Henderson in accordance with their respective terms, except as the
foregoing may be limited by (a) general principles of equity or (b) bankruptcy,
insolvency, reorganization, arrangement, moratorium or other laws or equitable
principles relating to or affecting creditor's rights generally.
5.4 Output. Except for sales of the type contemplated by Section 4.2(c)(2)
of this Agreement and for the HMP&L Contract, there are no contracts or other
arrangements in place by which any of the Station Two Surplus Capacity has been
sold, dedicated or committed by Henderson to any use, purpose or Person. The
Capacity and associated Energy generated by Station Two is free and clear of all
Liens, except for any Permitted Liens or any Liens created by the Bond
Ordinance, which Liens (including Permitted Liens) in such Capacity and Energy
are automatically released upon the sale and delivery of the same pursuant to
the Station Two Power Sales Agreement, upon payment therefor.
5.5 Station Two Contracts. Exhibit A contains a list of all agreements
relating to, or affecting, Station Two or the other Station Two Assets to which
Henderson is a party. Henderson has not received notice from any third party
(including Big Rivers) to the effect that any such agreements are not in full
force and effect. Neither Henderson nor, to the best of Henderson's knowledge,
Big Rivers is in material default under any such agreements, and no event has
occurred which, with notice or the passage of time, or both, would constitute a
material default under any such agreements. Henderson holds its interest in each
such agreement free and clear of any Liens, except for any Liens created by the
Bond Ordinance.
5.6 Bond Ordinance. Henderson has not defaulted, and is not now in
default, under the terms and provisions of the Station Two Bonds or the Bond
Ordinance, and no event has occurred which, with notice or the passage of time,
or both, would constitute a default thereunder.
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5.7 Condition of Station Two Assets. Except as set forth on Schedule 5.7,
to the best knowledge of Henderson each of the tangible assets included in the
Station Two Assets owned by Henderson is in all material respects well
maintained and in good condition and state of repair consistent with Prudent
Utility Practice and the Station Two Contracts, subject only to ordinary wear
and tear and to the performance of regularly scheduled maintenance that is yet
to be performed in the ordinary course of the operation of Station Two
consistent with Prudent Utility Practice and the Station Two Contracts.
5.8 Water Supply. Henderson currently has rights in or to a water supply
and Permits for waste water disposal sufficient for the operation of Station Two
at a Capacity of 312 net MW, and, as of the date hereof, no permit, license or
other governmental or private action or permission is required to utilize such
water supply (provided the ordinary charges for consumption or disposition
thereof are paid). Henderson has no knowledge of any pending or threatened
impediment to the continuation of such water supply and waste water disposal as
set forth above for the duration of the Phase I Subcontract Term and, as
applicable, the Phase II Assignment Term, other than renewals of Permits
required in the ordinary course of business. Henderson has no knowledge of any
breach, impediment or other reason why such renewals may not be granted to
Henderson.
5.9 Permits. To the best knowledge of Henderson, Schedule 5.9 contains a
listing of all material Permits currently required for the ownership or
operation of Station Two at a Capacity of 312 net MW (including, without
limitation, for the performance by Station Two Subsidiary of its obligations set
forth in this Agreement) and specifically identifies those material Permits that
expire prior to the end of the Phase I Subcontract Term and Phase II Assignment
Term. Each such Permit is in full force and effect. Henderson is in material
compliance with the terms of each such Permit and Henderson holds its interest
in each such Permit free and clear of any Liens, other than any Liens created by
the Bond Ordinance.
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5.10 Litigation and Insurance Claims. Schedule 5.10 contains a description
of (i) all pending or, to the best of Henderson's knowledge, threatened suits,
actions, arbitrations, claims, administrative proceedings or other proceedings,
or, to the best of Henderson's knowledge, governmental investigations relating
in any way to the ownership or operation of Station Two or the other Station Two
Assets owned by Henderson, or to the Station Two Bonds, and (ii) any claim,
demand or notice tendered to an insurer by Henderson with respect to any matter
related in any way to the ownership or operation of Station Two or the other
Station Two Assets.
5.11 Compliance with Laws. To Henderson's knowledge, the use and operation
of Station Two and the other Station Two Assets owned by Henderson are in
material compliance with all applicable laws, rules, orders, regulations or
restrictions, except any existing or previous noncompliance (whether or not
cured) that does not and will not materially interfere with the use or operation
of Station Two or the other Station Two Assets owned by Henderson or the use or
sale of Power generated therefrom, nor result in the imposition of any material
civil or criminal fines or penalties or other material liability on Henderson or
any of the LG&E Companies. Henderson has received no notice of material
violation or notice of material noncompliance which has not been cured.
5.12 Environmental Matters. To the knowledge of Henderson, other than the
matters set forth in the Baseline Environmental Audit Report or Schedule 5.1.19
attached to the Participation Agreement, there is no pending administrative or
judicial investigation, proceeding or action or any outstanding claim, demand,
order, administrative or legal proceeding or settlement, consent decree or order
under, or relating to any Environmental Law and further relating to or involving
Station Two or any other Station Two Assets, nor is there now, nor has there
been, any pattern of violations that would lead to any of the foregoing
(collectively, "Environmental Violations"). To the knowledge of Henderson, (i)
no Hazardous Substance or other waste (including without limitation garbage and
refuse) has been disposed of, spilled, leaked or otherwise released at, on,
under or from Station Two or the other Station Two Assets, any real property on
which Station Two or any other Station Two
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Assets is situated, or any land subject to any rights-of-way or easements used
in or committed to the operation of Station Two or the other Station Two Assets,
and (ii) there are no underground storage tanks at Station Two or on the real
property on which Station Two or any other Station Two Assets is situated or the
land subject to the rights-of-way used in or committed to the operation of
Station Two (collectively "Environmental Conditions"). For purposes of this
Section 5.12 only, the LG&E Companies acknowledge and agree that "knowledge"
shall mean the actual knowledge of the commissioners of HUC, the general manager
of HMPL or the project manager for Station Two on behalf of HUC, without any
such representatives of HUC or HMPL undertaking an independent audit or other
investigation (other than a review of written notices or correspondence in
Henderson's records) of Environmental Violations or Environmental Conditions
relating to or affecting Station Two or the other Station Two Assets. The LG&E
Companies further acknowledge and agree that Henderson shall have no obligation
to disclose to the LG&E Companies under this Section 5.12 any Environmental
Violations or Environmental Conditions that are set forth and identified in
Schedule 5.1.19 of Big Rivers' disclosure schedules attached to the
Participation Agreement, as the same shall be in existence on the Effective
Date, or in the Baseline Environmental Audit Report as such report shall be in
existence on the Effective Date and may thereafter be supplemented by quarterly
groundwater data in accordance with the terms of the Participation Agreement. In
the event the Parties at any time share any information relating to
environmental matters regarding Station Two or any other Station Two Asset, they
each agree to hold all such information in the strictest confidence and secrecy
to the fullest extent permitted by applicable law, absent the prior consent of
the other Parties, which approval will not be unreasonably withheld, conditioned
or delayed.
5.13 No Condemnation, Expropriation or Restrictions. Neither the whole nor
any portion of Station Two or the other Station Two Assets is subject to any
governmental decree or order to be sold or is being condemned, expropriated or
otherwise taken by any public authority with or without payment of compensation
therefor, nor to Henderson's knowledge, has any such condemnation,
expropriation, taking or material new assessment been proposed. Henderson has
received no notice that any zoning, land use or other governmental proceeding
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specific to Station Two or the other Station Two Assets is pending, nor to the
best of Henderson's knowledge is any such proceeding proposed, which would
materially adversely affect Station Two or any of the other Station Two Assets,
or the use and operation thereof in accordance with the terms of this Agreement
and the Station Two Contracts.
5.14 Miscellaneous Payments. Effective as of October 31, 2003, no further
payments shall be due and owing to Henderson pursuant to Section 6.6 of the
Station Two Power Sales Agreement.
5.15 Completeness of Statements. Henderson has disclosed to the LG&E
Companies and Big Rivers (limited to those representations and warranties made
to Big Rivers herein) in writing all material facts known to it relating to the
representations and warranties made by it to each such Party in this Agreement.
No representation, warranty or covenant of Henderson made to the LG&E Companies
and, as applicable, to Big Rivers in this Agreement contains any untrue
statement of a material fact, any misstatement of a material fact or omits to
state a material fact necessary to make the statements herein not misleading to
such Party.
6. REPRESENTATIONS AND WARRANTIES OF BIG RIVERS. Big Rivers hereby represents
and warrants to the LG&E Companies and Henderson as follows:
6.1 Organization and Powers of Big Rivers. Big Rivers is a rural electric
cooperative corporation, duly organized and existing under the laws of the
Commonwealth of Kentucky. Big Rivers has all requisite cooperative power and
authority to own, operate, and lease its properties, and to carry on its
business as now being conducted and, subject to satisfaction or waiver of all
conditions relevant to Big Rivers that are set forth in Schedules 2.1, 2.2 and
2.3 hereof, as proposed to be conducted pursuant to the terms of this Agreement.
The execution, delivery and performance of this Agreement by Big Rivers has been
duly authorized by all necessary action, and no further cooperative or Member
authorization is necessary.
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6.2 No Violation. Except as set forth in Schedule 6.2, Big Rivers'
execution and delivery of this Agreement and consummation of the transactions
contemplated hereby, including performance in all material respects of all of
its obligations hereunder, (a) will not violate any existing statute or law or
any existing rule, regulation, order, writ, injunction or decree of any court or
governmental authority, (b) will not under any existing statute or law or any
existing rule, regulation, order, writ, injunction or decree of any court or
governmental authority, require any authorization, consent, approval, exemption
or other action by or notice to any court or any administrative or governmental
agency, instrumentality, commission, authority, board or body, except to the
extent such authorization, consent, approval, exemption, notice or other action
is required solely as a result of actions taken by Henderson or any of the LG&E
Companies after the Effective Date, and, (c) subject to obtaining the consents
referred to in Schedule 6.2, will not violate or conflict with, or constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in the creation of any Lien upon any of the
Station Two Assets (other than a Permitted Lien) under, any terms or provisions
of the Articles of Incorporation or By-laws of Big Rivers, the Station Two
Contracts or any material contract, commitment, understanding, arrangement,
agreement or restriction of any kind or character to which Big Rivers is a party
or, to its knowledge, by which Station Two or any of the other Station Two
Assets may be bound or affected.
6.3 Effect of Agreement; Consents. This Agreement and the Station Two
Contracts have been duly and validly authorized, executed and delivered by Big
Rivers and constitute valid and legally binding obligations of Big Rivers
enforceable against Big Rivers in accordance with their respective terms, except
as the foregoing may be limited by (a) general principles of equity or (b)
bankruptcy, insolvency, reorganization, arrangement, moratorium, or other laws
or equitable principles relating to or affecting creditors' rights generally.
6.4 Completeness of Statements. Big Rivers has disclosed to the LG&E
Companies and Henderson in writing all material facts known to it relating to
the representations and warranties made by it in this Agreement. No
representation, warranty or covenant of Big
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Rivers in this Agreement contains any untrue statement of a material fact, any
misstatement of a material fact or omits to state a material fact necessary to
make the statements herein not misleading.
7. REPRESENTATIONS AND WARRANTIES OF THE LG&E COMPANIES. Each of The LG&E
Companies, for itself only, hereby represents and warrants to Henderson and Big
Rivers as follows:
7.1 Organization and Powers. Such LG&E Company is duly organized, existing
and in good standing under the laws of the state of its organization. Such LG&E
Company has all requisite corporate power and authority to own, operate, and
lease its properties, and to carry on its business as now being conducted and,
subject to satisfaction or waiver of all conditions relevant to that LG&E
Company set forth in Schedules 2.1, 2.2 and 2.3 hereof, as proposed to be
conducted pursuant to the terms of this Agreement. Station Two Subsidiary and
LEM are each an "affiliate" of a utility subject to regulation by the KPSC in
compliance with KRS ss. 96.520.
7.2 No Violation. Except as set forth in Schedule 7.2, the execution and
delivery of this Agreement by such LG&E Company, and the consummation by such
LG&E Company, of the transactions contemplated hereunder, including performance
in all material respects of all of its obligations hereunder, (a) will not
violate any existing statute or law or any existing rule, regulation, order,
writ, injunction or decree of any court or governmental authority, (b) will not
under any existing statute or law or any existing rule, regulation, order, writ,
injunction or decree of any court or any administrative or governmental
authority, require any authorization, consent, approval, exemption or other
action by or notice to any court or any administrative or governmental agency,
instrumentality, commission, authority, board or body, except to the extent such
authorization, consent, approval, exemption, notice or other action is required
solely as a result of actions taken by Big Rivers or Henderson after the
Effective Date, and, (c) subject to obtaining the consents referred to in
Schedule 7.2, will not violate or conflict with, or constitute a default (or an
event which, with notice or lapse of time, or both, would
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constitute a default) under, or result in the termination of, or accelerate the
performance required by, or result in the creation of any Lien upon any of the
assets of such LG&E Company under any terms or provisions of the respective
Articles of Incorporation, By-laws or other constituent documents of such LG&E
Company, or of any material contract, commitment, understanding, arrangement,
agreement or restriction of any kind or character to which such LG&E Company is
a party or by which the assets or properties of such LG&E Company may be bound
or affected.
7.3 Effect of Agreement. This Agreement has been duly and validly
authorized, executed and delivered by such LG&E Company and constitutes a valid
and legally binding obligation of such LG&E Company enforceable against such
LG&E Company in accordance with its terms, except as the foregoing may be
limited by (a) general principles of equity or (b) bankruptcy, insolvency,
reorganization, arrangement, moratorium, or other laws or equitable principles
relating to or affecting creditors' rights generally.
7.4 Completeness of Statements. Each of the LG&E Companies has disclosed
to Henderson and Big Rivers in writing all material facts known by it relating
to the representations and warranties made by it in this Agreement. No
representation, warranty or covenant of any such LG&E Company in this Agreement
contains any untrue statement of a material fact, any misstatement of a material
fact or omits to state a material fact necessary to make the statements herein
not misleading.
8. PHASE I SUBCONTRACT. During the Phase I Subcontract Term, Big Rivers hereby
engages Station Two Subsidiary, and Station Two Subsidiary accepts such
engagement, to perform as Big Rivers' subcontractor those obligations of Big
Rivers under certain of the Station Two Contracts as are specifically identified
in Section 8.2 of this Agreement, upon and subject to the terms and conditions
of this Agreement (the "Phase I Subcontract"). Henderson consents to and
approves of such limited engagement for all purposes. Henderson further
acknowledges and agrees that it shall have no implied rights or rights as a
third party beneficiary or otherwise, unless otherwise expressly granted to
Henderson in this Agreement,
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to pursue any of the LG&E Companies for failure of performance of any of the
duties or obligations due Big Rivers under this Section 8. The terms and
provisions of this Section 8 shall only apply during the Phase I Subcontract
Term, unless otherwise expressly provided below or elsewhere in this Agreement.
8.1 Term of Engagement. The term (the "Phase I Subcontract Term") of the
engagement of Station Two Subsidiary as the subcontractor of Big Rivers shall
commence on the Phase I Effective Date and shall end on the earlier of (a) the
Phase II Effective Date, (b) the December 31st that is closest to the
twenty-fifth anniversary of the Phase I Effective Date, or (c) the date of any
termination of this Agreement pursuant to Section 13 of this Agreement, entitled
"Termination; Default; Remedies."
8.2 Duties of Station Two Subsidiary. Station Two Subsidiary hereby agrees
with Big Rivers that, during the Phase I Subcontract Term, Station Two
Subsidiary, as Big Rivers' subcontractor, shall:
(a) Pay or perform, as applicable, for Big Rivers all of the
obligations of Big Rivers under the following sections of the Station Two
Operating Agreement which arise or accrue on or after the Phase I Effective Date
and during the Phase I Subcontract Term: (i) Section 13 (Operation, Maintenance
and Control), but excluding Section 13.8(c) (obligation to provide fuel),
Section 13.8(d) (concerning allocation of transmission system costs), and
Section 13.10 (but solely those provisions in Section 13.10 that require that
access be given to transmission and transformation facilities or any other
facilities, lands or properties in which Station Two Subsidiary, WKEC or any of
its Affiliates has no interest as an operator or lessee, or to facilities (or
portions thereof) control over which by the LG&E Companies has been denied by
reason of a breach or default by Big Rivers or Henderson under this Agreement or
any other Operative Document); (ii) Section 14 (Budgeting), provided that the
Operating Budget prepared by Station Two Subsidiary for Big Rivers' submission
to Henderson shall also comply with the procedures set forth in Section 8.15 of
this Agreement and Section 6 of the Facilities Operating Agreement; (iii)
Section 15 (Accounting and Auditing); (iv) Section 16
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(Billing and Payments); (v) Section 18 (Insurance), subject to those
modifications set forth in Section 10.8 of this Agreement; and (vi) Section 20
(Inspections, Rights of Access), except that Station Two Subsidiary shall have
no obligation to grant access or rights of inspection to any facilities or any
portions thereof in which Station Two Subsidiary, WKEC or any other LG&E Company
has no interest as an operator or lessee, and except that Station Two
Subsidiary's responsibilities and obligations to Big Rivers with respect to
Section 20.2 of the Station Two Operating Agreement shall be limited to the
safety of Station Two Subsidiary's representatives and employees, and to hold
harmless and indemnify Big Rivers from any loss or damage incurred by Big Rivers
by reason of injury to Station Two Subsidiary's representatives and employees
during such representatives' and employees' access to the premises of Big Rivers
or Henderson, unless such injury is due to the negligence or the willful
misconduct of Big Rivers or Henderson or their respective agents, employees or
representatives, or to the breach of this Agreement, any of the Station Two
Contracts or any of the other Operative Documents by Big Rivers or Henderson, as
the case may be (which act or omission is not itself the direct result of an act
or omission of any of the LG&E Companies).
(b) Pay or perform, as applicable, for Big Rivers all of the
obligations of Big Rivers under the following sections of the Joint Facilities
Agreement which arise or accrue on or after the Phase I Effective Date and
during the Phase I Subcontract Term: (i) Section 6 (Operation and Maintenance),
except for the operation and maintenance of facilities located between the
step-up transformer and the Station Two disconnect switches on the high-voltage
side of the unit step-up transformers, which shall be governed solely by
reference to Section 5.1 of the Transmission Services and Interconnection
Agreement and the agreement referenced therein, and except that the obligation
to renew or replace the Joint Use Facilities and any obligation respecting
Henderson Incremental Environmental O&M shall be governed by the terms of
Sections 8.16 and 8.17 of this Agreement; and (ii) Section 7 (Access), except
that Station Two Subsidiary shall have no obligation to grant access to
facilities or any portions thereof in which the Station Two Subsidiary, WKEC or
any other LG&E Company has no interest as an operator or lessee, or to
facilities (or portions thereof) control over which by the LG&E
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Companies has been denied by reason of a breach or default by Big Rivers or
Henderson under this Agreement or any other Operative Document.
Except for those obligations set forth above or as otherwise provided in this
Section 8, entitled "Phase I Subcontract," during the Phase I Subcontract Term,
Station Two Subsidiary shall not in any manner have any obligation,
responsibility, liability or duty to perform or discharge for Big Rivers any
other liabilities or obligations of Big Rivers under the Station Two Contracts,
and Big Rivers hereby covenants to the LG&E Companies that Big Rivers shall
retain, pay and perform all other obligations of Big Rivers under the Station
Two Contracts. Notwithstanding anything contained in this Section 8, entitled
"Phase I Subcontract," or any provision of the Station Two Contracts that
purports to obligate an LG&E Company for the payment of costs and expenses
relating to the Reid steam generating plant of Big Rivers (the "Reid Station")
or any of the Joint Use Facilities that may be owned by Big Rivers, the LG&E
Companies and Big Rivers hereby agree that their respective rights and
obligations as to each other for such costs and expenses shall nonetheless be
governed by the provisions of the Cost Sharing Agreement, the Power Purchase
Agreement, the Facilities Operating Agreement, the Lease or the Participation
Agreement, as applicable. Henderson and Big Rivers each hereby represents to the
LG&E Companies that, for purposes of this Agreement and the Station Two
Contracts, the Reid combustion turbine generating plant of Big Rivers is not a
Joint Use Facility and is not the "Reid Station" nor the "Reid Generating
Station," nor does it comprise a portion thereof, for purposes of one or more of
the Station Two Contracts, and that Henderson has no right or interest (legal,
contractual or otherwise) in or to the Reid combustion turbine generating plant
of Big Rivers, including, without limitation, any Right of First Offer (as such
term is defined in Section 9.6 of this Agreement).
8.3 Standards of Performance.
(a) Unless different standards or specifications are otherwise
required by any regulatory authority having jurisdiction thereof and such
standards or specifications make it impossible or illegal to comply with the
following, Station Two Subsidiary shall perform its
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duties under Section 8 of this Agreement, entitled "Phase I Subcontract," as Big
Rivers' subcontractor in accordance with standards and specifications equal to
the more stringent of (a) those set forth in the National Electric Safety Code
of the United States Bureau of Standards, (b) Prudent Utility Practice, and (c)
any other standards or specifications as may be expressly required of Big Rivers
under the relevant provisions of the Station Two Contracts which Station Two
Subsidiary has expressly agreed to perform for Big Rivers hereunder, unless such
performance by Station Two Subsidiary in accordance with Prudent Utility
Practice would result in a breach or default by Big Rivers under the Station Two
Contracts or by Henderson under the Bond Ordinance, in which event the
provisions of subclause (b) above shall not apply. Station Two Subsidiary will,
at all times, faithfully obey and substantially comply with existing and future
laws, rules and regulations of federal, state and local governmental bodies
lawfully affecting the operations and activities of Station Two and, in its
performance of its obligations under Section 8, entitled "Phase I Subcontract,"
Station Two Subsidiary will operate and maintain Station Two and the other
Station Two Assets in substantial compliance with any standards imposed by any
insurance policies required to be maintained by Big Rivers under the Station Two
Contracts or otherwise hereunder. Station Two Subsidiary's performance of its
duties under this Section 8 shall at all times be subject to Big Rivers' right
of control, review and approval as set forth in this Agreement, and shall be
conducted in a manner that would not cause Big Rivers to be in material default
under the provisions of the Station Two Contracts. At all times during which the
Station Two Bonds shall remain outstanding, Station Two subsidiary shall perform
its duties in a manner that is consistent with the provisions of the Bond
Ordinance and that would not cause Big Rivers to be in material default under
any provisions of the Station Two Contracts as it relates to the Bond Ordinance.
Station Two Subsidiary shall have no authority to act on behalf of or bind Big
Rivers in any way except as expressly set forth in this Agreement. The standards
of performance set forth in this Section 8.3 are made solely for the benefit of
Big Rivers and shall not be enforceable by Henderson against any of the LG&E
Companies.
(b) In the performance of the services under this Section 8,
entitled "Phase I Sub-Contract," Station Two Subsidiary shall be an independent
contractor and shall act as agent of
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Big Rivers solely in those instances expressly provided for in this Section 8,
entitled "Phase I Subcontract." Except as expressly provided in this Section 8,
neither Station Two Subsidiary nor any of its employees, subcontractors or
agents shall be deemed to be a servant, employee or agent of Big Rivers or its
Affiliates to any extent or for any purpose, nor shall anything herein be deemed
to create an association, joint venture, partnership, trust or similar legal
arrangement, or to impose a trust or partnership covenant, obligation or
liability on or with regard to the Parties to this Agreement. During the Phase I
Subcontract Term, Station Two Subsidiary shall have no power of decision or
authority regarding the conduct or management of the business or affairs of Big
Rivers, and shall have no power to bind or commit Big Rivers in any manner
whatsoever, except as otherwise expressly provided in this Section 8 or pursuant
to a written authorization or consent from Big Rivers. Station Two Subsidiary
shall at all times during the Phase I Subcontract Term follow the directives of
Big Rivers regarding the scope of the services and the results to be achieved by
Station Two Subsidiary, but shall be permitted, subject to the terms and
conditions of this Agreement and the Annual Budget, to employ any reasonable
means and methods which it deems necessary and appropriate to achieve such
results.
8.4 Station Two Subsidiary Negative Covenants. Unless Station Two
Subsidiary shall have obtained the prior written consent of Big Rivers, Station
Two Subsidiary hereby covenants to Big Rivers that it will not do, or, to the
extent the same is within its reasonable control, permit to occur, any of the
following:
(a) make any expenditure of, or otherwise use, any funds of Big
Rivers (including the making of any loans or advances to any Person), except as
permitted in the Annual Budget or to the extent otherwise expressly permitted in
this Agreement;
(b) commit Big Rivers to be or become directly or contingently
responsible or liable for any liability or other obligations to any other
Person, by contract, agreement, assumption, undertaking, guarantee, endorsement
or otherwise; or
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(c) settle, compromise, file or prosecute any claims, suits or
litigation for or on behalf of Big Rivers.
8.5 Reporting Obligations. Station Two Subsidiary shall report to and
consult with Big Rivers about the operation of Station Two on a continuing
basis, as reasonably requested by Big Rivers, and shall provide Big Rivers with
a monthly written operating report which shall include but not be limited to the
following matters with respect to Station Two:
(a) net Power production;
(b) fuel consumption and costs;
(c) lime, limestone and scrubber reagent consumption and costs;
(d) summary of outages and costs;
(e) major maintenance activities, including costs;
(f) safety statistics;
(g) environmental compliance;
(h) ash and waste water disposal;
(i) solid waste and landfill (Pozotec) production, including costs;
(j) staffing levels; and
(k) heat rate and other operational efficiencies.
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8.6 Communication of Certain Events. Station Two Subsidiary shall
communicate to Big Rivers, both orally and in writing as soon as possible after
the event, regarding (i) all significant operating and management events
relating to or affecting Station Two or the other Station Two Assets, including,
but not limited to, all forced and scheduled outages, partial or full load
restrictions due to equipment unavailability, deaths or injuries, governmental
inquiries or investigations, claims under any insurance policies, Operating
Emergencies and any other events or causes which may, in Station Two
Subsidiary's reasonable judgment, jeopardize personnel or property or result in
the unavailability of major equipment used in the operation of Station Two, and
(ii) all events and circumstances which are required to be reported to the KPSC
or any other governmental or regulatory authority or any insurance carrier, in
each case regarding the Station Two Assets or the operation thereof.
8.7 Maintenance of Books and Records. Station Two Subsidiary hereby
covenants to Big Rivers that it shall keep, or cause to be kept, up-to-date
books and records of financial transactions and other arrangements that carry
out the terms of this Agreement, which books and records shall be sufficiently
detailed to allow Big Rivers to fulfill its obligations under the Station Two
Contracts to Henderson or as it may otherwise be obligated under applicable Law.
Station Two Subsidiary hereby covenants to Big Rivers that it shall retain, or
cause to be retained, those books and records during the Phase I Subcontract
Term (unless the destruction or disposal thereof is otherwise approved by Big
Rivers or the Operating Committee, or Station Two Subsidiary delivers the books
and records it desires to destroy or dispose of to Big Rivers) and, upon prior
written request from Big Rivers to Station Two Subsidiary and at Big Rivers'
cost and expense, shall make those books and records available during normal
business hours for inspection and audit by Big Rivers. Big Rivers shall have no
duty to the LG&E Companies to make any such inspection or inquiry and shall not
waive any rights hereunder or incur any liability or obligation by reason of not
making such inspection or inquiry. All accounts maintained by Station Two
Subsidiary pursuant to this Section 8.7 shall be kept consistent with the
Accounting Practices and, where a different standard is required by the Station
Two Contracts, also in accordance with the Station Two Contracts.
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8.8 Statements and Reports. Station Two Subsidiary hereby covenants to Big
Rivers that it shall prepare and file, on Big Rivers' behalf, all required
reports, notices or filings with respect to the operation of the Station Two
Assets with governmental or other regulatory authorities (other than the RUS) to
the extent Station Two Subsidiary possesses the information to be included in
such reports, notices or filings. Big Rivers agrees to provide Station Two
Subsidiary, upon its request, with any and all information to be included in
such reports, notices or filings which Big Rivers possesses and which is not
otherwise available to Station Two Subsidiary, and agrees to reasonably
cooperate with Station Two Subsidiary in its preparation and filing of such
reports, notices and filings, including, without limitation, providing Station
Two Subsidiary with reasonable advance notice of deadlines for the filing of any
reports, notices and filings which are required by reason of Big Rivers' status
as a rural electric cooperative, and the authorities with which such reports,
notices and filings must be filed. Station Two Subsidiary shall furnish to Big
Rivers monthly statements of the costs incurred and expenditures made with
respect to Station Two pursuant to the Annual Budget approved and adopted for
Station Two. Station Two Subsidiary also covenants to Big Rivers that it shall
furnish to Big Rivers copies of all material reports, notices or filings made by
Station Two Subsidiary to any governmental or other regulatory authority with
respect to Station Two. Station Two Subsidiary shall also furnish to Big Rivers
such other reports in connection with the operation of the Station Two Assets as
may from time to time be reasonably requested by Big Rivers (but exclusive of
any information relating to the sale by LEM or any of its Affiliates of Station
Two Surplus Capacity to Persons other than Big Rivers); provided, that Big
Rivers shall bear one-half (1/2) of all costs and expenses incurred by Station
Two Subsidiary and its Affiliates in generating any such requested reports which
are not otherwise prepared and maintained by Station Two Subsidiary to comply
with this Section 8 or in the ordinary course of its business.
8.9 Confidentiality of Books and Records. The LG&E Companies and Big
Rivers shall each treat as confidential all books, records and other information
developed or acquired by that Party in connection with the Station Two Contracts
or the Station Two Assets and no such Party shall reveal or otherwise disclose
such confidential information to third parties (other
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than Henderson as required by the Station Two Contracts or under this Agreement)
without the prior written consent of the other Party, which consent shall not be
unreasonably withheld, conditioned or delayed. These restrictions shall not
apply to the disclosure of confidential information: (a) to any Affiliate of the
disclosing Party; (b) to each Party and its employees, attorneys, agents and
auditors; (c) to any public or private financing agency or institution which has
either lent money or committed to lend money to any Party hereto or is
considering such action; (d) to any third party to which a Party contemplates a
permitted transfer or assignment pursuant to Section 15.1 of this Agreement
(provided, however, that in any such case only such confidential information as
such third party shall have a legitimate business need to know shall be
disclosed); provided, in the case of any disclosure pursuant to (a), (b), (c) or
(d), that the Person receiving the disclosure first agrees to keep the
information confidential; (e) that otherwise comes into the public domain unless
as a result of a breach by such Party of its obligations under this Section 8.9;
or (f) that is required by applicable Laws, in the opinion of either Party's
legal counsel, to be disclosed to the RUS, KPSC or any other federal, state or
local government or appropriate regulatory agencies and departments of such
agencies, or that is required by applicable Laws, in the opinion of either
Party's legal counsel, to be publicly announced. Big Rivers and the LG&E
Companies each shall be responsible to the other Party(s) for any disclosures of
confidential information by its employees, attorneys, agents and auditors in
violation of this Section 8.9, which shall themselves constitute a breach hereof
by the responsible Party.
8.10 Fees and Expenses; Assignment of Rights. Big Rivers shall, during the
Phase I Subcontract Term, make the following payments to Station Two Subsidiary
(or an Affiliate designated by it), and assign the following rights and
interests to Station Two Subsidiary (or an Affiliate designated by it), which,
together with Big Rivers' other covenants to Station Two Subsidiary and its
Affiliates set forth in this Agreement, shall be the exclusive compensation for
the services provided by, and the exclusive reimbursement for the expenses
incurred by, Station Two Subsidiary during the Phase I Subcontract Term, except
as otherwise expressly provided elsewhere in this Agreement. Station Two
Subsidiary shall provide Big Rivers invoices hereunder in accordance with
Section 8.11(a) of this Agreement.
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(a) Notwithstanding Station Two Subsidiary's covenant to pay certain
costs of operation and maintenance allocated to the Reid Station under Sections
13.8(a) and 13.8(b) of the Station Two Operating Agreement (including costs for
operating and maintaining the Joint Use Facilities allocated in accordance with
such sections to the Reid Station, but specifically excluding any such costs
which, as between Big Rivers and the LG&E Companies or WKEC, are Incremental
Environmental O&M subject to the terms of Article 5 of the Cost Sharing
Agreement or are expenditures for a Capital Asset subject to the terms of
Article 7 of the Cost Sharing Agreement and, in each such case, subject to the
payment and reimbursement obligations set forth in the Cost Sharing Agreement),
and notwithstanding Station Two Subsidiary's covenant, as Big Rivers' agent, to
procure and pay for all of Big Rivers' fuel and reagents relating to Station Two
under Section 8.14(c) of this Agreement (collectively, the "Fuel and Reid
Station Operating Expenses"), Big Rivers shall pay or reimburse Station Two
Subsidiary for all of the Fuel and Reid Station Operating Expenses incurred by
Station Two Subsidiary in the performance of its obligations hereunder in
accordance with the terms of Section 8.11 of this Agreement, but only to the
extent not otherwise paid by Big Rivers to WKEC under the Facilities Operating
Agreement or the Cost Sharing Agreement. The LG&E Companies hereby acknowledge
that the Fuel and Reid Station Operating Expenses shall constitute "Operating
Pass Through Costs" payable by LEM to Big Rivers during the Phase I Subcontract
Term pursuant to Section 3.3(b) of the Power Purchase Agreement and, as such,
the payment thereof shall be made consistent with the provisions of Section 6.5
of the Power Purchase Agreement.
(b) During the Phase I Subcontract Term, Big Rivers hereby assigns,
grants and conveys to Station Two Subsidiary all of Big Rivers' rights to
receive payments due it from Henderson pursuant to (1) Section 13.6 of the
Station Two Operating Agreement, including, without limitation, all payments
attributable to general and administrative expenses of the Parties incurred in
connection with Station Two, and any late payment interest and sums due Big
Rivers pursuant to the annual reconciliation provided for in Section 16.6 of the
Station Two Operating Agreement, and (2) Section 3.3 of the Joint Facilities
Agreement.
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Notwithstanding anything in this Section 8.10(b) to the contrary, Station Two
Subsidiary shall promptly pay to Big Rivers a portion of any amounts that
Station Two Subsidiary receives from Henderson pursuant to this Section 8.10(b)
that corresponds to the portion of Henderson's obligation under Section 13.6 of
the Station Two Operating Agreement to pay to Big Rivers the additional 14
1/2(cent) per month, per kilowatt of total Capacity of Station Two (the "14 1/2
Cent Payments") (which obligation the Parties acknowledge will expire no later
than October 31, 2003). The portion of the 14 1/2 Cent Payments owing to Big
Rivers (the "Additional Payment") shall equal the percentage by which
Henderson's reserved Capacity from Station Two as of the relevant payment date
bears to the total rated Capacity of Station Two as of that date. Big Rivers
acknowledges and agrees that such Additional Payment shall at all times be
subject to Henderson's right of off-set set forth in Section 16.4 of the Station
Two Operating Agreement and its right of off-set set forth in Section 8.13 of
this Agreement.
(c) (1) Big Rivers hereby agrees that Station Two Subsidiary (or its
designated Affiliate) shall be entitled to the full use, enjoyment and benefit,
free of additional charge, of Big Rivers' rights in all SO2 allowances allocated
to Station Two (the "Station Two Allowances"), except as provided in subsection
(2) of this Section 8.10(c), and except (i) those allowances used by Station Two
to comply with emission standards applicable for the period beginning on January
1 immediately preceding the Effective Date and ending on the Effective Date,
(ii) Big Rivers' rights in the 154,384 Station Two Allowances previously
transferred by Big Rivers and Henderson in accordance with the Station Two
Contracts, (iii) Big Rivers' rights in any additional Station Two Allowances
that may be sold prior to the Effective Date with the LG&E Companies' prior
written consent, and (iv) Big Rivers' rights in any Station Two Allowances
having a vintage year prior to January 1 of the calendar year in which the
Effective Date occurs (which rights of Big Rivers in the Station Two Allowances
referred to in this Subclause (iv) represent part of the Inventory to be sold by
Big Rivers to WKEC on the Effective Date). The LG&E Companies and Big Rivers
further agree that, for purposes of the above described covenants of Big Rivers,
Station Two Allowances which Station Two Subsidiary (or its designated
Affiliate) shall be
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entitled to use shall also include Big Rivers' rights in (x) all bonuses,
extensions or transfer allowances allocated by the Environmental Protection
Agency to Station Two for a particular calendar year (or portion thereof) during
the Phase I Subcontract Term or the Phase II Assignment Term, and (y) all
bonuses, extensions or transfer allowances allocated by the Environmental
Protection Agency to Station Two, but not so allocated for a particular calendar
year (or portion thereof) during the Phase I Subcontract Term or the Phase II
Assignment Term, which shall be deemed to be allocated ratably to the period
commencing on the Effective Date and ending December 31, 1999, subject, however,
to Henderson's rights (if any) in and to such additional allowances and the
agreed upon allocation of any such additional allowances (or the proceeds
therefrom) set forth in the Station Two Contracts. Subject to subsection (2) of
this Section 8.10(c), upon the date of expiration or termination of this
Agreement, and provided Big Rivers has rights in those Station Two Allowances
which must be returned to it on such date of expiration or termination, Station
Two Subsidiary hereby acknowledges and agrees that it shall immediately return
to Big Rivers (free of all Liens), Station Two Subsidiary's (and its
Affiliate's, as applicable) rights in all of the Station Two Allowances
allocated by the Environmental Protection Agency for all years beginning on or
after such date of expiration or termination and Station Two Subsidiary's rights
in a pro rata portion of the Station Two Allowances allocated by the
Environmental Protection Agency for the remainder of the year in which such date
of expiration or termination occurs. Station Two Subsidiary further acknowledges
and agrees that, to the extent Station Two Subsidiary (or its Affiliate, as
applicable), together with Henderson, previously disposed of any Station Two
Allowances, and provided Big Rivers has rights in those Station Two Allowances
which must be returned to it on such date of expiration or termination, Station
Two Subsidiary shall have the obligation on such date of expiration or
termination to replace, at its sole expense, Station Two Allowances which are
equivalent to Big Rivers' rights in those Station Two Allowances so disposed of
by it (or its Affiliate, as applicable), together with Henderson, and to
transfer such replacement Station Two Allowances to Big Rivers (free of all
Liens). Notwithstanding anything in this Agreement to the contrary, the LG&E
Companies agree with Henderson that the LG&E Companies shall not be entitled to
use,
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nor shall the LG&E Companies have any right, title or interest in, any Station
Two Allowances which have been allocated to Henderson's share of Station Two
Capacity. As of the Effective Date, Big Rivers shall assign, grant and convey to
Station Two Subsidiary (or its designated Affiliate) all rights and interests of
Big Rivers under the Station Two Contracts (a) to utilize the Station Two
Allowances during the Phase I Subcontract Term and (b) to receive proceeds from
the sale of the Station Two Allowances, from whatever source.
(2) If the date of expiration or termination of this Agreement
occurs prior to the December 31st that is closest to the
twenty-fifth anniversary of the Effective Date, this Section
8.10(c)(2) shall apply and the year of termination shall be called
the "Final Year of Agreement;" provided that Big Rivers has rights
in those Station Two Allowances which must be returned to it on such
date of expiration or termination. In the event SO2 emissions from
Station Two during the portion of the Final Year of Agreement prior
to the date of such expiration or termination exceed the pro rata
amount of the Station Two Allowances allocated by the Environmental
Protection Agency to Station Two for the entire Final Year of
Agreement, Station Two Subsidiary shall transfer to Big Rivers SO2
allowances equal to the amount by which SO2 emissions from Station
Two exceed the pro rata amount of the SO2 Allowances for the Final
Year of Agreement allocable to Station Two, multiplied by the then
current percentage that reflects the proportion of the rights in
such Station Two Allowances allocable to Henderson and Big Rivers
and/or Station Two Subsidiary under Section 4.7 of the Station Two
Operating Agreement. In the event SO2 emissions from Station Two
during the portion of the Final Year of Agreement prior to the date
of termination are less than the pro rata amount of the Station Two
Allowances allocated by the Environmental Protection Agency for the
entire Final Year of Agreement, Big Rivers shall transfer to Station
Two Subsidiary (or its designated Affiliate) SO2 Allowances equal to
the amount by which SO2 emissions from Station Two are less than the
pro rata amount of the SO2 Allowances for the Final Year of
Agreement allocable to Station Two, multiplied by the then current
percentage that reflects the proportion of such
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Station Two Allowances allocable to Henderson and Big Rivers and/or
Station Two Subsidiary under Section 4.7 of the Station Two
Operating Agreement.
(d) Henderson hereby recognizes the assignments in Sections 8.10(b)
and 8.10(c) of this Agreement and agrees to make all such payments and to remit
all such amounts contemplated therein, in accordance with Sections 4.7, 13.6 and
16 of the Station Two Operating Agreement, directly to Station Two Subsidiary
during the Phase I Subcontract Term. All such payments and remissions, when made
by Henderson to Station Two Subsidiary in accordance with the terms hereof,
shall be deemed to discharge Henderson's obligations to Big Rivers for such
amounts.
8.11 Invoicing Procedure; Reid Station Operating Account(s).
(a) Big Rivers shall pay or reimburse Station Two Subsidiary or its
designated Affiliate (in lieu of paying WKEC for such expenses as required by
Section 9.2 of the Facilities Operating Agreement) for all Fuel and Reid Station
Operating Expenses on the Monthly Payment Date immediately following receipt of
an invoice from Station Two Subsidiary. The invoicing of Fuel and Reid Station
Operating Expenses shall be done by Station Two Subsidiary (or by WKEC or any
other designated Affiliate of Station Two Subsidiary, on its behalf) in the same
manner and in accordance with the time schedule set forth in Section 9.2 of the
Facilities Operating Agreement.
(b) Station Two Subsidiary (or WKEC or any other designated
Affiliate of Station Two Subsidiary, on its behalf) shall have the authority to
establish on behalf of Big Rivers one or more operating bank accounts, with a
mutually acceptable financial institution (the "Fuel and Reid Station Operating
Account(s)"). Station Two Subsidiary (or WKEC or any other designated Affiliate
of Station Two Subsidiary, on its behalf) will be given signatory authority to
make disbursements for all Fuel and Reid Station Operating Expenses by drawing
checks against these accounts in accordance with the terms of this Section 8.
Payment of Fuel and Reid Station Operating Expenses encompassing wages and
salaries of operating and
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maintenance personnel may be made from the Fuel and Reid Station Operating
Account(s), from any of them, or from any other Operating Account(s) established
under the Facilities Operating Agreement, as Station Two Subsidiary or its
designated Affiliate deems appropriate, as and to the extent required by Station
Two Subsidiary (or WKEC or any other designated Affiliate of Station Two
Subsidiary). On each Monthly Payment Date, Big Rivers shall make provisions for
adequate funds to be deposited into the Fuel and Reid Station Operating
Account(s) to fund disbursements required to be made by Station Two Subsidiary
(or WKEC or any other designated Affiliate of Station Two Subsidiary, on its
behalf), including the payment of all Fuel and Reid Station Operating Expenses.
8.12 Station Two Surplus Capacity. Big Rivers and the LG&E Companies
hereby affirm and agree that, during the Phase I Subcontract Term, Station Two
Surplus Capacity shall be purchased and sold in accordance with the terms of the
Power Purchase Agreement and any additional or different terms as may be set
forth below:
(a) All Station Two Surplus Capacity allocated to Big Rivers under
the Station Two Power Sales Agreement shall be purchased by Big Rivers in
accordance with the Station Two Power Sales Agreement, including, without
limitation, in accordance with the requirement therein that Big Rivers pay to
Henderson or the Trustee all Capacity charges for the Station Two Surplus
Capacity under Section 6.1 of the Station Two Power Sales Agreement. In
addition, Big Rivers shall purchase from Henderson (1) solely at the request of
LEM, all surplus Capacity resulting from good faith over-estimates of the needs
of the City and its inhabitants at such times as such surplus Capacity is
offered to Big Rivers, pursuant to Section 3.4 of the Station Two Power Sales
Agreement, (2) solely at the request of LEM, all or designated portions of any
Excess Henderson Energy (as defined in Section 11.5 of this Agreement) that may
then be available, and (3) all Energy associated with Excess Henderson Capacity
(as defined in Section 11.5 of this Agreement) that may be available, which
purchases by Big Rivers described in (2) and (3), above, shall be made pursuant
to Section 11.5 of this Agreement.
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(b) Big Rivers and the LG&E Companies hereby acknowledge that all
Station Two Surplus Capacity allocated to Big Rivers, any Excess Henderson
Energy and/or Energy associated with Excess Henderson Capacity purchased by Big
Rivers as contemplated in (a), above, and all surplus Capacity and associated
Energy acquired by Big Rivers pursuant to Section 3.4 of the Station Two Power
Sales Agreement as contemplated in (a), above, shall constitute Unit Output from
Station Two and shall be sold by Big Rivers to LEM pursuant to Section 3.2 of
the Power Purchase Agreement (regardless of whether the Participation Agreement
Phase I or Participation Agreement Phase II shall then be in effect). As
consideration for such Unit Output from Station Two ("Station Two Unit Output")
purchased from Big Rivers pursuant to the Power Purchase Agreement as
contemplated herein, LEM shall pay for such Unit Output pursuant to Section 3.3
of the Power Purchase Agreement. For purposes of Section 3.3(b) of the Power
Purchase Agreement, Operating Pass-Through Costs (as defined in Exhibit X to the
Participation Agreement) payable for Station Two Unit Output shall be deemed to
include only the sum of (i) the Capacity charges (excluding, however, from such
Capacity charges specified in this item (i) any expenditures or costs that
constitute a payment for a Station Two Improvement that are subject to the
payment provisions set forth in Sections 8.17 and 10.3(e) of this Agreement)
allocated to and paid by Big Rivers under Sections 6.1 and 6.2 of the Station
Two Power Sales Agreement solely as they relate to Sections 6.3(b), 6.3(c)(i)
(relating solely to payments into the Station Two O&M Account), 6.3(e) (but
subject to the provisions of the agreement described in Section 10.29 of this
Agreement), 6.3(f) and 6.3(g) of the Station Two Power Sales Agreement
(collectively, the "LEM Capacity Charge Share"), plus (ii) any taxes lawfully
imposed upon Henderson and paid by Big Rivers in the prior month pursuant to
Section 6.5 of the Station Two Power Sales Agreement, plus (iii) any amounts
paid by Big Rivers to Henderson in the prior month pursuant to Section 6.6 of
the Station Two Power Sales Agreement, plus (iv) any amounts paid by Big Rivers
to Henderson pursuant to Section 11.2 of this Agreement during the current month
for Excess Henderson Energy or Energy associated with Excess Henderson Capacity
purchased by Big Rivers and resold as Station Two Unit Power to LEM during the
prior month. The amount payable by LEM under Section 3.3 of the Power Purchase
Agreement,
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and determined by reference to this Section 8.12(b), shall be paid monthly no
later than the Monthly Payment Date (as established by Big Rivers and LEM under
the Power Purchase Agreement) and, with respect to the Capacity charges
described above, shall be based upon the sum due for the current monthly billing
period under the Annual Budget established for Station Two. Payments to Big
Rivers under this Section 8.12 (other than those to be made directly to
Henderson or the trustee as contemplated in (d) below) shall be made to the bank
and for the credit of the account that is designated by Big Rivers under Section
6.5 of the Power Purchase Agreement. In the event that the annual reconciliation
of Capacity charges under Section 9.4 of the Station Two Power Sales Agreement
determines that the actual Capacity charges with respect to the Station Two
Surplus Capacity under Sections 6.3(b), 6.3(c)(i) (relating solely to payments
into the Station Two O&M Account), 6.3(e) (but subject to the provisions of the
agreement described in Section 10.29 of this Agreement), 6.3(f) and 6.3(g) of
the Station Two Power Sales Agreement are less than the LEM Capacity Charge
Share, such excess shall be credited against and shall reduce LEM's next monthly
payment(s) due Big Rivers hereunder or if no such monthly payments are
thereafter due to Big Rivers from LEM, shall be paid by Big Rivers to LEM within
15 days after the date of the reconciliation. In the event that such annual
reconciliation determines that the actual Capacity charges with respect to
Station Two Surplus Capacity under Sections 6.3(b), 6.3(c)(i) (relating solely
to payments into the Station Two O&M Account), 6.3(e) (but subject to the
provisions of the agreement described in Section 10.29 of this Agreement),
6.3(f) and 6.3(g) of the Station Two Power Sales Agreement are greater than the
LEM Capacity Charge Share, LEM shall pay to Big Rivers the additional amount
which Big Rivers is due for such Capacity charges on the next Monthly Payment
Date or, if no further payments are due to Big Rivers, within 15 days after the
date of the reconciliation.
(c) If the Power Purchase Agreement (or Section 3 thereof) shall at
any time expire or be terminated, or otherwise be rendered of no further force
or effect, for any reason prior to the expiration or termination of the Phase I
Subcontract Term, then Big Rivers agrees to sell and deliver all Station Two
Unit Output to LEM throughout the remainder of the Phase I Subcontract Term
pursuant to this Section 8.12 and otherwise upon the same terms and
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conditions as were set forth in Sections 3.2 and 3.3 of the Power Purchase
Agreement (and such other provisions of the Power Purchase Agreement as shall be
reasonably necessary to give effect and meaning to Sections 3.2 and 3.3), which
terms and conditions shall then and thereafter be deemed to be incorporated by
reference in this Section 8.12 to the extent such provisions relate to Station
Two for all purposes; provided, that LEM shall not thereafter be required to pay
for that Station Two Unit Output any Initial Fixed Payment or Annual Fixed
Payments that are contemplated in Section 3.3(a) of the Power Purchase Agreement
(other than as expressly contemplated in Section 10.7(d) of this Agreement), it
being expressly understood that the consideration to Big Rivers contemplated in
Section 3.3(b) of the Power Purchase Agreement (modified as contemplated in (b),
above) shall alone be payable by LEM for such Station Two Unit Output.
(d) Big Rivers hereby assigns, grants and conveys to Henderson all
of Big Rivers' rights under Section 8.12(b) of this Agreement to receive from
LEM that portion of such Operating Pass-Through Costs which represents (1) the
portion of the Capacity charges relating to operating and maintenance expenses
of Station Two under Section 6.3(b) of the Station Two Power Sales Agreement and
(2) any Excess Henderson Energy and Capacity Charges payable by Big Rivers to
Henderson. LEM hereby recognizes such assignment and agrees, during the Phase I
Subcontract Term, to make all such payments (less any applicable off-sets under
Section 8.13 of this Agreement) directly to the Trustee until the Station Two
Bonds are canceled, retired or expire and thereafter to Henderson. The Parties
acknowledge and agree that the payment obligations of LEM assigned hereunder to
the Trustee (on behalf of Henderson) or Henderson, as the case may be, may be
off-set by Henderson pursuant to Section 8.13 of this Agreement against the
amount of operating and maintenance expenses for Station Two due from Henderson
to Big Rivers and assigned to Station Two Subsidiary under Section 8.10(b) of
this Agreement, which off-set shall be deemed to discharge Henderson's
obligations to Big Rivers and Station Two Subsidiary under such Section and
Section 13.6 of the Station Two Operating Agreement, and Big Rivers' and Station
Two Subsidiary's payment obligations contemplated in this Section 8.12, in each
case to the extent of the amounts so off-set. In addition, the Parties
acknowledge and agree that the payment obligations of LEM
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assigned hereunder to the Trustee (on behalf of Henderson) or Henderson, as the
case may be, to the extent paid by LEM to the Trustee or Henderson or otherwise
off-set by Henderson against Henderson's obligation to pay to Station Two
Subsidiary (as assigned to Station Two Subsidiary under Section 8.10(b) of this
Agreement) operating and maintenance expenses for Station Two, shall be deemed
for purposes of Section 6.1 of the Station Two Power Sales Agreement and Section
8.12(b) of this Agreement to be a payment by Big Rivers in discharge of its
obligations thereunder.
(e) In lieu of any rights that Big Rivers may have pursuant to
Section 6.4(b) of the Power Purchase Agreement or elsewhere to pay amounts to
LEM in lieu of actually purchasing Power under such agreement, during such
period of time as the Letter Ruling of the IRS dated January 26, 1971 (the
"Letter Ruling") shall remain in effect and continue to limit the distribution
of Energy from Station Two to customers within Henderson and Daviess Counties,
Kentucky, Big Rivers hereby covenants to the LG&E Companies and Henderson that
Big Rivers shall actually repurchase and accept delivery from LEM, and LEM
hereby covenants to Henderson and Big Rivers that it shall deliver to Big
Rivers, all Station Two Unit Output, less such amounts (if any) of Station Two
Power (x) as LEM sells to Henderson or otherwise delivers to Big Rivers pursuant
to or in connection with one or more Pre-Closing Development Agreements or
Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of
this Agreement, or (y) as LEM sells to Henderson Union Electric Cooperative
Corporation ("Henderson Union") for the benefit of Alcan pursuant to the
Agreement for Electric Service dated July 15, 1998, between Henderson Union and
LEM (the "LEM/Henderson Union Agreement"), at the price provided for in Section
8.12(h) of this Agreement. Big Rivers agrees to resell all such Station Two Unit
Output solely to all or any of Henderson Union, Green River Electric Corporation
("Green River") or Henderson, including, without limitation, pursuant to the
HMP&L Contract, for retail distribution solely within Henderson and Daviess
Counties, Kentucky. All such Power repurchased by Big Rivers (other than Power
resold by Big Rivers pursuant to the HMP&L Contract or Power purchased from LEM
in connection with a Pre-Closing Development Agreement or an Economic
Development Agreement) shall be credited toward any minimum obligation of Big
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Rivers to purchase Power, and any maximum obligation of LEM to sell Power, under
Section 4.1 of the Power Purchase Agreement. Big Rivers agrees that, until the
Station Two Bonds have been fully retired, its sales of Power to Henderson
Union, Green River and Henderson (including, without limitation Big Rivers'
sales pursuant to the HMP&L Contract) shall be fulfilled by Big Rivers under its
wholesale Power agreements with Henderson Union, Green River or Henderson (or
any additional or successor agreements) by first using Station Two Unit Output
that is purchased from LEM. For purposes of determining whether Big Rivers has
fulfilled its obligation under this Section 8.12(e), the amount of Station Two
Unit Output which Big Rivers is obligated to use in accordance with the prior
sentence shall be equal to the hourly output of Station Two allocated to Big
Rivers under Sections 3.3 and 4.1 of the Station Two Power Sales Agreement, less
the hourly sales (if any) of Station Two Unit Output by LEM to Henderson under
the terms of one or more Pre-Closing Development Agreements as contemplated in
Sections 11.1 and 11.2 of this Agreement and the hourly sales (if any) of
Station Two Unit Output by LEM to Henderson Union under the LEM/Henderson Union
Agreement. Henderson shall have the right to enforce the provisions of this
Section 8.12(e) against LEM, Station Two Subsidiary and Big Rivers. In the event
the Power Purchase Agreement (or the portions thereof requiring Big Rivers to
purchase Power from LEM thereunder) shall at any time expire or be terminated,
or otherwise be rendered of no further force or effect, for any reason prior to
the expiration or termination of this Agreement and LEM continues to have the
right or obligation to receive Station Two Unit Output, then Big Rivers agrees
to actually purchase and accept delivery from LEM of, and LEM agrees to deliver
to Big Rivers, all Station Two Unit Output (other than Unit Output sold by LEM
(x) to Henderson or otherwise delivered to Big Rivers pursuant to or in
connection with one or more Pre-Closing Development Agreements or Economic
Development Agreements or (y) to Henderson Union under the LEM/Henderson Union
Agreement) throughout the period commencing on that expiration or termination
date and expiring upon the redemption or retirement of the Station Two Bonds,
pursuant to this Section 8.12(e) and otherwise upon the same terms and
conditions as were set forth in the Power Purchase Agreement, which terms shall
then be deemed to be incorporated by reference in this Section 8.12 to the
extent they relate to Station Two Unit Output for all purposes.
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(f) Notwithstanding any provision of this Agreement or any other
Operative Document to the contrary, including, without limitation, the
immediately preceding Section 8.12(e) of this Agreement, Big Rivers shall not at
any time during the Phase I Subcontract Term be obligated to actually repurchase
and accept from LEM (in lieu of making the payments contemplated in Section
6.4(b) of the Power Purchase Agreement) any Station Two Unit Output to the
extent (but only to the extent) that Big Rivers does not then have the right to
resell that Power to Henderson (whether pursuant to the HMP&L Contract, one or
more Pre-Closing Development Agreements or Economic Development Agreements, or
otherwise), Henderson Union and Green River (or any of them) to meet the needs
of their respective customers located in Henderson County or Daviess County in
Kentucky, or there is no demand for such Unit Output from the respective
customers of Henderson, Henderson Union and Green River located in Henderson or
Daviess County, Kentucky, unless in either such situation the reason that Big
Rivers can not resell such Unit Output to Henderson, Henderson Union and/or
Green River for distribution in those Counties is due to (1) a breach or default
by Big Rivers of its wholesale Power agreements with Henderson, Henderson Union
or Green River (that was not itself the direct result of a breach or default by
any LG&E Company or Affiliate of an LG&E Company under any of the Operative
Documents or the negligence or willful misconduct of any LG&E Company or
Affiliate of an LG&E Company), whether or not such agreements are terminated by
Henderson or those Members as a result thereof, or (2) any other actions or
omissions on the part of Big Rivers or its employees, agents or representatives
that constitutes a breach or default by Big Rivers under any other agreement to
which it is a party (including, without limitation, any Operative Document),
that violates applicable Laws, or that constitutes negligence or willful
misconduct by Big Rivers or its employees, agents or representatives. Big Rivers
shall not, by reason of the foregoing provisions, be released from its
obligations under Section 6.4(b) of the Power Purchase Agreement to pay LEM
amounts in lieu of purchasing and accepting delivery of Station Two Unit Output
as contemplated above, if such provisions of the Power Purchase Agreement are
applicable. Notwithstanding the foregoing, and regardless of whether Big Rivers
shall have an
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obligation to also pay amounts to LEM pursuant to Section 6.4(b) of the Power
Purchase Agreement (and not in lieu of those payment obligations), in the event
Big Rivers shall not be released from its obligation to actually purchase and
accept delivery of Station Two Unit Output by reason of the circumstances (or
any of them) described in subclauses (1) and (2), above, Big Rivers shall be
entitled, in its discretion, and in lieu of actually purchasing, accepting
delivery of and paying the entire price for such Unit Output, to pay to LEM an
amount for each megawatt-hour of Energy that it was obligated to accept from LEM
equal to (A) 16% multiplied by (B) the applicable rate per megawatt-hour of Base
Power under Section 6.3 of the Power Purchase Agreement; provided, that the
foregoing right of Big Rivers to make payments in lieu of accepting delivery of
Station Two Unit Output shall apply only when there is insufficient customer
load in the two counties as described above, and then only to the extent that
Station Two Subsidiary shall have been given reasonable advance notice from Big
Rivers of the impending load constraints in Henderson and/or Daviess Counties so
that Station Two Subsidiary shall have had a reasonable opportunity to reduce
the output of Station Two accordingly. Big Rivers shall in no event be released
from any breach or default by Big Rivers under this Agreement arising by reason
of the actions, events or circumstances described in Subclauses (1) or (2),
above. The rights and obligations of LEM and Big Rivers, respectively, set forth
in this Section 8.12(f), including, without limitation, Big Rivers' release from
its obligation to repurchase and accept from LEM any Station Two Unit Output
pursuant to Section 8.12(e) of this Agreement, shall be subject to Section 10.5
of this Agreement and such Party's fulfillment of its obligations (provided such
obligations shall then be effective under such section) under Section 10.6 of
this Agreement to cooperate in the refinancing of the Station Two Bonds and to
pay its respective percentage of the costs associated with such refinancing.
(g) Nothing contained in this Agreement or in the Power Purchase
Agreement shall be deemed to prevent LEM from selling to any Person any Energy
associated with the Station Two Unit Output without also selling to that Person
the associated Capacity, subject, however, to the provisions of Sections 8.12(e)
and 10.5 of this Agreement.
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(h) Consistent with Section 8.12(e) of this Agreement, all Station
Two Unit Output sold to Big Rivers by LEM as contemplated in Section 8.12(e) of
this Agreement shall be sold either (i) at the Base Power Price established
pursuant to Section 6.4 of the Power Purchase Agreement; or (ii) to the extent
such Unit Output is resold to Henderson pursuant to the HMP&L Contract, at the
price provided for in Section 6.2(c) of the Power Purchase Agreement.
8.13 Phase I Off-Sets.
(a) The Parties hereby agree that LEM shall have the right to
off-set the amounts payable by Henderson to Station Two Subsidiary (as assignee
of Big Rivers pursuant to Section 8.10(b) of this Agreement) pursuant to Section
13.6 of the Station Two Operating Agreement, against the payments LEM owes
Henderson (payable to the Trustee during the term of the Station Two Bonds), as
the assignee of Big Rivers under Section 8.12(d) of this Agreement, and that
Henderson (and the Trustee) shall have the right to off-set the amounts payable
by LEM to Henderson pursuant to Section 8.12(d) of this Agreement against the
payments Henderson owes Station Two Subsidiary (as the assignee of Big Rivers)
pursuant to Section 13.6 of the Station Two Operating Agreement. Any such
off-set shall be deemed to discharge the relevant obligation against which the
off-set is made, to the extent of the amounts so off-set. Notwithstanding
anything set forth in Section 13.5(h) of this Agreement or elsewhere in this
Agreement to the contrary, during the Phase I Subcontract Term, Big Rivers shall
not, pursuant to Section 9.3 of the Station Two Power Sales Agreement or
pursuant to any other provision of any Station Two Contract or this Agreement,
off-set any amounts payable by Big Rivers to Henderson or to an LG&E Company,
against accounts receivable or other sums due from Henderson or any LG&E Company
to Big Rivers under the terms of the Station Two Power Sales Agreement, the
Station Two Contracts or this Agreement, or otherwise, the effect of which would
impair any payment due by Big Rivers or by Henderson to Station Two Subsidiary
or any other LG&E Company pursuant to Section 8.10(a) or 8.10(b) of this
Agreement, or any provisions of the Station Two Contracts.
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(b) Should Henderson at any time off-set any accounts payable or
other sums due from Henderson to any LG&E Company against any accounts
receivable or other sums due from Big Rivers to Henderson, the effect of which
is that the right of any LG&E Company to receive payment from Henderson is
impaired thereby, including, without limitation, an impairment of the right of
Station Two Subsidiary (as assigned by Big Rivers to Station Two Subsidiary
pursuant to Section 8.10(b) of this Agreement) to receive the payment due it
from Henderson under Section 13.6 of the Station Two Operating Agreement, such
off-set by Henderson shall automatically create a payment obligation by Big
Rivers to the relevant LG&E Company for the amount so off-set by Henderson,
which obligation by Big Rivers must be discharged within five (5) Business Days
after written notice of the off-set by Henderson is delivered by that LG&E
Company to Big Rivers. Failure by Big Rivers to timely pay such amount shall
constitute a payment default by Big Rivers to that LG&E Company which, if not
cured by Big Rivers as set forth in Section 13.5 of this Agreement, may (in
addition to all other remedies provided in this Agreement or at law or in
equity) be off-set by that or any other LG&E Company, or by WKEC, against any
sums then or thereafter due and owing Big Rivers under this Agreement
(including, without limitation, the Capacity charges due Big Rivers and assigned
to Henderson (or the Trustee) pursuant to Section 8.12(d) of this Agreement) or
under any of the other Operative Documents. Notwithstanding the foregoing, no
payment default by Big Rivers of the type described in this Subsection (b) shall
give rise to a right of any LG&E Company to terminate this Agreement in the
event (i) there remain sums then or thereafter due and owing to Big Rivers by
any LG&E Company which are sufficient to cover such Henderson off-set and
against which that LG&E Company shall be entitled to exercise an off-set right,
or (ii) Big Rivers notifies that LG&E Company that it is disputing its
obligation to pay to Henderson the account(s) receivable or other sum(s) which
were the basis for Henderson's off-set, until (with respect to (ii) above) such
time thereafter as it is determined in a final, non-appealable decision of a
court, arbitration panel or other tribunal having jurisdiction thereof, that Big
Rivers did, in fact, owe such sums to Henderson, in which event that LG&E
Company shall be entitled to so terminate this Agreement at any time following
the fifth Business Day after that determination (unless Big Rivers shall pay to
that LG&E Company all amounts so off-set by Henderson that have not been
previously recovered
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by that LG&E Company through off-sets against amounts due and owing to Big
Rivers as contemplated above). In the event it shall be finally determined that
Big Rivers did not owe such amounts to Henderson, that LG&E Company agrees to
promptly pay to Big Rivers all amounts previously off-set against payments
otherwise owing by that LG&E Company to Big Rivers; provided, that such LG&E
Company may pursue whatever rights and remedies that it may have against
Henderson for its initial off-set.
8.14 Additional Covenants of Big Rivers. During the Phase I Subcontract
Term Big Rivers hereby covenants to the LG&E Companies as follows:
(a) Big Rivers shall not do or permit anything within its reasonable
control to be done which would constitute a material default by Big Rivers under
any of the Station Two Contracts or omit to perform any of its material
obligations under the terms of any of the Station Two Contracts.
(b) Big Rivers shall not amend, modify or waive any provision of any
of the Station Two Contracts, or exercise any right that it may have to
terminate any of those contracts, without the prior written consent of Station
Two Subsidiary (which consent shall not be unreasonably withheld).
(c) Big Rivers shall continue to have the primary obligation to
Henderson to purchase all fuel and reagents as required by the terms of the
Station Two Contracts, including, without limitation, replacement of fuel
reserves as required of Big Rivers under Section 7.2 of the Station Two
Operating Agreement and full replacement, at its own cost, of all fuels consumed
from the Station Two fuel reserves for the production of Energy acquired by Big
Rivers during each month as required by Section 6.7 of the Station Two Power
Sales Agreement. Station Two Subsidiary shall have the exclusive right to
administer, as agent for Big Rivers, and shall administer, or cause to be
administered, all of Big Rivers' fuel and reagent supply agreements (including
those supply agreements existing at the Effective Date and all supply agreements
executed thereafter), and shall procure, or cause to be procured, and initially
pay for all fuel
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and reagents (which fuel and reagents are to be procured pursuant to such fuel
and reagents supply agreements), in accordance with Big Rivers' obligations
under the Station Two Contracts. The costs of such fuel and reagents shall
constitute Fuel and Reid Station Operating Expenses which are reimbursable or
payable by Big Rivers as contemplated in Section 8.10(a) of this Agreement, and
are covered by the Operating Pass - Through Costs payable by LEM.
8.15 Budget Process; Operating Committee. The Parties acknowledge that
Station Two Subsidiary will perform for Big Rivers its obligations under Section
14 of the Station Two Operating Agreement (preparation of the Operating Budget)
as an independent sub-contractor of Big Rivers, as follows:
(a) Station Two Subsidiary shall prepare the Operating Budget for
the Contract Year as contemplated in the first sentence of Section 14.1 of the
Station Two Operating Agreement. Station Two Subsidiary will separately identify
therein each item that represents anticipated expenditures associated with (1) a
Station Two Improvement (as defined in Section 8.17(a) of this Agreement),
including specification therein whether expenses related to that Station Two
Improvement are Henderson Incremental Capital Costs or Henderson Non-Incremental
Capital Costs, and (2) a Henderson Incremental Environmental O&M cost. As
between Big Rivers and Station Two Subsidiary, special arrangements described in
Sections 8.16 and 8.17 of this Agreement shall apply to all Henderson
Incremental Environmental O&M and Station Two Improvements, respectively. Those
distinctions among items in the Operating Budget shall have no meaning, however,
as between (x) Henderson and (y) Big Rivers and Station Two Subsidiary.
(b) Prior to submittal to Henderson of the Operating Budget for
Station Two as contemplated in the last sentence of Section 14.1 of the Station
Two Operating Agreement, and in any event on or before November 1 of each Year
subsequent to the Effective Date, Station Two Subsidiary shall submit in writing
to each member of the Operating Committee (which Committee is described in
Section 8.15(c) of this Agreement) a proposed Operating Budget for
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Station Two for the next Year. Within 30 days after receipt of Station Two
Subsidiary's proposed Operating Budget for Station Two, Big Rivers may propose
modifications to the proposed Operating Budget. The Operating Committee shall
meet in December and January of each year to review and discuss the Operating
Budget proposed by Station Two Subsidiary and to review and approve any
modifications thereof proposed by Station Two Subsidiary or Big Rivers. The
Operating Committee, by agreement of its members representing Big Rivers and
Station Two Subsidiary, may determine to adopt an amendment to the proposed
budget, in which case the proposed budget will thereafter be as so amended.
Absent agreement of the members of both Parties to modify the budget, the
Operating Committee must approve the Operating Budget as proposed by Station Two
Subsidiary if such budget is consistent with Prudent Utility Practice; provided,
that the responsibility of Big Rivers and the LG&E Companies with respect to the
costs incurred for items identified in the Operating Budget shall be determined
as provided elsewhere in this Agreement. In the event of a dispute between Big
Rivers and Station Two Subsidiary as to whether such budget (including those
amendments adopted by agreement) is consistent with Prudent Utility Practice,
those Parties will submit the dispute to arbitration consistent with Section 15
of the Participation Agreement; provided, however, if the expenditure disputed
by Station Two Subsidiary and Big Rivers is ultimately determined to be a
required expenditure under the Station Two Operating Agreement, Big Rivers and
Station Two Subsidiary shall not have the right to further arbitrate such
expenditure and the expenditure shall be included in the Operating Budget for
Station Two and paid or shared by Big Rivers and the LG&E Companies in
accordance with the terms and provisions set forth in Section 8 of this
Agreement, entitled "Phase I Subcontract." The Operating Budget, as approved in
accordance with this Section 8.15(b), shall be the only budget submitted by
either the LG&E Companies or Big Rivers to Henderson for its review as required
by Section 14 of the Station Two Operating Agreement; provided, however, that
Station Two Subsidiary (on behalf of Big Rivers) shall be entitled to submit to
Henderson an Operating Budget that may be the subject of a dispute between Big
Rivers and Station Two Subsidiary to the extent required for compliance with the
Station Two Operating Agreement, it being understood by Big Rivers and Station
Two Subsidiary that their respective obligations under this Agreement for items
set forth in that Operating Budget shall thereafter be
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determined through the dispute resolution procedures described above or as
otherwise agreed to by Big Rivers and Station Two Subsidiary. Henderson shall
have the final authority to modify and approve the budget or approve it without
modifications, subject however to whatever approval rights are available to Big
Rivers under the Station Two Operating Agreement.
(c) Each of Station Two Subsidiary and Big Rivers hereby establishes
an Operating Committee consisting of not more than two representatives appointed
by each such Party. Each such Party shall promptly designate its representatives
on the Operating Committee by notice given to the other such Party. Each such
Party may appoint one or more alternates to act in the absence of a regular
member or members, and may replace its representatives and alternates at any
time, in its sole discretion, by notice to the other Party. The chair of the
Operating Committee shall be a representative of Station Two Subsidiary. The
chair shall be responsible for calling meetings and establishing agendas in
consultation with the other committee members.
(d) The Operating Committee shall meet at least twice annually
including in December and January (for review and approval of the Operating
Budget) or more often by mutual agreement of Big Rivers and Station Two
Subsidiary. Meetings shall be held at Henderson, Kentucky or any other mutually
agreed place. Big Rivers and Station Two Subsidiary agree to cooperate and to
provide the Operating Committee with such information as is reasonably necessary
for the Operating Committee to perform its responsibilities. The Operating
Committee shall continue to be constituted, shall continue to act, and shall
continue to be governed by Sections 8.15(c) through 8.15(g), inclusive, of this
Agreement throughout any Phase II Assignment Term pursuant to Section 9 of this
Agreement, entitled "Phase II Assignments."
(e) Station Two Subsidiary shall give not less than ten (10) days'
notice to Big Rivers of regular Operating Committee meetings. Each meeting
notice shall include an agenda prepared by Station Two Subsidiary. Notice may be
waived by written consent of both Big
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Rivers and Station Two Subsidiary. A quorum for any meeting shall exist if each
of Big Rivers and Station Two Subsidiary is represented by at least one of its
two members. Station Two Subsidiary shall maintain minutes of Operating
Committee meetings and telephone conference calls. One of Station Two
Subsidiary's representatives shall prepare and distribute the minutes to Big
Rivers' representatives within 45 days after each meeting or telephone
conference call of the Operating Committee. The minutes, when signed by the
respective representatives of Big Rivers and Station Two Subsidiary, shall be
the official record of the decisions made by the Operating Committee and shall
bind Station Two Subsidiary and Big Rivers. Each of Station Two Subsidiary and
Big Rivers shall bear for its own account all expenses incurred by such Party's
representatives on the Operating Committee in connection with their duties on
the Operating Committee. Where such approval authority exists, the Operating
Committee may condition its approval of any Operating Budget hereunder (or
modification thereof) upon receipt of such studies and other information as they
may reasonably deem appropriate.
(f) In lieu of meetings, the Operating Committee may hold telephone
conference calls with Station Two Subsidiary and Big Rivers simultaneously and
in which each such Party shall be represented by at least one of its two
representatives on the Operating Committee. The Operating Committee, in lieu of
deciding any matter at a meeting or by telephone conference, may act by
instrument in writing signed by each such Party's representatives on the
Operating Committee.
(g) The Operating Committee may not modify any of the terms,
covenants or conditions of this Agreement or any Station Two Contract.
8.16 Adjustment for Henderson Incremental Environmental O&M. . If any of
the Capacity charges payable by Big Rivers under Section 6.3 of the Station Two
Power Sales Agreement represent payments attributable to Henderson Incremental
Environmental O&M incurred following the Closing, such Capacity charge costs
shall thereafter be shared by LEM and Big Rivers in accordance with this Section
8.16. If any of the operating and maintenance
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expenses allocated to the Reid Station under Section 13.8 of the Station Two
Operating Agreement constitute Incremental Environmental O&M, such costs shall
be allocated between and paid by Big Rivers and WKEC in accordance with the
payment and reimbursement procedures set forth in Article 5 of the Cost Sharing
Agreement.
(a) Notwithstanding the payments and reimbursements for Henderson
Incremental Environmental O&M made between Big Rivers, Station Two Subsidiary,
LEM and Henderson as contemplated in the Station Two Contracts or elsewhere in
this Agreement, Big Rivers shall pay a share of all Henderson Incremental
Environmental O&M incurred by Station Two Subsidiary each year during the Phase
I Subcontract Term, as and when incurred by LEM, Station Two Subsidiary or any
of their Affiliates, as follows (in each case "Big Rivers' Henderson Incremental
Environmental O&M Share"): (i) Big Rivers' share of Henderson Incremental
Environmental O&M incurred during the period from the Effective Date until
December 31, 2010, inclusive, is 20%; (ii) Big Rivers' share of Henderson
Incremental Environmental O&M incurred during the period from January 1, 2011 to
December 31, 2011, inclusive, is 40.26%; and (iii) Big Rivers' share of
Henderson Incremental Environmental O&M incurred during the period from January
1, 2012 until the Termination Date, inclusive, is 33.9%. Big Rivers' payment
shall be made by reducing each monthly payment required to be made by LEM for
the Station Two Unit Output pursuant to Section 3.3(a)(ii) of the Power Purchase
Agreement (which monthly payment is further contemplated in Section 8.12(b) of
this Agreement) by an amount equal to Big Rivers' Henderson Incremental
Environmental O&M Share based on the Henderson Incremental Environmental O&M
estimated by Station Two Subsidiary to be incurred in such month by Station Two
Subsidiary consistent with the Operating Budget. LEM shall pay the remaining
share of the Henderson Incremental Environmental O&M monthly through its
Operating Pass-Through Cost payments to Big Rivers as contemplated in Section
8.12(b) of this Agreement.
(b) Within 120 days after the end of each Year, LEM shall compute
the actual Henderson Incremental Environmental O&M for the Year ("Actual
Henderson Environmental O&M"). LEM shall compare the Actual Henderson
Environmental O&M with the aggregate
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payments made by Big Rivers (through reductions in the monthly payment due
pursuant to Section 3.3 of the Power Purchase Agreement) pursuant to this
Section 8.16 during such Year. If Big Rivers' Henderson Incremental
Environmental O&M Share of the Actual Henderson Environmental O&M is more than
the sum of such payments made by Big Rivers during the year, Big Rivers shall
promptly pay such difference to LEM. If Big Rivers' Henderson Incremental
Environmental O&M Share of the Actual Henderson Environmental O&M is less than
such payments made by Big Rivers, LEM shall promptly pay such difference to Big
Rivers.
(c) Except as expressly provided in this Section 8.16 or Section
9.9, elsewhere in this Agreement or in any other Operative Document to the
contrary, Big Rivers shall have no obligation or liability to Station Two
Subsidiary (or its Affiliates) for any operating or maintenance costs relating
to the Station Two Assets.
8.17 Station Two Improvements -- Forecasts, Budgeting and Payments.
(a) For purposes of this Agreement (including without limitation,
Section 9 of this Agreement, entitled "Phase II Assignments") as between Big
Rivers and Station Two Subsidiary, "Station Two Improvements" shall mean any
betterments, renewals, replacements or additions to the Station Two Assets used
in the operation of Station Two and/or the Reid Station (but only if not
otherwise accounted for under the Cost Sharing Agreement or the Lease, as
applicable), (i) that are made pursuant to the Operating Budget, or an approved
modification thereof, or a deviation therefrom as permitted by Section 8.17(f)
or Section 9.10(d), as applicable, or that result from an Operating Emergency as
contemplated in those Sections, or that are required to be made under the
Station Two Contracts in the absence of an approved Operating Budget, and (ii)
that should ordinarily be capitalized in accordance with the RUS Uniform System
of Accounts Bulletin 1767 B, as such Bulletin may be amended, modified, or
replaced from time to time (but subject to the Capitalization Guidelines).
Notwithstanding anything contained in this Section 8.17 or any provision of the
Station Two Contracts that purports to obligate an LG&E Company for the payment
of costs and expenses relating to the Reid Station (including, without
limitation, any such costs or expenses that
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would otherwise be includable in the "Operating Pass-Through Costs" payable by
LEM to Big Rivers for Station Two Unit Output), the LG&E Companies and Big
Rivers hereby agree that any operating and maintenance expense allocated to the
Reid Station under Section 13.8 of the Station Two Operating Agreement, and
which otherwise constitutes an expense for a "Capital Asset" under the Cost
Sharing Agreement, shall be allocated between and paid by Big Rivers and WKEC in
accordance with the payment and reimbursement procedures set forth in Article 7
of the Cost Sharing Agreement.
(b) Station Two Improvements made during the Phase I Subcontract
Term, including, without limitation, Station Two Improvements funded by draws
against amounts deposited by Big Rivers or Station Two Subsidiary into the
Station Two R&R Account, shall be paid for or reimbursed in accordance with this
Section 8.17, to the extent such expense is not the responsibility of Henderson.
Notwithstanding anything to the contrary in this Agreement or in any other
Operative Document, Big Rivers shall have no obligation to (1) authorize the
acquisition or construction of or pay for any Station Two Improvements unless
such Station Two Improvements are necessary, consistent with Prudent Utility
Practice, to maintain the Capacity of Station Two that is physically available
and can be legally utilized at 312 net MW (the "Station Two Rated Capacity"), or
to comply with any requirement of applicable Laws or administrative or judicial
interpretation of an applicable Law (including, without limitation, to comply
with any requirement of Environmental Law or any regulatory authority
(including, without limitation, any change in position of the KNREPC regarding
compliance with applicable opacity limitations based upon concurrent measurement
of particulate matter emissions affecting the Green Facility and which also
affects a Joint Use Facility), and including for the avoidance of doubt, and
without regard for the actual time of enactment or implementation of the same,
without limitation, the Proposed SIP Call and any Laws that may be enacted or
implemented pursuant thereto or in connection therewith) in which case Big
Rivers shall be obligated to so authorize the acquisition or construction of and
pay for (based on the proportion of Capacity allocation then existing between
Big Rivers and Henderson and otherwise in accordance with this Section 8.17)
such Station Two Improvements, (2) make any
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expenditure for Station Two Improvements which would not be capitalized pursuant
to the Accounting Practices (as interpreted, modified or supplemented by the
Capitalization Guidelines), (3) make any expenditure in connection with any
personal property or other asset which does not constitute a Station Two
Improvement (other than such expenditures as may be required by Big Rivers as a
result of any breach or default by Big Rivers under this Agreement or any of the
other Operative Documents, or pursuant to any indemnification or hold harmless
covenant of Big Rivers under this Agreement or any other Operative Documents
(unless such expenditures for such personal property or other asset is part of
Henderson Incremental Environmental O&M, in which event the provision of Section
8.16 of this Agreement shall govern, or unless such an expenditure involves a
repurchase of the End of Term Personal Property (defined in Section 10.35) by
Big Rivers in accordance with Section 10.35 of this Agreement), or (4) make any
expenditure for a Station Two Improvement the principal purpose of which is to
increase the Capacity of Station Two above the Station Two Rated Capacity or to
improve the efficiency of Station Two. Notwithstanding the limitations set forth
in subclauses (1), (3) and (4) of the immediately preceding sentence, if
requested by Station Two Subsidiary, Big Rivers shall authorize and approve, and
shall pay for (based on the proportion of Capacity then allocated to Big Rivers
from Station Two) all renewals, replacements and additions pursuant to Section
13.8(a)(3) of the Station Two Operating Agreement, Sections 6.3(c)(ii) and
6.3(d) of the Station Two Power Sales Agreement and Section 6 of the Joint
Facilities Agreement, to the extent such renewals, replacements and additions
are Station Two Improvements that comply with Subclause (2) above and are
required to be made to Station Two to comply with Big River's obligations under
any Station Two Contracts or the Bond Ordinance; provided, however, should a
dispute exist between the LG&E Companies and Big Rivers with respect to whether
the Station Two Contracts or the Bond Ordinance required any such expenditure,
the dispute shall be resolved, as between the LG&E Companies and Big Rivers,
pursuant to the dispute resolution procedures set forth in Article 15 of the
Participation Agreement (as contemplated in Section 13.5(e) of this Agreement).
All Station Two Improvements and all other renewals, replacements and additions
contemplated by this Section 8.17(b) shall in all events be further subject to
the approval rights, if any, of Henderson under the Station Two Contracts.
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(c) At least ten (10) days before the commencement of each quarterly
period referenced below, Station Two Subsidiary shall submit to Big Rivers a
forecast of cash requirements for each Station Two Improvement set forth in the
Annual Budget or any modification of that budget approved by the Operating
Committee under Section 8.15(b) of this Agreement (including specification of
requirements for Henderson Incremental Capital Costs and Henderson
Non-Incremental Capital Costs), together with a summary of all amounts that have
been required under the terms of the Station Two Contracts and/or the Bond
Ordinance to be deposited by Station Two Subsidiary into the Station Two R&R
Account (to the extent such information has been made available at that time by
Henderson), and that have been drawn out of that account to fund any one or more
Station Two Improvements. This forecast shall set forth cash requirements with
respect to such Station Two Improvements (i) for each quarterly period
commencing on the first day of June, September, December and March in which
costs for such Station Two Improvements shall become due and (ii) for each month
of the first two quarterly periods immediately following the issuance of the
forecast. Station Two Subsidiary shall revise and furnish the forecast to Big
Rivers no less often than every three months thereafter until completion of the
Station Two Improvement. Notwithstanding anything contained in this Section
8.17(c), Article 5 of the Cost Sharing Agreement or Section 2.3 of the Lease, or
elsewhere in this Agreement or any other Operative Document to the contrary,
none of Station Two Subsidiary or WKEC (in the case of the Lease), or WKEC (in
the case of the Cost Sharing Agreement) or LEM shall be obligated to pay for
their proportionate share, if any, of the costs and expenses associated with any
Station Two Improvement to a Joint Use Facility or a Henderson Incremental
Environmental O&M required in order for the Green Facility to comply with
applicable opacity limitations imposed under Laws unless the provisions of
Section 7.1 of the Cost Sharing Agreement or Section 2.3 of the Lease shall
require Station Two Subsidiary or WKEC to share in such costs and expenses, and
then solely to the extent so required by such provisions. Big Rivers and the
LG&E Companies (for themselves and on behalf of WKEC) each hereby acknowledge
that those Parties intend to include the costs for Station Two Improvements to
the Joint Use Facilities and Henderson Incremental Environmental O&M costs, to
the extent required to
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bring the Green Facility into compliance with applicable opacity limitations,
within the agreed upon procedure for allocation and sharing of such costs and
expenses as set forth in Section 7.1 of the Cost Sharing Agreement and Section
8.1 of the Lease.
(d) Station Two Subsidiary shall maintain an interest-bearing
account (the "Station Two Improvements Account") into which Big Rivers and
Station Two Subsidiary shall pay amounts as provided in this Section 8.17 and
from which Station Two Subsidiary shall be permitted to withdraw funds to pay
for Station Two Improvements at such time when Big Rivers or Station Two
Subsidiary, as applicable, shall have an obligation to pay for the same under
the Station Two Operating Agreement. On the first day of each month during the
Phase I Subcontract Term Station Two Subsidiary and Big Rivers shall each
deposit sufficient funds into the Station Two Improvements Account based on
their respective Station Two Improvement Sharing Ratios (defined in Section
8.17(e) below) but limited in the case of Big Rivers to the remaining Big Rivers
Contribution (as defined in Section 20.6 of the Participation Agreement) for
that Year with respect to Henderson Non-Incremental Capital Costs that are not
for Henderson Major Capital Repairs (as defined in the Participation Agreement)
(i) to cover all cash requirements forecast under Section 8.17(c) for that month
for all Station Two Improvements (less any excess between funds deposited and
interest accrued thereon and funds actually required for all Station Two
Improvements during the previous month) and (ii) to cover any shortfall between
funds deposited and funds actually required for all Station Two Improvements
during the previous month. With respect to funds deposited in the prior month,
which are remaining in the present month, and shortfalls in funds deposited in
the prior month relative to expenses for that month, Big Rivers' and Station Two
Subsidiary's obligation in the present month shall be adjusted proportionately
based on that Party's deposit during the prior month and that Party's relative
share of responsibility in that prior month for the Station Two Improvement for
which funds were withdrawn or not used. An illustration of the operation of this
Section is set forth in Schedule 8.17(d). Upon the expiration or earlier
termination of this Agreement (other than a Phase II Termination), all funds
remaining in the Station Two Improvements Account shall be immediately
distributed to Station Two Subsidiary and Big Rivers in accordance with the same
methodology as used in the prior sentence.
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(e) Station Two Improvement Sharing Ratios. Subject to the
provisions of Section 8.17(b), Station Two Subsidiary and Big Rivers shall
directly contribute to the payment of each Station Two Improvement in accordance
with its respective "Station Two Improvement Sharing Ratio," which will be as
follows:
(1) Each capital expenditure made by Big Rivers and/or Station
Two Subsidiary for a Station Two Improvement in accordance with
Section 8.17(d) of this Agreement and to comply with a new Law or
any revision to an existing Law, including but not limited to a new
or revised Environmental Law (including for the avoidance of doubt,
and without regard for the actual time for the enactment or
implementation of the same, without limitation, the Proposed SIP
Call and any Laws that may be enacted or implemented pursuant
thereto or in connection therewith), or to comply with any change in
applicable judicial or administrative interpretation of a Law,
occurring after the Effective Date shall be deemed a "Henderson
Incremental Capital Cost." Big Rivers' share of each Henderson
Incremental Capital Cost determined as of the date payment for such
Station Two Improvement is required to be made to the Station Two
Improvements Account pursuant to the forecast prepared by Station
Two Subsidiary pursuant to Section 8.17(c), shall be as follows: (i)
from the Effective Date until December 30, 2010, inclusive, 20%;
(ii) from January 1, 2011 to December 31, 2011, inclusive, 40.26%;
(iii) from January 1, 2012 until the Termination Date, inclusive,
33.9%. Station Two Subsidiary's share of each Henderson Incremental
Capital Cost shall be as follows: (i) from the Effective Date until
December 31, 2010, inclusive, 80%; (ii) from January 1, 2011 to
December 31, 2011, inclusive, 59.74%; and (iii) from January 1, 2012
until the Termination Date, inclusive, 66.1%.
(2) Each capital expenditure made by Big Rivers and/or Station
Two Subsidiary for a Station Two Improvement in accordance with
Section 8.17(d) of this Agreement, but which does not constitute a
Henderson Incremental Capital Cost, shall be deemed a "Henderson
Non-Incremental Capital Cost." Big Rivers' share of each Henderson
Non-
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Incremental Capital Cost, determined as of the date payment for such
Station Two Improvement is required to be made to the Station Two
Improvements Account pursuant to the forecast prepared by Station
Two Subsidiary pursuant to Section 8.17(c), shall be as follows: (i)
from the Effective Date until December 31, 2010, inclusive, 49%;
(ii) from January 1, 2011 to December 31, 2011, inclusive, 40.26%;
and (iii) from January 1, 2012 until the Termination Date,
inclusive, 33.9%. Station Two Subsidiary's share of each Henderson
Non-Incremental Capital Cost shall be as follows: (i) from the
Effective Date until December 31, 2010, inclusive, 51%; (ii) from
January 1, 2011 to December 31, 2011, inclusive, 59.74%; and (iii)
from January 1, 2012 until the Termination Date, inclusive, 66.1%.
(f) Station Two Subsidiary and Big Rivers agree with each other as
follows: Station Two Subsidiary shall immediately notify the Operating Committee
of any anticipated departure of 10% or more from the budget for Station Two
Improvements or for operating and maintenance expenses included in any approved
Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a)
operate within 90 percent to 110 percent of the total approved budget for
Station Two Improvements included in an Operating Budget, and (b) to spend at
least 90 percent of the total approved budget for operating and maintenance
expenses included in an Operating Budget (not including the fuel or reagent
budget). Subject to the provisions set forth below, any increase of 10 percent
or more proposed by Station Two Subsidiary to either the Station Two
Improvements budget or the operating and maintenance expense budget set forth in
an approved Operating Budget shall be subject to review and approval by the
Operating Committee; provided, that such review and approval shall not apply to
the operating and maintenance expense budgets that are included in an Operating
Budget that is a part of the Initial Period Budgets, it being understood that
increases of 10 percent or more proposed by Station Two Subsidiary to those
budgets shall be permissible without that review and approval if the relevant
expenditures are consistent with Prudent Utility Practice, in which case the
additional costs that are allocable to Big Rivers under the Station Two
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Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by
Station Two Subsidiary unless they constitute Henderson Incremental
Environmental O&M required to be borne by both Station Two Subsidiary and Big
Rivers in the manner provided for in Section 8.16. If Station Two Subsidiary
exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive
of such costs as are for Henderson Major Capital Repairs) that are included in
an approved budget for Station Two Improvements in an Operating Budget, the
additional cost of those Henderson Non-Incremental Capital Costs that are
allocable to Big Rivers under the Station Two Contracts shall, as between Big
Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the
parties agree otherwise, or unless remaining portions of the Big Rivers
Contribution for that Year that were not included in the approved Operating
Budget are available as contemplated in Section 20.6.2 of the Participation
Agreement (in which event such amounts will be applied as contemplated in that
Section). Subject to the next succeeding sentence, if Station Two Subsidiary
exceeds 110 percent of the total approved budget for Henderson Incremental
Capital Costs, or for Henderson Non-Incremental Capital Costs for Major Capital
Repairs, in either case that are included in an approved Operating Budget, the
additional costs of those Station Two Improvements that are allocable to Big
Rivers under the Station Two Contracts shall, as between Big Rivers and Station
Two Subsidiary, be borne by
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Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute
resolution procedure under Article 15 of the Participation Agreement (and
contemplated in Section 13.5(e) of this Agreement) determines that at the time
Station Two Subsidiary proposed the applicable portions of the Operating Budget
(or modification thereof) relating to those expenditures Station Two Subsidiary
acted consistent with Prudent Utility Practice, in which case the additional
costs shall be borne by Station Two Subsidiary and Big Rivers in accordance with
Sections 8.17(d) and 8.17(e) of this Agreement. Notwithstanding the provisions
of the immediately preceding sentence, if Station Two Subsidiary exceeds 110
percent of the total of any approved budget for Henderson Incremental Capital
Costs, or for Henderson Non-Incremental Capital Costs for Major Capital Repairs,
that are included in an Operating Budget that is a part of the Initial Period
Budgets, the additional cost of those Station Two Improvements that are
allocable to Big Rivers under the Station Two Contracts shall, as between Big
Rivers and Station Two Subsidiary, be borne by Station Two Subsidiary unless the
Parties otherwise agree, the dispute resolution procedure set forth in Article
15 of the Participation Agreement determines that the purchase and installation
of those Station Two Improvements, and the costs thereof, are consistent with
Prudent Utility Practice, regardless of whether the relevant Initial Period
Budget, or Station Two Subsidiary's actions in connection with the same, were
consistent with Prudent Utility Practice at the time that the budget was
prepared, in which case the additional costs that are allocable to Big Rivers
under the Station Two Contracts shall, as between Big Rivers and Station Two
Subsidiary, be borne by Station Two Subsidiary and Big Rivers in accordance with
Sections 8.17(d) and 8.17(e) of this Agreement. If Station Two Subsidiary fails
or refuses to use reasonable efforts to spend at least 90 percent of the total
budget for Station Two Improvements or for operating and maintenance expenses
included in an approved Operating Budget (excluding that portion relating to
Henderson Incremental Environment O&M), and pursuant to the dispute resolution
procedure under Article 15 of the Participation Agreement it is determined that
such failure or refusal was inconsistent with Prudent Utility Practice, Station
Two Subsidiary shall make the omitted expenditures as required pursuant to the
applicable dispute resolution procedure. Notwithstanding anything contained in
this Section 8.17(f) to the contrary, Station Two Subsidiary shall in no event
be required to expend the monies included in an approved Operating Budget where
to do so would cause Station Two Subsidiary to be in breach or default under any
Station Two Contract. Additional capital expenditures incurred by Station Two
Subsidiary in response to an Operating Emergency (as defined in the
Participation Agreement) which are not already included in an approved Operating
Budget, and which are allocated to Big Rivers under the Station Two Contracts
shall, as between Big Rivers and Station Two Subsidiary, be paid for by Station
Two Subsidiary unless (a) the same represents a Henderson Incremental Capital
Cost or expenditures for a Henderson Major Capital Repair (as defined in the
Participation Agreement), in which case such expenditures shall be paid by
Station Two Subsidiary and Big Rivers in accordance with Sections 8.17(d) and
8.17(e), or (b) there are remaining amounts in the Big Rivers Contribution for
that Year that were not included in the budget for Henderson Non-Incremental
Capital Costs in the approved Operating Budget, as contemplated in Section
20.6.2 of the Participation Agreement, in which case that remaining amount will
be allocated to any Henderson Non-Incremental
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Capital Costs in that Year resulting from that Operating Emergency as
contemplated in Section 20.6.2.
8.18 Reimbursement for Debt Service. At the Closing of the Phase I
Subcontract and thereafter on the first day of each month during the Phase I
Subcontract Term, commencing with the first day of the month following the
Closing, Station Two Subsidiary or its designated Affiliate shall pay to Big
Rivers a monthly payment, determined as set forth below, for that portion of the
Debt Service (as defined in the Bond Ordinance) allocable to and payable by Big
Rivers pursuant to Section 6.3(a) of the Station Two Power Sales Agreement
during that current month; provided, that Station Two Subsidiary's payment
obligation with respect to any Debt Service paid or payable by Big Rivers during
the month in which the Closing occurs shall be proportionally reduced by a
fraction, the numerator of which is the total number of days in that month which
preceded the Closing and the denominator of which is the total number of days in
that month; and provided further, that Station Two Subsidiary shall have no
payment obligation to Big Rivers hereunder with respect to Debt Service paid by
Big Rivers during any month that precedes the month in which the Closing occurs.
The monthly payment by Station Two Subsidiary (or its designated Affiliate)
relative to each such Debt Service payment by Big Rivers shall be an amount
equal to one-half of the portion of the Debt Service allocable to and payable by
Big Rivers pursuant to Section 6.3(a) of the Station Two Power Sales Agreement
during that current month.
8.19 Big Rivers' Performance Responsibility. Notwithstanding anything in
Section 8 of this Agreement, entitled "Phase I Subcontract," to the contrary,
throughout the Phase I Subcontract Term, Big Rivers shall continue to be
primarily responsible to Henderson for the full performance of all obligations
and covenants made under the Station Two Contracts in accordance with the
respective terms thereof, and for any and all claims, liabilities, expenses,
actions, damages, losses or other sums that are claimed by or otherwise due to
Henderson arising out of or resulting from any breach or default by Big Rivers
in its performance of covenants and obligations under the Station Two Contracts.
The LG&E Companies, with respect to their respective performance obligations
under this Section 8, have agreed to
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indemnify and save harmless Big Rivers in the manner set forth in Section
10.15(a) of this Agreement.
9. PHASE II ASSIGNMENTS. During the Phase II Assignment Term (as defined in
Section 9.3), Big Rivers shall assign to Station Two Subsidiary certain of its
rights and responsibilities under the Station Two Contracts (the "Phase II
Assignment"), in lieu of the subcontracting arrangements described in Section 8
of this Agreement, entitled "Phase I Subcontract," upon and subject to the terms
and conditions of this Agreement (including this Section 9).
9.1 Assignment. Effective as of the Phase II Effective Date, and without
any additional consideration from Station Two Subsidiary or any of the other
LG&E Companies, Big Rivers hereby grants, sells, bargains, conveys, transfers
and assigns to Station Two Subsidiary, its successors and permitted assigns,
except as otherwise provided in this Section 9.1 and Sections 9.4 and 9.5 of
this Agreement, all of Big Rivers' rights, title and interests under, in and to
the following agreements and undertakings (or portions thereof), as those
agreements or undertakings have been amended through the date of this Agreement
or any amendments to those agreements or undertakings effected pursuant to this
Agreement, including, without limitation, the 1993 Amendments and the 1998
Amendments, which rights, title and interests shall remain with Station Two
Subsidiary, its successors and permitted assigns, throughout the Phase II
Assignment Term:
(a) the Station Two Power Sales Agreement;
(b) the Station Two Operating Agreement; and
(c) the Joint Facilities Agreement (the agreements or portions
thereof described in (a) through (c), above, but subject to any modifications of
portions of such agreements in this Section 9.1 or Sections 9.4 or 9.5, being
hereinafter collectively referred to as the "Assigned Station Two Contracts").
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The foregoing assignments by Big Rivers to Station Two Subsidiary shall be
irrevocable throughout the Phase II Assignment Term absent an earlier
termination of this Agreement in accordance with its terms. The Parties
acknowledge that Big Rivers shall retain substantial rights and obligations
under the "Terms of General Applicability" (defined in Section 9.5 of this
Agreement), and that such Terms of General Applicability will continue to inure
to the benefit of, and will continue to be binding upon and enforceable against,
Big Rivers as the context of such provisions shall require (or as further
described in Section 9.5 of this Agreement). The Terms of General Applicability
shall also inure to the benefit of, and shall be binding upon and be enforceable
against, Station Two Subsidiary as the context of such provisions shall require
(or as further described in Section 9.5 of this Agreement). Notwithstanding any
provision of Section 9 of this Agreement, entitled "Phase II Assignments," to
the contrary, the provisions of Section 11 of this Agreement, entitled
"Additional Agreements Respecting Station Two Power," shall govern the rights
and obligations of the Parties with respect to the matters provided for in
Section 28 of the Station Two Power Sales Agreement.
9.2 Assumption of Assumed Station Two Liabilities. Station Two Subsidiary
hereby agrees as of the Phase II Effective Date to accept the grant, sale,
bargain, conveyance, transfer and assignment by Big Rivers to Station Two
Subsidiary, its successors and permitted assigns, of Big Rivers' rights, title
and interests under, in and to the Assigned Station Two Contracts during the
Phase II Assignment Term, as contemplated in Section 9.1 of this Agreement, and
hereby agrees as of the Phase II Effective Date to assume, perform and
discharge, except as otherwise provided in Sections 9.4 and 9.5 of this
Agreement, such obligations of Big Rivers' under the Assigned Station Two
Contracts which arise or accrue on or after the Phase II Effective Date and
during the Phase II Assignment Term (the "Assumed Station Two Liabilities").
Notwithstanding anything contained in this Section 9, entitled "Phase II
Assignments," or any provision of the Station Two Contracts that purports to
obligate an LG&E Company for the payment of costs and expenses relating to the
Reid Station or any of the Joint Use Facilities that may be owned by Big Rivers,
the LG&E Companies and Big Rivers hereby agree that their respective rights and
obligations as to each other for such costs
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and expenses shall nonetheless be governed solely by the provisions of the Cost
Sharing Agreement, the Facilities Operating Agreement, the Power Purchase
Agreement, the Lease or the Participation Agreement, as applicable.
9.3 Term of Assignment. The term (the "Phase II Assignment Term") of the
assignment by Big Rivers to Station Two Subsidiary, its successors and permitted
assigns, of certain rights and obligations under the Assigned Station Two
Contracts, as contemplated in Section 9.1 of this Agreement, shall commence on
the Phase II Effective Date and shall end on the earlier of (a) December 31st
that is closest to the twenty-fifth anniversary of the Effective Date or (b) the
date of any termination of this Agreement pursuant to Section 13 of this
Agreement, entitled "Termination; Default; Remedies."
9.4 Excluded Station Two Contracts or Liabilities. Notwithstanding Section
9.2 of this Agreement, Station Two Subsidiary shall not as of the Phase II
Effective Date assume, and shall not in any manner become responsible or liable
for, and Big Rivers shall retain, pay and perform, any debts, obligations or
liabilities of Big Rivers, whether known or unknown, fixed, contingent or
otherwise arising under the following contracts or portions thereof:
(a) all Station Two Contracts (or portions thereof) except for the
Assigned Station Two Contracts, including, without limitation: the 1980 Funds
Agreement (as defined on Exhibit A attached hereto); the Agreement for
Transmission and Transformation Capacity dated April 11, 1975; the Switchyard
Agreement dated June 1, 1978; the Spare Transformer Agreement dated July 11,
1972 (subject, however, to those further rights granted by Big Rivers and
Henderson to Station Two Subsidiary and WKEC for Station Two Subsidiary's or
WKEC's use of the Spare Transformer set forth in Section 10.28 of this
Agreement); the letter agreement dated December 22, 1982; the letter from Big
Rivers to Henderson dated April 3, 1989; the letter agreement dated July 30,
1984 (regarding the Henderson - SEPA Contract); the Systems Reserves Agreement
dated January 1, 1974, (it being understood by the Parties that the rights and
responsibilities of the LG&E Companies with respect to operating reserves and
system reserves during the Term shall be set forth solely in the New Reserves
Agreement
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identified in Section 10.30 of this Agreement); the Amended Interconnection
Agreement dated October 13, 1981; the Agreement dated August 31, 1981; and the
First Amendment to Amended Interconnection Agreement dated January 10, 1989;
(b) the obligations and liabilities of Big Rivers set forth in or
arising under the specific provisions of the Assigned Station Two Contracts as
described below:
(1) The Station Two Power Sales Agreement - Section 10.3;
Section 15.2(4); Section 23.2; Section 25 (Assignment), it being
hereby agreed by Big Rivers and Henderson that Station Two
Subsidiary shall have the right to assign its rights and obligations
under the Station Two Power Sales Agreement pursuant to Section 15.1
of this Agreement; and Sections 3.8, 19.2 and 19.3, it being
understood by the Parties that the respective rights and obligations
of Henderson and Big Rivers under those Sections are being retained
by those Parties, but are being suspended, modified or supplemented
by the provisions of Sections 11.5, 10.3(g) and 10.3(f),
respectively, of this Agreement during the Phase I Subcontract Term
and the Phase II Assignment Term.
(2) The Station Two Operating Agreement - Sections 4.8, 4.9,
4.10 and 4.11 (relating to the installation costs of the Station Two
FGD System and the billing and payment procedures relating thereto),
the full costs of which shall remain with and will be paid and
discharged by Henderson and Big Rivers in accordance with the
provisions set forth in such sections; Section 5 (Transmission and
Transformation Facilities); Section 6 (Joint Use Facilities);
Section 7 (Fuel Supply), except that the provisions of Section 7.2
shall be assumed by Station Two Subsidiary; Section 11 (Construction
Assistance); Section 12 (Start-up Assistance); Section 13.8(d)
(relating to operation, maintenance and repair of transmission and
transformation facilities); Section 13.10, but solely to the extent
such provision contemplates access to transmission and
transformation facilities or other lands, properties and/or
facilities in which Station Two Subsidiary or any of its Affiliates
has no interest as an operator or lessee; Section 20.2, but solely
with respect to any responsibility or indemnity or hold harmless
obligation of Big Rivers arising under Section 20.2 to the
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extent (A) relating to events or circumstances occurring or existing
prior to the Effective Date, or (B) relating to liability or expense
resulting from or by reason of the negligence or willful misconduct
of Big Rivers or its authorized agents, employees or
representatives, or resulting from or by reason of Big Rivers breach
or default of this Agreement, any of the Station Two Contracts or
any of the Operative Documents, without regard for when such
liability or expense shall arise; Section 22.1, but solely with
respect to any indemnification and hold harmless obligations of Big
Rivers arising under Section 22.1 to the extent (A) relating to
events or circumstances occurring or existing prior to the Effective
Date, or (B) relating to liability or expense resulting from the
negligence or any malfeasance or nonfeasance of Big Rivers, its
agents, servants, employees and representatives, or from the breach
of this Agreement, any of the Station Two Contracts or any of the
other Operative Documents, without regard for when such liability or
expenses shall arise; Section 34 (Sale or Other Disposition of
Plant); and Section 37 (Assignment), it being agreed that Station
Two Subsidiary shall have the right to assign its rights and
obligations under the Station Two Operating Agreement pursuant to
Section 15.1 of this Agreement.
(3) The Joint Facilities Agreement - Section 3.1, to the
extent that such provision requires Big Rivers to allocate to the
continuing joint use of the Parties (which shall be inclusive of the
LG&E Companies and Henderson) in the operation of Station Two and
the Reid Station certain auxiliary facilities (including
modifications thereto), provided, that any auxiliary facilities in
which WKEC or any of its Affiliates holds a leasehold interest, and
only for so long as the term of such interest, shall continue to be
allocated for the joint use of the Parties and will continue to be
subject to the modifications contemplated by Section 3.1 of the
Joint Facilities Agreement; Section 3.3, to the extent such
provision requires Big Rivers to allocate the Green Station FGD
System Facilities (including modifications thereto) for the
continuing joint use of the Parties (which shall be inclusive of the
LG&E Companies and Henderson) in the operation of Station Two and
the Reid Station, provided, that (i) to the extent of WKEC's or any
of its Affiliate's leasehold interest in the Green Station FGD
System Facilities, and only for so long as the term of such
interest, WKEC or
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its Affiliate (as applicable) shall continue to allocate such
Facilities for the joint use of the Parties in their operation of
Station Two, the Reid Station and the Green Generating Facility, and
(ii) Station Two Subsidiary shall be entitled throughout the Phase
II Assignment Term to receive the payment from Henderson of the
carrying costs of the Green Station FGD System Facilities set forth
in Section 3.3 of the Joint Facilities Agreement (as such section
has been modified by Big Rivers and Henderson by the 1998
Amendments); Section 4 (Title To Joint Use Facilities), provided,
that Big Rivers and Henderson acknowledge that WKEC or its Affiliate
shall have a leasehold interest in Big Rivers' Joint Use Facilities
during the Phase II Assignment Term, and LEM commits that any Joint
Use Facilities in which any of its Affiliates holds a leasehold
interest, and only for so long as the term of such interest, shall
continue to be allocated for the joint use of Henderson and Station
Two Subsidiary; Section 15 (Assignment), it being hereby agreed by
Henderson and Big Rivers that Station Two Subsidiary shall have the
right to assign its rights and obligations under the Joint
Facilities Agreement pursuant to Section 15.1 of this Agreement; and
any other provisions in the Joint Facilities Agreement to the extent
the joint facilities covered thereby relate to transmission and
facilities related to transmission, but only with respect to such
transmission and related facilities, including, without limitation,
Big Rivers' continuing obligation to maintain and operate, at its
cost, any such transmission and related facilities in accordance
with the operating standards set forth in the Joint Facilities
Agreement.
(4) Section 8 of the 1993 Amendments relating to
decommissioning costs of Station Two to be borne by Big Rivers and
Henderson, with Big Rivers' obligation thereunder to remain
unchanged;
(c) All obligations and liabilities of Big Rivers under the Terms of
General Applicability, as further described in Sections 9.5 of this Agreement
(provided, the LG&E Companies acknowledge that they (or certain of them) have
undertaken obligations and liabilities to Henderson under the Terms of General
Applicability as described in Section 9.5 of this Agreement); and
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(d) Any debts, obligations or liabilities of Big Rivers to Henderson
(including any liability for reclamation or corrective actions) that now exist,
or may hereafter arise, for any Environmental Violations or Environmental
Conditions existing as of, or prior to, the Effective Date. Nothing in this
subsection (d) shall affect or limit the respective rights and obligations of
Big Rivers and the LG&E Companies under Section 10.15(j) of this Agreement.
9.5 Terms of General Applicability. The terms and provisions of the
Assigned Station Two Contracts set forth below (hereinafter, "Terms of General
Applicability") shall continue to create rights and obligations of Big Rivers,
enforceable against or for the benefit of Henderson, notwithstanding the
assignments of certain provisions of the Assigned Station Two Contracts effected
by this Agreement, and, by virtue of such assignments and the assumption of the
Assumed Station Two Liabilities, shall also create rights and obligations of
Station Two Subsidiary, its successors and permitted assigns, enforceable
against or for the benefit of Henderson. The Terms of General Applicability
shall inure to the benefit of all Parties and shall be binding upon and
enforceable against such Parties, as the context shall require. Notwithstanding
anything herein to the contrary, the Terms of General Applicability shall at all
times during the Phase II Assignment Term inure to the benefit of Henderson, and
shall be enforceable by Henderson against Big Rivers and Station Two Subsidiary,
respectively, as the context shall require. Big Rivers and Station Two
Subsidiary shall have no obligation or liability to the other Party for any
breach or default by it of the terms and provisions of any of the Terms of
General Applicability, except where the other Party exercises such other Party's
right in accordance with this Agreement to cure Big Rivers' or Station Two
Subsidiary's (as the case may be) breach or default thereof and for which said
other Party seeks indemnification, a right of contribution or other remedy to
which it is entitled as a consequence of the cure effected by such other Party,
it being understood by Big Rivers and Station Two Subsidiary that the covenants
in the Terms of General Applicability are made by each of them solely for
Henderson's benefit and not for the benefit of the other Party. In addition,
neither Big Rivers nor Station Two Subsidiary shall have any obligation or
liability to Henderson by reason of any breach or default by the other Party
under the Terms of General Applicability. Henderson further agrees that during
the Phase II Assignment Term it
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shall perform all obligations it is required to perform under the Terms of
General Applicability for the benefit of Big Rivers and Station Two Subsidiary.
(a) The following Sections of the Station Two Power Sales Agreement,
subject to the exceptions and modifications set forth below, shall constitute
Terms of General Applicability in the Station Two Power Sales Agreement Section
11 (Annual Audit); Section 13 (Uncontrollable Forces - Continuing Obligation for
Payments); Section 14 (Arbitration); Section 15 (Default), except that (i)
neither Big Rivers nor Station Two Subsidiary (nor any other LG&E Company), nor
their respective successors or permitted assigns, shall be responsible for the
default of the other Party in their performance of any one or more of the
provisions of the Station Two Power Sales Agreement, (ii) clause (b) of Section
15.2 of the Station Two Power Sales Agreement shall not apply during the Phase
II Assignment Term, and (iii) the default provisions of Section 15 of the
Station Two Power Sales Agreement shall be in addition to, and not in limitation
of, the provisions regarding default set forth in Section 13 of this Agreement;
Section 16 (Waiver); Section 17 (Notices), except that the Parties shall provide
all notices, consents, payments and other communications to Station Two
Subsidiary and the other LG&E Companies pursuant to Section 18.3 of this
Agreement; Section 21 (Henderson-Daviess and City Electric Systems), provided,
however, that each Party's obligations with respect to compliance with the
Ruling Request during the Phase II Assignment Term are as further described in
Sections 9.7, 10.2, 10.5, 10.6, and 10.18 of this Agreement; Section 22 (Term
and Termination); Section 23 (Amendments), provided, that in the event Station
Two Subsidiary desires to amend, modify or alter the Station Two Power Sales
Agreement (with the consent of Henderson), and has obtained the prior consent of
Big Rivers as contemplated elsewhere in this Agreement, then upon the request of
Station Two Subsidiary, Big Rivers shall promptly request the approval of such
amendment, modification or alteration from the Administrator of the RUS as
contemplated in Section 23.2 of the Station Two Power Sales Agreement (assuming
that approval shall still be required), and Big Rivers agrees to use its
reasonable best efforts (at the expense of Station Two Subsidiary) to obtain
that approval at the earliest practicable time; and Section 24 (Severability),
except that this
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provision shall not be enforced or interpreted by any Party in such a way as to
materially frustrate the essential objectives of any of the Parties as expressed
in this Agreement.
(b) The following Sections of the Station Two Operating Agreement,
subject to the exceptions and modifications set forth below, shall constitute
Terms of General Applicability in the Station Two Operating Agreement Section 20
(Inspections, Right of Access), except that each Party shall be responsible for
providing access to its premises for the purposes specified in Section 20.1, and
each Party shall be responsible under Section 20.2 for the safety of its own
employees and representatives while on another Party's premises and to indemnify
such other Party for loss or damage resulting from injuries to those
representatives or employees while on such other Party's premises, unless such
loss or damage is due to the negligence or willful misconduct of such other
Party; Section 21 (Relationship of the Parties); Section 23 (Uncontrollable
Forces); Section 24 (Arbitration), except that any arbitrable matter between Big
Rivers and any LG&E Company shall be arbitrated instead pursuant to the terms
set forth in the Participation Agreement; Section 25 (Default), except that
neither Big Rivers nor Station Two Subsidiary (nor any other LG&E Company), nor
their respective successors or permitted assigns, shall be responsible for the
default of the other Party in their performance of any one or more provisions of
the Station Two Operating Agreement, and the default provisions of Section 25
shall be in addition to and not in limitation of, the provisions regarding
default set forth in Section 13 of this Agreement, entitled "Termination;
Default; Remedies;" Section 26 (Waiver); Section 27 (Notices), except that the
Parties shall provide all notices, payments and other communications to Station
Two Subsidiary and the other LG&E Companies pursuant to Section 18.3 of this
Agreement; Section 30 (Compliance with Governmental Regulations), with each
Party to be solely responsible for its faithful observance and compliance with
such laws, rules and regulations; Section 33 (Term and Termination; Section 35
(Amendments), provided, that in the event Station Two Subsidiary desires to
amend, modify or alter the Station Two Operating Agreement (with the consent of
Henderson), and has obtained the prior consent of Big Rivers as contemplated
elsewhere in this Agreement, then upon the request of Station Two Subsidiary,
Big Rivers shall promptly request the approval of such amendment, modification
or alteration from the Administrator of
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the RUS as contemplated in Section 35.2 of the Station Two Operating Agreement
(assuming that approval shall still be required), and Big Rivers agrees to use
its reasonable best efforts (at the expense of Station Two Subsidiary) to obtain
that approval at the earliest practicable time; and Section 36 (Severability),
except that this provision shall not be enforced or interpreted by any Party in
such a way as to materially frustrate the essential objectives of the LG&E
Companies as expressed in this Agreement.
(c) The following Sections of the Joint Facilities Agreement,
subject to the exceptions and the modifications set forth below, shall
constitute Terms of General Applicability in the Joint Facilities Agreement -
Section 3.2, whereby Henderson allocates for the continuing joint use of the
Parties, and their respective successors and permitted assigns, in the operation
of Station Two and the Reid Station certain designated auxiliary facilities
(including, without limitation, those facilities identified on Exhibit 1, Pages
1 and 2, Part B to the 1993 Amendments and Exhibit 1, page 3, Parts A and B, to
the 1993 Amendments); Section 7 (Access); Section 8 (Term); Section 10
(Uncontrollable Forces); Section 13 (Amendments), provided, that in the event
Station Two Subsidiary desires to amend, modify or alter the Joint Facilities
Agreement (with the consent of Henderson), and has obtained the prior consent of
Big Rivers as contemplated elsewhere in this Agreement, then, upon the request
of Station Two Subsidiary, Big Rivers shall promptly request the approval of
such amendment, modification or alteration from the Administrator of the RUS as
contemplated in Section 13.2 of the Joint Facilities Agreement (assuming that
approval shall still be required), and Big Rivers agrees to use its reasonable
best efforts (at the expense of Station Two Subsidiary) to obtain that approval
at the earliest practicable time.
9.6 Consents to Assignment. Henderson hereby consents for all purposes to
the assignment by Big Rivers to Station Two Subsidiary of the Assigned Station
Two Contracts, and the assumption by Station Two Subsidiary of the Assumed
Station Two Liabilities thereunder, upon the terms and conditions of this
Agreement. Henderson hereby waives any right of first offer or first purchase
(the "Right of First Offer") that it may have under Section 34 of the Station
Two Operating Agreement or under any other provision of the Station Two
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Contracts, or otherwise, with respect to the Assets of Big Rivers or the Station
Two Assets by reason of such assignment and assumption.
9.7 Sale of Station Two Surplus Capacity. The Parties hereby affirm and
agree that, during the Phase II Assignment Term, Station Two Surplus Capacity
shall be purchased and sold in accordance with the terms of the Station Two
Power Sales Agreement and as otherwise provided in this Section 9.7:
(a) All Station Two Surplus Capacity allocated to Station Two
Subsidiary (as Big Rivers' assignee) under the Station Two Power Sales Agreement
shall be purchased by Station Two Subsidiary, or its successors or permitted
assigns, in accordance with that agreement, including, without limitation, in
accordance with the requirement therein that Station Two Subsidiary pay to
Henderson or the Trustee all Capacity charges for the Station Two Surplus
Capacity under Section 6.1 of the Station Two Power Sales Agreement. In
addition, Station Two Subsidiary (or its successors or permitted assigns) may,
but shall not be obligated to, purchase from Henderson (1) all surplus Capacity
resulting from good faith overestimates of the needs of the City and its
inhabitants at such times as such surplus Capacity is offered to Station Two
Subsidiary, pursuant to Section 3.4 of the Station Two Power Sales Agreement,
and (2) all or a designated portion of any Excess Henderson Energy, as
contemplated in Section 11.5 of this Agreement. However, Station Two Subsidiary
(or its successors or permitted assigns) shall be obligated to purchase from
Henderson all Energy associated with Excess Henderson Capacity in accordance
with Section 11.5 of this Agreement.
(b) Notwithstanding the obligation of Station Two Subsidiary to
Henderson to pay such Capacity charges under Section 9.7(a) of this Agreement,
Big Rivers shall promptly pay to Station Two Subsidiary (or its successors or
permitted assigns) on each Monthly Payment Date during the Phase II Assignment
Term an amount (the "Debt Service and R&R Capacity Payment") equal to the sum of
(i) one-half of the portion of Debt Service allocable to and payable by Station
Two Subsidiary (as the assignee of Big Rivers) pursuant to Section 6.3(a)
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of the Station Two Power Sales Agreement during such month plus (ii) the
Capacity charges that are due to Henderson or the Trustee during such month
under the Station Two Power Sales Agreement, and that are attributable to: (A)
required payments into the Station Two R&R Account pursuant to Section
6.3(c)(ii) of the Station Two Power Sales Agreement; and (B) required payments
for the costs for Station Two Improvements under Section 6.3(d) of the Station
Two Power Sales Agreement or that may otherwise be a required payment for a
Station Two Improvement under Section 6.1 of the Station Two Power Sales
Agreement (subject, however, to the payment obligations relating to Station Two
Improvements set forth in Section 9.10 of this Agreement) or under Section 9.10
of this Agreement. Station Two Subsidiary shall invoice Big Rivers prior to the
fifth day of each month for the Debt Service and R&R Capacity Payment (exclusive
of any payment under (iii) above relating to a Station Two Improvement, which
shall not be invoiced hereunder and shall be paid by Big Rivers in accordance
with the terms of Section 9.10(c) of this Agreement) due for such month. Big
Rivers' payment for these Debt Service R&R Capacity Payments shall be made to a
bank account designated from time to time by Station Two Subsidiary for receipt
of these Debt Service and R&R Capacity Payments and may be immediately drawn
from such account by Station Two Subsidiary for payment of such obligation or to
reimburse Station Two Subsidiary if it has already paid such obligation. Big
Rivers and Station Two Subsidiary agree to implement and employ an adjustment
procedure for the payments owing by Big Rivers to Station Two Subsidiary as
contemplated above (including for this specific purpose all of such Debt
Services and R&R Capacity Payments) comparable to that provided for in Section
8.12(b) of this Agreement, based upon the annual reconciliation of the Capacity
charges under Section 9.4 of the Station Two Power Sales Agreement, and
reconciliation payments (if any) by Big Rivers to Station Two Subsidiary, or by
Station Two Subsidiary to Big Rivers, shall be made within the time required by
Section 8.12(b) for reconciliation payments between Big Rivers and LEM.
Notwithstanding anything herein to the contrary, in the event that the Phase II
Effective Date shall occur prior to the Phase I Effective Date, the respective
obligations of Big Rivers and Station Two Subsidiary for the portion of the Debt
Service due under Section 6.3(a) of the Station Two Power Sales Agreement to
Henderson or the Trustee during the month in which the Closing occurs shall be
determined as follows: (x) if such Debt Service
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payment is paid by Big Rivers to Henderson or the Trustee prior to the Closing,
then Station Two Subsidiary shall pay to Big Rivers at Closing an amount equal
to the product of (1) one-half of such Debt Service payment multiplied by (2) a
fraction, the numerator of which is the number of days that Station Two
Subsidiary will operate Station Two in that month (inclusive of the Closing
Date) and the denominator of which is the total number of days in that month;
and (y) if such Debt Service payment is due to Henderson or the Trustee after
the Closing, then Big Rivers shall pay to Station Two Subsidiary (at the Closing
or on the Monthly Payment Date, whichever is later) an amount equal to the
difference between (1) the Debt Service payment due to Henderson or the Trustee
in such month and (2) the product determined by application of the formula set
forth above in (x) of this sentence. Station Two Subsidiary shall in no event
have a payment obligation to Henderson, the Trustee or Big Rivers hereunder with
respect to Debt Service paid by Big Rivers during any month that precedes the
month in which the Closing occurs.
(c) All Station Two Surplus Capacity allocated to Station Two
Subsidiary, all surplus Capacity resulting from good faith over-estimates of the
needs of the City and its inhabitants offered to and purchased by Station Two
Subsidiary pursuant to Section 3.4 of the Station Two Power Sales Agreement, and
all Excess Henderson Energy and/or any Energy associated with Excess Henderson
Capacity purchased by Station Two Subsidiary from Henderson may be sold by
Station Two Subsidiary to LEM, subject, however, to the obligation of LEM to
sell such Power to Big Rivers as provided below. Consistent with Section 8.12(b)
of this Agreement, all such Capacity and Energy shall constitute Station Two
Unit Output during the Phase II Assignment Term. In lieu of any rights that Big
Rivers may have pursuant to Section 6.4(b) of the Power Purchase Agreement or
elsewhere to pay amounts to LEM in lieu of actually purchasing and accepting
delivery of Power thereunder, during the period of time that the Letter Ruling
shall remain in effect and continue to limit the distribution of Energy from
Station Two to customers within Henderson and Daviess Counties, Kentucky, Big
Rivers hereby covenants with the LG&E Companies and Henderson that Big Rivers
shall actually purchase and accept delivery from Station Two Subsidiary and/or
LEM, and Station Two
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Subsidiary and/or LEM hereby covenants to Henderson and Big Rivers that it shall
sell and deliver to Big Rivers, all Station Two Unit Output, less such amounts
(if any) of Station Two Power (x) as LEM and/or Station Two Subsidiary sells to
Henderson or otherwise delivers to Big Rivers pursuant to or in connection with
one or more Pre-Closing Development Agreements or Economic Development
Agreements as contemplated in Sections 11.1 and 11.2 of this Agreement, or (y)
as LEM sells to Henderson Union under the LEM/Henderson Union Agreement, at the
price provided for in (d), below. Big Rivers agrees to resell all such Station
Two Unit Output purchased by Big Rivers solely to all or any of Henderson Union,
Green River or Henderson, including, without limitation, pursuant to the HMP&L
Contract, for retail distribution solely within Henderson and Daviess Counties,
Kentucky. All such Station Two Unit Output purchased by Big Rivers (other than
Power resold by Big Rivers to Henderson pursuant to the HMP&L Contract or Power
purchased from LEM in connection with a Pre-Closing Development Agreement or an
Economic Development Agreement) shall be credited toward any minimum obligation
of Big Rivers to purchase Power, and any maximum obligation of LEM to sell
Power, under Section 4.1 of the Power Purchase Agreement. Big Rivers agrees
that, until the Station Two Bonds have been fully retired, its sales of Power to
Henderson Union, Green River and Henderson (including, without limitation, Big
Rivers' sales pursuant to the HMP&L Contract) shall be fulfilled by Big Rivers
under its wholesale Power agreements with Henderson Union, Green River or
Henderson (or any successor agreements) by first using Station Two Unit Output
that is purchased from LEM and/or Station Two Subsidiary. For purposes of
determining whether Big Rivers has fulfilled its obligation under this Section
9.7(c), the amount of Station Two Unit Output which Big Rivers is obligated to
use in accordance with the prior sentence shall be equal to the hourly output of
Station Two allocated to Big Rivers or Station Two Subsidiary under Sections 3.3
and 4.1 of the Station Two Power Sales Agreement, less the hourly sales (if any)
of Station Two Unit Output by LEM to Henderson under the terms of one or more
Pre-Closing Development Agreements or Economic Development Agreements as
contemplated in Sections 11.1 and 11.2 of this Agreement and the hourly sales
(if any) of Station Two Unit Output by LEM to Henderson Union under the
LEM/Henderson Union Agreement. Henderson shall have the right to enforce the
provisions of this Section 9.7(c) against LEM, Station Two
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Subsidiary and Big Rivers. In the event the Power Purchase Agreement (or the
portions thereof requiring Big Rivers to purchase Power from LEM thereunder)
shall at any time expire or be terminated, or otherwise be rendered of no
further force or effect, for any reason prior to the expiration or termination
of this Agreement and LEM continues to have the right or obligation to receive
Station Two Unit Output, then Big Rivers agrees to actually purchase and accept
delivery from LEM and/or Station Two Subsidiary of, and LEM and/or Station Two
Subsidiary agrees to deliver to Big Rivers, all Station Two Unit Output (other
than Unit Output sold by LEM (x) to Henderson or otherwise delivered to Big
Rivers pursuant to or in connection with one or more Pre-Closing Development
Agreements or Economic Development Agreements or (y) to Henderson Union under
the LEM/Henderson Union Agreement) throughout the period commencing on that
expiration or termination date and expiring upon the redemption or retirement of
the Station Two Bonds, pursuant to this Section 9.7(c) and otherwise upon the
same terms and conditions as were set forth in the Power Purchase Agreement,
which Terms shall then be deemed to be incorporated by reference in this Section
9.7 to the extent they relate to Station Two Unit Output for all purposes.
(d) Consistent with Section 9.7(c) of this Agreement, all Station
Two Unit Output sold to Big Rivers by Station Two Subsidiary or LEM as
contemplated in Section 9.7(c) of this Agreement (other than Station Two Unit
Output sold in connection with one or more Pre-Closing Development Agreements or
Economic Development Agreements as contemplated in Sections 11.1 and 11.2 of
this Agreement) shall be sold either (1) at the Base Power Price established
pursuant to Section 6.4 of the Power Purchase Agreement, or, (2) in the case of
Station Two Surplus Capacity that is resold by Big Rivers to Henderson pursuant
to the HMP&L Contract, at the price provided for in Section 6.2(c) of the Power
Purchase Agreement.
(e) Notwithstanding any provision of this Agreement or any other
Operative Document to the contrary, including, without limitation, Section
9.7(c) of this Agreement, Big Rivers shall not at any time during the Phase II
Assignment Term be obligated to actually purchase
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and accept from LEM (in lieu of making the payments contemplated in Section
6.4(b) of the Power Purchase Agreement) any Station Two Unit Output to the
extent (but only to the extent) that Big Rivers does not then have the right to
resell that Power to Henderson (whether pursuant to the HMP&L Contract, one or
more Pre-Closing Development Agreements or Economic Development Agreements, or
otherwise), Henderson Union and Green River (or any of them) to meet the needs
of their respective customers located in Henderson County or Daviess County in
Kentucky, or there is no demand for such Station Two Unit Output from the
respective customers of Henderson, Henderson Union and Green River located in
Henderson or Daviess County, Kentucky, unless in any such situation the reason
that Big Rivers cannot resell such Station Two Unit Output to Henderson,
Henderson Union and/or Green River for distribution in those counties is due to
(1) a breach or default by Big Rivers of its wholesale Power agreement(s) with
Henderson, Henderson Union or Green River (that was not itself the direct result
of a breach or default by any LG&E Company or Affiliate of an LG&E Company under
any of the Operative Documents or the negligence or willful misconduct of any
LG&E Company or Affiliate of an LG&E Company), whether or not such agreements
are terminated by those Members as a result thereof, or (2) any other actions or
omissions on the part of Big Rivers or its employees, agents or representatives
that constitutes a breach or default by Big Rivers under any other agreement to
which it is a party (including without limitation, any Operative Document), that
violates applicable Laws, or that constitutes negligence or willful misconduct
by Big Rivers or its employees, agents or representatives. Big Rivers shall not,
by reason of the foregoing provisions, be released from its obligations under
Section 6.4(b) of the Power Purchase Agreement to pay LEM amounts in lieu of
purchasing and accepting delivery of the Station Two Unit Output as contemplated
above, if such provisions of the Power Purchase Agreement are applicable.
Notwithstanding the foregoing, and regardless of whether Big Rivers shall have
an obligation to also pay amounts to LEM pursuant to Section 6.4(b) of the Power
Purchase Agreement (and not in lieu of those payment obligations), in the event
Big Rivers shall not be released from its obligation to actually purchase and
accept delivery of Station Two Unit Output by reason of the circumstances (or
any of them) described in Subclauses (1) and (2), above, Big Rivers shall be
entitled, in its discretion, and in lieu of actually purchasing, accepting
delivery of and paying
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the entire price for that Unit Output (for which there is no demand for the
reasons described in Subclauses (1) and (2), above), to pay to LEM or Station
Two Subsidiary an amount for each megawatt-hour of Energy that it was obligated
to accept from LEM equal to (A) 16% multiplied by (B) the applicable Base Power
rate per megawatt-hour under Section 6.3 of the Power Purchase Agreement;
provided, that the foregoing right of Big Rivers to make payments in lieu of
accepting delivery of Station Two Unit Output shall apply only when there is
insufficient customer load in the two counties as described above, and then only
to the extent that Station Two Subsidiary shall have been given reasonable
advance notice from Big Rivers of the impending load constraints in Henderson
and/or Daviess Counties so that Station Two Subsidiary shall have had a
reasonable opportunity to reduce the outputs of Station Two accordingly. Big
Rivers shall in no event be released from any breach or default by Big Rivers
under this Agreement arising by reason of the actions, events or circumstances
described in Subclauses (1) or (2), above. The rights and obligations of LEM,
Station Two Subsidiary and Big Rivers, respectively, set forth in this Section
9.7(e), including, without limitation, Big Rivers' release from its obligation
to repurchase and accept from LEM any Station Two Unit Output pursuant to
Section 9.7(c) of this Agreement, shall be subject to Section 10.5 of this
Agreement and such Party's fulfillment of its obligations (provided such
obligations shall then be effective under such Section) under Section 10.6 of
this Agreement to cooperate in the refinancing of the Station Two Bonds and to
pay its percentage of the costs associated with such refinancing.
(f) Nothing contained in this Agreement or in the Power Purchase
Agreement shall be deemed to prevent LEM from selling to any Person any Energy
associated with the Station Two Unit Output without also selling to that Person
the associated Capacity, subject, however, to the provisions of Sections 9.7(c)
and 10.5 of this Agreement.
(g) Big Rivers, Henderson and Station Two Subsidiary each agree that
those costs contemplated in Section 6.3(f) and Section 6.3(g) of the Station Two
Power Sales Agreement as being payable by Big Rivers during the Phase I
Subcontract Term and by Station Two Subsidiary during the Phase II Assignment
Term shall not include costs and expenses
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associated with any damages arising out of any breach by Henderson, Big Rivers
or Station Two Subsidiary, respectively, of its obligations under this Agreement
or any Station Two Contract, or arising out of any negligence or willful
misconduct by Henderson, Big Rivers or Station Two Subsidiary, respectively, or
its agents or employees, all of which costs and expenses will be the sole
responsibility of such Party.
(h) Notwithstanding any provision of this Agreement or the Station
Two Contracts to the contrary, the Parties hereby agree that Station Two
Subsidiary (or its successors or permitted assigns) shall have the right to
off-set the amounts payable by Henderson to Station Two Subsidiary (or its
successors or permitted assigns) pursuant to Section 13.6 of the Station Two
Operating Agreement against the payments Station Two Subsidiary (or its
successors or permitted assigns) owes Henderson (payable to the Trustee during
the term of the Station Two Bonds) pursuant to Sections 6.1 and 6.2 of the
Station Two Power Sales Agreement, and that Henderson shall have the right to
off-set the amounts payable by Station Two Subsidiary (or its successors or
permitted assigns) to Henderson pursuant to Sections 6.1 and 6.2 of the Station
Two Power Sales Agreement against the payments that Henderson owes to Station
Two Subsidiary (or its successors or permitted assigns) pursuant to Section 13.6
of the Station Two Operating Agreement. Any such off-set shall be deemed to
discharge the relevant obligation against which the off-set is made, to the
extent of the amounts so off-set.
9.8 Budget Process for Phase II Assignment. The Parties acknowledge that
Station Two Subsidiary, as the assignee of Big Rivers, will perform the
obligations set forth in Section 14 of the Station Two Operating Agreement
(preparation of the Operating Budget) theretofore performed by Big Rivers, as
follows:
(a) Station Two Subsidiary shall prepare the Operating Budget for
the Contract Year as contemplated in the first sentence of Section 14.1 of the
Station Two Operating Agreement. Station Two Subsidiary will separately identify
therein each item that represents anticipated expenditures associated with (1) a
Station Two Improvement, including specification therein whether expenses
related to that Station Two Improvement are Henderson Incremental Capital Costs
or Henderson Non-Incremental Capital Costs, and (2) a Henderson Incremental
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Environmental O&M cost. As between Big Rivers and Station Two Subsidiary,
special arrangements described in Sections 9.9 and 9.10 below shall apply to all
Henderson Incremental Environmental O&M costs and Station Two Improvements.
Those distinctions among items in the Operating Budget shall have no meaning,
however, as between (x) Henderson and (y) Big Rivers and Station Two Subsidiary.
(b) Prior to submittal to Henderson of the Operating Budget for
Station Two as contemplated in the last sentence of Section 14.1 of the Station
Two Operating Agreement, and in any event on or before November 1 of each Year
subsequent to the Phase II Effective Date, Station Two Subsidiary shall submit
in writing to each member of the Operating Committee (the composition and
operating procedures of which are set forth in Section 8.15 of this Agreement) a
proposed Operating Budget for Station Two for the next Year. With respect to
operating and maintenance costs, within 30 days after receipt of Station Two
Subsidiary's proposed Operating Budget for Station Two, Big Rivers may propose
to the Operating Committee modifications to the operating and maintenance cost
components of the Operating Budget proposed by Station Two Subsidiary. The
Operating Committee shall meet in December and January of each Year to review
and discuss the Operating Budget proposed by Station Two Subsidiary and review
and approve any modifications thereof proposed by Station Two Subsidiary or Big
Rivers. The Operating Committee, by agreement of its members representing Big
Rivers and Station Two Subsidiary, may determine to adopt an amendment to the
operations and maintenance cost components of the proposed budget, in which case
the proposed budget will thereafter be as so amended. Absent agreement of the
members of both of those Parties to modify the budget proposed by Station Two
Subsidiary, as recommended by Big Rivers, Station Two Subsidiary will determine
what portion of Big Rivers' proposed modifications to the operations and
maintenance components of the Operating Budget it will adopt, if any, and its
decision shall be final as between the Big Rivers and Station Two Subsidiary.
With respect to any component of the Operating Budget which constitutes a
Station Two Improvement or Henderson Incremental Environmental O&M costs, within
60 days after its receipt of the proposed Operating Budget for Station Two from
Station Two Subsidiary, Big Rivers may also propose to the Operating Committee
modifications to such
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components of the Operating Budget as proposed by Station Two Subsidiary. The
Operating Committee, by agreement of its members representing Big Rivers and
Station Two Subsidiary, may determine to adopt an amendment to the components of
the Operating Budget relating to Station Two Improvements and Henderson
Incremental Environmental O&M, in which event the proposed budget will
thereafter be so amended. Absent agreement of the members of both Parties to
modify the budget proposed by Station Two Subsidiary relating to a Station Two
Improvement or a Henderson Incremental Environmental O&M cost, as proposed by
Big Rivers, the Operating Committee must approve those components of the
Operating Budget as proposed by Station Two Subsidiary if such budget is
consistent with Prudent Utility Practice; provided, that the responsibility of
Big Rivers and the LG&E Companies with respect to the costs incurred for items
identified in the Operating Budget shall be determined as provided elsewhere in
this Agreement. In the event of a dispute as to whether such budget (including
those amendments adopted by agreement) is consistent with Prudent Utility
Practice, those Parties will submit the dispute to arbitration consistent with
Section 15 of the Participation Agreement; provided, however, if the expenditure
disputed by Station Two Subsidiary and Big Rivers is ultimately determined to be
a required expenditure under the Station Two Operating Agreement, Big Rivers and
Station Two Subsidiary shall not have the right to further arbitrate such
expenditure and the expenditure shall be included in the Operating Budget for
Station Two and paid or shared by Big Rivers and the LG&E Companies in
accordance with the terms and provisions set forth in Section 9 of this
Agreement, entitled "Phase II Assignment." The Operating Budget, as approved in
accordance with this Section 9.8, shall be the only budget submitted by either
the LG&E Companies or Big Rivers to Henderson for its review as required by
Section 14 of the Station Two Operating Agreement; provided, however, that
Station Two Subsidiary shall be entitled to submit to Henderson an Operating
Budget that may be the subject of a dispute between Big Rivers and Station Two
Subsidiary to the extent required for compliance with the Station Two Operating
Agreement, it being understood by Big Rivers and Station Two Subsidiary that
their respective obligations for items set forth in that Operating Budget shall
thereafter be determined through the dispute resolution procedures described
above or as otherwise agreed by Big Rivers and Station Two Subsidiary. Henderson
shall have the final authority to modify and approve the budget or approve it
without
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modifications, subject however to whatever approval rights are available to
Station Two Subsidiary under the Station Two Operating Agreement.
(c) Notwithstanding anything in this Section 9.8 to the contrary,
the Operating Committee may not modify any of the terms, covenants or conditions
of this Agreement or any Station Two Contract.
9.9 Adjustment for Henderson Incremental Environmental O&M.
Notwithstanding the assignment to Station Two Subsidiary (or its successors or
permitted assigns) of the obligation to pay Capacity costs under Section 6.3 of
the Station Two Power Sales Agreement arising or accruing during the Phase II
Assignment Term, in the event any of those Capacity costs represent payments
attributable to Henderson Incremental Environmental O&M, such costs shall
continue to be initially paid by Station Two Subsidiary in accordance with that
agreement, but shall thereafter be shared by Station Two Subsidiary and Big
Rivers in accordance with this Section 9.9. If any of the operating and
maintenance expenses allocated to the Reid Station under Section 13.8 of the
Station Two Operating Agreement constitute Incremental Environmental O&M, such
costs shall be subject to the payment and reimbursement procedures set forth in
Section 2.3.3 of the Lease.
(a) Big Rivers shall pay to Station Two Subsidiary, Big Rivers'
Henderson Incremental Environmental O&M Share (as then applicable) of all
Henderson Incremental Environmental O&M incurred by Station Two Subsidiary
during the Phase II Assignment Term, as follows: (i) Big Rivers' payment shall
be paid to Station Two Subsidiary on each Monthly Payment Date in an amount
equal to Big Rivers' Henderson Incremental Environmental O&M Share, multiplied
by the Henderson Incremental Environmental O&M estimated by Station Two
Subsidiary to be incurred in such month by Station Two Subsidiary consistent
with the Operating Budget. Within 120 days after the end of each Year, Station
Two Subsidiary shall compute the Actual Henderson Environmental O&M for the
Year. Station Two Subsidiary shall compare the Actual Henderson Environmental
O&M with the aggregate payments made by Big Rivers pursuant to this Section
9.9(a) during such Year. If
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Big Rivers' Henderson Incremental Environmental O&M Share of the Actual
Henderson Environmental O&M is more than such payments made by Big Rivers (or on
its behalf), Big Rivers shall promptly pay such difference to Station Two
Subsidiary. If Big Rivers' Henderson Incremental Environmental O&M Share of the
Actual Henderson Environmental O&M is less than such payments made by Big
Rivers, Station Two Subsidiary shall promptly pay such difference to Big Rivers.
9.10 Station Two Improvements -- Forecasts, Budgeting and Payments.
(a) During the Phase II Assignment Term, "Station Two Improvement"
shall not include any operating and maintenance expenses allocated to the Reid
Station under Section 13.8 of the Station Two Operating Agreement that
constitute a "Capital Asset" under the Lease, it being understood that such
expenses shall instead be allocated between and paid by Big Rivers and WKEC or
its Affiliate in accordance with the payment and reimbursement procedures set
forth in Article 8 of the Lease. Station Two Improvements made during the Phase
II Assignment Term, including, without limitation, Station Two Improvements
funded by draws against amounts deposited by Big Rivers or Station Two
Subsidiary into the Station Two R&R Account, shall be paid for or reimbursed in
accordance with this Section 9.10. Notwithstanding anything to the contrary in
this Agreement or in any other Operative Document, Big Rivers shall have no
obligation to (1) authorize the acquisition or construction of or to pay for any
Station Two Improvements unless such Station Two Improvements are necessary,
consistent with Prudent Utility Practice, to maintain the Capacity of Station
Two that is physically available and can be legally utilized at the Station Two
Rated Capacity, or to comply with any requirement of applicable Laws or
administrative or judicial interpretation of an applicable Law (including,
without limitation, Environmental Law) or any regulatory authority (including,
without limitation, any change in position of the KNREPC regarding compliance
with applicable opacity limitations based upon concurrent measurement of
particulate matter emissions affecting the Green Facility and which also affects
a Joint Use Facility and including for the avoidance of doubt, and without
regard for the actual time of enactment or implementation of the same, without
limitation, the Proposed SIP Call and any
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Laws that may be enacted or implemented pursuant thereto or in connection
therewith), in which case Big Rivers shall be obligated to so authorize the
acquisition or construction of and pay for (based on the proportion of Capacity
allocation then existing between Station Two Subsidiary and Henderson and
otherwise in accordance with this Section 9.10) such Station Two Improvements,
(2) make any expenditure for Station Two Improvements which would not be
capitalized pursuant to the Accounting Practices (as interpreted, modified or
supplemented by the Capitalization Guidelines), (3) make any expenditure in
connection with Station Two Personal Property or other asset which does not
constitute a Station Two Improvement (other than such expenditures by Big Rivers
as may be required as a result of any breach or default by Big Rivers under this
Agreement or any of the other Operative Documents, or pursuant to any
indemnification or hold harmless covenant of Big Rivers under this Agreement or
any of the other Operative Documents) (unless such expenditure for such Station
Two Personal Property is part of Henderson Incremental Environmental O&M, in
which event the provisions of Section 9.9 of this Agreement shall govern, or
unless a purchase involves a repurchase of the End of Term Personal Property by
Big Rivers in accordance with Section 10.35 of this Agreement), or (4) make any
expenditure for a Station Two Improvement the principal purpose of which is to
increase the Capacity of Station Two above the Station Two Rated Capacity or to
improve the efficiency of Station Two. Notwithstanding the limitations set forth
in subclauses (1), (3) and (4) of the preceding sentence, if requested by
Station Two Subsidiary, Big Rivers shall authorize and approve, and shall pay
for, or shall promptly reimburse Station Two Subsidiary for (based on the
proportion of Capacity then allocated between Henderson and Station Two
Subsidiary) all renewals, replacements and additions pursuant to Section
13.8(a)(3) of the Station Two Operating Agreement, Sections 6.3(c)(ii) and
6.3(d) of the Station Two Power Sales Agreement and Section 6 of the Joint
Facilities Agreement, to the extent such renewals, replacements and additions
are Station Two Improvements that comply with subclause (2), above, and are
required to be made to Station Two to comply with any obligation of Big Rivers
or any LG&E Company under any Station Two Contracts or the Bond Ordinance;
provided, however, should a dispute exist between the LG&E Companies and Big
Rivers with respect to whether the Station Two Contracts or the Bond Ordinance
required any such expenditure, the dispute shall be resolved, as between the
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LG&E Companies and Big Rivers, pursuant to the dispute resolution procedures set
forth in Article 15 of the Participation Agreement (as contemplated in Section
13.5(e) of this Agreement). All Station Two Improvements and all renewals,
replacements and additions contemplated by this Section 9.10 shall in all events
be further subject to approval rights, if any, of Henderson under the Station
Two Contracts.
(b) At least ten (10) days before the commencement of each quarterly
period referenced below, Station Two Subsidiary shall submit to Big Rivers a
forecast of cash requirements for each Station Two Improvement set forth in the
Annual Budget or any modification of that budget approved by the Operating
Committee under Section 9.8 of this Agreement (including specification of
requirements for Henderson Incremental Capital Costs and Henderson
Non-Incremental Capital Costs), together with a summary of all amounts that have
been required under the terms of the Station Two Contracts and/or the Bond
Ordinance to be deposited by Station Two Subsidiary into the Station Two R&R
Account (to the extent such information has been made available at that time by
Henderson), and that have been drawn out of that account to fund any one or more
Station Two Improvements. This forecast shall set forth cash requirements with
respect to such Station Two Improvements (including all sums in the Annual
Budget to be paid under Section 13.8(a)(3) of the Station Two Operating
Agreement or as a component of Capacity charges under Section 6.3 of the Station
Two Power Sales Agreement, as applicable) (i) for each quarterly period
commencing on the first day of June, September, December and March in which
costs for such Station Two Improvements shall become due and (ii) for each month
of the first two quarterly periods immediately following the issuance of the
forecast. Station Two Subsidiary shall revise the forecast and furnish the
revised forecast to Big Rivers no less often than every three months thereafter
until completion of the Station Two Improvement. Notwithstanding anything
contained in this Section 9.10(b), Article 5 of the Cost Sharing Agreement or
Section 2.3 of the Lease, or elsewhere in this Agreement or any other Operative
Document to the contrary, none of LG&E Companies or WKEC shall be obligated to
pay for their proportionate share, if any, of the costs and expenses associated
with any Station Two Improvement to a Joint Use Facility or a
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Henderson Incremental Environmental O&M required in order for the Green Facility
to comply with applicable opacity limitations imposed under Laws unless the
provisions of Section 7.1 of the Cost Sharing Agreement or Section 2.3 of the
Lease shall require any such LG&E Company or WKEC to share in such costs and
expenses, and then solely to the extent so required by such provisions. Big
Rivers and the LG&E Companies each hereby acknowledge that those Parties intend
to include the costs for Station Two Improvements to the Joint Use Facilities
and Henderson Incremental Environmental O&M costs, to the extent required to
bring the Green Facility into compliance with applicable opacity limitations,
within the agreed upon procedure for allocation and sharing of such costs and
expenses as set forth in Section 7.1 of the Cost Sharing Agreement and Section
2.3 of the Lease.
(c) Big Rivers and Station Two Subsidiary shall pay into the Station
Two Improvements Account amounts as provided in this Section 9.10(c). Station
Two Subsidiary shall be permitted to withdraw such funds (x) for its own account
at such times when Big Rivers shall have an obligation to pay or reimburse
Station Two Subsidiary for the costs of Station Two Improvements, whether paid
or payable by Station Two Subsidiary directly to third parties or as a component
of the Capacity charges Station Two Subsidiary owes Henderson (or the Trustee)
pursuant to Section 9.7(a) of this Agreement (including without limitation, in
order to reimburse Station Two Subsidiary for amounts that were deposited by it
in the Station Two R&R Account that were subsequently drawn upon by Henderson or
the Trustee to fund one or more Station Two Improvements), or (y) to pay for a
Station Two Improvement at such time when Big Rivers or Station Two Subsidiary,
as applicable, shall otherwise have an obligation to pay for Station Two
Improvements under this Agreement or any of the Station Two Contracts. On the
first day of each month during the Phase II Assignment Term Station Two
Subsidiary and Big Rivers shall each directly deposit sufficient funds into the
Station Two Improvements Account based on their respective Station Two
Improvement Sharing Ratios (defined in Section 8.17(e)), as then applicable, but
limited in the case of Big Rivers to the remaining Big Rivers Contribution (as
defined in Section 20.6 of the Participation Agreement) for that Year with
respect to Henderson Non-Incremental Capital Costs that are not for Henderson
Major Capital Repairs (as defined in the Participation
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Agreement) (i) to cover all cash requirements forecast under or otherwise
specified in Section 9.10(b) of this Agreement for that month for all Station
Two Improvements (less any excess between funds deposited and interest accrued
thereon and funds actually required for all Station Two Improvements during the
previous month) and (ii) to cover any shortfall between funds deposited and
funds actually required for all Station Two Improvements during the previous
month. With respect to funds deposited in the prior month, which are remaining
in the present month, and shortfalls in funds deposited in the prior month
relative to expenses for that month, Big Rivers' and Station Two Subsidiary's
respective obligations in the present month shall be adjusted proportionally
based on that Party's deposit during the prior month and that Party's relative
share of responsibility in that prior month for the Station Two Improvements for
which funds were withdrawn or not used. An illustration of the operation of this
Section (and Section 8.17(d) of this Agreement) is set forth in Schedule 8.17(d)
attached to this Agreement. Upon the expiration or earlier termination of this
Agreement, all funds remaining in the Station Two Improvements Account shall be
immediately distributed to Station Two Subsidiary and Big Rivers in accordance
with the same methodology as is used in the prior sentence; provided, Station
Two Subsidiary may first withdraw and retain all such funds from the Station Two
Improvements Account (including interest accrued thereon) and apply such funds
(and interest), (i) to reimburse Station Two Subsidiary for all amounts
deposited by it into the Station Two R&R Account (and not otherwise paid by Big
Rivers to Station Two Subsidiary as required by Section 9.7(b) of this
Agreement) which were drawn upon by Henderson or the Trustee to fund any one or
more Station Two Improvements, and (ii) to fund any other Station Two
Improvements for which Station Two Subsidiary has a continuing obligation to
fund (whether directly or as a component of the Capacity charges under Section
6.3(d) of the Station Two Power Sales Agreement). To the extent amounts
remaining in the Station Two Improvements Account are insufficient to satisfy
the foregoing obligations to Station Two Subsidiary, Big Rivers shall pay and
satisfy those obligations within five (5) days after the expiration or
termination of this Agreement (unless this Agreement expressly provides
elsewhere for a later payment date).
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(d) Station Two Subsidiary and Big Rivers agree with each other as
follows: Station Two Subsidiary shall immediately notify the Operating Committee
of any anticipated departure of 10% or more from the budget for Station Two
Improvements or for operating and maintenance expenses included in any approved
Operating Budget. Station Two Subsidiary shall use reasonable efforts to (a)
operate within 90 percent to 110 percent of the total approved budget for
Station Two Improvements included in an Operating Budget, and (b) to spend at
least 90 percent of the total approved budget for operating and maintenance
expenses included in an Operating Budget (not including the fuel or reagent
budget). Subject to the provisions set forth below, any increase of 10 percent
or more proposed by Station Two Subsidiary to either the Station Two
Improvements budget or the operating and maintenance expense budget set forth in
an approved Operating Budget shall be subject to review and approval by the
Operating Committee; provided, that such review and approval shall not apply to
the operating and maintenance expense budgets that are included in an Operating
Budget that is a part of the Initial Period Budgets, it being understood that
increases of 10 percent or more proposed by Station Two Subsidiary to those
budgets shall be permissible without that review and approval if the relevant
expenditures are consistent with Prudent Utility Practice, in which case the
additional costs shall, as between Big Rivers and Station Two Subsidiary, be
borne by Station Two Subsidiary unless they constitute Henderson Incremental
Environmental O&M required to be borne by both Station Two Subsidiary and Big
Rivers in the manner provided for in Section 9.9. If Station Two Subsidiary
exceeds the total budget for Henderson Non-Incremental Capital Costs (exclusive
of such costs as are for Henderson Major Capital Repairs (as defined in the
Participation Agreement) that are included in an approved budget for Station Two
Improvements in an Operating Budget, the additional cost of those Henderson
Non-Incremental Capital Costs that are allocable to Station Two Subsidiary under
the Station Two Contracts shall, as between Big Rivers and Station Two
Subsidiary, be borne by Station Two Subsidiary unless the parties agree
otherwise, or unless remaining portions of the Big Rivers Contribution for that
Year that were not included in the approved Operating Budget are available as
contemplated in Section 20.6.2 of the Participation Agreement (in which event
such amounts will be applied as contemplated in that Section). Subject to the
next succeeding
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sentence, if Station Two Subsidiary exceeds 110 percent of the total approved
budget for Henderson Incremental Capital Costs, or for Henderson Non-Incremental
Capital Costs for Henderson Major Capital Repairs, in either case that are
included in an approved Operating Budget, the additional costs of those Station
Two Improvements that are allocable to Station Two Subsidiary under the Station
Two Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne
by Station Two Subsidiary unless the Parties otherwise agree, or unless the
dispute resolution procedure under Article 15 of the Participation Agreement
(and contemplated in Section 13.5(e) of this Agreement) determines that at the
time Station Two Subsidiary proposed the applicable portions of the Operating
Budget (or modification thereof) relating to those expenditures Station Two
Subsidiary acted consistent with Prudent Utility Practice, in which case the
additional costs shall be borne by Station Two Subsidiary and Big Rivers in
accordance with Section 9.10(c) of this Agreement. Notwithstanding the
provisions of the immediately preceding sentence, if Station Two Subsidiary
exceeds 110 percent of the total of any approved budget for Henderson
Incremental Capital Costs, or for Henderson Non-Incremental Capital Costs for
Henderson Major Capital Repairs, that are included in an Operating Budget that
is a part of the Initial Period Budgets, the additional cost of those Station
Two Improvements that are allocable to Big Rivers under the Station Two
Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by
Station Two Subsidiary unless the Parties otherwise agree, or unless the dispute
resolution procedure set forth in Article 15 of the Participation Agreement
determines that the purchase and installation of those Station Two Improvements,
and the costs thereof, are consistent with Prudent Utility Practice, regardless
of whether the relevant Initial Period Budget, or Station Two Subsidiary's
actions in connection with the same, were consistent with Prudent Utility
Practice at the time that the budget was prepared, in which case the additional
costs that are allocable to Station Two Subsidiary under the Station Two
Contracts shall, as between Big Rivers and Station Two Subsidiary, be borne by
Station Two Subsidiary and Big Rivers in accordance with Section 9.10(c) of this
Agreement. If Station Two Subsidiary fails or refuses to use reasonable efforts
to spend at least 90 percent of the total budget for Station Two Improvements or
for operating and maintenance expenses included in an approved Operating Budget
(excluding that portion relating to Henderson Incremental Environment O&M), and
pursuant to the dispute resolution
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procedure under Article 15 of the Participation Agreement it is determined that
such failure or refusal was inconsistent with Prudent Utility Practice, Station
Two Subsidiary shall make the omitted expenditures as required pursuant to the
applicable dispute resolution procedure. Notwithstanding anything contained in
this Section 9.10(d) to the contrary, Station Two Subsidiary shall in no event
be required to expend the monies included in an approved Operating Budget where
to do so would cause Station Two Subsidiary to be in breach or default under any
Station Two Contract. Additional capital expenditures incurred by Station Two
Subsidiary in response to an Operating Emergency (as defined in the
Participation Agreement) which are not already included in an approved Operating
Budget, and which are allocated to Station Two Subsidiary under the Station Two
Contracts shall, as between Big Rivers and Station Two Subsidiary, be paid for
by Station Two Subsidiary unless (a) the same represents a Henderson Incremental
Capital Cost or expenditures for a Henderson Major Capital Repair, in which case
such expenditures shall be paid by Station Two Subsidiary and Big Rivers in
accordance with Section 9.10(c), or (b) there are remaining amounts in the Big
Rivers Contribution for that Year that were not included in the budget for
Henderson Non-Incremental Capital Costs in the approved Operating Budget, as
contemplated in Section 20.6.2 of the Participation Agreement, in which case
that remaining amount will be allocated to any Henderson Non-Incremental Capital
Costs in that Year resulting from that Operating Emergency as contemplated in
Section 20.6.2.
(e) Station Two Subsidiary and Big Rivers agree with each other as
follows: In the absence of an approved Operating Budget, Station Two Subsidiary
shall operate and maintain Station Two in accordance with Prudent Utility
Practice, unless otherwise required or permitted under this Agreement. In the
absence of an approved Operating Budget or an approved acquisition of a Station
Two Improvement, Station Two Subsidiary may (but shall not be obligated to, as a
condition of mediation or arbitration of the disputed budget or Station Two
Improvement) install or cause to be installed a disputed Station Two
Improvement; provided, however, that as between Station Two Subsidiary and Big
Rivers, Station Two Subsidiary shall bear the full cost of such Station Two
Improvement for its own account unless those Parties otherwise agree, or unless
the dispute resolution procedure set forth in Article 15
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of the Participation Agreement (and as contemplated in Section 13.5(e) of this
Agreement) determines that Station Two Subsidiary is entitled to reimbursement
from Big Rivers because Big Rivers was obligated to pay for the Station Two
Improvement pursuant to this Section 9.10, or unless Station Two Subsidiary
shall have been required to fund that Station Two Improvement under the terms of
the Station Two Contracts, in which case the costs of that Station Two
Improvement shall be borne by Big Rivers and Station Two Subsidiary in
accordance with this Section 9.10. If the Operating Committee fails to approve
an Operating Budget for the following Year on or before May 15 of the prior
Year, Big Rivers and Station Two Subsidiary will promptly proceed with the
dispute resolution procedures described above to resolve that issue.
9.11 [Intentionally Omitted].
9.12 Phase I Adjustments. The LG&E Companies and Big Rivers hereby agree
with each other that notwithstanding the termination of the Phase I Subcontract
Term, any of the following commitments or adjustments to the extent made during
the Phase I Subcontract Term and existing as of the Phase II Effective Date
shall survive the termination of the Phase I Subcontract Term and be carried
forward throughout the Phase II Assignment Term (the "Phase I Adjustments"):
(a) A continuation of any adjustments previously made to the
payments owing by LEM to Big Rivers pursuant to Section 3.3 of the Power
Purchase Agreement, as such adjustments shall be required pursuant to any
provision of this Agreement, resulting from the application of the Station Two
PP Price Reduction (defined in Section 10.35 of this Agreement), reductions or
abatements relating to condemnation or damage or destruction of the Station Two
Assets, or any reductions or abatements relating to a termination of this
Agreement, all of which shall continue as an adjustment to the Annual Fixed
Payments thereafter due under the Power Purchase Agreement or the Rental
Payments thereafter due under the Lease.
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(b) Any payments due as refunds of the Initial Fixed Payment, as may
be required under any provision of this Agreement, shall continue without
adjustment as to amount or timing of payment.
(c) A continuation of the calculation of Actual Henderson
Incremental Environmental O&M and Henderson Incremental Environmental O&M for
the entire Year which includes the transition from the Phase I Subcontract Term
to the Phase II Assignment Term (the "Transitional Year"). Big Rivers and
Station Two Subsidiary shall reconcile Actual Henderson Incremental
Environmental O&M incurred during the Transitional Year with Henderson
Incremental Environmental O&M incurred during the Transitional Year within 120
days after the end of the Transitional Year.
(d) A continuation, without adjustment, of balances and other
accounting with respect to the Station Two Improvements Account and a
continuation of the allocation of Station Two Improvements funded in accordance
with Sections 8.17 of this Agreement.
(e) A continuation of the effectiveness of the portion of any
approved capital expenditures for Station Two Improvements and operating and
maintenance expenditures pursuant to the Annual Budget as it relates to Station
Two and the other Station Two Assets in effect during any such Transitional
Year.
(f) A continuation of the relative percentages of Shared Costs
between Big Rivers and any of the LG&E Companies (as the case may be).
The Parties acknowledge that all payments or other sums due under the Station
Two Operating Agreement and the Station Two Power Sales Agreement to any other
Party shall continue to be paid without interruption (except that the primary
obligor for such sums may, as applicable, change from Big Rivers to Station Two
Subsidiary) and based upon the budget for such Transitional Year approved by
Henderson and Big Rivers (with the advice and consent of
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Station Two Subsidiary). The annual reconciliations required under Section 16.6
of the Station Two Operating Agreement and Section 9.4 of the Station Two Power
Sales Agreement in the Transitional Year to the Phase II Assignment shall be
inclusive of all payments made by the Parties throughout such Year without
regard to the termination of the Phase I Subcontract, and any sums due by
Henderson shall be paid to Station Two Subsidiary and thereafter, as among
Station Two Subsidiary, LEM and Big Rivers, shall be allocated among such
Parties (subject to any applicable off-sets) based on whether the amount
disbursed by Henderson relates to a Station Two Improvement funded by Big Rivers
(which shall be allocated to Big Rivers and credited to any reimbursement
payment due it by Station Two Subsidiary) or another expenditure (which shall be
allocated to Station Two Subsidiary or LEM, as appropriate). On or prior to the
Monthly Payment Date in the month in which the transition from the Phase I
Subcontract to the Phase II Assignment occurs, and in addition to the payment
owing by Big Rivers to Station Two Subsidiary under Section 9.7(b) of this
Agreement for that month, Big Rivers shall pay to Station Two Subsidiary an
amount equal to any payment previously made by Station Two Subsidiary or its
designated Affiliate to Big Rivers during that month pursuant to Section 8.18 of
this Agreement, relating to Station Two Subsidiary's share of Debt Service
payment due Henderson or the Trustee under Section 6.3(a) of the Station Two
Power Sales Agreement during that month; provided, that no such payment by Big
Rivers shall be payable to Station Two Subsidiary to the extent that Big Rivers
has already paid that amount to Henderson or the Trustee in satisfaction of the
Debt Service payment due and owing to Henderson or the Trustee for that month.
9.13 Survival of Phase I Subcontract Provisions and Claims.
Notwithstanding anything in this Agreement to the contrary, including, without
limitation, Section 8 of this Agreement, entitled "Phase I Subcontract," and
Section 13 of this Agreement, entitled "Termination; Default; Remedies," the
following terms and provisions set forth in Section 8, entitled "Phase I
Subcontract," shall survive the termination of the Phase I Subcontract Term by
virtue of the Phase II Effective Date and shall continue in full force and
effect from and after such termination throughout the Phase II Assignment Term:
(a) the terms relating to Station Two Allowances set forth in Section 8.10(c) of
this Agreement; (b) the agreed upon allocation of
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general and administrative costs as set forth in the G & A Allocation Agreement
provided for in Section 10.29 of this Agreement; (c) the terms of Section
8.13(b) of this Agreement, to the extent that any payment default which may
exist thereunder has not been fully paid or otherwise discharged as of the Phase
II Effective Date; (d) the terms for composition of the Operating Committee and
agreed upon operating procedures set forth in Section 8.15 of this Agreement;
and (e) all definitions of terms contained in a provision within Section 8,
entitled "Phase I Subcontract," to the extent such defined terms have
application in any other Section of this Agreement. In addition, all
indemnification claims and all other claims or causes of action that any of the
Parties may have for breach or default of this Agreement or the Station Two
Contracts, and all claims for payment or other sums due and owing a Party under
this Agreement or the Station Two Contracts, arising or accruing during the
Phase I Subcontract Term or otherwise relating to the Phase I Subcontract shall
survive the expiration or termination of the Phase I Subcontract Term.
9.14 No Release; Big River's Responsibility. Notwithstanding anything in
this Section 9 to the contrary, Big Rivers shall not throughout the Phase II
Assignment Term, by virtue of the assignments contemplated hereby, be released
from any of its covenants or agreements set forth in the Assigned Station Two
Contracts, or from any damages, actions, liabilities or obligations that may
result from or arise out of the performance or failure of performance of the
obligations thereunder from and after the Phase II Effective Date. The LG&E
Companies, with respect to their respective performance of the Assumed Station
Two Liabilities, have agreed to give Big Rivers the indemnity set forth in
Section 10.15(a) of this Agreement.
9.15 Standards of Performance. Unless different standards or
specifications are otherwise required by any regulatory authority having
jurisdiction thereof and such standards or specifications make it impracticable
or illegal to comply with the following, Station Two Subsidiary (or its
successors or permitted assigns) shall perform its duties under Section 9 of
this Agreement, entitled "Phase II Assignment," in accordance with standards and
specifications equal to the more stringent of (a) those set forth in the
National Electric Safety Code of the United States Bureau of Standards, (b)
Prudent Utility Practice, and (c) any other
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standards or specifications as may be expressly required of Station Two
Subsidiary (as the assignee of Big Rivers) under the relevant provisions of the
Assigned Station Two Contracts which Station Two Subsidiary has expressly agreed
to perform hereunder, unless such performance by Station Two Subsidiary in
accordance with Prudent Utility Practice would result in a breach or default by
Station Two Subsidiary under the Assigned Station Two Contracts or by Henderson
under the Bond Ordinance, in which event the provisions of subclause (b) above
shall not apply. Station Two Subsidiary will, at all times, faithfully obey and
substantially comply with existing and future laws, rules and regulations of
federal, state and local governmental bodies lawfully affecting the operations
and activities of Station Two and, in its performance of its obligations under
Section 9, entitled "Phase II Assignment," Station Two Subsidiary will operate
and maintain Station Two and the other Station Two Assets in substantial
compliance with any standards imposed by any insurance policies required to be
maintained by Station Two Subsidiary under the Assigned Station Two Contracts or
otherwise hereunder. Station Two Subsidiary's performance of its duties under
this Section 9 shall at all times be conducted in a manner that is at all times
consistent with the provisions of the Bond Ordinance and that would not cause
Station Two Subsidiary or Big Rivers to be in material default under any terms
of the Station Two Contracts as it relates to the Bond Ordinance or otherwise
(but only until redemption or retirement of the Station Two Bonds). The
standards of performance set forth in this Section 9.15 are made solely for the
benefit of Big Rivers and shall not be enforceable by Henderson against any of
the LG&E Companies.
9.16 Communication of Certain Events. Station Two Subsidiary shall
communicate to Big Rivers, both orally and in writing as soon as possible after
the event, regarding (i) all significant operating and management events
relating to or affecting Station Two or the other Station Two Assets, including,
but not limited to, all forced and scheduled outages, partial or full load
restrictions due to equipment unavailability, deaths or injuries, governmental
inquiries or investigations, claims under any insurance policies, Operating
Emergencies and any other events or causes which may, in Station Two
Subsidiary's reasonable judgment, jeopardize personnel or property or result in
the unavailability of major equipment used in the
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operation of Station Two, and (ii) all events and circumstances which are
required by Laws to be reported to the KPSC or any other governmental or
regulatory authority or any insurance carrier, in each case regarding the
Station Two Assets or the operation thereof.
9.17 Additional Payments to Big Rivers. Notwithstanding anything in
Section 9, entitled "Phase II Assignment," to the contrary, Station Two
Subsidiary shall pay to Big Rivers the Additional Payments promptly following
Station Two Subsidiary's receipt of the corresponding 14 1/2 Cent Payments from
Henderson, the same as contemplated in Section 8.10(b) of this Agreement. In the
event that Henderson shall off-set against the 14 1/2 Cent Payment due and owing
Station Two Subsidiary an amount payable by Station Two Subsidiary or any of its
Affiliates to Henderson, and as a consequence thereof the corresponding
Additional Payment payable to Big Rivers pursuant to this Section 9.17 is
reduced by such off-set, Station Two Subsidiary shall pay to Big Rivers the
amount by which that Additional Payment was so reduced by Henderson's exercise
of such off-set, which payment shall be made promptly following Station Two
Subsidiary's receipt of sufficient information relating to such off-set to
determine the amount of the corresponding reduction in such Additional Payment.
10. ADDITIONAL AGREEMENTS OF THE PARTIES.
10.1 Interim Period Reconciliations.
(a) In any Year which includes either the Effective Date or the date
of termination or expiration of the Term, Big Rivers, on the one hand, and
Station Two Subsidiary and LEM, on the other hand, hereby agree that, on or
before 30 days after the Effective Date or the date of termination or expiration
of the Term, as the case may be (or as soon thereafter as is reasonably
possible, in the event the relevant data is not available within 30 days), there
shall be a reconciliation between Big Rivers and the LG&E Companies of the
following charges and costs actually paid or accrued while Station Two was being
operated by Big Rivers prior to the Effective Date or by Station Two Subsidiary
during the Term, as compared with the estimates
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of such charges and costs paid or accrued (based on the Annual Budget with
Henderson) during the period of operation of Station Two by Big Rivers or
Station Two Subsidiary, respectively: (1) all charges and costs for operation
and maintenance of Station Two under the Station Two Operating Agreement, as
actually paid or accrued by Big Rivers or Station Two Subsidiary, respectively,
during the period of their respective operations of Station Two, as compared
with payments made or accrued by Henderson to Big Rivers or Station Two
Subsidiary, respectively, under Section 13.6 of the Station Two Operating
Agreement based upon estimates included in the Annual Budget; and (2) all
amounts paid or accrued to Henderson or the Trustee (pursuant to Section 6.1 of
the Station Two Power Sales Agreement) of estimated Capacity costs and charges
(based on the Annual Budget with Henderson) by Big Rivers or Station Two
Subsidiary or LEM during the period of Big Rivers' and Station Two Subsidiary's
respective operations of Station Two, as compared with the actual aggregate
Capacity costs and charges that should have been paid or accrued (based on
actual charges and costs so paid or accrued in the operation of Station Two) by
Big Rivers or by LEM or Station Two Subsidiary during the period of their
respective operation of Station Two.
(b) For purposes of reconciling operating and maintenance costs and
Capacity charges between Big Rivers, on the one hand, and LEM and Station Two
Subsidiary, on the other hand, before the Effective Date, the provisions of this
Section 10.1(b) shall govern. If (1) the sum of the operating and maintenance
costs actually paid or accrued by Big Rivers during the Partial Year prior to
the Effective Date plus the estimated Capacity costs and charges paid or accrued
by Big Rivers during the Partial Year prior to the Effective Date exceeds (2)
the sum of the estimated operating and maintenance costs paid or accrued by
Henderson as a reimbursement to Big Rivers during the Partial Year prior to the
Effective Date plus the Capacity costs and charges that should have been paid or
accrued (based on actual charges and costs paid or accrued in the operation of
Station Two) by Big Rivers during the Partial Year prior to the Effective Date,
then LEM and/or Station Two Subsidiary shall pay to Big Rivers the excess amount
on the next Monthly Payment Date. If, however, the sum described in (2), above,
exceeds the sum described in (1), above, then LEM and/or Station Two Subsidiary
shall have the right to off-set the amount of such deficiency against any
payments due and owing by LEM and/or Station Two Subsidiary to Big Rivers on the
next Monthly Payment
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Date or, if no sums shall then be due and owing, Big Rivers shall promptly pay
the amount of the deficiency to LEM and/or Station Two Subsidiary on the next
Monthly Payment Date. As between Big Rivers, on the one hand, and Station Two
Subsidiary and LEM, on the other hand, such Parties acknowledge and agree that
Station Two Subsidiary and LEM shall either be entitled to receive the benefit
of any sums payable by Henderson, or shall be obligated to pay Henderson any
sums owed to Henderson, as a result of the annual reconciliations required by
Section 9.4 of the Station Two Power Sales Agreement and Section 16.6 of the
Station Two Operating Agreement for the Year which includes the Effective Date.
Amounts which have accrued or become payable during the Partial Year but which
have not been paid to the relevant Party as of the Effective Date shall continue
to be payable to that Party following the Effective Date by the Party having the
obligation to make such payment prior to the Effective Date.
(c) For purposes of reconciling operating and maintenance costs and
Capacity charges between Big Rivers, on the one hand, and LEM and Station Two
Subsidiary, on the other hand, incurred during the Partial Year prior to the
date of expiration or termination of this Agreement, the provisions of this
Section 10.1(c) shall govern. If during the Partial Year ending on the
termination or expiration date: (1) the sum of the operating and maintenance
costs actually paid or accrued by Station Two Subsidiary in such Partial Year
plus the estimated Capacity costs and charges (A) during the Phase I Subcontract
Term, reimbursed in or reimbursable for such Partial Year to Big Rivers by LEM
and/or Station Two Subsidiary (including all dollar-for-dollar reimbursements of
Big Rivers for certain Capacity charges associated with Station Two operating
and maintenance expenses (including payments for Henderson Incremental
Environmental O&M), Station Two Subsidiary's (or its successors' or permitted
assigns') share of all Station Two Improvements funded during that Partial Year,
and all reimbursements of Big Rivers for Station Two Subsidiary's (or its
successors' or permitted assigns') corresponding share of Capacity charges
incurred during such Partial Year associated with Debt Service), and/or (B)
during the Phase II Assignment Term, paid in or payable for such Partial Year
directly to Henderson or the Trustee by Station Two Subsidiary
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(or its successors or permitted assigns) (reduced, however, by the amounts that
Big Rivers reimburses or must reimburse Station Two Subsidiary for Capacity
charges in such Partial Year associated with Big Rivers' share of Debt Service,
Big Rivers' share of Henderson Incremental Environmental O&M or Big Rivers'
share of all Station Two Improvements funded during that Partial Year) exceeds
(2) the sum of the estimated operating and maintenance costs paid or accrued by
Henderson as a reimbursement to Station Two Subsidiary during such Partial Year
plus the Capacity costs and charges that (based on actual charges and costs paid
or accrued in the operation of Station Two during such Partial Year, and not
based on estimates) should have been either (A) during the Phase I Subcontract
Term, reimbursed in or reimbursable for such Partial Year to Big Rivers by LEM
and/or Station Two Subsidiary (including all dollar-for-dollar reimbursements of
Big Rivers for certain Capacity charges associated with Station Two operating
and maintenance expenses (including payments for Henderson Incremental
Environmental O&M), Station Two Subsidiary's (or its successors' or permitted
assigns') share of all Station Two Improvements funded during that Partial Year,
and all reimbursements of Big Rivers for Station Two Subsidiary's (or its
successors' or permitted assigns') corresponding share of Capacity charges
incurred during such Partial Year associated with Debt Service), and/or (B)
during the Phase II Assignment Term, paid in or payable for the Partial Year
directly to Henderson or the Trustee by Station Two Subsidiary (or its
successors or permitted assigns) (reduced, however, by the amounts that Big
Rivers reimburses or must reimburse Station Two Subsidiary for Capacity charges
incurred during such Partial Year associated with Big Rivers' share of Debt
Service, Big Rivers' share of Henderson Incremental Environmental O&M or Big
Rivers' share of Station Two Improvements funded during that Partial Year); then
Big Rivers shall pay to LEM and/or Station Two Subsidiary such excess amount
within 45 days after the termination or expiration date (or, if the
determination of those amounts cannot reasonably be made within the initial
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day period as contemplated in Section 10.1(a), then within 15 days after that
determination can be reasonably made). If, however, the sum described in (2),
above, exceeds the sum described in (1), above, then Station Two Subsidiary (or
its designated Affiliate) shall pay to Big Rivers the amount of such deficiency
within 45 days after the termination or expiration date (or, if the
determination of those amounts cannot reasonably be made within the initial
30-day period as contemplated in Section 10.1(a), then within 15 days after that
determination can be reasonably made). As between Big Rivers, on the one hand,
and Station Two Subsidiary and LEM, on the other hand, such Parties acknowledge
and agree that neither Station Two Subsidiary nor LEM, nor any other LG&E
Company, shall have any right or interest in the proceeds due from Henderson, or
any duty or obligation to Big Rivers or Henderson for proceeds due to Henderson,
in the annual reconciliation required by Section 9.4 of the Station Two Power
Sales Agreement and Section 16.6 of the Station Two Operating Agreement for the
Year which includes the date of expiration or termination of the Term. Amounts
which have accrued or become payable during the Partial Year prior to the
expiration or termination of the Term, but which have not been paid to the
relevant Party as of the date of that expiration or termination, shall continue
to be payable to that Party thereafter by the Party having the obligation to
make such payment prior to the date of expiration or termination of the Term.
(d) Notwithstanding anything herein to the contrary, the agreements
set forth above are solely between Big Rivers, Station Two Subsidiary and LEM,
and shall not impose upon Henderson any duty or obligation to Big Rivers,
Station Two Subsidiary or LEM relating to such interim period reconciliations or
the annual reconciliations required by the Station Two Operating Agreement and
the Station Two Power Sales Agreement which are in addition to or different than
the duties and obligations required of Henderson under such Station Two
Contracts; provided, however, that Henderson hereby agrees to reasonably
cooperate and assist Big Rivers, Station Two Subsidiary and LEM in determining
the actual and estimated charges and costs paid, payable or accrued by the
Parties for the respective Partial Years of operation of Station Two by Big
Rivers and Station Two Subsidiary, respectively.
10.2 Transfer of Title to Station Two Surplus Capacity. Consistent with
and subject to the provisions of Sections 8.12(e), 8.12(f), 9.7(c), and 9.7(e)
of this Agreement, during the Phase I Subcontract Term and the Phase II
Assignment Term, but only during such period as the Letter Ruling shall continue
to limit the distribution of Energy from Station Two solely to customers within
Henderson and Daviess Counties, all Energy associated with the Station Two
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Unit Output sold by Station Two Subsidiary, LEM or their respective Affiliates
from Station Two shall be delivered to Big Rivers or Henderson, or to Henderson
Union, under the LEM/Henderson Union Agreement for resale to Alcan, as
applicable, and title thereto transferred by Station Two Subsidiary, LEM or
their Affiliate, as applicable, at the point of interconnection between Station
Two and Big River's Transmission System without exception. Big Rivers and
Henderson hereby agree to accept title to such Energy (exclusive of Energy sold
under the LEM/Henderson Union Agreement), as applicable, and delivery of such
Energy, as applicable, from Station Two Subsidiary, LEM or their Affiliate, as
applicable, at such point of interconnection during such period as the
restriction of the Letter Ruling shall remain in effect. Big Rivers and
Henderson each hereby acknowledge and agree that the delivery by Station Two
Subsidiary, LEM or their Affiliate of title to the Power from Station Two at
such point of interconnection shall not constitute a violation of the delivery
requirements in the Letter Ruling or any other requirements or restrictions
relating to delivery of the Power from Station Two set forth in the Station Two
Contracts or the Bond Ordinance, and thereafter no LG&E Company shall have any
further responsibility for compliance with the distribution requirements of the
Letter Ruling, the Station Two Contracts and the Bond Ordinance with respect to
that Power. Following the retirement or the redemption in full of the Station
Two Bonds, Station Two Subsidiary, LEM or their Affiliate may, but shall not be
obligated to, deliver all Power from Station Two sold by it to Big Rivers or to
Henderson Union at that same point of interconnection.
10.3 Sharing of Station Two O&M or R&R Account Balances.
(a) At the Closing, the chief financial officer of Big Rivers and
the General Manager of Henderson shall execute and deliver a certificate to the
LG&E Companies certifying and agreeing to the following: (1) the balances of
funds contained in the Station Two O&M Account and the Station Two R&R Account
as of the Effective Date; (2) the total amount of contributions and payments of
Big Rivers and Henderson, respectively, into the Station Two O&M Account and the
Station Two R&R Account with respect to that portion (if any) of the combined
balance in such accounts that exceeds $1,250,000; and (3) Big Rivers' and
Henderson's respective shares, as of the Effective Date, of the excess (if any)
of the balance of
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such funds (with any investments included in such accounts to be valued in
accordance with the Bond Ordinance) in the Station Two O&M Account and the
Station Two R&R Account, respectively, over $1,250,000 (taking into
consideration, for purposes of such calculation, any accrued and unpaid expenses
on the Effective Date, and any outstanding, uncleared checks or unconfirmed wire
transfers as of the Effective Date). Big Rivers' share of each such excess
account balance (if any) is referred to hereinafter as the "O&M Closing Balance"
as such excess may exist in the Station Two O&M Account and the "R&R Closing
Balance" as such excess may exist in the Station Two R&R Account.
(b) Notwithstanding anything to the contrary in Section 1(b) of the
Agreement dated April 8, 1980, between Big Rivers and Henderson, and provided
that this Agreement shall be in force and effect on the date of the disbursement
of the then remaining balances of monies contained in the Station Two O&M
Account and the Station Two R&R Account in accordance with Section 1 of said
Agreement, to the extent that the combined balance of such accounts are then in
excess of $1,250,000, Henderson shall, on that disbursement date, disburse to
Station Two Subsidiary a proportionate share of such excess account balances,
which is determined based upon the percentage of the excess balances that were
contributed by Big Rivers and Station Two Subsidiary (and all other LG&E
Companies), as compared with the percentage of those excess balances that were
contributed by Henderson. Station Two Subsidiary, in turn, shall have the
obligation to make disbursements (less appropriate off-sets as may be applicable
thereto and permissible under Section 10.3(c), below) to Big Rivers of that
portion of such excess balances in the Station Two O&M Account and the Station
Two R&R Accounts determined in Section 10.3(c) of this Agreement. Upon making
the disbursement to Station Two Subsidiary from excess account balances as
provided above, neither Henderson nor any LG&E Company shall have any further
responsibility or liability to Big Rivers for any payments from excess account
balances under the Agreement dated April 8, 1980 or under this Agreement.
(c) Within five (5) Business Days after Station Two Subsidiary
receives a disbursement of the excess account balances from Henderson, as
provided in (b) above, Station Two
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Subsidiary shall allocate and pay to Big Rivers the following sums: (i) an
amount equal to the O&M Closing Balance; (ii) an amount equal to the sum of the
R&R Closing Balance plus any additional sums over the R&R Closing Balance as may
have been disbursed by Henderson to Station Two Subsidiary as excess fund
balances in the Station Two R&R Account, but then only to the extent those
excess fund balances represent amounts that were contributed by Big Rivers to
that account since the Effective Date; and (iii) an amount equal to all interest
that has accrued on the O&M Closing Balance and the R&R Closing Balance, that
has not otherwise been applied toward the Debt Service, and that has been
disbursed by Henderson to Station Two Subsidiary; provided, that Station Two
Subsidiary shall have the right to off-set against the payment it is required to
make (if any) to Big Rivers under (i), (ii) and (iii), above, (x) any amounts
that may then be due and payable to Station Two Subsidiary pursuant to Section
10.3(e) of this Agreement, and (y) any then existing deficiency in any payment
obligations of Big Rivers under this Agreement and the Station Two Contracts
relating to the Capacity payments and reimbursement payments described above.
Any remaining balances from the Station Two O&M Account and the Station Two R&R
Account that are disbursed by Henderson to Station Two Subsidiary to be retained
by Station Two Subsidiary. In addition, Station Two Subsidiary shall have no
obligation to pay to Big Rivers any deficiency in the amounts disbursed to
Station Two Subsidiary by Henderson relating to the Station Two R&R Account
below the R&R Closing Balance to the extent such deficiency is caused by a
withdrawal by Henderson or the Trustee of funds from such account that were used
to fund a Station Two Improvement (except to the extent that an LG&E Company
otherwise has a current obligation under this Agreement to pay to Big Rivers (or
into the Station Two Improvements Account as required under Section 8.17(d) or
Section 9.10(c) of this Agreement) its share of the capital costs for such
Station Two Improvement funded by the amounts so withdrawn from that account at
the time of that withdrawal). To the extent those additional sums from the
Station Two R&R Account are less than the aggregate contributions made by Big
Rivers and Station Two Subsidiary, those additional sums shall be prorated
between Big Rivers and Station Two Subsidiary based on the portion of
unreimbursed payments made into that account after the Effective Date by Big
Rivers and Station Two Subsidiary, respectively, since the Effective Date.
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(d) Notwithstanding that Big Rivers shall at all times during the
Term have the obligation to pay the Trustee (during the Phase I Subcontract
Term) or to pay or reimburse Station Two Subsidiary (during the Phase II
Assignment Term) for the portion of the Capacity charges attributable to
required payments into the Station Two R&R Account pursuant to Sections 8.12(a)
and 9.7(b) of this Agreement, respectively, should any funds be withdrawn from
the Station Two R&R Account by Henderson to fund an operating and maintenance
expense for Station Two during the Phase I Subcontract Term or the Phase II
Assignment Term (which is not otherwise a capital expense characterized by Big
Rivers and the LG&E Companies in this Agreement as a Station Two Improvement),
within five (5) Business Days after notice is given by Big Rivers or Henderson,
of the withdrawal of those funds from that account specifying the type and
character of such expenditure made, Station Two Subsidiary (or its designated
Affiliate) shall pay to the Trustee (for further credit to the Station Two R&R
Account) the amount so withdrawn for the operating and maintenance expenditure
from that account and shall not require Big Rivers to reimburse it for such
payment. Any such payments by Station Two Subsidiary (or its designated
Affiliate) shall, during the Phase I Subcontract Term, be on behalf of Big
Rivers, and shall, during the Phase II Assignment Term, be on behalf of Station
Two Subsidiary. In the event, following the distribution of funds described in
(c), above, the Station Two R&R Account contemplated in the Bond Ordinance is
eliminated and replaced, with the Parties' approval, by another similar account
to fund renewals, replacements and additions at Station Two, the payments
contemplated in this Section 10.3(d) as being payable by Station Two Subsidiary
to the Trustee shall be paid instead into that replacement account. In the event
such a replacement account is not so established by the Parties following the
disbursement of excess funds from the Station Two R&R Account, then,
notwithstanding anything contained elsewhere in this Section 10.3 to the
contrary, Station Two Subsidiary shall have no obligation to repay to Henderson
or the Trustee the amount previously withdrawn from the Station Two R&R Account
for such operating and maintenance expenses, but shall pay such amounts to Big
Rivers to the extent that the withdrawal occurred prior to Henderson's
disbursements contemplated in (b), above, and then only to the extent such
withdrawal had the effect of reducing the amounts from the Station
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Two R&R Account that would otherwise have been payable by Station Two Subsidiary
to Big Rivers as contemplated in (c), above.
(e) Henderson is only entitled to use funds in the Station Two O&M
Account for the payment of "Operating Expenses" as defined in the Bond
Ordinance, subject, however, to the pledge in favor of bondholders thereunder.
Notwithstanding that Station Two Subsidiary shall at all times during the Term
have the obligation to pay or reimburse Big Rivers (during the Phase I
Subcontract Term) or to pay the Trustee (during the Phase II Assignment Term)
for the portion of the Capacity charges attributable to required payments into
the Station Two O&M Account to restore minimum fund balances in that account
pursuant to Sections 8.12(b) and 9.7(a) of this Agreement, respectively, should
any funds be withdrawn from the Station Two O&M Account by Henderson to fund a
Station Two Improvement, within five (5) Business Days after notice is given by
Station Two Subsidiary or Henderson of the withdrawal of those funds from that
account specifying the type and character of such expenditure made, Station Two
Subsidiary shall be permitted to withdraw from the Station Two Improvements
Account sufficient funds to restore to the Station Two O&M Account the amount so
withdrawn for the Station Two Improvement from that account, with Big Rivers and
Station Two Subsidiary each bearing responsibility for the amounts so withdrawn
from the Station Two Improvements Account based on their respective Station Two
Improvement Sharing Ratios or if there is not sufficient funds in the Station
Two Improvements Account to restore in full the amounts so withdrawn from the
Station Two O&M Account for the Station Two Improvement, then Big Rivers shall
(1) during the Phase I Subcontract Term pay to the Trustee (for further credit
to the Station Two O&M Account) an amount equal to the product of its then
applicable Station Two Improvement Sharing Ratio multiplied by the amount so
withdrawn for the Station Two Improvement from that account (which LEM shall not
be required to reimburse Big Rivers for such payment) and (2) during the Phase
II Assignment Term pay to Station Two Subsidiary (for its account) an amount
equal to the product of its then applicable Station Two Improvement Sharing
Ratio multiplied by the amount withdrawn for the Station Two Improvement from
that account. The LG&E Companies and Big Rivers intend that the foregoing
provisions of this Section 10.3(e), and Big Rivers' payment obligations to the
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Trustee and to Station Two Subsidiary hereunder, shall be subject to the
agreements between the LG&E Companies and Big Rivers in this Agreement relating
to Station Two Improvements, including, without limitation, those agreements
relating to the funding and payment for Station Two Improvements.
(f) (1) The Parties acknowledge that, pursuant to Section 19.3 of
the Station Two Power Sales Agreement (as amended by the 1998 Amendments), Big
Rivers and Henderson have agreed to separately establish and fund, on or before
the date of Henderson's disbursement of funds as described in (b), above, a new
Big Rivers Station Two O&M Fund (the "Big Rivers Replacement O&M Fund") and a
new Henderson Station Two O&M Fund (the "Henderson Replacement O&M Fund") (such
funds being collectively referred to herein as the "Replacement O&M Funds"),
which funds are intended to be used to support the operation and maintenance of
Station Two throughout the remaining term of the Station Two Power Sales
Agreement, subject to the provisions of that agreement. Big Rivers and Henderson
have further agreed to maintain a minimum balance in their respective
Replacement O&M Funds, and to replenish that fund up to its required minimum
balance with monthly payments thereto (but subject to certain maximum monthly
payment limits). In the event the Closing has occurred and this Agreement
remains in effect, Station Two Subsidiary hereby agrees to fully fund the Big
Rivers Replacement O&M Fund in the amount required from Big Rivers under Section
19.3 of the Station Two Power Sales Agreement (and in lieu of Big Rivers'
funding obligation under that section), promptly following the disbursement of
funds to Station Two Subsidiary described in (b), above. If for whatever reason
Big Rivers shall have funded the Big Rivers Replacement O&M Fund, in whole or in
part, prior to Station Two Subsidiary's funding thereof as required by the
preceding sentence, then promptly following the payment by Station Two
Subsidiary of funds into the Big Rivers Replacement O&M Fund, in accordance with
the preceding sentence, Henderson shall pay to Big Rivers from the Big Rivers
Replacement O&M Fund an amount equal to the lesser of the amount of Station Two
Subsidiary's payment or the amount so funded by Big Rivers into the Big Rivers
Replacement O&M Fund. Furthermore, Station Two Subsidiary agrees to replenish
that fund up to that minimum balance (i.e., that amount required from Big Rivers
under the 1998 Amendments) in
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the event amounts therein are withdrawn by Station Two Subsidiary or Henderson
to fund operating and maintenance expenses required during the Term as
contemplated below (but subject to the monthly funding limits provided for in
the Station Two Power Sales Agreement). Once fully funded, neither Big Rivers
nor Station Two Subsidiary shall have any obligation to fund the Big Rivers
Replacement O&M Fund to a level above the amount provided for in the 1998
Amendments. In the event the initial funding of the Big Rivers Replacement O&M
Fund by Station Two Subsidiary is required during the Phase I Subcontract Term,
Station Two Subsidiary shall deposit those amounts directly into that account on
behalf of Big Rivers, with the assistance of Henderson. In the event that
amounts are withdrawn by Henderson from the Big Rivers Replacement O&M Fund
during the Phase I Subcontract Term to fund one or more Station Two
Improvements, but those amounts have not been withdrawn by Station Two
Subsidiary from the Station Two Improvements Account or Big Rivers' share
thereof has not been repaid by Big Rivers to the Trustee prior to the
disbursement of funds by Henderson as contemplated in (e), above, then Big
Rivers shall pay its share of the amounts so withdrawn for that Station Two
Improvement based on its Station Two Improvement Sharing Ratio) directly to
Station Two Subsidiary (for its account), and Station Two Subsidiary shall have
no obligation to pay such funds into the Big Rivers Replacement O&M Fund to the
extent that Station Two Subsidiary has already fully funded that account as
contemplated above.
(2) During the Term, the Big Rivers Replacement O&M Fund shall be
maintained by Henderson as an interest bearing depository account at a
commercial bank in Henderson, Kentucky that is reasonably acceptable to Station
Two Subsidiary. All interest accruing on that account shall be the sole property
of Station Two Subsidiary, and shall be held by Henderson for the sole benefit
of Station Two Subsidiary and shall not be disbursed except as provided in (4),
below. The Parties agree that any funds deposited by Station Two Subsidiary into
the Big Rivers Replacement O&M Fund (exclusive of interest accruing thereon,
which may not be utilized by Henderson) may be used by Henderson and Station Two
Subsidiary only to fund costs and expenses required for the operation and
maintenance of Station Two during the Term, and which would have been required
or permitted to be paid or incurred as "Operating Expenses" under the Bond
Ordinance, but then, in the case of
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withdrawals from that fund by Henderson, only to the extent that (y) Station Two
Subsidiary has failed or refused to directly fund those operating and
maintenance expenses (as Big Rivers' subcontractor during the Phase I
Subcontract Term or for its own account during the Phase II Assignment Term) in
the ordinary course, or thereafter promptly following a written request to do so
by Henderson, and (z) Henderson has made a corresponding withdrawal from the
Henderson Replacement O&M Fund to fund a portion of that same cost or expense in
proportion to the then effective allocation of Station Two Capacity between
Henderson and Big Rivers (during the Phase I Subcontract Term) or Station Two
Subsidiary (during the Phase II Assignment Term), in accordance with Section 3
of the Station Two Power Sales Agreement. No such funds which are so deposited
by Station Two Subsidiary shall be used to fund Station Two Improvements,
Station Two Debt Service obligations or any other costs or expenses, or to
prepay expenditures required for the operation or maintenance of Station Two
following the Term, except that Henderson shall have the right of off-set
against such funds to the extent that Station Two Subsidiary has not satisfied
any payment obligation which became due and owing to Henderson during the Phase
I Subcontract Term or the Phase II Assignment Term. In addition, no funds of
Henderson or Big Rivers, whether or not relating to Station Two, shall be
deposited or commingled with the amounts deposited by Station Two Subsidiary
into the Big Rivers Replacement O&M Fund, or the interest accruing thereon.
(3) During the Phase I Subcontract Term, only Henderson shall have
signatory authority to deposit funds into, and withdraw funds from, the Big
Rivers Replacement O&M Fund. During the Phase II Assignment Term, only Henderson
and Station Two Subsidiary shall have such signatory authority.
(4) On May 31 of each Year during the Term, Henderson shall withdraw
and pay to Station Two Subsidiary all interest accrued on amounts deposited in
the Big Rivers Replacement O&M Fund during the prior Year. Upon any expiration
or earlier termination of this Agreement, Station Two Subsidiary shall be
entitled to an immediate disbursement of all amounts that were previously funded
by Station Two Subsidiary into the Big Rivers Replacement O&M Fund and that
remain in that account as of the expiration or termination of
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this Agreement, together with (A) all accrued but unpaid interest thereon, and
(B) an additional payment from Henderson in the amount of the portion (if any)
of the Big Rivers Replacement O&M Fund that was previously withdrawn by
Henderson for use in violation of the restrictions set forth above. Promptly,
following the disbursement to Station Two Subsidiary described above, Big Rivers
shall separately fund the Big Rivers Replacement O&M Fund to the same extent as
would have initially been required of it under Section 19.3 of the Station Two
Power Sales Agreement. Nothing contained in this Section 10.3(f) shall affect or
limit any rights that Station Two Subsidiary or any of its Affiliates may have
to reimbursement from Big Rivers (during the Phase I Subcontract Term) or
Henderson (during the Phase II Assignment Term) for operating and maintenance
expenses as contemplated elsewhere in this Agreement.
(g) (1) The Parties acknowledge that, pursuant to Section 19.2 of
the Station Two Power Sales Agreement (as amended by the 1998 Amendments), Big
Rivers and Henderson have agreed to separately establish and fund, on or before
the date of Henderson's disbursement of funds as described in (b), above, and
thereafter as contemplated in that agreement, a new Big Rivers Station Two
Renewals and Replacements Fund (the "Big Rivers Replacement R&R Fund") and a new
Henderson Station Two Renewals and Replacements Fund. Those funds are intended
to be used to support expenditures for renewals and replacements for Station Two
throughout the remaining term of the Station Two Power Sales Agreement, subject
to the provisions of that agreement. Notwithstanding anything contained in this
Agreement or any Station Two Contract to the contrary, the Parties agree that,
throughout the Phase I Subcontract Term and the Phase II Assignment Term, the
provisions of Section 19.2 of the Station Two Power Sales Agreement shall be
suspended and shall have no applicability to the Parties, and the provisions of
this Section 10.3(g) shall govern the Parties' respective rights and obligations
in lieu of Section 19.2.
(2) In the event the Closing occurs and this Agreement remains in
effect, and in the event the disbursement of funds to Station Two Subsidiary
contemplated in (b), above, shall have occurred, then LEM (during the Phase I
Subcontract Term) or Station Two
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Subsidiary (during the Phase II Assignment Term) hereby agrees to thereafter
remit and pay to Henderson by wire transfer, within two (2) Business Days
following that LG&E Company's receipt of a written request therefor from
Henderson, immediately available funds in an amount not to exceed $600,000 in
the aggregate from LEM and Station Two Subsidiary collectively (the "Maximum
Funding Limit"), for use by Henderson solely to fund one or more major renewals
or replacements with respect to Station Two that are then permitted to be made
under the Station Two Contracts in order to keep Station Two in good operating
condition at its rated capacity then in effect (including without limitation,
any such major renewals or replacements required to correct any unusual loss or
damage with respect to Station Two). Henderson's use of the funds contemplated
above shall be further limited to those situations where a sufficient budget was
not previously established in the then-current Annual Budget for Station Two,
but then only to the extent that the expenditure for such renewal or replacement
is required on an expedited basis and in advance of the time by which the
Parties could otherwise meet to separately budget for the expenditure.
Henderson's written request for funds contemplated above shall be effective only
if delivered to LEM or Station Two Subsidiary (as applicable) during the Phase I
Subcontract Term or the Phase II Assignment Term, and then only if it includes a
description of the major renewal(s) or replacement(s) for which the funds are
requested, the reason for their expenditure, the amount of funds so requested,
Henderson's good faith estimate of the actual cost of the relevant renewal(s) or
replacement(s), and the bank account of Henderson to which the funds are to be
wire transferred (with appropriate wiring instructions). LEM and Station Two
Subsidiary shall not be responsible for delays incurred in any wire-transfer of
funds to Henderson, so long as their bank has initiated that wire transfer
within the two (2)-Business Day period described above.
(3) Henderson shall be entitled, from time-to-time, in its
discretion, to submit multiple requests for funds from LEM or Station Two
Subsidiary pursuant to this Section 10.3(g); provided, however, that the
following additional conditions or limitations shall apply to the funding
obligations of LEM and Station Two Subsidiary hereunder for all purposes: (i)
the maximum amount of funds that LEM and Station Two Subsidiary, collectively,
shall be
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obligated to remit and pay to Henderson throughout the Term under this Section
10.3(g) for all renewals and replacements, collectively, shall not exceed the
Maximum Funding Limit, (ii) Henderson may not request funds hereunder in
increments of less than $10,000, (iii) LEM or Station Two Subsidiary (as
applicable) shall not be required to remit or pay funds to Henderson hereunder
in excess of that portion of the cost of the relevant renewal(s) or
replacement(s) corresponding with the Capacity from Station Two then reserved
for use by Big Rivers or Station Two Subsidiary (as contemplated in the Station
Two Power Sales Agreement and/or this Agreement), (iv) Henderson shall not
request funds in excess of its good faith estimate of the cost of such
renewal(s) or replacement(s), and hereby agrees to promptly repay to LEM or
Station Two Subsidiary (as applicable) any amounts funded by them in excess of
the actual cost thereof (which obligation of Henderson shall be deemed to
survive any expiration or termination of this Agreement), and (v) Henderson must
also contemporaneously fund, out of its own resources, that portion of the cost
of such renewal(s) and replacement(s) corresponding with Henderson's reserved
Capacity from Station Two at that time.
(4) Upon any expiration or termination of this Agreement, Henderson
agrees to immediately cease all expenditures of funds previously remitted and
paid by LEM or Station Two Subsidiary to Henderson as contemplated in this
Section 10.3(g), and agrees to promptly remit and pay to LEM or Station Two
Subsidiary, as applicable, all such funds then remaining in the possession or
control of Henderson, subject, however, to any rights of off-set Henderson may
have against any LG&E Company under this Agreement or the Assigned Station Two
Contracts. Big Rivers agrees that, within two (2) Business Days following that
expiration or termination, Big Rivers shall fund the Big Rivers Replacement R&R
Fund, to the same extent as would have initially been required of it under
Section 19.2 of the Station Two Power Sales Agreement upon Henderson's release
of the funds as provided for in Section 10.3(b) of this Agreement, and Henderson
shall thereafter be entitled to withdraw amounts from that fund as contemplated
in the Station Two Power Sales Agreement. Henderson further agrees to promptly
reimburse LEM or Station Two Subsidiary (as applicable) for any amounts paid by
them under this Section 10.3(g) to the extent Henderson receives insurance
proceeds
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by reason of the casualty, damage, event or other circumstance giving rise to
the relevant renewal(s) or replacement(s).
(5) Except as provided above with respect to Section 19.2 of the
Station Two Power Sales Agreement, and as expressly contemplated in this Section
10.3(g), nothing contained in this Section 10.3(g) is intended by the Parties to
modify their respective rights and obligations under this Agreement or any
Station Two Contract with respect to renewals or replacements relating to
Station Two or the funding of the same. Consistent with the foregoing, the
limitations on LEM's and Station Two Subsidiary's respective obligations to
provide funds to Henderson pursuant to this Section 10.3(g) shall not affect,
limit or eliminate the obligation of any LG&E Company to Henderson or Big Rivers
to ultimately share responsibility for the cost of such renewals or replacements
to the extent otherwise required under the terms of this Agreement or the
Assigned Station Two Contracts, nor shall they affect, limit or eliminate the
obligation of Henderson or Big Rivers (as applicable) under this Agreement or
any Station Two Contract to reimburse the LG&E Companies, or any of them, for
such costs, or to otherwise share responsibility for the same; provided, the
Parties each agree that any payment of funds by LEM or Station Two Subsidiary to
Henderson pursuant to this Section 10.3(g), upon the request of Henderson as
contemplated above, shall, to the extent of that payment, be deemed to satisfy
any obligations of the LG&E Companies and Big Rivers to Henderson to thereafter
fund that portion of the relevant renewals or replacements, whether under this
Agreement or any Station Two Contracts, including without limitation, any
obligation to pay that portion of any Capacity charges to Henderson or the
Trustee attributable to the costs and expenses of such renewal(s) or
replacement(s).
(6) In the event LEM and Station Two Subsidiary, or either of them,
shall be required at any time to provide funds to Henderson pursuant to this
Section 10.3(g), that LG&E Company shall provide Big Rivers with written notice
thereof, and Big Rivers agrees to reimburse that LG&E Company for its share
(based on its Station Two Improvement Sharing Ratio) of such amounts within five
(5) Business Days after its receipt of that written notice.
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10.4 [Intentionally Omitted].
10.5 Two County Restriction. In addition to any covenants or obligations
of Big Rivers under the Station Two Contracts, Big Rivers hereby further
covenants and agrees with the LG&E Companies and Henderson that, during the
Phase I Subcontract Term and the Phase II Assignment Term, Big Rivers will
comply with the requirements of the Letter Ruling and Section 21.1 of the
Station Two Power Sales Agreement with respect to all Station Two Power received
by it from any LG&E Company or transmitted by it over its transmission system.
The preceding covenant by Big Rivers shall continue until such time as
compliance with the terms of the Letter Ruling are no longer required under
applicable Laws to maintain and preserve the exemption from federal income
taxation of the interest on the Station Two Bonds. Notwithstanding anything in
this Agreement to the contrary, LEM and Station Two Subsidiary hereby
acknowledge and agree that, during the period that the Letter Ruling shall
remain in effect and shall continue to limit the distribution of Energy from
Station Two to customers within Henderson and Daviess Counties, (a) LEM and
Station Two Subsidiary shall sell Energy associated with the Station Two Surplus
Capacity (directly or indirectly) only to either Big Rivers, as contemplated in
this Agreement and in accordance with the Power Purchase Agreement, to
Henderson, or to Henderson Union pursuant to the terms of LEM/Henderson Union
Agreement for resale to Alcan, in each such case solely for distribution within
such two county area, and (b) the total amount of Energy produced from Station
Two during the month divided by the number of hours in the applicable month
shall not exceed the KWh Energy consumption by those retail customers served by
Henderson, Henderson Union or Green River located within Henderson and Daviess
Counties divided by the number of hours in the applicable month.
10.6 Two Counties' Demand. During the Phase I Subcontract Term and the
Phase II Assignment Term, the LG&E Companies or Big Rivers shall have the right,
in their discretion, upon written notice to Henderson and the other Party, to
request that the Station Two Bonds be refinanced in such a manner as will
eliminate the two county limitation of the
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Letter Ruling on the distribution and sale of Energy from Station Two, in the
event the LG&E Companies or Big Rivers, as the case may be, shall at any time
reasonably determine that the demand for Energy of the customers located in
Henderson and Daviess Counties to whom an LG&E Company or Big Rivers (directly
or through the Members) shall have a legal and contractual right to distribute
such Energy, is or is likely to become less than the amount of Station Two Unit
Output that is then or shall thereafter become available, for whatever reason,
including, without limitation, for the reason set forth in Section 8.12(f) and
9.7(e) of this Agreement. The Parties hereby agree that, immediately following
receipt of such a request from the LG&E Companies or Big Rivers, as the case may
be, Henderson, Big Rivers and the LG&E Companies shall take immediate steps,
using their respective commercially reasonable efforts, to cause Henderson to
refinance the Station Two Bonds at the earliest possible time with taxable bonds
or other forms of indebtedness of Henderson that will eliminate the limitation
of the Letter Ruling on distribution and sale of the Energy from Station Two
outside the two counties, and that otherwise contains terms that are customary
and commercially available at the time of such request for the type of financing
sought by the Parties. The Parties shall reasonably cooperate with each other
and take all action within their reasonable control as may be reasonably
necessary to complete the refinancing. The Parties hereby agree to share all of
the costs, fees and expenses associated with such refinancing, including the
incremental increase (if any) in interest costs (determined on a net present
value basis using a discount rate of eight percent (8%)) associated with
refinancing the Station Two Bonds with other taxable or tax-exempt indebtedness
(collectively, the "Refinancing Costs"), in proportion to the percentage of
Capacity allocated to Henderson, on the one hand, and to Big Rivers or Station
Two Subsidiary, on the other hand, for the month immediately preceding the month
in which the refinancing occurs, and with the further agreement between Big
Rivers and the LG&E Companies that the costs, fees and expenses of such
refinancing allocated to Big Rivers and Station Two Subsidiary shall be borne
equally by Big Rivers and Station Two Subsidiary. Notwithstanding the foregoing,
in the event that, during the period commencing on the date of the refinancing
of the Station Two Bonds and expiring on the earlier of March 1, 2002 or the
date which is three (3) years following the date of that refinancing, Henderson
has not recouped its proportionate share of the Refinancing Costs from profits
realized from sales of
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capacity or energy from its Station One generating station and/or from profits
realized from sales of its reserved Capacity or associated Energy from Station
Two (to the extent such sales are otherwise permitted under the Station Two
Contracts), in either case directly or indirectly to customers located outside
of Henderson and Daviess Counties, Kentucky, then the LG&E Companies shall be
obligated to pay to Henderson an amount in immediately available funds equal to
that portion of the Refinancing Costs not so recouped by Henderson. The
foregoing payment (if one shall become due) shall be paid by the LG&E Companies
within 10 days after the written request of Henderson is delivered following the
expiration of the period described above. Henderson agrees to use commercially
reasonable efforts to sell all such capacity and energy to the extent required
to recoup its Refinancing Costs as contemplated above, and shall maintain
appropriate records of all such transactions so that the Parties shall be able
to verify the profits realized therefrom by Henderson. If Big Rivers was the
Party which requested such refinancing, Big Rivers shall, within 15 days after
the written request of any of he LG&E Companies, reimburse the LG&E Companies
the amounts, if any, paid by the LG&E Companies to Henderson under this Section
10.6 to cover the portion of the Refinancing Costs not recouped by Henderson in
the manner described above.
10.7 Suspension of Performance.
(a) Prior to any LG&E Company's exercise of any rights that it may
have to terminate this Agreement (which rights shall not be affected or limited
by the provisions of this Section 10.7), and subject to any rights of off-set or
similar rights that may be available under this Agreement, the Station Two
Contracts or applicable Laws, the obligations of that LG&E Company under Section
8 of this Agreement, entitled "Phase I Subcontract," and, during the Phase II
Assignment Term, under any of the Assigned Station Two Contracts shall not be
disturbed, excused or suspended by reason of any breach or default by Big Rivers
or Henderson under this Agreement or any Station Two Contract, or by reason of
any breach or default by Big Rivers of any of the other Operative Documents
(including the termination of any of the Operative Documents), unless and only
to the extent that Big Rivers also has (and can exercise) the concomitant right
to disturb, excuse or suspend its performance under the
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corresponding portion(s) of such Station Two Contract by reason of a breach or
default by Henderson hereunder or thereunder (which rights Big Rivers
acknowledges it has an obligation to diligently pursue pursuant to Section
13.8(c) of this Agreement).
(b) Notwithstanding the limitations on the suspension of performance
by the LG&E Companies set forth in (a), above, and in addition to the
termination rights provided for in Section 13 of this Agreement, entitled
"Termination; Default; Remedies," the Parties hereby agree that: (i) the LG&E
Companies shall have the right to terminate this Agreement if at any time during
the Term (x) the Participation Agreement, the Power Purchase Agreement, the
Transmission Services and Interconnection Agreement, the Cost Sharing Agreement
and the Facilities Operating Agreement are terminated in accordance with their
respective terms by any of the LG&E Companies, or by WKEC, by reason of any
breach of default by Big Rivers under all or any of those agreements, or (y) the
Participation Agreement, the Power Purchase Agreement, the Transmission Services
and Interconnection Agreement and the Lease are terminated in accordance with
their respective terms by any of the LG&E Companies, or by WKEC, by reason of
any breach or default by Big Rivers under all or any of those agreements
(provided, that, the LG&E Companies' rights to terminate this Agreement by
reason of any of the circumstances described in (x) or (y), above, shall be
further conditioned upon the LG&E Companies then or thereafter having been
directly or indirectly denied access to, or the full use and enjoyment of, any
of the Fundamental Rights (as defined in Section 10.7(c) of this Agreement) for
any of the reasons described in Section 10.7(c) of this Agreement or as
permitted under Subclause (iv) of this Section 10.7(b)); (ii) Big Rivers shall
have the right to terminate this Agreement if at any time during the Term (x)
the Participation Agreement, the Power Purchase Agreement, the Transmission
Services and Interconnection Agreement, the Cost Sharing Agreement and the
Facilities Operating Agreement are terminated in accordance with their
respective terms by Big Rivers by reason of any breach or default by any of the
LG&E Companies or WKEC under all or any of those agreements, or (y) the
Participation Agreement, the Power Purchase Agreement, the Transmission Services
and Interconnection Agreement and the Lease are terminated in accordance with
their respective terms by Big
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Rivers by reason of any breach or default by any of the LG&E Companies or WKEC
under all or any of those agreements; (iii) the LG&E Companies and Big Rivers
shall at all times have the right to pursue each of their other respective
rights (if any) under this Agreement and the Station Two Contracts to terminate
this Agreement and/or any of the Station Two Contracts by reason of a breach or
default hereunder or thereunder by Henderson (subject, however, to any consent
rights in this Agreement as may exist as between the LG&E Companies and Big
Rivers prior to their taking any action to terminate any of the Station Two
Contracts); and (iv) following the retirement or redemption in full of the
Station Two Bonds, in the event that a breach or default by Henderson of this
Agreement or any of the Station Two Contracts, or any negligent or willful
misconduct of Henderson or any of its employees, agents or representatives,
shall have the effect, directly or indirectly, of denying the LG&E Companies and
Big Rivers access to, or the full use and enjoyment of, any of the Fundamental
Rights, then until such time as Henderson shall fully restore that Fundamental
Right the LG&E Companies and Big Rivers, in addition to all other rights and
remedies available to such Parties under this Agreement or the Station Two
Contracts, or in law or at equity, shall be excuse (without any obligations or
liability to Henderson or any other Party for breach or default of this
Agreement or the Station Two Contracts) from all obligations to Henderson under
the Station Two Power Sales Agreement to pay any Capacity charge payments and
reimbursement payments with respect to the Station Two Unit Output that is no
longer available, and under the Station Two Operating Agreement. In the event
the LG&E Companies are denied access to, or the full use and enjoyment of, any
of the Fundamental Rights by reason of a breach or default, or the negligence or
willful misconduct, of Henderson or its employees, agents or representatives, as
contemplated above, whether or not Big Rivers is also denied such access, use or
enjoyment, then the LG&E Companies shall be entitled to pursue and exercise any
and all rights and remedies that they may have against Henderson by reason
thereof, including without limitation, specific performance by Henderson of its
obligations under this Agreement and the Station Two Contracts, and under those
circumstances Big Rivers agrees to reasonably cooperate with the LG&E Companies
in their efforts to restore all of their Fundamental Rights at the earliest
practicable time. To the extent that the LG&E Companies and Big Rivers shall be
excused from their Capacity charge
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payment obligations to Henderson as contemplated above, then (A) in the case of
the LG&E Companies, they shall also be released from any obligation under this
Agreement to pay to Big Rivers, or reimburse Big Rivers for, any amounts
representing portions of those Capacity charge payments, and (B) in the case of
Big Rivers, it shall also be released from any obligation under this Agreement
to pay to the LG&E Companies, or reimburse them for, any amounts representing
portions of those Capacity charge payments.
(c) For purposes of this Section 10.7, the following rights, entitlements
and benefits from or relating to Station Two shall each constitute a
"Fundamental Right": (1) the access to and right throughout the Term to operate
and maintain Station Two and the other Station Two Assets (including, without
limitation, access to all of the Joint Use Facilities) as contemplated in this
Agreement and the Station Two Contracts; (2) the access to and right throughout
the Term to the full use and enjoyment of the Station Two Unit Output
(including, without limitation, the right of LEM and/or Station Two Subsidiary
to purchase, accept delivery of and resell such Unit Output to Big Rivers,
Henderson or Henderson Union (as contemplated in Sections 8.12(e) and 9.7(c)),
or to other Persons following the redemption or retirement in full of the
Station Two Bonds) in the manner, to the extent and at the costs contemplated in
this Agreement, the Station Two Power Sales Agreement and the LEM/Henderson
Union Agreement or, in the case of the rights of Big Rivers, under the Station
Two Power Sales Agreement alone; and (3) the access to and right throughout the
Term to reserve Big Rivers' available transmission capacity at tariffed or
market rates in quantities sufficient for (y) delivery of all Station Two Unit
Output to Henderson and to the Members of Big Rivers for distribution by them
solely within Henderson and Daviess Counties until such time as the Station Two
Bonds have been fully redeemed or retired, and (z) delivery of all Station Two
Unit Output to one or more interconnection points between the transmission
systems of Big Rivers and each interconnected utility's transmission system
after the Station Two Bonds have been fully redeemed or retired, in accordance
with Big Rivers' open access transmission tariff or any successor tariff of Big
Rivers or any other tariff that replaces Big Rivers' open access transmission
tariff or successor tariff that has been approved by FERC and that relates to
the Big Rivers' transmission system.
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(d) In the event (1) the Operative Documents (excluding this Agreement,
the Settlement Promissory Note, the Settlement Mortgage and the Subordinate
Mortgage and Security Agreement) shall terminate at any time during the Term of
this Agreement and (2) LEM and/or Station Two Subsidiary shall thereafter
continue to operate Station Two and to receive the Station Two Unit Output
pursuant to this Agreement, then Big Rivers shall, throughout the remainder of
the Term, continue to be entitled to receive on each Monthly Payment Date a
portion (determined on the basis of the formula set forth below in this Section
10.7(d)) of the monthly installments of the Annual Fixed Payment or Rental
Payment that it would have received under the Power Purchase Agreement or the
Lease had such agreements not been terminated (but excluding any adjustments to
the Annual Fixed Payments or Rental Payment that otherwise would be contemplated
because the Contract Limits have been eliminated due to the termination of the
Power Purchase Agreement), and a portion (determined on the basis of the formula
set forth below in this Section 10.7(d)) of the refund payment otherwise due to
WKEC or its Affiliate under Section 21.8 of the Participation Agreement shall
not be due and owing to WKEC or such Affiliate, but only for so long as (i) Big
Rivers continues to fulfill its obligation to purchase the Station Two Unit
Output from LEM and/or Station Two Subsidiary upon the terms and conditions
specified in Section 8.12(e) of this Agreement, or to make the payments to LEM
and/or Station Two Subsidiary in lieu of those purchases as permitted under
Section 8.12(f), (ii) Big Rivers continues to fulfill and discharge all payment
and other obligations to LEM under the Settlement Promissory Note, and (iii) the
LG&E Companies continue to receive all of the Fundamental Rights in all material
respects or, should any of the Fundamental Rights be denied the LG&E Companies,
the denial of such right is not by reason of a breach or default of this
Agreement or any Station Two Contract by Big Rivers or by reason of the
negligence or willful misconduct of Big Rivers or its employees, agents or
representatives. The portion of each monthly installment of any Annual Fixed
Payment or Rental Payment, if any, that shall be due Big Rivers under this
Section 10.7(d) shall be an amount equal to (1) the monthly installment of
Annual Fixed Payment or Rental Payment that would have been due Big Rivers at
that time under either the
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Power Purchase Agreement or the Lease had it continued in force and effect
(subject to all adjustments in such installment payments as shall then be
applicable under the terms of the Power Purchase Agreement and the Lease, but
excluding any adjustments to the Annual Fixed Payments or Rental Payment that
otherwise would be contemplated because the Contract Limits have been eliminated
due to the termination of the Power Purchase Agreement), multiplied by (2) the
ratio by which: (A)(i) the total number of megawatts of Station Two Surplus
Capacity allocated to Big Rivers and/or Station Two Subsidiary (or its
successors or permitted assigns) under the Station Two Power Sales Agreement on
the date on which the last of the Operative Documents (other than this
Agreement) terminates minus (ii) 50% multiplied by the difference (if any)
between (x) the average number of megawatts of Power anticipated to be reserved
for each hour by Henderson from Station Two between the relevant Monthly Payment
Date and the fourth (4th) anniversary thereof (as reflected in the current five
(5) year forecast of Henderson's needs required to be made under the Station Two
Power Sales Agreement, but adjusted to include any Economic Development Power
reserved by Henderson for its customers as contemplated in the 1998 Amendments
and Sections 11.1, 11.2 and 11.3 of this Agreement) and (y) the average number
of megawatts of Power from Station Two that were reserved by Henderson for each
hour during the four (4) year period immediately preceding the relevant Monthly
Payment Date, including, without limitation, any Economic Development Power
reserved by Henderson during the preceding four (4) year period; bears to (B)
1708 Megawatts. The portion of the refund of the Initial Fixed Payment or the
Initial Rental Payment that will not be due to WKEC or its Affiliate, if any,
shall be an amount equal to the amount of such refund payment that is due by Big
Rivers to WKEC or such Affiliate under Section 21.8 of the Participation
Agreement multiplied by the ratio described in (2) of the immediately preceding
sentence of this Section 10.7(d).
10.8 Insurance.
(a) Station Two Subsidiary shall have in place on the Effective Date, and
shall thereafter maintain in effect at all times during the Term, in accordance
with standards prevailing in the electric power industry (including the
independent power industry) for assets
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of similar size and nature to Station Two, insurance coverage for Station Two
with responsible insurers, for the benefit of Station Two Subsidiary, Henderson
and Big Rivers as their respective interests may appear, to protect and insure
against: third party liability for bodily injury and property damage, all risks
of physical damage to property or equipment, including transportation and
installation perils, catastrophic losses due to either third party liability or
damage to first party property, workers compensation insurance and such other
insurance as Station Two Subsidiary deems necessary, with reasonable limits and
subject to appropriate exclusions and deductibles/retentions. Such insurance
shall at all times be subject to prior approval by Henderson, which approval
shall not be unreasonably withheld, conditioned or delayed by Henderson. In no
event, however, shall the coverage maintained in effect by Station Two
Subsidiary at any time be less than the insurance coverages of the types and in
the minimum amounts set forth in Section 18.1 of the Station Two Operating
Agreement or as required in the Bond Ordinance or the Debt Restructuring
Documents, whichever is greater; provided, that Henderson shall in no event bear
any responsibility for payment of the increase in insurance premiums caused by
the requirements of the Debt Restructuring Documents. Station Two Subsidiary
may, at its option, continue and maintain in effect, the insurance policies and
coverage on Station Two in effect on the Effective Date and to have itself named
as an additional insured party, and Henderson and Big Rivers agree to reasonably
cooperate with Station Two Subsidiary to accomplish the same, upon its request.
Henderson agrees to promptly notify Station Two Subsidiary at such time as the
provisions of the Bond Ordinance require insurance coverages that are different
than those required by the Station Two Operating Agreement.
(b) At all times during the Term, when the Station Two Bonds shall remain
outstanding, all insurance proceeds from policies obtained pursuant hereto or
pursuant to any other provision of the Station Two Contracts ("Station Two
Assets Insurance") shall be paid and applied by Henderson, Big Rivers, the LG&E
Companies and/or the insurance company or companies providing such insurance in
accordance with the provisions of the Bond Ordinance and Section 12.2 of this
Agreement.
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(c) Henderson shall be named as the first named insured and each of Big
Rivers and Station Two Subsidiary shall be named as additional named insureds on
all policies of Station Two Assets Insurance (except for any crime policy and
any workers' compensation and employers' liability policy), and such policies
that do not carry a "separation of insureds" provision shall carry
cross-liability endorsements.
(d) Station Two Subsidiary shall notify Henderson and Big Rivers of the
assertion of any claim relating to the Station Two Assets immediately upon
assertion of the same, or of the occurrence of an event likely to result in the
assertion of such a claim. Station Two Subsidiary shall report annually to
Henderson, Big Rivers and the Operating Committee all claims asserted in the
amount of $100,000 or more, and shall provide Henderson, Big Rivers and the
Operating Committee with all notices provided to insurers with respect to any
such claim.
(e) Station Two Subsidiary shall furnish the Parties with Certificates of
Insurance evidencing the existence of the Station Two Assets Insurance and shall
furnish Henderson a copy of all policies of insurance providing coverage for
Station Two. Upon the request of Big Rivers or Henderson, Station Two Subsidiary
shall make available for inspection and copying a certified copy of each of the
policy forms of Station Two Assets Insurance, together with a line sheet
therefor (and any subsequent amendments) naming the insurers and underwriters
and the extent of their participation.
(f) Each of the Station Two Assets Insurance policies shall be endorsed so
as to provide that the Parties shall be given the same advance notice of
cancellation or material change as that required to be given to Station Two
Subsidiary.
(g) Nothing in this Agreement or the Station Two Contracts shall prohibit
Station Two Subsidiary from combining the coverage required by this Agreement
with coverage outside the scope of that required by this Agreement as long as
such combining of coverage in no way adversely affects the coverage required
hereunder.
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(h) Station Two Subsidiary shall assist any insurer in the investigation,
adjustment and settlement of any loss or claim covered by Station Two Assets
Insurance. Station Two Subsidiary and Henderson shall jointly present and
prosecute claims against insurers providing Station Two Assets Insurance in
respect of any loss of or damage to the Station Two Assets or liability of any
Party to third parties covered by such insurance.
10.9 Cooperation in Fuel Procurement. During the Phase I Subcontract Term
and the Phase II Assignment Term, Station Two Subsidiary or its Affiliates may
advise and assist Henderson, as and when requested by Henderson, in its
procurement of fuel and reagents for Station Two. Subject to applicable laws of
the Commonwealth of Kentucky, during the Phase I Subcontract Term and Phase II
Assignment Term, Henderson shall provide Station Two Subsidiary reasonable
advance notice each time that it intends to purchase fuel or reagents for
Station Two and shall offer Station Two Subsidiary or its designated Affiliates
a reasonable opportunity to participate in any procedures required of Henderson
by the Laws of the Commonwealth of Kentucky relating to its fuel and reagent
procurement for Station Two. Big Rivers acknowledges and agrees that Station Two
Subsidiary or its Affiliate may advise and assist Henderson in Henderson's
purchase of fuel and reagents for Station Two, and hereby agrees that it will
take no action that would in any manner interfere with such arrangement between
Henderson and Station Two Subsidiary (or any of its Affiliates); provided, Big
Rivers shall have no responsibility, liability or obligation, of any nature
whatsoever, relating to Station Two Subsidiary's advice and assistance to
Henderson hereunder. Station Two Subsidiary has agreed to indemnify Big Rivers,
upon the terms set forth in Section 10.15(b), for certain costs, liabilities and
obligations that it may incur during the Phase I Subcontract Term under certain
fuel supply agreements.
10.10 Maintenance Power. During the Phase I Subcontract Term and the Phase
II Assignment Term, Henderson agrees that, in the event both of the generating
units at Station Two are out of service by reason of a scheduled or unscheduled
outage, Henderson shall provide to Station Two all Power required for its
operation, maintenance and repair during that scheduled or unscheduled outage.
Henderson shall be paid by Station Two Subsidiary all
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of Henderson's actual costs to provide such Power to Station Two, and such
expenditures by Station Two Subsidiary shall be deemed to be reasonable and
necessary operations and maintenance expenses of Station Two for all purposes
under this Agreement and the Station Two Contracts.
10.11 Access to Premises; Rights-of-Way.
(a) Big Rivers and Henderson shall provide rights of access, ingress and
egress, to the LG&E Companies and their respective agents, attorneys,
representatives, Affiliates and employees to all plants, facilities, land and
properties for the purpose of enabling the LG&E Companies, and their agents,
attorneys, representatives, Affiliates and employees, to perform or fulfill
their respective obligations under this Agreement and the Assigned Station Two
Contracts (or pursuant to a new agreement entered into by the LG&E Companies and
Henderson in accordance with Section 13.8(f) of this Agreement), provided such
access does not unreasonably interfere with Big Rivers' ability to fulfill its
responsibilities and exercise its rights under this Agreement or to otherwise
conduct its operations, including, without limitation, its operation of the
facilities. Big Rivers (to the extent such right is not provided to the LG&E
Companies in any Operative Document or in the event such right is provided to
the LG&E Companies in an Operative Document but that Operative Document shall at
any time be terminated, rescinded or revoked prior to termination or expiration
of this Agreement) and Henderson each hereby further grants, or shall hereafter
grant, to the LG&E Companies such non-exclusive rights-of-way and easements over
its real property or the non-exclusive right to use any easement or
rights-of-way from others in which either Big Rivers or Henderson may possess an
interest, as may be reasonably necessary to enable the LG&E Companies and their
respective agents, attorneys, representatives, Affiliates and employees to
perform or fulfill their respective obligations to Big Rivers or Henderson under
this Agreement or the Assigned Station Two Contracts (or pursuant to a new
agreement entered into by the LG&E Companies and Henderson in accordance with
Section 13.8(f) of this Agreement), including, without limitation, all such
rights-of-way and easements that Big Rivers and Henderson shall have granted to
the other prior to the Effective Date or may
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hereafter grant to the other, in relation to Station Two or the other Station
Two Assets, provided such access does not unreasonably interfere with Big
Rivers' ability to fulfill its responsibilities and exercise its rights under
this Agreement or to otherwise conduct its operations, including, without
limitation, its operation of its transmission facilities. Neither Big Rivers nor
Henderson shall take any action to disturb the right or authority of the other
Party or any of the LG&E Companies at any time during the Phase I Subcontract
Term or the Phase II Assignment Term to any such rights, rights-of-way or
easements, or to the use thereof. At the request of the LG&E Companies, the
Parties shall execute and file with appropriate governmental offices such
short-form instruments or other agreements, instruments and documents, in form
reasonably satisfactory to the LG&E Companies, evidencing the LG&E Companies'
rights and interests in the properties granted in this Section 10.11. At such
time as Station Two Subsidiary or its Affiliates, successors or permitted
assigns under Section 15 of this Agreement shall no longer have the right to
operate and maintain Station Two, the LG&E Companies shall execute and file with
appropriate governmental offices such instruments and other agreements and
documents in form reasonably satisfactory to Henderson and Big Rivers,
respectively, releasing the LG&E Companies' rights and interest in those
properties granted in this Section 10.11.
(b) Big Rivers shall at all times have access to, and the right of ingress
and egress from, Station Two solely for the purposes of (1) providing the
services required of it under this Agreement and the other Operative Documents
or, (2) upon reasonable prior written notice to Station Two Subsidiary,
examining and observing the operation of the Station Two Assets, provided such
access does not unreasonably interfere with Station Two Subsidiary's ability to
fulfill its responsibilities and exercise its rights under this Agreement and
the Assigned Station Two Contracts. Any entry by Big Rivers or its employees,
agents or representatives on the premises of Station Two, and each examination
or inspection conducted by Big Rivers or its employees, agents or
representatives, shall be done at the expense and risk of Big Rivers, and shall
be conducted during normal business hours upon reasonable prior notice to
Station Two Subsidiary.
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10.12 Covenants to Exercise Rights and Remedies.
(a) At any time during the Phase I Subcontract Term, Big Rivers shall
exercise such rights in respect of the Station Two Contracts as are reasonably
requested from time to time by Station Two Subsidiary, LEM or WKEC to the extent
the exercise of such rights is reasonably necessary for any LG&E Company to
receive the full benefit, use and enjoyment of the LG&E Companies' respective
rights under the Phase I Subcontract. At any time during the Phase II Assignment
Term, Big Rivers shall exercise all such rights and shall consent to the taking
of such actions in respect of the Station Two Contracts as are reasonably
requested from time to time by any LG&E Company and as are reasonably necessary
to preserve the LG&E Company's rights and interests under this Agreement and the
Station Two Contracts. Such rights and consents that may be requested of Big
Rivers at any time during the Term shall include, to the extent such rights
reside in Big Rivers, without limitation, (a) exercising the right to request a
test to determine the total Capacity of Station Two pursuant to Section 3.6 of
the Station Two Power Sales Agreement, and (b) fully enforcing all rights and
legal remedies Big Rivers has under the Station Two Contracts (as further
provided in Section 13.8 of this Agreement), whether or not on account of a
breach or default thereunder by Henderson, and refraining from waiving
compliance by Henderson with any of its obligations under the Station Two
Contracts or this Agreement.
(b) Notwithstanding anything in this Agreement to the contrary, none of
the LG&E Companies or Big Rivers shall waive any rights, or fail to enforce any
remedy, that it may have against Henderson, the waiver or failure of which would
materially adversely affect the other Party's rights and interests under this
Agreement or the Station Two Contracts; provided, however, in fulfilling the
foregoing covenants, Big Rivers shall have no obligation to terminate this
Agreement or any Station Two Contract or exercise any option it may have to
purchase any property or assets related to Station Two, and the LG&E Companies
shall have no obligation to terminate this Agreement.
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10.13 Notice of Delivery Obligations. Big Rivers and the LG&E Companies
hereby agree that each shall provide the other Party with all notices, reports,
documents or other written communications that it directs to or receives from
Henderson pursuant to or relating to the Station Two Assets, the Station Two
Contracts or the Bond Ordinance.
10.14 Access to Records. From and after the Effective Date, and at all
times during the Term, each of the Parties shall, at the reasonable request of
another Party, afford or cause to be afforded to the agents, attorneys,
accountants and other authorized representatives of such other Party reasonable
access during normal business hours to all employees, representatives,
properties, books, records (excluding employee records), data, contracts and
documents, to which such requesting Party reasonably needs access to perform its
obligations under, or to exercise its rights and obtain the full benefits under,
this Agreement and the Station Two Contracts, and shall permit such
representatives, at the requesting Party's expense, to use and, if necessary,
make copies of such books, records, data, contracts and documents.
Notwithstanding anything herein to the contrary, each of the Parties shall
maintain dominion and control over their respective books, records, data,
contracts and documents at all times during the Term.
10.15 Indemnification; Waivers and Limitations of Liability.
(a) Station Two Subsidiary shall be fully responsible to Big Rivers during
the Phase I Subcontract Term for the performance, on behalf of Big Rivers, of
those provisions of the Station Two Operating Agreement and the Joint Facilities
Agreement that Station Two Subsidiary has expressly agreed to perform under
Section 8 of this Agreement, entitled "Phase I Subcontract," and during the
Phase II Assignment Term for the Assumed Station Two Liabilities that it has
expressly agreed to perform and discharge under Section 9 of this Agreement,
entitled "Phase II Assignment" (collectively, the "Station Two Subsidiary's
Performance Obligations"), in each case to the extent and in the manner required
by those Station Two Contracts and this Agreement. From and after the Execution
Date, Station Two Subsidiary hereby agrees to indemnify and save harmless Big
Rivers and Henderson from all
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claims, losses, liabilities, damages, costs (including court costs) and expenses
(including reasonable attorneys' and accountants fees) suffered or incurred by,
or made against, each such Party, or their respective agents, representatives
and employees, arising out of, resulting from or related to the following:
(1) Any inaccurate representation or warranty made by the LG&E
Companies to that Party in this Agreement.
(2) Any breach or default by an LG&E Company in the performance or
discharge of any of the covenants or agreements made to that Party in this
Agreement; provided, however, that with respect to the LG&E Companies'
performance obligations under Section 8.2 of this Agreement, such
performance shall be irrespective of any materiality standard set forth in
Section 8.3 of this Agreement.
(3) All liability and expense incurred by that Party on account of
any and all damages, claims or actions, including injury to or death of
Persons or damage to property, arising from any act, omission or accident
in connection with Station Two (including in the case of Henderson only,
without limitation, damages, liability and expense arising out of
Environmental Violations or Environmental Conditions), in each case, to
the extent caused by the negligence or any willful misconduct of Station
Two Subsidiary, or its agents, representatives and/or employees.
(4) For the benefit of Big Rivers only throughout the entire Term,
any breach or noncompliance by any LG&E Company with the Bond Ordinance in
performing or not performing its obligations under this Agreement and/or
the Station Two Contracts during the Term (it being understood that in the
event such breach or non-compliance by the LG&E Companies causes Henderson
to be in breach of the Bond Ordinance, the indemnity provided by the LG&E
Companies pursuant to this paragraph shall include the reasonable costs of
refinancing the Station Two Bonds incurred by Station Two Subsidiary
(including without limitation, incremental interest costs) if such
refinancing is deemed appropriate by
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Henderson and Big Rivers as a consequence of such breach or non-compliance
by an LG&E Company).
Nothing in this Section 10.15(a) shall impose on Station Two Subsidiary any
obligation for any such liability or expense incurred by that Party that arises
out of or otherwise is the result of the negligence or the willful misconduct of
Big Rivers or Henderson, or any of their respective agents, representatives or
employees (which negligence or willful misconduct is not the direct result of an
act or omission of any LG&E Company or its agents, representatives or
employees), or the breach or default of any of the terms or provisions of this
Agreement or the Station Two Contracts or any other Operative Document, which
Big Rivers or Henderson, respectively, is required to perform from and after the
Effective Date (in any such event which breach or default is not the direct
result of a breach or default by any LG&E Company under such agreements or any
LG&E Company's acts or omissions) or was required to perform prior to the
Effective Date. Notwithstanding anything contained in this Section 10.15(a) or
elsewhere in this Agreement to the contrary, and except to the extent
contemplated in Section 10.15(j) of this Agreement, no LG&E Company shall have
liability to Big Rivers under this Agreement for environmental matters
(including, without limitation, Environmental Violations and Environmental
Conditions), or any damages, liabilities, claims, injuries, costs, or expenses
arising out of, or relating to, such environmental matters, at or relating to
Station Two or any other Station Two Assets, or associated with its operation of
Station Two or any other Station Two Assets, and its sole obligation (if any) to
Big Rivers relating thereto shall be as set forth in Article 14 of the
Participation Agreement and Section 10.15(j) of this Agreement.
(b) During the Phase I Subcontract Term, Station Two Subsidiary shall
indemnify, defend and hold harmless Big Rivers and its directors, officers and
employees for any liability, loss, damage, claim, and cost (including reasonable
attorneys' fees) arising or accruing after the Effective Date in connection with
each and every fuel supply contract held by Big Rivers as of the Execution Date
for use in connection with Station Two, and all other fuel supply contracts
entered into by Big Rivers after the Execution Date with Station Two
Subsidiary's
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prior written consent, in each case including liabilities, losses, damages,
claims, and costs (including reasonable attorneys' fees) arising from any act or
omission of Big Rivers following the Effective Date, provided that, if such
liability, loss, damage, claim or cost (including reasonable attorneys' fees)
arises from any act or omission of Big Rivers that constitutes a breach or
default by Big Rivers under any such fuel supply contract, or negligence or
willful misconduct by Big Rivers or its employees, agents or representatives,
(which breach, default, negligence or willful misconduct by Big Rivers under any
such fuel supply contract is not related to or caused by any act or omission of
Station Two Subsidiary or any other LG&E Company), then Station Two Subsidiary
shall have no obligation to Big Rivers under this provision unless Station Two
Subsidiary or any other LG&E Company requested or concurred in writing to such
act or omission by Big Rivers (in which case Station Two Subsidiary's
obligations under this Section shall not be excused).
(c) From and after the Execution Date, Henderson, in addition to and not
in substitution for any indemnities given in any provision of the Station Two
Contracts, hereby agrees to indemnify and save harmless the LG&E Companies and
Big Rivers, and each of their respective agents, representatives, servants and
employees, from any and all claims, losses, liabilities, damages, costs
(including court costs) and expenses (including reasonable attorneys' and
accountants' fees) suffered or incurred by, or made against, such LG&E Companies
(or any of them) or Big Rivers, or their respective agents, representatives and
employees, arising out of, resulting from or related to the following:
(1) Any inaccurate representation or warranty made by Henderson to
that Party in this Agreement;
(2) Any breach or default by Henderson in the performance or
discharge of any of the covenants or agreements made to that Party in this
Agreement.
(3) For the benefit of each of the LG&E Companies throughout the
entire Term, all liability and expense incurred or suffered by that LG&E
Company on account of any
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and all damages, claims or actions, including injury to or death of
Persons or damage to property, arising from any act, omission or accident
in connection with Station Two (including, without limitation, damages,
liability and expense arising out of Environmental Violations or
Environmental Conditions), in each case to the extent caused by the
negligence or any willful misconduct of Henderson, its agents,
representatives and/or employees.
Nothing in this Section 10.15(c) shall impose on Henderson any obligation for
any such liability or expense incurred by any of the LG&E Companies or Big
Rivers that arises out of or otherwise is the result of the negligence or
willful misconduct of any of the LG&E Companies or Big Rivers, respectively, or
their respective agents, representatives and/or employees (which negligence or
willful misconduct is not the direct result of an act or omission of Henderson
or its agents, representatives or employees), or the breach or default of any of
the terms or provisions of this Agreement or the Station Two Contracts which any
of the LG&E Companies or Big Rivers, respectively, is required to perform from
and after the Effective Date (which breach or default is not the direct result
of a breach or default by Henderson under such agreements or Henderson's or its
agent's, representative's or employee's acts or omissions).
(d) From and after the Execution Date, Big Rivers, in addition to and not
in substitution for any indemnities given in any provision of the Station Two
Contracts, hereby agrees to indemnify and save harmless each of the LG&E
Companies and Henderson, and the respective agents, representatives and
employees of Station Two Subsidiary and Henderson, from any and all claims,
losses, liabilities, damages, costs (including court costs) and expenses
(including reasonable attorneys' and accountants' fees) suffered or incurred by
or made against any LG&E Companies or Henderson, or their respective agents,
representatives and employees, arising out of, resulting from or related to the
following:
(1) Any inaccurate representation or warranty made by Big Rivers to
that Party in this Agreement.
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(2) Any breach or default by Big Rivers in the performance or
discharge of any of the covenants or agreements made to that Party in this
Agreement.
(3) For the benefit of the LG&E Companies only throughout the entire
Term, all liability and expense incurred or suffered by that LG&E Company
on account of any and all damages, claims or actions, including injury to
or death of Persons or damage to property, arising from any act, omission
or accident in connection with Station Two to the extent caused by the
negligence or any willful misconduct of Big Rivers or its agents,
representatives and/or employees.
(4) For the benefit of each of the LG&E Companies only throughout
the entire Term, any breach or noncompliance by Big Rivers with the Bond
Ordinance in performing or not performing its obligations under this
Agreement and/or the Station Two Contracts during the Term (it being
understood that in the event such breach or non-compliance by Big Rivers
causes Henderson to be in breach of the Bond Ordinance, the indemnity
provided by Big Rivers pursuant to this paragraph shall include the
reasonable costs of refinancing the Station Two Bonds incurred by Station
Two Subsidiary (including without limitation, incremental interest costs)
if such refinancing is deemed appropriate by Henderson and Station Two
Subsidiary as a consequence of such breach or non-compliance of Big
Rivers).
Nothing in this Section 10.15(d) shall impose on Big Rivers any obligation for
any such liability or expense incurred by any of the LG&E Companies or Henderson
that arises out of or otherwise is the result of the negligence or willful
misconduct of any of the LG&E Companies or Henderson, respectively, or any of
their respective agents, representatives and/or employees (which negligence or
willful misconduct is not the direct result of an act or omission of Big Rivers
or its agents, representatives or employees), or the breach or default of any of
the terms or provisions of this Agreement or the Station Two Contracts which an
LG&E Company or Henderson, respectively, is required to perform from and after
the
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Effective Date (which breach or default is not the direct result of a breach or
default by Big Rivers under such agreements or acts or omissions of Big Rivers
or its agents, representatives or employees). Notwithstanding anything contained
in this Section 10.15(d) or elsewhere in this Agreement to the contrary, and
except to the extent contemplated in Section 10.15(j) of this Agreement, Big
Rivers shall have no liability to any LG&E Company under this Agreement for
environmental matters (including, without limitation, Environmental Violations
and Environmental Conditions), or any damages, liabilities, claims, injuries,
costs, or expenses arising out of, or relating to, such environmental matters,
at or relating to Station Two or any other Station Two Assets, or associated
with its operation of Station Two or any other Station Two Assets, and its sole
obligation (if any) to the LG&E Companies relating thereto shall be as set forth
in Article 14 of the Participation Agreement and Section 10.15(j) of this
Agreement.
(e) Station Two Subsidiary shall not be liable or in any way responsible
for, and Henderson and Big Rivers each hereby waives all claims or actions
against Station Two Subsidiary and its Affiliates, agents, representatives and
employees for, any breach or default by Big Rivers of this Agreement or any of
the Station Two Contracts, as the same are now or may hereafter be in effect
(unless such breach or default is the result of an act or omission by any LG&E
Company).
(f) None of the LG&E Companies, unless otherwise specifically provided in
this Agreement or in the Assumed Station Two Liabilities, shall be liable at any
time for any act, omission or legal obligation (i) of any other Party to this
Agreement; (ii) of the agents, representatives and/or employees of any other
Parties, or (iii) of any persons, corporations or other entities not a Party to
this Agreement. The provisions of this Section 10.15(f) are intended to provide
the LG&E Companies, throughout the Term, with the same rights and entitlements
as those that are provided to Henderson and Big Rivers in Section 21.2 of the
Station Two Operating Agreement.
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(g) Neither Big Rivers nor any of the LG&E Companies (the "Released
Party"), nor any of the Released Party's respective Affiliates, successors and
assigns, nor any of the Released Party's officers, consultants or agents, will
be liable or in any way responsible to the other Party(s) (the "Releasing
Party"), and the Releasing Party waives all claims that it may have against each
Released Party and each Released Party's Affiliates, agents, representatives or
employees, for any liability, loss, damage, claim or cost (including attorneys'
fees) suffered by the Releasing Party in connection with the performance of the
Released Party's (or any of its Affiliates') obligations under this Agreement or
the Station Two Contracts (including in the case of an LG&E Company any such
liability, loss, damage, claim or cost suffered by it in connection with the use
and/or operation of the Station Two Assets by that LG&E Company and its
Affiliates, agents, representatives or employees), except to the extent such
liability, loss, damage, claim or cost shall have been caused by the negligence
or willful act or omission of the Released Party, its Affiliates, successors and
assigns (unless the Released Party shall be released from such obligations
caused by its successors and assigns under Section 15.2 of this Agreement), or
their respective agents, representatives or employees, or by the breach or
default by the Released Party under this Agreement, any of the Station Two
Contracts or any of the other Operative Documents (which act or omission of any
such Released Party or its Affiliates, or their respective agents,
representatives or employees, is itself not the direct result of an act or
omission of any Releasing Party or any of its Affiliates, or their respective
agents representatives or employees), and except for losses, injuries and
damages specifically assumed by the Released Party or covered by any
indemnification or hold harmless covenant of the Released Party in this
Agreement, any of the Station Two Contracts or any of the Operative Documents.
This Section 10.15(g) is solely between Big Rivers and the LG&E Companies and is
not intended to modify or in any way limit the respective rights and obligations
specified in this Agreement or the Station Two Contracts, or otherwise, between
Henderson and Big Rivers or Henderson and any of the LG&E Companies.
(h) Station Two Subsidiary does not assume and shall not in any manner be
responsible or liable for, and Big Rivers and Henderson each hereby agrees, for
itself only, to indemnify and hold Station Two Subsidiary harmless from and
against, any and all loss, cost,
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expense (including reasonable attorneys' fees), claims and causes of action,
debts, obligations, liabilities or responsibilities, whether known or unknown,
fixed, contingent or otherwise, and not otherwise specifically assumed or
undertaken hereunder by Station Two Subsidiary (1) that arose or accrued under
the Station Two Contracts prior to the Effective Date, or (2) that arose out of
or relating to any failure by Big Rivers or Henderson, as applicable, to perform
any covenants or conditions under the Station Two Contracts which were required
to be performed or fulfilled by it prior to the Effective Date, or (3) that are
asserted by third parties (including, all claims asserted by Henderson or, in
the case of Henderson, all claims asserted by Big Rivers) related to the
ownership, use, operation and/or maintenance by Big Rivers or Henderson, as
applicable, of Station Two or the Station Two Assets, as the case may be, prior
to the Effective Date, including, in the case of Henderson only, and without
limitation, any Environmental Violation or Environmental Condition existing as
of the Effective Date. Notwithstanding anything contained in this Section
10.15(h) or elsewhere in this Agreement to the contrary, and except to the
extent contemplated in Section 10.15(j) of this Agreement, Big Rivers shall have
no obligation or liability to the LG&E Companies by reason of this Agreement or
the provisions hereof for any environmental matters (including without
limitation, Environmental Violation or Environmental Condition) at or relating
to Station Two, and Big Rivers' sole obligation or liability (if any) to the
LG&E Companies for such Environmental Violations and/or Environmental Conditions
shall be as set forth in the Participation Agreement and Section 10.15(j) of
this Agreement. The Parties further acknowledge that notwithstanding anything
contained in this Agreement to the contrary, Big Rivers shall have no obligation
or liability to Henderson, and Henderson shall have no obligation or liability
to Big Rivers, by reason of this Agreement or the provisions hereof for any
Environmental Violation or Environmental Condition at or relating to Station
Two, and that Big Rivers' sole obligation and liability to Henderson (if any),
and Henderson's sole obligation and liability to Big Rivers (if any) for such
Environmental Violations or Environmental Conditions shall be as set forth in
the Station Two Contracts.
(i) Station Two Subsidiary hereby agrees that, in connection with any
reversion and assignment to Big Rivers of all rights and obligations under the
Assigned Station Two
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Contracts which is to occur upon the expiration or termination of this Agreement
as provided for and in accordance with Section 10.16 of this Agreement, Big
Rivers shall not assume and shall not in any manner be responsible or liable
for, and Station Two Subsidiary hereby agrees to indemnify and hold Big Rivers
harmless from and against, any and all loss, costs, expense (including
reasonable attorneys' fees), claims, causes of action, debts, obligations,
liabilities and responsibilities, whether known or unknown, fixed, contingent or
otherwise, (1) arising out of or relating to any failure by Station Two
Subsidiary during the Term to perform any of the Station Two Subsidiary's
Performance Obligations, or (2) which are asserted against Big Rivers by any
third party (including Henderson) related to the use, operation and/or
maintenance by Station Two Subsidiary of Station Two or the other Station Two
Assets during the Term; provided, that Station Two Subsidiary shall have no
obligation or liability to Big Rivers under this Section 10.15(i) for any such
losses, costs, expenses, claims, causes of action, debts, obligations,
liabilities or responsibilities that arise out of or otherwise are the result of
the negligence or the willful misconduct of Big Rivers or Henderson, or any of
their respective agents, representatives and/or employees (which negligent or
willful act or omission is not the direct result of an act or omission of any
LG&E Company), or the breach or default of this Agreement or any of the terms or
provisions of the Station Two Contracts or any other Operative Document which
Big Rivers or Henderson is required to perform at any time prior to the date of
such reversion or assignment to Big Rivers (which breach or default is not the
direct result of a breach or default by any LG&E Company under such agreements).
Notwithstanding the foregoing, Big Rivers further acknowledges that neither
Station Two Subsidiary nor any other LG&E Company shall have any obligation or
liability to Big Rivers by reason of this Agreement or the provisions hereof for
any Environmental Violations or Environmental Conditions relating to Station Two
or any other Station Two Assets, or to the real property on which Station Two or
the other Station Two Assets are situated, and that the LG&E Companies' sole
obligation or liability (if any) for such Environmental Conditions shall be as
set forth in the Participation Agreement and Section 10.15(j) of this Agreement.
(j) Big Rivers and each of the LG&E Companies acknowledge and agree with
each other, but not with Henderson, that the provisions of Article 14 of the
Participation Agreement
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shall apply with equal effect to Station Two, and the other Station Two Assets,
and the real property on which Station Two and the other Station Two Assets are
situated, and to all Environmental Violations and Environmental Conditions at,
affecting or relating to Station Two, the other Station Two Assets and the real
property on which Station Two and the other Station Two Assets are situated, the
same as such provisions may apply to the Facilities and the real property on
which the Facilities are situated, and that the Baseline Environmental Audit
Report, the End of Term Baseline Audit and the scope of the related
environmental audits shall each be caused to encompass all such assets,
facilities and real property. On or prior to the Effective Date, Big Rivers, the
LG&E Companies and WKEC intend to amend the Participation Agreement to reflect
the Parties' acknowledgments and agreements described above; provided, that in
the event such amendments are not so made, the provisions of this Section
10.15(j) shall continue to govern the respective rights and responsibilities of
Big Rivers and the LG&E Companies with respect to Hazardous Substances or other
Environmental Violations or Environmental Conditions or circumstances at,
affecting or relating to Station Two or the other Station Two Assets, or the
real property upon which those assets and facilities are situated, and the
provisions of Article 14 of the Participation Agreement, as between Big Rivers
and the LG&E Companies, shall be deemed to be incorporated by reference herein
and shall be made a part of this Agreement for all purposes relating to Station
Two and the other Station Two Assets and the real property upon which such
Assets are situated, and the use and operation of the same. No expiration or
termination of the Participation Agreement prior to the expiration or
termination of this Agreement shall affect the respective rights and obligations
of the LG&E Companies and Big Rivers under this Section 10.15(j) or Article 14
of the Participation Agreement with respect to the Station Two Assets and the
real property on which such assets are situated, and the use and operation of
the same.
10.16 Reversion to Big Rivers. At the expiration or termination of this
Agreement, other than a termination due to a breach or default by Big Rivers,
the rights and obligations under the Station Two Contracts assigned to and
assumed by Station Two Subsidiary pursuant to Section 9 of this Agreement,
entitled "Phase II Assignment," shall automatically revert and be
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assigned to Big Rivers without any action on the part of any of the Parties
hereto, no LG&E Company shall retain any interest in the Assigned Station Two
Contracts following that reversion (except as provided below), and Big Rivers
shall thereafter assume and agree to pay and perform all obligations and
liabilities of Big Rivers under the terms of the Station Two Contracts that
arise or accrue from and after the expiration or termination date of this
Agreement; provided that no such reversion shall occur to the extent any of the
Station Two Contracts shall have been terminated prior to the expiration or
termination of this Agreement; and provided further, that no such reversion
shall result in any waiver or relinquishment by any LG&E Company of any claims
or causes of action that it may have arising out of any breach or default by
Henderson under the Assigned Station Two Contracts arising or accruing prior to
the date of expiration or termination of the Assigned Station Two Contracts. The
Parties agree that the LG&E Companies shall be released from any and all debts,
obligations and liabilities that arise or accrue under the Station Two Contracts
from and after the date that the Station Two Contracts revert to Big Rivers,
except for those debts, obligations or liabilities that are covered by any
indemnity given by the LG&E Companies to Big Rivers or Henderson under this
Agreement or any other Operative Document.
10.17 Rights of First Offer; Waivers.
(a) Henderson hereby waives and releases all of its Rights of First Offer
under the Station Two Contracts in connection with the proposed operating and
lease transactions contemplated between Big Rivers, the LG&E Companies and WKEC
in the Participation Agreement. Henderson further agrees not to object to the
proposed transactions among the LG&E Companies and Big Rivers contemplated in
the other Operative Documents, and agrees to support the transactions
contemplated in this Agreement. Henderson hereby waives and releases any and all
rights to object to or otherwise withhold its approval thereof in any manner
whatsoever, whether before the Bankruptcy Court, the KPSC or FERC or before any
other regulatory agency having the right to assert jurisdiction over such
Parties or the transactions so contemplated by such Parties.
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(b) The LG&E Companies agree that each mortgage and security interest held
by the LG&E Companies, or any of them, in the Reid Station and the Joint Use
Facilities shall be subject to Henderson's Rights of First Offer relating to
such plant and facilities set forth in the Station Two Contracts; provided,
however, that the LG&E Companies' agreement set forth in this Section 10.17(b)
shall be conditioned upon Henderson's agreement that, and Henderson hereby
agrees that, upon Henderson's purchase of any such plant or facility pursuant to
its exercise of such Right of First Offer, (i) Henderson shall assume in writing
all the duties and obligations of Big Rivers under the Participation Agreement
and all of the agreements and instruments executed in furtherance of the
transactions contemplated therein with respect to the assets and interests so
purchased by Henderson, to the extent those duties and obligations arise or
accrue following Henderson's purchase of the same, (ii) Henderson shall continue
to honor and fulfill all of its obligations and liabilities to such Parties and
their successors and permitted assigns under the Station Two Contracts and this
Agreement, and (iii) Henderson will assume and agree to perform and discharge
all of the duties, liabilities and obligations of Big Rivers under the Station
Two Contracts and this Agreement arising or accruing following that purchase, in
each such event relating to those plants and facilities so purchased by
Henderson. Henderson's assumption of Big Rivers' obligations pursuant to the
preceding sentence shall not release Big Rivers from responsibility for the
future performance of such obligations or liabilities for the benefit of the
LG&E Companies arising under the Station Two Contracts, this Agreement, the
Participation Agreement or such other agreements and instruments, regardless of
whether such obligations or liabilities first arise or accrue before or after
such assumption. The LG&E Companies agree to recognize an assignment of Big
River's rights, title and interest in and to those plants and facilities
purchased by Henderson in accordance with its Rights of First Offer, and the
assignment of Big Rivers' rights and interest in and to the Participation
Agreement, all agreements and instruments executed pursuant thereto, this
Agreement and the Station Two Contracts to the extent they relate to those
plants and facilities; provided, that the LG&E Companies' agreement is
conditioned upon all the terms and conditions of this Section 10.17(b) being
fully satisfied and performed by Henderson and Henderson having effected such
assignments lawfully and in accordance with its contractual obligations to Big
Rivers.
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(c) The Parties hereby agree that, in the event Henderson shall at any
time purchase the Reid Station pursuant to, and in accordance with, its Rights
of First Offer, and Henderson shall otherwise fulfill the terms and conditions
of this Section 10.17(c), Henderson shall be entitled from and after the date of
its purchase of the Reid Station to be paid by LEM a portion of the Annual Fixed
Payments otherwise payable by LEM to Big Rivers pursuant to Section 3.3(a) of
the Power Purchase Agreement (but only if the Phase I Agreements shall then be
in effect), and to be paid by WKEC or its Affiliate a portion of the monthly
installments of the Rental Payment otherwise payable by WKEC or such Affiliate
to Big Rivers pursuant to Section 2.3.2 of the Lease (but only if the Phase II
Agreements shall then be in effect), in each case in the amount determined by
multiplying 1.5 mils times the total number of kilowatt-hours of Energy
generated by the Reid Station during the calendar month immediately preceding
that monthly installment; provided, however, that in no event shall the amounts
payable by LEM, WKEC and such Affiliate, collectively, to Henderson under the
foregoing provisions exceed $700,000 in any Year (prorated for Partial Years).
Prior to each relevant Monthly Payment Date, Big Rivers shall provide to
Henderson and either LEM (during the Participation Agreement Phase I) or WKEC
and its relevant Affiliate (during the Participation Agreement Phase II), notice
of the portion of the monthly installment of the Annual Fixed Payment payable by
LEM, or the portion of the monthly installment of Rental Payment payable by WKEC
and such Affiliate, as the case may be, to Henderson on that Monthly Payment
Date pursuant to this Section 10.17(c). Any such payments by LEM, WKEC or such
Affiliate to Henderson of the amount set forth in Big Rivers' notice, as
contemplated above, shall be deemed to satisfy and discharge any obligation that
they may have to pay those amounts to Big Rivers pursuant to the Power Purchase
Agreement or the Lease (as applicable). Henderson and Big Rivers agree that in
the event LEM, WKEC or its Affiliate shall make a payment to Henderson under
this Section 10.17(c) in error, either due to an overpayment or underpayment to
Henderson, but shall have otherwise paid Henderson the amount set forth in Big
Rivers' notice as due Henderson on that Monthly Payment Date, LEM, WKEC or such
Affiliate, as the case may be, shall have no obligation to Big Rivers or
Henderson by reason of
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that error, and Big Rivers and Henderson shall reconcile the error through
appropriate payments made between them.
(d) Big Rivers hereby agrees that, upon its exercise of any purchase
option or right of first refusal with respect to Station Two or any Station Two
Assets, Big Rivers shall assume and agree to perform and discharge all the
duties and obligations of Henderson to the LG&E Companies under this Agreement
and the Station Two Contracts with respect to such assets, plant and facilities
so purchased by Big Rivers, to the extent arising or accruing following the date
that purchase is consummated. Big Rivers' assumption of Henderson's obligations
pursuant to the preceding sentence shall not release Henderson from
responsibility for the future performance of such obligations or liabilities for
the benefit of the LG&E Companies arising under the Station Two Contracts or
this Agreement, regardless of whether such liabilities first arise or accrue
before or after such assumption. Notwithstanding anything in this Agreement to
the contrary, each of the LG&E Companies acknowledges that it has no right to
force Big Rivers to exercise any such purchase option or right of first refusal
that Big Rivers may have from Henderson. If Big Rivers shall at any time
exercise any such purchase option or right of first refusal, such exercise, in
and of itself, shall not release the LG&E Companies from their respective
obligations under this Agreement or the Assigned Station Two Contracts.
10.18 Compliance with Bond Ordinance. This Agreement and all Station Two
Contracts shall be subject to the terms and provisions of the Bond Ordinance, as
the same may exist from time to time. Each of the Parties agrees that, in the
performance of its obligations under this Agreement or the Station Two
Contracts, it shall comply with the terms and provisions of the Bond Ordinance
and shall take all action, and shall not fail to take action, within its
reasonable control as may be necessary or required to comply with the Bond
Ordinance. Each of the Parties agrees that neither this Agreement nor any of the
Station Two Contracts will be amended, modified or otherwise altered in a manner
that will conflict with or violate the terms and provisions of the Bond
Ordinance as the same may, from time to time, exist.
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10.19 Additional Covenants of Henderson.
(a) Henderson hereby agrees to promptly provide to Station Two Subsidiary:
(1) after Henderson's delivery or receipt thereof, all copies of written
correspondence and notices of (A) the occurrence of an "Event of Default" under
the Bond Ordinance, (B) the occurrence of any other event or circumstance that,
with notice or the passage of time, may constitute a default or breach of the
Bond Ordinance, and (C) potential violations or conflicts with the terms and
provisions of the Bond Ordinance that may exist as a result of the performance
of this Agreement or the Station Two Contracts by any of the Parties hereto; (2)
all notices, reports, documents or other written communications that Henderson
directs to Big Rivers pursuant to or relating to the Station Two Assets or the
Station Two Contracts; and (3) all subsequent written correspondence or notices
that may be delivered or received by Henderson relating to any of the foregoing.
During the Phase I Subcontract Term, the reports provided by Henderson to
Station Two Subsidiary shall be inclusive of, without limiting those other
reports otherwise to be provided pursuant hereto, the annual audit report for
Station Two described in Section 11.1 of the Station Two Power Sales Agreement.
(b) Without in any manner limiting the rights that will be assigned to
Station Two Subsidiary throughout the Phase II Assignment Term, Henderson hereby
agrees with Station Two Subsidiary that it shall not:
(1) Without the prior written consent of Station Two Subsidiary,
during the Phase I Subcontract Term or the Phase II Assignment Term,
authorize or issue any additional bonds or other indebtedness under the
Bond Ordinance or any other ordinance the debt service on which would
constitute Capacity costs under the Station Two Power Sales Agreement,
subject, however, to Section 10.18 of this Agreement.
(2) During the Phase I Subcontract Term, add any additional
generating units to Station Two unless Station Two Subsidiary shall have
agreed with Henderson as to the terms and conditions applicable thereto
(including without limitation, the respective rights
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of those Parties with respect to the operation and maintenance thereof and
the use of the Power generated therefrom).
(3) Without the prior written consent of Station Two Subsidiary, at
any time during the Term sell, transfer, convey or assign any rights or
interests in or to Station Two, the Station Two Assets, or the Station Two
Contracts unless the transferee takes such assets and facilities subject
to all the rights, obligations, terms and conditions of this Agreement and
the Station Two Contracts applicable to Henderson; provided, nothing in
this Section 10.19(b)(3) shall restrict Henderson from selling Excess
Station Two Capacity and Excess Station Two Energy pursuant to Section
11.5 of this Agreement, in accordance with the terms thereof. As a
condition of any such sale, transfer, conveyance and assignment, such
transferee shall assume all duties, obligations and liabilities of
Henderson under this Agreement and the Station Two Contracts, by execution
and delivery to the LG&E Companies of a written instrument in form and
substance reasonably satisfactory to the LG&E Companies.
(c) During the Phase I Subcontract Term, and not in limitation of similar
rights the LG&E Companies shall have in the Phase II Assignment Term by virtue
of the Assigned Station Two Contracts, Henderson hereby confirms and agrees for
the benefit of the LG&E Companies that:
(1) Henderson shall give Station Two Subsidiary advance notice of,
and Station Two Subsidiary may have representatives present for, tests and
inspections of the printing demand meters and all other meters relating to
Station Two or the operation thereof, and shall at all times during such
period be promptly advised by Henderson of the results of such tests.
(2) Subject to approval of the regulatory bodies having jurisdiction
thereof, at all times maintain rates for services rendered by its electric
system which will be sufficient to adequately meet the costs of proper
operation and maintenance thereof, to provide for the
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depreciation thereof through renewals and replacements, or otherwise, and
to provide for the full and prompt payment of all obligations of Henderson
on all of its outstanding Electric Revenue Bonds, including, without
limitation, its Station Two Bonds.
(3) Station Two Subsidiary and its agents, authorized
representatives or employees shall have the right at all reasonable times
during the Phase I Subcontract Term to examine the books, accounts and
records of Henderson in order to determine the accuracy of the Capacity
charges and other charges to be paid by LEM and/or Station Two Subsidiary
to Big Rivers during the Phase I Subcontract.
(4) Except to the extent such obligation or duty is imposed on Big
Rivers under the Station Two Contracts, Henderson shall use its reasonable
best efforts to maintain all necessary Permits for the maintenance,
improvement and operation of Station Two, and shall use its reasonable
best efforts to obtain all renewals and extensions of such Permits for the
term of the Station Two Contracts.
(d) In addition to all other rights and entitlements granted by Henderson
in this Agreement or in the Station Two Contracts, and not in limitation
thereof, Henderson hereby irrevocably commits to Station Two Subsidiary for the
continuing use by Station Two Subsidiary and its Affiliates, successors and
assigns in the operation and maintenance of Station Two and/or the Reid Station
throughout the continuance of the term of all Station Two Contracts, or for such
longer period as Station Two Subsidiary (or its Affiliates, successors or
assigns) shall continue to operate or maintain Station Two or the Reid Station,
all of Henderson's Joint Use Facilities that it has committed to the joint use
of such generating facilities on the Effective Date, or as may thereafter be
committed by Henderson for use in the operation or maintenance of such
facilities. Henderson's commitment hereunder shall in any event continue for so
long as Station Two Subsidiary or its Affiliates, successors or assigns shall
continue to operate or maintain a generating station (as a subcontractor or
operator) served by any such Joint Use Facilities, and shall survive and not be
terminated by reason of a
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termination of this Agreement, any Station Two Contract or any other agreement
between or among the Parties.
10.20 Acknowledgments and Affirmations by Big Rivers. Big Rivers hereby
agrees that, throughout the Phase I Subcontract Term and the Phase II Assignment
Term, and in addition to all other rights and entitlements granted by Big Rivers
in this Agreement or any Station Two Contract, and not by way of limitation
thereof, Big Rivers hereby commits to Station Two Subsidiary (or its successors
or permitted assigns) for the continuing use by Station Two Subsidiary in the
operation and maintenance of Station Two and in the transmission of Power by
Station Two Subsidiary from such facilities throughout the continuance of the
term of all Station Two Contracts, and for such longer period as Station Two
Subsidiary (or its Affiliates, successors or assigns) shall continue to operate
or maintain Station Two or the Reid Station, all of Big Rivers' transmission
facilities and all Joint Use Facilities (including the Green Station FGD System
Facility) that it has committed (and in accordance with the terms of that
commitment) to the joint use of such generating facilities on the Effective Date
under the Station Two Contracts, or as may thereafter be committed by Big Rivers
for use in the operation or maintenance of such facilities. Big Rivers'
commitment under this Section 10.20 shall in any event continue for so long as
any LG&E Company, or their respective Affiliates, successors or permitted
assigns, shall continue to operate or maintain Station Two or the Reid Station,
and shall survive and not be terminated by reason of any expiration or
termination of this Agreement, any Station Two Contracts, or any other agreement
between or among the Parties; provided, however, such commitment shall terminate
upon the termination of this Agreement and (a) the Power Purchase Agreement, the
Transmission Services and Interconnection Agreement, the Cost Sharing Agreement,
the Facilities Operating Agreement and the Participation Agreement, or (b) the
Power Purchase Agreement, the Transmission Services and Interconnection
Agreement, the Lease and the Participation Agreement, as the case may be, by Big
Rivers in accordance with the terms of this Agreement and those agreements due
to a default by any LG&E Company or its Affiliate.
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10.21 SEPA Power. As soon as practicable following the Execution Date, Big
Rivers and the LG&E Companies shall cooperate with one another in good faith in
an attempt to structure and submit to Henderson at the earliest practicable time
a proposal for the purchase by Big Rivers and scheduling by LEM and/or Station
Two Subsidiary of peaking Power and associated Energy ("SEPA Power") from the
Southeastern Power Administration ("SEPA") that may be made available to
Henderson at any time during the Term pursuant to any new contract that may be
entered into following the Execution Date by Henderson with SEPA in place of the
existing contract between Henderson and SEPA dated July 1, 1984, but that may be
in excess of Henderson's needs for that SEPA Power. Until that new contract and
associated arrangements among the Parties have been entered into, Big Rivers
shall schedule through LEM (as further provided below) and purchase from
Henderson all SEPA Power that may be made available by Henderson to Big Rivers
in connection with the contract with SEPA dated July 1, 1984 (the "Existing SEPA
Contract"). In the event Big Rivers shall purchase SEPA Power, whether from
Henderson or SEPA in connection with the Existing SEPA Contract or any
replacement contract therefor, or from SEPA pursuant to any existing contracts
between Big Rivers and SEPA, at any time when the Letter Ruling shall remain in
effect and shall continue to limit the distribution of Energy from Station Two
to customers within Henderson and Daviess Counties, all such SEPA Power shall be
taken by Big Rivers for resale, and shall be resold or otherwise utilized by Big
Rivers, solely outside of Henderson and Daviess Counties unless the customer
load for those two counties in the hour(s) in which such SEPA Power is to be
delivered is in excess of the Station Two Unit Output generated for that hour,
in which event, for that hour, Big Rivers may take and resell in that two-county
area an amount of SEPA Power that is no greater than necessary to meet such
excess load in those two counties. At least 30 days prior to the expected
Effective Date and each October 1 thereafter during the period of time that Big
Rivers shall continue to have the legal and contractual right to take SEPA Power
from Henderson in excess of the needs of Henderson, Big Rivers shall submit to
LEM a schedule showing the amount of SEPA Power Big Rivers desires to have
delivered to it under its agreement with Henderson during each month ("SEPA
Schedule") of the following Partial Year or Year, and which Henderson has
notified Big Rivers will be made available to it during those months. In
addition, Big Rivers shall notify
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LEM at the earliest possible time after Big Rivers receives that notice from
Henderson, of the amount of SEPA Power that will be made available by Henderson
to Big Rivers, the time(s) at which and duration(s) for which it shall be
available, and point(s) of interconnection at which it will be made available to
Big Rivers. Henderson agrees to notify LEM that Henderson will make SEPA Power
available to Big Rivers as contemplated above, including the data regarding that
Power described above, as soon as is reasonably possible following Henderson's
notice of the same to Big Rivers, and Henderson agrees to keep LEM reasonably
apprised of any changes in those plans or such data. LEM shall act as Big
Rivers' agent for the scheduling of all SEPA Power that may be made available to
it by Henderson (whether in connection with the Existing SEPA Contract or
otherwise), and shall have the right to determine (consistent with the
provisions of the Existing SEPA Contract or any replacement therefor) the timing
of deliveries of such Power during each month; provided, however, for purposes
of the administration of this Agreement, such deliveries shall be deemed,
after-the-fact, to have occurred consistent with the SEPA Schedule and, to the
maximum extent allowable under the Existing SEPA Contract or any replacement
therefor, during hours of the Members' demand on Big Rivers' system.
10.22 Green Station FGD System Facility. Big Rivers and Henderson
acknowledge that the portion of the Green Station FGD System Facilities owned by
Big Rivers and described in Section 3.3 of the Joint Facilities Agreement is
subject to contractual rights, a license and a leasehold interest in favor of
WKEC or one of its Affiliates pursuant to the Operative Documents. The Parties
acknowledge that the portion of the Green Station FGD System Facilities owned by
Big Rivers is further subject to the terms of the Joint Facilities Agreement and
the Cross-Grants of Rights of Access and of Easements dated July 20, 1993
between Big Rivers and Henderson. In consideration of such rights and interests
of WKEC or its Affiliate, Big Rivers and Henderson hereby agree that at all
times during the Phase I Subcontract Term and the Phase II Assignment Term all
of the payments due by Henderson for a prorated share of the carrying costs of
the Green Station FGD System Facilities pursuant to Section 3.3 of the Joint
Facilities Agreement shall be paid by Henderson to Station Two Subsidiary, WKEC
or their designated Affiliate, rather than to Big Rivers, subject, however, to
Henderson's right of
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off-set set forth in Section 16.4 of the Station Two Operating Agreement. Such
carrying costs shall continue to be included as a cost under Section 6.3(g) of
the Station Two Power Sales Contract (payable by Big Rivers in the Phase I
Subcontract Term and by Station Two Subsidiary (or its successors or permitted
assigns) in the Phase II Assignment Term), subject, however, to LEM's right of
off-set in Section 8.13 of this Agreement during the Phase I Subcontract Term
and Station Two Subsidiary's (or its successors' or permitted assigns') right of
off-set in Section 9.3 of the Station Two Power Sales Agreement or Section
9.7(h) of this Agreement. Nothing in this Section 10.22 is intended to in any
way limit any Party's right of off-set which is set forth in any other provision
of this Agreement or any of the Station Two Contracts.
10.23 Transmission and Transformation Facilities. Throughout the Term, Big
Rivers and Henderson shall each provide, maintain and operate, to the extent
required of such Party by Section 5 of the Station Two Operating Agreement and
in accordance with Prudent Utility Practice, the 161 KV step-up transformers,
the 69 KV transmission line and related transformation facilities connecting
Station Two to Henderson's Existing System, surplus capacity on Big Rivers 69 KV
transmission lines and other lines and transmission facilities as necessary for
the delivery of Power from the point of Station Two to Big Rivers and to
Henderson's Existing System, and all other transmission and transformation
facilities used in or in connection with Station Two or necessary for the
delivery of Power from Station Two to Big Rivers' transmission system.
10.24 Governmental Consents. Promptly following the execution of this
Agreement, the Parties will proceed to prepare and file with the appropriate
governmental authorities any requests for approval or waiver that are required
(or that the Parties otherwise agree to seek) from governmental authorities in
connection with the transactions contemplated hereby, and that have not been
filed prior to the Execution Date, and the Parties shall diligently and
expeditiously prosecute and cooperate fully in the prosecution of such requests
for approval or waiver and all proceedings necessary to secure such approvals
and waivers. Compliance by the Parties with this Section 10.24 shall not affect
or limit the provisions of Section 3.1 of this
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Agreement which require, as a condition precedent to the Closing, that each of
the conditions set forth on Schedule 2.1 or Schedule 2.2 be satisfied or waived,
including such conditions as relate to the receipt of governmental approvals.
10.25 Third Party Consents. Promptly following the execution of this
Agreement, the Parties will use their reasonable best efforts to procure all
consents that are required from third parties in connection with the
transactions contemplated hereby, and the Parties shall diligently and
expeditiously seek such consents and cooperate fully in the procurement of such
consents.
10.26 Reasonable Best Efforts. Each Party agrees to use its reasonable
best efforts to effect the transactions contemplated by this Agreement and to
fulfill the conditions to the obligations of the Parties set forth in Schedule
2.1, 2.2 or, as applicable, 2.3 to this Agreement at the earliest practicable
time.
10.27 Further Assurances. Each of the Parties shall take, from time to
time, for no additional consideration, such actions and execute such additional
instruments as may be reasonably necessary or convenient to implement and carry
out the intent and purposes of this Agreement, including, without limitation,
such instruments of conveyance and assignment as shall be necessary or
appropriate in order to effect the assignment of the Assigned Station Two
Contracts and the assumption of the Assumed Station Two Liabilities as
contemplated by this Agreement. Station Two Subsidiary presently intends to
explore the possible repeal of KRS ss.96.520 insofar as it requires that sales
of wholesale Power by Henderson within the Commonwealth of Kentucky, or that the
operation and maintenance of the Station Two, be restricted to utilities
regulated by the KPSC or having customers located solely outside the
Commonwealth of Kentucky. To the extent that Station Two Subsidiary determines
to seek such repeal, each of the Parties hereto, at Station Two Subsidiary's
request, shall reasonably cooperate with and assist Station Two Subsidiary to
effect such repeal; provided that Station Two Subsidiary hereby agrees to pay
for all reasonable out-of-pocket costs and expenses
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incurred by Big Rivers in providing such cooperation and assistance to Station
Two Subsidiary.
10.28 Access to Spare Transformer. Throughout the Phase I Subcontract Term
and the Phase II Assignment Term, Henderson and Big Rivers agree that the spare
161 KV step-up Power transformer subject to the Spare Transformer Agreement
between Henderson and Big Rivers shall be available for use at Station Two, the
Coleman Facility of Big Rivers and such other facilities of Henderson or Big
Rivers as are permitted under the Spare Transformer Agreement. If Henderson or
Station Two Subsidiary shall determine that the spare transformer is needed at
Station Two, and the transformer is not then subject to a prior use at the
Coleman Facility or any other facility of Henderson or Big Rivers, as permitted
under the Spare Transformer Agreement, then Big Rivers and Henderson shall make
the spare transformer available for use at Station Two. Similarly, if Big Rivers
or WKEC, as the case may be, shall determine that the spare transformer is
needed at the Coleman Facility or any other facility of Big Rivers, as permitted
under the Spare Transformer Agreement, and the transformer is not then subject
to a prior use at Station Two, then Big Rivers and Henderson shall make the
spare transformer available for use at the Coleman Facility or such other Big
Rivers' facility. The availability and usage of the spare transformer shall at
all times be subject to the terms of the Spare Transformer Agreement. In
addition to making the spare transformer available for use at Station Two, the
Coleman Facility or any other facility of Big Rivers, as permitted under the
Spare Transformer Agreement, Big Rivers shall ready the spare transformer for
operation, install, operate and maintain the spare transformer and, with respect
to its use at Station Two only, shall charge Station Two Subsidiary only its
direct costs (without mark-up) incurred in providing such services and shall be
entitled to no other compensation from any of the LG&E Companies, WKEC or
Henderson for such services. The Parties shall account for the costs paid to Big
Rivers associated with the use of the spare transformer at Station Two as an
operating and maintenance expense of Station Two. Big Rivers and Henderson shall
fully enforce their respective rights under the Spare Transformer Agreement to
obtain and use the spare transformer whenever reasonably requested to do so by
Station Two Subsidiary or WKEC. Station Two Subsidiary and the other LG&E
Companies
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agree to indemnify and save harmless Big Rivers from all claims, losses,
liabilities, damages, costs (including court costs), and expenses (including
reasonable attorneys' fees and accountants fees) suffered or incurred by, or
made against, Big Rivers or its respective agents, representatives and
employees, arising out of, resulting from or related to Station Two Subsidiary's
use of the Spare Transformer, but exclusive of any such claims, losses,
liabilities, damages, costs or expenses that (y) are a direct result of a breach
or default by Big Rivers or Henderson under the Spare Transformer Agreement, any
Station Two Contract, this Agreement or any other Operative Document, the
negligence or willful misconduct of Big Rivers or Henderson, or any of their
respective agents, representatives or employees, or (z) are a direct result of
any latent defects in the Spare Transformer or in any of Big Rivers' or
Henderson's assets or properties; provided, that the LG&E Companies shall at no
time have any obligation or liability to Big Rivers or Henderson for any costs
of remediation or any other costs, expenses or liabilities arising under
Environmental Laws or in connection with compliance with such Environmental
Laws, at or associated with the Spare Transformer to the extent arising out of
events or circumstances occurring or existing at any time prior to the Effective
Date. Notwithstanding the foregoing, none of the LG&E Companies shall have any
obligation to indemnify and save harmless Big Rivers or any of its agents,
representatives or employees by reason of any damages to the Spare Transformer
resulting from, arising out of or relating to any defects (whether or not
latent), or any costs or expenses to repair or replace the same not arising out
of the negligence or willful misconduct of those LG&E Companies or their
employees, agents or representatives.
10.29 General and Administrative Expenses. On or prior to the Effective
Date, the Parties shall execute and deliver an agreement substantially in the
form of Exhibit C attached hereto providing for an appropriate and reasonable
allocation to Station Two of the Parties' anticipated general and administrative
expenses associated with their respective performance obligations relating to
Station Two under this Agreement and the Station Two Contracts following the
Effective Date (the "G & A Allocation Agreement"). On the Effective Date, the
agreements between Big Rivers and Henderson specifically relating to general and
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administrative expenses, as set forth in the Agreement dated February 15, 1991,
shall terminate and be of no further force or effect.
10.30 Systems and Operating Reserves. On or prior to the Effective Date,
Big Rivers, Henderson and LEM shall enter into an agreement in substantially the
form attached hereto as Exhibit D (the "New Reserves Agreement").
10.31 Rights and Remedies Not Waived.
(a) Notwithstanding anything in this Agreement to the contrary, (1)
Henderson shall continue to be responsible to Big Rivers for the full
performance of all of its covenants and obligations under the Station Two
Contracts, and shall not, by virtue of the assignment of Big Rivers' rights,
title and interests in and to the Assigned Station Two Contracts to Station Two
Subsidiary (or its successors or permitted assigns) or the assumption of the
Assumed Station Two Liabilities by Station Two Subsidiary (or its successors or
permitted assigns) during the Phase II Assignment Term as provided in this
Agreement, or by virtue of any other term or provision of this Agreement, be
released from any of its covenants and obligations under the Station Two
Contracts, and (2) Big Rivers shall not be deemed to have waived or to have
otherwise limited or restricted the availability to it of any of its rights or
remedies against Henderson under the Station Two Contracts.
(b) Notwithstanding anything in this Agreement to the contrary, (1) Big
Rivers shall continue to be responsible to Henderson for the full performance of
all of its covenants and obligations under the Station Two Contracts, and shall
not, by virtue of the assignment of its rights, title and interests in and to
the Assigned Station Two Contracts to Station Two Subsidiary (or its successors
or permitted assigns) or the assumption of the Assumed Station Two Liabilities
by Station Two Subsidiary (or its successors or permitted assigns) during the
Phase II Assignment Term as provided in this Agreement, or by virtue of any
other term or provision of this Agreement, be released from any of its covenants
and obligations under the Station Two Contracts (except to the extent that any
such covenant or obligation shall have been performed, paid or otherwise
discharged or satisfied under the terms and provisions of
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the Station Two Contracts by Big Rivers or any LG&E Company), and (2) Henderson
shall not be deemed to have waived or to have otherwise limited or restricted
the availability to it of any of its rights or remedies against Big Rivers under
the Station Two Contracts.
10.32 Survival Of Representations and Warranties. All of the
representations and warranties set forth in this Agreement shall survive the
date of this Agreement and the Effective Date, and shall continue to be binding
on the Party or Parties making such representations and warranties.
10.33 Station Two Inventories. On the Effective Date, Big Rivers shall
sell and assign to Station Two Subsidiary, free and clear of all Liens, all of
Big Rivers' (but not Henderson's) rights, title and interest under, in and to
the Station Two Inventory in Big Rivers' possession or control. Pursuant to the
procedures set forth on Schedule 9.1 attached to the Participation Agreement,
Big Rivers and Station Two Subsidiary shall jointly conduct an inventory survey
and agree upon the fair market value of the Station Two Inventory sold to
Station Two Subsidiary pursuant to this Section 10.33 prior to the Effective
Date. Station Two Subsidiary (or its designated Affiliate) shall pay Big Rivers
for the fair market value as so determined on the Effective Date or, if Station
Two Subsidiary and Big Rivers are unable to agree on such fair market value and
either party submits the issue of fair market value to the arbitration procedure
described in Section 13.5(e) of this Agreement, then within five (5) days after
final determination pursuant to that procedure. On the date of termination or
expiration of this Agreement, Station Two Subsidiary shall immediately sell and
assign to Big Rivers, free and clear of all Liens, all of Station Two
Subsidiary's rights, title and interest under, in and to the fuel and scrubber
reagent inventory, spare parts and materials and supplies inventory then owned
by Station Two Subsidiary or its Affiliates and held exclusively for use by
Station Two Subsidiary (or its Affiliates) at that time in connection with its
operation of Station Two and the other Station Two Assets, and in Station Two
Subsidiary's (or its Affiliates') possession or control (the "End of Term
Inventory"). Within 30 days after such sale, Station Two Subsidiary and Big
Rivers shall utilize the procedures set forth above and on Schedule 9.1 of the
Participation Agreement to determine the fair market value of the End of Term
Inventory
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sold to Big Rivers, and Big Rivers shall pay Station Two Subsidiary (or its
designated Affiliate) the fair market value of such inventory. In connection
with any such sale of the End of Term Inventory to Big Rivers upon the
termination or expiration or this Agreement, should any portion of such
inventory have been paid for by Big Rivers as Henderson Incremental
Environmental O&M (determined on a first in, first out basis) prior to the date
of expiration or termination of this Agreement, either pursuant to Section 8.16
or Section 9.9 of this Agreement, Big Rivers shall receive a credit against the
fair market value of the End of Term Inventory in an amount equal to that
portion for which it paid the applicable Henderson Incremental Environmental
O&M. If Station Two Subsidiary and Big Rivers are unable to agree upon the fair
market value of Station Two Inventory or the End of Term Inventory, the issue
shall be submitted to the arbitration procedure described in Section 13.5(e) of
this Agreement. Schedule 9.1 of the Participation Agreement is incorporated by
reference in this Agreement at the first place where such reference appears in
this Agreement and shall survive any termination or expiration of the
Participation Agreement prior to the date of termination or expiration of the
terms and provisions of this Section 10.33.
10.34 Assignment of Certain Station Two Intangible Assets.
(a) On the Effective Date, and pursuant to an assignment and assumption
agreement in substantially the same form as that agreement attached as Schedule
9.2 to the Participation Agreement, Big Rivers shall assign or transfer to
Station Two Subsidiary all of Big Rivers' (but not Henderson's) right, title and
interest in and to, and all of its obligations (if any) under, the Station Two
Intangible Assets (except (i) the Station Two Allowances, which are subject to
Section 8.10(c) of this Agreement, and (ii) if the Effective Date is the Phase I
Effective Date, the Permits), free and clear of all Liens, and Station Two
Subsidiary shall assume and agree to perform and discharge Big Rivers'
performance obligations, if any, under those Station Two Intangible Assets which
first arise or accrue on or after the Effective Date. Station Two Subsidiary
shall maintain and replace the Station Two Intangible Assets (if any such assets
shall exist) as shall be necessary, in its reasonable discretion, to operate the
Station Two Assets in a manner consistent with Prudent Utility Practice and the
Station Two
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Contracts. Station Two Subsidiary shall inform the Operating Committee of any
material change in the status of any material Station Two Intangible Asset, of
any pending applications for new Permits, and of the receipt of new material
intangible assets that are required of it, as operator of the Station Two
Assets, to comply with the performance standards set forth in Sections 8.3 and
9.15 of this Agreement, as the case may be. On the date of termination or
expiration of this Agreement, Station Two Subsidiary shall (subject to the
receipt of all third-party consents and approvals required therefor, if any)
assign to Big Rivers, free and clear of all Liens, its rights, title and
interest under, in and to the remaining Station Two Intangible Assets (exclusive
of rights in the Station Two Allowances, which are addressed in Section 8.10(c)
of this Agreement) and any additions, modifications or replacements of the
Station Two Intangible Assets (exclusive of the rights in the Station Two
Allowances) previously approved by Big Rivers in writing, and Big Rivers shall
assume all of Station Two Subsidiary's obligations thereunder arising after such
date of termination or expiration of this Agreement. Station Two Subsidiary
shall utilize its best efforts to obtain the third-party consents and approvals
referred to in the parenthetical in the prior sentence and agrees, to the extent
such consents or approvals are not obtained, to utilize its best efforts to
provide Big Rivers with its benefits and rights in, to and under such Station
Two Intangible Assets at no expense to Big Rivers.
(b) Notwithstanding the assignment provisions set forth in (a), above, Big
Rivers and the LG&E Companies agree that during the Phase I Subcontract Term,
(i) all Permits in which Big Rivers may have an interest (including, without
limitation, those held in its name as operator of Station Two) and which relate
in any manner to its operation of Station Two or any other Station Two Asset,
will not be assigned by Big Rivers to Station Two Subsidiary, and (ii) all
Permits which may be required or necessary in connection with the operation of
Station Two or any Station Two Asset shall be obtained by Big Rivers in its name
as operator of Station Two. Big Rivers shall take any and all action to maintain
and preserve in full force and effect, and shall timely renew, all of those
Permits as may be required or necessary for the operation of Station Two and the
other Station Two Assets in a manner consistent with Prudent
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Utility Practice and as may otherwise be required for Big Rivers and Station Two
Subsidiary to fulfill their respective obligations under this Agreement and the
Station Two Contracts. Notwithstanding the foregoing provisions of this Section
10.34(b), at all times during the Phase I Subcontract Term and thereafter during
the Term until such Permits are assigned to Station Two Subsidiary (or its
designated Affiliate), Station Two Subsidiary, solely to the extent permitted by
applicable Laws and the Station Two Contracts, shall administer, maintain,
preserve, renew and, where necessary, procure the Permits described above on
behalf of Big Rivers, as the agent of Big Rivers. Big Rivers and Henderson
acknowledge and agree that, where Station Two Subsidiary shall be precluded by
applicable Laws or the Station Two Contracts from doing so, Station Two
Subsidiary shall have no obligation, as the agent of Big Rivers or in any other
capacity, to administer, maintain, preserve, renew, procure or take any other
action of the type described above in respect of any such Permits, and in such
event Big Rivers shall be responsible for that action which must be taken in
respect of such Permits. On the Phase II Effective Date, or as soon as
reasonably practicable thereafter, Big Rivers and Station Two Subsidiary shall
execute and deliver an assignment and assumption agreement with respect to all
Permits held by Big Rivers with respect to its operation of Station Two or any
Station Two Asset to the extent such Permit may be assigned to Station Two
Subsidiary or its designated Affiliate) under applicable Laws. To the extent
that any such Permit is not so assignable by Big Rivers, Big Rivers agrees to
make such Permit otherwise available at no additional cost, to the greatest
extent possible, to Station Two Subsidiary in connection with the performance of
its obligations under this Agreement and the Station Two Contracts. Station Two
Subsidiary agrees, to the extent permitted by Law, to take during the Phase II
Assignment Term any and all actions necessary to administer, maintain or renew
such non-transferable Permits, consistent with those requirements and standards
set forth above for Big Rivers; provided, however, to the extent Station Two
Subsidiary is precluded from doing so under applicable Law or the Station Two
Contracts, Big Rivers, shall continue to maintain, preserve, renew and otherwise
take actions with respect to the non-transferable Permits consistent with its
obligations set forth above relating to the Permits during the Phase I
Subcontract. At all times during the Phase I Subcontract Term and thereafter
until the Permits are assigned to Station Two Subsidiary (or its designated
Affiliate), Big Rivers (x)
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shall cooperate with and assist Station Two Subsidiary in its actions taken in
respect of the Permits, to the extent reasonably requested by Station Two
Subsidiary or Henderson, and (y) shall obtain the consent of Station Two
Subsidiary and, where requested by Station Two Subsidiary or Henderson, shall
exercise all rights and remedies it may have in respect of such Permits, to the
extent the exercise of such rights or remedies is reasonably necessary for any
LG&E Company or Henderson to receive the full benefit, use and enjoyment of the
Station Two Assets and their respective rights under this Agreement and the
Station Two Contracts.
(c) Notwithstanding the assignment provision set forth in (a), above, Big
Rivers and the LG&E Companies agree that during the Phase I Subcontract Term,
all fuel or reagent supply agreements that Big Rivers may have with respect to
its operations at Station Two will not be assigned by Big Rivers to Station Two
Subsidiary and any additional fuel or reagent agreements required during the
Phase I Subcontract Term shall be entered into by Big Rivers in its own name
(subject to Station Two Subsidiary's rights as Big Rivers' exclusive agent for
administering Big Rivers' fuel and reagent supply agreements as is further set
forth in Section 8.14(c) of this Agreement). On the Phase II Effective Date, Big
Rivers and Station Two Subsidiary agree to execute an assignment and assumption
agreement with respect to the fuel or reagent supply agreements to which Big
Rivers may be a party and that relate to Big Rivers' obligations as the operator
of Station Two; provided, that Station Two Subsidiary shall have no obligation
to assume any fuel or reagent supply agreement entered into by Big Rivers during
the Phase I Subcontract Term to the extent Big Rivers did not receive Station
Two Subsidiary's consent to that agreement prior to executing that agreement. On
the date of termination or expiration of this Agreement, Big Rivers shall not be
obligated to assume any fuel supply agreements entered into by Station Two
Subsidiary during the Phase II Assignment Term to the extent Station Two
Subsidiary did not receive Big Rivers' written approval prior to executing such
fuel supply agreement.
(d) Nothing in this Section 10.34 shall in any way limit any additional or
different commitment of Big Rivers or any LG&E Company (or WKEC) relating to
Station Two Intangible Assets (including, without limitation, commitments
related to fuel and reagent
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supply in connection with operation of Station Two) as may be set forth in any
of the Operative Documents, including, without limitation, Section 9.2 of the
Participation Agreement.
10.35 Station Two Personal Property. On the Effective Date, Big Rivers
shall sell to Station Two Subsidiary (or its designated Affiliate) and Station
Two Subsidiary (or its designated Affiliate) shall purchase from Big Rivers,
free and clear of all Liens, all of Big Rivers' (but not Henderson's) rights,
title and interest under, in and to the Station Two Personal Property (if any)
in Big Rivers' possession, including, without limitation, any such Station Two
Personal Property which may be identified on Schedule 5.1.11 attached to the
Participation Agreement. Station Two Subsidiary shall pay Big Rivers an amount
equal to the net book value of the Station Two Personal Property as so
determined on the Effective Date (the "Station Two PP Price"). Upon such
payment, (a) in the event that the Effective Date is the Phase I Effective Date,
the Initial Fixed Payment referenced in Section 3.3(a) of the Power Purchase
Agreement shall be reduced by an amount equal to twenty percent (20%) of the
Station Two PP Price and the remaining monthly fixed installments payable
pursuant to such Section 3.3 shall each be reduced by an amount equal to 0.78%
of the Station Two PP Price, (b) in the event that the Effective Date is the
Phase II Effective Date, the Initial Rental Payment referenced in Section 2.3.1
of the Lease shall be reduced by an amount equal to twenty percent (20%) of the
Station Two PP Price and the remaining monthly installments of Rental Payment
payable pursuant to Section 2.3.2 of the Lease shall each be reduced by an
amount equal to 0.78% of the Station Two PP Price and (c) in the event that the
Phase II Effective Date follows the Phase I Effective Date, all remaining
monthly rental installments payable on and after the Phase II Effective Date
pursuant to Section 2.3.2 of the Lease shall each be reduced by an amount equal
to 0.78% of the Station Two PP Price (any such reduction set forth in (a), (b)
and (c), above, is sometimes referred to in this Agreement as the "Station Two
PP Price Reduction"). On the date of termination or expiration of this
Agreement, Station Two Subsidiary shall immediately sell to Big Rivers, free and
clear of all Liens, all of Station Two Subsidiary's rights, title and interest
under, in and to all tangible personal
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property (other than fuel and scrubber reagent, inventory, spare parts and
materials, and supplies) then owned by Station Two Subsidiary (or its
Affiliates) and used or held at that time exclusively for use in connection with
its use and operation of the Station Two Assets (the "End of Term Personal
Property"), and Big Rivers shall pay Station Two Subsidiary (or its designated
Affiliate) the net book value of such End of Term Personal Property as so
determined on the date of such termination or expiration of this Agreement. If
as of the date of any such termination or expiration of this Agreement, any
portion of the End of Term Personal Property has been paid for by Big Rivers as
Henderson Incremental Environmental O&M (determined on a first in, first out
basis), either pursuant to Section 8.16 or Section 9.9 of this Agreement, Big
Rivers shall receive a credit against the net book value of such End of Term
Personal Property in an amount equal to that portion for which it paid the
applicable Henderson Incremental Environmental O&M.
10.36 LG&E Parties' Residual Value Payment. In the event the Participation
Agreement terminates or expires prior to the date that this Agreement terminates
or expires, the terms and provisions of Section 22 of the Participation
Agreement relating to the LG&E Parties' Residual Value Payment on the Station
Two Assets shall survive the expiration or termination of the Participation
Agreement and shall be incorporated by this reference in this Agreement.
10.37 Survival of Monthly Margin Payments. LEM and WKEC hereby agree with
Big Rivers that the Monthly Margin Payments owing by LEM or WKEC (as
applicable), or their respective successors or permitted assigns, pursuant to
Section 3.3(a)(iv)(A) of the Power Purchase Agreement or Section 2.3.2(c)(i) of
the Lease shall survive the termination of the Power Purchase Agreement or the
Lease, as the case may be, and shall continue to be binding on LEM and WKEC
pursuant to this Agreement in accordance with their respective terms.
11. ADDITIONAL AGREEMENTS RESPECTING STATION TWO POWER. .
11.1 Pre-Closing Economic Development Opportunities. .
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(a) Notwithstanding anything contained in this Agreement or the 1998
Amendments to the contrary, neither the Closing, the Phase II Assignment nor the
consummation of any other transactions contemplated in this Agreement shall
constitute an undertaking by any LG&E Company of Big Rivers' obligation, under
one or more Power sales or similar agreements entered into prior to the
Effective Date, to sell and deliver Power to Henderson to meet all or any
portion of the Economic Development Load (as defined in the 1998 Amendments) of
one or more customers of Henderson (each a "Pre-Closing Development Agreement"),
unless such Power sales are to be made during the Term at the applicable
Economic Development Rate(s) set forth on Exhibit 1 to the 1998 Amendments, and
Henderson has agreed with LEM to pay all transmission fees that Big Rivers (or
its successor) is required or permitted to charge in order to deliver such Power
to Henderson over Big Rivers' transmission system, and then only to the extent
that LEM approved in writing the other material terms and conditions of those
Pre-Closing Development Agreements prior to their execution by Big Rivers and
Henderson. Prior to execution and delivery of any Pre-Closing Economic
Development Agreement, and as a condition precedent to the obligation of the
LG&E Companies to assume and undertake any obligation of Big Rivers set forth in
the Pre-Closing Economic Development Agreement, Big Rivers shall deliver a copy
of the Pre-Closing Economic Development Agreement to LEM for its determination
whether the material terms and conditions set forth in the Pre-Closing Economic
Development Agreement are acceptable to LEM. LEM shall notify Big Rivers and
Henderson of its approval or disapproval of the proposed terms of the
Pre-Closing Economic Development Agreement within 15 days after its receipt of
the Pre-Closing Economic Development Agreement. At the Closing, Big Rivers shall
assign and transfer to LEM, without further consideration (but subject to the
provisions of Subsection (d) below), all of Big Rivers' rights, title and
interests in and to all Pre-Closing Development Agreements pre-approved by LEM
as contemplated above. Upon any such assignment or transfer of any Pre-Closing
Economic Development Agreement to LEM, LEM shall be deemed to have assumed and
undertaken all of Big Rivers' obligations thereunder which arise or accrue
following that assignment or transfer; provided, in the event Big Rivers shall
have modified or amended in any material respect a Pre-Closing Development
Agreement without the consent of LEM, then
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in lieu of any obligation of LEM to assume that agreement, as otherwise provided
for in this Section 11.1(a), LEM shall have the option to have that agreement
assigned to and assumed by it (which option shall be exercised by LEM in
accordance with the procedures set forth below). If LEM shall decline or
otherwise fail to pre-approve a Pre-Closing Development Agreement within the
15-day period provided above, then LEM shall be deemed to have fully and forever
waived its right to elect to take an assignment of that Pre-Closing Development
Agreement at the Closing and Big Rivers shall retain, perform and discharge that
Pre-Closing Development Agreement. If Big Rivers shall fail to present to LEM
one or more Pre-Closing Economic Development Agreements as required by this
Section 11.1, then LEM shall be entitled, in its discretion (and not in
limitation of any claim or remedies that LEM may elect to pursue for failure of
Big Rivers to conform to that criteria), to elect to cause Big Rivers to assign
and transfer to LEM without further consideration all of Big Rivers' rights,
title and interest under, in and to each of those Pre-Closing Economic
Development Agreements upon written notice delivered to Big Rivers prior to or
within 30 days following the Effective Date. If LEM shall fail to make such an
election, Big Rivers shall remain solely responsible for the performance of the
relevant Pre-Closing Economic Development Agreement(s). If LEM makes such an
election, Big Rivers shall assign and transfer the relevant agreement to LEM
within two (2) Business Days following its receipt of LEM's election notice (but
subject to the provisions of subsection (d) below).
(b) Upon an assignment and transfer as described in (a) above, LEM agrees
to assume and undertake to perform and discharge all of Big Rivers' Power
delivery obligations under the relevant Pre-Closing Development Agreements which
arise or accrue following the assignment or transfer LEM shall not assume or be
responsible for, and Big Rivers shall retain, pay and perform, any transmission
service obligations or any other obligations or liabilities under those
Pre-Closing Development Agreements. Big Rivers shall retain all rights (if any)
to charge and receive payment for the transmission service obligations it
discharges only to the extent that such right is contemplated in Section 28 of
the Station Two Power Sales Agreement. Big Rivers and LEM shall enter into an
Assignment and Assumption Agreement in substantially the form attached as
Schedule 9.2 to the Participation Agreement, evidencing
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the assignment to and assumption by LEM of the relevant Pre-Closing Development
Agreement(s), if any.
(c) In the event Henderson shall have pre-paid Big Rivers for any of the
Power to be delivered by LEM to Henderson during the Term under any Pre-Closing
Development Agreement which LEM has assumed, Big Rivers agrees to pay to LEM all
such pre-paid amounts as they relate to Power deliveries to be made after the
assignment and assumption at the same time as its rights, title and interest
thereunder are assigned and transferred to LEM.
(d) The Parties acknowledge that the assignment and transfer of any
Pre-Closing Development Agreements by Big Rivers to LEM as contemplated above
may require the prior approval of the FERC or other federal, state or local
governmental authorities, which may take extended periods of time and
considerable expense to obtain. In light of this, the Parties agree that,
notwithstanding the provisions of Subsection (a) and (b), above, no such
assignment or transfer shall be deemed to have occurred in the event LEM shall
reasonably determine, and shall notify Big Rivers and Henderson in writing, that
any such approval by FERC or another governmental authority shall be required
for the same but shall not have been obtained. In such event, and in lieu of the
assignment and transfer of the relevant Pre-Closing Development Agreement as
contemplated in subsection (a), above, LEM shall be deemed by that notice to
have elected to (and shall then be obligated to) sell and deliver to Big Rivers,
and Big Rivers shall then be obligated to purchase from LEM, seventy-five
percent (75%) of all Power required by Big Rivers to meet its obligations to
Henderson under the relevant Pre-Closing Development Agreement(s), for a
purchase price payable by Big Rivers to LEM therefor equal to the total revenues
actually received by Big Rivers from Henderson for the corresponding Power that
it delivered to Henderson in connection with that agreement (but exclusive of
revenues attributable to transmission charges or reimbursements payable by
Henderson).
(e) In the event LEM elects to sell Power to Big Rivers to service a
Pre-Closing Development Agreement, in lieu of taking assignment of that
agreement, as contemplated in subsection (d), above, LEM agrees to sell and
deliver that Power to Big Rivers at one or more
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interconnection points on Big Rivers' transmission system, or at one or more
Points of Delivery (as defined in the Power Purchase Agreement), in either case
at the same time(s) that Big Rivers is required to deliver the corresponding
Power to Henderson under that agreement, and Big Rivers agrees to use its
commercially reasonable efforts to enforce all of its rights thereunder and to
continue the same in full force and effect for the remaining term thereof. LEM
agrees to reimburse Big Rivers for seventy-five percent (75%) of its reasonable
out-of-pocket costs and expenses incurred in connection with such enforcement,
promptly after being invoiced by Big Rivers for the same. LEM shall be entitled
at any time, and without further consideration, to elect to take assignment and
transfer of any Pre-Closing Development Agreement for which an initial election
was made to sell Power to Big Rivers in lieu of taking such assignment and
transfer, upon written notice delivered to Big Rivers. Upon such election, LEM
shall be responsible for obtaining all FERC and other governmental approvals
required for such assignment and transfer (at LEM's expense), and Big Rivers and
Henderson agree to reasonably cooperate with LEM in obtaining all such
approvals. Henderson hereby consents for all purposes to the assignments and
transfers described in this Section 11.1.
(f) In the event LEM shall at any time take an assignment and transfer of
a Pre-Closing Development Agreement from Big Rivers as contemplated in this
Section 11.1, Big Rivers agrees to sell and deliver to LEM, and LEM agrees to
purchase from Big Rivers, not less than twenty-five percent (25%) of the total
amount of Power required by LEM to service that Pre-Closing Development
Agreement with Henderson, for a purchase price payable by LEM to Big Rivers
therefor equal to the total revenues actually received by LEM from Henderson for
the corresponding Power that is delivered by LEM to Henderson under that
agreement (but exclusive of revenues attributable to transmission charges or
reimbursements that are payable by Henderson). Such Power shall be so delivered
by Big Rivers to LEM at one or more interconnection points on Big Rivers'
transmission system at the same time that the corresponding Power must be
delivered by LEM to Henderson. Big Rivers agrees to reimburse LEM for
twenty-five percent (25%) of its reasonable out-of-pocket costs and expenses
incurred in connection with LEM's enforcement of its rights under such
agreements, promptly after being invoiced by LEM for the same. Big Rivers agrees
that all such Power
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sales and deliveries shall be satisfied using Power other than the Unit Output
or Station Two Unit Output required to be sold by Big Rivers to LEM pursuant to
Section 3 of the Power Purchase Agreement; provided, that Big Rivers may provide
such Power from the Base Power sold to Big Rivers by LEM under Section 4 of the
Power Purchase Agreement.
(g) Except as otherwise provided in the relevant Pre-Closing Development
Agreement, Henderson shall be responsible for coordinating and paying for any
transmission services over the Big Rivers transmission system required for the
delivery of Power to Henderson or its customers (subject to any rights of
Henderson under the Station Two Contracts to use that system without such
payments). Where LEM is selling that Power directly to Henderson, Big Rivers
agrees to invoice Henderson separately for such transmission charges (if any).
Big Rivers and LEM agree with each other that they shall be solely responsible
for the costs and risks which each has undertaken in the relevant Pre-Closing
Development Agreement associated with their procuring and delivering the Power
for which they are responsible as described in this Section 11.1, including
without limitation any responsibility undertaken regarding the transmission and
related costs required in order to transmit that Power to Big Rivers'
transmission system. Big Rivers and LEM each agree to pay to the other Party,
the purchase price amounts for which they are responsible under this Section
11.1 within 15 days after receipt of the corresponding revenues from Henderson.
11.2 Economic Development Opportunities During The Term. Notwithstanding
anything contained in the 1998 Amendments or elsewhere in this Agreement to the
contrary, the Parties agree that during the Phase I Subcontract Term and the
Phase II Assignment Term the rights and obligations of Big Rivers under Section
28 of the Station Two Power Sales Agreement (as amended by the 1998 Amendments),
pertaining to "Economic Development Opportunities" of Henderson ("Section 28")
(other than its rights and obligations relating to Pre-Closing Development
Agreements, which shall continue to be governed by Section 28 and by Sections
11.1 and 11.3 of this Agreement) shall be deemed to be suspended, and Section
28, as modified and supplemented by this Section 11.2 and Section 11.3, below,
shall be deemed to represent separate and distinct rights and obligations of LEM
and Henderson to each other that
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shall continue in force and effect until such time as this Agreement expires or
is terminated in accordance with its terms. Notwithstanding the foregoing, the
Parties agree that Henderson shall continue to enjoy all of the rights and
benefits arising under Section 28, as well as under any other provisions of the
Station Two Power Sales Agreement to which Section 28 may relate; provided, that
Henderson hereby agrees that such rights and benefits shall be subject to the
provisions of Sections 11.1, 11.2 and 11.3 of this Agreement throughout the
Term. The covenants and agreements made by LEM and Big Rivers to each other in
this Section 11.2 and Section 11.3, below, shall be deemed to be independent of
the provisions of Section 28. Consistent with the foregoing, and for the purpose
of implementing the agreements contemplated in this Section 11.2, references to
Big Rivers in Sections 28.1 and 28.2 of the Station Two Power Sales Agreement
shall be deemed to be references to LEM throughout the Phase I Subcontract Term
and the Phase II Assignment Term. The Parties acknowledge that (a) the
availability of Station Two Economic Development Power to Henderson as
contemplated in this Section 11.2 shall take into consideration any Economic
Development Power utilized by Henderson in connection with any Pre-Closing
Development Agreements that may remain in effect at that time, and (b) except to
the extent otherwise provided for herein, Station Two Economic Development Power
shall be treated under this Section 11.2 in the same manner and with the same
effect as provided in Section 28.
(a) In the event Henderson shall elect to use available Station Two
Economic Development Power with respect to a particular "Economic Development
Opportunity" pursuant to Section 28 at any time during the Phase I Subcontract
Term or the Phase II Assignment Term (other than uses of that Power in
connection with Pre-Closing Development Agreements between Henderson, on the one
hand, and Big Rivers or LEM, on the other hand), Henderson shall be required, as
a condition to its right to utilize that Power: (i) to enter into an agreement
with LEM for the purchase by Henderson and the delivery by LEM of all capacity
and Energy requirements of such Economic Development Opportunity to the extent
not supplied by
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Henderson with its reserved capacity or with Station Two Economic Development
Power, which shall in no event be less than one-half of all capacity and Energy
required to meet the needs of that Economic Development Opportunity not supplied
by Henderson from its reserved Capacity in compliance with the Station Two
Contracts ("Surplus Power"), at a price and upon terms and conditions which
those Parties determine are based on the then-prevailing market for such Surplus
Power, or (ii) to make a binding written offer to LEM to purchase from LEM all
of that Surplus Power, at the price determined in accordance with the process
provided below (the "Offer Price") and on the other terms and conditions which
are determined in accordance with the process described below (the "Offer"). In
the event of such a negotiated agreement or an acceptance by LEM of an Offer,
Henderson shall be obligated to purchase and LEM shall be obligated to deliver
such Surplus Power in accordance with the terms of such negotiated agreement or
the agreement created by that Offer and acceptance.
(b) Any Offer made by Henderson to LEM, to be effective for purposes of
this Section 11.2, must be preceded by a notice by Henderson to LEM of
Henderson's desire to so utilize all or a portion of the remaining Station Two
Economic Development Power (a "Notice"), and by a completed bidding process as
contemplated below, and must otherwise comply with the provisions of this
Section 11.2, in each case absent the written agreement of LEM to the contrary.
Any Notice shall, upon its delivery to LEM, be deemed to be the commencement of
the bidding process provided for below in order to determine the relevant Offer
Price for the relevant Surplus Power (the "RFP Process"). The Notice must
identify the particular Economic Development Opportunity for which the Surplus
Power is being sought and the amount of Surplus Power and Station Two Economic
Development Power, respectively, that would be required for the same, and must
include a description in reasonable detail of the load characteristics and other
terms that would be relevant to the Surplus Power purchases to be made by
Henderson (which shall in no event materially deviate from the load
characteristics and other terms (exclusive of pricing terms) and conditions upon
which Henderson is to supply the capacity and Energy requirements of that
Economic Development Opportunity), including without limitation, the quantity or
quantities of Surplus Power to be delivered, the date for the Commencement of
service, the period or periods during which deliveries would be required, the
duration of the proposed agreement, the relevant delivery points to which the
Surplus Power must be delivered at the Power supplier's expense, the relevant
load factor(s), whether
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sales would be firm or interruptible, and all other material terms and
conditions upon which the Surplus Power sales would be made to Henderson.
(c) Promptly following its delivery of the Notice to LEM, Henderson shall
initiate the RFP Process by delivering a written request for proposal to not
less than six (6) power suppliers (other than LEM) which are then authorized by
applicable Laws to sell Power on a wholesale basis at market-based rates in the
Commonwealth of Kentucky (each a "Qualified Power Marketer"), soliciting from
those Qualified Power Marketers one (but not more than one) firm offer to sell
to Henderson all (but not less than all) of the Surplus Power required to meet
the needs of that Economic Development Opportunity. All such requests for
proposals shall be delivered by Henderson to the Qualified Power Marketers on
the same Business Day, shall specify the date by which proposals must be
received by Henderson, shall include the same terms and conditions for Surplus
Power sales as were set forth in the Notice delivered by Henderson to LEM, and
shall not include any different or additional terms or conditions. Any proposal
that may be received by Henderson in response to its requests for proposals, in
order to be valid for purposes of this Section 11.2, (i) must be in writing,
(ii) must contain a single price per megawatt-hour at which the relevant
Qualified Power Marketer is willing to sell the Surplus Power to Henderson
during each period specified in the request for proposals (with annual
adjustments, if any, to that price based on a nationally recognized industry
index which references price levels) but without any separate demand or capacity
charge absent the written agreement of LEM and Henderson to the contrary, (iii)
must represent a binding offer by that Qualified Power Marketer to sell and
deliver to Henderson all Surplus Power included in the request for proposals on
the terms and subject to the conditions set forth therein without material
condition or reservation (and must expressly recite that it is such a binding
offer), and (iv) must be irrevocable and not subject to modification by that
Qualified Power Marketer until at least 4:00 P.M. Henderson, Kentucky time on
the first Business Day following the date on which Henderson shall deliver the
Offer to LEM as contemplated in Subsection (e), below. Any offer or proposal
from a Qualified Power Marketer that does not meet each of the criteria set
forth in (i), (ii), (iii) and (iv), above, shall be disqualified from
consideration, but Henderson shall be free to obtain a replacement offer which
meets those criteria from that or
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any other Qualified Power Marketer. In order to facilitate the receipt of at
least three offers from Qualified Power Marketers that meet the foregoing
criteria, Henderson shall be permitted, following its delivery of the relevant
Notice to LEM, to provide to prospective power suppliers in advance and on an
informal basis the relevant information to be included in its formal request for
proposals, and to discuss with those prospective power suppliers the load
characteristics and other terms and conditions upon which Surplus Power sales
would be required.
(d) Henderson shall promptly deliver to LEM (i) a complete copy of all
requests for proposals that are delivered to prospective power suppliers, and
(ii) copies of all proposals that are received by Henderson from Qualified Power
Marketers in response to those requests, and Henderson shall notify LEM promptly
following the specified date by which proposals shall be received by Henderson
that Henderson has received at least three (3) qualifying proposals that will
remain effective through the period described in Section (c)(iv), above, and
that otherwise meet the criteria described in (c), above (including the
identities of those Qualified Power Marketers). Henderson shall rank such
qualifying offers from highest to lowest, based on the megawatt-hour prices
specified therein for the Surplus Power. In the event that a proposal shall
specify different prices for separate periods of time as permitted by the
request for proposals, the megawatt-hour price for such proposal shall be
determined by calculating the weighted average of the megawatt-hour prices so
specified, weighted based on the quantity of Energy to be purchased in each
period. For purposes of calculating the megawatt-hour prices of an offer which
specifies annual adjustments thereto based on an index as provided for in
Subsection (c) above, the amount of each such adjustment during the term of the
proposed agreement shall be assumed to be the same as the latest annual rate of
adjustment for such index as of the time of the price determination. Any demand
or capacity charges that are agreed to by LEM and Henderson as contemplated in
Subsection (c) above, shall be calculated for purposes of determining the
ranking of the proposals in the manner provided in such agreement. Based on the
ranking of the proposals as aforesaid: (i) if five or more qualifying proposals
are received by Henderson, then of the five qualifying proposals specifying the
lowest prices the highest and lowest of those proposals shall be eliminated, the
proposal which
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is the mean of the remaining three proposals shall constitute the "Mean
Proposal"; and (ii) if less than five but at least three qualifying proposals
are received by Henderson, then of the three qualifying proposals specifying the
lowest prices, the highest and lowest proposals shall be eliminated and the
remaining proposal shall be the Mean Proposal. The megawatt-hour price or prices
specified in the Mean Proposal (together with the adjustments thereto, if any,
specified in such proposal as are permitted by the request for proposals, shall
constitute the "Offer Price." In the event Henderson does not receive at least
three such qualifying proposals, then absent the written agreement of LEM and
Henderson to the contrary, that entire RFP Process shall be deemed to be
disqualified, and Henderson may elect (but shall be required as a condition to
its right of access to and use of the relevant Station Two Economic Development
Power) to once again deliver a Notice to LEM, commence and complete a new RFP
Process with those or other Qualified Power Marketers, and make a corresponding
Offer to LEM.
(e) Following a determination of the relevant Mean Proposal and Offer
Price as contemplated in (d), above, Henderson may, as a condition to its right
of access to and use of the relevant Station Two Economic Development Power, but
shall not be obligated to, deliver an Offer to LEM based solely on that Offer
Price and the other terms and conditions for Surplus Power sales and deliveries
as were set forth in the Mean Proposal; provided, however, that any such Offer
by Henderson, as an additional condition to its effectiveness hereunder, must be
delivered by Henderson to LEM within two (2) Business Days following Henderson's
determination of the relevant Mean Proposal. Any proposed Offer by Henderson to
LEM which does not follow a determination of the relevant Mean Proposal and
Offer Price as contemplated above, or which does not otherwise comply with the
provisions of this Section 11.2, shall be disqualified, and Henderson may
request (but shall be required as a condition to its right of access to and use
of the relevant Station Two Economic Development Power) to commence a new RFP
Process to once again determine the relevant Mean Proposal and Offer Price, and
to make a corresponding new Offer to LEM (absent the written agreement of LEM
and Henderson to the contrary)
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(f) LEM shall have a period of five (5) Business Days following receipt of
Henderson's Offer to accept the terms of such Offer and agree to supply the
Surplus Power at the Offer Price and on the other terms and conditions included
in the Offer. If LEM rejects or fails to accept such Offer within that
five-Business Day period, Henderson may pursue its rights provided for in
Section 28.2 of the Station Two Power Sales Agreement to seek alternative
sources for such Surplus Power, by either (i) accepting one of the original
qualifying proposals from any of the Qualified Power Marketers described in
Subsection (d), above, whose proposal was ranked lower than or constituted the
Mean Proposal, or (ii) accepting a new proposal from any such Qualified Power
Marketer or other third-party supplier based on the same material terms and
conditions as were included in the Offer, and that meets the criteria set forth
in Subclauses (i), (ii) and (iii) of Subsection (c), above; provided, that any
such new proposal, based on the method of calculation set forth in Subsection
(d), above, shall be ranked equal to or lower than the Mean Proposal on which
the Offer was based. If Henderson shall fail to so accept one of the original
qualifying proposals or a new proposal meeting the criteria described above,
then as a condition to Henderson's right to utilize the relevant Station Two
Economic Development Power, Henderson shall, prior to entering into an agreement
to buy the Surplus Power (or any of it) from a third-party Power supplier, offer
to LEM the right, in LEM's discretion, to match the price and other material
terms and conditions offered by or to that third-party supplier (a "Matching
Offer"), thereby agreeing to supply the Surplus Power to Henderson on those
terms and conditions in lieu of that supplier. Such a Matching Offer by
Henderson to LEM shall be accompanied by a copy of the proposed agreement with,
or binding written offer from or to, that third-party supplier. If the Matching
Offer is accepted by LEM, Henderson shall be obligated to purchase and LEM shall
be obligated to sell the relevant Surplus Power at the price and upon the other
material terms and conditions set forth or deemed to be included in the Matching
Offer. If LEM rejects the Matching Offer or fails to accept it within five (5)
Business Days after its receipt thereof and of a copy of the relevant third
party agreement or offer, Henderson shall be free to enter into that agreement
with the third-party supplier; provided, however, that if Henderson shall fail
to enter into that agreement for the purchase of the relevant Surplus Power
within thirty (30) days after the expiration of that five-Business Day period,
no such agreement shall be
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entered into without again first offering LEM the right to match the price and
material terms and conditions thereof as contemplated in this Subsection (f).
Big Rivers shall have no rights with respect to any Offer or Matching Offer that
is not accepted by LEM, absent the agreement of Henderson to the contrary.
Following any acceptance by LEM of an Offer or Matching Offer made by Henderson
as contemplated in this Section 11.2, and subject to the provisions of
Subsection (h), below, LEM shall be given at least ten (10) Business Days prior
written notice by Henderson of the date on which initial Surplus Power
deliveries by LEM must commence under their relevant agreement, and of the date
on which Henderson shall begin taking the relevant Station Two Economic
Development Power from Station Two for sale to that Economic Development
Opportunity (which shall not pre-date the date of such initial Surplus Power
deliveries).
(g) Any acceptance by LEM of an Offer or Matching Offer made by Henderson
must be in writing, and shall be deemed to obligate Henderson to purchase and
accept delivery of, and LEM to sell and deliver, Surplus Power on the relevant
terms and conditions for that Offer or Matching Offer described above. Any such
agreements that may be created between LEM and Henderson are hereinafter
referred to individually as an "Economic Development Agreement" and collectively
as the "Economic Development Agreements." Following any acceptance by LEM of an
Offer or Matching Offer made by Henderson in accordance with the terms hereof,
those Parties and their counsel may restate, without limitation, the Economic
Development Agreement created thereby in a separate written instrument executed
by LEM and Henderson.
(h) Notwithstanding anything contained in Section 28 or Section 11.2 of
this Agreement to the contrary, and notwithstanding LEM's acceptance of any
Offer or Matching Offer made by Henderson as contemplated herein, LEM shall be
entitled, in its discretion and upon written notice to Henderson, to terminate
any agreement created by that acceptance without further obligation to
Henderson, and to terminate Henderson's right pursuant to Section 28 and this
Section 11.2 to use the Station Two Economic Development Power relating to that
Offer or Matching Offer, in the event Power purchases by the relevant Economic
Development Op-
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portunity from Henderson under their agreement, and the corresponding Surplus
Power purchases by Henderson from LEM under their Economic Development
Agreement, have not commenced in accordance with their respective terms by the
date for commencement of service (the "Start Date") as set forth in the Offer or
Matching Offer, unless the relevant Economic Development Agreement between
Henderson and LEM expressly provides for Henderson's payment in the event that
service has not commenced by the Start Date of demand or capacity charges to LEM
commencing with the Start Date and continuing until service shall be commenced
in which event the foregoing termination rights of LEM shall not be exercisable
by LEM unless such purchases of Surplus Power by Henderson have not commenced in
accordance with the terms of those agreements within 36 months following the
date of LEM's acceptance of the Offer or the Matching Offer (or such shorter
period as is provided for in the relevant Economic Development Agreement). In
the event that the demand and/or use of Power by any Economic Development
Opportunity shall be reduced due to any unexpected inability to utilize such
Power or refusal to purchase such Power, or such Economic Development
Opportunity shall otherwise no longer be a customer of Henderson, upon
notification by Henderson to LEM of such an event, (i) in the case of such
reduction in Power requirement, the amount of the Power reduction shall be
applied to reduce the relevant Economic Development Power allocated and
available to Henderson under this Section 11.2 and Section 28, and the Surplus
Power purchased by Henderson and sold by LEM under the relevant Economic
Development Agreement, pro-rata based on the respective amounts of Power
thereof, and (ii) in the case of Henderson's loss of such Economic Development
Opportunity as a customer, the allocation to Henderson of the relevant Economic
Development Power shall end and the relevant Economic Development Agreement
shall be deemed terminated by the Parties. No Economic Development Power to
which Henderson becomes entitled pursuant to this Section 11.2 or Section 28
shall be used other than for the relevant Economic Development Opportunity,
except for the use of Excess Henderson Energy associated with the Capacity of
such Economic Development Power as provided in Section 3.8 of the 1998
Amendments and Section 11.5 of this Agreement. The foregoing termination rights
shall be in addition to and not in lieu of, any other termination rights that
LEM or Henderson may have under or with respect to the relevant Economic
Development Agreement,
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all of which, together with all other rights and remedies, shall be cumulative
to the fullest extent permitted by applicable Laws.
(i) The provisions of Section 28.3 of the Station Two Power Sales
Agreement shall continue to govern the Parties' respective rights and
obligations throughout the Phase I Subcontract Term and Phase II Assignment
Term, except that references therein to Big Rivers shall be deemed to be to LEM,
and the reference therein to the specified prices contained in Exhibit 1 shall
be deemed to be a reference to the relevant Offer Price or the price identified
in the relevant Matching Offer (as applicable). The Parties agree that the
provisions of Section 28.4 of the Station Two Power Sales Agreement shall have
no applicability during the Phase I Subcontract Term or the Phase II Assignment
Term.
(j) Within five (5) Business Days after any acceptance by LEM of an Offer
or Matching Offer made by Henderson with respect to an Economic Development
Opportunity as contemplated above, LEM shall notify Big Rivers of the resulting
Economic Development Agreement, shall provide Big Rivers with a copy of
Henderson's Offer or Matching Offer (as applicable), and shall offer in writing
to Big Rivers the right to sell and deliver to LEM twenty-five percent (25%) of
all Power required by LEM to service that Economic Development Agreement with
Henderson, for a purchase price payable by LEM to Big Rivers for such Power
equal to the total revenues actually received by LEM for the corresponding
amount of Surplus Power delivered to Henderson under that Economic Development
Agreement (inclusive of all corresponding Energy and demand or capacity charges,
if any, but exclusive of revenues attributable to transmission charges or
reimbursements (if any) payable by Henderson to LEM under that agreement). The
Power sales and deliveries contemplated by any such offer from LEM to Big Rivers
would be on the same material terms and conditions as are provided for in the
corresponding Economic Development Agreement between LEM and Henderson, and
deliveries by Big Rivers would be required to be made to LEM at one or more
interconnection points on Big Rivers' transmission system. Big Rivers shall have
five (5) Business Days following its receipt of that offer by LEM to accept the
same
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by written notice to LEM. Such acceptance by Big Rivers shall obligate it to
sell all such Power to LEM for the duration of LEM's corresponding Economic
Development Agreement with Henderson and on the other terms and conditions
described above. LEM shall be entitled, without obligation to Big Rivers, to
sell and deliver all Surplus Power required under that Economic Development
Agreement, solely for LEM's account, until such time as Big Rivers shall have
notified LEM of its acceptance of the foregoing offer from LEM, and, thereafter,
(i) until such time as Big Rivers has commenced deliveries of the relevant Power
as contemplated herein, or (ii) to the extent that Big Rivers shall at any time
fail to deliver the corresponding quantities of Power to LEM. LEM shall have no
obligation to enter into any Economic Development Agreement with Henderson, and
shall be entitled to terminate any such agreement as contemplated in Subsection
(h) above without the consent or approval of Big Rivers. Any failure by Big
Rivers to accept LEM's offer within that five (5) day period as to all Power
covered thereby, any failure by Big Rivers, following its timely acceptance of
that offer, to commence deliveries of the relevant Power to LEM within 24 hours
after such acceptance (or such later time at which LEM's corresponding Power
deliveries to Henderson are required to commence), or any failure by Big Rivers
to thereafter fulfill in all material respects all Power delivery and other
obligations of Big Rivers to LEM under their agreement, shall immediately
entitle LEM to revoke or terminate its offer or that agreement (as applicable)
by written notice to Big Rivers and without further obligation to Big Rivers,
and shall, following such revocation or termination, be deemed to release and
discharge LEM from any further obligation to Big Rivers, whether under this
Section 11.2(j) or otherwise, to purchase or offer to purchase from Big Rivers
any Power required by LEM for that or any future Economic Development Agreement
with Henderson; provided, that such revocation or termination by LEM shall not
be deemed to affect Big Rivers' rights and obligations under any other similar
power sales agreements with LEM in existence as of that revocation or
termination and relating to another existing Economic Development Agreement. Big
Rivers agrees that all Power sales and deliveries by it to LEM in connection
with one or more Economic Development Agreements shall be satisfied using Power
other than the Unit Output or Station Two Unit Output required to be sold by Big
Rivers to LEM pursuant to Section 3 of the Power Purchase Agreement; provided,
that Big Rivers may provide such Power from the
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Base Power sold to Big Rivers by LEM under Section 4 of the Power Purchase
Agreement. LEM agrees to pay to Big Rivers the purchase price amounts for which
it is responsible under this Section 11.2(j) within 15 days after LEM's receipt
of the corresponding revenues from Henderson.
(k) Throughout the term of any agreement created between Big Rivers and
LEM as contemplated in (j), above, Big Rivers agrees to reimburse LEM for 25% of
all out-of-pocket costs and expenses incurred by LEM in enforcing its
corresponding Economic Development Agreement with Henderson, promptly after
being invoiced by LEM for the same, and LEM agrees to use its commercially
reasonable efforts to so enforce that agreement against Henderson. Except as
otherwise provided in the relevant Economic Development Agreement, Henderson
shall be responsible for coordinating and paying for any transmission services
over the Big Rivers transmission system required for the delivery of Surplus
Power to Henderson or its customers (subject to any rights of Henderson under
the Station Two Contracts to use that system without such payments). Big Rivers
agrees to invoice Henderson separately for those transmission charges (if any).
Big Rivers and LEM agree with each other that they shall be solely responsible
for the costs and risks which each may undertake in the relevant Economic
Development Agreement associated with their procuring and delivering the Power
for which they are or may become responsible as described in this Section 11.2,
including without limitation, any responsibility undertaken regarding the
transmission and related costs required in order to transmit that Power to Big
Rivers' transmission system. The agreements between Big Rivers and LEM described
in this Subsection (k) and Subsection (j) above, and the performance and
non-performance thereof, shall have no effect on LEM's or Henderson's rights and
obligations under any Economic Development Agreements between them.
(l) In the event that, with respect to any Economic Development
Opportunity, Henderson shall for any reason elect not to, or shall fail to,
submit to LEM an Offer for Surplus Power that complies with the provisions of
this Section 11.2 or to otherwise negotiate and enter into an agreement with LEM
to supply that Surplus Power (in either case thereby foregoing its right to use
Station Two Economic Development Power for sale to the relevant
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Economic Development Opportunity), but Henderson shall instead pursue the
purchase of all or any portion of the Power needs of that Economic Development
Opportunity from one or more other power suppliers, and in the event Henderson
shall thereafter desire to enter into one or more agreements with a third-party
power supplier to purchase Power for resale to that Economic Development
Opportunity, then, prior to so entering into that agreement Henderson shall
provide a copy thereof (or the relevant offer(s) from or to that supplier) to
LEM, and shall offer in writing to LEM the right, in LEM's discretion, to match
the price and the other material terms and conditions offered by or to that
third-party supplier. If LEM rejects that offer or fails to accept it within
five (5) Business Days after its receipt thereof, Henderson shall be entitled to
enter into an agreement with that third-party supplier for the price and upon
the same material terms and conditions as were offered to LEM. In the event LEM
accepts any offer made by Henderson as contemplated in this Subsection (l), LEM
shall be obligated to sell and deliver, and Henderson shall be obligated to
purchase, all such Power at the price and upon the other material terms and
conditions described above. In the event LEM accepts an Offer under this Section
11.2(l), it shall have no obligation or liability whatsoever to Big Rivers with
respect to the resulting agreement between LEM and Henderson.
11.3 Treatment of Economic Development Agreements Following the Term.
(a) Upon the expiration or earlier termination of this Agreement for any
reason: (i) LEM shall assign and transfer to Big Rivers all of LEM's rights,
title and interest under, in and to any Pre-Closing Development Agreements that
were previously assigned and transferred to LEM in accordance with Section 11.1
and that continue in effect as of that expiration or termination date (other
than LEM's rights to payment thereunder for Power deliveries made prior to the
assignment or transfer to Big Rivers, and other than damage claims of LEM
arising thereunder prior to that assignment or transfer); (ii) any agreements
between LEM and Big Rivers providing for LEM's sale of Power to Big Rivers for
resale to Henderson under any Pre-Closing Development Agreement (as contemplated
in Section 11.1) shall be terminated (other than LEM's rights to payment
thereunder for Power deliveries already made to Big Rivers, and other than
damage claims of LEM or Big Rivers arising
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thereunder prior to that termination); (iii) any agreements between LEM and Big
Rivers providing for Big Rivers' sale of Power to LEM for resale to Henderson
under any Pre-Closing Development Agreement (as contemplated in Section 11.1)
shall be deemed to be terminated (other than Big River's rights to payment
thereunder for Power deliveries already made to LEM, and other than damage
claims of Big Rivers of LEM arising thereunder prior to that termination); and
(iv) LEM shall be deemed to be fully released and discharged by Big Rivers and
Henderson from further obligation or liability in connection with the agreements
described in (i), (ii) and (iii), above, except as contemplated above, and
except for breaches or defaults under those agreements on the part of LEM
occurring prior to the assignment, transfer or termination, as applicable, of
such agreements (which breaches or defaults on the part of LEM, and all
liabilities arising therefrom, shall remain an obligation of LEM after such
assignment, transfer or termination). Upon any assignment or transfer by LEM to
Big Rivers of any Pre-Closing Development Agreements as contemplated above, Big
Rivers shall be deemed to have assumed and undertaken all of LEM's obligations
thereunder which arise or accrue following that assignment or transfer;
provided, that in the event LEM shall have modified or amended in any material
respect a Pre-Closing Development Agreement without the consent of Big Rivers,
then in lieu of any obligation of Big Rivers to assume that agreement, as
otherwise provided for in this Section 11.3(a), Big Rivers shall have the option
to assume the agreement (which option shall be exercised by Big Rivers in
accordance with the procedures set forth in Section 11.3(b) relating to all
other Economic Development Agreements).
(b) In addition, upon the expiration or earlier termination of this
Agreement for any reason, LEM shall be deemed to have offered to Big Rivers the
right to cause LEM to assign and transfer to Big Rivers all (but not less than
all) of LEM's remaining rights, title and interest (if any) under, in and to any
Economic Development Agreements which are then in effect and to which LEM is
then a party (other than LEM's rights and entitlements thereunder for payments
owing by Henderson as of the assignment or transfer, and other than LEM's damage
claims arising thereunder prior to the assignment or transfer). Big Rivers shall
have a period of 30 days following the expiration or termination of this
Agreement to accept that offer
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from LEM by designating in writing to LEM, in reasonable detail, the specific
Economic Development Agreement(s) that will be assigned and transferred by LEM
to Big Rivers. If Big Rivers fails to so designate a particular Economic
Development Agreement within that 30-day period, its rights under this Section
11.3 with respect to that agreement shall be deemed to have been fully and
forever waived, its rights under Section 11.2 (or under any related agreement
with LEM contemplated in Section 11.2) to sell Power to LEM for resale to
Henderson under that Economic Development Agreement shall, at the election of
LEM made at any time thereafter upon notice to Big Rivers, be terminated without
further obligation on the part of LEM, and LEM shall thereafter supply all such
Power to Henderson from any source satisfactory to LEM during the remainder of
that Economic Development Agreement.
(c) The Parties acknowledge and agree that the assignment or transfer of
the Pre-Closing Development Agreements and Economic Development Agreements
contemplated by or made pursuant to Sections 11.3(a) and 11.3(b), above, may
require notice to or the prior approval of the FERC or other federal, state or
local governmental agencies. LEM shall be solely responsible for submitting all
notices or obtaining all approvals of the FERC or any other governmental
authority required for the assignment or transfer of such Power sales
agreements. LEM will pay the first $25,000, and Big Rivers will pay the
remaining balance due, of all reasonable fees and expenses incurred by LEM in
filing the notices and seeking the required approvals contemplated in this
Section 11.3(c), including, without limitation, consultant and legal fees,
administrative fees and filing fees. After the Term, and promptly following Big
Rivers' request therefor, LEM shall proceed in good faith and use its reasonable
best efforts to file such notices and to obtain such approvals as may be
required to transfer and assign such Power sales agreements to Big Rivers. In
light of the regulatory notices and approvals which may be required, the Parties
further agree that, notwithstanding the provisions of Subsection (a) and (b),
above, no such assignment or transfer shall be deemed to have occurred in the
event Big Rivers shall reasonably determine, and shall notify LEM and Henderson
in writing, that any such approval by the FERC or any other governmental
authority shall be required for the same but shall not have been obtained. In
any event, no
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such assignment or transfer shall occur until all necessary notices and
approvals to such assignments and transfers, and the terms thereof, are so
obtained from the FERC and all other governmental authorities, and the
provisions of the Pre-Closing Development Agreements and the Economic
Development Agreements shall remain unchanged except for such assignment or
transfer. If Big Rivers provides a notice to LEM and Henderson to the effect
contemplated in the preceding sentence, Big Rivers shall be deemed by that
notice to have elected to (and shall then be obligated to) sell and deliver to
LEM during the period specified below, and LEM shall have an obligation to
purchase and accept delivery from Big Rivers during the period specified below
(provided Big Rivers shall not then or at any time during that period be in
breach or default of any obligation that may be due and owing to any LG&E
Company), all Power required by LEM to meet its obligation to Henderson under
the relevant Pre-Closing Development Agreement(s) and Economic Development
Agreement(s), for a purchase price payable by LEM to Big Rivers therefor equal
to the total revenues actually received by LEM from Henderson for the
corresponding Power that it delivered to Henderson in connection with that
agreement(s) (but exclusive of revenues attributable to transmission charges or
reimbursements payable by Henderson). The period during which the purchase and
sale obligations specified in the preceding sentence shall be effective shall
commence on the date of Big Rivers' notice to LEM and Henderson and shall expire
on the earlier of (x) the date of receipt of all required regulatory and
governmental approvals to the proposed assignment or transfers of the relevant
Pre-Closing Development Agreement(s) and Economic Development Agreement(s) or
(y) the date of expiration or termination of the relevant Pre-Closing
Development Agreement(s) and Economic Development Agreement(s). Big Rivers and
Henderson agree to reasonably cooperate with LEM's efforts to submit such
notices and obtain such approvals, and Big Rivers agrees to seek such approvals
expeditiously. Upon any assignment or transfer by LEM to Big Rivers of the
Pre-Closing Development Agreement(s) and Economic Development Agreement(s) as
contemplated herein, LEM shall be deemed to be released and discharged from any
further obligation or liability to Henderson or Big Rivers thereunder or under
this Section 11.3(c), or with respect thereto or hereto, except for any breaches
or defaults by LEM under that agreement or under this Section 11.3(c) occurring
prior to that assignment or transfer.
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11.4 Section 3.4 of Power Sales Contract. By way of clarification only and
not in limitation of the Parties' respective rights and obligations thereunder,
the Parties acknowledge and agree that the annual adjustment to Henderson's five
year capacity reservation forecasts in amounts not exceeding five (5) megawatts
per Contract Year provided for in Section 3.3 of the Station Two Power Sales
Agreement, as applied as contemplated in the concluding sentence of Section 3.4
of the Station Two Power Sales Agreement (as amended by the 1998 Amendments), is
limited to five (5) megawatts per Contract Year for all commercial or industrial
customers of Henderson collectively, not five (5) megawatts per Contract Year
for each such customer.
11.5 Use of Excess Energy and Capacity. The Parties hereby agree that,
during the Phase I Subcontract Term and the Phase II Assignment Term, the
provisions of this Section 11.5 shall apply and govern their respective rights
and obligations with respect to Excess Henderson Energy and Energy associated
with Excess Henderson Capacity (each as defined below), in lieu of the
provisions of Section 3.8 of the Station Two Power Sales Agreement (as amended
by the 1998 Amendments). Consistent with the foregoing, the Parties agree that
the provisions of Section 3.8 of the Station Two Power Sales Agreement shall be
suspended throughout the Phase I Subcontract Term and the Phase II Assignment
Term. Notwithstanding the foregoing, the provisions of Sections 8.12 and 9.7 of
the Agreement, as they relate to Excess Henderson Energy and Energy associated
with Excess Henderson Capacity, shall also govern the Parties' respective rights
and obligations to the extent contemplated therein.
(a) In the event that at any time and from time to time Henderson does not
schedule or take the full amount of Energy associated with its reserved Capacity
from Station Two (determined in accordance with Station Two Power Sales
Agreement), (1) Big Rivers shall, during the Phase I Subcontract Term, upon the
prior request of LEM, and (2) Station Two Subsidiary may, during the Phase II
Assignment Term, in its discretion, take and utilize all such Energy (or any
portion thereof designated by Station Two Subsidiary) not so scheduled or taken
by Henderson (the "Excess Henderson Energy"), as provided herein. Henderson
agrees
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to permit Big Rivers or Station Two Subsidiary (as applicable) to take and
utilize all or any portion of such Excess Henderson Energy as contemplated
above.
(b) If at any time Station Two Capacity is generated in excess of the
Total Capacity of Station Two determined in accordance with Section 3.6 of the
Station Two Power Sales Agreement ("Excess Henderson Capacity"), (1) Big Rivers
shall during the Phase I Subcontract Term, and (2) Station Two Subsidiary shall,
during the Phase II Assignment Term, take and utilize all Energy associated with
such Excess Henderson Capacity as provided herein (unless otherwise agreed to by
Station Two Subsidiary and Henderson). Henderson agrees to permit Big Rivers or
Station Two Subsidiary (as applicable) to take and utilize all such Energy as
contemplated above.
(c) Promptly following the end of each calendar month during the Phase I
Subcontract Term and the Phase II Assignment Term, Station Two Subsidiary shall
notify Henderson and Big Rivers of the amount of Excess Henderson Energy and
Energy associated with the Excess Henderson Capacity, if any, taken by Big
Rivers or Station Two Subsidiary, as the case may be, during the previous month.
Big Rivers or Station Two Subsidiary (whichever Party so took the Excess
Henderson Energy and/or Energy associated with Excess Henderson Capacity) shall
pay to Henderson, prior to the 25th day of the then current month, for the
amount of Excess Henderson Energy and Energy associated with the Excess
Henderson Capacity so taken by it during that prior month, a purchase price per
megawatt hour equal to $1.50. In addition, Big Rivers or Station Two Subsidiary,
as the case may be, shall (i) provide, at its own cost, the full replacement of
all fuels and reagents consumed from the Station Two fuel and reagent reserves
for the production of the Excess Henderson Energy and Energy associated with the
Excess Henderson Capacity so taken by it, and (ii) pay the portion of the sludge
disposal costs attributable to that Excess Henderson Energy and Energy
associated with Excess Henderson Capacity, as calculated in accordance with
Section 3.4 of the Joint Facilities Agreement. Notwithstanding the foregoing,
Station Two Subsidiary agrees to promptly reimburse Big Rivers for its
out-of-pocket costs and expenses incurred in connection with such fuels,
reagents and sludge disposal to the extent not paid by LEM as an Operating Pass
Through Cost
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pursuant to Section 8.12 of this Agreement, and Station Two Subsidiary shall
administer all such fuel and reagent procurement on behalf of Big Rivers
pursuant to Section 8.14 (c) of this Agreement.
(d) Henderson and Big Rivers agree that Station Two Subsidiary shall be
allowed, but shall not be required, to operate Station Two to obtain Capacity
above the Total Capacity of Station Two determined in accordance with Section
3.6 of the Station Two Power Sales Agreement; provided, however, that Station
Two Subsidiary's operation of Station Two shall at all times be subject to its
operating covenants to Big Rivers and Henderson, respectively, set forth
elsewhere in this Agreement or the Assigned Station Two Contracts, as
applicable. Henderson further agrees that it shall not at any time be permitted
to sell or commit to any Person (other than to Big Rivers or Station Two
Subsidiary as contemplated in this Section 11.5) any Excess Henderson Energy
without having first offered Big Rivers or Station Two Subsidiary the
opportunity to purchase such Excess Henderson Energy as contemplated herein. Big
Rivers or Station Two Subsidiary (as applicable) shall have a reasonable period
of time after submission of Henderson's scheduled Energy requirements to decide
whether to purchase any Excess Henderson Energy not scheduled by Henderson. Big
Rivers or Station Two Subsidiary (as applicable) agrees to notify Henderson
thereafter if it does not intend to purchase such Energy, and agrees to give
Henderson a response within a reasonable time so that Henderson may take efforts
to resell that Energy to third-parties. Henderson agrees to compensate Big
Rivers according to Big Rivers' Open Access Transmission Tariff to the extent
Henderson utilizes any transmission on Big Rivers' transmission system in
marketing Excess Henderson Energy. In the event Big Rivers or Station Two
Subsidiary (as applicable) decline to purchase any Excess Henderson Energy as
contemplated above, then LEM agrees, upon the written request of Henderson
delivered within a reasonable period of time prior to the production of such
Excess Henderson Energy (but in no event prior to the redemption or retirement
in full of the Station Two Bonds), to reasonably assist Henderson it its efforts
to market that Excess Henderson Energy to third-parties for Henderson's own
account.
12. CONDEMNATION; DAMAGE OR DESTRUCTION OF STATION TWO ASSETS.
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12.1 Condemnation. If all or substantially all of the Station Two Assets
are condemned or become the subject of any taking through powers of eminent
domain, this Agreement shall terminate when possession of the Station Two Assets
is taken by the condemning or taking authority. Upon such termination, the
Parties hereto shall have no further liability or obligation under this
Agreement (other than liabilities accrued under this Agreement before the date
of such condemnation or taking). If less than substantially all of the Station
Two Assets are condemned or taken, then this Agreement shall not terminate.
12.2 Damage or Destruction. If at any time during the Phase I Subcontract
Term or the Phase II Assignment Term the Station Two Assets are damaged or
destroyed and such damage or destruction was caused by a casualty covered by an
insurance policy required by Section 18 of the Station Two Operating Agreement
or Section 10.8 of this Agreement, the proceeds of such insurance shall, to the
extent made available to the Parties (including the Trustee under the Station
Two Bonds) and to the extent consistent with Prudent Utility Practice, be used
to restore the Station Two Assets as soon as reasonably possible to
substantially the same general condition, character or use as existed before the
damage, and this Agreement shall remain in effect. To the extent not covered by
the proceeds of insurance, the capital costs of such restoration of the Station
Two Assets shall be allocated to and paid by the Parties as required by Section
6.3(d) of the Station Two Power Sales Agreement and Section 13(a) of the Station
Two Operating Agreement and, as between Big Rivers and Station Two Subsidiary to
the extent consistent with either Section 8.17(b) or 9.10(a) of this Agreement,
shall be deemed payments for Station Two Improvements pursuant to an approved
modification of the Operating Budget and shall be paid and reimbursed, as the
case may be, in accordance with the provisions of Sections 8.17(d) and 8.17(e)
or Section 9.10(c) of this Agreement, as then applicable, provided, that the
Station Two Improvement Sharing Ratios applied to such restoration shall be
those appropriate based on whether it is a Henderson Incremental Capital Cost or
a Henderson Non-Incremental Capital Cost. Each of the Parties shall pay the
restoration costs as provided above unless the damage or destruction to the
Station Two Assets resulted (a) from the negligence or willful misconduct of
Station Two Subsidiary or its
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Affiliates, or their respective employees, agents or representatives, in which
event Station Two Subsidiary shall bear such additional costs alone, (b) from
the negligence or willful misconduct of Big Rivers, or its employees, agents or
representatives, in which event Big Rivers shall bear such additional costs
alone, or (c) from the negligence or willful misconduct of Henderson, or its
employees, agents or representatives, in which event Henderson, if the Station
Two Bonds shall have been retired or redeemed prior to the restoration, or shall
at any time during the restoration process be retired or redeemed, shall bear
such additional costs alone from and after the date of any such retirement or
redemption; provided, however, that with respect to any negligence or willful
misconduct of Henderson or its employees, agents or representatives, and
notwithstanding anything herein to the contrary, Big Rivers and the LG&E
Companies shall retain and have the right, in their sole discretion, to pursue
any and all rights, causes of action and remedies that any of them may have
against Henderson relating to such negligence or willful misconduct, whether at
law or in equity and whether pursuant to this Agreement or any of the Station
Two Contracts, including, without limitation, any claims under Section 22 of the
Station Two Operating Agreement and Section 10.15 of this Agreement; and
provided, further, that with respect to any negligence or willful misconduct of
either Big Rivers or any LG&E Company, respectively, or of their respective
employees, agents or representatives, and notwithstanding anything herein to the
contrary, Henderson shall retain and have the right, in its sole discretion, to
pursue any and all rights, causes of action and remedies that it may have
against Big Rivers or any of the LG&E Companies, respectively, relating to such
negligence or willful misconduct, whether at law or in equity and whether
pursuant to this Agreement or any of the Station Two Contracts, including,
without limitation, any claims under Section 22 of the Station Two Operating
Agreement (which shall not be applicable to the LG&E Companies during the Phase
I Subcontract Term) and Section 10.15 of this Agreement.
13. TERMINATION; DEFAULT; REMEDIES.
13.1 Termination Prior to Effective Date. This Agreement may be terminated
prior to the Effective Date, upon notice delivered by the terminating Party(s)
to the other Parties, under the following circumstances:
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(a) by the LG&E Companies if (1) one or more of the Station Two Power
Sales Agreement, Station Two Operating Agreement or the Joint Facilities
Agreement are terminated, or (2) any other Station Two Contract is terminated by
Henderson or Big Rivers and the termination of such other Station Two Contract
would have a material adverse effect on the rights of the LG&E Companies under
this Agreement taken as a whole; provided, however, Henderson and Big Rivers
agree to promptly provide the LG&E Companies with notice of any default, breach
or other event that, with notice or the lapse of time, or both, may result in
the termination of any Station Two Contract prior to the Effective Date and, if
the proposed termination results from a breach or default of the terms and
provisions thereof by Big Rivers, Henderson and Big Rivers shall afford to the
LG&E Companies the cure rights and rights of off-set as are further set forth in
Section 13.5(f) of this Agreement.
(b) by the LG&E Companies or Big Rivers if the Participation Agreement
shall be terminated for any of the reasons set forth in Section 17.1.1 of the
Participation Agreement; or
(c) by the LG&E Companies, Big Rivers or Henderson if the Effective Date
shall not have occurred on or prior to December 31, 1998, other than by reason
of a breach or default under this Agreement on the part of the Party seeking to
effect such Termination.
13.2 Pre-Effective Date Remedies; Conditions Precedent. In the event of a
termination of this Agreement pursuant to Section 13.1, each of the Parties
shall be released from all liabilities and obligations arising under this
Agreement which do not survive such termination under Section 13.10 of this
Agreement, other than obligations or liabilities arising from their breach or
default under this Agreement. In addition, Big Rivers and the LG&E Companies
each acknowledge and agree that, in the event this Agreement is executed and
delivered by the Parties prior to the Participation Agreement Effective Date,
but is subsequently terminated by any Party(s) pursuant to Section 13.1 of this
Agreement or otherwise for any reason on or prior to that Participation
Agreement Effective Date, then the conditions precedent described in (a) Item 4
of Section I and Item 5 of Section II, respectively, of Schedule 3.1 of the
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Participation Agreement, (b) Item 5 of Section I and Item 3 of Section II,
respectively, of Schedule 3.2 of the Participation Agreement, and (c) Item 4 of
Section I and Item 2 of Section II, respectively, of Schedule 3.3 of the
Participation Agreement (as applicable), shall be deemed not to have been
fulfilled, and none of the LG&E Companies or Big Rivers shall be obligated to
consummate the transactions contemplated in the Participation Agreement and the
Phase I Agreements or the Phase II Agreements (as applicable) until an agreement
with respect to Station Two of the type contemplated in the above-described
items, which is mutually satisfactory to Big Rivers and the LG&E Companies, is
thereafter executed and delivered by them with Henderson, or until the relevant
conditions precedent to such transactions have been waived by Big Rivers and the
LG&E Companies in the manner contemplated in the Participation Agreement, and
then only to the extent all other conditions precedent to such transactions set
forth in that agreement have been appropriately fulfilled or waived.
13.3 Default During the Phase I Subcontract Term. During the Phase I
Subcontract Term, the terms and provisions of the respective Station Two
Contracts shall continue to govern the default and termination rights of Big
Rivers and Henderson for a breach or default under the terms of the Station Two
Contracts. A default under this Section 13.3 shall not, in and of itself, create
an additional basis for a breach or default by that Party under any of the
Station Two Contracts. Consistent with the preceding two sentences, the
occurrence of any of the following events at any time during the Phase I
Subcontract Term shall constitute a default by a Party under this Agreement:
(a) Failure by that Party to pay when due any and all amounts payable to
any other Party in accordance with the terms of Section 8 of this Agreement,
entitled "Phase I Subcontract," or any other provision of this Agreement.
(b) Any rejection in bankruptcy of this Agreement or any Station Two
Contract by that Party, or any other rescission or termination of this Agreement
or any Station Two Contract (in whole or in material part) by that Party in
breach or default of this Agreement or such contract.
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(c) Failure of that Party to perform any material covenant or obligation
that it may have under this Agreement (other than a payment obligation of the
type described in (a) of this Section 13.3, above, or a breach of the type
described in (d) of this Section 13.3, below; provided, that neither Big Rivers,
on the one hand, nor any LG&E Company, on the other, shall at any time during
the Phase I Subcontract Term be deemed to be in default under this Section
13.3(c) by reason of any act or omission on the part of the other which
constitutes a default by that other Party under this Section 13.3(c).
(d) Any attempt by that Party to transfer an interest in this Agreement in
breach of Section 15 of this Agreement.
(e) Except with respect to the Chapter 11 Case, any filing by that Party
of a Petition in Bankruptcy or insolvency, or for reorganization or arrangement
under any bankruptcy or insolvency laws, or voluntarily taking advantage of any
such laws by answer or otherwise or the commencement of any involuntary
proceedings under any such laws if such proceedings are not withdrawn or
dismissed within 60 days after their institution (with default occurring as of
the 61st day after such institution).
(f) Assignment by that Party for the benefit of creditors of any of its
rights or interests under this Agreement or any Station Two Contracts or, in the
case of Henderson, any of its rights or interests in the Station Two Assets.
(g) Allowance by that Party of the appointment of a receiver or trustee of
all or a material portion of its property if such receiver or trustee is not
discharged within 60 days after appointment (with default occurring as of the
61st day after such appointment).
(h) Any breach by that Party of a representation or warranty made by that
Party in this Agreement, provided that such breach has had a material adverse
effect on the non-defaulting Parties or their respective rights under this
Agreement and the Station Two Contracts taken as
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a whole; provided, however, the Parties acknowledge and agree that any breach of
any representation or warranty made by a Party as of the Effective Date in this
Agreement shall give rise to the right of the other Party to damages or
availability of other remedies provided for hereunder arising from such breach
only if the claim for damages or other relief is made within one year following
the Effective Date.
(i) For the benefit of Big Rivers and the LG&E Companies only, any
failure, inability or refusal of that Party, or its Affiliates, to cure a
default or breach by such Party or such Party's Affiliate under the Power
Purchase Agreement, the Cost Sharing Agreement, the Transmission Service and
Interconnection Agreement, the Facilities Operating Agreement or the
Participation Agreement that gives rise to a termination of such agreement, or
any termination by that Party or its Affiliates of any of the foregoing
agreements in breach or default under such agreement (including without
limitation, through a rejection in Bankruptcy).
(j) For the benefit of the LG&E Companies only, any failure by Big Rivers
to pay to LEM, when due, an amount owed pursuant to the Settlement Promissory
Note.
13.4 Default During the Phase II Assignment Term. During the Phase II
Assignment Term, the terms and provisions of the respective Station Two
Contracts shall govern the default and termination rights of Big Rivers, Station
Two Subsidiary and Henderson for a breach or default of their respective
obligations under the Station Two Contracts. A default under this Section 13.4
shall not, in and of itself, create an additional basis for a breach or default
by that Party under any of the Station Two Contracts. Consistent with the
preceding two sentences, the occurrence of any of the following events at any
time during the Phase II Assignment Term shall constitute a default by a Party
under this Agreement:
(a) Failure by that Party to pay when due any and all amounts payable to
any other Party in accordance with the terms of Section 9 of this Agreement,
entitled "Phase II Assignment," or any other provision of this Agreement.
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(b) Any rejection in bankruptcy of this Agreement or any Station Two
Contract by that Party, or any other rescission or termination of this Agreement
or any Station Two Contract (in whole or in material part) by that Party in
breach or default of this Agreement or such contract.
(c) Failure of that Party to perform any material covenant or obligation
that it may have under this Agreement (other than a payment obligation of the
type described in (a) of this Section 13.4, above, or a breach of the type
described in (d) of this Section 13.4, below); provided, that neither Big
Rivers, on the one hand, nor any LG&E Company, on the other, shall at any time
during the Phase II Assignment Term be deemed to be in default under this
Section 13.4(c) by reason of any act or omission on the part of the other which
constitutes a default by that other Party under this Section 13.4(c).
(d) Any attempt by a Party to transfer an interest in this Agreement in
breach of Section 15 of this Agreement.
(e) Except with respect to the Chapter 11 Case, any filing by that Party
of a Petition in Bankruptcy or insolvency, or for reorganization or arrangement
under any bankruptcy or insolvency laws, or voluntarily taking advantage of any
such laws by answer or otherwise or the commencement of any involuntary
proceedings under any such laws if such proceedings are not withdrawn or
dismissed within 60 days after such institution (with default occurring as of
the 61st day after such institution).
(f) Assignment by that Party for the benefit of creditors of any of its
respective rights or interests under this Agreement or any Station Two Contracts
or, in the case of Henderson, any of its rights or interests in the Station Two
Assets.
(g) Allowance by that Party of the appointment of a receiver or trustee of
all or a material portion of its property if such receiver or trustee is not
discharged within 60 days after appointment (with default occurring as of the
61st day after such appointment).
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(h) Any breach by that Party of a representation or warranty made by that
Party in this Agreement, provided that such breach has had a material adverse
effect on the non-defaulting Parties or their respective rights under this
Agreement and the Station Two Contracts taken as a whole; provided, however, the
Parties acknowledge and agree that any breach of any representation or warranty
made by a Party as of the Effective Date in this Agreement shall give rise to
the right of the other Party to damages or availability of other remedies
provided for hereunder arising from such breach only if the claim for damages or
other relief is made within one year following the Effective Date.
(i) For the benefit of Big Rivers and the LG&E Companies only, failure,
inability or refusal of that Party, or its Affiliates, to cure a default or
breach by such Party or such Party's Affiliate under the Lease, the Transmission
Service and Interconnection Agreement, the Power Purchase Agreement or the
Participation Agreement that gives rise to a termination of such agreement, or
any termination by that Party or by its Affiliates of any of the foregoing
agreements in breach or default under such agreement (including without
limitation, through a rejection in Bankruptcy).
(j) For the benefit of the LG&E Companies only, any failure by Big Rivers
to pay to LEM, when due, an amount owed pursuant to the Settlement Promissory
Note.
13.5 Notice of Defaults; Cure Rights.
(a) The Party in default under any provision of this Agreement shall be
referred to as the "Defaulting Party" and each other Party shall be referred to
as a "Non-Defaulting Party."
(b) Each Non-Defaulting Party shall have the right to give the Defaulting
Party a notice of default ("Notice of Default"), which shall describe the
default in reasonable detail and shall state the date by which the default must
be cured, which shall be at least 30 days after receipt of the notice, except as
to a default under Section 13.3(a) or Section 13.4(a) of
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this Agreement which shall be cured within three days after receipt of the
notice, except as to a default under Section 13.3(d) or 13.4(d) of this
Agreement which shall be cured within two days after receipt of the notice (and
which shall remain subject to the provisions of Section 15 of this Agreement),
and except as to a default under Sections 13.3(b), 13.3(e), 13.3(f), 13.3(g),
13.3(h), 13.3(i), 13.3(j), 13.4(b), 13.4(e), 13.4(f), 13.4(g), 13.4(h), 13.4(i)
or 13.4(j) of this Agreement, as to which the Defaulting Party shall have no
right or opportunity to cure.
(c) If within the three day period with respect to a default under Section
13.3(a) or Section 13.4(a) the Defaulting Party cures the default, if within the
two-day period with respect to defaults under Section 13.3(d) or 13.4(d) of this
Agreement, or if within the 30 day period with respect to defaults under Section
13.3(c) or 13.4(c) (which are not also a default under Sections 13.3(b),
13.3(d), 13.3(e), 13.3(f), 13.3(g), 13.3(h), 13.3(i) or 13.3(j), or under
Sections 13.4(b), 13.4(d), 13.4(e), 13.4(f), 13.4(g),13.4(h), 13.4(i) or 13.4(j)
of this Agreement), the Defaulting Party cures the default or if the default is
one that cannot in good faith be cured within such period and the Defaulting
Party (x) certifies to each Non-Defaulting Party that it agrees to cure such
default, (y) certifies a reasonable date by which the cure will be effected, and
(z) begins to correct the default within the 30 day period and continues
corrective efforts with diligence until a cure is effected, the Notice of
Default shall be inoperative and the rights under either Section 13.6 or 13.7 of
this Agreement, as applicable, of each Non-Defaulting Party shall not be
triggered. Subject to the Defaulting Party's right to contest under Section
13.5(d) of this Agreement, if the Defaulting Party does not cure or begin (and
diligently continue) to cure the default as provided above or effect the cure
within the period allotted above or such extension thereof as to which the
Parties in good faith agree, each Non-Defaulting Party which has incurred actual
damages of any kind by reason of the default or by reason of the actions or
omissions giving rise to that default, shall have (x) in the Phase I Subcontract
Term, the rights specified in Section 13.6 of this Agreement and (y) in the
Phase II Assignment Term, the rights specified in Section 13.7 of this
Agreement. A Non-Defaulting Party's right to damages or other relief resulting
from a default by a Defaulting Party hereunder shall begin to accrue as of the
first day of the default without regard to the
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availability of the cure opportunities hereunder, and without regard to whether
the default is cured.
(d) If the Defaulting Party disputes the existence or the nature of a
default asserted in a Notice of Default, then the Defaulting Party shall pay the
disputed payment or perform the disputed obligation, but may do so under
protest. The protest shall be in writing, shall accompany the disputed payment
or precede the performance of the disputed obligation, and shall specify the
reasons upon which the protest is based. The Defaulting Party shall deliver
copies of the protest to each Non-Defaulting Party. If it is later determined
pursuant to the dispute resolution, mediation or arbitration procedure required
by Section 13.5(e) of this Agreement that a protesting Defaulting Party is
entitled to a refund of all or any portion of a disputed payment or payments or
is entitled to the reasonable equivalent in money of non-monetary performance of
a disputed obligation theretofore made, then, upon such determination, the
Non-Defaulting Party(s) for whom such obligation was performed, or to whom such
payments were made, shall pay such amount to the Defaulting Party, together with
interest thereon at a rate equal to the Prime Rate from the date of payment or
from the date of completion of performance of a disputed obligation to the date
of reimbursement.
(e) Disputes relating to this Agreement or Station Two, or the other
Station Two Assets, that are solely between Big Rivers and any of the LG&E
Companies shall be resolved in accordance with the procedure set forth in
Article 15 of the Participation Agreement. All other disputes relating to this
Agreement or Station Two, or the other Station Two Assets, in which Henderson is
one of the Parties in dispute shall be resolved in accordance with the dispute
resolution procedures contained in the relevant Station Two Contract(s) or, in
the absence of such procedures, by any other legal means that may be available.
In the event the Participation Agreement shall expire or terminate for any
reason prior to the expiration or termination of this Agreement, then the
provisions of Article 15 of the Participation Agreement shall be deemed to
survive such expiration or termination for purposes of this Agreement and shall
be incorporated by reference in this Section 13.5(e).
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(f) Big Rivers and Henderson each agree to provide Station Two Subsidiary
with a copy of any Notice of Default or similar notice given by such Party under
this Agreement or any Station Two Contract at the same time as such notice is
given to Henderson or Big Rivers, respectively, under this Agreement or such
contract and, provided such default is not the result of a violation by Station
Two Subsidiary of its duties and obligations under this Agreement, each of Big
Rivers and Henderson shall permit Station Two Subsidiary (which shall have no
obligation to do so) to cure, or assist the Defaulting Party in curing, such
default (including any payment default for which there may otherwise be no cure
opportunity afforded to Big Rivers) by making payment to the Non-Defaulting
Party or by fulfilling any other obligation of the Defaulting Party under the
Station Two Contracts or this Agreement before any termination of any Station
Two Contract or this Agreement by that Non-Defaulting Party (assuming that
Non-Defaulting Party then has the right, pursuant to this Agreement or the
relevant Station Two Contract, to terminate the same). Any cure by Station Two
Subsidiary of a default by Big Rivers or Henderson shall be done according to
the terms of the Station Two Contracts or this Agreement, as applicable, except
that Station Two Subsidiary shall be afforded a reasonable period of time, in
addition to the cure period afforded Big Rivers or Henderson (as applicable), to
effect such cure; provided, in the event that Big Rivers shall have no right or
opportunity to cure a payment default by Big Rivers under the terms of any of
the Station Two Contracts or this Agreement, then the period of time afforded to
the LG&E Companies hereunder to cure that payment default shall be no less than
60 days. Nothing in this Section 13.5(f) shall deny any right to Big Rivers or
Henderson, or otherwise limit Big Rivers or Henderson from exercising any right,
that it may have under this Agreement or the Station Two Contract, as
applicable, to a notice of default, to any opportunity to cure the default, or
to protest the default. If Station Two Subsidiary elects to cure or attempt to
cure a perceived default of Big Rivers or Henderson, as applicable, and if it is
later determined pursuant to the dispute resolution, mediation or arbitration
procedure described in Section 13.5(e) of this Agreement, or by mutual agreement
of the Parties, that Big Rivers or Henderson, as the case may be, was not then
in default, all sums, costs and expenses paid or incurred by, and any other
obligations undertaken by, Station Two Subsidiary in curing the purported
default shall be solely for Station Two Subsidiary's account (but Station Two
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Subsidiary's actions in reliance upon the notice of default shall not prejudice
its right to pursue any other claims or actions that it may have against the
Party that delivered the Notice of Default (or the similar notice) or any other
third party to recover any sums, costs and expenses that Station Two Subsidiary
may have paid or incurred, or to rescind or otherwise terminate any obligations
it may have undertaken, in reliance upon such notice). If it is ultimately
determined pursuant to the dispute resolution, mediation or arbitration
procedure, (or by agreement of the Parties) that Big Rivers or Henderson, as the
case may be, was in default under the relevant Station Two Contract, then so
long as such default is not the result of a default by Station Two Subsidiary
under this Agreement, Station Two Subsidiary shall be entitled to reimbursement
from the Defaulting Party for all sums, costs and expenses incurred by it in
effecting or attempting to effect such cure, or, in lieu of such reimbursement,
may off-set the same against any sums then or thereafter due by Station Two
Subsidiary to the Defaulting Party under this Agreement or any Station Two
Contract (but, in the case of amounts so due to Henderson, only after the
Station Two Bonds have been retired or redeemed) and, in the event the
Defaulting Party is Big Rivers, may during the Phase II Assignment Term off-set
against any sums due to Big Rivers from any of Station Two Subsidiary's
Affiliates under any of the other Operative Documents.
(g) During the Phase II Assignment Term, Henderson and Station Two
Subsidiary agree each to provide Big Rivers with a copy of any Notice of Default
or similar notice given by that Party under any Station Two Contract or this
Agreement at the same time as such notice is given to Station Two Subsidiary or
Henderson, respectively, under this Agreement or such contract and, provided
such default is not the result of a violation by Big Rivers of its duties and
obligations under this Agreement, each of Henderson and Station Two Subsidiary
shall permit Big Rivers (which shall have no obligation to do so) to cure, or to
assist the Defaulting Party in curing, such default by making payment to the
Non-Defaulting Party or by fulfilling any other obligation of the Defaulting
Party under the Station Two Contracts or this Agreement before any termination
of any Station Two Contract or this Agreement by that Non-Defaulting Party
(assuming that Non-Defaulting Party then has the right, pursuant to this
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Agreement or the relevant Station Two Contract, to so terminate the same). Any
cure by Big Rivers of a default by Station Two Subsidiary or Henderson shall be
done according to the terms of the Station Two Contracts or this Agreement, as
applicable, except that Big Rivers shall be afforded a reasonable period of
time, in addition to the cure period afforded Station Two Subsidiary or
Henderson (as applicable), to effect such cure. Nothing in this Section 13.5(g)
shall deny any rights to Station Two Subsidiary or Henderson, or otherwise limit
Station Two Subsidiary or Henderson from exercising any right, that it may have
under this Agreement or the Station Two Contract, as applicable, to a notice of
default, to any opportunity to cure the default, or to protest the default. If
Big Rivers elects to cure or attempt to cure the perceived default of Station
Two Subsidiary or Henderson, and if it is later determined pursuant to the
dispute resolution, mediation or arbitration procedure required by Section
13.5(e) of this Agreement, or by mutual agreement of the Parties, that Station
Two Subsidiary or Henderson, as the case may be, was not then in default, all
sums, costs and expenses paid or incurred by, and any obligations undertaken by,
Big Rivers in curing the purported default shall be solely for Big Rivers'
account (but Big Rivers' actions in reliance upon the Notice of Default (or the
similar notice) shall not prejudice its right to pursue any other claims that it
may have against the Party that delivered the Notice of Default (or the similar
notice) or any other third party to recover any sums, costs and expenses that
Big Rivers may have paid or incurred, or to rescind or otherwise terminate any
obligations it may have undertaken, in reliance upon such notice). If it is
ultimately determined pursuant to the dispute resolution, mediation or
arbitration procedure (or by agreement of the Parties) that Station Two
Subsidiary or Henderson was in default under the relevant Station Two Contract,
then so long as such default is not the result of a default by Big Rivers under
this Agreement, Big Rivers shall be entitled to reimbursement from the
Defaulting Party for all sums, costs and expenses incurred by it in effecting or
attempting to effect such cure, or, in lieu of such reimbursement, may off-set
the same against any sums then or thereafter due by Big Rivers to the Defaulting
Party under this Agreement (but in the case of amounts so due to Henderson, only
after the Station Two Bonds have been retired or redeemed) and, in the event the
Defaulting Party is Station Two Subsidiary, may during the Phase II Assignment
Term off-set
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against any sums due by Big Rivers to Station Two Subsidiary or any of its
Affiliates under any of the other Operative Documents.
(h) Notwithstanding anything contained in Section 13, entitled
"Termination; Defaults; Remedies," or elsewhere in this Agreement, the Station
Two Contracts or the other Operative Documents to the contrary, and in addition
to any other rights of off-set set forth herein or therein, each Party shall
have the right to off-set any payments or other sums due and owing by another
Party to it under this Agreement, including, without limitation, any payments
owing at any time by Big Rivers to any of the LG&E Companies as contemplated in
Section 13.8(a) of this Agreement, and any damages or other sums awarded to or
otherwise due and owing by another Party to the off-setting Party pursuant to
any dispute resolution proceeding, mediation or arbitration procedure of the
type described in Section 13.5(e) of this Agreement, against any payments or
other sums that the off-setting Party may owe to such other Party (i) under this
Agreement (including, without limitation, damages or other sums awarded such
other Party under that or any other dispute resolution procedure between those
Parties), (ii) under any of the Station Two Contracts (but, in the case of
amounts so due to Henderson, only after the Station Two Bonds have been retired
or redeemed), and (iii) during the Phase II Assignment Term, as between Big
Rivers and the LG&E Companies or their Affiliates, under any of the other
Operative Documents.
13.6 Remedies During Phase I Subcontract Term. If the Defaulting Party's
default under this Agreement during the Phase I Subcontract Term is one for
which there is no right or opportunity to cure, or if the Defaulting Party fails
or refuses to cure a default under this Agreement for which a cure opportunity
is available within the time described above, each Non-Defaulting Party which
has incurred actual damages by reason of the default or by reason of the
Defaulting Party's actions or omissions giving rise to the default (including,
in the case of the LG&E Companies, any reasonable replacement Power costs which
they may suffer or incur (which costs shall be deemed to be direct damages for
all purposes under this Agreement), in addition to any other damages) shall
have, in addition to any rights that Party may have at law, in equity or
otherwise (including without limitation, rights to indemnification
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pursuant to Section 10.15), the following remedies, all of which shall be
cumulative, but subject to the limitations provided below:
(a) If any Party (together with that Party's Affiliates, collectively "X")
shall fail to make any payment or shall fail to perform any obligation under
this Agreement or the Settlement Promissory Note, the other Parties individually
or collectively (together with such Parties' Affiliates, collectively referred
to as "Y") will have the right (but not the obligation) without prior notice to
X to perform such obligation and to off-set the costs of such performance
incurred by Y or the amount of any such past due payment owing to Y against any
obligation of Y owing to X (whether or not matured) under this Agreement or the
Station Two Contracts, or to otherwise assert against X its right to
reimbursement for the costs of such performance; provided, that Big Rivers and
Station Two Subsidiary, and their respective Affiliates, shall have the further
right to, during the Phase II Assignment Term, off-set the costs of such
performance or the amount of any such past due payment against any obligation
owing to the other Party (or such Affiliates) under any of the other Operative
Documents.
(b) If the damages incurred by a Non-Defaulting Party (or such Affiliates)
have had a material adverse effect on that Non-Defaulting Party's respective
rights under this Agreement and the Station Two Contracts, taken as a whole, or
on that Non-Defaulting Party's business, financial condition or results of
operations, then that Non-Defaulting Party may terminate this Agreement upon 30
days' advance notice to the Defaulting Party and any other Non-Defaulting
Parties of its intent to do so; provided, however, if Henderson is the
Defaulting Party, Big Rivers and the LG&E Companies hereby covenant for the
benefit of the other, but not for the benefit of Henderson, that neither Big
Rivers nor the LG&E Companies, nor any of them, shall exercise the right of that
Party to terminate this Agreement until such time as the Station Two Bonds are
retired or redeemed in full.
(c) If Big Rivers is the Defaulting Party, and if Henderson or the LG&E
Companies terminate this Agreement pursuant to Section 13.6(b) of this Agreement
(but subject to Station Two Subsidiary's rights and Henderson's fulfillment of
its obligations under Section 13.5(f) of
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this Agreement), then (1) Henderson, from and after the date the Station Two
Bonds are redeemed or retired, in full, shall be entitled to terminate all (but
not less than all) of the Station Two Contracts upon 30 days' advance notice to
Big Rivers and Station Two Subsidiary (which notice may be included in
Henderson's notice to Big Rivers of termination of this Agreement, if
applicable); and (2) the LG&E Companies shall be entitled to terminate all of
the other Operative Documents (excluding, at the sole option of the LG&E
Companies, any duty to also terminate one or more of the Settlement Promissory
Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement
or the Non-Disturbance Agreement in the event the LG&E Companies shall determine
to terminate other Operative Documents) upon 30 days' advance notice to Big
Rivers (which notice may be included in any notice to Big Rivers of termination
of this Agreement by the LG&E Companies, if applicable), or the LG&E Companies
may elect in accordance with Section 14.3 of this Agreement, in lieu of
terminating the other Operative Documents, to pursue their rights to an
abatement against the Annual Fixed Payments or Rental Payment, as applicable, to
a reimbursement of the Initial Fixed Payment or the Initial Rental Payment, as
applicable, and to a reduction in the then applicable maximum Contract Limits
(provided, however, that any right of the LG&E Companies to cross-terminate to
the other Operative Documents or to abate payments, seek reimbursement of
payments and adjust the Contract Limits, as contemplated above, shall be further
subject to Big Rivers' rights under Section 13.8(a)(1) or 13.8(a)(2) of this
Agreement, as applicable). Any termination of the Station Two Contracts by
Henderson or any of the other Operative Documents by the LG&E Companies shall be
effective as of the date of termination of this Agreement. Henderson shall have
no right to terminate this Agreement for a default by Station Two Subsidiary of
its obligations to Big Rivers under the terms of the Phase I Subcontract, but
shall instead rely upon the rights and remedies (other than any termination,
rescission or other similar right) that it may have at law or in equity and
otherwise pursuant to this Agreement.
(d) If Henderson is the Defaulting Party, and provided Big Rivers or the
LG&E Companies have terminated this Agreement pursuant to Section 13.6(b) of
this Agreement (and in compliance with Sections 13.5(f), 13.6(b) and 13.8(b) of
this Agreement), then Big Rivers,
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from and after the date the Station Two Bonds are redeemed or retired, in full,
shall also be entitled to terminate all (but not less than all) of the Station
Two Contracts upon 30 days' advance notice to Henderson and Station Two
Subsidiary (which notice may be included by Big Rivers in its termination notice
to Henderson contemplated in Section 13.6(b) of this Agreement).
(e) If Big Rivers is the Defaulting Party under Section 13.3(b) or Section
13.3(j) of this Agreement, and as a result of that default this Agreement is
terminated, or if Big Rivers defaults under its covenant set forth in Section
13.8(b) not to terminate any of the Station Two Power Sales Agreement, the
Station Two Operating Agreement or the Joint Facilities Agreement, or to waive
its rights thereunder, without the prior consent of the LG&E Companies, then the
provisions of Section 13.8(a)(1) and 13.8(a)(2) of this Agreement shall not
apply, and each of the LG&E Companies may terminate the Operative Documents
(excluding, at the sole option of the LG&E Companies, any duty to also terminate
one or more of the Settlement Promissory Note, the Settlement Mortgage, the
Subordinate Mortgage and Security Agreement or the Non-Disturbance Agreement in
the event the LG&E Companies shall determine to terminate the other Operative
Documents) upon notice to Big Rivers, or may pursue their rights, in accordance
with Section 14.3 of this Agreement, to abate the Annual Fixed Payment or Rental
Payment (as applicable), to a reimbursement of the Initial Fixed Payment or
Initial Rental Payment (as applicable) and to reduce the maximum Contract
Limits. If Henderson is the Defaulting Party under Section 13.3(b) of this
Agreement by reason of its rejection in bankruptcy, rescission or termination of
any Station Two Contract, in whole or in part, then Big Rivers agrees that it
shall not be entitled to terminate this Agreement by reason of that default
without the prior consent of Station Two Subsidiary (provided, that in the event
the LG&E Companies elect to terminate this Agreement by reason of that default,
Big Rivers shall have the cross-termination rights set forth in Section 13.6(d)
of this Agreement).
(f) If Station Two Subsidiary is the Defaulting Party under Section
13.3(b) of this Agreement, and as a result of that default this Agreement is
terminated, or if any LG&E
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Company defaults under its obligation set forth in Section 13.8(b) of this
Agreement not to terminate any of the Station Two Power Sales Agreement, the
Station Two Operating Agreement or the Joint Facilities Agreement, or to waive
its rights thereunder, without the prior consent of Big Rivers, then the
provisions of Section 13.8(a)(4) of this Agreement shall not apply.
(g) Notwithstanding anything contained elsewhere in this Agreement to the
contrary, (i) Big Rivers may terminate this Agreement at any time that the
Guarantee (Big Rivers), as in effect on the Effective Date, provides Big Rivers
with the right to terminate the Operative Documents (other than the Settlement
Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security
Agreement and the Non-Disturbance Agreement, which Big Rivers shall not have a
right to terminate) upon notice delivered to the LG&E Companies and Henderson,
but only to the extent that Big Rivers also terminates all of the other
Operative Documents (other than the Settlement Promissory Note, the Settlement
Mortgage, the Subordinate Mortgage and Security Agreement and the
Non-Disturbance Agreement, which Big Rivers shall not have a right to terminate)
pursuant to the Guarantee Agreement, and (ii) Henderson may terminate this
Agreement at any time that the Guaranty, as in effect on the Effective Date,
provides Henderson with the right to terminate this Agreement, upon notice
delivered to Big Rivers and the LG&E Companies.
(h) Notwithstanding anything contained elsewhere in this Agreement to the
contrary, the LG&E Companies shall be entitled to terminate this Agreement upon
notice to the other Parties in the event Henderson exercises any rights that it
may have to terminate the Station Two Power Sales Agreement, the Station Two
Operating Agreement or the Joint Facilities Agreement by reason of a breach or
default thereunder by Big Rivers (other than a breach or default by Big Rivers
directly resulting from a breach or default of this Agreement by, or the
negligence or willful misconduct of, an LG&E Company). Upon any such termination
of this Agreement by the LG&E Companies, and subject to the provisions of
Sections 13.8(a)(1) or
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13.8(a)(2) (as applicable), the LG&E Companies may also terminate all of the
Operative Documents (excluding, at the sole option of the LG&E Companies, any
duty to also terminate one or more of the Settlement Promissory Note, the
Settlement Mortgage, the Subordinate Mortgage and Security Agreement or the
Non-Disturbance Agreement in the event the LG&E Companies shall determine to
terminate other Operative Documents) upon 30 days' advance notice to Big Rivers
(which notice may be included in the notice of termination of this Agreement by
the LG&E Companies), or the LG&E Companies may elect in accordance with Section
14.3 of this Agreement to pursue their rights to an abatement against the Annual
Fixed Payments or Rental Payment , as applicable, to seek reimbursement of the
Initial Fixed Payment or Initial Rental Payment, as applicable, and to reduce
the then applicable maximum Contract Limits, in lieu of terminating the
Operative Documents, in addition to all other rights and remedies.
(i) The provisions of this Section 13.6 shall be in addition to, and not
in lieu of, any other termination rights of the Parties expressly set forth
elsewhere in this Agreement.
(j) The LG&E Companies shall not have the right, by reason of a
termination of this Agreement or any of the Station Two Contracts (other than a
termination of this Agreement or any of the Station Two Contracts by Big Rivers
in breach or default of this Agreement) based upon a breach or default by
Henderson or any LG&E Company hereunder or thereunder, to an abatement against
the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement
of the Initial Fixed Payment or Initial Rental Payment, as applicable, to a
reduction in the maximum Contract Limits pursuant to Section 14.3 of this
Agreement, or to terminate any of the other Operative Documents, unless
permitted under Section 13.8(a)(3) or 13.8(a)(4) of this Agreement,
respectively, as applicable.
13.7 Remedies During Phase II Assignment Term. If the Defaulting Party's
default under this Agreement during the Phase II Assignment Term is one for
which there is no right
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or opportunity to cure, or if the Defaulting Party fails or refuses to cure a
default under this Agreement for which a cure opportunity is available within
the time described above, each Non-Defaulting Party which has incurred actual
damages by reason of the default or by reason of the Defaulting Party's actions
or omissions giving rise to the default (including any reasonable replacement
Power costs which they may suffer or incur, in addition to any other damages)
shall have, in addition to any rights that Party may have at law, in equity or
otherwise (including without limitation, rights to indemnification pursuant to
Section 10.15), the following remedies, all of which shall be cumulative, but
subject to the limitations provided below:
(a) If any Party (together with that Party's Affiliates, collectively "X")
shall fail to make any payment or shall fail to perform any obligation under
this Agreement or the Settlement Promissory Note, the other Parties individually
or collectively (together with such Parties' Affiliates collectively referred to
as "Y") will have the right (but not the obligation) without prior notice to X
to perform such obligation and to off-set the costs of such performance by Y or
the amount of any such past due payment owing to Y against any obligation of Y
owing to X (whether or not matured) under this Agreement or the Station Two
Contracts, or to otherwise assert against X its right to reimbursement for the
costs of such performance; provided, that Big Rivers and Station Two Subsidiary,
and their respective Affiliates, shall have the further right to off-set the
costs of such performance or the amount of any such past due payment against any
obligation owing to the other Party (or such Affiliates) under any of the other
Operative Documents.
(b) If the damages incurred by a Non-Defaulting Party have had a material
adverse effect on that Non-Defaulting Party's respective rights under this
Agreement and the Station Two Contracts, taken as a whole, or on its business,
financial condition or results of operations, then that Non-Defaulting Party may
terminate this Agreement upon 30 days' advance notice to the Defaulting Party
and any other Non-Defaulting Parties of its intent to do
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so; provided, however, if Henderson is the Defaulting Party, Big Rivers and the
LG&E Companies hereby covenant for the benefit of the other, but not for the
benefit of Henderson, that neither Big Rivers nor the LG&E Companies, nor any of
them, shall exercise the right of such Party to terminate this Agreement (other
than a termination right either of them may have under Section 10.7 of this
Agreement for a reason other than Henderson's breach or default) until such time
as the Station Two Bonds are retired or redeemed in full; and provided further,
that except for the LG&E Companies' right to terminate this Agreement under
Section 10.7, Section 13.7(c) or Section 13.7(g) of this Agreement, or Big
Rivers' right to terminate this Agreement under Section 10.7, Section 13.7(f) or
Section 13.7(g) of this Agreement, Big Rivers and the LG&E Companies hereby
covenant for the benefit of the other, but not for the benefit of Henderson,
that neither Station Two Subsidiary and its Affiliates (as to a Big Rivers' or
Henderson's default) nor Big Rivers (as to any LG&E Company's or Henderson's
default) may terminate this Agreement during the Phase II Assignment Term
without the prior consent of the other of those two Parties, and each shall rely
solely upon such Party's rights and remedies (other than any termination,
rescission or other similar right) that they may have at law or in equity or
otherwise pursuant to this Agreement.
(c) If Big Rivers is the Defaulting Party under Section 13.4(b) or Section
13.4(j) of this Agreement, and as a result of that default this Agreement or any
Station Two Contract is terminated, or in the event Big Rivers defaults under
its covenant set forth in Section 13.8(b) not to terminate any of the Station
Two Power Sales Agreement, the Station Two Operating Agreement or the Joint
Facilities Agreement, or to waive any rights thereunder, without the prior
consent of the LG&E Companies, then the provisions of Sections 13.8(a)(1) and
13.8(a)(2) of this Agreement shall not apply, and each of the LG&E Companies may
terminate the Operative Documents (excluding, at the sole option of the LG&E
Companies, any duty to also terminate one or more of the Settlement Promissory
Note, the Settlement Mortgage, the Subordinate Mortgage and Security Agreement
or the Non-Disturbance Agreement in the event the LG&E Companies shall determine
to terminate other Operative Documents) without
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further notice to Big Rivers, or may pursue their rights in accordance with
Section 14.3 of this Agreement, to abate the Annual Fixed Payments or Rental
Payment , as applicable, to seek reimbursement of the Initial Fixed Payment or
Initial Rental Payment, as applicable, and to adjust the maximum Contract
Limits. If Henderson is the Defaulting Party under Section 13.4(b) of this
Agreement by reason of Henderson's rejection in bankruptcy or rescission or
termination (in breach) of the Station Two Power Sales Agreement, the Station
Two Operating Agreement or the Joint Facilities Agreement, in whole or in part,
then the LG&E Companies (but not Big Rivers) shall be entitled to terminate this
Agreement upon notice to the other Parties, it being understood that Big Rivers'
rights with respect to any such action by Henderson shall be to pursue its
damages resulting therefrom (including any losses or damages which may affect
Big Rivers' reversionary interests in the Assigned Station Two Contracts
following the expiration or termination of this Agreement), and to pursue
injunctive relief and specific performance with respect to Henderson's default
(unless the LG&E Companies so elect to terminate this Agreement, in which event
Big Rivers shall have the cross-termination rights set forth in Section 13.7(h)
of this Agreement).
(d) If Station Two Subsidiary is the Defaulting Party under Section
13.4(b) of this Agreement, and as a result of that default this Agreement is
terminated, or if an LG&E Company defaults under its obligation set forth in
Section 13.8(b) of this Agreement not to terminate any of the Station Two Power
Sales Agreement, the Station Two Operating Agreement or the Joint Facilities
Agreement, or to waive its rights thereunder, without the prior consent of Big
Rivers, then the provisions of Section 13.8(a)(4) of this Agreement shall not
apply.
(e) If Big Rivers is the Defaulting Party, and if Henderson or any of the
LG&E Companies terminate this Agreement pursuant to Section 13.7(b) of this
Agreement (but subject to the limitations on such termination provided for in
Section 13.7(b), and to the provisions of Section 13.5(f)), then (1) Henderson,
from and after the date the Station Two
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Bonds are redeemed or retired, in full, shall be entitled to terminate all (but
not less than all) of the Station Two Contracts upon 30 days' advance notice to
Big Rivers and Station Two Subsidiary (which notice may be included in
Henderson's notice to Big Rivers of termination of this Agreement), and (2) the
LG&E Companies shall be entitled to terminate all of the other Operative
Documents (excluding, at the sole option of the LG&E Companies, any duty to also
terminate one or more of the Settlement Promissory Note, the Settlement
Mortgage, the Subordinate Mortgage and Security Agreement or the Non-Disturbance
Agreement in the event the LG&E Companies shall determine to terminate other
Operative Documents) upon 30 days advance notice to Big Rivers (which notice may
be included in any notice to Big Rivers of termination of this Agreement), or
the LG&E Companies may elect in accordance with Section 14.3 of this Agreement,
in lieu of terminating the other Operative Documents, to pursue their rights to
an abatement against the Annual Fixed Payments or Rental Payment , as
applicable, to a reimbursement of the Initial Fixed Payment or the Initial
Rental Payment, as applicable, and to a reduction in the then applicable maximum
Contract Limits (provided, however, that any right of the LG&E Companies to
cross-terminate to the other Operative Documents or to abate payments, pursue
reimbursement of payments and adjust the Contract Limits, as contemplated above,
shall be further subject to Big Rivers' rights under Section 13.8(a)(1) or
13.8(a)(2) of this Agreement, as applicable). Any termination of the Station Two
Contracts by Henderson or any of the other Operative Documents by the LG&E
Companies shall be effective as of the date of termination of this Agreement.
Henderson shall have no right to terminate this Agreement for a default by
Station Two Subsidiary of its obligations to Big Rivers under the terms of the
Phase II Assignment, but shall instead rely solely upon the rights and remedies
(other than any termination, rescission or other similar right) that it may have
at law or in equity or otherwise pursuant to this Agreement.
(f) Notwithstanding anything contained elsewhere in this Agreement to the
contrary, (1) Big Rivers may terminate this Agreement at any time that the
Guarantee (Big Rivers), as in effect on the Effective Date, provides Big Rivers
with the right to terminate the Operative
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Documents (other than the Settlement Promissory Note, the Settlement Mortgage,
the Subordinate Mortgage and Security Agreement and Non-Disturbance Agreement,
which Big Rivers shall not have a right to terminate), upon notice delivered to
the LG&E Companies and Henderson, but only to the extent that Big Rivers also
terminates all of the other Operative Documents (other than the Settlement
Promissory Note, the Settlement Mortgage, the Subordinate Mortgage and Security
Agreement and the Non-Disturbance Agreement, which Big Rivers shall not have a
right to terminate) pursuant to the Guarantee Agreement, and (2) Henderson may
terminate this Agreement at any time that the Guaranty, as in effect on the
Effective Date, provides Henderson with the right to terminate this Agreement,
upon notice delivered to Big Rivers and the LG&E Companies.
(g) Notwithstanding anything contained elsewhere in this Agreement to the
contrary, either Big Rivers, on the one hand, or the LG&E Companies, on the
other hand, shall be entitled to terminate this Agreement upon notice to the
other Parties in the event Henderson exercises any rights that it may have to
terminate the Station Two Power Sales Agreement, the Station Two Operating
Agreement or the Joint Facilities Agreement by reason of a breach or default
thereunder by the LG&E Companies (in the case of termination by Big Rivers, but
other than a breach or default by any LG&E Company directly resulting from a
breach or default of this Agreement by, or the negligence or willful misconduct
of, Big Rivers) or by Big Rivers (in the case of termination by the LG&E
Companies, but other than a breach or default by Big Rivers directly resulting
from a breach or default of this Agreement by, or the negligence or willful
misconduct of, an LG&E Company). Upon any such termination of this Agreement by
the LG&E Companies, and subject to the provisions of Sections 13.8(a)(1) or
13.8(a)(2), as applicable, the LG&E Companies may also terminate all of the
other Operative Documents (excluding, at the sole option of the LG&E Companies,
any duty to also terminate one or more of the Settlement Promissory Note, the
Settlement Mortgage or the Subordinate Mortgage and Security Agreement, and the
Non-Disturbance Agreement in the event the LG&E Companies shall determine to
terminate other Operative Documents) upon 30 days'
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advance notice to Big Rivers (which notice may be included in the notice of
termination of this Agreement by the LG&E Companies), or the LG&E Companies may
elect in accordance with Section 14.3 of this Agreement, in lieu of terminating
the other Operative Documents and in addition to all other rights and remedies,
to pursue their rights to an abatement against the Annual Fixed Payments or
Rental Payment , as applicable, to a reimbursement of the Initial Fixed Payment
or the Initial Rental Payment, as applicable, and to reduce the then applicable
maximum Contract Limits.
(h) If Henderson is the Defaulting Party, and provided Big Rivers or the
LG&E Companies have terminated this Agreement pursuant to Section 13.7(b) by
reason of that default (with the prior consent of the other Non-Defaulting Party
as contemplated in Section 13.7(b) of this Agreement), then Big Rivers, from and
after the date the Station Two Bonds are redeemed or retired, in full, shall
also be entitled to terminate all (but not less than all) of the Station Two
Contracts upon 30 days' advance notice to Henderson and Station Two Subsidiary
(which notice may be included by Big Rivers in its termination notice to
Henderson contemplated in Section 13.7(b) of this Agreement).
(i) The provisions of this Section 13.7 shall be in addition to, and not
in lieu of, any other termination rights of the Parties expressly set forth
elsewhere in this Agreement.
(j) The LG&E Companies shall not have the right, by reason of a
termination of this Agreement or any of the Station Two Contracts (other than a
termination of this Agreement or any of the Station Two Contracts by Big Rivers
in breach or default of this Agreement) based upon a breach or default by
Henderson or any LG&E Company hereunder or thereunder, to an abatement against
the Annual Fixed Payments or Rental Payment , as applicable, to a reimbursement
of the Initial Fixed Payment or the Initial Rental Payment, as applicable, to a
reduction in the maximum Contract Limits pursuant to Section 14.3 of this
Agreement, or to
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terminate any of the other Operative Documents, unless permitted under Section
13.8(a)(3) or 13.8(a)(4) of this Agreement, respectively, as applicable.
13.8 Additional Covenants Concerning the Parties' Rights and Remedies.
(a) The terms and conditions of this Section 13.8(a) shall provide to Big
Rivers the right, solely in those limited circumstances specifically described
below, to suspend the enforcement by the LG&E Companies and their Affiliates of
their rights provided in this Agreement (i) to terminate any of the other
Operative Documents, (ii) to abate the Annual Fixed Payments and Rental Payment
payable to Big Rivers under the Power Purchase Agreement and Lease,
respectively, and to seek reimbursement from Big Rivers of a portion of the
Initial Fixed Payment or Initial Rental Payment, in each case pursuant to
Section 14.3 of this Agreement, and (iii) to reduce the Contract Limits set
forth in the Power Purchase Agreement pursuant to Section 14.3 of this Agreement
(other than the cross-termination rights, abatement and reimbursement rights and
Contract Limit reductions permitted under Section 13.6(e) and 13.7(c) of this
Agreement, which rights shall in no event be suspended by any actions taken by
Big Rivers under this Section 13.8(a)) (collectively, the "LG&E Rights"). If,
however, Big Rivers shall fail at any time to satisfy each of the relevant terms
and conditions set forth below in this Section 13.8(a), then in addition to all
other rights and remedies available to the LG&E Companies at law or in equity,
or pursuant to this Agreement, the Station Two Contracts or the other Operative
Documents, the LG&E Companies shall be entitled to exercise their respective
rights to terminate other Operative Documents or, in their discretion, to abate
the payments, seek reimbursement for the prior payments and reduce the Contract
Limits, each as provided in Section 13.6 or 13.7 of this Agreement, Section 14
of this Agreement or elsewhere in this Section 13.8, as applicable.
(1) In the event a default under this Agreement by Big Rivers
results in a termination of this Agreement by Henderson or any of the LG&E
Companies in accordance with
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its terms (other than a termination pursuant to Section 13.6(e) or Section
13.7(c) of this Agreement), and in the event the Station Two Power Sales
Agreement and the Station Two Operating Agreement remain in full force and
effect and Henderson's material obligations thereunder have not been
waived by Big Rivers, excused by reason of a default thereunder by Big
Rivers, or otherwise relinquished pursuant to any amendments to those
agreements effected following the termination of this Agreement, then Big
Rivers must fulfill each of the conditions set forth below in order to
avoid the exercise by the LG&E Companies of the LG&E Rights, or any of
them: (A) Big Rivers must have satisfied its indemnification and hold
harmless covenants to the LG&E Companies set forth in this Agreement, and
must use its reasonable best efforts, consistent with the Station Two
Contracts and Prudent Utility Practice to minimize the generating costs at
Station Two; (B) Big Rivers must pay to LEM for all Power thereafter
allocated to Big Rivers under the terms of the Station Two Power Sales
Agreement for a particular month (without regard to any waiver of its
rights or entitlements thereunder or any amendments thereto following the
date hereof that may reduce Big Rivers' right or entitlement to such
Power, and without regard to the amount of Power actually generated or
taken by Big Rivers), an amount equal to the difference between (i) the
Base Power rate set forth in Section 6.3 of the Power Purchase Agreement
that would have been applicable had this Agreement remained in effect and
(ii) the actual generating costs to produce the Power from Station Two
(i.e., the Capacity charge payable to Henderson or the Trustee for such
Power plus the cost of all fuels and reagents consumed in the generation
of such Power) (the "LEM Margin"), which amount must be paid by Big Rivers
to LEM on or prior to the 25th day of the month following the month for
which determined; (C) Big Rivers must agree that the maximum annual and
hourly Contract Limits set forth in Section 4.3 of the Power Purchase
Agreement shall be reduced by the amount of Power from Station Two (in
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megawatt hours) allocated to Big Rivers during the relevant hour and Year
as contemplated in subclause (B), above, but that the minimum Contract
Limits set forth in Section 4.3 of the Power Purchase Agreement shall be
reduced only by the product of (x) the total amount of Power from Station
Two (in megawatt hours) so allocated to Big Rivers during the relevant
hour or Year, times (y) a fraction, the numerator of which is the then
applicable minimum Contract Limit under Section 4.3 of the Power Purchase
Agreement and the denominator of which is the then applicable maximum
hourly or annual (as applicable) Contract Limit under Section 4.3 of the
Power Purchase Agreement, and (D) Big Rivers must continue to meet the
Power purchase requirements under those minimum Contract Limits, or to
fulfill its payment obligations under Section 6.4(b) of the Power Purchase
Agreement for any deficiencies in those Power purchases.
(2) In the event that a default under this Agreement by Big Rivers
results in a termination of this Agreement by Henderson or any of the LG&E
Companies in accordance with its terms (other than a termination pursuant
to Section 13.6(e) or Section 13.7(c) of this Agreement), and at any time
thereafter either the Station Two Power Sales Agreement or the Station Two
Operating Agreement (or both of them) are no longer in force or effect, or
any of Henderson's material obligations thereunder have been waived by Big
Rivers, excused by reason of a default thereunder by Big Rivers, or
otherwise relinquished pursuant to any amendments to those agreements
effected following the termination of this Agreement, then the LG&E
Companies shall thereafter have the right, pursuant to Section 14.3 of
this Agreement, to an abatement against the Annual Fixed Payments or
Rental Payment (as applicable) due by them to Big Rivers, to a
reimbursement of the Initial Fixed Payment or Initial Rental Payment, and
to a reduction in the Contact Limits to the extent provided for in Section
14.3 of this Agreement, unless and until such time as:
(A) (y) Big Rivers has restored all of its rights and
entitlements under the Station Two Power Sales Agreement and
the Station Two Operating Agreement to reasonably comparable
levels as existed prior to the time they were terminated or
rendered of no
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further force or effect, or otherwise prior to the waiver,
excuse or amendment(s) described above, or Big Rivers has
entered into new contractual arrangements with Henderson
affording Big Rivers rights and entitlements reasonably
comparable to those that existed under the Station Two Power
Sales Agreement and the Station Two Operating Agreement prior
to the events described above, and (z) following the
restoration of rights and entitlements or establishment of new
arrangements (as applicable) described above, Big Rivers has
commenced to perform each of the obligations of Big Rivers
described in Subclauses (A) through (D), inclusive, of Section
13.8(a)(1) of this Agreement, in which event the LG&E Rights
shall be suspended for so long thereafter as Big Rivers
continues to perform those obligations, but the maximum and
minimum Contract Limits shall remain reduced to the extent
provided for in Section 14.3 of this Agreement notwithstanding
that the abatement rights of the LG&E Companies have been so
suspended; or
(B) (x) the LG&E Companies and Henderson, in their
discretion, have entered into new contractual arrangements
affording the LG&E Companies with rights and entitlements
reasonably comparable to those which the LG&E Companies would
have had under this Agreement, the Station Two Power Sales
Agreement, the Station Two Operating Agreement and the Joint
Facilities Agreement had this Agreement and those contracts
not been terminated, including without limitation, the right
to operate and maintain the Station Two Assets and to purchase
the Station Two Unit Output on terms reasonably comparable to
those set forth in this Agreement and those contracts, and (y)
to the extent that Big Rivers
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then has continuing rights with respect to the Station Two
Assets, the Joint Use Facilities and/or the Station Two Unit
Output, whether pursuant to any of the Station Two Contracts
or otherwise, Big Rivers has entered into an agreement in form
reasonably acceptable to the LG&E Companies that waives such
of those rights, or grants to the LG&E Companies such
additional rights, as are necessary to afford the LG&E
Companies with the rights and entitlements described in (x),
above, and Big Rivers continues to perform its obligations
under that agreement, and (z) Big Rivers agrees to purchase
from the relevant LG&E Companies all Station Two Unit Output
to the extent and for the period contemplated in Section
8.12(e) or Section 9.7(c) of this Agreement (whichever was
effective immediately prior to the termination of this
Agreement), which provision shall survive the termination of
this Agreement for the purposes hereof, and agrees to promptly
reimburse the LG&E Companies for any additional capacity
charge expenses for Station Two Unit Output (or their
equivalent), including, without limitation, components thereof
attributable to Debt Service payments, Station Two
Improvements and Henderson Incremental Environmental O&M, that
are or may thereafter become payable to Henderson or the
Trustee under the new contractual arrangements described in
this Section 13.8(a)(2)(B), by reason of the inability of the
LG&E Companies to otherwise collect those expenses from Big
Rivers under Section 8 or Section 9 (as applicable) of this
Agreement, and Big Rivers continues to perform those
obligations and make those reimbursement payments upon being
invoiced for the same. In the event the provisions of this
Section 13.8(a)(2)(B) are and remain fulfilled by Big Rivers,
the abatement and reimbursement rights of
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the LG&E Companies contemplated in Section 14.3 of this
Agreement shall be suspended and the maximum and minimum
hourly and annual Contract Limits shall be reinstated to their
levels in effect immediately prior to the termination of this
Agreement described in this Section 13.8(a)(2); or
(C) Big Rivers has commenced to perform and discharge
each of the following obligations for the benefit of the LG&E
Companies, in which event the LG&E Rights shall be suspended
for so long thereafter as Big Rivers continues to perform
those obligations, but the maximum and minimum Contract Limits
shall be and remain reduced in the manner provided for below:
(w) Big Rivers must satisfy all of its indemnification and
hold harmless covenants to the LG&E Companies set forth in this
Agreement;
(x) Big Rivers must pay to LEM on or before the 25th day of
each month during the remaining term of the Power Purchase Agreement
an amount determined by reference to the following formula:
X = (Y x 16%) x Z
Where:
X = The monthly payment owing by Big Rivers to LEM for the
relevant month.
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Y = The Base Power rate applicable under Section 6.3 of the
Power Purchase Agreement during the month in which such
monthly payment by Big Rivers is due.
Z = The total number of megawatt-hours of Station Two Surplus
Capacity to which Big Rivers and/or Station Two Subsidiary
were entitled under the terms of the Station Two Power Sales
Agreement throughout the calendar month immediately preceding
the date on which the Station Two Power Sales Agreement or
Station Two Operating Agreement (as applicable) was
terminated, determined without regard to any waiver by Big
Rivers or Station Two Subsidiary of its rights or entitlements
under the Station Two Power Sales Agreement, or any amendments
thereto following the Execution Date not approved in writing
by Station Two Subsidiary, in either case that reduced Big
Rivers' and/or Station Two Subsidiary's rights or entitlements
to such Station Two Surplus Capacity during that prior month,
and without regard to the amount of Power actually generated
or taken by Big Rivers and/or Station Two Subsidiary during
that prior month;
(y) Big Rivers must agree that the Contract Limits set forth
in Section 4.3 of the Power Purchase Agreement shall thereafter be
reduced as follows: (1) the Maximum Hourly Power Purchase Amount
shall be and remain reduced by the total number of megawatt-hours of
Station Two Surplus Capacity to which Big Rivers was entitled under
the terms of the Station Two Power Sales Agreement for the period
from 12:00 noon to 1:00 p.m. on the last day of the month
immediately preceding the date on which the Station Two Power Sales
Agreement or Station Two Operating Agreement (as applicable) was
terminated;
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(2) the Maximum Annual Power Purchase Amount shall be and remain
reduced by the product of total number of megawatt-hours determined
as described in (1), above, multiplied by 8,760; (3) the Minimum
Hourly Power Purchase Amount shall be and remain reduced by the
product of the total number of megawatt-hours determined as
described in (1), above, multiplied by a fraction, the numerator of
which is the Minimum Hourly Power Purchase Amount in effect on the
last day of the month described in (1), above, and the denominator
of which is the Maximum Hourly Power Purchase Amount in effect on
that same day; and (4) the Minimum Annual Power Purchase Amount
shall be and remain reduced by the product of the total number of
megawatt-hours determined as described in (3), above, multiplied by
8,760; and
(z) Big Rivers must continue to meet the Power purchase
requirements under those minimum Contract Limits, or to fulfill its
payment obligations under Section 6.4(b) of the Power Purchase
Agreement for any deficiencies in those Power purchases.
Notwithstanding anything contained in this Section 13.8(a)(2) to the
contrary, in the event each of the requirements of either Section
13.8(a)(2)(A), Section 13.8(a)(2)(B) or 13.8(a)(2)(C) have not been
fulfilled on or prior to the first anniversary of the termination of this
Agreement, or following their initial fulfillment they shall at any time
cease to be fulfilled by reason of any failure by Big Rivers to perform
the obligations or meet the conditions thereunder, then the LG&E Companies
shall be entitled, in their discretion and in lieu of continuing their
abatement of the Annual Fixed Payments or Rental Payment , as applicable,
their pursuit of reimbursement of the Initial Fixed Payment or Initial
Rental Payment, as applicable, and their reduction in the maximum hourly
and annual Contract Limits, to terminate all of the other Operative
Documents (excluding, at the sole option of the LG&E Companies, any duty
to also terminate one or more of the Settlement Promissory Note, the
Settlement Mortgage, the Subordinate Mortgage and Security
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Agreement or the Non-Disturbance Agreement in the event the LG&E Companies
shall determine to terminate other Operative Documents) upon 30 days'
prior notice delivered to Big Rivers at any time thereafter that such
requirements are not being fulfilled.
(3) In the event Big Rivers or the LG&E Companies shall terminate
this Agreement in accordance with its terms by reason of a default
hereunder by Henderson, and either (A) Big Rivers shall not exercise its
rights, pursuant to Section 13.6(d) or 13.7(h) of this Agreement, to also
terminate all of the Station Two Contracts, or (B) Big Rivers shall
exercise its termination rights under Section 13.6(d) or 13.7(h) of this
Agreement, but shall at any time during the Participation Agreement Phase
I or the Participation Agreement Phase II enter into new contractual
arrangements with Henderson affording Big Rivers rights and remedies that
are reasonably comparable to any of the rights or remedies maintained by
Big Rivers under the Station Two Power Sales Agreement or the Station Two
Operating Agreement prior to their termination, then Big Rivers must
thereafter fulfill each of the obligations set forth in Subclauses (A)
through (D), inclusive, of Section 13.8(a)(1) of this Agreement in order
to avoid the exercise by the LG&E Companies of the LG&E Rights, or any of
them. The failure of Big Rivers to do so shall give the LG&E Companies the
right to exercise the LG&E Rights.
(4) In the event that a default under this Agreement by any LG&E
Company results in a termination of this Agreement by Big Rivers or
Henderson in accordance with its terms, none of the LG&E Companies shall
have any right as a result of that termination to also exercise any of the
LG&E Rights; provided, however, that if following that termination of this
Agreement Big Rivers continues to have access to and the right to purchase
and utilize any of the Station Two Unit Output, or subsequently obtains
such access and rights, in either case on reasonably comparable terms, but
Big Rivers fails to promptly pay to LEM the LEM Margins associated with
that Unit Output (determined as described in Section 13.8(a)(2)(B)), or
fails to acknowledge a reduction in the maximum
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and minimum Contract Limits to the extent contemplated in Section
13.8(a)(1)(C), or fails at any time to meet those minimum Contract Limits
or to fulfill its payment obligations under Section 6.4(b) of the Power
Purchase Agreement for any deficiencies in those Power purchases, then the
LG&E Companies shall thereafter during such time as the requirements are
not being fulfilled have the right, consistent with the procedures
described in Section 14.3 of this Agreement, to abate the Annual Fixed
Payments or Rental Payment (as applicable) due to Big Rivers, to seek
reimbursement of the Initial Fixed Payment or Initial Rental Payment, and
to reduce the maximum Contract Limits or, in their discretion, to
terminate all of the other Operative Documents (excluding, at the sole
option of the LG&E Companies, any duty to also terminate one or more of
the Settlement Promissory Note, the Settlement Mortgage, the Subordinate
Mortgage and Security Agreement or the Non-Disturbance Agreement in the
event the LG&E Companies shall determine to terminate other Operative
Documents) upon 30 days' prior notice to Big Rivers, but only at such time
as the LG&E Companies shall have fulfilled their respective
indemnification and hold harmless obligations to Big Rivers set forth in
this Agreement.
(b) In addition to the limitations on termination provided for elsewhere
in this Section 13, neither Big Rivers nor any LG&E Company may at any time
during the Term take any action, or exercise any rights that they may have, to
terminate any of the Station Two Contracts, or to waive any rights thereunder
that may adversely affect the economic interests of the other Party, without the
prior consent of the other Party. Big Rivers also agrees that it shall not,
throughout the Term, have the right upon a default under this Agreement by
Henderson or the LG&E Companies, in and of itself, or upon any termination of
this Agreement for any reason, to terminate any of the other Operative
Documents, nor shall any such breach or default constitute a default under any
other Operative Document. The covenants of Big Rivers and the LG&E Companies set
forth in this Section 13.8(b) are made solely for the benefit of each other and
are not made for the benefit of Henderson.
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(c) In addition to the covenants made by Big Rivers to the LG&E Companies
in Sections 10.12, 10.7(b) and 10.34(b) of this Agreement, during the Phase I
Subcontract Term Big Rivers shall, upon the request of any of the LG&E
Companies, diligently pursue and fully enforce all rights and remedies under
this Agreement, the Station Two Contracts, and at law or in equity, that it has,
or may then have, against Henderson upon any breach or default by Henderson of a
Station Two Contract that adversely affects Station Two Subsidiary or its
Affiliate(s), or their respective rights and interests to enjoy the full use and
benefit of the Station Two Assets and the Station Two Surplus Capacity as
contemplated in the Phase I Subcontract; provided, Big Rivers shall have no
obligation to pursue a termination of the Station Two Contracts, and agrees not
to pursue any termination of the Station Two Contracts, unless Big Rivers and
the LG&E Companies agree that such termination is the appropriate remedy or
action to be taken under the given circumstances. Station Two Subsidiary shall
reimburse Big Rivers for the reasonable out-of-pocket costs and expenses
incurred by Big Rivers in complying with its obligations under Sections 10.12,
10.7(b) (but with respect to Section 10.7(b) of this Agreement only to the
extent of Big Rivers' commitment thereunder to reasonably cooperate with the
LG&E Companies) and 10.34(b) of this Agreement (except to the extent that Big
Rivers has expressly agreed elsewhere in this Agreement to be responsible for
such costs and expenses) and in pursuing and enforcing its rights and remedies
under the Station Two Contracts to the extent, but only to the extent, the
relevant breach or default by Henderson does not or would not adversely affect
Big Rivers' rights and interests under the Station Two Contracts or, following
the assignment to Station Two Subsidiary of the Assigned Station Two Contracts,
Big Rivers' reversionary interest in the Station Two Contracts. If the relevant
breach or default by Henderson adversely affects Big Rivers' rights and
interests under the Station Two Contracts or its reversionary interest in the
Station Two Contracts, Station Two Subsidiary shall reimburse Big Rivers for an
equitable percentage of the reasonable out-of-pocket costs and expenses incurred
by Big Rivers relative to the rights and interests of each of the Parties that
are adversely affected by the breach or default by Henderson. Each of Big Rivers
and Station Two Subsidiary (and its Affiliate(s)) shall
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cooperate with one another in Big Rivers' assertion of any rights and remedies
against Henderson with the purpose, where possible and not adverse to the
economic interests of any such Parties, of minimizing or reducing the potential
adverse effect that the assertion of such right or remedy may have on the other
Party or such other Party's rights and interests under this Agreement and the
Station Two Contracts. Any sums or damages recovered by Big Rivers from
Henderson for a breach or default of the Station Two Contracts shall be
equitably allocated among Station Two Subsidiary and its Affiliates and Big
Rivers as their respective interests may appear.
(d) During the Phase II Assignment Term, Big Rivers hereby agrees that
Station Two Subsidiary shall have the right to control all remedies that Big
Rivers may have against Henderson for breach or default by Henderson of any
Station Two Contract. Station Two Subsidiary agrees that, except as provided
below, during the Phase II Assignment Term it shall, upon the request of Big
Rivers, diligently pursue and fully enforce all rights and remedies under the
Station Two Contracts, and at law or in equity, that it has or may have against
Henderson upon any breach or default by Henderson of the Station Two Contract,
to the extent required to protect the economic or reversionary interests of Big
Rivers in the Station Two Contracts or to minimize or reduce the potential
adverse effect that such breach or default may have on Big Rivers' rights and
interests under this Agreement and the Station Two Contracts; provided, Station
Two Subsidiary shall have no obligation to pursue a termination of the Station
Two Contracts, and agrees not to pursue a termination of the Station Two
Contracts, unless Big Rivers and the LG&E Companies agree that such termination
is the appropriate remedy or action to be taken under the given circumstances.
Big Rivers shall reimburse Station Two Subsidiary for the reasonable
out-of-pocket costs and expenses incurred by Station Two Subsidiary in pursuing
and enforcing rights and remedies under the Station Two Contracts to the extent,
but only to the extent, the relevant breach or default by Henderson does not or
would not adversely affect any LG&E Company's rights, interests, use and
benefits under this Agreement or any of the Assigned Station Two Contracts or
any LG&E
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Company's use and benefit of the Station Two Assets and the Station Two Surplus
Capacity. If the relevant breach or default by Henderson would so adversely
affect any LG&E Company's rights, interests, uses and benefits, then Big Rivers
shall reimburse Station Two Subsidiary for an equitable percentage of the
reasonable out-of-pocket costs and expenses incurred by Station Two Subsidiary
relative to the rights and interests of each of the Parties that are adversely
affected by the breach or default by Henderson. Each of Big Rivers and Station
Two Subsidiary shall cooperate with one another in Station Two Subsidiary's
assertion of any rights and remedies against Henderson with the purpose, where
possible and not adverse to the economic interests of any such Parties, of
minimizing or reducing the potential adverse effect that the assertion of such
right or remedy may have on the other Party or such other Party's rights and
interests under this Agreement and the Assigned Station Two Contracts. Any sums
or damages recovered by Station Two Subsidiary from Henderson for a breach or
default of the Station Two Contracts shall be equitably allocated among Station
Two Subsidiary and its Affiliates and Big Rivers as their respective interests
may appear.
(e) Nothing contained in this Section 13 shall be deemed to affect, limit
or eliminate any rights that Big Rivers, on the one hand, or any of the LG&E
Companies, on the other hand, may have to terminate any of the Operative
Documents other than this Agreement in accordance with their respective terms,
or any other rights or remedies that they may have under those other Operative
Documents.
(f) If any of the Station Two Power Sales Agreement, the Station Two
Operating Agreement or the Joint Facilities Agreement shall at any time during
the Phase I Subcontract Term or the Phase II Assignment Term be terminated by
Big Rivers or by Henderson for any reason other than a breach or default by any
of the LG&E Companies under this Agreement or, during the Phase II Assignment
Term, under any Assigned Station Two Contract, then the LG&E Companies and
Henderson each agree between themselves (but not with Big Rivers)
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that each shall negotiate with the other Party(s), to effect a new agreement
among themselves (including a guaranty of LEC in substantially the same form and
substance as the Guaranty). The new agreement among the LG&E Companies and
Henderson shall be by means of a structure substantially the same as the Phase
II Assignment structure contemplated in this Agreement and the Station Two
Contracts or by some other mutually agreed upon structure that preserves or
enhances the relative economic benefits contemplated by the LG&E Companies and
Henderson, and that otherwise does not impose additional material risks or
obligations upon any of the LG&E Companies or Henderson than the risks and
obligations undertaken or assumed by such Parties in this Agreement and the
Station Two Contracts (unless any such Party, in its discretion, agrees to
accept lesser economic benefits or greater risks or obligations than undertaken
or assumed by such Party in this Agreement and the Station Two Contracts). All
negotiations undertaken or required pursuant to this Section 13.8(f) shall be
conducted in good faith and each Party participating in such negotiations shall
use their reasonable best efforts to effect the new agreement. Notwithstanding
anything herein to the contrary: (i) in connection with the foregoing
negotiations, neither Henderson nor the LG&E Companies shall have an obligation
to agree to perform for the other certain services or to furnish or commit to
Station Two certain assets and properties that were unique to Big Rivers in such
Station Two Contracts, including, without limitation, providing or furnishing
transmission related services, transmission facilities and lines, the Joint Use
Facilities owned by Big Rivers (except to enforce rights they may have with
respect thereto or to provide any interests that such Party may have in such
Joint Use Facilities), and common employees and supplies in the operation of
Station Two and the Reid Station; provided, however, if Henderson shall then
have the right, on account of such termination or any other event or
circumstance, to purchase the Joint Use Facilities owned by Big Rivers and/or
the Reid Station, or the right to use transmission facilities or services in
connection with the delivery of Station Two Power, then Henderson and the LG&E
Companies agree with each other to negotiate in good faith terms of financing
and other commercially reasonable terms associated with that purchase or use of
transmission facilities or services with a view toward securing for
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both Henderson and the LG&E Companies the continued enjoyment, use and benefit
of those Joint Use Facilities, the Reid Station and transmission facilities or
services upon terms no less favorable to either Henderson or the LG&E Companies
than those that are contemplated by the Parties in this Agreement or the Station
Two Contracts; and (ii) in the event the termination of the Station Two Power
Sales Agreement, the Station Two Operating Agreement or the Joint Facilities
Agreement (as applicable) shall result from a material breach or default of
Henderson, the provisions of this Section 13.8(f) shall be applicable only at
the option of Station Two Subsidiary, in its sole discretion. The LG&E Companies
and Henderson further agree to negotiate in good faith such other commercially
reasonable terms and provisions as either such Party may reasonably request to
enable such Party to enter into and perform their respective obligations under
the new agreements and to continue to obtain and enjoy the benefits of the
Capacity and Energy from Station Two as contemplated in this Agreement for the
Phase II Assignment Term. Big Rivers, without waiving or releasing any other
rights under this Agreement, the other Operative Documents, the Station Two
Contracts, or at law or in equity, hereby consents to the LG&E Companies and
Henderson negotiating and entering into a new agreement as provided for in this
Section 13.8(f), and hereby waives any claims or rights that it may have to
operate and maintain Station Two or to purchase or acquire the Station Two
Assets (including Henderson's interest in any Joint Use Facilities) or any
Station Two Surplus Capacity by virtue of such negotiations or new agreement
between Henderson and any one or more of the LG&E Companies (or their
Affiliates), in the event that the Station Two Power Sales Agreement, the
Station Two Operating Agreement or the Joint Facilities Agreement are (1)
terminated by Henderson for a breach or default by Big Rivers of those Station
Two Contracts or this Agreement (other than a breach or default resulting from
the act or omission of any LG&E Company in breach of this Agreement) or (2)
terminated by Big Rivers during the Term for any reason other than a termination
of this Agreement for a default of this Agreement by the LG&E Companies. Big
Rivers shall not be deemed by virtue of the consents and waivers set forth above
to have consented to the foregoing or waived any rights or interests that it may
have to operate Station Two or to purchase any of the Station Two
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Assets or Station Two Surplus Capacity, to the extent such rights or interests
were not set forth in the Station Two Contracts that were terminated, nor shall
any such consent or waiver exist for any termination by Henderson or the LG&E
Companies that is in breach or default of this Agreement or any of those Station
Two Contracts.
(g) Unless otherwise expressly provided in this Agreement, a Party shall
not be liable to any of the other Parties for any special, incidental or
consequential damages arising in connection with this Agreement, or any breach
or default hereunder and, from and after the retirement or redemption of the
Station Two Bonds, for any special, incidental or consequential damages arising
in connection with the Station Two Contracts or any breach or default thereof.
In the event that the negligence or willful misconduct of any LG&E Company or a
breach or default by any LG&E Company of this Agreement shall directly result in
Henderson obtaining a judgment or other award of special, incidental or
consequential damages from Big Rivers, then the LG&E Companies hereby agree
that, notwithstanding any limitations in this Section 13.8(g) between those
Parties for those types of damages, as between the LG&E Companies and Big Rivers
such damages (if awarded) shall be deemed to be direct damages for which Big
Rivers may pursue against the LG&E Companies its right to indemnification or any
other legal or equitable right it may have against the LG&E Companies as a
result of such breach or default.
(h) The LG&E Companies agree that they shall not at any time during the
Phase I Subcontract Term or the Phase II Assignment Term authorize or approve
any amendments or modifications of any Station Two Contracts, or any suspensions
of performance under any Station Two Contracts, in either case without the prior
consent of Big Rivers, which consent shall not be unreasonably withheld,
conditioned or delayed.
(i) Should any breach or default by Big Rivers under this Agreement, any
of the Station Two Contracts or any of the other Operative Documents, or should
the negligence or
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willful misconduct of Big Rivers or any of its employees, agents or
representatives, have the effect, directly or indirectly, of denying the LG&E
Companies access to, or the full use and enjoyment of, any of the "Fundamental
Rights" (as defined in Section 10.7) in any material respects, then the damages
that shall be recoverable by the LG&E Companies from Big Rivers shall include,
without limitation, (1) any costs that the LG&E Companies may suffer or incur in
purchasing Power in place of the Station Two Unit Output that was thereby
rendered unavailable for purchase, use, transmission or sale by the LG&E
Companies; (2) any transmission charges incurred to transmit that replacement
Power that would not have otherwise been incurred had it been available from
Station Two; (3) any costs and expenses incurred by the LG&E Companies
(including without limitation, Capacity charges) associated with the Station Two
Unit Output that can be generated but cannot be utilized by the LG&E Companies
by reason of the denial of one or more of the Fundamental Rights; and (4) any
increased Capacity Charges that may be payable by any LG&E Company for Station
Two Surplus Capacity that may still be available for use notwithstanding the
denial in any material respect of the Fundamental Right described in Section
10.7(c), but only to the extent those increased charges resulted from that
denial.
13.9 Termination Date True Up. On the date this Agreement expires or is
terminated for any reason, Big Rivers and the LG&E Companies (and without in any
manner impairing Big Rivers' refund obligations, if any, under Section 21.8 of
the Participation Agreement) agree that all amounts due and owing under this
Agreement to the other Party, or any outstanding credits, in each case, shall be
so paid within five (5) days after the date of termination or expiration after
netting all such amounts and credits owed by each of those Parties to the
other(s) or their Affiliates under this Agreement or the Operative Documents.
The Parties agree that all credits shall be converted to a cash amount for
purposes of this provision.
13.10 Survival of Terms and Conditions. The provisions of this Agreement,
other than those which specifically address the period of time prior to the
Closing, shall survive the
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Closing. Upon the expiration or earlier termination of this Agreement, each of
the Parties shall be released from all liabilities and obligations arising under
the terms and provisions of this Agreement, except for liabilities and
obligations arising under terms and provisions of this Agreement which expressly
provide for the survival thereof following such expiration or earlier
termination, and except for the following terms and provisions which shall
survive any such expiration or earlier termination of this Agreement, all of
which shall continue to be binding on the relevant Party(s): (a) the covenants
of confidentiality set forth in Sections 4.1(b) and Section 8.9 of this
Agreement; (b) the agreement of Station Two Subsidiary set forth in Section
10.8(h) of this Agreement to assist any insurer in investigating, adjusting and
settling any loss or claim covered by Station Two Assets Insurance, but only to
the extent such loss or claim arises or accrues during the Phase I Subcontract
Term or the Phase II Assignment Term; (c) all of the terms and provisions of
Section 10.16, relating to the reversion of the Station Two Contracts and the
Parties' respective rights and obligations in connection therewith, as may be
applicable on the date of termination; (d) each of the commitments set forth in
this Agreement of Henderson and Big Rivers, respectively, regarding access to
and the right to utilize the Joint Use Facilities (including, without
limitation, the Green Station FGD System Facility) and, in the case of Big
Rivers only, its commitments to provide transmission access and certain
transmission and transformation facilities, including, without limitation, those
commitments of Henderson and Big Rivers set forth in Sections 10.19(d) and 10.20
of this Agreement, respectively; (e) those provisions of Sections 11.1, 11.2 and
11.3 of this Agreement (relating to Economic Development Power) which
specifically contemplate their survival for the benefit of one or more of the
Parties following the expiration or termination of this Agreement; (f) all
rights of first purchase of LEM provided for in Section 4.4 of this Agreement to
purchase Station Two Surplus Capacity from Henderson following Henderson's
election, pursuant to Section 15.2 of the Station Two Power Sales Agreement, not
to sell such Power to Big Rivers; (g) the terms and provisions of Section 13.9
of this Agreement, until each of the Parties' respective obligations thereunder
are performed and discharged in full; (h) any rights to terminate the other
Operative Documents,
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any rights to an abatement of the Annual Fixed Payments or the Rental Payment
due to Big Rivers under either the Power Purchase Agreement or the Lease, any
rights to reimbursements of portions of the Initial Fixed Payment or the Initial
Rental Payment, as applicable, and any rights to adjustments of the Contract
Limits, in each case as provided for in Sections 13.6, 13.7, 13.8 or 14 of this
Agreement, and any rights of Big Rivers set forth in Section 13.8(a) of this
Agreement to suspend the enforcement of the foregoing rights by the LG&E
Companies and their Affiliates; (i) all terms and provisions of this Agreement
which create or provide for obligations between the Parties for sums due and
owing any other Party, or credits due any other Party, under this Agreement as
of its expiration or termination (which payment obligations shall survive until
finally paid in full or off-set by such Parties against sums that may otherwise
be owed by any such Party under this Agreement or any Operative Document); (j)
the agreement between Henderson and the LG&E Companies to negotiate a new
agreement relating to Station Two and the Station Two Surplus Capacity pursuant
to the terms of Section 13.8(f) of this Agreement; (k) any indemnification
claims or actions for breach or default to the extent that the events or actions
that gave rise to liability occurred prior to the expiration or termination of
this Agreement and the Station Two Contracts, including without limitation,
claims relating to breaches or defaults occurring prior to the Effective Date;
and (l) the terms and provisions of Section 18.15 of this Agreement.
14. ABATEMENT AND OTHER RIGHTS.
14.1 Abatement and Other Rights For Condemnation. In the event of a
condemnation or taking by governmental authority of all or substantially all of
the Station Two Assets, or of both or either of the Station Two generating
units, Big Rivers agrees that the Annual Fixed Payments payable by LEM for each
month during the condemnation or taking (prorated for partial months) pursuant
to Section 3.3(a) of the Power Purchase Agreement or the Rental Payment payable
by WKEC (or its Affiliates) for each month during the condemnation or taking
(prorated for partial months) pursuant to Section 2.3.2 of the Lease, whichever
is then
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applicable, shall be reduced proportionately from and after possession is taken
based upon the ratio of (a) the fair market value at the time of the
condemnation or taking of the specific Station Two Assets condemned or taken to
(b) the sum of (y) the fair market value at the time of the condemnation or
taking of all the Station Two Assets and (z) the fair market value at the time
of the condemnation or taking of the Generating Assets of Big Rivers which are
not also Station Two Assets hereunder, each determined on the basis that said
condemnation or taking had not occurred (the "Fair Market Value Ratio"). In
addition, if the initial condemnation or taking of the Station Two Assets occurs
prior to the second anniversary of the Effective Date, Big Rivers shall refund
to LEM, as agent for the LG&E Companies and their Affiliates, an amount equal to
(a) the amount of the Initial Fixed Payment or the Initial Rental Payment, as
the case may be, paid to Big Rivers under the Power Purchase Agreement or the
Lease on the Effective Date, multiplied by (b) the ratio of (1) the number of
days between the date of the initial condemnation or the taking and the second
anniversary of the Effective Date over (2) 730, multiplied by (c) the Fair
Market Value Ratio. Such refund amount shall be payable by Big Rivers, free of
interest, in twenty-four equal monthly installments commencing on the one-month
anniversary of the date of the condemnation or the taking. The LG&E Companies
and Big Rivers agree that the fair market value of the Station Two Assets taken
shall be determined equitably by taking into consideration, among other relevant
factors, the amount of surplus Capacity that is not available from Station Two
by virtue of the condemnation or the taking, the amount of the Station Two
Surplus Capacity that was available to Station Two Subsidiary and/or LEM,
directly or through Big Rivers, immediately prior to the condemnation or the
taking of the Station Two Assets, and a reasonable estimate of the future
allocation of Station Two Surplus Capacity that would have been made available
to Station Two Subsidiary and/or LEM from Station Two based on historical
allocations of Capacity from Station Two reserved by Henderson and the
reasonably foreseeable and determinable future needs for such Capacity by
Henderson (for its governmental and proprietary facilities and its retail sales
to inhabitants of the City, present and future). The Contract Limits provided
for in Section 4.3 of the Power
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Purchase Agreement shall not be affected or modified by reason of any
condemnation or taking, in whole or in part, of the Station Two Assets.
14.2 Abatement and Other Rights for Damage or Destruction.
(a) There shall be no refund of the Initial Fixed Payment or the Initial
Fixed Rental Payment , no abatement in the Annual Fixed Payments by LEM under
Section 3.3 of the Power Purchase Agreement, the Rental Payment payable by WKEC
(or its Affiliates) under Section 2.3.2 of the Lease or the Debt Service
reimbursement payments of Station Two Subsidiary (or its successors or permitted
assigns) to Big Rivers under Sections 8.18 and 9.11 of this Agreement, and no
adjustments made to the Contract Limits set forth in Section 4.3 of the Power
Purchase Agreement, if the Station Two Assets are damaged or destroyed during
the Term for any reason (including, without limitation, an Uncontrollable Force
or the negligence or willful misconduct of any of the LG&E Companies or
Henderson, or any of their respective employees, agents or representatives)
other than the negligence or willful misconduct of Big Rivers or any of its
employees, agents or representatives, but then only to the extent provided for
in this Section 14.2.
(b) If the Station Two Assets are damaged or destroyed during the Term and
the damage or destruction was caused by the negligence or willful misconduct of
Big Rivers, or any of its employees, agents or representatives, then the Annual
Fixed Payments by LEM under Section 3.3 of the Power Purchase Agreement and the
Rental Payment payable under Section 2.3.2 of the Lease shall be abated, and the
Debt Service reimbursement payments to Big Rivers pursuant to Section 8.18 of
this Agreement shall on each Monthly Payment Date be abated, until such time as
the Station Two Assets are restored in the manner provided in Section 12.2 of
this Agreement, in each case in an amount equal to (1) the monthly installment
of Annual Fixed Payment, Rental Payment and/or Debt Service reimbursement
payment that is
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due Big Rivers at that time under either the Power Purchase Agreement, the Lease
or this Agreement (subject to all adjustments in such installment payments as
shall then be applicable under the terms of the Power Purchase Agreement, the
Lease or this Agreement), multiplied by (2) the ratio by which (A) the average
number of megawatts of Station Two Surplus Capacity that were allocated to Big
Rivers (prior to the Effective Date or during the Phase I Subcontract Term, as
applicable) and Station Two Subsidiary (during the Phase II Assignment Term)
under the Station Two Power Sales Agreement for each hour during the four (4)
year period immediately preceding the date of the damage or destruction, but
with an equitable reduction in that number to reflect the increase (if any) in
(y) the average number of megawatts of Power anticipated to be reserved for each
hour by Henderson from Station Two between the relevant Monthly Payment Date and
the fourth (4th) anniversary thereof (as reflected in the then current forecast
of Henderson's needs required to be made under the Station Two Power Sales
Agreement, but adjusted to include any Economic Development Power reserved by
Henderson for its customers as contemplated in the 1998 Amendments and Sections
11.1, 11.2 and 11.3 of this Agreement) over (z) the average number of megawatts
of Power from Station Two that were reserved by Henderson for each hour during
the four (4) year period immediately preceding the relevant Monthly Payment
Date, bears to (B) 1708 Megawatts, multiplied by (3) the percentage of Station
Two Power which can no longer be generated by Station Two by reason of the
damage or destruction (the multipliers in (2) and (3), above, being hereinafter
collectively referred to as the "Damage Multipliers"). In addition, the Debt
Service payments by Big Rivers to Station Two Subsidiary pursuant to Section
9.7(b ) shall on each Monthly Payment Date be increased, until such time as the
Station Two Assets are restored in the manner provided in Section 12.2 of this
Agreement, by an amount equal to such Debt Service payment by Big Rivers
multiplied by the Damage Multipliers. In addition, if the damage or destruction
to the Station Two Assets occurs prior to the second anniversary of the
Effective Date, which damage or destruction was caused by the negligence or
willful misconduct of Big Rivers or any of its employees, agents or
representatives, Big Rivers agrees to refund to LEM, as agent for the LG&E
Companies and their Affiliates, an amount equal to (i) the amount of the Initial
Annual Fixed Payment or the Initial Rental Payment, as the case may be, paid to
Big Rivers under the Power Purchase
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Agreement or the Lease on the Effective Date, multiplied by (ii) the ratio of
(A) the number of days between such damage or destruction date and the earlier
of the date the Station Two Assets are restored in the manner provided in
Section 12.2 of this Agreement or second anniversary of the Effective Date over
(B) 730, multiplied by (iii) the Damage Multipliers in the order described
above. Such refund amount shall be payable by Big Rivers, free of interest, in
twenty-four equal monthly installments commencing on the one-month anniversary
of the damage or destruction date. No adjustments shall be made to the Contract
Limits set forth in Section 4.3 of the Power Purchase Agreement as a consequence
of such damage or destruction.
14.3 Abatement and Other Rights Upon Termination.
(a) At the time(s), and under the circumstances permitted by Section 13.6,
13.7 and 13.8 of this Agreement (but subject to Big Rivers' rights provided for
in Section 13.8(a) of this Agreement), and at such time prior to a termination
of this Agreement as Henderson shall terminate the Station Two Power Sales
Agreement, the Station Two Operating Agreement or the Joint Facilities Agreement
by reason of a breach or default thereunder by Big Rivers, the relevant LG&E
Companies and their relevant Affiliates shall be entitled (1) to an immediate
abatement against, and the right to reduce, any Annual Fixed Payments thereafter
owing by LEM to Big Rivers under Section 3.3 of the Power Purchase Agreement,
and any Rental Payment thereafter owing by WKEC or its Affiliates to Big Rivers
under Section 2.3 of the Lease, (2) where applicable (as described below), to a
reimbursement by Big Rivers to LEM, WKEC and its Affiliates of a portion of the
Initial Fixed Payment or the Initial Rental Payment (as applicable), and (3) to
an immediate reduction in the maximum and minimum Contract Limits, in each case
to the extent provided in this Section 14.3. Any such abatement, reimbursement
and Contract Limit reduction rights, once effective, shall remain in effect at
all times during the remainder of the Term (or, if this Agreement shall have
been terminated for the remainder of the Participation Agreement Phase I or the
Participation Agreement Phase II, as applicable), but subject to Big Rivers'
rights provided for in Section 13.8(a) of this Agreement.
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(b) In the event that an abatement against the Annual Fixed Payments or
the Rental Payment , as applicable, is required or permitted under this Section
14.3, then on each Monthly Payment Date such abatement shall be in an amount
equal to (1) the monthly installment of Annual Fixed Payment, or Rental Payment
that is due to Big Rivers at that time under either the Power Purchase
Agreement, the Lease or this Agreement (subject to all adjustments in such
installment payments as shall then be applicable under the terms of the Power
Purchase Agreement, the Lease and this Agreement), multiplied by (2) the ratio
by which (A) the average number of megawatts of Station Two Surplus Capacity
that was allocated to Big Rivers (prior to the Effective Date or during the
Phase I Subcontract Term, as applicable) and Station Two Subsidiary (during the
Phase II Assignment Term) under the Station Two Power Sales Agreement for each
hour during the four (4) year period immediately preceding the date on which the
LG&E Companies' respective abatement rights first accrue under Sections 13.6,
13.7 or 13.8 of this Agreement, but with an equitable reduction in that number
to reflect the increase (if any) in (y) the average number of megawatts of Power
anticipated to be reserved for each hour by Henderson from Station Two between
the relevant Monthly Payment Date and the fourth (4th) anniversary thereof (as
reflected in the then current forecast of Henderson's needs required to be made
under the Station Two Power Sales Agreement, but adjusted to include any
Economic Development Power reserved by Henderson for its customers as
contemplated in the 1998 Amendments and Sections 11.1, 11.2 and 11.3 of this
Agreement) over (z) the average number of megawatts of Power from Station Two
that were reserved by Henderson for each hour during the four (4) year period
immediately preceding the relevant Monthly Payment Date, bears to (B) 1708
Megawatts, (the multipliers identified in (1) and (2), above, being hereinafter
collectively referred to as the "Termination Multipliers").
(c) In the event that the relevant termination of this Agreement or a
Station Two Contract giving rise to abatement rights hereunder occurred prior to
the second anniversary of the Effective Date, then in addition to the abatement
rights described above, Big Rivers agrees to refund to LEM, as agent for the
LG&E Companies and their Affiliates, an amount equal to
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(i) the amount of the Initial Fixed Payment or the Initial Rental Payment, as
the case may be, paid to Big Rivers under the Power Purchase Agreement or the
Lease on the Effective Date, multiplied by (ii) the ratio of (A) the number of
days between such termination date and the second anniversary of the Effective
Date over (B) 730, multiplied by (iii) the Termination Multipliers in the order
described above. Such refund amount shall be payable by Big Rivers, free of
interest, in twenty-four equal monthly installments commencing on the one-month
anniversary of the termination date.
(d) At such time as any of the LG&E Companies shall be entitled to an
abatement against its payment obligations as contemplated in Section 14.3(a),
above, and for so long as that abatement right shall continue, then the Contract
Limits provided for in Section 4.3 of the Power Purchase Agreement shall be and
remain reduced as follows: (1) the maximum Contract Limits set forth in Section
4.3 of the Power Purchase Agreement shall be reduced by the amount of Power from
Station Two allocated to Big Rivers during the relevant hour or Year under the
terms of the Station Two Power Sales Agreement (without regard to any waiver of
its rights or entitlements thereunder or any amendments thereto following the
date hereof that may reduce Big Rivers' right or entitlement to such Power, and
without regard to the amount of Power actually generated or taken by Big
Rivers), or if the Station Two Power Sales Agreement has been terminated as
contemplated in Section 14.3(a), then the amount of Power that would have been
allocated to Big Rivers had that agreement remained in effect; and (2) the
minimum Contract Limits set forth in Section 4.3 of the Power Purchase Agreement
shall be reduced only by the product of (x) the total amount of Power from
Station Two (in megawatt hours) so allocated to Big Rivers during the relevant
hour or Year, times (y) a fraction, the numerator of which is the then
applicable minimum Contract Limit under Section 4.3 of the Power Purchase
Agreement and the denominator of which is the then applicable maximum hourly or
annual (as applicable) Contract Limit under Section 4.3 of the Power Purchase
Agreement.
14.4 Abatement Rights Cumulative. The rights of the LG&E Companies
specified in this Section 14, entitled "Abatement," shall be in addition to, and
not be exclusive of, any other rights or remedies that the LG&E Companies may
have in this Agreement, the Station Two
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Contracts or the Operative Documents, or at law or in equity, as a consequence
of any breach or default under, or termination of, this Agreement, any of the
Station Two Contracts or any of the other Operative Documents.
15. TRANSFERS AND ASSIGNMENTS.
15.1 Permitted Assignments. No Party shall assign any of its rights or
obligations under this Agreement or any of the Station Two Contracts without the
prior consent of the other Parties, except that with respect to an assignment of
the type described in (a) or (c) below, only the consent of Henderson shall be
required (which consent shall not be unreasonably withheld, conditioned or
delayed by Henderson) and, with respect to an assignment of the type described
in (b) or (d) below, no prior consent shall be required with respect to such an
assignment:
(a) to any Person into which or with which the Party making the assignment
is merged or consolidated or to which the Party transfers substantially all of
its assets including this Agreement and/or the Station Two Contracts.
(b) with respect to Station Two Subsidiary, LEM or WKEC, to any Affiliate
of those Parties.
(c) with respect to Station Two Subsidiary, LEM or WKEC, to any third
party which is authorized by all appropriate regulatory authorities and under
applicable law to fulfill such Party's obligations under this Agreement or that
Station Two Contract (as applicable) to which such Party is a party and which
provides assurances of payment and performance of equal or greater value to that
provided in this Agreement or such Station Two Contract, as reasonably
determined by Henderson and Big Rivers.
(d) in the case of either Big Rivers or Henderson, unless to do so would
violate the terms of the Station Two Contracts as in effect on the date hereof,
and in the case of the LG&E Companies, to any (a) creditor holding a Permitted
Lien as security for the underlying obligation, (b) other mortgagee or other
secured party as security for indebtedness incurred for
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borrowed money by such Party for any renewal, replacement, improvement or
addition to Station Two, or (c) other entity as security for indebtedness for
borrowed money loaned to Big Rivers or any LG&E Company; provided, that each
such secured party of Big Rivers or any LG&E Company referenced herein executes
a Non-Disturbance Agreement in substantially the form of Exhibit H attached to
the Participation Agreement (or, in the case of an assignment by an LG&E
Company, in a form reasonably acceptable to Big Rivers and Henderson), and each
such secured party may transfer or assign the interest given as security
pursuant to, or in lieu of, a foreclosure of the Lien (or the exercise of power
of sale) held by such secured party, provided that the transferee or assignee
assumes all of the duties and obligations of the pledging Party under this
Agreement and the Station Two Contracts, including, without limitation, the
obligation to enter into a nondisturbance agreement, and all other agreements
that relate to the interest being transferred or assigned. No such assignment by
any Party pursuant to this Section 15.1(d) shall be deemed to release that Party
from any of its obligations hereunder.
Notwithstanding anything in this Section 15.1 to the contrary, Henderson may
withhold its consent (without regard to whether the withholding thereof is
otherwise unreasonable) to any assignment by an LG&E Company of the type
described in (a) or (c), above, if (y) such assignment is to any Person that is
not an Affiliate of LEC and (z) the request for Henderson's consent to such
assignment is not accompanied by an opinion of counsel to LEC, in substantially
the form of the legal opinion to be delivered by Kentucky counsel at the Closing
pursuant to Item 29 of Schedule 2.1 to this Agreement, as to the enforceability
of the Guaranty as it relates to such non-affiliated Person's performance of its
obligations to Henderson under this Agreement from and after the date of such
assignment. In addition, all of the assignments described in this Section 15.1
shall in any event be subject to compliance with all applicable Laws. Subject to
the foregoing restrictions in this Section, this Agreement shall be binding
upon, inure to the benefit of and be enforceable by the Parties and their
respective successors and assigns.
15.2 Assignment and Assumption of Related Agreements. No transfer or
assignment of any interest in the Station Two Assets or in this Agreement or the
Station Two Contracts, or
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any part thereof, pursuant to Sections 15.1(a), 15.1(b) or 15.1(c) of this
Agreement may be made unless, simultaneously, the transferring Party's rights
under this Agreement and all Station Two Contracts and all other agreements that
relate to such interest are similarly transferred or assigned to the same Person
or Persons (or one or more Affiliates of such Person or Persons), and such
Person or Persons (or one or more Affiliates of such Person or Persons) assumes
in writing all the duties and obligations of the Party making such transfer or
assignment under such agreements that relate to the interest being transferred
or assigned and that accrue or arise after the date of assignment. Unless the
provisions of Sections 15.1(a), 15.1(b) or 15.1(c) of this Agreement and the
immediately preceding sentence are satisfied, no such assignment or transfer
shall release the transferring or assigning Party from any of its obligations
pursuant to this Agreement or the Station Two Contracts or such other
agreements; provided, in no event shall Big Rivers be released by virtue of any
such assignment. Nothing in this Section 15.2, as it relates to Big Rivers and
Henderson, shall modify or amend any such additional or different rights or
obligations that either such Party has or owes the other Party under the terms
of the Station Two Contracts on the date hereof, including, without limitation,
the rights of first refusal of each such Party under the Station Two Contracts.
15.3 Noncomplying Assignment. Any attempted or purported assignment or
transfer made other than in accordance with this Section 15, entitled "Transfers
and Assignments," whether voluntarily, involuntarily or by operation of law,
including, without limitation, by merger or consolidation shall be void and of
no effect.
15.4 Regulatory Approvals. Assignments or transfers under this Agreement
or any Station Two Contract may be subject to the jurisdiction of state or
federal regulatory agencies. Such assignments or transfers shall not be
effective until all required approvals and all other required action by such
agencies having jurisdiction shall have been obtained.
15.5 Liens. No Party shall directly or indirectly create, incur, assume or
suffer to exist any Lien on or with respect to the Station Two Assets, except
Permitted Liens or the Liens created by the Bond Ordinance. Station Two
Subsidiary agrees to pay before delinquency all costs for work, services or
materials furnished or used during the Term in connection with the
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Station Two Assets, the non-payment of which could result in any Lien against
the Station Two Assets. Henderson will keep title to the Assets free and clear
of any and all Liens other than Permitted Liens and Liens in existence under the
Bond Ordinance on the date hereof. Each Party hereto will immediately notify the
other Parties of the filing of any other Lien which such Party creates, incurs,
assumes or suffers to exist upon the Station Two Assets and any pending claims
or proceedings related to any such Lien, and will indemnify and hold the other
Parties harmless from and against all loss, damages and expenses (including
reasonable attorneys' fees) suffered or incurred by such other Parties as a
result of the imposition of such Lien (regardless of whether or not Station Two
Subsidiary knew of the existence of such Lien). In case any such other Lien
attaches, the Party which creates, incurs, assumes or suffers to exist a Lien
upon the Station Two Assets agrees to cause it to be immediately released and
removed of record (failing which any of the other Parties may do so at such
defaulting Party's sole expense). Notwithstanding anything herein to the
contrary, the Party who creates, incurs, assumes or suffers to exist any such
other Lien shall have the right to contest in good faith such Lien even if such
contest prolongs or permits the existence of such Lien.
16. UNCONTROLLABLE FORCES.
16.1 Suspension of Performance for Uncontrollable Forces. Except as may be
further limited in Section 16.2 of this Agreement, none of the Parties shall be
considered in default or breach with respect to any obligation under this
Agreement if prevented from fulfilling such obligation by reason of an
"Uncontrollable Force" (as defined in Exhibit B attached hereto). If LEM or
Station Two Subsidiary is unable to fulfill any obligation by reason of an
Uncontrollable Force, it shall exercise due diligence to remove such disability
as soon as reasonably possible; provided, that no Party shall be relieved of any
payment obligation that it may have to any other Party (or to the Trustee) under
this Agreement or any Station Two Contract by reason of an Uncontrollable Force.
16.2 Uncontrollable Forces. -- Station Two Contracts. Station Two
Subsidiary shall not be considered in default or breach with respect to any
obligation under Section 8 of this
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Agreement entitled "Phase I Subcontract" and Section 9 of this Agreement
entitled "Phase II Assignment," if prevented from fulfilling such obligation by
reason of an "Uncontrollable Force" (as hereinafter defined), but only to the
extent that such obligation arises under the terms of the Station Two Contracts
or the corresponding provisions of Section 8, and provided, that no Party shall
be relieved of any payment obligation that it may have to any other Party (or to
the Trustee) under this Agreement or any Station Two Contract by reason of an
Uncontrollable Force. If Station Two Subsidiary is unable to fulfill any such
obligation by reason of an Uncontrollable Force, it shall exercise due diligence
to remove such disability as soon as reasonably possible. For purposes of this
Section 16.2, with respect to each specific obligation, the term "Uncontrollable
Force" shall have the same meaning as set forth in the Station Two Contract
under which the obligation arises, and no performance under Section 8 of this
Agreement and Section 9 of this Agreement shall be excused by reason of an
Uncontrollable Force unless performance of such obligation is also excused under
the terms of such Station Two Contract.
17. TAXES. The provisions of this Section 17 shall apply only as to the
respective rights and obligations of the LG&E Companies and Big Rivers with
respect to each other, and not as to their respective rights and obligations
with respect to Henderson, and then only to the extent that such rights and
obligations have not been addressed in Section 11 of the Participation
Agreement.
17.1 Sales and Use Taxes. Notwithstanding anything in this Agreement or
any other Operative Document to the contrary, (a) Big Rivers shall pay (or
reimburse the LG&E Companies for) any and all sales and use Taxes imposed on (1)
its transfer of Station Two Inventory and Station Two Personal Property to
Station Two Subsidiary pursuant to Sections 10.33 and 10.35 of this Agreement,
(2) its lease of any Station Two Assets to WKEC or its Affiliates pursuant to
the Lease or any characterization of this transaction, or any portion thereof,
as a lease by Big Rivers to any LG&E Company of Station Two Assets, and (3) if
the Phase I Subcontract Term become effective, its sale of Station Two Unit
Output to LEM pursuant to the Power Purchase Agreement, to the extent of the
lesser of (i) the sales Tax imposed on Big Rivers with respect to the
consideration described in Section 3.3(a) of the
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Power Purchase Agreement, and (ii) the sales Tax that would have been imposed on
Big Rivers if the Phase II Assignment Term (rather than the Phase I Subcontract
Term) were effective as of the Effective Date, and (b) an LG&E Company shall pay
(or reimburse Big Rivers for) any and all sales and use Taxes imposed on (1)
Station Two Subsidiary's transfer of the End of Term Inventory and the End of
Term Personal Property to Big Rivers on date of expiration or termination of
this Agreement, and (2), if the Phase I Subcontract Term becomes effective, Big
Rivers' sale of Station Two Unit Output to LEM pursuant to the Power Purchase
Agreement and this Agreement, to the extent that the amount of such sales Tax
exceeds the amount of the Tax described in clause (a)(3) of this sentence. The
allocation of responsibility for sales and use Taxes pursuant to this Section
17.1 also shall apply to any Taxes enacted after the date hereof in replacement
of any such sales or use Tax.
17.2 Property Taxes. Big Rivers shall pay when finally due and owing all
property Taxes assessed, levied, or exacted on the Station Two Assets (but
specifically excluding for purposes of this Section 17.2 all Station Two
Inventory and Station Two Personal Property from the Station Two Assets) that
are the obligation of Big Rivers or Station Two Subsidiary under applicable Law
or pursuant to any of the Station Two Contracts, including, without limitation,
any property taxes that may be treated as an operating and maintenance expense
of Station Two and payable in whole or in part, as a component of the Capacity
charges due the trustee or Henderson, as the case may be, under Section 6.1 and
6.3 of the Station Two Power Sales Agreement. Where Station Two Subsidiary or
any other LG&E Company is required to pay such Taxes directly to the relevant
taxing authority, Henderson or the trustee, Big Rivers agrees to promptly
reimburse that LG&E Company for the same, but subject to the following sentence.
Station Two Subsidiary shall, following the Effective Date, reimburse Big Rivers
for thirty (30) percent of all such property Taxes described in the immediately
preceding sentence that are actually paid by Big Rivers and allocable to the
period beginning on the Effective Date and ending on the date of termination or
expiration of this Agreement; provided, however, that the thirty (30) percent
sharing ratio shall be changed to 43.64% for the year 2011 and to 52.54% as of
January 1, 2012 and remain at 52.54% throughout the remainder of the Term. In
the event that Big Rivers elects to reduce the Contract Limits pursuant to
Section 4.3(e) of the Power Purchase Agreement, the property Taxes sharing ratio
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shall be adjusted by multiplying Big Rivers' then applicable percentage share of
property taxes by the sum of one (1) plus the CCAP in effect on the date of
assessment of such taxes. Any adjustments to the property Tax sharing ratio made
pursuant to the preceding sentence shall be effective for taxable periods (or
portions thereof) beginning on the effective date for the Reduction in Contract
Limits set forth in Section 4.3(e) of the Power Purchase Agreement. For purposes
of this Section 17.2, property Taxes imposed on the Station Two Assets for a
taxable period shall be allocated to each day in such period on a pro rata
basis. Station Two Subsidiary shall reimburse Big Rivers for Station Two
Subsidiary's portion of such property Taxes within thirty (30) days of receiving
notice from Big Rivers showing the nature and amount of such property Taxes,
proof of Big Rivers' payment of such property Taxes, and the computation of
Station Two Subsidiary's share of such property Taxes. The allocation of
property Taxes pursuant to this Section 17.2 also shall apply to any Taxes
enacted and effective on or after the date hereof in replacement of such
property Tax.
17.3 Unidentified Asset-Related Taxes. Following the Effective Date, the
LG&E Companies shall pay when due all Taxes that are imposed upon Big Rivers
and/or Station Two Subsidiary in connection with the operation or maintenance of
the Station Two Assets that are presently the obligation of Big Rivers or
Station Two Subsidiary under applicable Law or pursuant to any of the Station
Two Contracts and that are not otherwise described in Section 17.1 or 17.2 of
this Agreement; provided, however, that this Section 17.3 shall not apply to (i)
any income or franchise Tax (except to the extent that LEC assumes an income or
franchise Tax pursuant to the Tax Indemnification Agreement) or (ii) any utility
gross receipts license Tax.
17.4 Change of Tax Law. Except as provided in Sections 17.1 and 17.2
concerning replacement Taxes, Big Rivers shall pay any Tax imposed on Big Rivers
that is attributable to a change in law or regulation (or any interpretation
thereof) after the Effective Date to the extent that the amount of such Tax does
not exceed the amount of the Tax that would have been imposed on Big Rivers if
the Phase II Assignment Term (rather than the Phase I Subcontract Term) had been
in effect as of the Effective Date. The LG&E Companies shall pay any Tax imposed
on Big Rivers following the Effective Date that is attributable to a
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change in law or regulation (or any interpretation thereof) after the Effective
Date to the extent that such Tax exceeds the amount of the Tax that would have
been imposed on Big Rivers if the Phase II Assignment Term (rather than the
Phase I Subcontract Term) had been in effect as of the Effective Date. Nothing
in this Section 17.4 shall relieve Big Rivers of its obligations under Section 8
of the Power Purchase Agreement or Big Rivers or any LG&E Company of their
respective obligations under Section 8.17 or Section 9.10 of this Agreement.
17.5 Other Taxes. Any Tax imposed on an LG&E Company or Big Rivers during
the Term of this Agreement and that is not specifically allocated between those
Parties (either by direct payment or reimbursement) pursuant to the Station Two
Contracts, Sections 17.1, 17.2, 17.3, or 17.4 of this Agreement, Article 11 of
the Participation Agreement, Section 8 of the Power Purchase Agreement, or the
Tax Indemnification Agreement, shall be borne by the Party that is primarily
obligated under governing Laws, to pay such Tax.
17.6 Kentucky Tax Rulings. At the request of Big Rivers or the LG&E
Companies, each of Big Rivers and the LG&E Companies shall request jointly and
in writing, that the KRC determine, or issue a certificate or other statement to
each of those Parties to the effect, that an exemption and/or a reduced rate of
property Tax are allowable with respect to all or any portion of the Station Two
Assets owned, leased and/or used by Big Rivers or Station Two Subsidiary in the
operation and maintenance of Station Two or the Reid Station for any taxable
period; provided, however, that, if the KRC determines that an exemption or
reduced rate of Tax is not allowable for a taxable period with respect to all or
any portion of the Station Two Assets, then the Parties shall also request that
the KRC determine the amount of such exemption or rate and advise Big Rivers and
the LG&E Companies of the nature and computation of the amount of Tax in
controversy. Big Rivers and the LG&E Companies shall have the right to
participate in the preparation and filing of any and all written and oral
submissions to the KRC for purposes of obtaining the determination, certificate,
and/or statement described in this Section 17.6, and each of those Parties shall
have the right to join in all negotiations and communications with the KRC for
such purpose. Each of Big Rivers and the LG&E Companies shall cooperate fully
and shall execute all applicable documents and
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necessary waivers of confidentiality of Tax and other information that is or may
be reasonably related to the subject matter of the determinations, statements,
and certificates described in this Section 17.6.
17.7 Appeal of Tax Assessment. Except as otherwise provided in the Tax
Indemnification Agreement, each Party shall have the right to appeal and contest
the assessment of any Tax that is or may be imposed upon such Party by operation
of law or that is allocated to such Party (either by direct payment or
reimbursement) pursuant to this Section 17, entitled "Taxes," Section 8 of the
Power Purchase Agreement or any other provision of this Agreement or any Station
Two Contract.
18. MISCELLANEOUS.
18.1 Miscellaneous Disclaimers. The respective covenants of the Parties
set forth in this Agreement are several and not joint and, except as expressly
provided otherwise, (a) the covenants of Big Rivers or Henderson made solely to
the LG&E Companies are for the benefit of only the LG&E Companies, (b) Big
Rivers and Henderson shall have no obligation or liability under this Agreement
to each other for a breach of any covenant made by either of them solely to any
LG&E Company set forth in this Agreement, and (c) except as expressly provided
in Sections 15 and 13.11 of this Agreement, this Agreement may not be assigned
to, or relied upon by, anyone other than the Parties hereto and WKEC.
18.2 No General Obligations of the City. Nothing herein contained shall
constitute general obligations of the City within Kentucky Constitutional
restrictions on such obligations. The obligations herein imposed on the City
shall be borne entirely from revenues or other legally available funds or
resources of Henderson's electric light and power system.
18.3 Notices. All notices, consents, waivers, demands, requests, payments
and other communications required or permitted to be made or given under this
Agreement by a Party to one or more other Parties, or under any other Operative
Document, must be in writing, and shall be addressed respectively as follows:
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For the City and HUC, addressed to:
City of Henderson, Kentucky
City Building
P.O. Box 716
Henderson, Kentucky 42420
Phone No.: (502) 831-1200
Kendel D. Bryan
Henderson Municipal Power & Light
P.O. Box 8
100 Fifth Street
Henderson, Kentucky 42420
Facsimile No.: (502) 826-9650
With a copy to:
Robert E. Ferdon, Esq.
O'Melveny & Myers LLP
Attorney at Law
Citicorp Center
153 East 53rd Street
54th Floor
New York, New York 10022-4611
Phone No.: (212) 326-2000
Facsimile: (212) 326-2061
Charles B. West, Esq.
The Law Firm Of Sheffer Hoffman
300 First Street
Henderson, Kentucky 42420
For Big Rivers, addressed to:
Michael Core
David Spainhoward
Big Rivers Electric Corporation
201 Third Street
Post Office Box 24
Henderson, Kentucky 42420
Phone No. (502) 827-2561
Facsimile: (502) 827-2558
With a copy to:
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James M. Miller, Esq.
Sullivan, Mountjoy, Stainback & Miller, P.S.C.
100 St. Ann Building
Post Office Box 727
Owensboro, Kentucky 42302-0727
Phone No. (502) 926-4000
Facsimile: (502) 683-6694
For Station Two Subsidiary, LEM, WKEC, LEC, or their Affiliates,
addressed to the Chief Operating Officer of such entity:
c/o LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-2585
With a copy to:
John R. McCall, Esq.
Executive Vice President, General Counsel
and Secretary
LG&E Energy Corp.
220 West Main Street
Louisville, KY 40202
Phone: (502) 627-3665
Facsimile: (502) 627-2585
Daniel E. Fisher, Esq.
Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202-3197
Phone No. (502) 587-3620
Facsimile: (502) 587-3695
Each Party may change such address by notice given to the other Parties in the
manner set forth above. All such notices shall be effective, and all such other
consents, waivers, demands, requests, payments and other communications shall be
deemed to have been
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delivered (i) if sent by messenger or courier service, when delivered, (ii) if
sent by U.S. Mail, three days after posting, assuming it is then or thereafter
actually delivered to the relevant address in the ordinary course, and (iii) if
sent by facsimile, when sent (provided that, if sent by facsimile, a duplicate
copy thereof is promptly sent by U.S. Mail which is actually delivered to the
relevant address in the ordinary course); provided that if a provisions hereof
specifies that a period shall be measured by a fixed number of days after
receipt of a notice, notice shall be effective when received, irrespective of
the means of delivery.
18.4 Waiver. The failure of a Party to insist on the strict performance of
any provision of this Agreement or to exercise any right, power or remedy upon a
breach of any provision of this Agreement shall not constitute a waiver of any
provision of this Agreement or limit the Party's right thereafter to enforce any
provision or exercise any right.
18.5 Amendment and Modification. No amendment or modification of this
Agreement shall be valid unless made in writing and duly executed by the
Parties.
18.6 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the Commonwealth of Kentucky.
18.7 Successors and Assigns. This Agreement shall bind and inure to the
benefit of the Parties and their respective successors and permitted assigns.
18.8 Counterparts. This Agreement may be executed in counterparts, each of
which taken together shall constitute a single Agreement.
18.9 Severability. If any provision of this Agreement or the application
thereof to any Person or circumstance shall to any extent be held in any
proceeding to be invalid, illegal or unenforceable, the remainder of this
Agreement, or the application of such provision to such Persons or circumstances
other than those to which it was held to be invalid, illegal or
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unenforceable, shall not be effected thereby, and shall be valid, legal and
enforceable to the fullest extent permitted by law, but only if and to the
extent such enforcement would not materially and adversely frustrate the
Parties' objectives as expressed herein. Notwithstanding the foregoing, the
Parties hereto shall endeavor in good faith and negotiations to replace the
invalid, illegal or unenforceable provisions with valid provisions, the economic
effect of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
18.10 Headings. The headings in this Agreement are included for purposes
of convenience only and should not be considered a part of this Agreement in
construing or interpreting any provision hereof.
18.11 Entire Agreement. This Agreement, including all attached Exhibits
and Schedules, together with the Station Two Contracts contain the entire and
final understanding of the Parties and supersedes all prior agreements and
understandings between the parties related to the subject matter of those
agreements.
18.12 Construction. This Agreement was the product of negotiations between
the Parties and, therefore, the rule of contract construction that an agreement
shall be construed against the drafter shall not be applied to this Agreement.
18.13 Production of Operative Documents. At or prior to the Closing, the
LG&E Companies and Big Rivers shall deliver to Henderson an executed copy of all
of the Operative Documents.
18.14 Zero Capacity Allocations. Notwithstanding anything contained
elsewhere in this Agreement or any Station Two Contract to the contrary, the
consummation of the transactions contemplated in this Agreement (including
without limitation, the Phase II Assignment) shall not, in and of themselves, be
deemed to cause Big Rivers' allocation of Capacity from Station
-250-
<PAGE>
Two to be reduced to zero, it being expressly understood by the Parties that,
throughout the Term, such Capacity from Station Two shall at no time be deemed
to be so reduced to zero for purposes of the Station Two Contracts unless and
until the allocation of Station Two Capacity to Big Rivers under the Station Two
Contracts and to Station Two Subsidiary under the Assigned Station Two Contracts
shall have each been reduced to zero.
18.15 Continuation of Agreement.
(a) Big Rivers recognizes and acknowledges that the RUS, the Members and
the LG&E Companies have in good faith entered into the transactions to which
this Agreement and the other Operative Documents relate, and have agreed to
consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for the
stated Term (i.e., approximately 25 years). Big Rivers has informed the RUS, the
Members and the LG&E Companies that Big Rivers has in good faith entered into
this Agreement in reliance upon and with the specific intent of continuing this
transaction through the stated term (i.e., approximately 25 years). In order to
enable Big Rivers to comply with certain requirements of the KPSC related to
approval of its proposed rates, and to provide additional assurances of its good
faith and commitment, and without in any way intending to reduce or otherwise
avoid abiding by this Agreement throughout its stated Term (i.e., approximately
25 years), and without any implication by any of the Parties that Big Rivers is
or would be entitled to attempt to reduce or otherwise avoid the terms of this
Agreement, Big Rivers additionally commits and undertakes that for the period
prior to January 1, 2012, in the event of any filing by Big Rivers of a petition
or similar filing for bankruptcy or reorganization or arrangement under any
federal or state bankruptcy or insolvency or similar Law, or the commencement of
involuntary proceedings against Big Rivers under any such Law, neither Big
Rivers nor its successors or assigns, if any, shall file, direct the filing of,
join in, consent to, or otherwise support any other party to any such
proceedings in a motion, complaint, pleading, statement, testimony or otherwise
make any attempt to terminate, reject or modify this Agreement (other than in
accordance with its terms) under Section 365 of the United States Bankruptcy
Code, 11 U.S.C. ss. 101, et seq., as it
-251-
<PAGE>
subsequently may be amended, modified or supplemented or any other similar,
applicable federal or state bankruptcy or insolvency laws (the "Insolvency
Assurance"). Thereafter, Big Rivers shall continue the Insolvency Assurance
unless and until the RUS, in the exercise of its discretion, were to consent to
any of the foregoing. In all events and throughout the Term, each of the RUS,
the Members and the LG&E Companies shall be entitled to rely upon the specific
provisions of this Agreement, including but not limited to the stated Term
(i.e., approximately 25 years), and shall be entitled to take whatever actions
may prove to be necessary or appropriate to maintain the benefit of their
bargain in the event that Big Rivers ever attempts to cause the rejection or
termination of this Agreement (other than in accordance with its terms) in a
subsequent bankruptcy or reorganization proceeding or otherwise.
(b) The LG&E Companies recognize and acknowledge that the RUS, the Members
and Big Rivers have in good faith entered into the transactions to which this
Agreement and the other Operative Documents relate, and have agreed to
consummate those transactions, in specific reliance upon the fact that the
transactions contemplated in the Operative Documents shall continue for the
stated Term (i.e., approximately 25 years). The LG&E Companies have informed the
RUS, the Members and Big Rivers that the LG&E Companies have in good faith
entered into this Agreement in reliance upon and with the specific intent of
continuing this transaction through the stated term (i.e., approximately 25
years). In order to facilitate the approval of the proposed rates of Big Rivers
and to provide additional assurances of their good faith and commitment, and
without in any way intending to reduce or otherwise avoid abiding by this
Agreement throughout its stated Term (i.e., approximately 25 years), and without
any implication by any of the Parties that any of the LG&E Companies is or would
be entitled to attempt to reduce or otherwise avoid the terms of this Agreement,
the LG&E Companies additionally commit and undertake that for the period prior
to January 1, 2012, in the event of any filing by any of the LG&E Companies of a
petition or similar filing for bankruptcy or reorganization or arrangement under
any federal or state bankruptcy or insolvency or similar Law, or the
commencement of involuntary proceedings against any of the LG&E Companies under
any such Law, none of the LG&E Companies or their respective successors or
assigns, if any, shall file, direct the filing of, join in, consent to, or
otherwise support any other party
-252-
<PAGE>
to any such proceedings in a motion, complaint, pleading, statement, testimony
or otherwise make any attempt to terminate, reject or modify this Agreement
(other than in accordance with its terms) under Section 365 of the United States
Bankruptcy Code, 11 U.S.C. ss. 101, et seq., as it subsequently may be amended,
modified or supplemented or any other similar, applicable federal or state
bankruptcy or insolvency laws (the "Insolvency Assurance"). Thereafter, the LG&E
Companies shall continue the Insolvency Assurance unless and until the RUS, in
the exercise of its discretion, were to consent to any of the foregoing. In all
events and throughout the Term, each of the RUS, the Members and Big Rivers
shall be entitled to rely upon the specific provisions of this Agreement,
including but not limited to the stated Term (i.e., approximately 25 years), and
shall be entitled to take whatever actions may prove to be necessary or
appropriate to maintain the benefit of their bargain in the event that any of
the LG&E Companies ever attempts to cause the rejection or termination of this
Agreement (other than in accordance with its terms) in a subsequent bankruptcy
or reorganization proceeding or otherwise.
(c) Nothing in this Section 18.15 shall modify, reduce or diminish: (i)
the rights of the RUS under the New RUS Loan Documents (as defined in that
certain New RUS Loan Agreement between Big Rivers and the RUS to be executed and
delivered on the Effective Date; (ii) the rights of the Mortgagees under the New
RUS Mortgage (as defined in said New RUS Loan Agreement); including without
limitation, any right to withhold consent with respect to any sale or
disposition of Big Rivers' property except on terms acceptable to the RUS and/or
such mortgages; but subject in the case of (i) or (ii) above, in all cases to
the Non-Disturbance Agreement.
IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the
date first written above.
CITY OF HENDERSON, KENTUCKY
By: /s/ Glenn L. Johnson
----------------------------------
-253-
<PAGE>
Title: Mayor
-------------------------------
("City")
CITY OF HENDERSON UTILITY
COMMISSION
By: /s/ B.E. Higginson
----------------------------------
Title: Chairman
-------------------------------
("HUC")
BIG RIVERS ELECTRIC CORPORATION
By: /s/ Michael H. Core
----------------------------------
Title: President and CEO
-------------------------------
("Big Rivers")
WKE STATION TWO INC.
By: /s/ George Basinger
----------------------------------
Title: President
-------------------------------
("Station Two Subsidiary")
LG&E ENERGY MARKETING INC.
By: /s/ John R. McCall
----------------------------------
Title: Vice President and Secretary
-------------------------------
("LEM")
-254-
<PAGE>
WESTERN KENTUCKY ENERGY CORP.
By: /s/ George Basinger
----------------------------------
Title: President
-------------------------------
("WKEC")
-255-
<PAGE>
EXHIBIT 10.90
FIRST AMENDMENT TO
LG&E ENERGY CORP. SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN
1. Section 3.2 shall be deleted and replaced in its entirety to read as
follows:
"Section 3.2 FORMS OF PAYMENT
The normal form of benefit payment (to which the formula in Section 3.1
applies) shall be a straight life annuity. Prior to the Member's benefit
commencement date, he may elect to receive his benefit in the form of an
actuarially equivalent (based on the factors set forth in Section 3.1)
joint and survivor annuity, which shall provide a reduced monthly benefit
payable for the life of the Member and continued thereafter in an amount
of one of the following: fifty percent (50%), sixty-six and two-thirds
percent (66 2/3%), seventy-five percent (75%), or one hundred percent
(100%) to a beneficiary designated in writing by the Member."
2. Article 3 shall be further amended by adding a new Section 3.5 to the
end thereof to read as follows:
" Section 3.5 PRE-RETIREMENT DEATH BENEFIT
A. Eligibility: If a Member whose age is at least fifty (50) and who has
been credited with five (5) years or more of Service or a Member who has
been fully vested pursuant to Section 12.2, dies after September 2, 1998
but prior to commencing benefits under Section 3.1, Section 3.3 or Section
3.4 herein, then the Member's Beneficiary shall be entitled to a
pre-retirement death benefit, pursuant to this Section.
B. Amount of Benefit: The Pre-retirement Death Benefit shall equal fifty
percent (50%) of the Member's accrued benefit calculated in accordance
with Section 3.1 at the time of the Member's death.
C. Form of Distribution. The Pre-retirement Death Benefit shall be payable
as a monthly annuity over the life expectancy of the Beneficiary, except
in the case of a non-spouse Beneficiary whose life expectancy is greater
than five (5) years, in which case the benefit shall be payable in sixty
(60) equal monthly payments." and
The amendments described herein shall be effective as of September 2, 1998.
<PAGE>
EXHIBIT 10.91
FIRST AMENDMENT TO
LOUISVILLE GAS AND ELECTRIC COMPANY AND
LG&E ENERGY CORP. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FOR R.W. HALE
1. Section 3.2 shall be deleted and replaced in its entirety to read as follows:
"Section 3.2 FORMS OF PAYMENT
The normal form of benefit payment (to which the formula in Section 3.1
applies) shall be a straight life annuity. Prior to the Employees benefit
commencement date, he may elect to receive his benefit in the form of an
actuarially equivalent (based on the factors set forth in Section 3.1)
joint and survivor annuity, which shall provide a reduced monthly benefit
payable for the life of the Employee and continued thereafter in an amount
of one of the following: fifty percent (50%), sixty-six and two-thirds
percent (66 2/3%), seventy-five percent (75%), or one hundred percent
(100%) to a beneficiary designated in writing by the Employee."
2. Article 3 shall be further amended by adding a new Section 3.5 to the
end thereof to read as follows:
"Section 3.5 PRE-RETIREMENT DEATH BENEFIT
A. Eligibility: If the Employee dies after September 2, 1998 but prior to
commencing benefits under Section 3.1, Section 3.3 or Section 3.4 herein,
then the Employee's Beneficiary shall be entitled to a pre-retirement
death benefit, pursuant to this Section.
B. Amount of Benefit: The Pre-retirement Death Benefit shall equal fifty
percent (50%) of the Employee's accrued benefit calculated in accordance
with Section 3.1 at the time of the Employee's death.
C. Form of Distribution. The Pre-retirement Death Benefit shall be payable
as a monthly annuity over the life expectancy of the Beneficiary, except
in the case of a non-spouse Beneficiary whose life expectancy is greater
than five (5) years, in which case the benefit shall be payable in sixty
(60) equal monthly payments."; and
The amendments described herein shall be effective as of September 2,
1998.
<PAGE>
LG&E CAPITAL CORP.
MEDIUM-TERM NOTES, SERIES A
U.S. $150,000,000 OF 5 3/4% RESET PUT SECURITIES
TERMS AGREEMENT
October 29, 1998
Morgan Stanley & Co. Incorporated ("Morgan Stanley")
1585 Broadway, 2nd Floor
New York, New York 10036
Chase Securities Inc. ("CSI")
270 Park Avenue
New York, New York 10017
Merrill Lynch & Co. ("Merrill")
Merrill Lynch, Pierce, Fenner & Smith Incorporated
World Financial Center - North Tower
250 Vesey Street
New York, New York 10281
J.P. Morgan Securities Inc. ("JPMSI")
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
LG&E Capital Corp., a Kentucky corporation (the "Company"), proposes to
issue and sell to Morgan Stanley, CSI, Merrill and JPMSI (the "Agents"), subject
in all respects to the terms and conditions of the Private Placement Agency
Agreement dated February 3, 1998 (the "Agreement"), U.S. $150,000,000 aggregate
principal amount of its Medium-Term Notes, Series A, described in the Pricing
Supplement (as defined below). This agreement (this "Terms Agreement") is
supplemental to the Agreement. The notes to be issued pursuant to this Terms
Agreement are referred to herein as the "Notes". All terms used herein have the
meanings given to them in the Agreement except as otherwise indicated.
<PAGE>
2
The following terms and conditions of the Notes are more extensively
described in the Company's Pricing Supplement, dated October 29, 1998, relating
to the Notes (the "Pricing Supplement"):
Title: 5 3/4% REset Put Securities ("REPS(SM)")*
Trade Date: October 29, 1998
Original Issue Date: November 3, 1998
Principal Amount: $150,000,000
Price to Public: 100% of Principal Amount, plus accrued
interest, if any, from and including
November 3, 1998
Purchase Price: 100% of Principal Amount, plus accrued
interest, if any, from and including
November 3, 1998
Commission: $525,000
Interest Rate: To but excluding November 1, 2001, 5 3/4%.
From and including November 1, 2001, as
described in the Pricing Supplement under
"Additional Terms--Interest Rate and
Interest Payment Dates"
Form: Book-Entry Only
Interest Payment Dates: November 1 and May 1 of each year,
commencing May 1, 1999
Maturity Date: November 1, 2011, subject to the purchase
and repurchase rights referred to below
Remarketing: The Notes may be purchased by the
Remarketing Dealer prior to the Maturity
Date, as described in the Pricing Supplement
under "Description of the REPS--Purchase by
the Remarketing Dealer; Remarketing"
Remarketing Dealer: Morgan Stanley & Co. Incorporated
Repurchase by the Company: The Notes are subject to repurchase by the
Company prior to the Maturity Date if the
Notes are not purchased by the Remarketing
Dealer, as described in the Pricing
Supplement under " Description of the REPS
--Mandatory Repurchase by the
- --------
* REPS is a service mark of Morgan Stanley Dean Witter & Co.
<PAGE>
3
Company" and "--Optional Repurchase by the
Company"
Purchase Date and Time: 10:00 a.m., New York time, on November 3,
1998
Place for Delivery of Notes and
Payment Therefor: New York, New York
Method of Payment: Wire transfer of immediately available funds
Address for notices: As set forth in Section 6 hereof
Period during which additional debt securities may not be sold pursuant to
Section 4(m) of the Agreement (until the Purchase Date, unless otherwise
specified herein): From the date hereof through and including November 3, 1998.
1. On the terms and subject to the conditions of the Agreement and this
Terms Agreement, the Company hereby agrees to issue the Notes and to pay to the
Agents the aggregate Commission set forth above, and the Agents agree to
purchase from the Company, at a purchase price of 100% of the principal amount
of the Notes, plus accrued interest, if any, from and including November 3, 1998
(the "Purchase Price"), the entire principal amount of Notes; provided, however,
that the Company's obligations hereunder are subject to the receipt by the
Company on or prior to the Purchase Date of documentation evidencing the
termination (without payment by either party) of the transactions described and
confirmed in the Confirmation dated September 28, 1998 between Morgan Stanley
Capital Services Inc. and the Company.
2. As a condition precedent to the Agents' obligations to consummate the
transaction referred to above, the Agents shall have received the following: (1)
a letter from each of John R. McCall, Esq., the General Counsel of the Company,
and Gardner, Carton & Douglas, counsel for the Company, to the effect set forth
in Section 6(c) of the Agreement and such other legal matters as the Agents
shall reasonably request; (2) a letter from counsel for the Agents, to the
effect set forth in Section 6(c) of the Agreement, and such other legal matters
as the Agents shall reasonably request; (3) a letter from Arthur Anderson LLP,
to the effect set forth in Section 6(d) of the Agreement; and (4) a certificate
of the Company and LG&E Energy Corp. dated as of November 3, 1998 to the effect
set forth in Section 6(b) of the Agreement.
3. This Terms Agreement is subject to termination by any Agent, as to
itself, as set forth in Section 7 of the Agreement. In the event of such
termination, no party shall have any liability to any other party hereto, except
as provided in Section 7 of the Agreement and except for any direct liability
arising before or in relation to such termination.
4. If at any time when an Offering Memorandum is to be delivered in
connection with sales of the Notes (including any sale of the Notes by the
Remarketing Dealer or any Agent or any of their affiliates in connection with
any remarketing referenced above), any event shall occur or condition shall
exist as a result of which it is necessary, in the reasonable opinion of counsel
for such Agent or for the Company, to amend or supplement any Offering
Memorandum or Pricing Supplement in order that such Offering Memorandum or
Pricing Supplement will not
<PAGE>
4
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
the Company shall prepare such amendment or supplement as may be necessary to
correct such statement or omission, or prepare any such new offering memorandum,
offering memorandum supplement and pricing supplement as may be necessary for
such purpose, and furnish to such Agent such number of copies of such amendment,
supplement or other document as they may reasonably request. In addition, the
Company shall, in connection with any such sale of the applicable principal
amount of Notes by any Agent or any of its affiliates in connection with such
remarketing, (i) execute and deliver or cause to be executed and delivered legal
documentation (including, but not limited to, a purchase agreement with
customary indemnities, covenants, representations and warranties, comfort
letters and legal opinions) reasonably requested to facilitate a successful
Coupon Reset Process in accordance with the terms of the Remarketing Agreement,
in form and substance reasonably satisfactory to such Agent, (ii) provide
promptly upon request updated consolidated financial statements as provided for
in the Agreement, and (iii) to the extent the Company and such Agent deem
reasonably necessary for successful completion of the Coupon Reset Process, make
available senior management of the Company for road show and one-on-one
presentations. The Remarketing Dealer and or such Agent will conduct the
remarketing in a manner (i) substantially consistent with the original offering
and sale of the Notes, to the extent required by law, and (ii) which complies
with any applicable transfer restrictions set forth in the Indenture; provided,
however, that each of the Remarketing Dealer and the Agents acknowledges and
agrees that the Notes have not been registered or qualified, and the Company has
no obligations to register or qualify, the Notes under the Securities Act of
1933, as amended, or, subject to Section 4(i) of the Agreement, any other
applicable securities laws.
5. On July 31, 1998, Standard & Poor's downgraded its ratings of the
Company's senior unsecured debt to "A" from "A+" and LG&E Energy Corp.'s senior
unsecured debt and preferred stock to "A" from "A+". Solely with respect to the
Notes, the Agents hereby waive the condition to their obligations set forth in
Section 5(m) (the No Downgrade condition) of the Agreement with respect to the
July 31, 1998 downgrade. Such waiver shall not apply to (i) any downgrading,
surveillance or review of the Company's or LG&E Energy Corp.'s debt securities
or preferred stock as set forth in Section 5(m) of the Agreement occurring from
and after the date hereof and prior to the Purchase Date, (ii) any other
condition to the Agents' obligations set forth in the Agreement or (iii) any
other notes issued or to be issued by the Company.
6. All notices to the Agents pursuant to Section 15 of the Agreement shall
be sent (i) with respect to Morgan Stanley, to Morgan Stanley & Co.
Incorporated, 1585 Broadway, 3rd Floor, New York, New York 10036, Attention:
DPG, Telephone: 212-761-2566, Telecopy: 212-761-0580 and (ii) with respect to
any other Agent, at the address for such Agent set forth in Section 15 of the
Agreement.
7. This agreement is a Terms Agreement referred to in the Agreement and
shall be governed by and construed in accordance with the laws of the State of
New York and shall be binding upon the parties hereto and their respective
successors.
<PAGE>
5
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement between the
Company and you.
Very truly yours,
LG&E CAPITAL CORP.
By: /s/ C. A. Markel
--------------------------------------------
Name: Charles A. Markel III
Title: Chief Financial Officer and Treasurer
LG&E ENERGY CORP.
By: /s/ C. A. Markel
--------------------------------------------
Name: Charles A. Markel III
Title: Vice President - Finance and Treasurer
<PAGE>
6
Accepted as of the date hereof:
MORGAN STANLEY & CO.
INCORPORATED
By: /s/ signed
-------------------------------------
Name:
Title:
CHASE SECURITIES INC.
By: /s/ William Dexter Rogers
-------------------------------------
Name: William D. Rogers
Title: Managing Director
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: /s/ Richard N. Doyle
-------------------------------------
Name:
Title:
J.P. MORGAN SECURITIES INC.
By: /s/ Kevin O'Brien
-------------------------------------
Name:
Title:
<PAGE>
EXHIBIT 12.01
KENTUCKY UTILITIES COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of $)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Net Income......................................... $ 72,764 $ 85,713 $ 86,163 $ 76,842 $ 77,512
Add:
Federal income taxes - current..................... 45,704 38,500 39,221 24,451 38,594
State income taxes - current....................... 10,008 8,718 8,248 5,324 9,157
Deferred Federal income taxes - net................ (2,492) 2,971 1,845 11,759 (1,479)
Deferred State income taxes - net.................. 54 1,635 1,905 3,743 (80)
Deferred investment tax credit-net................. - - - (71) (86)
Investment tax credit - net........................ (3,829) (4,036) (4,013) (4,024) (4,024)
Undistributed income of............................
Electric Energy, Inc............................ 622 (37) 24 99 (39)
Fixed charges...................................... 39,318 40,324 40,266 40,694 35,136
------- ------- ------- ------- -------
Earnings......................................... 162,149 173,788 173,659 158,817 154,691
---------- --------- --------- --------- ---------
Fixed Charges:
Interest Charges per statements of income.......... 38,660 39,729 39,688 40,116 34,558
Add:
One-third of rentals charged to
operating expense (1).......................... 658 595 578 578 578
---------- --------- --------- --------- ---------
Fixed charges................................ $ 39,318 $ 40,324 $ 40,266 $ 40,694 $ 35,136
---------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges.................... 4.12 4.31 4.31 3.90 4.40
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
NOTE:
(1) In the Company's opinion, one-third of rentals represents a reasonable
approximation of the interest factor.
<PAGE>
EXHIBIT 12.02
LOUISVILLE GAS AND ELECTRIC COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Thousands of $)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings:
Income before cumulative effect of a change
in accounting principle per statements
of income........................................ $ 78,120 $ 113,273 $ 107,941 $ 83,184 $ 61,689
Add:
Federal income taxes - current..................... 39,618 59,074 34,019 35,824 30,926
State income taxes - current....................... 10,164 14,754 7,589 8,795 7,726
Deferred Federal income taxes - net................ 2,167 (4,171) 19,816 4,261 (950)
Deferred State income taxes - net.................. 636 778 6,648 2,788 956
Investment tax credit - net........................ (4,312) (4,342) (4,406) (4,742) (4,619)
Fixed charges...................................... 37,571 40,928 42,198 43,550 44,665
---------- --------- --------- --------- ---------
Earnings......................................... 163,964 220,294 213,805 173,660 140,393
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Fixed Charges:
Interest Charges per statements of income.......... 36,322 39,190 40,242 41,918 42,856
Add:
Interest income (1).............................. - - 409 - -
One-third of rentals charged to
operating expense (2).......................... 1,249 1,738 1,547 1,632 1,809
---------- --------- --------- --------- ---------
Fixed charges................................ $ 37,571 $ 40,928 $ 42,198 $ 43,550 $ 44,665
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Ratio of Earnings to Fixed Charges.................... 4.36 5.38 5.07 3.99 3.14
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
</TABLE>
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.
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANTS
Louisville Gas and Electric Company (a Kentucky corporation), Kentucky
Utilities Company (a Kentucky and Virginia corporation), LG&E Capital Corp.
(a Kentucky corporation), WKE Corp. (a Kentucky corporation), Western
Kentucky Energy Corp. (a Kentucky corporation), LG&E Power Inc. (a Delaware
corporation), LG&E Power Services Inc. (a California corporation), LG&E Power
Operations Inc. (a California corporation), LG&E Energy Marketing Inc. (an
Oklahoma corporation), and LG&E International Inc. (a Delaware corporation)
are significant subsidiaries of LG&E Energy Corp. Louisville Gas and
Electric Company, Kentucky Utilities Company and LG&E Capital Corp. are
wholly-owned direct subsidiaries of LG&E Energy Corp. WKE Corp., LG&E Power
Inc. and LG&E International Inc. are wholly-owned direct subsidiaries of LG&E
Capital Corp. Western Kentucky Energy Corp. is a wholly-owned direct
subsidiary of WKE Corp. LG&E Energy Marketing Inc., LG&E Power Services Inc.
and LG&E Power Operations are wholly-owned direct subsidiaries of LG&E Power
Inc.
LG&E Capital Corp., directly and through it subsidiaries and affiliates,
including WKE Corp., LG&E Power Inc. and LG&E Power Inc., is a holding company
for non-regulated domestic energy and energy related operations, investments,
activities and services.
WKE Corp., together with Western Kentucky Energy Corp. and two other
subsidiaries, leases and operates power generation facilities in western
Kentucky and related assets.
LG&E Power Inc. conducts non-regulated domestic energy operations and activities
through its subsidiaries and affiliates, including LG&E Energy Marketing Inc.,
LG&E Power Services Inc. and LG&E Power Operations Inc. LG&E Energy Marketing
Inc., together with one subsidiary operating in the United States, markets and
brokers electric power and natural gas in the United States. LG&E Power Services
Inc. operates and maintains domestic power generation facilities. LG&E Power
Operations Inc., together with approximately 37 subsidiaries or affiliates
operating in the United States, owns interests in domestic power generation
facilities. Approximately twenty-one other subsidiaries of LG&E Power Inc. (20
operating in the United States and one operating in Canada) together are
involved in the gathering, processing, storage and transportation of natural gas
in the United States and the marketing of natural gas in Canada.
LG&E International Inc., together with eight subsidiaries operating in the
United States, three operating in Argentina and two in Spain, holds LG&E Energy
Corp.'s investments in the Argentine gas distribution companies and its current
investments in foreign power generation facilities.
Louisville Gas and Electric Company has no subsidiaries.
Kentucky Utilities Company has one subsidiary, Lexington Utilities Company (a
Kentucky corporation).
<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 27, 1999 (except with respect to the
matters discussed in the eighth and ninth paragraphs of Note 5, as to which
the date is February 12, 1999, and Note 22, as to which the date is March 15,
1999) included in this Form 10-K, into the Company's previously filed
Registration Statement No. 333-43985 relating to the Company's Savings Plan
and the 401(K) Savings Plan for Employees of the Louisville Gas and Electric
Company who are represented by Local 2100 of IBEW, Post-Effective Amendment
No. One to Registration Statement No. 33-56942 and Post-Effective Amendment
No.1-C to Registration Statement No. 33-33687 relating to the Automatic
Dividend Reinvestment and Stock Purchase Plan of the Company, Registration
Statement No. 333-05457 and Post-Effective Amendment No. 2-C to Registration
Statement No. 33-33687 relating to the Employee Common Stock Purchase Plan of
the Company, Registration No. 333-05459 and Post-Effective Amendment No. Two
to Registration Statement No. 33-38557 relating to the Omnibus Long-Term
Incentive Plan of the Company, Post-Effective Amendment No. One to
Registration Statement No. 33-56525 relating to the Stock Option Plan for
Non-Employee Directors of the Company, and Post-Effective Amendment No. One
to Registration Statement No. 33-60765 relating to the Deferred Stock
Compensation Plan for Non-Employee Directors of the Company.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Louisville, Kentucky
March 26, 1999
<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 27, 1999 (except with respect to the
matters discussed in the eighth and ninth paragraphs of Note 3, as to which the
date is February 12, 1999, and Note 16, as to which the date is March 11, 1999)
included in this Form 10-K, into Louisville Gas and Electric Company's
previously filed Registration Statement No.
33-13427.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Louisville, Kentucky
March 26, 1999
<PAGE>
Exhibit 23.03
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of our
report dated January 27, 1999 (except with respect to the matters discussed
in the fifth paragraph of Note 3, as to which the date is February 12, 1999,
and Note 13, as to which the date is March 8, 1999) on the financial
statements of Kentucky Utilities Company in this Form 10-K.
/S/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Louisville, Kentucky
March 26, 1999
<PAGE>
Exhibit 24.01
POWER OF ATTORNEY
WHEREAS, LG&E ENERGY CORP., a Kentucky corporation, is to file with the
Securities and Exchange Commission, under the provisions of the Securities
Act of 1934, as amended, its Annual Report on Form 10-K for the year ended
December 31, 1998 (the 1998 Form 10-K); and
WHEREAS, each of the undersigned holds the office or offices in LG&E ENERGY
CORP. set opposite his or her name;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER
W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them,
individually, his attorney, with full power to act for him and in his name,
place, and stead, to sign his name in the capacity or capacities set forth
below to the 1998 Form 10-K and to any and all amendments to such 1998 Form
10-K and hereby ratifies and confirms all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals
this 3rd day of March 1999.
/s/ Roger W. Hale /s/ Anne H. McNamara
- --------------------- --------------------------
ROGER W. HALE ANNE H. McNAMARA
Chairman and Chief Director
Executive Officer
/s/ Mira S. Ball /s/ T. Ballard Morton, Jr.
- --------------------- --------------------------
MIRA S. BALL T. BALLARD MORTON, JR.
Director; Director;
/s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr.
- --------------------- --------------------------
WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR.
Director Director
/s/ Owsley Brown II /s/ William L. Rouse, Jr.
- --------------------- --------------------------
OWSLEY BROWN II WILLIAM L. ROUSE, JR.
Director Director
/s/ Carol M. Gatton /s/ Charles L. Shearer, Ph.D.
- --------------------- -----------------------------
CAROL M. GATTON CHARLES L. SHEARER, PH.D.
Director Director
/s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D.
- --------------------- ---------------------------
JEFFERY T. GRADE LEE T. TODD, JR., PH.D.
Director Director
/s/ J. David Grissom /s/ R. Foster Duncan
- --------------------- --------------------------
J. DAVID GRISSOM R. FOSTER DUNCAN
Director Chief Financial Officer
1
<PAGE>
Exhibit 24.01
POWER OF ATTORNEY (cont.)
/s/ David B. Lewis /s/ Michael D. Robinson
- --------------------- --------------------------
DAVID B. LEWIS MICHAEL D. ROBINSON
Director Vice President and Controller
STATE OF KENTUCKY )
)ss.
COUNTY OF JEFFERSON )
On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public,
State of Kentucky at Large, personally appeared the above named directors and
officers of LG&E ENERGY CORP., a Kentucky corporation, and known to me to be
the persons whose names are subscribed to the foregoing instrument, and they
severally acknowledged to me that they executed the same as their own free
act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
on the date above set forth.
My Commission expires: /s/ Margaret L. Cowan
July 28, 2000 --------------------------------
Margaret L. Cowan, Notary Public
State of Kentucky at Large
2
<PAGE>
Exhibit 24.02
POWER OF ATTORNEY
WHEREAS, LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, is to
file with the Securities and Exchange Commission, under the provisions of the
Securities Act of 1934, as amended, its Annual Report on Form 10-K for the
year ended December 31, 1998 (the 1998 Form 10-K); and
WHEREAS, each of the undersigned holds the office or offices in LOUISVILLE
GAS AND ELECTRIC COMPANY set opposite his or her name;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER
W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them,
individually, his attorney, with full power to act for him and in his name,
place, and stead, to sign his name in the capacity or capacities set forth
below to the 1998 Form 10-K and to any and all amendments to such 1998 Form
10-K and hereby ratifies and confirms all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals
this 3rd day of March 1999.
/s/ Roger W. Hale /s/ Anne H. McNamara
- ---------------------- ------------------------------
ROGER W. HALE ANNE H. McNAMARA
Chairman and Chief Director
Executive Officer
/s/ Mira S. Ball /s/ T. Ballard Morton, Jr.
- ---------------------- ------------------------------
MIRA S. BALL T. BALLARD MORTON, JR.
Director; Director;
/s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr.
- ---------------------- ------------------------------
WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR.
Director Director
/s/ Owsley Brown II /s/ William L. Rouse, Jr.
- ---------------------- ------------------------------
OWSLEY BROWN II WILLIAM L. ROUSE, JR.
Director Director
/s/ Gene P. Gardner /s/ Charles L. Shearer, Ph.D.
- ---------------------- ------------------------------
GENE P. GARDNER CHARLES L. SHEARER, PH.D.
Director Director
/s/ Carol M. Gatton /s/ Dr. Donald C. Swain
- ---------------------- ------------------------------
CAROL M. GATTON DR. DONALD C. SWAIN
Director Director
/s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D.
- ---------------------- ------------------------------
JEFFERY T. GRADE LEE T. TODD, JR., PH.D.
Director Director
1
<PAGE>
Exhibit 24.02
POWER OF ATTORNEY (cont.)
/s/ J. David Grissom /s/ R. Foster Duncan
- ---------------------- ------------------------------
J. DAVID GRISSOM R. FOSTER DUNCAN
Director Chief Financial Officer
/s/ David B. Lewis /s/ Michael D. Robinson
- ---------------------- ------------------------------
DAVID B. LEWIS MICHAEL D. ROBINSON
Director Vice President and Controller
STATE OF KENTUCKY )
)ss.
COUNTY OF JEFFERSON )
On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public,
State of Kentucky at Large, personally appeared the above named directors and
officers of LOUISVILLE GAS AND ELECTRIC COMPANY, a Kentucky corporation, and
known to me to be the persons whose names are subscribed to the foregoing
instrument, and they severally acknowledged to me that they executed the same
as their own free act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
on the date above set forth.
My Commission expires: /s/ Margaret L. Cowan
July 28, 2000 --------------------------------
Margaret L. Cowan, Notary Public
State of Kentucky at Large
2
<PAGE>
Exhibit 24.03
POWER OF ATTORNEY
WHEREAS, KENTUCKY UTILITIES COMPANY, a Kentucky corporation, is to file with
the Securities and Exchange Commission, under the provisions of the
Securities Act of 1934, as amended, its Annual Report on Form 10-K for the
year ended December 31, 1998 (the 1998 Form 10-K); and
WHEREAS, each of the undersigned holds the office or offices in KENTUCKY
UTILITIES COMPANY set opposite his or her name;
NOW, THEREFORE, each of the undersigned hereby constitutes and appoints ROGER
W. HALE, R. FOSTER DUNCAN, and MICHAEL D. ROBINSON, and each of them,
individually, his attorney, with full power to act for him and in his name,
place, and stead, to sign his name in the capacity or capacities set forth
below to the 1998 Form 10-K and to any and all amendments to such 1998 Form
10-K and hereby ratifies and confirms all that said attorney may or shall
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and seals
this 3rd day of March 1999.
/s/ Roger W. Hale /s/ Anne H. McNamara
- ---------------------- ------------------------------
ROGER W. HALE ANNE H. McNAMARA
Chairman and Chief Director
Executive Officer
/s/ Mira S. Ball /s/ T. Ballard Morton, Jr.
- ---------------------- ------------------------------
MIRA S. BALL T. BALLARD MORTON, JR.
Director; Director;
/s/ William C. Ballard, Jr. /s/ Frank V. Ramsey, Jr.
- ---------------------- ------------------------------
WILLIAM C. BALLARD, JR. FRANK V. RAMSEY, JR.
Director Director
/s/ Owsley Brown II /s/ William L. Rouse, Jr.
- ---------------------- ------------------------------
OWSLEY BROWN II WILLIAM L. ROUSE, JR.
Director Director
/s/ Carol M. Gatton /s/ Charles L. Shearer, Ph.D.
- ---------------------- ------------------------------
CAROL M. GATTON CHARLES L. SHEARER, PH.D.
Director Director
/s/ Jeffery T. Grade /s/ Lee T. Todd, Jr., Ph.D.
- ---------------------- ------------------------------
JEFFERY T. GRADE LEE T. TODD, JR., PH.D.
Director Director
/s/ J. David Grissom /s/ R. Foster Duncan
- ---------------------- ------------------------------
J. DAVID GRISSOM R. FOSTER DUNCAN
Director Chief Financial Officer
1
<PAGE>
Exhibit 24.03
POWER OF ATTORNEY (cont.)
/s/ David B. Lewis /s/ Michael D. Robinson
- ---------------------- ------------------------------
DAVID B. LEWIS MICHAEL D. ROBINSON
Director Vice President and Controller
STATE OF KENTUCKY )
)ss.
COUNTY OF JEFFERSON )
On this 3rd day of March 1999, before me, Margaret L. Cowan, a Notary Public,
State of Kentucky at Large, personally appeared the above named directors and
officers of KENTUCKY UTILITIES COMPANY, a Kentucky corporation, and known to
me to be the persons whose names are subscribed to the foregoing instrument,
and they severally acknowledged to me that they executed the same as their
own free act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official seal
on the date above set forth.
My Commission expires: /s/ Margaret L. Cowan
July 28, 2000 --------------------------------
Margaret L. Cowan, Notary Public
State of Kentucky at Large
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK>0000060549
<NAME>LOUISVILLE GAS AND ELECTRIC COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,752,016
<OTHER-PROPERTY-AND-INVEST> 1,154
<TOTAL-CURRENT-ASSETS> 285,027
<TOTAL-DEFERRED-CHARGES> 66,440
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,104,637
<COMMON> 424,334<F1>
<CAPITAL-SURPLUS-PAID-IN> 50<F2>
<RETAINED-EARNINGS> 247,462
<TOTAL-COMMON-STOCKHOLDERS-EQ> 671,846
0
95,328
<LONG-TERM-DEBT-NET> 626,800
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 710,663
<TOT-CAPITALIZATION-AND-LIAB> 2,104,637
<GROSS-OPERATING-REVENUE> 850,056
<INCOME-TAX-EXPENSE> 56,307
<OTHER-OPERATING-EXPENSES> 658,226
<TOTAL-OPERATING-EXPENSES> 714,533
<OPERATING-INCOME-LOSS> 135,523
<OTHER-INCOME-NET> (21,081)<F3>
<INCOME-BEFORE-INTEREST-EXPEN> 114,442
<TOTAL-INTEREST-EXPENSE> 36,322
<NET-INCOME> 78,120
4,568
<EARNINGS-AVAILABLE-FOR-COMM> 73,552
<COMMON-STOCK-DIVIDENDS> 85,000
<TOTAL-INTEREST-ON-BONDS> 34,267
<CASH-FLOW-OPERATIONS> 225,711
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes common stock expense of $836.
<F2>Represents unrealized gain/loss on marketable securities, net of taxes.
<F3>Includes $32,072 Merger costs to achieve.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK>0000055387
<NAME>KENTUCKY UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,477,345
<OTHER-PROPERTY-AND-INVEST> 14,238
<TOTAL-CURRENT-ASSETS> 218,900
<TOTAL-DEFERRED-CHARGES> 53,314
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,763,797
<COMMON> 307,545<F1>
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 299,167
<TOTAL-COMMON-STOCKHOLDERS-EQ> 606,712
0
40,000
<LONG-TERM-DEBT-NET> 546,330
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 570,755
<TOT-CAPITALIZATION-AND-LIAB> 1,763,797
<GROSS-OPERATING-REVENUE> 810,114
<INCOME-TAX-EXPENSE> 53,256
<OTHER-OPERATING-EXPENSES> 631,470
<TOTAL-OPERATING-EXPENSES> 684,726
<OPERATING-INCOME-LOSS> 125,388
<OTHER-INCOME-NET> (13,984)
<INCOME-BEFORE-INTEREST-EXPEN> 111,404
<TOTAL-INTEREST-EXPENSE> 38,640
<NET-INCOME> 72,764
2,256
<EARNINGS-AVAILABLE-FOR-COMM> 70,508
<COMMON-STOCK-DIVIDENDS> 78,347
<TOTAL-INTEREST-ON-BONDS> 37,290
<CASH-FLOW-OPERATIONS> 257,420
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Includes common stock expense of $595.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<CIK>0000861388
<NAME>LG&E ENERGY CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,229,361
<OTHER-PROPERTY-AND-INVEST> 571,097
<TOTAL-CURRENT-ASSETS> 782,270
<TOTAL-DEFERRED-CHARGES> 190,540
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,773,268
<COMMON> 774,792<F1>
<CAPITAL-SURPLUS-PAID-IN> 167<F2>
<RETAINED-EARNINGS> 466,279
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,241,238
0
136,530
<LONG-TERM-DEBT-NET> 1,510,775
<SHORT-TERM-NOTES> 365,135
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,519,590
<TOT-CAPITALIZATION-AND-LIAB> 4,773,268
<GROSS-OPERATING-REVENUE> 1,976,413
<INCOME-TAX-EXPENSE> 111,823
<OTHER-OPERATING-EXPENSES> 1,602,899<F3>
<TOTAL-OPERATING-EXPENSES> 1,714,722
<OPERATING-INCOME-LOSS> 261,691
<OTHER-INCOME-NET> (248,310)<F4>
<INCOME-BEFORE-INTEREST-EXPEN> 13,381<F4>
<TOTAL-INTEREST-EXPENSE> 102,047
<NET-INCOME> (88,666)
6,824
<EARNINGS-AVAILABLE-FOR-COMM> (95,490)
<COMMON-STOCK-DIVIDENDS> 160,815
<TOTAL-INTEREST-ON-BONDS> 71,557
<CASH-FLOW-OPERATIONS> 211,722
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
<FN>
<F1>Includes common stock expense of $3,481.
<F2>Represents unrealized loss on marketable securities, net of taxes.
<F3>Includes equity in earnings of affiliates of $73,798.
<F4>Includes loss from discontinued operations of $23,599 and loss on disposal of
discontinued operations of $225,000, both net of income taxes. Also includes
cumulative effect of accounting change of $7,162, net of income taxes.
</FN>
</TABLE>
<PAGE>
Exhibit 99.01
Cautionary Factors for LG&E Energy Corp., Louisville Gas and Electric Company
and Kentucky Utilities Company
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements to encourage such disclosures without the threat
of litigation providing those statements are identified as forward-looking and
are accompanied by meaningful, cautionary statements identifying important
factors that could cause the actual results to differ materially from those
projected in the statement. Forward-looking statements have been and will be
made in written documents and oral presentations of LG&E Energy Corp. ("LG&E
Energy"), Louisville Gas and Electric Company ("LG&E") and Kentucky Utilities
Company ("KU") (collectively, the "Companies"). Such statements are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used in the Companies' documents or oral
presentations, the words "anticipate," "estimate," "expect," "objective" and
similar expressions are intended to identify forward-looking statements. In
addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause the
Companies' actual results to differ materially from those contemplated in any
forward-looking statements include, among others, the following:
* Increased competition in the utility, natural gas and electric power
marketing industries, including effects of: decreasing margins as a result
of competitive pressures; industry restructuring initiatives; transmission
system operation and/or administration initiatives; recovery of investments
made under traditional regulation; nature of competitors entering the
industry; retail wheeling; a new pricing structure; and former customers
entering the generation market;
* Changing market conditions and a variety of other factors associated with
physical energy and financial trading activities including, but not limited
to, price, basis, credit, liquidity, volatility, capacity, transmission,
currency, interest rate and warranty risks;
* Risks associated with price risk management strategies intended to mitigate
exposure to adverse movement in the prices of electricity and natural gas on
both a global and regional basis;
* Legal, regulatory, public policy-related and other developments which may
result in redetermination, adjustment or cancellation of revenue payment
streams paid to, or increased capital expenditures or operating and
maintenance costs incurred by, the Companies, in connection with rate, fuel,
transmission, environmental and other proceedings applicable to the
Companies;
* Legal, regulatory, economic and other factors which may result in
redetermination or cancellation of revenue payment streams under power sales
agreements resulting in reduced operating income and potential asset
impairment related to the Companies' investments in independent power
production ventures, as applicable;
* Economic conditions including inflation rates and monetary fluctuations;
* Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas where
the Companies have a financial interest;
* Customer business conditions including demand for their products or services
and supply of labor and materials used in creating their products and
services;
* Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission, state public utility
commissions, state entities which regulate
<PAGE>
natural gas transmission, gathering and processing and similar entities with
regulatory oversight;
* Availability or cost of capital such as changes in: interest rates, market
perceptions of the utility and energy-related industries, the Companies or
any of their subsidiaries or security ratings;
* Factors affecting utility and non-utility operations such as unusual weather
conditions; catastrophic weather-related damage; unscheduled generation
outages, unusual maintenance or repairs; unanticipated changes to fossil
fuel, or gas supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents; or
electric transmission or gas pipeline system constraints;
* Employee workforce factors including changes in key executives, collective
bargaining agreements with union employees, or work stoppages;
* Rate-setting policies or procedures of regulatory entities, including
environmental externalities;
* Social attitudes regarding the utility, natural gas and power industries;
* Identification of suitable investment opportunities to enhance shareholder
returns and achieve long-term financial objectives through business
acquisitions;
* Some future project investments made by the Companies, respectively, as
applicable, could take the form of minority interests, which would limit the
Companies' ability to control the development or operation of the project;
* Legal and regulatory delays and other unforeseeable obstacles associated
with mergers, acquisitions and investments in joint ventures;
* Costs and other effects of legal and administrative proceedings,
settlements, investigations, claims and matters, including but not limited
to those described in Notes 5, 18 and 22 (for LG&E Energy), Notes 3, 12 and
16 (for LG&E) and Notes 3, 11 and 13 (for KU) of the respective Notes to
Financial Statements of the Companies' Annual Reports on Form 10-K for the
year ended December 31, 1997, and items under the caption Commitments and
Contingencies;
* Technological developments, changing markets and other factors that result
in competitive disadvantages and create the potential for impairment of
existing assets;
* Factors associated with non-regulated investments, including but not limited
to: continued viability of partners, foreign government actions, foreign
economic and currency risks, political instability in foreign countries,
partnership actions, competition, operating risks, dependence on certain
customers, third-party operators, suppliers and domestic and foreign
environmental and energy regulations;
* Other business or investment considerations that may be disclosed from time
to time in the Companies' Securities and Exchange Commission filings or in
other publicly disseminated written documents.
* Factors affecting the realization of anticipated cost savings associated
with the merger between LG&E Energy and KU Energy Corporation including
national and regional economic conditions, national and regional competitive
conditions, inflation rates, weather conditions, financial market
conditions, and synergies resulting from the business combination;
The Companies undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
<PAGE>
EXHIBIT 99.02
DESCRIPTION OF LG&E ENERGY COMMON STOCK
The information under this caption is a succinct summary of certain provisions
and is subject to the detailed provisions of LG&E Energy Corp.'s (the
"Company's") Amended and Restated Articles of Incorporation, as amended, and of
its By-Laws, which have been filed (or incorporated by reference) as exhibits to
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and which are incorporated herein by this reference.
Authorized Stock
Under the Company's Articles of Incorporation, the Company is authorized to
issue 300,000,000 shares of Common Stock, without par value (the "Common
Stock"), of which approximately 129,677,030 shares were outstanding on February
26, 1999.
The Company is also authorized to issue 5,000,000 shares of preferred stock,
without par value (the "Preferred Stock"). As discussed below under the caption
"Rights to Purchase Series A Preferred Stock," the Company has created a series
of Preferred Stock designated as "Series A Preferred Stock," and the number of
shares constituting such series is 2,000,000. No shares of such Series A
Preferred Stock and no shares of any other Preferred Stock are currently
outstanding. Preferred Stock may be issued in the future in such series as may
be designated by the Company's Board of Directors. In creating any such series,
the Company's Board of Directors has the authority to fix the rights and
preferences of each series with respect to, among other things, the dividend
rate, redemption provisions, liquidation preferences, and sinking fund
provisions.
Dividend Rights
Subject to the prior payment in full of all accrued and unpaid dividends on the
Series A Preferred Stock and possible prior rights of holders of other Preferred
Stock that may be issued in the future, holders of the Company's Common Stock
are entitled to receive such dividends as may be declared from time to time by
the Board of Directors of the Company out of funds legally available therefor.
The funds required by the Company to enable it to pay dividends on its Common
Stock are expected to be derived principally from dividends paid by Louisville
Gas and Electric Company ("LG&E") and Kentucky Utilities Company ("KU"), the
Company's principal subsidiaries, on LG&E's and KU's respective Common Stock.
LG&E and KU may declare dividends on their respective Common Stock out of any
surplus or net profits legally available for such purpose.
The Company's ability to receive dividends on LG&E's Common Stock is also
subject to the prior rights of the holders of LG&E's preferred stock and the
covenants of debt instruments limiting the ability of LG&E to pay dividends. The
only existing covenant limiting LG&E's ability to pay dividends is in LG&E's
trust indenture, as supplemented, securing LG&E's first mortgage bonds. It
provides in substance that retained income of LG&E equal to the amount by which
the aggregate of (a) provisions for retirement and depreciation and (b)
<PAGE>
expenditures for maintenance, for the period from January 1, 1978, to the end of
the last preceding month for which a balance sheet of LG&E is available, is less
than 2.25% of depreciable property, including construction work in progress, as
of the end of that period, shall not be available for the payment of cash
dividends on the Common Stock of LG&E. No portion of retained income of LG&E is
presently restricted by this provision.
The Company's ability to receive dividends on KU's Common Stock is also subject
to the prior rights of holders of KU's preferred and preference stock and the
covenants of debt instruments limiting the ability of KU to pay dividends. KU's
articles of incorporation provide that full cumulative dividends on the
preferred and preference stock for the current and all past quarterly dividend
periods shall have been paid or declared and set apart for payment and KU shall
not be in arrears in its sinking fund obligations in respect of any shares of
preferred or preference stock. KU's mortgage indenture securing its first
mortgage bonds provides that, so long as certain currently outstanding series of
first mortgage bonds are outstanding, KU will not declare or pay and dividends
on its Common Stock or make any other distribution on or purchase any of its
Common Stock unless the amounts expended by KU for maintenance and repairs
provided for depreciation subsequent to April 30, 1947, plus KU's earned surplus
(retained earnings)for such period and remaining after any such payment,
distribution or purchase, shall aggregate not less than 15% of the gross
operating revenues of KU for the period. KU's articles of incorporation provide,
in effect, that, so long as any of the KU preferred stock is outstanding, the
total amount of all dividends or other distributions on KU Common Stock and
purchases of such stock that may be paid or made during any 12-month period
shall not exceed (a) 75% of the "net income available for dividends on common
stock" if the ratio of "common stock equity" to "total capital" (each as
defined) of KU shall be 20% to 25%, or (b) 50% of such net income if such ratio
shall be less than 20%. When such ratio is 25% or more, no such dividends,
distributions or purchases may be paid or made which would reduce such ratio to
less than 25% except to the extent permitted by clauses (a) and (b) above. No
portion of retained earnings of KU is presently restricted by the indenture or
articles.
Voting Rights
Every holder of Common Stock and every holder of Series A Preferred Stock that
may be issued in the future is entitled to one vote per share for the election
of directors and upon all other matters on which such holder is entitled to
vote. At all elections of directors, any eligible shareholder may vote
cumulatively. The Board of Directors of the Company has the authority to fix
conversion and voting rights for any new series of Preferred Stock (including
the right to elect directors upon a failure to pay dividends), provided that no
share of Preferred Stock can have more than one vote per share.
Notwithstanding the foregoing, if any Series A Preferred Stock is issued in the
future and if and when dividends payable on such Series A Preferred Stock that
may be issued in the future shall be in default for six full quarterly dividends
and thereafter until all defaults shall have been paid, the holders of the
Series A Preferred Stock, voting separately as one class, to the exclusion of
the holders of Common Stock, will be entitled to elect two (2) directors of the
Company.
<PAGE>
The Company's Articles of Incorporation contain "fair price" provisions, which
require that mergers and certain other business combinations or transactions
involving the Company and any substantial (10% or more) holder of the Company's
Voting Stock (as defined below) must be approved by the holders of at least 80%
of the voting power of the Company's outstanding Voting Stock and by the holders
of at least 66-2/3% of the voting power of the Company's Voting Stock not
beneficially owned by the 10% owner unless the transaction is either approved by
a majority of the members of the Board of Directors who are unaffiliated with
the substantial holder or certain minimum price and procedural requirements are
met. Any amendment to the foregoing provisions must be approved by the holders
of at least 80% of the voting power of the Company's outstanding Voting Stock
and by the holders of at least 66-2/3% of the voting power of the Company's
Voting Stock not beneficially owned by any 10% owner. The Company's Voting Stock
consists of all outstanding shares of the Company generally entitled to vote in
the election of directors and currently consists of the Company's Common Stock.
Subject to the rights of the Series A Preferred Stock (if any are issued) to
elect directors under certain circumstances described above and any voting
rights of the holders of the Company's Preferred Stock that may be issued in the
future, the Company's Articles and By-Laws contain provisions stating that: (a)
the Board of Directors shall be divided into three classes, as nearly equal in
number as possible, each of which, after an interim arrangement, will serve for
three years, with one class being elected each year, (b) directors may be
removed only with the approval of the holders of at least 80% of the voting
power of the shares of the Company generally entitled to vote, except that so
long as cumulative voting applies no director may be removed if the votes cast
against removal would be sufficient to elect the director if cumulatively voted
at an election of the class of directors of which such director is a part, (c)
any vacancy on the Board of Directors shall be filled by the remaining directors
then in office, though less than a quorum, (d) advance notice of introduction by
shareholders of business at annual shareholders' meetings and of shareholder
nominations for the election of directors shall be given and that certain
information be provided with respect to such matters, (e) shareholder action may
be taken only by unanimous written consent or at an annual meeting of
shareholders or a special meeting of shareholders called by the President, the
Board of Directors or, to the extent required by Kentucky law, shareholders, and
(f) the foregoing provisions may be amended only by the approval of the holders
of at least 80% of the voting power of the shares of the Company generally
entitled to vote. These provisions along with the "fair price" provisions and
cumulative voting provisions discussed above and the Rights described below, may
deter attempts to change control of the Company (by proxy contest, tender offer
or otherwise) and will make more difficult a change in control of the Company
that is opposed by the Company's Board of Directors.
Liquidation Rights
Subject to the prior rights of the holders of the Series A Preferred Stock that
may be issued in the future and the possible prior rights of holders of other
Preferred Stock that may be issued in the future, in the event of liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary, the
holders of the Common Stock are entitled to the remaining
<PAGE>
assets.
Other Provisions
No holder of Common Stock or any future holder of Preferred Stock has the
preemptive right to subscribe for and purchase any part of any new or additional
issue of stock or securities convertible into stock. The Common Stock is not
subject to redemption and does not have any conversion or sinking fund
provisions. The issued and outstanding shares of Common Stock are fully paid and
nonassessable shares of Common Stock of the Company.
Under the Company's Articles of Incorporation, the Board of Directors may issue
additional shares of authorized but unissued Common Stock for such consideration
as it may from time to time determine.
Rights to Purchase Series A Preferred Stock
On December 5, 1990, the Board of Directors of the Company: (i) declared a
dividend distribution of one Preferred Stock purchase right (a "Right" or
"Rights") for each outstanding share of Common Stock to shareholders of record
on December 19, 1990, and issuable as of such Record Date and (ii) further
authorized the issuance of one Right with respect to each share of Common Stock
of the Company that becomes outstanding after such Record Date and before the
Distribution Date (as defined below).
The Company declared a three-for-two split of the Common Stock to shareholders
of record on April 30, 1992. As a result of the stock split and in accordance
with the terms of the Rights, the number of Rights associated with a share of
Common Stock was reduced, effective May 15, 1992, from one Right per share to
two-thirds of a Right per share. The Company declared a two-for-one split of the
Common Stock to shareholders of record on April 1, 1996. As a result of the
two-for-one split and in accordance with the terms of the Rights, the number of
Rights associated with a share of Common Stock was reduced from two-thirds of a
Right per share to one-third of a Right per share, effective April 15, 1996.
On June 7, 1995, the Board of Directors approved the First Amendment to Rights
Agreement, whereby the definition of "Acquiring Person" (see below) was modified
to provide that an "Acquiring Person" shall be any person who has acquired, or
obtained the rights to acquire, beneficial ownership of 15% or more of the
outstanding Common Stock of the Company. The previous ownership threshold was
20%.
On May 20, 1997, in connection with the announcement of the Merger with KU
Energy Corporation ("KU Energy"), the Board of Directors approved the Second
Amendment to Rights Agreement so that the execution, delivery and performance of
the Merger Agreement and the LG&E Energy Stock Option Agreement (as defined in
the Second Amendment to Rights Agreement) will not cause any Rights to become
exercisable, cause KU Energy or any of its affiliates to become an "Acquiring
Person" or give rise to a "Distribution Date" or "Stock Acquisition Date" (see
below).
Each whole Right entitles the holder of record to purchase from the Company one
one-hundredth of a share of Series A Preferred Stock, without par value,
<PAGE>
of the Company ("Series A Preferred Stock") at a price of $110 per one
one-hundredth of a share (the "Purchase Price"). The description and terms of
the Rights are set forth in the Rights Agreement, as amended (the "Rights
Agreement").
Initially the Rights will not be exercisable, certificates will not be sent to
shareholders and the rights will automatically trade with the Common Stock.
The Rights will be evidenced by the Common Stock certificates until the close of
business on the earlier to occur of the tenth day following (i) a public
announcement (or, if earlier, the date a majority of the Board of Directors of
the Company becomes aware) that a person or group of affiliated or associated
persons has become an "Acquiring Person", which is defined as a person who has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding Common Stock of the Company (the "Stock Acquisition Date"),
or (ii) the commencement of, or public announcement of an intention to commence,
a tender or exchange offer the consummation of which would result in the
ownership of 15% or more of the outstanding Common Stock (the earlier of the
dates in clause (i) or (ii) being called the "Distribution Date").
Notwithstanding the foregoing, if the Board of Directors of the Company
determines in good faith that a person who would otherwise be an "Acquiring
Person," has become such inadvertently and without any intention of changing or
influencing control of the Company, and such person, as promptly as practicable
after being advised of such determination, divests himself or itself of
beneficial ownership of a sufficient number of shares of Common Stock so that
such person would no longer be an "Acquiring Person," then such person shall not
be deemed to be an "Acquiring Person" for any purposes of the Rights Agreement.
Until the Distribution Date, (i) the Rights will be evidenced by the Common
Stock certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate.
As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights ("Right Certificates") will be mailed to holders of record
of the Company's Common Stock as of the close of business on the Distribution
Date, and such separate certificates alone will evidence the rights from and
after the Distribution Date.
Each of the following persons (an "Exempt Person") will not be deemed to be an
Acquiring Person, even if they have acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding Common Stock of the
Company: (i) the Company, any subsidiary of the Company, any employee benefit
plan or employee stock plan of the Company or of any subsidiary of the Company;
and (ii) any person who becomes an Acquiring Person solely by virtue of a
reduction in the number of outstanding shares of Common Stock, unless and until
such person shall become the beneficial owner of, or make a tender offer for,
any additional shares of Common Stock.
The Rights are not exercisable until the Distribution Date. The Rights will
expire at the close of business on December 19, 2000, unless earlier redeemed or
exchanged by the Company as described below.
<PAGE>
The Purchase Price payable, and the number of shares of Series A Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for Series A
Preferred Stock or convertible securities at less than the current market price
of the Series A Preferred Stock or (iii) upon the distribution to holders of the
Series A Preferred Stock of evidences of indebtedness or assets (excluding
dividends payable in Series A Preferred Stock) or of subscription rights or
warrants (other than those referred to above). The number of Rights associated
with a share of the Company's Common Stock is subject to adjustment from time to
time in the event of a stock dividend on, or a subdivision or combination of,
the Common Stock.
In the event any Person (other than an Exempt Person) becomes the beneficial
owner of 15% or more of the then outstanding shares of Common Stock (except
pursuant to an offer for all outstanding shares of Common Stock that the
independent directors determine to be fair to and otherwise in the best interest
of the Company and its shareholders) or any Exempt Person who is the beneficial
owner of 15% or more of the outstanding Common Stock fails to continue to
qualify as an Exempt Person, then each holder of record of a whole Right, other
than the Acquiring Person, will thereafter have the right to receive, upon
payment of the Purchase Price, Common Stock (or, in certain circumstances, cash,
property or other securities of the Company) having a market value at the time
of the transaction equal to twice the Purchase Price. However, Rights are not
exercisable following such event until such time as the Rights are no longer
redeemable by the Company as set forth below. Any Rights that are or were at any
time, on or after the Distribution Date, beneficially owned by an Acquiring
Person shall become null and void.
For example, at an exercise price of $110 per Right, each whole Right not owned
by an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $220 worth
of Common Stock (or other consideration, as noted above) for $110. Assuming that
the Common Stock had a per share value of $22 at such time, the holder of each
valid Right would be entitled to purchase 10 shares of Common Stock for $110.
After the Rights have become exercisable, if the Company is acquired in a merger
or other business combination (in which any shares of the Company's Common Stock
are changed into or exchanged for other securities or assets) or more than 50%
of the assets or earning power of the Company and its subsidiaries (taken as a
whole) are sold or transferred in one or a series of related transactions, the
Rights Agreement provides that proper provision shall be made so that each
holder of record of a whole Right will have the right to receive, upon payment
of the Purchase Price, that number of shares of common stock of the acquiring
company having a market value at the time of such transaction equal to two times
the Purchase Price.
After any such event, to the extent that insufficient shares of Common Stock are
available for the exercise in full of the Rights, holders of Rights will receive
upon exercise shares of Common Stock to the extent available and then
<PAGE>
other securities of the Company, including units of shares of Series A Preferred
Stock with rights substantially comparable to those of the Common Stock,
property, or cash, in proportions determined by the Company, so that the
aggregate value received is equal to twice the Purchase Price. The Company,
however, shall not be required to issue any cash, property or debt securities
upon exercise of the Rights to the extent their aggregate value would exceed the
amount of cash the Company would otherwise be entitled to receive upon exercise
in full of the then exercisable Rights.
No fractional shares of Series A Preferred Stock or Common Stock will be
required to be issued upon exercise of the Rights and, in lieu thereof, a
payment in cash may be made to the holder of such Rights equal to the same
fraction of the current market value of a share of Series A Preferred Stock or,
if applicable, Common Stock.
At any time until ten days after the Stock Acquisition Date (subject to
extension by the Board of Directors), the Company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (subject to certain
anti-dilution adjustments) (the "Redemption Price"). After such redemption
period, the Company's right of redemption may be reinstated, under certain
circumstances, if an Acquiring Person reduces his beneficial ownership of Common
Stock to below 10% and there is no other Acquiring Person. Immediately upon the
action of the Board of Directors of the Company authorizing redemption of the
Rights, the right to exercise the rights will terminate, and the only right of
the holders of Rights will be to receive the Redemption Price without any
interest thereon.
The Board of Directors may, at its option, at any time after any Person becomes
an Acquiring Person, exchange all or part of the outstanding Rights (other than
Rights held by the Acquiring Person and certain related parties) for shares of
Common Stock at an exchange ratio of three (3) shares of Common Stock per Right
(subject to certain anti-dilution adjustments). However, the Board may not
effect such an exchange at any time any Person or group owns 50% or more of the
shares of Common Stock then outstanding. Immediately after the Board orders such
an exchange, the right to exercise the Rights shall terminate and the holders of
Rights shall thereafter only be entitled to receive shares of Common Stock at
the applicable exchange ratio.
The Board of Directors of the Company may amend the Rights Agreement. After the
Distribution Date, however, the provisions of the Rights Agreement may be
amended by the Board only to cure any ambiguity, to make changes which do not
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person or an affiliate or associate of an Acquiring Person), or to
shorten or lengthen any time period under the Rights Agreement; provided,
however, that no amendment to adjust the time period governing redemption shall
be made at such time as the Rights are not redeemable. In addition, no
supplement or amendment may be made which changes the Redemption Price, the
final expiration date, the Purchase Price or the number one one-hundredths of a
share of Series A Preferred Stock for which a Right is exercisable, unless at
the time of such supplement or amendment there has been no occurrence of a Stock
Acquisition Date and such supplement or amendment does not adversely affect the
interests of the holders of Rights (other than an Acquiring Person or an
associate or affiliate of an Acquiring Person).
<PAGE>
Until a Right is exercised, the holder, as such, will have no rights as a
shareholder of the Company, including, without limitation, the right to vote or
to receive dividends.
The issuance of the Rights is not taxable to the Company or to shareholders
under presently existing federal income tax law, and will not change the way in
which shareholders can presently trade the Company's shares of Common Stock. If
the Rights should become exercisable, shareholders, depending on then existing
circumstances, may recognize taxable income.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors and, accordingly, will make more
difficult a change of control that is opposed by the Company's Board of
Directors. However, the Rights should not interfere with a proposed change of
control (including a merger or other business combination) approved by a
majority of the Board of Directors since the Rights may be redeemed by the
Company at the Redemption Price at any time until ten days after the Stock
Acquisition Date (subject to extension by the Board of Directors). Thus, the
Rights are intended to encourage persons who may seek to acquire control of the
Company to initiate such an acquisition through negotiations with the Board of
Directors. Nevertheless, the Rights also may discourage a third party from
making a partial tender offer or otherwise attempting to obtain a substantial
equity position in, or seeking to obtain control of, the Company. To the extent
any potential acquirors are deterred by the Rights, the Rights may have the
effect of preserving incumbent management in office.
A copy of the Rights Agreement has been filed with the Securities and Exchange
Commission as an Exhibit to the Company's Registration Statement on Form S-8,
Registration No. 33-38557. A copy of the First Amendment to Rights Agreement has
been filed with the SEC as an Exhibit to the Company's Registration Statement on
Form 8-A/A, Registration No. 1-10568, filed on June 20, 1995. A copy of the
Second Amendment to Rights Agreement has been filed with the SEC as an Exhibit
to the Company's Registration Statement on Form S-4, Registration No. 333-34219.
This summary description of the Rights does not purport to be complete and is
qualified in its entirety by reference to the Rights Agreement, as amended,
which is incorporated in this summary description herein by reference.
Miscellaneous
The Company's outstanding Common Stock is listed on the New York and Chicago
Stock Exchanges.
Transfer Agents and Registrar
The Transfer Agents for the Common Stock are the Company and Harris Trust and
Savings Bank, Chicago, Illinois. Registrars for the Common Stock are PNC Bank,
Kentucky, Inc., Louisville, Kentucky, and Harris Trust and Savings Bank,
Chicago, Illinois.
<PAGE>
Exhibit 99.03
Kentucky Utilities Company
Director and Officer Information
The outstanding stock of Kentucky Utilities Company ("KU") is divided into
three classes: Common Stock, without par value, Preferred Stock, without par
value, and Preference Stock, without par value. As of the close of business
on February 16, 1999, the record date for the 1999 Annual Meeting of
Shareholders (the "Annual Meeting") of KU, the following shares of each were
outstanding:
<TABLE>
<CAPTION>
<S> <C>
Common Stock, without par value......................................... 37,817,878 shares
Preferred Stock, without par value (stated value $100 per share)
4.75% series ................................................. 200,000 shares
6.53% series ................................................. 200,000 shares
</TABLE>
All of the outstanding common stock of Kentucky Utilities Company ("KU") is
owned by LG&E Energy Corp. ("LG&E Energy"). As of February 16, 1999, all
directors, nominees for director and executive officers of KU as a group
beneficially owned no shares of KU Preferred Stock.
INFORMATION ABOUT DIRECTORS AND NOMINEES
The following contains certain information as of February 16, 1999,
concerning the nominees for director, as well as the directors whose terms of
office continue after the 1999 Annual Meeting.
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING
AT 2002 ANNUAL MEETING OF SHAREHOLDERS
MIRA S. BALL (AGE 64)
Mrs. Ball has been Secretary-Treasurer and Chief Financial Officer of
Ball Homes, Inc., a residential developer and property management company
in Lexington, Kentucky, since August 1959. Mrs. Ball is a graduate of the
University of Kentucky. Mrs. Ball has been a director of LG&E Energy and
Louisville Gas and Electric Company ("LG&E") since May 1998 and of KU
since 1992.
ROGER W. HALE (AGE 55)
Mr. Hale has been a Director and Chairman of the Board and Chief
Executive Officer of LG&E Energy since August 1990. Mr. Hale served as
President of LG&E Energy from August 1990 to May 1998. Mr. Hale has also
been Chief Executive Officer and a Director of LG&E since June 1989,
Chairman of the Board of LG&E since February 1, 1990, and served as
President of LG&E from June 1989 until January 1, 1992. Mr. Hale has been
a Director and Chairman of the Board and Chief Executive Officer of KU
since May 1998. Prior to his coming to LG&E, Mr. Hale served as Executive
Vice President of Bell South Enterprises, Inc. Mr. Hale is a graduate of
the University of Maryland, and received a master's degree in management
from the Massachusetts Institute of Technology, Sloan School of
Management. Mr. Hale is also a member of the Board of Directors of Global
TeleSystems Group, Inc. and H&R Block, Inc.
DAVID B. LEWIS (AGE 54)
Mr. Lewis is a founding partner of the law firm of Lewis & Munday, a
Professional Corporation, in Detroit, Michigan. Since 1972, Mr. Lewis has
served as Chairman of the Board and a Director of the firm. Mr. Lewis is
a graduate of Oakland University and received his law degree from the
University of Michigan Law School. He also received a master's degree in
business administration from the University of Chicago Graduate School of
Business. Mr. Lewis has been a director of LG&E Energy and LG&E since
November 1992 and of KU since May 1998. Mr. Lewis is also a member of the
Board of Directors of TRW, Inc., M.A. Hanna Company and Comerica Bank, a
subsidiary of Comerica Incorporated.
1
<PAGE>
ANNE H. MCNAMARA (AGE 51)
Mrs. McNamara has been Senior Vice President and General Counsel of AMR
Corporation and its subsidiary, American Airlines, Inc., since June 1988.
Mrs. McNamara is a graduate of Vassar College, and received her law
degree from Cornell University. She has been a director of LG&E Energy
and LG&E since November 1991 and of KU since May 1998. Mrs. McNamara is
also a member of the Board of Directors of The SABRE Group Holdings, Inc.
FRANK V. RAMSEY, JR. (AGE 67)
Mr. Ramsey has been President and a Director of Dixon Bank, Dixon,
Kentucky, since October 1972. Mr. Ramsey is a graduate of the University
of Kentucky. Mr. Ramsey has been a director of LG&E Energy and LG&E since
May 1998 and of KU since 1986.
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING
AT 2001 ANNUAL MEETING OF SHAREHOLDERS
CAROL M. GATTON (AGE 66)
Mr. Gatton has been Chairman and Director of Area Bancshares
Corpora-tion, an Owensboro, Kentucky bank holding company, since April
1976. Mr. Gatton is also owner of Bill Gatton Chevrolet-Cadillac-Isuzu in
Bristol, Tennessee. Mr. Gatton is a graduate of the University of
Kentucky, and received a master's degree in business administration from
the University of Pennsylvania, Wharton School of Business. Mr. Gatton
has been a director of LG&E Energy and LG&E since May 1998 and of KU
since 1996.
LEE T. TODD, JR., PH.D. (AGE 52)
Dr. Todd has been President and Chief Executive Officer and Director of
DataBeam Corporation, a Lexington, Kentucky high-technology firm, since
April 1976. Dr. Todd is a graduate of the University of Kentucky. He also
received a master's degree and doctorate in electrical engineering from
the Massachusetts Institute of Technology. Dr. Todd has been a director
of LG&E Energy and LG&E since May 1998 and of KU since 1995.
2
<PAGE>
NOMINEES FOR DIRECTORS WITH TERMS EXPIRING
AT 2000 ANNUAL MEETING OF SHAREHOLDERS
WILLIAM L. ROUSE, JR. (AGE 66)
Mr. Rouse was Chairman of the Board and Chief Executive Officer and
director of First Security Corporation of Kentucky, an Owensboro,
Kentucky multi-bank holding company, prior to his retirement in 1992. Mr.
Rouse is a graduate of the University of Kentucky. Mr. Rouse has been a
director of LG&E Energy and LG&E since May 1998 and of KU since 1989. Mr.
Rouse is also a member of the Board of Directors of Ashland, Incorporated
and Kentucky-American Water Company, a subsidiary of American Water Works
Company, Inc.
CHARLES L. SHEARER, PH.D. (AGE 56)
Dr. Shearer has been President of Transylvania University since July
1983. Dr. Shearer is a graduate of the University of Kentucky and
received a master's degree in diplomacy and international commerce from
that institution. He also received a master's degree and a doctorate in
economics from Michigan State University. Dr. Shearer has been a director
of LG&E Energy and LG&E since May 1998 and of KU since 1987.
DIRECTORS WHOSE TERMS EXPIRE
AT 2001 ANNUAL MEETING OF SHAREHOLDERS
OWSLEY BROWN II (AGE 56)
Mr. Brown has been the Chairman and Chief Executive Officer of
Brown-Forman Corporation, a consumer products company, since July 1995,
and was President of Brown-Forman Corporation from 1987 to 1995. Mr.
Brown was first named Chief Executive Officer of Brown-Forman Corporation
in July 1994. Mr. Brown is a graduate of Yale University, and received
his master's degree in business administration from Stanford University.
He has been a director of LG&E Energy since August 1990, of LG&E since
May 1989 and KU since May 1998. Mr. Brown is also a member of the Board
of Directors of Brown-Forman Corporation and North American Coal
Corporation, a subsidiary of NACCO Industries, Inc.
3
<PAGE>
J. DAVID GRISSOM (AGE 60)
Mr. Grissom has been Chairman of Mayfair Capital, Inc., a private
investment firm, since April 1989. He served as Chairman and Chief
Executive Officer of Citizens Fidelity Corporation from April 1977 until
March 31, 1989. Upon the acquisition of Citizens Fidelity Corporation by
PNC Financial Corp. in February 1987, Mr. Grissom served as Vice Chairman
and as a Director of PNC Financial Corp. until March 1989. Mr. Grissom is
a graduate of Centre College and the University of Louisville School of
Law. Mr. Grissom has been a director of LG&E Energy since August 1990, of
LG&E since January 1982 and of KU since May 1998. He is also a member of
the Board of Directors of Providian Financial Corporation and Churchill
Downs, Inc.
DIRECTORS WHOSE TERMS EXPIRE
AT 2000 ANNUAL MEETING OF SHAREHOLDERS
WILLIAM C. BALLARD, JR. (AGE 58)
Mr. Ballard has been of counsel to the law firm of Greenebaum Doll &
McDonald PLLC since May 1992. He served as Executive Vice President and
Chief Financial Officer from 1978 until May 1992, of Humana, Inc., a
healthcare services company. Mr. Ballard is a graduate of the University
of Notre Dame, and received his law degree, with honors, from the
University of Louisville School of Law. He also received a Master of Law
degree in taxation from Georgetown University. Mr. Ballard has been a
director of LG&E Energy since August 1990, of LG&E since May 1989 and of
KU since May 1998. Mr. Ballard is also a member of the Board of Directors
of United Healthcare Corp., Health Care REIT, Inc., Healthcare
Recoveries, Inc., MidAmerica Bancorp, American Safety Razor, Inc. and
Jordan Telecommunications Products, Inc.
JEFFERY T. GRADE (AGE 55)
Mr. Grade has been Chairman and Chief Executive Officer and Director of
Harnischfeger Industries, Inc., which is engaged in the manufacture and
distribution of equipment for the mining and papermaking industries,
since January 1993. He served as President and Chief Executive Officer
from 1992 to 1993 and President and Chief Operating Officer from 1986 to
1992. Mr. Grade is a graduate of the Illinois Institute of Technology and
received a master's degree in business administration from DePaul
University. Mr. Grade has been a director of LG&E Energy and LG&E since
October 1997 and of KU since May 1998. He is also a member of the Board
of Directors of Case Corporation.
T. BALLARD MORTON, JR. (AGE 66)
Mr. Morton has been Executive in Residence at the College of Business and
Public Administration of the University of Louisville since 1983. Mr.
Morton is a graduate of Yale University. Mr. Morton has been a director
of LG&E Energy since August 1990, of LG&E since May 1967 and of KU since
May 1998. Mr. Morton is also a member of the Board of Directors of the
Kroger Company.
4
<PAGE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS
Each member of the Board of Directors of KU is also a director of LG&E
Energy and LG&E. The committees of the Board of Directors of KU include an
Audit Committee, a Compensation Committee, a Nominating and Governance
Committee and a Long-Range Planning Committee. The directors who are members
of the various committees of KU serve in the same capacity for purposes of
the LG&E Energy and LG&E Board of Directors.
During 1998, there were a total of nine meetings of the KU Board. All
directors attended 75% or more of the total number of meetings of the Board
of Directors and Committees of the Board on which they served.
COMPENSATION OF DIRECTORS
Directors who are also officers of KU receive no compensation in their
capacities as directors. During 1998, non-employee directors received a
retainer of approximately $2,333 per month, or $28,000 annually ($30,000
annually for committee chairmen), a fee for Board meetings of $1,100 per
meeting, a fee for each committee meeting of $1,000 and, where appropriate,
reimbursement for expenses incurred in traveling to meetings. Non-employee
directors residing out of Kentucky received an additional $1,000 compensation
for each Board or committee meeting they attended. The foregoing amounts
represent the aggregate fees paid to directors in their capacities as
directors of LG&E Energy, LG&E and KU, as applicable, during 1998. Upon their
resignation as directors of LG&E Energy during 1998, Messrs. Dabney and
Gardner and Dr. Swain each received one-time awards of $10,000 in recognition
of their years of service on that Board.
Non-employee directors of KU may elect to defer all or a part of their
fees (including retainers, fees for attendance at regular and special
meetings, committee meetings and travel compensation) pursuant to the LG&E
Energy Corp. Deferred Stock Compensation Plan (the "Deferred Stock Plan").
Each deferred amount is credited by LG&E Energy to a bookkeeping account and
then is converted into a stock equivalent on the date the amount is credited.
The number of stock equivalents credited to the director is based upon the
average of the high and the low sale price of LG&E Energy Common Stock on the
New York Stock Exchange for the five trading days prior to the conversion.
Additional stock equivalents will be added to stock accounts at the time that
dividends are declared on LG&E Energy Common Stock, in an amount equal to the
amount of LG&E Energy Common Stock that could be purchased with dividends
that would be paid on the stock equivalents if converted to LG&E Energy
Common Stock. In the event that LG&E Energy is a party to any consolidation,
recapitalization, merger, share exchange or other business combination in
which all or a part of the outstanding LG&E Energy Common Stock is changed
into or exchanged for stock or other securities of the other entity or LG&E
Energy, or for cash or other property, the stock account of a participating
director shall be converted to such new securities or consideration equal to
the amount each share of LG&E Energy Common Stock received, multiplied by the
number of share equivalents in the stock account.
A director will be eligible to receive a distribution from his or her
account only upon termination of service by death, retirement or otherwise.
Following departure from the Board, the distribution will occur, at the
director's election, either in one lump sum or in no more than five annual
installments. The distribution will be made, at the director's election, either
in LG&E Energy Common Stock or in cash equal to the then-market price of the
LG&E Energy Common Stock allocated to the director's stock account. At February
16, 1999, eight directors of LG&E were participating in the Deferred Stock Plan.
Non-employee directors who are also directors of LG&E Energy also receive
stock options pursuant to the LG&E Energy Corp. Stock Option Plan for
Non-Employee Directors (the "Directors'
5
<PAGE>
Option Plan"), which was approved by LG&E Energy's shareholders at the 1994
Annual Meeting. Under the terms of the Directors' Option Plan, upon initial
election or appointment to the LG&E Energy Board, each new director, who has not
been an employee or officer of LG&E Energy within the preceding three years,
receives an option grant for 4,000 shares of LG&E Energy Common Stock. Following
the initial grant, eligible directors receive an annual option grant of 4,000
shares on the first Wednesday of each February. Option grants for 1994-1996 were
for 2,000 shares, all of which were adjusted in April 1996 to reflect a
two-for-one stock split. The option exercise price per share for each share of
LG&E Energy Common Stock is the fair market value at the time of grant. Options
granted are not exercisable during the first twelve months from the date of
grant and will terminate 10 years from the date of grant. In the event of a
tender offer or an exchange offer for shares of LG&E Energy Common Stock, all
then exercisable, but unexercised options granted under the Directors' Option
Plan will continue to be exercisable for thirty days following the first
purchase of shares pursuant to such tender or exchange offer.
The Directors' Option Plan authorizes the issuance of up to 500,000
shares of LG&E Energy Common Stock, of which 251,000 shares are subject to
existing options at a weighted average per share price of $22.83. As of
February 16, 1999, each non-employee director held 20,000 exercisable options
and 4,000 unexercisable options to purchase LG&E Energy Common Stock, with
the exception of Mr. Grade, who held 8,000 exercisable options and 4,000
unexercisable options, and Messrs. Gatton, Ramsey and Rouse, Mrs. Ball and
Drs. Shearer and Todd, who each held 4,000 exercisable and 4,000
unexercisable options. The number of shares subject to the Directors' Option
Plan and subject to awards outstanding under the plan will adjust with any
stock dividend or split, recapitalization, reclassification, merger,
consolidation, combination or exchange of shares, or any similar corporate
change.
AUDIT COMMITTEE
The Audit Committee of the Board is composed of Messrs. Ballard, Brown,
Gatton, Grade, Grissom, Lewis and Ramsey, Mrs. Ball and Drs. Shearer and
Todd. During 1998, the Audit Committee maintained direct contact with the
independent auditors and KU's Internal Auditor to review the following
matters pertaining to KU and to LG&E Energy and its subsidiaries, including
LG&E: the adequacy of accounting and financial reporting procedures; the
adequacy and effectiveness of internal accounting controls; the scope and
results of the annual audit and any other matters relative to the audit of
these companies' accounts and financial affairs that the Committee, the
Internal Auditor, or the independent auditors deemed necessary. The Audit
Committee met three times during 1998.
COMPENSATION COMMITTEE
The Compensation Committee, composed of non-employee directors, approves the
compensation of the Chief Executive Officer and the executive officers of LG&E
Energy, LG&E and KU. The Committee makes recommendations to the full Board
regarding benefits provided to executive officers and the establishment of
various employee benefit plans. The members of the Compensation Committee are
Messrs. Gatton, Grade, Grissom, Morton, Ramsey and Rouse and Mrs. McNamara. The
Compensation Committee met seven times during 1998.
NOMINATING AND GOVERNANCE COMMITTEE
The Nominating and Governance Committee is composed of the Chairman of
the Board and certain other directors. The Committee reviews and recommends
to the Board of Directors nominees to serve on the Board and their
compensation. The Committee considers nominees suggested by other members of
the Board, by members of management and by voting shareholders. To be
considered for inclusion in the slate of nominees proposed by the Board of
Directors at an annual meeting, voting shareholder recommendations must be
submitted in writing to the Secretary of KU not later than 120 days prior to
the Annual Meeting. In addition, the Articles of Incorporation and bylaws of
KU contain procedures governing voting shareholder nominations for election
of directors at a shareholders'
6
<PAGE>
meeting. The Chairman of the Annual Meeting may refuse to acknowledge the
nomination of any person not made in compliance with these procedures. The
members of the Nominating and Governance Committee are Messrs. Ballard, Brown,
Hale (ex officio), Lewis, Ramsey and Rouse, Mrs. Ball and Mrs. McNamara and Dr.
Shearer. The Nominating and Governance Committee met two times during 1998.
LONG-RANGE PLANNING COMMITTEE
The Long-Range Planning Committee is composed of Messrs. Grade, Grissom,
Lewis, Morton, Rouse and Todd, Mrs. Ball and Mrs. McNamara and Dr. Shearer. The
Long-Range Planning Committee considers and makes recommendations to the Board
regarding KU's future strategy and direction, long-term goals and other
matters of long-term importance. The Long-Range Planning Committee did not meet
during 1998.
7
<PAGE>
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table shows the cash compensation paid or to be paid by KU,
KU Energy or LG&E Energy and any of its subsidiaries including LG&E, as well
as certain other compensation paid or accrued for those years, to the Chief
Executive Officer and the next four highest compensated executive officers of
KU who were serving as such at December 31, 1998, in all capacities in which
they served during 1996, 1997 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------
ANNUAL COMPENSATION AWARDS
----------------------------------- ----------
OTHER SECURITIES PAYOUTS
ANNUAL UNDERLYING -------- ALL OTHER
COMPEN- OPTIONS/ LTIP COMPEN-
NAME AND SALARY BONUS SATION SARS PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#)(2) ($) ($)
- ----------------------------------------------- ---- ------------ -------- ------------ ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 1998 $ 700,000 $649,800 $ 32,301 133,588 $821,581 $ 36,191(1)
Chairman of the Board 1997 580,000 311,808 18,212 67,728 313,037 26,675
and Chief Executive Officer 1996 510,000 416,068 11,010 55,000 641,092 26,909
Victor A. Staffieri 1998 300,000 150,461 10,269 45,802 166,611 15,590(1)
Former Chief Financial Officer 1997 270,000 159,064 8,063 27,946 57,416 10,635
(Currently President and Chief 1996 245,000 175,310 7,431 26,022 124,950 9,336
Operating Officer of LG&E Energy)
John R. McCall 1998 260,000 140,399 7,870 34,733 96,635 15,582(1)
Executive Vice President, 1997 245,000 114,764 6,922 15,605 32,306 11,414
General Counsel and Corporate Secretary 1996 231,000 112,303 7,230 15,098 35,868 11,029
Wayne T. Lucas 1998 252,035 161,822 1,307 23,028 0 9,500(1)
Executive Vice President-- 1997 215,792 69,555 1,271 0 29,576 4,750
Power Generation 1996 208,137 49,043 749 0 33,124 6,361
Robert M. Hewett 1998 211,484 126,469 919 19,928 0 7,405(1)
President, Kentucky Utilities 1997 183,727 45,033 1,768 0 29,576 4,750
Company 1996 164,681 32,052 363 0 33,124 4,500
Michael R. Whitley 1998 431,205 74,770 2,667,167(3) 58,203 0 4,024,014(1)(4)
Former Vice Chairman and 1997 444,427 186,173 2,477 0 50,967 4,750
Chief Operating Officer 1996 387,737 99,741 2,164 0 79,768 6,242
</TABLE>
- ------------------------
(1) Includes employer contributions to 401(k) plan, nonqualified thrift plan
and employer paid life insurance premiums in 1998 as follows: Mr. Hale
$4,375, $16,625 and $15,191, respectively; Mr. Staffieri $4,875, $8,897
and $1,818, respectively; Mr. McCall $4,318, $6,925 and $4,340,
respectively; Mr. Lucas, $4,800, $0 and $4,700, respectively; Mr. Hewett
$4,800, $0 and $2,604, respectively; and Mr. Whitley $4,800, $7,072 and
$64,610, respectively.
(2) As adjusted for the 2 for 1 stock split effective in April 1996.
(3) Includes tax gross-up of $2.6 million.
(4) Includes contract termination benefits of $3.9 million.
8
<PAGE>
OPTION/SAR GRANTS TABLE
OPTION/SAR GRANTS IN 1998 FISCAL YEAR
The following table contains information at December 31, 1998, with respect
to grants of stock options and stock appreciation rights (SARs) to the named
executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------ REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL
SECURITIES TOTAL RATES OF STOCK
UNDERLYING OPTIONS/SARS EXERCISE PRICE APPRECIATION
OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------------------
NAME (#) (1) FISCAL YEAR ($/ SHARE) DATE 0%($) 5%($) 10%($)
- ------------------- --------------- ------------------- ----------- ------------ ------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Roger W. Hale 133,588 16.8% 23.47 02/04/2008 0 1,971,780 4,996,877
Victor A. Staffieri 45,802 5.8% 23.47 02/04/2008 0 676,045 1,713,230
John R. McCall 34,733 4.4% 23.47 02/04/2008 0 512,665 1,299,193
Wayne T. Lucas 23,028 2.9% 26.50 05/04/2008 0 383,778 860,876
Robert M. Hewett 19,928 2.5% 26.5 05/04/2008 0 332,114 744,986
Michael R. Whitley 58,203 7.3% 26.5 05/04/2008 0 969,994 2,175,854
</TABLE>
- ------------------------
(1) Options are awarded at fair market value at time of grant; unless otherwise
indicated, options vest in one year and are exercisable over a ten-year
term.
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
AGGREGATED OPTION/SAR EXERCISES IN 1998 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
The following table sets forth information with respect to the named
executive officers concerning the exercise of options and/or SARs during 1998
and the value of unexercised options and SARs held by them as of December 31,
1998:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS OPTIONS/SARS AT
ON VALUE AT FY-END (#) FY-END ($)(1)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------- -------- -------- ------------- ----------------
<S> <C> <C> <C> <C>
Roger W. Hale 29,900 $183,379 136,042/133,588 784,583/646,900
Victor A. Staffieri 0 N/A 110,536/45,802 837,050/221,796
John R. McCall 0 N/A 37,651/34,733 235,255/168,195
Wayne T. Lucas 0 N/A --/23,028 --/41,681
Robert M. Hewett 0 N/A --/19,928 --/36,070
Michael R. Whitley 0 N/A 58,203/-- 105,304/--
</TABLE>
- ------------------------
(1) Dollar amounts reflect market value of LG&E Energy Common Stock at year-end,
minus the exercise price.
8
<PAGE>
LONG-TERM INCENTIVE PLAN AWARDS TABLE
LONG-TERM INCENTIVE PLAN AWARDS IN 1998 FISCAL YEAR
The following table provides information concerning awards made in 1998 to
the named executive officers under the Long-Term Plan.
<TABLE>
<CAPTION>
NUMBER PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
OF SHARES, OTHER PERIOD NON-STOCK PRICE BASED PLANS
UNITS OR UNTIL (NUMBER OF SHARES) (1)
OTHER MATURATION ---------------------------------------------
NAME RIGHTS OR PAYOUT THRESHOLD(#) TARGET(#) MAXIMUM(#)
- ------------------------------------ ------------- ----------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Roger W. Hale 39,244 12/31/2000 15,698 39,244 58,866
Victor A. Staffieri 6,728 12/31/2000 2,691 6,728 10,092
John R. McCall 5,102 12/31/2000 2,041 5,102 7,653
Wayne T. Lucas 2,996 12/31/2000 1,198 2,996 4,494
Robert M. Hewett 2,592 12/31/2000 1,037 2,592 3,888
Michael R. Whitley 11,357 12/31/2000 4,543 11,357 17,036
</TABLE>
- ------------------------
(1) The table indicates the number of performance units that are paid 50% in
stock and 50% in cash at maturation.
Each performance unit awarded represents the right to receive an amount
payable 50% in LG&E Energy Common Stock and 50% in cash on the date of
payout, the latter portion being payable in cash in order to facilitate the
payment of taxes by the recipient. The amount of the payout is determined by
the then-fair market value of LG&E Energy Common Stock. For awards made in
1998, the Long-Term Plan rewards executives on a three-year rolling basis
dependent upon the total shareholder return for shareholders. The target for
award eligibility requires that LG&E Energy shareholders earn a total return
at a preset level in comparison to that of the utility holding companies and
gas and electric utilities in LG&E Energy's Long-Term Plan Peer Group. The
Committee sets a contingent award for each management level selected to
participate in the Plan and such amount is the basis upon which incentive
compensation is determined. Depending on the level of achievement, the
participant can receive from zero to 150% of the contingent award amount.
Payments made under the Long-Term Plan in 1998 are reported in the summary
compensation table for the year of payout.
9
<PAGE>
PENSION PLANS
The following table shows the estimated pension benefits payable to a
covered participant at normal retirement age under LG&E Energy's qualified
defined benefit pension plans, as well as non-qualified supplemental pension
plans that provide benefits that would otherwise be denied participants by
reason of certain Internal Revenue Code limitations for qualified plan benefits,
based on the remuneration that is covered under the plan and years of service
with KU, LG&E Energy and its subsidiaries:
1998 PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------
REMUNERATION 15 20 25 30 OR MORE
- --------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
$ 100,000 $ 47,896 $ 47,896 $ 47,896 $ 55,665
$ 200,000 $ 111,896 $ 111,896 $ 111,896 $ 111,896
$ 300,000 $ 175,896 $ 175,896 $ 175,896 $ 175,896
$ 400,000 $ 239,896 $ 239,896 $ 239,896 $ 239,896
$ 500,000 $ 303,896 $ 303,896 $ 303,896 $ 303,896
$ 600,000 $ 367,896 $ 367,896 $ 367,896 $ 367,896
$ 700,000 $ 431,896 $ 431,896 $ 431,896 $ 431,896
$ 800,000 $ 495,896 $ 495,896 $ 495,896 $ 495,896
$ 900,000 $ 559,896 $ 559,896 $ 559,896 $ 559,896
$1,000,000 $ 623,896 $ 623,896 $ 623,896 $ 623,896
$1,100,000 $ 687,896 $ 687,896 $ 687,896 $ 687,896
$1,200,000 $ 751,896 $ 751,896 $ 751,896 $ 751,896
$1,300,000 $ 815,896 $ 815,896 $ 815,896 $ 815,896
$1,400,000 $ 879,896 $ 879,896 $ 879,896 $ 879,896
$1,500,000 $ 943,896 $ 943,896 $ 943,896 $ 943,896
$1,600,000 $ 1,007,896 $ 1,007,896 $ 1,007,896 $1,007,896
$1,700,000 $ 1,071,896 $ 1,071,896 $ 1,071,896 $1,071,896
</TABLE>
A participant's remuneration covered by the Retirement Income Plan (the
"Retirement Income Plan") is his or her average base salary and short-term
incentive payment (as reported in the Summary Compensation Table) for the
five calendar plan years during the last ten years of the participant's
career for which such average is the highest. The estimated years of service
for each named executive employed by the Company at December 31, 1998 is as
follows: 32 years for Mr. Hale; 29 years for Mr. Lucas; 4 years for Mr.
McCall; 6 years for Mr. Staffieri and 30 years for Mr. Hewett. Benefits shown
are computed as a straight life single annuity beginning at age 65.
Current Federal law prohibits paying benefits under the Retirement Income
Plan in excess of $120,000 per year. Officers of LG&E, KU and LG&E Energy with
at least one year of service with either company are eligible to participate in
LG&E Energy's Supplemental Executive Retirement Plan (the "Supplemental
Executive Retirement Plan"), which is an unfunded supplemental plan that is not
subject to the $120,000 limit. Presently, participants in the Supplemental
Executive Retirement Plan consist of all of the eligible officers of LG&E, KU
and LG&E Energy. This plan provides generally for retirement benefits equal to
64% of average current earnings during the final 36 months prior to retirement,
reduced by Social Security benefits, by amounts received under the Retirement
Income Plan and by benefits from other employers. As part of its employment
agreement with Mr. Hale, LG&E established a separate Supplemental Executive
Retirement Plan. The special plan generally provides for a retirement benefit
for Mr. Hale of 2% for each of his first 20 years of service with LG&E Energy,
LG&E or with certain prior employers, 1.5% for each of the next 10 years of
service and 1% for each remaining year of service completed prior to age 65, all
multiplied by Mr. Hale's final 36 months average compensation, less benefits
payable from the Retirement Income Plan, benefits payable from any other
qualified or nonqualified plan sponsored by LG&E Energy, LG&E or certain prior
employers, and primary Social Security benefits. Under Mr. Hale's employment
agreement (see below), he may elect to commence payment of his retirement
benefits at age 50. If he retires prior to age 65, Mr. Hale's benefits will be
reduced by factors set forth in the employment agreement.
10
<PAGE>
The estimated annual benefits to be received under the Retirement Income
Plan and the Supplemental Executive Retirement Plans upon normal retirement at
age 65 and after deduction of Social Security benefits will be $712,328 for Mr.
Hale; $122,371 for Mr. Lucas; $249,108 for Mr. McCall; $292,023 for Mr.
Staffieri; and $112,580 for Mr. Hewett.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT
ARRANGEMENTS AND CHANGE IN CONTROL PROVISIONS
On May 20, 1997, Mr. Hale entered into a new employment agreement with LG&E
Energy for services to be provided to LG&E Energy and its subsidiaries,
including LG&E and KU. This agreement became effective upon the May 4, 1998
consummation of the merger with KU Energy and has an initial term of five years
ending on May 4, 2003. Under the agreement, Mr. Hale is entitled to an annual
base salary of not less than $675,000, subject to annual review by the
Compensation Committee, and to participate in the Short-Term Plan and the
Long-Term Plan. Mr. Hale's agreement with LG&E Energy provides for a short-term
incentive target award of not less than 60% of base salary and long-term
incentive grants with a present value of not less than 110% of base salary to be
delivered two-thirds in the form of performance units/shares and one-third in
the form of non-qualified stock options. In addition, the agreement provides
that at the Company's expense a life insurance policy in the amount of not less
than $2 million shall be provided to Mr. Hale. LG&E Energy's Board of Directors
may terminate the agreement at any time and, if it does so for reasons other
than cause, LG&E Energy must pay Mr. Hale's base salary plus his target
short-term incentive award for the remaining term of his employment contract,
but not less than two years.
During 1998, officers of LG&E Energy and KU entered into revised change in
control agreements, which agreements generally provide for the benefits
described below. In the event of a change in control, all such officers of KU
and LG&E Energy shall be entitled to the following payments if, within
twenty-four months after such change in control, they are terminated for reasons
other than cause or disability, or their employment responsibilities are
altered: (i) all accrued compensation; (ii) a severance amount equal to 2.99
times the sum of (a) his or her annual base salary and (b) his or her bonus or
"target" award paid or payable pursuant to the Short-Term Plan. Payments may be
made to executives which would equal or exceed an amount which would constitute
a nondeductible payment pursuant to Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), or be subject to an excise tax imposed by Section
4999 of the Code and, in the latter case, KU and LG&E Energy will "gross up"
the applicable severance payments to the executive to cover any excise taxes
that may be due. The executive is entitled to receive such amounts in a lump-sum
payment within thirty days of termination. A change in control encompasses
certain mergers and acquisitions, changes in Board membership and acquisitions
of voting securities of LG&E Energy.
Also upon a change in control of LG&E Energy, all stock-based awards shall
vest 100%, and all performance-based awards, such as performance units and
performance shares, shall immediately be paid out in cash, based upon the extent
to which the performance goals have been met through the effective date of the
change in control or based upon the assumed achievement of such goals, whichever
amount is higher and prorated for the executive's deemed period of service
during the relevant performance period. Additionally, executives shall receive
continuation of certain welfare benefits and payments in respect of accrued but
unused vacation days and for out-placement assistance. During 1998, Michael R.
Whitley, former Vice Chairman and Chief Operating Officer received cash payments
before tax "gross up" of approximately $3.9 million, pursuant to existing
employment and change in control agreements, in addition to the stock-based
awards and other benefits described above, in connection with his departure from
KU.
11
