<PAGE>
As filed with the Securities and Exchange Commission on March 31, 1998
File No. 70-09159
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 3 TO
------------------
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
-------------------------------
LG&E Energy Corp.
220 West Main Street
P.O. Box 32030
Louisville, Kentucky 40232
(Name of company filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent)
John R. McCall George S. Brooks, II
Executive Vice President, General Counsel and
General Counsel and Secretary Corporate Secretary
LG&E Energy Corp. KU Energy Corporation
220 West Main Street One Quality Street
Louisville, Kentucky 40232 Lexington, Kentucky 40507
(Name and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Peter D. Clarke Robert A. Yolles
Gardner, Carton & Douglas Jones, Day, Reavis & Pogue
321 North Clark Street, Suite 3400 77 West Wacker Drive
Chicago, Illinois 60610 Chicago, Illinois 60601
<PAGE>
TABLE OF CONTENTS
Item 1. Description of Proposed Transaction ............................. 1
A. Introduction .................................................... 1
1. General Request and Overview of Transaction ................ 2
B. Description of the Parties to the Transaction ................... 3
1. General Description ........................................ 3
(a) LG&E Energy ........................................... 3
(b) KU Energy ............................................. 6
2. Description of Energy Sales and Facilities ................. 8
(a) LG&E .................................................. 8
(i) Energy Sales ................................... 8
(ii) Electric Generating Facilities ................. 9
(iii) Electric Transmission and Other Facilities ..... 9
(iv) Fuel Sources ................................... 10
(v) Gas Facilities ................................. 10
(b) Kentucky Utilities .................................... 10
(i) Energy Sales ................................... 10
(ii) Electric Generating Facilities ................. 10
(iii) Electric Transmission and Other Facilities ..... 12
(iv) Fuel Sources ................................... 12
3. Electric Coordination ...................................... 12
4. Non-Utility Interests of LG&E Energy and KU Energy ......... 14
(a) LG&E Energy ........................................... 14
(b) KU Energy ............................................. 15
C. Description of Transaction and Statement as to Consideration .... 15
1. Background ................................................. 15
2. Merger Agreement ........................................... 22
3. Management of LG&E Energy following the Transaction ........ 23
4. Related Agreements ......................................... 23
Item 2. Fees, Commissions and Expenses .................................. 23
Item 3. Applicable Statutory Provisions ................................. 24
A. Section 10(b) ................................................... 26
1. Section 10(b)(1) ........................................... 26
(a) Interlocking Relations ................................ 26
(b) Concentration of Control .............................. 26
2. Section 10(b)(2) ........................................... 29
(a) Reasonableness of Consideration ....................... 30
(b) Reasonableness of Fees ................................ 31
i
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3. Section 10(b)(3) ........................................... 34
B. Section 10(c) ................................................... 37
1. Section 10(c)(1) ........................................... 37
(a) Compliance With Section 8 ............................. 37
(b) No Detriment to the Carrying Out of Section 11 ........ 37
2. Section 10 (c)(2) .......................................... 41
(a) Efficiencies and Economies ............................ 41
(b) Integrated Public Utility System ...................... 44
(i) Electric System ................................. 44
(ii) Gas Utility System .............................. 47
C. Section 10(f) ................................................... 48
D. Section 3(a)(1) ................................................. 48
E. Section 3(a)(2) ................................................. 50
Item 4. Regulatory Approvals ............................................ 50
A. Antitrust ....................................................... 50
B. Federal Power Act ............................................... 51
C. State Public Utility Regulation ................................. 51
Item 5. Procedure ........................................................ 53
Item 6. Exhibits and Financial Statements ................................ 53
A. Exhibits ........................................................ 53
B. Financial Statements ............................................ 55
Item 7. Information as to Environmental Effects .......................... 57
ii
<PAGE>
Item 1. Description of Proposed Transaction
A. Introduction
This Application-Declaration seeks approval of the Securities and Exchange
Commission (the "Commission") relating to the proposed merger of KU Energy
Corporation, a Kentucky corporation ("KU Energy"), into LG&E Energy Corp., a
Kentucky corporation ("LG&E Energy"), with LG&E Energy as the survivor (the
"Transaction"). LG&E Energy is currently an exempt holding company pursuant to
Section 3(a)(1) of the Public Utility Holding Company Act of 1935 (the "Act")
and owns all of the common stock of Louisville Gas and Electric Company, a
Kentucky corporation ("LG&E"), which is an electric utility company and a gas
utility company under the Act. LG&E owns 4.9% of the common stock of Ohio Valley
Electric Corporation ("OVEC"), which in turn owns all of the common stock of
Indiana-Kentucky Electric Corp. ("IKEC"). Both OVEC and IKEC are electric
utilities under the Act. KU Energy is also an exempt holding company pursuant to
Section 3(a)(1) of the Act and owns all of the common stock of Kentucky
Utilities Company, a Kentucky and Virginia corporation ("Kentucky Utilities"),
an electric utility company under the Act. Kentucky Utilities owns 20% of the
common stock of Electric Energy Inc. ("EEI"), which also is an electric utility
company under the Act, and 2.5% of the common stock of OVEC.
The Transaction is expected to produce substantial benefits to the public,
investors and consumers and will meet all applicable standards of the Act. Among
other things, LG&E Energy and KU Energy believe that the Transaction offers
significant strategic and financial benefits to each company and to their
respective shareholders, as well as to their employees, customers and the
communities in which they do business. In this regard, LG&E Energy and KU Energy
believe that synergies created by the Transaction will generate substantial cost
savings which would not be available absent the Transaction. LG&E Energy and KU
Energy have estimated the dollar value of certain synergies from the Transaction
to be approximately $680 million in non-fuel savings, net of costs to achieve,
over a 10-year period. The expected Transaction benefits are discussed in detail
in Item 3.B.2(a) below.
The Transaction has been approved by the shareholders of LG&E Energy and KU
Energy, with more than 95% of the votes cast at each meeting voting in favor of
the Transaction. The Transaction was approved by the Kentucky Public Service
Commission (the "Kentucky Commission") on September 12, 1997, which, among other
things, found that the Transaction is in accordance with law, for a proper
purpose and consistent with the public interest. The Transaction was also
approved by the Virginia State Corporation Commission (the "Virginia
Commission") on January 20, 1998. On March 27, 1998, the Federal Energy
Regulatory Commission (the "FERC") issued its order approving the Transaction
without further investigation. Various aspects of the Transaction are also
subject to the expiration of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") which should have
expired at midnight on March 27, 1998. A filing with the Tennessee Regulatory
Authority (the "Tennessee Commission") advising it of the Transaction was made
on October 21, 1997. In addition, LG&E and Kentucky Utilities possess various
franchises, permits and licenses granted by local and state authorities that may
need to be renewed or replaced as a result of the Transaction. Apart from the
approval of the Commission under the Act, the foregoing approvals are the
only
<PAGE>
governmental approvals required for the Transaction. In order to permit timely
consummation of the Transaction and the realization of the substantial benefits
it is expected to produce, LG&E Energy requests that the Commission's review of
this Application-Declaration commence and proceed as expeditiously as
practicable.
1. General Request and Overview of Transaction
Pursuant to Section 9(a)(2) and Section 10 of the Act, LG&E Energy requests
that the Commission: (i) authorize the direct and indirect acquisition by LG&E
Energy pursuant to the Transaction described herein of all of the issued and
outstanding common stock of Kentucky Utilities, 20% of the issued and
outstanding stock of EEI and 2.5% of OVEC (which, in turn, owns all of the
common stock of IKEC), and (ii) grant such other authorizations as may be
necessary in connection therewith. LG&E Energy also requests (i) an order under
Section 3(a)(1) of the Act declaring it exempt from all provisions of the Act
except Section 9(a)(2) following consummation of the Transaction and (ii) an
order under Section 3(a)(2) of the Act declaring Kentucky Utilities, as a
holding company, exempt from all provisions of the Act except Section 9(a)(2)
after consummation of the Transaction.
LG&E Energy and KU Energy have entered into an Agreement and Plan of
Merger, dated May 20, 1997 (the "Merger Agreement"), whereby KU Energy will be
merged into LG&E Energy with LG&E Energy as the surviving corporation. A copy of
the Merger Agreement is incorporated by reference as Exhibit B-1. Pursuant to
the Merger Agreement, upon effectiveness of the Transaction, each issued and
outstanding share of common stock, no par value, of KU Energy ("KU Energy Common
Stock") (except shares held by KU Energy shareholders who perfect dissenters'
rights with respect thereto ("KU Energy Dissenting Shares")), together with
associated stock purchase rights, will be canceled and converted into 1.67
shares (the "Exchange Ratio") of common stock, without par value, of LG&E Energy
("LG&E Energy Common Stock"), together with associated stock purchase rights.
Each issued and outstanding share of LG&E Energy Common Stock (except shares
held by LG&E Energy shareholders who perfect dissenters' rights with respect
thereto ("LG&E Energy Dissenting Shares")) will remain outstanding, unchanged,
as one share of LG&E Energy Common Stock.
Upon completion of the Transaction, LG&E Energy will directly own LG&E, a
combination electric and gas public utility company, and Kentucky Utilities, an
electric public utility company. LG&E Energy also will own indirectly LG&E's
4.9% interest in OVEC, Kentucky Utilities' 2.5% interest in OVEC, and Kentucky
Utilities' 20% interest in EEI. As stated above, both OVEC and EEI are electric
public utility companies under the Act.
Upon consummation of the Transaction, LG&E Energy in addition to owning
LG&E, Kentucky Utilities and their respective interests in OVEC and EEI, will
continue to own all of its existing non-utility subsidiaries and will acquire
all of the outstanding capital stock of the non-utility subsidiaries of KU
Energy. See Exhibit E-10 for the corporate structure to be in effect upon
consummation of the Transaction.
2
<PAGE>
B. Description of the Parties to the Transaction
1. General Description
(a) LG&E Energy
LG&E Energy was incorporated under the laws of the Commonwealth of Kentucky
in 1989. It is a holding company exempt from regulation by the Commission under
the Act (except for Section 9(a)(2) thereof) pursuant to Section 3(a)(1) of the
Act. LG&E Energy claims its exemption pursuant to annual filings in accordance
with Rule 2 under the Act.
LG&E Energy owns all of the outstanding common stock of LG&E, a Kentucky
corporation, which is a public-utility company under the Act. Maps of the
electric and gas service areas of LG&E are filed as Exhibits E-3 and E-5.
LG&E is engaged primarily in the generation, transmission and distribution
of electricity to approximately 351,000 customers in Louisville and adjacent
areas in Kentucky. LG&E's service area covers approximately 700 square miles in
17 counties in Kentucky and has an estimated population of 800,000. LG&E also
purchases, distributes and sells natural gas to approximately 277,000 customers
within this service area and in limited additional areas. Included within LG&E's
service area is the Fort Knox Military Reservation, to which LG&E transports gas
and provides electric service, but which maintains its own distribution systems.
Retail sales rates, services and other aspects of LG&E's electric and gas
retail operations are subject to the jurisdiction of the Kentucky Commission.
The Kentucky Commission also possesses regulatory authority over aspects of
LG&E's financial activities including security issuances, property transfers
when the asset value is in excess of $100,000, and mergers with other utilities.
Wholesale rates for electric energy sold in interstate commerce, wheeling
rates for energy transmission in interstate commerce, and certain other
activities of LG&E (including its hydro-electric facilities) are subject to the
jurisdiction of the FERC.
LG&E owns 4.9% of the common stock of OVEC, which has one wholly-owned
subsidiary, IKEC. OVEC and IKEC were organized in 1952 by LG&E and other public
utilities to supply the entire power requirements of the U.S. Department of
Energy's gaseous diffusion plant in Pike County, Ohio, north of Portsmouth. OVEC
owns a 1,075 Megawatt ("Mw") generating station near Cheshire, Ohio and IKEC
owns a 1,290 Mw generating station at Madison, Indiana. All of the electricity
sold by OVEC and IKEC is sold either to the U.S. Department of Energy or to the
owners (or their subsidiaries, all of which are utility companies) of the stock
of OVEC. OVEC and IKEC do not sell electricity to private consumers and do not
have any securities outstanding in the hands of the public. For each of the
three years in the period ended December 31, 1996, LG&E derived less than 0.16%
of its net income from its share of the earnings of OVEC. See, e.g., In the
Matter of Ohio Valley Electric Corporation, et al., Holding Co. Act Release No.
11578, 34 S.E.C. 323 (Nov. 7, 1952).
3
<PAGE>
In addition, as discussed in more detail under Item 1.B.4(a) below, LG&E
Energy and certain non-utility affiliates have entered into a Joint Plan of
Reorganization with Big Rivers Electric Corporation ("Big Rivers") that provides
for the 25-year lease by LG&E Energy affiliates of Big Rivers' generation
facilities and other arrangements between Big Rivers and LG&E Energy affiliates
for the operation of those facilities and the purchase of electricity therefrom.
Big Rivers' generation facilities will be dispatched separately from those of
LG&E and Kentucky Utilities, and Big Rivers' transmission facilities will not be
owned, leased or controlled by LG&E or Kentucky Utilities.
While LG&E is currently the only subsidiary of LG&E Energy that is a
public-utility company under the Act, LG&E Energy has two other directly-owned
subsidiaries, LG&E Energy Foundation, Inc. ("LG&E Energy Foundation") and LG&E
Capital Corp. ("LG&E Capital"). LG&E Energy Foundation is a tax-exempt
charitable foundation that makes charitable contributions to qualified entities.
LG&E Capital, through various subsidiaries and joint ventures, is involved in
numerous non-utility, energy-related businesses. The activities of these
subsidiaries are more fully described under Item 1.B.4(a) below. For the year-
ended December 31, 1996, approximately 77% of LG&E Energy's consolidated
operating revenues and 14% of its consolidated net income were derived from the
non-utility businesses. As of December 31, 1996, approximately 33% of LG&E
Energy's consolidated assets were invested in non-utility businesses. For the
twelve months ended September 30, 1997, approximately 81% of LG&E Energy's
consolidated operating revenues and 6% of its consolidated net income were
derived from non-utility businesses. As of September 30, 1997, approximately 37%
of LG&E Energy's consolidated assets were invested in non-utility businesses.
LG&E Energy's Common Stock is listed on the New York Stock Exchange,
Inc. ("NYSE") and the Chicago Stock Exchange. As of September 30, 1997, there
were 66,525,636 shares of LG&E Energy Common Stock outstanding. LG&E Energy has
no preferred stock outstanding. As of September 30, 1997, there was a total of
1,610,287 shares of LG&E preferred stock outstanding, under three separate
series. LG&E's outstanding preferred stock will not be affected by the
Transaction. LG&E Energy's and LG&E's principal executive office is located at
220 West Main Street, Louisville, Kentucky 40202. Copies of the Articles of
Incorporation of LG&E Energy and LG&E are incorporated by reference as Exhibit
A-1 and Exhibit A-2.
On a consolidated basis, LG&E Energy's operating revenues and operating income
for the twelve months ended December 31, 1996, were $3.589 billion and $211
million, respectively, consisting of the following (before intercompany
eliminations):
4
<PAGE>
($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Revenues Income
--------- ---------
<S> <C> <C>
LG&E
Electric $ 607 $193
Gas 214 18
LG&E Capital 2,768 16
</TABLE>
Consolidated assets of LG&E Energy and its subsidiaries as of December 31, 1996
were approximately $3.012 billion, consisting of $1.449 billion in net electric
utility property, plant and equipment; $237 million in net gas utility property,
plant and equipment; and $1.326 billion in other corporate assets.
On a consolidated basis, LG&E Energy's unaudited operating revenue and operating
income for the twelve months ended September 30, 1997, were $4.264 billion and
$197 million, respectively, consisting of the following (before intercompany
eliminations):
($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Revenues Income
--------- ---------
<S> <C> <C>
LG&E
Electric $ 600 $183
Gas 224 14
LG&E Capital 3,440 16
</TABLE>
Unaudited consolidated assets of LG&E Energy and its subsidiaries as of
September 30, 1997, were approximately $3.248 billion, consisting of $1.441
billion in net electric utility property, plant and equipment; $247 million in
net gas utility property, plant and equipment; and $1.560 billion in other
corporate assets.
More detailed information concerning LG&E Energy and its subsidiaries is
contained in LG&E Energy's Annual Report on Form 10-K for the year ended
December 31, 1996, its Annual Report to Shareholders for the year ended December
31, 1996, and its Quarterly Reports on Form 10-Q for the quarters ended March
31, 1997, June 30, 1997, and September 30, 1997, which are incorporated by
reference as Exhibits H-1, H-4, H-7, H-8, and H-9, respectively, and in LG&E's
Annual Report on Form 10-K for the year ended December 31, 1996, and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30,
1997 and September 30, 1997, which are incorporated by reference as Exhibits H-
3, H-13, H-14, and H-15, respectively.
5
<PAGE>
(b) KU Energy
KU Energy, incorporated under the laws of the Commonwealth of Kentucky in
1988, is a holding company exempt from regulation by the Commission under the
Act (except for Section 9(a)(2) of the Act) pursuant to Section 3(a)(1) of the
Act and by order of the Commission in KU Energy Corporation, Holding Co. Act
Release No. 25409, 50 S.E.C. Docket 294 (November 13, 1991).
KU Energy's utility subsidiary, Kentucky Utilities, is an electric utility
company under the Act. Kentucky Utilities is engaged in producing, transmitting
and selling electric energy to about 432,900 customers in over 600 communities
and adjacent suburban and rural areas in 77 counties in central, southeastern
and western Kentucky, and to about 28,800 customers in 5 counties in
southwestern Virginia. In Virginia, Kentucky Utilities operates under the name
Old Dominion Power Company. Kentucky Utilities also sells electric energy at
wholesale for resale in 12 municipalities in Kentucky. A map of the electric
service area of Kentucky Utilities is filed as Exhibit E-1.
The territory served by Kentucky Utilities has an aggregate population
estimated at about 1,000,000. The largest city served is Lexington, Kentucky.
The population of the metropolitan Lexington area is estimated at about 225,000.
The populations of the next 10 largest cities served at retail range from about
21,000 to 9,000. The territory served includes most of the Bluegrass Region of
central Kentucky and parts of the coal mining areas in southeastern and western
Kentucky and southwestern Virginia.
Kentucky Utilities is subject to the jurisdiction of the Kentucky
Commission and the Virginia Commission as to retail rates and service, accounts,
issuance of securities and in other respects. The FERC has jurisdiction under
the Federal Power Act over certain of the electric utility facilities and
operations, wholesale sale of power and related transactions and accounting
practices of Kentucky Utilities, and in certain other respects as provided in
the Federal Power Act. 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 $226,000), Kentucky Utilities may also be subject to the jurisdiction
of the Tennessee Commission as to retail rates, accounts, issuance of securities
and in other respects.
Kentucky Utilities owns 2.5% of the common stock of OVEC, which company is
described in Item 1.B.1. (a) above. Kentucky Utilities also owns 20% of EEI. EEI
was formed in the early 1950s to provide electric energy to a uranium enrichment
plant located near Paducah, Kentucky. The enrichment plant was originally
operated by the Atomic Energy Commission and the Department of Energy and is
operated today by the United States Enrichment Corporation. EEI owns the Joppa
Plant, a 1,015 Mw coal-fired electric generating plant located near Joppa,
Illinois, and six 161 kilovolts ("Kv") transmission lines which transmit power
from the Joppa Plant to the Paducah enrichment plant. EEI's common stock is held
by Kentucky Utilities and three other utility companies. EEI sells its excess
electricity to its sponsoring utilities for resale. The uranium enrichment
facility is EEI's only end-user customer. For each of the three years in the
period ended December 31, 1996, KU Energy derived less than 3.4% of its net
income from its share of the earnings of EEI and OVEC. See Central Illinois
Public Service Co., Holding Co.
6
<PAGE>
Act Release No. 10340, 32 S.E.C. 202 (Jan. 15, 1951); Electric Energy, Inc.,
Holding Co. Act Release No. 10639, 32 S.E.C. 495 (June 26, 1951); Electric
Energy, Inc., Holding Co. Act Release No. 13312, 1956 WL 7451 S.E.C.); (Nov. 19,
1956); and In the Matter of Electric Energy, Inc., Holding Co. Act Release No.
13871, 38 S.E.C. 658 (Nov. 28, 1958) for more information concerning EEI.
In addition to Kentucky Utilities, KU Energy has one other subsidiary, KU
Capital Corporation ("KU Capital"). KU Capital is KU Energy's vehicle for
investments in various non-utility energy related ventures, which are described
in more detail in Item 1.B.4(b) below. For the year ended December 31, 1996,
approximately 1.0% of KU Energy's consolidated operating revenues were derived
from its non-utility businesses. As of December 31, 1996, approximately 3.0% of
KU Energy's consolidated assets were invested in non-utility businesses. For the
twelve months ended September 30, 1997, approximately 1.0% of KU Energy's
consolidated operating revenues were derived from its non-utility businesses. As
of September 30, 1997, approximately 3.0% of KU Energy's consolidated assets
were invested in non-utility businesses.
KU Energy's Common Stock is listed on the NYSE and the Pacific Stock
Exchange. As of December 31, 1996 and September 30, 1997, there were 37,817,878
shares and 37,817,517 shares of KU Energy Common Stock outstanding,
respectively. KU Energy has no shares of preferred stock outstanding. As of
December 31, 1996 and September 30, 1997, there were 400,000 shares of Kentucky
Utilities preferred stock outstanding. Kentucky Utilities' outstanding preferred
stock will not be impacted by the Transaction. KU Energy's and Kentucky
Utilities' principal executive office is located at One Quality Street,
Lexington, Kentucky 40507. Copies of the amended Articles of Incorporation of KU
Energy and Kentucky Utilities are incorporated by reference as Exhibit A-3 and
Exhibit A-4, respectively.
For the year ended December 31, 1996, KU Energy's operating revenues
and operating income on a consolidated basis were approximately $716 million and
$165 million, respectively, consisting of the following: ($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Company Revenues Income
- ------- --------- ----------
<S> <C> <C>
Kentucky Utilities $712 $169
Non-Utility 4 (4)
</TABLE>
Consolidated assets of KU Energy and its subsidiaries as of December 31, 1996,
were approximately $1.7 billion, consisting of $1.5 billion in net electric
utility property, and $55 million in non-utility assets.
7
<PAGE>
For the twelve months ended September 30, 1997, KU Energy's unaudited
operating revenues and operating income on a consolidated basis were
approximately $714 million and $165 million, respectively, consisting of the
following:
($ in millions)
<TABLE>
<CAPTION>
Operating Operating
Company Revenues Income
- -------------------- --------- ----------
<S> <C> <C>
Kentucky Utilities $709 $167
Non-Utility 5 (2)
</TABLE>
Unaudited consolidated assets of KU Energy and its subsidiaries as of September
30, 1997, were approximately $1.7 billion, consisting of $1.5 billion in net
electric utility property, plant and equipment, and $58 million in non-utility
assets.
More detailed information concerning KU Energy and Kentucky Utilities is
contained in the Annual Reports of KU Energy and Kentucky Utilities, on Form 10-
K for the year ended December 31, 1996, which are incorporated by reference as
Exhibits H-2 and H-6, respectively, in KU Energy's 1996 Annual Report to
Shareholders, which is incorporated by reference as Exhibit H-5, in KU Energy's
Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30,
1997 and September 30, 1997, which are incorporated by reference as Exhibits H-
10, H-11, and H-12, respectively, and in Kentucky Utilities Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997, June 30, 1997, and September
30, 1997, which are incorporated by reference as Exhibits H-16, H-17 and H-18,
respectively.
2. Description of Energy Sales and Facilities
(a) LG&E
(i) Energy Sales
For the year ended December 31, 1996, and the twelve months ended September
30, 1997, LG&E sold the following amounts of electric energy (at retail or
wholesale) and distributed the following amounts of natural or manufactured gas
at retail:
<TABLE>
<CAPTION>
Year-ended Twelve Months Ended
December 31, 1996 September 30, 1997
----------------- -------------------
<S> <C> <C>
Kwh of electric energy sold (including 14,132,936 13,591,865
amounts delivered in interchange) - in
thousands
Mcf of gas distributed at retail 56,708,885 53,606,473
(including transported gas)
</TABLE>
8
<PAGE>
(ii) Electric Generating Facilities
LG&E's power generating system consists of eight coal-fired units operated
at its three steam generating stations. Combustion turbines supplement the
system during peak or emergency periods. At September 30, 1997, LG&E owned the
following electric generating stations:
<TABLE>
<CAPTION>
Year in
Steam Stations: Service Capability Rating (Mw)
------- ----------------------
Mill Creek-Kosmosdale, Ky.
<S> <C> <C>
Unit 1 1972 303
Unit 2 1974 301
Unit 3 1978 386
Unit 4 1982 480 1,470
---
Cane Run-near Louisville, Ky.
Unit 4 1962 155
Unit 5 1966 168
Unit 6 1969 240 563
---
Trimble County-Bedford, Ky.
Unit 1 1990 371 (a)
Combustion Turbine Generators (Peaking
capability):
Zorn 1969 16
Paddy's Run 1968 43
Cane Run 1968 16
Waterside 1964 33 108
-- ---
2,512
=====
</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 Illinois
Municipal Electric Agency (IMEA) and Indiana Municipal Power Agency
(IMPA) for expenditures related to Trimble County based on their
proportionate share of ownership interest.
LG&E also owns an 80 Mw hydroelectric generating station located in Louisville,
operated under license issued by the FERC.
The 1997 electric system peak load for LG&E was 2,414 Mw and occurred on
July 21, 1997, exclusive of off-system transactions. For the year ended December
31, 1996, approximately 93% of the kilowatt hour ("Kwh") sales of LG&E was
obtained from coal-fired generation, 6% from purchases and approximately 1% from
hydro and oil and gas-fired generation.
(iii) Electric Transmission and Other Facilities
As of December 31, 1996, LG&E's electric transmission system included 102
pole miles of 345 Kv line, 66 pole miles of 154 Kv line, 250 pole miles of 138
Kv line and 233 pole miles of transmission line of 69 Kv or less. As of December
31, 1996, LG&E's 21 transmission substations had a combined capacity of
approximately 11,026,897 thousand kilovolt amps ("Kva") and the 83 distribution
substations totaled approximately 3,383,530 thousand Kva. A map of LG&E's major
electric transmission lines is filed as Exhibit E-4.
9
<PAGE>
Other assets owned by LG&E include electric distribution systems located
throughout its service area, and property, plant and equipment owned or leased
supporting its electric and gas utility functions. LG&E also owns or leases
other physical properties, including real property, and other facilities
necessary to conduct their operations. See Item 1.B.3. for information on
present electric coordination.
(iv) Fuel Sources
LG&E's electric power generation is predominately coal-fired. LG&E's
average cost of coal is set forth in the LG&E Annual Report on Form 10-K for the
year ended December 31, 1996, which is incorporated by reference as Exhibit H-3.
(v) Gas Facilities
LG&E provides natural gas service at retail in the Louisville metropolitan
area and in 16 neighboring counties. LG&E is directly connected to two
interstate pipelines and has a portfolio of supply arrangements in order to meet
the needs of its customers.
The gas properties of LG&E include 3,528 miles of natural gas distribution
mains and 178 miles of transmission mains. LG&E operates 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 season.
(b) Kentucky Utilities
(i) Energy Sales
For the year ended December 31, 1996, and the twelve months ended September
30, 1997, Kentucky Utilities sold the following amounts of electric energy (at
retail or wholesale):
<TABLE>
<CAPTION>
Year-ended Twelve Months Ended
December 31, 1996 September 30, 1997
----------------- -------------------
<S> <C> <C>
Kwh of electric energy sold 18,630,578 18,575,369
(including amounts delivered
in interchange) - in thousands
</TABLE>
(ii) Electric Generating Facilities
Kentucky Utilities' power generating system consists of the twelve coal-
fired units operated at its five steam generating stations. Combustion turbines
supplement the system during peak or emergency periods. At September 30, 1997,
Kentucky Utilities owned the following electric generating stations:
10
<PAGE>
<TABLE>
<CAPTION>
Steam Stations: Year In Service Capability Rating (Mw)
--------------- ----------------------
<S> <C> <C>
Ghent-Ghent, Ky.
Unit 1 ....................................... 1974 487
Unit 2 ....................................... 1978 516
Unit 3 ....................................... 1981 506
Unit 4 ....................................... 1984 491 2,000
---
E.W. Brown-Burgin, Ky.
Unit 1 ....................................... 1958 107
Unit 2 ....................................... 1963 170
Unit 3 ....................................... 1972 434 711
---
Tyrone, Ky.
Unit 1 and 2 ................................. 1948 63
Unit 3 ....................................... 1948 73 136
---
Green River-South Carrollton, Ky
Unit 1 and 2 ................................. 1950 59
Unit 3 ....................................... 1954 72
Unit 4 ....................................... 1959 111 242
---
Pineville-Four Mile, Ky
Unit 3 ....................................... 1941 33 33
Combustion Turbine Generators (Peaking capacity)
Haefling ..................................... 1971 59
E.W. Brown ................................... 1994-96 484 543
--- -----
3,665
=====
</TABLE>
Kentucky Utilities also owns a 24 Mw hydroelectric generating station located in
Burgin, Kentucky.
Under a contract with Owensboro Municipal Utilities (OMU), Kentucky
Utilities 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 Kentucky Utilities. Such power constituted about 8% of Kentucky
Utilities net system output during 1996.
Kentucky Utilities owns 20% of the common stock of EEI, which, as noted
above, owns and operates a 1,015 Mw generating station in southern Illinois.
Kentucky Utilities 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 Kentucky Utilities. Such power constituted about 8% of
Kentucky Utilities net system output in 1996.
The 1997 electric system peak load for Kentucky Utilities was 3,510 Mw and
occurred on July 28, 1997. For the year ended December 31, 1996, approximately
84% of Kwh sales of
11
<PAGE>
Kentucky Utilities was obtained from coal-fired generation,
approximately 16% from purchases and less than 1% from other generation.
(iii) Electric Transmission and Other Facilities
As of December 31, 1996, Kentucky Utilities' electric transmission system
included 57 pole miles of 500 Kv lines, 356 pole miles of 345 Kv lines, 1,381
pole miles of 138-161 Kv lines and 2,472 pole miles of lines at 69 Kv or less.
As of December 31, 1996, Kentucky Utilities' transmission substations had a
combined capacity of 14,235,000 Kva and the distribution substations had a
combined capacity of 4,172,000 Kva. These facilities are located within the
states of Kentucky and Virginia. A map of Kentucky Utilities' major electric
transmission lines is attached as Exhibit E-6.
Other assets owned or leased by Kentucky Utilities include electric
distribution systems located throughout its service territory and other physical
properties, including real property, and other facilities necessary or
appropriate to conduct its operations. See Item 1.B.3. for information on
electric coordination.
(iv) Fuel Sources
Coal-fired generating units provided more than 99% of Kentucky Utilities'
net kilowatt-hour generation for 1996. Kentucky Utilities' average cost of coal
is set forth in its Annual Report on Form 10-K for the year ended December 31,
1996, which is incorporated by reference as Exhibit H-6.
3. Electric Coordination
The following table sets forth certain information with respect to the
electric utility operations of LG&E Energy as of December 31, 1996, adjusted to
give effect to the Transaction (before intercompany eliminations).
<TABLE>
<CAPTION>
Electric Operating Kwh of Electric Energy Sales
Revenues (including amounts delivered
($ in millions) in interchange--in thousands)
--------------- -----------------------------
<S> <C> <C>
LG&E $ 607 14,132,936
Kentucky Utilities $ 711 18,630,578
------ ----------
TOTAL $1,318 32,763,514
====== ==========
</TABLE>
The following table sets forth certain unaudited information with respect to the
electric utility operations of LG&E Energy for the twelve months ended September
30, 1997, adjusted to give effect to the Transaction (before intercompany
eliminations).
12
<PAGE>
<TABLE>
<CAPTION>
Electric Operating Kwh of Electric Energy Sales
Revenues (including amounts delivered
($ in millions) in interchange) - in thousands
------------------ ------------------------------
<S> <C> <C>
LG&E $ 600 13,591,865
Kentucky Utilities $ 708 18,575,369
------ ----------
TOTAL $1,308 32,167,234
====== ==========
</TABLE>
LG&E and Kentucky Utilities are already physically interconnected through
transmission lines that they own, including two 138 Kv transmission lines and
two 69 Kv transmission lines. LG&E and Kentucky Utilities are two of the 28
members of the East Central Area Reliability Coordination Agreement, the purpose
of which is to augment the reliability of the members' bulk power supply through
coordination of planning and operation of generation and transmission
facilities. The members are engaged in the generation, transmission and sale of
electric power and energy in the east central area of the United States, which
covers all or portions of Michigan, Indiana, Ohio, Kentucky, Pennsylvania,
Virginia, West Virginia and Maryland. LG&E and Kentucky Utilities intend to
operate their separate electric systems as a single system, economically
dispatched. LG&E and Kentucky Utilities have developed a Power Supply System
Agreement pursuant to which, following consummation of the Transaction, they
will designate an operating committee to coordinate joint planning for new
facilities, load responsibility, reserve levels and maintenance schedules. The
Agreement will establish the terms for intercompany exchanges of energy, joint
dispatch of generating facilities and provision of emergency service. Pursuant
to a Transmission Coordination Agreement to be entered into between LG&E and
Kentucky Utilities, following consummation of the Transaction, the transmission
systems of LG&E and Kentucky Utilities will be operated as a single control area
from a common transmission center and will be governed by a single system open
access tariff offering both network service and point-to-point service on their
combined transmission facilities.
LG&E and Kentucky Utilities are also each directly interconnected to
numerous other neighboring utilities. In addition to its direct interconnections
with Kentucky Utilities, LG&E is also directly interconnected with 10
neighboring utilities: PSI Energy, The Cincinnati Gas & Electric Company,
Southern Indiana Gas and Electric Company, American Electric Power (Indiana
Michigan Power Company), OVEC, Big Rivers, Tennessee Valley Authority, Wabash
Valley Power Association, Indiana Municipal Power Agency and East Kentucky Power
Cooperative. In addition to its direct interconnection with LG&E, Kentucky
Utilities is directly interconnected with 11 neighboring utilities: American
Electric Power (Ohio Power Company and Kentucky Power Company), Tennessee Valley
Authority, East Kentucky Power Cooperative, Indiana Municipal Power Agency,
Owensboro Municipal Utilities, OVEC, EEI, PSI Energy, Wabash Valley Power
Association and Big Rivers.
All of the above interconnections are depicted on the map attached as
Exhibit E-2.
13
<PAGE>
4. Non-Utility Interests of LG&E Energy and KU Energy
(a) LG&E Energy
In addition to LG&E, LG&E Energy has two other first-tier subsidiaries,
LG&E Energy Foundation and LG&E Capital both of which are wholly-owned. LG&E
Energy Foundation, a charitable foundation exempt from Federal income tax under
Section 501(c)(3) of the Internal Revenue Code, makes charitable contributions
to qualified entities. LG&E Capital is the vehicle through which LG&E Energy is
engaged in numerous non-utility ventures.
Through its subsidiaries, LG&E Capital has interests in and operates
electric power plants in several states, Argentina and Spain. Each of these
facilities is a qualifying cogeneration facility ("QF") under the Public Utility
Regulatory Policies Act of 1978, an exempt wholesale generator ("EWG") under
Section 32 of the Act or a foreign utility company ("FUCO") under Section 33 of
the Act. LG&E Capital also has interests in and operates two natural gas
distribution companies in the Mendoza and Cordoba provinces in Argentina, both
of which are FUCO's. LG&E Capital is actively involved through various
subsidiaries in energy marketing and trading and, for the year ended December
31, 1996, was the largest utility affiliated energy marketer in the United
States in terms of revenues. With respect to natural gas, LG&E Capital also is
involved through subsidiaries in the gathering, processing, storage and
transportation of natural gas.
As indicated above, LG&E Energy and several of its non-utility affiliates
have entered into a Joint Plan of Reorganization with Big Rivers, an electric
cooperative currently operating under Chapter 11 of the Bankruptcy Code. The
purpose of the Joint Plan is to allow Big Rivers to emerge from bankruptcy as a
financially viable utility capable of fulfilling its responsibilities toward its
member cooperatives at rates that are materially lower than those in effect
today. The Joint Plan includes a series of agreements between Big Rivers and
LG&E Energy and its non-utility affiliates. Throughout the approximately 25-year
term of such agreements, Big Rivers will continue to own all the generating
facilities to which it currently has title, and will continue to own and operate
all its transmission facilities and to meet the electricity requirements of its
member cooperatives. Under the Joint Plan, Big Rivers will sell certain
inventory and personal property to a wholly-owned indirect subsidiary of LG&E
Energy, Western Kentucky Leasing Corp. Western Kentucky Energy Corp. ("WKEC"),
another indirect wholly-owned subsidiary of LG&E Energy, will conduct day-to-day
operation of the facilities. It is expected that WKEC will qualify as an EWG
under the Act. After the required regulatory approvals are received, WKEC will
lease the facilities from Big Rivers, will own the electrical output of the
facilities and will sell to LG&E Energy's energy marketing subsidiary the net
output of the facilities, some of which LG&E Energy's energy marketing
subsidiary is obligated to resell to Big Rivers.
Prior to obtaining the necessary regulatory approvals, Big Rivers will
subcontract with another indirect wholly-owned subsidiary of LG&E Energy for the
day-to-day operation of another facility which is owned by the City of
Henderson, Kentucky. LG&E Energy's operation of this facility is the subject of
a separate no-action letter under the Act requesting confirmation that such LG&E
Energy subsidiary is not an electric utility company under the Act. After the
necessary regulatory approvals are obtained, such subsidiary will take
assignment of Big Rivers'
14
<PAGE>
responsibilities under the current Big Rivers' agreements with the City of
Henderson and will take title to a portion of the electrical output of the
facility (to the extent the output of such facility is not committed to the City
of Henderson to meet the requirements of its residents).
LG&E Energy's non-utility subsidiaries and investments constituted
approximately 33% of LG&E Energy's consolidated assets as of December 31, 1996.
LG&E Energy's non-utility subsidiaries provided approximately 7% of LG&E
Energy's operating income and approximately 14% of LG&E Energy's consolidated
net income for the year ended December 31, 1996. As of September 30, 1997, LG&E
Energy's non-utility subsidiaries and investments constituted approximately 37%
of LG&E Energy's consolidated assets and, for the twelve-months ended September
30, 1997, provided approximately 8% of LG&E Energy's total operating income and
approximately 6% of LG&E Energy's consolidated net income.
Although LG&E Energy is not a registered holding company, LG&E Energy's
aggregate investment in EWGs as of December 31, 1996 would be within the limits
of Rule 53 under the Act. Similarly, LG&E Energy's aggregate investment in other
non-utility subsidiaries and affiliates as of December 31, 1996 would be within
the limits on such investments contained in Rule 58 under the Act.
(b) KU Energy
In addition to Kentucky Utilities, KU Energy has one other first-tier
subsidiary, KU Capital, which is wholly-owned and through which KU Energy
pursues various non-utility ventures. To date, these activities have consisted
of investing as an equity participant in leases of eight combustion turbine
generating units to other utilities and investing in limited partnership
interests in various independent power projects that are either QF's or EWG's.
Each of the leveraged lease investments is subject to a Schedule 7-D filing. A
subsidiary of KU Capital, KU Solutions, is engaged in natural gas marketing, but
is not a public utility company within the meaning of the Act.
KU Energy's non-utility subsidiaries and investments constituted
approximately 3% of KU Energy's assets on a consolidated basis as of December
31, 1996. KU Energy's consolidated total operating income and net income for the
year ended December 31, 1996 were reduced by about 2% each as a result of losses
by KU Energy's non-utility subsidiaries and investments.
C. Description of Transaction and Statement as to Consideration
1. Background
LG&E Energy and KU Energy are neighboring holding companies which have
had a variety of working relationships at the utility level on a wide range of
issues over many years. LG&E and Kentucky Utilities are both parties to the
East Central Area Reliability Coordination Agreement, which is designed to
augment the reliability of the members' bulk power supply through coordination
of planning and operation of generation and transmission facilities. In
addition, the two utilities are parties to interconnection agreements and from
time to time have entered into short-term power sales agreements with each other
and have assisted one another in
15
<PAGE>
restoring service following major storms. As explained above, both companies
also have ownership interests in OVEC. Representatives of LG&E and Kentucky
Utilities also have served together on various electric utility industry task
forces and have pursued joint state legislative initiatives.
In connection with the working relationship between LG&E and Kentucky
Utilities, Roger W. Hale, Chairman and Chief Executive Officer of LG&E Energy,
has periodically met to discuss industry and joint business issues with Michael
R. Whitley, Chairman and Chief Executive Officer of KU Energy, and with Mr.
Whitley's predecessor, John T. Newton. During such meetings, Mr. Hale, Mr.
Whitley and Mr. Newton also discussed their views regarding the future of the
utility industry generally and of LG&E Energy and KU Energy in particular. From
time to time, Mr. Hale, Mr. Whitley and Mr. Newton also informally discussed the
potential benefits that could result from a combination of LG&E Energy and KU
Energy. Mr. Hale, Mr. Whitley and Mr. Newton periodically informed their
respective Boards of Directors of such informal discussions.
In recent years both companies turned their strategic attention to
developments in federal regulatory policy which are designed to increase
competition in the wholesale market for bulk power and expand competition in the
market for generation. Many of these developments were prompted by the Energy
Policy Act of 1992 (the "1992 Act"), which granted the FERC the authority to
order electric utilities to provide transmission service to other utilities and
to other buyers and sellers of electricity in the wholesale market. The 1992 Act
also created a new class of power producers, EWGs, which are exempt from
regulation under the Act. The exemption from regulation under the Act of EWGs
has increased the number of entrants into the wholesale electric generation
market, thus increasing competition in the wholesale segment of the electric
utility industry.
Commencing in December 1993, pursuant to its authority under the 1992
Act, FERC issued a number of orders in specific cases directing utilities to
provide transmission services. On April 7, 1995, FERC issued a notice of
proposed rulemaking under which it proposed to implement, on a comprehensive
basis, the comparable transmission service policies it has set forth in specific
cases. In April 1996, FERC issued Orders 888 and 889, implementing in large
part the proposals in its proposed rulemaking. Under FERC's current
transmission policies, electric utilities are required to offer transmission
services to third parties on a basis comparable to services that the electric
utilities provide themselves. In addition, pursuant to Order 889, electric
utilities have been required to separate their merchant and transmission
functions. FERC's actions to date and its transmission rulemaking proceedings
have increased the availability of transmission services, which also has created
greater competition in the wholesale power market.
In addition, legislative and regulatory bodies in numerous states have
initiated reviews of the basic structure of the electric utility industry and
are considering or have adopted various proposals to require more competition in
the retail portion of the industry. The Kentucky Commission has held a series
of informal meetings with electric utilities under its jurisdiction and other
parties to discuss the potential impact of industry restructuring. The theme of
the meetings has been how the Kentucky Commission and the electric utilities can
best work together to ensure that any restructuring benefits Kentucky consumers.
16
<PAGE>
The changes to the electric industry that have occurred and that are
occurring are bringing increased competition to various sectors of the business
and are putting pressure on utilities to lower their costs. Both LG&E Energy
and KU Energy have advocated nationwide customer choice and competition in the
energy market and believe that, as low cost producers of electricity, they will
be able to compete effectively in a more competitive environment. Each of LG&E
Energy and KU Energy independently concluded that key factors contributing to
success in a more competitive environment will include maintaining low-cost
production and achieving a size that will enable it to continue to provide high
quality customer service, enhance its competitive position and maintain its
financial strength.
Since the adoption of the 1992 Act, the management of LG&E Energy and
the LG&E Energy Board of Directors (the "LG&E Energy Board") have continually
analyzed various potential strategic options and opportunities that might be
available to LG&E Energy. Such analysis has resulted in LG&E Energy developing
a significant energy marketing business. For 1996, LG&E Energy was the largest
utility-affiliated power marketer in the United States and had revenues from
energy marketing and trading in excess of $2.7 billion. LG&E Energy has also
sought to take advantage of the new competitive environment by acquiring
interests in and operating independent power plants in several states, Argentina
and Spain and two gas distribution companies in Argentina.
LG&E Energy management's review of potential strategic options and
opportunities has also included analysis of possible business combinations with
other utilities. LG&E Energy's management periodically briefed the LG&E Energy
Board on the results of management's analysis. Management's analysis indicated
that KU Energy was the most attractive merger candidate due to its comparable
size, its low cost production, its financial strength, the existence of
contiguous service territories and the potential synergies and cost savings that
could result from combining LG&E Energy and KU Energy.
KU Energy management recognized the changes in the regulatory
environment and resulting changes in the electric utility industry brought about
by the 1992 Act and other legislative and regulatory changes. KU Energy
management and the KU Energy Board of Directors ("KU Energy Board") continually
reviewed current trends in the electric utility industry noting in particular
the increased level of competition in recent years. In April 1994, the KU
Energy Board created a Long-Range Planning Committee. That committee has been
charged to review KU Energy's strategic options and opportunities and report to
the KU Energy Board from time to time. The committee's review has included
consideration of retail marketing, bulk power marketing and energy services
initiatives and has recognized KU Energy's strong competitive position resulting
from its low cost production of electricity, high quality service and
competitive prices. The committee also has considered possible business
combinations with other utilities in light of KU Energy's strategic position and
direction. The committee and the KU Energy Board heard numerous presentations
from management as well as outside financial and legal advisors regarding these
issues. Management analyzed the potential benefits of a merger with several
neighboring utilities including LG&E Energy and concluded that a business
combination with LG&E Energy would likely produce numerous benefits because of
the contiguous service territories of the two utility companies, the similar
size, financial strength,
17
<PAGE>
strategic initiatives and management styles of the companies, the potential cost
savings that would result from a combination with LG&E Energy and LG&E Energy's
strengths in energy marketing and trading.
At a June 5, 1996 meeting of the LG&E Energy Board, Mr. Hale again
described the merger options that could be pursued by LG&E Energy and discussed
KU Energy as an attractive prospect. Following the Board meeting, senior
management of LG&E Energy further analyzed a possible business combination with
KU Energy by updating and supplementing previously-prepared internal financial
and synergy analyses. At a regular meeting of the LG&E Energy Board on
September 4, 1996, senior management of LG&E Energy reviewed the results of its
analysis of KU Energy and the LG&E Energy Board authorized Mr. Hale to pursue
discussions with KU Energy regarding a possible business combination between
LG&E Energy and KU Energy. Mr. Hale also reviewed with the LG&E Energy Board
the terms of a letter that he proposed to deliver to Mr. Whitley. After
reviewing management's analysis of the terms of the proposed letter, the Board
expressed support for the delivery of the letter.
Following the meeting of the LG&E Energy Board on September 4, 1996,
legal counsel and LG&E Energy's financial advisors assisted LG&E Energy
management in the preparation of the letter to Mr. Whitley. At a meeting in
Louisville on September 13, 1996, between Mr. Hale and Mr. Whitley, Mr. Hale
delivered the letter to Mr. Whitley (the "September 13 Letter") expressing LG&E
Energy's desire for serious and prompt discussions regarding a possible business
combination between LG&E Energy and KU Energy. The September 13 Letter
indicated that based on the information possessed by LG&E Energy, LG&E Energy
could make an offer of $38.00 for each share of KU Energy Common Stock payable
in shares of LG&E Energy Common Stock, which had a then current market price of
$23.125 per share. At their meeting, Mr. Hale presented additional terms that,
Mr. Hale believed could form the basis for commencing discussions between LG&E
Energy and KU Energy. Such additional terms were that, following completion of
any business combination, Kentucky Utilities would maintain its separate
existence and corporate headquarters location, the initial board of directors of
the surviving corporation in any merger would consist of individuals designated
by LG&E Energy (comprising approximately 60% of the total number of directors)
and individuals designated by KU Energy (comprising approximately 40% of the
total number of directors), and the surviving corporation in any merger would
adopt a new name to reflect its national presence and would be headquartered in
Louisville, Kentucky. The respective roles of Messrs. Hale and Whitley
following any merger were outlined in the September 13 Letter. Mr. Whitley
advised Mr. Hale that he would review the September 13 Letter and such terms
with his senior management and the KU Energy Board.
Promptly following his meeting with Mr. Hale, Mr. Whitley advised KU
Energy's outside legal counsel and Goldman, Sachs & Co. ("Goldman Sachs"), KU
Energy's financial advisor, as well as certain senior executive officers of KU
Energy and certain members of the KU Energy Board, of the September 13 Letter.
In a telephone conversation on September 25, 1996, Mr. Whitley informed Mr. Hale
that the KU Energy Board would further review with KU Energy's financial and
legal advisors the matters raised in the September 13 Letter and that Mr. Hale
could expect a response in several weeks.
18
<PAGE>
On October 17, 1996, LG&E Energy formally entered into an engagement
letter with The Blackstone Group L.P. ("Blackstone"), whereby Blackstone agreed
to act as financial advisor to LG&E Energy in connection with the possible
combination with KU Energy. On October 22, 1996, KU Energy entered into a
formal engagement letter with Goldman Sachs whereby Goldman Sachs agreed to act
as financial advisor to KU Energy in connection with possible business
combination transactions.
At an October 22, 1996 special meeting of the KU Energy Board, Mr.
Whitley further discussed the September 13 Letter and the meeting between him
and Mr. Hale at which the September 13 Letter was delivered. At the conclusion
of the meeting, the KU Energy Board authorized Mr. Whitley to respond to LG&E
Energy and specified certain questions and concerns that they wished Mr. Whitley
to address with regard to the exchange ratio, the composition of the board of
directors and the name of the post-merger company.
Following the KU Energy Board meeting on October 22, 1996, Mr. Whitley
and Mr. Hale met on several occasions to discuss the various open issues. At
these meetings, Mr. Hale and Mr. Whitley agreed that, if LG&E Energy and KU
Energy determined to further investigate the possibility of a business
combination, the valuation of KU Energy's common stock would be further
discussed after the parties and their legal and financial advisors had conducted
reciprocal due diligence investigations and the parties completed a joint
analysis of the potential cost savings that could result from a business
combination. Mr. Hale and Mr. Whitley also agreed that the composition and
duties of senior management of the combined companies would be further discussed
and that both companies were in agreement that decisions regarding such matters
would be made based on what the parties mutually agreed would be in the best
interest of the combined company. Mr. Hale and Mr. Whitley then agreed that,
following the execution of a confidentiality agreement, a limited number of
senior executives from LG&E Energy and KU Energy, together with the companies'
respective financial and legal advisors, would meet to commence discussions and
exchange information in order to investigate a potential strategic business
combination between LG&E Energy and KU Energy and to consider what operational
synergies could be anticipated to result from such a combination.
Shortly thereafter, LG&E Energy's financial advisors, Blackstone, and
KU Energy's financial advisors, Goldman Sachs, began exchanging financial
information and analysis in order to help facilitate agreement on a mutually
acceptable exchange ratio in the event that LG&E Energy and KU Energy determined
to enter into a strategic business combination. In addition, between October
31, 1996, and November 10, 1996, LG&E Energy and KU Energy exchanged requests
for information in connection with their respective operational, financial,
regulatory, legal and other analyses and due diligence reviews and
representatives of LG&E Energy and KU Energy discussed the procedures that would
be followed in order to facilitate such analyses and reviews.
Working groups composed of representatives of both companies were
formed to examine various issues including structure, financial modeling,
regulatory considerations, employee and employee benefit matters, communications
and an analysis of cost savings. Meetings were held on November 11 and 12,
1996 among representatives of LG&E Energy and KU Energy and their respective
counsel and financial advisors. At those meetings, senior
19
<PAGE>
management of each company made presentations regarding such company's
operations, financial results and condition and other matters to the other
company and its advisors. In addition, LG&E Energy and KU Energy commenced the
exchange and review of due diligence and other information previously requested.
At the conclusion of such meetings, it was agreed that the parties would
commence the preparation and negotiation of a merger agreement and other
documents that would be required if the parties determined to enter into a
strategic business combination.
On November 18, 1996, counsel for LG&E Energy and KU Energy jointly
engaged Deloitte & Touche Consulting Group ("D&T Consulting Group") to assist
the managements of LG&E Energy and KU Energy in their identifying and
quantifying potential cost savings that could result from a business combination
between the two companies.
During the next several weeks, the various parties continued their
work with respect to the cost savings analysis, business plans, legal structure,
regulatory plans, due diligence and employee benefits. In addition, discussions
continued between LG&E Energy management and Blackstone, on the one hand, and KU
Energy and Goldman Sachs, on the other hand, with respect to financial models
and analysis to help facilitate the establishment of a mutually agreeable
exchange ratio. LG&E Energy and KU Energy and their respective legal advisors
also engaged in negotiations with respect to the terms of a draft merger
agreement, reciprocal stock option agreements and other documents that would be
required to effect a merger of the two companies. While these matters were
occurring, Mr. Hale and Mr. Whitley also continued to discuss key financial and
governance issues, the legal structure of a combined company and employment
terms for Mr. Hale and Mr. Whitley.
By the first week of December, 1996, the companies had substantially
completed their preliminary analysis of potential cost savings and their
respective due diligence reviews. Each of LG&E Energy and KU Energy called
special meetings of their Boards of Directors for December 6, 1996 to consider a
proposed merger of KU Energy into LG&E Energy. Several terms of the proposed
transaction remained unresolved, with the most significant one being the
exchange ratio. Also unresolved were issues related to termination, including
circumstances permitting termination and amounts of termination fees, and issues
relating to reciprocal stock options.
The KU Energy Board received detailed and extensive updates on the
status of all significant developments and negotiations at its meeting on
December 2, 1996. At the conclusion of the meeting, the KU Energy Board asked
Mr. Whitley to inform LG&E Energy of the KU Energy Board's dissatisfaction with
various aspects of the proposal, including exchange ratio level, board
composition, management issues, headquarters location, continuing corporate
presence and transition matters.
On December 2, 1996, Mr. Whitley advised Mr. Hale of the KU Energy
Board's position. On December 3, and 4, 1996, Mr. Hale and Mr. Whitley discussed
the most significant unresolved issues. During a series of discussions, Mr. Hale
and Mr. Whitley and their respective financial advisors were unable to reach
agreement on an exchange ratio. In addition, the parties were unable to agree on
the responsibilities and reporting relationship for Mr. Whitley and Mr. Hale and
other corporate governance issues. On December 5, 1996, Mr. Whitley informed Mr.
Hale by telephone that the KU Energy Board was not prepared to consider a
proposed merger
20
<PAGE>
between KU Energy and LG&E Energy on the terms discussed to date. Mr. Whitley
and Mr. Hale agreed to discuss the matter further in January 1997. Following Mr.
Whitley's discussion with Mr. Hale, Mr. Hale described these developments to the
LG&E Energy Board.
At a January 17, 1997 meeting in Louisville, Mr. Hale presented a
letter to Mr. Whitley requesting that KU Energy resume negotiations. In the
letter, LG&E Energy proposed an exchange ratio of 1.67 shares of LG&E Energy
common stock for each outstanding share of KU Energy common stock. In addition,
the letter proposed that Mr. Hale become Chairman and Chief Executive Officer of
the combined company and that Mr. Whitley become Vice-Chairman, President and
Chief Operating Officer of the combined company. Mr. Whitley informed Mr. Hale
that the KU Energy Board of Directors would carefully consider LG&E Energy's
latest proposal and that Mr. Whitley would contact Mr. Hale with any response.
At a meeting between Mr. Hale and Mr. Whitley on February 26, 1997,
Mr. Whitley informed Mr. Hale that KU Energy was prepared to resume discussions
with LG&E Energy. Following several discussions between representatives of LG&E
Energy and KU Energy and their respective legal and financial advisors, on March
13, 1997, representatives of the companies and their respective financial and
legal advisors met to discuss the process by which the unresolved issues would
be addressed, the preliminary cost savings analysis and the process for updating
and finalizing the parties' respective due diligence reviews and the other
actions that would be required if the parties were to agree to a business
combination.
Throughout March, April and early May of 1997, the parties updated
their work with respect to the cost savings analysis, business plans, regulatory
plans and due diligence. In addition, the parties and their respective counsel
negotiated the remaining terms of the merger agreement, the stock option
agreements and the other agreements required to effect the proposed business
combination.
Mr. Hale discussed further with the LG&E Energy Board the issues
relating to the proposed merger and the status of negotiations at a Board
meeting in March and a meeting on May 8, 1997. At the meeting on May 8, 1997,
Mr. Whitley met with the LG&E Energy Board and reviewed with them his views on
the energy industry generally, the business of KU Energy and its subsidiaries
and the proposed transaction. The KU Energy Board was updated on the status of
negotiations at meetings on April 22, 1997, and May 12, 1997. At the meeting on
May 12, 1997, Mr. Hale met with the KU Energy Board and reviewed with them his
views on the energy industry generally, the business of LG&E Energy and its
subsidiaries and the proposed transaction.
During the period from May 12, 1997 through May 20, 1997, the parties
finalized their work with respect to the cost savings analysis, business plans,
regulatory plans and due diligence and reached final agreement on the terms of
the merger agreement and the other related agreements.
On May 20, 1997, the LG&E Energy Board of Directors and the KU Energy
Board each unanimously approved the Merger Agreement and certain related
agreements and the transactions contemplated thereby and authorized their
execution.
21
<PAGE>
Additional information regarding the background of the Transaction is
set forth in the Registration Statement on Form S-4 of LG&E Energy, which is
filed as Exhibit C-1 hereto (the " Registration Statement").
2. Merger Agreement
The Merger Agreement provides for KU Energy to be merged with and into
LG&E Energy, with LG&E Energy as the surviving corporation. Pursuant to the
Merger Agreement, upon effectiveness of the Transaction, each issued and
outstanding share of KU Energy Common Stock (except KU Energy Dissenting
Shares), together with associated stock purchase rights, will be canceled and
converted into 1.67 shares of LG&E Energy Common Stock, together with associated
stock purchase rights. Each issued and outstanding share of LG&E Energy Common
Stock (except LG&E Energy Dissenting Shares) will remain outstanding, unchanged,
as one share of LG&E Energy Common Stock. The Merger Agreement is incorporated
by reference as Exhibit B-1.
The Transaction is expected to be tax-free to LG&E Energy and KU
Energy shareholders (except as to dissenters' rights and fractional shares).
Based on the capitalization of LG&E Energy and KU Energy on May 20, 1997, and
the Exchange Ratio, the holders of LG&E Energy Common Stock and KU Energy Common
Stock would have held approximately 51.3% and 48.7%, respectively, of the
aggregate number of shares of LG&E Energy Common Stock that would have been
outstanding if the Transaction had been consummated as of such date.
Except as set forth below, if any holder of KU Energy Common Stock
would be entitled to receive a number of shares of LG&E Energy Common Stock that
includes a fraction, then in lieu of a fractional share, such holder will be
entitled to receive a cash payment determined by multiplying the fractional
share interest by the average of the last reported sales price, regular way, per
share of LG&E Energy Common Stock on the NYSE Composite Tape for the ten
business days prior to and including the last business day prior to the day on
which the Transaction is consummated. Fractional shares of KU Energy Common
Stock held in accounts under the dividend reinvestment plans and employee
savings plan of KU Energy will be converted into the applicable number of shares
(or fractional shares) of LG&E Energy Common Stock, in accordance with the
Exchange Ratio.
The Transaction is subject to customary closing conditions, including
the receipt of the requisite shareholder approvals of KU Energy and LG&E Energy
(which have been obtained) and all necessary governmental approvals, including
the approval of the Commission.
The Transaction is designed to qualify as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code of 1986, as amended. LG&E
Energy and KU Energy believe the Transaction will be treated as a "pooling of
interests" for accounting purposes.
The Merger Agreement contains certain covenants relating to the
conduct of business by the parties pending the consummation of the Transaction.
Generally, the parties must carry on their businesses in the ordinary course
consistent with past practice, may not increase common stock dividends beyond
specified levels, and may not issue capital stock except
22
<PAGE>
as specified. The Merger Agreement also contains restrictions on, among other
things, charter and bylaw amendments, capital expenditures, acquisitions,
dispositions, incurrence of indebtedness, certain increases in employee
compensation and benefits and affiliate transactions.
3. Management of LG&E Energy following the Transaction
As provided in the Merger Agreement, after the Transaction is
consummated, the LG&E Energy Board will consist of 15 directors, eight
designated by LG&E Energy and seven designated by KU Energy. The Board of
Directors will have the following four committees: (i) an Audit Committee, (ii)
a Compensation Committee, (iii) a Nominating and Governance Committee and (iv) a
Long Range Planning Committee. The Audit Committee will have ten members, with
five designated by LG&E Energy (one of whom would be the chairman) and five
designated by KU Energy. The Compensation Committee will have seven members,
with four designated by LG&E Energy (one of whom would be the chairman) and
three designated by KU Energy. The Nominating and Governance Committee will have
eight members, with four designated by LG&E Energy and four designated by KU
Energy (one of whom would be the chairman). The Long Range Planning Committee
will have nine members, with five designated by LG&E Energy and four designated
by KU Energy (one of whom would be the chairman). When the Transaction is
consummated, Mr. Hale will become Chairman and Chief Executive Officer of LG&E
Energy, LG&E and Kentucky Utilities and Mr. Whitley will become Vice Chairman,
President and Chief Operating Officer of LG&E Energy and Vice Chairman and Chief
Operating Officer of LG&E and Kentucky Utilities. Upon consummation of the
Transaction, the Board of Directors of LG&E will consist of those persons
serving as directors of LG&E immediately prior to the Transaction plus those
persons designated by KU Energy to serve on the LG&E Energy Board. Similarly,
following the Transaction, the Board of Directors of Kentucky Utilities will
consist of those persons serving as directors of Kentucky Utilities immediately
prior to the Transaction plus those persons designated by LG&E Energy to serve
on the LG&E Energy Board. In addition, while no employment agreements exist
regarding other executive officers of LG&E Energy or its subsidiaries after the
Transaction, Mr. Hale and Mr. Whitley have orally agreed as to certain members
of the executive management of LG&E Energy, LG&E and Kentucky Utilities after
the Transaction consisting of individuals currently employed at LG&E Energy,
LG&E, KU Energy or Kentucky Utilities.
4. Related Agreements
In connection with the Merger Agreement, LG&E Energy and KU Energy
also entered into reciprocal stock option agreements (the "Option Agreements")
(Exhibits B-2 and B-3 hereto) giving each company the right to acquire shares of
the other's common stock under specified circumstances. The Option Agreements
provide that no option may be exercised until all necessary regulatory approvals
(including any required approval of the Commission) have been obtained for the
acquisition of shares pursuant to such option.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction, including the solicitation of
proxies, registration of securities of
23
<PAGE>
LG&E Energy under the Securities Act of
1933, and other related matters, are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
Commission filing fee for the
Registration Statement on Form S-4...................................................... $400,230.00
Accountant's fees....................................................................... /1/
Legal fees and expenses relating to the Act............................................. /1/
Other legal fees and expenses........................................................... /1/
Other................................................................................... /1/
Shareholder communication and proxy solicitation........................................ /1/
NYSE listing fee........................................................................ /1/
Exchanging, printing, and engraving
of stock certificates................................................................... /1/
Investment bankers' fees and expenses
Blackstone............................................................................ /1/
Goldman Sachs......................................................................... /1/
Consulting fees related to human resource
issues, public relations, regulatory support,
and other matters relating to the Transaction........................................... /1/
Expenses related to integrating the operations of the merged company and miscellaneous.. /1/
TOTAL................................................................................... /1/
</TABLE>
Item 3. Applicable Statutory Provisions
Sections 9(a)(2) and 10 of the Act are directly or indirectly applicable to
the proposed Transaction. To the extent that other sections of the Act or the
Commission's rules thereunder are deemed to be applicable to the Transaction,
such sections and rules should be considered to be set forth in this Item 3.
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person...to acquire, directly or
indirectly, any security of any public-utility company, if such person is an
affiliate...of such company and of any other public-utility or
- ---------------------
/1/ To be filed by Amendment.
24
<PAGE>
holding company, or will by virtue of such acquisition become such an
affiliate." Under the definition set forth in Section 2(a)(11) of the Act, an
"affiliate" of a specified company means "any person that directly or indirectly
owns, controls, or holds with power to vote, 5 per centum or more of the
outstanding voting securities of such specified company," and "any company 5 per
centum or more of whose outstanding voting securities are owned, controlled, or
held with power to vote, directly or indirectly, by such specified company...."
LG&E and Kentucky Utilities, along with EEI and OVEC, are "public-utility
companies" as defined in Section 2(a)(5) of the Act. Since LG&E Energy currently
owns more than five percent of the voting securities of LG&E and will acquire
more than five percent of the voting securities of Kentucky Utilities (and,
indirectly, EEI and OVEC) as a result of the Transaction, LG&E Energy must
obtain the approval of the Commission for the Transaction under Section 9(a)(2)
and 10 of the Act. The statutory standards to be considered by the Commission in
evaluating the Transaction are set forth in Sections 10(b), 10(c) and 10(f) of
the Act.
As set forth more fully below, the Transaction complies with all of the
applicable provisions of Section 10 of the Act and should be approved by the
Commission:
. The consideration to be paid in the Transaction is fair and
reasonable;
. The Transaction will not create detrimental interlocking relations or
concentration of control;
. The Transaction will not result in an unduly complicated capital
structure for the LG&E Energy system;
. The Transaction is in the public interest and the interests of
investors and consumers;
. The Transaction is consistent with Sections 8 and 11 of the Act;
. The Transaction tends toward the economical and efficient development
of an integrated electric utility system; and
. The Transaction will comply with all applicable state laws.
Furthermore, this Transaction also provides an opportunity for the
Commission to follow certain of the interpretive recommendations made by the
Division of Investment Management (the "Division") in the report issued by the
Division in June 1995 entitled "The Regulation of Public Utility Holding
Companies" (the "1995 Report"). While the Transaction and the requests contained
in this Application-Declaration are well within the precedent of transactions
approved by the Commission as consistent with the Act prior to the 1995 Report
and thus could be approved without any reference to the 1995 Report, a number of
the recommendations contained therein serve to strengthen the Applicant's
analysis and would facilitate the creation of a new holding company better able
to compete in the rapidly evolving utility industry. The Division's overall
recommendation that the Commission "act administratively to modernize and
simplify holding company regulation...and minimize regulatory overlap, while
protecting the interests of consumers and investors,"/2/ should be used in
reviewing this Application-Declaration because, as demonstrated below, the
Transaction will benefit both consumers and shareholders of LG&E
- ---------------------
/2/ Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report at 3.
25
<PAGE>
Energy and KU Energy and because the other federal and state regulatory
authorities with jurisdiction over this Transaction have approved it as in the
public interest.
A. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public-utility companies, of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding-company system of the applicant or will be detrimental to
the public interest or the interest of investors or consumers or the
proper functioning of such holding-company system.
1. Section 10(b)(1)
(a) Interlocking Relations
By its nature, any merger results in new links between previously unrelated
companies. However, these links are not the types of interlocking relationships
targeted by Section 10(b)(1), which was primarily aimed at preventing business
combinations unrelated to operating synergies. The Merger Agreement provides for
the Board of Directors of LG&E Energy to consist of fifteen members, eight
designated by LG&E Energy and seven designated by KU Energy. Forging such
relationships is beneficial to the protected interests under the Act and thus is
not prohibited by Section 10(b)(1). The Commission has recognized that in the
interest of efficiencies and economics, the existence of such interlocking
relationships is permissible. See Northeast Utilities, Holding Co. Act Release
No. 25221, 47 S.E.C. Docket 1270 (Dec. 21, 1990). Moreover, the benefits that
will accrue to the public, investors and consumers from the combination of LG&E
Energy and KU Energy make clear that whatever interlocking relationships may
arise from the combination are not detrimental.
(b) Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex, and irrational holding company systems at which the
Act was primarily aimed." In the
26
<PAGE>
Matter of American Electric Power Company, Inc., Holding Co. Act Release No.
20633, 46 S.E.C. 1299, 1307 (July 21, 1978). In applying Section 10(b)(1) to
utility acquisitions, the Commission must determine whether the acquisition will
create "the type of structures and combinations at which the Act was
specifically directed." Vermont Yankee Nuclear Power Corp., et al., Holding Co.
Act Release No. 15958, 43 S.E.C. 693, 700 (Feb. 6, 1968). The merger of LG&E
Energy and KU Energy will not create a "huge, complex and irrational system,"
but rather will afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and consumers.
Size: While the combination of LG&E Energy and KU Energy will result in a
large utility system, it certainly will not be one that exceeds the economies of
scale of current electric generation and transmission technology. If approved,
the LG&E Energy system will serve approximately 783,900 electric customers and
277,000 gas customers in one state, Kentucky, and 28,800 electric customers in
Virginia. As of December 31, 1996, the combined consolidated assets of LG&E
Energy and KU Energy totaled approximately $4.7 billion and, for the year ended
December 31, 1996, combined operating revenues totaled approximately $4.3
billion. As of September 30, 1997, the combined consolidated unaudited assets of
LG&E Energy and KU Energy totaled approximately $5.0 billion and, for the twelve
months ended September 30, 1997, combined unaudited operating revenues totaled
approximately $5.0 billion. As of December 31, 1996, the combined owned summer
generating capacity of LG&E and Kentucky Utilities (including their share of
OVEC and EEI capacity, but excluding the Big Rivers capacity) totaled 6,682 Mw.
The Commission has approved a number of acquisitions involving larger
utilities. See, e.g., Ameren Corporation, Holding Co. Act Release No. 26809
(December 30, 1997) (combination of Union Electric Co. and Central Illinois
Public Service Company, combined assets at time of acquisition approximately
$8.8 billion); New Century Energies, Inc., Holding Co. Act Release No. 26748, 65
S.E.C. Docket 277, (Aug. 1, 1997) (combination of Public Service Company of
Colorado and Southwestern Public Service Company; combined assets at time of
acquisition of approximately $7.0 billion); TUC Holding Company et al., Holding
Co. Act Release No. 26749, 65 S.E.C. Docket 301, (Aug. 1, 1997) (combination of
Texas Utilities Company and ENSERCH Corporation; combined assets at time of
acquisition of $24.0 billion); Houston Industries Incorporated et al., Holding
Co. Act Release No. 26744, 65 S.E.C. Docket 83, (July 24, 1997) (combination of
Houston Industries Incorporated and NorAm Energy Corp.; combined assets at time
of acquisition of $16.0 billion); CINergy Corp., Holding Co. Act Release No.
26146, 57 S.E.C. Docket 2353, (Oct. 21, 1994) (combination of The Cincinnati Gas
& Electric Co. and PSI Resources, Inc.; combined assets at time of acquisition
of approximately $7.9 billion); Entergy Corporation et al., Holding Co. Act
Release No. 25952, 55 S.E.C. Docket 2035, (Dec. 17, 1993) (acquisition of Gulf
States Utilities Company; combined assets at time of acquisition in excess of
$22 billion); Northeast Utilities, supra (acquisition of Public Service Company
of New Hampshire; combined assets at time of acquisition of approximately $9
billion); Centerior Energy Corp., Holding Co. Act Release No. 24073, 35 S.E.C.
Docket 769 (April 29, 1986) (combination of Cleveland Electric Illuminating
Company and Toledo Edison Company; combined assets at time of acquisition of
approximately $9.1 billion); In the Matter of American Electric Power Company,
Inc., supra (acquisition of Columbus and Southern Ohio Electric Company;
combined assets at time of acquisition of close
27
<PAGE>
to $9 billion)./3/ Following the Transaction, LG&E Energy will be a mid-size
exempt holding company, and its operations will not exceed the economies of
scale of current electric generation and transmission technology or provide
undue power or control to LG&E Energy in the region in which it will provide
service.
Efficiencies and economies: The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. As the
Commission stated in In the Matter of American Electric Power Company, although
the framers of the Act were concerned about "the evils of bigness ... they were
also aware that the combination of isolated local utilities into an integrated
system afforded opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production capacity and
reserves and generally more efficient operations...[and] [t]hey wished to
preserve these opportunities...." supra at 1309.
More recent pronouncements of the Commission confirm that size is not
determinative. Thus, in Centerior Energy Corp., the Commission stated flatly
that a "determination of whether to prohibit enlargement of a system by
acquisition is to be made on the basis of all the circumstances, not on the
basis of size alone." Supra, at 771; see also Entergy Corporation, supra. In
addition, in the 1995 Report, the Division recommended that the Commission
approach its analysis on merger and acquisition transactions in a flexible
manner with emphasis on whether the transaction creates an entity subject to
effective regulation and is beneficial for shareholders and customers as opposed
to focusing on rigid, mechanical tests./4/
By virtue of the Transaction, LG&E Energy will be in a position to realize
the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations" described by the Commission in In the
Matter of American Electric Power Company, Supra, at 1309. Among other things,
the Transaction is expected to yield significant non-fuel savings primarily from
reductions in labor costs and corporate and administrative expenses and from
purchasing economies. These expected economies and efficiencies from the
combined utility operations are described in greater detail in Item 3.B.2(a)
below and are projected to result in net non-fuel savings of approximately $680
million over the first ten years alone. A portion of these savings will result
in direct energy cost savings to customers through lower rates.
Competitive Effects: Section 10(b)(1) also requires the Commission to
consider possible anticompetitive effects of a proposed combination. See Entergy
Corporation et al., supra at 2041, citing Municipal Electric Association v.
S.E.C., 413 F. 2d 1052, 1056-1057 (D.C. Cir. 1969). As the Commission noted in
Northeast Utilities, the "antitrust ramifications of an acquisition must be
considered in light of the fact that public utilities are regulated monopolies
and that federal and state administrative agencies regulate the rates charged
customers." Supra at
- --------------------
/3/ These numbers are unadjusted for inflation. The AEP-Columbus number in
particular would be considerably higher in current dollars.
/4/ 1995 Report at 65-66.
28
<PAGE>
1282. On February 25, 1998, LG&E Energy and KU Energy filed separate
Notification and Report Forms with the Department of Justice and the Federal
Trade Commission pursuant to the HSR Act describing the effects of the
Transaction on competition in the relevant market and it is a condition to the
consummation of the Transaction that the applicable waiting period under the HSR
Act shall have expired.
In addition, the competitive impact of the Transaction was considered by
the FERC. A detailed explanation of the reasons why the Transaction will not
threaten competition in even the most narrowly drawn geographic and product
markets is set forth in the prepared testimony of Dr. Robert M. Spann and Dr.
Mark W. Frankena, filed with the FERC on behalf of LG&E Energy and KU Energy,
copies of which are filed as Exhibits D-1.1 and D-1.2, respectively. The
application filed by LG&E Energy and KU Energy with the FERC is filed as Exhibit
D-1.3. The Commission may appropriately rely upon the FERC with respect to such
matters. Entergy Corporation et al., supra, at 2042, citing City of Holyoke v.
S.E.C., 972 F.2d 358, 363-64 (D.C. Cir. 1992), quoting Wisconsin's Environmental
Decade v. S.E.C., 882 F.2d 523,527 (D.C. Cir. 1989).
As summarized in the testimony and exhibits of Dr. Spann and Dr. Frankena,
LG&E Energy and KU Energy have a small share of a broad market. They concluded
that the Transaction would raise no competitive concerns and would not have an
adverse effect on competition because LG&E Energy and KU Energy are small
participants in a highly competitive market. Prior to the Transaction, LG&E and
Kentucky Utilities have shares of 1.8 percent and 2.7 percent, respectively, of
installed generating capacity in the region. The relevant region consists of
that area served by LG&E and Kentucky Utilities and the other electric utilities
in Southern ECAR, Southern MAIN and Northern SERC (i.e., TVA). In addition,
LG&E and Kentucky Utilities, along with other regional public utility companies,
have filed for the FERC's approval to transfer operational control over certain
transmission facilities owned separately by them to a Midwest Independent System
Operator ("Midwest ISO"), and application has been made with the FERC to
establish a Midwest ISO. As a policy matter, the FERC has recognized that
participation in an Independent System Operator would likely serve to mitigate
market power held by applicants in a merger proceeding./5/
Following the Transaction, and even including Big Rivers' generating
capacity, LG&E Energy's combined share of generating capacity in the region will
be 5.7 percent. In fact, Dr. Spann concluded, "By itself, such a low share
suggests that the proposed transaction is highly unlikely to have any
anticompetitive effects. Indeed, two entities directly interconnected with both
[LG&E and Kentucky Utilities], AEP and TVA, each have individual low-cost, coal-
fired plants that have approximately as much or more capacity than LG&E's total
capacity...prior to this [Transaction] and the lease of Big Rivers' capacity."
For these reasons, the Transaction will not "tend towards interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
2. Section 10(b)(2)
As noted above, the Commission may not approve the proposed
combination of LG&E Energy and KU Energy under Section 10(b)(2) if it finds that
the consideration to be paid in connection with the combination, including all
fees, commissions and other remuneration, is "not reasonable or does not bear a
fair relation to the sums invested in or the earning capacity of...the utility
assets underlying the securities to be acquired...."
- ------------------------
/5/ See Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (1996), FERC
Stats. & Regs. 31,044 (1996), order on reconsideration, Order No. 592-A, 62 Fed.
Reg. 33,341 (1997)
29
<PAGE>
(a) Reasonableness of Consideration
LG&E Energy and KU Energy believe that standards of Section 10(b)(2)
regarding consideration are satisfied in the present case for the following
reasons.
First, the Transaction is a pure stock-for-stock exchange and qualifies for
treatment as a pooling of interests. As set forth more fully above and except
for KU Energy Dissenters' Shares, each share of KU Energy Common Stock will be
converted into the right to receive 1.67 shares of LG&E Energy Common Stock, and
each share of LG&E Energy Common Stock (except for LG&E Energy Dissenters'
Shares) will continue as a share of LG&E Energy Common Stock. The Transaction
will therefore involve no "acquisition adjustment" or other write-up of the
assets of LG&E Energy or KU Energy.
Second, the Transaction was submitted to, and approved by, the affected
public shareholders, i.e., the common shareholders of LG&E Energy and KU Energy.
Holders of approximately 97% of LG&E Energy's common stock represented at the
meeting approved the Transaction and holders of approximately 95% of KU Energy
common stock represented at the meeting approved the Transaction.
Third, the Exchange Ratio is the product of extensive and vigorous arms-
length negotiations between LG&E Energy and KU Energy. These negotiations were
preceded by extensive due diligence, analysis and evaluation of the assets,
liabilities and business prospects of each of the respective companies. See Item
1.C.1 of this Application-Declaration and "Background of the Merger" at pages 35
to 42 of the Registration Statement (Exhibit C-1 hereto). As recognized by the
Commission in Ohio Power Co., Holding Co. Act Release No. 16753, 44 S.E.C. 340,
346 (June 8, 1970), prices arrived at through arms-length negotiations are
particularly persuasive evidence that Section 10(b)(2) is satisfied.
Finally, nationally-recognized investment bankers for each of LG&E Energy
and KU Energy have reviewed extensive information concerning the companies,
analyzed the Exchange Ratio employing a variety of valuation methodologies and
opined that the Exchange Ratio is fair to the respective holders of LG&E Energy
Common Stock and KU Energy Common Stock as of the date of the Merger Agreement
and as of the date the proxy statement/prospectus included in the Registration
Statement was mailed to the respective stockholders of LG&E Energy and KU
Energy. The investment bankers' analyses and opinions are described in detail on
pages 46 to 56 of the Registration Statement (Exhibit C-1 hereto). The
assistance of independent consultants in setting considerations has been
recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Holding Co. Act
Release No. 24579, 40 S.E.C. 350 (Feb. 12, 1988).
In rendering their fairness opinions, LG&E Energy's investment banker
(Blackstone) and KU Energy's investment banker (Goldman Sachs) performed a
number of analyses relevant to the reasonableness of the Exchange Ratio and
their relation to the investment in, and earning capacity of, the utility assets
of LG&E Energy and KU Energy. These analyses considered, among other things, the
pro forma effect of the Transaction on earnings, dividends and cash flow,
30
<PAGE>
and the respective contributions of LG&E Energy and KU Energy in terms of
assets, earnings, dividends, cash flow and businesses. Both Blackstone and
Goldman Sachs considered both public and non-public historical and projected
financial information and forecasts related to the earnings, assets, business,
dividends, cash flow, and prospects of LG&E Energy and KU Energy; historical
market prices and trading activities of LG&E Energy Common Stock and KU Energy
Common Stock and certain publicly traded companies deemed similar; and other
information, as more fully described on pages 46 to 56 of the Registration
Statement.
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Transaction, the
Exchange Ratio falls within the range of reasonableness, and the consideration
for the Transaction bears a fair relation to the sums invested in, and the
earning capacity of, the utility assets of LG&E Energy and KU Energy.
(b) Reasonableness of Fees
LG&E Energy and KU Energy believe that the overall fees, commissions and
expenses incurred and to be incurred in connection with the Transaction are
reasonable and fair in light of the size and complexity of the Transaction
relative to other transactions and the anticipated benefits of the Transaction
to the public, investors and consumers are consistent with recent precedent, and
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, LG&E Energy and KU
Energy together expect to incur a combined total of approximately $16.5
million/6/ in fees, commissions and expenses in connection with the Transaction.
By contrast, Union Electric Co. and Central Illinois Public Service Company
together incurred $21.8 million in fees, commissions and expenses in connection
with their combination into Ameren Corporation; Public Service Company of
Colorado and Southwestern Public Service Company together incurred $23.5 million
in fees, commissions and expenses in connection with their combination into New
Century Energies, Inc.; Texas Utilities Company and ENSERCH Corporation together
incurred $37.2 million in fees, commissions and expenses in connection with
their combination into TUC Holding Company; Houston Industries Incorporated and
NorAm Energy Corp. together incurred $32.0 million in connection with their
combination into Houston Industries Incorporated; The Cincinnati Gas and
Electric Company and PSI Resources, Inc. together incurred $47.1 million in
fees, commissions and expenses in connection with their combination into CINergy
Corp.; Northeast Utilities alone incurred $46.5 million in fees and expenses in
connection with its acquisition of Public Service Company of New Hampshire; and
Entergy Corporation alone incurred $38 million in fees in connection with its
recent acquisition of Gulf States Utilities--all of which amounts were approved
as reasonable by the Commission. See New Century Energies, Inc., supra; TUC
Holding Company et al., supra; Houston Industries Incorporated et al., supra;
CINergy Corp., supra; Northeast Utilities, supra; Entergy Corporation, et al.,
supra.
With respect to financial advisory fees, LG&E Energy and KU Energy believe
that the fees payable to their investment bankers are fair and reasonable for
similar reasons.
- ---------------------
/6/ This number is a preliminary estimate only, and will be updated as
necessary.
31
<PAGE>
In October 1996, KU Energy engaged Goldman Sachs as a financial advisor to
assist the senior management of KU Energy in exploring the possibility of a
business combination with LG&E Energy. The Board of Directors of KU Energy
selected Goldman Sachs as a financial advisor in connection with the proposed
business combination because Goldman Sachs, as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes. Goldman Sachs is familiar with KU Energy, having acted as its
financial advisor in connection with, and having participated in certain of the
negotiations leading to, the Merger Agreement. Goldman Sachs has also provided
certain investment banking services to KU Energy from time to time, including
acting as managing underwriter of certain public offerings of debt securities of
Kentucky Utilities.
Pursuant to a letter agreement dated October 22,1996 (the "Goldman Sachs
Engagement Letter"), KU Energy engaged Goldman Sachs to act as its financial
advisor in connection with a potential merger, business combination or other
strategic combination. Pursuant to the terms of the Goldman Sachs Engagement
Letter, KU Energy has paid Goldman Sachs retainer fees of $150,000, which amount
is credited against the Success Fee (as defined below). In addition, in
connection with the Transaction, KU Energy has agreed to pay Goldman Sachs a
success fee of 0.475% of the aggregate consideration paid for the KU Energy
Common Stock (including amounts paid to holders of options, warrants and
convertible securities) of approximately $7.4 million (the "Success Fee"). The
Success Fee is payable in three installments, 33.3% upon execution of the Merger
Agreement, 33.3% upon the approval of the Merger Agreement by KU Energy
shareholders and 33.3% upon the consummation of the Transaction. The first
installment was calculated based on the LG&E Energy Common Stock closing price
on May 20, 1997, the business day prior to the announcement of the execution of
the Merger Agreement. The remaining installments will consist of the actual
Success Fee less the actual installments previously paid. The retainer fees were
credited against the first installment of the Success Fee. KU Energy has also
agreed to reimburse Goldman Sachs quarterly for its reasonable out-of-pocket
expenses, including attorneys' fees and disbursements of up to $100,000 (which
amount may be increased with the consent of KU Energy, which consent may not be
unreasonably withheld), and to indemnify Goldman Sachs against certain
liabilities, including certain liabilities under the federal securities laws.
In October, 1996, LG&E Energy entered into an engagement letter with
Blackstone pursuant to which Blackstone was retained to act as LG&E Energy's
financial advisor in connection with a potential business combination with KU
Energy. LG&E Energy retained Blackstone because of its experience and expertise.
Blackstone has an internationally recognized merger and acquisition advisory
business. Blackstone, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions. Blackstone is familiar with LG&E Energy, having
provided certain investment banking services to LG&E Energy from time to time,
and having acted as its financial advisor in connection with, and having
participated in certain of the negotiations leading to, the Transaction.
32
<PAGE>
Pursuant to a letter agreement dated October 17, 1996, (the "Blackstone
Engagement Letter"), LG&E Energy engaged Blackstone to act as its financial
advisor with respect to a possible transaction with KU Energy. Pursuant to the
terms of the Blackstone Engagement Letter, LG&E Energy has agreed to pay
Blackstone: (i) an engagement fee of $175,000 (the "Engagement Fee"), (ii)
monthly fees of $50,000 over a period commencing October 17, 1996 through the
execution of the Merger Agreement with KU Energy but not to exceed six months
(the "Monthly Retainer Fee"), (iii) $1,000,000 upon execution of the Merger
Agreement (the "Merger Execution Fee"), (iv) $1,000,000 upon approval of the
Merger Agreement by holders of LG&E Energy Common Stock (the "Merger Approval
Fee"), and (v) a success fee of $5,175,000 upon consummation of the Transaction
(against which the Engagement Fee, the Monthly Retainer Fee, the Merger
Execution Fee and the Merger Approval Fee are to be credited). In addition, LG&E
Energy has agreed to reimburse Blackstone for its reasonable out-of-pocket
expenses, including the fees and disbursements of their attorneys, and to
indemnify Blackstone and certain related persons against certain liabilities,
including certain liabilities under the federal securities laws, arising out of
its engagement.
In the instant case, the aggregate fees to be paid to both companies'
investment bankers in connection with the Transaction--approximately $12.6
million as described above--constitute approximately .45% of the companies'
combined market value./7/ These fees are generally in accord with the fees
approved by the Commission in recent cases. In one recent case, the Commission
approved combined investment banking fees of approximately $11 million, equal to
.30% of the market value of the transaction. New Century Energies, Inc., supra.
In TUC Holding Company et al., supra, the Commission approved combined
investment banking fees of approximately $21 million, amounting to .22% of the
combined market value of the common stock of Texas Utilities Company and ENSERCH
Corporation. The combined investment banking fees of approximately $24 million
approved by the Commission in the combination of Houston Industries Incorporated
and NorAm Energy Corp. amounted to .32% of the combined market value of the two
companies' common stock. Houston Industries Incorporated et al., supra. In The
Southern Company; SV Ventures, Inc., supra, the Commission approved investment
banking fees equal to 0.96% of the aggregate value of the acquisition, or more
than twice the investment banking fee here on a percentage basis. In Centerior
Energy Corp., supra, relating to the affiliation of two utility companies under
a new common holding company, the Commission approved combined investment
banking fees amounting to 0.275% of the combined market value of the two
companies' common stock. In its order approving the acquisition by Northeast
Utilities of Public Service Company of New Hampshire, the Commission approved
approximately $10.6 million in financial advisory fees for Northeast alone,
representing in excess of 0.35% of the value placed by the bankruptcy court on
the assets to be acquired. Northeast Utilities, supra. In the Entergy-Gulf
States decision, the Commission approved financial advisory fees of $8.3 million
by Entergy to its investment bankers, representing 0.36% of the market value of
the transaction. Entergy Corporation, et al., supra. Finally, in CINergy, the
Commission approved investment banking and financial advisory fees of
approximately $13.1 million, amounting to 0.31% of the aggregate combined market
value of the two companies'
- -------------------------
/7/ Based on the number of shares of LG&E Energy Common Stock and KU Energy
Common Stock outstanding as of September 30, 1997 and their closing prices
on September 30, 1997 of $22 3/16 and $34 11/16 per share, respectively.
33
<PAGE>
common stock. CINergy Corp., supra. The estimated financial advisory fees to be
paid by LG&E Energy and KU Energy in connection with the Transaction are smaller
on a percentage basis than those approved in Southern, and generally comparable
on a percentage basis to those approved in Northeast Utilities, Entergy and
CINergy.
Finally, the investment banking fees of LG&E Energy and KU Energy
reflect the competition in the marketplace, in which investment banking firms
actively compete with each other to act as financial advisors to merger
partners.
Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Transaction will "unduly complicate the capital structure" of the LG&E Energy
system or will be "detrimental to the public interest or the interest of
investors or consumers or the proper functioning" of the LG&E Energy system.
Capital structure: The corporate capital structure of LG&E Energy
after the Transaction will not be unduly complicated and will be substantially
similar to capital structures approved by the Commission in other orders. See,
e.g., Centerior Energy Corp., supra; Midwest Resources, Inc., et al., Holding
Co. Act Release No. 25159, 47 S.E.C. Docket 252 (Sept. 26, 1990); CINergy Corp.,
supra.
In the Transaction, the shareholders of KU Energy will receive LG&E
Energy Common Stock. LG&E Energy will own 100% of the common stock of LG&E and
Kentucky Utilities and there will be no minority common stock interest remaining
in either company. Furthermore, the existence of LG&E and Kentucky Utilities
preferred stock will not unduly complicate the capital structure of LG&E Energy.
Each outstanding share of LG&E and Kentucky Utilities preferred stock will
remain outstanding without change. Each share of the 5% series of LG&E preferred
stock (the "LG&E Voting Preferred") is entitled to one vote per share on all
matters presented to stockholders. If the Transaction were consummated December
31, 1996, the outstanding LG&E Voting Preferred would have represented 3.39% of
the total voting power of the LG&E preferred and common stock, 1.3% of the total
capital of LG&E (including long-term and short-term debt) and 2.4% of the book
equity which comprises common and preferred stock and retained earnings. For the
year ended December 31, 1996, and the twelve months ending September 30, 1997,
LG&E's combined fixed charges and preferred dividend requirements were covered
4.54 times and 4.69 times, respectively, before provision for taxes. In
addition, due to the obligations imposed by Kentucky law and the substantial
financial commitment of LG&E Energy in LG&E, there is virtually no likelihood
that LG&E assets or businesses will be permitted to deteriorate to an extent
that would jeopardize the interests of the LG&E preferred stock. The Commission
has found previously that the existence of preferred stock under facts similar
to those of LG&E does not violate the standards of Sections 10(b)(3), 10(c)(1)
or 11(b)(2) of the Act. Illinois Power Company, Holding Co. Act Release No.
16574, 44 S.E.C. 140 (Jan. 2, 1970). See also Niagara Mohawk Power Corporation,
S.E.C. No-Action Letter (Jan. 24, 1991), CIPSCO Incorporated, Holding Co. Act
Release No. 25152, 47 S.E.C. Docket 174 (1990) and In the Matter of Texas
Utilities Co., Holding Co. Act Release No. 9786, 31 S.E.C. 367 (Apr. 5, 1950).
34
<PAGE>
The existing debt securities of LG&E and Kentucky Utilities will likewise
remain outstanding without change. The only voting securities of LG&E Energy
which will be publicly held after the Transaction will be LG&E Energy Common
Stock.
LG&E Energy will have the ability to issue preferred stock, the terms of
which, including any voting rights, may be set by LG&E Energy's Board of
Directors. The only class of voting securities of LG&E Energy direct non-utility
subsidiaries will be common stock and, in each case, all issued and outstanding
shares of such common stock will be held by LG&E Energy.
Set forth below are summaries of the historical capital structures of LG&E
Energy and KU Energy as of December 31, 1996, and the pro forma combined capital
structure of LG&E Energy (assuming the Transaction occurred on December 31,
1996):
<TABLE>
<CAPTION>
LG&E Energy and KU Energy Historical Capital Structures
(dollars in millions)
LG&E Energy KU Energy
----------------------------- ------------------------------
<S> <C> <C> <C> <C>
Common stock equity $ 811,218 47.4% $ 645,513 50.2%
Preferred stock 95,328 5.6 40,000 3.1
Long-term debt 646,835 37.8 546,373 42.5
Short-term debt/8/ 158,000 9.2 54,221 4.2
---------- ----- ---------- -----
Total $1,711,381 100.0% $1,286,107 100.0%
========== ===== ========== =====
</TABLE>
LG&E Energy Pro Forma Combined Capital Structure
(dollars in millions) (unaudited)
<TABLE>
<S> <C> <C>
Common stock equity $1,456,731 48.6%
Preferred stock 135,328 4.5
Long-term debt 1,193,208 39.8
Short-term debt/9/ 212,221 7.1
---------- -----
Total $2,997,488 100.0%
========== =====
</TABLE>
Set forth below are summaries of the unaudited historical capital
structures of LG&E Energy and KU Energy as of September 30, 1997, and the
unaudited pro forma combined capital structure of LG&E Energy (assuming the
Transaction occurred on September 30, 1997):
- ------------------------------
/8/ Includes long-term debt due currently.
/9/ Includes long-term debt due currently.
35
<PAGE>
<TABLE>
<CAPTION>
LG&E Energy and KU Energy Historical Capital Structures
(dollars in millions)
LG&E Energy KU Energy
----------- ---------
<S> <C> <C> <C> <C>
Common stock equity $ 828,970 43.7% $ 659,049 51.7%
Preferred stock 95,328 5.0 40,000 3.1
Long-term debt 664,315 35.0 546,351 42.9
Short-term debt/10/ 309,161 16.3 29,921 2.3
---------- ----- ---------- -----
Total $1,897,774 100.0% $1,275,321 100.0%
========== ===== ========== =====
</TABLE>
LG&E Energy Pro Forma Combined Capital Structure
(dollars in millions) (unaudited)
<TABLE>
<S> <C> <C>
Common stock equity $1,488,019 46.9%
Preferred stock 135,328 4.3
Long-term debt 1,210,666 38.1
Short-term debt/11/ 339,082 10.7
----------
Total $3,173,095 100.0%
==========
</TABLE>
LG&E Energy's pro forma combined common equity to total capitalization
ratio of 48.6% (46.9% as of September 30, 1997) is significantly higher than
Northeast Utilities' 27.6% common equity position and comfortably exceeds the
"traditionally acceptable 30% level." Northeast Utilities, supra, at 1279.
Protected interests: Section 10(b)(3) also requires the Commission to
determine whether the proposed combination will be detrimental to the public
interest, the interests of investors or consumers or the proper functioning of
the LG&E Energy system. The combination of LG&E Energy and KU Energy is entirely
consistent with the proper functioning of the LG&E Energy holding company
system. LG&E's and Kentucky Utilities' utility operations will be fully
integrated. Further, the combination will result in substantial, otherwise
unavailable, savings and benefits to the public and to consumers and investors
of both companies and the integration of LG&E and Kentucky Utilities will
improve the efficiency of their respective systems. The Transaction also has
been approved by the Kentucky Commission and supported by resolutions of both
houses of the Kentucky legislature. Copies of these resolutions are attached
hereto as Exhibit K-1. The integration of LG&E and Kentucky Utilities is
described below in Item 3.B.2(a) and the benefits and savings are described in
Item 3.B.2(b). Moreover, as noted by the Commission in Entergy Corporation et
al., supra, at 2045, "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and the
securities market themselves." LG&E Energy, LG&E and Kentucky Utilities are and
will remain reporting companies subject to the continuous disclosure
requirements of the 1934 Act following the completion of the Transaction. The
various reports previously filed by LG&E
- --------------------------------
/10/ Includes long-term debt due currently.
/11/ Includes long-term debt due currently.
36
<PAGE>
Energy, KU Energy, LG&E and Kentucky Utilities under the 1934 Act contain
readily available information concerning the Transaction. For these reasons, the
Applicant believes that the Transaction will be in the public interest and the
interest of investors and consumers, and will not be detrimental to the proper
functioning of the resulting holding company system.
B. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11/12/;
or
(2) the acquisition of securities or utility assets of a public-utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system....
1. Section 10(c)(1)
(a) Compliance With Section 8
Section 8 prohibits registered holding companies from acquiring properties
which would result in combined gas and electric operations in the same area
without the authorization of the appropriate state commission, where state law
prohibits or requires authorization for such combined operations. Section 8
applies only to registered systems and thus, by its terms, is not applicable to
LG&E Energy, KU Energy or the Transaction. Moreover, the Transaction will occur
only after authorization of the Kentucky Commission and the Virginia Commission
have been granted. As previously noted, the Kentucky Commission approved the
Transaction on September 12, 1997, and the Virginia Commission approved the
Transaction on January 20, 1998. Accordingly, the Transaction will not be
unlawful under Section 8, and thus that portion of Section 10(c)(1) relating to
Section 8 of the Act is satisfied.
(b) No Detriment to the Carrying Out of Section 11
Section 11 of the Act sets forth the integration and simplification
requirements of the Act applicable to registered holding company systems.
Section 11 requires the Commission to take action with respect to registered
holding company systems that will (1) limit the operations of each registered
holding company system to a single integrated public-utility system, certain
- ---------------------
/12/ By their terms, Sections 8 and 11 only apply to registered holding
companies and are therefore inapplicable at present to LG&E Energy or KU
Energy, since neither is now a registered holding company. Also, under the
present transaction structure, LG&E Energy will remain an exempt holding
company after consummation of the Transaction.
37
<PAGE>
"functionally related" businesses/13/, and one or more additional integrated
public utility systems meeting certain requirements (Section 11(b)(1)); and (2)
ensure that the registered system has a simplified corporate structure without
undue or unnecessary complications or inequitable distribution of voting power
(Section 11(b)(2)).
Section 11 applies only to registered holding companies. In a proceeding
under Section 9(a)(2) where the resulting system would be exempt, as well as in
proceedings under Section 3 for the grant of an exemption, compliance with the
standards of Section 11 is not required./14/ As the Commission has stated in
approving an exempt company's application under both Section 9(a)(2) and Section
3, "Section 10(c)(1)'s requirement that the acquisition not be `detrimental' to
carrying out the provisions of Section 11 does not mandate that the latter
section's integration requirements be met."/15/
Instead, in applying Section 10(c)(1) to an exempt system, the Commission
looks to whether the acquisition would be detrimental to the public interest.
With respect to combination gas and electric systems, which could raise
integration issues under Section 11 for registered holding companies, the
Commission approves applications for exempt systems where it finds generally
that the other requirements of Section 10 have been met and that the appropriate
state commission has acted favorably. For example, in TUC Holding Company et
al., supra, the Commission was faced with the acquisition of a significant gas
utility by an exempt holding company engaged only in the electric utility
business. The Commission stated:
Section 11(b)(1) makes provision for the acquisition and retention of more
than one integrated system only if the requirements of section 11(b)(1)(A)-
(C) ("ABC clauses") are satisfied. By its terms, however, section 11(b)(1)
applies only to registered holding companies. The Commission has previously
determined that a holding company may acquire utility assets that will not,
when combined with the acquiring company's existing utility assets, make up
an integrated system or comply fully with the ABC clauses, provided that
there is de facto (emphasis in original) integration of contiguous utility
- ---------------------
/13/ See Mississippi Power & Light Co. S.E.C. No-Action Letter [1982 Transfer
Binder] Fed. Sec. L. Rep. (CCH) (P)77,241 at 78,047 (July 1, 1982)
(holding company's electric utility subsidiary's acquisition of a 40%
interest in a cable television company did not bear the "functional
relationship" to the operation of the utility system required by Section
11(b)(1) of the Act); Consolidated Natural Gas Service Co., S.E.C. No-
Action Letter [1982-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH)
(P)77,328 at 78,224 (Oct. 27, 1982) (("functional relationship") test
requires that acquisition be "reasonably incidental" and "economically
necessary" to operations of utility systems).
/14/ See e.g., TUC Holding Company et al., supra, at 305. ("By its terms,
however, Section 11(b)(1) applies only to registered holding companies.");
Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170, 58 S.E.C.
Docket 189, 193 (Nov. 23, 1994) ("Exempt holding companies are not
directly subject to Section 11(b)(1)'s integration standards."). See also
the 1995 Report at 61. ("Section 11's integration provisions apply only to
registered holding companies"); Dominion Resources, Inc., Holding Co. Act
Release No. 24618 40 S.E.C. Docket 847, 849 (Apr. 5, 1988) (where no
consideration of Section 11(b)(1) was necessary as DRI was entitled to an
exemption under Rule 2 of the Act.)
/15/ Gaz Metropolitain Inc., supra, note 14, at 193.
38
<PAGE>
properties and the holding company will be exempt from registration under
section 3 of the Act following the acquisition./16/
Applying this standard to the combination of a purely electric utility system
with a purely gas utility system, the Commission determined that the standard
had been met. The Commission stated:
In this matter, there will be de facto (emphasis in original) integration
of the combined utility properties. The respective service territories of
the TUC and ENSERCH systems generally overlap. The two systems will be
coordinated administratively. The combination offers TUC and ENSERCH a
means to compete more effectively in the emerging energy services business,
and it does not appear that the merger will give rise to any of the abuses,
such as ownership of scattered utility properties, inefficient operations,
lack of local management or evasion of state regulation, that section
11(b)(1) and the Act generally were intended to address. The merger of the
two companies should have no effect upon the ability of state and local
ratemaking authorities to carry out their statutory duties. Accordingly,
the Commission does not find that the proposed acquisition would be
detrimental to the carrying out of section 11, so that section 10(c)(1) of
the Act is satisfied./17/
Similarly, in WPL Holdings, Inc., the Commission approved a reorganization
in which a holding company was established over combined gas and electric
operations./18/ The Commission stated:
We have recognized in previous cases that exempt companies, such as
Holdings, are not held to strict compliance with the single-
integrated, public-utility standard of Section 11(b)(1) "unless and
except" (in the prefatory language of Section 3(a)) less than full
compliance with that standard would be "detrimental to the public
interest or the interest of investors or consumers."/19/
Looking generally to the public interest, the Commission noted that the state
authorities had expressly approved and authorized the transaction and would
continue to assert jurisdiction over and to oversee the operations of the
companies. The Commission stated:
Where, as here, the record contains evidence of affirmative state
regulation over the activities of a combination company otherwise
entitled to an exemption under Section 3(a) from the provisions of the
Act, we need not find, and in this case do
- ---------------------
/16/ TUC Holding Company et al., supra, at 305-306, citing to Gaz
Metropolitain Inc., supra note 14.
/17/ Id. at 306.
/18/ WPL Holdings, Inc., Holding Co. Act Release No. 24590, 49 S.E.C. 761
(Feb. 26, 1988), aff'd in part and rev'd in part sub nom. Wisconsin's
Environmental Decade, Inc. v. S.E.C., supra.
/19/ WPL Holdings, Inc., supra note 18, at 769-70.
39
<PAGE>
not find, that permitting retention of combined operations would be
detrimental to the public interest or the interest of investors or
consumers./20/
Subsequently, in Dominion Resources, Inc., the Commission used the same
reasoning to approve the acquisition by a combination company of a gas
utility./21/ In so doing, the Commission explicitly recognized that the limits
in Section 11 were inapplicable given the applicant's exemption from
registration. With respect to the extension of the gas operations of the
combined system, the Commission took pains to state that "the only question" was
whether that extension would be "detrimental to the public interest or in the
interest of investors or consumers" within the language of Sections 10(b)(1) and
10(b)(3)./22/ The Commission went on to state that Section 10(c)(1) of the Act
would bring Section 11(b)(1) into consideration only if Dominion Resources were
not entitled to an exemption under Rule 2 of the Act./23/
Recently, in New Century Energies, the Commission also recognized that the
gas and electric industries are converging and that separation of such
businesses could cause the separated entities to be weaker competitors. Thus the
concern, expressed in earlier cases such as New England Electric System, that
joint ownership of gas and electric facilities could be detrimental to the
public interest is no longer relevant. In fact, the Commission now recognizes
that such joint control is likely to promote the public interest through
creation of stronger competitors.
Based on the foregoing precedent, the Transaction clearly satisfies the
requirements of Section 10(c)(1). First, as discussed previously and as will be
discussed below, the combination of LG&E Energy and KU Energy will meet all the
specific standards set forth in Section 10, including the requirement that the
Transaction tend toward the efficient and economical development of an
integrated public utility system. In brief, the combination will produce an
integrated electric utility system that overlaps an integrated gas utility
system and that will reap the many benefits available from combined resources
while preserving local control and state regulation, and while also enhancing,
rather than decreasing, competition in Kentucky and nationwide. Second, the
Transaction will not go forward until the Kentucky Commission and the Virginia
Commission have addressed and ruled favorably on the issues raised by combining
the electric and gas system of LG&E with the electric system of Kentucky
Utilities. As previously noted, the Kentucky Commission approved the Transaction
on September 12, 1997, and the Virginia Commission approved the Transaction on
January 20, 1998. Finally, the Applicant does not believe that the Transaction
poses any other concerns to the public interest or
- ---------------------
/20/ Id. at 772.
/21/ Dominion Resources, Inc., supra, note 14.
/22/ Id. at 849.
/23/ Id., n.3. See also Midwest Resources, Inc., supra; I.E. Industries Inc.,
et al., Holding Co. Act Release No. 25325, 48 S.E.C. Docket 1735 (June 3,
1991); Southern Indiana Gas and Electric Company, Holding Co. Act Release
No. 26075, 57 S.E.C. Docket 78 (June 30, 1994); NIPSCO Industries, Inc.,
Holding Co. Act Release No. 25766, 53 S.E.C. Docket 1997 (Mar. 25, 1993);
NIPSCO Industries, Inc., Holding Co. Act Release No. 25470, 50 S.E.C.
Docket 1231 (Feb. 5, 1992). In these cases, the Commission approved
acquisitions or reorganizations involving exempt combination systems
without specifically addressing Section 10(c)(1).
40
<PAGE>
the interest of investors or consumers than those already addressed or that are
likely to arise in the state proceedings. For these reasons, no adverse finding
is required under Section 10(c)(1).
2. Section 10 (c)(2)
Because the Transaction is expected to result in substantial cost
savings and synergies, it will tend toward the economical and efficient
development of an integrated public utility system, thereby serving the public
interest, as required by Section 10(c)(2) of the Act. "The Commission has
previously determined ... that where a holding company will be exempt from
registration under section 3 of the Act following an acquisition of non-
integrating utility assets, it suffices for purposes of section 10(c)(2) to find
benefits to one integrated system."/24/ The Transaction clearly satisfies this
requirement as it will produce benefits both to the electric utility businesses
of LG&E and Kentucky Utilities and to the gas utility business of LG&E.
(a) Efficiencies and Economies
The Transaction will produce economies and efficiencies more than
sufficient to satisfy the standards of Section 10(c)(2) of the Act. Although
some of the anticipated economies and efficiencies will be fully realizable only
in the longer term, they are properly considered in determining whether the
standards of Section 10(c)(2) have been met. See In the Matter of American
Electric Power Co., supra at 1320-1321. Some potential benefits cannot be
precisely estimated, nevertheless they too are entitled to be considered.
"[S]pecific dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., supra at 775, citing In the
Matter of American Electric Power Co., supra.
LG&E Energy and KU Energy estimated the nominal dollar value, net of
costs to achieve, of non-fuel savings from the Transaction to be approximately
$680 million over a 10-year period. The Transaction is expected to yield several
types of presently quantifiable benefits and savings, which are identified by
area below: (1) corporate and operations labor costs; (2) facilities
integration; (3) corporate and administration programs; (4) purchasing economies
(nonfuel); and (5) capacity deferral. The total amount of savings currently
estimated in each of these categories, on a nominal dollar basis is summarized
in the table below:
- ---------------------
/24/ TUC Holding Company et al., supra at 306, citing Gaz Metropolitain, Inc.,
supra note 14.
41
<PAGE>
Transaction Synergies in Nominal Dollars
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Category Nominal
Amount
- --------------------------------------------------------------------------------
<S> <C>
Corporate and Operations Labor $380.4 million
Facilities Integration $8.3 million
Corporate and Administrative Programs $168.5 million
Purchasing Economies (Nonfuel) $160.5 million
Capacity Deferral $46.9 million
================================================================================
Total Savings $764.5 million
Less: Costs to Achieve ($77.2 million)
================================================================================
Net Savings $687.3 million
</TABLE>
These expected savings exceed, or are comparable to, the anticipated
savings in a number of recent acquisitions approved by the Commission. See,
e.g., Ameren Corporation, supra (estimated savings of $686 million over 10
years); New Century Energies, Inc. supra at 281 (estimated savings of $770
million over 10 years); TUC Holding Company, supra, at 303 (estimated savings of
$505 million over 10 years); Northeast Utilities, supra, at 1286 (estimated
savings of $837 million over 11 years); The Kansas Power and Light Co., Holding
Co. Act Release No. 25465, 50 S.E.C. Docket 1224 (February 5, 1992) (expected
savings of $140 million over five years); IE Industries Inc., et al., supra note
22 at 1736 (expected savings of $91 million over ten years); Midwest Resources,
supra, at 253 (estimated savings of $25 million over five years). These savings
categories are described in greater detail below.
Corporate and Operations Labor Costs Savings: LG&E Energy and KU Energy
estimate that a net reduction in labor costs of approximately $380.4 million can
be achieved as a result of the Transaction through elimination of approximately
453 full time equivalent duplicative positions in certain corporate functions,
with 373 occurring in the first year after the consummation of the Transaction
and 80 occurring in the second year.
Facilities Integration: LG&E Energy and KU Energy estimate that the
combination and elimination of existing facilities will result in savings of
approximately $8.3 million.
Corporate and Administrative Programs: LG&E Energy and KU Energy estimate a
reduction in corporate and administrative programs through the consolidation of
overlapping or duplicative programs and expenses of $168.5 million. Specific
areas in which savings are expected to occur include information systems,
professional services, benefits, insurance, directors' fees, advertising and
shareholder services.
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Purchasing Economies (Nonfuel): LG&E Energy and KU Energy estimate savings
of $160.5 million through the combined procurement of material and supplies,
inventory reduction from standardization and limited sharing of parts and
components and from economies of scale from the aggregation of related work
activities and increased purchasing power over service providers.
Capacity Deferral: LG&E Energy and KU Energy estimate $46.9 million
of savings resulting from deferral of costs associated with the building of new
generation or purchasing firm generating capacity created by diversity of the
peaks of LG&E and Kentucky Utilities and a joint reduction in reserve margins.
Additional Expected Benefits: In addition to the benefits described
above, there are other benefits which, while presently difficult to quantify,
are nonetheless substantial. These other benefits include maintenance of
competitive rates, expanded management resources, production dispatch savings
and continued community involvement.
Maintenance of Competitive Rates: LG&E Energy will be able after the
Transaction to meet the challenges of the increasingly competitive
environment in the utility industry more effectively than either LG&E
Energy or KU Energy standing alone. The Transaction will create the
opportunity for strategic, financial and operational benefits for customers
in the form of lower rates over the long term and for shareholders in the
form of greater financial strength and financial flexibility. Kentucky
Utilities and LG&E proposed in filings with the Kentucky and Virginia
Commissions and the FERC that net non-fuel savings expected to result from
the Transaction be spread among the shareholders, wholesale requirements
customers and the retail electric customers in each state. The Kentucky
Commission approved the Transaction on September 12, 1997, and approved
surcredit tariffs that will result in reductions in Kentucky retail
electric customers' bills in amounts based on 50% of the currently
estimated gross non-fuel cost savings to be achieved during the first five
years, less 50% of the actual costs to achieve such savings (but not in
excess of the currently estimated costs to achieve) in each of the five
years following effectiveness of the Transaction. In addition, the parties
have agreed to a five year retail rate freeze absent the occurrence of
extraordinary events that impair the utilities' credit or operations.
Before FERC, the companies have agreed to similarly freeze wholesale rates
for the same period. All of the rate plans are effective upon closing of
the Transaction.
Expanded Management Resources: A combined LG&E Energy and KU Energy
entity will be able to draw on a larger and more diverse mid and senior-
level management pool to lead LG&E Energy after the Transaction forward in
an increasingly competitive environment for the delivery of energy, and
should be better able to attract and retain the most qualified employees.
The employees of LG&E Energy and KU Energy should also benefit from new
opportunities in the expanded organization.
Production Dispatch Savings: LG&E Energy and KU Energy believe that
production dispatch savings will result from the integrated economic
dispatch of the LG&E and Kentucky Utilities electric systems. LG&E and
Kentucky Utilities currently
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commit and dispatch their respective systems on an "economic dispatch"
basis, that is, each company commits and dispatches its generating system
to meet the load in such manner as to minimize production costs. Currently,
energy transactions between the companies occur when it is economically
beneficial to do so. However, there are differences in incremental cost
between the two systems. LG&E Energy will be able to take advantage of
these factors by committing and dispatching the lower cost generation from
LG&E and Kentucky Utilities to serve the total load of LG&E Energy system
at a cost that is lower than the combined cost of the two systems on a
stand-alone basis.
Community Involvement: LG&E Energy will continue to play a strong role
in the economic development efforts of the communities LG&E and Kentucky
Utilities now serve. The philanthropic and volunteer programs currently
maintained by the two companies will be continued.
(b) Integrated Public Utility System
Because Section 2(a)(29) specifies separate definitions for gas and
electric systems, the Commission has historically taken the position that gas
and electric properties together cannot constitute a single integrated public-
utility system./25/ However, Commission authority is equally clear that Section
10(c)(2) does not limit Commission approval to acquisitions resulting in only
one integrated system. "[W]e have indicated in the past that acquisitions may be
approved even if the combined system will not be a single integrated system.
Section 10(c)(2) requires only that the acquisition tend `towards the
economical and the efficient development of an (emphasis in the original)
integrated public-utility system.' "/26/
In this case, the Transaction will tend toward the economical and efficient
development of two integrated systems; the combined electric utility system of
LG&E and Kentucky Utilities and the stand-alone gas utility system of LG&E.
(i) Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility assets,
whether owned by one or more electric utility companies, are physically
interconnected or capable of physical interconnection and which under
normal conditions may be economically
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/25/ See New Century Energies, Inc., supra at 286, citing SEC v. New England
Electric System, 384 U.S. 176, 178 n.7; In the Matter of Columbia Gas &
Electric Corporation, Holding Co. Act Release No. 2477, 8 S.E.C. 443, 462-
463 (Jan. 10, 1941) (rejecting an earlier interpretation to the contrary in
American Water Works and Electric Company, Inc., 2 S.E.C. 972,
983 (Dec. 30, 1937)).
/26/ Gaz Metropolitain, Inc., supra note 14 at 192, quoting In the Matter of
Union Electric Company, Holding Co. Act Release No. 18368, 45 S.E.C. 489,
505 (April 10, 1974), aff'd without op. sub nom. City of Cape Girardeau,
Missouri v. S.E.C., 521 F.2d 324 (D.C. Cir. 1975). See also, New Century
Energies, supra.
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operated as a single interconnected and coordinated system confined in its
operations to a single area or region, in one or more States, not so large
as to impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation, and
the effectiveness of regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
electric system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) the system must be confined in its operations to a single area or
region; and
(4) the system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., Holding Co. Act Release No. 35-13781, 38
S.E.C. 658, 668 (Nov. 28, 1958)). The Transaction satisfies all four of these
requirements.
First, LG&E and Kentucky Utilities are already physically interconnected.
LG&E and Kentucky Utilities are directly connected through transmission lines
that they own, including two 138 Kv transmission lines and two 69 Kv
transmission lines. See Exhibit E-2 hereto.
Second, LG&E and Kentucky Utilities will be economically operated as a
single interconnected and coordinated system. The two companies are
interconnected by a transmission system which will allow the transfer of power
between LG&E and Kentucky Utilities to achieve production cost savings. LG&E and
Kentucky Utilities intend to operate as a single system, economically
dispatched.
Because LG&E and Kentucky Utilities currently exchange a significant
amount of economy energy, the parties do not believe that anticipated power
flows after the Transaction will change significantly from flows prior to the
Transaction. Thus, they believe that the anticipated power flows between the
companies after the Transaction should not have any adverse effect on the
systems of neighboring utilities. Moreover, under FERC's rules governing open
access transmission service and under the specific transmission tariffs being
filed by LG&E and Kentucky Utilities, there is an obligation to expand
constrained facilities if there is a sufficient demand for transmission service
to justify doing so.
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For integration purposes under the Act, what is relevant is that: (i) LG&E
and Kentucky Utilities will have sufficient internal transmission capacity to
accommodate the anticipated transfers between them under central economic
dispatch, and will obtain transmission service from neighboring utilities to
accommodate any transfers that might exceed the capabilities of its system; and
(ii) the anticipated production cost savings can be achieved without the need
for contracting for transmission service with others.
Third, this single integrated system will operate in a single area or
region, the area delineated on Exhibit E-10, covering portions of Kentucky and
Virginia. As set forth in Item 3.B.2(a), the Transaction will result in
economies and efficiencies for the utilities and, in turn, their customers.
Fourth, the system is not so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. The
Commission's past decisions on "localized management" show that the Transaction
fully preserves the advantages of localized management. In these cases, the
Commission has evaluated localized management in terms of: (i) responsiveness to
local needs, see In the Matter of American Electric Power Co., supra, at 1312
(advantages of localized management evaluated in terms of whether an enlarged
system could be "responsive to local needs"), General Public Utilities Corp.,
Holding Co. Act Release No. 13116, 37 S.E.C. 28, 36 (Mar. 2, 1956) (localized
management evaluated in terms of "local problems and matters involving relations
with consumers"); (ii) whether management and directors were drawn from local
utilities, see Centerior Energy Corp., supra, at 775 (advantages of localized
management would not be compromised by the affiliation of two electric utilities
under a new holding company because the new holding company's "management [would
be] drawn from the present management" of the two utilities); Northeast
Utilities, supra, at 1285 (advantages of localized management would be preserved
in part because the board of New Hampshire Utility, which was to be acquired by
an out-of-state holding company, included "four New Hampshire residents"); (iii)
the preservation of corporate identities, see Id. (utilities "will be maintained
as separate New Hampshire corporations...[t]herefore the advantages of localized
management will be preserved"); Columbia Gas & Electric Corporation, supra, note
23 (benefits of local management maintained where the utility to be added would
be a separate subsidiary); and (iv) the ease of communications, see In the
Matter of American Electric Power Co. supra, at 1312 (distance of corporate
headquarters from local management was a "less important factor in determining
what is in the public interest" given the "present-day ease of communication and
transportation").
The Transaction satisfies all of the factors described above. LG&E and
Kentucky Utilities will continue to operate through numerous regional offices
with local service personnel and line crews available to respond to customers'
needs. The new management and Board of Directors of LG&E Energy is expected to
be drawn solely from the existing management and boards of LG&E Energy, LG&E, KU
Energy and Kentucky Utilities. After the Transaction, LG&E and Kentucky
Utilities will maintain their current offices as subsidiary headquarters and as
local operating headquarters for the areas they presently serve, while LG&E
Energy will maintain the system headquarters. The Merger Agreement provides that
Kentucky Utilities will maintain its Lexington headquarters and a substantial
presence throughout its service territory in order to conduct the state-wide
operations of Kentucky Utilities. Although the location of the
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corporate headquarters of LG&E Energy will add a modest increase in the distance
from people who are served by Kentucky Utilities, this distance is, as noted by
the Commission in the American Electric Power case supra, a relatively
unimportant factor given the present ease of transportation and communications
and the retention of Kentucky Utilities headquarters at its present location.
Thus, the Transaction will preserve all the benefits of localized management of
LG&E and Kentucky Utilities.
As described earlier, the system will facilitate efficient operation.
Finally, the Transaction will not impair the effectiveness of state regulation.
LG&E and Kentucky Utilities will continue their separate existence as before and
their utility operations will remain subject to the same regulatory authorities
by which they are presently regulated, namely the Kentucky Commission, Virginia
Commission and the FERC. All required regulatory approvals for consummation of
this Transaction have been obtained.
(ii) Gas Utility System
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by being
operated as a single coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to impair
(considering the state of the art and the area or region affected) the
advantages of localized management, efficient operation, and the
effectiveness of regulation: Provided, that gas utility companies deriving
natural gas from a common source of supply may be deemed to be included in
a single area or region.
The LG&E gas utility system will meet the standard set forth in Section
2(a)(29)(B) and, therefore, will satisfy the requirements of Sections 10(c)(1)
and (2) and should be approved by the Commission.
LG&E's gas utility system will operate as a coordinated system confined in
its operation to a single area or region covering portions of Kentucky. See
Exhibit E-5 hereto. As shown by the maps in Exhibits E-1, E-3 and E-5, there is
substantial overlap between the gas service territory of LG&E and the electric
service territories of LG&E and KU. Substantially all of the gas customers will
be served with electricity by either LG&E or Kentucky Utilities. The system also
will not be so large as to impair the advantages of localized management or the
effectiveness of regulation. As set forth in Item 3.B.2(b)(i), localized
management will be preserved. The centralized functions of LG&E's gas utility
business will continue to be managed from Louisville, Kentucky, and the local
functions will continue to be handled from several regional offices. Management
will, accordingly, remain close to the gas operations, thereby preserving the
advantages of local management. As also set forth in Item 3.B.2(b)(i), from a
regulatory standpoint, there will be no impairment of regulatory effectiveness.
The same regulators currently overseeing the LG&E gas operations (i.e., the
Kentucky Commission) will continue to have jurisdiction after the Transaction.
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For all of these reasons, the post-Transaction gas operations satisfy
the integration requirements of Section 2(A)(29)(B).
C. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect of such acquisition
have been complied with, except where the Commission finds that compliance
with such State laws would be detrimental to the carrying out of the
provisions of section 11.
As described below under Item 4, Regulatory Approvals, and as evidenced by the
filings before the Kentucky Commission and Virginia Commission, LG&E Energy and
KU Energy intend to comply with all applicable state laws related to the
Transaction.
D. Section 3(a)(1)
LG&E Energy requests that the Commission issue an order under Section
3(a)(1) declaring that LG&E Energy will be exempt from all provisions of the Act
except Section 9(a)(2). Section 3(a)(1) of the Act provides that the Commission
may issue the above-requested order to a holding company, if:
such holding company, and every subsidiary company thereof which is a
public utility company from which such holding company derives,
directly or indirectly, any material part of its income, are [1]
predominantly intrastate in character and [2] carry on their business
substantially in a single State in which such holding company and
every such subsidiary company thereof are organized.
LG&E Energy and each of its material public utility subsidiaries/27/ following
the Transaction will be Kentucky corporations operating primarily in Kentucky.
LG&E Energy therefore will meet the second part of the Section 3(a)(1) test.
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/27/ Although EEI will be a subsidiary of LG&E Energy following consummation
of the Transaction and is not a Kentucky corporation, it will not be a
material public utility subsidiary of LG&E Energy. KU Energy has not in
the past derived a material part of its income from EEI (less than 3.5%
in each of the last three years) and, on a proforma basis following
consummation of the Transaction, EEI will constitute an even smaller part
of LG&E Energy's income (on a percentage basis). The conclusion that EEI
is not a "material" subsidiary is further supported by the determination
in connection with KU Energy's Section 3(a)(1) order, that KU Energy did
not derive a material part of its income from EEI. KU Energy Corporation,
supra. Neither OVEC nor IKEC will be a "subsidiary" of LG&E Energy
following consummation of the Transaction because LG&E Energy's total
indirect ownership of OVEC will be only 7.4%.
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With regard to the first part of the test, in determining whether a
company's operations are "predominantly intrastate in character," the Commission
has primarily examined the amount of utility revenues derived by that entity
from out-of-state activities,/28/ but has also considered out-of-state service
area, customers, property, generation and sales./29/ While no specific numerical
tests have been set as a guide for interpreting the meaning of the term
"predominantly" in order to establish eligibility for this exemption, holding
companies have claimed exemptions under Section 3(a)(1) pursuant to Rule 2 with
disclosed out-of-state utility revenue percentages as high as 22.4% and
disclosed out-of-state energy sales as high as 36.3% which exemptions have not
been challenged by the Commission./30/ Furthermore, the Commission has issued
orders granting exemptions under Section 3(a)(1) to holding companies with out-
of-state revenues of up to 9.9%./31/
In the case of the public utility system to be owned by LG&E Energy
following the Transaction, based on financial information for the year ended
December 31, 1996, less than 4.0% of the system's consolidated retail utility
revenues, none of its retail natural gas sales, and less than 4.0% of its sales
of electricity (by kilowatt hour) would be from utility operations outside of
Kentucky./32/ Virtually all (99%) of the system's net utility plant (based on
book value) and utility customers (based on number of customers) would be
located in Kentucky. These amounts are well within the existing range of orders
issued by the Commission under Section 3(a)(1)./33/
As discussed above, the combination of gas and electric properties in the
new system in this case will not raise competitive or other public interest
concerns. In fact, in its order approving the Transaction the Kentucky
Commission found that "the uncontested evidence conclusively demonstrates that
LG&E Energy, LG&E and [Kentucky Utilities] possess the
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/28/ See In the Matter of Commonwealth Edison Co., Holding Co. Act Release No.
8331, 28 S.E.C. 172, 173 (June 30, 1948); Yankee Atomic Electric Co.,
Holding Co. Act Release No. 13048, 36 S.E.C. 552 (Nov. 25, 1955). The
focus of these Section 3(a)(1) orders is on the "predominantly
intrastate" requirement of the exemption.
/29/ See In the Matter of Wisconsin Electric Power Co., Holding Co. Act
Release No. 8741, 28 S.E.C. 906, 911-13 (Dec. 20, 1948). Again, the focus
of this Section 3(a)(1) order is on the "predominantly intrastate"
requirement.
/30/ See, e.g., 1983 Form U-3A-2 filed by Diversified Energies (22.4% of 1982
revenues from out-of-state); 1990 Form U-3A-2 filed by Texas-New Mexico
Power Company (19.7% of 1989 consolidated revenues from out-of-state,
16.9% of consolidated net utility plant out-of-state and 19% of the
consolidated system's total customers out-of-state); 1995 Form U-3A-2
filed by Southwestern Energy Company (parent company of Arkansas Western
Gas Co.) (out-of-state retail gas sales of 36.3%).
/31/ See Sierra Pacific Resources, Holding Co. Act Release No. 24566, 40
S.E.C. Docket 103, 114 n. 29 (Jan. 28, 1988).
/32/ For this purpose, utility revenues do not include electric sales by
exempt wholesale generators, gas transmission or wholesale revenues, and
revenues from other operations that are not "utility" operations within
the meaning of Section 2(a)(5) of the Act.
/33/ See supra notes 31 and 32 and accompanying text.
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requisite financial, technical and managerial expertise to continue to provide
the high quality utility service currently received by customers of LG&E and
Kentucky Utilities. Furthermore, the merger is for a proper purpose and is in
accordance with the law ...." Accordingly, there is no basis for the Commission
to withhold the exemption based on the "unless and except" clause./34/
E. Section 3(a)(2)
LG&E Energy requests that the Commission issue an order under Section
3(a)(2) declaring that Kentucky Utilities, as a holding company, will be exempt
from all provisions of the Act except Section 9(a)(2). Section 3(a)(2) of the
Act provides that the Commission may issue the above-requested order to a
holding company if:
such holding company is predominantly a public-utility company whose
operations, as such, do not extend beyond the State in which it is
organized and States contiguous thereto.
Following the Transaction, Kentucky Utilities will continue to hold a 20%
interest in EEI and, moreover, will continue to be predominantly a public-
utility company operating in the Commonwealth of Kentucky, its state of
incorporation, as well as the Commonwealth of Virginia and the State of
Tennessee which are contiguous to Kentucky. As discussed above, the Transaction
is in the public interest and thus there is no basis for the Commission to
withhold the exemption under Section 3(a)(2).
Item 4. Regulatory Approvals
Set forth below is a summary of the regulatory approvals that LG&E
Energy and KU Energy expect to obtain in connection with the Transaction. It is
a condition to the consummation of the Transaction that final orders approving
the Transaction be obtained from the Commission under the Act and from the
various federal and state commissions described below on terms and conditions
which would not have, or would not be reasonably likely to have, a material
adverse effect on the business, assets, financial condition or results of
operations of LG&E or of KU or of LG&E Energy and its prospective subsidiaries
taken as a whole or which would be materially inconsistent with the agreements
of the parties contained in the Merger Agreement.
A. Antitrust
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Transaction) may not be consummated until certain
information has been submitted to the Department of Justice ("DOJ") and Federal
Trade Commission ("FTC") and the specified HSR Act waiting period requirements
have been satisfied. Each of LG&E Energy and KU Energy submitted its
Notification and Report Form and all required information to the DOJ and FTC on
February 25, 1998. Accordingly, the HSR Act waiting period should have expired
at midnight on March 27, 1998.
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/34/ See supra notes 20, 31 and 32 and accompanying text.
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The expiration of the HSR Act waiting period does not preclude the
Antitrust Division or the FTC from challenging the Transaction on antitrust
grounds; however the Applicant believes that the Transaction will not violate
Federal antitrust laws. If the Transaction is not consummated within twelve
months after the expiration or earlier termination of the initial HSR Act
waiting period, LG&E Energy and KU Energy will be required to submit new
information to the Antitrust Division and the FTC, and a new HSR Act waiting
period would have to expire or be terminated before the Transaction could be
consummated.
B. Federal Power Act
Section 203 of the Federal Power Act provides that no public utility shall
sell or otherwise dispose of its jurisdictional facilities or directly or
indirectly merge or consolidate such facilities with those of any other person
or acquire any security of any other public utility, without first having
obtained authorization from the FERC. On October 9, 1997, an application was
filed with the FERC for approval of the Transaction under Section 203 and Part
33 of the FERC's regulations. LG&E and Kentucky Utilities also filed on October
9, 1997, a Power Supply System Agreement, pursuant to which they will jointly
dispatch their power supply resources and jointly plan for new generation; a
Transmission Coordination Agreement, pursuant to which they will plan and
operate their combined transmission facilities as a single integrated system;
and a single system Open Access Transmission Tariff.
On March 27, 1998, the FERC issued its order approving the Transaction
without further investigation, noting that LG&E's and KU's participation in the
Midwest ISO, discussed at Item 3.A.1(b), coupled with proposed measures, such as
ratepayer protection mechanisms, included in the Transaction "will ensure that
the merger will not adversely affect competition, rates or regulation." The FERC
also accepted without suspension or hearing the proposed Power Supply System
Agreement and Transmission Coordination Agreement, each to become effective
concurrent with consummation of the Transaction. The FERC accepted the proposed
single-system open access transmission tariff, approving its effectiveness upon
consummation of the Transaction, subject to hearing and refund regarding the
proposed transmission rates.
C. State Public Utility Regulation
Applications for approval of the Transaction and related transactions were
filed in July 1997 with the Kentucky Commission and the Virginia Commission. As
described below, the Kentucky Commission approved the Transaction on September
12, 1997, and the Virginia Commission approved the Transaction on January 20,
1998. A notice filing was made with the Tennessee Authority on October 21, 1997
and acknowledged December 8, 1997.
The Kentucky Commission and the Virginia Commission must find, in general,
that the Transaction is in the public interest. Such commissions may attach such
conditions to their approval as they deem to be appropriate or necessary.
Kentucky Utilities and LG&E have included a regulatory plan in the filings
seeking regulatory approval of the Transaction. The companies proposed that the
net non-fuel cost savings expected to result from the Transaction be spread
among the shareholders, wholesale requirements customers and the retail electric
customers in each state jurisdiction in an equitable manner over a five year
period. All fuel savings would be passed on to customers through fuel adjustment
clauses. The Kentucky Utilities and LG&E proposal for allocation of these net
non-fuel cost savings among each of the state jurisdictions would result in
reductions (in the form of surcredits) in retail electric customers' bills in
amounts based on 50% of the currently estimated non-fuel cost savings to be
achieved as a result of the Transaction, less 50% of the actual costs to achieve
such savings (but not in excess of estimated costs to achieve), in each of the
five years following effectiveness of the Transaction. Under the plan, customers
would be entitled to such reductions (surcredits) whether or not such level of
cost savings was actually achieved. In addition, a rate freeze was proposed for
five years after consummation of the Transaction, except in the event of an
extraordinary circumstance.
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On September 12, 1997 the Kentucky Commission entered an Order (the
"Kentucky Order") approving the merger of KU Energy with LG&E Energy and
approving, with minor modification, the regulatory plan submitted by the
companies. The Kentucky Order requires KU and LG&E to initiate a formal
proceeding, no later than midway through the fifth year following the
Transaction, to present a plan for sharing with ratepayers the then projected
levels of merger savings for periods following the initial five years. The
Kentucky Order also requires KU and LG&E to file by September 14, 1998, or the
consummation of the Transaction, whichever is later, detailed plans to address
any future rate regulations that may be adopted in the state. If either utility
elects to remain under traditional rate of return regulation, it must state the
reasons and include an analysis and proposals relative to its earnings at that
time. Alternatively, the Kentucky Order provides that if either utility elects
non-traditional regulation, the reasons for this choice must be disclosed, along
with details of a proposal and how it will achieve the Kentucky Commission's
goals of providing incentives to utilities and a sharing of resulting benefits
with ratepayers. The Kentucky Order further provides that the Kentucky
Commission will at that time determine on the basis of the described filings and
other information whether changes should be made to the existing regulation of
KU and LG&E.
The Virginia Commission entered an Order (the "Virginia Order") on January
20, 1998 approving the merger of KU Energy with LG&E Energy subject to certain
conditions, including among others, the following conditions: (i) that Kentucky
Utilities reduce its Virginia jurisdictional retail revenues over the first five
years after the merger is consummated by at least $4,122,185, provided that, any
additional merger savings shall be provided to Virginia jurisdictional customers
proportionately; (ii) that additional merger-related savings may be at issue in
any future filings or proceedings addressing rates; (iii) that all merger-
related savings shall be recorded above the line for purposes of Kentucky
Utilities' filings or other proceedings addressing rates and in connection
therewith the costs to achieve the merger shall be amortized over five years;
(iv) that, within 180 days after consummation, Kentucky Utilities shall file a
detailed report with the Virginia Commission describing all actual merger-
related costs; (v) that the amortized balance of deferred costs to achieve the
merger shall be subject to write-off or write-down in the event of over-earnings
per an annual earnings test; (vi) that no costs attributable to LG&E's
regulatory assets or potential strandable costs will be included in Virginia
retail rates, without prior approval of the Virginia Commission; (vii) that no
merger-related costs in excess of merger-related savings will be included in
Virginia retail rates in any year following the merger; (viii) that Kentucky
Utilities shall quantify, in accordance with GAAP, the merger-related costs
attributable to the test period used to establish Virginia retail rates and
demonstrate that the merger-related savings for the same period exceeds such
merger-related costs; (ix) that Kentucky Utilities will not terminate merger-
related surcredits at the end of the initial five years of the plan, without
prior approval of the Virginia Commission; and (x) that Kentucky Utilities shall
file a general rate case with the Virginia Commission no later than nine months
prior to the end of the fifth year of the merger to address the future sharing
of merger savings with ratepayers. The Virginia Order expresses the opinion
"that adequate service and just and reasonable rates will not be impaired or
jeopardized by LG&E Energy acquiring [Kentucky Utilities] pursuant to the terms
and conditions set forth in the [Merger Agreement] subject to the conditions
referenced above."
52
<PAGE>
Except as set forth above, no other state or local regulatory body or
agency and no other Federal commission or agency has jurisdiction over the
transactions proposed herein.
Item 5. Procedure
On March 6, 1998 the Commission issued and published the requisite
notice under Rule 23 with respect to the filing of this Application-Declaration
(Release No. 35-26838) and such notice specified a date not later than March 30,
1998, by which comments must be entered. The Commission is respectfully
requested to issue its order granting and permitting this Application-
Declaration to become effective as soon after March 30, 1998 as practicable.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements
A. Exhibits
A-1 Amended and Restated Articles of Incorporation of LG&E Energy (filed
as Exhibit 3.06 to Form 10-Q of LG&E Energy for the quarter ended
March 31, 1996, File No. 1-10568, and incorporated herein by
reference)
A-2 Restated Articles of Incorporation of LG&E (filed as Exhibit 3.06 to
Form 10-Q of LG&E for the quarter ended September 30, 1996, File No.
2-26720, and incorporated herein by reference)
A-3 Amended and Restated Articles of Incorporation of KU Energy (filed as
Exhibit 3A to Form 10-K of KU Energy for the year ended December 31,
1992, File No. 1-10944, and incorporated herein by reference)
A-4 Amended and Restated Articles of Incorporation of Kentucky Utilities
(filed as Exhibit 4.03 and 4.04 to Form 8-K of Kentucky Utilities,
dated July 29, 1996, File No. 1-3464 and incorporated herein by
reference)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as Annex A to
Registration Statement No. 333-34219 on Form S-4 and incorporated
herein by reference)
B-2 LG&E Energy Stock Option Agreement (filed as Annex B to Registration
Statement No. 333-34219 on Form S-4 and incorporated herein by
reference)
B-3 KU Energy Stock Option Agreement (filed as Annex C to Registration
Statement No. 333-34219 on Form S-4 and incorporated herein by
reference)
C-1 Registration Statement of LG&E Energy on Form S-4 (as amended) (filed
as Registration Statement No. 333-34219 and incorporated herein by
reference)
C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1)
53
<PAGE>
C-3 Registration Statement of LG&E Energy on Form S-3 relating to the LG&E
Energy Dividend Reinvestment Plan (filed as Registration Statement No.
33-56942 and incorporated herein by reference)
D-1.1 Original testimony of Dr. Robert M. Spann to the FERC
D-1.2 Original testimony of Dr. Mark W. Frankena to the FERC
D-1.3 Application of LG&E and Kentucky Utilities before the FERC, and the
FERC Order, dated March 27, 1998, approving the Transaction
D-2.1 Application of LG&E and Kentucky Utilities before the Virginia
Commission, and the Order of the Virginia Commission, dated January
20, 1998, approving the Transaction
D-3.1 Notice of Kentucky Utilities before the Tennessee Authority
D-4.1 Application of LG&E and Kentucky Utilities before the Kentucky
Commission
D-4.2 Order of the Kentucky Commission, dated September 12, 1997, approving
the Transaction
E-1 Map of electric service area of Kentucky Utilities
E-2 Map showing interconnections of LG&E and Kentucky Utilities (included
in Exhibit E-1)
E-3 Map of LG&E electric service area
E-4 Map of LG&E transmission system (included in Exhibit E-3)
E-5 Map of LG&E gas service area
E-6 Map of pro forma combined service area (included in Exhibit E-1)
E-7 Map of Kentucky Utilities transmission system (included in Exhibit E-
1)
E-8 LG&E Energy corporate chart
E-9 KU Energy corporate chart
E-10 Pro Forma LG&E Energy Corporate Chart
F-1 Preliminary opinion of counsel to LG&E Energy
F-2 Preliminary opinion of counsel to KU Energy
F-3 Past-tense opinion of counsel (to be filed by amendment)
G-1 Opinion of Goldman, Sachs & Co. (filed as Annex G to Registration
Statement No. 333-34219 on Form S-4 and incorporated herein by
reference)
G-2 Opinion of The Blackstone Group L.P. (filed as Annex F to Registration
Statement No. 333-34219 on Form S-4 and incorporated herein by
reference)
H-1 Annual Report of LG&E Energy on Form 10-K for the year ended December
31, 1996 (File No. 1-10568 and incorporated herein by reference)
H-2 Annual Report of KU Energy on Form 10-K for the year ended December
31, 1996 (File No. 1-10944 and incorporated herein by reference)
H-3 Annual Report of LG&E on Form 10-K for the year ended December 31,
1996 (File No. 2-26720 and incorporated herein by reference)
H-4 LG&E Energy 1996 Annual Report to Shareholders (File No. 1-10568 and
incorporated herein by reference)
H-5 KU Energy 1996 Annual Report to Shareholders (File No. 1-10944 and
incorporated herein by reference)
H-6 Annual Report on Form 10-K of Kentucky Utilities for the year ended
December 31, 1996 (File No. 1-3464 and incorporated herein by
reference)
H-7 Quarterly Report of LG&E Energy on Form 10-Q for the quarter ended
March 31, 1997 (File No. 1-10568 and incorporated herein by reference)
H-8 Quarterly Report of LG&E Energy on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-10568 and incorporated herein by reference)
54
<PAGE>
H-9 Quarterly Report of LG&E Energy on Form 10-Q for the quarter ended
September 30, 1997 (File No. 1-10568 and incorporated herein by
reference)
H-10 Quarterly Report of KU Energy on Form 10-Q for the quarter ended March
31, 1997 (File No. 1-10944 and incorporated herein by reference)
H-11 Quarterly Report of KU Energy on Form 10-Q for the quarter ended June
30, 1997 (File No. 1-10944 and incorporated herein by reference)
H-12 Quarterly Report of KU Energy on Form 10-Q for the quarter ended
September 30, 1997 (File No. 1-10944 and incorporated herein by
reference)
H-13 Quarterly Report of LG&E on Form 10-Q for the quarter ended March 31,
1997 (File No. 2-26720 and incorporated herein by reference)
H-14 Quarterly Report of LG&E on Form 10-Q for the quarter ended June 30,
1997 (File No. 2-26720 and incorporated herein by reference)
H-15 Quarterly Report of LG&E on Form 10-Q for the quarter ended September
30, 1997 (File No. 2-26720 and incorporated herein by reference)
H-16 Quarterly Report of Kentucky Utilities on Form 10-Q for the quarter
ended March 31, 1997 (File No. 1-3464 and incorporated herein by
reference)
H-17 Quarterly Report of Kentucky Utilities on Form 10-Q for the quarter
ended June 30, 1997 (File No. 1-3464 and incorporated herein by
reference)
H-18 Quarterly Report of Kentucky Utilities on Form 10-Q for the quarter
ended September 30, 1997 (File No. 1-3464 and incorporated herein by
reference)
I-1 Notice of the Transaction
K-1 Resolutions of Kentucky Legislature Supporting Transaction Financial
Statements
FS-1 LG&E Energy Unaudited Pro Forma Combined Condensed Balance Sheet as of
June 30, 1997 (included in Form 10-Q for the quarter ended June 30,
1997 of LG&E Energy (Exhibit H-8 hereto) at p. 20 and 21)
FS-2 LG&E Energy Unaudited Pro Forma Combined Condensed Statements of
Income for the year ended December 31, 1996 (included in Form 10-Q for
the quarter ended June 30, 1997 of LG&E Energy (Exhibit H-8 hereto) at
p. 27)
FS-3 LG&E Energy Consolidated Balance Sheet as of December 31, 1996 (see
Annual Report of LG&E Energy on Form 10-K for the year ended December
31, 1996 (Exhibit H-1 hereto) at p. 36)
FS-4 LG&E Energy Corp. Consolidated Statements of Income for its last three
fiscal years (see Annual Report of LG&E Energy on Form 10-K for the
year ended December 31, 1996 (Exhibit H-1 hereto) at p. 35)
FS-5 KU Energy Consolidated Balance Sheet as of December 31, 1996 (see
Annual Report of KU Energy on Form 10-K for the year ended December
31, 1996 (Exhibit H-2 hereto), at p. 244)
FS-6 KU Energy Consolidated Statements of Income for its last three fiscal
years (see Annual Report of KU Energy on Form 10-K for the year ended
December 31, 1996 (Exhibit H-2 hereto), at p. 242)
FS-7 LG&E Consolidated Balance Sheet as of December 31, 1996 (see Annual
Report of LG&E on Form 10-K for the year ended December 31, 1996
(Exhibit H-3 hereto), at p. 26)
55
<PAGE>
FS-8 LG&E Consolidated Statements of Income for its last three fiscal years
(see Annual Report of LG&E on Form 10-K for the year ended December
31, 1996 (Exhibit H-3 hereto), at p. 24)
FS-9 Kentucky Utilities Consolidated Balance Sheet as of December 31, 1996
(see Annual Report of Kentucky Utilities on Form 10-K for the year
ended December 31, 1996 (Exhibit H-6 hereto), at p. 26)
FS-10 Kentucky Utilities Consolidated Statements of Income for its last
three fiscal years (see Annual Report of Kentucky Utilities on Form
10-K for the year ended December 31, 1996 (Exhibit H-6 hereto), at p.
24)
56
<PAGE>
Item 7. Information as to Environmental Effects
The Transaction neither involves "major federal actions" nor "significantly
[affects] the quality of the human environment" as those terms are used in
Section (2)(C) of the National Environmental Policy Act, 42 U.S.C. S.E.C. 4332.
The only federal actions related to the Transaction pertain to the Commission's
declaration of the effectiveness of the Registration Statement, the approvals
and actions described under Item 4 and Commission approval of this Application-
Declaration. Consummation of the Transaction will not result in changes in the
operations of LG&E or Kentucky Utilities that would have any impact on the
environment. No federal agency is preparing an environmental impact statement
with respect to this matter.
57
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned company has duly caused this Amendment No. 3 to its
Application-Declaration to be signed on its behalf by the undersigned thereunto
duly authorized.
LG&E Energy Corp.
By: /s/ Victor A. Staffieri
------------------------
Chief Financial Officer
Date: March 31, 1998
58
<PAGE>
Index of Exhibits
EXHIBIT - DESCRIPTION - TRANSMISSION METHOD
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<S> <C> <C>
A-1 Amended and Restated Articles of Incorporation of LG&E Energy
(filed as Exhibit 3.06 to Form 10-Q of LG&E Energy for
the quarter ended March 31, 1996, File No. 1-10568, and
incorporated herein by reference)
A-2 Restated Articles of Incorporation of LG&E (filed as Exhibit 3.06
to Form 10-Q of LG&E for the quarter ended September
30, 1996, File No. 2-26720, and incorporated herein by
reference)
A-3 Amended and Restated Articles of Incorporation of KU Energy
(filed as Exhibit 3A to Form 10-K of KU Energy for the
year ended December 31, 1992, File No. 1-10944, and
incorporated herein by reference)
A-4 Amended and Restated Articles of Incorporation of Kentucky
Utilities (filed as Exhibit 4.03 and 4.04 to Form 8-K
of Kentucky Utilities, dated July 29, 1996, File No. 1-
3464 and incorporated herein by reference)
B-1 Agreement and Plan of Merger (Merger Agreement) (filed as Annex A
to Registration Statement No. 333-34219 on Form S-4 and
incorporated herein by reference)
B-2 LG&E Energy Stock Option Agreement (filed as Annex B to
Registration Statement No. 333-34219 on Form S-4 and
incorporated herein by reference)
B-3 KU Energy Stock Option Agreement (filed as Annex C to
Registration Statement No. 333-34219 on Form S-4 and
incorporated herein by reference)
C-1 Registration Statement of LG&E Energy on Form S-4 (as amended)
(filed as Registration Statement No. 333-34219 and
incorporated herein by reference)
C-2 Joint Proxy Statement and Prospectus (included in Exhibit C-1)
C-3 Registration Statement of LG&E Energy on Form S-3 relating to the
LG&E Energy Dividend Reinvestment Plan (filed as
Registration Statement No. 33-56942 and incorporated
herein by reference)
D-1.1 Original testimony of Dr. Robert M. Spann to the FERC
D-1.2 Original testimony of Dr. Mark W. Frankena to the FERC
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<C> <C> <S>
P D-1.3 Application of LG&E and Kentucky Utilities before the FERC,
and the FERC Order, dated March 27, 1998, approving the
Transaction
D-2.1 Application of LG&E and Kentucky Utilities before the
Virginia Commission, and the Order of the Virginia
Commission, dated January 20, 1998, approving the
Transaction
D-3.1 Notice of Kentucky Utilities before the Tennessee Authority
D-4.1 Application of LG&E and Kentucky Utilities before the
Kentucky Commission
D-4.2 Order of the Kentucky Commission, dated September 12, 1997,
approving the Transaction
ME-1 Map of electric service area of Kentucky Utilities
ME-2 Map showing interconnections of LG&E and Kentucky Utilities
(included in Exhibit E-1)
E-3 Map of LG&E electric service area
E-4 Map of LG&E transmission system (included in Exhibit E-3)
E-5 Map of LG&E gas service area
E-6 Map of pro forma combined service area (included in Exhibit
E-1)
E-7 Map of Kentucky Utilities transmission system (included in
Exhibit E-1)
E-8 LG&E Energy corporate chart
E-9 KU Energy corporate chart
E-10 Pro Forma LG&E Energy Corporate Chart
Electronic F-1 Preliminary opinion of counsel to LG&E Energy
Electronic F-2 Preliminary opinion of counsel to KU Energy
F-3 Past tense opinion of counsel (to be filed by
Amendment)
G-1 Opinion of Goldman, Sachs & Co. (filed as Annex G to
Registration Statement No. 333-34219 on Form S-4 and
incorporated herein by reference)
G-2 Opinion of The Blackstone Group L.P. (filed as Annex F to
Registration Statement No. 333-34219 on Form S-4 and
incorporated herein by reference)
H-1 Annual Report of LG&E Energy on Form 10-K for the year
ended December 31, 1996 (File No. 1-10568 and incorporated
herein by reference)
H-2 Annual Report of KU Energy on Form 10-K for the year ended
December 31, 1996 (File No. 1-10944 and incorporated herein
by reference)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<C> <C> <S>
H-3 Annual Report of LG&E on Form 10-K for the year ended
December 31, 1996 (File No. 2-26720 and incorporated herein
by reference)
H-4 LG&E Energy 1996 Annual Report to Shareholders (File No.
1-10568 and incorporated herein by reference)
H-5 KU Energy 1996 Annual Report to Shareholders (File No.
1-10944 and incorporated herein by reference)
H-6 Annual Report on Form 10-K of Kentucky Utilities for the
year ended December 31, 1996 (File No. 1-3464 and
incorporated herein by reference)
H-7 Quarterly Report of LG&E Energy on Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-10568 and
incorporated herein by reference)
H-8 Quarterly Report of LG&E Energy on Form 10-Q for the
quarter ended June 30, 1997 (File No. 1-10568 and
incorporated herein by reference)
H-9 Quarterly Report of LG&E Energy on Form 10-Q for the
quarter ended September 30, 1997 (File No. 1-10568 and
incorporated herein by reference)
H-10 Quarterly Report of KU Energy on Form 10-Q for the quarter
ended March 31, 1997 (File No. 1-10944 and incorporated
herein by reference)
H-11 Quarterly Report of KU Energy on Form 10-Q for the quarter
ended June 30, 1997 (File No. 1-10944 and incorporated
herein by reference)
H-12 Quarterly Report of KU Energy on Form 10-Q for the quarter
ended September 30, 1997 (File No. 1-10944 and incorporated
herein by reference)
H-13 Quarterly Report of LG&E on Form 10-Q for the quarter ended
March 31, 1997 (File No. 2-26720 and incorporated
herein by reference)
H-14 Quarterly Report of LG&E on Form 10-Q for the quarter ended
June 30, 1997 (File No. 2-26720 and incorporated herein by
reference)
H-15 Quarterly Report of LG&E on Form 10-Q for the quarter ended
September 30, 1997 (File No. 2-26720 and incorporated
herein by reference)
H-16 Quarterly Report of Kentucky Utilities on Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-3464 and
incorporated herein by reference)
H-17 Quarterly Report of Kentucky Utilities on Form 10-Q for the
quarter ended June 30, 1997 (File No. 1-3464 and
incorporated herein by reference)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<C> <C> <S>
H-18 Quarterly Report of Kentucky Utilities on Form 10-Q for the
quarter ended September 30, 1997 (File No. 1-3464 and
incorporated herein by reference)
I-1 Notice of the Transaction
K-1 Resolutions of Kentucky Legislature Supporting Transaction
FS-1 LG&E Energy Unaudited Pro Forma Combined Condensed Balance
Sheet as of June 30, 1997 (included in Form 10-Q for the
quarter ended June 30, 1997 of LG&E Energy (Exhibit H-8
hereto) at p. 20 and 21)
FS-2 LG&E Energy Unaudited Pro Forma Combined Condensed
Statements of Income for the year ended December 31, 1996
(included in Form 10-Q for the quarter ended June 30, 1997
of LG&E Energy (Exhibit H-8 hereto) at p. 27)
FS-3 LG&E Energy Consolidated Balance Sheet as of December 31,
1996 (see Annual Report of LG&E Energy on Form 10-K for the
year ended December 31, 1996 (Exhibit H-1 hereto) at p. 36)
FS-4 LG&E Energy Corp. Consolidated Statements of Income for its
last three fiscal years (see Annual Report of LG&E Energy
on Form 10-K for the year ended December 31, 1996 (Exhibit
H-1 hereto) at p. 35)
FS-5 KU Energy Consolidated Balance Sheet as of December 31,
1996 (see Annual Report of KU Energy on Form 10-K for the
year ended December 31, 1996 (Exhibit H-2 hereto), at p.
244)
FS-6 KU Energy Consolidated Statements of Income for its last
three fiscal years (see Annual Report of KU Energy on Form
10-K for the year ended December 31, 1996 (Exhibit H-2
hereto), at p. 242)
FS-7 LG&E Consolidated Balance Sheet as of December 31, 1996
(see Annual Report of LG&E on Form 10-K for the year ended
December 31, 1996 (Exhibit H-3 hereto), at p. 26)
FS-8 LG&E Consolidated Statements of Income for its last three
fiscal years (see Annual Report of LG&E on Form 10-K for
the year ended December 31, 1996 (Exhibit H-3 hereto), at
p. 24)
FS-9 Kentucky Utilities Consolidated Balance Sheet as of
December 31, 1996 (see Annual Report of Kentucky Utilities
on Form 10-K for the year ended December 31, 1996 (Exhibit
H-6 hereto), at p. 26)
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Method Exhibit Description
of Filing Number -----------
- --------- ------
<C> <C> <S>
FS-10 Kentucky Utilities Consolidated Statements of Income for
its last three fiscal years (see Annual Report of Kentucky
Utilities on Form 10-K for the year ended December 31, 1996
(Exhibit H-6 hereto), at p. 24)
</TABLE>
63
<PAGE>
EXHIBIT F-1
LG&E ENERGY CORP.
220 West Main Street
P.O. Box 32030
Louisville, Kentucky 40232
502-627-2000
March 30, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: LG&E Energy Corp.
Form U-1 Application-Declaration
(File No. 70-9159)
Ladies and Gentlemen:
I refer to the Form U-1 Application-Declaration, as amended (the
"Application"),under the Public Utility Holding Company Act of 1935, as amended
(the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by LG&E Energy Corp. ("LG&E Energy"), a Kentucky corporation, with
respect to the merger of KU Energy Corporation ("KU Energy") with and into LG&E
Energy (the "Transaction"). Capitalized terms used in this letter but otherwise
not defined shall have the meanings ascribed to such terms in the Application.
The Application seeks authorization and approval of the Transaction and
pursuant thereto the acquisition of all the issued and outstanding common stock
of Kentucky Utilities and, indirectly, 20% of the issued and outstanding stock
of EEI and 2.5% of OVEC.
I have acted as counsel for LG&E Energy in connection with the Application
and, as such counsel, I am familiar with the corporate proceedings taken by LG&E
Energy in connection with the Transaction as described in the Application.
I have examined originals, or copies certified to my satisfaction, of such
corporate records of LG&E Energy, KU Energy and Kentucky Utilities, certificates
of public officials, certificates of officers and representatives of LG&E
Energy, KU Energy and Kentucky Utilities, and other documents as I have deemed
it necessary to examine as a basis for the opinions hereinafter expressed. In
such examination I have assumed the genuineness of all signatures and the
authenticity of all documents submitted to me as originals and the conformity
with the originals
<PAGE>
of all documents submitted to me as copies. As to various questions of fact
material to such opinions I have, when relevant facts were not independently
established, relied upon certificates of officers of LG&E Energy, KU Energy and
Kentucky Utilities and other appropriate persons and statements contained in the
Application and the exhibits thereto.
The opinions expressed below are subject to the following further
assumptions and conditions:
(a) The Transaction, as contemplated by the Application, shall have been
authorized by the Commission and shall have been consummated as
described therein.
(b) The Transaction shall have been duly authorized and approved to the
extent required by the governing documents and applicable federal or
state laws and by the respective Board of Directors of LG&E Energy and
KU Energy, and such authorization or approval shall remain in full
force and effect.
(c) The Commission shall have duly entered an appropriate order or orders
with respect to the Transaction, as described in the Application,
granting and permitting the Application to become effective under the
Act and the rules and regulations thereunder and the Transaction shall
have been consummated in accordance with the Application.
(d) A registration statement with respect to the shares of LG&E Energy
common stock to be issued in connection with the Transaction shall
have become effective pursuant to the Securities Act of 1933, as
amended; no stop order shall have been entered with respect thereto;
and the issuance of securities in connection with the Transaction
shall have been consummated in compliance with the Securities Act of
1933, as amended, and the rules and regulations thereunder.
(e) The parties shall have obtained all consents, waivers and releases,
if any, required for the Transaction under all applicable governing
corporate documents, contracts, agreements, debt instruments,
indentures, franchises, licenses and permits.
(f) No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions
expressed herein.
(g) The Transaction shall have been consummated as described in the
Application and under my supervision as the General Counsel of LG&E
Energy acting for LG&E Energy; Gardner, Carton & Douglas, special
counsel to LG&E Energy; Simpson Thacher & Bartlett, special counsel to
LG&E Energy; the General Counsel of KU Energy acting for KU Energy;
and Jones, Day, Reavis & Pogue, special counsel to KU Energy, and all
legal matters incident thereto shall be satisfactory to each of us.
<PAGE>
Based upon the foregoing, and subject to the assumptions and conditions set
forth herein, and having regard to legal considerations which I deem relevant, I
am of the opinion that, in the event that the Transaction is consummated in
accordance with the Application:
1. All laws of the Commonwealth of Kentucky applicable to the Transaction
will have been complied with.
2. LG&E Energy is validly organized and duly existing under the laws of
the Commonwealth of Kentucky.
3. The shares of LG&E Energy common stock to be issued in connection with
the Transaction will be validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the Amended and Restated Articles of
Incorporation of LG&E Energy.
4. LG&E Energy will legally acquire (a) the shares of common stock of KU
Energy to be exchanged for common stock of LG&E Energy in connection
with the Transaction and (b) the shares of common stock of Kentucky
Utilities.
5. The consummation of the Transaction will not violate the legal rights
of the holders of any securities issued respectively by LG&E Energy or
its subsidiaries or KU Energy or its subsidiaries.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ John R. McCall
John R. McCall
Executive Vice President,
General Counsel and Secretary
<PAGE>
EXHIBIT F-2
KU ENERGY CORPORATION
One Quality Street
Lexington, Kentucky 40507
606-255-2100
March 30, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: LG&E Energy Corp.
Form U-1 Application-Declaration
(File No. 70-09159)
Ladies and Gentlemen:
I refer to the Form U-1 Application/Declaration, as amended (the
"Application"), under the Public Utility Holding Company Act of 1935, as amended
(the "Act"), filed with the Securities and Exchange Commission (the
"Commission") by LG&E Energy Corp., a Kentucky Corporation ("LG&E Energy"), with
respect to the merger of KU Energy Corporation ("KU Energy") with and into LG&E
Energy (the "Transaction"). Capitalized terms used in this letter without
definition have the meanings ascribed to such terms in the Application.
The Application seeks authorization and approval relating to the
Transaction and pursuant thereto the acquisition of all the issued and
outstanding common stock of Kentucky Utilities and, indirectly, 20% of the
issued and outstanding stock of EEI and 2.5% of OVEC.
I have acted as counsel for KU Energy in connection with the
Application and, as such counsel, I am familiar with the corporate proceedings
taken by KU Energy in connection with the Transaction as described in the
Application.
I have examined originals, or copies certified to my satisfaction, of
such corporate records of LG&E Energy, KU Energy and Kentucky Utilities,
certificates of public officials, certificates of officers and representatives
of LG&E Energy, KU Energy and Kentucky Utilities, and other documents as we have
deemed necessary to examine as a basis for the opinions hereinafter expressed.
In such examination I have assumed the genuineness of all signatures and
<PAGE>
the authenticity of all documents submitted to us as originals and the
conformity with the originals of all documents submitted to us as copies. As to
various questions of fact material to such opinions I have, when relevant facts
were not independently established, relied upon certificates of officers of LG&E
Energy, KU Energy and Kentucky Utilities and other appropriate persons and
statements contained in the Application and the exhibits thereto.
The opinions expressed below are subject to the following further
assumptions and conditions:
a. The authorization and approval of the Transaction by the Boards
of Directors and shareholders of LG&E Energy, KU Energy and subsidiaries
thereof remain in full force and effect.
b. All required approvals, authorizations, consents, certificates,
and orders of, and all filings and registrations with, all applicable
federal and state commissions and regulatory authorities with respect to
the Transaction shall have been obtained or made, as the case may be, and
shall remain in effect (including the approval and authorization of the
Commission under the Act, the Federal Energy Regulatory Commission under
the Federal Power Act, as amended, and the rules and regulations
thereunder, the Kentucky Public Service Commission under the applicable
laws of the Commonwealth of Kentucky, and the State Corporation Commission
under the applicable laws of the Commonwealth of Virginia), and the
Transaction shall have been accomplished in accordance with all such
approvals, authorizations, consents, certificates, orders, filings and
registrations.
c. The Commission shall have duly entered an appropriate order or
orders with respect to the Transaction as described in the Application
granting and permitting the Application to become effective under the Act
and the rules and regulations thereunder.
d. No stop order shall have been entered with respect to the S-4
Registration Statement, which has become effective pursuant to the
Securities Act of 1933, as amended, with respect to the shares of LG&E
Energy Common Stock to be issued in connection with the Transaction; and
the issuance of shares of LG&E Energy Common Stock in connection with the
Transaction shall have been consummated in compliance with the Securities
Act of 1933, as amended, and the rules and regulations thereunder.
e. The applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder shall have expired.
f. Instruments of merger shall have been duly and validly filed with
the Secretary of State of Kentucky, and such other corporate formalities as
are required by the laws of such state for the consummation of the mergers
contemplated by the Transaction shall have been taken; and the merger shall
have become effective in accordance with the laws of Kentucky.
2
<PAGE>
g. The parties shall have obtained all consents, waivers and
releases, if any, required for the Transaction under all applicable
governing corporate documents, contracts, agreements, debt instruments,
indentures, franchises, licenses and permits.
h. No act or event other than as described herein shall have occurred
subsequent to the date hereof which would change the opinions expressed
herein.
i. I have relied upon the opinion of John R. McCall, Esq., General
Counsel of LG&E Energy as to the matters set forth therein.
j. The Transaction shall be consummated as described in the
Application and under the supervision of Gardner, Carton & Douglas, Simpson
Thacher & Bartlett, Jones, Day, Reavis & Pogue and the General Counsel of
LG&E Energy and KU Energy and all legal matters incident thereto shall be
satisfactory to each of us.
Based upon the foregoing, but subject to the assumptions,
qualifications and limitations set forth herein, I am of the opinion that, in
the event that the proposed Transaction is consummated in accordance with the
Application:
1. Each of KU Energy and Kentucky Utilities is validly organized and
duly existing under the laws of the Commonwealth of Kentucky.
2. The shares of common stock of KU Energy to be converted into
shares of LG&E Energy Common Stock in connection with the Transaction will
be validly issued, fully paid and nonassessable. The shares of common
stock of Kentucky Utilities to be acquired by LG&E Energy as a result of
the Merger of KU Energy into LG&E Energy will be validly issued, fully paid
and nonassessable, and LG&E Energy, as the holder thereof, will be entitled
to the rights and privileges appertaining thereto set forth in the Restated
Articles of Incorporation of Kentucky Utilities.
I hereby consent to the use of this opinion as an exhibit to the
Application.
Respectfully yours,
/s/ George S. Brooks II
George S. Brooks II
General Counsel and Secretary
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